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21 May 2008
Hull insurance operates with two kinds of compensation: compensation for total loss and compensation for damage. If the vessel is destroyed or so severely damaged that it is irreparable, it will be an actual total loss. Problems arise in distinguishing between a total loss, and when repairing the vessel is possible but the damage is so severe that it is necessary to evaluate whether repairs would be profitable or whether it should be considered a total loss (ie, a so-called ‘constructive’ total loss).
The insured will be compensated usually for a total loss without any deductions for the sum insured. Payment will be made normally within a short time. Owners often have separate total loss insurances in addition to hull insurance, such as hull interest insurance (intended to absorb additional costs of replacing the lost ship) and freight interest insurance (intended to cover loss of future freight income). Therefore, it may be an advantage for the insured - both economically and practically - if the vessel’s total loss is declared. However, the insurer may wish to avoid this.
These opposing interests call for clear-cut rules in order to avoid disagreement and uncertainty. For hull insurance provided on the basis of the Norwegian Marine Insurance Plan, the line between total loss (actual and constructive) and damage is drawn by the condemnation rules in Chapter 11.
According to the plan, condemnation conditions are met when the damage is so extensive that repair costs will amount to at least 80% of the insured value or of the value of the vessel after repairs if the latter is higher than the insured value.
Pursuant to the plan, repair costs are deemed to include all anticipated costs of removal and repairs at the time when the condemnation request is submitted. Specific procedures for determining these costs are not set forth in the plan, but the insurer is entitled to demand that the vessel be removed to a place where the damage may be surveyed properly. In borderline cases the parties must obtain tenders from different shipyards. The question of whether the vessel is condemnable must then be determined according to normal rules on probability (ie, whether it is probable that repair costs will exceed the 80% limit). If the parties are unable to agree through negotiation, they may submit the matter to the courts.
Only the insured may request condemnation. Once this happens, the insurer must decide whether the request will be accepted. The insured can always choose between repair and a condemnation claim, but if the insured demands that the vessel be repaired even if it is condemnable, the insurer’s liability is limited to the insured value minus the value of the wreck. The insured must submit the condemnation request to the insurer without undue delay after the ship has been salvaged and it has had an opportunity to survey the damage. Consequently, the insured loses the right to request condemnation at some point after the vessel has been salvaged. However, the insurer has no explicit time limit to decide whether to accept the condemnation request. The only means by which the insured can force a decision is to bring legal action against the insurer with a claim for total-loss compensation.
Disagreement between the insurer and the insured may occur when additional damage is discovered during the repair work which pushes repair costs past the 80% condemnation limit. Will the insured, under such circumstances, be deprived of the right to request condemnation or does a new time limit for requesting condemnation arise because of the discovery? The situation is not regulated directly in the plan.
The Norwegian courts have taken the position that the insured is not entitled to re-open discussions and submit a condemnation request after the repair work has begun. This solution is also supported by the plan’s requirement to submit the request without undue delay after the insured has had the opportunity to survey the damage. Prior to initiation of the repair work, the vessel must be surveyed in order to enable the parties to evaluate the extent of work required to repair the vessel. The period within which the insured must submit a condemnation request is considered to have started once such a survey has been conducted.
Another important aspect in this regard is the fact that the owner will have concluded a final and binding contract with the repair yard for the repair work, which does not usually include a right to cancel. An additional argument is that even in the event that repair costs will exceed the condemnation limit of 80%, there is still a 20% excess before the insured value or the ship’s value after repairs is reached. Thus, unless the increased repair cost exceeds this amount, the insured can be confident that the insurance will compensate the full repair cost. There have been no cases where, after the repair cost was estimated properly by qualified surveyors, the actual repair cost did in fact exceed the 20% excess. If the insured believes that the survey has been conducted insufficiently for the purpose of estimating the repair cost, it must express this at the time of the survey. This enables insurers to address such concerns at the time. When obtaining tenders from shipyards for the repair work, the yards will normally survey the vessel. The tenders submitted then provide a clear basis for the condemnation assessment. If the insured participates in surveys with tendering yards and in the negotiation and signing of a repair contract without taking explicit reservation, the insured will have no right to request condemnation at a later stage.
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