Section 3: Liability of the assured to third parties

• Clause 4-13. Main rule

  This Clause is identical to Cl. 74 of the 1964 Plan.

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  Clause 4-13. Main rule

  The insurer is not liable for the assured's liability to third parties, unless otherwise provided in this Plan or specially agreed.

• Clause 4-14. Cross liabilities

  Under Cl. 4-14, first sentence, the Plan maintains the principle of cross-liabilities in connection with liability of the assured to third parties. The principle is in accordance with established customary Norwegian marine insurance law, cf. Brækhus in AfS 4.468-69 with references, and is of the greatest practical importance in connection with collision settlements. This is best illustrated by a somewhat stylised example:

  The insured vessel A has collided with vessel B. The blame fraction is one half. A’s hull damage is 300, the time loss 120, a total of 420. B’s loss totals 350. The settlement between the vessels under Section 161, second sub-clause, of the Norwegian Maritime Code can be drawn up in two ways. One could either say that the total loss is 770, that each of the parties shall bear one half, i.e. 385, and that this is achieved by the vessel having sustained the smallest loss, B, paying 35 to A. Such a single-liability settlement results in a single claim. Or A could also be held liable to pay half of B’s loss, i.e. 175, and B to pay half of A’s loss, i.e. 210. These two claims are set off against each other, with the result that B must pay the balance of 35 to A. This is the cross-liability settlement.

  In the relationship between the parties, the result will be the same regardless of which principle is adhered to. In the ensuing settlement between the individual shipowner and his insurers, the choice between the two methods of settlement will, however, be of great importance. The reason for this is that the compensation obtained from the other vessel will often, to a greater or lesser extent, be credited to other persons than those who shall bear the liability of the oncoming vessel. The compensation from the oncoming vessel shall, as regards the loss of time, fall to the shipowner (if appropriate, the loss-of-hire insurer, cf. Chapter 16), whereas the compensation for hull damage shall normally be divided proportionately between the hull insurer and the owner, cf. Cl. 5-13, sub-clause 2. Liability towards the oncoming vessel, however, shall as a rule be covered in its entirety by the hull insurer, cf. Chapter 13 (sometimes the P&I insurer will also come into the picture, see below). If the settlement between the shipowner and the insurer is based on the cross-liability principle, it is the gross liability amounts before the set-off that shall be debited and credited respectively under these rules. If, however, the single-liability principle is adopted, there will be only one amount, the liability balance, to be apportioned. If the balance is in the oncoming vessel’s favour, it shall be debited to the hull insurer as liability insurer. If it is in the insured vessel’s favour, it shall be divided proportionately between the owner and the hull insurer. In the light of the cross-liability settlement, the single-liability settlement may lead to the result that a claim from the oncoming vessel, which shall accrue to a person, e.g., compensa­tion for loss of time payable to the owner, is used as a set-off to cover the liability of the oncoming vessel which, under the insurance conditions, should be covered in full by the hull insurer.

  If we assume in the numerical example above that A’s hull insurer indemnifies A’s hull damage with 240, and that A has to pay the outstanding 60 himself, plus the loss of time of 120, a cross-liability settlement of the collision liability between A and his hull insurer will be as follows:

  	A's hull insurer	A	B and/or B's insurers
  Hull damage	240	60
  - 1/2 refund from B	-120	-30
  	=120	=30	150
  Loss of time		120
  - 1/2 refund from B		-60
  		=60	60
  Liability for 1/2 of B's loss	175		-175
  Final total charge	295	90	35

   

  In the event of a single-liability settlement, there will only be one amount, viz. the balance of 35 in A’s favour, which shall be divided proportionately between A and his hull insurer. As A’s total loss was 420, this means that the compensation from B gives a refund of 35/420 = 1/12, and we get the following settlement:

  	A's hull insurer	A	B and/or B's insurers
  Hull damage	240	60
  - 1/2 refund from B	-20	-5
  	=220	=55	25
  Loss of time		120
  - 1/2 refund from B		-10
  		=110	10
  Liability to B			0
  Final total charge	220	165	35

   

  There can be no doubt that the cross-liability settlement is preferable; it gives the shipowner exactly the refund from the other vessel warranted by the portion of blame. In the case of a single-liability settlement, the refund is reduced, in our example from 1/2 to 1/12, despite the fact that the oncoming vessel has been held liable for one half of the loss.

  The collision settlement will sometimes also affect the P&I insurer: firstly where the liability of the oncoming vessel exceeds the limit of the hull insurer’s liability, cf. Cl. 13-3 and, secondly, in the event of what is termed indirect personal-injury and cargo liability. For personal injury caused by a collision, both vessels are jointly and severally liable, cf. Section 161, third sub-clause, of the Norwegian Maritime Code; under US law the same also applies to liability for cargo damage. It is therefore conceivable that the oncoming vessel B must pay compensation for personal injury, or for damage to the cargo on board the cargo-carrying vessel A and that, in the settlement with A, B attributes half of the compensations paid to A. A for its part may have suffered far more extensive damage from the collision than B, which would mean that a settlement of the hull damage alone would give a substantial profit in A’s favour. However, this is wholly or partly set off by B’s refund claim in connection with the personal injury and cargo damage compensations. In this case as well, the final balance that emerges from the external settlement must be divided into claims and counterclaims according to the cross-liability principle, given that the indirect liability for personal injury and damage to the insured vessel’s own cargo shall be attributed to the P&I insurer, cf. Clause 13-1, sub-clause 2 (b), (c), (d) and (j). See also Brækhus 1. c. pp. 482-97.

  Special difficulties arise where one or both of the colliding vessels limit their liability. In the relationship between the vessels, the limitation will, under the laws of most countries, first be applied in respect of the liability balance, in other words, on the basis of the single-liability principle, cf. Article 5 of the Limitation of Liability Convention of 1976 and Section 172, last sub-clause, of the Norwegian Maritime Code. In consequence hereof, the calculated gross liability will not concord with the balance which is in actual fact paid, and the normal cross-liability settlement in the relationship between the shipowner and his insurers will not be correct. In English marine insurance, which is based on cross-liability as the principal rule, this has led to a switch to single liability as soon as one of the involved vessels limits its liability, cf. I.T.C., Hulls, no. 8.2.1. However, this solution results in an unfortunate discontinuity. An insignificant increase in liability, making limitation applicable, may result in a very substantial reduction of the reimbursement of the owner’s loss of time. Danish and Norwegian practice has instead adopted a modified cross-liability settlement in the limitation cases by reducing the largest gross amount of liability in the insurance settlement by the same amount by which the liability balance in the external settlement has been reduced as a result of the limitation rule, see further Brækhus, 1. c., pp. 469-82 and 497 et seq. This method of settlement was also approved by the Norwegian Supreme Court in the Fernstream case, ND 1963.175, and it is explicitly adopted as a basis in the Plan, cf. Cl. 4-14, second sentence. For the sake of clarity, the third sentence of the Clause specifies how the settlement shall be effected when the limitation is applied to the liability balance.

  Incidents causing mutual damage and liability that affect the insurance settlements do not occur only in connection with collisions between vessels, although collision cases are probably predominant. The cross-liability principle must also be applied in a case such as the following: a cargo of slimes which is carried by the insured vessel becomes liquid. The vessel, which does not have the necessary longitudinal bulkheads, takes a list and ends up turning over and going down. The accident was due partly to negligence of the cargo owner: he had failed to say that the slimes were of a particularly difficult type, and partly to negligence of the vessel: even when carrying ordinary slimes, the vessel should have had longitudinal bulkheads. In the claims settlement, the cargo owner’s (partial) liability for the loss of the vessel will, to some extent, be offset by the owner’s (partial) liability for the loss of the cargo. In the ensuing insurance settlement, the balance must be broken down as follows: the compensation the cargo owner pays for the loss of the vessel must be covered by the hull insurer, while the compensation to the cargo owner for the loss of the cargo must be paid by the P&I insurer.

  In the above example, it is assumed that both the assured’s own loss and his liability to third parties are covered by insurance. However, the cross-liability principle must be applied, even if it is only the assured’s own loss, or only the liability, which is insured. The individual insurer’s liability shall not depend on how the assured has covered his other interests. For this reason, the application of the cross-liability principle has been authorised specifically with a view to liability insurance in this Clause and with a view to the apportionment of subrogation claims in Cl. 5-13, sub-clause 1, second sentence.

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  Clause 4-14. Cross liabilities

  If the assured has incurred liability, and  it is entitled to make a claim against the injured party for a loss which  the assured itself has suffered on the same occasion, the settlement of the claim between the assured and the insurer shall be based on the calculated gross liabilities before an...

• Clause 4-15. Unusual or prohibited terms of contract

  The collision liability covered by the hull insurer will normally have been incurred vis-à-vis a third party with whom the assured does not have any contractual relationship. However, it is conceivable that the assured’s contracts may be of significance, especially in connection with liability to owners of tugboats or quays, canals and similar installations the vessel has used.

  Under sub-sub-clause (a), the insurer shall always cover liability based on terms of contract that must be considered customary in the trade concerned. In offshore contracts, it is customary to use limitations of liability in the form of “knock-for-knock” clauses, which entail that the contracting parties shall cover damage to their own objects, even if the other contracting party may be held liable for the damage under general law of damages. Such clauses must in this context be considered “customary”. However, limitation of liability clauses in offshore contracts are often linked to a waiver-of-subrogation clause in the claimant’s insurance contract, whereby the insurer waives the right to seek recourse against the assured’s contracting counterpart. In that event, the question whether such limitation of liability clauses are customary is of little independent significance.

  The limitation of liability in sub-sub-clause (b) relates to Cl. 3-28, which authorizes the insurer to prohibit or require the use of certain contractual forms.

  In contracts for repairs, it is not unusual to find clauses to the effect that everything that is scrapped during repairs shall accrue to the repair yard, without compensation. Such clauses are also binding on the insurer according to custom and practice and by analogy from Cl. 4-15, cf. Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), pp. 603-604.

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  Clause 4-15. Unusual or prohibited terms of contract

  The insurer is in no case liable for liability incurred because the assured or someone on its behalf: has entered into a contract that results in stricter liability than that which follows from the ordinary rules of maritime law, unless such terms must be considered customary in the trade...

• Clause 4-16. Objects belonging to the assured

  If two of the assured’s vessels collide, the vessels’ hull insurers will cover the damage they have sustained. If the vessel had belonged to different legal entities, the vessel that was at fault would have also had to cover the other vessel’s loss of time, deductions, deductibles concerning the hull damage and other financial losses that the owner has suffered because of the collision. This liability would normally have been covered by the hull insurer of the vessel at fault. No such liability can arise when both vessels belong to the same person. The assured will suffer a corresponding reduction in his cover and the hull insurer of the vessel at fault will not be liable for loss of time, etc. for which he otherwise would have been liable. This is not reasonable. The Plan therefore prescribes, in conformity with earlier law, that a fictitious collision settlement shall be effected between the vessels. Compensation shall be calculated as if they had belonged to different persons. This “sister-vessel rule” is customary in international marine insurance.

  The same applies where the vessel has run into other objects belonging to the assured, e.g., a quay or a wharf. In this case, the insurer shall cover the liability the assured would have incurred if the quay or wharf had belonged to a third party, based on the view that the insurer’s liability should not be reduced because of the coincidence that the vessel has run into the assured’s own property.

  The sister-vessel rule represents a positive extension of the liability cover. Hence, it cannot be invoked against an insurer who has only insured the “innocent” vessel. He will only be liable for the vessel’s hull damage in accordance with the insurance contract. On the other hand, liability under this provision for the insurer of the vessel at fault is subject to the condition that he would have been liable under the rules of the Plan if the claimant had been an outside third party. Accordingly, if the insurer would not have been liable for the collision liability, etc., on account of the rules in Chapter 3, including the identification rules, he will also be free from liability to the assured under the current provision.

  Another question is whether the insurer of the “innocent” vessel will have recourse against the assured in his capacity as owner of the vessel at fault. The question is first and foremost of interest when the vessel at fault is not insured and is, accordingly, not of any great practical significance. The correct solution must be that his position as assured under the innocent vessel’s insurance protects him against such a recourse claim to the same extent that he has a claim against his own insurance. This means that it is the general rules in Chapter 3 of the Plan which decide the question.

  If a fault was committed on board both of the colliding vessels, the application of the sister-vessel rule must be “based on the calculated gross liabilities before any set-off”, cf. Cl. 4-14.

  The extended cover under Cl. 4-16 applies only to loss of or damage to objects other than the insured vessel and its supplies and equipment, cf. second sentence. Damage to such objects is not recoverable under these rules.

  A corresponding “sister-vessel rule” is applied when the vessel is salvaged or receives assistance from another vessel belonging to the assured, cf. Cl. 10-11.

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  Clause 4-16. Objects belonging to the assured

  The insurer is liable for loss sustained by the assured when an object belonging to the assured is damaged or lost under such circumstances that the assured itself would have become liable for the loss if the object had belonged to a third party and the insurer would have had to indemnify the...

• Clause 4-17. Determination of the liability of the assured

  This Clause corresponds to relevant Nordic Insurance Contracts Acts (Nordic ICAs). Cl. 4-17 was amended in the 2013 Plan in order to better safe guard against non-Nordic courts allowing a direct action against the insurer.

  The Nordic ICAs contain a provision which gives an injured third party a direct claim against the tortfeasor’s liability insurer. This provision is not appropriate in marine insurance. Consequently, for insurances taken out on the basis of the Plan, an injured third party will have no such right to direct action. This is reflected in paragraph 1 of the provision. However, an injured third party under the relevant Nordic ICAs is protected against the compensation being paid to the assured without the latter having proved that the injured party’s claim has been honoured. Furthermore, the injured party will have a direct claim against the insurer if the assured is insolvent, cf. Section 7-8, second paragraph. These provisions are mandatory in marine insurance as well, cf. the relevant Nordic ICAs.

  Sub-clause 2 sets out a number of procedures the assured may follow in order to document his claim. The deciding factor for the insurer’s obligation to indemnify the assured is, however, that the claim is justified, not that the relevant procedure has been complied with. This is reflected in sub-clause 3. Consequently, if the assured has, contrary to the umpire’s decision, cf. Cl. 5-11, accepted that a dispute shall be decided by arbitration, the insurer must cover the assured’s liability under the arbitration decision, provided that the assured is able to prove that he would have incurred liability even if he had complied with the umpire’s decision, cf. Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), p. 572.

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  Clause 4-17. Determination of the liability of the assured

  If the insurance covers the assured's liability to third parties, an injured third party does not have any direct claim against the insurer. The insurer will indemnify the assured's loss as a result of liability if it has been established by: a final and unappealable judgment or order by a...