In a recent ruling, the Court upheld the legitimacy of “pay to be paid” clauses in marine insurance contracts, asserting that third parties are barred from pursuing claims against insurers unless the insured party has first settled the liability. This decision clarifies how courts will address conflicting provisions within insurance contracts, according to a report by Hill Dickinson.
Case Background
On May 29, 2017, the vessel was chartered to BMC by its Owners under a time charterparty agreement. BMC subsequently secured charterers’ liability insurance from MS Amlin, effective from April 1, 2018, for a 12-month period.
The vessel ran aground in the Solomon Islands on February 4-5, 2019. On March 25, 2021, BMC entered into insolvent liquidation in the British Virgin Islands. In March 2023, LMAA arbitrators found BMC liable for over $47 million to the Owners and their P&I Club, factoring in accrued interest and costs.
In April 2024, BMC was officially wound up under the Insolvency Act 1986.
Issue at Hand
The central question was whether the “pay to be paid” clause in BMC’s insurance policy prevented the Owners and their P&I Club from claiming indemnity from MS Amlin under the policy.
Understanding “Pay to Be Paid” Clauses
“Pay to be paid” clauses—also known as “pay as may be paid” or “pay first” clauses—mandate that the insurer must first settle any liability before seeking indemnity from the insurer. This clause’s validity was confirmed by the House of Lords in 1991, even involving third parties, as per the Third Parties (Rights Against Insurers) Act 1930. The 2010 amendment to the Act retained this provision for marine insurance, with exceptions for death or personal injury cases.
The Policy Details
The marine insurance policy in question included an insurance certificate attached to MS Amlin’s “Charterers’ Liability: Marine Liability Policy 1-2017” booklet. The “Conditions” section of the certificate referenced this policy, which comprised five parts. Only parts 1 (charterers’ liability) and 4 (war risk protection) were applicable under the certificate.
The “pay to be paid” clause, found in Section 30.13, required the Assured to first discharge any loss, expense, or liability to qualify for recovery under the policy.
Arguments and Court Ruling
The Owners and their P&I Club contended that:
- The clause was either not part of the policy or did not apply to third parties.
- The clause conflicted with the policy’s primary purpose.
- An implied term should exclude the clause in cases of insolvency or inability to pay.
In its ruling, the Court outlined the principles for resolving apparent contractual inconsistencies:
- A bespoke clause may override a standard term.
- Clauses within a single document are typically meant to be interpreted together.
- Subsidiary clauses should not undermine the primary contractual objectives.
- Clauses should be construed to preserve the substantive and subsidiary provisions’ sensible content.
Applying these principles, the Court determined that the “pay to be paid” clause, while seemingly inconsistent with the policy’s terms and purpose, coexisted with MS Amlin’s right to terminate the policy upon insolvency. This ruling upheld the enforceability of the “pay to be paid” clause and denied the Owners and their P&I Club’s claim for indemnity under the policy.
