When war risk becomes war reality – Association of Average Adjusters warning

Marine insurers and their lawyers are grappling with unresolved challenges two years after the outbreak of the Russia-Ukraine war, according to the Association of Average Adjusters.

The conflict had brought chaos “not only in the lives of those in the region, but for the maritime industry trying to make sense of the shock,” said Burkhard Fischer, the body’s chairman, in an address to its annual conference.

Headlining his talk “When War Risk becomes War Reality”, Fischer spoke of implications “that may still develop further” regarding coverage of vessels trapped in Ukrainian ports.

The history of war risk insurance has shaped present attitudes but has left key aspects open to interpretation, Fischer said.

The detention in 2022 of some 70 foreign-flagged vessels in Ukrainian ports came as a surprise not only to the vessels’ owners and charterers but also to the war risk underwriters, the speech highlighted.

Fischer, also director of Cyprus-based Albatross Adjusters, emphasised that despite its name, war risk cover was not designed against the risks of a war already underway.

Commonly bought at a sometimes low premium, it was there to cover against the legacy of war in times of peace including derelict mines, bombs, and rusting weaponry, he warned.

Once a live war came into the equation, or even the perception of increased regional risk, a termination clause allowed war underwriters to cancel with seven days’ notice. Reinstating the cover then came with a hefty additional premium because of the additional risks of aggression, he highlighted.

The situation in Ukraine was unique, he explained, in that many vessels had entered its ports when they were covered by the basic war risk insurance with no need to reinstate the policy with a higher premium.

Being liable potentially for many CTL (constructive total loss) claims with hardly any additional premiums paid at the time of port closures was bad news for war risk underwriters, suggested Fischer, adding that the level of basic war premiums should be reconsidered.

If a war underwriter would take into consideration the consequences of actual wars the charge of premium would be correspondingly high. And if a war effectively became a world war, even an enormous reserve would not be adequate to meet the expected losses.

This led to the concept of two premiums, he said, the first being for the whole period of insurance, the so-called basic war cover, while an additional premium is charged for visits by the insured ship to defined areas with a high element of danger. Any insurance of risks during a world war is excluded.

Voyage charters do not usually permit shipowners to recover the additional premium from the charterers, as additional war premiums are supposed to be covered by the freight. For time charters, several law cases had clarified that, while the basic war risk premium was for the shipowner to pay, any additional premium should be paid by time charterers.

In February 2022, there was confusion between shipowners and charterers, he noted, with the latter protesting that they had never signed up to trade a vessel in a war risk area and “should not be on the hook for premiums of for instance five percent of the sum insured per week”.

Case law was on the side of charterers, he emphasised. Charter parties were cancelled based on frustration of charter, leaving owners of detained ships with a choice: not to pay the additional premiums, meaning the war risk cover would not be reinstated; or try and negotiate the premiums down by reducing the vessel’s sum insured.

He cited the 2003 case of Scott v Copenhagen Reinsurance Co. This involved a British Airways aircraft stranded in Kuwait as Saddam Hussein invaded and that was later destroyed by allied bombing, still within the policy period.

English courts ruled that the triggering event for the loss was the commencement of hostilities, he noted, and that similar situations have arisen In Ukraine.

“It was clear that cover under the detainment clause would apply if it started before cancellation. But was there still cover if the vessel was destroyed after cancellation but before a 12-month period of detainment was over?”

“Based on the ruling on Scott v Copenhagen Re it seemed possible to argue that cover was ongoing against other war perils, such as mine and missile strikes. If so, an owner would not have to worry about additional premiums,” he said.

Another question was whether underwriters were entitled to levy an additional premium on a subject matter insured that ceased to be at the shipowner’s free disposal.

“I have to admit that I was struggling to find a satisfactory answer to that question, possibly because there is none,” Fischer said.

“With time the situation became clearer. My discussions with senior practitioners confirmed that a vessel detained in Ukraine at the outbreak of war would remain covered for a CTL claim for detainments after a period of 12 months, even with no additional premium paid, and the war risk cover effectively ceased. However, there would be no cover for other war risks,” Fischer said.

Fischer said that war cover could provide for a ship’s loss of earnings, for 90 or even 180 days, but that the complexity arose when that was set against a CTL claim for detainment.

He explained that under the Nordic Plan, on which most loss of hire policies are based, if the assured is entitled to claim a CTL, loss of hire payments are restricted to one month. At the time of the CTL claim, if loss of hire for more than one month had already been paid, then it should be deducted from the total loss compensation, he said.

Fischer suggested It would be fair to grant the owner, deprived of his vessel’s earning capacity for 12 months, the full loss of hire compensation.

Is interest payable in the case of a CTL claim submitted after 12 months of detainment?

“Yes - and no! In principle, the assured may claim interest from one month after sending notice of the casualty to 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,” he said.

Turning to “another reality of war, total loss settlements”, Fischer mentioned that there were some interesting ones for vessels detained in Ukrainian ports.

He noted one company had submitted a CTL claim for a bulk carrier in Ukraine and received settlement of the total loss sum as well as the sum insured for disbursements.

The ship was sold to a German shipping company, as directed by the war underwriters, with the latter reportedly receiving about 50% of the total loss sum, the vessel’s market value exceeding the insured hull value by around 25%. Exactly how and when this vessel would return to international trade was an open question.

“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 continued: “More pressingly, what exactly is the war insurers’ role in these back-to-back deals? What we see is a financially strong party speculating that the war or at least the detention of the vessel will end soon. And that there will be no targeted attacks on blockaded ships… A vessel stuck in a Ukrainian port for another five years would be old, under-maintained, and technologically outdated.

“What we shouldn’t forget is that cases can only be judged on their own merits and, indeed, what might seem like a similar scenario for another owner, might have subtle differences, rendering a comparison invalid,” he added.