4.3 Faulty Material
The term “faulty material” implies that the material used in the part in question suffers from a deficiency. The term does not delineate towards any type of material and it must be presumed that it includes all types of material, including raw material that can be used individually or combined to create a part.
The term “faulty” indicates that the material must be weaker or in a worse condition than what can be expected from the material. The Commentary uses a similar definition and defines “faulty material” on page 294 as a situation where: “the material used in some part of the vessel suffers from some weakness or deficiency compared to applicable standards”. In order to establish if the material is faulty, it is important to establish which standard that should be applied when assessing whether the material is below applicable standards. Neither the term “faulty material” nor the wording in the Commentary give any direct guidelines.
The role of the classification society is central throughout the Nordic Marine Insurance Plan, and the approval is so important that it is a prerequisite for cover, cf. Cl. 3-14. From this perspective, the standard applied by the class is clearly an acknowledged standard in the contract. This implies that the standard set by the classification societies could be used an applicable standard.
Another standard is the one applied by the industry in general, such as manufacturers and yards. It could be argued that these industry standards may be driven by cost-benefit analyses, where economic benefits could be weighted more favorably than safety. If the rationale of using such a standard is solely the safety of the material, one should be careful to use industry standards when assessing the material standard, as this may allow for minor shortcomings in the material provided sufficient economic advantages. There are institutions, such as the government and independent research hubs, that will not have any apparent economic incentives, which might result in an objectively higher standard.
However, for the purpose of the insurance, it may be disproportionately strict to expect that the assured must use the highest possible standard on the material. Safety is strictly regulated in both the Nordic Marine Insurance Plan and in the industry in general.(1) See Chapter 3 of the Nordic Marine Insurance Plan. Reference is also made to the International Convention for the Safety of Life at Sea, the International Safety Management Code and similar international regulations Thus, it must be expected that even institutions driven by economic incentives uphold a satisfactory safety level. Based on the system of the Nordic Marine Insurance Plan, it would also be unfortunate if the highest possible standard was determinative, as this could result in a high number of parts being “faulty” compared to the high standard. In a worst-case scenario, it could result in abuse from the insurers with an excessive use of the exclusions for cover.
To summarize, the standard applied by the classification societies appears to balance out the above-mentioned concerns. The classification standard has a clear focus on safety, whilst it does not require the assured to invest in the best available material. Thus, by way of a conclusion, the classification standard should be the leading standard when assessing whether the material is below applicable standards.
It could be argued that faulty material often may be the result of an unfortunate incident. Material that is intrinsically sound, but inadequate for its intended purpose should be considered as an error in design.(2) Commentary, p. 294Hence, the term faulty material only includes incidents where the vessel is equipped with material with a lower quality than what could be expected. This will rarely occur as a consequence of a business risk knowingly taken by the assured. Faulty material may instead occur as a consequence of malfunctioning during the manufacturing process or because there may be something wrong with the material itself.(3) Commentary, p. 294 Consequently, it could be argued that the principle of unforeseeability should carry a lot of weight. On the other hand, even though a damage caused by faulty material might be highly unpredictable, the repairs would still leave the vessel in a better condition than before the casualty. Hence, even though the business element is less prominent in these cases, there is still a need to balance the countervailing considerations and principles for losses caused by faulty material.