Author Wenhao Han
The recent UK Supreme Court decision in Gard Marine and Energy Limited v China National Chartering Company Limited & another (The “Ocean Victory”)  UKSC 35 considers whether an insurer can bring a subrogated claim against a co-insured to recover loss paid to another insured, in light of the terms of the contract pursuant to which the insurance was arranged.
The Ocean Victory, a Capesize bulk carrier, was demise chartered on the Barecon 89 form and then time chartered to China National Chartering Co Ltd (Sinochart). Sinochart in turn sub-chartered her to Daiichi Chuo Kisen Kaisha (Daiichi) for a time charter trip. On October 24, 2006, the vessel grounded at the port of Kashima in Japan and became a total loss. Gard Marine & Energy Ltd (Gard), one of the vessel’s hull insurers, after paying the loss, took assignments of rights from the owners and the demise charterers in respect of the grounding and total loss of the vessel, and subsequently brought a claim against Sinochart who in turn sought to recover from Daiichi. Gard’s case (as assignees of the demise charters) was that the demise charterers had a liability to owners, which in turn enabled demise charterers to claim damages down the charterparty chain.
At first instance, Teare J held that the casualty was caused by the unsafety of the port and that the owners, although indemnified by the insurers, had a subrogated claim against demise charterers for breach of the safe port undertaking, which entitled Gard to recover damages for breach of the safe port warranty from Sinochart who in turn were entitled to recover an indemnity from Daiichi. On appeal by Daiichi, Teare J’s decision was overturned by the Court of Appeal. Gard were granted permission to appeal to the Supreme Court.
The Supreme Court upheld the Court of Appeal’s decision that there was no breach of the safe port undertaking. As a result, it was not strictly necessary for the Supreme Court to consider the insurance issue but the Justices recognized the importance of the issue.
The Supreme Court decision
As a general principle of English law, co-insureds cannot bring claims against each other in respect of an insured loss. This means that an insurer cannot bring a claim in the name of one insured (to whom an indemnity has been paid) in order to recover loss paid to another co-insured. The juridical basis of the principle is, however, not settled. Some earlier authorities suggest that the doctrine of circuity of action or the implication of an implied term into the insurance contract forms the basis of this principle, whereas more recent authorities suggest that construction of the underlying contract rather than the terms of the insurance policy made pursuant to the contract is the more favorable basis.
In this case, the Supreme Court endorsed that construction of the underlying contract of the parties should determine whether a subrogated insurer can claim against the co-insured in respect of an insured loss. Nonetheless, the Justices are divided in their construction of the underlying Barecon form which creates the co-insurance.
The Supreme Court considered Barecon 89 (clause 12) which provided that marine and war risks insurances were to be taken out by the charterers at their expense to protect the interests of owners, charterers and any mortgagees, and to be in the joint names of owners and charterers, as their interests may appear.
The majority of the Supreme Court (Lord Mance, Lord Toulson, and Lord Hodge) took the view that clause 12 was clearly intended comprehensively to deal with the risks of loss or damage to the vessel and what was to happen in such an event. Lord Mance noted that the principle that insurers cannot claim against their own co-insured in respect of an insured loss rested on a natural interpretation of or implication from the contractual arrangements giving rise to such co-insurance. In agreement, Lord Toulson added that:
“[T]he question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss. Like all questions of construction, it depends on the provisions of the particular contract…”
Lord Toulson agreed with the Court of Appeal that the proper construction of clause 12 was that there was to be “an insurance funded result in the event of loss or damage to the vessel by marine risks” and that, had the demise charterers been in breach of the safe port clause, they would have been under no liability to the owners for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation. He concluded that “the insurance arrangements under clause 12 provided not only a fund but the avoidance of commercially unnecessary and undesirable disputes between the co-insured”.
However, Lord Sumption and Lord Clarke, in the minority, considered that clause 12 did not contain an express exclusion of liability on the part of the demise charterer for breach of the safe port undertaking and there was no need to imply a term to the contrary. Lord Sumption noted that under clause 12, the demise charterer’s liability for the loss of the ship was not excluded but satisfied through the insurance payment. It followed that the demise charterer could claim against the time charterer who is not party to the insurance or any of the contractual arrangements connected with it. In his view, a different question arose in this case as between a co-insured (or his insurer) and a third party wrongdoer, which none of the existing English authorities purports to answer. He also raised the question what if an insurer becomes insolvent after a loss – in other words, if owners and demise charterers look to an insurance funded outcome, what happens if the insurance does not or cannot pay? Would owners still be precluded, as a matter of principle, from recovering against demise charterers? Lord Mance and Lord Toulson regarded that as a remote eventuality which cannot be a guide to the meaning of clause 12.
The demise charterers also relied upon clauses 13 and 29 of Barecon. Under clause 13 (if chosen), owners maintain marine and war risks insurance while demise charterers have to maintain P&I insurance. It contains express exclusion of a right of recovery or subrogation in the context of insurances taken out by owners. Clause 29 contains the safe port undertaking for employment “only between good and safe berths, ports or areas where vessel can safely lie always afloat”. It was submitted that unlike clause 13 there was no express exclusion of subrogation in clause 12 and that charterers must have some liability towards owners under clause 29 because otherwise there can be no back-to-back claim down the charterparty chain. Lord Mance dismissed these submissions. In his view, there was no reason to think that clauses 12 and 13 were devised as anything other than two routes to the same substantive allocation of responsibilities for repairs and total loss, irrespective of fault, and clause 29 cannot have been intended to give rise to a system of recourse for loss of the hull, by way of damages for breach of contract, separate from the no fault scheme of responsibility and insurance recovery for a hull loss introduced by clause 12.
This decision should be heeded by underwriters. Although it is a decision on a particular (albeit important) provision of Barecon 89, it may well have wider implications on the ability of Underwriters to subrogate where the contract pursuant to which joint insurance is purchased is in similar terms and where the subrogated claim itself relies on an ability to pass a claim down a contractual chain. What seems clearer now is that the underlying contractual arrangement between the parties which gives rise to the co-insurance in their joint names will dedicate whether any such subrogated recovery claim will succeed at the end of the day.