Marine Practice

Charter Default insuranCe

i • Charter Default Insurance

In response to shipowners’ increasing concerns about charterers’ solvency, Marsh has developed an industry-first product that protects owners from damaging financial losses. Backed by both insurers and a leading financial institution, Marsh’s Charter Default product provides a mix of fixed recovery guarantee and credit insurance, tailored to the shipowner’s particular requirements.

Covering both outstanding debt at the time of an insolvency and the loss of future revenue for a set period, the product de-risks important revenue streams, thereby assisting owners to attract better terms fr om lenders by reducing counterparty credit risk.

Marsh • 1

f Financial default is a recurring problem. Recent high profile cases of shipping companies filing for bankruptcy have again highlighted counterparty risk in the shipping sector

f Companies with ships on charter are exposed to loss of revenue if their charterer folds or, at best, to enforced renegotiation of charter hire terms

f The risk of default increases at times of global financial uncertainty

f Fixed Recovery Guarantees and Credit Insurance protect against the risk of charterer default

f For a listed company, de-risking the revenue stream can improve stock prospects

f De-risking the revenue stream can also attract better terms from lenders

ProDuCt overviewProteCting revenue against the risk of finanCial Default

2 • Charter Default

Key FeaTuRes

• an insurance policy designed to compensate an owner

for financial loss as a result of a charterer’s failure to pay

undisputed amounts, typically because of bankruptcy

• The insured will be expected to make every effort to

mitigate any loss (eg; by withdrawing the ship from a

defaulting charter)

• The insured will be required to share the risk by retaining

a pre-agreed percentage of all potential losses (typically

20% - 25%)

• all credit insurance policies covering charter default

would be expected to cover unpaid daily hire as a result

of charterer insolvency (less the self insured retention)

up to a pre-agreed limit or until the ship is withdrawn

from the defaulting charter, whichever occurs first.

• an enhanced charter default credit insurance policy will

also provide cover up to a pre-agreed limit for the

difference between the daily hire earned under the

defaulting charter and the daily hire earned from a

replacement charter (the Mark to Market Difference)

• In addition to compensating for unpaid hire, an

enhanced charter default credit insurance policy will

cover unpaid expenses incurred by the insured on the

charterer’s behalf (Charterer’s additional Costs)

• The MC2 wording also allows for compensation of losses

following a commercial settlement between Insured and

Charterer, provided the terms of the settlement have

been agreed by the Insurers.

• 12, 18 or, in certain circumstances, 24 month policy

periods are offered. Ideally policies will include the

provision to cancel and rewrite well before expiry (eg; 6

months before expiry). although credit insurers can

decline to offer renewal terms, the ability to cancel and

rewrite minimises the possibility of an insured being left

without cover just as the credit risk turns bad.

• The policy is non-assignable other than in respect of

claims proceeds, albeit with strict provisos

• a financial instrument designed to transfer counterparty

risk to a third party financial institution in return for

payment of premium

• The financial institution will pay a pre-agreed sum in the

event the counterparty (the reference obligor)

experiences a credvent

• The credit event will be defined in the terms but can

include bankruptcy, insolvency, Chapter 11 or its

equivalent

• The guarantee level is not linked to the actual financial

loss and can amortise over the contract to reflect

reducing risk exposure

• a fixed recovery guarantee is a long term commitment

between client and guarantor

• a fixed recovery guarantee can be transferred to an

alternative party (e.g. a new owner), but any transfer

must be sanctioned by the provider

• a fixed recovery guarentee will normally only be

available to cover a counterparty that has publically

traded debt (e.g. a bond issue) or which is a public

company with actively traded shares.

fixeD reCovery guarantee

CreDit insuranCe

Marsh • 3

Key DIFFeRenCes

Provided by an insurance company Provided by a bank

normally short term, typically not exceeding 24 months.

not linked to duration of reference contract, but capable

of rolling forward

short cover long term - matching length of reference

contract (e.g. 10 years)

Premium renegotiated for each period. The policy will

typically be renewed six months before expiry to allow

rolling forward

Premium fixed at inception for full contract period.

Premium payment schedule could be structured over

full contract period

Will compensate an insured’s financial loss if a credit

event occurs to an agreed maximum limit, subject to the

policy conditions

Will pay an agreed sum if a credit event occurs. actual

losses are not relevant.

Credit insurers insist on the insured retaining a

proportion of each risk – typically 20%-25%

There is no requirement for the buyer to retain a

proportion of risk

The maximum compensation is linked to contracted

revenue over the compensation period (e.g.; daily charter

hire x 18 months, less the self insured retention)

Can amortize over time to reflect declining contract

value

fixeD reCovery guarantee

CreDit insuranCe

Common features of the fixeD reCovery guarantee anD CreDit insuranCe

• The providers of both these products assess the probability of loss and calculate premium on an assessment of the

reference obligor’s credit position.

• There is finite capacity available for both products and, in general terms, there is a direct correlation between obligor

credit rating, available capacity and premium.

• There is a relatively small market available for both products. The global economic crisis had a negative impact on

provider appetite and interest for shipping sector business is only slowly returning.

• neither product is intended to bolster a failing charter. They are designed to provide a ‘sleep easy’ for healthy contracts.

4 • Charter Default

fixeD reCovery guarantee

CreDit insuranCe

CReDIT InsuRanCe InFoRMaTIon RequIReD

• Identity of the charterer.

• Financial data relating to the charterer. This

may be problematic if it is a private company.

• Details of the charter party conditions and

details of the ships involved.

• Trading history and payment experience with

the charterer and its group companies.

FIxeD ReCoveRy GuaRanTee InFoRMaTIon RequIReD

• Identity of the counterparty.

• Contract duration, contract value and

amortisation schedule.

InDICaTIve exaMPle

(based on the MC2 wording)

• Ten year time charter at us$27,500 per day

• Policy period: 18 months, renewable after 12 months

• self insured retention: 25%

• Maximum compensation period: 18 months (540 days) made up of;

• First loss period covering unpaid invoiced hire of up to 90 days from the Date of loss (being the first date on which an insured sum is due and unpaid by the charterer) and

• second loss period covering the Mark to Market Difference that begins at the end of the first loss period and ends 540 days after the Date of loss

• limit for first loss period: us$1,822,500 (calculated at us$27,500 per day less 25% self insured retention multiplied by 90 days)

• Minimum limit for second loss period: us$5,906,250 (calculated at us$27,500 per day less a ‘floor’ of us$10,000 per day less 25% self insured retention multiplied by 450 days)

• The floor represents the lower level of daily hire that could be anticipated to be earned if it was necessary to recharter the ship during the policy period. The floor will be agreed between insured and insurer when the initial terms are agreed

• overall policy limit: us$8,437,500 (calculated as the limit for the first loss period plus the limit for the second loss period)

• sub-limit for unpaid expenses incurred by the insured on charterer’s behalf (Charterer’s additional Costs): to be agreed, based on previously invoiced or anticipated amounts

• Indicative premium for an overall policy limit of us$8,437,500 for 18 month policy period: us$180,000

• The above is for indicative purposes only. The premium actually quoted will depend upon an analysis of the charterer’s credit risk.

yeaR PResenT value oF ConTRaCT

PayouT uPon CReDIT evenT

50%

annual CosT

1 100,000,000 50,000,000 1,612,500

2 90,000,000 45,000,000 1,451,250

3 80,000,000 40,000,000 1,290,000

4 70,000,000 35,000,000 1,128,750

5 60,000,000 30,000,000 967,500

6 50,000,000 25,000,000 806,250

7 40,000,000 20,000,000 645,000

8 30,000,000 15,000,000 483,750

9 20,000,000 10,000,000 322,500

10 10,000,000 5,000,000 161,250

8,868,750

Where revenue from a ten year contract is US$10m per year and the buyer of a fixed recovery guarantee requires coverage for 50%, of the outstanding contract value

Marsh • 5

Charter Default fixeD reCovery guarantee

q1. Who offers this instrument?

a: It is a banking product.

q2. Is it transferable or tradeable?

a: It can be transferred or traded,

but only with the agreement of the

provider.

q3. What is Marsh’s role in this

transaction?

a: Marsh is not an expert in banking

products. Where an insurance

solution appears less suitable we can

introduce our client to a bank or

banks, but are unable to provide

advice.

q4. Will Marsh be remunerated for

the introduction??

a: It is likely that Marsh will receive

an introductory commission or

service fee from the bank.

frequently askeD questionsThese Faqs should be read in conjunction with the insurance product developed by Marsh and Chaucer - Wording (‘MC2’), to which it refers.

aPPenDix

q1. If I buy this cover what are the

risks of my charterers learning that I

have insured against their going

bankrupt?

a: Brokers and underwriters are

aware that the motivation for buying

charter default cover is likely to be

based around a general de-risking of

the business but we do realise that

this cover may be misconstrued as a

lack of confidence in a trading

partner.

Confidentiality is in the interests of all

parties which is why clause 7.2.2

prohibits disclosure. In addition

brokers and underwriters are

prepared to sign confidentiality

agreements on request.

q2. Why might I buy this product?

a: Charter default insurance is a

trade credit insurance offering

protection against unpaid revenue

due to financial default. It may appeal

because it fits your corporate risk

strategy. It could also be a way of

making the company more attractive

in an IPo or potentially be used to get

better rates of interest from lenders.

q3. What is the purpose of the

‘waiting period’?

a: The waiting period is intended to

allow sufficient time for short term

hire irregularities to be resolved

without involving the underwriter in a

claim.

q4. What is the purpose of the

‘first loss period’ and the ‘second loss

period’?

a: Policy MC2 is designed to

compensate for 540 days unpaid

charter hire split between a ‘first loss

period’ and a ‘second loss period’.

During the first loss period unpaid

daily hire will be reimbursed in full by

underwriters (less any self insured

retention). once the first loss period

has ended, claims will be reimbursed

on a ‘Mark to Market Difference’ basis

up to the limit of the ‘second loss

period’. If the charter party is

cancelled because hire is unpaid, the

first loss period will end when the

ship is withdrawn from the charter.

q5. What is ‘Mark to Market

Difference’?

a: ‘Mark to Market Difference’ is

defined in the MC2 policy wording. It

is the difference between the original

Charter Default insuranCe

6 • Charter Default

charter rate and either the hire being

paid on the replacement fixture or an

estimated market rate achievable for

the vessel if a replacement fixture

hasn’t been arranged.

q6. How does ‘Mark to Market

Difference’ work in practice?

a: Policy MC2 provides for a

shipbroker’s evaluation of what

constitutes an ‘achievable’ market

rate (clause 9.9).

While charter hire rates are primarily

determined by the pressures of

supply and demand, achievable rates

will, to an extent, also depend on the

perceived quality of the charterer and

in practice the replacement charter

may be in a completely different

trade. Therefore underwriters will

compensate the owner for the

difference between the original hire

rate and a ‘comparable’ new fixture at

a reasonable hire rate as agreed by a

shipbroker.

With underwriters’ agreement, the

replacement charter may be a

renegotiation of the original fixture.

This may occur where the charterer is

in administration and the

renegotiated fixture is a reasonable

commercial substitute in the context

of prevailing market rates.

q7. Which of our losses can we

recover from the insurer once the

‘waiting period’ has passed?

a: Reimbursement of all undisputed

insured losses, including unpaid hire

or ‘charterer’s additional costs’

(below), suffered up to that date.

Thereafter, further losses can be

claimed as they occur.

q8. What is included in the

‘charterer’s additional costs’?

a: Charterer’s additional costs are

sums which, under the charter, are for

the charterer’s account, although

they have been initially paid by the

(disponent) owner. These may

include, for example, additional

insurance premiums and port

disbursements. They may also

include the cost of bunkers where the

charterer failed to pay and the

(disponent) owner becomes subject

to an ‘in rem’ action against the

vessel. Cover for charterer’s

additional costs is subject to an

agreed sub-limit.

q9. Can we make a recovery from

the insurer even though we are still

involved in litigation against the

charterer?

a: If the quantum of hire remains in

dispute, litigation has to be

concluded before the policy

responds. Reimbursement from

underwriters can be sought before

enforcement proceedings commence

provided enforcement is not

unreasonably delayed.

q10. When, other than following

the insolvency, liquidation or

administration of a charterer, would

this policy respond?

a: The policy would respond where

the charterer is still solvent but does

not honour an arbitral award or court

judgement or an agreed commercial

settlement of a legal dispute. The

(disponent) owner remains

responsible for enforcing the award if

possible (and sharing the recovery

with the insurer) but this is not always

achievable. This policy would also

respond where payments are

intermittent and the charter still alive,

but undisputed amounts remain

unpaid after the waiting period.

q11. Why do underwriters

impose a significant retention and

why am I prevented from insuring this

retention?

a: underwriters impose a retention

to encourage the (disponent) owner

to act as a ‘prudent uninsured’,

particularly when pursuing charterers

to recover unpaid hire.

q12. What are our obligations to

the insurer if they have paid our

losses and we subsequently make a

recovery or a partial recovery from

the charterer?

a: Recovery costs incurred during

the waiting period will be reimbursed

first. Insurers and insured will then be

reimbursed in proportion to the

insured share of the risk. any

remaining balance will be reimbursed

to the insured in full.

q13. Who pays the legal costs

associated with pursuing the

charterer for hire?

a: legal costs are payable by the

(disponent) owner (or their FD&D

underwriters) but this policy will

reimburse pro rata those amounts

which relate solely to the

enforcement of rights and not to

disputes of rights or of quantum.

q14. Why can’t I buy a multi-year

policy that matches the duration of

my charter party?

a: The underwriters are limiting the

policy duration to 18 months or,

under certain circumstances, 24

months. It will, however, normally be

possible to roll policies forward by

‘cancelling and rewriting’ the policy

at the anniversary date of policy

inception.

Marsh • 7

Trade Credit Insurance – Ship Charter Hire

MC2 Wording September 2011

This insurance is to compensate the Insured in respect of Charterer’s non-payment of Hire and/or Charterer’s Additional Costs accruing under the Charter during the Policy Period, subject to the terms, conditions and exclusions set out below. 1 Compensation: 1.1 Upon expiry of the Waiting Period and subject to the terms and conditions of

this Policy, this insurance will pay the following amounts in the event of an Insured Occurrence:

1.1.1 If, with Insurers’ prior written agreement, the Insured does not bring proceedings against Charterer to recover an Insured Sum:

a) in respect of Charterer’s Additional Costs, 75% of the amount unpaid;

b) in respect of Hire, 75% of the Hire payable during the First Loss Period and 75% of the Mark-to-Market Difference during the Second Loss Period.

1.1.2 If, with Insurers’ prior written agreement, the Insured reaches a commercial settlement with Charterer in relation to the payment of an Insured Sum, 75% of the shortfall (if any) between the settlement figure payable by Charterer and the Insured Sum.

1.2 No Compensation shall be payable hereunder until after expiry of the Waiting Period.

1.3 Thereafter, Compensation:

1.3.1 under clause 1.1.1, in respect of Charterer’s Additional Costs and in respect of the First Loss Period is payable in full upon expiry of the Waiting Period;

1.3.2 under clause 1.1.1 in respect of the Second Loss Period is payable monthly in arrears during the Second Loss Period or as may otherwise be agreed;

1.3.3 under clause 1.1.2, is payable upon expiry of the Waiting Period.

2 Notification: 2.1 As a condition precedent to Insurers’ liability hereunder, the Insured shall notify

the Insurers promptly of the occurrence of any of the following:

2.1.1 it becoming apparent to the Insured that Hire and/or Charterer’s Additional Costs may not be paid when due;

2.1.2 non-payment of Hire and/or Charterer’s Additional Costs;

2.1.3 any payment made by the Insured of a debt owed by Charterer and incurred under the Charter, in order to reduce the risk of arrest of the Vessel.

2.2 The Insured shall provide the Insurers with all documents the Insurers may, at any time, reasonably require, including but not limited to:

This is a original and proprietary product developed by Marsh and Chaucer, which is subject to copyright.

2.2.1 Charter;

2.2.2 invoice for Insured Sum;

2.2.3 correspondence between Charterer and Insured regarding the Insured Sum;

2.2.4 details of any possible mitigation or set-off open to the Charterer or any other reason why the Insured Sum may not in fact be due from Charterers.

2.3 In any claim, action, suit or proceeding to enforce a claim for loss hereunder, the burden of proving that the loss is recoverable under this Policy, that no warranty has been breached and that no exclusion applies shall fall upon the Insured. If such proof of loss has not been submitted within two years of the Date of Loss the Insurers shall be discharged from all liability hereunder in respect of such loss.

3 Warranties: 3.1 The Insured warrants that, at inception of this Policy and at the time of any

amendment hereto, and save as disclosed in writing to the Insurers, the Insured has no knowledge of any Insured Occurrence or any fact, matter or circumstance which is likely to give rise to or which indicates a pre-existing Insured Occurrence.

If the Insured learns that they are in breach of this warranty above, they must immediately notify the Insurers and the Insurers shall have absolute discretion to:

a) waive such breach of warranty; or

b) amend the premium, terms and conditions of this insurance as they may in their absolute discretion require; or

c) treat themselves as discharged from liability from the moment of breach.

3.2 The Insured warrants that the Insured has obtained all authorisations and licences which the Insured is required to obtain under the regulations of the Insured’s Country for the performance of the Contract of Hire.

3.3 The Insured warrants that the Insured will maintain a minimum uninsured percentage of [●] % of its participation in the Contract of Hire for the duration of this Policy. The Insured will at all times bear the risk of loss for its minimum [●] % uninsured percentage net and unhedged.

4 Exclusions: 4.1 In no case shall this Policy cover loss, liability, damage or expense whether

directly or indirectly caused by:

4.1.1 non-payment of any Insured Sum in circumstances where Charterer is entitled to refuse to pay that Insured Sum, including but not limited to where Charterer has an express right of deduction under the Charter; for off-hire periods; or where Charterer can lawfully off-set damages claims against Hire;

4.1.2 failure of any bank and/or guarantor (where applicable) to open, amend, guarantee or extend any applicable instrument except where such failure results from an Insured Occurrence;

4.1.3 material breach of the terms of this insurance by the Insured.

4.1.4 illegal or criminal acts by the Insured.

4.1.5 failure by the Insured to comply with local laws or regulations of which they should reasonably have been aware having the effect of law in the Host Country which were in existence at the inception of this insurance.

4.1.6 currency fluctuations (including devaluations) or due to any foreign currency exchange controls or currency transfer controls;

4.1.7 the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system;

4.1.8 lawful cancellation of the Charter due to non-performance by the ship or of the Insured;

4.1.9 the outbreak of war; civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power;

4.1.10 capture, seizure, arrest, restraint or detainment (barratry and piracy included), and the consequences thereof or any attempt thereat;

4.1.11 derelict mines torpedoes bombs or other derelict weapons of war;

4.1.12 In no case shall this Policy cover loss damage liability or expense directly or indirectly caused by or contributed to by or arising from

4.1.12.1 ionising radiations from or contamination by radioactivity from any nuclear fuel or from any nuclear waste or from the combustion of nuclear fuel

4.1.12.2 the radioactive, toxic, explosive or other hazardous or contaminating properties of any nuclear installation, reactor or other nuclear assembly or nuclear component thereof

4.1.12.3 any weapon or device employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter

4.1.12.4 the radioactive, toxic, explosive or other hazardous or contaminating properties of any radioactive matter. The exclusion in this sub-clause does not extend to radioactive isotopes, other than nuclear fuel, when such isotopes are being prepared, carried, stored, or used for commercial, agricultural, medical, scientific or other similar peaceful purposes

4.1.12.5 any chemical, biological, bio-chemical, or electromagnetic weapon.

4.1.13 insolvency of the Insured or of its group parent, including any voluntary or compulsory winding-up or dissolution or formal protection from creditors under any applicable bankruptcy or insolvency laws or the occurrence of any similar event in any jurisdiction.

4.1.14 amounts due under any variation to the Charter unless such variation is advised promptly to and accepted by Insurers on such additional premium, terms and conditions as the Insurers shall in their absolute discretion require;

4.1.15 any sum accruing or due from Charterer to Owners as at the date of inception hereof;

4.1.16 interest on any Insured Sum or penalty charges of any sort relating to any Insured Sum; or

4.1.17 any Hire or Charterer’s Additional Costs accruing post cancellation, termination or expiry of the Charter.

4.2 No Insurer shall be deemed to provide cover and no Insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that Insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.

5 Loss Prevention/Mitigation: 5.1 The Insured shall promptly give written notice to the Insurers (and in any event

within 30 days) after becoming aware of a circumstance material to the ability or willingness of the Charterer to comply with the terms of the Charter. The Insured shall, at its own cost (save as provided in clause 6.1 below), take all reasonable practicable measures to avert or minimise any losses which may be claimable hereunder and act to recover sums unpaid by the Charterer.

5.2 The Insured shall, at its own cost (save as provided in clause 6.1 below), provide prompt assistance to Insurers, including but not limited to:

5.2.1 ensuring that rights against the Charterer and any guarantor or other third party are properly preserved and exercised;

5.2.2 the transfer, assignment and delivery (so far as it is legal and contractually able) to the Insurers of the Insured’s rights of recovery against any person or organisation in respect of the valid claim for which claim payment is made.

5.2.3 withdrawing the Vessel(s) from the Charter, in pursuit of alternative earnings if entitled to do so and where reasonably requested by Insurers to do so;

5.2.4 pursuing proceedings against the Charterer for recovery of an Insured Sum where reasonably requested by the Insurer to do so;

5.2.5 co-operating with Insurers and complying with Insurers’ reasonable requests in relation to the recovery of an Insured Sum from Charterer;

5.2.6 not permitting, insofar as it is within its power, any receivables or other sources of recovery to which the Insurers are or may be subrogated to be subject to any lien, security interest, or other third party claim superior to that of the Insurers;

5.2.7 remitting any Recovery immediately to the Insurers and until such remittance holding same in trust for the Insurers.

5.3 After receipt by the Insurers, any Recovery shall be divided between the Insured and the Insurers in the following order:

5.3.1 a sum equivalent to the Recovery Costs incurred prior to and during the Waiting Period by the Insured in compliance with its obligations under clause 5.1 and 5.2 shall be paid to the Insured (less any such sum previously reimbursed by Insurers);

5.3.2 a sum proportionately equivalent to the compensation per Clause 1 paid by Insurers and their Recovery Costs per Clause 6.1.2 shall be paid to (retained by) the Insurers;

5.3.3 any remaining balance shall be remitted to the Insured by the Insurer.

6 General Conditions: 6.1 Costs

6.1.1 Save as provided in clause 5.3.1, the Insurers shall not be liable for any legal costs incurred by the Insured prior to or during the Waiting Period.

6.1.2 The Insurers will pay 75% of the Recovery Costs incurred after expiry of the Waiting Period, provided such costs have been specifically authorised in advance and in writing by the Insurers.

6.1.3 If the total debts owed to the Insured by the Charterer exceed the limit of Insurers’ liability hereunder, the amount of Recovery Costs to which the 75% may be applied will be reduced to reflect that proportion which the limit bears to the total debts owed.

6.1.4 Any Recovery Costs incurred in currency other than currency of the Charter shall be converted at the rate of exchange listed in the Financial Times as at the date when the Insured pays these costs.

6.2 Assignment This insurance may not be assigned by the Insured other than in respect of the payment of any compensation hereunder if Insurers receive reciprocal assignment of Recoveries.

Any such assignment of any compensation payable hereunder does not relieve the Insured from any implied or express term of this insurance, including the payment of premium and the execution of all responsibilities in utmost good faith.

6.3 Automatic Termination 6.3.1 Unless due to an Insured Occurrence or otherwise agreed by the

Insurers, the insurance of any declared Charter shall automatically terminate upon:

6.3.1.1 the date of termination or expiry of the Charter but without prejudice to any liability which has accrued as at that date;

6.3.1.2 any change in control of the Insured unless the prior written consent of the Insurers is obtained with such additional premium, terms and conditions as the Insurers shall in their absolute discretion require.

6.3.2 This insurance shall become null and void, and all claims in process of payment hereunder shall be immediately forfeited, and any payments already made hereunder shall be returned to Insurers in full if:

6.3.2.1 the Insured makes any claim knowing the same to be false or fraudulent as regards amounts or otherwise; or

6.3.2.2 the Insured discloses the existence of this insurance to any other party at any time before or after the expiry of this insurance policy, other than on a confidential basis to its own professional, financial or legal advisors, or relevant regulatory authorities as required and, where applicable, the Loss Payee, without the prior written consent of the Insurers.

6.4 Allocation of Monies Received Prior to the Date of Loss Unless otherwise agreed in writing by the Insurers, any monies or other benefits received by or on behalf of the Insured prior to the Date of Loss in connection with any Charter shall be applied to the total amounts of Hire due and owing from the same Charterer in chronological order of due dates.

6.5 Non-Cancellation This insurance is not cancellable by the Insured or the Insurers other than by the exercise of the Payment of Premium Clause or any other provision herein and in these circumstances, no premium is returnable other than as specified in such provision.

6.6 Stop Commitment Unless otherwise agreed, the Insurers shall not accept a declaration of any further charterparty, contract of hire, contract of affreightment or other similar contract should more than 3 Invoices be at that time invoiced but unpaid by that Charterer and overdue for more than 30 days.

6.7 Fraud

This Policy shall become void, and all claims hereunder shall be forfeited, if the insured has made any material statement, report, application or claim under this Policy, where the Insured knew that the statement, report, application or claim was false or fraudulent.

6.8 Insurer Downgrade

The Insured and its representatives reserve the right to review the financial security of insurers hereunder as applicable at any time. The Insured may terminate, subject to daily pro rata return of premium, any insurers participation on this policy at any time should any of the insurers’ financial condition no longer meet the minimum security requirements of the Insured which for the purposes of this contract shall be Standard & Poors “A-“ and/or equivalent rating to “S&P A-“ under A.M. Best. To effect such termination the Insured is required to provide relevant Insurers with 30 days notice of such termination. The Insured shall provide the Insurers with a release of all liability hereunder effective upon the actual date of termination.

6.9 Complete Agreement of the Parties, Amendment and Waivers

The terms of this insurance may not be waived or changed, except by written endorsement issued and signed by the Insurer(s). the failure of the Insurer(s) to exercise any right or remedy shall not be deemed to constitute a waiver of such right or remedy in the future.

6.10 Notice

All notices under any provision of this insurance shall be in writing and given by hand, prepaid express courier, airmail, electronic notice properly addressed to the appropriate party or its designated representative and will be deemed as having been effected only upon actual receipt.

6.11 Third Party Rights

A person who is not a party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this agreement.

6.12 Law and Arbitration

The construction, validity and performance of this Policy shall be governed by the laws of England and Wales.

Any dispute arising out of or in connection with this Policy, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into this clause. The tribunal shall consist of three arbitrators with one to be nominated by the Insured, another by Insurers and the third to be agreed by mutual consent by the respective parties within 30 days thereafter without regard to Article 6.1 of the LCIA Rules as to the nationality of the chairman. Where the respective parties cannot agree on a presiding arbitrator as the third the two nominated arbitrators shall appoint the third presiding arbitrator. The chairperson of the tribunal shall be a qualified lawyer under the Laws of England and Wales. The place of arbitration shall be London. The language of the arbitration shall be English.

Nothing contained herein shall be construed to allow the arbitrator(s) or any court or any forum to award punitive, exemplary or any similar damages. By entering into this agreement to arbitrate, the parties expressly waive any claim for punitive, exemplary or any similar damages. The only damages recoverable under this Policy are compensatory damages.

7 Definitions: 7.1 “Charter” means the charterparty, contract of hire, contract of affreightment or

other similar contract entered into by the Insured and the Charterer for hire of the Vessel(s) and as declared hereunder.

7,2 “Charterer” means the party hiring or leasing a vessel or vessels from the Insured.

7.3 “Charterer’s Additional Costs” means expenses incurred by the Insured on the Charterer’s behalf or for the Charterer’s account pursuant to the Charter, which are due but unpaid by the Charterer and are not in dispute.

7.4 “Date of Loss” means the first date on which an Insured Sum is due and unpaid by the Charterer (or its guarantor, if any, following explicit demand under any guarantee).

7.5 “First Loss Period” means a maximum of 180 days from the Date of Loss, during which period the Insured Sum continues to be unpaid or until withdrawal

for alternate employment or inception of a replacement charter, whichever is the shorter.

7.6 “Hire” means the sum payable under the terms of the Charter by the Charterer to the Insured, during the time that the Vessel(s) is on hire less any counterclaim or set-off which can be lawfully used by the Charterer to reduce or reclaim the hire payable.

7.7 “Host Country” has the meaning ascribed to it in the Risk Details.

7.8 “Insured’s Country” has the meaning ascribed to it in the Risk Details.

7.9 “Insured Occurrence” means any non-payment by the Charterer or by its guarantor of:

7.9.1 An Insured Sum; or

7.9.2 An award handed down by a competent arbitration tribunal or court with regard to the payment of an Insured Sum; or

7.9.3 Sums agreed as due and payable by the Charterer to the Insured in respect of an Insured Sum under a commercial settlement agreement, howsoever recorded.

7.10 “Insured Sum” means any Hire and/or Charterer’s Additional Costs which have accrued during the Policy Period and are due but, in either case, are unpaid and are not in dispute.

7.11 “Mark-to-Market Difference” means the difference between Hire (without deduction or set-off) and

7.11.1 If the Vessel is still subject to the Charter or not earning hire or freight then the estimated market rate achievable for the Vessel(s) on the final day of the First Loss Period, in the opinion of the Shipbroker, for a comparable replacement time charter or the time charter equivalent (“TCE”) rate on a comparable replacement voyage charter, as applicable; or

7.11.2 If the Vessel is employed under a substitute fixture, then the actual replacement hire or TCE rate achieved by the Insured provided such rate is agreed by the Shipbroker to be reasonable, given the nature and type of the Vessel and prevailing market conditions

provided always that if the estimated or actual market rate is greater than the Hire, the Mark-to-Market Difference shall be zero and provided always that if the estimated or actual market rate is less than USD10,000 per day, the Mark-to-Market Difference shall be the difference between Hire and USD10,000 per day.

7.12 “Recovery” means all sums recovered in respect of claim moneys paid by Insurers.

7.13 “Recovery Costs” means reasonable legal costs incurred in pursuing a Recovery, but the Insurers will not contribute towards costs incurred in relation to:

7.13.1 the resolution or the settlement of any dispute between the Charterer and the Insured as to the Charterer’s obligation to pay; or

7.13.2 the Insured’s administrative costs and expenses; or

7.13.3 the determination of the amount of Hire or Additional Costs due and owing in case such amount has been disputed by the Charterer.

7.14 “Second Loss Period” means the period commencing on the first consecutive day following the expiry of the First Loss Period and finishing 540 days from the Date of Loss.

7.15 “Shipbroker” means the shipbroker appointed jointly by the Insured and the Insurer. If the Insured and the Insurers cannot agree upon the identity of the Shipbroker, the Shipbroker shall be appointed by the Chairman of the Baltic Exchange in London.

7.16 “Vessel(s)” means the vessel or vessels that the Charterer is hiring from the Insured pursuant to the Charter.

7.17 “Waiting Period” means:

7.17.1 in the case of claims under clause 1.1.1, 180 consecutive days from the Date of Loss;

7.17.2 in the case of claims under clause 1.1.2, 30 consecutive days from the date of a court judgment, arbitral award or commercial settlement agreement in favour of the Insured, whichever is the later.

Charter Default insuranCe – inDiCation sheet

Charterparty Facts Insurance requests Insurer commentsInsured:

Charterer:

Charterer’s Guarantor:

vessel(s):

Description:

Charter Date:

Inception:

Duration:

Trading intentions:

CP form:

Payment terms:

Withdrawal rights:

Daily Hire (100%):

us$

limit for 1st loss Period:

us$

Charterer’s additional Costs (100%) Per monthly invoice

limit (in the aggregate):

us$

Mark-to-Market Floor

us$

limit for 2nd loss Period:

us$

self insured retention: 25%

Combined single limit:

us$

Gross premium:

shipbroker nomination: line:

noTe: this sheet is abbreviated – see email correspondence for full detail, information or representations and offer

negotiations.

unDerwriting information requireD for

Charter Default quotes unDer mC21. The identity of the owner and the charterer as it

appears on the charter party

If the nominated charterer is a subsidiary or special

purpose company, underwriters will need to

understand the link between the contracting party

and its parent. If they cannot establish a link, any

quote will reflect the credit status of the subsidiary, or

may result in submissions being declined.

2. Financial information relating to the charterer

In order to price charter default risk, underwriters

need to assess the debt profile, gearing and past

performance of the charterer. underwriters have

access to financial information relating to publically

traded companies and limited information for some

private companies. If sufficient information is not

readily available, it may be necessary to obtain it to

facilitate a quote.

3. Details of the ship(s) being chartered (type, year built, deadweight and IMo number)

4. Daily charter hire amounts

5. Charter party signing date, duration and inception date

6. Charter party terms – a copy of the charter party or ‘fixture recap’ if it includes sufficient information

underwriters need to understand the charter hire

payment terms and the termination provisions in the

event of non-payment.

7. Details of any security provided by the charterer to the owner

For example, the charterer’s parent company might

guarantee performance of the charter party if the

nominated charterer is a subsidiary. This will enable

underwriters to price the risk on the parent company’s

credit risk.

8. Details of the anticipated employment of the ship (where known)

underwriters will look more favourably on charters

where there is a strong underlying business case for

employing the ship and less favourably if the charter

appears speculative.

9. Details of the trading history and experience between owner and charterer

underwriters require disclosure of any other current

non-insured charter with the same charterer and

details of any payment problems in the past. It will also

help to understand the depth and strength of the

trading relationship between owner and charterer.

10. Charter hire payment schedule to date

The underwriters will want to compare charter hire

due dates against actual payment dates under any

existing charters and will need to understand the

reasons for any delays.

11. Details of the owner’s credit control procedures

The underwriters will want to know that the insured

has robust procedures in place to monitor prompt

payment and to enforce payment where necessary.

12. Details of any attempts made by the charterer to renegotiate the charter party terms since it was signed.

18 • Charter Default

13. an explanation of the amount requested to be covered under Charterer’s additional Costs

The MC2 wording includes provision for the insured to

recover costs which should have been paid by the

charterer. These might include War Risk additional

premium, Kidnap & Ransom premium and the cost of

bunkers. underwriters will cap the amount

recoverable under this section. To arrive at an

appropriate limit they need to know the typical

maximum amount due for reimbursement from

charterers at any time plus the maximum amounts

due to fuel suppliers, etc for bunkers, etc.

14. any proposed daily hire ‘floor’ to be applied to the Mark to Market Calculation under the second loss Period

When indicating terms, underwriters will assume

market charter hire will not fall below a floor level

during the policy period. The limit for the second loss

Period will be calculated on the difference between

the contracted daily hire and the floor. The insured

may wish to propose a floor based on their own

market knowledge.

15. any other information that may influence the underwriter when considering the risk

all material facts must be disclosed to the

underwriters. The non-disclosure or

misrepresentation of a material fact will entitle an

underwriter to avoid the insurance policy.

Marsh • 19

PRoPosal FoRM FoR CHaRTeR DeFaulT InsuRanCePlease supply the following information by carefully completing this questionnaire, in as far as is practical, for an initial

indication of insurance costing from underwriters. If a question is not applicable to the operations of the applicant, please

state so by ‘n/a’ and if more space is required to fully answer a question please attach a separate sheet identifying the

question to which it responds. More detailed information may be required prior to obtaining a formal quotation.

We would respectfully remind you of your duty to disclose all information, facts or circumstances which are, or ought to be, known

to you and which are material to the risk. If you have any doubt whether information is material, you should disclose it to Marsh,

as failure to do so might lead to your policy being avoided by insurers.

1. InsuReD

a. name

b. address

c. Country

2. CHaRTeReR

a. name

b. address

c. Country

d. ownership (public/private)

3. vessel

a. name

b. IMo number

c. year built

d. Deadweight

e. Type

f. Flag

4. CHaRTeRPaRTy

a. Charterparty form

b. Date executed

c. Charterparty inception

d. Duration

e. Daily hire rate

f. Payment terms

g. law of the Charterparty

h. Where will and dispute be

arbitrated?

i. What termination provisions are

contained within the Charterparty

in the event of non-payment of

hire?

20 • Charter Default

j. Does the Insured know of any

licensing/permit requirements or

changes in law which might

prevent fulfilment of the

Charterparty by the Charterer?

k. Is there any additional security/

guarantees in place relating to the

charterparty?

5. InsuReD’s exPeRIenCe

a. Please provide details of the

Insured’s prior trading experience

with this charterer.

b. Please identify any instalments

that were not received in a timely

manner and the reasons for the

delay.

c. Does the Insured have robust

procedures in place to monitor

prompt payment of hire?

Please describe:

d. Has the Charterer attempted to

renegociate any of the

Charterparty’s terms since it was

signed? If so, what was the

outcome of such negociation?

6. oTHeR InFoRMaTIon

Please provide details of any

information, not covered above,

that may influence the insurer

when considering this risk

Marsh • 21

aDDITIonal InFoRMaTIon

Please supply any additional information you consider relevant to initial risk assessment. It would assist if you would

provide copies of any Company brochures, annual Reports or any other literature describing the aforementioned

operations. Please advise internet address if applicable.

DIsClosuRe oF MaTeRIal FaCTs

Every proposer or insured, when seeking new insurance or amending or renewing an existing policy must disclose any

information which might influence the insurer in deciding whether or not to accept the risk, what the terms of the policy should be

or what premium to charge. If you fail to disclose all material facts, this may render the insurance voidable from inception (the

start of the contract) and enable the insurer to repudiate liability (entitle the insurer not to pay your claims). If you are not sure

whether a fact is material, you should disclose it.

By ticking here, We declare that all statements and particulars are true, full enquiry having been made, and we have not

omitted, suppressed or mis-stated any material facts which may be relevant to the Insurer’s consideration of this insurance

proposal and undertake to inform the Insurer of any change to any material fact that occurs prior to the point at which the

insurance contract has been concluded and throughout the duration of the contact of insurance. We understand that the

information we provide will be used by the Insurer in determining acceptance of the application together with the premium

charged for the risk and the terms of any policy provided.

We will process your data in accordance with relevant data protection legislation. Your data will be passed to insurers so that they

can assess and provide you with a quote (or cover) if applicable. We may exchange information with members of Marsh &

McLennan Companies, Inc. to provide you with services and to process information on your behalf (in jurisdictions inside and

outside the European Economic Area where there may be less stringent data protection laws). Wherever it is processed, your

information will be protected by a strict code of secrecy and security which all members of Marsh Ltd, their staff and any third

parties are subject to and will only be used in accordance with our instructions. To help us to continually improve our service and

in the interests of security, we may monitor and/or record your telephone calls with us. Marsh & McLennan Companies, Inc.

means Marsh & McLennan Companies, Inc., its subsidiaries, associated and affiliated companies.

It is very important to read and understand the contract you will be entering into when purchasing insurance.

Completion of this proposal form/questionnaire does not imply that insurance cover will be offered by insurers.

applicant’s signature

Dated

Position Held

Marsh is one of the Marsh & Mclennan Companies, together with Guy Carpenter, Mercer, and oliver Wyman.

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

In the united Kingdom, Marsh ltd. is authorised and regulated by the Financial services authority for insurance mediation activities only.

Copyright © 2011 Marsh ltd. all rights reserved.

For further information, please

contact your local Marsh office

or visit our web site at: marsh.

com

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PaRIsTel: +33 1 4134 5000

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san FRanCIsCo Tel: +1 415 743 8000

seoulTel: +1 714 245-7810

sInGaPoReTel: +65 6332 0288

ToRonToTel: +1 416 349 4700

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