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MARINE & ENERGY COVERS: WHAT ABOUT DEFECTS AND DAMAGE? A lecture by Jonathan Bruce and Laura Britten, Elborne Mitchell 8 December 2009

These notes are derived from a talk by Jonathan Bruce and Laura Britten of Elborne Mitchell, given at Lloyd's Old Library on Tuesday 8 December 2009. Where specific reference is made to the law it is to English law as at 8 December 2009. For specific advice, you should please contact Jonathan Bruce, Laura Britten or the partner with whom you usually deal at Elborne Mitchell.

Disclaimer: These Notes are for information only and nothing in them constitutes legal or professional advice. They should not be considered a substitute for legal advice in individual cases; always consult a suitably qualified lawyer on any specific legal problem or matter. Elborne Mitchell assumes no responsibility to recipients of these Notes.

MARINE & ENERGY COVERS: WHAT ABOUT DEFECTS AND DAMAGE? Jonathan Bruce and Laura Britten, Elborne Mitchell 8 December 2009

Introduction The question as to whether there has been an insured loss under the policy wording is central to all marine and energy insurance claim, and this is commonly an issue in dispute. Today we are going to focus on hull and construction all risks policy standard form wordings and look at these from a marine and energy perspective focusing on the meaning of damage within the standard forms, and trying to identify the difference between defects and damage. The first port of call for marine and off-shore energy underwriters, brokers and assureds when dealing with claims should be the policy wording and standard incorporated wordings. The Marine Insurance Act 1906 is also likely to be relevant, and we will look at this, along with some standard forms before examining some of the most important terms and issues, and how the English Courts have approached these. We will specifically focus on latent defects, wear and tear, fortuities and inevitabilities. We will look at what is a part in these contexts when establishing if a part of a hull or machinery has been damaged. We will also look at the meaning of damage, although we would note here that damage will be a running theme throughout the lecture. The Marine Insurance Act 1906 Under a typical marine policy, the statutory position in respect of specific perils for which underwriters are on risk is provided by Section 55 of the Marine Insurance Act (MIA). The most relevant parts of Section 55 read as follows: 1. the insurer is liable for any loss proximately caused by a peril insured against, but he is not liable for any loss which is not proximately caused by a peril insured against. 2. In particular (c) the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice Therefore, the MIA sets out the statutory limitations on underwriters liability to indemnify the assured, limiting exposure to losses proximately caused by an insured peril, and specifically excluding wear and tear. The onus is on the assured to show that a loss has occurred by an insured peril. We would note here that under a named perils policy, the general intention of the programme is to cover the operator, co-venturer, contractors and subcontractors as assureds literally for all risks in so far as they are involved with the works. The onus in a typical all risks policy is on the assured to show that damage has been caused by a fortuity, and for underwriters to demonstrate an exception (which can include wear and tear under the MIA), if they wish to deny cover.

Standard named perils policy forms Institute Time Clauses Hulls (1 October 1995): Turning now to an example of a standard named perils form, the Institute Time Clauses Hulls. This is the most frequently used English law hull policy (along with its predecessor, ITCH 83). 6.1 This insurance covers loss of or damage to the subject matter insured caused by

6.2.2 bursting of boilers, breakage of shafts or any latent defects in the machinery or hull. Provided such loss or damage had not resulted from want of due diligence by the assured, owners or managers. Therefore just by way of summary ITCH expressly covers damage caused by latent defects and such a clause is commonly known as the Inchmaree clause. Lets move on now to examine some frequently used all risks standard forms. Marine Construction All Risks (MARCAR) (01/09/ 2007) This is designed for marine construction projects, including docks, yards, vessels, rigs and pipelines:Section A 2. 2.1 2.2 Perils the insurance under Section A is against all risks or physical damage to the subject matter insured caused and discovered during the period of the insurance. the subject matter insured shall not be regarded as physically lost or physically damaged solely by virtue of the existence therein of any defect in design, plan or specification, defect in workmanship, defect in material or latent defect.

Also excluded from MARCAR is the cost of replacing, repairing or rectifying any of these defects. It does however cover the cost of repairing damage caused by the defect, if the cost of repairing damage is more than the cost that would have been incurred to replace, repair or rectify the defect immediately prior to when damage was caused. MARCAR excludes damage caused solely by ordinary wear and tear. Therefore, by way of summary there is no cover under the standard MARCAR wording, unless the optional buy back is used, which we will come on to in a moment, for damage caused by latent defects or faulty design, or for the cost of repairing, replacing, or rectifying such defects and it expressly excludes wear and tear. The application of MARCAR (although we would note that this was a slightly earlier form), was considered by the Courts in the case of Shell UK Limited v CLM Engineering Limited and others (2000). In this case it was confirmed by the Court that the position under

MARCAR is that cover is primarily designed for physical losses to insurable property caused by an insurable peril, and not to losses attributable to design defects. The Court held that there was nothing in MARCAR to indicate that it extended cover to matters such as errors in design and latent defects. As we mentioned there is a compromise available under MARCAR where there is the option for the assured to buy back, for an additional premium, cover for 50% of the costs of repairing, replacing and rectifying the physical damage caused by a defect in design, as long as the damage is covered under the perils clause. Institute Clauses for Builders Risks (01/06/1988) Moving on then to the standard clauses in the Institute Clauses for Builders Risks, commonly used for the construction risks involving vessels and (sometimes) rigs:5. 5.1 Perils this insurance is against all risks of loss of or damage caused and discovered during the [policy] periodincluding cost of repairing, replacing or renewing any defect parts condemned solely in consequence of the discoveryduring the [policy] period of a latent defect. In no case shall it insurance cover the cost of renewing faulty welds. Faulty design includes loss of or damagearising from the faulty design of any part or partsbut in no case shall this insurance extend to cover cost of repairing, modifying, replacing or renewing such part or parts nor betterment nor alteration in design Therefore, the builders risks clauses cover damage caused by latent defects, including the cost of repairing, replacing or renewing the defective parts. However cover is not extended to the cost of repairing, modifying, replacing or renewing the faulty part itself. WELCAR 2001 Turning now to WELCAR, which is a policy wording which provides all risks cover for off shore construction projects. As with the other all risks standard forms, the assured needs only to demonstrate that a fortuitous peril has caused the casualty and it is for insurers to rely on exclusions, if applicable. Section I physical damage 1. Covered perils Section I insures against all risks of physical loss of and/or damage to the property covered hereunder, provided such loss or damage arises from an Occurrence within the Policy Period 2. Covered property

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 covers works executed in performance of all contracts relating to the project including material, components, parts, machinery, fixtures, equipment property destined to become a part of the completed Project 7. Defective parts covers physical loss and/or physical damage to the property insured resulting from a Defective Part, faulty design, faulty materials, faulty or defective workmanship or a latent defect even though the fault in design may have occurred prior to the attachment of the Policy. does not provide coverage for loss or damage to (including the cost of modifying, replacing or repairing) any Defective Part itself unless all of the following is satisfied: a) such Defective Part has suffered physical loss or physical damage during the Policy Period; b) such physical loss or physical damage was caused by an insured peril external to that part; and c) the defect did not cause or contribute to the physical loss or physical damage. Therefore, cover under WELCAR is provided for damage, including that caused by a defective part even if it contains a latent or design defect. However whilst the wording seems to provide a wide cover, it is narrowed as to the defective part itself by this three-stage test which must be satisfied. WELCAR assists by defining the meaning of Defective Part for us, we will deal with the question as to what is a part later on, but we would note here that WELCARs definition is rather circular in that it defines a Defective Part by reference to a part. The definition says a Defective Part is any part of the subject matter which is or becomes defective and/or unfit or unsuitable for its actual intended purpose, or by the reason of faulty design, faulty workmanship or a combination of those. This also includes ancillary parts, which although might not be defective, would have to be removed and replaced when the faulty component is rectified. Faulty welds are expressly excluded. There is a defective part exclusion buy back available by endorsement, providing the insured with the opportunity to buy back the exclusion of cover for defective parts, and this relates to the cost of repairing and replacing defective part which has suffered loss or damage during the policy period, subject to an additional premium of course. We would note that this is something for brokers to discuss with underwriters on a case-by-case basis, but practically speaking, brokers and assureds should be aware that underwriters will likely want to know details as to relevant new technology and safety and quality control procedures in place for the particular construction project before agreeing to the buy back and considering the sublimits. Latent defects Having examined the standard forms, lets now turn to an analysis of what some of the terms mean and we will begin with latent defects.

The concept under the Inchmaree clause, which we looked at in the context of ITCH, had been for cover to be provided for damage to some part other than where the latent defect is present. As we will see this changed after the decision in the Nukila, a 1997 Court of Appeal decision, and the ITCH were altered by the International Hull Clauses 2003 to accommodate for a situation where even though there was no cover provided by the standard form for the cost of correcting latent defects, where there is a recoverable claim, underwriters will also cover one half of the costs common to the correction of the latent defect and to repair the losses or damage caused thereby. The IHC 2003 is not a commonly used wording compared to ITCH, but given underwriters liability on these issues, and consequently the certainty of cover for the assured, remains unclear, perhaps IHC is one wording which brokers and underwriters should be thinking about incorporating more frequently, of course where appropriate. As compared with standard perils, such as perils of the sea, Arnould (a leading authority on marine insurance law) describes latent defect as follows: A condition which may give rise to progressive damage or deterioration over a considerable period, perhaps spanning several policy periods, without it being discovered and without there being anything which can readily described as a casualty at any finite point in time. However, as we shall see, the same can apply to wear and tear. In the non-marine construction case of Baxall v Sheard Walshaw Partnership (2002), the Court said a defect will not be latent where in the normal course of events, a surveyor will be engaged in a survey of a building for purchaser, and, with the exercise of due diligence the surveyor would have discovered the defect. It is no coincidence that ITCH and the Institute Builders Risks Clauses, for example, require loss of, or damage to have been suffered by the insured property, because the standard forms are not designed to simply cover unidentifiable defects, or indeed guarantee that the vessel is free from defects on inception. Why then was the Inchmaree clause introduced, you might be asking yourself. Interestingly it was introduced to cover damage which was not strictly speaking a peril of the sea. However, it has had the effect of creating some coverage difficulties, because whilst such wordings provide cover for latent defects, showing when damage has in fact occurred is often problematic. Just for context we will run over the facts of the Inchmaree. The Inchmaree (1887) was the subject of a hull insurance claim for damage to the donkey pump so called because the mechanism looks like a nodding donkey! - which was used to pump up the vessels boilers for her journey. It was held that the loss did not fall within the meaning of the words perils of the sea, which were included in the hull insurance policy wording, because the sea had had no involvement in the incident except the powering of the ship, the same kind of damage could easily have occurred on land or at sea. Perils of the sea were not therefore causative of the loss, and a new clause was then designed to cater for this. By its very nature, a latent defect cannot sensibly be said to impact the insured property and trigger cover unless and until damage has been caused, and this is apparent from the standard wordings and case law. The early principles as to latent defects were laid down in the 1911

case of Hutchins Brothers v Royal Exchange Assurance Corporation, where the wording provided cover for damage caused by latent defects. The Court said that the development of a latent defect is not the same as damage to the machinery through a latent defect. In a situation where a latent defect has simply developed and damage occurs, the damage is not caused by a latent defect, but is the latent defect itself and nothing more. The Court of Appeal had the opportunity to review the earlier decisions on this issue in the 1997 case of Nukila. The facts of Nukila are fairly lengthy and complex, but essentially the Nukila was a mobile off-shore work platform. She had been in service for about four years without any real difficulties until the incident occurred. During the policy period cracks were discovered on the legs and spud cans (feet of the legs) and it was found that the welds attaching the top plate of the spud cans had not been properly profiled, and extensive fractures had developed. On inception the minute fatigue cracks were not visible and they were therefore latent defects, it was claimed. Incorporated into the policy was the ITCH standard form and this included cover for latent defects. Further, for an additional premium, the Additional Perils clauses included cover for the defective part itself which had caused the damage (provided there was damage to the vessel). When considering this claim the Court went back to basics and considered whether the cracking caused damage, or whether it was just the latent defect becoming patent, as in Hutchins (1911). If a defect has simply been discovered then there has actually been no loss, because the vessel was essentially in the same condition as at the start of the policy. Hobhouse LJ, one of the three Court of Appeal Judges said that: Applying common sense test to this question, it seems to me plain that this was not simply a latent defect becoming patent, it was well beyond that. Metal had fractured. That was damage to the hull. So lets look at the legacy of Nukila in this context. It is clear that there will be problems for underwriters, brokers and assureds when there are borderline cases where there is the development or spreading effect of a defect, which was present on inception, but which nobody knew about. The question is whether the defect is simply becoming patent, and therefore not causing damage. Also, as damage in fact been caused, and there is also the question of what is a part. The Court did look at the question of what is a part, but we will look at this in more detail later on. The position on all of this is somewhat uncertain and perhaps underwriters and brokers should consider including a carefully drafted wording in to the slip to try to deal with these issues. However, one thing that does seem clear is that the Courts will apply a common sense approach to claims and will approach these situations by a question of fact and degree. In the Caribbean Sea (1979) in which Elborne Mitchell acted for the defendant underwriters, the Commercial Court looked at the issue of design defects. The Court also looked at the issue of wear and tear, but we will look at this separately later. The Caribbean Sea sank off the coast of Nicaragua in 1977 due to a facture caused by cracking in part of her structure. The vessel had completed her last special survey and there were no outstanding recommendations. It was shown that the fillet welds were a source of loss of fatigue strength to the vessel. The policy wording incorporated the American Institute Hull Clauses, which included cover for latent defects. The issue was as to the design and suitability of the vessel for her ordinary operation. Underwriters argued, amongst other things, that the damage was caused by defective design and that following Jackson v Mumford (1902), in which case the design of the vessel had 6

not been adequate for the ordinary task of the ship, they argued that the design of the Caribbean Sea was a shortcoming, and therefore the loss was attributable to a design defect rather than latent defects. The Court however held that the damage was caused by a latent defect and did fall within the policy wording. However, the Court did say that if the damage had been due to a design defect, it would not have been covered under the terms incorporated into the policy, in that particular case. Wear and Tear So, moving on to wear and tear, this is obviously a common cause of damage, which insureds will try to claim for if they possibly can. Sometimes it is only a cause of part of the damage, and it can be very difficult to quantify. Usually wear and tear is expressly included in property covers, including hull; the basis for that is that it is not a fortuity, and the purpose of insurance is only to cover fortuities, as we are coming on to. We have already mentioned s.55 of the Marine Insurance Act, which states unless the policy provides otherwise, the insurer is not liable for wear and tear . Although strictly speaking the Marine Insurance Act only applies to marine insurance, the courts will apply it where there is a connection to a marine risk, for example offshore energy. In any event, there is a shifting boundary between marine and non-marine risks, and the fact is that wear and tear is not a fortuity so we do not need to go any further than that. What is it? We are going to try to define wear and tear, and we think a useful way of looking at it is to compare it with latent defects. There are similarities, because the manifestation or damage caused may be either gradual or sudden in either case. The fact that the damage occurs over a matter of years is not a pointer one way or the other. The significance is that the underwriter may cover defects or damage arising from defects, but will never want to cover wear and tear. Defects are created by a positive act of human agency, usually a fault in the manufacture, design or materials within a part (and we are coming on to part later). It is a condition causing premature failure which was either present on construction or installation, or has resulted from the way the part was designed or constructed or installed. Compare that with wear and tear. This is the uncorrected result of ordinary, natural and inevitable incidents of trading or use. For example, this would include where the relevant part requires renewal at intervals and has merely worn out at the end of its normal working life. Alternatively it could be where a part fails prematurely as a result of external circumstances which are not due to an internal defect. So, for example, corrosion or damage caused by a change of ambient temperature would normally be wear and tear. However, if there is some other insured peril which has brought on the damage, such as someones negligence or a previous accident which was a fortuity, that could trump wear and tear and bring the damage back within the cover. It is a matter of what is the proximate cause. Beware, however: wear and tear is not always wear and tear. As we have just said, wear and tear can easily be displaced as a proximate cause. We have already mentioned The Caribbean Sea (1980). That is an example of wear and tear mixed with latent defect. There you had defective welding which led to a fatigue crack, and then the vessel sank and was a total loss. The underwriters said that the loss was excluded as it was caused by wear and tear. It was held, however, by Goff J, that no, this was not the case it was not wear and

tear where the latent defect has developed in the ordinary use of the ship, as was held to be the case with this particular cracking. Therefore the loss was covered. The latent defect was present from construction, so it was held that this was the proximate cause, and the loss was therefore covered. Incidentally, the courts will try where possible to identify only one proximate cause for each aspect of damage. Fortuities and inevitabilities There is a general rule in English insurance law that losses must be fortuitous. That is the case even if the policy is an all risks policy. The main authorities for this are marine cases, but the doctrine also applies to non-marine insurance. To give you one or two quotes: Firstly, Lord Herschell in The Xantho (1887): the purpose of the policy is to secure an indemnity against accidents which may happen, not against the events that must happen. Then, Donaldson LJ in Soya GmbH v White (1983): The whole concept of insurance is about risks, not certainties. Finally, Hobhouse LJ in The Nukila (1997): Insurance covers fortuities, not losses which have occurred through the ordinary incidence of the operation of the vessel. So, under English law, a loss which was certain will not be covered. Inevitability can be difficult to prove for underwriters. Therefore an alternative defence for underwriters might be material non-disclosure. This is where an assured knew that the loss was certain or every likely, but did not disclose this to underwriters prior concluding the insurance contract. Depending on the case, that might be an easier avenue for underwriters. Incidentally underwriters may choose expressly to cover losses which are certain, but that is very unlikely in practice. What about the overlap between inevitability and inherent vice? There has been a recent case on this, Global Process Systems Inc v Syriakats Takaful Malaysis Berhat (2009). Here, a jack-up rig, the Cendor MOPU, was towed on top of a barge from Galveston to Malaysia. Its legs were up in the air and it had fatigue cracking. As a result, all three legs broke off into the sea off South Africa. The underwriters said that the loss was excluded due to inherent vice and/or inevitability. It was held by the court that the damage was not inevitable. However, underwriters still successfully defended the claim, on the basis that the cracks were a known risk and the legs were unable to withstand the ordinary incidence of the voyage, and so the Court held that this was inherent vice. That is an example which shows how difficult it is to prove absolute inevitability. But there is more than one way to skin a cat. Other defences are often available to underwriters where a loss smells of inevitability, for example, inherent vice, material non-disclosure, and also wear and tear. What about deliberate acts? These are usually not fortuitous and therefore will not be covered. A good example of this is Samuel v Dumas (1924), where the scuttling of a vessel by its crew with privity of its owners was held not to be fortuitous and therefore not covered by the policy.

An exception to that exception is General Average. General Average expenses are clearly deliberate, but they are expressly covered. We all know that the arcane world of General Average likes to be a bit special and different! What is damage? We all know when there is a massive elephant in the room but sometimes we simply do not want to deal with it. Likewise, the issue of damage crops up quite often, but it is very difficult to define. A good starting point is the Oxford English Dictionary, which defines it as harm or injury impairing the value or usefulness of something . Obviously that is not a legally binding definition, but it does seem to be borne out by the case law. In Humber v Canary Wharf, CA (1996), Pearl LJ said damage is in the physical change which renders the article less useful or less valuable. So we can probably say that (a) physical alteration is required (probably) we say probably because there can be economic loss, such as rectification expenses where there is no physical damage, and this has led to disputes, depending on the wording. Secondly, (b) it must impair the value or usefulness of the insured property. That is a matter of evidence, a question of showing reasonable repair costs and so on. Does the alteration have to be physical? Most property and CAR policies will expressly only cover physical loss or damage, e.g. WELCAR s1.1. It is certainly sensible for underwriters to include the word physical, in order to exclude defects (unless there is a buy back) and to exclude pure economic loss. The case law distinguishes damage from defects. For example, in Bacardi v Thomas Hardy Packaging (2002), benzene ended up inside bottles of Bacardi Breezers leading to a massive product recall, and Bacardi sued the supplier responsible. There was an exclusion in the contract for direct physical damage. Mance LJ said in the Court of Appeal that the product was not damaged, but merely defective at the moment of its creation, so drawing a distinction between damage and defects. There was a similar finding in Pilkington v CGU (2004). In this case, defective glass panels had been installed at the Eurostar Terminal in Waterloo. Potter LJ in the Court of Appeal said that this was not damage: damage requires some altered state . So probably, even if you do not use the word physical, it will be implied, unless there is some contrary wording in the policy. A tricky example in an offshore context would be where you have a platform with piling problems due to unsuitable foundations, but where there is no damage to the substructure and no damage to the piles themselves. In that case, there is no physical damage, so the massive rectification expenses would not be covered, for example under WELCAR, where only physical damage is covered. What about temporary damage? This can still be damage. In The Orjula CA (1995), there was a spillage of hydrochloric acid on the ships deck. The acid was neutralised with soda and washed off. It was held that the deck was damaged, even though it was only

temporarily altered. That has surely to be on the borders of what damage is. A similar case was King v Lees (1949), where there was spillage in a taxi. This is perhaps a seasonal cautionary tale with all the Christmas parties coming up! Here there was a, shall we say, human spillage, and that was held to be damage, even though it was all washed off! And now a quick word of warning for underwriters. In Cementation Piling v Aegon, CA (1995), there was a CAR claim in relation to the dock at Barrow-in-Furness. The claim was for consequential rectification costs arising from defects and holes in the dock wall. The wording covered indemnity in respect of physical damage. The Court of Appeal found that the words in respect of extended the cover beyond physical damage. There was an exclusion for rectification costs unless damage resulted from the defect. Additionally, betterment in rectification of defects was expressly excluded. The court found that this must have meant that non-betterment rectification of defects was not excluded, and as a result consequential rectification was covered in this case even though it was not physical damage, and even though Gibson J acknowledged that this may not have been intended by the underwriters. So here, drafting which was intended to help the underwriters was used against them, with massive consequences. What is a part? The final thing we are going to look at is what is a part, in the context of coverage for defective parts and consequential losses due to those defects. Again, we have an elephant in the room. This is difficult to define and difficult to deal with, although we may all think we know what it is. Also there is not much case law on this issue. The purpose of most underwriters is not to guarantee parts against defects, unless an additional premium is paid. That is because underwriters will see it as the manufacturers responsibility to guarantee parts. Mustill J summed up the problem in The Miss Jay Jay, Commercial Court (1985): What is the meaning of part? It is easy enough to apply when two items, separately manufactured, are put together when the vessel is constructed what if failure occurs in one continuous structure, through bad design, and this leads to damage in another area? Were they separate parts, or merely different areas of a single part? A complete solution is hard to find. In that case, the judge dodged the question and decided the case on a different ground. An exclusion in the policy stated solely latent defect, and the judge found that there was an intervening peril, namely perils of the sea, which was covered, so it was not solely latent defect. Broadly, what is a part will always depend on the facts and the wording. In The Nukila, Hobhouse LJ in the Court of Appeal looked at how to define a part (although in that case there was cover for Additional Perils, so the defective part itself was covered if there was damage to the vessel). He came up with the obviousness test. He found that the defective welding was just as much as part as a bulk head or plate or the totality of the leg structure. That is a slightly circular statement, because the totality of the leg structure arguably includes the welds. But, he went on to say that the argument based on part (i.e. that there was no damage other than to the defective part and therefore no cover

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for the defective part in this case) leads to absurd results. It provides no criterion for distinguishing between what is and what is not damage. The suggested criteria what can be physically separated, what performs a separate function are not in the clause. For what it was worth, Hobhouse LJ thought that the welds were a separate part, but he found that this was irrelevant because the wording did not require damage outside that part. So again, the issue was dodged in this case, and again the court found against underwriters. As an aside, faulty welding is excluded in WELCAR (exclusion L), and so this issue would not be a problem under WELCAR or similar wordings. The only really bomb-proof way of defining a part in a policy, for the purposes of any exclusion which underwriters may want to rely on, would be to list each part individually, in my opinion, and clearly that is just not practical. There is a good attempt to define part in WELCAR, but that is subject to the same weaknesses set out by Hobhouse LJ. Is paint a part? Yes, it almost certainly is, but there are a couple of things to mention here in relation to the WELCAR wording. Firstly, WELCAR includes an exclusion for fluctuation in temperature. So, for example insulation coating which peels off in cold temperatures due to the fact that it was applied in warmer climes would not be covered. Secondly, Defective Part in WELCAR is expressly defined to include ancillary components which need replacement when the faulty component is rectified. If paint has failed due to the surface being defective, then the paint will therefore not be covered unless the insured has brought the buy-back for defective parts. Then, under clause 7, WELCAR provides that damage must be caused by an insured peril external to that part. So, where you have a defective surface, not even the cost of re-preparing the surface would be covered under WELCAR, unless again the insured bought the buy-back. And then finally, for comedy value, next time any of you get caught short in Minster Court, you might want to consider, is a toilet a part? This was considered in the Minster Court case, Mitsubishi v Royal London Insurance CA (1994). Here, there were 94 defective toilet modules, all of which were in some way attached to a single cementitious board. It was held that this was only one part, and so only one deductible applied. Accordingly, all 94 toilets were only one part. This will depend on the facts and the wording in each case however. Conclusion what can be done? The extent to which latent defects are covered is a matter of negotiation and the drafting of the policy. We have seen how wordings have developed which seek to cover - or not cover the defective part, and the consequential damage to the rest of the property. The idea usually is that underwriters intend to cover damage but want to exclude latent defects to varying degrees, although buy-backs and compromises are possible, as we have seen from the wordings available and which are commonly used.

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Is it necessary to define damage in the policy? Probably not, but if we were an underwriter, we would specify that the damage must be physical, if that is what was intended. Is it useful to define part in the policy? As the case law stands presently, we would say that it is virtually impossible and pointless to define part, or at least hopelessly impractical, but hopefully the position will be clarified when a daughter of Nukila reaches the courts. Until then, any inclarity or ambiguity is likely to be decided in favour of insureds. These are thorny issues, but for the most part they can be safely navigated through careful drafting at the placement stage, or through common sense at the claims stage, although there will always be some grey area cases which will lead to dispute.

Jonathan Bruce and Laura Britten Elborne Mitchell Solicitors Tel: 020 7320 9000 bruce@elbornes.com / britten@elbornes.com

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