PROPOSAL FOR CIVIL LIABILITY REGIME AND COMPULSORY INSURANCE FOR PASSENGER CARRIAGE BY SEA

Contents PURPOSE... 2 STATEMENT OF ISSUE... 2 BACKGROUND... 2 PROPOSAL... 4 JUSTIFICATION... 6 IMPLICATION... 8 SUMMARY... 8 CONCLUSION... 8 RECOMMENDATION... 9 APPENDICES 1

PROPOSAL FOR CIVIL LIABILITY REGIME AND COMPULSORY INSURANCE FOR PASSENGER CARRIAGE BY SEA PURPOSE The purpose of this paper is to recommend the implementation of a civil liability regime and compulsory passenger and third party liability insurances for commercial and public purpose vessels. This paper argues that a civil liability regime for compulsory passenger and third party liability insurances for commercial and public purpose passenger vessels is necessary for enhancing the protection of passengers travelling by sea and for ensuring the business continuity of small commercial and public purpose passenger carriers. STATEMENT OF ISSUE 2. Accidents involving passenger ships and licensed boats have increased 500% with a total of twenty eight fatalities since 2008 1. News reports of the accidents often highlight victims pleas to the Government for assurance that adequate compensation will be awarded 2. There is no liability regime for maritime passengers. Thus, the carrier could exclude and limit liability for personal injury. There is also no requirement for carrier to take and maintain adequate insurance cover and thus no assurance that the claimants claims will be met, particularly in relation to small operators. There is a need for measures to ensure that victims are compensated quickly and adequately. BACKGROUND 3. Passenger carriage by sea refers to the conveyance of passengers by ship, boat or yacht, operated for a commercial or public purpose. Section 2 of the Merchant Shipping Ordinance (MSO) 1952 defines passenger as any person carried upon a vessel (ship or boat) not propelled by oars, who is not an employee (crew), stowaway, rescued person or a child under one year of age. By definition, persons carried upon recreational fishing boats, daytripper boats and yachts are passengers. Passenger ship is not defined but there is a reference to passenger steamer which is defined to mean every British, Malaysian or foreign steamship carrying more than twelve passengers to or from any place, or between any places, in the Federation. For the purposes of this proposal, a ship, boat or yacht is considered as a passenger carrier so long as it is operated for the commercial purpose of conveyance of the general fare-paying public. 2

4. These persons are not passengers by definition: operator and passenger of personal watercrafts (personal watercraft is not a vessel) 3 ; parasail and water-sled riders (persons are towed instead of carried upon by vessel or craft); and dragon boaters, kayakers and sailboat racers (persons are considered as crew). 5. The MSO 1952 regulates the registration of passenger ships 4, licensing of passenger boats 5, and safety certification of passenger vessels 6. The Langkawi International Yacht Registry Act 2003 provides for the registration of yachts 7 and allows for regulations to be made on matters concerning safety, health and welfare of persons on board yachts 8. There are provisions on limitation of shipowners liability 9 but does not have provisions regulating civil liability of the passenger carrier. The civil liability of a passenger carrier is based on common law principles. (Refer to Appendix 2) 6. The basis of the carrier s liability is fault-based. In all cases of personal injury, the claimant has to prove that the carrier owed the claimant a duty of care, that the carrier breached that duty of care (through fault or negligence) and that the breach resulted in the incident which caused injury to the claimant. Should the claimant succeed in proving his case, the burden shifts to the carrier to show that he had exercised reasonable care and that the loss was not foreseeable; the claimant had contributed to his own loss (contributory negligence); or that there was a valid exclusion clause which the carrier is entitled to rely upon to avoid liability. Assuming that the carrier is found liable, Section 360 MSO 1952 entitles the carrier to limit the extent of his liability to 3100 gold francs (approximately RM629.51) 10 per gross registered tonnage. The average gross registered tonnage for a high-speed passenger ferry is 400GRT with a capacity of 150 passengers. The limit of the fund for loss of life, personal injury and loss of property is thus RM251, 807 or RM1680 per passenger. Compensation awarded for bodily injury ranges RM2, 000-RM400, 000 per claimant depending on type of injury 11. Litigation costs typically approximate 30% of sum awarded. The limit of fund set by Section 360 of the MSO 1952 is insufficient. 7. The MSO 1952 was recently amended by the Merchant Shipping (Amendment and Extension) Act 2010 (the 2010 Act), which introduced a new Section 360 to incorporate the Convention on Limitation of Liability for Maritime Claims (LLMC) 1976 as amended by the Protocol of 1996, increasing the limit of shipowner s liability for passenger claims from RM1680 per passenger to RM868, 000 12 per passenger. The 2010 Act also introduced a new Section 361 which requires proof of a contract of insurance or other financial security satisfying the requirements of the LLMC 1976 in respect of limits of liability. Thus, a passenger carrier certified to carry 150 passengers is required to have insurance coverage for RM130 Million. The 2010 Act has not yet taken effect. 8. Passenger and Third Party Liability Insurance covers the insured in respect of his legal liability to pay compensation for bodily injury to or accidental damage to the property of another person caused by or through the negligence of the insured or his employees. The MSO 1952 does not yet require compulsory insurance cover 13. Proof of liability insurance cover is required for registration of yachts under the Langkawi International Yacht Registry Act 2003 14 and the Recreational Fishing Regulations 2009 under the Fisheries Act 1985 also require permit holders (licensed fishing vessels) to take passenger liability insurance cover 15. The limit of liability for which insurance is to cover is not specified. This ambiguity may lead to inadequate insurance cover. It is observed that smaller vessel operators take marine hull insurances which only cover damage to the insured vessel and opt for selfinsurance in relation to passenger and third party liability. Passenger liability insurance makes up a very small portion of the marine insurance portfolio. Main marine insurance 3

providers provide passenger liability cover on a selective basis due to the degree of uncertainty in passenger liability claims 16. PROPOSAL 9. It is proposed that a civil liability regime for carriage of passengers by sea be introduced and passenger and third party liability insurances be made compulsory for passenger carriers. (i) Introduce a civil liability regime for carriage of passengers by sea. A civil liability regime provides for the basis of liability and apportionment of burden of proof. It is proposed that the Minister of Transport amend the MSO 1952 to include provisions for the implementation of a civil liability regime. (Refer to Appendix 3). The provisions must provide that: (a) The liability rules are to apply to carriage of all persons who are not crew on a vessel operated for commercial or public purposes. (b) The passenger carrier should be excluded from contracting out of liability and thus void any waivers used in the contract of carriage. (c) The passenger (claimant) must prove that the injury is caused by the fault of the carrier. However the carrier is presumed to be at fault (claimant does not need to prove fault of carrier) if injury is caused by shipwreck, collision, stranding, fire, explosion or defect of the vessel. For loss not caused by a shipping incident, the carrier is liable if the incident which caused the loss was due to the fault or neglect of the carrier. The burden of proving fault or neglect lies with the claimant. (d) The liability of the carrier only includes loss arising from incidents which occurred in the course of the carriage. The burden of proving that the incident which caused the loss occurred in the course of the carriage, and the extent of loss, lies with the claimant. (e) The passenger carrier is not liable or liability is reduced if injury is caused by or contributed by the fault of the claimant. (ii) Implement requirement for compulsory passenger and third party liability insurance for passenger carriers of commercial and public purpose vessels. The MSO 1952, as amended by the 2010 Act, when it comes into effect, will make it mandatory to have insurance cover sufficient for the limits set by the LLMC 1976. As the main consideration relating to the implementation of compulsory passenger and third party liability insurances is how to ensure that the insurance is in place, it is suggested that the implementation of compulsory insurance needs to be complemented by licensing of vessels, business, operations or activities. This can be achieved through regulations, which the MSO 1952 has empowered the Minister of Transport to make. (iii) Clarify the limit of liability for which insurance coverage is required under the Langkawi International Yacht Registry Act 2003 and the Recreational Fishing Regulations 2009 under the Fisheries Act 1985. This can be achieved by amending the provision to specify the limit of liability consistent with the LLMC 1976. (iv) A result-oriented monitoring and evaluation framework needs to be implemented by the Ministry of Transport to oversee implementation, to monitor and evaluate the impact of the policy and to review the policy in due course. Reference is made to the 4

UNDP Handbook on Monitoring and Evaluating for Results, which proposes that the following be conducted: (a) Outcome monitoring: This requires the Ministry of Transport to establish baseline data, select outcome indicators for performance and design mechanisms that include planned actions such as field visits, stakeholder meetings and systematic analysis or reports; and (b) Outcome evaluation: This compares planned outcome with intended outcome achievement by comparing indicators before and after policy intervention. Some suggested indicators that can be used for monitoring and evaluation purposes include: passenger satisfaction, duration for settlement of claims, cost of legal claims, investment in loss mitigation and prevention measures, welfare costs, and compensation awards. 10. Other options considered are: (i) Establishment of a Maritime Accident Fund. The Maritime Accident Fund is a proposed fund into which both passengers and passenger carriers contribute to. The Maritime Accident Fund will be managed by an agency, perhaps comprising the Marine Department (the Government), insurance and finance professionals. The point of collection of contribution could be at the point of contract of carriage, and the carrier is entrusted to remit the collection to the Maritime Accident Fund. The mechanism could be modelled after the mechanism in place for the collection of sales and service tax. To make this option attractive for passengers, it is suggested that the Athens Convention s no-fault liability arrangement be adopted in relation to shipping incidents. To make this option attractive for carriers and their insurers, it is suggested that a limit is set for damages or claims payable depending on the type of injury. This can be modelled after SOCSO benefits and the Compendium of Personal Injury Awards developed by the Bar Council Malaysia could be used as a reference. It is also imperative that the passenger waives further claims against the carrier and insurer after accepting compensation from the fund. Otherwise, there is no incentive for carriers and insurers to support such a fund. The value of the scheme is that it is a win-win solution for all stakeholders. It affords the benefit of a simplified claim process and certainty of payment for passengers and carriers. There is problem with free-riders which only stringent enforcement, beginning with the complete registration or licensing of all passenger carrying vessels, can remedy. (Refer to Appendix 4) (ii) Ratification of The Athens Convention relating to the Carriage of Passengers and Their Luggage By Sea 1974 (Athens Convention) and Athens Protocol 2002. The Athens Convention and Protocol is an international regime that deals with the civil liability of carriers to passengers for losses incurred due to loss of life or personal injury or loss of or damage to their property and the provisions concerning limitation of liability. The Athens Protocol 2002 introduces compulsory insurance, allows for direct action against an insurer and introduces a compensation mechanism more consistent with other international compensation regime introduced by the IMO. The Athens Convention offers an improved apportionment of liability and burden of proof. The requirement for compulsory liability insurance and availability of direct action against insurer ensures that claimants are protected against the insolvency of carriers. (Refer to Appendix 5) (iii) Implement requirement for compulsory passenger and third party liability insurances for passenger carriers 17. This option places the cost of loss or damage solely with the 5

carrier. It needs to be recognised that different minimum insurance levels should be required for vessels of different carrying capacity. Enforcement of such a requirement is best achieved through licensing of vessels. Larger passenger carriers, with protection and indemnity cover will have no difficulty in complying with this requirement. Lower limits for smaller passenger carriers will ensure that these operators can afford insurance cover. The MSO 1952 has enabling provisions for making insurance cover a prerequisite to licensing 18. Making passenger and third party liability insurances compulsory for passenger carriers affords better assurance for passengers that their claims will be met. It also allows for quicker settlement of claims and ensures that the business does not become insolvent as a result of an unmet claim. (iv) Implement requirement for compulsory liability insurances for passenger carriers and optional personal accident insurances for passengers. This option envisages cost sharing by both passengers and passenger carriers. This mechanism is modelled after the practice in air travel, where it is the passengers choice whether to purchase travel insurance. JUSTIFICATION 11. The implication of a fault-based civil liability regime and optional liability insurance is as follows: (i) It is a challenge for the claimant to successfully prove fault and causation. As there is a risk of getting only a paper judgment, claimants are coerced into settling for lesser amounts of compensation. (ii) Smaller operators run the risk of insolvency as they do not take advantage of the certainty and cost-savings which insurance provides to businesses by converting large liability claims and legal costs to regular payments of premiums. (iii) Frequent appeals to Government for assurance of adequate compensation following a marine accident give the impression that the Government is not doing enough to protect passenger s interests. Insurance provides an incentive for both insurers and passenger carriers to address carelessness through inspections, policy provisions requiring certain types of vessel safety maintenance and loss mitigation measures. In the absence of insurance, the cost of enforcement and passenger welfare falls on the Government. 12. Consultation with representatives from the Persatuan Insurans Am Malaysia, the Consumer Association of Penang (CAP), the Malaysian Shipowners Association, and the Bank Negara Malaysia, indicated support for some measures to be taken to enhance the protection of passenger interests and that the organisations are open to further deliberate on the recommendations. (Refer to Appendix 7) 13. The proposed approach is consistent with the approach taken by other countries dealing with similar issues 19. 6

(i) China has ratified the Athens Convention and requires passengers to buy life insurance when boarding a vessel, while the owner or operator is required to buy third party liability insurance. (ii) Hong Kong has ratified the Athens Convention and requires minimum insurance liability cover of HK$10 Million (approximately RM4 Million) for vessels permitted to carry more than 12 persons and HK$5 Million (approximately RM2 Million) for vessels carrying less. Liability insurance covers injury to passengers and to third party. (iii) The United Kingdom and Canada have ratified the Athens Convention and require all craft to be licensed and licence application must be accompanied by an insurance certificate indemnifying persons using the boat against claims in respect of death or bodily injury to any other persons caused by or arising out of the use of the boat. (iv) Philippines has not ratified the Athens Convention. Vessels carrying 11 or less passengers are not required to carry passenger insurance. Vessels carrying 12 or more passengers require cover at P50, 000 (approximately RM3, 000) per passenger capacity. 14. The benefits and value offered by other options are offset by its trade-offs. (i) Establishment of a Maritime Accident Fund. This option requires the design of a workable scheme and will require much public consultation with stakeholders before it can take effect. It may present a long-term ideal but not suitable as an immediate solution. A similar proposal has been made for road traffic accidents but did not receive favourable support 20. (ii) Ratification of the Athens Convention and Protocol. This option is offset by the limited application of Athens Convention to only registered passenger ships for international carriage and the limit of liability which is set too high compared to the MSO 1952. This will require a review of the risk and revision of premiums chargeable, which will lead to increase in operational costs, adversely affecting smaller passenger vessel operations and may make registration less attractive. Whilst the Athens Convention presents the most comprehensive regime for the regulation and protection of maritime (sea-going) passengers, it is of limited application, covering only vessels for commercial and public purposes for international carriage. Larger vessel operators, with access to Protection and Indemnity Club protection will not have difficulty meeting the limits but smaller passenger carriers will find it very difficult to get affordable insurance cover which satisfies the limit of liability set by the Athens Convention and Protocol. In view of this, it is not recommended that Malaysia accede to the Athens Convention and Protocol. (iii) Implement requirement for compulsory passenger and third party liability insurances for Passenger Carriers. This option is not favourable as it does not address the issue of apportionment of liability and burden of proof and passenger carriers may still exclude liability in the contract of carriage and deny claimants of a claim. (iv) Implement requirement for compulsory liability insurances for passenger carriers and optional personal accident insurances for passengers. This option is not favourable as it does not address the issue of apportionment of liability and burden of proof and passenger carriers may still exclude liability in the contract of carriage and deny 7

claimants of a claim. This approach may be viable for larger passenger operators (such as ferries) but its implementation may be more challenging for smaller passenger operators (such as day-trippers), as it would involve additional administration and coordination burden. IMPLICATION 15. The proposed passenger liability regime would accord better apportionment of liability and burden of proof. It maintains the defences available to the passenger carrier whilst making it easier for the claimant to prove his claim. This leads to quicker settlement of disputes and lowers legal costs. 16. Making passenger and third partly liability insurances compulsory for passenger carriers also provides better protection for passengers. It allows for quicker settlement of claims and ensures that the passenger receives compensation and that the business does not become insolvent as a result of the claim, In addition to providing an incentive for loss mitigation methods, insurance could also encourage investment in loss prevention measures because of concern over rate reductions and legal costs. This encourages passenger carriers to adopt best management practices and practice self-regulation, which leads to lower enforcement and welfare costs for the Government. SUMMARY 17. A fault-based liability system makes it difficult for maritime passengers to claim for compensation. As liability insurances are optional, many smaller passenger carriers choose not to insure against liability losses. This leads to victims being coerced to settle for lesser amounts of compensation or risk getting only a paper judgment. Maritime legislative developments have focused on safety and management of vessels and on the carriage of cargo, but have neglected passenger interests. To enhance the protection of passenger interests, and to ensure that smaller passenger carriers better manage liability risks, it is recommended that a civil liability and compulsory insurance regime be introduced for carriage of passengers by sea. It is proposed that the civil liability regime be based upon the Athens Convention relating to the Carriage of Passengers and Their Luggage by Sea 1974 and Protocol 2002. When the 2010 Act take effect, the limits of liability established by the LLMC 1976 will adequately cover the injury awards. To facilitate implementation of Section 361 of the MSO 1952, as amended by the 2010 Act, it is proposed that the Minister of Transport makes regulations to make proof of insurance cover a prerequisite to licensing of vessel and activity. CONCLUSION 18. Maritime related legislation has focused on the regulation of carriage of cargo. There is as yet no legislation regulating the carriage of passengers. This study recommends a civil liability regime for carriage of passengers by sea and compulsory passenger and third party liability insurance for commercial and public purpose passenger vessels. 8

RECOMMENDATION 19. To address the concerns of passengers more comprehensively, it is recommended that: (i) Malaysia adopts a civil liability regime for passenger carriage modelled after the Athens Convention 1974 and the 2002 Protocol. The liability rules are to apply to carriage of all persons who are not crew on a vessel operated for commercial or public purposes. Passenger carriers should be denied from contracting out of liability and thus any waivers used in the contract of carriage should be void. The passenger (claimant) is required to prove that the injury is caused by the fault of the carrier. However the carrier is presumed to be at fault (claimant does not need to prove fault of carrier) if injury is caused by shipwreck, collision, stranding, fire, explosion or defect of the vessel. Carrier is not liable or liability is reduced if injury is caused by or contributed by the fault of the passenger (claimant); and (ii) All passenger vessels used for commercial and public purposes be required to take passenger and third party liability insurance cover. Insurance may be on usual commercial terms and the insurance cover should reflect the limits of liability of the LLMC 1976 based on the passenger carrying capacity of the vessel. The Ministry of Transport should make regulations making proof of insurance cover, a prerequisite to licensing of vessel and activity, to facilitate the application and enforcement of Section 361 of the MSO 1952, as amended by the 2010 Act. 1 Refer to Appendix 1 for statistics. 2 In 2006, two ferries collided about 14.5 nautical miles from Langkawi, killing a child, In 2007, a ferry accident occurring in Tioman killed four and injured many others. In 2010, a collision involving a tugboat and a dragon boat killed six and injured twelve people. Also in 2010, two collisions involving tourist boats off Kuala Terengganu seriously injured foreign tourists and a river express boat accident caused six deaths and injured 17 people in Ulu Tatau, Sarawak. In another incident off Mersing, Johor, a ferry accident killed five people and 24 were injured. It was not reported, in all the aforesaid incidents, whether the victims and their families received reasonable compensation for their loss following public appeal to the Government for assurance of compensation. 3 Case law suggests that personal watercrafts are not vessels. Refer to Curtis v Wild [1991] 4 All ER 172, Steedman v Scofield [1992] 2 Lloyd s Rep 163, and in particular the recent ones: The Sovereign Explorer [2001] 1 Lloyd s Rep 60, The Winnie Rigg [1998] 2 Lloyd s Rep 675. and R. v Goodwin [2005] EWCA Crim.3184. 4 Part IIA Merchant Shipping Ordinance 1952 5 Section 474 Merchant Shipping Ordinance 1952 and the Boat Rules 1953 6 Part IV Merchant Shipping Ordinance 1952 7 Part III Langkawi International Yacht Registry Act 2003 8 Section 60(2)(n) Langkawi International Yacht Registry Act 2003 9 Part IX Merchant Shipping Ordinance 1952. This is being amended by the Merchant Shipping (Amendment and Extension) Act 2010, which has not yet taken effect. There is no equivalent in the Langkawi International Yacht Registry Act 2003. As the Langkawi International Yacht Registry Act 2003 does not expressly preclude the application of the MSO 1952, it is argued that the definition of vessel in Section 2 MSO 1952 which includes any ship or boat or any other description of vessel used in navigation, extends the application of non-conflicting provisions in the MSO 1952 to yachts. As such, limit of liability provisions in the MSO 1952 is applicable so long as there are no specific provisions in the Langkawi International Yacht Registry Act 2003 to the contrary. 10 Merchant Shipping (Limitation of Liability)(Malaysian Ringgit Equivalent) Order 1993 11 Refer to Appendix 5 12 Based on Bank Negara Malaysia s exchange rate of RM4.96 per Unit of Account as at 26 September 2011. 9

13 New section 361 Merchant Shipping Ordinance 1952 as amended by the Merchant Shipping (Amendment and Extension) Act 2010 prohibits any ship from entering or leaving a part in Malaysia, or any part of Malaysian waters or the exclusive economic zone, unless there is in force in respect of the ship a contract of insurance or other financial security satisfying the requirements of the Convention [LLMC 1976 as amended by Protocol 1996] in respect of the limits of liability. 14 Section 61 Langkawi International Yacht Registry Act 2003 requires every Langkawi yacht to carry insurance cover against risks of loss and damage to third parties, in particular the owner s liabilities to a crew member and in respect of the removal of the yacht in the event that the yacht is abandoned or becomes a wreck. 15 Regulation 9 requires permit holders to take insurance cover for all recreational anglers carried upon the vessel for the entire duration of the carriage 16 Based on feedback from the Persatuan Insurans Am Malaysia and Bank Negara Malaysia. 17 Refer to Appendix 6 for types of liability insurance available to passenger carriers 18 Sections 57(g) and 483(k) Merchant Shipping Ordinance 1952 19 Extracted from a report on Recommendations on Regulations on Compulsory Passenger Insurance Pursuant to Marine Liability Act and Programs, prepared by The Mariport Group Ltd for Transport Canada, Marine Policy, October 2002 20 Muthiah, W. (2010, April 11). At odds over no-fault scheme. The Star 10