Time for ‘Marriage Counselling’ in Relationship between London Marine Hull Clauses and Claims?

Associations, Marine Insurance — By on May 16, 2016 at 2:49 PM
Andrew Patton

Andrew Patton

Time for ‘Marriage Counselling’ in Relationship between London Marine Hull Clauses and Claims? Andrew Paton, chairman of Association of Average Adjusters, calls for reforms to end ‘muddle’ over coverages

London insurance market hull clauses and the cover and services they provide for handling claims “is a relationship which is in need of some assistance, ” Andrew Paton has set out in his chairman’s address to the annual meeting of the Association of Average Adjusters.

The title of his talk put the requirement in memorable terms: Hull Clauses and Claims – time for some Marriage Counselling?

Mr Paton told the meeting at Lloyd’s Old Library on May 12 2016 that behind the choice of a flippant title was his call for reform or review of some key London market clauses, and that the expertise of claims practitioners could help substantially to take such a project forward.

This was important “because these clauses provide the insurance cover which the shipowners need to respond with clarity and certainty in the event of a claim.

“Too often the London market hull clauses can seem like a series of hurdles and barriers for an assured to overcome, and worse, are capable of providing some unpleasant surprises. In some cases a lack of certainty on aspects of cover can result in an assured being faced with an uncertainty of outcome at a time when crucial decisions have to be made in the handling of a casualty.”

Mr Paton, who is a Liverpool-based director of Richards Hogg Lindley, outlined “fundamental issues” which he said needed to be addressed.

He referred to the three principal sets of clauses, of which the Institute Time Clauses – Hulls 1/10/83 is the most widely used. The 1/11/95 clauses are also widely used, but frequently amended to bring them back to the position of the 1/10/83 clauses. The third set, the International Hull Clauses (01/11/03) are rarely used.

In addition some assureds have their own sets of clauses often modelled on the Institute Time Clauses. Other assureds add Owners’ Clauses to meet the needs of cover for vessels of special types or for those engaged in particular trades. The great majority of such clauses are intended to deal with what are perceived to be deficiencies in the basic hull clauses, said Mr Paton.

One might argue that this scenario reflected well on the London hull market in providing flexibility in cover for assureds. “On the other hand, it could be said that there is a state of muddle – a complete mishmash of insurance, ” Mr Paton declared. “In my view the present situation does not reflect well on the London market, particularly in comparison with the cohesive and coherent Nordic Plan [an institutional framework between four Nordic shipowner associations and the Nordic Association of Marine Insurers].”

He urged practitioners in the London hull market to follow the example set recently in the field of General Average, where there were five sets of the governing York-Antwerp Rules – 1950, 1974, 1974 as amended 1990, 1994 and 2004 – with the 1994 Rules being the most commonly used. “This situation with the York-Antwerp Rules was considered to be unsustainable and so the CMI [Comité Maritime International, an organisation dedicated to harmonising maritime law] prepared and issued a new set of York-Antwerp Rules 2016 which it is intended will be adopted by the great majority of shipowners and other interested parties.”

Mr Paton said: “I believe that the comprehensive consultation exercise by the CMI International Working Group and its extensive round of discussion meetings are the example which needs to be followed for a review of the hull clauses. However, who will provide the necessary leadership for this review?”

He said that the proposal made by his predecessor as chairman of the Association, Paul Rowland, for a Claims Council “is the ideal kind of forum which the London market needs in order to drive a review of the hull clauses.” Mr Paton was pleased that the impetus for such a Claims Council was gaining momentum, “albeit slowly, with progress made as to who should be its initial constituent members. A review of the hull clauses could perhaps give the Claims Council a clear rationale for its existence.”

As an example of how “unsatisfactory” it is that the three principal sets of London market hull clauses differ, Mr Paton said that the notice provisions to underwriters of an accident to a vessel which the owners consider could give rise to a claim varied in each of the three sets.

Further, the differences between the 1995 and 2003 clauses with regard to notice of the awareness of the insured party of loss or damage could have serious practical implications. Not only are the periods of time different (12 months in the 1995 clauses, and half that in the 2003 clauses), but so is the relevant degree of awareness of the assured.

All three sets provide that the underwriters can decide the port to which a vessel shall proceed for dock or repair. “I do wonder how many times, if ever, this provision has been enforced by underwriters or attempts have been made by underwriters to enforce it, ” commented Mr Paton. “It is also questionable whether such a provision is legally enforceable. Can an underwriter, who has no proprietary interest, force the owner of a vessel to repair his property at a particular port or shipyard?”

The clauses differed again over the application of a 15% deduction from the claim when there had been a breach of these provisions. It needed to be clear whether this was the gross or net claim, but in any case Mr Paton had “reservations as to whether retaining such a ‘big stick’ is appropriate for modern hull clauses.”

A review should also consider the major topic of the burden of proof on the insured to show that loss or damage was caused by an insured peril, which could perhaps operate better under an “all risks” system.

The 1983 clauses restricted the scope of the allegation of want of due diligence to the assured, owners or managers, and this was in the 1995 version expanded, controversially, to include superintendents and onshore management. The 2003 clauses reverted to the 1983 version. Should the proviso continue at all in the future? While people at director level were responsible for setting effective policies and procedures for safe management of vessels, they are unlikely to be involved in day-to-day operations and circumstances which give rise to marine accidents, said Mr Paton.

Mr Paton went on to warn that the Constructive Total Loss area of insurance was ripe for another major dispute unless the opportunity were taken to reform the relevant clause to make it clear that underwriters were entitled to receive the net residual value of a vessel when sold.

He said the market should consider making the concept of ‘sound market value’ – introduced because of volatility in ship values – part of standard hull cover. It had become common for hull policies to incorporate a Sound Market Value clause which provides that a vessel is fully insured for payment of salvage, general average and sue and labour regardless of whether insured for full sound market value at the time of an incident.

A further area to tackle was the capping of cargo interests’ liability to pay their proportion of General Average in relation to forwarding cargo to its intended destination in accordance with the Bigham Clause provision, which could leave the shipowner to bear the difference.

Reforms should take into account the law with regard to breach of warranty, which would change fundamentally under the UK’s Insurance Act 2015, due to come into force in August 2016. Breaches of warranty irrelevant to a loss would no longer discharge underwriters from liability. The market should also look at whether the Disbursements Warranty should remain in future hull clauses.

The mooted Claims Council might also want to take action on the standard wording for loss of hire (in the ABS 1/10/83 Wording) which too was “in pressing need of review and reform.”

Mr Paton concluded: “Since the handling of claims is any insurance market’s ‘shop window’, it would be good to see the reform of the London market hull and loss of hire clauses driven by the claims community.”

On the conclusion of his term of office as 2015-16 chairman of the Association, Mr Paton has been succeeded for 2016-17 by Association current vice-chairman Keith Martin, who is UK energy claims advocacy leader for the Marsh broking group. Burkhard Fischer, a director of Albatross Adjusters of Limassol, has been appointed vice-chairman of the Association. Alex Kemp, a senior associate at law firm Holman Fenwick Willan; and Amy Dallaway, marine and aviation claims adjuster at Antares Underwriting, join the committee of management as Associates.

Note to editors: The Association of Average Adjusters promotes professional principles in the adjustment of marine claims, uniformity of adjusting practice, and the maintenance of high standards of professional conduct. Irrespective of the identity of the instructing party, the average adjuster is bound to act in an impartial and independent manner. The Association plays an important part in London insurance market committees, and has strong relationships with international associations and insurance markets.

Please see www.average-adjusters.com

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