Red Sea and Gulf of Aden – Insurance and Charterparty Considerations

NorthStandard has said that, following the recent intensification of hostilities between Israel and Hamas in Gaza, the Iran-backed Yemeni Houthis have been attacking vessels in the Red Sea and Gulf of Aden.

It said that, in response to a large number of requests from members, it has produced a guidance on the insurance and legal aspects of the situation.

P&I Cover

P&I cover is not prejudiced solely by a decision to continue a voyage through the Red Sea. The additional risks created by the hostilities and attacks will likely fall to war risk insurance. If the primary layer of this cover is not placed with the Club, it is important that Members speak to their war risks underwriters. (Also, see “War Risks” below.)

A decision to re-route a vessel to avoid the Red Sea may have serious P&I implications as this may be considered an unjustified deviation, which potentially engages an exclusion to cover. Members should discuss at the first opportunity any plan to deviate from the most usual customary or geographical route with the Club. The impact on cover – and, in particular, whether special insurance needs to be arranged – will be assessed on a case-by-case basis.

Members who are planning to undertake a new voyage through the Red Sea may wish to consider including an appropriate liberty provision in their contract of carriage entitling them to re-route to avoid the area.

Charterparty Issues

NorthStandard said that it was seeing a number of FD&D issues arising from the hostilities and attacks in the Red Sea / Gulf of Aden, both for its Owner and Charterer Members, including whether Owners could refuse Charterers’ instructions to proceed via the Red Sea / Gulf of Aden / Suez Canal, and whether Charterers could place the vessel off-hire and/or claim in damages if Owners decide to deviate the vessel via an alternative route.

The Club noted that the situation was “fast-evolving and unpredictable”. Our Members will need to consider each potential dispute as it arises and on its own merits, looking at the context including charterparty terms, vessel ownership and trading pattern, and carefully assess security risks at the relevant time, along with commercial considerations.

It said that every charterparty should be reviewed carefully to determine Owners’ and Charterers’ rights and responsibilities when “war risks” arise. Since clauses were often bespoke or amended it was impossible to provide a “one size fits all” answer to the main issues that had arisen. However, the Club said that it commonly saw BIMCO’s CONWARTIME and VOYWAR clauses incorporated into time and voyage charterparties respectively.

War Risks include any “actual, threatened or reported: war, act of war, civil war or hostilities…civil commotion…warlike operations…acts of hostility or malicious damage…by any person, body, terrorist or political group, or the government of any state or territory whether recognised or not”.

Under CONWARTIME 2013, Owners can refuse Charterers’ orders to transit a port, place, area or zone, or any waterway or canal (collectively, an “area”), if to do so may, in the reasonable judgment of the Master and/or the Owners, expose the vessel, cargo, crew or other persons on board the vessel to War Risks.

Under VOYWAR 2013, prior to commencement of loading of cargo, Owners may cancel the charterparty or refuse to perform if to do so may, in the reasonable judgment of the Master and/or the Owners, expose the Vessel, cargo, crew or other persons on board the Vessel to War Risks. Owners must first allow the Charterers an opportunity to nominate an alternative safe port for loading or discharging. If the exposure to War Risks arises after commencement of loading of cargo, Owners may give notice to Charterers that a longer route will be taken (and if the total extra distance exceeds 100 miles, Owners may be entitled to additional freight).

The test for determining whether Owners should proceed, or can refuse to proceed, is based on whether an area is dangerous. Owners must be able to evidence that an area may be dangerous, or may become dangerous to the vessel, cargo, crew or other persons on board the vessel.

Owners, in order to establish that a decision has been made in the “reasonable judgment” of the Master/Owners, must carry out their own appropriate and contemporaneous risk assessments ahead of making a decision to invoke charterparty provisions including CONWARTIME and VOYWAR in order to – for example – refuse to follow Charterers’ orders, cancel a charter or deviate.

NorthStandard noted that there were a number of resources which could assist Members in this process. “We would advise against simply looking at what other Owners/operators have done – the particular situation for each vessel can be very different, and the situation (and therefore the risk profile of the region, and the risk to each vessel) is changing from day to day”, NorthStandard said.

The Club pointed out that it understood that the nature of its members’ business necessarily demanded that decisions be made quickly. “In due course we envisage that it may be necessary (depending on the merits in each case) to determine in arbitration/Court whether these decisions were lawful or unlawful”.

If Charterers’ orders to transit the Red Sea / Gulf of Aden / Suez Canal are found to be lawful, and Owners’ refusal to follow those orders found to be unlawful, the consequences for Owners including substantial claims in damages for losses suffered, could be significant. The Club said therefore that it was imperative that members – both Owners and Charterers – give full consideration to each key issue as it arises, in so far as time and information available allows, before reaching a final decision. NorthStandard’s FD&D lawyers were available to assist with this process.

Mutual Owners Entries

Mutual P&I cover is subject to Rule 24 (North) and Rule 4.3 (Standard) whose provisions, broadly speaking, exclude from cover liabilities, costs or expenses arising from a war. NorthStandard said that it would consider in any particular incident whether a loss fell within the exclusion but, where it did apply, cover for the loss may alternatively be found in a separate Owner’s war risks policy.

Mutual P&I cover provides an excess layer of cover to a limit of $500m beyond the amounts recoverable under the greater of either the Entered Ship’s hull and/or war risks policies and any P&I inclusion clauses attached thereto, or the proper value of the ship.

The proper value is an amount reasonably close to the equivalent of the free uncommitted market value of the Entered Ship and for the purposes of Club Rules the proper value shall be deemed not to exceed $500m. NorthStandard may provide the primary war risks cover through an entry in Class 3 (North) or War Risks Class (Standard), or it may have been placed by the owner with another underwriter(s).

If, for example, a vessel were struck by a missile due to the conflict between Israel, Hamas and, more recently, the Iran-backed Yemeni Houthi’s, and crew on board were killed (or indeed any other P&I liability were incurred), then any legal liability incurred by the Owner in relation to the crew would fall first to war risks cover and not mutual P&I cover.

Members with Class 3 or War Risks Class entries should speak to NorthStandard or their other war risk underwriters before trying to enter or leave any defined additional premium area.

Charterers entries

A charterers entry may contain a War Inclusion Clause (North), a P&I war risks clause (Standard) and/or a War risks clause for additional covers (Standard), which variously cover Members on a primary basis for liabilities, costs and expenses otherwise excluded by Rule 24(1) (North) or Rule 4.3 (Standard) but on additional terms set out in the Certificate of Entry, including the policy limits and deductibles.

These clauses will have the effect of covering a charterer for P&I and, depending on the terms of entry, Damage to Hull (DTH) risks caused by war perils. In addition to setting out exclusions, the additional terms under these clauses would define the circumstances in which cover might be terminated automatically or upon notice. At present, this notice period is 72 hours, albeit all war risks cover is automatically terminated on the basis of ‘Five Powers’ outbreak of war.

Owners’ Fixed premium

Dependent upon Members’ terms and conditions of entry – Coastal & Inland Rules (Standard) or Owners’ Fixed Premium (OFP) Terms and Conditions (North) – cover will usually attach on a “P&I excess” basis (in the same manner as for mutual cover), covering P&I war risks above the policy limits of the insured’s war risks cover or the proper value of the insured ship (whichever is the greater).

Part IV of the OFP T&Cs contain the provision for the Club to provide P&I war risks cover on a ground-up basis if agreed between the Club and the Insured.

It should be noted that for fixed-premium entries cover will be subject to a policy limit or sub-limit under the Certificate of Insurance arising out of one event, accident or occurrence.