Energy Insurance Market Legal RoundUp

02 July 2019

This regular feature in our newsletter tracks recent insurance and reinsurance cases and what the outcome was in court.

UK Supreme Court rules on the Burden of Proof in Cargo Claims

The UK Supreme Court has ruled on how the burden of proof lies when it comes to cargo claims. In this case a cargo of coffee beans were shipped in containers from South America to North Europe.

The coffee beans were placed by stevedores into unventilated containers who had been contracted by the carrier. Coffee beans emit moisture when carried from a warm to a cool climate.

The containers were lined with kraft paper as a precaution against moisture damage, but on discharge the coffee beans showed evidence of condensation damage.

The cargo interests claimed against the carrier on the basis that the damage was sufficient proof that the carrier had failed to care for the cargo in breach of the Hague Rules. In particular, the cargo interests alleged that the carrier had not used enough lining paper to conform to industry practice.

The carrier argued that the moisture damage was inevitable due to the characteristics of the cargo, and therefore could rely on the inherent vice exception of the Hague Rules. The Supreme Court considered the question of which party bore the burden of proof.

Did the cargo interests need to prove that the cargo was damaged by the carrier’s breach of Article III Rule 2 rather than the inherent defect, quality or vice of the cargo (which was the conventional allocation), or did the carrier have to prove they were not in breach of the duty to care for the cargo in their possession?

The Supreme Court held that the application of the Hague Rules should be considered against the background of the common law of bailment, that being the concept that, if one party agrees to take possession of another party’s property, that person, the bailee, has a responsibility to take reasonable care of that property. If it is returned damaged, it is the bailee’s burden to prove the absence of negligence.

Article III Rule 2 of the Hague Rules puts a duty on the carrier to “properly and carefully” load, handle, stow, carry, keep, care for and discharge the cargo. The Court considered that this duty was similar to the common law position on bailment, and that the carrier had the burden of proving they were not in causative breach of this provision. This would be before they could rely on the inherent vice exception in Article IV Rule 2(m).

According The Supreme Court said that the availability of the Article IV Rule 2(m) defence should not be interpreted as contradictory to the fundamental duty of care owed by the carrier under the general scheme of the Hague Rules.

For a carrier to rely on the inherent vice exception, they had to prove either that they were not in breach of Article III Rule 2 and the damage occurred anyway, or that the cargo would not have survived the voyage regardless of whether the carrier discharged the duty of care; i.e., that the loss was inevitable.

US Supreme Court hears oral argument in Jones Act Case

The United States Supreme Court held oral argument on a Jones Act case in an attempt to resolve a circuit split. The Jones Act case reached the Supreme Court from the Ninth Circuit, whose district courts have held that a claim for punitive damages is available to Jones Act seamen in a general maritime unseaworthiness claim.

This is in direct conflict with decisions from the Fifth Circuit, among others, where district courts have held that a Jones Act seaman’s recovery for unseaworthiness under general maritime law does not include punitive damages. Arguments noted that the Jones Act (1920) supplemented whatever remedies were already available under general maritime law, while one judge wondered why unseaworthiness claims had evolved so much since the Jones Act if Congress had intended for the courts to step back.

Another judge focused on differences between the Jones Act and unseaworthiness claims.

Arguments were put forward that this was akin to asking the Court to “put on our common law hat and decide that punitive damages are a good thing” even though there was no pre-Jones Act case allowing punitive damages.

The differences were pointed out between maintenance and- cure claims, where punitive damages are awardable, and unseaworthiness claims.

The impact of the Supreme Court’s decision was one of the many sources of conflict in briefing and at oral argument, with counsel for the respondent arguing that punitive damages have value as a deterrent to ship-owners and have been awarded in the Ninth and Eleventh Circuits with no ill effects to the shipping industry, while many amicus briefs suggested that allowing punitive damages in an unseaworthiness claim would harm the maritime industry and national economy.

Ultimately, the Court must decide if it should defer to Congress regarding seamen’s personal injuries or if it should exercise its general maritime law functions, including adherence to the longstanding principle of special solicitude for the welfare of sailors.

STOP PRESS: At the time of publication the US Supreme Court had just released its long awaited decision disallowing Punitive damages, reversing the Ninth Circuit in a 6-3 vote – we will provide further commentary in our next edition.

Engineering firm Additional Assured under WELCAR Construction Wording

A Texas Court of Appeal has upheld a District Court finding that an engineering company that worked on the construction and design of the Big Foot offshore platform, qualified as an “other assured” under the construction insurance policy, and therefore was immune from subrogation claims asserted by the Underwriters of the Offshore Construction Project Policy issued to the principal assured.

The engineering firm had provided engineering services for the Big Foot tension-leg platform in the US Gulf of Mexico, including the design and installation of the tendons.

The tendons that had been installed failed, which resulted in a significant loss paid under the construction policy which underwriters sought to recover this from the engineering firm by way of subrogation. The engineering firm argued they were an “other assured” under the policy with the benefit of a waiver of subrogation.

“Other assured” was defined as… any other company, firm, person, or party… with whom the principal assured had entered into written contract(s) with in connection with the project.

The Appeal Court agreed with the District Court that it was uncontested that the engineering firm had contracted with the project owners to provide engineering services, making them an “other assured” under the policy and therefore was the beneficiary of the waiver of subrogation clause.

First UK Insurance Act 2015 decision considers whether an insurer had waived its right to disclosure

In the first case to be decided under the Insurance Act 2015, it was alleged that the insured had breached its duty of fair presentation and the issue for the Court was whether the insurer had waived its right to disclosure of particular information that had not been disclosed.

The Insured took out a policy that insured commercial premises. Fire extensively damaged the premises and the Insured claimed GBP 7.2 million under the Policy in respect of the damage caused.

The insurer declined the claim on the basis that the insured had breached its duty under section 3(1) of the Insurance Act 2015 to make a fair presentation of the risk.

The insurer argued that the Insured had not disclosed the fact that he had been the director of four companies which had been dissolved after an insolvent liquidation or had been placed into insolvent liquidation within the 5-year period immediately preceding the policy inception (the undisclosed information).

In response, the insured argued that the insurer had waived disclosure of the undisclosed information. The insured had provided the insurer with a market presentation in advance of inception created using software used by the broker.

The undisclosed information was not included in the market presentation. The market presentation did include a question that sought to elicit information around the insured’s potential moral hazard:

"Select any of the following that apply to any proposer, director, or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity:”

The software used to create the presentation provided for seven possible responses including one option which was in the following terms: “been declared bankrupt or insolvent or been the subject of bankruptcy proceedings or insolvency proceedings”.

The response chosen from the list of drop-down options was “None”.

Following the submission of the market presentation, the insurer sent a reply email to the broker attaching the terms of cover and setting out the following list of assumptions:

“Insured has never:

  • Been declared bankrupt or insolvent
  • Had a liquidator appointed
  • Been the subject of a County Court judgment...”

The insurer argued that the insured had breached the duty to make a fair presentation of the risk by not disclosing the undisclosed information in the market presentation. The insurer argued in the case that the undisclosed information was material and that had it been provided, it would not have agreed to write the risk on any terms.

The insured raised two arguments in its motion:

  • First, that there had been no misrepresentation as the response to the question around moral hazard was correct. The Insured had never been declared bankrupt, insolvent or had a liquidator appointed.
  • Second, that the insurer had waived its entitlement to disclosure of the information by asking (as the insured put it) in its email response to the market presentation whether the insured had ever been made bankrupt or insolvent, or had a liquidator appointed.

The insured asserted that, by restricting the question to the insured, and not including companies in which the insured had been involved, the insurer waived any entitlement to disclosure of prior insolvencies or bankruptcies experienced by anyone other than the insured themselves.

The insurer denied this and argued that its email did not set out questions for the insured to respond to, rather that it set out the basis on which cover was being offered.

The Court found that the market presentation was intended to be the totality of the information that was provided to the insurer in relation to the risk. The scope of the market presentation was entirely within the control of the prospective insured and the insurer was not aware of the options in the drop-down menu.

This case differs from a conventional situation in which the insurer provides the prospective insured with a proposal form which dictates the scope of the information the insurer requires to analyse the risk through questions.

In a conventional situation, there may be greater scope for applying the doctrine of waiver, as the insurer controls the scope of the information it seeks and signals (via the questions asked) what it regards as material.

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UK Court of Appeal’s decision provides guidance on the key principles relevant to the question of whether there has been a notification of circumstances to a Claims Made liability insurance policy.

The Claimant specialised in the installation of a system of movable “booms” in swimming pools. The Claimant was insured by the Defendant, under two professional indemnity policies issued in 2006 (the First Policy) and 2007 (the Second Policy).

The issue in dispute was whether expenses incurred in installing a new hydraulic system to power the booms at several pools were incurred to mitigate potential claims arising from circumstances notified under the First Policy, or whether the potential claims in respect of which the expenses were incurred arose from circumstances notified under the Second Policy.

The limit of liability under the First Policy had been eroded by other claims up to GBP 4.3 million.

The policies imposed an obligation on the Claimant to notify the Defendant of any circumstances that might give rise to a Claim, stating that: “[The Insured] shall as a condition precedent to their right to be indemnified under the insurance give written notice to [Insurers] as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… for which there may be liability under this Insurance.

Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given.”

The policies also excluded: “the consequence of any circumstance 1) notified under any insurance which was in force prior to the inception of this Insurance [or] 2) known to [The Insured] or which should have been known to [The Insured] at the inception of this Insurance which might reasonably be expected to produce a Claim.”

In 2007 the Claimant had been informed of problems with the steel tank system used in booms that it had installed at two sites. A notification of circumstances was made to the First Policy as a result and the Claimant informed the Defendant that it would attempt to fix the problem by installing inflatable bags in the booms.

The Claimant soon identified problems with the inflatable bag system and in 2008 it notified the Defendant of the same.

The Claimant ultimately installed hydraulic systems and expressed the view that its claims for indemnity for such mitigation work attached to the Second Policy (which had not been eroded by other claims made by them), their position being that its notification in 2007 related only to the use of steel tanks, whereas the indemnity claimed related to the replacement of both bags and tanks in favour of a hydraulic system and it should therefore attach to the Second Policy.

The Defendant Insurer’s position was that the costs of remedial works in respect of which an indemnity was claimed arose from the circumstances notified in 2007 and that the claim therefore attached to the First Policy.

In a unanimous decision, the Court of Appeal determined that the mitigation costs attached to the First Policy. The legal principles from the authorities applicable to the question of whether there has been a notification of circumstances under a claims made liability insurance policy were not in dispute between the parties.

However, the court helpfully summarised the key principles from the authorities being:

  • A deeming provision in the policy is to be construed and applied with a view to its commercial purpose which is to provide an extension of cover for all claims in the future which flow from the notified circumstances
  • The test that notified circumstances “may” give rise to claims set a deliberately undemanding test. It required only a possibility of claims in the future
  • The insured may give a “can of worms” or “hornet’s nest” notification i.e. a notification of a problem, the exact scale and consequences of which are not known
  • The insured does not need to know or appreciate the cause or all the causes of the problems which have arisen, or the consequences which may flow from them
  • There has to be some causal, as opposed to merely some coincidental, link between the notified circumstances and the later claim
  • When construing a communication to determine whether it is, or its scope as, a notification, one applies conventional principles of interpretation.

The Appeal Court concluded that the circumstances notified in 2007 were that the booms were not rising and falling properly rather than that there was a problem with the steel tanks. The fact that the claimant did not know at that stage what the fundamental cause of the problem was did not make any difference. It was sufficient that the claimant knew that there was a problem in that the booms failed to rise and fall properly and that it might face potential claims from third parties as a result.

The Appeal Court was also satisfied there was a sufficient causal link and were comfortable that the claims “arise from” the circumstances notified in 2007, and found it impossible to say that there was no more than a “purely coincidental” connection between the problems notified in 2007 and the work carried out from mid-2008 to install hydraulics, which was intended to solve the same problem as had been notified in the 2007 policy year.

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  • John CooperJohn Cooper

    John joined JLT in 1987 having spent three years with Leslie & Godwin (now Aon) in the Marine Hull Technical Department.

    John gained extensive knowledge in the technical design and servicing of energy related insurance programmes covering physical damage, business interruption, control of well and liability exposures for a wide spectrum of energy clients including oil & gas lease operators, mobile rig contractors, oil & gas service companies, and major integrated oil companies.

    At JLT Risk Solutions John sat on the "Energy Executive Committee" that oversaw the management and strategy of the Energy Business Unit. In January 2005 John moved from JLT Risk Solutions to Lloyd & Partners where he has responsibility for managing the Energy team. He sits on the Energy & Marine Executive Committee and is a strategic advisor to the LPL Board.

    He is also a broker consultant representative to the London Joint Rig Committee and has worked on a consultancy basis with Oil Insurance Limited (OIL). In the combined Marsh JLT Specialty, Energy and Power team, John now performs the role of Global Chief Client Officer.

    If you would like to talk about any of the issues raised in this article, please contact John Cooper, Global Chief Client Officer on +44 (0)203 394 0464.

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