The Running Down Clause in Marine Insurance Contracts in Nigeria: an overview.

Chinenye Elekwachi

May, 2010

Contents
1.0. 2.0. 3.0. 4.0. 5.0. 6.0. 7.0. Abstract .............................................................................................................................................................. 2 Introduction....................................................................................................................................................... 2 Definition of the Term .................................................................................................................................... 6 Three Quarter Collision Liability Loss: An appraisal ................................................................................. 7 Risks excluded from the Running Down Clause......................................................................................... 9 Excess collision liability ................................................................................................................................. 11 Conclusion ....................................................................................................................................................... 12

Works Cited ....................................................................................................................................................................... 14

1.0. Abstract The Running Down Clause (RDC) in marine insurance, has generated a lot of controversies when weighed against the backdrop of the general principles of insurance in which the insured agrees to pay a premium and the insurer agrees that, if certain losses or damage occur to certain interests of the insured, the insurer will indemnify the insured. This work will take the form of a critical overview of the complex nature of Marine Insurance policy which may be in the form of Hull & Machinery (covering Vessel loss), Total Loss Only (as against partial loss), Voyage or Time Basis loss and the English law hull policy (RDC) which distributes liability in the event of a loss, in a 3:1 ratio between the underwriters of a policy and the ship owners club. Although this method of distribution may appear clumsy at first glance, it may well be the only remedy available to a small ship owner in the event of collision for indemnifying excess collision liability. 2.0. Introduction Accidents happen, sometimes as a result of mans fault at other times as a result of an Act of God. 1 It happens in the air, land and of course the sea. Atop the deep blue sea collisions often occur and as such in the field of marine insurance there are rules regulating the avoidance of collisions at sea- the so-called COLREGS.2 Although the regulations, presently in force, were introduced in1972, they

1 Act of God is a legal term for events outside of human control, such as sudden floods or other natural disasters, for which no one can be held responsible. In the law of torts, an act of God may be asserted as a type of intervening cause, the lack of which have avoided the cause or diminished the result of liability (e.g., but for the earthquake, the old, poor constructed building would be standing). However, foreseeable results of unforeseeable causes may still raise liability. For example, a bolt of lightning strikes a ship carrying volatile compresses gas, resulting in the expected explosion. Liability may be found if the carrier did not use reasonable care to protect against sparks- regardless of their origins. See (Black, 1990) 2 Convention on the international Regulations for Preventing Collisions at Sea, 1972. The other conventions include: convention for the unification of certain Rules of Law with respect to collisions between vessels, 1910 and international Convention on the safety of Life at Sea, 1974.

have a long history. They originate from customary law and the first to put them in writing were the British in 1840.3 A discourse of the running down clause (RDC) or the three quarter collision liability loss 4 in Marine insurance will necessarily entail a consideration howbeit in passing of the general principles of insurance by way of an introduction. The general principles of marine insurance are the same as with other types of insurance in that there are two parties: the assured and assurer (or carrier). The assured or insured agrees to pay a premium and the insurer agrees that, if certain losses or damage occurs to certain interests of the insured, the insurer will indemnify the insured. However, the complex circumstances involved in sea voyages require very specific arrangements for the provision of marine insurance. The fixing rates and specific conditions, for example, require a vast knowledge of the nature of vessels and cargos and of the conditions of navigation. By virtue of Section 3 of the Marine Insurance Act5, a contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in a manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure. Section 4(1) goes further to state that a contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.

3 (Schoenbaum, 2009) 4 The three quarter collision liability loss clause is also referred to as the Running Down Clause and shall be used interchangeably throughout our discourse.
5

Chapter 216 Laws of the Federal Republic of Nigeria 1990

The Marine policy may cover the risks of a single voyage, or may cover the risks of a certain period of time. Cargo is almost always insured for a single voyage. Vessels are usually insured for certain duration of time, usually year to year. Typical of marine insurance is the principle that no contract of marine insurance is valid unless the insured has an insurable interest in the subject matter at the time of loss. The term insurable interest has been variously defined. According to the English Marine Insurance Act of 1906,6 every person has an insurable interest who is interested in a marine adventure. A person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof. Among the perils of the seas 7 that are deemed to be covered under a marine policy are the extraordinary action of the wind and waves, collision, foundering, striking on rocks and icebergs. Not covered are ordinary wear and tear and losses which can be anticipated as regular incidents of sea carriage or navigation.

See Section 7 of the Marine Insurance Act, Chapter 216 Laws of the Federal Republic of Nigeria 1990 which states as follows: (1) subject to the provisions of this Act every person has an insurable interested in a marine adventure. (2) in particular a person a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may be prejudiced by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.

7Section

5 (3) ibid states thus for the purposes of this section, maritime perils means the perils consequent on, or incidental to, the navigation of the sea,

that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of prince and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.

Typically, marine insurance is split between the vessels and cargo. Insurance of the vessels is generally known as Hull and Machinery (H& M). A more restricted form of cover is Total Loss Only (TLO), generally used as a reinsurance, which only covers the total loss of the vessel and not partial loss. Cover may be on either a voyage or time basis. The voyage basis covers transit between the ports set out in the policy; the time basis covers a period of time, typically one year, and is more common. Hull policies, used to be quite specific as to the risks covered but modern policies are written to cover most forms of liability. A collision and running down clause is contained in the standard hull policy to cover liability incurred for another vessel or structure, and sometimes even personal injuries incurred. This means the policy covers against collision liability not covered by the collision and running down clause, as well as against all other liability exposure. Under a marine policy a loss can be partial or total. Total losses can be actual or constructive. Actual total loss can be defined as the situation in which a ship or its goods can no longer arrive at their destination in specie. Actual total loss can also be found where the goods are so damaged in the course of the voyage that, while they still exist in specie at the time and can be sold where they are, there is no reasonable possibility that they can be transported to their destination without complete destruction or change. Constructive total loss is distinguished from actual total loss whereas the tender of abandonment is a prerequisite of a claim under constructive loss.8

See section 56- 64 ibid dealing with loss and abandonment on the meaning, similarities, differences and implications of total and

partial loss within the Nigerian context.

Also most marine insurance policies are agreed value policies which mean that the insured and the underwriter have already set a value for the insured vessels.9 Having armed ourselves howbeit perfunctorily with the general knowledge of marine insurance we shall proceed to consider the Running Down Clause clause critically.

3.0. Definition of the RDC The Running Down Clause (RDC) has been defined as a clause within a marine policy which provides legal liability coverage if an insured collides with another vessel.10 This definition however is very broad and does not quite do justice to the term. A more apt definition is perhaps that of it being a clause in a marine insurance policy binding the underwriters to indemnify the insured in respect of any damages in tort he may be liable for as a result of his ship colliding with another.11 The term has also been defined as coverage in liability insurance for a ship owner in the event of collision with another ship. A running down clause, when added to basic hull marine insurance, protects against liability for lost income to the other vessels owner during the time it cannot be used.12 At common law, such a policy covers only the insureds physical losses. The clause is customarily restricted to three quarters of the damages in question. When two vessels collide, the damage done to each is added together and treated as a common loss. It is divided between insurers according to

See generally (J., Birds Modern insurance Law, 2004) (Donaldson, 1990) (1004) (Law Jrank.org) (allbusiness.com)

10 11 12

the proportion of blame attributable to each ship or, if this cannot be determined, then it is divided between the insurers equally.13 4.0. The Running Down Clause: An appraisal Section 91(3) of the Marine Insurance Act, 2004 posits that the rules of the common law of England, to the purposes of this Act, be in force in all State of Nigeria; and save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to contracts of marine insurance. Subsection (4) goes on to assert that to give effect to subsection (3) of this section in any state, the rule of the common law shall where necessary be deemed to have been duly revived; and for the removal of doubts, and subject to the provisions of this subsection, the usages of the law merchant in England shall be deemed to be part of the common law and be construed with and form part of this Act. Thus our discussion will be predicated on the common law rules as well. The English form of hull policy requires the ships hull underwriter to pay three- fourths only of the liability of the insured ship in respect of loss or damage to another ship or her cargo as a result of the collision. The remaining one- fourth of such liability is insured by the ship owners club.14 This one- fourth usually makes the club the largest single insurance interest, and in practice the managers of the club will usually be asked by the hull underwriters to handle the issue of collision liability with the other ship and her cargo on behalf of all the underwriting interests. It is also usual for club concerned to give, on behalf of the insured ship- owner, any necessary guarantees to the other ship and her cargo, the club taking appropriate counter- security from the insured ship- owner and also from the hull underwriters (or brokers) to the extent of their respective interests.

13 14

(Law Jrank.org) Various ship- owners clubs or Protection & Indemnity clubs exist the world over.

The purpose of the three quarter collision liability clause is to provide a ship- owner with some insurance cover for third party liability on the event of a collision. It is necessary to note that two distinct type of loss may arise as a result of collision, first it is to be recalled that the damage referred by the insured vessel is recoverable as a loss by perils of the seas as defined in Rules 7 of the Rules of construction 15 with the celebrated case of Wilson Sons & co and Owner of cargo per Xantho16. Such a loss if arising as a result of the negligence of master officers, crew or pilot in navigation is also recoverable under clause 6.2.2 of the ITCH 9517. The second type of loss known as third party liability incurred by the assured in the form of damages payable to the owner of the vessel is also recoverable under this clause. Such a consequential loss was not however prior to the decision of D Varix V. Salvador18 by reason of its remoteness considered as loss by a peril of the sea. The RDC was thus introduced to provide a shipowner with the cover for such a monetary loss resulting from a collision of his vessel with another vessel. By clause 8 of the ITCH 95 underwriters agree to indemnify the assured for the amount of three fourths of the damage inflicted upon the other vessel in the event of a collision, the other one fourth being borne by the assured. But in practice the ship owner is actually a member of a Protection and Indemnity club (P & I) who would meet the shortfall in the third party cover. It is significant to note that in no circumstance will the underwriters liabilities for damages amount to more than three quarters of the insured value of the vessel insured.
15

See clause 7 of the schedule to the Marine Insurance Act 2004 titled Rules of construction of policy which states that the term

perils of the seas refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the wind and waves.
16Wilson

Sons and Co and Owners of Cargo per Xantho (1887) 12 APP CAS 503 time Clauses Hulls (international law)

17Institute 18

D Varix V. Salvador (1836) 4 AD & E 420

5.0. Risks excluded from the Running Down Clause There are a number of important exclusions from liability of the hull underwriters in the Running Down Clause. For instance, wreck removal liability are excluded, as is consequent damage to shore side structures or to the cargo in the insured ship herself, and pollution from and loss of life or personal injury on board any ship involved. All those liabilities are insured by the ship owners Club.

The Club cover includes, and the hull underwriters cover excludes, not only the wreck removal of the insured ship herself, but also the removal of the wreck of any other ship involved. The same is true of liabilities incurred by the ship- owner not in tort but because of the existence of a contractual obligation, as the words in the Running Down Clause pay by way of damages have been interpreted as being restricted to payments in respect of tortuous liability.

Thus in Furness Withy and Co v Duder19 payments made by a ship- owner for collision damage to a tug were held to be unrecoverable from hull underwriters where the collision was caused solely by

19Furness

Withy and Co v Duder [1936] 2 KB 461. Other extant cases in this regard include Crowley MatineServs inc v Maritrans inc

447 F.3d, 2006 AMC 1246; Owner of S.S. Mendip Range v Radcliffe [1921] 1 A. C. 556; The Aleksandr Marinesko and Quint Star [1998] 1 Llouds Rep. 265; The Antares 11 and Victory [1996] 2 Lloyds. 482 at 498; The Eglantine, Credo and Inez [1989] 1 Lloyds Rep. 593. The Maloja 11 [1993] 1 Lloyds Rep. 48; The Nordic Ferry [1991] 2 Lloyds Rep. 591; and The p. Caland [1893] A.C. 207. A recent case is that of Laichkwiltach Enterprises Ltd. v. F/V Pacific Faith (ship), 2007 BCSC 1852, additional reasons 2008 BCSC 282. This was as action for damages arising out of a collision. The Plaintiffs ship was moored at a wharf when the Defendants vessel struck it while attempting to dock. The court held that the defendants were prima facie negligent as there is a presumption of fault when a moored vessel is struck by a moving vessel. The court accepted that there was a clutch failure on the Defendants vessel but, in the absence of evidence of the history or maintenance of the clutch, this did not absolve the Defendant of liability. The Plaintiff sought a total of $105,000 in damages including approximately $14,000 for loss fishing income. The Court, however, found that the Plaintiff had failed to prove much of the damages if claimed and those damages it had proves were reduced to reflect new for old or betterment. Part of the reason for lack of proof was the Court gave no weight to the opinions of the Plaintiffs expert

the negligence of the tug and liability arose under the special terms of the towage contract; the shipowner may in such circumstances recover his payment from his Club (although in the case of towage other than other ordinary harbor towage, by special arrangement only).

It may be asked why the club cover should include the insured ship owners liability to cargo carried in his own ship, in view of the fact that Clubs cargo cover is conditional upon the application of the Hague or Hague- Visby Rules and these Rules exclude claims by cargo in respect of the negligent navigation of the carrying ship.

In most jurisdictions it is indeed most unlikely that the owner of cargo in the vessel could succeed in a claim against the owner of that ship in a collision situation. The cargo owner may make a claim against the non-carrying vessel in accordance with her degree of blame, if any, but cannot recover either from the carrying ship or from the non-carrying ship in respect of that part of the blame attributable to the carrying ship.

However in the US there is a well established principle, the innocent cargo rule to the effect that cargo may recover from the non-carrying ship the whole of its loss, provided only that there is some
because the experts report had apparently been drafted by a lawyer and the Court was uncertain as to whose opinions were expressed in the report. The claim for loss income was denied on the grounds that the Plaintiff had unreasonably delayed in effecting the repairs.

degree of blame, however slight, upon the non-carrying ship. The non- carrying ship is entitled to recover against the carrying ship in respect of the carrying ships degree of blame for the collision. In this indirect manner the owner of the carrying ship may become obliged to pay part of the claim of the cargo carried on board his own ship. As the ship- owner would be unable, because of the terms of the last sentence of the Running Down Clause, to recover in respect of this payment from his hull underwriters, the Club cover is extended to fill that gap. 6.0. Excess collision liability Under the term of the Running Down Clause English hull underwriters and those writing hull risks on similar terms are not obliged to make payments in respect of collision liabilities beyond a sum representing three-fourths of the ships insured value under the hull policies. In certain countries the extent of the hull underwriters interest may be even smaller where the insured vessel herself is also heavily damaged or lost, as the local policies do not follow the scheme of the RDC in establishing for collision liability a fund separate from the ships basic fund, but instead provide that the hull underwriter may stop paying altogether when he reaches the insured value of the ship.

The common theme, in any event, is that at some point the hull underwriter may limit his payments to the insured ship-owner in respect of collision liabilities. The overspill beyond this limit is picked up by the ship owners Club.

In view of the possibility of a ship of low insured value colliding with one or more ships of very high value, this part of the Club cover is more important than it may at first sight appear, as the Club cover under this head could be increased unfairly by a decision of the ship-owners, for one reason or another, the Clubs however provide in their Rules that claim in respect of excess collision liability

can be reduced appropriately if in the opinion of the Directors of the Club the ship has not been insured with her hull underwriters for proper value.

It is to be asserted that the RDC is not part of the ordinary policy of marine insurance but rather a separate contract.20 Due to this fact the RDC is not interpreted with the same strict reference to the doctrine of proximate cause as the marine policy is21. In the RDC one is no longer dealing with a contract of indemnity for material damage immediately resulting from certain named perils, but with a guarantee of repayment of a stated proportion of liabilities involuntarily incurred by the insured.

7.0. Conclusion The RDC is on the whole laudatory and serves as a veritable means to provide legal coverage for accidents resulting from a collision.

20 21

Burger V. Indemnity Mutual (1899) QBD 15 Times LR 506 PER Mathew. J See generally Section 56. (1) of the Marine Insurance Act 1994. .

Works Cited
(n.d.). Retrieved 04 29, 2010, from www. goguenchamplain.Com/glossary.Cfm (n.d.). Retrieved 04 30, 2010, from Law Jrank.org: http://law.Jrank.Org/pages/14405/collision- clause(running- down- clause) (n.d.). Retrieved 04 30, 2010, from allbusiness.com: http://www.allbusiness.com/glossaries/running- downclause/4961211 Black, H. C. (1990). Blacks law Dictionary (6th ed.). Saint Paul, Minnesota, United States of America: West Publishing Co. Convention for the unification of certain Rules of Law with respect to Collision between Vessels . (1910). Convention on the International Regulation for Preventing Collisions at Sea. (1972). Donaldson, E. (1990). Lowndes and Rudolf: Law of General Average and the York Antwerp Rules. (W. Cooke, Ed.) Sweet & Maxwell. J., B. (2004). Birds Modern insurance Law. Sweet & Maxwell. Marine Insurance Act Laws of the Federal Republic of Nigeria (Cap 216 ed.). (1990). Schoenbaum, J. (2009). Collision and Marine Casualty in Admiralty and Maritime Law ( 4th ed.).