Choice of repair yard, Cl. 16-9

  1. The potential conflict of interest between the loss of hire insurer and the hull insurer

    The loss of hire insurer normally wants repairs to be performed as fast as possible. If tenders from alternative repair yards have been obtained, he will therefore be interested in choosing the tender which offers the shortest time for repairs, even if it is not the cheapest.

    The hull insurer is not liable for the loss of time and therefore wants the costs of repairs to be as low as possible, provided the quality is up to standard.

    Since a yard that can offer a short repair period is often more expensive than a yard offering a longer repair period, there may be a conflict of interest between the loss of hire insurer and the hull insurer. This conflict ought to be resolved in a manner which, to a reasonable extent, takes into consideration the assured's interest in averting an uncovered loss.

    Similar conflicts of interest may occur in relation to costs incurred in expediting the repairs etc. The assured and the loss of hire insurer may want to use methods which speed up repairs, such as overtime, air transport of spare parts etc., whereas the hull insurer wants the cost of repairs to be as low as possible. The assured may further be interested in temporary repairs of the damage, if this makes it possible to postpone the final repairs to a more convenient time, whereas the hull insurer may prefer that the ship's damage is permanently repaired immediately. These conflicts are discussed in 7.2.2 and 12 below.

  2. Solutions to the conflict of interest between the hull insurer and the loss of hire insurer

    Problems related to the co-ordination of the hull cover and the loss of hire cover have a long history and have been discussed many times, both in relation to hull conditions and in relation to loss of hire conditions. A very thorough discussion is found in the Commentary to the 1972 conditions, pages 39-46 and 77-80. Reference is also made to pages 2-3 of the Commentary to the 1977 Amendments, to page 18 of the Commentary to the 1993 conditions and to the Commentary to Cl. 19-9 of the Plan.

    One possible solution to the conflict of interest between the hull insurer and the loss of hire insurer could be to let the hull insurer's liability be restricted to the cheapest repair alternative, whereas the increased costs incurred by choosing a tender which offers a shorter time for repairs are considered as increased costs incurred in order to save time, for which the loss of hire insurer is liable.  For historical reasons, this solution has not been adopted. The solution under the 1930 Plan was entirely to the advantage of the hull insurer since it at no time required the hull insurer to consider the assured's interest in averting a loss of time.  This system was, however, modified to a certain extent in the hull policies used.

    Another possible solution would be to choose the overall most economic repair alternative, taking into account both the repair costs, the costs of removing the ship to the repair yard and the repair period offered, and to let the respective insurer be liable for this alternative. This possibility was discussed in the Commentary to the 1972 conditions, page 42, but was not adopted.

    The solution that has been settled on is a system whereby the hull insurer to some extent pays increased repair costs incurred in order to save time.  During the 1964-revision of the Plan there was general agreement that the hull insurer should be required to show a certain degree of consideration for the assured's interest in averting a loss of time in most of the situations where this could occur. One of the reasons for this general agreement was that not all shipowners take out loss of hire insurance. The tradition that hull insurer is liable for "loss of hire elements" has been maintained in the Plan, see Cl. 12-7, Cl. 12-8, Cl. 12-11, Cl. 12-12 and Cl. 12-13, see 7.2.3 below.

    The remaining problem is to co-ordinate the loss of hire cover with the hull cover.  This co-ordination has been dealt with in several ways in the course of time with regard to the choice of repair yard.

    The original 1972 conditions and the 1993 conditions solved the co-ordination problem by a compromise between the interests of the loss of hire insurer and the assured.  These conditions stated that the assured decided which yard was to be used, but the liability of the loss of hire insurer was limited to the loss of time under the tender which would have caused the shortest loss of time, plus half of the additional loss of time which arose by not choosing that tender, see Cl. 6 of the 1972 and the 1993 conditions. This was naturally a simple solution, but it was unfavourable to the assured if he did not choose the quickest repair alternative, because one half of the "additional loss of time" remained uncovered. The following example illustrates the point: 

    Yard A   B   C  
    Repair/removal cost 1.8 mill. 1.2 mill. 1.0 mill.
    Loss of hire USD 10,000 per day 0.3 mill 0.45mill. 0.75mill
    Total 2.1 mill. 1.65mill 1.75mill

     The loss of time at each yard would be:

    Yard A: 30 days (USD 10,000 per day = USD 300,000 or 0.3 mill)
    Yard B: 45 days (USD 10,000 per day = USD 450,000 or 0.45 mill.)
    Yard C: 75 days (USD 10,000 per day = USD 750,000 or 0.75 mill.)

    According to Cl. 6 of the 1972 and 1993 conditions the insurer's liability was limited to the time lost by the quickest tender, which means 30 days at yard A, with the addition of one half of the 15 days which is the difference between A and B, i.e. a total of 37.5 days, or USD 0.375 mill.  The total compensation under this regime would accordingly have been USD 1.2 mill. + USD 0.375 mill. = USD 1.575 mill. This means that even if the assured chose the overall most economical alternative, namely alternative B, he would incur an uncovered loss of time of 7.5 days, i.e. USD 75,000. If the assured chose Yard C, he will recover 30 + 22 1/2 = 52 1/2 days = USD 525,000 from his loss of hire insurer. He will be uncovered for a loss of hire in the amount of USD 750,000 – USD 525,000 = USD 225,000. Thus, the best alternative for the assured was Yard B under the previous regime.

    The 1977-Amendment of Cl. 6 of the 1972 conditions provided a solution that was more favourable to the assured.  Said provision stated that the liability of the loss of hire insurer should be calculated on the basis of the tender which would have caused the shortest loss of time, plus full compensation of up to 30 days plus one half of any additional time lost due to the fact that another yard had been chosen.

    In the above example, the result of the latter provision would have been that the 15 days which is the difference between alternative B and alternative A, would have been compensated in full by the loss of hire insurer, and under alternative C the assured would have recovered 67 1/2 days.

    During the 1996 revision of the Plan there was a general agreement to protect better the assured's interest than had Cl. 6 of the 1993 conditions.

    It was decided to undertake a complete co-ordination of the hull conditions and the loss of hire conditions in the same way as for the War Risk Insurance, see Clauses 15‑14 (b) and 15-19 of the Plan. Such co-ordination is for practical purposes very difficult, if not impossible, to achieve unless the same insurer covers 100% of both the hull insurance and the loss of hire insurance.

    Furthermore, both the hull insurance and the loss of hire insurance must be covered on the basis of the Plan. This precondition is often not met because the Nordic market offers loss of hire insurance on the basis of Chapter 16 of the Plan to owners who have their hull insurance with foreign markets on foreign conditions. It was at the time found impractical to draw up alternative loss of hire conditions for which the scope of varied depending on the actual hull cover for the vessel. However, the revision committee reversed its view in this regard, when preparing the 2003 version of the Plan and reintroduced the 1972 solution for the assureds that have covered hull insurance on other conditions than the Plan, see further under 7.2.4 below.

    It was agreed to improve the standard cover by introducing a solution that aimed at giving the assured an incentive to choose the quicker, but more expensive yard, at which repair costs would be covered in full by the hull insurer, i. e. Yard B in the example above.  If the assured chose this yard, he will be covered in full by his loss of hire insurer, see Cl. 16-9, sub-clause 3, discussed under 7.2.4 below. But before we explain the solution contained in Cl. 16-9, we shall explain in more detail the hull insurer's cover of loss of hire elements.

  3. Hull insurer's cover of loss of hire elements

    As mentioned in 7.2.2 above, hull conditions on the basis of the Plan have traditionally also covered some elements of loss of time, and this tradition has been maintained in the Nordic Plan, see Clauses 12-7, 12-8, 12-11, 12-12 and 12-13.

    The basic provision is Cl. 12-12, which deals with the choice of repair yard for hull insurance. Sub-clauses 1 and 2 thereof read as follows:

    The tenders received shall, for the purpose of comparison, be adjusted by the costs of removal being added to the tender amount.

    The assured decides which yard shall be used, but the insurer's liability for the costs of repairs and the removal is limited to an amount corresponding to the amount that would have been recoverable if the lowest adjusted tender had been accepted, with an addition of 20% p.a. of the agreed insurable hull value for the time the assured saves by not choosing that tender.


    Cl. 12-12 is identical to § 183 of the 1964 Plan and is based on the view that the hull insurer shall show a certain consideration for the assured's interest in having the ship repaired at a yard which is more expensive, but works fast, thereby reducing the loss of time.

    Cl. 12-12 allows the assured to charge to the hull insurer the extra cost of more expensive but quicker repairs, up to an amount equal to 20% p.a. of the agreed hull insurable value for the time saved by the assured accepting the more expensive tender.  This limit is equivalent to 0.55 per mille per day (24 hours). The 20% p. a. formula may seem rather arbitrarily chosen, but the daily amount or daily rate arrived at by this method was at the time deemed not to be widely off the earning capacity of the various types of vessel in a long term perspective. A vessel with a hull valuation of USD 20 mill. will pursuant to this formula be deemed to have an earning capacity of USD 11,000 per day (24 hours). Whether the 20% p.a. formula has been adequate during the period since 1964 has not to the writer’s knowledge been subject to any research.

    Under the rules of Cl. 12-7 concerning temporary repairs and Cl. 12-8 concerning costs incurred to expedite repairs, the hull insurer is liable for the entire cost of temporary repairs when permanent repairs cannot be carried out at the place where the ship is situated, while the cost of temporary repairs in other cases and cost incurred to expedite repair work are covered within the 20% p.a. formula for the time that is saved for the assured. These provisions are based on the assumption that any excess cost incurred to save time will be covered by the loss of hire insurance so that the assured can also recover those costs that are not covered by the hull insurer, see Cl. 16‑11, which has been further addressed under 12 below. [18]

    Cl. 12-11 (concerning invitations to tender in relation to hull insurance), sub-clause 2, reads:

    If the time taken to obtain tenders exceeds ten days as from the date the invitation to submit tenders is sent out, the insurer is liable to compensate the loss of time at the rate of 20% p.a. of the agreed insurable hull value during the excess period.


    This is actually a true loss of hire compensation covered under the hull insurance, as opposed to cover of extra expenses and costs incurred to save time.

    Even if an invitation to tender from several yards is primarily in the interest of the insurers, it is a normal and proper procedure to invite tenders in connection with the repair of major damage. The assured must thereby in any event accept a certain delay in connection with the submission of the tenders. For this reason, it has been established that the hull insurer's liability for loss of time due to invitation to tender takes effect only after 10 days as from the date the invitation is sent out. The hull insurer's liability is limited to the 20% p.a. formula during the excess waiting period. The Commentary to Cl. 12-11 emphasises that there must be causation between the fact that tenders are being invited and the loss of time. If all the relevant repair yards are busy so that the vessel will have to wait at any rate, the invitation to tender will not have caused the assured any loss.

    Also Cl. 12-13, sub-clause 1, which deals with the costs of removal of the ship to the repair yard, establishes that the hull insurance provides a limited cover of the assured's loss of time.  The removal of the ship to the repair yard constitutes part of the repairs. The hull insurer must therefore cover the costs of removal, including inter alia the cost of bunkers, any necessary towage, and canal and port expenses.  However, the assured has also a limited cover of his loss of time during the removal, in that the hull insurer is liable for the wages and maintenance of the "necessary crew" during the relevant period of removal of the ship.  "Necessary crew" means crew which are required for the removal of the ship and includes the maritime crew, whilst hotel and shop staff on a passenger liner will normally not be covered.   It should also be noted that the wages and maintenance costs which the assured saves through the fact that the removal places an employed ship in a more favourable position, must be deducted, see Cl. 12-13, sub-clause 1, second sentence.

    Otherwise reference is made to 7.3 below concerning the loss of hire insurer's cover of the time lost during removal to the repair yard.



    [18] It is worth noting that the hull insurer in certain circumstances assumes all cost incurred to save time if the damage cannot be repaired within a reasonable time, so called “unrepairability”. The Commentary to Cl. 12-1 has introduced the concept of “unrepairability” where it is stated:

    ”Regardless of whether the repairs are carried out with used or new parts, it is a prerequisite that the part is obtainable within a reasonable period of time. The question as to what is “a reasonable period of time” must be decided on a case-to-case basis depending on the type of ship and the place of repairs. If the part cannot be obtained within a reasonable period of time, this means that there is a situation of “unrepairability”, and the insurer must cover new and/or more expensive parts to the extent that this is necessary. If the waiting time is not so long as to entail unrepairability, the use of new parts in order to save time may have to be regarded as a cost in order to expedite the repairs according to Cl.12-8.”

    In some cases there have been very long delivery times for required new parts. Delivery times of up to nine months have been experienced in some cases. However, by incurring extra expenses to the yard, manufacturers or other third parties, the delivery time has been shortened considerably. In some cases the manufacturer has, with or without justification, operated with a ”flexible” price system. The earlier the delivery, the higher the price. Another creative solution may have been to take parts from sister vessels under construction or in operation and pay a compensation for this swap. There have also been cases where a competitor has possessed the required parts in storage and has charged a rent or hire for the part until it has been replaced by a new part as soon as this could be delivered. If the concept of ”unrepairability” has been deemed satisfied, then hull insurers have paid such hire as part of the, under the circumstances, ”reasonable costs of repair”. It goes without saying that the borderline here is very difficult to draw, and a wide discretionary power is vested with those who draw up the adjustment or decide in the final instance, whether it be the courts, arbitrators or independent adjusters with whom the parties have left the final decision.

  4. The loss of hire insurer's cover, Cl. 16-9, sub-clause 3

    Cl. 16-9, sub-clause 3 was as mentioned under 7.2.2 above amended in 2003 and deals with the complicated problems concerning the borderline between hull insurance and loss of hire insurance and reads as follows:

    The assured shall decide which yard is to be used. However, the liability of the insurer shall be limited to the loss of time under the tender that would have resulted in the least loss of time among the tenders for which the assured would have been able to claim compensation under the hull insurance. If the assured chooses this repair yard, the claim shall be settled on the basis of the actual time lost, even if this is greater than that specified in the tender. If the hull insurance has been effected on conditions other than those of the Plan, and these conditions have been accepted in writing by the insurer, the liability of the insurer shall be limited to the loss of time under the tender that would have resulted in the least loss of time plus half of any additional loss of time that may occur.

     
    The effect of Cl. 16-9 if the hull insurance is covered on the basis of the Plan is best illustrated by the same example used in 7.2.2 above, and for the sake of convenience repeated here. The example is also used in the Commentary to Cl. 16-9:

    Yard A   B   C  
    Costs of repair and removal 1.8 mill. 1.2 mill. 1.0 mill.
    Loss of time at USD 10,000 per day 0.3 mill. 0.45mill. 0.75mill.
    Total 2.1 mill. 1.65mill. 1.75mill.

    20% p.a. of the agreed hull value has been set to USD 10,000 per day. The loss of time at each yard would be:

    Yard A: 30 days (USD 10,000 per day = USD 300,000 or 0.3 mill)
    Yard B: 45 days (USD 10,000 per day = USD 450,000 or 0.45 mill.)
    Yard C: 75 days (USD 10,000 per day = USD 750,000 or 0.75 mill.)


    The daily amount under the loss of hire insurance is also USD 10,000 in this example.

    According to Cl. 12-12 of the 1996 Plan the assured is entitled to recover from the hull insurer the lowest tender;  i.e.  Yard C - USD 1 million, with the addition of up to maximum 45 saved days, which is the difference between the time lost by choosing the lowest tender (75 days) and the time lost by choosing Yard A, i.e. USD 1 mill. + USD 0.45 mill. = USD 1.45 mill.

    USD 1.45 mill. is thus the maximum repair cost recoverable from the hull insurer. This is not sufficient to pay for repair at Yard A, so if the assured chooses this yard, he will only recover USD 1.45 mill. from his hull insurer and USD 300,000 from his loss of hire insurer (the deductible period is presumed consumed by time lost prior to repairs).

    If the assured chooses Yard B or C, he will recover in full the repair cost of USD 1.2 mill. alternatively USD 1 mill. from his hull insurer as he will never recover more than the actual repair cost from his hull insurer.

    According to Cl. 16-9, sub-clause 3 related to hull cover on the Plan, the loss of hire insurer pays for the time lost under alternative B, i.e. 45 days or USD 0.45 mill. This means that if the assured chooses alternative B he receives a total of USD 1.65 mill., which means that he is covered in full.

    The assured is free to decide which yard is to be used, but the recovery from the loss of hire insurer is limited to the loss of time which occurs if the assured chooses the more expensive alternative which falls within the hull insurer's liability, i.e. the alternative which gives the best total result. This situation reflects the general view that the hull insurance is the basic marine insurance and that other insurances, such as loss of hire, are supposed to be complementary to the hull insurance cover.

    The second sentence in sub-clause 3 provides that if the assured chooses the more expensive alternative which falls within the hull insurer's liability (alternative B in the above example), he will be entitled to recover under the loss of hire insurance for the time actually taken to complete the repairs even though this is greater than specified in the tender.  If the repairs require 55 days rather than the 45 days stated in tender B, the assured is entitled to recover 55 days, i.e. USD 550,000.

    The reason for amending Cl. 16-9, sub-clause 3 and going back to the 1972 solution, if the hull insurance is covered on conditions other than the Plan, is that under the previous versions of the Plan prior to the 2003 version, it was not a condition for the loss of hire insurer's liability under Cl. 16-9 that the hull insurance was based on the Plan. Sub-clause 3 referred simply to the ship's hull insurance, without setting further requirements. If the actual hull policy only covered the cheapest repair alternative, the loss of hire insurer was obliged to cover the time lost under this alternative. In the above example this means that the loss of hire insurer did have to pay for 75 days. It was considered unfortunate for the promotion of the Plan as a whole that the effect of Cl. 16-9, sub-clause 3 in certain instances could induce the assured to elect foreign hull conditions, rather than the Plan hull conditions, in order to obtain a better loss of hire cover in such cases as referred to above. Hence Cl. 16-9 was amended so that the 1972 solution was reintroduced if the vessel was insured on foreign hull conditions. Even though the wording of the current Cl. 16-9 does not expressly provide that, if the assured has not obtained the loss of hire insurer’s written acceptance of the foreign hull conditions, the adjustment must be made on the basis of Cl. 16-9, sub-clause 3 second and third sentence, this is expressly stated in the Commentary to Cl. 16-9 at the very end. The assured may not, in these situations, fall back on the solution adopted before the 2003 amendment of Cl. 16-9, sub-clause 3.

    This amendment is not necessarily to the detriment of those assureds who have insured the hull on foreign conditions as compared with those who have the hull insured on the Plan.

    If the assured elects Yard C in the above example, he will only be compensated the 45 days under alternative B as explained above if the hull is insured on the Plan. However, if the hull is insured on foreign conditions, he is compensated for 52 1/2 days, see under 7.2.2 above.

    Another example also shows that the amendment may provide those assureds with hull cover on foreign conditions a better loss of hire cover than those who insure the hull on the Plan. 

    Yard A B
    Repairs 1.8 mill. 1.8 mill.
    Loss of time 30 days = 0.3 mill. 25 days = 0.25 mill.

     If Yard A is to be preferred, the assured with hull cover on the Plan will only recover 0.25 mill. under his loss of hire insurance, while the assured with hull cover on foreign conditions will recover 2 1/2 days more (half of the extra time of 5 days).

    There may well be other examples showing the same picture, but, by and large, the assured who has covered the hull insurance on the Plan has now a greater possibility than before to get "full" cover (deductible disregarded), but he must see to it that he makes the right decisions.

    If the loss of hire insurer should leave it entirely to the assured to choose repair yard, without any limitation in the cover, it would be very tempting to the assured to elect the cheapest and slowest yard in periods where the freight market is low, in particular if the daily amount recovered under the loss of hire insurance should yield more than what the vessel could have earned in the market. When the market rate is high, the assured will shorten the off-hire periods as much as possible. The long term effect for the insurance market as a whole may therefore not be much affected, but this is apparently not sufficient ground for individual loss of hire insurers to let the assured have a free hand in choosing the repair yard.

  5. Tenders

    It is normal and proper procedure in the repair of a major damage to a ship to invite several repair yards to tender for the necessary work, so that the best technical solutions and commercial terms are obtained. The tenders will also indicate how quickly the damage can be repaired.

    Although marine insurance based on the Plan allows the assured to decide where his ship is going to be repaired, most shipowners would probably invite several yards to tender for the work, even if the insurer involved did not interfere. In practice, tenders will normally be obtained after consultation between the assured, the hull insurer and the loss of hire insurer.

    Nevertheless, competition between several yards will primarily be in the interest of the insurers and provisions have been included in the Plan in order to protect these interests. According to Cl. 12-11, sub-clause 1 (with regard to hull insurance) and Cl. 16-9, sub-clause 1 (with regard to loss of hire insurance), the insurer may require that tenders be obtained from repair yards of their choice.  The insurer must advise the assured whether or not he will demand invitations to tender. If he fails to do so, he may not object if the assured commences repairs without further notice, and the insurer will be obliged to cover the time actually lost.

    If, on the other hand, the insurer has demanded invitations to tender and the assured fails to comply with such demand, Cl. 16-9, sub-clause 1, second sentence, establishes the insurer's right to obtain tenders directly, possibly even after the repairs have been carried out. The same applies if the assured repairs the damage without having notified the insurer. Even if the assured and/or the hull insurer have obtained some tenders, the loss of hire insurer is entitled to obtain additional tenders independently, if he has reason to be dissatisfied with those already obtained.

    The assured may sometimes refuse to have the ship repaired at a particular repair yard under any circumstances, inter alia due to the bad reputation of the yard or due to other more specific business factors. Cl. 16-9, sub-clause 2, which corresponds to Cl. 12-12, sub-clause 3 (concerning hull insurance), reads:

    If, due to special circumstances, the assured has justifiable objections to the use of a particular repair yard, he may require that the tender from that yard be disregarded. [19]


    Firstly, the assured's right to require that a particular tender be disregarded is subject to the assured objecting as soon as he becomes aware of the relevant circumstances. If the assured has already invited the yard to submit a tender, it is normally too late to raise objections concerning circumstances of which the assured was, or ought to have been, aware when he requested the yard to submit a tender.

    Secondly, the assured may only demand that the yard be disregarded if "due to special circumstances" the assured has "justifiable objections" to the use of the yard. The following circumstances will normally be considered "justifiable objections":

    • justifiable doubt as to whether the yard has sufficient technical capability,

    • justifiable doubt as to whether the yard has sufficient financial capacity, and

    • an actual threat of strike at the yard, or the yard has recently been involved in repeated strikes and there is reason to fear that the conflict has not been resolved.

    The fact that the assured has had many disputes with a particular yard concerning earlier assignments is usually not relevant. However, the situation may be different if the assured can prove that the disputes have occurred due to dishonesty or due to a notorious unbusinesslike attitude on the part of the repair yard with regard to variation order requests.



    [19] For reasons unknown to the writer, the English 2003 version of Cl. 16-9, sub-clause 2 has been amended so that the wording is no longer exactly identical to Cl. 12-12, sub-clause 3 in spite of the Commentary to Cl. 16-9 stating that the wordings are identical. There must have been some unauthorised initiative taken on this point, which though cannot have any substantive effect on the understanding and application of the two provisions. This little editorial discrepancy has not been corrected in any of the subsequent versions of the Plan.