LOSS OF HIRE Presentation for Master students UIO

LOSS OF HIRE Presentation for Master students, UIO March 28 th , 2007 Advokat Haakon Stang Lund

”Experience is something you don’t get until just after you need it”

Risk assessment • Protection of Income. Financial peace of mind. • How vulnerable to off hire is your organisation? • Trade and c/p • Fleet size, vessel type • Clients, reputation • Financing • Damage to the vessel and loss of earnings is easily identified. Total costs will be much higher. • LOH helps to minimise your total exposure to an accident.

If only… M/V “Sorry Sailor” Collision, 75% liability. No LOH cover Potential recovery with LOH: Off hire: 90 days Deductible: 14 days Net claim: 76 days 76 days @ USD 20 000 = USD 1 520 000

Choice of cover? • • Basic covers e. g. 14/90/90; 14/120; 14/270. Minimum deductible is 14 days (21 for passenger and cruise vessels). Excess covers – more catastrophic e. g. 45/90/90, 104/180/80 etc. The risk appetite of the buyer together with prevailing market conditions will determine the preferred basis of cover. • Additional deductible days against machinery damage are common for older vessels e. g. 14(21)/90/90.

Minimising “off hire time” • The assured and the insurer have a common interest in minimising time “off hire”. In order to reduce “off hire time” we will work closely with the assured and seek workable solutions based on: • Experience and knowledge from similar cases. • Creativity and innovation.

Use of available resources Gas carrier Towage by Offshore supply vessel Towage from Bahamas to El Ferrol 10 -29 April

Grounding in Suez Crude oil tanker – 159. 000 dwt, double hull The Canal cross-sections are trapezoidal in shape, having side slopes of 3/1. Width between buoys: 222 mts Abt. 40 mts from port bank

Repair at Daewoo (Mangalia) Shipyard in Romania, arr. 31. 03. 04 Steel price USD 2, 75 / kg – 48 Web frame Longitudinals days repair

The bill. . H&M: ( 100% ) LOH: ( 60 -14 days @ 40 000) USD 3. 200. 000 USD 1. 840. 000

Example • 2005 built UCC, 91. 410 grt, Collision • ”Difficult to get dry dock……. due to draft restrictions and stricter yard policy” • Estimated repair days 152 • D. I. $30. 000; basis 14/120 • Substitute vessel D. I. $40. 000……

Example • 1996 built TCR, 156. 852 grt, Grounding • Challenge to find available yards in the FE for final repairs. • Severe damages to bottom hull after the grounding incident. 4 months is calculated for completion of repairs. • D. I. $50. 000; basis 60/120

Example • LNG Carrier (1973) • damage to main gear • vulnerable and vital trade • the assured urgently needs the ship back in trade

The challenge • Old LNG (1973) – No new main gear in stock • One year production time • LNG urgently required for trade

NMIP § 16 -11 – The solution provider “Costs incurred in order to save time” • Buy an old tanker, take out the gear and use it as a spare part. • Charter an Antonov transport airplane and bring the gear from US West Coast to Europe as quick as possible. • Pay bonuses and overtime to working staff at yard in order to further reduce “off hire” time

M/T VLCC – Lack of docking facilities (2006/2007) • July 2006. • Grounded Dalian, China • Fully loaded with crude oil 276. 110 t crude • Repairs completed Singapore 10 th December 2006 • Off-hire days 137 days • Loss of income USD 13. 700. 000, • Repair period Singapore 51 days (USD 5. 100. 000, -)

Lack of docking facilities WW&FE June 2006 Explosion / fire in cargo tank South China Sea

§ 16 -1 Blocking and trapping The insurance also covers loss due to the ship being wholly or partially deprived of income: … (b) because it is prevented by physical obstruction (other than ice) from leaving a port or a similar limited area, …

THE PLAN • MARINE INSURANCE CONTRACT • CONTAINS ALL MAJOR MARINE INSURANCE TYPES, EXCEPT P&I • AGREED DOCUMENT • INTERNATIONALLY ACCEPTED • BUILT ON ”ALL RISK” PRINCIPLE

THE PLAN - CONTENTS • PART 1: GENERAL CLAUSES • PART 2: HULL & MACINERY CLAUSES • PART 3: OTHER MARINE INSURANCES • LOSS OF HIRE – CHAPTER 16 • PART 4: OTHER INSURANCES BUILDING RISKS, OFFSHORE ETC.

INVOLVED PARTIES LOSS OF HIRE UNDERWRITER SHIPOWNER BROKER

IMPORTANT ISSUES FOR OWNERS • • Duty of disclosure Alteration of risk Classification Clause Trading limits Safety regulations Measures to avert loss Notification of claims - § 3 -1 - § 3 -8 - § 3 -14 - § 3 -15 - § 3 -22, §§ 3 -24 and 3 -25 - §§ 3 -29 – 3 -31 - § 5 -23

Claims And Claims Leader • Chapter 5 deals with settlement of claims • Chapter 9 deals with the claims leader’s role and power to bind the co-insurers • In the Norwegian market the claims are dealt with directly between the assured and the claims leader who normally prepares the adjustment • The role of the broker

HULL & MACHINERY VS. LOSS OF HIRE HULL & MACHINERY POLICY LOSS OF HIRE POLICY Independent policy INSURED PERILS SCOPE OF COVER REF. THE PLAN § 16 -1 AND THE POLICY WORDING

HOW IS LOSS OF HIRE TRIGGERED? HULL & MACHINERY POLICY LOSS OF HIRE POLICY Main policy Subsidiary policy SETS OUT THE SCOPE OF COVER FOLLOW ACTUAL H&M SCOPE OF COVER

§ 16 -1 Scope of Insurance The insurance covers loss due to the vessel being wholly or partially deprived of income as a consequence of damage to the vessel which is recoverable under the terms of the Plan. ……… • Reference to Plan chapter 10 -12 can be waived by way of written agreement by the insurer, and be replaced by the provisions of the actual H&M conditions.

What Is Covered? • Time loss as a consequence of damages which are recoverable as per the actual H&M conditions • Level of deductible is irrelevant for the question of cover • Exceptions from the condition of damage: • If the vessel has stranded • Prevented by physical obstructions……other than ice • As a consequence of measures taken to salvage or remove damaged cargo

§ 16 -2 Total and Compromised Total Loss • No loss of hire will be compensated: • In total loss situations • Constructive total loss situations

§ 16 -3 Main Rule for Calculating Allowable Time • Loss of time – The time the vessel has been deprived of income • Daily amount - Net loss of income per day Normally assessed daily amount • Calculation - Lost time x daily amount per day • Time start running earliest at the time of damage • Ballast voyage before commencement of the laden voyage a damage occur is not recoverable

§ 16 -4 Calculation of the Loss of Time • Days, hours and minutes • Partially loss of time: • To be converted into corresponding total loss of income

§ 16 -5 The daily amount • • So called ”open policy” Gross income as per contract of affreightment Less saved expences If no contract • Average freight rates for compareable vessels • Must have suffered a loss, cp. ”CAPRICORN”, see page 39 of the Handbook

§ 16 -6 Assesed daily amount • Express presumption that the daily amount stated in the policy is an assessed daily amount • CAPRICORN applies also if the daily amount is assessed

§ 16 -7 Deductible period • No standard deductible in the Plan • Most common deductible period is 14 days • But longer or shorter periods is seen • 7 days DNK loss of hire cover • 30 days • 45 days • Deductible period commences when the loss of time occurs • Partly deprived of income, § 16 -4, subpara 1, second sentence

§ 16 -8 Survey of damage • Important for the loss of hire insurer to engage his own surveyor • I. a. to assess the repair time required for the damage repair • § 12 -10 applies correspondingly

§ 16 -9 Choice of repair yard • The insured decides which yard is to be used • Tenders must be collected if the insurer so demand • The potential conflict of interest between the insured, the hull insurer and the loss of hire insurer • The main purpose is to encourage the insured to elect the repair alternative that overall is the cheapest • Repair costs + loss of income during repair • Special rule if the hull is on other conditions than the Plan

§ 16 -9 Example Yard A B C Repair/removal cost 1. 8 mill 1. 2 mill 1. 0 mill Loss of time USD 10, 000 per day 0. 3 mill 0. 45 mill. 0. 75 mill Total 2. 1 mill. 1. 65 mill 1. 75 mill

§ 16 -10 Removal to the Repair Yard • Time lost during removal of the vessel to and from repair yard, shall be attributed to the class of repairs that necessitated the removal Important: • A causa proxima principle apply to the removal time • No apportionment in the deductible period

Example of removal time 1) VLCC sustain main engine damage on laden voyage from Sullom Voe to Canada. Towed to Rotterdam for repairs. Removal time from damage position to yard 8 days. Repair time 28. ” of which Owners work 10 days. and damage repair work 28 days. Removal time from yard to damage position 4 ”__. Total time lost 40 days. Conclusion: The removal time will be paid by LOH in full.

Example of removal time 2) VLCC on ballast voyage from Japan to AG deviate to Bahrain for maintenance work. At the same time deferred damage repairs are being carried out. Removal time from deviation position to yard 1 day. Repair time 28. ” of which Owners work 10 days. and damage repair work 16. ” Removal time from yard to deviation point 1. ” Total time lost 30 days. Conclusion: The removal time will be paid by Owners in full.

§ 16 -11 Costs incurred to save time • Extra costs or extraordinary measures taken for the purpose of preventing loss of time covered by the insurance, is paid by LOH if such costs are not paid by H&M • Must be extraordinary - and must save time • Owners must carry pro rata share of costs, if time is also save for the Owner • Example: Repair time 16 days reduced to 12 by way of overtime With a deductible of 14 days do Owner / LOH share the overtime cost 50/50 • In this respect is LOH subsidiary to H&M

§ 16 -12 Simultaneous Repairs What is simultaneous repairs? • Two or more classes of work are carried out at the same time • Contrary to a main rule principle, this clause establish an equal apportionment principle

§ 16 -12 Simultaneous Repairs • In legal terms a special rule of causation • As a starting point a rule to split time equal between Owners and LOH underwriter • Owners work are put into three categories: • a) Classification work • b) Work necessary for the seaworthiness of the vessel, or carried out to fulfil contractual obligations, or • c) reconstruction work • Work under share time 50/50

Simultaneous repairs § 16 -12 Deductible Average work Owners Class Work Maintenance Compensation 0 7 14 21 28 35

Case Study – Gas Al Kuwait 21. 09. 99: Rudder damages – Repairs at Keppel, Singapore Damage repairs Deductible Time in excess of deductible Common repairs for Owners class / safety related work Recoverable time paid by LOH underwriter 30 days 14 ”_ 16 days 8 ”_ 12 days

§ 16 -12, 1. Subparagraph

§ 16 -12, 2. Subparagraph Two casualties are being carried out simultaneously • If the deductible period run parallel for the two cases, then the period thereafter is being covered equal 50/50 • If deductible periods do not run parallel, the rule of simultaneous repairs should apply when only one deductible still run, i. e. . 50/50 Owners and LOH

§ 16 -12, 2. Subparagraph

§ 16 -12, 3. Subparagraph Two Casualties – Two Policies

§ 16 -12, 3. Subparagraph Two Casualties – Two Policies Plus Class

§ 16 -12, 4. Subparagraph • When calculating time as if carried out separately • Counts from the day the work started • All work is consider to start upon the vessels arrival at the repair yard – except when: • Damage occur in the dock • Unknown damage is being discovered in dock • What is the situation when the various classes of work interfere with each others? Example…….

§ 16 -12, 4. Subparagraph, Last Sentence

§ 16 -13 Loss of time after completion of repairs • Main rule: No recovery • 3 exception: • Time lost until the vessel can resume engagement under freight contract in force at time of casualty • Liner service in fixed schedule • Removal to first port to take cargo fixed before the casualty occurred. • Passenger vessel resume service – max 14 days

§ 16 -14 Repairs Carried Out After Expiry of the Insurance Period • Time limit to carry out repairs is 2 years after expiry of the policy period • Actual loss is being recovered if repairs commence after expiry of the policy period, ref. § 16 -5 • Multi year policies – jfr. § 1 -5, subparagraph 4

§ 16 -16 Rule of Subrogation LOH have the right of subrogation: • Against H & M insurer for loss of time and operating costs paid pursuant § 12 -11 or § 12 -13 or corresponding rules in other hull conditions • Other insurer or in general average

Casualty Examples Vessel Basis D. I. Incident Days Off Hire Claim 1992 TCR 153. 000 grt 14/60/60 $80. 000 Main Engine Breakdown 45 $2. 480. 000 1994 BBU 76. 000 grt 14/60/60 $40. 000 Grounding 22 $320. 000 1999 BBU 87. 000 grt 14/60/60 $25. 000 Grounding 34 $540. 000 1999 GGC 13. 000 grt 14/90/90 $28. 000 Grounding 57 $1. 596. 000 1996 OSY 3. 700 grt 14/90/90 NOK 125. 000 Fire 48 NOK 4. 250. 000 2000 UCC 65. 000 grt 14/90/90 $26. 000 Main Engine Breakdown 24 $260. 000 2001 TCR 136. 000 grt 14/60/60 $50. 000 Grounding 24 $500. 000 2003 LNG 91. 000 grt 14/300 € 77. 000 Cargo Tank Insulation 63 € 3. 773. 000

Thank you for your attention