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Bunker Insurance


Jagan - January 25, 2021 - 4 comments

Bunkersi was initially used to denote storage containers for coal used in Steamships to feed furnaces on ships to generate steam.  As coal was the original fuel for steamships, the word has now become synonymous with fuel used in ships. The price of Bunkers fluctuate depending on the type of Bunkersii together with the demand and supply at various locationsiii. The value of Bunkers on board a vessel would depend on the daily consumption of the vessel, the voyage and bunkering locationsiv. Given the increasing size of vessels, the Bunkers on boardv would sometimes be for a significant quantity and value and therefore this article will focus on whether it should be insured and if so, by whom.  

  1. Shipping trade has become specialised such that some owners prefer to let out their vessel on time charter instead of operating it by themselves. In this case, the operational control of the vessel rests with the charterer and who is also responsible for the Bunkers required for the vessel. Some owners still operate their vessels such that they are involved in the commercial operations. The question is whether there is any difference in the two i.e., Owner or Time Chartered vessel with respect to Bunkers?

  2. Exposures: Assuming that there is an incident (say collision, grounding, etc.) say caused by engine failure due to the use of off-spec bunkers or due to the negligence of the crew, the following would be the exposures:
    a. 
    Pollution costs and which may invariably be more than the value of the Bunkers lost.
    b. Loss of Bunkers and which will be the value of Bunkers i.e., a property loss.
    c. Contribution to Salvage / General Average depending on the value of Bunkers saved.
    With respect to a, this is a liability exposure, and which would either be covered under a Charterers or Owners P&I Policy. In respect of b & c, this would be covered by the Property Insurers based on the Ownership of Bunkers i.e. whether the bunkers are owned by Charterers or Owners. Our article will focus on the insurance aspects related to Property in the Bunkers.
  3.  Insurance Coverage:
    a. 
    H&M Policy: If the insurance cover is on the basis of English Lawvi, the UK Marine Insurance Act 1906 would apply. The First Schedule of the Act lists the Rules for the construction of the policy. In particular, Rule 15 states “The term “ship” includes the hull, materials and outfit, stores and provisions for the officers and crew, and, in the case of vessels engaged in a special trade, the ordinary fittings requisite for the trade, and also, in the case of a steamship, the machinery, boilers, and coals and engine stores, if owned by the assured(words in underline for emphasis by us). Insurance policies generally provide for the interest insured as being Hull & Machinery, etc or everything connected therewith. Accordingly, if the Bunkers are owned by the Owners and unless there are any specific exclusionsvii, they would fall for coverage provided under the H&M policyviii.
    b. Bunker Insurance: If the Bunkers are owned by Charterers, then they would be on risk. In order to ameliorate such risks, Charterers should seek cover  from Insurers who provide such cover. If the Owners H&M Cover excludes Bunkers, then Owners would also need to effect similar cover i.e. Bunker Insurance.

  4. Following an incident, the property exposures related to Bunkers are as follows:
    a. Loss of Bunkers – If Bunkers are lost overboard, then this is a Total Loss claim for the value of Bunkers.
    b. Salvage and General Average: If the incident results in a salvage or general situation, property interests would have to contribute rateably to any Salvage Award and / or General Average. In this regard, contributions would be due for the following:
    i. Salvage: Bunkers on board the vessel at the time when the vessel is in a position of safety after Salvors have given notice of re-delivery.
    ii. General Average: Bunkers remaining on board the vessel at the completion of adventure and which were on board at the time of the general average act plus any amount made good in general average for bunkers previously consumed (or sacrificed) during any resort to a port of refuge, etc.

  5. Ownership of Bunkers:
    a. If Bunkers are owned by Owners, the necessary cover would be provided by the H&M policy (as mentioned in 3a above). Given that some ships carry a substantial quantity of bunkers on board for use during the intended voyage, it would be beneficial to relook at the sum insured so as to avoid any reduction in recovery, particularly when there is a Total Loss. With respect to a Partial Loss, the H&M policies do provide cover up to the sum insured without any adjustment for under-insurance, and therefore the effect of any under insurance may be minimal.
    b. What may complicate recovery from Insurers is the possibility that the ownership of the bunkers has not been transferred i.e. Bunker suppliers may provide for retention of title clauses (Romalpa clause) in the Bunker sale contract and which allow them to retain ownership of bunkers until payment is received, but with the risks of loss being on the buyers. This being the case, it may be possible for Insurers to deny any claim for loss of bunkers given that the bunkers were not owned by the Insured at the time of the incident. Having said this, given that the risks of loss are on the Owners/Charterers (as the case may be), it would be best to avoid ambiguity on the “ownership aspects”, say by seeking an appropriate endorsement in the policy, such that the Insurers remain on risk even if the property in the Bunkers is yet to be transferred to Owners/Charterers.

  6. As mentioned in 3 above, the criterion for deciding the cover is on the basis of ownership of Bunkers. Absent any provision in the Owners H&M policy, it may be possible for Owners and Charterers to agree that while the Bunkers are paid by the Time Charterers, the ownership, risk and liability remain with the Owners whilst on board the vessel. In this case, as the Bunkers are “owned” by the Owners, this may indeed fall for coverage under the H&M policy. However, we believe that this option is rarely considered given that this would have an impact on the valuation of the vessel and potential recovery under a H&M policy for Sue & Labourx, General Averagexi and Salvage (as the provisions of under-insurance will kick in).

  7. Returning to our topic at hand, given the increasing values of Bunkers at risk and the potential of being uninsured for the loss of Bunkers together with contributions for any Salvage / General Average, we submit that it would always be appropriate to take an appropriate Bunker insurance cover, if it is not already covered under the Owners H&M policy. 

i. https://en.wikipedia.org/wiki/Fuel_oil#Bunker_fuel
ii.Presently, Ships use various Heavy Fuel Oil (HFO), Low or Very Low Sulphur Fuel Oil (LSFO) and Diesel oil.
iii.Bunker prices at Singapore can be viewed at https://shipandbunker.com/prices/apac/sea/sg-sin-singapore.
iv. Some ports such as Singapore, Hong Kong, Fujairah, Rotterdam, Houston etc. provide Bunkers at competitive prices and therefore Owners / Operators would prefer to Bunker at these location due to the cost advantages.
v. We estimate that the bunkers on board say ONE APUS (which has recently been reported to have lost 1800 containers overboard during the voyage) would be around 5000 MT’s of Bunkers and say 500 MT’s of Gas oil. The value of the Bunkers would depend on the type used and even if we consider a figure of USD 350/MT for Bunkers and USD 400/MT for Gas Oil, the value of Bunkers and Gas Oil on board would be USD 1,950,000 say USD 2 million.                                                                                                                                                vi. The American Institute Hull Clauses both 1977 and 2009 make reference to Bunkers being part of the vessel (Line 16 in AIHC 1977 and Line 26 in AIHC 2009
).
vii. 
One of the features of the English Marine Insurance Act 1906 is of it pre-dominantly non-mandatory nature. Barring a small number of provisions reflecting public policy (for instance, S 55), the Act comprises default rules, applicable only in the absence of contrary intention. Accordingly, it is possible for parties to a H&M policy to exclude its application say for Bunkers.
viii. The most commonly used English form is Institute Time Clauses Hull 1/10/83 with the cover being on “Hull, Materials, Machinery, Outfits etc., and everything connected therewith.
ix.
See S 69(1) of the UK Marine Insurance Act 1906.
x. Although S 78 of the UK Marine Insurance Act 1906 does not have any restrictive provision to consider underinsurance for recovery under the policy, English Hull Forms expressly provide for this i.e. the recovery under the policy would be subject to any underinsurance and the limit of the policy (see Cl 13.4 of ITCH 1/10/83,   Cl 11.4 of ITCH 1/11/95 & Cl 9.4 of the International Hull Clauses 2003).
xi.  See S 73(1) & (2) of the UK Marine Insurance Act 1906 which provides that the recovery under a policy would be adjusted to consider the underinsurance.

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4 comments

  1. Vasant Pathak

    Excellent article Jagan.. Thanks for sharing

  2. Joern Groninger

    Once again an interesting article with some good points to think about! Recommended reading…

  3. Capt. Edwin

    A very thoughtful and well argued article. Incidentally, I had never come across of and insurance providers or carriers catering to this specific class of bunker insurance policy.

    On the scenario of the physical bunker supplier owning the bunker but risk transferred to the party ordering it, does it also means that the insurance of the bunker during the delivery and custody transfer continues until such times when the bunker is consumed? If that is assumed to be the case, does it mean the buyer of the bunker buys on a silent CIF and can look to the insurance carrier for protection and compensation? Is there any case law on this perplexing issue that presumably no one had look into this before?

    Please enlighten us on such service providers and my question on the hypothetical situation above.

    • Jagan

      Dear Capt Edwin,

      Thank you for your comments. There are various commercial insurers who do provide cover (Gard/Swedish Club, etc).
      The cover is on the basis of loss due to a casualty i.e. grounding / fire / etc…. and provided the bunkers are owned by the Insured at the time of the loss, they would be entitled an indemnity.
      Unfortunately, I have not seen any case laws on this subject and perhaps this is due to the Insurers promptly indemnifying their Insureds.

      Trust this assists.
      Regards,
      Jagan/NAU

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