The UK Supreme Court decision in the Renos case provides useful guidance for both shipowners and insurers concerning the cost in deciding whether a vessel is a constructive total loss under its hull and machinery policy.
Watson Farley & Williams law firm provides information on the Renos case and on guidance for shipowners and insurers for similar cases.
The Renos lost main engine power due to a fire in the engine room whilst sailing laden with cargo in the Red Sea.
Owners appointed salvors on the ‘no cure no pay’ Lloyds Open Form (“LOF”), which included the Special Compensation Protection and Indemnity clause (“SCOPIC”) under which the salvors would receive extra payment at set tariffs due to the environmental risk posed by the vessel, whether or not it was successfully salved.
The vessel had hull and machinery insurance policy on the Institute Time Clauses – Hulls (1/10/83) for an insured value of US$12m. The owners supported that the cost for repairing the vessel exceeded its insured value, making it a constructive total loss.
Therefore, owners would be entitled to abandon the vessel to insurers and to be paid its insured value under sections 60 and 61 of the Marine Insurance Act 1906, which state:
- Section 60 [1]: “…there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.”
- Section 60 [2]: “In particular, there is a constructive total loss – …(ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired. 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…”.
- Section 61: “Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.”
Five months later and after discussions, the owners of the vessel issued a notice of abandonment (NOA) on the underwriters as required by section 62 of the Act, abandoning the vessel and claiming its insured value on the basis that it was a CTL. Yet, the lead underwriters were only obliged to pay for a partial loss of the vessel (namely its US$1.4m diminution in value) and not for a CTL (US$12m).
The owners began court proceedings.
The High Court and the Court of Appeal held in favour of owners, rejecting the insurers’ arguments that:
- The owners had elected not to abandon the vessel to the insurers. The courts rejected this argument – there had been no such election.
- The owners could not claim a CTL on the basis that the NOA had been given too late, in breach of MIA section 62(3), which states:
The court decided that the NOA wasn’t issued too late. The owners had not received “reliable information of the loss” before giving the NOA, and so section 62(3) of the Act (which requires NOA to be given with “reasonable diligence after the receipt” of such information) was not triggered.
Moreover, even if the owners had received such information, it could not be said that they had failed to give the NOA “with reasonable diligence” or within a “reasonable time”: whilst five months was relatively unusual viewed in the abstract, the estimated repair figures provided by the underwriters during the five months of discussions had suggested that the vessel was not a CTL, in addition to which there was no danger or immediate urgency requiring an immediate decision to be taken, nor was this a case where the owners had decided to abandon the vessel but had failed to communicate this to the underwriters.
3. The estimated cost of repairs did not exceed the insured value on the basis that the salvage costs, standby tug charges and other costs that had been incurred before the NOA was given could not, unlike post-NOA costs, be treated as costs of repair. The courts rejected this argument – the pre-NOA costs and SCOPIC remuneration were costs of repair.
4. The US$1.4m SCOPIC remuneration awarded to the salvors could not be treated as costs of repair as they were costs incurred to avert environmental damage which the vessel’s Protection and Indemnity Club might otherwise be liable to pay, rather than costs of an H&M nature. The courts rejected this argument – the SCOPIC charges were costs of repair.
The lead underwriters appealed to the Supreme Court on the issues of the pre-NOA costs and SCOPIC remuneration.
Supreme Court decision/Pre-NOA costs
The Supreme Court held in favour of the owners:
According to the court, the only two authorities supporting the insurer lacked arguments and were controversial.
Also, the language of section 60(2)(ii) did not, as the insurers were arguing, assist either:
a. “Would” reflected the hypothetical character of the exercise, as opposed to (as the insurers were arguing) the date when the costs are incurred; and
b. The reference to “future” salvage operations and general average contributions did not, contrary to the insurers’ submission, point to any particular point in time and (the Supreme Court considered on an obiter basis) was probably limited to the treatment of general average contributions anyway.
Applying general marine insurance principles:
a. The loss under an H&M policy occurs at the time of the casualty, not when it is ascertained at a later stage. The underwriters must hold owners harmless against that loss, and they are technically in breach of that obligation when the physical damage occurs.
b. It follows from this that the reference in section 60(2)(ii) to the “cost of repairing the damage [exceeding] the value of the ship when repaired”, is to the entire damage as from the date of the casualty, irrespective of when the cost of recovery/repair is incurred.
c. The requirement to give NOA does not affect this analysis. Indeed, in certain circumstances defined by section 62(2)(ii), NOA is not needed.
On this basis, the pre-NOA costs were to be taken into account.
According to Watson Farley & Williams law firm, the conclusion is that the Supreme Court’s decision is principled and in line with industry expectations – certainly in relation to pre-NOA costs, but also with regards to SCOPIC charges, which are of a P&I nature rather than an H&M character – as were the decisions of the High Court and the Court of Appeal in relation to the NOA in light of the facts of this case.
All three decisions will promote certainty moving forward and achieve a fair result.
