In Global Process Systems v Syarikat Takaful Malaysia Berhad  EWCA Civ 1398, the Court of Appeal was asked to consider whether the loss of the legs of a jack-up rig occurring during a tow in anticipated weather conditions was due to inherent vice and, therefore, excluded under an All Risks Marine Insurance Policy. The Court held that the test for inherent vice was not whether the weather was within the range that could reasonably be anticipated, but whether it would be bound to occur as a usual incident of the type of voyage being undertaken. On the facts the damage was caused by the perils of the sea, not inherent vice, and was, therefore, not excluded.
The Claimants (the Appellants in the Court of Appeal) purchased a jack-up rig that they required to be towed from Texas where the rig was laid up to East Malaysia. The Claimants retained a firm to arrange transit, who in turn recommended a marine surveyor required to approve the transit arrangements for insurance purposes. The principal and anticipated issue with the transportation of the jack-up rig was the risk of metal fatigue to the legs, which extended 300 feet into the air during the tow, caused by the action of the waves. Therefore, consultants were engaged to calculate the structural integrity of the legs and, following those calculations, the marine surveyor issued the certificate of approval for the tow.
Although there was an issue at First Instance as to why the marine surveyors did not have sight of further calculations by the consultants carried out during the currency of the voyage that suggested fatigue life of the legs had been expended, it was never suggested that the Claimants knew the legs were unfit for the journey or were reckless as to whether the legs were fit. The Claimants relied on the marine surveyor, as did the insurers.
The final part of the journey around the Cape of Good Hope commenced on 28 October 2005. On 4 November 2005, the starboard leg broke off followed the next day by the forward leg and the port leg.
It was common ground between the parties that the loss of the legs was as a result of fatigue cracks that had developed and propagated as a result of the motion of the sea. Once the cracks had reached a critical size, the application of sufficient stress led to the failure of the legs, with the other legs more exposed to failure once the starboard leg had been lost. The expert evidence on the cracking accepted at First Instance and by the Court of Appeal was that the cracks themselves would not have been enough to cause the loss of the legs, which would only have failed as a result of a leg breaking final stress.
The Claimants accepted that the weather experienced during the tow was within the range that could reasonably have been contemplated. The limited evidence on the weather and waves created some difficulties for the Court of Appeal given the conclusions drawn on the correct test for inherent vice.
First Instance Decision
The policy covered "all risks of loss of or damage to the subject matter insured" but excluded "loss damage or expense caused by inherent vice or nature of the subject matter covered".
The task for Mr Justice Blair was to ascertain the proximate cause of the loss, the burden being on insurers to prove that the damage was a result of inherent vice if they wished to rely upon that exclusion. Blair J's judgment was that the legs failed because they had an inherent inability to withstand the normal incidents of the voyage, including the weather reasonably to be expected. Therefore, the damage was excluded by the inherent vice exclusion.
Decision of the Court of Appeal
The issues before Court of Appeal were (a) whether Blair J had applied the correct test; and (b) whether his conclusion was correct. The Court of Appeal unanimously overturned the judgment of Blair J and found for the Claimants, Lord Justice Waller giving the leading judgment.
Waller LJ agreed with Blair J that damage caused by inherent vice could extend beyond damage caused solely and exclusively by the internal characteristics of the property insured and could include a combination of internal characteristics and the ordinary incidents of the voyage. However, inherent vice could not be a proximate cause of loss if there was an external eventuality or accident that caused the loss. It was only where a peril insured against was not a proximate cause that inherent vice could be the sole and proximate cause of loss.
Where Waller LJ differed from Blair J was in his view that the answer to the question of what were the ordinary incidents of the voyage was not to be found by reference to what wind and wave conditions were reasonably foreseeable (the test articulated by Mr Justice Moore-Bick (as he then was) in Mayban General Assurance BHD v Alstom Power Plants Ltd (2004) 2 Lloyd's Rep 609). Rather, the ordinary incidents of the voyage were defined by reference to wind or wave which, it would be the common understanding, would be bound to occur as the ordinary incidents on any normal voyage of the kind being undertaken. This correct test was narrower than the reasonable foreseeability test but was wider than certainty (that loss or damage would occur), and that question might be affected by considering precisely what the insurance was covering.
Expressing some reservations over the evidence on waves and weather adduced at First Instance, Waller LJ concluded that in finding that the accident was not a certainty, Blair J must have determined that a leg breaking wave that caused the damage was not bound to occur during the transportation of the rig.
In the present case the rig had been properly stored and was in good condition in that marine surveyors had been consulted and certified the rig fit for the voyage. The legs had not simply suffered severe metal fatigue and cracking so as to constitute normal wear and tear. Metal fatigue was not the sole cause of the loss of the legs. A leg-breaking wave, not bound to occur in the way it did in a voyage round the Cape of Good Hope, caused the starboard leg of the rig to break off, which led to the others being at greater risk and then breaking off. It was not certain that a leg-breaking wave would occur and, although with the benefit of hindsight the occurrence of such a wave was a high probability, that was a risk against which the insured had sought and obtained insurance.
The Court of Appeal's judgment is helpful to insureds in providing a narrower construction of incidents of the voyage that will be treated as constituting an inherent vice of the subject matter insured in the context of marine insurance. Although the Court of Appeal found for the assured on this occasion, the question of the type of weather and waves that on a particular voyage are bound to occur will inevitably be fact sensitive and so, necessarily, will be the determination of those conditions which mean the proximate cause of the loss is a peril of the sea rather than inherent vice. The conclusion that inherent vice can only be a proximate cause of loss if there is no other insured peril that is a proximate cause is similarly helpful to insureds. The consequences of the judgment will no doubt lead to the role of marine surveyors being scrutinised and insureds will need to continue to comply strictly with marine survey policy conditions. It remains to be seen how insurers in this class will respond in terms of certification requirements.