Background
Two vessels, the MV Martin P and the MV Sea Rhine, were insured at Lloyd's under a hull and machinery policy led by Syndicate 2002 (the Wellington Syndicate). Both vessels were mortgaged to Banque Cantonale Vaudoise as security for a loan to the owners.

In April 1999, the managers of the vessels delegated some of their responsibilities to sub-managers (ABC Maritime), who entered into a separate management agreement with the owners. ABC's responsibilities, however, did not include responsibility for arranging insurance cover, which was left with the original managers.

"The Assured" in the Wellington policy included the owners, the managers and ABC "as sub-managers/co-assured". The policy also included a broker's cancellation clause whereby, in the event of non-payment of premium, the brokers were authorised to cancel the policy on 10 days' written notice.

By November 1999, due to a combination of a poor freight market and the cost of unscheduled repairs, the owners were behind with their premiums to the tune of US$81,000 and the brokers wrote a letter threatening cancellation of the policy if the outstanding amounts were not paid within 10 days. The owners also owed ABC about US$800,000.

Although they remained responsible for dealing with insurance, the principal managers failed to do anything about the unpaid premiums and effectively passed the problem on to ABC to sort out. Unsurprisingly, ABC was unwilling to pay the premium itself. Concerned about the brokers' threat to withdraw cover, it arranged alternative hull and machinery cover with Syndicate 239 (the Jones Syndicate) on 16 December 1999.

But ABC did not check to find out if cancellation had actually taken place, and the cover they obtained from Jones was not expressed to be contingent on the Wellington policy having been cancelled. "The Assured" was described in the Jones slip as "ABC Maritime as managers and/or affiliated and/or associated companies for their respective rights and interests" and in the policy as "ABC Maritime (as manager) and/or others for their respective interests". In the case of the Martin P, the insured value under this policy was US$2.5 million, whereas under the Wellington policy, it was US$5 million. The policy also included a broker's cancellation clause and a premium warranty clause.

On 29 December 1999, the Martin P ran aground. Very shortly afterwards, ABC learned that the Wellington policy had not, after all, been cancelled. It quickly paid the outstanding premiums and sought to cancel the Jones policy. On 30 December 1999, Jones agreed to a cancellation with effect from inception.

On 7 January 2000, ABC, acting with the authority of the owners, tendered notice of abandonment of the Martin P to Wellington and claimed for a constructive total loss. Wellington agreed to the settlement of the claim on 10 February, but shortly afterwards became aware of the existence of the Jones policy. Wellington still paid up the insured value of US$5million, but argued that Jones was a co-insurer and was liable to contribute.

Section 32 of the Marine Insurance Act 1906 provides that, where two or more policies are effected by or on behalf of the insured "on the same adventure and interest or any part thereof and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance". Where the policy is a valued policy, "the assured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject-matter insured "

Section 80 provides for the right of contribution in cases of double insurance:
"Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract... If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers and is entitled to the like remedies as a surety who has paid more than his proportion of the debt".

Were the owners double insured? This depended on whether they could be said to be an insured under the Jones policy. A party ("B") who is not a named insured can still enforce an insurance contract as undisclosed principal if the person who obtained the cover ("A") had express or implied authority to enter into that contract so as to bind B as co-insured and intended to do so. In the absence of actual authority, if the policy names a class of persons who are to be covered and B falls within that class and A intended B to be covered, then B will still be able to enforce the policy (National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd's Rep 582).

Judgment
On the evidence, the judge was satisfied that ABC had intended to insure the owners as well as to protect its own interests and those of the bank. But did ABC have actual authority to do so? Under the terms of its management agreement with the owners, it had no responsibility for arranging insurance. But the principal managers (who did have this responsibility) had quite clearly passed the buck to ABC to solve the problem of unpaid premiums. In the judge's view, this was equivalent to the owners indirectly authorising ABC to take whatever steps ABC considered necessary with regard to the cover. Consequently, there was not only an intention to insure the owners, but actual authority to do so.

Since the owners had been insured by the Jones policy as well as the Wellington policy at the time of the incident, this was clearly a case of double insurance.

Had Wellington lost the right to claim a contribution from Jones because of the cancellation? It was common ground that Jones was on risk under its policy at the time of the accident, but the cancellation took effect from inception.

The judge followed the decision of the Court of Appeal in Legal and General Assurance Society Limited v Drake Insurance Co Limited [1992] QB 887. In that case, two policies of motor insurance were in place at the time of the accident. It was not until one insurer had paid the claim that it found out about the other policy and claimed a contribution. The second insurer, however, argued that the right to a contribution only arose at the time the first insurer had settled the claim. By that date the second insurer was not liable because the insured had breached a condition precedent by failing to give it notice of the claim within 14 days.

The Court of Appeal, however, held that the right to contribution arose at the time of the loss. At that point, both insurers are potentially liable and it is up to the insured which one he claims against. The liability to contribute could not be defeated by a subsequent breach of condition or cancellation.

Wellington's right to a contribution from Jones was, therefore, unaffected by the subsequent cancellation of the policy. It would be extraordinary if, after a loss had occurred, an insurer and insured could agree to a cancellation so that the insurer could avoid a liability to contribute to the amount paid by the other insurer.

If, however, Jones could show that it was entitled to avoid the policy for a breach of the duty of utmost good faith, then there would be no double insurance and no right to a contribution. This is because the remedy for breach takes effect from inception, so it is as if the insurer had never been on risk at all (see Legal and General, above). Jones' principal case was that there had been non-disclosure of the fact that the owners were behind with their premium payments and that Wellington intended to cancel cover for non-payment. A poor payment record raised the question whether the insured had financial problems and whether it might be cutting costs in maintaining the vessels.

The judge, however, was not persuaded that late or non-payment under a previous policy was a material fact to be disclosed to insurers. It was not necessarily indicative of a lack of resources, nor of an intention not to maintain the vessels properly. The expert evidence was that late payment of premiums was a common malaise in the marine insurance market and it would be extremely unusual for an insurer to require disclosure. In any event, Jones was not only protected by section 53(1) of the MIA (under which, in marine policies, the broker is directly responsible to insurers for the premium) but also by the broker's cancellation clause and the premium warranty clause in the policy.

Jones' argument that the policy was void for mistake was quickly disposed of in light of the decision in Great Peace Shipping Ltd v Tsavliris Salvage International Limited [2002] 3 WLR 1617. For a contract to be void for mistake, the mistake must render the subject matter of the contract "essentially and radically different" from what the parties believed it to be. But here the parties believed they were entering into a valid policy to insure the two vessels, and that is what they did. There was no mistake as to the subject matter - only as to whether another policy was in place at the time.

In cases of double insurance, there are several different approaches to calculating how much an insurer is required to contribute. Under the independent liability method, each insurer's contribution is adjusted proportionately to the amount which each would, independently, be liable to pay the insured. In this case, Wellington insured the Martin P for $5 million and Jones for $2.5 million, so they would contribute to the loss in a ratio of 2:1.

Under the maximum liability method, insurers' respective contributions are proportionate to their respective maximum liabilities under the policies. For instance, if the maximum insured under two policies is £10,000 and £1,000 respectively and the loss is £4425, insurers' contributions will be payable in the ratio 10:1 (Commercial Union Assurance Co Limited v Hayden [1977] QB 804). In this case, however, since the loss was in excess of the maximum sums under both policies, the result would be the same as under the independent liability method.

The third method is the common liability or double liability basis of apportionment. Under this, the two insurers bear equally any loss up to the amount for which each would, independently, be liable. Above that, any surplus for which only one is liable is borne exclusively by that insurer. In the present case, this would mean that the first US$2.5 million of the loss would be shared equally between Wellington and Jones and Wellington would bear all of the remaining US$2.5 million up to its US$5 million indemnity limit. Wellington would, therefore, be entitled to a contribution of US$1.25 million and would have to bear the remaining US$3.75 million itself.

Which method applies to marine insurance is an open question. MIA section 80 provides that each insurer is bound "to contribute rateably to the loss in proportion to the amount for which he is liable under his contract". In the judge's view, this excluded the common liability method because that would produce contributions not in proportion to the amounts for which Wellington and Jones were respectively liable under their policies. Since the independent and maximum liability methods provided the same result in this case, it was not necessary for the judge to decide between them. The correct ratio was 2:1.