BIMCO’S VIEW ON THE IMPORTANCE OF CO-ASSURANCE

BIMCO’s attention has been drawn to the fact that some shipowners do not name third party ship managers as co-assured on their hull and machinery policies. This is a highly dangerous practice that may leave ship managers exposed to large claims from third parties for which they may be uninsured. Even large ship management companies who may accept not being named as co-assured on the owners’ hull and machinery policies run a big commercial risk in doing so. In some cases it may simply be that the shipowners do not nominate the ship managers as co-assured because the managers have not requested them to do so. However, there may be other reasons for this practice, such as the shipowners avoiding the situation where they are unable to decide on a constructive total loss of a vessel without the acceptance of the managers.

Professional indemnity insurers, such as the ITIC, make it a condition of cover that their ship management members have to be co-assured due to the fact that ship managers in most jurisdictions will be deemed to be the ship operator. By being named on the hull and machinery and P&I policies, the ship manager is taking the same cover that has traditionally been available to ship owners performing in-house technical management of the ship. The insurers are not providing any extra cover by including the ship manager as a co-assured since the shipowner has only sub-contracted to a third party some of the functions he used to perform himself.

Ship managers need to be co-assured because the economics of ship management are based on a management fee structure that does not envisage the manager purchasing separate P&I and hull and machinery cover. The costs to the ship manager of obtaining separate insurance to cover his interests up to the full value of the ship (for hull risks) and for all liabilities that might possibly be passed to him (for P&I risks) are prohibitive and unnecessary - especially as this cover is available to the owners for no additional cost as part of the their standard marine insurances.

Whereas P&I insurers are used to naming the ship and crew manager as a full co-assured, there is sometimes initial opposition from hull underwriters, who want to resist expanding the cover to the ship manager as well. They would rather see the ship manager as a target for a claim from them in subrogation rather than as a co-assured. Such claims could of course expose the ship manager to liabilities far exceeding the value of the ship management company itself.

There are a number of examples where the importance of the ship managers being co-assured is evident. In one such case a managed ship entered dry-dock and was found to have suffered extensive engine damage. To protect the position of the ship manager, a Salvage Association surveyor was appointed to attend. The report subsequently issued appeared to confirm that the damage resulted from wear and tear and not from any negligent act on the part of the ship manager. Three years later the ship manager received a letter from lawyers acting on behalf of hull underwriters. The underwriters alleged that the poor condition of the ship, and the main engine, was evidence of the fact that the ship manager had failed to properly manage the ship in accordance with the standards required under the terms of the ship management agreement. The underwriters claimed damages of USD 500,000 under subrogation from the owners. Unfortunately the ship management agreement failed to make any provision for co-assurance and the ship manager was not co-assured. This claim is still in arbitration and has yet to be settled and has cost the ship managers involved a considerable amount of time and money.

Another example involved a managed vessel that sunk, after an explosion, outside a port area whilst having repairs to its engines. Three lives were lost. The ship manager was supervising the work and was an obvious target for the owners and their insurers. However, they were co-assured on all the owner's policies and were provided with assistance by the hull and P&I underwriters. Had they not been co-assured the manager would not have had any degree of protection and could potentially had been liable for death and bodily injury claims, salvage, wreck removal and other associated costs. The loss would have been considerably greater than the annual management fee.

Of particular note is a situation that might arise where the “Running Down Clause” (ITCH clause 8/ ICH 2002 clause 6) takes effect. In this situation, the managers may be sued by the other ship in tort. To the extent that this liability falls within the scope of the hull policy, the managers would be exposed/uninsured if ITIC or equivalent does not cover this risk. The advantage to owners, therefore, in making the managers co-assured is that it avoids their managers from being uninsured, which is of benefit in terms of continued management and operation of the ship.

In fact, hull underwriters are not taking on additional exposure in this way because the managers would still have the benefit of the indemnity in Shipman clause 11.3 which should enable them to claim back from owners (and therefore the hull insurers) if they do become liable. Co-assurance would, however, avoid the risk of a potentially costly series of indemnity actions.

In conclusion, it is worth recalling that the intention behind the drafting of Shipman was not to give owners, or their underwriters, an advantage over the position where the owners managed their own ships. Therefore ship managers’ professional indemnity insurers make it a requirement for a ship manager to be co-assured, not to avoid claims for negligence against the ship manager, but importantly to protect the ship manager from claims that are rightly the responsibility of the owners. For this reason BIMCO strongly urges all shipowners, as a matter of routine practice, to ensure that their ship managers are named as co-assured on both their hull and P&I policies. BIMCO’s Shipman 98 contains a provision (Clause 6 – Insurance Policies) which expressly requires the owners to name the ship managers as co-assured on their insurances. We recommend that all owners using this form ensure that this provision is maintained in all agreements.

This article, which appeared on the BIMCO website, has been reproduced with the consent of BIMCO.