Excepted Risks

Excepted Risks

1. Excepted perils

Generally, but not always, an excepted peril is a peril which would be included within an insured peril and would be covered by the policy but for the exception. That is, the excepted peril is often a sub-set of the insured perils. For example, the policy may provide cover for loss caused by fire but also provide that there will be no cover in the event that the loss is caused by a fire deliberately started.

On the other hand, there are exclusions – often broad in scope – which seek to delineate the boundary between the insured risks and the excluded risks. Such exclusions are not necessarily a sub-set of the insured risks. See, for example, the war risks and strikes exclusions in the Institute Time Clauses – Hulls (1/11/95), clauses 24 and 25.

Insurance exclusions need not necessarily be interpreted on a contra proferentem basis, because they are provisions which define the insured risk (Impact Funding Solutions Ltd v Barrington Support Services Ltd; Crowden v QBE Insurance (Europe) Ltd).

The most commonly encountered excepted perils are those set out in section 55(2) MIA, namely:

  • Loss caused by the assured’s wilful misconduct.
  • Loss caused by delay (compare sections 48 and 49 MIA).
  • Ordinary wear and tear.
  • Ordinary leakage and breakage.
  • Inherent vice of the subject-matter insured.
  • Loss caused by rats or vermin.
  • Injury to machinery not proximately caused by maritime perils.

Clause 4 of the Institute Cargo Clauses (A) sets out many of the above exceptions and add the following:

a) Insufficiency or unsuitability of packing.

b) Insolvency or financial default of the owners, managers, charterers or operators of the vessel (Ikerigi Compania Naviera SA v Palmer (The Wondrous)).

In addition, a marine policy may exclude cover for losses caused by ‘war’, ‘strikes’ or the detonation of an explosive or any weapon of war caused by a person acting maliciously or with a political motive.

See, for example, clauses 24–26 of the Institute Time Clauses – Hulls (1/11/95); clauses 6 and 7 of the Institute Cargo Clauses (A) (1/1/82) and (1/1/09). However, these risks can be expressly covered by ‘war risks’ insurance policies, etc.

There is commonly a nuclear war exception in the policies (see, for example, clause 4.7 of the Institute Cargo Clauses (A) (1/1/82) and (1/1/09); clause 27 of the Institute Time Clauses – Hulls (1/11/95)).

2. Wilful misconduct

If the loss has been procured by the wilful misconduct of the assured, then there will be no cover under the policy (section55(2)(a) MIA). It is not possible to contract out of this exception.

The misconduct must be of the assured. Where the assured is a corporation, the individual who is guilty of misconduct must be the alter ego or the directing mind and will of the company. The misconduct of the assured’s employees would not be sufficient to attract the exception (Red Sea Tankers Ltd v Papachristidis (The Hellespont Ardent)).

The misconduct of the master or crew will not prevent recovery if the loss is caused by a peril insured against (section 55(2)(a) MIA).

It is open to question whether the wilful misconduct must itself be a proximate cause of the loss or whether merely a contributing cause, if the assured is to be deprived of an indemnity.

Wilful misconduct is often clearly identified, but difficult to prove. It is an act committed by the assured deliberately with the intention of procuring the loss or recklessly not caring whether or not the loss results but appreciating the danger that a loss may result (compare National Oilwell (UK) Ltd v Davy Offshore Ltd). For example, where the assured deliberately sinks his or her vessel, the vessel will have been lost by the assured’s wilful misconduct.

It is not sufficient to show that the assured was negligent or pursued a voyage in the face of a known risk of loss (unless it could be said that the assured intended to bring about the loss of the vessel). 

In Patrick v Royal London Mutual Insurance Society Ltd the Court of Appeal, in construing a policy provision which excluded claims arising from ‘any wilful, malicious or criminal acts’, held that the assured will have acted wilfully if he or she was reckless as to the consequences of his or her act, that is, if he or she did something knowing that it was risky or not caring whether it was risky or not.

Where the policy is composite, the wilful misconduct of one co-assured will not prevent the other co-assured from recovering under the policy: Parker v National Farmers Union Mutual Insurance Society Ltd.

As to the burden and standard of proof in cases of wilful misconduct:

  • The insurer bears the burden of proof.
  • The standard of proof is the balance of probabilities, but given the seriousness of the allegation, evidence proving wilful misconduct must be clear and persuasive; it is sometimes said that the standard of proof approaches the criminal standard (‘beyond a reasonable doubt’).

3. Delay

Section 55(2)(b) MIA states that, unless the policy otherwise provides, the insurer will not be liable under a policy on ship or goods in respect of loss caused by delay, even though the delay is caused by a peril insured against.

This section only applies to policies on ship or goods. It does not for example apply to policies on freight or hire. However, the Institute Clauses often include such an exclusion.

4. Wear And Tear

This exclusion (section 55(2)(c) MIA) applies only to the wear and tear of the subject-matter insured and not of any other property.

Wear and tear refers to the ordinary use to which the subject-matter insured may reasonably be put. Loss or damage caused by wear and tear is therefore seen as inevitable and not fortuitous (compare rule 7 of the Rules of Construction in Schedule 1 of the MIA).

Wear and tear presupposes that the subject-matter insured is not defective; however, where the subject-matter insured is old or in a debilitated state, its general condition must be considered in determining the effects of wear and tear.

A latent defect caused by wear and tear is not covered by the Inchmaree clause.

5. Ordinary Leakage And Breakage

This excepted peril (section 55(2)(c) MIA) is concerned with the inevitable or ordinary breakages and leakages suffered by certain types of liquid or fragile cargoes (and is to be equated with wear and tear or inherent vice). It would be surprising if this excepted peril related to an insured vessel springing a leak, which in most cases must be considered an extraordinary leakage.

In De Monchy v Phoenix Insurance Co of Hartford, ‘leakage’ was defined as ‘any stealthy escape either through a small hole which might be discernible, or through the pores of the material of which the cask is composed.’ In this case, leakage was an insured peril.

This exception can be overridden by the parties’ agreement.

6. Inherent Vice

Loss or damage caused by inherent vice is an excepted peril (section 55(2) (c) MIA) (compare Bird’s Cigarette Manufacturing Co Ltd v Rouse, where the insured cigarettes were damaged by both internal and external causes).

‘Inherent vice’ refers to the risk of deterioration of the subject-matter insured as a result of its natural behaviour during the ordinary course of the contemplated voyage or the inability of the subject-matter insured to withstand the ordinary incidents of the contemplated voyage or the ordinary use of the subject-matter insured without the involvement of an external fortuitous event. 

In Global Process Systems Inc v Syarikat Takaful Malaysia Berhad, the Supreme Court held that the exception of inherent vice was limited to cases where the inherent vice was the sole cause of the loss or damage and no external fortuitous event participated in causing the loss or damage.

‘Inherent vice’ includes inadequate packaging. Insufficiency of packaging is an express exclusion under the Institute Cargo Clauses (A) (1/1/82) and (1/1/09).

However, like the other exceptions referred to in section 55(2)(b) and (c) MIA, the parties may agree that the policy covers losses caused by such perils.

  • The removal of this exclusion may be construed restrictively (Overseas Commodities Ltd v Style)
  • The ‘latent defect’ cover afforded by the Inchmaree clause is such an agreement to cover loss caused by inherent vice (The Caribbean Sea).
  • Similarly, an insurance against loss by ‘heating or sweating’ may be sufficient to displace the ‘inherent vice’ exception (Soya GmbH v White; CT Bowring & Co Ltd v Amsterdam London Insurance Co Ltd). An insurance against damage caused by ‘mould and mildew’, however, did not include mould and mildew caused by inherent vice (ED Sassoon & Co v Yorkshire Insurance Co; the Court of Appeal in this case held that the burden was on the insurer to prove inherent vice).

7. Rats And Vermin

This exception (section 55(2)(c) MIA) was introduced because it was considered that certain types of wooden vessel would inevitably suffer damage by reason of the gnawing of rats (Hunter v Potts, Hamilton, Fraser & Co v Pandorf & Co).

However, it is open to question to what extent this exclusion could today sensibly operate other than in respect of wooden vessels, such as yachts.

8. Injury To Machinery

This exception (section 55(2)(c) MIA) reflects the finding of the House of Lords in Thames & Mersey Marine Insurance Co v Hamilton, Fraser & Co

This exception is often displaced by the Inchmaree clause.

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