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Underinsurance – Liability Policies

Jagan - May 29, 2018 - 0 comments

We were recently involved in a Transport Liability claim in which the claim exceeded the limits provided under the policy. The question then was what were the amounts properly due under the Policy?

  1. Under-insurance occurs when the value of the property or liability insured exceeds the amounts insured for. Marine Insurance policies may be either Valued or Unvalued. The difference between these two is that the Valued policies specify the agreed value of the subject-matter insured1, whereas in the Unvalued policies, the insurable value is determined at a later date2. In the case of under-insurance, the Insured would either be considered as self-insuring for the values above the amounts insured for3 and participating  in the risk4 or would be sharing in the risk pro-rata on the basis of the concept of average5.
  2. Various Marine Policies: The basic covers available under Marine Policies is for Hull (we have considered Loss of Hire and Freight policies under this heading given that they are linked to Hull), Liability6 (includes Protection and Indemnity and Transport Liability ) and Cargo. Invariably, both Hull and Cargo are insured under Valued policies whereas Liability policies are insured upto a limit i.e. Sum Insured.
  3. For Liability policies, given that the cover is for liabilities, one would have to first ascertain the limits required. In the case of a Transport Intermediary, we had in our earlier article “Calculating cargo exposures for International Sea Transport Intermediaries / Operators” suggested ways to calculate exposures so as to consider the sufficiency of the limit required. However, given that 3rd party exposure7 is indeed difficult to quantify8  (exposures may sometimes be for astronomical amounts), it may be best to consider a combination of cover economically available together with legal entity management9.
  4. An Insured may sometimes find themselves insured for a sum lesser than the amounts claimed. If the Insured deliberately sought cover for a limit which is woefully inadequate, it does raise the possibility of an argument made by Insurers that the Insured failed in their duty of fair presentation of risks as provided under the Insurance Act 201510. Whether this failure would entitle Insurers to avoid cover is yet to be judicially decided and therefore we would have to await their pronouncements.
  5. If the loss was caused purely by the Insured’s fault or negligence (without any possibility of recovery from a third party), subject to cover being confirmed, the Liability policy would pay up to its limit and with the balance being borne by the Insured by themselves (as provided in S 81 Marine Insurance Act 1906). If the cover includes costs, then this will be factored in any payment made by the Liability insurers. If however, costs are covered under a separate extension with a separate limit, then the Insurers liability would be either up to the limits provided under the policy on the specific section or on a pro-rata basis (if it is linked to the cover and limits provided under the liability section) i.e. they will bear the costs in proportion to the limit and the actual exposure.
  6. If there is a possibility of recovery, say from a third party, what then would be the reimbursement under the policy? There are two possibilities and which are a. before recovery from 3rd party or b. after recovery from 3rd party. We will consider each of these below: 
    1. Before recovery from 3rd party: Once the Insurers have indemnified the Insured, they are entitled to seek recovery from the 3rd parties on the basis of subrogation11. There are two possibilities and which are as follows:
      1.  The Insured is considered as insuring the layer above the Insurers limits (for the sums uninsured). The proceeds of recovery are applied on a “top down” basis12 i.e. the Insured recovers first for their uninsured losses followed by the Insurers for the payments they have made under the terms of the policy. If there is a deductible, then this will be the bottom most layer and would be entitled to recover if there are any proceeds left.
      2. The Insured is considered as a co-insurer for the uninsured amounts and therefore entitled to recover on a pro-rata13 basis on any recoveries which may be made from the third parties (i.e. the Insurers and Insured share pro-rata basis the amounts borne by each of them). 

        The better view, as suggested in Marine Cargo Insurance – Second Edition by John Dunt (in 15.36) although this is for Cargo policies, is that the limit under a policy does not create under-insurance as the assured has paid the full premium up to the limit (say rate on line). Accordingly, Section 81 of the Marine Insurance Act 1906 should not apply to a partial loss occasioned by the application of a policy limit. Hence, the limits operate more like layered insurance and that the decision in Kuwait Airways (No 1) should be applicable in such cases (we believe that this is the correct view for liability policies) 

        However, liability policies invariably have a clause entitling Insurers to first recover up to the amounts paid14 and which means that the application of i above is varied i.e. the Insurers get the first bite of the recovery up to the sums paid without considering as to whether the Insured bore a portion of the loss.

    2.  After recovery from 3rd party: In this case, an argument may be made by the Insured that the claim is for the reduced amount and should be considered on this basis (in some instances, the claim may then fall under the limits provided in the policy). In The Wind Star15, the English Court of Appeal held that if the assured has already recovered from a third party, there can be no liability under a contract of indemnity16. It is therefore submitted that the sums available for payment under the liability policy would be reduced by the amounts recovered ( if the amounts recovered are lesser than the limit under the policy, then the basis of recovery would be whether there is a contractual provision entitling the Insurers to recover first or on a top-down or pro-rata basis). 

      In the matter at hand, the policy did provide for the Insurers to the benefit of any recovery up to the amount of claims paid. Although, the claims were yet to be paid at the time of adjustment, given the circularity of action (once the claim is paid, the Insurers are entitled to the recoveries made), the Insured’s reimbursement under the policy would take the recovery into account.

  7.  Property Policies: While this article focused on liability policies, other marine property policies do have some liability components i.e. Cargo policies17 provide cover for General Average and Hull policies18 provide cover for ¾ Collision Liability and General Average. In the circumstances, similar under-insurance issues may also arise .
  8. Conclusion:
    1. The insured should conduct a risk analysis to determine the right limits required for their liability cover. 
    2. Insurance policies would invariably have clauses entitling the Insurers to the benefits of any recovery made such that if there is any underinsurance, the insured may be adversely affected.
  1. S 27(2) of the Marine Insurance Act 1906 states “A valued policy is a policy which specifies the agreed value of the subject-matter insured”.
  2. S 28 of the Marine Insurance Act 1906 states “Unvalued policyAn 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. S 81 of the Marine Insurance Act 1906 states “Effect of under insurance – Where the assured is insured for an amount less than the insurable value or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance”.
  4. S 67(2) of the Marine Insurance Act 1906 states “Where there is a loss recoverable under the policy, the insurer, or each insurer if there be more than one, is liable for such proportion of the measure of indemnity as the amount of his subscription bears to the value fixed by the policy in the case of a valued policy, or to the insurable value in the case of an unvalued policy”.
  5. If the sum insured at the time of a loss is less than the insurable value of the insured property, the amount claimed under the policy may be reduced in proportion to the under-insurance. 
  6. S 74 of the MIA 1906 deals with Liabilities to third parties and states “Where the assured has effected an insurance in express terms against any liability to a third party, the measure of indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party in respect of such liability”.
  7. The exposures for Owners and Time Charterers could be calculated by reference to the Convention on Limitation of Liability for Maritime Claims (LLMC) 1976. Unfortunately, there exists no such convention dealing with liability to third parties for others involved in the transportation of goods.
  8. The exposures for the recent “Maersk Honam” incident is estimated be above USD 200 million as stated in an article published in Tradewinds. If the fire was caused by mis-declared cargo in a container shipped by say a Contractual Carrier who is identified, the exposure to the Contractual Carrier would be for at least this amount.
  9. Legal Entity Management is a tool to manage the legal risks associated with the organization’s corporate form on the assumption that the corporate viel remains intact.
  10. A briefing published by Herbert Smith Freehills discusses on the issues which may arise due to Underinsurance including the duty of fair presentation and which can be viewed at—e-bulletin—insurance-act-2015-average-and-remedies.pdf
  11. S 79 of the MIA 1906 deals with Subrogation and states – Right of subrogation:
    1. Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.

    2. Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.

  12. Kuwait Insurance Corporation v Kuwait Insurance Co (No 1) [1996] 1 Lloyd’s Rep. 664
  13. The Commonwealth [1907] P 216 (CA).
  14. The contractual clauses would have wordings similar to “allows any recovery to the fullest extent of any Claim, indemnity, costs and expenses paid by the insurers”
  15. In Colonia Verischerung AG v Amoco Oil Co (The Wind Star) [1997] 1 Lloyd’s Rep. 261 where an assured buyer recovered the full value of a cargo of contaminated naptha from the seller in return for an assignment of the rights under the cargo policy, but the assignment was expressed not to affect the insurer’s rights of subrogation. The English Court of Appeal held that the seller could not recover from the insurer: the insurer’s right of subrogation meant that it was entitled to the benefit of the payment made by the seller to the buyer in diminution of the loss).
  16. See also Castellain v Preston (1880) 11 Q.B.D. 380.
  17. Clause 2 of the Institute Cargo Clauses (A), (B) & (C) of both 1/1/82 and 1/1/09
  18. Clause 8 & 11 of the Institute Time Clauses – Hull 1/10/83

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