Non-Disclosure and want of due diligence
Loss of Hire

Sealion Shipping Ltd & Anor v Valiant Insurance Co [2012]¹
Commercial Court, 20 January 2012

This case concerned a loss of hire claim by the owners of the “TOISA PISCES”, a support vessel used in connection with drilling operations in the Gulf of Mexico, and which at the relevant time was under charter to the Mexican oil company, Pemex. The vessel was capable of dynamic positioning, enabling her automatically to maintain her position above a wellhead, with the aid of computer controlled rotating bow and stern thrusters. The thrusters, in turn, were driven by electric motors, of which a key component was a cylindrical stator core, containing insulated copper wires.

On 25 February 2009, the vessel suffered a motor breakdown in one of the thrusters, caused by a short circuit in the port motor stator core. Pemex placed the vessel off hire, for which the Claimant owners pursued a corresponding claim under their loss of hire policy, equivalent to the policy limit of 30 days.

Insurers denied the claim and contended that they were entitled to avoid the policy on grounds of material non-disclosure and/or misrepresentation. In the alternative, they relied upon a policy defence of want of due diligence by the assureds.

Firstly, the insurers pointed to an undisclosed incident in 2004, when the starboard motor had failed due to a loose stator, causing the vessel to be off hire for 7½ days. At that time, the vessel was insured for loss of hire by another insurer, Transmarine, but under a policy imposing a 34 day excess. Consequently, no policy claim arose, although the incident was disclosed to Transmarine on subsequent renewal.

The repairs in 2004 involved the replacement of the motor, although the old motor was repaired and kept in storage. A further incident followed in 2005, when vibration was detected in the port motor, for which again a loose stator was thought to be responsible. Upon inspection, however, the cause was found to be a problem with a rotor, which was replaced with a rotor from the old starboard motor. Both the 2004 and 2005 incidents were claimed for under the prevailing hull and machinery policy.

After the 2005-06 policy, the assured stopped taking out loss of hire insurance, but decided to resume loss of hire cover from 2008, at which point their brokers approached the defendant insurers, Valiant. It was stated during the broking process that the vessel had suffered only one hull and machinery claim, and noted that the vessel had no history of major business interruption. The loss of hire cover was duly issued, with a 30 day limit and subject to a 21 day excess in respect of machinery breakdown. The insuring clause in the policy also contained the standard exception with respect to breakdowns resulting from the assured’s “want of due diligence”. ²

Following the February 2009 breakdown, the port motor was replaced with the old starboard motor, but during testing two further failures were experienced, on 11 March and 25 April 2009, and the vessel was off hire in total for almost three months. In the alternative to the avoidance and due diligence defences, insurers contended that the events of 2009, in fact, constituted three separate breakdowns, each attracting an excess of 21 days, and since no single breakdown was responsible for more than 21 days loss of hire, no claim was payable.

The Commercial Court found for the assured on all issues. On the question of avoidance, the court held that the undisclosed loss of hire in 2004 was not material. It was for a short period only, far less than the 21 day excess imposed by the Valiant policy, it was more than four years before the current policy and it had not resulted in a claim on the prior policy. Moreover, the fact that the brokers had seen fit to advise the 2004 loss of hire to Transmarine did not render material to the Valiant policy something which, objectively, was not so. Similarly, in the proper context, the statement that there was no history of major business interruption was true.

As to the prior hull claims, neither of these was in fact material to the loss of hire risk underwritten by Valiant. They could only be relevant insofar as they had given rise to any (undisclosed) period of loss of hire, and since the latter had been found not material, the same had to be true of the hull claims. The fact that the brokers had elected to disclose one hull claim did not render the second a material fact warranting disclosure. In other words, if the hull claims were immaterial, they remained so, even if one was mentioned and not the other.

As to due diligence, want of due diligence meant negligence, or in other words "a lack of reasonable care”³. Insurers complained that the assured could have diagnosed the problem with the port stator following the earlier inspection, or at any rate prior to its breakdown, but failed to take the appropriate steps. Having considered the expert evidence, the Court rejected this. There was no reason to doubt the adequacy of the prior inspection when the stator was found to be secure, and the rotor was diagnosed as the cause. No problem was then identified with the stator.

Finally, on the question of aggregation, it was accepted that there was no technical causal link between the failures on 25 February 2009 and those experienced on 11 March and 25 April 2009. They were therefore three separate “occurrences”. Nevertheless, so the Court found, the assured was entitled to treat the entire 82 days off hire as being consequent upon the original breakdown, even though other work may have been undertaken during that time⁴. Doing the best they could, the assureds could not have made the repair time any shorter. The reality is that after the failure of the port motor on 25 February 2009, one thing led to another. The assureds had reasonably tried to deal with the problem by substituting the starboard motor. Had this succeeded, there would have been no claim for loss of hire at all. Unfortunately, a separate hydraulics failure had frustrated that effort. When the starboard motor was eventually installed, it failed after a couple of days at sea, with the result that the process of substitution had to be undertaken all over again. Consequently, the whole period counted from the date of the original breakdown, and the assured was entitled to pursue a claim for a limits loss of 30 days loss of hire.

Result: Judgment for the assured.

1) [2012] EWHC 50
2) Loss of Charter Hire (ABS 1/10/83 Wording) Clause 1(b)
3) Applying a decision of the Nova Scotia Court of Appeal in Secunda Marine Services Ltd v Liberty Mutual Insurance Company 2006 NSCA 82
4) The "Ferdinand Retzlaff" [1972] 2 Lloyd's Rep. 120