Sun Alliance v. PT ADM

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Sun Alliance & London Insurance plc v PT Asuransri Dayin Mitra TBK (The "No 1 Dae Bu")
English Commercial Court: Langley J: [2006] EWHC 812 (Comm): 11 April 2006
Julian Kenny (instructed by Hill Taylor Dickinson) for the Defendant/Part 20 Claimant, PT Asuransri Dayin Mitra TBK
The Part 20 Defendant, PT Pelumin, did not appear and was not represented

In this action, an Indonesian insurer sought a declaration that it was not liable to its Indonesian insured for the total loss of a vessel. The proper law and jurisdiction of the insurance contract was English. On the basis of the evidence and arguments presented in relation to multiple breaches of warranty committed by the insured, and with due regard to the criteria to which the court must refer when exercising its discretion, the court held that the insurer was entitled to the declaration of non-liability claimed.

DMC Category Rating: Confirmed

This case note was prepared by Jim Leighton, BSc (Hons) (University of Plymouth), LLM (Maritime Law) (University of Southampton) and Claims Consultant

This was an application by the Defendant/Part 20 Claimant,1 PT Asuransri Dayin Mitra TBK ("ADM"), an Indonesian insurer, for relief in the form of declarations of non-liability under a marine insurance policy ("the Policy") entered into with the Part 20 Defendant, PT Pelumin ("Pelumin"), the insured Indonesian ship operator. ADM claimed the negative declarations in aid of ending litigation commenced by Pelumin in Indonesia, following the reinsurers, Sun Alliance & London Insurance plc and three others ("the Claimants"), claiming declarations that they were not liable to indemnify ADM under the reinsurance for the losses claimed by Pelumin. The structure of the insurance was to the effect that ADM fronted the Policy for the Claimants, due to Indonesian regulatory requirements.

The Policy covered three risks: Hulls, Increased Value and War Risks, written on Institute of London Underwriters’ standard clauses with some specific variations. The Policy coverage was on the Lloyd’s Marine Policy Form ("MAR 91"). An Endorsement to the Policy was agreed to provide time and voyage cover, during the Policy term, to the "No 1 Dae Bu" ("the Vessel"), following her purchase by Pelumin. The Vessel’s Class was stated to be "KR", referring to the Korean Registry of Shipping. The time cover, on the "Institute Time Clauses – Hulls" ("the ITCH"), was limited to "trading" in "Indonesian waters only". Clause 4.1 ITCH provided for the automatic termination of cover at the time of "any change of the Class Society of the Vessel, or change, suspension, discontinuance, withdrawal or expiry of her Class therein". The delivery voyage cover was "from" Yeo Su Port in Korea "to" Batam in Indonesia and was "subject to vessel being in class". "All other terms and conditions" were as provided by the Policy.

The Vessel was struck by a typhoon when she was anchored half-a-mile offshore at Yeo Su. Work was being carried out on her engine in preparation for the voyage to Indonesia. The vessel was out of Class with KR, having lost her KR Class following previous typhoon damage, though she had interim Class certificates from the International Maritime Bureau Inc of Panama. The anchor dragged and the Vessel went aground on a breakwater just offshore.

ADM submitted that they were not liable to indemnify Pelumin for five reasons:

  1. the Vessel was warranted in Class with KR, but she was not;
  2. the delivery voyage cover was "subject to vessel being in class" (to be construed to mean in Class with KR), but she was not;
  3. the suspension and then withdrawal of KR Class before the loss meant that the cover terminated automatically under clause 4.1 of the ITCH;
  4. the delivery voyage cover was "from" Yeo Su, but there was no cover for the Vessel "at" Yeo Su; as a result, the loss occurred before the Vessel was covered;
  5. the delivery voyage cover was subject to an implied warranty of seaworthiness at the inception of the cover; if cover had incepted (contrary to the previous submission) the Vessel was not seaworthy at the time of loss, so was in breach of the implied warranty.

The Loss
The judge noted that if the loss was (if at all) recoverable, this could only be done on the delivery voyage cover, as the time cover was restricted to trading in Indonesian waters only.

Applicable Law
The Hull, Increased Value and War Risks cover provided by the Policy, and by way of the Endorsement, were, directly or by incorporation, expressly "subject to English law and practice". The judge held that the choice of English law was express or demonstrated with reasonable certainty by the provisions of the insurance, in accordance with Article 3 of the Rome Convention, implemented by the Contracts (Applicable Law) Act 1990, which applies to contracts of insurance covering risks situated outside the EEA.

MAR 91 expressly provided: "This insurance shall be subject to the exclusive jurisdiction of the English courts, except as may be otherwise expressly provided herein to the contrary". The terms of the Policy and Endorsement incorporated MAR 91 and neither contained any provision to the contrary. The judge held that the claims by Pelumin under the insurance and ADM in the present proceedings were, by agreement, subject to the exclusive jurisdiction of the English courts.

The Warranty Issue
In following the general rule, stated in para 681 of Arnould (vol II, 16th edn), that every statement of fact contained in a policy related to the thing insured "amounted to a warranty and as such must be fulfilled", the judge held that there could be no real doubt that the reference to Class KR was a warranty. As there was no possible answer to ADM’s submission on the warranty issue, it followed that on this ground alone ADM was not liable to indemnify Pelumin for the damage to the Vessel.

The Voyage Cover Issue
The Endorsement clearly stated that the delivery voyage cover was "subject to vessel being in class". As a matter of construction, this was a reference to the Class declared and provided for (that is, KR) and could not be read as "some or any class". As a result, the judge held that ADM were off-risk at the time of the loss, so could also succeed on this ground.

The Clause 4.1 ITCH Issue
The judge held that this ground could not be sustained, as clause 4.1 addressed a change of Class following inception of the Policy. The suspension of Class KR antedated inception. The judge also did not think that any cancellation of Class after inception (which was doubtful) would affect the position.

The Coverage Issue
The delivery voyage cover was "from Yeo Su … on 4 or 5 July", but the Vessel was not proceeding from Yeo Su when it grounded on 4 July and was not in any condition to proceed on the voyage. The judge held that the risk insured by the cover had not attached and would not have attached until the Vessel proceeded on her voyage, in accordance with Rule 2, and in contrast to Rule 3(a), in Schedule 1 of the Marine Insurance Act 1906.2 There was, therefore, no cover for the loss, so ADM were also entitled to succeed on this basis.

The Seaworthiness Issue
Due to the other findings, the seaworthiness issue did not arise. The judge, however, stated that the ship was clearly in an unseaworthy condition at the time of the typhoon and grounding and that the unseaworthiness was causative of the loss.

The Relief Claimed
On the basis of the factors3 the court needed to consider, laid down in New Hampshire Insurance Co v Phillips Electronics [1999] Lloyd’s Rep IR 58 and Dornoch v Mauritius Union [2000] Lloyd’s Rep IR 127, the judge held that, in light of the conclusions reached, the case was one in which he was entitled to exercise his discretion to grant the relief sought by ADM. This was because (1) England was the agreed exclusive forum for the determination of claims relating to the Endorsement and Policy, (2) as the contract was subject to English law, the English court was in the best position to address and determine the questions of law raised, and (3) ADM’s Indonesian lawyer’s evidence indicated that the English judgment would support its proposed application to the Indonesian courts.

In relation to the clause 4.1 ITCH issue - unless the clause was incorporated or replicated in the voyage cover (which did not appear to be the case) - the ITCH clauses were only relevant to the time cover, being separate from the voyage cover, and were irrelevant on the facts, as the time cover had not attached when the loss occurred. The apparent extract from clause 4.1 ITCH (above) appears to correspond to the 1/10/83 (not the 1/11/95) version of the ITCH clauses, but both ITCH versions appear to have the same intended effect in relation to loss, suspension or alteration of Class.

The lesson to be learnt, from the perspective of insureds, is that the information given to insurers, when obtaining cover, must accurately reflect the factual situation at hand, to avoid breach of warranty. The insured must also ensure that the terms and conditions of the policy selected and/or drafted will attach cover as soon as is reasonably practicably, to guard against relevant risks.

Part 20 of the Civil Procedure Rules enables a party to proceedings to bring a claim or counterclaim against a third party in relation to matters in issue in, or related to, the main proceedings. The Part 20 Claimant may seek (as appropriate) a contribution, indemnity or some other remedy against the Part 20 Defendant. In the present case, the insurer joined the insured to the action to avoid the potential knock on effect of the reinsurance contract dispute, that is, the insurer would wish to avoid indemnifying the insured if the reinsurer would not in turn indemnify the insurer, due to the intended "back-to-back" effect of the insurance and reinsurance policies.

2 "2. Where the subject-matter is insured "from" a particular place, the risk does not attach until the ship starts on the voyage insured.

3.– (a) Where a ship is insured "at and from" a particular place, and she is at that place in good safety when the contract is concluded, the risk attaches immediately."

3 The case of New Hampshire Insurance Co. v. Phillips Electronics set out the factors to be considered in granting a negative declaration, as follows:
"1. There is power to grant a negative declaration in an appropriate case, the fundamental test being whether it would be useful.
2. However, careful scrutiny will be exercised not only to test the utility or, on the other hand, the futility, of seeking to determine the claim by means of a negative declaration in England, but also to ensure that inappropriate forum shopping is not allowed, let alone encouraged.
3. A negative declaration will not be appropriate where it is premature or hypothetical, such as where no claim has been made or threatened against the [claimant].
4. The existence of imminent or, more particularly, current foreign proceedings is always a highly relevant consideration, not only for the purpose of testing the utility of the English claim, but also so as to have in mind the need to avoid the twin dangers of forum shopping and of the vices of concurrent proceedings."

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