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RISK IN CONTEXT

Ensuring Protection and Indemnity (P&I) Cover Responds to Collision Liability, Including Cyber

POSTED BY Mark Cracknell Thursday, 20 August 2020

Shipowners may wish to seek their protection and indemnity (P&I) club’s approval for their hull and machinery (H&M) policy’s collision and property damage clauses. 

This is because P&I club rules vary when it comes to cover for collision and fixed-and-floating-objects risks, and their approved terms for H&M policies’ insurance of these risks.

Shipowners with some or all of these risks insured under H&M, up to the sum insured under the H&M policy, may therefore wish to seek approval of their P&I club(s) in either of the following scenarios: 

  1. Where the standard collision or third-party property damage clauses under major H&M forms — such as Institute Time Clauses, the Nordic Plan, or Deutschen Transportversicherungs Verband — have been varied.
  2. Where they insure other than on one of these or similar commonly used H&M forms.

This will ensure the safe operation of P&I cover for excess (of the H&M sum insured) collision liability, and for collision and third-party risks not covered under H&M.

Additionally, H&M underwriters now insist on excluding cyber risks via clauses such as the London Market Association’s LMA5403 — effectively transferring this exposure to P&I cover, where in most respects there is no cyber exclusion.[1]

However, it is safer not to rely on the lack of an exclusion of cover as evidence that cover exists.

This is particularly true given there is no established precedent that LMA5403 or similar exclusions of cyber risk form part of a definition of “standard” H&M conditions, however widespread the use of such exclusions may have become.

Club Rules

The differences between what P&I clubs regard as approved H&M conditions are noteworthy.

North’s collision rule 19(10), for example, provides cover for: “Liabilities and costs incurred as a result of a collision between an entered ship and any other ship:

(a)  to the extent of the one-fourth (or such other proportion as may be applicable and agreed by the managers) of the member’s liabilities costs and expenses not recoverable under Lloyd’s Marine Policy with Institute Time Clauses (Hulls) 1.10.83, including collision liability clause, or under other forms of hull policies on the entered ship approved by the managers … .”

Skuld does not refer to any specific hull policy. Instead, it states at rule 30.1.2 that it will not cover “liabilities, losses, expenses, or costs … which are recoverable under the vessel’s hull policies or which, in the opinion of the association, would have been recoverable had the vessel been properly insured for her uncommitted market value on standard terms without deductible or franchise.” “Standard terms” is not defined.

Gard makes no reference to the terms of an entered ship’s hull policy, but states in the guidance notes to its rules that:

“Cover is available under rule 36 for collision liability incurred by the member only to the extent that such liability is not covered by his hull policies. This exclusion is based on the expectation and understanding that the member will follow normal prudent practice and ensure that the ship is fully insured for hull and machinery risks on ‘standard terms’….

“The association considers the hull policies which provide cover for hull and machinery risks on English, Scandinavian, American, German, Japanese, or French terms and conditions to be on ‘standard terms.’ Therefore, if the ship is insured for hull and machinery risks on other terms and conditions, the association will need to consider and evaluate such terms and conditions in order to determine whether they constitute ‘standard terms’ for the purposes of this rule.”

Removing Uncertainty

Given this mixed picture, shipowners insuring on terms not based on one of the major H&M forms, or where the collision or third-party property clauses under those forms have been amended, may wish to consider adding a clause to their P&I terms of entry, confirming that their hull terms are approved by their P&I club(s). 

All P&I club members may also wish to include a clause in their terms of entry, confirming cyber collision and fixed-and-floating-objects liabilities excluded under the H&M policy are covered by P&I.

[1] P&I club cover for collision and third-party property risks is always subject to P&I club rules, which exclude war and terrorism risks. 

And the excess P&I war cover provided by the P&I clubs is subject to a cyber exclusion, along similar lines to the cyber exclusions seen in most primary P&I war risks policies.

Marine  Marine