{"id":307658,"date":"2025-11-21T03:02:55","date_gmt":"2025-11-21T03:02:55","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/legal\/court-upholds-pay-to-be-paid-clause-in-marine-insurance\/"},"modified":"2025-11-21T03:02:55","modified_gmt":"2025-11-21T03:02:55","slug":"court-upholds-pay-to-be-paid-clause-in-marine-insurance","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=307658","title":{"rendered":"Court Upholds \u201cPay to Be Paid\u201d Clause in Marine Insurance"},"content":{"rendered":"


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MS Amlin Marine NV v King Trader Ltd and Others [2025] EWCA Civ 1387<\/a><\/p>\n

The Court of Appeal has recently affirmed\/upheld the principle that the pay to be paid clause in a marine insurance policy<\/a> is valid and effective. Therefore, the insurer of an insolvent assured was able to rely on this clause to avoid payment to third parties, who were seeking to bring a claim directly against the insurer under the Third Parties (Rights against Insurers) Act 2010.<\/p>\n

What Is the \u201cPay to Be Paid\u201d Clause in Marine Insurance?<\/h2>\n

The pay to be paid rule in marine insurance is a well-established and a well-known rule, under which an assured should first discharge any loss, expense, or liability to third parties, before it can recover the money from its insurer. In this case, the assured became insolvent and could not pay for the loss caused to a third party who would have been entitled to be compensated. The third party sought to bring a claim directly against the insurer, but failed, because of the pay to be paid clause.<\/p>\n

Key Facts of MS Amlin Marine NV v King Trader Ltd<\/h2>\n

King Trader (the Owners) time-chartered the vessel Solomon Trader to Bintan Mining Corporation (the Charterers\/Assured) by a time charterparty dated 29 May 2017.<\/p>\n

On 4 to 5 February 2019 the vessel grounded in the Solomon Islands. Later the Charterers became insolvent.<\/p>\n

On 14 March 2023 an LMAA arbitration tribunal in Hong Kong found that the Charterers were liable in damages to the Owners and a third party, the Korea Shipowners\u2019 Mutual Protection and Indemnity Association, in respect of the grounding. The total amount awarded exceeded US$47 million.<\/p>\n

The Charterers were insured by Amlin<\/a> (the Insurer), under a Charterers\u2019 liability insurance policy, at the time of the grounding. The maximum sum insured was US$50 million \u201cany one accident or occurrence combined single limit\u201d.<\/p>\n

Under the policy, Amlin would indemnify a third party \u201cagainst the Legal Liabilities, costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance \u2026\u201d. The term \u201cLegal Liability\u201d was defined as \u201cLiability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body\u201d.<\/p>\n

However, the policy also provided that: \u201cIt is a condition precedent to the Assured\u2019s right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability.\u201d (the pay to be paid rule).<\/p>\n

The Owners and their Insurers sought to bring a claim directly against Amlin by virtue of the Third Parties (Rights Against Insurers) Act 2010<\/a>.<\/p>\n

It was common ground that the Charterers\u2019 liability had been \u201cestablished\u201d by the arbitration award, a precondition for a direct claim under section 1(4) of the 2010 Act.<\/p>\n

However, there was the issue of the \u201cpay to be paid\u201d clause. In circumstances, where the assured was insolvent, and in the policy, there was a \u201cpay to be paid\u201d clause, a claim against the insurers was not possible by the terms of the policy.<\/p>\n

The only exception is if the claim is in respect of death or personal injury, in which case, a third party can bring a claim directly against the insurer, even if the assured is insolvent. (section 9(5) of the 2010 Act). However, in the present case, the claim was not for personal injury.<\/p>\n

In the first instance, the Court held that no indemnity was payable by the Insurer in respect of any liability that the Charterers had not discharged.<\/p>\n

Court of Appeal Decision Explained<\/h2>\n

The Owners and their Insurers appealed the decision. They argued that the pay to be paid clause was inconsistent with the insuring obligation. They also argued that the pay to be paid clause was an onerous clause<\/a> that had to be clearly brought to the Charterers\u2019 attention, as if there was a red hand pointing at the clause (the \u201cred hand\u201d doctrine). Since the clause had not been pointed out to the Charterers when they agreed to the policy, the clause should be considered ineffective.<\/p>\n

Held, that the appeal would be dismissed. There was no inconsistency, and the clause was not onerous.<\/p>\n

There was no inconsistency<\/h3>\n

The indemnity fell due when the award was made, but the indemnity could not be enforced until the assured had paid the claim. That was a qualification, not a negation of the indemnity.<\/p>\n

Pay to be paid clauses are commonly used in the insurance and reinsurance industry.<\/p>\n

The clause was not onerous<\/h3>\n

The argument of \u201cred hand doctrine\u201d, reclassified by the Court of Appeal as the \u201conerous clause doctrine\u201d, was that where a clause was particularly onerous, there was a duty for the party who sought to rely on that clause, to bring the clause to the other party\u2019s attention, otherwise the clause would not bind the contracting party.<\/p>\n

In the present case, the doctrine did not apply. The pay to be paid clause was not unusual but was widely deployed in marine policies. The assured was represented by a professional broker, and this was a commercial contract between parties of approximately equal bargaining power.<\/p>\n

Accordingly, the appeal was dismissed.<\/p>\n

FAQs<\/h2>\n

Q: What does the \u201cpay to be paid\u201d clause mean in marine insurance?
A: It requires the assured to discharge liability before claiming indemnity from the insurer.<\/p>\n

Q: Does the Third Parties (Rights Against Insurers) Act 2010 override this clause?
A: No, except for death or personal injury claims under section 9(5).<\/p>\n<\/div>\n