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Lewins, Kate --- "Marine Insurance Reform - Rocking the Boat?" [2001] ALRCRefJl 26; (2001) 79 Australian Law Reform Commission Reform Journal 48

Reform Issue 79 Spring 2001

This article appeared on pages 48 – 52 & 73 of the original journal.

Marine Insurance Reform: Rocking the Boat?

The Australian Law Reform Commission’s report Review of the Marine Insurance Act 1909 (ALRC 91) was tabled in federal Parliament in May 2001. Kate Lewins* reviews the report.

There is a lot at stake in reforming the law of marine insurance in Australia. Marine insurance is a commodity that is offered by insurers in Australia and elsewhere. It is important for Australian balance of trade figures that, where there is a choice, marine insurance premiums be spent in Australia rather than elsewhere. It is also important that insurers are willing to participate in the Australian market at a cost that is reasonable to the insureds. No one wishes to lose the market in marine insurance that currently exists in Australia, nor its affiliation with the law of overseas markets (particularly the United Kingdom). These factors are relevant in considering reform of the law applicable to marine insurance in Australia.1

However, the Marine Insurance Act 1909 (Cth) (MIA) is out of step with the modern expectations of fairness in commercial dealings between insurer and insured — and in this respect at least it is in need of reform. In 1986, the Insurance Contracts Act (Cth) (ICA) radically reformed the law of general insurance in Australia so as to better balance the interests of insurer and insured. From that time, there have been stark differences between the law of general insurance and the law of marine insurance in Australia. Conduct acceptable under the MIA is not acceptable under the ICA. Concepts discarded by the ICA are still alive under the MIA. Australia’s divergence in laws applicable to general insurance and marine insurance is unique in the common law world.

The ALRC received a reference to undertake a review of the MIA in January 2000. Its recent report, Review of the Marine Insurance Act 1909 (ALRC 91) has considered the MIA, and has proposed amendments. Part of the challenge for the ALRC was to recommend changes that keep the MIA internationally consistent and competitive, while reforming its more undesirable aspects. In almost all respects the suggestions for reform are welcome, although the report is, in parts, controversial.

Commercial v personal insurance

One strong theme of the ALRC report that can be supported is the legal dichotomy between commercial and non-commercial marine insurance. The MIA is best understood as regulating commercial marine insurance. There were many aspects of the MIA that were unfair when applied to, for instance, the insurance of a pleasure craft. Pleasure craft were taken from the domain of MIA in 1998. In its report, the ALRC proposes to complete this realignment of commercial/non-commercial marine risks by removing the transportation of personal effects from the application of the MIA and including in its ambit commercial vessels, whether inland or not.2

These recommendations will enable the MIA to become the legislative regime for commercial marine insurance. This is a sensible move on the part of the ALRC. Its effect will be to protect consumer interests, which will be covered under the ICA, and justifies a decision to leave the MIA in its familiar form.

Rewriting remedies

As will become apparent, another aim of the ALRC inquiry was to ensure that those remedies of draconian effect were removed and replaced with fairer, commercially appropriate mechanisms. There is a particular concern with breaches of warranties and breaches of utmost good faith, where the insurer, at present, can avoid the contract regardless of whether the breach caused the loss. Under the ALRC proposal,3 the insurer will be entitled to a remedy only if the insured’s breach is the proximate cause of the loss claimed on the policy.

Policy to be a complete and express statement of the contract

Another general theme is the ALRC’s desire to require insurers to be more explicit about the cover they are offering. At present, many of the limitations upon an insurer’s obligation to pay are not set out in the contract itself but are contained in the MIA as implied warranties. The ALRC recommends that, as a result of the reforms, the insurer will need to redraft policies to include express terms that were previously implied warranties in the MIA.4 The result is that the insured should be better informed about the extent of cover provided.

Some of the more significant proposed reforms are reviewed below.


As part of the contract of marine insurance, an insured makes certain promises, called warranties, to the insurer. Warranties are, in effect, a guarantee of a certain state of affairs. They may be expressly set out in the contract — such as that the insured vessel will not travel outside a set geographical zone. They may be implied by the MIA itself — such as the warranty that the vessel is seaworthy (s 45) or that the voyage is a lawful one (s 47).

Under the current law, the consequences of a breach of warranty are dire for the insured. The insurer is discharged from liability after the breach, regardless of whether the breach had any connection to the loss or whether it had been remedied before the loss.5 The combination of an implied warranty and the strict consequences means that it is possible for an insured to inadvertently breach a warranty it does not know about, and be rendered uninsured as a result, even though the breach is unrelated to the eventual loss.

Rather than seeking to update the notion of warranties, the ALRC seeks to:

(1) remove the concept of warranties from marine insurance altogether, replacing them with express terms; and

(2) introduce a requirement that the insurer not be entitled to rely upon the breach of a policy term to refuse to pay a claim unless that breach was the proximate cause of the loss.6

Warranties removed

Insurers will not notice much difference between writing an ‘express warranty’ and an ‘express term’ — it is in the remedies for breach that the difference will be noticed. However, there is likely to be more concern about the proposal to remove statutory implied warranties. Insurers will no longer be able to rely on implied warranties in the Act (such as to legality or seaworthiness). However, insurers will be able to include an express term in the policy dealing with, for instance, seaworthiness and legality. If those terms are express in the policy there is a better chance that the insured will be aware of them.

The insurer will be entitled to refuse to pay a claim where the insured breached an express term of the contract and this is the proximate cause of a loss. The difference is that the insurers need to redraft policy wordings to include terms about the insured’s continuing behaviour that they consider to be relevant, and the consequences of breach. While this appears to be a radical change, in reality it is likely to be one to which the industry will adjust rapidly.

Change to remedy for breach of term of insurance

Insurers have been resigned to the alteration of their remedy for breach of warranty.7 Under the proposed reforms, the insurer will no longer be able to deny a claim because of non-compliance with policy terms unless the non-compliance was the proximate cause of the loss. However, the ALRC has decided against introducing an element of proportionality as found in s 54 of the ICA.8 While consistency may have been a good reason to follow the ICA, the ALRC acknowledged that s 54 was inappropriate for marine insurance.9

The upshot is that, once the breach of the express term is found to have proximately caused the loss, the insurer will be entitled to refuse to pay the claim. The insurer cannot refuse to pay the claim where the breach was something less than the proximate cause but nevertheless did somehow worsen the situation. This contrasts with the situation under the ICA, which gives an insurer the ability to refuse the claim even if the breach only contributed to the loss and also allows an insurer to reduce its payment to the extent that it has suffered prejudice as a result of the breach. The marine insurer will have no such recourse. Perhaps the insurer will regard it as a fair price to pay in exchange for a simpler rule that is easier to administer than s 54, but it might be difficult for insurers to swallow. Certainly insureds are greatly advantaged by the reforms in this respect.

Overall, the case for deleting warranties is strong. One can replicate the same obligations as express terms of the contract. Clearly the draconian consequences of a breach of the warranty have to be removed. However it is possible that under the proposed reforms the pendulum may swing too far to the insurer’s disadvantage. Nevertheless, insurers may well prefer this to being embroiled in extensive litigation such as has surrounded s 54.

Coverage of the MIA

Another controversial issue for the ALRC is how best to delineate between risks covered by the MIA and those that fall outside the MIA and therefore into the default regime provided by the ICA. The problem of determining the applicable legal regime for a particular contract of insurance is unique to Australia. In other common law countries there is not much difference between the law of marine insurance and the general law of insurance. But in Australia there is a significant difference between the legal regimes of the ICA and the MIA.

The MIA itself is unhelpful in describing its coverage. It talks obtusely about insuring matters relating ‘to marine adventure’.10

Many of the problems with coverage should be resolved by two sensible recommendations from the ALRC that have already been noted — the removal of personal/domestic risks from the MIA to the ICA, and the inclusion in MIA coverage of commercial vessels on the seas or inland waters.

However, that still leaves problems in the cargo insurance context. Of particular concern is the regime to apply when one policy (called open or annual cover) is issued over a myriad of future shipments by whatever means. It is only at the end of the period that the exact consignments and modes of transport are known. Unfortunately, this means that it is only after the event that one can accurately assess what law applied to the insurance cover. The ALRC seems to have been unable to propose a solution as to how one can determine what law applies at the outset of the cover.11 This is clearly unsatisfactory. The parties to the insurance contract are entitled to certainty as to the applicable legal regime so that they can enforce their rights and carry out their obligations as defined by the relevant regime. Perhaps a practical solution could have been to deem all open or annual cargo cover to fall within the MIA if the parties at the time of entry had a reasonable expectation that the majority of shipments would be substantially marine in nature. Another industry-based alternative mentioned by the ALRC12 would be for insurers to write two open policies for each insured — one for transits that are substantially marine (covered by MIA), and the other for the rest (which would be covered by the ICA). However, it is preferable for the terms of the MIA itself to resolve the problem.

The question of MIA coverage of cargo insurance, particularly open or annual cover, remains a real issue that will not be resolved by the reforms proposed by the ALRC.

Non-disclosure & misrepresentation

Again, there was a perception that the issue of non-disclosure and misrepresentation deserved scrutiny and possibly amendment. Ultimately the ALRC recommends only modest changes to the test of non-disclosure and misrepresentation.13 Faced with the options of status quo, amendment along the lines of the ICA or introducing a new test, the ALRC adopted a status quo approach. Minor tinkering with the formulation of the insured’s duty introduces an objective element to result in a mixed objective/subjective test — the insured must disclose to the insurer those matters it knows to be material or matters a reasonable person in its position would know. This will give the insured some protection — at present, an insured would be expected to know what a prudent insurer would consider material.14 What is ‘material’ will be unchanged under the recommendations,15 leaving the current body of law intact and allowing the common law to develop.

Of greater significance are the changes to the remedies open to the insurer if the duty is breached. Currently, the insurer may avoid the contract where there has been non-disclosure or misrepresentation of a material fact, regardless of whether the non-disclosure was negligent or fraudulent, and regardless of whether the insurer would have entered the contract anyway even if it had known the fact. Again, the result of this ‘all or nothing’ approach to remedies is draconian and heavily biased in favour of the insurer.

The ALRC proposes a stepped approach not unlike that in place in the ICA.16 The seriousness of the consequences is determined firstly by whether the material non-disclosure or misrepresentation is fraudulent. If it is, then the insurer may avoid the contract. This is essentially a matter of policy. If not fraudulent, the next question is whether the insurer would not have entered into the contract if it had known of the undisclosed fact. If not, then the insurer can avoid the contract but must return the premium. If the insurer would have still insured the risk, then the insurer can cancel the policy. If in the meantime a claim has arisen, the insurer need not pay the claim if it was proximately caused by the undisclosed circumstance. If it was caused by unrelated circumstances the insurer must pay but may alter the payout to allow for the higher premium or excess that would have been set had the circumstance been known. The insurer will bear the onus of proving what it would have done had it known of the circumstance.

As a result of these reforms, the remedies aspect of non-disclosure disputes will be the subject of greater contests than is currently the case, and at greater cost. However, one would envisage that much of the evidence required to determine this point would already be placed before the court on the earlier issue of materiality. In any event the motivation for the change — to introduce remedies related to the effect of the breach — cannot be questioned.

Post contractual good faith

Insurance contracts are unique in that they impose on both parties an obligation to act towards one another in utmost good faith throughout the life of the contract.17 For marine insurance, this is enshrined in s 23 MIA. That section also provides that the remedy for breach of the duty is avoidance of the contract. Whether that is the limit of available remedies has been a matter of great academic interest.18 At present it appears that rescission is the only remedy available. This disadvantages the insured in particular because if an insurer breaches its duty of utmost good faith, the insured will want to enforce the contract, not avoid it.

The ALRC amendments in this regard are unlikely to be controversial but are significant. The ALRC has recommended adopting the ICA formulation, which converts the duty to a term of the contract. Once it is a contractual term, all of the remedies available for breach of contract will become available should that term be breached. For instance, the innocent party will be able to seek damages or an injunction. An action against an insurer for breach of utmost good faith will lead to an appropriate remedy. Insurers will need to be especially conscious of the teeth that the ALRC has given a previously toothless tiger.

Insurable interest

Sure to cause great controversy amongst insurers is the proposal to remove the requirement that the insured have an insurable interest in the goods insured at the time of the loss. Usually an insured is taken to have an insurable interest in goods if it has property (ownership) or bears risk of damage to the goods. In this respect the ALRC seeks to replicate the ICA reforms by requiring instead that the insured suffer an economic or pecuniary loss.

This proposal is to overcome a technicality that arises typically in cargo insurance. Usually a commercial cargo transit involves a sales contract, a transport contract and an insurance contract. Problems may arise when an insured has paid for the goods and arranged insurance cover over them, but not yet acquired an insurable interest in the goods under the sales contract at the time they are damaged or lost. In this instance, it seems that the technical requirement of passing of property or risk before acquiring insurable interest ‘defeats’ the claim of the insured on the policy. To a large extent this problem relates to the antiquated law of sale of goods still operational in Australian States (which has since been the subject of reform in the United Kingdom).

In a legal sense, the broader concept of pecuniary or economic loss will serve the insured better than ‘insurable interest’. The change should make little difference to the legal position of insurers, as there is still a requirement for a loss that falls within the terms of the policy, and in any event the insured can only ever recover under the policy its actual loss under the indemnity principle. To the extent that insurers are concerned that they may end up paying for losses not intended to be covered under the policy,19 then they need only ensure that the policy wording specifies that those losses are excluded. Also, a marine insurance policy covers against marine losses20 — it is difficult to imagine that an insured would be entitled to claim losses due to other causes without an express term in the contract to that effect.


The ALRC review of the Marine Insurance Act 1909 is a comprehensive work displaying both scholarship and pragmatism. To an admirable extent the ALRC was able to involve academics, the judiciary, the insurance industry and its advisors. Apart from the few criticisms contained in this article, the proposed reforms will achieve the aims of the ALRC — to remove or improve that which is outdated, while retaining the familiar form of an Act replicated and interpreted in many jurisdictions throughout the world.

*Kate Lewins is a Lecturer at the School of Law at Murdoch University in Western Australia.


1. Australian Law Reform Commission, Review of the Marine Insurance Act 1909 (ALRC 91), ALRC, Sydney, 2001, Ch 3.

2. Ibid, Recommendations 2 and 5.

3. Ibid, Recommendations 7 and 9.

4. Ibid, Recommendations 10 - 17.

5. MIA s 39, s40.

6. Recommendation 7.

7. See, for example, Michael Hill at paragraph 7.0 of his submission to the Attorney-General available at MLAANZ website. <> .

8. Section 54 of the ICA has the effect of allowing the insurer to decline the claim only if the breach of the policy caused or contributed to the loss (s 54(2)). If the breach did not so cause or contribute, the insurer may still reduce the payout to the insured by the amount which reflects the prejudice suffered by the insurer as a result of the insured’s breach (s 54(1)). For example, an insured may breach a provision requiring prompt notification to the insurer of an accident. Clearly the insured’s breach had no causal link to the loss; however, the insurer may have lost an opportunity to collect evidence while fresh. In that instance the insurer is allowed to reduce its payout to reflect the prejudice it has suffered by the insured’s breach.

9. ALRC 91, para 9.123.

10. MIA s 7.

11. ALRC 91, paras 8.38-8.61.

12. Ibid, para 8.45.

13. Ibid, Ch 10.

14. Ibid, para 1.30.

15. Ibid, para 10.95.

16. Ibid, Recommendation 25.

17. The duty of good faith prior to entering the insurance contract manifests itself in the duty of disclosure.

18. ALRC 91, see paras 10.124-10.127.

19. See, for example, the concerns of Michael Hill at p 9.2 of his submission to the Attorney-General available at MLAANZ website <> .

20. See MIA s 7.

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