Subrogation, other insurance and general average, Cl. 16‑16

  1. Subrogation and double insurance in general

    Cl. 5-13 is the general rule that the insurer is subrogated to the rights of the assured against third parties. This rule is also applicable to the loss of hire insurance. The general rule is that the insurer is entitled to his proportion of such claims. The insurer's claim shall not take preference over the assured's claim against the third party. The assured may have suffered losses that are not covered by the insurer, such as deductibles, or he has not taken out insurance for the loss, it is uninsurable or he has lost his insurance cover for that particular loss. Regardless of the reason why the assured has suffered a loss on his own account, he is entitled to a proportion of the recovery from the third party.

    Cl. 2-6, sub-clause 1, contains the general rule on double insurance. The general rules is that each insurer is jointly liable towards the assured. He may choose between them, and if one insurer does not pay wholly or in part, the assured may make a claim against the other insurer until he has received the full compensation to which he is entitled.

    In some cases, insurance conditions expressly state that the insurance is subsidiary to any other insurance.

    Pursuant to Cl. 2-6, sub-clause 2, the subsidiary insurer is only liable to the extent the primary insurer does not pay the claim.  If all insurances are subsidiary, the rule in Cl. 2-6, sub-clause 1, shall apply which means that all of them are transformed to primary insurances with joint and several liability towards the assured.

    Cl. 2-7 provides that the insurers are internally liable in proportion to the amount for which each insurer was liable and may seek recourse against each other if they have paid more than their share to the assured.

    Cl. 2-6 and 2-7 are also applicable to the loss of hire insurance, but Cl. 2-7 is set aside by Cl. 16-16 as will be explained under 9.3 below.

  2. Subrogation in claims against third parties

    As explained under 9.1 above, Cl. 5-13 also applies the loss of hire insurer.  He is therefore subrogated to the assured's claim for loss of earnings caused by a collision between the assured's vessel and a vessel belonging to a third party. The loss of hire insurer may also be subrogated to the assured's direct claim, if any, against the other vessel's insurer covering the liability for the collision.

    Likewise, the loss of hire insurer is subrogated to the assured’s claim against a repair yard for faulty repairs and delayed re-delivery of the vessel from the yard after repairs subject to the terms of the contract between the assured and the yard.  He may also be subrogated to the assured's claim for freight against a charterer. In all these cases, the apportionment principle of Cl. 5-13 will apply.[24]

    The Commentary to Cl. 16-16 provides an example to illustrate how apportionment shall be adjusted according to Cl. 5-13 (as opposed to the now obsolete and abolished “top/down principle”. The Commentary states:

    An example will illustrate how the apportionment is to be carried out: the ship is insured for 90 days per casualty. The daily amount is USD 10,000 and the deductible period is 14 days. After a collision, the ship suffers a loss of time of 180 days equivalent to USD 1,800,000. The casualty is settled as follows: the assured must carry the first 14 days, after which the insurer covers the next 90 days, paying a total of USD 900,000 in compensation, and finally the assured covers the remaining 76 days. It is assumed that there are no simultaneous repairs. Blame in the collision settlement is apportioned on a 50/50 basis, and the opposite party accepts the loss of time of 180 days as the basis for the settlement. The insured ship then recovers 50% of USD 1,800,000 = USD 900,000. The recovery must be apportioned on a pro rata basis between the parties according to the time each of them has covered. The assured receives 50 % of (14 + 76) = 90 days of lost time, i.e. USD 450,000, while the insurer receives 50 % of the loss of time that he has covered (90 days), i.e. USD 450,000.

    The net result of this procedure is that the insurer only pays USD 450,000 despite the fact that the sum insured is USD 900,000. At the same time, the assured will have an uncovered loss of 50 % of the uninsured time, i.e. USD 450,000. When the loss-of-hire conditions of 1972 and 1993 were practiced, it was claimed that since the insurer’s net payment did not amount to the full sum insured, he had to use his share of the recovery to “continue” to cover the assured’s uncovered loss of time in excess of the deductible period. In actual fact, however, this would be reintroducing the “top-down” principle. The rule of pro rata apportionment pursuant to Cl. 5-13 must be applied consistently in all cases. Therefore the insurer must not be obliged to use the amount he recovers to compensate for further loss of time.

    As an extension of this issue, there has in practice been discussion as to whether the insurer is liable for use of the unused part of the sum insured – in the example above, USD 450,000 – to cover a subsequent casualty in the same insurance period. The answer to that question is no. In practice, it can take many years from the time of the casualty to which the refund applies until the refund is actually paid out. The possibility of transferring such a refund to a subsequent casualty will create uncertainty as regards the scope of the cover. Normally, the parties will also have agreed that cover is to be automatically reinstated. In such case the calculation of the reinstatement premium must be deferred until the time of refund or, if appropriate, adjusted once the refund is ready. This can take place many years after the insurance contract period has been “closed”. The same approach must therefore be adopted for subsequent casualties as for the casualty to which the refund applies: in no case may the refund be used to cover the assured’s uncovered losses.

    However, the apportionment principle in accordance with Cl. 16-16, cf. Cl. 5-13, only applies to recovery settlements. Other principles apply to apportionment settlements between the assured and the insurer in accordance with Cl. 16-11, sub-clause 3; see the Commentary on this provision.

    [24] The Commentary to the versions prior to the 2003 version (1999 Commentary on page 414) introduced a so-called “top/down principle” which was not in conformity with Cl. 16-16 express reference to Cl. 5-13. Since the 2003 version of the Norwegian Plan the Commentary to Cl. 16-16 expressly states that the “top/down” principle shall no longer apply. This is maintained in the Nordic Plan Commentary to Cl. 16-16 in the 2013 version and the current 2016 version. 

  3. Subrogation in claim against other insurers or general average

    As explained under 9.1, Cl. 16-16 sets aside Cl. 2-7 and introduces the principle of Cl. 5-13 instead. Cl. 16-16 reads:

    The rules as to subrogation in Cl. 5-13 of the Plan shall apply correspondingly to:

    1. the assured's right to claim compensation for loss of time and operating costs during removal to a repair yard under Cl. 12-11 or Cl. 12-13 of the Plan, or equivalent provisions in other conditions applicable to the ship’s hull insurance, and

    2. any right the assured might otherwise have to claim compensation for his loss from any other insurer or in general average.

    This provision corresponds to Cl. 13 of the 1972/1993 conditions.

    Under 7.2.3 above, it was explained that the hull insurance offers a true loss of hire cover for time lost in obtaining tenders.  The hull insurance covers time so lost in excess of ten days. The same period of loss of time compensated by the hull insurer may also be covered by the loss of hire insurer. Letter (a) of Cl. 16-16 provides that the loss of hire insurer shall be entitled to full recourse against the hull insurer for loss of time which is payable by the hull insurer pursuant to Cl. 12-11, sub-clause 2. While the hull insurer's liability during the excess period is fixed at 20% per annum of the agreed insurable value, the loss of hire insurer may be liable to pay any loss of hire exceeding such amount, if recoverable pursuant to Clauses 16-5 or 16‑6.

    The same goes for the partial cover of operating costs compensated by the hull insurance pursuant to Cl. 12-13, sub-clause 1. The reason that the loss of hire insurer has full recourse against the hull insurer for these costs is that the assured will be compensated twice if he recovers both loss of hire and operating costs. The lost income compensated by the loss of hire insurer is not the net profit of the assured, but the gross income. It would be a windfall profit for the assured if the loss of hire insurer were not entitled to recover the operating costs compensated by the hull insurer.

    However, it must be evaluated on a case by case basis whether there would in fact be any such windfall profit for the assured. If not, there is no reason for any recourse or deduction by the loss of hire insurer. In the most common cases where the daily amount is agreed at an amount without any specification as to which items are covered, the daily amount is normally intended to compensate the gross income less saved variable costs. If so, there will be a windfall profit for the assured, if he should both get the agreed daily amount and the compensation from the hull insurer according to Cl. 12-13, sub-clause 1 for costs of removal of the damaged vessel to the repair yard.

    In some cases, the hull insurer compensates wholly or partly crew wages if they participate in the damage repairs. This is so, for example, under German hull conditions. According to Cl. 12-5 (a) of the Nordic Plan, ordinary crew wages are not covered during repairs unless otherwise specially agreed. Such special agreement is rather common these days as the insurer acknowledge that it may also be beneficial for the hull insurer to let the crew carry out repairs that do not need to be carried out at a yard or by expert repairers.  Overtime paid to the crew participating in damage repairs is normally covered by the hull insurer. In many cases it may be difficult to distinguish between ordinary crew wages and overtime, which cause the hull insurer to agree to pay all the crew wages (ordinary as well as overtime) for those participating in the damage repairs. Also in these cases the loss of hire insurer will have recourse against the hull insurer according to Cl. 16-16 (a), if there will, otherwise, be a windfall profit for the assured. However, the hull insurer’s compensation of mere overtime to the crew participating in damage repairs, will normally not entitle the loss of hire insurer to any recourse against the hull insurer, as overtime is not comprised within the daily amount unless expressly agreed.

    Cl. 16-16 deals with recourse, not with priority[25]. The assured may thus always claim the total time lost from the loss of hire insurer and leave it to the loss of hire insurer to seek recourse from the hull insurer.  However, to the extent that any loss of time has already been compensated by the hull insurer, such amount should be set off against the assured's right to compensation from the loss of hire insurer, see the Commentary to Cl. 16-16. The same follows from Cl. 2-6.

    Letter (b) of Cl. 16-16 is probably superfluous insofar as the assured's claim in general average is concerned. Cl. 5-13 would have been applied on such claims at any rate, cp. the 1972 Commentary, page 71.

    Operating costs such as victualling, crew wages may be allowable in general average and, if so, the loss of hire insurer should be subrogated to these claims for the same reason as explained above with regard to Cl. 12-13 claims on the hull insurer.

    For all practical purposes, a loss of time claimable from insurers other than the hull insurer is a claim against a liability insurer. This may be the liability insurer of another vessel or another tortfeasor. Such claims would at any rate be subject to Cl. 5-13, se under 9.2 above, if there is a right of direct action.

    However, in addition to a loss of hire insurance, the assured may have taken out separate, freight risk insurance covering a voyage freight. If so, there is a double insurance, and the loss of hire insurer will have full recourse pursuant to letter (b).

    [25] Cl. 16-11, on the other hand, expressly provides in effect that for any overlap between the hull insurance and the loss of hire insurance with regard to costs of preventive measures covered by the loss of hire insurance, the loss of hire insurance is subsidiary to the hull insurance.