Circular No Circular No. 9/97


December 1997



TO THE MEMBERS



Dear Sirs,

RE: US POLLUTION LEGISLATION - CERTIFICATES OF FINANCIAL RESPONSBILITY (COFRS) - UPDATE

This circular relates to certificates of financial responsibility (water pollution) (COFR) required for trading to the United States. It is addressed to all owners and operators of vessels including tank vessels, dry cargo vessels and cruise vessels trading in US waters. With effect from 28 December 1997, all these categories of vessels are required to obtain COFRs prior to entry into US waters. Any dispensation with regard to non-tanker vessels ceases. Full details of the requirements, including COFR amounts required are contained in Circulars 1/94 and 4/94.

Since the last circular in this matter various industry schemes for the provision of COFRs have been developed and/or amended. These include a surety bond facility through International Sureties Limited and an insurance-based scheme through COFRSURE. Arvak and SIGCo have amended their terms and there have been changes in the management of Shoreline and Arvak. All these facilities are acceptable to the US Coast Guard (USCG).

1. INTERNATIONAL SURETIES LTD
This facility has only just been introduced. It is only available to non-tanker vessels. The maximum COFR is USD 70 million. This facility is a bonding facility provided by International Sureties Limited ("ISL").

The bond facility is one of the approved methods by which financial responsibility can be established under the COFR regulations and the wording of the Bond follows that drafted by the USCG and published in the Federal Register of 7 March 1996. It is open to non-tanker shipowners entered in an International Group Club. ISL have confirmed that the premium is said to be USD 1,000 per vessel per year regardless of size.

The scheme is expected to operate in the following way:

A Member interested in the bonding facility offered through ISL will first obtain a bond form and an indemnity agreement from ISL. The Member will then advise the Club which vessels are to be covered under the bonding facility. On receiving this information, the Club will provide to the Member a letter confirming entry of the vessel and a letter addressed to ISL confirming the Club?s agreement to give notice of non-renewal and cancellation of insurance. The Member will then forward to ISL: (a) the completed and signed bond form, (b) the signed indemnity agreement typed on the shipowner?s letterhead, (c) the letters from the Club confirming entry and agreement to give notice of non-renewal/cancellation of insurance and (d) the premium of USD 1,000 per vessel.

Comments
The indemnity agreement required from the shipowner is wider than SIGCo, e.g. a shipowner is required to reimburse the bonding companies for legal costs incurred by them in the case of a claim against them. ISL advise, however, that it is a standard wording required by the surety companies in respect of any bond which they issue and is non negotiable. Unlike previous proposals for COFRs based on a bond, ISL do not require any other collateral security such as letters of credit.

The letters to be provided by the Club confirming entry and agreement to provide notice of non-renewal/cancellation of insurance follow the wording adopted under other COFR facilities. The Club is able to provide these letters to Members on request and can supply copies of sample letters.

Largest COFR available: USD 70 million
Only available for non-tanker vessels.
Premium: USD 1,000 per vessel.

The address of ISL is :
International Sureties, Ltd
210 Baronne street, Suite 1700
New Orleans, LA. 70112-1722
USA
Tel: 00 1 504 581 6404
Fax: 00 1 504 561 1876

2. COFRSURE
COFRSURE was launched in June 1997 and is a provider of guarantees backed by insurance and reinsurance in the London and Bermuda markets. It is administered by Terra Nova Underwriting Agency ("TNUA") on behalf of Scandinavian Re Limited. It was approved by the USCG on 30 May 1997. It is available to all shipowners entered in an International Group club.

Like Arvak, SIGCo, and Shoreline, COFRSURE is based on difference in conditions insurance.

COFRSURE's stated strategy includes providing "continuing credit" and "no claims bonuses". A continuing credit, similar to a loyalty bonus, is granted after 12 months on renewal of the policy. The credit available is 10 per cent of the original premium paid by the shipowner and is available on all guarantees. The No Claims Bonus is available after 24 months. The amount refundable is 15 per cent of the original premium paid and is subject to no losses on the policy. The No Claims Bonus can, however, be protected on payment of an additional 2.5 per cent of premium, even if there is a loss during the year.

Comments
Generally, the COFRSURE Agreement appears to be even more onerous in terms of the information to be provided to the insurer and administration than that of the earlier industry providers.

Conditions in excess of those in SIGCo and Arvak contracts are:

The indemnity required under the COFRSURE Agreement is much wider in ambit than that of SIGCo and Arvak. More control is retained by COFRSURE over payments to be made under the guarantee as COFRSURE can make payments without reference to the Owner or the Club.

COFRSURE require a Power of Attorney to enable them to comply with the terms of the guarantee to the USCG. This is against the tide of other COFR providers (see below).

The COFSURE Agreement also requires the applicants to have war risks cover in addition to full P&I and collision cover.

The insurer is given an automatic right to terminate the agreement on the happening of certain events and the termination will be of immediate effect unless the termination is at the request of the shipowner. The events giving rise to termination are similar to those in Rules 25.1 and 25.2(a) and (c) of the Club Rules. There is also an automatic right to terminate with immediate effect in the event of a breach of the applicant of any of the undertakings, representations or warranties.

If the agreement is terminated, then COFRSURE will be entitled to cancel the guarantee issued to the USCG. There is nothing in this agreement which requires COFRSURE to give notice to the applicant of the cancellation of the guarantee. Since termination is automatic, unless at the instigation of the shipowner, the applicant could therefore find himself trading in the US without the necessary guarantee and thereby expose himself to fines by the USCG.

COFRSURE requires that the Classification Society in which the vessel is to be entered is to be approved by COFRSURE and also that the vessel will comply with its flag requirements.

The Club is required to provide letters to the Member confirming entry and the usual agreements that the agreement with COFRSURE will not constitute a double insurance for the purpose of Club Rules, that any payments by the Guarantor shall be considered to be payment by the Member for the purposes of the "pay to be paid" rule and that they will inform the insurers of any non renewal and cancellation of insurance. The form of the letters of undertaking required from the Club are identical to those required under the SIGCo Agreement. The Club is able to provide such letters on request.

The address to which applications should be sent is:
Scandinavian Reinsurance Company Limited
c/o Terra Nova Underwriting Agency Ltd., Richmond House, 2nd Floor
12 Par-La-Ville, Hamilton, Bermuda
Tel: 00 1 441 292 6320
Fax: 00 1 441 292 1454
e.mail: gbtnard 1 @ ibmmail.com.

3. ARVAK
ARVAK has confirmed that it no longer requires a Power of Attorney under the terms of its Agreement. We are advised that the ARVAK agreement is presently being amended to reflect this. Further information will be circulated when the amended agreement is available.

ARVAK has confirmed also that it will now cover legal costs incurred by it if it is sued direct in the case of a spill following changes with regard to the Management of ARVAK (on which we comment below).

4. ARVAK/SHORELINE
Shoreline Mutual Management have now acquired the controlling interest in ARVAK and will now manage both ARVAK and Shoreline Mutual, although the two facilities will remain separate in that ARVAK continues as a fixed cost basis facility and Shoreline as a mutual.

The joint management has enabled ARVAK to obtain an expanded reinsurance cover, which has led to ARVAK amending its facility.

It is understood that the Shoreline Rules will remain unchanged for the 1998 policy year.

5. SIGCo
SIGCo has made the following amendments to their Agreement:
(a) SIGCo has dispensed with the need to provide a Power of Attorney. This decision took effect as of 26 September but applies not only to prospective applicants for COFR guarantees as from that date but also to all Powers of Attorney which have been supplied in connection with prior applications. SIGCo have also given notice that it waives its rights under any Powers of Attorney previously granted; and
(b) Clause 1.2(d) has been amended to include a provision that in respect of any recommendations or qualifications of a classification society, the applicant undertakes to comply with such recommendations or to take steps to remove such qualifications within the time specified by the classification society; and
(c) SIGCo has now deleted Clause 3.1.1(b) which deals with costs in excess of USD 50,000. This amendment will have effect as from 12 March 1997 and applies to all COFR guarantees issued prior to, as well as subsequent to this date. The effect of the amendment is to remove the cap of USD 50,000 previously applicable by Clause 3.1.1(b) to payments by SIGCo for costs and expenses under Clause 3.1.2(c).

We are advised that the present SIGCo agreement is being amended to reflect these changes and will be published shortly.

6. FIRSTLINE
Firstline has not accepted any new business since 27 December 1996.

GENERAL
Members are reminded that the Club has no knowledge of reinsurance arrangements made and can merely report on the information which has been published. It will be for each Member and his broker, where relevant, to assess the scheme most suited to his needs and to satisfy himself that he has sufficient information on the scheme for which he is applying with regard to financial viability and otherwise.

All requests for documentation should be addressed by fax to Liv Gundersen or Alf Ivar Sørensen in Arendal or Anne Walker in Gard (UK) Ltd.

Yours faithfully,
ASSURANCEFORENINGEN GARD
-gjensidig-

John G. Bernander
Managing Director