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Supreme Court clarifies the “costs of repair” which count towards a Constructive Total Loss in The Renos

Supreme Court clarifies the “costs of repair” which count towards a Constructive Total Loss in The Renos

17.06.2019

Carrie Radford

Carrie Radford Partner

Sveriges Angfartygs Assurans Forening (The Swedish Club) and others (Appellants) v Connect Shipping Inc and another (Respondents) [2019] UKSC 29

In a decision which partially overturns the findings of the courts below, the Supreme Court has last week handed down its judgment in a dispute between shipowners and insurers over whether the M.V. “Renos” was a constructive total loss (“CTL”).

The Marine Insurance Act 1906 provides that in the case of damage to a ship, there is a CTL where “she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired”.  The Institute Clauses, on which the vessel’s hull and machinery insurance was written, substitute the vessel’s insured value (here US$12m) for the sound market value.

The dispute before the Supreme Court revolved around which items could be included within the meaning of the “cost of repairing the damage”. Insurers, who had lost in both the Commercial Court and the Court of Appeal, sought to exclude two types of cost from this calculation: firstly, costs incurred prior to the service of a Notice of Abandonment (“NOA”), and secondly, Special Compensation Protection and Indemnity Clause (“SCOPIC”) remuneration under the Lloyd’s Open Form 2011.

On the first question, the Supreme Court upheld the decisions of the courts below and found that pre-NOA costs were properly within the cost of repairing the damage. This question was determined on the basis that the insured loss occurs (and is complete) at the time of the casualty, even if the extent of the loss develops thereafter, and that a CTL is simply a partial loss which is financially equivalent to a total loss. Whether a vessel was a CTL was therefore an objective fact from the time of the casualty. Contrary to the insurers’ submissions, it was not possible for a vessel which was a CTL to cease being so simply because the shipowners incurred some of the costs of repair before they served the NOA. The fact that a vessel could cease to be a CTL where the loss was ‘adeemed’, for instance where a hijacked vessel was returned, was not analogous and did not support the insurers’ case.

On the second question, however, the Supreme Court agreed with the insurers. The objective purpose of the SCOPIC remuneration was to reduce the shipowner’s (and ultimately their P&I Club’s) exposure to third party liabilities in respect of environmental damage. That was not a “cost of repairing the damage”, even if those services were performed by the same salvors who brought the vessel to a place of safety (which is a cost of repair). Unlike the Courts below, the Supreme Court found that the SCOPIC charges were separable from traditional salvage charges.

The case was remitted to the Commercial Court judge to decide whether, with the SCOPIC charges excluded from the calculation, the vessel was in fact a CTL.

Read the full article here.

This article was co-authored by Keith Rowbory, trainee solicitor at Ince.

Article authors:

Carrie Radford

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