A fire broke out in the engine room of the owner’s vessel, while on a laden voyage in the Red Sea, causing serious damage. The vessel was insured with the defendant insurers under a hull and machinery policy, which incorporated the Institute Time Clauses Hulls, 1 October 1983, and with the first defendant under an increased value policy. The owner appointed salvors under Lloyd’s Open Form 2011, who invoked the special compensation protection and indemnity clause (“SCOPIC”), which entitled salvors to additional remuneration for measures taken while performing salvage services in order to prevent or minimise damage to the environment. A salvage tug towed the vessel to Adabiya, where her cargo was discharged, and then to Suez, where the salvage services ended. A tug hired by the owner stood by the vessel throughout her time at Suez. Having received a range of estimates for the cost of repairs, and taking into consideration the salvage costs, including the SCOPIC charges payable to the salvors, the hire of the standby tug and other costs already incurred, five months after the fire the owner served notice of abandonment claiming that the vessel was a constructive total loss under section 60(2)(ii) of the Marine Insurance Act 1906 because the “cost of repairing the damage” would exceed her insured value. It was common ground that there had been a loss by an insured peril and that the “cost of repairing the damage” in section 60(2)(ii) included the cost of recovering the vessel. The insurers acknowledged liability for a partial loss but rejected the notice of abandonment on the basis that the vessel was not a constructive total loss because neither the cost of recovery and repair incurred prior to the notice of abandonment nor SCOPIC costs counted towards the constructive total loss calculation for the purposes of section 60(2)(ii) of the 1906 Act, so that the cost of repairing the damage would not exceed the vessel’s insured value. On the owner’s claim for indemnity on a constructive total loss basis, the judge held that both the cost of recovery and repair incurred prior to the date of notice of abandonment and SCOPIC costs could be counted as cost of repairs for the purpose of section 60(2)(ii) of the 1906 Act and that therefore, on the facts as found, the vessel was a constructive total loss. The Court of Appeal upheld that decision.
On the insurers’ further appeal—
Held, (1) that the references in section 60 of the Marine Insurance Act 1906 to expenditure which “would” be incurred did not point only to future expenditure to be incurred after abandonment but reflected the hypothetical character of the whole exercise therein, and the reference to “future” salvage operations and general average contributions in the additional paragraph of section 60(2)(ii) did not implicitly exclude past expenditure for the purpose of determining whether a vessel was a constructive total loss; that, since as a general rule the loss under a hull and machinery policy occurred at the time of the casualty, notwithstanding its development thereafter, unless a second casualty broke the chain of causation, and since whether there had been a constructive total loss depended on the objective facts, the damage referred to in section 60(2)(ii) was in principle the entire damage arising from the casualty from the moment when it happened; that the measure of such damage was its effect on the depreciation of the vessel, which was represented by the entire cost of recovering and repairing it whenever such cost was incurred; that, further, the legal requirement for a notice of abandonment did not affect that principle; that, therefore, the cost of repair and recovery incurred prior to the date of notice of abandonment could rank towards the “cost of repairing the damage” in section 60(2)(ii) of the Marine Insurance Act 1906 when assessing whether a vessel was a constructive total loss; and that, accordingly, in the present case, the “cost of repairing the damage” included all the reasonable costs of salving and safeguarding the vessel from the time of the casualty onwards, together with the prospective costs of repairing her, and were to be taken into account for the purpose of determining whether the vessel was a constructive total loss under section 60(2)(ii) of the 1906 Act and the courts below had been right so to determine (paras 8, 10, 11, 12–14, 19).
But (2), allowing the appeal in part, that since the objective purpose of SCOPIC costs was to protect the shipowner’s potential liability for environmental pollution, their purpose was unconnected with the damage to the hull, or its hypothetical reinstatement; that, therefore, SCOPIC costs were not part of the “cost of repairing the damage” for the purpose of section 60(2)(ii) of the 1906 Act or the “cost of rec overy and/or repair” for the purpose of clause 19.2 of the Institute Time Clauses Hulls and could not rank towards a constructive total loss calculation; and that, accordingly, the judge’s order would be set aside and the matter remitted to him to determine whether the vessel was a constructive total loss (paras 25, 27–28).
Michael Ashcroft QC and Luke Pearce (instructed by Thomas Cooper llp) for the insurers.
Steven Berry QC and Neil Hart (instructed by Hill Dickinson llp) for the claimants.