The Hull Policy
Prepared by: Brian P. Flanagan,
Prepared for: Marine Insurance Seminar in Conjunction with
the Maritime Law Association of the United States, May 7, 1993
“Touching the adventures and perils which the assurers (we, the said underwriters) are contended to bear and do take upon us in this voyage, they of the seas, men-of-war, fire, (lightning, earthquake), enemies, pirates, rovers, thieves, jettesones, letters of mart and counter-mart, surprizals, takings at sea, arrest, restraints and detainments of all kings, princes, and people of what nation, condition or quality whatsoever, barratry of the masters and mariners, and of all (other like) perils, losses and misfortunes that have or shall come to the hurt, detriment, or damage of said goods and merchandise (vessel, etc.) or any part thereof . . . “
A.J. Shumaker in an article in the 1967 Tulane Law Review Symposium Issue on the hull policy describes this perils clause as being substantially unaltered in specimen policies dating as far apart as 271 years [SHUMAKER, THE HULL POLICY 41 TULANE L. REV. No. 2 (Feb. 1967) at 239]. Indeed, the language quoted above, absent the parenthetical quotations, appeared in a policy dated 1692 and is substantially the same as the present perils clause in the American Institute clauses of June 2, 1977. (Attachment II)
The purpose of this paper is to explain basic provisions of the hull policy as it has developed over the last 200 years in order to provide a basic understanding of its major terms and conditions. The early policy forms, such as the Lloyd’s SG (Shipped Goods) policy form was developed to protect a shipowner or merchant from loss of physical damage arising from certain enumerated marine perils. To the basic form over the years has been added several additional provisions which sound atypical to the unfamiliar ear. These provisions include sue and labor clause, the running down clause, the inchmaree clause, the free of capture and seizure clause, and the war risk clause. Although the derivation of some of the names may be remote, each of the clauses has been the subject of a significant body of interpretative case law and each will be discussed below.
I. Warranties, Representations, Disclosures,and Conditions
Prior to discussion of the substantive provisions in the insurance contract, there are certain other aspects of the relationship between assured and underwriter that bear comment. These fall into the category of warranties, representations, disclosures, and conditions. For an excellent and more detailed discussion regarding these items, see NICHOLAS HEALY, THE HULL POLICY WARRANTIES, REPRESENTATIONS, DISCLOSURES, AND CONDITIONS, 41 TULANE LAW REVIEW No. 2 (Feb. 1967) at 245.
A. Disclosures – Uberrimae Fidei
The maxim in insurance is the doctrine of Uberrimae Fidei, or utmost good faith. Simply stated, both underwriter and assured have concurrent obligations to each other to disclose all facts material to the risk. Failure to meet this obligation by one party will allow the other to avoid the insurance contract. HEALY, at 245; PARKS, THE LAW AND PRACTICE OF MARINE INSURANCE AND AVERAGE at 222 (Cornell Maritime Press 1987).
The duty principally stems from the fact that early policies were often written when the vessel was at sea or at a distant port; thus, the underwriter who did not have modern communications and informational services of today had to rely on the statements and representations of the assured in evaluating the risk. The assured, in most cases the vessel’s owner, was in the unique position to have the most recent and complete set of facts at his disposal. The duty of the assured was then to make known to the underwriter ” . . . every material circumstance known to him [the assured], i.e. every circumstance that would influence the judgment of a prudent underwriter in deciding whether or not he will accept the risk, or in deciding the amount of the premium at which he is willing to accept it.” HEALY at 246; [United Kingdom] MARINE INSURANCE ACT, 1906, ‘ 18, 6 EDW., 7 c. 41.
The Healy article cites a cogent example of non-disclosure in the case of The Papoose, wherein the owner of a wooden vessel that developed a leak and sank during a voyage from Bimini to Fort Lauderdale had failed to inform the underwriter that a surveyor had recently examined the vessel and recommended extensive hull repairs. The owner had, in fact, not submitted that survey report, but the report of an earlier survey, indicating the vessel to be seaworthy. The underwriter, thus, was able to avoid the policy. Gulf Stream Cargo Ltd. v. Reliance Ins. Co., 1966 A.M.C. 385 (S.D. Fla. 1966).
What facts are material and, thus, must be disclosed to the underwriter? The material facts fall into a wide variety of categories depending on the particular nature of the vessel and its service. Some examples of material facts are:
- 1. Ownership of the vessel;
- 2. Vessel condition and age (recent survey reports);
- 3. Loss history of the owner or operator of the vessel;
- 4. Nature of the vessel’s service;
- 5. Value of the vessel;
- 6. Trading areas.
The test of nondisclosure is different on a case by case basis given the unique circumstances of each risk. Indeed, it is actually substantive as what might be “material” to one underwriter may be of little interest to another. The assured, however, is only under a duty to disclose material facts and has no duty to disclose immaterial or superfluous facts, or even facts that might tend to reduce the risk, or that are notoriously known through general knowledge. HEALY at 246.
The duty of nondisclosure is not based upon fraud. Despite the fact that the insured might have acted in good faith, yet due to a lapse of memory failed to provide underwriter with material information, will still allow the underwriter to avoid the policy. Reliance Ins Co. v. McGrath, 671 F. 2d 669 (No. CA. 1987).
- B. Warranties
A warranty in a contract of marine insurance is in essence a promise that the insured expressly or impliedly undertakes with regard to performance under the contract. Perhaps the most well known warranty, as well as the most litigated warranty in regard to a hull policy, is that of seaworthiness. Under a voyage policy, as the early policies were normally written, the assured impliedly warranted that the vessel would be seaworthy in all respects when it broke ground on the voyage. HEALY at 253. As to a time policy, which involves the vast majority of vessel policies today, decisions are mixed as to whether there exists an implied warranty of seaworthiness. HEALY at 252-54. The American Rule with regard to time policies is that there is an implied warranty that the owner will exercise due diligence to ensure that the vessel is seaworthy in all respects before it breaks ground on each separate adventure. See DAVIS MARITIME LAW DESK BOOK, c. XIX(T)(1)(b) (for a discussion and citations). Breach of a warranty will allow the underwriter to avoid coverage for a particular claim if the breach caused or contributed to the loss. L&L Marine Services, Inc. v. Insurance Co. of North America, 796 F.2d 1092 (8th Cir. 1986). As this is in the nature of a warranty, literal compliance with the warranty is required. By contrast, breach of a condition or representation by the assured will be grounds for avoidance only where the breach complained of proximately caused the accident underlying the claim. Note the distinction between the causal connections when comparing breaches of warranties with breaches of conditions or representations. Some examples of warranties are as follows:
- 1. Trading warranties (restricting the geographic location of vessel operations or the particular type of service the vessel is employed in);
- 2. Passenger warranties (limiting the total number of passengers to be carried; see, for e.g., Mutual Fire Marine and Inland Ins. Co. v. Costa, 789 F.2d 83 (1st Cir. 1986));
- 3. Change of ownership or management warranty;
- 4. Inspection Certificate warranties (requiring that the vessel be operated in conformity with its Coast Guard Certificate of Inspection or surveyor’s report);
II. The Assured
The assured under a hull policy must have an insurable interest in the vessel. Obviously, the owner or demise charterer will have an insurable interest. Hooper v. Robinson, 98 U.S. 528 (1878). A legal interest in the vessel or its cargo will normally suffice and, on some occasions, an equitable interest, beyond an mere expectation, will also do it [will also satisfy the “insurable interest” requirement]. The two primary types of legal interest in the vessel are owners/demise charterers (owners pro hac vice) and mortgagees or lienholders. A mortgagee/lienholder will have an insurable interest to the extent of the outstanding balance of the loan or promissory note. Common practice today is that the loss payee will be described as the assured or, upon the assured’s order. Occasionally, the mortgagee will ask for further protection by having itself designated individually in the loss payee portion of the policy in a manner such as:
- 1. Loss payee: AB Shipping Corp as owner and XYZ Bank as Mortgagee, as their respective interests may appear
Occasionally, mortgagees or lienholders may seek a “belt and suspenders” type of insurance by obtaining an additional endorsement to the hull policy known as a “breach of warranty” endorsement. This endorsement provides that if the vessel owner or mortgagor violates an express condition or warranty of the policy which would otherwise provide grounds for denial of coverage for a loss, the mortgagee or lienholder will be made whole up to the extent of its interest in the vessel. A sample of this type of endorsement is included as Attachment II to the handout materials. Obviously, underwriters will seek the additional premium for this type of endorsement. [For further discussion of insurable interests, see PARKS, THE LAW AND PRACTICE OF MARINE INSURANCE AND AVERAGE, VOL. 6 I at 185; see also HAEHL, HULL POLICY ADDITIONAL ASSUREDS, ETC., TULANE L. REV. No. 2 (Feb. 1967).]
III. Substantive Terms
A. The Perils Clause
The first and foremost Perils Clause involves perils of the sea. The clause in its entirety, as set forth above, has not changed substantially in the last 200 years. Some of the major specifics of the perils clause are as follows:
1. Incursion of Sea Water
Incursion of sea water must be unusual and not caused by ordinary wear and tear. It must be fortuitous and accidental. See PARKS at 274-75; see also Compagnie de Navegacion v. Fireman’s Fund Ins. Co., 277 U.S. 66 (1928).
The unlawful or fraudulent acts of the master or crew which result in a situation where the owner of the vessel suffers legal injury. [Basically, the master or crew sank or stole the vessel, the owner might recover unless he has privity or knowledge of the condition which lead to the act.] Nat’l Union Fire Ins. Co., Inc. v. Republic of China, 254 F.2d 177 (4th Cir. 1958).
Under the old perils policy, the loss must result as a result of a “perils of the seas” but not necessarily of the seas. For example, grounding, stranding, collision are also included in losses under the old perils clause. See VOGLE, TULANE L. REV. No. 2, at 262 (Feb. 1967). The perils clause also includes collision between the vessel and any object. Id.; see also Raybold v. U.S., 82 U.S. (15 Wall.) 202 (1872). The perils clause also includes loss by fire, lightning, or earthquake. Belle of Portugal, 421 F.2d 390, 1970 A.M.C. 30 (9th Cir. 1970)
B. The Inchmaree Clause
(Otherwise Known as the Additional Perils Clause)
The Inchmaree Clause is contained in lines 75 through 86 of the American Institute Hull Form. The Inchmaree Clause was, in large part, developed with the advent of steam navigation and machinery aboard vessels. The term “Inchmaree” comes from the early case of Thames and Mercy Marine Ins. Co. v. Hamilton, Frazier & Co., 12 App. Cas. 484 (1887) and involved a vessel of the same name. Essentially, the Inchmaree provides additional coverages for items not necessarily included under the perils clause. Some of these well known coverages are as follows:
1. Latent Defects
The Inchmaree Clause provides coverage for damage occasioned by latent defects in the vessel’s hull and machinery. Latent defects are those defects that cannot be ascertained or corrected by reasonable inspection of the exercise of due diligence on the part of the vessel owner. See Nat’l Sugar Refining Co. v. M/S Las Villas, 225 F. Supp. 686 (E.D. La. 1964). The definition of latent defects does not include damage occasioned by machinery which malfunctions due to ordinary wear and tear. Ferrante v. Detroit Fire and Marine Ins. Co., 125 F. Supp. 621 (S.D. Cal. 1954). Coverage under the latent defects provision extends to repairing damage occasioned by the latently defective part or piece of machinery, but not repairing the latently defective part or piece of machinery itself.
2. Negligence of Masters or Crew
The Inchmaree Clause also provides for damages occasioned by negligence of the master or crew with regard to damage done to the vessel. Generally, the damage must result from “operational negligence” as opposed to negligence in the management of the vessel. For example, if a crewmember fails to turn on the low lube oil pressure alarm and a minor loss of pressure ultimately causes complete engine failure, the damage to the engine would normally be covered. On the other hand, if the master or owner is aware for a period of time that the low lube oil pressure alarm is not functioning and fails to take steps to repair it and put it in operating condition, this would be a lack of due diligence and no doubt the resulting damage would not be covered.
There also may be such a thing as a “e;mixed claim”e; where by damage from an undiscovered latent defect is enhanced by operational negligence. See Carter Tug Service v. Home Ins. Co., 345 F. Supp. 1193 (S.D. Ill. 1971). See also DAVIS, THE MARITIME LAW DESK BOOK 406
Note also that, if the insurer seeks to raise a defense of lack of due diligence in the management of the vessel in defense to a claim, the insurer will have to shoulder the burden of proof. See Janet Navigation, Inc. v. Sturge, 711 F. Supp. 1199 (S.D.N.Y. 1989).
The Inchmaree Clause also extends to damage resulting from accidents in loading, discharging, and handling cargo; negligence of charterers or repairers; accidents while going on and off dry docks, scraping docks, etc.; and explosions on shipboard or elsewhere. 1
C. The Free of Capture and Seizure Clause (FC&S Clause)
The FC&S Clause in most hull insurance policies may act as both an excluding clause, as well as an insuring clause. The perils clause, discussed above, in large part, insures any and all marine perils, including those stemming from acts of negligence or national disaster, as well as intentional acts, governments, and individuals (e.g. men of war, enemies, letters of mart and countermart, takings at sea, arrests, restraints, detainments of all kings and princes, etc.).
These types of risks are generally termed “war risks.” Because war risks are much different during times of active hostilities than they are during peacetime, the FC&S Clause effectively excludes from the insurance contract risks enumerated in the clause which would otherwise be included in the perils clause. In this instance, the FC&S Clause is acting as an excluding clause. HARRY L. HAEHL JR., THE HULL POLICY: COVERAGES AND EXCLUSIONS FREQUENTLY EMPLOYED: THE FC&S, WAR RISKS, SR&CC, AUTOMATIC TERMINATION, CANCELLATION, 41 TULANE L. REV. NO. 2 at 277-279. Essentially, the FC&S Clause excludes from risks capture, seizure, arrest, or detainment; taking of the vessel by requisition; damage from mines, bombs or torpedoes (not carried as cargo); atomic weapons; civil war, revolutions, civil strife; piracy; strikes, lockouts, political or labor disturbances; malicious acts of vandalism; hostilities or warlike operations.
If an insured wanted to obtain coverage for such risks, he would do so by obtaining a war risk endorsement. At first, this was accomplished by paying an additional premium and obtaining an endorsement effectively deleting the FC&S Clause. Today, war risk clauses are more narrowly drawn to provide additional coverage for only certain risks, but not so broad as to completely delete the FC&S Clause. See, PARKS, LAW AND PRACTICE OF MARINE INSURANCE AND AVERAGE, VOL. I, 321-327 (Cornell Maritime Press 1987)
D. The Running Down Clause (Collision Liability)
In general, the hull policy is much in the nature of the property damage portion of a homeowner’s insurance policy, i.e. it reimburses the assured for damage to the assured’s property if caused by one of the enumerated events covered in the policy. By contrast, 10 liability of the assured to third parties for damage or personal injury is normally covered by protection and indemnity insurance. There is, however, one provision within the hull policy that straddles the line. This is known as the Collision Liability Clause or “Running Down Clause.” The Running Down Clause provided indemnity to the assured for any sums the assured shall become liable to pay as a result of a collision between the assured’s vessel and another vessel. Thus, in essence, the Running Down Clause provides a form of liability or indemnity insurance to the assured.
Early on, underwriters were reluctant to write coverage under the Running Down Clause on more than a three-fourths basis. This, essentially, means that the underwriters would only insure three-quarters of their assured’s liability. The rationale behind this practice was that, if the assured would ultimately remain liable for one-fourth of damages he might become liable to pay due to a collision between his vessel and another vessel, he would be more careful in his selection of master and crew. As a result, a shipowner with a three-fourths running down clause under his hull policy might seek to insure the remaining one-fourth under his protection and indemnity insurance. Indeed, it has been said that the attempt by shipowners to form “clubs” by which they would each seek to insure each other for this onefourth uninsured risk under their marine policies lead to the first mutual insurance associations. See PARKS at Vol. II, 691. Today, however, it would seem that most United States policies are written on a full four-fourths collision basis. The Running Down Clause only provides coverage when an insured vessel is in collision with another vessel. Thus, collisions with floating debris or stationary objects have been held not covered. EASTHAM, THE HULL POLICY, THE RUNNING DOWN CLAUSE, GENERAL COVERAGE SISTERSHIPS, CROSSLIABILITY, LEGAL NON-CONTRACTUAL LIABILITIES; EXCLUSION OF CARGO, TULANE L. REV. VOL. 41 NO. 2 at 399.
Bear in mind that in certain circumstances there will be an interrelationship between coverage provided under the protection and indemnity policy and coverage provided by the Running Down Clause. For an excellent discussion and examples of the interrelationship of the policies, as well as the difficulties in adjusting collision damages under the concept of cross-liability, see EASTHAM, at 399. One last interesting aspect of the Running Down Clause is that, if both vessels involved in a collision are subject to common ownership, they will be treated for purposes of settlement on the concept of cross-liabilities as if they were owned separately.
E. The Sue and Labor Clause
The Sue in Labor Clause essentially provides that expenditures made by the assured in order to preserve the vessel or mitigate damages after an accident will be compensable. In theory, actions taken by the assured after a casualty inure both to the benefit of the assured and the underwriter. The assured’s duty upon sustaining a casualty to the insured vessel, is to promptly notify the underwriter, but in all other respects, to act as a prudent uninsured. Thus, the assured must do everything reasonably necessary (and at reasonable expense and with reasonable promptitude) to minimize the loss by making a timely inspection and seeking the services of repairers or salvors. See Reliance Ins. Co. v. McGrath, 671 F. Supp. 669 (N.D. Cal. 1987). See also DAVIS, MARITIME LAW DESK BOOK at 414-417. Even if the insurer is later to deny coverage, prompt action by the assured pursuant to the Sue in Labor provisions will still seek to preserve the vessel and reduce the ultimate cost of repair to the assured, absent insurance coverage. Bear in mind, however, that the Sue in Labor Clause only provides coverage for expenses in protecting and preserving a vessel that has become damaged through a peril that is otherwise insured. See Reliance Ins. Co. v. The Escapade, 280 F.2d 482 (5th Cir. 1960).
Note, however, that salvage in Sue and Labor expenses incurred before the abandonment of the vessel or a determination of constructive total loss are not included in such computation. See DAVIS, MARITIME LAW DESK BOOK at 417-418
F. Agreed Value
A unique feature of a marine hull policy is that they are generally written on an agreed value basis. What this means is that, at the inception of coverage (often subject to a condition and valuation survey) underwriter and assured agree as to what the value of the vessel will be in the event of a total loss of a total constructive loss. Unlike automobile policies, which normally compensate the owner of the car for the actual cash value or blue book value if it is a total loss, if a marine hull policy is written on an agreed value basis, the value of the vessel agreed upon at inception of coverage will be that which is paid to the assured upon the vessel being found a total loss.
A constructive total loss is distinguished from a “total loss” in that, with a total loss, the vessel ceases to have its identity as a vessel. An example of a total loss would be if the vessel were totally destroyed by fire or explosion or lost at sea in such a way that it would be impossible to recover the vessel. By contrast, a constructive total loss, as defined in American hull policies, occurs when the vessel sustains the casualty and the cost of recovering and repairing the vessel is contemplated to exceed the agreed value. At this juncture, the owner may abandon the vessel to underwriters and seek full compensation for the vessel’s agreed value. This is described by one author as the concept of “full indemnity for partial damage . . .” HERBERT LORD, THE HULL POLICY: ACTUAL AND CONSTRUCTIVE TOTAL LOSS AND ABANDONMENT, TULANE L. REV. VOL. XLI NO. 2 at 347
The expenses used in the computation of constructive total loss have been described as follows:
In the calculation of repair and recovery costs it is proper to include the expenditure necessary to deliver 13 the ship from its peril to a port of safety and thereafter to make it a seaworthy vessel. Accordingly, in addition to repair costs, the expenses of salvage, dry dock and surveys, pilotage and towage, and the superintendence are allowable.
Compagnie Maritima Astra, S.A. v. Archdale, 1954 A.M.C. 1674 (N.Y. Sup. Ct. 1954); see also DAVIS, at 417-418.
Note, however, that a fraudulent overvaluation may be a violation of the doctrine of Uberrimae Fidei. Knight v. United States Fire Ins. Co., 804 F2d 9 (2d Cir. 1986).