Hull Insurance according NMIP Professor Svante O. Johansson
Chapter 10 NMIP Scope of H & M
Trading areas NMIP 3
Objects covered Hydraulic oil Art Radiostation Cargo/containers Lashings Money Mooringropes Lub. oil Tarpaulins Bunkers Anodes Bottompaint Dunnage The vessel with spare parts and equipment and parts borrowed or hired. Temporarily removed ashore for repairs, to be returned onboard prior to departure. 4
Example on objects covered Insured ship A assessed value 10 000 000 Due to hard weather the following losses and damages was claimed from the insurer Loss of life boats 20 000 Damages to hatches 14 000 Destroyed lashings 4 000 Two barrels of lub.-oil fell and were destroyed 500 Fork lift came loose and was destroyed 1 000 Total claim 39 500 How much shall the insurer pay if the deductible is set at 20 000? 5
Example on objects covered (cont.) Losses and Costs Insurer Owner Loss of life boats ( 10-1, 1 b) 20 000 Damages to hatches ( 10-1, 1 a) 14 000 Destroyed lashings ( 10-1,2 c) 4 000 Two barrels of lub.-oil fell and were destroyed ( 10-1, 1 c) 500 Fork lift came loose and destroyed ( 10-1, 1 b) 1 000 Total 35 500 4 000 Deductible -20 000 20 000 Grand total 15 500 24 000 6
Cover provided - point of depature All Risk Insurance 2-8 All perils covered except a) war b) intervention by state power c) insolvency d) perils covered by the RACE II clause 7
Liability of the insurer an overview Total loss Actual 11-1 Constructive 11-3 Presumed 11-7 Compromised Physical damage Repair costs (Particular average) 12-1 Collision and striking Third Party Collisions (RDC) 13, 4-14 Fixed and Floating Object (FFO) 13 Costs to avert or minimise loss Cost for security 4-3 Litigation 4-4 Settlement of claims and establishing loss 4-5 General Average Assumed G.A. 4-8, 4-11 Salvage 4-12 Mitigating Loss 4-12 8
Limit of liability of the insurer 1. Liability up to the sum insured by any one casualty 2. Equivalent amount for costs of measures taken to avert or minimise loss Also if the sum in 1 is not exhausted 3. Equivalent amount for collision Cannot use 1 or 2 even if not exhausted Even if the sum insured is exceeded Loss for security, litigation and settlement of claims interest 9
Example on max liability Insured ship A assessed value 10 000 000 Collision with ship B Damages 6 500 000 Salvage 4 000 000 Collision liability 14 000 000 Litigation 500 000 How much shall the insurer pay? 10
Example on max liability (cont.) Costs Insurer Owner 1. Damage ( 4-18, 1:1) 6 500 000 2. Salvage ( 4-18, 1:2) 4 000 000 Balance from 1: 3 500 000 Balance from 2: 6 000 000 3. Collision ( 4-18,2 13-3) 10 000 000 4 000 000 4. Litigation ( 4-19, 4-4) 500 000 Total 21 000 000 4 000 000 Deductible -100 000 100 000 Grand total 20 900 000 4 100 000 11
Chapter 11 NMIP Total Loss The assured may claim compensation for a total loss if the ship is lost without there being any prospect of it being recovered or if the ship is so badly damaged that it cannot be repaired. No deductions shall be made in the claims adjustment for unrepaired damage sustained by the ship in connection with an earlier casualty.
Actual total loss Two forms ( 11-1) No prospect of recover Sinking, not salvageable, ceases to be a thing of the kind insured Assessed from an economical point of view Unrepairability Difference between repair and new building Assessed from a technical point of view 13
Total loss due to salvage attempt Conflict of interests Insured value low Owner wants to salvage Insurer pay and leave ( 4-21) Insured value high The insurer has a right to attempt to salvage ( 11-2) Total loss if not salvaged in time Six months time limit ( 11-2) From notification 14
Condemnation or Constructive Total Loss The assured may claim compensation for a total loss if the conditions for condemnation are met ( 11-3) Met when Cost of repair exceeds 80 % of 1. Insured value or 2. Value after repair, if higher 15
Example on condemnation Cost of repair 8 Assessed value 11 Value of the ship repaired 14 Value of the wreck 7 Can the owner claim total loss? No! Cost of repair (8)/value of the ship (14) = 57 % The value of the wreck is left outside NB! Value added due to repair is only 7 (14-7) even though the cost of repair was higher (8) Makes it economic sense to repair? 16
Some criteria for condemnation Casualty damage Only casualty damage counts Only covered damages Other damages included ( 11-3, 4) Reported and Surveyed In the course of three years prior this casualty Cost of repairing the ship ( 11-3, 4:2) Cost of repair Actual costs Cost of removal (but not salvage) Important factor in some instances 17
Example on condemnation Ship A is running heavily aground on a voyage from Oslo to Göteborg. The ship is salvaged and taken to a safe harbour. The salvage award was settled at 1,5 mill. The market value of the ship was 11 mill., while the assessed value was 10 mill. According to an estimation the scrap value of the ship was 2 mill. The cost of repairs was estimated to 9 mill. Calculate the insurers liability. 18
Example on condemnation (cont.) Calculation if ship is condemned instead of repaired Cost of repair 9 mill. divided by (not salvage) Market value 11 mill. give 81 % and the ship can be declared a constructive total loss Costs Insurer Owner 1. Total loss 10 mill. 2. Salvage 1,5 mill. Total 11,5 Deductible n/a 0 Grand total 11,5 19
Example on condemnation when reparing (cont.) Now the owner in the example has chosen to repair the ship, which gives the following figures Costs Insurer Owner 1. Damage repair 8 mill. 1 mill (10 mill. less 2 mill. 12-9) 1. Salvage 1,5 mill. Total 9,5 Deductible -0,05 0,05 Grand total 9,45 1,05 20
Other total loss situations Presumed total loss ( 11-7 8) Missing During three months from expected port entry Ice bound extends the period to twelve months Abandoned During three months from abandonment Ice bound twelve months If it is clear that she will not be recovered Claim at once May not reject after the period even if recovered Compromised total loss 21
Other total loss insurances Hull interest insurance ( 14-1) Total loss Liability for collision in excess the sum insured in the Hull policy Freight interest insurance ( 14-2) Against loss of long term freight income Limitation by the sum insured ( 14-4) Cannot cover more than 25 % of the assessed insurable value of Hull policy Owner can claim 100 % from Hull, 25 % from Hull interest and 25 % of Freight interest 22
Chapter 12 NMIP Damage.
Main rule damage 12-1 What is a damage? Vessel damage without rules relating to total loss being applicable. Right to repair Insurer liable for restoring the vessel to the condition it was prior to the occurrence, 12-1, 1 Duty to repair Liability arises as and when the repair costs are incurred ( indemnity insurance ), 12-1, 2 Deduction for improvements, 12-1, 3 Complete repairs unreasonable/impossible Claim for depreciation in value, 12-1, 4 24
Unrepaired damage 12-2 Can claim for unrepaired damage when the insurance period expires Based on estimated reduction in ship s market value at the time of expiry, not exceeding estimated cost of repairs. Total loss absorbs partial loss No cover for unrepaired damage if vessel becomes an actual or constructive total loss before policy expiry. The assured may transfer claims for known damage to a new owner 25
Excluding inadequate maintenance The insurer is not liable for costs incurred in renewing or repairing a part or parts of the hull, machinery or equipment which were in a defective condition as a result of wear and tear, corrosion, rottenness, inadequate maintenance and the like. 26
Excluding error in design If the damage is a result of error in design or faulty material, the insurer is not liable for the costs of renewing or repairing the part or parts of the hull, machinery or equipment which were not in proper condition, unless the part or parts in question had been approved by the classification society. 27
Example maintenance and error in design Stena Carisma ND 2002 s. 31 Built in 199X in aluminium. Shelving and frames were made of a different kind of alloy mixture. Later on it was discovered that the frames had corroded. It could be ascertained that the alloy was not able to stand salt water in the same way as the shelving aluminium. Was this excluded from cover? It was held that the aluminium frames were made in the ordinary way and the alloy was not different from others of the same kind. Ergo: not faulty material and thus not excluded. However, choosing an alloy that was sensitive to salt water was regarded as error in design and thus excluded (in that particular case). The damage was also held to amount to corrosion and thus excluded as inadequate maintenance. Obiter said that it might be covered in extreme cases 28
Not recoverable losses The insurer is not liable for costs of ordinary operation ( 12-5): (a) crew wages and maintenance and other ordinary expenses connected with the running of the ship during the period of repair, unless this is specially agreed, (b) expenses of shifting, storing and removal of cargo, (c) accommodation of passengers, 29
Nor for losses connected to ordinary maintenance or replacement (d) objects which must normally be replaced several times during the expected life of the ship and which and have been used for mooring, towing and the like, unless the loss is a consequence of the ship having sunk, or is attributable to collision, fire or theft. The same applies to tarpaulins, (e) zinc slabs, magnesium slabs and the like fitted for protection against corrosion, (f) loss due to lubricating oil, cooling water or feed water becoming contaminated, unless proper measures were taken as soon as possible after the assured, the master or the chief engineer became, or must be deemed to have become, aware of the contamination, and in any event not later than three months after one of them should have become aware of the contamination 30
Time and cost in repair The conflicting interests in choice of yard Prompt repair raises the costs (not an interest of insurers) Prolonged repairs leads to loss of hire or freight (not an interest of owners) The compromise The insurer liable for the cheapest alternative It will cost for the owner if he or she chooses the more expensive yard 31
Survey of damage 12-10 Survey is to take place Before any damage is repaired a representative of the assured and a representative of the insurer shall participate The representatives shall submit survey reports, in which they shall describe the damage and state their opinions as regards the probable cause of each individual item of damage, the time of its occurrence and the costs of repair. Remedies if the assured repaired without any survey being held or without notifying the insurer of such survey, the burden of proving that the damage is not attributable to causes not covered by the insurance 32
Temporary repairs 12-7 The insurer is liable for the costs of necessary temporary repairs when permanent repairs cannot be carried out at the place where the ship is located. If temporary repairs of the damaged part are carried out in other cases, the insurer is liable for costs up to the amount he saves through the postponement of the permanent repairs, or up to 20 % p.a. of the hull valuation for the time the assured saves, if the latter amount is higher. 33
Example on temporary repair Sokna is a small coaster trading on the west coast of Sweden and Norway. Her sum insured under H&M is 1 000 000. Temporary repairs are carried out on Sokna in Bergen on the rational that the Owner has booked a scheduled docking in Göteborg within a month. The price of the docking is 10 000 per day and the time calculated in dock was 2 days. A surveyor estimated that permanent repairs in Bergen would have cost 100 000 during 10 days. Permanent repairs was later fulfilled in Göteborg at the amount of 110 000. In total the work continued for 10 days, whereof owners work would have taken 6 days and casualty work 9 days if made separately. 34
Example on temporary repair (cont.) Costs Insurer Owner 1. Temporary repair 2 740 17 260 No savings! Repair more expensive in Göteborg. Actual time saved: 2 days in Bergen, add 3 days in Göteborg (9 days average repair less 6 days owners work) compared with 10 days, gives 5 days saved 1 000 000 * 20 % * 5 days/360 = 2. Permanent repair 110 000 17 260 Total 112 740 Deductible -50 000 50 000 Grand total 62 740 67 260 35
Invitation to tender 12-11 A right of the insurer The insurer may demand that tenders be obtained from the repair yards of his choice. If the assured does not obtain such tenders, the insurer may do so. If the time taken to obtain tenders exceeds ten days as from the date the invitation to submit tenders is sent out, the insurer is liable to compensate the loss of time at the rate of 20% p.a. of the hull valuation during the excess period. 36
Removal cost 12-13 The insurer is liable for the costs of moving the ship to the repair yard, wages and maintenance for necessary crew, and bunkers and similar direct expenses all if it has connection with the running of the ship during the period of time involved. If the removal results in costs savings for the assured, a corresponding amount shall be deducted. 37
Choice of repair yard 12-12 The assured decides which yard shall be used Limitation of the insurer s liability for the costs of repairs and the removal Limit An amount corresponding to the amount that would have been recoverable if the lowest adjusted tender had been accepted, with an addition of 20% p.a. of the hull valuation for the time the assured saves by not choosing that tender 38
Example on repair yard Assessed value 1 000 Tender yard 1 Tender yard 2 Repair cost 100 Repair cost 90 Removal cost 5 105 Removal cost 20 110 55 days 50 days The insurer pays Repair yard 1 105 with an additional of 20 % *1 000 * 5/360 = 2,777 Total 107,8 39
Cost incurred in expediting repairs Limit loss of time of the assured if he expedites repairs by extraordinary measures Mobile team Overtime payment Spare parts by flight Another ship taken out from dock The insurer s liability for the costs thereby incurred is limited to 20 % p.a. of the hull valuation for the time saved by the assured. Deciding factors Total time period of repairs (both casualty and other) Compared with the actual time the ship lies idle 40
Apportionment of common expenses 12-14 NMIP 1. If expenses have been incurred which are common to repair work for which the insurer is liable and work which is not covered by the insurance, these expenses shall be apportioned on the basis of the cost of each class of work 2. However, common expenses which depend on the length of the period of repairs shall be apportioned on the basis of the time that the recoverable and the non-recoverable work would have required if the two classes of work had been carried out separately 41
Apportionment of common expenses over cost Expenses Tank cleaning Removal Ca Ow x Wages/maint. x Bunkers x Towage x Towage certificate x Pilotage to repair quay x Tuggage - x Overtime in and out x 42
Apportionment of common expenses over cost (cont.) Expenses Port disbursements Harbor dues Customs Pilotage in/out Tuggage in/out Telephone agent/sup.in. Agency fee Gas freeing certifi. Fire watch Fire line Gangway Class society Ca Ow x x x x x x x x x x x Expenses Ca Ow Port disbursements Adj radio directed x Crane rental x Heaters in enginge room x Adjusting compass x Shifting boatmen x Garbage galley x Cooling water x Watchmen gangway x Fresh water x Telephone ½ ½ Electr. connect/heat ½ ½ Owners superint x 43
Apportionment of common expenses to be divided over repair time Ballastwater Pilotage to/from dry-dock Tuggage to/from dry-dock Boatmen Dock master In and out of dry-dock Standing in dry-dock Adjusting of blocks Lightning conductor Coke-fires in dry-dock Etc. 44
Example on apportionment of common expenses Casualty 50 000 Dry-dock cost 30 000 Owners 35 000 Port disbursement 25 000 Days in dry-dock Casualty 15 Owners 10 Σ 25 Common expenses over time Casualty 15/25 * 30 000 = 18 000 Owners 10/25 * 30 000 = 12 000 Common expenses over cost Casualty (50 000 + 18 000) * 25 000 /115 000 = 14 783 Owners (35 000 + 12 000) * 25 000/115 000 = 10 217 Insurer to pay 82 783 and Owner s part 57 217 45
Example on settelment Vessel Ingo with insurance sum 10 000 000 Ingo encountered shallow waters and received heavy damages to the propeller. Survey showed that it had to be replaced by a new. The costs for this was calculated thus. New propeller 100 000 Work excl. owner s part of common expenses 60 000 Owners superintend (casualty) 5 000 Total claim 165 000 Scrap value of the old propeller was 20 000 Calculate the insurer liability. 46
Example on settlement (cont.) Costs Insurer Owner New propeller 100 000 Work 60 000 Owners superintend. 5 000 Total 165 000 Deductible -50 000 50 000 Grand total 115 000 50 000 Return on sale of old propeller 20 000. Insurer has paid 110/160 of the new one and proportioned Insurer 110/160 * 20 000 or -13 750 Owner 50/160 * 20 000 or - 6 250 Total 101 250 43 750 ( 5-19 cf. 5-13 para. 2) 47
Chapter 13 NMIP Collision and striking
The insured event The insurer is liable for liability imposed on the assured for loss which is a result of collision or striking by the ship, its accessories, equipment or cargo, or by a tug used by the ship. NB! Liability Collision or striking 49
The insurer is not liable for a) liability arising while the ship is engaged in towing, or caused by the towage, Cover if it takes place in connection with a salvage operation ( 3-12, subparagraph 2) b) liability for personal injury or loss of life, c) other loss suffered by passengers or crew on the insured ship, d) liability for damage to or loss of cargo, other effects on board the insured ship, or equipment which the ship uses, e) liability to charterers or others who have an interest in the insured ship 50
The insurer is not liable for f) liability for pollution damage and damage resulting from fire or explosion caused by oil or other liquid or volatile substances, and contamination damage caused by radioactive substances. However, if the insured ship has collided with another ship, liability for such damage to the other ship with equipment and cargo is covered, g) liability for loss caused by cargo or bunkers after grounding or striking against ice, 51
The insurer is not liable for h) liability for loss caused by the ship s use of anchor, mooring and towing gear, loading and discharging appliances, gangways and the like, and liability for damage to or loss of these objects, i) liability for removal of the wreck of the insured ship and for obstructions to traffic created by the insured ship, j) refund of amounts which a third party has paid by way of compensation for loss as mentioned under letters a) to i) above. 52
Single or cross liability Single or cross liability does not normally matter Two cases were it matters: Single Liability when Limitation is calculated (sec. 9:2 SMC) Cross Liability when the Hull Underwriter s Liability for collision liability is settled 14-4 53
Example on Single and Cross liability Collision between A and B. Equally to blame. Sustained damage A = 100 B = 200 Limitation A = 20 Adjust the external collision settlement as well as the internal insurance settlement for A. 54
Example on Single and Cross liability Collision settlement (external) A to bear: 50 % of total losses (100+200) 150 Less A s own damages -100 Balance 50 Limitation applied 20 Reduction in balance due to limitation 30 A pays to B limitation amount 20 55
Example on Single and Cross liability insurance settlement (internal) Costs Insurer Owner A s own losses Damage 100 Less deductible -5 5 Liability 50 % of B s damage 100 Less reduction in balance due to limitation -30 Recovers from B 50 % of own damage -47,5-2,5 Total 117,5 2,5 56
Deductibles
Particular average deductible 12-18 For each casualty the amount stated in the policy shall be deducted. Damage caused by heavy weather or navigating in ice which has occurred during the period between departure from one port and arrival at the next one shall be regarded as a single casualty. Costs in connection with the claims settlement, cf. 4-5, and loss through measures to avert or minimise the loss, see 4-7 to 4-12, are recoverable without any deductible. 58
Deduction for ice and machinery 12-15. Icedamagedeductions Damage due to striking against or contact with ice - excluding collision with icebergs on the open sea - is recoverable subject to a deduction of one fourth. 12-16. Machinery damage deductions Damage to machinery and accessories and to pipelines and electrical cables outside the machinery is recoverable subject to deductions as set out in the policy. To this shall be added the deductible referred to in 12-18, subparagraph 1 for particular damage. However, no machinery damage deduction shall be made if the damage is a consequence of: (a) the ship having been involved in a collision or striking, (b) the engine room having been completely or partly flooded, (c) a fire or explosion originating outside the engine room. 59
Collision deductible 13-4 For each casualty the amount stated in the policy shall be deducted. Litigation costs, cf. 4-4, costs in connection with the claims settlement, cf. 4-5, and loss caused by measures to avert or minimise the loss, cf. 4-7 to 4-12, are recoverable without any deductible. 60
Compensation without deduction No deduction is applicable to total loss Recoverable without deductions in accordance with 12-15 (ice) and 12-16 (machinery) are: a) loss recoverable under 12-1, subparagraph 4 (depreciation in value), 12-11, subparagraph 2 (time exceeding tender), and 12-13 (removal of ship), b) unused spare parts that are damaged or lost, c) temporary repairs 61
Example on engine breakdown and Assumed General Average On a ballast voyage from Turku to Trondheim in order to loading oil the m/t Hyvä had a black out in the main engine on the Baltic Sea. After some prelimary repair by the crew the ship could return to Turku. It was decided that permanent repairs should be conducted in Turku due to the safety of the ship on the North sea. After permanent repairs the ship fulfilled the voyage. The owners filed the following claim with the insurers. Permanent repairs Turku 30 000 Wages and maint. in/out Turku 15 000 Wages and maint. during repair 10 000 Bunkers in/out Turku 8 000 Bunkers during repair 3 000 Port fees in/out Turku 12 000 Port charges Turku 10 000 Class survey perm. Repair 5 000 93 000 What shall the insurer pay? 62
Example on engine breakdown and Assumed General Average (cont.) Costs AGA PA OWN Permanent repairs Turku 30 000 Wages and maint. in/out Turku 15 000 Wages and maint. during repair 10 000 Bunkers in/out Turku 8 000 Bunkers during repair 3 000 Port fees in/out Turku 12 000 Port charges Turku 10 000 Class survey perm. Repair 5 000 48 000 35 000 10 000 Deductible -35 000 35 000 Total 48 000 0 45 000 Insurer pays 48 000 according to 4-11 63