INSURANCE LAW. LEE KIAT SENG LLB (NUS), LLM (Land), Advocate & Solicitor (Singapore)

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1 224 SAL Annual Review 2000 INSURANCE LAW LEE KIAT SENG LLB (NUS), LLM (Land), Advocate & Solicitor (Singapore) Introduction The Singapore Law Reports for 2000 contain two cases on insurance law which are of general interest. By the nature of marine insurance, the cases revolved around the construction of clauses in standard term contracts. Scope of cover - 'As Owner of the Vessel' The assured, Pan United Shipyard Pte Ltd, are in the business of ship building and repairs. The assured entered into a contract to convert a vessel, the 'Ikopa', from a bulk carrier to a clean-product tanker. The contract provided that the title and risk in the vessel vested in the assured until delivery of the vessel took place. The assured took out a Collective Policy of Insurance, which included, inter alia, the incorporation of the Institute Time Clauses for Builders' Risks. The policy covered 'hull and machinery, equipment, outfits and everything connected therewith in respect of a bulk carrier IKOPA to be converted to a clean product tanker.' While conversion works were carried out from early 1992 to early 1993, a yacht was undergoing works in a shipyard next to the assured's yard. In June 1995, the owners of the yacht made a claim against the assured for negligence, in the course of the work carried out on the 'Ikopa', which caused damage to their yacht. The claim under the policy was rejected on two grounds: firstly, that the claim did not fall within the scope of the policy; and secondly, the claim was excluded by the exclusion clause in the policy. The assured then conducted their own defence with the suit being settled and the claim dismissed but with no order as to costs. The assured subsequently brought a suit against the insurers for a declaration that they were entitled, under the policy, to an indemnity for their legal costs. The relevant section in the policy, cl 19.1 provides: 'The Underwriters agree to indemnify the Assured for any sum or sums paid by the Assured to any other person or persons by reason of the Assured being legally liable, as Owner of the Vessel, for any claim, demand, damages and/or expenses, where such liability is in consequence of any of the following matters or things and arises from an accident or occurrence during the period of this insurance.'

2 Insurance Law 225 Clause 10.1 provides: 'No claim arising from a peril insured against shall be payable under this insurance unless the aggregate of all such claims arising out of each separate accident or occurrence (including claims under clauses ) exceeds -... in which case this sum shall be deducted.' (The exclusion sum is stipulated by the schedule as being $50,000.) In the trial court, the judge held that cl 19.1 limited indemnity in relation to any liability qua owner of the vessel. Since the negligence suit in question was brought in relation to the assured's negligence as ship repairers and had nothing to do with them being owners of the vessel, the claim would fall outside the scope of the insurance cover offered by the policy. In any event, the trial judge held that even if the insurers were liable to indemnify the assured, the deduction of cl 10.1 would apply. The assured then appealed to the Court of Appeal where the main point of contention was the scope of cl The decision is reported as Pan-United Shipyard Pte Ltd v India International Insurance Pie Ltd [2000] 4 SLR 303. On appeal, the insurers adopted the same arguments as they took in the lower court - the character of the assured was central in establishing if the liability incurred was within the scope of the cover. In order to be within the cover, it had to be shown that the assured had incurred such liability in relation to his role as 'owner' of the vessel. This was 'an essential ingredient'. The use of the term was not meant to be purely for the purposes of describing the assured's status or identity, it was to circumscribe the risk underwritten. The authorities relied on were Stnrge v Hackett [1962] 1 Lloyd's Rep 117 and Rigby & Anor v Sun Alliance & London Insurance Ltd 1980] 1 Lloyd's Rep 359. On the other hand, the assured raised the objection to the trial judge's decision on the basis that the distinction that the court made in the assured as the owner and the assured as a repairer was superficial as at all material times, the assured was really wearing both hats. The assured relied on Christmas v Taylor Woodrow Civil Engineering Ltd & Anor [1997] 1 Lloyd's Rep 407. In that case, although the policy only covered liability as an owner, the court decided that a demise charterer could take the benefit of the policy because he had been named in the policy as an insured party. The assured sought to rely on this case on the basis that an analogy could be drawn with their situation as they had also been named as an assured under the policy. The Court of Appeal did not accept this argument primarily on the basis that in the case relied upon by the assured, the court could come to the conclusion it did on the premise that the typewritten addition of the demise charterer as an assured had to take precedence over the printed restriction to liability qua owner. As such, the clause had to be read as

3 226 SAL Annual Review 2000 altered to include the assured. The court was quite right in not accepting the analogy which the assured tried to draw. The analogy is fallacious, if not simplistic. The mere fact that a person is named as the assured in any policy does not, of itself, answer the question of the capacity in which he incurs liability. The similarities between Christmas v Taylor and the present case is more apparent than real - the liability must be incurred as 'owner' and the assured was named in the policy. However, the crucial point which did not arise in Christmas' case is that here, the assured wore two distinct hats and so, the question of whether the liability was incurred as owner or in some other capacity did not even begin to arise. In Christmas' case, since the assured could not have incurred liability as an owner, because he was not one, the policy had to be read as being necessarily altered to take that into account. On the other hand, the assured in the present case could have incurred liability as an owner, and thus there was no need to infer such adaptation of the contract. Thus, the reliance on the authority was misplaced. Cover note - when effective contractual undertaking to insure? One of the common misconceptions about cover notes is that once the insurer issues it to a prospective assured, the insurer is bound to insure the assured. To begin with, the cover note itself may be of a limited lifespan - it may be effective until the actual policy has been worked out or failing that, within a stipulated period of time. Of course, it does not end there. Cover notes may also incorporate terms of the insurer's standard terms insofar as they are applicable and can be adapted. They may also require certain other criteria to be met, viz, there are certain presumptions which form the premise behind the cover offered by such cover notes. If these are not met, then there should really be no question as to whether there is in fact an effective contract. It is, after all, well accepted that contracting parties may impose conditions precedent to the contract coming into effect. This was one of the main issues explored in the case before the High Court in Everbright Commercial Pte Ltd & Anor v AX A Insurance S'pore Ltd [2000] 4 SLR 226. The facts of the case are interesting though not all of them are particularly relevant to the question of the cover note. It shall suffice for our discussion to note that a cover note was issued by Wilcom on behalf of the defendant insurer to cover a cargo of timber to be shipped on a ship which later turned out to be a phantom ship. At the time when the cover note was issued by Wilcom, the only thing that they had to go on was that there was a shipment of timber and it was clear what the area of the port of loading and unloading would be. However, there was then no indication as to the ship which would be used to transport the shipment. Judith Prakash J took pains to point out

4 Insurance Law 227 that a cover note is simply an undertaking by insurers to insure goods under the note by the proposed insured. The effectiveness and validity of such a note depends on whether the relevant particulars of the shipment has been declared and whether the terms of the cover note have been fully complied with. The argument between the plaintiff and the defendant went thus: as far as the plaintiff insured was concerned, since the cover note was obviously for a prospective shipment, it would automatically attach when the cargo was loaded and the vessel's name and other particulars were furnished to the insurer. On the other hand, the defendant insurer took the view that furnishing such details was only one part of the obligation before the cover note kicked in. There was also the question of whether the terms of the cover note had been met. The court held that the latter view was the correct one. It had to be the case because the issuing of cover notes in the marine arena is necessarily fraught with uncertainty - in most cases, when the risk is proposed to the underwriter, the only thing which is certain is the marine adventure, ie what goods are to be shipped. At that point in time, it may not be clear yet which is the port of unloading, or the nature or particulars of the ship to undertake the voyage and other details. As such, prudent insurers can be expected to exercise caution by imposing restrictions and conditions precedent. Here, the term in question was the expression that the efficacy of the cover note was subject to the vessel conveying the goods being an 'approved vessel... subject to Institute Classification Clause..." The Institute Classification Clause (TCC') provides, inter alia, a list of classification societies by which the vessel must have been classed as well as stipulates other characteristics of the vessel, eg age. What the ICC then does is that it circumscribes the type of vessel which can be used by the insured. Such limitation is not unusual as these limits, in particular the requirement of the vessel being classed by the list classification societies, will indicate the risk profile of the insured adventure, thus enabling insurers to decide on whether to take on the risk and the premium at which to underwrite it. The plaintiff argued in vain that since the ICC does not actually use the expression "approved vessel', the use of such a term in the cover note simply indicates that any vessel nominated by the insured would automatically be an 'approved vessel' subject to the express rejection of the insurers. Not surprisingly Prakash J did not accept the submission. As the court rightly pointed out, although there is no express mention of the phrase 'approved vessel' in the ICC, it does not rule out the use of the ICC since the words used in the cover note clearly defined what would constitute an 'approved vessel' by reference to the ICC. In the context of which it was used in juxtaposition with the ICC, the defendant was clearly seeking to import and borrow the ambit laid down in the ICC to define what would be an 'approved vessel' for the cover note.

5 228 SAL Annual Review 2000 Institute Classification Clauses and classification societies In the course of considering whether the vessel was nonetheless within the held covered clause in the ICC, Prakash J made some observations on the efficacy of the ICC and the role played by classification societies in marine insurance. The court pointed out that cover notes are usually issued in advance of shipment taking place. They are usually issued at a time when a marine adventure is set down, but a vessel has not been found or designated as yet. Thus, it is in the interest of the insurers to ensure that a limit is placed on the range of risks they are willing to undertake. This makes good commercial sense as the alternative would be for the insurers to simply turn away the proposed insured. The incorporation of the ICC allows the insurers to keep the potential business and yet protect themselves against undertaking all manner of risks. The ICC in laying down the requirement of classification of a vessel by a classification society is ensuring that the vessel should, at the minimum, be able to cope with the normal incidents of a sea voyage, ie it should be able to comfortably cope with 'perils of the sea'. As pointed out by the court, the classification of a vessel has significant implications - it demonstrates some level of safety standards of the hull and machinery, as well as other aspects of ship safety which directly affect the standard of quality, safety and reliability. By meeting the requirements of a major or reputable classification society, the shipping community can take comfort and confidence that the vessel in question meets the proper standards in these areas. The ICC ensures that the vessels in question must meet the mininum safety standards imposed by the major, reliable and reputable classification societies listed therein. Held covered clause - when properly invoked? The court found that the vessel in question could not have been 'held covered' under para 4 of the ICC but made some dicta remarks which are instructive. Prakash J held that in order for an assured to be protected by a held covered clause, two things must be shown: (a) once the assured knows of material facts which take the insured interest beyond the ambit of the policy cover, the assured has to give reasonable notice to the underwriter of these facts so that the latter will know that the clause is being relied on; and (b) it must still be possible, in spite of the increase of risk, to obtain a reasonable commercial rate of premium for the cover. The obligation to give reasonable notice is implied by the law. This will ensure that the underwriter has a reasonable opportunity to consider under what additional terms he will continue to underwrite the risk and the additional premium to be charged. This is all very well, but what exactly is meant by a reasonable time? Prakash J referred to Liberian

6 Insurance Law 229 Insurance Agency Inc v Masse [1977] 2 Lloyd's Rep 560, where Donaldson J expressed the view that what is reasonable has to turn on the circumstances - the more imminent the peril to the insured interest, the shorter the 'reasonable time' will be. In the ultimate analaysis, it has to be the case that what is reasonable is an elastic concept and will be dependent on the factual matrix of each case. In the present case, Prakash J held that although the notice was given a month after the vessel had first been chartered, it was still reasonable notice as there was still more than two weeks before completion of loading and the ship setting sail. Insofar as (b) is concerned, the court again referred to the Liberian Insurance case where Donaldson J took the view that the held covered clause would apply only if the assured, on the basis of an accurate declaration of all the facts affecting the risk, but without taking into account knowledge of subsequent events, could have obtained a quote in the market at a premium which could be properly described as 'a reasonable commercial rate'. In the current case, since the chartered vessel was a phantom ship, no underwriter would have been willing to insure cargo carried on it and as such, there was really no way to determining what the reasonable commercial rate of premium would be and thus, the plaintiff would not be able to invoke the held covered clause as this second requirement could not be met. Section 41 of the Marine Insurance Act and foreign illegality The defendant insurers made an issue out of whether the plaintiff assured had colluded with other persons to circumvent laws of the Solomon Islands and as such, should not be allowed to recover under the policy. Section 41 of the Marine Insurance Act (Cap Ed) ('MIA') reads: 'Wamintv of Legality There is an implied warranty that the adventure insured is a lawful one. and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner.' The court took the view that the consideration of this issue ought to proceed on a two-stage process - (a) was any illegality involved in the sale or export of the logs, and if yes, (b) what is the effect of this illegality in light of s 41 of the MIA? What is pertinent is the court's ruling on question (b). Prakash J considered the authorities and found that the weight of authority was against any assertion that s 41 would apply equally to a foreign illegality. The conclusion of the court is not surprising especially in light of the fact that most commentators on the MIA consider it a trite point that, whatever else may be the implications for a contract which breaches a foreign law. foreign illegality is not within the scope of s 41.