4.4 Loss damage or expense caused by inherent vice or nature of the subject matter insured.
Having commented on the exclusion thirty years ago in 1982, the House of Lords, now succeeded by the Supreme Court, had a renewed opportunity to return to the exclusion and to finally settle its scope in 2011, in the case of The Cendor MOPU.6 Next, the factual background to these two key cases should be set out.
I. FACTUAL BACKGROUND
In Soya v White,7 the courts had been asked to draw a line of principle or law – not of evidence or fact – between events that are inevitable and those that are fortuitous; a task made more difficult by events that are covered, although they may not be objectively fortuitous but are fortuitous from the perspective of the insured, such as arson. The subject matter insured was a cargo of soya beans. The first shipment in a series had deteriorated and additional insurance was purchased against heat, sweat and spontaneous combustion (‘HSSC’) for the subsequent shipments, as follows:
This insurance is to cover against the risks of heat sweat and spontaneous combustion only.
While most policies of marine insurance exclude inherent vice in addition to the statutory exclusion, it is worth noting that the insurance was, in a manner of speaking, the negative of a usual policy, in that it was designed to cover the carve-out of inherent vice which is not covered by a regular policy by virtue of the statutory exclusion, and of course any similar provision in the policy. The policy in this case was designed to cover risks also encompassing inherent vice namely, heat, sweat and spontaneous combustion. An additional argument of failure to disclose the condition of the first cargo arose but was summarily dismissed by Lloyd J at first instance. Upon appeal, the only remaining issue was the construction of the words quoted above, and whether they prevented the insurance from covering an inherent vice, which necessitated a definition of that concept. The House of Lords held that the words ‘inherent vice’ referred to the peril, or risk, by which the loss was caused and not to the loss itself. The definition provided was offered by Lord Diplock who stated that:
This phrase (generally shortened to ‘inherent vice’) where it is used in s. 55(2)(c) refers to a peril by which a loss is proximately caused; it is not descriptive of the loss itself. It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty. Prima facie, this risk is excluded from a policy of marine insurance unless the policy otherwise provides, either expressly or by necessary implication.8
The House of Lords went on to conclude that the question whether particular kinds of inherent vice were covered under a particular policy was a question of construction of that policy. On the facts being considered, ‘heat, sweat and spontaneous combustion’ were all covered under the policy.
In The Cendor MOPU, a jack-up oil rig was to be transported from Galveston in Texas to Malaysia. It was placed on a barge and instead of detaching the legs, they were left attached and sticking up a 100 metres into the air. Although the arrangement was, perhaps reluctantly, approved by surveyors, it was an obviously risky one and indeed off the coast of South Africa, one of the legs came off, soon followed by the other two. The weather conditions were reasonably good and there was no signal event such as lightning or a storm or particularly bad swell that immediately caused the legs to come off. A key factor contributing to the loss was metal fatigue. Upon inspection in South Africa, subtle cracks had been discovered and an attempt had been made at repairing them, which in the end did not prevent the loss from occurring.
At first instance, Blair J held that the loss had been caused by the inherent vice of the rig. The judge also found, as a matter of fact, that the loss was not inevitable.9 This decision was appealed on the issue of inherent vice, but not on the judge’s findings as regards inevitability. In contrast to the lower court’s decision, the Court of Appeal held that the loss had not been caused by inherent vice but had resulted from an insured peril in the form of a leg-breaking wave, the occurrence of which was a fortuity.10 The policy was on all risks terms, namely the Institute Cargo Clauses (A) 1982 and therefore proof of a fortuity was essentially sufficient to put the claimants in a position to recover. At the Supreme Court, the central issue was the meaning of the inherent vice exclusion.
II. FORTUITY AND INEVITABILITY
In Soya v White, the fact that the policy was said to cover heat and sweat meant that the relevant question raised was whether it also covered heat and sweat caused by the soya beans’ own inherent propensity to overheat and ultimately to spontaneously combust. On the wording of the policy, this would certainly be covered, but at the same time it was clear that any inevitable damage could not be covered, because insurance does not cover inevitabilities. In Soya v White, this translated neatly to the difference between a moisture content of over 15 per cent upon shipment, when heat damage would become inevitable. A moisture content below 12 per cent was safe; therefore with the moisture content of 13 per cent, in the range between 12 and 14 per cent, damage could either happen or not happen. These numbers probably made the issue seem deceptively simple and perhaps obscured the potential for delicate borderline cases. In other cases, discerning when damage is ‘inevitable’ is not quite so obvious. In the context of the facts of The Cendor MOPU, just how much fatigue cracking was necessary for the leg to fall off spontaneously, without the impact of a leg-breaking wave? And to what extent must a leg-breaking wave be considered completely inevitable, so that it was not a fortuity but a certainty that the first leg should fall off in the course of the voyage? These issues were not before the Supreme Court because Blair J at first instance had concluded as a matter of fact that the loss, although very likely, had not been inevitable.
The policy in Soya v White did not cover the inevitable; not by virtue of some intricate interpretation but simply because insurance never covers the inevitable.11 An element of fortuity is regarded as a conceptual limit on any policy under the law of England and Wales.12 However, taking for a moment a practical – rather than a legal – perspective, it may be said that inherent vice carries with it an element of inevitability. It is known that potatoes rot, rabbit flesh rots, citrus fruits rot, tobacco rots and all other perishables rot. This is inevitable and is likely to have historically been the very reason for the exclusion of inherent vice from a marine policy. By way of illustration, in Soya v White, Lloyd J noted at first instance that the policy would not have covered the loss if the temperature rose above 15 degrees, because the loss would then have been entirely foreseeable.13 The cargo of soya beans would spontaneously combust and therefore the damage at that temperature or more was inevitable. This serves as an illustration of a situation where there is no element of fortuity present in insurance for cargoes, beyond the point where they must inevitably be destroyed, and the only insurance that could make sense was one that did not cover them beyond that point. According to Blair J at first instance in The Cendor MOPU, that policy did not cover the inevitable either, and the wider question was whether metal fatigue in combination with waves of ordinary stature created a certainty where insurance required there to be only an uncertainty.
As a further issue, Donaldson LJ in Soya v White expressed preference for the term ‘known certainty’ rather than ‘inevitability’. The judge stated that ‘in practical terms there is as much a risk if the inevitability of a loss is not known as if the loss itself may or may not occur’.14 The judge suggested that known certainty ‘of the loss or of the particular extent of the loss’ should be used instead of the concept of inevitability. Accordingly, where the certainty of loss is known to the assured but not the insurer, the insurer would be able to raise a defence of fraud or non-disclosure, so that the claim would fail. Where both parties are aware that the loss is a certainty, then it is highly unlikely that the insurer would provide cover. Where, however, the certainty of loss is not known to either party, then should the policy respond?
On the facts of Soya v White, it was common ground between the parties that were the soya beans shipped with a moisture content below or above a certain point, then the microbiological activity that would lead to heating would not occur in the first instance, or would be bound to occur in the second. As such there was a grey area between the points where it was unknown whether such activity would or would not occur; and it was in this grey area that a risk existed. Other cases may not, however, be as straightforward. For example, what if the assured and insurer did not know that the loss, which had ultimately occurred, had been inevitable? Where the inevitability is proved with hindsight, would it be acceptable for the insurers to not be liable, even though they had accepted a premium for the insurance? Without specific reference to Donaldson LJ’s comments on the matter, Lord Mance in The Cendor MOPU stated that ‘if neither party knows, then inevitability resulting from inherent characteristics of the goods will, in the absence of express provision, bar recovery on the grounds of inherent vice.’15 It could be inferred from this statement that Lord Mance rejected the test proposed by Donaldson LJ in Soya v White. Lord Mance questioned whether inevitability resulting from outside causes would prevent recovery, referring to such situations as ‘an open question’, but noted that the issue did not require examination in the context of the case.
III. BURDEN OF PROOF
A critical question is where the burden of proof lies as regards proving inherent vice, and how that burden may be affected, if at all, where the policy is extended to provide appropriate cover as regards the particular vice of the subject matter insured. It will be seen that the matter of what exactly must be proved has been the issue of some controversy.
A. ‘All Risks’ Cover
It is first necessary, however, to comment on the nature of policies that cover ‘all risks’, for example, those incorporating the 1982 or 2009 ICC(A). In such cases, previous case law has been understood as showing that the insured’s hurdle is a low one. In British & Foreign Marine Insurance v Gaunt,16 the claimant was the buyer of a portion of a clip of wool produced in Patagonia, to be delivered in bales to the port of Punta Arenas in Chile, and then shipped to Europe. The claimant was also the assignee of three policies of marine insurance, whereby the wool in question was insured during the transit from the sheep’s back in the interior to Punta Arenas. The bales were badly damaged by water and it was proved at the trial that this damage arose during the transit to Punta Arenas. Consequently, the claimant brought an action against the defendant insurers in respect of a partial loss by damage. By the time the dispute reached the House of Lords, the questions raised by the appeal were (1) whether the damage was due to a risk covered by the policies, or, in other words, whether it was due to a casualty; and (2) whether the wool was removed from the scope of the policies on the ground that it was not specifically insured to be carried as deck cargo; the latter question being outside the scope of the discussion here.
In construing the policies which covered ‘all risks’, Lord Birkenhead emphasised that
these words cannot, of course, be held to cover all damage however caused, for such damage as is inevitable from ordinary wear and tear and inevitable depreciation is not within the policies… Damage, in other words, if it is to be covered by policies such as these, must be due to some fortuitous circumstance or casualty.17
Accordingly, under such policies, the insured must still establish his case. As asserted by Lord Birkenhead, the claimant insured
must show that the loss comes within the terms of his policies; but where all risks are covered by the policy and not merely risks of a specified class or classes, the (claimant) discharges his special onus when he has proved that the loss was caused by some event covered by the general expression, and he is not bound to go further and prove the exact nature of the accident or casualty which, in fact, occasioned his loss.18
Lord Sumner also gave judgment in this case, providing the following, often quoted interpretation of the term all risks
There are, of course, limits to ‘all risks’. There are risks and risks insured against. Accordingly the expression does not cover inherent vice or mere wear and tear or British capture. It covers a risk, not a certainty; it is something which happens to the subject-matter from without, not the natural behaviour of that subject-matter, being what it is, in the circumstances under which it is carried … Finally the description ‘all risks’ does not alter the general law; only risks are covered which it is lawful to cover, and the onus of proof remains where it would have been on a policy against ordinary sea perils.19
Lord Sumner continued, however, to note how the ‘quasi-universality’ of the description affects the onus of proof in one way, stating that
The claimant insured against and averring a loss by fire must prove loss by fire, which involves proving that it is not by something else. When he avers loss by some risk coming within ‘all risks’, as used in this policy, he need only give evidence reasonably showing that the loss was due to a casualty, not to a certainty or to inherent vice or to wear and tear. That is easily done. I do not think he has to go further and pick out one of the multitude of risks covered, so as to show exactly how his loss was caused. If he did so, he would not bring it any the more within the policy.20 (emphasis added)
Lord Sumner further concluded that ‘if the casualty was a fortuity, it needed not to be a calamity’. In light of both judgments, it is apparent that, under an ‘all risks’ policy, the insured need only establish that the loss was due to some accident or casualty, and the exact nature of that casualty does not need to be proved. That being said, it is arguably unclear whether Lord Sumner also places the burden of proving that the loss under an all risks policy was not due to inherent vice on the insured. Even though uncertain, it is submitted that the judgment did not have such an effect.
B. The Evolving Nature of the Burden
In the more recent case of Soya v White, Lloyd J was much more definitive on the matter, holding that ‘the burden of proving inherent vice undoubtedly rests on the defendants’.21 In that case, Lloyd J held that the defendant underwriters had proved that inherent vice was a cause in the sense that without moisture, the damage could not have occurred at all, but they had not succeeded in proving that inherent vice was the cause, the proximate cause, or one of the proximate causes. At the Court of Appeal, Donaldson LJ reiterated that the burden of proving inherent vice lay on the defendant underwriter, while providing that ‘the burden of disproving inevitability might lie on the plaintiff.’22 As the only issue on appeal to the House of Lords was the construction of the words in the HSSC policy, no comment on the burden of proof was given.
Subsequently, the case of TM Noten BV v Harding came before the courts. In that case, water contained in leather gloves shipped from Calcutta to Rotterdam during the monsoon season had condensed on the inside of the packaging and dripped back onto the leather gloves, causing them to arrive in a mouldy condition. The gloves had been covered on an all risks basis. At first instance, Phillips J had found that the damage was from an external source, as the water had left the gloves before it fell back onto them.23 That decision was however overruled by the Court of Appeal,24 who held that because the water had emanated from the gloves in the first place, the loss was caused by inherent vice.25 While competing theories of causation were considered, the issue of where the burden of proof lay was not explicitly dealt with in either of the judgments. Perhaps this is because, as a general rule, it was understood that the burden of proving an exclusion to cover lay with the underwriter. Even so, it can be said that the law took an unexpected turn following the decision in Mayban General Assurance BHD v Alstom Power Plants Ltd.26
In Mayban, the cargo in question was a transformer which, just like the jack-up rig in The Cendor MOPU was afflicted by metal fatigue. The policy incorporated the ICC(A) 1982 providing all risks cover with certain exclusions, including an express exclusion for loss or damage caused by inherent vice. The judge directed himself that such a policy only required the insured to show that the loss had happened through some fortuity. In particular, it was held that ‘in order to recover under the policy the insured must prove that the loss was caused by an accident or casualty of some kind’; as insurers accept the risk but not the certainty of loss. In addition, ‘although the insured must prove a loss by an accident of some kind, it is not necessary for him to go further and establish the exact nature of the accident by which it occurred.’27 There is no controversy here, as the words used clearly mirror the judgment in Gaunt. Moore-Bick J also provided that an all risks policy
does not cover the insured against loss due to wear and tear or the inherent vice of the thing insured, whether that loss was bound to occur or was fortuitous in the sense that its occurrence depended on the particular circumstances to which the goods happened to be exposed in the course of the voyage.28
This statement correctly reflects the principle that loss or damage as a result of inherent vice is not inevitable; yet, even though the experience of loss may be fortuitous, it is not covered by the policy.
Satisfied that the damage was caused by the prolonged working of the transformer’s joints brought about by the motion of the vessel in which it was carried, it fell to Moore-Bick J to determine the proximate cause of the loss. Based on evidence of previous successful shipments of similar kinds of transformers, it was held that the damage suffered was not inevitable, but that did not mean that the damage was proximately caused by an external fortuitous event. Further, even though it was common ground that the immediate cause of the damage was the violent movement of the vessel due to the actions of the wind and sea, the judge was not convinced that they were the real cause of the loss. Moore-Bick J referred, it is submitted erroneously, to the ‘competing causes’ of perils of the sea and inherent vice, as being ‘to a large extent opposite sides of the same coin.’29 He stated
If the conditions encountered by the vessel were more severe than could reasonably have been expected, it is likely that the loss will have been caused by perils of the sea… If, however, the conditions encountered by the vessel were no more severe than could reasonably have been expected, the conclusion must be that the real cause of the loss was the inherent inability of the goods to withstand the ordinary incidents of the voyage.30 (emphasis added)
It is submitted that the reasoning of Moore-Bick J regarding the cause of the loss was such as to turn inherent vice into a default outcome. If the conditions of the voyage were no worse than could reasonably be expected, and there was no other apparent cause of loss, that must mean, said Moore-Bick J, that the loss had been occasioned by an inherent vice of the subject matter insured. Unfortunately for the claimants, the judge concluded that the conditions encountered by the vessel on the relevant passage were neither extreme nor unusual in the sense that they were encountered often enough for mariners to regard them as a normal hazard.31 He made it clear that ‘conditions or events which are well known to occur from time to time but which are nonetheless relatively uncommon may well properly be regarded as ordinary incidents of the voyage.’32
As a consequence, it is argued that the judgment had the effect of reversing the burden of proof. As noted above, exclusions to cover such as inherent vice, must usually be proven by the insurer. However in Mayban, the failure of the insured to demonstrate that any extraordinary event had occurred led the judge to the conclusion that the loss must have been caused by inherent vice, since there was no other cause of loss in evidence. Naturally, the burden of proof does initially rest on the insured; however, the onus is not to demonstrate that the voyage contained some extraordinary event, but to demonstrate that the loss took place through some fortuitous event. This set the scene for the same issues as they arose in The Cendor MOPU, thirty years on from Soya v White.
C. Burden of Proof and The Cendor MOPU
At first instance, Blair J first confirmed that the claimants were
only required to show that the cause of the loss was accidental, or to put it another way, that the loss was not inevitable. Once the claimants discharge that burden, the burden is then on the insurer to make out the exclusion relied on.33
It was also reiterated that damage may be caused by inherent vice without it being inevitable, so it was therefore not an answer to a plea based on inherent vice that the loss was fortuitous. Blair J explicitly provided that ‘the burden is however on the defendant insurer to make out the exclusion.’34
Ms Blanchard, counsel for the claimant cargo owners,35 was also of the opinion that the effect of the decision in Mayban was ‘to reverse the burden of proof, by taking the burden of proof off the insurer to prove inherent vice and requiring the insured to prove extraordinary weather,’ thus significantly reducing the scope of cover afforded for perils of the sea in a cargo policy.36 As the claimants had accepted that the weather experienced during the voyage was within the range that could reasonably be contemplated, their attempts to persuade the court that inherent vice did not follow from the lack of extraordinary weather was understandable. Blair J agreed with Ms Blanchard to the extent that if the Mayban decision had ‘created a rule of evidence that, absent exceptional weather being shown to have occurred, the loss must be attributed to inherent vice, such a submission would be contrary to authority, and wrong.’37 Nonetheless, Blair J held that this was a mistaken analysis of the decision. Blair J ultimately held that the defendant insurers had proved that the proximate cause of the loss was the fact that the legs were not capable of withstanding the normal incidents of the insured voyage, including the weather to be reasonably expected. As such, the loss was due to inherent vice and thereby excluded from the policy.
On appeal, The Cendor MOPU allowed the Court of Appeal to re-examine the correct test to be applied in such cases, with particular focus on the relationship between perils of the sea and inherent vice.38 After an extensive review of the authorities, Waller LJ, delivering the leading judgment, held that ‘where one has an accident at sea such as occurred here, the burden is on the underwriter to establish inherent vice as the proximate cause.’39 As regards the appropriate test, the judge reasoned
Even if the question to be considered is – Was the cause an inability to withstand the ordinary incidents of the voyage? – the answer cannot be found by reference to what might be reasonably foreseeable as the ordinary incidents of that voyage, but by reference to wind or wave which, it would be the common understanding, would be bound to occur as the ordinary incidents on any normal voyage of the kind being undertaken. This is not equating inherent vice with certainty but it is recognising that an insurer would not cover damage to cargo flowing from the motion of a vessel in such seas, even if it was not certain to occur.40
As a result, Waller LJ was persuaded that a narrower test than that accepted by Moore-Bick J in Mayban, as applied by Blair J in the lower court, was the correct test.41 This led to the conclusion that ‘a leg breaking wave, not bound to occur in the way that it did on any normal voyage round the Cape of Good Hope, caused the starboard leg to break off.’ The high probability of this happening was not known to the insured, and that was a risk against which the claimants insured. The insurers appealed.
The central issue before the Supreme Court was the meaning of the exclusion of inherent vice, both in the contract in question and in section 55(2)(c) of the 1906 Act. At the outset, Lord Saville repeated that it was common ground between the parties that it was for the insurers to prove that the loss was proximately caused by inherent vice.42 In this regard, the insurers submitted that it was not enough to negative inherent vice to have some external fortuity. The external fortuity had to intervene so that it negated causation of the loss by the unfitness of the goods which existed on shipment. As the sea conditions were within the range that could reasonably have been contemplated for the voyage, there had been no intervention of any fortuitous external accident or casualty, so that the loss had been proximately caused by inherent vice.43 In doing so, it could be said that the defendants were attempting to prove inherent vice by disproving the occurrence of any intervening act. Lord Saville held that the authorities relied upon by the insurers established that
where the only fortuity operating on the goods comes from the goods themselves, the proximate cause of the loss can properly be said to be the inherent vice or nature of the subject matter insured and so (in absence of provisions to the contrary) falls outside the cover.
Lord Saville confirmed, however, that these cases did not provide authority for the proposition put forward by the insurers; the only case that did so, was the decision in Mayban, which, in the judge’s opinion was ‘wrongly decided’.44
Lord Saville agreed with the assured’s submission that the effect of applying the test adopted at first instance would be to reduce much of the purpose of cargo insurance, for the cover would then only extend to loss or damage caused by perils of the seas that were exceptional, unforeseen or unforeseeable, and not otherwise. This would go far to frustrate the very purpose of all risks cargo insurance, which is to provide an indemnity in respect of loss or damage caused by, among other things, all perils of the seas.45 As to the test applied at first instance, Lord Saville observed
Where in my view the judge erred was in giving the phrase inherent vice or nature of the subject-matter insured too wide a meaning and, as the other side of the coin, giving the risk of perils of the seas too narrow a meaning, by in effect including in the former and excluding from the latter external fortuities that were unexceptional or which were foreseen or foreseeable; and then answering the question of fact on this erroneous basis. All or virtually all goods are susceptible to loss or damage from the fortuities of the weather on a voyage; this does not mean that such loss or damage arises from the nature of the goods; it arises from the fact that the goods have encountered one of the perils of the seas.46
To determine the proximate cause of the loss, the judge held that the question was one of fact, to be decided on common sense principles. Such principles, when applied to the present case, provided that the proximate cause of the loss was not inherent vice but an external fortuitous accident or casualty of the seas.
D. The Current Legal Position
It is argued in Colinvaux that following The Cendor MOPU, it is unclear where the burden of proof rests. Where it may have been previously argued that the burden of proof rests on the insurer to demonstrate that inherent vice is the proximate cause, as it is an excluded peril, it is stated that ‘it appears from Global Process Systems that as long as there is a peril of the seas then there is recovery.’47 The following example is provided
If there is a storm at sea, and the cargo on its arrival is found to have depreciated by reason of its perishable nature, the assured cannot recover simply because he cannot show that the loss was proximately caused by perils of the seas. But if the cargo is unfit for the voyage and is damaged by perils of the seas, the assured can recover. There is no need for the insurers to prove inherent vice, and there is no situation in which the assured will lose cover for a loss caused by perils of the seas even if the goods are at the same time affected by inherent vice. It would thus seem that inherent vice does not have to be proved at all.48
The correct interpretation of the Supreme Court’s decision is thus of critical importance. It appears that where the insured can show that the loss was caused by some fortuity, then inherent vice cannot be an additional cause of the loss and the inquiry is concluded. Colinvaux