Law of Insurance Warranties, The

Alastair Owen

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CHAPTER 2 The origin and history of warranties

Early marine insurance

2.1 The concept of marine insurance first appears to have been introduced to England in the thirteenth century by Lombardian merchants. This early form of insurance was based on the marine insurance that had been developed in Europe in the early part of the twelfth century. The Royal Exchange in Lombard Street was established under a Royal Charter in 1570; at this stage merchants themselves were the main providers of insurance. Despite its common heritage with insurance law in Europe, from the sixteenth century onwards the law in England began to diverge significantly from that on the continent. The Chamber of Assurances at the Royal Exchange, established in 1577, doubled as both an underwriting and arbitration centre and a register for marine policies.1 One of the earliest recorded London policies was issued in 1547 on the cargo of the vessel Santa Maria Venetia;2 the policy was written in Italian, but subscribed to by London merchants. The earliest known insurance claim was filed in the Court of Admiralty in 1524,3 and in the second half of the sixteenth century most insurance cases were decided in Admiralty courts. The first reported English judicial ruling upon a marine policy in the King’s Bench was in 1588. By the end of the sixteenth century the concept of Bottomry Bonds was well established; under such bonds the shipowner received a loan in advance of the voyage, on security of the vessel, to be repaid with interest if the vessel arrived safely within the agreed period; however, the assured would retain the benefit of the loan if the vessel was lost or repairs were required to complete the voyage.4 The Merchant Assurances Act 1601 established a special Court on Policies of Assurance. The Act, under which the Lord Chancellor was to appoint a standing commission, failed to work as intended and was amended in 1662, but judgements could be enforced against vessels and cargos. The Act lapsed and was replaced by a system of arbitration established under the Arbitration Act 1698. 2.2 The cost of the War of the Spanish Succession (the end of which was marked by the 1713 Treaty of Utrecht) was to some extent met by the South Sea Company which had been formed in 1711 with a charter from Queen Anne and which assumed a substantial proportion of the national debt. As part of the arrangements, the company was given exclusive trading

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rights in the Americas. The initial success of the company led to a number of attempts to raise capital on speculative, and often fraudulent, overseas ventures. Many of these were based around forms of insurance. The Bubble Act of 1720 was introduced in order to reduce these speculative ventures and funnel investment to the South Sea Company. In order to curb gambling, the Marine Insurance Act of 1746 effectively outlawed insurance where the policyholder held no interest in the subject of the insurance (an ‘insurable interest’). 2.3 Several provisions in the Bubble Act were directed at marine insurance. Royal Charters were issued to two corporations, the Royal Exchange Assurance and London Assurance, and conferred upon them the right to effect loans by way of bottomry. Until 1824, they remained the only joint-stock firms with such a charter.5 Legislation introduced in 1725 led to the chartered companies being able to plead partial loss only and face liability only for that sum. The Bubble Act was eventually repealed in 1825. There was nothing in the Act which prevented individuals from offering marine insurance, and indeed the Act included a specific allowance for ‘private or particular persons.’ In any event there remained a need for additional insurance capacity. This capacity was provided by shipowners forming associations or ‘Mutuals’; the owners contributed sums towards a common fund which would be used to pay any losses suffered by individual members: if the fund was insufficient, it could be supplemented by ‘calls’ on members for additional payments. Easily the most important of these associations was Lloyd’s, and Lloyd’s coffee shop became a focus for these underwriters. Although unintended, one of the consequences of the Bubble Act was to cement the dominance of Lloyd’s as the provider of marine insurance. By 1740 most of the marine underwriting in England was effected at Lloyd’s; in 1771 there were 79 subscribers at the coffee house, but by 1810 this had mushroomed to approximately 1500, of whom two-thirds were underwriters.

The origin of insurance warranties

2.4 Particularly in marine insurance policies, warranties were used extensively as risk control measures throughout the seventeenth, eighteenth and nineteenth centuries. The initial purpose of a warranty was to define the risk run by the insurers:6 if the risk was not as described, the insurers could avoid liability. Early litigation relating to warranties was nearly all marine related. A warranty in an insurance policy became recognised as an unconditional promise, breach of which discharged the insurer from all future liability. Some of the earliest examples of marine insurance warranties are found in cases arising from the War of Spanish Succession, utilising the phrase ‘warranted to depart with convoy.’7 The judgements in a number of instances were seemingly based on the assumption that compliance with the warranty was a condition precedent to recovery. In Jefferies v Legandra,8 the ship The Olive Branch was insured on a voyage from London to Naples and subject to a warranty that it would sail in convoy. The vessel set sail in convoy, but became separated in bad weather and was captured by a French warship. The court found that, while the warranty was intended

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for the entire voyage, if, as on the facts of the case, the insured vessel became separated from the convoy without the fault of the assured, then there was no breach of the warranty and the assured could recover. Merkin argues that the legal effect of a breach of warranty is not clear from the early cases, and suggests that the draconian effect of insurance warranties had not been established by the time of Jefferies v Legandra and did not become evident until the middle of the eighteenth century.9 In Jefferies, while the court accepted that, had the insured deliberately broken with the convoy, the insurers would not have been on risk, the court did not discuss whether the removal of cover would have applied to all risks, or only those likely to be mitigated by sailing in convoy. 2.5 In 1779 Lloyd’s adopted a standard form of wording for marine insurance which became known as the Lloyd’s SG Policy. This cumbersome policy, which remained in use until 1982, has been the butt of much judicial and practitioner criticism. The policy defined the insured perils, delineated the duration of cover and was supplemented by specific clauses, often in the form of warranties, restricting cover in various respects. The guiding principles of marine insurance evolved in the period 1756 to 1815, and Lloyd’s played a crucial role in this evolution. Reportedly, Lloyd’s underwriters accounted for a 96% market share in the period between 1720 and 1825.10 Over time, the insurer’s exposure was mitigated in a number of ways. The assured’s duty of utmost good faith encompassed the duty to disclose and not misstate material facts, but immaterial misstatement gave no actionable rights to the insurer. As a result the habit grew of the assured being required to warrant statements which, if breached, gave the insurer the right to treat the policy as discharged. The lack of effective communications and the resultant inability to prove cause led to assumption of an approach of strict liability under which proof of breach was sufficient to discharge the insurer. Absent specific provision, if the risk increased after the inception of the policy, underwriters were required to bear that risk. This in turn led to the introduction of both present warranties requiring, at the commencement to risk, strict compliance with statements made in the policy and future warranties, with which the assured was obliged to comply throughout the policy term. 2.6 The principle underpinning warranties was stated by Buller J in Blackhurst v Cockell; ‘It is a matter of indifference whether the thing warranted be or be not material; but it must be literally complied with; and if it be so, that is sufficient.’11 The warranty had to appear on the face of the policy: Pawson v Watson.12 In this case a representation was made concerning the number of guns with which a ship would be armed. This was not reflected on the face of the policy and the insurer was obliged to meet the claim, notwithstanding that the ship was not in fact armed in accordance with the representation. A warranty could be incorporated into the policy by reference in another document: Worsley v Wood.13 Ambiguity was, however, construed in favour of the assured: Le Mesurier v Vaughan.14 In the eighteenth century the strict nature of a warranty was re-enforced by a series of judgements; for example in Hore v Whitmore,15 where the sailing warranty required departure on or before 26 July, however

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sailing was delayed and the vessel was subsequently taken by a privateer, a risk expressly covered by the policy; nevertheless, because of the late departure, the insurer escaped liability. 2.7 Against a backcloth in which the nation was often in a state of war, convoy warranties, requiring vessels to sail in convoy, were commonplace. A key question was whether the warranty only related to the situation where initial compliance was required, or whether it imposed a continuing obligation. In Lilly v Ewer16 ‘sailing with convoy’ was held to constitute a continuing obligation. This case also confirmed that a vessel separated from the convoy by an insured peril was not in breach of the warranty to sail with convoy. The need for a convoy warranty was partially superseded by the Convoy Act 1798, designed to protect British shipping and their cargoes against capture. The Act in effect established a presumption that vessels should travel in convoy. A licence to sail without convoy could be granted by the Lord High Admiral, but if a licence was available, but was for some reason invalid, then the voyage was illegal and insurance coverage was lost: Ingham v Agnew.17 Insurers sought to protect themselves as far as possible by imposing a warranty of neutrality on the vessels of a nation not at war, usually using the formulation ‘warranted neutral ship and property.’ It is evident from Woolmer v Muilman_18 that non-neutral status from the outset meant that the risk did not attach. It was held in Lothian v Henderson19 that a statement as to the nationality of a vessel was to be construed as a warranty and thus took effect as an implied warranty of neutrality where that nation was neutral. In Rich v Parker,20 at the time of sailing the insured vessel did not have papers to support a warranty that she was American. The necessary papers were subsequently obtained and the vessel was seized after the papers had been secured; however, the initial breach was sufficient to release the insurer from liability as the breach of warranty terminated the risk with effect from the date of sailing and could not be cured. In Eden v Parkinson,21 however, it was held that the words ‘warranted a neutral ship and neutral property’ did not have a continuing effect. In this case the policy was entered into on 28 November 1780. On the commencement of the policy both the ship and her cargo, being Dutch, were neutral property. This remained the case when the vessel sailed and continued to be so until 20 December, when war broke out between Britain and Holland. At that point as the vessel and its cargo were Dutch, both ceased to be neutral property. The vessel was captured on 25 December and subsequently condemned as a lawful prize. In the words of Lord Mansfield the warranty was ‘that things stand so at the time; not that they shall continue.’ In Garrels v Kensington22 it was held that, although the loss of neutrality did not, of itself, release the underwriters, misconduct by the master and crew, leading to a loss of neutrality, provided a defence to a claim under the policy. When in 1807 America introduced an embargo on trade with England and France, the market responded by introducing provisions stating that relevant vessels, and/or cargo, were ‘warranted free from American condemnation.’23 War

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risks were essentially excluded from standard policies following the introduction of The Free from Capture and Seizure warranty in 1883. 2.8 In Bean v Stupart24 Lord Mansfield held that a warranty in the margin of a policy must be strictly adhered to, as if it had been written into the body of the document. In this case the insured warranted that the insured ship would carry ‘Eight nine-pounders with close quarters, six six-pounders on her upper decks, thirty seamen, besides passengers.’ The court held that 30 persons belonging to the ship’s company, including cook, surgeon, boys etc. were in this instance sufficient to meet the terms of the warranty in relation to manning levels. In Hibbert v Pigou25 a warranty required the insured vessel to sail in convoy. The ship missed the departure of the designated convoy, but met another navy vessel and sailed under its protection; however, this did not constitute a ‘convoy’ and accordingly the warranty was breached and the insurer escaped liability. Buller J observed:

It is immaterial whether the captain of the “Arundel” did all he could to procure a convoy or not; the warranty must still be complied with. Whether it was complied with or not is a question of fact, and the facts show that the ship departed without convoy.26

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