Constructive total loss, what costs should be included in the calculations: The “RENOS”

In giving the sole judgment of the Supreme Court on this case involving an assured’s claim for a total loss under a hull and machinery policy, the now retired Lord Sumption has given a definitive answer to a question on which there was no direct authority and clarified a second question on which there was doubt.

The first point was whether costs incurred before a notice of abandonment (the “notice”) is served count toward ascertaining whether the ship is a constructive total loss (“CTL”).  Frequently it is clear from early on that the ship will be a CTL, and if not, the hull insurer may well reject the notice and hold back for future negotiations and a compromise on the claim.  This may explain why this point has never had a direct judicial answer.

The starting point is the Marine Insurance Act 1996 (the “MIA”), Section 60(2)(ii) which provides that a ship is a CTL where:

…she is so damaged by a peril insured against that the costs of repairing the damage would exceed the value of the ship when repaired”. The costs of repair include salvage charges under clause 19.2 of the Institute Time Clauses and, in fact, were always treated as such in practice.  The reason to make the point is that in this case all the salvage charges were incurred prior to the notice.  So, do these “charges” count in the calculations for a CTL?

Early in Lord Sumption’s judgment he makes two fundamental points that shape the reasoning.  The first is that the use of the word “would” in the MIA “reflects the hypothetical character of the whole exercise and not the chronology of expenditure.”  There is, therefore, nothing in the wording of the MIA to suggest it is necessary to divide expenditure up along time lines depending on when a formal notice was given

Early in Lord Sumption’s judgment he makes two fundamental points that shape the reasoning.  The first is that the use of the word “would” in the MIA “reflects the hypothetical character of the whole exercise and not the chronology of expenditure.”  There is, therefore, nothing in the wording of the MIA to suggest it is necessary to divide expenditure up along time lines depending on when a formal notice was given.

Secondly, he points out a general rule that loss under a H&M policy occurs at the time of the casualty.  It may be that this loss has yet to be quantified but the moment it arose was the time of the casualty.  Moreover,

“The rule that the loss is suffered at the time of the casualty applies notwithstanding that the loss developed thereafter, unless it developed as a result of something that can be regarded as a second casualty, breaking the chain of causation..”.

Although several more points are then made in the judgment, the conclusion is that the timing of the notice is irrelevant.  Salvage costs incurred beforehand count in the calculations towards a constructive total loss.

The second question was whether SCOPIC costs should also be included in the calculation.  These are the costs a salvor incurs in protecting damage to the environment and for which they are subsequently entitled to charge the shipowner by way of “special compensation”Lord Sumption noted that these charges are designed to protect the shipowner for liability to the environment.

In consequence, the Supreme Court has held that SCOPIC remuneration is excluded from a CTL calculation.

They are very different in nature to the costs of actual repair of the ship together with the costs of, for instance, towage to a repair facility preliminary to those repairs.  This difference is also reflected in the difference in insurers.  Environmental damage is a P&I and not an H&M risk. In consequence, the Supreme Court has held that SCOPIC remuneration is excluded from a CTL calculation.

In consequence, the Supreme Court has held that SCOPIC remuneration is excluded from a CTL calculation.

Sveriges Angfartygs Assurans Forening (The Swedish Club) & Ors v Connect Shipping Inc & Anor (The “RENOS”) [2019] UKSC 29

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