Marine insurers often ask their insureds to warrant certain things are true before issuing a policy. For example, the insured may warrant that the ship will be in survey throughout the policy. If the ship is then taken by pirates, the insurer may then deny indemnity due to the breached warranty, even though the (survey) warranty had nothing to do with the cause of the loss.
This system has been in place for hundreds of years. For example, in Kenyon v Berthon , a ship was warranted as “in Port 20th July, 1776”. If fact she sailed 2 days earlier. Lord Mansfield stated that “though the difference of two days may not make any material difference in the risk, yet as the condition has not been complied with, the underwriter is not liable.”
This legal position has been codified in section 39 of the Marine Insurance Act 1909, which states “A warranty… is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him or her before that date.”
On first glance, this section seems very precise and harsh, yet recently, judiciaries around the common law world have attempted to water down its efforts. In short, there are four main methods by which judges have softened the effect of the section.
Method one: breaching a warranty for all the right reasons
In 2006, the Western Australian Supreme Court heard the case of the Pilbara Pilot. In this case, a cyclone was to hit the moored vessel, and the captain, on good advice, decided to move the vessel. This was a direct breach of warranty. The cyclone caught the vessel and the owner claimed under the marine insurance policy. The insurer denied indemnity. The insured successfully appealed. Justice EM Heenan stated four reasons why the insured should have been indemnified: 1) the Plaintiff’s actions were reasonable, 2) the loss was caused by the same cyclonic peril the Plaintiff was escaping from, 3) the Plaintiff was acting to avoid damage and protect the insured property and 4) the loss was caused by a peril of the sea and not by the breach of warranty regarding the mooring. Essentially, the Judge ruled that the legislation stating “a warranty… is a condition which must be exactly complied with, whether it be material to the risk or not” was not to be taken too literally.
Method two: find a conflicting provision, any conflicting provision
In 1999, the Hong Kong High Court heard the case of Nylon v QBE Insurance. The insured “warranted that this is a container load shipment”. In fact there were no such containers, as they were devanned and shipped break bulk. The cargo was damaged, and the insurer refused indemnity. The insured claimed the Institute Cargo Clause (A) 8.3 overrode the warranty. Clause 8.3 stated “this insurance shall remain in force … during delay beyond the control of the Assured, any deviation, forced discharge, reshipment or transhipment and during any variation of the adventure arising from the exercise of a liberty granted to shipowners or charterers under the contract of affreightment.” Justice Stone agreed with the insured. His Honour stated, unusually, that the general Clause 8.3 made an exception to the specific warranty.
Method three: claim the breach was all in the past
Superior courts in Britain, Canada and the United States have all ruled that when a breach of warranty is in play, the insured is off risk, though when that breach subsides the insured is, once again, on risk. For example, in 2006, the High Court of England and Wales heard the case The Newfoundland Explorer. The vessel was “warranted fully crewed at all times”. This warranty was ruled to be delimiting and not promissory, meaning that when the vessel was not fully crewed, the insurer would need pay no indemnity, but when the vessel was fully crewed, the insurer would be on risk. Justice Gross stated he “would accordingly have been reluctant to go further and hold this was a promissory warranty, so that any breach would discharge the insurer from liability automatically, as from the date of the breach” [at 508]. Therefore the breach did not cancel the warranty from the date of the breach, but suspended it, despite the Marine Insurance Act stating “If [the warranty] be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty” s39, and ‘where a warranty is broken, the Assured cannot avail himself of the defence that the breach has been remedied’ s40(2).
Method four: claim it’s not a warranty, but a mere liability limitation clause
In 1983, the Canadian Supreme Court heard the case Bamcell II. Here the insured ‘WARRANTED that a watchman is stationed on board the BAMCELL II each night from 2200 hours to 0600 hours with instructions for shutting down all equipment in an emergency’. A loss occurred mid-afternoon. The question was whether the absence of a night watchman allowed the insurer to deny indemnity. Justice Ritchie ruled that “the clause would only have been effective if the loss had occurred between 2200 hours and 0600 hours, and it was proved that there was no watchman stationed aboard during those hours. To this extent the condition contained in the clause constituted a limitation of the risk insured against but it was not a warranty”. Here, the Court seems to be saying that eking out the metes and bounds of a warranty destroys its status as a warranty; better to keep warranties broad.
How insurers can protect themselves
There are three main methods that insurers can get extra protection for themselves. First, in line with Bamcell II, insurers need their warranties drafted broadly and not narrowly. Second, insurers should not have anything in their policy that could be seen as conflicting with the warranties. Third, insurers should incorporate the strict wording of the Marine Insurance Act into their own contract, otherwise the insurers may face the Hussain v Brown  problem, namely that “it must be remembered that a continuing warranty is a draconian term. The breach of such a warranty produces an automatic cancellation of cover, and the fact that a loss may have no connexion with that breach is irrelevant. If underwriters want such protection, it is up to them to stipulate for it in clear terms” . This, in line with the recent trend, might even apply in Australia where the Marine Insurance Act states “A warranty… is a condition which must be exactly complied with, whether it be material to the risk or not.” Therefore, insurers who have not updated their contracts for some time should seek advice on how they can be protected from this new trend in judicial decision making.