On 31 May 2010 the Supreme Court of Appeal of South Africa dismissed the appeal of Lloyds of London Insurers against the decision of the Cape High Court awarding Classic Sailing Adventures payment of its claim for the insured value of the Motor Yacht “Mieke”.
The matter should be of interest to vessel owners, insurers and brokers alike operating in the South African marine environment not least because it is a David versus Goliath victory where a local vessel operator being part of the Balobi Group succeeded against the insurance giant, Lloyds of London.
Of importance was the upholding of South African legislative provisions “designed to protect insured parties” from insurers who attempt to escape liability by the raising of technical defenses not relating to the cause of the loss.
The MY “Mieke” was originally built in 1997 as a fishing vessel, but was later converted to a luxury charter yacht in 2003. On 18 September 2005 the vessel sank about 58 nautical miles off the coast of Mozambique.
Having submitted a claim against its insurers, a Lloyds syndicate, the insurers repudiated liability. The vessel owners had no other option but to institute action out of the Cape High Court against the insurers. The vessel owners had the onus of proving that the loss of the vessel was caused by a peril insured against. The insurers raised several technical defenses for which they bore the onus.
This article focuses on the technical defenses raised by the insurer and the Court’s decisions and analysis of the law relating to such defenses.
English Marine Insurance Act Versus South African Short Term Insurance Act
In terms of the hull policy the parties agreed that the applicable law was English Law and that South African Courts would have jurisdiction. Lloyds in particular relied on sections of the English Marine Insurance Act of 1906 in support of its special defenses. A question paramount to the determination of such special defenses was, to the extent that there is inconsistency or a conflict between the English Marine Insurance Act and the provisions of the Short Term Insurance Act, which law governs?
Firstly, the Supreme Court of Appeal held that a choice by parties to a contract of the governing law is valid, however, the legality arising from such choice of governing law is a question to be determined by the law of the Court having jurisdiction. The Court held that mandatory legislative provisions of the law must apply and cannot be excluded especially where the action against Lloyds is brought in terms of the statute in question, being the Short Term Insurance Act. Furthermore, the South African Short Term Insurance Act is applicable to marine insurance by virtue of the definition of a “short term policy” stated therein which expressly includes insurance of a vessel.
The Court further referred to convincing argument that where the law of the Court having jurisdiction is “designed to protect the weak party in contractual negotiations, the chosen law, if it is inconsistent, should not prevail”.
A further approach adopted by the Court was that where “public policy and interest” would be prejudiced, statutory provisions cannot be waived by a party by the choice of another system of law.
In particular sections 53 and 54 of the Short Term Insurance Act are provisions designed to protect the insured parties. The Court held further that “it should not be open to the parties to contract out of the application of the provisions of that statute by choosing another system of law to govern their contracts”.
In referring to inter alia Swiss and German Private International Law, the Court proclaimed that “mandatory interventions” cannot be contracted out of as such interventions are “norms employed by the State to regulate private relationships in the public common interest while pursuing socio-economic tasks”. The Court further compared these norms to the values of our Constitution, and then further recorded that the counsel for Lloyds in this matter conceded that the parties would not have been able to contract out of the provisions (“and thus the norms and values”) of the Constitution. The conclusion is that the protection afforded to insured persons by the Short Term Insurance Act (on the same basis as the norms and values of the Constitution) cannot be avoided by means of contractual waiver.
Furthermore, the Court referred to other “strong indications” that the Short Term Insurance Act should prevail where inconsistent with the English Insurance Act. In particular the action against Lloyds was instituted in terms of the provisions of the Short Term Insurance Act and Lloyds in turn is regulated by the Short Term Insurance Act in respect of the placing of insurance in South Africa. In addition, Lloyds relies extensively on other South African statutes such as the Merchant Shipping Act and the Safe Manning Regulations in the constitution of its technical defenses. Therefore the Court concluded that “it is difficult to discern why Classic Sailing should be bound by the provisions of those Acts and not entitled to the benefits conferred by those of the Short Term Insurance Act”.
The Court found that the most definitive answer was to be found in the Admiralty Jurisdiction Regulation Act (“AJRA”) which governs the prosecution of maritime claims in South Africa with marine insurance constituting a category of maritime claim. In particular the Court referred to Section 6(2) of the AJRA which in effect states that the application of English Law in the determination of any dispute “shall not derogate from the provisions of any law of the Republic applicable to any of the matters contemplated…”.
Accordingly, the Court held that Sections 53 and 54 of the Short Term Insurance Act applied to the contract of insurance in this matter and to the extent that the English Marine Insurance Act of 1906 is inconsistent with such statutory provisions it is not applicable.
Test of Materiality
Accordingly, when determining the non-disclosure defense raised by Lloyds, the Appeal Court could apply the test referred to in Section 53 of the Short Term Insurance Act rather than the test as set out in Section 18 of the English Marine Insurance Act. The main difference between the two tests is that in terms of the Short Term Insurance Act provisions, the test of materiality is based on what a “reasonable prudent person” would decide as relevant information to be disclosed rather than as in the English Marine Insurance Act what a “prudent insurer” would determine as material when fixing a premium or taking the risk. The South African test is intentionally weighted in favour of the insured and upholding the cover.
In applying the South African test, the Court held that there was no material non-disclosure.
Implied Warranty of Legality
Another technical defense raised by Lloyds was the applicability of Section 41 of the English Marine Insurance Act which states that “there is an implied warranty that the adventure insured is a lawful one, and that, so far as the insured can control the matter, the adventure shall be carried out in a lawful manner”. Lloyds’ argument was that the “Mieke” yacht sailed in an unlawful manner, contrary to the provisions of the Merchant Shipping Act in that the Master onboard the vessel did not have the required certification provided by the regulations and there was a breach of the stability provisions. As well as finding that in fact no illegality was committed, the Court further found that Section 54(1) of the Short Term Insurance Act was not consistent with Section 41 of the English Marine Insurance Act and accordingly Section 54(1) of the South African statute should prevail. Section 54(1) relates to the validity of contracts and states that “a short term policy, whether entered into before or after the commencement of this Act, shall not be void merely because a provision of a law, including a provision of this Act has been contravened or not complied with in connection with it”.
As such, even if there were contraventions of the Merchant Shipping Act, the aforesaid Section of the Short Term Insurance Act provides that the insurance policy would not be made void merely because of a provision of a law had been contravened.
Therefore the important finding by the Supreme Court of Appeal was that Section 54(1) of the Short Term Insurance Act precludes Lloyds from relying on any breach of the implied warranty introduced by the English Marine Insurance Act.
The Cause of Sinking
The balance of the matter related to the cause of the sinking of the vessel and whether such cause was a peril insured against. Both the Cape Town High Court and the Appeal Court agreed with the version argued by the insured based on the factual and expert evidence that the sinking of the vessel was caused by a latent defect in the hull of the vessel, and that this cause was covered by the policy.
In the circumstances, Lloyds has been ordered to pay the full capital, interest (from 18 September 2005) and legal costs of not only the plaintiff vessel owner, but also the brokers who the plaintiff was forced to join as parties to these proceedings.
It is submitted that the Supreme Court of Appeal’s decision will have an impact on the placing, application and interpretation of marine insurance policies in South Africa, particularly where the policy stipulates the choice of law being English Law.
Perhaps, more importantly from a jurisprudential perspective, the decision appears to be a positive step in the upholding of South African legislative provisions designed for the protection of public interests against the provisions of a foreign statute promulgated over a hundred years ago, which has certain provisions designed to decline cover rather than uphold it.