Thor II judgement which reviewed the use of valued and unvalued policies
IN THE HIGH COURT OF JUSTICE
QUEEN?S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 14th January 2005
THE HONOURABLE MRS JUSTICE GLOSTER DBE
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THOR NAVIGATION INC.
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INGOSSTRAKH INSURANCE COMPANY LTD.
SCHWARZMEER UND OSTSEE VERSICHERUNGS-AKTIENGESELLSCHAFT
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Mr Stephen Kenny (instructed by Holman Fenwick and Willan) for the Claimant
Mr Huw Davies (instructed by Hill Taylor Dickinson) for the 1st and 2nd Defendants
Hearing dates: 12, 13, 14 and 15 July 2004
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I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mrs Justice Gloster DBE:
1.This is the trial of certain preliminary issues ordered to be determined by Cresswell J at the Case Management Conference on 5th March 2004. The parties agreed that I should also determine certain additional preliminary issues.
2.Once these preliminary issues are determined, the parties intend to attempt mediation to resolve the balance of their dispute. The hope is that the answers to these preliminary issues will assist with the mediation.
3.The estimated length of trial was 3 days with half a day estimated reading time. In fact the trial lasted 4 days (12, 13, 14 and 15 July 2004). There were 2 live witnesses who gave evidence and 2 experts who also gave evidence. There were a number of files of documentary evidence and numerous authorities referred to. Opening skeleton arguments ran to over 30 pages on each side and there were extensive written closing submissions.
4.The claim is made by the Claimant, Thor Navigation Inc. ("Owners"), owner of the vessel "THOR II" ("the Vessel"), under two fleet policies of hull and machinery insurance insuring the Interglobal fleet. The first policy, dated 11 July 2002, was issued by the First Defendant, Ingosstrakh Insurance Company Ltd ("Ingosstrakh"), covering 40% of the risk; the second policy, dated 29 June 2002, was issued by the Second Defendant Schwarzmeer Und Ostsee Versicherungs-Aktiengesellschaft ("SOVAG"), covering 60% of the risk. I shall refer to the First and Second Defendants collectively as "Insurers".
5.Ingosstrakh is a Russian joint-stock company and has been a leader in the Russian insurance market for 55 years, including the marine hull insurance market. SOVAG is a German company owned by Ingosstrakh. Although SOVAG took 60% of the risk, this business was led at all times by Ingosstrakh. Mr Semenkov, a director of Ingosstrakh?s marine hull ocean going department, was the individual responsible for agreeing the terms on which Insurers were prepared to offer and provide cover for Owners? vessels (including the Vessel).
6.Topmar Shipping Corp SA ("Topmar") acts, amongst other things, as a producing broker for Ingosstrakh in Greece. The agency relationship began in 1997. Topmar (acting primarily by Mr Krasnokutskiy and also by Mr Hallak) acted as brokers for Insurers in relation to the placement of this business, their role being that of a conduit between Insurers on the one hand and Owners and their brokers on the other.
7.Owners, a Liberian company, own the Vessel which operates as part of a fleet of vessels managed by Interglobal Marine Agencies ("Interglobal"). European Link SA ("Link") acted on behalf Interglobal and Owners in the placement of this business. The individual at Link who was concerned with the placement was Mr Myrianthopoulos.
8.Ingosstrakh writes business in a number of international markets, not just Russia. Most of its international business comes from London, Greece, Norway and Germany. About 50% of the hull and machinery policies written by Ingosstrakh are written on an unvalued (as opposed to valued) basis although the percentage figure varies from market to market. In the Russian market the figure is more than 90%, in the Greek market it is between 80-90%, whereas in the London and German markets it is approximately 5%. The majority of Ingosstrakh?s international business incorporates Institute Time Clauses ? Hulls, clause 280, 1/11/95 (which is expressed to be subject to English law and practice) and is subject to English jurisdiction.
9.The policies gave hull and machinery cover in materially identical terms for a period of 12 months from noon on 29 June 2002. They set out, in respect of each vessel insured, brief details of the vessel, its owners, the particular terms of cover applicable to that vessel, and a "sum insured" for each. In particular, the Vessel was listed with a "sum insured" of US$1.5m and was subject to "Institute jurisdiction clause 358 1/11/81." Cover for the Vessel was subject to the Institute Time Clauses ? Hulls 1/11/95, as amended by various other terms including the following: "For Thor II conditions are amended to be free from particular average unless caused by fire, grounding, collision, stranding, lightning, explosion including 4/4 RDC".
10.On 15 September 2002 the Vessel suffered a casualty: she broke her intermediate shaft, causing further damage to her main engine. The vessel was immobilised, and had to be towed to Piraeus. At Piraeus, the vessel was inspected, and repair specifications were drawn up and sent to three repair yards. The repair yards? quotations indicated that the costs of repairs would exceed US$2m. Owners claimed for a constructive total loss and gave Notice of Abandonment (which was declined).
11.On 12 November 2002 the Insurers gave notice that they believed that the Vessel could be repaired for less than her sum insured (but gave no details). On 14 November 2002 Owners sold the vessel for scrap.
12.Insurers now claim that the policies were unvalued policies. Owners deny this; but assert that, if the policies are, on their true construction, unvalued policies, then Insurers are estopped from so contending, alternatively that the policies ought to be rectified.
13.The Preliminary Issues for the Court?s determination are as follows:
1.whether the hull policies the subject of the claim were as a matter of construction valued or unvalued policies;
2.whether Insurers are estopped from contending that they are unvalued;
3.whether the policies should be rectified;
4.on the assumption that the policies are unvalued, what the repaired value of the Vessel would have been (for the purpose of ascertaining whether she was a constructive total loss); (this has now been agreed by the expert valuers to be US $ 900,000, so no longer needs to be determined;)
5.a determination in principle, on the assumption that the policies are unvalued, of the measure of insurable value payable to Owners if the vessel is ascertained to be a constructive total loss.
Construction of the policies
14.Section 27(1) of the Marine Insurance Act, 1906 expressly provides that a (marine) policy may be "valued or unvalued". If the policy is valued, then the value fixed by the parties is conclusive of the insurable value of the subject matter insured (section 27(3)). Section 27(2) provides that:
"A valued policy is a policy which specifies the agreed value of the subject matter insured."
15.So the burden rests on the parties to specify the agreed value in the policy if it is to be regarded as valued. Section 28 defines an unvalued policy as one which "does not specify the value of the subject matter insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained".
16.It was common ground before me that whether a policy is valued or unvalued is a matter of interpretation of the particular contract; see para 28-7 of The Law of Insurance Contracts by Clarke and para 1-15 of MacGillivray on Insurance Law (10th ed). It was also common ground that the parties? intentions are to be objectively assessed to determine whether they intended to (1) place an agreed value on the subject matter insured or (2) just limit the insurer?s liability to a stated maximum and that the ordinary principles of construction, for establishing the intentions of the parties, objectively ascertained, applied. Thus, adopting the approach of Lord Hoffmann in ICS v West Bromwich BS  1 WLR 896 at 912-913, the Court must ascertain the meaning "which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract"; that background knowledge includes "anything which would have affected the way in which the language of the document would have been understood by a reasonable man." In particular:
"the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd.  A.C. 749."
See per Lord Hoffmann in ICS v West Bromwich BS (ibid) at 912-913.
Accordingly, the critical issue of construction which I have to decide is whether, although the policy makes no express reference to "an agreed value", nonetheless the reference to a particular "SUM INSURED" for each vessel is, in the context of these particular policies, to be regarded as a specification of the agreed value of the vessels or whether, in the words of section 28, the policies, subject to the limit of the sum insured, leave the insurable value to be subsequently ascertained.
Normally, words such as "valued at", or "so valued", or something similar, are used. However, as Thomas J (as he then was) stated in Kyzuna Investments Ltd v. Ocean Marine Mutual Insurance Assoc (Europe)  1 Lloyd?s 505, the words "agreed value" or "valued at" need not be used to create a valued policy, "provided the intention of the parties is clear that there is a specified agreed value, proposed by the assured and accepted by the underwriter" (p.508 rhc ? principle (3)). In other words, and as required by section 27(2) of the Act, the parties have to make their intention clear that they are specifying an agreed value. By contrast, "The use of the term "sum insured" will normally indicate the amount for which the subject matter is insured and not as specifying the agreed value" (p.509lhc ? principle (4)). At p.510lhc Thomas J reiterated the point by saying in relation to the words "sum insured" that "far from meaning the value has been agreed, this ordinarily means the sum is the ceiling of recovery".
The principles of law applicable to determining whether a policy of marine insurance is a valued policy, or an unvalued policy, are clearly summarised by Thomas J in Kyzuna as follows:
"The applicable principles of law were not in dispute and can be shortly summarised.
(1) Section 27(2) of the Marine Insurance Act 1906 defines a valued policy as: ?A valued policy is a policy which specifies the agreed value of the subject-matter insured.?
(2) At the time the common law was codified by the Act, the common form of marine policy (the SG Form set out in Sch 1 to the Act) contained the following provision on value:
"The said ship, etc, goods and merchandises etc.., by the Act, the concerns the assured by agreement between the assured and the assurers in this policy, are and shall be valued at?."
The editors of Arnould on Marine Insurance (16th edn, 1981) commented that that clause was also usually contained in every form of marine policy in use in the UK.
The current form of marine policy now in general use (MAR91) and which came into general use with the revision to the policy form and Institute Clauses in the early 1980s contains a schedule where the name of the insured, vessel and subject matter are to be set out; this also sets out a space for ?agreed value (if any)? and ?amount insured hereunder?.
Thus the standard forms of marine policy allow for agreement as to value by making specific reference to the value as an agreed value in accordance with s 27(2) of the Marine Insurance Act.
(3) It is clear from a number of cases that the words ?agreed value? need not be used; for example, it appears to have been common to use the term ?valued at? on a slip. In Wilson v Nelson (1864) 33 LJQB 220 a policy on the SG Form contained after the words ?are and shall be valued at? the words ?as under?. The policy then concluded with the words ?1,300l. on freight?. The court held that it was not a valued policy; the sum of ?1300 was no more than the sum insured. Blackburn J said (at 222):
?? and in all the policies I have ever seen, I think I may say that the invariable practice is, when it is intended that the policy shall be "valued," after stating that the sum insured and the thing insured, to add "valued at the same," or at so much, adding the same or a greater sum.?
It is not essential that the words ?valued at? are used, provided the intention of the parties is clear that there is a specified agreed value, proposed by the assured and accepted by the underwriter. I agree with the view expressed in a footnote to Arnould para 424 which states: ?Yet if the intention of the parties is clear the policy will be regarded as valued notwithstanding that the words "valued at" are not used.? The editors cite as authority for that proposition the decision of Wright J in Loders & Nucoline Ltd v The Bank of New Zealand (1929) 33 Ll L Rep 70; but there is nothing, in my view, in that case which supports the proposition. However the proposition must, self-evidently, be right.
(4) The use of the term ?sum insured? will normally indicate the amount for which the subject matter is insured and not as specifying the agreed value. There are a number of authorities that make this clear. The judgments in Wilson?s case draw a careful distinction between the sum insured and what is required if there is to be a valued policy. In British Traders? Insurance Co Ltd v Monson (1964) 111 CLR 86 the High Court of Australia had to consider a policy which contained insuring words that stated (at 88):
?? the liability of the Company shall in no case exceed in respect of each item the sum expressed in the said Schedule to be insured thereon or in the whole the total sum insured hereby ?
THE PROPERTY INSURED SUM INSURED
As per schedule attached hereto and incorporated herein ?5,318
Total Sum insured ?5,318?.
The High Court stated that a somewhat faint attempt had been made to suggest the policy should be construed as a valued policy; they held it was not. In contrast in Elcock v Thomson,  2 KB 755, the policy, after setting out the ?sum insured?, went on specifically to provide that this sum was accepted by the underwriters and the assured as being the true value of the property insured. The current leading textbooks, to which I was referred, all refer to the use of the term ?sum insured? as being the maximum amount insured under the policy or the ceiling on recovery. For example in Dr Malcolm Clarke?s The Law of Insurance Contracts (3rd edn, 1999) para 28-7 he refers to the ?sum insured? as being a ceiling on recovery which does not make the policy a valued policy. Professor Merkin in Colinvaux Law of Insurance (7th edn, 1997) para 1-15 refers to the sum insured as the amount at which the insurers? liability is limited. Professor Rhidian Thomas in his The Modern Law of Marine Insurance (1996) draws the distinction between the use of the term the ?sum insured? as a ceiling to the liability of underwriters and the agreement to a valued policy.
I was also referred to the decisions in Blascheck v Bussell (1916) 33 TLR 74 and Re Freesman and Royal Insurance Co of Canada (1986) 29 DLR (4th) 621 where the courts took the view that the sum stated in the policy was the sum insured and not an agreed value.
(5) It is common for a policy of marine insurance to be a valued policy. There are at least two principal reasons why such policies are used. Agreement on valuation avoids disputes over valuation in the event of loss (see Barker v Janson (1868) LR 3 CP 303 especially at 307 per Montague Smith J). Although under s 27(4), an agreed value is not conclusive for the purpose of determining whether there has been a constructive total loss, the Institute Clauses have provided for many years that the insured value is to be taken as the repaired value. In many cases, this has the effect of making it more difficult for there to be a constructive total loss. In General Shipping and Forwarding Co v British General Insurance Co Ltd (1923) 15 Ll L Rep 175, Bailhache J set out some considerations why marine underwriters preferred agreed over-valuations of the hull.
(6) In policies where (as in this policy) the proposal is made the basis of the policy, any terms in the proposal which conflict with the policy are overridden by the conflicting term in the policy. The law was summarised by Lord Wright in Izzard v Universal Insurance Co Ltd (1937) LL.L.Rep. 121 at p.125 col 1,  AC 773 at 780:
?No doubt the proposal conditions and the express conditions of the policy must be read together, and, as far as may be, reconciled, so that every part of the contract may receive effect, but, if there is a final and direct inconsistency, the positive and express terms of the policy must prevail.?
(7) As the wording was put forward by the defendant underwriters, any ambiguity should be resolved against them."
In Quorum AS v. Schramm  1 Lloyd?s 249 Thomas J made clear that his decision in Kyzuna applied generally to all cases of marine insurance, reiterating that he had well in mind that it was common for a marine policy to be valued (see p.260lhc), and he restated the "well known distinction between an insured value and a sum insured" (see p.260rhc).
Counsel for Owners (Mr Stephen Kenny) submitted that, in the particular circumstances of this case, the approach of Thomas J in Kyzuna should be distinguished, because (he said) the policy in the present case is significantly different. First, he submitted, this case concerns a commercial trading vessel, whereas Kyzuna involved a pleasure yacht; the former vessels are, under English marine insurance practice, invariably insured under valued policies, whereas there is no such invariable practice in relation to yachts. Second, he submitted, that, in the policies with which this case is concerned, there are no general insuring clauses or special equipment clauses, of the type that influenced Thomas J in the Kyzuna case and that the policies contain very little by way of policy-specific wording. Third, he submitted, that, on the contrary, the scope of insurance in this case is defined, almost entirely, by reference to the Institute Time Clauses ? Hulls 1/11/95, amended in the case of the Vessel by the rubric: "free from particular average unless caused by fire, grounding collision, stranding lightning, explosion including 4/4 RDC" and that these Clauses contain numerous references to the vessel?s insured value.
In summary he submits, that, on their true construction, the relevant policies are valued policies for the following reasons:
(1) The policies, which are short, one- or two-page policies, incorporate (by reference) the Institute Time Clauses ? Hulls 1/11/95 ("the ITCH"), and the Institute English Jurisdiction Clause 358 1/11/91.The ITCH (in common with all the modern Institute Clauses) specify as follows:
"This insurance is subject to English law and practice"
(At trial it was not in dispute that this is a reference to English marine insurance practice.)
(2) The plain intent of the provision is to specify that any insurance on ITCH terms should be interpreted consistently with the practices and understandings of the English marine insurance market; see Arnould on Marine Insurance Volume 3 paras 9, 10, 14; O?May on Marine Insurance pp. 24-26; Rhidian Thomas, The Modern Law of Marine Insurance p. 53. The provision is designed to ensure consistency with English norms, even where these do not form part of English law, strictly speaking. Thus, the effect of the provision is that English practices, understandings and usages can be relied upon when seeking to construe the ITCH, and policies incorporating them. Further, these practices, understandings and usages are a key part of the factual matrix against which the policies have to be construed.
(3) In this case there is unanimous evidence that, at least in the English marine insurance market, there is an invariable custom or usage that trading vessels are insured on agreed values.
(4) The policies should not be construed as being inconsistent with that custom because the ITCH clauses specifically state that "This insurance is subject to English law and practice".
(5) Moreover "If there is an invariable, certain, and general usage or custom of any particular trade or place, the law will imply on the part of one who contracts ? upon a matter on which such usage or custom has reference a promise for the benefit of the other party in conformity with such custom or usage; provided there is no inconsistency between the usage and the terms of the contract": Chitty on Contracts (29th ed. 2004) p. 783 para 13-018. There is no inconsistency between the express words of the policies and that custom.
(6) The underlying assumption of the ITCH is that the insurance to which they attach is on valued terms. Thus, he submitted,
(i) Clause 19.1, "constructive total loss", provides that "In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value?" . Clause 19.2 then goes on to provide: "No claim for constructive total loss based on the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value?".
(ii) Even more clearly, Clause 11 of the ITCH ? "duty of assured (sue and labour)" ? assumes a valued policy. Clause 11.4 provides:
"When expenses are incurred pursuant to this Clause 11 the liability under this insurance shall not exceed the proportion of such expenses that the amount insured hereunder bears to the value of the vessel as stated herein, or to the sound value of the Vessel at the time of the occurrence giving rise to the expenditure if the sound value exceeds that value."
(iii) Clause 11.5 provides: "? if the Vessel be insured for less than its sound value at the time of the occurrence giving rise to the expenditure, the amount recoverable under this clause shall be reduced in proportion to the under-insurance" and clause 11.6 provides: "The sum recoverable under this Clause 11 shall be in addition to the loss otherwise recoverable under this insurance but shall in no circumstances exceed the amount insured under this insurance in respect of the Vessel."
(iv) There are other references to the vessel?s "insured value" in the ITCH: see Clause 1.5, 18.3, 22.1.1, 22.1.2. All of these are inconsistent with an unvalued policy.
(v) In the Kyzuna case, Thomas J felt able to disregard equivalent clauses in the Institute Yacht Clauses (clauses 16.3 and 17.2 of the Institute Yacht Clauses 1/11/85) as "standard clauses applicable only if there is an agreed value" (see p. 510 lhc). Where there is other language pointing clearly against the policy being valued, such an approach to construction is plainly necessary. However, here:
The insurance is on a trading hull, and the ITCH contain the substance of the insuring clauses of the policy;
The underlying assumption that the insurance is valued is more pervasive in the ITCH than in the Institute Yacht Clauses;
There is no other language pointing clearly against the policy being valued.
(vi) In these circumstances the "cogent submission" that the definition of Constructive Total Loss in Clause 19 of the ITCH, and the other references to "insured value" in those clauses, points towards a valued policy is much less easy to reject than it was in Kyzuna. On the contrary, once the invariable usage of the market is taken into account, it is clear from the incorporation of the ITCH that they were intended to be valued.
(7) Additionally, "a policy is more likely to be construed as a valued policy in cases in which a valued policy is most useful?"; see Clarke's The Law of Insurance Contracts (1999 edition) par. 28-7, adopted by Thomas J in Quorum v Schramm  1 Lloyd?s Rep. 249 at 260. In the case of a marine policy on hull, a valued policy is most useful, not only for the reasons set out in the Kyzuna above, but also because banks, and others who finance trading vessels, generally favour valued policies, because they ensure that, in the event of total loss, the recovery will be sufficient to discharge any mortgage debt. Underwriters also favour valued policies, not only because they make a constructive total loss less likely; but also because the underwriters commonly "rate" the premium charged at a percentage of the agreed value: the higher the agreed value, the higher the premium. In addition, the market valuation of a particular trading vessel is readily ascertainable by underwriters by reference to published material (e.g. Lloyds? Index). But the market valuation may not represent the true value of the vessel as a continuing source of income to her owner. By agreeing in advance the sum payable on a total loss, the owner can secure some compensation for the loss of his continuing source of income. Likewise, he submitted, difficulties of valuation arise when such a policy is unvalued.