Commentary

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Chapter 8: Co-insurance of third parties

  • General

    In 2016, Chapter 8 had some new clauses added, see Cl. 8-2, Cl. 8-3, Cl. 8-5 and Cl. 8-6, whereas other clauses were amended and/or given a new placing, see Cl. 8-1, Cl. 8-4 and Cl. 8-7. The Commentary to all the clauses was rewritten, and this introduction to the Chapter was new. 

    In accordance with Nordic tradition and the Insurance Contract Acts of the Nordic countries, a marine insurance contract is a contract entered into between the insurer, cf. Cl. 1-1 litra (a), and the person effecting the insurance, cf. Cl. 1-1 litra (b). The term “the person effecting the insurance” is not a term commonly used outside the Nordic countries. If the person effecting the insurance enters into a marine insurance contract to insure his own ship, he is both the person effecting the insurance and the assured, as this term has been defined in Cl. 1-1 litra (c), since he is “the party who is entitled under the insurance contract to compensation” in case of a casualty. In practice, this assured owner is often called the “principal assured”, but the term is not used in any of the clauses of the Plan.

    The term “the assured” is defined in Cl. 1-1 litra (c) to make room for others than the “principal assured” to be included as assureds under the insurance contract. This is done by making use of the concept of co-insurance. There may be a number of reasons why the benefit of an insurance is extended to others. In many cases, the principal assured has committed himself to do so in a separate contract with a third party. The most common and practical case is that of the mortgagee. Here, the Plan’s Chapter 7 provides an automatic cover of the mortgagee’s interest under the insurance, making the mortgagee a co-insured party. As for other third parties, no automatic cover under the insurance will apply. For a third party to be given specific rights under the insurance, the insurance has to be explicitly effected for the benefit of that third party, cf. the Plan’s Chapter 8.  

    Chapter 8 is applicable to all co-insured third parties other than the mortgagees. The protection of contractual mortgagees is exhaustively regulated in Chapter 7, but the mortgagees may obtain an extended protection pursuant to Cl. 8-7, see further the Commentary to that Clause. The rules in Chapter 8 apply when a specific and explicit agreement is concluded to the effect that the insurance shall also apply for the benefit of one or more third parties other than the contractual mortgagees. The most frequently occurring example is in connection with insurance of MOUs, cf. Cl. 18-1 litra (i). 

    The mechanism of co-insurance of third parties is used for a variety of reasons in different contexts. The need for co-insurance may conveniently be divided into three issues: 

    Firstly, it can be used to cover what might be described as a “value interest”. Either a co-insured third party can have an interest in the economic value of the insured object, or in the income it produces. One example is the interest of the owner of equipment that is placed on board the vessel. This interest could be co-insured under the owner’s hull insurance, see Cl. 10-1 litra (b).  Another example is owner’s supplies and stage payments, which can be co-insured under a builders’ risks insurance taken out by the yard, see Cl. 19-3, cf. Cl. 19-9. It is also feasible, although seldom done in practice, to insure the loss of income of both the owner and a time charterer under a single insurance contract. A less common example could be that a buyer of a ship is co-insured under the owner’s (seller’s) insurance contract for a limited period, e.g. until the vessel is delivered. Since Cl. 3-21 provides that cover terminates when there is a change of ownership, such co-insurance of a buyer’s interest has to be arranged by special agreement.  In bareboat charterparties, the bareboat charterer often has the duty to take out both hull and P&I insurance. The bareboat charterer is liable to redeliver the vessel in the same condition as when he took it over, but the charterparty terminates if the vessel becomes a total loss. In such a case, the hull insurance may protect both the charterer’s value interest in recovery for the cost of repairs of any damage incurred and the owner’s interest as he will be compensated for the value of the vessel in the event of a total loss. 

    Secondly, co-insurance can be used to cover a third party’s “liability interest”. Managers, charterers of various kinds and others can become directly liable to third parties who suffer loss as a consequence of a vessel’s operation. It is common practice to name managers of various types as co-insured, as they may have significant exposure to liabilities covered by different Plan insurances. Hull insurance under the Plan is a combined insurance as collision and striking liability for vessels is covered pursuant to Chapter 13 and for MOUs by Chapter 18, Section 2-4. Chapter 15 on war risks insurance, Cl. 15-2 litra (e) and Section 7, includes full scale P&I insurance against war risks. The same goes for coastal and fishing vessels, which have liability insurance cover by virtue of Chapter 17, Section 6. Liability insurance can also be purchased under the builders’ risks insurance in Chapter 19, Section 4. If co-insurance of a third party is agreed, Chapter 8 is applicable to all these liability schemes unless departed from as in Cl. 18-1 litra (i) or in the individual insurance contract.

    Thirdly, the co-insurance can merely protect a third party from a subrogation claim by the insurer. The term “protective co-insurance” is sometimes used for this type of co-insurance. It refers to the situation where a third party is exposed to liability for loss of or damage to the insured object itself or where another assured might otherwise expose him to a claim. In such a case, the third party and the person effecting the insurance may agree to include the third party as a co-insured under the insurance. If the insurer has covered the loss to the assured, the status as co-insured would protect the third party against a possible subrogation claim from the insurer. Similarly, if the assured should elect to bring action against the third party instead of claiming under the insurance, the co-insured third party would be able to avail himself of the insurance cover. The central idea behind both situations is that the loss, damage or claim should rest with the insurer according to the insurance conditions, without him being able to seek recovery from or deny cover to the co-insured third party. In other words; the “protection” that is relevant differs from a co-insured’s liability interest because it is protection as between co-insureds based on some form of underlying contractual relationship, which in turn is recognised and accepted by the insurer. 

    Protective co-insurance of a third party may be combined with a “value interest” co-insurance or with a “liability interest” co-insurance, as these expressions are explained above. However, there are many cases where a co-insured third party will lack a real “value interest” or “liability interest”. An illustrative example is the manager of a vessel, who is often named as co-insured under the owner’s hull insurance, irrespective of the fact that he has no ownership interest and irrespective of whether the insurance contract includes collision liability. The benefit to the co-insured third party under Nordic law and under many other jurisdictions is that the insurer in such a case may not exercise rights of subrogation against the co-insured in order to claim reimbursement for losses or liabilities that the insurer has covered. The protective interest of the co-insured is central to the way contracts and insurance are organised under a knock for knock regime. There are many different variants of this type of contract. The core of the knock for knock principle is an agreement that each party will retain and insure the risk for damage to its own property as well as liability for death or injury of its own personnel, and obtain from their respective insurers co-insurance and often a waiver of subrogation in favour of the other contracting party. Cl. 8-2 is a default solution for all cases where the primary purpose of the co-insurance is to cover a “protective” interest in accordance with an underlying contract between the person effecting the insurance and the third party. Cl. 18-1 litra (i) contains more specific provisions for use in the case of MOUs, see also the Commentary to that provision. 

    The parties are free to enter into whatever co-insurance arrangements they think best serve their interests. However, it seems convenient to have a set of standard rules in the Plan as a point of departure. This should not discourage the parties from carefully considering the need for the various interests to be co-insured and carefully drawing up appropriate insurance clauses that match their underlying contractual arrangements. No standard rules on co-insurance can fit all the needs of the various parties doing business in the complex international shipping and offshore markets.

  • Clause 8-1. Rights of third parties against the insurer

    The Clause corresponds to Cl. 8-1, sub-clause 1, of the 2013 Plan. In Version 2016, the last part of the sub-clause was added and the identification provision previously found in the sub-clause was moved to Cl. 8-3, sub-clause 3.

    NMIP 2013 Cl. 8-1, sub-clause 2, had references to Cl. 7-3, sub-clause 1, and to Cl. 7-4, sub-clause 6. The first reference was replaced in 2016 with the present Cl. 8-5. As for the second reference, the provision was not repeated in 2016. This implies that the insurer is entitled to set-off outstanding premium and any other claim he may have in the compensation payable under the insurance contract, provided the conditions for set-off are satisfied according to the applicable law. 

    The first part of the provision defines under what circumstances a third party other than the contractual mortgagees may be given rights under the insurance contract. Contrary to the rules in Chapter 7, there is no automatic co-insurance cover for such third parties. The insurance has to be explicitly effected for their benefit. This solution is chosen to protect the assured owner from a situation where parts of the compensation have to be paid to co-owners or others with registered rights or other interests in the ship without an advance agreement with the assured owner. Such third party interests will in particular be relevant for the hull insurances, as described in the General Commentary to Chapter 8 above.

    The insurance contract must spell out who the third party is in order for him to be included as a co-insured party. This is normally done by explicitly naming the third party in the insurance contract. However, in practice arrangements are also common with a number of entities included as co-insured by some form of general non-specific reference, e.g. affiliated, associated or subsidiary companies of a named assured. Wordings like “as their interests may appear” are occasionally used. This kind of generic references will also activate the rules in Chapter 8, with the exception of Cl. 8-7 where the third party has to be explicitly named in order to achieve the protection given under this Clause. 

    When named as a co-insured, the insurance will also cover the third party’s interests. As explained in the General Commentary to Chapter 8 above, such interests may be of different kinds: “value interest”, “liability interest” and “protective interest”. It is ordinarily not difficult to identify what interests the particular third party will have covered under the insurance.Most co-insured third parties will have a “protective interest” under the insurance, safeguarding them against subrogation claims from the insurer. Whether or not they also have a “value interest” and/or a “liability interest” to be covered under the insurance, may vary.

    The interests of the co-insured third party are only covered “within the scope and overall limits of the insurance”. The wording was new in 2016, but entails no material amendment from NMIP 2013.The wording entails that co-insurance of a third party will not extend the scope of the insurer’s obligation to indemnify losses, costs or liabilities as defined in the insurance contract. Furthermore, the insurer will not be liable beyond the limits that apply to the insurance, be it the sum insured, the separate liability sum or the sum to cover costs of measures taken to avert or minimise loss, cf. Cl. 4-18. As stated in Cl. 8-3, sub-clause 3, the co-insurance does not give the third party independent cover. However, such independent cover may be arranged through special agreement, cf. Cl. 8-7.

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    Clause 8-1. Rights of third parties against the insurer

    If the insurance is explicitly effected for the benefit of a third party, the insurance also covers this party’s  interests within the scope and overall limits of the insurance.

  • Clause 8-2. Protection of third parties against subrogation claims from the insurer

    The Clause was new in 2016.

    The first part of the provision states the main rule: The insurer has no right of subrogation against the co-insured third party. As mentioned in the General Commentary to Chapter 8 above, an important reason why the person effecting the insurance agrees to name the third party as a co-insured party under the insurance contract is normally to protect him from subrogation claims from the insurer. 

    The provision contains two exceptions from the main rule. The first is where the insurance contract itself prescribes that the right of subrogation of the insurer has been reserved. In such instances, the parties to the insurance contract have agreed specifically that the general principle of waiver of subrogation found in the main rule should not apply. If this is in breach with the promise given to the third party to protect him against a subrogation claim, the person effecting the insurance will need to find another insurer who is willing to accept the waiver of subrogation rule found in Cl. 8-2. 

    The second exception refers to a situation where the third party expressly has undertaken to remain liable for the relevant losses, even if he has been included as a co-insured party. Such undertaking should be in the form of a contractual obligation to the person effecting the insurance or to another assured. Since the third party’s undertaking has to be express, it is normally not sufficient to rely on a provision in a standard contract making the third party liable for such loss. In order to fulfil the requirement of an express undertaking, the commitment must be clear from a separate and individual provision in the contract between the parties. An example may illustrate how this can be done. If the standard charterparty between the assured owner of the ship and the charterer contains a “safe port” provision, the charterer will as a co-insured party be protected under the main rule of Cl. 8-2 against a subrogation claim from the insurer in case of damage caused by a breach of the provision. If the assured owner and/or the insurer requests a subrogation right for the insurer, he/they would have to secure that the charterer undertakes a specific contractual obligation to the assured owner. This can be done through a separate clause or rider in the contract with the owner, setting out that the charterer will remain liable for losses of the kind prescribed in the “safe port” provision despite the protection given to him by the co-insurance arrangement. 

    Some standard charterparties expressly regulate the question of the insurer’s right to subrogation where the charterer is included as a co-insured party. Supplytime 2005 Cl. 17(a)(ii) states: 

    “The Charterers shall upon request be named as co-insured. The Owners shall upon request cause insurers to waive subrogation rights against the Charterers (as encompassed in Clause 14(e)(i)). Co-insurance and/or waivers of subrogation shall be given only insofar as these relate to liabilities which are properly the responsibility of the Owners under the terms of this Charter Party.” 

    With wording like this, the condition “expressly undertaken a contractual obligation to the assured to remain liable” must be seen as having been fulfilled, since the provision explicitly and clearly regulate the extent of the insurer’s right of subrogation in relation to the charterer (the third party).

    The insurer has the burden of proof that an express contractual obligation for the third party to remain liable exists, and that the third party has in fact accepted it.

    Accordingly, the effect of the provision in Cl. 8-2 is that a co-insured third party is fully protected against a subrogation claim from the insurer, unless the insurance contract itself reserves a right of subrogation for the insurer or the third party himself has expressly undertaken a contractual obligation to remain liable for the relevant type of loss, even if he has status as a co-insured party under the insurance. 

    Where the charterer under a charterparty with the assured owner of a vessel is not a co-insured third party under the insurance, the insurer has a right of subrogation against him, whether or not the charterparty specifically allows such a right. If at a later stage the charterer and the owner agree to give the charterer status as a co-insured party, the insurer will lose his right of subrogation unless the charterer expressly undertakes a contractual obligation towards the owner to remain liable for the relevant type of loss.

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    Clause 8-2. Protection of third parties against subrogation claims from the insurer

    The insurer does not have any right of subrogation against the co-insured third party unless and to the extent that such right is specified in the insurance contract or the co-insured third party has undertaken an express contractual obligation to an assured to remain liable for losses of the kin...

  • Clause 8-3. Application of the rules in Chapter 3 and Cl. 5-1

    The Clause was new in 2016. Sub-clause 1 is identical with Cl. 8-2, sub-clause 1, of the 2013 Plan, whereas Cl. 8-2, sub-clause 2, of the 2013 Plan is deleted. Sub-clause 3 repeats the identification clause found in the 2013 Plan, Cl. 8-1 in fine

    The provision in sub-clause 1 regulates a situation where the third party is in possession of information that has a bearing on the insurer’s assessment of the risk. If the co-insured third party knows that the insurance is also taken for his benefit, he has the same duty as the person effecting the insurance to give the information he has to the insurer. A co-insured third party’s failure to do so will be assessed under the general rules relating to the duty of disclosure contained in the Plan. The rule means that there is a difference between mortgagees and other co-insured parties on this point, given that a mortgagee will not be subject to any duty of disclosure under Chapter 7.  

    A duty of disclosure for the third party presupposes that he is aware of the fact that the insurance is affected. If a third party is unaware of the insurance, it is hardly conceivable that he has failed to comply with the duty of disclosure (or other duties) in a blameworthy manner. 

    Failure to fulfil this duty means that the third party risks losing his insurance cover according to the same rules that apply in relation to the person effecting the insurance. As a main rule, other assureds will not be identified with the one neglecting his duties. If the co-insured third party is the one who has the decision-making power concerning the running of the ship, Cl. 3-37 will apply. This was previously expressed in Cl. 8-2, sub-clause 2, but the situation is unpractical and the express rule was left out in Version 2016. 

    The provision only governs the third party’s breach of his duty of disclosure. This is due to the fact that these rules are aimed at the person effecting the insurance. Hence, a special authority is therefore required to impose a duty of disclosure on the co-insured third party. 

    Sub-clause 2 on the other hand governs the third party’s breach of the rules relating to duty of care. The provision gives the insurer the right to invoke the rules in Chapter 3, Sections 2 to 5 or Cl. 5-1 against the third party. It may be argued that the provision is superfluous, since the rules relating to the duty of care are aimed directly at “the assured” and the third party as a co-insured party is covered by this expression. However, for the sake of information, it is considered helpful to introduce a specific provision to this effect. If a co-insured third party fails to comply with any of the duties found in the provisions referred to, the insurer will be entitled to invoke these rules directly.

    Whereas sub-clauses 1 and 2 signalize the effect on the insurance cover of the co-insured third party of his own faults or negligence, sub-clause 3 regulates the question of identification, i.e. to what extent faults or negligence committed by others may be invoked against the co-insured third party. The provision states that the co-insurance of the third party is not providing an independent cover, and that he must accept identification with others in accordance with Cl. 3-36 to Cl. 3-38. A similar rule is found in Cl. 7-1 in fine for mortgagees under Chapter 7, and reference is therefore made to the explanations given in the Commentary to Cl. 7-1. 

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    Clause 8-3. Application of the rules in Chapter 3 and Clause 5-1

    The rules contained in Chapter 3, Section 1, shall apply correspondingly to the co-insured third party, provided that he is aware of the fact that he is named in the policy. The insurer may invoke the rules in Chapter 3, Sections 2 - 5, or Cl. 5-1 against a co-insured third party. The insurer may...

  • Clause 8-4. Amendments and cancellation of the insurance contract

    This Clause corresponds to Cl. 8-3 of the 2013 Plan. The Clause was not amended in substance in 2016, but the words “any co-insured third party” has been replaced by the words “the co-insured third party”.

    The provision gives the person effecting the insurance a far-reaching authority to amend or cancel the insurance contract with effect for the co-insured third party. His agreement with the insurer to alter the insurance contract or end it, is binding on the third party. The Clause is different from Cl. 7-2, which requires that the mortgagee shall be given not less than 14 days’ notice before his rights are affected by any amendments or cancellation of the insurance contract. The provision in Cl. 8-4 applies whether or not the contract between the person effecting the insurance and the third party contains provisions that requires consultations with the third party before such changes are made. Should the insurer be aware of the undertaking towards the third party, ordinary rules of law will decide whether the insurer is free to ignore this information.

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    Clause 8-4. Amendments and cancellation of the insurance contract

    If the insurance contract has been amended or cancelled, this shall also apply in relation to the co-insured third party.

  • Clause 8-5. Handling of claims, claims adjustment, etc.

    The Clause was new in 2016, but corresponds to the provision found in Cl. 8-1, sub-clause 2, of the 2013 Plan which contained a reference to Cl. 7-3, sub-clause 1.

    The provision states that a co-insured third party is not entitled to participate in discussions in respect of casualties, adjustments or claims against a third party. All decisions in this respect may be taken without the co-insured third party’s agreement. This is the same rule that applies to a co-insured mortgagee, cf. Cl. 7-3, sub-clause 1. It would be inexpedient and bothersome to involve a third party in the settlement of a claim. If the party effecting the insurance wants to secure a better position for the co-insured third party, this must be agreed specifically with the insurer. 

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    Clause 8-5. Handling of claims, claims adjustment, etc.

    Decisions required in respect of casualties, adjustments or claims against third parties may be made without the participation of any co-insured third party.

  • Clause 8-6. Other insurance

    The Clause was new in 2016.

    The provision prescribes that the insurance is subsidiary to another insurance that the co-insured third party has taken out. Consequently, the insurer shall only be liable to the extent that the co-insured third party has not obtained cover under the other insurance, cf. Cl. 2-6, sub-clause 2. If the other insurance also has a subsidiary provision, Cl. 2-6, sub-clause 1, shall prevail, cf. Cl. 2-6, sub-clause 3, with the effect that the co-insured third party is free to claim under any of the two insurances. 

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    Clause 8-6. Other insurance

    If the co-insured third party’s claim for compensation under the insurance is also covered by other insurance he has effected, cover under this Chapter is subsidiary to that other insurance.

  • Clause 8-7. Independent co-insurance of mortgagees or named third parties

    The Clause was new in 2016 and corresponds to Cl. 8-4 of the 2013 Plan. The title was altered to clarify that the Clause applies both to mortgagees and to named third parties. Certain modifications were also made in the text itself. 

    The provision gives extended protection to a mortgagee and a third party compared to the rules found in Chapter 7 and in Cl. 8-1 to Cl. 8-6. The extended cover can only be activated by an explicit agreement stating that the rules in Cl. 8-7 shall apply to the co-insured mortgagee and/or third party. Contrary to other clauses in Chapter 8, in order to receive the protection given in Cl. 8-7 the co-insured third party must be explicitly named in the insurance contract. 

    The independent cover implies that the co-insured mortgagee or named third party is not identified with the person effecting the insurance or with other assureds if found in breach with their duties under the contract. This means that the insurer can neither plead breach of the duty of disclosure on the part of the person effecting the insurance, nor a failure to meet the duty of care on the part of other assureds, e.g. the breach of a safety regulation. On the other hand, those clauses in Chapter 3 that objectively limit or exclude cover, e.g. Cl. 3-17 and Cl. 3-19, will also apply to the co-insured mortgagee or named third party if granted independent cover under Cl. 8-7. 

    Cl. 8-7 does not protect the independent co-insured mortgagee or named third party in the case of loss of cover resulting from a failure of the person effecting the insurance to pay the premium. In that event, the insurance will lapse according to the ordinary rules in Chapter 6, unless the co-insured mortgagee or named third party is willing to pay the outstanding premium as a means of keeping the insurance in force. The independent co-insurance under Cl. 8-7 will have no influence on the rule set out in Cl. 8-4, which provides that any amendment or cancellation of the insurance contract shall also apply to the co-insured third party under Chapter 8. The question does not arise under the comparable provision in Cl. 7-2, since this provision already gives an ordinary co-insured mortgagee better protection than a co-insured third party under Cl. 8-4. 

    An obvious but important limitation of the cover provided by Cl. 8-7 is that it only applies to the insurance to which it is attached. Therefore, it cannot be a full substitute for a so-called Mortgagee Interest Insurance. This type of insurance is a separate insurance, which is taken out for the benefit of a mortgagee bank on either a portfolio, fleet or individual basis. Such insurance protects the mortgagee if his position is prejudiced due to the acts or omissions of an assured resulting in a loss of cover under the core insurances, including P&I-insurance and war risks insurance.

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    Clause 8-7. Independent co-insurance of mortgagees and named third parties

    If it has been explicitly agreed that the interest of a mortgagee or a named third party shall be independently co-insured, the insurer may not plead that he has no liability due to an act or omission from the person effecting the insurance or another assured under the rules contained in Chapter ...