Loss of hire cover

The purpose of the Loss of Hire Cover
The Loss of Hire cover primarily protects the shipowner against losses where the ship is wholly or partially deprived of income as a result of the vessel being out of operation whilst repairing damage that is recoverable under the Hull and Machinery policy. Time charterparties usually contain off-hire clauses that may be triggered when the vessel is damaged. The charterer may therefore be able to put the vessel off-hire, i.e. not pay hire for the time lost. Such lost hire could be covered under the Loss of Hire cover. For example, Clause 15 of the NYPE form charterparty provides that loss of time due to damage to hull which prevented the full working of the vessel, would enable the charterer to put the vessel off-hire. If the vessel owner did not have a loss of hire insurance, this loss would fall squarely on his shoulders. It may be that the owner is able to financially bear any amount of lost hire, however, a loan institution may require the owner to purchase a loss of hire insurance.

Even if the vessel is not damaged, a loss of hire policy under the Norwegian Plan also covers loss where the vessel is wholly or partially deprived of income where the ship has been stranded, is prevented from leaving a port by physical obstructions, or loses time as a result of measures taken to salvage or remove damaged cargo, or as a consequence of an event that is allowed in General Average. Loss of hire is a commonly used form of cover. It has been popular among Scandinavian owners for many years, having been offered by Norwegian insurers since the 1950's.

The Cover
Loss of hire is dealt with separately in chapter 16 of the Norwegian Plan. In addition to the Plan, two other main sets of conditions exist, i.e. the A.B. Stewart 1.10.83 wording (English) and the American SP40B (the Lazard form).

When covered by the Plan, the prerequisite for the liability of the insurer is damage to the ship that is covered by the Plan, or the vessel's actual Hull and Machinery conditions if agreed by the loss of hire insurer. Deductible amounts are not considered when determining whether damage is covered by the hull conditions.

All three sets of conditions exclude total loss.

If War insurance has not been arranged, the Loss of Hire insurance against war risks must be agreed separately. War insurance may cover the issue of loss of hire if taken out. However, if not arranged, loss of hire alone will not cover loss of hire during war or war-like circumstances.

Calculating liability
The loss of hire cover protects the owner from a daily loss of income during a certain number of days, thus the owner must stipulate both the daily amount which reflects the actual daily income of the vessel and the number of indemnity days required in order to cover an "average worst case" scenario at a repair yard.

The sum insured is calculated by multiplying the number of indemnity days with the vessel's stipulated daily income.

The parties must agree upon the following items:

- the deductible period
- the number of days compensated per accident
- the total number of days compensated for all accidents during the policy period.

The insured can normally choose between an "assessed" daily amount in the policy and an "open policy" which would cover the actual net loss of income incurred. In practise, the daily amount will nearly always be assessed.

Under the Norwegian conditions, in case the daily amount is left "open", this means that the number of days (provisionally) agreed upon in reality can be extended as long as the compensation is within the sum insured. In other words, a 14/90/90 policy may be compensated for more than 90 days as long as the total amount does not exceed the sum insured.

Sometimes a fleet limitation is added to the placing for example, 14/90/180. The figure 180 would indicate that 180 days compensation is the total amount insured, not only for each vessel, but also for the entire fleet covered.

Duration of insurance
A loss of hire insurance policy normally runs for 12 months and is negotiated at each renewal.