The Swedish Club may yet be able to reduce its payout costs following a serious 2012 fire that led to a bulker being declared a constructive total loss (CTL).

The insurer has argued that it was only liable for a partial loss claim in the case of the 38,400-dwt Greek-controlled Renos (built 1985), which was hit by a blaze in the Red Sea off Egypt.

It had appealed to the UK Supreme Court to overturn a 2016 high court ruling that classed the claim as a CTL. The judgement was later backed up in the appeal court.

But the Supreme Court has now set aside the high court order and referred the case back to the original high judge, Justice Robin Knowles, for him to determine whether it was indeed a CTL.

It partially allowed the club's appeal in a ruling on Wednesday.

The blaze severely damaged the engine room, required steel replacement and involved a Lloyd’s Open Form (LOF) salvage operation, with the special compensation protection-and-indemnity (P&I) clause (Scopic) provision aimed at minimising environmental damage also invoked.

The hull and machinery of the Machrimar Management-operated, Connect Shipping-owned Renos was insured for $12m by underwriters led by the Swedish Club, with the mutual providing full cover for a further $3m of increased-value insurance.

Lord Jonathan Sumption lead the supreme court panel which had to consider what types of costs incurred in the salvage of a damaged ship qualify when assessing whether it is a CTL.

Two key issues decided

There were two issues in play.

The first was whether the cost of repairing the damage to the vessel includes expenditure already incurred before the service of notice of abandonment. The Swedish Club's appeal was dismissed on this point.

The judges said: "As a general rule, the loss under a hull and machinery policy occurs at the time of the casualty and not when the measure of indemnity is ascertained. This rule applies even if the loss developed after the time of the casualty, unless it developed as a result of a second casualty breaking the chain of causation."

But the appeal was allowed under the second question, which hinged on whether Scopic charges counted towards the relevant costs of a CTL.

The Supreme Court ruled that the purpose of Scopic charges are to protect an entirely distinct interest of the shipowner, namely potential liability for environmental pollution.

"It follows that the courts below erred in holding that Scopic charges are part of the 'cost of repairing the damage'," it added.

Underwriters supporting the Swedish Club’s defence of the Renos claim included Dutch insurance group Reaal Schadeverzekeringen, the People’s Insurance Co of China, AXA, HCC, Warta and the Lloyd’s syndicates Kiln 510, Ark 4020 and Hardy 382.

Renos was sold for demolition for $3.5m in 2013 to breakers from Pakistan.