The Court of Appeal has overturned a decision handed down last year by the Commercial Court concerning the issue of proximate cause of loss.

The first instance decision supported the insurer's argument that the proximate cause of the loss of the legs of an oil rig while being towed from Texas to Malaysia was "inherent vice" and thus excluded from the "all risks" cover. The claimant insured argued that the loss was accidental and not inevitable and should be covered under the policy, and that the proximate cause was inadequate repairs carried out mid-tow. The Malaysian insurer argued that the proximate cause was the inherent vice in the inability of the legs to withstand the ordinary incidents of the voyage, meaning the loss was excluded from cover, or alternatively, that the loss was an inevitable consequence of the voyage embarked upon. For the background facts and more detail on the first instance decision click here (http://tinyurl.com/yjbejqc ).

The insured appealed the decision, querying whether the Commercial Court had applied the correct test for determining proximate cause.

The Court of Appeal, allowing the appeal, held that:

  • A wide test had been applied at first instance: absent exceptional weather being shown to have occurred, the loss must have been attributable to inherent vice.
  • The correct test was more narrow in its scope – in considering whether damage was caused by inherent vice, an inability to withstand the ordinary incidents of the voyage was not answered by reference to what might be reasonably foreseeable as the ordinary incidents of that voyage, but by any event which would be bound to occur as an ordinary incident.
  • On the facts, metal fatigue (i.e. the inherent vice) was not the sole cause of the loss of the legs and a leg breaking wave which was not bound to occur in the way that it did as a normal incident of the voyage in question, caused the starboard leg, followed by the other legs, to break off. Even though it was highly probably with the benefit of hindsight, this high probability was unknown to the insured and was an external fortuitous event.

In addition to the narrower test applied, the Court also seemed to suggest that an inherent vice exclusion may only apply where the inherent vice is the sole and proximate cause of loss, which would further limit the scope of the exclusion for insurers.

The decision demonstrates that where insurers are seeking to rely on an inherent vice exclusion, the courts will be less likely to adopt an either/or approach and will be willing to examine other causative factors which may have contributed to the loss in question. The decision will be welcomed by the insureds in that the approach taken by the Court of Appeal limits the scope of the inherent vice exclusion within "all risks" insurance cover.

Further reading: Global Process Systems Inc and Another v Syarikat Takaful Malaysia Berhad [2009] EWCA Civ 1398

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 08/01/2010.