Charterers Liability Insurance Essential Best Practice by Heinz E. Gohlish Witherby Insurance Ltd. 4 Dunlop Square, Deans Estate, Livingston, West Lothian, EH54 8SB, United Kingdom. vi CHARTERERS’ LIABILITY INSURANCE ABOUT THE AUTHOR Heinz Gohlish was born in Bremen but grew up in Winnipeg from where he joined the Royal Canadian Navy in 1965. Having spent 10 years at sea, specialising as a navigator, he left to attend university on a full time basis, first at Victoria and then at Cardiff, achieving a post graduate degree in Maritime Economics. From there he worked as a P&I underwriter, marine liability broker and shipping Consultant based in London, becoming an Associate Director of a P&I Club, an Executive Director of a Lloyd’s broker, a Director of a marine consultancy firm and finally the Underwriting Manager for the Charterers P&I Club. Heinz has contributed regular features to a diverse range of shipping and naval Journals and also to various academic publications and marine insurance briefing reports. He has contributed to naval conferences on commercial shipping and marine security matters. His current projects include research on the history of containerisation. Heinz is a member of the Nautical Institute (MNI) and the International Association of Maritime Economists (IAME). Heinz lives in Chiswick, west London with his wife Carole where he continues to maintain an active interest in all matters relating to shipping and marine insurance. vii FOREWORD To my knowledge this is the first reference book that has sought to condense the multi-faceted aspects of charterers’ liability into a single comprehensive work. I have been involved with this specialised area of insurance since the foundation of the Charterers P&I Club in 1986 and have a close relationship with many of the people that have contributed to the successful publication of this book. In his capacity as principal author Heinz Gohlish has done a magnificent job, not only in those chapters that he has written himself; but also in co-ordinating the input of other experts in this field. This book is targeted at those who have an interest in chartering activity, but do not possess a detailed understanding of the attendant liability exposures; or the means by which such exposure can be managed, particularly by way of insurance protection. It is intended as a general point of reference and therefore deliberately avoids too much detailed technical analysis of certain trades, cargoes or jurisdictions; nevertheless, it will still be of interest to more experienced practitioners. It is more than twenty years since the Charterers P&I Club was founded and it is remarkable to note how the complexion of charterers’ liability has transformed to date. During our earlier marketing forays it was quite common to find charterers that were not aware that they had any exposure, or did not consider that it was worth bothering to insure their risk. In recent years we have witnessed a significant increase in the charterers’ potential exposure, which has been driven by three key factors. The first factor is the fundamental shift in the balance of power between owner and charterer. The previous few years have seen a very buoyant freight market in which owners have gained the upper hand in fixture negotiations. Inevitably this has led to an environment where charterparties are more owner friendly, with much more risk being passed contractually to the charterer. This unwelcome trend has been further amplified, and often fuelled, by the shipowner’s underwriters, for example the P&I club or the hull underwriter, wishing to make recovery from the charterer if at all possible. A second factor, and one which is linked to the latter point, is the dramatic increase in both vessel and commodity values over recent years. This has not only led to a step change in the potential value of claims against charterers; but also the tenacity with which other parties, such as hull underwriters, will pursue such claims. The third factor is an increasingly hostile regulatory and legislative environment. In the event of a major casualty it is now much harder for a charterer to duck under the radar and leave the shipowner to deal with the problem. There have been several recent cases where a charterer has been called directly to account, or fined, this trend being particularly prevalent with environmental issues such as pollution. It follows that this increase in exposure has led to a much higher demand for charterers liability insurance, heightened by the fact that many owners will now insist that the charterer purchases charterers liability cover. At the time of writing we have just witnessed a sharp market correction fuelled by the volatility surrounding the global fallout from the credit crunch, this may ultimately tip the balance more in the charterers favour, such is the ebb and flood of the cycle; but charterers’ liability is here to stay and the underlying risks and potential exposures will not recede significantly. In order to succeed, charterers need to understand the risks that they face and to ensure that they are managed properly. Charterers’ liability insurance is a technically complex area. The risk is essentially legal in nature arising predominantly out of the contractual framework within which the charterer is entwined. In the event of a claim being made against the charterer the ultimate outcome can be very heavily influenced by viii CHARTERERS’ LIABILITY INSURANCE viii the way in which the claim is handled and the steps taken in the early stages to protect the charterer’s position. In extreme situations this can make the difference between either no claim at all, or a successful claim against the charterer for millions of dollars. It is critical that charterers understand this aspect of their exposure and posses the relevant expertise, either in house or through their liability underwriters and brokers, to be able to manage complex claims quickly and effectively. We still come across charterers that do not fully understand the risks to which they are exposed, or are unwilling to purchase insurance, although this is thankfully far less common than it was twenty years ago. Many charterers possess a basic awareness of their exposure, but lack experience in this field and often have little understanding of the arcane practices of marine insurance. This book should prove invaluable, not only to charterers but also to those with an interest in this area, or to students of maritime commerce and insurance who wish to gain a deeper and more practical understanding of this specialised subject. Christopher Else London September 2008 TABLE OF CONTENTS Page Dedication iii About the Author vi Foreword vii Acknowledgements ix List of Photographs and Illustrations xiii List of Acronyms and Abbreviations xv Introduction xvii SECTION 1 Principles 1 Chapter 1 Marine Insurance Principles 1 Introduction, Marine Insurance Act 1906, Application of Marine Insurance Principles, Conclusion. SECTION 2 Charterers’ Insurance Market 13 Chapter 2 The International Market 13 Introduction, World maritime trade…, …And the Impact on Maritime Transport, The Marine Insurance Environment, The International Marine Market, Insurance Brokers, Marine Markets by Sector, Conclusion. Chapter 3 The London Market 23 Introduction, Lloyd’s of London, Companies Markets. Chapter 4 Protection and Indemnity Market 31 Introduction, The P & I Mutual Principles, The P & I Mutual Market, The P & I Fixed Premium Market and Pools. Chapter 5 Charterers’ Liability Market 37 Introduction, Charterers’ Needs, New Market Opportunities, The Charterers P&I Club, The Market Expands. SECTION 3 Charterers’ Insurance Sectors 43 Chapter 6 Hull and Machinery Cover 43 Introduction, Background, The Mar Policy, The International Hull Clauses (IHC), Variations in Hull Clauses, Ship Values for Insurance, Charterers Damage to Hull. Chapter 7 Protection and Indemnity Cover 49 Introduction, P & I Cover, P & I Club Procedures, Group Clubs’ Performance, Group Clubs’ Pooling and Reinsurance, Charterers’ P & I Insurance. Chapter 8 Marine Cargo Insurance 57 Introduction, Marine Cargo Insurance, Marine Cargo Clauses, International Trade and Sales Contract, Underwriting Charterers’ Cargo Risks. Chapter 9 Trade Disruption Insurance 63 Introduction, Trade Disruption Insurance, Strikes Insurance, Evolution of LOH/TDI Insurance. Chapter 10 Freight Demurrage and Defence 69 Introduction, FD&D Insurance in Theory, FD&D Insurance in Practice, FD&D Insurance in Action, Conclusion. xi xii CHARTERERS’ LIABILITY INSURANCECONTENTS SECTION 4 Charterers’ Insurance Issues 75 Chapter 11 Maritime Conventions and Regulations 75 Introduction, The International Maritime Organization, Limitation of Liability Conventions, Port State Control, Conclusion. Chapter 12 Ship Owners’ Liability (SOL) 83 Introduction, Contractual Deviations, Breaches of Contract, Reinstatement of Cover. Chapter 13 NYPE Inter-Club Agreement 89 Introduction, The Agreement, Evolution of the NYPE Inter-Club Agreement, How the Agreement Works. Chapter 14 War Risks, Piracy and Terrorism 95 Principles, The Charterer, War Risk Exclusion Zones, Piracy. Chapter 15 Sub-Standard Ships 101 The Charterer and Ship Quality, Evaluating Nominated Ships, Classification Societies, Open Registries and Ship Manning, Liability Insurers and Sub- Standard Ships. SECTION 5 Charterers’ Insurance Practice 109 Chapter 16 Charterers’ Legal Liabilities 109 Introduction, Limitation of liability – the Charterers’ Rights to Limit, Conclusion. Chapter 17 Chartering Contracts 119 Introduction, The Time Chartering Contract, The Voyage Chartering Contract, Bill of Lading, The Bunker Sales Contract, Conclusion. Chapter 18 Dispute Resolution 127 Introduction, Litigation, Arbitration, Mediation, Expert Determination. Chapter 19 Charterers’ Bunkers 133 Introduction, Charterers’ Liability for Bunkers, The Charterers’ Dilemma, Technical Considerations, Bunkers Insurance. Chapter 20 Charterers’ Cargo Liability 139 Introduction, Cargo Owner vs. Cargo Carrier, Conclusion. Chapter 21 Charterers’ Underwriting 143 Introduction, The Charter Party, The Bill of Lading (B/L), Ship and Operating Variables, Premium Calculation, Renewals, Conclusion. Chapter 22 Claims Management 151 Introduction, Claims Management Resources, Claims Management Practice, Conclusion. SECTION 6 Summary and Conclusion 161 Chapter 23 The Charterer and CL Insurance 161 General, CL Insurance and the Market, CL Insurance and Future Developments, A Final Word… SECTION 7 Appendices 165 1. Duty of Care to the Insurer 165 2. Endorsement to Extend Cover to War Risks 167 3. Key Judgments 169 4. On Deck Cargo 177 5. Letter of Indemnity 179 References 181 Index 183 75 Grain in Bulk Introduction A ship operator must navigate a diverse and complex array of rules and regulations to transport cargo world-wide. All of these have a specific purpose and most concern the important matters of safety, security, employment and the environment. The ship operator must not only comply with all the relevant rules and regulations, he must also be seen to be in compliance and must be able to prove such compliance on demand by any authorised enforcement or regulatory body, wherever the ship trades. CHAPTER 11 MARITIME CONVENTIONS AND REGULATIONS CHARTERERS’ INSURANCE ISSUES4 SECTION 76 CHARTERERS’ LIABILITY INSURANCESECTION 4 A time or voyage charterer however, by the very nature of his operation, is often spared the direct responsibility of ship regulatory compliances. That is not to say he can ignore the compliance issues or can simply hide behind the ship owner’s compliance, or lack of it. In fact, the charterer needs to be extremely alert to all ship compliance issues relevant to his operation and he must be as well informed as the ship owner on all compliance matters for a ship taken on charter. This is discussed further in Chapter 15, under ship standards. In some respects, compliance is a more difficult problem for the charterer as he has no direct control over what the ship owner has done (or failed to do), yet his operation could suffer economic loss and his business could suffer loss of reputation on the basis of a non-compliance issue that may be entirely outside the charterers’ influence. The laws and regulations under which a ship operates throughout the world are governed by two factors. First is the flag of the ship, ie, the state or legal domicile of the ship owning company. Second is the legal jurisdiction where the ship is currently trading. When the ship is in port, that is straightforward. When the ship is at sea, it is governed by the UN Convention on the Law of the Seas (UNCLOS), which in turn is given legal effect through the flag state of the ship. The charterer must therefore be completely familiar with the maritime laws of the flag state of the ship being chartered. There are in theory as many potential flag states as there are national jurisdictions. In practice however, these are limited to about 50 to 60 states that register ships and take an interest in international maritime matters. This still presents the charterer with an unwieldy number of legal options and it is unlikely that any charterer, no matter how active, could keep up- to-date with so many possible legal jurisdictions. Fortunately there is a practical solution. This comes in the form of agreed international standards that can be adopted nationally through domestic legislation. If enough flag states adopt such agreed standards there will be a degree of consistency in the application of maritime rules and regulations across a wide range of jurisdictions. Such standards do exist and they are given effect by international conventions, which are instruments between sovereign states. To initiate, draft, promulgate and administer multi-national conventions requires a widely accepted extra-national body. For all matters relating to the safe and secure operation of ships at sea world-wide, that body is the International Maritime Organization (IMO). The International Maritime Organization The IMO is a secretariat of the United Nations (UN) comprising of 168 member States. It was originally established in 1958 as the Inter-Governmental Maritime Consultative Organization (IMCO), a name that accurately described its function. The primary concern of the IMO is maritime safety and security and it is therefore the driving force behind the promulgation and administration of safety and security standards, known as conventions. The related duty, enforcement, is the responsibility of the national jurisdictions (ie flag states) that have adopted (ratified) the specific conventions. Despite generally lacking enforcement powers, the IMO has become an effective body with real influence in the maritime world. It has accomplished this feat by becoming the principal repository organisation for several key maritime laws, conventions and regulations. For example, an important law applicable to ship operations outside its home territory is the UN Convention on the Law of the Seas (UNCLOS) noted above. This stipulates the laws under which 77 MARITIME CONVENTIONS AND REGULATIONSCHAPTER 11 ships are governed on the high seas and usually underlies the maritime law within individual national states. IMO Main Office, London Another example of IMO regulations is the International Regulations for Preventing Collisions at Sea (1972), the Colregs known to all sailors, amateur and professional, as the Rules of the Road. Other important IMO conventions are Loadline (Plimsoll Lines) concerning the safe loading of ships, Marpol (1973/78) for ship pollution, Civil Liability (CLC, 1969) for oil spills compensation, the Athens Convention (1974) for passenger death and injury compensation, and the Convention for Safe Containers (CSC, 1972). These are all pertinent examples of how the IMO goes about its work and the world-wide influence the IMO has on international and domestic maritime policies. The charterer needs to be aware of all these conventions to ensure the ship he/she is about to charter is fully compliant with the many provisions of all relevant regulations, and also to fully understand which regulations apply to the flag state of the ship to be chartered. Most maritime states have ratified all the above conventions and that alone demonstrates the usefulness of a multi-national approach to maritime standards. Not all conventions or regulations are applicable for all operations. For example, CLC mainly concerns tankers while CSC is for container ships. Nevertheless there are some IMO conventions that are applicable in all cases and it can be safely assumed that all serious maritime states have ratified these, either directly or tacitly (see below), the most important of which are the following: Safety of Life at Sea (SOLAS) Most directly applicable to the safe operation of ships at sea is the principal IMO convention, Safety of Life at Sea (SOLAS). Safety at sea almost everywhere begins with SOLAS. The original version of SOLAS predates IMCO/IMO, originating in 1914 as a direct response to the Titanic disaster. It has been amended many times since, with the last full version published in 1974 and IMO 78 CHARTERERS’ LIABILITY INSURANCESECTION 4 which was finally adopted in 1994. It has been, and remains, the most fundamental international convention concerning the safety of merchant ships at sea and underpins commercial maritime safety procedures. SOLAS has since been ratified by at least 147 states representing 98% of the world seaborne tonnage. Lifeboat on Board Vessel In the IMO’s own words: “The main objective of the SOLAS Convention is to specify minimum standards for the construction, equipment and operation of ships, compatible with their safety. Flag States are responsible for ensuring that ships under their flag comply with its requirements, and a number of certificates are prescribed in the Convention as proof that this has been done1”. SOLAS is an exceptional and powerful tool in the IMO’s legislative armoury2, bearing in mind that the IMO has no direct regulatory function, it can only persuade and pressurise. The 1974 version of SOLAS is particularly noteworthy in that it makes provisions for the “tacit acceptance procedure”. This enables a SOLAS amendment to enter into force on a specified date unless, 1 International Convention for the Safety of Life at Sea (SOLAS), 1974 under Technical Provisions preamble. See www.imo.org/ conventions. 2 Steven, Jones. Maritime Security, The Nautical Institute, London 2006. page 94. Photo courtesy of Lloyd’s List