Claims Guidelines no. 5

Contracts and Insurance

Certain contracts entered into by the owners or managers of a vessel can have an effect on insurance cover. We therefore advise all our assureds to contact us whenever they are presented with a contract form that a) is new and/or unusual and b) directly affects the operation and use of the vesel.

This primarily applies to charter parties and docking/repair contracts.

 

How can operational contracts affect the insurance coverage?

 

  1. The link between contract and the insurance conditions is explicitly contained within § 3-28 and § 4-15 of the Nordic Plan.
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  3. § 3-28 says that the insurer can require that certain terms be included or prohibited in contracts concerning the operation of the insured vessel. § 4-15 states that if the assured fails to comply with such orders, the insurer will not cover liability that arises due to the breach.
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  5. § 4-15 further states that if the assured enters into contractual arrangements that have a stricter liability regime than that which follows from ordinary maritime law or custom, the insurer is not liable for the liability that arises due to the deviation from normal terms.

 

What does this mean in practice?

 

  1. If, for example, an owner enters into a contract with a shipyard for repairs to his vessel whereby the parties agree that the yard cannot be held liable for any loss or damage to the vessel, howsoever arising, this would probably be considered a stricter liability regime than ordinary law and practice would dictate.
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  3. In the event of damage to the vessel due to negligence by the yard, the insurers would probably be unable to step into the shoes of the owner and seek a recovery. This is something they would otherwise have been able to do if the contract was on standard terms.
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  5. § 4-15 gives the insurer the right to limit the compensation payable to the owner to the level that would have been achieved had a more normal liability regime been agreed upon.
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  7. However, if the owners can prove that it is customary for all shipyards in the area to operate with contracts of the kind agreed upon, the insurer would be obliged to pay the full claim.

 

Towage and salvage contracts

 

  1. Situations whereby the assured has a need for towage or salvage services invoke a general duty upon the assured to inform the underwriter as soon as possible. One of the reasons for this, is that the insurer will often have a greater level of knowledge of the usual contractual arrangements utilized in such circumstances and will be able to advice the assured accordingly, or indeed take over the contractual negotiations entirely.
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  3. If, for example, the assured fails to inform the insurer beforehand and enters into a Lloyds Open Form salvage contract for a standard wet tow operation, the insurer could justifiably claim that the towage should have been performed on commercial terms at a much lower price, and limit the compensation to that level.
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Again, if in doubt as to the effect of certain contractual conditions, we encourage our assureds to send us a brief mail. Better safe than sorry!

 

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.