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The Reasons for Change.
The reason for the first change has been said to be to reinstate a distinction between the defect and its consequential damage to what, it is said, it was understood to be prior to the Court of Appeal decision in the “Nukila” (1997), but to do so without referring to ‘part’. However, the first difficulty with this explanation is that the “Nukila” decision turned on a finding of fact that there had clearly been damage. This, under a policy which also contained the Institute Additional Perils Clause, meant that the cost of repairing the defect was in fact covered anyway. Furthermore no previous authorities were overruled in the “Nukila” judgments. As to the relevance or meaning of ‘part’ in the context of latent defects, where the defect is in a continuous structure such as a hull there never has been consensus as to what constitutes a part. That is a difficult but often purely factual area. In the “Nukila” underwriters had put their case very high, accepting in their argument that the hull of a ship would be a single part so that no system of fatigue cracking short of total loss (however extensive and whether or not leading to shearing or other tensile failures) could (they argued) amount to damage to the hull for the purposes of the Inchmaree Clause. One wonders if the desire to resurrect this argument is part of the reason for the change referred to above.
It can be said that the new wording does in one sense refer back to the ‘Nukila’. There Lord Justice Hobhouse , as he then was, said “Correcting latent defects is, as a matter of principle, an expense to be borne by the shipowners and not the underwriters.” This statement would seem to me to be the foundation for the introduction of a threshold of the cost that would have been incurred to correct the latent defect.
The New Clause – In Operation.
However, to see what is covered one must look at the whole of the new clause. It is then clear that the basic coverage for latent defect claims is exactly the same as with previous Institute Time Clauses i.e. loss of or damage to the subject matter insured caused by latent defect in the machinery or hull.
In the case of damage, if it is repaired, it is the reasonable costs of repairing that consequential damage after allowing for any deductible, that is claimable. Any claim should therefore initially be adjusted in exactly the same way under all three sets of Clauses (1983, 1995 and 2002). Then, in the case of the new clauses, there is the novel restriction on coverage to be considered - do the actual costs so adjusted of repairing the consequential damage exceed the costs that would have been incurred to correct the latent defect? To the extent that they do, the assured may recover.
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