Global Maritime trade is affected hugely by the policies of maritime insurance being followed in various nations. An insurance policy is a contract in which an individual or entity (known as an insured) receives monetary reimbursement against losses, emerging from the occurrence of an event, from an insurance company (known as an insurer), generally in exchange for a premium. Marine insurance alludes to a contract by which the insurer promises to reimburse the insured a loss resulting from “losses incidental to marine adventure”. It provides coverage against any loss/harm to ships, terminals, cargo, etc.
It is said that Marine insurance is the primary insurance policy. In Babylonian times (2100 B.C.), the genesis of the initial insurance policy was observed whereby the merchants assured a sum to guarantee the safe arrival of their goods. Later, around 300 B.C., the concept of “Bottomry” came around. It was an arrangement by which the owner of the ship borrows money for repairing or maintenance of the ship and in return pledges the ship as security. If something happened to the ship by way of any perils, the lender shall lose his money but if the ship returns, the lender shall get his money back with a premium. This laid the foundation stone for the outset of Marine insurance. Marine Insurance, in a somewhat similar way as we know them now, was first found in Middle Ages in Europe.
In 1688, the first official insurance company was formed in London in a coffee shop that was famous amongst merchants and ship owners and grew to be immensely successful. And that’s how the Insurance policies evolved. It is a well-established reality that when the Indian Marine Insurance Act of 1963 (MIA 1963) was drafted, the drafters had the Marine Insurance Act of 1906 (MIA 1906) of the English Law at the back of their heads. The 1963 and 1906 Acts are closely similar or indistinguishable from each other. The principles governing the 1906 English Act are duplicated in the 1963 Act of India. The Parliament passed the MIA 1963 to ensure the smooth functioning of shipping which saw a huge expansion right after industrialization.
The principle of Indemnity is considered to be the backbone of the insurance law and industry. It simply means to put the insured in the place he would have been had the loss not occurred. There exist broadly two kinds of marine insurance: valued policy and unvalued policy. Unvalued policy (section 30 of MIA 1963) does not specify the value of the subject matter insured but sets a limit of the sum insured. This policy is similar to other kinds of insurance policies like fire, medical, etc. However, in actuality, choosing the valued insurance policy is the modern trend. Valued policy insurance is an insurance policy where the value of the subject-matter insured is specified or mutually agreed upon by both parties while making the contract. This effectively allows the insurer and insured to negotiate the insurable value of the subject matter between themselves, however, it may be very difficult for them to ascertain the value accurately.
The hull of a vessel was insured for a specified voyage undervalued policies for a sum considerably in excess of her market value. There were also taken out concurrent policies on freight and disbursements for sums out of all proportion to the risks at stake. The managing owner (who had carried through the insurances) also effected on his own behalf further insurances for a large sum, the policies in respect of disbursements and the managing owner’s own policies being ‘honour’ policies. The vessel proceeded on the voyage in charge of a master who had not been to sea for twenty-two years, who had lost his last ship, and whose certificate had in consequence been suspended for six months. The vessel was wrecked and became a total loss.
The Gunford Ship Company Limited & Liquidator with Thomas Greig Hardie (the pursuers) bought a legal action against Thames & Mersey Marine Insurance Company Limited (the defenders) seeking payment of 2000 pounds underwritten by the defenders. If the insurances be split up they were as follows:— Upon hull, £19,000; on freight, £5500, the freight for the voyage being about £4800, of which one-half had been paid in advance and was not at risk; on disbursements P. P. I. policy worth £4600, and additional on hull and disbursements (including debts of ship to her managing owners and others) against total loss,
£6500. The Gunford was launched at the shipyard of Scott & Co., Greenock, for Briggs, Harvie & Co., Glasgow in October 1892. She was sold to Francis Briggs & Co., Glasgow. In 1897. The “Gunford” Shipping Company, Limited, was managed by Francis Briggs, by whom all the business of the ship, including the employment of her officers and the effecting of insurances, was transacted.
The actual value of the hull was about £9000. No insurable interest could be shown in respect of the greater part of the items stated to have been insured under the odenomination of disbursements, and full indemnity for actual disbursements would, in the event of loss, be recovered by reason of the high valuation of hull. It was admitted that it would be a great deal better for the shareholders if the ship were lost.
If she completed the voyage she would earn £2400 freight, and be worth herself some £9000, in all £11,400. If she were lost her owners and agents stood to receive £35,600, less a sum of £2400 freight already paid. Their theory of insurance was to insure the original capital of the company which owned her and add to that the debts of the company.
The master of the ship had not been to the sea for twenty-two years, being employed on shore as a stevedore, and on the last occasion when he was at sea his ship had been lost and his certificate suspended for six months. The captain of the vessel on the voyage in question was A. W. Sember. The “Gunford” sailed from Hamburg on the 12th October 1907, with a full cargo of patent fuel, coke, and 13 tons machinery, on a voyage round Cape Horn to Santa Rosalia. In the course of this voyage, upon the incidents of which was not well logged in, she, on the 10th December 1907, went ashore near Cape San Roque and became a total loss.
The underwriters of the hull were not informed of the master’s record, nor of the freight and disbursements policies or the policies on behalf of the manager.
In the Court of Session, 16th July 1910, The vessel having become a total loss, and the owners suing under the policies on the hull, held, affirming judgment of the First Division,
- That as the master’s competency was covered by the warranty of seaworthiness there was no duty on the owners to disclose to the underwriters his record,
- That in the circumstances the master was not proved to have been incompetent so as to put the owners in breach of the warrant of seaworthiness; but, reversing judgment of the First Division,
- That there was a duty on them to disclose the other policies of insurance, these being material circumstances which would influence the mind of a prudent insurer in fixing the premium and determining whether he would take the risk, and that the policies were therefore voidable and the underwriters not
The defenders or appellants, the Thames and Mersey Marine Insurance Company, Limited, appealed to the House of Lords.
All the policies, both voyage and time, contained a warranty of seaworthiness. The appellants alleged that this warranty was broken, in that the ship was not seaworthy, because Captain Sember, who, as already stated, sailed in charge of her, was not a competent master. Lord Salvesen, the Lord Ordinary before whom the case was tried in the first instance, came to the conclusion that there was no breach of the warranty of seaworthiness. He found, after considering the evidence on this question, the captain himself being a witness, and after carefully discussing all the incidents of the voyage, that the “Gunford” was not unseaworthy by reason of the captain’s incompetence. Upon this part of the case your Lordships did not call upon the learned counsel for the respondents.
Upon the second ground, namely, that there was concealment of material facts in connection with the employment of the captain, there was a great deal of evidence on both sides. The facts relied upon by the appellants were that a period of 22 years had elapsed since Captain Sember had last been at sea, he during that time having been engaged as a stevedore; it was further said that his engagement as captain was made without sufficient inquiry, and the circumstances under which he was engaged were such that it was material to the underwriter to be informed of the previous history and experience of the captain. A great many witnesses were called for the appellants, who stated that in their opinion it was material to the underwriters that they should be informed of the circumstances connected with the captain’s experience above referred to. The matter formed the subject of some correspondence after the vessel had sailed and before the loss. The Lord Ordinary, in his judgment, came to the conclusion that under ordinary circumstances underwriters rely upon the information at their own disposal with regard to the competency of masters, that the name of the master is as a rule not inserted in the policy, and that it is only on very rare occasions that underwriters make any inquiry as to his name or history, and that they rely on the shipowners to engage a competent master.
There is no doubt that in this case the information at the disposal of the underwriters would not have afforded the necessary information, because Captain Sember was not appointed master of the “Gunford” until the 19th July, and the records of information as to masters, at the disposal of the underwriters at the date the policies were effected, would not have contained his name, as per the Lord Ordinary and the Court of Session upon this part of the case. The fact upon which most reliance was placed was that the underwriters were not told that the master had been on shore for twenty-two years; but this fact could not well be stated by itself without further information as to other matters put before Mr Briggs as to the qualifications of Captain Sember, and looking to the well-established usage, as appears in the judgments in the Court below, that there was no concealment of any material fact in regard to the captain.
We need to observe the remaining point in the case, and that is, whether or not there was concealment of material facts by reason of the non-disclosure of the insurances effected upon the ship. In reference to the sections of the Marine Insurance Act 1906, Section 17, mentions—A contract of marine insurance is a contract based upon the utmost good faith, and if the utmost good faith be not observed by either party the contract may be avoided by the other party.
Section 18 (1). Subject to the provisions of this section the assured must disclose to the insurer before the contract is concluded every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which in the ordinary course of business ought to be known by him. If the assured fails to make such disclosure the insurer may avoid the contract.
- Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.
- In the absence of inquiry the following circumstances need not be disclosed, namely, ( a) any circumstance which diminishes the risk; ( b) any circumstance which is known or presumed to be known to the insurer; the insurer is presumed to know matters of common notoriety or knowledge and matters which an insurer in the ordinary course of his business as such ought to know; ( c) any circumstance as to which information is waived by the insurer; ( d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.
- Whether any particular circumstance which is not disclosed be material or not is in each case a question of fact.
- The term “circumstance” includes any communication made to or information received by the assured.
Section 19:- Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for an assured by an agent the agent must disclose to the insurer ( a) every material circumstance which is known to himself; and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by or to have been communicated to him.
The two policies to which the appeal now under consideration related were dated on the 30th and 31st August 1907, but the material date for the purpose of the question under consideration, viz., the date of the initialling of the slip was on the 3rd August. The policies were effected upon the instructions of Mr Briggs. The actual amount of freight due under the charter-party was £4790, of which one half, £2395, was paid in advance at Hamburg. The disbursements and other outlay which had been incurred in order to earn the freight was stated to amount to £5280. Some portion of this amount would not have created any insurable interest having regard to the provisions of section 16, Moreover, it was conceded that the only source from which these disbursements could be repaid was the freight earned by the ship, which freight were itself insured. The insurances which were effected on behalf of the owners amounted to £29,300, as follows:—
Hull, valued at £18,500 £19,000
| Freight, valued at £5500 | £ 5,500 |
| Master’s effects, valued at £200 | £200 |
| Disbursements, P.P.I. policy | £4,600 |
| Total :- £29,300 |
In addition Mr Briggs took out, for his own protection, insurances to the amount of £6500 by P.P.I. honour policies, making in all £35,800. The evidence established that the actual value of the property at risk was hull £9000, and freight about £5000, but, as already stated, the underwriters accepted a policy upon which the hull was valued at £18,500. Assuming that no part of the disbursements should be taken into consideration as being included in the difference between £9000, the actual value of the hull, and £18,500, the insured value of the ship, there was still a double insurance in respect of the alleged disbursements to the extent of £4600 in addition to the £6500 insurances effected by Briggs.
It was proved in evidence that no dividends had been earned by the ship for about seven years; it was further established that the object of the insurances was to cover debts owing by the company in the event of the loss of the vessel. There was further evidence that the profits which were being earned by the ship could not stand the amount paid in respect of premiums of insurance. All the disbursement policies were valued policies—that is to say, in the event of the ship being lost the full amount would be paid, and it was admitted by Mr. Briggs, that it would be a great deal better for the shareholders, if they lost their ship under the policies than if they had to realise their ship by sale, unless they got the Spanish Government to buy or a war took place. Even assuming the value of the ship to be taken at £18,500, the total amount at risk did not exceed £23,500 before the moiety of the freight was paid at Hamburg, and a little over £21,000 after the vessel left Hamburg.
Some distinction was attempted to be made between over-valuation and over insurance, but inasmuch as all the policies were valued policies the question becomes immaterial. There was on over-valuation to the extent of £11,100, without taking into consideration the difference between the declared value, £18,500, and the actual value, £9000. Apart, then, from evidence in the particular case, it seems to me that the statement of the above facts is sufficient to show that, looking to the provisions of the Act of 1906, the circumstances above stated were material as being those which would influence the judgment of a prudent insurer in fixing the premium or determining whether he would take the risk.
The “Gunford” was towed from Rotterdam, and on 12th October 1907 left Hamburg with apparently a full cargo. She was wrecked on 29th November near Cape San Roque on the Brazilian coast. After various ineffective tackings for the purpose of weathering the Cape, she struck badly on a rock or reef and became a total loss. The crew of twenty-six reached the shore in safety, although ten sailors unfortunately died of a fever caught after landing. A Board of Trade inquiry was held upon the circumstances, and there seems no reason to doubt the soundness of its findings, that the stranding was caused by the default of the master. His certificate of competency was suspended for twelve months.
Briggs was the managing owner of the ship, the disbursements in respect of which he was purporting to insure were moneys due from the ship to him, and in considering whether there was over-valuation or over- insurance.
Reflecting upon the merits of the plea of unseaworthiness—a plea which is founded upon the alleged incapacity of Captain Sember for the responsible post of master of this sailing vessel. Sember’s record was not good. He had not been to sea for twenty-two years, having been acting mostly as a stevedore during that time. When he was last at sea his conduct had been such that his certificate had been suspended for six months, his ship having been lost. The certificates which he produced, although good, should have prompted inquiry into his record. But, answering an advertisement, he was appointed as mate of a vessel named the “Belford” at £9 a month, and within a few days he was appointed master of the “Gunford” at
£20 a month. The interviews at which these appointments were made lasted a few minutes. They were held with Briggs.
Much more serious considerations, however, follow. There were insurances on freight to the extent of £5500, and insurances on disbursements to the extent of £4600. The latter policies—those on disbursements — were P. P. I. policies. They were bound to be so, because in point of fact, as was admitted in argument for the respondents, the disbursements were the very things which had been already accounted for in the freight, and when the ship became a wreck the payment on these policies was not to be a payment of indemnity, but a present to the assured of this sum of money—a present falling to be made in the event of the wreck and loss of the vessel. There were also insurances on disbursements on behalf of Briggs. These were time policies current during the voyage to an amount of no less than £6500. Briggs had made advances to the bank on behalf of the company, and he was in other ways deeply involved as a creditor. Any payments made under these insurances would, again, not be payments to indemnify Briggs for loss, but would be of the nature also of presents—presents made on the issue of a gamble upon the life of the vessel, the issue to be favourable to Briggs when the vessel was lost.
The vessel had originally cost £20,750. At the date of the policies now in question she was 15 years old, and was worth about £9000 to sell. For the purposes of insurance of the hull and materials her value was agreed at £18,500. The underwriters, of course, were well aware that this was an over-valuation. Knowing as they did the age and type of the vessel and the rate of annual depreciation, they could tell, almost as exactly as her owners, what she was worth, and, moreover, they had, as it happened, regularly insured her for years past. Although the contract of insurance is expressed to be a contract of indemnity, and the indemnity is properly based on market value at the time of the loss, yet the law allows the insured value to be agreed between the parties, and the agreed value, though frequently, and perhaps generally, in excess of the market value, is binding in the absence of fraud. There are often legitimate business reasons for this discrepancy between the selling value and the insured value, and it should not be assumed that it necessarily creates any actual conflict between duty and interest on the part of the shipowner in regard to the safety of the thing insured. The assured naturally aims at reinstatement rather than bare indemnity, and the insurer has also his own reasons for preferring that the values should be high so long as they do not constitute a temptation to loss. In order that he may be saved the trouble of small claims, which are often of a doubtful character, he stipulates that the ship shall be warranted free from average under three per cent., and where the total agreed value is high, the insurer’s protection under this clause is increased. Again, in claims for constructive total loss, the higher the value, the more difficult it is for the assured to establish that the cost of repairs will exceed the repaired value, so as to entitle him to treat the vessel as lost and leave the wreck on the insurer’s hands. The insurer is therefore willing to undertake the risk of a certain amount of over—valuation, relying, no doubt, on the character of the assured and also on the interest that the managing owners or managers have in preserving the ship as a source of business profit to themselves. In addition to the hull and materials, the plaintiff insured the gross freight at £5500. This policy also involved an over-valuation, as it made no deduction for the expenses of earning the freight, but the insurance of gross instead of net freight is expressly allowed by our law, and is of great practical convenience in avoiding a troublesome, uncertain, and possibly litigious inquiry into working expenses.
By the foregoing policies the plaintiffs secured that in case of loss they would receive more than a strict indemnity based on existing values, but perhaps not quite enough to replace the article insured without some slight loss. They proceeded, however, to effect a valued policy for £4600 on “disbursements.” A list of the payments comprised under this head was put in by the plaintiffs, and amounted to £5280 as against a total chartered freight of £4790. So far as these payments consisted of current working expenses necessary to earn freight, they were covered by the insurance on the gross freight, and so far as they consisted of repairs, outfit, and insurance premium on hull, they would ordinarily be included in-the policy on ship and materials.
This policy was therefore an over-insurance by double insurance. The plaintiffs could not legally avail themselves of it to enforce recovery of any sum in excess of the indemnity allowed by law, but this was a “P.P.I.” or honour policy, i.e., it was made “without further proof of interest than the policy itself.” In other words, it was a wager, and it is well known that the sums insured under such policies are, under ordinary circumstances, paid with the same regularity as if they were legally due.
Their Lordships reversed the order appealed from, and entered judgment for the defenders. The court dismissed the defenses raised by the defenders and held that the pursuers were entitled to recover under the policies insuring freight upto the actual amount at risk.
The judgement of the Lord Ordinary was upheld. The court found in favour of the pursuers, holding that the sailing ship was not unseaworthy due to the master’s alleged incompetence. However, the policies were deemed voidable due to the non-disclosure of material facts, including the master’s history and over-insurance. The pursuers were granted the right to recover under the policies insuring freight upto the actual amount at risk.
