Keywords and phrases: sue & labour, loss prevention and mitigation clause, mitigation of damages, marine insurance, insurance policy.

Introduction

Various clauses are common in marine insurance, with the sue & labour clause occupying a prominent place. This clause obliges the insurer to compensate not only for the immediate damage from an insured event but also for the policyholder’s expenses incurred in preventing or mitigating the damage. The rationale behind this clause is that the insurer’s interest lies in minimising compensation. If the policyholder’s actions result in the amount of damage subject to compensation being reduced or the damage not occurring at all, this benefits the insurer and, therefore, the policyholder should be compensated. But if the damage from the insured event does not actually occur, then what should the insurer pay for? And doesn’t the policyholder have an interest in ensuring that their losses are kept to a minimum? Let’s examine this issue of balancing the interests of the insurer and the policyholder by analysing the essence of the clause.

The Concept and Essence of the Clause

It is noteworthy that the original English term “sue & labour” does not contain a direct semantic reference to the prevention and mitigation of losses. “Sue” goes back to the Anglo-French “suer,” which means to continue, to preserve (in modern French “suivre” meaning to observe, to follow, to prosecute). The semantics of the word “labour” emphasise the difficulty of sea travel and the need to take special measures, often requiring heavy physical labour. The original texts of insurance policies, as a rule, contained a clause in the wording “to sue, labour and travel for,” where the English “travel” was likely an interpretation of the French word “travail,” similar to the English “labour.” ¹

Anyway, the literal meaning of sue & labour hardly reflects the underlying duty to mitigate loss.

In modern usage, the sue & labour clause is a mechanism for reimbursing extraordinary expenses incurred in preventing or minimising losses to the insured property ² caused by an insured event. The clause is based on the idea that, when an insured event occurs, the policyholder should not passively wait for the loss of the insured property but rather should take measures aimed at preventing such loss.

History of the Doctrine

The sue & labour clause arose because, in ancient times, carriage of cargo by sea was time-consuming, and connections between ports were slow and unreliable. Therefore, the parties to the insurance contract preferred to agree that the insured, often personally accompanying the insured cargo, would use all available means to protect the insured property. The insured was responsible for bearing the costs, which were subsequently covered by the insurance company. The insured was required to undertake the same measures to save the cargo as a prudent uninsured owner would have taken in respect of his own property.

Historically, there were two models of the clause: the Dutch-Italian model, which included the right of the insured to restore, repair, and preserve the cargo, and the Spanish-French model, which provided the right of the insured to sell the cargo to avoid insurance losses. One of the earliest versions of the French model of the clause is found in a mid-16th-century French insurance policy, which states: “And we give to him [the insured] ample power to help and give orders for the salvage of ships and merchandises or part of the same to sell and distribute them, if need be, without asking us leave or license. And we in turn shall pay all charges average and expenses borne during transportation.” ³

As for the English model of the sue & labour clause, the first mention of the clause presumably dates back to the 1613 TIGER ship insurance policy, ⁴which provided for coverage of the costs of transporting goods on board a vessel from London to Mediterranean ports. The clause in the 1779 Lloyd’s standard marine policy – the SG (Ships and Goods) Policy reads: “And in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguard and recovery of the said goods and merchandises and ship or any part thereof, without prejudice to this insurance; to the charges whereof we, the assurers, will contribute, each one according to the rate and quantity of his sum herein assured. And it is especially declared and agreed that no acts of the insurer or insured in recovering, saving, or preserving the property insured, shall be considered as a waiver, or acceptance of abandonment…” ⁵ It follows that taking measures to prevent or mitigate the threat of loss was initially advisory in nature; i. e. English insurance practice perceived mitigation as a right, not an obligation, of the insured. Later, in the Marine Insurance Act 1906, undertaking such measures was transformed into an obligation.

The modern meaning of the clause is reflected in Section 78 (4) of the British Marine Insurance Act 1906, which stipulates the insured’s duty “to take reasonable steps in all cases to prevent or mitigate loss.” If an insurance policy contains a sue & labour clause, the obligation to pay compensation under that clause is considered additional to the agreed insurance coverage. ⁶ The insured may claim reimbursement from the insurer for any expenses incurred that are covered by the insurance policy, despite the fact that the insurer has already compensated for the amount of damage or that the insured property is excluded from insurance coverage in whole or in part. ⁷

The duty to reimburse expenses is reflected in the Institute Cargo Clauses. Clause 16, “Minimising Losses,” requires the insured and its agents to take reasonable steps to prevent or mitigate losses while ensuring that the rights of the carrier or a third party responsible for the storage of the goods are respected. ⁸ A third-party guarantee clause is also called a “bailee clause” or “insurer’s liability clause for losses occurring during storage of the goods in the warehouse.”⁹ The purpose of this condition is to ensure the transfer of rights to the insurer against third parties by way of subrogation, including with respect to costs incurred to mitigate damages. In addition, the sue & labour clause is contained in clause 13 of the Institute Time Clauses Hulls. ¹⁰

The clause directly establishes the obligation of the insured to take reasonable measures aimed at reducing losses. ¹¹

The standard text of the sue & labour clause is also included in the UNCTAD model clauses for water transport insurance and cargo insurance contracts. The UNCTAD-proposed clause stipulates that the insurer is obliged to compensate the policyholder for reasonable expenses incurred in the event of loss of or damage to the vessel as a result of an insured event, or in the event of a threat of such loss or damage. ¹²UNCTAD rules clearly state that this clause does not apply to coverage of general average and salvage costs.

Duties and Responsibilities of the Insured Under the Clause

Who is subject to the obligation to mitigate losses? Section 78 of the Marine Insurance Act 1906 places this obligation on the insured and its agents. However, clause 13.2 of the Institute Time Clauses – Hulls and the Institute Cargo Clauses also refer to “servants,” in addition to the insured and its agents. ¹³

This addition implies that the vessel’s master and crew are also covered by the clause.

The question of whether the duty to minimise losses extends to the crew was raised in the case of The Gold Sky,¹⁴ which involved the deliberate denial of access to a sinking ship by salvors. The court held that the word “agents” should be interpreted restrictively, excluding the crew, in cases where the shipowner or cargo owner failed to provide the crew with clear directions and instructions regarding the measures to be taken to mitigate damages. The opposite position is evident in the case of State of Netherlands v Youell, ¹⁵which confirmed that the text of the clause implies that the shipowner delegates duties, including mitigation of losses caused by an insured event, to his agents, including the ship’s master.

The obligation to prevent or mitigate losses is the sole responsibility of the policyholder and cannot be assigned to the insurer. ¹⁶ Therefore, in cases where the insurer takes measures to reduce losses subject to coverage while protecting its own economic interests, the insurer has no right to demand reimbursement of these expenses from the policyholder or offset them against the insurance payment. ¹⁷

However, if the policyholder fails to take reasonable steps to minimise losses, he is not entitled to claim compensation for insured losses to the extent that such losses could have been prevented or mitigated had the policyholder exerted appropriate efforts. An insurer”s claim of failure by the policyholder to fulfil his duty under sue & labour clause requires proof of negligence on the part of the policyholder or its agents. Negligence is assessed based on the behaviour that would be expected of a prudent uninsured party under similar circumstances. For example, in the case of The Talisman¹⁸ the court found that the insured was required to use all reasonable endeavours to protect the vessel from sinking or damage. The dispute arose over the master’s actions upon detecting water in the hold. He could either close the Kingston valves or pump the water out. The master chose the latter option, but the vessel sank. The House of Lords ruled that it could not be assumed that the average, competent skipper, under the conditions the vessel encountered, would attempt to close the valves. However, the court noted that “a more knowledgeable person, assessing the situation impartially,” would have realised that closing the valves would have significantly increased the vessel’s chances of salvage.

The reasonableness of the measures taken has another dimension: the expenses incurred by the insured must be economically justified. For example, the insured is not entitled to claim compensation for storage costs after the goods can be reshipped. Also, the law does not permit the recovery of freight or repair costs that exceed the vessel’s market value. For example, in the case of Lee v Southern Insurance Co¹⁹ a claim was made for £213 in reimbursement for the cost of transporting cargo by rail instead of the originally planned sea shipment, which became impossible due to the ship running aground. The insurer claimed that using a rail carrier was unnecessary; repairs to the ship and re-routing the cargo were sufficient, which, even including unloading (during repairs) and loading, would have cost only £70. The latter amount was recovered from the insurer as damages, under the sue & labour clause.

Therefore, if the policyholder fails to take reasonable steps to mitigate damage, the insurer will not cover losses attributable to the failure to take appropriate measures, to the extent that the failure increased the damage. The amount of the insurance indemnity is reduced to the extent that the insurer proves that the damage has worsened.

Duties and Responsibilities of the Insurer Under the Clause

Is the insurer liable for reimbursement of expenses in cases where the policyholder has made efforts to mitigate losses in the absence of an express sue & labour clause? In modern marine insurance practice, such cases are extremely rare. However, several similar precedents are known.

For example, in Emperor Gold Mining Co Ltd v Switzerland General Insurance Co Ltd,²⁰ cargo transported from Sydney to Fiji was insured under a policy that did not contain a sue & labour clause. After leaving Sydney, the vessel developed a leak and was forced to return to port. The insured reshipped the cargo on another vessel, demanding compensation for sue & labour costs from the insurer. The insurer refused compensation, citing the absence of a relevant clause in the insurance policy. The Supreme Court ruled that, despite the absence of a clause in the policy, the insurer cannot be excused from reimbursing the insured’s expenses incurred to mitigate damage. This obligation arises from maritime custom.

In the case Netherlands Insurance Co Ltd v Karl Ljungberg²¹ the insurer was the consignee. The insurance contract contained a sue & labour clause and a bailee clause. The insured filed a claim against the carrier and, in addition, demanded that the insurer reimburse legal costs in accordance with the bailee clause. The insurer rejected this claim, arguing that it was only willing to reimburse expenses incurred in fulfilling its sue & labour obligation, as this was expressly provided for in the contract, and that additional expenses incurred under the bailee clause were not subject to reimbursement because the clause did not stipulate the insurer’s obligation to reimburse expenses, but solely the policyholder’s obligation to mitigate damages. The court ruled that the insured was entitled to recover the costs of preventing and mitigating damages, as well as legal costs incurred in pursuing claims against third parties. In justifying its judgment, the court stated that since since the bailee clause imposes on the policyholder an obligation to preserve and exercise rights against third parties in the insurer’s interests, the expenses incurred for the purpose of fulfilling such an obligation must be reimbursed by the insurer to the extent that they are related to the preservation and exercise of rights in relation to property that was damaged as a result of the insured event.

It follows from the cases discussed above that when, in the absence of a corresponding clause, the policyholder fulfils its obligation under the sue & labour clause or properly exercises rights with respect to third parties, which, as a general rule, is in the interests of the insurer, the latter may be required to reimburse the policyholder’s related expenses as a consequence of the obligation arising from the implied clause. It is quite difficult to imagine the opposite: the inclusion of a so-called “incomplete sue & labour clause” in a policy, which imposes on the insured the obligation to mitigate losses without guaranteeing compensation for mitigation efforts by the insurer. Therefore, such an incomplete clause is not used in modern marine insurance policies and is known in legal scholarship solely as a theoretical construct.

Terms and Conditions for Reimbursement of Expenses in Accordance with the Clause

Mitigation costs are, by their nature, closely related to the insurer’s liability. This thesis aligns with the existing concept of a marine insurance contract in English law as a transaction in which the insurer provides the policyholder with a guarantee that the vessel will avoid perils of the sea. ²² In this regard, the insurance premium serves as consideration for the guarantee of the safety of the maritime enterprise, and the insurance payment, in turn, is considered compensation for the breach of guarantee (indemnity). ²³It follows that mitigation costs should also be understood as the insurer’s liability. The logic is similar: as a result of the insurer’s breach of guarantee, the policyholder was forced to incur unforeseen expenses that it seeks to recover from the “bad-faith” insurer.

The right to recover expenses does not arise from successfully preventing or mitigating losses; it arises from the very fact of taking measures within the scope of the relevant clause. This entails a number of conditions for recovery under the sue & labour clause. First, only expenses incurred to prevent or mitigate damage that would otherwise be covered by the insurer are eligible for recovery. Second, if expenses are incurred to prevent or minimise damage from both insured and uninsured risks, such expenses are divided proportionately between the insurer and the insured. The fact that the losses were incurred specifically in connection with the insured risk must be proven by the insured. An example of such a combination of recoverable and nonrecoverable expenses is a situation where a vessel insured under one policy (e. g. without a sue & labour clause) and its cargo on board, insured under another policy (with a sue & labour clause), is caught in a storm. In this case, salvage of the vessel is inextricably linked to salvage of the cargo. However, the cargo insurer will be obliged to reimburse salvage costs only in proportion to the volume and value of the cargo. ²⁴

However, there are a number of exceptions where the occurrence of an insured event is not a mandatory condition for claiming reimbursement of expenses under the clause. One such exception is presented in the case of The Pomeranian, where the court ruled that the insurer shall compensate for the losses caused by the prevention of such an insured event, despite the absence of an insured event itself. ²⁵ The case concerned cattle insured against loss resulting from perils of the sea. Shortly after leaving port, the vessel encountered severe weather conditions and was towed to the nearest port for repairs. As a result, the cargo was delayed, and additional feed was purchased to support the cattle. The insured claimed the cost of the additional feed as expenses under the sue & labour clause. The insurer rejected the claim, citing that at the time the expenses were incurred, the cargo was not directly threatened by the peril against which it was insured, and in the absence of an insured event, there was no basis for reimbursement. The court ruled that the costs of the additional feed should be recovered from the insurer, as there was a real risk that the cattle could have been completely lost if the additional feed had not been purchased.

Paradoxically, the sue & labour clause in US case law does not cover losses associated with the payment of crew wages. Courts typically deny claims for compensation for the cost of paying crew members’ wages during vessel repairs (Perry v Ohio Insurance Co²⁶), the vessel’s idle time in the event of non-acceptance of abandonment (McBride v Marine Insurance Co²⁷), as well as the costs of paying for the work of an additional crew member (May v Delaware Insurance Co²⁸).

Although the prevention or mitigation of losses is often associated with salvage, not all salvage expenses are covered by the sue & labour clause. There are two categories of such expenses: the first category covers cases where the salvor is hired by the insured or acts with their consent; the second category covers the salvor’s actions in the absence of a salvage agreement with the insured. ²⁹In the first case, salvage expenses will be reimbursed to the policyholder. In the second scenario, where the salvor acts independently and voluntarily without a contractual basis, the insured has no right to claim reimbursement for salvage expenses within the sue & labour clause.³⁰

Regardless of the supplementary nature of coverage under the sue & labour clause, insurers reimburse expenses within the policy period (or in connection with an event occurring during the policy period). ³¹ Courts sometimes interpret this principle broadly, stating that covered expenses may be incurred as long as the insured property remains in danger and as long as there remains an imminent risk of increasing the amount of damage incurred. ³²

As a general rule, expenses under the sue & labour clause are reimbursed in full unless otherwise provided by the insurance policy. However, if the policy contains a “free from particular average” clause, then only losses associated with the destruction of the insured property are reimbursed (total loss). This raises the question: can extraordinary expenses incurred to prevent or minimise losses from a particular average be reimbursed? This issue is not regulated by law, and courts in most cases conclude that if the contract contains a “free from particular average” clause, any expenses not related to the loss of the insured property, even if incurred for the purpose of minimising losses, are not subject to reimbursement (Great Indian Peninsula Railway Co v Saunders, ³³ Booth v Gair³⁴). Insurance under the free from particular average model effectively excludes the possibility of compensation under the sue & labour clause.

The Correlation Between Sue & Labour Costs and Legal Costs

The issue of reimbursement of legal costs, or “legal expenses,” is treated ambiguously. English courts tend to distinguish between legal costs and sue & labour costs. For example, in Xenos v Fox, the court rejected a claim for costs incurred in litigation arising from a collision. ³⁵

The case arose from a collision between the vessel SMYRNA and a tugboat, which resulted in the steamer’s sinking. SMYRNA was insured under a policy with a sue & labour clause and a runningdown clause. The tugboat owner initiated legal proceedings against the steamer owner. The vessel’s insurer was notified of the proceedings and consented to them, but later refused to reimburse the ownerмs legal defence costs. The court also sided with the insurer, holding that the sue & labour clause only covered legal costs incurred in filing a claim for damages and did not apply to legal costs incurred by the insured when a third-party claim was filed.

Prevention and Mitigation of Losses Under Russian Law

The Merchant Shipping Code (hereinafter referred to as the MSC) contains provisions on the prevention and mitigation of losses in Article 272. The article establishes the policyholder’s obligation, upon the occurrence of an insured event, to take reasonable and accessible measures (here, unlike English law, the Russian legislator adds the criterion of “accessibility”) to prevent or mitigate losses. Measures to prevent and mitigate losses include the policyholder’s actions to secure claims against persons responsible for causing the losses. Furthermore, the MSC establishes the obligation to notify the insurer of the occurrence of an insured event, as well as the obligation to follow the insurer’s instructions when taking appropriate measures. The Russian version of the clause exempts the insurer from liability for losses arising from the insured’s failure to take measures under the sue & labour clause, regardless of whether the failure to prevent and mitigate losses was intentional or grossly negligent.

Article 275 of the Merchant Shipping Code provides an exhaustive list of expenses reimbursed under the loss prevention and mitigation clause. These expenses include: a) expenses aimed at preventing and mitigating losses for which the insurer is responsible (under Russian law, these expenses are subject to reimbursement even if the measures are unsuccessful, unlike the English approach); b) expenses incurred in compliance with the insurer’s directions and instructions; c) expenses for the purpose of establishing the specific amount of losses subject to reimbursement; d) expenses for preparing a general average statement. The provision on reimbursement of expenses regardless of the achievement of the result for which they were intended in Russian law does not mean that the obligation to reimburse arises in all cases automatically from the moment the expenses are incurred. The obligation to pay insurance indemnity arises only when the cause of the losses were caused by perils covered by the policy. The “failure” clause in this case indicates that the insurer is released from the obligation to prove the degree of effectiveness of the measures taken by the policyholder. ³⁶

With regard to the issue of reimbursement of expenses in excess of the insured amount, Russian arbitration practice generally allows for coverage, in excess of the insured amount, of expenses incurred in protecting, inspecting and salvaging a vessel that has suffered a casualty, unless otherwise expressly provided in the contract. For example, in the case of the Maritime Arbitration Commission (hereinafter referred to as the MAC) No. 2 / 2007 of 17 June 2008, a Panamanian vessel was insured by a Russian insurer under a contract containing a provision for reimbursement of necessary and reasonable expenses to prevent or mitigate damage, as well as salvage costs, if such expenses, together with the insurance indemnity, do not exceed twice the insured amount. ³⁷ The contract also stipulated that in the event of the loss of the vessel, the amount of damage exceeding the insured value is recognised as equal to it. The vessel suffered a casualty, and the shipowner filed a claim for reimbursement of expenses in full. The insurer insisted on reimbursement of only a portion of the expenses, limited to the insured amount, and also refused to cover expenses incurred not by the policyholder directly, but by third parties. Furthermore, the insurer demanded a reduction in the total insurance indemnity by the amount received by the policyholder from transferring parts of the stricken vessel to the shipbuilder. The court ordered the insurer to reimburse expenses in excess of the insured amount, citing the provisions of Article 276 of the Merchant Shipping Code. The arbitrators held that the fact that a third party incurred salvage expenses does not affect the insurer’s obligation to reimburse such expenses, since they were incurred on behalf of and in the interests of the policyholder, who was subsequently obliged to reimburse the third party for the expenses (accordingly, the policyholder also incurred expenses equal to the third party»s salvage expenses).

Costs to prevent or mitigate losses include the costs of calling at a port of refuge (similar to the cost of the vessel’s transit to a repair facility). This position was confirmed in MAC case No. 18 / 2005 of 24 May 2006, where, following an engine failure, the vessel was towed to the nearest port of Korsakov, from where it was subsequently moved to a repair facility agreed upon with the insurer. The insurer refused to reimburse the costs of calling at the port of Korsakov, citing the absence of a clause in the contract for compensation for consequential losses and cargo-related damages. The insurer also cited the insured’s failure to secure claims against third parties responsible for the engine failure (the cause of the casualty). The arbitrators found the latter argument unfounded due to insufficient evidence. The award emphasised the insurer»s right to instruct the insured on actions aimed at compensating for the damage. The arbitrators found the expenses for the stricken vessel’s call at a port of refuge reasonable and appropriate, awarding them to the insurer for reimbursement despite the fact that cargo-handling expenses were not eligible for compensation under the terms of the insurance contract. The arbitrators’ reasoning was based on the principle that the insurer covers expenses caused by the insured event. Therefore, the costs of provisions for the crew, fuel, and oil were deemed reimbursable.

A significant difference in the Russian regulation of this clause is that reimbursement is independent of the actual “effectiveness” or “utility” of expenses. Expenses are reimbursed in an amount proportional to the ratio of the insured amount to the insured value. This ensures a balance of insurance interests.

Conclusion

The sue & labour clause is one of the most common risk management tools in marine insurance contracts. The clause essentially establishes mutual obligations between the policyholder and the insurer, whereby the policyholder undertakes to take necessary, reasonable, and appropriate measures to prevent or mitigate losses, and the insurer undertakes to reimburse such expenses which facilitate minimisation of the damages subject to compensation. The sue & labour clause helps to balance the property interests of the parties to a marine insurance contract, as the policyholder is additionally motivated to exercise care and diligence with respect to the insured item, which, in turn, serves the interests of the insurer by reducing its liability for losses in the event of their mitigation or complete prevention. ■

Notes