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HULL INSURANCE (BLUE & NON BLUE WATER)
Although the following discussion of some of the principal clauses in the Hull Policy applies only to an ocean cargo carrier, many of the clauses are found in policies covering tugs, barges, and other commercial vessels.
Hull insurance provides Physical Damage coverage for the ship itself while in transit on oceans, rivers and lakes. Coverage may be obtained for a single vessel or an entire fleet. Limited Liability insurance may also be included through the Running Down clause, which protects the owner if he or she is held liable for the negligent operation of the vessel in damaging another ship.
Assured and Loss Payable Clauses. Most vessels are financed by a lending institution. The loan agreement will set forth not only what insurance the owner is required to carry but will also specify who must be named as an insured (or assured as they are known in marine insurance) and to whom losses will be paid.
Duration of risk/policy term. Policies are written for a period of not exceeding one year and are noncancellable except by mutual agreement, contrary to most no marine contracts. Exceptions to this are found in the Change of Ownership Clause, which provides among others that a change of ownership of a ship without the prior agreement of the insurer will automatically terminate the policy. Failure to pay premium when due will also give the insurer the option to cancel.
Rate. The rate is determined by negotiation between the owner’s broker and insurers and is based on the owner’s experience. The number of vessels in a fleet, their age, type, and trade will influence the rate.
Each fleet is individually rated based on the loss ratio arrived at by contrasting net premium earned by the hull insurer with losses sustained. The policy rate has two components: the first takes into account the total loss exposure (which effectively is a class rate based on type of craft and age and value); and the second reflects the partial loss exposure, which in turn reflects the individual’s loss experience. Payment of premium is usually quarterly.
Deductible. The aggregate of all claims, arising out of each separate accident, is subject to a negotiable deductible. Thus, if the total claim is $100,000 and the deductible is $10,000, the policy will pay $90,000. The deductible does not apply to a total loss. The amount of the deductible will have an influence on the premium.
Perils. From the Perils Clause cited, the policy insures the vessels against perils of the sea and all other like perils.
There is also an Additional Perils (Inchmaree) Clause which extends coverage to include specified accidents which had been held by the courts to be excluded from the Perils Clause such as certain machinery breakdowns and damage done to the vessel through the negligence of charterers, repairers, or crew. This clause has a proviso that excludes any such loss or damage if it resulted from want of due diligence by the assured, owner, or manager. A broader clause, the Liner Negligence Clause, may be substituted in certain fleet policies, subject to prior agreement of the insurer.
Deliberate damage. As a consequence of the severe damage to the environment caused in recent years by stranding and other losses to tankers, the policy has been extended to include “loss or damage to the vessel directly caused by governmental authorities acting for the public welfare to prevent or mitigate a pollution hazard, or threat thereof; resulting directly from damage to the vessel for which the underwriters are liable” - provided such act of governmental authorities has not resulted from want of due diligence by the assured.
General Average and Salvage. To review, particular average is a term used to refer to partial losses whereas General Average is a voluntary sacrifice made by the vessel and/or cargo to preserve ship and cargo in the face of an imminent peril. If the sacrifice is successful, all parties contribute to the loss to ship and/or cargo resulting from the sacrifice as the value of each individual interest bears to the total of the contributing values. The Hull Policy will respond for the vessel’s contribution less the applicable deductible. However, if the insured value of the vessel is less than the contributory value as determined by an independent surveyor, the insurer will be liable only for his proportion of the contribution, or:
Insured value (divide by) Contribution value (multiply by) Contribution Due = Insurer’s Contribution
Salvage is an award due a salvor for services rendered when a vessel and/or her cargo are in distress. The famous and most commonly used Lloyd’s Open Form is a “no cure, no pay” contract. Thus, if the salvor’s efforts are not successful, there is no award or “no pay.” This type of contract has been supplanted in some instances by a more specific contract which spells out the fee to be received by the salvor whether or not his efforts are successful. In either instance the vessel owner should get the prior agreement of his insurer to the form of contract if time permits. Insurers will contribute to the salvage award or salvage charges similar to a General Average contribution.
Total loss. Obviously, the policy will pay in the event of the total loss of the vessel from a peril insured. Such a claim occurs, for example, when a vessel has sunk or been stranded in waters that make salvage impossible or impractical. The policy will also pay in the event of a constructive total loss which occurs after an accident when the expense of recovering and repairing the vessel exceeds the insured value.
Sue and labor. “In the case of Loss or Misfortune, it shall be lawful and necessary for the Assured, their Factors, Servants and Assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of the Vessel….” In other words, the assured must take whatever action is necessary to minimize a loss, and insurers will contribute to any expenses so incurred in accordance with policy conditions.
Collision liability. “And it is further agreed: (a) if the vessel shall come into collision with any other ship or vessel…” and the vessel is held liable or partial liable for the damage to the other vessel, the insurers will reimburse the assured for a liability incurred not in excess of the insured value. Since collision with another vessel is a peril of the seas, his insurers will reimburse the owner for damage incurred by his vessel. This clause extends the policy to cover his liability for damage to the other vessel. In many instances it may be advantageous to restrict liability under the Hull Policy to three fourths and insure the remaining one fourth under the Protection and Indemnity Policy for reasons that will be discussed. Irrespective of the damage to the insured vessel reimbursed by the insurers, they will also pay damages to the other vessel up to the insured value. For example, if the insured vessel was held to be 100 percent liable: Insured value………………………………...................................................................................$1,000,000Damage to insured vessel less deductible………………………………......................................... 500,000Damage to other vessel……………………………….....................................................................1,000,000Underwriters will pay $500,000 plus $1,000,000 or a total of $1,500,000. Collision liability is, in effect, a separate contract.Pilotage and towage. Many pilot age and towage contracts restrict the liability of the pilot and/or tower. Insofar as these contracts are in accordance with established local practice, hull insurers agree to waive their right of subrogation against the pilot and/or tower. When the contract to be signed is not in accordance with established local practice, the prior approval of the insurers must be obtained.Additional insurances. The Hull Policy restricts the amount of additional insurance the assured, owners, managers, operators, or mortgagees may take out against the risk of total loss of the vessel to 25 percent of the insured value.The clause further restricts the amount of insurance that can be placed on collect freight, anticipated freight, time charter hire, and premiums. But the clause gives the owner permission to place insurance irrespective of amount against risks of War and Strikes, General Average and Salvage Disbursements.War, Strikes, and Related Exclusions. You will recall the Perils Clause quoted at the beginning referred to such risks, which are excluded by this clause. Separate insurance must be placed if such coverage is required.Claims. The policy makes some general provisions as to the procedure to be followed in the event of damage to the vessel.However, the presentation of a claim to the insurer is usually prepared by a loss adjuster, who in the United States is usually an employee of the insurance broker and a member of the Association of Average Adjusters. The Association sets forth certain rules that must be followed in preparing the loss adjustments.Trading warranty. The area in which the vessel will be permitted to trade will be specified in the policy. Protection and Indemnity InsuranceP&I provides the liability insurance required by a vessel owner and might otherwise be called a Vessel Owner’s Liability Policy. Virtually all P&I insurance on ocean cargo vessels is underwritten by the Mutual P&I Associations (or Clubs), who protect and indemnify their members (owners) against third-party liability claims. Although most of the major maritime nations have a domestic P&I Association (in the United States, the American Steamship Owners P&I Association), the majority of the Clubs are of English origin, and although they may be now domiciled in Bermuda or Liechtenstein, the daily operations are handed by the Clubs’ managers in London.Premiums. A Mutual Club differs from a fixed premium insurance placed with an insurance company or with one or more Lloyd’s syndicates in that the members of the Club (the vessel owners) at the beginning of the policy year (usually February 20th) pay an advance call (premium) based on each Club’s estimate of what the total claims will amount to during the policy year. Several months or even several years after the end of the policy year when the Club has been able to make a more accurate assessment of the actual claims and the liabilities accruing therefrom, a supplementary call (premium) is made being a percentage of the advance call.The advance call is a rate per Gross Registered Ton of each vessel entered by an owner and is based on the total tonnage entered by the owner as well as his record of paid and estimated claims.P&I insurance on smaller commercial vessels is, more frequently, placed at a fixed premium with an insurance company.Coverage. Among the liabilities covered by the rules (terms and conditions) of the Mutual Clubs are:1. Loss of life or personal injury to or illness of any person other than a seaman but excluding liability under any Workmen’s Compensation Act or Employer’s Liability Act.2. Loss of life or personal injury to or illness of any seaman while on board or proceeding to or from the entered vessel, arising under statutory obligation or other contract of employment.3. Expenses incurred in repatriating an ill or injured seaman.4. Loss or damage to cargo.5. Damage to docks, buoys, bridges, cables, and other fixed or floating objects (other than a vessel).6. One fourth of an owner’s liability for collision damage to any other vessel, assuming the Hull Policy covers only three-fourths collision liability.7. Damages caused other than by collision such as wash damage.8. Fines and penalties.9. Quarantine expenses.10. Wreck removal.11. The proportion of general average or salvage charges not recoverable from cargo.12. Expenses in defending unfounded claims.13. Customary towage contracts.14. Pollution caused by oil or hazardous substances.Some liabilities not insured are:1. Those arising as a consequence of deviation such as stowing cargo on deck with an under deck bill of lading. However, this may be covered with the prior agreement of the insurer or placed independently of the P&I insurance.2. Contractual liability (including a passenger ticket) unless previously sighted, approved, and agreed by the insurer.3. Those incurred with the privity of the assured such as knowingly sending an unseaworthy vessel to the sea as a consequence of which there is loss to life to the crew and damage to cargo.Limits of liability and claims. There is no limit of liability as such in a mutual P&I entry except entries in the American Club. However, most countries permit a vessel owner to limit his liability for loss of life, and so on, and for property damage in the absence of privity on his part. The exception to this is that the Clubs presently limit their liability arising out of oil pollution claims to $300 million for any one occurrence.If the insurance is placed with an insurance company, there must, of necessity, be an agreed limit of liability. If the owner deems this amount to be insufficient, there is no restriction on the amount of excess liability insurance he can buy, assuming the cost is practical.The Clubs maintain a network of claim facilities located in the principal ports of the world. If necessary, the Master or agent of a vessel can contact a local claim representative for advice and guidance. In the event it becomes necessary for an owner to put up a guarantee to avoid his vessel being arrested, liened or otherwise detained, most claimants and governmental authorities will accept a Club’s letter of guarantee in lieu of a bond. P & I insurers in the American market offer the same facilities although only the American Club has an international claims organization.The Clean Water Act of 1977 requires that owners of all Flags calling at U.S. ports (including Puerto Rico, U.S. Virgin Islands, Panama Canal, Hawaii, and the Trust Territories of the Pacific) file with the Federal Maritime Commission (FMC) evidence of insurance (or other financial guarantee), demonstrating compliance with the financial requirements of the act. The Mutual Clubs will furnish such evidence; but as most American insurance companies exclude pollution liability from their P &I policies, the Water Quality Insurance Syndicate was formed to provide a market and to provide the necessary evidence of insurance to the FMC.Although P&I Clubs and insurers through their claims agents or correspondent lawyers will negotiate settlements on behalf of and subject to agreement by their assured, your broker should be in a position to offer advice and guidance and, if necessary, negotiate with the Club or underwriter on your behalf.
Additional insurances
Some additional forms that may be required or considered follow.War risks and strikes. For a vessel engaged in international trade this is, if not essential, required by all lenders/mortgagees. Written at present for a very nominal annual premium, it permit’s the vessel to trade to any port or place in the world excluding those ports or places which may be considered unusually dangerous because of existing or possible military action or political tension. Vessels calling at such ports or places must obtain the agreement of war risk insurers to extend coverage for an agreed period of time for which an additional premium may be required. Depending on the locale and situation such additional premium can be insignificant or substantial. War Risk Policies also include a provision that the insurance will be automatically terminated:A. Upon and simultaneously with the hostile detonation of any nuclear weapon of war whosesoever and whensoever such detonation may occur.B. With the outbreak of war between two of the five major powers.C. When the vessel is requisitioned.The policy, generally, is extended to cover an owner’s liability for P&I war risks (excluding any contractual liability to the crew) at no additional premium.Increased value including excess liabilities. Provides additional insurance in the event of the total loss of the vessel and provides protection against loss of a lucrative charter or a rise in the market value or just additional insurance against total loss.It also covers General Average, Sue and Labor Charges, and Collision not recoverable in full under the Hull Policy but not exceeding the amount insured.The rate is less than that required by the hull insurance as the policy does not cover partial losses.The amount that may be insured on this interest is restricted by the Disbursements Warranty/Additional Insurances Clause of the Hull Policy to 25 percent of the insured value set forth in the Hull Policy.Loss of hire. Insures against a loss of charter hire due to a partial loss suffered by a vessel. The insurance reflects the daily charter hire and pays for an agreed number of days in excess of an agreed number of days (a deductible of days rather than dollars). Thus, the policy might agree to pay $1,000 per day for 90 days in excess of the first 14 days but not exceeding 180 days in all during the policy year irrespective of the number of accidents. Each accident is subject to a deductible of 14 days.The policy excludes a claim arising out of the total loss of the vessel and is automatically terminated on expiry or cancellation of the charter unless the vessel immediately enters into another charter.Charterer’s liability. Covers those liabilities assumed by the charterer when he charters (leases) a vessel. These include damage to the vessel itself as well as to the cargo on board and to third parties including loss of life, and so on, and property damage. Your insurance broker and insurer should be furnished with a copy of the charter so there is no misunderstanding of the liabilities that are being covered.Strike insurance. Is similar in concept to loss of hire insurance except that it covers only the loss of time a vessel may be delayed by a strike, lockout, stoppage, or restraint of labor excluding the ship’s crew or officers. A strike by the ship’s officers or crew may also be insured but not a lockout.Insurers agree to pay a daily indemnity equal to the sum of the daily running costs for an agreed number of days in excess of an agreed number of days for each strike.MarketsAn owner should insist that his insurance be placed in reputable markets that are financially sound and pay claims promptly. His broker should have the same philosophy. Certainly the insurance companies in the United States, being subject to the financial requirements and regulation by the various states, qualify. Insurance placed with syndicates at Lloyd’s, or members of the Institute of London Underwriters, also qualify. Lloyd’s and Institute of London Underwriters maintain trusteed reserves in the United States exceeding $1 billion. For this reason any lender, including the U.S. Maritime Administration, will approve them as security.There are many other responsible markets in both Europe and the Far East, particularly Japan. Despite the fact they are financially sound, pay claims promptly, and all the major lenders will approve their use, they do not maintain trusteed reserves in the United States and, therefore, will not be approved by the Maritime Administration.Worldwide capacity is such that at the present time the market for ocean hulls is competitive. The market for smaller commercial vessels is more restricted, owners usually preferring, for a number of reasons, to insure locally.Please note that the precise coverage afforded is subject to the terms, conditions, and exclusions of the policy as issued. This explanation is intended only as a guideline. This information is not intended to be considered investment, tax or legal advice. It is provided, for your education only. This is not an insurance contract. All terms and coverages are defined solely by your policy.For more details, please call a PaulBalep representative toll-free 1-800-964-8614 to receive a free, no-obligation quote. Like so many satisfied clients, we think you’ll be happy you did. And to set up a meeting to discuss additional insurance and financial goals: Visit us online at www.paulbalep.com, or e-mail us at info@paulbalep.com. “It pays to shop around with PaulBalep. Your one stop shop for insurance and financial services” <<Independence is number one>>. We are nonexclusive producers who represent an average of eight companies-not just one. PaulBalep can evaluate and compare the products of several fine companies to find you the right combination of coverage and value. |
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