DMC Category Rating: Confirmed

This case note is based on an Article in the February 2005 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website.

Background
The claimants, Thor Navigation, were the owners of the "Thor II", which was part of the Interglobal fleet managed by Interglobal Marine Agencies. The fleet was insured under two hull and machinery policies. The first, dated 11 July 2002, was issued by Ingosstrakh Insurance, a Russian company, and covered 40% of the risk. The second, dated 29 June 2002, was issued by a German company owned by Ingosstrakh and covered the remaining 60%. Although it held a smaller share, Ingosstrakh took the role of lead insurer.

The cover was negotiated on both sides through agents. In January 2001, the owners' brokers began seeking quotations for hull cover from various insurers on the basis of stated vessel values. All the other insurers approached appeared to have understood this as a request for valued cover. Ingosstrakh's agents, however, provided a quote (and later a revised quote) which expressly stated "SUM INSURED" in respect of each vessel and did not make any reference to insured value or agreed value. The owners' brokers raised no objection to the quote (nor, subsequently, to the insurance) being on the basis of a sum insured.

Two policies were issued in materially identical terms, giving cover for 12 months from 29 June 2002 and incorporating Institute Time Clauses - Hulls 1/11/95. The policies set out, in respect of each vessel, brief details of the vessel, its owners and particular terms of cover applicable and a "SUM INSURED". The "Thor II" was given a sum insured of US$1.5m.

On 15 September 2002, the vessel broke its intermediate shaft, causing damage to the main engine. Quotations from three repair yards indicated that the costs of repair would exceed US$2m. The owners claimed for a constructive total loss and gave Notice of Abandonment, which was not accepted by insurers. On 12 November 2002, insurers gave notice that they believed the vessel could be repaired for less than the sum insured, but gave no details. On 14 November 2002, the vessel was sold for scrap.

The owners claimed that the policies were valued polices but that, even if they were unvalued, insurers were estopped from arguing they were unvalued; alternatively that the policies should be rectified. The parties agreed that these issues should be decided by way of a preliminary hearing, after which the dispute would go to mediation. If the policies were held to be unvalued and the loss proved to be a constructive total loss, the court was also asked to determine in principle the measure of insurable value payable to the owners.

The construction issue
Section 27(1) of the Marine Insurance Act 1906 provides that a marine policy may be valued or unvalued. Under 27(2), "a valued policy is a policy which specifies the agreed value of the subject matter insured". If the policy is valued, the value fixed by the parties is conclusive of the insurable value of the subject matter (section 27(3)). An unvalued policy is defined by section 28 as one 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".

The principles of deciding whether a policy is valued or unvalued were set out by Thomas J in Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Assoc (Europe) [2000] 1 Lloyd's Rep 505. The words "agreed value" or "valued at" need not be used to create a valued policy "provided the intention of the parties is clear that there is a specified agreed value, proposed by the assured and accepted by the underwriter". By contrast, "the use of the term "sum insured" will normally indicate the amount for which the subject matter is insured and not as specifying the agreed value". "Far from meaning the value has been agreed, this ordinarily means the sum is the ceiling of recovery". In Quorum AS v Schramm [2002] 1 Lloyd's Rep 249, Thomas J. made it clear that his decision in Kyzuna applied generally to all cases of marine insurance.

The owners, however, argued that Kyzuna should be distinguished because the policy in that case concerned a pleasure yacht, not a commercial trading vessel. They maintained that, under English marine insurance practice, commercial trading vessels are invariably insured on an agreed value basis. These policies were stated to be subject to "English law and practice" by virtue of the Institute Time Clauses - Hulls, 1/11/95. Alternatively, based on the custom and usage of the market, a term should be implied into the contract to the effect that the policies were valued policies.

Expert evidence called by both parties confirmed that it was the invariable practice of the English marine insurance market for hull and machinery to be insured on a valued basis, as long as the policy wording included words such as "so valued" or "valued at". Both experts agreed, however, that the term "sum insured" was universally recognised as denoting the maximum amount of insurers' liability. The true meaning of a policy depended on the words actually used.

Judgment
The judge agreed with insurers that, on their true construction, these policies were unvalued. Section 27 of the Act requires the parties to specify an agreed value. Specification of a sum insured is not enough. In addition, section 28 emphasises the difference between the sum insured (the limit of insurers' liability) and insurable value (the amount the insurer has to pay if there is a total loss). The clear guidance to be obtained from the Act was that simply using the words "sum insured", without any reference to words of valuation, denotes an unvalued policy.

Although the Kyzuna case concerned a yacht, that decision laid down principles applicable in all cases of marine insurance, whatever the nature of the vessel involved. The issue depended on the construction of the actual words used in the policy. The ordinary meaning of the words used in these policies was clear.

As for the custom and usage argument, these policies were subject to English law, which dictates that evidence of custom or usage is inadmissible where it seeks to vary or contradict express terms of the contract. Even if that was not the case, there was no evidence of any custom or practice to the effect that the words "sum insured" meant the policy could be treated as a valued policy, even in the absence of any words specifying an agreed value. It might be the practice of English marine underwriters to provide hull cover on a valued basis, but they do this by using clear words to that effect.

Estoppel and rectification
The owners argued that, even if this was construed as an unvalued policy, insurers were estopped from arguing the cover was unvalued because, as was clear from the correspondence, the parties had intended the cover to be on a valued basis and a reasonable insured in the circumstances would have considered insurers were using the term "SUM INSURED" as meaning "insured value". The policies should be rectified to reflect the owners' belief that they were valued policies.

Judgment
The judge was not convinced. To obtain rectification, the claimant has to prove that the written instrument did not reflect the true agreement of both parties. Where only one party was mistaken, the claimant has to show that the other party had actual knowledge of, or wilfully shut its eyes to, the obvious fact of that mistake, or at the very least suspected that there was a mistake.

Although the evidence showed that the owners, through their brokers, subjectively intended to contract on a valued basis, there was no evidence that insurers intended to enter into anything other than an unvalued policy. Every quote sent on behalf of insurers and every policy and endorsement issued by them expressly used the words "SUM INSURED". At no time was any reference made to any value being recognised or agreed by insurers. Although the request for a quote may have been on a valued basis, this was not what insurers were prepared to offer, and they made that plain.

Nor was there any evidence to suggest that insurers knew of or suspected the owners' mistake. The evidence from the underwriter was that he regularly issued policies on an unvalued basis without giving much thought to whether the insured might have preferred to transact on a different basis. The insurer was entitled to assume that he was dealing with an experienced broker who understood the legal effect of the cover being provided. In the context of an arm's length relationship, the judge did not accept that insurers should have checked whether the broker properly understood the nature of the cover.

The claim in estoppel was rejected for similar reasons. At no stage did insurers conduct themselves in a way that suggested they were treating the policies as valued policies. The fact that they did not spell out to owners the difference between the two terms did not amount to the type of clear and unequivocal representation of fact required to support an estoppel.

Insurable value
The sum insured serves two purposes: it fixes a figure by which the premium can be calculated and the upper limit of recovery, but it does not provide a basis for calculating the insurable value or the claim (The Captain Panagos DP [1985] 1 Lloyd's Rep 625).

Section 68 of the Marine Insurance Act specifies that, subject to any express provision of the policy, where there is a total loss of the subject matter insured,
"(2) If the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject matter insured".

Section 16(1), headed "Measure of insurable value" provides that, subject to any provision or valuation in the policy, in insurance "on ship", the insurable value is the value of the ship at the commencement of the risk, including its outfit, provisions and stores, money advanced for wages and other disbursements. Mustill J in The Captain Panagos, however, held that section 16(1) was archaic and unsuited to modern conditions and that both 16(1) and section 68 were, in any event, subject to the provisions of the policy.

Judgment
The judge in this case adopted the same approach. Clause 16 of the Institute Time Clauses - Hulls provides that "this insurance covers loss of or damage to the subject matter insured". The subject matter was expressly limited to the vessel's hull and machinery. The appropriate measure of indemnity (assuming liability and a constructive total loss were established) was, therefore, the market value of the vessel at the time and place of her loss, which the parties agreed was US$800,000.

Back to Top