Vessel charters carry certain liabilities that are clearly outlined in the charter agreement, and once all parties agree to the terms, the charter may begin … or should it?
There are other liabilities not listed in the agreement that pose a risk to the charter party of which they may not be aware. Fortunately, a Charterers Legal Liability Policy is available to protect the interest of the charter party and cover a multitude of risks.
Often, when chartering a vessel, the greatest concern is the assurance of a specified time frame and the safety of the cargo. The charter agreement may create a false sense of security over the move, however, many factors are present that are out of anyone’s control. In addition, it is recommended to consult with your insurance broker to verify the charter agreement does not cause a conflict of interest or void your current insurance coverages.
We can utilize the example of a charter that was thought to be designed impeccably until the unexpected occurred. Company ABC chartered a vessel to move their equipment to their client, Company XYZ. A vessel with specific characteristics to properly handle the cargo was selected. The time frame worked in accordance with the production schedule at the destination. Coordination of the pre-carriage and on-carriage portion was in line and ready to be implemented. Stevedores on the load and discharge side were vetted and put into place and surveyors were on hand for each critical portion of the move. Weather conditions were adequate and the move commenced. The cargo moved to the vessel and was properly loaded, lashed and secured. Export clearance was completed and the vessel departed. Less than 24 hours after sailing, the vessel collided with another and there was significant damage to the hull. The vessel was towed to a nearby terminal for assessment and repairs.
Fortunately, the cargo received no damage, however, that was not the case for the vessel. The charter party assumed the carrier’s insurance would cover for such incidents, however, per the terms of the charter agreement, the charterer was responsible for the costs of repairs to the hull as well as the financial loss incurred from the vessel being unable to trade during its time in dry dock for the repairs.
This incident is one example of many that could occur where the charter party has exposure.
Avoiding Costly Surprises
Without a Charterers Legal Liability Policy in place, a charter party is responsible for situations they cannot predict nor prevent, and without contracts between the various charter party members, all parties are at risk for these exposures. Is this a mandatory coverage when chartering? Surprisingly no, very few charter vessels require proof of coverage by the charter party, therefore it is highly recommended to avoid costly circumstances that may occur.
Coverages under a Charterers Legal Liability Policy may include defense, expenses, hull, and protection and indemnity, or P&I. We will use the above example to explain how the coverages could be utilized.
For defense, the collision would most likely result in legal proceedings, therefore, the defense clause could possibly cover claims and disputes as well as recovery costs.
Various items fall under expenses. Due to the collision, the charter party will likely face fines due to marine pollution from oil/bunkers entering the ship channel. While we are discussing bunkers, bunker removal and/or replacement fees may occur. If measures to prevent further damage to the vessel, cargo and/or environment are not taken, the charter party may be subject to suit and labor expenses.
Regarding hull cover, damage to the hull as well as demurrage would potentially factor into the scenario due to the collision. Remember, the charter party is responsible for both the cargo and the vessel.
Finally, we look at the likely P&I exposures. Loss or damage to property, collision, wreck removal and towage are items that would all apply in this case. There could also be potential injury and/or loss of life to crewmembers. If bunkers leaked into the ship channel, pollution would be added to the list of blame. Last, but surely not least, general average could be declared, which may perhaps prolong the entire event to an extremely uncomfortable time frame and increase the overall cost exponentially.
The charter agreement typically places all liability onto the charter party. Proper legal counsel is advised prior to signing as well as discussing the benefits of a Charterer’s Legal Liability Policy. When considering the significance of coverage provided within the policy, it is difficult to comprehend how a charter process can move forward without it. This step is just as important as finding the right vessel and taking all measures possible to protect the cargo.
La Donna Logan is account manager at Roanoke, an insurance group specializing in cover for transportation intermediaries, customs brokers and supply chain risks.
Photo credit: Shutterstock
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