The text itself has not been amended in the 2013 Plan, but some amendments have been made to the Commentary.
This Clause contains the substantive main rules concerning the extent of the insurer’s liability for repair costs and supersedes the relevant Nordic Insurance Contracts Acts to the effect that the assured shall receive full compensation for his economic loss. According to sub-clause 1, the rules shall apply when the ship has sustained damage for which the insurer is liable without the rules relating to total loss “being applicable”. For the rules relating to total loss to become applicable, it is required that both the conditions for a total loss are met and that the rules are invoked. If the ship is declared a constructive total loss, but the assured has it repaired, the insurer’s liability will therefore in principle be regulated by the rules in this Chapter, cf., however, Cl. 12-9, which in this case limits the insurer’s liability for the costs of repairs.
That the ship has been “damaged” means first and foremost that it has sustained physical damage. However, pollution of the ship itself is also within the meaning of the term, so that the insurer will cover the costs of removal and cleaning.
The main rule is contained in the statement that the ship shall be “restored to the condition it was in prior to the occurrence of the damage”. This means first and foremost that the repairs shall satisfy the classification requirements. Certain qualifications must nevertheless be pointed out. On the one hand, the assured may not demand that the ship’s standard after repairs shall satisfy the classification requirements if it did not do so prior to the casualty. On the other hand, the insurer must cover the extra costs caused by the fact that special materials or designs beyond the requirements of the classification society had been used when building the ship, unless the insurer can limit his liability under sub-clause 4, second sentence, of the Clause.
There will invariably also be parts of the object insured that are not subject to classification, such as bunkers and lubricating oil (which as a starting point are part of the object insured as per Cl. 10-1). There is no doubt that the same principle applies that the insurer is liable to restore such articles to the condition they were in prior to the casualty. However, in case there e.g. is a recoverable machinery damage which also involves contamination of the lubricating oil, there is no automatic right on the assured to claim for a full replacement of the contaminated lubricating oil. Firstly, the question is which condition the lubricating oil was in prior to the damage, and e.g. in case the lubricating oil was contaminated prior to the casualty due to inadequate lubricating oil separation / maintenance, the supply of new lubricating oil will be excluded pursuant to Cl. 12-3. And secondly, even if the lubricating oil was in perfect condition prior to the casualty, there is also a possibility that contamination caused by a casualty can be “repaired” e.g. by proper lubricating oil separation. If so, it will follow that the claim in respect of the contaminated lubricating oil would be limited to the costs of separation (if any). The above principles will apply for lubricating oil already in use in the engine as well as lubricating oil in a storage tank, in line with practice under the previous Norwegian Plan.
That the ship, as a result of the damage and the repairs, has a lower market value than it had before the damage, e.g. because a buyer is afraid that there may be latent damage, is not in itself decisive if the repairs must be regarded as complete from a technical point of view and are approved by the classification society. See the judgment by the Oslo City Court of 30 January 1996, which is published on Cefor’s web page: https://cefor.no/clauses/nordic-plan/related-documents/. Accordingly, in such cases, there is no room for the rules in sub-clause 4.
A special question arises if the requirements of the classification society have been made stricter than the requirements in effect when the ship was built or at the time of earlier repairs. If the assured, independently of the casualty, would have had to replace the damaged part at a later point in time, he may not claim compensation for the costs of the increase in standard. However, if transitional rules would not have required him to make a replacement if the casualty had not taken place, he must be entitled to claim compensation for his entire costs. But if the replacement, etc. results in a “special advantage for the assured because the ship is strengthened or the equipment improved”, the assured will have to accept a deduction under sub-clause 3, cf. below.
The requirement that the ship be restored to the condition it was in prior to the occurrence of the damage cannot be taken quite literally. The assured must, to a large extent, accept that damaged parts are repaired and not replaced by new ones, even if this entails that the ship will not be restored to exactly the condition it was in before. An example of this is when damage to the crankshaft is repaired by grinding the crank pin to a size below standard, see also Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), p. 458. If the classification society accepts the repairs, the assured will not be entitled to compensation for a new crankshaft, unless he is able to establish that the repairs will result in depreciation in value. Moreover, a new part would often result in an increase in standard, to which the assured is not entitled, cf. sub-clause 3.
Use of un-original parts on ships is experienced from time to time, which in certain circumstances may reflect an acceptable level of care, see further below. In situations where there is recoverable damage to un-original parts of the ship, and the assured decides to replace them with original and more expensive parts, the insurer can limit liability to the costs of un-original part. This would be sufficient in order to restore the vessel to the condition she was in prior to the occurrence of damage. On the other hand, in case there is recoverable damage to original parts of the ship, the assured can claim the full costs of replacement with corresponding new original parts, even if cheaper and otherwise “acceptable” un-original parts may be available in the market.
The assured must also, to a certain extent, be content with used components when older parts are damaged, e.g. in case of damage to an auxiliary engine. However, he shall have the right to demand that the used component is clearly at least as good as the damaged one, and that the classification society approves the used part. In addition, it must normally be a requirement that the component is newly overhauled.
The use of machinery parts that have not been produced by the original machinery or equipment manufacturer creates a dilemma for the shipping industry. On the one hand safety considerations require that replacement parts should in all respects be equal to the original. On the other hand, insistence on the use of original parts from the original manufacturer gives that manufacturer a monopoly position which can all too easily be exploited. “Unoriginal” parts need not necessarily be sub-standard. They could have been produced under licence or have been subjected to some form of independent quality control. It is possible, especially in the case of less complex units, that the part is perfectly adequate even though it is strictly speaking a so called “un-original part” in the sense it has been produced without the approval of the original manufacturer and without any form of independent quality control. Competition in the production of spare parts can bring ship operators and their insurers the benefit of lower prices. The obvious danger is that lower prices might result in lower quality. Insurers have identified the use of cheap sub-standard pirate parts as the cause of a number of casualties. There are a number of potential insurance issues as discussed below.
Class approval required
If the installation of a replacement part should have been approved by class and the Assured has deliberately or negligently failed to ensure this but has used a sub-standard pirate part, then clearly the sanctions for breach of a safety regulation will apply, Cl. 3-25. Both the cost of repairing the pirate part and perhaps more significantly any consequential damage to other parts will not be covered.
If the installation of an unoriginal part, e.g. one manufactured under licence, has been approved by class then the rule in Cl. 12-4 will apply and damage to the part arising from an error in design or faulty material will be covered.
Class approval not required
If class approval of a replacement part is not required the ordinary rules apply. The use of a pirate part will not amount to a breach of a safety regulation so that the insurer will only be able to avoid liability, in part or in whole, if:
- the assured has deliberately installed an inferior part in order to save money,
- the use of the part amounts to gross negligence, or
- the part is damaged as a consequence of error in design or faulty material.
In addition, when applying the exclusion for ordinary wear and tear and ordinary corrosion, Cl. 12-3, one would take into account that cheap pirate parts are likely to become worn out more quickly than original parts.
Regardless of whether the repairs are carried out with used or new parts, it is a prerequisite that the part is obtainable within a reasonable period of time. The question as to what is “a reasonable period of time” must be decided on a case-to-case basis depending on the type of ship and the place of repairs. If the part cannot be obtained within a reasonable period of time, this means that there is a situation of “unrepairability”, and the insurer must cover new and/or more expensive parts to the extent that this is necessary. If the waiting time is not so long as to entail unrepairability, the use of new parts in order to save time may have to be regarded as a cost in order to expedite the repairs according to Cl. 12-8.
In situations where casualty repairs necessitate the purchase of special tools and such tools are kept on board, it has been customary in practice to cover 50% of the costs of the tools if such tools could not ordinarily be expected to be found on board. This practice should be maintained where new parts necessitate the purchase of new tools, or if the repairs require special tools that cannot be expected to be on board. On the other hand, the costs of tools which, according to good seamanship, should have been on board before the casualty should not be indemnified. The same must apply to the rental of such tools.
Decisive for the insurer’s liability are repair costs that have in actual fact been incurred, unless one of the special limitation rules applies. An advance approximate estimate under Cl. 12-10, sub-clause 3, will only affect the insurer’s liability if the repairs are not carried out and cannot be used to limit the insurer’s liability for the costs of repairs.
Foreign insurance conditions and YAR limit the liability to “reasonable cost of repairs”. Because of the wide international distribution of the Plan, the issue of whether a corresponding limitation should be incorporated in the Plan text was considered, but it was decided that this was not a very good idea. In the first place, discussions might arise concerning the interpretation of “reasonable cost of repairs”, in particular in relation to the identical formulation in the English conditions. It has been assumed that those conditions may, in certain cases, conceivably provide somewhat more extensive cover than the 1964 Plan, and it was not considered expedient to introduce a corresponding extension of the cover in the Plan. In the second place, such limitation may have an unreasonably adverse effect for the assured. If he has no option but to have the ship repaired at a repair yard which enjoys a monopoly at the location concerned, the invoice may, from an objective point of view, be unreasonably high in relation to the work carried out. The insurer should nevertheless cover the full cost of the repairs in such cases. In this and other cases, however, the insurer must be entitled to refuse to accept the invoice to a certain extent, e.g. if the yard has charged more for the recoverable casualty work than for maintenance work, or if the calculation of prices is in conflict with public price regulations in the country concerned. If in the latter case the assured does not succeed in having the invoice reduced through negotiations or litigation, the insurer must cover it in full, provided, however, that the assured’s conduct has been loyal in relation to the insurer. Generally accepted business standards suggest that the discussion concerning the amount of the cost of repairs be clarified with the insurer in advance by having the insurer’s surveyor participate in the negotiations with the repair yard and stating his opinion. If the assured negotiates and accepts the invoices for the recoverable repairs without inviting the surveyor to the negotiations, he has the burden of proving that the repairs were carried out in the most reasonable way possible. If the insurer is otherwise able to document that the owner has not made any effort to obtain the least expensive repairs possible, or has in some other way been disloyal to the insurer, it follows from general principles of contract law that the insurer will not have to pay the additional costs. Depending on the circumstances, the insurer will in such cases also be able to invoke the rules relating to fraud during the claims settlement.
The insurer’s liability covers not just the actual invoice from the repair yard, but also other expenses necessary to have the repairs carried out. These are expenses particularly associated with the repairs in question, as well as accessory expenses applicable to any and all repairs which must be apportioned as common expenses pursuant to Cl. 12-14 if non-recoverable work is carried out at the same time. According to general practice, the insurer is therefore liable for the bunkers required for testing the engines, costs of a trial run, oil used for “flushing”, and the crew’s overtime work in connection with their direct participation in the recoverable repairs.
Supply of electricity to a ship during repairs is usually made for several purposes. Firstly, the electric power that would have been consumed in running the ship regardless of the repairs is disallowed pursuant to Cl. 12-5 (a). However, any extra electric power consumed due to repair work being effected is allowed as a common repair expense as per Cl. 12-1. It is the assured who has the burden of proving the extent of loss, cf. Cl. 2-12, sub-clause 1.
The assessment must be based on the particular circumstances in each case. In practice, it is difficult to identify exactly how much of the consumption is related directly to the repairs. Due to this fact, the common practice, though not legally binding, is to allow a proportion of 50% of the total electricity consumption as a common repair expense. If obviously unreasonable, ref. the judgment of Gulating Court of Appeal of 17 October 2014, electric consumption may be apportioned differently. Electric consumption in a time period during which no repairs are effected (e.g. waiting time or the like), is not allowed as a common repair expense. It makes no difference whether electricity is purchased from a yard or if the vessel’s own auxiliary engines are run in order to produce the electric power.
Another category of costs necessary in order to carry out the repairs to the ship is the cleaning of tanks and, possibly, the removal and destruction of oil residue from the tanks. Costs in connection with the removal and destruction of contaminated bunkers, lubricating oil, etc. must also be covered, even though practice has here gone in the opposite direction. Removal and possible destruction of oil that must be regarded as part of the cargo are not covered, however, cf. Cl. 12-5 (b). Expenses of this nature are covered by the P&I insurer.
Also gas-freeing of gas tankers sailing in ballast which have retained a small quantity of gas in the tanks in order to cool them down must be regarded as necessary accessory expenses. In practice, it has been alleged that gas-freeing represents a loss of cargo and therefore falls outside the scope of the hull insurer’s liability. However, the correct approach must be to see this as a loss of a cooling agent. Given that the rule of the Plan is that the ship shall be restored to the same condition as it was in prior to the casualty, the missing cooling agent must be replaced. The same applies to additional expenses for cooling down the tanks after the repairs. On the other hand, the loss of gas carried as a cargo is not covered.
However, as regards a number of the accessory expenses, the insurer’s liability is regulated by special provisions, cf. Cl. 12-5 (a)-(c) and Cl. 12-13.
Another category of expenses that must be covered in addition to the actual repair invoice are expenses in connection with foreseeable consequences of docking and repairs, e.g. the removal, discarding and destruction of minor oil spills inside the dock. However, oil spills outside the dock must fall outside the hull cover. If the oil spill is of such an extent that it penetrates beyond the dock, it will normally be due to an accident or a misjudgement during the docking, which the P&I insurance must cover.
In the event of a risk of oil spill, the assured may receive an order from the port authorities to carry out temporary repairs of the ship. If the pollution risk is acute and immediate, the costs of such repairs must be covered by the P&I insurer as costs of measures to avert or minimise loss. In practice, however, there are examples of port authorities having demanded temporary repairs also in other cases, e.g. in connection with underwater welding of cracks out of fear of oil spill. If such temporary repairs are a condition for letting the ship into the port of repairs, it must be regarded as part of the costs of repairs under the hull insurance.
A difficult question is to the extent to which the insurer must cover expenses that must be regarded as a substitute for another loss which according to its nature had to be covered under the hull insurance, i.e. so-called “substituted expenses”. A starting proposition under the 1964 Plan was that this type of expense was not covered, unless there was a special authority, cf. also Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), p. 417. During the revision of the Plan, extended cover of such expenses was considered, but rejected. The content of the term “substituted expenses” is difficult to establish and, if basic cover of such expenses were allowed, the door would be opened to a discussion of a whole series of claims. If the insurer has to cover such expenses, this must be on the basis of an advance agreement between the parties, or the Special Conditions must provide a clear authority. The Plan itself contains a number of rules that explicitly preclude cover of such expenses, cf. e.g. Cl. 4-2, Cl. 4-12 and Cl. 12-5 (a).
Costs common to repairs that are recoverable and repairs that are not shall be apportioned according to Cl. 12-14. Access work is not a common expense to be apportioned under Cl. 12-14; it constitutes part of the actual repair work. If the access work has been necessary for the recoverable as well as the non-recoverable repairs, practice has, however, been to apportion all common access work on a 50/50 basis.
Sub-clause 2 maintains the traditional principle in hull insurance that the insurer does not cover damage unless the damage has been repaired. In the 2007 version, however, a general right to claim compensation has been introduced, cf. Cl. 12-2. The situation where the assured goes bankrupt before the invoice has been paid is referred to in the Commentary on Cl. 7-4, see also Brækhus/Rein: Håndbok i kaskoforsikring (Handbook of Hull Insurance), p. 326.
The provision in sub-clause 3 is in reality superfluous in view of sub-clause 1. The Committee has nevertheless decided to leave it. Deductions are subject to the condition that “the ship is strengthened or the equipment improved”, and that this has entailed “special advantages” for the assured. If, in connection with the repair work, the assured takes the initiative himself to have the ship strengthened or the equipment improved, it is obvious that he must bear these additional costs himself. The same must apply where a classification society issues a general recommendation that, concurrently with repairs, work to strengthen a specific type of vessel shall be carried out. However, the provision will also apply where orders are issued to carry out repairs in a specific manner which entails that the ship will be better than it was, e.g. where an order is given to replace a damaged iron propeller by a propeller made of bronze. A deduction is nevertheless always subject to the condition that the strengthening or the improvement has made the repairs more expensive.
The “special advantages” requirement indicates some specific benefit or gain. As a starting proposition, it is natural to assume that the assured will have obtained an advantage if there has been an increase in standard. It is nevertheless not sufficient to justify a deduction that the replacement of a worn part by a new part, generally speaking, represents an advantage to the owner. For instance, the insurer may not claim a deduction under sub-clause 3 where an entirely new engine following an engine breakdown replaces an older, but still functional, auxiliary engine. But a deduction must be made if a part is installed with higher performance or better quality than the old part, e.g. where a new engine has greater active power or lower fuel consumption than the old one. This nevertheless presupposes that an engine of the “old” quality is obtainable. If that is not the case, and the improvement is inevitable, no deduction shall be made, regardless of whether or not the assured is able to take advantage of the improvement.
It is not considered an “advantage” under sub-clause 3 that an error from earlier recoverable repairs is corrected in connection with the repairs of a casualty which is a result of the error, provided that the relevant part was approved by the classification society, cf. Cl. 12-4.
Sub-clause 4, first sentence was amended in the 2007 version. Under earlier versions, if it was impossible to repair the damage completely, but the ship could be made seaworthy and fit for its intended use by less extensive repairs, the insurer was only liable for the depreciation in value in addition to the repair costs. However, the rules regarding seaworthiness were removed from the Plan in the 2007 version. Accordingly, the wording “the ship can be made seaworthy” has been replaced by “the ship satisfies the requirements as regards technical and operational safety”, cf. in that respect the wording in Cl. 3-23.
If the repairs are feasible, but will be disproportionately expensive, the insurer has the right to limit his liability to the amount that less extensive repairs would cost, plus the depreciation in value, cf. sub-clause 4, second sentence. Typical situations where this provision may be applied is where the ship has sustained a dent in its keel, or where artistic decorations on board put in by the assured have been damaged. The situation is more doubtful when the bottom frame of the engine has been damaged and the choice is between welding it or replacing it. In such a situation it is hardly possibly to indicate a general solution.
It is only the insurer who can invoke the rule in sub-clause 4, second sentence. It may also be in the interest of the assured to make do with less extensive repairs, if complete repairs of the ship would result in a considerable loss of time for him, particularly if he is granted the right to claim compensation for the depreciation in value represented by the unrepaired damage. However, such a right for the assured entails a risk that claims for damages for a depreciation in value will be lodged very frequently, and these claims will be difficult to assess and might lead to the insurer being subjected to a great deal of pressure.
The fact that the assured has the ship restored to its prior condition at his own expense obviously does not mean that he is not entitled to claim separate compensation for the depreciation in value.
The claim for supplementary compensation arises when the repairs have been completed.
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