Subrogation immunity

The “POLAR” revisited: the future of subrogation immunity

Rob King, of Clyde & Co LLP, analyses the significant implications of the coming hearing of Herculito Maritime Ltd v Gunvor International BV due to be heard by the Supreme Court in 2023

Through the years, cases before the English courts have shaped the limits within which subrogated recoveries can be successfully pursued in the name of an assured against third parties.

One key limitation is founded on the concept that, in certain circumstances, a third party may receive subrogation immunity despite not being a party to the insurance.

While at first blush this concept may seem straightforward, cases before the English courts have dealt with a collection of distinctive situations and disputes that have created an intricate patchwork of authorities that need to be considered for potential claims.

Subrogation forms a key part of an insurer’s book, but can often be disregarded or overlooked and together with identifying opportunities early, securing evidence and identifying claims, understanding the effect of these cases is vital in determining whether a recovery prospect is possible.

S U B R O G A T I O N I M M U N I T Y

Looking at the year ahead, a shipping case developing this case law, and one which serves as a timely reminder of the intricacies of subrogation immunity, is Herculito Maritime Ltd v Gunvor International BV due to be heard by the Supreme Court in 2023.

Heard by the Commercial Court in December 2020 as an appeal from an arbitration award, and by the Court of Appeal in December 2021, Herculito concerns the extent to which subrogation immunity can be conferred on third parties in circumstances where there is no express agreement between the insured and the third party granting such immunity.

During a voyage from St Petersburg to Singapore, M/V “POLAR” was seized by pirates while transiting the Gulf of Aden, forcing the shipowners (Herculito) to pay a ransom to release the vessel.

Additional clauses were incorporated within the charterparty including a Gulf of Aden clause, war risks and kidnap and ransom clauses, providing that “any additional premiums payable by the owner in respect of war risks ... shall be for the charterer’s account”.

ALL TERMS, CONDITIONS, LIBERTIES AND EXCEPTIONS

Six bills of lading were issued in favour of Gunvor (holders) for the carriage of fuel oil. The bills provided for the incorporation of “all terms and conditions, liberties and exceptions of the Charterparty”. The owners were fully indemnified for the ransom payment under the additional risks cover. After general average (GA) was declared, shipowners’ insurers sought a GA contribution from cargo interests.

At arbitration, cargo owners successfully defended the contribution claim. Among other findings, the tribunal held that, on the true construction of the bills of lading, the bills gave rise to an “exclusive insurance fund” which precluded owners from recovering a GA contribution from the cargo interests.

This was because: (1) the charterparty contained a “code” for losses resulting from piracy in the Gulf of Aden and pursuant to the charter owners had agreed not to claim a GA contribution from charterers for such losses, and (2) the “code” was incorporated into the bills such that owners’ insurers were unable to pursue a recovery against cargo interests.

The Commercial Court overturned this decision, finding that, while the additional clauses in the charterparty created an insurance code between the owners and charterers, this code could not extend to cargo interests since there was no foundation in the bills for an agreement by owners not to seek a contribution from holders for piracy losses.

The Court highlighted that the bills did not contain an agreement by the holders to pay an additional premium.

The Court of Appeal affirmed the decision of the

During a voyage from St Petersburg to Singapore, M/V “POLAR” (inset right) was seized by pirates whilst transiting the Gulf of Aden, forcing the shipowners (Herculito) to pay a ransom to release the vessel.

Commercial Court, noting that ultimately this was a case where both parties were insured against the risk of piracy and allowing the owners to claim would mean each set of insurers would bear its proper share of the risk which they had agreed to cover.

In contrast, the effect of construing the bills to exclude a claim by owners would have meant the owners’ insurers bearing the loss entirely with the cargo owners’ insurers escaping liability.

The Court also raised doubts over the practicalities of suggesting that charterers’ obligation to pay premium could be manipulated to impose the obligation on holders.

The Court noted there was nothing in the bills or charterparty indicating how liability for premium would be apportioned between the holders, eg, jointly and severally or by reference to cargo value or volume.

POWERFUL ARGUMENT

The Court did acknowledge the “powerful argument” put forward by cargo owners that it was cargo owners rather than charterers which would be directly concerned with the GA contribution and that there should be no reason why one party (charterers) should not agree to pay premium for the benefit of another (cargo interests) on the basis that the counterparty (owners) would not seek a contribution from the party for whose benefit the premium is paid. However, the Court did not accept this, stating that had this been the intention it should not have been left to be implicitly understood by reference to “complex arguments concerning the incorporation of charterparty terms”, this being “an unnecessarily convoluted way to express a simple concept”.

There were no express terms rebutting the presumption that shipowners had not abandoned its right to GA contribution from cargo owners.

At its heart therefore, the Court of Appeal’s decision emphasised the commercial reality of the parties’ insurance arrangements in circumstances where cargo owners’ financial interest was covered by its own insurance (on ICC (A) terms).

As it stands, Herculito emphasises in line with previous key authorities on the insurance code, including The Evia No. 2 [1983] 1 AC 736 and The Ocean Victory [2017] UKSC 35, that whether a contractual provision creates an insurance fund as the sole avenue for making good a loss (and subrogation immunity towards third parties) must be determined in each case as a matter of construction based on the facts presented and with specific consideration of the express intention between and actions of the insurance interests and the third party.

There are a number of points made throughout the Herculito judgments which suggest that in different circumstances the courts’ analysis may have been different, regardless of whether ultimately the same decisions would have been arrived at.

For example, if it was not common practice for cargo interests to take out insurance, if there was some indication regarding how liability for premium should be apportioned or if there was some factor to rebut the presumption that owners had not abandoned their right to a contribution from cargo owners.

In this context a further decision from the Supreme Court on the insurance code, albeit specifically in the context of incorporation of a charterparty’s terms, stands to provide additional key authority on the extent of a third party’s ability to obtain subrogation immunity absent express agreement.

“Subrogation forms a key part of an insurer’s book, but can often be disregarded or overlooked, and together with identifying opportunities early, securing evidence and identifying claims, understanding the effect of these cases is vital in determining whether a recovery prospect is |possible.’’