Sveriges Angfartygs Assurans Forening (The Swedish Club) v. Connect Shipping Inc (MV Renos) [2018] EWCA Civ 230

The Court of Appeal has recently upheld a first instance decision in a case that required the Court to consider the following issues: (i) at what point an insured is held to have received “reliable information” of a constructive total loss (“CTL”); (ii) how soon after having received “reliable information” the insured is required to give Notice of Abandonment to their insurers; and (iii) whether expenses incurred by the insured prior to the Notice of Abandonment (“NOA”) and SCOPIC fees paid to salvors count towards the CTL calculation.

The background facts

In August 2012, the RENOS was in the Red Sea when a fire broke out in the engine room. Salvors were appointed under a Lloyds Open Form 2011 (“LOF”) and invoked the Special Compensation Protection and Indemnity Clause (“SCOPIC”).

It was common ground that the fire was an insured peril and that the repair costs would need to be US$8 million or greater in order for the vessel to be a CTL. The parties’ surveyors were unable to agree on the estimated repair costs.

By early December 2012, both the Owners and the Insurers had sent differing repair specifications to various shipyards. By late December 2012, the Owners had received three quotes from shipyards: two above US$8 million and one under US$3 million. By late January 2013, additional quotes were received, ranging from US$4 million to US$9 million.

The Owners then received a report from a further independent surveyor, estimating repair costs at over US$8 million. At the end of January, the Insurers urged the Owners to make a prompt decision as to what they would do. Two days later, the Owners served a NOA (some five months after the fire), which the Insurers rejected for being late. The Insurers argued that the vessel was not a CTL and that, in any event, the Owners had lost the right to abandon her and claim CTL.

The Commercial Court found in favour of the Owners. The Insurers appealed. The appeal was dismissed.

The Court of Appeal decision

At what point is an insured held to have received “reliable information” of a CTL?

Section 62(3) of the Marine Insurance Act 1906 (the “MIA”) requires a NOA to be given with “reasonable diligence after receipt of reliable information of the loss”. The Insurers had argued that the Owners had “reliable information” by: (i) early December 2012, when they had the repair specifications; (ii) alternatively, by late December 2012, when they had quotations that exceeded US$8 million; or (iii) by 25 January 2013, when they received a report stating that repairs would cost over US$8 million.

The Court of Appeal stressed that whether an assured has reliable information of the loss will depend on the circumstances of the case. Here, the Owners were entitled to conclude that they were without “reliable information” in early December 2012 because they had not yet received quotations from the shipyards approached. Given that the Insurers’ surveyors’ repair specification differed from the Owners’ at that time, the Owners were entitled to regard that conflict as causing the information relating to the loss to still be unreliable. Furthermore, since the quotations that they subsequently received included a quotation of US$2,838,370, as well as quotations exceeding US$8 million, they had cause to doubt the quotations in excess of US$8 million sufficiently that they still did not have “reliable information” of the loss by late December 2012.

In addition, as at January 2013, the continued existence of the Insurers’ materially different, but equally credible, repair specification meant that the conflict remained. By this date, the Owners had also received a further quotation of US$6,341,102 that was below the CTL level of US$8 million. Accordingly, the Court of Appeal held that the Owners were not in possession of “reliable information” at that date.

The Court of Appeal stressed that given this was a question of fact, where the matter was not one involving urgency, danger to the vessel or giving rise to a need for immediate decisions, the Owners were entitled to take time to consider the survey report, particularly given the complex history of the matter.

In conclusion, the Owners had acted “with reasonable diligence”.

How soon after having received “reliable information” is the insured required to give NOA to their insurers?

The Court of Appeal was also asked to consider whether the Owners had given the NOA within a “reasonable time“. Whilst the time taken from the fire to the date of the NOA was over five months, the Court of Appeal held that “no more than a reasonable time was taken” where, amongst other factors, the Insurers continued to advance repair figures that did not support a CTL.

Do expenses incurred by the insured prior to the NOA and SCOPIC fees paid to salvors count towards the CTL calculation?

The second issue for the Court of Appeal to consider was whether the costs incurred prior to the date of the NOA and the SCOPIC costs could be counted as “cost of repairs” for the purposes of the CTL calculation.

The Insurers argued that only post-NOA costs of recovery and repair should be counted towards whether a vessel is a CTL, in circumstances where section 60(2)(ii) of the MIA states:

“In estimating the costs of repairs… account is to be taken of the expense of future salvage operations.”

The Court of Appeal noted that, in many cases, there is a need for an insured to expend substantial salvage costs before it can be determined whether the vessel is a CTL. It also called into question the authoritative weight of the cases referred to by the Insurers in support of their arguments and held that the just and logical position was for all repair costs incurred to be taken into account when assessing whether the vessel is a CTL. The word “future” was simply construed as a word of inclusion.

The Insurers also argued that the SCOPIC costs should not be counted towards the “cost of repairs” for the purpose of the CTL calculation where they are not a cost of repair for the purpose of the MIA and are contractually excluded by paragraph 15 of the SCOPIC clause.

The Court of Appeal disagreed. It found that the SCOPIC element of the payment to salvors was a payable and indivisible part of the salvage costs, which the Insurers accepted were a “cost of repairs”.

Comment

The Court of Appeal stressed that CTL matters are heavily dependent on the facts. In more straightforward cases, it is easy to see that the lapsing of such a long period will be regarded as unreasonable and that the NOA should be given without delay once an insured has made the decision to abandon the insured subject matter.

The Court of Appeal’s willingness to include SCOPIC costs in the CTL calculation has taken the market by surprise and it will be interesting to see whether insurers choose to insert wording expressly excluding them in future policy wording.

It remains to be seen whether the Insurers will appeal to the Supreme Court.