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.