The COVID-19 crisis is affecting port calls, crew changes and freight markets as it appears to be impacting all shipowners to varying degrees. Further to this, the current pandemic and subsequent lockdown measures may have serious implications for time spent in a shipyard whilst a vessel is undergoing routine maintenance or repairs. The purpose of this briefing note is to explain the ways in which those policies written on different loss of hire conditions would respond under various circumstances and where the policy limitations lie.
The complexity of this global pandemic means many of the longterm effects to the shipping sector are still unknown. Nonetheless, when observing the effects from a short term perspective, it has been noted that vessel time off hire is undoubtedly of an immediate concern. The handling and adjusting of loss of hire claims has taken the spotlight and the shipping industry will need clarity on this.
Nordic Plan Conditions for Loss of Hire
It is difficult to provide commentary covering all possible situations, but, with the assistance of insurers, we will attempt to provide some general guidance in the coming weeks, though each claim will have to be evaluated based on its own merits.
Can Loss of Hire claims occur from delays caused by COVID-19?
The main rule under the Nordic Plan1 is that the loss of hire cover is triggered when there are damages to the vessel due to an insured peril, that in principle, would be covered under the vessel’s Hull & Machinery cover (as if nil deductible applied).
In other words, insurers are likely to be of the view delays resulting solely from the effects of COVID-19 where no damage has occurred to the vessel are not covered under a standard loss of hire insurance based on the Nordic Marine insurance Plan.
COVID-19 delays to otherwise recoverable repairs
A typical question asked by shipowners during the COVID-19 pandemic would be; ‘What happens if the time for repairing damage to a vessel is extended on account of delays caused by the effects of the COVID-19?’
In answer to this question, should the vessel experience delays/off-hire due to damage or breakdown which is agreed by insurers to be covered on Hull & Machinery, then the policy should respond.
However, should repairs be extended or delayed due to COVID-19, we are seeing insurers consider the extra time lost as being attributed to the pandemic and not the repair works themselves. This is resulting in insurers apportioning the loss accordingly and reducing compensation. The conditions are opaque on this point and each claim will have to be discussed separately and be determined based on its individual circumstances.
One factor that may be decisive when assessing this, is the foreseeability of the delays. It is therefore important to notify the potential for claims as early as possible; especially if there are damages or breakdowns under the current circumstances that may take longer than the deductible period to repair. If loss of hire insurers are informed at an early stage and the repair method/ location is coordinated with them, any foreseeable delays due to the pandemic can be flagged in advance. This could prove important if the loss is to be apportioned.
The commentary to the plan provided by Gard under the “General” section offers some guidance on how delays should be treated2 :
“If the loss has been caused by a combination of perils that are covered by the insurance and perils that are not covered, it must be apportioned proportionately between the perils insured against and the excluded perils according to the influence each of them must be assumed to have had on the occurrence and extent of the loss.“
“Concurrent causes in relation to loss-of-hire insurance may occur in a variety of situations, which may arise alone or in combination:”
“There may be a situation where causes that are not covered or causes that must be attributed to another insurance period may result in the prolongation of a loss of time or stay in a repair yard that is due to the occurrence of hull damage. Such causes may be external factors in the form, for instance, of a strike, extreme weather conditions or the detention of the ship due to its arrest and the like, or factors related to the ship itself, such as the discovery during repairs of unknown damage to the ship that is not covered by this insurance.”
“In this case, there will be no apportionment settlement for the underlying hull damage, and Cl. 2-13 must thus be applied directly to the loss-of-hire settlement. Consequently, the loss of time shall be apportioned over the individual perils according to the influence each of them must be assumed to have had on the occurrence and extent of the loss. Guidance has to be sought in the Commentary to Cl. 2-13 where criteria for weighing the different causes in different situations are given. One of the criteria will be how foreseeable the event prolonging the loss of time is when the ship is sent to the repair yard. In relation to Loss of Hire insurance, this criterion of foreseeability must be seen in connection with the rules regarding evaluation of tenders in Cl. 16-9, the assured’s duty to reduce the loss and general preventive considerations.”
Given the uncertain, complex and completely novel situation we are in, further responses to these issues will no doubt have to be developed during the coming months, if not years. We are not aware of a similar situation having arisen previously and therefore there isn’t a known practice that has developed in dealing with these claims which can be directly applied to this situation, although some guidance can be found in old court decisions concerning combination of marine and war perils dating as far back as WW2. Furthermore, Clause 2-13 opens for a discretionary evaluation of each cause involvement on the loss of hire, which would mean that the evaluations made by individual claims leaders and/or average adjusters (or, in worst case – hopefully not too often - arbitrators or courts) will influence on the amount allowed.
ABS Loss of Hire Conditions
The ABS wording would respond when there is a claim recoverable under the vessel’s Hull and Machinery (H&M) insurance (i.e. there is damage to the vessel caused by an insured peril). As with the Nordic Plan, where no damage to the vessel has occurred or delays in repair works are caused solely by COVID-19 issues, the ABS wording would not respond.
If the length of time it takes to repair damage is extended, either due to delays in receiving spare parts or service technicians, then we would expect that losses arising from this to be recoverable. As mentioned previously, we would recommend, more so now than ever, that underwriters are consulted as early as possible regarding potential repair locations to ensure all options are considered with the underwriter’s involvement.
Currently in the ABS wording there is no written guidance on how time might be apportioned, but in practice, time is apportioned in a similar manner to drydock dues in hull and machinery claims for example:
a). Where repairs on owner’s account which are immediately necessary to make the vessel seaworthy are executed concurrently with other repairs which underwriters are liable for; or
b). Where the repairs for which underwriters are liable are deferred until a routine dry-docking and are executed concurrently with repairs on owners account;
Then time would be apportioned equally between the shipowner and the underwriter.