Supreme Court rules on how to calculate Constructive Total Loss (CTL)

Supreme Court regains shipping experience|BDM Blog|BDM Law
Regular visitors to our blog may remember our earlier article on the “Renos” which can be found here. Since then hull underwriters were granted leave to appeal that decision to the Supreme Court on two issues.

Should costs incurred before Notice of Abandonment is tendered be excluded from the CTL calculation?

Should SCOPIC costs be taken into account in determining whether a ship is a CTL?

The factual context is as follows. In August 2012, the “Renos” sustained fire damage. As a consequence, the ship lost main engine power and salvage was required. An LOF form was signed and SCOPIC triggered. Hull underwriters did not accept that the ship was a CTL on a number of grounds and Owners sued underwriters in the English Courts under their insurance policies. The insured value was USD 12million topped up by an increased value policy of USD 3million. Owners succeeded in the High Court and Court of Appeal, leading underwriters to appeal to the Supreme Court.

The Supreme Court has now agreed(1) with the lower Courts in that pre-Notice of Abandonment costs should count towards CTL. This is significant (a) because such costs can be substantial and (b) there has been a dearth of relevant legal authority.

However, the underwriters’ second ground of appeal succeeded. The Supreme Court ruled that SCOPIC costs should not be taken into account for the purposes of CTL calculations and were not costs of recovery and/or repair. The Judges’ reasoning emphasised that SCOPIC was a matter of P&I cover not hull insurance, its aim being to minimise Owners’ liability for environmental pollution. SCOPIC was therefore by its nature separately identifiable from the cost of repairing damage.

This is an important decision for hull underwriters, P&I Clubs, shipowners, salvors and the marine insurance market in general. It has clarified a number of unanswered legal issues and set a binding precedent that the shipping and marine insurance markets can rely upon in the future.

(1) Sveriges Angfartygs Assurans Forening (The Swedish Club) and others (Appellants) v Connect Shipping Inc and another (Respondents) [2019] UKSC 29

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