LONDON (CN) – The United Kingdom Supreme Court heard arguments this past week in a marine insurance case which could significantly affect insurers and ship owners.
The issues in the case began when a ship suffered an engine room fire during a voyage, after which money was spent on salvage operations. In the months that followed, quotes for the cost of full repair were obtained, ranging from around $3 million to $9 million.
Eventually, the ship owners decided inform the insurers they were abandoning the ship, believing the cost of repair would exceed the value of the ship and was therefore a constructive total loss.
Claiming a constructive total loss meant the ship owners could receive a payout for the full insured value of the ship, in this case $12 million. But the insurers claim the ship owners are only entitled to just over $1.4 million, which was the reduction in the vessel’s value as a result of the fire.
Both a trial court and an appellate court found in favor of the ship owners, prompting an appeal to the U.K. Supreme Court. One key issue for the court to consider is whether the costs incurred in salvaging and repairing the ship before the notice of abandonment was given should be included in the calculation of a constructive total loss.
The basic criterion for a constructive total loss is if the cost of repairing the ship exceeds the value of the ship. If costs incurred before the notice was given are included in this criterion, then the ship is a constructive total loss as the ship owners claim. If not, the ship is only a partial loss as the insurers say.
Attorney Michael Ashcroft, representing the insurers, argued the question is “whether the hypothetical prudent owner would, if uninsured, have gone to the future expense of repairing the vessel.” He emphasized only future expenses are considered in this question and therefore expenses which were incurred before the notice of abandonment was given are irrelevant.
Senior Judge Lord Sumption challenged Ashcroft’s argument, saying “the prudent uninsured owner test is concerned with the reasonableness of incurring expenditure. Therefore, although you ask the question at the time of the notice of abandonment, the question that you ask is whether it was reasonable to incur the expenditure at the time it was incurred.”
Lord Sumption suggested that although the question of costs arises when notice is given, this does not necessarily preclude the consideration of costs incurred before that point.
Ashcroft, with the firm Thomas Cooper LLP, further argued that since the wording of the Marine Insurance Act 1906 mentions that account should be taken of future expense when considering a constructive total loss, this supports his contention that only future expenses should be taken into account. He described the test for constructive total loss as “forward looking” only.
Ashcroft also suggested that if ship owners want to include all costs in the calculation of a constructive total loss, they should give a notice of abandonment immediately after a ship is damaged so that any costs incurred in salvaging and repairing the ship will be in the future and thereby included in the calculation of constructive total loss.
The ship owner’s attorney Steven Berry called the ‘forward looking’ argument fallacious. He stated there should be no limitation put on the cost of recovery and repair which is considered in the calculation of constructive total loss.
He cited the Marine Insurance Act and stated “the question is whether she is so damaged that the cost of repairing would exceed the value of the ship when repaired. It is as simple as that.”
In his view it was clear from the act that all costs of repair should be taken into account, regardless of when they are incurred.
“A brave counsel would now sit down,” Berry joked before continuing.
In response to Ashcroft’s suggestion that ship owners should give notice of abandonment as soon as a casualty occurs, Berry pointed out the Marine Insurance Act requires a valid notice of abandonment to be given only after reliable information of the loss has been obtained.
He added it would be unreasonable to force a ship owner to spend money to obtain reliable information so that a valid notice can be given and then not allow the money spent be counted toward the calculation of a constructive total loss.
Sumption and Lord Reed probed Berry with questions throughout as the justices considered the arguments.
Christian Gaddes reports for Courthouse News Service from London.