Marine Insurance Lecture

1. NEWCASTLE UNIVERSITY - OCTOBER 2017

2. MARINE LIABILITY
INSURANCE AND LAW
Simon MacLeod & Alvin Forster
North of England P&I Association
0191 232 5221
simon.macleod@nepia.com
alvin.forster@nepia.com
www.nepia.com

3. • General Module
Lecture 4 October 1000 to 1200
Tutorial 18 October 1200 to 1300
Assignment by – 03 November 1200
• Ship Module
Lecture 08 November 1000 to 1200
Tutorial 22 November 1200 to 1300
Assignment by – 08 December 1200
• Exam
Tutorial 10 January 2017 1000 to 1200
Exam fortnight beginning ___________
3
MARINE LIABILITY
INSURANCE AND LAW

4. General Module
• A brief history in marine insurance
• H&M Insurance
What it is
What it covers
• P&I Insurance
What it is
What it covers
• FD&D Insurance
What it is
What it covers
4
MARINE LIABILITY
INSURANCE AND LAW

5. What are a Shipowner’s risks?
• The ship(s) - own and others
• Property of others
• Pollution
• People
• Cargo
• Commercial
• Strikes
• War
5
MARINE LIABILITY
INSURANCE AND LAW

6. • Additional Reading
• Marine Insurance, Vol 1 Principles and Basic Practice, Robert H
Brown, Witherby
• P&I Clubs, Law and Practice, Third Edition, Steven J Hazelwood,
LLP
• Shipping Law Handbook, Fourth Edition, Michael Bundock,
Informa.
• Hill Dickinson “at a glance” shipping guides
• Swedish P&I Club – Anatomy of an Accident
MARINE LIABILITY
INSURANCE AND LAW

7. 7
Joseph Vernet “ship wreck” 1759
HISTORY OF MARINE
INSURANCE
Phoenician merchant traders
Edward Lloyd’s coffee shop

8. 8
HISTORY OF MARINE
INSURANCE

9. Shipowner’s insurance requirements:
• Hull and Machinery (H&M)
• Protecting and Indemnity (P&I)
• Freight, Demurrage & Defence (FD&D)
• War Risks
• Strike risks
9
MARINE LIABILITY
INSURANCE AND LAW

10. 10
Hull & Machinery Insurance (H&M)
MARINE LIABILITY
INSURANCE AND LAW

11. 11
HULL & MACHINERY
INSURANCE
• Institute Time Clauses (ITC) - Hulls
1983
1995
• International Hull Clauses 2002
• Covers:
• Total loss (actual and constructive)
• Partial loss (repairable)
• General average contributions
• Salvage awards
• Collision liabilities to other vessel

12. • Shipowner permanently deprived of use of ship
• Actual total loss or constructive total loss
TOTAL LOSS
Containershipping.comle-cedre.
Prestige 2002 Limburg 2002
12

13. • Ship is lost and cannot be salvaged.
13
ACTUAL TOTAL LOSS

14. • Recovery and/or repair would exceed the ships
insured value
14
CONSTRUCTIVE TOTAL LOSS

15. Loss other than a total loss:
• Partial loss (economically
viable to repair)
• Third party liabilities for
collisions (RDC)
15
PARTIAL LOSS

16. Self-unloading
bulk carrier
“Yeoman
Bontrup”:
repairable
damage
16
PARTIAL LOSS

17. 17
PARTIAL LOSS
Yeoman Bontrup:
….the aftermath

18. Loss or damage caused by:
• Perils of the seas, rivers, lakes or other navigable waters
• PERILS OF THE SEA - Fortuitous accidents or casualties, peculiar to
transportation on a navigable water, such as stranding, sinking,
collision of the vessel, striking a submerged object, or encountering
heavy weather or other unusual forces of nature.
• Fire, explosion
• Violent theft by persons from outside the vessel
• Jettison
• Piracy
ITC – Hulls Clause 6.1
INSURED PERILS -
TRADITIONAL
18

19. Subject to due diligence - loss or damage
caused by:
• Accidents in loading, discharging or
shifting cargo or fuel.
• “Bursting of boilers, breakage of shafts”
or any latent defect in the machinery or
hull.
• Negligence of master/crew
• Negligence of repairers/charterers
• Barratry
ITC – Hulls Clause 6.2
INSURED PERILS –
“INCHMAREE”
Containershipping.nl
19

20. 20
OWNER OBLIGATIONS
DUE DILIGENCE
Proviso to clauses describing perils:
• Loss or damage has not resulted from want of due
diligence by the assured, owners or managers
ITC – Hulls dated 1 October 1983
• Loss or damage has not resulted from want of due
diligence by the assured, owners or managers or
superintendents or any of their onshore management
ITC – Hulls dated 1 November 1995

21. • A party who suffers loss or incurs costs
in order to save property belonging to
others has the right of compensation
from all those who have benefited from
it
• GA can be declared by the shipowner if
there is:
Extraordinary sacrifice or
extraordinary expenditure
Intentionally and reasonably made
or incurred for the common safety
Made at time of peril
Purpose of preserving the property
from peril in a common maritime
adventure
21
GENERAL AVERAGE
DEFINITION:
“AVERAGE” = LOSS

22. General average
Examples of General Average acts include:
• Cargo jettisoned for common safety
• Fire on board and damage is caused to the ship
and/or the cargo by the fire fighting measures
• Ship is aground and the main engine is damaged in
efforts to refloat
• Expenses incurred when making for and whilst at
port of refuge which was entered for common safety
22
GENERAL AVERAGE

23. 23
GENERAL AVERAGE
“Fire on board and
damage is caused to the
ship and/or the cargo by
the fire fighting
measures”
Video Fertiliser Cargo Fire.MPEG

24. 24
GENERAL AVERAGE
Cargo 1 Cargo 2 Cargo 3
Owner
of
Cargo 1
Owner
of
Cargo 2
Owner
of
Cargo 3
Charterer’s
Bunkers
Shipowner
PARTIES TO
THE MARITIME
ADVENTURE

25. When GA has been declared, the losses can
be general average or particular average.
Losses and costs that qualify for GA
contributions are general average expenses.
Losses and costs that must be borne by only
one party (such as the shipowner - and
therefore the H&M insurer) are known as
particular average.
A general average adjuster will determine
what costs fall under general average and
which ones are particular average.
25
GENERAL AVERAGE
ADJUSTMENT

26. Another example:
APL VANDA
13 February 2016
Southampton UK
• Power failure in busy
waterway
• The decision was made
to deliberately ground
the vessel to prevent
collisions
How could this be general
average?
26
GENERAL AVERAGE

27. Payment for services rendered
voluntarily to a ship in order to:
• Save the ship, its cargo or other
property on board
• Rescue property from a ship
Salvage award assessed on salved
value and the element of danger
involved
Framework detailed in the 1989
Salvage Convention
Most common salvage contracts = LOF,
WRECKHIRE and WRECKFIXED
27
SALVAGE

28. 28
COLLISIONS
“the contact or running down of one ship by another”

29. Collision
Both P&I and H&M insurers have
potential exposure
Liabilities covered by H&M under
standard collision (RDC) clause:
H&M COLLISION LIABILITIES
• 3/4 of damage to other vessel
• 3/4 of damage or loss to cargo and
property on other vessel
• 3/4 of detention of other vessel
• 3/4 of General Average and Salvage
contributions of other vessel
29
• 4/4 of damage to own
vessel
• 4/4 General Average and
Salvage contributions of
own vessel
Why 3/4?

30. Third party liabilities not covered
under standard collision (RDC)
clause:
• Loss of life or personal injury
• Damage to property and cargo
on own vessel
• Pollution
• Wreck removal
• Unrecovered general average
expenses
H&M COLLISION LIABILITIES
Picture: Containershipping.nl
30
Who might cover
these liabilities?

31. 31
Protecting & Indemnity Insurance (P&I)
MARINE LIABILITY
INSURANCE AND LAW

32. 32
What is P&I Cover?
Insurance for a shipowners liabilities to third parties. These include:
• Cargo liabilities (damage, loss, etc.)
• Injuries and illness to crew, passengers and other persons – such as
treatment, compensation and expenses
• Damage to other parties’ property (cranes, quays, terminals etc.)
• Collision liabilities not covered by H&M insurer
• Pollution clean up and compensation
• Wreck removal
• Contributions to salvage (pollution prevention)
• Unrecovered general average contributions
MARINE LIABILITY
INSURANCE AND LAW

33. International Group P&I Clubs (Mutual)
• Collective insurance (Pooling) and
Reinsurance to very high financial
limits
• Non profit making (insurance at cost)
• In house claims handling with
expertise
• Long term relationship
• Loss prevention services
Fixed Premium Providers (Non-mutual)
• Lower financial limits
• Commercial and profit making
• Outsourced claims handling
• Short term relationship
• No specialist loss prevention
33
WHO PROVIDES P&I COVER?
More examples in the book!!

34. The P&I Club
An Association of Shipowners who:
• Provide third party liability
insurance cover
• On a mutual basis (sharing of risks)
• Is non-profit making
International Group of P&I Clubs
• 13 Member Clubs
• Over 90% of world tonnage
• Collective insurance and reinsurance
• Represent view of shipowners
• Exchange information
www.igpandi.org 34
P&I CLUB - A DEFINITION

35. 35
DEPARTMENTS IN A P&I
CLUB
Board of Directors
(Shipowners)
Managers (in-house or
third party)
Underwriting
P&I Claims
FD&D
Loss Prevention
HR & Office Services
IT
Accounts
Compliance

36. P&I Clubs that are members of the International Group can provide
cover up to:
• All Claims (except for oil pollution and people)
Approximately $8,000 million for a single claim
• Oil Pollution Claims (limited)
$1,000 million for a single claim
• People Claims (limited)
$2,000 million for a single claim on passenger claims and US
$3,000 million combined limit on passenger and crew claims
36
LIMIT OF FINANCIAL
LIABILITY

37. HOW DO WE PROVIDE THESE LIMITS?
THROUGH POOLING & REINSURANCE
US$3.1bn to
approx
US$8bn –
Overspill
Call

38. P&I Rule Book:
Rule 19 – “Risks Covered”
Broadly categorised as:
• People
• Ships
• Cargo
• Others
38
RISKS COVERED

39. 39
CLAIMS FIGURES – 2015
POLICY YEAR
Number Value
TOTAL CLAIMS 3,010 $149,525,579
PEOPLE CLAIMS 1,092 $47,387,494
CARGO CLAIMS 1,000 $57,856,518
SHIP CLAIMS 401 $38,516,412
OTHER P&I CLAIMS 93 $4,020,734
NON-P&I CLAIMS 420 $1,726,699

40. 40
PEOPLE CLAIMS
Who can be involved?
• Crew (Seamen)
• Supernumeraries
• Passengers
• Third Parties (Stevedores, Surveyors,
Pilots etc)
Claim costs include:
• Treatment
• Compensation (damages) that include
loss of earnings
• Expenses incurred by injured party
• Expenses incurred by shipowner

41. Pay damages or compensation for death, personal injury or illness
41
PEOPLE – DEATH, INJURY &
ILLNESS
AFFECTED
PARTY
STATUTORY CONTRACTUAL
DUTY OF CARE
(NEGLIGENCE)
Crew
Governed by
jurisdiction
Contract of
Employment and
Crew Agreement
Yes
Supernumaries
Dependent on
jurisdiction
No (unless a
stowaway has
been put to
work)
Yes
Passengers
e.g. EU
Passenger
Liability
Regulation
Terms contained
in the Passenger
Ticket (Athens
Convention)
Yes
Third Parties
Dependent on
jurisdiction
No Yes

42. Expenses for:
• Landing injured or sick
persons
• Assisting persons in
distress
• Landing stowaways or
refugees
What are these expenses?
42
DIVERSION EXPENSES

43. 43
SHIP CLAIMS
• Collisions
• Damage to Property (FFO)
• Non-contact Damage
• Wreck Removal
• Towage
• Pollution
• Salvage and General
Average Contributions

44. • Liabilities to the other ship:
Assuming ITC hull policy with 3/4 liability RDC clause
44
COLLISIONS – LIABILITIES
P&I LIABILITY H&M
LIABILITY
SHIP DAMAGE 1/4 3/4
DETENTION 1/4 3/4
PROPERTY ON SHIP 1/4 3/4
CARGO 1/4 3/4
GENERAL AVERAGE 1/4 3/4
SALVAGE 1/4 3/4
PERSONAL INJURY 4/4 No
POLLUTION 4/4 No

45. • Liabilities to own ship and other parties:
Assuming ITC hull policy with 3/4 liability RDC clause
45
COLLISIONS – LIABILITIES
P&I LIABILITY H&M LIABILITY
OWN SHIP DAMAGE No 4/4
OWN SHIP GENERAL AVERAGE No 4/4
OWN SHIP SALVAGE No 4/4
PROPERTY NOT ON SHIPS 4/4 No
CARGO ON OWN SHIP 4/4 No
PERSONAL INJURY 4/4 No
POLLUTION 4/4 No
WRECK REMOVAL 4/4 No

46. Damage to fixed and floating
objects (FFO):
• Cranes
• Quays/Berths
• Buoys
• Port Facilities
FFO Claim = Physical Damage + Consequential Losses
46
DAMAGE TO PROPERTY
(FFO)

47. 47
DAMAGE TO PROPERTY
(FFO)

48. 48
NON-CONTACT DAMAGE TO
SHIPS

49. Sources of pollution:
• Oil – Cargo, Bunkers and Bilge Water/Oil
Waste (MARPOL Annex I)
• Noxious Liquid Substances in Bulk (Annex II)
• Harmful Substances in Packages (Annex III)
• Sewage (Annex IV)
• Garbage (Annex V)
• Air Pollution (Annex VI)
• Ballast Water (BWM Convention)
• Hull coatings (Anti-fouling Convention)
49
POLLUTION

50. 50
WRECK REMOVAL

51. Towing can be:
• ‘customary’ (e.g. harbour
towage)
• ‘other than customary’ (e.g.
salvage operation)
P&I Clubs cover the liabilities
associated with towage under
an approved towage contract
P&I Clubs generally do not cover
actual costs of a towage
operation
51
DURING TOWAGE

52. 52
CARGO CLAIMS
Different vessels carry different
cargoes which present
different risks
Cargo Ship Types
• Bulk Carrier
• Container Ship
• General Cargo Ship
• Crude Oil Tanker
• Product Tanker
• Chemical Tanker
• Gas Carrier (LPG or LNG)
• Car Carrier / Ro Ro
• Reefer
• Barge

53. 53
CARGO CLAIMS
Cargo Claim Types:
• Damage to Cargo (e.g.
impact damage, collapse
wetting, spoiling)
• Loss of Cargo
• Shortage
• Contamination
• Contractual / Bills of Lading
P&I Clubs are not cargo insurers.
P&I Clubs cover a shipowner’s cargo liabilities and the costs that may
arise from the loss or damage to a cargo

54. 54
CARGO CLAIMS
Typical P&I cargo claims include:
• Wet damage to dry bulk cargoes
(leaking hatch covers)
• Break bulk cargo damage due to lack
of securing and shifting
• Improper ventilation during voyage
leading to condensation
• Inadequate cleaning of cargo holds
or cargo tanks
• Discrepancies in the quantity of
cargo on board at loading and
discharge
54
Additional costs:
• Discharging or disposing of
damaged or worthless cargo

55. CONTAINERCARGO CLAIMS

56. • A steel exporter
(shipper) is selling steel
beams to a buyer
(consignee) in another
country
• A shipowner (carrier) is
approached to transport
these goods
56
CARRIAGE OF CARGO: AN
EXAMPLE

57. • The Bill of Lading is the
contract of carriage
between the “carrier”
(the shipowner or
charterer) and the cargo
interests (shipper and
consignee)
• Most common contract
of carriage is the Hague-
Visby Rules (H-V)
57
CARGO: CONTRACT OF
CARRIAGE

58. Seaworthiness:
• Carrier has an obligation to exercise due diligence to make a vessel
seaworthy at the commencement of voyage (Hague Visby Article
III Rule 1)
• Seaworthy means ship is fit to undertake the particular voyage
and fit to carry the particular cargo on that voyage
• Being seaworthy implies being cargoworthy
Care for Cargo:
• Carrier has an obligation to carefully load, handle, stow, carry,
keep, care for and discharge the goods carried (Article III Rule 2)
• Cargo must be loaded, cared for and discharged in the same
apparent order and condition as when delivered to the ship at the
load port
58
CARGO: CARRIER’S
OBLIGATIONS

59. 59
CARGO – CARRIER’S
DEFENCES
• H-V Rules allow exceptions where the
carrier will not be liable for the
damage or loss (eg. crew negligence,
fire, perils of the sea, war, acts of God)
• But if found liable, the Rules allow the
carrier to limit their liability (SDR per
unit or per kg of cargo)
• The ability to limit liability can be
taken away if the carrier acted with
intent to cause damage, or acted
recklessly

60. 60
CARGO CLAIMS
The Cargo Claim Process (simplified):
• The shipper delivers the cargo to the ship at the load port
• The ship’s master issues a document ‘bill of lading’ that records the apparent
condition and quantity of the cargo
• When the receiver pays the shipper for the cargo, they receive a copy of the bill of
lading that allows them to collect the cargo from the vessel at the discharge port
• If the cargo is received differently to the description on the bill of lading (condition
or quantity) then the receiver will pursue a claim against their cargo insurer
• If the cargo insurer finds that the ship was liable for the loss or damage as per the
terms of the contract of carriage then they will seek a recovery from the
shipowner
• The shipowner then seeks reimbursement from the P&I Club

61. 61
‘OTHER’ CLAIMS
• General Average
• Salvage
• Fines
• Legal Costs
• Omnibus Rule

62. P&I Clubs not normally involved in
general average
P&I may contribute if:
• cargo owners refuse to contribute
on the allegation of
unseaworthiness
• The general average contribution
required from the ship is greater
than the insured value of the vessel
62
GENERAL AVERAGE

63. P&I Clubs traditionally not involved in salvage costs
Framework detailed in the 1989 Salvage Convention
Most common salvage contract = LOF
Salvage awards normally funded by H&M
underwriters
“Special compensation” may be awarded if threat of
environmental damage. This is normally met by P&I
Special compensation may be replaced with a
Special Compensation P&I Clause (SCOPIC)
Remember – this is different to wreck removal!!!!
63
SALVAGE

64. P&I cover for fines:
• With the Club Managers’ approval:
o Customs fines (short or overlanded cargo)
o Smuggling
o Immigration laws
o Accidental pollution
• At Director’s discretion:
o Other fines
o May partly or wholly compensate for confiscation of ship
64
FINES

65. • Legal Costs that
are directly
associated with
the P&I Claim
• Sue and labour
costs
• “Special
Direction”
65
P&I CLAIM: LEGAL COSTS

66. The Omnibus Rule
A shipowner’s liabilities and risks are ever changing………
66
RISKS INCIDENTAL TO
SHIPOWNING
? ?

67. Many charterers are exposed
to similar risks and liabilities
as a shipowner:
• P&I – Cargo Liabilities
• Damage to Hull (DTH)
• Bunkers
• Freight or Hire
67
SPECIAL COVER FOR TIME
CHARTERERS
Ship Owner Time ChartererTime Charter-party

68. • The first part of each
claim is borne by the
Shipowner
• Size of deductible has
an effect on premium
• A shipowner may have
different deductibles
for different types of
claim
68
DEDUCTIBLES
Crew
Claim paid by
P&I insurer
US $85,000
Third party
claim
US $100,000
Deductible paid by
Member
US $ 15,000
Cargo
Claim paid by
P&I insurer
US $75,000
Deductible paid by
Member
US $ 25,000

69. RISKS NOT COVERED BY P&I
Primary Exclusions:
• Risks covered under Hull
Policy
• Double Insurance
• War Risks
• Radioactive Materials
• Imprudent or Hazardous
Operations
• Sanctions
69
Risks Specifically Not Included:
• Damage to entered ship
• Equipment
• Repairs to entered ship
• Freight
• Salvage
• Charter parties
• Bad Debts
• Demurrage
• Towage
• Members’ other interests

70. 70
Freight, Demurrage & Defence
(FD&D) Cover
MARINE LIABILITY
INSURANCE AND LAW

71. 71
FD&D COVER
Shipowner
Charterer
Lawyer

72. • Additional Class of optional insurance
• Covers legal costs in the event of a commercial dispute
– does NOT cover legal costs directly associated with a
P&I or H&M claim
• Does NOT cover the actual substantive liabilities (such
as payment of awards) – only the legal and handling
costs incurred in relation to the dispute is covered
• FD&D cover is discretionary – disputes will only be
fought if cost effective and has reasonable chance of
success.
FD&D COVER
72

73. • Charterparty disputes
• Payment of hire/freight
• Laytime and demurrage
• Safe port disputes
• Bunker disputes
• Vessel speed and
performance
FD&D – TYPICAL DISPUTES
73
• Newbuilding disputes
• Sale and purchase disputes
• Liens
• Disputes with underwriters
• Crew / ITF disputes
• Disputes with suppliers
• Disputes with mortgagees,
managers or operators

74. • There can be a
number of different
parties involved in a
voyage………..
• And a lot of
different contracts
between these
parties
• Some will be P&I
matters and some
will be FD&D
74
CONTRACTUAL DISPUTES

75. An example scenario – a vessel is under charter (a contract
between a charterer and the owner):
1. The charterer orders the vessel to a port and it is
agreed that cargo must be loaded within three days
2. The ship’s cargo cranes repeatedly break down and the
loading operation takes five days
3. Whilst the cargo is in the ship’s hold, there is a leak
from the adjacent ballast tank and it damages the cargo
What is P&I and what is FD&D?
DIFFERENCE BETWEEN P&I
AND FD&D

76. The ship’s cargo cranes repeatedly break down and the
loading operation takes five days – this may incur extra
charges from the port or even penalties. No cargo damage
has been suffered at this point and this is purely a
contractual dispute.
FD&D matter
Whilst the cargo is in the ship’s hold, there is a leak from
the adjacent ballast tank and it damages the cargo – the
cargo has been affected whilst under the care of the vessel.
P&I matter under P&I Rule 19(17)(a)
DIFFERENCE BETWEEN P&I
AND FD&D

77. Covered in the Ship Module on 9 November:
• Collisions
• Damage to property
• Pollution
• Claims handling
MARINE LIABILITY
INSURANCE AND LAW

78. 78
THANK YOU