When assessing a constructive total loss of a ship, should the value of salvage services incurred prior to the issuance of a Notice of Abandonment be taken into account? Grant Pilkington offers advice in the context of a court decision in the RENOS engine room fire insurance claim and highlights its relevance for marine insurers in the UAE and Saudi Arabia.

This article was first published in the Middle East Insurance Review in May 2017.

In the recent insurance coverage litigation involving RENOS (Connect Shipping Inc. and another v Swedish Club and others [2016] EWHC 1580 (Comm)), the English High Court clarified a question which had long remained unanswered: When assessing a constructive total loss (CTL), should the value of salvage services incurred prior to the issuance of a Notice of bandonment (NOA) be taken into account?

In the RENOS case, the assured brought a claim under a policy on the Institute Time Clauses – Hulls (1/10/83) (ITC 1/10/83) for a CTL of the insured vessel following an engine room fire during a voyage along the Egyptian coast. Salvage services were rendered on Lloyd’s Open Form terms and the Special Compensation Protection and Indemnity Clause (SCOPIC) was invoked.

Two main principles can be drawn from the court’s decision:

  • Salvage and General Average costs incurred prior to the issuance of an NOA may be included in the calculation of a CTL; and
  • SCOPIC expenses paid to salvors are an integral part of necessary salvage operations that insurers accept as a cost of repair.

CTL under UAE law

Although standard forms contain provisions stating “This insurance is subject to English law and practice”, in coverage litigation in the UAE, it is unlikely that English law or authorities would be considered relevant by the domestic courts, who will ordinarily apply UAE law to determine the claim. Essentially, in UAE litigation, a foreign law needs to be proven as a fact. Where the court cannot determine the foreign law on a particular matter, Article 28 of Federal Law No. 5 of 1985 (the UAE Civil Code) allows the court to apply UAE law as a fall-back. There are comparable provisions under the codes of other Gulf states.

A practitioner seeking guidance regarding the assessment of a CTL under UAE law is likely to be disappointed. Although Chapter 6 of UAE Federal Law No. 26 of 1981 (the Maritime Code) contains provisions governing marine insurance, specific provisions concerning the issuance of an NOA and calculation of a CTL are limited. There are no reported UAE Court decisions which provide clear guidance on these issues.

The UAE Federal Transport Authority is undertaking a review to update and modernise the Maritime Code.

Article 409 of the Maritime Code stipulates that an assured may abandon the vessel insured where:

  • The vessel is a “total loss”;
  • No news of the vessel has been received for three months. The vessel is presumed lost on the date when last news of her was received;
  • The vessel sustains damage which is impossible to repair or the repair of which is impossible due to the nonavailability of the necessary material means at the place where the vessel is, unless the vessel can be towed to another place where repairs can be carried out; and
  • The cost of repairing the vessel equals at least three quarters of her “value”.

The Maritime Code does not specify the value (actual or insured) and time (at the time of the accident or after the repairs) for calculating a CTL.

Similarly, there are no express provisions or authorities under UAE law which define when the vessel should be deemed a “total” loss.

In coverage litigation, the UAE Court’s starting point for calculating a CTL would be the operative terms of the policy agreed between the assured and the insurers.

The English High Court noted that standard forms such as the ITC 1/10/83 do not draw any distinction between past and future costs of recovery and repair (Clause 19 of the ITC 1/10/83; Other standard institute forms also contain similar provisions).

Further, the forms do not contain express language limiting the costs of recovery or repair to costs incurred after the NOA has been tendered.

In light of this and the “pro-assured” approach of the UAE Courts, in a claim for a CTL under an H&M policy on standard institute forms, there would be significant scope for an assured to argue for salvage costs incurred prior to NOA and SCOPIC expenses to be taken into account.

CTL under KSA law

Litigated coverage dispute in Saudi Arabia for a CTL would be heard by the SAMA Committee for the Resolution of Insurance Disputes and Violations (the Insurance Disputes Committee (IDC) under the insurance regulator, the Saudi Arabian Monetary Authority (SAMA).

The question being raised in this situation is whether English law or authorities – such as the decision in the RENOS – be considered relevant by the IDC.

Unlike other Gulf states, which have codified maritime laws, KSA has no such law. Although the sources of KSA maritime law are found in several (non-marine) statutes and ad hoc regulations, none contains express guidance regarding the calculation of a CTL.

However, Article 9 of the IDC Regulations provides that the IDC is able to take into account established “comparative jurisprudence” in relation to the determination of insurance disputes.

In practice, this means that the IDC can consider established law and decisions from other jurisdictions where KSA law does not address the particular issues to be decided.

In theory, if the IDC were asked to consider a claim for a CTL, it would be possible for an assured to argue points of comparable insurance law from, say, the English legal system and highlight the decision in the RENOS to the IDC.

That argument would be bolstered where the policy is on standard forms and contains an English law and practice provision. The assured could also argue for interpretation of the policy upon English law principles on the grounds that this represents an accepted international standard and the jurisdiction where the policy wording was originally conceived and developed.

From the experience of previous cases, it appears the IDC is increasingly prepared to consider such arguments based on international market practice.

However, at the time of writing there is no reported decision of the IDC in which a foreign choice of law provision has been upheld in favour of KSA law.

Takeaway points for marine insurers

Marine insurers underwriting H&M cover in the Middle East should be aware that:

  • Where cover is underwritten on institute clauses, domestic law is likely to be applied by the courts, despite any foreign choice of law and practice provisions;
  • Where there is limited (or no clear) guidance under domestic law, there is likely to be significant scope for an assured to argue for salvage costs incurred prior to NOA and SCOPIC expenses to be taken into account when calculating a CTL;
  • In theory, in KSA there is also scope for “comparative jurisprudence” and application of the English legal principles set down in the RENOS, particularly where the policy is on standard forms and contains an English law and practice provision; and
  • Insurers may wish to consider amending standard market wordings to make clear that costs incurred prior to NOA and SCOPIC expenses are to be excluded from any CTL calculation. However, it is also recommended that legal advice be taken to ensure such provisions meet the formal and regulatory requirements for valid incorporation in insurance policies, and are therefore upheld under domestic law.