In August 2012, a fire broke out in the engine room of Renos, causing extensive damage. Owners appointed salvors under an LOF 2011 and invoked the Special Compensation Protection and Indemnity Clause (SCOPIC). Duncan Ealand, a Senior Associate in CJC’s London Office, explains what happened next and how the Supreme Court has provided clarity on which expenses can count towards a constructive total loss (CTL) calculation.
In August 2012, a fire broke out in the engine room of the m/v RENOS ("Vessel"), causing extensive damage. The Vessel’s owners ("Owners") appointed salvors under an LOF 2011 and invoked the Special Compensation Protection and Indemnity Clause ("SCOPIC"). The Vessel was insured by a hull and machinery ("H&M") policy. The Vessel was towed by the salvors to Adabiya, where her cargo was discharged, and then to Suez, where the salvage services ended, and Owners eventually served a Notice of Abandonment ("NOA").
The initial surveys conducted by the Owners' and the H&M insurers' respective surveyors had reached substantially different conclusions on the estimated repair costs, with the Owners’ surveyor placing the value of such repairs at over US$8 million and H&M insurers’ surveyor estimating the smaller figure of approximately US$5 million. It was common ground that for the Vessel to be a CTL, the repair costs would have to be US$8 million or more.
For Owners to establish that the Vessel was a CTL (i.e. for them to reach the US$8M mark), they needed to show that:
- costs incurred prior to the date of the NOA formed part of the CTL calculation ("1st Issue"); and
- SCOPIC fees paid to salvors amount to "costs of repairs" for the purpose of the CTL calculation ("2nd Issue").
The First instance and Court of Appeal found in Owners' favour on these two issues, finding that costs prior to serving an NOA and SCOPIC fees both formed part of the CTL calculation. These two issues formed the basis of the appeal to the Supreme Court.
1st Issue – The Supreme Court upheld the previous decisions and agreed that costs incurred prior to the date of the NOA did formed part of the CTL calculation.
Ultimately the Court found that damage referred to in section 60(2)(ii) of the Marine Insurance Act is in principle the entire damage arising from the casualty from the moment it happens. Accordingly, loss under an H&M Policy for CTL calculation purposes occurs at the time of the casualty, not at the time NOA is served.
2nd Issue – The Supreme Court overturned the previous judgments and found that SCOPIC expenses did not form part of the CTL calculation.
This had been the contentious part of the previous judgments because it muddied the division between when and whether H&M and/or P&I where exposed under the relevant policy. Traditionally, damage to a vessel itself and/or costs incurred in seeking to avert or minimise such damage ("Sue & Labour" expenses) fell under the H&M policy, whereas liability to third parties, including cover against risk to the environment and SCOPIC, was covered by P&I insurers.
The inclusion of SCOPIC costs as part of the CTL calculation (as previously held by the Court of Appeal) may have made the difference in establishing a CTL and meant that Owners could recover the vessel’s entire insured value from their H&M insurers. Some saw this as an indirect claim (on the H&M insurers) in relation to SCOPIC remuneration, which traditionally would not have come within the H&M insurers' remit.
This is no longer the case as the Supreme Court has clarified that the objective purpose of SCOPIC expenditure is not to enable to the ship to be repaired, but to protect an entirely distinct interest of the shipowner, namely his potential liability for environmental pollution. Therefore, SCOPIC charges cannot be considered as part of the "cost of repairing the damage" for the purpose of section 60(2)(ii).