After a fire aboard the RENOS, her owners claimed a constructive total loss from the hull insurers. The Supreme Court held that the cost of repair includes salvage and safeguarding costs incurred before notice of abandonment, but not SCOPIC charges incurred to prevent environmental damage. It set aside the earlier order and remitted the question whether, on that basis, the vessel was a constructive total loss.
On 23 August 2012 the laden RENOS was seriously damaged by an engine-room fire in the Red Sea. The owners appointed salvors under Lloyd’s Open Form 2011. The vessel was taken to Adabiya, where her cargo was discharged, and then to Suez, where the salvage services ended. A tug stood by to tow her to scrap or repair. On 1 February 2013, while she was at Suez, the owners gave the hull underwriters notice of abandonment and claimed a constructive total loss.
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The hull and machinery policy, incorporating the Institute Time Clauses Hulls (1/10/83), insured the vessel for an agreed US$12 million. The Swedish Club was lead hull insurer and also subscribed an increased value policy of up to US$3 million. It was common ground that the fire was an insured peril. The insurers accepted liability for a partial loss, declined the notice and denied a constructive total loss. Knowles J held that there was a constructive total loss, and the Court of Appeal agreed. Two questions about the costs to be counted came before the Supreme Court.
What counts as the cost of repair
Under section 60(2)(ii) of the Marine Insurance Act 1906, a ship can be a constructive total loss if the cost of repairing the damage exceeds its value when repaired. Salvage costs can count towards repair. Here, excluding all costs incurred before notice of abandonment would bring the amount below the agreed threshold. Excluding only the environmental charges left the outcome undecided.
Costs incurred before notice
Lord Sumption, with whom Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed, held that pre-notice costs are included. A hull claim is a claim for unliquidated damages, and the insurer is in breach when the damage occurs. The loss is suffered at the casualty even if it later develops, unless a second casualty breaks the chain of causation. A constructive total loss is not a separate category of loss. It is a partial loss which is financially equivalent to a total loss and which the assured may elect to treat as total. The damage under section 60(2)(ii) is the whole damage caused by the casualty, measured by the whole reasonable cost of recovery and repair. The time at which that cost was incurred does not matter.
Notice of abandonment, required unless waived or of no possible benefit to the insurer, exists so that the insurer may take over what remains of the ship and relevant freight. As held in Robertson v Petros M Nomikos Ltd, it is a condition of the right to claim for a constructive total loss, not of the loss having occurred. The rule that the loss must still be total when notice is given concerns a later event which reverses, or “adeems”, the loss. The assured then recovers only what remains under a contract of indemnity. Expenditure by the owner on salvage or repair does not reduce the loss; it is part of it. In Sailing Ship Blairmore Co Ltd v Macredie, insurers could not turn a constructive total loss into a partial loss by themselves paying to raise the ship. The RENOS calculation therefore included all reasonable costs of salving and safeguarding her from the casualty onwards, together with the prospective repair cost. The courts below were affirmed on this issue.
SCOPIC charges
The SCOPIC clause provides additional remuneration for measures taken during salvage to prevent or minimise environmental damage. It followed the International Convention on Salvage 1989, given effect by the Merchant Shipping Act 1995, and was designed to give salvors a commercial return for that work. Remuneration above the ordinary salvage award is payable by the shipowner alone. Under clause 15 it is not a general average expense, and no claim for the excess is to be made in general average or under the hull and machinery policy. The vessel’s protection and indemnity insurer, the American Club, paid the charges. Knowles J found that they were about half the total salvage remuneration.
The owners argued that the charges were an integral part of the remuneration required to salve the ship so that she could be repaired, and that a prudent uninsured owner would have contracted on the same terms. Lord Sumption accepted that the cost of repair can include preliminary expenditure, such as salvage, temporary repairs and towage, whose objective purpose is to make repair possible and to show whether the ship is financially worth saving. The purpose of the SCOPIC charges was different: they protected the owner’s separate exposure to environmental liability, which is not the subject-matter of the hull insurance and is not part of the measure of damage to the ship. Had one contractor salved the ship and another supplied booms, the cost of the booms would not have counted. The use of one contractor for both tasks was incidental.
Assuming that a prudent uninsured owner would have made the same contract did not alter the result. That test is used where the facts are hypothetical, and section 60(2)(ii) confines it to quantifying the cost of repair. It does not allow expenditure with a different purpose to be included. The SCOPIC scheme keeps the two heads of charge separately identifiable, consistently with the division between hull and protection and indemnity risks. SCOPIC charges therefore form no part of the cost of repairing the damage under section 60(2)(ii), or of the cost of recovery and/or repair under clause 19.2. The appeal was allowed on that point.
Verdict: The Court unanimously allowed the insurers’ appeal in part. Reasonable salvage costs incurred before notice counted; the environmental SCOPIC charges did not. Knowles J had to determine whether the remaining costs made the Renos a constructive total loss.
