Floating policy and open cover

In a floating policy, the insurance is described in general terms. A floating policy is useful where several consignments of cargo are sent over a period and the insurer does not have all the details, such as the names of the vessels on which the consignments are to be shipped and the dates of the shipments at the time of taking out the policy. The names of the ships, dates of shipments and the values of the shipments will be declared by the assured as and when the goods are shipped.32 On declaration of the values,33 the amount of cover available on the floating policy will be reduced by that amount, and, when the declared values add up to the original amount, the policy will be run off or written off. Section 29 of the MIA defines a floating policy thus:

Where goods are shipped under a fl oating policy, a certifi cate of insurance will be issued in respect of the goods shipped where evidence of insurance is required.

This may cause problems where the goods have been shipped on CIF terms. Under English law, a certificate is not recognised as a good substitution for an insurance policy.34 The parties may agree to tender a certificate of insurance instead of an insurance policy, in which case the tender will be a good tender.35

The problem with floating policies is that, once the amount is exhausted, cover ceases immediately and the assured might suddenly find that some of the cargo is not covered. Issue of a further floating policy is required for the assured to remain under cover.To minimise inconvenience (e.g., continuous monitoring of declarations to ascertain whether the agreed amount is exhausted), the practice emerged of providing cover where a further floating policy was not taken out. This arrangement came to be known as ‘open cover’. Open cover is similar to a floating policy, in that the insurer agrees to insure the goods of the assured. However, unlike the floating policy, the open cover is not a policy. It is simply an arrangement where the insurer undertakes to issue policies, floating or specific, when required by the assured. Open cover is extremely popular in the insurance market because of its flexibility and is said to have replaced floating policies.36

Principles of marine insurance law

A contract of utmost good faith

It is a long established principle that all insurance contracts, including marine insurance contracts, are contracts of utmost good faith (uberrimae fidei).37 This means that the insurer38 and the assured are placed under an obligation to disclose information that is likely to affect the judgment of the other.

32 There may be a contractual clause of when the insured should declare shipments to the insurer. Such clauses are read strictly, so a breach would result in the assured losing his right to recover for losses under the policy. See Union Insurance Society Canton Ltd v George Wills and Co [1916] 1 AC 281.

33 Where the insured declares value after the loss, according to s 29(4), the policy will be treated as an unvalued policy, which means that the value of the goods will be calculated on the basis of the rules contained in s 16(3). See ‘Valued policy and unvalued policy’, p 406.

34See Diamond Alkali Export Corp v Fl Bourgeois [1921] 3 KB 443; see Chapter 1, Policy.

35See Burstall v Grimsdale (1906) 11 Com Cas 280; also see Chapter 1, Policy.

36There is also another type of policy, known as a blanket policy, where the insured does not have to make declarations of his shipments. It is an attractive alternative since it cuts down on administration.

37Lord Clyde in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co and La Réunion Européene (The Star Sea) [2001] 1 Lloyd’s Rep 389 observed that he was unable to trace the origins of the concept of uberrimae fidei. See also Lord Hobhouse at pp 398–9.

38On whether the insurer’s mutual obligation of good faith limits his right of avoidance. See Drake Insurance plc v Provident Insurance plc [2004] QB 601, p 626 ff.

The word ‘judgment’ – to quote the Oxford English Dictionary to which we were referred – is used in the sense of ‘the formation of an opinion’. To prove the materiality of an undisclosed circumstance, the insurer must satisfy the court on a balance of probability – by evidence or from the nature of the undisclosed circumstance itself – that the judgment in this sense, of a prudent insurer would have been infl uenced if the circumstance in question had been disclosed. The word ‘infl uenced’ means that the disclosure is one which would have had an impact on the formation of his opinion and his decision making process in relation to the matters covered by s 18(2) [at p 492].

The judgment in Container Transport International was widely criticised since it places the insured under the onerous burden of having to reveal endless information of the insured’s past.The insured cannot point to the particular insurer’s failure to request certain information as a defence since the standard is an objective one – that is, that of the prudent insurer. In Pan Atlantic v Pine Top42 (a non-marine insurance case), the Court of Appeal, acknowledging the criticisms of the decision in Container Transport International, took the view that a fact is material only if the prudent insurer would have regarded the non-disclosure as increasing the risk. There is, however, no need to prove that he would have a taken a different decision. As Steyn LJ said:

. . . I would rule that, as the law now stands, the question is whether the prudent insurer would view the undisclosed material as probably tending to increase the risk. That does not mean that it is necessary to prove that the underwriter would have taken a different decision about the acceptance of the risk. After all, there may be many commercial reasons for still writing the risk on the same terms [at p 506].

On appeal, the House of Lords, by a majority of three to two, upheld Container Transport International – namely, for the purposes of s 18(2), a circumstance is material if it would have had an effect on the mind of a prudent insurer in assessing the risk.43 However, to avoid the contract for non-disclosure, the undisclosed material circumstance must have induced the (particular) insurer into making the contract. In other words, the test for establishing whether the undisclosed fact is material is objective, whereas the test for avoiding the contract for non-disclosure is subjective.44 The introduction of this subjective test means that an insurer will be unable to avoid a contract simply on the grounds that a prudent insurer would have wished to be aware of the undisclosed circumstance. As expressed by Lord Mustill:

Before embarking on this long analysis, I suggested that the questions in issue were short. I propose the following short answers. (1) A circumstance may be material even though a full and accurate disclosure would not have had a decisive effect on the prudent underwriter’s decision whether to accept the risk and if so at what premium. But (2) if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the senseinwhichthatexpressionisusedinthegenerallawofmisrepresentation),theunderwriter is not entitled to rely on it as a ground for avoiding the contract.

ThesepropositionsdonotgoasfarasseveralcriticsoftheCTI[ContainerTransportInternational] case would wish, but they maintain the integrity of the principle that insurance requires utmost good faith . . . [at p 618].

42[1994] 3 All ER 581; [1993] Lloyd’s Rep 496. See also New Hampshire Insurance Co v Oil Refineries Ltd [2002] 1 Lloyd’s Rep 462.

43[1994] 3 All ER 581, at p 607.

44The attribute of materiality of a given circumstance has to be tested at the time of the placing of the risk and by reference to the impact it would have on the mind of a prudent insurer. See The Grecia Express [2002] 2 Lloyd’s Rep 88 at pp 131–2, Peter Malcolm Brotherton and Others v Asegurdaro Colseguros SA and 1 Other [2003] EWHC 1741 (Comm).

Although Pine Top has curtailed the harshness of the Container Transport International decision by introducing an actual inducement test for the purposes of avoiding the contract on grounds of non-disclosure of material circumstances, the onus seems to be on the insured to show that the underwriter was not induced into making the contract because of the non-disclosure of a material fact. This, in practice, may be difficult to establish. The insured may have to examine past practices of the insurer in relation to similar risks and establish whether he was or was not induced by the non-disclosure of the material circumstances. Such information may not always be readily available or, where available, may not be easily forthcoming. Past course of dealings between the insurer and the assured to cover similar risks may make the task much easier. In most cases, the insurer is likely to say that there was actual inducement. The problems are compounded where more than one insurer has underwritten the risk as in a slip. It also seems that, where the undisclosed fact is objectively material, the presumption of inducement is easily raised.45

In Assicurazioni Generali Spa v Arab Insurance Group (BSC) [2002] EWCA Civ 1642, Clarke LJ enunciated the relevant principles of inducement succinctly as follows:

(i)In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.

(ii)There is no presumption of law that an insurer is induced to enter in the contract by a material non-disclosure or misrepresentation.46

(iii)The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him.

(iv)In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so [at para 62].

Since the ‘drastic remedy’47 for non-disclosure is avoidance, no doubt, the principle of utmost good faith as applied has come under vehement criticisms48 from all quarters – the most extreme being that it should be abolished altogether. This suggestion was put forward in Mutual and Federal Insurance Co Ltd v Transport Industries Insurance Co Ltd.49 This may be possible where contract law generally embodies the principle of good faith as in Roman law. English law lacks such an underlying

45See Longmore, ‘An Insurance Contracts Act for a new century?’ [2001] LMCLQ 356. It must be said that there are interesting issues as between leading underwriters and subsequent underwriters. If a subsequent underwriter is aware of dubious practices on the part of the insured in the past, should he alert the leading underwriter to this? In Peter Malcolm Brotherton and Others v Asegurdaro Colseguros SA and 1 Other [2003] EWHC 1741 (Comm), the following market was entitled to avoid the policy since the lead underwriter was

principle. This may well change once the Principles of European Contract Law50 exercise more influence on the development of English contract law.

There is also the associated issue of whether this requirement of utmost good faith continues once the contract is concluded. In other words, does it subsist post-contract?51 The matter was more recently considered by the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co and La Réunion Européene (The Star Sea).52 Although the court acknowledged that good faith subsisted post-contract, it was not an absolute and the degree varied according to circumstances. In the words of Lord Clyde:

In my view, the idea of good faith in the context of insurance contracts refl ects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justifi cation for requiring that degree necessarily to continue once the contract has been made [at p 392].

The duty of good faith, however, does not extend to litigation: ‘. . . once the parties are in litigation, it is the procedural rules which govern the extent of disclosure’ (at p 407).

It is very difficult to say beforehand which circumstance will be regarded as material and which will not. It really is a question of fact to be decided by the surrounding circumstances, attitudes of the underwriters and so on. Nonetheless, decided cases do provide a few rough indications. For instance, excessive valuation of the goods,53 low priced end of stock goods,54 contracts with stevedores at below market rates,55 proven dishonesty56 and facing charges of fraud, even if unfounded,57 are likely to be regarded as material facts. Suspicions and rumours may affect materiality.58

In Strive Shipping Corp v Hellenic Mutual War Risks Association (The Grecia Express),59 the defendants (insurers) were suspicious concerning the loss of vessels in which the assured had an interest on a number of previous occasions. They argued there was fraudulent conduct on the part of the insured and the sinking of the ships should have been disclosed. They were material and affected the magnitude of the risk. The court found for the claimant since the facts and evidence examined by the court did not lend support to the allegation of scuttling. As to the standard of proof, it seems that the insurer has to prove on a balance of probabilities that the assured acted fraudulently.

As for the burden of proving lack of utmost good faith, that is on the party alleging it. Where the contract is not made in utmost good faith and the insurer elects to avoid it,

the premium paid must be returned, unless there is fraud on the part of the insured according s 84(3)(b).

50 See Chapter 2, Principles of European Contract Law.

51 See Cory v Patton (1872) LR 7 QB 304; Lishman v Northern Maritime Insurance Co (1875) LR 10 CP 179.

52 [2001] 1 Lloyd’s Rep 389. For facts of the case, see ‘Warranties on the Part of the Insured – Implied and Express’, pp 415–7. 53 See Ionides v Pender (1874) LR 9 QB 531.

54See Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd’s Rep 560.

55See Tate v Hyslop (1885) 15 QBD 368.

56See Cleland v London General Insurance Co (1935) 51 LILR 156.

57See North Shipping Ltd v Sphere Drake Insurance plc [2006] EWCA Civ 378.

58It seems that the worth of rumours has to be decided in terms of their provenance. The better the provenance they cannot be dismissed as idle gossip. See Brotherton v Asegurdaro [2003] EWHC 1741 (Comm), para 33.

59[2002] 2 Lloyd’s Rep 82.

According to s 18(3), an insured, unless asked, is not required to disclose the following:

(a)any circumstance which diminishes the risk,

(b)any circumstance which is known or presumed to be known to the insurers,60

(c)any circumstance as to which information is waived by the insurer61 and

(d)any circumstance which it is superfluous to disclose by reason of an implied or express warranty.62

The requirement of utmost good faith also applies to material representations made during negotiations. So, where a material representation – that is, a representation that influences the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk – is untrue, the insurer can elect to avoid the contract (s 20(1)). However, the insurer can avoid the contract if the misrepresentation did, in fact, induce the making of the contract.63

Insurable interest

Another established principle of marine insurance law – a consequence of the marine insurance contract being a contract of indemnity – is that the person for whose benefit the insurance policy is affected has or expects to acquire an insurable interest in the property.64 Section 5 of the MIA defines insurable interest as:

(1)Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

(2)In particular, a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure to any insurable property at risk therein, in consequence of which, he may benefi t by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

The MIA, in ss 6–16, also lists a number of specific interests that are regarded as insurable interests. Accordingly, among others, buyers,65 consignees, those who have advanced money on the goods, shipowners, charterers, bailees66 and insurers have an insurable interest.

The Institute Cargo Clauses (A), (B) and (C) reflect this requirement of insurable interest in their cl 11.1, which states that, ‘in order to recover under this insurance, the assured must have an insurable interest in the subject matter insured at the time of the loss’.

Where there is some doubt about whether the assured’s interest comes within the ambit of s 5 of the Act, insurers may issue policy proof of interest (ppi) policies.67 A ppi policy is one where the policy is taken to be sufficient proof of the assured’s interest and the assured does not have to prove the nature of his interest in the subject matter. Such policies are regarded as wagering or gaming contracts (s 4(2)) and are, therefore, void under s 4(1). Therefore, they cannot be legally

60See Brotherton v Asegurdaro [2003] EWHC 1741 (Comm).

61See Wise Underwriting Agency Ltd v Grupo National Provincial SA [2004] 2 Lloyd’s Rep 483.

62On warranties, see pp 415–7.

63See Pan Atlantic v Pine Top [1994] 3 All ER 581, at p 618.

64See Lucena v Craufurd (1806) 2 B&PNR 269.

65On insurable interest of an FOB buyer, see John Gillanders Inglis v William Ravenhill Stock (1885) 10 App Cas 263. In FOB contracts, risk passes when goods pass the ship’s rail. See also Karlshamns Oljefabriker v Eastport Navigation Co,The Elafi [1981] 2 Lloyd’s Rep 679.

66See Tomlinson v Hepburn [1966] AC 451.

67Cheshire and Co v Thompson (1919) 24 Com Cas 198.

enforced. Despite this, ppi policies are in common use. These policies are binding in honour only, and, if the insurer decides not to pay the insured on the policy, the latter cannot enforce it in a court of law. This also means that, where an insurer has paid out on a ppi policy, he cannot claim under subrogation. In John Edwards Co Ltd v Motor Union Insurance Co,68 the defendants had paid out for the total loss of a vessel under a ppi policy to the plaintiffs. The plaintiffs subsequently recovered damages from the owners of the vessel responsible for the collision. In an action for declaration that the defendants were not entitled to the recovered sums, the court held that rights of subrogation could arise only where there is a contract of indemnity. As MacCardie J said:

[A contract destitute of all legal effect between the parties] cannot operate as if it were a valid bargain carrying with it the legal and equitable remedies and the body of jural remedies which ordinarily fl ow from an insurance contract. Legal proceedings to enforce subrogative rights cannot be based on a document which is stricken with sterility by Act of Parliament [at p 256].

Subrogation and double insurance

It is a well established principle in insurance law that, once the insurer settles the assured’s claim, he is subrogated to all the rights and remedies of the assured in relation to the subject matter. That is, the insurer takes the place of the insured and can exercise any rights and remedies the insured has in respect of the loss for which the insurer has paid out. In other words, as Lord Cairns, the Lord Chancellor, stated in Simpson v Thomson:69

. . . [subrogation is founded] on the well known principle of law that, where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnifi ed might have protected himself against or reimbursed him for the loss. It is on this principle that the underwriters of a ship that has been lost are entitled to the ship in specie if they can fi nd and recover it; and it is on the same principle that they can assert any right which the owner of the ship might have asserted against a wrongdoer for damage for the act which has caused the loss [at p 284].70

This principle applies (equally) to marine insurance contracts (s 79).

Under the doctrine of subrogation,71 the insurer will be entitled to recover only what he has paid out. Yorkshire Insurance v Nisbet Shipping72 exhibits this well. In this case, a ship insured by the plaintiffs sank as a result of a collision. The insurers paid out the insured sum of £72,000 to the assured. The shipowners were successful in their proceedings against the tortfeasors in Canada and received damages that produced a sum of £127,000 as a result of devaluation. The shipowners returned the sum of £72,000 to the insurers and retained the balance. The insurers brought an action against the assured for the balance. The court held that the assured could retain the balance and the insurer was not entitled to the windfall.

The doctrine of subrogation has to be distinguished from proprietary rights that the insurer acquires on abandonment after total loss is paid. The case of AG v Glen Line Ltd73 provides a good illustration. The vessel, in this case, was seized because of the outbreak of war. The insurers paid for total loss, and the ship was abandoned to the insurers. Once hostilities ceased, the ship was

68 [1922] 2 KB 249.

69(1877) 3 App Cas 279.

70See also Burnard v Radocanchi (1888) 7 App Cas 333.

414 | MARINE INSURANCE

sold for an amount greater that that paid to the shipowner by the insurers. The shipowners (i.e., the assured) also received compensation from the German government for the loss of use of their vessel. The issues for consideration were:

(a)Did the insurers have a right to retain the excess they received from the sale of the ship?

(b)Did the insurers have a claim on the compensation received by the assured?

The court held that profits made on the sale of the subject matter belonged to the insurer since he had acquired proprietary rights on abandonment. As for the compensation, that was paid to the owners for the loss of profits and was not related to the loss of the ship itself. The insurer had no rights to the compensation. Lord Atkin elucidated the distinction between proprietary rights and subrogation thus:

But a right to sue a wrongdoer for a wrongful act which causes a loss which gives rise to an abandonment appears to be something quite different from the proprietary rights incidental to the ship which passes on abandonment.

If one treats the insurer by analogy as a purchaser after the marine peril had taken effect, it is plain that the sale by itself would not pass the right to sue which would remain in the vendor. The fact is that confusion is often caused by not distinguishing the legal rights given by abandonment (s 63) from the rights of suborgation (s 79). No one doubts that the underwriter on hull damaged by collision and abandoned as a constructive total loss is entitled to the benefit of the rights of the assured to sue the wrongdoer for the damage to the hull. But he derives his right from the provisions of s 79, whereby he is subrogated to ‘all rights and remedies of the assured in and in respect of the subject matter’, very different words from ‘all proprietary rights incidental thereto’ and it is to be noted that in respect of abandonment the rights exist on a valid abandonment, whereas in respect of subrogation they only arise on payment; and that subrogation will only give the insurer rights up to 20 shillings in the £ on what he has paid [at pp 13–14].

The origins of the doctrine of subrogation are uncertain. Some of the judges regard it as a creation of common law.74 Others regard it as a creation of equity with conviction.75

Regardless of its origins, it must be pointed out that subrogation ensures that the insured is not overcompensated – that is, does not make a profit out of his loss, which leads us as a matter of course to double insurance. It is possible that the cargo is insured with two insurers – for example, where the cargo is insured by the shipper as well as the consignee. Double insurance is explained by s 32(1) as:

Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance.

Where there is double insurance, in the event of loss, the assured cannot recover the loss twice. Where one of the insurers pays out on the loss, he is entitled to look to the other insurer for contribution. The rules relating to double insurance and right of contribution76 are set out in s 32(2) and s 80 of the MIA.

74Yorkshire Insurance Co v Nisbet Shipping [1962] 2 QB 330, at p 339.

75Napier v Hunter [1993] 2 WLR 42, at pp 57–60.

76The following cases address various issues relating to contribution: Commercial Union Assurance Co Ltd v Hayden [1977] QB 804; Legal and General Assurance Society Ltd v Drake Insurance Co Ltd [1992] QB 887; Eagle Star Insurance Co Ltd v Provincial Insurance plc [1994] 1 AC 130.