Publications
Inherent Vice as a Policy Defence?
London & Bermuda Newsletter
Spring 2010
As readers may recall from our Summer 2009 edition of this newsletter, the English Commercial Court considered the policy defence of inherent vice in the context of an “all risks” policy in the case of Global Process Systems Inc and Anr v Syarikat Takaful Malaysia Berhad in March 2009. However, on 17 December 2009 the Court of Appeal [2009 EWCA Civ 1398] overturned this decision restricting the scope of this policy defence and, therefore, underwriters’ ability to rely on it.
The facts
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A jack-up oil rig was being towed on a barge from Texas to Malaysia in November 2005. During its sea voyage around the Cape of Good Hope, 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 which included the following standard exclusion for inherent vice:
“In no case shall this insurance cover … loss damage or expense caused by inherent vice or nature of the subject matter covered”.
It was common ground between the parties that the action of the waves were no greater than was “reasonably to be expected” in November around the Cape of Good Hope. The key question was the proximate cause of the loss. The claimant rig owners identified it as perils of the sea. In contrast, the insurer identified it as inherent vice in the rig’s legs. The insurer argued that if the actions of the sea were no more than reasonably foreseeable on that particular voyage, then the rig’s legs themselves were not capable of withstanding the normal incidents of the tow in ordinary weather conditions. Accordingly, the cause of the loss had to be inherent vice.
The First Instance Decision
At first instance, the judge dismissed the insured’s case in favour of the insurer.
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The Court of Appeal Decision
The Court of Appeal held that the test applied by the judge at first instance was too narrow. The correct test should have been whether the loss had occurred in conditions that were bound to occur rather than conditions which were reasonably foreseeable. A reasonable expectation of the weather conditions from which the loss arose was not, on its own, enough to show inherent vice.
On appeal, the appellant rig owner was able to demonstrate that “a leg breaking wave” (which did amount to a peril of the sea) caused the starboard leg of the rig to break off and that this, in turn, had led to the other legs of the rig being at greater risk and then also breaking off. The wave, while reasonably foreseeable, was not bound to occur in the way that it did on any normal voyage around the Cape of Good Hope. The Court of Appeal found that such an incident was not certain to happen and although with the benefit of hindsight it was highly probable, that high probability was unknown to the appellant rig owners and a risk which they had insured against.
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Comment
This case has clearly narrowed the circumstances in which inherent vice will successfully be able to operate as a policy defence. Subject to any appeal to the Supreme Court, Underwriters are now likely to find it much more difficult to rely on inherent vice as a policy defence and will need to adduce detailed expert evidence in such cases to show whether the loss, in any given case, occurred in conditions that were bound to occur rather than in conditions which were reasonably foreseeable.
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