Insurance Jottings
An overview of the insurance implications of a mega box ship casualty
Article from Standard Club
A mega box ship casualty will result in a number of losses and third party liabilities for an owner. This article looks at the major areas of P&I cover that respond to a major casualty incident.
P&I claims handling
From the outset, the club will work closely with our member and its hull insurers to ensure that prompt action is taken to try and avoid and mitigate any losses and liabilities.
Loss of life and personal injury of crew
The crew’s safety and wellbeing is at the forefront of our minds when dealing with any casualty or major incident. Upon notification to the club of any such incident, usually a search and rescue operation is already underway.
The club, via its extensive global network of correspondents, will help ensure that the crew members receive the best level of medical treatment and are properly assessed before their repatriation home is arranged. The club is also able to draw on the services of CEGA, a specialist medical management company, part of the Charles Taylor group, in appropriate cases.
The cost of medical treatment and repatriation is covered under an owner’s P&I policy as are the costs of the funeral for any crew member who may have died as a result of the incident.
P&I cover also responds to a member’s responsibility at law and/or under a collective bargaining agreement and the employment contract to compensate the crew member (or their family) for any injury or death in service.
Liability of the owner to crew for the loss of personal effects is also covered.
Collision liability
Typically, a ship’s hull underwriter will cover three-fourths of the liability of the insured ship in respect of loss of/damage to another ship and her cargo as a result of a collision. Generally, this means one-fourth of this liability is covered by the ship’s P&I policy (although other arrangements are often in place).
Hull underwriters and P&I will work together in respect of handling collision
liability and the provision of security.
Pollution
Over recent years, there has been a significant increase in an owner’s liability for pollution caused as a result of a casualty or incident, such as an escape of cargo and/or bunkers. The club and the owner will work actively with organisations such as ITOPF to try and mitigate the effects of any pollution.
P&I cover will respond to an owner’s legal liability for such accidental pollution as well as steps to be taken to try and prevent and/or minimise any such pollution following an incident.
The club can also provide security by way of a letter of undertaking for P&I liabilities such as pollution and wreck liabilities to allow a ship to enter a port for refuge.
Wreck liabilities
P&I cover includes liabilities for or incidental to the raising, removal, destruction, lighting or marking of the wreck of the ship (or cargo or property carried on the ship). The value of the wreck and all stores and materials saved will be deducted from any reimbursement payable to members.
Cargo liabilities
A mega box ship has the capacity to carry a huge volume and variety of cargo which means that any casualty or incident involving a mega box ship has the potential for an extraordinary number of cargo claims.
Unless different arrangements are agreed in advance with the club, cargo liability
cover is given on the basis that the contractual terms of carriage are no more onerous than those of the Hague or Hague-Visby regimes (or Hamburg Rules where applicable by law).
P&I cover also responds to an owner’s liability to discharge or dispose of
worthless cargo (provided such costs cannot be recovered from any other party). As is discussed later in this publication, local and international regulations must be adhered to when disposing of damaged and often hazardous cargo which can make this process very complicated and expensive.
Cargo’s proportion of general average or salvage
P&I cover extends to the proportion of general average, special charges or salvage which an owner is or would be entitled to claim from cargo interests or another party which is not recoverable solely by reason of a breach of the contract of carriage.
SCOPIC
SCOPIC (or Special Compensation P&I Clause) is an adjunct to the Lloyd’s
Open Form salvage contract, designed to encourage a salvor to respond where there is a threat to the environment but where the traditional assessment of salvage renumeration may not provide sufficient encouragement.
Although P&I cover includes SCOPIC remuneration, owners should be careful to ensure that no side letters are signed with the salvors without first consulting with the club as such side letters could provide cover and could render any SCOPIC security provided by the club invalid.
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Oil Tankers Steer Clear of Middle East Refuelling Hub As Attacks, Insurance Costs Rise
Oil tanker owners are avoiding sending their ships to the Middle East’s main refuelling hub after a spate of attacks on vessels in the past two months ratcheted up tensions and highlighted the growing risks of operating in the region.
Strikes on tankers just outside the Persian Gulf in mid-June were the second in a month near the Strait of Hormuz, the chokepoint through which about a third of global seaborne oil moves.
Now demand for ship fuel at Fujairah, the United Arab Emirates coastal shipping hub close to the Strait, has waned as some tankers stay away, traders involved in the regional market said.
“Only expect issues to get worse before they get better,” said Matt Stanley, a senior broker at Star Fuels in Dubai. Fujairah is seeing “a significant drop in demand owing to war-risk premiums” that are levied by ship insurers, he said.
The root cause of the slump — whether ships are avoiding the Middle East altogether or just skipping Fujairah — is not completely clear. But since the attacks in early May, insurance costs have soared and some owners turned wary of sending their carriers to the region.
One of the largest, Frontline Ltd., even temporarily paused trading from the Persian Gulf.
Fujairah provides tankers with fuel, supplies and repairs as they ply the route from the Persian Gulf through the Strait of Hormuz to refineries the world over.
Local officials say that there’s been no slump in refuelling from facilities at the port itself, but that only captures a fraction of the trade. Carriers are also supplied at anchorage areas — where four tankers were attacked in early May — and it is there that brokers and traders are reporting the drop-off.
There is no public data for overall sales, but the brokers and traders say there’s been drop of about 15% since the May attacks, although their estimates vary sharply. One broker said bunker demand had declined more than 30% to as little at 500,000 tons a month.
Facts Global Energy estimates sales have slumped to about 650,000 tons a month, a drop of about 13% compared with the period before the incidents.
Volumes reached as much as one million tons in 2016, but had been slipping since then.
Environmental Rules
Officials at the port and in the local government declined to comment on the volume of ship-fuel being traded offshore.
The amount of refined products transferred into and out of storage tanks at the port probably reached the highest level this year during June, said William List, director of operations at the Fujairah Oil Tank Terminal. That did not include data on offshore bunkering, he said.
Government economic adviser Salem Khalil said any decline in bunker volumes would likely be due to new environmental rules that will take effect next year. Fujairah expects demand at the port to increase in 2020, he said.
Multiple Challenges
The attacks are just the latest challenge for Fujairah, which has developed in recent years into a trading centre for crude oil and refined products, as well as fulfilling its traditional role as a refuelling hub.
Iran, the region’s main producer of the high-sulphur fuel oil which most ships use today, is under pressure from U.S. sanctions which threaten buyers of the country’s oil with financial penalties. Demand for that type of fuel is also set to plummet next year when the United Nations’ International Maritime Organisation will require ships either to burn cleaner fuel or scrub their emissions.
Ships will not shun Fujairah entirely because there are few alternatives close by with the same range of services, the traders said. One possibility, though, is to go to Singapore for carriers which are making return trips from Asia. That can be advantageous for tanker owners anyway if they are considering sailing to West Africa to seek their next cargoes.
Vessels which go to Fujairah solely for fuel and servicing would be more likely go elsewhere, the traders said. However, a large proportion of tankers sailing through Hormuz to load crude or fuel in the Gulf will probably keep visiting the port as those ships will have paid higher insurance premiums already, they said.
Pool Re secures £40 million non-damage business interruption retro cover led by Liberty Specialty Markets
UK government-backed terrorism reinsurer Pool Re has placed its new retrocession programme covering non-damage business interruption (NDBI) losses.
The cover, placed with Liberty Specialty Markets (LSM) as the lead market, protects Pool Re with a limit of £40 million and sits excess of both a £15 million placement attachment and separately, the member retentions.
Other key partners in Pool Re’s property damage retro programme, including Munich Re and AXA XL, also participated in the placement.
The Counter-Terrorism and Border Security Bill 2018, which was signed in February 2019, allows Pool Re to cover losses incurred if a business cannot trade or is prevented from accessing its premises in the wake of a terrorist attack that does not involve damage.
Before the law was changed, Pool Re could only reinsure losses incurred if a company’s premises had been physically damaged by terrorists.
Pool Re said the placement was made possible by the development of in-house NDBI modelling capability, returns the majority of NDBI risk to the private market, and supports its long-term strategy to “normalise the market to the maximum, sustainable extent possible”.
The cover is focused primarily on non-damage denial of access caused by a terrorist attack.
Steve Coates, chief underwriting officer at Pool Re, said:
“This is the culmination of our longstanding efforts to both enable Pool Re to cover non-damage business interruption and to return as much of the risk to the private market as possible. Our actuarial team, in collaboration with the broker and counter-terrorism specialists, developed an in-house model for NDBI, which allows both us and our reinsurers, to quantify and evaluate the risk.”
Lloyd’s to Require Cyber Cover Clarity in Re/Insurance Policies
Lloyd’s wants all insurance and reinsurance policies to state clearly whether coverage will be provided for losses caused by a cyber-attack, saying this was in the best interest of both brokers and customers.
Lloyd’s, the insurance market which covers risks from oil rigs to soccer stars’ legs, said all policies must provide clarity on cyber insurance by either excluding or definitely providing cover.
Lloyd’s action follows on from a recommendation by Britain’s financial watchdog the Prudential Regulation Authority which wrote to insurers in January saying they should have plans to reduce the unintended exposure which could be caused by unclear cyber cover.
A coordinated global cyber-attack, spread through malicious email, could cause economic damage anywhere between US$85 billion and US$193 billion, a hypothetical scenario developed as a stress test for risk management showed earlier this year.
Cyber-attacks have been in focus after a virus spread from Ukraine to wreak havoc around the globe in 2017, crippling thousands of computers and disrupting ports from Mumbai to Los Angeles.
Governments have repeatedly warned about the risks private businesses face from such attacks, both those carried out by foreign governments and financially motivated criminals.
Lloyd’s, the specialist insurance and reinsurance market, which includes 80-plus syndicates, said its underwriters should ensure that all policies starting in 2020 for first-party property damage should make the status of cyber cover clear.
For liability and treaty reinsurance the requirements will come into effect in two phases during 2020 and 2021, Lloyd’s said.