Managers may face more claims in tightly regulated industry

The regulatory framework in shipping continues to be ever more complex. As a result, ITIC has seen an increase in claims from the owner against the ship manager.

Although a manager must be named as full co-assured under the ship’s insurances, there are certain regulatory losses that may not be insured.  If these arose solely from the negligence of the manager the owner will turn against them.  

In 2011 a ship managed by an ITIC member entered into Californian waters. An inspector of the Californian Air Regulatory Board (CARB) asked the chief engineer if he was aware of the revised regulations that had been effective since 2009.  These required ships to switch over main engine, auxiliary engines and auxiliary boilers to low sulphur fuel.  The chief engineer told the inspector that he was only aware of the earlier 2007 regulation requiring switching over just the auxiliary engines to low sulphur fuel.  The inspector, after going through the record books, found that between 2009 and 2011 the ship had called at Californian ports 17 times. CARB imposed a penalty of US$ 283,500 on the ship owner.  

The owner claimed against the manager on the basis that they had been negligent. In 2009 a fleet circular had been sent to all vessels by the managers setting out the change in regulations, and asking that it be displayed in a prominent position. The managers therefore initially rejected the claim as resulting from crew negligence (which is excluded in BIMCO management agreements). The owners did not accept this rejection on the basis that the managers had failed to update the SMS. As it was considered unlikely that the manager would successfully defend a claim resulting from his failure to update the SMS the claim was paid in full.

In a similar example in 2017 a ship manager was managing a ship also trading into Californian waters.  The ship was operating with an approved ballast water plan that allowed deballasting beyond the 50 nautical mile limit.  New regulations however had come into force in California requiring vessels to deballast beyond 200 nautical miles, if entering from international waters.

The Californian authorities had disseminated this change to the shipping industry by way of circulars.  The ship manager failed to pick these up in time and the ballast water plan was not updated accordingly.  The master and chief engineer therefore deballasted beyond 50 nautical miles as usual.  After an inspection of the record books the authorities issued a penalty of US$ 300,000 against the owner.  

The fine was successfully negotiated down to US$ 215,000.  The owner however turned to their manager to recover this amount, on the basis the manager had negligently failed to update the ballast water plan.  

The IMO has released guidelines on cyber risk management to raise awareness of threats and vulnerabilities to the maritime sector. The guidelines were issued in response to the increased threat of cyber related incidents reported in the maritime sector and seek to address cyber risks under the ISM Code enforced on all ships. The IMO now require that flag states ensure cyber risks are addressed in the SMS no later than 1st January 2021. 

Many Lloyd’s H&M policies still contain the Institute Cyber Attack Exclusion Clause (Cl.380), and any claim that arises from a cyber event will be excluded.  If therefore a manager was to pass on a computer virus to a ship, for example via a navigation system update that caused a navigation failure and grounding, the hull insurer will exclude any resulting loss. The only route for the owner to recoup their losses would be to bring a claim in negligence against the manager.  It is vital therefore managers do not wait for the 2021 deadline set by the IMO, but review their cyber risk and update the SMS now.