The Running Down Clause In Marine Insurance Contracts In Nigeria: an Overview.
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Transcript of The Running Down Clause In Marine Insurance Contracts In Nigeria: an Overview.
The Running Down Clause in Marine Insurance Contracts in Nigeria: an overview.
Chinenye Elekwachi
May, 2010
Contents
1.0. Abstract.........................................................................................................2
2.0. Introduction...................................................................................................2
3.0. Definition of the Term...................................................................................6
4.0. Three Quarter Collision Liability Loss: An appraisal....................................7
5.0. Risks excluded from the Running Down Clause..........................................10
6.0. Excess collision liability..............................................................................12
7.0. Conclusion...................................................................................................14
Works Cited.............................................................................................................15
1.0. Abstract
The Running Down Clause (RDC) in marine insurance, has generated a lot
of controversies when weighed against the backdrop of the general
principles of insurance in which the insured agrees to pay a premium and
the insurer agrees that, if certain losses or damage occur to certain
interests of the insured, the insurer will indemnify the insured. This work
will take the form of a critical overview of the complex nature of Marine
Insurance policy which may be in the form of Hull & Machinery (covering
Vessel loss), Total Loss Only (as against partial loss), ‘Voyage’ or ‘Time
Basis’ loss and the English law hull policy (RDC) which distributes liability
in the event of a loss, in a 3:1 ratio between the underwriters of a policy and
the ship owners club. Although this method of distribution may appear
clumsy at first glance, it may well be the only remedy available to a small
ship owner in the event of collision for indemnifying excess collision
liability.
2.0. Introduction
Accidents happen, sometimes as a result of man’s fault at other times as a
result of an Act of God.1 It happens in the air, land and of course the sea. 1 Act of God is a legal term for events outside of human control, such as sudden floods or other
natural disasters, for which no one can be held responsible. In the law of torts, an act of God may be
asserted as a type of intervening cause, the lack of which have avoided the cause or diminished the
result of liability (e.g., but for the earthquake, the old, poor constructed building would be standing).
However, foreseeable results of unforeseeable causes may still raise liability. For example, a bolt of
lightning strikes a ship carrying volatile compresses gas, resulting in the expected explosion. Liability
may be found if the carrier did not use reasonable care to protect against sparks- regardless of their
Atop the deep blue sea collisions often occur and as such in the field of
marine insurance there are rules regulating the avoidance of collisions at
sea- the so-called COLREGS.2 Although the regulations, presently in force,
were introduced in1972, they have a long history. They originate from
customary law and the first to put them in writing were the British in 1840.3
A discourse of the running down clause (RDC) or the three quarter collision
liability loss 4 in Marine insurance will necessarily entail a consideration
howbeit in passing of the general principles of insurance by way of an
introduction. The general principles of marine insurance are the same as
with other types of insurance in that there are two parties: the assured and
assurer (or carrier). The assured or insured agrees to pay a premium and
the insurer agrees that, if certain losses or damage occurs to certain
interests of the insured, the insurer will indemnify the insured. However,
the complex circumstances involved in sea voyages require very specific
arrangements for the provision of marine insurance. The fixing rates and
specific conditions, for example, require a vast knowledge of the nature of
vessels and cargos and of the conditions of navigation.
origins. See (Black, 1990)
2 Convention on the international Regulations for Preventing Collisions at Sea, 1972. The other
conventions include: convention for the unification of certain Rules of Law with respect to collisions
between vessels, 1910 and international Convention on the safety of Life at Sea, 1974.
3 (Schoenbaum, 2009)
4 The three quarter collision liability loss clause is also referred to as the Running Down Clause and
shall be used interchangeably throughout our discourse.
By virtue of Section 3 of the Marine Insurance Act5, ‘a contract of marine
insurance is a contract whereby the insurer undertakes to indemnify the
assured, in a manner and to the extent thereby agreed, against marine
losses, that is to say, the losses incident to marine adventure.’
Section 4(1) goes further to state that ‘a contract of marine insurance
may, by its express terms, or by usage of trade, be extended so as to protect
the assured against losses on inland waters or on any land risk which may
be incidental to any sea voyage.’
The Marine policy may cover the risks of a single voyage, or may cover the
risks of a certain period of time. Cargo is almost always insured for a single
voyage. Vessels are usually insured for certain duration of time, usually year
to year.
Typical of marine insurance is the principle that no contract of marine
insurance is valid unless the insured has an insurable interest in the subject
matter at the time of loss. The term insurable interest has been variously
defined. According to the English Marine Insurance Act of 1906,6 “every
5 Chapter 216 Laws of the Federal Republic of Nigeria 1990
6 See Section 7 of the Marine Insurance Act, Chapter 216 Laws of the Federal Republic of Nigeria
1990 which states as follows:
(1) ‘subject to the provisions of this Act every person has an insurable interested in a
marine adventure.
(2) in particular a person a person is interested in a marine adventure where he
stands in any legal or equitable relation to the adventure or to any insurable property
person has an insurable interest who is interested in a marine adventure. A
person is interested in a marine adventure where he stands in any legal or
equitable relation to the adventure or to any insurable property at risk
therein, in consequence of which he may benefit by the safety or due arrival
of insurable property, or may be prejudiced by its loss, or damage thereto,
or by the detention thereof, or may incur liability in respect thereof”.
Among the “perils of the seas”7 that are deemed to be covered under a
marine policy are the extraordinary action of the wind and waves, collision,
foundering, striking on rocks and icebergs. Not covered are ordinary wear
and tear and losses which can be anticipated as regular incidents of sea
carriage or navigation.
Typically, marine insurance is split between the vessels and cargo.
Insurance of the vessels is generally known as ‘Hull and Machinery’ (H&
M). A more restricted form of cover is ‘Total Loss Only’ (TLO), generally
at risk therein, in consequence of which he may benefit by the safety or due arrival of
insurable property, or may be prejudiced by its loss, or damage thereto, or by the
detention thereof, or may be prejudiced by its loss, or damage thereto, or by the
detention thereof, or may incur liability in respect thereof.’
7Section 5 (3) ibid states thus ‘for the purposes of this section, “maritime perils” means the perils
consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war
perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of prince and peoples,
jettisons, barratry, and any other perils, either of the like kind or which may be designated by the
policy.’
used as a reinsurance, which only covers the total loss of the vessel and not
partial loss.
Cover may be on either a ‘voyage’ or ‘time’ basis. The ‘voyage’ basis covers
transit between the ports set out in the policy; the ‘time’ basis covers a
period of time, typically one year, and is more common.
Hull policies, used to be quite specific as to the risks covered but modern
policies are written to cover most forms of liability. A “collision and running
down” clause is contained in the standard hull policy to cover liability
incurred for another vessel or structure, and sometimes even personal
injuries incurred. This means the policy covers against collision liability not
covered by the “collision and running down” clause, as well as against all
other liability exposure.
Under a marine policy a loss can be partial or total. Total losses can be
actual or constructive. Actual total loss can be defined as the situation in
which a ship or its goods can no longer arrive at their destination in specie.
Actual total loss can also be found where the goods are so damaged in the
course of the voyage that, while they still exist in specie at the time and can
be sold where they are, there is no reasonable possibility that they can be
transported to their destination without complete destruction or change.
Constructive total loss is distinguished from actual total loss whereas the
tender of abandonment is a prerequisite of a claim under constructive loss.8
8 See section 56- 64 ibid dealing with loss and abandonment on the meaning, similarities, differences
and implications of total and partial loss within the Nigerian context.
Also most marine insurance policies are “agreed value” policies which mean
that the insured and the underwriter have already set a value for the
insured vessels.9
Having armed ourselves howbeit perfunctorily with the general knowledge
of marine insurance we shall proceed to consider the Running Down Clause
clause critically.
3.0. Definition of the RDC
The Running Down Clause (RDC) has been defined as ‘a clause within a
marine policy which provides legal liability coverage if an insured collides
with another vessel.’10 This definition however is very broad and does not
quite do justice to the term.
A more apt definition is perhaps that of it being a ‘clause in a marine
insurance policy binding the underwriters to indemnify the insured in
respect of any damages in tort he may be liable for as a result of his ship
colliding with another.’11
The term has also been defined as ‘coverage in liability insurance for a ship
owner in the event of collision with another ship. A running down clause,
9 See generally (J., Birds’ Modern insurance Law, 2004) (Donaldson, 1990)
10 (1004)
11 (Law Jrank.org)
when added to basic hull marine insurance, protects against liability for lost
income to the other vessel’s owner during the time it cannot be used.’12
At common law, such a policy covers only the insured’s physical losses. The
clause is customarily restricted to three quarters of the damages in
question. When two vessels collide, the damage done to each is added
together and treated as a common loss. It is divided between insurers
according to the proportion of blame attributable to each ship or, if this
cannot be determined, then it is divided between the insurers equally.13
4.0. The Running Down Clause: An appraisal
Section 91(3) of the Marine Insurance Act, 2004 posits that ‘the rules of
the common law of England, to the purposes of this Act, be in force in all
State of Nigeria; and save in so far as they are inconsistent with the express
provisions of this Act, shall continue to apply to contracts of marine
insurance.’
Subsection (4) goes on to assert that ‘to give effect to subsection (3) of
this section in any state, the rule of the common law shall where necessary
be deemed to have been duly revived; and for the removal of doubts, and
subject to the provisions of this subsection, the usages of the law merchant
in England shall be deemed to be part of the common law and be construed
with and form part of this Act.’
12 (allbusiness.com)
13 (Law Jrank.org)
Thus our discussion will be predicated on the common law rules as well.
The English form of hull policy requires the ship’s hull underwriter to pay
three- fourths only of the liability of the insured ship in respect of loss or
damage to another ship or her cargo as a result of the collision. The
remaining one- fourth of such liability is insured by the ship owners club.14
This one- fourth usually makes the club the largest single insurance
interest, and in practice the managers of the club will usually be asked by
the hull underwriters to handle the issue of collision liability with the other
ship and her cargo on behalf of all the underwriting interests. It is also
usual for club concerned to give, on behalf of the insured ship- owner, any
necessary guarantees to the other ship and her cargo, the club taking
appropriate counter- security from the insured ship- owner and also from
the hull underwriters (or brokers) to the extent of their respective interests.
The purpose of the three quarter collision liability clause is to provide a
ship- owner with some insurance cover for third party liability on the event
of a collision. It is necessary to note that two distinct type of loss may arise
as a result of collision, first it is to be recalled that the damage referred by
the insured vessel is recoverable as a loss by ‘perils of the seas’ as defined
in Rules 7 of the Rules of construction15 with the celebrated case of Wilson
14 Various ship- owners clubs or Protection & Indemnity clubs exist the world over.
15 See clause 7 of the schedule to the Marine Insurance Act 2004 titled ‘Rules of construction of
policy’ which states that ‘the term “perils of the seas” refers only to fortuitous accidents or casualties
of the seas. It does not include the ordinary action of the wind and waves.’
Sons & co and Owner of cargo per ‘Xantho’16. Such a loss if arising as a
result of the negligence of master officers, crew or pilot in navigation is also
recoverable under clause 6.2.2 of the ITCH 9517.
The second type of loss known as third party liability incurred by the
assured in the form of damages payable to the owner of the vessel is also
recoverable under this clause. Such a consequential loss was not however
prior to the decision of D Varix V. Salvador18 by reason of its remoteness
considered as loss by a peril of the sea. The RDC was thus introduced to
provide a ship- owner with the cover for such a monetary loss resulting from
a collision of his vessel with another vessel.
By clause 8 of the ITCH 95 underwriters agree to indemnify the assured
for the amount of three fourths of the damage inflicted upon the other
vessel in the event of a collision, the other one fourth being borne by the
assured. But in practice the ship owner is actually a member of a Protection
and Indemnity club (P & I) who would meet the shortfall in the third party
cover. It is significant to note that in no circumstance will the underwriter’s
liabilities for damages amount to more than three quarters of the insured
value of the vessel insured.
16Wilson Sons and Co and Owners of Cargo per ‘Xantho’ (1887) 12 APP CAS 503
17Institute time Clauses Hulls (international law)
18 D Varix V. Salvador (1836) 4 AD & E 420
5.0. Risks excluded from the Running Down Clause
There are a number of important exclusions from liability of the hull
underwriters in the Running Down Clause. For instance, wreck removal
liability are excluded, as is consequent damage to shore side structures or
to the cargo in the insured ship herself, and pollution from and loss of life or
personal injury on board any ship involved. All those liabilities are insured
by the ship owners Club.
The Club cover includes, and the hull underwriter’s cover excludes, not only
the wreck removal of the insured ship herself, but also the removal of the
wreck of any other ship involved. The same is true of liabilities incurred by
the ship- owner not in tort but because of the existence of a contractual
obligation, as the words in the Running Down Clause “pay by way of
damages” have been interpreted as being restricted to payments in respect
of tortuous liability.
Thus in Furness Withy and Co v Duder19 payments made by a ship- owner
for collision damage to a tug were held to be unrecoverable from hull
underwriters where the collision was caused solely by the negligence of the
tug and liability arose under the special terms of the towage contract; the
ship- owner may in such circumstances recover his payment from his Club
19Furness Withy and Co v Duder [1936] 2 KB 461. Other extant cases in this regard include Crowley
MatineServs inc v Maritrans inc 447 F.3d, 2006 AMC 1246; Owner of S.S. Mendip Range v Radcliffe
[1921] 1 A. C. 556; The ‘Aleksandr Marinesko’ and Quint Star’ [1998] 1 Lloud’s Rep. 265; The
“Antares 11” and ‘Victory” [1996] 2 Lloyd’s. 482 at 498; The ‘Eglantine”, Credo” and “Inez” [1989] 1
Lloyd’s Rep. 593. The “Maloja 11” [1993] 1 Lloyd’s Rep. 48; The “Nordic Ferry” [1991] 2 Lloyd’s Rep.
591; and The p. Caland [1893] A.C. 207. A recent case is that of Laichkwiltach Enterprises Ltd. v. F/V
Pacific Faith (ship), 2007 BCSC 1852, additional reasons 2008 BCSC 282. This was as action for
damages arising out of a collision. The Plaintiff’s ship was moored at a wharf when the Defendant’s
vessel struck it while attempting to dock. The court held that the defendants were prima facie
negligent as there is a presumption of fault when a moored vessel is struck by a moving vessel. The
court accepted that there was a clutch failure on the Defendant’s vessel but, in the absence of
evidence of the history or maintenance of the clutch, this did not absolve the Defendant of liability.
The Plaintiff sought a total of $105,000 in damages including approximately $14,000 for loss fishing
income. The Court, however, found that the Plaintiff had failed to prove much of the damages if
claimed and those damages it had proves were reduced to reflect “new for old” or betterment. Part of
the reason for lack of proof was the Court gave no weight to the opinions of the Plaintiff’s expert
because the expert’s report had apparently been drafted by a lawyer and the Court was uncertain as
to whose opinions were expressed in the report. The claim for loss income was denied on the grounds
that the Plaintiff had unreasonably delayed in effecting the repairs.
(although in the case of towage other than other ordinary harbor towage, by
special arrangement only).
It may be asked why the club cover should include the insured ship owner’s
liability to cargo carried in his own ship, in view of the fact that Club’s
cargo cover is conditional upon the application of the Hague or Hague-
Visby Rules and these Rules exclude claims by cargo in respect of the
negligent navigation of the carrying ship.
In most jurisdictions it is indeed most unlikely that the owner of cargo in the
vessel could succeed in a claim against the owner of that ship in a collision
situation. The cargo owner may make a claim against the non-carrying
vessel in accordance with her degree of blame, if any, but cannot recover
either from the carrying ship or from the non-carrying ship in respect of
that part of the blame attributable to the carrying ship.
However in the US there is a well established principle, the “innocent cargo
rule” to the effect that cargo may recover from the non-carrying ship the
whole of its loss, provided only that there is some degree of blame, however
slight, upon the non-carrying ship. The non- carrying ship is entitled to
recover against the carrying ship in respect of the carrying ship’s degree of
blame for the collision. In this indirect manner the owner of the carrying
ship may become obliged to pay part of the claim of the cargo carried on
board his own ship. As the ship- owner would be unable, because of the
terms of the last sentence of the Running Down Clause, to recover in
respect of this payment from his hull underwriters, the Club cover is
extended to fill that gap.
6.0. Excess collision liability
Under the term of the Running Down Clause English hull underwriters and
those writing hull risks on similar terms are not obliged to make payments
in respect of collision liabilities beyond a sum representing three-fourths of
the ship’s insured value under the hull policies. In certain countries the
extent of the hull underwriters’ interest may be even smaller where the
insured vessel herself is also heavily damaged or lost, as the local policies
do not follow the scheme of the RDC in establishing for collision liability a
fund separate from the ship’s basic fund, but instead provide that the hull
underwriter may stop paying altogether when he reaches the insured value
of the ship.
The common theme, in any event, is that at some point the hull underwriter
may limit his payments to the insured ship-owner in respect of collision
liabilities. The overspill beyond this limit is picked up by the ship owners
Club.
In view of the possibility of a ship of low insured value colliding with one or
more ships of very high value, this part of the Club cover is more important
than it may at first sight appear, as the Club cover under this head could be
increased unfairly by a decision of the ship-owners, for one reason or
another, the Clubs however provide in their Rules that claim in respect of
excess collision liability can be reduced appropriately if in the opinion of the
Directors of the Club the ship has not been insured with her hull
underwriters for proper value.
It is to be asserted that the RDC is not part of the ordinary policy of marine
insurance but rather a separate contract.20 Due to this fact the RDC is not
interpreted with the same strict reference to the doctrine of proximate
cause as the marine policy is21. In the RDC one is no longer dealing with a
20 Burger V. Indemnity Mutual (1899) QBD 15 Times LR 506 PER Mathew. J
21 See generally Section 56. (1) of the Marine Insurance Act 1994.
.’
contract of indemnity for material damage immediately resulting from
certain named perils, but with a guarantee of repayment of a stated
proportion of liabilities involuntarily incurred by the insured.
7.0. Conclusion
The RDC is on the whole laudatory and serves as a veritable means to
provide legal coverage for accidents resulting from a collision.
Works Cited
(n.d.). Retrieved 04 29, 2010, from www. goguenchamplain.Com/glossary.Cfm
(n.d.). Retrieved 04 30, 2010, from Law Jrank.org:
http://law.Jrank.Org/pages/14405/collision- clause-(running- down- clause)
(n.d.). Retrieved 04 30, 2010, from allbusiness.com:
http://www.allbusiness.com/glossaries/running- down- clause/4961211
Black, H. C. (1990). Black’s law Dictionary (6th ed.). Saint Paul, Minnesota, United
States of America: West Publishing Co.
Convention for the unification of certain Rules of Law with respect to Collision
between Vessels . (1910).
Convention on the International Regulation for Preventing Collisions at Sea.
(1972).
Donaldson, E. (1990). Lowndes and Rudolf: Law of General Average and the York
Antwerp Rules. (W. Cooke, Ed.) Sweet & Maxwell.
J., B. (2004). Birds’ Modern insurance Law. Sweet & Maxwell.
Marine Insurance Act Laws of the Federal Republic of Nigeria (Cap 216 ed.).
(1990).
Schoenbaum, J. (2009). Collision and Marine Casualty’ in Admiralty and Maritime
Law ( 4th ed.).