Miller's Marine War Risks

Michael Davey; James Davey and Oliver Caplin

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CHAPTER 31 War risk insurance in time of war

Note for the Fourth Edition

This chapter considers the arrangements between the United Kingdom government and the insurance industry for State support for the marine (and aviation) war risks market in the event of the outbreak of war. The Act of Parliament under which this operates (the Marine and Aviation Insurance (War Risks) Act 1952) and the 1988 Reinsurance agreements remain in place.1 What follows is the expert analysis provided by Michael Miller in the previous edition. He begins by explaining the lack of progress in bringing about much needed reforms since the Second Edition in 1994.

Note from the previous author

There was great concern in 1913 that British merchant ships would be attacked by the powerful German High Seas Fleet. There was equal concern in 1939 that they would be similarly attacked by the large German U-Boat fleet, and during the Cold War (1950 to 1995–2000) that they would be subject to the attentions of the very powerful navy of the USSR. There was always the danger that the Cold War would become “hot” and result in actual hostilities between NATO and the Warsaw Pact countries. Now that the Cold War is over there is no powerful navy left in the world which might be expected to attack British merchant ships, and the question arises if it is any longer necessary to have a form of contract with Her Majesty’s Government whereby the Secretary of State can bring the non-Queen’s Enemy Risks insurance to an end by issuing a General Premium Notice and so substituting for it the Queen’s Enemy Risks insurance. Unquestionably Her Majesty’s Government will require British (and perhaps foreign) ships in support of such military operations as it undertakes and will either have to give them insurance or pay for the insurance which they themselves effect. The South Atlantic War (1982) to eject Argentina from the Falkland Islands is the example which springs to mind, and nobody can say whether or not there will be others. It is only prudent to have an insurance scheme in place which is ready for instant use, but it will be very different from that which presently exists. The publication of the Third Edition cannot wait until this is in place and much work will have to be done before it is. It may be helpful to have a

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chapter which describes the Queen’s Enemy Risks insurance as it presently is, and to this end [this chapter] is reproduced from the Second Edition. 2 31.1 Under the Notice of Cancellation and Automatic Termination of Cover Clause, war risk insurance provided by the Institute War and Strikes Clauses attached to the MAR Form and most of the Mutual War Risks Associations terminates upon the hostile detonation of a nuclear weapon of war, or the outbreak of war between the United Kingdom, the United States of America, France, the Union of Soviet Socialist Republics and the People’s Republic of China (). The reasons why this happens are given in on “The premiums”. This does of course open a yawning gap in the insured shipowners’ insurance cover, and the purpose of this chapter is to discuss how it is to be filled to the extent that it is possible to do so. 31.2 At paragraph 3.2, the point is made that the risk is so huge that only governments, or combinations of governments, have the necessary capacity to provide such insurance. The schemes of individual governments vary enormously in the scope or range of the insurance which they offer. The United States has a scheme, referred to generally as “The Binder” which gives ships insurance when they are taken into the service of the State during wartime. Norway, Denmark and France have similar schemes, whilst ships put into NATO’s service will be insured by the Interallied Insurance Organization. A discussion in depth will concentrate upon the British scheme, which Canada has copied in most of its essential details. 31.3 Governments have different priorities than do commercial underwriters. The exercise of the Royal Prerogative of Her Majesty to requisition British ships carries with it the obligation to pay for their use, and to make good or pay for damage which they suffer whilst they are compulsorily in her service. The requisitioning laws of various countries are not necessarily the same in every respect, and, as an example, a difference can readily be seen in Robinson Gold Mining Co. and Others v. Alliance Insurance Co. 3 There the Republic of South Africa, as it existed on the outbreak of the Boer War, was obliged to pay for requisitioned cattle and wagons only; the owners of all other requisitioned property had the right to share in any booty which the Republic, if victorious, might have captured from its enemies during the course of the war. If there was no booty, then there would be no compensation. In addition, a government has a natural desire to make sure that merchant ships, if lost, should be replaced, or if damaged repaired, in the national interest so that they can continue to carry the sinews of war and the country’s seaborne trade. If a government is unable to ensure that this is possible, then it probably cannot prosecute the war. 31.4 Immediately before the First World War, His Majesty’s Government desired that the loss of or damage to merchant ships should be dealt with on insurance principles. This had several advantages. Marine insurance principles were already well developed, the compensation for lost merchant ships would be limited to their insured values, which were readily ascertained, or if the government desired, controlled, and the scheme could be virtually self-financing by charging premiums. 31.5 The resources of the State were behind the scheme, but it was always intended that the necessary funds should be raised from premiums without calling for a subvention

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from the taxpayer. Another vital consideration was that money to replace a lost ship or to repair a damaged one would be available immediately, and thus make possible the prompt replacement or the repair in the national interest. The government asked the London Group of War Risks Associations (The London Group) (see paragraph 2.6) to prepare a scheme. Out of this, the concept of insurance of King’s (Queen’s) Enemy Risks (in Canada referred to as the Canada Engaged Risks) was born. The London Group added the necessary extra insured perils to its insurance, known as the King’s Enemy Risk, and His Majesty’s Government reinsured them. These are insured perils to be contrasted with the other insured perils which the London Group covers which are discussed earlier in this work; these are not reinsured by Her Majesty’s Government, there being no element of the Sovereign’s enemies being involved, and they are therefore known as the Non-Queen’s Enemy Risks. 31.6 From that date to this, the London Group has insured King’s (Queen’s) Enemy Risks and His (Her) Majesty’s Government has given them reinsurance in proportions which have varied between 75% and 100%. Loss or damage suffered by merchant ships in both World Wars was paid for by this arrangement, primarily by the London Group which was reinsured by His Majesty’s Government. Whilst, as we shall see, this insurance arrangement is continually operative, there have been three occasions since the Second World War when it has had real meaning; the Korean War (1950–1953), the Anglo-French invasion of Egypt (1956) and the Falklands War, sometimes referred to as the South Atlantic War (1982). On all occasions, merchant ships were requisitioned or chartered to support the military to carry troops and all that troops need to fight a war. On each occasion, His, or latterly Her, Majesty had “enemies”. 31.7 The complaint has often been raised, with more eloquence than reason, that shipowners have been unduly favoured by this scheme. During the First World War, the damage to civilian property in the United Kingdom was trivial, mostly resulting from some ineffectual Zeppelin raids, which nevertheless caused great alarm, and a bombardment by the German High Seas Fleet on coastal towns in the early days of the war. There was one very important exception to this general statement—the loss of and damage to merchant ships was very substantial. Those whose property was damaged by the exercise of the Royal Prerogative were compensated under the Indemnity Act 1920, some of whose workings are described at paragraph 11.66. In World War II when a considerable amount of damage was done to civilian property, particularly by bombing, there was a war damage scheme which also operated on insurance lines, and householders paid premiums for the cover which it afforded. 31.8 There have, during the course of the years, been several updatings of the enabling Act, which gives the Secretary of State (formerly the Minister) for Transport the statutory powers which he needs to enter into a Reinsurance Agreement, and of the Reinsurance Agreement itself. The current enabling Act is the Marine and Aviation Insurance (War Risks) Act 1952. This Act is now well out of date, and moves are afoot for a further updating so that Her Majesty’s Government can give reinsurance for the latest forms that war risk insurance has taken in the past 40 years since 1952. Nevertheless, the Act does give the Secretary of State a great number of the powers which he needs for the basic essentials of the Reinsurance Agreement. The Act deals with cargo and aircraft as well as ships, but so far as merchant ships are concerned, the following characteristics are the most interesting.

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31.9 The Secretary of State may give reinsurance for war risks at any time in respect of a British ship, but for a ship other than a British ship he may afford such reinsurance only “during the continuance of any war or other hostilities in which Her Majesty is engaged or arise after any such war or hostilities in consequence of things done or omitted during the continuance thereof” (section 1(1)). 31.10 There is a definition of “war risk” (section 10) but no definition of a “British ship” for the purposes of the Act. This expression, strange as it may seem, is one of the most elusive terms known to the law. It is true that the Act allows ships of India and the Republic of Ireland to be considered as “British ships” (section 10(2)) but this is not of much help nowadays. In 1952 it did not matter particularly, because British-owned ships were, with few exceptions, registered in the United Kingdom and could be described as “British ships”, loose as the term is. Nowadays many British-owned ships are registered for a variety of reasons under other flags. But from a practical proposition, Her Majesty’s Government will depend upon their availability in time of war. They cannot be described as “British ships” in any sense of the expression. Even registration in the United Kingdom cannot be regarded as a totally reliable guide when the very odd case of The Polzeath 4 is considered. There, the Registrar of British ships in King’s Lynn raised the question whether the ship was entitled to be registered as a British ship. She was owned by a British company with some British and some German directors, but the main shareholder was a German living in Hamburg. He was in the habit of sending instructions in the most peremptory form on the minutest details to the British directors, and, after the First World War broke out, continued doing so through neutral Dutch intermediaries. It was held by Bargrave Deane J. that the ship was not entitled to be registered as a British ship and she was accordingly struck off the register. Bearing in mind the great variety of shareholdings from all over the world which make up the ownership of British companies owning British-registered ships, the question raises itself just how far registration by itself is, in the absence of an express provision, a reliable guide as to what is or what is not a “British ship” for the purposes of an Act which gives no definition for its own purposes. 31.11 Until the Act can be amended, the Secretary of State and the London Group have done what it is possible to do to resolve the position with the following definition: “British ship—A ship registered in the United Kingdom, the Isle of Man, any of the Channel Islands or any British Colony.” This seeks to make registration alone the test; once a ship is accepted for registration in any one of these places, she can, for the purposes of the Queen’s Enemy Risks Rules and Her Majesty’s Government Reinsurance Agreement, be considered as a British ship, at least as long as this registration lasts. The Rules also contain a warranty that she shall remain so registered, so that if she is removed from the register for any reason, the insurance position is clear to all concerned. 31.12 This position is not entirely satisfactory and will not be so until this definition, or something similar, can be incorporated into a new enabling Act. For the present, so long as Bermuda and Gibraltar remain colonies, ships registered in these territories can be considered as “British ships”. Ships registered in places which were once colonies, but now no longer are, such as Hong Kong, Singapore and the Bahamas, cannot be regarded as British ships. Their problems are dealt with by the Reinsurance Agreement.

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War risks are defined by the Act (section 10(1)) as:

War Risks means risks arising from any of the following events that is to say, hostilities, rebellion, revolution and civil war, from civil strife consequent on the happening of any of those events, or from action taken (whether before or after the outbreak of any hostilities, rebellion, revolution or civil war) for repelling an imagined attack or preventing or hindering the carrying out of any attack, and includes piracy.

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