HULL INSURANCE AND GENERAL AVERAGE

General Scheme of The Marine Insurance

Marine hull insurance covers the damages that happen to an insured ship or other insurable parts of it, during the voyage, carrying cargo, during dispatch, anchorage, or repair. This coverage comprises all physical losses or perils, liabilities, and expenses of third parties, which arise from perils of the sea. They are known as “Marine Hull” among the Lloyd’s London market.

This insurance type has a small capacity, and they constitute %2 of the global non-life insurance. Nevertheless, it is a well-specialised field that provides exclusive coverages for different perils.

The main marine insurance market is in London which has the 18% of the global maritime premium. London market is represented by unions organised under Lloyd’s Underwriters Association and, on the other side also represented by International Underwriting Association. The second biggest market is in Japan which has the 16% of the global premium, and they are followed by the USA with %13 and Germany – Norway with 9%.

Marine insurance, especially Ocean Hull, has similarities with non-life reinsurance than other direct insurance types. It starts with the construction of the ship in foreign countries, and it does not have to be in a certain place. When the ship is launched, it can be open to traffic with cargo owners, insurers, and directors worldwide. In addition to this, in general, the crew is a combination of different nationalities. The flag of the ship is usually the flag of the owner’s country or any other country, where is not a part of the ship’s traffic.

Second, the type, which is named Ocean Hulls, has high insurance values. Therefore, in general, more than one insurer from different countries share the risk. These works proceed through brokers.

The third resemblance between marine insurance and non-life reinsurance is, those policies are usually issued for the one-year period except for one-time coverages.

As the fourth, mostly the result of the above explanation, the premium circulation is not stable (volatility) and therefore the demands are changeable. Apart from natural variations, that affect the occurrence of the damage, volatility may also be the result of changes in the deductible amounts, increased risks, variations of international regulations, or exposure of risk.

Hull and Machinery Insurances

The word “marine” is a comprehensive concept which embodies notions “hull”, “cargo”, “marine liability” and “offshore”.

In order to define “a ship”,; a ship is a sea vessel, which is not very small, that can move on the sea and the usage of the ship depends on its movability. Hull is a wider concept than a ship and it means a thing which is hallowed and voluminous. It is a general concept for ships and sea vessels. An insurance type HULL AND MACHINERY (H&M) provides a coverage for ship and its machinery. Although, in theory, H&M is not a compulsory insurance, it has become compulsory in practice to avoid problems that may happen on the controls of the international ports.

In the H&M Coverage, the insurable interests are, integral parts of the ship (when those parts are missing the ship is an incomplete ship; the hull, the mast, the deck, the tank, etc.) and additions of the ship that belong to the owner (maps, signal tools, etc.). In addition to this, subject to the insurer’s approval, sea vessels, which cannot be defined as a ship; houseboats, floating crane, barge, floating restaurants, sea motorcycles, etc. can be a subject of the policy.

From a different perspective, what real dangers in the marine industry are? They can be classified like in the below:

  • (A) Damage to the insured or loss of the insured, whether the insured is a ship or an oil rig, cargo, or another concept which is in the marine concept (partial or total loss).
  • (B) Every kind of liabilities. (Collision, environment, port, crew etc.)
  • (C) Loss of profit that arises from a temporary malfunction due to an accident (loss of profits insurance).
  • (D) Expenses arising from an accident, which can be compensated under Marine Insurance Policy. (Towage, salvage, etc.)

Hull Policy is a united assurance for risks under the scope of A, B, and D. Such that, for the united risks, an insurer can only be responsible for threefold of the insured amount. However, if the liability covered under the policy is exceeded, the exceeded amount is usually covered by P&I Clubs. Rules may show differences for every P&I Club since there are limited clubs that work under these conditions.

For the corporate objective, vessels are divided as Coasting Vessel and Ocean Vessel (Ocean Hull). Ocean Hull is also named “Bluewater Boat”. While ocean vessels have an international character, which refers to any ship that is part of international maritime trade, coasting vessels are generally used in inland waters.

Although coasting vessels can describe other small vessels such as fishing boats, coastal ferries, barges, etc., there is not a certain line to separate these notions. While damages to fishing boats and damages they have caused may be covered under the marine policy, the lives of fishers and loss of their profits may not be covered even if they are under the scope the marine insurance.

When we evaluate the other headline of our topic, General Average, it can be described as “voluntary sacrifices and extraordinary expenses in a voyage to protect the ship or cargo from a danger.”. At Article 1272 / III of the Turkish Commercial Code, it is stated that damages will be appropriated between ship, cargo, and carriage. This article is in accordance with Article A of York- Antwerp Rules. Because freight of a charterer, fuel for the time charter, or container of a commercial manager can also be subject to a general average.

For the existence of the general average, the ship and cargo should be together. Therefore, there will be no general average if the ship sails without cargo. However, a ship that sails without cargo and without charter-party, can be protected against extraordinary expenses and voluntary sacrifices with additional clauses to policy.

Being exposed to a sea danger is not a compulsory matter for declaring a general average. To illustrate it; the extension of the fire in the dock to the ship or cutting the anchor in order to prevent the spread of flames can also be a reason for the general average. In addition to this; even if the ship and cargo do are not damaged on the same level, declaration of the general average would be proper.

There is a condition for a proper general average declaration, real danger. Estimated danger or proximate danger (causa Proxima) is not sufficient for the general average. A precedent Supreme Court of Turkey decision states that the general average cannot be declared when the ship is grounded by its master’s own negligence. Therefore, the faulty party cannot claim any compensation and also is responsible to related parties for damage that arose by his own negligence (Turkish Court of Appeal 11th Circuit D: 25.11.1985, 1985/6087 and 1985/6406). Further, in the case “Watson v Fireman’s Fund Insurance”; the court held that; even if the master has a margin of error, spilling water because of the estimation that there is a fire and this fire will cause damage to goods in holds is not proper for declaring a general average and the master is responsible from the damages arose from the water.

Does the master have to wait until the appearance of real danger? An answer for this question is stated by Roche J. in “THE MAKIS” case. Roche J. held that; the danger does not have to be immediate or occur right away, the danger must not be imaginary.

In general average situation, actions and expenses should also be extraordinary. Although it is open for an opposite interpretation, there is an important case that can set an example. “Wilson v Bank of Victoria”; The ROYAL STANDARD was a large sailing ship with an auxiliary steam screw. She sailed on a voyage from Australia to England carrying a cargo of gold and about 500 tons of bunker coal. Eleven days into the voyage she hit an iceberg and suffered so much damage to her masts and sails that, in practical terms, she lost all power of sailing. She reached Rio de Janeiro under steam alone and nearly exhausted her stock of coal. The expense that made, in that case, was not held as extraordinary and the general average was not accepted.

After the above explanations about the “Hull Insurance” and “General Average”; it should be explained in such a circumstance which insurer bears which damage? This will be determined after the apportionment of damages (dispatch). In principle, H&M Insurer bears the “damages to the ship” and Cargo Insurer bears the “damages to the cargo”. “Gaps” that were left behind from the dispatch period, are filled by the liability insurer.

Due to article 66/4 of Marine Insurance Act 1906; if the assured has incurred a general average expenditure, without claiming from other relevant parties of the general average he may claim expenses directly from the insurer. If hull insurance does not cover the full expenses, the remaining amount will be covered by P&I (Protection and Indemnity) Club.

If some expenses are not under the coverage of the hull insurance, marine vessels liability insurance will bear those expenses. As an example, to this situation, if the real value of the ship is higher than the insured value, or rejection of the compensation claim by the cargo insurer because of breach of the carriage contract by the carrier.

The general average Absorption Clause is regulated with IHC 2002’s article 43 (additional Clauses), a part of the English Hull Clauses. Subject to insurer’s written approval, insured has right of choice. If the insured will not claim any demand from other relevant parties to the general average, the insurer will waive his right to subrogate. However, this situation is against article 1472 of the Turkish Commercial Code and therefore otherwise cannot be agreed upon since the code is compulsory.

Another point about Hull Insurances that should be mentioned; the question of whether there is a direct right to claim from the insurer. Although there is a chance to claim directly from the insurer in most countries and in Turkey, this right is not accepted under English Law. However, the direct claim right is provided, if the right of compensation of third parties are covered in the policy, in Denmark under Insurance Policies Code, Article 95.

As an example, “The Yusuf Cepnioglu” is an important case for this subject. The injured party brought an action in Turkey, directly to the P&I Club. High Court evaluated the case whether there is a need for an anti-suit injunction or not. The foreign law (Turkish Commercial Code) was discussed that gives a chance of a right of direct claim. Court of Appeal decided that, although the right of a direct claim is a contractual right, it is not an independent right and, the court allowed the anti-suit injunction. This decision of the Court of Appeal is important because it is about the right of a direct claim against and current.

In conclusion, Marine Insurance has an important role to ease maritime commerce and international trade. Since “Marine Insurance” is proceeded as a legal contract, “marine Insurance Law” plays a significant role in the field. English Law is the dominant law about maritime law.

DLA Piper published global report on sustainability

DLA Piper has today published a comprehensive global report on sustainability and the implications on the insurance industry. The report looks at sustainability-related initiatives and frameworks around the world and analyses the current status in 19 countries. With its global reach and coverage the report is the first of its kind setting out the legal basis for sustainable insurance.

The insurance industry is affected by environmental, social and governmental (ESG) risks in its entirety. From asset prices and investment choice to business transition risk; the ESG risk to insurers’ own operations including property, personnel. supply chains and claims – the insurance industry will need to deal with many issues. However, it is also uniquely placed to play a fundamental role in as part of the solution. Insurance engages with almost every industry and sector; it owns a large amount of the world’s assets and it has a global reach and a finely detailed knowledge of risk transfer and solutions.

The report was launched at an online event attended by industry members from a variety of functions (including compliance, responsible business, claims and risk management) at insurance companies, brokers and consultancy firms with speakers from UNEP FI, AIG, Insurance Council of New Zealand and FTI Consulting. During the session a survey was conducted which found that in spite of the COVID-19 pandemic 69% of attendees had experienced an increase of the importance of ESG issues due to public attention and policymaker statements. This has been reinforced by increasing focus on ESG topics from employees (57%) and customers (31%) and 38% of attendees noticed a marked increase in their competitors’ activities in this area. Within insurance companies the areas most affected by ESG issues were Investment (71%) and Risk Management (64%) departments.

Download a full copy of the report

Jennifer Waldner Grant, Chief Sustainability Officer at AIG, who provided an editorial to the report, said: “We applaud the commitment DLA Piper has made through the publication of this report. It will ensure the insurance industry is informed and educated around the changing regulatory landscape on ESG topics, global coalitions, partnerships and initiatives supporting businesses, regulators and society in addressing the climate emergency.”

DLA Piper Counsel and Chief Editor of the report, Heike Schmitz said: “DLA Piper has a particular focus on sustainability issues, both as a firm and supporting our clients in this hugely important area. This report is our contribution to the debate, focused on the insurance market, and aims to provide an overview of current developments and thus support decision makers, inhouse counsel, sustainability officers and others as they develop their sustainability strategies.”

Electronic Insurance Regulations Issued

The United Arab Emirates (UAE) Insurance Authority recently published the Insurance Authority Board of Directors’ Resolution No. 18 of 2020 on Electronic Insurance Regulations dated 27 April 2020 (“the Regulation”). The first draft of these regulations was published in January 2019, and after public consultation and discussion, a revised draft was published in December 2019, which has now been finalised. The Regulations and the timing of it are very relevant in the current circumstances, i.e. the impact of COVID-19 and the social distancing measures by the government, marketing, and solicitation of insurance by physical means is at an all-time low.

The term electronic has been widely defined as anything relating to technology having electrical, digital, magnetic, wireless, visual, electromagnetic, automated, optical or similar capabilities. The scope of the Regulations extend to all electronic and smart insurance operations carried out on the internet address of the company, social media such as Facebook, Linkedin, multimedia such as YouTube, Instagram, blogs, applications such as google doc, Wiki, AI-based systems, text messages, instant chat channels, smart applications, etc.

All insurance companies and related businesses such as insurance agents, actuary, broker, surveyor, insurance consultant, carrying out operations through electronic mode, require prior approval from the Insurance Authority. The application for such approval must be accompanied by an action plan for electronic operations, approved by the Board, and contain analysis of the risk, projected volume and contingency plan for the electronic operations.

Life insurance policies with investment components cannot be transacted online, while the sale of life insurance policies with standard underwriting (less the investment component), such as term life is allowed. Health and general lines of business on property and liability risk, including marine cargo insurance can all be sold online and are subject to the Regulations.

The website of the insurance companies must be maintained by the IT department of the company, but if the management of such a website is being outsourced to a third-party, then prior approval of the Insurance authority must be obtained in this regard. Insurers currently use multiple online platforms for online marketing and selling, often procured through third-party entities. The intent of the Regulations is to capture and regulate, where possible all such third-party entities who are engaged in insurance distribution.

The Regulations also put much impetus on provisions of information security and also requires that storage of data must be in the UAE. It is however not clear whether the Regulations require any Cloud server to be based within the UAE.

In addition, the Regulations recognise that the electronic platforms and systems of the companies may not be developed enough to carry out these operations and hence allow outsourcing of electronic operations for this purpose. The Regulations also allow usage of third-party websites for sale of insurance but require the prior consent of the Insurance Authority to be obtained for any such arrangements.

The Regulations also recognise, for the first time, the “Price Comparison Websites” and interestingly state that only an insurance broker can deal with a price comparison website. The Regulations also require Price Comparison Websites to be registered with the Insurance Authority and a copy of the agreement signed between Insurance Broker and Price Comparison Websites must be shared with the Insurance Authority. The prerequisites for registration of Price Comparison websites has also been listed in the Regulations but state that the application for registration must be made in accordance with the applicable regulations, implying that the Insurance Authority may be issuing further regulation on Price Comparison Websites shortly.

The Regulations state that the provisions shall apply from the date of publication of Regulations in the official gazette, but also allow insurance companies and insurance-related professions a time period of 6 months from the date of publication in the official gazette to align their position and operations with the Regulations.

While the recognition of Price Comparison Websites is a step in the right direction from the UAE Insurance Authority given the global trends in this regard, the requirement for a Price Comparison Website to deal only through a broker creates an extra layer of regulatory requirement and therefore unnecessary costs, the benefit of which could have been passed on to end customers in the absence of such requirement. Nonetheless, insurance markets globally have noticed a surge in demand for insurance policies through online mode and therefore this Regulation brings much-needed clarity, which will help in further growth of the UAE insurance market.

Dentons adds Insurance Regulatory duo in Los Angeles

Dentons, the world’s largest law firm, today announces that Robert P. Barbarowicz and Kathleen M. McCain have joined the Insurance Regulatory practice. Focused on complex insurance transactions and regulatory disputes, the pair will be resident in the Firm’s Los Angeles office.

Both highly experienced in regulatory proceedings and transactions, the pair bring a balance of Barbarowicz’s transactional experience in complex transactions involving insurance companies and agencies and McCain’s perspective from litigating insurance disputes at the trial and appellate levels.

“We’re delighted to welcome Bob and Kathleen to our world class insurance practice,” said Keith Moskowitz, co-chair of Dentons’ US Insurance practice. “Our insurance clients will benefit from their wealth of experience and their transactional and litigation experience serving the industry.”

Barbarowicz has more than 30 years’ experience in the insurance industry with a particular focus on large and complicated insurance transactions, purchase transactions, redomestications, securing regulatory approvals for complex transactions in many states, force-placed insurance, rate regulation and rate filings. His experience includes representing property and casualty, life and title insurance companies. Prior to entering private practice he held leadership roles at several large insurance companies, including Balboa Insurance Group and the Ahmanson Insurance Companies. In addition to counseling insurance clients Barbarowicz advises clients on corporate finance transactions including substantial capital extraction. He holds both a JD and a BA from Pennsylvania State University.

McCain represents insurance companies and regulators in navigating rate regulations, policy review, insurance M&A, compliance, financial and market conduct examinations, litigation strategy, holding company matters, reinsurance, corporate governance, insolvency and asset recovery. Experienced across all lines of insurance including property and casualty, life, title insurance and surplus lines matters, she also uses her litigation background to offer clients unique perspective and insight. McCain is an Accredited Insurance Receiver for Legal and Reinsurance by the International Association of Insurance Receivers. She holds a JD from Valparaiso University Law School and a BA from Ohio Northern University.

Pinsent Masons gets cloud guidance improved for insurers

International law firm Pinsent Masons has seen a number of its recommendations enacted following its response to EIOPA’s consultation on cloud guidance, making it easier for insurers to comply with their regulatory requirements.

The guidance, which sets to place strict regulatory demands on insurers in respect of both the contents of their contracts with cloud providers and their governance of those contracts, has been under review since June 2019, with the final guidelines now being issued.

In its response to the consultation, the firm raised a number of concerns about both the wording of and rationale for some areas of EIOPA’s draft guidance. Those concerns addressed fundamental matters such as the scope of the guidance and potentially confusing concepts and terminology. They also focused on the requirements around the content of insurers’ cloud contracts, their exit planning, the extent of information that insurers would have to document about their contractual requirements, and the location of data in the cloud.

Pinsent Masons’ recommendations have led to the re-drafting of certain definitions, the removal of unclear language and greater clarity and alignment with the European Banking Authority (EBA).

Some of the changes included the removal of references to ‘material outsourcing’ to describe the concept of a ‘critical or important operational function’. EIOPA also agreed to drop plans that require insurers to assume that their purchase of goods or services from, or entry into arrangements with, cloud providers constitute outsourcing arrangements that are subject to its guidance in cases where the matter is unclear. They also deleted wording around having ‘directly measurable’ service levels specified in contracts after the firm said it was it was unclear how insurers could comply with that obligation.

Commenting on the guidelines, head of Fintech propositions at Pinsent Masons, Luke Scanlon said: “When regulators bring out guidance and impose rules which vary slightly from other requirements for regulated entities, this can lead to unintended consequences and cost for financial institutions. Ultimately, this cost is borne by the customer and therefore it is positive to see that EIOPA has taken the views of the sector into account and made some adjustments to its final guidance.

“In our response to the consultation we put forward the views of our clients impacted by this guidance to ensure that the final guidelines are fit for purpose. This is particularly important following recent data from the Bank of England which shows that insurers are falling behind with regards to the adoption of cloud based technology in comparison to banks. We hope that these changes will now facilitate far greater adoption across the sector.”

All new cloud outsourcing arrangements entered into or amended on or after 1 January 2021 will be subject to the guidelines, while insurers will have until the end of 2022 to bring cloud outsourcing contracts entered into prior to that date into line with the new requirements.

KPMG hires Zurich veteran

KPMG has announced the appointment of Graham Boffey as insurance partner in its financial services consultancy team, effective October 01.

In his new role, Boffey will work closely with Simon Ranger, head of insurance at KPMG, to support clients across the UK market. Boffey brings considerable insurance industry experience and most recently acted as head of UK distribution at Zurich Insurance. He began his career at IBM and Barclays, and spent more than a decade at Aviva, where he fulfilled many roles including chief executive officer of Aviva Healthcare, and, later, managing director of corporate benefits.

“It’s great to be heading back to KPMG – its UK leadership team is bold and braced for change and I want to take that mentality out to clients,” said Boffey. “Customers, and society at large, are putting ever greater pressure on big businesses to demonstrate their value and nowhere is that more prevalent than in insurance; a sector designed to help people protect what’s important to them. Simon and the team at KPMG understand that we have to change now to be relevant in the future. I’m looking forward to getting to know the team and their clients to help them make that change.”

“Graham brings with him a huge amount of experience and a practical understanding of how the industry needs to change,” said Ranger. “He’s helped some of the biggest insurers navigate some of the choppiest waters over the last few decades. I’m sure our clients will appreciate his knowledge, and, most importantly, our colleagues will benefit enormously from working with him.”