In a significant ruling for the marine insurance industry, the High Court of England & Wales has confirmed the enforceability of “pay to be paid” clauses in marine insurance policies.
What is a “pay to be paid” clause?
The “pay to be paid” concept stipulates that an insurer’s obligation to indemnify an insured only arises after the insured has paid the third-party claim in question and has consequently discharged the relevant liability.
Such a rule applies to all marine insurance policies, including P&I.
The background
MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) EWHC 1813 (Comm)
Owners: King Trader Ltd (owners of the Solomon Trader)
Charterers: BMC
Charterers’ insurer: MS Amlin
The owners fixed the vessel to the charterers under a time charterparty dated 29 May 2017. BMC held a charterers’ liability insurance policy with MS Amlin, effective from 1 April 2018 for 12 months.
On 4 February 2019, the vessel grounded in the Solomon Islands.
In March 2023, arbitrators from the London Maritime Arbitrators Association (LMAA) found BMC liable to the owners and their P&I Club in respect of the grounding for a total award amount of US$47 million.
BMC’s liability insurance included a “pay to be paid” clause, and MS Amlin argued that it meant that no indemnity was payable unless BMC had first discharged liability towards the owners. The Court had to consider whether this clause was enforceable considering BMC’s insolvency.
The High Court decision
The Court ruled that the “pay to be paid” clause was enforceable. It held that such clauses are common in marine insurance and are intended to ensure that insurers are only liable to indemnify once an insured has discharged its liability.
The Court further found that there was no inconsistency between the “pay to be paid” clause and the main purpose of the charterers’ liability policy, which was to provide liability cover.
The Court has also addressed the applicability of the Third Parties Act 2010. This Act transfers the rights of the insured to third parties in the event of insolvency.
The Court held that while the Act allows third parties to claim directly against insurers, it does not override “pay to be paid” clauses in marine insurance contracts, except in cases involving death or personal injury, which was not the case in the circumstances.
The consequences
The “pay to be paid” concept is now a protected right of the insurers and cannot be challenged as per this recent High Court decision. This means that even if there are contractual contradictions between the marine insurance policies and other documents, the “pay to be paid” clause will prevail.
We should therefore expect marine insurers to rely on this rule and resist any direct third-party actions.
Also, this court decision emphasises the need for every insured to manage their financial responsibilities and be ready to discharge any claim and liability before claiming any reimbursement from their insurers.
At the same time, we recommend any insured to carry out due diligence when dealing with a new counterparty to ensure their credible financial standing. This is to to avoid situations of insolvency which may deprive the insured of their right to claim against the insurer on the basis of the “pay to be paid” rule.
For further information, please contact the author or your Lockton representative.
