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The judgment in MOK Petro Energy v Argo (No. 604) Limited (The “F1”) [2024] EWHC 1935 (Comm) is notable as the first to consider (obiter) the application of section 11 of the Insurance Act 2015 (the Act). Section 11 was introduced to prevent insurers relying on breach of certain terms if an insured can show that breach of the particular term could not have increased the risk of the loss in the circumstances in which it actually occurred. The case contains some interesting discussion about how this might be in applied in practice.

BACKGROUND

The claimant (MOK) was an oil trading company insured under an all-risks marine cargo policy for shipments of petrochemical cargoes. The insurers reinsured the risk on back-to-back terms and MOK brought its claim against the reinsurers directly pursuant to a cut-through clause.

The claim concerned a cargo that was carried from Oman to Yemen. The cargo was made up of a blend of gasoline and methanol loaded from separate shore tanks in Oman. Such gasoline/methanol blends are prone to phase separation and the greater the proportion of water in a blend, the higher the temperature required to maintain its stability.   The cargo was certified to be on-specification in Oman. However, on arrival in Yemen, the cargo was found to be off-specification and unmarketable. The cargo was rejected by the buyer and ultimately sold to a salvage buyer at a discounted price.

MOK claimed an indemnity under the policy for the damage to the cargo arguing:

  1. The on-specification cargo had been contaminated with water when it was loaded on to the vessel and this raised its phase separation temperature and made it unmarketable; or
  2. The original seller's fortuitous choice to blend the cargo in the actual proportions it did caused the cargo to suffer damage by phase separating when cooled or having the propensity to do so.

Reinsurers argued that the cargo could never have been on-specification as certified in Oman and so was always off-specification irrespective of any water contamination so there was no damage. Alternatively, the reinsurers argued any claim under the policy was precluded by virtue of MOK's breach of a survey warranty in the policy.

DECISION 

MOK's claim for an indemnity

A large proportion of the judgment goes to the chemical properties of the cargo and we do not discuss these technical issues here. In summary, on MOK's key arguments relating to damage to the cargo, the court found:

  • The cargo was never on-specification at the load port in Oman.  
  • Despite accepting that the original seller's choice of blend proportions was fortuitous so far as MOK was concerned, the judge found that MOK's alternative claim also failed on the basis that there had been no "damage" to the cargo. The judge held that the concept of damage required some physical change which was commercially harmful. Since the separation could be reversed by increasing the temperature of the blend, the separation could not be regarded as damage. As to a propensity to separate, the judge also found that this could not be regarded as damage since a mere propensity involves no change in physical state. The subject matter insured was the gasoline/methanol blended on board the vessel, not its constituent parts. Since the blended product only ever existed in a defective condition, the judge found a propensity to separate could also not be regarded as damage.

Was there a breach of the survey warranty?

The most interesting aspect of this case, in our view, is the examination of this issue and the application of particular provisions of the Insurance Act 2015. Although not strictly required, the judge considered this issue and found that the claim would have failed in any event because MOK had breached a survey warranty in the policy. Although obiter, there is some interesting discussion around the application of the Act.

The relevant warranty read as follows:

Quantitative/Qualitative survey carried out by internationally recognised marine surveyor at loading port/discharge port at owners cost, including inspection/certification of the cleanliness of the vessel tanks at load port and the shore tanks at discharge port and the connecting pipelines between the vessel and the shore tanks at both load and discharge port.

The judge found that although the shorelines had been inspected, they had not been certified, which was a separate and distinct obligation under the policy.

Contracting out section 10 of the Act

The policy contained a clause which provided:

"Failure to comply with a warranty will, in normal circumstances, void this insurance policy".

The issue for the court was whether this amounted to an agreement to contract out of section 10 of the Act (which sets out the effect of a breach of warranty) or a general warning that was not intended to contract out of the Insurance Act. The judge found it was the latter noting that :

  • the natural and ordinary meaning of the words suggested merely a warning rather than a statement with contractual effect;
  • the wording was not replicated in the certificate of insurance but only appeared in the cover note;
  • the wording referred to warranties in general rather than being limited to the survey warranty specifically;
  • the wording was insufficiently clear to be an unambiguous statement that a breach of warranty would render the contract void given the inherent scope for disagreement as to what constitutes “normal circumstances"; and
  • the wording left the position wholly obscure where the circumstances were not "normal".

To the extent an insurer wishes to contract out of any section of the Act, the strict transparency requirements in section 17 apply.  In this case it was the insured who was arguing that the term was an agreement to contract out of the Act and that the reinsurers were estopped from asserting a breach of warranty because they had continued to defend the claim on the basis the policy was not void. The judge noted that it was unclear whether the transparency requirements apply to a term which is relied upon by the insured (as opposed to the insurer) but that, in any event, the wording used here was not sufficiently clear to contract out of the Act if such requirements were to apply.

Section 11 of the Act

Section 11 prevents an insurer from relying on breach of certain terms (including conditions precedent and warranties) if an insured can show that breach of the particular term could not have increased the risk of the loss which actually occurred in the circumstances.

This section of the Act would only apply in this case if compliance with the warranty would tend to reduce the risk of water contamination.  In this case, MOK's breach related only to the certification part of the warranty. 

The judge found that it is necessary to look to the relevant term as a whole for the purposes of applying section 11 and considered there was nothing in section 11 to suggest that where a term can be breached in more than one way, it is only the particular breach which must be looked at. Rather, section 11 is directed at the effect of compliance with the entire term and not with the consequences of the specific breach. The judge relied on paragraph 96 of the Explanatory Notes to the Act which provides that "a direct causal link between the breach and the ultimate loss is not required. That is, the relevant test is not whether the non-compliance actually caused or contributed to the loss which has been suffered".

In this case, there was no serious dispute that compliance with the warranty as a whole was capable of minimising the risk of water contamination and, therefore, that non-compliance could have increased the risk of the loss which actually occurred. Accordingly, the judge found that the reinsurers would have been able to rely on a breach of warranty defence.

While it might be thought unlikely that the parties intended MOK to be denied cover solely because there was no certification of a perfectly satisfactory inspection, the judge noted that "If there is a breach of warranty, the Defendants are entitled to rely on it, no matter how technical the argument might be."

COMMENT

This case is the first to consider the application of section 11 of the Act. One paragraph in the Explanatory Notes on section 11 (not quoted in the judgment) reads:

"it is intended that the insurer should not be able to rely on that non-compliance to escape liability unless the non-compliance could potentially have had some bearing on the risk of the loss which actually occurred"

Some may find that rationale behind section 11 difficult to reconcile with the judge's obiter comments in this case in circumstances where the insured's failure to comply with part of a warranty could neither have caused nor contributed to the loss.

The judge's comments on section 11 suggest that a broad enquiry is required to consider whether compliance with the entire term in question would tend to reduce the risk of the loss. It will be interesting to see if arguments are made in other cases that section 11 should be construed so as to avoid technical arguments by insurers succeeding given the judge's comment that insurers are entitled to rely on a breach of warranty irrespective of how technical such an argument might be.

Since avoiding a dispute is always preferable, this decision also highlights the importance of vigilance when it comes to warranties in policy wordings.

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