Daily amount

The daily amount is the assured's loss of income per day and is an important factor in calculating the insurer's liability.  The determination of the daily amount raises several difficulties - to some extent similar to those involved in calculating the loss of time.

The loss of hire conditions operate with two different systems: either establishing the loss of hire as an agreed daily amount at the time of taking out the insurance, see under 5.4.2 or, alternatively, a so-called "open policy", where the daily amount is determined at the time of the loss of income, see under 5.4.1. The former alternative is the most frequently used.

  1. Open policy - Cl. 16-5

    Cl. 16-5 reads as follows:

    The assured's loss of income per day (the daily amount) shall be fixed at the equivalent of the amount of freight per day under the current contract of affreightment less such expenses as the assured saves or ought to have saved due to the ship being out of regular employment.

    If the ship is unchartered, the daily amount shall be calculated on the basis of average freight rate for vessels of the type and size concerned during the period in which the ship is deprived of income.

    The open policy method will usually only apply pursuant to 16-14, sub-clause 2, according to which loss of time resulting from a stay at a repair yard commencing after the expiry of the insurance period is recoverable in accordance with the rules in Cl. 16-5 regardless of the agreed daily amount, if the actual loss of income per day is lower than the agreed daily amount.

    The daily amount under an open policy will be equal to the gross freight income per day, less savings caused by the vessel being out of service (e.g. bunkers, pilotage, port dues etc.). Expenses which the assured should have saved will also be deducted, regardless of whether they were, in fact, saved.

    If the vessel is unemployed at the time of the repairs, the daily amount shall be calculated on the basis of the average freight rate for vessels of the same kind and during the same period.  The reason for this rule is to avoid speculation as to the employment the assured would have sought for the vessel had it not been for the repairs - a short term contract at a very favourable hire or a longer term contract at a reduced hire. Since the assured may find it difficult to prove either of these alternatives and, in order to avoid hindsight speculation as to how the vessel would have been employed, this rule contains an objective element - the daily amount may be determined without any need to consider how the assured would actually have employed the vessel. Therefore, this rule means that the assured is not necessarily indemnified for his actual loss.

    Nevertheless, some problems may arise. A reference to "average freight rates" leaves open whether one should calculate the average freight rate throughout the total repair period or whether one should also take into consideration the length of time during which the various freight rates maintain almost the same level - the so-called "weighted average". In our opinion, the latter procedure should be adopted, if possible. Moreover, if the hire under a long term charterparty differs from the freight under a voyage charterparty (calculated on a time charter basis), which is often the case, the average of these two types of employment should apply.

    For an insured ship in liner trade, the daily amount must be based upon obtainable information regarding the freight earned by the particular vessel and other vessels in the same types of trade at the time of the casualty and the subsequent repairs.

    The rule in Cl. 16-5, sub-clause 2, offers satisfactory solutions both to the insurer and the assured, even though it could be improved by distinguishing between short and long term contracts of affreightment.  Nevertheless, by opting for an open policy, the assured has chosen uncertainty. 

  2. Agreed daily amount, Cl. 16-6

    Since the determination of the daily amount under an open policy may entail certain difficulties discussed above, an assured who prefers a more predictable assessment of his loss of income in case of a casualty to his vessel, may fix the daily amount in advance, as a so-called agreed daily amount.

    Cl. 16-6 reads as follows:

    If it is stated in the insurance contract that loss of income shall be compensated by a fixed amount per day, this amount shall be regarded as an agreed daily amount unless the circumstances clearly indicate otherwise.

    The agreed daily amount is not decided unilaterally by the insurer. The agreed insurable value is, according to Cl. 2-3, fixed by agreement between the parties. This practice is well known in hull insurance, where it has been considered advantageous to fix the insurable value at the inception of the insurance, see Cl. 2-2, because the market price of ships can vary greatly and make it difficult to assess the actual value of a ship from time to time. The same reasoning lies behind the use of agreed daily amounts in loss of hire insurances as freight rates will also fluctuate.

    The agreed daily amount for a time chartered vessel will normally equal the daily hire under the charterparty.  If the vessel is not employed under a time charterparty, the agreed daily amount must be based on an estimate of future income for the vessel.

    A loss of hire insurance should clearly state that the daily amount is agreed. However, the insurance contract refers normally only to an amount payable by the insurer per day. This may be understood as an agreed daily amount or as the agreed insured value per day. These two alternatives may be different - it is not necessary that the agreed daily amount is insured 100%, although that is the most common practice. Such uncertainties are solved by Cl. 16-6 which provides that unless the circumstances clearly indicate otherwise, the daily amount mentioned in the insurance contract shall be regarded as an agreed daily amount. This means that there is a presumption that the daily amount stated in the insurance contract is an agreed daily amount.  If by express agreement or by implication of the facts this presumption does not apply, the daily amount stated in the policy is merely the daily sum insured, but the recoverable amount must be calculated pursuant to Cl. 16-5.  The sum insured per day constitutes the maximum amount payable by the insurer but, if the actual loss per day is lower, only the lower amount will be recoverable under the loss of hire insurance in these cases.

    The use of an agreed daily amount is a benefit to the assured, as he will not need to substantiate his loss of earnings throughout the relevant period. This enables him to predict his earnings regardless of any major casualty to the vessel. Furthermore, he may then often obtain more favourable conditions for the financing of the vessel. An owner will usually assign the earnings and payments under a loss of hire insurance to the institutions financing the vessel or the financiers may be co-insured pursuant to Chapter 7 and 8 of the Plan. (see also under 10 and 11 below).