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Rule 7 Alteration of risk

1 Where after the conclusion of the contract of insurance circumstances occur which result in an alteration of the risk, the Member shall disclose such circumstances to the Association without undue delay.

2 Where there is an alteration of the risk which has been intentionally caused or agreed to by the Member and the Association would not have accepted the entry at the same Premium Rating if it had known of such an alteration prior to the conclusion of the contract of insurance, the Association is free from liability to the extent that the liability, loss, cost or expense incurred by the Member was caused or increased by the alteration. 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 the conditions the Association would have accepted.

Guidance

(A) …after the conclusion of the contract of insurance…the Member shall disclose… (Rule 7.1)
Whilst Rule 6 sets out the duty of disclosure in respect of circumstances existing at the time of conclusion of the contract of insurance, Rule 7 imposes a duty on the Member to disclose circumstances occurring after that time which result in an alteration of the risk.1 

Rule 7 involves a consideration of two separate issues:

1 Are there circumstances that result in an alteration of the risk?; and

2 If so, then in what circumstances is the Association entitled to place restrictions on cover? 

The test of whether there are circumstances which result in an alteration of the risk is a question of fact and is irrespective of whether or not the Member has actual knowledge of those circumstances, or if he has such knowledge, of whether he perceives them to represent an alteration of the risk. However, logically, it is difficult for the Member to disclose circumstances if he has no knowledge of them. Therefore, the Association is entitled to place restrictions on the cover that is available to the Member for his failure to disclose only in the event that the alteration of risk has been intentionally caused or agreed to by the Member.2 Where the Member neglects3 the duty of disclosure under Rule 7.1, the Association may terminate the insurance of any or all Ships entered by the Member on giving 14 days’ notice in accordance with Rule 24.2.4

Furthermore, the Association has no liability for a claim made by the Member in the circumstances described in Rule 7.2.5 

(B) …circumstances occur which result in an alteration of the risk… (Rule 7.1)
‘Circumstances’ covers every fact or matter relating to the ship; however, it is only those circumstances which ‘result in an alteration of the risk’ that are subject to the duty of disclosure. The altered circumstances must be relevant or material in the sense that they affect or influence the judgement of the Association in assessing the risk,6 in deciding the correct premium rating or in determining the terms and conditions imposed for the ship’s entry or renewal in the Association.7 An example of such a circumstance would be the conversion of, or a radical change of trade of, a Ship.8 

(C) …without undue delay… (Rule 7.1)
The above words permit some delay, but not to the extent that the delay becomes ‘undue’ or excessive. A Member must inform the Association as soon as practically possible of the circumstances that cause an alteration of the risk. 

Entries in the Association are often effected through intermediaries such as brokers or managers whose acts are deemed to be those of the Member.9 It is important that such brokers, managers and others whose knowledge may be deemed to be that of the Member understand this Rule and that they comply by disclosing promptly all relevant and material information relating to changed circumstances. 

(D) …an alteration of risk which has been intentionally caused or agreed to by the Member… (Rule 7.2)
The consequences of any alteration of the risk are described in Rule 7.2. Whilst an alteration of the risk must in both cases have been intentionally caused or agreed to by the Member a distinction is drawn between circumstances in which it can be said that;

a the Association would not have accepted the entry either at all or at the agreed premium rating if it had known of the altered risk prior to the conclusion of the contract of insurance (See (E) and (F) below); and

b those where it can be said that the Association would have accepted the entry at the agreed premium rating but on different terms (See (G) below). 

(E) Where there is an alteration of the risk…and the Association would not have accepted the entry… (Rule 7.2)
The Association has no liability for the Member’s liability, loss, cost or expense caused or increased by the alteration of the risk, if: (a) it was intentionally caused by, or agreed to by the Member, and (b), where the Association would not have accepted the entry either at all or on the same premium rating if it had known about it prior to the conclusion of the contract of insurance. 

The Association has the burden of proving that, if it had received information about the circumstances causing the alteration of the risk at the time of entry or renewal, the entry of the ship in the Association would not have been accepted at the same premium rating.10 

(F) …the Association is free from liability to the extent that the liability…was caused or increased by the alteration. (Rule 7.2)
It is necessary to distinguish between two situations:

i Where the liability, loss, cost or expense has been caused by the alteration of the risk the Association has no liability to reimburse the Member for any such liability, loss, cost or expense.

ii However, where the liability, loss, cost or expense has been merely increased by the alteration of the risk, the Association is free from liability to only to the extent that the liability, loss, cost or expense which the Member has incurred has been thereby increased. 

Therefore, there must in both cases be a link of causation between the altered circumstances and the incident which forms the basis of the Member’s claim upon the Association.11 For example, if the ship no longer complies with her statutory manning requirements, the Association is free from liability if the incident would not have taken place had she been properly manned.12 However, if the breach of manning requirements is not relevant to the claim, the Association cannot avoid liability under Rule 7.13 

An example of increased risk is where the Member, after the conclusion of the contract of insurance, alters the trading pattern of the ship to call regularly at ports in jurisdictions where the port safety systems are less developed and/or where the exposure to legal liability is much higher as a result of strict liability regimes and/or the deprivation of the right to limit liability. For example, should the Ship suffer a grounding incident as a result of local port conditions with the result that the Member incurs substantial liability which he cannot resist or limit under the applicable local law, the Member might have been able to resist and/or limit such liability if the incident had occurred in a port in the trading area which had been advised to the Association at the time of conclusion of the contract of insurance. In such circumstances, cover is available only for the liability that would have been incurred if the risk had been as originally disclosed. 

(G) …Where the Association would have accepted the entry at the same Premium Rating but on other conditions… (Rule 7.2)
The second sentence of Rule 7.2 reduces the danger of potential loss of cover pursuant to the first sentence of the Rule,14 i.e. where the alteration of risk is of such a character that the Association would still have accepted the entry at the same premium rating, but subject to other conditions. For example, this could occur when, as a result of a change in her trading pattern, the ship operates in an area for which the Association would have applied a special deductible for liabilities, costs and expenses as a result of stowaway activities. 

Example of the relationship between Rules 6 and 7
The Member has notified the Association before the Entry of the Ship that the Ship would not be engaged in the carriage of ammunition, but subsequently learns following the Entry that the time charterers had always intended to carry ammunition on the Ship. That could be considered to be both “a change in such circumstances as previously disclosed” for the purposes of Rule 6.1 and “an alteration of the risk...after conclusion of the contract” for the purposes of Rule 7.1. 

If the Member has “intentionally caused or agreed to” the carriage of the ammunition then that is likely to be an “alteration of the risk” and the provisions of Rule 7 apply. However, if the Member has not “intentionally caused or agreed to” the carriage of the ammunition, then this is, nevertheless, likely to be “a change in such circumstances as previously disclosed” for the purposes of Rule 6 with the result that the Association is entitled to rely on the provisions of Rule 6 only if the Member has failed to disclose such facts to the Association without undue delay after becoming aware of such circumstances. Therefore, if the Member has not “intentionally caused or agreed to” the carriage of the ammunition and has made prompt disclosure once he has become aware of it, the Member is entitled to cover.


1 See the Guidance to Rule 6. The type of circumstances which the Member must disclose under Rule 7 may be similar in kind to those that should be disclosed under Rule 6.
2 See the comments below under (D).
3 See (E) of the Guidance to Rule 6 for discussion of the meaning of ‘neglect’.
4 See (F) of the Guidance to Rule 24.
5 The provisions of Rule 7.2 apply irrespective of whether the Member has neglected his duty of disclosure – see (D) below.
6 Furthermore, Rule 92.2 also allows the Association to amend the Rules (upon notice to Members) where a substantial alteration of risk occurs affecting the whole or a substantial part of the Association’s Members.
7 The Nordic Marine Insurance Plan provides that there is an alteration of risk where an alteration occurs in the circumstances which, according to the contract, are to form the basis of the insurance, and the risk
thereby is changed contrary to the implied conditions of the contract. As to the information which forms the basis of the contract of insurance, see Rule 3.3.
8 The Norwegian case of MK Anna II ND (1953) p. 376 is illustrative in this regard: The ship sank in open seas carrying a cargo of fish. The hull insurer was allowed to deny cover as the ship was insured only as a fishing vessel and not as a cargo vessel. The Oslo City Court found that the shipowner should have
informed the hull insurer of the ship’s alternative use to carry cargo since the insurer would have either increased the premium or issued an additional policy.
9 See (A) of the Guidance to Rule 6.
10 See the comments on burden of proof under (F) of the Guidance to Rule 6.
11 Such a causal link is not required to enable the Association to avoid liability for non-disclosure under Rule 6 – see (E) of the Guidance to that Rule.
12 See the Norwegian case of Ormlund ND (1978) page 31.
13 However, the Member may not be entitled to recover if in breach of Rule 8.1.
14 See (H) of the Guidance to Rule 6 for discussion of the burden of proof.