The English Law of Marine Insurance - Coursework Example

The English Law of Marine Insurance Introduction Founded on the concept of indemnity, the English Law of Marine Insurance can be reasonably described as heavily weighted in favour of the insurer at the expense of the insured. While it is true that in practice, indemnification can result in under-indemnification, it is also true that the assured may be over-indemnified.1 English courts have consistently pointed out the imperfect results that a principle of indemnification can achieve.2 Be that as it may, the concept of indemnity has given way to limitations on insurable interests so that the insurer may be determined to have an unfair advantage over the assured under the English Law of Marine Insurance. This paper examines the concept of indemnity in the context of English Marine Insurance Law and argues that it is an imperfect system of compensation for both the assured and the insurer, but can be construed to be heavily weighted in favour of the insurer at the expense of the insured. The Principle of Indemnification The concept of indemnification within the parameters of the English Law of Marine Insurance is firmly entrenched by legislation. Section 1 of the Marine Insurance Act 1906 defines marine insurance as follows: “A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.”3 Based on the wording in Section 1 of the 1906 Act, the basis of a marine insurance contract is indemnification. To this end, all rights, claims and obligations pertaining to a contract of marine insurance are determined around the concept of indemnification.4 Fortifying this principle, Lord Wright maintained in Richards v Forestal Land, Timber and Railway Co. [1941] 3 All ER 62 that, the both the courts and the legislature have aimed to “give effect to the idea of indemnity, which is the basic principle of insurance.”5 The basic idea is to the application of the indemnity concept to the complex and diverse situations that necessarily arise in cases of maritime adventures.6 Strict adherence to the principle of indemnity can favour the insurer to the extent that he is not bound to an open-ended compensatory regime. As Lord Ellenborough noted in Brotherston v Barber [1816] 5 M & S 418: “The great principle of the law of insurance is that it is a contract for indemnity. The underwriter does not stipulate, under any circumstances, to become the purchaser of the subject-matter insured; it is not supposed to be in his contemplation; he is to indemnify only.”7 Even so, the courts have developed an approach to the Marine Insurance Act 1906 that allows for flexibility with respect to markets changes.8 Therefore arguments that the English Law of Marine Insurance is unfairly balanced in favour of the insurer can be easily countered by the flexibility with which the current law permits judicial flexibility.9 It is also important to note that the Marine Insurance Act 1906 effectively codified the bulk of judicial interpretations as they had been developed over a period of at least 200 years.10 Be that as it may, the presumption of indemnity only remains enshrined in the current tenure of English Marine Insurance Law.11 In order to respond to the margin of error that could conceivably favour the insurer in the event an insurable interest is barred from recovery under the principle of indemnity, the parties may contract to greater coverage.12 To this end there are a number of Standard Marine Clauses that were devised by the International Underwriting Association of London which can supersede the various presumptions contained in the Act of 1906.13 In fact Institute Clauses have been amended several times over the years so that the assured may benefit from full coverage.14 It therefore follows that the principle of indemnity can be waived, provided the insurer agrees to the incorporation of full coverage clauses within the contract of insurance. The fact remains, the law starts out with a presumption that the assured is only entitled to indemnity, although flexibility of construction and the provision of contractual clauses will allow further coverage. To this end, the law of marine insurance under English Law, gives the insurer the upper hand unless the contract provides otherwise. The Principle of Insurable Interest The principle of insurable interest in English Law of Marine Insurance provides the most significant argument that the law as it is, functions in favour of the insurer at the expense of the assured. A contract of marine insurance under English Law is an agreement by which the insurer promises to indemnify the assured with respect to any losses to the subject matter insured in the event such losses accrue out of certain perils at sea.15 Obviously, the coverage is always subject to the conditions and extent provided for in the policy of insurance.16 It therefore follows that an insurable interest is limited to persons who have an interest in the safety and preservation of the subject matter. To this extent, Section 5(1) of the Marine Insurance Act 1906 provides that all persons who have an interest in a marine adventure will have an insurable interest.17 However, the extent of that interest commands that the person must have a relationship with the subject matter of insurance so that if it is destroyed or damaged he must be at risk of suffering some liability or loss.18 To this end, a person will acquire an insurable interest under the law of marine insurance if he stands to acquire a pecuniary benefit from its safety and preservation or will suffer some measure of loss as a result of its destruction or damage in the course of the event insured against.19 Arguments that the English Law of Marine Insurance heavily favours the insurer can be gleaned from the fact that the mere expectation of a benefit will not give rise to an insurable interest.20 The fact is, the insurable interest must be in effect at the time of the loss although, it may not be in effect at the time of executing the policy.21 It is a tenet of English Marine Insurance Law that the contract of insurance is a personal contract. To this end, the insurable interest with respect to the subject matter persists until such time as the insured is in actual possession of the subject matter. In the event the title is transferred to another, the transferee’s interest is terminated and he will no longer be covered by the insurance policy. It therefore follows that the vendor of goods or a ship will only be covered to the extent that he or she has an insurable interest in the relevant property.22 Some guidance can be gleaned from the case of Reed v Cole [1764] 3 Burr 1512. In this case, the court ruled that when a ship’s owner sold the ship by virtue of a contract which necessitated the payment of funds to a purchaser, a loss within that particular timeframe allotted to the ship owner an insurable interest, but only to the extent of the funds paid.23 However, where the property forming the subject matter of a sales’ contract has passed to the purchaser in is entirety from the vendor, the vendor’s insurable interest terminates while the insurable interest accrues to the purchaser.24 Likewise, a mortgagor has an insurable interest on any property under a marine insurance policy to the extent of the full value of the mortgaged property, and the mortgagee has an insurable interest to the extent of the funds due and owing under the actual mortgage.25 A trustee with an legal interest in the subject matter held under a marine insurance policy also has an insurable interest which reflects the full value of the subject matter and can recover the entire amount on the condition that he or she holds the same in trust for the relevant beneficiary or beneficiaries.26 Noussia27 explains that the concept of insurable interest in English Marine Insurance Law developed as a means of distinguishing “indemnity insurance from wager polices” and also to “satisfy the requirement of the indemnity principle itself” which mandates that the assured should be compensated for losses suffered at sea. However, the Gambling Act 2005 which came into effect on September 1, 2007, by implication repealed the insurable interest requirement so that the principle of indemnity limits the assured to only recovering his “actual loss on the happening of the insured peril.” Nevertheless, the indemnity principle together with insurable interest have given way to what may be considered entirely unjust results that can only be interpreted as leaning heavily in favour of the insurer. For example in the case of Linelevel Ltd v Powszechny Zaklad Ubezpieczen SA, (The Nore Challenger) [2005] EWHC 421 a vessel under charter to the plaintiff was covered for loss due to perils at sea as well as for loss of hire in excess of five days.28 In June of 2002, the charter company assigned to the plaintiff each of the outstanding claims as well as the vessel’s management. The assured policy was acknowledge to have commenced from October 2000. However, when the vessel went into dry dock and damages were discovered, the insurers refused payment, submitting that the plaintiff and management had no title. Moreover, the loss had not been sustained as a result of the perils at sea.29 The court ruled however, that the plaintiff was entitled to recover damages in respect of the chartered vessel. Moreover, the charter company as charters with a duty to repair the vessel and to keep insured had an insurable interest. However, the charter company had assigned its rights to the plaintiff and as such the plaintiff had title to sue for the damaged hull. Moreover, the charter company could not benefit from the loss of hire since the charter party had previously expired and as such that right could not be assigned to the plaintiff.30 In essence the court limited the extent to which the insured could recover damages from the insurer, leaving the matter almost entirely between the insured and the charter party. Conclusion The English Law of Marine Insurance as reflected in the Marine Insurance Act 1906 firmly establishes the principle that the contract of marine insurance is based on indemnification. To this end, the insured may only recover damages in respect of insurable interests. As a result the law appears to be heavily weighted in favour of the insurer at the expense of the insured. This is because, ultimately the insured may only recover actual losses. Be that as it may, the courts have been flexible in its approach to the interpretation of the Marine Insurance Act, so that parties may agree to full coverage and in an appropriate case, reduced coverage. In this regard, the English Law of Marine Insurance will only provide a greater advantage for the insurer if the insured allows it. In other words, the insured may insist upon the inclusion of full coverage clauses in the body of the marine insurance contract. By taking this approach, the insured will avoid the consequences of limited coverage under the presumptions and principles that flow from both the indemnity principle and the insurable interest doctrine. Bibliography British and Foreign Insurance Co. Ltd. v Wilson Shipping Co. Ltd. [1921] 1 AC 188. Brotherston v Barber [1816] 5 M & S 418. Croly, C and Merkin, R. (2001) “Doubts About Insurance Codes.’ JBL 32, 587-604. Ebsworth v Alliance Marine Insurance Co[1873] LR 8 CP 596. Halsbury’s Laws of England, Vol. 25, 4th Edn. Para 377, 210. Hodges, S. (1996) Law of Marine Insurance. Routeledge. Joyce v Swann [1864] 17 CBNS 84. Linelevel Ltd v Powszechny Zaklad Ubezpieczen SA, (The Nore Challenger) [2005] EWHC 421. Lloyd v Fleming [1872] LR 7 QB 299. Marine Insurance Act 1906. Merkin, R. (2000) Marine Insurance Legislation. London: LLP. Murphy, K. and Sarma, K. (2002) Modern Law of Insurance. London: Butterworths. Noussia, K. (2007) The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach. Springer. Noussia, K. (2008) “Insurable Interest in Marine Insurance Contracts: Modern Commercial Needs Versus Tradition”. Journal of Maritime Law & Commerce, 39(1), 81-96. Reed v Cole [1764] 3 Burr 1512. Richards v Forestal Land, Timber and Railway Co. [1941] 3 All ER 62. Stockdale v Dunlop [1840] 6 M & W 224. Sutherland v Pratt [1843] 11 M&W 296. Read More