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.