An Eternal Triangle at Sea

7/29/2019 An Eternal Triangle at Sea

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Jura Falconis Jg. 39, 2002-2003, nummer 2

An eternal triangle at sea:

Loss of insurance cover under a direct action

in marine liability insurance.

Gregory Fossion

Thesis presented in view of obtaining the degree of Master of Laws inMaritime Law. Written and developed under the scientific conduct of

Professor Dr. H. J. Bull.

List of abbreviations

BMC - Belgian Maritime Code- Loi du 21 aut 1879 contenant le Livre II du Code de

Commerce. De la navigation maritime et de lanavigation intrieure.

- Wet van 21 augustus 1879 houdende Boek II van hetWetboek van Koophandel. Zeevaart en binnenvaart.

Cass. - Decision of the Belgian Supreme Court- Arrt de la Cour de Cassation belge- Arrest van het Hof van Cassatie

Cass. Civ. - Decision of the French Supreme Court, civil bench- Arrt de la cour de cassation, chambre civile

Cass. Comm. - Decision of the French Supreme Court, commercialbench

- Arrt de la cour de cassation, chambre commerciale

CLC International Convention on Civil Liability for OilPollution Damage

D.M.F. Droit Maritime Franais

HNS Convention International Convention on Liability and Compensationfor Damage in Connection with the Carriage ofHazardous and Noxious Substances by Sea.

I.L.J. Insurance Law Journal


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Joint Consultation PaperThe Law Commission Consultation Paper No. 152 andThe Scottish Law Commission Discussion Paper No.

104 in a Joint Consultation Paper of 1998 on ThirdParties (Rights Against Insurers) Act 1930,http://www.lawcomm.gov.uk/

Joint Report The Law Commission and The Scottish LawCommission (LAW COM No 272) (SCOT LAW COMNo 184) Joint Report of 2001 on Third Parties (RightsAgainst Insurers) Act 1930, http://www.lawcom.gov.uk/

MIA 1906 Marine Insurance Act of 1906

NICA - Norwegian Insurance Contract Act: Act No. 69 of 16June 1989 Relating to Insurance Contracts (Norway)

- Forsikringsavtaleloven (Norge)

NMIP 1996 - Norwegian Marine Insurance Plan of 1996- Norsk Sjforsikringsplan

NMC 1994 - Norwegian Maritime Code- Lov om Sjfarten

UNCLOS United Nations Convention on the Law of the Seas


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LOSS OF INSURANCE COVER UNDER A DIRECT ACTION IN MARINE LIABILITY INSURANCE

Jura Falconis Jg. 39, 2002-2003, nummer 2 291

Introduction

The aim of the study of the defences of the liability insurers is to analyse therights of third parties under a direct action against liability insurers. Ascontrary as this first sentence of this thesis are the rules that apply to the directactions: they claim both to protect the injured party and to avoid the insurancecompanies taking on the full liability of their members themselves. It is aneternal triangle between three players (and even four if we count the injuredparty's insurer) who know that they have rights and obligations towards eachother, but that the exact scope of these rights and obligations are hazy. In thisunclear situation every party tries to get the largest part of the cake and allhave good arguments to claim it.

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 therisk of insolvency or even fraud they prefer to address the insurer. The right ofthe injured party to claim directly from the insurer is based on statutes thatarose in almost all jurisdictions beginning from the 1930's. Also internationalconventions as the CLC 1969 and the HNS convention recognise the right ofdirect 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 importantaspect of the analyses of the right to direct action therefore lays in thepreliminary study of the rules of conflict of laws. (1.2) The importance of thedetermination of the applicable law will appear when we examine the differentconditions 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 marineliability insurance that is dominated by the P & I Clubs. (1.4) The fact thatthese clubs are mutual insurers has had a great influence on the development ofshipping in general. The third parties unfortunately have not been spared fromthe consequences of this sui generis legal personality.

The heart of the thesis will deal with the defences that the P & I Clubs caninvoke against the statutory right to direct action. The first available defencesare those that are available to the insured. As the accountability of the club isbased on the liability of its members, case law and doctrine make the limitationof 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 theinsured is found liable but that his insurer is not because the underwriter hassuccessfully challenged the insured's liability.

More discussion will arise when talking about the policy defences that can beopposed to a third party. One group contains the arbitration clause (2.3.1), thepayment clause (2.3.2) and the limitation clause (2.3.3). These can be defined


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as procedural rules determined in the insurance policy. The different legaltraditions will offer different views on whether or not to oppose these defencesas 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 theinsurance and of the right to a direct action will indicate whether or not tomaintain one or the other defence.

The second group of contractual terms that prohibit insurance cover aim atmore material problems. The wilful misconduct of the assured, non-paymentof the premium, unseaworthiness of the vessel, etc. are actions or omissions bythe insured that may make him lose the insurance cover. Can the behaviour ofthe insured be opposed to the third party who uses the same ground to claimdamages? This discussion will be the subject of title 2.4.


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1 Direct action and marine insurance

1.1 Introduction

Before we can talk about the defences that the insurer can rely upon in a directaction, it is important first to analyse the right to a direct action. The basic ideaof this right is to make liability insurance directly available for the ones towhom the insured is liable.

Liability policies cover the cases where the insured is liable for damages hecaused. The insured will be reimbursed for the losses and costs incurred whenrepairing the damages to the injured person. The payment by the tortfeasor wassometimes uncertain because of his uncertain financial situation. In the 1930's

the Scandinavian legislators, as did the English, the French and others, gave athird party the right to claim directly against the insurer in the case ofinsolvency 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 personwhom he has already caused trouble to. But a second incentive is to be foundin the economics of law: it is much more efficient to reduce the number ofsuits by giving the injured party the right to go directly against the insurer, whoin 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 courtdecision was required before a direct action would be authorised. Theconditions for the right to direct action in different jurisdictions are discussedunder 1.3.

The need for comparison between the solutions of different jurisdictions is setout under 1.2. As maritime adventures are always of an international character,the third parties suing the ship owners insurer will inevitably be faced with theproblems of private international law. The importance of the analyses ofconflict of law rules will be repeated throughout the thesis.

The end of the first part of this work, title 1.4, will briefly indicate what formthe direct action takes in the world of marine insurance. This world isdominated by the P & I Clubs, who sometimes are a little more reluctant toreceive direct actions against them. The Clubs argue that their members onlycontract an indemnity cover, which does not contain a liability cover towardsthird parties. After the discussion on this specific policy, we will see how thelegislator can protect third parties against the rules of the P & I Clubs, namelythrough mandatory law.

The introduction of mandatory insurance aims to protect the injured partyagainst the risk of insolvency of the wrongdoer or even against theopportunistic insurance policy providers escaping the indemnification of the


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injured party. Voluntary insurance on the other hand concentrates on theperson contracting the policy. Also in voluntary insurance the third party canbe protected, but this protection will be lesser. Prior to discussing these

consequences the paper will present the idea of compulsory insurance in thelast title of this first part.

1.2 Applicable law

Most maritime cases have an international character. It is therefore not onlynecessary to determine which material law applies, but also which national lawimposes its solution. The answer to this question can be found in the conflict oflaw rules, also called private international law. These rules are part of each

national law system, but there are also international conventions regulating thissubject to promote uniformity in international matters. To know which conflictof law rule applies, the judge will qualify the problems brought before him.Each qualification has its own conflict rules.1 The categories that areinteresting to analyse in relation to this subject matter are tort law, contract lawand more specifically insurance law.

In respect of extra-contractual liability, the internationally accepted conflictrule is to apply the lex loci delicti commissi.2 The basis for this rule in the civillaw countries is Art. 3 of the Code Civil.3 This rule has been followed on an

international level e.g. in the Hague Traffic Accident Convention of 1971.4

5

In the case of contractual liability6 the terms of the agreement will determinewhen there is a basis for liability of one of the parties, its conditions and theconsequences of it. The contractual freedom of the parties is the firstinstrument to determine this, but usually this does not regulate all possibleproblems. Second in line is the party's autonomy: the parties have the right tochoose which national law will regulate their contractual relationship. In thisway they not only determine the content of the contract by inserting specificterms, but also submit the whole of the contract to a national law. This is

1 See H., VAN HOUTTE, Internationaal privaatrecht. Leidraad en teksten bij de colleges, Acco,Leuven, 2002, p. 5-15.2 Both civil and common law countries agree on this point. See Ch., SCAPEL, L'action directecontre les P & I Clubs, in Etudes de droit maritime l'aube du XXIe sicle, Editions MOREUX,2001, p. 333.3 Les lois de police et de scurit lient tout ceux qui resident sur le territoire franais, in Franceor in Belgium Wetten van politie en veiligheid verbinden allen die op het Belgisch grondgebiedwonen, meaning that you cannot depart from this rule by agreement between the parties.4 See H. VAN HOUTTE, op. cit., p. 64.5 A specific problem for maritime law is the question of jurisdiction and applicable law when anaccident took place on the high seas- on no territory at all. According to UNCLOS the flag of thevessel determines the 'nationality of the actions'.6 Which cannot be insured against in land-based insurance law but can be in marine insurance.


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important when the strict contractual terms don't offer a solution7 and the judgeor arbitrator has to find the solution in the national law applicable to thecontract. 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 theconflict rules of the forum that determine the applicable law.

In case of transportation contracts, the Rome Convention8 introduces thepresumption that it is the domestic law of the carrier that applies. The generalconflict rule for contract law is to submit the question to the law of the place ofperformance of the principle obligation of the contract. Under an internationaltransportation contract the principle obligation per definition operates on amultitude of territories. Therefore the place of delivery is usually taken as areference. But as different interpretations can be advanced, the French Cour de

Cassation proposed to apply the lex locus delicti.9

This solution is not followedin other jurisdictions and is criticised in doctrine.

But what law to apply to the direct action against the insurer? In this case thejudge has the choice between the lex locus delicti and the lex contractus of theunderlying liability issue and the law applicable to the insurance contract or lexassurandi.

In the Hague Traffic Accident Convention, the lex assurandi comes last in theorder of applicable laws. This convention cannot however be taken as an

authority for the solution in marine insurance issues that traditionally proposedifferent solutions. The answer will also differ between common and civil law.

French jurisprudence10 and doctrine11 have agreed since the 1930's that the lexlocus delicti governs the claim under a direct action. It is to be noted howeverthat the choice of law has not always been made clear by French judiciary. 12The Irini M case13 provides a good example of the hesitation of the FrenchSupreme Court to apply the lex locus delicti as the only applicable law. The lexassurandi always found its way through in some way or another, and this wasthe case in France.14 Before English Courts, English law is normally applied as

7 When the parties didn't propose a solution or when their solution is supplemented by mandatoryrules as it is the case for cargo and passenger liability.8 This convention is a very broadly applicable instrument for trade within Europe.9 See Cass. Civ. 1re, 21 avril 1972, Revue crit. DIP 972, 306, Note of P. Lagarde.10 See Cass. Req. 24 fvrier 1936, D. 1 936-1-49, Note of Savatier.11 See V., HEUZE and L., MAZEAUD, Trait conomique et pratique de la responsabilitdlictuelle et contractuelle, Sirey, 1931, n 2719, p. 961; Ch., JAMIN, La notion d'action directe,

LGDJ, 1991, p. 84; Ch., SCAPEL, op. cit., 334.12 See W., TETLEY, Marine insurance and the conflict of laws, in Marine insurance at the turn ofthe millenium, Intersentia, Antwerpen, 1999, p. 321-324.13 Cass. Comm. 27 juin 1995, D.M.F., 1995, p. 530. And see P., SIMON, Du nouveau sur laction

directe contre les P & I Clubs, inD.M.F. 1995, 525-529.14 See P., SIMON, op. cit.; F., FOUCHIER, LAction Directe contre les P & I clubs, in D.M.F.2000; B., HARRIS, The Fanti and The Padre Island decisions,D.M.F., 1990 and dALES, T.,Lexonration de la responsabilit du transporteur international de marchandises par voie


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being the lexassurandi or as being the legal basis for the claim (1930 Act). InAustralia the basis for the liability indicates the applicable law.15

In the case of carriage of passengers the lex contractus of the contract ofcarriage will be the one that determines whether or not and under what rulesthe passenger has a direct action.16 Another advantage of these internationalconventions establishing a right to direct action is that a country like Greecewhich does not recognise the right to direct action still has to accept it underthe scope of the international conventions.17 But for example the AthensConvention on passenger and luggage liability does not contain any provisionon direct actions yet. Until now the convention only indicated which law toapply, but the projects that are subject to discussion in the legal committee ofthe IMO are aimed to include compulsory insurance with a right to direct

action.18

If such provisions were introduced the preliminary discussion on theapplicable 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 lawmakersfound it necessary to give special rights to protect third parties (C) who have tosuffer 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 somecases the debtor (B) of C creates a special contract with another person (A) toescape his liability towards C. For these kinds of situations the law introducedthe actio pauliana.19 The fraudulent contract will, in that case, not beopposable to C, who will get his payment. The action introduced by the thirdparty 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 ofthe relation between A and B and does allow the third party to acquire rightsbased on the contract.20

In another hypotheses, B will have an outstanding claim against A which hedoes not pursue. In this case the creditors of B can introduce an action on hisbehalf against A to force his payment.21 This will create a solvency with B

maritime : consquences sur lassurance, 1999,http://perso.wanadoo.fr/karine/memoires/indexmem.html15 See W., TETLEY, op. cit., p. 321.16 See P.-Y., NICOLAS, Le transport maritime de passagers: responsabilit et assurance,D.M.F.1999, p.863.17 See K., SPAIDATIOTIS, Marine insurance law in Greece, http://www.maritimeadvocate.com/.18 For the discussions and the developments on the draft protocol for the Athens convention, see

http://folk.uio.no/erikro/WWW/corrgr/index.html.19 Article 1167 of the Code Civil.20 See VAN GERVEN, W., Algemeen Deel, 1969, BBPR, Story.21 Article 1166 of the Code Civil.


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who then can be forced to pay by C. However, this action oblique has aninconvenience in that all creditors benefit from it even if they did not act.22Therefore, in some cases, this will result in no benefit at all for the one

introducing the action based on Art. 1166 CC.

23

After those two general articles, the lawmaker tried to solve the problems thatwere still open: the person that acts against A should be paid immediatelyhimself and he should benefit first from his efforts. However, no general rightfor 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 systemsare derogations from a much more important general principle: the privity ofcontract. The Latin adagio Res inter alios acta...24 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 party.25

Going further than whathad already been attributed to the third parties would be breaking down thevery fundament of contract law.

But the idea of a direct action was not abandoned even if it has been awardedonly to a very strict number of cases. The most important ones are; the directaction by an owner against an sub-contractor,26 the direct action by sub-contractors against those responsible for a yard27 and the right of direct actionagainst the insurer by the injured party in certain specific cases.28 The idea hasbeen 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 thanthe idea of privity of contract.29 The French Supreme Court allows the right toa direct action in insurance law based on Art. L 124-3:

Lassureur ne peut payer un autre que le tiers ls tout ou partie de la

somme due par lui tant que ce tiers ne sest pas dsinteress, jusqu

concurrance de ladite somme, des consquences pcuniaires du fait

dommageable ayant entran la responsabilit de lassur.30

22 See Y., LAMBERT-FAIVRE, Droit des assurances, Dalloz, Paris, 2001, p. 505.23 See B., STARCK, Droit civil. Obligations, Librairies Techniques, Paris, 1972, p. 775-780.24 Art. 1165 of the Code Civil.25 See J., ADAMS, and R., BROWNSWORD, Key issues in contract, Butterworths, London, 1995,p.125.26 Article 1753 of the Code Civil.27 Article 1798 of the Code Civil.28 This provision can be found in the several basic insurance acts in the world, even if theconditions can differ strongly.29 See F., FOUCHIER, op. cit., p. 4.30 Freely translated as: The insurer can only pay part or the whole of the due by him to the thirdparty himself, as long as this third person has still an interest in the financial consequences of thecause of the damages that led to the liability of the assured.


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In its decision the Cour de Cassation held that the obligation for the insurer topreserve 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 directclaim for that sum.31 French jurisprudence sets very limited conditions for theright to direct action: the third party must prove its interest before the court andprove that its claim falls under the cover of the policy.32 The interest to claimdamages comes down to proving that one is either the injured person sufferingthe loss or the person surrogating to the rights of the injured party.33

In a recent decision of the Cour de Cassation it was decided that the wrongdoerdoes not necessarily need to be condemned for his actions to make the insurerliable.34 Establishing this liability is of course still necessary when one wants

to pursue the decision against the insured. In that case, the insurer and theinsured are jointly liable. They are held in solidum because they extinguish thesame debt, even if the cause of this debt towards the injured party isdifferent.35

In Belgium, where the civil code is founded on the French one of 1804, thesolution proposed to third parties has enjoyed a different evolution. In Belgiuma special law was introduced in 1937, adding a 9 in article 20 of themortgages law.36 This new paragraph introduced a privilege for the injuredperson as a remedy for the negative aspect of the action oblique as described

above.37

This solution is thus an intermediary solution between privity ofcontract and direct action. Under this law the action of the third party againstthe insurer is the action proper to the insured exercised by the third party. Thethird party has no personal right to claim against the insurer. This had far-reaching consequences for the procedures introduced against the underwriter.38

Since 1993 a new article 147, 3 has come into force in the law on land-basedinsurance contracts. This article suspends the application of article 20, 9 ofthe mortgage law for land-based insurance contracts. This caused a problem inBelgium 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

31 Cass. civ. 14 juin 1926, DP 1927, p. 57.32 See F., FOUCHIER, op. cit., p. 533 See Cass. 1re Civ., 15 janvier 1991, RGAT 1991, 405, relying on L 124-3 of the French codedes assurances.34 Cass. 1re Ch. Civ., 7 novembre 2000, R.C.A. 2001, n 29.35 See Y., LAMBERT-FAIVRE, op. cit., p. 508-511.36 Law of 16 December 1851 on privileges and mortgages.37 See S., ROLAND, Les droits de la victime d'un accident vis--vis de l'assurance et la

responsabilit de l'auteur du dommage,R.H.A., 1977-1978, p.105.38 See i.a. Cass., 8 mei 1971, A.C. 1971, 886; Antwerpen, 25 juni 1980, R.H.A. 1981, 451-456(Simone); Gent, 23 oktober 1985, R.H.A. 1985, 16-22 (RN 7, Mauricette); Antwerpen, 16 maart1993, R.H.A. 1994, 429-453.


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error has been corrected by the law of 16 March 199439, which specifies thatthe insurance law of 1992 is not applicable to marine insurance. A claim fromthe injured party against the insurer still has to be based on the mortgage law.

1.3.2 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 astarting point, we have to go back to 1927, when the resembling InsuranceContract Acts40 for Scandinavian countries came about. The analysis of theNorwegian act will immediately sketch the current situation for Sweden andDenmark as the reform of their new insurance contract Act is not yetcompleted.

The basis for insurance law remained the freedom of contract, with a limitedamount of mandatory rules. The provisions in the act were mainly directoryand could be set aside by the insurance policy. Provisions on the right to adirect action can be found under part II E of the ICA 1927 on liabilityinsurance. 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 estatein 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 thirdparties. Although the text does not say that the provision is mandatory, the caselaw has defended and reaffirmed this idea. The Norwegian Supreme Court hasdefended this point of view in the Skogholm case.41

In Sweden the ICA 1927 is still applicable and the solution thus remained

unchanged since the Skogholm-decision. In this country the conditions to havea right to direct action still are: manifest insolvency of the insured tortfeasor;possession of a claim of indemnity;42 payment is not received and the claim isto be assigned to the third party. It is interesting to notice that if the judiciary

39 B.S. 4 Mai 1994.40 The Swedish ICA of 1927 and the Norwegian and the Danish ICA's of 1930, further referred to

as ICA 1927.41 ND 1954, p. 445 (NH)42 A legal liability, no matter of what nature (strict, negligence or vicarious)


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prefers to defend the third party,43 the legislative work in preparing a newinsurance code takes the opposite direction.44

The Danish Code is also a little more severe to the third party as it requires theinjured party to have established the liability of the insured preliminary to theintroduction of the direct action. The establishment of the liability can either bethrough a court ruling or through an agreement between the injured party andthe wrongdoer. Again in Denmark, the Courts seem to be more open towardsthird parties than the legislator.

The new Insurance Contract Act No. 69 of 16 June 1989 and more specificallyits 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.45

Through thislaw the Norwegian legislator moves away from the common law andapproaches a civil law solution.

With their new Insurance Contract Act of 1995, Finland also chose thedirection of the Norwegian model, without copying it fully.

1.3.3 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 bedistinguished by the conditions under which the rights are transferred. Thediscussions between the different countries also lead to developmentsthroughout time. A recent example of this is the new draft bill proposed by theEnglish 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 1998.46 This paper presents the presentregulation and the practice in relation to direct action against insurancecompanies. 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 oftheir joint report.47 These instruments will be useful for the analyses of the

43 See the Deger, ND 1996 p. 1 (HVS).44 See S., JOHANSON, Third party claim under marine insurance. The Swedish approach, inSimply: Scandinavian Institute of Maritime Law Yearbook 1999, Oslo, 1999, p. 157-174.45 Compare 7-6 with 7-6 of the Norwegian ICA of 1989.46 The Law Commission Consultation Paper No. 152 and The Scottish Law CommissionDiscussion Paper No. 104 in a Joint Consultation Paper of 1998 on Third Parties (Rights Against

Insurers) Act 1930, http://www.lawcomm.gov.uk/47 The Law Commission and The Scottish Law Commission (LAW COM No 272) (SCOT LAWCOM No 184) Joint Report of 2001 on Third Parties (Rights Against Insurers) Act 1930,http://www.lawcom.gov.uk/.


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present situation, which is still governed by the 1930 Act48 with its lateramendments.

Under the 1930 Act the transfer of rights to the injured person arises onlywhen the insured is in one of the enumerated insolvency events.49 Moreoverthe injured person can only get payment if the insured can recover his losshimself. Therefore the liability of the insured has to be established beforesuing the insurance company.50 The explanation for this is found in theindemnity clause of the insurance policies. Lord Denning underlined that theessence of this clause is that the insured must prove his loss.51 Only whenliability has been established, will the loss follow and the insurer can be heldliable under the policy.

The third party only establishes liability for these purposes once theamount52 (as well as the existence) of the liability has been ascertained. TheEnglish case law decided that the liability could be established by judgement,an arbitral award or through an agreement. Only then is the third party entitledto enforce his rights, and only then is the insured entitled to make a claim onthe insurance policy.

The J.C.P. of 1998 recognises that the situation under Scottish law isidentical.53

Although the present thesis will focus on the defences that an insurer caninvoke, it is important to indicate the negative consequences thesepreconditions have for the injured third party. This is especially important asthe English legislator is preparing to make changes to the existing situation.

The first problem is the multiple proceedings: in order to obtain a judgementunder the 1930 Act, the third party has to spend considerable time and moneyto establish both the insolvency and the liability of the insured. Even after hehas done so, he will not be certain to obtain direct payment from the insurerand has to engage in more effort to obtain policy information.54 Under the

English Companies Act,55

it is possible that the third party will have to restore

48 Third Parties (Rights against Insurers) Act 1930 of 10th July 1930, Cf. Annex49 Section 1, (1) and (2) of the 1930 Act.50 Post Office v. Norwich Union Fire Insurance Society LTD [1967] 2 QB 363.51 Lord Denning in the Post Office case, referring at p. 373 to the following obiter dicta of Devlin Jin West Wake Price & Co v Ching [1957] 1 WLR 45, 49.52 In Cox v Bankside [1995] 2 Lloyds Rep 437, judge Philips J. decided that the liability is alsodeemed to be established when the third party was awarded an interim payment against the

insured.53 J.C.P. para 4.8 and 4.9.54 Cf. Infra : Defences.55 Companies Act 1985.


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a dissolved company in order to establish its liability in order to be entitled to adirect action against the insurer.56

The commission, in the Joint Report of 2001, proposes to remove therequirement to establish the insureds liability prior to the proceedings againstthe insurer, firstly to help the third party and lower the judicial costs and alsobecause the intention of Parliament has to be followed.57 All consulteessupported the idea to solve the problem in a single set of proceedings. It willnot be required to join the insured in the proceedings under the draft bill. Theadvantage 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). 58

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 directaction under present title. The reason for this is the diversity of direct actionstatutes throughout America because this is a matter that is of the jurisdictionof States.59

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 liabilityarose. The ship owners joined forces to cope with the high risk of maritimeadventures in so-called P & I Clubs. The P & I Clubs covered and still coverthose risks that are not covered under the Hull and Machinery insurancepolicies. As the solution of the ship owners was to form mutual insurance, theClubs always enjoyed a special legal statute.

This specific character was already expressed in the name of the insurers:Protection and Indemnity Clubs. The idea was to protect the members of theClub and to indemnify them for the losses they suffered,60 as long as this

happened within the scope of the Club Rules. The refund is linked to the

56 For more information on these problems, Cf. J.C.P. 1998, para 4.10 - 4.54.57 Three factors suggest this: (1) the absence of any reference to the moment when liability isestablished in the 1930 Act itself; (2) the absence of any reference to the requirement in the historyof the Bills reading in Hansard; (3) the fact that the 1930 Act was modelled on the WorkmensCompensation Act 1906 which expressly provides for the insureds liability to the third party to belitigated between the insurer and third party. That the 1930 Act was modelled on this earlierlegislation is clear from the wording of the two Acts. It was also stated in Parliament(Parliamentary Debates (HC) 29 April 1929, vol 231, col 130).58 For more information on the draft, Cf. Joint Report 2001, Part 3.59 See M., MAGINNIS, J., COT, Direct action statutes and P & I insurance, in MLA special report,2001, http://www.mlaus.org/60 See S., HAZELWOOD, P & I Clubs: law and practice, LLP, London, 1994, p. 275.


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payment of a premium and since it concerns mutual insurers, the members willshare the extra expenses at the end of the year.

The appearance of the 1930 Act

61

was a complete change of philosophy for theinsurance market: the insurance proceeds should now be considered to beaccorded to the insured or even directly to the injured party, but always for thebenefit of this injured party.62

The P & I Clubs saw the danger of the 1930 Act, especially when thinking ofthe single ship-companies that were more likely to become insolvent. As ananswer they claimed that the 1930 Act was not applicable to them, as themembers of the associations had no insurance contract with the club in themeaning 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 atthe discretion of a committee in the insurance company.63

This argument was set aside after some years and the P & I Clubs are nowconsidered to be insurance companies falling within the scope of the 1930Act.64 However, the Club rules include special policy terms that are againsupported by their specific protecting and indemnifying character.65 Theseterms are not normally found in land-based insurance policies and thus formthe specificity of marine liability insurance in relation to the right to directaction.

1.4.2 Voluntary and compulsory liability insurance

Unlike the compulsory liability insurance for motor vehicles that almost everycountry knows, there is no general obligation for ship owners to take outliability insurance. Although the idea of insurance emerged on the sea, we cannow see that every motor vehicle, whether it is a bus, a truck or a car needs totake 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 hasfound its way into maritime law in more specific international conventions.The first provisions on compulsory insurance were introduced as an exemptionin the Convention on Liability of Operators of Nuclear ships.66 The realbreakthrough of compulsory insurance has happened within the IMO.67 Theidea was first introduced in the CLC in 1969, reaffirmed in its later version and

61 And in Scandinavia the Insurance Contract Act of 6 June 1930.62 See S., HAZELWOOD, ibidem.63 See S., HAZELWOOD, op. cit., p. 276 and the references made there.64 Under other statutes they still enjoy a special treatment.65 Cf. Infra.66 Signed in Brussels in 1962.67 See E., RSAEG, Compulsory marine insurance, Simply 2000.


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also taken over in the HNS convention of 1996. The discussion on mandatoryinsurance within the IMO now concerns the convention on liability for wreckremoval, on death and injury of passengers, on bunker fuel oils68 and in

connection with crew claims.

69

In the LLMC convention of 1996, no mention on compulsory insurance hasbeen made. According to Prof. Rsaeg this is due to the fact that thisconvention only regulates the limitation of liability and doesnt deal with thebasis of the liability. The same author indicates that the draft of one generalconvention on maritime liability is not realistic.

The discussions in the legal committee of the IMO resulted in ResolutionA.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 EUwe can find support for the idea that all ship owners should be insured. In theirliability convention for inland transport, which includes transport overwaterways, provisions on compulsory insurance are included. Theseinstruments expressing the involvement of national governments in the idea ofcompulsory insurance finds it origin in the new insurance philosophy thatliability insurance is taken out to protect third parties.70

But the introduction of compulsory liability insurance is of great importance inthe setting of the present thesis. The P & I Clubs fear that compulsory

insurance and an express direct action clause will extend their exposure toliability and would be a threat to their existence. The most important fear laysin the risk that through compulsory insurance the P & I Clubs would loose theability to invoke some71 policy defences against the third parties. This problemwill be illustrated in part two.

2. Limitations to the direct action

2.1 Introduction

After the discussion on the applicable law to direct actions and, thepresentation of the conditions that need to be fulfilled in several important

68 Article 7 of the bunkers convention of 23/03/2001 introduced compulsory insurance only forvessels carrying over 1000 tons of oil but this convention has not yet entered into force. See P.,Griggs, International Convention on Civil Liability for Bunker Oil Pollution Damage. Article 7(10) of this convention also provides the injured party with a right to direct action. Cf. Annex69 See E., RSAEG, ibidem.70 For other advantages and reasons to promote compulsory insurance see E., RSAEG, op. cit.and from the same author: The impact of insurance practice on liability conventions, in Legislative

approaches in maritime law. Proceedings from the European Colloquium on Maritime Law:Lysebu, Oslo, 7-8 December 2000.Marius No 283, Oslo, 2001.71 In E., RSAEGs view no policy defence is strong enough to empty out the third partys right todirect action.


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maritime jurisdictions and having presented the specific marine insurers thatare the P & I Clubs, the time has come to proceed to the core of this thesis: thearguments that the P & I Clubs can use to oppose third parties.

Firstly there are the defences that the tortfeasor himself can invoke against theinjured person. These defences concern the rules that lead to the liability of theinsured, i.e. the liability that the insurer promised to cover. Title 2.2.1 willdiscuss whether or not the underwriter can re-litigate on the liability of hismember. This title will however not go into the material analysis anddiscussion of the Hamburg rules, Hague Visby rules or other more specificinternational 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 wecan clearly distinguish between two groups: those terms that can be seen ascontractual preconditions for the right of direct action to exist and then thedefences that limit the scope of the insurance cover. Under the first, moreformal group, we will concentrate on the arbitration clause, the payment clauseand the limitation clause. They are analysed under 2.3. Title 2.4 gives a shortoverview of the material arguments to deny insurance cover, namely: wilfulmisconduct of the assured, non-payment of the premium, unseaworthiness of

the vessel, agreed deductibles, ... This distinction will have especially clearconsequences in France.72

2.2 Defences of the tort feasor

This title will present the first defences that the insurer can use to oppose thirdparty. It concerns the defences proper to the tortfeasor in whose rights theinsurance company is surrogated. The idea is that the third party cannot havemore rights against the insurer than those he had against the wrongdoer. Directaction 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 ofcourse related to the proof of liability of the tortfeasor. The second type ofdefence that the insurer can rely on is the right to limitation of liability of theship owner that is accorded to him through different legal bases.

2.2.1 Liability rules

The first limitations to the right to get payment from the tortfeasor are the tortlaw rules or liability rules. The right under the direct action is fundamentallybased 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

72 Cf. infra.


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liability. As expressed under 1.2.2, the legal liability of the tortfeasor has to beestablished. This means that the proof of negligence must be brought beforethe court, except in the cases where the ship owner is made strictly liable.73

The statutory excuses for the ship owners liability are also available for theinsurer: force majeure or act of god and the exceptions for damage caused byfire or management of the ship under transportation contracts.74 This followsfrom the construction of subrogation itself: transfer of rights and obligationfrom one party to another. The insurance company is not defending a separateliability, but is only covering the very liability of the ship owner.

It is undisputed that the insurance company will not have to pay in the caseswhere the insurer was not found liable. The condition has been referred toabove 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 thetortfeasor has to be established by law. Under title 1.2.1 the first importantissue of the applicable law has been discussed. The most important conclusionto remember about the conflict of laws at this stage is that the insurancecontract has no influence on determining the liability of the insured when theaction is directed against the insurer.75

The question of whether the insured needs to be condemned before a court orarbitration tribunal before the third party can claim anything from the insurerhas 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 thatthe liability of the wrongdoer can but does not have to be judicially establishedin 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 courthas to follow the decision against the insured when deciding upon the liabilityof the insurer. Of course the basic rule remains that the court is not bound bythe ruling of another court. At least this is the rule in the civil law countries. Inthis legal tradition, the addressed court is completely autonomous from thedecision of another court, even if that court is higher in hierarchy, as long as it

does not concern the very same case.76

In the situation before us, the court willactually be free, as the parties before the court are not the same. The problemthat the facts brought before the court are the same, does not concern the judgewho has to decide on a different issue between other parties.

73 Cf. supra.74 Section 3 MIA 1906, stating that the insurance company will only indemnify when the insured isliable.75 For the outcome of the influence of the insurance contract and its governing law on thecontractual defences, Cf. Infra.76 In the situation of a pending case, one of the two courts will have to be declared incompetent inorder not to get two decisions on one same case. The same applies if one court has alreadysentenced on a case. The second court will be incompetent on the basis of the authority of a

judicial decision.


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This means that the first court can find the insured liable even if he tried toprove that he has showed due diligence. The second court that must decidewhether 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 legalarguments in a different manner. This is certainly true if the case against theinsurance company is brought before a different court than the one that ruledover the case between the insured and the injured party. This is a dangeroussituation, but one that will not easily be encountered. Most of the courts stilltry to give homogenous interpretations of the basic legal principles and will inpractice also refer to other judgements even if they have to build up their ownargumentation to support this. Moreover the Ministry of Justice or a specificorgan77 under its competence will watch over the coherency in the decisions

rendered by the judges.78

The same idea applies in the Scandinavian legal systems. The Deger case,rendered in 1996 before the Appeals Court of Gteborg is an illustrationhereof.79 The review of the facts by the Supreme Court was due to the specificdevelopments of the case. The cargo on the vessel was damaged due to badstowage on a voyage between the ports of Aarhus in Denmark and the port ofSydney in Australia. The liability was first admitted before an Australian courtin 1974. The London Arbitration tribunal decided in the same way in 1985, butas 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 theP & I club was brought before the Swedish court 22 years after the facts and anew study and argumentation on them was thus not illogical. The solutionfinally 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 formerdecisions to support their judgements and arguments and have to followprecedents. However the Common Law system does not impose a requirementcompelling judges to follow all decisions that have been rendered in situations

that seem rather similar. The seized court can find the decision rendered uponthe liability of the insured as being incorrect and can just as easily come to adifferent decision. Theoretically, the court deciding on the liability of theinsurance company could come to the conclusion that the insured is not liablelegally towards the injured party, whereas the same tortfeasor has beensentenced to damages in an earlier decision. In practice the situation will besolved in the same way as set out above: the judge will be entitled to examine

77 This role can also be taken by the Supreme Court.78 We have to notice however that in the case of marine insurance the issue often is of atransnational nature. Therefore the court that decided on the liability can be in another countrythan the court before which the insurance company is brought.79 ND 1996 p. 1-11 (HVS)


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the liability of the tortfeasor before establishing the insurers even if referenceis 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 companiesactive in each region: Puerto Rico and Louisiana are traditional maritime

jurisdictions protecting the claimant. Under New York jurisdiction, the insurerwill be protected. For the present issue of liability rules applicable in a directaction, this special protection will be reflected through the power of the final

judgement against the insured. A suit under the Californian direct actionstatute requires a final judgement in such a way that the insurer is estoppedfrom re-litigating on the res iudicata.80 The jurisdictions that are morefavourable to the insurer will, on the other hand, permit the insurer to

reconsider the liability issue and thus escape from its liability towards the thirdparty.

A solution to the problem of possible contradictory decisions can be found insuing the tortfeasor and his insurance company in joint liability before onecourt. The possibility has been explicitly mentioned in the NICA81 and thispossibility is also offered in Icelandic law.82 An action in joint liability is oftenused in practice.83 This solution has many advantages: limiting the costs, asyou 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 interest84

of both the insured and the insurer will berepresented by one lawyer.In the case where the injured party sues both the insured and his insurer, butbefore two different courts in different jurisdictions, the second court can butdoesnt have to refer his case to the first court because of the closeconnection. (concordance samenhang) This can benefit by giving ahomogenous character to the solution to the pending problem.

We can thus see that in the action against the insurer the judge must establishthe 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 owneror by the people, for whom the ship owner is responsible,85 he will not have topay damages to the third, injured party. This payment will however still be due

80 See N., FOSTER, Marine Insurance: Direct Action Statutes and Related Issues, U.S.F. M.L.J.,Vol. 11 (1998-99) No.2, p. 280.81 Section 7.6, al. 3 NICA.82 Section 19.1 of the Icelandic Civil Procedure Act.83 See F., FOUCHIER, op. cit., p. 3.84 There still remains a danger of conflicting interests between the insurer and insured, e.g. whenthe insured wouldn't be entitled to indemnification under the policy.85 In maritime law it is characteristic that the ship owner has a considerable vicarious liability, inorder to ensure the payment of damages caused by the operation of his vessel. In the same way asfor a direct action, the injured party will not have to file a suit against a person that will not besolvent.


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in the situation where the law, applicable to the incident has imposed a strictliability on the ship owner. Strict liability is imposed through severalinternational conventions: The oil pollution liability convention, the

convention on transportation of hazardous and noxious substances, the bunkersconvention and the Athens convention relating to the carriage of passengersand their luggage by sea.

Although the purpose of this title is not to go into specific liability regimes, itis important to know of their existence. They can give rise to specific problemswhen handling the insurance claim, and the injured party must be aware ofthese. The major problem is in the case of collisions. As few problems canarise when one party is clearly responsible, so many can arise in cases whereboth 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 Americanjudges will often propose a different solution to other countries.

No matter what the nature of the liability is, once established, the insurer canstill escape from it by proving that the accident or the damage founding theircause is a force majeure-event or is an Act of God. In case of contractualliability the insurer has a similar, extra chance to escape liability by provingthat the actual cause of the damages lays in the management of the vessel or iscaused by fire.86

2.2.2 Limitation of liability

The second restriction to the right to get damages from the insured is the set ofrules on limitation of liability. It would seem logical that the injured party isentitled to full compensation of the incurred damage. This is the rule to applyin land-based tort law. In contractual land-based law, the contractual freedomallows the parties to agree on the damages to be paid in certain circumstances,however law restricts the parties autonomy and other restrictions can beimposed 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 ofliability has been granted in different domains, as there is collision liability,cargo liability, passenger liability, oil pollution liability, environmentalpollution liability, 87

In case of contractual and third party material liability, section 172 and 175NMC apply under Norwegian law. For passenger claims and personal injuryclaims, section 175 NMC comes into play alone. In transportation contracts,

86 Article IV, 2 (b) of the Hague-Visby Rules.87 Section 172 and following and section 191 in the NMC. The concept has been recognised as ageneral principle in liability of the ship owner through the convention on limitation of liability formaritime claims of London, 19 November 1976.


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the limitation of liability will be calculated per package or per kilo of cargo,whichever gives the highest value.88 After applying this rule, the ship owner isstill 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 ofliability.

The question of importance in relation to limitation of the ship ownersliability is whether the insurance company can use this right against the injuredparty, claiming directly against them. Limitation of liability has been grantedto ship owners because of the high amounts of damages that they riskbecoming 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 theship 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 bankruptcycould result in no payment of the injured party at all.

If this is the argumentation that applies to the limitation of liability of shipowners, we have to search for the argument that would allow the insurer to beable to limit his liability towards the injured party. Their cover under directaction is allowed in cases of manifest insolvency of the insured. However it isunlikely that the insurance company or the P & I club would go bankrupt afterpaying damages to the injured party. The argument of limited capacity of theinsurance market has not been withheld in either of previous studies on this

topic.89

This could have been the reasoning followed by the American judges up until1986. In the Cushing case of 195290 the judges of the Supreme Court firstdecided on the procedural matter. They denied the P & I underwriters the rightto rely on the ship owners right to limitation of liability, vested in 46 USC 181 et seq. On the basis of this decision the 5th Circuit Court confirmed thepersonal character of the right to limitation of liability. The Limitation ofLiability Act, 46 USC 181 et seq. is available only to the owner of the vesseland the vessels demise charterer. In a direct action suit against the P & I

underwriter, the insurer cannot invoke the right as he lacks ownershipinterest.91

The Nebel Towing decision of 196992 caused unexpected exposure of liabilityto foreign P & I clubs in the US as they were expecting to rely on the shipowners limitation of liability through the right of subrogation. The solutionthen presented was to insert a clause in the P & I policy that indicated a limited

88 Section 280 NMC89 See E., RSG, op. cit.,Marius No 283, Oslo, 2001.90 Cushing v. Maryland Casualty Co., 1952 AMC 1803 5th Cir.91 See R., LEMON, Limitation of liability to that of the ship owner, http//www.mlaus.org/.92 Olympic Towing Corp. v. Nebel Towing Co., 419 F.2d 230 (5th Cir. 1969), 1:634.


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liability towards the ship owner,93 which they could then invoke against thethird injured party. The Nebel Towing decision was finally overruled and theeffect of the clause was recognised in the Crown Zellerbach case of 1986.94

The Zellerbach decision concerned a collision between the first of 15 bargespushed by the tugboat FR Bigelow and the Crown Zellerbach water intakestructure located at Baton Rouge in Louisiana. The accident was caused due tothe fog and heavy rain over the Mississippi River. The Crown Zellerbach Co.filed a suit against the tugboat FR Bigelow and Ingran, the bareboatcharterer. The prime insurer of Ingran, Cherokee Insurance Company and theLondon Steam Ship Owners Mutual Insurance Association, in their capacityas excess P & I insurers were included in the action at a later stage. Theprocedural issue before the Circuit Court concerned whether the limitation of

liability under a direct action against the liability insurer was in conformitywith the Louisiana Direct Action Statute or not.

A different solution from the Nebel Towing case was justified because thelegal question was different. In the latter the insurer could not rely on thestatutory right of limitation of liability of the ship owner, following theCushing doctrine. The statute only grants the right to the ship owner. A policyclause linking the insurers obligation to the limited liability amount of theship owner was considered void on the basis of the Louisiana Direct ActionStatute.95

The question in the Zellerbach decision was slightly different: the P & Iunderwriter 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.96 In doing so the

underwriter does not claim the personal right of the ship owner to betransferred to him, but only limits his liability to what he has promised to theship owner under the insurance contract. The limit for the insurers liabilityresides thus in the insurance contract according to the American vision of this

defence.97

93 Even if in the relation between the insurer and the insured this clause would be of no utility, asthe insured can only recover up to the sum of what he actually paid to the injured party.94 Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc),17:271.95 The statute simply voids any policy clause which conditions the right of the injured person toenforce against the insurer its contractual obligation to pay the insureds debt upon, as prerequisite,the obtaining by the injured person of a judgement against the insured. Hidalgo v. Dupuy, 122So.2d 639, 644-645 (la. App. 1960), quoted in Nebel Towing, 1969 AMC at 1579, 419 F.2d at237.96 See Crown Zellerbach Corp. v. Ingram Industries, Inc., 783 F.2d 1296 (5th Cir. 1986) (en banc),17:271 at 1746-1477.97 For more details on the validity and the interpretation of the so-called Crown Zellerbach clauseand the qualification of the clause in the SP-23 form, see R., LEMON, op. cit.


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In other countries, the solution has always been to allow the insurer to rely onthe 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 partyshould not get more rights against the insurer than those he had against thetortfeasor.

The French Cour de Cassation98 supported the right to limitation of liabilityunder a direct action on the text that led them to accept the right to directaction itself. Art. L124.3 of the code des assurances99 refers to theconsequences of the liability of the assured. As the liability of the assured islimited and the third party is not entitled to more rights from the direct actionthan those he would have had under a claim against the tortfeasor, the judges

concluded that the limitation of liability also applied to the direct actionagainst the underwriter.100

The final way to limit the amount that the insurer will pay to the injured partyis 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 firstargument after trying to avoid liability. I put this as the last in the row ofdefences concerning the right to limit ones liability because it is usually notreferred to as a limitation of liability in a technical sense. In practice it has thesame 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 againstthe injured party and that are based on the insurance policy.101 Even if thedirect action tries to break through the negative consequences of the privity ofcontract 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 againstthe injured party who surrogates in the contractual rights of the assured. Thelegislator 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 intoplay at this particular stage as this character of the insurance expresses thelegislators will to protect the third party.

98 Cass. civ. 14 juin 1926, DP 1927, I, p. 57.99 Cf. 1.3.1: interest in the financial consequences of the cause of the damages that led to theliability of the assured.100 See F., FOUCHIER., op. cit., 4.101 The right of a victim against the insurer, even though it has an independent and direct nature,derives its source and finds its limits in the insurance agreement concluded between the insurerand the assured freely translated from Cass. Civ., 16 fvrier 1937, D.H. 1937, p. 204.


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The 1930 Act expressly indicates what can and what can not be done: thehappening of one of the insolvency events enumerated in the Act cannot be theground to avoid the insurance contract or alter the rights of the third party.102

All agreements between the insured and the insurer that defeat or defect therights of the third party will also be void if they are agreed on after the liabilityand the insolvency have occurred.103

This Section 3 of the 1930 Act has however been used as an argument acontrario to support all other kinds of restrictions and limitations to the rightsof the third party. Let us now look at some specific clauses and how they arereceived before the courts in several jurisdictions. This title will discuss thedefences and under title 2.4 the more general limitations are discussed.

Under the term defence I qualify the arbitration clause, the pay to be paidclause and the clauses on the limitation period. These clauses operate as adefence 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 mandatoryrules, intended to protect a third party.104

2.3.1 Arbitration clause

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 insurancecontract take away the jurisdiction of national courts and submit all (or certainspecified) claims to an arbitration panel. As in many other fields ofcommercial law marine insurance contracts also tend to opt for disputesettlement before an arbitration tribunal. Having seen the specificity of theproblems relating to the issue that is the object of the present paper, the choicefor a specialised panel is not surprising. For the implication of the introductionof 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 thepresent discussion.105

The aspect that will be analysed under this chapter is the validity of anarbitration clause under the direct action from an injured party against theinsurance company. Does the injured party have to comply with the arbitrationclause and its procedural rules or will a court have jurisdiction over the disputebetween the injured party and the company? The basis for liability (contractual

102 Section 1 (3) 1930 Act.103 See 5.6-5.9 in the J.C.P. and section 3 of the 1930 Act.104 See G., Cordero Moss, "International Commercial Arbitration. Party Autonomy and MandatoryRules", Tano Aschehoug, Oslo 1999 at p. 95-96.105 See G., Cordero Moss, ibidem and for the negative consequences see the discussion in the JointConsultation Paper of 1998.


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or third party liability) of the insured will have no influence on the applicationof the arbitration clause included in the insurance policy.

An aspect that is not often mentioned is the existence of an arbitrationagreement between the injured party and the person causing damages.106 Thepresence of such an understanding between the third party and the insured willnot help the underwriter to defeat the competence of the court when he iscalled before a national court by the third party. The existence of an arbitrationagreement will never be an argument to defend the exclusive competence of anarbitration tribunal.

For the situation in civil law countries we again use French law as thereference. The competence of the French courts has been recognised by the

Cour de Cassation in the Irini M case.107

The court handling the ground of theclaim is equally competent to take hold of the claim against the P & I club onthe basis of Art. 10 of the Brussels Convention of 27 September 1968.108 Thenational courts incompetence can be defended by the insurer if he is broughtbefore the court in a joint action with the insured and the latter has anarbitration agreement with the injured party. The French courts will alwaysdisregard the existence of the arbitration clause in the insurance policy whenthe 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.109

Beforethe Puerto Rico Courts the arbitration clause is disregarded on the basis of theDirect Action Statute. In the Ocean Eagle case110 the judges first establishedthat 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 torely on his insurance contract that is subordinate to the law. The Court arguedthat the insurance company could not weaken the legal position of a third partythrough a private agreement. This argument could also be accepted beforeNorwegian Courts faced with an arbitration clause, as the idea is explicitlyincluded in the new NICA.111

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 contractand therefore is bound by the terms of this contract.112 The Aasma case

106 As a clause in their contract or in the form of an agreement concluded after the happening of thecause for liability.107 Cass. Civ. 27 juin 1995108 See also P., Simon, op. cit., p. 528.109 See H.J., Bull, Tredjemannsdekninger i Forsikringsforhold, Sjrettsfondet, Oslo, 1988, p. 522and p. 147.110 1974 AMC 1629 DPR, p. 1633.111 Section 7-8 in fine NICA and see G. Cordero Moss at p. 95.112 See August Aasma, et al. v. American Steamsip Owners Mutual Protection & Indemnity Assn,95 F.3d 400, 1997 AMC 1 (6th Cir. 1996).


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concerned a third party claimant who was exposed to asbestos on a vessel onthe high seas. The claimant sued the insurance company of the ship owner onthe basis of the insurance policy. The decision of the court was inspired by the

legal basis of the claim itself: the insurance contract.

113

One can say that the claimant in the Aasma case accepts to be submitted to theterms of the insurance policy if he bases his right to direct action on theinsurance contract. If you get rights out of a certain source, you cannot denythe limits that are pointed out in that same source. It can be deplored that thecourt only decided the case based on the principles of contract law and didntmake any consideration whatsoever concerning the guiding principle ofprotection of the weaker, third injured party.114 The reason for it is that theprotection 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 othercourts moving in the opposite direction. The solution depended on theapplicable direct action statute. As a matter of fact, the judges were moregenerous towards the third party in states where the direct action statute giveslarge rights to the injured party. As an example we can point at the conclusionthat has been reached in the Talbott Big Foot decision.115 In this case the courthas decided to stay the case in order for the proceedings in arbitration to beconcluded instead of dismissing the direct action as in the Aasma case. This

liberal solution appears to be inspired by the very generous direct action statuteof Louisiana. The same result was reached in the Zimmerman case,116 wherethe judges based their decision on the Talbott Big Foot decision and on theFederal Arbitration Act.

According to some authors, the third party can keep his right to direct action ifhe bases his claim on the direct action statute. Only then does he not need to goto an arbitration tribunal nor is he even obliged to stay his lawsuits duringarbitration.117 When the injured party relies on the insurance contract tosupport his right to direct action however, the injured party seems to be

exposed to the arbitration clause and its consequences. Not even mandatorylaw protecting the third party can prevent this. Only if the rules on protectionof the weaker party are seen as public policy will the seized judges be able tooverrule the arbitration clause. The outcome of the problem will therefore

113 See Aasma, 95 F.3d at 400 citing Cheshire Place Associates v. West of England Ship OwnersMutual Insurance Assn, 815 F. Supp. 593, 597, 1993 AMC 2701 (E.D.N.Y. 1993): When aparty to a contract bases its rights to sue on the contract itself and not upon a statute or some otherbasis outside the contract, a provision requiring arbitration as a condition precedent to recoverymust be observed, whether the plaintiff acquired rights under the contract as an agent, third partybeneficiary or assignee.114 See N., FOSTER, op. cit., 290.115 In re Tolbott Big Foot, Inc., 887 F.2d 611, 1990 AMC 1780 (5th Cir. 1989).116 Zimmerman v. International Companies & consulting Inc., 107 F.3d 344 (5 th Cir. 1997)117 See M., MAGINNIS, J., COT, op. cit., http://www.mlaus.org/


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depend on the law that is applicable according to the judge, federal law or statelaw.118

The judge who came to the decision in the Aasma case held that the solutionwould be as severe as he saw the solution119 if it came under the application ofEnglish law.120 The courts will withhold all defences out of the insurancepolicy, including the arbitration clause. The direct action brought before anational court by an injured party against the insurer will be referred to thearbitration tribunal for the handling the action if the insurance policy containsan arbitration clause. The English courts are of the opinion that the insurercannot be in a worse position against the third party than he was against theinsured.121

As the American judge correctly indicated the UK courts decided thatarbitration clauses are to be respected.122 In the Freshwater case LordHanworth held that it would be impossible to get a right to sue the insurancecompany without complying with the limits spelled out in the contract, whichleads to liability of the underwriter.123 The decision in arbitration is consideredto be a precedent contractual condition to the liability of the insurancecompany.124

Although claimants have submitted the argument of unnecessary andunreasonable extra costs that they could not even bear and that legal support

didnt cover, the courts minimised this aspect as a problem of personal nature.The plaintiffs personal troubles should not interfere with the insurancecontract and the underwriters rights there under.125 Lord Denning took thedefence of the third party by questioning this reasoning in the case of Fakes v.Taylor Woodrow Construction Ltd.126 However the other judges did not followhim in protecting the right of defence and access to justice. The presentsituation is a good example where the protection of the third party is noteffective and merely reduced to theory in case the plaintiff has limitedresources.127

118 See the discussion on this point in the Aasma case. For a more detailed analysis see J.,GOLDSTEIN, The life and times of Wilburn Boat: A critical guide, in J. M. L. & C. No. 28, 1997,p. 395-448 and p. 555-593.119 And thus more severe as the general solution proposed by American doctrine.120 See Aasma, 95 F.3d at 405.121 The Fanti and Padre Island, 2 All E.R. 705 (1990) as referred to in the Aasma case.122 For England see Freshwater v. Western Australia Assurance Co. Ltd. [1933] 1 KB 515 and forScottland see Cunningham v. Anglian Insurance Co. Ltd. 1934 SCT 273.123 See the Freshwater case p. 516.124 Dennehy v. Bellamy [1938] 2 All ER 262.125 Smith v. Pearl Assurance Co. Ltd. [1939] 1 All ER 95.126 [1973] 1 QB 441.127 The actual state of affairs has been explained in M., CLARCK, The Law of Insurance Contracts(3rd ed 1997) p. 161: While seeking to protect the third party from the poverty of the insured,Parliament showed no intention to protect him from his own.


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After an open consultation the Scottish and English Law Commissions decidedto maintain the present situation.128 Under the reform of the Third Parties Actof 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 consulteeswho explained the need for an arbitration clause in the following way: thearbitration clause can form a guarantee to get insurance disputes resolvedfollowing UK law. This is possible as an arbitration procedure escapes fromthe scope of the Brussels Convention: arbitrators will form their own

judgement on the applicable law. When we look at the solution that wasreached under French forum, we can easily understand the argument of thisconsultee. The question that remains is if foreign courts cannot avoid theapplication of the arbitration clause on the basis of proper norms that they can

apply according to Conflict of Law rules.

2.3.2 Pay to be paid

A pay-to-be-paid clause129 is a contractual term that has traditionally beenincluded in P & I policies and is almost only found in these types of insurancepolicies. Through this clause the P & I club can only be forced to pay theinsured 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 (indemnifyagainst) 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 avoidpayment 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 injuredparty, the P & I club will not let its money go to the insured. The question in adirect action against the underwriter by the injured party is somewhat different:the party suffering the loss will earn the money. The goal of the liabilityinsurance 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 thissubject is the decision in the Skogholm case.130 The Skogholm case concernedSection 95 of the FAL. This section is construed to protect the third partyagainst the insolvency of the insured and cannot therefore be derogated from.In his judgement the Supreme Court invalidated the pay to be paid clause

128 Joint Report of 2001, p. 63-65.129 Also called "pay first" clause or payment clause.130 Skogholm, ND 1954 p. 445 (NH)


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based on the argument that the P & I club cannot avoid the statutory rights ofthe third party.131

The relevant provision of the former Scandinavian law is still applicable inSweden. The solution that was proposed under the Norwegian SupremeCourts decision is equally followed in these countries.132 This vision has morerecently been confirmed before the Court of Appeal of Stockholm in theDeger case133 where the judges decided that Section 95 is a mandatory rulethat cannot be derogated from by the contractual parties.

In Norway insurance law has been changed since the Skogholm case. Since1989 Sections 7-6 and 7-8 of the NICA explicitly prohibit the effect ofpayment clauses in liability insurance contracts, which under Norwegian

jurisdiction includes P & I policies. No recent case can confirm the rule, butthe law is very clear in its text: The provisions of this section cannot becontracted out of to the detriment of the injured party.

134

In Icelandic law the solution in relation to a payment clause will depend on thenature of the insurance. If the insurance is compulsory, objections from theinsurance contract cannot be invoked against a third party in a direct action. Inthe case of voluntary insurance however the objections of the insurancecontract can be invoked against the injured party who surrogates in the rightsof the insured. These rights are limited by the insurance policy and the third

partys rights will be limited in the same way. However Section 96 of theIcelandic Insurance Code protects the third party. This article stipulates thatthe insurance contract cannot limit the rights of the third party in a way that thelatter would have fewer rights than those he would have had against theinsured.135 Therefore the payment clause seems to be accepted under Icelandiclaw, at least in case of voluntary insurance. When the liability insurance isimposed by law, the third party is put in a position whereby no objectionregarding the insurance contract can be used against him.136

Common Law lawyers attach much more importance to the specific

relationship between the P & I clubs and their members. This visiondistinguishes the liability insurers who cover the liability of their insured fromthe indemnity insurers who only promise to indemnify their members for thelosses suffered by paying under their legal liability.137 Although the principle

131 For more on this case see M., LUND,Sentrale dommer: Skogholm., in : Nordiske Domme iSjfartsanliggender 1900-2000, Oslo: Sjrettsfondet, 2001,Marius nr. 278, p. 129-138.132 See S., JOHANSON, op. cit., p. 157-174.133 Deger, ND 1996 p. 1 (HVS)134 Section 7-8 NICA in fine.135 See B., DANIELSON, Third party claim under marine insurance. The Icelandic approach, in

Simply, Oslo, 1999, p. 189.136 SeeB., DANIELSON, op. cit., p. 192.137 See S., HAZELWOOD,op. cit., p. 323 and Hong Kong Borneo Services Co. And others v.Anthony David Pileher [1992] 2 Lloyds Rep 593.


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of a right to direct action against liability insurers is explicitly recognised inthe Third Parties Act of 1930,138 the P & I Clubs have always tried to escapefrom this rule basing their argument on the very specific character of the P & I

Clubs.

139

The House of Lords accepted this construction.140 In arbitration, before theappeal judges and the Court of Appeals, the decision in these cases on whetheror not to apply the payment clause was going both ways, with dissentingopinions between the judges of each instance. The House of Lords finallydismissed the Direct Action on the basis of the existence of a payment clausein a unanimous decision.141

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 andsought for an arbitral award for this liability in a direct suit against the P & IClubs. All conditions for a direct action under the Third Parties Act of 1930were satisfied. The direct payment from the club to the injured party washowever prevented by a clause in the insurance contract. At first sight thisdenial seems to be in contradiction with the aim of the 1930 Act, which is toprotect the third party against the insolvency (impossibility of payment) of theassured.142

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 themoment precisely before their winding up in respect to the liability to the thirdparties?(2) Does the pay-to-be-paid clause purport, in a direct or indirect way, to avoidthe insurance contract or to alter the rights of the parties to the insurancecontract upon winding up of the member, as far as to take away the effect ofthe 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 themembers?

Without reproducing the full argumentation143 the most important argument isthat the

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