MarIus

4.4.1 The Concept of “Error in Design”

The term “design” is understood to be the process relating to the planning of form and function of an object. The term relates to the characteristics of the object, and includes layout, functionality, shape, material, dimensions and how the object should look once constructed. The term also includes how the object fits into adjacent machinery and the general construction of the vessel. Even though the planning process is the most prominent part of the term “design”, also the completed object will be included, as this represents the outcome of the planning process.

The Commentary defines «design» on page 295 as:

“(…) the entire process of defining how the various parts of the vessel should be configured and assembled, how they should be manufactured and the exact nature and quality of the material to be used.”

The term “error” may be defined in two ways. Firstly, it can relate to the characteristics of the object, as these may be unfit or inadequate for its intended use. Secondly, the term can be interpreted similarly to the term “faulty material”, which implies that the design is erroneous as it deviates from an applicable expected standard. In the Commentary, the two categories are called objective and subjective errors, respectively. The distinction is primarily of theoretical importance, as the cover for objective and subjective errors is the same. Still, the distinction demonstrates the different considerations and principles behind Cl. 12-4 as well as the variations within the term «error in design». Hence, a more thorough discussion about the two categories is necessary.

The objective errors are defects that become apparent after the vessel is in operation. In other words, during the design process it was expected that the design would work well, but after the design is used in operation, it becomes apparent that it does not function as anticipated. Hence, the design is objectively not functioning.

The Commentary defines an objective error on page 295 as a design that is “suitable in the light of current knowledge and standards but is subsequently shown to be inadequate for reasons that were not understood at the time the vessel was built”. Conventional designs are normally tested and eventually also used for some time in the business. Such designs will rarely be faulty based on subsequent knowledge, especially once tested for some time in the market. New designs, on the other hand, involves a higher element of risk, as there is some uncertainty as to how the design will function in practice.

An example is the IMO 2020 Low Sulphur Regulation, which have resulted in a boost of scrubbers being installed worldwide. Some of the scrubber designs have turned out to be less than favorable, resulting in extensive damage.(1) Mahajan, Learning as we go: challenges with the use of exhaust gas scrubbers, 2019 Without concluding on the scope of cover of scrubber damage, the IMO 2020 illustrates how new regulations force the shipowner to take certain business decisions that could affect the insurance cover.

Subjective errors in design share a lot of the characteristics of faulty material, as the question of whether an error exists will be determined based on established standards. Hence, it will be a subjective error if the design does not meet the market expectation to the quality and function of such a design.(2) The applicable standard should be evaluated in the same way as for faulty material. Reference is made to the discussion in Chapter 4.3

The Commentary defines subjective errors on page 295 as a defective design “in the light of current knowledge and established standards”. Hence, the material strength, production methods or other stress factors to which the object may be exposed turns out to be weaker than it ought to be, given the knowledge and established standards available at the time of construction.(3) T. Wilhelmsen and H. Bull, Handbook on Hull Insurance, 2017, p. 301

Similarly to faulty material, subjective errors often may be the result of unfortunate incidents rather than experimental and new design.(4) S. Brækhus & A. Rein, Håndbok i kaskoforsikring, 1993, p. 112The shipowner will normally approve design or repair plans for the vessel and should be able to trust that the yard delivers in accordance with such plans. Consequently, it could be argued that a potential error will be outside the shipowner’s responsibility.

4.4.2 Considerations and Principles

In order to get a complete understanding of how “error in design” should be interpreted and handled under the Nordic Marine Insurance Plan, it is natural to look to the underlying considerations and principles, as these are the reason why errors in design are partly excluded from cover.

The Commentary elaborates on the term “error in design” with several circumstances that should be considered in order to get a full understanding of the terms.(5) Commentary, p. 296 with further comments in T. Wilhelmsen and H. Bull, Handbook in Hull Insurance, 2017, pp 301–304 These elements are all closely connected with the considerations and principles behind the exclusion for error in design and faulty material. The first element is related to the controlling principle of foreseeability. As this is a governing principle it will influence all the other elements to some extent. The second element is related to how long it took for the damage to develop and to be discovered. This element demonstrates the borderline to Clauses 10-3 and 12-3. The third element is an evaluation of whether the part would have been changed if the assured became aware of the defect before it resulted in a damage. Fourthly, it is important to assess the degree of seriousness related to the defect and whether it has the potential of causing a casualty. Lastly, it should be discussed whether the defect is a consequence of a business risk willingly taken by the assured.

The controlling principle of insurance law is to provide a safeguard against unforeseeable losses.(6) See e.g. Commentary, p. 256 To maintain the contractual balance, only the unforeseen risks should be for the insurer’s account. The degree of unforeseeability will vary a great deal depending on the type of error in design. On one hand, damage occurring as a consequence of experimental designs could be more foreseeable. Furthermore, the risk for such damage will normally not be a part of the agreed premium. Hence, cover of such losses could cause a contractual imbalance. Losses occurring as a consequence of conventional designs will, on the other hand, often be unexpected for the assured.(7) S. Brækhus & A. Rein, Håndbok i kaskoforsikring, 1993, p. 112In these cases, the assured has selected a design which was supposed to be adequate and well-functioning, but damage still occurred due to unfortunate circumstances. Consequently, the risk of incentivizing experimental design is relatively low in these cases, whilst the principle of unforeseeability applies to a high degree.

The second element to consider is the time aspect. The aspect of time will be relevant in two ways. The first way is related to how long it took for the damage to occur. In other words, how much time passed by from the part was installed in the vessel until the casualty and consequent damage occurred. If a part is damaged almost immediately after installation, or at least years before reaching its expected lifetime, it is a clear indication that there is something wrong with the part either due to an external factor or due to the design.(8) Commentary, p. 295–296 Similarly, if a part has functioned for many years before a damage occurs, it is more likely that the damage is caused by either wear and tear, or an external factor. If there are no previous indications that the part did not function as it was supposed to, it is unlikely that the damage was caused due to an error in design. Thus, it can be presumed that an error in design will manifest into a damage relatively quickly after installation, as the definition of an “error in design” is that the part does not work. Hence, it will be difficult to argue that a part suffers from an error in design if it works for several years before suddenly malfunctioning. Still, the time element must be considered a general rule of thumb, and it must be specifically evaluated based on the circumstances, the affected part and the error.

The second way that time is relevant is related to whether the damage occurred suddenly or developed gradually. A damage that develops gradually is more foreseeable, and the assured may plan and budget for the necessary modifications.(9) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, pp. 302–303 Hence, a gradually developed damage will most likely not be regarded as a consequence of an error in design, but rather a foreseeable and natural consequence of the way the vessel has been operated, and thus unrecoverable in accordance with Cl. 10-3.

Both the above-mentioned aspects of time demonstrate the borderline between losses caused by error in design and losses excluded from cover in accordance with Cl. 10-3. Some losses that are a normal consequence of the running of the ship may occur earlier than expected if the vessel is operated in more demanding conditions than normal. This does not necessarily mean that the design is inadequate. If the assured uses the vessel in more demanding conditions, the risk of damage should be apparent to the assured and within his control. Consequently, the assured should carry the costs if the risk materializes.(10) S. Brækhus & A. Rein, Håndbok i kaskoforsikring, 1993, p. 100

The third element is related to whether the part would have been changed if the assured became aware the defect before it resulted in a damage. As mentioned above, the term “error” indicates that the part in question is designed in a way that is unfit for its intended use or that the design is unable to perform as it is supposed to. Thus, a prudent shipowner would undertake measures to change it when the error is discovered.(11) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 301

The fourth element is related to the degree of seriousness related to the defect and whether it has the potential of causing a damage. On page 295 of the Commentary it is stated that:

“the focus is on the safety of the vessel and avoiding any breakdown in operation, these being the focus of the classification process. One cannot argue that a vessel suffers from an error in design simply because parts become worn out more quickly than anticipated.”

The remarks in the Commentary indicates that the error in design must have the potential of causing a casualty. This can be seen in connection with the consideration of covering unforeseen losses for the assured.(12) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 302If the risk is low and a potential damage develops gradually, similarly to wear and tear, the rationale behind the cover does not apply to the same extent.

The last element to consider is whether the design is a consequence of a business risk willingly and knowingly taken by the assured. The rationale of Cl. 12-4 is to balance the risk of underwriting new technology and the assured’s need for economic compensation for unbudgeted losses. As such, the insurance should not be a remedy to remove the economic risk of investing in experimental technology.(13) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, p. 300 with further references to the Commentary p. 291 This element is clearly described in the Commentary on page 295:

“Nor is it an error in design in cases where the party responsible for ordering the vessel has deliberately chosen solutions that entail a degree of uncertainty about serviceability or useful lifetime, for example new technology that is not yet fully tested. Similarly, if the party ordering the vessel has adopted design solutions on the basis of inadequate analysis or in order to save money.”

The statement should be read in connection with the general consideration behind the cover provided by Cl. 12-4 that the insurer should not underwrite the assured’s business risks. If the assured chooses to invest in a design that entails a higher risk of damage, such a damage should be for the assured’s account, as both the risk and award form part of the totality of the cost-benefit analysis. Furthermore, such a loss will be more foreseeable and predictable, reducing the need to insure a potential financial loss.(14) T. Wilhelmsen & H. Bull, Handbook in Hull Insurance, 2017, pp. 303–304