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The main change in Clause 2 is as mentioned above in relation to latent defect. In this regard the Institute Time Clauses Hulls wording was
“6.2 This insurance covers loss of or damage to the subject matter insured caused by
6.2.1 bursting of boilers, breakage of shafts or any latent defect in the machinery or hull.”
The general meaning of the Clause and the coverage given by it has been well understood. It is not the burst boiler or broken shaft or latent defect that is covered but loss of the vessel or damage to it that is caused by one of these, that is the consequential loss of or damage to the insured vessel. If there is no such consequential damage, for example a latent defect is discovered and nothing more, then there is no recovery at all under the insurance. If there is some consequential damage it is only the reasonable cost of repairs to that damage which is recoverable, not the part of the cost relating to putting right or repair of the defect itself or the boiler or shaft. Such cost can be covered by buying additional coverage from underwriters under the Additional Perils Clause 1/11/95.
There have been some well known cases in the English Courts that have focused on the issue of whether or not there has been consequential damage to a vessel or whether what has been found has been merely the latent defect becoming patent during normal use and so not covered by the policy. A good example is the case of Scindia Steamships (London) Ltd. v. The London Assurance Co. Ltd. (1936) 56 Ll. L. Rep.136. The vessel involved had traded for a number of years without incident and went into drydock for the purpose of renewing the lower half of the wood lining of the stern bush. For this purpose it was necessary to remove the propellor and draw the tailshaft. Whilst the propellor was being wedged off, the shaft broke owing to a latent defect in it. The propellor and the end of the shaft fell into the drydock and one blade of the propellor was broken. Hull underwriters agreed to pay for the repair to the propellor as being damage caused by the breakage of the shaft or alternatively by the latent defect but refused to pay for a new shaft. The surveyor had found that where the break had taken place there was a deep smooth flaw in the shaft extending down from the top and that about one half of the material was sound and had been newly fractured. The flaw was treated as an old flaw and the shaft was disposed of as scrap. The shipowners made their claim for the new shaft essentially on the basis that they were covered under the “breakage of shafts” peril or, alternatively, under the heading of “latent defect in the machinery”, saying that since the shaft was part of the machinery and its breakage was due to a latent defect there was coverage. The judge rejected the argument based on “breakage of the shafts” saying that the breakage of the shaft itself is not covered, nor is such breakage loss of or damage to the machinery caused by the breakage of the shaft. The only damage caused by the breakage of the shaft was the propellor damage and that had been paid for. Turning to latent defect he found that the same argument applied. The shaft had not been subjected to anything in the shape of a peril, but to an ordinary operation of ship repairing and that operation caused its breakage. The breakage was not damage caused by the latent defect, all that had happened was that the old flaw had gone on developing.
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