Ship managers - errors when arranging insurance

One of the duties undertaken by ship managers is to arrange insurances. Shipman 98 provides that this shall be “on such terms and conditions as the owners shall have instructed or agreed, in particular regarding conditions, insured values, deductibles and franchises”. ITIC has dealt with a number of situations when the placement of insurances has left the manager facing a potential claim. The following are typical examples.

A ship manager failed to recall that the hull policy excluded Cuba. The cover was placed when the ship had been trading under the terms of a charterparty that excluded Cuba from the acceptable range. The ship entered a new charterparty and was not only trading to Cuba, but sustained a fire in Cuban waters. The ship manager faced a claim for the owner’s uninsured losses.

In another case, a ship manager was instructed by principals to insure a ship’s hull and machinery for a value of US$ 5,000,000. Subsequently the manager was given a copy of the bareboat charter which contained the requirement that hull insurance of US$ 12,000,000 would be obtained and maintained in place. The manager did not notice this provision. Subsequently the ship was involved in a collision and the shortfall was discovered. The owner claimed that the manager should have pointed out the discrepancy. On this occasion the damage was not significant, but the manager could have faced a substantial claim.

Although Shipman 98 provides that the owner shall instruct or agree the terms of the cover, any shortfall in the amount insured can be a problem for the ship manager as a joint assured under the policy. In the following example, however, the manager chose an unrealistic level for his own insurance.

The ship managers provided crew to a managed ship. They employed the crew and their contracts made them responsible for, amongst other things, crew medical costs. They had also contracted with the owner to arrange crew P&I insurance. There was an accident on board the ship that resulted in two crew members being severely injured. The ship was close to the USA and the injured crew were evacuated to that country. Their medical expenses were approximately US$ 20,000 each per day, but the insurance arranged by the managers was only for an amount of US$ 200,000 for each crew member. This limit was to cover both the medical costs and also compensation to the injured crew. The claims rapidly exceeded the policy limits and the manager had to make up the shortfall.