KNOWLEDGE TO ELEVATE
It is neither controversial nor new to say that co-assureds under a joint insurance policy cannot claim against each other in respect of a co-insured loss. It is taken to be an implied term and the possibility of financial claims between co-assureds is irrelevant: the insurer will pay.
If there are only two, an owner and a charterer, in the contractual chain, and if the charterer is held liable, then the matter goes no further: the insurer covers the loss and there is no recourse claim to be pursued.
However, what happens if there is a guilty third party and the insurer wants to pursue a subrogated claim (against, say, a sub-charterer on materially back to back terms) to recover its financial outlay?
This scenario was considered by the UK Supreme Court in The OCEAN VICTORY, where the charterer had made insurance premium payments on behalf of themselves and the owner and the demise charterparty provided for them to be co-assureds.
Background
At first instance the Court held the charterer liable for ordering the vessel to an unsafe port and said the insurer could pursue a subrogated claim against the sub-charterer. But on appeal this decision was overturned. The Court of Appeal held that the port was safe and that the insurance provisions in the demise charterparty contained a ‘complete code’ for “an insurance funded result in the event of loss or damage to the vessel by marine risks” (in this case loss of the vessel as a result of bad weather in port).
In the Supreme Court five law lords unanimously agreed with the Court of Appeal and found that the port was safe. It followed that the charterer was therefore not liable to the owner and there was no recourse claim for the insurer to pursue in any event.
However, on the second question of whether the hull and machinery insurer of the co-assured could bring a subrogated claim against the sub-charterer, the law lords’ decision was split 3:2.
Effect of the Joint Insurance
Lord Sumption in his minority judgment asked if the effect of the joint insurance was that:
(a) the charterer’s liability to pay damages to the owner was excluded, or
(b) the payment made by the insurer made good the owner’s loss and thereby satisfied charterers’ liability.
His question was important because if liability was excluded (‘a’ above), then no recourse claim would follow, but if the payment ‘made good’ the loss (‘b’ above), the insurers could pursue a recourse claim. Lord Sumption felt the liability was made good, Lord Clarke agreed, but the other three law lords held that the liability was excluded and so no recourse claim could be pursued.
A legal black hole?
Much has been written about the effect of this judgment.
The decision came down to contractual construction, leading three of the five law lords to conclude that in reality the owner and the charterer had chosen to exclude liability to one another under the demise charterparty and had agreed that in the event of loss an “insurance funded solution” would be sought: no loss was suffered which could form the basis of a recourse claim and no recourse claim could therefore be pursued.
However, whilst it is important to remember that the comments of the law lords in this Supreme Court judgment were obiter (meaning that they do not form the reason behind the final judgment), for some this has left a ‘legal black hole’ where the wrong do-er is in principle able to avoid liability and there are still arguments available to insurers which may allow pursuit of a subrogated claim.
The first concerns the charterer’s status as a bailee (custodian) of the vessel holding possessory title and their right to pursue a sub-charterer in tort, although such a claim would require the proof of negligence on the part of a sub-charterer.
The second, concerns the principle of transferred loss where a contracting party (the insurer) may recover damages from a third party (sub-charterers) where the consequence of the sub-charterers actions would foreseeably cause loss to insurers but where insurers did not have a direct right of action against sub-charterers.
BIMCO, in the BARECON 2017, has published a clause which we hope addresses this ‘legal black hole’.
Source: SKULD
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