Commentary

Scroll to the top

Chapter 6: Premium

  • General

    Chapter 6 contains rules on the payment of premium, additional premiums and reductions of premiums in certain situations. The Chapter has been greatly simplified in relation to the 1964 Plan, which contained a number of provisions that in practice were seldom or never applied. Accordingly, the following provisions have been deleted:

    1. Cl. 114 of the 1964 Plan, which contained rules on premium reminders as an alternative to the ordinary procedure in the event of non-payment of a premium in Cl. 113 (now Cl. 6-2). The provision corresponded to the Norwegian Insurance Contracts Act (ICA) Section 5-2, first paragraph, cf. Section 5-1, but under ICA the premium reminder is obligatory. The detailed and formal procedure was not very appropriate for shipowners' insurance, however, and the provision was thus not used in practice.

    2. Cl. 115 of the 1964 Plan on fraud and dishonesty. Sub-clause 1, which affirmed that the full premium was to be paid in the event of invalidity due to fraud or dishonesty, conflicted with declaratory background law. In addition, the provision was of minor practical significance and of hardly any preventive effect.

    Sub-clause 2, which conferred on the insurer entitlement to the full premium if the liability lapsed partially or in its entirety in the event of breach of the rules in Chapter 3 or Cl. 83, sub-clause 2, was superfluous. If the first breach led to the contract not being binding, it followed that no premium was paid either, cf. above. If, however, the consequence of the breach was that the insurer was entitled to disclaim liability for a casualty which had occurred, the contract ran in the usual manner, in which case a full premium was, of course, payable. If breaches of duties of disclosure or care led to the insurer cancelling the contract, it would already follow from Cl. 121 (now Cl. 6-5) that no premium would be paid for the time after the cancellation.

    3. Cl. 117 of the 1964 Plan on additional premiums when the risk became greater than originally assumed due to incorrect information or an alteration of the risk, without the insurer being able to invoke Cl. 26 or Cl. 32, was viewed as impractical.

    4. Cl. 119 of the 1964 Plan, on lapse of the entitlement to the premium when no risk attaches to the insurer, and Cl. 120, on the reduction of the premium when the sum insured is greater than the insurable value, were also impractical. Most situations in which the risk is reduced can be resolved using the provision in Cl. 6-5. If an exceptional situation arose which could not be brought within the provision or resolved through negotiations, background law, i.e. the Norwegian Contracts Act (Avtaleloven) Section 36: the doctrine on failure of implied basic assumptions, (translators note: roughly equivalent to frustration in Anglo-American law) could possibly be used to resolve the most inequitable situations.

    5. Clauses 123-125 of the 1964 Plan on the calculation of return of premium during a stay in port were unnecessarily comprehensive and detailed, but the solutions have been worked into the Commentary on Cl. 6-6 on return of premium in the event of a stay in port.

    In practice, the payment of the premium will often take place through a broker. Under English law, the broker is, in that case, liable to the insurer for the premium. By contrast, the 1964 Plan assumed that the issue of premium was a matter between the person effecting the insurance and the insurer and that the broker simply acted as the agent of the person effecting the insurance when the premium was paid through the broker. This approach has been maintained in the new Plan. Since the broker is an intermediary and not a party to the contract, there is no need for a broker's cancellation clause as is used in English insurance conditions to allow the broker to cancel the contract if the person effecting the insurance does not pay the premium. The broker's status as an intermediary also makes it unnecessary to regulate the broker's relationship to the premium in the Plan text, although the use of a broker for paying the premium is referred to below in the Commentary where it is natural to do so.

    In practice, it has been problematic that current payment routines lead to brokers being in possession of premiums and thereby earning interest income. This problem has been solved with the new broker regulations of 24 November 1995 No. 923.

  • Clause 6-1. Payment of premium

    This Clause was amended in the 2013 Plan.

    Under sub-clause 1, first sentence, the person effecting the insurance is "liable to pay the premium". The premium may, however, be paid by another party, for example the assured. The key point of the provision is thus that responsibility for the payment rests with the person effecting the insurance.

    For a person to have the status of "person effecting the insurance" and thus be liable for payment of the premium, it is a precondition that the person acts in his own name and becomes, in his own capacity, a party to the contract. If the insurance has been taken out by an agent acting in another’s name, then the principal is the person effecting the insurance. If a manager takes out hull insurance on a ship which is co-owned by several shipowners, the manager will often act as an agent for the owners, giving the owners the status of persons effecting the insurance. In bareboat chartering, however, the bareboat charterer will most often be listed as the person effecting the insurance, for example because the charterer wishes to have the status of co-assured under the insurance contract. In the mutual associations the status of person effecting the insurance will usually depend on who has been accepted as a member of the association and not on whose account the insurance has been taken out, cf. ND 1983.79 DH FRENDO, where the owners of the insured ships were listed in the insurance contract and given status as members of the association. As such, they were deemed to be persons effecting the insurance and held liable for the premium, despite the fact that, under the charterparty, the bareboat charterer was to keep the ship insured for his own account and was responsible for effecting the insurance and for all contact with the insurer.

    Sub-clause 1, second sentence states that the premium falls due on demand in the absence of any agreement to the contrary.

    It follows from what has been said by way of introduction that the rules on payment deadlines establish when the insurer is to have received payment of the premium. Accordingly, it is not sufficient that the person effecting the insurance has paid the amount to the broker.

    Sub-clause 2 contains a provision on interest on overdue payments and refers to the rate of interest provided for in Cl. 5-4, sub-clause 4. This provision was amended in the 2013 Plan in order to adapt the Plan to its future application in Denmark, Finland and Sweden. 

    View ClauseGo to Plan page

    Clause 6-1. Payment of premium

    The person effecting the insurance is liable to pay the premium. Unless otherwise agreed, the premium falls due on demand. If the premium is not paid when due, interest on overdue payments accrues at the same rate as provided for in Cl. 5-4, sub-clause 4.

  • Clause 6-2. Right of the insurer to cancel the insurance in the event of non-payment of premium

    This Clause corresponds to Cl. 113 of the 1964 Plan.

    The provision corresponds to the Norwegian Insurance Contracts Act (ICA) Section 5-2, with the difference that the ICA provision contains detailed rules on obligatory premium reminders, cf. also Cl. 114 of the 1964 Plan, and rules on protection of the person effecting the insurance if the non-payment is due to unforeseen impediments for which he cannot be blamed. There is no need for such comprehensive protection in marine insurance, and ICA Section 5-2, including the second sub-clause on unforeseen impediments is, accordingly, not applicable to insurance based on the Plan.

    By contrast, ICA Section 5-3, on when payment is deemed to have taken place, does apply to marine insurance as well. For the person effecting the insurance to be able to invoke the provision in the event of late payment, however, the premium must have been sent to the insurer. A delay in sending the amount from the person effecting the insurance to the broker is, accordingly, irrelevant, cf. the general comment above.

    View ClauseGo to Plan page

    Clause 6-2. Right of the insurer to cancel the insurance in case of non-payment of premium

    If a premium is not paid at the proper time, the insurer may cancel the insurance by giving fourteen days' notice. If the premium is paid before expiry of the time-limit, the notice of cancellation no longer applies.

  • Clause 6-3. Premium in the event of total loss

    This Clause corresponds to Cl. 116 of the 1964 Plan. The Commentary was amended in the 2010 version.

    Sub-clause 1 is identical to Cl. 116 of the 1964 Plan, and is in line with established international practice in shipowners' insurance to the effect that the full premium is to be paid for the current insurance year when a total loss has occurred. In loss-of-hire insurance, total loss occurs when the entire liability period is expended.

    Shipowners' insurance is usually taken out for a year at a time, meaning that the insurer will be able to demand one year's premium. The same applies, however, if it has been agreed that the insurance is to attach for a period longer than one year. In such case, it follows from Cl. 1-5, sub-clause 4, which was added in the 2003 version, that the insurance period is to be divided up into one-year periods in relation to, inter alia, Cl. 6-3, sub-clause 1. The calculation of the insurance period in these cases is explained in further detail in the Commentary on Cl. 1-5. In mutual insurance the rule has been adapted to the insurance conditions.

    Under the provision, the insurer is entitled to the “entire agreed premium”. This poses no problem in relation to hull insurance. On the other hand, the rule cannot apply to the loss-of-hire premium in the event of a total loss under the hull cover. Under Cl. 16-2, a total loss under the hull insurance does not entitle the assured to loss-of-hire insurance. This means that the risk of the loss-of-hire insurer ceases in the event of a total loss, and that the insurer may only require payment of the loss-of-hire premium up to that date. The cut-off time for the duty to pay loss-of-hire premium in such cases is the time at which the casualty occurred. The duty to pay premium therefore ceases to apply at the same time, regardless of whether it is a question of a total loss which is ascertained at the time of the casualty or a condemnation settlement, which takes longer. If the insured has paid premium for the period of time after the casualty occurred, he is entitled to a reduction in premium for this amount.

    A precondition for the application of the provision in sub-clause 1 is that the insurer actually pays total loss compensation during the insurance period. If the insurer is able to disclaim all or part of the liability because the total loss is due to a peril which is not covered by the insurance, the insurer should only be able to demand full premium for that period during which he bore the risk. This is expressed in sub-clause 2. If the loss has been caused by a combination of marine perils and war perils and liability is to be shared equally between the two groups of insurers pursuant to Cl. 2-14, the marine perils insurer may only demand half of the premium for the remaining portion of the insurance period. If the loss was partly caused by another peril that is expressly excluded and liability is apportioned according to the general apportionment rule in Cl. 2-13, the reduction in premium must be adjusted to reflect the apportionment fraction.

    Under the 1964 Plan it was assumed that the exception in Cl. 116, sub-clause 2, only applied in the case of objective exclusion of perils. In the event of breach of the duties of disclosure or of care, the person effecting the insurance was to pay the full premium regardless, pursuant to Cl. 115, sub-clause 2. This provision has now been deleted, cf. the introduction to this Chapter, with the consequence that the exception in Cl. 116, sub-clause 2, will also cover a situation in which the total loss is totally or partially due to breach of the duties under Chapter 3. Consequently, the person effecting the insurance will always be entitled to a reduction of or to be released from the obligation to pay premium for the remaining insurance period, in so far as the insurer can disclaim liability for the total loss, wholly or in part. Full premium shall always be paid for the time up to the casualty, unless the contract is invalid, cf. above.

    In the event of an ordinary total loss, the ship's insurances lapse at the time of the loss. Accordingly, the premium shall only be paid up to that time, unless either the insurer in question is liable for the total loss, or there is a specific provision in the insurance conditions on the right of the insurer to receive a premium. However, in the event of condemnation or abandonment, or if the insurer wishes to avail himself of the deadline under Cl. 11-2, sub-clause 2, to attempt to salvage the ship, there will be a period of uncertainty during which one will not know whether total loss compensation will be paid, or whether the other insurances will lapse or continue to run in return for full premium during the period of repairs, cf. ND 1945.433 Oslo HAAKON JARL. If, in such cases, it turns out that total loss compensation is to be paid, it followed from Cl. 116, sub-clause 2, second sentence of the 1964 Plan that the risk for the other insurers had to be deemed to have lapsed at the time of the casualty. This provision has been deleted, although the intention is not to effect any changes on points of substance. If the ship has been abandoned, the risk must be deemed to have lapsed at the last time there was any information about the ship.

    The 1964 Plan also contained a rule on depositing the premium until the issue of total loss was finally settled. This has also been found to be superfluous and has been deleted. If the issue is still not resolved at the expiry of the insurance period, the issue of a possible extension of the insurance, and the issue of the insurer's entitlement to a premium, must be resolved under the rules in Cl. 11-8 and Cl. 6-4.

    View ClauseGo to Plan page

    Clause 6-3. Premium in the event of total loss

    If the insurer pays compensation for total loss, or pays the sum insured pursuant to Cl. 4-21, he is entitled to the entire agreed premium. If the total loss is attributable, wholly or in part, to a peril which is not covered by the insurance, the person effecting the insurance may, for the...

  • Clause 6-4. Additional premium when the insurance is extended

    This Clause is identical to Cl. 118 of the 1964 Plan.

    Sub-clause 1 must be viewed in connection with the right to an extension of the insurance period. The provision is of significance in relation to both hull insurance and the separate insurance for total loss, cf. reference to the hull insurance rules in Cl. 14-3.

    If, after arriving in port, the ship turns out to be condemnable, an insurer who is not liable for the total loss will not be liable for new casualties occurring after the casualty which caused the total loss, cf. sub-clause 11-9, sub-clause 1. In cases such as this, the insurer may only demand a premium for the time up to the casualty, cf. the Commentary on Cl. 6-3. There can accordingly be no question of extending the insurance.

    Under Cl. 11-9, sub-clause 2, the insurer who is liable for the total loss shall cover all collision liability occurring after the casualty but before compensation is paid and which falls under the hull insurer's liability pursuant to the rules in Chapter 13. In this case, however, the insurance will not be “extended pursuant to Cl. 10-10”, cf. sub-clause 1 of This Clause, and the insurer cannot demand a separate premium for this liability cover. As soon as it is discovered that the ship is condemnable, it is clear that the insurer who is liable for the total loss is to receive a full year's premium, cf. Cl. 6-3, sub-clause 1. The liability of the other insurers is deemed to have lapsed as at the time of the casualty.

    Sub-clause 2 regulates the entitlement of the insurer to a premium when it is not known at the expiry of the insurance period whether the assured will be entitled to claim compensation for total loss under the rules in Cl. 11-2, sub-clause 2, Cl. 11-7 and Cl. 15-11.  The wording “at the expiry of the insurance period” must in this case be interpreted as meaning the expiry of the agreed insurance period regardless of whether it has been agreed that the insurance period is to attach for one year or for more than one year, compare Cl. 1-5, sub-clause 4, which explicitly mentions the provisions under which a multi-year insurance contract shall be divided up into one-year periods. The present provision is not included. If, at the expiry of the insurance period, the ship is stranded, but the insurer wishes to avail himself of the right to attempt to salvage it pursuant to Cl. 11-2, sub-clause 1, no premium shall be paid as long as it is not known whether the salvage attempt will be successful. If the ship is salvaged before expiry of the deadline, it will normally have sustained damage that would make the extension rules in Cl. 10-10 applicable. The premium will then begin to run again from the time the assured “gained control of the ship”, which in this situation will mean that it has been re-floated and can commence moving to a repair yard. If, however, it turns out that the ship is condemnable, the rules set out in the preceding sub-clause will have to be applied.

    Under Cl. 11-7 and Cl. 15-11, the assured may claim compensation for total loss upon expiry of certain specified time periods when the ship has disappeared, been abandoned by the crew or been taken from the assured. If, at the expiry of the insurance period, it is not known whether compensation for total loss will be claimed under one of these rules, all payment of premiums is to cease. If compensation for total loss is subsequently paid, the settlement of premiums must take place along the lines described above pertaining to a case of condemnation.

    Even though the time limit under one of the above-mentioned sub-clauses has expired, the assured may, however, still keep the issue of compensation open if, due to economic factors, he prefers to have the ship back rather than receive total loss compensation. This will be particularly relevant in wartime. If the ship is found before the assured has claimed compensation for total loss, the insurance shall under Cl. 11-8 be extended until the ship has reached port, and the rules in Cl. 10-10 shall apply after that. Under the present clause, sub-clause 2, the premium will begin to run again from the time the assured, or someone on his behalf, gains control of the ship.

    If the ship becomes a total loss after it has been found but before the extended insurance extension has expired, the insurer may not demand a new, full year's premium. What the insurer may claim pursuant to Cl. 6-3 in the event of total loss is the entire "agreed premium", but an extension of insurance does not imply any agreement on insurance for a new insurance year. In this case, an additional premium shall only be paid for the period as of when the assured gained control of the ship until it was lost.

    View ClauseGo to Plan page

    Clause 6-4. Additional premium when the insurance is extended

    In the cases referred to in Cl. 10-10 the insurer may demand an additional premium in proportion to the time by which the insurance has been extended. If, at the expiry of the insurance period, it is uncertain whether a claim for total loss will be brought under Cl. 11-2, sub-clause 2, Cl. 11-7 o...

  • Clause 6-5. Reduction of premium

    This Clause corresponds to Cl. 121 of the 1964 Plan and relevant Nordic Insurance Contracts Acts (Nordic ICAs) relating to termination of the insurance during the insurance period.

    The term “insurance period” must be interpreted here as the expiry of the agreed insurance period regardless of whether the insurance period agreed upon is for one year or for several years, compare Cl. 1-5, sub-clause 4, which explicitly mentions the provisions where a multi-year insurance contract is to be divided up into one-year periods. The present provision is not included.

    Under the 1964 Plan, a pro-rata reduction of the premium could only be claimed if the insurance period became shorter than agreed upon or if the insurance was rendered inoperative pursuant to Cl. 37, sub-clause 3, Cl. 41 and Cl. 44. The authority for the pro-rata reduction has now been generalised, so that a pro-rata reduction may also be effected when the suspension is due to circumstances attributable to the assured or the person effecting the insurance, e.g. when the ship navigates into an excluded trading area with the consent of the assured, cf. Cl. 3-15, sub-clause 3.

    The Clause only applies to a reduction of the contractually agreed charge for the insurance. This does not, of course, exclude the insurer being entitled to demand compensation from the person effecting the insurance or the assured, if he has sustained an economic loss due to the circumstance which has caused the insurance to lapse and the conditions for compensation are otherwise met.

    During the revision, there was also discussion as to whether the shipowner needs to have the possibility of terminating the insurance if the risk becomes less than agreed upon or disappears altogether. Out of consideration for the insurer's reinsurance cover, however, it is difficult to give the shipowner general authority to terminate the contract in these types of situations. If there is an obvious disparity between the agreed premium and the risk incurred, the parties will usually agree on some premium reduction. If not, the issue may have to be resolved under the rules on failure of implied basic conditions or the Norwegian Contracts Act (Avtaleloven), Section 36.

    View ClauseGo to Plan page

    Clause 6-5. Reduction of premium

    If the insurance period is shorter than agreed, or the insurance has not been in effect for a period of time, the person effecting the insurance may demand a reduction of premium which corresponds to the reduction of the insurance period.

  • Clause 6-6. Reduction of premium when the ship is laid up or in similar situations

    This Clause corresponds to Cl. 122 of the 1964 Plan, Cefor V.1, sub-clause 1, and PIC Cl. 9.

    Cl. 122 of the 1964 Plan did not contain any basis for a return of premium, but stated that if the parties had entered into an agreement on the matter, the premium reduction was to be calculated according to the rules in clauses 123-125. These rules were modified somewhat in the Special Conditions, cf. Cefor V 1, sub-clause 1, and PIC Cl. 9. The present Clause is based on the solutions in the Special Conditions, with some modifications.

    The condition in sub-clause 1, to the effect that the entitlement to a return of premium is subject to the ship having been in one location for an uninterrupted period of at least 30 days with no cargo on board, is taken from the Special Conditions. The date of arrival and the date of departure are not to be included in the calculation of the length of stay. It makes no difference, for the purposes of the calculation, if the old insurance contract expires and a new one begins to run while the ship is in port; the decisive factor is the cumulative stay.

    The provision assumes that the ship is lying "at one location for an uninterrupted period". Moving the ship within a port area is not to be deemed an interruption, unless the move is part of the voyage and the ship is held up before final departure. The issue of whether there is one or more locations (ports) must be decided as a question of fact according to the geographic and commercial circumstances at the place in question. Clauses 123 and 124 of the 1964 Plan and Cefor V.3 and PIC Cl. 9.3 contained detailed regulation of these and other questions. Even though the provisions are not repeated in the text of the Plan, it is assumed that the calculation method in future shall be based on the same principles.

    The provision in sub-clause 1 only applies when the ship is laid up or more or less laid up, cf. the condition "with no cargo on board". This is a somewhat more narrow formulation than in the Special Conditions, which set out common rules for lay-up and other stays in port, etc. The ordinary reduction of premium rules should not usually be applied, however, in the case of a stay in port which occurs more or less by chance, during which the ship is earning full freight, cf. the criticism of the Special Conditions in Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), pp. 340-341. Nevertheless, it is not a precondition for negotiations for a premium reduction that the ship is without freight income. Negotiations must also be possible in a situation in which a rig is laid up with its operating expenses covered but with orders to reduce operating expenses as much as possible.

    The Special Conditions also contained a prerequisite that the ship be laid up "under safe conditions" and detailed provisions as to how these requirements were to be met. This has been deleted. Given that the provision now applies only to lay-up and similar stays, because under Cl. 3-26 the insurer is to approve the lay-up plan, and the requirement for safe conditions thereby becomes superfluous. In addition, the issue of safe conditions should affect the scope of the premium reduction and not be a condition for the return of premium.

    When the conditions have been met, the assured is entitled to "demand negotiations" for a reduction of premium. This is a change in relation to earlier practice. While Cl. 122 of the 1964 Plan assumed that the scope of the premium reduction was a subject for negotiation, the Special Conditions operated with set return-of-premium rates. The general rule was that the return of premium was to be 90% with a minimum premium of 0.35% p.a. During the revision, there was agreement that the issue of return of premium had to be a subject for negotiation and not a general and automatic right for the assureds, inter alia because a set rate might possibly be in conflict with the rules on price collaboration in the Norwegian Competition Act (Konkurranseloven). Accordingly, the return of premium rates must be agreed upon individually. This may be done either at the time the insurance contract is entered into or at a later time when lay-up, etc. enters the picture. This last approach is the most practical because that is when one has the best overview of the factual circumstances, although it does give the insurer a clear advantage in negotiations.

    Particular return-of-premium issues arise when the ship is laid up at a shipyard. It follows from the general rule that the assured will not be entitled to a return of premium in such cases, but may negotiate with the insurer for a premium reduction if the conditions in sub-clause 1 are met. It is nevertheless less common to obtain a return of premium in the case of a stay at a shipyard than in the case of ordinary lay-up. Even though the navigation risk will be reduced, the total risk may in fact increase as a result of the increased risk of damage due to fire or explosion. In certain circumstances the question may therefore rather be whether an additional premium should be paid for the stay at a shipyard. This issue must be resolved by applying the ordinary rules on alteration of the risk. If the stay at the shipyard is a relevant alteration of the risk under Cl. 3-8, the insurer may cancel the insurance pursuant to Cl. 3-10 and then demand an increase in premium to resume the cover.

    Sub-clause 2 corresponds to Cl. 125 of the 1964 Plan, but sub-sub-clause (b), which stipulated that the insurer was entitled to the full premium during a stay in port when the ship was in a port at which it could only call subject to an additional premium, has been deleted. This is also an issue that must be left to the parties to negotiate.

    View ClauseGo to Plan page

    Clause 6-6. Reduction of premium when the ship is laid up or in similar situations

    If the ship, during the insurance period, lies at one location for an uninterrupted period of at least 30 days, with no cargo on board, the assured may demand negotiations for a reduction of premium (return of premium). The insurer is entitled to full premium during a stay provided that: the ship...

  • Clause 6-7. Claim for a reduction of premium

    This Clause corresponds to Cl. 126 of the 1964 Plan.

    Cl. 126 of the 1964 Plan contained deadlines for the bringing of claims for a reduction of premium, but made no provision for sanctions if the deadline was not complied with. The deadline provision has, accordingly, been amended to become a pure time-bar rule, so that the claim lapses if the deadline is not complied with. The provision applies whenever the duty to pay premium of the person effecting the insurance lapses wholly or in part under the rules in Chapter 6.

    The "insurance year" means a period of one year, starting at the time the insurance came into effect. If the insurance contract is continuous, the insurance year will be a period of one year, starting from the time of expiry of the preceding insurance year. The insurance year may coincide with the calendar year, but need not do so.

    Sub-clause 2 of the 1964 Plan provision conferred on the insurer the right to charge a reduction fee if the claim for a premium against the person effecting the insurance lapsed. This provision was of little significance in practice and has been deleted.

    View ClauseGo to Plan page

    Clause 6-7. Claim for a reduction of premium

    A claim for a reduction or return of premium according to the rules contained in this Chapter shall be brought within six months of expiry of the insurance year or the insurance period, if this is shorter than one year. If the claim depends on the way in which the ship has been used, the person...