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Rule 84 Recoveries from third parties

1 When the Member has a right of recourse against a third party for any liability, loss, cost or expense covered by the Association, the Association shall be subrogated to the Member’s right of recourse upon payment by the Association to the Member in respect of the liability, loss, cost or expense.

2 Where the Association has made a payment in respect of any liability, loss, cost or expense to or on behalf of a Member, the whole of any recovery from a third party in respect of that liability, loss, cost or expense shall be credited and paid to the Association up to an amount corresponding to the sum paid by the Association together with any interest element on that sum comprised in the recovery, provided however, that

where because of a deductible in his terms of entry the Member has contributed towards a liability, loss, cost or expense any such interest element shall be apportioned between the Member and the Association taking into account the payments made by each and the dates on which those payments were made; and

b the Association shall retain the whole amount of any award of costs in respect of its own handling of any case, and

c in respect of a Defence entry, any recovery from a third party in respect of legal and other costs or expenses (the ”Recovery”) shall be applied as follows and in the following order:

i first, if and to the extent a maximum deductible is agreed, the Recovery shall be credited and paid to the Association up to an amount corresponding to the sum of legal and other costs paid by the Association, in excess of the Member’s maximum deductible, together with any interest element on that sum comprised in the Recovery.

ii secondly, if and to the extent the Association only has agreed to cover an agreed percentage of legal and other costs or expenses incurred by the Member, the Association shall be credited and paid a proportion of the Recovery corresponding to the percentage of legal and other costs and expenses the Association has agreed to cover pursuant to these Rules and the terms of entry agreed.

iii finally when the requirements in (i) and (ii) above have been satisfied the Recovery shall be applied against the Member’s minimum deductible.

3 Subject to Rule 84.2, all monies recovered for a Member with Defence cover shall be paid over to the Member, except that the Association may deduct from such monies and retain any amount due to the Association from the Member.

4 Where a Member settles or compromises a claim within its Defence cover for a lump sum which includes costs or without making provision as to costs, the Association shall determine what part of that lump sum shall be deemed attributable to costs.

 

Guidance

The Member may have a right of recourse against a third party for a liability, loss, cost or expense that is covered by the Association. Such right of recourse can arise under a contract between the Member and the third party such as, for example, the right that arises as result of a clause in a time charterparty that obliges the charterer to indemnify the shipowner for any liability that he incurs to cargo receivers as a result of the inadequate cargo stowage that has been performed by the charterers’ servants or agents. Alternatively, the right of recourse may be founded in statute or on common law principles such as bailment or tort. 

If the Member has rights or potential rights of recourse against a third party, he is obliged under the Rules to take, and to continue to take, reasonable steps to preserve those rights, in order to protect the interests of the Association,1 e.g. by ensuring that his recourse claim does not become time-barred or prejudiced in any way by his acts or omissions. However, the Member does not have any obligation to pursue a claim against a third party to its conclusion before he is entitled to compensation from the Association. 

Rule 84 regulates the rights and obligations of the Association and the Member in relation to any rights that the Member may have to make recoveries from third parties. 

(A) …the Association shall be subrogated to the Member’s right of recourse upon payment by the Association… (Rule 84.1)
Rule 84.1 provides that, upon payment of compensation for the Member’s claim, the Association is subrogated to any rights of recourse that the Member may have against third parties, whether they be charterers, cargo owners, the owner of another ship, or any other third party. In such circumstances, the Association takes over from the Member the rights that the Member would have in respect of the recourse claim if that claim were to be pursued by the Member himself. However, the Association is subrogated only to the extent that it has compensated the Member. This is important to remember since the recourse claim that may be made against a third party may include items of claim that do not concern the Association, e.g. liabilities, losses etc., that are insured by other insurers and/or uninsured losses that are borne by the Member. 

For example, if the Ship has been struck by another ship whilst moored at a berth, and the collision has caused injury to members of the Ship’s Crew, damage to the Ship and the cancellation of a voyage charter, the Association will be subrogated to the Member’s rights of recourse against the other ship upon payment of compensation to the Member for the Crew injury claims. However, whilst the Association will be subrogated to whatever rights the Member has to bring a recourse action against the owners of the other ship for the personal injury claims, the Association will not be subrogated to that part of the recourse claim that is made in relation to the damage to the Ship, or for the financial losses that have been incurred by the Member as a result of the cancellation of the voyage charterparty. Therefore, the Member will retain the right to sue the owners of the other ship for the uninsured loss that has been caused by the cancellation of the charterparty, whilst the right of recourse for the claim for damage to the Ship lies with the hull underwriters who will be subrogated to such claims pursuant to the Hull Policies. 

(B) …the whole of any recovery from a third party…shall be credited and paid to the Association up to an amount…together with any interest… (Rule 84.2)
If the Association has compensated the Member for any particular liability, loss, cost or expense, the Association has the right to receive any and all monies that are recovered from a third party in respect of such liability, loss etc., up to, but not exceeding, the amount that has been paid by the Association. 

However, the right of recovery may be complicated if, for example, the claims that are brought against the other colliding ship in the example that is given in (A) were to be settled with the approval of the Association,2 on terms that 90 per cent of all claims is payable by the other ship. In such circumstances, the hull underwriters will receive 90 per cent of the claim to which they are subrogated under the Hull Policy, the Member will receive 90 per cent of the uninsured claims and the Association will receive 90 per cent of the personal injury claims to which they have been subrogated under the Rules. The Association is entitled to receive the full 90 per cent even if part of that recovery relates to a deductible that the Member has borne for the Crew injury claims since the Association is entitled to receive all of the recovery up to the amount of the compensation that it has paid to the Member before the Member has the right to retain funds in respect of the deductible. 

The recovery claim may also include interest for the time that has elapsed between the date on which the Member has incurred the liabilities, losses etc., and the date on which he has been able to obtain recovery from the third party. In such circumstances, the Association is entitled to receive its proportion of such interest since the Member has benefited, and the funds of the membership have been depleted, as a result of the fact that the Member has received compensation from the Association before recovering from the third party. Therefore, Rule 84.2 gives the Association the right to receive that proportion of such interest that the sum paid by the Association to the Member bears to the total principal sum that has been claimed by the Member from the third party. 

For example, if the Association were to pay USD 200,000 to the Member in compensation for the Crew injury claims in the example that is described in (A) above and the Member were to make a full recovery of all of the claims that are made against the owners of the other ship in the amount of USD 1 million plus a further USD 100,000 by way of interest, the Association is entitled to receive USD 20,000 in addition to the principal amount of USD 200,000, i.e. 20 per cent of the interest that has been recovered. Similarly, if the hull underwriters have compensated the Member for repair costs etc., resulting from the damage to the Ship in the amount of USD 500,000, they would be entitled to receive 50 per cent of the interest that was recovered, i.e. USD 50,000. 

(C) …where because of a deductible in his terms of entry the Member has contributed towards a liability…any such interest element shall be apportioned between the Member and the Association… (Rule 84.2.a)
Finally, if the Member has received compensation from the Association for the amount of the deductible that the Member has contributed to the settlement of the claim that has been brought against him, and a recovery claim is then brought against a third party to recover the sums that have been paid to the claimants, the Member is entitled to receive that proportion of the interest that is recovered from the third party in relation to such claim that the deductible bears to the total principal amount that has been recovered. 

For example, if, in the example described above in (B), the Association has paid the sum of USD 180,000 to the Member by way of compensation for the sums that have been paid by the Member to the claimants for Crew injuries, and the Member has also paid the sum of USD 20,000 to the claimants corresponding to the value of the deductible, that proportion of the interest that is recoverable from the third party (the owners of the other ship) for the Crew injuries claims (USD 20,000) is shared in the following proportions: USD 18,000 to the Association and USD 2,000 to the Member. 

(D) …the Association shall retain the whole amount of any award of costs in respect of its own handling of any case… (Rule 84.2.b)
Whereas the commentary in (B) relates to the principal amount that has been recovered from the third party by way of subrogation and the commentary in (C) relates to the interest that may have been recovered in addition to the principal amount, the commentary in (D) relates to the costs that may have been recovered from the third party. 

In some countries a successful claimant is entitled to receive all, or at least a proportion of its costs from the losing party in any litigation. In such circumstances, such recoverable costs are apportioned between the various parties that have an interest in the recovery claim. Therefore, in the example described in (A) above, the recoverable costs will be apportioned between the Association, the hull underwriters and the Member in accordance with the proportions that their respective claims bears to the total claim that is made against the third party, i.e. the owners of the other ship. Once the recoverable costs have been apportioned between the Association and the Member, on the one hand, and the other interested parties (the hull underwriters in the above example), on the other hand, it is necessary to apportion the balance of the recovered costs between the Association and the Member. In this regard, a distinction is drawn between the costs that the Association may have incurred in relation to P&I claims and the costs that it may have incurred in relation to Defence claims. 

In the case of the costs that have been incurred in relation to P&I claims, Rule 84.2.b permits the Association to retain out of any recovery that may be made from a third party the whole amount of the costs that have been incurred by the Association that have either been awarded by a court or tribunal or agreed to be payable as part of a settlement. Such costs include travelling costs that have been incurred by Association staff and legal and enquiry costs that have been incurred by the Association under Rules 44 and 45. 

However, the costs that have been recovered in relation to Defence claims are allocated between the Association and the Member in the manner described in (E) below. 

(E) In respect of a Defence Entry, any recovery from a third party in respect of legal and other costs or expenses (the ”Recovery”) shall be applied as follows and in the following order:

i first, if and to the extent a maximum deductible is agreed, the  Recovery shall be credited and paid to the Association up to an amount  corresponding to the sum of legal and other costs paid by the  Association, in excess of the Member’s maximum deductible, together  with any interest element on that sum comprised in the Recovery.
ii secondly, if and to the extent the Association only has agreed to cover  an agreed percentage of legal and other costs or expenses incurred by  the Member, the Association shall be credited and paid a proportion of  the Recovery corresponding to the percentage of legal and other costs  and expenses the Association has agreed to cover pursuant to these  Rules and the terms of entry agreed.
iii finally when the requirements in (i) and (ii) above have been satisfied the Recovery shall be applied against the Member’s minimum deductible.

The standard percentage deductible for defence entries is 25 per cent, subject to a minimum deductible of USD 5,000.3 Therefore, should the costs of a Defence claim exceed USD 5,000 any additional costs will be borne partly by the Member and partly by the Association. Consequently, should the Member be successful in recovering costs from a third party in relation to such claim, those costs are to be shared between the Member and the Association in proportion to the costs that each has paid prior to the recovery. However, if the recovered costs are less than the costs that have been incurred then such allocation is made in accordance with a system of priority that is based on the principle of the “last dollar paid the first recovered.” 

Therefore, if the Defence entry is subject not only to the standard percentage deductible of 25 per cent and a minimum deductible of USD 5,000 but also a maximum deductible of USD 1 million then the costs will be borne, and the recovery will be allocated, in the manner illustrated by the following diagram:

 

For example: 

Scenario 1

A Costs Incurred

If the total costs incurred are USD 1.5 million (i.e. in excess of the maximum deductible of USD 1 million) then:

1 The Member pays the first USD 5,000;
2 The Association pays the next USD 15,000;
3 The Member pays 25 per cent of the next USD 980,000 (i.e. USD 245,000) and the Association pays 75 per cent of that figure (i.e. USD 735,000), i.e. up to the maximum deductible of USD 1 million;
4 The Association pays the total costs in excess of the maximum deductible of USD1 million (i.e. USD 500,000);

Therefore, the Member pays a total of USD 250,000 and the Association pays a total of USD 1.25 million. 

B Costs Recovered

If USD 600,000 costs are recovered from the third party then:

a The Association recovers in full the USD 500,000 that it has paid in excess of the Member’s maximum deductible of USD 1 million; and

b 75 per cent of the balance of the recovered costs of USD 100,000 which fall within the bracket between USD 20,000 and the maximum deductible of USD 1 million

Therefore, The Association recovers USD 575,000 and the Member recovers USD 25,000 towards the total costs that they have paid.

 

Scenario 2

A Costs Incurred

If the total costs are USD 500,000 (i.e. less than the maximum deductible of USD 1 million) then:

1 The Member pays the first USD 5,000;

2 The Association pays the next USD 15,000;

3 The Member pays 25 per cent of the next USD 480,000 (i.e. USD 120,000) and the Association pays 75 per cent of that figure (i.e. USD 360,000);

Therefore, the Member pays a total of USD 125,000 and the Association pays a total of USD 375,000. 

B Costs Recovered

If USD 300,000 costs are recovered from the third party then:

The Association recovers 75 per cent of the balance of the recovered costs of USD 300,000 (i.e. USD 225,000) and the Member recovers 25 per cent of the recovered costs (i.e. USD 75,000) 

Therefore, if the Member’s Defence entry provides that the Member’s percentage deductible has an upper limit, the Association is entitled to retain out of any recovery any amounts that is has paid in excess of the Member’s deductible limit before the Member is entitled to recover its share of the balance. The balance is then shared in accordance with the percentage contribution that the Member and the Association has made. 

 

However, if the Defence entry is not subject to a maximum deductible then the costs will be borne, and the recovery will be allocated, in accordance with the percentage contribution that they have made in the manner illustrated by the following diagram:

 

 

For example: 

A Costs Incurred

If the total costs incurred are USD 1.5 million then:

1 The Member pays the first USD 5,000;

2 The Association pays the next USD 15,000;

3 The Member pays 25 per cent of the next USD 1,480,000 (i.e. USD 370,000) and the Association pays 75 per cent of that figure (i.e. USD 1,110,000);

Therefore, the Member pays a total of USD 375,000 and the Association pays a total of USD 1.125 million.

 

B Costs Recovered

If USD 600,000 costs are recovered from the third party then:

The Association recovers 75 per cent of such costs (i.e. USD 450,000) and the Member recovers 25 per cent (i.e. USD 150,000) towards the total costs that they have paid.

 

(F) Subject to Rule 84.2, all monies recovered for a Member with Defence cover shall be paid over to the Member, except that the Association may deduct from such monies and retain any amount due to the Association from the Member… (Rule 84.3)
Rule 84.3 gives the Association the right to set-off any amounts that are due from the Member to the Association against any and all monies that have been recovered for a Member in a case for which the Member has been afforded Defence cover. Such amounts include unpaid premiums, deductibles or any other sums but a deduction cannot be made unless the relevant amount is due and payable to the Association at the time that the monies are recovered for the Member. Furthermore, such monies include not only the costs and expenses that have been incurred in order to pursue or defend claims for the principal amount in dispute, but also the principal amount itself and any interest that has been paid thereon. 

For example, if the Association has recovered the sum of USD 125,000 from a charterer on the Member’s behalf in late June in respect of outstanding hire, at a time when a total of USD 25,000 is due to the Association from the Member by way of accrued deductibles, and at a time when the second instalment of the  Estimated Total Call for that Policy Year has been debited in the amount of USD 250,000, but has not yet fallen due for payment, the Association is entitled to deduct and retain the sum of USD 25,000 from the recovered amount of USD 125,000, but is not entitled to deduct the second instalment of the Estimated Total Call since this is not yet due for payment. Therefore, the Association must release the sum of USD 100,000 to the Member out of the total sum of USD 125,000 that has been recovered from the third party. 

(G) …the Association shall determine what part of that lump sum shall be deemed attributable to costs. (Rule 84.4)
If a Member has settled a claim for which he has received Defence cover for a lump sum, Rule 84.4 gives the Association the right to decide what proportion of such lump sum is to be deemed to represent the costs that should be credited in whole or in part to the Association. Rule 84.4 is intended to avoid arguments between the Member and the Association as to how such lump sums should be apportioned between the principal amount which, subject to Rule 84.3, is to be retained by the Member, and the costs that should be paid to the Association. The rationale for this provision is the fact that since the Association has afforded cover for legal costs, the Association has probably been instrumental in recovering that lump sum for the Member. 

However, if, on the other hand, the lump sum is payable not to, but by, the Member, Rule 84.4 gives the Association the right to determine what proportion of that amount is attributable to the third party’s claim that is payable by the Member, and what proportion is attributable to the third party’s recoverable costs that are payable by the Association under the Member’s Defence entry.