UK: Construction Of Insurance Warranties - A Search For Meaning Is Not Always Easy

Last Updated: 2 April 2009
Article by Wenhao HAN

Marine insurance warranties are terms of an insurance contract by which the insured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby the existence of a particular state of facts is affirmed or denied.

The rationale behind warranties is that the insurer only accepts the risk provided that the warranty is fulfilled. It was settled in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The "GOOD LUCK" ) (1992) that breach of warranty would bring the risk to an end automatically as from the time of breach. The unique characteristic of an insurance warranty is that it has to be strictly complied with and the breach of it does not need to be causative of the loss, or material to the risk, before the insurer is discharged from liability.

Over the years, criticism over the draconian nature of warranties has accumulated and the Law Commissions of England and Scotland are currently considering the reform of insurance contract law with particular reference to the law on warranties. At the same time, the English courts have made enormous efforts to mitigate the harshness of insurance warranties. At one level, the English courts have tried to make a distinction between promissory warranties and delimiting warranties (or descriptive warranties) and to make the latter only have a suspensive effect, the breach of which will only suspend the cover temporarily. At another level, the English courts have attempted to construe warranties (both promissory warranties and delimiting warranties) in a purposive manner, in accordance with their commercial common sense, when being asked to ascertain what a particular warranty means. This was well illustrated in the recent Court of Appeal judgment in John Pratt v Aigaion Insurance Company SA. (2008) which was handed down on 27 November 2008.

The dispute

Mr Pratt took out a policy of marine insurance with Aigaion, through brokers, for his fishing trawler. The hull and machinery policy contained a warranty which stated "warranted Owner and /or Owner's experienced Skipper on board and in charge at all times and one experienced crew member".

On 11 December 2006, Mr Pratt and his crew of three took the vessel to fish for a day and returned to North Shields at about 20:00 hours. The crew landed the catch and readied the vessel for fishing for the next day. Then Mr Pratt and the crew left the vessel to go home and/or meet friends. At about 22:20 hours, the vessel was found to be on fire, and later investigation showed that the cause was the operation or malfunction of the deep fat fryer or the fridge. There was no crew onboard when the fire occurred and the generator was left running while the crew was ashore.

Aigaion declined Mr Pratt's claim and submitted that there was no owner or experienced skipper on board and in charge "at all times"; or specifically at the time of the fire by which there was a breach of the warranty. Mr Pratt submitted that the clause was obviously directed to periods when the vessel was navigating or working and, if applied literally, would lead to absurd results. Aigaion were prepared to concede that the term was suspensory rather than a true warranty, but that did not affect the outcome in any way because the fire occurred while the vessel was not crewed.

Decision of HHJ Mackie QC

At first instance, the court ruled in Aigaion's favour. HHJ Mackie QC held that the natural and literal meaning of the words required that the owner or the owner's experienced skipper must be on board and in charge at all times and that meant all the time.

HHJ Mackie QC further held that some qualification to the literal meaning of "on board ... at all times" should be allowed. However, following the "MILASAN" (2000) and the "NEWFOUNDLAND EXPLORER" (2006) where similar wordings were held by the English courts to require that the skipper/crew should be on board "at all times" - subject to emergencies requiring departure from the vessel or for the purpose of carrying out other crewing duties or related activities - HHJ Mackie QC held that the qualification to the literal wording should be only that required by commercial common sense and it should not go further than the ones stipulated in the "NEWFOUNDLAND EXPLORER".

As a side point, HHJ Mackie QC believed that there was no ambiguity about the warranty clause in dispute, except as to whether the "one experienced crew member" must also be on board and in charge at all times. However, he considered this irrelevant to the dispute. Interestingly, the Court of Appeal disagreed on this point and this led them to reach a different decision after reading the wording with the rest of the clause as a whole.

Decision of the Court of Appeal

On appeal, it was common ground, as it was at first instance, that the disputed clause was a delimiting warranty, a breach of which does not automatically cancel the cover for good but only means that the underwriters are not on risk for as long as the insured does not comply with its terms. The Court of Appeal focused on the construction of the disputed warranty and, in particular, on how far the expression "at all times" should be qualified.

Sir Anthony Clarke MR, delivering the leading judgment, held that "any clause in a contract must be construed having regard to its context within the contract, which must in turn be set in its surrounding circumstances or factual matrix". In this regard, he examined the general principles of construction of contract in the recent authorities and also echoed the comment by Lord Steyn in Sirius Insurance Co v FAI Insurance (2004) that "there has been a shift from literal methods of interpretation towards a more commercial approach".

After applying the above principles to the facts, Sir Anthony Clarke MR distinguished the present case from the "MILASAN" and the "NEWFOUNDLAND EXPLORER". By reading the warranty clause as a whole, with reference to "and one experienced crew member" in particular, he held that the primary/underlying purpose of the warranty was to protect the vessel against navigational hazards in circumstances in which at least two members of the crew, i.e. the skipper and one other, could be expected to be on board.

Disagreeing with the first instance judge, Sir Anthony Clarke MR believed that there was ambiguity in the warranty clause and, therefore, held that the clause should be construed contra proferentem, i.e. against the insurers. He held that the principal time when at least two members of the crew, including the skipper, would be required was when the vessel was being navigated, including when she was manoeuvring; and that, if the insurer wanted the owner and an experienced crew member on board whenever the vessel was left with the generator still running, it should clearly have provided so. For this reason, there was no breach of warranty in the present case and the appeal was allowed.

Practical implications

The result of the appeal in this case seems to have reassured those who were surprised by the first instance judge's decision earlier in 2008. The decision seems to reconfirm implicitly that the English courts will try to construe insurance warranties in a more insured-friendly fashion. However, the substantive law remains unchanged. The English courts, wrestling with the construction of warranties, have indeed justified their decisions by using their commercial common sense in most situations. But this approach also brings the problem that the decisions of the courts are not always easy to predict.

It is important to note that the decision of the Court of Appeal in this case does not touch upon whether the warranty in dispute is a promissory warranty or delimiting warranty, as it is common ground for both sides in the proceeding that the warranty is a delimiting one. However, Sir Anthony Clarke MR in his judgment did refer to Hussain v Brown (1996) where the Court of Appeal held that, if underwriters want to make their promissory warranty a continuing one, it is up to them to stipulate it in clear terms. Following on, Sir Anthony Clarke MR suggested that, if the underwriters wish to have any special protection, they should stipulate it clearly in the terms of the contract.

In light of the above decision, the reality remains that the search for meaning in the construction of insurance warranties is not always easy. The message to the marine insurance market is still that it is vital that (re)insurers and (re)insureds ensure that they understand the nature of their contractual obligations, particularly if these are likely to be construed as warranties.

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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