Supreme Court clarifies types of expense to be taken into account in calculating a constructive total loss

The Supreme Court has today held that salvage and other costs incurred prior to tender of Notice of Abandonment (NOA) should be taken into account for the purpose of assessing whether a vessel is a constructive total loss (CTL), but Special Compensation Protection and Indemnity Clause (SCOPIC) expenses should not.

Background

Brief details of this case are set out in our previous article where we examined the implications of the Court of Appeal’s judgment that held that the assured was entitled to recover for a CTL. Insurers appealed to the Supreme Court, later abandoning their argument that NOA was tendered late.

Decision

The Supreme Court was unanimous in holding that “the cost of repairing the damage” included all the reasonable costs of salving and safeguarding the vessel from the time of the casualty onwards, together with the prospective cost of repairing her. These costs were not reduced by being incurred before the NOA and are therefore to be taken into account for the purposes of section 60(2)(ii) of the Marine Insurance Act 1906.

The court was also unanimous in holding that SCOPIC remuneration should not be taken into account. SCOPIC charges protect an entirely separate and distinct interest of the shipowner - potential liability for environmental pollution - which has nothing to do with reinstatement of the vessel.

In light of this judgment, the case was remitted back to the Commercial Court to determine whether or not there was a CTL on the facts.

Implications and comment

Both assureds and insurers will be grateful for confirmation that past expense should count towards a CTL, as this reflects the predominant view in the market. The court’s reasoning was essentially that since loss is suffered at the time of the casualty (even if it may develop thereafter), the references to expenditure which “would” be incurred reflects the hypothetical character of the notional exercise of calculating the costs of recovery and repair from the date of the casualty. It makes no difference when (or if) that cost was incurred. NOA is irrelevant to quantification of a CTL.

Insurers had argued that the principle that required the assured to prove a CTL as at the date of the casualty and at the date of NOA meant that only future costs from the date of NOA should be taken into account. However that requirement deals with the issue of ademption of loss – where something happens between a casualty and NOA (or issue of proceedings) which reduces or extinguishes the loss. Salvage costs do not adeem a loss.

The Supreme Court’s confirmation that SCOPIC expenses should not be included as part of the costs of recovery and repair is very welcome news for hull insurers, and reflects common sense. It should avoid the need for potential amendments to standard hull wordings and to SCOPIC itself.

The key is whether the objective purpose of the relevant expense was to enable the vessel to be repaired. So salvage expenses, the cost of temporary repairs, towage and other steps plainly preliminary to permanent repair are taken into account.

The courts below had accepted the assured’s arguments that SCOPIC costs were indivisible as part of the costs of recovery. The Supreme Court disagreed. The costs are divisible because they relate to an entirely different interest and are separately insured.

Essentially SCOPIC costs cannot qualify as costs of recovery of the vessel because they are entirely unconnected with damage to the vessel’s hull or its reinstatement.

Read other items in London Market Brief - July 2019

Read more items in Marine Brief - September 2019

Related item: SCOPIC and assessing whether vessel is a constructive total loss