The Supreme Court ruled that, in marine insurance, if a ship is sent to sea in an unseaworthy condition, the insurer is not responsible for any losses attributable to unseaworthiness. It also noted that knowledge of a breach of warranty by an insurer does not inherently constitute a waiver unless expressly stated.
The Court ruled that an insured party requesting insurance coverage based on a Classification Certificate for a vessel must notify the Classification Society of any deficiencies or flaws before the certificate is issued. This is crucial because the insurance coverage is founded on the assumption that the Classification Society evaluated all aspects thoroughly prior to issuing the certificate.
The court stated, “Due to the warranty requirement, the assured is expected to notify the Classification Society of any deficiencies or defects, if any, prior to the issuance of the Class Certificate, since the insurance coverage to be provided by the insurer is predicated on the issuance of the Class Certificate by the Classification Society.”
The bench comprised of Justices AS Bopanna and MM Suresh was hearing an appeal from the NCDRC, which had denied the appellant’s 16 crore maritime insurance claim after he lost his vessel and cargo in an accident.
In this instance, the appellant failed to disclose prior injury to the port main engine when obtaining class certification.
The court observed “taking note of the provisions relating to warranty and the manner in which the Classification Certificate is issued, in the instant facts the appellant had failed to establish that the warranty class had not been breached by them. In that circumstance, we are of the opinion that the NCDRC having considered the relevant aspects of the matter in its correct perspective has arrived at its conclusion, which would not call for interference.“
The Supreme Court therefore upheld the NCDRC order and dismissed the appeal.
BACKGROUND OF THE CASE
In this case, the appellant purchased a maritime hull insurance policy from the respondent (insurer) for 8 crores for his vessel between 2005 and 2006.
In 2006, the primary port engine sustained damage. The surveyors inspected the structure and determined that it was beyond repair. However, because the engine’s replacement would take six months and there was an urgent commercial need, it was temporarily repaired. The respondent provided one billion rupees for the replacement of the engine’s crankshaft.
Now, the appellant has obtained a new 2006-2007 policy from the respondent. The American Bureau of Shipping inspected the vessel and issued a class certificate on 19 October 2006.
Unfortunately, the ship sank on 3.12.2006 after being impacted by a tugboat.
The appellant demanded eight billion rupees from the respondent, who hired a surveyor to evaluate the loss.
The surveyor determined that the appellant had not informed ABS of the previous engine damage. It also stated that if any damage to the vessel is not reported to the class, the class certificate would be automatically suspended.
In the meantime, the previous surveyors after the first accident issued a final report in 2007 stating that it was unlikely the vessel would be recovered, so there was no sense in making permanent repairs and they should recover 1 crore rupees given previously.
The Supreme Court’s Evaluation
Based on a review of the provisions of the Marine Insurance Act of 1963, the Court concluded that the insurer is not liable for losses if the ship is sent to sea in an unsuitable condition and the insured party is aware of this. In this instance, the classification certificate issued by a Classification Society is significant, as it attests to the ship’s compliance with specific safety and operational standards.
The Court clarified that if defects in a vessel were not reported to the Classification Society prior to the issuance of a Classification Certificate, and it is later discovered that these defects were concealed and warranty conditions were not met, then the Classification Certificate’s very foundation is compromised.
The court noted that there is no evidence that the replacement of the engine had been waived prior to the issuance of the current insurance policy, despite the fact that the insurer was aware that repairs were made and a voyage was planned due to a waiting period for engine replacement. Therefore, when the insurance company utilised the Class Certification to issue the policy, there was no explicit or implicit indication of waiver.
The Court stated, “Although the insurer was aware of the immediate voyage with repairs, the replacement was to be made in due course.” The insurer cannot be solely responsible for determining whether the engine was subsequently replaced with the funds received. In the event that the replacement was not made, it was the appellant’s responsibility to notify the Classification Society, and in the event that the Class Certificate was issued, the warranty class had been violated by the appellant, and the exclusion would apply, rendering the certificate invalid.”
The court also emphasised the fundamental importance of trust and openness in policy issuance, emphasising that all parties must act in good faith to preserve the contract’s integrity. The court emphasises that the appellant could have informed the respondent that the advance receipt was not utilised. This could have been accompanied by an offer to return the sum or a mutual agreement to retain the sum for future use when the engine crankshaft became available. The court indicated that adopting such a transparent strategy would have allowed the appellant to present their case in a legitimate manner.
The court added, “Having noted that the issuance of a policy is based on trust, it would have been natural for the appellant to come clean on this aspect prior to the issuance of a subsequent policy by informing the respondent of the non-utilization of the advance receipt, offering to return the sum, or requesting permission to retain it for use when the engine crank shaft became available.” “Only if such a course of action had been taken could the appellant have been heard to present such a defence.”
Case title: Hind Offshore Pt Ltd v. IFFCO General Insurance Co. Ltd.
