ALTERATION OF THE RISK

The importance of giving correct information during the insurance

period.

• General rules: 3-8 to 3-13

• Special rules: 3-14 to 3-21

• What constitutes an alteration of risk?

• Consequences?

2

?

• In connection with development of the Fyrvik field outside the FaroeIslands a German WW2 mine is discovered at 50 metres depth, can in theory still be connected and therefore still live.

• Mr. Victor having a fleet of offshore vessels has been offered the job ofmoving the mine prior to destruction. Different alternatives areconsidered; us of the crane, use a ROV to place a net around the mine, etc.

• In the hard pressed market Mr Victor is considering whether or not to inform the insurers as the additional premium charged might make a huge slice in the profit from the job.

• Marine or war risk?

• Alteration of risk?

WHAT CONSTITUTES AN ALTERATION OF RISK?

An alteration of the risk occurs when there is a change in the

circumstances which, according to the contract, are to form the basis

of the insurance, and the risk is thereby altered contrary to the implied

conditions of the contract, Cl. 3-8, sub-clause 1

RISK ASSESSMENT FACTORS

• Vessel factors:

- type and tonnage of vessel,

- trade,

- classification society

- flag

- repair costs particular to the vessel and its trade

- age,

- loss record

• Ownership and management factors:

- Claims experience of owner and manager

- Crew (experience and nationality)

- Owners operating history

• The cover is provided for a vessel in its normal trade during a lifecycle, which includes trading, loading/unloading, scheduled dockings, Class surveys and damage repairs.

CONVERSION RISKS

- the scope of work - the complexity of the project.

- yards capability and experience with similar projects

- yards safety management

• Major conversions → alteration of the risk

• Also follows from basic insurance principles.

- If a vessel by having been converted has changed identity -

the “old” insurance is only covering the “old” vessel which

doesn’t exist any more.

3-8, SUB-CLAUSE 2:

• Alteration of risk = change of:

- the State of registration,

- the manager of the ship or the company which is responsible for

the technical/maritime operation of the ship

- classification society

CONSEQUENCES OF AN ALTERATION OF THE RISK:

• Cancel the insurance - 3-10

• Free from liability - 3-9

- the assured has intentionally caused or agreed to an alteration of the risk; or

- fails to notify the insurer, cf. 3-11

provided that it may be assumed that he would not have accepted the insurance if, at the time the contract was concluded, he had known that the alteration would take place.

If it may be assumed that the insurer would have accepted the insurance, but on other conditions, he is only liable to the extent that the loss is proved not to be attributable to the alteration of the risk.

Cases where the insurer may not invoke alteration of the risk, cf.

3-12

• the alteration of the risk has ceased to be material to the insurer

• if the risk is altered by measures taken for the purpose of saving

human life, or by the insured ship salvaging or attempting to salvage

ships or goods during the voyage.

Duty of the insurer to give notice, 3-13

• without undue delay and in writing - notify the assured of the extent

to which he intends to invoke 3-9 and 3-10

SPECIAL RULES

SPECIAL RULES:

- Loss of class

- Trading area

- Illegal activites

- Requisition

- Seizure

- Removal to repair yard

- Chage of ownership

LOSS OF CLASS

3-14. LOSS OF THE MAIN CLASS

The insurance terminates in the event of loss of the main class

- unless the insurer explicitly consents to a continuation of the

insurance contract.

- If the ship is under way when the main class is lost, cover shall

continue until the ship arrives at the nearest safe port in

accordance with the insurer's instructions.

Loss of the main class occurs where

- the assured, or someone on his behalf, requests that the main

class be cancelled,

- or where the main class is suspended or withdrawn for reasons

other than a casualty.

TRADING AREAS

• Ice

- 3-15

- 17-3

- Appendix to 3-15 and 17-3

• War

- 3-15

- 15-9

3-15 TRADING AREAS

Based on a tripartite division:

1. Ordinary trading area

2. Conditional trading area (areas in which the ship may sail subject

to an additional premium/compliance with stipulated safety

regulations)

3. Excluded trading area (areas where there is no cover unless

express prior dispensation has been given)

NOTIFICATION

The person effecting the insurance shall notify the insurer before the

ship proceeds beyond the ordinary trading limit, cf. 3-15 (1).

Consequences of lack of notification depends on the trading area:

CONDITIONAL TRADING LIMITS, 3-15 SUB-CLAUSE 3

• Held covered

• Deduction of one fourth, maximum USD 200,000

• Failure to exercise due care and dilligence – further

reduction based on degree of fault and circumstances

generally

EXCLUDED TRADING LIMITS, 3-15 SUB-CLAUSE 5

• The insurance ceases to be in effect

• unless

‐ consent in advance

‐ unintentional by the ship

‐ rescue and/or salvage measures

3-21. CHANGE OF OWNERSHIP

The insurance terminates if the ownership of the ship changes by sale

or in any other manner.

COSTS OF MEASURES TO AVERT OR

MINIMISE THE LOSS. (SUE AND LABOUR)

COSTS OF PREVENTIVE MEASURES

• Duty to avert or minimise loss, Cl. 3-30

• General criteria for insurance cover in Cl. 4-7

• The scope of the insurers liability

- General average contributions Cl 4-8 to Cl 4-11

- Costs of particular measures Cl 4-12

12-7?

12-8?

16-11?

GENERAL CRITERIA, CL 4-7

• measures taken “on account of peril insured”

• casualty threatens to occur or has occurred

• extraordinary nature

• reasonable

GENERAL CRITERIA, CL 4-7

• measures taken “on account of peril insured”

• casualty threatens to occur or has occurred

• extraordinary nature

• reasonable

THE SCOPE OF THE INSURERS LIABILITY

▪ General average contributions Cl 4-8 to Cl 4-11

▪ Costs of particular measures Cl 4-12

• Salved values

• Ship: $ 10 000 000

• Cargo: $ 40 000 000

• Tot: $ 50 000 000

• Ship: 1/5 - Cargo: 4/5

• Salvage reward: $ 2 500 000

• Hull insurers pays $ 500 000

• Cargo pays $ 2 000 000

GENERAL AVERAGE

• Rhodian Law – 800 B.C.

• York Conference 1864

• Antwerpen Conference 1877

• YAR 1890/1924/1950

• YAR 1974(90)

• YAR 1994/2004/2016

BASIC PRINCIPLE: That wich has been sacrificed for the benefit of all shallbe made good by the contribution of all.

GENERAL AVERAGE, 4-8

• Insurer is liable for GA contribution apportioned on the insured

interest

• GA adjustment – YAR

- Contributory value/insured value

• Breach of contract of affreightment

- GA contribution still recoverable

• Salvage awards

• GA absorption amount

GENERAL AVERAGE, CONT.

• All interests belong to the same person, Cl 4-9

• Damage to the insured object covered as particular average if that

gives him better cover. Cl. 4-10

• Assumed general average, 4-11

CL. 4-12 COSTS OF PARTICULAR MEASURES TAKEN TO

AVERT OR MINIMISE LOSS

• Particular means not recoverable in G/A

• All kinds of measures are recoverable if covered pursuant to Cl.

4-7

‐ Sacrifice of property

‐ Liability incurred

‐ Costs incurred

• Apportionment over several interests

THE SUM INSURED AS THE LIMIT OF LIABILITY

FOR THE INSURER

THE SUM INSURED AS THE LIMIT OF THE LIABILITY

OF THE INSURER

What is the total economic exposure of the insurer under a Hull

insurance as per chapter 10-13?

MAIN RULE, CF. 4-18

Interest insured:

‐ the sum insured for loss caused by any one casualty.

Costs of measures taken to avert or minimise loss:

‐ the sum insured for the costs of measures taken to avert or

minimise loss arising in connection with the casualty.

‐ If the costs of such measures exceed that amount, the hull insurer

is also liable to the extent that the sum insured has not been

exhausted

Third party liability insurance:

‐ separate liability in accordance with the rules contained in 13-3

and 14-1.

«ANY ONE CASUALTY»

«ANY ONE CASUALTY»

• The steering gear of a ship is damaged in a collision with the result

that the helm is locked in a starboard position. Before the crew

manages to stop the engine, a new collision occurs.

• Error in design causes damage to several auxiliary engines onboard.

• New damage is caused during damage repairs.

“ANY ONE CASUALTY”

• Is there a close connection in terms of location and time between

the successive incidents of damage, or are the new accidents of a

totally independent nature?

- As long as the incidents occur within a delimited area, it must be

accepted that they occurred at certain intervals.

• What possibilities did the assured have of averting the last

damage? Negligence by the assured?

• Does the initial damage or its cause entail an increased risk of new

damage, or is the last incident a result of a “generally prevailing

risk of damage” which would have occurred with the same effect

independently of the first damage or its cause?

THE INSURER MAY AVOID FURTHER LIABILITY BY

PAYMENT OF THE SUM INSURED, CF. 4-21

What about measures implemented before the assured received the

insurers notice?

Cover loss referred to in

- 4-3 to 4-5,

- 4-7 to 4-12 and

- 5-21, first sentence

In such case the insurer has no right to the object insured under 5-19.

LIABILITY OF THE ASSURED TO THIRD

PARTIES

DOES THE PLAN COVER LIABILITY TO THIRD

PARTIES? CL. 4-13.

LIABILITY PROVISIONS IN THE PLAN

• Ch 13 - Liability of the assured arising from collision or striking

• Ch 15 - War risk insurance - Sec 7 - Owner’s liability, etc. (P&I)

• Ch 17 - Special rules for fishing vessels and small freighters, etc.-

Sec 6 - Liability insurance

• Ch 19 - Builders’ risks insurance - Sec 4 - Liability insurance

?

• Ship A has collided with ship B.

• The blame fraction is one half.

• A’s hull damage is 300, the time loss 120.

• B’s hull damage is 200, the time loss 90.

• A’s H&M insurance deductible is 50.

• B’s H&M insurance deductible is 30.

• Draw up the settlement between the ships and its insurers.

CROSS LIABILITY, CF. 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.

LEGAL BASIS FOR THE LIABILITY

Collision:

• may be based on fault, strict liability, or liability pursuant to

agreement.

• “liability imposed on the assured” according to the laws of the

country under which the collision is judged, Cl 13-1.

• Will the insurer cover all liability the assured undertakes in a

contract or are there restrictions? Cf. 4-15

• What will be the result if two ships owned by the same assured

collides? Will the vessels be liable towards each other? What is the

“sistership rule”? Cf. 4-16

DIRECT ACTION

• What is direct action? What is the position in the Plan? Cf. 4-17,

sub-clause 1

PRACTICAL HANDLING OF THIRD PARTY LIABILITY

CLAIMS

• Assured is liable to a third party

• Third party is liable to the assured

LIABILITY OF THE ASSURED TO THIRD PARTIES

- A CLAIM FOR DAMAGES COVERED BY THE

INSURANCE IS BROUGHT AGAINST THE

ASSURED.

• Duties of the assured? Cf. 5-9

• Can the insurer demand to take over the handling of the claim? Cf.

5-10

• What if the assured and the insurer disagrees or have conflicting

interests? Cf. 5-11

EXAMPLE

COLLISION BETWEEN CONTAINER VESSEL

«ELENA» AND CARGO VESSEL «EFI»

Cargo onboard both vessels are lost.

After careful considerations and good advice from expert in maritime

claims Mr. Erik the “ELENA” side decides to take legal steps in the US

as this seems to be the most favorable jurisdiction. They succeed and

“EFI” is held 100% liable for the loss.

Ms. Gabriella, handling the H&M insurance of “EFI” is very

disappointed, she is (of course) of the opinion that the judgment is

wrong and want to appeal. However Ms. Gillian, who is handling the

P&I insurance and who knows everything worth to know about

maritime law is arguing that appealing is clearly a waste of money, the

ONLY beneficiary of an appeal would be the lawyers and she is of the

firm opinion that the judgement should not be appealed.

Innocent cargo rule:

If «ELENA» is to blame for the collision, the cargo onboard «EFI» can

claim 100% of its loss against «ELENA».

Say that the division of liability is changed from 100/0 in «ELENA»

favor to 70/30. «ELENA» will after paying the «EFI» cargo owners,

claim 70% back from the owners of «EFI».

DECISIONS CONCERNING LEGAL PROCEEDINGS

OR APPEALS, CF. 5-11

• Disagreement – umpire

- Which solution is likely to result in the smallest overall loss for

the assured and his insurers?

- Not take into account any advantage someone may have

through a higher degree of blame in a collision case being

awarded.

• Non compliance by the assured – insurers liability is limited

• But if the assured succeeds the insurer will be partly liable for the

litigation costs.

SECURITY

• Do the insurer have a duty to provide security? Cf. 5-12

- if the insurer do – it does not affect the question of liability

- if the liability falls outside the insurance – the assured must

refund expenses

• The relationship between the claims leader and the co-insurers, cf.

9-7

- commission

- payment of compensation

- right to set off

CLAIMS AGAINST THIRD PARTIES

• Which claims?

• Who can pursue a claim towards a third party?

- Can the insurer pursue a claim? How can this be done?

- What is subrogation?

SUBROGATION

• 5-13 (1)

‐ the insurer is, upon payment of compensation to the assured for

the loss, subrogated to the rights of the assured against the third

party concerned

• 5-22

‐ the insurer is subrogated to the assured's claim against third

parties who are liable to pay compensation for damage to the

object insured that has been covered by the insurer

HANDLING OF CLAIMS AGAINST THIRD PARTIES

• Can the assured waive his claim for damages? 5-14.

• Duties of the assured? 5-15 and 5-16. Disagreements? 5-17, cf 5-

11.

• Who gets the compensation? How will this be settled by the

assured and the insurer?

Total claim for damages 90

Assureds deductible 30

Insurer pays 60

Third party pays 60

Assured receives …

Insurer receives …

Total loss

Market value 120

Assessed insured value 90

Recovery 80

Assured …

Insurer …

?

Total loss - how shall the compensation received be apportioned among the hull insurer, the hull-interest insurer and the freight-interest insurer? Apportionment or layer distribution?

Marked value equal to or lover than the insured hull value the hull insurer is given priority.

Marked value higher than the insured hull value – apportionment

Example:

Marked value 25

H&M insured value 18

Hull interest value 4

Refund from third party 3

Hull insurer – 18/25 of 3

HI insurer - 4/25 of 3

Owner - 3/25 of 3

CO-INSURANCE

Co-insurance means that the insurance agreement between the

person effecting the insurance and the insurer is made to the benefit of

more than one assured.

Learning goal:

Understand the position of the co-assured.

STARTING POINT:

P.E.T.I

• Contractual partner to the insurer

• Normally also the beneficiary – the «principal assured»

Co-assured(s)

• Third parties

• No liability for premium

• Subject to amendments and cancellation of the insurance

• Identification

• No authority in respect of casualties, adjustments or claims against

third parties

REASONS

«VALUE INTEREST» - Economic interest in the insured object’s

capital value

• ship owner

• mortgagee

• owners of equipment on board the ship, 10-1

Safeguarding

“[P.E.T.I] and/or associated and/or affiliated and/or subsidiary

companies and/or Owners and/or Managers”

REASONS

«LIABILITY INTEREST» - Liability to third parties who suffer loss

as a consequence of use of the insured object

• Bareboat charterer

• Collision liability as disponent owner

• Pollution liability caused by a war peril, Cl. 15-2 litra e and Section

7

• Managers

REASONS

«PROTECTIVE CO-INSURANCE» - Indirect liability cover where a

third party is exposed to liability for loss or damage to the insured

object itself.

- Claim from another assured

- Claim from the insurer

• Time/Voyage charterer

• Managers

CO-INSURANCE HAS TO BE EXPLICITLY AGREED,

CF. 8-1 (1)

Exemptions:

• Automatic co-insurance of mortgagees, cf. 7-1

• Agreement between the assured and a third party, cf. 18-1, letter i)

- provided that such contractual regulation is regarded as customary in the activities in which the structure is involved.

- subsidiary cover

- waiver of subrogation and/or co-insurance shall not exceed theperson’s rights or indemnites under the contract.

CO INSURANCE WILL NOT EXTEND THE SCOPE OF THE INSURERS OBLIGATIONS, NOR THE LIMITS OF INSURANCE

- Subsidiary to other insurance, cf. 8-6

SUBROGATION, CF. 8-2

The insurer does not have any right of subrogation against the co-

insured third party.

‐ Unless:

▪ the insurance contract itself reserves a right of subrogation for the

insurer

▪ the co insured party has undertaken an express contractual obligation

to an assured to remain liable for the relevant type of loss

BIMCO – Supplytime 2005

Clause 17 (a) (ii)

“Co-insurance and/or waivers of subrogation shall be given only insofar

as these relate to liabilities which are properly the responsibility of the

Owners under the terms of this Charter Party.”

DUTIES OF THE CO-INSURED

• DUTY OF DISCLOSURE

‐ Named and aware of it, cf. 8-3, sub-clause 1

‐ Not mortgagees

• DUTY OF CARE, 8-3, sub-clause 2

• IDENTIFICATION, 8-3, sub-clause 3

AMENDMENTS AND CANCELLATION OF THE

INSURANCE CONTRACT

If the insurance contract has been amended or cancelled, this shall

also apply in relation to the co-insured third party, cf. 8-4.

Exemption – Mortgagees:

• If the insurance contract has been amended or cancelled, the rights

of the mortgagee shall not be affected unless the insurer has given

him specific notice of not less than fourteen days, cf. 7-2

• war risk insurance, cf. 15-8, subparagraph 1, second sentence.

HANDLING OF CLAIMS, CLAIMS ADJUSTMENTS,

ETC.

Decisions required in respect of casualties, adjustments or claims

against third parties may be made without the participation of the co-

insured and the mortgagee, cf. 8-5 and 7-3 (1).

The right to compensation for a total loss may not be waived, wholly or

in part, to the detriment of the mortgagee, cf. 7-3 (2).

PAYMENT OF COMPENSATION

Mortgagees

• 7-4

• Loss payable clause

7-4. PAYMENT OF COMPENSATION

In the event of a total loss, the mortgagee’s interests take priority.

Compensation for loss from a single casualty exceeding 5% of the sum insured shall, in the absence of consent from the mortgagee, only be paid by the insurer upon presentation of a receipted invoice for repairs carried out. If the ship is insured with two or more insurers against the same perils, this restriction applies to the combined payments from the insurers.

Compensation under Cl. 12-1, subparagraph 4, and Cl. 12-2, may not be paid without the consent of the mortgagee.

Compensation for loss of time may not be paid without the consent of the mortgagee who has a mortgage on the ship’s freight income.

Liability to a third party which is covered by the insurance may only be settled upon presentation of a receipt from the third party.

In the absence of the mortgagee's consent, the insurer may only set off claims which have arisen out of the insurance contract relating to the ship in question and which have fallen due in the course of the last two years prior to the settlement of a claim.

PAYMENT OF COMPENSATION

Other co-assureds

• Agreements between P.E.T.I and the co-assured?

EXTENDED CO-INSURANCE

Clause 8-7 Independent co-insurance of mortgagees and named

third parties

If it has been explicitly agreed that the interest of a mortgagee or a

named third party shall be independently co-insured, the insurer may

not plead that he has no liability due to an act or omission from the

person effecting the insurance or another assured under the rules

contained in Chapter 3 and Cl. 5-1.

MII