WAR RISKS INSURANCE

Freddy Furulund & Anders G. Hovelsrud (DNK)

15 November 2018

AGENDA

• About war risks insurance

• Insurance Cover

– War perils

– The Nordic Marine Insurance Plan

– Special covers

– Cyber Risks

• DNK - The Norwegian War Risk Association

WAR RISKS INSURANCE

MARITIME SECURITY – A GLOBAL CHALLENGE

Yemen

Somalia Sulu SeaVenezuela Nigeria

N KoreaIranLibya

INSURANCE AGAINST WAR RISKS - CHARACTERISTICS

• Catastrophe risk

‐ Low frequency, high severity

‐ Few statistics

‐ Traumatic experience for shipowners/crew

• Exclusion in traditional marine insurance

• Special covers

• Underwriting process

• Lloyd’s of London

• Mutual clubs (P&I and war)

• Commercial marine insurers

WAR RISK INSURANCE MARKET

3 MUTUALS – MARKET UK – HELLENIC - DNK

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

UKW HWR DNK

Average premium income 2013-2016 (USDm)

Annual premium Additional premium

AREAS WITH ADDITIONAL PREMIUM

War Perils

Marine perils

War Perils

Marine perils

SYSTEMATIC APPROACH

All riskNordic Plan (NMIP)

Named perilsInstitute Time Clauses

(ITC)

Marine Insurance Act 1906 (ITC)

• Section 55:

Subject to the provisions of this Act, and unless

the policy otherwise provides, the insurer is

liable for any loss proximately caused by a peril

insured against, but, subject as aforesaid, he is

not liable for any loss which is not proximately

caused by a peril insured against.

COMPARATIVE

NMIPClause 2-8. Perils covered by an insurance against marine perilsAn insurance against marine perils covers all perils to which the interest may be exposed, with the exception of:

a) Perils covered by an insurance against war perils in accordance with Cl. 2-9,

b) capture at sea, confiscation, expropriation and other similar interventions by own State power provided any such intervention is made for the furtherance of an overriding national political objective. Own State power is understood to mean the State power in the vessel’s State of registration or in the State where the major ownership interests are located. Own State power does not include individuals or organisations exercising supranational authority,

c) requisition by State power,

d) insolvency or lack of liquidity of the assured or the operation of ordinary legal process to enforce payment of any fine, penalty, debt or right to security unrelated to a claim or liability covered by the insurance,

e) perils covered by the RACE II Clause:

EXAMPLES OF POSSIBLE MISMATCH –

NMIP/MIA(ITC)• According to the NMIP piracy is regarded as a war peril. Under English conditions piracy is often

regarded as a marine peril, which means that a person with Nordic insurance against marine perils

and an English insurance against war perils may not be covered against piracy.

• The Plan is based on a modified “dominant-cause” rule in the event of a combination of marine

perils and war perils, see Cl. 2-14, while English law in such a combination-of-perils situation

would rely on a strictly “dominant-cause” criterion. If the person effecting the insurance has

Nordic insurance against marine perils and English insurance against war perils, he runs the risk

that English courts will say that the marine peril must be regarded as “dominant”, and that the

English war-risk insurer must consequently be free from liability, while Nordic courts would

perhaps reach the conclusion that both groups of perils must be deemed to have exerted equal

influence on the occurrence and extent of the loss and, in keeping with Cl. 2-14, second sentence,

find the Nordic insurer against marine perils liable for only 50% of the loss.

-> To mix NMIP for marine and ITC for War is not a good idea!

Marine perils NMIP WAR perils ITC

UK arbitration conclude: 51% marine perils: Dominant cause, strict: Marine underwriters

to pay 100%

51% 49%

Marine perils NMIP WAR perils ITC

40% 60%

Nordic arbitration: modified dominant cause = 50/50 contribution

Pitfall of mixedconditions

Marine perils

War perils

Losses covered

• Hull & Machinery

• P&I (and occupational injury)

• Loss of Hire

• Special covers

Perils covered

PERILS AND LOSSES COVERED

INSURANCE COVER

NM

IP -

WA

R

cl. 2-8, 2-9, 2-14, 2-15, 2-16

cl. 3-17, 3-19

cl. 7-2

cl. 11-4, 11-9

Chapter 15

cl. 17-33

cl. 18-11, 18-16, 18-59-62

cl. 19-28

WHERE’S THE WAR?

The Perils covered

State requisition & seizure

Rights of the mortgages

TLO – combination of perils

WAR insurance

Fishing vessels: Marine + Waron same policy. (liability)

MOU’s. Special amendments to fit ch 15

Bld risk.

DEFINITION OF MARINE RISKS – NMIP 2019

Clause 2-8. Perils covered by an insurance against marine perilsAn insurance against marine perils covers all perils to which the interest may be exposed, with the exception of:

a) Perils covered by an insurance against war perils in accordance with Cl. 2-9,

b) capture at sea, confiscation, expropriation and other similar interventions by own State power provided any such intervention is made for the furtherance of an overriding national political objective. Own State power is understood to mean the State power in the vessel’s State of registration or in the State where the major ownership interests are located. Own State power does not include individuals or organisations exercising supranational authority,

c) requisition by State power,

d) insolvency or lack of liquidity of the assured or the operation of ordinary legal process to enforce payment of any fine, penalty, debt or right to security unrelated to a claim or liability covered by the insurance,

e) perils covered by the RACE II Clause:

DEFINITION OF WAR RISKS – NMIP 2019

Clause 2-9. Perils covered by an insurance against war perils

An insurance against war perils covers:

a) war or war-like conditions, including civil war or the use of arms or other implements of war in the

course of military exercises in peacetime or in guarding against infringements of neutrality,

b) capture at sea, confiscation, expropriation and other similar interventions by a foreign State power,

provided any such intervention is made for the furtherance of an overriding national or

supranational political objective. Foreign State power is understood to mean any State power other

than own State power as defined in Cl. 2-8 (b), second sentence, as well as organisations and

individuals exercising supranational authority or who unlawfully purport to exercise public or

supranational authority,

c) riots, sabotage, acts of terrorism or other social, religious or politically motivated use of violence or

threats of the use of violence, strikes or lockouts,

d) piracy and mutiny,

e) measures taken by a State power to avert or limit damage, provided that the risk of such damage is

caused by a peril referred to in sub-clause 1 (a) - (d).

CH 15: TERMINATION OF WAR COVER

• §15-5 War between 5 major powers.

• §15-6 Use of nuclear arms for war purposes

• §15-7 If the vessel is Bareboat chartered

• §15-8 Alternation of risk

CLAUSE 2-9 (A) WAR OR WAR-LIKE CONDITIONS

• ”Classic” war risk

• Including Civil War (NMIP 2010)

• All measures that are undertaken by powers that are attributable to war

• Also after the war where the implement was used has ceased

CL. 2-9 (B) FOREIGN STATE POWER INTERVENTIONS

Capture at sea, confiscation, expropriation and other similar interventions by a foreign State power, provided any such intervention is made for the furtherance of an overriding national or supranational political objective.

Foreign State power is understood to mean any State power other than own State power as defined in Cl. 2-8 (b), second sentence, as well as organizations and individuals exercising supranational authority or who unlawfully purport to exercise public or supranational authority,

Other similar interventions: Criteria's:

1. The party carrying out the intervention must be a foreign state power

2. Owner must be deprived of ownership

3. Act exceeds the measures necessary in order to enforce police and customs legislation

4. The intervention must be founded in an overriding political objective

GAP IN COVER ?: THE SIRA CASE

LAGOS

1.February: Vessel arrive Lagos for discharge. Local security team + 1 british security consultant board the vessel

5.February: Pirates attempt to board the vessel. Pirates abort when they see guards. One shot was fired by guards.

14.February: Discharge completed. Vessel detained by Nigerian Maritime Administration

13.March: Vessel formally arrested. Basis: Foreign security advisor onboard.

31:March: Vessel released, Letter of indeminity signed.

Losses:• Off Hire• Enhanced operational expenses• Legal expenses• Travelling & accomodation

Marine: §2-8 b) No cover for State intervention

War: §2-9b) Cover for «..confiscation and other similarinterventions by a foreign state power»

Arbritation:

Vessel held back due to legitimate reasons. In order to qualify for War cover:

-Deprived ownership-Excessive use of force-Politiacl motivation, on national level

=> Shipowner uncovered

CL. 2-9 (C) ACTS OF TERRORISM

• Revised after 9/11 to include ”terrorism”

• Requires social, religious, or political motivation behind the act or

threat

• Distinction against ordinary criminal acts purely for the purpose of

gain

• Intended purpose of such acts is traditionally to influence

governments or its people or other powerful entities

• Clarification in 2010 version of the Plan

CL. 2-9 (D) PIRACY AND MUTINY

• Commentary : “illegal use of force by private individuals on the open sea

against a ship with crew, passengers and cargo”

• No motive requirements other than personal gain

• From criteria of “open sea” (2006) to “port limits” (2010)

‐ Crime can be dealt with by port State authorities

‐ En route between ports

‐ Distinguish from common criminal acts

• Marine or war peril

NMIP – WATERTIGHT COVER?

MARINE RISKSNMIP §2-8

WAR RISKSNMIP §2-9

GAP IN COVER

Event: May 10th 2017: Vessel arrested in Murmansk following a routine inspection by Russian Coast Guard. The inspection had revealed a valid formality error, caused by Norwegian fishing administration.

Consequence: Russian authorities launch investigations, and set the bail amount equal to NOK 90m.

Release: Vessel released on 1st June 2017 following involvement of top level Norwegian bureaucrats. It is not known if bail or other inducements was paid.

Outcome: Fine at NOK 30m, loss of hire & enhanced operational expenses.

Implications for insurance:

• H&M/LOH underwriter: No cover for LOH, uninsured event. (no physical dmg)

• P&I club: No resources to support Remøy with during the arrest. Not in position to fund bail.

• DNK: The event does not qualify for cover under the war policy.

QUICK CASE STUDIES

1. ”Animal Liberation Front” activists sink whaling ship in Northern Norway.

2. Reefer is attacked by armed militants at berth in Lagos, Nigeria. Master is abducted and tortured.

3. Seismic ship is arrested off Vietnam by Chinese coastguards for ”trespassing of territorial waters and suspicion of smuggling”.

4. During Iran-Iraq war, an oil tanker is severely damaged at Basrah terminal due to a sudden fire in the engine room.

5. British authorities are considering bombing an oiltanker following a casualty, for the purpose of limiting the threatening oil spill.

6. Tug engaged in salvage of grounded warship, damaged by exploding torpedo.

Discuss:

- Does the event fall under the war risk insurance?

- Which war peril(s) could be relevant?

DEN NORSKE KRIGSFORSIKRING FOR SKIB

(DNK)

• Mutual insurance association owned by Norwegian Shipowners

• Established 30th October 1935

• Suspended operation during WWII

• NORTRASHIP admin 85% of merchant marine 1939-45, charter to UK. Essential for allied victory.

• DNK resumed operation after WWII, still relevant.

• Hard to find re insurance capacity, post WWII

• Cold War, Middle East turmoil, Terrorism

DNK TODAY

• Insures interests attached to vessels, drilling rigs and similar movable units against war risk

• Comprehensive war risk cover and contingency support

• Largest war risk insurance mutual world wide

• 3300 vessels

• 460 members

• USD 217 billion insured value

• Capacity USD 1,589 billion

DNK INSURANCE CONDITIONS

NMIPNordic Marine Insurance Plan

DNK special covers

CONDITIONAL TRADING AREAS

Premium = Insured value * DNK rate for area in consideration

Discount for short stays, high values, armed guards

LOSS OF HIRE

Standard Cover NMIPChapt 15, section 6, and Chapter 16

• Physical damage

• Blocking and trapping

• Not triggered by piracy

• Open cover

• 7 day deductible / 14 days in

conditional trading areas

• 180 days

Additional Cover DNK

Clause 11 – DNK Insurance Conditions

• Open cover

• Non-physical damage (H&M or P&I incident to vessel)

• Limits:

‐ 7 day deductible

‐ 10% self-insured retention

‐ USD 100,000 max. daily limit

‐ USD 30,000,000 per occurrence

and in all

‐ 180 days

DNK «HORN OF AFRICA SUPPLEMENT”

Costs related to Hijacking

• Reasonable costs, cf. Cl. 4-7 and

4-12 NMIP ‐ Ransom

‐ Related costs, e.g. negotiator

• Not limited to vessel’s proportion

• No need to declare GA

• Payment on account

(cf. Cl. 5-7 NMIP)

Loss of Hire

• No deductible

• No self-insured retention

• Other limits remain‐ USD 100,000 max. daily amount

‐ USD 30,000,000 per occurrence and in all

‐ 180 days

DNK SPECIAL COVERS, CHAPTER 15 NMIP

Major powers war

• Automatic Termination as basic rule (Cl. 15-5)

• extended but limited cover for DNK members

• 30 days, maximum aggregate limit of USD 1 billion.

Radioactive and biochemical perils

• RACE exclusion as basic rule (Cl. 2-9 (2) (b))

• extended, but limited cover for DNK members

Requisition for ownership or use - by State of Registration

• no cover for requisition by own flag state as basic rule (Cl. 2-9 (1) (b))

• extended, but limited cover for DNK members

FOCUS ON CYBER

CYBER: CL. 380

Institute Cyber Attack Exclusion Clause

1.1 Subject only to Clause 1.2 below, in no case shall this insurance cover loss damage liability or expense directly caused by or contributed to by or arising from 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 electronic system.

1.2 Where this Clause is endorsed on policies covering risks of war, civil war, revolution, rebellion, insurrection, or civil strife arising there from, or any hostile act by or against a belligerent power, or terrorism or any person acting from a political motive, Clause 1.1. shall not operate to exclude losses (which would otherwise be covered) arising from the use of any computer, computer system computer software programme, or any electronic system in the launch and/or guidance system and/or firing mechanism of any weapon or missile.

FEAR OF THE UNKNOWN: FOR A GOOD REASON?

No consensus on:

‐ What cyber means

‐ What a cyber risk looks like

‐ What cyber insurance

should cover

DNK CYBER COVER

• Cyber cover included, by not excluding it (Cl 380)

• Cover for cyber risks follows the trigger points for war cover in the NMIP §2-9.

• Cyber warrisks (H&M+P&I+LOH) + limited marine cyber (H&M)

• Each case will have to be reviewed on its own merits.

CYBER: DIFFERENTIATION AND IMPACT

Cyber crime

Cyber warfare

Cyber terrorism

Hacktivism

Cyber espionage

MARITIME EXPOSURES

• Cyber security onboard merchant vessels is

arguably years behind the curve when

compared to land-based industries

• Shipowners and others involved in the

maritime industry are responsible to actively

defend against the risks of a cyberattack

• Successful cyberattacks could shut down a

port, commandeer a ship or reveal sensitive

pricing data

• The next hacker playground?

“Cyber threat is one of the most serious economic and national security

challenges we face”. (Barack Obama 2013)

THANK YOU!

For more information on war risk insurance, please vist – www.warrisk.no

1,590

1,000

400

500 500

400

1,000

50

150

50

0

200

400

600

800

1,000

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1,400

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DNK UKW HWR

Totaltap P&I, per enhet Storkrigsdekning, ATC RACE

✓ LOH 180 open✓ LOH without physical dmg✓ Cyber, full cover✓ Requisition, foreign state✓ Rekvisisjon own state✓ Biochem

✓ Cyber, 150 MUSD✓ Requisition, foreign state

COVER AND LIMITS, 3 CLUBS

COVER STRUCTURE, 3 MUTUALS

X = included in standard cover X = available as separate cover

DNK HWR UKW

H&M x x x

Cyber x x --

Major powers war x -- --

LoH standard x x x

LoH without physical damage x -- --

P& x x x

GA Cargo Horn of Africa x -- --

Requisition, foreign state x x --

Requisition, own state x -- --

RACE x x --

Biochem waste x -- --

Builder's risk x -- --

Security Incident Response (SIR) x -- --

SIR LoH x -- --

P&I cruise, per enhet x x x