CTL Assessment in Marine Insurance

The Swedish Club v Connect Shipping (The MV Renos) [2018] EWCA Civ 230

The insured vessel, the Renos, was on a laden voyage in the Red Sea in August 2012 when a fire broke out. The owners sought assistance and on 23 August a salvage agreement (in LOF form) was signed to deliver the vessel to a place of safety. The salvors invoked the SCOPIC clause immediately and brought the vessel to anchorage off the Suez Canal on 31 August. The owner’s surveyor inspected the vessel and estimated that the repair cost would be in the region of US$ 8 million. The insurer’s surveyor, on the other hand, valued the repair costs around US$ 5.527 million. It was a common ground between the assured and insurer that to be declared as a constructive total loss (CTL) under s. 60 of the Marine Insurance Act (MIA) 1906, the repair costs needed to be in excess of US$ 8 million.

The vessel was towed to a place of safety, the port of Adabiya (Egypt), by the end of September 2012.  There, the owners in conjunction with the insurer’s surveyors drew up a repair specification which was completed by the end of November. In December, the owners received several repair quotations ranging from US$ 2.8 million to US$ 9 million. Discussions over the repairs continued between the assured and insurer throughout January 2013 and ultimately the owners issued a notice of abandonment on 1 February 2013.

The insurers refused to accept the notice of abandonment on the premise that it was not given within a reasonable time after receipt of reliable information of the loss and a reasonable time for inquiry, as stipulated by s. 62(3) of the MIA 1906. The trial judge, Knowles, J, delivered the judgment on this point [2016] EWHC 1580 (Comm) in favour of the assured indicating that due to the complexity of the repairs required and contradictory information received from different surveyors as to the cost of repairs, it was understandable why it took until 1 February 2013 for the assured to give notice of abandonment. Therefore, it was held that the assured did not lose its right to abandon the vessel to underwriters under s. 62(3) of the MIA 1906.  The insurers appealed to the Court of Appeal on this point.

Another point of dispute was the type of costs that can be taken into account for the purposes of the CTL calculation. Relying on the wording of s. 60(2)(ii) of the MIA 1906, which stipulates that “in estimating the costs of repairs…. account is to be taken of the expense of the future salvage operations” the insurers argued, unsuccessfully before the trial judge, that the costs incurred prior to the date of date of the notice of abandonment should not be included. It was also argued that the payment due under the SCOPIC clause should not be taken into account in estimating the costs of repairs. This argument was also rejected. The insurers also appealed against these findings to the Court of Appeal.

The Court of Appeal’s decision is momentous especially on the issue of calculation of cost of repairs for identifying whether CTL can be declared on the premise that “the cost of repairing the damage would exceed the value of the ship when repaired”.  Hamblen, LJ, who delivered the judgment of the Court of Appeal, was of the opinion that the relevant date for calculating the costs of repair for this purpose was the date of the casualty. The reference to “future” in s. 60 (2)(ii) was justified on the premise that this was a word of inclusion rather than exclusion making it clear that future costs should be taken into account alongside those already incurred. This certainly makes sense considering how matters progress in practice. Once a casualty arises, the first consideration of any owner is to appoint a salvor to assist his ship rather than sending a notice of abandonment to their hull insurers just in case the casualty is serious and the cost of repair (including salvage cost) is high enough to justify abandoning the insured vessel to underwriters. At that stage, the assured simply does not possess adequate information to be able to make a decision as to whether to send a notice of abandonment or not.

The decision of the Court of Appeal on the SCOPIC expenses could prove to be more controversial. In the present case, the cost of the salvage operation was around US$ 1.2 million for the notional Art. 13 salvage award and US$ 1.428 million in respect of SCOPIC paid over and above the Art. 13 award. It was the contention of the insurers that the SCOPIC costs should not be taken into account as costs within s. 60(2)(ii) of the MIA 1906 as the SCOPIC remuneration was conceptually different from Art. 13 award payable and not payable under the hull and machinery policy. Affirming the first instance judgment, Hamblen, LJ, rejected this contention. He was of the opinion that the benefit that was conferred on the insured property by the SCOPIC services could not be easily divorced from the benefit under Art. 13 award. Put differently, had there been no SCOPIC element, the insured vessel would presumably have been declared economically unsalvageable and, therefore, a wreck. Therefore, in determining whether the vessel had become a CTL it should be disregarded which insurer (hull and machinery insurer or P & I Club) pays which part of the salvage award. The author understands the reasoning behind this decision. But it ultimately means that in determining whether CTL under a hull and machinery policy has arisen, costs which do not fall for indemnity under that policy (i.e. SCOPIC award) should be taken into account. One might regard this outcome counter-intuitive and even slightly peculiar and it is possible that insurers might wish to reverse this position by adding clauses to the contracts in future to the effect that SCOPIC reward should not be taken into account in calculating costs under s. 60(2)(ii) of the MIA 1906.

The decision of the Court of Appeal on the point whether the assured had lost their right to abandon the vessel to them under s. 62(3) of the MIA 1906 does not set a precedent but is a good illustration of the difficulties that can emerge after a casualty in determining whether notice of abandonment was given in a reasonable amount of time. On this point too, the Court of Appeal affirmed the judgment of the first instance judge. Hamblen, LJ, stressed that in determining whether notice of abandonment was given in a reasonable time the factual context needed to be examined carefully. The nature of the casualty in this case meant that obtaining reliable information about the loss would inevitably be complex and take time. Also, given that the repairs required were likely to be substantial and complex, it would have been very difficult to have reliable information as to loss until quotations from various shipyards had been received. Such quotations were not received until early December. Furthermore, insurers on several occasions challenged the findings of the assured’s surveyor making it rather difficult for the assured to have reliable information to make a decision as to whether they would abandon their interest to the insurer or not. Hamblen, LJ, concluded on this point at [58] by stating “…the Insurers chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the Vessel was not a CTL. They shared that information with the Owners, insisted on its correctness, and can hardly complain if it is taken into account in considering whether there was reliable information of the loss.”

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Professor Barış Soyer

Professor Soyer was appointed a lecturer at the School of Law, Swansea University in 2001 and was promoted to readership in 2006 and professorship in 2009. He was appointed Director of the Institute of Shipping and Trade Law at the School of Law, Swansea in October 2010. He was previously a lecturer at the University of Exeter. His postgraduate education was in the University of Southampton from where he obtained his Ph.D degree in 2000. Whilst at Southampton he was also a part-time lecturer and tutor. His principal research interest is in the field of insurance, particularly marine insurance, but his interests extend broadly throughout maritime law and contract law. He is the author of Warranties in Marine Insurance published by Cavendish Publishing (2001), and an impressive list of articles published in elite Journals such as Lloyd’s Maritime and Commercial Law Quarterly, Berkley Journal of International Law, Journal of Contract Law and Journal of Business Law. His first book was the joint winner of the Cavendish Book Prize 2001 and was awarded the British Insurance Law Association Charitable Trust Book Prize in 2002, for the best contribution to insurance literature. A new edition of this book was published in 2006. In 2008, he edited a collection of essays published by Informa evaluating the Law Commissions' Reform Proposals in Insurance Law: Reforming Commercial and Marine Insurance Law. This book has been cited on numerous occasions in the Consultation Reports published by English and Scottish Law Commissions and also by the Irish Law Reform Commission and has been instrumental in shaping the nature of law reform. In recent years, he edited several books in partnership with Professor Tettenborn: Pollution at Sea: Law and Liability, published by Informa in 2012; Carriage of Goods by Sea, Land and Air, published by Informa in 2013 and Offshore Contracts and Liabilities, published by Informa Law from Routledge in 2014. His most recent monograph, Marine Insurance Fraud, was published in 2014 by Informa Law from Routledge. His teaching experience extends to the under- and postgraduate levels, including postgraduate teaching of Carriage of Goods by Sea, Transnational Commercial Law, Marine Insurance, Admiralty Law and Oil and Gas Law. He is one of the editors of the Journal of International Maritime Law and is also on the editorial board of Shipping and Trade Law and Baltic Maritime Law Quarterly. He currently teaches Admiralty Law, Oil and Gas Law and Marine Insurance on the LLM programme and also is the Head of the Department of Postgraduate Legal Studies at Swansea.

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