Miller's Marine War Risks
Page 232
CHAPTER 26
Held covered
The “family” of held covered clauses
26.1 War risks policies, in common with many types of insurance contract, often contain held covered clauses. In war risks insurance, these frequently appears in connection with entry to an area for which an additional premium is chargeable by the underwriter due to the prevailing political circumstances in the region. The current clause regulating the entry into an “area of perceived enhanced risk” (APER) is considered in . The effect of a “held covered” clause is to alter the legal consequences of non-compliance with policy limits, or other circumstances in which cover would be reduced. This family of clauses reflect market practice and their precise legal effect have troubled the courts. 26.2 We begin with a review of what the clauses are meant to achieve in practice, before moving to a detailed consideration of their legal effect. Generally, prior notice of entry is expected in order that the additional premium may be agreed, the underwriter may be put on notice when the extra risk of greater danger arises and there may be certainty in the relationship between the shipowner and the underwriter. There has long been the danger that the insured ship may enter such an area without the shipowner’s knowledge; in the past this has happened because there has been an accident on board and repairs are urgent, or because sick or injured seamen have to be landed for medical treatment ashore, or because the charterer requires the Master to load or discharge at a different port. News of this may not reach the shipowner in time for prior notice to be given. To guard against the shipowner losing his insurance cover inadvertently, an extra clause was added to ensure that his insurance will continue and a typical provision in the early twentieth century read: “Or held covered at a premium to be arranged.” These can be termed “simple held covered clauses”. 26.3 These clauses can lead to abuse because sometimes there is the temptation, to which some succumb, to enter an additional area and hope to slip in and out unobserved. If there was a casualty whilst within the APER area, the commonly held belief was that one is “held covered” and all that one had to do is to produce the premium to get the resulting claim paid. For the reasons which appear below, this belief is often profoundly mistaken. In response to those issues, a series of “complex held covered” clauses have developed, which are much less amendable to statements about their precise legal effect, and which require detailed legal analysis. Failure to give advance notice often requires the courts to resolve a series of interrelated questions:-
1(a) Does the clause, properly interpreted, require the insured to give notice of entry into an APER, or is the clause merely permissive?Page 233
- 1(b) If the clause requires the insured to give notice, during what period must notice be given?
- 1(c) If the clause requires the insured to give notice, what are the legal consequences of a failure to give timely notice?
- 2(a) Is the underwriter required to provide extended cover and if so what is the effect of a failure to give timely notice on this duty?
- 2(b) If the underwriter is required to provide extended cover, how is any additional premium payable calculated?
- 3(a) If the clause permits the underwriter to insist upon amended cover (in addition to any increase in premium), how are amendments determined?
- 4(a) To what extent does the doctrine of utmost good faith apply to the process of notifying underwriters of entry into an APER and/or negotiation of additional premium and/or amended terms?
“Simple” held covered clauses
26.4 The difficulties that these early clauses caused can be demonstrated by a brief review of the case law. In Greenock Steamship Co v. Maritime Ins Co, Ltd,1 the court was faced with a breach of the implied warranty of seaworthiness alongside a contractual clause stating: “Held covered in case of any breach of warranty, deviation, and/or any unprovided incidental risk or change of voyage, at a premium to be hereafter arranged”. The facts arose before the adoption of the Marine Insurance Act 1906, but the principles remain unchanged.2 The vessel left Montevideo with sufficient supplies of coal for the expected voyage, but these supplies proved to be insufficient in light of strong head winds and high seas. The master therefore ordered that parts of the ships fittings and cargo be used as fuel. The insured shipowner was unaware of the lack of seaworthiness due to insufficient bunkers for the voyage intended until after the vessel left port, and so no notice was given or additional premium negotiated. Bigham J. (at first instance) read the clause as fixing the underwriter with the obligation to insure those risks which were held covered, but on the basis of the information known to the parties at the time of the loss:… it entitles the shipowner, as soon as he discovers that the warranty has been broken, to require the underwriter to hold him covered. It also entitles the underwriter to exact a new premium commensurate with the added risk. But what is to happen if the breach is not discovered until a loss has occurred? I think even in that case the clause still holds good, and the only open question would be, what is a reasonable premium for the added risk? To answer this the parties must assume that the breach was known to them at the time it happened, and must ascertain what premium it would then have been reasonable to charge. If they cannot do it by agreement, they must have recourse to a Court of law. It is like the case of goods sold at a reasonable, though an unnamed, price. The sale is good, but the price has to be ascertained, either by agreement or at law.3