Marine insurers and legal practitioners continue to face unresolved challenges two years after the outbreak of the Russia-Ukraine war. The conflict has caused significant disruption, particularly for the maritime industry.
Burkhard Fischer, the 2023-24 chairman of the Association of Average Adjusters, addressed these issues in his speech at the association’s annual conference in London on May 9, 2024.
In his talk titled “When War Risk Becomes War Reality,” Fischer discussed ongoing implications regarding coverage of vessels trapped in Ukrainian ports. He highlighted how the long history of war risk insurance has influenced current practices but left critical aspects open to interpretation.
In 2022, around 70 foreign-flagged vessels were detained in Ukrainian ports, surprising not only the vessels’ owners and charterers but also the war risk underwriters. Fischer, a director of Albatross Adjusters in Limassol, noted that despite its name, war risk cover was not designed for actual wartime risks.
Traditionally purchased at low premiums, it covered risks from the remnants of war in times of peace, such as derelict mines and bombs. However, during an active conflict or increased regional risk, a termination clause allows war underwriters to cancel with seven days’ notice, with reinstatement requiring a significantly higher premium.
The situation in Ukraine was unique as many vessels were in Ukrainian waters with basic war risk insurance, without needing to pay higher premiums. The potential liability for many constructive total loss (CTL) claims, with minimal additional premiums collected at the time of port closures, posed a challenge for war risk underwriters. Fischer suggested reconsidering the current low level of basic war premiums.
If war underwriters factored in the consequences of actual wars, Fischer noted that the premiums would be much higher. In the event of a global conflict, even substantial reserves might not cover the expected losses. This led to the concept of two premiums: the basic war cover for the entire insurance period, and an additional premium for high-risk areas. Risks during a world war are excluded.
Voyage charters typically do not allow shipowners to recover additional premiums from charterers, as these are covered by freight. Time charter cases have clarified that while basic war risk premiums are paid by the shipowner, any additional premiums should be paid by time charterers.
In February 2022, confusion arose between shipowners and charterers, with charterers arguing they had not agreed to trade vessels in a war risk area and should not be liable for premiums as high as 5% of the insured sum per week. Case law supported the charterers’ position.
Many charter parties were cancelled due to frustration, leaving owners of detained ships with a choice: not paying additional premiums, which would void war risk cover, or negotiating lower premiums by reducing the vessel’s insured sum.
Another issue was whether underwriters could levy an additional premium on an insured subject that was no longer at the shipowner's disposal. Fischer admitted difficulty in finding a satisfactory answer, suggesting there might be none.
Over time, the situation became clearer. Senior practitioners indicated that a vessel detained in Ukraine at the war's outbreak would be covered for a CTL claim for detainment after 12 months, even without additional premiums, though other war risks would not be covered.
Fischer mentioned that war cover could provide for a ship’s loss of earnings for up to 180 days. However, if a CTL claim for detainment was made, the Nordic Plan limited loss of hire payments to one month. If more than one month's hire had been paid, it should be deducted from total loss compensation.
Fischer suggested that owners deprived of their vessel’s earning capacity for 12 months should receive full loss of hire compensation.
Regarding interest on CTL claims after 12 months of detainment, Fischer explained that interest could be claimed from one month after notifying the insurer.
“But crucially a sub-clause clarifies that the payment of interest is subject to the assured proving that the vessel will not be recovered. This means that in the end, no interest on the CTL claim will be payable by the underwriters,” Fischer said.
Fischer highlighted some interesting total loss settlements for vessels detained in Ukraine. One company received a total loss settlement for a bulk carrier and the sum insured for disbursements. The ship was sold to a German company, with war underwriters reportedly receiving about 50% of the total loss sum, as the vessel’s market value exceeded the insured hull value by around 25%.
“The last time I checked, the vessel was still berthed at Mykolaiv, and apparently this was not the only vessel detained in Ukraine sold discreetly to a cash buyer within the process of settling a total loss claim, with the proceeds going to the insurers,” he said.
Fischer raised concerns about the role of war insurers in such back-to-back deals, noting that financially strong parties might speculate that the war or vessel detentions would end soon, without targeted attacks on blockaded ships. He pointed out that a vessel stuck in a Ukrainian port for several years would become outdated and under-maintained.
“In a situation like Ukraine, with 70 vessels detained, we should remember that each have their own particular story and despite the overarching events we must treat them as such,” Fischer said.
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