Co-insurance pursuant to Chapter 8 of the Plan

  1. The co-insurance agreement

    Chapter 8 of the Plan governs the co-insurance of third parties (other than mortgagees). This chapter was substantially edited and re-written in the 2016 version. Unlike the automatic protection given to mortgagees pursuant to Cl. 7-1, Cl. 8-1 provides:

    If the insurance is explicitly effected for the benefit of a third party, the insurance also covers this party’s interests within the scope and overall limits of the insurance.

    The word “named” was deleted from Cl. 8-1 in 2016. This deletion has significant implications. In the previous versions of the Plan, there was no co-insurance of third parties unless they were expressly named. The intention was that each co-assured should be identified by the name of the company (or individual) stated to be a co-assured under the insurance. If not, there was no co-insurance in place. Thereby, the insurer got full control over the extra risks that a co-insurance may entail.

    However, in particular in the offshore industry, the practice was to define the co-assured in more generic terms, cf. the waiver of subrogation and co-insurance clause in Cl. 18-1 (i). This practice spread to individual co-insurance clauses in insurance contracts for trading vessels. It was considered too burdensome to name each company that should be co-assured if there were many. Therefore, it is now common with co-insurance clauses to list a number of entities as co-assured in a generic manner by general non-specific reference, e.g. affiliated, associated or subsidiary companies of a named assured. Wordings like “as their interests may appear” are occasionally used. This kind of generic references will, under Cl- 8-1 as amended from 2016, also activate the rules in Chapter 8. Cl. 8-7, on the other hand, will not apply so that independent cover is not provided unless the third party is expressly named.

    The legal effect of such generic co-insurance clause was never really considered or debated under the previous versions of the Plan nor tested by any court. The insurer probably would be bound by the clause he had agreed in spite of the previous requirement that the co-assured should be expressly named. Let that be as it may, as the matter is no longer causing any legal issue under the 2016 Plan.

    In a similar way to Cl. 7-1, Cl. 8-3, sub-clause 3 provides that the co-assured stands in the shoes of the "owner", that is to say that the co-insurance offered under Chapter 8 is so called “dependent co-insurance”. The co-insurance may, however, be made independent by effecting cover pursuant to Cl. 8-7, see above at and below under 11.2.7.

  2. Protection of the co-assureds against subrogation claims from the insurer

    Clause 8-2 of the Plan is new in the 2016 version and governs the insurer’s right to be subrogated to claims against the co-assureds. The clause expressly provides that “the insurer does not have any right of subrogation against the co-insured third party unless and to the extent that such right is specified in the insurance contract or the co-insured third party has undertaken an express contractual obligation to an assured to remain liable for losses of the kind otherwise covered by the insurance.”

    The effect of Cl. 8-2 is that, if the insurer at the time he accepts to co-insure a third party does not expressly reserve the right to seek recourse against the co-assured third party, he will be deemed to have waived any right of subrogation against him, subject, of course, that the co-assured has not forfeited his right to recover or be protected under the insurance, see further below and Cl. 8-3, sub-clause 2 discussed under 11.2.3. The burden is on the insurer to reserve any such right of subrogation against the co-assured unless the co-assured has expressly agreed to remain liable in spite of the fact that he is co-insured.

    An example may illustrate the latter point. Very often the charterer under a time charterparty warrants that the ports he order the vessel to go to are safe for the vessel. Thus, if the vessel is damaged or lost due to an unsafe port, the charterer must compensate the owner for the damage and loss. The hull insurer having compensated the owner for e.g. cost of repairs under the hull insurance will normally be subrogated to the owner’s claim against the charterer. However, if the charterer is co-insured under the hull insurance there will be no right of subrogation into any claim against the charterer unless the hull insurer has expressly reserved such right of subrogation according to Cl. 8-2.

    Alternatively, it is conceivable that the charterer is prepared to compensate the owner and his hull insurer for damage to or loss of the vessel due to an unsafe port, but that he wishes to remain protected under the co-insurance for any liability, e.g. collision liability, or any other claims covered under the hull insurance. Therefore, the charterer may agree to include in the charterparty a clause to the effect that he shall remain liable according to the unsafe port clause, in spite of the fact that he is co-insured under the hull insurance. Such an express clause will suffice to give the hull insurer a right of recourse against the charterer for damage to or loss of the vessel due to unsafe port, even if the hull insurer has not himself reserved a right of subrogation against the charterer. Cl. 8-2 requires that such clauses are expressly incorporated into the contract (charterparty). The antithesis is clear and intended. Any implied terms to the same effect will not suffice to secure any recourse from the insurer.

    If the loss of hire insurer has compensated loss of income due to the damage to the vessel caused by ordering the vessel to an unsafe port, he may also seek recourse against the charterer either according to express clauses in the loss of hire insurance contract or in the relevant charterparty, provided, of course, that the law governing the charterparty allows also indirect losses such as loss of income to be claimed.

    Even though Cl. 8-2 is new in 2016, it may be said that it only confirms what would follow from the background law. The background law may of course vary from country to country and may not necessarily be settled law. No comparative study on this point is warranted for the purpose of this handbook but, in so far as Norwegian law is concerned, it may be said that the background law is not settled, as the matter has not been considered by any known published judgement or arbitration award. However, Hans Jacob Bull (Professor Emeritus of the Nordic Institute of Maritime Law at the University of Oslo) wrote his doctor thesis on Insurance Cover of Third Parties, published by Sjørettsfondet 1988. He wrote his monography in Norwegian, but with a rather comprehensive summary in English at the end of the book. In section 4.9 (pages 317-320), he discusses that co-insurance works also as an indirect liability insurance. On page 318, he concludes that in effect a co-insurance implies also a waiver of subrogation against the co-assured and refer to other academic’s supporting this view. On page 530 in the English summary he wrote:

    (4.9)    Although none of the provisions examined contain specific rules on the point, it is generally assumed that status as coinsured affords the third party protection against subrogation claims from the insurer. By including the third party as coinsured, the insurer thus waives his right of subrogation. It is argued that the coinsured is also in a position to claim compensation directly from the insurer in a case where the insured has elected to claim compensation for his loss from him instead of from the insurer. It is pointed out that the indirect liability cover provided through the insurer’s waiver of subrogation, is not absolute protection: the ordinary rules as to breach of duties contained in the insurance contract will also apply to this cover. (Emphasis added)

  3. Co-assured’s' duty of disclosure

    The person effecting the insurance, i.e. the contracting party, see Cl. 1-1, letter (b), will usually have an interest in the subject matter insured and will take out the insurance for his own benefit. However, he may also enter into the insurance contract for the benefit of a third party who may have an interest in the subject matter insured. Typically, the owner effects an insurance to protect his own interests and at the same time names the charterer as assured as well.  Any party whose interests are assured by the insurance contract is defined as an assured, see Cl. 1-1, letter (c). The assured who has not effected the insurance is referred to as a "co-assured".

    According to Chapter 3, Section 1, the duty of disclosure is vested in the person effecting the insurance. If the person effecting the insurance fails to comply with his duty of disclosure, the insurer may invoke this failure against any co-assured parties, see Cl. 3-38.

    Cl. 8-3, sub-clause 1, extends the scope of the duty of disclosure set out in Chapter 3, Section 1, to any co-assured, other than a co-assured mortgagee, see the Commentary to Cl. 8-3 , who is aware of having been named as co-assured under the policy. If one such co-assured party is in breach of his duty of disclosure, the insurer may only invoke this breach against the other assured parties if the co-assured in breach had the overall decision-making authority for the operation of the vessel, see Cl. 8-3, sub-clause 3, and Cl.3-37. The co-assured in breach of the duty of disclosure may, of course, have forfeited his own cover even if he was not in charge of the operation of the vessel.

    Sub-clause 2 governs the third party’s breach of the rules relating to duty of care. The provision gives the insurer the right to invoke the rules in Chapter 3, Sections 2 to 5 or Cl. 5-1 against the third party. A co-assured charterer who has the duty to comply with safety regulations related to, for example, dangerous goods carried onboard, may forfeit his protection under the co-insurance if the breach is in violation of Cl. 3-22, cf. Cl. 3-25 causing loss of or damage to the vessel. Thus, the protection offered to the co-assured according to the new Cl. 8-2, see further on this clause under 11.2.2, will not apply and the hull insurer who has paid the loss or damage may seek recourse against the charterer. The same will apply to the loss of hire insurer who has compensated the owner for loss of time due to the damage.

    It may be argued that the provision in sub-clause 2 is superfluous, since the rules relating to the duty of care are aimed directly at “the assured” and the third party as a co-assured party is covered by this expression. However, for the sake of clarity, it was decided to introduce an express provision to this effect. 

  4. Amendments to and termination of the insurance contract

    Cl. 8-4 does not protect the co-assured third party from the person effecting the insurance amending or terminating the insurance contract to the detriment of the co-assured. As opposed to a co-assured mortgagee duly recorded with the insurer, the co-assured is not entitled to any specific notice of amendments or early termination of the policy. In theory, the co-assured may obtain the insurer’ agreement that he shall be notified, but that is rarely, if ever, done.  The better alternative is for the co-assured to take out an insurance in his own name if he does not trust his contracting party to maintain the insurance as originally agreed.  Clause 8-4 will apply also to independent co-insurance pursuant to Cl. 8-7.

  5. Claims handling and set off

    Cl. 8-5 provides:

    Decisions required in respect of casualties, adjustments or claims against third parties may be made without the participation of any co-assured third party.

    The Clause was new in 2016, but corresponds to the provision found in Cl. 8-1, sub-clause 2, of the 2013 Plan which contained a reference to Cl. 7-3, sub-clause 1.

    The provision states that a co-assured third party is not entitled to participate in claims handling in respect of casualties, adjustments or claims against a third party. All decisions in this respect may be taken without the co-assured third party’s agreement. This is the same rule that applies to a co-assured mortgagee, cf. Cl. 7-3, sub-clause 1. It would be inexpedient and bothersome to involve a third party in the settlement of a claim. If the party effecting the insurance wants to secure a better position for the co-assured third party, this must be agreed with the insurer. 

  6. Other insurance

    Clause 8-6 was new in 2016.

    The clause prescribes that the insurance is subsidiary to another insurance that the co-assured third party has taken out. Consequently, the insurer shall only be liable to the extent that the co-assured third party has not obtained cover under the other insurance, cf. Cl. 2-6, sub-clause 2. If the other insurance also has a subsidiary provision, Cl. 2-6, sub-clause 1, shall prevail, cf. Cl. 2-6, sub-clause 3, with the effect that the co-assured third party is free to claim under any of the two insurances. 

  7. Independent co-insurance of mortgagees and named third parties

    Clause 8-7 reads:

    If it has been explicitly agreed that the interest of a mortgagee or a named third party shall be independently co-insured, the insurer may not plead that he has no liability due to an act or omission from the person effecting the insurance or another assured under the rules contained in Chapter 3 and Cl. 5-1.

    The Clause was new in 2016 and corresponds to Cl. 8-4 of the 2013 Plan. The heading was amended to clarify that the Clause applies both to mortgagees and to named third parties. Certain modifications were also made in the text itself. 

    The provision gives extended protection to a mortgagee and a third party compared to the rules found in Chapter 7 and in Clauses 8-1 to 8-6. The extended cover can only be activated by an explicit agreement stating that the rules in Cl. 8-7 shall apply to the co-insured mortgagee and/or third party. Contrary to other clauses in Chapter 8, in order to receive the protection given in Cl. 8-7, the co-insured third party must be explicitly named in the insurance contract, see also above 11.2.1.

    The independent cover implies that the co-insured mortgagee or named third party is not identified with the person effecting the insurance or with other assureds if found in breach with their duties under the contract. This means that the insurer can neither plead breach of duty of disclosure on the part of the person effecting the insurance, nor any failure to meet the duty of care on the part of other assureds, e.g. the breach of a safety regulation. On the other hand, those clauses in Chapter 3 that objectively limit or exclude cover, e.g. Cl. 3-17 and Cl. 3-19, will also apply to the co-insured mortgagee or named third party if granted independent cover under Cl. 8-7. 

    Cl. 8-7 does not protect the independent co-insured mortgagee or named third party in the case of loss of cover resulting from a failure of the person effecting the insurance to pay the premium. In that event, the insurance will lapse according to the ordinary rules in Chapter 6, unless the co-insured mortgagee or named third party is willing to pay the outstanding premium as a means of keeping the insurance in force. The independent co-insurance under Cl. 8-7 will have no influence on the rule set out in Cl. 8-4, which provides that any amendment or cancellation of the insurance contract shall also apply to the co-insured third party under Chapter 8. The question does not arise under the comparable provision in Cl. 7-2, since this provision already gives an ordinary co-insured mortgagee better protection than a co-insured third party under Cl. 8-4. 

    An obvious but important limitation of the cover provided by Cl. 8-7 is that it only applies to the insurance to which it is attached. Therefore, it cannot be a full substitute for a so-called Mortgagee Interest Insurance. This type of insurance is a separate insurance, which is taken out by the mortgagee bank on either a portfolio, fleet or individual basis. Such insurance protects the mortgagee if his position is prejudiced due to the acts or omissions of an assured resulting in a loss of cover under the core insurances, including P&I-insurance and war risks insurance.