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Inherent Vice and Inevitable Loss
London & Bermuda Newsletter
“All risks” policies can give rise to a tension between the commercial objective of general cover for the widest range of perils, and the limits of insurability.
The English Commercial Court’s recent judgment in Global Process Systems Inc and Anr v Syarikat Takaful Malaysia Berhad (31 March 2009) provides useful guidance as to the principles that the English Courts will apply when considering whether loss is recoverable under an “all risks” policy by virtue of being inevitable or, alternatively, caused by inherent vice. It also helpfully considers the interrelation between inevitable loss and inherent vice. The case concerns a marine policy, but many of the principles will be applicable in a non-marine context.
The facts
A jack-up oil rig was being towed on a barge from Texas to Malaysia in November 2005. During its sea voyage, it lost three of its legs due to fatigue cracking caused by the repeated bending of the rig’s legs under the influence of the motions of the barge in ordinary weather conditions. Prior to the rig’s demise and during the same journey, some cracking had been noticed on the rig and considerable remedial work had been carried out. The rig was insured as cargo under an “all risks” policy of insurance.
The claim
Insurers defended the insured’s claim on the basis that the cause of the loss was “inherent vice” in that the rig’s legs themselves were not capable of withstanding the normal incidents of the tow in ordinary weather conditions. That placed the loss within the following standard exclusion:
“In no case shall this insurance cover … loss damage or expense caused by inherent vice or nature of the subject matter covered”.
Alternatively, insurers submitted that the fractures to the rig’s legs were an inevitable consequence of the sea journey. As the “all risks” policy covered risks and not certainties, it followed that there could be no cover for this loss.
The insured disagreed. The loss was accidental and therefore within the terms of the “all risks” insurance policy. The proximate cause was failure to ensure that adequate repairs were carried out to the rig during its sea journey and the loss of the legs had therefore not been inevitable.
Additionally, insurers’ case on inherent vice must be wrong. Inherent vice refers to a natural condition of the subject matter itself, not external matters such as conditions of voyage. Otherwise any cargo loss occurring during normal conditions of voyage would be caused by inherent vice.
The judgment
The Court confirmed the insured need only show the cause of the loss was accidental (that is, not inevitable). The burden was then on the insurers to prove the loss fell within the “inherent vice” exclusion in the policy which it sought to rely on.
The inevitability defence
The Court dismissed insurers’ inevitability or lack of fortuity defence. Although the failure of the rig’s legs was very probable, it could not be said to have been inevitable.
The onus of proving that the loss in question is fortuitous, or not inevitable, represents a low hurdle for the insured. On the facts of the current case, the insured overcame the hurdle. It was true that the rig was “very lucky” to have made it through the first leg of its journey without failing, as events of the second leg of the voyage revealed. Nevertheless, the potential for failure was still not determinate, and depended upon weather and wave patterns. However likely those factors were to occur, they were still contingencies, with the result that inevitability could not be made out.
The inherent vice defence
However, insurers succeeded in their “inherent vice” defence.
It was not necessary for insurers to prove the loss resulted purely from the natural behaviour of the insured cargo and without any “external intervention”, in order to show inherent vice. The appropriate test for inherent vice was whether there was an inherent inability of the rig to withstand the ordinary incidents of its voyage. Since, on the facts of the case, the rig had been fundamentally unable to withstand the ordinary incidents of being towed in normal weather conditions, the Court was satisfied that the proximate cause of the loss was inherent vice as opposed to the failure to carry out adequate repairs as argued by the insured.
The failure of repairs to avert the loss was irrelevant. There was no intention to carry out repairs extensive enough to render the rig capable of withstanding the remainder of the voyage. Nor would repairs of that nature have been practicable.
Conclusion
This case provides welcome clarification on the principle of inherent vice as excluded under an “all risks” policy and serves to emphasise that the fundamental purpose of insurance is to cover risks, not certainties. It is also helpful to see inevitable loss and inherent vice measured against one another. The test for inherent vice emerges with a lower hurdle, allowing insurers to rely on external contingencies which must be disregarded in relation to inevitability.
Global Process Systems Inc and Anr v Syarikat Takaful Malaysia Berhad (31 March 2009)
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