jura falconis, jg 39, 2002-2003, nr 2, p. 289-330
An eternal triangle at sea:
Loss of insurance cover under a direct action in marine liability insurance.
Thesis presented in view of
obtaining the degree of Master of Laws in Maritime Law. Written and developed under the scientific
conduct of Professor Dr. H. J. Bull.
List of abbreviations
BMC - Belgian Maritime Code
- Loi du 21 aôut 1879 contenant le Livre II du
Code de Commerce. De la navigation maritime et de la navigation intérieure.
- Wet van 21 augustus 1879 houdende Boek II van
het Wetboek van Koophandel. Zeevaart en
Cass. - Decision of the Belgian Supreme Court
- Arrêt de la Cour de Cassation
- Arrest van het Hof van Cassatie
Cass. Civ. - Decision of the French Supreme Court, civil bench
- Arrêt de la cour de cassation, chambre civile
Cass. Comm. - Decision of the
French Supreme Court, commercial bench
- Arrêt de la cour de cassation,
Convention on Civil Liability for Oil Pollution Damage
HNS Convention International Convention on Liability and
Compensation for Damage in Connection with the Carriage of Hazardous and
Noxious Substances by Sea.
I.L.J. Insurance Law Journal
Joint Consultation Paper
The Law Commission Consultation Paper No. 152 and
The Scottish Law Commission Discussion Paper No. 104 in a Joint Consultation
Paper of 1998 on Third Parties (Rights Against Insurers) Act 1930,
Joint Report The
Law Commission and The
Scottish Law Commission (LAW COM No
272) (SCOT LAW COM No 184)
Joint Report of 2001 on Third Parties (Rights Against Insurers) Act 1930, http://www.lawcom.gov.uk/
MIA 1906 Marine Insurance Act of 1906
NICA - Norwegian
Insurance Contract Act: Act No. 69 of 16 June 1989 Relating to Insurance
- Forsikringsavtaleloven (Norge)
NMIP 1996 - Norwegian
Marine Insurance Plan of 1996
- Norsk Sjøforsikringsplan
NMC 1994 - Norwegian
- Lov om Sjøfarten
UNCLOS United Nations Convention on the Law of the
The aim of the study of the defences of the
liability insurers is to analyse the rights of third parties under a direct
action against liability insurers. As contrary as this first sentence of this
thesis are the rules that apply to the direct actions: they claim both to
protect the injured party and to avoid the insurance companies taking on the
full liability of their members themselves. It is an eternal triangle between
three players (and even four if we count the injured party's insurer) who know
that they have rights and obligations towards each other, but that the exact
scope of these rights and obligations are hazy. In this unclear situation every
party tries to get the largest part of the cake and all have good arguments to
The argument of the injured party is the right to
full reparation of damages. Based on tort law they can claim reparation from
the tortfeasor but due to the risk of insolvency or even fraud they prefer to
address the insurer. The right of the injured party to claim directly from the
insurer is based on statutes that arose in almost all jurisdictions beginning
from the 1930's. Also international conventions as the CLC 1969 and the HNS
convention recognise the right of direct action against the insurer.
Apart from the international conventions that award
a direct action in specific cases, the right of the third party is based on
national law. A very important aspect of the analyses of the right to direct
action therefore lays in the preliminary study of the rules of conflict of
laws. (1.2) The importance of the determination of the applicable law will
appear when we examine the different conditions for the right of direct action
between the three major law systems. (1.3) A short title will also be needed to
indicate the specific nature of marine liability insurance that is dominated by
the P & I Clubs. (1.4) The fact that these clubs are mutual insurers has
had a great influence on the development of shipping in general. The third parties
unfortunately have not been spared from the consequences of this sui generis legal personality.
The heart of the thesis will deal with the defences
that the P & I Clubs can invoke against the statutory right to direct
action. The first available defences are those that are available to the
insured. As the accountability of the club is based on the liability of its
members, case law and doctrine make the limitation of liability (2.2.2) and the
arguments challenging the liability of the ship owner (2.2.1) also available to
the insurer. This however creates the risk that the insured is found liable but
that his insurer is not because the underwriter has successfully challenged the
More discussion will arise when talking about the policy
defences that can be opposed to a third party. One group contains the
arbitration clause (2.3.1), the payment clause (2.3.2) and the limitation
clause (2.3.3). These can be defined as procedural rules determined in the
insurance policy. The different legal traditions will offer different views on
whether or not to oppose these defences as pre-conditions to payment by the
clubs. The question is whether they empty a statutory right of its content. The
compulsory or voluntary character of the insurance and of the right to a direct
action will indicate whether or not to maintain one or the other defence.
The second group of contractual terms that prohibit
insurance cover aim at more material problems. The wilful misconduct of the
assured, non-payment of the premium, unseaworthiness of the vessel, etc. are
actions or omissions by the insured that may make him lose the insurance cover.
Can the behaviour of the insured be opposed to the third party who uses the
same ground to claim damages? This discussion will be the subject of title 2.4.
1 Direct action and marine insurance
Before we can talk about the defences that the
insurer can rely upon in a direct action, it is important first to analyse the
right to a direct action. The basic idea of this right is to make liability
insurance directly available for the ones to whom the insured is liable.
Liability policies cover the cases where the insured
is liable for damages he caused. The insured will be reimbursed for the losses
and costs incurred when repairing the damages to the injured person. The
payment by the tortfeasor was sometimes uncertain because of his uncertain
financial situation. In the 1930's the Scandinavian legislators, as did the
English, the French and others, gave a third party the right to claim directly
against the insurer in the case of insolvency of the insured wrongdoer.
The rationale behind this right was to protect the
interest of the injured party. The insolvency of the insured should not have
negative effects on the person whom he has already caused trouble to. But a
second incentive is to be found in the economics of law: it is much more
efficient to reduce the number of suits by giving the injured party the right
to go directly against the insurer, who in the end is the one who has to pay.
This idea is however only getting through in recent years in common law
jurisdictions, where until recently a court decision was required before a
direct action would be authorised. The conditions for the right to direct action
in different jurisdictions are discussed under 1.3.
The need for comparison between the solutions of
different jurisdictions is set out under 1.2. As maritime adventures are always
of an international character, the third parties suing the ship owner’s insurer
will inevitably be faced with the problems of private international law. The
importance of the analyses of conflict of law rules will be repeated throughout
The end of the first part of this work, title 1.4,
will briefly indicate what form the direct action takes in the world of marine
insurance. This world is dominated by the P & I Clubs, who sometimes are a
little more reluctant to receive direct actions against them. The Clubs argue that their members only
contract an indemnity cover, which does not contain a liability cover towards
third parties. After the discussion on this specific policy, we will see how
the legislator can protect third parties against the rules of the P & I
Clubs, namely through mandatory law.
The introduction of mandatory insurance aims to
protect the injured party against the risk of insolvency of the wrongdoer or
even against the opportunistic insurance policy providers escaping the
indemnification of the injured party. Voluntary insurance on the other hand concentrates
on the person contracting the policy. Also in voluntary insurance the third
party can be protected, but this protection will be lesser. Prior to discussing
these consequences the paper will present the idea of compulsory insurance in
the last title of this first part.
1.2 Applicable law
Most maritime cases have an international character.
It is therefore not only necessary to determine which material law applies, but
also which national law imposes its solution. The answer to this question can be
found in the conflict of law rules, also called private international law. These rules are part of each national law system, but
there are also international conventions regulating this subject to promote
uniformity in international matters. To know which conflict of law rule
applies, the judge will qualify the problems brought before him. Each
qualification has its own conflict rules.
The categories that are interesting to analyse in relation to this subject
matter are tort law, contract law and more specifically insurance law.
respect of extra-contractual liability, the internationally accepted conflict
rule is to apply the lex loci delicti
commissi. The basis
for this rule in the civil law countries is Art. 3 of the Code Civil.
This rule has been followed on an international level e.g. in the Hague Traffic
Accident Convention of 1971.
In the case of contractual liability
the terms of the agreement will determine when there is a basis for liability
of one of the parties, its conditions and the
consequences of it. The contractual freedom of the parties is the first
instrument to determine this, but usually this does not regulate all possible
problems. Second in line is the party's autonomy: the parties have the right to
choose which national law will regulate their contractual relationship. In this
way they not only determine the content of the contract by inserting specific
terms, but also submit the whole of the contract to a national law. This is
important when the strict contractual terms don't offer a solution
and the judge or arbitrator has to find the solution in the national law
applicable to the contract. If the parties do not specify the law that will
solve disputes between them, or if the law does not allow them to make a free
choice, it will be the conflict rules of the forum that determine the
case of transportation contracts, the Rome Convention
introduces the presumption that it is the domestic law of the carrier that
applies. The general conflict rule for contract law is to submit the question
to the law of the place of performance of the principle obligation of the
contract. Under an international transportation contract the principle
obligation per definition operates on a multitude of territories. Therefore the
place of delivery is usually taken as a reference. But as different
interpretations can be advanced, the French Cour de Cassation proposed to apply
the lex locus delicti.
This solution is not followed in other jurisdictions and is criticised in doctrine.
But what law to apply to the direct action against
the insurer? In this case the judge has the choice between the lex locus delicti and the lex contractus of the underlying
liability issue and the law applicable to the insurance contract or lex assurandi.
In the Hague Traffic Accident Convention, the lex assurandi comes last in the order of
applicable laws. This convention cannot however be taken as an authority for
the solution in marine insurance issues that traditionally propose different
solutions. The answer will also differ between common and civil law.
and doctrine have agreed
since the 1930's that the lex locus
delicti governs the claim under a direct action. It is to be noted however
that the choice of law has not always been made clear by French judiciary.
The Irini M case provides a
good example of the hesitation of the French Supreme Court to apply the lex locus delicti as the only applicable
law. The lex assurandi always found its way through in some way or another, and
this was the case in France.
Before English Courts, English law is normally applied as being the lex assurandi
or as being the legal basis for the claim (1930 Act). In Australia the basis
for the liability indicates the applicable law.
In the case of carriage of
passengers the lex contractus of the
contract of carriage will be the one that determines whether or not and under
what rules the passenger has a direct action.
Another advantage of these international conventions establishing a right to
direct action is that a country like Greece which does not recognise the right
to direct action still has to accept it under the scope of the international
conventions. But for
example the Athens Convention on passenger and luggage liability does not contain
any provision on direct actions yet. Until now the convention only indicated
which law to apply, but the projects that are subject to discussion in the
legal committee of the IMO are aimed to include compulsory insurance with a
right to direct action.
If such provisions were introduced the preliminary discussion on the applicable
law would disappear.
1.3 Conditions for a direct action
1.3.1 Origins in the code civil
Direct action is a concept that finds its origin in
civil law. The lawmakers found it necessary to give special rights to protect
third parties (C) who have to suffer from a problem that finds its cause in a
different relationship between his debtor and a person with whom he has no
contractual relationship. In some cases the debtor (B) of C creates a special
contract with another person (A) to escape his liability towards C. For these
kinds of situations the law introduced the actio
fraudulent contract will, in that case, not be opposable to C, who will get his
payment. The action introduced by the third party is no real direct action, as
he is not claiming to get a payment from A. The main difference with a direct
action is that it challenges the existence of the relation between A and B and
does allow the third party to acquire rights based on the contract.
In another hypotheses, B will have an outstanding
claim against A which he does not pursue. In this case the creditors of B can
introduce an action on his behalf against A to force his payment.
This will create a solvency with B who then can be forced to pay by C. However,
this action oblique has an
inconvenience in that all creditors benefit from it even if they did not act.
Therefore, in some cases, this will result in no benefit at all for the one
introducing the action based on Art. 1166 CC.
After those two general articles, the lawmaker tried
to solve the problems that were still open: the person that acts against A
should be paid immediately himself and he should benefit first from his
efforts. However, no general right for such a direct action could be introduced
in the law. As a matter of fact, article 1166 and 1167 CC and the equivalent
provisions in other legal systems are derogations from a much more important
general principle: the privity of contract. The Latin adagio “Res inter alios acta...”
expresses this same idea: a person who is not party to a contract cannot
benefit from it nor can he be burdened by a contract to which he is not a
Going further than what had already been attributed to the third parties would
be breaking down the very fundament of contract law.
But the idea of a direct action was not abandoned
even if it has been awarded only to a very strict number of cases. The most
important ones are; the direct action by an owner against an sub-contractor,
the direct action by sub-contractors against those responsible for a yard
and the right of direct action against the insurer by the injured party in
certain specific cases.
The idea has been defended as being a derogation from the principle of privity
of contract but a derogation that represents a remedy to the negative effects
of this theory.
In all the above-mentioned cases, and not least in
case of insurance contracts, lawmakers considered the idea of reparation of
damages more important than the idea of privity of contract.
The French Supreme Court allows the right to a direct action in insurance law
based on Art. L 124-3:
“L’assureur ne peut payer à un autre que le tiers lésé
tout ou partie de la somme due par lui tant que ce tiers ne s’est pas
désinteressé, jusqu’à concurrance de ladite somme, des conséquences pécuniaires
du fait dommageable ayant entraîné la responsabilité de l’assuré.”
In its decision the Cour de Cassation held that the obligation for the insurer to preserve
damages only in the interest of the victim, has the consequence that the third
party who has the legal interest must also have the right to a direct claim for
that sum. French
jurisprudence sets very limited conditions for the right to direct action: the
third party must prove its interest before the court and prove that its claim
falls under the cover of the policy.
The interest to claim damages comes down to proving that one is either the
injured person suffering the loss or the person surrogating to the rights of
the injured party.
In a recent decision of the Cour de Cassation it was
decided that the wrongdoer does not necessarily need to be condemned for his
actions to make the insurer liable.
Establishing this liability is of course still necessary when one wants to
pursue the decision against the insured. In that case, the insurer and the
insured are jointly liable. They are held in
solidum because they extinguish the same debt, even if the cause of this
debt towards the injured party is different.
In Belgium, where the civil code is founded on the
French one of 1804, the solution proposed to third parties has enjoyed a
different evolution. In Belgium a special law was introduced in 1937, adding a
§9 in article 20 of the mortgages law.
This new paragraph introduced a privilege for the injured person as a remedy
for the negative aspect of the action
oblique as described above.
This solution is thus an intermediary solution between privity of contract and
direct action. Under this law the action of the third party against the insurer
is the action proper to the insured exercised by the third party. The third
party has no personal right to claim against the insurer. This had far-reaching
consequences for the procedures introduced against the underwriter.
Since 1993 a new article 147, 3° has come into force
in the law on land-based insurance contracts. This article suspends the
application of article 20, 9° of the mortgage law for land-based insurance
contracts. This caused a problem in Belgium as article 20, 9° of the mortgage
law seemed not to be applicable to marine insurance, the law of 1992 having a
general scope of application. This error has been corrected by the law of 16
March 1994, which
specifies that the insurance law of 1992 is not applicable to marine insurance.
A claim from the injured party against the insurer still has to be based on the
Scandinavian view on direct action
But how has the idea of a
direct action been seen and developed in the "Scandinavian law", and
more specifically in the domain of insurance? As a starting point, we have to
go back to 1927, when the resembling Insurance Contract Acts
for Scandinavian countries came about. The analysis of the Norwegian act will
immediately sketch the current situation for Sweden and Denmark as the reform
of their new insurance contract Act is not yet completed.
The basis for insurance law remained the freedom of
contract, with a limited amount of mandatory rules. The provisions in the act
were mainly directory and could be set aside by the insurance policy.
Provisions on the right to a direct action can be found under part II E of the
ICA 1927 on liability insurance. Section 95, 3 of the Act in Norway and Sweden says:
“Where an insured, who has been declared
bankrupt or placed in insolvent liquidation, possesses a claim against the
insurer for an indemnity which he may not collect without the assent of the
injured party, the latter shall be entitled, in the event payment of such sum
is not received by him for the estate in bankruptcy or estate in liquidation,
to have the claim of the insured awarded to him.”
This section is said to lay down the right to a
direct action for injured third parties. Although the text does not say that
the provision is mandatory, the case law has defended and reaffirmed this idea.
The Norwegian Supreme Court has defended this point of view in the Skogholm
In Sweden the ICA 1927 is still applicable and the
solution thus remained unchanged since the Skogholm-decision. In this country
the conditions to have a right to direct action still are: manifest insolvency
of the insured tortfeasor; possession of a claim of indemnity;
payment is not received and the claim is to be assigned to the third party. It
is interesting to notice that if the judiciary prefers to defend the third
the legislative work in preparing a new insurance code takes the opposite
The Danish Code is also a little more severe to the
third party as it requires the injured party to have established the liability
of the insured preliminary to the introduction of the direct action. The
establishment of the liability can either be through a court ruling or through
an agreement between the injured party and the wrongdoer. Again in Denmark, the
Courts seem to be more open towards third parties than the legislator.
The new Insurance Contract Act No. 69 of 16
June 1989 and more specifically its sections 7.6-7.8 confirmed Norway's strong
protection of the third party. The insolvency of the insured is not a
requirement anymore to get a right to direct action, at least against
large-scale commercial entities.
Through this law the Norwegian legislator moves away from the common law and
approaches a civil law solution.
With their new Insurance Contract Act of 1995,
Finland also chose the direction of the Norwegian model, without copying it
Direct action in Common Law
In common law systems direct action against the
insurer has been recognised since the 1930's. Within this legal system many
different approaches can be distinguished by the conditions under which the
rights are transferred. The discussions between the different countries also
lead to developments throughout time. A recent example of this is the new draft
bill proposed by the English and Scottish Law Commissions jointly.
The first step in this process was the publication
of a joint consultation paper (further referred to as J.C.P.) in 1998.
This paper presents the present regulation and the practice in relation to
direct action against insurance companies. On the basis of the J.C.P. and
guided by the multitude of reactions from the professionals, the joint
commission proposed a draft bill as a part of their joint report.
These instruments will be useful for the analyses of the present situation,
which is still governed by the 1930 Act
with its later amendments.
Under the 1930 Act the transfer of rights to the
injured person arises only when the insured is in one of the enumerated
Moreover the injured person can only get payment if the insured can recover his
loss himself. Therefore the liability of the insured has to be ‘established’
before suing the insurance company.
The explanation for this is found in the ‘indemnity clause’ of the insurance
policies. Lord Denning underlined that the essence of this clause is that the
insured must prove his loss.
Only when liability has been ‘established’, will the loss follow and the
insurer can be held liable under the policy.
The third party only
“establishes liability” for these purposes once the amount
(as well as the existence) of the liability has been ascertained. The English case law decided
that the liability could be ‘established’ by judgement, an arbitral award or
through an agreement. Only then is the third
party entitled to enforce his rights, and only then is the insured entitled to
make a claim on the insurance policy.
The J.C.P. of 1998 recognises that the situation
under Scottish law is identical.
Although the present thesis will focus on the defences
that an insurer can invoke, it is important to indicate the negative
consequences these preconditions have for the injured third party. This is
especially important as the English legislator is preparing to make changes to
the existing situation.
The first problem is the multiple proceedings: in
order to obtain a judgement under the 1930 Act, the third party has to spend
considerable time and money to establish both the insolvency and the liability
of the insured. Even after he has done so, he will not be certain to obtain
direct payment from the insurer and has to engage in more effort to obtain
Under the English Companies Act,
it is possible that the third party will have to restore a dissolved company in
order to establish its liability in order to be entitled to a direct action
against the insurer.
The commission, in the Joint Report of 2001,
proposes to remove the requirement to establish the insured’s liability prior
to the proceedings against the insurer, firstly to help the third party and
lower the judicial costs and also because the intention of Parliament has to be
consultees supported the idea to solve the problem in a single set of
proceedings. It will not be required to join the insured in the proceedings
under the draft bill. The advantage of still doing so is that the insured will
also be bound by the judgement (and will only be bound if he has been joined).
Although all well know that the American legal
system also is based on the Common law tradition, it is difficult to discuss
its position towards direct action under present title. The reason for this is
the diversity of direct action statutes throughout America because this is a
matter that is of the jurisdiction of States.
1.4 Direct action in marine insurance
1.4.1 P & I Clubs
The country where we ended the study of the
conditions for the right to a direct action was also the country where the
specific issue of marine insurers liability arose. The ship owners joined
forces to cope with the high risk of maritime adventures in so-called P & I
Clubs. The P & I Clubs covered and still cover those risks that are not
covered under the Hull and Machinery insurance policies. As the solution of the
ship owners was to form mutual insurance, the Clubs always enjoyed a special
This specific character was already expressed in the
name of the insurers: “Protection and Indemnity Clubs”. The idea was to protect
the members of the Club and to indemnify them for the losses they suffered,
as long as this happened within the scope of the Club Rules. The refund is
linked to the payment of a premium and since it concerns mutual insurers, the
members will share the extra expenses at the end of the year.
The appearance of the 1930 Act
was a complete change of philosophy for the insurance market: the insurance
proceeds should now be considered to be accorded to the insured or even
directly to the injured party, but always for the benefit of this injured
The P & I Clubs saw the danger of the 1930 Act,
especially when thinking of the single ship-companies that were more likely to
become insolvent. As an answer they claimed that the 1930 Act was not
applicable to them, as the members of the associations had no “insurance
contract” with the club in the meaning of Art. 1 of the 1930 Act. An argument
that was accepted before the courts is that in an insurance contract – sensu
stricto – the cover cannot be at the discretion of a committee in the insurance
This argument was set aside after some years and the
P & I Clubs are now considered to be insurance companies falling within the
scope of the 1930 Act.
However, the Club rules include special policy terms that are again supported
by their specific “protecting and indemnifying” character.
These terms are not normally found in land-based insurance policies and thus
form the specificity of marine liability insurance in relation to the right to
1.4.2 Voluntary and compulsory liability insurance
Unlike the compulsory liability insurance for motor
vehicles that almost every country knows, there is no general obligation for
ship owners to take out liability insurance. Although the idea of insurance
emerged on the sea, we can now see that every motor vehicle, whether it is a bus,
a truck or a car needs to take out insurance and that there is no such a
general obligation for ferries, vessels or boats.
Although no general obligation exists, the idea of
compelled insurance has found its way into maritime law in more specific international
conventions. The first provisions on compulsory insurance were introduced as an
exemption in the Convention on Liability of Operators of Nuclear ships.
The real breakthrough of compulsory insurance has happened within the IMO.
The idea was first introduced in the CLC in 1969, reaffirmed in its later
version and also taken over in the HNS convention of 1996. The discussion on
mandatory insurance within the IMO now concerns the convention on liability for
wreck removal, on death and injury of passengers, on bunker fuel oils
and in connection with crew claims.
In the LLMC convention of 1996, no mention on
compulsory insurance has been made. According to Prof. Røsaeg this is due to
the fact that this convention only regulates the limitation of liability and
doesn’t deal with the basis of the liability. The same author indicates that
the draft of one general convention on maritime liability is not realistic.
The discussions in the legal committee of the IMO
resulted in Resolution A.898(21), urging all ship owners to take similar
security. This proves the common intention of all member states to go in this
direction. Also in the EU we can find support for the idea that all ship owners
should be insured. In their liability convention for inland transport, which
includes transport over waterways, provisions on compulsory insurance are
included. These instruments expressing the involvement of national governments
in the idea of compulsory insurance finds it origin in the new insurance
philosophy that liability insurance is taken out to protect third parties.
But the introduction of compulsory liability
insurance is of great importance in the setting of the present thesis. The P
& I Clubs fear that compulsory insurance and an express direct action clause
will extend their exposure to liability and would be a threat to their
existence. The most important fear lays in the risk that through compulsory
insurance the P & I Clubs would loose the ability to invoke some
policy defences against the third parties. This problem will be illustrated in
2. Limitations to the direct action
After the discussion on the applicable law to direct
actions and, the presentation of the conditions that need to be fulfilled in
several important maritime jurisdictions and having presented the specific
marine insurers that are the P & I Clubs, the time has come to proceed to
the core of this thesis: the arguments that the P & I Clubs can use to
oppose third parties.
Firstly there are the defences that the tortfeasor
himself can invoke against the injured person. These defences concern the rules
that lead to the liability of the insured, i.e. the liability that the insurer
promised to cover. Title 2.2.1 will discuss whether or not the underwriter can
re-litigate on the liability of his member. This title will however not go into
the material analysis and discussion of the Hamburg rules, Hague Visby rules or
other more specific international or national instrument determining the
liability of ship owners.
Title 2.2.2 will further discuss the possibility for
the P & I Clubs to rely on the legal limitation of liability that is
granted to ship owners.
Secondly, are the defences that are based on the
insurance contract. Here we can clearly distinguish between two groups: those
terms that can be seen as contractual preconditions for the right of direct
action to exist and then the defences that limit the scope of the insurance
cover. Under the first, more formal group, we will concentrate on the arbitration
clause, the payment clause and the limitation clause. They are analysed under
2.3. Title 2.4 gives a short overview of the material arguments to deny
insurance cover, namely: wilful misconduct of the assured, non-payment of the
premium, unseaworthiness of the vessel, agreed deductibles, ... This
distinction will have especially clear consequences in France.
2.2 Defences of the tort feasor
This title will present the first defences that the
insurer can use to oppose third party. It concerns the defences proper to the
tortfeasor in whose rights the insurance company is surrogated. The idea is
that the third party cannot have more rights against the insurer than those he
had against the wrongdoer. Direct action is accepted to help the injured party
to get payment for the damages he suffered, but it is not the goal to give him
more than that. The first limits are of course related to the proof of
liability of the tortfeasor. The second type of defence that the insurer can
rely on is the right to limitation of liability of the ship owner that is
accorded to him through different legal bases.
The first limitations to the right to get payment from
the tortfeasor are the tort law rules or liability rules. The right under the
direct action is fundamentally based on the rights the injured party has
against the wrongdoer. The right against the insurer is therefore equally
limited by the rules that establish one's liability. As expressed under 1.2.2,
the legal liability of the tortfeasor has to be established. This means that
the proof of negligence must be brought before the court, except in the cases
where the ship owner is made strictly liable.
The statutory excuses for the ship owner’s liability are also available for the
insurer: force majeure or act of god and the exceptions for damage caused by
fire or management of the ship under transportation contracts.
This follows from the construction of subrogation itself: transfer of rights
and obligation from one party to another. The insurance company is not
defending a separate liability, but is only covering the very liability of the
It is undisputed that the insurance company will not
have to pay in the cases where the insurer was not found liable. The condition
has been referred to above as the legal liability. It is not enough that there
is an appearance of liability or feeling of responsibility with the insured,
but the liability of the tortfeasor has to be established by law. Under title
1.2.1 the first important issue of the applicable law has been discussed. The
most important conclusion to remember about the conflict of laws at this stage
is that the insurance contract has no influence on determining the liability of
the insured when the action is directed against the insurer.
The question of whether the insured needs to be
condemned before a court or arbitration tribunal before the third party can
claim anything from the insurer has arisen. This discussion has been introduced
above under 1.3.3 and I will therefore not repeat it here. The important thing
to repeat at this stage is that the liability of the wrongdoer can but does not
have to be judicially established in order to obtain the right to act directly
against the insurance company.
The next question in relation to a possible judicial
decision is whether the court has to follow the decision against the insured
when deciding upon the liability of the insurer. Of course the basic rule
remains that the court is not bound by the ruling of another court. At least
this is the rule in the civil law countries. In this legal tradition, the
addressed court is completely autonomous from the decision of another court,
even if that court is higher in hierarchy, as long as it does not concern the
very same case. In the
situation before us, the court will actually be free, as the parties before the
court are not the same. The problem that the facts brought before the court are
the same, does not concern the judge who has to decide on a different issue
between other parties.
This means that the first court can find the insured
liable even if he tried to prove that he has showed due diligence. The second
court that must decide whether his insurer shall pay directly to the injured
party can see the same man as not being negligent and therefore his insurance
company will not be liable. Two courts may as a matter of fact, interpret and
weigh the very same legal arguments in a different manner. This is certainly
true if the case against the insurance company is brought before a different court
than the one that ruled over the case between the insured and the injured
party. This is a dangerous situation, but one that will not easily be
encountered. Most of the courts still try to give homogenous interpretations of
the basic legal principles and will in practice also refer to other judgements
even if they have to build up their own argumentation to support this. Moreover
the Ministry of Justice or a specific organ
under its competence will watch over the coherency in the decisions rendered by
The same idea applies in the Scandinavian legal
systems. The Degerö case, rendered in 1996 before the Appeals Court of Göteborg
is an illustration hereof.
The review of the facts by the Supreme Court was due to the specific
developments of the case. The cargo on the vessel was damaged due to bad
stowage on a voyage between the ports of Aarhus in Denmark and the port of
Sydney in Australia. The liability was first admitted before an Australian
court in 1974. The London Arbitration tribunal decided in the same way in 1985,
but as the time-charterer was bankrupt, he assigned his rights under the
insurance policy to the injured party. The direct action from the cargo owners
against the P & I club was brought before the Swedish court 22 years after
the facts and a new study and argumentation on them was thus not illogical. The
solution finally rendered, was again, to the benefit of the injured party.
Under English law the situation seems to be very
different at first sight. Here, the judicial decisions are based on case law.
The judges will refer to former decisions to support their judgements and
arguments and have to follow precedents. However the Common Law system does not
impose a requirement compelling judges to follow all decisions that have been
rendered in situations that seem rather similar. The seized court can find the
decision rendered upon the liability of the insured as being incorrect and can
just as easily come to a different decision. Theoretically, the court deciding
on the liability of the insurance company could come to the conclusion that the
insured is not liable legally towards the injured party, whereas the same
tortfeasor has been sentenced to damages in an earlier decision. In practice
the situation will be solved in the same way as set out above: the judge will
be entitled to examine the liability of the tortfeasor before establishing the
insurer’s even if reference is made to a former decision on the question.
In the United States, the solution will again depend
on the applicable state law. The statutes will always be inspired by the
special interests of the companies active in each region: Puerto Rico and
Louisiana are traditional maritime jurisdictions protecting the claimant. Under
New York jurisdiction, the insurer will be protected. For the present issue of
liability rules applicable in a direct action, this special protection will be
reflected through the power of the final judgement against the insured. A suit
under the Californian direct action statute requires a final judgement in such
a way that the insurer is estopped from re-litigating on the res iudicata.
The jurisdictions that are more favourable to the insurer will, on the other
hand, permit the insurer to reconsider the liability issue and thus escape from
its liability towards the third party.
A solution to the problem of possible contradictory
decisions can be found in suing the tortfeasor and his insurance company in
joint liability before one court. The possibility has been explicitly mentioned
in the NICA and this
possibility is also offered in Icelandic law.
An action in joint liability is often used in practice.
This solution has many advantages: limiting the costs, as you do not have to
sue both the wrongdoer and the insurer in different actions, you also win time
to get damages and the insured might also be better defended as the interest
of both the insured and the insurer will be represented by one lawyer.
In the case where the injured party sues both the
insured and his insurer, but before two different courts in different
jurisdictions, the second court can – but doesn’t have to – refer his case to
the first court because of the close connection. (concordance – samenhang) This
can benefit by giving a homogenous character to the solution to the pending
We can thus see that in the action against the insurer
the judge must establish the liability of the insured, independently from an
eventual decision against the latter. If the insurer can prove that there was
no negligence by the ship owner or by the people, for whom the ship owner is
responsible, he will not
have to pay damages to the third, injured party. This payment will however
still be due in the situation where the law, applicable to the incident has
imposed a strict liability on the ship owner. Strict liability is imposed
through several international conventions: The oil pollution liability
convention, the convention on transportation of hazardous and noxious
substances, the bunkers convention and the Athens convention relating to the
carriage of passengers and their luggage by sea.
Although the purpose of this title is not to go into
specific liability regimes, it is important to know of their existence. They
can give rise to specific problems when handling the insurance claim, and the
injured party must be aware of these. The major problem is in the case of
collisions. As few problems can arise when one party is clearly responsible, so
many can arise in cases where both parties are to blame. The applicable law
will determine how the situation will be resolved. In this paper I will limit
myself by saying that the American judges will often propose a different
solution to other countries.
No matter what the nature of the liability is, once
established, the insurer can still escape from it by proving that the accident
or the damage founding their cause is a ‘force majeure-event’ or is an ‘Act of
God’. In case of contractual liability the insurer has a similar, extra chance
to escape liability by proving that the actual cause of the damages lays in the
management of the vessel or is caused by fire.
Limitation of liability
The second restriction to the right to get damages
from the insured is the set of rules on limitation of liability. It would seem
logical that the injured party is entitled to full compensation of the incurred
damage. This is the rule to apply in land-based tort law. In contractual
land-based law, the contractual freedom allows the parties to agree on the
damages to be paid in certain circumstances, however law restricts the parties’
autonomy and other restrictions can be imposed by the public order.
In maritime law, apart from the contractual terms that
parties can agree upon, laws and conventions allow ship owners to limit his
liability. The limitation of liability has been granted in different domains,
as there is collision liability, cargo liability, passenger liability, oil
pollution liability, environmental pollution liability, …
In case of contractual and third party material
liability, section 172 and 175 NMC apply under Norwegian law. For passenger
claims and personal injury claims, section 175 NMC comes into play alone. In
transportation contracts, the limitation of liability will be calculated per
package or per kilo of cargo, whichever gives the highest value.
After applying this rule, the ship owner is still entitled to call on the
global limitation of section 172 NMC. The aim of the present thesis is not
however to go into detail about the limitation of liability.
The question of importance in relation to limitation
of the ship owner’s liability is whether the insurance company can use this
right against the injured party, claiming directly against them. Limitation of
liability has been granted to ship owners because of the high amounts of
damages that they risk becoming liable for: loss of life or personal injury,
damage to or loss of cargo, damages to or total loss of a vessel etc. The
lawmakers were afraid to push the ship owners to bankruptcy by exposing them to
an unlimited liability. With all the credits that are still open due the
operational life of a vessel, the bankruptcy could result in no payment of the
injured party at all.
If this is the argumentation that applies to the
limitation of liability of ship owners, we have to search for the argument that
would allow the insurer to be able to limit his liability towards the injured
party. Their cover under direct action is allowed in cases of manifest
insolvency of the insured. However it is unlikely that the insurance company or
the P & I club would go bankrupt after paying damages to the injured party.
The argument of limited capacity of the insurance market has not been withheld
in either of previous studies on this topic.
This could have been the reasoning followed by the
American judges up until 1986. In the Cushing case of 1952
the judges of the Supreme Court first decided on the procedural matter. They
denied the P & I underwriters the right to rely on the ship owner’s right
to limitation of liability, vested in 46 USC § 181 et seq. On the basis of this
decision the 5th Circuit Court confirmed the personal character of
the right to limitation of liability. The Limitation of Liability Act, 46 USC §
181 et seq. is available only to the owner of the vessel and the vessel’s demise
charterer. In a direct action suit against the P & I underwriter, the
insurer cannot invoke the right as he lacks ownership interest.
The Nebel Towing decision of 1969
caused unexpected exposure of liability to foreign P & I clubs in the US as
they were expecting to rely on the ship owner’s limitation of liability through
the right of subrogation. The solution then presented was to insert a clause in
the P & I policy that indicated a limited liability towards the ship owner,
which they could then invoke against the third injured party. The Nebel Towing
decision was finally overruled and the effect of the clause was recognised in
the Crown Zellerbach case of 1986.
The Zellerbach decision concerned a collision between
the first of 15 barges pushed by the tugboat “FR Bigelow” and the Crown
Zellerbach water intake structure located at Baton Rouge in Louisiana. The
accident was caused due to the fog and heavy rain over the Mississippi River.
The Crown Zellerbach Co. filed a suit against the tugboat “FR Bigelow” and
Ingran, the bareboat charterer. The prime insurer of Ingran, Cherokee Insurance
Company and the London Steam Ship Owners’ Mutual Insurance Association, in
their capacity as excess P & I insurers were included in the action at a
later stage. The procedural issue before the Circuit Court concerned whether
the limitation of liability under a direct action against the liability insurer
was in conformity with the Louisiana Direct Action Statute or not.
A different solution from the Nebel Towing case was
justified because the legal question was different. In the latter the insurer
could not rely on the statutory right of limitation of liability of the ship
owner, following the Cushing doctrine. The statute only grants the right to the
ship owner. A policy clause linking the insurers’ obligation to the limited
liability amount of the ship owner was considered void on the basis of the
Louisiana Direct Action Statute.
The question in the Zellerbach decision was slightly
different: “the P & I underwriter is
claiming only that, as prescribed by the Louisiana Direct Action Statute, the
terms of its own insurance policy limit maximum liability to the dollar amount
for which the ship owner-assured would be liable upon successful maintaining
the right to limit its liability.”
In doing so the underwriter does not claim the personal right of the ship owner
to be transferred to him, but only limits his liability to what he has promised
to the ship owner under the insurance contract. The limit for the insurers’ liability
resides thus in the insurance contract according to the American vision of this
In other countries, the solution has always been to
allow the insurer to rely on the right of limitation of liability, granted to
the ship owner. The argument for this is that the insurer surrogates in the
right of the insured. The third party should not get more rights against the
insurer than those he had against the tortfeasor.
The French Cour de Cassation
supported the right to limitation of liability under a direct action on the
text that led them to accept the right to direct action itself. Art. L124.3 of
the code des assurances
refers to the consequences of the liability of the assured. As the liability of
the assured is limited and the third party is not entitled to more rights from
the direct action than those he would have had under a claim against the
tortfeasor, the judges concluded that the limitation of liability also applied
to the direct action against the underwriter.
The final way to limit the amount that the insurer
will pay to the injured party is to argue on the method of determining the loss
incurred by the third party. Simply not accepting the amount that the injured
party claims will be the first argument after trying to avoid liability. I put
this as the last in the row of defences concerning the right to limit one’s
liability because it is usually not referred to as a limitation of liability in
a technical sense. In practice it has the same result: one will have to pay
less money to the claimant.
2.3 Policy defences
Under this title I will discuss the defences that the
insurer can invoke against the injured party and that are based on the
Even if the direct action tries to break through the negative consequences of
the privity of contract it will not give more rights to the third party than to
the insured. Therefore the insurer can invoke some of the following policy
defences against the injured party who surrogates in the contractual rights of
the assured. The legislator has however limited this possibility and in that
way turned the liability insurance to the benefit of the person to whom the
insured is liable. The difference between voluntary and compulsory insurance
will enter into play at this particular stage as this character of the
insurance expresses the legislator’s will to protect the third party.
The 1930 Act expressly indicates what can and what can
not be done: the happening of one of the insolvency events enumerated in the
Act cannot be the ground to avoid the insurance contract or alter the rights of
the third party.
All agreements between the insured and the insurer that defeat or defect the
rights of the third party will also be void if they are agreed on after the
liability and the insolvency have occurred.
This Section 3 of the 1930 Act has however been used
as an argument a contrario to support all other kinds of restrictions and
limitations to the rights of the third party. Let us now look at some specific
clauses and how they are received before the courts in several jurisdictions.
This title will discuss the ‘defences’ and under title 2.4 the more general
limitations are discussed.
Under the term ‘defence’ I qualify the arbitration
clause, the pay to be paid clause and the clauses on the limitation period.
These clauses operate as a defence against the third party receiving any
payment at all. They are not legal, but contractual pre-conditions to the right
of direct action. In some jurisdictions these kinds of clauses may be void as
they try to avoid mandatory rules, intended to protect a third party.
The first defence, based on the insurance policy,
that can block a direct action is the arbitration clause. Through this clause
the parties to the insurance contract take away the jurisdiction of national
courts and submit all (or certain specified) claims to an arbitration panel. As
in many other fields of commercial law marine insurance contracts also tend to
opt for dispute settlement before an arbitration tribunal. Having seen the
specificity of the problems relating to the issue that is the object of the
present paper, the choice for a specialised panel is not surprising. For the
implication of the introduction of an arbitration clause on the applicable
legal rules, I refer to other, specialised works, as this analysis would take
us too far out of the scope of the present discussion.
The aspect that will be analysed under this chapter
is the validity of an arbitration clause under the direct action from an injured
party against the insurance company. Does the injured party have to comply with
the arbitration clause and its procedural rules or will a court have
jurisdiction over the dispute between the injured party and the company? The
basis for liability (contractual or third party liability) of the insured will
have no influence on the application of the arbitration clause included in the
An aspect that is not often mentioned is the
existence of an arbitration agreement between the injured party and the person
causing damages. The presence of such an understanding
between the third party and the insured will not help the underwriter to defeat
the competence of the court when he is called before a national court by the
third party. The existence of an arbitration agreement will never be an
argument to defend the exclusive competence of an arbitration tribunal.
For the situation in civil law countries we again
use French law as the reference. The competence of the French courts has been
recognised by the Cour de Cassation in the Irini M case.
The court handling the ground of the claim is equally competent to take hold of
the claim against the P & I club on the basis of Art. 10 of the Brussels
Convention of 27 September 1968.
The national courts’ incompetence can be defended by the insurer if he is
brought before the court in a joint action with the insured and the latter has
an arbitration agreement with the injured party. The French courts will always
disregard the existence of the arbitration clause in the insurance policy when
the third party directs his claim against the insurer.
Although the question has not come before a
Scandinavian court, its solution is said be similar to the one reached before
the courts of Puerto Rico.
Before the Puerto Rico Courts the arbitration clause is disregarded on the
basis of the Direct Action Statute. In the Ocean Eagle case
the judges first established that the proceedings are based on the law and not
on the insurance contract. The second decision was based on this first one and
prohibited the insurer to rely on his insurance contract that is subordinate to
the law. The Court argued that the insurance company could not weaken the legal
position of a third party through a private agreement. This argument could also
be accepted before Norwegian Courts faced with an arbitration clause, as the
idea is explicitly included in the new NICA.
Most American jurisdictions submit the third party
to the arbitration clause. The rationale for it is that the third party bases
its suit on the insurance contract and therefore is bound by the terms of this
contract. The Aasma
case concerned a third party claimant who was exposed to asbestos on a vessel
on the high seas. The claimant sued the insurance company of the ship owner on
the basis of the insurance policy. The decision of the court was inspired by
the legal basis of the claim itself: the insurance contract.
One can say that the claimant in the Aasma case
accepts to be submitted to the terms of the insurance policy if he bases his
right to direct action on the insurance contract. If you get rights out of a
certain source, you cannot deny the limits that are pointed out in that same
source. It can be deplored that the court only decided the case based on the
principles of contract law and didn’t make any consideration whatsoever
concerning the guiding principle of protection of the weaker, third injured
party. The reason for it is that the protection of
the weaker party is a mandatory rule, but is no part of the ordre public that the judges raise ex officio.
The Aasma decision limits the right of the third
party at a time when other courts moving in the opposite direction. The
solution depended on the applicable direct action statute. As a matter of fact,
the judges were more generous towards the third party in states where the
direct action statute gives large rights to the injured party. As an example we
can point at the conclusion that has been reached in the Talbott Big Foot
decision. In this
case the court has decided to stay the case in order for the proceedings in
arbitration to be concluded instead of dismissing the direct action as in the
Aasma case. This liberal solution appears to be inspired by the very generous
direct action statute of Louisiana. The same result was reached in the
where the judges based their decision on the Talbott Big Foot decision and on
the Federal Arbitration Act.
According to some authors, the third party can keep
his right to direct action if he bases his claim on the direct action statute.
Only then does he not need to go to an arbitration tribunal nor is he even
obliged to stay his lawsuits during arbitration.
When the injured party relies on the insurance contract to support his right to
direct action however, the injured party seems to be exposed to the arbitration
clause and its consequences. Not even mandatory law protecting the third party
can prevent this. Only if the rules on protection of the weaker party are seen
as public policy will the seized judges be able to overrule the arbitration
clause. The outcome of the problem will therefore depend on the law that is
applicable according to the judge, federal law or state law.
The judge who came to the decision in the Aasma case
held that the solution would be as severe as he saw the solution
if it came under the application of English law.
The courts will withhold all defences out of the insurance policy, including
the arbitration clause. The direct action brought before a national court by an
injured party against the insurer will be referred to the arbitration tribunal
for the handling the action if the insurance policy contains an arbitration
clause. The English courts are of the opinion that the insurer cannot be in a
worse position against the third party than he was against the insured.
As the American judge correctly indicated the UK
courts decided that arbitration clauses are to be respected.
In the Freshwater case Lord Hanworth held that it would be impossible to get a
right to sue the insurance company without complying with the limits spelled
out in the contract, which leads to liability of the underwriter.
The decision in arbitration is considered to be a precedent contractual
condition to the liability of the insurance company.
Although claimants have submitted the argument of
unnecessary and unreasonable extra costs that they could not even bear and that
legal support didn’t cover, the courts minimised this aspect as a problem of
personal nature. The plaintiff’s personal troubles should not interfere with
the insurance contract and the underwriter’s rights there under.
Lord Denning took the defence of the third party by questioning this reasoning
in the case of Fakes v. Taylor Woodrow Construction Ltd.
However the other judges did not follow him in protecting the right of defence
and access to justice. The present situation is a good example where the
protection of the third party is not effective and merely reduced to theory in
case the plaintiff has limited resources.
After an open consultation the Scottish and English
Law Commissions decided to maintain the present situation.
Under the reform of the Third Parties Act of 1930 the plaintiff would be bound
by the arbitration clause in the insurance contract before he can get payment
through a direct action against the insurer. In their last joint report the
commissions refer to one of the few consultees who explained the need for an
arbitration clause in the following way: the arbitration clause can form a
guarantee to get insurance disputes resolved following UK law. This is possible
as an arbitration procedure escapes from the scope of the Brussels Convention: arbitrators will form their own judgement on the applicable law. When we look
at the solution that was reached under French forum, we can easily understand
the argument of this consultee. The question that remains is if foreign courts
cannot avoid the application of the arbitration clause on the basis of proper
norms that they can apply according to Conflict of Law rules.
to be paid
A “pay-to-paid” clause
is a contractual term that has traditionally been included in P & I
policies and is almost only found in these types of insurance policies. Through
this clause the P & I club can only be forced to pay the insured ship owner
if the latter has paid the damages to the injured party first. This theory is
logical as the insurance contract can only cover (indemnify against) actual
losses of the insured and the loss of the insured is only suffered once the
money leaves his property. The payment clause is meant to avoid payment to the
ship owner that would not benefit the injured party.
In case of bankruptcy of the insured however an
obvious problem will arise: since the insured is insolvent he cannot pay and as
he does not pay the injured party, the P & I club will not let its money go
to the insured. The question in a direct action against the underwriter by the
injured party is somewhat different: the party suffering the loss will earn the
money. The goal of the liability insurance is thus served although a
contractual pre-condition is not satisfied. How is this problem solved in the
several jurisdictions that are covered in this thesis?
In Norwegian and Swedish law, the first and most
important reference on this subject is the decision in the Skogholm case.
The Skogholm case concerned Section 95 of the FAL. This section is construed to
protect the third party against the insolvency of the insured and cannot
therefore be derogated from. In his judgement the Supreme Court invalidated the
pay to be paid clause based on the argument that the P & I club cannot
avoid the statutory rights of the third party.
The relevant provision of the
former Scandinavian law is still applicable in Sweden. The solution that was
proposed under the Norwegian Supreme Court’s decision is equally followed in
This vision has more recently been confirmed before the Court of Appeal of
Stockholm in the Degerö case
where the judges decided that Section 95 is a mandatory rule that cannot be
derogated from by the contractual parties.
In Norway insurance law has
been changed since the Skogholm case. Since 1989 Sections 7-6 and 7-8 of the
NICA explicitly prohibit the effect of payment clauses in liability insurance
contracts, which under Norwegian jurisdiction includes P & I policies. No
recent case can confirm the rule, but the law is very clear in its text: “ The provisions of this section cannot be
contracted out of to the detriment of the injured party.”
In Icelandic law the solution
in relation to a payment clause will depend on the nature of the insurance. If
the insurance is compulsory, objections from the insurance contract cannot be
invoked against a third party in a direct action. In the case of voluntary
insurance however the objections of the insurance contract can be invoked
against the injured party who surrogates in the rights of the insured. These
rights are limited by the insurance policy and the third party’s rights will be
limited in the same way. However Section 96 of the Icelandic Insurance Code
protects the third party. This article stipulates that the insurance contract
cannot limit the rights of the third party in a way that the latter would have
fewer rights than those he would have had against the insured.
Therefore the payment clause seems to be accepted under Icelandic law, at least
in case of voluntary insurance. When the liability insurance is imposed by law,
the third party is put in a position whereby no objection regarding the
insurance contract can be used against him.
Common Law lawyers attach much
more importance to the specific relationship between the P & I clubs and
their members. This vision distinguishes the liability insurers who cover the
liability of their insured from the indemnity insurers who only promise to
indemnify their members for the losses suffered by paying under their legal
the principle of a right to direct action against liability insurers is
explicitly recognised in the Third Parties Act of 1930,
the P & I Clubs have always tried to escape from this rule basing their
argument on the very specific character of the P & I Clubs.
The House of Lords accepted
In arbitration, before the appeal judges and the Court of Appeals, the decision
in these cases on whether or not to apply the payment clause was going both
ways, with dissenting opinions between the judges of each instance. The House
of Lords finally dismissed the Direct Action on the basis of the existence of a
payment clause in a unanimous decision.
In both the cases that were
first joined before the Court of Appeals, the claimants obtained a judgment
against the ship owner for cargo loss and sought for an arbitral award for this
liability in a direct suit against the P & I Clubs. All conditions for a
direct action under the Third Parties Act of 1930 were satisfied. The direct
payment from the club to the injured party was however prevented by a clause in
the insurance contract. At first sight this denial seems to be in contradiction
with the aim of the 1930 Act, which is to protect the third party against the
insolvency (impossibility of payment) of the assured.
The reasoning for the right to
direct action before the House of Lords was introduced by three questions:
(1) What were the rights of
the members against their P & I insurer at the moment precisely before
their winding up in respect to the liability to the third parties?
(2) Does the pay-to-paid
clause purport, in a direct or indirect way, to avoid the insurance contract or
to alter the rights of the parties to the insurance contract upon winding up of
the member, as far as to take away the effect of the provisions to the extent
of section 1(3) of the 1930 Act?
(3) What rights can be
transferred to the third party upon the winding up of the members?
Without reproducing the full
argumentation the most
important argument is that the third party cannot have more rights out of the
insurance policy than the member. Since the member did not pay damages, he will
not be entitled to get an indemnity from the Club. If the member does not have
this right, the House of Lords cannot see how the third party should be
entitled to this right. The decision of the House of Lords can, apart from
in favour of the P & I Clubs, be justified by the principle that clarity
takes the lead over justice in commercial law.
In the Joint Report of the
British and the Scottish Law Commissions we can see that the protection of the
P & I clubs continues. Although the general rules in the draft act tend to
offer more protection to the third parties, this is not the case in marine
insurance. The explanation given in the report is not to interfere with the
future international legal framework for marine insurance.
It would have been preferable to at least propose an interim measure for marine
insurance even if a solution on an international level can be reached.
The position of the French
jurisprudence has been somewhat incoherent and uncertain on the matter. The
solution to the problem of a payment clause under a direct action seemed to be
open. A decision
from the French Supreme Court might have brought clarity on the case:
the pay-to-paid rule has not been endorsed in French jurisprudence.
The last time that the issue came before the French Cour de Cassation,
it only ruled on the procedural aspect of the matter, namely that the Appeals
Court of Basse-Terre had given no legal argumentation in conformity with Art.
455 of the French Procedural Code when it condemned the P & I club to the
payment of damages.
Before the decision of the
Cour de Cassation of 1995 the French position developed through several steps.
After the legal establishment of the right to direct action against the insurer
in the law of 13 July 1930, the conditions for it were spelled out through
The Court of Appeals of Rennes however dismissed a direct action because the
conditions under the English Direct Actions Act were not fulfilled.
These decisions were inspired by the vision that the direct action finds its
source in the underlying insurance agreement and its applicable law. The
insurance policy itself was also used to dismiss
or to award the
payment of damages under a direct action.
The decisions thus went both ways, based on the
contract (including a payment clause) and on English law (that recognises the
effect of the payment clause). Some courts still defended the right to direct
action on French law as applicable to all damages caused on the French
territory. French law and its far-reaching protection of the third party does
not accept the effect of pay-to-paid clauses.
Some Courts ignored the clause on public policy grounds: the P & I club
cannot force his member to be bankrupt before indemnifying him for the damages
he had to pay to the injured party.
They here (wrongly) decided that the obligation of the club was to guarantee
his members default.
In the note under the decision of the Cour d’Appel of Rennes, the author refers
to Cozian to
indicate that the right to a direct action cannot overrule private
international law, as it is not part of the international ordre public.
But without relying on that argument, the Tribunal de Commerce of Rouen came to
a decision that French law shall govern all disputes concerning damages caused
on the French territory even if the insurance contract is governed by a foreign
law that does not accept a right of direct action.
The stabilising decision of the Cour de Cassation of
1995, in the Irini M case, confirms the application of the lex assurandi,
but indicates that the application of the payment clause is not accepted in
French jurisprudence. This decision is contradictory, as the application of
English substantial law to the direct action would include the application of
the pay-to-paid rule. The explanation for departing from the English
jurisprudence on this point can be found in the fact that P & I Clubs are
seen as regular insurance companies under French law, whereas the UK still
recognises the specific character of mutual insurers.
This French approach is very important as it
indicates that the lex assurandi will
apply to determine the conditions to apply to a direct action. Its decision is
equally hybrid as the interpretation of the insolvency of the assured is done
in accordance with French law.
When applying the terms of the insurance contract that is governed by English
law, the Cour the Cassation ignores the payment clause on the basis of French
law. We together with other authors
can only regret any substantial argumentation by the judges on the choice of
the different applicable laws.
On the other hand, the more logical solution to
apply would be that the right to a direct action is determined by the lex loci delicti commissi or else the lex contractus
from the underlying agreement in the case of contractual liability.
The possibility of invoking defences based on the insurance policy can then be
based on the lex assurandi.
The problem in connection with the limitation period
for direct actions resides in the complex relation between the different
related claims. There are different periods applicable to the insurance
contract (for the claim from the insured against the insurer) and to the claim
for damages (based on tort law or on the contract between the insured
tortfeasor and the injured party). Where the law specifies a statutory
limitation period for direct actions against the marine insurer, the problem is
easily solved. When this is not the case or when the relevant law does not to
the P & I Clubs, the solution is more difficult to find. Although a
homogeneous solution has not been reached, the discussions in doctrine are also
In France the limitation period is the one that is
applicable to the claim against the tortfeasor.
The third party does not need to follow the limitation period of two years
prescribed in L 114-1 of the Code des assurances as the direct action is seen
as a personal right of the injured party.
The French Supreme Court
even extended the period as long as the insured has the right to sue his
insurer and this rule is now laid down in L 124-3 of the French insurance Act.
The English position is again opposite to the one
taken in France: In the Joint Report of 2001, the joint commissions conclude
that we should take into account the period governing
the insured’s right of action under the insurance contract against the insurer.
The reasoning that is followed in England is based on the subrogation in the
rights of the assured. If the right of the assured is limited by a certain
period, then the right of the surrogated third party should be limited in the
same way. It has to
be said that the commissions accorded strong protection for the third parties
by proposing that the limitation period should only start running from the date
that the liability of the insured is established!
2.4 Limiting the right
After the contractual terms conditioning the right to
insurance cover, we will now briefly discuss the terms that limit the right to
compensation. These concern the wilful misconduct of the assured and to a
certain degree other negligent acts of the assured, the preliminary payment of
damages to the injured party, the non-payment of the premium, the
unseaworthiness of the vessel, contractually agreed deductibles, illegal, hazardous
or improper character of the marine adventure of the assured and finally the
arbitration clause etc.
The clauses that are discussed under the present title
concern personal actions or omissions of the insured having consequences on the
contract. It is difficult to say that the injured party should be punished
because the insured breached a contractual term. On the other hand it is
difficult to make an insurer liable when he explicitly indicated not to provide
cover under certain circumstances. The question on the opposability of these
terms to a third party will thus depend on the degree of protection given to
the third party.
This is the reason why under compulsory insurance
these defences are generally not available to oppose to the injured party. In
that case the legislator installed a right to direct action in order to protect
the third party. No contractual term could then be opposed to the mandatory
rule ... no contractual term but the exception of wilful misconduct.
Wilful misconduct of the assured
The term "wilful misconduct" refers to
of the assured. Not just the intentional but also reckless acts seem to fall
under the actions aimed at by section 55(2) of the MIA 1906. The wilful
character is clearly more than just acting negligently with privity.
In a case-to-case study the judge must establish that the insured caused the
damage wilfully or disregarded a possible risk that ultimately caused the
very little discussion on the matter exists, the Norwegian approach seems
preferable. The NMIP 1996 describes the different consequences for acts under
intent or under gross negligence. Moreover it stipulates expressly
that the wilful act loses its wrongful character when it is committed to avert
a greater loss or to save human life.
It is public policy that a man cannot profit from
the consequence of his own criminal conduct. Therefore it is also a general
principal in insurance law that an assured cannot recover indemnity when he
deliberately caused the loss and thus will not be covered if the wilful
misconduct is at least one of the effective causes of the loss.
Unlike the other subsection, Section 55(2), a of the MIA 1906 cannot be
excluded by express stipulation.
As the fundament of this rule is public policy, the
underwriters have the right to refuse payment also to a third party claimant.
It seems to be unfair that the injured party has to be the victim in this
situation, but their personal interest cannot overrule the public policy. This
idea not only supported finds, but also in international conventions as the
The only case where the discussion is inactive is
the circumstance of personal injury. Courts estimate that reparation of
personal injury is more important than the protection of the insurer against
the criminal acts of his insured. The discussion to get the wilful
misconduct-exception out of the Athens convention is going on at this very
moment. The result
of these discussions will show if the hierarchy is to be considered as being
Non-payment of the premium
The rights under the insurance contract are linked
to obligations from the counter-party, just as in all other types of contracts.
The basic condition for the insurance contract to provide cover is the payment
of the premium by the assured. If the assured does not do so, this constitutes
a fundamental breach of contract that results in the loss of insurance cover
for the insured. (Although in some cases the insurer cannot rely on non-payment
of the premium altogether)
A third party bringing a claim directly against the
insurer will generally be bound by such contractual term in the same way as the
assured. This is a consequence of the rule that the third party - when
surrogating in the rights of the assured - cannot have more rights than the
Under English law, there is a sharp distinction
between the effect of terms and the one of conditions. In Murray v. Legal and
General Assurance Society Ltd
the court held the insurance company liable although the premium was not paid
to it. The court considered that the P & I Club is entitled to rely on this
clause, and that the wording of the policy expressed the will not to make it a
precondition for third party claimants.
The Joint Committee however explicitly underlined that the non-payment of the
premium will be opposable to the third party under the new draft of the 1930
This trend was already set after the critics on the Murray decision. The
decision to oppose the non-payment to the third party was followed in Cox v
Bankside and it is
supported by large doctrine that the injured party can only get rights if they
are subject to the same defences as the insured.
pointed out in the Joint Consultation Paper, a breach of the insurance contract
may well occur around the time of a statutory transfer. If this does occur, the
third party may not be able to cure the breach, either because the term in
question requires the insured to do something personally, or because he is not
aware of it in time, or because he lacks the financial resources to do so.
As the 1930 Act lays the insolvency of the insured as a precondition, the last
hypothesis is not unlikely to occur. The condition to the right of direct
actions can be the same ground for a defence not to obtain payment under
English law. This is at least a remarkable conclusion.
the third party surrogates in the rights and obligations of the assured, he can
also pay the premium before directing his claim against the insurance company.
Can the judge go as far as to deduct the premium from the damages to be paid to
the injured party? Howard Bennett sure doesn't think so.
The author finds support to refuse the right of set-off to the insurer in a
judgement of 1970.
In this case Cumming-Bruce held that the statutory subrogation was limited
" to the rights under the contract in respect of the liability incurred by
the insured to the third party. Rights which are not referable to the
particular liability ... are not transferred."
Some final defences that could arise out of the
insurance contract need to be mentioned. They are not however subject to much
discussion before the courts nor in doctrine. I think it is wise to leave it
that way and finish this part two by indicating the generally accepted
Firstly we have the negligence of the assured. All
lawyers agree that when the assured acts negligently and causes damages with
these acts, the P & I Clubs cannot waive the claim of the injured party
based on this very same negligence. Ivamy writes: "Negligence, whether on
the part of the assured himself or of his employees, does not release the
insurers from liability...."
As a specific type of negligence we can refer to the
breach of the insured's duty to provide information. The Louisiana courts have
followed the general rule in Edwards v. Fidelity & Casualty Co. of New
York. The line
of reasoning was based on the fact that the claimant's compensation should not
depend on the actions of the insured. This argument can certainly be defended
in countries like Norway where the right to direct action is mandatory but it
is less certain that the argument will stand before English courts. In West v.
Monroe Bakery the court
held that the right of the third party arises at the time he was injured and
that in the light of public policy such right cannot be defeated by the
omission of the insured to give notice. This argumentation strongly resembles
the French theory of déchéances
and also the Joint law commissions of Scotland and English authors alike
agree that this defence can only be invoked if it consists in a denial of a
substantial right of the insurer.
Finally, the unseaworthiness of the vessel or other
policy conditions relating to minimum safety standards cannot be objected to
the third parties. The joint law commissions underline that the third party
cannot look after this duty and therefore cannot be held responsible for the
consequences of such a breach.
The description of the position of the third party
faced with the policy defences shows that the generally conceded right to
direct action is a very fragile right. Where the political will exists to
protect a fragile party faced with an unreliable wrongdoer, the interests of
the P & I Clubs seem to have the law on their side in some countries.
Although the direct action has been granted based on the general policy of
protection of the weaker (third) party and the legal rules confirm this right
explicitly, there seems to be a more important legal principle to protect the
economic interest of the P & I Clubs.
The most important evidence of this fact is that the
least effective protection is given in the jurisdiction where the P & I
Clubs have the strongest influence. England has granted the right to direct
action in land-based law together with all other jurisdictions and has not
arisen any special objections to it. Therefore it is even more painful to see
that in the field where insurance law found its roots and even more in the
country that is both an important maritime and insurance nation people hold on
to those roots and fear the evolution of their market.
But when we compare the English position with the
one taken in Norway, which is also a maritime nation with strong players in the
P & I market, we see a striking difference. Here the protection of the
weaker party is understood and incorporated in the practice. Although the Clubs
still include self-protecting clauses in their rules, the judicial power does
not bend to their wishes. The Scandinavian doctrine also prefers to take a
legal position rather than to serve the interests of the P & I Clubs. And
in Norway we can see that even with the strong right to direct action the
arguments put forward by the English P & I Clubs are exaggerated and the
Norwegian ones are still competitive.
I hope that this thesis clarified the importance of
a stronger right to direct action from a legal point of view. If this is
recognised in a uniform way all over the globe, this will serve both the law
and economics. First of all the number of judicial actions can be reduced. In
the case of compulsory insurance, the income of the P & I Clubs will
increase with the number of the members. If there still remains a lack of money
because of higher expenses, the members will be willing to contribute as they
profit from the right to direct action indirectly. Another strong argument for
compulsory insurance is that the right to direct action adds to the standards
on vessels and will be a factor lowering the number of incidents.
I am convinced that the right to direct action is an
important instrument to help the injured party to be reimbursed, but I am also
convinced that ship owners and P & I Clubs will profit from the
introduction of this right in the long run. I therefore think it would be wise
for the lawmakers to provide third parties with a large and transparent right
to direct action against the insurers so as to provide a solution for the
existing eternal triangle at sea.
Laws and statutes
- Law of 11 June 1874, on Insurance in general, B.S. 14 June 1874.
- Law of 25 June 1992, on land-based insurance contracts, B.S. 20
- Marine Insurance Act, 21
December 1906 (6 Edw 7 c 41)
- Third Parties (Rights against Insurers) Act
1930 of 10th July 1930
- Act no. 69 of 16 June 1989 relating to insurance contracts
(Earlier Act no. 20 of 6
June 1930 relating to insurance contracts. - See Acts of 3 February 1961
relating to liability for damage caused by a motor vehicle, no. 39 of 10 June
1988 on insurance activity and no. 65 of 16 June 1989 relating to industrial
- Act no. 39 of 24 June 1994 The Norwegian Maritime Code
Federal Arbitration Act,
- 1968 Brussels Convention on jurisdiction and the enforcement of
judgments in civil and commercial matters, Official Journal L 299 , 31/12/1972
p. 0032 – 0042,
- Convention of 16 September 1988 on jurisdiction and the
enforcement of judgments in civil and commercial matters
- EC Convention on the Law Applicable to Contractual Obligations,
Rome 19 June 1980, Official Journal C 27, 26.01.1998,
- Freshwater v. Western Australia Assurance Co.
Ltd.  1 KB 515
- Cunningham v. Anglian Insurance Co. Ltd. 1934
- Dennehy v. Bellamy  2 All ER 262.
- Smith v. Pearl Assurance Co. Ltd.  1
All ER 95
- West Wake Price & Co v Ching  1 WLR
- Post Office v. Norwich Union Fire Insurance
Society LTD  2 QB 363.
- Murray v. Legal and General Assurance Society
Ltd  2 QB 495
- Fakes v. Taylor Woodrow Construction Ltd
 1 QB 441.
- H.L. Firma C. Trade S.A. v. Newcastle
Protection and Indemnity Association (The ”Fanti”) and Socony Mobil Oil Co.
Inc. v. West of England (The ”Padre Island”)  2 Lloyd’s rep. 191.
- Popplewell J in Lefevre v White  1 Lloyd’s Rep
569 at p 578
- Hong Kong Borneo Services Co. And others v.
Anthony David Pileher  2 Lloyd’s Rep 593
- Cox v Bankside  2 L.L.Rep. 437, p. 451
Civ. 14 juin 1926, DP 1927, p. 57.
- Cass. Civ. 28 mars 1928, Bull. Civ. II, No 148, p. 9
Req. 24 février 1936, D. 1 936-1-49, note of Savatier
Civ., 16 Février 1937
- Cass. Civ., 10 March 1937
Civ. 1ère, 21 avril 1972, Revue crit. DIP 972, 306, note of P.
Rennes, 15 mai 1981, D.M.F. 1982, pp. 275-283.
1ère Civ., 11 mars 1986, RGAT 1986, 354
de Rouen, 17 décémbre 1987, DMF 1988, p. 477, (Sea Saint).
de Rouen, 20 mai 1988, DMF 1988, p. 381.
- TC de Rouen, 20 mai 1989
de Salon-de-Provence, 25 mai 1990
1ère Civ., 15 janvier 1991, RGAT 1991, 405
de Rouen, 11 mai 1993
de Bordeaux, 23 septembre 1993, DMF 1993, p. 731, (Heidelberg).
de Rouen 13 juillet 1994 (Heidi)
Comm. 27 juin 1995, DMF, 1995, p. 530 (Irini M)
Rouen, 26 juin 1997, D.M.F., 1998, pp. 133-137.
Comm., 7 juillet 1998, D.M.F., 1998, pp. 826-843.
Rouen, 18 mars 1999, D.M.F., 1999, pp.822-828.
1ère Ch. Civ., 7 novembre 2000, R.C.A. 2001, n° 29.
- Cass., 18 oktober 1945, Pas. 1945, I, 247.
- Cass., 26 februari 1960, Pas. 1960, I, 749.
- Cass., 8 mei 1971, A.C. 1971, 886.
- Antwerpen, 25 juni 1980, R.H.A. 1981, 451-456
- Gent, 23 oktober 1985, R.H.A. 1985, 16-22 (RN
16 maart 1993, R.H.A. 1994, 429-453.
- Skogholm, ND 1954, p. 445 (NH)
- A/S Dolsøy
Degerö, ND 1996 p. 1 (HVS)
- Cushing v. Maryland Casualty Co., 1952 AMC
1803 5th Cir.
- Ocean Eagle case, 1974 AMC 1629 DPR, p. 1633.
- Crown Zellerbach Corporation v. Ingram
Industries Inc. et Al. and London Steam-ship owners mutual insurance
association Ltd., Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc), 17:271; 1986
- In re Tolbott Big Foot, Inc., 887 F.2d 611,
1990 AMC 1780 (5th Cir. 1989).
- August Aasma, et al. v. American Steamsip
Owners Mutual Protection & Indemnity Ass’n, 95 F.3d 400, 1997 AMC 1 (6th
- Zimmerman v. International Companies & consulting Inc., 107 F.3d 344 (5th Cir. 1997
H., VAN HOUTTE, Internationaal privaatrecht. Leidraad en teksten bij de
colleges, Acco, Leuven, 2002, p. 5-15.