LAW BITES – MARCH 2021
The Co-Insurance Quandary
The economics of insurance have been reliant on the doctrine of subrogation which allows the insurer to sue the “guilty” party on behalf of the insured. Two recent English cases highlighted situations where such rights of subrogation may be lost based on the terms of the contract between the insured and the “guilty party”.
“The Ocean Victory”
Gard Marine and Energy Ltd v China National Chartering Co Ltd and another; China National Chartering Co Ltd v Gard Marine and Energy Ltd and another; Daiichi Chuo Kisen Kaisha v Gard Marine and Energy Ltd and another  UKSC 35 (“The Ocean Victory”)
The first case in 2017 involved the Ocean Victory, which was owned by Ocean Victory Maritime Co. and demise-chartered to a related company, Ocean Line Holdings Ltd. The demise charterer then sub chartered the vessel. Each charterparty in the chain contained a safe port warranty.
The demise charterparty contained a co-insurance clause that required the demise charterers to keep the vessel insured against, inter alia, marine risk in the joint names of the demise charters and shipowners. Further, the shipowners were to approve such insurance.
The vessel subsequently became a total loss due to grounding. The hull insurers paid out to the shipowners and issued proceedings against the sub charterers (in the name of the demise charters) for breach of the safe port warranty. The UK Supreme Court, in a narrow 3:2 majority, adopted the position that the “guilty” co-insured’s liability to pay damages was excluded by the terms of the co-insurance clause in the contract and that parties had agreed to look to the insurance funds as the sole recourse for any breach of the safe port warranty. As such, the demise charterers, not being liable to the shipowners, had no claim to pass on to the sub charterers. It followed that the hull insurers were not subrogated to any claim.
While much turned on the interpretation of the wording of the co-insurance clause, Lord Mance (speaking for the majority) highlighted that the insurance was to be taken out in a fixed amount (US$70 million). At the date of her total loss, the vessel was said to have been worth some US$15 million more than that amount. Lord Mance opined that it was implausible to suggest that having developed a comprehensive insurance scheme (and having paid for it), the demise charterers would accept being potentially exposed to paying additional damages.
Herculito Maritime Limited and others v Gunvor International BV and others  EWHC 3318 (“The Polar”)
The second case in 2020 involved a time chartered vesselwhich was seized by pirates in the Gulf of Aden and released after a ransom of US$7,700,000 was paid. General average (“GA”) was declared and a claim was made by the shipowners (the insurers through a subrogated claim) against the cargo owners.
The time charterparty included clauses that required specific insurance concerning piracy risk whilst transiting the Gulf of Aden be paid for by the charterers.
The cargo owners argued that the shipowners agreed to look solely to their insurance cover and not to their counterparties for general average.
The Judge held that since the cargo owners have not paid the insurance premium, there was no agreement between the shipowners and the cargo interests for the shipowners to look only to the insurance policy. As such, the cargo owners were liable to pay for their portion of the GA.
However, the Judge went on to observe that as between the shipowners and the charterers (who paid for the insurance), the shipowners’ insurers would prima facie have no right of subrogation against the charterers. However, the charterers were not involved as the claim was against cargo owners for GA. [We understand that permission to appeal this decision to the English Court of Appeal had been granted]
The outcome of The Ocean Victory and the position taken by the cargo owners in The Polar (although rejected by the English High Court) are departures from the general norm that insurance recoveries are ignored in the assessment of damages arising from a breach of duty.
That said, it appears that the impact of The Ocean Victory and The Polar may be quite limited.
The holding in The Polar was that the B/L holders could not take advantage of the insurance or the insurance clause in the charterparty as they did not pay the premiums. As such, the insurers (of the shipowners) could still claim against the B/L holders.
Whilst the outcome of The Ocean Victory was not beneficial to the insurers, both the minority and the majority, took pains to highlight that there were other possible claims (such as bailment and/or the principle of transferred loss) on which a demise charter might be able to claim damages from a sub charterer. These other claims were not considered on appeal as the insurers did not argue these alternative claims in the Courts below.
Implicitly, the UK Supreme Court recognised that the sub-charterers should not be allowed to get off “scot-free”. Whilst these other heads of claim will need to be elucidated in due course, it shows that the Court is cognizant of the need to preserve the right of insurers to claim against the party causing the loss.
Nonetheless, parties should be aware of the potential impact of co-insurance clauses and consider carefully what exactly they intend when agreeing to such clauses.
For more details contact:
|K. Murali Pany
T: (65) 6224 3645
T: (65) 6329 2411
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This update is for general information only and is not intended to constitute legal advice. JTJB has made all reasonable efforts to ensure the information provided is accurate at the time of publication.