Reform or revolution?

IT is universally recognised that one of the finest pieces of legislative drafting anywhere in the world is the English Marine Insurance Act 1906, or the English MIA. The English MIA has been adopted or closely followed in many jurisdictions. For instance, Australia adopted its own version of the English MIA in 1909 (the MIA), which is almost identical to the English MIA.

Australian marine insurance practice is very similar to practice in the London market, but Australia also has another piece of important insurance legislation, namely the Insurance Contracts Act 1984 (ICA). The ICA does not apply to insurance contracts governed by the MIA. Nor does it apply to certain other classes of insurance, including reinsurance. The ICA is more pro-insured than the MIA.

In January 2000, the Commonwealth Attorney General sent a reference to the Australian Law Reform Commission (ALRC) to undertake a comprehensive review of the MIA. The ALRC undertook an extensive programme of consultation with the insurance industry, marine insurance lawyers and judges, academics, and anybody else with an interest in marine insurance. The ALRC prepared a comprehensive review which was tabled in parliament in late May 2001.

The review is, arguably, one of the more important documents on marine insurance law to be published in the common law world for many years, and brings the MIA closer to the ICA. Many of its recommendations were anticipated by industry, and many of them are uncontroversial. These include changes to some of the more anachronistic provisions of the MIA to bring it more into line with modern market practices, and ironically with amendments to the English MIA previously not adopted in Australia. In some areas the review adopts the position which the courts have adopted in interpreting the MIA over the years. This is particularly the case with what may be regarded as the more technical or small-print provisions of the MIA dealing with policy formation, different types of policies (for instance the MIA will now take account of cargo open covers), the role of the slip, and evidentiary matters.

However, this is no gentle review of the MIA. Industry anticipated some major changes to controversial areas such as the provisions of the MIA pertaining to warranties, material non-disclosure, and insurable interest. The ALRC's recommendations are significant and in some respects sweeping. Some in the industry might say that the ARLC's recommendations have gone too far in that there does not appear to be any call by industry for such sweeping changes. The main recommendations of a more controversial nature cover utmost good faith, warranties, material non-disclosure, insurable interest and cancellation.

Utmost good faith

The concept of utmost good faith has been rewritten to bring it into line with the provisions of the ICA. Interestingly, the duty of good faith now becomes a contractual duty rather than a duty imposed by law. In addition, the remedies available to underwriters for breach of this duty have been made less draconian, and the duty now ends once proceedings have commenced. In this respect, many of the recommendations reflect the recent decision of the English House of Lords in the Star Sea case.

Warranties

As anticipated, the ALRC has wholly rewritten the warranty provisions which under the MIA entitled underwriters to avoid a policy for the most technical of breaches of warranty, even if there was no causal connection between the breach of the warranty and the damage. The new regime introduces concepts of causal connection before an underwriter can decline a claim.

Importantly, the ARLC has done away with such age-old implied warranties as the warranty of seaworthiness and the warranty of legality. The ARLC comments that there is no reason why such warranties cannot be incorporated into the contract as conditions. This rather begs the question of what the market will accept.

The lesson for underwriters is that, from now on, all warranties must be specifically incorporated into the contract, and insurers will not be able to rely on the implied warranties from the MIA. Some of these changes were anticipated, but they are nonetheless radical departures from the MIA. Underwriters will certainly have to change the way they write risks and word their policies if they want to have the benefit of the traditional warranties, or indeed any warranties at all.

Material non-disclosure

The changes recommended by the ALRC parallel the provisions in the ICA. Essentially, they adopt the 'reasonable insured' test of materiality as opposed to the traditional 'prudent underwriter' test under the MIA. Some of the proposals reflect recent developments in common law in both England and Australia (for instance, the Pan Atlantic decision of the House of Lords), but the changes go much further.

Underwriters will certainly have to rethink how they accept risks and what questions they should put to intending insureds and their brokers, particularly if it is new business they are being asked to underwrite. With regard to the amount of litigation which the equivalent provisions of the ICA have generated over the last fifteen years, and some of the results of these cases, some questions must be asked as to whether these changes were really needed. Will these changes assist in ensuring that there is a fair presentation of the risk to the underwriter?

Insurable interest

This is one of the more radical departures. The ARLC has followed the ICA and abolished altogether the concept of insurable interest. This necessitates a repeal of many time-honoured provisions in the MIA. Basically, anybody who suffers an economic loss as a consequence of damage to insured property will be entitled to claim. It will no longer be necessary to demonstrate that they had an insurable interest at the time of the loss.

In the area of multi-modern transport, and in cargo insurance where goods are bought and sold 'on the water', this change is bound to raise eyebrows and perhaps a little more. In many respects it introduces concepts which are inconsistent with well-accepted practices in the international trading community such as the provisions of INCOTERMS, and some of the concepts underlying the many Institute clauses.

Although the ALRC seems to adopt the view that the abolition of the concept of insurable interest under the ICA did not lead to the collapse of the ordered world, there are many marine insurers and others who are far from convinced that this logic applies to marine insurance. Certainly the abolition of the concept will make it theoretically possible for more than one party to claim indemnity under a cargo policy. The changes also seem to suggest that it is acceptable for a party to have a claim for indemnity, even if the time of the loss and the nature of the loss had nothing to do with the perils insured under the policy. Of course, it may be that an answer is for underwriters to draft their policies more carefully with regard to these considerations. Only time will tell. I suspect we have not heard the end of the debate on this particular issue.

Cancellation

Marine policies can no longer be cancelled unilaterally by underwriters. Notice must be given to the insured, along the lines of the provisions in the ICA. Although it is not particularly controversial, the operation of the MIA has been extended to some grey areas such as 'inland waters' in accordance with market practice as reflected in the Institute clauses. The MIA will now apply to the risks of shiprepair. The MIA will also no longer apply to domestic or non-consumer goods, which will now be covered by the ICA. The MIA will contain a comprehensive code on subrogation rights as between underwriters and their insureds.

It is going to be very interesting to see how the market reacts to the review. One thing is for certain. If the majority of the major recommendations by the ALRC are enacted, the law and practice in marine insurance in Australia will be very different to what it has been in the past in crucial areas.

One qualification should be made to all of this. The ARLC has recommended that there be no provisions in the MIA requiring it to apply compulsorily to contracts of marine insurance entered into in Australia or by Australian parties. This raises the tantalising possibility that a marine insurer may seek to avoid the recommendations, if they become law, by contracting under the laws of another jurisdiction, say the laws of England. It will be incumbent upon insureds and their brokers, if they wish to have the benefit of the reforms, to insist that policies are subject to Australian law and jurisdiction. This raises the question of whether this is the best way to ensure that legislative reform does indeed apply to contracts written in Australia, supposedly for the benefit of Australians. The position under legislation such as the ICA and the Carriage of Goods by Sea Act is quite different. Alternatively, the MIA should not be altered so radically that it may no longer command acceptance in the international marine market. That is the real dilemma posed by the review.

The review is not yet law. There is no bill before parliament. It is no more than the recommendations of the ALRC, including a draft bill. There is time for interested parties to make submissions. It is likely that marine insurers and reinsurers will do so.