The Supreme Court of Queensland recently held that a ship repairer’s excess layer insurance policy was a marine insurance policy as the underlying risks constituted a ‘maritime peril’ within the meaning of the Marine Insurance Act 1909 (Cth).
The Marine Insurance Act 1909 (Cth) (the MIA) and the Insurance Contracts Act 1984 (Cth) (ICA) impose varying rights and obligations on the parties which may be crucial to coverage under the policy.
Generally, in comparison with the ICA, MIA tends to favour the interests of the insurer over the insured in matters such as a requirement for an insurable interest, duties of disclosure, warranties and remedies for breach of contract. The ICA covers most contracts of insurance, including insurance of air and land transport (except where risks are ‘incidental’ to marine transport) and marine pleasure craft.
Determining whether an insurance policy is a general insurance policy or a marine insurance policy can therefore be a critical issue for both insurers and insureds.
The Court’s decision in this case illustrates the factors to be considered when classifying a policy as being one of general insurance or marine insurance.
The insured plaintiff entered into a contract with the Australian government to design, manufacture and supply Armidale Class Patrol Boats and provide in-service support to the boats for a 15 year service period after commissioning (the ACPB contract).
While one of the patrol boats was in the possession of the plaintiff’s subcontractor for the purpose of work under the contract, it was destroyed by fire. The plaintiff agreed to pay the Commonwealth a settlement sum of $31.5 million in respect of the damage to the patrol boat.
The plaintiff had arranged insurance policies providing indemnity for all sums which it became liable to pay by reason of its legal liability as a ship repairer for loss or damage to any vessel or aircraft which was in the plaintiff’s care, custody or control for the purpose of being worked upon under the ACPB contract. The plaintiff insured had obtained a primary layer insurance policy with Royal and Sun Alliance Insurance and an excess layer policy.
In an earlier decision, the Court found that the plaintiff was entitled to indemnity under the primary layer insurance policy and 50% of the excess layer policy (the excess policy).
The underwriters of the remaining 50% of the excess layer policy denied that they were liable to indemnify the insured plaintiff. The underwriters alleged that the plaintiff had breached its duty of disclosure prior to entry into the excess policy, entitling them to avoid the policy.
A critical question in the proceeding was whether the excess policy was governed by the ICA or the MIA. The Court dealt with this issue as a separate question.
The plaintiff contended that the ICA applied while the defendant underwriters submitted that the MIA applied. The determination of which Act applied would impact upon:
- The scope of the plaintiff’s duty of disclosure; and
- Whether the defendant underwriters had to establish prejudice under section 28 of the ICA in respect of any non-disclosure by the plaintiff.
As a starting point, the Court noted that the critical question was whether the risks insured by the policy could be regarded as perils consequent on or incidental to the navigation of the sea. This involved assessing the nature of the risk insured, rather than the loss giving rise to the claim under the policy.
The Court noted that it was not necessary for a risk to be one which arose at sea for it to be characterised as ‘consequent on or incidental to the navigation of the sea’.
In concluding that the policy was governed by the MIA, the Court had regard to the following relevant matters:
- The liability insured under the excess policy was the risk of harm to the patrol boats as a result of the plaintiff performing particular activities which it had contracted to perform under the ACPB contract;
- The insured plaintiff had contracted to perform work to a particular standard and the performance of the work was an integral part of the Commonwealth’s ability to engage in the contemplated marine adventures;
- The risks encountered in the marine adventures were ‘not limited to risks encountered at sea but extended to risks encountered in harbours, dry docks and ports where the boats were to be maintained by the plaintiff in such a way as they could continue on their marine adventure‘. The risk of a ship being damaged or lost by fire while undergoing work under the ACPB contract was a ‘maritime peril’ for the purposes of the MIA; and
- The plaintiff had contracted to accept the risk of a particular type of maritime peril coming to pass, namely damage to the patrol boats while they were in the plaintiff’s possession.
The differing rights provided to insurers and insureds under the ICA and MIA may be crucial to coverage under the policy. The classification of an insurance contract as being marine insurance or general insurance can have critical implications for both an insured’s disclosure obligations and an insurer’s ability to cancel a policy.
Insurers should carefully consider whether a policy described as a marine insurance policy relates to maritime perils. If the policy is more likely to be characterised as a general insurance policy, the ICA will apply, altering an insured’s disclosure obligations and restricting the insurer’s ability to cancel the policy for breaches.
This article was written by Anthony Highfield, Partner and James McIntyre, Special Counsel.