Maritime Insurance Law Part 25

Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series the basis and elements of Marine Insurance claims will be explored.

The Sue And Labour Clause (Mitigation Of Loss)

1. The Sue And Labour Clause

   The ‘sue and labour’ clause in the SG form of policy reads: ‘and in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and ship, etc., or any part thereof, without prejudice to this insurance; to the charges whereof we, the assurers, will contribute…’The modern counterpart of this clause may be found, for example, in clause 11 of the Institute Time Clauses – Hulls (1/11/95):

   ‘11.1 In case of any loss or misfortune it is the duty of the Assured and their servants and agents to take such measures as may be reasonable for the purpose of averting or minimising a loss which would be recoverable under this insurance.

   11.2…the Underwriters will contribute to charges properly and reasonably incurred by the Assured their servants or agents for such measures…’

   This formulation is also retained in clause 9 of the International Hull Clauses 2003. See also clause 16 of the Institute Cargo Clauses (A) (1/1/82) or (1/1/09) (often referred to as the ‘Bailee Clause’), because it imposes a wider duty than clause 11 of the Hulls Clauses in that it requires the assured to preserve rights of action against third parties.

   A sue and labour clause probably has two components, namely:

   1. A duty upon the assured to take reasonable steps to avert or minimise a loss.
   2. An obligation upon the insurer to indemnify the assured for the costs of such steps.The former component is unnecessary given that the duty is set out in section 78(4) MIA. The latter component, however, seems to be essential to the recovery of a ‘sue and labour’ expense by the assured from the insurer.

2. The Assured’s Entitlement Under The Sue And Labour Clause

   Under section 78(1)MIA, where a policy contains a sue and labour clause, ‘the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause…’

   Therefore, if the policy contains such a clause, the assured is entitled to recover from the insurer the expenses incurred pursuant to the clause (i.e. the expenses incurred for the purpose of minimising or averting a loss (provided that they are reasonably and properly incurred)).

   The insurer’s liability is supplementary to his or her liability under the insurance contract (i.e. the insurer will be liable for such expenses in addition to the limit of his or her liability under the insurance contract).

   Therefore:

   1. If the insurance contract limits the insurer’s liability (by way of a valuation or a ‘sum insured’ clause) to say US$2,000,000, any sue and labour expenses are recoverable notwithstanding that the insurer is also liable for the US$2,000,000 under the insurance contract.
   2. Similarly, sue and labour expenses may be incurred even though a policy limit has been reached, subject to the terms of the contract.
   3. It does not matter if the subject-matter of the insurance is warranted free from particular average (sections 76(2), 78(1) MIA or the insurer has paid a total loss (section 78(1) MIA). When does a right to recover ‘sue and labour’ expenses from the insurer arise (assuming the insurance contract contains a ‘sue and labour’ clause)? It appears that the following elements have to be proved.
   4. An insured peril was imminent or was operative. As to the meaning of an ‘imminent’ peril in the context of a clause similar to a sue and labour clause in a ‘construction all risks’ policy, the authority is the case of Gerling General Insurance Co v Canary Wharf Group plc.
   5. The assured or his or her agent has undertaken unusual and extraordinary steps or exertion or incurred unusual and extraordinary expense. The expense need not necessarily involve the outlay of money; a waiver of a claim which has a value in money will be sufficient.
   6. The purpose of the action or the expense must have been to preserve the insured property from loss by an insured peril. If the expense was incurred for the purpose of averting or minimizing a loss not covered by the policy, the expense is not recoverable under the sue and labour clause (section 78(3) MIA). (Where the expense is incurred for dual purposes, one of which is to prevent or minimise a loss covered by the policy.)
   7. The action or expense must have been reasonable. It does not have to be successful.
   8. If a loss had occurred by reason of the insured peril, the loss would have been indemnifiable under the insurance contract. It is not necessary for the assured to show that the loss would very probably have occurred; there need only be a risk that the insurer would have to bear the loss.

   If the purpose of the expense is to avoid a loss which is covered under the policy and a loss which is not covered under the policy, the assured will be entitled to recover a proportionate part of the expense (Cunard Steamship Co v Marten, Kuwait Airways Corp v Kuwait Insurance Co SAK; compare the position where the expense is incurred to protect insured property and lives not insured under the policy: Royal Boskalis Westminster NV v Mountain).

   As to the recovery of ransoms paid to pirates under a sue and labour clause, see Masefield AG v Amlin Corporate Member Ltd.

   However, if the expense has been incurred illegally, then the expense may not be recovered from the insurer.

   As to the recovery of mitigation expenses where there was a dual purpose behind such expenditure, in the case of non-marine insurance, see Ace European Group Ltd v Standard Life Assurance Ltd.

   As to the position where the expense is incurred to protect both insured property and lives not insured under the policy, see also Atlasnavios-Navegação Lda v Navigators Insurance Co Ltd.

   Costs may be recovered under the sue and labour clause of a marine policy even where such costs would not be recovered as partial loss or particular average claims under the same policy: Atlasnavios-Navegação Lda v Navigators Insurance Co Ltd.

   It may be that sue and labour costs may also constitute ‘cost of repair’ for the
   purpose of determining whether the insured vessel is a constructive total loss: Connect Shipping Inc v The Swedish Club (The Renos).

   If a loss had occurred by reason of the insured peril, the loss must have been indemnifiable under the insurance contract. As to the degree of possibility or probability of such loss occurring, see Integrated Container Service Inc v British Traders Insurance Co Ltd; see also Suez Fortune Investments Ltd v Talbot Underwriting Ltd.

   Sue and labour expenses may be incurred while the insured peril continues to operate, in other words until the vessel is in a place of safety (Suez Fortune Investments Ltd v Talbot Underwriting Ltd).

   The entitlement to recover sue and labour expenses appears to come to an end upon the issue of legal proceedings in respect of the relevant loss (Kuwait Airways Corp v Kuwait Insurance Co SAK; Atlasnavios-Navegação Lda v Navigators Insurance Co Ltd; Suez Fortune Investments Ltd v Talbot Underwriting Ltd.

3. The Assured’s Entitlement In The Absence Of A Sue And Labour Clause

   If there is no sue and labour clause, the question arises whether or not the assured can recover expenses incurred for the purpose of preserving or protecting the subject-matter insured from loss caused by an insured peril in any event or on any other grounds.

   The Courts are generally sceptical towards any attempt to recover mitigation expenses in the absence of a sue and labour clause (Seele Austria GmbH & Co v Tokio Marine Europe Insurance Ltd).

   However, there are five possible bases upon which there might be such a recovery:

   1. If the expense can be viewed as a loss resulting from the operation of the insured peril, the expense may be recovered under the policy, unless there is a break in the chain of causation (see Stanley v Western Insurance Co, The Diamond, Symington & Co v Union Insurance Society of Canton Ltd, Canada Rice Mills Ltd v Union Marine & General Insurance Co Ltd, compare Kuwait Airways Corp v Kuwait Insurance Co SAK). If the assured mistakenly believes that there is an imminent or operative peril, the assured will not be able to recover an indemnity for any expenses incurred thereby (Joseph Watson & Son Ltd v Firemen’s Fund Insurance Co of San Francisco).
   2. The expense may be recovered as ‘salvage charges’ within the meaning of section 65 MIA. Under that section, salvage charges are charges recoverable by a salvor under ‘maritime law’ independently of a contract and do not include charges incurred under a salvage contract, which are normally recoverable under the sue and labour clause (clause 10 of the Institute Time Clauses – Hulls (1/11/95), clause 10; International Hull Clauses 2003, clause 8).
   3. The expense may be recovered as a ‘general average loss’ pursuant to section 66(4) MIA. This depends on establishing a ‘general average act’ within the meaning of section 66(2) MIA (The Abt Rasha) (see clause 10 of the Institute Time Clauses – Hulls (1/11/95), clause 10; International Hull Clauses 2003, clause 8).
   4. If the expense is incurred as ‘particular charges’, which are defined under section 64(2) of the MIA as ‘expenses incurred by or on behalf of the assured for the safety or preservation of the subject-matter insured, other than general average and salvage charges’. The traditional view is that particular charges are not recoverable in the absence of a sue and labour clause. However, where the view is set out that particular charges may be recovered independently of a sue and labour clause provided that ‘it can plausibly be said that the need for the expenditure is the direct and natural result of the casualty and the MIA does not lay down a specific measure of indemnity which meets the case’. This view was referred to with apparent approval in the case of Royal Boskalis Westminster NV v Mountain.
   5. There is an argument that such expenses may be recovered as ‘mitigation damages’ or pursuant to an implied term. However, this is contrary to the decision of the Court of Appeal in Yorkshire Water v Sun Alliance & London Insurance Ltd. As regards the Bailee Clause, in The Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB, the Privy Council found that there was an implied term entitling the assured to be reimbursed in respect of the second limb of the Bailee Clause (however, in this case, there was also a sue and labour clause).

4. The Assured’s Duty To Mitigate: S.78(4)

   Section 78(4) MIA provides that ‘it is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss.’

   The following attributes of section 78(4) MIA should be noted:

   1. Although section 78(4) MIA speaks of a ‘duty’, this is in effect no more than a statement of the law that if the assured or his agents fail to take reasonable measures to avert or minimise a loss, that failure may be the proximate cause of the assured’s loss, in whole or in part, so that the assured would be unable to prove that that part of the loss is caused by an insured peril and would be prevented from recovering an indemnity in respect of such loss under the policy. It is comparable to the ‘duty to mitigate’ arising in respect of ordinary contracts. The failure to comply with this duty will not automatically constitute a defence to the claim (compare Currie & Co v The Bombay Native Insurance Co) or give rise to a claim for damages for breach of contract (The Gold Sky), unless the relevant duty can be said to arise by way of an express or implied promissory obligation (The Vasso– this case involved the ‘Bailee Clause’).
   2. The word ‘agents’ is a reference to ‘agents to sue and labour’, that is, agents who have been instructed by the assured to take steps to preserve or protect the property insured and/or who are agents by necessity. Such agents generally will include the master (Currie & Co v The Bombay Native Insurance Co, State of the Netherlands v Youell, contra The Gold Sky).
   3. The duty is one of reasonableness. The assured must act as a prudent uninsured (Integrated Container Service Inc v British Traders Insurance Co Ltd), taking into account the knowledge and experience of the assured or his or her agent (Stephen v Scottish Boatowners Mutual Insurance Association (The Talisman).
   4. There is a potential conflict between sections 55(2)(a) and 78(4) MIA in that the former provision provides that unreasonable conduct on the part of the master will not prevent the assured from recovering under the policy provided that the loss has been caused by an insured peril, whereas the latter provision provides that the assured’s claim may be prejudiced if the master as the assured’s agent fails to take reasonable steps to avert or minimise the damage. In State of the Netherlands v Youell, the Court of Appeal said that this conflict is unlikely to arise and noted that if the master’s negligence is an insured peril under the policy, the conflict would not arise.
   5. The duty applies ‘in all cases’, suggesting that it applies even when there is no sue and labour clause.
   6. However, there is a question whether or not the duty applies in respect of all circumstances which are insured or only those relating to a maritime adventure (section 3 MIA).

If you have any questions or require any additional information, please contact our lawyer that you usually deal with.

This article is written by our Principal Associate, Chakaravarthi