Court looks to the purpose of the contract when construing an exclusion

In Hongfa Shipping Co. Ltd v MS Amlin Marine N.V. and another [2021] EWHC 999 (Comm) the High Court considered the proper interpretation of an exclusion in a marine liability policy. Mr Justice Pelling stressed that exclusions must be construed in a manner consistent with, and not repugnant to, the purpose of the insurance contract. He held that, although the exclusion was not well drafted, all parts of the exclusion were subject to a qualification that they only applied when the insured acted "recklessly or intentionally".

Background

A cargo of steel was being transported from China to Argentina aboard the MV Huanghai Glory in May 2019. Under the terms of the time charter, stowage, lashing and the securing of cargo was at the time charterer's risk. The cargo had been stowed, lashed and secured under the supervision of the ship's crew. During the voyage the cargo in one of the holds shifted in turbulent weather, causing damage both to the cargo and to the hold. As a result, the owner incurred repair costs which it sought to pass on to the charterer.

The charterer in turn claimed under its marine liability policy. The Insurers declined the claim, arguing (amongst other things) that it was expressly excluded under the policy. The parties disagreed as to the proper construction of the exclusion and the charterers sought summary judgment on the point.

The Exclusion

The clause in question excluded cover where:

"The claim or dispute arose out of or [is] consequent upon the Insured Vessel carrying illegal goods, contraband, blockade running or the Assured recklessly or intentionally employed or caused unduly hazardous or improper trade or voyage or that the Cargo carried and/or the method of its securing or unsecuring, carriage, loading, discharging, inspection, maintenance, treatment or lack thereof during the voyage was unduly hazardous, patently inappropriate or improper; ..." (the Exclusion)

The Insured argued that the qualification underlined above applied to all subsequent parts of the Exclusion. On this analysis, Insurers would only be entitled to rely on the Exclusion where "the Assured recklessly or intentionally" used a method of securing, carrying or loading the cargo was unduly hazardous, patently inappropriate or improper.

Insurers disagreed.  They argued that the "recklessly or intentionally" qualification applied to all subsequent parts of the Exclusion i.e.:

1. employing or causing the vessel to be employed in an unlawful or unduly hazardous improper trade or voyage; or
2. the cargo carried being unduly hazardous, patently inappropriate or improper; or
3. the method of securing, carrying or loading the cargo being unduly hazardous, patently inappropriate or improper.

Decision

Following Diplock LJ in Fraser v. BN Furman (Productions) Ltd [1967] 1 WLR 898, Pelling J emphasised "that an exclusion provision within a contract of insurance must be construed in a manner that is consistent with and not repugnant to the purpose of the insurance contract". In this case the Insured had cover for (amongst other things) its liability as charterer for loss or damage to the chartered vessel. The effect of the exclusions was to restrict the cover which was otherwise available under the policy.

Pelling J disagreed with Insurers that the Insured's interpretation did not make "good linguistic sense".  If Insurers had intended to exclude liability for claims arising out of the cargo being "unduly hazardous, patently inappropriate or improper" that would have been easily achieved by insertion of clear wording. The Judge also noted that the clause was poorly drafted and so the policy as a whole, including its commercial purpose, the underwriting context and commercial common sense, should be used to properly understand the Exclusion's true meaning, per Arnold v Britton [2015] UKSC 36, [2015] AC 1619.

Pelling J preferred the Insured's construction for the two main reasons:

1. The commercial purpose of the policy was to protect the Insured against its liabilities as charterer. There was no commercial or other logic for treating losses consequent upon employing the vessel in an unlawful or hazardous or improper trade or voyage more narrowly as a ground for excluding liability than those arising from the method of loading and discharge.
2. The Insurers' construction of the Exclusion (which did not require Insurers to demonstrate that the Insured had acted recklessly or intentionally in the method of securing, carrying or loading the cargo) would be repugnant to the policy. It would exclude from cover situations where the Insured's liability arose from actions of others of which the Insured was unaware: "a risk posed by a method of loading which are not known to the insured is precisely the risk or one of the risks being insured against".

The Judge concluded that phrase "the Assured recklessly or intentionally" applied to everything that followed it in the Exclusion.

Comment

The judgment is a reminder that the court will not interpret an exclusion clause in an insurance policy in a manner which is repugnant to the commercial purpose of the policy. Careful thought should always be given to the wording of policy exclusions to avoid coverage disputes later down the line.