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Is the Equipment Policy a Valued or an Unvalued Policy?

Author: M Jagannath
Date: May 7, 2015

Recently, one of our readers of our previous article, GA & Salvage - Value of Containers, had posed a question relating to the reimbursement from the Insurers under the equipment policy as to whether it should be on the basis of Depreciated Value (“DV”) or Replacement Value (“RV”). The above article touches on these aspects and tries to answer as to whether an Equipment policy is a Valued or an Unvalued Policy.

  1. Containers are generally insured under an equipment extension provided by the Transport Liability / P&I Insurers or may be Insured under a separate policy (eg if the Liability cover provided to a Transport Operator excludes Equipment, then the Operator would have to consider seeking separate cover for their equipment risks) . We have considered the wordings of the Institute Container Clauses - Time 1/1/87 for the purpose of this article (We believe that the wordings of bespoke policies providing cover to equipment is on similar basis except for minor variations).

  1. Cl 1 of Institute Container Clauses – Time 1/1/87 is known as the Risks clause and states “ This insurance covers all risks of loss or damage to the subject-matter insured, except as provided in Clauses 4,5,6,7 and 8 …” The cover provided is on the basis of “All Risks” except for exclusions mentioned in the policy.

  1. Prior to the inception of the policy, Insurers generally require a proposal form to be provided by the Insured stating details of their container fleet including their valuation for which cover is sought. Some insurers require this declaration every quarter (as the values of the fleet may change) and base their premium’s on this basis. The cover provided by the Insurers is basis the declaration made in the proposal form. Hence, it is important to ascertain what has been declared to the Insurers in the Proposal form and what is stated either in the Policy or in the case of a Scheduled Policy, the Schedule – for the purpose of this article, reference to “Policy” will include a schedule. (A schedule to the policy is an outline of the cover provided under the policy and will detail the name of the Assured, the cover provided together with the relevant limits, sums insured and the deductible. A schedule is not a standalone document and should always be read in conjunction with the policy wordings. Further, the schedule may outline additional clauses, exclusions and warranties to the cover being provided by the Insurer).

  1. Equipment policies would mention the limit of liability for any one incident or occurrence for loss or damage to containers due to the risks covered under the policy (which is akin to Sum Insured). Other policies will, in addition to the limit of liability / sum insured, state the basis of indemnity as per container leasing agreement or replacement value for Owned containers or as per Insured value. The question now is whether these policies are Valued or Unvalued Policy?

  1. Policies would invariably provide for “English Law and Practice” or for the incorporation of UK Marine Insurance Act 1906 (the effect is the same in that the UK Marine Insurance Act 1906 applies to govern the terms of the policy). The relevant clauses in the UK Marine Insurance Act 1906 are as follows:

    1. Valued Policy: S 27

      1. A policy may be either valued or unvalued.

      2. A valued policy is a policy which specifies the agreed value of the subject-matter insured.

      3. Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

      4. Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss.

    2. Unvalued Policy: S28

      An unvalued policy is a policy which does not specify the value of the subject-matter insured, but subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained, in the manner herein-before specified.

    3. Extent of Liability of Insurer for Loss: S67

      1. The sum which the assured can recover in respect of a loss on a policy by which he is insured, in the case of an unvalued policy to the full extent of the insurable value, or, in the case of a valued policy to the full extent of the value fixed by the policy is called the measure of indemnity.

    4. Total Loss : S68

      Subject to the provisions of this Act and to any express provision in the policy, where there is a total loss of the subject-matter insured,

      1. If the policy be a valued policy, the measure of indemnity is the sum fixed by the policy.

      2. If the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject-matter insured.

  1. As mentioned in 4) above, there are two possibilities:

    1. The policy may the state the limit of liability / sum insured for the risks covered under the policy. In Thor Navigation v Ingosstrakh, a decision of the English Commercial Court under a Hull and Machinery policy, the court ruled that in order for the policy to be valued, S27 of the MIA 1906 requires the parties to specify an agreed value in the policy. Hence, provision of a sum insured in the policy without any reference value would mean that the policy is an Unvalued policy.

    2. If the policy/schedule mention the values of the containers, then this would tend to suggest that the policy is a valued policy. As mentioned in 5a above, the valuation agreed by the parties, in the absence of fraud, would be the insurable value of the subject matter insured. In this case, if the containers are a Total Loss, the claim under the policy would be for the value mentioned in the policy.

  1. With respect to partial loss of the containers, Cl 15 of the Institute Container Clauses 1.10.87 states “Where a claim is payable under this insurance for a container which is damaged and not a total loss, the measure of indemnity shall not exceed the reasonable cost of repairing such damage”. This being the case, the indemnity allowed under the policy would be restricted to the reasonable costs of repairs of the containers.

  1. The next question is whether cover for containers should be sought on the basis of RV or DV? We had in our earlier article, GA & Salvage – Value of containers, defined the various values possible. Our view are as follows:

    1. RV for containers owned by the Operator: Containers are used by Operators to earn revenue. Hence, following a damage to the containers, an Operator would repair the containers (if the containers are economically repairable) or replace the containers (if the containers are a Total Loss) so as to continue with their ongoing business. This being the case, our view is that for containers owned by Operators, it should be on RV basis as this mirrors their loss.

    2. DV for containers leased by the Owners / Operators from the leasing companies: Leasing contract would provide for Operators to be liable to the lessors for the depreciated value of the containers if the containers were to become a Total Loss. Although the Institute Container Clauses – Time 1/1/87 do not have any specific provision, we note that Clause 3 on Leased Equipment in International Hull Clauses 1/11/03 states as follows:

      3.1  This insurance covers loss of or damage to equipment and apparatus not owned by the Assured but installed for use on the vessel and for which the Assured has assumed contractual liability, where such loss or damage is caused by a peril insured against this insurance.

      3.2 
      The liability of the Underwriters shall not exceed the lesser of the contractual liability of the Assured for loss of or damage to such equipment or apparatus or the reasonable cost of their repair or their replacement value. All such equipment and apparatus are included in the insured value of the vessel (words in underline for emphasis).

      If Owners / Operators are covered for containers under similar wordings, they may be caught by the reference to the replacement value should this be lower than the contractual Value (which would generally be on DV). This being the case, Owners / Operators should seek coverage on the basis of their contractual liability / DV of the containers at the time of the loss so as to avoid any shortages in thier contractual liability.

  1. In conclusion,

    1. An Equipment / Container policy could either be Valued or Unvalued and this could be ascertained by reviewing as to whether the valuation of the containers is provided in the Policy. If the value of the containers is ascertained following the loss, then the policy is an unvalued policy.

    2. Owners / Operators must consider the basis of valuation for Owned and Leased containers. In particular, Operators contractual liability for leased containers may sometimes be more than the replacement value of the containers and therefore they must consider seeking cover on this basis i.e. their contractual liability.

 

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