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As we reported in our case preview, at issue in Global Process Systems is the meaning of “inherent vice”, which is a risk typically excluded from cover under marine cargo and many non-marine “all risks” insurance policies.

Background and first instance decision

The case before the Supreme Court arose out of the Appellant’s insurance of the Respondents’ oil rig off the coast of South Africa.  In the course of being towed from Galveston in the United States to Lumut in Malaysia, the rig’s three legs broke off and fell into the sea.  The Respondents made a claim under their policy with the Appellant for the loss of these three legs.

The insurance policy excluded “loss, damage or expense caused by inherent vice or nature of the subject matter insured” from cover. The loss resulted from metal fatigue in the three legs.  The fatigue was the result of stresses generated by the effect of wave action on the motion of the rig as it travelled.

It was common ground that the weather encountered on the voyage was within the range that could reasonably be expected.  The Appellant insurers therefore argued at first instance, before Blair J in the Commercial Court, that there was no cover under the policy because the loss of the legs was an inevitability, not a risk. In his judgment, however, Blair J rejected this argument, stating that the failure of the legs off South Africa was “…very probable, but it was not inevitable“.

However, Blair J also held that “the proximate cause of the loss was the fact that the legs were not capable of withstanding the normal incidents of the insured voyage from Galveston to Lumut, including the weather reasonably to be expected“. He therefore held that the loss resulted from the inherent vice of the legs, and accordingly was not covered by the insurance policy.

Court of Appeal

The Court of Appeal disagreed. In their judgment, they held that the proximate cause of the loss was a “leg breaking wave” which resulted in the starboard leg breaking off, thereby increasing the stress on the other two legs, which then in turn broke off. Waller LJ (at paragraph 64) said that:

“It was not certain that that would happen and although with the benefit of hindsight we know that it was highly probable, that high probability was unknown to the insured and that was a risk against which the appellants insured.“

The appeal was therefore dismissed.

Supreme Court

The Supreme Court has now upheld the Court of Appeal’s decision.

This provides endorsement at the highest level of the narrow construction of inherent vice espoused by the Court of Appeal, and a definitive rejection of the wider construction adopted by Moore-Bick J (as he then was) in Mayban General Assurance BHD v Alstom Power Plants Ltd [2004] EWHC 1038 (Comm) and relied upon by Blair J at first instance in Global Process Systems.

This is essentially a matter of the allocation of risk. The force of the ultimately unsuccessful arguments put forward by the Appellant insurers can be appreciated – given the weather over the course of the rig’s voyage was not exceptional, on one level it could readily be said to be an inherent vice of the rig’s structure not to be able to withstand the stresses to which this weather ultimately gave rise.

However, the Supreme Court has rejected the idea that, unless the weather was exceptional, unforeseen or unforeseeable, the proximate cause would be inherent vice. In the words of Lord Mance (at paragraph 81) inherent vice would only arise if:

“. . .  the loss or damage could be said to be due either to uneventful wear or tear… in the prevailing weather conditions or to inherent characteristics of the hull or cargo not involving any fortuitous external accident or casualty that insurers would have a defence.”

Of course, as Lord Clarke pointed out (at paragraph 140) this conclusion relied upon the factual finding of Blair J that the loss had not been bound to occur, albeit it was very likely. If the loss had inevitable, the loss would not have been covered.

Comments

An important part of the Supreme Court’s reasoning in its judgment was that exclusion of losses such as these can be dealt with by specific exclusions in policies.  This may indeed be the market’s response, although, conversely, insureds are likely to resist the introduction of wording into marine cargo and all risks policies which could imply that the cover responds only to exceptional circumstances.

In any event, the Supreme Court has rejected the Holmesian approach of equating the absence of an exception peril with inherent vice, and confirmed the narrow concept of inherent vice with a decision which will be of comfort to insurers.