(As noted in Issue 122 the Editor of this column would visit ITC-Hulls 1/10/83 with the assistance of the one “ITC HULLS 1.10.83” which was written by Mr. D. John Wilson who kindly allowed the Editor copyright on his book for any future editions.)
Almost every accident to a ship results in the Ship-owner or Manager encountering considerable extra work and, for instance, in the case of a serious stranding, this might include arranging for
- Entry into a port of refuge,
- Towage to another port for repairs,
- Temporary and/or permanent repairs,
- The obtaining of spare parts and forwarding to the port of repair,
- Superintendence of the repairs,
- Settlement of repair accounts,
- Salvage security,
- All General Average formalities, etc.
Actual out-of-pocket expenses incurred in making these various arrangements have always been claimable from Underwriters, but it has also been an established practice that the Owner (repeat, Owner) of a ship was not entitled to claim any remuneration for his own time and trouble on such affairs, whether as general or particular average.
The Association of Average Adjusters have a Rule of Practice No. A3 on the subject dating from 1906 and reading as follows:
AGENCY COMMISSION AND AGENCY
That, in practice, neither commission (excepting bank commission) nor any charge by way of agency or remuneration for trouble is allowed to the shipowner in average, except in respect of services rendered on behalf of cargo when such services are not involved in the contract of affreightment.
Over the years, however, and for various reasons, many ship-owners have formed separate companies to manage their ships for them – or have employed specialist ship managers – and these management companies have often put forward a separate fee for the extra work to which they were put in attending to the average matters listed earlier, plus their work of collecting the necessary documents and presenting them for adjustment purposes. Whether such fees were permissible under the management contract is not known, but they were often claimed from and paid by hull underwriters.
Thus, over many years a practice has grown of allowing an agent or manager acting on the Assured’s behalf to charge a fee for the work involved in compiling the Assured’s claim for the Assured to recover this as part of the claim on policies of insurance on hull and machinery which is subject to English law and practice. There is probably no parallel in any other branch of insurance. However, as noted earlier, a ship-owner who manages his own ships and presents his own claims, cannot enjoy the privilege. This produces a result which can be termed anomalous and this anomaly is even more marked where the difference between the management company and the ship owning company is little more than a technicality.
At one time it was considered whether the charges should not be allowed to any management or agency company which was a subsidiary or in any way affiliated to the ship-owning company. In 1970, a Special Committee of the Association of Average Adjusters, which included representatives of Underwriters and Ship-owners, was appointed to consider the above-mentioned Rule of Practice in the light of modern conditions and make such recommendations as might be thought fit regarding its revision. After considerable consideration, a Report was issued on 22nd January 1971 wherein “it was unanimously agreed that the present Rule of Practice should remain unaltered and the Underwriters’ Representatives would consult their principals for agreement that the present practice of allowing agency fees where these had been incurred in connection with the average be continued but reserving the right to question the quantum of such fees if considered unreasonable.” Evidently, in practice Underwriters have continued to pay for the fees charged by vessel Owners’ managers for the time spent handling damage claims, dealing with brokers, surveyors, lawyers, adjusters and others, if they appear to be reasonable.
A further point which needs stating is that it was often the management company which appointed the average adjuster and, human nature being what it is, it was sometimes difficult for the average adjuster to contain the fees proposed by the management company within reasonable bounds. Thus, allowance of large agency fees was not uncommon.
In 1983 the London market introduced a completely new set of Institute Clauses for the insurance of the hull and machinery of ocean-going (blue water) vessels to be used in conjunction with the new Marine Policy Form. Obviously, Underwriters seized the opportunity to exclude liability for remuneration in connection with a claim altogether, whether to a ship-owner or to a managing company. The wording they have chosen as follows (Clause 17 of ITC-83) does not seem to reflect their intention:
17 AGENCY COMMISSION
In no case shall any sum be allowed under this insurance either by way of remuneration of the Assured for time and trouble taken to obtain and supply information or documents or in respect of the commission or charges of an manager, agent, managing or agency company or the like, appointed by or on behalf of the Assured to perform such services.
A straight construction of these words means that fees payable to a management company for those services listed earlier in these comments may still continue to be claimed and paid. Indeed, by inference, perhaps, even a ship-owner operating his own ships should now be entitled to claim similar remuneration?
In practice, however, Underwriters have made it clear that their intention was to exclude all claims for remuneration by the Assured, their managers or agents for time and trouble incurred on any aspect of a claim. Accordingly, ship’s proportion of agency fee allowable in general average would need to be deducted from the claim on policy of insurance subject to ITC – Hulls 1/10/83.
For the record, whilst it was blindingly obvious, without any form of explanation, that agency charges included in a port agent’s general account covering expenses incurred in respect of the vessel thereat are not excluded by the terms of this Clause, to avoid the risk of having the settlement under the adjustment delayed, at one time, the following explanatory note, or similar, would appear in the adjustment:
The fee charged in the above account represent charges of port agents for handling operations connected with the vessel at the port. Allowance therefor is not excluded by the terms of Clause 17 of the Institute Time Clauses – Hulls 1/10/83.”
It is noted that the wording of Clause 17 of the ITC – Hulls 1/10/83 is the same as Clause 19 of the International Hull Clauses (01/11/03).
Understandably, it is not uncommon to see Ship-owners special clauses incorporated in the hull and machinery policies of insurance subject to ITC – Hulls 1/10/83 specifically delete the Clause 17, thus enabling the Assured to enjoy the pre-1983 practice mentioned earlier.
No equivalent provisions are to be found in the American Institute Hull Clauses but it is noted that in practice Underwriters in the American Market would not pay for any agency charge which was made by the Assured himself. For Underwriters to entertain payment, the charge would necessarily have to be made to the Assured – Owner by a managing agent or company.
Section 69 (3) of the Marine Insurance Act 1906 provides that :
“Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage”.
Until about 1950 there was a well-established practice in the London market for negotiating any claim for unrepaired damage. It was generally on the following lines:
- Where the ship was sold, to endeavour to find out what price the purchaser of the vessel would have paid for her if the damage did not exist, subtract the actual price paid, and claim from Underwriters in respect of the difference – (always assuming that this difference was less than the cost of repairing the damage!)
- Where the ship was not sold, to take the basic cost of repairs as estimated by Underwriters surveyor, generally to ignore dry-docking and other incidental charges, and to offer the Assured a figure less than this sum, the amount depending on the likelihood of whether or not the damage would eventually be repaired.
That is to say, prior to 1950 the settlement of claims for unrepaired damage was based on what the market considered to be the pure principle of Marine insurance, i.e. to INDEMNIFY the Assured for the actual amount he had lost – or was likely to lose – by reason of the unrepaired damage, and with the settlement based solely on the estimated cost of repairs and ignoring the insured value (other than as a limit on the amount payable).
There then followed a series of law cases in England and the U. S. A., including Elcock v.Thomson (1949), Irvin v. Hine (1949), the “Armar” (1954), and Delta Supply Co. v. Liberty Mutual (1963),
and these cases introduced the Insured Value of the vessel into the calculation. Although never challenged by Underwriters in the Courts (e. g. see the “Medina Princess” – 1965), they regarded the introduction of the Insured Value into the calculation as something of an irrelevance, in the sense that any claim for repairs actually carried out was payable in full, regardless of whether the real value of the ship was over – or under – insured.
The position under the legal cases is best demonstrated by an extreme example where an elderly
ship with a sound market value not much more than her scrap value sustains a serious damage, e. g.:
The Courts decided that this 40% Depreciation was to be applied to the Insured Value of the vessel and the legal claim on underwriters to be either:
- a) The resultant figure, or
- b) The estimated cost of repairs,
whichever was the less. For example:
It will be appreciated that the real loss sustained by the assured as the result of the accident is only the difference between the sound and damaged values, – i.e. 200,000 – but as most ships tend to be insured for more than their real value, the general effect of the legal cases was to produce a much larger claim for the assured, i.e.:
The London market introduced a new clause in 1983 dealing with the vexed question of unrepaired damage; Clause 18 of the ITC-Hulls 1/10/83 reads as follows:
- UNREPAIRED DAMAGE
18.1 The measure of indemnity in respect of claims for unrepaired damage shall be the reasonable depreciation in the market value of the Vessel at the time this insurance terminates arising from such unrepaired damage, but not exceeding the reasonable cost of repairs.
18.2 In no case shall the Underwriters be liable for unrepaired damage in the event of a subsequent total loss (whether or not covered under this insurance) sustained during the period covered by this insurance or any extension thereof.
18.3 The Underwriters shall not be liable in respect of unrepaired damage for more than the insured value at the time this insurance terminates.
Clause 18.1 overrides the effect of the legal cases and, to a large extent, re-introduces the pre-1950 practice mentioned earlier. The Insured Value will be ignored, other than as a limit on the amount of the claim.
Clause 18.2 is a restatement of the position under English as codified by Section 77(2) of the Marine Insurance Act 1906, which provides that :
“Where, under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed by a total loss, the assured can only recover in respect of the total loss”
The purpose of a marine insurance policy is to indemnify the Assured for losses which he sustains as the result of perils insured against and, in general, a ship-owner does not sustain any loss until he repairs the damage and incurs the cost of those repairs. It follows, therefore, that if the vessel becomes a total loss before an earlier damage has been repaired, the Assured loses nothing by reason of that earlier accident.
English law applies the principle that “the greater absorbs the lesser”, and the subsequent total loss overrides and/or absorbs the earlier damage.
Even if the subsequent total loss is the result of some peril excluded – or not covered – by the policy, the same rule of “the greater absorbing the lesser” still applies, and there is no claim for the earlier partial loss left unrepaired – see the legal cases of Livie v. Janson (1810) and Wilson Shipping Co., Ltd. v. British and Foreign Marine Insurance Co., Ltd. (1919).
It should be noted that the above remarks apply only to situations where both the earlier partial loss and the subsequent total loss occur on the same policy.
As soon as a policy expires, the Assured has a legal right to claim from his Underwriters in respect of any damage sustained during the currency of that policy and which is presently unrepaired. The agreed insured value in the succeeding policy is assumed to take account of the fact that the vessel was then in a damaged condition (even though the matter was probably not considered by Ship-owners or Underwriters at the time) and in the event of a total loss occurring on that following policy, the full insured value will be paid, while a claim for supposed depreciation will be paid on the earlier policy.
This point was covered in the interesting case of Lidgett v. Secretan (1871), where a vessel sustained damage during the currency of one policy and, while repairs were being carried out – but during the currency of a following policy – the vessel caught fire and was totally lost, The Underwriters of the first policy were held liable to pay the cost of the repairs actually completed at the time of the fire, plus a claim in respect of the unrepaired damage, while the Underwriters of the second policy were liable for a total loss and the full insured value. A very complete indemnity!
Clause 18.3, limiting claims to the insured value, was introduced to the ITC Hulls only in 1983 and relates to the equally new provisions in Clause 1.3 where the original insured value of the vessel may be reduced to some lower figure if the vessel sails for the purpose of being broken up.
Lines 117/119 of the American Institute Hull Clauses (June 2, 1977) reads as follows:
No claim for unrepaired damages shall be allowed, except to the extent that the aggregate damage caused by perils insured against during the period of the Policy and left unrepaired at the expiration of the Policy shall be demonstrated by the Assured to have diminished the actual market value of the Vessel on that date if undamaged by such perils.
The wording is quite different from the ITC Hull clause, but the effect of both is identical in that the judgements of the British and American courts have been set aside as commercial irrelevancies. To support a claim, the Assured must demonstrate that the damage left unrepaired when the policy expired has actually brought about a depreciation in the vessel’s value. The AIHC do not state that the indemnity cannot exceed the estimated reasonable cost of repairs as do the ITC Hulls, but, of course, that is also the position in the American market.
The following self-explanatory wording is commonly seen under the Ship-owners Special Clauses incorporated in hull and machinery policies of insurance:
“Underwriters’ liability in respect of unrepaired damage will be the estimated cost of repairs at the first reasonable opportunity including estimated dry-dock and services, tank cleaning, superintendence and removal, if necessary.”