Legal roundup of court cases relevant to the energy sector

01 April 2019

Energy insurance legal roundup This regular feature from our energy newsletter tracks recent insurance and reinsurance cases and what the outcome was in court.

UK Court of Appeal Grants appeal to Supreme Court to establish what salvage costs can be used to calculate a vessel’s Constructive Loss

In the recent Court of Appeal decision in The Renos [2018], the ship suffered an engine room fire and salvage services were rendered to it under a Lloyd’s Open Form (LOF) with SCOPIC (Special Compensation P&I Clause) included and invoked.

Traditionally, a salvor is only paid if the salvage is successful, and its remuneration cannot exceed (and will only in very rare cases even match) the salved value of the property at risk (typically ship, cargo and bunkers).

As a result, salvors were rarely incentivised to intervene in the most difficult cases, as they would not be rewarded for doing so. The consequences in terms of potential environmental damage (and associated liability) are obvious.

SCOPIC is a bolt-on clause to the Lloyd’s Open Form of Salvage Contract (LOF) that effectively guarantees the salvor a reasonable remuneration for the personnel and material deployed in attempting to salve the casualty.

SCOPIC remuneration is only payable to the extent that it exceeds a conventional salvage award, so there is no question of the salvor recovering twice.

Another difference between SCOPIC and salvage remuneration is the identity of the insurer who funds it: salvage is ultimately paid by the property insurer (hull and machinery in the case of the ship), but SCOPIC is a P&I matter.

That is because the liabilities avoided by a successful salvage of a valueless ship (i.e., wreck removal and pollution) are P&I risks.

Energy insurance legal roundup April 2019Consistently with that difference in nature, SCOPIC is not recoverable in General Average (see Rule VI(c) of the York- Antwerp Rules 2004) nor under hull insurance (see the Institute Time Clauses (Hulls), which exclude it).

And the SCOPIC Clause itself provides (in paragraph 15) that – “… liability to pay such SCOPIC remuneration shall be that of the Shipowner alone and no claim whether direct, indirect, by way of indemnity or recourse or otherwise relating to SCOPIC remuneration in excess of the Article 13 award shall be made in General Average or under the vessel’s Hull and Machinery Policy by the owners of the vessel”.

In the Renos case, one issue for the Court (among several others) was whether SCOPIC remuneration could be included in the Constructive Total Loss (CTL) calculation. If it could, then the vessel was a CTL; if it could not, then it was a partial loss only.

The hull underwriters argued that such costs were not a “cost of repair” for the purpose of the Marine insurance Act 1906; and that such a claim was precluded by SCOPIC. The Court rejected both arguments and ruled in favour of the owners but allowed insurers further appeal to the Supreme Court (which is now set to be heard on the 10th of April 2019).

Spanish court rules P&I club must pay Prestige claim

Spain’s highest court has issued a final ruling that The London P&I club must pay EUR1.6bn (USD 1.9bn) to the State in damages over the 2002 Prestige oil spill.

The judgement confirms a provincial court ruling that the London P&I Club must pay the claim stemming from one of Europe’s worst environmental disasters. Under the court decision, the French State was also awarded EUR61mn. It is widely thought however that that the next stage of litigation will take place in a London court.

Energy insurance legal roundup

Commenting on the ruling, a spokesman for the London Club said the P&I club was disappointed, adding that the direction that the Spanish legal system has chosen has been disquieting to many parties for some time, and therefore, although frustrating, this comes as no surprise.

The London Club also said some comfort can be taken from the prior decision of the UK Court in 2015 that the claims are not enforceable against the club beyond the CLC [The International Convention on Civil Liability for Oil Pollution Damage] limit.

Defence costs not subject to liability policy’s Joint Venture ‘scaling to interest’ clause

The Texas Supreme Court has ruled that the London Excess Liability form which scales an Insured’s recovery to their percentage interest in a joint venture limit (written on a “100%” basis) only does so for liabilities, not defence costs, concluding that the term ‘liability’ refers ‘to an obligation imposed on the Insured by law to pay for damages sustained by a third party who submits a written claim,’ and does not encompass defense costs.

Although liabilities and defense expenses are both included as ‘ultimate net loss,’ and thus both are ‘insured’, the policy distinguishes between the two, and the joint venture provision applies only to liabilities, not to defense expenses.

This ruling stems from a claim from a joint venture partner in the BP Macondo Deepwater Horizon loss.

Ruling on contradictory dispute resolution provisions

In this case, the court considered the meaning and effect of a number of seemingly contradictory dispute resolution provisions in an excess insurance policy.

The apparent inconsistency arose due to incorporation of terms from an underlying policy, and illustrates the difficulties that may arise when terms are incorporated (either, as here, from an underlying layer, or from the original policy in a reinsurance context) without due consideration being given to whether or not those terms are appropriate for the policy into which they are incorporated.

Here, the Excess Policy incorporated by reference a Service of Suit Clause from an underlying policy, providing that, in the event of the failure of the Underwriters to pay a claim under the Excess Policy, the Underwriters would submit to the jurisdiction of a competent US Court.

However, the Excess Policy also contained endorsements providing for “any dispute, controversy or claim” to be determined in London under the Arbitration Act 1996; for the construction and interpretation of the policy to be governed by the laws of the State of Washington; and that “Solely for the purpose of effectuating arbitration, in the event of the failure of the Company to pay any amount claimed to be due hereunder, the Company, at the request of the Insured, will submit to the jurisdiction of any court of competent jurisdiction within the United States.”

The court construed these provisions as together having the effect that:

  1. any disputes under the excess policy would be determined in London under the Arbitration Act 1996.

  2. underwriters had submitted to the jurisdiction of any competent US court in the event of their failure to pay any claim, but this was “solely for the purpose of effectuating arbitration”.

  3. under the Service of Suit clause, Underwriters had certain rights to commence or otherwise pursue an action before a competent US court.

In view of the conclusion set out in the 1), the circumstances contemplated at 2) and 3) would involve the enforcement of an arbitration award (or establishing jurisdiction in the event that the parties agreed to dispense with arbitration).

The court expressly adopted this analysis in part because it “recognises that there is no conflict in the drafting”. A conclusion that there was a conflict would not be one that could or should lightly be attributed to commercial parties. The court was also influenced by its view that its construction “works commercially”.

A further factor influencing the court was that the Excess Policy sat within a number of layers, at least two of which contained arbitration agreements providing for mandatory arbitration in London. Against this background, the unlikelihood of the parties having intended the Insured’s construction increased further still.

Having reached this conclusion, the court made an order restraining the Insured from pursuing proceedings before the District Court in the State of Washington.

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Texas Court of Appeals Affirms Holding That Jones Act Employer Did Not Breach Duty to Provide Medical Care

The United States Court of Appeals recently issued an opinion that affirmed the district court’s dismissal of a seaman’s Jones Act claim seeking damages for the employer/vessel owner’s alleged breach of its non-delegable duty to provide prompt and adequate medical care.

The plaintiff, was employed as a seaman by vessel owner, when he suffered a stroke in the service of the vessel. The plaintiff began to feel fatigued and lightheaded in the process of unloading groceries onto the vessel and subsequently went to his bunk room to rest.

The plaintiff’s fellow crewmember heard noise from his bunk room and discovered him incapacitated on the floor and unable to communicate.

The crewmember immediately notified the captain, who quickly called the emergency services who took the plaintiff to a regional medical center.

The vessel owner did not instruct the emergency responders to take the plaintiff to the medial centre nor hire, authorize, or contract with the medical center to provide medical care to its seamen.

The medical centre physicians failed to diagnose the stroke and did not timely administer the appropriate medication, which could have improved the plaintiff’s post-stroke recovery. As a result, the plaintiff was permanently disabled and needs constant custodial care.

The plaintiff brought suit against his employers alleging that they negligently failed to provide prompt and adequate medical care. The lower court granted the employer’s motion for partial summary judgment in their favor dismissing the Jones Act negligence claim.

The plaintiff appealed the lower court’s decision and argued that his employer, through its employees, acted negligently and breached its duty to provide adequate medical care by merely calling the emergency services in response to his stroke and that they are therefore vicariously liable for the medical center’s physicians’ alleged medical malpractice.

Energy insurance legal roundup

The Appeal Court explained that breaches of the duty to provide medical care is fact intensive and varies by injury and the availability of medical facilities.

For example, a vessel owner breaches its duty when it fails to get a crewmember to a doctor when reasonably necessary and the vessel owner is reasonably able to do so.

Additionally, the duty is breached when the vessel owner takes its seaman to a doctor it knows is not reasonably qualified to care for the injury.

Based on the facts, the Appeal Court found that the plaintiff’s employer did not breach its duty to provide medical care because their employees selected a course of action reasonably calculated to get the plaintiff to a medical facility that would be able to treat him and simply because the physicians may be faulted does not mean that they directly liable for failing to procure adequate medical care.

Further, the Appeal Court held that the employer was not vicariously liable for the alleged medical malpractice of the physicians because they did not choose the on-shore physicians to treat the plaintiff.

US District Court finds that in order for a maritime worker to avail her or himself of the Jones Act or general maritime law remedies, the injury must involve a “vessel”.

The US Jones Act and general maritime law provides maritime workers with specific remedies after an injury. However, not all maritime employees were entitled to these remedies. The District Court rejected the contention that an employee injured on an oil platform permanently affixed to the sea floor could seek recovery under either the Jones Act or general maritime law.

The plaintiff, fell, and injured himself while working as a galley hand and cook on an oil platform permanently affixed to the sea floor in the Gulf of Mexico.

The Plaintiff suit against his employers seeking to recover for his injuries, asserting claims under the Jones Act, under general maritime law for negligence and for the alleged unseaworthiness of the platform. In support of his Jones Act and general maritime law claims, the Plaintiff asserted that the platform was a “vessel” and that he qualified as a “seaman.”

The court found that, in order to maintain a cause of action under the Jones Act and general maritime law, an injury must relate to work on a vessel. Looking to US Supreme Court decisions for guidance, the court noted that only a “seaman” can recover under the Jones Act.

A seaman is “an employee whose duties ‘contribute to the function of the vessel or to the accomplishment of its mission’ and who has ‘a connection to a ‘vessel’ in navigation . . . that is substantial in terms of both its duration and nature.’”

The court found that a “vessel” was a watercraft capable of maritime transportation, “regardless of its primary purpose or state of transit at a particular moment.”

However, the court qualified this definition, noting that a watercraft did not qualify as a “vessel” where it was “not ‘capable of being used’ for maritime transport in any meaningful sense” i.e., if it had been permanently moored or otherwise rendered practically incapable of transportation or movement.

Following precedent from the U.S. Court of Appeals for the Fifth Circuit, the court found that the platform was both practically and theoretically incapable of movement as it was permanently affixed to the sea floor, had not moved in two decades, had never been used as a form of transportation, was physically incapable of movement, and had no propulsion system or other means of moving itself from one location to another.

Accordingly, the platform did not qualify as a “vessel” and the Plaintiff did not qualify as a seaman under the Jones Act.

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If you would like to talk about any of the issues raised in this article, please contact John Cooper, Managing Director -Technical on +44 (0)203 394 0464.