Whether vessel was a constructive total loss/ prudent uninsured test in a marine context/ sue and labour expenses


The vessel in this case was insured against war risks by  a policy issued by the defendant  insurers. The vessel was sailing from Ukraine to China, and made arrangements for  a security team to embark at Aden. Whilst  waiting off Aden, a group of pirates boarded the vessel. They eventually set  off an explosive in  the engine room, causing a fire which rendered the vessel a dead ship without power. The crew was  rescued, the cargo transferred to another vessel and the owners tendered notice of abandonment  (“NOA”), declaring the vessel a constructive total loss (“CTL”). The insurers rejected the NOA.  Proceedings in England were commenced by the owners in February 2012 and the vessel was sold a  month later for scrap. A number of issues arise in the case and a split trial was ordered (with a  breach of warranty defence to be heard at a later trial). Some of the points discussed in this  decision are as follows:

  1. Was the vessel a CTL?

Under section 60(2)(ii) of the Marine Insurance Act 1906 (“MIA”), a vessel is a CTL “where she is  so damaged…that the costs of repairing the damage would exceed the value of the ship when  repaired”. In this case, that provision was qualified by clause 19 of the Institute Time Clauses-  Hulls 1/10/83 incorporated into the Policy which provides that “the insured value…shall be taken as  the repaired value and nothing in respect of the damaged or break-up value of the vessel shall be  taken into account” and that the costs of repair should exceed the insured value. There was no  suggestion here of fraudulent over-valuation and so the relevant amount against which the repairs  should be compared was the insured value of USD 55 million (even though the agreed repaired value  of the vessel would have been only USD 10.2 million).

In assessing the costs of repair, the court asks what a prudent uninsured shipowner would do. Here,  there were practical difficulties because the vessel was never in fact repaired (or even cleaned)  before it was sold for scrap. Because of the state of the vessel after the fire, a proper  inspection could not be carried out by the surveyors (and so no detailed and completely accurate repair specification could be drawn up).

In such circumstances, Flaux J said that that the court should apply to any repair estimate “a  large margin”. One issue here was where the prudent uninsured owner would have carried out repairs.  The experts advised that there had been a choice between dockyards in China and Dubai. Flaux J held  that, although it would have been some USD 11 million cheaper to have repaired the vessel in China, a prudent uninsured owner would still, on balance, have favoured repair in  Dubai. This was because: (i) repair in China would have involved a lengthy tow, with a risk of  further casualty; (ii) repair would have taken longer in China (and there can be issues with the quality of the workmanship there); and (iii) a delay would have had adverse financial consequences  for the owners.

The judge then calculated the cost of repair in each country. One aspect of this involved the cost  of insurance while the vessel was being towed to be repaired. Flaux J held that the prudent uninsured owner would only insure the vessel for the tow for her value in a  damaged condition, and not for her previous insured value.

Taking into account the additional costs of salvage, the judge concluded that the cost of repair  (in both China  and Dubai) would have exceeded the insured value of the vessel, and hence it was a  CTL.

  1. Had the owners lost the right to claim for a CTL?

The insurers had sought to argue that by selling the vessel, the owners had acted inconsistently  with a continued intention to abandon the vessel to insurers and so had lost the right to claim for a CTL. That argument was rejected on the basis that the insurers had  been aware  that the owners had intended to sell the vessel and had not objected to the sale (and  instead had only reserved their rights): “this is a case where in selling the vessel the owners  were acting in the interests of both themselves  and the insurers, so that no question of  revocation of the notice of abandonment or of loss of the right to claim for a CTL could arise”.

  1. The measure of indemnity recoverable for a partial loss

The judge considered this alternative case, even though not required to do so, since he had found a  CTL. Section  69 of the MIA provides that where a ship is sold in a damaged state, the insured  should be indemnified for   “the reasonable depreciation arising from the unrepaired damage”. There  are three possible methods for calculating this: method A – insured value less damaged market  value; method B – the proportion of the vessel’s actual depreciation applied to the insured value;  or method C – actual depreciation in market value.

It was agreed that the value of the vessel in a sound condition was USD 10.2 million but in a  damaged condition was USD 700,000. Flaux J held that in this  case the insurers were correct to  argue that method C was the correct method. Section 69 of the MIA had been modified by Clause 18 of the Institute Hull Clauses, which provides that the measure of indemnity  for a claim for unrepaired damage shall be “the reasonable depreciation in the market value of the  vessel”. Flaux J said: “In my judgment, the intention and effect of clause 18 is to define  depreciation by reference to the market value of the  vessel rather than by reference to terms  prescribed by the provisions of the 1906 Act such as “the value fixed by the policy” or “the  insurable value””. Hence the insured would have been entitled to USD 10.2 million less USD 700,000 ie USD 9,500,000 (methods A and B would have resulted in a recovery of USD 54.3 million and USD  52.2 million respectively).

  1. Sue and labour

The owners sought to recover expenditure incurred in order to avert or minimise the loss. Insurers  raised two arguments:

  1. It could not be said that the expenditure was incurred whilst the peril covered by the war  risks policy was still operating. Flaux J rejected that argument. When the vessel was a dead ship anchored in  international waters, she was not in a place of safety and the original peril of piracy or  malicious mischief continued to operate.
  2. Sue and labour expenses were not recoverable after the NOA or once the claim form was issued.  Flaux J referred to his recent decision in Atlasnavios v Navigators Insurance (see Weekly Update 46/14),  which in turn referred to Rix J’s decision in Kuwait Airways v Kuwait Insurance (1996). Rix J had  held that the right to sue and labour ceases when a writ is issued but not when a NOA is tendered  (there was no writ clause in this case and so the issue of whether the right to sue and labour  ceases at that point did not arise here). In Atlasnavios, Flaux J said that Rix J “may well be  right” that the right to sue and labour ceases when the writ is issued. In this case, he said that  he did not think Rix J’s view was wrong but that even if he thought otherwise, “comity suggests  that I should follow and apply it and leave it to the Court of Appeal to determine if the analysis in that case is correct or not”.