Total loss Clause 16-2

Clause 16-2 reads:

The insurer shall not be liable for loss of time resulting from a casualty which gives the assured the right to compensation for total loss under Chapter 11 of the Plan or under the corresponding conditions in the hull insurance that applies to the ship pursuant to Cl. 16-1, sub-clause 1, second sentence.

The effect of Cl. 16-2 is that there will be no recovery under the loss of hire insurance if the vessel is a total loss or a constructive total loss, see further under 4.2 and 4.3.

  1. The need for loss of hire insurance

    If the vessel is lost, the assured should, theoretically, not suffer any loss of income.  Either he can replace the vessel immediately, or the compensation from the hull insurer should furnish sufficient capital to generate the same income as the vessel had earned. If payment under the hull insurance is delayed for more than one month from the date the casualty was notified to the hull insurer, the assured is entitled to interest on his claim, Cl. 5-4 of the Plan.

    However, real life does not always follow theory.  In certain circumstances, a total loss may be to the benefit of the assured while, in other circumstances, a total loss may be most unwelcome and the assured may suffer not only loss of the investment cost of the vessel itself but also loss of income.

    The valuation of the vessel under the hull insurance, as compared to the market value of the vessel at the time of the loss, is very important in this regard.  It is also very important to take into account the assured’s possibility of covering the so-called hull interest and freight interest insurance in addition to regular hull insurance. Hull interest insurance and freight interest insurance, which in English insurance terminology are more often called Disbursement and Increased Value insurance, are dealt with in Chapter 14 of the Plan[6].  The insurance market offers these types of insurances precisely to satisfy those losses that the assured suffers in case of a total loss which are not covered by the hull insurance, the purpose of which is merely to cover the market value of the vessel. Pursuant to the Plan such increased value insurance may be taken out for 25% of the hull valuation as hull interest insurance and, in addition, another 25% of the hull valuation as freight interest insurance. Thus, the assured should have ample cover for the additional expenses or loss of income he suffers as a result of the loss of the vessel. 

    Pursuant to Cl. 14-4, sub-clause 3, the assured may obtain freight interest coverage even in excess of 25% of the hull value, if he suffers a loss under an existing time charter or a contract for consecutive voyages, as a result of the total loss of the vessel. In order to protect his interests under such existing contracts, the assured may take out an open freight interest insurance policy.  Any payment under such open cover policy will reduce payment under a regular freight interest insurance, see Cl. 14-4, subparagraph 3, last sentence. The idea is that the assured shall not recover 25% of the hull value under regular freight interest insurance in addition to the recovery under the open freight interest policy. The payments under these two policies must be consolidated. However, this consolidation shall not apply to payments under hull interest insurance.

    This means that in case of a total loss, the assured, who is fully insured, may recover the market value of the vessel under his hull insurance, plus 25% of the market value under his hull interest insurance and another 25% of the market value under his freight interest insurance, together 150% of the market value, provided that the insurable value and the sum insured correspond to the market value of the vessel.  The recovery may be further improved if the vessel is fixed on long term contracts.  Therefore, in the event of a total loss casualty, there is no need for any loss of hire insurance in addition to the hull insurance, hull interest insurance and freight interest insurance.  For this reason, Cl. 16-2 provides that the loss of hire insurance does not cover loss of time resulting from a total loss.

    [6] See further on the concept of Hull Interest and Freight Interest insurance, Wilhelmsen & Bull, Handbook on Hull Insurance, page 334-335.

  2. Actual and constructive total loss

    Cl. 16-2 provides that "The insurer shall not be liable for loss of time resulting from a casualty which gives the assured the right to compensation for total loss under Chapter 11 of the Plan.”  Chapter 11 deals with actual total loss (Cl. 11-1), unsuccessful salvage (Cl.11-2), constructive total loss (CTL) or, as the Plan calls it, "condemnation" (Cl. 11-3), and a missing or abandoned vessel (Cl. 11-7).  Therefore, there can be no claim under the loss of hire insurance in all those cases where the assured is entitled to total loss compensation. It does not matter whether the assured actually makes use of his right to claim total loss compensation. It suffices that he has a right to do so.

    In cases where there is a dispute concerning whether the vessel is a total loss pursuant to Chapter 11, the loss of hire insurer will usually follow the decisions made by the hull insurer. However, these decisions are not binding on the loss of hire insurer, cf. what is said in the Commentary to Cl. 16-1, sub-clause 1, about a parallel issue.

    If the hull insurer pays the sum insured in accordance with Cl. 4-21, such payment cannot be equated with payment of total loss compensation in accordance with Chapter 11. The assured may be able to satisfy that the vessel was not a CTL[7] and, if so, would be entitled to loss of hire compensation.  Should it later prove that the conditions for condemnation would have been fulfilled, Cl. 16-2 will be applicable. The same applies if the further development of the casualty results in the ship actually becoming a total loss, for instance where it has struck a reef and later sinks during the salvage operation or during the towage to a safe port or place.

    If the ship’s hull insurance has been effected on conditions other than those of the Plan, and the insurer has accepted those conditions, the question of the right to compensation for total loss shall be decided by the conditions of the hull insurance corresponding to Chapter 11 of the Plan, see also Cl. 16-1, sub-clause 1, second sentence which is expressly referred to in Cl. 16-2, see further under 3.6 above.

    [7] Constructive Total Loss

  3. Agreed or compromised total loss

    The concepts "agreed total loss" and "compromised total loss" do not exist under the Plan, even though they are often used in practice.  If the assured is not entitled to total loss compensation under Chapter 11, he was previously not entitled to any compensation unless the vessel was actually repaired, see Cl. 12-1. If the vessel was sold, the assured as seller could claim compensation for unrepaired damage, see Cl. 12-2. Cl. 12-2 was amended in the 2007 version so that the assured may opt for cash compensation for unrepaired damage at the expiry of the insurance period.

    However, these provisions do not prevent the assured and the hull insurer from reaching an agreement on "total loss compensation" in cases other than when the assured is entitled to compensation pursuant to Chapter 11 or Cl. 12-2.  Such agreement would, in reality, be an agreement for compensation for unrepaired damage. In certain circumstances, such an agreement may be to both parties' benefit.  That may be the case if the vessel is not a constructive total loss but the sum of the estimated repair costs and the value of the damaged vessel exceed the market value of the repaired vessel.  It would benefit both parties if the insurer paid the assured the difference between the market value of the repaired vessel and the value of the vessel in damaged condition. The insurer would save money as compared with paying the repair costs.  On the other hand, the assured may recover the equivalent to the market value of the vessel in repaired condition if he sells it in damaged condition plus receives the aforementioned compensation from the insurer. It goes without saying that the assured will not accept such a compromise if he believes that he will earn more by trading the repaired vessel in the market. He will then benefit from getting the actual repair costs covered by the hull insurer.

  4. Unrepaired damage

    The assured may claim compensation for unrepaired damage from his hull insurer as per Cl. 12-2. There are no similar provisions of Chapter 16 whereby the assured may claim compensation based on an estimate of lost time. The loss of hire insurance will only cover time that has actually been lost. In line with this, the assured may not transfer his potential loss of hire claim to a new owner in connection with a sale of the vessel, cf. Cl. 16-15 sub-clause 3.

    If the assured should get compensation from his hull insurer for unrepaired damage either by way of a compromise or pursuant to Cl. 12-2, the assured will still be entitled to compensation for actual loss of time caused by the casualty. If for example the vessel has grounded the time from the grounding to the vessel has been refloated and necessary temporary repairs have been conducted will be recoverable. If the assured does not carry out repairs, the loss of time may be so short that it does not exceed the deductible period, Cl. 16-7, see below under 6. Loss caused by the decision to postpone repairs will not be recoverable if the assured should elect at a later stage to repair the vessel, the actual time lost in connection with the repairs will be recoverable. When postponing repairs, Cl. 16-14 might limit the assured’s right to recovery, see below under 7.4.3.