Hull Warranties

1. Hull Warranties By: Jean Knudsen October 3, 2003

2. Law of England • The British Marine Insurance Act of 1906 governs the English law of marine insurance and it holds under Section 39(5) “in a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure.” Therefore, there is no absolute implied warranty of seaworthiness under English law at any stage of a time policy. However, English law does impose the following implied obligation: “but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.” • Section 33 of the Marine Insurance Act, 1906 states: A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. A warranty may be express or implied.

3. Law of England Section 34 of the British Marine Insurance Act states, particularly as respects non compliance, (1) Non compliance with a warranty is excused when, by reason of a change in circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law. (2) Where a warranty is broken, the insured cannot avail himself of the defense that the breach has been remedied, and the warranty complied with, before loss. (3) A breach of warranty may be waived by the insurer.

4. Law of England (cont’d) Section 35 of the Marine Insurance Act states with respect to express warranties: (1) An express warranty may be in any form of words from which the intention to warrant is to be inferred. (2) An express warranty must be included in, or written upon, the policy, or must be contained in some document incorporated by reference into the policy. (3) An express warranty does not exclude an implied warranty, unless it be inconsistent therewith.

5. Promissory Warranties - American Law • There are two ways a court will interpret warranty clauses: First, as a promissory warranty and second, as a term used to denote a mere limitation on, or exception from, the general coverage of the policy. A warranty may be express or implied. A promissory warranty, when strict literal compliance is required, is a condition which must be exactly complied with whether it be material to the risk or not. Where there is a failure in such compliance, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date. An absolute warranty of seaworthiness, which is a promissory warranty, implied at the inception of the policy (in a time policy) is a condition precedent to the attachment of a policy. Breach of such a warranty would result in avoidance of the policy ab initio. The literal compliance rule results in the “forfeiture” of the policy. This is contrasted with a “suspensive condition precedent”; a form of warranty in which the coverage is suspended until the breach is removed.

6. American Rule – Absolute Implied Warranty at the Inception of the POLICY • The breach of the Absolute Warranty at the Inception of the POLICY will void a policy ab initio. In Employers Ins. Of Wausau 1993 AMC 1460, the court states: “The insurer need not demonstrate that the insured had knowledge of the unseaworthy condition nor that the insured was somehow at fault in not discovering the unseaworthy condition. It is enough to discharge the insurer…if the vessel is in fact not seaworthy at the inception of the policy.”

7. American Rule – Negative Implied Warranty of Seaworthiness at the Commencement of the VOYAGE -Fifth Circuit decision in 1959 • The American Rule establishes a negative implied warranty “under which the insured promises not to knowingly send a vessel to sea in an unseaworthy condition.” In Saskatchewan Government Insurance Office v. Spot Pack, Inc., [The American Rule] is… stated in the negative that the Owner, from bad faith or neglect, will not knowingly permit the vessel to break ground in an unseaworthy condition. And, unlike a breach of a warranty of continuing seaworthiness, express or implied, which voids the policy altogether, the consequence of a violation of this “negative” burden is merely a denial of liability for loss or damage caused proximately by such unseaworthiness. This negative implied warranty is analyzed from the commencement of the voyage.

8. Negative Implied Warranty, cont. The following are limitations on the duty imposed by the implied warranty of seaworthiness. • The underwriter cannot escape coverage for unfitness of a vessel which arises while the vessel is at sea which the assured could not have prevented in the exercise of due diligence. • The underwriter bears the burden of proving unseaworthiness. • The warranty of seaworthiness is implied in hull, but not protection and indemnity policies.

9. Continental Insurance v. Lone Eagle Shipping Ltd. ( SDNY 1997) • Named perils hull policy AITH Form 1977. Coverage for total loss only. • M/V “ALPHA STAR” a 21 year old Ore/Bulk oil (OBO) carrier alleged to have become a constructive total loss as a result of heavy weather, a peril of the sea. • Hull underwriters filed a declaratory judgment action in Southern District Court of NY and sought a declaration of non-liability for the CTL of the vessel. Vessel sailed in an unseaworthy condition in allegedly heavy weather. • Court ruled in favor of underwriters and held the proximate cause of the damage to the M/V “ALPHA STAR” was wastage and corrosion in the side shell plating and frames, not the heavy weather encountered on the voyage. The assured fail to satisfy its burden of proof to demonstrate an insured peril caused the loss under the named perils terms of this hull policy.

10. 5801 Associates v. Continental Insurance Co. (5th Cir 1993) The Fifth Circuit, in 5801Associates, Ltd. v. Continental • Barge “Ocean Transporter” sank while under tow in the Gulf of Mexico. Underwriters declined the claim for breach of the loading warranty contained in the hull policy. They filed a declaratory judgment action and sought to have the policy declared void. • The barge’s hull policy contained a seaworthiness provision, which the court held was not an express warranty of seaworthiness, but an exclusion. The decision states that “A warranty, whether express or implied, stands in contrast to an exclusion, which does not represent a promise on the part of the insured, but merely,” define(s) the coverage limits..(by) clarify(ing) and defin(ing) the types of events an insurer does not intend to cover. • In an application of Wilburn Boat, the Fifth Circuit held in the case of 5801 Associates v. Continental Ins. Co. that Missouri State automobile insurance law applied on the issue of severability; and found, although the Barge “Ocean Transporter” was unseaworthy, the bank named as an additional insured could recover the proceeds of the “CTL” of the vessel. The barge had been found to be unseaworthy as a result of the manner in which cargo had been loaded on board the barge.

11. Express WarrantiesCertain Underwriters at Lloyd’s v. Johnston (D.P.R 1999) • Insured’s yacht policy contained an express warranty that the vessel be seaworthy at the inception of coverage. • In Certain Underwriters at Lloyd’s v. Johnston, the insured’s policy contained an express warranty that the vessel be seaworthy at the inception of coverage. The court stated that “the American law of marine insurance recognizes an implied warranty of seaworthiness in time policies such as the one at issue” and ruled in favor of the underwriters “based upon the clear unseaworthiness of the vessel at virtually every moment in time material to this case.” The breach of the express and implied warranty of seaworthiness voided the policy ab initio. The Court agreed: “The insurer need not demonstrate that the insured had knowledge of the unseaworthy condition nor that the insured was somehow at fault in not discovering the unseaworthy condition. It is enough to discharge the insurer…if the vessel is in fact not seaworthy at the inception of the policy.” The court found the proof of the defendant’s breach of the express warranty of seaworthiness to be overwhelming, and therefore the underwriters were entitled to deny liability for any damage proximately caused by the particular unseaworthy condition.

12. Casualty – Breach of Trading Warranty • In Pacific Fisheries Corporation v. HIH Casualty & General Insurance, Ltd., the US Court of Appeals for the 9th Circuit affirmed the lower court’s ruling that hull & P&I policies on the ICY POINT were voided as a result of breach of the trading warranty “regardless of any question of casualty connection between the breach and the losses claimed.” The court found that the trading warranty provision was material to the insurance policy and that Fisheries had deliberately breached the warranty in complete disregard of the terms of the insurance contract.” Interestingly, the decision stated under California law, “breach of even an immaterial warranty will void a policy “where the policy expressly declares that it shall avoid it.” There is no requirement that the loss claimed have been caused by the breach of warranty.

13. Royal Insurance Company of America v. Harbor Shuttle, Inc. 1999 AMC 931 (SDNY 1999) • Royal Insurance Company filed a declaratory judgment action in SDNY to have a marine hull policy covering a ferry owned by Harbor Shuttle declared void. • The ferry, insured for $5,100,000, grounded and was declared a CTL. Royal alleged the assured breached five express warranties and committed a material misrepresentation by failing to inform underwriters that the purchase price of the vessel was $650,000. • The court held NY State law applied and granted summary judgment to Royal by granting their request to have the policy voided ab initio. The decision was based upon the parties agreement that Harbor violated five express warranties: (1) the named crew would remain with the Ferry for the entire voyage, (2) a deck log would be maintained onboard, (3) an engine log would be maintained onboard, (4) the Ferry’s daily position would be reported, and (5) any damage to the Ferry would be reported to Royal’s surveyors. • Those warranties pertain to risks at sea, and their breach voids the insurance contracts. “This marine rule mandates that compliance with a marine policy warranty is a condition precedent to the Underwriters’ liability thereunder and affords a complete defense to coverage if not complied with, regardless of whether causation between the breach and injury exists.”

14. Express Warranty of Seaworthiness • Underwriters at Lloyd’s v. Labarca which is an appellate decision from the United States District of Puerto Rico (No. 00-2142). On June 5, 1999 the M/V GYPSY sank at her slip in San Juan. The district court granted Underwriter’s summary judgment motion seeking relief from any obligation on the hull policy on the basis that the vessel, on undisputed facts, was unseaworthy at the time of her sinking and she sank as a result of her unseaworthy condition. The policy of insurance contained an express warranty of seaworthiness. The appellate court stated “A warranty of seaworthiness is an absolute duty owed by a ship owner to its crew and, in this case, to its insurer, to provide “a vessel and appurtenances reasonably fit for their intended use.” The court further stated “the duty of seaworthiness applies no less to the quality of the vessel’s equipment and working procedures than to the integrity of the vessel’s physical structure. The unseaworthy condition was caused by the operation of the air conditioning system with unsealed hoses, which caused the sinking of the M/V Gypsy. LaBarca did not produce any evidence to rebut the presumption of unseaworthiness, which arises when a vessel sinks in calm waters. The appellate court affirmed the district court’s ruling in favor of underwriters.

15. Express Warranty of Seaworthiness – Trading Warranty • Federal admiralty law, rather than the state law of Washington, was found to be applicable in the case of Port Lynch, Inc. and Interstate Production Credit Association v. New England International Assurety of America, Inc. The HAWAIIAN PRINCESS was a total loss as a result of a fire. The loss occurred while the vessel was in transit from crab fishing grounds in the Bering Sea, more than 1000 miles from southeast Alaska where she was warranted to be processing shrimp at anchor. The case contains an interesting discussion of the duty of disclosure and the choice of law issues in respect of the Wilburn Boat decision. Summary judgment declaring no coverage under the excess hull and machinery policy was granted by the court on the basis of a breach of the navigational warranty. The court relied on Lexington Ins. Co. v. Cooke’s Seafood in which the court held “it is well established under general maritime law that “where a vessel ventures voluntarily outside of the navigational limits specified in a hull policy, and sinks or is otherwise destroyed while outside the mentioned limits, the insurer is relieved from liability for the loss of the vessel” The navigational warranties were found by the court to be peculiarly maritime in nature.

16. Express Warranty of Seaworthiness – Trading Warranty (cont’d) The court stated that the use of the word “warranted” in the policy was of no special significance. The court also stated that if Washington state law were to be applied, the result would be the same; there would be no requirement that the breach contributed to the loss in order for the policy to be forfeited. Furthermore, the trading limits warranty was strictly interpreted and found to be critical to any marine policy, as clearly affecting the risks undertaken by Underwriters.

17. La Reunion, S.A. v. Christy M.D. FLA 1999 • Express Warranty – navigational limits • Insurer filed a declaratory action when the insured vessel was lost outside the limits of the policy’s Navigational Limits Warranty. • The court held that a “breach of the express warranty by the insured releases the insurance company from liability even if compliance would not have avoided the loss.

18. La Reunion Francaise, S.A. v. Halbart, 1999 AMC 14 (EDNY 1999) • Underwriters should be precise in their policy language describing navigational limits because the courts generally construe any ambiguity against the underwriters, as illustrated in La Reunion Francaise, S.A. v. Halbart. The vessel TRIPLE VISION II, developed a large crack in its hull while its owner, Halbart, was sailing it in the Caribbean 1500 Rally. The crew was forced to abandon the yacht, which was never found. The underwriter denied Halbart’s claim because of a breach of the navigational limits warranty. However, the court granted summary judgment in favor of Halbart because the navigational warranty was not specific, and therefore unenforceable.