New Compulsory Marine Liability Insurance Gives Shipowners and their Insurers the Blues

The Nairobi International Convention on the Removal of Wrecks 2007 comes into force later this month (18 April 2015 and 17 May 2015 for Malta and Tuvalu respectively, but 14 April 2015 for all other contracting states, including the UK).

 The current number of contracting states is low.  But compliance extends to any vessel that wants to trade within the waters of the contracting state.  So it has a wide application.  The Convention brings with it a new regime of strict liability and compulsory insurance for wreck removal – to be backed up with a "Blue Card" scheme similar to that already in place for bunker pollution.  In reality all ocean-going vessels will require a new Blue Card to cover their wreck removal liability.  There is already a back log of applications to the flag authorities of contracting states so vessel owners (and their insurers) need to be comfortable that they are issuing the right documents and that they are, in turn, doing what they can to protect any uninsured exposures that come with a strict liability regime.

So How Does It Work?

The Convention gives a state party the power to take measures in relation to the removal of a wreck within its EEZ which poses a hazard to navigation or a threat to the marine environment (a state can also opt to extend the power to within its territorial waters).  The contracting state can then recover the cost of removal from the vessel owner and its insurers.  A wreck is defined broadly and includes any object that is or has been on board a vessel – covering cargo and any fittings or machinery – which is sunk, stranded or adrift as a result of a maritime casualty.  There is a limited exclusion of liability for wrecks caused by certain war-related risks.  But in general the right of recovery – including a right of direct recovery by the state against insurers – operates on a strict liability basis.  

Compulsory Insurance 

The Convention (article 12) requires any vessel over 300MT gross tonnage which is either:

1. flagged by a state party, or
2. wishes to trade/navigate within the territorial waters of a state party

to maintain insurance for wreck removal liability under the Convention.  The Convention gives the flag state a right of direct action against the insurer. 

The insurance must provide cover in an amount up to the limits of liability under the 1976 Limitation Convention (with 1996 Protocol) levels.  With increased 1996 Protocol limits coming into force in June 2015 this can be a high limit.

Each qualifying vessel must carry on board a flag state Certificate of Insurance evidencing that the compulsory insurance is in place.  The Certificate must contain particulars about the vessel and its ownership, the identity of the insurer and the period of validity of the relevant insurance. 

Insurer "Blue Cards"

To obtain a flag state Certificate of Insurance, the shipowner assured must first obtain a "Blue Card" from their marine liability insurer verifying that the compulsory insurance is in place.  (The format of the "wreck removal" Blue Card mirrors the content already accepted for "bunker" Blue Cards).  The assured then submits the Blue Card to the relevant institution (usually the flag state authority) responsible for issuing the Certificates in their state; in the case of the UK this is the UK Maritime and Coastguard Agency ("MCA"). 

Owners of a vessel registered in a state party must apply to the relevant institution in that state; for example, a UK registered vessel must apply to the MCA for the Certificate.  Some state authorities are happy to issue Certificates to vessels from other flags, but several state authorities have already said that, for the moment, they will only issue Certificates to vessels flying their flag.

Guidance provided by the MCA in respect of applications for a Certificate can be found at the following link: https://www.gov.uk/government/publications/application-for-bunker-and-tanker-certificates-msf-3233. 

The MCA has already identified a backlog of applications. The MCA can process on-line applications but only if the insurers issuing the "Blue Card" is already on their approved list.  If your application is not already in it is pretty unlikely that your Certificate will be ready by 14 April 2015.  The MCA has also suggested that applications in respect of non-state party vessels be made to relevant authorities in alternative jurisdictions including Cook Islands, Denmark, Germany, Liberia, Marshall Islands or Palau.

Right of Direct Action against Insurers and Period of Strict Liability

Any claim for wreck removal costs under the Convention by a state party can be brought directly against the insurer identified in the Certificate.  The liability of the insurer is strict (save for limited exclusions in relation to war-related causes).  The Blue Card (and Certificate) can only be cancelled on giving 3 months' notice to the issuing authority.  If the casualty occurs within that 3 month notice period then the insurers who issued that Blue Card is on the hook - irrespective of any underlying policy defences.

In practice, if a shipowner goes off-risk with one P&I insurer, it will place immediate replacement cover elsewhere and get a fresh Blue Card to replace the existing one.  But most coverage issues do not become apparent until weeks or months after a loss has occurred or a coverage problem has come to light.  With a strict 3 month notice provision in the Blue Card, this could lead to a situation where the insurer is directly liable to a state party for wreck removal but are technically off-risk under the policy terms.  The insurer may want to obtain an indemnity from its assured for that exposure or an assignment of the right to claim under any replacement cover in the event the old insurer gets stuck with the bill.

War Risk Exclusion

The Blue Card will, in practice, be issued by the P&I insurer (or other principal marine liability insurer) even though they may not cover liabilities arising from war risks and the "war" P&I is placed elsewhere.

The Convention (article 10) contains a limited exemption of wreck removal liability where the maritime casualty which leads to the wreck removal order is caused by war or hostilities, or wrongful government acts.  This "exclusion" may not be wide enough to match the standard war risks perils. So insurers should check the extent to which their own policy's war risk exclusions match the carve-out in the Convention.  If they don't match, insurers should be alive to situations where they may be strictly liable for wreck removal caused by war risks which they do not in fact insure.  They will, however, still be on the hook with strict liability under the Blue Card.  As with the existing bunker Blue Cards, the insurers may look for an indemnity from their assureds together with an assignment of the right to claim under the assured's war P&I cover.

Conclusions

The shipping world has gotten to grips with the bunker Blue Card regime and in many ways the wreck removal Blue Card regime operates in the same way.  In the majority of incidents the wreck removal costs will be picked up only by the P&I Club/marine liability insurer who had cover in place at the time the casualty occurred.  But there is scope for marine liability insurers to find themselves exposed to strict liability to pay significant wreck removal costs which, on the policy terms, they are not liable to pay.  Aside from the cash-flow challenges, that can also cause a headache with your reinsurance collections.  So it may be prudent for insurer, as a condition to issuing any Blue Card, to seek an indemnities and contingent assignments from their assureds in the event that they do get stiffed with the bill.