Marine Insurance Law & Salvage, Collisions, Admiralty Jurisdiction & General Average - Essay Example

Marine Insurance Law & Salvage, Collisions, Admiralty Jurisdiction & General Average Part To what extent will the assured’s failure to disclose every material circumstances allow the insurer to avoid a contract for marine insurance? Marine Insurance exists to indemnify interested parties against loss, damage, or expense occasioned accidentally in connection with vessels, cargoes and any type of goods carrier at the sea.1Maritime contracts embraced charter parties, affreightments, marine hypothecations, contracts for averages and contributions, and also policies of insurances. “Polices of insurance are within (also not exclusively within) the admiralty and maritime jurisdiction of the United Kingdom. It is to be noted that for admiralty, an insurance contract must be wholly maritime. Where both maritime and non- maritime obligations are involved, admiralty jurisdiction will generally be denied, unless the maritime part can be separated from the rest of the policy2. The nature of Marine Insurance is described as ‘Uberrimae fidei’3 which means utmost good faith. If any of the party involved in the contract observes no good faith, then the contract can be avoided. As defined in the Marine Insurance Act 1906, the clauses related to the disclosure of information by assured and disclosure by agent effecting insurance are as follows: Disclosure by Assured : 1) It is liable on the assured to disclose all the information and material circumstance before concluding the contract. The assured in returns need to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract. 2) The premium is fixed by the insurer taking into consideration every material. 3) In the absence of inquiry the following circumstances4 need not be disclosed : a) In which there is a reduction of the risk involved. b) In which presumption to know general information is required. c) In circumstances in which information is given by the insurer; d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty 4) For any circumstance, being material or not, which is not disclosed becomes a question of fact 5) The term circumstance here refers to any communication made to or received by the assured. Thus the following sections in the Marine Insurance Act, determines the duties of the insured and insurer related to the disclosure of materiality and its related facts. Section 17 -18 recite the duties of the assured to disclose all the material circumstances to the insurer prior to acceptance of the risk. It includes further provisions for avoidance of the policy where these material facts have been concealed. The burden is put upon the assured to affirmatively bring this information to the assurer’s attention. This doctrine is an elaboration of the position taken by Lord Mansfield in the case of Carter v Boeham5 the duty to act in utmost good faith towards insurers. Marine insurance is always a specialized form of business and was expected that quite knowledgeable parties in the business would negotiate the contract. The civil law6 has long retained a system of automatic contract conformity, but the common law preserved breach remedies for the claimant himself to plead. The doctrine of strict and affirmative disclosure in insurance remains a contract anomaly where the policy of caveat emptor7 has otherwise been relaxed. Some commentators suggest that this provision overreaches the insured by causing forfeiture even for innocent error. Economically it suggests that the seller has less resource at his disposal than the buyer and that the rectification in terms for premium is inadequate for sellers. It is not cost efficient and resources are directed toward the seller unrelated to his ascertainable costs. In Insurance, adverse risk selection is always a factor in underwriting. The assurer does not wish inadequate insurers to select him. Besides the principle of insurance rather than mutual protection is that losses are predictable and quantifiable due to the law of large numbers, not the characteristic of any individual risk. This principle is fudged by the disclosure clause. Section 19 deals with representations in more detailed way. Representations as to facts are presumed to be true, for the benefit of securing marine insurance. Section 24 sets out the insured’s obligation of full disclosure of all material circumstances prior to the conclusion of the contract, which is extended to cover the insured’s agent by s 25. The prohibition against misrepresentation by the insured and its agent during the negotiation of the contract are found in s 268. In the event of a breach of these obligations by the insured, the insurer is given the right to avoid the contract. Besides, a breach of warranty is grounds for insurer to avoid the contract, regardless of its materiality. Warranty here could be of different types as such – express warranties, warranty of neutrality, warranty of good safety, warranty of sea worthiness of ship and warranty of legality. Cure of the breach before loss is not a defense. The act also details that express warranties are in writing and some specific items and conditions are mandatory, such as seaworthiness and neutrality of the ship, which must include documentation. The naming of a term as warranty does not offer automatic clarity as to whether the term is a warranty or a condition. Basically, in contract law, breach of a warranty is not grounds to avoid the entire contract. Breach of a condition may, under some conditions, be grounds for avoiding liability, depending upon the circumstances. Marine insurance policies have traditionally used the terms “warranted free” or “warranted that” and so on as preliminary recitals of conditions. There are many situations where the term has no contextually fixed meaning and can fall in the category of innominancy, which means it can be either condition or warranty. The English practice stands alone in strict application of the doctrine because of the requirement of immateriality of the warranty. As the doctrine of good faith in insurance has been accepted in other jurisdictions they have evolved a materiality test for the warranty and some would avoid the policy for fraud. There are three major types of marine insurances: (a) hull insurance, (b) cargo insurance, and (c) protection and indemnity (P & I) insurance. The standard forms used by insurers for each of these policies may have attached to them various clauses, schedules, or other provisions covering additional risks or contingencies underwritten by the insurer. Part 2 : Case Study : a) How might ‘O’ be able to bring a claim for the outstanding demurrage against Tricky Micky? A ) Demurrage refers to the fee or charge on detention of a vessel by freighter beyond the given time limit. Both the parties involved should be aware of the arbitration rules to be followed. If Tricky Micky is avoiding ‘O’and is not agreeing to the rules of the London Maritime Arbitration Association (LMAA) or to the rules of the Society of Maritime Arbitrators, Inc ( SMA), then it is advisable for ‘O’ to take Tricky Micky to the court. It is mandatory for ‘O’ to send the claim in writing to Tricky Micky with supporting documents within ninety days from the completion of discharge of the consignment. It is to be noted that demurrage is a liability in damages incurred when the charterer detains the ship beyond stipulated lay days or the estimated time frame. b) Would your answer to (a) above be different if, before sending the Floating Flyer to Liverpool, Tricky Micky had sold the vessel to a separately registered company (n which Tricky Micky in fact owned all the shares) which had been specifically set up to buy the ship under this sale? A) The contract of marine insurance is based on the principle of ‘utmost good faith’. It gives scope for the involved parties to avoid or terminate the contract if they do not observe that utmost good faith. In this case, ‘O’ have all the rights to avoid getting into the contract if any mistrust, chaos or confusion is observed. It is ethically obligatory for Tricky Micky to make ‘O’ aware of any new developments or changes which would affect their contract. In reference to this question, yes the plan of action would have been different and a separate set of procedure needs to be followed. At this moment, ‘O’ has two options : Firstly, as suggested in the earlier answer he can drag Tricky Micky to the court on the basis that he was not made aware of any such developments or changes and Secondly, since the vessel is being sold to the separate registered company, ‘O’ can claim the demurrage from this company as a whole irrespective of the fact that Tricky Micky owns all the shares. ‘O’ can as well claim as a maritime lien as there has been a non payment on services provided. Moreover, as per the International Hull Clauses9 it contains a sister ship clause at Clause 7.By virtue of this clause, an assured who uses ship belonging wholly or in part to the same owners or under the same management as the casualty has the same rights against the insurers as if the salving ship is entirely the property of owners not interested in the casualty. The clause provides for the amount payable for the services rendered to be referred to a sole arbitrator. c) What advise would you give to ‘B’ if the owners of the Saviour arrest the Captain Pugwash to satisfy their outstanding salvage claim against O? A) Under the Marine Insurance Act 1906 the expense of a salvage service may be recovered if it is a “salvage charge” or as general average. “Salvage charges” are defined10 as charges recoverable under maritime law by a salvor independently of contract. They do not include the expenses of services in the nature of salvage rendered by the assured or his agents or any person employed for hire by them for the purpose of averting a peril insured against. When a vessel provides salvage or other assistance to another vessel following a casualty, a claim by the Member in relation to the insured vessel in respect of oil pollution arising out of the salvage, that assistance or the casualty shall be aggregated with any liabilities or expenses incurred in respect of oil pollution with the same casualty when such other vessels are either i covered by the Association in respect of oil pollution, or ii covered for those risks by any other Association which participates in the Pooling Agreement and the Group excess reinsurance policy. A successful salvage claim requires three proofs: (1) marine peril; (2) voluntary service rendered when not required as an existing duty or from a special contract; and (3) success in whole or in part, or contribution to the success of the operation. Since the Coast Guard proved tug assistance to the vessel pursuant to its mandatory obligations under the Federal Water Pollution Control Act, it was not acting voluntarily and hence had no valid salvage claim or salvage lien against the vessel.  Hence in this case, ‘B’ has the following options : 1) ‘B’ can claim the outstanding amount from Tricky Micky on the basis that not all information was provided and he was not made aware about all the circumstance. 2) Secondly, the salvors may terminate their obligations under the “SCOPIC” 2000 clause and LOF 2000, if the total cost of the services to date and the services that would be needed to fulfill obligations there under will exceed the sum of the values of the property capable of being salved and all sums to which the salvor will be entitled as “SCOPIC” remuneration. Here ‘B’ can terminate his obligation to pay “SCOPIC” remuneration after the “SCOPIC” 2000 clause has been invoked by giving at least five clear days notice. d) How far do you think the LOF form, as signed by the master of the Captain Pugwash, meets the needs of the international shipping community? A) LOF is an acronym for Lloyds Open Form of Salvage Agreement. Lloyds form has continuously been adapted to meet the needs of all sides of the maritime industry and illustrates the benefits of having an internationally renowned standard form of salvage contract. As per the SCOPIC Clause (Special Compensation P&I Clause) it states that “SCOPIC” remuneration shall not be a general average expense to the extend that it exceeds the Article 13 and no claim for the excess shall be made in general average or under the vessel’s hull and machinery policy by the ship owners11.In practice this expense would be insured by the ship owners P&I club. The action of the master of Captain Pugwash of signing the LOF 2000 under SCOPIC provisions meets all the requirements of the international shipping community as it was recommended in the August 1999 provisions that SCOPIC be incorporated in all the LOF forms. However, it is a debatable question12 whether salvage reward under a Lloyd’s Standard Form of Salvage Agreement in a salvage charge. Since expenditure incurred by the parties to the adventure in the nature of salvage, whether under contract or otherwise, is allowable in general average, and recoverable as such under most policies of insurance, it is usually academic whether or not it is also recoverable as salvage charge. BIBLIOGRAPHY: -> Aleka Mandaraka Sheppard, 1997: Admiralty Law -> Aust, 2005 : Handbook of International Law. -> Bachrach J George, 1998 : Salvage by the Surety -> Bross, R Steward, 1956 : Ocean Shipping -> Christie Hazel, 1999 : Law of the Sea. -> Couper, AD & Walsh, C.J, 1999 : Voyages of Abuse : Seafarers, Human Rights and International Shipping -> Ehlers Peter, 2002 : Marine Issues : From a Scientific, Political and Legal Perspective. -> Gault Simon & Marsden, R.G, 2003 : Marsden : Collisions at Sea -> Geary, Ed, 2004: Gotcha: International Marine Insurance Fraud and Conspiracy -> Holdsworth, William Searle, 1958: A History of English Law -> Hughes, Robert Mortan : Handbook of Admiralty Law -> Jonnard M Claude, 1997 : International Business and Trade -> Kalis J Peter & Reiter Thomas, 1997: Policyholders’s Guide to the Law of Insurance Coverage -> Laite, Armould: Law of Marine Insurance and Average -> Lauterpacht E, 1979 : International Law Reports -> Stempel Jeffrey W, 1995 : Law of Insurance Contract Disputes -> Solomon Stephen, 1980 : Marine Insurance -> Stopford Martin, 1997 : Maritime Economics -> Susan Hodges, 1996: Law of Marine Insurance -> Solomon Stephen, 1980: Marine Insurance. 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