It will be remembered from Section 33, sub section (3) of M.I.A. 1906 that if a warranty is not exactly complied with, then subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach, but without prejudice to any liability incurred by him before that date. It does not matter whether it is material to the risk or not, thus where a vessel is warranted neutral, and is lost by a peril of the sea. Underwriters are not liable if it can be shown that she was not neutral.
Section 34 of the Μ.I.Α., 1906, deals with the question of breach of warranty further:
34. (1) Non-compliance with a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law.
(2) Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss.
(3) A breach of warranty may be waived by the insurer.
An example of sub-section (1) would apply if the vessel was “warranted armed” during war-time, and subsequently peace was declared. Also, quite naturally, the assured cannot be expected to break a law which subsequently comes into operation in conflict with a warranty.
As it is immaterial if a breach of warranty is remedied before loss, the insurer is nevertheless discharged from liability as from the date of the breach. However, a breach of warranty can be waived by the insurer, and frequently provision is made in the policy for payment of an additional premium e.g. the Institute Warranties, or “warranted no Black Sea, or held covered”. However, the insurer is not entitled to waive the implied warranty of legality.
It is convenient at this point to refer once more, recalling that this concerned a vessel which was insured against war risks with a mutual club whose rules empowered the directors to declare prohibited areas. These areas were of such extreme danger that it was not considered acceptable by the club that they should cover vessels entering them, and the insurance was deemed to contain a warranty that the member would comply with the prohibitions. However, if an owner required covering his vessel while in such an area, the insurance would be specially arranged with the club on a facultative basis.
In 1982, during hostilities between Iraq and Iran, the vessel was proceeding to Bandar Khomeini, a port within the prohibited area at the north end of the Gulf, when she was struck by Iraqi missiles, ultimately being declared a constructive total loss. Although the club was aware that the vessel was trading in a prohibited area, no application was received by them to cover the extra risk, and they rejected the claim for an indemnity in respect of her loss. Nevertheless there was a dispute with the bank mortgagees, as assignees of the policy, who asserted that the club should have notified them that the vessel was trading uninsured, this being a requirement of a letter of undertaking given by the club to the bank.
In the proceedings which followed the Court of Appeal arrived at a rather curious decision about the effect of a breach of warranty. They ruled that such a breach did not have the effect of automatically bringing the contract of insurance to an end; it entitled the insurer to treat the contract as at an end if he so chose, but the matter was one for his choice. The club could not he said to have ceased to insure the vessel in accordance with the rules until they had formed an opinion whether there had been a breach of warranty or not.
The Courts, however, did not agree with this analysis, delivering the unanimous verdict, stated that the words of S.33 (3) of the Act were clear. They showed that discharge of an insurer from liability is automatic and does not depend on any decision by the insurer to treat the contract or the insurance as at an end, though; under S.34 (3) the insurer may waive the breach of warranty. They agreed that once the vessel entered into a prohibited area she was, in ordinary business terminology, and in truth, uninsured, and so the club had ceased to insure her within the meaning of the letter of undertaking. The assignees were entitled to damages.
The true position, therefore, is that if there is a breach of warranty the cover ceases to be applicable unless the insurer subsequently affirms the contract rather than treat the occurrence as a breach of the contract by the assured. Section 34 (3) allows the insurer to waive the breach and pay for any subsequent casualty, subject to the payment of whatever additional premium may be involved.
American case history has a remarkable similarity to the decisions in the English Courts, it will be found that the general rule arising out of American cases is also that a warranty in a contract of insurance must be literally complied with, and that a breach of the warranty releases the Underwriter from liability regardless of the fact that compliance with the warranty would not have avoided the loss.
The Statement of General Insurance Practice, quoted in Chapter III, binds Underwriters, except those on marine and aviation policies, not to repudiate liability unreasonably on the grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach. Whether or not marine Underwriters will feel obliged to follow this practice will depend on individual circumstances, and, to some extent, on the brokers, who have a strong sense of justice and fair play.
Takis Kalogerakos
Marine Underwriter
