Sveriges Angfartygs Assurans Forening (The Swedish Club) and others v Connect Shipping Inc and another

For a constructive total loss under section 60(2)(ii) of the Marine Insurance Act 1906, the cost of repairing a damaged ship includes reasonable expenditure incurred from the casualty onwards, including expenditure incurred before notice of abandonment. Notice affects the right to claim on a total-loss basis, rather than the existence or measure of the loss.

Preliminary expenditure counts only where its objective purpose is to enable the ship to be repaired. SCOPIC charges protect the shipowner against environmental liabilities. They are therefore excluded from the cost of repair, despite being payable to the same salvors as conventional salvage remuneration.

The vessel “RENOS” was seriously damaged by an insured engine-room fire. Her owners claimed under hull and increased-value policies on the basis that she was a constructive total loss. The insurers admitted a partial loss but rejected the notice of abandonment and disputed the measure of indemnity.

Knowles J held that there was a constructive total loss. The Court of Appeal dismissed the insurers’ appeal in [2018] EWCA Civ 230. The insurers appealed on two issues: whether expenditure incurred before notice of abandonment counted towards the cost of repair under section 60(2)(ii) of the Marine Insurance Act 1906, and whether that cost included SCOPIC remuneration for measures protecting the environment.

1. The appeal was allowed on the SCOPIC issue but dismissed on the pre-notice expenditure issue. Lord Sumption delivered the judgment, with which Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed.

2. A loss under a hull and machinery policy ordinarily occurs when the insured casualty happens. A constructive total loss is a partial loss which is financially equivalent to a total loss and which the assured may elect to treat as total. The statutory inquiry is objective. Future or unknown facts require a reasonable assessment of probabilities, but the owner’s opinion or prediction is not determinative.

3. The damage under section 60(2)(ii) of the Marine Insurance Act 1906 comprises the entire damage arising from the casualty. Its measure is the entire reasonable cost of recovering and repairing the vessel. Expenditure does not cease to count merely because it was incurred before notice of abandonment. Notice is a condition precedent to claiming against the hull insurer on a constructive-total-loss basis, not to the existence of that loss.

4. A subsequent event may reduce or reverse the assured’s actual loss before notice or action. That principle reflects the indemnity character of the policy. Expenditure by the owner on salvage or repair does not produce such an ademption. It forms part of the measure of loss. Accordingly, all reasonable costs of salving and safeguarding the vessel from the casualty onwards, together with prospective repair costs, entered the statutory calculation.

5. The cost of repair may include expenditure preliminary to physical reinstatement, such as conventional salvage, reasonable temporary repairs and towage to a repair yard. The governing consideration is the expenditure’s objective purpose. An item may count in determining whether the ship is financially worth saving even if the policy would not indemnify that item on a partial-loss basis.

6. SCOPIC expenditure had the distinct purpose of preventing or minimising environmental damage and protecting the owner against environmental liability. It did not concern damage to the hull or its hypothetical reinstatement. Its payment to the same contractor as conventional salvage remuneration was adventitious. SCOPIC charges were therefore excluded from both the statutory “cost of repairing the damage” and the contractual “cost of recovery and/or repair”.

7. The order of Knowles J was set aside. The matter was remitted to him to decide whether the vessel was a constructive total loss after excluding SCOPIC charges and to determine the resulting financial consequences.

1. United Kingdom Supreme Court: Allowed the insurers’ appeal on the treatment of SCOPIC charges, dismissed it on pre-notice expenditure, set aside Knowles J’s order and remitted the matter.

2. Court of Appeal: In [2018] EWCA Civ 230, agreed with Knowles J’s conclusions and reasons on both issues.

3. High Court: Knowles J held that the vessel was a constructive total loss and decided both disputed categories of expenditure in the owners’ favour.