Insurance Contract Law Issues Paper 2 Warranties - Law Commission

A.7 Thus the insurer is exempted from liability only if it can show the ship was sent to
sea in an unseaworthy state with “the privity of the assured”, and that the loss
was “attributable to unseaworthiness”. Both concepts require explanation.
A.8 “Privity” is taken to mean “knowledge or consent”, 3 and the definition of
“knowledge” was considered at length in The Star Sea. 4 The House of Lords held
that the insurer must show the insured had either actual knowledge, or “blind eye
knowledge”. This is a demanding test. It is not enough that the insured failed to
make enquiries from laziness or gross negligence. The insured must have had an
actual suspicion that was firmly grounded and targeted on specific facts, and
have then taken a deliberate decision to avoid confirming these suspicions.
A.9 Furthermore, the loss is only excluded if it is “attributable to unseaworthiness”. It
has been argued that this means the unseaworthiness must be a “proximate
cause”. 5 In other words, it must be one out of only a few efficient, dominant or
real causes of the accident. 6 Clearly if the unseaworthiness was the only cause of
the accident, the loss would not be caused by one of the insured risks, and the
insurer would not be liable in any event. 7 Section 36(5) applies when there are
several causes: when, for example, a loss is caused both by bad weather and by
a defect in the hull. It means that if the insured knew about the hull defect, the
loss is not covered, even if the insurer would otherwise be liable for loss caused
by the perils of the sea. 8
The difference between the two provisions
A.10 The difference in the way the law treats voyage and time policies is startling. In
voyage policies, the insurer is discharged the moment the ship leaves port in an
unseaworthy condition, even if the defect is minor, is later remedied, is unknown
to the insured, or has nothing to do with the loss. By contrast, in a time policy the
insured can act negligently in putting a ship to sea in a seriously poor condition.
However, unless the insurer can show that the ship owner knew of the problem,
section 39(5) does not bite. Furthermore, even if the insured knew that the crew
was too few and this may well have contributed to the risk of an accident, the
insurer is still liable unless it can show that the lack of crew was one of the main
causes of the loss.
3 On the issue of privity, see Compania Maritime San Basilio SA v Oceanus Mutual
Undertaking Association (Bermuda) Ltd (The Eurysthenes) [1977] 1 QB 49;
4 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469.
5 See B Soyer, Warranties in Marine Insurance (2 nd ed, 2006), pp 92-7.
6
Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350.
7 Except in the unlikely circumstances that unseaworthiness was a risk specifically covered
by the policy, when section 36(5) would be expressly excluded from the policy.
8
In JJ Lloyd Instruments v Northern Star Insurance Co (The Miss Jay Jay) [1987] 1 Lloyd’s
Rep 32, the insured was unaware of the defect. The insurer was therefore liable for a loss
caused partly by a latent defect in the hull and partly by difficult though not exceptional
weather. If the insured had been aware of the defect, the insurer would not have been
liable.
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