Legal roundup in the energy insurance market

04 October 2019

This regular feature in our newsletter tracks recent insurance and reinsurance cases and what the outcome was in court.

The US Supreme Court Resolves Split Regarding Punitive Damages

As reported in our July 2019 newsletter, the United States Supreme Court held 6-3 that an injured Jones Act seaman may not recover punitive damages on a claim for unseaworthiness.

The case made its way to the Supreme Court when a split in authority arose between the United States Fifth Circuit and Ninth Circuit Courts of Appeals. Specifically, the Ninth Circuit expressly disagreed with the Fifth Circuit and found that punitive damages were recoverable for Jones Act seamen for a claim of unseaworthiness.

The Supreme Court granted certiorari (allowing appeal) to resolve the conflict between the two circuits and addressed whether a mariner may recover punitive damages on a claim that he was injured as a result of the unseaworthy condition of the vessel.

In concluding that punitive damages are not recoverable in an unseaworthiness claim, the Court based its reasoning on three grounds. First, the Court found that, unlike maintenance and cure, the overwhelming historical evidence suggests that punitive damages are not available for claims of unseaworthiness.

Second, the promotion of a uniform rule applicable to all sanctions for the same injury, whether under the Jones Act or the general maritime law, commands conformity with the statutory scheme established by the Jones Act. Lastly, the Court was not persuaded that, in the absence of everything else, punitive damages are warranted as a matter of policy.

In this regard, the Court noted that allowing punitive damages would place American shippers at a significant competitive disadvantage to their foreign counterparts and would discourage foreign-owned vessels from employing American seamen.

The UK Supreme Court holds ‘SCOPIC’ expenses not to be taken into account in establishing whether a vessel is a Constructive Total loss

Further to our report in our April 2019 newsletter of the UK Court of Appeal’s referral to the Supreme Court of a case to establish what salvage costs can be used to establish a vessel’s constructive total loss, the UK Supreme Court has now held salvage and other costs incurred before tender of notice of abandonment should be taken into account for the purpose of assessing whether a vessel is a constructive total loss, but special compensation protection and indemnity clause (SCOPIC) expenses should not.

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.

The main difference between SCOPIC and salvage remuneration is the identity of the insurer that 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.

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

The Supreme Court was unanimous in holding “the cost of repairing the damage” included all the reasonable costs of salving and safeguarding the vessel from the time of the casualty onwards, together with the prospective cost of repairing it. These costs were not reduced by being incurred before the notice of abandonment and are therefore to be taken into account for the purposes of s60(2)(ii) of the Marine Insurance Act 1906.

The court was also unanimous in holding SCOPIC remuneration should not be taken into account. SCOPIC charges protect an entirely separate and distinct interest of the shipowner – potential liability for environmental pollution – which has nothing to do with reinstatement of the vessel.

The lower courts had accepted the assured’s arguments that SCOPIC costs were indivisible as part of the costs of recovery. The Supreme Court disagreed. The costs are divisible because they relate to an entirely different interest and are separately insured.

In light of this judgment, the case was remitted back to the Commercial Court to determine whether or not there was a constructive total loss on the facts.

Marine Warranty Surveyor held to be an ‘Other Insured’ under WELCAR Offshore Construction wording

Insurers have lost a case in a Texas court against the Marine Warranty Surveyor (MWS) on the 2014 ‘Big Foot’ Construction project in the Gulf of Mexico project.

Whilst technically underwriters pay or contribute to the costs of the MWS, in practice they are appointed by, and enter into a contract with the insured, thus automatically making them an ‘Other Insured’. WELCAR has a specific Waiver of Subrogation against “any Principal Assured and/or Other Assured”.

However insurers claimed they were not subrogating in the name of the insured, but directly in tort against the MWS which owed them a duty of care that was not fulfilled, and the MWS was therefore negligent to insurers.

The Court’s opinion confirms the established principle that an insurer may not sue an insured to recover money paid for the risk that the insurer promised to insure. It also alludes to the fact that insurers failed to prove damages were caused by the breach of the duty MWS’s owed to underwriters, and that whilst insurers “clothed damages in a negligence dress” they are damages insurers paid the Insured (and therefore can only be claimed via subrogation, which was clearly waived by insurers to all ‘Other Insureds’).

A standard WELCAR requires compliance by contracting parties with Quality Assurance/Quality Control requirements of the insured to qualify as ‘Other Insured’ and to be granted a waiver of subrogation. However, in this case those provisions were deleted from the WELCAR policy, so did not come into question.

The court went on to state that insurers were paid about USD 30mm to assume the risks specified in the Offshore Construction Policy (including damage caused by negligence), with one of those risks becoming a reality, and, negligence or not, the insurers had to pay the insured (again enforcing the fact that insurers action could only be in subrogation).

Insurers also tried to claim that the MWS were not an ‘Other Insured’ as the WELCAR policy in question only covered physical damage, not liabilities, and that the service contract required the MWS to indemnify the insured for up to USD 5mm and purchase liability insurance that was specifically non-contributory, which underwriters argued waived or abrogated their ‘Other Insured’ status under WELCAR. The Court did not agree with insurers on this point.

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  • John CooperJohn Cooper

    John joined JLT in 1987 having spent three years with Leslie & Godwin (now Aon) in the Marine Hull Technical Department.

    John gained extensive knowledge in the technical design and servicing of energy related insurance programmes covering physical damage, business interruption, control of well and liability exposures for a wide spectrum of energy clients including oil & gas lease operators, mobile rig contractors, oil & gas service companies, and major integrated oil companies.

    At JLT Risk Solutions John sat on the "Energy Executive Committee" that oversaw the management and strategy of the Energy Business Unit. In January 2005 John moved from JLT Risk Solutions to Lloyd & Partners where he has responsibility for managing the Energy team. He sits on the Energy & Marine Executive Committee and is a strategic advisor to the LPL Board.

    He is also a broker consultant representative to the London Joint Rig Committee and has worked on a consultancy basis with Oil Insurance Limited (OIL). In the combined Marsh JLT Specialty, Energy and Power team, John now performs the role of Global Chief Client Officer.

    If you would like to talk about any of the issues raised in this article, please contact John Cooper, Global Chief Client Officer on +44 (0)20 8108 9542.

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