November 2002

"Pay to be paid" provisions in non-mutual marine liability policies are to be interpreted in the same manner as "pay to be paid" provisions in mutual insurance policies.

Walter A. Conohan and Eastern Marine Underwriters Inc. v. the Cooperators, 2002 FCA 60 (released February 11, 2002)

There was a collision between vessels A and B. Vessel B was insured under a marine liability policy issued by Cooperators to G, vessel B's owner and master. C, the owner of vessel B, and EMU, C's insurer, sought repayment from G. Cooperators refused to pay for vessel A's damages (repairs and loss of use) until there was a finding of liability against G and G paid for C's losses. G did not have the money to pay. C and EMU threatened to sue G. G admitted that the collision was his fault due to his errors in navigation and failing to keep an adequate lookout. He assigned his rights under his Cooperators policy, in respect of the claims against him and vessel B, to C.

C and EMU then sued Cooperators on G's policy seeking reimbursement. Their action was dismissed at trial. The dismissal was affirmed on appeal.

The case deals with the collision liability coverage provided by clause 16 of the Fishing Vessel Wording Rider. The Federal Court of Appeal, agreeing with and applying U.K. decisions, held that a clearly worded "pay to be paid" requirement in a non-mutual insurance policy is to receive the same interpretation it would in a mutual insurance policy. The insured must first pay in order to be repaid. The Court stated that "the ordinary meaning of the words employed in the clause plainly required that payment first be made to the third party as a condition precedent to recovery." The relevant portion of the clause 16 of the Fishing Vessel Wording Rider is:

It is further agreed that if the vessel hereby insured shall come into collision with any other vessel and the insured shall in consequences thereof become liable to pay and shall pay by way of damages to any other person or persons any sum or sums in respect of such collision for ... [damage to the other vessel, property on the vessel, general average, salvage, etc] the insurer will pay the insured such sums so paid ..." [emphasis added]

The Court also affirmed the principle that the insured's impecuniousity is not grounds for the court to ignore a clearly stated "pay to be paid" requirement. The remedy in equity, which in the absence of an express pay to be paid requirement might otherwise permit the insured to enforce the policy obligation to indemnify for insured liability without first paying, does not apply.

D.C.