The importance of complying with insurance warranties

Summary

Hong Kong’s top court (the Court of Final Appeal – CFA) recently handed down its judgment in Hua Tyan Development Ltd v Zurich Insurance Co. Ltd.The judgment confirms that breach of a marine insurance warranty will generally discharge an insurer from liability, whether or not the warranty is material to the risk2 .

It is possible that an insurer could lose this protection if it unequivocally waives the breach; for example, knowing of a breach of warranty, the insurer chooses not to avoid cover. However, what comes across from the CFA’s judgment is that in practice an insured will need to point to clear evidence that the insurer has waived its right to avoid cover. In this case, the fact that the insurer could have found out about the breach of warranty from information available on the internet did not fix the insurer with actual or presumed knowledge. 

Background

The insured took out a policy for marine cargo insurance cover with the insurer. The policy was for cover with respect to a shipment of logs from Malaysia to China. The cover note warranted that the deadweight tonnage (DWT) of the vessel was not less than 10,000. It was not disputed that this was a marine insurance warranty. The policy identified the vessel by name. 

On the voyage to China the vessel sank and the cargo was lost at sea. The insured made a claim under the policy for a maritime loss. The insurer sought to deny cover on two main grounds. First, the vessel’s DWT was less than that provided for by the warranty. Second, the insured had failed to disclose this fact.

At issue was whether the insurer was entitled to deny cover.

Decision

First instance 

The judge at first instance disregarded the warranty and adopted a contextual interpretation of the policy, taking into account (among other things): the factual matrix of the negotiations before the policy, the wording of the cover note and the fact that over a three year period the majority of some seventy or so policies between the insured and the insurer did not contain a DWT warranty. 

The judge also found that the insured had not breached its duty of disclosure because the insurer could readily have verified the particulars of the named vessel (including its DWT); for example, through internet databases. 

Judgment was given against the insurer. Implicit in the judge’s reasoning is that had the insurer known about the DWT of the vessel it would still have issued the policy. Interestingly, the insured also sued the broker in the alternative. The judge found that had the insurer been entitled to avoid the policy the broker would have been liable to indemnify the insured on the basis that the broker had failed: (i) to effect a policy that met the insured’s requirements; (ii) to give proper advice. 

Court of Appeal 

The insurer’s appeal succeeded. The Court of Appeal held that (among other things) the fact that the vessel was clearly named in a contract of marine cargo insurance did not prevent the insurer relying on a warranty that the vessel possessed certain characteristics set out in the cover note; such as (for example) a minimum deadweight capacity. Therefore, a breach of the warranty entitled the insurer to decline cover after the vessel and cargo were lost at sea. 

Having allowed the insurer’s appeal, the Court of Appeal ordered that judgment be entered for the insured against the broker. 

CFA

The insured’s appeal was emphatically dismissed by the CFA. Taking a more strict construction analysis, the CFA did not see any ambiguity in the wording of the cover note (referring to the DWT) and the identification of the vessel by name in the policy. The CFA found that there was no inconsistency in the identity of the vessel being known and the insurer being able to rely on the warranty to deny cover; for example, by insisting that the vessel had certain characteristics.

For the purposes of the appeal (and without deciding the point), it was assumed that, if the insured could make out a case of actual knowledge (of the vessel’s DWT) by the insurer, the claim would succeed. However, the CFA found that the insured had not made out even a prima facie case of actual knowledge.

The CFA was also sympathetic to the Court of Appeal’s analysis that even if the insurer could have checked the vessel’s DWT on the internet this (of itself) did not fix it with constructive or presumed knowledge such that the insurer lost its right to deny cover. 

In his concluding remarks, the Chief Justice observed: 

“Quite simply, the Deadweight Warranty was breached and there was no answer to that.” 3

As such, the fact that the identity of the vessel was not in dispute and the warranty may not have been material to the risk did not assist the insured. 

Comment 

The outcome in the case is no surprise; indeed, it is perhaps a bit surprising that the highest court was troubled with it4.

The CFA judgment represents what is the commonly held view in practice; marine insurance warranties should be strictly complied with. To that extent, the outcome in the case is welcome because it gives rise to greater certainty. 

It is interesting to note the position of the broker, who did not feature in the Court of Appeal or CFA proceedings. Ultimately, the broker was found to have been in breach of its duty to the insured, although the insured’s appeal to the CFA may suggest that it was not confident of being able to recover on the judgment against the broker. 

What is also evident from the case is the need for insureds’, insurers’ and brokers’ staff to be familiar with the insurance cover documents and to ensure that those documents are fit for their respective purposes. 

It is also important for insurers’ staff to have adequate training and experience to ensure that when considering cover they do nothing to prejudice an insurer’s ability to rely on warranties. 

An insurer could be prevented from relying on a breach of warranty in order to deny cover where (for example) the insurer has unequivocally waived its right to rely on the warranty; in practice, though, this is often a difficult threshold for an insured to meet.

An insurer might also lose the right to rely on a warranty if it has actual or (perhaps) presumed knowledge of facts that contradict the subject matter of the warranty. That is a question of fact. Presumed knowledge is far from straightforward. However, in this case, the fact that particulars of the vessel’s deadweight capacity could be verified by the insurer from information freely available on the internet5 did not (of itself) support a finding of knowledge and did not affect the operation of an unambiguous warranty.