Table of contents
1 A Member shall (subject to Rule 25.5) cease to be covered by the Association in respect of any and all Ships entered by him in the following circumstances:
a where the Member is a corporation, a resolution is passed for the voluntary winding up of the Member or an order is made for its compulsory winding up or it is dissolved or a receiver or similar official to all or part of its affairs is appointed or any secured party takes possession of any of its property or it seeks protection from its creditors under any applicable bankruptcy or insolvency laws or any similar event occurs (in the determination of the Association) in any applicable jurisdiction; and
b where the Member is an individual, the Member dies or becomes incapable by reason of mental disorder of managing or administering his property and affairs or he becomes bankrupt or he makes any composition or arrangement with his creditors generally or a receiving order is made against him or any secured party takes possession of any of his property or any similar event occurs (in the determination of the Association) in any applicable jurisdiction.
2 The Member shall (subject to Rule 25.5) cease to be covered by the Association in respect of any Ship entered by him in the following circumstances:
a the Ship becomes a total loss;
b the Ship is, in the determination of the Association, abandoned by the Member on account of its total loss appearing to be unavoidable;
c the Ship is accepted by the hull underwriters (whether of marine or war risks) as a constructive total loss;
d the Ship suffers damage and the cost of repairs (as determined by the Association) will equal or exceed the higher of 80 per cent of its insured value or of its value in repaired condition (as determined by the Association);
e the Ship is transferred to a new owner by sale or otherwise;
f new managers of the Ship are appointed or there is a change in the operator of the Ship;
g any mortgagee or other secured party enters into possession of the Ship;
h the Ship ceases to be classed with a classification society approved by the Association, or its class is suspended;
i the Ship is requisitioned;
j the Ship, with the consent or knowledge of the Member, is being used for the furtherance of illegal purposes.
3 Where a Ship disappears, it shall be deemed to be a total loss ten days from the day it is last heard of.
4 Notwithstanding and without prejudice to Rules 25.1, 25.2 and 25.3 a Member shall forthwith cease to be insured by the Association in respect of any and all Ship(s) entered by him if any Ship is employed by the Member in a carriage, trade or on a voyage which will thereby in any way howsoever expose the Association to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever by any State where the Association has its registered office or permanent place of business or by any State being a Major Power or by the United Nations or the European Union. For the purpose of this Rule 25 (3) ”Major Power” means any of the following States: United Kingdom, United States of America, France, the Russian Federation and the People’s Republic of China.
5 Notwithstanding the provisions of Rules 25.1, 25.2 and 25.4, the Association may decide in any particular case that cover shall be continued without interruption, or that cover shall be reinstated, in either case on such terms as the Association shall determine.
6 Notwithstanding the provisions of Rule 25.2.a, b, c and d, the Association shall cover subject to these Rules and the terms of entry agreed, liabilities, losses, costs and expenses flowing from the casualty which gave rise to the total loss or constructive total loss of the Ship.
(A) A Member shall...cease to be covered... (Rules 25.1 and 25.2)
Rule 25 provides for cessation of cover on the occurrence of certain events. Cover will cease automatically on the occurrence of such events, i.e. without a need for the Member or the Association to give notice to the other party. This is to be contrasted with the position under Rules 23 and 24, which, with the exception of Rule 24.2.a, require the service of notice by the Member or the Association. The effect of a cessation of cover is described in Rule 26.
(B) ...in respect of any and all Ships entered by him... (Rule 25.1) ...in respect of any Ship entered by him... (Rule 25.2)
The events described in Rule 25.1 are ones that affect the Member’s personal status and his ability to perform his obligations as a Member of the Association, whereas the events described in Rule 25.2 are ones that affect individual Ships. The entry of all Ships which have been entered by the Member will cease on the occurrence of the events described in Rule 25.1, whereas it is only the entry of the particular Ship that is affected by the events described in Rule 25.2, which entry will cease on the occurrence of such events.
(C) ...in the following circumstances... (Rules 25.1.a and b)
It is clearly important for the continued financial well-being of the Association and its membership that individual Members remain able and willing to contribute funds as and when required. The occurrence of any of the events described in Rule 25.1 may seriously affect the Member’s continuing ability to do so and therefore, it is considered prudent that the entry of all Ships entered by the Member should cease on the occurrence of such events. Rule 25.1.a applies where the Member is a corporation and Rule 25.1.b where the Member is an individual.
The circumstances itemised in Rule 25.1.a apply when the Member is a corporation are the following:
“...a resolution is passed for the voluntary winding up of the Member...” i.e. a decision is taken by the corporation itself to wind up the business;
“...an order is made for the compulsory winding up of the Member...” i.e. a court order which declares that the corporation is insolvent or has to be wound up for any other reason;
“...the Member...is dissolved...” e.g. the partners of a limited liability partnership decide to part company;
“...a receiver or similar official to all or part of its affairs is appointed...” e.g. a consortium of banks from which the Member has borrowed funds to finance the Ships decides to exercise its mortgage rights by administering the affairs of the Member;
“...any secured party takes possession of any of its property...” e.g. banks who exercise mortgage rights to acquire ownership of Ships;
“...it seeks protection from its creditors under any applicable bankruptcy or insolvency laws...” as may happen pursuant to Chapter 11 proceedings in the USA. For example, a Member may file a declaration of bankruptcy, which is granted, but the creditors subsequently accept the Member’s offer to continue to operate the business of the corporation on their behalf.
“...any similar event occurs...” The Association’s Members are domiciled in many different countries and there is a wide diversity of laws, as well as legal and administrative procedures, in those different jurisdictions which affect the liquidation, dissolution etc., of a corporation. Therefore, the Association is given the right in the interests of the membership as a whole to determine whether a particular event shall cause the Member’s cover to cease. However, such an event must be similar in nature to those expressly enumerated.
Rule 25.1.b applies where the Member is an individual and the listed circumstances are:
“...the Member dies...” In such circumstances, the Association will require confirmation of the death from a reliable source, such as the police authority or other public authorities;
“...the Member...becomes incapable by reason of mental disorder of managing or administering his property and affairs...” In most circumstances, the Association will require confirmation of the mental disorder by medical certification or attestation;
“...the Member...becomes bankrupt...” i.e. when a court order of bankruptcy is issued;
“...any similar event occurs...” See the Guidance above relating to similar words in Rule 25.1.a.
(D) ...the Ship becomes a total loss... (Rule 25.2.a)
Rule 25.2.a provides that cover for a Ship shall cease upon the total loss of the Ship. In this context, ‘total loss’ means an actual total loss (ATL), which should be distinguished from a constructive total loss (CTL) to which applies Rule 25.2.c.1 A total loss occurs when the Ship is physically lost without any prospect of it being recovered, e.g. when it has foundered in deep waters, or has been damaged so badly that it cannot be repaired.2 It is necessary to read Rule 25.2.a together with Rule 25.3,3 which provides that, for the purposes of the Rules, a Ship is deemed to be a total loss upon the expiry of ten days after the date on which it was heard of last.Although cover for the Ship will cease as soon as it becomes a total loss, the Association will, pursuant to Rule 25.6, continue to cover liabilities, losses, costs and expenses ‘flowing from the casualty which gave rise to the total loss’, e.g. wreck removal and pollution prevention/clean-up costs.4
(E) ...the Ship is in the determination of the Association abandoned... (Rule 25.2.b)
Rule 25.2.b enables the Association to treat the entry of a Ship as having ceased when the Association judges that the Member has abandoned the Ship on the basis that it appeared inevitable that the Ship would become a total loss. For example, if a Member were to order the Crew to abandon the Ship in the interests of safety, Rule 25.2.b would enable the Association to determine whether the Ship had been merely temporarily abandoned in the expectation that it could be saved, in which case the entry would not cease, or whether the Ship had been abandoned in the expectation that it would inevitably become a total loss, in which case the entry would cease.
(F) ...constructive total loss... (Rule 25.2.c)
Whereas Rule 25.2.a treats the entry as having ceased when the Ship has become an actual total loss, Rule 25.2.c treats the entry as having ceased when where the Ship has been accepted by the hull underwriters, whether for marine or war risks, as a constructive total loss. The opinion of the Association as to whether the Ship has actually become a CTL is irrelevant for the purposes of this provision. However, see (G) below.
A ship will usually be accepted as a CTL under the Hull Policies when either:
i the Member has lost possession or control of his Ship and is unlikely to be able to regain possession of it, or that the costs of doing so will exceed the Ship’s value when regained; or
ii the Ship is damaged to such an extent that the cost of repairs will exceed the insured value of the Ship or its market value when repaired, whichever is the higher (or a certain percentage5 of either of those values as agreed in the Hull Policies).
Cesser of cover under Rule 25.2.c is not affected by the subsequent decision of the hull underwriters to abandon their interest in the Ship after it has been accepted by them as a CTL. Although cover for the Ship will cease when it is accepted by the hull underwriters as a CTL, the Association will, pursuant to Rule 25.6, continue to cover liabilities, losses, costs and expenses ‘flowing from the casualty which gave rise to the...constructive total loss.’ However, the cesser of cover will protect the Association against future claims which may affect the Ship, e.g. claims arising during subsequent towage to a scrap yard.
(G) ...where...the cost of repairs will equal or exceed 80 per cent of... (Rule 25.2.d)
Cover will cease pursuant to Rule 25.2.c only where the Ship is accepted by the hull underwriters as a CTL. However, Rule 25.2.d gives the Association the additional and separate right to determine that the cover shall cease even if the Ship is not accepted by the hull underwriters as a CTL if the Ship has suffered damage and the repair costs are equal to, or exceed, 80 per cent of the insured value of the Ship or of its value in repaired condition,6 whichever is higher. This Rule gives the Association the flexibility to determine that cover shall cease if the hull underwriters are unable for whatever reason to determine whether or not to accept the Ship as a CTL, or delay in doing so for an unreasonable time.
(H) ...transferred to a new owner... (Rule 25.2.e)
The entry of a Ship is accepted by the Association partly on the basis of the Association’s assessment of the owner. It is a basic principle of mutual insurance that the benefit of the insurance contract cannot be transferred by the owner to a third party without the consent of the Association.7 Therefore, Rule 25.2.e brings the entry of the Ship to an end when ownership is transferred. Such a transfer may be the result of a positive act, e.g. sale or gift, or of an involuntary act, e.g. by a forced sale of the Ship pursuant to a court order. Where the transfer is from one company to another within the same group, e.g. as a result of a change in flag, the Association will generally consider a request from the former owner for the entry to be continued in the new ownership in a sympathetic manner.8
(I) ...new managers...or...change in the operator... (Rule 25.2.f)
Whereas Rule 25.2.e applies in the event that there is a change of ownership, Rule 25.2.f applies where there is a change in the identity of those managing or operating the Ship. The identity of the manager or operator is a material fact which is relevant to the risk which is insured by the Association and which must, therefore, be disclosed to the Association.9 In many respects a change of manager or operator is as important to the Association as a change in owner, since the manager or operator will normally be responsible for the technical management and crewing of the Ship.10 The Rules do not define manager or operator, but these terms include companies that are responsible for the commercial or technical functions that relate to the ownership, maintenance, operation and control of a Ship. If there is uncertainty, the Association has the right to decide whether there has been a change of manager or operator.11
(J) ...any mortgagee or other secured party enters into possession... (Rule 25.2.g)
Whilst it is relatively unusual for a mortgagee bank12 or any other secured party to take physical possession of a Ship rather than enforcing a sale of the Ship, this does happen from time to time. Such an act has much the same effect, from the perspective of the Association, as a change of owner or operator, and will, in any event, probably only arise because the Member is in financial difficulties and, therefore, has not paid amounts due that are secured by the mortgage. The steps that are required to enable a secured party to take possession of a ship will depend on the law that governs the terms of his security, or the law of the place where the ship is located. Under English law, no formal steps are required, whereas under other systems of law a secured party may only take possession pursuant to a court order. An action taken by a secured party which falls short of taking possession does not constitute cesser for the purposes of Rule 25.2.g.
(K) ...ceases to be classed...or...class is suspended... (Rule 25.2.h)
Rule 8.3 provides that a Member cannot be compensated by the Association in respect of any claim that arises during a period when the Ship is not complying with the classification requirements of Rule 8.1 and Rule 25.2.h provides that cover for the Ship ceases when the Ship is no longer in class. Cover also ceases if the class is ‘suspended’, i.e. when the relevant classification society is not prepared to maintain the Ship in class until certain identified conditions have been remedied. Cover ceases since a Ship which has a class suspension is likely to expose the Association to unacceptable risks which were not contemplated at the time that the contract of insurance was concluded.
If the Member fails to comply in time with the classification society’s recommendations or requirements, such failure may not cause that society to cease or to suspend class, in which case cover will not cease pursuant to Rule 25.2.h. However, such non-compliance is likely to represent a breach by the Member of Rule 8.1.c and, therefore, to cause him to lose rights of recovery during the period of non-compliance pursuant to Rule 8.3. Similarly, whilst a change of classification society must be advised to the Association in accordance with Rule 8.1.e, such a change does not, per se, cause cover to cease under Rule 25.2.h so long as the new classification society is also one that is approved by the Association. However, if the new classification society is not approved by the Association, cover will cease under Rule 25.2.h.
(L) ...the Ship is requisitioned... (Rule 25.2.i)
A requisition of the Ship, whether by the authorities of the country in which the Ship is registered or where the Member has his principal place of business, or by any other country, will cause cover to cease. In some cases, the requisition has the effect of depriving the shipowner of the ownership of the Ship whereas in other cases, the requisition amounts to an enforced charter or hire of the Ship. Cover will cease in either case, since the requisition has the same effect, insofar as the Association is concerned, as a change of owner or operator.
(M) ...the Ship, with the consent or knowledge of the Member, is being used for the furtherance of illegal purposes. (Rule 25.2.j)
Cover will cease if the Ship is being used for the furtherance of illegal purposes with the consent or knowledge of the Member. Purposes are considered to be illegal when there is contravention of the laws of the country where the Ship is registered, or where the Member has his principal place of business or carries out operations, or where there is a breach of the laws of the country where the Ship is being used for such purposes.13 It is necessary in this regard to distinguish between circumstances in which the Ship is, on the one hand, being used deliberately for the furtherance of purposes that are clearly illegal, e.g. when used wilfully as a means of drug smuggling, and, on the other hand, where the Ship is being used for a lawful purpose but in an illegal manner, e.g. the discharge to shore of slops in contravention of port regulations whilst carrying out an, otherwise, lawful trade. In the latter case, cover does not cease pursuant to Rule 25.2.j, but the Association has the right to decline cover on other grounds.14
The phrase ‘consented to’ means that the Member has approved the use of the Ship for illegal purposes, whilst ‘knowledge of’ means that the Member is aware, or should reasonably have been aware, that the Ship is used for illegal purposes and does not take immediate action to remedy the situation. Therefore, cover will cease if the Member, although aware of the fact that the Crew is using the Ship for drug smuggling purposes, fails to take any action to prevent them from doing so.
Cover will cease from the time that the Ship is first used for the furtherance of any illegal purpose with the consent or knowledge of the Member. It is the time of the Member’s consent or knowledge that determines the time when cover shall cease, and not the time when the Ship is in fact first being used for illegal purposes.
(N) Where a Ship disappears... (Rule 25.3)
It is necessary to regulate how cover is to operate in circumstances where a Ship disappears and appears to be lost. On the one hand, the Member has a need for cover for a reasonable period of time while he tries to ascertain what has happened to the Ship. On the other hand, it is not in the best interests of the membership that the Association should be exposed for an unlimited period of time to unknown risks in respect of a Ship which cannot be traced. Therefore, Rule 25.3 seeks to strike a balance between the two competing concerns by providing that cover shall cease 10 days after the last reported sighting or position of the Ship.
It should be noted that cover which has ceased pursuant to this Rule will not be automatically reinstated if the Ship is subsequently traced. In such circumstances, the Member must make a new application for entry since the discretion which the Association has to reinstate cover under Rule 25.5 does not extend to Rule 25.3.
(O) Notwithstanding and without prejudice to Rules 25.1, 25.2 and 25.3 a Member shall forthwith cease to be insured by the Association in respect of any and all Ship(s) entered by him if any Ship is employed by the Member in a carriage, trade or on a voyage which will thereby in any way howsoever expose the Association to the risk of being or becoming subject to any sanction prohibition or adverse action in any form whatsoever by any State where the Association has its registered office or permanent place of business by any State being Major Power or by the United Nations or the European Union... (Rule 25.4)
For the background relating to the introduction of this Rule and to the subsequent amendments to it see the commentary in paragraph (K) of the Guidance to Rule 24.
Whereas Rule 24.3 gives the Association the right to terminate entry on the giving of notice in the circumstances described in paragraph (K) of the Guidance to Rule 24, Rule 24.3 also emphasises that the provisions of Rule 24.3 are without prejudice to the provisions of Rule 25.4.
Rule 25.4 emphasises that if ”any Ship is employed by the Member in a carriage, trade or on a voyage which will thereby in any way howsoever expose the Association to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever by the State where the Association has its registered office or has a permanent place of business, a State being a permanent member of the UN Security Council or the United Nations or the EU”, cover shall cease immediately and automatically without any need for notice. The Association is of the opinion that the potential impact of existing and any future sanctions regulations that are or may be imposed by any of the above-mentioned States is extremely wide and constitutes a substantial increase in risk in that it envisages,inter alia, the imposition of sanctions on organisations and individuals ”underwriting or otherwise providing insurance or reinsurance” in relation to such trade. Therefore, the Association is of the view that such a form of automatic cesser is necessary in order to protect the interests of the Association and its assets for the benefit of the membership in general.
For example, the cover will cease in a situation where the vessel is participating in the transportation of Iranian origin petroleum products in violation of EU Council Regulation 267/2012 article 11.1 (a) and/or (c).15, 16, 17 In such circumstances, the Association would be in breach of article 11.1 (d) of such Regulation and the corresponding Norwegian regulation relating to restrictive measures against Iran18 and, therefore, exposed to considerable risk if it continued to provide cover.
The imposition of sanctions may also have an impact on the ability of the Association to indemnify the Member against liabilities, costs or expense.19
(P) ...the Association may decide that cover shall be continued...or...be reinstated (Rule 25.5)
Rule 25.5 gives the Association the right, where it is considered beneficial to the Association, to let the cover continue, or to reinstate cover where it has ceased pursuant to any of the provisions in Rules 25.1, 25.2 and 25.4, but not Rule 25.3. A decision to continue the cover means that the existing cover will continue without interruption. However, a decision to reinstate cover entitles the Association to make the reinstatement subject to altered terms, e.g. payment of additional premium or the pre-condition that the Ship must pass an inspection conducted on behalf of the Association pursuant to Rule 9.
(Q) Notwithstanding...the Association shall cover...liabilities...flowing from the casualty... (Rule 25.6)
The events that may cause cover to cease pursuant to Rule 25.2.a, b, c and d may occur as a result of a casualty which arises in direct connection with the operation of the Ship. However, some of the liabilities, losses, costs and expenses that arise as a result of such a casualty may do so only after the Ship has become a total loss, CTL etc., and, therefore, at a time when cover for the entry has already ceased. Therefore, Rule 25.6 continues to make cover available for all liabilities, losses, costs and expenses ‘flowing from the casualty’. In this regard, Rule 25.6 must be distinguished from Rule 26.2 which states that the Association shall have no liability whatsoever ‘by reason of anything occurring after cessation or termination’ of the entry. Rule 26.2 applies to new events which occur after the entry has ceased whereas Rule 25.6 applies to the event which causes the entry to cease and which is, therefore, an ‘event that occurs during the period of entry of the Ship’.20
The cover that is available under Rule 25.6 applies only to events that flow from the casualty which caused the Ship to become an actual total loss or a constructive total loss. Therefore, there must be a clear causal connection between that casualty and the liabilities, losses, costs and expenses which have been incurred by the Member. For example, cover is available under Rule 25.6 for liability to remove the wreck or for liability for damage caused by oil pollution from the wreck. However, cover is not available under Rule 26.2 for liability for pollution from the wreck that has been caused by another ship subsequently dragging its anchor over the wreck. Such liability would not flow from the casualty which gave rise to the total loss of the Ship, but would be the result of a new and independent subsequent event, which occurs after cover has ceased.
1 See (F).
2 A ‘constructive total loss’ (CTL), is a term used for insurance purposes where the cost of repair of the Ship is higher than a prescribed percentage of its insured value or of its value in repaired condition with the result that the insured has the right to claim compensation for the sum insured under the Hull Policies .
3 See (N).
4 See the Guidance to Rules 25.6, 38 and 40, respectively.
5 Clause 11-3 of the Nordic Marine Insurance Plan determines that a Ship is a CTL when the cost of repairs and other essential costs such as those relating to the removal of the ship exceeds 80 per cent of the hull value or 80 per cent of the market value (when repaired), whichever is the higher.
6 The phrase ‘value in repaired condition’ means the market value of the Ship as determined by the Association after consultation with a professional ship valuation broker, after complete and permanent repairs of the relevant damage.
7 See the Guidance to Rule 89.
8 See the Guidance to Rule 25.5 in (P).
9 See the Guidance to Rules 6 and 7.
10 The Association may agree to maintain cover when there is a change of manager or operator by the exercise of its discretion under Rule 25.5. Any Member who intends to make such a change should discuss the matter with the Association well in advance of the intended change.
11 See Rule 1.5.
12 See the Guidance to Rules 78 and 89.
13 See the Guidance to Rule 74.
14 For example, see Rules 72 and 74.
15 See Gard Circulars Nos. 1/2010, 7/2010, 24/2010, 12/2011, 15/2011, 18/2011, 1/2012, 7/2012, 20/2013 and 24/2013 for further information.
16 See International Group of P&I Club’s Frequently Asked Questions dated 8 February 2012, 25 May 2012, 15 August 2012, 1 November 2012 and 29 January 2013.
7 Certain oil products, such as crude oil, can be transported from Iran to countries benefiting from the US National Defence Authorisation Act (NDAA) waivers outside the EU. At the time of publication, these are, China, India, South Korea, Taiwan and Turkey. For example, an EU owned or registered vessel would be permitted to transport oil cargoes from Iran, or cargoes that originate in Iran, and which fall within the scope of the Annex I of Council Regulation 42/2014 to a country outside the EU benefiting from the NDAA waiver. However a shipowner involved in the transportation of, and an insurer providing insurance cover for, an oil or petroleum cargo from Iran to a non NDAA waiver country will be in breach of the US and/or EU sanctions in force at the time of publication.
18 Forskrift om sanksjoner og tiltak mot Iran av 9. februar 2007 nr. 4 § 11.1 d).
19 See the Guidance to Rule 77.2 and 77.3.
20 See Rule 2.4.c.