The “Renos” – the Supreme Court rules that SCOPIC charges are not to be taken into account in calculating a constructive total loss
There were two issues for the Supreme Court to decide in the Renos. The first was whether, under section 60(2)(ii) of the Marine Insurance Act 1906 (“the Act”), the “cost of repairing the damage” to the vessel in the computation of a constructive total loss (CTL) included expenditure already incurred before the notice of abandonment was served. The second was whether the relevant costs included charges payable to salvors under SCOPIC.
Unsurprisingly, the Supreme Court ruled on the first issue that it did not make any difference when the costs were incurred; the damaged referred to in the Act was the “entire damage arising from the casualty from the moment that it happens.” The costs which were to be taken into account, in determining whether the vessel was a constructive total loss, included “all the reasonable costs of salving and safeguarding the “Renos” from the time of the casualty as well as the prospective cost of repairing her.” The fact that these costs were incurred before the notice of abandonment was served did not reduce them and they were to be taken into account for the purposes of determining whether there was a CTL.
On the second issue the Supreme Court ruled, overturning the first instance and Court of Appeal judgments, that SCOPIC charges were not part of the relevant costs for the purposes of s60(2)(ii). This is because the objective purpose of SCOPIC charges is environmental protection. Where preliminary steps have been included in “the cost of repairing the damage” their common feature is that their objective purpose is to enable the vessel to be repaired. This is generally true of charges such as salvage, temporary repairs and towage which are preliminary to permanent repairs. Environmental protection is a distinct interest of the shipowner, who wishes to avoid liability for environmental damage, and has nothing to do with the possibility of repairing the vessel. It is not part of the measure of damage to the ship. Therefore, SCOPIC charges do not count when assessing a CTL and do not fall within “the cost of repairing the damage” because their purpose is “unconnected with damage to the hull or its hypothetical reinstatement”.
Very often in cases where SCOPIC is invoked under LOF, the values of ship and cargo, if any, are low. Where it is anticipated that there will be little or no salved fund the vessel may already be, in effect, a CTL, hence the incentive for salvors to invoke SCOPIC in order to get paid. However, in the occasional case where the cost of salvage and repairs may not themselves exceed the insured value the liability for SCOPIC costs potentially might tip the balance, if allowed, as in the Renos case. It is of course only right and fair that SCOPIC expenditure payable under a P&I policy should not be counted and allowed together with other costs that are covered by the vessel’s hull and machinery underwriters.
In practice salvors invoke SCOPIC not to save the environment, but to get paid. However, the reason why the International Group of P&I Clubs agreed to underwrite SCOPIC expenditure was to incentivise salvors to intervene or continue to intervene, the alternative being that the vessel and any cargo would end up abandoned with consequent potential threat to the environment. P&I Clubs insure for pollution and wreck removal risks and therefore, in principle, their Members’ financial interests are protected when SCOPIC is invoked leading to a successful salvage. This decision restores a fair balance between these stakeholders and should be welcomed by the hull and machinery market.
14 July 2019