Marine Insurance Warranties – Keeping it Simple

Steven Wise, Partner, Smyth & Co in association with RPC

The recent unanimous judgment of the Court of Final Appeal (the “CFA”) in Hua Tyan Development Ltd v Zurich Insurance Co. Ltd [2014] HKEC 1489 confirms that, pursuant to section 33(3) of the Marine Insurance Ordinance (Cap. 329) a breach of a marine insurance warranty will generally discharge an insurer from liability, whether or not the warranty is material to the risk.

In this case, the fact that the carrying vessel was clearly named in a contract of marine cargo insurance did not prevent the insurer from relying on a warranty that the vessel possessed certain characteristics set out in the cover note; such as (for example) a minimum deadweight capacity. Therefore, a breach of the warranty entitled the insurer to decline cover after the vessel and cargo were lost at sea.

The outcome in the case is no surprise; indeed, it is perhaps surprising that the highest court was troubled with it*. However, a number of points are worth noting.

  • Where a contract term is clear (particularly, in an insurance contract), little (if any) assistance is to be derived from considering the “factual matrix” of a contract (ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896; New World Harbourview Hotel Co. Ltd & Ors v ACE Insurance Ltd & Ors (2012) 15 HKCFAR 120).
  • An insurer could be prevented from relying on a breach of warranty in order to deny cover where (for example) the insurer has unequivocally waived its right to rely on the warranty; in practice, this is a difficult threshold for an insured to meet.
  • An insurer might also lose the right to rely on a warranty if it has actual or presumed knowledge of facts that contradict the subject matter of the warranty. That is a question of fact. Presumed knowledge is far from straightforward. However, the fact that particulars of the vessel's deadweight capacity can be verified by the marine insurer from information on the internet does not (of itself) support a finding of knowledge and does not affect the operation of an unambiguous warranty.
  • Cases at first instance (particularly, those involving specific industry sector experience) can sometimes take peculiar turns. For example, in the Hua Tyan case, the insured (claimant) succeeded at first instance and it was left to the appeal courts to get things back on track. This is not a criticism of the first instance judgment; rather, an observation that cases heavily laden with facts and what appear to be (on their face) complex points of law may be more straightforward than they seem.
  • One should not underestimate the inherent litigation risk in sometimes being misunderstood. As the Chief Justice noted in the Hua Tyan case (giving the final word of the courts):

    "Quite simply, the Deadweight Warranty was breached and there was no answer to that.”

* The appeal was made as of right pursuant to section 22(1)(a) of the CFA Ordinance. A right due to be removed by the Administration of Justice (Miscellaneous Provisions) Bill 2014.