‘Inherent vice’ exception in marine insurance applies when there is no fortuitous action
The United Kingdom Supreme Court has recently decided a case interpreting the ‘inherent vice’ exclusion under the widely used Institute Cargo Clauses (A) policy and the equivalent exclusion under the Marine Insurance Act 1906 (UK) (‘MIA’) in contradistinction to the insurance coverage term ‘peril of the sea’. Because the Marine Insurance Act 1909 (Cth) is for all intents and purposes identical to the MIA, and because of the wide customary usage of the Institute Cargo Clauses, the case is important to all practitioners in the fields of marine insurance and international trade law.
The subject matter of the insurance was an oil rig which was to be loaded on a towing barge in Galveston, United States to Lumut in Malaysia. When the barge arrived at Saldanha Bay near Cape Town on 28 October 2005, repairs were undertaken on the oil rig to alleviate fatigue cracking on the legs. On 4 November 2005, the starboard leg broke off the oilrig and fell into the sea. The following evening two other legs broke off. The assured claimed under its marine insurance policy (which incorporated the Institute Cargo Clauses (A)) for the loss of the three legs.
The legs were lost because of metal fatigue; critically, this involves an initial cracking, propagation of the cracking, and finally the complete fracture of the component legs. The stresses that generated the metal fatigue in this instance were as a result of the height and direction of the waves and their effect on the rolling and pitching of the barge and therefore the oil rig. The weather experienced during the voyage was within reasonable contemplation and was not extraordinary.
Both s 55(1) of the MIA and its Australian equivalent provide:
‘Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is not liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.
S 55(2)(c) and its Australian equivalent contain the following exception:
‘Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately cause by rats or vermin, or for any injury to machinery not proximately caused by maritime perils’
Institute Cargo Clauses (A) is an ‘all risks’ policy subject to limited exclusions including an exclusion for inherent vice (cl 4.4).
The trial judge found that the insurers (who bore the burden) proved 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.’ As such, his Honour found that the proximate cause was inherent vice within the meaning of the exception in the policy.
In contrast, the Court of Appeal found that the proximate cause of the loss was a ‘leg breaking wave’ which broke off the starboard leg, causing greater stresses on the remaining legs, which then also fell off. On that basis, the Court of Appeal found that the proximate cause of the loss was a fortuitous accident (effectively a peril of the sea), and found in favour of the insured.
On appeal, the Supreme Court needed to decide whether the proximate cause of the loss fell within the inherent vice exception or was a peril of the sea.
Both parties relied on Lord Diplock’s consideration of ‘inherent vice’ in Soya GmbH Mainz Kommanditgesellschaft v White  1 Lloyd’s Rep 122 (‘Soya’):
‘This phrase […] where it is used in section 55(2)(c) refers to a peril by which a loss is proximately caused; it is not descriptive of the loss itself. It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty’.
The insurers argued that in this instance the inherent vice was the oil rig’s internal risk of deterioration; and that such risk eventuated and was the proximate cause of the ultimate failure of the oil rig’s legs because the goods were simply not capable of withstanding the normal incidents of the insured voyage, including the weather reasonably to be expected. In support of that proposition, the insurers relied upon numerous authorities including Donaldson LJ’s decision in the Court below in Soya and Moore Bick J’s decision regarding the shipment of a transformer in Mayban General Insurance v Alstom Power Plants Ltd  2 Lloyd’s Rep 609 (‘Mayban’).
The Supreme Court in separate judgments unanimously rejected the insurers’ submission. Lord Saville pithily illustrated his criticism of such an analysis (at ):
‘There is nothing to suggest that Lord Diplock was in agreement with the definition of inherent vice suggested by Donaldson LJ, namely that a loss is proximately caused by inherent vice if the natural behaviour of the goods is such that they suffer a loss in circumstances in which they are expected to be carried. Such a definition pays scant regard as to how and in what circumstances the loss occurred.’
In fact the trial judge had found that, whilst the failure of the rig’s legs was very probable, it was not inevitable, and required a ‘leg breaking’ or ‘final straw’ stress. According to one of the experts at trial, a particular wave had to catch the leg ‘just right’ if the leg was to fail all the way around.
As noted, the weather itself was not extraordinary and was within reasonable contemplation. The term ‘perils of the sea’ in the MIA refers ‘only to fortuitous accidents or casualties of the seas’ and specifically does not include ‘the ordinary action of the wind and waves’. Nonetheless the Supreme Court rejected the trial judge’s reasoning by implication that, because the weather was not extraordinary the proximate cause of the loss must have been an inherent vice of the cargo. In so doing, the Supreme Court unanimously rejected Moore Bick J’s decision in Mayban.
None of the Court suggested that the inherent vice exclusion can apply only where the nature of the cargo is such that the loss is inevitable. Rather, because there had been a fortuitous action of a particular wave bringing about the incident, the Supreme Court was able to conclude unanimously that the proximate cause of the loss was a peril of the sea.
Further, because there is no exception for the unseaworthiness of cargo under the Institute Cargo Clauses or the MIA, the ‘inherent vice’ exception should be not be given an interpretation which broadly would exclude an insurer’s liability for cargo that was unable to withstand weather that was within reasonable contemplation for the voyage.
The case is consistent with Australian High Court authority and in particular Skandia Insurance Co Ltd v Skoljarev (1979) 42 CLR 375 insofar as the UK Supreme Court has confirmed that there is no need for there to be an extraordinary fortuity for the proximate cause of a loss to be attributable to a peril of the sea. However, unlike the situation in Skandia, the Court was careful to articulate precisely how the loss occurred. The case may have been decided differently absent positive evidence of a fortuity.
Insurers wishing to rely on the inherent vice exclusion should be mindful to ensure that there is an absence of any fortuity causing loss or deterioration to the cargo, and should ensure they have evidence focusing on the inherent nature of the cargo causing its deterioration.
 See the rules for construction contained in the Second Schedule to the MIA. Such a finding would be inconsistent with the Court of Appeal’s decision in Soya  1 Lloyd’s Rep 136, and also in TM Noten BV v Harding  2 Lloyds Rep 283.
Clive Madder – CommBar profile