LoH insurance suspension during lay-up - Awareness

Cl. 9-3 vests with the claims leader to approve the lay-up plan with binding effect for the co-insurers, if any.

If no lay-up plan has been issued by the assured or he has failed to obtain approval of it by the insurer or the lay-up plan has not been complied with, this will be deemed to be a violation of a safety regulation sanctioned according to Cl. 3-25, sub-clause 1. Cl. 6-6 gives the assured on certain conditions a right to negotiate a return of premium in case the vessel is laid-up.

Thus the assured has the option to keep the vessel fully insured during lay-up, alternatively to agree with the insurer various other arrangements deemed satisfactory to both parties’ interests under the circumstances. Normally, under a so called cold lay-up(1) the assured will get a return or reduction of the premium as the risks the vessel is exposed to during lay-up is less than during trading. But the risk for damage to or loss of the vessel is not eliminated altogether during lay-up so normally the hull insurance and other property insurance is maintained may be with adjusted insured value if the lay-up is due to a falling market lowering the values of vessels, cf. Cl. 2-3, sub-clause 2.

However, for Loss of Hire insurance it may be in the best interests of the assured to have the insurance terminated or suspended during an extended lay-up period. There will be no compensation under the Loss of Hire insurance if the damage to the vessel is repaired during lay-up, as the assured is not suffering any loss of income as the vessel would have been out of service regardless of the damage.

On the other hand, the assured may still suffer a loss of income at a later stage, namely when the damage shall be repaired. In this context it is unimportant whether the damage was discovered immediately when it occurred or only after the vessel was recommissioned and started normal operation. The assured ought, therefore, to consider carefully what insurance arrangements are in his best interest. If the Loss of Hire insurance is terminated or suspended during lay-up any damage to the vessel occurring(2) during lay-up will be uncovered. A damage that occurred during lay-up must be referred back to the lay-up period regardless of when the damage was or should have been discovered.

Repairs may not be possible or uneconomical to carry out at the location of the lay-up, so the vessel will have to be removed for repairs. Such removal will normally be done in connection with the vessel breaking the lay-up and then the assured may be suffering a loss of income as the transition period from breaking the lay-up to the vessel is ready for trading again is prolonged due to the damage repairs. Normally, the deductible period according to Cl. 16-7 start to run from the commencement of the loss of time, which then will be when the lay-up period is ended.

For example: An offshore unit (MOU) is laid-up between two contracts. The MOU is damaged during the lay-up. Remaining period of lay-up is 45 days. Deductible period is 30 days. If repairs are commenced immediately at lay-up site and lasts for 75 days, there will be no claim under the Loss of Hire insurance. The first 45 days the MOU would have been out of service at any rate due to the lay-up, and the next 30 days are the deductible period commencing at the end of the lay-up period. Only if repairs continues fore more than 75 days will the Loss of Hire insurance respond by paying the daily amount for the number of days exceeding 75 days. If the daily amount is reduced during the lay-up, e.g. from USD 150,000 to USD 75,000, the Loss of Hire insurer will pay only USD 75,000 for the each day in excess 75 days.

The result will be the same also in cases where the MOU must be removed for repairs. Such removal may entail that the daily running costs are increased as compared with mere lay-up costs. Such increased costs will not be covered under an ordinary Loss of Hire insurance, if there is no loss of income. So if the removal occurs while the MOU at any rate is out of service, i.e. during the 45 days remaining of the lay-up period in our example, there will not be any compensation during the removal even if the daily costs are increased during the removal.

In practice it is often agreed that the daily amount is set at NIL at the termination or expiry of the charter, and that the daily amount is increased to the new daily charter rate from the moment a new charter is agreed. Alternatively, the increase of the daily amount may take effect when the new charter enters into force.

If the daily amount is set at NIL during the lay-up between two charters, there will not be any compensation under the Loss of Hire insurance for days of repairs exceeding the deductible period if the damage occurs while the daily amount is set at NIL even if the repair takes place after the daily amount is increased to the new charter rate. As explained at footnote 2, the Loss of Hire cover must be referred back to the cover in place when the damage occurs. If the Loss of Hire insurance is terminated or suspended during lay-up there will be no cover for incidents occurring during the lay-up. The same goes if the daily amount is set at NIL during lay-up.

Hence, as aforesaid the assured should carefully consider whether it is in his best interest to terminate or suspend the Loss of Hire cover during lay-up. In the same way he should equally carefully consider whether it is in his best interest to set the daily amount to NIL.

1) 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.

2) Cl. 2-11 entails that under certain circumstances a peril may be deemed to have struck prior to the “occurance” with the effect that the resulting damage shall be referred back to a previous insurance year or in this context before the Loss of Hire insurance was terminated or suspended. But in many cases, may be most cases, the peril strikes more or less at the same time as the damage occurs, which is what we have in mind now leaving aside the finer points of Cl. 2-11 for the purpose of this discussion.

1. Oct. 2015