50:50 clause

Most of us are familiar with the 50:50 clause. Used in Project insurance and marine cargo insurance, this clause seeks to spell out how losses which are discovered after completion of the marine transit at the project site will be settled and by which insurer. If the project insurance and marine cargo insurance are with different insurers, the problem gets compounded. Typically, the cargo insurer would say that the loss did not happen during transit while the project insurer would argue that there is nothing to show show that the loss happened at the project site. The poor assured could well be wringing his hands in despair despite having both policies in place.

A normal 50:50 clause in a marine cargo policy would read as —

‘Where separate CAR/EAR insurance has been affected by the Insured it is agreed that in the event of loss or damage to the Property insured due to a peril insured against hereunder being discovered after the risk has terminated under the marine insurance and, if after proper investigation it is not possible to ascertain whether the cause of such loss or damage happened prior to the termination of the marine venture or subsequently, it is understood and agreed that the Insurers herein shall contribute 50% of the property adjusted claim, the CAR/EAR Insurers also agreeing to contribute 50% of the claim, such contribution to be without prejudice to subsequent final apportionment of the claim as may be agreed between the Insurers herein and the CAR/EAR Insurers in the light of the terms and conditions of the respective policies.’

Seems quite simple …. the assessed loss is shared by the Project insurer and the Cargo insurer in 50:50 proportion. Practical application and implementation often becomes difficult and many such cases land up in Court. One such case was the one between European Group Ltd and others v Chartis Insurance UK Ltd (formerly known as AIG (UK) Ltd and AIG Europe (UK) Ltd) in 2012 before the High Court of Justice, Queen’s Bench Division. The judgement brought home the fact that the mere inclusion of the 50:50 clause does not mean the loss will be shared between the project insurer & cargo insurer. There has to be a deep-dive to ascertain the facts of the case to see if the 50:50 clause comes into play at all.

Facts of the case are as under:

Lakeside Energy was setting up a waste recycling plant in the UK and had appointed Itochu and Takuma as EPC contractors. The EPC contractors in turn had sub-contracted the manufacture of Economizer blocks (which contained lengths of tubes) to Vulcan SA in Romania. European Group Ltd were the insurers for EAR & ALOP while Chartis Insurance (UK) covered the marine cargo insurance & DSU. Both policies had the names of the principals & EPC contractors and both policies were subject to 50:50 clause.

The economizer blocks were moved from the factory near Bucharest to the port of Constanta by road and then by sea to Southampton and again by road to the project site. After 4-6 months of the economizer blocks reaching the project site, cracks were noticed in the tubes. Everyone was unanimous in their opinion that ‘Fatigue Stress’ was the cause for the cracks. Differences arose on the reason or what caused the fatigue stress. The project insurer, European Group argued that the fatigue stress was caused due to resonant vibrations occurring on the uneven Romanian roads during transit. The cargo insurer, Chartis vehemently opposed this saying the fatigue stress could not have occurred during the road or sea transit and it was due to the turbulent winds blowing at the project site. They also brought in the exclusion for ‘inherent vice’, stating that even assuming the road conditions were bad, the design of the economizers and the quality of welding also would have contributed the loss. So if there be two proximate causes, one covered under the policy and the other a specific exclusion, the exclusion should prevail.

The issues before the Court were — 1) Was the cause of damage resonant vibrations during transit or strong winds at the project site? 2) If resonant vibrations during transit was one cause, can the additional defence of inherent vice taken by Chartis be upheld? 3) Did the assured actually suffer the quantum of loss stated?

In addressing these issues, the Court brought out when the 50:50 clause could be invoked. Point 3- The quantum of loss 4.6 million pounds was, in the opinion of the Court justified. On Point 1, The Court accepted the expert opinion submitted by European Group to establish that resonant vibration caused by wind at the project site could be ruled out a cause of damage. It was not considered a ‘realistic enough mechanism’ to explain the damage. However, the Court did not immediately say that 50:50 clause would be invoked. As an explanation it was said — this clause will be applicable if: “(a) there was such certainty that it is not possible to reach any conclusion as to when the damage occurred; or (b) one theory is so improbable that even if the other theory is ruled out, it cannot as a matter of common sense be described as more likely than not to have occurred”.

The Court having discounted the theory of strong winds causing the vibrations, now looked at the theory of rough roads in Romania leading to or aggravating the damages. The Court found evidence of rough roads and missing/ineffective packing between the wires and concluded that it was a credible and realistic theory for the vibrations. On the basis of probabilities, it was concluded that the ‘transport theory’ was stronger than the ‘wind theory’ and the damages had occurred prior to arrival at the project site. The defence of inherent vice was also shot down by the Court saying that the only proximate cause was the missing/ineffective packing which was a fortuity and not the design of the economizer.

The 50:50 clause did not come into play at all and the entire liability was on the cargo insurer. So the 50:50 clause is not an easy option which both insurers would agree in a jiffy. Every effort will be made by both insurers to establish that the loss does not fall under their policy. Possibly one reason why it is prudent to have the same insurer insure both the erection and transit. Not always possible though.