Marine Insurance | If Ship Is Sent To Sea In Unworthy State, Insurer Not Liable For Any Loss Due To Unseaworthiness : Supreme Court

The Supreme Court recently held that in marine insurance, if the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.  It also observed that the mere knowledge of an insurer about a breach of warranty does not automatically equate to a waiver unless explicitly stated.

The Court held that an insured party seeking insurance coverage based on a Classification Certificate for a vessel must proactively bring any shortcomings or defects to the attention of the Classification Society before the certificate is issued. This is important as the insurance coverage is based on the assumption that the Classification Society has diligently assessed all aspects before issuing the certificate.

The court observed, “In view of the warranty requirement, the assured is expected to bring to the notice of the Classification Society the shortcomings or the defects if any, before the issue of such Class Certificate since the insurance coverage to be provided by the insurer is based on such Class Certificate which is assumed to have been issued by the Classification Society.”

The bench comprising Justices AS Bopanna and Justice MM Sudresh was hearing an appeal from NCDRC which refused to grant a maritime insurance claim of 16 crores to the appellant who lost the vessel and his cargo in an accident.

In this case, the appellant did not disclose previous damage to the main port engine while obtaining class certification.

The court observed “taking note of the provisions relating to warranty and the manner in which the Classification Certificate is issued, in the instant facts the appellant had failed to establish that the warranty class had not been breached by them. In that circumstance, we are of the opinion that the NCDRC having considered the relevant aspects of the matter in its correct perspective has arrived at its conclusion, which would not call for interference.”

Therefore, the Supreme Court upheld the order of NCDRC and dismissed the appeal.

BACKGROUND OF THE CASE

In this case, the appellant had obtained a maritime hull insurance policy for his vessel from the respondent(insurer) for 8 crores between 2005-06.

In 2006, there was damage to the main port engine. The Surveyors conducted an inspection and found that it was beyond repair. But since the replacement time was 6 months and there was an urgent commercial requirement, the engine was temporarily repaired. The respondent issued 1 crore rupees for replacing the engine crankshaft.

Now the appellant entered obtained a fresh policy for 2006-07 from the respondent. American Bureau of Shipping conducted a survey on the vessel and issued a class certificate dated 19.10.2006. Unfortunately on 3.12.2006, the vessel was struck by a tug boat and it sank.

The appellant claimed 8 crores from the respondent who appointed a surveyor to assess the loss. The surveyor found that the appellant had not told ABS about the previous damage to the main port engine. It also informed that if the vessel undergoes any damage and it is not reported to the class, then the class certificate would automatically be suspended.

Meanwhile, the previous surveyors after the 1st accident gave their final report in 2007 stating that it's unlikely that the vessel would be recovered, therefore there’s no point in permanent repairs and they should recover 1 crore rupees given earlier.

SUPREME COURT’S ANALYSIS

Based on a perusal of provisions of the Marine Insurance Act, of 1963, the Court opined that in cases where the ship is dispatched to sea in an unfit condition, and the insured party is aware of this, then the insurer has no liability for losses. Here, the classification certificate issued by a Classification Society assumes importance since it attests to the ship's compliance with specific safety and operational standards.

The Court clarified that if defects in a vessel were not reported to the Classification Society prior to the issuance of a Classification Certificate and later it is discovered that these defects were concealed and warranty conditions were not fulfilled, the very basis of the Classification Certificate is compromised

The Court noted that apart from the insurer being aware that repairs were done and a voyage was planned due to a waiting period for engine replacement, there is no evidence that the replacement of the engine had been waived before issuing the current insurance policy. Therefore, when the insurance company used the Class Certification to provide the policy, there was no clear indication of waiver either explicitly or implicitly.

The Court observed “Though the immediate voyage with repairs had been brought to the knowledge of the insurer, the replacement was to be made in due course. The entire onus cannot be on the insurer to check as to whether subsequently the engine had been replaced by utilising the amount received. In such situation when the replacement, in fact was not made, the onus was entirely on the appellant to bring it to the notice of the Classification Society and in that circumstance when the Class Certificate was issued, the warranty class had in fact been violated by the appellant and the exclusion as indicated would apply and make it invalid.”

The court also underscored the foundational role of trust and transparency in policy issuance, emphasizing that parties involved must act in good faith to maintain the integrity of the contract. The court highlights that the appellant could have informed the respondent about the non-utilization of the advance receipt. This could have been coupled with an offer to return the sum or mutual consent to retain the amount for future use when the engine crankshaft became available. The court indicated that adopting such a transparent approach would have provided the appellant with a legitimate platform to present their case.

The court added “When we have noted that the issue of policy is based on trust, the natural conduct of the appellant ought to have been to come clean on this aspect before the issuance of subsequent policy by informing the respondent of non-utilization of the advance receipt, offer to return the sum or with consent retain it to be utilized when the engine crank shaft was available. Only if such course was adopted, the appellant could have been heard to put forth such a plea, not otherwise”.

Case title: Hind Offshore Pvt Ltd v. IFFCO General Insurance Co. Ltd.

Citation: 2023 LiveLaw (SC) 640

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