Is there a “legal black hole” in some joint insurance cases?

Sammy Smallbone, Claims Executive and lawyer at marine insurer Skuld, has noted that it is neither controversial nor new to say that co-assureds under a joint insurance policy cannot claim against each other in respect of a co-insured loss. “It is taken to be an implied term and the possibility of financial claims between co-assureds is irrelevant: the insurer will pay”, Smallbone writes in a legal update on the Skuld website.

However, Smallbone notes the implications of the recent UK Supreme Court ruling on the Ocean Victory, where there was a guilty third party and the insurer wanted to pursue a subrogated claim to recover its financial outlay.

In the Ocean Victory case the charterer had made insurance premium payments on behalf of themselves and the owner and the demise charterparty provided for them to be co-assureds.

A lower court held the charterer liable for ordering the vessel to an unsafe port and said the insurer could pursue a subrogated claim against the sub-charterer. On appeal the decision was overturned, with the Court of Appeal holding that the port was safe and that the insurance provisions in the demise charterparty contained a ‘complete code’ for “an insurance funded result in the event of loss or damage to the vessel by marine risks”.

In this case it was the loss of the vessel as a result of bad weather in port.

The case went to the UK Supreme Court, where five law lords unanimously agreed with the Court of Appeal and found that the port was safe. The charterer was therefore not liable to the owner and there was no recourse claim for the insurer to pursue in any event.

However, on the second question of whether the hull and machinery insurer of the co-assured could bring a subrogated claim against the sub-charterer, the law lords’ decision was split three-to-two.

Lord Sumption in his minority judgment asked if the effect of the joint insurance was that:

(a) the charterer’s liability to pay damages to the owner was excluded, or

(b) the payment made by the insurer made good the owner’s loss and thereby satisfied charterers’ liability.

Smallbone noted that Lord Sumption’s question was important because, if liability was excluded (as in point (a)), then no recourse claim would follow, but if the payment ‘made good’ the loss (as in point (b)), then the insurers could pursue a recourse claim. Lord Sumption felt the liability was made good, Lord Clarke agreed, but the other three law lords held that the liability was excluded and so no recourse claim could be pursued.

Smallbone questions whether this implies “a legal black hole”.

Much has been written about the effect of this judgment.

The decision came down to contractual construction. Smallbone said that However, while it was important to remember that the comments of the law lords in this Supreme Court judgment were obiter (they did not form the reason behind the final judgment), Smallbone said that in principle this left a legal black hole where the wrong doer was in principle able to avoid liability. “and there are still arguments available to insurers which may allow pursuit of a subrogated claim”.

The first argument could concern the charterer’s status as a bailee of the vessel, holding possessory title and their right to pursue a sub-charterer in tort, although such a claim would require the proof of negligence on the part of a sub-charterer.

The second argument could concern the principle of transferred loss, where a the insurer, the contracting party, might recover damages from the sub-charterer (a third party))where the consequence of the sub-charterers actions would foreseeably cause loss to insurers, but where insurers did not have a direct right of action against sub-charterers.

Smallbone noted that BIMCO, in BARECON 2017, had published a clause which it was hoped would address this ‘legal black hole’.

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