A marine insurance contract is one of indemnity: the insurer agrees to indemnify the insured to an extent, in a manner agreed by both parties, against risks that are also agreed by both parties. In other words, in exchange for a premium, the insurer acts as a financial shock absorber for the assured where it suffers loss or damage arising from risks for which the insurer has provided cover.
Where a party causes loss or damage to another party, the guilty party is generally required by law to redress the wrong. In many cases, the law will allow the guilty party to limit its liability by having it capped at an amount specified by law. This concept of limitation is not new and is accepted as one of the bases on which many maritime transactions are conducted. While views on the propriety of the right to limit liability vary, the main (and positive) effect of the right to limit liability is that it prevents the frequent opening of the floodgates with regard to claims, to the detriment of the guilty party. This update examines the concept of the limitation of liability from the perspective of marine insurance in Nigeria.
Limitation of liability: understanding the concept
A basic legal principle is restitution in integrum (ie, to restore the injured party to the position that it would have been had the injury not been caused). This indicates a complete restoration to that position and, as such, the limitation of liability concept could be seen to contravene this principle. In The Amalia ((1863) 1 Moore NS 471 (PC)), Dr Lushington opined that "the principle of limited liability is (not) that of full indemnity, the natural right of justice, will be abridged for political reasons".
Further, in The Bramley Moore ((1963) 2 Lloyds Rep 429), Lord Denning admitted that the concept of limitation of liability is more one of public policy than natural justice when he noted that:
"The principle underlying limitation of liability is that the wrongdoer should be liable according to the value of his ship and no more… a small tug has a comparatively small value and it should have a correspondingly low measure of liability, even though it's towing a greater liner and does great damage. I agree that there is not much room for justice in this rule; but limitation of liability is not a matter of justice. It is a rule of public policy which has its origins in history and its justifications in convenience."
Notably, this principle is ideal for preserving the maritime industry, as the industry could be drowned in claims if operators were not permitted to have their liability capped.
What does this mean for insurers?
Although the Convention on the Limitation of Liability for Maritime Claims 1976 has yet to be domesticated in Nigeria, certain laws provide for the limitation of liability in some instances. However, the question remains as to whether the insurer – where the law permits an assured to limit its liability and it makes a claim – must indemnify the assured up to the limit of its liability or to the fullest extent of the policy.
Before answering this question, the instances in which an insurer will be legally exempted from indemnifying the assured must be examined. The Marine Insurance Act 2003 clearly provides that where an assured has wilfully conducted itself in a manner that has caused the loss or where the subject matter insured is defective, the insurer will be exempted from indemnifying the assured for the loss. In this regard, the act states that:
"The insurer shall not be liable for any loss attributable to the wilful misconduct of the assured, but unless the policy otherwise provides, he shall be liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the master or crew."
This does not exclude the fact that the act shields the insurer from liability in the case of:
- loss caused by ordinary wear and tear;
- inherent vice in the nature of the subject matter insured;
- loss caused by delay;
- injury to machinery not caused by maritime perils; and
- other exceptions contained in the act or the applicable insurance policy.
Further, Section 352(5) of the Merchant Shipping Act 2007 provides that "an insurer of liability for claims subject to limitation in accordance with the rules of this Part of this Act shall be entitled to the benefits of this Part of this Act to the same extent as the assured himself". This section further provides that under the act, a shipowner is entitled to limit its liability and that "if any claims set out in section 353 of this Act are made against any person for whose act, neglect or default the shipowner or salvor is responsible, such person shall be entitled to avail himself of the limitation of liability provided for in this Part of this Act".
Limiting or avoiding liability: steps to take
Arguably, the ideal situation for any claims handler would be where it can rely on the law and policy to decline a claim or at least limit the extent of its liability in accordance with the law. So, how can a claims handler go about achieving this?
Insert exception clause in insurance policy
As noted above, the Marine Insurance Act exempts insurers from paying out in certain instances. In addition, an insurer may insert into the marine insurance policy clauses exempting its liability in specific instances. For instance, when issuing a policy, an insurer may incorporate the terms of cargo or hull and machinery policies which exempt its liability in several instances. As an example, in a hull and machinery policy, the insurer and assured may agree to incorporate the terms of the International Hull Clauses 2003 into the policy. Clause 6.4 of the International Hull Clauses states that:
"In no case shall the Underwriters indemnify the Assured under this Clause 6 for any sum, which the Assured shall pay for or in respect of 6.4.1 removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever 6.4.2 any real or personal property or thing whatsoever except other vessels or property on other vessels 6.4.3 the cargo or other property on, or the engagements of, the insured vessel 6.4.4 loss of life, personal injury or illness 6.4.5 pollution or contamination, or threats thereof, of any real or personal property or thing whatsoever (except other vessels with which the insured vessel is in collision or property on such other vessels) or damage to the environment, or threat thereof, save that this exclusion shall not exclude any sum which the Assured shall pay for or in respect of salvage remuneration in which the skill and efforts of the salvors in preventing or minimizing damage to the environment as referred to in Article 13 paragraph l(b) of the International Convention on Salvage, 1989 have been taken into account."
Such incorporation will act as a shield against liability for the insurer where damage to the insured vessel is caused by one of the aforementioned circumstances.
Insert warranties excluding losses into policy
Warranties are better understood as an undertaking between the insurer and the insured that a specific action will or will not be taken. Notably, where a breach of a warranty in a non-marine insurance contract occurs, the insurer is not automatically permitted to avoid the contract. Instead, as reaffirmed by the court in Prestige Assurance Co Ltd v Financial Assurance Co Ltd, the insurer can only avoid the contract from the date of the breach. Although not a marine insurance case, in Prestige the insurer settled a claim for damage to the insured's factory and consequently claimed an indemnity from its reinsurers for the part of the risk ceded to the reinsurers. The reinsurers denied liability on the ground that the insured had breached specific warranties in the insurance policy. In explaining the effect of a breach of a warranty, the judge noted that:
"A breach of warranty by the assured provides the insurer with a defence to any claim brought in respect of a time subsequent to the breach... the policy is not automatically void upon the occurrence of a breach of warranty... but only if the insurers elect to exercise their right to avoid the policy and repudiate all liability. It is always open to an insurer to waive a breach of warranty and indeed, it may even be held in some circumstances that even where insurers have not expressly affirmed the contract, they are nonetheless estopped by their conduct from repudiating liability."
Underwriters in the marine insurance industry will be pleased to note that the position is different in marine insurance contracts. Following the rulings of the English courts and the wording of Section 34 of Nigeria's Marine Insurance Act, which mirrors Section 33 of the English Marine Insurance Act, the breach of a warranty automatically discharges the insurer of liability from the time of the breach. Section 34 states that:
"A warranty within the meaning of this section may be express or implied, and is a condition which shall be exactly complied with, whether it is material to the risk or not. If it is not so complied with, then, subject to any express provision in the policy, the insurer shall be discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date."
When examining whether an insurer must indemnify the assured up to the limit of its liability or to the fullest extent of the policy – where the law permits an assured to limit its liability and it makes a claim – it should be noted that the assured may be either the guilty party or the injured party. Where the assured is the guilty party and it can limit its liability in accordance with the law, its insurer is also entitled to limit its liability. As a result, the insurer of a party that has suffered damage often ends up claiming less (in subrogation) than it has paid out owing to the guilty party's insurer's right to limit its liability as enshrined by law. As this update demonstrates, Nigerian law offers insurers, in certain instances, the right to limit their liability. In order for insurers to ensure that they break even in marine insurance claims, it is pertinent that they take advantage of the above options by avoiding paying out a claim unnecessarily or limiting their liability when they have to pay.
Insurers also have the right to take a 'second bite of the cherry' and pursue the guilty third party to recoup their expenses after paying out a claim (ie, subrogation).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Ngozi Medani at Akabogu & Associates by telephone (+234 1460 55550) or email ([email protected]). The Akabogu & Associates website can be accessed at www.akabogulaw.com.
