Limitations etc. on Defence cover - Rule 70: Limitation

1. The Association shall not be obliged to compensate under a Defence entry legal and other costs falling within the scope of Rule 65 and legal and other costs incurred in establishing or resisting claims in connection with purchase and sale of the Ship, including claims in connection with the future employment of Ship being purchased, falling within the scope of Rule 66 (a) and (b) in excess of USD 15 million per event.

2. The Association shall not be obliged to compensate under a Defence entry legal and other costs falling within the scope of Rule 66 (sale and purchase disputes exempted) in excess of USD 1 million per event.

3. The Association shall determine in its absolute discretion whether legal and other costs for the purpose of this Rule 70 shall be deemed to fall within the scope of Rule 65 or Rule 66 and whether the legal and other costs have arisen out of one or several events, irrespective of whether one or several Ships were involved.

4. The Association shall be under no obligation to give reasons for any of its decision under this Rule.

Guidance

(A) The Association shall not be obliged to compensate under a Defence entry legal and other costs falling within the scope of Rule 65 and...in connection with purchase and sale of the Ship... falling with the scope of Rule 66 (a) and (b) in excess of USD 15 million per event... (Rule 70.1) The Defence cover that is available for legal and other costs that fall within the scope of Rule 65 or Rule 66 (a) and (b) (to the extent that Rules 66 (a) and (b) relate to disputes that arise in relation to the purchase or sale of the Ship, or the future employment of the Ship that is being purchased), is subject to an overall limit of USD 15 million per event. The Association has no liability whatsoever to compensate a Member for any legal or other costs net of deductible that exceed this amount when incurred by him in relation to such claims.¹ 

(B) The Association shall not be obliged to compensate under a Defence entry legal and other costs falling within the scope of Rule 66 (sale and purchase disputes exempted) in excess of USD 1 million per event (Rule 70.2) The Defence claims for which cover is available pursuant to Rule 66 can expose membership funds to substantial financial risk and, consequently, it has been considered prudent and necessary to take steps that are reasonable and necessary in order to protect such funds against unacceptable losses. Consequently, such claims are subject to a special cover limit of USD 1 million per event except for claims that relate to the purchase or sale of the Ship, or the future employment of a Ship that is being purchased, which claims are subject to the substantially higher cover limit of USD 15 million per event pursuant to Rule 70.1. 

The intention of this Rule is that the special cover limit of USD 1 million should apply to claims arising out of building, mortgaging, conversion or alteration of ships.  In addition the USD 1 million limit applies to claims in connection with the future employment of ships arising out of their building, conversion or alteration. This limit will normally apply even where the transfer of the ship takes place under a ship sale and purchase contract provided always that the underlying contract is a shipbuilding contract. The structure in which the end buyer (being the Member) purchases the ship which is being built under a ship sale and purchase agreement (with or without a tripartite agreement between the end buyer, seller and the shipyard) is common when building ships in some jurisdictions and the intention is that claims connected with these agreements are subject to the USD 1 million limit. A distinction will be drawn, however, between this type of claim and a claim in relation to a straight sale and purchase agreement that happens to relate to a newly built vessel where the buyer has no connection with the building of the vessel. In those circumstances the limit of cover will be USD 15 million except in relation to any aspects of the sale that relate to the building of the vessel, such as the assigned right of the buyer to claim under the warranty clause against the seller or the shipyard.

(C) The Association shall determine in its absolute discretion whether legal and other costs for the purpose of this Rule 70 shall be deemed to fall within the scope of Rule 65 or Rule 66... (Rule 70.3)

In view of the significant difference in the limit of cover that is applicable to the claims that are subject to Rules 70.1 and 70.2 it is not in the best interests of the membership as a whole to allow disputes to arise between a Member and the Association as to which Rule should apply for the purpose of cover. Therefore, Rule 70.3 emphasises that the Association has absolute discretion to determine whether legal and other costs are those that are subject to limitation under Rule 70.1 or 70.2. 

(D) ...and whether the legal and other costs have arisen out of several events, irrespective of whether one or several Ships were involved... (Rule 70.3) A Member might seek to argue in some instances that, since the case involves more than one Ship, there has been more than one event so that more than one limitation amount is applicable in such circumstances. Consequently, Rule 70.3 gives the Association the right that is necessary for the wider interests of the membership as a whole, to decide in its absolute discretion whether legal and other costs have arisen out of one or more events. 

(E) The Association shall be under no obligation to give reasons for any of its decision under this Rule. (Rule 70.4) Rule 70.4 emphasises that the decision of the Association is final in relation to the matters that are regulated by Rule 70 and that the Association need not give any reasons for its decision.

1 See Appendix V, paragraph 3.a.