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08 January 2020
The UK Supreme Court's recent decision in the Renos case (Sveriges Angfartygs Assurans Forening (The Swedish Club) v Connect Shipping Inc  UKSC 29)) is a landmark decision on marine insurance under the English Institute Time Clauses Hulls (1/10/83) (ITCH) conditions.(1) It clarifies that when determining whether a vessel is a constructive total loss (CTL) under the ITCH conditions, regard should be had to the costs incurred prior to the owner's notice of abandonment, but not to remuneration payable under a special compensation protection and indemnity clause (SCOPIC). The decision is of significance to the insurance market because of its financial and practical implications. But what would the position be under the 2019 version of the Nordic Marine Insurance Plan 2013 (Nordic Plan)?
Under the Nordic Plan, an assured is entitled to claim a CTL if the conditions for condemnation of a vessel set out in Clause 11-3 are met. 'Condemnation' is the term used in the Nordic Plan for CTL. The conditions for condemnation are met when the damage is so extensive that the cost of repairing the vessel would amount to at least 80% of the insurable value (or of the value of the vessel after repairs, if the latter is higher than the insurable value).
Under Clause 11-5, if an assured wants a vessel to be condemned, it must submit a request for condemnation to the insurer without undue delay after the vessel has been salvaged and it has had an opportunity to survey the damage. This allows the parties to make rational decisions based on their best evaluation of the situation. The assured is not required to give notice of abandonment.
Pursuant to Clause 11-3(4), repair costs are deemed to include all costs of removal and repairs which, when the request for condemnation is submitted, must be anticipated if the vessel is to be repaired. The relevant costs include the costs of repairing all damage reported in the previous three years. However, the provision sets out some important exceptions, including that salvage awards will not be considered.
As is pointed out in the commentary on the Nordic Plan, the fact that removal costs are included in the calculation means that the decisive point about condemnation is founded on a more realistic basis. Alternatively, damage to a ship would be considered alone, regardless of the ship's location. The example in the commentary is that there will be a material difference between a damaged ship which is in a port at, for example, Svalbard and a ship with similar damage in a port with good possibilities of repairs.
However, a line must be drawn between removal costs (which count towards condemnation) and salvage awards (which do not count towards condemnation).
The main reason why salvage awards are excluded from a condemnation assessment is that it will always be difficult to estimate a salvage award in advance, and this would introduce a serious element of uncertainty in the condemnation formula. At the same time, it is difficult to survey damage properly if a vessel has not been salvaged.
The commentary states that the distinction between a salvage award and the expenses that will be included, especially removal costs, must be based on general maritime law criteria:
The decisive factor must be the situation which the ship was in when the salvor was given the assignment, and not whether the remuneration agreed to on a 'no cure - no pay basis' was determined in advance or shall be paid according to accounts rendered.
This means that not only Article 13 awards, but also SCOPIC remuneration, will be excluded under the Nordic Plan in a condemnation calculation.
Even if a salvage award is not included in the condemnation formula, hull and machinery insurers must in practice also take the salvage award into consideration if the assured claims for a total loss before the ship has been salvaged. The significance of the condemnation request being made while the ship is still at the place of casualty lies in the fact that this is the point in time that will be decisive for the assessment of the costs and the market value of the ship.
Further, under the Nordic Plan, salvage awards are covered as costs of measures taken to avert or minimise loss arising in connection with the casualty (sue and labour costs) up to an equivalent amount of the sum insured in addition to the compensation for a particular or total loss.
The assessment in the Renos case would clearly be different under the Nordic Plan.
First, the CTL threshold is different. Under the Nordic Plan, the threshold is 80%, whereas it is 100% under the ITCH.
Second, salvage awards are treated differently in a CTL assessment. The UK Supreme Court established in the Renos case that salvage costs count towards CTL under the ITCH, but that SCOPIC remuneration does not count. However, under the Nordic Plan, the costs of salvage awards do not count towards CTL, irrespective of whether the award is an Article 13 award or SCOPIC remuneration. The common denominator therefore between the Nordic Plan and the ITCH, following the Renos case, is that SCOPIC remuneration does not count towards CTL.
The idea behind the regulation in the Nordic Plan (ie, the combination of the lower threshold and excluding salvage awards) is that it makes it easier for an assured to assess whether the requirements for a total loss are satisfied.
Finally, the mechanics under the Nordic Plan may, in practice, more easily lead to a condemnation (mainly because of the lower threshold).
(1) For an overview of the UK Supreme Court's decision, please see "Supreme Court issues important decision on CTL in Renos case".
Niklas Sonnenschein, legal counsel at the Nordic Association of Marine Insurers, assisted with the preparation of this article.
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