Table of contents
1 The Member shall prior to the conclusion of the contract of insurance make full disclosure to the Association of all circumstances which would be of relevance to the Association in deciding whether and on what conditions to accept the entry. Should the Member subsequently become aware of any such circumstances as are mentioned above, or of any change in such circumstances as previously disclosed, he must without undue delay inform the Association.
2 Where the Member at the conclusion of the contract of insurance has neglected his duty of disclosure and the Association would not have accepted the entry at the Estimated Total Call agreed if the Member had made such disclosure as it was his duty to make, the Association is free from liability. Where the Association would have accepted the entry at the same Premium Rating but on other conditions, the Association shall only be liable to the extent that it is proved that any liability, loss, cost or expense would have been covered under those conditions the Association would have accepted.
3 Where the Member neglects his duty of disclosure subsequent to the conclusion of the contract of insurance and the Association would not have accepted the entry at the same Estimated Total Call had it known of the circumstances prior to the conclusion of the contract, the Association is free from liability. Where the Association would have accepted the entry at the same Estimated Total Call but on other conditions, the Association shall only be liable to the extent that it is proved that any liability, loss, cost or expense would have been covered under those conditions the Association would have accepted.
(A) The Member shall…make full disclosure… (Rule 6.1)
An important principle of insurance law is that the contract of insurance is based upon the good faith of the parties.1 The applicant for insurance has a duty to disclose to the insurer every fact or circumstance which may influence the insurer in deciding whether or not to enter into the contract. Rule 6 emphasises the duty of disclosure that the Member has prior to and at the conclusion of the contract of insurance with regard to aspects of risk which are relevant to the Association. For example, this would include but would not be limited to disclosure of any survey evidence relating to the Ship2 or any evidence relating to the status and character of the applicant. The Member is required to inform the Association of every fact which would influence its judgement in estimating the risk or in assessing the premium or the terms and conditions on which the entry or renewal of a Ship should be accepted. Such duty is not predicated on, or simply triggered by, any request for information that may be made by the Association but is a duty to make full disclosure of any such material facts regardless of whether the Association has made any request for such information. ‘Member’ in this context includes both prospective Members and Members who are renewing their previous year’s entry. ‘Member’ may also include Co-assureds and Affiliates and any Joint Member or Co-assured.3
The Member’s duty of disclosure extends to circumstances known, not just to the Member, but also to an officer or employee in the Member’s organisation or to independent contractors, such as managers, to whom the Member has delegated important functions relating to the management and operation of the Ship,4 even if these circumstances were not known to the Member personally.
The knowledge of a broker5 or other person who effects the insurance on the Member’s behalf may also be considered to be the knowledge of the Member, for the purpose of Rule 6, even if the circumstances are not known to the Member himself. For example, if a broker has insured a Ship for a previous owner, material facts known to him when effecting that insurance may need to be disclosed in the context of a later application for entry made by that broker on behalf of a subsequent owner.
The use of the term ‘Member’ hereinafter in the Guidance to this Rule includes all such persons.
The Association has no liability for a claim6 where it would not have accepted the entry at the Estimated Total Call agreed if, at the time of conclusion of the contract, full disclosure had been made of all relevant circumstances.7 The Association may also terminate the insurance (by giving 14 days’ notice) of any or all Ships entered by a Member who has neglected the duty of disclosure.8
(B) …prior to the conclusion of the contract of insurance…Should the Member subsequently become aware of any such circumstances as are mentioned above, or of any change in such circumstances… (Rule 6.1)
Under Rule 6 the Member has a continuing duty, commencing before, and continuing both at the time of the conclusion of the contract of insurance9 and thereafter, to disclose to the Association all facts and circumstances which would be relevant to the Association when deciding whether to accept the entry and/or the terms upon which it should be accepted. He also has the duty once the contract of insurance has been concluded to inform the Association if there has been any change to those facts and circumstances. For example, such a duty would arise if the Member, after concluding the contract of insurance realises that his broker has informed the Association that the Ship has segregated ballast tanks when in fact it has not.
A Member must inform the Association of a change in circumstances ‘without undue delay’. The Member must ensure that information which in the hands of, or channelled through, managers, brokers or other parties identified with the Member is relayed speedily to the Association. Delay or failure to disclose new or changed circumstances on the part of such managers, brokers or other parties may be deemed delay or non-disclosure by the Member.
The continuing duty of disclosure under Rule 6 should also be read in conjunction with Rule 7 but not confused with the requirements of Rule 7. Rule 6 deals with circumstances existing at the time of conclusion of the contract of insurance, whereas Rule 7 deals with alterations of risk occurring thereafter (See the example given at the end of the Guidance to Rule 7).
(C) …all circumstances which would be of relevance to the Association… (Rule 6.1)
The Member must advise the Association of every fact, matter and circumstance which would be relevant to the Association’s assessment of the risk. The duty extends not only to circumstances relating to the Ship herself, but also to her ownership, management and operation.
Although the Association requires applicants to complete entry forms10 they cannot and do not embrace every detailed aspect of a particular Member’s business. Accordingly, Members must not assume that the only information required by the Association is that requested in the entry form. In addition, Members must provide on the entry form, or otherwise in writing, all other information that would be relevant to the Association’s assessment of the risk. It is not sufficient justification for a Member to say ‘if it was relevant why did the Association not ask?’11
A circumstance will be ‘of relevance’ if it is a fact or matter that would influence the judgement of the Association in estimating the risk, particularly if that circumstance tended to increase the risk. Although it is not possible to make an exhaustive list, relevant circumstances would include a Member’s intention to trade the Ship substantially outside ‘warranty limits’,12 to carry a cargo or cargoes on a Ship not constructed, designed or adapted for the carriage of such cargo, i.e. containers on a bulk carrier, to change substantially the contractual terms under which the Ship is operating, or to change the manning level13 or the nationality of the Crew with a commensurate increase in contractual death, disability or other compensation benefits. The guideline must be that, if in doubt, all matters should be disclosed to the Association.
(D) Where the Member…has neglected his duty of disclosure… (Rules 6.2 and 6.3)Under Norwegian law, the Member, or any manager, broker or other person identified with the Member, will be considered to have neglected his duty of disclosure only if he has been negligent in not disclosing information to the Association. If none of the aforesaid people could have known about the relevant circumstances, the duty of disclosure will not be considered to have been neglected.14
The Member and those identified with him cannot, however, ‘turn a blind eye’ by failing to make diligent enquiries or to exercise rights to obtain information from others, and will be deemed to know every material circumstance which ought to be known in the ordinary course of business. For example, the Member will normally have the right to receive all information regarding the Ship which is in the possession of the Ship’s classification society. Accordingly, the Member will be deemed to have been aware of such information, even if the Member has not inspected the class records.
(E) Where the Association…would not have accepted the entry… (Rules 6.2 and 6.3)
The consequences of a breach of the duty of disclosure are described in Rules 6.2 and 6.3. Where full and proper disclosure has not been made by the Member a distinction is drawn between circumstances in which it can be said (a) that the Association would not have accepted the entry either at all or at the agreed Estimated Total Call; and (b) those where it can be said that the Association would have accepted the entry at the agreed Estimated Total Call but on different terms.15
In the case of (a) the failure to disclose need not be causative of the event giving rise to the claim16 and the Association has no liability for any claim made under the contract of insurance in respect of the Ship or Ships to which the failure to disclose is relevant.17 For example, if the Member informs the Association prior to or at the time of entry of a Ship that it is classed by a classification society that is approved by the Association18 when in reality it is not, the Association will be free from any liability arising in respect of that Ship, but not in respect of the other Ships entered by the Member where correct information has been given, unless the contract of insurance is in respect of more than one Ship.
The neglect by the Member of his duty of disclosure under Rule 6 also gives the Association a right to terminate the entry subject to 14 days’ notice of such termination pursuant to Rule 24.2.c.
The Association has the burden of proving that the entry would not have been accepted at the same Estimated Total Call , if the Association had known of the circumstances which the Member has neglected to disclose. However, it is sufficient for these purposes if the Association establishes that it would not have accepted the entry in such circumstances, regardless of the attitude of other P&I clubs or insurers.
(F) Where the Association would have accepted the entry at the same Estimated total Call but on other conditions… (Rules 6.2 and 6.3)
Where, notwithstanding the non-disclosure, the Association would nevertheless have accepted the entry at the same Estimated Total Call , but subject to other conditions, the Association is liable to indemnify the Member only in respect of liabilities, losses, costs and expenses that would have been covered under the conditions that the Association would have accepted had full and proper disclosure been made.
For example, if the Member failed to disclose the fact that the Ship would be trading exclusively between Japan and the US with high value steel cargo, and the Association would have accepted the entry at the same Estimated Total Call subject to a cargo claim deductible three times higher than that which was actually agreed, then the Association would be liable to indemnify the Member in respect of covered cargo liabilities, but on the basis that the Member would bear such increased deductible.
The Association has the burden of proving the terms and conditions which it would have required in order to accept the entry if full and proper disclosure had been made. In turn, the Member has to prove that the liability, loss, cost or expense which the Member has incurred would have been covered under the conditions that the Association would have required in such circumstances.
1 This principle of ‘utmost good faith’ (or uberrimae fidei) is enshrined in Section 17 of the English Marine Insurance Act. Norwegian law adopts similar principles.
2 See also the Guidance to Rule 9.
3 See the Guidance to Rules 1 and 79.
4 See also the Guidance to Rule 72 on identification issues under Norwegian law.
5 Brokers normally act as agents of the applicant or prospective Member – see the Guidance to Rule 3.
6 See (E) below and the Norwegian Insurance Contract Act of 1989, sections 4-2 and 4-3 concerning the consequences for the assured of failing to comply with the duty of disclosure. See also Rule 90.
7 See (C) below.
8 See the Guidance to Rule 24 and (E) below.
9 The contract of insurance is normally concluded when the Member or the person placing the insurance on his behalf (usually the broker) accepts the Association’s terms for entry or renewal. See the Guidance to Rule 3.
10 See (E) of the Guidance to Rule 3 for details of the information required on the Association’s entry forms.
11 The provisions of Rule 6.1 are similar to the provisions in the Nordic Marine Insurance Plan, which require disclosure of all relevant information, regardless of whether the insurer has made pertinent enquiries. This goes further than the position under the Norwegian Insurance Contract Act of 1989, section 4-1, which is based on the principle that the insured need only give correct replies to the insurer’s questions.
12 See the Norwegian case of MK Anna II ND (1953) page 376, discussed in (B) of the Guidance to Rule 7.
13 See the Norwegian case of Ormlund ND (1978) page 31.
14 See the Norwegian case of Onega ND (1962) page 270.
15 For comment on (b) see (F) below.
16 In contrast, Rule 7 requires a link of causation between the alteration of risk and the liability, loss, cost or expense which the Member has incurred. See (E) of the Guidance to Rule 7.
17 See the Norwegian case of Fønix ND (1938) p. 188 for an example of an insurer being relieved of liability for non-disclosure by the assured.
18 See Rule 8.1.a.