Restricting the defence of inherent vice
The Cendor Mopu was a mobile oil rig consisting of a working platform with three cylindrical steel legs.
It was decided to relocate the rig from the United States to Malaysia by towage on a barge with the platform lowered to the maximum so that the legs projected about 300 feet into the air. It was insured for the transit on an 'all risks' basis under a policy incorporating widely-used London market clauses, the Institute Cargo Clauses (A). The legs were weakened by metal fatigue in the course of crossing the Pacific Ocean to the point where, off the coast of South Africa, the impact of a wave of sufficient force at the critical angle (a 'leg-breaking wave') caused one of the weakened legs to break, the resulting destabilisation of the rig causing the other legs to break as well.
The ensuing claim on the cargo policy was met by a defence of inherent vice. An inherent vice defence is stated expressly in various sets of Institute cargo clauses and in any event is implied, subject to contrary intention, by virtue of the Marine Insurance Act 1906, s 55(2)(c). The ensuing litigation became a leading authority on the scope and operation of this important limitation on cover.
Significantly, a restrictive view was taken of the scope of the inherent vice defence, commensurately increasing the utility of cargo insurance for cargo owners, and thereby also supporting the cargo insurance market.
The Court of Appeal confined inherent vice to damage sustained even though the insured property had encountered only such 'wind or wave which, it would be the common understanding, would be bound to occur as the ordinary incidents on any normal voyage of the kind being undertaken' (Waller LJ).
The Supreme Court adopted a similarly restrictive but different approach, namely that inherent vice afforded an insurer a defence only where it constituted the sole proximate cause of the loss. In circumstances where factually a loss was caused by a combination of the insured property's own characteristics and an external fortuity, in law the only operative cause would be the external fortuity because the definition of inherent vice as a legal concept required the absence of any operative external fortuity. The insured's claim therefore succeeded.
Both the Court of Appeal and the Supreme Court referred to Professor Bennett’s article 'Fortuity in the Law of Marine Insurance' [2007] Lloyd's Maritime and Commercial Law Quarterly 315. In the Court of Appeal, Waller LJ, having identified the questions that required consideration, stated:
In considering these questions, which I have found far from easy, I should immediately record my gratitude to Professor Bennett and an article he wrote in Lloyd's Maritime and Commercial Law Quarterly 2007 page 315, from which I shall unashamedly borrow.
Carnwath LJ similarly acknowledged that he had gained 'particular assistance' from Professor Bennett's article. In the Supreme Court, Lord Clarke stated:
In reaching my conclusions I have been much assisted by the article by Professor Bennett [2007] LMCLQ 315 referred to above, especially at p 346, where he said that section 55(2)(c) of the Act operates not as an implied contractual exclusion but as a clarification on the scope of cover. As he put it, it amplifies the proximate cause rule articulated in section 55(1) and provides an example of a circumstance of a loss not proximately caused by a peril insured against.
Both appellate courts rejected any idea that inherent vice required the insured property to be fit to withstand the reasonably foreseeable perils of the insured transit (such as the leg-breaking wave, which was of a normal force for such waters at that time of year), as suggested by an earlier first instance decision. In overruling that decision to the extent that it so suggested, Waller LJ and Carnwath LJ in the Court of Appeal and Lord Clarke in the Supreme Court all quoted a passage from Professor Bennett’s article. Lord Clarke, having stated his conclusion that inherent vice afforded a defence only where it constituted the sole proximate cause, stated as follows:
The approach also seems to me to accord with commonsense, at any rate in a case like this. It would be commercially unacceptable if cover for loss arising as a result of the interaction of perils of the seas and the nature of the goods were reduced to situations where the conditions of the sea were not reasonably foreseeable. As Professor Bennett puts it, at p 348 of his article:
"…assureds do not procure insurance against losses that they consider fanciful. Rather, it is precisely because commercial experience indicates a certain level of probability of a particular type of loss that the reasonable person considers insurance a sensible and prudent investment. If, however, goods have to be fit to withstand reasonably foreseeable perils or the loss will be considered to be proximately caused by the inherent vice of the goods, or at least not by a 'risk' within the meaning of the 'all risks' insuring clause, much of the point of cargo insurance disappears. 'All risks' cover would be confined to loss or damage occasioned only by wholly unusual perils or wholly unusual examples of known perils."
NB Professor Bennett has since returned to the distinction between a contractual exclusion and a clarification on the scope of cover in 'Reading Marine Policies: Determining the Scope of Cover' (2020) 27 Asia Pacific Law Review 239.