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21 January 2009
In the event of a marine casualty the shipowner may be ordered to remove the shipwreck or to cover the costs of having the wreck removed. If the shipowner is unwilling or unable to remove the wreck or to cover the wreck removal costs, the question arises as to whether the government may bring a claim for the wreck removal costs directly against the relevant protection and indemnity (P&I) club.
The scope of cover for wreck removal liability under P&I insurance is similar in all the major P&I clubs due to cooperation between members of the International Group of P&I Clubs. As a general rule the coverage extends to costs relating to the raising, removal, destruction, lighting and marking of a ship, the wreck of a ship or parts thereof as a result of a casualty, provided that such raising, removal, destruction, lighting and marking is compulsory by law or the costs thereof are legally recoverable from the shipowner.(1)
Relationship with hull insurance
The vessel may be so extensively damaged after a casualty that it is an actual or constructive total loss under its hull insurance. If the hull insurance is according to Norwegian hull conditions, the owner may decide to give up any attempts to salvage the vessel and instead claim total loss compensation from the hull insurer.(2) The hull insurer is, at its own risk and expense, entitled to attempt to salvage the vessel for a period of up to six months in order to avoid having to pay total loss compensation.(3) If the owner becomes entitled to total loss compensation from the hull insurer, it must be prepared to abandon the wreck to the hull insurer, which is entitled to take over the title to the wreck.(4)
If the hull insurer does not accept abandonment of the wreck, the title remains with the owner. Any wreck removal liability will then remain with the owner and be covered by the P&I insurance. Should the hull insurer accept abandonment and thus acquire title to the wreck, any wreck removal liability may - depending on the applicable law - be transferred to or imposed upon the hull insurer. The P&I insurance does not cover wreck removal liability for the hull insurer. However, if the wreck removal liability remains with the owner, it will continue to be covered by the P&I insurer.
The P&I insurer will cover wreck removal liability only if the realized value of the wreck or other property salved is credited to the P&I club. However, there will rarely be any net proceeds available to the P&I club, because the hull insurer has the right of first refusal when the owner abandons the wreck.
Limitation of liability
Where the owner is entitled to limit its liability pursuant to any applicable national or international limitation of liability regime, the maximum recovery under the P&I insurance is the amount to which the liability is limited.(5)
Wreck removal liability is generally subject to the international conventions on limitation of liability or similar national limitation regimes. However, the international conventions allow each contracting state to make reservations in relation to wreck removal liability. Some states have made wreck removal liability unlimited while others, such as Norway, have introduced higher limitation limits for wreck removal liability. P&I insurance will cover liability according to the applicable national law regardless of whether the liability is unlimited, subject to special national limitation rules or subject to limitation under one of the limitation conventions.
Right to commence direct action
Under Norwegian law, direct action for wreck removal liability follows the general principles of direct action under Section 7-6 of the Insurance Contracts Act 1989. The starting point is that the injured party is entitled to claim compensation directly from the insurer in parallel to and simultaneously with any claim against the assured tortfeasor.
On a general basis it is possible to contract out of the provisions in the act if the insurance relates to commercial activities concerning ships required to be registered according to the Norwegian Maritime Code.(6) In practice, Gard and Skuld have contracted out of the act in their rules, including the injured party’s right to commence direct action. Furthermore, the ‘paid to be paid’ clause also bars direct action. However, if the owner has become insolvent, the insurer cannot invoke any insurance conditions preventing direct action. In other jurisdictions, such as the United Kingdom, the ‘paid to be paid’ clauses are upheld by the courts to a greater extent.
Jurisdiction and choice of law
Direct actions concerning wreck removal liability are often connected to several jurisdictions. Therefore, the injured party must decide where to sue the insurer. The relevant court must decide whether it has jurisdiction and which law to apply.
The jurisdiction of Norwegian courts is governed by national legislation and the Lugano Convention. According to Articles 7 to 9 of the convention, the insurer may be sued before the courts where it is domiciled, where the claimant is domiciled or where the damage occurred. Article 10 provides that this shall also apply to actions brought by the injured party directly against the insurer “where such direct actions are permitted”. This provision was considered by the Norwegian Supreme Court in Leros Strength.(7) A bulk carrier sank and caused oil pollution along the Norwegian coast. The Norwegian government pursued a claim for clean-up costs before the Norwegian courts directly against the UK P&I club in which the vessel was entered. The court held that when deciding whether Article 10 provided jurisdiction, a choice of law had to be made under the Norwegian choice-of-law rules. The question of whether direct action was allowed had to be considered lex causae (ie, according to the law applicable to the substantive matter). The court held that if Norwegian law were applied (ie, the law of the place where the damage occurred and the domicile of the injured party), the direct action would be allowed because the owner was insolvent. If UK law was applied (ie, the law of the insurance contract and domicile of the insurer), the question of allowing the direct action would be more difficult. The P&I club alleged that Article 10 required that direct action would be allowed not only in general under the applicable law, but also in the particular case. For procedural reasons the court did not decide this issue and referred the matter back to the lower court. The matter was subsequently settled. The question of whether Article 10 provides jurisdiction in similar cases therefore remains unanswered.
Arbitration and jurisdiction clauses
In general, it might seem that jurisdiction or arbitration clauses in insurance contracts are not binding on third parties that commence direct action. However, in 2007 the Finnish Supreme Court dismissed a direct action commenced directly against Gard from the Finnish courts on the basis of the arbitration clause in Gard’s rules. An alternative legal basis could perhaps be Section 7-6(5) of the Insurance Contracts Act, which provides that direct actions under the act must be brought in Norway unless otherwise prescribed by Norway’s obligations under public international law.
This update was written in cooperation with Haakon Stang Lund of the Norwegian Hull Club.
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