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NVO’s Liability and Equipment cover – issues which may arise due to separate covers

Jagan - September 28, 2015 - 0 comments

Non Vessel Operating Common Carriers (“NVO”) may use their own equipment / containers for the carriage of the goods. This article discusses issues which may arise due to the liability and equipment risks being covered under separate policies.

  1. NVO’s are not only a common feature in the short sea trades but also frequently seen in some long haul trades (more so for Tank, Reefers and Special Containers / Equipment). A NVO could operate either using the equipment of the overlying carrier which he contracts with or by using their own equipment (due to imbalance in equipment in some trade lanes, some NVO’s only operate using their own equipment). In order to manage their risks, NVO’s would seek cover for their liability risks for acting as a contractual carrier and for the equipment (if this is owned/leased and operated by the NVO’s). This article touches on the issues which may arise for the coverage of liability and equipment if it is placed with separate insurers.
  2. Disclaimer: The purpose of writing this article is purely to consider the issues, arising due to separate covers taken by a NVO. We do not have any interests on the cover being either placed with a single insurer or multiple insurers. We are also not involved in the broking / placement of covers. Our role is strictly neutral and we assist clients, when engaged in our capacity as claims correspondents & consultants, in various types of marine claims / losses. 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, if any, are entirely ours.
  3. Transport Liability Insurance policies are relatively a young product in the marine insurance market given that the development of various intermediary roles occurred in the last few decades. Prior to this, the role of intermediaries was generally restricted to that of acting as agents for the owners or the cargo interests. The cover provided by Transport Liability Insurers is mainly for the liability risks of NVO’s and may include the equipment risks (equipment owned or leased by their Insured’s) as an extension. However, as the equipment risks are more of a “property cover”, some Transport Liability Insurers are not keen in providing this cover. Hence, NVO’s who are covered by these Transport Liability Insurers (who do not provide cover for equipment) would have to consider placing the equipment with other Insurers. There may be advantages to the NVO’s in placing the cover separately and which could be the expertise of the Insurer, extent and limits of cover and / or the premiums charged.
  4. If cover is placed with two separate insurers (liability policy with one insurer and equipment policy with another), it is possible that there may be issues on the engagement of policies. In one of the matters we were involved, containers of a NVO were held by the custom authorities due to a mis-declaration of cargo by the cargo interests.  It was not known as to when the custom authorities would complete their investigations and return the containers, but, going by the previous such matters dealt by the same custom authorities, it appeared that they (custom authorities) would retain the containers for at least a few years. The issue was whether the liability or the equipment policy should engage to resolve this issue by approaching the relevant customs department or the courts to seek recovery of the containers. With respect to the liability policy, as the customs department did not issue any notices against the NVO, it was “not triggered” to respond to the loss. With respect to the equipment policy, it was meant to respond to “all risks of loss of or damage …” and as the containers were themselves not damaged, the equipment policy was also “not triggered“. Both these policies (Liability and Equipment) had a clause entitling the Insurers to deal with the claim as they deemed fit. As both Insurers had different interests, it became important for the NVO to find a solution to resolve this matter to recover their containers (the number of containers involved in this incident was indeed substantial).
  5. It is submitted that while there was no “physical loss” at the time of the incident, if the containers were not retrieved from the customs department, the NVO would be deprived of the possession of his containers. This being the case, the NVO would be entitled to submit a claim for the Constructive Total Loss (S60 of the UK Marine Insurance Act 1906) of the containers. In order to claim for a Constructive Total Loss, the NVO must give a notice of abandonment to his insurers (S 62 of the UK Marine Insurance Act 1906). Alternatively, if the NVO incurs expenses to recover the containers from the custom authorities, they would also be entitled to submit a claim under the Sue & Labour which is not only a duty under law but also provided contractually under the equipment policy (although there are some doubts as to whether under English Law, Sue and Labour expenses can be recovered in the absence of contractual provision in the policy, it is our view that the recovery of expenses would be implied to give business efficacy. This being the case, as long as the claim for the Sue and labour expenses is reasonable and falls within the indemnity allowed under the policy, the policy should reimburse these expenses).
  6. By way of an analogy, we have considered issues arising when a vessel becomes a Constructive Total Loss (given that the Hull and P&I markets have a longer history and therefore more developed practices in the adjustment of claims).  When a vessel becomes a CTL, Hull insurers generally do not accept notice of abandonment as they do not wish to be burdened by the liabilities. Does this mean that the Hull Insurers are not entitled to the proceeds of the damaged vessel, if any, particularly when the P&I Policy responds to deal with the liabilities arising due to pollution, say under a compulsory order? This point was addressed by Mr Richard Cornah in his address as the Chairman of the Association of Average Adjusters of 2008/2009 where he stated “ … hull insurers have not accepted notice of abandonment and even if they had done so, this merely confers an entitlement to exercise proprietary rights, not an obligation to do so. They exercise no controls but equally they incur no liabilities; they can only sit there and hope to benefit from whatever residual value their assured can achieve. If the amount of the net proceeds which comes to them is higher because their assured had, prudently, paid premiums for liability cover, and he can therefore recover the dry-docking costs and thus protecting the reducing of proceeds, then simply, I would suggest, that is the Insurers’ good fortune”.
  7. In the case at hand (see 4 above), as there may be a potential liability for costs of the storage of the containers against the NVO, the Liability Insurers agreed to initiate recovery action for the containers, and in this way, the NVO were able to recover the containers. The alternative course of action available to the NVO was to update both Insurers that they (NVO) intended to mitigate their loss by approaching the custom authorities for recovery of the containers and subsequently submit the costs incurred for reimbursement under the terms of the policy (This was not necessary as the Liability Insurers were flexible in their approach).
  8. With respect to NVO, issues on coverage could also arise in General Average and Salvage and where it is the usual practice of the Owners / Salvors to demand security from the property interests for their values prior to release. If security is not provided either by the NVO or their insurers (for instance, if the security demanded is excessive and is more than the value of the equipment) for the equipment, Owners / Salvors would not release the container such that the NVO would be unable to fulfill the contract of carriage with the cargo interests and thereby incur liability (In which case, the Liability policy may be triggered to respond to any liability). Alternatively, while the NVO or their Equipment Insurers have provided security, cargo interests may not have provided security, with the result being that Owners /Salvors continue to retain the equipment with the cargo. As security for the equipment has been properly provided, NVO can demand Owners / Salvors that they devann their containers and return back. However, if the Owners / Salvors do not accede to the NVO’s demand, then the NVO and their Equipment Insurers would necessarily have to consider the legal costs for pursuit (which sometimes may exceed the value of equipment at risk and therefore may not be commercially viable). In this case, the NVO equipment insurer would probably weigh the costs of pursuit, the costs of providing an interim security or a CTL claim.
  9. In conclusion, when the NVO is covered under seperate policies for Liability and Equipment, they must :
    1. Advise their Insurers of the covers being placed and seek an agreement that in case of policy coverage issues, both Insurers agree to reimburse the NVO 50% of the costs / indemnity as per the terms of the policy. The Insurers may agree to recover from the other depending on who is later found to be on risk.      or
    2. Seek confirmation from their Insurers that they agree to waive the requirement to follow the direction of Insurers with respect to mitigation of loss in such cases (and in this way be entitled to seek recovery of the expenses incurred under the relevant policy).

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