What is loss of hire insurance

  1. 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.

  2. 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. 

  3. 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.