Double Insurance
By Roger Miles of Elborne MitchellFirst published: Maritime Risk International - Vol 18 - Issue 4 [4th April 2004]

Roger Miles, Master Mariner and partner in the shipping and marine insurance department of City firm Elborne Mitchell, reviews a recent hull and machinery dispute in which he acted and considers some of its implications.

Double insurance causes practical and legal problems. It is expensive and can lead to delays in receiving payment from insurers. As policies begin to include several co-assureds, owners and operators may increasingly find themselves over insured by double insurance on hull. English law now offers some practical guidance as to what to do in those circumstances.
Double insurance exists where there are two or more policies on the same adventure and interest or any part of it, and the sums insured exceed the insurable value in the case of an unvalued policy or the value fixed by the policy in the case of a valued policy.
If there is double insurance then unless the policy says otherwise payment may be claimed from the insurers in any order. However despite paying two (or more) lots of premium the assured cannot recover more than the greatest insured value and must give credit for any sum received by him under any other policy. If he happens to be paid more, he is deemed to hold any excess in trust for the insurers.

Normally of course you would not knowingly insure the same risk twice. But double insurance is in fact quite common in many sectors of the insurance market; for example, cargoes are often sold several times during a voyage and each new owner may insure it as a precaution against its loss. You might think double insurance on hull and machinery was impossible. Not so, as the English High Court's decision in Chris O'Kane and Others v Jonathan Jones and Others [2003] shows.

In the spring of 1999 the sole director of the owners of the vessel "MARTIN P", and of her then managers, decided to transfer management of the vessel to new managers with whom he entered into a management agreement. On renewal of the vessel's hull and machinery policy with the first insurer (O'Kane) from 1st July 1999, the named assureds were the owners, the former managers, described as "operators", and the new managers described as "sub- managers/co-assureds". The insured value of the vessel under this policy was US$5 million.

The policy documents included a warranty from the assureds' brokers to the underwriter that the premium had been paid. However, no premium was paid, so in mid-November the brokers, without informing O'Kane, wrote to the mortgagee bank, with copies to the assureds, advising that unless the premium outstanding was paid by the end of the month they might be unable to continue their warranty. There was still no payment. The new managers insisted that owners pay the premium whilst the owners wanted the new managers to pay it.

The new managers assumed that the policy with O'Kane had been cancelled because of non-payment of premium. In mid-December, having told the owners of their intentions, the new managers took out hull and machinery insurance on the vessel with the second insurers (Jones). The named assureds in this second policy were the new managers "and/or affiliated and/or associated companies for their respective rights and interests". The insured value of the vessel under this policy was US$2.5 million.

In late December 1999 the "MARTIN P" became a constructive total loss. At the time of the loss both policies of insurance were in place. However, O'Kane was unaware of the Jones policy. Within a few days of the loss, when the assureds realised that the policy issued by O'Kane had not been cancelled, they agreed with Jones to cancel the second policy. An endorsement to the policy reading "it is hereby noted and agreed that this insurance is cancelled with effect from inception" was issued. The outstanding premium on the O'Kane policy was paid and a claim made against that policy for US$5 million.

O'Kane became aware of the Jones policy. After investigating the loss, O'Kane agreed to pay to the assureds the insured value of the vessel less the contribution that O'Kane claimed was due from Jones. The assureds challenged O'Kane's right to make any deduction so O'Kane paid the full insured value of US$5 million and sought a contribution from Jones.
The case raised some novel issues. Jones argued that it should not contribute because its policy had no legal effect under the Marine Insurance Act 1906 since the new managers had no legitimate insurable interest in the vessel. The Judge disagreed: the managers had an insurable interest by reason of their potential exposure to liability under the management agreement and their potential loss of income under the management agreement if the vessel were lost or damaged.

Jones also argued that no contribution was due because its policy had been cancelled as recorded in the endorsement. Both policies were of course in force at the time of the loss of the vessel, but O'Kane argued that later events (the cancellation) should be ignored in deciding whether a contribution was due. It was the situation at the time of the loss that was decisive.
The Judge in the O'Kane case agreed. Jones was bound by equity to contribute. At the time of the loss the assureds had the right to proceed against either of the insurers. They could not lose that right against one of the insurers, for example because it was a condition precedent to make a claim under that policy that notice of the loss was given within, say, 14 days, merely because they had chosen to pursue their claim against the other insurer.

Working out the amount of the contribution due from Jones was also complicated. The Marine Insurance Act 1906 says only that the insurers contribute to the overall loss in proportion based on the amount for which each is liable under his own contract.

In cargo insurance, where the insured values under the policies are different, a sensible and practical method for determining the contribution between insurers has evolved outside the courts. This is sometimes referred to as the "common liability" method. Under it there is deemed only to be double insurance up to the lower insured value. The insurers bear the loss equally up to that insured value and the higher insured value policy bears the remainder.
There was no direct case precedent for double insurance on hull and machinery. Other forms of insurance have used the "maximum liability" method whereby the insurers' respective contributions are proportionate to their respective maximum liabilities under the policies; or the "independent liability" method whereby the respective contributions are adjusted proportionately to the amount that each insurer would, independently, be liable to pay to the assured in respect of the loss sustained.

If the loss is equal to or in excess of the maximum sums insured under both policies, the contributions are the same whichever method is used. But if the loss is less, the methods produce significantly different contributions.
The US Courts tend to favour the maximum liability basis for determining contributions between the insurers but in England the trend has been to prefer the independent liability method. The Court in O'Kane followed that trend - although because the vessel was a total loss the same result would have been arrived at using the maximum liability method. The US$5 million loss was to be borne by the first insurer and the second insurer in the ratio 2:1. The contribution due to O'Kane from Jones was therefore US$1.67 million.

So, what lessons can be learned from this case?
Double insurance is expensive for all concerned. For owners and operators it means paying twice over for the same thing - which makes no commercial sense; even though in this case, the assureds between them recovered US$5 million overall rather than just the US$2.5 million under the Jones policy they still had to pay the premium to O'Kane. Moreover they were brought into the dispute about the contribution due from Jones, so they had to incur legal costs not all of which Jones was ordered to pay.

The problem would never have arisen had the new managers checked with their brokers whether the O'Kane policy had been cancelled before taking out the Jones policy themselves. Owners and operators should take care to try to ensure they are fully aware of the cover they have in place before seeking further insurance. This was an unusual case, but simple things like checking whether policy periods overlap can easily be overlooked, especially if it is not clear who within any ownership structure has responsibility for insurance coverage.

Despite everyone's best efforts, however, double insurance will still occur. Once a loss happens there is no going back - unless an exclusion applies the insurers will have to contribute. Working out the contribution due from each insurer should be easier, however, as insurers and assureds now have authoritative guidance, so hopefully this will speed up payments to assureds.