Calculation of the claim, Cl. 16-3

In commercial shipping and the off-shore industry, time is money or, more precisely, loss of time is loss of income. In order to recover loss of income under the loss of hire insurance, the assured must establish that the vessel has been deprived of income during a certain period - that is the loss of time (cf. also Cl. 16-4), and the loss of income per day - i.e. the daily amount (Cl. 16-5 and Cl. 16-6) and, finally, the assured must accept a reduction in his loss of time as per the agreed deductible period (Cl. 16-7).

The calculation itself does not usually give rise to any dispute. It is normally the determination of the time lost and sometimes the assessment of the daily amount that necessitates the adjuster's skilful navigation.

The main rule for calculation of the compensation is Cl. 16-3:

Compensation shall be determined on the basis of the time during which the vessel has been deprived of income (the loss of time) and the loss of income per day (the daily amount). Loss of time arising before any of the events described in Cl. 16-1 shall not be taken into account.

According to the first sentence, the compensation shall be calculated as the product of the loss of time (i.e. the period during which the vessel has been out of service) and the daily amount.

Clause 16-3 must be read in conjunction with 16-1 which states that “the insurance covers loss due to the ship being wholly or partially deprived of income…..” Even though Cl. 16-3 does not contain the words “wholly or partially”, it is clear that these words must be read into Cl. 16-3 as well. Cl. 16-4, sub-clause 1, second sentence is expressly dealing with the calculation of the loss for vessels which have been “partially deprived of income”, see further below under 5.3.1.

  1. The period out of service

    The starting point is that the period out of service (the loss of time) corresponds to the period when the damage occurs until the vessel is ready to go back to service after completion of repairs.

    The period during which the vessel has been deprived of income will usually include time lost during survey(s) of the damage, obtaining tenders, tank cleaning, deviation to the repair yard, waiting to commence repairs, docking and other measures necessary to carry out repairs and, not least, the time necessary for the repairs.

    However, the time during which earnings are lost need not necessarily coincide with the period the vessel is actually out of service. The vessel may be on a time charter according to which the vessel shall be off-hire during the repair period and until she resumes service in a position not less favourable than where the casualty occurred. In such case, the vessel will be ready for service upon leaving the repair yard, however, without earnings until again being on hire as per the charterparty. It follows from Cl. 16-13 (a) that in such case, the insurer will be liable for time lost until the vessel can resume the voyage or the activity that it was engaged in under the charterparty in force at the time of the casualty, see further on recoverable loss of time after completion of repairs under 7.4.2 below.

  2. The commencement of the period

    According to Cl. 16-3, last sentence, the loss of time period commences at the time of the casualty.  This provision was introduced to simplify the computation of the claim under the loss of hire policy.

    It is conceivable that the vessel may suffer loss of income prior to the time when the damage occurred. For example, a vessel staying in Port A is fixed for a voyage with cargo from Port B to Port C. The ballast voyage from port A to port B is normally estimated to take five days while the loading in Port B and the voyage to Port C and subsequent discharge, will take 25 days. The freight, USD 300,000, is payable at destination, i.e. USD 10,000 "per day", totally 30 days including the ballast voyage. The vessel suffers a casualty the first day after departure from Port B in loaded condition and has to return to Port B for discharge and repair. The estimated repair time gives the charterer the right to cancel the contract of affreightment, and the assured cannot claim freight or distance freight. However, one may say that the vessel has been deprived of income both under the ballast voyage, during loading in Port B and the voyage up to the casualty, but such loss is not covered under Cl. 16-3. Neither is the loss of the charterparty covered under Cl. 16-3[8]

    So, under the loss of hire insurance, only the loss of income per day (the daily amount) multiplied by the number of days from the casualty occurred until completion of repairs[9], less the deductible period, is recoverable.

    [8] What is recoverable under the loss of hire insurance must not be confused with what may be claimable in tort against a third party. If the damage was caused by a collision with another vessel, it may well be that the total net freight under the voyage charterparty frustrated due to the collision may be claimable against the owner of the other vessel.

    [9] Cf. Cl. 16-13 on extension of the loss of hire period beyond completion of repairs in certain instances. 

  3. Sum Insured and insurable value

    The sum insured under a loss of hire insurance, according to Cl. 16-4, sub-clause 2, is normally simply the product of the daily amount multiplied by the maximum number of days insured. If the daily amount is stated in the insurance contract to be USD 20,000 and the maximum number of days insured are stated to be 180 days, the sum insured is USD 20,000 x 180 days = USD 3,600,000, which constitutes the maximum liability for the insurer, cf. Cl. 4-18.[10] See also under 5.3.2 where Cl. 16-4, sub-clause 2 is discussed in more detail.

    The insurable value under a loss of hire insurance based on the Plan is not defined in Chapter 16, but Cl. 2-2 in Part One of the Plan applies also to loss of hire insurance. Cl. 2-2 provides:

    The insurable value is the full value of the interest at the inception of the insurance.

    According to the Commentary to Cl. 2-2, the full value is the market value of the interest, which means, in loss of hire insurance, the market rate for the vessel in question. For practical purposes, according to Cl. 16-5, the daily amount constitutes the insurable value. See further on Cl. 16-5 under 5.4.

    In theory, the daily amount or the insurable value may not be insured in full. Such under-insurance may, of course, be deliberate by the assured but it may also occur by accident, in the sense that the daily amount stated in the insurance contract may, due to market fluctuations, be lower than the current market rate for the vessel. This is mere theory because, if the daily amount is stated in the insurance contract, Cl. 16-6 provides that this is a strong presumption that this amount is an agreed[11] daily amount. Therefore, the daily sum insured by stating the daily amount in the insurance contract will usually also be the agreed daily insurable value, so that the daily sum insured and the insurable value are one and the same amount. Hence Cl. 2-4 on under-insurance will normally not apply unless the assured deliberately under-insures his interest by stating a daily amount of, e.g. USD 20,000, and a daily sum insured of USD 10,000. See further on Cl. 16-6 under 5.4 below.

    [10] Cf. also Cl. 4-19 which provides that the insurer is liable for interest on the compensation and certain other expenses even if the sum insured is exceeded.

    [11] The terminology was changed in the 2016 version of the Plan both in Cl. 2-3 and 16-6. The previous term “assessed insurable value” and “assessed daily amount” was replaced by “agreed insurable value” and “agreed daily amount”.