The Insurance Act 2015 (the “Insurance Act”) brought about a seismic shift in insurance law by introducing many new protections for policyholders. Yet, since it came into force in 2016, surprisingly few cases have addressed these newly introduced rights.

The recent case of Mok Petro Energy FZC v Argo (No. 604) Limited [2024] EWHC 1935 (“Mok Petro v Argo”) does, however, consider policyholders’ strengthened rights in relation to breaches of warranties introduced by the Insurance Act. In this article, Policyholder Disputes associate Hebe Peck explains this case’s relevance to all involved in insurance law.

Case background

The claimant (“Mok Petro”) was an oil trading company based in Dubai insured under an all-risks marine cargo open cover for shipments of petrochemicals declared to the policy. Mok Petro was insured by Cedar Insurance & Reinsurance Co. Ltd but brought its claim against its reinsurers directly pursuant to a cut-through clause.

Mok Petro arranged a shipment of 11,800 MT (+/- 5%) of gasoline with an insured value of $7.5m to be transported from Sohar in Oman to Hodeidah in Yemen, which was declared to the policy in May 2017. The cargo was certified as being on specification when it left the port in Oman. Unfortunately, when the cargo arrived in Yemen, it was found to be off-specification and unmarketable due to a raised phase separation temperature (a risk the product was vulnerable to, particularly if contaminated with water).

The three main issues were as follows:

1. Mok Petro claimed that the product was on specification at the load port but was fortuitously contaminated with water during loading. Mok Petro sought indemnity for its losses attributable to this contamination. In response, insurers denied there had been any contamination, stating instead that the cargo had been off specification prior to loading. At the crux of this issue was a factual dispute about the accuracy of the load port certificates of quality, which stated the cargo was on specification.
2. Alternatively, Mok Petro argued that if the cargo was off specification at the time of loading, then the blending of the cargo itself was a fortuity covered by the policy. Insurers disputed this point saying that this fell outside the scope of cover.
3. Insurers further argued that, in any event, they were not required to provide cover because Mok Petro had breached a warranty requiring inspection and certification by a marine surveyor. The warranty read as follows:

“Quantitative/Qualitative survey carried out by internationally recognised marine surveyor at loading port/discharge port at owners cost, including inspection/certification of the cleanliness of the vessel tanks at load port and the shore tanks at discharge port and the connecting pipelines between the vessel and the shore tanks at both load and discharge port.

“Failure to comply with a warranty will, in normal circumstances, void this insurance policy.”

The court’s findings

The court found that Mok Petro’s claim failed on all three points.

Although the cargo was certified as being on specification when it left Oman, the court agreed with insurers there were doubts as to the reliability of these certificates. Contrary to the specification on the certificates, samples taken at the time of loading showed that the cargo had a raised phase separation temperature. Mok Petro suggested these samples could not be relied on because:

• the parties could not be certain they were samples taken from the cargo at the time of loading, and
• they were first analysed more than a year after the loading took place and may have degraded during that time.

The court dismissed both these concerns and found that on the balance of probabilities the samples could be relied on. Accordingly, the cargo was found to be off specification when loaded. Therefore, no damage had occurred during the voyage that would be covered by the policy.

Further, the court did not accept Mok Petro’s argument that the actual blending of the off-specification cargo was a fortuity covered by the policy. The policy specifically covered the shipment, which was identified as a cargo of 11,800 MT +/- 5% to be carried on the vessel. As such, the insured product did not exist and was not covered until it was fully loaded onto the named vessel in the specified quantity. Any issues arising from the blending were not “damage” to the insured product (which did not yet exist) and would be outside the scope of the cover. In other words, there was no damage during the voyage because it was damaged from the outset.

The court also found in favour of insurers on their breach of warranty defence. While the judgment is obiter (ie, a non-binding observation by the judge that is not essential to the decision) on this issue, it remains the first reported decision grappling with the provisions in section 11 of the Insurance Act. The remainder of this article considers this section of the judgment in detail.

The Insurance Act 2015 – key provisions

One of the key changes brought about by the Insurance Act was the strengthening of policyholders’ rights in the event of any breach of the warranties set out in the policy. Previously, insurers could discharge all liability in the event policyholders breached their warranties regardless of whether that breach brought about the loss or increased the risk of that loss. For example, a breach of a warranty to ensure a working fire alarm was in place could, for instance, have precluded recovery for property damage caused by flooding.

The Insurance Act created a more policyholder-friendly position, in particular through the introduction of the following provisions:

• Section 10 – Abolished the blanket rule that breach of warranty discharged insurers’ liability. Instead, this section broadly provides that insurers’ liability is discharged from the time the breach of warranty occurs until the breach is remedied, at which point insurers come back on cover.
• Section 11 – Provides that even where there is a breach of warranty (or other clause that looks to reduce the risk of a loss of a particular kind/at a particular location/at a particular time), insurers cannot exclude, limit or discharge their liability if the policyholder can show that the breach of that clause could not have increased the risk of the loss that actually occurred in the circumstances in which it occurred.

Since the introduction of the Insurance Act, there has been much discussion regarding how Section 11 would be applied. The explanatory notes to the Insurance Act appeared to favour a broad interpretation, stating: “A direct causal link between the breach and the ultimate loss is not required. That is, the relevant test is not whether the non-compliance actually caused or contributed to the loss which has been suffered” (paragraph 96). There was, however, no substantive judicial commentary on this point until Mok Petro v Argo.

The court’s commentary regarding the breach of warranty

As explained above, the court found that the policyholders’ claim failed for reasons aside from the policyholders’ breach of warranty, and this issue was therefore rendered moot. However, the parties made detailed submissions about the interpretation and application of sections 10 and 11 of the Insurance Act. Although not relevant to the outcome, the judgment provides some useful obiter guidance.

Importantly, the survey warranty (set out above) required two separate actions to be carried out: firstly, inspection and secondly, certification. Insurers alleged that the warranty was breached because no proper survey of the shorelines was carried out nor any timely certification of this survey. Mok Petro brought witness evidence confirming that inspection had taken place prior to loading of the cargo and said that the certification requirement was satisfied by the issuance of a certificate almost six years post-inspection.

Based on the witness evidence, the court was prepared to accept that an inspection had taken place and that Mok Petro was not in breach of that aspect of the warranty. However, the court found that the certification requirement had been breached. The court found that the delay of almost six years between inspection and the issuance of the certificate breached an implied temporal limit requiring certification to occur within a reasonable time (according to industry standards). Accordingly, Mok Petro was in breach of the survey warranty.

While it was clear that breach of the inspection aspect of the warranty would increase the risk of water contamination, Mok Petro argued that it was only the certification aspect of the warranty that was relevant when considering whether insurers would be on cover as only this limb of the warranty had been breached. Mok Petro’s position was that a lack of certification would not increase the risk of the loss occurring. The court disagreed and found that the warranty must be looked at as a whole, and both the inspection and certification aspects should be viewed together.

Accordingly, although there had only been a breach of the certification aspect of the warranty, both elements of the warranty were relevant when considering whether the breach increased the risk of the loss that actually occurred occurring in the circumstances in which it occurred (which was hypothetically the risk of water damage to the cargo, which Mok Petro had asserted had occurred). Since a breach of the inspection aspect of the warranty would increase the risk of the loss, the policyholder’s breach of the survey warranty more broadly was relevant to whether insurers would be on risk – ie although only the certification aspect was breached, the court was entitled to consider whether a breach of the inspection aspect would increase the risk of the loss occurring.

Therefore, the court concluded that had Mok Petro succeeded on its primary case (that the product was contaminated by water during loading), its claim would nevertheless have failed because Mok Petro had breached the survey warranty, and a breach of this warranty would increase the risk of the loss occurring.

Key takeaways

Mok Petro v Argo provides commentary on the application of sections 10 and 11 of the Insurance Act. Importantly, it has stated that warranties with multiple aspects to them should be considered as a whole when deciding whether a breach would increase the risk of a loss occurring for the purposes of section 11. Consequently, this case is unhelpful to policyholders as it indicates that insurers can avoid cover where policyholders have breached warranties under the policy even if only a narrow aspect of the warranty was breached and this narrow breach would never be causative of the loss or increase the risk of it.

For that reason, the decision appears harsh, and going forward, we expect policyholders to look to distinguish the case based on its facts and the particular policy wording. It should also be noted that as the comments are obiter, they will not create a binding precedent. Nevertheless, Mok Petro v Argo stands as a useful reminder of the serious consequences arising from breaches of warranty. Policyholders should be mindful at all times of any warranties set out in their policies and take steps to ensure they comply with them.

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