SCOPIC and assessing whether vessel is a constructive total loss

Swedish Club and others v Connect Shipping Inc (The Renos) [19.02.18]

Date published

23/02/2018

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The Court of Appeal has refused insurers’ appeal and upheld the Commercial Court decision that salvage costs incurred prior to tender of Notice of Abandonment (NOA) and SCOPIC expenses can both be taken into account for the purpose of assessing whether a vessel is a constructive total loss (CTL).

Background

The vessel was insured for hull and machinery risks under a policy on the Institute Time Clauses (ITC) Hulls 1.10.83. Following an engine room fire in August 2012, salvage services were rendered on Lloyd’s Open Form (LOF) terms and the Special Compensation Protection and Indemnity Clause (SCOPIC) invoked. 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. Hull and Increased Value insurers defended the claim on a number of grounds.

  • The assured had lost the right to abandon the vessel and claim a CTL by failing to tender NOA “with reasonable diligence after receipt of reliable information of the loss” – s.62(3) of the Marine Insurance Act (MIA) 1906.
  • Salvage costs incurred prior to tender of NOA should not count towards the CTL assessment, relying on Hall v Hayman [1911] and The Medina Princess [1962].
  • SCOPIC costs should not count towards the CTL assessment being outside the scope of the hull and machinery cover and excluded by Paragraph 15 of SCOPIC.

The Commercial Court rejected these arguments. The insurers appealed to the Court of Appeal.

Decision

  1. The Court of Appeal confirmed that the test in section 62(3) MIA is fact dependent. The judge was entitled to conclude that Owners did not have reliable information of the loss in December 2012 and in February 2013, and to find that the time taken to tender NOA was reasonable.
  2. Insurers were right to accept that the costs of repair under section 60(2)(ii) MIA include the costs of recovering the vessel, such as the costs of salvage. However, there was no logical basis for salvage costs prior to tender of NOA to be excluded from the calculation. Hall v Hayman and The Medina Princess carried little authoritative weight and would not be followed. The same result would apply under ITC Hulls 1.10.83.
  3. The Court of Appeal also agreed with the judge that SCOPIC remuneration was an ‘indivisible’ part of an item (salvage) that insurers accept as a cost of repair. It was an unavoidable part of what the assured had to pay to recover the vessel. Paragraph 15 of SCOPIC did not apply. The judge was therefore correct to hold that the costs could be taken into account in determining if the vessel was a CTL.

Implications

While the insured cannot simply wait and see how things develop, each case will turn on its own facts as to what a reasonable time for tender of NOA might be.

The decision on allowing past salvage expense to count towards a CTL is not entirely surprising, given that the authors of Arnould considered that the decisions in Hall v Hayman and The Medina Princess were wrong.

The Court of Appeal’s confirmation that SCOPIC expenses could be included as part of the costs of recovery and repair is much more controversial. While it is correct that the costs of recovery form part of the costs of repair for the purposes of Section 60(2)(ii), SCOPIC costs do not seem in fact or in law to be capable of being costs of recovery of the vessel.

SCOPIC is an agreement between owners, P&I insurers and salvors to allow recovery by salvors of a fair rate of expense for efforts to protect the environment, in lieu of the “special compensation” regime under Article 14 of the International Convention on Salvage 1989, where the salved fund is insufficient to enable proper recompense for such efforts.

SCOPIC may be dealt with as a part of the same salvage arbitration award but it is clearly divisible (being the subject of a separately quantified award) from the Article 13 award. The sum awarded is not “salvage”. It is contractual expense in lieu of “special compensation”.

The Court of Appeal’s decision appears to be based on the unreasoned assertion that the assured had to pay the entirety of the salvage remuneration (both Article 13 and 14 awards) in order to recover the vessel. It is true that a salvor will have a maritime lien over the vessel for salvage, but there is no such lien for special compensation under Article 14 nor for SCOPIC expense. Under SCOPIC, security for the SCOPIC award has to be provided by P&I insurers within two working days in the sum of US$3 million. It follows therefore that an assured can recover the vessel merely by paying the Article 13 award.

The Court’s conclusion on the scope of Paragraph 15 of SCOPIC is perhaps easier to follow, given that no claim as such for SCOPIC expense was being made as against hull and machinery insurers, although the intention behind Paragraph 15 was to exclude SCOPIC expense from any claims under the hull policy for all purposes.

Comment

Unless there is a successful appeal to the Supreme Court, it will probably now be necessary for hull and machinery insurers to impose a “RENOS” clause to amend the standard market hull wordings to make clear that SCOPIC expense (and any other loss not covered by the policy, such as delay) is to be excluded from any CTL calculation. Hull insurers as a collective body may wish to lobby for suitable amendments to Paragraph 15 of SCOPIC as well – we understand that revisions to SCOPIC are currently under consideration.

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

Read other items in the Marine Brief - March 2018