In our INDECS insights, we provide our thoughts and commentary on insurance market developments and recent insurance legal cases which may be of interest to our readership.

The case of Sealion Shipping Ltd v Valiant Insurance Company [2012] EWHC 50 (Comm) (“Sealion”) looks at the materiality of allegations of non-disclosure and the meaning of ‘due diligence’ in a marine insurance context. We think it offers encouraging news for insureds in all industries.

The defendant insurer issued a Loss of Hire insurance policy to the claimants on the vessel Toisa Pisces for the year commencing May 2008. Following a series of machinery breakdowns, the vessel suffered a propulsion motor breakdown in February 2009. Vessel owners, Sealion, sought an indemnity under the Loss of Hire policy and claimed for USD 2,100,000; equivalent to 30 days off-hire.

Blair J held that the insurer could not avoid liability for machinery breakdown under the Loss of Hire policy. The aspects of insurance law disputed in the case are as follows:
1. Material non-disclosure / Misrepresentation

Sealion advised only one previous hull claim when in fact there had been two. The insurer argued that under section 18(1) of the Marine Insurance Act (MIA) 1906, “…The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured…”

The fact that the vessel had suffered 10 days loss of hire in 2004 had also remained undisclosed, and the broker made statements as to “no major business interruption” and “excellent hull record”.

It was held that these matters were not material. Blair J concluded that 10 days loss of hire was not significant in comparison to a 21 day excess under the 2008 policy. “The fact is that this was not a particularly long period of off-hire, it was nearly four years previous to the placing of the policy with the defendant, it did not result in a claim, and it did not come close to the excess period”. Duty to disclose is proportionate not absolute.

The statements made by the broker were held as merely the broker’s opinion, made in good faith, under section 20(5) MIA 1906.
2. Want of Due Diligence

The “Inchmaree” clause provided by standard hull and machinery policies provides cover for breakdown of machinery so long as this does not result from wear and tear or “want of due diligence” by the insured.

It was agreed between the parties that the breach of due diligence must be on the part of the insured itself, and in this case the acts of an individual (Sealion’s onshore technical manager) constituted the acts of Sealion (the insured).

Sealion argued that for the “want of due diligence” exception to bite, recklessness on its part was required. They maintained that the policy would be “granting an indemnity with one hand and taking it away with the other” if it denied cover for mere negligence.

Insurers reasoned that had the insured carried out thorough inspections following the incident, the loss would have been avoided. Blair J agreed with the insurers’ submission that the standard is one of negligence, and that “want of due diligence” is a lack of reasonable care.

On the facts of the case, the insurers failed to prove negligence on Sealion’s part. Sealion was entitled to rely on the advice sought by the technical manager from external competent specialists and had not been negligent.
3. Causation / Number of Occurrences

Finally, the insurer argued that there had been three separate breakdowns rather than one, as the substitute motors had failed in February, March and April. Three occurrences rather than one, if successful, would substantially reduce the off-hire claim.

However, Blair J held that the three breakdowns were not separate events; “one thing led to another”. The Court of Appeal agreed, “The hydraulics failure was simply an incidental vicissitude of the events set in train by the [port motor] breakdown.”

The judge found that the issue required a “practical approach” and Sealion had acted reasonably to mitigate problems by substituting the starboard boiler. The chain of causation had therefore not been broken.
Comment

The judgment may well be a reflection of a generally changing culture, with many of its features due to become enshrined in statute under English law in the forthcoming Insurance Bill (which will replace the MIA1906).

As the rules for business insurance move closer to consumer legislation, insurers will be required to be more specific on what must be disclosed at the proposal stage.

One word of caution is that in a dispute over due diligence of the insured, we infer that the courts may accept the company has breached its obligation as the insured by virtue of the act(s) of a single employee who is not a director or officer of the company. It may be time for insurers and insureds to be clear on what level of employee constitutes the alter ego of the insured.