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.