The Nordic Plan is a mutually agreed set of conditions with regular updates to match the insurance needs in the market. Hence, it is with pride that a third edition of this handbook is published, hopefully assisting the reader searching for answers to what is a complex product.
Loss of Hire Insurance has maintained its relative importance to the Club’s insurance portfolio despite our diversification strategy, and we are considered as one of the global Leaders within this area.
Haakon Stang Lund is still to be seen as the "father" of the Handbook, and maybe even more so, the Nordic Plan. He has actively participated in the work of the revision committee drawing up the amendments, including Chapter 18 of the Plan.
We are most grateful to him that he was willing to take up the task of up-dating this book, which proved more time consuming than originally anticipated, so some long hours have been spent not only on weekdays, but also on weekends and during the Easter holidays.
Haakon has since retired and we wish him all the best in taking on new tasks and challenges. However, he has left his legacy for the future, both in the Club and in his work with the Nordic Plan and this book.
Norwegian Hull Club Hans Christian Seim Chief Executive Officer
Preface by the author
Since the second edition of the Handbook on Loss of Hire Insurance was published in 2008, three new versions of the Plan have been published. The second edition was based on the 2007 version of the Plan. In 2010 a new and the last version of the Norwegian Marine Insurance Plan was published. Then, a discussion commenced within the Nordic Maritime Community to issue a Nordic Marine Insurance Plan. This Nordic Plan materialized in 2013 after agreement was reached between CEFOR - the Nordic Association of Marine Insurers and the four Shipowners’ Associations of Finland, Denmark, Norway and Sweden. The need for a third edition of the Handbook is, therefore, long overdue.
Norwegian Hull Club, publisher of the two first editions of the book, also asked me to be the author of this third edition. It was again with some reluctance, but also joy, that I answered their call. The reluctance was this time due to the fact that I was approaching retirement, and I feared that I might not have the strength required to complete the task. Even though the challenges due to health reasons proved to be greater than anticipated, I am now very pleased that I was able to complete the task although a little behind the original planned schedule. As of 31.12.2015 I retired from my position as Legal Counsel of Norwegian Hull Club. The original schedule was to finalise the book before retirement, but when this was not possible, we agreed that I should continue after the turn of the year to complete the book.
The third edition is, of course, up-dated with the amendments to the Plan since the 2007 version, including the latest and current 2016 version of the Nordic Plan. Parts of the book have been rewritten, not only due to amendments of the Plan, but also to expand and clarify topics discussed. The third edition contains two new chapters. Chapter 17 on loss of hire insurance for fishing vessels and Chapter 18 on Mobile Offshore Units, as some special rules on loss of hire insurance have been included in these two.
This time, all chapters were distributed for comments to an internal reference group as I completed my drafts.
This group consisted of:
Per Åge Nygård, Roar Sanden and Brian Roberts of the Legal department; Olav Hausvik of the underwriting department; Jostein Egeland, Olav Tufta, Truls Langeland and Joannis Bloch Danielsen of the claims department.
I will express my sincere thanks in particular to Roar Sanden and Brian Roberts for very valuable comments and suggestions for improvements. Also Truls Langeland and Joannis Bloch Danielsen have contributed with practical examples and other valuable inputs.
I will also express my thanks and gratefulness to Håkon Roer-Eide, who has been kind enough to go through the whole manuscript and formatted it. He also drew up the Index, List of abbreviations etc. and has given me other valuable input.
My thoughts and grateful thanks also go to my beloved, patient and understanding wife, Lill Selmer Stang Lund, who has seen me disappearing into the "author’s den" and remain there for long hours in the evenings, over week-ends and during holidays.
Also for the third edition, it is to the highest degree important to emphasize that I alone am accountable for the content and solutions advocated for where the available sources of law are not giving any definite answer. I do not hold any authority to bind Norwegian Hull Club to any specific solutions on doubtful issues, and any possible mistakes by me must not be deemed to be admissions made by the Association.
CEFOR, holder of the copyright of the Plan, has graciously allowed me to reproduce Chapter 16.
Finally, it only remains for me to thank Norwegian Hull Club for having entrusted me with writing this third edition.
Haakon Stang Lund
2. Introduction
2-1: Norwegian Hull Club
Norwegian Hull Club (NHC) was established in 2001 through a merger between Bergens Skibsassuranseforening (Bergen Hull Club) and the Oslo based UNITAS Gjensidig Assuranseforening (UNITAS Mutual Association). Bergen Hull Club was established in 1937 through a merger of two old and distinguished mutual clubs, Bergens Assuranceforeningfounded in 1850 and Bergens Dampskibs-Assuranceforening founded in 1879. UNITAS was the result of a long series of mergers of in all eight mutual hull clubs, the last one in 1996, when UNITAS took over the portfolio and staff of Christianssands Skibsassuranceforening. UNITAS traces its’ origin back to 1837 when Skibsassuranceforeningen of Arendal was established. Thus NHC celebrated its 175 years anniversary in 2012.
Marine insurance had been offered for some time internationally before interest in establishing insurance institutions began to arise in Norway. However, the rapid growth of the Norwegian merchant fleet during the 19th century precipitated the establishment of a large number of local insurance associations in coastal cities. These were all mutual hull insurance associations. Several decades were to pass before insurance companies, which were also being founded at that time, began to accept marine risks. The mutual clubs were thus in a position to dominate the Norwegian marine market for a long time.
For many years the clubs remained reluctant to insure steamships. In Bergen, where the steamship fleet was growing more rapidly than anywhere else in the country, the problem was particularly acute and, in response, Bergens Dampskibs-Assuranceforening(Bergen Steamship Association) was founded. Thereafter, all the major hull clubs gradually began to accept steamships in their portfolios. Bergen's position as Norway's most important shipping centre during the decades preceding World War I gave the city's hull clubs a firm position among the Norwegian mutual hull insurance associations. Although Bergen's share of the Norwegian merchant fleet has since been reduced, Bergen Hull Club not only retained its strong position, but also improved it significantly.
A similar development was experienced in Oslo where an important maritime cluster developed. UNITAS was the major hull club in the east part of the country and through mergers also in the south part. After the merger in 2001, NHC became the only mutual association insuring ocean going vessels.
International and domestic development necessitated that the mutual clubs enter the international insurance market, and NHC is today an important international insurer rather than a domestic insurer for Norwegian flag vessels.
The Nordic marine insurance market (ex. P & I) is per 2013, the second largest, with about 10.9% market share of the global market. The latest statistics available at the time of printing this book is for 2013 and comprises hull, loss of hire, war, construction risks and total loss insurances. The market leader is UK (Lloyds 16% and IUA 5.8%). China follows third (10.4%) and Japan fourth (8.3%) trailed by Latin America (8.2%). There are no separate statistics available for the loss of hire market, but it is assumed that the Nordic market has a similar, or even larger, share of this segment of the market
2-2: Scope of the work
The aim of this book is to explain the Nordic loss of hire insurance conditions that are primarily found in Chapter 16 of the Nordic Marine Insurance Plan of 2013. Chapter 16 constitutes the Nordic loss of hire conditions which is used by many non-Nordic owners even if their hull insurance is not covered on the Plan.
The Nordic conditions will be compared to the English and American conditions to some extent, but not to the level of a full comparative study. Additional foreign sources of law will also be considered, although not exhaustively.
2-3: What is loss of hire insurance?
Brief history of loss of hire insurance
Loss of hire insurance does not have a very long history and tradition. Such insurance was rarely taken out by shipowners before the Suez Canal crisis in 1956. Air strikes by the British and French forces aimed at preventing President Nasser of Egypt from taking control of the Suez Canal resulted in the demobilisation of several vessels and the closing of the Canal. Because of the ensuing international crisis, the Canal remained closed for a number of years. The pattern of commercial shipping routes changed overnight, and vessels trading from Asia to Europe or vice versa had to sail around Africa. The demand for tonnage increased correspondingly without any possibility to increase the supply. Charter rates soared until the supply of vessels adjusted to the new demand.
Shipowners felt the need to insure their interest in their vessels' earning capability in addition to traditional hull- and P & I insurance. Initially, the owners insured loss of hire in the literal sense, namely their loss of charter hire as opposed to their loss of earnings in general. As will be explained in 5.4, this distinction is relevant in current loss of hire conditions, but development has made the significance of the distinction less important. Today, it is possible to insure both types of losses. It would be more precise to call it "loss of earnings insurance" rather than "loss of hire insurance", but the Plan has maintained the latter terminology, and it is therefore also adopted in this book.
Subject matter insured
The term "loss of hire insurance" suggests that the assured is insured in general for any incident that causes one or more of his vessels to be demobilised so as to be deprived of income. However, loss of hire insurance has never been that comprehensive. It has only covered the assured for loss of income resulting from damage to a particular insured vessel, which damage must be recoverable under the hull insurance of the vessel, see further under 3.4 – 3.6 below.
However, loss of hire and damage to the vessel are not necessarily connected. An assured may sustain a loss of income through many sources other than damage to the vessel. Natural catastrophes such as typhoons, floods etc., as well as strikes in port, congestion, riots, war and other man-made events may disturb the operation of the vessel. Many such events are equally fortuitous as damage to the vessel, but the assured in some cases may be able to influence to a certain degree the way in which these events will affect his operation of the vessel and consequently the loss of income sustained. In the case of damage to the vessel, the assured may not be able to influence the economic consequences of the damage, although he may be able to avoid the damage itself to a certain degree.
It is therefore natural to ask why loss of hire insurance is linked to the hull insurance of the vessel. The answer is that the insurer offering loss of hire insurance found that the traditional hull insurance of vessels had developed over such a long period that hull insurance had established the "right" balance between what should be covered and what should be excepted from cover. The "right" balance between the assured and the insurer when it comes to cover for loss of income has still not been explored.
The insurance market presently appears unready to embark upon the task, and instead it seems minded to go about the product development of loss of hire insurance on a case by case basis. There has been a trend towards extending the insurance to cover loss of income resulting from a grounding without any damage to the vessel so that there is nothing to recover from the hull insurer. Further extensions of the cover have been made, but they are few and casuistic and not very far-reaching, see under 3.7 below.
Comparison with non-marine insurance
Loss of hire insurance is in principle the same type of insurance that land-based factories and industry may cover as loss of use insurance. The relevant civil perils (like marine perils) are fire and natural catastrophes. War perils are equally relevant on shore as at sea. However, the mobility of vessels makes war a greater and more complex risk for insurer to evaluate. On the other, hand mobility of vessels makes it possible for insurers to define trading areas and to get vessels moved out of harm’s way when a conflict escalates into a war or war-like situation. Therefore, it is generally easier for owners of vessels to get war risks insurance than it is for the owners of fixed property on land. The non-marine insurers generally exclude war risks altogether, while many marine insurers are prepared to cover war risks at an additional premium in combination with ordinary marine perils. There are also entities specializing in covering war risks for vessels and other floating and movable units.
Loss of hire insurance for vessels and loss of use insurance for shore-based industry have apparently developed completely independently of each other. There also seems to have been very little, if any, communication between professionals within the different branches. It is difficult to say who would benefit the most by such communication apart from, hopefully, the customers.
The Nordic marine insurance market, broadly speaking, has put much greater emphasis on developing the various insurance products in co-operation with the customers (the shipowners) than has the non-marine insurance market. For example, the Nordic non-marine market has no equivalent to the Nordic Marine Insurance Plan which has been developed through a co-operation between insurance professionals and shipowners in four Nordic countries (Denmark, Finland, Norway and Sweden). This seems also to be true outside the Nordic market. It is likely that the strong tradition of shipowner-controlled mutual insurance in the Nordic market has contributed significantly to this phenomenon of shipowner participation in the development of marine insurance terms.
2-4: The insurance conditions
2-4-1: The current loss of hire insurance conditions
The Nordic market covers as of 2016 loss of hire insurance based on the Nordic Marine Insurance Plan of 2013, version 2016 (hereinafter the Plan). The Plan is a set of standard insurance conditions agreed and adopted by the Nordic market.
The Plan is governed by the law of one of the Nordic countries, see for the details Cl. 1-4. However, the Plan is, for practical purposes, the main source of legal regulation of marine insurance. The Plan is not a source of law in and of itself because it is not a legislative act. It is a document agreed between organisations representing respectively the Nordic marine insurance market, the shipowners and other interested parties. Therefore, it becomes legally binding only if it is expressly incorporated into the individual insurance contract.
The Nordic Plan has maintained the same widespread international acceptance as the previous Norwegian Plan of 1996 and subsequent versions, the latest of 2010. Furthermore, it has been intended to expand this acceptance even further, in view of which the 2013 Plan has been structured to lend itself easily to international application.
The Nordic Plan has maintained the structure of the Norwegian Plan of 1996, which in turn maintained the structure of the Norwegian Marine Insurance Plan of 1964. Part One is maintained as the General Part applicable to all insurance covered on the basis of the Plan, including loss of hire insurance. Part Two contains provisions on hull insurance, including liability for collisions or striking (4/4th RDC and FFO). Part Three contains provisions on other insurance for ocean-going vessels, such as total loss insurance (Chapter 14), war risk insurance (Chapter 15) and loss of hire insurance (Chapter 16). Part Four contains provisions relevant to other insurance, such as insurance for coastal and fishing vessels (Chapter 17), movable off-shore units (drilling rigs etc.) (Chapter 18) and building risks (Chapter 19). Chapter 15, Section 6 contains some special rules for war risks, loss of hire insurance, which are dealt with in Chapter 16 below. Chapter 17, Section 7 contains some special conditions for fishing vessels which are dealt with in Chapter 17 below. Chapter 18, section 4 has incorporated to a large extent verbatim the same clauses as in Chapter 16, but there are some material differences which will dealt with in Chapter 18 below.
The provisions of immediate interest to a shipowner who wants to cover loss of hire insurance on the basis of the Plan will be those found in Chapter 16, in combination with the provisions of Part One.
2-4-2: Earlier loss of hire insurance conditions
As mentioned in 1.3.1 above, loss of hire insurance developed out of the Suez crisis in 1956. The development originated in the London market and the Norwegian market followed suit, initially using the conditions adopted by the London market. Later on, each of the insurers introduced their own conditions, to a large extent based on the conditions used by the competing foreign markets, with the US emerging as a third alternative market to London and Norway.
In connection with the 1964 revision of the Norwegian Marine Insurance Plan, new loss of hire insurance conditions were introduced in Chapter 20 of this Plan. This was the first attempt to create common loss of hire conditions for the Norwegian market based on the Norwegian tradition of using the framework of the Plan. However, the new conditions were never used by the Norwegian market because the insurers engaged in this type of insurance still preferred their individual conditions, and the market was not prepared to adopt some of the solutions introduced in Chapter 20 of the 1964 Plan. § 261 of the 1964 Plan regarding simultaneous repairs in particular was at the time considered unsuitable by the market, see the 1972 Commentary, page 13.
In 1972, another attempt was made to create common Norwegian conditions on loss of hire insurance, this time successfully. The 1972 conditions were initiated and published by four insurance companies: Vesta and three other companies that merged into the previous Storebrand Property Insurance Company. Substantial restructuring has occurred within the Vesta and Storebrand Groups, the gist of which, for the purpose of loss of hire insurance, is that the ocean marine portfolio was transferred to Gard Marine and Energy.
The 1972 conditions were prepared by an expert group. The leader of the expert group was the late Professor dr. jur. Sjur Brækhus. The three average adjusters practicing in Norway at the time constituted the other members of the expert group. These were the late Henrik Ameln and the late Leif Strøm-Olsen and Jan Frøystein Halvorsen, who was later appointed Supreme Court Judge (now retired). Sjur Brækhus wrote extensive commentaries to the 1972 conditions in co-operation with the other members of the expert group. Furthermore, the four insurance companies that originally published the 1972 conditions had appointed a committee of six representatives from their own staff, which closely examined and commented on the proposals of the expert group.
Amendments to §§ 6 and 8 of the 1972 conditions were introduced in 1977 and were generally accepted and used by the market. They came to be known as "Amendments 1977".
As late as 1993, there was a general overhaul of the loss of hire insurance conditions by market people with assistance from the average adjuster Ragnar Svarstad (now retired). The 1993 revision was published by the then Mutual Marine Insurers' Committee (GSK)[1] and was entitled General Conditions for Loss of Charter Hire insurance (1972) (Revised 1993). The company market published the same conditions as CEFOR form No. 237.
By this time, the committee entrusted with the task of revising the Norwegian Plan itself was already appointed and had commenced its work. Part of its mandate was to incorporate the loss of hire conditions into the new Plan. This mandate was not restricted to merely incorporating the 1993 revision, but extended also to reviewing the conditions anew. This review resulted in the new Chapter 16 of the Norwegian 1996 Plan. Chapter 16 was amended in the 2003, 2007 and 2010 versions of the Norwegian Plan and maintained with one amendment in the Nordic Plan of 2013. One further amendment was made in the 2016 version which, as explained under 1.4.1 above, now comprises the current loss of hire conditions used by the Nordic market.
[1] GSK was dissolved with effect from 1 January 2001. The members of GSK, including NHC, joined The Central Union of Marine Underwriters (CEFOR) from the same date, which changed name to the Nordic Association of Marine Insurers (Cefor) in 2009.
2-4-3: Future amendments to the Plan
Parties to an individual insurance contract are of course free to agree individual conditions. The market wishes, however, to avoid any development in the direction of generally adopted additional clauses, such as the 1977 amendments. In furtherance of this goal, the market has appointed a permanent Plan revision committee whose mandate is to propose amendments to the Plan, including the loss of hire insurance conditions contained in Chapter 16 of the Plan, if developments suggest that further amendments to the Plan are called for.
Such amendments are incorporated into the Plan itself, and the consolidated amended text of the Plan will be reprinted every third year. The internet version of the Plan will be updated correspondingly. The first printed version of the Norwegian 1996 Plan was published as version 97. At the end of 1998, version 1999 was released. Subsequently, versions 2002, 2003, 2007 and 2010 have been published. The Nordic Plan was published in 2013 and a new version in 2016. The next version is anticipated only in 2019, as the market agreed in 2003 that there is no need to produce new versions of the Plan with such high frequency as in the first years of the Norwegian 1996 Plan. There should at least be three years between each new version.
The Plan and the Commentary are published in English and posted on the internet, at address:
The English text is now the only official version of the Plan, but translations of the Plan text into Danish, Finnish, Norwegian and Swedish are published at the same website. If there is any conflict between the English text and any of the translations, the English text shall prevail. The Commentary has not been translated into any of the Nordic languages.
Amendments, if any, are normally published on the above website by 1st October and are intended to enter into force on 1st January of the calendar year following the publication with effect for insurances entered into or renewed in the course of that year. General principles of contract law dictate that amendments cannot have retroactive effect on current policies unless expressly agreed by the parties to the particular insurance contract. There is nothing preventing the parties from agreeing to apply a new version of the Plan immediately after publication.
If the amendments are to the benefit of the assured, the insurer may not be willing to let the assured enjoy these benefits on current policies without additional premium. But if there are several simultaneous amendments that go either to the detriment or the benefit of the assured, the parties may agree that on balance the amendments do not require any adjustment of the premium and therefore can apply to a current policy. That was in fact the case when the Norwegian Plan of 1996 entered into force on 1st January 1997. It was given retroactive effect on a large number of the current policies by express agreement. The same procedures have been followed with regard to the subsequent versions of the Plan.
Foreign loss of hire conditions
2-5-1: English conditions
The English conditions are known as the A.B. Stewart conditions or, in the latest version, only "ABS conditions". The full name of the latest version of the English conditions is Loss of Charter Hire Insurance - Including War (ABS 1/10/83 Wording). These conditions are subject to English law and practice. They contain no jurisdiction or arbitration clause.
2-5-2: US conditions
The U.S. conditions are known as the Lazard form, or in its full name, Loss of Charter Hire Form (August 1961). There is no choice of law clause in the Lazard form, but Clause J provides for New York arbitration.
Sources of Law - Norwegian conditions
3. Perils insured and losses covered
3-1: Overview
In daily insurance terminology, it is unusual to distinguish between peril and loss. The term "risk" is often used to include both peril and loss. Risk is often used synonymously with peril: for example, "war risk insurance" is a more commonly used term than "war peril insurance". In Norwegian legal terminology it is customary to distinguish between peril (or risk) and loss. The Plan adopts this terminology and treats risk as synonymous with peril, but distinct from "loss".
A peril may be described as the cause of a "casualty" which is also referred to as an "insured incident" or the "average".[2] The Plan does not define these concepts nor is such definition necessary for practical purposes. It suffices to define the insured perils and the losses recoverable under the insurance in question. Depending on the terms of the insurance contract, the insured perils may be "named perils" i.e. only those perils expressly mentioned are covered under the insurance, or "all perils"/"all risks" meaning that all perils are covered except those expressly excluded in the contract. The Plan adopts the latter approach.
However, even all risk insurances are limited to cover only "named losses". No market has yet developed an "all losses" insurance, which would not be in great demand, since the owners have different needs. Therefore, different types of insurance have been developed, such as hull and machinery, P & I, loss of hire, etc. Under the Plan, all these types of insurance are covered as "all risks" insurances, but each type of insurance covers only the loss defined in the relevant chapters of the Plan. The Plan does not contain a chapter on P & I insurance, but Chapter 17 Section 6 contains rules on liability insurance for coastal and fishing vessels not entered with one of the P& I clubs, and Chapter 15 Section 7 contains rules on war risks liability insurance (P &I insurance). Chapter 18 Section 6 and Chapter 19 Section 5 contain provisions for liability insurance for respectively Mobile Offshore Units and conventional vessels construction risks.
The following example may illustrate the difference between peril and loss:
A vessel catches fire due to crew negligence - welding without removing combustible cargo on the other side of the bulkhead. The peril is the negligence of the crew. At the same time the negligence is the cause of the fire. The fire results in extensive damage. The hull and machinery insurer shall pay for the repair costs, or possibly for a total loss if the damage is so extensive that the vessel is deemed a constructive total loss. However, the hull and machinery insurer shall not pay for all possible losses suffered by the assured as a result of the fire, such as loss of market, special market value of this particular vessel etc., as these losses are excluded under this type of insurance. Loss of or damage to consumables and some special equipment may also be excluded losses, see Cl. 10-1.
Loss of income is not included in the hull and machinery insurance but may be covered under a separate loss of hire insurance. However not every conceivable loss of income is covered. There are limitations and exclusions, or - in keeping with the present terminology - some loss of income is excluded, see above under 1.3.2.
[2] In Norwegian; forsikringstilfellet and havariet.
3-2: Perils insured
Traditionally, hull insurance has covered both marine and war perils. In principle marine and war hull-insurance are separate insurances provided by different insurers or groups of insurers. The borderline between marine and war perils is clearly defined, see Clauses 2-8 and 2-9 of the Plan.
Loss of hire insurance may likewise cover both marine and war perils and often the same insurer covers both risks under the same policy. In such a case of dual coverage, the issue of apportionment of responsibility between more than one insurer is eliminated and there is consequently no practical reason to distinguish between marine and war perils.
War risk cover under Chapter 15 of the Plan also includes war risk loss of hire insurance. Therefore, those assureds who are covered for war risks pursuant to Chapter 15 of the Plan do not need to include any war risks extension to their ordinary loss of hire insurance for marine perils.
3-2-1: Marine perils
Loss of hire insurance for marine perils will cover loss of income resulting from damage to the vessel caused by a marine peril. Cl. 2-10 of the Plan provides that unless otherwise agreed, the insurance covers only marine perils. This means that it must be expressly agreed if the loss of hire insurance is also to cover war perils. Without such express agreement, the loss of hire insurance will be deemed to be a marine peril insurance.
Cl. 2-8 of the Plan defines marine perils insurance as an "all perils insurance" with four exceptions:
war perils pursuant to Cl. 2-9
intervention by a state power
insolvency
release of nuclear energy and other perils excluded by the English Institute Extended Radioactive Contamination Exclusion Clause (known as the RACE II clause).
The all-risk principle means that it is not necessary to look for which perils are positively covered, since there is no such listing. Every risk is covered unless it is expressly excepted by one of the four heads listed above. This means that damage to the vessel and any loss of income caused by grounding, fire, explosion, collision or perils of the sea such as heavy weather etc. is covered under a marine loss of hire insurance.
Since Cl. 2-8 (a) expressly refers to war risk cover as defined in Cl. 2-9, there will be no overlap or gap in the cover between marine and war risk insurance under the Plan. Thus, if a peril is not a war peril pursuant to Cl. 2-9, it is by definition a marine peril under Cl. 2‑8, unless excepted pursuant to letters (b) to (d).
This is different from the English and American conditions (both for hull and loss of hire insurance) which are based on the "named peril" principle. The named peril principle has exactly the opposite effect of the all risk principle. Only those perils expressly listed or named in the policy or the insurance conditions will be covered. Owners which are familiar with the English conditions, but not with the Plan all risk principle may be confused and feel uncomfortable at not seeing a list of the perils covered in the policy or conditions. Under the Plan conditions it is important to look for the exceptions rather than the perils covered.
The real difference between the perils covered under the various systems is not great and may be unimportant to the assured if no dispute arises. However, the Plan all risk principle is more beneficial to the assured than the English named peril principle in the event of any dispute or uncertainty. According to the Plan Cl. 2-12, sub-clause 2, it is the insurer who bears the burden of proving that the loss has been caused by an excepted peril, while under the English conditions, the burden is on the assured to prove that the loss was caused by a named peril. This means that English insurers, once they decide to dispute a claim, simply inform the assured that the claim is rejected because the loss was not caused by an insured peril.
3-2-2: War perils
Loss of hire insurance for war perils will cover loss of income resulting from damage to the vessel caused by a war peril as defined in Cl. 2-9. A war peril insurance based on the Plan is a named peril insurance as an exception to the general all risk principle adopted for marine peril insurance under Cl. 2-8 (see 2.2.1above). Similarly, under English conditions the war peril insurance is also a named peril insurance.
The war peril concept is, in practical terms, almost identical under the Plan and the English systems with one important difference: piracy and mutiny are marine perils under the English system whilst they are war perils under the Plan Cl. 2-9, sub-clause 1 (d). For the assured, this difference will be irrelevant as long as there is a consistent choice of conditions. However, the assured may either have an overlap or a gap in cover if the Plan and English conditions are mixed. There will be a gap in cover if the Plan marine and English war peril insurance is taken out, whilst there will be an overlap of cover in the reverse situation. It is, of course, possible to fill the gap or eliminate the overlap by appropriate clauses in the policy. For further discussion on the war peril concept, see the Commentary to Cl. 2-9 and Brækhus and Rein: Kaskoboken, pages 55 et seq.
The war perils insurance covers, inter alia, damage to the vessel caused by war or war-like conditions; the use of weapons etc. in the course of military exercises in peacetime, or in acts guarding against the infringement of neutrality, as well as riots strikes, lockouts, sabotage, acts of terrorists etc.
Where a certain peril results in a series of events or consequences, which in and of themselves may constitute insured perils, it will be the original peril which will be determinative in classifying the insured event. A classic example is the "Torrey Canyon" casualty where the vessel, which had begun leaking oil as a result of grounding, was deliberately bombed to prevent oil pollution damage and consequently sank. According to Cl. 2-8 (b), such loss and the damage caused by the measure taken is a marine peril because the original peril (the grounding) is a marine risk. If, however, the original peril had been a war risk (e.g. damage by torpedo), the loss and consequential damage would, according to Cl. 2-9, sub-clause 1 (e), be a war peril.
3-3: Perils not insured
As per Cl. 2-9, sub-clause 2, insolvency and RACE II exceptions are expressly exempted from war perils coverage, which means that these risks are covered neither by the marine nor war peril insurers.
3-3-1: Insolvency
The vessel may be delayed and lost as a result of insolvency (e.g. arrest and subsequent forced sale of the vessel). Such delay and loss is not insurable regardless of whether it is the owner, the assured (if different from the owner) or a third party who faced financial difficulties resulting in damage or loss to the assured. A shipyard in financial difficulties is a third party that may cause the assured damage or loss by delayed or ineffective repairs etc. due to financial strain on the yard.
3-3-2: Nuclear energy – RACE II exceptions
Commercial insurance markets exclude nuclear incidents and other RACE II perils as insured perils because of the long-term and cumulative consequences which such incidents may have. The accidental release of nuclear energy from a nuclear power plant in central Europe may result in nuclear contamination of extensive areas and a large number of vessels simultaneously. Separate compensation schemes for nuclear perils have been established internationally, see the Paris Convention 1960 with subsequent additions and protocols. See further Brækhus and Rein: Kaskoboken, page 115.
The use of nuclear arms is also excluded from commercial war risk insurance for the same reason. International compensation schemes have not been established and the owners must turn to the flag state or to the state of registration (if different from the flag state) in order to obtain compensation or to obtain assistance in recovering compensation from a hostile power which has used nuclear arms. The same goes for other RACE II excepted perils.
3-3-3: Intervention by state power
"State power" is defined as individuals or organisations exercising public or supranational authority see Cl. 2-8 (b) and Cl. 2-9, sub-clause 1.
The combined effect of Clauses 2-8 and 2-9 is that intervention by the vessel's "own" state is not an insurable peril. This means that intervention by the state of the vessel's registration (normally also the flag state) is not covered by any insurance. The reason is that the intervening state should compensate the owner (e.g. for requisition for title or use). The insurance market was concerned that if the owner was covered by insurance, the flag state might more easily decide not to compensate the owner since his loss would be covered by the insurer.
However, if the flag state is neither the state of registration, nor the state where the major ownership interests are located (which requirements a flag of convenience state could conceivably meet), it would qualify as a "foreign state" under Cl. 2-9(1) (b) and interventions such as capture at sea, condemnation in prize, confiscation etc. would be covered by war perils insurance.
It should be noted that requisition for title and use by any state power is not be considered an intervention. Requisition is excluded from coverage regardless of whether the requisition is carried out by the vessel's "own" state or a foreign state power. Thus an important and practical type of government intervention is excluded from cover.
This exclusion of requisition from cover may lead to some uncertainties. Cl. 2‑9 (1)(b) mentions capture at sea, condemnation in prize and confiscation as interventions by foreign state powers which are covered by war peril insurers. The distinction between confiscation and requisition is that the owner is not compensated by the confiscator, whilst he should be compensated by the state power requisitioning the vessel, see the Commentary to Cl. 2-9
4. Scope of the insurance, Clause 16-1
Clause 16-1 reads:
"The insurance covers loss due to the ship being wholly or partially deprived of income as a consequence of damage to the ship which is recoverable under the conditions of the Plan, or which would have been recoverable if no deductible had been agreed, see Cl. 12-18. If the hull insurance has been effected on conditions other than those of the Plan, and these conditions have been accepted in writing by the insurer, the rules in Chapters 10-12 of the Plan shall be replaced by the corresponding conditions of the insurance concerned when assessing whether the damage is recoverable.
The insurance also covers loss due to the ship being wholly or partially deprived of income:
a. because it has stranded,
b. because it is prevented by physical obstruction (other than ice) from leaving a port or a similar limited area, or
c. as a consequence of measures taken to salvage or remove damaged cargo, or
d. as a consequence of an event that is allowed in general averagepursuant to the 1994 York-Antwerp Rules".
Sub-clause1 of this provision contains several fundamental requirements that must be satisfied in order for the assured to recover under his loss of hire insurance:
the word "loss" means that the assured must have suffered a loss of income;
the words "due to" and "as a consequence of" require a causative connection between the damage and the loss;
the words "wholly or partially deprived of income" mean that the vessel could not have been operated as intended;
the words "damage etc." require that the vessel is physically damaged and that this damage is recoverable under the hull insurance.
These four elements are discussed below.
Loss of income
The words "The insurance covers loss due to the vessel being wholly or partially deprived of income" are a verbatim repetition of § 2, subparagraph 1 of the 1972 and 1993 conditions.
The 1972 Commentary, page 32 made it clear that the intention of these words was that if, the vessel would have been unable to earn any freight regardless of the damage, there should be no recovery under the loss of hire insurance. The English courts have confirmed and settled the law on this point in "The Capricorn”, Cepheus Shipping Corporation v. Guardian Royal Exchange Assurance plc. [1995] 1Lloyd’s Rep 622. The Commentary to Cl. 16-3 refers to "The Capricorn" and re-emphasised this fundamental principle.
In the “Capricorn” the plaintiffs claimed 60 days’ loss of time under the loss of hire policy. The policy was subject to the Norwegian "General Conditions for Loss of Charter Hire Insurance (1972)" with 1977 amendments and with the incorporation of a reference to the Institute Time Clauses (Hull) 1.10.83. The plaintiffs argued that it was irrelevant to consider what, if any, use they might have made of the vessel after the end of the peak season but for the damage. They submitted that the policy wording compensated them for loss of earning capacity without proof that such capacity would have been deployed by them in the market. The defendants argued that the policy was not to be read as covering loss which the vessel would have sustained, damage or no damage, because she would in any eveny have been out of the market. They submitted that the vessel was due to be and would have been laid up throughout the low season and thus that the plaintiffs had no insurable interest.
The judge held that the plaintiff's insurable interest in the subject matter insured (i.e. freight and income from trading) must have existed at the time of loss. The judge found that it was clear that the assured would not have exercised their off-season option to trade the vessel, and that their intention throughout was and would (irrespective of the damage repairs) have been that the vessel should remain in lay-up. In other words, any loss of earnings was not due to the damage, but due to the fact that the vessel would have been out of the market anyway.
However, assuming that the assured would have reconsidered his intention to continue the lay-up had the market improved substantially, the judge concluded that the market never actually did and any prospect that it might was remote.
Although the vessel must have been deprived of income, firm evidence of possible employment is not required. It is not necessary that the vessel has been employed at the time of the casualty. A reasonable possibility of obtaining employment for the vessel during the repair period will be sufficient to show that the vessel had the necessary earning capacity.
However, the assured must show that, from a commercial point of view, it is both the intent and purpose of the assured to place the vessel in the market and that there exists a possibility of obtaining employment. The assured thus has the burden of proving that although the vessel happened to be unemployed, his loss of income was the result of the insured damage. Such burden of proof follows from Cl. 2-12, sub-clause 1, according to which the assured has the burden of proving that he has suffered a loss of the kind covered by the insurance and the extent of the loss.
If, for example, the assured places his vessel in the Persian Gulf as one of several vessels waiting for a possible voyage charter and certain fixtures are made for other vessels, he must be deemed to have fulfilled the condition regarding earning capacity. One cannot demand that the vessel actually has been employed during the relevant period. But, if the allegedly available employment is geographically distant, the assured must prove that moving the vessel from where it lay when it was decided to carry out the repairs was both feasible and commercially realistic.
The borderline between a laid-up and an unemployed but freight seeking vessel may be difficult to draw. There are in general two lay-up conditions to be considered, so called hot lay-up and cold lay-up depending on the extent of the functions that are shut down. In the author’s opinion guidance can be found in the classification societies’ guidelines on cold and hot lay-up.
DNV (now DNV/GL) Guidelines of March 2012 has the following definitions for vessels:
Hot lay-up: In this lay-up condition, the machinery is kept in operation for the sake of fast re-commissioning, but measures may be taken to reduce various operational costs.
Cold lay-up: In cold lay-up condition the machinery is taken out of service and the vessel is kept “electrically dead” with the exception of emergency power. This condition usually implies 3 weeks re-commissioning time or more depending on the level of preservation and maintenance during lay-up. The level of preservation is mainly decided based on the age and value of the vessel and the most likely re-commissioning scenario.
For cold lay-ups as defined above, it is clear that a lay-up plan is to be approved by the insurers and to be followed by the assured, ref the Plan Cl. 3-26, cf. Cl. 3-25. As long as the vessel is in such cold lay-up the assured has not been deprived of income due to any damage to the vessel.
For hot lay-ups as defined above, it seems equally clear that a lay-up plan pursuant to the Plan Cl. 3-26 is not required. At the outset, therefore, a vessel in hot lay-up must be considered to be freight seeking and thus may be deprived of income due to a damage triggering the loss of hire insurance. However, if the assured elects to reduce the crew on board and/or shut down certain functions, it is difficult to outline exactly when an approval of lay-up plan is a requirement according to the Plan Cl. 3-26. As a general rule, if a unit has a lengthy stay out of operation due to no contract, accompanied by a request of reduction in premium, it must be deemed to be laid-up both according to the Plan Cl. 3-26 and in relation to the test “deprived of income”.
However, this principle must not be extended to apply in those cases where the assured is entitled to a proportionate recovery pursuant to Cl. 16-12 for simultaneous repairs. From a logical viewpoint, it could be argued that if damage repairs are postponed to be carried out simultaneously with owners repair or reconstruction, the owner has not suffered any loss if damage repairs are carried out simultaneously with owner’s work. But there is no doubt that, in adjusting practice, Cl. 16-12 prevails over Cl. 16-1, so that the owner will be compensated for half the common repair time if at least one of the requirements under Cl. 16-12 for such apportionment is satisfied. Prior to the Nordic Plan, in 2013 it was proposed that Cl. 16-12 should be amended to reflect the principle that the loss of hire insurance would not respond if the owner had not suffered any loss because the vessel had been deprived of income in any event. This proposal was rejected by the insurers and never came before the Standing Revision Committee for discussion.
If, however, there had been any common repair time in the “Capricorn” case, then the owner would still not have recovered under the loss of hire insurance for any time “lost” while the vessel was in any event in lay-up. One must distinguish between lay-up and taking out a trading vessel from service to carry out required class work or other categories of work as listed in Cl. 16-12 (a) - (c).
Causation
Causation is primarily a question of fact. In many instances it is easy to establish the required causation. If the vessel collides with another vessel and is severely damaged, the vessel must be repaired at the nearest yard capable of carrying out repairs. If no other repairs are carried out at the same time, the assured is entitled to be compensated under his loss of hire insurance for the whole period, from the time of the collision until the completion of the repairs (possibly even longer, subject to Cl. 16-13), less the deductible period.
However, in real life, once the vessel has to be taken out of service, the assured will more often than not take the opportunity to carry out other repairs and maintenance work simultaneously with the average repairs in order to use the time lost as efficiently as possible.
On the other hand, the assured does not take the vessel out of service for damage repairs if such repairs can be postponed to a later planned docking period and carried out concurrently with the assured's work.
Regardless of which category of work triggered the off-hire period it is, in principle, a combination of causes that contribute wholly or in part towards the loss of income for the assured during the common repair period or other common loss of time.
It is difficult to resolve the causation problem in these cases based on generally applied principles such as the causa proxima doctrine or the apportionment rule. Therefore, the Nordic loss of hire conditions contain specific rules on how to adjust the claims in cases of simultaneous repairs, see further Cl. 16-12 dealt with under 7.4.1 below. The solutions adopted in Cl. 16-12 are premised upon the principle of equal apportionment regardless of the question of causation in each case. This solution may not always be fair and reasonable,but it provides a clear and practical solution.
Cl. 16-10 contains another solution on how to apportion time lost during removal to the repair yard, see under 7.3 below. This period of time lost shall be attributed to the category of repairs that necessitated the removal. The same applies to time lost after completion of repairs, if recoverable pursuant to Cl. 16-13 (see 7.4.2 below) and to time lost during surveys, while obtaining tenders, during tank cleaning, waiting to commence repairs and other similar measures necessary to carry out the repairs. Cl. 16-10 introduces something very similar to the causa proxima doctrine.
In other cases of combined causes, the apportionment rule set out in Cl. 2-13 applies
The 1972 Commentary illustrates the apportionment principle by the following example on page 16: a vessel is damaged and has to seek a port of refuge and carry out temporary repairs shortly before the winter season. Before the repairs are completed, the port is closed by ice. The 1972 Commentary suggests that all loss of time until completion of the repairs should be attributed to the damage, while additional loss of time thereafter due solely to the ice should be excluded from the adjustment.
However, this method of apportionment is open to criticism. The time lost during the period when the vessel was prevented from sailing due to both the repairs and the ice could have been apportioned equally between these two independent but simultaneously contributing causes. It is conceivable that even the period after the repairs were completed (when only ice prevented the vessel from sailing) should be apportioned, since the vessel would not have found itself in an ice-bound port but for the damage causing it to become delayed into the ice season.
As can be seen from the above, the apportionment rule gives little guidance and therefore gives a broad discretion to average adjusters, the courts and/or arbitrators.
The Commentary to Cl. 16-1 discusses the application of the apportionment rule in Cl. 2-13 in loss of hire insurance at some length.
Firstly, the case is discussed where the hull damage is caused by an insured and an uninsured peril. The insured peril may be an error in navigation by the master leading to grounding of the vessel and the uninsured peril may be a breach of safety regulation that can be imposed against the assured such as e.g. failure to provide the vessel with an adequate and/or updated chart for the area. Another example, damage to the hull may have been caused partly by a peril of the sea (heavy weather) which is an insured peril, and partly by corrosion, which is excluded from the hull cover pursuant to Cl. 12-3. Even if the repair period and other loss of time due to survey etc. are not increased as a result of the uninsured peril, the loss of time must be apportioned. The Commentary points out that an apportionment made by the hull insurer according to Cl. 2-13, will normally be followed by the loss of hirer insurer unless there are special reasons to apply a different apportionment in relation to the loss of hire insurance. If the damage has been caused by a combination of marine and war perils, the rules in Cl. 2-14 to Cl. 2-16 apply.
Secondly, in cases of simultaneous repairs the Commentary emphasises that the equal apportionment rule of Cl. 16-12 applies instead of the apportionment rule in Cl. 2-13, cf. above.
Thirdly, there may be a situation where perils not covered or attributable to another insurance period may result in delays or prolongation of the loss of time or stay at a repair yard. Such perils may be external, for instance, strike at the yard, extreme weather conditions delaying the repair work or detention of the vessel due to arrest or similar measures. There may also be delays related to the vessel itself, such as discovery during repairs of damage previously unknown and not covered by the current loss of hire insurance. Cl. 16-12 on simultaneous repairs may also apply in the latter case. The Commentary to Cl. 16-1 states with regard to this third situation:
As to the third situation, we must fall back on the general rule of apportionment in Cl. 2-13. In this case, contrary to the first situation, there will be no apportionment settlement for the underlying hull damage, and Cl. 2-13 must thus be applied directly to the loss-of-hire settlement. Consequently, the loss of time shall be apportioned over the individual perils according to the influence each of them must be assumed to have had on the occurrence and extent of the loss. Guidance has to be sought in the Commentary to Cl. 2-13 where criteria for weighing the different causes in different situations are given. One of the criteria will be how foreseeable the event prolonging the loss of time is when the ship is sent to the repair yard. In relation to Loss of Hire insurance, this criterion of foreseeability must be seen in connection with the rules regarding evaluation of tenders in Cl. 16-9, the assured’s duty to reduce the loss and general preventive considerations. (Emphasis added)
This paragraph of the Commentary was amended in 2013 in order to underscore that the apportionment principles of Cl. 2-13 should be applied unless otherwise expressly provided so that the guidelines contained in previous versions of the Commentary should no longer apply.
The Commentary to Cl. 16-1 goes on to discuss how the apportionment rule may be applied, if the repair period is prolonged because of a strike. In the 1996 and subsequent versions until version 2003, the Commentary to Cl. 16-1 contained the following passage:
Questions relating to causation must also be dealt with in accordance with the rules in the general part of the Plan. If time is lost partly because of damage to the ship and partly because of other circumstances not covered by the insurance, then the apportionment rule in § 2-13 will determine the extent of the insurer’s liability. In principle, such an apportionment should be made where the stay at the repair yard is prolonged because of a strike. In practice extra delay arising from a strike by workers at a repair yard has been covered. On the basis that a strike at the repair yard is not unforeseeable, it is assumed that this practice will be continued. The extent of the cover will, however, depend on what was the reason for the vessel’s stay at the repair yard, c.f. § 16-12 and below. [3]
The Commentary stated that the whole period at the yard should be covered in full, subject to Cl. 16-12, if it is the yard's own workers that go on strike and thereby prolong the loss of time.
In 2003, Chapter 16 was reviewed and the above quoted passage was replaced as follows:
In practice, it is particularly the prolongation of stays in a repair yard due to strikes that has caused problems. The 1996 Commentary states that while, in principle, the apportionment rule in § 2-13 was to be applied, in practice a prolongation of the stay in a repair yard due to a strike among the yard workers had been covered. However, the practice referred to consisted only of accepting local strikes at the yard as “foreseeable”, and in such cases paying “full” compensation, i.e. without proportionate apportionment. In the Committee’s view, prolongation due to a strike must be considered in the customary manner on the basis of § 2-13, and not on the basis of whether or not the strike is local. [4]
Since 2003 there has been no amendment to the Commentary on this point. The effect of this amendment of the Commentary to Cl. 16-1 is that the previous alleged practice is abolished. Prolongation of the repair period due to local strike at the repair yard must be apportioned in accordance with Cl. 2-13. Such “apportionment” may still be 100-0, depending on the circumstances in each case, see further the Commentary to Cl. 2-13.
The above quoted passages from the Commentary to Cl. 16-1 put weight on whether a concurrent cause prolonging the loss of time or stay at a repair yard is foreseeable.
In cases where the insured vessel after an incident triggering the loss of hire insurance is delayed by the local authorities, the foreseeability criterion has been applied in determining whether such delays may be wholly or partly allowed under the loss of hire insurance. If the delay caused by the local authority is a foreseeable consequence of the damage to the vessel, at least a certain part of the delay has been allowed. If, on the other hand, the delay is unforeseeable, the chain of causation is broken. According to adjusting practice the delay must be a foreseeable consequence of the vessel’s own damage. If the vessel causes damage to third parties property and is delayed as a result of arrest by a third party claimant and/or the local authorities held the vessel while the incident is investigated, such delays are not covered under the loss of hire insurance at all. This point was emphasised in the 1972 Commentary in the smaller font on page 15. The current Commentary does not discuss the point, but no amendment was intended by omitting this discussion.
In recent years local authorities have become increasingly concerned about damage to coral reefs after groundings on such reefs. In many cases not only the coral reef is damaged, but also the vessel. If the vessel is delayed solely due to the authorities concern for the environmental damage, no part of the delay will be allowed. But if the authorities are also concerned with the damage to the vessel and wishes to ensure that the vessel is capable of continue safely either by its own power or in tow, adjustment practice has allowed a few days delay caused by the local authorities’ investigation and to issue necessary towage permits etc. This practice dates back to the 1972 Conditions. But only two or three days were allowed as this was deemed what was reasonable and necessary for the authorities to complete the investigation and to issue the required permits to continue the voyage or to move to an appropriate repair port. There are examples of authorities delaying the vessel for longer periods, but such extended delay is not compensated under the loss of hire policy.
Adjustment practice may apply a relative foreseeability test depending on where the incident takes place. In countries where the bureaucracy is known to work slowly, five days delay for example may be deemed foreseeable. Any further delay is unforeseeable and is thus not allowed.
Other examples from adjustment practice:
The vessel entered the repair dock for class work and other owner’s work. The vessel struck the dock gate so that the bunker tank was punctured causing bunker oil to run out into the dock. The dock gate was closed in time to avoid any oil spill outside the dock. No repairs could be commenced until the bunker oil was removed from the dock. This took 15 days. The repair of the contact damage took another 10 days. Deductible was 14 days. The 15 days it took to clean the dock was deemed a foreseeable consequence of the damage and allowed under the loss of hire insurance, even if it was not the damage to the vessel itself that caused the delay. Thus 10 plus 15 days were allowed, less the deductible of 14 days, giving 11 days compensation under the loss of hire insurance.
A tanker is damaged but the class does not require immediate repair and issues a Condition of Class that the repair is carried out within a certain time or at the next docking etc. Traditionally, under the general mitigation rule in Cl. 3-30 the assured must then postpone repairs and cannot opt to repair immediately at the expense of the loss of hire insurer. This tradition is challenged if the vessel for commercial reasons cannot defer repairs. It may be that the major oil companies will not charter the vessel for trade to US ports as long as there is a Condition of Class pending. If the vessel can nonetheless be employed in other trade, such a commercial restriction is no reason for the assured to repair the vessel before required by the class. But it may be situations where such commercial restriction is inflicting upon the assured loss of income so that it must be deemed reasonable to allow the assured to carry out repairs earlier than required by class.
When it comes to auxiliary engines and multiple failures the typical scenario is as follows: A vessel has one auxiliary engine out of commission due to either maintenance or damage, then there is a damage to a second auxiliary engine, with consequential off-hire for repairs. There is clear practice with regard to a combination of different perils, in accordance with the Plan section 2-13, for this type of incidents. If reasonable measures have been taken to re-commission the first auxiliary engine, then the loss of hire is allocated to the latter auxiliary engine damage only. It is considered that the latter auxiliary engine damage is the triggering cause. Of course, this is provided that the Class would not allow the vessel to sail with two auxiliary engines out of operational condition. In the Nordic marine insurance practice, insurers, and the independent and sworn average adjusters, have frequently referred to and found analogous support in the NMIP 16-10, sub-clause 1.
[4] This amendment of the Commentary was overlooked in error in the second edition of this book.
Wholly or partially deprived of income
The vessel is wholly deprived of income when it is unable to operate due to the damage. Normally this will correspond to the period when the vessel is physically unable to operate. If the vessel is able to operate with the damage, the situation might be that it is only partially deprived of income. Typical examples are where the vessel has to operate at reduced speed due to engine damage or the cargo capacity is reduced due to damage to the hull or damage to the cargo handling equipment. However, the terms of the contract of affreightment may put the vessel wholly off-hire even if the vessel is able to perform the services required. This will be the case if the charterparty provides that the vessel will remain off-hire under the charterparty until it is restored to its earlier condition, see 5.2.1 below.
Where the vessel is partially deprived of income compensation is granted on a pro rata basis, see 5.3.1 below.
Damage to the vessel
Cl. 16-1 contains another fundamental principle of loss of hire insurance: there is no recovery under the loss of hire insurance unless the vessel has suffered damage recoverable under the Plan. Cl. 16-1 was amended in 2003 so that damage to the vessel covered under the actual hull insurance for the vessel may also trigger cover under the loss of hire insurance, see further under 3.6 below. Whether the damage is recoverable pursuant to Chapter 12 or in General Average and thus recoverable under the hull insurance via Cl. 4-8, is immaterial. In both cases, loss of time caused by the damage is recoverable under the loss of hire insurance, see the Commentary to Cl. 16-1. Total loss and constructive total loss are not considered to be damage for this purpose, see Cl. 16-2 and further comments under 4 below.
Even if the damage was in fact not recoverable under the terms of the Plan, the requirement would nevertheless be satisfied if it would have been recoverable but for any agreed deductible. The amount of the deductible is immaterial, which means that the assured is free to agree any deducible he wants with his hull insurer without affecting his cover under the loss of hire insurance. The assured may even increase the "deductible" to 100%, that is to say the vessel may be kept uninsured without affecting the loss of hire insurance.
Damage excluded from the hull cover
There are several exceptions from cover under the Plan that may be relevant to the hull cover. The wording of Cl. 16-1 suggests that any and all of these exceptions would be relevant also in relation to the loss of hire insurance, but the Commentary to Cl. 16-1 clearly suggests that it is the objective exceptions from the hull cover contained in Chapters 10 and 12 that are relevant. This means that, if the hull insurer is entitled to refuse cover under the hull insurance on the basis of the exceptions contained in Chapter 3 of the Plan, it is necessary to evaluate separately and independently whether the same exceptions apply also in relation to the loss of hire insurance. In many instances, the exceptions will apply equally to both types of insurance. If the vessel is deemed in a poor condition in violation of applicable safety regulations in relation to the hull insurance so that Cl. 3-22 et. seq. is applicable, this will normally also apply in relation to the loss of hire insurance.
In relation to the duty of disclosure, Cl. 3-1, it is possible that the assured may be in breach of his duty in relation to his hull insurer while full disclosure was made to the loss of hire insurer. The fact that the assured may not recover from his hull insurer because of non-disclosure is completely irrelevant for the loss of hire insurer who has been provided with all relevant information. The same goes for change of class, see Cl. 3-8, sub-clause 2. The assured may have remembered to inform his hull insurer about a change of class, while he forgot to inform his loss of hire insurer. Even if the damage is covered under the hull insurance, the loss of hire insurer is entitled to reject the claim if the condition for denying the claim pursuant Cl. 3-8, cf. Cl. 3-9 is satisfied, for instance if the loss of hire insurer is able to substantiate that he would not have accepted the insurance in the first place, if he had known that the assured would change class.
Breach of the warranty of class contained in Cl. 3-14 would normally be equally relevant to both groups of insurers but, in the unlikely event that the hull insurer for one reason or another has accepted to continue the hull insurance in spite of the fact that the class is lost or suspended, does not deprive the loss of hire insurer from invoking the class warranty in order to deny any claim under the loss of hire insurance.
These examples illustrate that these two types of insurances must be treated separately in many respects, even if they are linked together by virtue of Cl. 16-1.
The loss of hire insurer is not bound to accept or be guided by any settlement which might have been reached between the assured and the hull insurer. The loss of hire insurer will only be responsible to the extent that the loss of hire was caused by a physical damage which would have been recoverable under the Plan, regardless of whether any settlement was reached with the hull insurer. Any decision with respect to the loss of hire insurance issue, even if it rejects the basis for the hull settlement, will of course not affect the hull settlement per se, since the hull insurer is not party to the dispute between the loss of hire insurer and the assured.
4-5-1: Exclusions contained in Chapter 10 of the Plan
The most important provisions of Chapter 10 are Clauses 10-1 (objects insured), 10-2 (objects temporarily removed from the ship) and 10-3 (damage due to ordinary use). Loss of hire resulting from physical damage which is not covered under the hull policy is not recoverable. The same applies for loss of hire resulting from physical damage caused by ordinary use of the vessel (e.g. loss of time during repairs of the cargo holds which have been damaged by normal use of the grabs during discharge operations).
4-5-2: Exclusions contained in Chapter 12 of the Plan
The most important exceptions from hull cover in Chapter 12 are the exceptions in Clauses 12-3 (inadequate maintenance, etc.), and 12-4 (error in design of parts not approved by the class). These exceptions will not be dealt with here, other than to note that loss of time during repairs of damage to the hull and/or machinery due to lack of maintenance etc. is not recoverable under the loss of hire insurance. For a detailed discussion of these exceptions, see the Commentary to Cl. 12-3 to Cl. 12-5 and Brækhus and Rein: Kaskoboken, pages 86-108, on the similar, but not identical provisions of the 1964 Plan, Clauses 175 and 176 (m), and Wilhelmsen and Bull, Handbook in Hull Insurance, chapter 10.5.
Vessels insured on foreign hull cover conditions
The assured is free to take out loss of hire insurance on Nordic conditions and simultaneously insure the vessel on non-Nordic hull conditions. Cl. 16-1 was amended in the 2003 version to take care of this combination of insurance conditions. It is expressly provided that the loss of hire insurer must accept the non-Nordic hull conditions in writing. The reasons for this stringent and formal requirement of acceptance of foreign hull conditions in writing are two-fold:
avoidance of any discussion of which hull conditions will trigger cover under the loss of hire insurance;
the loss of hire insurer’s need to carry out a proper risk evaluation and quote adequate premium.
If the foreign hull conditions have not been accepted in writing by the loss of hire insurer, the loss of hire insurance will be triggered only when any damage sustained by the vessel would have been covered under the Plan, regardless of whether the foreign hull cover on point is more extensive or restricted than the Plan. The loss of hire insurer may deny cover because the damage to the vessel is not recoverable under the Plan. If the cover under the Plan is the more extensive, the loss of hire insurer must compensate regardless of the assured's recovery under the actual hull cover.
What is written above applies to well-known standard conditions. If the assured has agreed with his hull insurer special clauses deviating from the standard conditions, such special clauses will never trigger the loss of hire insurance unless the special clauses have been expressly agreed in writing by the loss of hire insurer. The same applies, of course, equally to any special clauses agreed in a hull policy based on the Plan.
In those cases where the loss of hire insurer has accepted the foreign hull conditions in writing, the question arises to what extent the foreign clauses and the foreign background law should be deemed incorporated into the loss of hire insurance contract. Cl. 16-1 expressly provides that only Chapters 10, 11 and 12 are replaced by corresponding provisions in the foreign hull cover. No reference is made to chapter 13 because this chapter is not relevant in this regard, as it deals with the hull insurer’s cover of collision liability.
Consequently, only the provisions of the foreign hull conditions which are accepted in writing that correspond to chapters 10-12 of the Plan are relevant in relation to the loss-of-hire cover.
On the one hand, this means that cover must be based on the foreign hull conditions in question insofar as they state which objects are covered by hull insurance and the scope of the hull cover in the event of damage to the ship. Furthermore, the foreign hull conditions must be followed in order to determine whether the vessel is an actual or constructive total loss. If the vessel is deemed an actual or constructive loss under the foreign hull conditions, the assured is not entitled to any compensation under the loss of hire insurance, cf. Cl. 16-2.
On the other hand, this means that issues that are regulated by chapters 1-9 of the Plan, must always be decided based on the rules in the general part of the Plan. Coordination with foreign hull conditions is only linked to the assessment of the underlying hull damage; issues related to the loss-of-hire insurance itself, such as the rules regarding the duty of disclosure or special trading limits relating to loss of hire cover must always be decided in accordance with the Plan. If the ship is outside the trading area covered by the foreign hull insurance but within the trading area covered by the Plan, the loss of hire insurer will therefore be liable, even if no compensation is payable under the hull insurance.
The assured may conceivably change his hull insurance in the course of the insurance period under the loss of hire insurance, for instance from Plan conditions to English ITCH conditions. In such case, the hull insurance and the loss of hire insurance must be coordinated on the basis of the hull conditions that applied when the loss of hire insurance was effected, unless the assured has notified the insurer of a change to other standard conditions and received the latter’s written acceptance of these, because the loss of hire insurer calculates the premium in relation to the hull conditions that apply at the time the loss of hire insurance is effected.
As regards the burden of proof, the Norwegian Supreme Court has stated in obiter dicta that where the hull insurance is governed by foreign conditions, the burden of proof will also be governed by the foreign rules, cf. the "White Sea" Rt. (Law Reports) 1997 page 1459, in particular page 1464. The vessel in question was hull insured on the English ITC 1983 conditions including the Liner Negligence Clause. The issue was whether damage to the boiler was due to wear and tear, or to crew negligence, or to accident. In this case, the court did not actually have to apply any burden of proof rules because the facts indicated that the cause of the damage was wear and tear, which was excluded under the ITC conditions. The damage was therefore not recoverable under the actual hull conditions, which by express agreement replaced the reference to the Plan, and there was thus no claim under the loss of hire insurance.
Unless there is an express agreement with regard to choice of law and/or jurisdiction, Cl. 1-4 of the Plan will apply since this clause is in Chapter 1 of the Plan and therefore prevails over any reference to foreign hull conditions. This means that for a Norwegian based insurer, such as Norwegian Hull Club, Norwegian law and jurisdiction will apply on the loss of hire insurance, even if the foreign hull conditions are subject to foreign law and jurisdiction.
However, in those cases where the loss of hire policy is expressly made subject to foreign law and/or jurisdiction, the question arises whether the foreign background law should prevail over the provisions of chapters 1 to 9 of the Plan to the extent that the application of foreign law will lead to other results than those following from Chapters 1 to 9 of the Plan.[5]
Neither the Commentary nor any other Nordic legal sources offer any solutions to this question. If the choice of foreign law is combined with a corresponding foreign jurisdiction clause, the question will be decided by the foreign court which may favour its own legal system to the provisions of the Plan. But disregarding the potential for such preferences, we venture to suggest that the foreign court should apply chapters 1 to 9 of the Plan, rather than its own background law. The reference to governing law in Cl. 1-4 is obviously not meant to set aside the provisions of chapter 1 to 9 of the Plan, but merely to supplement the contract with relevant and applicable background law where there are no solutions to the contrary in the Plan. The Norwegian ICA contains provisions on duty of disclosure, safety regulations etc. at variance with the corresponding Plan provisions, and there is no doubt that Norwegian courts must apply the Plan provisions rather than competing Norwegian law. The same must apply to foreign courts, even if the parties have agreed to apply a foreign background law. The foreign court must apply its own background law chosen by the parties only to the extent that it is not in conflict with but supplementing Chapters 1 to 9 of the Plan.
[5] Further on the subject, see Casper M. Meland, MarIus Nr. 356, En komparativ analyse av norsk og engelsk kontraktsrett.
Loss of hire in cases where there is no damage to the vessel
Under 1.3.2, it is briefly mentioned that there has been a development towards extending the loss of hire insurance to include loss of income resulting from a grounding which does not result in damage to the vessel. Under Cl. 16-1, sub-clause 1, and the earlier loss of hire conditions, there would be no recovery if there were no damage to the vessel. This result was seen as unsatisfactory in those cases where the vessel was delayed because of a grounding but the assured and hull insurer were lucky enough to refloat the vessel without any physical damage. Delay may also occur because the authorities investigating the cause of the grounding will wish to satisfy themselves that the vessel is not damaged and fit for service, see the discussion under 3.2 above.
Cl. 16-1, sub-clause 2, included loss of hire insurance coverage, without reference to the hull insurance, in three different cases. Version 2003 added a new cause of loss at letter (d), so that Cl. 16-1, sub-clause 2 now reads:
"The insurance also covers loss due to the vessel being wholly or partially deprived of income:
because it has stranded,
because it is prevented by physical obstructions (other than ice)from leaving a port or a similar limited area,
as a consequence of measures taken to salvage or remove damaged cargo, or
as a consequence of an event that is allowed in general average pursuant to the 1994 York-Antwerp rules".
4-7-1: Loss of hire due to "stranding"
Letter (a) extends cover in those cases where the vessel has "stranded". The word "stranded" must be read as synonymous to "grounding". Thus cover is extended to all cases where the vessel is prevented from moving because it is stuck on the seabed, regardless of whether the vessel drifted ashore or was moving under its own power. The cause of the grounding is immaterial, as long as it is due to a peril covered under the policy, see 2 above, and the exclusions from cover in Chapter 3 do not apply. However, the Commentary to letter (a) underscores the following limitation on the perils covered:
“To say that the ship “has stranded” means that the stranding must be in the nature of a casualty, even though there is no requirement that the stranding resulted in damage. If, on the other hand, the stranding is a consequence of “ordinary use”, for instance foreseeable stranding during navigation on a shallow river, cf. Cl. 10-3, the insurer is not liable for the loss of time”
It is difficult to imagine that this extension of cover will result in any significant payments from the insurer because if the grounding is so light that there is no damage to the vessel, the delay will seldom reach beyond the deductible period. If the unlikely should occur, i.e. that the vessel is aground without any damage but the vessel cannot be moved, Cl. 16-2 will prevent the assured from recovering under the loss of hire insurance if the hull insurer pays out total loss compensation, see further under 4.3 below.
4-7-2: Loss of hire due to vessel being prevented from leaving due to physical obstructions (ice excluded)
Letter (b) may be described as civil or marine "blocking and trapping" cover. Such cover was developed in war risk policies both to provide total loss compensation if the vessel was blocked or trapped for an extended period (12 months usually) and to compensate loss of income during the period the vessel was delayed, see Cl. 15-12 and Cl. 15-16. On the latter provision, see under 16.1 below.
The blocking and trapping cover under Cl. 16-1, sub-clause 2 (b), is narrower than the cover under Cl.15-16. Only delays caused by physical obstructions are covered. Such obstructions may be another vessel blocking the entrance to the port after an accident, a collapsed bridge, fallen power lines, etc. The only obstruction excluded is ice. Delay caused by ice preventing the vessel from leaving the port is not covered. However, if ice was only one contributing cause of the delay, there may be partial cover if the other cause is covered under the loss of hire insurance, see further on causation under 3.2 above.
After the Deepsea Horizen catastrophe in the Gulf of Mexico, ports were temporarily closed due to extensive oil pollution in the port. Whether extensive pollution on the sea amounts to a “physical obstruction” is debateable. Oil on the sea will not physically prevent vessels from passing through, but if the port authorities in the port affected by the pollution do not prohibit vessels from passing through, port authorities at the next and subsequent destinations may well deny a vessel stained by oil entrance because of fear of pollution. Hence, the vessels that have to wait in port until the pollution is cleaned up are for practical and commercial reasons blocked. Thus, there are good reasons to treat extensive pollution equal to a physical obstruction in relation to Cl. 16-1, sub-clause 2 (b).
If the vessel is prevented from entering (as opposed to leaving) a port because the entrance is blocked, the ensuing delay, loss of freight or extra costs of discharging or loading the cargo elsewhere, is not covered under the loss of hire insurance. The market at this point of time is still not prepared to extend cover any further than to vessels blocked in port or similar limited areas. A vessel prevented from entering a port may, of course, move freely in the physical sense, but from a legal standpoint its movements may be restricted because of its contractual obligations which may oblige the assured to keep the vessel waiting for a certain period to see whether the hindrance disappears and prevents him from taking any action to mitigate the loss until after a considerable time. Thus there is no doubt that if the vessel cannot enter a port because of a physical obstruction, the assured may suffer losses worthy of being covered by loss of hire insurance but which losses are nevertheless uninsurable under the generally available loss of hire insurance conditions.
The words "similar limited area" are not commented on in the Commentary to Cl. 16-1, sub-clause 2 (b), other than by reference to Cl. 15-12 (war risk blocking and tapping). In 16.1 below, it is explained that the whole Arabian Gulf is deemed a "similar limited area" to a port or harbour for the purpose of Clauses 15-12 and 15-16 and it is suggested, in opposition to the Commentary that the same may apply to other gulfs and bays etc. The same extremely wide interpretation of the words "similar limited area" can not be applied in relation to Cl. 16-1, sub-clause 2. To the contrary Cl. 16-1, sub-clause 2 (b), must be read more in line with the York-Antwerp Rules' concept as a place where the vessel can be safely moored similar to when in port.
It is probably of no importance to carry this analysis any further as the "physical obstruction" requirement will be the most important one in practice. If the whole Arabian Gulf should be considered as a "similar limited area" per Cl. 16-1, sub-clause 2 (b), it is hardly conceivable that the entrance to the Gulf, the Hormuz-Strait, could be blocked by a physical obstruction caused by a marine peril. If there is a physical obstruction caused by a marine peril preventing the vessel from leaving an area, that should suffice for the purpose of applying Cl. 16-1, sub-clause 2 (b), and there is no need to restrict the cover further by introducing a narrow interpretation of the words "similar limited area".
4-7-3: Loss of hire as a consequence of measures taken to salvage or remove damaged cargo
Letter (c) of Cl. 16-1, sub-clause 2, was new in 1996. Time lost in removing or salvaging damaged cargo is covered by the loss of hire insurance. It does not matter whether the assured is liable under the contract of affreightment towards the cargo owner for the damaged or lost cargo, or whether he is covered under his P & I policy for such liability. But, if the assured is privy to the cargo damage in such a way that the exclusions from cover under Chapter 3 of the Plan apply, he may also have forfeited his cover under the loss of hire policy. However, this evaluation must be made separately for the loss hire insurance and, in principle, it has nothing to do with the assured's right to limitation of liability, if any, or to recovery under his P & I policy.
4-7-4: Loss of hire as a consequence of an event that is allowed in general average pursuant to the 1994 York-Antwerp rules
Letter (d) was added in the 2003 version and extends cover to include delay resulting from a general average situation that does not lead to damage to the ship, for instance caused by cargo shifting in bad weather. If the vessel seeks a port of refuge to avoid loss of or damage to the vessel and cargo, the deviation to the port of refuge is a general average act. The time lost due to this deviation and the time in the port of refuge used to reload or restow the cargo or take other measures to enable the vessel to continue the voyage safely will be covered under the loss of hire insurance. This corresponds with the solution under English loss of hire conditions. It may be that measures taken to salvage or remove damaged cargo go further than general average acts covered under letter (d). If so, cover may be sought under letter (c) if the condition for cover under this letter is satisfied.
In the 2010 Commentary, the piracy example was also discussed as pirates operating from Somalia at the time hijacked a number of vessels in the Gulf of Aden and the Indian Ocean. As piracy is a war peril according to Cl. 2-9, sub-clause 1 letter d, loss of hire cover for such attacks will be discussed in 16 below.