Coverage under builders’ risk clauses including faulty welds and faulty design
The assured is the shipyard but will contain long list of parties such as purchasers, sub contractors, affiliated companies because there are various contracts likely to be involved.
Value of SMI normally dealt with in slip or on a gradual declaration basis as different components arrive & overall value increases. Creates hybrid between value and unvalued status.
Section 5 - This insurance is against all risk of loss of or damage to the smi caused and discovered during the period of insurance including the cost of repairing, replacing or renewing any defective part condemned solely in consequence of the discovery therein during the period of this insurance of a latent defect.
But under cl 8 - includes loss or damage caused and discovered arising from faulty design but EXCLUDES costs of making good the faulty designed part and any cost incurred by reason of betterment or alteration in design.
ICBR specifically coves the cost of any defective part condemned solely in consequence of the discovery during the period of insurance of a latent defect. Mere discovery seems sufficient to provide cover for latent defect, doesn’t have to be physical damage. Contracts out of the legal position as stated in the NUKILA & OCEANIC v FABLE
Not only covers RCOR but also ‘ALL ADDITIONAL EXPENSES…UNTIL TRIALS RE RUN” and elsewhere “LIABILITY FOR MAINTENANCE OF THE SHIP DURING ANY PERIOD OF DELAY CAUSED BY MAKING GOOD OR REPAIRING FAULTS”.
Nigel Rogers 2006 AAA Address.
Contributions between policies covering the same risk
Max liability method
Contributions between insurers in pptn to the maximum potential exposure of each under his policy.
Common liability method
The two insurers bear equally any loss up to the amount for which each would independently be liable. Above that, any surplus for which only one is liable is borne exclusively by that insurer.
Independent liability method
Contribution between insurers in pptn to their respective liabilities assessed as if each had been solely liable for the loss which had occurred.
Policy A insured for 100k, B for 10k. Any loss up to 10k would be shared equally. Any loss above 10k would be shared in ratio of the max liability under each policy. Thus, a loss of 30k would be shared in the ratio of 3:1, because policy A would be liable for the loss in full, and policy B would only be liable for 10k. So policy B contributes 7.5k.
Double Insurance
S 32 of MIA
Two or more insurers would have a common liability to indemnify the assured iro the same loss.
Recovery from one insurer reduces/ extinguishes the assured’s entitlement against the other insurers.
When an insurer discharges more than his proportion, he has a right of contribution against the other insurers for his share.
When an assured is over insured by double insurance, the assured is entitled to claim payment under the polices in whatever order he chooses. Can seek full indemnity from one insurer, and the insurer who pays is left to claim contribution from the other insurers.
The assured is not entitled to be overindemnified.
How to calculate how much an insurer is required to contribute:-
1. Independent liability method - each insurer’s contribution is adjusted proportionately to the amount which each would independently be liable to pay the insured. E.g, Wellington insured the Martin P for 5m, Jones insured for 2.5m, they would be liable to contribute in the loss ratio of 2:1
- Maximum liability method - insurers contributions are proportionate to their respective maximum liabilities under the policies. For instance, if the max insured under two policies is 10,000 and 1,000 respectively, and the loss is 4,425, insurers contribute in the ration 10:1 (commercial union assurance v Hayden).
- Common liability method - Two insurers bear equally any loss up to the amount for which they would independently be liable. Above that, any surplus for which only one is liable if borne exclusively by the insurer. In the Martin P case, this would mean the 2.5m would be shared equally and the remaining 2.5m would be borne by Wellington, up to its limit. Wellington would therefore be entitled to a contribution of US$1.25m, and would have to bear the remaining 3.75m itself.
Pay to be paid
P&I clubs normally make payment of the third partys claim by the member a condition precedent to the members right of recovery from the club.
It’s been long disputed whether this clause could operate under the third parties (rights against insurer) act 1930, given if the assured becomes insolvent and cannot pay the claim, this bars any claim under the policy and prevents any claim by the third party.
In the Fanti, when cargo interests sought to recover from their P&I clubs of insolvent shipowners, decided the clause was ineffective because the assured right to be paid was transferred to the third party and prepayment did not affect this right and was to be disregarded. But it was held there was no contractural entitlement to payment by the club without prepayment, and the cargo owners had no right to recover.
2010 Act provides pay to be paid clauses are valid and enforceable unless the claim is one for death or personal injury.
Accordingly, clubs can continue to insist upon prepayment for cargo and other property damage, but not for injury claims.
P&I indemnity based not liability based.
Third parties not being able to claim directly against P&I club protects the mutual nature of the clubs and their membership funds.
Reinsurers are entitled notwithstanding their promise to pay as may be paid thereon, to say the original insurer was not liable to pay.
Reinsurance - compromised or agreed loss
Chippendale v Holt established that if the reinsured was liable for total loss only under the direct policy, then the settlement of a partial loss as if it were a total loss would not be recoverable from reinsurers, notwithstanding the use of “to pay as may be paid thereon”
To get around this, total loss only reinsurance policies began to provide cover not only for ATL/ CTL but also for compromised & arranged total loss.
Street v Royal Exchange Assurance - there was a compromised total loss where the assured has brought a claim for total loss, which was settled on the original policy, notwithstanding that there was an alternative claim for partial loss, and the settlement did not identify the basis on which the claims were settled.
