GUIDE: Hull & Machinery Insurance

Hull and Machinery insurance is a form of marine insurance which pays the owner for damage done to the ship itself or the equipment which forms part of it (for instance, cranes, hydraulic winches etc.). it is often simply known as hull insurance or hull cover.

It is possible to buy a much cheaper insurance ('TLO') for the hull risk, which covers Total Loss Only. In other words, if the vessel is damaged you must repair it at your own cost; the policy will only respond if the vessel is a total loss (by paying you what it was worth so that you can purchase a new one).

Most hull brokers will be able to obtain the best overall cover by blending an H&M policy which excludes total loss with a standalone Total Loss Only policy. The latter policy would find most vessels never making a claim and could therefore be bought relatively cheaply and as the H&M policy excludes the largest risk possible (for loss of the vessel) it too would be comparatively cheap.

The rationale from an underwriting side is that both insurers can more accurately identify the risk in what they are underwriting and can therefore be more specific in how much premium they charge.

Linked Insurances 
Increased Value - For well known reasons, the Marine Insurance Act only allows you to buy cover for things in which you have an 'insurable interest'.  For this reason, H&M insurance is limited to the market value of your vessel. However, it was gradually realised that as a shipowner, if you lose your vessel, you will incur a great deal of costs which exceed the mere cost of buying a new one. Therefore, a new insurance became available, calling 'hull interest' or 'increased value' or 'IV', to provide cover for this. It generally entitles you to a payment of 20% - 25% of the vessel's value in the event the vessel is a total loss. This will be paid in addition to the main H&M settlement for the vessel's value.

War & Strikes - Losses related to war and strikes are excluded from normal H&M cover, but you can buy an additional cover which replaces this exclusion (albeit some elements of the exclusion like Nuclear cannot be bought back).

K&R - Kidnap and ransom insurance became more popular again in the 2000s, with an upsurge in attacks in Somalia, South East Asia and West Africa. It pays the cost of negotiating release of the crew and / or ship, in the event they are taken by pirates.

RDC/FFO - Most H&M policies include only 3/4ths cover for collision risk, and none for FFO (damage to fixed of floating objects) risk. However, today many H&M insurers allow you to add full cover for collision risk or cover for FFO risks to their policy. It is important to ensure your P&I then excludes these risks, in a way which dovetails with your additional H&M cover, as otherwise you will have a Double Insurance position, which will be procedurally and legally problematic in the event of a claim; and you will obviously not be paying premium efficiently if you are paying to insure the same risk twice, but can only claim once.

GUIDE: Collision Claims

Collision claims, also known as RDC claims*, involve incidents where two ships have made contact, or in layman's terms when two ships have hit each other. 


Liability
Where a collision occurs which is 100% the fault of one vessel, that vessel shall bear its own losses and compensate the other for its losses as a result of the collision. However, because of their very nature collisions almost always involve a degree of fault by each party involved. The general rule is therefore that the total damage is calculated and the % liability of each vessel for causing the collision is calculated and each vessel's owners pay their fair percentage of the total damage.  


Time Limit for Claims
Collision claims are, in most jurisdictions, subject to a two-year time limit, which runs from the date on which the collision occurs. This limit comes from the 1910 Collision Convention, which most countries have ratified.**


Wash Damage
At law claims for 'wash damage' (where the movement of one vessel creates waves in the water which damage other vessels) are generally considered collision claims and dealt with as such by the courts. This is the case even though there is no physical contact between the ships. It is important to note that, despite this, the wording of some P&I and Hull policies will be such that wash damage claims cannot be considered as collisions (if they cover 'contact' with a third party vessel for example).


FFO Claims
When a ship makes contact with property other than another vessel (shore cranes, bridges etc.) and causes damage to it, this is not considered a 'collision'. Technically it is an 'allision' (two moving objects collide with each other, whereas one moving object allides with a fixed object). This term is less common today and these claims are more frequently known as FFO claims, which stands for 'Fixed and Floating Object' claims. Hitting a quay would be an example of damage to a fixed object and cracking a navigational buoy would be an example of damage to a floating object).


* This is the old terms for collisions and stands for 'Running Down Collision', essentially a reference to when one ship ran down, i.e. into, another. 
** Convention for the Unification of Certain Rules of Law with respect to Collisions between Vessels (Brussels, 23 September 1910)

GUIDE: Marine Cargo Insurance

Marine Cargo Insurance basically insures the owners of cargo for loss of, or damage to, it during a voyage either wholly or partly over water.

Because these insurance policies are relatively complicated and need to offer different levels of cover to different assureds, but they often need to be generated and agreed quickly for urgent shipments, sets of 'standard wordings' are often used by underwriters writing this kind of business.

The most common wordings are those of the 'Institute of London Underwriters'*, known as:
1) Institute Cargo Clauses A (provides the broadest cover, but also the most expensive)
2) Institute Cargo Clauses B (less cover, less expensive)
3) Institute Cargo Clauses C (least cover, least expensive)

There are also standard wordings for these additional risks:
1) War Clauses
2) Strike Clauses

Incoterms (International Commercial Terms)

Incoterms basically give legal clarity of the meaning of terms frequently used in iternational commercial conrtracts. The full descriptions are available here, but essentially they describe who is responsible for cargo and insuring it at varisou stages of transit. There used to be many categories, but now only three remain D, E and F.

Many exporters sell their cargo on a CIF (Cost, Insurance and Freight) basis, so the seller promises to arrange the cargo insurance. If a seller sells goods on an FOB, Ex Works or similar basis, then the buyer arranges his own cargo insurance. This can be risky, because usually the goods are not paid for until after delivery. If the goods arrive in a damaged condition, or an allegedly damaged condition, the buyer may simply refuse to pay for them. In this case, as the exporter has not taken out the cargo insurance, they have no one to appeal to for compensation. Special, relatively cheap, cargo cover has developed to cover only this situation, it is known as 'Contingency (seller's interest)' insurance. 


Common Types of Cargo Cover


Open Cover – This is the most common type. It covers a type of movement for either a set number of movements or over a set period of time. Each individual movement need not be notified to the insurer (for example, if you owned a factory in China exporting rubber ducks to the USA, and sent 10 shipments of one container each a month you could take out open cover for moving rubber ducks from China to the US by container and all your shipments would be automatically  insured).

Specific ('Voyage') Policy – This is cover for an individual shipment, usually high value or an unusual one for the exporter (sending a set of generators to Iraq, where you usually only ship to Europe and the USA for example).

Contingency (Seller's Interest) Policy – As described above, this is the cheapest insurance available. It specifically covers the situation where a seller is sending cargo overseas and the buyer arranges the cargo insurance. If the cargo arrives damaged the buyer may not pay for it and fail to make a cargo insurance claim, or make such a claim but fail to then compensate the seller or pay for the goods. 


Export Credit / Trade Credit - This type of insurance covers sellers exporting goods to customers in a new market. It repays the seller for the cost of the goods where they are shipped to a foreign country and then not paid for due to a fraud or because the buyer has gone bankrupt.


Premium

Cargo premium is generally calculated on the following basis:
1)  The value of goods insured (possibly with an increase to insured value to account for lost profit)
2) The type of goods (highly valuable, dangerous, toxic etc.)
3) The dangers faced by the goods (modes of transit, area, length of journey etc.)


Related Terms


General Average – All cargo must pay a portion of the damaged cargo on the basis that it was sacrificed to save the remaining cargo. Good examples include: cargo wet damaged when sprayed with water in a fire fighting action onboard. Generally the carrier will not release safe-landed cargo in a GA situation until a contribution to the damaged cargo is paid. If insured the insurer will pay this or post a bond for it to allow the cargo to be released.


Particular Average – A situation where the loss or damage to a cargo is borne only by the owner of that cargo, usually the shipper. 


Both-to-Blame Collision Clause – In the event of two ships colliding at sea where both are at fault, all vessels and cargo (by way of their hull or cargo policies) shall proportionately pay their share of the total losses based on the value of their cargo.


Sue and Labour Clause - A standard clause in a maritime insurance policy which allows the insured to recover from the insurer any reasonable expenses incurred by the insured in order to minimise or avert a loss to the insured property, for which loss the insurer would have been liable under the policy.


Facts to Note


Cargo which is insured against "All Risks" is not insured against "all losses", only losses caused by a "fortuity" in transit.

* The Institute of London Underwriters (ILU) recently merged with a re-insurers organisation (LIRMA) to create the International Underwriting Association of London (IUA).