Marine focus: New Zealand Court of Appeal scrutinises an open cargo policy

JDA Co. Ltd and ors v AIG Insurance New Zealand Limited [2022] NZCA 532

The New Zealand Court of Appeal has just delivered its first-ever judgment on the operation of a marine open cargo policy and, in doing so, affirmed orthodox principles taken from English law.    

Facts

The case involved an open cargo policy issued to Automotive Technologies Limited (ATL), a provider of logistics-related services to exporters of used cars from Japan.  The coverage under the policy could be made available to those exporters, who could elect to take the insurance for local and international transits for cars being exported, including cover storage in Japan incidental to transit.  This was known as the AIMS scheme.

By 2018, the co-insurers of the scheme were AIG, Vero and NZI.  At the start of the 2018 policy year, ATL’s broker advised the insurers that an estimated 32,000 cars would be insured in that year.

Cover was available on either Institute Cargo Clauses (A) or (B) terms.  By virtue of the “Bound to Declare” clause in the policy, at the start of each month the details of all cars to be insuredwhich had been received into a pre-shipment holding yard during the preceding month, had to be declared to insurers and premiums paid accordingly, based on the nominated terms of cover.   Provided that there had been compliance with the policy terms, the insurers were bound to accept the declaration, with risk attaching retrospectively from the date that each car had been purchased.

In August and September 2018, large numbers of cars being held in pre-storage holding yards were damaged in typhoons that struck Japan, with a further typhoon being forecast.  This led to a very significant increase in the number of cars insured in September, including from exporters who either did not normally use the AIMS scheme or who only insured low numbers of cars.  The declaration provided to insurers of cars that had been insured in September was for 27,717 cars, not far short of the total number that had been expected for the whole of 2018. 

Insurers began investigating the basis on which ATL was making the insurance available to its customers, concluding that the policy terms were not being adhered to, and gave notice of cancellation of cover.

The hundreds of typhoon-damage claims were then reviewed, and a great many were declined.  This led to proceedings being issued by three representative plaintiffs on behalf of a number of other allegedly insured parties.

The Court of Appeal decision

After a five-day trial in the High Court, Justice Gault declined the exporters’ claim that they were entitled to indemnity under the policy.  The exporters appealed.

Justice Gault’s decision was upheld unanimously by the Court of Appeal.  The Court held that, in the first instance, exporters needed to demonstrate that they had intended to insure under the AIMS scheme at the time they purchased each car.  Only one of the representative plaintiffs could demonstrate the necessary intention, with the others choosing whether or not to insure on a case-by-case basis, depending on the terms of sale to an overseas buyer and the identity of the chosen carrier.  Often, their election to insure post-dated the attachment of risk, sometimes by significant periods.

Even where an intention to insure could be shown, it was a mandatory policy requirement that all insured vehicles be declared in the month after entry into a pre-shipment holding yard.  Very often, this was not happening, meaning that the insurers were not being provided with up-to-date key information regarding the extent of the risk to which they were exposed, and as to premium.  The Court agreed with the insurers that exporters were keeping their shipping and insurance options open or waiting for a sale on CIF terms before declaring and paying the premium.

The Court also agreed with the insurers that, despite not being expressed as a warranty, as a matter of interpretation the requirement to declare was a promissory warranty under section 34 of the Marine Insurance Act 1908.  A promissory warranty is one that must be exactly complied with, whether material to the risk, or not.  Failure to comply with the terms of a promissory warranty discharges the insurers from liability as from the date of the breach, and the insurers here argued that this was what had happened.

In response, the exporters argued that the declaration requirement was not a promissory warranty, but that if it was, they were saved by section 11 of the Insurance Law Reform Act 1977.  Section 11 relieves insured parties from the consequences of an exclusion or limitation provision directed at an activity likely to increase the risk but where there is no causal connection between the breach and the eventual loss. 

The Court agreed that the declaration requirement was a promissory warranty and that it had been breached by all of the plaintiffs.  It also said that, on its face, section 11 appeared inapplicable to section 34.  While not determining that issue, the Court accepted that declarations were not required because the absence of a declaration would increase the likelihood of loss.  Rather, their purpose was to allow insurers to calculate and invoice the premium, monitor their exposure, assess reinsurance arrangements and determine in advance of the next renewal whether the premium remained appropriate.  Hence, the policy term regarding the making of declarations was not a provision to which section 11 could apply.

In any event, the Court affirmed the rule in The Tiburon [1990] 2 Lloyd’s Rep 418, that where a declaration does not conform to the terms of the policy, no contract is formed.  Thus, there was no contract of insurance in place in relation to any vehicle not declared in the correct month, an issue which removed any right to cover from all of the representative exporters.

The exporters then relied on the Errors and Omissions clause of the policy to excuse their late declarations.  The Court rejected that argument, saying that the clause was directed at inadvertence and not at intentional non-declaration pending the sale of each car and the making of shipping arrangements.  It held that a decision to the contrary would have meant that the exporters were free to select against the insurers, despite the policy having been structured in a manner intended to prevent such behaviour.

Finally, it was confirmed by the Court that in marine insurance practice, a broker is ordinarily the agent of the insured and not of the insurer, this being different to the position in the fire and general market.  This conclusion likely means that section 10 of the Insurance Law Reform Act 1977, which deems “a representative of the insurer who acts for the insurer during the negotiation of any contract of insurance” to be the agent of the insurer, will not apply to marine insurance contracts negotiated via a broker.

Comment (Pauline Davies)

Pauline Davies, with Craig Langstone, was counsel for the insurers in the High Court and sole counsel in the Court of Appeal. 

Pauline comments that this case involved unusual facts and a bespoke wording, but the outcome was nevertheless reached through the application of ordinary principles of marine insurance, some of which have never before been considered in New Zealand.  The Court of Appeal has apparently recognised the need for international consistency in matters of international trade and so its decision is to be welcomed, particularly in its clarification of areas of apparent conflict with aspects of New Zealand’s domestic legislation.

Pauline Davies is a partner at Fee Langstone