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Marine markets facing large total loss claims from ships trapped in Ukraine

7th November 2022 - Author: Kassandra Jimenez-Sanchez

With a number of ships trapped in Ukraine due to the country’s conflict with Russia, the marine market is expected to face a large number of “total loss” claims early in 2023, according to a recent report.

Marine shipping reinsuranceUkrainian ports have been closed for vessel entry and exit since February 25, 2022, the day after the Russian invasion, and mines are reported to have been planted, effectively blocking as many as 100 vessels in ports and up rivers.

The full value of vessels trapped is unclear, but it could be as much as $800 million to $1 billion, the report stated.

A market briefing organised by the Association of Average Adjusters and the International Underwriting Association, highlighted the depth of the marine insurance issues involved.

Jonathan Bruce, a partner at HFW LLP and deputy head of his firm’s global insurance and reinsurance group joined Burkhard Fischer, vice-chairman of the Association, to survey key issues over the detention of ships.

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Bruce said: “This is a novel situation and there is therefore quite a lot of uncertainty. Unless things change quickly, it seems likely that there will be a lot of deemed total losses all in one ‘clump’ next February, and some quick decisions will need to be made.”

According to Bruce, if trapped vessels were on charter, extra premium might have continued to be paid but over time that would presumably have stopped and most of the policies lapsed or been cancelled.

He explained that under the Institute War & Strikes Clauses (the IWSC) it was likely that the perils of war, hostile act, restraint, and detainment had all been triggered since the invasion and subsequent closure of port.

Usually, for a claim to occur there must be physical loss of damage, but under the detainment clause a claim can be done after 12 months of restraint as it is considered total loss. In the case of the ships stranded in Ukraine, this period expires next February.

Before a loss can be declared, there would have to be the usual test under the Marine Insurance Act of the assured being deprived of the possession of the ship by an insured peril: a difficult test to satisfy, so usually it would be easier to rely on the detainment clause.

There was an addendum introduced in 1984 known as the blocking and trapping clause, it extended “restraint” to apply where waterways are blocked by warlike acts for 12 months.

Bruce outlined the dilemma: “What happens where a policy has been cancelled or has lapsed after the vessel became trapped; then before the 12 months it gets destroyed by a missile or by a mine? The position gets even more difficult if it turns out that other vessels are then able to escape unharmed from the same port before the 12 months, in other words but for the missile strike there would have been no potential loss. That is quite a difficult and interesting question and there is no English reported case which provides the answer on precisely those facts.”

Insurers might say that the cover was not extended, and no premium was being paid at the time of the missile strike, so that was an act which was not covered. On the other hand, it could be argued that the vessel was already doomed when the invasion took place, and at that time the insurers were still at risk, the report noted.

As to aggregation of claims, Bruce said: “There is an issue as to whether losses will be aggregated as losses arising from one occurrence or event, and there could well be disputes about that, as well as to which reinsurance policy responds. That in turn depends on the date which you take as the date of loss.

“Aggregation is a big issue because if the losses are all lumped together there is only one excess which applies. That is usually a good thing for the insurer as against reinsurers unless the per-event limit is exceeded.”

At the time of the invasion many of the vessels had war risks policies, but on February 24 war risks insurers began to use their right to demand extra premium to extend the cover.

A question remained regarding whether it was justified to impose an additional premium on a vessel after it had been struck by “capture, seizure, arrest, restraint, detainment, confiscation or expropriation” and if the assured had therefore lost the free use and disposal of the vessel.

Fischer said: “My view is that it is at least problematic for underwriters to charge additional premiums for ships that were detained in Ukrainian ports as from February 24, 2022.”

If this additional war premium is not paid, the war risk insurance would be cancelled, or the agreed policy period would run out while the ship was detained and before 12 months expiration time stipulated by the detainment clause.

“Is it a good idea to end an insurance contract at a time when the risk of being detained has already struck, but the claim under the policy has not yet materialised? Because this is what detainment constitutes: a peril with two components, namely an initial strike and a time element. Without these two ingredients a claim under the policy cannot materialise,” Fischer said.

According to the report, as there are similarities between a missing ship and one detained in a war situation, both cases might eventually be treated as total loss.

Continuation Clause of the Institute Time Clauses Hulls 1995 provides for a missing ship to be held covered until arrival at the next port in good safety, or until made safe. There are good arguments to suggest that the “held covered” provision also applies if the vessel is finally found to be a total loss.

Fischer concluded: “My view is that it might be a solution to adopt this practice for a war risks policy that contains a detainment clause, namely a provision that a detained vessel be held covered until the time that it is either free to leave or declared a total loss, at a pro rata monthly premium.”

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