KNOWLEDGE TO ELEVATE
The ‘unreasonable’ cost of casualty repairs: Association of Average Adjusters chairman details claims dilemmas
Marine underwriters and insurance brokers have been urged to keep up to date with the changing ramifications for repair of casualty-stricken ships, to prevent the costs getting out of hand. Willum Richards, chairman of the Association of Average Adjusters, has stressed the importance of market participants monitoring the impact of technology, modern communications and the latest court determinations on what are reasonable expenses.
He was delivering the autumn seminar lecture, which he entitled The Unreasonable Cost of Repairs, for the Association of Average Adjusters. The event was organised jointly with the International Underwriting Association.
Mr Richards reminded the London meeting, on September 21, 2017, that “in any hull and machinery claim, once you have established causation and coverage under the policy, the cost of repairs is the next big question that needs to be addressed.”
How cover responded in terms of “reasonable repair costs” was fundamental to the shipowner understanding what they were likely to recoup. This question was at the heart of all property insurance claims – marine and non-marine.
“You may have thought that with the hundreds of years of precedent that the marine insurance industry has had, that we would be pretty confident that we had this part of the equation right,” said Mr Richards.
“What is reasonable, however, is not static. Changes in technology and communication as well as the judgments of the courts should constantly be prompting us to question what is reasonable in the current environment… we need to be prepared to amend our views as the environment changes.”
He said: “For those that want certainty I can only offer the advice which I have given a number of the underwriters I have worked with as well as brokers over the years: if you do not like the results that you are seeing in the policy wording – it is not that hard: change it, or manuscript a wording.”
Each ship required specific consideration of the scope and terms of hull and machinery insurance against damage, depending on its type and the trade in which it engaged.
Mr Richards said that there were occasions in ‘particular average’ (partial loss) cases where there was a fundamental difference of opinion between the shipowners and the surveyor appointed by the insurers about the correct course of action. “A lack of effective or timely communication by one side or the other (or both) leads to a situation where the shipowner thinks he is being financially coerced into doing something to his vessel which he does not think is advisable; or the insurers’ surveyor thinks that the shipowners are taking the insurers for a ride.
“Very often, it is the average adjuster who has to try and be the voice of calm in the middle and establish what is reasonable. This is not always easy and there are certainly some topics and allowances which cause more problems than others. You often feel like a French rugby referee at the end of a British and Irish Lions versus All Blacks test match – whilst you are trying to just get it right, you know that not everyone will agree with your decision.”
Decisions on the reasonable cost of repairs were usually allied with claims for constructive total loss and were often one of several issues in dispute between insurers and shipowners.
Addressing whether “the goalposts” had moved, Mr Richards said that some recent decisions by the courts had established or re-established a few ground rules. “Whether these have made the position clearer or increased the fog is a matter of opinion. Certainly, some are perhaps slightly at odds with at least my perception of where the dividing line between reasonable and unreasonable lay.”
Section 69(1) of the Marine Insurance Act provides that “where the ship has been repaired, the assured is entitled to the reasonable cost of repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty.”
“Simple enough one would have thought,” commented Mr Richards. The first question should therefore be “What does ‘reasonable’ mean?” It had been said long ago in a judicial dictionary: “It would be unreasonable to expect an exact definition of the word reasonable.”
What may appear “reasonable” from a shipowner’s perspective, might not appear so from that of an insurer. The shipowner will generally be looking to get the vessel repaired as fast as possible and back to earning money. The insurer might be looking to get the vessel repaired as cheaply as possible and justify this by referring to the fact that loss by delay is not covered by the Institute Time Clauses (Hulls).
“The Marine Insurance Act gives us no guidance as to through whose glasses we should look at the problem. The courts have, however, given us some guidance.”
What is “reasonable” is what a “reasonable man” would do in the circumstances. A case in 1903 gave us the “man on the Clapham Omnibus” as the definition of the average “reasonable man”, but Mr Richards indicated that some considered this unsatisfactory.
If the proposed repair would not put the owner in the same commercial or technical position he enjoyed before the casualty, it would not be a reasonable repair.
The practice of allowing temporary repairs and the excess cost of overtime for liner vessels had come about as owners of such vessels were more concerned about maintaining their advertised schedule than the additional one-off cost of doing repairs more expensively.
Mr Richards said that when a vessel is repaired it is common for a shipowner to send a member of his technical department to attend with a view to agreeing the scope of work required, negotiating with the repairers, ensuring the repairs are done correctly and liaising with class society and other surveyors.
For a casualty repair the insurers would pay the fees and expenses of the superintendent, but “on one level, this is a very strange allowance. The superintendent’s salary is not an additional expense of the casualty.”
Historically, where repairs were done at overseas ports, a master would engage the services of a local marine surveyor, but with the speed of modern travel, it became common for shipowners to send their own technical people, as they would be more familiar with the vessel and the owner’s requirements. The allowance of the cost of a shipowners’ superintendent was therefore seen as a ‘quasi-substituted’ expense for the cost of a local surveyor.
Should that allowance be based on the cost of a local surveyor? This would lead to a situation where the amount of allowance would depend on whether the repairs were done in Europe or parts of Asia. “I believe that we have moved on from this and the allowance for the superintendent now bears more relation to his cost than the historical substituted expense of a local surveyor.”
What should be the appropriate allowance for a shipowner’s superintendent? “My personal view is that there cannot be a one size fits all solution. The allowance must bear some relevance to the cost of the superintendent to the shipping company,” but “the shipowner should certainly not be making a profit after taking into account all overheads.” Was it reasonable to hire a superintendent and did that person need to be there all day, every day?
Mr Richards concluded: “Whilst strict compliance standards and IT system requirements can be blamed for stifling creativity in many of today’s insurance and broking houses, my view is that insurers and brokers should not be frightened to make the policy fit their and their client’s requirements rather than have their requirements shoehorned into what ‘the system’ will allow. “This is considerably easier to achieve in marine insurance (particularly hull and machinery) than in the more commoditised insurance products such as motor or domestic property. If there are concerns about what the repercussions of a wording may be, ask an average adjuster – they are used to seeing issues from the claims side and picking through policy wording and thinking up the ‘what if’ scenarios.”
Mr Richards, director of New Zealand-based Willum Richards Consulting Ltd, was warmly thanked for his presentation by Keith Martin of Marsh, who presided at the event. Mr Martin is immediate past chairman of the Association of Average Adjusters.
Note
The Association of Average Adjusters promotes professional principles in the adjustment of marine claims, uniformity of adjusting practice, and the maintenance of standards of professional conduct. Irrespective of the identity of the instructing party, the average adjuster is bound to act in an impartial and independent manner. The Association plays an important part in London insurance market committees, and has strong relationships with international associations and insurance markets.
Source: Association of Average Adjusters
