The need for loss of hire insurance

If the vessel is lost, the assured should, theoretically, not suffer any loss of income.  Either he can replace the vessel immediately, or the compensation from the hull insurer should furnish sufficient capital to generate the same income as the vessel had earned. If payment under the hull insurance is delayed for more than one month from the date the casualty was notified to the hull insurer, the assured is entitled to interest on his claim, Cl. 5-4 of the Plan.

However, real life does not always follow theory.  In certain circumstances, a total loss may be to the benefit of the assured while, in other circumstances, a total loss may be most unwelcome and the assured may suffer not only loss of the investment cost of the vessel itself but also loss of income.

The valuation of the vessel under the hull insurance, as compared to the market value of the vessel at the time of the loss, is very important in this regard.  It is also very important to take into account the assured’s possibility of covering the so-called hull interest and freight interest insurance in addition to regular hull insurance. Hull interest insurance and freight interest insurance, which in English insurance terminology are more often called Disbursement and Increased Value insurance, are dealt with in Chapter 14 of the Plan[6].  The insurance market offers these types of insurances precisely to satisfy those losses that the assured suffers in case of a total loss which are not covered by the hull insurance, the purpose of which is merely to cover the market value of the vessel. Pursuant to the Plan such increased value insurance may be taken out for 25% of the hull valuation as hull interest insurance and, in addition, another 25% of the hull valuation as freight interest insurance. Thus, the assured should have ample cover for the additional expenses or loss of income he suffers as a result of the loss of the vessel. 

Pursuant to Cl. 14-4, sub-clause 3, the assured may obtain freight interest coverage even in excess of 25% of the hull value, if he suffers a loss under an existing time charter or a contract for consecutive voyages, as a result of the total loss of the vessel. In order to protect his interests under such existing contracts, the assured may take out an open freight interest insurance policy.  Any payment under such open cover policy will reduce payment under a regular freight interest insurance, see Cl. 14-4, subparagraph 3, last sentence. The idea is that the assured shall not recover 25% of the hull value under regular freight interest insurance in addition to the recovery under the open freight interest policy. The payments under these two policies must be consolidated. However, this consolidation shall not apply to payments under hull interest insurance.

This means that in case of a total loss, the assured, who is fully insured, may recover the market value of the vessel under his hull insurance, plus 25% of the market value under his hull interest insurance and another 25% of the market value under his freight interest insurance, together 150% of the market value, provided that the insurable value and the sum insured correspond to the market value of the vessel.  The recovery may be further improved if the vessel is fixed on long term contracts.  Therefore, in the event of a total loss casualty, there is no need for any loss of hire insurance in addition to the hull insurance, hull interest insurance and freight interest insurance.  For this reason, Cl. 16-2 provides that the loss of hire insurance does not cover loss of time resulting from a total loss.

[6] See further on the concept of Hull Interest and Freight Interest insurance, Wilhelmsen & Bull, Handbook on Hull Insurance, page 334-335.