October 7, 2013

What issues should you consider when insuring a non-Norwegian flagged MODU under the Nordic Plan 201

The Nordic Plan 2013 does not include an obligation on the insured to maintain a vessel’s “seaworthiness”, but instead refers to breaches of safety regulations by the insured as a defence to liability for an insurer. Safety regulations contained in Norwegian ship safety legislation will ensure high safety standards for any vessel which is Norwegian flagged or operating in Norwegian waters.

Clyde & Co hosted a panel seminar on 17 September 2013 to discuss what considerations should be kept in mind when insuring a non-Norwegian flagged vessel. The panel was made up of speakers from different areas of the energy insurance market, who provided different perspectives and a rounded discussion – Mike McMahon from Charles Taylor Adjusting, Radmil Kranda from Gard and Nigel Chapman and Margaret Curzon from Clyde & Co. Despite the rainy afternoon, over 60 members of the energy underwriting market attended, including senior underwriters, adjusters and claims handlers.

Nordic Plan 2013

Margaret Curzon opened the panel discussion by presenting a short summary of the Plan, which highlighted some key features and changes. She discussed Clause 3-25, which provides that if a safety regulation has been breached, the insurer shall only be liable to the extent that the loss is not a consequence of the breach, or that the assured has not breached the safety regulation through negligence.

The 2013 Plan clarified the burden of proof under this Clause; the insurer has the burden of proving that a safety regulation has been breached, unless the vessel springs a leak whilst afloat. She commented that while this caveat may seem to provide a level of comfort for insurers in reversing the burden of proof in event of a leak, in reality it will be relatively straightforward for the insured to satisfy this test, i.e. prove that he did not breach a safety regulation through negligence, and that there is no causal connection between the breach of safety regulation and the casualty, particularly if the vessel or Unit is on the sea bed and cannot be recovered or inspected.

A “safety regulation” for the purposes of a non-Norwegian vessel under the 2013 Plan will likely be the class or flag requirements of the vessel. Regulations can also be stipulated in the insurance contract or prescribed by the insurer pursuant to the insurance contract.

Margaret Curzon also discussed causation under the 2013 Plan. She noted that under the Plan, as distinct from English law, if the loss is caused by a combination of perils, all causative factors are given weight in proportion to their influence (Clause 2-13).

Causation

Mike McMahon presented a loss scenario involving a hypothetical MODU covered under the 2013 Plan, in order to investigate causation and the effect of the 2013 Plan. In this scenario, the MODU had undergone various works and was in class with a leading class society. The Unit was flagged in Singapore which only requires ISM Code compliance for Units which are self propelled. This particular MODU had been modified to remove the Unit’s propulsion system, and as a result there was no requirement for the Unit to be ISM compliant.

Mike McMahon then ran through a very detailed analysis of the loss. A computer animation of the incident helped the panel and the attendees get to grips with the mechanism of the failure. In particular, a breach in the hull seems to have occurred at the point where the propulsion system was removed. However, it was clear that the loss was a result of a combination of causes, including crew error, potential design defect and potential breach of safety requirements during the removal of the propulsion system.

The Unit in the scenario quickly sank to the sea bed and it was not possible / cost effective to inspect. As a result, not all the causal factors are known, and as the Unit was classed with a leading Class society, without express and apparent breaches of safety regulations there are few defences available to insurers. Mike McMahon noted that interest becomes payable one month after notice of the casualty to the insurer, at (depending on the currency of the sum insured) LIBOR + 2%, increasing to punitive rates after the “due date”. This is a significant, and sometimes crucial, factor for insurers handling claims under the 2013 Plan.

Checklist

Nigel Chapman summarised the discussion by reference to a checklist of issues which should be considered when an incident involves a non-Norwegian flagged Unit:

  1. Coverage issues

    – Cause of loss/combination of perils

    – Infringement of safety regulation?

    – Gross negligence?

    – Identification of “Assured” for these purposes

    – Interest provisions

  2. Adjusting the loss

    – Duty of Assured to provide documents

    – Right of insurer to approach class

    – Disputes concerning adjustment

    – Due date

    – Wreck removal?

  3. Subrogation

    – Warranties

    – Position of class

He noted that although the loss in the scenario may have been caused by a failure in the hull, as “unseaworthiness” could not be relied upon as a defence by insurers and the Unit was in class, it was very difficult for insurers to provide any defence to a claim. Perhaps if the Unit was a Norwegian flagged vessel with the heightened safety regulations and requirements which that entails, the works on the hull would have been more closely supervised. In addition, there would be more documentation to evidence compliance by the insured with safety regulations, including copies of these documents onshore.

Conclusion

The Panel concluded that, while the requirement of “seaworthiness” was not necessary in the 2013 Plan for Norwegian flagged vessels or vessels operating in Norwegian waters, underwriters might consider including certain safety requirements into the Plan if they are insuring non-Norwegian flagged vessels. This provides insurers with greater comfort in the event of a loss, as they can put the insured to a proof that they have not breached more extensive safety regulations through negligence.

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