Introduction to marine insurance
Due to the risks involved in operating a ship, marine insurance is a key element in the operation or financing of ships. The three main categories of marine insurance taken out by the owner of a ship are:
(a) hull and machinery insurance;
(b) war risks insurance; and
(c) protection and indemnity insurance ("P&I").
Hull and machinery insurance covers the ship for any physical loss or damage arising from certain maritime perils but not from war risks. An interesting case dealing with perils of the sea covered by the H&M policy is Global Process Systems Inc. and another v. Syarikat Takaful Malaysia Berhad (The Cendor MOPU), [2011] UKSC 5, [2011] 1 Lloyd’s Rep. 560, where the Supreme Court was asked to consider whether the proximate cause of a loss was the perils of the sea or the inherent vice. In addition, in terms of fire risks, the Captain Panagos DP [1985] 1 Lloyd’s Rep. 625 case reaffirmed the long-standing position that scuttling is not an insurable risk, and that on this instance the insurers are not liable to pay any amounts under the insurance policies.
Due to the underwriting considerations of insuring against war losses and liabilities arising from war, all hostilities are specifically excluded under the War Exclusion Clause of the Hull and Machinery policy. Therefore, owners will have to take a specific war risk insurance policy to protect their ship against physical loss and damage caused by war and liabilities arising from war, including terrorism and piracy where required. Last but not least, protection and indemnity insurance cover is a third party liability insurance cover (covering, for example, liabilities to crew and cargo or liabilities for oil pollution towards certain countries). Most commonly, the war risks insurance policy and the P&I insurance policy operate on a "pay to be paid" rule (i.e. the ship owner cannot claim unless they have actually paid out to the third party in respect of which the claim for indemnity is being made).
A further category of insurance, which is sometimes taken out by a ship owner (and which the owner’s financier will sometimes insist on the owner taking out) is loss of hire insurance. This is a type of business interruption insurance which compensates the owner for any loss of earnings following a claim under its hull and machinery cover (e.g. compensation for any hire lost, if the ship goes off-hire while repairs are carried out). This insurance policy is usually subject to an excess (usually 14 days) and is limited to the agreed number of days (often 180 days per accident and in total during policy year). No claim can be made under such policy where there has been a total loss of the ship.
Hull and machinery insurance is usually taken out in the commercial insurance markets through specialist insurance brokers whereas P&I cover is usually obtained by means of an entry in a mutual insurance association of ship owners (known as a "P&I club"), which is essentially a group of persons or entities with common insurable interests who pool their risks under a mutual club. War risks cover falls somewhere between the two since it is common for it to be taken out either in the commercial markets or through a mutual war risks association. It is worth noting that, when insurance is taken through specialist insurance brokers, the brokers play a significant role and are subject to liability towards their client. An example of this is found in Lane v. Dive Two Pty Ltd. [2012] NSWSC 104, where the broker was held liable for losses suffered by the insured as a result of inadequate cover. Similarly, in Koktu Bread Pty Ltd v. Vero Insurance Ltd. [2012] QSC109, the court found that the insurer’s refusal to cover the insured’s property after fire damage was a direct result of the broker’s negligence in failing to make proper enquiries with the insured when procuring cover.
From a financier’s point of view, a lender financing the acquisition of the ship will need to conduct a careful review of the insurances on such ship and will often enlist the assistance of specialist insurance advisers to issue a formal insurance report as a condition precedent to advancing funds. The ship mortgage or deed of covenant will contain various detailed provisions as to the scope, terms and quality of the insurance cover. These provisions will normally require that the ship is insured for at least a certain per cent. of the outstanding mortgage debt and in any case for not less than her market value. They will also require that the insurances must be placed and renewed on terms approved by the financier with brokers and insurers acceptable to them (the creditworthiness of the underwriters being a key factor to check). The mortgagee will also impose various information covenants on the owner requiring it to keep the mortgagee advised of various material matters such as any cancellation of cover or failure to renew the insurances when due. Finally, the financier will normally take an assignment of the owner’s rights under each of these insurance policies.
