Insurance: proximate cause of loss: inherent vice and the scope of "all risks" cover

A recent Commercial Court decision revisited the issue of proximate cause of loss in considering whether the loss was accidental (and therefore covered as a risk) or inevitable and therefore outside the scope of cover provided under an “all risks” policy.

The issue to be determined was the proximate cause of the loss of the legs of an oil rig while being towed from Texas to Malaysia. The voyage was covered under a policy of marine insurance underwritten by a Malaysian company providing 'Takaful' insurance, which is based on Islamic principles. The policy incorporated the Institute Cargo Clauses (A) of 1 January 1982 and provided cover for “all risks”, subject to specified exclusions, including “inherent vice”. The claimant owners of the rig argued that the loss was accidental and not inevitable, and so within the terms of the “all risks” cover, and that the proximate cause was inadequate repairs carried out mid-tow. The Malaysian insurer argued that the proximate cause was the inherent vice in the inability of the legs to withstand the ordinary incidents of the voyage, meaning the loss was excluded from cover, alternatively, that the loss was an inevitable consequence of the voyage embarked upon.

The court held:

• It is well established that insurers can rely on inevitability of loss to decline to pay a claim. Insurance is about risks, not certainties and the words “all risks” do not cover all damage however caused, such as damage as a result of inevitable ordinary wear and tear and depreciation. The question of inevitability must be judged at the point of inception. On the evidence, the failure of the rig legs was very probable, but it was not inevitable. Therefore, subject to any relevant exclusions the loss was within the scope of cover.
• In deciding the proximate cause of the loss, the test to be applied is essentially one based on the common sense of the ordinary businessman or seafarer. As a matter of common sense, the rig legs failed not because of the repairs, but despite of them. The defendant insurer had successfully proved that the proximate cause of the loss had been the inherent vice in the inability of the rig legs to withstand the normal incidents of the voyage. The loss therefore fell within the “inherent vice” exclusion clause and the claim failed.

The decision underlines the low threshold that an insured must attain when insurers contend that a loss is “inevitable”: the insured need only establish that there is a degree of uncertainty as to whether an event would happen (or not). However, although the burden of proving that a loss falls within an exclusion clause is on the insurer, in this case they successfully relied on the “inherent vice” exclusion to decline to pay the claim. The court dismissed the rig owners’ claim even though, on the facts, the concerns relating to the potential failure of the rig legs were discussed between the parties before the voyage commenced.

Further reading: Global Process Systems Inc and another v Syarikat Takaful Malaysia Berhad [2009] EWHC 637 (Comm)