Insurers may deposit insurance payments under the Nordic Plan

Wikborg Rein successfully defended insurers against a co-insured bareboat charterer’s claim for direct payment.

The award assessed the applicability of the Norwegian Insurance Contracts Act of 1989 (NICA), and also examined the co-insureds’ rights pursuant to:

• Barecon 2001, as amended
• Loss Payable Clauses, as agreed, and
• The Nordic Plan, Chapter 8

The arbitration award, which was issued on 19 December 2022, is the first award known to have been rendered under NOMA rules, since their implementation with clause 1-4B of the 2019 version of the Nordic Plan.

NICA section 7-4

According to section 7-4 of the NICA, a co-insured will not be able to object to the insurer placing the insurance payment in a bank account where it will be held at the joint disposal of the policyholder and the co-insured. By making the deposit, the insurer is considered to have satisfied its payment obligations under the relevant policy regardless of the policyholder or the co-insured’s interests, rights, or claims for compensation. The subsequent distribution of the deposited payment will no longer concern the insurer and it will be for the policyholder and co-insured to battle it out between themselves – through negotiations or legal proceedings.

Background

Two car ferries were chartered on similar Barecon 2001 bareboat charterparties in 2014. As customary, the charterers were obliged to maintain the vessels in accordance with Barecon 2001 clause 10 (line 169-182), while insured repairs should be carried out by the charterers subject to any provision in the Financial Instrument (i.e. owners’ financing and security arrangements) and the approval of the owners and the insurers in accordance with clause 13 (line 373-386).

Importantly, clause 13 had otherwise been amended so that the owners – and not the charterers – would arrange for insurance, presumably to allow the charterers to take advantage of the owners’ fleet discount. The owners had in turn duly insured the vessels with the charterers as a named co-insured, but had also included Loss Payable Clauses to the sole benefit of their mortgagees and themselves.

The Loss Payable Clauses specified that all insurance compensation for repairs above a certain level should be paid directly to the mortgagee, while lesser amounts were to be paid directly to the owners.

During the charter period, both vessels suffered damage which the charterers repaired, but without seeking prior clarification and approval of the repairs and of how they were to be compensated from owners and the insurers. The charterers, as named co-insured under the Nordic Plan clause 8-1, then turned to the insurers and claimed compensation for their disbursements, less the deductibles.

The insurers accepted coverage, quantum and the fact that the disbursements had been paid by the charterer. Being well aware of the Loss Payable Clauses and the owners’ interest in first-hand payment due to an underlying redelivery dispute with the charterers, the insurers decided to deposit the full compensation amount for the joint disposal of the owners and charterers (which was also initially encouraged by the charterers). When informed of the payment deposit, the charterers changed their minds and rejected deposit on grounds of invalidity based on the Nordic Plan’s regulation of co-insurance. They primarily argued that the Nordic Plan could not be supplemented by NICA section 7-4, and alternatively that the deposit failed to fulfil various preconditions that were allegedly in the provision.

The award

Curiously, and despite this not being directly relevant issue to be determined by the Tribunal (the issue being the effect of the deposit paid by the insurer), and also despite the charterparty being subject to English law and owners’ not being involved in the arbitral proceedings, the Norwegian arbitration tribunal chose first to assess the charterers’s rights and interests under the charterparty with the owners. Largely based on more contextual interpretations than on the strict wording of the charterparties and the Loss Payable Clauses, the tribunal concluded – albeit obiter dictum – that the compensation could have been paid by the insurers directly to the co-insured charterers.

Regardless of this conclusion, the tribunal found that (1) Norwegian law should apply exclusively by way of the Nordic Plan clause 1-4B which includes the NICA section 7-4, and that (2) the provision applied unless otherwise agreed, cf. NICA section 7-5.

With reference to NICA’s preparatory works, the tribunal highlighted that the reasoning for granting the insurers right to deposit the insurance payment stemmed from a desire to free the insurers from a duty to manage the money in a situation where the compensation had been duly calculated, but where it was unclear whether it could be rightfully claimed by the policyholder or a co-insured. On this basis, the tribunal did not hesitate to supplement the Nordic Plan with NICA section 7-4.

The tribunal went on to establish that there were no further or stricter conditions to meet with respect to deposits of insurance payments than what was contained in the provision itself (which did not name any conditions), or the preparatory works (which simply referred to the unclear relationship between the policyholder and the co-insured). Due to the owners’ failure to explicitly accept payment of the insurance compensation to the charterers, the condition was met. The tribunal also found reason to believe that the insurers did not want to be involved in an arbitration between the owners and charterers, which the tribunal found to be sufficient reason for the insurers to be able to exercise their right to deposit the insurance payment.