EXCLUDED LOSSES
CHAPTER 10
EXCLUDED LOSSES
INTRODUCTION
Section 55 of the Marine Insurance Act 1906 provides the framework for all included and excluded losses. Section 55(1) declares the rule of proximate cause as the general principle to be applied for determining the liability of the insurer.1 Having stated the general position, s 55(2) then enumerates the ‘particular’ exclusions for which the insurer is not liable. These particular exclusions include, in s 55(2)(a): ‘…any loss attributable to the wilful misconduct of the assured…’ and, in s 55(2)(b): ‘Unless the policy otherwise provides…any loss caused by delay, although that delay be caused by a peril insured against.’ Section 55(2)(c) then deals with the issues of wear and tear and inherent vice. Again, the Act prefaces the exclusion with: ‘Unless the policy otherwise provides,’ and then goes on to state that ‘…the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or by any injury to machinery not proximately caused by maritime perils’.
Notably, the Institute Hull Clauses do not include general exclusions clauses; reliance has, therefore, been placed upon the Act itself to provide the necessary defences for the insurer.
This, however, is not the case with the Institute Cargo Clauses. Clauses 4.1 to 4.5 of all the Institute Cargo Clauses reiterate the general law of exclusions as laid down in the Act, but the ICC (B) and (C) go on, in cll 4.6 to 4.8, to itemise additional exclusions which are not specifically alluded to in the Act. These additional exclusions include cl 4.6: ‘…insolvency or financial default of the owners managers charterers or operators of the vessel’; cl 4.7: ‘deliberate damage to or deliberate destruction of the subject matter insured…’; and cl 4.8, the radioactivity contamination clause.
Should the assured, under the ICC (B) and (C), wish to be covered against ‘deliberate damage’ or ‘deliberate destruction’, then such additional cover is available by way of the Institute Malicious Damage Clause. Clauses 4.6 and 4.7 of the ICC (A) only exclude ‘insolvency’ and ‘contamination from radioactivity’; no mention is made of deliberate damage or deliberate destruction of the subject matter.
WILFUL MISCONDUCT OF THE ASSURED
Section 55(2)(a) of the Marine Insurance Act 1906 states: ‘The insurer is not liable for any loss attributable to the wilful misconduct of the assured…’, and this exclusion is repeated in cl 4.1 of all the Institute Cargo Clauses. It is significant to note that this exclusion is not, as in the cases of s 55(2)(b) and (c), prefaced with the words ‘unless the policy otherwise provides’.
Meaning of wilful misconduct
The complexities in this area of the law are twofold.
First, as improper conduct could range from mere negligence, gross or culpable negligence, indifference, reckless disregard, to wilful misconduct, it is necessary to identify the qualities of an act which would amount to ‘wilful misconduct’. The following cases: Papadimitriou v Henderson [1939] 64 LlL Rep 345; National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582;2 Thompson v Hopper (1856) 6 E&B 937; (1858) EB&E 1038 and the Australian authority of Wood v Associated National Insurance Co Ltd [1985] 1 Qd R 2973 have endeavoured, in general or specific terms, to draw the line of demarcation between these acts of impropriety. In Papadimitriou v Henderson, the characteristics of an act of wilful misconduct was discussed in the context of war, and recently, in NOW v DOL, in the context of scuttling, though the policy under consideration was not a marine policy of insurance.
Secondly, a more focused issue—whether a shipowner who has sent an unseaworthy ship to sea with reckless disregard or reckless indifference is guilty of an act of wilful misconduct—has to be examined. The question was specifically considered in Thompson v Hopper and the Wood case in relation to unseaworthiness under a time policy of insurance, and was discussed in general terms in NOW v DOL. This must necessarily refer us to the concept of ‘privity’ as laid down in s 39(5) of the Act, under which privity or knowledge is sufficient to free the insurer from liability, if the loss is attributable to the particular unseaworthiness to which the assured is privy. The interrelationship between the defences of unseaworthiness with the privity of the assured under s 39(5), and that of wilful misconduct under s 55(2)(a) would, inevitably, have to be considered; more pointedly, would a finding of ‘privity’ under s 39(5) necessarily lead to a finding of ‘wilful misconduct’ under s 55(2)(a)? It is to be observed that under both sections, the applicable rule of causation is to be found in the words ‘attributable to’. Thus, any loss attributable to such unseaworthiness to which the assured is privy or any loss attributable to the wilful misconduct of the assured will prevent recovery under the policy.
Papadimitriou v Henderson [1939] 64 LlL Rep 345
The plaintiffs effected a time policy of insurance with the defendants on freight and on the hull and machinery of Ellinico Vouno, a Greek registered vessel. Attached to the policy was a war and strikes clause which covered risks otherwise excluded by the f c and s clause. In May 1938, during the Spanish Civil War, Ellinico Vouno sailed from Odessa with a cargo of lorries and spare parts belonging to the Spanish Government and bound for Oran in North Africa. The owners of Ellinico Vouno were aware of the presence of hostile warships in the Mediterranean and ordered the vessel to put into Malta to await orders. Whilst passing between Greece and Sicily, Ellinico Vouno was intercepted by a Spanish insurgent warship and escorted to Majorca, where the ship and cargo were confiscated and the master and crew returned to Greece. The plaintiffs claimed for an actual or constructive total loss, but the underwriters refused payment on the basis of, inter alia, the wilful misconduct of the assured in sending the ship on a voyage where capture was always imminent.
The court ruled in favour of the plaintiff shipowners, in that they were only endeavouring to fulfil a perfectly lawful voyage.
Goddard LJ: [p 349] …Of course, if it was a case in which the shipowner got warning that a blockade had been established at a particular port or that a ship was lying waiting at a particular point, and the shipowner deliberately sent his ship forward to that point to run the blockade, it may be that there would be, in certain cases, an inference to be drawn that he was not endeavouring to carry out the voyage, but what he was endeavouring to do was to get his ship captured, and that, of course, would be wilful misconduct. In the last war it would have been a serious thing for this country if it was said that every shipmaster who continued his contract voyage to this country, when it was known that there were submarines at large in the Channel or the approaches to the Channel, was guilty of wilful misconduct because there was a risk that his ship would be seized and sunk, whether it was a neutral ship or a British ship. I certainly should be very sorry to lay down any such doctrine, that a shipowner who had dispatched his ship on what was to him a perfectly lawful voyage, should be held guilty of wilful misconduct because he had continued on that voyage and was doing his best to fulfil it, more especially when one finds that when he was asked to order the ship to return, he did order his ship to return. On that point I am quite clear.
The dispute in AG v Adelaide SS Co Ltd, ‘Warilda’ [1923] AC 292, HL,4 was primarily concerned with the issue of whether, in the case of a collision, the negligent navigation of the master displaced the status or nature of the duty in which the ship was engaged (warlike operations). However, Lord Wrenbury, whilst deliberating over the consequence of such negligence, also considered the effect of wilful misconduct.
Lord Wrenbury: [p 308] …As regards sea peril, I may perhaps express it by saying that the underwriter insures against the sea peril, however it may happen—including, therefore, negligence of the master. It is otherwise if the loss occurs through the wilful negligence or wilful act of the assured. In that case the loss does not ‘happen’, but is caused by the assured himself, and, consequently, he cannot recover.
Notes
Whether a negligent act can ever be wilful is, it is submitted, questionable. However, the main controversy is whether an act of reckless disregard or reckless indifference is equivalent to an act of wilful misconduct. The case of Thompson v Hopper provides a suitable platform for this discussion, for it centres itself on the act of sending an unseaworthy ship to sea with reckless disregard. Though the judge had tended to merge the specific defence of unseaworthiness (with privity of the assured) with the general defence of wilful misconduct, his comments are, nevertheless, useful for the purpose of providing an insight into the requirements of the latter defence.
Reckless disregard or reckless indifference
The issue raised in Thompson v Hopper, below, was whether ‘reckless disregard’ or ‘reckless indifference’ fell within the meaning of ‘wilful misconduct’. That is, was the meaning of ‘wilful misconduct’ wide enough to include not just an intentional positive wrongdoing, but also the inaction of an assured in showing disregard or indifference to a wrongdoing? The court concluded that it was.
Thompson v Hopper (1856) 6 E&B 937; (1858) EB&E 1038
The plaintiff effected a time policy of insurance with the defendants upon the vessel Mary Graham. After loading a full cargo of coal in Sunderland, she left harbour with her standing rigging still loose, in order to catch the spring tide at the bar. During the night, an easterly gale sprang up and Mary Graham was driven ashore and wrecked. The court later heard from the sole survivor that the anchor cable had parted close to the anchor and the length of cable, still attached, had made the ship unmanageable, and the crew’s efforts to release the cable had failed, because it was rusted. It was assumed that, at the time of the loss, the standing rigging had been made fast. The question before the court was whether the plaintiffs, the owners of Mary Graham, had ‘knowingly, wilfully and wrongfully’ sent her to sea in an unseaworthy state and whether this action was the proximate or remote cause of her loss.
Bramwell B: [p 1045] …Supposing, I say again, she had been struck by lightning while being there, would the plaintiffs have wilfully caused that? The causing, if in any sense a causing, is a remote causing; it is that the assured sent her to sea unseaworthy, caused her to remain there, and be exposed to a storm if it came, and so caused her to be lost. The maxim, causa proxima non causa remota spectatur, applies. This maxim is recognised, but said not to be applicable; that a remote causing by ‘improper conduct’ of the insured is enough. But a fallacy lurks in that word ‘improper’. I agree a man shall not take advantage of his own wrong. But the phrase contains the same fallacy; and the fallacy is made apparent by the inappropriate use of the maxim dolus circuitu non purgator. ‘Improper’, ‘wrong’, and ‘dolus’, in the sense in which dolus is used in that maxim, are to my mind inappropriate expressions. There was nothing improper, nothing wrong, no dolus, in sending the ship to sea unseaworthy. There is nothing wrongful in sending an unseaworthy ship to sea; though she is insured, there is nothing wrongful in burning her. The wrong is in making a claim founded on such an act.
Willes J: [p 1047] I am of opinion that the judgment ought to be reversed. It appears to me to be founded upon a misapplication of the maxim dolus circuitu non purgator. Dolus therein stands for dolus malus, and cannot mean simply any thing which may lead to the damage of another: indeed some such acts constitute what has been called dolus bonus; and some are damna absque injuria. Without entering into a discussion of the precise meaning of dolus or dolus malus in the civil law, I may say that, if the dolus, in the sense in which it is used in the maxim, can exist independent of evil intention, it cannot so exist without either the violation of some legal duty, independent of contract, or the breach of a contract, express or implied, between the parties. To recognise in a court of justice dolus, or wrong, or misconduct, as a ground of action or defence, apart from these conditions, would be to confound all certainty in the law.
Notes
Thompson v Hopper has to be read with caution, as it was decided before the Act at a time when the law relating to seaworthiness in a time policy was not well developed. As was seen, under current law, as stated in s 39(5), ‘privity’ alone of the particular unseaworthiness to which the loss is attributable is sufficient to free the insurer from liability.5 In such a circumstance, there is no need for the insurer to rely on the wilful misconduct of the assured as a defence, save as an alternative plea should the loss be found not to have been attributable to such unseaworthiness.
Webster’s Comprehensive Dictionary of the English Language defines ‘reckless’ as being ‘foolishly heedless of danger’ or ‘indifferent’ to that danger. Although ‘reckless indifference’ or ‘reckless disregard’ does not imply intent, as does wilful misconduct, the Wood case, an Australian case which reached the Appeal Court, equated the two by showing that reckless indifference may, indeed, amount to wilful misconduct. The same stance, it would appear, was taken in the recent case of NOW v DOL.6
Wood v Associated National Insurance Co Ltd [1984] 1 Qd R 507; [1985] 1 Qd R 297
Isothel, a diesel powered fishing vessel owned by the plaintiffs, a father and two sons, was insured under a time policy of insurance with the defendants. On Sunday 17 May 1981, Isothel left Brisbane bound for Townsville, with one of the sons in command and three other young crewmen. Later that day, after heading northwards for some time, because the bilge pump was not working, Isothel anchored off Double Island Point, with the intention of continuing the following morning. This anchorage was, by general consent, unsafe when the wind blew from north of east. The following day, Monday, it was found that the main engine would not start and the son sent a message to his father for assistance. The father, a trained mechanic, arrived later in the day and fixed both the main engine and the bilge pump. Both the father and the son, the skipper of Isothel, then departed for Brisbane, leaving the three young crewmen aboard. Whilst in Brisbane, on the Tuesday, the father raised the insurance on Isothel by A$20,000 to reflect improvements made to her. Two days later, on Thursday, a gale from the north east sprang up, the three crewmen swam ashore, barely saving their lives, and Isothel was wrecked.
The full Court of Appeal upheld the decision of the trial judge and ruled that the plaintiffs had acted with reckless disregard, amounting to wilful misconduct, and that the insurers were not liable for the loss.
…There was, in my view, therefore, ‘wilful misconduct’ in relation to the vessel. The remaining question is whether the loss of Isothel can, within the meaning of s 61(2)(a), be said to be ‘attributable to’ that wilful misconduct. It is for the insured to show that the loss was proximately caused by a peril insured against…It is difficult to avoid the conclusion that the risk to which Isothel was exposed throughout the period was one that the owners would not have run had she not been insured: cf Thompson v Hopper (1858) El&Bl 1056, pp 1048–49; 120 ER 796, p 800, per Willes J. To the objection that a consideration of that kind is relevant to the element of wilful misconduct rather than to causation, the answer is that it shows the continuing efficacy of wilful misconduct as the operative cause of the loss.
…With an incompetent crew, Isothel was deprived of the ordinary protection of a vessel against perils of the sea. That means that the risk of loss by such a peril was transformed, as time progressed and she remained exposed, from a chance to a predictable probability. Because the insured carries the burden of proving that the loss was due to perils of the sea, it is essential to the success of the plaintiffs’ claim that it be established on a balance of probabilities ‘that the loss was attributable to a fortuitous accident’: Skandia Insurance Co Ltd v Skoljarev (1979) 142 CLR 375, pp 386–87. The question in each case has been said to be ‘whether a fortuitous event has occurred bringing about coverage or application of the policy’: see Northwestern Mutual Life Insurance Co v Linard 498 F 2d 556, p 563, cited with approval by Mason J in the Skandia case: (1979) 142 CLR 386, p 391.
It was the wilful misconduct of the plaintiffs that exposed Isothel to the perils of the seas when she was known not to be in a condition fit to encounter them. Once it became predictable that as a matter of probability she would encounter those perils and in her condition not be able to survive them, the element of chance or fortuity was eliminated or substantially reduced and her consequent loss became attributable to the owners’ wilful misconduct and not to a peril insured against. The expression ‘perils of the sea’ in this policy refers only to ‘fortuitous accidents or casualties of the seas’: see r 7 of the Rules of Construction of Policy forming part of the Second Schedule to the Marine Insurance Act, which Mason J in Skandia Insurance Co Ltd v Skoljarev (1979) 142 CLR 375, p 384, said was a codification of the antecedent common law. The loss of The Isothel was due not to a fortuitous accident or casualty of the seas, but to one that was a probable and predictable consequence of the plaintiffs’ wilful misconduct.
And, in the case of NOW v DOL, below, Colman J considered the meaning of reckless indifference by referring to an older case where wilful misconduct was likened to reckless ‘carelessness’.
National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582
The plaintiffs, National Oilwell (UK) Ltd, were sub-contracted to supply subsea wellhead components to the defendants, Davy Offshore Ltd. After delivering the components, the plaintiffs pursued a claim upon the defendants for unpaid invoices and the defendants, in turn, counterclaimed for defective parts which had been delayed in delivery. In reality, the defendants’ counterclaim was made by their insurers who had settled a claim upon the defendants for these defective parts and were now pursuing the plaintiffs by way of subrogation. Amongst other things, the plaintiffs were accused of wilful misconduct in supplying parts they knew to be defective. Colman J, in delivering the judgment of the court, referred at length to previous cases before deliberating about wilful misconduct and reckless indifference. Initially, reference was made to Lord Alverstone’s definition in Forder v Great Western Railway Co.
Colman J: [p 621] …Mr Aikens, on behalf of DOL, has referred me to Lord Alverstone’s well known definition of wilful misconduct in the context of terms and conditions of carriage in Forder v Great Western Railway Co [1905] 2 KB 532, p 535:
…I am quite prepared to adopt, with one slight addition, the definition of wilful misconduct given by Johnson J in Graham v Belfast and Northern Counties Ry Co where he says:
Wilful misconduct in such a special condition means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself who knows and appreciates that it is wrong conduct on his part in the existing circumstances to do, or to fail or omit to do (as the case may be), a particular thing, and yet intentionally does, or fails or omits to do it, or persists in the act, failure, or omission regardless of consequences.
The addition which I would suggest is, ‘or acts with reckless carelessness, not caring what the results of his carelessness may be’.
[p 622] …Clearly, for the conduct to be characterised as ‘misconduct’, it must be wrongful in the context of the contractual or other relationship existing at the relevant time between the parties concerned. That is to say, in the context of a contract, one party must do or omit to do something which is aptly described as misconduct towards the other contracting party. In the context of a policy of insurance on property, the misconduct in question must obviously relate to the subject matter insured and it must also relate to the assured’s obligations under the policy. Thus, deliberately to sink an insured ship with a view to claiming on the insurers is clearly misconduct in the context of insurance on that ship. However, deliberately to sink an insured ship because the owner cannot afford to operate it, lay it up or tow it to a scrap yard, but without any intention to claim on the insurers, is clearly not wilful misconduct in the context of the policy. That conduct would, however, become misconduct if a claim in respect of the loss of the ship were presented. Accordingly, the loss of or damage to the insured property in respect of which the assured presents a claim must be shown to have been caused or procured by the assured in order to achieve a loss which he then intends to present to insurers as an insured loss or which subsequently does present to insurers as an insured loss or must be shown to have been permitted to happen in circumstances where the assured was recklessly indifferent whether the subject matter was lost or damaged but where, the loss or damage having thus been sustained, he claims on his insurers in respect of it. In either case, essential elements are that the assured intended to achieve a loss or the damage or that he was recklessly indifferent whether such loss or damage was caused and that his immediate purpose was to claim on his insurers or that he subsequently advanced such a claim.
Although the case of Compania Maritime San Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Ltd, ‘Eurysthenes’ [1976] 2 Lloyd’s Rep 171, CA, is associated with the in depth analysis of ‘privity’, Lord Denning MR touched briefly on recklessness and wilful misconduct:7
[p 177] …The contest is: what degree of personal involvement is such as to deprive the insurer of his indemnity? The shipowners say that they are only to be deprived of it if they have been guilty of wilful misconduct, in this sense, that they have deliberately or recklessly sent the ship to sea knowing she was unfit. [Emphasis added.]
Notes
In a factual situation such as in the Wood case, it may be necessary to differentiate between the applicability of the defences of unseaworthiness with the privity of the assured, under s 39(5), and that of wilful misconduct of the assured, under s 55(2)(a). The former defence is of relevance to an insurer only if the loss is found to have been attributable to such unseaworthiness to which the assured is privy, and the latter when the loss is attributable to the wilful misconduct of the assured. The defences are mutually exclusive, but, in either event, the proximate cause of the loss must be an insured peril before any need to consider these defences can arise.