01 AUG 2005
It is well established under most legal regimes that, in case there has been a both-to-
blame collision, the settlement between the vessels shall be based on the single liability
principle. When the shipowners turn to their insurers providing cover for collision
liability, the settlement will almost equally certainly be based on cross liability. But
what if one of the vessels can limit liability?
Introduction
Following a both-to-blame collision, the applicable principles are well settled and relatively
simple, in that settlement between the vessels shall be based on single liability, whilst the
settlements between the shipowners and their respective insurers are carried out based on
cross liability. However, in case either of the vessels is entitled to limit liability, some sets
of hull and machinery insurance conditions, notably the various English conditions, deviate
from the general principle of applying cross liability and provide that the single liability
principle is to be applied. The reason is, apparently, that it is thought not to be possible to
carry out a cross liability settlement in cases involving limitation of liability. The
Norwegian Marine Insurance Plan of 1996 (NMIP) on the other hand establishes that the
cross liability principle shall be applied in all cases.1
Basic principles
In a single liability settlement between two colliding vessels, each vessel is liable for its share
of the total amount of losses suffered by both vessels, according to its degree of fault. For
instance, if both vessels are equally to blame, and vessel A and B have suffered losses of
USD 400 and USD 1,000 respectively, each vessel should carry 50 per cent of the total
amount of loss, i.e., USD 700 each. To achieve the necessary balance, vessel A has to pay the
difference between its own loss (USD 400) and the USD 700 they ultimately should bear, i.e.,
(USD 700 USD 400) USD 300 is payable by A to B. There is thus only one (single)
liability payable between the parties.
Under the cross liability principle, each vessel is liable according to its degree of fault for the
losses suffered by the other vessel, and consequently there will be two liabilities. For
example, vessel A is liable for 50 per cent of Bs losses (equalling USD 500), and vessel B is
liable for 50 per cent of As losses (equalling USD 200).
Perhaps not surprisingly, as between the two vessels the end result will be the same
whichever principle is applied.
According to the law of the major shipping nations, the shipowner has the right to limit
liability in a number of cases where his vessel has caused loss to a third party. National
legislation is often based on the Convention on Limitation of Liability for Maritime Claims
(LLMC), 1976, and it is made clear that the shipowner can only limit his liability on the
balance after claim and counter-claim have been set off against each other, i.e., on the
single liability,2 as it would not make sense to allow limitation of a vessels gross liability
before set-off of the vessels own claim. One could then end in a situation where both vessels
could limit liability, in which case the largest vessel (with the highest global limitation)
would always be on the paying side irrespective of the extent of damage/loss suffered by each
vessel.
1 NMIP 4-14.
2 LLMC Article 5.
Why is it necessary to apply cross liability in the internal settlement between the
assured and his insurers?
As shown above, it does not really matter whether the settlement between the vessels is based
on single or cross liability, as the end result will be the same.
On the other hand, when the shipowner turns to his various insurers, the losses suffered will
normally consist of insured and uninsured losses and the liabilities towards the other vessel
may be covered by hull and machinery or P&I, depending on the nature of the other vessels
claim. It is therefore necessary to open up the single settlement between the vessels in order
to place the liabilities and recoveries where they properly belong. A simple example may
illustrate:
Following a collision between X and Y, vessel X suffers (insured) physical damage of USD
500 and (uninsured) loss of use of USD 500. Vessel Y suffers no damage other than a few
paint scratches at no cost. Blame is apportioned equally, which will result in vessel Y paying
50 per cent of Xs losses, i.e., a total payment of USD 500; the hull and machinery insurer
receives USD 250 as recovery for physical damage and the assured receives USD 250 as
recovery for loss of use. If vessel Y also suffers damage/losses of USD 1000, there will be no
payment between the vessels, as their respective damage/losses reflect their share of blame.
Assuming that any collision liability falling on X is covered by its P&I insurer, if the
settlement between X and its insurers had been based on single liability, there would be no
recovery nor any liability, as there was no payment effected between the vessels. But from
Xs perspective, why should the (arbitrary) amount of Ys losses have any impact on Xs
recovery of its own losses? And why should the P&I insurer covering collision liability
benefit from the (equally arbitrary) amount of losses on its own vessel? Clearly, therefore, the
internal settlement between the shipowner and his insurers must be based on cross liability.
Therefore, in the latter scenario, although there is no payment between the vessels, Xs P&I
insurer must pay 50 per cent of Ys damage/losses or USD 500, which is credited to X and
the hull and machinery insurer as a recovery of USD 250 each (i.e., Xs recoveries will not be
influenced by Ys losses).
The above principles are subscribed to by all markets, provided there is no limitation of
liability on either side. However, cross liability should be applied also in case of limitation, in
line with the Norwegian approach. The question of whether that is possible to do has been
well documented on several occasions and should be undisputed,3 although certain English
authoritative text books have suggested that it is impracticable. The clue is that the general
principle of application of cross liability is modified in the last sentence of NMIP 4-14,
which provides that If the limitation is applied to the balance between the liabilities of the
assured and the injured party, the largest calculated gross liability shall be reduced by the
same amount by which the balance has been reduced. How this may work in practice is
perhaps best shown by the use of examples comparing the Norwegian and English insurance
conditions where limitation comes into play. The examples are adapted to highlight the
differences in the end result for the insurers and the insured.
3 See for instance the article published in 1961 (AfS 4.458) by Prof. Sjur Brkhus of
the Scandinavian Institute for Maritime Law, giving a thorough theoretical analysis
of the issues. See also Wilmot, Who has got his cross liabilities crossed? in
LMCLQ 1989, p. 450-464.
Examples
One could have written hundreds of pages about single and cross liability, still the principles
might be hard to grasp in the absence of examples. Therefore, some of the following
examples may help to illustrate how the different insurance conditions work in practice.
Assume a collision between A and B, and their losses being as follows:
Vessel A:
Hull damage USD 2,600,000
Loss of earnings (40 days @ 35,000) USD 1,400,000
As losses claimed against B USD 4,000,000
Vessel B:
Hull damage USD 4,000,000
Loss of earnings (50 days @ 40,000) USD 2,000,000
As losses claimed against B USD 6,000,000
Comments:
It will be noted that the settlements are by and large equal to example 1a, as both settlements
are based on the cross liability principle. However, the observant reader will note that the
total payment from hull and machinery insurers (covering four-fourths RDC), which must be
compared with the total payments from hull and machinery and P&I under 1a above
(covering three-fourths and one-fourth RDC respectively), is now USD 6.3 million, i.e., USD
50,000 more than under the English approach. The reason is that under the NMIP the assured
is better off as he is entitled to a proportional recovery of the particular average deductible
borne4 (i.e., 25 per cent of USD 200,000), whilst under ITCH 1/10/83 in principle the assured
will have to bear his full deductible until the insurer has recovered all of his losses.5,6
4 NMIP 5-13, 2nd sub-paragraph.
5 ITCH (1/10/83) Clause 12.3.
6 It can however be mentioned that the recent International Hull Clauses (1/11/03)
have adopted the Norwegian approach in this respect.
Limitation
So far so good, and the small difference in the examples above is something that can hardly
be criticised to any extent, although the NMIP produces a better solution for the assured. The
important issue, however, is that both regimes provide for a cross liability settlement in the
internal settlement between the assured and his insurers.
Let us now look at the position where the liability of A is subject to global limitation.
Example 2a
Assumptions as 1a above (based on ITCH 1/10/83), but the global limitation amount is
USD 3,499,000.
Settlements:
i) Settlement between the parties (single liability):
A to bear 75 per cent of total losses of USD 10 million USD 7,500,000
Less own damages USD 4,000,000