Ocean Victory: Serious Consequences for Hull Insurers

ship hull

Although primarily addressing the issue of whether there had been a breach of the safe port undertaking (it was held there had not), the Supreme Court’s recent judgment in the Ocean Victory also discusses (obiter) an insurance point with potentially widespread and serious consequences for hull insurers of vessels on bareboat charter where both the vessel’s owner and bareboat charterer are co-assureds. 

The Barecon 89 form in question required the bareboat charterers to arrange insurance for their and owners’ interests in joint names. Lord Mance (in the majority of 3:2) held that the insurance provisions meant that it was “understood implicitly that there will be no claim” by owners against charterers: i.e. the insurance provisions effectively provided a complete code such that if there was a loss (which was insured) following a breach by the charterers, the parties would look to the insurance they had agreed would be arranged, rather than to each other (and then down the charter chain assuming that breach was replicated down the chain).

The result? If there had been a breach of the safe port undertaking by the time charterers, the insurers in the case (Gard) would – having paid the loss – have been unable to subrogate down the charter chain against the time charterers to recover the sums paid by way of indemnity under the policy. The effect was (a) that the safe port undertaking was pointless insofar as losses resulting from breach were insured and (b) time charterers effectively got the benefit of the policy in question.  The outcome has been described as “surprising”.

What does this mean for hull insurers going forward? Although (a) there are arguments which might provide insurers a route to recovery should the point arise again and (b) new standard industry wordings to address the point may well be introduced fairly swiftly, hull insurers would be well advised to give consideration to steps which might be taken to ensure that their position is protected now. If underwriters are aware that insured vessels are, or will be, operated on a bareboat basis with owners and bareboat charterers named as co-assureds in a similar “co-insurance scheme”, it might be appropriate, for example, to require an express term be included in the bareboat charter to preserve rights as between the parties regardless of the insurance arrangements in place, and to ensure underwriters’ subrogation rights are preserved.

If you have any questions arising out of the decision, or would like to discuss its implications or steps to mitigate its effect, please do not hesitate to contact us.

Joe O’Keeffe

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