ISSUE 019: June 2011 Pauline Barratt
The Inherent Vice Exclusion: Only A Shadow Remains
Introduction
Marine insurers are of course familiar with the
inherent vice exclusion that customarily applies
in both hull and cargo insurance (for example,
exclusion 4.4 in Institute Cargo Clauses (A))
and which is based on section 55 of both the
New Zealand and UK Marine Insurance Acts.
This decision was overturned by the Court of
Appeal. It said that the correct test was
whether the rig had been capable of
withstanding such weather as was bound to
occur – not, such weather as could reasonably
have been expected.
There have been a number of cases in which
the expression “inherent vice” has been
defined.
For example, in Soya GmbH v
Harding, Lord Diplock said that "It means 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".
A further appeal to the Supreme Court
followed. A large part of the focus was on how
to reconcile the fate of the oil rig with the test in
Soya GmbH v White, set out above. The
insurers argued that “the ordinary course of the
contemplated voyage” included all foreseeable
weather conditions, so that if damage occurred
during such foreseeable conditions, there was
no fortuity and thus the loss should be
considered as having arisen through inherent
vice.
This authority, and others to similar effect, have
now been the subject of re-examination in a
recent decision of the UK Supreme Court, with
results that may be unpalatable to insurers.
The Cendor Mopu
The case concerned an oil rig (named “Cendor
Mopu”) that was purchased by the plaintiffs and
taken by barge from Texas to Malaysia, with
the three legs of the rig extending about 300
feet into the air. The rig was insured with the
defendant insurer on terms which excluded
losses from inherent vice.
During the course of the lengthy voyage, first
one and then the other two legs of the oil rig
broke off and fell into the sea off the coast of
South Africa. The owner‘s insurance claim
asserted loss by perils of the sea, particularly
the sea conditions at the time of the loss. The
insurers responded by denying cover and
alleging inherent vice, saying that the legs were
simply too weak to cope with the voyage.
At trial, it was held that the cause of the loss
was metal fatigue caused by wave action, with
the final failure being caused by the impact of a
“leg-breaking wave”. The trial judge concluded
that as the legs were not capable of
withstanding the normal incidents of the
voyage, including weather conditions that could
reasonably have been expected, the inherent
vice exclusion applied.
The cargo owner, by contrast, said that if
goods are lost by what would otherwise be an
insured peril such as a peril of the seas, that is
itself a fortuity and is outside the ordinary
course of the contemplated voyage.
The Supreme Court was not impressed by
either position, saying that if the insurers were
right it would effectively mean that cargo would
have to satisfy a precondition of fitness,
something not supported by the law; whereas
if cargo owners were right, it would mean that if
there were any fortuitous event at all, it would
preclude a finding that inherent vice was the
proximate cause of the loss. The Court thus
searched for an intermediate position between
these two extremes.
In so doing, it was held (Lord Mance) that Lord
Diplock’s reference to “the ordinary course of
the intended voyage” did not refer to
foreseeable weather conditions, but rather was
used by way of contrast with a voyage on
which some fortuitous external accident or
casualty occurred. Further, there was no
limitation on Lord Diplock’s qualification
“without the intervention of any fortuitous
external accident or casualty”. The effect is
that if a cause of the loss was something that
could be considered a fortuity, it would prevent
the loss from being treated as having been
caused by inherent vice.
Conclusions
The ultimate conclusion was that only if the
loss or damage was due either to uneventful
wear and tear in the prevailing weather
conditions, or to inherent characteristics of the
hull or cargo not involving any external event,
would insurers be able to rely on the inherent
vice exclusion. So, “ordinary wear and tear”
will cover losses arising from the normal
incidents of use (in the case of a vessel) or of
handling and carriage (in the case of cargo),
whereas inherent vice will cover the inherent
characteristics of or defects in a hull or cargo,
leading to it causing damage to itself without
any intervening fortuity. It was also said that:
If this exposes insurers to risk which
they are not prepared to accept, they
may of course seek to provide
otherwise, either by special provision or
by amendment of the standard clauses
upon which most hull and cargo
insurance is now underwritten.
On the facts of the case, it was held that the
loss was covered by the policy. Both parties
had known of the risk of stress cracking on the
voyage and, although the cracks developed
sooner than had been expected, the ultimate
failures only occurred when first one, then the
other two legs were caught by waves of the
necessary strength coming from the necessary
direction. These waves were not inevitable
and amounted to fortuitous events.
One issue that arose, was how this conclusion
could be reconciled with the decision in Noten
BV v Harding, the well known case where
leather gloves were damaged when they went
through a cycle of releasing then re-absorbing
their own moisture in the heat of Calcutta. The
insurers argued that if the ordinary but not
inevitable temperatures of Calcutta did not give
rise to a fortuity, then neither should the
ordinary but not inevitable wave conditions off
South Africa at the time of the loss. The
Supreme Court, however, held that the heat
experienced by the gloves in Noten, combined
with their moisture content, caused the gloves
to essentially damage themselves, and that
they were not subjected to a fortuitous event.
This was different to what happened to the oil
rig, where the breaking of the legs was neither
expected nor contemplated, and would not have
happened but for the legs having been hit by the
leg-breaking waves.
Consequences
The inherent vice exclusion has effectively been
knee-capped. It can now only be relied upon in
those very rare situations where the only cause
of the loss is the innate characteristics of the
item insured. Where there is any intervention
from a peril of the sea, the exclusion will not
apply even if the peril was foreseeable, and
even if the cargo was inherently unsuitable for
carriage by sea.
The result, as Lord Mance has suggested, is
that it may now be necessary to further define in
marine policies, the types of loss that insurers
will not cover – meaning that underwriters will
need to make more inquiries than would
previously have been thought necessary, about
the types of losses to which the insured cargo or
hull may be susceptible and write policy terms
accordingly.
Syarikat Takaful Malaysia v Global Process
Systems Inc. and anor (The “Cendor Mopu”)
[2011] UKSC 5, 1 February 2011
Pauline Barratt
Email: pauline.barratt@jonesfee.com
DDI: 373 0055