LOSS OF HIREPresentation for Master students, UIO

March 28th , 2007Advokat Haakon Stang Lund

”Experience is something you don’t get until just after you need it”

Risk assessment

• Protection of Income. Financial peace of mind.

• How vulnerable to off hire is your organisation? • Trade and c/p

• Fleet size, vessel type

• Clients, reputation

• Financing

• Damage to the vessel and loss of earnings is easily identified. Total costs will be much higher.

• LOH helps to minimise your total exposure to an accident.

If only…

M/V “Sorry Sailor”

Collision, 75% liability.

No LOH cover

Potential recovery with LOH:

Off hire: 90 days

Deductible: 14 days

Net claim: 76 days

76days @ USD 20 000 = USD 1 520 000

Choice of cover?

• Basic covers e.g.14/90/90; 14/120/120; 14/270/270.

• Minimum deductible is 14 days (21 for passenger and cruise vessels).

• Excess covers – more catastrophic e.g. 45/90/90, 104/180/80 etc.

• The risk appetite of the buyer together with prevailing market conditions will determine the preferred basis of cover.

• Additional deductible days against machinery damage are common for older vessels e.g. 14(21)/90/90.

Minimising “off hire time”

• The assured and the insurer have a common interest in minimising time “off hire”. In order to reduce “off hire time” we will work closely with the assured and seek workable solutions based on:

• Experience and knowledge from similar cases.

• Creativity and innovation.

Use of available resources

Towage from Bahamas to El Ferrol 10-29 April

Gas carrier Towage by Offshore supply vessel

Grounding in Suez

Abt. 40 mts from port bank

Width between buoys: 222 mts

The Canal cross-sections are trapezoidal in shape, having side slopes of 3/1.

Crude oil tanker – 159.000 dwt, double hull

Repair at Daewoo (Mangalia) Shipyard in Romania, arr. 31.03.04

Steel price USD 2,75 / kg – 48 days repair

Web frame

Longitudinals

The bill..

H&M: ( 100% ) USD 3.200.000

LOH: ( 60-14 days @ 40 000) USD 1.840.000

Example

• 2005 built UCC, 91.410grt, Collision• ”Difficult to get dry dock…….due to draft restrictions and

stricter yard policy”• Estimated repair days 152• D.I. $30.000; basis 14/120/120• Substitute vessel D.I. $40.000……

Example

• 1996 built TCR, 156.852grt, Grounding• Challenge to find available yards in the FE for final

repairs.• Severe damages to bottom hull after the grounding

incident. 4 months is calculated for completion of repairs.• D.I.$50.000; basis 60/120/120

Example

• LNG Carrier (1973)• damage to main gear• vulnerable and vital trade

• the assured urgently needs the ship back in trade

The challenge

• Old LNG (1973) – No new main gear in stock

• One year production time

• LNG urgently required for trade

NMIP §16-11 – The solution provider

“Costs incurred in order to save time”

• Buy an old tanker, take out the gear and use it as a spare part.

• Charter an Antonov transport airplane and bring the gear from US West Coast to Europe as quick as possible.

• Pay bonuses and overtime to working staff at yard in order to further reduce “off hire” time

M/T VLCC – Lack of docking facilities (2006/2007)

• July 2006 .• Grounded Dalian, China • Fully loaded with crude oil

276.110 t crude• Repairs completed Singapore

10th December 2006• Off-hire days 137 days• Loss of income USD

13.700.000,-• Repair period Singapore 51

days (USD 5.100.000,-)

Lack of docking facilities WW&FE

June 2006Explosion / fire in cargo tank

South China Sea

§ 16-1 Blocking and trappingThe insurance also covers loss due to the ship being wholly or partially deprived of income:…(b) because it is prevented by physical obstruction (other than ice) from leaving a port or a similar limited area, …

THE PLAN

• MARINE INSURANCE CONTRACT

• CONTAINS ALL MAJOR MARINE INSURANCE

TYPES, EXCEPT P&I

• AGREED DOCUMENT

• INTERNATIONALLY ACCEPTED

• BUILT ON ”ALL RISK” PRINCIPLE

THE PLAN - CONTENTS

• PART 1: GENERAL CLAUSES

• PART 2: HULL & MACINERY CLAUSES

• PART 3: OTHER MARINE INSURANCES

• LOSS OF HIRE – CHAPTER 16

• PART 4: OTHER INSURANCES

BUILDING RISKS, OFFSHORE ETC.

INVOLVED PARTIES

SHIPOWNERLOSS OF HIRE UNDERWRITER

BROKER

IMPORTANT ISSUES FOR OWNERS

• Duty of disclosure - §3-1

• Alteration of risk - §3-8

• Classification Clause - §3-14

• Trading limits - §3-15

• Safety regulations - §3-22, §§3-24 and 3-25

• Measures to avert loss - §§3-29 – 3-31

• Notification of claims - §5-23

Claims And Claims Leader

• Chapter 5 deals with settlement of claims

• Chapter 9 deals with the claims leader’s role and power to bind the co-insurers

• In the Norwegian market the claims are dealt with directly between the assured and the claims leader who normally prepares the adjustment

• The role of the broker

HULL & MACHINERY VS.LOSS OF HIRE

HULL & MACHINERY

POLICY

Independent policy

INSURED PERILS

SCOPE OF COVER

LOSS OF HIRE

POLICY

Independent policy

REF. THE PLAN §16-1

AND THE POLICY WORDING

HOW IS LOSS OF HIRE TRIGGERED?

HULL & MACHINERY

POLICY

Main policy

SETS OUT THE SCOPE OF COVER

LOSS OF HIRE

POLICY

Subsidiary policy

FOLLOW ACTUAL

H&M SCOPE

OF COVER

§16-1 Scope of Insurance

The insurance covers loss due to the vessel being wholly or partially deprived of income as a consequence of damage to the vessel which is recoverable under the terms of the Plan.………

• Reference to Plan chapter 10-12 can be waived by way of written agreement by the insurer, and be replaced by the provisions of the actual H&M conditions.

What Is Covered?

• Time loss as a consequence of damages which are recoverable as per the actual H&M conditions

• Level of deductible is irrelevant for the question of cover

• Exceptions from the condition of damage:• If the vessel has stranded• Prevented by physical obstructions……other than

ice• As a consequence of measures taken to salvage or

remove damaged cargo

§16-2 Total and Compromised Total Loss

• No loss of hire will be compensated:

• In total loss situations• Constructive total loss situations

§16-3 Main Rule for Calculating Allowable Time

• Loss of time – The time the vessel has been deprived of income• Daily amount - Net loss of income per day Normally assessed daily amount• Calculation - Lost time x daily amount per day

• Time start running earliest at the time of damage• Ballast voyage before commencement of the laden

voyage a damage occur is not recoverable

§16-4 Calculation of the Loss of Time

• Days, hours and minutes

• Partially loss of time:• To be converted into corresponding total

loss of income

§ 16-5 The daily amount

• So called ”open policy”

• Gross income as per contract of affreightment

• Less saved expences

• If no contract• Average freight rates for compareable vessels

• Must have suffered a loss, cp. ”CAPRICORN”, see page 39 of the Handbook

§ 16-6 Assesed daily amount

• Express presumption that the daily amount stated in the policy is an assessed daily amount

• CAPRICORN applies also if the daily amount is assessed

§ 16-7 Deductible period

• No standard deductible in the Plan• Most common deductible period is 14 days• But longer or shorter periods is seen

• 7 days DNK loss of hire cover• 30 days• 45 days

• Deductible period commences when the loss of time occurs

• Partly deprived of income, § 16-4, subpara 1, second sentence

§ 16-8 Survey of damage

• Important for the loss of hire insurer to engage his own surveyor• I.a. to assess the repair time required for the damage repair

• § 12-10 applies correspondingly

§ 16-9 Choice of repair yard

• The insured decides which yard is to be used

• Tenders must be collected if the insurer so demand

• The potential conflict of interest between the insured, the hull insurer and the loss of hire insurer

• The main purpose is to encourage the insured to elect the repair alternative that overall is the cheapest• Repair costs + loss of income during repair

• Special rule if the hull is on other conditions than the Plan

§ 16-9 Example

Yard A B C

Repair/removal cost 1.8 mill 1.2 mill 1.0 mill

Loss of time USD 10,000 per day

0.3 mill 0.45mill. 0.75mill

Total 2.1 mill. 1.65mill 1.75mill

§16-10 Removal to the Repair Yard

• Time lost during removal of the vessel to and from repair yard, shall be attributed to the class of repairs that necessitated the removal

Important:• A causa proxima principle apply to the

removal time• No apportionment in the deductible period

Example of removal time

1) VLCC sustain main engine damage on laden voyage from Sullom Voe to Canada. Towed to Rotterdam for repairs.

Removal time from damage position to yard 8 days.Repair time 28. ”

of which Owners work 10 days.and damage repair work 28 days.

Removal time from yard to damage position 4 ”__.Total time lost 40 days.

Conclusion: The removal time will be paid by LOH in full.

Example of removal time

2) VLCC on ballast voyage from Japan to AG deviate to Bahrain for maintenance work. At the same time deferred damage repairs are being carried out.

Removal time from deviation position to yard 1 day.

Repair time 28. ”

of which Owners work 10 days.

and damage repair work 16. ”

Removal time from yard to deviation point 1. ”

Total time lost 30 days.

Conclusion: The removal time will be paid by Owners in full.

§16-11 Costs incurred to save time

• Extra costs or extraordinary measures taken for the purpose of preventing loss of time covered by the insurance, is paid by LOH if such costs are not paid by H&M• Must be extraordinary - and must save time

• Owners must carry pro rata share of costs, if time is also save for the Owner

• Example: Repair time 16 days reduced to 12 by way of overtime

With a deductible of 14 days do Owner / LOH share the overtime cost 50/50

• In this respect is LOH subsidiary to H&M

§16-12 Simultaneous Repairs

What is simultaneous repairs?

• Two or more classes of work are carried out at the same time

• Contrary to a main rule principle, this clause establish an equal apportionment principle

§16-12 Simultaneous Repairs

• In legal terms a special rule of causation• As a starting point a rule to split time equal between

Owners and LOH underwriter• Owners work are put into three categories:

• a) Classification work• b) Work necessary for the seaworthiness of the vessel, or

carried out to fulfil contractual obligations, or• c) reconstruction work

• Work under share time 50/50

Simultaneous repairs § 16-12

0 7 14 21 28 35

Compensation

Maintenance

Owners ClassWork

Average work

Deductible

Case Study – Gas Al Kuwait

21.09.99: Rudder damages – Repairs at Keppel, Singapore

Damage repairs 30 days

Deductible 14 ”_

Time in excess of deductible 16 days

Common repairs for Owners class /

safety related work 8 ”_

Recoverable time paid by LOH underwriter 12 days

§16-12, 1. Subparagraph

Damage work

Owners Class work

Deductible 14

Repair time if carried out separately

30 30

Settlement 8 8

§ 16-12, 2. Subparagraph

Two casualties are being carried out simultaneously

• If the deductible period run parallel for the two cases, then the period thereafter is being covered equal 50/50

• If deductible periods do not run parallel, the rule of simultaneous repairs should apply when only one deductible still run, i.e.. 50/50 Owners and LOH

§16-12, 2. Subparagraph

Engine Heavy weather damage

Remaining deductible 0 14

Repair time if carried out separately

40 20

Settlement 37 3

§16-12, 3. SubparagraphTwo Casualties – Two Policies

Engine 1998

H.w.d 1999

Remaining deductible 14 14

Repair time if carried our separately

40 20

Settlement 23 3

§16-12, 3. SubparagraphTwo Casualties – Two Policies Plus

Class Damage

98 Damage

99 Class

Deductible 0 20

Repair time if carried our separately

60 80 60

Settlement 20 30 30

§16-12, 4. Subparagraph

• When calculating time as if carried out separately• Counts from the day the work started

• All work is consider to start upon the vessels arrival at the repair yard – except when:• Damage occur in the dock• Unknown damage is being discovered in dock

• What is the situation when the various classes of work interfere with each others? Example…….

§16-12, 4. Subparagraph, Last Sentence

Damage Class

Actual time 98 30

Repairs if carried out separately

90 30

Deductible 14

Settlement 74 24

§16-13 Loss of time after completion of repairs

• Main rule: No recovery• 3 exception:

• Time lost until the vessel can resume engagement under freight contract in force at time of casualty

• Liner service in fixed schedule• Removal to first port to take cargo fixed before the

casualty occurred.• Passenger vessel resume service – max 14 days

§16-14 Repairs Carried Out After Expiry of the Insurance Period

• Time limit to carry out repairs is 2 years after expiry of the policy period

• Actual loss is being recovered if repairs commence after expiry of the policy period, ref. §16-5

• Multi year policies – jfr. § 1-5, subparagraph 4

§16-16 Rule of Subrogation

LOH have the right of subrogation:

• Against H & M insurer for loss of time and operating costs paid pursuant § 12-11 or § 12-13 or corresponding rules in other hull conditions

• Other insurer or in general average

Casualty Examples

Vessel Basis D.I. Incident Days Off Hire Claim

1992 TCR 153.000grt

14/60/60 $80.000 Main Engine Breakdown

45 $2.480.000

1994 BBU 76.000grt

14/60/60 $40.000 Grounding 22 $320.000

1999 BBU 87.000grt

14/60/60 $25.000 Grounding 34 $540.000

1999 GGC 13.000grt

14/90/90 $28.000 Grounding 57 $1.596.000

1996 OSY 3.700grt

14/90/90 NOK125.000 Fire 48 NOK4.250.000

2000 UCC 65.000grt

14/90/90 $26.000 Main Engine Breakdown

24 $260.000

2001 TCR 136.000grt

14/60/60 $50.000 Grounding 24 $500.000

2003 LNG 91.000grt

14/300/300 €77.000 Cargo Tank Insulation

63 €3.773.000

Thank you for your attention