In Marine Insurance, If Ship Is Sent On Voyage In Unfit State, Insurer Not Liable For Losses: Supreme Court

In Marine Insurance, If Ship Is Sent On Voyage In Unfit State, Insurer Not Liable For Losses: Supreme Court

The NCDRC had refused to grant a claim of Rs.16 crores to the appellant who lost the vessel and his cargo in an accident

The Supreme Court has held that in marine insurance if the ship is sent to sea in an unworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

The bench comprising Justice AS Bopanna and Justice MM Sudresh observed that the mere knowledge of an insurer about a breach of warranty did not automatically equate to a waiver unless it was stated explicitly.

It held, “In view of the warranty requirement, the assured is expected to bring to the notice of the Classification Society the shortcomings or the defects if any, before the issue of such Class Certificate since the insurance coverage to be provided by the insurer is based on such Class Certificate, which is assumed to have been issued by the Classification Society.”

The Court was hearing the appeal on the National Consumer Disputes Redressal Commission (NCDRC) order, which refused to grant a maritime insurance claim of Rs.16 crores to the appellant who lost the vessel and his cargo in an accident. Importantly, the appellant had not disclosed the previous damage to the main port engine while obtaining the class certification.

The Court observed “The provisions relating to a warranty and the manner in which the Classification Certificate is issued, the appellant failed to establish that the warranty class had not been breached by them. Therefore, the NCDRC having considered the relevant aspects arrived at its conclusion, which would not call for interference.”

Thus, the Apex Court upheld the order of NCDRC and dismissed the appeal.

In 2005-2006, the appellant obtained a maritime hull insurance policy of Rs.8 crores for his vessel from the insurer.

In 2006, the main port engine was damaged, which the surveyors found was beyond repair. However, since the replacement time was six months and there was an urgent commercial requirement, the engine was temporarily repaired. The respondent issued Rs.1 crore for replacing the engine crankshaft.

The appellant then obtained a fresh policy for 2006-2007 from the respondent. The American Bureau of Shipping (ABS) conducted a survey on the vessel and issued a class certificate on 19 October 2006. But, on 3 December 2006, the vessel was struck by a tugboat and sank.

The appellant claimed Rs.8 crores from the respondent who appointed a surveyor to assess the loss. The surveyor found that the appellant had not told ABS about the previous damage to the main port engine. It also stated that if the vessel underwent any damage and it was not reported, then the Class Certificate would be suspended automatically.

Meanwhile, after the first accident, the previous surveyors gave their final report in 2007. They stated that it was unlikely that the vessel would be recovered. Therefore, there was no point in permanent repairs, and they should recover Rs.1 crore given earlier.

The Supreme Court cited the provisions of the Marine Insurance Act, 1963. It explained that if the ship is dispatched to sea in an unfit condition and the insured party is aware of it, the insurer has no liability for losses. The certificate issued by the Classification Society assumes importance since it attests to the ship's compliance with specific safety and operational standards.

The bench clarified that if defects in a vessel were not reported to the Classification Society prior to the issuance of a Classification Certificate, and later it was discovered that the defects were concealed and warranty conditions were not fulfilled, the basis of the certificate was compromised.

The Court noted, “Though the immediate voyage with repairs had been brought to the knowledge of the insurer, the replacement was to be made in due course. The entire onus cannot be on the insurer to check as to whether, subsequently, the engine had been replaced by utilizing the amount received.

It added, “When the replacement was not made, the onus was entirely on the appellant to bring it to the notice of the Classification Society. In that circumstance, when the Class Certificate was issued, the warranty class was violated by the appellant and the exclusion would apply and make it invalid.”

The Judges underscored the foundational role of trust and transparency in policy issuance, emphasizing that the parties involved must act in good faith to maintain the integrity of the contract.

The Court highlighted that the appellant could have informed the respondent about the non-utilization of the advance receipt. This would have come with an offer to return the sum or on mutual consent to retain the amount for future use when the engine crankshaft became available. It indicated that adopting such a transparent approach would have provided the appellant with a legitimate platform to present its case.

The Court added, “Only if such a course was adopted, the appellant could have been heard to put forth such a plea, not otherwise.”