Newsletter

GA - Insurance Covers

Author: M Jagannath
Date: June 29, 2014

This article focuses on the insurance cover available to various parties who may be involved in a General Average

  1. Following our article of General Average – Issues arising in Container Shipping of last week, we now focus on the various insurance coverage's available to the various interests involved in a General Average (Owners, cargo interests, container interests, freight interests). We will touch on each of these interests and their insurance coverage's available and issues which may arise with respect to the engagement of these policies.
  2. Owners: Owners of vessels would generally be covered for both Hull and Machinery and Protection & Indemnity Insurance (commonly known as P&I Insurance). In addition, Owners may also seek cover for Bunkers, Freight and Equipment Insurance. We are considering the various covers below:
    1. Hull & Machinery Insurance: The cover is for the loss or damage to the Hull & Machinery i.e. property. We have considered the wordings of Institute Time Clauses Hulls ("ITCH") 1983, 1995 and The International Hull Clauses ("IHC") 01/11/03 below. Among the three polices, the ITCH 1983 continue to be the most widely used and barring minor differences, the cover provided for General Average by all of these policies are similar.

      1. ITCH 1983: Clause 11 of the wordings deals with General Average and which provides for the vessel's proportion of salvage, salvage charges and / or GA subject to adjustment in the case of under insurance. It also provides that in respect of a GA sacrifice, the assured could recover the whole loss from their Insurers without first enforcing the rights of contribution from other parties.
      2. ITCH 1995 : Clause 10 of the wordings deal with GA and the first four sub-clauses are similar to what is shown in ITCH 1983 (except for reference to York Antwerp Rules 1994 in 10.3 – the ITCH 1983 refers to York Antwerp Rules 1974). The addition is with respect to two sub-clauses (10.5 & 10.6) which excludes payment of any claim for special compensation under Article 14 of the International Convention on Salvage 1989 (hereinafter known as the "Salvage Convention") / pollution claims but allows payment in respect of extra salvage remuneration under Article 13 of the Salvage Convention.
      3. IHC 01/11/03: Clause 8 of the wordings deals with GA with the major difference being that there is no reduction in the case of any under-insurance. Again, cover is excluded with respect to Art 14 of the Salvage Convention / Pollution Claims and provision for payment under Art 13 of the Salvage Convention. All of the policies provide for the application of a deductible which applies to the aggregate of all claims arising out of each separate accident or occurrence.
    2. Protection & Indemnity Insurance: This form of insurance provides cover for third party liabilities. We have considered the wordings of Institute Protection and Indemnity Clause, Hulls – Time 20/7/87 and the wordings generally used by P&I Clubs/Mutual who are part of the International Group of P&I Clubs.
      1. Institute P&I Clause, Hulls – Time 20/7/87 provides cover for legal liabilities of the Assured for any claim as a consequence of loss or damage to any loss or damage to any fixed or moveable object or property or other thing … Coverage is also provided for legal costs incurred with the prior written consent of the underwriters.
      2. Wordings of an IG P&I Club would generally cover the Unrecoverable General Average Contributions which the Member may become liable or be unable to recover solely due to a breach of the contract of carriage and / or shortfall in the contribution from the H&M Insurer due to under insurance. The Cover would also include cargo liabilities carried by the Insured vessel.
      3. In addition, all mutuals have an "Omnibus Rule" which allows the Directors to pay certain claims which may not be expressly covered by any of the heads of cover set out in the Club's Rules. For this, the member would have to present their case for consideration to the Directors.
      4. Application of deductible: We understand that there would be an application of a deductible provided under the policy (see Clause 3 of Institute P&I Clauses Hulls – Time 20/7/87).
      5. Owners have a duty under common law to collect securities from all parties to the adventure. In this regard, Owners have an entitlement under common law to a possessory lien on the cargo and other interests (equipment/containers). The issue arises when some parties provide security and others do not. What should the owners do then? While a lienor has no power of sale at common law, s.12 of the English Torts (Interference with Goods) Act confers a right of sale subject to following the prescribed procedure. The Court also has powers to order sale under s.13 of the same act. If the contract of carriage (charter party/bill of lading) provides for English Law to be the governing law of the contract, Owners would then be entitled to use the provision of English Torts (Interference with Goods) Act. If, however, the governing law of the contract incorporates the law of other countries, then the Owners must consider as to whether they have any entitlement to conduct a sale under their contracts of carriage and / or the benefit of any similar laws available to conduct a sale.
      6. If Owners decide to detain the secured cargo together with unsecured cargo for tactical reasons (see our article General Average - Issues arising in Container Shipping para< 4 i)) provided the P&I Insurers endorse their actions, we believe that cover is available under both Institute P&I Clause, Hulls – Time 20/7/87 Cl 1.1.1 and an IG P&I Club for cover under Property on board the insured vessel. However, if P&I Insurers endorsement is not taken, then the P&I Insurer may exclude cover on the basis of Wilful Misconduct (which is generally defined as "Claims arising in circumstances where there has been wilful misconduct on the part of the Member, defined as an act intentionally done, or a deliberate omission, by the Member with knowledge that the performance or omission will probably result in injury, or an act done or omitted in such a way as to allow an inference of a reckless disregard of the probable consequences").

        Alternatively, cover may be provided under the "Omnibus Rule" subject to the Directors of the Mutual agreeing to exercise their discretion to provide cover.
    3. Bunkers: Whether Bunkers are owned by the Owners or by a Time Charterer (If the vessel is under Time Charter), they would contribute as a separate interest to any general average. Cover is available as "Bunker Insurance" to both the Owners and Charterers (as the case may be) and which will reimburse them to their contribution for the GA.
    4. Freight: The basic rule is that freight is earned and payable only after true delivery of the cargo. Hence, freight is effectively at the carrier's risk (Owners or Charterer who may be acting as the carrier) throughout the adventure. However, this rule is, in practice, modified by the express terms of the Bills of Lading or the Charter Party and which would provide that the "freight is deemed earned on loading / signing of the Bills of Lading". If however, the Owners/Charterers have not modified this rule, then they would need to cover for Freight risks and which is available under Institute Time Clauses 1/10/83 & 1/11/95. The coverage in these forms are generally similar in nature and cover is as provided in Clause 11/10 of ITC Hulls 1983/1995.
    5. Equipment: If Owners are operating the vessel themselves, then they may have equipment such as containers on board the vessel and which would contribute to the General Average. While bespoke policies are available, coverage is similar to what is provided under the wordings of Institute Container Clauses 1/1/87. Clause 2 of the Institute Container Clauses states the coverage available for General Average and Salvage (there is no application of a deductible for General Average).
  3. Charterers:
    1. Charterers P&I Cover: If the vessel is on a Time Charterer, then the Charterers are responsible for the bunkers and may use their own equipment on board the vessel (containers). Cover is available on Charterers P&I Policy for their interests on Bunkers/Freight and Equipment and which is on similar terms as mentioned in 2.3, 2.4 and 2.5.
    2. Charterers FD&D Cover: This cover provides for legal costs and expenses which may be incurred with the approval of the Insurers (it is not a right per se but Insurers would support their Assured keeping in mind the claim and the chances of success) and this includes general average. In case of Container Liner Shipping, considering that there are so many interests involved in a voyage, issues may arise for the failure of some interests to provide security. As the direct contractual link is with the Charterers, Owners may pursue them, amongst others, for their failure to ensure that they have contracted properly for the provision of General Average. In such cases, Charterers may have to spend substantial amounts to defend any such claims. While this cover is only for the legal costs, it does not cover the dispute per se and if Owners should succeed, the actual claim would have to be paid by the Charterers themselves.

      If the Charterers in turn contract with Slot Charterers, then slot charterers may be, in turn, liable to them and for which they would generally take similar FD&D cover from Insurers providing Charterers Cover.
  4. Non Vessel Operating Common Carrier: Contractual carriers who issue their own contracts of carriage with the Cargo interests and in turn contract with overlying carrier (who may be the slot charterer/container operator) are known as Non Vessel Operating Common Carriers ("NVOCC"). They may also use their own equipment for the carriage of goods (which is very common in the Indian Sub-Continent and Middle East. We believe that NVOCC's would grow exponentially considering that there are substantial costs for Owning / Operating vessels and that Owners/Operators would prefer to focus on providing the service, leaving downside players to deal with the logistical issues).
    1. Liability Insurance: Cover is available from various Transport Liability Insurers including TT Club, a mutual insurer.
      1. The coverage of the various Insurers are similar in that they provide cover to the assured for their legal / contractual liability of the Insured for cargo's proportion of the general average, salvage or salvage charges.
      2. The policy would also provide that the Insured contract on the basis of terms and conditions which have been approved by the Insurers or on the basis of National Forwarding Conditions (which are deemed to have been approved) or in the case of sea carriage, incorporation of The Hague /The Hague Visby Rules by way of the Clause Paramount into their contracts of carriage.
      3. As the cargo is not owned the by  NVOCC, our understanding is that the NVOCC would not have any legal liability for the provision of securities unless this has been agreed contractually with the overlying carriers. If the NVOCC have agreed contractually with the overlying carriers any terms providing imposition of additional liabilities, this should be declared to their insurers and cover should be sought accordingly. Otherwise, Insurers may be entitled to decline cover on the basis of material non-disclosure.
      4. The major difference with respect to cover from a Mutual and a Non - mutual is that in a Mutual they would have the "Omnibus Rule"/discretionary Insurance and which permits for additional coverage at the discretion of the Directors.
      5. Issues arise when Owners hold lien on the containers (which have been secured) but some or all of the cargo is yet to be secured (this may be for tactical reasons as mentioned in 2.2 vi) above). As mentioned in our last article Pt 4, it is our understanding that Owners have a duty to release the containers / cargo which is properly secured and which means that if they have to devan the container to remove the unsecured cargo, they should do so.
      6. As the contract between the cargo interests is with the NVOCC, cargo interests may pursue the NVOCC for the failure to release the secured cargo. While the NVOCC may join and / or initiate a separate action against the Owners for the failure to release secured cargo, costs would be incurred to defend the claim/ pursue the Owners. In actual practice, considering the legal costs which may be incurred, secured interests rarely consider this option unless the value of the cargo is substantial and that there is a real chance of damage to the cargo due to the delay in releasing them (perishable cargoes which are time sensitive). Costs incurred for both defending the cargo claim and pursuing the Owners would fall for consideration under the liability policy under the section dealing with cargo liabilities.
      7. One way to get around this is for the NVOCC to approach their Insurers to provide an interim security for the unsecured interests. As mentioned in iv) above, Mutual's have provision of an "Omnibus Rule"/discretionary Insurance and which means that their member can apply to the directors for provision of interim security to Owners to enable cargoes to be released and continue with the voyage. While we believe that the Directors would be sympathetic to the requests made by their members, these requests would need to be made during the Directors meetings and which may necessarily not be during the time of the incident i.e. any relief required may not be immediate.

        We also understand that one of the major Transport Liability Insurers do provide interim security subject to specific conditions (ensuring that the unsecured cargoes are not released unless proper securities have been collected prior to release).
      8. Provision of interim security would be of immense assistance to NVOCC's, particularly those who are involved in the consolidation business (there would multiple cargo interests involved in one container) as provision of security may not be possible by all at the same time and further, some of the cargoes may be uninsured. The policy may also provide for the application of a deductible for any claims arising under the policy. As provision of interim security is not a claim per se, we believe that no deductible would be applied unless the policy expressly requires the same.
    2. Freight Insurance: As mentioned in 2.4 above, if the freight is at risk, then the NVOCC should consider taking freight insurance. However, the practice is for the contracts of carriage to provide that freight is deemed earned at time of loading, irrespective of the terms of payment of freight (freight prepaid or collect), and therefore freight is not at risk.
    3. Equipment Insurance: We have touched on this in 2.5 above. While cover is also available under bespoke policies, coverage for General Average and Salvage is similar to what is provided under Institute Container Clauses 1/1/87.
  5. Cargo Interests: Cargo is generally covered either under Institute Cargo Clauses A, B and C (1/1/09 or the earlier wordings 1/1/82) or under Institute Clauses for Particular Commodities. Clause 2 of ICC wordings provides for cover for General Average and unless any of the risks fall under the exclusions under the policy, Insurers would be liable for the cargo interest's contributions to a General Average.
    1. The ICC A form is an "all risks" form and which means that it covers all losses or damages which occur fortuitously (see Gaunt v British & Foreign Marine Insurance Co Ltd) subject to the exclusions provided in the policy. If Owners do not release the secured cargo (as they want the other interests to provide security), it would be possible for the cargo interests to submit a claim to their Insured under this form on the basis that the Owners are holding the cargo unlawfully (see Bayview Motors Ltd v Mitsui Marine and Fire ICL).
    2. With respect to ICC B and C forms, the coverage provided is to specific perils. This being the case, if the secured cargo is not released to the cargo interests, the cargo interests would not have any additional coverage available (as available in ICC A) such that they would have to consider pursuit of the owners on their own account.
  6. Non acceptance of Average Guarantees provided by Insurers:
    1. Owners may decline to accept Average Guarantee provided by the any of the Insurers due to their unsuitability (for instance Insurers do not have appropriate credit ratings). In this case, all most all of the policies would have a "sue and labour clause" which make it a pre-condition for the Insured to take reasonable steps to mitigate or minimise liability (Minimising Losses Clause in the ICC). This being the case, the Insured could make arrangements for payment of a cash deposit or seek alternate security from other providers and in turn seek reimbursement of the costs incurred from their insurers.
    2. On the other hand, if the various interests and their insurers consider that the Owners are not entitled to refuse their security (Average Guarantee's), then they may apply to the courts to seek relief accordingly.
  7. Conclusion: We have considered the various insurances available to the various interests who may be involved in a GA. In particular, we would suggest that following:
    1. Owners must keep their P&I Insurers closely informed of developments following a GA. If Owners wish to hold the secured interests as a tactic to force provision of security from the other interests, unless the P&I Insurers agree to this course of action, this may prejudice their P&I Cover.
    2. Charterers / NVOCC must not sign any contracts with overlying parties imposing greater liabilities than the norm in the industry. If any additional liability is imposed contractually, then this should be brought to the attention of their liability insurers and specific cover be sought.
    3. Charterers / NVOCC must consider seeking cover which entitles them to seek assistance from their Insurers for the provision of interim security for a GA. This would facilitate movement of cargo to final destination without any delays and avoid any loss in value to cargo / cargo damage and cargo claims.
    4. If Owners do not accept Average Guarantee's provided by any of the Insurers, the Insured interest must consider other options to ensure that security is provided to Owners so as to facilitate release.
    5. NVOCC/Cargo interests must also consider the potential loss in value of the cargo if their container / cargo are unlawfully held by the Owners. In this regard, they should seek assistance from their Insurers as any recovery would also go to minimise the exposure of their Insurers.
    6. Finally, all parties should communicate to work together to resolve the issues. After all, a GA is for the common benefit and therefore all parties should work together to the attainment of the same.


We are aware that there are more qualified people to comment on these issues and we would be happy to hear their comments and publish their views. The views expressed here together with all errors are entirely ours.

 

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