Clarifying Proximate Cause in Marine Insurance: All Risks Cover vs Inherent Vice

Introduction

The case of Global Process Systems Inc & Anor v. Berhad ([2011] 1 Lloyd's Rep 560) was heard by the United Kingdom Supreme Court on February 1, 2011. This litigation centered on a marine insurance policy involving the loss of three legs of the oil rig "Cendor MOPU" during its tow from Galveston, Texas, to Lumut, Malaysia. The primary issue was whether the loss incurred fell under the "all risks" cover provided by the Institute Cargo Clauses (A) or was excluded due to "inherent vice or nature of the subject matter insured."

Summary of the Judgment

The Supreme Court upheld the decision of the lower courts, determining that the proximate cause of the loss was a peril of the sea—a leg-breaking wave—that was a fortuitous external accident. This finding meant that the insurers were liable under the "all risks" insurance policy. The Court rejected the insurers' argument that the loss was due to inherent vice, as the loss resulted from an external fortuity rather than solely from the inherent characteristics of the rig.

Analysis

Precedents Cited

The judgment extensively referenced prior cases to delineate the boundaries between covered perils and inherent vice. Key cases include:

Soya GmbH Mainz Kommanditgesellschaft v White [1983] 1 Lloyd's Rep 122: Defined "inherent vice" as the risk of deterioration due to the natural behavior of goods without external fortuity.
T M Noten BV v Harding [1990] Lloyd's Rep 283: Emphasized that proximate cause should be determined using the common sense of a business or seafaring man.
J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The "Miss Jay Jay") [1987] 1 Lloyd's Rep 32: Established that concurrent causes, one insured and one excluded, result in the exclusion of the claim.
Mayban General Insurance v Alstom Power Plants Ltd [2004] Lloyd's Rep 609: Incorrectly interpreted inherent vice to include inability to withstand ordinary perils, which the Supreme Court criticized.
Global Process Systems Inc & Anor v. Berhad ([2011] 1 Lloyd's Rep 560): The present case which clarified the distinction between perils of the sea and inherent vice.

The Supreme Court critically assessed the Mayban decision, concluding it was wrongly decided and inconsistent with established principles, thereby reinforcing the clear separation between inherent vice and covered perils.

Legal Reasoning

The Court focused on the definition of "proximate cause" under the Marine Insurance Act 1906, particularly section 55(2)(c), which excludes losses caused by inherent vice or the ordinary action of the winds and waves. The Court reiterated Lord Diplock's definition of inherent vice, emphasizing that it refers to deterioration resulting solely from the natural behavior of the insured goods without external fortuity.

In this case, the Court found that the sudden breakage of the rig's legs was caused by a "leg-breaking wave," an external fortuity falling under "perils of the seas." Despite the rig's inherent susceptibility to fatigue cracking, the final cause of the loss was identified as an external accidental event. Thus, the loss did not stem solely from inherent vice but was primarily due to a peril insured against.

The Court dismissed the insurers' argument that the combination of inherent vice and external perils should exclude the claim, aligning with the principle that if any proximate cause is an insured peril, the exclusion of other causes does not negate coverage.

Impact

This judgment significantly clarifies the application of "proximate cause" in marine insurance, particularly in distinguishing between inherent vice and covered perils. It reinforces that:

Perils of the sea encompass external, fortuitous accidents regardless of whether the underlying conditions were ordinary or foreseeable.
Inherent vice excludes coverage only when the loss is solely due to the natural behavior or characteristics of the insured goods without any external event.
Concurrent causes: If the proximate cause includes an insured peril, the exclusion of inherent vice does not negate the insurer's liability.

Future cases will reference this judgment to determine the balance between inherent vice and external perils, ensuring that all risks cover remains effective without being unduly restricted by inherent imperfections of the insured goods.

Complex Concepts Simplified

Inherent Vice

Inherent vice refers to the natural tendency of goods to deteriorate or become damaged without any external cause. For example, fruit might rot naturally over time, or chemicals might spontaneously combust. In insurance terms, if damage stems solely from inherent vice, it is excluded from coverage.

Proximate Cause

Proximate cause is the primary cause of a loss, the nearest or most effective cause that initiates a chain of events leading to the loss. Determining proximate cause involves assessing whether the loss was directly caused by an insured peril or by an excluded factor such as inherent vice.

Perils of the Seas

Perils of the seas include fortuitous, accidental, and external events like storms, waves, or collisions that cause damage. These are covered under all risks marine insurance policies unless specifically excluded.

All Risks Cover

All risks cover in marine insurance means coverage against all causes of loss or damage, except those specifically excluded in the policy. It is comprehensive coverage that includes most unforeseen incidents.

Conclusion

The Supreme Court's decision in Global Process Systems Inc & Anor v. Berhad serves as a pivotal reference in marine insurance law, particularly in distinguishing between inherent vice and perils of the seas. By affirming that proximate cause must align with an insured peril rather than inherent imperfections, the judgment ensures that all risks cover remains robust and commercially viable. This decision aids both insurers and policyholders in understanding their rights and obligations, promoting fair and predictable outcomes in marine insurance claims.

The clear delineation between inherent vice and external perils safeguards the fundamental purpose of marine insurance: to indemnify against unforeseen losses without being hampered by inherent traits of the insured goods. As such, this judgment not only resolves the specific dispute at hand but also fortifies the legal framework governing marine insurance, fostering greater confidence and clarity in maritime commercial practices.