4.2 Considerations and Principles
The purpose of insurance is to transfer the risk of unforeseen losses from the assured to the insurer. This fundamental principle is also the basis for the Nordic Marine Insurance Plan.(1) See e.g. Commentary, p. 256 A contract should seek to create a balance between the parties, resulting in a fair and reasonable contract.(2) T. Wilhelmsen, Planen som Nordisk Plan, 2019, pp. 24–25 In an insurance contract, this balance is achieved as the insurer agrees to compensate the assured for a pre-agreed scope of cover against a premium paid by the assured. The premium should represent the risk the insurer undertakes.(3) T. Wilhelmsen, Planen som Nordisk Plan, 2019, pp. 24–25 The risk is normally calculated based on the qualities of the vessel, previous damage to the vessel itself and similar vessels, technical management and other factors that may affect the risk of a damage occurring. Based on the principles of fairness and reasonableness, the insurer’s liability should coincide with the risk included in the premium.(4) T. Wilhelmsen, Planen som Nordisk Plan, 2019, pp. 24–25 Consequently, the assured may carry out a cost-benefit analysis and transfer any unwanted risks to the insurer. The insurer must, on the other hand, carry out a similar analysis to ensure that the premium is sufficient to cover the risk he agrees to undertake.(5) T. Wilhelmsen, Flexibility, foreseeability and reasonableness in relation to the Nordic Marine Insurance Plan 2013, 2013, p. 48
The calculation of premium represents the risk for potential damage. As such, it is not reasonable to include costs of repairs that will occur with absolute certainty, such as ordinary maintenance. It would be disproportionately expensive for both the insurer and the assured to insure these costs. Consequently, the premium should represent the objective risks outside the assured’s control – the risk of unforeseen damage and loss.(6) T. Wilhelmsen, Planen som Nordisk Plan, 2019, pp. 24–25 The subjective risks that are within the assured’s control are to some extent described as the assured’s duties in the Nordic Marine Insurance Plan.(7) See Chapter 3 of the Nordic Marine Insurance Plan Thus, the structure of the contract implies that the purpose of the insurance is to regulate events caused by risks outside the assured’s control.
The concepts of faulty material and error in design somewhat challenge the above starting point. Both faulty material and error in design are defects that may exist in the vessel for a long period of time. From a general insurance law point of view, losses resulting from such defect are excluded from cover as the losses are considered to be inevitable.(8) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 299 The possibility for faulty material and error in design for vessels is affected by the fact that the shipowners may choose material and design as they see fit in order to improve the performance of the vessel. This decision may entail a significant degree of risk, especially if the material or design is experimental and relatively untested.(9) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 299 If all incidents caused by error in design and faulty material were covered in full, the insurer would in principle underwrite “the quality of work processes that are directly or indirectly affected by choices made by the shipowner”.(10) Commentary, p. 291 In marine insurance, these choices are considered to be a business decision containing a calculated risk, where both the rewards and risk should rest with the assured.(11) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 299 Hence, when the assured carries out a cost-benefit analysis to consider whether to invest in a new design or material, the assured should not be able to transfer the known risks to the insurer.
On the other hand, a loss caused by error in design or faulty material may also appear just as unexpectedly as any other, which indicates that it should be considered a transferrable and objective risk. Both the timing and the extent of loss will be outside the assured’s control, which justifies using the insurance as a mechanism to cover the risk.(12) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 299 Furthermore, error in design and faulty material may not only occur in relation to new designs to enhance performance, but also in more conventional design. In such cases, the risk will not be a calculated risk taken by the assured, but rather an unfortunate incident.(13) S. Brækhus & A. Rein, Håndbok i kaskoforsikring: på grunnlag av Norske Sjøforsikringsplan av 1964, 1993, p. 110 The rationale of covering unforeseeable losses would be particularly strong in these situations.
The Nordic Marine Insurance Plan seeks to balance the above-mentioned considerations as described on page 291 of the Commentary:
“The cover provided by the Plan supports innovation to the extent that the costs of restoring the vessel to its original condition are covered but not the costs of remedying any shortcomings that the incident reveals about the design or technology itself. The rewards and therefore the costs of innovation and technological development belong firmly with the equity investors.”
Consequently, the “financial need for compensation that is the underlying rationale for this cover must be weighed against the considerations that were traditionally used against such cover”.(14) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 300 In the Nordic Marine Insurance Plan, Cl. 12-4 represents a measure to maintain this balance in practice, as it provides cover for the loss incurred by the assured without covering the costs of renewing the design or material.
The balance is also protected by another central principle of insurance law: the assured should not benefit from an insurance claim. The insurer undertakes the risk for damage and the consequent costs to repair the vessel to its original state.(15) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, pp. 279–280 Hence, the settlement should not put the assured in a better position than before the casualty. This principle is also challenged when it comes to losses caused by faulty material and error in design. The faulty material or error in design represents a defect to the vessel. Following a damage, both the damage and the defect will be rectified. As the rectification will leave the vessel without the previous defect, the assured will be in a better position than before the casualty. Consequently, the rules concerning cover for losses caused by faulty material and error in design must seek to take this betterment into consideration.