4.2 Clause 12
The charterparty cl. 12 contains a comprehensive regulation of “Insurance and repairs”, and maps out i) that the charterer shall effect the insurance for their own expense, ii) that the insurance shall protect the interests of both the owners and charterers and be in the names of both according to their interest, iii) the situation if the charterer fails to effect the insurance and iv) the charters liability to effect insured repairs and how the insurance payment shall be distributed in case of a total loss. Both the heading and the text indicate that the clause regulates the bare-boat charterer’s duty to effect insurance, the duty to repair the vessel and how the settlement shall be in case of total loss. This must be seen in the context of the characteristic feature of bare-boat chartering that the bare-boat charterer takes possession of the vessel with the corresponding duties connected to maintenance and insurance.
The wording on co-insurance is very limited:
Such marine, war and P & I insurances shall be arranged by the Charterers to protect the interests of both the Owners and the Charterers and mortgagees (if any), and the Charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear.
The charterer has a duty “to protect the interests of both the Owners and the Charterers and mortgagees”. According to Norwegian law, the concept of “interest” in relation to insurance is developed i.a. to explain that the object of insurance is not the physical object that is insured, but the economic interest in this object.(1) Trine-Lise Wilhelmsen, Forsikring og regress ved salg av bolig, Tidsskrift for erstatningsrett, forsikringsrett og trygderett, no. 2-3, 2018, pp. 108-137 at p. 122, Selmer, p. 74 f.; Bull, p. 433; NOU 1987: 24 Lov om avtaler om skadeforsikring, ch. 6.2.1. In this sense, the concept of interest is also used to explain that different persons can possess different economic interests in the same property, for instance the distinction between the mortgagees interest in the value of the loan and the owners interest in the rest of the value of the same property.(2) Selmer, p. 75; Bull, p. 433. In relation to the charterer, the economic interest that is directly insured is his duty to effect repairs of the vessel as part of the bare-boat charter. The clause letter c also states that in case of total loss the insurance shall be distributed between “the Owners and the Charters according to their respective interests”. Such distribution of the insurance proceeds according to each co-insureds direct economic interest is according to Norwegian law principles for co-insurance.(3) Bull p. 520 ff, and for example NP Cl. 7-4 for co-insurance of mortgagees.
In addition to this, insurance/co-insurance means that the insurer may not raise a claim against an assured/co-insured for damage to the insured interest. In the Ocean Victory case, the bare-boat charterer B was the assured, and any wrongdoing on his part will be regulated by NP ch. 3. This means that his claim may be reduced if he caused the loss by gross negligence,(4) NP Cl. 3-33. but there is no basis for subrogation against him as the “main” assured. This is similar to the principle on “indirect liability insurance” for the co-insured, but as the owner A in this case has the position of co-insured, he has no need for such cover. It is also clear as stated by the majority that the inclusion of a safe port warranty in itself would not provide the insurer with a wider right of subrogation. This is as mentioned above in 2.5 clearly stated in the Commentary for co-insurance and must be even clearer in the case of the bare-boat charterer being the main assured.
On the other hand, the clauses say nothing about the relationship between the charterer and the owner, and does not say that the loss is channeled to the insurance company in a way that precludes the owner from claiming the charterer instead of the insurance company.
Nor does it follow that the charterers, instead of availing himself of the insurance, are precluded from pursuing a claim against a third party. According to Norwegian law, in cases where the loss is not channelled to the insurer according to tort act § 4-2 cf. § 4-3, the insurer is as mentioned above in section 2.5 free to make a subrogated claim against the person causing the loss. If the bare-boat charterer in the position of policy-holder in the Ocean Victory case is seen as the “main assured”, the insurer’s right of subrogation will follow directly from the wording of NP cl. 5-13. If the owner is seen as the main assured because he is entitled to the insurance compensation for total loss, the situation is more complicated. Here, the insurer first covers the owner. This would as a starting point give him a subrogated claim against the bare-boat charterer, but this claim is barred when the bare-boat charterer is co-insured. This means that the insurer by covering the assured’s loss, also covers the bare-boat charterer’s liability as indirect liability insurer. He may then take over the bare-boat charterers claim against the charterer, the charterer will sue the sub-charterer D and the loss will rest with him as the liable party.
The majority’s interpretation that co-insurance is meant to establish “an insurance funding” which prevents any claim between the parties appears to implicate a knock for knock agreement where all parties in the contractual chain are protected against a claim from any other contractual party. The bare-boat charter cl. 12 is interpreted to mean that the bare-boat charterer waive their liability against the owner. Since the owner has no claim against the bare-boat charterer, the bare-boat charterer will not have a claim against the time-charterer S, who in turn has no claim against the sub-charterer D who is directly liable for the loss. This means that both the bare-boat charterer’s liability against the owner and the bare-boat-charterer’s right to subrogation against the charterer is waived. The result is that cl. 12 also means a waiver of liability for the time-charterer S and the sub-charterer D, even if these parties are not parties to the bare-boat charterparty and not co-insured under the insurance scheme.
Such waiver of liability and right to subrogation is typical for a knock for knock agreement much used in the off-shore sector, but these agreements are carefully drafted to obtain the effect.(5) See Wilhelmsen 2013 pp. 87-95 and as examples of knock for knock regulation, Supplytime 2017 Time Charter for Offshore Service Vessels (Supplytime), art. 14 and 15, OLF Proposal “New conditions of contract for drilling and well services” no. 8, ”https://www.norskoljeoggass.no/contentassets/5cd867 185b5c47fc85 720d3d96a6f399/drilling-and-well-services.pdf, Norwegian Fabrication Contract 2015 (NF), art. 29-31, cf. https://www.norskindustri.no/dokumenter/leveringsbetingelser/nfntk-standardkontrakter/ In particular, there is extensive regulation of liability between the parties to the contract, and to include other parties in the contractual structure, there is a complicated system of attribution of liability not only between the parties to the contract, but including parties to other contracts in the same projects. The court’s interpretation of cl. 12 implies that this carefully drafted system of liability and insurance is unnecessary and that the same effect could be obtained using a co-insurance scheme.
It is interesting to note the court’s reasoning that the co-insurance scheme “provide the fund for the cost of restoring and repairing the fire damage rather than … indulge in litigation with each other” (para 143). This is also a main reason for establishing a knock for knock system.(6) Bull p. 353, Kaasen p. 766, Wilhelmsen 2013 pp. 95-96. However, such argument has not been used to explain co-insurance of third parties. The rationale here is mainly that it is convenient that one insurance capture the different economic interests in the same asset or entity instead of each party having to insure their own economic interest. This is efficient from a transaction cost perspective, but is has never been implied that such an instrument will create a full liability regulation between the contractual parties.
A strong argument against the court’s interpretation is also that it results in an unwarranted gain for the sub-charterer that is not co-insured. This sub-charterer has presumably not paid any part of the insurance premium for the co-insurance scheme and thus can have no legitimate expectation to be protected by the insurance. At the same time, the insurer will have to calculate the premium for such bare-boat arrangements to include protection of not co-insured sub-charterers. This means that the economic risk for the sub-charterer’s contractual breach is attributed to the owner and bareboat charterer, which again can reduce the deterrence effect of the liability system. A main argument against the knock for knock principle is that it undermines the deterrence effect of liability. But with a full knock for knock regulation all parties are familiar with the regulation and it must be presumed that the contractual attribution of risk for damage is fairly attributed between the parties.(7) See on the deterrence effect and the knock for knock principle, Wilhelmsen 2013 pp. 98-101. This was presumably not the situation in the Ocean Victory case.