A dispute on new for old insurance

The damaged property could be replaced under the insurance contract, but the method was not as simple as the thought of the insured in the dispute below, resulting in the lost of hundreds of millions of VND

Summary of the facts

A shipping company (Claimant) signed with an insurance enterprise (Respondent) an insurance contract (Insurance Contract). At 13:00 on 11/08/2017, the ship carrying 1,100 metric tons of steel scrap left Can Tho port for Hai Phong as port of discharge. At 19:20 on the same day, the ship had arrived at the anchorage area of Dinh An estuary and dropped anchor, waiting for suitable tides to sail further. On 12/08/2017, at 03:00 a.m. the ship heaved up her anchor to continue sailing to Hai Phong. When arriving at buoy No. 20 at 04:10 a.m. she was unable to maneuver, and had to anchor at position of 9o31.012N - 106o21.737E. The chief engineer had checked and reported that the gearbox transmission fitting had problem, therefore, the ship was unable to sail. The Captain contacted the ship owner and tugs for assistance of towing the ship to shipyard for repairing the gearbox. Right after receiving the report from the Captain, the Claimant informed the Respondent of the incident to have a solution. At 08:30 a.m. on 19/08/2017, the ship was towed by a tug to a port in Hau Giang for repair. On 08/11/2017, Claimant requested the compensation of VND 1,067,232,894 but the Respondent refused to pay. On 28/10/2019, the Claimant sued the Respondent at the arbitration.

The viewpoints of the parties

The Claimant thought that the insured event was occurred, so the Respondent had to pay indemnities of VND 1,396,319,951, including: (i) VND 1,040,552,072 for troubleshooting expenses, of which: VND 806,075,926 for buying a new gearbox and its installing cost under the repair contract; VND 23,650,000 for air fare of the mechanic to install the new gearbox; VND 220,000,000 for the cost of towing the ship to a port in Hau Giang; VND 17,506,968 for the port charge and loading cost of the gearbox; deducting VND 26,680,822 as 2.5% of deductible indemnitiy amount under the insurance contract; (ii) VND 190,767,880 for interest on late payment of indemnity money approximately counting from 30/11/2017 to the end of 29/09/2019; the Respondent had to continue paying interest from 30/09/2019 to the date of completing indemnity.

The Respondent declined to pay indemnity because of the risk outside the insurance scope liability under Section 6.2.2 of the Insurance terms and said that even if there happened indemnity, the indemnity amount could not be as so much.

Analysis of the arbitral tribunal and lessons learned

Regarding applicable law, according to the Insurance Contract, it was “... the current Vietnamese laws system. For the provisions which Vietnamese laws had not specified, the English insurance law and practice applied”.

Concerning the risk, the Arbitral Tribunal thought that it was within the insurance scope liability, so the Respondent was responsible for indemnity (this matter was rather long, but interesting which woud be reverted in another opportunity if possible).

For the claim of VND 1,396,319,951, the Arbitral Tribunal found that: (i) According to the Inspection Report, the main engine gearbox was not completely damaged, only some parts were in trouble but Claimant had replaced the new gearbox instead of repairing the damaged parts without the Respondent’s written approval; (ii) The Claimant stated that he chose the option of new gearbox replacement under the Inspector’s advice, but failed to produce evidence of this; (iii) The Claimant signed the Repair Contract with a repair company on 16/08/2017, whereas, until 21/08/2017, the mechanic dismantled the gearbox for Inspector and Chief Engineer to check and record the damaged parts. As such, the claimant already decided to take the new gearbox before Inspector, Claimant and Respondent knew the damaged status of the gearbox; (iv) Although the Claimant had provided supporting documents for the costs of repairing and fixing the damage of the gearbox and the Quotation of the repair company, it neither explained nor produced the evidence of market price at the time and place where the damage occurred to prove the reasonableness of such expenses; (v) Inspector was the person working right at the site to inspect, monitor and supervise the repair and remedial work. The Inspector’s assessment was independent and objective based on the actual extent of damage and the market price at the time and place of the damage. Therefore, the Arbitral Tribunal accepted the assessment of the inspection company and considered it to be the best evidence available to determine the reasonable costs of fixing the failure of the main engine gearbox; (vi) Subject to the provisions of Clause 3, Article 47 of the 2010 Law on Insurance Business, the Respondent had the right to recover the damaged parts of the gearbox after full indemnity at the market price of these parts. Therefore, the value of replacement materials would be deducted from the insurance indemnity amount; (vii) The repair contract did not require the Claimant to bear an air ticket for the mechanic; The repair company also didn’t request this. Therefore, the airfare from Hai Phong to Hau Giang for the mechanic was not accepted by the Arbitration Tribunal; (viii) Berth dues and loading cost of the gearbox had not been assessed by the inspection company in Annex 1 of the Inspection Report. These are necessary expenses for the repair and fixing of the incident consequences, so the Arbitral Tribunal accepted these; (ix) Costs and expenses requested by Claimant included VAT. The Claimant’s input VAT had been deducted from the output one, therefore, the VAT of the above-mentioned costs and expenses were not accepted by the Arbitral Tribunal.

From the foregoing analysis and statements, the Arbitral Tribunal decided that the Respondent ought to indemnify the reasonable costs and expenses for remedying the damage of the main engine gearbox (excluding VAT) of VND 560,021,425 including: (1) Repair cost of VND 344,106,000; (2) Towing cost of VND 200,000,000; (3) Berth dues and loading cost of VND 15,915,425; less: deductible (VND 15,000,000), 10% due to crew fault (VND 54,502,143) and value of material replacement (VND 1,186,080); the remaining amount was VND 489,333,202 and VND 109,396,135 interest due to late payment from 09/12/2017 to 03/03/ 2020. Finally, the total amount payable by the Respondent to the Claimant excluding VAT was VND 598,729,337 (VND 489,333,202 VND plus VND 109,396,135).

Please be added that the Respondent (the insurer in this dispute), having a serious sense of high respect for the law, had transferred soon the entire amount as ordered by the Arbitral Award to the Claimant even though the payment period was still much.

Ngo Khac Le - VIAC Arbitrator