UK: The Significance Of Taking Out A Valued Policy In The Present Economic Climate

Last Updated: 12 December 2008

Under the Marine Insurance Act 1906, a distinction is made between valued and unvalued policies of insurance. Pursuant to section 27 (2) of the Act 1906, "a valued policy is a policy which specifies the agreed value of the subject-matter insured". Pursuant to s 27(3) of the Act, in the absence of fraud, the value fixed by the policy will be conclusive, as between the insurer and assured, of the insurable value of the goods or vessel in question.

By contrast, section 28 of the Act 1906 defines an unvalued policy as "a policy which does not specify the value of the subject-matter insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained..."

In other words, a valued policy will specify the agreed value of the subject matter, whilst an unvalued policy will state merely the maximum limit of the sum insured and leave the insurable value to be ascertained subsequently.

The main difference between the two types of policy is that in the case of a valued policy, the value fixed by the policy will, in the absence of fraud, be conclusive of the insurable value of the subject insured, while in the case of an unvalued policy the value of the insured goods has to be proved by production of invoices, vouchers, estimates and other evidence. In the case of an unvalued policy, the insurable value of goods is the prime cost of the goods, plus the expenses of and incidental to shipping and the charges of insurance upon the whole.

Furthermore, under section 68 (2) Act 1906, "if the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject matter insured". Whilst this appears at first instance to be the logical way to measure the amount payable under the insurance policy, it does raise the question of how adversely ship-owners will be affected by the falling market rates for their vessels in the event they make a claim under an unvalued policy relating to the vessel. They may find that any recovery they make will be only a fraction of what the vessel was worth at the time they took out the policy and as a result they could face significant losses.

That is why it is doubly important for those seeking to take out cover for their vessels to ensure they obtain the appropriate cover with the requisite wording. Whilst the distinction between valued and unvalued policies seems to be clear, the identification of a policy as being of one or the other type has proved far from clear-cut as can be seen from some of the case-law.

In the case of "Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Assoc (Europe)" [2000] 1 LLR 505, it was held that the words "agreed value" or "valued at" were not necessary to create a valued policy provided that the parties' intentions were clear that there was a specified agreed value, proposed by the assured and accepted by the underwriter. On the other hand, the court added that the use of the term "sum insured" would normally indicate the amount for which the subject matter was insured and not as specifying the agreed value. That sum would the ceiling of recovery.

In "Thor Navigation Inc v Ingosstrakh Insurance" [2005] EWHC 19 (Comm), there were two fleet policies of hull and machinery insurance. One policy, issued by the Russian insurer, Ingosstrakh, covered 40% of the risk. The remaining 60% was insured by a second policy issued by Ingosstrakh's German subsidiary. The policies provided cover in materially identical terms and set out details of each vessel insured, its owners, the particular cover terms applicable to that vessel and a "sum insured" for each vessel. The "THOR II" was listed with a sum insured of US$1.5 million. In 2002, it was immobilised by a broken shaft and main engine damage and the repairs were estimated to cost US$2 million. The ship-owners gave notice of abandonment as the repairs were expected to cost more than the sum insured. They argued the vessel was a constructive total loss.

The insurers declined the notice as they believed the vessel could be repaired for less. The owners subsequently sold the vessel for scrap. One issue arising in the subsequent legal proceedings was whether the policies were unvalued policies as the insurers claimed. The court had to consider whether failing to use the words "agreed value" or "valued at" were conclusive. It held that it was not essential that these words were used in order to create a valued policy, provided the intention of the parties was clear. However, the term "sum insured" would not normally be treated as specifying the agreed value of the subject matter insured; rather, it fixed a figure by which the premium could be calculated and established the limit of recovery. Without reference to any words of valuation though, the policy remained unvalued. Consequently, the court held that the appropriate measure of indemnity in this case was the market value of the vessel at the time and place of her loss.

In the very recent Australian case of "Vero Insurance NZ Ltd v Posa" (unreported but decided in August 2008), the issue of whether a policy was for an agreed value arose again. The case is relevant to English insurance law practitioners because the New Zealand Marine Insurance Act is in all material respects similar to the English Marine Insurance Act 1906.

In that case, Mr. Posa's pleasure craft was destroyed by a fire at his home. The insurer sought to avoid the policy on the grounds inter alia of failure to disclose material information at previous renewals of the policy, including an alleged failure to inform the insurer about previous unsuccessful attempts to sell the vessel below the market rate. Whether this disclosure was material depended partly on whether the policy was for an agreed value.

The policy schedule stated that the "sum insured" was $105,000, that the total liability of underwriters should not exceed this amount and that "the agreed value would be used to help Vero measure the amount of the loss". The conditions in the policy provided inter alia that underwriters could settle up to the sum insured specified in the schedule and that if there was a total loss, they would not deduct for depreciation in determining the value of the vessel.

The judge in that case relied on the decision in "Thor v Ingosstrakh" and found there was insufficient intention to fix a value for the vessel in the policy terms. Rather, he held that the terms of the cover did no more than fix a maximum amount that could be paid out and the insurable value remained subject to determination at the time the claim was made. The policy was therefore unvalued.

In that case, the decision worked in the assured's favour in that it meant the underwriters were not entitled to avoid the policy on the grounds of material non-disclosure by the assured at the renewal of the policy. However, where such circumstances do not apply, the assured is likely to lose out where his policy is unvalued, particularly in the present economic climate. It is important, therefore, that the language used in policies is clear in identifying whether a policy is valued or unvalued and the provisions in the policy should be consistent so as to leave no room for doubt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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