Claims Guidelines no. 6

Knock-for-Knock

The most frequent collision liability claims seen by the hull insurers are incurred vis-à-vis a third party with whom the assured does not have a contractual relationship. However, from time to time liability issues arise where the assureds’ contracts are of significance, in particular in contracts in the offshore industry.

In offshore contracts, it is not uncommon to include a mutual hold harmless clause with respect to damage to personnel and property, a so-called “knock-for-knock” regime. In short this means in practice that each party covers damage to their own objects, even if the contracting party caused the damage, as opposed to the normal rule, where the party causing the damage is liable for the consequences.

 

Commercial and legal advantages

The knock-for-knock regime reduces the scope for delay and disruption following an incident, by removing the need for detailed and costly investigation, and by reducing the scope for dispute and litigation between the parties. In that way knock-for-knock can be said to provide predictability. If each party covers (only) damages to its own property and personnel it is thought to be easier to make sure that various assets and personnel are insured.

In case damage occurs, the injured party must seek cover under its insurance policy, and both the insured and the underwriter is prevented from claiming compensation or recourse from the party causing the damage. On the positive side, damage to the other party is never their concern.

 

Key issues to be aware of in regards to the insurance cover

Under the Nordic Marine Insurance Plan 2013 conditions clause 4-15 and its commentaries, it has been acknowledged that knock-for-knock clauses must be considered customary in the offshore industry and liability incurred based on knock-for-knock clauses are normally covered by policies taken out on these terms. As seen above, such clauses may be both positive and negative for underwriters.

Insurers generally encourage knock-for-knock, as it avoids the need of overlapping insurance coverage, and the insurers’ exposure is more foreseeable.

However, there are a number of important issues regarding knock-for-knock that need to be considered carefully at the contracting stage, and in order to have the intended application, the knock-for-knock regime must be watertight and without exceptions.

It is sometimes argued that the knock-for-knock clause shall not apply in case of e.g. gross negligence, breach of contractual obligations, breach of ethical rules and/or breach of laws, to mention some regular examples. When agreeing to such exceptions, the relevant party is responsible for damage both to its own and the other party’s property in certain circumstances and the underwriter’s exposure is increased similarly.

If the assured is presented with knock-for-knock liability clauses that differ from the standard clauses found in the BIMCO Supplytime 2005 contract for example, we would encourage you to get in touch to discuss the possible implications.

For further information, please contact your local claims office.

 

Sources: NMIP of 2013 and its Commentary

Disclaimer: These guidelines cannot be construed as a complete and binding answer to all of the possible problems and questions that can arise in connection with the topic addressed.