The TERAS LYZA – Towage bet partially voids an otherwise recoverable claim

Nearly ten years after the Insurance Act 2015 (IA) came into force, the Singapore High Court has considered the breach of warranty provisions (s10) and “terms not relevant to the actual loss” (s11). In the same case, nearly 120 years after the Marine Insurance Act 1906 (MIA), the Court also considered the law on gaming and wagering policies (s4).

The Loss

In May 2018, the “TERAS LYZA” (the Vessel), a four-legged jack-up lift barge, departed from Vietnam on a wet tow to Taiwan. On 5 June 2018, the Vessel developed a list, and within two hours had capsized.

The subsequent litigation in the Singapore High Court concerned a claim under a Hull & Machinery (H&M) and Increased Value (IV) policy governed by English law. The Vessel’s owner and manager had gone into liquidation and the claim was pursued by the mortgagee (OCBC), as co-assured.

OCBC alleged the loss was caused by a peril of the sea, that the Vessel was a constructive total loss (CTL), and that it was entitled to recover the full insured values under the H&M (US$ 56m) and IV (US$ 14m) sections of the policy.

Decision

A number of points were in issue, but the following are worthy of note:

Breach of towage warranties – Underwriters failed to prove that any of the three warranties had been breached as alleged.
Policy Proof of Interest (PPI) – the Court endorsed the opinions of the parties’ expert witnesses on English law (two London KCs), who agreed that as the IV section contained a PPI provision, it was void as a gaming or wagering contract under s4 MIA.

The decision may be subject to appeal.

Breach of towage warranties

The towage warranties included requirements that:

All statutory and regulatory requirements as to seaworthiness be complied with.
All arrangements for “moves” to be in accordance with standard operational procedures.
Tug, tow, crew competency, voyage and weather routing be carried out by a marine warranty surveyor with all recommendations to be complied with prior to and during sailing.

The Court found that the warranties had in fact been complied with, but nonetheless expressed views on whether these warranties were terms which defined the risk as a whole (and thus outside the application of s11 IA) or whether they were risk mitigation terms (and thus subject to s11).

If the towage warranties “defin[ed] the risk as a whole”, then any breach would have afforded a defence to Underwriters (i.e. cover would be suspended during the period of breach). However, no defence would have been available if the warranties were merely risk mitigation terms, and if OCBC could also show that non-compliance (i.e. the breach) “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred” under s11.

Underwriters argued that the towage warranties were not subject to s11 as they were terms which would affect their overall assessment of the risk, for example in setting an appropriate premium. Bear in mind that the cover was for navigating risks, with a prohibition on towing “except as is customary or to the first safe port or place when in need of assistance”.
OCBC, by contrast, argued that “defining the risk as a whole” only embraces terms which are so fundamental and extensive as to delimit the very risk being insured; for example, geographical and usage restrictions placed on insured property (although it is difficult to see why towage would not be such a usage).
Although he did not need to decide the point, the Judge agreed with OCBC that the towage warranty was not so fundamental or extensive as a geographical/usage restriction, and thus did not define the risk as a whole.

PPI clause

Wager policies were first prohibited around 280 years ago under a 1745 predecessor to the MIA. They were made void to stamp out a practice of gambling on the success of a marine adventure in which the buyer of the insurance had no genuine interest.

Section 4 MIA provides:

Every contract of marine insurance by way of gaming or wagering is void.
A contract of marine insurance is deemed to be a gaming or wagering contract.
Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest.
Where the policy is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term:
Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.

Historically, risks were written “PPI” where the sum insured or the nature of the indemnity (for example, disbursements under an IV policy or loss of hire) was not necessarily objectively ascertainable. They were known as “honour” policies – i.e. they would be honoured by the market despite being legally “void” under s4 MIA.

There are old cases in England where the point has been taken, but there are no recently reported cases, which suggests either that the defence has not been taken in England, or generally policies are no longer written on a PPI basis.

Comment

While Singapore decisions are not binding on the English Courts, this case highlights the difficulty for Underwriters in mandating compliance with towage warranties, and the uncertainties surrounding whether breaches of such terms will provide a defence to Underwriters.

If Underwriters wish to have certainty that they can rely on non-compliance with terms which they consider to be of fundamental importance to the risk, the only safe course is (in addition to careful drafting) to agree that s11 IA does not apply, as contracting out of certain provisions of the IA is permissible (subject to detailed “transparency” requirements).

The OCBC v Argoglobal case is also notable because two experienced English KCs, instructed as experts on English insurance law, appear to have had little difficulty in agreeing that policies written on a PPI basis are void, a conclusion accepted by the Singapore Court.