Marine Claims,Nordic Plan - H&M conditions

15-17th Jan. 2014

By Sveinung Måkestad,

Vice President, Gard AS

The Nordic Association of Marine Insurers1

Content

• H&M Insurance

• General Rules (NMIP Chapter 10)

• Total Loss (Chapter 11)

• Damage (Chapter 12)

• Liability by collission or striking (Chapter 13)

• (Measures to avert or minimize loss, Chapter 4)

2

General rules relating to the scope of the hull insurance

• Objects insured (§ 10-1)

• Objects temporarily removed from the ship (§ 10-2)

• Loss due to ordinary use (§ 10-3)

• Standard cover versions (§§ 10-4 to 10-8)

• Variations from “full conditions” to “stranding terms”

• Misc provisions (§§ 10-9 to 10-12)

Objects insured (§ 10-1)

Objects insured;

◦ The ship incl. machinery

◦ Equipment and spares on board the vessel But not equipment temporarily on board during stay in a port of call Irrespective of ownership… New equipment etc insured as from “passing the ship’s railing”.

◦ Bunkers and luboil (Bunkers belonging to timecharterer?)

Not insured;

◦ Supplies and articles intended for consumption

◦ Boats and equipment used for fishing

◦ Loose objects for securing/protecting cargo

◦ Loose containers for carriage of cargo

Objects temporarily removed from the ship (§ 10-2)

• Insured whilst temporarily removed from ship…, provided they are intended to be put back on board before departure◦ Parts taken ashore for repairs?

◦ New parts purchased for renewal on board?

Loss due to ordinary use (§ 10-3)

•The insurer is not liable for loss that is a normal consequence of the use of the ship and its equipment.

•Stevedore damage (often accumulated over time)

•Touching ground in rivers e.g. due to sand-banks continously ”moving”…

Total loss / condemnation andrelated issues

7

Total loss vs. Damage

Total loss, Chapter 11◦ Assessed value, incl.

Hull/freight interest

◦ No deductions / exclusions

◦ Quick settlement(?)

Damage, Chapter 12◦ Cost of repairs

◦ Deductions, e.g. §§ 12-3, 12-4, 12-15, 12-16, 12-18

◦ Time (& trouble) for repairs, incl. Lost earnings

8

Total loss situations

•Actual total loss (§ 11-1)

•Missing/abandoned ship (presumed total loss) (§ 11-7)

•Constructive total loss (condemnation) (§ 11-3)

•(Compromized / arranged total loss)

9

Condemnation, § 11-3

Vessel is condemnable when cost of repairing ”casualty damage” exceeds 80% of insurable value or value of the ship after repairs, whichever is the higher◦ Request to be made without undue delay…(§ 11-6)

◦ Market value at the time when requesting condemnation

◦ Casualty damage reported/surveyed by insurer during 3 years prior to casualty

◦ Salvage not to be taken into account

10

The Assured’s position• Frequently favouring a settlement for total loss, unless e.g;

◦ Underinsurance?

◦ favourable long term freight contract / commercial reasons?

◦ special purpose ship?

• The assured has the choice whether or not to repair the vessel, but;◦ If the assured decides to repair a vessel that is condemnable,

insurers liability is limited to sum insured, less value of wreck (Plan § 12-9)

11

Considerations to be made by insurer

Starting point to remember – insurer is liable for up to 3 times the sum insured (+ interest/costs), Plan § 4-18 ◦ Damage/loss of vessel,

◦ Measure to avert/minimise loss

◦ Collision liability

Insurers goal: Reduce the total claim◦ How much to spend on salvage efforts?

◦ Prospects of successful salvage?

12

No or minor prospects of salvage?

Insurers should consider Plan § 4-21◦ The insurer may avoid further liability by informing the assured that

he will pay the sum insured.

◦ Misc. costs, salvage etc. and costs of preserving vessel/wreck is recoverable in excess of the sum insured (see § 4-18 and § 4-19), provided that it is attributable to measures implemented before the assured was notified of the insurer’s decision.

◦ The insurer has then no right to the object insured under § 5-19 - insurers must beware! HR 29/06/1998 ”Lomita judgement” (Rt 1998 – 1032)

Would the considerations and outcome potentially be different under LOF?

13

HR 29/06/1998 ”Lomita judgement”

• 19/09/92 Ocean Blessing collided and caught fire in Malacca Strait. Shipowners entered into a LOF with Semco Salvage, under which the vessel was to be brought to Singapore for redelivery. Vessel was beached, fire extinguished and eventually towed to Singapore, where she arrived 5th Feb 1993.

• On the 5th Nov. 1992 the leading insurer (Storebrand) declared the vessel a total loss under the H&M policy, and the sum insured was paid 5th Dec. 1992 (at a time when the salvage prospects were uncertain) with reference to 1964 Plan § 82 (corresponding to § 4-21 in the Nordic Plan)

• Salvage award approx. SGD 1,33 M, which was less than proceeds of sale of wreck

• The assured claimed the salvage award from H&M insurer, who in turn rejected the claim, as sales proceeds exceeded the salvage award

• Oslo City court: Favoured the shipowners, - insurers appealed• Appeal Court (Borgarting Appeal Court): reversed the judgement, as they

found that there was no loss as the proceeds of wreck exceeded the salvage award. The assured appealed.

• Supreme Court: reversed the appeal court judgement, and insurers had to pay salvage in addition to sum insured for Total Loss.

14

Insurers right to attempt to salvage

Plan § 11-2

◦ “The insurer is entitled to attempt to salvage the ship at his own expense and risk…”

Plan § 11-6◦ If the assured request condemnation, the insurer may without undue

delay after salvage demand removal to a place where the damage may be properly surveyed.

◦ Insurer bear the removal costs and liability for losses arising during or as a consequence of the removal which is not covered by other insurers.

15

NMIP Chapter 12

Damage

§ 12-1: Main rule concerning liability of the insurer

• Damage = Vessel damage without rules relating to total loss being applicable.

• Important principle and starting point: - Insurer is liable for restoring the vessel to the condition it was prior to the occurrence • Not necessarily exactly same condition...

• Liability arises as and when the repair costs are incurred (an ‘indemnity’ policy), § 12-1, second subpara• Exception - see § 12-2.

• Deduction for improvements, § 12-1, third subpara

• Complete repairs unreasonable/impossible - claim for depreciation in value, §12-1, fourth subpara

§ 12-2: Compensation for unrepaired damage

• The assured may claim compensation for unrepaired damage when the insurance period expires.

• Based on estimated reduction in market value, but not exceeding estimated cost of repairs

• No compensation for unrepaired damage if vessel becomes a total loss before policy expiry

§ 12-3: Inadequate maintenance, etc.

• No cover for parts defective due to wear and tear, corrosion, rottenness, inadequate maintenance or the like

• Damage to other parts - consequential loss - is covered

§ 12-3: Inadequate maintenance, etc. (cont’d)

• What was the technical condition of the ship at the time of the casualty?

• Which parts should, from an objective point of view, have been repaired/replaced in any event, irrespective of the casualty?

• Identification of part or parts?• Technical and economic consideration

• Irrespective of the part’s significance and position in the causal chain

• Exclusion for parts itself together with labour costs etc for access and installation/replacement + ppn of common repair expenses (§ 12-14)

• Borderline between lack of maintenance and crew negligence

§ 12-4: Error in design, etc.

• Regulates to which extent there is a claim for damage caused by error in design or faulty material

• normally having been present since newbuilding

• Error in design means that the design of a part of the ship proves to be unfortunate, or that the degree of strength proves to be inadequate.

• Faulty material means that the material in a part of the ship is of a quality inferior to the presupposed standard.

• Parts that are;

◦ not in proper condition due to faulty material or error in design, and

◦ physically damaged,

are covered provided that the parts have been approved by the Classification Society.

§ 12-4: Error in design, etc.

• Parts must be “damaged” – no cover if parts are defective due to faulty material or error in design but not damaged.

• Sufficient that damage can only be ascertained by advanced methods, e.g. an initial crack by x-ray or similar

• Damage to other parts as a result of error in design or faulty material - consequential loss - is covered.

• Borderline between error in design and faulty workmanship

• Borderline between error in design and “cheap” solutions/ untested new technology/inadequate analysis etc.

• “You cannot expect a Jaguar…

when you pay for a Lada …”

§ 12-5: Losses that are not recoverable.

(a) Crew’s wages and maintenance and other ordinary expenses connected with the running of the ship, unless specially agreed.

(b) Expenses of shifting, storing and removal of cargo.

(c) Accommodation of passengers.

(d) Objects which normally need to be replaced several times during vessel’s lifetime, and which are and have been used for mooring/towing (ropes etc), except if vessel has sunk, or if damaged due to collision, fire or theft.

(e) Zinc anodes and other items for protection against corrosion.

§ 12-5: Losses that are not recoverable. (cont.)

(f) Loss due to contamination of lubricating oil, cooling water and feed water is only covered :◦ if “proper measures” were taken as soon as possible after the

assured became aware or must be deemed to have become aware of the contamination, and not later than 3 months after they should have become aware…

◦ “Proper measures” is not satisfied by cleaning only, - identification and removal of source of contamination is also necessary.

NB - The assured is identified with his master and chief engineer in this regard.

§ 12-6: Deferred repairs.

If repairs deferred more than 5 years, insurer is not liable for any increase in cost.

§ 12-7: Temporary repairs.

• If permanent repairs cannot be carried out where the ship is: Covered in full.

• In other cases, the insurer is liable either:

◦ up to what he saves through postponement of permanent repairs, or

◦ up to 20% p.a. of the hull valuation for the time saved by the assured,

whichever is higher.

§ 12-7: Temporary repairs. (Cont.)

What does it mean that “repairs cannot be carried out”?◦ Repairs physically impossible, i.e. there is no yard in the area

than can carry out repairs in a satisfactory manner.

◦ Waiting time is unreasonably long. No absolute limit, but generally Owners must accept 1-2 weeks waiting,

but not 3-4 months.

Possible cost savings for the insurer due to postponement of permanent repairs – e.g. by moving to a cheaper repair yard.

Possible savings in time for the assured – e.g.

◦ in case the vessel can be removed to a yard where can be carried out in shorter time, or

◦ repairs can be carried out concurrently with scheduled Owners’ work.

◦ To avoid waiting time for necessary spares for perm. rep

§ 12-8: Costs incurred in expediting repairs.

• Insurer covers costs incurred by expediting repairs of the damaged part by extraordinary measures, limited to 20% p.a. of the hull valuation for the time saved by the assured.

• “Expediting repairs of the damaged part”:◦ Does not included measures such as:

Rental of a generator. Buying a new part instead of repairing the part.

• Division between ordinary and extraordinary measures, e.g.;◦ Sending spare parts by charter plane = Extraordinary.

◦ Overtime payment to repair yard = (Usually) Extraordinary

◦ Use of travelling repairers = Ordinary.

§ 12-9 Repairs of condemnable ship.

• The assured may want to repair the vessel even if he could claim for Total Loss• Re. rules for condemnation - § 11-3.

• Insurer’s liability limited to:◦ Sum insured (plus costs and interest, § 4-19).

◦ Less value of wreck.

• What is the rationale behind deducting value of wreck?

§ 12-10 Survey of damage

• Before repairs, damage shall be surveyed by representatives of the assured and the insurer.

• Normally Owners’ Superintendent and Surveyor nominated from insurer’s list of correspondents.

• Both shall submit reports,• To include description of damage, cause consideration, time of

damage and costs involved

• If any disagreement, an umpire may be appointed.

• If survey not held, the assured has the burden of proving that damage is not attributable to causes not covered by the insurance.

§§ 12-11/12-12: Tendering & choice of repair yard.

• Underwriters may request tenders

• Partly coverage for lost time due to tendering:

◦ 20% p.a. of hull valuation if time taken to obtain tenders exceeds 10 days.

• Tenders to be adjusted for removal costs (and time) before comparison

• Owners decide where to repair

• Insurer’s liability limited to lowest adjusted tender plus 20% p.a. of hull valuation for time saved by not choosing that tender.

§ 12-13 Removal of shipCost of removing ship to yard for repairs is covered (subject to

tendering provisions)• Repairs of damage discovered at yard?

• Repairs of damage occurring during removal?

If removed both for damage repairs and owners work: Treated as General Expenses (§ 12-14)

Includes e.g. wages and maintenance of crew, bunkers and lube oil, towage if necessary, canal dues, etc.

Deduction for savings for the assured.

§ 12-14 Apportionment of Common repair expenses

• Common rep. expenses = Expenses that are common to damage repairs and Owners’ work.

• Starting point: To be apportioned over cost of each class of work.

• Example: Damage repairs: 300 Owners work: 200 Common rep. expenses: 50 Hull Underwriters will compensate 50x300/(300+200) =

30.

§ 12-14 Apportionment of Common rep. expenses (cont)

• Expenses to be apportioned over cost may include e.g.:

◦ Agent’s fee in port of repairs.

◦ Removal of ship as per § 12-13.

◦ Owners’ representative (Superintendent).

◦ Fire watchman.

◦ Shifting within port of repairs.

◦ Tank cleaning, gas freeing.

§ 12-14 Apportionment of Common rep. expenses (cont)

• Exception: Drydock expenses and quay hire to be apportioned over time required for each class of work (in DD and alongside respectively) if carried out separately.

• Example: Damage repairs: 6 days. Owners work: 10 days. Cost of docking/undocking: 20 Dock rental: 10 days @ 10 = 100

• Hull Underwriters will compensate (100+20)x6/(6+10) = 45.

§ 12-14 Apportionment of Common rep. expenses (cont)

Docking expenses (expenses to be apportioned over time) include e.g. :

◦ Ballast water.

◦ Pilot for shifting to/from dock.

◦ Tugs for shifting to/from dock.

◦ Boatmen/line handlers.

◦ Docking master.

◦ Placing of dock blocks.

◦ Docking in and out, dock hire.

◦ Heating under vessel’s bottom.

§ 12-14 Apportionment of Common rep. expenses (cont)

• Distinction between “repair costs” and “costs of running the ship”

◦ Expenses connected with the running of the ship during the period of repair would include e.g. removal of garbage, cooling water for a/c, black/grey water connection/disposal

• Special practice - Electrical current, and phone exp. at yard

◦ 50% allowed as common rep expenses to be apportioned over cost.

◦ 50% disallowed as expenses connected with the running of the ship.

Deductions?

§ 3-15 – Trading limits.

• If vessel is damaged while in a conditional trading area with the consent of the assured and without notice having been given to the insurer:

◦ Deduction of ¼.

◦ Maximum USD 200.000,-

◦ (NB – Additional premium may also apply!)

§ 12-15 Ice damage deduction

• Applies to damage due to striking against or contact with ice.

• Do not apply to collisions with icebergs on the open sea.

• Amount to be specified in the Policy – otherwise no deduction.(NB – used to be 1/4th in the Norw. Plan!)

§ 12-16 Machinery damage deduction

• Applies to damage to:◦ Machinery and accessories.

◦ Pipelines and electrical cables outside the machinery.

• Comprehensive list of parts subject to machinery deduction in the commentary.

• Amount to be specified in the policy.

• No deduction if damage caused by:◦ Grounding/Collision/striking.

◦ Engine room flooded.

◦ Fire/explosion originating from outside engine room.

§ 12-17 Compensation without deductions

• Deductions as per §§ 12-15 (ice) and 12-16 (machinery) not to apply to:◦ Claims for depreciation (§ 12-1)

◦ Loss of time while taking tenders (§ 12-11 – 20% rule)

◦ Removal of ship (§ 12-13)

◦ Unused spare parts that are damaged or lost

◦ Temporary repairs

◦ Agent

◦ Superintendent

◦ Class’ expenses

§ 12-18 Deductible

• The amount stated in the policy shall be deducted for “each casualty”.• Normally easy to identify

• Damage developed over time

• Errors during repairs• “Foreseeable”?

• Error in design

• See also § 4-18

• Applicable in addition to other deductions (if any).

• Heavy weather damage or ice damage occurred on voyage from one port to another regarded as one casualty.

• Deductible shall not be applied to:◦ Costs in connection with claims settlement.

◦ Measures to avert or minimise loss, including General Average.

§ 12-19 Basis for calculation of deductions

• Amount subject to deduction: Full amount of compensation before any deductions made.

• Example:

◦ Vessel suffered ice damage.

◦ Damage occurred in conditional area, notice not given to insurer.

◦ Total damage: USD 400.000,-

◦ Deduction as per § 3-15, ¼: USD 100.000,-

◦ Deduction as per § 12-15, agreed ¼: USD 100.000,-

◦ Deductible as per § 12-18, say: USD 150.000,-

◦ Claim: USD 50.000,-

Chapter 13

Liability of the assured arising from collision or striking.

§ 13-1 Scope of liability of the insurer (§ 13-1)

• Covers the liability imposed on the assured for damage as a result of collision or striking.• Collision = Contact with other ship

• Striking = Contact with object other than ship

• Must as a starting point be caused by vessel’s movement• E.g. damage to and by tug assisting vessel?

• Subject to a number of exclusions, e.g.; • Liability whilst engaged in towing

• personal injury and loss of life,

• pollution, environmental damage (incl. coral reefs)

• damage to cargo on own ship,

• wreck removal of own ship,

• (Check that there is no gap between H&M and P&I in respect of liabilities!)

Collision settlement – both to blame

• Settlement between the parties based on single liability.

• I.e. the smaller liability will be deducted from the larger creating a single liability.

◦ “If the person liable has a valid counterclaim, and the claim and counterclaim have arisen out of the same event, limitation can only be demanded for that part of the claim which exceeds the counterclaim…”

Collision settlement – both to blame (cont.)

• Insurance settlement to be based on ”cross liability” (§ 4-14)• “If the assured has incurred liability, and he is entitled to make a

claim against the injured party for a loss which he himself has suffered on the same occasion, the settlement of the claim between the assured and the insurer shall be based on the calculated gross liabilities before any set-off is effected…”

• I.e. it is assumed that each shipowner pays his liability to the other party without set-off.

Mona Lisa smile secrets revealed...: Secret 1: She was a marine insurance student.Secret 2: Smile is captured 30 seconds after a cross-liability presentation….

§ 13-4 Deductible

• A separate deductible for collision liability to be stated in the policy.

• Deductible shall not be applied to:◦ Litigation costs.

◦ Costs in connection with claims settlement.

◦ Measures to avert or minimise loss.