UK: Insurer Fails To Avoid Policy On Grounds Of Misrepresentation, Non-Disclosure, Breach Of Warranty And Illegality

In Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy) [2013] EWHC 2116 (Comm), the First Claimant (the vessel's registered owner) and Second Claimant (a party representing itself as the vessel's commercial and technical manager) sought an indemnity under a policy of marine insurance taken out with the Defendant.

Facts

The policy commenced in December 2008. In the previous four years, the vessel was subject to four port state control detentions which were not disclosed to the Defendant. The fourth, in October 2008, identified deficiencies relating to fire safety measures, which were rectified immediately. The vessel had a flag-state annual safety inspection and class survey, and an ISM document of compliance was endorsed following a verification audit.

In early 2009, the vessel carried cargo from Iran to China, and payments under the charter were processed by the Claimants' US bank in US dollars. In February 2009, a fire broke out on board, rendering the vessel a constructive total loss. The Claimants claimed an indemnity under the insurance policy.

The Defendant sought to avoid the policy, arguing that the Claimants were guilty of, inter alia: misrepresentation and/or material non-disclosure in respect of the identity of the vessel's commercial and technical manager and the port state control detentions; breach of warranty that the vessel would comply with the ISM code; and breaking US sanctions against Iran by causing their US bank to process the charter payments.

Judgment

The court found in favour of the Claimants.

The issue of misrepresentation as to the identity of the managers was a question of fact. The key question was: which party retained overall control and authority in relation to technical and commercial management functions? On the basis of expert evidence, the Claimants had not made any misrepresentation or non-disclosure in this regard.

The most significant issue in relation to the PSC non-disclosure issue was the materiality of the deficiencies identified in October 2008. The Defendant knew that the vessel was old, and all deficiencies identified were immediately rectified. If the detention had been disclosed, the Defendant would have been told that the deficiencies were rectified and confirmed by Class, and would have renewed cover on the same terms. The Defendant had not been induced to enter into the policy by any material non-disclosure.

As regards the warranty of ISM compliance, the policy required documentary compliance only. On that basis there had been no breach. The Claimants did, however, fail in their argument that the warranty applied only at the date of the inception of the policy.

The Claimants' bank breached the Iranian Transactions and Sanctions Regulations by processing the freight due under the Iran-China charter. In causing the bank to do so, the Claimants had violated US law. However, the claim under the policy was entirely unconnected with that violation. It arose out of an unconnected incident, after completion of the Iran-China charter. There was no defence here, as there was no causative connection between the illegality and the claim for indemnity.

Comment

An indemnity claim under an insurance policy will only fail by application of the policy terms, which will be applied strictly to the facts of a particular case. Any alleged wrongdoing by the party claiming an indemnity must also be causative of the claim under the policy.

This case highlights the importance of the facts in determining whether an indemnity will be permitted, or whether the insurer is able to raise a defence.

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