Marine insurers (and courts) must sometimes base their decisions on how a vessel lost insured cargo at sea. For example, the ship may have lost the cargo as a result of an “inherent vice” of the cargo itself (which is usually excluded from coverage under most cargo insurance policies) or as a result of a “peril of the seas” (which is normally covered by the policy). The U.K. Supreme Court (the new name of the House of Lords) considered this quandary recently in Global Process Systems Inc. v. Syarikat Takaful Malaysia Berhad.

The respondents bought a jack-up oil rig for conversion into a mobile offshore production unit, for use off the coast of Malaysia. It planned to transport the rig from Galveston, Texas, to Lumut, Malaysia. The respondents insured the rig against “all risks” under a marine policy incorporating the Institute Cargo Clauses (A) of January 1, 1982. Clause 4.4 of the policy excluded “loss, damage or expense caused by inherent vice or nature of the subject matter insured”. The three massive tubular legs of the rig extended some 300 feet into the air during the towage. When the tug and barge arrived just north of Cape Town, South Africa, some repairs were made to the legs before the voyage resumed. Nevertheless, the starboard leg broke off, falling into the sea just north of Durban. The following evening, the forward and port legs also broke off. This resulted in a claim by the respondent against the underwriter, citing metal fatigue in the three legs.

Blair J. in the Commercial Court found that the legs, given their deteriorated state, were incapable of withstanding the weather that the respondents expected on the insured voyage and that the loss was therefore the result of an inherent vice. As such, it was excluded from coverage under clause 4.4 of the Institute Cargo Clauses “A” and section 55(2)(c) of the U.K.’s Marine Insurance Act, 1906 (“MIA”).

The English Court of Appeal reversed Blair J., holding that a “leg breaking wave” had felled the first leg, resulting in greater stress on the other two legs, which ultimately also broke off. This constituted a peril of the sea, meaning the loss was insured within the meaning of section 55(1) of the MIA, and was therefore a loss covered under the policy. The insurers appealed to the U.K. Supreme Court to determine if the proximate cause of the loss of the legs was an inherent vice, a peril of the seas, or a combination of both (probably resulting in exclusion of coverage).

The Supreme Court reiterated the definition of “inherent vice or nature of the subject matter insured”, as understood in section 55(2)(c) of the MIA. That definition had been formulated by Lord Diplock in Soya GmbH Mainz Kommanditgesellschaft v. White as “... the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty”. The Court rejected the proposition that inherent vice is established by showing that the goods in question were incapable of withstanding the normal incidents of the insured voyage – a position articulated by Moore-Bick J. in Mayban General Insurance v. Alstom Power Plants Ltd. That position, in the Court’s judgment, would frustrate the very purpose of cargo insurance, for coverage would then extend only to loss or damage caused by perils of the seas that are exceptional, unforeseen or unforeseeable. Losses resulting from unseaworthiness of the cargo would then not be covered. Yet, the MIA, at section 40(1), expressly provides that in cargo insurance there is no implied warranty that the goods are seaworthy (unlike the implied warranty that the ship is seaworthy in hull insurance, under section 39(1) of that Act). Nor does cargo insurance have a provision equivalent to those found in time policies, excluding loss or damage attributable to unseaworthiness at the outset if known to the assured.

Lord Mance arrived at the same conclusion. He noted that after the rig’s first leg broke, the breakage of each of the other two legs was caused in just the “right” way by a leg-breaking wave. Such a wave was a fortuitous, external accident or casualty, and as such was insured under an all-risks cargo insurance policy such as the policy subscribed in this case. Lord Clarke agreed. He noted that as decided in The Miss Jay, a claim lies under the policy even if the action of the wind or sea is the immediate cause of the loss, notwithstanding that the conditions were within the range of sea conditions which could reasonably have been anticipated under the circumstances.

This decision is filled with useful authorities on inherent vice and peril of the sea in marine insurance law. It is surely relevant to Canada, since Canadian law on marine insurance is so largely based on English law and the UK’s 1906 statute.