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Specialist operations – Limitation on P&I cover

What are considered "specialist operations"?
The preamble to Rule 59 of the Association’s Rules for P&I insurance of ships contains a list of the sort of operations which were defined as "specialist operations" by the International Group of P&I Clubs. This definition was made effective from 20th February 1993, and reads as follows; "Specialist operations shall include, but not be limited to dredging, blasting, pile driving, well stimulation, cable or pipe laying, construction, installation or maintenance work, core sampling, depositing of spoil, professional oil spill response and professional oil spill response training, but excluding fire fighting".

Rapid advances in technology and the ever changing demands on specialist ships made it impossible to compile an exhaustive list of specialist operations. This open ended definition has lead to criticism, since it may leave other non-listed operations open to ambiguities. Several types of specialist operations were discussed when the list was compiled. As an example, seismic or geophysical research were amongst the types of operations considered, but the P&I Clubs concluded that the risk associated with the deployment of streamers was not so special that it would be considered an undue strain upon the concept of mutuality. The use of streamers was therefore considered covered on an equal basis to the use of a trawl or fishing net by fishing boats.

An example of a recent enterprise which would qualify as a specialist operation, but which is not currently listed, is the on-going conversion of a former semi-submersible drilling platform into a rocket launching platform for satellites. This type of launching operation was unknown to the P&I Clubs when the specialist operation exclusion was drafted in 1992, and serves as an example of why an exhaustive list of specialist operations could not be compiled.

A brief history leading up to the Chicago pile driving incident in 1991
Vessels engaged in specialist operations became an issue for serious discussion by the International Group of P&I Clubs when several P&I Clubs where asked to insure drilling vessels and other vessels used in the offshore industry in the early seventies. Prior to this date the cover offered for different specialist vessels underwent individual evaluation by different P&I Clubs, without any formal or coherent Group practice, than the framework provided by the more general rules. Specialist vessels have always been treated separately from ordinary merchant ships and passenger vessels. The interpretation of what constitutes "specialist operations" has, however, been the subject of evolution.

At the beginning of the seventies when the offshore vessels was brought on the agenda, much of the focus was given to the type and superstructure of the vessels, although the operations undertaken by the vessels were also considered. It was common practice however, for owners of dredgers and pile driving vessels to insure the "operational liabilities" under a separate policy, whilst the "normal" P&I risks were insured by the P&I Clubs. Owners of drilling vessels and semi-submersible offshore units had to pursue a different P&I cover, since the P&I Clubs had decided not to accept such vessels as insurable risks.

In the mid seventies some P&I Clubs were approached to provide P&I insurance for semi-submersible pipe laying derrick barges. Semi-submersible vessels were at the time not accepted by the P&I Clubs, and owners of such crafts had to pursue facultative cover. The reason was that the barges did not have motive power and looked more like drilling units than ships. In November 1977 it was agreed that from then on the distinction should be drawn on the basis of liabilities rather than types of crafts, since the liabilities born by them were precisely the same. Semi-submersible barges were therefore accepted as insurable objects by the P&I Clubs.

The question of specialist vessels was however, still subject to considerable uncertainty, although the P&I Clubs now had adopted a common practice dealing with liabilities arising from dredgers, pile driving vessels, pipe laying vessels, and the use of submarines, diving bells and divers. For example, it was noted that some Clubs considered well stimulation vessels as drilling vessels, whilst others did not. In 1986 the International Group of P&I Clubs agreed to common guidelines for dredgers, pile driving vessels, well stimulation vessels, cable and pipe laying barges, diving vessels and vessels undertaking blasting or core sampling operations, commonly referred to as ancillary crafts. In 1988 it was agreed that these vessels should more correctly be referred to as "crafts engaged in specialist operations".

An agreement was also made in principle to offer full P&I cover with the exception of product liability and liability for non performance, save for the use of submarines, diving bells and divers which were still subject to a strict exclusion.

Construction vessels used in the offshore industry were however,still considered and treated almost as strictly as drilling vessels, production vessels and accommodation units used as an integrated part of such exploration or production operations. In 1991 a decision was made with respect to vessels which carried out construction operations. Since the application of the exclusion was considered ambiguous, it was agreed that construction vessels should only be considered in the exclusion dealing with specialist operations, and not in the wider exclusion dealing with drilling vessels, production units and accommodation units.

The effect of the 1991 Chicago pile driving incident
In 1991 a pile driving vessel was engaged in pile driving certain sections of the Chicago waterways. One of the piles accidentally punched through the bottom of the canal and penetrated the underground transport system resulting in severe flooding. Following this incident in 1992, the P&I Club’s reinsuring underwriters indicated that they would not be prepared to continue to provide cover on the present widely-drawn basis for such specialist vessels. The reinsuring underwriters left it for the P&I Clubs to draft an appropriate exclusion, which should extend to third party risks. The P&I Clubs agreed that the cover should be excluded by reference to the operation and not by reference to the type of vessel or the contractual arrangement under which the work was carried out. By 20th February 1993 the International Group of P&I Clubs had agreed on a wording, which also was acceptable to the reinsurers. This wording is set out in Rule 59 of the Association’s rules for P&I insurance of ships (see above).

The exclusion for specialist operations, Rule 59
Claims brought by any party in respect of the specialist operations
The exclusion in Rule 59.a for "specialist operations" was enforced because the risks associated with such operations were considered to be of an essentially different kind from those arising out of conventional shipping, and thus would put an undue strain upon the concept of mutuality and the reinsurance contract. As mentioned above it was left to the P&I Clubs to arrive at an adequate wording to exclude the type of professional and third party liabilities that was demonstrated by the Chicago pile driving incident. During this process it was discussed whether the exclusion for specialist operations should refer to "incidents arising out of the use of specialist vessels" or whether it should refer to "incidents arising during the course of performing specialist operations". It was agreed that the exclusion should refer to the operations themselves. This principle would provide a clearer test, and it would ensure that the distinction was drawn on the basis of the operations themselves, rather than the types of vessels. The P&I Clubs did not want to introduce a sweeping exclusion for third party claims. In order tomaintain the third party cover associated with conventional shipping, the P&I Clubs introduced a second test to the exclusion. In order for the claim to fall within the exclusion it should be demonstrated that the claim would not have arisen but for the specialist nature of the operations. These two distinctions are essential to the overall understanding of the exclusion, and how it is intended to work.

Example 1
The exclusion would apply to a supply ship fitted out with a remote operated underwater vehicle (r.o.v.) performing maintenance work to an installation, but it would not apply to a supply ship performing an underwater survey of the same installation by use of an r.o.v., since the latter operation would not be considered to be construction, maintenance or installation work. Liabilities arising out of the use of the r.o.v. would however, be excluded in both instances since liabilities arising out of the operation of such crafts are excluded from normal P&I cover by a separate rule. (Reference is made to Rule 611 of the Association’s Rules for P&I insurance of ships.)

Example 2
The exclusion would not apply to a cable or pipe laying vessel whilst navigating to or from the offshore site, since the sole navigating of the vessel would not be considered a specialist operation. This means that the exclusion would neither apply during navigation within the offshore site or whilst the vessel is on stand-by at the site, provided the specialist operations are not in progress. Even in circumstances where the specialist operations have commenced, the exclusion may not be invoked in the event of an incident, as long as the incident did not arise out of the specialist nature of the operations. For example, if the vessel is hit by a black out resulting in the loss of steering whilst installing a cable, and subsequently drifts and collide with an installation in the vicinity, the occurrence would not be considered an incident that arose out of the specialist nature of the operations, and the exclusion would not apply. The claim must be in respect of the specialist nature of the operations to be considered an excluded loss for the purpose of Rule 59.a.

Failure to perform and the fitness for purpose
The exclusion in Rule 59.b is in respect of a product liability or similar claims based on defective performance. Such liabilities whilst incurred during the course of performing specialist operations, may not manifest themselves until after the completion of the operations. The exclusion will therefore apply, for example, to a claim in respect of the rupture of a pipe which occurs after completion of pipe laying as a result of defective welding or the pipe being laid out of alignment. The exclusion of such product liabilities or liabilities for failure to perform has been a common exclusion for several years, as opposed to the exclusion set out in
Rule 59.a.

Loss of or damage to the contract works
The exclusion in Rule 59.c will be applied where there is loss or damage to the contract works in respect of which the specialist operations are performed, for example to subsea manifolds which are being installed or to a harbour which is being repaired or extended. With respect to the contract works the exclusion is absolute. It is not necessary for the loss or damage to have been caused by the specialist operation, provided it arises during the course of those operations.

Example 3
Where a pile driving vessel engaged in construction works on a jetty collides with and damages the jetty due to an error in navigation, resulting claims will be excluded.

Example 4
A contractor has entered into a contract for the dumping of gravel to cover and protect a pipeline. The object of the contract works is the pipeline and the gravel which is intended to cover the pipe. During the dumping of the gravel the discharging hose is ruptured resulting in an uncontrolled discharge and a fraction of the pipeline is subsequently damaged. The resulting claims will be excluded, as the pipeline is deemed part of the contract works. In the event of the uncontrolled quantum of gravel hitting another pipeline or another subsea installation in the vicinity, the resulting claim would also be excluded, but then by reference to the specialist nature of the operations pursuant to Rule 59.a, since this pipeline or other subsea installation could not be considered the object of the contract works.

Reinstated cover in respect of certain risks
The exclusion for specialist operations is widely drafted, although it does allow for the recovery of P&I risks, as long as they do not arise out of the specialist nature of the operations, failure to perform and fitness for purpose or damage to the contract works.

It was considered essential by the P&I Clubs to continue to offer the Membership the widest cover possible given the parameters laid down by the reinsuring underwriters. In this context it was also considered essential that full cover in accordance with the Rules should be granted with respect to crew and other personnel on board the entered vessel, the wreck removal of the vessel and oil pollution from the vessel. This reinstatement was granted because these risks were consider to be of such a fundamental value and importance that any ambiguity should not exist. These liabilities were neither considered to be the type of liabilities that should be caught pursuant to an exclusion for specialist operations, as the liabilities themselves were not different from those arising out of conventional shipping.

It should be noted however, that the reinstatement does not extend to personnel who are not on board the vessel, the wreck removal of an r.o.v. or other items, cargo, crafts or property that are not considered to be part of the vessel or pollution which is not oil pollution.

The Association has arranged a dovetailed and comprehensive insurance package for its Members’ operation specialist crafts, which can provide cover for the specialist operations, damage to the work, the use of ancillary crafts and finally contractual liabilities. This cover will be presented and discussed in our September issue of Gard News.

1 Rule 61. Submarines, diving bells and divers.
The Association shall not cover under a P&I entry liabilities, losses, costs or expenses arising out of
(a) the operation by the Member of submarines, minisubmarines or diving bells; or
(b) the activities of professional or commercial divers where the Member is responsible for such activities (other than activities arising out of salvage operations being conducted by the Ship where the divers form part of the crew of the Ship (or of diving bells or other similar equipment or craft operating from the Ship) and where the Member is responsible for the activities of such divers).