Coverage v Denial – Use of Common Sense to Decide

From the views aired by many professionals, it is apparent that people can get into the trap of confusing and complicating claim issues, because of claim complexities and going in circles thereafter.

However, courts have regularly striven to drive home that there is need to use common sense and simplify issues by going to the core of matter as argued by the parties. Two cases may help to clarify the matter:

1.?????Global Process Systems Inc & Anor v Syarikat Takaful Malaysia Berhad [2009]

This case related to a marine insurance policy on cargo which incorporated the Institute Cargo Clauses (A) 1982.

It was known to the underwriters from the outset that the legs of the oil rig to be insured could be at risk of fatigue cracks during the voyage. Hence, the legs were inspected at Galveston (US) by experts as approved by the insurers. The Certificate of Approval by surveyors required that the legs be reinspected when the barge reached Cape Town (roughly the half way point going to Malaysia) and remedial work be undertaken, should it be found necessary. The oil rig consisted of a platform and three legs extending down to the seabed. The legs were massive tubular structures, made of welded steel and cylindrically shaped, with a diameter of 12 feet and a length of 312 feet. Each weighed 404 tons. The rig was carried on the barge with its legs in place above the platform, so that the legs extended some 300 feet into the air. After some repairs, the voyage resumed. Soon after one leg broke off and fell into the sea. The following evening the other two legs fell off.

On repudiation, in the lower court the judge felt that the cause of the loss was inherent vice within the meaning of the policy and that accordingly the insurers were not liable for the claim. The Court of Appeal took a different view and concluded that the proximate cause of the loss was an insured peril in the form of the occurrence of a “leg breaking wave”. The insurers appealed to the Supreme Court. All the courts concerned sought to find the “proximate cause” of the loss. After examining the possible causes, the final two were seen to be stresses put upon the rig by the height and direction of the waves encountered, or inherent vice or nature of the subject matter insured.

Both parties relied upon the definition of inherent vice or nature of the subject matter insured, given by Lord Diplock in Soya GmbH Mainz Kommanditgesellschaft v White [1983] 1 Lloyd’s Rep 122. In that case a cargo of soya beans was insured against risks of heating, sweating and spontaneous combustion. The goods arrived in a heated and deteriorated condition. The insurers denied liability on the grounds that the proximate cause of the damage was inherent vice or nature of the subject matter insured, for which they were not liable. The House of Lords decided that as a matter of construction the policy did “otherwise provide” within the meaning of the opening words of section 55(2)(c) so that the perils of heating, sweating and spontaneous combustion arising from inherent vice or nature of the subject matter insured were covered.

Lord Diplock, at p 126, stated that: “This phrase (generally shortened to “inherent vice”) where it is used in section 55(2)(c) refers to a peril by which a loss is proximately caused; it is not descriptive of the loss itself. It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty.” In this case the insurers applying this definition, looked whether at Galveston, assuming the ordinary course of the contemplated voyage, without any intervening adverse fortuity, the rig had within itself internally the risk of deterioration, which they described as “the inherent vice at Galveston”; while the second question was whether the inherent vice at Galveston was the proximate causes of the loss. Insurers stated that the sea conditions were to be considered normal during voyage.

In the case T M Noten BV v Harding [1989] 2 Lloyd’s Rep 527; [1990] Lloyd’s Rep 283 industrial leather gloves were shipped from Calcutta to Rotterdam. On arrival the good were found to be wet, stained, mouldy and discoloured. The Court of Appeal observed that the ascertainment of the proximate cause was a question to be answered applying the common sense of a business or seafaring man. And concluded that “The damage was caused because the goods were shipped wet.”

In the case Mayban General Insurance v Alstom Power Plants Ltd [2004] 2 Lloyd’s Rep 609, the cargo shipped was a transformer, which was seriously damaged by the violent movements of the vessel due to the action of the wind and sea. The court there held that goods tendered for shipment must be capable of withstanding the forces that they can ordinarily be expected to encounter in the course of the voyage and that if the conditions encountered by the vessel were no more severe than could reasonably have been expected, the conclusion must be that the real cause of the loss was the inherent inability of the goods to withstand the ordinary incidents of the voyage. The court held that the insurers were not liable for the damage, since the cover excluded loss damage or expense caused by inherent vice or nature of the subject matter insured. However, the SC declared that Mayban General Insurance v Alstom Power Plants was wrongly decided, agreeing with the insured that the Mayban case would reduce much of the purpose of cargo insurance, for the cover would then only extend to loss or damage caused by perils of the seas that were exceptional, unforeseen or unforeseeable, and not otherwise. This, it was submitted, would go far to frustrate the very purpose of all risks cargo insurance, which is to provide an indemnity in respect of loss or damage caused by, among other things, all perils of the seas. ?The meaning of “perils of the seas” in the Act is contained in the “Rules for construction of policy” contained in Schedule 1, where the phrase is defined as referring “only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.”

The court reiterated that “the real question was as to the proximate cause of the loss… The question is one of fact, to be decided on common sense principles.” The court felt that the lower court erred by giving the phrase inherent vice or nature of the subject-matter insured too wide a meaning and, as the other side of the coin, giving the risk of perils of the seas too narrow a meaning. Hence applying common sense principles, the loss was not caused by inherent vice nor indeed ordinary wear or tear or the ordinary action of the wind and waves, but an external fortuitous accident or casualty of the seas. This took the form of the rolling and pitching of the barge in the sea conditions encountered catching the first leg at just the right moment to produce stresses sufficient to cause the leg to break off, thereby leading to increased stresses on the remaining legs and their subsequent breakage.

2.?????Leeds Beckett University v Travelers Insurance Company Ltd (Rev 1) [2017] EWHC 558 (TCC)

In this case the question revolved around the whether loss was caused by gradual deterioration or a fortuity as covered in the all-risk policy. The University built a student accommodation block ("the Building") in 1996, whose eastern wall ran adjacent to the Leeds/Liverpool canal. In August 2011, the University took out an all risks insurance policy. In December 2011, large cracks appeared in the internal walls and ceilings on the eastern part of the Building. Investigations revealed that an area below the ground concrete blockwork, which supported the Building's superstructure, had deteriorated and turned to "mush", offering no structural support.

Following the emergence of cracks in an accommodation block, the University decided to demolish the building and sought to recover its losses under the policy. Travelers Insurance denied the claim. The Judge stated that insurance policies covering ‘accidental damage’ would not cover events which were inevitable. On the facts, the ‘event’ which caused the damage could not be classified as a flood (as the University had contended), and given the way the building was constructed it was inevitable that the supporting concrete blocks would fail. The damage to the building was, therefore, not accidental damage, and was not covered by the policy. In the alternative, and assuming that the damage was accidental, the court considered whether the cause of the damage was excluded by the policy. It was held that the blocks had ‘gradually deteriorated’, and that the design was ‘faulty and defective’, and both of these causes meant that the damage (if accidental) was excluded under the policy.

The University argued that gradual deterioration cannot occur from an interaction between the property insured and its environment (i.e. the ground water) and that it should be restricted to where the property deteriorates of itself. The Judge rejected this interpretation stating: "Thus, as a matter of construction and of common sense, I conclude that gradual deterioration can be caused by the interaction between the property insured and the circumstances in which that property exists". Further, the Judge clarified that "It seems to me that the word ‘gradual’ is intended to convey something which developed over time. If deterioration is itself progressive (i.e. it takes place over time), then gradual deterioration must mean a process that may go even more slowly."