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08 January 2020
The 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 Institute Time Clauses Hulls (1/10/83) (ITCH) conditions. 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 (NOA), but not to remuneration payable under a special compensation protection and indemnity (P&I) clause (SCOPIC). The decision is of significance to the insurance market because of its financial and practical implications.
The Renos sustained significant damage following a fire off the Red Sea coast on 23 August 2012, resulting in it losing main engine power and requiring salvage assistance. A Lloyd's open form (LOF) with a SCOPIC was signed, and the SCOPIC was invoked. Following extensive discussions between the vessel's owners and hull and machinery (H&M) insurers, the owners tendered an NOA on 1 February 2013. The H&M insurers contended that the vessel was not a CTL.
A SCOPIC is an optional clause in an LOF. If included and invoked by a salvor, it provides guaranteed remuneration based on predetermined rates for tugs, personnel and equipment deployed by the salvor. SCOPIC remuneration is payable only insofar as it exceeds a conventional salvage award under Article 13 of the Salvage Convention 1989. As a rule, an Article 13 award is an H&M risk, whereas SCOPIC remuneration is a P&I risk.
Both the High Court and the Court of Appeal found that the vessel was a CTL, on the basis that the pre-NOA costs and the SCOPIC costs were included, and found it unnecessary to make findings as to the other alleged costs of recovery and repair. The Supreme Court granted leave of appeal in respect of the pre-NOA and SCOPIC issues.
Should costs incurred prior to NOA be excluded from CTL calculation?
On this issue, the Supreme Court affirmed the decision of the lower courts and held that the cost of repairing the damage for the purpose of determining whether the vessel was a CTL under Section 60(2)(ii) of the Marine Insurance Act included all of the reasonable costs of salving and safeguarding the Renos from the time of the casualty onwards, together with the prospective cost of repairing it. The cost of repairing the damage was in no way adeemed because part of it had already been incurred when NOA was given and action was brought on the policy.
Should SCOPIC costs be excluded from CTL calculation?
The Supreme Court disagreed with the lower courts on this issue and held that SCOPIC costs should not be considered when assessing whether a vessel is a CTL. The Supreme Court emphasised that SCOPIC costs are not intended to enable a ship to be repaired, but to protect a shipowner's potential liability for environmental pollution. According to the Supreme Court, this was not part of the measure of the damage to the Renos and had nothing to do with the possibility of repairing it. The Supreme Court pointed out that environmental pollution is a P&I risk and was covered by the owners' P&I club. However, it held that the mere fact that the H&M insurer would not, under the policy terms, be liable for some item of expenditure on a partial loss basis did not necessarily mean that it could not be included in the assessment of whether there was a CTL.
In many cases, this may have great financial implications as SCOPIC costs may be a large part of salvage costs, such as in this case where the SCOPIC costs were about half of the total salvage remuneration.
The Supreme Court set aside the High Court's order and remitted the matter back to it to determine – with SCOPIC excluded from the assessment – whether the Renos was a CTL.
(1) For a discussion on the position under the 2019 version of the Nordic Marine Insurance Plan 2013, please see "UK Supreme Court decision in Renos case: position under Nordic Plan".
Niklas Sonnenschein, legal counsel at the Nordic Association of Marine Insurers, assisted with the preparation of this article.
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