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.