Lloyd's Maritime and Commercial Law Quarterly
BREACH OF WARRANTY IN THE LAW OF INSURANCE
The Good Luck
In The Good Luck,1 the ship of that name was insured with the defendant club and mortgaged to the plaintiff bank. As required by the mortgage, the benefit of the insurance was assigned to the bank, and the club gave a letter of undertaking to the bank, whereby the club promised to advise the bank promptly if the club should “cease to insure” the ship. The ship was sent to part of the Arabian Gulf in breach of warranty under the insurance, was hit by Iraqi missiles and became a constructive total loss. Both club and bank knew of the loss but, whereas the club discovered the breach of warranty, the bank did not and (negligently) did not investigate the possibility. In the mistaken belief that the loss was covered, the bank made further loans to the shipowners. In view of the breach of warranty, the insurance could not be enforced, but the bank sued the club for having failed to give prompt notice that the club had ceased to insure the ship. The main issue in the House of Lords was whether the club had ceased to insure the ship at the time that the warranty had been broken and thus before the loans by the bank, as argued by the bank, or when the club elected to terminate the cover for the breach of warranty and thus after the loans by the bank, as argued by the club. If the bank’s argument prevailed, as it did in the House of Lords, the club was in breach of its contract with the bank and the club was liable to the bank in respect of at least some of the loss represented by the loans.
The nature of warranties in insurance contracts
The time at which the club had “ceased” to insure the ship depended on the effect of the shipowner’s breach of warranty and on the nature of warranties in contracts of marine insurance. Lord Goff of Chieveley (with whose speech the other members of the House agreed) started with ss. 33 and 34 of the Marine Insurance Act 1906, which concern, according to s. 33(1), “a promissory warranty … by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts”. Although s. 34(3) provides that a “breach of warranty may be waived by the insurer”, suggesting an election, s. 33(3) provides that, if a
1. [1991] 2 W.L.R. 1279. A number of other points were resolved on the road to the House. Hobhouse, J., held (1) that the club was liable to the bank in tort for “breach of a duty to speak”, but (2) that the club was not liable to the bank for breach of an alleged duty of good faith, as no such duty was owed by the club to the bank: [1988] 1 Lloyd’s Rep. 514; Muchlinski [1988] LMCLQ 27. In the Court of Appeal the decision of Hobhouse, J., was upheld on point (2) but reversed on point (1): [1989] 2 Lloyd’s Rep. 238; Clarke [1989] C.L.J. 363; Davenport [1989] LMCLQ 251. In the House of Lords, no argument was heard and no view expressed on points (1) and (2).
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