Particular average Flashcards
Measure of indemnity
MIA 69
The measure of indemnity for a partial loss caused by a peril insured against will be:
1) The reasonable cost of repairs, less any customary deductions, not exceeding the sum insured in respect to one casualty.
2) where part repairs are done and the measure of indemnity shall be the reasonable cost of such repairs, plus the reasonable depreciation arising from the unrepaired damaged (at the end of the policy), not exceeding the reasonable cost of repairing the whole damage.
Quite often the case when the insured value is higher than the sound- started repairs and realised its not worth it – therefore they will claim for the work done and then the depreciation in sound value at the end of the policy.
3) where the ship is left unrepaired, and is not sold in her damaged state, the measure of indemnity shall be the reasonable depreciation arising from such damage, not exceeding the reasonable cost of repairs as calculated in 69 (1)
Concept of the reasonable cost of repairs - The Medina Princess
What does repairs include? The Medina Princess – ‘what would have to be expended to put the ship right?”
- Crew wages during repairs not allowed as part of the cost of repairs
- Surveyors’ fees, provided they are reasonable, may be included in the cost of repairs
- Does not include the expenses incurred in discharging cargo
- Reasonable cost of repairs does include the damage to machinery, drydocking charges, cost of tow to repair port where necessary repairs can be carried out
- Cost of temporary repairs allowed when necessary to remove vessel to port where repairs can be carried out
- During the risk, the measure of indemnity is computed at the termination of the risk:
When the ship has not been repaired, and has not been sold in her damaged state during the risk… [Emphasis added.] The ship may be repaired at any time after the casualty and during the risk. If she is then wholly repaired, sub-s (1) operates. If she is then partly repaired, sub-s (2) operates. But if ‘during the risk’, which I construe as meaning ‘during the period between the casualty and the expiry of the policy whether by effluxion of time or otherwise’ she is neither repaired nor sold, then sub-s (3) comes into operation. Until the moment when the risk expires, the ship might be repaired, or indeed might be sold. The section is silent as to the position if the ship is sold unrepaired, and I need not trouble with that contingency. But, it is only when the risk is ended that it can be predicted for certain that neither repair nor sale will take place during the risk. That, in my judgment, is the moment at which sub-s (3) operates and requires that the measure of indemnity shall be ascertained and quantified.
In principle, what is reasonable as between the parties
Concept of the reasonable cost of repairs - Field v Burr
Any enhancement in the cost of repair in order to suit the commercial interest of the ship-owner should be excluded from the reasonable cost of repair. (apart from overtime for liner vessels, air freighting spare parts, things which are reasonable etc)
Concept of the reasonable cost of repairs - The DC Merwestone
Whether it was reasonable to replace the vessel’s main engine with a new engine, or whether only the cost of replacement with a reconditioned engine should be allowed in particular average. Popplewell J held that the cost of installing a new engine was reasonable, in the light of uncontradicted expert evidence that the owners would have incurred significant extra operating cost and encountered practical difficulties had they opted to install a reconditioned engine. It would not have been possible to retain the vessel’s UMS Notation, enabling her to continue to trade with a periodically unmanned engine room, with a reconditioned engine installed. Installing a new engine enabled the vessel to trade in the same way and with the same manning as before the casualty. Those factors which weighed with their expert and with the average adjusters had not been in the assured’s mind when making the decision to install the new engine, but that was irrelevant: “whether the cost of repairs is reasonable is an objective test and the cost of an objectively reasonable repair is recoverable whatever the motive of the assured in taking that course”.
Reasonable cost of repairs is stated in MIA s69(1) to (3):
Partial loss of ship.
Where a ship is damaged, but is not totally lost, the measure of indemnity, subject to any express provision in the policy, is as follows:—
(1)Where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty:
(2)Where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs, computed as above, and also to be indemnified for the reasonable depreciation, if any, arising from the unrepaired damage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed as above:
(3)Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage, computed as above.
RCOR - Cost of repairing in the test for CTL in s60(2):
Constructive total loss defined.
(1)Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
(2)In particular, there is a constructive total loss—
(i)Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered; or
(ii)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.
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; or
(iii)In the case of damage to goods, where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival.
Case law justification for common allowances - The Renos
A vessel insured under ITCH 1/10/83 caught fire and sustained substantial damage. Owners obtained quotations for the cost of repairs, which suggested that the vessel could be a constructive total loss. Other estimates and quotations were obtained in the following months, which were inconclusive, owing to considerable discrepancies, some suggesting that the vessel was a CTL and others that she was not. 6 months after the casualty, the owners served a notice of abandonment to the underwriters.
The insurers acknowledged liability for a partial loss but not for CTL. The High Court held that 6 months were a sufficient period of time for the owners to make inquiries in terms of s. 62(3) of the Marine Insurance Act 1906, and that the word “future” in s. 60(2)(ii) means future to the casualty i.e. including cost of recovery incurred before the service of the NOA. The Supreme Court upheld the decision of the High Court and also decided that expenditure incurred in the nature of SCOPIC is not to be taken into account when assessing whether a vessel is a CTL or not.
Case law justification for common allowances - “Brillante Virtuoso”, The [2015]
This case concerned what was ultimately found (in a judgment given in 2019) to be an attempt to defraud the vessel’s war risk insurers of US$ 77 MM. However, before the question of liability under the policies was tried, the preliminary issues which had arisen regarding the quantum of the loss were placed before the High Court. In addition to disputing the existence of a CTL, Underwriters contended that there should be no liability for standby tugs from the point the vessel was redelivered under LOF (7 October 2011) on the basis that the original peril had ceased to operate (piracy, vandalism, malicious mischief etc.). However, in the 2015 judgment the court held that the vessel was a CTL and
(i) that the original peril continued to operate after redelivery by the salvors,
(ii) that such ongoing expenses as the standby tugs were incurred for the benefit of assured and underwriters; therefore sue and labour expense should be recoverable until proceedings were commenced on 8 February 2012 (date when claim form issued) but not until the vessel was ultimately delivered to scrap purchasers on 15 March 2012.
Case law justification for common allowances - Vancouver (1886)
Following a voyage from Hong Kong to San Francisco the vessel was found to have a foul bottom. This was affecting the vessel’s speed so it was necessary for her to be dry docked to enable cleaning, scraping and painting before she put to sea again. Whilst in dry dock it was discovered that the stern post was fractured due to a peril of the seas, so therefore damage repairs were recoverable from hull insurers. If owner’s works had been carried out separately, it would have taken 3 days, whilst the particular average repairs would have required 8 days. The work was carried out simultaneously and completed within the 8 days. The House of Lords affirmed the earlier decision in the Court of Appeal that as the simultaneous works had saved time in the dry docking; the costs should be apportioned equally for those 3 days saved.
The owners claimed on their policy of insurance for the whole of the cost for dry-docking, or a proportion of the cost. As the policy was warranted ‘free from average under 3%’, the inclusion of the dry-dock charges was vital to the claim. The House of Lords, affirming the decision of the Court of Appeal, decided that the dry-dock charges should be apportioned between the routine maintenance carried out by the owners and the repair costs for which the insurers were liable. The additional cost of the apportioned dry-docking charges then ensured that the underwriters were liable for a particular average loss, as the total amount of repair costs then amounted to more than 3% of the insured value.
Case law justification for common allowances - - Ruabon Steamship Co Ltd v London Assurance (1900) – Drydock
The “Ruabon” [1897] The vessel entered dry dock at Cardiff in January 1896 for repairs in consequence of having run aground. Her next scheduled maintenance and classification survey was due in November 1896. The owners therefore took the opportunity to advance the date of the survey and carry it out concurrently with the grounding repairs. The owners claimed all dry-docking costs on their policies of insurance, which the insurers objected to, contending that the repairs ought to be equally divided. The Commercial Court and Court of Appeal followed the decision of the Vancouver case that the costs should be apportioned. However, the House of Lords ruled that the whole of the drydocking expenses should be paid by the underwriters.
This decision was incorporated by the AAA and is now ROP D5: 1 -
That, in practice, where repairs, for the cost of which underwriters are liable are necessarily effected in dry dock as an immediate consequence of the casualty, or the vessel is taken out of service especially to effect such repairs in drydock, the cost of entering and leaving the drydock, in addition to so much of the dock dues as is necessary for the repair of the damage, shall be chargeable in full to the underwriters, notwithstanding that the shipowners might have taken advantage of the vessel being in drydock to carry out survey for classification purposes or to effect repairs on his account which are not immediately necessary to make the vessel seaworthy.
Temporary repairs in particular average
- In general not allowable in particular average without considering first whether the effecting of the repairs has resulted in a saving to underwriters may be a saving in drydock dues and other expenses if the repairs are postponed until routine drydocking and repair period / they enable permanent repairs to be effected at a cheaper repair port
- Impossibility: if there is no facility to effect full permanent repairs at a port the cost of temporary repairs effected there is allowable in particular average.
- Unreasonable delay: if the full permanent repairs cannot be effected because a certain part necessary for the permanent repairs is not available for an unreasonable period, the cost of temporary repairs may be allowable as particular average. The reason is that a vessel is a valuable freight-earning instrument and it would be unreasonable to keep a vessel out of service for a long period when relatively minor temporary repairs would enable her to continue trading.
Temporary repairs - D10 Liner Vessels
Where a vessel is operating to a fixed and advertised schedule, the cost of temporary repairs and overtime that are reasonably incurred to maintain that schedule may be allowed to particular average without regard to savings to hull underwriters
Temporary repairs - general average
- For the common safety
- For the safe prosecution of the voyage
- For GA sacrifice
Rule XIV - Temporary Repairs
Where temporary repairs are effected to a ship at a port of loading, call or refuge, for the common safety, or of damage caused by general average sacrifice, the cost of such repairs shall be admitted as general average.
Where temporary repairs of accidental damage are effected in order to enable the adventure to be completed, the cost of such repairs shall be admitted as general average without regard to the saving, if any, to other interests, but only up to the saving in expense which would have been incurred and allowed in general average if such repairs had not been effected there.
No deductions “new for old” shall be made from the cost of temporary repairs allowable as general average.
Or substituted expense in Rule F
Overtime in particular average
- In general not allowable in particular average, unless it can be demonstrated that there was a saving, then the excess cost of overtime will be allowed up to the saving in total number of days required on repairs and therefore in other expenses such as port charges, general services (save on drydock dues etc)
- If the overtime is unavoidable. A particular repair may have to be carried out continuously for technical reasons. In such cases the excess cost of overtime is allowed as part of the reasonable cost of repairs without reference to savings.
- Riding repair teams
- D10 Liner vessels:
Where a vessel is operating to a fixed and advertised schedule, the cost of temporary repairs and overtime that are reasonably incurred to maintain that schedule may be allowed to particular average without regard to savings to hull underwriters
Overtime in general average
For the common safety, GA sacrifice. And temp repairs of PA damage necessary for the safe prosecution of the voyage – up to the savings made in ga if they did permanent repairs
Air freight
The treatment of air freight charges incurred in connection with the transportation of spare parts required for repairs, provides an example of the way in which the question of what constitutes the reasonable cost of repairs may change with the passage of time. Some years ago sea freight was considered to be the normal method of transportation for the majority of spare parts. If the owner elected to transport the spares by air freight he would often have found the increased costs thereby incurred subject to disallowance. In the modern era, however, air freight has become the recognised form of transportation of spare parts required for repairs in all but exceptional cases. Such costs are now allowable in full without reference to whether the total claim on underwriters could have been any less if sea freight had been adopted as the method of transportation. Since in most cases air freight as a method of transport is deemed to be reasonable (and is the method likely to be adopted by the prudent uninsured owner), so the costs incurred are now deemed to form part of the reasonable cost of repairs.
Consideration must nevertheless always be given to whether transporting spare parts by air freight is a reasonable course of action. In the event of a heavy item of machinery being required for repairs scheduled to take place in several months time at a specific port, it would obviously be unreasonable for the insured owner (and not prudent for the uninsured owner) to incur the costs of air freight when he could get
Increased cost of repairs by reason of deferral (ROP A4)
Deferment of repairs may result in an increase in the cost of repairs due to inflation. However, if repairs are deferred to a scheduled overhaul, the dock dues are divided and even if the repair cost increases, the overall cost may not increase, therefore it would be allowable.
If repairs are deferred when they could have feasibly been affected earlier and so results in an increased cost of repairs- such increase cannot generally be allowed in the claim.
(it is common for non-urgent repairs to be deferred to next routine DD)
Defer with class approval to scheduled DD – usually will make savings, and commercial situation you need to consider. If they differ it to scheduled docking – no real issues, but if they defer again, you need to take an extra look and see why and look at the costs.
4 DUTY OF ADJUSTERS IN RESPECT OF COST OF REPAIRS
1) That in adjusting particular average on ship or general average which includes repairs, it is the duty of Adjusters to satisfy themselves that such reasonable and usual precautions have been taken to keep down the cost of repairs as a prudent Shipowner would have taken if uninsured.
2) Where a claim for particular average arises and the Assured has elected to repair the vessel, the Assured is entitled to:
(a) recover the reasonable cost of repairs in terms of section 69(1) of the Marine Insurance Act 1906, irrespective of whether repairs are carried out before or after the expiry of the policy.
(b) defer repairs, subject to Class approval, to the first reasonable opportunity which is likely to be the next routine overhaul or dry-docking period. Any increase in the overall cost of repairs arising from deferment beyond the first reasonable opportunity will be for the account of the Assured.
Generator hire - ROP D9 & Nordic Approach
- To effect/ undertake damage repairs, e.g the vessel’s generator have been disabled and a hired generator may be required to power tools needed for repairs/ provide lighting
- Where vessel is at a port where repairs cannot be effected and a generator is hired to remove the vessel to another port to effect damage repairs
- Where it results in a saving (defer repairs to a cheaper port etc)
- If delay for generator parts is unreasonable (lead time for a new generator)
- Sometimes there is an option to buy and resell a temporary generator – will be allowed if cheaper than hiring (must compare)
- Installation and removal – ALLOWED
- Hire – ALLOWED
- Additional cost of operating the generator – DISALLOWED (enhanced ordinary voyage expense)
D9 TEMPORARY GENERATOR HIRE
That in practice the hire of a temporary generator will be deemed to be analogous to a physical temporary repair and allowed in accordance with the same criteria. Any allowances are limited to the cost of installation and removal of the generator and hire charges and will not include any additional costs relating to consumption of fuel.
The method shown above reflects the “actual use” approach that was used for many years. For reasons discussed more fully in exchanges that concluded with RRC’s email of 21/11/19 it has been decided to move closer to the Nordic approach, which has been followed by some English adjusters for many years.
The Nordic Plan commentary states as follows –
* Supply of electricity to a ship during repairs is usually made for several purposes. Firstly, the electric power that would have been consumed in running the ship regardless of the repairs is disallowed pursuant to Cl. 12-5 (a). However, any extra electric power consumed due to repair work being effected is allowed as a common repair expense as per Cl. 12-1. It is the assured who has the burden of proving the extent of loss, cf. Cl. 2-12, sub-clause 1.
The assessment must be based on the particular circumstances in each case. In practice, it is difficult to identify exactly how much of the consumption is related directly to the repairs. Due to this fact, the common practice, though not legally binding, is to allow a proportion of 50% of the total electricity consumption as a common repair expense. If obviously unreasonable, ref. the judgment of Gulating Court of Appeal of 17 October 2014, electric consumption may be apportioned differently. Electric consumption in a time period during which no repairs are effected (e.g. waiting time or the like), is not allowed as a common repair expense. It makes no difference whether electricity is purchased from a yard or if the vessel’s own auxiliary engines are run in order to produce the electric power.
It should also be noted that the English law concept of taking incidental advantage to do owner’s work at a special dry-docking or repair period is not applicable – 50% of shore power or generator fuel consumed will always go to Remainder.
Division of drydock dues (ROP D5)
- That, in practice, where repairs, for the cost of which Underwriters are liable, are necessarily effected in dry dock as an immediate consequence of the casualty, or the vessel is taken out of service especially to effect such repairs in dry dock, the cost of entering and leaving the dry dock, in addition to so much of the dock dues as is necessary for the repair of the damage, shall be chargeable in full to the Underwriters, notwithstanding that the Shipowners may have taken advantage of the vessel being in dry dock to carry out survey for classification purposes or to effect repairs on their account which are not immediately necessary to make the vessel seaworthy.
- (a) Where repairs on Owners’ account which are immediately necessary to make the vessel seaworthy and which can only be effected in dry dock are executed concurrently with other repairs, for the cost of which Underwriters are liable, and which also can only be effected in dry dock, or
(b) Where the repairs, for the cost of which Underwriters are liable, are deferred until a routine dry-docking and are then executed concurrently with repairs on Owners’ account which require the use of the dry dock, whether or not such Owners’ repairs affect the seaworthiness of the vessel,
the cost of entering and leaving the dry dock, in addition to so much of the dock dues as is common to both repairs, shall be divided equally between the Shipowners and the Underwriters, irrespective of the fact that the repairs for which Underwriters are liable may relate to more than one accident or may be payable by more than one set of Underwriters. - Where necessary the sub-division between Underwriters of the proportion of dry-docking expenses chargeable to them shall be made on the basis of accidents.
Tank cleaning (ROP D6)
- That, in practice, where repairs, for the cost of which Underwriters are liable, require the tanks to be rough cleaned and/or gas-freed as an immediate consequence of the casualty, or the vessel is taken out of service especially to effect such repairs, the cost of such rough cleaning and/or gas-freeing shall be chargeable in full to the Underwriters, notwithstanding that the Shipowners may have taken advantage of the vessel being rough cleaned and/or gas-freed to carry out survey for classification purposes or to effect repairs on their account which are not immediately necessary to make the vessel seaworthy.
- (a) Where repairs on Owners’ account which are immediately necessary to make the vessel seaworthy and which require the tanks being rough cleaned and/or gas-freed are executed concurrently with other repairs, for the cost of which Underwriters are liable, and which also require the tanks being rough cleaned and/or gas-freed, or
(b) Where the repairs, for the cost of which Underwriters are liable, are deferred until a routine dry-docking or repair period, at which time repairs on Owners’ account which also require the tanks being rough cleaned and/or gas-freed are effected, whether or not such Owners’ repairs affect the seaworthiness of the vessel,
the cost of such rough cleaning and/or gas-freeing as is common to both repairs shall be divided equally between the Shipowners and the Underwriters, irrespective of the fact that the repairs for which Underwriters are liable may relate to more than one accident or may be payable by more than one set of Underwriters. - The cost of fine cleaning specifically for a particular repair or particular repairs shall be divided in accordance with the principles set forth above.
- Where necessary the sub-division between Underwriters of the proportion of rough tank cleaning and/or gas-freeing and/or fine cleaning chargeable to them shall be made on the basis of accidents.
Removal costs (ROP D1)
- For the purpose of ascertaining the reasonable cost of repairs, and subject to any express provisions in the policy, where a vessel is at any port place or location (hereinafter referred to as ‘port’) and is necessarily or reasonably removed to some other port for the purpose of repairs, either because the repairs cannot be effected at the first port, or cannot be effected prudently, the additional expenses reasonably incurred by the Shipowners in removing the vessel (other than any expenses allowable in general average) shall be treated as part of the reasonable cost of repairs.
- (a) Where the vessel after repairing forthwith returns to the port from which she was removed, the expenses incurred both in removing the vessel to the port of repair and in returning shall be treated as part of the expenses of removal.
(b) Where the vessel loads a new cargo at the port of repair or proceeds thence to some other port for the same purpose, the expenses shall be calculated as though, but for the repairs, the vessel had previously been engaged to proceed direct from the port from which she was removed to the loading port.
(c) Where, immediately following a casualty, or upon completion of the voyage on which the casualty occurred, the vessel is removed solely to enable repairs to be effected which are essential for continued trading, the expenses may, at the Owners’ option, be calculated only for the single passage to the repair port. - (a) The expenses of removal shall include, inter alia, the cost of any necessary temporary repairs, wages and provisions of crew and/or runners, pilotage, towage, extra marine insurance, port charges, bunkers and stores.
(b) Where by moving the vessel to or from the port of repair any new freight or hire is earned, such net earnings shall be deducted from the expenses of removal. - The expenses of removing the vessel for repair shall be charged as follows:
(a) Where the vessel is removed to the port of repair as an immediate consequence of damage for the repair of which Underwriters are liable, or the vessel is necessarily taken out of service especially to effect repairs arising from that damage, the whole cost of removal shall be treated as part of the cost of repairing that damage, notwithstanding that the Shipowners may have taken advantage of the removal to carry out survey for classification purposes or to effect other average repairs or repairs on their own account.
However, where the vessel is removed for Owners’ purposes, other than a routine overhaul as in 4(b) below, or as an immediate consequence of damage for which Underwriters are not liable, no part of the cost of removal shall be charged to
Underwriters, notwithstanding that repairs for which they are liable may be carried out at the port of repair.
(b) Where the vessel is removed to the port of repair for routine overhaul at which repairs on both Owners’ and Underwriters’ accounts are effected, the expenses of removal shall be apportioned pro rata to the cost (including drydock dues and general services) of all work effected at the port, other than to any damage sustained after the commencement of the removal passage and the cost of any major parts shipped to the repair port from elsewhere.
Pollution in drydock - Advisory Committee Opinion P.8 and other sources.
Normal cost of drydock cleaning is considered part of the reasonable costs of repairs under hull policies.
Questions arise about whether extraordinary costs incurred to mitigate liability or manage pollution are also recoverable under hull policies.
Inclusion of Pollution-Related Costs:
Anticipated Pollution: Costs incurred to prevent pollution, where it is known beforehand that vessel damage poses a pollution risk, are included as reasonable costs of repairs.
Actual Pollution: Cleaning costs for pollution that occurs, even if anticipated, are generally included unless due to a novus actus interveniens (e.g., negligence).
Unexpected Pollution: Cleaning costs from unforeseen pollution caused directly by the vessel’s damage are recoverable under reasonable repair costs.
Rationale for Inclusion:
Ancillary to Repairs: Costs for mitigating pollution are considered incidental to labor and equipment necessary for repairs.
Examples of Similar Costs:
Drydocking costs for underwater repairs.
Tank cleaning and gas freeing.
Discharging damaged cargo to facilitate repairs, as allowed in certain cases (e.g., The Alchemist, Medina Princess).
Judicial Guidance:
In The Alchemist, costs of removing residual cargo adhering to tank walls were deemed part of reasonable repair costs when damage caused the residue.
Similarly, costs for pollution containment and cleanup during repairs should be allowable if they are the most practical solution to mitigate risks and enable repairs.
Comparison with P&I:
Pollution-related liabilities may traditionally fall under P&I coverage.
However, when pollution containment and cleanup are necessary for the repair process itself, these costs align more closely with hull policy coverage.
Practical Considerations:
In cases involving oil or bunker tank damage, temporary repairs to prevent leaks or gas-free the tanks are recoverable.
Moving the vessel into drydock and taking anti-pollution measures may be the most efficient and reasonable approach, justifying their inclusion in repair costs.
Conclusion:
Pollution-related costs that are ancillary to the repair process—such as anti-pollution measures, cleanup during drydocking, and associated extraordinary costs—can be included under hull policies as reasonable repair costs. The inclusion hinges on whether the expenses are necessary to facilitate repairs and mitigate risks arising directly from the vessel’s damage, distinguishing them from liabilities covered by P&I policies. Judicial precedents, such as The Alchemist and Medina Princess, support this approach.
ITC Hulls 1.10.83 Clause 7– pollution hazard clause
“This insurance covers loss of or damage to the vessel caused by any governmental authority under the powers vested in it to prevent or mitigate a pollution hazard, or threat thereof, resulting directly from the damage to the vessel for which the underwriters are liable under this insurance, provided such act of governmental authority has not resulted from want of due diligence by the assured, the owners, or managers of the vessel or any of them to prevent or mitigate such hazard or threat. Master, officers, crew or pilots not to be considered owners within the meaning of this Clause 7 should they hold shares in the vessel.”
Costs of opening up where there is no damage discovered
Key Case: Lysaght v Coleman
Facts:
A cargo of galvanized sheet iron was insured during transit to Australia.
Damage occurred to part of the cargo during heavy weather. The assured landed all the cargo to assess the damage, claiming costs for examining both damaged and undamaged packages.
Court Ruling:
Insurers were liable only for depreciation and examination costs of damaged packages.
Costs for examining undamaged packages were disallowed.
Reasoning:
Insurers cover direct damage from sea perils, not costs associated with mitigating perceived risks.
Suspicion of damage without actual evidence does not justify recoverable costs.
Modern Practice: Precautionary Examination
Machinery Damage:
On modern vessels, the interconnected nature of machinery often necessitates examining components beyond those initially known to be damaged.
Example: If one engine unit is damaged, opening adjoining units for inspection is often allowed if deemed appropriate by a surveyor, even if no damage is found.
Precedents:
Medina Princess: Allowed inspection costs (e.g., calibration of furnaces) as part of determining the extent of necessary repairs, even without confirmed additional damage. These were categorized under “Reasonable Cost of Repairs” (RCOR) rather than Sue and Labour.
Propeller damage: Costs for precautionary examinations (e.g., suspecting unseen damage) are allowable if the inspection aligns with good repair practices and prevents further loss.
General Principles:
Sue and Labour Clause:
Covers reasonable expenses incurred to minimize loss or damage.
Does not cover ordinary operational costs or enhanced costs, such as earning freight.
Costs related to mitigating suspicion (without actual damage) are generally not recoverable unless explicitly allowed by the policy (e.g., sighting bottom costs after stranding).
RCOR Rationale:
Inspections necessary to identify the extent of repairable damage are recoverable as repair costs.
Encouraging modest precautionary costs benefits insurers by potentially preventing greater future expenditures.
Costs must be tied to a reasonable expectation of damage and not abused (e.g., no claim arises if no damage exists to justify the examination).
Field v Burr Principle:
Insurance covers damage to the ship or cargo, not losses to the shipowner (e.g., enhanced operating costs).
Conclusion:
Precautionary examination costs are recoverable under marine insurance policies when they are ancillary to identifying and repairing insured damage. The Lysaght v Coleman case limits recoverability to actual damage-related expenses, but subsequent practice recognizes that modest precautionary measures, aligned with reasonable expectations of damage, serve the interests of both insurers and assureds. Costs unrelated to actual damage or incurred for the shipowner’s benefit (e.g., enhanced costs) remain excluded.
Duty of the assured
Duty of the Assured (Clause 13.1)
The assured is obligated to take reasonable measures to avert or minimize losses covered under the insurance policy. This duty applies to both the assured and their agents.
Marine Insurance Act (MIA) 1906, Section 78(3)
Expenses to avert or reduce losses not covered by the policy are not recoverable under the Sue and Labour clause.
Key Features of Sue & Labour (S&L)
Expense by the Assured/Agents: Costs must be incurred by the assured or their agents.
Covered Loss: Actions must relate to an imminent loss covered by the policy.
Exclusions:
General Average cannot be recovered under Sue and Labour, as it involves multiple interests (e.g., ship and cargo), while Sue and Labour pertains solely to insured property.
Reasonableness: Expenses must be reasonable in the context of the threat.
Supplementary Clause: Sue and Labour expenses can be recovered in addition to a Total Loss claim.
Case Study: Integrated Container Service Incorporated v Oyama Shipping Co. Ltd.
Facts:
ICS leased containers to Oyama Shipping, who insured the containers under the lease.
After Oyama’s insolvency, their insurance lapsed, leaving ICS to recover 1,000 abandoned containers worth $2-3 million.
ICS spent $130,000 on recovery efforts and claimed the expense under their own insurance as Sue and Labour.
Insurers’ Argument:
Loss arose from the lawful sale of containers, not from insured perils.
Sue and Labour coverage did not apply.
Court’s Decision:
Lord Justice Eveleigh ruled the containers were at risk (e.g., theft, misuse, liens) and deemed the expenses reasonable.
It was not required to prove the loss was “very probable”; a reasonable assessment of the risk at the time was sufficient.
Principles Established
Reasonable Actions by Assured:
The duty under S.78 and the Sue and Labour clause imposes a standard of reasonableness. The assured must act as a prudent person would in preserving their property, even if the actual loss was not very probable.
Assessment of Expenses:
Recoverability depends on whether the assured reasonably believed their actions were necessary to prevent loss.
The clause entitles recovery of extraordinary, reasonable expenses incurred to minimize risk to insured property.
Reasonableness Over Hindsight:
The assured is judged on the situation as perceived at the time of action, not on hindsight analysis of the ultimate risk or outcome.
Imminent Loss:
There must be a reasonable perception of imminent loss to justify expenses under the Sue and Labour clause.
Conclusion
The Sue and Labour clause reinforces the assured’s duty to mitigate losses but allows recovery for extraordinary, reasonable expenses incurred in preventing covered losses. The ICS case highlights that insurers cannot demand proof of “very probable” loss to deny recovery, as long as the assured’s actions align with what a prudent person would reasonably undertake to protect insured property.
Removal of cargo for repair to ship (Rule X and Field SS v Burr)
Rule X
(b) (i) The cost of handling on board or discharging cargo, fuel or stores, whether at a port or place of loading, call or refuge, shall be allowed as general average when the handling or discharge was necessary for the common safety or to enable damage to the ship caused by sacrifice or accident to be repaired, if the repairs were necessary for the safe prosecution of the voyage, except in cases where the damage to the ship is discovered at a port or place of loading or call without any accident or other extraordinary circumstances connected with such damage having taken place during the voyage. (ii) The cost of handling on board or discharging cargo, fuel or stores shall not be allowable as general average when incurred solely for the purpose of re-stowage due to shifting during the voyage, unless such re-stowage is necessary for the common safety.
In the contrary:
Field SS v Burr (1899)
- Following a collision, cargo of cotton seed was so badly damaged that the cargo receivers refused to take delivery.
- Owners contended that it was necessary to remove cargo for repairs and therefore sought to claim the costs of discharging the damaged cargo from insurers.
- Rejected - vessel was at destination and held that discharging cargo was simply an incident of the contract of affreightment.
- But this view challenged in Medina Princess, suggests in some circumstances removal of cargo for repairs could form part of the reasonable cost of repairs.
Unrepaired damage
The assured can only claim for unrepaired damage at the time the insurance terminates, or when the ship is sold (which automatically terminates the contract under cl 4).
Why? – MIA77 successive losses, any unrepaired damaged followed by a TL is non recoverable.
Unrepaired damage - legal basis
rvine v Hine
Small boat valued at US$2,000 but insured for US$9,000 due to high demand during war. Vessel suffers damage and grounds in heavy weather whilst under tow. Owner claimed a CTL, but this claim failed.
Court had to decide the extent of liability for partial loss. Vessel sold in damaged state for £685 - agreed to be the damaged value. Estimated cost of repairs agreed at £4,620.
Question is, how to calculate the “reasonable depreciation” as in MIA 69?
Start with sound market value (£2,000) or insured value (£9,000)? (MIA 69 does not say)
Citing section 27 (value fixed by policy conclusive etc.), judge held that it must be the insured value.
Two methods put forward on this basis, but as both came out as higher than estimated cost of repairs, judge did not need to choose which method was preferable, as claim is limited to estimated cost of repairs under MIA 69.
So reasonable depreciation should be calculated by taking the insured value and subtracting the damaged value.
Methods as follows: see page 27 of A Guide to Marine Hull Insurance Claims.
1) Simply insured value less damaged value = depreciation.
2) (Sound value less damaged value) as a percentage of the insured value = depreciation.
- The Armar (US law)
Vessel grounded by held not a CTL, so had to decide the measure of indemnity as a partial loss – adopted the 2nd method from Irvine v Hine: (Sound value less damaged value) as a percentage of the insured value = depreciation vessel grounded by held not a CTL, so had to decide the measure of indemnity as a partial loss – adopted the 2nd method from Irvine v Hine: (Sound value less damaged value) as a percentage of the insured value = depreciation.
Unrepaired damage under Clause 18 ITC Hulls 1/10/83
The other two sub sections of section 69 of MIA 1906 deal with unrepaired damage.
The sub sections refer to “reasonable depreciation” but do not explain how such depreciation should be calculated. Various law cases did not clearly establish an agreed principle and such cases were therefore usually settled by negotiation. Therefore a new clause 18 was introduced when the ITC 1.10.83 were brought into effect. This states that the measure of indemnity is the reasonable depreciation in the market value at the time the insurance terminates but not exceeding the estimated cost of repairs. A comparison is made between sound and damaged values and the difference is the depreciation. However many claims are still settled by negotiation because of the differences of opinion there can be on ship valuations and on estimated repair costs.
18.1 The measure of indemnity In respect of claims for unrepaired damage shall be the
reasonable depreciation in the market value of the Vessel at the time this insurance terminates arising from such unrepaired damage, but not exceeding the reasonable cost of repairs.
18.2 In no case shall the Underwriters be liable for unrepaired damage In the event of a
subsequent total loss (whether or not covered under this insurance) sustained during the
period covered by this insurance or any extension thereof.
18.3 The Underwriters shall not be liable in respect of unrepaired damage for more than the insured value at the time this insurance terminates.
Unrepaired damage MIA69(3)
Where the ship is left unrepaired, and is not sold in her damaged state, the measure of indemnity shall be the reasonable depreciation arising from such damage, not exceeding the reasonable cost of repairs as calculated in 69 (1)
Bottom painting - ITC 83
15 BOTTOM TREATMENT
In no case shall a claim be allowed in respect of scraping gritblasting and/or other surface preparation or painting of the Vessel’s bottom except that
15.1 gritblasting and/or other surface preparation of new bottom plates ashore and supplying and applying any “shop” primer thereto,
15.2 gritblasting and/or other surface preparation of:
the butts or area of plating immediately adjacent to any renewed or refitted plating damaged during the course of welding and/or repairs, areas of plating damage during the course of fairing, either in place or ashore,
15.3 supplying and applying the first coat of primer/anti-corrosive to those particular areas mentioned in 15.1 and 15.2 above, shall be allowed as part of the reasonable cost of repairs in respect of bottom plating damaged by an insured peril.
Wages and maintenance - ITC 83 & 95
No claims shall be allowed, other than in general average, for wages and maintenance of the Master Officers and Crew, or any member thereof except when incurred solely for the necessary removal of the Vessel from one port to another for the repair of damage covered by the Underwriters, or for trial trips for such repairs, and then only for such wages and maintenance as are incurred whilst the Vessel is under way.
Wages and maintenance IHC 1/11/03
Other than in general average, the Underwriters shall not be liable for wages and maintenance of the Master, Officers and Crew or any member thereof, except when incurred solely for the necessary removal of the vessel from one port to another for the repair of damage covered by the Underwriters, or for trial trips for such repairs, and then only for such wages and maintenance as are incurred whilst the vessel is under way.
Agency commission - ITC 83
17 AGENCY COMMISSION
In no case shall any sum be allowed under this insurance either by way of remuneration of the Assured for time and trouble taken to obtain and supply information or documents or in respect of the commission or charges of any manager, agent. managing or agency company or the like, appointed by or on behalf of the Assured to perform such services.
Notice of claim and tenders, and application of the clause
- NOTICE OF CLAIMS AND TENDERS
10.1 In the event of accident whereby loss or damage may result in a claim under this insurance, notice shall be given to the Underwriters prior to survey and also, if the Vessel is abroad, to the nearest Lloyd’s Agent so that a surveyor may be appointed to represent the Underwriters should they so desire.
10.2 The Underwriters shall be entitled to decide the port to which the Vessel shall proceed for docking or repair (the actual additional expense of the voyage arising from compliance with the Underwriters. requirements being refunded to the Assured) and shall have a right of veto concerning a place of repair or a repairing firm.
10.3 The Underwriters may also take tenders or may require further tenders to be taken for the repair of the Vessel.
Where such a tender has been taken and a tender is accepted with the approval of the Underwriters, an allowance shall be made at the rate of 30% per annum on the insured value for time lost between the despatch of the invitations to tender required by Underwriters and the acceptance of a tender to the extent that such time is lost solely as the result of tenders having been taken and provided that the tender is accepted without delay after receipt of the Underwriters’ approval. Due credit shall be given against the allowance as above for any amounts recovered in respect of fuel and stores and wages and maintenance of the Master Officers and Crew or any member thereof, including amounts allowed in general average, and for any amounts recovered from third parties in respect of damages for detention and/or loss of profit and/or running expenses, for the period covered by the tender allowance or any part hereof, Where a part of the cost of the repair of damage other than a fixed deductible is not recoverable from the Underwriters, the allowance shall be reduced by a similar proportion.
10.4 In the event of failure to comply with the conditions of this Clause 10 a deduction of 15% shall be made from the amount of the ascertained claim.
Purpose of clause is to ensure that, as far as possible, the cost of repairs shall be reasonable and underwriters shall have some say in decision as to the port, repairers etc.
