Insurers probably see allowable expenses ruling in Renos case a net win

Although the ultimate ruling in the case of MV Renos was that expenses occurred prior to a Notice of Abandonment (NOA) and a Constructive Total Loss (CTL) could be included in assessing the value of the loss, the ruling that expenses for salvage services provided in the Special Compensation, Protection and Indemnity Clause (SCOPIC) could not be applied, probably meant that the insurers were on the whole happier with the June 2019 ruling from the Supreme Court than were the owners, according to Chirag Karia QC, who was speaking at Quadrant Chambers Marine Insurance Legal breakfast Forum yesterday, September 9th, hosted by Kennedys Law.

The Hull & Machinery (H&M) cover on the Renos was for $12m, incorporating Institute Time Clauses Hulls (1/10/83). The vessel was seriously damaged by an engine room fire. A Supreme Court decision was handed down in June this year.

Salvage services were provided under Lloyd’s Open Form (LOF) 2011, incorporating the SCOPIC clause. The vessel was salved at which point the Owners served a notice of abandonment, claiming constructive total loss.

Karia observed that, as if often the case, the insurers rejected the notice of abandonment and the dispute between the two parties was as to whether the Renos was a CTL.

Although there were various issues decided by Knowles J in the first instance, and the matter went to the Court of Appeal, but the concern here is the two issues considered by the Supreme Court.

The core question related to the construction of section 60(2)(ii) of the Marine Insurance Act:

  • “In the case of damage to a ship, 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”.

The key phrase was “the cost of repairing the damage, observed Karia. Two categories of expense were in dispute. The first was the expenses incurred by the assured prior to the service of the NOA. The second was whether expenses related to SCOPIC qualified as being part of “the cost of repairing the damage”.

In the first case, if those were not allowable in the CTL calculation, then the action would fail, because all of the salvage costs had been incurred prior to the NOA.

Because the LOF had a SCOPIC clause, and because almost 50% of the salvage costs were related to SCOPIC, the question was whether that part of the cost of the salvage was allowable.

As regard the first part, it is relevant to note that section 62 (1) requires the service of a notice of abandonment as a condition to the assured’s right to claim a CTL. “So essentially the whole question boiled down to at what point in time do you measure the cost of repairing the damage? The insurer said that it had to be at the time you serve the NOA, because it is at that time you have to decide whether or not you are going to carry out the repairs or whether you are going to abandon the vessel to the insurers and claim a CTL”, said Karia.

The owners on the other hand said that it was from the time of the casualty.

Lord Sumption in the Supreme Court issued the only reasoned judgement. He first looked at the Marine Insurance Act and found very little assistance in it. There were some arguments made in court about the meaning of the word “would” in section 62, but he found no help in the use of that word. He then looked at two post-MIA authorities, and in those cases what had happened was that pre-notice-expenses had been excluded from the calculation. In one case that had been based on a concession by the insured, while in the other case there appeared to have been no argument or reasoning from the Judge. So Lord Sumption concluded that these cases did not provide precedent, and he therefore approached it as a matter of principle.

He ruled that pre-notice-expenses were costs of repairing the damage, under the act, for three main reasons.

First, and to Karia the crucial reason, the loss occurs and the insurers are in breach from the moment of the casualty, the moment that some loss is suffered. That is regardless of whether or not the loss then increases further. It all relates back to that point in time.

The other point was that the measure of loss in the act is the depreciation, which is set to include the cost of repairs if they have been carried out. As a combination of those two the court decided that you need to look at the whole situation retrospectively from the time of the casualty and the cost of repairs or depreciation, add them all up, and then compare that with the remaining value of the vessel.

Ultimately, said Karia, there was a big practical reason: generally you will not know the extent of the damage, and certainly it would be very difficult to know whether or not the vessel is a CTL, until she has been salved, inspected, and what is wrong with the vessel has been established. If therefore you were to exclude pre-NOA expenses, in almost all cases, salvage cost would be excluded. But the law is clear that salvage costs do fall within the CTL calculation.

The insurers argued that this would then deprive the requirement to serve an NOA of its effect, to establish the crucial point in time. Lord Sumption rejected this argument. He pointed out that the Marine Insurance Act itself contains two exceptions – first where the insurer has waived the requirement for an NOA, and secondly when an NOA could be of no benefit whatsoever to the insurers.

Your ability to elect to treat a loss as a CTL is pre-supposing that there already is a CTL. The service of the notice cannot be the triggering event as there has to be a CTL in place before it can be served. Other older authorities were looked at, such as an adeeming loss, where, after the event, another event occurs to cancel the CTL – classically when a vessel was captured by the French, leading to an NOA, but then the vessel was recaptured by the British. The insured could not then continue to claim a CTL. The older authorities did not assist the insurers in the Renos case because the assured had already spent the expenses.

The second issue was that of SCOPIC remuneration.

SCOPIC are paid for and charged by salvors to minimize damage to the environment. The owners said that the charges had to be paid to salve the vessel, and the ship had to be salved in order for her to be repaired. Therefore, the owners said, those costs were logically part of the “cost of repairing the damage”.

The owners also pointed out, “quite correctly”, said Kaira, that a prudent uninsured owner would have incurred those costs. If he did not have any H&M insurers he would have incurred those SCOPIC costs because you would be stupid to risk the liability for environmental damage that might otherwise ensue.

The Supreme Court held that SCOPIC charges were not costs of repairing the damage – reversing the Court of Appeal on this point – with the key point in the SC judgement being that you could not draw an analogy between SCOPIC costs and other costs which have been recognized as being normal costs of repair. The fact that distinguishes the two of them is that the second category are all preliminary to repairs. You need to incur those costs in order to be able to repair the vessel. The purpose of SCOPIC charges however was not to enable the vessel to be repaired but was to avoid the shipowner’s liability for environmental damage. hence the SCOPIC charges were not part of the measure of the loss that the owner suffered.

As regards the prudent uninsured test, the SC said, yes, the prudent uninsured would have incurred these expenses, but that begs the question of whether or not those charges were incurred for the purpose of repairing the ship. They were not, said the court. They were incurred for the purpose of preventing liability for environmental damage.

“As we know, both of those aspects have different insurers. H&M insurers covers the cost of repair whereas the P&I Club covers the cost of environmental damage, and the court recognized that as well.”

In the result the case was remitted to the Commercial Court to calculate whether or not the allowable expenses exceeded the $12m value of the policy. “Although the owners won on the primary issue, one gets the feeling, although I have not done the sums, that they are probably going to lose at the end of the day because they are going to lose 50% of their salvors’ remuneration, concluded Karia, stating that “I suspect overall this has been a victory for the insurers”.