Hull and machinery cover

The purpose of Hull and Machinery Cover
The main purpose of Hull and Machinery cover is to provide the shipowner with an expectation of status quo regarding a vessel's operational ability during a maritime enterprise. Since marine perils are a risk that the shipowner assumes each venture, the shipowner takes out Hull and Machinery cover to protect against losses that may occur to the vessel and her equipment during the enterprise.

The Cover
The three sets of Clauses most commonly used are the Norwegian Marine Insurance Plan 1996, Version 2003 (the Plan), the English Institute Time Clauses Hulls 1/10/83 (ITCH) and the American Institute Hull Clauses (June 2,1977). The English Clauses have also been issued in newer versions that are not widely used, but the newest version known as the International Hull Clauses 1/11/03 (IHC) appears to have won some support and may be a substitute for ITCH in the future.

The Plan has been agreed between the insurance companies and shipowners, whereas the ITCH, IHC and American Conditions have not.

Hull and Machinery insurance, based on the Plan, covers all risks subject to the normal exclusions for wear and tear and similar causes such as lack of maintenance. Furthermore, war risks, intervention by a state power, insolvency and nuclear perils are also excluded from the standard Hull and Machinery cover. Physical damage to parts that are defective due to error in design or faulty material is covered, subject to those parts that have been approved by the Classification Society. The Plan covers 4/4ths collision liability and liability which is a result of striking fixed and floating objects (RDC - Running Down Clause and FFO -Fixed and Floating Objects) while the ITCH and IHC covers 3/4ths RDC but not FFO (IHC have an optional 4/4ths RDC and FFO cover) and the American Conditions cover 4/4ths collision liability but not FFO. The advantage of an all risks system is that all causes of loss, however unusual or unimaginable, are covered unless the insurer can establish that a specific exclusion applies.

The ITCH, the IHC and the American Conditions provide cover on a named perils basis (the assured must prove that the loss or damage was caused by one of the insured perils), but are usually supplemented by an Additional Perils or Liner Negligence clause. With this clause added, the ITCH, the IHC and American Conditions will cover nearly all losses that might arise in practice and which are covered by the Plan. An exception to this is that under the standard Additional Perils/Liner Negligence clauses, the cost of repairing or replacing any part that is defective due to error in design or construction is excluded unless the defect has caused consequential damage or the costs can be defined as a cost listed elsewhere in the clauses, e.g. bursting of boilers or breakage of shafts. There is no equivalent restriction in the Plan §12-4. On the other hand, the Plan contains specific rules excluding losses arising from lack of maintenance, which are probably more stringent than the rules that follow from MIA (the Marine Insurance Act) section 55 and English case law. The relationship between the cover for "perils of the sea" and the exclusion of wear and tear in MIA s.55 has caused considerable discussion, particularly in connection with the decision in the "Miss Jay Jay" case.

The English Court of Appeal decision in the "Nukila" case seemed to expand cover under Cl. 6.2. of ITCH compared to the traditional view in that any damage occurring during the policy period as a result of any latent defect is covered. If the term latent defect includes an error in design and is not excluded by the exclusion for inherent vice in MIA S.55 then the cover under Cl. 6.2 for loss caused by latent defects appears to be equivalent to that provided by the Plan. This means that the Additional Perils clause could provide less cover than the "Inchmaree" clause, Cl. 6.2 in this type of situation. This situation has been dealt with in IHC by inserting a specific exclusion for the costs of correcting the latent defect in Cl. 2.2. However, half the costs common to the correction of the latent defect and repairing the damage are covered by Cl. 2.4.

Under the Plan (§ 12-2) the assured cannot claim compensation for unrepaired damage unless ownership of the vessel has passed from the assured (normally by sale). Under ITCH (Cl. 18) and IHC (Cl. 20) the assured may claim for unrepaired damage at the termination of the policy (but not in the event of a subsequent total loss sustained during the policy period). In relation to temporary repairs, and costs incurred in expediting repairs the Plan (§§ 12-7 and 12-8) provides cover for extra expenses incurred in order for the assured to save (costs and) time, with certain limitations. Under English law there is no similar provision and the insurer is liable for "reasonable cost of repairs..." which is normally the cheapest repair alternative.

It is important to be aware of the nuances and exclusions from Hull and Machinery cover as well as to be aware of cover options and requirements. For instance, although the ship, equipment and spare parts are covered by the Hull and Machinery insurance, loose items that accompany the ship in its trade, but which cannot be deemed to be a part of it, e.g. stores and supplies are covered under the ITCH, but not under the Plan. As a result, the shipowner may consider purchasing additional insurance cover for items falling outside of the Plan's cover provisions. However, many times, the loss and/or damage of such items fall well below the deductible amount. Therefore, an individual assessment should be made.

Another important consideration is cover of items that are not normally on board the ship for an indefinite or prolonged period of time. The Plan's prerequisite for covering equipment and spare parts under the Hull and Machinery cover is that they are normally on board. According to the Plan, actual ownership is irrelevant so long as there is a transfer of liability of risk. Accordingly, the shipowner does not have to take out a separate property insurance for equipment that he does not own, but for which he carries the risk. Of interest is the Plan's cover of third party interests, which includes spare parts.

ITCH has to be supplemented by the Leased Equipment Clause (1/11/95) in order to provide the assured with this type of cover. There is, however, an important reservation in that the liability of the insurers shall not exceed the assured's contractual liability for the leased equipment, or its replacement value. This means that, when examining any claim involving leased equipment, it will be essential to call for the contract of hire in order to ascertain what the assured's contractual liability is.

The IHC includes a Leased Equipment Clause (Cl. 3), which provides a cover with similar reservations to those mentioned above.

Items that are temporarily removed from the ship is another area worth focusing upon. Hull and Machinery cover is relevant in connection with loading and discharging, routine overhauling of special equipment and when machinery or equipment is sent to special repair yards. The prerequisite for cover under § 10-2 of the Plan is that the relevant object has been on board and that the intention is to put it back on board before departure. (Thus, new equipment on its way from the manufacturer to the ship is not covered by Hull and Machinery insurance.) ITCH has to be supplemented by the Parts Removed Clause (1/11/95). Cover is limited to 30 days whilst removed. Period in excess of 30 days is held covered on terms to be agreed provided notice is given to insurers prior to the expiry of the 30 day extension. IHC includes a Parts Taken Off Clause (Cl. 4), which limits cover to 60 days whilst removed. Period in excess of 60 days is held covered on terms and additional premium to be agreed provided notice is given to insurers prior to the expiry of the 60 day extension.

Furthermore, the Plan provides for the additional condition that objects are removed in connection with the operation of the ship or due to situations such as repair or rebuilding. Items such as forklift trucks and other objects accompanying the ship will have to be indemnified by the Hull and Machinery insurer if they are damaged while ashore in connection with loading or discharging. It is important that the shipowner is aware of the absolute condition that the objects removed from the ship are intended to be brought back on board before departure from the port in question. ITCH has to be supplemented by the Parts removed Clause (1/11/95), see the previous section.

If the interest covered by the insurance is mortgaged, the Plan provides cover also for the mortgagee's interest - in other words the mortgagee is automatically co-insured (§ 7-1), which is not the case regarding other third parties. Under ITCH and IHC the mortgagee has to require the mortgagor shipowner to assign the hull policies in his favour. This is frequently achieved by endorsements on the shipowners' policies noting the interest of the mortgagee.

Timing of Insurance
The standard cover normally runs for a period of 12 months and needs to be renegotiated at each renewal. Cover for new equipment and spare parts commences from the time the object concerned is "swung over the railing" to be placed onboard ship.

The shipowner should also be aware of the situations where cover can be denied or reduced:

Duty of disclosure of the person effecting the insurance
The assured has, before the insurance contract is concluded, an obligation to disclose all circumstances that are material to the insurer when deciding whether and on what conditions he is prepared to accept the insurance. Included in this obligation are situations where the person effecting the insurance subsequently becomes aware that he has given incorrect or incomplete information regarding the risk - he then has a duty to notify the insurer without undue delay (the Plan § 3-1).

If the person effecting the insurance has fraudulently failed to fulfil his duty of disclosure, the contract is not binding on the insurer. (the Plan § 3-2). If the insurer, at the time when the information should have been given, knew or ought to have known of the matter, he is prevented from pleading that incorrect or incomplete information has been given (the Plan § 3-5).

Alteration of the risk
An alteration of the risk occurs when there is a change in the circumstances which, according to the insurance contract, are to form the basis of the insurance. It is, furthermore, a prerequisite that it alters the risk contrary to the implied conditions of the contract (the Plan § 3-8).

If an alteration of the risk occurs, the insurer may terminate the insurance by giving 14 days' notice (the Plan § 3-10). The assured has a duty to notify the insurer without undue delay if he becomes aware that an alteration of the risk will take place or an alteration has already taken place (the Plan § 3-11). Examples of alteration of risk are:

Loss of class or change of classification society (the Plan § 3-14)
Trading limits (the Plan § 3-15)
Change of ownership (the Plan §3-21).

These examples are commented on further below.

Unseaworthiness
The insurer is not liable for a loss that is a consequence of the ship not being in a seaworthy condition. A prerequisite is that the assured knew or ought to have known of the ship's defects at such a time that it would have been possible for him to intervene (the Plan § 3-22). In respect of ITCH and IHC, for the insurer to avoid liability, English law requires that the assured should be privy to the unseaworthiness. In other words, the assured must have knowledge, not only of the facts constituting the unseaworthiness, but also knowledge that those facts rendered the ship unseaworthy (Marine Insurance Act S39(5)).

Safety regulations, breach of safety regulations - warranties
A safety regulation is a rule that deals with measures for the prevention of loss. It can be issued by public authorities or by the classification society, stipulated in the insurance contract or prescribed by the insurer in accordance with the insurance contract (the Plan § 3-24). If the assured is in breach of a safety regulation, the insurer is only liable to the extent that it is proved that the loss is not a consequence of the breach, or that the assured was not responsible for the breach (the Plan § 3-25).

ITCH and IHC does not use the term safety regulations. The area is addressed by warranties. Under English law a warranty must be strictly complied with, whether material to the risk or not. In case of breach, the insurer is discharged from liability as from the date of breach of warranty (subject however to certain exceptions), (MIA S. 33). However, under IHC the duty to follow statutory and Class requirements is not formulated as a true warranty in that the Underwriters is only relieved from liability if the breach was causative of the loss being claimed for.

Intent
If the assured intentionally brings about the casualty, he has no claim against the insurer (the Plan § 3-32).

Gross negligence
Any liability of the insurer shall be determined based on the degree of fault and circumstances generally (the Plan § 3-33).

Classification by a class society
A prerequisite for insurance cover is that the ship is classed with a classification society approved by the insurer (the Plan § 3-14). It is not a requirement under ITCH 1/10/83 (contrary to IHC) that the vessel must be classed. However, if the vessel is actually classed, the insurance terminates automatically at the time of change, suspension, withdrawal or expiry of class.

Under the Plan, § 3-14, the insurance automatically terminates in the event of loss, suspension or change of class. Any failure to carry out a class recommendation or survey within the required time limit under the Plan is treated as a breach of a safety regulation. This means that the insurance remains in force but the insurer is not liable for loss or damage that is caused by the failure to comply with class requirements. Under IHC, a failure to carry out a Class requirement will relieve Underwriters for liability for any claim that is caused by the failure to carry out such requirement (Cl. 14.4).

Change of ownership, management etc.
Change of ownership can have an influence on the risk that the insurer has undertaken. An alteration of the risk occurs when there is a change in circumstances which, according to the contract, are to form the basis of the insurance, and which alter the risk contrary to the implied conditions of the contract.

The Plan provides for automatic termination of cover in the event of change of ownership. The same result follows from ITCH clause 4 and IHC clause 14, as well as the American Institute Hull Clauses. The Plan stipulates that any change of management or bareboat charterer is an alteration of the risk under §3-8. This means that if a change of management is made without the insurer being notified the insurer can only avoid liability for losses that have occurred after the change by proving that he would not have accepted the risk had he known that the change would be made during the currency of the policy. Under ITCH and IHC a change of management etc. without giving notice to and obtaining the consent of the insurer results in automatic termination.

Loss due to ordinary use
The insurer is not liable for loss that is a normal consequence of the use of the ship and its equipment. The deciding factor is whether the insured has deliberately used the ship in a manner or in a trade where damage is foreseeable (the Plan § 10-3). This reflects a central principle of insurance law, i.e. that the insurance shall only cover unforeseeable and unpredictable losses. It is therefore also the case under ITCH, IHC and the American Institute Hull Clauses.

Inadequate maintenance
The insurer is not liable for costs incurred in renewing or repairing a part or parts of the hull, machinery or equipment which are in a defective condition as a result of wear and tear, corrosion, rottenness, inadequate maintenance and the like (the Plan § 12-3). On the other hand, consequential damage is covered.

Consequential damage is also covered under ITCH and IHC.

Trading limits
The Plan § 3-15 requires that the assured shall notify the insurer before the ship proceeds beyond the ordinary trading limit. The ship may sail in the conditional trading areas, subject to an additional premium and to any other conditions that might be invoked by the insurer. If the ship proceeds into an excluded trading area, the insurance ceases to be in effect. The insurer can, however, give permission in advance. If the infringement was not the result of an intentional act by the master of the ship the insurance is still in effect. The Appendix to the Plan supplements § 3-15 in that it defines and illustrates the excluded and conditional trading areas.

Under ITCH and IHC the ship is held covered provided prompt notice is given. If notice is not given, the assured will be unable to recover anything if loss or damage occurs while the ship is outside the ordinary trading limits.

Identification - Are the actions those of the assured?
The rarely used 1995 version of ITCH introduced a change in the wording of the due diligence proviso in clause 6.2. It specifically stated that not only lack of due diligence by the assured, owner or managers, but also by a superintendent, could deprive the assured of cover. The wording was rather controversial, and in IHC (clause 2.2) the position has been brought back to the 1983-version of ITCH.

The Plan § 3-36 deals with this problem in general terms. It states firstly that negligence of the master or crew in their service as seamen cannot be pleaded as a defence by the insurer. Secondly, it is stated that the actions of persons or companies to whom functions of significant importance for the insurance have been delegated will be regarded as the actions of the assured. The commentary to this rule makes it clear that this wording is intended to be an expression of existing practice and is not intended to introduce any change. It is assumed that it is in line with general principles of both English and American law. In reality the courts will have to evaluate each case to decide whether the person at fault has had the kind of authority that justifies that his actions are identified as the actions of the assured.