Commentary

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Chapter 14: Separate insurances against total loss

  • General

    The 1964 Plan used two types of “interest” insurances in addition to the ordinary hull and freight insurances, i.e. hull interest insurance and freight interest insurance. Both of these types of insurance had to be viewed as an extension of the total loss cover under the hull insurance and, accordingly, were triggered only in the event of total loss. The hull interest insurance was aimed at covering that part of the capital value of the ship which was not covered under the ordinary hull insurance. The arrangement was used because the insurable value for hull insurance is normally agreed and, consequently, does not necessarily correspond to the ship's "full value at the inception of the insurance", cf. Cl. 2-2. Thus there is room for setting a capital value for the ship which is not covered by the agreed insurable hull value. In practice, insurers have also been willing to provide hull interest insurance in situations where the agreed insurable hull value corresponded to - or was even higher than - the full value of the ship at the time of inception of the insurance.

    A freight insurance contract was linked to loss arising from expiry of a pre-determined, long-term contract of affreightment which the owner had entered into or to a pre-determined form of employment for the ship and was taken out in addition to ordinary freight insurance, which covered loss of isolated freight amounts or loss-of-hire in the event of damage to the ship.

    Even though the two interest insurances concerned different interests, they were closely related. The capital value of the ship, which is covered through hull and hull interest insurance, will depend primarily on the earning capacity the market believes the ship will have in future. The value of the ship can be said to consist precisely of the future income the ship can generate, capitalised down to current value. In other words, a hull interest insurance contract which covers the market value of the ship includes part of the freight interest value. Strictly speaking, the object of the freight interest insurance is therefore only that portion of the freight income which is attributable to the fact that the ship is hired at a rate above the market rate. Nonetheless, in practice, higher agreed values have been accepted than what the foregoing might indicate.

  • Clause 14-1. Insurance against total loss and excess collision liability (hull interest insurance)

    With the approach of the Plan to the separate forms of total loss cover, it is not necessary to draw a sharp dividing line between the interests covered under the various types of insurance. The primary issue will be one of expediency as to how the total capital value of the ship is to be apportioned between the ordinary hull insurance and the separate total loss policies.

    The provision states what a hull interest insurance covers. The first part of the provision is new and specifies that the insurable value in a hull interest insurance is agreed and given in the form of an amount stated in the insurance contract. This provision must be read in the light of the limitations rule in Cl. 14-4. If the sum insured is lower than the insurable value, this will lead to a further reduction in the insurer's liability under the general rules in Cl. 4-18.

    Sub-clause (a) sets out the principle that hull interest insurance is cover against total loss. Any casualty  giving rise to entitlement to total loss compensation under Chapter 11 under hull insurance, or under Cl. 15-10 under war risk insurance, will also constitute total loss under hull interest insurance. Conversely, a compromised total loss will not trigger hull interest insurance.

    Sub-clause (b) sets out the liability of the hull interest insurer for excess collision liability. The provision is related to the liability of the P&I insurer for collision liability, which only applies to collision liability which exceeds the market value of the ship. If the agreed insurable value under the hull insurance is lower than the market value of the ship, the shipowner is ensured cover for his liability for the difference between the agreed insurable hull value and the market value. However, the provision applies regardless of the relationship between the assessed insurable hull value and the market value in the actual situation.

    Like the hull insurer, the hull interest insurer is liable "separately" for collision liability, i.e. for a separate sum insured for that liability. The deductible is not calculated under the separate cover. The rule implies that there is to be no transfer of collision liability over to the P&I insurer before the separate sums insured under both the hull insurance and the hull interest insurance have gone towards covering the liability.

    If several separate insurances have been effected, each of the insurers will only be liable for excess collision liability in relation to their respective portions of the aggregate of the separate insurances. Consequently, if any of the insurances have been effected on non-Norwegian terms without cover for excess collision liability, a corresponding portion of this liability will be uninsured, unless the P&I insurer covers it.

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    Clause 14-1. Insurance against total loss and excess collision liability (hull interest insurance)

    If an insurance has been effected against total loss and excess collision liability (hull interest insurance), the insurer is liable for the amount stated in the insurance contract : for total loss in accordance with the rules contained in Chapter 11, and Cl. 15-10, and separately for the assured...

  • Clause 14-2. Insurance against loss of long-term freight income (freight interest insurance)

    As mentioned in relation to Cl. 14-1, it is unnecessary to define which interest is covered under the different insurances against total loss. Consequently, it is sufficient to state what freight interest insurance covers. The provision specifies that freight interest insurance like hull interest insurance is total loss cover, cf. further on the reference to Chapter 11 above under the Commentary on Cl. 14-1 (a).

    The Plan regulates only freight interest insurance with agreed insurable values, cf. Cefor 248, No. 2.1. The rationale is that there is deemed to be a limited need for an open freight interest insurance based on an existing charterparty. If the shipowner has especially favourable freight contracts, this will usually be reflected in the agreed insurable value under the hull insurance and thereby indirectly also in the interest insurances in that the maximum amounts for the latter will be based on the agreed insurable hull value, cf. Cl. 14-4. If, in an actual situation, it nonetheless becomes necessary to have an open insurable value for freight interest, Cl. 14-4, sub-clause 3 allows for this type of insurance being effected in addition to the agreed interest insurances, if need be.

    As under Cl. 14-1 for hull interest insurance, Cl. 14-2 specifies that freight interest insurance has a separate agreed amount. The provision in Cefor 248, No. 2.1 also contained a maximum amount, set at 25% of the agreed insurable hull value. The maximum amounts and the effect of exceeding them are the same for hull interest and freight interest insurances, however, and, consequently, the rules imposing limitations have been grouped together under Cl. 14-4.

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    Clause 14-2. Insurance against loss of long-term freight income (freight interest insurance)

    If an insurance has been effected against loss of long-term freight income (freight interest insurance), the insurer is liable for total loss in accordance with the rules contained in Chapter 11 for the amount stated in the insurance contract .

  • Clause 14-3. Common rules for separate insurances against total loss

    A fundamental prerequisite for cover under the separate insurances against total loss is that the assured claim compensation for total loss from the hull insurer, cf. sub-clause 1, first sentence. Thus, the assured cannot demand payment under the separate insurance for total loss while at the same time demanding that the ship be repaired pursuant to Chapter 12. The insurer need not take over the wreck, however; it is sufficient that the assured claims compensation for total loss.

    The provision only applies to the insurer's liability "for total loss". Cover of excess collision liability is not contingent on whether a claim for total loss has been filed with the hull insurer.

    In one situation, however, it is not necessary that the assured has brought a claim for total loss: when the assured wishes to salvage the ship, but the hull insurer pays the sum insured pursuant to Cl. 4-21, cf. sub-clause 1, second sentence. If the salvage later proves to be unsuccessful, the assured is also entitled to payment under the separate total loss insurances. In that case, however, the separate total loss insurers will be entitled to take over the wreck under the rules in Chapter 5, Section 4 of the Plan. If separate insurances have been effected under both Cl. 14-1 and Cl. 14-2, the hull interest insurer has a first claim to the wreck, cf. sub-clause 1, third sentence.

    Cl. 14-3, sub-clause 2 specifies that the insurance does not cover loss caused by measures taken to avert or minimise loss. It is established practice that the hull insurer covers both general average contributions and particular costs of measures taken to avert or minimise loss concerning the ship, and does not draw the separate total loss insurers into a proportional sharing of the loss under Cl. 4-12, sub-clause 2.

    Under Sub-clause 3, the general rules on hull insurance must be given corresponding application to the separate insurances against total loss to the extent they are appropriate.

    Sub-clause 4 gives application to some of the rules on the leading insurer's competence and authority in the relationship between the leading insurer under the hull insurance and the insurers of the separate total loss insurances. This applies to rules on notification of casualty, proceedings against third parties for the assured's liability or claims for damages, as well as the rules governing venue. The Plan does expand the competence of the leading insurer in relation to the separate insurers by giving corresponding application to Cl. 9-5 on salvage and Cl. 9-6 on removal and repairs. This means that the separate total loss insurers are bound by the leading insurer's decision on removal in connection with a claim for condemnation and measures in connection with a salvage operation. However, the leading insurer's decision to abandon a salvage operation will not bind the interest insurers, cf. Cl. 14-3, sub-clause 4, which only refers to Cl. 9-5, first sentence.

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    Clause 14-3. Common rules for separate insurances against total loss

    The insurer's liability is subject to the condition that the assured claims for a total loss against the hull insurer. If the hull insurer has paid the sum insured in accordance with Cl. 4-21, the assured may claim compensation from the insurer provided that he is prepared to transfer the wreck t...

  • Clause 14-4. Limitations on the right to effect separate insurances against total loss

    Cl. 14-4, sub-clause 1 contains a limitation on the right to effect a separate insurance against total loss, set at 25 % of the agreed insurable value under the hull insurance for each of the insurances. Accordingly, if either hull or freight interest insurance has been effected for an amount exceeding 25% of the agreed insurable hull value against the same peril, the provision for the excess amount is void.

    The limitation is aimed at discouraging parties from moving significant portions of hull cover over to the separate total loss insurances. This is explained in more detail in the Commentary on Cl. 10-12 above, which sets out the impact on the hull cover of the assured possibly being paid an amount higher than 25% of the agreed insurable value under the hull insurance either under the hull interest insurance or the freight interest insurance, or both.

    Sub-clause 2 regulates the settlement when several hull interest or freight interest insurances have been effected and their aggregate cover exceeds the limitations set for hull interest and freight interest insurances, respectively, pursuant to sub-clause 1. In principle, this constitutes double insurance, cf. Cl. 2-6, but the provision rules out the joint and several liability which otherwise applies to double insurance, and states that instead there is to be a proportional reduction of liability.

    As mentioned earlier in relation to Cl. 14-2, the Plan contains no rules on freight interest insurance with an open insurable value. However, sub-clause 3, first sentence, specifies that the limitations rule in sub-clause 1 does not preclude having an open freight interest insurance like this based on an actual charterparty. This may be a possibility for a ship for which the agreed insurable hull value does not reflect the earnings of the ship, for example, a gas ship with a low market value and a favourable charterparty which expires in the event of total loss. Usually, a freight insurance like this with an open insurable value will be based on a time charterparty or a charterparty for a series of voyages (charterparty for consecutive voyages), but this type of insurance may also be used when a contract to ship a certain quantity of goods is, exceptionally, performed using a single ship, cf. the term "contract" for a series of voyages.

    It follows from the second sentence that any compensation under a freight interest insurance with an open insurable value is to go towards reducing the compensation the assured may claim under a freight interest insurance with an agreed insurable value effected pursuant to Cl. 14-2.

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    Clause 14-4. Limitations on the right to effect separate insurances against total loss

    If hull interest insurance has been effected for more than 25 % of the agreed insurable value under the hull insurance which covers the same perils, the excess part of the hull interest insurance is void. The same applies to a freight interest insurance. If more than one hull interest insurance o...