Insurers prevail in landmark Nordic Plan CTL judgment
Following a long legal battle before the Norwegian courts, the Court of Appeal has dismissed a claim by the owners of the vessel “Champion Express” for a constructive total loss (“CTL”) under the Nordic Plan. Wikborg Rein acted for the insurers in what has been the first Norwegian judgment on CTL since the now 31 year old ND-1992-172 Berglift judgment.
In LA-2021-97236-4 Champion Express, which was handed down on 7 July 2022, the Court of Appeal reversed the District Court’s judgment. The outcome of the appeal was largely due to the insurers’ being able to obtain evidence previously concealed by the owners. Following the Supreme Court’s rejection of the owners’ further appeal on 17 November 2022, the decision is now legally binding.
The judgment confirms that the contractual duty of loyalty applies to marine insurance. In the Champion Express, this meant that the owners’ were inter alia obliged to make wholehearted efforts to obtain flag state waivers from regulations which would make repairs more expensive to the extent that it could affect the level of insurance cover. The judgment affirms the principle that information for the appraisal of repair costs should be obtained by a pre-agreed and tenable procedure, as established in the Berglift case 30 years prior, and includes comments on the allowance for unforeseen costs.
The Nordic Plan Cl. 11-3
Pursuant to the Nordic Plan Cl. 11-3, the assured may claim for CTL (which in the Nordic Plan is called ”condemnation”) if the repair costs will amount to at least 80% of:
- the insurable value according to the hull insurance, or
- the value of the vessel after repairs, if the latter is higher than the insurable value according to the hull insurance.
The assessment includes all foreseeable costs of removal and repairs which, at the time when the request for CTL is submitted, must be anticipated if the vessel is to be repaired. Costs of salvage shall not be taken into consideration.
If the conditions for CTL are fulfilled, the owners would be entitled to total loss compensation not only under the hull insurance, but also under the hull interest and freight interest insurances.
The vessel’s main engine broke down in August 2018. On 7 December 2018, the owners claimed for a CTL based on estimated repair costs exceeding 80% of the insurable value. The claim mainly relied on:
- the need to equip a new non-identical replacement engine with a NOx reducer system in order to comply with Tier III requirements under MARPOL Annex VI, Regulation 13.2.2, and
- a 15% write up of the total repair costs in contingent expenses.
The need to equip the vessel with a NOx reducer relied on the assertion that the owners were unable to obtain a waiver from the Tier III requirements from the flag state pursuant to IMO’s resolution MEPC.230(65). This assertion was supported by rather brief correspondence between the owners and their flag state and classification society respectively, including an email from the latter in which the possibility of a waiver was seemingly summarily dismissed.
Upon the insurers’ requests for full disclosure of the owners’ correspondence with the flag state, the owners repeatedly claimed that all such correspondence had been duly presented and disclosed in the proceedings.
The District Court ruled in the owners’ favour based on the evidence available to it.
Simultaneously with the futile efforts to obtain the requested documentation from the owners in the Norwegian proceedings, the insurers also filed for discovery against the vessel’s flag state in the U.S., where the flag state’s administrative headquarters were located. The discovery process revealed that the owners had concealed a substantial amount of their correspondence with the flag state in the legal proceedings, including emails to the flag state’s local representative’s private email address, by which they had secretly argued for a negative reply to their application. The arguments were dismissed by the flag state’s main office, which instead provided a relevant example of a waiver granted to another vessel.
Shortly before the hearing in the Court of Appeal, the insurers also managed to obtain another example of a waiver granted by the same flag state, by means of a Norwegian court order against a different classification society.
Among the correspondence disclosed by the flag state was also internal correspondence and correspondence between the flag state and the vessel’s classification society. This correspondence revealed that the classification society’s dismissive email to the owners – which the owners had relied heavily on when arguing the case before the District Court – was labelled by the flag state as internal and non-conclusive.
The Court of Appeal judgment
The Court of Appeal established that the contractual duty of loyalty obliges an assured shipowner to make wholehearted efforts to obtain available waivers from regulations issued by public authorities, particularly where such waivers may be decisive for CTL.
Based on the evidence obtained by discovery, the Court of Appeal concluded that the owners had not wholeheartedly attempted to obtain a waiver from the flag state, but instead found that:
“The correspondence with the [flag state] clearly indicates that the owners wanted it to appear as if they had applied, whilst in reality, they wanted the application to be dismissed.”
The Court of Appeal also considered that the owners had not only failed to include the insurers in the process to clarify whether there were grounds for a waiver from the flag state, but had seemingly also provided the insurers with information that was either wrong, or at least misleading and highly inaccurate. On this basis, the court found that the owners’ approach “must be considered as an ‘untenable procedure’ pursuant to the Berglift judgment”.
The Court of Appeal went on to consider the consistent application of MEPC.230(65) by the flag state and two “well renowned classification societies” in the two examples presented by the insurers where waivers had been granted by the flag state. On this basis, the court found it probable that the owners would have obtained a waiver if they had made wholehearted efforts.
Contingency for unforeseen costs
The Court of Appeal held that whether to add a margin for contingency expenses is discretionary and in particular depends on the level of uncertainty about the repair cost estimate. As a benchmark, the court referred to the 10% margin applied by English courts in Brillante Virtuoso, Renos and Irene EM, two of which concerned engine room fires, which the Champion Express did not. The court went on to emphasise witness statements that such engine room fires typically make it more difficult to estimate repair costs.
On the specific facts of the case, the Court of Appeal found that the quotations obtained from the engine manufacturer for a new engine, as well as the quotation from a reputable yard, reduced uncertainty about the purchase and installation costs.
On this basis, the Court of Appeal found that neither the damage nor the repairs were sufficiently complicated to justify a contingency for unforeseen costs above 10% of the otherwise estimated costs.
Based on the Court of Appeal’s findings, the repair costs were estimated to be lower than the required 80% of the insurable value, and thus the insurers were acquitted after more than two years of legal battle.