Marine Insurance: Law and Practice




7.1 The general common law rule is that only the parties to a contract have rights and obligations under that contract, although this rule is subject to a number of exceptions. The doctrine of privity of contract is a large subject which is more appropriately dealt with in general works on the law of contract and the law of insurance. It is sufficient to note a few central points here. 7.2 First, it is not enough to state that only the parties to a contract are entitled and obliged thereunder without identifying the contract and who are the parties to it. In particular, in a commercial situation there may be more than one relationship, with similar or different parties. Thus, an insurer who is liable under an insurance contract to an assignee of the policy (such as a bank mortgagee of the insured ship) may also be liable to the bank under a collateral letter of undertaking or duty of care in tort.1 More importantly, although a person may not be immediately involved with negotiations, he may be a party to the contract because he is a principal of one of the parties who conclude the contract. This is the common situation where marine insurance contracts are negotiated by agents.2 7.3 Secondly, the law has minimal formal requirement as to the naming of the assured or his agent in the contract.3 This helps avoid the unnecessary exclusion of a claimant from the class of intended assureds. However, that class is nonetheless decided by the intention of the parties as ascertainable from the construction of the contract. Thus, in a case involving a ship under construction, it was regarded as consistent with commercial needs to construe the class of assureds under a shipbuilding policy so as to enable an entity which comes within the ambit of the original group of shipowners during the course of the cover, whether as the result of an acquisition, a change in corporate structure, the conclusion of a joint venture agreement or however, to obtain the benefit of the group’s insurance on notification to the insurers; but the policy was not be construed so as to include all potentially interested parties, such as mortgages and the shipyard completing and fitting the vessel.4 Insurance of a class of unidentified assureds may contain an obligation to notify the insurer, thereby giving him the opportunity to reinsure.5 7.4 Thirdly, by virtue of one of the exceptions to the privity doctrine, a third-party beneficiary may be able to enforce the contract.6 For example, it is provided by the Contracts (Rights of Third Parties) Act 1999 that this will be the case where the contract expressly or purportedly confers such a right on a third party.7 In that case, the ability of the original parties to vary or rescind the contract is curtailed.8 However, the application of the Act is subject to contrary provision.9 Accordingly, the International Hull Clauses 2003, clause 36 provides: first, that no benefit of an insurance contract governed by the Clauses is intended to be conferred on or enforceable by any party other than the assured, save as may be expressly provided therein to the contrary; and, secondly, that the contract may, by agreement between the assured and the underwriters, “be rescinded or varied without the consent of any third party to whom the enforcement of any terms has been expressly provided for”. 7.5 Fourthly, in practice, if third parties are enabled to enforce marine insurance contracts, this is less likely to be because they derive rights as third-party beneficiaries than because one of the original parties—normally the assured—transfers his own rights by assignment. Assignment is considered below.10 7.6 Fifthly, an important practical exception to the privity doctrine arises in favour of non-parties to insurance contracts in cases of the insurer’s insolvency, under the Third Parties (Rights Against Insurers) Act 1930. This is considered below.11


Original and derivative interests

7.7 If an insurance contract is not clearly made with a particular person as principal, it is necessary to determine who is the insured in order to determine who can enforce the contract and what defences can be maintained by the insurer. In a number of cases policies have been effected by persons (normally brokers) “as well in their own name as for and in the name and names of all and every other person or persons to whom the subject-matter of this policy does, may, or shall appertain in part or all”.12 Where an insurance is effected on behalf of someone by an intermediary, it is a question of fact whether the intermediary is acting as an agent or as a principal.13 The fact that the terms of the policy are wide enough to cover a person’s interest is not by itself sufficient to prove the intermediary’s intention to insure on behalf of that person as principal.14 7.8 If the intermediary is acting as an agent, in law the insurance contract is made directly between the insurer and the person on whose behalf it is effected. Thus, if the insurer has a defence to a claim brought by the insured, he can defeat a claim brought under the policy either by the insured or by someone who derives his claim from the insured. Thus, in Graham Joint Stock Shipping Co Ltd v Merchants Mar Ins Co Ltd,15 the House of Lords held that the insurer could plead the owner’s fraud in scuttling the ship as a defence to a claim brought by mortgagees who derived their interest under the policy as equitable assignees of the shipowner. Two months later the same panel held that the owner’s connivance in scuttling (which was a defence against the owner) could not be used as a defence to a claim by mortgagees as the broker had also intended to insure the mortgagees as principals. Obviously, although a general form of words may be employed with a view to insuring the interest of more than one person, this cannot circumvent the necessity of determining exactly whose interest it was intended to insure, and the question is better resolved by identifying him specifically rather than generally.

Transfers of interests and rights

7.9 This part of this chapter is concerned with transfers of interests which may be the concern of marine insurance. The word “transfer” is used in a broad sense to embrace a range of specific forms of transfer which may be possible, of which different descriptions may be used, and to which different rules may apply. Its lack of specificity is preferred to the word “assignment”, which normally has a particular legal meaning but which is employed by the Marine Insurance Act 1906 to refer to three different types of transfer. These will be dealt with in turn. 7.10 An interest or right which a person has may cease to exist, for example if his property is destroyed by fire or the contractual performance which he is owed has been completed, as where freight is paid to a shipowner or capital repaid to a mortgagee. Otherwise, a person’s interest will generally endure; thus, as a general rule, ownership of property cannot simply be abandoned.16 Where the subject of the interest endures, a person’s interest will normally only terminate in two circumstances. First, it may be transmitted by law,17 ie on death or insolvency; an insurer will also acquire rights by subrogation.18 Second, in most cases a person can voluntarily transfer an interest himself.

Dealings in subject matter insured

7.11 Whether interests in the subject matter of a contract of insurance can be created or are transferable or transferred is governed by principles and rules of the law of property.19 Property may be dealt with in different ways, for example: where cargo is sold; a ship is mortgaged; or the right to receive performance under a contract, such as the payment of freight, is assigned. As these examples demonstrate, different types and descriptions of transfer are employed for different types of property. In particular, it is important to note that the Marine Insurance Act 1906, section 15 refers to the transfer of an interest in the subject matter insured as “assignment”20 but the term is generally employed in law to refer to the transfer of a right of action (traditionally described as a chose in action) such as a right to receive freight. 7.12 Dealings in property are likely to require consideration of the insurance cover of the transferor or transferee. This should be done because, as the Marine Insurance Act 1906, section 15 states:

“Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there be an express or implied agreement with the assignee to that effect”.21

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