Deductible period, Cl. 16-7

  1. General

    A deductible is common in all kinds of insurances. However, while the hull insurance refers to an amount expressly stated in the policy, see, for example, Cl. 12-18, the loss of hire conditions refer to a deductible period counted in days. The principle is that the insurer is only liable for the agreed number of days exceeding the deductible period.

    The loss of time applicable to the deductible period will be determined in accordance with the provision in Cl. 16-4. The rule in Cl. 16-7 reads as follows:

    Each casualty shall be subject to a deductible period which shall run from the commencement of the loss of time and last until the loss of time, calculated in accordance with the rule in Cl. 16-4, sub-clause 1, second sentence, is equivalent to the deductible period stated in the insurance contract. Loss of time in the deductible period is not recoverable.

    Damage caused by heavy weather or navigating in ice which has occurred during the period between departure from one port and arrival at the next one shall be regarded as one casualty.

    If a separate deductible period for damage to machinery has been agreed on, Cl. 12-16 shall apply correspondingly.

    Sub-clause 2 was shortened and simplified in the 2003 version, and sub-clause 3 was added in the 2007 version.

    Sub-clause 1 contains the basic rule - any loss of hire during the deductible period is unrecoverable from the insurer. The assured may recover loss of hire during the deductible period from a tortfeasor, e.g. in case of a collision with another ship. Alternatively, the assured may recover loss of hire during the deductible period from a contracting party subject to the terms of the contract. If no recovery from any third party is available or possible, the assured will have to accept that the loss of hire during the agreed deductible period is for his own account. The same goes, incidentally, for any loss of hire during an excess period, if any, not covered by the loss of hire insurance.

    Cl. 16-7, sub-clause 1, refers expressly to Cl. 16-4, sub-clause 1, second sentence.  The point in this context is that the agreed deductible period must be adjusted correspondingly, if a vessel is only partially out of service. If a vessel can only operate at half speed after an engine damage, so that it takes 28 days instead of 14 days to remove the vessel to a repair yard, the deductible period of 14 days is only consumed after 28 days unless the vessel is 100% off-hire pursuant to the charterparty.  In this example, the assured will therefore only receive compensation under the loss of hire policy from the commencement of the repairs if there was no loss of time other than the sailing period before repairs were commenced.

    The number of days constituting the deductible period is agreed in the policy. For practical and economic reasons, the insurer will normally require a deductible period of minimum 14 days in particular to avoid a large number of minor loss of hire claims that would lead to costly and time-consuming claims handling. In order to save premium, the assured will often choose a longer deductible period, e.g. 30 days or, in some cases, even up to 60 days. Even though 14, 30 or 60 days deductible periods are the ones most common in practical use, the parties are, of course, free to agree any deductible period they wish in consideration of a reduction or increase in the premium, as appropriate, in each individual case.

  2. One or more casualties

    Each casualty will be subject to one deductible period. A casualty, in this respect, is a set of circumstances, which, pursuant to Cl. 16-1, give rise to a claim under the policy. Thus, if a casualty is followed by several separate periods of delays, for example in connection with the subsequent surveys or during temporary and subsequent permanent repairs, there shall be only one deductible period.

    The term "casualty" is not defined in the Plan. In the context of loss of hire insurance, a casualty constitutes the circumstance which gives rise to a new claim under the loss of hire policy - i.e. the event which the assured is insured against.

    However, it is usually not difficult to determine whether there has been more than one casualty.  Section 16-7, sub-clauses 2 and 3, deals with possible disputes regarding heavy weather damage and damage caused by the vessel passing through ice.

    Judgements on deductible or sum insured under hull insurance may be of interest also in relation to loss of hire insurance. Judgements on limitation of liability may also provide some guidance, as there is one limitation amount available for each event or accident.

    In the Norwegian Supreme Court case in respect of the "Vestfold I", ND 1977 page 38 NH, the engine gear was damaged during grounding.  About two months after the repair of the damage, the gear broke again. A misalignment was discovered on the crankshaft that had not been discovered during the first repairs. In addition to misalignment, the crankshaft had been wrongly mounted. It was found that the damage to the gear was caused either by misalignment in the crankshaft or wrongful installation, or a combination of these factors. The insurer's liability in respect of the damage to the machinery, including the gear, was subject to the damage being the result of the grounding. The question in dispute was whether the new gear damage should be attributed to the original grounding, in which case it would be covered under the insurance policy, or whether it should be considered a new casualty caused by error in workmanship, in which case it would not be covered by the insurance. The Supreme Court held that the insurer was liable according to the rule concerning the combination of perils and who should therefore pay 2/3 of the new damage to the gear. The court stated that the chain of causation from the original grounding was not broken when the yard made errors in connection with the repairs.[13]

    The "Sunvictor", ND 1974, page 103 NH, dealt with the question of the number of deductibles under an Anglo-American deductible clause. The hull policy incorporated the 1964 Plan, but contained a special deductible clause providing for a deductible of USD 100,000 for claims "arising out of each separate accident".  It was further provided "that a sequence of damage arising from the same accident shall be treated as due to that accident".  The "Sunvictor" grounded in the St. Lawrence channel and sustained bottom damage. Further bottom damage occurred when the vessel was pulled off the ground. In addition, the vessel was damaged by ice while aground and during towage to the nearest port or place of refuge. Finally, the vessel sustained further ice damage during removal to the repair yard in Quebec. The hull insurer argued that all damage occurring during removal of the vessel from the port or place of refuge to Quebec was a new "separate accident", so that two deductibles should apply. The Norwegian Supreme Court did not agree. The court held that there was causative connection between the grounding and all the subsequent damage, and that there was a "sequence of damage" so that only one deductible should apply.

    The proper interpretation of the words "one and the same event" for limitation of liability purposes was considered in the "Tønsnes" case, ND 1984, page 129, in which the vessel caused damage to several fishing nets during approximately one hour. The court held this to be “one and the same event“.  The same expression was considered in connection with the "Ny Dolsøy", ND 1987 page 160, which delivered contaminated bunkers to two different ships during 24 hours, resulting in damage to the engines of both vessels. This was  also considered as being "one and the same event" in relation to limitation of liability.

    On the basis of these judgements it is impossible to formulate any simple test giving guidance in evaluating whether there is one or more casualties. Nevertheless, the following factors seem to be of importance: (i) distance in location and time between the incidents, (ii) causation; could the assured have avoided the last incident and to what extent and (iii) was the last incident a consequence of an increased risk due to the first incident?

    The above discussion is for practical purposes of limited, if any, interest under a loss of hire insurance.  Whether there are one or more casualties, is potentially of great importance for the parties in the other cases mentioned above.  Whether one or more global limitation amounts shall apply, may have dramatic consequences for the parties concerned. The same may apply to the sum insured, in particular if the assured should end up in the unfortunate situation that one court decides that two or more global limitation amounts are available to the third parties having suffered damage as a result of the casualty, while another court decides that there is only one sum insured available to cover the liability towards third parties.  The claim in tort by the third parties may well be subject to the jurisdiction of a court different from the court deciding the assured's claim under his insurance policies. The courts may even be located in different countries.

    Even the question of one or more deductibles under a hull policy may be of significant importance, depending on the amount of the deductible. In principle, the same may be said with regard to the deductible under a loss of hire policy. Deductible periods of 30 days or more are not uncommon, and with daily loss of income in the range of USD 10,000 or more, there may be amounts at stake of some importance to the parties. The daily income may be several times higher than the amount agreed in the policy depending on the state of the market and, in the off-shore sector  and passenger trade (namely large cruise vessels and/or ferries), income may well be several hundred thousand dollars per day increasing dramatically the importance for the parties of whether one or more deductible periods should be applied.

    Under the loss of hire conditions there is no basis for aggregating the deductible periods if they run parallel for the casualties covered under the loss of hire policy.  That will normally be the case in those borderline cases where there may be doubt as to whether there are one or more casualties.

    The example of a vessel being out of control in port after an engine breakdown may illustrate the point. The vessel may sustain damage at several places at different times while striking other vessels in port before ending its uncontrolled navigation firmly aground or stuck at a quay.  Even if one should conclude that each striking is a separate casualty, no loss of time will occur until the vessel is stopped one way or another.  Only then will the deductible period or periods start to run, see below at 6.3. A possible solution could have been that, if the series of events was deemed to be two or more casualties, two or more deductible periods should be applied. However, the Commentary to Cl. 16-7 expressly states that, as long as the deductible periods run parallel, they shall not be cumulative, but shall be exhausted at the same time. In other words: in this situation, it does not matter whether the series of events is deemed to be one or more casualties. The same solution was adopted in the 1972/1993 conditions, see the 1972-Commentary, page 34. This solution was apparently considered self-evident by the authors of the 1972‑Commentary and was repeated without discussion in the 1996 revision of the Plan.

    [13] Even though this judgment is often cited and used in relation to discussion of one or more casualties, it is important to bear in mind that the Supreme Court did not decide on whether one or two deductibles should apply, but whether there was any cover at all under the limited cover provided under the special conditions for insurance of coastal and fishing vessels. In order to secure some cover for the insured, the Supreme Court did not deem a clear error in workmanship by the repair yard as breaking the chain of causation between the grounding and the subsequent gear damage that occurred only after insufficient and erroneous repairs were carried out. In order to secure part cover for the insured, the court went so far as to expressly state that it was a foreseeable consequence of the grounding that the yard might make an error in workmanship. This statement is in itself at best very dubious, if not manifestly wrong, and it must be queried whether the court would have stretched the law to this extent, if the subject matter for the court had been the far less serious issue for the assured of whether one or two deductibles should apply. The writer suggests that an error in workmanship by the repair yard must be deemed as a new incident so that the costs of repair and loss of time due to such errors must be subject to a new deductible.

  3. The commencement of the deductible period

    Before the 2003 version, Cl. 16-7 sub-clause 1 provided that the deductible period should commence "from the beginning of the casualty". If the vessel was not delayed immediately after a casualty, adjustment practice invariably counted the deductible period from the initial time lost until the agreed number of days had been reached, so that the insurer’s exposure commenced only after such time. On this basis, the wording of Cl. 16-7 on this point was inaccurate. The wording was therefore changed in the 2003 version and now provides that the deductible period “shall run from the commencement of the loss of time”.

    The deductible period may be interrupted or consumed in stages. Some delay may occur immediately after the casualty and later on in connection with surveys, temporary repairs, tenders and final repairs. In theory, the deductible period could be apportioned over the various periods the vessel is out of service, but as is explained in the following case, the deductible period runs from the commencement of the loss of time.

    In the "Ranhav" award, ND 1967, page 269, the arbitrator decided a dispute under the loss of hire conditions in use at the time.  He adopted the solution explained above which was then adopted in adjustment practice after the "Ranhav" case was decided and was incorporated in to the 1972/1993 conditions and maintained in Cl. 16-7.

    The principle of always reckoning the deductible days from the commencement of the loss of time has several consequences:

    Firstly, in connection with common repair time of casualty repairs and work not covered under the loss of hire insurance which are repaired simultaneously, the loss of hire insurer shall, in accordance with Cl. 16-12, pay only 50% of the compensation which would otherwise have been due under the insurance. Consequently and to the extent that the assured considers it necessary or advantageous to carry out any repairs not covered by the insurance, the assured will benefit from having such repairs carried out during the deductible period which, in any event, would not be covered by the loss of hire insurance.

    Secondly, in relation to the daily amount, if it is not the same for the whole period that the insurer shall compensate. If during permanent repairs, the daily amount is reduced pursuant to Cl. 16-14, sub-clause 2, the assured cannot opt for the deductible period to be the period during which the daily amount is reduced, thus enabling him to benefit from the higher daily amount during the earlier temporary repairs.

    Thirdly, in connection with recoveries from third parties.  Pursuant to Cl. 5-13, cp. also Cl. 16-16, recoveries from third parties shall be apportioned between the assured and the insurer in proportion to their respective interests. 

    The 1997 version of the Commentary to Cl. 16-16 introduced a new principle of top/down apportionment, but this principle was abolished altogether in the 2003 version of the Commentary, see further under 9.4.

    The Commentary to Cl. 16-7, also mentions Cl. 4-12, sub-clause 2 and Cl. 16-11, sub-clause 3 in this context.  Cl. 4-12 deals with costs of preventive measures in general, and Cl. 16-11 contains some special rules related to the cost of preventive measures which are most relevant under the loss of hire insurance – costs incurred in order to save time, see further under 12.

  4. Heavy weather, ice and shallow waters

    Cl. 16-7, sub-clause 2, was simplified in the 2003 version and is now identical to Cl. 12-18 in respect of hull insurance. Heavy weather damage encountered during a voyage between two ports shall be considered one casualty. The reason for this rule is that it is difficult to assess and separate each and all of the heavy weather damage sustained during the same voyage. This clause is of less importance under a loss of hire insurance than under a hull insurance for the same reasons as explained above under 6.2.

    The previous second sentence in Cl. 16-7, sub-clause 2, deals with heavy weather damage when the insurance period expires while the vessel is on a voyage between two ports. This sentence was not carried forward as the revision committee wanted the language of Cl. 16-7, sub-clause 2 to be identical with Cl. 12-18 which does not have any language to this effect. However, the 2003 Commentary expressly states that adjustment practice should continue as before, so, for all practical purposes, the amendments made to Cl. 16-7, sub-clause 2 should not have any substantive consequences.

    The meaning of the now deleted provision is best explained by the following example from the Commentary to Cl. 16-7 (dates reflect the fact that the example originates from the 1997 version):

    On a voyage which lasts from 20 December 1995 to 10 January 1996, the ship sails in heavy weather for six days before and three days after the new year, resulting in a total loss of time of 60 days. The 1995 insurance contract has a 30-day deductible and covers 180 days per casualty, while the 1996 insurance contract has a 15-day deductible and covers 90 days per casualty. The 1995 insurance contract thus covers 6/9 of the 60 days of lost time, i.e. 40 days, subject to a deduction of 2/3 of the deductible period of 30 days, i.e. 20 days; hence 20 days of loss of time is recoverable. The 1996 insurer covers 1/3 of the loss of time, i.e. 20 days, subject to a deduction of 1/3 of the 1996 deductible period, i.e. five days; hence 15 days are recoverable. The maximum number of recoverable days under the 1995 insurance contract is 2/3 of 180 days, i.e. 120 days, and under the 1996 insurance contract 1/3 of 90 days, i.e. 30 days. Thus, in our example limits would have no relevance.

    Sub-clause 2 of Cl. 16-7 expressly applies also to damage caused by ice during one voyage, so that all ice damage occurring during the voyage between the departure and arrival ports shall be deemed as one casualty. Prior to the 2003 revision, this was provided for in sub-clause 3 of 16-7. The above example relating to apportionment between two insurance periods is equally relevant for ice damage.

    The pre-2003 sub-clause 3 of Cl. 16-7 also expressly provided that the then sub-clause 2 should apply correspondingly to damage caused by navigation in shallow waters. For the reasons explained above, the current Cl. 16-7, sub-clause 2 does not refer to how damage due to navigation in shallow waters shall be treated in connection with deductible periods. There is still every reason to treat this type of damage as equal to heavy weather and ice damage. The 2003 Commentary to Cl. 16-7 therefore expressly emphasises that damage occurring during one voyage due to navigating in shallow waters shall also continue to be treated as one casualty. In addition, the apportionment between two insurance periods shall be treated the same way as for heavy weather and ice damage.[14]

    [14] In hindsight one may query whether there really was any benefit in making § 16-7, sub-clause 2 identical with § 12-18 and thereby deleting relevant express provisions which accurately provided for solutions the revision committee wished to maintain. Instead of getting the solutions directly from the text, users of the Plan must now read the Commentary very carefully in order to find out that what may seem from the outset as important substantive amendments are, in reality, not intended to entail any amendment at all. In the writer’s opinion, such legislative technique is not commendable.

  5. Separate deductible period for machinery damage

    The new sub-clause 3 to Cl. 16-7, which was added in the 2007 version, deals with a matter that previously had not been dealt with. This is because it is only in recent years that a practice has developed to agree a separate deductible period for machinery damage different from the deductible period for other damages, such as damage to the hull and equipment other than machinery. It complicates matters considerably to introduce different deductible periods for different parts of the insured object, but the market has developed this practice for commercial reasons. By, for instance, agreeing longer deductible periods for damage to older machinery for which spare parts are no longer readily available and, in many instances, have to be produced individually, the premium can be reduced as the exposure for the insurers is reduced. However, the individually drafted clauses providing for a separate deductible period for machinery very often leaves two important questions unanswered, and the revision committee thought the time was ripe for dealing with the problem by an express provision in Cl. 16-7.

    The two most important questions that arise are:

    1. What is machinery damage? That is to say, what is the borderline between the two, separate, deductible periods provided for in the individual insurance contract?
    2. Should the deductible period for machinery damage apply regardless of the cause of the machinery damage?

    These two questions are answered in Cl. 16-7, sub-clause 3 simply by providing that Cl. 12-16 shall apply correspondingly. Cl. 12-16 deals with a similar problem related to hull insurance, namely when a separate machinery deduction is agreed.

    The effect of the reference to Cl. 12-16 is that, for the purpose of the separate deductible period, machinery is not only the propulsion engine with propellershaft, bearings and propeller, but also all auxiliary engines and accessories, pipelines and electrical cables outside the machinery, see further the Commentary to Cl. 12-16.

    In the modern type propulsion system, known as diesel/electric propulsion, propulsion engines are really electric motors located near the propellers or rather more often in the azimuth units each containing one propeller. These electric motors with all cabling must be deemed part of the machinery and subject to a separate deductible period. The same goes for the diesel engines running the generators providing the electric power to run the electric propulsion motors. The same diesel engines and generators may also produce electric power converted for other consumers on board, such as electrical driven pumps, electronic navigational equipment on the bridge, various appliances in the galley, lights etc. and thus serve the same functions as mere auxiliary engines on conventional vessels. All the diesel engines, generators, converters etc. must be deemed part of the machinery subject to a separate deductible period, regardless of whether one may define them as auxiliary engines or part of the propulsion system or both.

    Whether the reference in Cl. 16-7, sub-clause 3 to Cl. 12-16 is intended to comprise also Cl. 12-16, sub-clause 1, second sentence, is not expressly commented on in the Commentary to Cl. 16-7, sub-clause 3. Since there is no exception made for application of this part of Cl. 12-16, the effect must be that this provision shall apply correspondingly to any separate deductible period for machinery. If so, the separate deductible period for machinery shall be cumulative with the generally agreed deductible period in the loss of hire policy, unless the wording of the policy suggests that the general deductible period shall not be applied in addition to the separate deductible period for machinery.

    However, the Commentary expressly states that Cl. 12-16, sub-clause 2 shall apply correspondingly to any separate deductible period for machinery, which means that, if any machinery damage is caused by any of the causes listed in Cl. 12-16, sub-clause 2, any separate deductible period for machinery damage shall not apply. The thinking behind Cl. 12-16, sub-clause 2 is that machinery damage caused by external causes outside the machinery itself shall be subject to the general deductible. The three most practical external causes that may also result in machinery damage are expressly listed in Cl. 12-16, sub-clause 2 letters (a) to (c). In the event of these three causes, a separate deductible period for machinery shall not apply, if the machinery damage is a consequence of;

    1. the ship having been involved in a collision or striking
    2. the engine room having been completely or parted flooded
    3. a fire or explosion originating outside the engine room

    Cause (a) should not normally cause any difficulties, but the Commentary to Cl. 12-16 points out that it shall be deemed to be a striking if the propeller strikes drifting timber, drifting ice[15] or other floating objects. The same applies if a plastic bag or ice sludge is blocking the cooling water intake, or a fishing line or other similar lines or ropes entangle the propeller shaft, resulting in damage due to overheating or leakages etc. These are all external causes and the damage to the machinery is not due to any defect or inherent vice within the machinery itself.

    However, striking pre-supposes that the vessel or any of its parts or equipment is struck by a foreign object, as distinct from an object which originates from the vessel itself. The Commentary to Cl. 12-16 mentions, as an example that the rudder is falling off or brought out of position without any external impact, so that the propeller is “striking” the rudder and becomes damaged. Such damage will be subject to any separate deductible period for machinery. Not so if the vessel is striking its own fishing lines or nets or other equipment outside the vessel such as e.g. a streamer towed after a seismic vessel.

    Cause (b) may overlap with cause (a) in the sense that, as a result of a collision or striking, the hull may be punctured or damaged so that seawater has flooded the engine room. Because the previous versions of the Commentary categorised Cl. 12-16, sub-clause 2 as nautical exceptions, a discussion arose whether flooding of the engine room caused by error of the engine crew in, for example, closing a valve would come within cause (b). This is because such error can hardly be deemed nautical, in the sense that it has nothing to do with the navigation of the vessel. Nevertheless, since such error is an external cause outside the machinery, the revision committee concluded that such flooding should come within cause (b) as the wording clearly is wide enough to comprise flooding caused by errors of the engine crew. This is also expressly pointed out in the Commentary.[16]

    Cause (c) also clearly comprises external causes unrelated to any defects or inherent vice within the machinery To be on the absolute safe side, it is even expressly provided that the fire or explosion must have originated outside the engine room. The Commentary to Cl. 12-16 seems to define the engine room as the room where the propulsion engine is located. Pump rooms and other rooms forward of the engine room bulkhead are then outside the engine room. This definition presupposes that the engine room is located aft, which is most common on modern vessels. Any further partition of the engine room aft of the engine room bulkhead is of no importance to the application of cause (c) unless the rooms are separated by similar safety bulkheads as the engine room bulkhead.

    This definition of the engine room in relation to cause (c) may cause some difficulties in modern diesel/electric driven vessels as the discussion above shows. The room where the diesel engines are located must, in this context, be deemed as the engine room for the purpose of application of cause (c). However, should rooms or spaces where electric propulsion motors are located, if separate from where the diesel engines are located, be deemed to be an engine room within the meaning of cause (c)? Loss of time due to damage caused by a fire occurring in or originating from the electro motor should really be subject to a separate deductible period for machinery, as such fire is not external but is directly connected to the machinery.[17]

    [15] If the vessel is operated in the excluded or conditional trading areas or any other actually ice infested areas in violation of § 3-15, any and all damage resulting therefrom may be wholly or in part excepted from cover.

    [16] Even though the third paragraph of the Commentary to § 12-16, touches on this discussion by pointing out that the previous versions erroneously list cause (b) as a nautical exception, the corresponding correction is not made in the sixth paragraph. This slip will not have any bearing on the fact that the revision committee made a conscious choice as explained above.

    [17] This discussion shows that the criteria “outside the engine room” is not particularly adequate in this context. The distinction should be whether the fire or explosion occurred or originated from the machinery. If so, a separate machinery deductible period should apply. If the fire is unrelated to the machinery, but spreads so that machinery is damaged, only the generally applicable deductible period shall be applied. The whole discussion also shows that it should be carefully considered whether it is worthwhile to introduce a separate deductible period for different parts of the vessel or different types of damages or losses.