RENOS: Breaking up is hard to do

November 2019

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Justice Scale

As anticipated in the Club’s May 2018 website article ‘How late is too late?’ the hull and machinery underwriters did indeed appeal to the Supreme Court for a final decision.

Recalling the case, the Renos was the subject of a salvage operation conducted under a Lloyd’s Standard Form of Salvage Agreement (LOF) with SCOPIC incorporated and invoked by the salvor. The argument before the courts was whether the owners were entitled to claim a Constructive Total Loss (CTL) or, as argued by the hull and machinery insurers only, a lesser partial loss on the basis the requirements of a CTL had not been met. The lower courts had earlier addressed a question of whether a delayed Notice of Abandonment prevented an owner from claiming a CTL and found in the owners’ favour that it did not. However, the insurers further challenged the lower court’s decision to allow all expenditure of salvage and repair, including SCOPIC remuneration, incurred prior to the Notice of Abandonment to be included within a CTL calculation.

The Supreme Court addressed the question in two parts.

First, the insurers argued a literal interpretation of the Marine Insurance Act (MIA) section 60(1) which states a CTL will exist when an actual total loss appears to be unavoidable or the cost to avoid the total loss would exceed its insured value. Taking the word ‘would’, the insurers argued this referred only to expenditure from the date of the Notice of Abandonment, i.e. future costs from the notice. The Supreme Court noted that any objective assessment of the cost to repair a casualty following a salvage operation ordinarily would occur once the salvor had delivered the casualty to a place of safety at which point, if the assessment warranted it, a Notice of Abandonment may be issued. If the insurers’ interpretation was correct then in the majority of cases the salvage remuneration would be excluded from the assessment of a CTL. The court found little support for this argument either in the language of the MIA or in past precedent finding that, as a general rule, a loss under a hull and machinery policy occurs at the time of the casualty and not at the time of any subsequent assessment of the loss. The same applied in the case in question and the time of the casualty is to be the objective point from which to calculate a CTL.

However, on the second point, the Supreme Court did find in the insurers’ favour in respect of SCOPIC. Recalling the origins of SCOPIC as a commercial alternative to the additional salvage remuneration ‘Special Compensation’ permitted under Article 14 of the Salvage Convention 1989, the court took the view these costs were primarily incurred in the avoidance of damage to the environment. As such, SCOPIC remuneration can be distinguished from ordinary salvage remuneration which is incurred for the purpose of enabling the ship to be repaired, a fact underlined by the two liabilities falling to different underwriters, SCOPIC for the account of P&I insurers and loss to property to the hull and machinery insurers. SCOPIC in the view of the court added nothing to the assessment of the cost to repair the ship and should not be included in the assessment of a CTL.

Although this decision is primarily of concern to owners and their hull and machinery insurers, in any SCOPIC case the P&I Club concerned will be looking to determine at what point a casualty has become a wreck removal. One factor in this assessment may be the acceptance by a property insurer that the casualty has become a CTL. However, the exclusion of SCOPIC costs in the assessment of a CTL may have the unintended consequence of prolonging that decision potentially to the detriment of an enhanced SCOPIC remuneration.

Article by Ian Freeman

Syndicate Manager

Americas Syndicate