Liability insurance - a luxury or necessity?

A large number of ship and crew managers still operate without professional indemnity or liability insurance – by one calculation perhaps 40% of them. Why is this? Have the 60% who have chosen to protect themselves got it right or are they wasting their money? As the leading insurer of ship and crew managers’ liabilities, the Club put forward its own views and looks at what the management industry has to say on the subject.

The main reason why so many ship and crew managers still trade unprotected is that they have yet to fully appreciate the dangers and risks that they are exposed to. There are three reasons for this;

• Firstly, the management industry is a relatively young one. The number of people who have so far experienced a liability claim is small.
• Secondly, only relatively recently has the ship manager’s role and responsibility developed to the extent that he runs the risk of being found liable for his negligence.
• Finally, and perhaps most importantly, the industry has yet to experience the full implications of the most recent change in its working environment.

Although much has been written about the possible effects of the ISM Code on ship managers, it is still too early to know whether the predicted dangers exist in practice. These three points require some further explanation:

A fast changing industry

Insurance of any kind responds to a demand from its customers. Without ships carrying cargo there would be no P&I or hull insurers. This demand takes time to grow. Today, no sensible ship owner would dream of setting sail without being properly insured. When P&I insurance was a novelty in the mid 19th century, only the most cautious owners sought P&I protection.

In the form that they are recognised today ship managers have only existed for perhaps the last thirty years. This is not a long time in marine insurance circles. Not only does demand grow slowly, it also takes time for insurers to produce a product suited to their customers. Insurance like that offered by ITIC to its ship manager members is never static. As the industry moves, experiences different problems and faces new liabilities, so the insurance must move with it.

The ship management industry is also an industry that has been forced to change considerably in its short life. Twenty years’ ago, the few managers that existed were generally close to their ship owner principals. The true third-party managers were yet to arrive. Management contracts, if they existed at all, often overlooked the question of liability. The manager/owner relationship invariably coped with the occasional failure on the part of one or other. However, from the mid-1980’s onwards, with ships being repossessed by financiers and private investors becoming involved in ship owning, the demand for ship management expertise grew. Banks and investors were, however, unwilling to accept the shortcomings of their ship managers. If a mistake was made and the owner’s investment suffered as a result, the manager had to pay.

In 1989, a forum of owners and ship managers produced the BIMCO Shipman Management contract. The contract aimed to find an equitable balance of responsibility between the owner and manager. A limit of ten times the annual management fee was chosen. Almost ten years later, this is now widely accepted as the industry standard. In itself, the Shipman went a long way towards defining the modern role of the ship manger. It also encouraged both the owner and manager to appreciate the responsibility and liability of both parties and, before something goes wrong, to have it clearly understood who pays what.

The ISM Code

Why should the ISM Code mean greater risk for the ship manager? Ensuring that a ship first complies with the Code, implementing the necessary safety management system, performing safety audits and maintaining compliance all creates work for the already overworked manager. Greater responsibility means more that can go wrong. Unfortunately, it is likely to get worse before it gets better. As one commentator put it recently, “ISM is the first step in a self-governing regime.” With more to do and more people watching, for every ship manager, getting it right first time becomes essential.

The public profile of ship managers is also altered by the ISM Code. Although a ship may have been under third-party or technical management before ISM, the world at large still viewed the ship owner as the party responsible in the event of a maritime disaster. Now, with managers offering full or technical services being named under the Code as the party who has “assumed responsibility for the operation for the ship” they are firmly and unquestionably in the shop window.

It is also possible that the documentation which the ISM Code requires a manager to complete will give any person wishing to claim that a ship is unseaworthy an “audit trail” of the circumstances affecting unseaworthiness. The reason why this is so dangerous for the ship manager is because, if an owner is found to have provided an unseaworthy ship, perhaps because of a well documented system failure by the manager, the owner loses his right to limit his liability under article 4 of the 1976 Limitation Convention. He may then be liable in full for the claim and would have no alternative but to look to the manager for payment. Hopefully, provided the manager is co-assured on the owner’s P&I insurance, he would be protected. It is possible however that the manager’s act or failure could be deemed to be so negligent that the P&I insurance cover is withdrawn. If this happens, the manager is on his own or, with luck, is ready to be rescued by his liability insurer, ITIC.

That is the insurer’s view. But what does the ship management industry, and those who comment upon it, think about the need for ship and crew managers to insure themselves? The subject of the potential loss of right to limit (and ISM code audit trails possibly helping to prove unseaworthiness) has been widely discussed in the ship management journals for some time. However, evidence that this really could happen is perhaps best illustrated by an existing case that reached the House of Lords in 1984. Described by Herry Lawford of the UK P&I Club in Chapter 6 of the recently published 3rd Edition of Ship Management, as “the most celebrated case in the ship manager’s lexicon”, the MARION [1984] 2 Lloyd’s Rep. 1 “came as a bombshell to most ship managers.” Briefly, the facts of the case were as follows:

The MARION’s anchor fouled and damaged an oil pipeline on the seabed in Tees Bay. The master had been navigating with an out of date chart upon which the pipeline was not marked. The ship’s manager had previously instructed the master to dispose of all obsolete charts and had asked for confirmation that this had been done but the master failed to respond. A claim for US$ 25 million was made by the pipeline owners against the ship owner. Amongst other things, they argued that a proper system should have been in place to ensure charts were updated and the old ones disposed of and the ship management company was named as the responsible party.

The House of Lords found that the ship management company, in particular its managing director, had a duty to ensure that an adequate level of supervision was exercised over the master. This duty had not been fulfilled. Furthermore, they accepted the view of a lower court that in such a case one looks to the management company, not the ship owner, as being the party guilty of actual fault.

Nevertheless, it was the ship owner who lost his right to limit his liability. Rather than being liable for only the limited amount of US$ 1 million, the ship owner and his P&I Club had to settle the claim for close to the full amount of US$ 25 million. Had the ship manager not been co-assured on the same P&I insurance, he would have had to meet this payment himself.

The International Ship Manager’s Association (ISMA) recently made ship management liability the subject of one of their member seminars. Four “nightmarem scenarios” based upon actual events but devised by Peter Martyr of the law firm Norton Rose looked at different situations whereby the manager could face a serious liability claim including cases of a delay causing a cancellation of a cargo stem and officers with invalid certificates. Presumably, without insurance, any ship managers who become embroiled in such problems might find themselves with a potentially life threatening liability.

Conclusion

Everyone has his or her own view about insurance. The Club believes that the majority of ship and crew managers who have chosen to be insured have made the correct decision. As this article demonstrates, it is not only the possibly prejudiced view of an insurer of ship managers that they need to protect themselves.

Only time will tell what the true effect of the ISM Code is upon ship manager’s liabilities but nobody could argue that it makes a manager’s job less dangerous. It is not impossible that more and more responsibility for the safe operation of ships will fall on the ship and crew manager’s shoulders. If this happens then, as with ship owner’s hull and P&I insurance, ship managers may find having a suitable professional indemnity or liability insurance an essential licence to trade which they cannot do without.

The above article appeared in the February 1999 Baltic Magazine Special Supplement on Ship Management.