Hull insurance: SCOPIC and past expenses count towards constructive total loss

The Commercial Court has allowed the insured’s constructive total loss claim following an engine room fire on the insured vessel.

The Commercial Court has allowed the insured’s constructive total loss (CTL) claim following an engine room fire on the insured vessel, despite tender of notice of abandonment (NOA) five months after the loss; salvage costs incurred prior to NOA and SCOPIC expenses could be taken into account.

Background

The insured’s claim, under a policy on the Institute Time Clauses (ITC) Hulls 1.10.83, was for a CTL of the insured vessel following an engine room fire in August 2012 while on a laden voyage in the Red Sea. Salvage services were rendered on Lloyd’s Open Form (LOF) terms and the Special Compensation Protection and Indemnity Clause (SCOPIC) invoked. 

In early September the owners' independent surveyor indicated that the vessel could be a CTL, but the insurers disagreed. In October 2012, the vessel’s classification society reported on the repairs they considered necessary. There were lengthy investigations by each side’s surveyors into the nature of the damage and the possible costs of repair. NOA was tendered on 1 February 2013. 

Increased Value (IV) cover was triggered in the event of a CTL.

Hull and IV insurers defended the claim on a number of grounds, including that:

• The insured failed to serve a notice of abandonment “with reasonable diligence after receipt of reliable information of the loss”, as required by s.62(3) of the Marine Insurance Act (MIA) 1906.
• The vessel was not in fact a CTL on the basis that certain expenses should be excluded from the calculation and that the costs of repair should be calculated using the price of Chinese steel/yards.

Decision

The first question was whether the insured had tendered NOA in a timely fashion.

Mr Justice Knowles was not impressed by the insurers’ arguments, given that they and their surveyors had made the process harder and take longer, and their conduct, viewed overall, was uncooperative.  

In deciding that salvage costs incurred prior to tender of NOA can be taken into account in assessing whether or not the vessel is a CTL, Knowles J had primary regard to Clause 19 ITC Hulls 1.10.83. This draws no distinction between past and future costs of recovery and repair and alters the position under s.60(2)(ii) MIA 1906. That section allows potential future salvage and ships’ general average (GA) contributions to be taken into account. However, this did not mean that past expense is to be ignored. He refused to follow Hall v Hayman [1911] and The Medina Princess [1962] to the extent that these cases might suggest otherwise.

The insurers argued SCOPIC liability could not properly be described as a cost of recovery or repair because it was compensation to encourage salvors to minimise environmental damage following a casualty. Protection and indemnity (P&I) insurers paid this liability. Clause 15 of SCOPIC costs, which were not indemnifiable under the hull and machinery (H&M) policy, should not be allowed as part of the calculation. Knowles J disagreed. The principle in operation under section 60(2)(ii) was simply to look at what the costs of repair were: SCOPIC remuneration was an ‘indivisible’ part of an item (salvage) that insurers accept as a cost of repair. The reasonable legal costs of salvage arbitration were also to be taken into account. 

Implications

The Commercial Court’s decision is the latest in a series of reverses for insurers disputing CTL claims following on from Irene EM [2014] and Brillante Virtuoso [2015]. In practice it is very difficult for insurers successfully to challenge whether a vessel is a CTL on the figures where there is disagreement between the parties’ surveyors.  

In effect, s.62(3) MIA 1906 requires NOA to be given within a reasonable time after the insured has sufficient information to be able to decide whether to elect to abandon the property insured. The insured cannot wait and see how things develop. On the facts, as there were conflicting repair estimates, a five-month delay was reasonable. That will not always be the case, and other judges on the same facts might well not have been so generous. That said, the facts here might well have estopped insurers from taking the point that NOA was late.

Somewhat curiously, counsel for the insurers submitted that the insured should tender a ‘protective’ NOA in circumstances where it was possible the vessel might become a CTL - which seems to misunderstand what was said in The Anita [1971]. That suggestion was rejected by the court, because s.62(2) MIA 1906 requires an NOA to be irrevocable. It is, of course, open to the insured to tender several NOAs, in case some turn out to be premature, and indeed it may be prudent for the insured to do so; but it is hard to see how this can be turned into a requirement to tender NOA prematurely.

The decision on past salvage expense is not entirely surprising, given that the authors of Arnould considered that the decisions in Hall v Hayman and The Medina Princess were wrong to exclude past expense. In Hall v Hayman there was a concession by counsel that wasted salvage expense prior to the NOA was not recoverable. In The Medina Princess a small repair sum incurred prior to the date of NOA was excluded from a CTL calculation. In the case of salvage expenses, the court’s approach in MV Renos seems correct. It will often not be possible until after salvage services have been rendered even to assess whether the vessel might or might not be a CTL, and so judge whether to tender NOA.

We suspect that the court’s decision that SCOPIC expenses could be included as part of the costs of recovery and repair is more controversial. SCOPIC reflects an agreement between owners, P&I insurers and salvors to allow recovery by salvors of compensation for efforts to protect the environment under Article 14 of the International Convention on Salvage 1989, which on the face of it seems very much to be divisible from the Article 13 award which H&M insurers agree to pay.

SCOPIC as a concept post-dates ITC Hulls 1.10.83 clauses, which make no mention of it (unlike ITC Hulls 1.11.95). However, this expense would not be payable by H&M insurers in the event of a partial loss, whether or not the policy so provides, because the expense is not loss of, or damage to, the property insured. It cannot be recoverable as sue and labour expense for the same reason.  

Since the very concept of a CTL is that it is a species of partial loss converted into a total loss by reason of the insured’s election as evidenced by tender of NOA, the court’s decision on this point may seem questionable. But, pending the outcome of any appeal, it may now be necessary for insurers to amend the standard market wording to make clear that SCOPIC expense (and any other loss not covered by the policy) is to be excluded from any CTL calculation.   

Although the test for a CTL is whether the costs of recovery and repair exceed 100% of the agreed insured value, unlike the test under the Nordic Marine Insurance Plan, in practice the courts will allow a generous ‘contingency’ on repair estimates. In this case the margin was 10%, adopting the same approach as taken in Brillante Virtuoso.

Read other items in the Shipping and Commodities Brief - September 2016