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