UK: Inherent Vice: The Latest Instalment

Last Updated: 13 April 2010
Article by Chris Zavos and Matthew Montgomery

The Court of Appeal has delivered a ruling which will make inherent vice more difficult for insurers to plead. Global Process Systems Inc. v Syarikat Takaful Malaysia Bhd (2009).

The policy defence of inherent vice has been the subject of some scrutiny in recent years, most recently by the Court of Appeal in Global Process Systems Inc. v Syarikat Takaful Malaysia Bhd (2009).

At first instance, the Commercial Court affirmed its decision in Mayban General Assurance Bhd v Alstom Power Plants Ltd (2004), deciding that, to establish inherent vice, insurers must show that cargo suffered loss, in conditions in which it was expected to be carried. The Court of Appeal has reversed that decision, finding for owners and limiting the application of the inherent vice defence for insurers.

The Cendor MOPU oil rig, owned by Global Process Systems, lost three of its legs during a sea voyage from Texas to Malaysia. The weather conditions experienced were within the range that were reasonably contemplated. The legs suffered fatigue cracking caused by the rolling motion of the barge but the evidence was that this alone would not have been sufficient for the legs to break off. Owners claimed under their insurance policy, identifying the proximate cause of the loss as perils of the sea.

Underwriters defended the claim on the basis of inherent vice in the legs of the rig. Underwriters said that if the actions of the sea were no more than would be reasonably foreseeable on that particular voyage, then the cause of the loss must be inherent vice. Even if owners could show that the loss was caused by a peril of the sea, inherent vice would also be a proximate cause. When there were two proximate causes, one of which is covered by the policy and the other which is expressly excluded (such as inherent vice) then there was no cover.

Owners argued that losses arising in reasonably foreseeable conditions were covered by a marine policy under perils of the sea. Owners said that to successfully defend the claim insurers must show that the inherent vice in the legs was the sole cause of the damage. Owners submitted that the immediate cause of the loss was a leg breaking wave and thus by a peril of the sea.

At first instance, Mr Justice Blair agreed with underwriters. Following the reasoning of the Commercial Court in The Mayban, he said that inherent vice was established because the legs had suffered loss in conditions in which they were expected to be carried. The Court of Appeal reversed Mr Justice Blair's decision and decided in favour of owners. Lord Justice Waller, giving the leading judgment, said that the correct test was whether the loss occurred in conditions that were bound to occur rather than those that were reasonably foreseeable.

The Court concluded that the legs had been properly stowed and were in good condition at the outset of the voyage. The fact that surveyors had approved the manner in which the rig would be carried was also noted. The Court agreed with owners that metal fatigue was not the sole cause of the loss of the legs. In order to show a loss by perils of the sea, owners need only show a proximate cause of the loss was the immediate action of the wind or sea notwithstanding that such conditions were reasonably foreseeable. If owners could show that an insured peril was a proximate cause, then inherent vice would not be the sole and proximate cause. Although there was concern at the limited evidence regarding the weather conditions, the Court found that it was a 'leg breaking wave' that caused the legs to break off and concluded that such an incident was not bound to occur in the way it did on the voyage in question. Owners had successfully shown that the accident was not a certainty.

The Court of Appeal's decision has narrowed the previous test formulated in The Mayban and has made inherent vice all the more difficult for insurers to plead. In order to defend a claim by way of inherent vice, it seems that insurers will now have to show that, due to the defect, the damage was caused by weather conditions that were bound to occur during the voyage.

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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