UK: EAR v Project Cargo Policy - The Timing Of Damage

European Group Ltd & Ors v Chartis Insurance UK Ltd [2012]¹Commercial Court, 11 May 2012

The Claimants in this case were insurers under an Erection All Risks (EAR) policy, issued in connection with a project for the installation of economiser blocks to a UK waste recycling plant. The Defendants were the marine project cargo insurers in relation to the same equipment, which had been produced by a manufacturer in Romania and was required to be brought to the site by road to Constanta and from there by ship to Southampton.

Both policies also covered delay in start up caused by damage to the property covered by the respective policy. Each policy also incorporated a "50/50 clause", providing that, in the event it was not possible to ascertain whether the damage occurred before or after the arrival of the equipment at the facility, the two policies would each contribute 50% to the adjusted claim.

After the economisers had been on site for between four and six months, fatigue crack damage was discovered in weld joints where vertical tubes in the economisers were welded to tubular headers. It was common ground that the fatigue cracking was caused by resonant vibration occurring between the time the blocks left the factory in Romania and the discovery of the cracks on site. The EAR insurers settled the claim in full, but without prejudice to their position that the damage in fact occurred during transit and so was covered by the marine project cargo policy alone. Accordingly, they sought to recover the appropriate indemnity amount from the insurers under the cargo policy, having taken an assignment of the insureds rights.

The cargo policy was on the Institute Cargo Clauses (A), which exclude liability for loss or damage caused by inherent vice. However, the normal ICC(A) exclusion in respect of insufficiency of packing was amended, such that it applied only to packing deficiencies known to the assured.

The marine insurers contended that the damage had been caused by wind excitation after the arrival and installation of the blocks. Alternatively, they argued that, if the damage occurred during transit, its proximate cause was inherent vice, on account of stresses introduced in the welding procedure during manufacture, or because of defects in the welds themselves.

After hearing the parties' expert evidence, the court was satisfied that resonant vibration by wind buffeting could effectively be ruled out as a cause of the loss. As a mechanism to explain the damage, it was held to be "not a realistic possibility".

As to the 50/50 clause in the two policies, it was held that this would be applicable only if there was such uncertainty that it was not possible to reach any conclusion as to when the damage occurred. Having eliminated the possibility of wind excitation, therefore, the court went on to consider the alternative hypothesis, namely vibration during transit. If this alternative was, in fact, "more likely than not" then the 50/50 clause would not apply. On that question, the court accepted the Claimants' evidence that the overland leg in Romania was sufficiently rough to have caused the necessary vibration, and that enough of the packing was missing or ineffective to account for the damage. Accordingly, damage during the road transport in Romania was a realistic and credible possibility, perhaps exacerbated by further damage during the road journey in England. It was much more the likely of the two alternative explanations.

As to inherent vice, the court was satisfied that the condition of the economiser blocks when they left the factory was such that they could reasonably be expected to survive the transportation, if properly packed. There was nothing in the inherent condition or design of the economisers which could be described as a proximate cause of the loss. On the evidence, therefore, the damage arose through an external fortuity during transit, translating into an insured loss under the marine project cargo policy, from which the EAR insurers were entitled to seek reimbursement in full.

Result: Judgment for EAR insurers.

Footnotes

^{1. [2012] EWHC 1245 (Comm)}

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