VALUED AND UNVALUED POLICIES
CHAPTER 5
VALUED AND UNVALUED POLICIES
VALUED POLICIES
Introduction
The Act, in s 27(2), provides the definition of a valued policy in the following terms:
A valued policy is a policy which specifies the agreed value of the subject matter insured.
The purpose of a valued policy was considered in the old case of Lewis v Rucker (1761) 2 Burr 1167, where hogsheads of sugar were insured under valued policies of insurance for a voyage from the West Indies to Hamburg. When, on arrival at Hamburg, the hogsheads were found to be damaged by seawater, the owner of the goods claimed on his policy and the court was obliged to consider the significance of a valued policy which, at the time, was thought by many to be a means of effecting a wagering policy.
Lord Mansfield: [p 1171] …A valued policy is not to be a considered a wager policy, or like ‘interest or no interest’ …The only effect of the valuation is fixing the amount of the prime cost; just as if the parties admitted it at the trial: but, in every argument, and for every other purpose, it must be taken that the value was fixed in such a manner as that the insured meant only to have an indemnity.
And, in Irving v Manning (1847) 1 HL Cas 287, an ex-East Indiaman, General Kydd, was insured under a valued policy for a voyage from China to Madras when she was severely damaged by heavy weather. Two issues were resolved: (a) in determining whether she was or was not a constructive total loss, the significant value for verifying such a loss was the market value of the ship or the value specified in the policy;1 (b) the measure of indemnity was the sum agreed at the time the policy was effected.
Patteson J: [p 305] …By the terms of it, the ship, etc, for so much as concerns the assured, by agreement between the assured and the assurers, are and shall be rated and valued at £17,500, and the question turns upon the meaning of these words.
Do they, as contended for by the plaintiff in error, amount to an agreement that, for all purposes connected with the voyage, at least for the purpose of ascertaining whether there is a total loss or not, the ship should be taken to be of that value, so that when a question arises whether it would be worth while to repair, it must be assumed that the vessel would be worth that sum when repaired? Or do they mean only, that for the purpose of ascertaining the amount of compensation to be paid to the assured, when the loss has happened, the value shall be taken to be the sum fixed, in order to avoid disputes as to the quantum of the assured’s interest?
We are all of the opinion that the latter is the true meaning; and this is consistent with the language of the policy, and with every case that has been decided upon valued policies.
Finally, in Lidgett v Secretan (1871) LR 6 CP 616, a vessel, which was insured under two valued policies of insurance, was lost after a fire consumed her whilst she was in dry dock undergoing repairs to damage caused by a previous grounding. In the course of his reasoning, Willes J considered the overall significance of a valued policy and why such a policy could be advantageous to both the assured and the insurer. The judge also pointed out the problems which are inherent in valued policies, but suggested that they were a necessity to the shipping industry.
Willes J: [p 627] …The second point arises upon the second policy, and is one of great importance, and one which has been the subject of much discussion and criticism both by lawyers and legislators; and yet nobody has been able to improve upon the practice as to valued policies which has been recognised and adopted by shipowners and underwriters, and has, at least amongst honest men, the advantage of giving the assured the full value of the thing insured, and of enabling the underwriters to obtain a larger amount of profit. It saves them both the necessity of going into an expensive and intricate question as to the value in each particular case…Of course, if the sum inserted as the value of the ship were so outrageously large as to make it plain that the assured intended a fraud on the underwriters, the latter would have their remedy. So, if a jury should think the real intention was a wager on the value of the ship. There are many questions why this system of valuation—though unquestionably often resorted to for the purpose of evading the law against wagering policies—is useful. Ships are often insured whilst on a distant voyage, and when their exact condition or value cannot be known or ascertained. It is manifestly important that the owner should be able to insert a fair sum as to the value of the vessel, treating her as sound, though she may at the time have sustained damage even to the extent of what may ultimately turn out to be a total loss, that being in fact one of the perils insured against.
The agreed value is conclusive
Section 27(3) of the Act confirms that the value fixed by the policy is conclusive of the value of the subject matter ‘intended’ to be insured when it states:
The Act specifically uses the words ‘intended to be insured’ to signify that the value fixed by the policy is the figure agreed at the time the contract is made, before the policy attaches. In so doing, the Act recognises that there may be a lapse of time between the conclusion of the contract and the attachment of the policy, with the result that the value of the subject matter may be quite different at those points in time.
This was noted long ago, in Barker v Janson (1868) LR 3 CP 303, where a vessel, Sir William Eyre, was insured under a valued time policy of insurance for £6,000. Although, at the time of the effecting of the policy and unknown to the assured, the ship had already met with a serious accident, the value fixed by the policy was considered by the court to be conclusive.
Montague Smith J: [p 307] …A thousand things might lessen the value of a vessel between the time of the policy being made and the time of its attaching, such as natural decay, worms, or the ship becoming a drug in the market; and all the evils intended to be avoided by this kind of policy would arise again.
However, early in the 19th century there had been some concern over valued policies being nothing more than a convenient way of effecting a wagering policy. Added to this, the law as to the measure of indemnity under a valued policy had not been clearly settled by the courts.
When this vexed issue, concerning whether the sum agreed under a valued policy was conclusive, was eventually clarified in the case of Irving v Manning (1847) 1 HL Cas 287, Lord Campbell could hardly contain his pleasure at finally seeing it being resolved. In this instance, the ship General Kydd was insured under a valued policy of insurance for £17,500. When she was severely damaged by bad weather on a voyage from China to Madras, the court was faced with determining whether she was or was not a constructive total loss, and what the measure of indemnity was.
The House of Lords ruled that the valuation fixed by the policy was conclusive of the amount recoverable under the policy in the event of a loss. However, at the time, under the common law, the valuation had nothing to do with determining whether the ship was or was not a constructive total loss.2
Lord Campbell: [p 307] …My Lords, I am extremely glad that a question which has agitated Westminster Hall for the last 30 years is at last solemnly decided by a judgment of your Lordships. It is a question of great importance to the commerce of this country. I entirely concur in the opinion expressed by my noble and learned friend upon this subject.
My Lords, it appears to me that on the just construction of this contract, the plaintiff was entitled to recover the sum which the jury has awarded him. If you look at the contract, it seems to me that it was definitely determined that, for all purposes, the value of the ship would be taken at the sum of £17,500. There was nothing illegal in this contract; we have only to put a construction upon it, and if it be a just construction, and there is neither any rule of common law nor any statute to prevent the construction being carried into effect, we are bound to give effect to it, and to pronounce in favour of the plaintiff below. I repeat that I rejoice that this question, which has so long agitated Westminster Hall, is now for ever set at rest, and is satisfactorily decided.
That, with a valued policy of insurance, the value fixed in the policy is binding on the parties, has been confirmed many times by the courts.3
Woodside v Globe Marine Insurance Co Ltd [1896] 1 QB 105
The vessel Bawnmore was insured under a valued time policy of insurance for £20,000. During the currency of the policy, she was driven ashore on the coast of Oregon and stranded; some 36 hours later, she was completely destroyed by fire.
The court ruled that the plaintiffs could recover for the full amount insured under the policy. Mathew J summed up the law with respect to valued policies of insurance on both ship and goods.
Mathew J: [p 107] Whether the subject matter of insurance be ship or goods, the valuation is the amount fixed by agreement at which, in case of loss, the indemnity is to be calculated. Where goods are assured, the valuation may be low when the policy attaches; but the value to the owner may be enhanced when the goods have nearly reached their destination by the expenses of transit, etc. Yet the valuation is binding. And, again, if the valuation be high, but the goods are depreciated in value from fall of market or other causes for which the underwriter is not liable, the valuation cannot be opened.
In the case of a ship, in the same way, the vessel may, from many causes, be worth much less at the time of the loss than the agreed value; but the valuation determines the amount of the underwriter’s liability.
Loders and Nucoline Ltd v Bank of New Zealand (1929) 33 LlL Rep 70
The Bank of New Zealand, the defendants, sold 300 tons of copra to Messrs Fischel and Co who, then, sold the same consignment of copra to Messrs Loders and Co. The sale was on CIF terms. However, the ship carrying the copra caught fire whilst she was at Fiji, and both ship and cargo were totally lost, with the result that there was no freight payable on the copra at the intended port of destination. The plaintiffs, Loders and Co, as assignees to the policies of insurance, claimed against the underwriters, but the sum paid out only amounted to the value of the copra and did not include the freight. The plaintiffs then sued the Bank of New Zealand for the freight, which should have been insured as part of the gross price of the copra under a CIF contract of sale.
The court ruled in favour of the plaintiffs, Loders and Co, the purchasers of the copra. As the sale was CIF, the policies of insurance should have covered the cost of the freight and, therefore, the bank was liable to the plaintiffs for a sum amounting to the freight which would have been payable.
Wright J: [p 75] …I think the sellers [Bank of New Zealand] were wrong in this contention, and I think that the insurance company would have been bound to pay the insured value in the event of a total loss if the policies had been, as they ought to have been, policies on copra valued at whatever the amount is, £27 plus 5%. First of all, the policy would have been a valued policy, and I think that it is of primary importance in the law of marine insurance that the valuation in a policy should be treated as something binding and conclusive; but, in any case, the law is now very well established that the valuation cannot be reopened. I believe that can be stated categorically and without any qualification at all, because the only qualification which is found in the Act is, I think, on its true construction, not a qualification of that sort, but a reminder of another rule, which again is of essential importance in marine insurance.
I need not refer to the earlier cases about valued policies. It has been laid down over and over again that the valuation in a policy cannot be reopened; but s 27(3) of the Marine Insurance Act 1906 says this:
Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.
[p 76] …The words qualifying s 27(3), namely, ‘subject to the provisions of this Act’, may perhaps refer to ss 29(4) and 75(2), as the learned editor (Chalmers) points out, and the words ‘in the absence of fraud’ do not, in my judgment, mean that the value as such can be reopened. They are simply a warning that if there is fraud, not only the valuation, but the whole of the policy may be reopened and avoided.
[p 77] …There is no foundation at all for saying here that, under such a policy, assuming it to have been taken out, the insured value would have been notionally split up or that part of the value which might be said to be attributable to freight can be separated from some other parts of the value which it was said ought to be attributed to the goods. The insurance would have been on, and ought to have been on, a single indivisible value per ton, on a single and indivisible subject matter of insurance, 100 tons of copra on each policy; and, that being so, if the buyers had, as I hold they ought to have had, those policies, they could not have failed to recover the total amount under those policies; and, therefore, in my judgment the arbitrators were quite right in awarding to the buyers the amount that they had awarded, namely, the difference between the amount recoverable under the then policies and the amount that would have been recovered under the policies if they had been in the proper form.
The agreed value is also binding on the assured
Section 27(3) of the Act confirms that, under a valued policy, the sum by the policy is ‘…as between the insurer and assured, conclusive…’. That is, not only is the insurer bound by the valuation, but also the assured. Thus, if an assured is indemnified by the insurer to the amount agreed in the policy and he, the assured, then succeeds in a claim against a third party, the insurer has the right, by way of subrogation, to recover that money from the assured.4
Such was the case in North of England Iron Steamship Insurance Association v Armstrong (1870) LR 5 QB 244, where a vessel sank after a collision with another ship and was totally lost. As the sunken vessel had been insured under a valued time policy of insurance, the insurers indemnified the owners to the extent of £6,000, the sum fixed by the policy. Later, the insurers sought to recover over £5,000 from the owners when they, the owners, were awarded that sum by the Admiralty Court from the other colliding vessel. In this, the insurers were successful.
Lush J: [p 250] …If each of the parties agrees that a certain sum shall be deemed to be the value of the thing insured, the underwriter, in the case of a total loss, is not to be at liberty to say the thing is not worth so much; he is bound to pay the amount fixed upon, whether it is the proper amount or not. And, on the other hand, the assured is not at liberty to say it is worth more; he is bound by that amount.
Furthermore, should an assured claim upon a valued policy of insurance, the indemnity he is entitled to receive can only be based upon the valuation fixed in the policy, regardless of the true value of the subject insured. In Steamship ‘Balmoral’ Co Ltd v Marten [1902] AC 511, HL, the vessel Balmoral, after suffering a fractured tail shaft in heavy weather, received assistance by way of a tow to London. Although, in the ensuing salvage action, the amount to be paid by the owners of Balmoral in general average was based on the ‘true’ value of the ship, the indemnity paid by the insurers was based upon the ‘insured’ value of the vessel, which was considerably less.
Thus, as Balmoral’s true value was £40,000 and her insured value was £33,000, the insurers were only liable for 33/40ths of the claim made upon them by the assured.
Lord Shand: [p 515] …The policy of insurance provides that the ship, for so much as concerns the assured, by agreement between the assured and assurers in this policy, is and shall be valued at, say, £33,000. In all questions of indemnity, therefore, the parties to the policy, insurers and insured, have agreed that, though the ship may in truth be much more valuable, her value is to be taken at £33,000 only. There is no exception.
Scrapping voyages—the value is the scrap value
The Institute Time Clauses Hulls incorporates a clause, namely cl 1.5, which is intended to provide specifically for what is termed a ‘scrapping voyage’. Under a time policy of insurance on hull, should the insured ship undertake a voyage for the purpose of being broken up or be sold to be broken up, the value of the ship, in the event of loss or damage, is taken to be her scrap value, and not the value fixed by the policy. This rule applies, unless the underwriter is notified prior to the voyage, and the terms of cover, insured value and premium are refixed.
To this effect, cl 1.5 of the ITCH(95) states:
In the event of the Vessel sailing (with or without cargo) with an intention of being: (a) broken up; or (b) sold for breaking up, any claim for loss of or damage to the Vessel occurring subsequent to such sailing shall be limited to the market value of the Vessel as scrap at the time when the loss or damage is sustained, unless previous notice has been given to the Underwriters and any amendments to the terms of cover, insured value and premium required by them have been agreed…
Excessive over-valuation
In the absence of fraud
The Act, in s 27(3), makes specific reference to ‘fraud’ when it states that the sum fixed by a valued policy is conclusive only ‘…in the absence of fraud…’.
However, excessive over-valuation does not necessarily imply a wager or fraud, for there are usually sound commercial reasons why, for example, a ship is valued under a policy for far more than its true value. It therefore falls upon the courts to be pragmatic on this issue, and distinguish between overvaluation for good reasons and over-valuation based on fraudulent practice.
Fraudulent over-valuation
The position with respect to fraudulent over-valuation was laid down long ago, in a clinical fashion, by Sir James Mansfield in the old case of Haigh v de la Cour, below.
Haigh v de la Cour (1812) 3 Camp 319
Goods were insured under a valued policy for £5,000 for a voyage from London to Pernambucco, in Brazil, aboard the ship Maira. In reality, the insurance had been effected by bankrupts, and the goods were worth nothing more than £1,400. The invoices were fictitious, the bills of lading had been altered and the bankrupts had placed an associate aboard, who ran away with the ship and sold the goods in the West Indies.
When the assignees to the policy laid claim for their loss, the court was in no doubt that the policy was rendered void.
Sir James Mansfield CJ: [p 320] If the bankrupts intended from the beginning to cheat the underwriters, the assignees can recover nothing. The fraud entirely vitiates the contract.
But fraud, being a criminal offence, is not easy to prove. In the well known case of Thames and Mersey Marine Insurance Co Ltd v ‘Gunford’ Ship Co Ltd [1911] AC 529, HL, where a vessel was grossly over-insured and there were additional high value ppi policies effected on disbursements, the insurers made no attempt to defend themselves on the basis that the claim was fraudulent. Instead, they successfully contended that the owners were guilty of the non-disclosure of a material fact, in that they (insurers) had not been informed of the existence of other policies. Nevertheless, the court considered the likely effect of fraud.
Lord Shaw of Dunfermline: [p 320] …Had this over-valuation been tainted by fraud, the contract of insurance could not have been enforced. Where there is heavy over-valuation fraud is, a priori, not very far to seek. But fraud is not here pleaded.
Over-valuation for sound business reasons
As already suggested, over-valuation is often a commercial necessity, a fact recognised by the courts. Over-valuation of a ship by a shipowner may reflect his commitment to a mortgage and/or the cost of replacement,5 rather than the real value of the ship itself. As Lord Robson has pointed out, in Thames and Mersey Marine Insurance Co Ltd v ‘Gunford’ Ship Co Ltd [1911] AC 529, HL, where the issue before the court was one of serious over-valuation, it is often to the benefit of the insurer that the insured property be over-valued.
Lord Robson: [p 548] …Although the contract of insurance is expressed to be a contract of indemnity, and the indemnity is properly based on market value at the time of the loss, yet the law allows the insured value to be agreed between the parties, and the agreed value is binding in the absence of fraud. There are often legitimate business reasons for this discrepancy between the selling value and the insured value, and it should not be assumed that it necessarily creates any actual conflict between duty and interest on the part of the shipowner in regard to the safety of the thing insured. The assured naturally aims at reinstatement rather than bare indemnity, and the insurer has also his own reasons for preferring that the values should be high, so long as they do not constitute a temptation of loss. In order that he may be saved the trouble of small claims, which are often of a doubtful character, he stipulates that the ship shall be warranted free from average under 3%, and where the total agreed value is high, the insurer’s protection under this clause is increased. Again, in claims for constructive total loss, the higher the value, the more difficult it is for the assured to establish that the cost of repairs will exceed the repaired value, so as to entitle him to treat the vessel as lost and leave the wreck on the insurer’s hands. The insurer is therefore willing to undertake the risk of a certain amount of over-valuation, relying, no doubt, on the character of the assured and also on the interest that the managing owners or managers have in preserving the ship as a source of business profit to themselves.
A particularly good example for over-valuing a ship for the best of commercial reasons can be found in the Maira (No 2) case, below.
Glafki Shipping Co SA v Pinos Shipping Co No 1, ‘Maira’ (No 2) [1986] 2 Lloyd’s Rep 12, HL
The defendants, Pinos Shipping Co, were the owners of the vessel Maira which had been built in Japan in 1977. The money to pay for the vessel had been raised by way of two marine mortgages, the terms of which were that the ship should be insured for 130% of the mortgage debt. The management of Maira was entrusted to the plaintiffs, who insured the vessel for $10,000,000, the actual value at the time being $4,875,000. Ten days after the insurance was effected, Maira exploded and sank off the coast of Australia, and the insurers paid the resulting claim in full. However, the defendant owners of Maira contended that, under the terms of the management agreement, the ship should have been insured by the plaintiff ship managers for almost $12,000,000—that sum representing 130% of the outstanding balances owed under the mortgages.
The House of Lords ruled that the plaintiff ship managers were liable to the owners for the sum of almost $2,000,000, as they had failed to insure the ship to the full value agreed under the management agreement.
Breach of duty to observe ‘utmost good faith’
The principle of ‘utmost good faith’ contained in s 17 is the ethical doctrine upon which all contracts of insurance are based.6 Thus, in order to comply with the doctrine of uberrimae fidei under s 17, the assured must observe utmost good faith not only before, but also after, the conclusion of the contract.7 It falls upon an assured under s 18 to disclose any material circumstance before the conclusion of the contract, and, under s 20, not to make any material misrepresentation during the negotiations for the contract. As with the case of a breach of the duty to observe utmost good faith under s 17, a breach of ss 18 and 20 renders the policy voidable.
It is, therefore, emphasised that a court could well be persuaded to find an excessive over-valuation as evidence of fraud, upon which the insurer would be perfectly entitled to avoid the policy.
Non-disclosure of a material circumstance
In Ionides v Pender, below, the trial judge laid down a simple, but effective, test for deciding whether there was over-valuation and whether knowledge of that over-valuation was material to an underwriter. That test was adopted by Blackburn J, who then went further, by highlighting the problems associated with over-valuation, before laying down the general principles which were to be used for the purpose of determining whether a circumstance was or was not ‘material’ for the purpose of disclosure.
Ionides v Pender (1874) LR 7 QB 531, CA
The vessel Da Capo