SUBROGATION – still a tricky issue
June 2015
The principles behind insurers’ rights of subrogation are generally well understood. Insurers who indemnify an insured for a loss thereby become entitled to claim against the wrongdoer who has caused that loss. By paying a claim the insurer “steps into the shoes” of the insured and takes over any rights that the insured has against third parties who may be responsible for the loss.
Often, however, what seems straightforward, or to be expected, turns out not to be the case. The recent Court of Appeal decision in the “Ocean Victory” (2015 EWCA Civ 16) is a good illustration of this and so provides a useful opportunity to revisit some of the principles behind sub-rogation under both English and Norwegian law.
BASIC PRINCIPLES
Under English law subrogation is an equitable principle that prevents an insured from retaining the benefit of a double recovery which otherwise might arise if the insured receives both an indemnity under the insurance and damages from a third party for the same loss. For subrogation to arise it is necessary to show that there are valid rights of recourse against a third party and that those rights can be effectively enforced by the insured. Norwegian law starts from a slightly different position. Sec. 4-3 and 4-4 of the Norwegian Tort Act 1969 provides that an insurer who has paid compensation to the insured may claim recourse from the wrongdoer provided that the insured could have claimed compensation from the wrongdoer. This reflects a general principle of Norwegian law stated by the Norwegian Supreme Court in Rt 1997 p. 1029 (on p. 1036) that:
“…. it follows from general principles of law that a party that has covered another’s party’s obligation, normally and as a starting point, has a valid recourse action. It is the limitation of any such recourse action that requires specific legal basis”.
Thus, whereas Norwegian law seeks to impose liability on the party at fault who has caused the loss, the English position is much more agnostic and looks simply at what rights the insured has to which subrogation applies.
INSURANCE COMPLICATION
Complications arise when insurance arrangements are put in place which impact on rights of
recourse where loss and dam-age occurs that is also covered by insurance. The subrogation principle under both English and Norwegian law does not give the insurer any different or greater rights than those which the insured has against the third party.
Under English law subrogation operates to vest in the insurer the benefit of rights that the insured has against third parties or an interest in recoveries made by the insured. Norwegian law goes somewhat further and states that, upon payment of the loss, insurers acquire by operation of law both the right and title of any claim that the insured has against any third party that has caused the loss. However in both cases the principle is the same, namely that if the insured has
no rights of recourse then there is nothing to which subrogation can apply. Insurers’ rights of subrogation can be waived. This can hap-pen because either the express terms of the insurance
state that all rights of subrogation are waived, or the terms of the contract agreed between the insured and the third party has the same effect. If the insured has contracted on terms that effectively exclude or limit the third party’s liability under the contract then this exclusion will also bind the insurer, (and may also, depending on the wording of the insurance contract, deprive the insured of cover if this is not disclosed prior to inception). This is because the insurer cannot acquire by subrogation any better right than is possessed by the insured in whose name the claim is being advanced.
Where the third party is covered under the insurance, for example. as co-insured, as was the case in the “Ocean Victory”, the subrogation issues may be further complicated and may, as explained further below, lead to different results depending on the applicable law of the underlying contract.
THE “OCEAN VICTORY”
The “Ocean Victory” was a capsize bulk carrier trading under a chain of charters: from head owners to demise charterers, fur- ther to time charterers and down to sub time charterers. The demise charter was based on Barecon 89, whilst the time charters were on the NYPE form. Both the demise and time charters contained safe port warranties.
In October 2006 the vessel was ordered by the time charterers to unload at the Kashima port in Japan. Due to bad weather, the time charterers instructed the vessel to leave port. On its departure the vessel grounded, broke apart and was later declared a total loss.
In accordance with the terms of Barecon 89 the demise charterer, an associated company of the owners, had insured the vessel for hull and machinery risks both for its own interests and those of the owners. Hull insurers duly paid the claim and then sought to recover their loss by bringing a claim in the name of the demise charterers against the time charterers for the loss of the vessel on the grounds that the port of Kashima as unsafe. Ultimately this claim was unsuccessful because the Court of Appeal (as opposed to the High Court) did not find Kashima to be unsafe. However of equal interest was the further finding that, even if there had been a breach of the
safe port warranty by time charterers, the demise charterer could not bring a claim because they had not suffered a loss. The reasoning was that the agreed insurance arrangements in the demise charter effectively meant that the owners of the “Ocean Victory” had waived any rights to claim against by demise charterer for the loss of the vessel due to a breach of the safe port warranty.
NO LOSS
Where claims are made down contractual chains it is necessary to show the first claim in the chain creates a loss that can then be passed down the chain. If there is no claim then there can be no loss and thus no liability for which the parties down the chain can be called upon to indemnify. This is the case even though the parties down the contractual chain are clearly at fault and responsible for the loss that has occurred.
Applying this to the “Ocean Victory” unless the owners of the vessel could bring a claim against the demise charterers for the loss of the vessel then no liability or loss arises which could then be
passed down to the time charterer and the sub time charterer who gave the order for the vessel to proceed to Kashima.
NO CLAIM
The question in the “Ocean Victory” was whether the owners could bring a claim against the demise charterers for the loss of the vessel. Under the demise charter it had been agreed that the demise charterer would arrange and pay for the insurance to protect the interests of both owners and demise charterers “as their interests may appear”. The alternative option, which could have been selected by the parties, was that the owners could have insured. Had this option been chosen then owners would expressly have waived any rights of subrogation as per the standard wording of the Barecon. This waiver would have been effective to shut off any claim against the demise charterers for the loss of the vessel due to a breach of the safe port warranty.
There was no similar express waiver of subrogation where the demise charterer arranged and paid for the insurance. As such the question for the Court was whether the fact that the insurance was for the joint interests of the owners and demise charterers, and had been paid for by the demise charterers, was to be treated as a waiver of the owners’ rights to claim against the demise charterers for any losses covered by that insurance. The Court’s answer to this question was that it did.
The Court of Appeal first upheld the principle that where a party pays for insurance they must be treated as having been released by their contracting party from any liability that might be imposed on them if a loss occurs which the insurers are required to pay. This was the approach followed by the House of Lords in the “Evia” (No.2) 1983 where claims against charterers were dismissed in circumstances where the vessel was lost due to war risks and the charterers had paid for the insurance cover which had then indemnified owners for their loss.
The Court of Appeal also held that the requirement that the demise charterer take out the
insurance in the joint names of owners and demise charterers as their interests appeared effectively meant that the parties were joint insureds. The conclusion drawn from this was that the parties had agreed to look to their insurers for indemnification and as such the owners of the “Ocean Victory” had excluded any right to claim against the demise charterers for any insured losses.
Thus the reasoning of the Court was that where parties agree to take joint insurance or are co-insureds, or where insurance is paid for by one party for the benefit of both parties, then that agreement is to be construed as the parties have agreed an insurance funded solution in the event of loss or damage covered by insurance and that all subrogation rights in connection with insured losses are to be treated as having been waived.
UNINTENDED CONSEQUENCES
Whilst the outcome of the “Ocean Victory” was perhaps understandable in terms of allocating risk between the owners and demise charterers, the unintended consequence is that by shutting the claim off at the top of the chain the demise charterers was prevented from seeking redress against the time charterer own the chain. It is very unlikely that this was the intention either of the
demise charterers or the insurers who paid the loss. The starting position under Norwegian law is the same. If subrogation has been waived, as the case often is in, for example offshore contracts and knock-for-knock regimes, and dis-closed to the insurer (if not customary), the insurer is obliged to cover without any right of subrogation. However, unless there are clear words which state that subrogation claims are excluded or restricted, Norwegian law will assist in ensuring that the loss falls where it should, which is with the party at fault and their insurers. Considering the “Ocean Victory” facts, the result may well have been different under Norwegian law and the Nordic Marine Insurance Plan (“NMIP”).
One issue is whether a Norwegian court would arrive at a different conclusion on whether subrogation was waived under the relevant Barecon 89 wording. The Court’s approach would place weight on the fact that the principle of safe port under Norwegian background law is that the owners are only entitled to be compensated if the vessel was negligently ordered to an unsafe port, cf. e.g. the Norwegian Maritime Code sections 385. Thus, liability would not be based on the application of a warranty and a different balance of the parties’ interest would apply. Furthermore, under NMIP conditions both the owners and the demise charterers, as co-insureds, would be defined as the “assured”. The NMIP provides that the insurer is not only subrogated the claim for which compensation has been paid (clause 5-13), but also “the assured’s claim against third parties who are liable to pay compensation for damage to the object that has been covered by the insurer”, ref. clause 5-22. The latter would imply that the demise charterers’ claim would have been separately subrogated, regardless of whether the same claim may have been made solely by the owners.
Thus in the case of the “Ocean Victory” no question would have arisen as to whether the demise charterers had suffered a loss since their interests would have been considered to have been the one and the same as the owners. The starting point would be that it was unreasonable that a time charterer could avoid liability for a loss simply because of the nature of the insurance arrangements as between the owner and demise charterer. The unintended consequence of
the “Ocean Victory” will now be considered by the Supreme Court who have recently given permission for an appeal to be heard. Until the position is reversed parties need to be aware that a problem lies with the wording of Barecon charter where the effect of introducing insurance funded solutions can effectively deprive insurers from pursuing recourse claims against third
parties. This will be the case unless the demise charterer can show that he has suffered the loss directly, as in the case of partial losses, or the loss is uninsured or the claim arises in tort.