The Running Down Clause in Marine Insurance Contracts in Nigeria: an overview.

Chinenye Elekwachi

May, 2010

Contents

1.0. Abstract.........................................................................................................2

2.0. Introduction...................................................................................................2

3.0. Definition of the Term...................................................................................6

4.0. Three Quarter Collision Liability Loss: An appraisal....................................7

5.0. Risks excluded from the Running Down Clause..........................................10

6.0. Excess collision liability..............................................................................12

7.0. Conclusion...................................................................................................14

Works Cited.............................................................................................................15

1.0. Abstract

The Running Down Clause (RDC) in marine insurance, has generated a lot

of controversies when weighed against the backdrop of the general

principles of insurance in which the insured agrees to pay a premium and

the insurer agrees that, if certain losses or damage occur to certain

interests of the insured, the insurer will indemnify the insured. This work

will take the form of a critical overview of the complex nature of Marine

Insurance policy which may be in the form of Hull & Machinery (covering

Vessel loss), Total Loss Only (as against partial loss), ‘Voyage’ or ‘Time

Basis’ loss and the English law hull policy (RDC) which distributes liability

in the event of a loss, in a 3:1 ratio between the underwriters of a policy and

the ship owners club. Although this method of distribution may appear

clumsy at first glance, it may well be the only remedy available to a small

ship owner in the event of collision for indemnifying excess collision

liability.

2.0. Introduction

Accidents happen, sometimes as a result of man’s fault at other times as a

result of an Act of God.1 It happens in the air, land and of course the sea. 1 Act of God is a legal term for events outside of human control, such as sudden floods or other

natural disasters, for which no one can be held responsible. In the law of torts, an act of God may be

asserted as a type of intervening cause, the lack of which have avoided the cause or diminished the

result of liability (e.g., but for the earthquake, the old, poor constructed building would be standing).

However, foreseeable results of unforeseeable causes may still raise liability. For example, a bolt of

lightning strikes a ship carrying volatile compresses gas, resulting in the expected explosion. Liability

may be found if the carrier did not use reasonable care to protect against sparks- regardless of their

Atop the deep blue sea collisions often occur and as such in the field of

marine insurance there are rules regulating the avoidance of collisions at

sea- the so-called COLREGS.2 Although the regulations, presently in force,

were introduced in1972, they have a long history. They originate from

customary law and the first to put them in writing were the British in 1840.3

A discourse of the running down clause (RDC) or the three quarter collision

liability loss 4 in Marine insurance will necessarily entail a consideration

howbeit in passing of the general principles of insurance by way of an

introduction. The general principles of marine insurance are the same as

with other types of insurance in that there are two parties: the assured and

assurer (or carrier). The assured or insured agrees to pay a premium and

the insurer agrees that, if certain losses or damage occurs to certain

interests of the insured, the insurer will indemnify the insured. However,

the complex circumstances involved in sea voyages require very specific

arrangements for the provision of marine insurance. The fixing rates and

specific conditions, for example, require a vast knowledge of the nature of

vessels and cargos and of the conditions of navigation.

origins. See (Black, 1990)

2 Convention on the international Regulations for Preventing Collisions at Sea, 1972. The other

conventions include: convention for the unification of certain Rules of Law with respect to collisions

between vessels, 1910 and international Convention on the safety of Life at Sea, 1974.

3 (Schoenbaum, 2009)

4 The three quarter collision liability loss clause is also referred to as the Running Down Clause and

shall be used interchangeably throughout our discourse.

By virtue of Section 3 of the Marine Insurance Act5, ‘a contract of marine

insurance is a contract whereby the insurer undertakes to indemnify the

assured, in a manner and to the extent thereby agreed, against marine

losses, that is to say, the losses incident to marine adventure.’

Section 4(1) goes further to state that ‘a contract of marine insurance

may, by its express terms, or by usage of trade, be extended so as to protect

the assured against losses on inland waters or on any land risk which may

be incidental to any sea voyage.’

The Marine policy may cover the risks of a single voyage, or may cover the

risks of a certain period of time. Cargo is almost always insured for a single

voyage. Vessels are usually insured for certain duration of time, usually year

to year.

Typical of marine insurance is the principle that no contract of marine

insurance is valid unless the insured has an insurable interest in the subject

matter at the time of loss. The term insurable interest has been variously

defined. According to the English Marine Insurance Act of 1906,6 “every

5 Chapter 216 Laws of the Federal Republic of Nigeria 1990

6 See Section 7 of the Marine Insurance Act, Chapter 216 Laws of the Federal Republic of Nigeria

1990 which states as follows:

(1) ‘subject to the provisions of this Act every person has an insurable interested in a

marine adventure.

(2) in particular a person a person is interested in a marine adventure where he

stands in any legal or equitable relation to the adventure or to any insurable property

person has an insurable interest who is interested in a marine adventure. A

person is interested in a marine adventure where he stands in any legal or

equitable relation to the adventure or to any insurable property at risk

therein, in consequence of which he may benefit by the safety or due arrival

of insurable property, or may be prejudiced by its loss, or damage thereto,

or by the detention thereof, or may incur liability in respect thereof”.

Among the “perils of the seas”7 that are deemed to be covered under a

marine policy are the extraordinary action of the wind and waves, collision,

foundering, striking on rocks and icebergs. Not covered are ordinary wear

and tear and losses which can be anticipated as regular incidents of sea

carriage or navigation.

Typically, marine insurance is split between the vessels and cargo.

Insurance of the vessels is generally known as ‘Hull and Machinery’ (H&

M). A more restricted form of cover is ‘Total Loss Only’ (TLO), generally

at risk therein, in consequence of which he may benefit by the safety or due arrival of

insurable property, or may be prejudiced by its loss, or damage thereto, or by the

detention thereof, or may be prejudiced by its loss, or damage thereto, or by the

detention thereof, or may incur liability in respect thereof.’

7Section 5 (3) ibid states thus ‘for the purposes of this section, “maritime perils” means the perils

consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war

perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of prince and peoples,

jettisons, barratry, and any other perils, either of the like kind or which may be designated by the

policy.’

used as a reinsurance, which only covers the total loss of the vessel and not

partial loss.

Cover may be on either a ‘voyage’ or ‘time’ basis. The ‘voyage’ basis covers

transit between the ports set out in the policy; the ‘time’ basis covers a

period of time, typically one year, and is more common.

Hull policies, used to be quite specific as to the risks covered but modern

policies are written to cover most forms of liability. A “collision and running

down” clause is contained in the standard hull policy to cover liability

incurred for another vessel or structure, and sometimes even personal

injuries incurred. This means the policy covers against collision liability not

covered by the “collision and running down” clause, as well as against all

other liability exposure.

Under a marine policy a loss can be partial or total. Total losses can be

actual or constructive. Actual total loss can be defined as the situation in

which a ship or its goods can no longer arrive at their destination in specie.

Actual total loss can also be found where the goods are so damaged in the

course of the voyage that, while they still exist in specie at the time and can

be sold where they are, there is no reasonable possibility that they can be

transported to their destination without complete destruction or change.

Constructive total loss is distinguished from actual total loss whereas the

tender of abandonment is a prerequisite of a claim under constructive loss.8

8 See section 56- 64 ibid dealing with loss and abandonment on the meaning, similarities, differences

and implications of total and partial loss within the Nigerian context.

Also most marine insurance policies are “agreed value” policies which mean

that the insured and the underwriter have already set a value for the

insured vessels.9

Having armed ourselves howbeit perfunctorily with the general knowledge

of marine insurance we shall proceed to consider the Running Down Clause

clause critically.

3.0. Definition of the RDC

The Running Down Clause (RDC) has been defined as ‘a clause within a

marine policy which provides legal liability coverage if an insured collides

with another vessel.’10 This definition however is very broad and does not

quite do justice to the term.

A more apt definition is perhaps that of it being a ‘clause in a marine

insurance policy binding the underwriters to indemnify the insured in

respect of any damages in tort he may be liable for as a result of his ship

colliding with another.’11

The term has also been defined as ‘coverage in liability insurance for a ship

owner in the event of collision with another ship. A running down clause,

9 See generally (J., Birds’ Modern insurance Law, 2004) (Donaldson, 1990)

10 (1004)

11 (Law Jrank.org)

when added to basic hull marine insurance, protects against liability for lost

income to the other vessel’s owner during the time it cannot be used.’12

At common law, such a policy covers only the insured’s physical losses. The

clause is customarily restricted to three quarters of the damages in

question. When two vessels collide, the damage done to each is added

together and treated as a common loss. It is divided between insurers

according to the proportion of blame attributable to each ship or, if this

cannot be determined, then it is divided between the insurers equally.13

4.0. The Running Down Clause: An appraisal

Section 91(3) of the Marine Insurance Act, 2004 posits that ‘the rules of

the common law of England, to the purposes of this Act, be in force in all

State of Nigeria; and save in so far as they are inconsistent with the express

provisions of this Act, shall continue to apply to contracts of marine

insurance.’

Subsection (4) goes on to assert that ‘to give effect to subsection (3) of

this section in any state, the rule of the common law shall where necessary

be deemed to have been duly revived; and for the removal of doubts, and

subject to the provisions of this subsection, the usages of the law merchant

in England shall be deemed to be part of the common law and be construed

with and form part of this Act.’

12 (allbusiness.com)

13 (Law Jrank.org)

Thus our discussion will be predicated on the common law rules as well.

The English form of hull policy requires the ship’s hull underwriter to pay

three- fourths only of the liability of the insured ship in respect of loss or

damage to another ship or her cargo as a result of the collision. The

remaining one- fourth of such liability is insured by the ship owners club.14

This one- fourth usually makes the club the largest single insurance

interest, and in practice the managers of the club will usually be asked by

the hull underwriters to handle the issue of collision liability with the other

ship and her cargo on behalf of all the underwriting interests. It is also

usual for club concerned to give, on behalf of the insured ship- owner, any

necessary guarantees to the other ship and her cargo, the club taking

appropriate counter- security from the insured ship- owner and also from

the hull underwriters (or brokers) to the extent of their respective interests.

The purpose of the three quarter collision liability clause is to provide a

ship- owner with some insurance cover for third party liability on the event

of a collision. It is necessary to note that two distinct type of loss may arise

as a result of collision, first it is to be recalled that the damage referred by

the insured vessel is recoverable as a loss by ‘perils of the seas’ as defined

in Rules 7 of the Rules of construction15 with the celebrated case of Wilson

14 Various ship- owners clubs or Protection & Indemnity clubs exist the world over.

15 See clause 7 of the schedule to the Marine Insurance Act 2004 titled ‘Rules of construction of

policy’ which states that ‘the term “perils of the seas” refers only to fortuitous accidents or casualties

of the seas. It does not include the ordinary action of the wind and waves.’

Sons & co and Owner of cargo per ‘Xantho’16. Such a loss if arising as a

result of the negligence of master officers, crew or pilot in navigation is also

recoverable under clause 6.2.2 of the ITCH 9517.

The second type of loss known as third party liability incurred by the

assured in the form of damages payable to the owner of the vessel is also

recoverable under this clause. Such a consequential loss was not however

prior to the decision of D Varix V. Salvador18 by reason of its remoteness

considered as loss by a peril of the sea. The RDC was thus introduced to

provide a ship- owner with the cover for such a monetary loss resulting from

a collision of his vessel with another vessel.

By clause 8 of the ITCH 95 underwriters agree to indemnify the assured

for the amount of three fourths of the damage inflicted upon the other

vessel in the event of a collision, the other one fourth being borne by the

assured. But in practice the ship owner is actually a member of a Protection

and Indemnity club (P & I) who would meet the shortfall in the third party

cover. It is significant to note that in no circumstance will the underwriter’s

liabilities for damages amount to more than three quarters of the insured

value of the vessel insured.

16Wilson Sons and Co and Owners of Cargo per ‘Xantho’ (1887) 12 APP CAS 503

17Institute time Clauses Hulls (international law)

18 D Varix V. Salvador (1836) 4 AD & E 420

5.0. Risks excluded from the Running Down Clause

There are a number of important exclusions from liability of the hull

underwriters in the Running Down Clause. For instance, wreck removal

liability are excluded, as is consequent damage to shore side structures or

to the cargo in the insured ship herself, and pollution from and loss of life or

personal injury on board any ship involved. All those liabilities are insured

by the ship owners Club.

The Club cover includes, and the hull underwriter’s cover excludes, not only

the wreck removal of the insured ship herself, but also the removal of the

wreck of any other ship involved. The same is true of liabilities incurred by

the ship- owner not in tort but because of the existence of a contractual

obligation, as the words in the Running Down Clause “pay by way of

damages” have been interpreted as being restricted to payments in respect

of tortuous liability.

Thus in Furness Withy and Co v Duder19 payments made by a ship- owner

for collision damage to a tug were held to be unrecoverable from hull

underwriters where the collision was caused solely by the negligence of the

tug and liability arose under the special terms of the towage contract; the

ship- owner may in such circumstances recover his payment from his Club

19Furness Withy and Co v Duder [1936] 2 KB 461. Other extant cases in this regard include Crowley

MatineServs inc v Maritrans inc 447 F.3d, 2006 AMC 1246; Owner of S.S. Mendip Range v Radcliffe

[1921] 1 A. C. 556; The ‘Aleksandr Marinesko’ and Quint Star’ [1998] 1 Lloud’s Rep. 265; The

“Antares 11” and ‘Victory” [1996] 2 Lloyd’s. 482 at 498; The ‘Eglantine”, Credo” and “Inez” [1989] 1

Lloyd’s Rep. 593. The “Maloja 11” [1993] 1 Lloyd’s Rep. 48; The “Nordic Ferry” [1991] 2 Lloyd’s Rep.

591; and The p. Caland [1893] A.C. 207. A recent case is that of Laichkwiltach Enterprises Ltd. v. F/V

Pacific Faith (ship), 2007 BCSC 1852, additional reasons 2008 BCSC 282. This was as action for

damages arising out of a collision. The Plaintiff’s ship was moored at a wharf when the Defendant’s

vessel struck it while attempting to dock. The court held that the defendants were prima facie

negligent as there is a presumption of fault when a moored vessel is struck by a moving vessel. The

court accepted that there was a clutch failure on the Defendant’s vessel but, in the absence of

evidence of the history or maintenance of the clutch, this did not absolve the Defendant of liability.

The Plaintiff sought a total of $105,000 in damages including approximately $14,000 for loss fishing

income. The Court, however, found that the Plaintiff had failed to prove much of the damages if

claimed and those damages it had proves were reduced to reflect “new for old” or betterment. Part of

the reason for lack of proof was the Court gave no weight to the opinions of the Plaintiff’s expert

because the expert’s report had apparently been drafted by a lawyer and the Court was uncertain as

to whose opinions were expressed in the report. The claim for loss income was denied on the grounds

that the Plaintiff had unreasonably delayed in effecting the repairs.

(although in the case of towage other than other ordinary harbor towage, by

special arrangement only).

It may be asked why the club cover should include the insured ship owner’s

liability to cargo carried in his own ship, in view of the fact that Club’s

cargo cover is conditional upon the application of the Hague or Hague-

Visby Rules and these Rules exclude claims by cargo in respect of the

negligent navigation of the carrying ship.

In most jurisdictions it is indeed most unlikely that the owner of cargo in the

vessel could succeed in a claim against the owner of that ship in a collision

situation. The cargo owner may make a claim against the non-carrying

vessel in accordance with her degree of blame, if any, but cannot recover

either from the carrying ship or from the non-carrying ship in respect of

that part of the blame attributable to the carrying ship.

However in the US there is a well established principle, the “innocent cargo

rule” to the effect that cargo may recover from the non-carrying ship the

whole of its loss, provided only that there is some degree of blame, however

slight, upon the non-carrying ship. The non- carrying ship is entitled to

recover against the carrying ship in respect of the carrying ship’s degree of

blame for the collision. In this indirect manner the owner of the carrying

ship may become obliged to pay part of the claim of the cargo carried on

board his own ship. As the ship- owner would be unable, because of the

terms of the last sentence of the Running Down Clause, to recover in

respect of this payment from his hull underwriters, the Club cover is

extended to fill that gap.

6.0. Excess collision liability

Under the term of the Running Down Clause English hull underwriters and

those writing hull risks on similar terms are not obliged to make payments

in respect of collision liabilities beyond a sum representing three-fourths of

the ship’s insured value under the hull policies. In certain countries the

extent of the hull underwriters’ interest may be even smaller where the

insured vessel herself is also heavily damaged or lost, as the local policies

do not follow the scheme of the RDC in establishing for collision liability a

fund separate from the ship’s basic fund, but instead provide that the hull

underwriter may stop paying altogether when he reaches the insured value

of the ship.

The common theme, in any event, is that at some point the hull underwriter

may limit his payments to the insured ship-owner in respect of collision

liabilities. The overspill beyond this limit is picked up by the ship owners

Club.

In view of the possibility of a ship of low insured value colliding with one or

more ships of very high value, this part of the Club cover is more important

than it may at first sight appear, as the Club cover under this head could be

increased unfairly by a decision of the ship-owners, for one reason or

another, the Clubs however provide in their Rules that claim in respect of

excess collision liability can be reduced appropriately if in the opinion of the

Directors of the Club the ship has not been insured with her hull

underwriters for proper value.

It is to be asserted that the RDC is not part of the ordinary policy of marine

insurance but rather a separate contract.20 Due to this fact the RDC is not

interpreted with the same strict reference to the doctrine of proximate

cause as the marine policy is21. In the RDC one is no longer dealing with a

20 Burger V. Indemnity Mutual (1899) QBD 15 Times LR 506 PER Mathew. J

21 See generally Section 56. (1) of the Marine Insurance Act 1994.

.’

contract of indemnity for material damage immediately resulting from

certain named perils, but with a guarantee of repayment of a stated

proportion of liabilities involuntarily incurred by the insured.

7.0. Conclusion

The RDC is on the whole laudatory and serves as a veritable means to

provide legal coverage for accidents resulting from a collision.

Works Cited

(n.d.). Retrieved 04 29, 2010, from www. goguenchamplain.Com/glossary.Cfm

(n.d.). Retrieved 04 30, 2010, from Law Jrank.org:

http://law.Jrank.Org/pages/14405/collision- clause-(running- down- clause)

(n.d.). Retrieved 04 30, 2010, from allbusiness.com:

http://www.allbusiness.com/glossaries/running- down- clause/4961211

Black, H. C. (1990). Black’s law Dictionary (6th ed.). Saint Paul, Minnesota, United

States of America: West Publishing Co.

Convention for the unification of certain Rules of Law with respect to Collision

between Vessels . (1910).

Convention on the International Regulation for Preventing Collisions at Sea.

(1972).

Donaldson, E. (1990). Lowndes and Rudolf: Law of General Average and the York

Antwerp Rules. (W. Cooke, Ed.) Sweet & Maxwell.

J., B. (2004). Birds’ Modern insurance Law. Sweet & Maxwell.

Marine Insurance Act Laws of the Federal Republic of Nigeria (Cap 216 ed.).

(1990).

Schoenbaum, J. (2009). Collision and Marine Casualty’ in Admiralty and Maritime

Law ( 4th ed.).