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How to prevent direct claims under marine insurance policies from becoming time-barred?

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New Supreme Court judgment provides important clarifications.

The Supreme Court has recently delivered a landmark judgment on limitation of the injured party’s direct claim against the P&I underwriter and recourse between P&I underwriters. The ruling served to clarify key issues in relation to interpretation of the Insurance Contracts Act and the Limitation Act. The judgment demonstrates that swift action is required to prevent separate limitation of the direct claim.

The Supreme Court judgment of 4 February 2020 (HR-2020-257-A)

Thommessen assisted the P&I club Assuranceforeningen Gard – gjensidig ("Gard") and its member SwissMarine Services SA ("SwissMarine") in litigation against the P&I club Assuranceforeningen SKULD – Gjensidig and SKULD Mutual Protection and Indemnity Association (Bermuda) Ltd. (jointly "Skuld"). The underlying direct claim action was split prior to the hearing before the District Court, with the proceedings before the Supreme Court being restricted to the issue of whether the claims brought by Gard and SwissMarine against Skuld were time-barred.

The Supreme Court concluded that SwissMarine’s direct claim against Skuld is not time-barred, thus also implying that Gard’s recourse claim against Skuld is not time-barred either. The ruling was thereby referred back to the Oslo District Court for further hearing of the direct claim.

Background to the case

The case has its origin in a ship collision in the port of Fangcheng in China in 2007. At the time of the accident, the vessel was chartered through a chain of charterparties, including the charterparty which gave rise to the disputed claim, under which SwissMarine had chartered the vessel to Transfield ER Cape Ltd ("Transfield"). SwissMarine had P&I cover with Gard, while Transfield had cover with Skuld. However, Transfield went into liquidation in 2010, thereby giving SwissMarine a statutorily protected right to bring a potential direct claim against Skuld pursuant to Section 7-6,

cf. Section 7-8, of the Insurance Contracts Act.

For a lang time it was unclear whether SwissMarine would have a claim against Transfield/Skuld, since the issue of liability throughout the charterparty chain was only finally resolved through an arbitral award given in London in 2016. For that reason, SwissMarine only brought a claim against Skuld after that award was handed down and it was certain that a loss would be incurred. However, Skuld argued that the direct claim was time-barred by then.

Which legal issues the Supreme Court ruled on

The limitation issue under consideration gave rise to a number of sub-issues which the Supreme Court was called upon to rule on, including important matters of principle.

The first issue before the Supreme Court was whether the limitation provisions in Section 8-6 of the Insurance Contracts Act are mandatorily applicable in those cases where the injured party has a statutorily protected right to bring a direct claim against the P&I underwriter because of insolvency on the part of the insured. If the Supreme Court were to conclude that the provision is not mandatorily applicable, the issue arises of what it would take to contract out of that provision, including the issue of whether the general waiver, in Skuld’s terms and conditions, of the Insurance Contracts Act as background rules of law for the insurance contract is sufficient.

The Supreme Court found that Section 8-6 of the Insurance Contracts Act was not mandatorily applicable, as it was concluded that the legislator must have made a definite choice with regard to the scope of "absolute statutory protection". Consequently, only those provisions expressly referred to in the wording of Section 7-8, Sub-section 2, of the Insurance Contracts Act are mandatorily applicable upon insolvency of the injured party.

On the issue of what it takes to contract out of Section 8-6 of the Insurance Contracts Act, the Supreme Court indicated that a certain level of clarity is required. The Supreme Court nonetheless held that the provision in Skuld’s terms and conditions, which generally waives the Insurance Contracts Act as background rules of law for the insurance contract, is a sufficiently clear waiver of Section 8-6 in relation to any direct claim as well.

Since the Supreme Court concluded that Section 8-6 of the Insurance Contracts Act is not mandatorily applicable and that it had been waived for the direct claim, the issue of limitation had to be considered under the provisions of the Limitation Act. Also in this regard did the case give rise to a number of interpretational issues, both in relation to the delineation between Section

3 No. 1 and Section 9 No. 3 of the Limitation Act and in relation to commencement of the limitation period under Section 3 No. 1, alternatively Section 9, or extension of the limitation period under Section 10 No. 1.

However, the Supreme Court did not opine on the delineation between Sections 3 and 9 of the Limitation Act, since the limitation period will for most intents and purposes commence at the same time under Section 10 No. 1 and Section 9 and since the Court concluded that the limitation period had not expired under either of these provisions. The Supreme Court started out from the premise that the limitation period under the said provisions will commence when the claimholders have sufficient information to institute legal proceedings with a reasonable prospect of a positive outcome, as now reflected in a number of rulings. The Supreme Court concluded, based on a specific assessment of the facts of the case, that such knowledge was not available to SwissMarine until 18 November 2015, when the shipmaster’s testimony, which was of key importance to the issue of liability, was given. Since SwissMarine filed a petition for conciliation proceedings against Skuld on 22 September 2016, the claim was therefore not time-barred.

In the wake of the main hearing before the District Court, Gard met the liabilities of SwissMarine in relation to Exelon Generation Co LLC ("Exelon"), from which SwissMarine had chartered the vessel. Gard was thereby subrogated to the predominant part of SwissMarine’s claim against Skuld. Gard’s claim against Skuld also raised matters of principle in relation to the issue of limitation. As far as this claim was concerned, the arguments of the parties before the Supreme Court were primarily concentrated on application of Section 8 of the Limitation Act. There was a particular focus on the issue of whether Section 8 of the Limitation Act, which can "resuscitate" a time-barred claim if it is brought by the holder of a recourse claim, could be applied in the case despite Gard and Skuld not being directly liable for the same claim. The Court of Appeal took the view that this provision was applicable in the case, a conclusion with which Skuld disagreed. However, the Supreme Court concluded that Gard’s claim was not time-barred, and did not address application of Section 8 of the Limitation Act. Gard was subrogated to SwissMarine’s claim against Skuld upon meeting SwissMarine’s liabilities, and the Supreme Court took the view that it could therefore be concluded, as a matter of course, that Gard’s claim against Skuld was not time-barred since SwissMarine’s claim was not time-barred.

Our comments on the judgment

The Supreme Court judgment provides important clarification on the scope for contracting out of the Insurance Contracts Act in marine insurance policies with effect also for injured parties that are not party to the insurance contract between the injuring party and the P&I underwriter. There will also be such scope for contracting out of the Insurance Contracts Act in other liability insurance policies that are subject to Section 1-3, Sub-section 2, of the Insurance Contracts Act, i.e. liability insurance policies in relation to major business operations, etc., cf. Section 7-8 of the Insurance Contracts Act. Only those provisions expressly referred to in Section 7-8, Sub-section 2, of the Insurance Contracts Act are mandatorily applicable in the event of the injuring party being insolvent. The "Skogholm" judgment (Rt-1954-1002), which called for a more specific assessment of the scope of statutory protection under the Insurance Contracts Act of 1930, has thereby been consigned to legal history. The Supreme Court also concludes that a general waiver of the Insurance Contracts Act as a whole in the liability insurance policy is sufficient to contract out of the limitation provisions in Section 8-6 of the Insurance Contracts Act vis-à-vis the injured party.

If the provisions of the Insurance Contracts Act have been waived, the issue of limitation of the injured party’s direct claim must therefore be resolved by application of the general provisions under the Limitation Act. The Supreme Court is in this regard affirming (in paragraph 73) the view recently expressed in HR-2019-2034-A that "…it would because of the res judicata effects of a judgment be unfortunate if the limitation provisions were to force a claimholder to bring legal action before he or she has a real prospect for prevailing with a claim". This implies that whether the direct claim of the injured party is time-barred must be determined through a specific assessment informed by the status of the compensation claim against the injuring party. If such compensation claim is pending before the Norwegian courts, it will be possible to name the liability insurer as a party to the case, or at least to send it a notice of impending legal proceedings pursuant to Section 15-9 of the Civil Procedure Act, thereby interrupting the limitation period. However, if the underlying compensation claim is subject to arbitration, or is pending before a non-Norwegian court or arbitral tribunal, legal action needs to be brought in Norway in order to interrupt the limitation period for the direct claim.

Consequently, the Supreme Court judgment implies that the injured party should not await final resolution of the compensation claim against the injuring party before interrupting the limitation period for the direct claim against the liability insurers. The direct claim against the insurance provider should be brought at the same time as the compensation claim against the injuring party, and the limitation period must be interrupted separately unless agreement is reached on extending the limitation period. If the right to bring a direct claim against the underwriter only arises upon the insolvency of the injuring party, the limitation period for the direct claim must be interrupted as soon as possible after the occurrence of insolvency. The Supreme Court established in Rt-1999-7 that interruption of the limitation period in relation to the injuring party does not suffice, since limitation of the direct claim is separate from limitation of the underlying compensation claim. Postponing interruption of the limitation period for the direct claim whilst awaiting the outcome of the underlying compensation claim is a high-risk approach.

Limitation of recourse claims between insurance providers is regulated in Section 8 of the Limitation Act, which stipulates a limitation period of one year after payment, but it is also in this regard important to pay heed to the notification obligations this provision imposes on the holder of a recourse claim if the principal claim against the person against whom recourse is sought is time-barred. However, the Supreme Court did not opine on these issues in this case, since it concluded that SwissMarine’s direct claim against Skuld was not time-barred.

Read the Supreme Court judgment here.

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