Claims etc. - Rule 84: Recoveries from third parties
Rule 84 Recoveries from third parties
When the Member has a right of recourse against a third party for any liability, loss, cost or expense covered by the Association, the Association shall be subrogated to the Member’s right of recourse upon payment by the Association to or on behalf of the Member in respect of the liability, loss, cost or expense.
Where the Association has made a payment in respect of any liability, loss, cost or expense to or on behalf of a Member, the whole of any recovery from a third party in respect of the case to which that liability, loss, cost or expense relates shall be credited and paid to the Association up to an amount corresponding to the sum paid by the Association together with any interest element on that sum comprised in the recovery, provided however, that
where because of a deductible in its terms of entry the Member has contributed towards a liability, loss, cost or expense any such interest element shall be apportioned between the Member and the Association taking into account the payments made by each and the dates on which those payments were made; and
the Association shall retain the whole amount of any award of costs in respect of its own handling of any case, and
In respect of any recovery whatsoever under a Defence entry the Association shall determine, at its sole discretion, what part of that recovery represents a reasonable amount (the “Reasonable Amount”) that should be allocated to costs and expenses (the “Costs”), regardless of whether any specific agreement, award or order as to costs has been made, and regardless of whether the recovery has been agreed by settlement or decided by a court or other competent authority. When determining the Reasonable Amount, the Association may take into account the proportion of the realistic claim plus interest and Costs that has been recovered and any other matters which the Association considers relevant. Once the Reasonable Amount has been established the Member will be given due credit, if applicable, for the corresponding contribution it has made to the Costs incurred by way of deductible in line with the agreed deductible structure.
Subject to Rule 84.3.a all monies recovered for a Member with Defence cover shall be paid over to the Member, except that the Association may deduct from such monies and retain any amount due to the Association from the Member.
Guidance
The Member may have a right of recourse against a third party for a liability, loss, cost or expense that is covered by the Association. Such right of recourse can arise under a contract between the Member and the third party such as, for example, the right that arises as result of a clause in a time charterparty that obliges the charterer to indemnify the shipowner for any liability that he incurs to cargo receivers as a result of the inadequate cargo stowage that has been performed by the charterers’ servants or agents. Alternatively, the right of recourse may be founded in statute or on common law principles such as bailment or tort.
If the Member has rights or potential rights of recourse against a third party, he is obliged under the Rules to take, and to continue to take, reasonable steps to preserve those rights, in order to protect the interests of the Association, e.g. by ensuring that his recourse claim does not become time-barred or prejudiced in any way by his acts or omissions. However, the Member does not have any obligation to pursue a claim against a third party to its conclusion before he is entitled to compensation from the Association.
Rule 84 regulates the rights and obligations of the Association and the Member in relation to any rights that the Member may have to make recoveries from third parties.
(A) …the Association shall be subrogated to the Member’s right of recourse upon payment by the Association… (Rule 84.1) Rule 84.1 provides that, upon payment of compensation for the Member’s claim, the Association is subrogated to any rights of recourse that the Member may have against third parties, whether they be charterers, cargo owners, the owner of another ship, or any other third party. In such circumstances, the Association takes over from the Member the rights that the Member would have in respect of the recourse claim if that claim were to be pursued by the Member himself. However, the Association is subrogated only to the extent that it has compensated the Member. This is important to remember since the recourse claim that may be made against a third party may include items of claim that do not concern the Association, e.g. liabilities, losses etc., that are insured by other insurers and/or uninsured losses that are borne by the Member.
For example, if the Ship has been struck by another ship whilst moored at a berth, and the collision has caused injury to members of the Ship’s Crew, damage to the Ship and the cancellation of a voyage charter, the Association will be subrogated to the Member’s rights of recourse against the other ship upon payment of compensation to the Member for the Crew injury claims. However, whilst the Association will be subrogated to whatever rights the Member has to bring a recourse action against the owners of the other ship for the personal injury claims, the Association will not be subrogated to that part of the recourse claim that is made in relation to the damage to the Ship, or for the financial losses that have been incurred by the Member as a result of the cancellation of the voyage charterparty. Therefore, the Member will retain the right to sue the owners of the other ship for the uninsured loss that has been caused by the cancellation of the charterparty, whilst the right of recourse for the claim for damage to the Ship lies with the hull underwriters who will be subrogated to such claims pursuant to the Hull Policies.
(B) …the whole of any recovery from a third party…shall be credited and paid to the Association up to an amount…together with any interest… (Rule 84.2) If the Association has compensated the Member for any particular liability, loss, cost or expense, the Association has the right to receive any and all monies that are recovered from a third party in respect of such liability, loss etc., up to, but not exceeding, the amount that has been paid by the Association.
However, the right of recovery may be complicated if, for example, the claims that are brought against the other colliding ship in the example that is given in (A) were to be settled with the approval of the Association,2 on terms that 90 per cent of all claims is payable by the other ship. In such circumstances, the hull underwriters will receive 90 per cent of the claim to which they are subrogated under the Hull Policy, the Member will receive 90 per cent of the uninsured claims and the Association will receive 90 per cent of the personal injury claims to which they have been subrogated under the Rules. The Association is entitled to receive the full 90 per cent even if part of that recovery relates to a deductible that the Member has borne for the Crew injury claims since the Association is entitled to receive all of the recovery up to the amount of the compensation that it has paid to the Member before the Member has the right to retain funds in respect of the deductible.
The recovery claim may also include interest for the time that has elapsed between the date on which the Member has incurred the liabilities, losses etc., and the date on which he has been able to obtain recovery from the third party. In such circumstances, the Association is entitled to receive its proportion of such interest since the Member has benefited, and the funds of the membership have been depleted, as a result of the fact that the Member has received compensation from the Association before recovering from the third party. Therefore, Rule 84.2 gives the Association the right to receive that proportion of such interest that the sum paid by the Association to the Member bears to the total principal sum that has been claimed by the Member from the third party.
For example, if the Association were to pay USD 200,000 to the Member in compensation for the Crew injury claims in the example that is described in (A) above and the Member were to make a full recovery of all of the claims that are made against the owners of the other ship in the amount of USD 1 million plus a further USD 100,000 by way of interest, the Association is entitled to receive USD 20,000 in addition to the principal amount of USD 200,000, i.e. 20 per cent of the interest that has been recovered. Similarly, if the hull underwriters have compensated the Member for repair costs etc., resulting from the damage to the Ship in the amount of USD 500,000, they would be entitled to receive 50 per cent of the interest that was recovered, i.e. USD 50,000.
(C) …where because of a deductible in his terms of entry the Member has contributed towards a liability…any such interest element shall be apportioned between the Member and the Association… (Rule 84.2.a) Finally, if the Member has received compensation from the Association for the amount of the deductible that the Member has contributed to the settlement of the claim that has been brought against him, and a recovery claim is then brought against a third party to recover the sums that have been paid to the claimants, the Member is entitled to receive that proportion of the interest that is recovered from the third party in relation to such claim that the deductible bears to the total principal amount that has been recovered.
For example, if, in the example described above in (B), the Association has paid the sum of USD 180,000 to the Member by way of compensation for the sums that have been paid by the Member to the claimants for Crew injuries, and the Member has also paid the sum of USD 20,000 to the claimants corresponding to the value of the deductible, that proportion of the interest that is recoverable from the third party (the owners of the other ship) for the Crew injuries claims (USD 20,000) is shared in the following proportions: USD 18,000 to the Association and USD 2,000 to the Member.
(D) …the Association shall retain the whole amount of any award of costs in respect of its own handling of any case… (Rule 84.2.b) Whereas the commentary in (B) relates to the principal amount that has been recovered from the third party by way of subrogation and the commentary in (C) relates to the interest that may have been recovered in addition to the principal amount, the commentary in (D) relates to the costs that may have been recovered from the third party.
In some countries a successful claimant is entitled to receive all, or at least a proportion of its costs from the losing party in any litigation. In such circumstances, such recoverable costs are apportioned between the various parties that have an interest in the recovery claim. Therefore, in the example described in (A) above, the recoverable costs will be apportioned between the Association, the hull underwriters and the Member in accordance with the proportions that their respective claims bears to the total claim that is made against the third party, i.e. the owners of the other ship. Once the recoverable costs have been apportioned between the Association and the Member, on the one hand, and the other interested parties (the hull underwriters in the above example), on the other hand, it is necessary to apportion the balance of the recovered costs between the Association and the Member. In this regard, a distinction is drawn between the costs that the Association may have incurred in relation to P&I claims and the costs that it may have incurred in relation to Defence claims.
In the case of the costs that have been incurred in relation to P&I claims, Rule 84.2.b permits the Association to retain out of any recovery that may be made from a third party the whole amount of the costs that have been incurred by the Association that have either been awarded by a court or tribunal or agreed to be payable as part of a settlement. Such costs include travelling costs that have been incurred by Association staff and legal and enquiry costs that have been incurred by the Association under Rules 44 and 45.
However, the costs that have been recovered in relation to Defence claims are allocated between the Association and the Member in the manner described in (E) below.
(E) In respect of any recovery whatsoever under a Defence entry (Rule 84.3.a) Rule 84.3.a regulates the Association’s right to determine what part of the total amount recovered from a third party under a Defence entry shall be allocated to cover the Association’s and the Member’s costs and expenses (together ‘Costs’) incurred in connection with making or defending the claim. The provision only applies where the Member has made a recovery from a third party.
It has always been the case that where a Member settles or compromises a claim the Association has discretion to decide what portion of the settlement sum should be attributable to Costs.
With respect to Costs incurred in relation to court or arbitration proceedings, the court or tribunal rarely decides that one party shall cover the whole of the other party’s Costs. If, however, the court or tribunal awards full recovery of the Association’s and the Member’s actually incurred Costs, the recovered Costs will be distributed between the Association and the Member according to the portion of Costs actually paid by each of them, and both the Association and Member will consequently receive full recovery of their respective Costs.
In many cases, however, the Costs awarded by a court or tribunal will be substantially lower than the actual Costs incurred in obtaining the recovery. For example, Costs incurred in locating and attaching assets for security are usually not recoverable and Costs incurred in seeking enforcement action of any order or award may not be recoverable, moreover, legal costs awarded by a court or tribunal are often lower than the actually incurred Costs. Therefore, the Association may determine that a part of the total amount recovered shall be allocated to cover Costs, regardless of the amount of any Costs awarded by a court or tribunal. This part of the total amount is referred to in the provision as the ‘Reasonable Amount’
When deciding what is the Reasonable Amount the Association will have regard to the entire factual circumstances of the particular case:
The Association will usually take into account the proportion of the total sum recovered compared to the realistic claim, plus Costs and interest.
The Association will never recover more than the Costs it has incurred plus interest on that amount.
The Association will give due credit to the Member for the Member’s contribution to the Costs by way of deductible in line with the agreed deductible structure.
Allocation and distribution of the ‘Reasonable Amount’ in practice
The standard percentage deductible for Defence entries is 25 per cent, subject to a minimum deductible of USD 5,000, see Appendix V, section 3.a of the Rules. Therefore, should the Costs of a Defence claim exceed USD 5,000 the Association will pay the next USD 15,000 and any additional Costs will be borne 25 % by the Member and 75 % by the Association. This is illustrated by the diagram below:
Should the Member be successful in making a recovery from a third party in relation to such claim, the Association shall determine in its sole discretion what part of that recovery represents the Reasonable Amount that shall be allocated to Costs.
The Reasonable Amount is to be shared between the Member and the Association in accordance with the Costs that each has paid prior to the recovery in accordance with the agreed deductible structure. If the Reasonable Amount is less than the Costs that have been incurred then such allocation is made in accordance with a system of priority based on the principle of the “last dollar paid is the first dollar recovered.”
Example:
A. Costs Incurred:
If the total Costs incurred are USD 220,000 then:
The Member pays the first USD 5,000;
The Association pays the next USD 15,000;
The Member pays 25 per cent of the next USD 200,000, (i.e. USD 50,000) and the Association pays 75 per cent of that figure (i.e. USD 150,000);
Therefore, the Member pays a total of USD 55,000 and the Association pays a total of USD 165,000.
B. Allocation of the Reasonable Amount:
If the Reasonable Amount is determined at USD 100,000 then:
The Association recovers 75 per cent of such Reasonable Amount, i.e. USD 75,000, and the Member recovers 25 per cent, i.e. USD 25,000.
Effect of the minimum deductible
In the above example, the Reasonable Amount only covers part of the Costs exceeding the first USD 20,000 paid (the part of which the Member contributes to with 25 per cent and the Association contributes to with 75 per cent). The Costs recoverable by the Member and the Association can therefore be calculated by attributing 25 per cent of the Reasonable Amount to the Member and 75 per cent to the Association.
However, if the Reasonable Amount is sufficient, the Costs recoverable by the Member and the Association is not calculated by simply attributing 25 per cent of the Reasonable Amount to the Member and 75 per cent to the Association. In such a case, in accordance with the “last dollar paid is the first dollar recovered” principle, the Reasonable Amount must (i) first be applied to cover the Costs exceeding the first USD 20,000, allowing the Member and the Association recovery of their respective contribution to such Costs; (ii) thereafter, the Reasonable Amount must be attributed to the Association to recover the USD 15,000 paid by the Association; (iii) finally, any remaining part of the Reasonable Amount will contribute to the Member’s payment of the first USD 5,000 (the minimum deductible). Notably, it is only where all the Association’s Costs have been recovered in full that the Reasonable Amount will contribute to the Member’s minimum deductible.
Example:
A. Costs Incurred:
If the total Costs incurred are USD 28,000 then:
The Member pays the first USD 5,000;
The Association pays the next USD 15,000;
The Member pays 25 per cent of the remaining USD 8,000 (i.e. USD 2,000) and the Association pays 75 per cent of that figure (i.e. USD 6,000);
Therefore, the Member pays a total of USD 7,000 and the Association pays a total of USD 21,000.
B. Allocation of the Reasonable Amount:
If the Reasonable Amount is determined at USD 25,000 then:
The Association recovers 75 per cent of USD 8,000 which is the amount paid over USD 20,000 (i.e. USD 6,000) and the Member recovers 25 per cent of that amount (i.e. USD 2,000)
The Association receives in full the next USD 15,000
Once the Association has received all sums it has paid, the balance of USD 2,000 will be allocated against the minimum deductible and paid over to the Member.
Therefore, the Member receives a total of USD 4,000 and the Association receives USD 21,000.
Effect of the maximum deductible
Some entries are subject not only to the minimum deductible of USD 5,000 and standard percentage deductible of 25 per cent but also to a maximum deductible. In such cases, in accordance with the “last dollar paid is the first dollar recovered” principle, the Association is entitled to retain out of the Reasonable Amount any amounts that is has paid in excess of the Costs contributed to by the Member’s deductible, before the Member is entitled to recover its share of the balance. The balance is then shared in accordance with the agreed deductible structure.
Example:
A. Costs Incurred:
If the total Costs incurred are USD 220,000 and a maximum deductible of USD 50,000 has been agreed, then the Member will contribute with 25 per cent to the total Costs up until his contribution has reached USD 50,000, i.e. when the total Costs reach USD 200,000, and the Association will cover the Costs above USD 200,000 without contribution from the Member:
The Member pays the first USD 5,000;
The Association pays the next USD 15,000;
The Member pays 25 per cent of the next USD 180,000 (i.e. USD 45,000) and the Association pays 75 per cent (i.e. USD 135,000);
The Member has reached its maximum deductible contribution (USD 50,000) and the Association will pay all Costs in excess of USD 200,000 (i.e. the remaining USD 20,000)
Therefore, the Member pays a total of USD 50,000 and the Association pays a total of USD 170,000.
B. Allocation of the Reasonable Amount:
If the Reasonable Amount is determined at USD 100,000 then:
The Association recovers in full the USD 20,000 that it has paid in excess of USD 200,000;
The Association recovers 75 per cent of the balance of the Reasonable Amount (i.e. 75 per cent of the remaining USD 80,000, i.e., USD 60,000); and
The Member recovers 25 per cent of the balance of the Reasonable Amount (i.e. 25 per cent of USD 80,000, i.e., USD 20,000).
Therefore, the Association recovers USD 80,000 and the Member recovers USD 20,000.
(F) Subject to Rule 84.3.a, all monies recovered for a Member with Defence cover shall be paid over to the Member, except that the Association may deduct from such monies and retain any amount due to the Association from the Member… (Rule 84.3.b) Rule 84.3.b gives the Association the right to set off any amounts that are due from the Member to the Association against any and all monies that have been recovered for a Member in a case for which the Member has been afforded Defence cover. Such amounts include unpaid premiums, deductibles or any other sums but a deduction cannot be made unless the relevant amount is due and payable to the Association at the time that the monies are recovered for the Member. This deduction will be made from the amount recovered after any amount due to the Association under Rule 84.3.a has been reimbursed.
For example, if the Association has recovered the sum of USD 125,000 from a charterer on the Member’s behalf in respect of outstanding hire, at a time when a total of USD 25,000 is due to the Association from the Member by way of accrued deductibles, and at a time when the second instalment of the Estimated Total Call for that Policy Year has been debited in the amount of USD 250,000, but has not yet fallen due for payment, the Association is entitled to deduct and retain the sum of USD 25,000 from the recovered amount of USD 125,000, but is not entitled to deduct the second instalment of the Estimated Total Call since this is not yet due for payment. Therefore, the Association must release the sum of USD 100,000 to the Member out of the total sum of USD 125,000 that has been recovered from the third party.
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