The Taylor Wessing Insurance And Reinsurance Review Of 2011

Marine and Energy

Supreme Court rules on inherent vice Loss of jack-up rig under tow

Global Process Systems Inc v Syarikat Takaful Malaysia Berhad [2011]1 Supreme Court, 1 February 2011

As Lord Birkenhead LC noted in the famous case of British & Foreign Marine Insurance v Gaunt [1921]2, a policy on "all risks" terms cannot be held simply to cover all damage howsoever caused "for such damage as is inevitable from ordinary wear and tear ... is not within the policies". The principle is simply this: insurance covers risks, that is to say something that might or might not happen, and not certainties.

The point was developed further in Soya GmbH v White [1983]3, concerning a claim for heat damage to a consignment of soya beans on a voyage from Indonesia to Antwerp. The court in that case drew a distinction between cargo shipped with greater than 15% moisture content, which on the expert evidence it said was bound to suffer heat damage during the intended voyage, and cargo shipped with between 13% and 15% moisture content, which it said "might or might not" result in such damage. In the former case, damage would be regarded as inevitable and thus irrecoverable in principle; in the latter case the damage was fortuitous but resulted from an inherent vice, that is to say the moisture present in the cargo at the time of shipment. In that particular case the claim succeeded because the policy expressly included such loss, by way of an extension covering "heat, sweat and spontaneous combustion".

Commercial Court

The issue has recently come up for consideration again in the long running case of Global Process Systems Inc v Syarikat Takaful Malaysia Berhad. The claim concerned the loss of a jack-up rig being towed on a barge from Galveston to Malaysia. The jack-up rig design allows a working platform to be floated into position and jacked up on cylindrical legs, to suit the sea depth at the point of operation. Steel pins are engaged into the legs through pinholes spaced at six foot intervals and, to reduce stress at the corners of the pinholes, circular holes are incorporated at each corner roughly an inch and a half in diameter. For the present tow, the rig was carried on a barge with its legs in place and elevated in the air above the deck.

The tow was interrupted mid way through the voyage, near Cape Town, where some cracking was found in the way of certain of the pinhole corners. Repairs were carried out and the voyage resumed, but soon after three of the legs broke off and fell into the sea.

The rig was insured as cargo under Institute Cargo Clauses (A), containing the standard exclusion in respect of loss or damage caused by "inherent vice or the nature of the subject matter insured".

At the initial trial, insurers argued that the loss was inevitable and as such there was a lack of the necessary fortuity. Alternatively, they relied upon the inherent vice exclusion. They argued that the legs were not capable of withstanding the normal incidents of the tow, as demonstrated by the fact that they failed in weather conditions that could reasonably have been expected on this voyage. For their part, the assured contended that the question of inevitability had to be judged subjectively; thus, they argued, a claim for inevitable loss would be recoverable unless it could be shown that the assured knew the loss to be inevitable when taking out the insurance. As to inherent vice, the assured contended that the true proximate cause was the failure to carry out adequate repairs in Cape Town.

In the Commercial Court, the trial judge determined that the failure of the legs, though very probable, could not be said to be objectively "inevitable". Citing the British & Foreign case, the judge noted that the onus of proving fortuity "represents a low hurdle for the assured", which in this case the assured had cleared. As such, the insurers' defence of lack of fortuity failed.

However, the trial judge went on to confirm that a loss could still be caused by inherent vice though not be inevitable. On this point, the Commercial Court took account of the approach in Mayban General Insurance v Alstom Power Plants [2004]4, in which the trial judge put it this way:

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 (though even then there might be evidence that the goods would have suffered the same degree of damage under normal conditions). 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.

Adopting the above approach, the trial judge in Syarikat noted that the legs of the rig had broken off despite the fact that the weather experienced was within the range that could reasonably be contemplated. That was enough to lead to the conclusion that the cargo was incapable of withstanding the ordinary incidents of the voyage, and as such the proximate cause of loss was inherent vice.

Court of Appeal

The matter proceeded to the Court of Appeal, which reversed the decision of the Commercial Court, in a Judgment handed down on 17 December 2009. Having reviewed the authorities and academic texts in some detail, the Court of Appeal came to the conclusion that the test for claims on a cargo policy should in principle be no different to that for hull policies. While not formally overruling Mayban, the Court of Appeal said that, if the action of the sea is the immediate cause of the loss, which clearly was true here, a claim may still lie under the policy even though the conditions were within the range of "what could reasonably be anticipated". If, on the other hand, the cargo had been damaged by the motion of the vessel in weather that could be described as "perfect" or "favourable", then the obvious inference in most cases would be that any...

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