COVID-19: The Impact on Marine Protection and Indemnity Coverage

 

COVID-19: The Impact on Marine Protection and Indemnity Coverage

Amid the tragic human impact of COVID-19 and governments' restrictions on travel and commerce, businesses are feeling the economic consequences of the pandemic.

COVID-19 has reshaped the marine sector's risk landscape, and raised questions about shipowners' protection and indemnity (P&I) coverage and how this may be triggered.

The rules of the International Group (IG) Clubs are very similar, so there should be little difference in the P&I coverage they provide. But COVID-19 has highlighted some discrepancies, particularly relating to quarantine.

Giving definitive answers on all aspects of cover is not possible, as many claims will be subject to Club boards' discretion. This will leave many shipowners in a difficult position, with one Club possibly covering a risk that is rejected by another.

For this commentary, we have referenced the rules of the UK Club, although we strongly recommend that you check the rules of your specific Club(s) when considering any of the issues referenced below[note 1].

As an "infectious disease," COVID-19 is most likely to trigger claims under the following aspects of cover:

• Liability to persons other than seamen (including passengers).
• Illness and death of seamen.
• Repatriation and substitute expenses.
• Loss of or damage to the effects of seamen and other persons on board.
• Diversion expenses.
• Quarantine expenses.
• Fines.
• Cargo-related claims.

There may also be claims that give rise to enquiry expenses, "expenses incidental to the operation of ships," sue and labor costs, and expenses incurred “at the direction of” the Club. Some of these claims will, by their very nature, be entirely discretionary.

It is worth considering some specific examples:

Liability to Persons Other Than Seamen

Liability to pay damages or compensation to persons other than seamen owing to COVID-19 seems most likely to arise in respect of passengers, although cover will also exist where a shipowner is deemed to have a liability to, say, shore workers (such as stevedores), state personnel, and third-party surveyors attending the ship.

Passenger risk has received much media coverage and several Clubs are handling significant claims. Liability to passengers covers illness and death claims, and also extends to damages and compensation to passengers on board (our emphasis) "as a consequence of a casualty to that ship." A casualty is defined in the UK Club rules, inter alia, as "a threat to the life, health or safety of passengers in general." A COVID-19 outbreak clearly falls under that definition and would therefore, in our opinion, fall under Club cover. Cover can also include "the cost of forwarding passengers to destination or return to port of embarkation" and "maintenance of passengers ashore."

Illness and Death of Seamen

Liability to seamen again has illness or death triggers, and is likely to be defined under a contract of employment, although liability could additionally arise in tort. Cover for seamen should also extend to repatriation and substitution expenses arising from a statutory obligation, to which COVID-19 could clearly give rise. Claims for mental injury might also arise as a result of an outbreak of COVID-19 — especially after an extended period of quarantine (this applies equally to passengers, seamen, and "others").

Loss of or Damage to the Effects of Seamen and Other Persons on Board

Liability to pay compensation for the loss or damage to the "effects of seamen or others" could result from quarantine and disinfection — although these costs may equally be recoverable under the quarantine rule itself (see below).

Diversion Expenses

Diversion expenses (like quarantine expenses) do not require a liability on the part of the shipowner to trigger cover. These are covered where they represent the net loss to the member above what would otherwise have been incurred in respect of fuel, insurance, wages, and so on, and where they are incurred "solely for the purpose of securing treatment for an injured or sick person..." Some vessels (mainly passenger) appear to have been diverted for this purpose, but it could equally happen with cargo vessels.

Quarantine Expenses

How cover for quarantine expenses is triggered varies between the Clubs, with the UK Club covering "additional expenses incurred...as a direct consequence of an outbreak of infectious disease...including quarantine and disinfection expenses," without any requirement for a formal quarantine order. Other Clubs' rules, however, require one. In practice, this should not be a problem, as it seems unlikely a ship would be quarantined due to COVID-19 without the close attention of a government authority. As mentioned above, the disposal of crew or passenger effects could potentially be a recoverable cost under the quarantine rule.

Fines

Shipowners could be subject to fines because of COVID-19 — for example, for breaches of the Maritime Labour Convention regulations on crew changes, or allegations of misdeclarations about the true health of all the crew/passengers on board. Except in a limited number of specified circumstances, P&I cover for fines is discretionary, so careful examination of the rules and circumstances will be necessary in each case.

For most heads of claim, P&I cover requires that the shipowner has a legal liability to pay a claim — quarantine being an exception. All Clubs will therefore expect shipowners to preserve all potential defenses, both as regards liability and quantum, and keep accurate records of expenses incurred and their decision-making processes. In respect of illness and death claims, the Clubs have a wealth of experience from which to assess whether it is best to defend or settle a claim and, if settling, how much to pay. It is therefore important always to follow their advice.

Cargo-Related Claims

COVID-19 is causing severe imbalances in world trade and shipowners (especially in the liner trades) are increasingly facing port congestion, requiring containerized cargos to be offloaded short of their ultimately intended port of delivery and stored pending delivery at a later date. Although this is a normal feature of the container trades, much-longer-than-usual delays are anticipated, making it more difficult to assess what constitutes reasonable dispatch.

This may result in a technical deviation under the contract of carriage, the potential loss of Hague-Visby (or similar) defenses, and the risk of a breach of Club cover. With banks physically closed in more than a third of the world, there is also the problem of Bills of Lading not being processed by the banking system, resulting in pressure on shipowners to release cargo without production of the Bill of Lading. Any resultant claims will generally only be covered by the Clubs at the discretion of their boards of directors.

Finally, while it is inevitable that some of the extra expenditure falling on shipowners is simply the enhanced cost of operating vessels (albeit in these most unusual circumstances), a considerable amount of additional expense will be incurred in order to mitigate claims that would otherwise fall under P&I Club cover. In these unprecedented times, we believe strongly it is incumbent on the P&I Clubs to do all they can to exercise their discretion in favor of their members.

Navigating Uncertainty

So how can a shipowner best cope in a sea of uncertainty?

The Clubs have built a reputation for providing quick and clear advice and, in all the situations described above, they should be consulted as to the best course of action and involved as much as possible in the decision-making process. This is especially true where potential claims may be at the board’s discretion. Even if a Club cannot say what will and what will not be covered, it can advise on the best reasonable course of action and highlight any actions that might risk prejudicing a claim.

The IG has created a COVID-19 sub-committee to consider the issues arising. 

COVID-19: The Impact on Marine Protection and Indemnity Coverage Video :

Does ICC (A) clauses cover cargo claims for delays due to COVID-19..??

Does ICC (A) clauses cover cargo claims for delays due to COVID-19..??

As we have all seen, COVID-19 is causing severe imbalances in world trade which is affecting everyone, whether it is an exporter, importer, shipping line, shipowner, freight forwarder, trucker, or a spaza shop around the corner..

While ships are moving, ports are discharging and loading containers, nothing is working at a 100% capacity in most of the countries around the world as yet..

Ships are facing port congestion resulting in blank sailings, containers are stuck in storage at ports, terminals, and depots around the world for later deliveries creating longer delays than anticipated and also causing yard space congestion..

Majority of global trade is still on paper-based documentation and with many banks around the world still unable to function fully, important documents such as bills of lading are not being negotiated and released to the customer which means goods could be stuck at various points.

Of course, a lot of the shipping lines have and are doing their best in providing some out of the box solutions such as storage in transit, release of cargo on LOI without bill of lading etc, there are still issues relating to timely releases..

All these issues have one big repercussion for trade and that is “cargo claims”..

In general, for all sea freight shipments, it is in the interest of the parties involved in the trade that the cargo is covered by a marine cargo insurance policy..

Marine cargo policies cover goods in transit and covers the insured against losses and/or damages due to external causes during transportation.. For the policy to be active, the goods must actually be in transit, having left the origin on its way to the final destination..

Institute Cargo Clauses (ICC) is a set of 3 clauses (A, B & C) commonly included in a marine insurance policy.. Each of these clauses vary in their level of coverage and items covered and naturally the insurance premiums are proportionate to the cover chosen..

• Institute Cargo Clause A: is considered to have the widest marine insurance coverage with the highest premium ;
• Institute Cargo Clause B: is a slightly restrictive cover with a moderate premium ;
• Institute Cargo Clause C: is the most restrictive in terms of its coverage and comes with a low premium

Bearing in mind the wide coverage of ICC (A), there was a question raised on this site 

“Does ICC (A) clauses cover cargo claims due to COVID-19 delays..??” 

Traders who deal in time-sensitive cargoes should have had special clauses inserted in their policy. However, traders, in general, would have left the clauses as is with no changes as the COVID-19 took the world by surprise.

When looking into any claim in terms of a policy, it is necessary to read the wording of the policy taking into account the simple everyday meaning of the words.  It is of no use to try to put some magical words or interpretations into the words.

ICC (A) cargo claims COVID-19

Let us look at a simple claim to see how its settlement will be affected by the Covid-19 pandemic.

As mentioned above ICC (A) clauses is considered to be the highest marine insurance cover for cargo because all risks are covered. But remember, “All risks” are not really “All Risks” because for a claim to be considered, there must what is called a fortuity which means “an actual happening or occurrence”.

With the Covid-19 virus, there has not been any fortuity in that the cargo has been delayed albeit beyond the control of the insured.

ICC (A) states that the policy covers all risks of loss or damage to the subject-matter insured except as excluded in terms of clauses 4, 5, 6 and 7.

To take the claim to the next stage, let us look at the exclusions and Clause 4.5 in particular, which states

4.5 loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)

The only expenses payable are those falling under clause 2 which refers to general average and salvage charges.

The next stage is to look at the duration, or, transit clause.

As per the Transit Clause (Clause 8 of ICC (A) 2009),

this insurance attaches from the time the subject-matter insured is first moved in the warehouse or at the place of storage (at the place named in the contract of insurance) for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit, continues during the ordinary course of transit and terminates

8.1.1 on completion of unloading from the carrying vehicle or other conveyance in or at the final warehouse or place of storage at the destination named in the contract of insurance,

8.1.2 on completion of unloading from the carrying vehicle or other conveyance in or at any other warehouse or place of storage, whether prior to or at the destination named in the contract of insurance, which the Assured or their employees elect to use either for storage other than in the ordinary course of transit or for allocation or distribution, or

8.1.3 when the Assured or their employees elect to use any carrying vehicle or other conveyance or any container for storage other than in the ordinary course of transit or

8.1.4 on the expiry of 60 days after completion of discharge overside of the subject-matter insured from the oversea vessel at the final port of discharge, whichever shall first occur.

Meaning, as per 8.1.4 above, the insurance cover shall terminate after 60 days of the goods being discharged at the place mentioned in the insurance cover. So if the delays due to COVID-19 is more than 60 days from discharge, the insurance cover lapses.

Clause 8.3 states that

the insurance shall remain in force subject to clauses 8.1.1 to 8.1.4 and provisions of clause 9 when the delay is beyond the control of the Assured.

These clauses refer to when the cargo is still in the care and custody of the seagoing vessel.  The delay to which the virus is the cause would in all probability be after discharge from the seagoing vessel.

Clause 9 refers to the contract of carriage and once again shall terminate unless prompt notice is given to the insurers and request for continuation be requested.  This period is limited to 60 days after arrival at the port or place where the extension is requested.

Taking all of the above points into consideration it becomes evident that any loss would fall entirely under the exclusion of delay even though the policy may have been extended as permitted by the Assured.

Therefore, because delay is excluded, there would be no claim in terms of the policy on delays caused by COVID-19.

Does ICC (A) clauses cover cargo claims for delays due to COVID-19 Video :

INSTITUTE CARGO - STRIKES CLAUSES

INSTITUTE CARGO - STRIKES CLAUSES


RISKS COVERED
1. - Risks Clause   

1 This insurance covers, except as provided in Clauses 3 and 4 below, loss of or damage to the subject-matter insured caused by

1.1 strikers, locked-out workmen, or persons taking part in labour disturbances, riots or civil commotions

1.2 any terrorist or any person acting from a political motive.
2. - General Average Clause   

2 This insurance covers general average and salvage charges, adjusted or determined according to the contract of affreightment and/or the governing law and practice, incurred to avoid or in connection with the avoidance of loss from a risk covered under these clauses.

EXCLUSIONS
3. - General Exclusions Clause   

3 In no case shall this insurance cover

3.1 loss damage or expense attributable to wilful misconduct of the Assured

3.2 ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject-matter insured

3.3 loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured (for the purpose of this Clause 3.3 "packing" shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants)

3.4 loss damage or expense caused by inherent vice or nature of the subject-matter insured

3.5 loss damage or expense proximately caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above)

3.6 loss damage or expense arising from insolvency or financial default of the owners managers charterers or operators of the vessel

3.7 loss damage or expense arising from the absence shortage or withholding of labour of any description whatsoever resulting from any strike, lockout, labour disturbance, riot or civil commotion

3.8 any claim based upon loss of or frustration of the voyage or adventure

3.9 loss damage or expense arising from the use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter

3.10 loss damage or expense caused by war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power.
4. - Unseaworthiness and Unfitness Exclusion Clause   

4.1 In no case shall this insurance cover loss damage or expense arising from unseaworthiness of vessel or craft, unfitness of vessel craft conveyance container or liftvan for the safe carriage of the subject-matter insured, where the Assured or their servants are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein.

4.2 The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness.

Marine Cargo Insurance Practice

Marine Cargo Insurance Practice

The Marine Insurance Act includes, as a schedule, a standard policy (known as the "SG form"), which parties were at liberty to use if they wished. Because each term in the policy had been tested through at least two centuries of judicial precedent, the policy was extremely thorough. However, it was also expressed in rather archaic terms. In 1991, the London market produced a new standard policy wording known as the MAR 91 form and using the Institute Clauses. The MAR form is simply a general statement of insurance; the Institute Clauses are used to set out the detail of the insurance cover. In practice, the policy document usually consists of the MAR form used as a cover, with the Clauses stapled to the inside. Typically each clause will be stamped, with the stamp overlapping both onto the inside cover and to other clauses; this practice is used to avoid the substitution or removal of clauses.

Because marine insurance is typically underwritten on a subscription basis, the MAR form begins: We, the Underwriters, agree to bind ourselves each for his own part and not one for another [...]. In legal terms, liability under the policy is several and not joint, i.e., the underwriters are all liable together, but only for their share or proportion of the risk. If one underwriter should default, the remainder are not liable to pick his share of the claim.

Typically, marine insurance is split between the vessels and the cargo. Insurance of the vessels is generally known as "Hull and Machinery" (H&M). A more restricted form of cover is "Total Loss Only" (TLO), generally used as a reinsurance, which only covers the total loss of the vessel and not any partial loss.

Cover may be on either a "voyage" or "time" basis. The "voyage" basis covers transit between the ports set out in the policy; the "time" basis covers a period of time, typically one year, and is more common.

Origins of formal marine insurance

Origins of formal marine insurance

Maritime insurance was the earliest well-developed kind of insurance, with origins in the Greek and Roman maritime loan. Separate marine insurance contracts were developed in Genoa and other Italian cities in the fourteenth century and spread to northern Europe. Premiums varied with intuitive estimates of the variable risk from seasons and pirates.

The modern origins of marine insurance law in English law were in the law merchant, with the establishment in England in 1601 of a specialized chamber of assurance separate from the other Courts. Lord Mansfield, Lord Chief Justice in the mid-eighteenth century, began the merging of law merchant and common law principles. The establishment of Lloyd's of London, competitor insurance companies, a developing infrastructure of specialists (such as shipbrokers, admiralty lawyers, bankers, surveyors, loss adjusters, general average adjusters, et al), and the growth of the British Empire gave English law a prominence in this area which it largely maintains and forms the basis of almost all modern practice. The growth of the London insurance market led to the standardization of policies and judicial precedent further developed marine insurance law. In 1906 the Marine Insurance Act was passed which codified the previous common law; it is both an extremely thorough and concise piece of work. Although the title of the Act refers to marine insurance, the general principles have been applied to all non-life insurance.

In the 19th century, Lloyd's and the Institute of London Underwriters (a grouping of London company insurers) developed between them standardized clauses for the use of marine insurance, and these have been maintained since. These are known as the Institute Clauses because the Institute covered the cost of their publication.

Within the overall guidance of the Marine Insurance Act and the Institute Clauses parties retain a considerable freedom to contract between themselves.

Marine insurance is the oldest type of insurance. Out of it grew non-marine insurance and reinsurance. It traditionally formed the majority of business underwritten at Lloyd's. Nowadays, Marine insurance is often grouped with Aviation and Transit (cargo) risks, and in this form is known by the acronym "MAT"..

Institute Cargo Clauses "C"

Institute Cargo Clauses "C"

Cover loss of or damage to the subject matter insured, "reasonably attributable to:
" 1. Fire or explosion.
2. Vessel of craft being stranded, grounded, sunk or capsized.
3. Overturning or derailment of land conveyance.
4. Collision or contact of vessel, craft or conveyance with any external object other than water.
5. Discharge of cargo at a port of distress.
The insurance also covers loss or of damage to the subject matter insured caused by:
1. General average sacrifice.
2. Jettison. To sum up, the "C" clauses provide major casualty coverage during the land, air or sea transit.

HISTORY OF MARINE INSURANCE

HISTORY OF MARINE INSURANCE 

Contrary to popular belief, Lloyds' of London was not the first group of people to offer insurance for maritime commerce. The first form of marine insurance dates back to the year 3000 BC when Chinese merchants dispersed their shipments amongst several vessels so as to abridge the possibility of damage to the product(s). The earliest account of insurance came in the form of bottomry, a monetary payment that protects traders from debt if merchandise is lost or damaged. Another form of early insurance was the general average. During cargo shipments in 916 BC, a merchant would accompany his cargo to see that it was not jettisoned, or voluntarily thrown overboard by the crewmen in times of a storm or sinkage. To guard against this mutual interest of safety and quarreling amongst merchants, the Rhodians initiated the general average, which ideally meant that a person would be compensated through pro rata contributions of other merchants if their goods were jettisoned during shipment.

From the 11th century to 18th century, a few additional breakthroughs occurred in marine insurance. In 1132, the Danish began to reimburse those who experienced loss at sea. In 1255, insurance premiums were used for the first time as the Merchant State of Venice pooled these premiums to indemnify loss due to piratry, spoilage, or pillage. The first marine insurance policy was introduced in 1384 in an attempt to cover bales of fabric traveling to Savona from Pisa, Italy. Within the next century, merchants from Lombard began the first insurance practice in London. Finally, in 1688, Lloyd's of London, named after Edward Lloyd, began the risky business of insurance underwriting and have grown to become the largest marine insurance underwriters in the world. The Marine Insurance Act of 1906 was then proposed and initiated in an attempt to clarify and set forth the regualtions and policy variables associated with marine insurance agreements.