INSURANCE OF AVERAGE DISBURSEMENTS 23 she Moriaed Ves sang (with of witout crs) wih an imenton ofeing broken ue eng ll or Sub-clause 1.1 is purely declaratory. Sub-clause 1.2 appears to be generous to the mortgagee assured, in that it extends the list of the shipowner's wrongdoings which could provide his underwriters with a defence on his (the shipowner's) policy; to that extent therefore broadening the ciscumstances under which the mortgagees’ underwriters will provide cover ‘But bankers beware! Underwriters generally have a new weapon in theie armoury against sub-standard ships. ‘This is the International Ship Management Code, compliance with which is now mandatory on shipowners and ship operators by virtue of Chapter IX of the International Convention for the Safety of Life at Sea (SOLAS) 1974. Failure of shipowners or other responsible parties to hold a valid Document of Compliance and a valid Safety Management Certificate under Chap- ter IX of this Convention will render hull insurance subject to the IHC to be liable to automatic termination.?* By Clause 2 of the Mortgagees’ Interest Clauses of 11/5/04 the sins of the shipowners in this respect will be visited upon their mort- gagee bankers should they be privy to"* or become aware of their customers! default ‘There isa similarly arbitrary provision in sub-clause 2.3 which applies an auto- ‘matic termination of the Mortgagees’ Interest policy in the event of the shipowners’ sending the ship on a voyage to be broken up, or being sold for this purpose, unless the mortgagee assured gives his underwriters prompt notice and pays any additional insurance premiums. No doubt such action on the part of the shipowner would be in dire breach of the loan agreement, but one wonders why MIL underwriters need to penalise their assured in the face of the shipowners" misconduct. 5. THE INSURANCE OF AVERAGE DISBURSEMENTS Introduction ‘The occasion for this insurance arises when the shipowner or another party or parties to the common maritime adventure (hereinafter called “the general average financier”) incurs a liability to a salvor or disburses funds on account of expenses ‘which are expected to form the subject of a rateable contribution by all the parties concerned in the adventure. In placing the insurance, the general average financier may well have two separate objects in view. His initial object will be: 1. to protect himself against the risk thar, between the time that he has incurred the liability to pay and the time that he can enforce his right to receive the contributions contingently due from the other parties, the property liable to 24, See commentary on the ISM Cade in relation wo the Inchmaree Clause proviso, p.122. 25. Intemational Hull Clauses 1/11/03, ause 13. Sce pp.96-102 26. For the meaning of dhe word “peivy, see The Eurssthene [1976] 2 Lloyd's Rep 171 313INSURANCES FOR VARIG TERESTS make such contributions may become a total loss or suffer such reduction in value that the fund available to pay those contributions will be insufficient to reimburse him for their proportion of the expenses and liabilities for which he has assumed responsibility. ‘Additionally the general average financier and his advisers may have in mind a further object, viz.: 2. to protect all parties to the common maritime adventure (including himself) against the risk that, by reason of an event occurring after he has incurred such liability and before the contribution of all parties will be assessed, the basis of the contribution will be altered in such a way as to vary the incidence of liability to contribute to those expenses, thus placing an additional burden upon some of the contributing interests, Although this class of insurance is traditionally described as an insurance on “average disbursements”, the rationale for the insurance is best illustrated by reference to a case involving a liability on the interests involved in the adventure to pay a salvage reward, taking into consideration that salvage services are, by defini- tion, performed by persons outside the community of interest formed by the parties to the adventure, whereas general average concerns the obligations of those parties inter se. Hence, under the Law Maritime, a salvor is entitled to demand security for his reward as soon as his services are completed, whereas a shipowner cannot demand security for general average from cargo interests until he is in a position to tender delivery of the goods at the termination of the adventure. However, once the salvage reward has been paid, either by the shipowner on behalf of all interests, or by the owners of the salved property for their proportionate shares, the general rule is that the amounts so settled (including legal costs and. other charges involved in the settlement) will be admissible as general average, and. will fall to be reapportioned over the values obtaining at the termination of the adventure. This has been recognised for many years by the laws and practices of all, ‘maritime countries (except possibly Great Britain)?” Adjustment under the York-Antwerp Rules When the York-Antwerp Rules 1974 or 1994 apply to the adjustment of general average, the position will be governed by Rule VI, reading as follows: “Rule VI. Salvage remuneration [Expenditure incurred by the parties to the adventure on account of salvage, whether ‘under contract or otherwise, shall be allowed in general average to the extent that the 27. In the United States, see Amarada Hou Corporation v Mobil 1979 AMG 2406. For the practice in ‘Givi! Law counties, see the Resolution passed by the IM General Assembly of AIDE, reading (i ‘wanslaion): Apportionment of salvage This Assembly considers that when a salvage award bas alveady been apportioned by a Cour or an arbitrator berween slip, freight and cargo, the average adjuster should ‘teat the swand as general average and undertake another apportionment on the basis of actual values, after having verified those values and [established] which of them will be retained in the adjustment. 314INSURANCE OF AVERA‘ DISBURSEMENTS, salvage operations were undertaken for the purpose of preserving from peril the property involved in the common maritime adventure.” However, when the York-Antwerp Rules 2004 apply to the adjustment of general average, consideration will have to be given to the terms of the new Rule VI,"" the relevant paragraph of which reads as follows: “Rule VI. Salvage Remuneration Salvage payments, including interest thercon and legal fees associated with such pay- ‘ments, shall lie where they fall and shall not be allowed in General Average, save only that if one party to the salvage shall have paid sll or any of the proportion of salvage (including interest and legal fees) due from another party (calculated on the basis of salved values and not General Average contributory values), the unpaid contribution to salvage due from that other party shall be credited in the adjustment to the party that has paid it, and debited to the party on whose behalf the payment was made.” At the time of writing this commentary (early 2005), one can only speculate what may be the practical effect of applying this new Rule, but it appears that the intention of the draftsmen is, except when the proviso applies, to avoid any re- apportionment of salvage payments over the values of the property at final destina- tion of where the adventure ends. Separate securities for salvage and general average Under English law—and this will apply whenever the salvage services are performed under Lloyd’s Form of Salvage Agreement (LOF 2000)—the liability of the salved interests to pay their proportion of the salvage remuneration is individual, and not joint or several. When the ship is carrying a bulk cargo for a single cargo interest, it is a relatively simple matter for the salvor to communicate with the shipper or receiver of the cargo in order to demand that security for the salvage be lodged with the Committee of Lloyd’s or in such alternative manner as the salvor may require. However, when the ship is carrying a general cargo under numerous bills of lading, it is by no means so easy to get in touch with all interests, and there is a danger that the voyage may be retarded, with the ship and cargo under arrest or threat of arrest, until the salvor is satisfied with the adequacy of the security. In these circumstances the shipowner may well wish to tender security to the salvors on behalf of all interests in order to prevent his ship from being delayed. Other reasons, such as the desire to minimise the inconvenience suffered by the regular customers of the line, may also induce him to put up salvage security on behalf of the cargo as well as the shi ‘Under the maritime law which applies in certain other countries, notably Greece, the Netherlands and Spain, the salvor need only look to the shipowner for payment of the salvage remuneration since he has no direct right to claim against the cargo. In France the salvor has the option of proceeding either directly and exclusively against the ship or separately against the ship and cargo owners, 28, Adopted by the CMI Conference held at Vancouver in June 2008 315INSURANCES FOR VARIOUS INTERESTS ‘When, for whatever reason, the shipowner has furnished security to the salvor on behalf of the cargo as well as the ship and any pending freight, he bears the risk for the proportion of the salvage remuneration which attaches to those other interests, until such time as he can obtain counter-security from each of them. In cases involving a general cargo, the salvor may (provided he agrees to accept securities less watertight than those which he could require under LOF) be prepared to release the vessel and cargo at an intermediate port, on the shipowner’s security in respect of | his interests, plus his undertaking to obtain guarantees from cargo underwriters which will, pari passu, replace his temporary guarantee in this respect. (See form ISU 1, designed by the International Salvage Union for this purpose.) However, the traditional situation is that the shipowner who has furnished salvage security for the cargo interests will remain unsecured as regards cargo’s proportion, of the eventual salvage reward until he is able to demand security for his outlays in general average from those concerned in cargo. In the majority of cases of general average it is the shipowner who finances the expenditure. In our example it will probably be he who pays for the charges of entry and departure from the port of refuge, the cost of discharging, storing and reloading the cargo so that the ship can be placed in dry dock for the necessary repairs; as well as other expenses during the period the voyage is prolonged. Sometimes when a vessel is time-chartered the charterer may be obliged under the terms of the time charter-party to pay certain of these expenses, or he may undertake to do so because of his better financial position. ‘The general average financier remains at risk for the amount he has defrayed until, the end of the voyage, at which time the shipowner, being in a position to tender delivery of the goods, may exercise the lien which he enjoys over them for general average and other proper charges. In the vast majority of cases this position arises at the port named in the bill of lading for delivery of the goods. Occasionally, however, the carrying ship may have been so badly damaged by excepted perils that she is no longer capable of carrying the cargo to its destination without an expenditure which would exceed her value when repaired, or subject to such delay as would frustrate the object of the adventure. In these circumstances the shipowner will become legally entitled to abandon the voyage, and the adventure will terminate wherever the ship happens to be. In practice the cargo interests are invited (often before the voyage has been completed) to furnish security for the general average by way of an average bond signed by the receiver of the goods, supported either by a guarantee from the cargo underwriters or from a bank, or by a cash deposit. Furthermore, ifthe securities are furnished by cargo interests while the voyage is still in being, they do not become effective until the goods are delivered to the party entitled to them. Different bases for apportioning salvage and general average ‘The assessment of a salvage reward is based upon the value of the salved interests at the termination of the salvage services, whereas the values which establish the parties’ contribution in general average are those which obrain on completion of the adventure. Unless the salvage services also terminate at the port where the adven- 316INSURANCE OF AVERAGE DISBURSEMENTS ture ends, these two sets of values will almost certainly differ. Such difference can arise on account of any one or more of the following factors: @ (b) © @ © ‘There is variation in the market value of the ship between the time the salvage services are concluded and the end of the voyage. Where the salvage remuneration is determined within the jurisdiction of the courts of England (or where English jurisdiction is agreed to by the parties) the value of a ship under time charter will be assessed taking into account the beneficial (or in some cases the detrimental) effect of the time charter, which consideration is disregarded in assessing the value of the ship for general average purposes by virtue of Rule XVII of the York- Antwerp Rules, ‘There is some variation between the salved value of the cargo (based upon. ‘commercial or market values ruling at the time and place where the salvage services terminated) and the value ascertained from the commercial invoice rendered to the receiver. General average values are assessed with the addition of any amount made ‘good in the adjustment for general average sacrifice, which calculation, does not figure in the assessment of salved value. Finally, the value of one or more of the interests may be reduced between the time the salvage services are concluded and the end of the voyage, by. reason of loss, damage or liability sustained or incurred in consequence of fa subsequent accident, Indeed, this may have the effect of reducing the values for contribution at the end of the voyage to a sum less than the liabilities incurred to the salvors, and in the event of a total loss of all interests, the values for contribution in general average will be nil, and there will be no general adjustment at all. ‘The figures which follow provide a highly simplified example of the effect of readjustment of the parties’ liability to salvage, consequent upon a reduction in the value of the ship. Example Values atthe time of completion of Salvage the salvage service ‘Ship £600,000 £60,000 Cargo. £600,000 £60,000 Fi,200,000 pays £120,000 oF a contribution of 10% 317INSURANCES FOR VARIOUS INTERESTS Values at the termination of the adventure Ship £400,000 pays £48,000 Cargo {£600,000 pas £22000 1,000,000 pays £120,000 cor a contribution of 12%. ‘When the variation in values occurs through market forces, nothing can be done to sugar the pill, but when the reduction in the value of any interest is due to a subsequent accident, the remedy can be supplied by an insurance on average disbursements. Market practice Prior to the introduction of new Clauses dated 14/5/87, there were two quite different sets of clauses available in the United Kingdom marker (and also used elsewhere) providing cover as follows: ‘The Salvage Association's Clause was available to provide the protection referred to on pages 313-314 above, at (1), namely against the risks of total loss of the contributory values, or such a reduction in those values that the residual values for contribution were insufficient to pay in full the expenses and liabilities to which the shipowner was exposed. ‘The alternative form was: ‘The Adjusters’ Clauses—otherwise known as William Richards’ Clauses. ‘This form in addition to providing cover against total loss also provided the protection referred to on page 314 above, at (2), $0 as to pay the proportion of the expenses and liabilities insured attaching to any diminution in the value of the contributing interests which might occur as a result of a subsequent accident. [As from 14/5/87 these clauses have been superseded in the United Kingdom by two sets of clauses agreed by the Institute of London Underwriters and the Association, of Average Adjusters. They are: ‘The Average Disbursements Clauses (A) and ‘The Average Disbursements Clauses (B) “The designation by the letters (A) and (B) follows the pattern set in the Institue Cargo Clauses, in that the (A) Clauses provide the wider cover approximating to that previously available in the Adjusters’ Clauses, whereas the (B) Clauses provide cover similar to that previously available with the Salvage Association's Clauses. Other than for Clause 7 relating to the measure of indemnity, the texts of the (A) and (B) Clauses are exactly the same, thus eliminating several of the small differ- ences which characterised the earlier forms. 318INSURANCE OF AVERAGE DISBURSEMENTS ‘The Average Disbursements Clauses (A) and (B), 14/5/87 ‘This clause was designed so as to bring within the cover provided by the insurance all classes of persons who might have an insurable interest in the disbursements and liabilities insured, insofar as they have suffered financial loss by reason of a sub- sequent accident affecting the assessment of the contributory values of the property at the termination of the adventure. Such persons can be (a) The shipowner or other party financing the general average disbursements, particularly in respect of the protection referred to on pages 313-314 above, at (A); (b) Any party to the adventure (including the shipowner) whose contribution to the general average may be increased by reason of a diminution in the value of the other contributing interests by reason of a subsequent acci- dent; this being the protection referred to on page 314 above, at (B); (©) A party external to the common maritime adventure who has advanced funds to enable the general average disbursements to be paids (@) Any insurer of any of the above. ‘The inclusion of all parties who have an insurable interest renders it unnecessary to admit the interest insured. Consequently it will no longer be necessary to attach a slip declaring that the “policy is proof of interest”, thus exposing the parties to the risk that the policy might be declared unenforceable in law. ‘The description of the assured in appropriately wide terms makes it clear that, if the shipowner is insured under a form of policy which is subject to the Marine Insurance Act 1906, it is the hull underwriter who by reason of his liability to pay the claim for the proportion of the general average expenditure which “falls upon” the assured (see s.66(4) of the Act) is entitled to the benefit of the recovery from the insurance on average disbursements in all those cases where the ship's proportion of the general average expenditure is enhanced by reason of the extinction or diminu- tion of the contributing values of other interests. ‘This follows from the judgment in the case of Green Star Shipping Co Ltd v London Assurance (The Andree),2 which demonstrated that, when the general average expenditure exceeded 100 per cent of the ship and cargo values at destination, and by the law of the jurisdiction the cargo interests were liable only to pay 100 per cent of their value as general average contribution, the balance of the general average expenditure, even though it exceeded the value of the ship, was recoverable under tan English marine insurance policy as being the proportion of the general average expenditure which fell upon the shipowner. Fv hron illo! fg ope gh oko 29, (1931) 30 LIL Rep 213, 319INSURANCES FOR VARIOUS INTERESTS ovens for General Atrage inthe conc of rsent cen the sscnce och pov 8 Clause 2.1 ‘This clause deals with the attachment of the risk. Of course, as soon as disburse- ‘ments have been incurred which are likely to be of a general average nature, the shipowner (or the general average financier) has something to insure. However, it thas to be recognised that, if an insurance is required in order to cover the disburse- ‘ments incurred while the vessel is still in a position of peril, or at sea before she can bbe brought into the safety of a port of refuge, the premium which an underwriter will requite to insure that kind of risk—in the London market, called an “overdue risk” —is likely to be a great deal higher than the premium which he would charge if the commencement of the insured risk (or as stated in the Clauses “the time of attachment”) is deferred until the vessel’s arrival in comparative safety at the port of refuge. Hence the reference to “the agreed time of attachment as stated herein” in the proviso to Clause 2.1 Proviso to Clause 2.1 ‘This states that “no risk shall attach” in respect of loss or damage which has occurred before the “agreed time of attachment as stated herein”. The purpose of the proviso is to make clear that the cover provided in Clause 6 is limited to loss or damage suffered after the insurance attaches. In the usual course the broker for the general average financier will request that the risk should be stated to attach “at and from {the named port of refuge]”, and subject to acceptance by the leading under- ‘writer those words will form part of the designation of the voyage insured. At this time, of course, not all of the disbursements, costs and charges intended to be covered by the insurance will have been incurred, and such disbursements incurred or for which a liability ataches after the commencement of the risk will ntionally bbe added to the subject-matter of the insurance until they each the “amount finally ascertained” in accordance with Clause 5 Under the (A) Clauses, the proviso requires that the reduction in values at the termination of the common maritime adventure must be shown to have occurred by reason of loss or damage which was not in existence at the time when the insurance attached. However, the test under the proviso as to when the loss of or damage to the property occurred is not the same as would be employed in investigating its proximate cause. Indeed, the damage causing the reduction in value may have had its proximate cause in something which occurred long before the attachment of the risk. For example, if general average disbursements have been incurred in con- sequence of efforts to fight a fie, and, it being thought that che fie was extinguished and the ship having arrived at a port of refuge, the insurance on average disburse- 320INSURANCE OF AVERAGE DISBURSEMENTS ments was duly opened; subsequently, on opening the hatches, a further outbreak of fire occurs: in these circumstances loss or damage caused by the further outbreak of fire will under the (A) Clauses be taken into account in calculating the reduction in the contributory values. It will therefore be appreciated that the words of the proviso to Clause 2.1 do not have the same effect as a stipulation, for example, that the insurance will be “free of accident reported”. Under the (B) Clauses the effect of the proviso is somewhat limited, since a claim for partial loss will only arise when the amount of the contributory values at the termination of the adventure have been reduced by the perils insured to a sum less than the total of the disbursements costs and charges (the subject-matter of the insurance). The extent of this reduction in the values of the property can only be ascertained after the adventure has come to an end but, in order to ensure that the calculation of the measure of indemnity has not been affected by any reduction in value which had already occurred prior to the attachment of the risk, it may be necessary to demonstrate that the actual values of the property at risk at the time of attachment exceeded the total of the disbursements costs and charges for which the insurance was effected. To put the matter another way, if at the time of the attachment of the risk the values of the property had already been reduced (albeit unknown to the parties) by prior accident(s) to an amount which was less than the subject-matter of the insurance, the average disbursements underwriters would not bbe on tisk for the excess. Clause 2.2 ‘This clause provides that the risk will end at the termination of the common maritime adventure, that is to say, at the end of the general average voyage. This differs from the provisions contained in the previous sets of Clauses which termi- nated 30 days after arrival of the ship at destination, and, under the Adjusters’ Clauses, specifically included a continuation of the risk in respect of cargo until such. time as it had been taken delivery of by consignees “at final destination”, ‘The proviso to Clause 2.2 is new. The reason for it is that underwriters will require to know all the ciscumstances which might affect their assessment of the risk and the appropriate premium to be charged, and consequently in any of the events mentioned in the proviso notice must be given to the underwriters. Usually, at the time when instructions are given to open the insurance, it is known whether or not intended to discharge cargo for the purpose of repairing the ship, and whether it is intended that such cargo will be reshipped on to the carrying vessel or transhipped and forwarded by another vessel. Such information can usually there- fore be given to the underwriters prior to the opening of the insurance, but if there is a change of plan then it is essential that the underwriters be notified as early as possible. hd Tho tel ot eewankng velo raf has Inet ala ny ports or places any onder fr any pupore 321INSURANCES FOR VARIOUS INTERESTS Both of these provisions were substantially included in the Adjusters’ Clauses, and there are only two small changes of note: In Clause 3.1 the words “or forwarding vessel”, coupled with the reference to forwarding contained in the proviso to Clause 2.2, demonstrate clearly that, pro- vided the undervriters are on notice as to the arrangements made for forwarding the cargo by another vessel, such forwarding of the cargo to its destination by a substitute vessel will be within the contemplation of the insurance, and that, despite the separation of the cargo so forwarded from the community of interest at risk at the time of the general average act, the risk of diminution in the value of the cargo so forwarded will continue to be covered. ‘The “held covered” provision in Clause 3.2 no longer refers to deviation. The reason for this is that in the drafting of the Clauses it was considered that the liberties granted in Clause 3.1 were sufficiently wide to cover all likely instances of commercial deviation from the advertised or declared course of the voyage. Any ‘more serious variation from the contemplated course of the voyage would in all probability amount to a “change of voyage”, which the underwriters have agreed to cover subject to prompt notice and a reasonable additional premium if required. “Tistonunce tn sopert of ger vag dh 1 shage and sahag hag nce of. ‘This description of the subject-matter is somewhat more restricted than in the previous forms of Clauses. In particular, the description “general average disburse- ments” would seem to exclude special charges on cargo (or on containers) except and insofar as such charges are brought back into contribution in general average on. account of their being incurred in order to avoid or minimise the occurrence or extent of general average damage, or to remedy the consequences of such damage. ‘The proposal to exclude special charges on cargo emanated from the underwriters" representatives, who considered that this was a different category of risk from that which they were prepared to insure on average disbursements. The average adjust- ers on the committee regretted the exclusion in spite of the fact that the incidence of claims for non-recovery of special charges was extremely limited, since such claims could arise only when the value of the interest concerned was reduced to less than the amount due to be paid as special charges. “The word “disbursements” is intended to comprehend all the outlays of a general average nature which the shipowner and/or the other parties financing the common ‘maritime adventure may have to make. It does not include the amounts due to be ‘made good for general average sacrifice of cargo and freight, nor for general average sacrifice of ship unless such sacrificial damage of loss is repaired of replaced during the course of the general average voyage. “The reason in principle for the exclusion of general average sacrifice not repaired or otherwise made good during the voyage is tha, in the event ofa total loss of the property or such reduction ints value at the end of the voyage as to cause a shortfall in the amount required to pay the general average disbursements, the parties suffering such sacrificial loss or damage will lose their right to contribution, in which circumstances (f insured) they have to look to their underwriters to indemnify them for the whole of their loss. 322INSURANCE OF AVERAGE DISBURSEMENTS “The position is different in the case of general average damage to ship, or loss of bunkers or stores, which are made good during the voyage by repairs or replace~ (a) In these circumstances there is an actual outlay to pay for the cost of repairs or replacement, and (b) In assessing the values for contribution, the amounts made good for the ‘cost of repairs or replacements effected on the voyage will (unless already included) be added to the residual physical values of the property at the termination of the adventure. This has the effect of reducing the liability of average disbursements underwriters in the event of any claim other than for total loss So far as the (B) Clauses are concerned, the correctness of this treatment can be demonstrated mathematically, as the following simple example will show: Example Alpha In cach of the three cases considered below, the shipowner incurs: —a libilty for salvage and costs, amounting to £300,000, — general average expenditure, amounting to £100,000, — particular average repair costs, amounting to £200,000, In case 1, the ship sustains no sacrificial damage. In ease 2, the ship sustains sacrificial damage, which is repaired at the port of refuge, ata cost of £100,000 In case 3, the ship sustains sacrificial damage, which is not repaired, the estimated cost of repairs being. £100,000 ‘The insurance on average disbursements was taken out on completion of the salvage service, the valucs of the property being: ‘Ship: sound market value — £1,000,000, less damage sustained Cargo: cif. value—£1,200,000 By reason of a subsequent accident, the ship is damaged to such an extent that she is not worth repairing, and the cargo also suffers substantial damage. The values at the termination of the adventure are therefore reduced to" Ship: net scrap value—£150,000 Cargo: proceeds of sale a damaged—£100,000 Let us assume the general average is to be adjusted in accordance with the York- Antwerp Rules 1904 ‘The claims under the (B) Clauses will be established as follows: 323INSURANCES FOR VARIOUS INTERESTS Case Cae? Case NoGA | GA.dumage | GA. damage damage to ship ship ‘op repaired | wnrpaled ‘The amounts 1 be included as the subject: mater ofthe insurance under Clause 4 a i Priniple, and subject o djusmeat (sce Example Beta) Salvage and costs 300,000 300.000 300.000 GA expendione 100.000 100,000 ‘6.000 GA. damage to ship NA 100.000 MI ‘noon s00.000| “00.000 “The contibutory values athe termination of the adventure, calculated in accordance with slau 62 ae ase 1 Ship: net serap value 150,000 Cargo: proceeds 100.000 250,000 case 2 Ship: net srap value £150,000 suk: mal good in GA (ace YAR XVI 100,000 rm Cargo: proceeds 00.000 350.000 case 3 Ship: net serap value £150,000 ho ation for made good, fine oo allowance made in GEA. for unpaired damage Oe YAR XVID Cargo: proceeds 100,000 20.000 Therefore the deficiency in each case isthe sane, viz £150,000 150.000 150,000 As we shall see later, the claims under the (A) Clauses will produce different sets of figures but there is no difference in principle. Sa Tae fie state ls he nn aly rie in pec ofthe be Incepnn of he isk. found to be defen th maybe creased by nt more an 25% aubject tO In ascertaining the insurable value of the subject-matter it must be remembered that 324INSURANCE OF AVERA‘ DISBURSEMENTS, in Clause 1 it is stated thar the insurance is effected for account of all parties concerned in the property at risk. Hence there may be general average disburse- ments or salvage settlements incurred by parties other than the shipowner to be taken into account. ‘This clause 5 recognises that the amount of the general average and salvage cannot be accurately established at the commencement of the insurance: conse- quently the ascertainment of the closing figure has to be left until the average adjuster has all but completed his task. At this time, when the adjuster has decided upon the extent of the general average admissions, he will be in a position to assess the amount of the general average disbursements etc. which have accrued during the period of the risk, and this will be “the amount finally ascertained”. In the assessment of “the amount finally ascertained in respect of the disburse- ments costs and charges”, the average adjuster will include: All the amounts which the parties have paid in settlement of the salvage remuneration ultimately found to be due to the salvor, excluding only such interest payable on the reward, or the proportion of the reward, as arises in consequence of any unreasonable delay on the part ofthe party due to make the settlement. Legal costs, and the proportion of the Committee of Lloyd’s charges and arbitration fees chargeable to each of the salvage settlements effected as above All the disbursements incurred by the parties, ultimately allowed in general average, whether incurred before the attachment of the risk or subsequently In this respect the amount covered by the insurance is more comprehensive than it was under earlier forms of average disbursements insurance.” Clause 5.1 ‘This clause provides that the insurable value of the subject-matter is “the amount finally ascertained in respect of the disbursements costs and charges described in Clause 4”, plus the cost of insurance. This will include the charges incurred by the shipowner in obtaining general average security and the costs which he incurs in proving his claim, including the charges of adjustment, except insofar as those costs relate to the ascertainment of any general average sacrifice excluded from the ambit of the insurance. Excluded are: 530. Under previous forms the disbursements had to be those which had been incurred oF fr which lability was pending, a form of words which suggested that Use dsbursements intended to Be covered by the insurance were limited to those which were in the contemplation of the shipowtner or the general tverage financier effecting the insurance at tht time, The question then wss whether an isurance in such terms would cover general average disbursements incurred subsequent tothe vessel's resort othe Port of refuge, uch asthe enhanced cost of discharging cargo damaged by measures to extinguish fe, the cost of abtaining general average socurty at the ports of discharging and the cost of adjustment, howwsthstanding that such additonal expenditure could well have been in the contemplation of the person effecting the insurance. For dhe avoidance of doubr, «became the practice to clause the subject- tmatter ofthe insurance, under borh the Adjusters’ Clauses and the Salvage Association's Clause, 25 “isbursementsincured or to be incurred” 325INSURANCES FOR VARIOUS INTERESTS Any allowances for sacrifice of ship, freight and cargo, except for sacrificial loss or damage to ship, bunkers and stores, replaced or repaired during the voyages Any allowances for commission and interest under Rules XX and XXI of the York-Antwerp Rules.” Clause 5.2 ‘The wording is unclear and open to misinterpretation. The words “at the inception of the risk” at the end of the first sentence are intended to refer to the time when the estimation is made in respect of the subject-matter to be insured. If the alternative interpretation were correct, namely that only disbursements at the inception of the risk are to be taken into account in the estimation, this would conflict with the provisions of Clause 5.1. A better wording to express the intention would have been: “for the amount of such disbursements costs and charges estimated at the inception of the risk” ‘The second sentence records the agreement in the London market, followed in some other markets, to permit an increase upon the amount for which the insurance is opened, up to 25 per cent, on the same terms, conditions and rate of premium as applied to the original placement. However, circumstances can arise when the original estimate of the disburse- ‘ments etc. is found to be insufficient by more than 25 per cent. In this event it would. be customary for the new facts to be placed in the hands of the insurance brokers, so that they can go into the market and negotiate terms on which the additional amount at risk, over 125 per cent of the original estimation, can be placed Clause 5.3 records the practice of the London market to grant a return of premium to the extent that the original placing, on the basis of “the estimated amount ... at the inception of the risk” is found to be excessive, when a pro rata return of premium shall be allowed or reusin ofthe consitory veo he propery and eight tk arng me S42 ‘Gocl chor roth ene icetad vr inn ach wo damage Satiishanen rn the sence of such proves i tecardance with he Soering aw and pace ‘This is basically an “all risks” cover, approximating very closely to the cover provided in the previous Adjusters’ Clauses, To found a claim under an “all risks” policy, there has to be some accident or fortuity causing the damage or loss. 31, See Opinion aa 11 of the Advisory Commince ofthe AAA dated 23.843, referring vo questions under previous forms of ADL 532. See commentary on “ll rks” cover, pp. 12-13 herein 326INSURANCE OF AVERAGE DISBURSEMENTS Inevitable deterioration, ordinary wear and tear and loss of value through market forces are all excluded. It might therefore be thought that a claim arising from the loss of value of cargo, resulting from its inherent vice should likewise be excluded, but this will not always bbe the case. For example, suppose a cargo of coal takes fire as a result of sponta- neous combustion, Its consequent reduction in value at the termination of the adventure will have the result that a higher contribution to the general average will hhave to be paid by the other parties to the adventure. Since therefore it will be such. other parties who will be entitled to the benefit of the average disbursements insurance, the fact that the cargo of coal had a tendency to spontaneous combustion ‘was fortuitous so far as they were concerned, and the fact that the fire occurred and caused loss or damage during the voyage will be a risk covered by the policy. By way of analogy, if the master of the ship, being concerned at the overheating of such cargo and fearing that if fire should break out it will be beyond the ship's means to control it, puts into a port of refuge, this will found a case of general average** and the reduction in the contributory values to the first general average (the subject of the average disbursements insurance) by reason of the contributions made to this subsequent general average will be covered under Clause 6.1.3. On the other hand, if a cargo of grain is down-graded by the inspectors at destination owing merely to the length of time which it has been in the ship, such deterioration would almost certainly have to be considered as inevitable, unless the deterioration had been brought about by some extraordinary delay resulting from a fortuitous event subsequent to the original period of general average detention, and. even then the validity of the claim would be arguable on the authority of Pink v Fleming. Under Clause 6.1.2 itis made clear that a reduction in value due to the property ‘being called upon to pay special charges or other expenses of a “suing and labour ing” nature will be covered, provided of course that the liability to pay such charges arose out of an accident subsequent to the original general average act. Clause 6.1.3 recognises the principle that the priority of the charges upon the property is in inverse order to the events which gave rise to them. As average adjusters say, the second general average is always adjusted first, and the contribu- tory values to the first general average (in point of time) are accordingly reduced by the amount of their contribution to the second (and any subsequent) general averages. Clause 6.1.4 covers the risk that any of the property—particularly the ship—may bbe subject to seizure or civil arrest at the hand of an outside party in respect of a claim for damage or injury suffered by such party having a right to proceed in rem against the property concerned. In order to found a claim upon the average disbursements insurance, the cause of action giving the third party the right to seize the property must arise during the currency of the insurance (and this is so stated), 33, See The Knight of Sr Michael [1898] P30; 8 Asp MLC 360; 3 Com Cas 62. The general average point was conceded in argument—see the report in Commercial Cases 54. (1890) 25 QBD 396; 6 Asp MLC 554. 327INSURANCES FOR VARIOUS INTERESTS and the seizure or arrest must be followed by a legal execution against the property concemed. If the arrest is lifted because the owner of the property can furnish acceptable alternative security by way of a guarantee, as is usually the case, the clause will not apply. Clause 6.2 runs parallel to Clause 2.2 and is included in the text of the clauses ‘merely for clarification. We have already noted two consequences of the assessment of contributory values at the termination of the adventure in accordance with the usual provisions for the adjustment of general average: (a) Claims resulting from loss or damage to any of the cargo occurring between the time of its discharge from the ship and its delivery to the ultimate receiver will not be covered by this insurance, even though in the event of a loss of the goods occurring prior to their delivery, a receiver of cargo would probably be extremely reluctant to pay any general average contribution at all (b) When there has been a general average sacrifice of ship, cargo or freight which is made good to the party concerned in the general average adjust- ment, then the amount made good is added to the physical value of the property in order to establish the value upon which it will contribute in general average. Indemnity ‘The next Clause, which deals with the measure of indemnity, appears in different forms in the (A) and (B) Clauses. In the (A) Clause it reads: Clause 7.1 does not call for any special comment. Where there are no contribu- tory values, there isa total loss of the contributing interests and the amount payable by the insurance will be the full sum insured. ‘This will be the toral of the insurable value of the subject-matter (including the premium of insurance), provided that the estimated amount for which the insurance was opened in accordance with Clause 5.2, plus any increase of not more than 25 per cent thereof, is sufficient to cover the “amount finally ascertained” plus the charges of insurance. Ifthe estimated amount plus 25 per cent is insufficient to cover the “amount finally ascertained”, the sum. insured will not provide a full indemnity. Clause 7.2 provides the partial loss indemnity envisaged in paragraph B of this paper. As shown in the example set out below, the effect of itis to maintain the same level of contribution, so far as the insurable disbursements are concerned, as would 328INSURANCE OF AVERA‘ DISBURSEMENTS, have been applied to each of the contributing interests if there had been no subsequent accident. In the (B) Clause, Clause 7.2 reads: ‘The two different methods for calculating the partial loss indemnity are best demonstrated by example: Example Beta Let us assume the same exposure for disbursements costs and charges as in Example Alpha, case 3. We will now extend these figures to show the adjustment of the general faverage and the assessment of the insurable value of the average disbursements as follows: General Trurable value average per of average VAR 1994 | disbursements “Total liability for salvage and costs £300,000, £300,000 General average expenditure 100,000 100,000 General average damage to ship not 100,000 et repaired on voyage £300,000 £400,000 Commission @ 2% on £400,000 8,000 et Interest on £500,000, say 50,000 = Cost of adjustment and other proofs of 25,000 loss of which: proportion attaching to inured disbursements £400,000 20,000 [Average disbursements insurance premium at say 0.2% on £420,842 842 842 (note: allowed in general average per Rule XX of the York-Antwerp Rules) £383,842 £420,842 Under the (A) Clauses FFor a claim under the (A) Clauses we have to establish the extent t0 which the contributory values of the property have been reduced by reason of the operation of the risks covered in Clause 6.1, This involves first ofall ascertaining what would have been the contributory values of the property but for the loss which occurred in consequence ‘of those risks, Let us say that those values would have been, in accordance with the York Antwerp Rules, 1994: 329INSURANCES FOR VAR ‘Ship Value as in sound condition £1,000,000 deduct: damage received in first accident 300,000 FE 700,000 add: made good in general average 100,000 FT 800,000 Cargo A. cif. value £ 700,000 B cif. value £ 400,000 ‘Fis100,000 Containers 100,000 — 1,200,000 Ba000,000 Now we have to assess the contributory values at the termination of the common ‘maritime adventure, Let us consider the so following cases Case 1. Ship and cargo sustain further damage by the second accident, not sufficient to reduce the contributory values to lees than the general average disbursements, bbut so as to distort the level of contribution, Case 2. Ship and cargo sustain such further damage by the second accident as to bring the contributory values below the level ofthe general average disbursements at risk In Case 1 let us say that the values atthe termination ofthe adventure will be assessed 1 follows: ‘Ship Value as in sound condition £1,000,000 deduct: damage (1) £300,000 damage (2) 150,000 450,000 F 350,000, add: made good in G.A. (1) 100,000 FE 650,000, Cargo A. cif, value (undamaged) £700,000 B caf. value £400,000 deduct: damage (2) 200,000 200,000 Containers £100,000 deduct: damage (2) 50,000 50,000 ———= _ 950,000 RO) ‘The reduction in the contributory values is therefore: as they would have been but forthe loss £2,000,000 les: as they are 1,600,000 £400,000 ‘The measure of indemnity under the (A) Clauses is calculated as follows Insurable value £428,842 x 400,000 _ 000,000 = £84,168.40 330INSURANCE OF AVERAGE DISBURSEMENTS In Case 2 let us suppose that as a result ofthe subsequent accident the ship sustains further damage which would cost in excess of £550,000 to repair, but that she has a value for scrapping of £150,000 “as is, where is”. Since the deduction of the P.A. damages (1) and (2) would theoretically produce a nil value, the ship's contributory value will be taken at her net serap value and (by virtue of Rule XVIII of the York-Antwerp Rules) nothing will be made good in general average in respect of the unrepaired sacrificial damage. ‘Similarly let us assume tha all cargo and containers are subject to substantial loss and damage, and are sold in one lot for what they will fetch. ‘The values atthe termination of the adventure will be: Ship: net scrap value £150,000 Cargo and containers: proceeds of sale 100,000 £250,000 (These figures are the same as in Example Alpha, case 3.) ‘The reduction in the contributory values. is therefore: as they would have been but for the loss £2,000,000 less: as they are 250,000 £1,750,000 ‘The measure of indemnity under the (A) Clauses is calculated as follows: 1,750,000 _ Insurable value £420,842 x PPO = 566.036.75 Under the (B) Clauses For a claim under the (B) Clauses its not necessary to establish the extent ofthe reduction in the contributory values in consequence of the further accident or occurrence: all we have to do ie to ascertain what are the contributory values st the termination of the adventure and whether they amount to more or less than the insurable value. In Case 1 above, it is clear at a glance that the contributory values at {1,600,000 substantially exceed the insurable value ofthe disbursements etc. at £420,842 and conse quently there will be no claim, In Case 2 there is @ claim, which may be shown as follows: ‘The total of the disbursements, costs and charges is £420,000 ‘The contributory values at the termination ofthe adventure are 250,000 ‘The “deficiency” in terms of Clause 7.2 is £170,000 ‘The measure of indemnity under the (B) (Clauses is caleulated as follows: 170,000 Tnsorable value £920,882 3 FO = a5 340.81 331INSURANCES FOR VAR Under-insurance ‘There is @ proviso relating to underinsurance in Clause 7.2 in both the (A) and (B) Clauses, which states that if the total of the disbursements costs and charges is not fully insured, the amount payable under Clause 7.2 shall be reduced in proportion to the under Let us assume that in Example Beta the ‘amount estimated at the inception of the Fisk, for which the insurance was opened, was £280,000 [As the case progressed, it became clear that this amount would be insufficient, and consequently the estimated amount was increased, in accordance with Clause 5.2, by 25% 70,000 £350,000 We would then have a case of underinsurance, and assuming that our claim under Example Beta, Case 1, was covered by the (A) Clauses, the figures would be: Insurable value as finally ascertained £420,842 pays £84,168.40 Insurable value as initially estimated, plus 25%, a8 above £350,000 plus premium of insurance 701 £350,701 pays in pp. £70,140.20 OF course, if the policy were closed for £350,000 without taking into account the cost of the insurance, the recovery under the policy would be further reduced, in proportion to the sum insured, to £70,000.00 Effect of claim ‘Assuming, as envisaged in Clause 1, that the average disbursements insurance is effected, for account of al parties concerned, the effect of making a claim upon the insurance isto reduce the extent of the obligation upon the interests liable to contribute in general average. Thus, in practice, the claim upon the average disbursements insurance is shown, in the adjustment of general average as a credit item before the apportionment Let us assume the figures in Example Beta, Case 1, with a claim under the (A) Clauses (fully covered by the insurance): 332INSURANCE OF AVERA‘ DISBURSEMENTS, General average per YAR 1004 “Total general average as adjusted £583,842.00 ‘credit: amount recoverable from undersriters’ subscribing policy on average disbursements for £420,842 £84,168.40 less: brokers’ collecting commission, say 841.68 83,326.72 ‘The net general average is then apportioned over the contributory values (as set out on page 330) as follows: Ship £850,000 £203,334.33, Cargo A "700,000 218,075.44 Cargo B 200,000 62,564.41 Containers 50,000 15,641.10 £1,600,000 pays £300,515.28 ‘This clause is necessary in order to circumvent the extremely harsh rule of English Jaw that in a voyage policy there is an implied warranty that the ship is seaworthy and in a fit condition to carry the cargo to its destination—see section 39 of the Marine Insurance Act 1906. Since this provision applies even to an innocent assured who has no means of determining whether or not the carrying vessel is seaworthy, it would in many instances negate the object of the insurance.” Conse- quently this clause is essential in order to give business efficacy to the policy. We have already observed in the commentary on Clause 1 that if a shipowner is insured under a form of policy subject to English law, any enhancement in the proportion of the general average expenditure which falls upon him will normally be recoverable under the hull policy. Consequently, were it not for this provision in the average disbursements insurance, there could be a case of double insurance. The effect of this clause is that the average disbursements underwriter will pay the measure of indemnity provided in Clause 7 and, even though it may be the shipowner who has placed the insurance, that part of the recovery which goes to reduce the claim upon his hull policy for ship's proportion of general average will in effect inure to the benefit of his hull underwriters. ‘Tr nrurance subject Bnglish bw and practise ‘This clause is common to all the new Institute Clauses issued from 1/1/82 onwards, in order to ensure that, despite the relegation to the archives of Lloyd’s SG form, the benefits available by way of reference to the Marine Insurance Act 1906 should not 35, Gh Clause 5.2 ofthe Insiute Cargo Clauses, p23 333INSURANCES FOR VARIOUS INTERESTS be lost. By this clause, English law, as it has developed both before and after the ‘Marine Insurance Act, will continue to be applied in the interpretation of the Average Disbursements Clauses. ‘The clause does not, as has been feared in some countries, govern the question of jurisdiction. Any policy containing these clauses will continue to be subject to the jurisdiction of the country in which it was issued, ‘The next clause is introduced by a caution, reading: > Clases (A) VR except othe ete hat such ss “Wilful misconduct" means a course of action undertaken either deliberately, knowing it to be wrongful so far as others are concerned, or recklessly, without caring whether it is wrongful or not, ‘Wilful misconduct of the assured bars any claim under a marine insurance policy to which English law applies—see section 55(1)(a) of the Marine Insurance Act. Hence the importance of Clause 11.1 is in the proviso, namely that the exclusion, will not defeat a claim brought by an innocent assured. Although, when the (B) Clauses apply, the person most likely to be gaining an advantage from the insurance will be either the shipowner or the general average financier, the “assured” under the (A) Clauses will comprise each and every interest which has been protected by ‘operation of the insurance from an increase in its general average contribution. [tis difficult to envisage how any of these parties, except perhaps the shipowner, could engage in a course of action amounting to wilful misconduct. Clause 11.2 defines and limits the war risks cover, Prima facie, “the risks of loss . .. or damage” include war risks as well as every other type of risk. Clause 6 of the Institute Cargo Clauses (A) 1/1/82 excludes war risks (other than capture, seizure, arrest, restraint or detainment resulting from piracy), and Clause 1 of the Institute War Clauses (Cargo) 1/1/82 reinstates them. ‘The wording of Clause 11.2 seems unnecessarily convoluted, but in fact it was so drafted in order to restrict the war risks cover to the extent traditionally reserved to the UK marine insurance market under the “waterborne agreement”. The effect of the clause is quite simple: namely that, so far as war risks are concerned, the insurance on average disbursements is subject to the same terms and exceptions as, apply to a cargo assured under the Institute War Clauses (Cargo) 1/1/82. Law and practice in countries outside the United Kingdom A comparative study of the laws and practices relative to the insurance of average disbursements in different countries, and in particular Denmark, France, Germany, Great Britain, Norway, Poland and the United States was undertaken by a working group appointed by AIDE. The working group reported in two stages: 334INSURANCE OF AVERA‘ DISBURSEMENTS, prior to the introduction of the Institute/AAA Clauses reviewed above; this report was presented at Bruges in 1987 subsequently, incorporating comments on these clauses; report presented at York in 1989.2 In general it appeared that shipowners and their average adjusters in France, the Nordic countries and the United States preferred their own forms of ADI, whereas in other countries there was, prior to 1987, considerable support for the Adjusters’ Clauses. In the opinion of the authors, the Institute/AAA Clauses, the subject of the present commentary, have settled down well since their introduction, have not thrown up any insoluble problems and bode well for the future, 36, Copies ofthe working group's reports can be obtained from: AIDE Secretariat, ola Fedorowica & Parmers, Rue dAnogrune 170, B-1380 LASNE, Belgium. 335