Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 15
CA15/10	OPINION OF LORD MENZIES in the cause GREEN ISLAND ORGANICS LTD Pursuers; against Q.B.E. INSURANCE (EUROPE) LTD Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Upton; Balfour + Manson LLP (For Dowle Smith & Rutherford, solicitors, Lerwick)

Defenders: M Ross; Lesley A Gray, solicitors, Gullane

27 January 2011

Introduction

[1] The pursuers carry on a fish farming business in Shetland. On 1 October 2007 they effected a contract of insurance in respect of the mortality and physical loss of Atlantic salmon farmed by them. The term of the contract was until 1 October 2008 , but by virtue of two endorsements it was extended to 1 January 2009. The insurance was placed to the extent of three quarters with three Lloyds underwriting syndicates and to the extent of one quarter with the defenders.

[2] The schedule to the policy specified eight Insured Perils. Insured Peril 3 was "Predation or physical damage by predators or other aquatic organisms (but not sea lice or other ectoparasites)." Insured Peril 8 was "Disease". The conditions were stated to include "UK Aquaculture Policy Wording 483NSB00208" and "Disease Extension Clause wording 483NSB00201 - Disease period 60 days".

[3] The schedule contained a Disease Extension Clause in the following terms:

"In consideration of the payment of an additional premium incorporated herein, this insurance is extended to include Mortality of fish stock, but not loss of market value of live fish, resulting from Disease as defined. Underwriters shall however be liable only in respect of each and every outbreak of Disease for losses occurring within a period not exceeding the number of consecutive days as stated in the attached schedule.

In the event that a reported loss commences within the period of insurance but continues beyond the expiry date hereof, the indemnity afforded by this insurance as a result of such loss shall be extended for a period not exceeding thirty days from the commencement of the said loss.

Definition

DISEASE shall mean the presence of a pathogen or group of pathogens shown to have a primary causative relationship to the mortality of the insured fish; such presence to be substantiated by its (their) isolation and identification or reasonably assumed following histological and/or other pathological examination and certification by a recognised authority.

Warranty

Warranted that all medication used in the treatment or for the prevention of Disease (including Sea Lice or other Ectoparasites) shall be applied in accordance with the manufacturer's instructions and/or recommendations unless otherwise directed by the Insured's veterinary adviser.

It is noted and agreed that mortalities arising directly or indirectly as a result of medication used in the treatment or for the prevention of a Disease outbreak shall be included within any claim made in respect of that Disease.

Subject to the terms and conditions of this insurance."

[4] The pursuers aver that in November 2008 Atlantic salmon owned by them at one of their sites suffered an infestation of sea lice. On about 25 March 2009 the pursuers intimated a claim to be indemnified under and in terms of the contract of insurance. The period of the claim was for losses from 20 November to 18 December 2008. The Lloyds underwriters have indemnified the pursuers for approximately three quarters of the pursuers' adjusted losses, but the defenders have declined to indemnify them for the balance. The pursuers have therefore raised the present action seeking payment of that balance.

[5] The pursuers argue that an infestation of sea lice leading to mortality of fish stock is a disease within the meaning of Peril 8. They aver that the general understanding of insurers of aquaculture risks, and of those whom they insure, is that insurance of farmed fish against disease includes outbreaks of sea lice, and that for at least twenty years insurers at Lloyds of London have indemnified marine fish farmers in, chiefly, Canada and Scotland, insured under effectively the same wording, for losses caused by sea lice. Many if not all marine fish farmers in Scotland in general and in Shetland in particular consider cover against sea lice to be a necessary part of insurance of their stock, without which such insurance is of little value, aside from cover for storm damage. There is no market for the insurance of the stock of marine fish farms which does not cover disease in general and sea lice in particular. By contrast, the defenders argue that sea lice are aquatic organisms that cause physical damage. Physical damage by sea lice is excluded in terms of Peril 3. Fish damaged by sea lice are not diseased. Fish damaged by sea lice may sustain a physical disability, which is not disease. The wording of the contract of insurance is not apt to cover losses sustained as a result of damage caused by sea lice.

[6] A proof before answer was allowed on the question of liability, it being understood that this would be confined to the question of whether, in light of all the relevant surrounding circumstances, mortality of fish as a result of an infestation of sea lice fell within the contractual definition of Disease and so was covered by the policy.

The evidence

[7] At the outset of the proof parties lodged a Joint Minute of Admissions (number 33 of process) and a Joint Expert Report (number 34 of process). The evidence of four witnesses was led on behalf of the pursuers, and one witness on behalf of the defenders.

[8] Professor Randolph Harvey Richards was aged 62 and Professor of Aquatic Veterinary Studies at the Institute of Aquaculture at the University of Stirling. The University of Stirling is the only university in the United Kingdom with a department such as this. Professor Richards' extensive and impressive curriculum vitae extended to 19 pages and included 153 publications on aquaculture. He was appointed to the Roberts Morrice Bray Chair of Aquaculture at Stirling University in 1991 and had given advice on aquaculture to fish farmers, insurers of fish farms, governments and international bodies over several decades. In particular he has been involved in advising on insurance claims arising from sea lice infestations, and has contributed to conferences and committees in the insurance industry which have developed the structure and phraseology of clauses in aquaculture insurance policies. Several of his publications covered sea lice infestations, and several of his publications categorised infestation by sea lice as a disease of fish. Professor Richards was referred to the policy schedule in this case (number 6/37 of process) which he had seen before. He described the definition of Disease in the Disease Extension Clause at page 12 of that document as having been used for a number of years now as the definition of disease. He could not say that this was universal, but it was commonly used by the major insurers of which he was aware.

[9] Professor Richards explained that sea lice are crustacean parasites, commonly present on wild and farmed fish. Small numbers cause no problems, but excessive numbers feeding on the fish can kill them. Parasites are quite different from predators - a predator eats its prey, whereas a parasite survives in conjunction with its host, without necessarily killing it. In the context of fish farming, a seal is an example of a predator, and sea lice are parasites. The present case concerns an infestation of lepeophtheirus salmonis, which is a member of the family Caligidae. These lice require to attach to the skin of a salmon (or sea trout) as part of their lifecycle. In their pre-adult and adult form they move around the skin of the fish, "grazing" by scraping the surface of the skin. This scraping action will erode the skin and gradually remove it, resulting in ulcerous areas, particularly around the head of the fish. When large areas of skin are destroyed, the fish cannot maintain the balance between saltwater and seawater which is necessary for it to survive. When in seawater, the fluid in the fish is less salty than the surrounding seawater, and a mechanism is necessary to remove salt from the body of the fish. Excessive numbers of sea lice and consequent damage to the skin of the fish inhibit this process. If the skin is damaged by sea lice, less saline water will be lost from the fish, which will become dehydrated; the blood of the fish will contain excessively concentrated quantities of salt, and this will result in heart failure and death. Heart failure is the most common cause of death as a result of sea lice infestation; however, if there is a slow and prolonged infestation, skin lesions may, in a minority of cases, result in bacterial infections occurring through the lesions.

[10] Professor Richards spoke to the terms of his report dated 6 January 2010 (number 6/8 of process). He explained that there are a variety of conditions which can cause diseases in fish; White Spot Disease and Costia are examples of protozoan parasites; sea lice are crustacean parasites; bacterial, viral and fungal conditions can also cause disease.

[11] Looking to the contractual terms of the policy (6/37) the Disease Extension Clause defines the disease and restricts the period of claim, and requires payment of an additional premium. Peril 3 can include aquatic organisms such as jelly fish or algae, but cannot include sea lice. Without the Disease Extension Clause, there would be no cover for disease - Peril 8 would be struck off the policy. In order to give content to Peril 8, it is necessary to have the definition provided in the Disease Exclusion Clause. Professor Richards was clearly of the opinion that an infestation of sea lice constituted a pathogen which might be shown to have a primary causative relationship to the mortality of the fish. Parasitic diseases may be crustacean or protozoan or as a result of worm infection (e.g. fluke); sea lice are ectoparasites, that is to say they exist outside the body of the host, but they are nonetheless pathogens. Professor Richards referred to the publication "Pathogens of Wild and Farmed Fish: Sea Lice" (number 6/59 of process), to which Professor Nylund and Dr Minchin each contributed, as did Professor Richards himself; he had never heard of any unease or doubt amongst marine biologists, veterinary practitioners or academics about the description in the title of the work indicating that sea lice were pathogens. He referred to page 622 of a publication which may be an early edition of Black's Veterinary Dictionary (number 6/60 of process) where, under the heading "Diseases due to parasites" it is stated that:

"Parasitic diseases are seldom caused by one or a few specimens, but as a rule depend on mass infestations....parasites...may cause damage to the host in the following ways: ...

(5) By actual traumatic damage, e.g. by piercing and destroying skin...by clinging to surfaces by means of sharp hooks, and in many other ways"

Other conditions which are external to the fish also constitute a disease - for example, a fungus growing on the skin of a fish which can break down the skin.

[12] Professor Richards was referred to the penultimate paragraph of his report dated 6 January 2010 which made reference to "the fact that the presence of large numbers of sea lice causing skin ulceration can be defined as disease" (emphasis added), and agreed that it would be more accurate to substitute the word "should" for the word "can". "Pathogen" may include bacterial, viral or fungal organisms, or parasites - all of these fall within the contractual definition of Disease in this policy. The pathogen is the agent which causes the disease.

[13] Professor Richards was referred to the report by Professor Nylund (number 7/2 of process) and was asked to comment on passages therein. He agreed with each of the following passages:

"Feeding of pre-adult and adult lice will cause skin ulcers and if the lice are abundant they will cause disease - caligosis, i.e. skin ulcers and osmoregulatory failure. Other pathogens may also enter the host as a consequence of easier access through the skin via ulcers...Sea lice are not a disease or predators, but a parasite and a low number of lice on each salmon are part of the normal fauna of parasites associated with this host. However, if abundant enough, sea lice may cause disease" ...

Dr Minchin "is correct in stating that sea lice are ectoparasites and not a disease. However, sea lice may, if abundant on the host, cause disease." ...

"Sea lice are ectoparasites that may cause disease in the same way as viruses or bacteria may cause disease if abundant enough....Salmon lice...are ectoparasites that can cause disease."

Professor Richards noted that Professor Nylund disagreed with the statement in Professor Richards' report that "Sea lice infestation is very definitely a parasitic disease...", but considered that Professor Nylund was approaching this issue purely as an academic biologist, and not with a view to the contractual definition of Disease in the present policy.

[14] In cross examination Professor Richards agreed that sea lice are ectoparasites which are a form of aquatic organism, that the damage to the skin of the fish which they caused prevented the fish from ridding itself of excess salt, and that it was this damage which led to the death of the fish. He agreed that if the words in parenthesis in Peril 3 were not there, this would be one definition of a sea louse. He agreed that it could not be said from a reading of the various veterinary reports (6/12, 6/16, 6/17 and 6/19) that the population of salmon in these cages was diseased. He agreed that a salmon with one sea louse on it was not a diseased fish, and that one louse was not (generally) capable of directly causing disease. At that stage the presence of a sea louse could not be described as pathogenic. He agreed that mortality was essential to the contractual definition of Disease - if the fish does not die, there is no Disease for the purpose of the contract. Moreover, the provision of treatment does not mean of itself that there is a Disease as contractually defined. However, he observed that the insurance covers only mortality, and not the costs of drugs or medication - this is a typical clause in such a policy. It may not be a "normal" definition of disease in everyday parlance, but it is normal in fish insurance policies. He was referred to the definitions of disease in other aquaculture insurance policies (numbers 7/3, 7/4 and 7/5 of process) and agreed that these did not contain exactly identical phraseology, but that they were similar to the policy in question.

[15] In re-examination Professor Richards was asked what abundance of sea lice was required in order to constitute Disease; he expressed the opinion that this would vary depending on the size of the fish, but it would require to be infestation which led to pronounced damage and death of the fish.

[16] Jason Scott was aged 44 and carried on business as a self employed risk management consultant specialising in aquaculture. He had a BSc in Fishery Science and Technology, and an MSc in aquaculture from the Institute of Aquaculture at the University of Stirling (although Professor Richards did not personally teach him). He had worked with salmon farms in New Zealand and Scotland, and given papers at aquaculture conferences. In 1998/99 he was employed by the defenders providing technical support for underwriters regarding aquaculture insurance. Between 2000 and 2002 he worked in aquaculture insurance with SBJ Nelson Stevenson Limited (which was part of SBJ). He had never dealt with the pursuers. Since 2002 he had practised on his own account as a risk management consultant, providing various services on risk management in aquaculture to several insurers. He had been involved in pre-risk surveys and also post-loss surveys. Since May 2010 he had been retained as a consultant by SB Marine Risk Limited on aquaculture risks. He had seen the present policy (number 6/37) before, and had seen insurance schedules and policy terms and conditions in the same terms as these when working with the defenders and then with SBJ between 1998 and 2002. He was familiar with the definition of Disease in the Disease Extension Clause - he could not guarantee that he knew the exact words, but he could not identify anything unfamiliar with this definition. The Perils on page 1 of the schedule were the same as those he dealt with in the period 1998-2002; since 2002 there had been slight changes in the wording.

[17] Mr Scott stated that he was aware that it was generally assumed in insurance practice that mortality of fish due to sea lice was covered by disease insurance. Everybody assumed this, and he understood this to be the case when he was employed with the defenders and thereafter with SBJ. He was asked whether he was aware that claims were made and paid on the basis of mortality of fish due to sea lice on the basis of this definition of Disease, but he could not be absolutely certain of this because he was not involved personally in payment of claims. He was asked if he had ever seen policies which included Peril 8, Disease, but did not include a Disease Extension Clause, and he said "No - if disease was included, a Disease Extension Clause with this definition was also included." He was asked what were the major risks to offshore fish farms, and he replied that they were disease, storm and nowadays plankton bloom in some areas. He did not think that in the period 1998 - 2002 there was a market for marine disease insurance cover without sea lice cover. As far as he was aware, since 2002 all aquaculture insurance policies which contained disease cover include infestation by sea lice within that cover, unless a particular client does not require that cover and it is excluded. He would expect a fish farmer to assume that mortality caused by sea lice would be covered by the Insured Peril of disease. If a fish farmer had a problem with sea lice, he would call a vet or a health expert.

[18] In cross-examination Mr Scott confirmed that he was not an underwriter, and that the Lloyds test which he had passed did not qualify him to be an underwriter but enabled him to do business in Lloyds. Although his last experience as a an employee in the insurance business was in 2002, since that date he had remained closely involved in insurance business and he was currently on a retainer for Lloyds underwriters. He observed that nowadays we do not use precisely the same words as the definition of Disease in this policy, but this was a very common definition at the time.

[19] Robert Sibthorp was aged 67 and employed in the aquaculture insurance division of Swinglehursts, who are Lloyds insurance brokers. He specialised in claims and placings of aquaculture insurance in the Lloyds market. He had been an insurance broker with Lloyds brokers since 1964, when he was aged about 20. He had been the pursuers' insurance broker for the last two years, and before that had acted as insurance broker for the Johnston brothers, who were the principals of the pursuers. He had specialised in aquaculture broking as a Lloyds broker. He was employed by Roberts Morrice Bray ("RMB") for about ten years in the 1980s and 1990s, where he dealt only with aquaculture business. RMB were the first brokers who designed an insurance policy for aquaculture, at about the time that salmon farming started in Shetland. This policy was based on a Lloyds livestock policy, involving the same principle as mortality loss caused by an Insured Peril. In 1997 he moved to another firm of Lloyds brokers, Nelson Stevenson, who were part of SBJ. He worked there for about twelve years until 2009, designing aquaculture policies, taking them into the Lloyds market and dealing with aquaculture claims. Since 2009 he has been the claims manager of the aquaculture division of Swinglehursts. He acts on behalf of a number of Scottish fish farms, and he handled the present claim for the pursuers.

[20] Mr Sibthorp was very familiar with the terms of the policy in the present action (number 6/37). RMB designed the original wording for the definition of Disease in the Disease Extension Clause; when other brokers entered the market, slightly different words were used, but he described all these wordings as essentially plagiarisms of the original wording. Perils 3 and 8 were in use in the same terms when he was with RMB in the early 1990s, and there was at that time a similar reference to the Disease Extension Clause with a specified disease period under the conditions on page 1 of the schedule. The definition of Disease in the Disease Extension Clause in 6/37 was the same definition that he had worked with since the early 1990s, up to the heading "Warranty"; the heading "Warranty" and the following two sentences came into use in about the mid to late 1990s. RMB did not offer commercial cover to marine fish farms on any other terms. He was asked whether other insurance brokers used the same terms, and he replied that this was a specialist class of business, and other brokers would come to RMB to place this type of business, so the same policy and the same definition was in general use.

[21] RMB no longer exist, but Mr Sibthorp works at Swinglehursts with the team of brokers which formerly worked with RMB. A large percentage of aquaculture business at Lloyds is passed through his team at Swinglehursts now, although some larger brokers such as Willis and Marsh try to handle this themselves.

[22] When he was at RMB Mr Sibthorp was aware to his knowledge of claims on this wording for losses by sea lice being made, and paid, under this definition of Disease. When he was at Nelson Stevenson sea lice were not such a problem. However, aquaculture insurance was a very small market with a limited number of players in it, and he was aware that claims for sea lice infestation had been paid out through other brokers, particularly in Norway. Any insured could ask for a policy to be restricted in return for a cheaper premium, but sea lice are a major problem for fish farmers and no marine salmon farmer would ask for this because it would not be in his interest to do so. He was of the opinion that in the United Kingdom there was no market for disease cover without it including mortality as a result of sea lice infestation.

[23] Disease was one of the Insured Perils, and in order for this to operate it was necessary to have a definition of what constituted disease - one could not have disease specified as an Insured Peril without having a Disease Extension Clause providing the definition of disease. In the rare event of an insured not wanting to buy disease cover - e.g. a non marine trout farmer or a fish farmer in an area without sea lice - Insured Peril 8 Disease would simply be scored out. However, one could not have Insured Peril 8 remaining in the policy without the Disease Extension Clause and the definition which it contained.

[24] Mr Sibthorp confirmed that number 6/4 of process was a contract endorsement which extended the policy so that it expired on 1 January 2009, the reason being that there was a potential claim due to sea lice. This endorsement had been initialled as agreed on behalf of the defenders by Rebecca Attridge on 28 November 2008; she was a deputy underwriter for the defenders. Mr Sibthorp personally took this endorsement to her, and she initialled it in his presence.

[25] In cross-examination Mr Sibthorp reiterated that Miss Attridge was a deputy underwriter with the defenders and would deal with matters if Mr Needham was not there. Either Mr Sibthorp or his colleague placed the original cover on this policy in the Lloyds market; the risk was placed on the original RMB wording (as all Mr Sibthorp's aquaculture work was). This wording was what he described as the "base wording" and appeared on all their slips. If they wished to expand on it, they would add an extension to the wording, but the body has remained essentially the same since the early 1990s. Other insurance companies may phrase it slightly differently, but all include mortality of fish as a result of sea lice infestation under disease cover. For example, the Global Aquaculture Insurance Consortium wording (as in number 7/5 of process) was written by Neil Hopkin, who used to work with Mr Sibthorp, and who had "reconfigurated" the wording to make it look slightly different, but the substance was the same. The wording had survived twenty years and included mortality caused by sea lice. The reason that sea lice were excluded from Insured Peril 3 was to make it clear that they were not predators - in his experience mortality caused by sea lice infestation had always been dealt with as a disease.

[26] Peter Charles Carter was aged 67; he ceased to work full time in 2003, but continues as a part-time underwriter on aquaculture accounts with Catlin Syndicate at Lloyds, who were the lead underwriters in respect of this policy and bore one quarter of the risk. He was personally involved in underwriting this policy, in discussing the claim, and in settling Catlins' share of indemnification. His career at Lloyds began in 1962, when he was involved in blood stock and livestock broking with Durtnell & Fowler; in 1972 he moved to the Butcher & Hall syndicate as a deputy underwriter, livestock and blood stock. A market for offshore aquaculture insurance in the United Kingdom began in the early 1970s, and he had been involved with it since then. He was an underwriter with the New Green Agency, then with Cassidy Davis, then with the Crowe syndicate, the Coatesworth syndicate then the Wellington syndicate, which was bought by Catlin. He was underwriting offshore aquaculture risks from the early 1970s until 1984, and then (after a ten year break in which he was involved with land based animal underwriting) from the early 1990s until the present day.

[27] Mr Carter was very familiar with the terms of the policy and schedule in this claim (number 6.37) and in particular with the operative words in the third paragraph of page 6 and the definition of disease in the Disease Extension Clause on page 12. He had seen these terms used on other occasions, and they had been in existence (possibly with slight changes) since the early 1970s. He had come across these terms in all the businesses in which he had underwritten aquaculture risks, and had used this definition for as long as he could remember. He did not remember using any other definition of disease over forty years, and he was involved in underwriting between 80 and 100 aquaculture policies using this definition each year. He could not say if the same definition was in use with other underwriters, but his experience with 80 to 100 policies each year was with more than one house of brokers. The reference numbers after the policy wording and the Disease Extension Clause wording on page 1 of the schedule reflected the fact that at one time all Lloyds policies had to go to the Lloyds policy signing office; this practice ended in the 1980s, but brokers tended to adhere to the practice of giving reference numbers to their standard form of wording. These were standard clauses which might be found on a broker's website.

[28] Mr Carter was clearly of the view that loss of fish by sea lice was an insured peril. In Lloyds he considered that the general understanding was that sea lice are covered under the definition of disease. He was asked if he had personal experience of claims on the basis of this definition of disease involving mortality caused by sea lice; he stated that he may have had one a long time ago but he was not sure, but he had paid out on this claim, and there was a similar claim currently pending in relation to a Canadian fish farm. Mr Carter was asked whether there was a market in the United Kingdom for insurance for commercial offshore fish farms which does not cover mortality caused by sea lice, and he replied "Not that I know of". He observed that if a policy such as this does not include cover for sea lice, he would expect it to specifically exclude this under the conditions in the schedule at the foot of page 1. The reason that there is specific reference to sea lice in the warranty is because mortality caused by infestation of sea lice is a major peril, and is treated by medication instructed by a veterinary surgeon. He was asked whether this meant that it was not included as a disease as defined in the previous paragraph, and he replied "Not at all, no." Medication against sea lice will itself inevitably result in some mortality; if the medication is used properly, such mortality will be covered by the insurers. The words "Disease Extension Clause" exist because originally the policy was designed only to cover pollution, and other perils were added on; the clause relates essentially to an extension of insured perils, not merely a temporal extension.

[29] In cross-examination Mr Carter stated that his understanding that the definition of disease included mortality caused by sea lice infestation was shared by other Lloyds underwriting syndicates, although he could not say what the understanding of underwriters who were not Lloyds syndicates was. He was the lead underwriter in this policy, and he paid his share of indemnity to the pursuers. He could not be specific about claims arising from sea lice going back twenty or thirty years. He agreed that sea lice were not mentioned in the definition of Disease, but he would expect to see an express exclusion of sea lice on page 1 if they were to be excluded from the definition of disease. He agreed that they were excluded from Insured Peril 3, but if they were to be excluded from disease he would expect a specific exclusion to appear under conditions at the foot of page 1. He considered that disease was quite well defined on page 12. He was asked what his understanding of disease would be leaving aside the definition given at Clause 12 and he defined it as bad health brought about by a causative agent.

[30] No separate additional premium was paid in this case in respect of disease - the premium for disease was combined with the original premium. As far as Mr Carter could remember, the warranty clause had always formed part of the Disease Extension Clause, although he could not be sure that every aquaculture policy contains it.

[31] Philip Needham was the only witness for the defenders. He was aged 56 and had been involved in the insurance industry since 1972, when he started as a claims broker with Harvey Cooper. He became an assistant underwriter with the LH Martin syndicate at Lloyds in 1974, when he began to specialise in equine underwriting. In early 1978 he set up his own syndicate 454, where he was the deputy underwriter, again in equine insurance. In 1994 this syndicate was acquired by another syndicate and Mr Needham became the equine underwriter of that syndicate. In 1996 he took his equine accounts to the defenders, and since 2003 he has been heading the defenders' equine team of six underwriters, as their portfolio manager dealing with business around the world. He is involved both in making underwriting decisions and in managing.

[32] The defenders began underwriting aquaculture risks in about 2005, although this was a very small part of their business. They stopped underwriting aquaculture risks directly in early 2009, but they support a consortium which continues to do so. Between 2005 and early 2009 the defenders underwrote about eight to ten aquaculture risks each year; however, they did not act as lead underwriters and were not involved in negotiations between the broker and the lead underwriter. They were "at the end of the slip" - they did not discuss terms, and were presented with the details of terms and premium payable by the leading underwriter, which was Catlin syndicate. The other three parties underwriting the present policy are Lloyds syndicates; the defenders are not a Lloyds syndicate but an independent company quoted on the Australian Stock Exchange and employing about 14,000 people worldwide (about 1,000 of whom work in London).

[33] Mr Needham explained that a broker acting on behalf of a client will approach a lead underwriter expert in that class of business, and once the lead underwriter has agreed to write a percentage the broker will place the balance of the risk with other underwriters. Although the broker will discuss price and terms and conditions with the lead underwriter, he still has a duty of care and disclosure to the other underwriters. Although Mr Needham would not expect him to explain all the details to the other underwriters, he would expect the broker to explain the main clauses and risks. The policy in this case (6/37 of process) was a fairly typical example of a slip, although more detailed than some. The condition numbers towards the foot of page 1 were the brokers reference numbers which related to their aquaculture policy; the underwriters would have access to these if they wished to. To the best of his recollection he did not have any discussion with the broker concerning the Disease Extension Clause in the present policy; when he read this clause he understood it to relate to something passing unseen, an infection such as flu. His experience in equine underwriting suggested to him that disease was something that might pass from horse to horse, and similarly with regard to aquaculture his understanding was that disease might be passed from one fish to another. There was no additional premium for disease cover - the premium was for all the eight Insured Perils. There was a limitation of period in relation to disease cover, because one could not have a disease lasting forever.

[34] The warranty specified what the client was required to do, i.e. to treat the fish with medication in accordance with the manufacturer's instructions and/or recommendations and expert advice. With regard to the second sentence of the warranty, if a fish farmer suffered fish mortality as a result of treating fish for sea lice infestation, provided that the medication was applied in accordance with the manufacturer's instructions, he would be covered by the insurers even though mortality arising from the sea lice infestation itself would not be covered.

[35] Mr Needham confirmed that the endorsement (number 6/4 of process) was initialled by Rebecca Attridge, who was an underwriter and a member of his team. However, her initialling of the endorsement merely indicated her agreement to a temporal extension of the policy while a claim was being investigated - it did not indicate any acceptance of the validity of the claim, which would require to be considered by the claims department. Mr Needham's understanding regarding mortality of fish stocks as a result of sea lice infestation under this policy was very clear; Insured Peril 3 specifically states that losses from sea lice are not covered. If it had been silent on this point, the defenders would have indemnified on this claim. To a normal underwriter, sea lice are excluded from cover under this policy; this is the view which the defenders continue to take.

[36] Mr Needham accepted that he was not an expert in the field of aquaculture insurance - his forty years experience in the insurance business was principally on the equine side. He was not aware of any other cases where claims had been made regarding sea lice infestation, and certainly the defenders had not been involved in any such claim. He had heard subsequently of the possibility of a claim being paid in relation to a Canadian fish farm, but the defenders had no involvement in this. The aquaculture market is a very small part of the insurance market, with probably only two or three syndicates (including Catlin) with some specialism in the area. He was asked how many individual underwriters were familiar with aquaculture risks at the time of this policy, and he replied that there were two or three - obviously Peter Carter was well known in this field. It was not Mr Needham's own field of speciality.

[37] In cross-examination Mr Needham confirmed that the defenders' involvement in aquaculture insurance began in 2005, that he was not familiar with the definition of disease in aquaculture insurance policies before 2005, and that he would never pretend to be an expert in aquaculture insurance. It was not his understanding that sea lice infestation was included as a disease under the policy - if he had thought that it was included, the defenders would have paid this claim. He confirmed that mortality of fish arising as a result of treatment by medication for sea lice would be covered by the policy, even though mortality as a result of sea lice would not be covered; he had no problem with that. However, a warranty never extends a policy or terms and conditions - it is something with which a client is required to comply. Although his experience was principally in equine insurance, he observed that if it was intended to cover sea lice in the present policy, why were they excluded under Peril 3? If it was intended to cover sea lice under Peril 8, there should be an express inclusion of sea lice under Peril 8. He regarded sea lice as aquatic organisms, not a disease. In his view sea lice were aquatic organisms that eat fish and kill them; pathogens are bacteria. He accepted that he was not an expert in the meaning of what constitutes a pathogen.

Submissions for the pursuers

[38] Counsel for the pursuers provided the court with written submissions (number 35 of process), to which he adhered without much further elaboration in his submissions to the court, and I do not propose to rehearse these in detail. He moved the court to pronounce decree in terms of the first conclusion, or in the alternative to decide the question whether, on a proper construction of the contract, sea lice are a pathogen within the definition of Disease at page 12 of the policy. Because the proof which had been allowed was limited to liability, there was then some discussion with both counsel as to what should happen following this proof. Counsel were in agreement that if the pursuers were successful on the issue of the proper construction of the contract, I should grant decree for payment in terms of the first conclusion of the summons. The defenders had required to investigate quantum, but that was no longer an issue. If I was with the defenders, counsel were agreed that the appropriate result would be absolvitor.

[39] Counsel for the pursuers drew my attention to a variety of facts which he submitted were either admitted or agreed, having regard to the pleadings, the joint minute of admissions (number 33 of process) and the joint report of Professor Richards and Professor Nylund (number 34 of process). He then listed some twenty-four findings in fact which he invited the court to make as a result of the evidence led. Stated shortly, the evidence was to the effect that the presence of large numbers of sea lice on salmon cause ulceration and destruction of the skin of the salmon, leading to osmotic imbalance and the death of the fish as a result of heart failure. In ordinary usage this is a parasitic disease, and scientific articles and books treat sea lice as a disease of fish. They are a pathogen, and are generally described as such in scientific literature. Both Professor Richards and Professor Nylund agree that sea lice are pathogens which can cause disease. They therefore fall within the definition of disease in the Disease Extension Clause.

[40] The contract requires to be construed as a whole. Insured Peril 8 must be read together with the operative words of the policy at page 6 and the Disease Extension Clause at page 12. Pathogen in the definition of disease is a scientific or technical term, or a veterinary medical term. It is therefore relevant and material for the court to be given assistance by scientific evidence as to its meaning. Counsel referred to Lewison on the Interpretation of Contracts at paragraphs 5.03 and 5.07. The definition of disease in the Disease Extension Clause clearly supports the construction favoured by the pursuers - an infestation of sea lice is a pathogen which has been shown to have a primary causative relationship to the mortality of the insured fish, and it is therefore a disease.

[41] Sea lice are excluded from Insured Peril 3 because they are not predators, and because the Disease Extension Clause does not apply to Insured Peril 3. Without the Disease Extension Clause the temporal limit of sixty days does not apply; if sea lice were covered by Peril 3 the insurer would be liable for mortalities from sea lice occurring on any day of the year. Under the disease cover the insurer's exposure is limited to (in this case) sixty days.

[42] The medication warranty also supports this construction. The two sentences of the warranty are contractual counterparts to each other. On the one hand, the insurers will indemnify for mortalities arising from medication used to treat or prevent Disease; on the other hand the insured warrants that he will use all such medication properly. The first paragraph, which contains the insured's warranty, refers to the proper use of "medication used in the treatment or for the prevention of Disease (including sea lice or other ectoparasites)". This supports the construction favoured by the pursuers. If sea lice were not a Disease where the word is used in the second sentence, then sea lice medication mortalities would not be covered by the policy, because it is only mortalities for medication used in the treatment of a "disease outbreak" that are covered. Mr Needham's evidence that mortalities as a result of medication properly applied for treatment of or prevention of sea lice would be covered, whereas mortalities arising from sea lice themselves would not be covered, is nonsensical. The construction favoured by the pursuers is consistent with practical common sense and gives content to all parts of the contract. The terms of the warranty are entirely consistent with the terms of the definition of disease in the preceding paragraph; on a proper construction of the contract sea lice fall within the contractual definition of disease.

Submissions for the defenders

[43] Counsel for the defenders moved for decree of absolvitor, and adopted the arguments in her outline submissions (number 28 of process). She submitted that Mr Needham was a credible and reliable witness. A question mark should be placed against Professor Richards' evidence as to the meaning of the Disease Extension Clause, not because he was in any way partial to one side or the other, but because his independence when looking at this clause was questionable as he had been so closely involved in advising the insurance industry as to its drafting and the ultimate wording of this policy. Counsel was at pains to stress that she was not casting doubt on Professor Richards' bona fides, but on his objectivity when considering the question of whether sea lice fell within the contractual definition of disease.

[44] Turning to the facts, the agreed facts are contained in the joint minute. Counsel accepted that sea lice are parasites, not predators; they are aquatic organisms which cause damage. When abundant, they kill fish by damaging the ability of the fish to osmoregulate, causing the fish to die as a result of heart failure. To the extent that they are pathogens, they are capable of causing disease, but they are not themselves a disease. The cause of a disease is something different from a disease. Counsel took issue with that part of the submission for the pursuers which stated that the definition of disease is one that has been widely and commonly used for many years in the UK aquaculture insurance industry. Although there is a common thread to aquaculture insurance policies, there are differences in wording, as is apparent from the productions for the defenders; moreover, the industry is so tiny that it is misleading to describe any definition as having been widely used in it. She reiterated that from a veterinary or biological perspective, whilst sea lice may be pathogens because when abundant they may cause disease, they are not themselves a disease. Being the cause of a disease does not make them a disease. Disease, which has an ordinary biological meaning, has over the passage of time turned into a technical term on the form seen in the Disease Extension Clause; however, this is a technical term of insurance, not a biological, veterinary or scientific technical term.

[45] There is ambiguity in this contract; sea lice are expressly excluded in terms of Insured Peril 3, but may perhaps be included by implication in the definition of disease in the disease extension clause. In light of this ambiguity the court must construe the contract as a whole, applying common sense commercial reality, the test of knowledge of a reasonable person entering into the contract, and the presumption against absurdity. If one can identify a pathogen and if there is death, disease is defined in remarkably wide terms in the Disease Extension Clause; this raises questions of commercial reality and common sense. The word has been taken out of its original context and is not used in the sense in which an ordinary biologist would recognise it, but in a technical way specific to aquaculture insurance policies. Mr Needham is an experienced underwriter (albeit not experienced in aquaculture risk); he gave evidence of his understanding of the meaning of disease. This illustrates the narrow, technical and arcane way in which disease has been defined by a small number of people in the Lloyds aquaculture insurance market. Counsel was not suggesting that Mr Needham's subjective understanding of disease was relevant, but it did at least show that one experienced underwriter in the London insurance market did not read it in the way favoured by the pursuers. The policy is clearly not a model of clarity.

[46] Turning to the approach to the construction of this policy, counsel accepted that the contract must be construed as a whole, and where there is ambiguity or uncertainty it is for the court to construe the contract. She referred me to the decision of the Supreme Court in Multi-Link Leisure Developments Limited v North Lanarkshire Council [2010] UKSC 47, particularly at paragraph 21. In construing the contract the court must not only read Insured Peril 8 and the Disease Extension Clause but also Insured Peril 3, which specifically excludes sea lice. The words in parenthesis expressly exclude sea lice from the Insured Perils. This is the only place where sea lice are mentioned in the schedule. There is an ambiguity created by the Disease Extension Clause, but this is no more than an implicit inclusion of sea lice, which relies on a technical definition which is not consistent with the standard or common sense understanding which the ordinary business person might have.

[47] Counsel accepted that the standard in this case is that of an ordinary aquaculture insurance underwriter having knowledge of the Disease Extension Clause. When she was asked what the court should make of the un-contradicted evidence about a lack of market in the London insurance market for marine aquaculture insurance excluding mortality from infestation by sea lice, she suggested that the balance of the evidence was against sea lice being such a major risk. If it was so important and valuable to fish farmers, she asked why no claims had been paid before the present claim. Counsel for the pursuers had suggested that the relationship between Perils 3 and 8 could be understood by the particular way in which time limitation applied to the latter, but there was a much more reasonable explanation - this contract does not cover sea lice.

[48] Turning to the definition in the Disease Extension Clause, there was no reference to sea lice in this definition. This was significant against the evidential background that this wording has been refined over a period of more than a decade. It would have been easy to make it clear that disease included sea lice - especially given that there is an express exclusion of sea lice under Peril 3. There is a real difficulty in using a disease definition in which sea lice may be implicitly included, against a schedule in which they are explicitly excluded. The reasonable aquaculture underwriter with the requisite background of knowledge would look at page 1 and page 12 and read the definition at page 12 as part of an overall contract in which the parties have taken care to exclude sea lice.

[49] With regard to the warranty, this recognised that medication has to be used in the treatment or for the prevention of Disease, and medication causing the death of fish might have been applied for any purpose. However, Mr Needham's understanding that mortalities arising as a result of medication used in the treatment or for the prevention of sea lice would be covered may simply have been mistaken. Nonetheless, counsel submitted that Mr Needham was correct in his view that a warranty cannot extend the risk undertaken by an underwriter. She did however accept that it might shed light on the definition of disease in the preceding paragraph.

[50] In conclusion, counsel submitted that the policy must be construed as a whole. It has an explicit exclusion of sea lice, and at best an implicit inclusion of sea lice. The preferred interpretation, bearing in mind the relevant principles of construction, is that cover does not extend to sea lice. She renewed her motion for absolvitor.

Discussion

[51] I found each of the witnesses to be credible and reliable, and to be doing his best to assist the court. In particular, I found the evidence of Professor Richards to be of considerable assistance. He gave his evidence in a careful, measured and authoritative manner. I did not accept the suggestion made by counsel for the defenders that his independence when looking at the Disease Extension Clause in this contract should be questioned because he had been so closely involved in advising the insurance industry as to its drafting; on the contrary, I found the range and depth of the Professor's experience, encompassing as it did academic veterinary expertise, practical involvement in aquaculture and involvement in advising as to the insuring of aquaculture risks, of particular assistance.

[52] The exercise which falls to be carried out in the construction of a contract such as this is well recognised, and most recently and authoritatively set out by the Supreme Court in Multi-Link Leisure Developments Limited v North Lanarkshire Council [2010] UK SC 47, particularly per Lord Hope of Craighead at paragraph 21. As Lord Diplock observed in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201, if detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must yield to business common sense. Lord Steyn made the same point in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771, that words are to be interpreted in the way in which a reasonable commercial person would construe them, and that the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language. He also observed in Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580 that the court must not try to divine the purpose of the contract by speculating about the real intention of the parties. It may only be inferred from the language used by the parties, judged against the objective contextual background.

[53] Looking to the language of the present contract, sea lice and other ectoparasites are clearly excluded from Insured Peril 3, "predation or physical damage by predators or other aquatic organisms". Counsel for the defenders submitted that this served to act as an explicit exclusion of sea lice under any of the Insured Perils, but I consider that this goes too far. The words in parenthesis in Insured Peril 3 relate to that Peril only. They cannot be read in themselves as applicable to all the other Insured Perils. A very cursory glance at the Insured Perils listed in the schedule to this policy might possibly cause the reader to assume that sea lice were excluded as an Insured Peril under this policy, but this would not be a proper or justifiable approach to the construction of this contract, which needs to be read as a whole.

[54] The list of Insured Perils includes Peril 8, Disease. The attention of the reader is directed, some seven lines below this, to the wording of the Disease Extension Clause, which is quoted at paragraph [3] above. The essential of the contractual definition of disease found there is "the presence of a pathogen or group of pathogens shown to have a primary causative relationship to the mortality of the insured fish". Disease is therefore given a wider meaning than it might have in the context of academic biology, or even in common parlance. However, that meaning is tolerably clear. Counsel for the defenders was at pains to emphasise that the cause of a disease is something different from a disease, and in everyday parlance that distinction may be well made. However, in general parties to a contract may define a word as they choose. In this contract they have chosen to define disease in the manner quoted. Professor Richards and Professor Nylund agree that sea lice are pathogens which can cause disease. There is no contradictory evidence, and it is clear from the body of academic literature referred to by Professor Richards in his evidence that sea lice are generally regarded in the scientific community as pathogens. This is consistent with ordinary usage, which is simply something that causes or produces disease. The agent may be bacterial, viral or parasitic; some dictionaries give as examples a bacterium, a micrococcus or virus, but there is no justification for confining the term to these examples. Although Mr Needham stated his view that pathogens are bacteria, he accepted that he was not an expert in the meaning of what constitutes a pathogen, and I consider that his understanding of the term is unduly restricted.

[55] Sea lice are a pathogen. If their presence is shown to have a primary causative relationship to the mortality of the insured fish, then the language of the contract supports the construction that sea lice are a disease.

[56] This interpretation is supported by the terms of the warranty in the Disease Extension Clause, which refers to "medication used in the treatment or for the prevention of Disease (including Sea Lice or other Ectoparasites)". While it may be the case, as Mr Needham stated, that a warranty never extends a policy or terms and conditions, the terms of the warranty may shed light on other elements of the contract, and may assist in their construction. In this case the warranty follows immediately after the contractual definition of Disease, and Disease (which must mean Disease as contractually defined) is referred to three times in the warranty. Mortality of fish caused by medication is only covered by the warranty if the medication is used in the treatment or for the prevention of a Disease; mortality which is caused by medication used in the treatment or for the prevention of something other than a Disease (as defined) is not covered. It is in this context that the fact that the warranty refers to Disease as including sea lice or other ectoparasites is relevant. This supports the interpretation given above that sea lice are a pathogen and if they have a primary causative relationship to the mortality of the fish they are a Disease as defined. Mr Needham's understanding that mortality caused by medication used in the treatment or prevention of sea lice would be covered, even though mortality caused by sea lice would not be covered, is in my view mistaken.

[57] Looking to the wording of this contract as a whole, I consider that the language of the contract supports the interpretation favoured by the pursuers, namely that infestation by sea lice which is shown to have a primary causative relationship to the mortality of the insured fish is an event covered by Insured Peril 8. However, it is necessary to look to the evidence of the surrounding circumstances, and in particular to the way in which a reasonable commercial person would construe the contract, to see what the commercial object of these provisions is and whether this interpretation is consistent with business common sense. In the context of the present case, counsel for the defenders was in my view correct to accept that the standard is that of an ordinary aquaculture insurance underwriter having knowledge of the Disease Extension Clause.

[58] Professor Richards gave evidence that the definition of disease contained in the Disease Extension Clause was normal in fish insurance policies, and had been commonly used by the major insurers of which he was aware for a number of years now. Mr Scott spoke from the perspective of a risk management consultant specialising in aquaculture, who had been employed for a time by the defenders and had provided technical support for underwriters regarding aquaculture insurance. He stated that it was generally assumed in insurance practice that mortality of fish due to sea lice was covered by disease insurance. He did not think that in the period 1998 to 2002 there was a market for marine disease insurance cover without sea lice cover, and since 2002 all aquaculture insurance policies which contained disease cover included infestation by sea lice within that cover. From the perspective of a very experienced aquaculture insurance broker, Mr Sibthorp stated that the definition of disease was the same definition that he had worked with since the early 1990s, and there was no market for disease cover in marine aquaculture policies without it including mortality as a result of sea lice infestation. Mr Carter was clearly a leading practitioner in the field of marine aquaculture insurance over many decades, and had been involved in underwriting between 80 and 100 aquaculture policies using this definition each year. He was clearly of the view that loss of fish by sea lice was an insured risk and that in Lloyds he considered that the general understanding was that sea lice are covered under the definition of disease. He too was of the view that there was no market in the United Kingdom for insurance for commercial offshore fish farms which does not cover mortality caused by sea lice.

[59] The body of evidence referred to in the preceding paragraph amounts to strong support for the view that the construction of this contract favoured by the pursuers does not flout business common sense. The evidence of Mr Needham did not undermine this. Essentially Mr Needham spoke to his own understanding of the contract. The defenders are not themselves a Lloyds syndicate, and they were only directly involved in underwriting aquaculture risks from about 2005 until early 2009. Their involvement extended to underwriting only about eight to ten aquaculture risks each year, and this was a very small part of their business. Mr Needham's own experience was principally in equine insurance, and he was not an expert in the field of aquaculture insurance. With due respect to Mr Needham, who gave his evidence very fairly and without exaggeration, his evidence did not cause me to reach the view that the construction favoured by the pursuers flouted business common sense. I am satisfied that an ordinary aquaculture insurance underwriter having knowledge of the Disease Extension Clause would understand that mortality of fish caused by infestation of sea lice would be covered by this policy. It is worthy of note that the defenders' obligation to indemnify is limited to one quarter of the risk in this policy, the remaining three quarters being met by three other underwriters, including Catlin syndicate in which Mr Carter was involved. Each of these three underwriters took the view that mortality of fish caused by sea lice was covered by Insured Peril 8 in this contract, and each has paid its share of the claim. Looking to this contract as a whole, and in light of the evidence about surrounding circumstances which I have heard, I consider that the other three underwriters were correct in their understanding that they were obliged to indemnify the pursuers to the extent which they have. I prefer the construction of this contract urged by the pursuers to that favoured by the defenders.

[60] In light of this, and as agreed by counsel at the Bar, there being no outstanding issue as to quantum, I shall repel the pleas-in-law for the defenders, sustain the second plea-in-law for the pursuers and pronounce decree in terms of the first conclusion of the summons.