A court recently considered an insurance claim under a marine cargo all-risk insurance policy for damages to a ship unloader crane that had occurred while it was being unloaded onto a barge at West Port, Port Klang.(1)

Facts

The first plaintiff was a Malaysian marine engineering company, specialising in purchasing, refurbishing and selling port cargo cranes for the shipping and logistic industry.

The plaintiff had purchased a second-hand CSU 1300 crane (a crane which continuously unloads coal from a ship or barge at port onto a conveyor belt and along the wharf into a warehouse) from West Port.

In October 2010 the plaintiff entered into a sale and purchase agreement for the crane with the second plaintiff, Pulau Graha Amerindo, for $1.5 million. The crane was to be loaded onto a barge and towed by tug to the Suralaya Coal Power Station in Indonesia on or around December 15 2010.

The defendant was an insurer based in Malaysia.

Before the voyage to Indonesia, the plaintiff and purchaser jointly purchased all-risks cargo insurance (single voyage) from the defendant to insure the crane while it was towed from West Port, Port Klang to the Suralaya Coal Power Station in Indonesia. The crane was insured for RM5.1 million and a RM18,826 premium was paid.

On December 5 2010 the crane was unloaded from the West Port Wharf onto the barge and steel sea-fastening pipes were welded onto the crane as temporary sea fastenings pending jacking-down operations.

On December 8 2010 the jacking-down process commenced. The plaintiffs' contended that the wake caused by a passing container ship caused the barge to roll and pitch heavily, resulting in the crane falling onto the wharf. The crane completely buckled and was beyond economic repair.

The plaintiffs submitted a compensation claim to the defendant under the insurance policy for total loss of the crane. By a letter dated January 3 2012, the defendant repudiated liability in respect of the plaintiffs' claim under the insurance policy based on breaches of warranty.

Issues

The issues to be tried were as follows:

  • Was the incident resulting in damage to the crane covered under Clause 1 of the Institute Cargo Clause A set out in the insurance policy?
  • What was the effect of the towage and lashing and pre-shipment survey clause – that is, was the clause a warranty, pre-condition or condition? Further, the court had to decide whether the plaintiffs had breached said clause.
  • Had the plaintiff breached the warranty of seaworthiness of the barge under Clause 5.1 or as implied in the insurance policy?
  • Were the plaintiffs prevented from claiming loss, damage or expenses due to the incident pursuant to Clause 5.1 of the Institute Cargo Clause A or breach of the implied warranty of seaworthiness in the insurance policy?
  • Had the plaintiffs failed to comply with the clause in the insurance policy which stated that the tug and barge being used for the voyage could not be older than 15 years?
  • Was the clause in the insurance policy which set out the age of the tug and barge considered a warranty, pre-condition or condition?
  • Was the incident resulting in the collapse of the crane due to non-compliance with any of the warranties or conditions under the insurance policy?

Decision

Insurance policy coverage The court held that for the plaintiffs to succeed, the loss had to fall within Clause 1 of the policy and the onus was on the plaintiffs to prove on the balance of probabilities that their claim fell within Clause 1, which read as follows: "This insurance covers all risk of loss or damage to the subject matter insured except as provided in Clauses 4,5,6 and 7."

The court was of the view that, in accordance with Clause 1, the defendant had undertaken to indemnify the plaintiffs against all risks of loss to the insured cargo in the course of transit, including loading and unloading. Therefore, there was no dispute that loss of the crane during the unloading process was covered by the insurance policy.

Breach of towage clause The insurance policy incorporated Institute Cargo Clause A and contained the following statement:

"Clauses/warranties: subject to towage and lashing & preshipment survey at insured's own cost and all recommendation of the surveyor to be complied with at all times

warranted single tow only cargo weight does not exceed the load line capacity of the barge vessel exclude fresh, rain sea water damage tug and barge not exceeding 15 years."

The defendant argued that the plaintiffs had failed to carry out the towage, lashing and pre-shipment survey, which the defendant claimed was a warranty or condition under the insurance policy, which had to be completed before the crane was unloaded from its original position.

The pre-shipment clause read as follows: "Subject to towage and lashing [sic] and Pre-shipment Survey at Insured's own cost and all recommendation of the surveyor to be complied with at all times."

The court was of the view that the first issue was on the interpretation of the pre-shipment clause. The plaintiffs submitted that the clause required three separate surveys: a pre-shipment survey, a towage survey and a lashing survey. The plaintiffs further submitted that only the pre-shipment survey had been completed, as the towage survey and the lashing survey – which were meant to be completed after the crane was loaded and ready to commence the journey – could not be completed because the crane had toppled before it was unloaded onto the barge.

The defendant submitted that there was only one survey consisting of towage, lashing and pre-shipment, which had to be completed before the crane was unloaded from its original position. Therefore, as the same was not done, the plaintiffs had breached the warranty or condition precedence, which warranted the dismissal of the claims under the insurance policy.

The court referred to the Court of Appeal's decision in Malaysia British Assurance Berhad v Syarikat Pembenaan Karun Sdn Bhd(2) on the construction of an insurance policy, wherein the following was held:

"[23] In construing the policy, the object of the parties is to be steadily borne in mind and the policy must not be construed so as to defeat that object, nor as to render it practically illusory. This was stated by Lindley L.J., delivering the judgment of the English Court of appeal in Cornish v The Accident Insurance Company Ltd [1889] QBD Vol XXIII, 453:

...to ascertain the true meaning of the exception the whole document must be studied and the object of the parties to it must be steadily borne in mind. The object of the contract is to insure against accidental death and injuries, and the contract must not be construed so as to defeat that object, nor so as to render it practically illusory."

The parties agreed that the purpose of the lashing survey was to ensure that the cargo concerned was secured for the intended voyage.

The defendant took the position that the towage, lashing and pre-shipment survey had to be completed before the cargo was loaded onto the barge. However, under cross examination, the defendant's witness contradicted himself and agreed to the plaintiffs' suggestion that the towage survey:

  • could not be performed before the loading of cargo;
  • could be performed only once the tug and barge were ready for voyage; and
  • must be completed before commencement of the voyage.

The court agreed with the plaintiffs' contention that it was only the pre-shipment survey that had to be completed before the crane was unloaded from its original position. The court was of the view that the lashing and towage surveys could not be carried out until the crane had been lowered to its final position on the deck of the barge for the voyage to Indonesia. Further, the court held that there were three separate surveys, not just one survey.

The court further agreed with the plaintiffs that based on the rule in Contra Proferrantum, where there are doubts as to the meaning of a clause, the same must be interpreted against the insurer. The defendant argued that the clause ought to be given a plain interpretation and the reference to a singular survey, rather than multiple surveys, indicated that only one survey was required.

The court found that there was some ambiguity in the clause regarding whether it referred to just one survey or three distinct surveys.

The court considered Amanah Raya Bhd v Jerneh Insurance Bhd,(3) wherein the Court of Appeal referred to the applicable rules on the construction of insurance policies and stated as follows:

"[9] It may be useful to bear in mind the rules on construction of insurance policies before determining the meaning of the exclusion clause. As Fisher J said in Jason v Batten (1930) Ltd; Jason v British Trader 2019; Insurance Co Ltd [1969] 1 QB 281 at p 290:

A policy of insurance is subject to the same rules of construction as any other written contract. The words used in it must be given their plain, ordinary meaning in the context of the policy looked as a whole, subject to any special definitions contained in the policy. In case of ambiguity the contra proferentum rule will apply but apart from this there is no rule of law which requires me to strain the language of the policy in favour of or against the insured person."

The court was of the view that if the insurance policy had more than one meaning, and if there was any doubt as to which meaning the parties intended the words to bear, then the construction to be adopted should be that which is most favourable to the assured. In support of its findings, the court referred to Central Lorry service Co Sdn Bhd v The American Insurance Co,(4) which found as follows:

"In construing insurance policies, the contra proferentem rule shall apply if there is ambiguity or doubt as to the extent of the policy. Since the policy was prepared by the insurance company, the doubt and ambiguity should be construed in favour of the insured, namely, the plaintiff in this case."

The court was of the opinion that according to the true construction of the clause, the lashing and towage survey requirements were distinct and separate from the pre-shipment survey and could not be performed because the crane collapsed before the loading process could be completed. Therefore, the plaintiffs had not breached the clause when they failed to prepare the lashing and towage surveys before commencement of the loading process.

The court found that even if the lashing and towage surveys amounted to warranties or conditions, as submitted by the defendant, there was no necessity of compliance as the crane collapsed before the surveys could be completed; thus, the lashing and towage survey requirements had not been breached. This was pursuant to Section 34 of the United Kingdom Marine Insurance Act 1906, which has been set out in Malaysian law under Section 5 of the Civil Law Act 1956.

In deciding the pre-shipment survey issue, the court had to address two factors:

  • whether the pre-shipment survey was performed in this case; and
  • whether the pre-shipment survey was a warranty or a condition.

The plaintiffs' expert report explained that a pre-shipment survey is conducted on the cargo to determine its suitability for transport and loading. The defendant contended that a pre-shipment survey includes all activities, including lashing and towage.

The court found that the plaintiffs' pre-shipment survey not only dealt with the cargo, but also:

  • the condition of the crane before the commencement of the loadout operation;
  • the inspection of the internal sea fastening of the platform, railings and miscellaneous parts of the crane; and
  • the process and procedures for when the crane was ready to be loaded.

The court was of the opinion that the plaintiffs' pre-shipment survey fell under the definition set out in the insurance policy; as such, there was no need to ascertain whether the clause was a warranty or condition precedent.

Breach of warranty of seaworthiness The defendant contended that the claim was not payable, as the plaintiffs had breached the warranty of seaworthiness of the barge under Clause 5.1 of the insurance policy

The insurance policy schedule incorporated Institute Cargo Clause A as part of the insurance contract between the plaintiffs and the defendant. Clauses 5.1 and 5.2 of the Institute Cargo Clause A read as follows:

"5.1 In no case shall this Insurance cover loss damage or expense arising from:-

unseaworthiness of vessel or craft, unfitness of vessel craft conveyance container of liftman for the safe carriage of the subject matter insured, where the Assured or their servants are privy to such unseaworthiness or unfitness, at the time the subject matter insured is loaded therein.

5.2 The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness."

The court referred to the Court of Appeal's decision in Loh Shiiun Hig v Kurnia Insurances (M) Bhd,(5) where it was held that the unseaworthiness of a vessel is a question of fact and that the burden of proof lies with the insurer. Thus, the onus was on the defendant to prove that a breach of Clause 5.1 had occurred, namely that:

  • the barge was unseaworthy;
  • the loss claimed under the insurance policy arose out of the barge's unseaworthiness; and
  • the plaintiffs knew of the unseaworthiness.

It was the defendant's case that the barge's bulkheads were not tight, which allowed water from the ballast tanks to leak. Both of the defendant's experts agreed that loose bulkheads will render the vessel unseaworthy. The plaintiffs' expert disagreed.

The court found that there was no evidence regarding how, when and what caused water to enter into the tanks, nor how much. The court further found that even if there was a leak, the stability of the barge would not be affected in this case and the barge would have remained stable and seaworthy for the intended voyage.

The defendant was further required to establish that the loss claimed under the insurance policy arose out of the barge's unseaworthiness.

In this regard, the court agreed with the plaintiffs' contention that all of the experts agreed that the alleged unseaworthiness of the barge did not cause it to topple and found that the defendant had failed to establish that the loss claimed under the insurance policy arose out of the barge's unseaworthiness. The court held that on the balance of probability, the collapse of the crane was a result of the wake caused by a fast-moving ship and not due to any unseaworthiness of the barge.

The court found that the plaintiffs had proven their case on the balance of probability and granted their claim for RM4.5 million, with costs.

For further information on this topic please contact Rajasingam Gothandapani at Shearn Delamore & Co by telephone (+60 3 2070 0644) or email (rajasingam@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.

Endnotes

(1) Jasib Shipyard & Engineering (M) Sdn Bhd v Tune Insurance Malaysia Bhd [2016] MLJU 1136.

(2) [2008] 6 MLJ 29.

(3) [2005] 2 CLJ 393; [2005] 4 MLJ 1.

(4) [1980] 1 LNS; [1981] 2 MLJ 40.

(5) [2014] 5 MLJ 124.

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