Loss of income

The words "The insurance covers loss due to the vessel being wholly or partially deprived of income" are a verbatim repetition of § 2, subparagraph 1 of the 1972 and 1993 conditions.

The 1972 Commentary, page 32 made it clear that the intention of these words was that if, the vessel would have been unable to earn any freight regardless of the damage, there should be no recovery under the loss of hire insurance. The English courts have confirmed and settled the law on this point in "The Capricorn”, Cepheus Shipping Corporation v. Guardian Royal Exchange Assurance plc. [1995] 1Lloyd’s Rep 622. The Commentary to Cl. 16-3 refers to "The Capricorn" and re-emphasised this fundamental principle.

In the “Capricorn” the plaintiffs claimed 60 days’ loss of time under the loss of hire policy. The policy was subject to the Norwegian "General Conditions for Loss of Charter Hire Insurance (1972)" with 1977 amendments and with the incorporation of a reference to the Institute Time Clauses (Hull) 1.10.83. The plaintiffs argued that it was irrelevant to consider what, if any, use they might have made of the vessel after the end of the peak season but for the damage. They submitted that the policy wording compensated them for loss of earning capacity without proof that such capacity would have been deployed by them in the market. The defendants argued that the policy was not to be read as covering loss which the vessel would have sustained, damage or no damage, because she would in any eveny have been out of the market. They submitted that the vessel was due to be and would have been laid up throughout the low season and thus that the plaintiffs had no insurable interest.

The judge held that the plaintiff's insurable interest in the subject matter insured (i.e. freight and income from trading) must have existed at the time of loss. The judge found that it was clear that the assured would not have exercised their off-season option to trade the vessel, and that their intention throughout was and would (irrespective of the damage repairs) have been that the vessel should remain in lay-up. In other words, any loss of earnings was not due to the damage, but due to the fact that the vessel would have been out of the market anyway.

However, assuming that the assured would have reconsidered his intention to continue the lay-up had the market improved substantially, the judge concluded that the market never actually did and any prospect that it might was remote.

Although the vessel must have been deprived of income, firm evidence of possible employment is not required.  It is not necessary that the vessel has been employed at the time of the casualty. A reasonable possibility of obtaining employment for the vessel during the repair period will be sufficient to show that the vessel had the necessary earning capacity.

However, the assured must show that, from a commercial point of view, it is both the intent and purpose of the assured to place the vessel in the market and that there exists a possibility of obtaining employment. The assured thus has the burden of proving that although the vessel happened to be unemployed, his loss of income was the result of the insured damage. Such burden of proof follows from Cl. 2-12, sub-clause 1, according to which the assured has the burden of proving that he has suffered a loss of the kind covered by the insurance and the extent of the loss.

If, for example, the assured places his vessel in the Persian Gulf as one of several vessels waiting for a possible voyage charter and certain fixtures are made for other vessels, he must be deemed to have fulfilled the condition regarding earning capacity. One cannot demand that the vessel actually has been employed during the relevant period. But, if the allegedly available employment is geographically distant, the assured must prove that moving the vessel from where it lay when it was decided to carry out the repairs was both feasible and commercially realistic.

The borderline between a laid-up and an unemployed but freight seeking vessel may be difficult to draw. There are in general two lay-up conditions to be considered, so called hot lay-up and cold lay-up depending on the extent of the functions that are shut down.  In the author’s opinion guidance can be found in the classification societies’ guidelines on cold and hot lay-up.

DNV (now DNV/GL) Guidelines of March 2012 has the following definitions for vessels:

Hot lay-up: In this lay-up condition, the machinery is kept in operation for the sake of fast re-commissioning, but measures may be taken to reduce various operational costs.

Cold lay-up: In cold lay-up condition the machinery is taken out of service and the vessel is kept “electrically dead” with the exception of emergency power. This condition usually implies 3 weeks re-commissioning time or more depending on the level of preservation and maintenance during lay-up. The level of preservation is mainly decided based on the age and value of the vessel and the most likely re-commissioning scenario.

For cold lay-ups as defined above, it is clear that a lay-up plan is to be approved by the insurers and to be followed by the assured, ref the Plan Cl. 3-26, cf. Cl. 3-25. As long as the vessel is in such cold lay-up the assured has not been deprived of income due to any damage to the vessel.

For hot lay-ups as defined above, it seems equally clear that a lay-up plan pursuant to the Plan Cl. 3-26 is not required. At the outset, therefore, a vessel in hot lay-up must be considered to be freight seeking and thus may be deprived of income due to a damage triggering the loss of hire insurance. However, if the assured elects to reduce the crew on board and/or shut down certain functions, it is difficult to outline exactly when an approval of lay-up plan is a requirement according to the Plan Cl. 3-26. As a general rule, if a unit has a lengthy stay out of operation due to no contract, accompanied by a request of reduction in premium, it must be deemed to be laid-up both according to the Plan Cl. 3-26 and in relation to the test “deprived of income”.

However, this principle must not be extended to apply in those cases where the assured is entitled to a proportionate recovery pursuant to Cl. 16-12 for simultaneous repairs. From a logical viewpoint, it could be argued that if damage repairs are postponed to be carried out simultaneously with owners repair or reconstruction, the owner has not suffered any loss if damage repairs are carried out simultaneously with owner’s work. But there is no doubt that, in adjusting practice, Cl. 16-12 prevails over Cl. 16-1, so that the owner will be compensated for half the common repair time if at least one of the requirements under Cl. 16-12 for such apportionment is satisfied. Prior to the Nordic Plan, in 2013 it was proposed that Cl. 16-12 should be amended to reflect the principle that the loss of hire insurance would not respond if the owner had not suffered any loss because the vessel had been deprived of income in any event. This proposal was rejected by the insurers and never came before the Standing Revision Committee for discussion.

If, however, there had been any common repair time in the “Capricorn” case, then the owner would still not have recovered under the loss of hire insurance for any time “lost” while the vessel was in any event in lay-up. One must distinguish between lay-up and taking out a trading vessel from service to carry out required class work or other categories of work as listed in Cl. 16-12 (a) - (c).