Queensland Supreme Court considers whether an excess policy is a marine policy subject to specific marine insurance legislation or a general insurance statute

Key Points


  • The policy that a ship-repairer entered into was to be characterised as one of marine insurance, because the underwriters undertook to indemnify the ship-repairer against losses which were substantially incidental to marine adventure.
  • The risks encountered in marine adventures are not limited to risks encountered on the high seas, but extend to risks encountered in harbours, dry docks, and ports. What matters is the nature of the risk insured, not the loss giving rise to the claim.
  • It remains to be seen if the new insurance contracts regime being developed in New Zealand will maintain a distinction between general insurance and marine insurance. If so, New Zealand is likely to face similar conflicts between obligations and rights under insurance policies depending on their characterisation.

Background


  • DMS Maritime Pty Ltd (DMS) is a ship builder and repairer. It contracted with the Commonwealth of Australia to design, manufacture, and supply Armidale Class Patrol Boats and to provide in-service support to the boats.
  • Royal and Sun Alliance Insurance Plc insured DMS for all sums which DMS became liable to pay due to its legal liability as ship-repairer for loss of or damage to any vessel or craft in DMS’s care, custody or control for the purposes of being worked on.
  • Whilst DMS’s subcontractor was working the HMAS Bundaberg, a patrol boat supplied under the contract, a fire destroyed the boat.
  • There were two relevant insurance policies. A 100% primary layer and a 50% first excess layer with Royal and Sun Alliance.1  Navigators Corporate Underwriters Ltd (Navigators) subscribed as to the other 50% of the excess lawyer which was governed by the excess policy.
  • Navigators, amongst other things, denied that they were liable to indemnify DMS on the basis that DMS had breached its duty of disclosure prior to inception and Navigators were entitled to avoid the policy ab initio. DMS commenced proceedings against the Navigators claiming entitlement to indemnity under both policies.

Issues


  • The Supreme Court of Queensland had to determine whether the Contract was governed by the Marine Insurance Act 1909 (MIA) or the Insurance Contracts Act 1984 (Cth) (ICA).
  • The question was significant because the applicable Act directly influenced the scope of DMS’s duty of disclosure and, if the ICA applied, Navigators would also have to establish they were prejudiced by the non-disclosure.

Decision


  • DMS sought to characterise the cover broadly, as insuring DMS generally for its work as a ship-repairer, rather than insurance falling within the definition of marine insurance.2 While the Court acknowledged that the insurance was liability insurance, it agreed with previous case law3 that characterising the insurance in such a way did not mean that the insurance could not also be regarded as falling within the definition of marine insurance under the MIA.4
  • The Court noted that whether the MIA applies to a particular contract of insurance requires determination of whether the contract is one that indemnifies the assured against losses incidental to maritime adventure. Such losses include the exposure of any ship, goods, or other movables to the perils consequent on, or incidental to, the navigation of the sea (i.e. perils of the sea, fire, war perils, pirates etc.).5
  • To determine whether the risk is consequent on or incidental to the navigation of the sea the Court will evaluate the nature of the risk insured under the contract of insurance, not the loss giving rise to the claim. It is not necessary for the risk to be one which occurs at sea.6
  • The Court considered that the policy covered the legal liabilities that arose from DMS’s contractual obligations. The terms of the contract between DMS and the Commonwealth were therefore directly relevant to the scope of the risk insured.
  • The contract contemplated that the patrol boats would be designed and constructed so that they were capable of embarking on marine adventures. Critically, the contract also included in service support to the patrol boats for a 15-year period after commissioning to ensure their ongoing operational availability.
  • Consequently, the risks encountered in the marine adventures were not limited to those on the high seas but extended to risks encountered in harbours, dry docks and ports, where the boats were to be maintained by DMS to a standard which enabled them to continue on their marine adventure and that ensured that DMS discharged its contractual obligations.
  • Being subject to such work had to be regarded as incidental to or a consequence of marine adventure.7 The risk of a patrol boat being damaged or lost by fire while being maintained or repaired is a “maritime peril” for the purposes of the MIA.
  • The Court held that DMS, in performing its activities on the patrol boats, accepted the risk that the boats might be damaged and need replacement and contracted to accept the risk of a certain type of maritime peril occurring.8 Further, the Court considered that by both the primary policy and excess policy, DMS insured itself against the loss it would suffer if such a maritime peril ensued.9
  • The Court considered that Navigators had agreed to indemnify DMS against losses which must be regarded as substantially incident to marine adventure. Therefore, the Contract was to be regarded as a marine insurance contract, in accordance with the MIA.10

Analysis


The mixed nature of cover under insurance contracts can make it difficult to determine when land risks are incidental to a sea voyage and therefore a contract of marine insurance. The approach of the Queensland Supreme Court is likely to be persuasive in any consideration of this issue by the New Zealand courts.

The decision highlights the very real consequences that can follow characterisation of a contract of insurance as one of marine insurance or not.

In November 2019, the New Zealand government announced a reform of insurance contract law. The next step is the release of an exposure draft Bill for consultation in mid-2021.

If New Zealand takes a similar approach to the Australian legislation and maintains a distinction between principles of general insurance contracts and marine-specific insurance contracts, similar conflicts between obligations under different insurance policies are likely to arise.


If you would like to know more about this case and the potential impact of the insurance contract law reform on marine insurance in New Zealand, please contact Andrew Colgan, Stacey Fraser, or Lourenzo Fernandez


  1. The Supreme Court of Queensland held that the Insurer was obliged to indemnify DMS under the two policies for its share of the settlement sum in DMS Maritime Pty Ltd v Royal and Sun Insurance Plc [2018] QSC 303.  An appeal of this decision was dismissed, see Royal and Sun Alliance Insurance Plc v DMS Maritime Pty Ltd [2019] QCA 264.
  2. At [116].
  3. Gibbs v Mercantile Mutual Insurance [2003] HCA 39, (2003) CLR 604 at [46] per McHugh J.
  4. [At [116].
  5. [At [14]. See s 7 of the Maritime Insurance Act.
  6. At [17].
  7. At [121].
  8. At [121].
  9. At [122].
  10. At [122].
  11. At [123].

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