How late is too late?

May 2018

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The question of whether a Notice of Abandonment (“NOA”) given 5 months after the casualty meant that Owners had lost the right to abandon the vessel and claim indemnity for a constructive total loss (“CTL”) was recently considered by the Court of Appeal, on appeal from the 2016 High Court case The MV Renos [2016] EWHC 1580 (Comm). The Court was further asked to consider whether Owners were entitled to take into account costs incurred prior to the NOA towards the CTL calculation.

Facts

In August 2012, a fire broke out in the engine room of the “Renos” while she was on a laden voyage in the Red Sea. The same day Owners appointed Salvors under a Lloyds Open Form 2011 (“LOF”) and the SCOPIC clause was invoked.

The vessel was insured for US$12,000,000 on a hull policy subject to ITC – Hulls 1/10/83 and US$3,000,000 under an increased value policy. It was agreed that the fire was an insured peril. It was common ground that the vessel was likely to be a CTL as the damage repair costs were estimated to be US$8 million or more.

In the weeks and months that ensued, Owners and Insurers carried out multiple investigations aimed at determining the extent of damage and cost of repairs. The parties held several inconclusive discussions as to whether and where the vessel should be repaired and what such repairs should entail. By the end of January 2013, the parties had failed to reach an agreement as to whether Owners were entitled to be indemnified for a CTL.

Faced with an impasse, Owners finally tendered their NOA on 1 February 2013, to which Insurers reacted with a rejection, on the grounds that it had been given too late.

Insurers sought to defend the claim, inter alia, on the grounds that the vessel was not a CTL, that Owners failed to serve a NOA in a timely manner and that certain expenses should be excluded from the CTL calculation. At first instance, Knowles J gave judgment for Owners.

The Court of Appeal’s decision

On appeal, Insurers asked the Court to consider:

(1) Whether the Judge was wrong to conclude that the Owners had not lost the right to abandon the vessel and claim CTL pursuant to s.62(3) of the Marine Insurance Act 1906 (“MIA”).

(2) Whether the Judge was wrong to conclude that the vessel was a CTL, and, in particular, to hold that (a) costs incurred prior to the date of the NOA and (b) SCOPIC costs could be counted as “costs of repairs” for the purpose of the CTL calculation.

First ground

Section 62(3) of the MIA provides: “Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry.”.

In the 2016 trial the Judge considered that Owners had not received reliable information as to the loss prior to tendering their NOA. Therefore, Owners had taken no more than a reasonable time. 

While it considered that, in abstract, five months is a long time, the Court unanimously took the view that the Judge at first instance was entitled to conclude that there had never been enough reliable information that the vessel was a CTL and that this remained the position when the NOA was given. There had been a wide range of repair estimates and Owners and Insurers had both prepared materially conflicting, but equally credible, repair specifications.

Notably, the Court observed that the question of how to interpret “reasonable” in the phrase “reasonable diligence” is one of fact, as stated in section 88 of the MIA. The Court accepted that this was a case in which knowledge of the extent of damage, the scope of repair and the cost of repair were essential in order to have reliable information of the loss.

As to whether Owners had exceeded the reasonable time allowed to “make inquiry”, again, the Court noted this to be a question of fact and found that Owners had reasonably attempted to resolve the contradictions posed by the Insurers’ approach, which was to continually challenge the figures that would support a CTL.

Second ground

Pursuant to section 60(2)(ii) of the MIA, in the case of damage to a ship, “there is CTL 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”.

Section 60 further provides that, “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…

The Court conceded that the explicit reference to future salvage operations and future general average contributions is problematic, however it advised that section 60(2)(ii) should not be taken to mean that past expenses necessarily incurred to repair the vessel should be treated differently. The Court concluded that costs incurred prior to the date of the NOA could be taken into account for the purpose of a calculation towards a CTL. In so doing, the Court overruled two previous decisions relied upon by the Insurers, in Hall v Hayman (1912) Comm Cas 81 and The Medina Princess [1965] 1 Lloyd’s Rep 361, both of which the Court considered to have only “slight” authoritative weight.

Insurers also argued that the Judge at first instance was wrong to hold that the SCOPIC costs could be ranked towards the CTL calculation, because (1) they were not properly a cost of repair and/or (2) Insurers could not be held liable for such costs due to the terms of paragraph 15 of the SCOPIC clause barring their recovery under the vessel’s H&M policy. The Court’s rejection of these arguments was twofold: firstly, the SCOPIC costs were an indivisible element of the salvage remuneration that owners had to pay to recover their vessel, and as such part of the cost of repair; secondly, because the claim was for the total loss of the vessel and not for an indemnity relating to SCOPIC remuneration.

Comment

By affirming the Commercial Court’s 2016 judgment, the Court of Appeal’s decision could be seen as particularly penalising on hull insurers in light of section 62(3) of the MIA. Effectively, despite the onus of reasonableness this provision places on the insured to elect whether to abandon the property insured, the insurer’s conduct could lead to a wider interpretation of the rule. However, the Court here was careful to emphasise section88 of the MIA, as to say that the findings in one case may not be extrapolated to cases with a materially different set of facts. The decision, nonetheless, brings clarity to the interpretation of section 63(3) and carries great interest for future CTL cases where the timing of the NOA is under dispute.

The Court’s finding that SCOPIC remuneration, ultimately covered by P&I Clubs, could count as a cost of repair towards the CTL calculation would seem more controversial. Given its potential implications to the hull insurance market, it may well become the subject of a future appeal.

  

Article by Francisco Carvalho
Syndicate Executive, Americas Syndicate
Francisco.Carvalho@simsl.com