QCR Summer 2018: The Court of Appeal clarifies that SCOPIC expenditure can be included in ascertaining whether a casualty was a constructive total loss ("CTL")
Sveriges Angfartygs Assurans Forening (The Swedish Club) v. Connect Shipping Inc (MV Renos)  EWCA Civ 230
The MV RENOS was on a laden passage along the coast of Egypt when a fire broke out in her engine room on 23 August 2012. Owners appointed salvors on LOF terms and the salvors invoked SCOPIC. Surveyors were appointed by both Owners and their hull and machinery insurers ("the insurers") to assess the costs of repairs. A preliminary estimate provided to Owners by 3 September suggested that the vessel could be a CTL. Owners started drafting a detailed repair specification for obtaining quotations from shipyards and this was sent to the insurers. The insurers' surveyors then produced an estimate for the repairs which did not suggest that the vessel was a CTL. By the end of December a number of varying repair quotations had been received from shipyards, some suggesting the strong possibility that the vessel was a CTL, others suggesting the vessel was not a CTL. Unable to resolve matters, Owners served a notice of abandonment ("NOA") on the insurers on 1 February 2013. The insurers rejected the NOA for being given "far too late".
The main issues were:
- Whether Owners had lost the right to issue an NOA by 1 February 2013; and
- If the NOA was valid, could costs incurred prior to the date of the notice of abandonment (including salvage costs and SCOPIC remuneration payable to the salvor) be included for the purposes of the CTL calculation
The Judge at first instance decided the above issues in Owners' favour and the insurers appealed. The appeal was dismissed.
- On the first issue, the judge at first instance considered s.62(3) Marine Insurance Act 1906 which provided that a NOA "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". Insurers had argued that this required the owners to give notice of abandonment within a reasonable time after receipt of reliable information of the loss and a reasonable time for inquiry which Owners had failed to do.
The Judge decided that on the basis that this was a complex and difficult casualty with conflicting advice as to repair costs, the NOA had been given in time as per s.62(3) Marine Insurance Act 1906. Owners were entitled to a reasonable time to make enquiries.
The Court of Appeal upheld the judge's conclusion above, pointing out that "a striking feature of the insurers' case on reliable information is that it requires the owners to disregard or reject the Insurers' own expert assessment at the time as to the scope of repairs, an assessment that the Insurers insist was correct" and "insurers chose at the time to carry out their own detailed surveys so as to produce their own repair specification and quotations for repair costs, which they relied upon to demonstrate that the vessel was not a CTL. They shared that information with owners, insisted on its correctness, and can hardly complain if it's taken into account when considering whether there was reliable information of the loss."
- On the second issue, the insurers accepted that the cost of repair under section 60(2)(ii) includes the costs of recovering the vessel so that she may be repaired , such as the cost of salvage. However, the insurers contended that it is only post-NOA costs of recovery and repair which rank towards whether a vessel is a CTL. Section 60(2)(ii) of the Marine Insurance Act 1906 states that account is to be taken of any expense incurred in respect of future salvage operations and any future general average event.
Both the Court at first instance and the Court of Appeal rejected the insurers' argument. The Court of Appeal submitted that the assured should not be penalised for having incurred some expense before he gives notice to assist him in forming a judgement as to whether the facts justify abandonment. When he is deciding whether to abandon, he is entitled to have regard to the totality of the repairing cost, not merely to those costs what have yet to be incurred. The reference to "future" in s.60(2)(ii) was best explained by considering it as a word of inclusion rather than exclusion, making it clear that future costs should be taken into account alongside those already incurred.
In support of this conclusion, the Court of Appeal referred inter alia to commentary in Arnould, the position in the US, and to extra judicial comments provided by Lord Donaldson in an address he gave as Chairman of the Association of Average Adjusters in 1982.
The insurers also argued that SCOPIC liability is additional compensation payable by the P&I insurers to encourage salvors to minimise a casualty's environmental impact, thus benefiting the P&I insurers. It is not payable by the H&M insurers and the costs are not, properly understood, a "cost of repair". Furthermore, paragraph 15 of the SCOPIC clause precludes owners from making any claim (whether direct, indirect, by way of indemnity or recourse or otherwise) against hull and machinery insurers. The insurers claimed that it would be unjust to allow costs not indemnifiable under the H&M policy as part of the CTL calculation.
The judge at first instance did not agree with this line of argument and held that SCOPIC expenses paid to salvors can be counted towards the CTL clause, notwithstanding paragraph 15 of the SCOPIC clause. The Court of Appeal upheld the First Instance decision and agreed that SCOPIC remuneration was an indivisible part of an item that insurers accept as a cost of repair and were the reasonable legal costs of salvage arbitration.
The cost of the salvage operation was around US$1.2 million for the notional Article 13 salvage award and US$1.4 million in respect of SCOPIC paid over and above the Article 13 award. The insurers contended that the SCOPIC costs should not be costs within section 60(2)(ii) of the Marine Insurance Act 1906 or clauses 19.2 and 9.2 of the Institute Time clauses because the SCOPIC remuneration was conceptually different from the Article 13 award payable by the P&I Club. As SCOPIC was not payable under the hull and machinery (H&M) policy, they should not, it was argued, rank for the purposes of a CTL claim under the H&M policy as repair costs. The Court identified the difficulty with this construction in that, in order to recover the vessel (and put the owners in a position to repair or declare a CTL), Owners had to pay the entirety of the salvage remuneration. SCOPIC was an unavoidable part (or extension) of that salvage operation which led to the recovery of the vessel. The Court of Appeal concluded, therefore, that this must be an indivisible part of the cost of repair, confirming the first instance decision.
This decision has assisted in clarifying two points in relation to CTL claims;
- Salvage and GA costs incurred prior to the issuance of an NOA may be included in the calculation of a CTL, and
- SCOPIC expenses that are paid to salvors are necessary salvage operations that insurers accept as a cost of repair.
While this decision has cleared up the above areas of ambiguity, the case raises concerns for hull underwriters that the use of LOF with SCOPIC may have a greater potential of leading to CTL claims. It is not unforeseeable therefore that hull underwriters might lobby to amend the standard market wordings expressly to exclude from any CTL calculations costs incurred prior to NOA and SCOPIC expenses.
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