Sveriges Angfartygs Assurans Forening (The Swedish Club) & Ors v Connect Shipping Inc & Anor [2019] UKSC 29

The m/v RENOS suffered an engine room fire. Owners claimed a constructive total loss under their hull policy. The Supreme Court held pre-notice-of-abandonment costs counted towards repair costs, but SCOPIC environmental salvage charges did not, as they were unconnected with repairing the hull.

Facts

On 23 August 2012, the m/v ‘RENOS’ was seriously damaged by an engine room fire while on a laden voyage in the Red Sea. The owners appointed salvors under Lloyd’s Open Form 2011 (No Cure – No Pay), which incorporated the SCOPIC clause. The vessel was towed to Adabiya for cargo discharge, then to Suez where salvage services ended. A tug was hired to stand by and eventually tow the vessel for scrapping or repair. Notice of abandonment was served on hull underwriters on 1 February 2013.

The vessel was insured at an agreed value of US$12m under a hull and machinery policy incorporating the Institute Time Clauses Hulls (1/10/83). The owners claimed a constructive total loss (CTL); insurers accepted a partial loss only and rejected the notice of abandonment.

Issues

Two issues reached the Supreme Court concerning the computation of the ‘cost of repairing the damage’ under section 60(2)(ii) of the Marine Insurance Act 1906 and clause 19.2 of the Institute Time Clauses:

• Whether expenditure already incurred before service of the notice of abandonment (including salvage remuneration and standby tug costs) counted towards that cost.
• Whether charges payable to salvors under the SCOPIC clause (for environmental protection) formed part of that cost.

Arguments

Insurers’ submissions

The insurers contended the CTL question was ‘time-sensitive’ and must be assessed at the date of notice of abandonment. Sunk costs already incurred could not form part of the assured’s election between claiming total or partial loss; only prospective costs counted. On SCOPIC, they argued that such charges fall outside the cost of repair because they relate to environmental liability, not reinstatement of the hull.

Owners’ submissions

The owners submitted that the damage under section 60(2)(ii) is the entire damage flowing from the casualty, and the cost of recovery and repair is the entire cost, whenever incurred. On SCOPIC, they argued the charges formed an integral part of the salvors’ remuneration; the ship had to be salved on those terms to be repaired, and a prudent uninsured owner would have contracted in the same way.

Judgment

Pre-notice expenditure

Lord Sumption (with whom Lord Reed, Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed) held that pre-notice expenditure is included. The loss under a hull and machinery policy occurs at the time of the casualty, not when the indemnity is ascertained. A constructive total loss is a partial loss financially equivalent to a total loss; the measure is the depreciation in value represented by the entire cost of recovery and repair, whenever incurred.

The word ‘would’ in section 60 reflects the hypothetical character of the exercise, not the chronology of expenditure. The requirement for a notice of abandonment exists for the benefit of the insurer (to enable the exercise of rights over what remains) and does not alter the substantive identification of loss. Authorities such as Robertson v Petros M Nomikos Ltd [1939] AC 371 confirmed that a constructive total loss dates back to the casualty.

The line of authority from Hamilton v Mendes (1761) 2 Bur 1198 through Bainbridge v Neilson (1808) and Polurrian Steamship Co Ltd v Young [1915] 1 KB 922 establishes only that the indemnity is limited to the assured’s actual loss as reduced by subsequent events ‘adeeming’ the loss. Expenditure by the owner on salvage or repair does not reduce his loss; it forms part of it. Sailing Ship ‘BLAIRMORE’ Co Ltd v Macredie [1898] AC 593 confirmed that expenditure by the insurer raising the ship did not convert a total loss into a partial one. The earlier English cases of Hall v Hayman (1912) and The ‘MEDINA PRINCESS’ [1965] 1 Lloyd’s Rep 361, which appeared to exclude pre-notice costs, were lightly reasoned and not followed.

SCOPIC charges

The Supreme Court allowed the appeal on this issue. The test for inclusion in the ‘cost of repairing the damage’ is whether the expenditure’s objective purpose was to enable the ship to be repaired. Classic salvage charges, temporary repairs and towage to a repair yard qualify because they are essential preliminaries to repair.

SCOPIC charges have a different objective purpose: protecting the shipowner’s distinct interest in potential liability for environmental pollution. They are not part of the measure of damage to the ship and have nothing to do with repairing her. The market division of risk between hull underwriters and P&I insurers (reflected in clause 15 of the SCOPIC clause) reinforces that these are separately identifiable heads of expenditure. The fact that a prudent uninsured owner would have contracted with salvors on SCOPIC terms is irrelevant; the prudent uninsured owner test, following Angel v Merchants’ Marine Insurance Co [1903] 1 KB 811 as codified by section 60(2)(ii), concerns only the comparison between the cost of repair and the repaired value.

Disposal

The Court made a declaration, set aside the order of Knowles J, and remitted the matter for determination of whether the ‘RENOS’ was a constructive total loss in light of the judgment.

Implications

The decision clarifies two important aspects of the CTL analysis under the Marine Insurance Act 1906:

• Pre-notice expenditure: In calculating whether the cost of repairing the damage exceeds the repaired value, all reasonable costs of salving and safeguarding the vessel from the moment of the casualty are included, regardless of whether they were incurred before or after notice of abandonment. This resolves a long-running uncertainty and aligns the statutory test with the principle that loss is suffered at the time of the casualty. It is particularly significant because salvage remuneration (often the largest single cost) is typically incurred before the extent of damage can be professionally assessed.
• SCOPIC charges: These are excluded from the CTL computation because their purpose is to protect against environmental liability, which falls within P&I cover, not hull cover. This preserves the traditional market division of risks between hull and P&I insurers.

The decision matters principally to shipowners, hull and machinery underwriters, P&I clubs and salvors. It provides a clearer framework for assessing CTL claims and confirms that the objective purpose of expenditure determines whether it counts towards the ‘cost of repair’. The Court was careful to ground its reasoning in the statutory language, the indemnity nature of marine insurance and the established role of notice of abandonment as a procedural protection for insurers.

Verdict: Appeal allowed in part. The Supreme Court affirmed the lower courts’ decision that expenditure incurred before notice of abandonment (including salvage charges) is included in the ‘cost of repairing the damage’ under section 60(2)(ii) of the Marine Insurance Act 1906. However, the appeal was allowed on the SCOPIC issue: SCOPIC charges are not part of the ‘cost of repairing the damage’ because their purpose is environmental protection, unconnected with repair of the hull. The order of Knowles J was set aside and the matter remitted to determine, on the correct legal basis, whether the ‘RENOS’ was a constructive total loss.

Source: Sveriges Angfartygs Assurans Forening (The Swedish Club) & Ors v Connect Shipping Inc & Anor [2019] UKSC 29