Bulletins

Marine Insurance Bulletin, March 2015

In this issue: The BRILLANTE VIRTUOSO: part one; Right for underwriters to invoke insurance terms and conditions; Liability limits to increase by 51%; The Nairobi International Convention; Conferences and events

The BRILLANTE VIRTUOSO: part one

The High Court has recently issued its judgment in a claim brought by the owner of the BRILLANTE VIRTUOSO (the vessel) against a number of London market insurers for an indemnity for the constructive total loss (CTL) of the vessel under a hull insurance policy (the Policy).

The judgment is not determinative of liability under the policy because the Court ordered a split trial on policy cover (where the defendant insurers are arguing a breach of a warranty relating to piracy) and quantum issues. It is the latter issues that are the subject of this judgment.

The Court was asked, amongst other things, to consider whether the vessel was a CTL and in doing so gave some useful guidance on how the quantum of such claims should be approached, which will be relevant in the context of inter-ship damages claims, as well as claims under hull insurance policies as was the case here.

The background to the claim

The vessel was hijacked by pirates on 5 July 2011 whilst at anchorage off Aden and proceeded to the coast of Somalia. Sometime after that the vessel’s main engine stopped and could not be restarted. The pirates detonated an explosive device causing a fire which engulfed the engine room and accommodation.

Upon the vessels release, quotations were obtained for repair of the vessel in Dubai and in China. The Court held that the costs of repair in Dubai were about US$64.4 million, and the equivalent figure in China was US$53 million, which was below the vessel’s insured value under the policy. Both quotations included a 10% contingency figure. The owners maintained that they were entitled to the more expensive cost of repair at Dubai when taking into account whether the vessel was a CTL.

Was the vessel a CTL?

Cost of repairs

The Court held that the prudent shipowner must not necessarily elect for the cheapest place of repair, and is entitled to take into account a number of factors including:

• The risk of the long towage of a dead ship, particularly of damage to the vessel, pollution, grounding or collisions with other vessels.
• The ability of the respective yards to carry out the repairs on time and on budget.
• The quality of workmanship of the respective yards.
• The financial consequences to the owners of the repair location on future earning potential.

The Court held on the facts that the owners were entitled to the more expensive costs of repairs at Dubai.

The 10% contingency

The Court held that in circumstances where a full determination of the extent of damage to machinery and equipment is not possible, a shipowner is entitled to a “large margin” to recognise that it was not possible to fully determine the extent of the damages and the fact that other items may have to be replaced.

Conclusion

The judgment of the Court is a useful addition to the English law precedents on quantum. Although in its judgment the Court indicated that it was likely that the parties would be able to resolve their differences once the parameters of the recoverable amount were know, the stage two trial will arguably be of even more interest to the marine insurance community if it results in judicial consideration of best management practices to deter piracy and, from a neutral perceptive, it is eagerly awaited.

For more information, please contact Matthew Wilmshurst, Associate, on +44 (0)20 7264 8115 or matthew.wilmshurst@hfw.com, or your usual contact at HFW.

Right for underwriters to invoke insurance terms and conditions

In a decision dated 13 May 2014, the French Supreme Court had the opportunity to re-state the principles applying to (1) the enforceability of insurance terms and conditions, and (2) “faute inexcusable” of an assured (“faute inexcusable” is the equivalent of the gross negligence of owners who acted recklessly and with the knowledge that a loss might occur).

Following the wreck of a trawler in 2013, hull underwriters declined cover, firstly because owners had not notified them of a mortgage on the vessel and, secondly, due to owners’ “faute inexcusable” and failure to act with “due diligence”.

The Court first stated that the contractual conditions of the policy could only be invoked against the assured if underwriters could prove that the former knew them and accepted them.

It was not enough that those terms and conditions were consistent with the standard or market hull policy for fishing vessels (in particular with their requirement that the assured disclose the mortgage on the vessel). Underwriters could not plead that the policy was null and void by reason of the assured’s failure to notify them of the mortgage unless it was proved that the conditions were accepted by owners/the assured.

The Court went on to analyse underwriters’ argument that owners committed “faute inexcusable” and failed to act with “due diligence” to protect the assured’s goods by deciding to sail with invalid navigation documents due to technical problems of the ship.

Pursuant to article L 172-13 of the Insurance Code, losses resulting (1) from the failure of an assured to act with due diligence in relation to the vessel or (2) from a “faute intentionnelle” (would be equivalent to wilful misconduct in the insurance field i.e. intentional damage caused by a deliberate act) or a “faute inexcusable” of the assured (the main difference between the two being the intention to cause the loss) are not covered. As a matter of fact “faute inexcusable” will also deprive shipowners of their right to limit their liability pursuant to LLMC.

In this case, the Court held that underwriters could not deny their cover under the all risks policy since they had failed to prove that the fault of the assured had actually caused the loss. Under the current law insurers do not need to prove the causal link between the loss and the fault of an assured if the insurance contract clearly stipulates an exclusion clause (Cass. 1ère civ. 7 April 1999). However in this case underwriters were not relying on any contractual exclusion clause but on article L 172-13 of the Insurance Code which allows insurers to refuse cover if it can be proved that “loss was caused by the lack of due diligence of the Insured”.

Finally the Court considered the possibility for underwriters to invoke the second limb of article L 172-13 of the Insurance Code enabling insurers to deny cover in case of “faute inexcusable”. It was held that in this instance the assured’s conduct did not amount to gross negligence since owners were not aware of the probability of the risk of the ship sinking due to sailing with invalid navigation documents.

For more information, please contact Pierre-Olivier Leblanc, Partner, on +33 1 44 94 40 50 or pierre-olivier.leblanc@hfw.com, or your usual contact at HFW.

Liability limits to increase by 51%

On 8 June 2015, the limits of an owners’ liability for a maritime incident under the Convention on Limitation of Liability for Maritime Claims (LLMC) 1976 will rise by 51%¹ under the “tacit acceptance” procedure pursuant to Articles 8.7 and 8.8 of the 1996 Protocol to the LLMC.

Member States voted to increase the limits at the 99th session of the IMO (16-20 April 2012), driven partly by the view that the existing limits are insufficient to cover likely claims, in particular the consequences of a bunker spill. The PACIFIC ADVENTURER spill in Queensland (2009) was specifically cited as justification, and the rise was deemed necessary to “keep pace with the real costs of compensating victims” and for “limits to be sufficient to meet demands”. Calls for a higher increase were rejected on the grounds any increase had to reasonable to ensure affordable insurance was available. Further the concept of limitation requires some claims to exceed limit to avoid the LLMC being rendered redundant.

No enabling domestic legislation is required to bring the Amended 1996 Protocol limits and for incidents after 8 June 2015, the higher limits shall automatically apply in any contracting State. The limits cannot, however, be reviewed again until 2020, meaning there should be no further increase until 2023.

Illustrated Examples

US$1.41135:1SDR (20 February 2015)

Comment

Insurers should keep the increased limits in mind when managing a major maritime claim, in particular when setting an appropriate reserve for their maximum likely exposure on any file. It may also be that when assessing potential jurisdictions for limiting one’s liability, questions of “what” claims can be limited may become more important than simply to what level. Finally, in the context of cargo claims, one should not forget the package limitation defence available under Article IV 5(a) of the Hague-Visby Rules, in addition to the global tonnage limitation regime under the LLMC.

For more information, please contact Michael Ritter, Associate, on +44 (0)20 7264 8449 or michael.ritter@hfw.com, or your usual contact at HFW.

Footnotes

1. http://www.imo.org/About/Conventions/ListOfConventions/Pages/Convention-on-Limitation-of-Liability-for-Maritime-Claims-(LLMC).aspx

The Nairobi International Convention

The Nairobi International Convention on the Removal Wrecks will enter into force on 14 April 2015 and will be incorporated into the MSA 1995 by the Wreck Removal Convention Act 2011 which also comes into force next month in the UK.

The Convention aims to replace a patchwork of legislation surrounding wreck removal, which is said to have created legal uncertainty and lack of transparency in this area. But will the Convention be a “game changer” for the industry, further increasing risk exposure for owners, underwriters and P&I Clubs but introducing desirable certainty, or will the practical impact of the Convention be minimised by its limited application where wrecks are most likely to occur?

By way of reminder, the key features of the Convention are as follows:

• The Convention applies to contracting states’ Exclusive Economic Zone (EEZ) which usually starts at the seaward edge of the territorial sea and extends 200 nautical miles from the coastal baseline. States may extend the scope of the Convention to their own territorial sea, which normally extends 12 nautical miles from the coastal baseline. If states choose not to do so, incidents in their territorial waters will remain subject to domestic law and the provisions of the Convention (including the compulsory insurance regime) will not apply.
• Compulsory insurance is required for wreck removal liabilities for all ships trading internationally and over 300 GT (up to the 1976 Liability Convention limits (as amended) as implemented in the relevant state). In simple terms, a vessel will not be allowed to the enter ports of a ratifying state unless she is properly insured and has a certificate to prove it. Coupled with this compulsory insurance requirement is the state’s right to bring a direct action against the insurer.
• The Convention gives coastal states the right to demand removal if the wreck creates the potential for substantial damage to the environment (i.e. not just where the wreck is deemed a hazard to navigation).

The UK is one of the few states which has opted to extend the application of the Convention to territorial waters.With wrecks likely to occur closer to the shore (and therefore within territorial waters), quickly establishing whether or not the relevant state has extended the application of the Convention to territorial waters will be crucial.

Another issue will be the link between the Nairobi Convention and the 1976 Limitation Convention in the context of compulsory insurance limits. Many of the countries ratifying the 1976 Limitation Convention (including the UK and, most recently, Malaysia), have excluded the right to limit liability for wreck removal - we would expect these states to ensure that the Nairobi Convention does not change that position, such that apparent limits to wreck removal liability for insurers under the compulsory insurance regime may not, in practice, be available. No doubt insurers are already wary of the requirement to sign up to another line of compulsory insurance, seemingly without limits.

In conclusion, the landscape of management of wreck removal seems be entering a new phase, with the provision of stronger and more overt powers for coastal states in their battle against wreck abandonment by uninsured or impecunious owners. That said, where coastal states do not uniformly extend the application of the Convention to territorial waters, and insofar as there remains a link to national limitation of liability regimes, there will remain a patchwork of legislation which leaves significant scope for confusion and, ultimately, disputes.

For more information, please contact Tom Walters, Partner, on +44 (0)20 7264 8285 or tom.walters@hfw.com, or Christopher Garley, Associate, on +44 (0)20 7264 8572 or christopher.garley@hfw.com, or your usual contact at HFW.

Conferences and events

Ports & Terminals Seminar
HFW London
28 April 2015
Presenting: Matthew Wilmshurst and Craig Neame

Marine Terminal Finance & Investment Summit 2015
New York
5–6 May 2015
Presenting: Alistair Mackie

IBA – Maritime and Transport Law Conference
Geneva
7–8 May 2015
Presenting: Andrew Chamberlain

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