admin No Comments

AA Talk: HULL INSURANCE CLAUSES – Agency Commission Unrepaired Damage

(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.)

 

AGENCY COMMISSION

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

  • Salvage,
  • Entry into a port of refuge,
  • Surveys,
  • 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:

“Adjusters’ Note:

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.

UNREPAIRED DAMAGE

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:

  1. 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!)
  2. 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:

  1. a) The resultant figure, or
  2. 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:

  1.        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.”

 

Raymond Wong

 

admin No Comments

AA Talk: HULL INSURANCE CLAUSES – Constructive Total Loss

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:

  1. The estimated cost of repairing the ship,
  2. The estimated value of the “wreck” as scrap, and
  3. 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.

  1. Costs of recovery &/or repair of the Vessel which may be included in computing a C.T.L.
  2. Repairs to hull and machinery of the vessel, including spare parts
  3. (Add) 10% for contingencies – as recommended by the “Renos” 2016
  4. Air freight on spares
  5. Cost of dry-docking and general services
  6. Superintendent’s fees and expenses
  7. Towage to repair port (including crew wages and maintenance, bunkers, etc.)
  8. Cost of discharging cargo necessary to enable repairs be effected
  9. Cost of Class survey
  10. Port charges, pilots, towage, etc.
  11. General Average contributions payable by ship (cargo sacrifice)
  12. Cost of salvage of the vessel
  13. 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

 

admin No Comments

Substituted Expenses in Particular Average on Ship?

The Institute organized an evening seminar on the subject “Substituted Expenses in General Average per York-Antwerp Rules” on 20th March 2018, a workshop in Hong Kong following the English Supreme Court’s decision on “The Longchamp” case, which was reported in the last issue of “Seaview”.

The Editor was not surprised to receive a question: “What about the substituted expenses in Particular Average?”.

It is worth recalling that the principle of substituted expenses is not generally recognized under English law, which position is, however, varied by the York-Antwerp Rules in the case of general average.

In the case of Wilson v. Bank of Victoria [1867] (which case pre-dates the York-Antwerp Rules), an auxiliary sailing ship, on a laden voyage from Australia to Britain, struck an iceberg and sustained damage, being dismasted.  The ship put into Rio de Janeiro where, on account of the prohibitive cost of repairs, only temporary repairs were carried out allowing the ship to proceed to destination under steam with coal being purchased at Rio and at Fayal for such purpose.  A claim was made by the Shipowners for contribution towards the cost of the coal purchased on the grounds that they were substituted expenses for the expenses that would have been incurred at Rio if permanent repairs had been effected there.  The claim was disallowed by the court holding that the use of the auxiliary engine to bring the vessel home, and the consequent expenditure on coal, was merely the performance of a service by the Shipowners to the owners of the cargo carried and was therefore not a subject for contribution.

The Editor has some notes on the subject of “Substituted Expenses in Particular Average” made by his former partners and colleagues who are highly respected average adjusters and would like to share these with readers of “Seaview”.

Particular Average, as defined by section 64(1) of the Marine Insurance Act 1906, is a partial loss of the subject matter insured caused by a peril insured against, and the measure of indemnity for the partial loss of ship is the reasonable cost of repairs, as provided by section 69 of the Act.

It is perhaps a fallacy to think that alternative means of repair are open to the Shipowners in circumstances where they are obliged (vis-à-vis their Underwriters) to effect repairs at the most reasonable cost.  There may in theory be several ways in which a Shipowner can go about effecting a particular repair, but only one of those ways can be the most reasonable.  Once the most reasonable course of repairs is determined, the other alternatives cease to exist and it therefore follows that the course adopted cannot have been a substitution for another alternative.

This was the gist of Wilson v. Bank of Victoria, i.e. that for there to be a substitution an alternative must exist.  It was held in that case that, in as much as the Master could, by the expenditure of a small sum on temporary repairs and coal, bring the ship safely to destination, it was his duty under the contract of carriage to do so.  Consequently, the perceived alternative of landing the cargo and repairing at the port of refuge was not an alternative open to the Shipowner at all and it was therefore a fallacy to say that the cost of the coal (which the Shipowners were seeking to recover in General Average) was incurred in substitution for those measures.  The principle can therefore be applied to Particular Average claims that, as the Shipowners are obliged to effect the most reasonable repair, the claim must be based on the actual cost thereof and not on the cost of some alternative prohibited from taking.

For Particular Average on ship, the test continues to be “the reasonable cost of repairs” and hence any cost which is not a repair cost cannot be allowed as part of the claim without the specific agreement of Underwriters.  An example of a non-repair cost which Underwriters do agree to bear or contribute to, depending on the circumstances, is the cost of removal from one place of repair to another because the latter is cheaper.  On the face of it, this appears to be no different to the situation where the Shipowners incur extra fuel costs, say by burning diesel instead of fuel oil, to get from a port of refuge, where repairs are expensive, to destination, where repairs are cheaper.  However, in the first example, Owners have derived no operational benefit from the removal cost.  That is not the case with the second example, where the voyage on which the extra operating costs have been incurred is a freight-earning voyage.

Mr. John Crump, in his address on “Reasonable Cost of Repairs” at the annual general meeting of the British Association of Average Adjusters in May 1992, highlighted a few interesting cases on which he commented as follows:

QUOTE

(A) A vessel has damage to her steering gear in an area where repairs are expensive. Class agrees that the vessel may continue to trade for a limited period until she reaches a cheaper repair area provided extra tugs are employed when entering and leaving ports.

(B) A vessel has a main engine damage and Class agrees a temporary repair until she reaches a more appropriate and cheaper repairing port. The repair adopted, however, involves burning diesel oil instead of the customary fuel oil during the interim period.

(C) Damage to a winch, or winches, is sustained during discharge. Rather than effect repairs at the discharge port, which is an expensive one, equipment is hired to enable the affected hold(s) to be discharged, thus enabling the vessel to repair later at reduced cost.

In case (A) the assured claims for the cost of extra tugs, in case (B) he claims for the extra cost of diesel oil over fuel oil consumption and in (C) the claim is for hire of equipment for discharge. In each case the claim is based on the fact that the extra costs incurred saved greater repair costs for which Underwriters would otherwise have been liable.  At the same time, I would submit that it is difficult, if not impossible, to argue that any of them in themselves form part of the cost of repairing the ship.

The only law case of which I am aware which is sometimes quoted as authority for applying the “substituted expenses” idea to insurance claims is Lee v. Southern Insurance (1870) LR5, CP397.

That case in fact involved not an insurance on ship but an insurance on freight and the facts were as follows:

A vessel was bound for Liverpool with a cargo of palm oil and stranded off the Welsh coast.  Cargo had to be discharged and the Shipowner arranged to forward it by rail to destination at a cost in excess of ￡200, thereby earning his freight which was at risk.  The vessel was then towed to Caernarfon, where she was made seaworthy for the rest of the voyage.

The forwarding costs were claimed under the freight policy, but the Court held that such claim must be limited to ￡70, which would have been the cost involved in reshipping the cargo onto the original vessel after repair.

The case thus involved a claim for particular or special charges, not a claim for particular average loss. I cannot see it as referring in any way to the “substituted expenses” concept, for the hypothetical reshipping costs of ￡70 were introduced solely as a test of the reasonableness or otherwise of the forwarding costs of ￡200. The older editions of Arnould report the facts of the case under the sub heading “Only reasonable expenses recoverable.”

Reverting to the three practical examples already mentioned, I submit that as a matter of principle the unfortunate assureds have no remedy for recovery of any of their extra costs under the hull policies.

At first sight this stance seems a harsh one, even ‘uncommercial’.  In each instance a peril covered by the policy has operated and the assured has, as a direct consequence, incurred costs.  As a result of his doing so Underwriters on the ship have been saved money.  Should they not respond on that basis?

It should perhaps first be pointed out that the assured too would almost certainly have saved substantial sums as a result of the actions taken. That, however, is not, in my view, the real point which is that the losses suffered by the assured as a result of incurring those extra costs relate to freight or earnings rather than hull insurance.  If the freight was at risk and insured for the voyage on which these various expenses were incurred, I would suggest they would form a particular or special charge on the freight policy. That is their essential character and the fact that nowadays freight is frequently at the risk of the cargo owner rather than the Shipowner so that the latter will then seldom have appropriate insurance cannot alter that character.

Could I add one final point about this type of case. It will doubtless be argued that if the assured cannot recover this type of expense from his Underwriters he may on occasion seek to avoid incurring it and allow the latter to take the rap for the increased repair costs that result.  I do not believe that argument to be realistic.  Even in those cases, probably rare ones, in which the assured himself does not gain from adopting the practical and commercially sensible course, it must be remembered that the test of ‘reasonableness’ of the ultimate repair cost must still be applied and if the assured increases the latter cost solely to save additional costs of keeping his ship operational in order to protect his freight or earnings, that increase will not, strictly, be for account of Hull Underwriters.

I submit that the concept of substituted expenses, which under English law is of doubtful validity in any context, can certainly have no application to a claim for particular average on a hull policy.

UNQUOTE

The following are few common examples where the damages are caused by perils insured against, the insurances being subject to English law and practice:

Example 1. 

Vessel sustains damage to stern-tube seals.  There are 2 alternatives open to the Shipowner – an emergency drydocking which will be claimed in full from Underwriters, or deferment of repairs for 3 months which will involve additional consumption of lubricating oil but save 50% of drydock dues.  Can the cost of lubricating oil be claimed from Hull Underwriters?

It is tempting to take the view that if it can be shown that Underwriters benefited from the extra consumption of the lube oil they should pay for it or contribute towards it.  It is submitted that since the Shipowners are obliged to effect repairs at the most reasonable cost, they do not, in reality, have the option of drydocking immediately.  The extra consumption of lube oil is thus of no benefit to Underwriters – they were only ever liable for the cost of repairs as deferred and carried out in drydock. The excess lube oil consumption is not a repair cost – it is an extra or enhanced operational cost.  There are no grounds for allowing it to Particular Average.

Example 2

Vessel under Time Charter.  Turbo charger breaks down in the South Atlantic. The vessel can continue to Santos but additional diesel oil will be consumed and will be charged by Time Charterers to Shipowners.  The alternative is that the vessel could be towed to Santos.  The vessel uses the extra diesel oil.  At Santos repairs are deferred again but more additional diesel oil is claimed on the basis that repair costs would be cheaper if repaired later.  Can the extra cost of diesel oil be claimed from Hull Underwriters?

Applying the same logic as in Example 1 above, there does not appear to be any ground that either the tugs or extra fuel getting to port could be charged to Underwriters.  The second set of alternatives, once at the port, are effectively the same as in Example 1 and cannot be allowed to Particular Average.

Example 3. 

Vessel’s crankshaft condemned but the new crankshaft will take 6 months to supply. Instead the Owners grind down existing crankshaft as temporary repair. Temporary repairs result in following –

(i) additional manning required in engine room;

(ii) turbo charger requires more frequent cleaning;

(iii) additional consumption of diesel oil;

(iv) as a result of running out of balance, some fretting results in main engine.

Can these additional costs (i) to (iv) be claimed from Hull Underwriters?

Firstly, Underwriters should recognize that the sole purpose of the ship is to be a freight or revenue earning instrument.  It is patently unreasonable to leave her out of commission for 6 months awaiting parts if, by way of a temporary repair, she can be quickly returned to employment with the permanent repair effected on delivery of the necessary parts. It follows therefore that the temporary repairs is in itself reasonable and forms a direct claim on Underwriters.

There is suggestion that where a temporary repair is reasonable, any extra operating costs which is known will result direct from the temporary repair would be treated as part of the cost of that repair.  However, it is submitted that whilst (ii) and (iv) can comfortably be allowed as Particular Average as they involve damage or quasi damage to the vessel, (i) and (iii) should be disallowed as they are merely the enhanced cost of running the vessel in semi-damaged condition.

Editor’s Note:  It is advisable that if claims are put forward at the request of the Assured, which are not in accordance with the law (and practice as it should be) then the Adjusters should seek prior agreement of the Underwriters before issuing the adjustment, making it clear to both parties what the position is.

 

(Editor: Raymond T C Wong Average Adjuster)

 

admin No Comments

AA Talk: Can Law be determined by reference to Practice?

Raymond Wong

“…, the law cannot be decided by what is understood among writers and practitioners in the relevant field … Experience shows that in many areas of practical and professional endeavour generally accepted points of principle and practice, when tested in court, sometimes turn out to be unsustainable.  I accept that it may be right for a court to have regard to practices which have developed and principles which have been adopted by practitioners, but they cannot determine the outcome when the issue is ultimately one of Law.”   

Lord Neuberger in “The Longchamp” [2017]

“THE LONGCHAMP”

Included in Issue No.118 is “An Adjusters’ Note on Substituted Expenses and Ransom Payments” contributed by Richards Hogg Lindley following the Commercial Court judgment on “The Longchamp” case having been reversed by the Court of Appeal, highlighting that the position under English law with regards to Rule F of the York-Antwerp Rules reverted to the position being in line with the views of the majority on the Advisory Committee of the British Association of Average Adjusters.

The Editor, however, did mention in this column that “Readers are reminded that the “Longchamp” case where the Court of Appeal has reversed the 2014 High Court judgment is coming up for trial in the Supreme Court.”

The Supreme Court, on 25th October 2017, allowed the Appeal, thus overruling the decision at the Court of Appeal.

The case has been widely reported but for sake of completeness and easy reference, the Editor would repeat briefly summary of the factual backgrounds and decisions.

 

The casualty

On 29 January 2009 the chemical carrier MV Longchamp (“the vessel”) was transiting the Gulf of Aden on a voyage from Rafnes, Norway, to Go Dau, Vietnam, laden with a cargo of 2,728.732 metric tons of Vinyl Chloride Monomer in bulk (“the cargo”).  The cargo was carried under a bill of lading dated 6 January 2009 which stated on its face that “General Average, if any, shall be settled in accordance with the York-Antwerp Rules 1974”.

At 06.40, seven heavily armed pirates boarded the vessel.  The pirates commanded the master to alter course towards the bay of Eyl, Somalia, where she arrived and dropped anchor at 10.36 on 31 January 2009.  At 14.05 on 30 January 2009 a negotiator for the pirates boarded the vessel and demanded a ransom of US$6m.  The vessel’s owners (“the owners”) had meanwhile formed a crisis management team who had set a target settlement figure of US$1.5m.  On 2 February 2009 an initial offer of US$373,000 was put to the pirates.  Negotiations between the pirates’ negotiators and the owners’ crisis management team continued over the following seven weeks with various offers and counter-offers being made.

Eventually on 22 March 2009, after a negotiation period of 51 days, a ransom was agreed in the amount of US$1.85m.  On 27 March 2009 the ransom sum was delivered by being dropped at sea.  At 07.36 on 28 March 2009 the pirates disembarked and at 08.00 that day the vessel continued her voyage.

It is worth noting that the cargo was subsequently valued at destination at US$787,186 and the value of the ship was assessed at US$3,947,096.  That is to say, the total value of the property at risk amounts to US$4,734,282 which sum is less than the ransom of US$6m initially demanded.

 

The relevant York-Antwerp Rules

Rule of Interpretation

In the adjustment of general average the following lettered and numbered Rules shall apply to the exclusion of any Law and Practice inconsistent therewith.

Except as provided by the numbered Rules, general average shall be adjusted according to the lettered Rules.

Rule A

There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.

Rule C

Only such losses, damages or expenses which are the direct consequence of the general average act shall be allowed as general average.

Loss or damage sustained by the ship or cargo through delay, whether on the voyage or subsequently, such as demurrage, and any indirect loss whatsoever, such as loss of market, shall not be admitted as general average.

Rule E

The onus of proof is upon the party claiming in general average to show that the loss or expense claimed is properly allowable as general average.

Rule F

Any extra expense incurred in place of another expense which would have been allowable as general average shall be deemed to be general average and so allowed without regard to the saving, if any, to other interests, but only up to the amount of the general average expense avoided.

 

Adjustment dated 31 August 2011

The Adjusters allowed in general average the following expenses incurred during the negotiation period, which the cargo disagrees:

Commercial Court decision [2014]

The Court found that:

  • the expenses ii) – v) incurred during the negotiation period were allowable in general average under Rule F as “substituted expenses” (in lieu of US$4.15m saving);
  • the expenses i) and vi) were allowable in general average under Rule A;
  • payment of the original ransom demand of US$6m without negotiation would have been reasonable.

Court of Appeal decision [2016]

The cargo appealed challenging to the judgment on expenses i) – v) and the Court agreed that:

  • payment of the original ransom demand of US$6m without negotiation would have been reasonable;
  • the media response costs, i) are allowable in general average under Rule A;
  • consumption of bunkers is treated as an expense for the purpose of Rule F;

but found that:

  • the negotiation period expenses, ii) – v), did not fall within Rule F holding that negotiating a reduced ransom of US$1.85m (and the saving of US$4.15m) was not “an alternative course of action” to the payment of the original sum demanded – merely a variant (which decision apparently followed the reasoning supported by the leading textbooks and was in line with the conclusion made by the majority of the majority of the Advisory Committee of the British Association of Average Adjusters, reflecting the almost universal practice not to allow these items under Rule F in the circumstances).

Supreme Court decision [2017]

The owners appealed to the Supreme Court submitting that the negotiation period expenses, ii) – v) amounting to US$160,213.95, fell within the expression “expense incurred” by them within Rule F and those expenses were incurred “in place of another expense”, i.e. the saving of US$4.15m resulting from the negotiations.  Since the negotiation period expenses were less than the “general average expense avoided”, they were accordingly allowable in general average under Rule F.

The Supreme Court (by a majority of 4 to 1) reversed the Court of Appeal decision, allowing the negotiation period expenses, ii) – v), in general average under Rule F and finding that:

  • the language of Rule F did not require that the expenses were incurred following an alternative course;
  • it was not necessary to consider whether the initial ransom demand was reasonable under Rule A;

It is worth noting the issues considered by the Supreme Court, which are highlighted as follows:

  1. The Court found that it would not be necessary, and it would be wrong to assume that it would be necessary, to establish that it would have been reasonable to accept the initial ransom demand in order to justify the contention that the negotiation period expenses were allowable under Rule F.  Such assumption would mean that, “if a ship-owner incurs an expense to avoid paying a reasonable sum, he can in principle recover under Rule F, whereas if he incurs expense to avoid paying an unreasonable sum (i.e. a larger sum), he cannot recover.  The more obvious his duty to mitigate, and the greater the likely benefits of such mitigation, the less likely he would be to be able to recover.”
  2. The Court considered that the words in Rule F “another expense which would have been allowable as general average” were a reference to an expense of a nature/type which would have been allowable (rather than its’ quantum) under Rule A, under which a ransom would be allowable in general average.
  3. Lord Neuberger favoured the interpretation of Rule F which “produces an entirely rational outcome: whenever an expense is incurred to avoid a sum of a type which would be allowable, that expense would be allowable, but only to the extent that it does not exceed the sum avoided.” Accordingly, the negotiation period expenses in the amount of US$160,213.95 fell under Rule F as they were incurred to avoid paying US$6m, resulting in a saving of US$4.14m.
  4. The Court found that Rule C only applies to loss consequential on a general average act defined by Rule A. It does not apply to expenses covered by Rule F, which is concerned with sums expended in avoiding expense otherwise allowable as general average.
  5. The Court disagreed to the payment of a reduced ransom being not “an alternative course of action” to paying the original ransom demand but merely a “variant”. The Court found that incurring the negotiation period expenses was an alternative to paying a higher ransom; “the former involved incurring vessel-operating expenses whereas the latter involved paying a ransom”.
  6. The Court saw no reason for restrictively interpreting the word “extra” so as to require an expense to be of a nature which would not normally have been incurred in response to the peril threatening the adventure. The Court was of the opinion that the natural contextual meaning of “extra expense” was “simply an expense which would not otherwise have been incurred (but for the saving of the “other expense”)”.

The following comments made by the Supreme Court in the judgment are well worth noting:

  1. The York-Antwerp Rules are an international agreed sets of rules. In para 29 of the judgment, Lord Neuberger states: “Given that the Rules represent an international arrangement, it is particularly inappropriate to adopt an approach to their interpretation which involved reading in any words or qualification.  As already mentioned, it appears to me that, as a matter of ordinary language, Rule F applies to the negotiation period expenses for the reasons given in para 26 above.  To imply some qualification such as the requirement that those expenses must have been incurred so as to achieve an “alternative course of action” appears to me to be very dangerous.  In the same way as an international convention or treaty, the Rules should be interpreted by a United Kingdom court “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation” …. “it is the unadorned language of the article to which attention must be directed”.”
  2. Lord Neuberger is not convinced that, as a matter of language, the passages in the leading textbooks support the conclusion that Rule F can only be invoked when the claimant has taken an “alternative course of action”, and he states in para 25 of the judgment: “… the law cannot be decided by what is understood among writers and practitioners in the relevant field … Experience shows that in many areas of practical and professional endeavour generally accepted points of principle and practice, when tested in court, sometimes turn out to be unsustainable.  I accept that it may be right for a court to have regard to practices which have developed and principles which have been adopted by practitioners, but they cannot determine the outcome when the issue is ultimately one of Law.” (The obvious precedents are the The Makis [1929] and The Alpha [1991]).

The English Supreme Court judgment is in contrast with the current practice of most average adjusters to disallow such negotiation period expenses and will no doubt affect the future English general average adjustments of substituted expenses under the York-Antwerp Rules.  It will be interested to see if the market would, like what it had done following “The Makis” case, seek to revert to the long accepted practice.

admin No Comments

CAUSE AND TIMING OF DAMAGES – Which Policies Pay?

 

CAUSE AND TIMING OF DAMAGES

Which Policies Pay?

IFSPA 2017

The Institute of Seatransport participated in the IFSPA 2017 (International Forum on Shipping, Ports and Airports), conducting an Industrial Session at PolyU on Wednesday afternoon, 24th May 2017 when the day started with yellow rain at 0615, followed by red at 0930 and black at 1130 before returning to yellow at 1230.  It was most encouraging to see the majority of those enrolled turn up on time.

 

The session began at 1330 and finished at 1800 with (a) the Editor presenting a 2.5-hour workshop on practical aspects of marine hull insurance claims with emphasis on General Average, Particular Average and Constructive Total Loss, and (b) Mr. C H Wong, a well-known logistics & projects consultant and director of Five Oceans Marine Ltd., presenting on the role of Hong Kong as an international maritime centre under BRI.  A couple of interesting issues on the hull insurance claims were discussed, which the Editor would like to share with readers.

Casualty

One of the case studies involved a container carrier on liner service trading between Far East/American ports which lost steering control on 1st December 2012, necessitating towage to a port of refuge where underwater inspection revealed that the vessel’s rudderstock had a fracture which appeared to be beyond repair.  All laden containers were discharged (to enable repairs to be effected in dry-dock) and forwarded to destinations by a sister-ship.

 

Insurance Conditions

The vessel was insured on hull and machinery, etc., for 12 months commencing from 1st April 2012, subject to Institute Time Clauses – Hulls 1/10/83 [referred to “ITC” here] and Institute Additional Perils Clauses – Hulls 1/10/83 [referred to “IAPC” here].  The insurance is subject to English law and practice and the relevant insurance conditions applicable to claim for the damage to the rudderstock are:

  • Clause 6.2 of the ITC which provides that “This insurance covers loss of or damage to the subject-matter insured caused by …. 6.2.2 …. any latent defect in the machinery or hull…”
  • IAPC which extends the insurance to cover

1.1 the cost of repairing or replacing ….

1.1.2 any defective part which has caused loss or damage to the Vessel covered by Clause 6.2.2 of the Institute Time Clauses – Hulls 1/10/83

1.2 loss of or damage to the Vessel caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever

Both ITC Clause 6.2 and the IAPC are subject to due diligence proviso: “Provided such loss or damage has not resulted from want of due diligence by the Assured Owners or Managers.”

Particular Average

Particular Average is a partial loss of the subject-matter insured caused by peril insured against, which is not a general average loss (as defined by section 64(1) of the Marine Insurance Act, 1906).

The effect of the wording, “This insurance covers loss of or damage to the subject-matter insured caused by” is that the Policy which will respond for a claim for Particular Average will be the Policy current at the time when the loss occurred or the damage was sustained.  The incorporation of the IAPC in addition to the ITC allows exception for latent defect cover (IAPC Clause 1.1.2), let alone that the extension (in particular, “any accident” cover) affords the less weighty burden of proof.

It is worth noting that whilst IAPC Clause 1.1.2 only uses the words “defective part”, the link to ITC Clause 6.2.2 must mean that the word “latently” is implied.  Furthermore, a “latent defect in the machinery or hull” is not only confined to a flaw in material but can include wrongly assembled parts provided that they satisfy the usual test of latency – “defect which could not be discovered by a person of competent skill and using ordinary care” , definition given by Carver approved in the “Dimitrios N. Rallias” (1922).

Taking into the familiar “Nukila” test (1997), it is suggested that, for processing Particular Average claim, the following questions should be borne in mind:

  • What is the cause of damage under the policy?
  • When did the damage occur – which policy pays?
  • How many accidents and deductibles are involved?
  • What can be claimed – the reasonable cost of repairs?

We are considering the first two questions herein.

Onus of proof

Burden of proof is on the Assured to show on a balance of probability that the loss was caused in the way alleged.  The degree of proof required is to show a balance in favour of an accidental loss by peril(s) insured against.  If, as in the “Popi M” (1985) case where an old vessel sailing in calm seas with fair weather developed a fracture allowing seawater to enter and sank, the occurrence of the event, collision with a submarine, as alleged, is extremely improbable, on basis of common sense, the true cause being in doubt, the Assured has failed to prove.

In practice, most accidents are straight forward having known causes, and the claim for loss or damage would then be based on that known cause, e.g. fire, collision, contact, grounding, etc.  However, machinery damages often require technical investigations on both cause and timing, necessitating, on occasions, metallurgical and/or other special tests.

Cause of damage to the rudderstock

There is suggestion that fatigue failure of a rudderstock is not an event that can be expected in the normal operation of the vessel, hence the rudderstock damage would not be a result of normal wear and tear and the damage being “accidental” in nature would fall within the wide cover by IAPC.   However, in practice, Underwriters would expect that the words “any accident” (which probably cover event without apparent cause) are likely to be used only when the cause of loss or damage is obscure or unexplained.  Furthermore, whilst one can insist that the Assured have proved prima facie that the damage was caused by a peril insured against, he would probably be expected to demonstrate that the whole damage occurred during the currency of the policy in force, since it is not uncommon that the fatigue fracture would be of a progressive nature, i.e. damage occurs and develops, without becoming apparent, over a period of time that spans more than one policy.

It is also believed that for other good reasons, e.g. loss prevention, it would be advisable for a prudent Ship-owners to be aware of the cause of damage.

Results of the investigations

  • The nature of the crack suggested that it had developed over a period of time until the rudderstock was finally unable to resist the forces put on it.
  • The vessel was last previously in dry-dock during July 2010 when the rudder and underwater parts were surveyed;
  • The attending Surveyors agree that:
    • the damage arose from loss of a retainer ring (forming a latent defect in machinery) allowing displacement of the lower pintle bush, causing cyclic stress to be set up which led to fracturing of the rudderstock due to fatigue;
    • the rudderstock retaining rings were either not fitted at all or were incorrectly fitted by the Repairers in July 2010 (constituting negligence of Repairers);
    • the initiation of the fracture probably occurred some 3 to 6 months after the loss of the retaining rings which would probably have occurred in July 2010 or sometime thereafter;
    • the rudderstock would have been condemned well before April 2012;
    • there was an equal chance of the rudderstock becoming condemnable prior to and after April 2011.

Which policies pay?

During the material time covered in this case study, there was a policy change on 1st April and accordingly the claims arising therein would involve 3 policies, namely: (a) 2010/11 Policy (1st April 2010/31st March 2011), (b) 2011/12 Policy (1st April 2011/31st March 2012) and (c) 2012/13 Policy (1st April 2012/31st March 2013).

There was negligence of repairers in July 2010 (2010/11 Policy) resulting in a latent defect causing damage to the rudderstock culminating in a breakdown in December 2012 (2012/13 Policy).  On the agreed fact that, if the true facts had been known, the rudderstock was already damaged beyond repairs, would have been condemnable, and was worth only scrap before 1st April 2012, i.e. prior to the inception of the 2012/13 Policy, no claim in respect of the cost of replacement of the rudderstock can lie against this policy year, since the rudderstock was incapable of being damaged any further.  The damage to the rudderstock would be treated as progressive over the 2010/11 and 2011/2012 policy periods, being reasonably split 50/50 in the circumstances (as agreed by the Surveyors).

General Average

The ITC Clause 11.4 provides that “No claim under this Clause 11 shall in any case be allowed where the loss was not incurred to avoid or in connection with the avoidance of a peril insured against.”  It is the peril which is operating or which will operate which determines the matter.  Hence, the claim for general average falling on the vessel arising from the loss of steering control on 1st December 2012 would fall on the 2012/13 Policy insuring the vessel when the peril was operative.

Deductible

All claims, General Average and Particular Average, arising out of the same accident are subject to one Deductible in terms of ITC Clause 12.  The Deductible is divided between the three policies over the respective claims attaching thereto.

Summary

2010/11 Policy pays 50% of the reasonable cost of replacing the rudderstock less 50% of its scrap value (if any) and proportion of Deductible;

2011/12 Policy pays 50% of the reasonable cost of replacing the rudderstock less 50% of its scrap value (if any) and proportion of Deductible;

2012/13 Policy pays the general average claim falling on the vessel less proportion of Deductible.

Conclusion

It is advisable to pay proper attention to (a) the plain sense of the policy wording, which may all require a different approach to the same set of facts and (b) the facts of each case.  “In practice, average adjusters are required to produce equitable and practical solutions based on the facts of individual claims and the theoretical difficulties endemic in the topic are generally settled by agreement with underwriters.” (Mr. Donald O’May)

LAW CASE

Readers are reminded that the “Longchamp” case where the Court of Appeal has reversed the 2014 High Court judgment is coming up for trial in the Supreme Court.

 (Editor: Raymond T C Wong Average Adjuster)

 

admin No Comments

A Few Questions on Claims

Question 1

A vessel with bulk cargo on board under one bill of lading grounded and tugs were engaged to refloat her but then the limited information available would be sufficient to substantiate that the vessel and the cargo were in position of peril and it was suggested that the vessel could have been refloated under her own power after a period of time.  What would you suggest I (the Ship-owners) can do to protect my interests?

For the expenditure to be considered as general average all the properties in the adventure must be at risk and not merely one interest.  It does not appear that the facts as known at that time were sufficient to help make a judgment as to whether the expenditure would fall to be general average (to be shared by all the properties in the adventure) or sue and labour charges (to be paid by Hull & Machinery Underwriters subject to the cover).  It is certainly a border-line case.  I would suggest that firstly check the terms and cover of the insurance on the ship to see if there is a General Average Absorption Clause that may adequately cover the expenditure involved.  In absence of such cover and if time allows, you should approach the Hull & Machinery Underwriters (through Brokers) with a view to persuading the Underwriters to accept liability for the relevant costs on the basis of them being Sue & Labour.  The last resort would be to proceed with the collection of general average security from the concerned in cargo in view of the fact that only one bill of lading is involved – preferably with the agreement of Hull Underwriters in the circumstances to bear the cost of collecting security (which would unlikely be much) if at the end of the day when the full facts of the casualty proves that this is a case of Sue & Labour.

Question 2

What obligations as to seaworthiness does a ship-owner have under a time policy on ship subject to Institute of Time Clauses – Hulls 1/10/83?

The ITC-Hulls 1/10/83 (which specifies that the insurance is subject to English law and practice) do not mention the word “seaworthiness” / unseaworthiness and Section 39(5) provides as follows:

“In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.”

So, the law does not imply that the vessel, at any particular time, shall be seaworthy. However, where the vessel was unseaworthy, and the unseaworthiness contributed to the loss/damage, and the Assured was aware of the unseaworthiness, the Underwriters are not responsible for the loss/damage.

Hence, if the vessel was unseaworthy and the Assured was aware of that unseaworthiness which did not contribute to the loss/damage caused by a peril insured, the Underwriters still have to pay the claim.  On the other hand, if the seaworthiness contributed to the loss/damage proximately caused by a peril insured but the Assured was not aware of that unseaworhiness, the Underwriters again will have to pay the claim.

“Privy” means that the Assured must know or should have known the defect and such knowledge includes so-called “turning a blind eye” and it is submitted that this will extend to the Assured being required to ask questions, keep a good record of maintenance and inspection.  The burden of proving unseaworthiness rests with the Underwriters but the Assured will have to first of all prove a loss proximately caused by a peril insured against.

Question 3

Damage to main engine bearings, etc., attributed to negligence of crew was repaired at Port A early last year but after 12 months damage to main engine idle gears became apparent at sea and the vessel had to put into Port B where permanent repairs were effected.  The repairs involved re-metalling bearings and was agreed to have been resulted from negligence of the repairers in re-metalling of the bearings at Port A last year.

The vessel was insured subject to Institute of Time Clauses – Hulls 1/10/83. The Assured has put forward the claim for the Port B repairs as being a supplementary claim for the Port A repairs, i.e. same crew negligence claim applying one single deductible for both.  Underwriters however contend that the second repair is a separate claim attributable to negligence of the repairers at Port A on the first occasion and is subject to a separate deductible in terms of Clause 12 of the ITC-Hulls 1/10/83.  Whose contention is correct?

Section 69 of the Marine Insurance Act 1906 provides for the measure of indemnity being the reasonable cost of repairs.  What is reasonable is a question of fact.  Section 88 of the MIA specifically states that this is so as regards reasonable time, reasonable premium and reasonable diligence and it would seem logical to apply the same principle to reasonable cost and reasonable repairs.  Understandably, the Assured, having acted reasonably and bona fide in carrying out the reinstatement of his loss he is entitled to call these repairs the reasonable repairs and cost incurred the reasonable cost of repairs.  However, it is submitted that there is a clear distinction between the situation where repairs, effected and in good faith considered to be permanent, subsequently transpired to have been insufficient and the situation where repairs would have been entirely satisfactory but for the negligence of repairers in the effecting of the repairs (whether the negligence results in a duplication of the original damage or not).  The facts of this case seem to suggest that the latter situation exists.  We would agree with the Underwriters that the damage repaired at Port B is a result of an entirely new and separate accident, negligence of repairers at Port A.

The Editor would share with readers the following old notes by his former partner, who was an outstanding average adjuster:

  1. Underwriters are liable for reasonable cost of repairs but are not guarantors to Assured for workmanship of repairers.
  2. If repairs are entrusted to repairers of repute with appropriate facilities the cost of that work normally represents reasonable cost of repairs.
  3. If such repairers do a bad job and damage results, the damage is a separate claim for repairers’ negligence if covered.
  4. If such repairers do a bad job, whether damage is sustained or not, the cost of re-doing properly the work which had been done badly, is not part of the reasonable cost of repairs either of the original damage, or of the new damage.
  5. If, with general agreement, a calculated risk is taken with a method of repair which might succeed or not (e.g. metal locking, or welding on propeller blade tips) and it fails in ordinary service, I would allow the cost of that work, and the cost of the new bedplate etc. or propeller, as part of the reasonable cost of repairing the original damage.

Question 4

Clause 10.4 of Clause 10 – Notice of Claim and Tenders of the ITC-Hulls 1/10/83 states: “In the event of failure to comply with the conditions of this Clause 10 a deduction of 15% shall be made from the amount of the ascertained claim.  Does “ascertained claim” refer to the gross claim?

There used to be argument that the “ascertained claim” refers to the gross claim, i.e. before the application of the policy deductible.  However, in practice, we often saw adjusters apply the 15% penalty to “net” claim, i.e. after applying the deductible.  In their book on the Institute Time Clauses, Messrs. N.G. Hudson and J.C. Allen, both former chairmen of the Association of Average Adjusters write: “There is a fixed penalty for non-compliance with the conditions of this clause and this is specified as a 15 per cent deduction from the ascertained claim (the ascertained claim being the net claim after the policy deductible).”

 

(Do you have a specific problem on a marine insurance claim?  Then, write to “AA Talk” – email: info@seatransport.org)