It is not only since the recent “BRILLANTE VIRTUOSO” case that the consequences of an agreed value far above the real market value of an insured vessel have been widely discussed. In the “BRILLANTE VIRTUOSO” case the vessel was insured for USD 55 million under a war Hull policy plus an additional USD 22 million for disbursements and increased value (“IV”) totaling USD 77 million. The real market value of the vessel was about USD 13.5 million.
The German Hull and IV standard conditions contain a clause (cf. clause 6 (2) ADS and clause 10(4) DTV-ADS 2009) providing that, if the prerequisites of the clause are met, the insurer may reduce the agreed insurable value to the real market value of the vessel at the time of the agreement of the sum insured. This is a unilateral right of the insurer who must declare this right which they may do even after the occurrence of an insured loss. Furthermore, generally, the insurer may keep the premium paid on the basis of the unreduced sum insured.
It would appear that such a right of reduction of the agreed insurable value is not commonly used in the English market. By contrast, the Nordic Marine Insurance Plan (“NMIP”) contains a clause allowing the insurer as well as the insured to demand a modification of the agreed insurable value if there has been a significant change of the value of the interest insured due to changes in the circumstances which formed the basis of the parties´ agreement of the insurable value (cf. Clause 2-3 (2), (3) NMIP). However, it is pointed out in the commentary to the NMIP that if the insurable value was agreed on the basis of the contractual arrangements of the vessel or outstanding loans, market fluctuations will not trigger the right of reduction.
In particular, in view of the market fluctuations common in the shipping industry, German policies normally exclude the clause providing the insurer’s right to reduce the agreed insurable value. Otherwise, the assured would run the risk to buy a vessel at a market peak, and later after the renewal and a drop-in value of the vessel, they are confronted with a total loss for which they do not receive enough insurance proceeds to pay outstanding loans. One might, however, argue that this is a risk to be taken by the insured rather than the insurer because the insurer only insures the vessel’s value at the risk inception and not (indirectly) also the loan agreements with the bank. On the other hand, insurers also benefit from an agreed insurable value that is above the market value by receiving a higher premium.
As the insurer is generally aware that the vessel is insured above the real market value it only seems fair to exclude the right of reduction. In other cases, for example if the assured deceives the insurer about the market value, by application of general provisions such as the rules against misrepresentation the insurer will be free from liability.
In view of the aforementioned, the German right of reduction contained in the standard terms does not always reflect the parties’ interest which explains why it is usually excluded in the respective policies.
