Tag: MV Renos

Supreme Court Clarifies the Law on CTL Calculation in Marine Insurance

The Swedish Club v Connect Shipping (The MV Renos) [2019] UKSC 29

Under s. 60(2)(ii) of the Marine Insurance Act (MIA) 1906, there is constructive total loss (CTL) when the insured ship is damaged by a peril it’s insured against and the cost of repairing said damage would exceed the insured value of the ship when repaired. In estimating the cost of repairs for the purposes of this provision, it has been held by Knowles, J, [2016] EWHC 1580 (Comm) that i) the costs incurred prior to the date of notice of abandonment and ii) the costs of salvage operations performed before the notice of abandonment, including sums payable under the SCOPIC clause, should be taken into account.

The underwriters’ appeal to the Court of Appeal on these points was rejected unanimously [2018] EWCA Civ 230 (per Hamblen, LJ, with whom Simon, LJ and Sir Geoffrey Vos C agreed). In a previous case note, the author was critical of the Court of Appeal’s reasoning, especially with regard to the second point, i.e. taking into account SCOPIC expenses incurred before the notice of abandonment in estimating the cost of repairs.

The Supreme Court (composed of Lords Sumption, Reed, Hodge, Kitchin and Lloyd Jones) allowed the appeal on this ground holding that SCOPIC charges cannot be considered as part of the “cost of repairing the damage” under s. 60(2)(ii) of the MIA 1906 (or the “cost of recovery and/or repair” under clause 19.2 of the Institute Hull Clauses). The Supreme Court stressed that the primary purpose of SCOPIC expenditure is to protect owners’ potential liability for environmental pollution not to enable the ship to be repaired. Hence, such expenditure is not connected with the damage to the hull or its hypothetical reinstatement and the mere fact that a prudent uninsured owner would have contracted with the same contractors for both prevention of environmental pollution and protection of the property does not make them indivisible. The author believes that the Supreme Court’s decision on this issue is intuitive and makes sense.   

On the issue of whether expenses incurred prior to the notice of abandonment should count towards the calculation of a CTL under s. 60(2)(ii) of the MIA 1906, the Supreme Court rejecting the submission of the underwriters, affirmed the findings of the lower courts. The Supreme Court approached the matter with reference to basic principles of insurance law indicating that several older judgements on the matter (in particular Hall v. Hayman (1912) 17 Comm Cases 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361) lacked reasoning and legal argument. Taking into account the objective character of the factual enquiry of whether a vessel is a CTL and the fact that in marine insurance context the loss is suffered at the time of the casualty, the Supreme Court was adamant that the reference to “damage” in s. 60(2)(ii) was in fact reference to the entire damage arising from the casualty from the moment that it happened. Therefore, it cannot make any difference when costs are incurred, i.e. pre or post notice of abandonment. On that premise, the Supreme Court evaluated whether this principle might be affected by the legal requirement for a notice of abandonment but reached the conclusion that it is not.                   

At the commencement of litigation, it was agreed by the parties that, to be declared a CTL under s. 60 of the MIA 1906, the repair costs needed to be in excess of US$ 8 million. The matter in the light of the Supreme Court judgment will be remitted to the trial judge to determine whether the vessel had been a CTL and what financial consequences would follow from that. 

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.”