Insurer’s ‘exposure’ to risk of US sanctions.

 

 

In Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] EWHC 2643 (Comm).  the effect of the on-off-on again of US sanctions against Iran which are due to kick in again this Sunday 4 November at 1159 pm EST came under consideration. A claim under the marine insurance policy was made in respect of the theft of cargo carried from Russia to Iran in 2012, under a bill of lading naming an Iranian national was the consignee. The US sanctions regime came into effect in 2013, was lifted in 2016, and is reimposed this Sunday. The policy provided ““to the extent that …payment of such claim …would expose that insurer to any sanction, prohibition or restriction under …the trade or economic sanctions, laws, or regulations…” and the issue was whether the insurer could refuse to pay out on the ground that payment would ‘expose’ it to US and/or EU sanctions within the meaning of the policy clause.

 

Teare J held that the present clause referred to a payment which “would expose” the insurer “to any sanction, prohibition or restriction”, rather than being “exposed” to the risk of being sanctioned (in the sense of being subject to the risk of a sanction).  Before a sanction can lawfully be applied there must be conduct which is prohibited. It was not enough that that the regulatory agency in question might conclude that there was prohibited conduct (when in law there was not or may not be) and so impose a sanction. Accordingly, the clause provided that the insurer was not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus “would expose” the Defendants to a sanction. Nor did the sanctions clause extinguish liability under the policy when sanctions against Iran were previously imposed in 2013.

 

The claimants had also argued that the EU Blocking Regulation[1] would preclude the claimants from refusing to pay out under the policy. In the light of the construction of the sanctions clause, this issue did not fall to be decided but Teare J saw “[c]onsiderable force in the Defendants’ “short answer” to the point, namely that the Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause such as the one in the Policy. In such a case, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment.”

 

[1] Regulation (EC) 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, as amended by Commission Delegated Regulation (EU) 2018/1100, amending the Blocking Regulation with effect from 7 August 2018 by including the various US sanctions against Iran

Autonomous Ships- Regulatory Work Begins

The idea of developing smart ships that have ability to navigate without human input has been around for some time and as a result of technological developments in recent years, it is believed that this could be a reality in near future.

The Maritime Safety Committee (MSC) of the International Maritime Organisation (IMO) at its most recent meeting (MSC 99) in May 2018 agreed to establish a Working Group (WC) (named as Maritime Autonomous Surface Ships (MASS) WC) to undertake a scoping exercise with a view to identifying which of the existing international instruments dealing with maritime safety should be amended and what new instruments should be developed to facilitate the operation of such vessels in international waters.

For the purposes of this exercise, a number of provisional definitions have been prescribed. Most significantly, MASS is defined as “a ship which, to varying degree, can operate independent of human interaction”. This is a very broad definition and encompasses all of the ships that are currently under consideration. The WG has prescribed four degrees of autonomy: (MSC 99/WP.9 Annex 1, para 4)

  1. Ship with automated processes and decision support. Such ships have on board seafarers to operate and control shipboard systems and functions.
  2. Remotely controlled ships with seafarers on board. The ship is controlled and operated from a distant location.
  3. Remotely controlled ships without seafarers on board. The ship is controlled and operated from a distant location.
  4. Fully autonomous ships. Here, the operating system of the ship is able to make decisions and determine actions by itself.

The categorisation seems to be rather basic but perhaps simplicity is necessary at this early stage. We suppose in case of (ii), it is envisaged that seafarers on board will have technical knowledge and knowhow to intervene and take control in case of an emergency. It is also worth noting that ever increasing cyber risks should be taken into account and especially in case of (iii), it is curious to know what steps can be taken to ensure that the safety is not compromised in a case where contact between the ship and offshore operator is lost. This could be also a significant issue with regard to vessels which have full autonomy (e.g. iv).

It is worth reminding ourselves that the scope of this exercise is restricted to instruments concerning maritime safety (i.e. COLREG 1972, SOLAS 1974, STCW 1974, SAR 1979 and International Convention on Loadlines 1966). Once smart ships become operational other problems, i.e. the liability of manufacturers/software producers, impact of cyber risks on traditional division of liability, salvage law, are also likely to arise. These issues do not form at this stage part of the IMO’s work on the subject.

It is expected that the work of the MASS WC will be completed by the end of 2020. Even then, this is only beginning of a long journey. It will possibly take another decade or so to formulate new legal rules and amend existing ones to enable autonomous ships to engage in cross-border commercial operations. However, as Lao Tzu once famously said:

“The journey of a thousand miles begins with one step”.

Please note that smart ships will form part of the discussion in our 14th Annual Colloquium to be held on 10-11 September 2018:

https://www.eventbrite.co.uk/e/new-technologies-and-shippingtrade-law-tickets-46148370017

 

Insurance fraudsters, look out! There are punitives about.

Can an insurer get punitive damages against fraudsters and fraudulent claimants? Until today the matter was doubtful. Although such damages had since Kuddus v Leicestershire Chief Constable [2002] 2 AC 122 been available on principle for all causes of action, they were still subject to Lord Devlin’s other limits in Rookes v Barnard [1964] AC 1129: statute aside, there had to be either public authority wrongdoing or an intent to make gains exceeding any compensation payable. The former was not relevant: as for the latter, even if the fraudster made a gain his liability was not less than but equal to, or — once other heads of damage such as investigation were thrown in — greater than, that gain.

Logical, but from today not correct, courtesy of some slightly tortuous reasoning from the Court of Appeal.

 Axa Insurance UK Plc v Financial Claims Solutions Ltd & Ors [2018] EWCA Civ 1330 (15 June 2018) involved a couple of fraudulent fender-bender-cum-whiplash claims against Axa. Axa, to their credit, smelt a rat. They paid nothing and instead sued the lawyers responsible for making the claims in deceit. In this action they claimed their costs in investigating, and superadded a claim for punitive damages. Reversing the trial judge, the Court of Appeal said they could have the latter, and mulcted each defendant in the sum of £20,000. The requirement for calculation of gains exceeding liabilities was satisfied, it was said, because even if the fraudsters knew they were liable for the full amount of their ill-gotten gains they hoped never in fact to pay; this hope was sufficient to generate the element of hoped-for profit.

The result is welcome, even if the reasoning is a bit surprising. It is also highly significant, since it seems to mean that almost any fraudulent claim against an insurer is now capable of generating a punitive damages liability in the person bringing it if the court thinks fit to exercise its discretion in favour of an award. This presumably includes cases where the fraudster is the claimant himself; although fraudulent claims by policyholders are now dealt with by Part 4 of the Insurance Act 2015, it seems unlikely that this provision was intended to pre-empt the right of the underwriter to sue in tort for deceit if he so wished.

As to when such awards will be made, this is not yet clear. At a guess they are most likely where the whole, or a large proportion, of the claim is bogus: it seems doubtful whether simple exaggeration cases will attract them. But all we can do now is wait and see.

 

We do need a marine insurance drugs clause

Another item for the agenda at the LMA (and elsewhere where they do insurance).  If someone tries to use your ship without your knowledge for drug-smuggling and the vessel gets seized, the Supreme Court has now confirmed in Navigators Insurance Co Ltd & Ors v Atlasnavios-Navegação Lda [2018] UKSC 26 that your insurance may well not respond, with your underwriters politely but regretfully telling you that you are on your own.

While an elderly  bulker, the B Atlantic, was loading a cargo of coal in Maracaibo, Venezuela, enterprising drug smugglers strapped nearly 300 lb of cocaine to her hull with a view to retrieving it later. The drugs were found, and the vessel seized and condemned by the Venezuelan authorities. Her owners’ H&M insurance included the Institute War & Strikes Clause, which gave cover for capture, seizure and arrest; against persons acting maliciously; and against confiscation and expropriation. But specifically excluded under Clause 4.1.5 was detainment, confiscation or expropriation by reason of infringement of customs or trading regulations. The underwriters declined to pay. Flaux J decided for the owners; the smugglers’ acts were those of “persons acting maliciously”, and Clause 4.1.5 did not apply because the substantial cause of their loss was the acts of the smugglers and not the resulting infringement of the Venezuelan customs code. The Court of Appeal disagreed: the exclusion of infringement of customs or trading regulations should not be limited in this way, and in the circumstances excluded liability.

The Supremes, led by Lord Mance, agreed with the Court of Appeal, but went further. Not only did the events fall fair and square within the exclusion of confiscation for breach of customs or trading regulations, but there had been no cover in the first place. “Persons acting maliciously” meant persons deliberately out to injure the interests of the owners. Unlike terrorists, bombers or garden-variety vandals, drug-smugglers did not fall in this category: they were criminals, true, and knew that what they did might have consequences for the owners, but this was not enough.

This is, if one may say so, a sensible and convincing decision on the facts and the wording. But it does leave owners high and dry when faced with a risk against which they can quite legitimately desire protection. A specific clause protecting against seizure for drug-smuggling committed without the knowledge or connivance of the owner or the crew now seems a high priority. As we said, it’s over to you at the LMA.

 

 

Marine Cargo Policies Do Not Normally Provide Cover for Economical Losses

Engelhart CTP (US) LLC v. Lloyd’s Syndicate 1221 for the 2014 year of account [2018] EWHC 900 (Comm)

Having purchased 1,967.898 metric tonnes of cooper ingots, said to be shipped in 102 containers from New York, the buyer (assured) obtained “Marine Cargo and Storage Insurance Policy” from various insurers at Lloyd’s. The insurance policy, inter alia, stated:

“… noted and agreed that unless otherwise declared the contrary, the broadest coverage shall apply.”

“Container Clause

It is agreed that this Insurance contract is also to pay for shortage of contents (meaning thereby the difference between the number of packages as per shippers and/or suppliers invoice and/or packing list loaded or alleged to have been laden in the container and/or trailer and/or vehicle load and the count of packages removed therefrom by the Assured and / or their agent at time of container emptying) notwithstanding that seals may appear intact, and/or any other loss and/or damage including but not limited to cargo and/or container sweat howsoever arising.”

 

“Fraudulent Documents

This insurance contract covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or Shippers of fraudulent documents of title, including but not limited to Bill(s) of Lading and/or Shipping Receipt(s) and/or Messenger Receipt(s) and/or shipping documents and/or Warehouse Receipts and/or other document(s) of title.

This insurance contract is also to cover physical loss of or damage to goods insured caused by utilisation of legitimate Bill(s) of lading and/or other documents of title without the authorisation and/or consent of the Assured or their Agents and/or Shippers.”

On arrival at Hong Kong for transhipment, it was discovered that no cooper ingots were, in fact, shipped in the containers. Indeed, no such cargo existed and the containers only contained slag of nominal commercial value.

The assured’s claim for indemnity was turned down on various grounds but it was specifically stipulated by Sir Ross Cranston, sitting as a judge of the High Court, that all risk marine cargo insurance was generally construed as covering only losses following from physical loss or damage to goods and this policy as a whole did not displace the presumption against cover for pure economic loss.

The trial judge  dismissed the assured’s contention that the alleged loss fell under the container clause stressing that the term “shortage” in the clause should be given its ordinary meaning and could not cover a situation where there was no goods in the first place. He also emphasised that the “fraudulent documents” clause expressly and exclusively responded to “physical loss of or damage to” goods through the acceptance of dishonest documents so this clause rather than displacing the presumption against cover for pure economic loss in cargo policies endorsed it in the sense that it did expressly indicate that no cover was available for physical losses.

2 points emerge from the judgment:

  1. Considered from the perspective of the construction of contracts, the decision is not at all surprising. It is in line with the spirit of several high profile judgments of the Supreme Court, such as Rainy Sky SA Kookmin Bank [2011] UKSC 50; Arnold v. Britton [2015] UKSC 36 and Impact Funding Solutions Ltd v. Barrington Support Services Ltd [2016] UKSC 57, which emphasise that construing a written document is “first and foremost” a textual exercise. On that premise, a clear and express wording is required to extend the cover of a marine cargo policy to losses which are economic in nature. General statements in the policy purporting to describe the nature of coverage provided in broad terms are not on their own capable of extending the nature of cover beyond physical loss or damage to goods.
  2. It is somehow surprising that the insurers did not develop an alternative defence to the claim by arguing that the policy in this case was void (or did not attach) as the subject matter of insurance has never existed in the first place (see AF Watkinson & Co. Ltd. v. Hullett (1938) 61 L1L Rep 145) In fact, it was argued forcefully in Marine Insurance Fraud, (2014, Informa Law) at 2-117-2-118) that where insurance is obtained for an imaginary cargo, the non-disclosure and misrepresentation is of such magnitude that there is no cover at all.             

Warranty or Not?

Bluebon Ltd (in liquidation) v Ageas (UK) Limited, Aviva Insurance Ltd and another [2017] EWHC 3301 (Comm)

The assured, owners of the Star Garter Hotel at West Lothian, having purchased the property in December 2007, obtained an insurance policy from insurers, Ageas and Aviva, which incepted on 3 December 2009 for a period of 12 months. The insured property suffered loss by fire on 15 October 2010 and a claim was made. The insurers denied liability on the premise that the Electrical Installation Inspection Warranty was breached. The relevant term in the policy was worded as follows:

“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”

On the premise that the last electrical inspection at the Hotel had taken place in September 2003, the insurers argued that the policy was either void or suspended from the outset. In the case, the trial judge, Bryan, J, was required to determine:

  1. The proper construction of the Warranty – was the five-year period to be calculated from the date of the last electrical inspection, or from Policy inception?
  2. Was the Warranty a True Warranty, a Suspensive Warranty, or a Risk Specific Condition Precedent, and what was the consequence of a breach?

The proper construction of the warranty

The assured argued that the five year period should be calculated from the date the policy has been incepted. Taking into account the commercial purpose of the warranty, i.e. ensuring that the risk of fire is minimised (whilst also protecting the health and safety of the insured and the occupiers of the hotel), the judge rejected this contention. This objective can only be achieved if the electrical installation is inspected at regular intervals, e.g. every five years, and any defects identified are remedied. The judge also suggested that the contention of the assured, i.e. the installation inspected every 5 years from the inception of the policy, would make no commercial sense and not work in the context of a one year policy, like this one.

This outcome makes sense and the judgment is in line with recent authorities on the matter such as AC Ward & Son Ltd v. Catlin (Five) Ltd [2009] EWHC 3122 (Comm) and GE Frankona Reinsurance Ltd v. CMM Trust No 1400 (The Newfoundland Explorer) [2006] EWHC 429 (Admlty), analysed by the author in his contribution to the 4th Volume of The Modern Law of Marine Insurance (2016, Informa Law) “New Parameters in Construing Insurance Contracts”

Legal classification of the clause            

The insurers argued that the clause in question was a true warranty and accordingly in this case breach had the effect of rendering the policy void from inception as the warranty related to a period before the attachment of the risk. Alternatively, they argued that the clause was a “suspensive provision” and as the inspection had not been carried out in 2008, the cover was suspended from the outset, i.e. the insurer never came on the risk. Conversely, the assured argued that the clause was a “Risk-Specific Condition Precedent”- i.e. a term which required compliance in respect of risks relating to the electrical installation. Therefore, in case of breach the assured could not recover for liabilities that emerge from risks associated with the electrical installation but cover should be available for liabilities that emerge from other risks.

The assured’s contention was a novel one and essentially based on the premise that a clause could make compliance with a specific aspect of the risk condition precedent to liability. That is certainly possible but clear and apposite language is required to achieve such an outcome. That does not seem to be the case here and the trial judge finding in favour of the insurers expressed the view that the clause was a “suspensory provision”. In reaching this conclusion, he worked on the assumption that the clause was designed to ensure that the assured undertakes such an inspection immediately if there had been no such inspection in the last five years. In other words, he assumed that the intention of the clause was to encourage the assured to get the inspection done as soon as possible by suspending the cover until it is completed. The author is not certain that this was the original intention of the insurers. The insurers in all probability desired to assess the risk accurately at the outset by ensuring that they were insuring a property that had gone through electrical surveys at regular intervals. To the author, it was clear that the clause went to the root of the contract and bore materially on the risk of fire and damages would not have been an adequate remedy (these are all the attributes of a true warranty as highlighted by Rix, LJ in HIH Casualty & General Insurance v New Hampshire Insurance Co [2001] EWCA Civ 735, at [101]). In fact the judge himself appreciated that the term carried all these attributes! It is, therefore, arguable that this was a true warranty.

In the end, the judge’s classification of the clause as a “suspensory provision” had no impact on the outcome. In the present case, the cover was suspended from the outset as the electrical survey had not been concluded 5 years after the previous one by the time the policy had been incepted.

The outcome is in line with the recent trend in the judiciary, i.e. to avoid classifying terms as warranties due to the harshness of the remedy they attract in case of their breach. (see, for example, Sugar Hut Group v. Great Lakes Reinsurance (UK) Plc [2010] EWHC 2636 (Comm)) Of course, had the case been considered under the Insurance Act 2015 a different outcome could have been possible. Under s. 11 of the 2015 Act, the assured could possibly argue that this was a term designed to reduce the risk of a particular type (i.e. fire that is caused by electrical default) and the assured should be able to recover for the loss if he can show that its breach did not increase the risk of the loss which occurred in the circumstances in which it occurred.

It is worth noting that s. 11 is not available in cases where the term in question is designed to define the risk in a general way. The author does not think that the clause in question is of that nature but nevertheless one should be alert to the fact that this kind of disputes could arise under the new Act as s. 11 introduces a type of causation test from the backdoor (even though the Law Commissions were desperate to avoid such an outcome!). (for a more analytical evaluation on s. 11 and the effect of changes on law see- B. Soyer, “Risk Control Clauses in Insurance Law: Law Reform and the Future” (2016) Cambridge Law Journal 109)

When copper turns out to be slag. No physical loss of cargo, no claim under all risks open policy.

 

In   Engelhart CTP (US) LLC v Lloyd’s Syndicate for the 2014 year of account [2018] EWHC 900 (Comm) the cif buyer claimed under an all risks open policy when containers were found not to contain the copper ingots it had traded, only slag of nominal value. It was assumed that no copper was ever shipped and that the claimant in good faith has paid for and taken up fraudulent bills of lading and other shipping documents.  Sir Ross Cranston held that the purpose of all risks marine cargo insurance, was to cover loss of or damage to property. In this case, there was no physical loss of or damage to property as  there never was any cargo of copper ingots, and, consequently, no cargo to be physically lost or damaged. Something must exist to be physically lost.

The scope of the policy was extended by additional clauses but these were all suggestive of physical loss. The first was a Container clause which provided that the policy “is also to pay for shortage of contents…notwithstanding that seals may appear intact”.  The word “shortage” in the clause bore its ordinary meaning and could not cover a situation where there were no goods in the first place.  The second was a Fraudulent Documents clause which was expressly provided to cover a physical loss of goods through acceptance of fraudulent documents of title. Neither clause extended the scope of the policy beyond physical loss of or damage to goods.

 

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.”

Counting the costs for a constructive total loss. The Renos.

 

The Renos provides important guidance as to the costs that can be taken into account in determining whether a vessel is a CTL. The Court of Appeal, [2018] EWCA Civ 230, has upheld the first instance decision of Knowles J, [2016] EWHC 1580 (Comm), that the owners were entitled to be indemnified by their insurers on a constructive total loss (‘CTL’) basis.

On 23 August 2012 a fire broke out in the vessel’s engine while she was on a laden voyage and the owners appointed salvors under LOF 2011. The salvors invoked the SCOPIC clause. On 1 February 2013 the owners served notice of abandonment which the insurers promptly rejected on the grounds that it had been given too late and that owners could only claim on a partial loss basis. Knowles J held that owners did not have reliable information of the loss until 25 January 2013 and that the notice of abandonment (‘NOA’) had been given with reasonable diligence thereafter.

There then came the issue of which costs could be taken into account for the purposes of the CTL calculation. The insurers argued that two costs should be discounted from the CTL calculation. First, there were costs incurred prior to the date of the NOA. The insurers pointed to s.60(2)(ii) of the Marine Insurance Act which provides “In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired…” The insurers argued that the reference to future general average contributions and future salvage operations showed that shows that past salvage and general average costs did not count and there was no logical reason to treat other types of expenses any differently.

Second there were the SCOPIC costs incurred by owners. The insurers argued that these should not count towards the cost of repairs for the CTL calculation. They sought to rely on that para 15 of the SCOPIC clause by way of defence pursuant to the Third Parties (Rights against Insurers) Act 1999. Paragraph 15 provides that “no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 14 Award shall be made in General Average or under the vessel’s Hull and Machinery Policy by the owners of the vessel.”

Knowles J rejected both arguments. Section 60(2)(ii) of the Marine Insurance Act 1906 did not refer to the giving of NOA and did not distinguish between the time when a repair cost might be incurred. The reference to future general average contributions and future salvage operations were words of inclusion not exclusion. As regards SCOPIC no claim of any sort had been made relating to remuneration under the SCOPIC clause. SCOPIC remuneration was relevant only as part of the cost of repair to be taken account in deciding whether the vessels was a CTL.

The Court of Appeal have upheld the decision of Knowles J on all these points.

 

Direct actions against liability insurers. Port of Assens v Navigators Management (UK) Ltd – the sequel.

 

Following the Court of Justice’s interpretation of art. 13(5) of the Brussels I Regulation, reported in this blog on July 13 2017, the matter came back before the Danish Supreme Court. The CJEU had found that an agreement on jurisdiction in an agreement between an insurer and a policyholder is not binding on an injured party who wishes to bring an action directly against the insurer before its home court or before the courts for the place where the harmful event occurred. On 9 October 2017 the Danish Supreme Court found that the CJEU judgment did not contain any reservations to the effect that, for this to apply, the injured party must be regarded as an economically or legally weaker party in this particular case.

Accordingly, under the Brussels I Regulation the Port of Assens would be entitled to bring an action before the Danish courts, if it was permitted to bring an action directly against the insurance company under the national rules applicable to the case. The claim was most closely linked to Denmark so this issue was to be settled under Danish law. Section 95(2) of the Danish Insurance Contracts Act thus applied and the Port of Assens was correct in bringing the action in Denmark. The Supreme Court remitted the case to be heard on its merits before the Maritime and Commercial Court.