A Comparative Analysis Regarding Coverage

Leonidas Villagran
[email protected]

The London Market
London is recognized as the world’s leading market for marine insurance. Its development began in the 18th century with the Bubble Act (Royal Exchange and London Assurance Corporation Act of 1719), which prohibited companies from conducting marine insurance business unless authorized by an Act of Parliament or Royal Edict.

However, there was no provision in the law preventing individuals (natural persons) from developing this business. Thus, individual entrepreneurs began to seize this opportunity and met in various London coffeehouses to form alliances and provide joint coverage for claims. The most notable meeting place was Edward Lloyd’s coffeehouse, which gained considerable renown over time. Indeed, by the beginning of the 19th century, Lloyd’s of London was already dominant in the global market (Gurses, 2015).

Thus, to facilitate their business, individual insurers used special forms containing the clauses and conditions for coverage and exclusions in marine insurance contracts. In 1779, Lloyd’s issued the SG policy form, which was so influential that it was later included as the first annex to the Marine Insurance Act of 1905.

Furthermore, in the 19th century, the so-called Institute Clauses began to appear, promoted by the Institute of London Underwriters in conjunction with Lloyd’s.

Since their creation, the Institute Clauses have been updated to maintain competitiveness in the insurance market, to clarify concepts, and also to respond to changes in the law resulting from court decisions. In the 1980s, a new set of standard clauses was developed.

The tradition in the London market was, and continues to this day, to insure ships against specific risks.

Three types of hull and machinery coverage clauses are available in the London market: The Institute Hull Clauses (ITC), published in 1983 and 1995; and The International Hull Clauses (IHC), published in 2003. (Gurses, 2015) The application of these clauses is not mandatory, and they can now be found published on the IUA Library website. The IUA is the International Association of London Underwriters, an entity that replaced the ILU after a merger with the International Insurance and Reinsurance Association (LIRMA).

The Nordic Market
The Nordic Association of Marine Insurers (CEFOR), initially promoted by Norwegian companies and formerly known as the Central Union of Marine Insurers, is the leading organization for the development of standard rules in the Nordic marine insurance market.

The first Norwegian standard conditions, known as the Norwegian Marine Insurance Scheme, appeared in 1871 under the auspices of the renowned classification society DNV Det Norske Veritas. It is well known that from the outset, these schemes, with the exception of the first, were developed based on agreements with market participants. In 2001, DNV transferred its intellectual property rights to the Scheme to CEFOR. The scheme’s latest version was released in 2010. Following this, CEFOR promoted the creation of the Nordic Scheme (Lund, 2011).

In 2010, the Shipowners’ Associations of Denmark, Finland, Norway, and Sweden signed an agreement with CEFOR to develop the Nordic Marine Insurance Scheme. The Plan was approved and made available in 2013 under the name The Nordic Marine Insurance Plan 2013, based on the Norwegian Marine Insurance Plan of 1996, Version 2010. In accordance with the agreement, the Plan is updated every three years. The current version is 2023. The Plan’s clauses are not mandatory. The difference with the clauses in the London market is that the Nordic Plan is the result of a formal agreement between shipowners and insurers. (Hammer, 2014) (Cefor, The Nordic Plan, 2016). The Plan is considered unique compared to other non-Nordic market conditions. (Lund, 2011)

Essentially, the main difference with the London market is that the Nordic Plan establishes the principle of all-risk coverage as the standard. Once a loss occurs, it is the insurer’s responsibility to prove that an exception to the coverage should apply. The all-risk principle is at the heart of the Plan (Nordic Association of Marine Insurers, 2013).

Coverage Implications
Taking as an example a vessel that collides with a ferry and a slipway, causing damage to both the hull and cargo of the vessel causing the collision, as well as to the vessel being struck and the slipway, there will be different coverage considerations between the London and Nordic markets for both shipowners and cargo owners.

Damage to the Vessel Caused by a Collision
If the vessel that collides with another is insured in the London market under the standard clauses of the Institute Hull Clauses or the International Hull Clauses, partial damage to the vessel is covered, considering that a collision is a peril of the sea. Essentially, a collision is considered contact with another vessel. (Donner, Liljedahl, & Mukherjee, 2015)

It should be noted that in this particular case, the vessel also impacts the dock ramp, and the hull damage may have resulted from this incident. Under English law, this is not considered a collision because it is not contact with another vessel, but the loss is covered under the standard clauses of the Institute Hull Clauses or the International Hull Clauses as contact with land transport, docks, or port equipment installations. Consequently, any damage to the insured vessel resulting from a collision or contact with a port installation is covered by these clauses.

However, as a preliminary step, the insurer will verify whether the guarantees have been fulfilled, as well as compliance with any conditions included in the policy.

The insurer in the London market will also verify the existence of a causal link that determines the proximate cause of the loss, which, according to English law, is the closest in efficiency, not time. If the proximate cause relates to negligent conduct on the part of the insured, it is highly unlikely that there will be any recovery.

Furthermore, if the incident results from “boiler explosion, shaft failure, or any latent defect in the machinery or hull,” “negligence on the part of repair shops or charterers (bearing in mind that such repair shops or charterers are not insured),” or “malice on the part of the captains, officers, or crew,” then the Inchmaree Clause applies, and the loss must be paid.

In this respect, 50% of the costs of repairing or replacing such boilers or latent defects are covered under the International Hull Clauses, but an optional clause called Additional Perils is included, providing 100% coverage of these costs.

Under the Nordic Plan, the all-risk principle applies. The traditional Clause 2-8 of the current version of the Plan establishes as a general rule that “marine perils insurance covers all perils to which the insured interest is exposed.”

The clause specifies some exceptions to this rule relating to perils of War, intervention by a state power, insolvency, and perils related to the RACE II clause, which covers nuclear and radioactive materials not used for peaceful purposes, as well as chemical, biological, and electromagnetic weapons.

On the other hand, the insured under the Nordic Plan may appear prima facie to be adequately covered, but this can change if negligence on the part of the insured is verified, resulting in a violation of safety regulations directly connected to the loss (Joiner, Willumsem, & Faerden, 2015).

Shipowners may have insured the vessel against freight risks through English clauses known as Institute Time Clauses Freight or Institute Voyage Clauses Freight. These clauses operate under the same regime as those relating to hull and machinery. Consequently, when a hull and machinery insured risk occurs and causes damage, it is highly likely that the damage will be covered and the insured will be compensated.

Regarding loss of business or freight insurance, Norway is known to be the prominent market with the most favorable conditions. of the Nordic Plan. The London market limited the issuance of this coverage in the 1980s but resumed coverage as part of a commercial package. The London market’s loss of business coverage is based on ABS conditions (Silver, 2012).

In contrast, according to Chapter 16 of the Nordic Plan, the calculation of loss of business is based on lost time, stipulated in days, hours, and minutes (unlike the London market, which uses days). Clause 16-3 (Loss of Time After Repairs) states that the insured must be compensated until the vessel is ready to resume the voyage or activity according to the charter party in force at the time of the incident. If the vessel is engaged in liner service, then compensation is due when it is possible to resume that activity. If the vessel has a charter party in force before the incident, then the insured will be compensated when the vessel sails to the first port of call under that charter party.

Liabilities
If a collision results in damage to the struck vessel or to property on board, and liability arises, it should be noted that under English law, this is not considered a peril of the sea. However, the London clauses of the Institute Hull Clauses include what is known as the Running Down Clause (RDC), or collision liability clause, which provides coverage for liability in a collision with another vessel up to three-quarters of the damage, but not exceeding 75% of the insured vessel’s value.

Three-quarters of the legal costs previously authorized to contest liability or take action to limit liability are also covered by the RDC clause. The IHC clauses stipulate that insurers’ liability should not exceed 25% of the vessel’s insured value unless otherwise stipulated in writing.

The practice has been for shipowners to obtain P&I coverage for any loss not covered by their hull and machinery policy.

Regarding liability arising from a collision or contact with any other object, such as the dock ramp, standard London market clauses do not provide coverage, which can be obtained through P&I Clubs. However, IHC clauses include an option to cover fixed or floating objects (FFO clause). This option must be expressly agreed upon in writing.

Furthermore, IHC clauses include another option that allows for 100% (4/4) coverage for collision or collision liability. In this case, the insurer’s liability limit will be the insured value of the vessel in relation to any collision.

Additional coverage refers to liability resulting from delay or loss of profits to the other vessel, fixed or floating object, or other property. In this case, it is possible to extend coverage for business losses to the ferry operators and the dock ramp.

Under the Freight Collision Clause, the insured is covered for any liability for freight and legal costs, both up to three-quarters, with a limit of 75% of the total insured value.

Cargo on the insured vessel is expressly excluded from coverage in the policy, as stated in the standard clauses of the Institute and the IHC. Third-party liability coverage generally corresponds to P&I Clubs.

Clause 4-13 of the Nordic Plan establishes that the general rule is that the insurer does not cover third-party liability, unless otherwise agreed.

Clause 13-1 includes the collision and collision clause. Therefore, the insurer will indemnify the insured for a loss resulting from the insured’s liability due to a collision or contact with the vessel, its fittings, equipment, or cargo, or with a tug used by the vessel. Similar to the London market, there is no coverage for cargo on board. P&I clubs are required to provide this coverage. The insurer’s primary responsibility is to establish the equivalent value of any loss, up to the insured amount. Litigation costs and expenses incurred in measures to prevent or minimize the loss are also recoverable. In this case, there is no deductible.

Cargo
Cargo in the London market must be insured for the cargo’s interests, based on the clauses known as the Cargo Institute Clauses (ICC). Versions (A), (B), and (C) are available. The current version was issued in 2009, and the previous one in 1982, which remains the most widely used, although the changes to it have not been substantial. (Donner, Liljedahl, & Mukherjee, 2015)

Version (A) provides all-risk coverage. Versions (B) and (C), in subclause 1.1.4, provide coverage when the loss is reasonably attributable to collision with other perils. Version (B), in subclause 1.2.3, also provides coverage for loss caused by the ingress of seawater or river water into the vessel, craft, hold, container, or storage location.

In the case of version (A), the insured will be indemnified due to the all-risk coverage. In the case of versions (B) and (C), the loss appears to be reasonably attributable to the collision, regardless of the proximate cause. Consequently, the insured under either London market clause shall be indemnified according to the insurance contract.

Additionally, insurers in both markets will verify that the insured complied with the condition of avoiding or minimizing damages and preserving subrogation rights.

In the case of the Nordic market, the Norwegian cargo clauses, known as the Conditions Relating to Insurance for the Carriage of Goods of 1995, version 2022, apply. These clauses are based on the Norwegian Cargo Insurance Plan of 1967, in which DNV also participated. In 1985, they were amended by a CEFOR initiative to align them with the Institute Cargo Clauses. Similar to the London market, the Norwegian cargo clauses offer three options. (A) All Risks, (B) Extended Transport Accident, and (C) Transport Accident.

In any case, the Norwegian cargo insurance conditions are similar to those in the London market. Since clause (A) relates to all risks, damage caused by collision with any other object is fully covered. Both clauses (B) and (C) provide coverage for collision with any object. This is the same as the insurance conditions in Sweden and Finland. (Donner, Liljedahl, & Mukherjee, 2015).

It can be concluded that under both the London and Nordic markets, the insured will be compensated for cargo damage resulting from a collision. In both markets, the existence of an insurable interest must be assessed beforehand.