Raymond Wong
It is an amazing surprise that the Institute Time Clauses – Hulls 1/10/83 (ITC-83) remain widely used after some 34 years in hull and machinery insurance policies!
There were indeed attempts to modernize hull insurance cover, through a 1995 version of the ITC wording and the International Hull Clauses (IHC) 2003, but both failed to attract much market support. In early April this year, it was reported that leading London underwriters would review the ITC-83 to see how they could be improved to meet current ship-owners and underwriters needs.
Understandably, Assureds likely believe the devil they know is better than the devil they do not know. However, it is very common to see hull and machinery policies incorporating ITC-83 but adding on ship-owners’ special clauses with favourable wording either tailor-made or extracted from IHC and/or other hull forms.
For the next few issues of Seaview, the Editor of this column will revisit ITC-83 with an emphasis on claims-related clauses, identifying the major differences with the American Hull Form (which is being used by a few large fleets in Hong Kong). There are plenty of analyses of the ITC-83 by English local market experts; the Editor would however comment with the assistance of the one “ITC HULLS 1 10 83” which was written by Mr. D. John Wilson, a well-respected average adjuster.
The Editor wrote in 1988 the following Forward for the Chinese version of the “ITC HULLS 1 10 83”, which was published in Taiwan:
I knew Mr. D. John Wilson by name in 1969 through the book he wrote on the ”One Hundred Year of The Association of Average Adjusters 1869-1969”. I met John in London in 1973 when, in conjunction with the present Lord Donaldson, Master of the Rolls, and Lord Justice Staughton, he was editing the current tenth edition of the British Shipping Laws, Vol.7 – the Law of General Average and the York-Antwerp Rules.
For years John has enjoyed the somewhat daunting and unending task of helping the juniors of the Richards Hogg Group progress with their studies and average adjusting work. He was indeed the man I had to satisfy before being put forward to sit for the examination of the Association of Average Adjusters (AAA).
We had the opportunity of working together in Hong Kong for a couple of years. Apparently, he gained the impression that I was an interested person so that when I was visiting Tokyo where he was resident in August 1984, he granted me the privilege of reading his more or less final draft on the ITC HULLS – 1.10.83. When I had read it from cover to cover, I was fully convinced that it would be the best (and perhaps the first) analysis and comparison of some of the clauses issued by the Institute of London Underwriters covering Hull, Freight, Disbursements and Excess Liabilities etc. plus the American Institute Hull Clauses. I immediately asked John if he would allow the book to be translated into Chinese. He gave his consent without hesitation but in return I had to make him a chop for his Chinese name.
Whilst I was deliberating how I should proceed with the translation, my colleague in Taipei, Edmund Chen, completely out of the blue, told me enthusiastically on the phone that he and Ms. Christine Wang would take up this formidable task. Having now read the Chinese version, I believe that the joint vigorous effort of Christine and Edmund is going to be of great value to any Chinese practitioners and students in the field of shipping and/or insurance. My heart-felt congratulations on their success.
As the Chairman of the AAA 1987/1988 John wrote an extremely valuable booklet on “The Insurance of Average Disbursements and other Subsidiary Interests following a Marine Casualty” which was published by the Association in May 1988. John, I understand, is now working on the new edition of the British Shipping Laws, Vol.7 – the Law of General Average and the York-Antwerp Rules.
The Editor understands that John’s Analysis of the 83 Clauses was largely prepared for the Japanese market and the leading insurers there did all the printing, a copy was given to the Editor personally by John who kindly allowed him (the Editor) copy right on this book for any future editions.
It is worth reminding readers that the ITC-83 state that the insurance is subject to English law and practice, meaning that, subject to any overriding provision in the policy, the Marine Insurance Act 1906 and the UK Insurance Act 2015 will apply.
CONSTRUCTIVE TOTAL LOSS
A Constructive Total Loss is defined by section 60 of the Marine Insurance Act 1906, which is subject to any express provision in the policy. In ascertaining whether a ship is a constructive (or commercial) total loss and not worth repairing, a prudent uninsured owner would have regard to three main factors:
- The estimated cost of repairing the ship,
- The estimated value of the “wreck” as scrap, and
- The estimated value of the ship when repaired.
As a general rule, if 1 + 2 is greater than 3, then the vessel is a C.T.L.
It will be noted that each of these three factors depends on an estimate, always a somewhat flexible or “elastic” figure.
An uninsured owner has only himself to consider when evaluating these estimates and making his decision whether to repair or scrap the vessel, but the position is totally different when the vessel is insured. Each estimate will then provide a fruitful source for argument between the parties, more particularly when it is recognized that so much money used to be at stake under the particular conditions of an old fashioned policy of marine insurance subject only to the provisions of the Marine Insurance Act.
If the ship-owner under such a policy was able to demonstrate that the vessel was a constructive total loss and not worth repairing, on an estimated sound value of the ship when repaired of, e.g 500,000 he was entitled to recover the full insured value of the vessel – whatever that might be, e.g.1,000,000 plus his subsidiary insurances, if any, on Freight & Increased Value, etc. of a further, say 250,000, will equal 1,250,000.
In addition (and although this does not concern the ship-owner himself), many reinsurances of the ship on Total Loss Only conditions would be affected by the decision of the original hull underwriters as to whether or not the vessel was a constructive total loss.
Clause 19 of ITC-83 does contain an express provision, which reads as follows:
19. CONSTRUCTIVE TOTAL LOSS
19.1 In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
19.2 No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account.
To reduce the areas of possible dispute between ship-owners and underwriters in ascertaining whether the vessel is a constructive total loss, this clause provides that:
The insured value shall be taken as the repaired value, and Nothing in respect of the damaged or break-up value of the vessel or wreck shall be taken into account.
There is thus only one factor left within the realms of estimate – (the likely cost of repairing the ship) – and, further, that estimated repair cost must be compared with the insured value of the ship instead of her market value. In practice, most ships tend to be insured for more than their market value and it becomes more difficult, therefore, for the assured to demonstrate a constructive total loss and thereby enable him to recover the insured value of his vessel, plus any sums insured on subsidiary insurances such as Freight & Increased Value.
The first sentence of Clause 19.2 sets out in greater detail and reiterates what is already implied in the first section of the clause, i. e. that
“No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed the insured value.”
The second sentence of Clause 19.2 was largely borrowed from the American Institute Hull Clauses ( June 2, 1997 ). The clause provides that only the costs relating to a single accident may be taken into account in determining whether the vessel is a constructive total loss. This resolves a problem which had been discussed for many years and which was mentioned in the case of the “Medina Princess” (1965) and also in his address to the Association of Average Adjusters in 1982 by Lord Justice Donaldson, later Master of the Rolls.
For example, a vessel insured for 1,000,000 might sustain damage by grounding, repairs to which were deferred, but which would cost……………………………………………………………………………………….. 400,000
Subsequently, the vessel is involved in a collision or some other accident, repairs to
which would cost ………………………………………………… …………………………..…….…. 650,000
. 1,050,000
Clearly, the vessel is a constructive total loss within the terms of Clause 19.1, but should the assured be entitled to claim the insured value of the vessel, plus the sums insured on his subsidiary insurances, – and that without the application of any policy deductibles (under Clause 12.1 )? Or should his claim be limited to one for Unrepaired Damage (under Clause 18 ) and be subjected to the application of the policy deductibles?
As already stated, this problem has now been resolved and a claim for constructive total loss can only be based on the costs relating to a single accident.
- Costs of recovery &/or repair of the Vessel which may be included in computing a C.T.L.
- Repairs to hull and machinery of the vessel, including spare parts
- (Add) 10% for contingencies – as recommended by the “Renos” 2016
- Air freight on spares
- Cost of dry-docking and general services
- Superintendent’s fees and expenses
- Towage to repair port (including crew wages and maintenance, bunkers, etc.)
- Cost of discharging cargo necessary to enable repairs be effected
- Cost of Class survey
- Port charges, pilots, towage, etc.
- General Average contributions payable by ship (cargo sacrifice)
- Cost of salvage of the vessel
- SCOPIC liability – as upheld by the Court of Appeal in the “Renos” 2018
Lines 134/139 of the American Institute Hull Clauses (June 2, 1977) reads as follows:
TOTAL LOSS
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and repairing the Vessel would exceed the Agreed Value. In making this determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of notice of abandonment shall not be considered if such are to be claimed separately under the Sue and Labour clause.
The provision is largely of identical effect to their counterparts in the ITC-83, the difference being that the American Hull form specifically state that “expenses incurred prior to tender of notice of abandonment” and “are to be claimed separately under the Sue and Labour clause” cannot be ranked when calculating the cost of recovery and repairs of the vessel.
Ship-owners Special Clauses
The following self-explanatory wording is commonly seen under the Ship-owners Special Clauses incorporated in the hull and machinery policies of insurance (the wording being the same as Clause 21 of the IHC 2003):
21. CONSTRUCTIVE TOTAL LOSS
21.1 In ascertaining whether the Vessel is a constructive total loss, 80% of the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.
21.2 No claim for constructive total loss based upon the cost of recovery and/or repair of the Vessel shall be recoverable hereunder unless such cost would exceed 80% of the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account.
Furthermore, there are other clauses amended to the effect that it would be necessary to show costs up to 80% of the Insured Value or Market Value at the Assured’s option (or whichever is lower).
Raymond T C Wong
Average Adjuster