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It is well established under most legal regimes that, in case there has been a both-to-blame collision, the settlement between the vessels shall be based on the “single liability” principle. When the shipowners turn to their insurers providing cover for collision liability, the settlement will almost equally certainly be based on “cross liability”. But what if one of the vessels can limit liability?

Introduction
Following a “both-to-blame” collision, the applicable principles are well settled and relatively simple, in that settlement between the vessels shall be based on “single liability”, whilst the settlements between the shipowners and their respective insurers are carried out based on “cross liability”. However, in case either of the vessels is entitled to limit liability, some sets of hull and machinery insurance conditions, notably the various English conditions, deviate from the general principle of applying “cross liability” and provide that the “single liability” principle is to be applied. The reason is, apparently, that it is thought not to be possible to carry out a “cross liability” settlement in cases involving limitation of liability. The Norwegian Marine Insurance Plan of 1996 (NMIP) on the other hand establishes that the “cross liability” principle shall be applied in all cases.1

Basic principles
In a single liability settlement between two colliding vessels, each vessel is liable for its share of the total amount of losses suffered by both vessels, according to its degree of fault. For instance, if both vessels are equally to blame, and vessel A and B have suffered losses of USD 400 and USD 1,000 respectively, each vessel should carry 50 per cent of the total amount of loss, i.e., USD 700 each. To achieve the necessary balance, vessel A has to pay the difference between its own loss (USD 400) and the USD 700 they ultimately should bear, i.e., (USD 700 – USD 400) USD 300 is payable by A to B. There is thus only one (“single”) liability payable between the parties.

Under the cross liability principle, each vessel is liable according to its degree of fault for the losses suffered by the other vessel, and consequently there will be two liabilities. For example, vessel A is liable for 50 per cent of B’s losses (equalling USD 500), and vessel B is liable for 50 per cent of A’s losses (equalling USD 200).

Perhaps not surprisingly, as between the two vessels the end result will be the same whichever principle is applied.

According to the law of the major shipping nations, the shipowner has the right to limit liability in a number of cases where his vessel has caused loss to a third party. National legislation is often based on the Convention on Limitation of Liability for Maritime Claims (LLMC), 1976, and it is made clear that the shipowner can only limit his liability on the balance after claim and counter-claim have been set off against each other, i.e., on the “single” liability,2 as it would not make sense to allow limitation of a vessel’s gross liability before set-off of the vessel’s own claim. One could then end in a situation where both vessels could limit liability, in which case the largest vessel (with the highest global limitation) would always be on the paying side irrespective of the extent of damage/loss suffered by each vessel.

1  NMIP § 4-14.
2  LLMC Article 5.

Why is it necessary to apply cross liability in the internal settlement between the assured and his insurers?
As shown above, it does not really matter whether the settlement between the vessels is based on single or cross liability, as the end result will be the same.

On the other hand, when the shipowner turns to his various insurers, the losses suffered will normally consist of insured and uninsured losses and the liabilities towards the other vessel may be covered by hull and machinery or P&I, depending on the nature of the other vessel’s claim. It is therefore necessary to “open up” the single settlement between the vessels in order to place the liabilities and recoveries where they properly belong. A simple example may illustrate:

Following a collision between X and Y, vessel X suffers (insured) physical damage of USD 500 and (uninsured) loss of use of USD 500. Vessel Y suffers no damage other than a few paint scratches at no cost. Blame is apportioned equally, which will result in vessel Y paying 50 per cent of X’s losses, i.e., a total payment of USD 500; the hull and machinery insurer receives USD 250 as recovery for physical damage and the assured receives USD 250 as recovery for loss of use. If vessel Y also suffers damage/losses of USD 1000, there will be no payment between the vessels, as their respective damage/losses reflect their share of blame. Assuming that any collision liability falling on X is covered by its P&I insurer, if the settlement between X and its insurers had been based on single liability, there would be no recovery nor any liability, as there was no payment effected between the vessels. But from X’s perspective, why should the (arbitrary) amount of Y’s losses have any impact on X‘s recovery of its own losses? And why should the P&I insurer covering collision liability benefit from the (equally arbitrary) amount of losses on its own vessel? Clearly, therefore, the internal settlement between the shipowner and his insurers must be based on cross liability. Therefore, in the latter scenario, although there is no payment between the vessels, X’s P&I insurer must pay 50 per cent of Y’s damage/losses or USD 500, which is credited to X and the hull and machinery insurer as a recovery of USD 250 each (i.e., X’s recoveries will not be influenced by Y’s losses).

The above principles are subscribed to by all markets, provided there is no limitation of liability on either side. However, cross liability should be applied also in case of limitation, in line with the Norwegian approach. The question of whether that is possible to do has been well documented on several occasions and should be undisputed,3 although certain English authoritative text books have suggested that it is impracticable. The clue is that the general principle of application of cross liability is “modified” in the last sentence of NMIP § 4-14, which provides that “If the limitation is applied to the balance between the liabilities of the assured and the injured party, the largest calculated gross liability shall be reduced by the same amount by which the balance has been reduced”. How this may work in practice is perhaps best shown by the use of examples comparing the Norwegian and English insurance conditions where limitation comes into play. The examples are adapted to highlight the differences in the end result for the insurers and the insured.

3  See for instance the article published in 1961 (AfS 4.458) by Prof. Sjur Brækhus of the Scandinavian Institute for Maritime Law, giving a thorough theoretical analysis of the issues. See also Wilmot, “Who has got his cross liabilities crossed?” in LMCLQ 1989, p. 450-464.

Examples
One could have written hundreds of pages about single and cross liability, still the principles might be hard to grasp in the absence of examples. Therefore, some of the following examples may help to illustrate how the different insurance conditions work in practice.

Assume a collision between A and B, and their losses being as follows:

 Vessel A:
Hull damage
USD 2,600,000
  Loss of earnings (40 days @ 35,000)USD 1,400,000
  A’s losses claimed against BUSD 4,000,000
    
  Vessel B:
Hull damage
USD 4,000,000
 Loss of earnings (50 days @ 40,000)USD 2,000,000
  A’s losses claimed against BUSD 6,000,000
    
 Total amount of losses, both vessels USD 10,000,000
    
 
Division of blame 75/25 in B’s favour.
 

Example 1a
A’s global limitation amount is USD 3.51 million.

Both vessels are insured under ITCH 1/10/83 (including three-fourths RDC), with clause 12 deductibles in the amount of USD 200,000.

Vessel A is insured for 60 days loss of hire in excess of 14 deductible days (based on NMIP). Daily insured amount is USD 35,000.

Settlements:
i) Settlement between the parties (single liability):

 A to bear 75 per cent of total losses of USD 10 millionUSD 7,500,000
 Less own damages USD 4,000,000
 Balance payable by AUSD 3,500,000
 A’s liability can not be limited, being slightly below the global limitation.


ii) Insurance settlement for vessel A:

  

Loss of hire
insurer

P&IHull and
machinery
Shipowners
       
 Damage to ship  2,600,000  
 

Loss of earnings (deductible charged to the assured)

910,000  490,000
 

Settlement with B (cross liability basis): Liability, 75 per cent of B’s losses

 1,125,0003,375,000  
 

Recovery, 25 per cent of own losses

-227,500 -650,000-122,500
 

Less deductible

  -200,000200,000
 Total 682,5001,125,0005,125,000
567,500

Comments:
It will be noted that the total amount recoverable from hull and machinery and P&I insurers is USD 6,250,000 and uninsured losses after recovery are USD 567,500. Any deductibles under the P&I policy have not been taken into account.

Example 1b
Assumptions as above, but the hull and machinery policies are now based on NMIP 1996 (including four-fourths RDC), with particular average deductible in the amount of USD 200,000. It has been agreed that no separate deductible is applicable for collision liability in case the particular average deductible is exhausted.

Settlements:
i) The settlement between the parties will of course be equal to that shown under 1a
above.

ii) The insurance settlement (based on the NMIP) will be as follows:

  Loss of hire insurer

Hull and machinery

Shipowners
  Damage to ship 2,600,000  
 Loss of earnings (deductible charged to the assured)910,000 490,000
 Less particular average deductible  -200,000200,000
 Sub-total910,0002,400,000690,000
 Settlement with B (cross liability basis): Liability, 75 per cent of B’s losses  4,500,000  
 Recovery, 25 per cent of own losses-227,500-600,000-172,500
 Total 682,5006,300,000517,500


Comments:
It will be noted that the settlements are by and large equal to example 1a, as both settlements are based on the cross liability principle. However, the observant reader will note that the total payment from hull and machinery insurers (covering four-fourths RDC), which must be compared with the total payments from hull and machinery and P&I under 1a above (covering three-fourths and one-fourth RDC respectively), is now USD 6.3 million, i.e., USD 50,000 more than under the English approach. The reason is that under the NMIP the assured is better off as he is entitled to a proportional recovery of the particular average deductible borne4 (i.e., 25 per cent of USD 200,000), whilst under ITCH 1/10/83 in principle the assured will have to bear his full deductible until the insurer has recovered all of his losses.5,6

4  NMIP § 5-13, 2nd sub-paragraph.
5  ITCH (1/10/83) Clause 12.3.
6  It can however be mentioned that the recent International Hull Clauses (1/11/03) have adopted the Norwegian approach in this respect.

Limitation
So far so good, and the small difference in the examples above is something that can hardly be criticised to any extent, although the NMIP produces a better solution for the assured. The important issue, however, is that both regimes provide for a cross liability settlement in the internal settlement between the assured and his insurers.

Let us now look at the position where the liability of A is subject to global limitation.

Example 2a
Assumptions as 1a above (based on ITCH 1/10/83), but the global limitation amount is
USD 3,499,000.

Settlements:
i) Settlement between the parties (single liability):

 A to bear 75 per cent of total losses of USD 10 millionUSD 7,500,000
  Less own damagesUSD 4,000,000
   
 BalanceUSD 3,500,000
   
 Limited toUSD 3,499,000
   
 which is the amount actually paid by A to B. 

ii) Insurance settlement for vessel A, based on ITCH 1/10/83 (which is now to be based on single liability as one of the vessels can limit liability):7

7  ITCH (1/10/83) Clause 8.2.1.

 

  Loss of hire
insurer
P&I Hull and machinery Shipowners
 Damage to ship  2,600,000 
  Loss of earnings (deductible charged to the assured) 910,000  490,000
  Settlement with B
Liability, limitation fund (3,499,000)
 874,7502,624,250  
  Less deductible   -200,000200,000
      
 Total910,000874,7505,024,250 690,000

Comments:
It will now be noted that the combined payment by P&I and hull and machinery insurers is only USD 5,899,000. Under 1a above it was USD 6,250,000. A reduction of liability between the parties of just USD 1,000 has led to a reduction of claims against hull and machinery and P&I insurers of USD 351,000. The “shortfall” from hull and machinery and P&I insurers is now to be borne by the assured (USD 122,500) and their loss of hire insurers (USD 227,500), who will not receive any recovery as they would have under the cross liability basis. A simple and crucial question for the assured to ask himself is: why should he have to “waive” his recovery of USD 122,500 allowed under example 1a) for the simple reason that the liability between the vessels has been limited and reduced by a few dollars? And if loss of hire was uninsured (as is quite common), the assured would have to pick up the entire difference of USD 351,000 himself. In fact, theoretically, the assured would be much better off if he did not limit his liability and paid the USD 3.5 million in full, although as against his insurers he will probably have a duty to do plead limitation.

Example 2b
Assumptions as 1b above (based on NMIP), with global limitation as in 2a (USD 3,499,000).

Settlements:
i) The settlement between the parties will of course be equal to that shown under 2a above.
ii) The insurance settlement (based on the NMIP) will be as follows:

   Loss of hire
insurer
Hull and
machinery
Shipowners
 Damage to ship  2,600,000 
 Loss of earnings (deductible charged to the assured) 910,000 490,000
 Less particular average deductible  -200,000200,000
 Sub-total 910,000 2,400,000690,000
 Settlement with B (cross liability basis): Liability, 75 per cent of B’s losses 4,500,000    
 Less reduction in balance between the parties due to limitation (see last sentence of NMIP § 4-14) -1,000    
 Sub-total4,499,000 4,499,000 
 Recovery, 25 per cent of own losses -227,500-600,000-172,500
 Total  682,5006,299,000517,500

Comments:
The only difference from example 1b (NMIP without limitation) is that the hull and machinery insurers’ exposure is reduced by the same amount as the reduction in liability to the other vessel, i.e., there is a sensible transition between situations with limitation and with no limitation. Otherwise it is apparent that the cover from hull and machinery insurers (based on NMIP) is USD 400,000 higher than the corresponding cover from hull and machinery and P&I insurers under example 2a.

Example 3a
For illustration purposes, one may also examine the insurance settlement for vessel B, based on the scenario where A can limit liability to USD 3,499,000, with hull and machinery insurance on ITCH 1/10/83 terms and no loss of hire insurance taken out.

Settlements:
i) Settlement between the parties will be as detailed under 2a, i.e., B receives USD 3,499,000 from A.
ii) Insurance settlement for B (based on ITCH 1/10/83):

   Hull and machineryShipowners
 Damage to ship 4,000,000 
 Loss of earnings 2,000,000
 Settlement with B (single liability basis): Recovery, limitation fund (3,499,000)-2,332,667-1,166,333
 Less deductible-200,000200,000
 Total1,467,3331,033,667

Comments:
As the settlement is to be based on single liability, the P&I insurer is not exposed at all, there is only a recovery from vessel A. Similarly, there is no liability payable under the RDC clause in the hull and machinery policy.

Example 3b
Assumptions as per example 3a, but hull and machinery insurance is based on NMIP (as in 1b).

Settlements:
i) Settlement between the parties as above, i.e., B receives USD 3,499,000 from A.
ii) Insurance settlement for B (based on NMIP):

 

   Hull and machineryShipowners
 Damage to ship  4,000,000  
 Loss of earnings  2,000,000
 Less particular average deductible -200,000200,000
 Sub-total 3,800,0002,200,000
 

Settlement with B (cross liability basis): Liability, 25 per cent of A’s losses

 1,000,000 
 

Recovery, 75 per cent of own losses

-4,500,000   
  Less reduction in balance between the parties due to limitation (see last sentence of NMIP § 4-14)1,000   
 Sub-total-4,499,000   
  Apportioned over own claims (3.8 m and 2.2 m)   -2,849,367-1,649,633
 Total  1,950,633550,367

Comments:
As will be noted, the claim under the NMIP is USD 483,300 (1,950,633 less 1,467,333) higher compared to the cover afforded by the ITCH 1/10/83, which all goes into the assured’s pockets.

Concluding remarks
The above collision scenario is fairly simple and straightforward, but it should demonstrate that it is possible to effect a cross liability settlement even where one of the vessels can limit liability, by application of the principle laid down in the last sentence of NMIP § 4-14. Thus, in the NMIP examples 2b and 3b above, the reduction of (single) liability from USD 3,500,000 to 3,499,000 (i.e., reduction of USD 1,000) is applied to the largest gross liability which is USD 4,500,000.

Under the English approach,8 as soon as one of the vessels can limit liability, the liability fully insured is in practice set off against certain uninsured losses. And as shown particularly in the comparison of examples 1a and 2a, this results in a discontinuity of the parties’ position which can be hardly justified by anyone.

It is evident that the English approach in most, if not all, cases will be disadvantageous to the assured, and this is one of the factors that the assured should take into account when choosing insurance conditions. It will also be disadvantageous to the loss of hire insurers, as it can not do anything but reduce their recovery prospects. On the other hand it will always work to the advantage of P&I insurers. The hull and machinery insurer can derive both advantages and disadvantages from the English approach, although it will normally be an advantage, at least for hull and machinery insurers covering four-fourths RDC.

The Norwegian approach laid down in the NMIP, which gives a fair and reasonable result and places the recoveries and liabilities where they properly belong, has been successfully used for more than 40 years. Other markets are still welcome to join.

8 It can be mentioned that the American Institute Hull Clauses (June 1977) contain provisions similar to the ITCH (1/10/83), see lines 167-170.

Any comments to this article can be e-mailed to the Gard News Editor.

Gard News is published quarterly by Gard AS, Arendal, Norway.