Dozen ships alongside in Ukraine could be declared total losses
Marine insurers braced for hit running to tens of millions if Russian invasion reaches six-month point
‘There is some debate here as to what is happening. Are the ships subject to an embargo? Is there a blockade, are they trapped? But it really doesn’t matter, you may be entitled to a total loss,’ argues lawyer
AROUND 12 to 15 vessels trapped in Ukraine will likely be declared constructive total losses if fighting in that country continues until August, with marine insurers braced for a hit provisionally estimated at tens of millions of dollars, according to market sources.
Several dozen more ships will become CTLs if the Russian incursion is not over by next February, with the difference down to whether their war risk insurance policies specify six months or 12 months as the applicable period of abandonment.
While the hit will be unpleasant for the sector, it pales into insignificance alongside the billions of dollars in payouts currently facing aviation insurers, after many Russian aircraft lessors responded to sanctions by pleading they could no longer keep up dollar payments on their jets.
In marine insurance terms, hull policies would not respond to a claim for war perils, which are insured separately through a war risk policy.
War risk rates for Ukraine became controversial early in the hostilities, when rates for Black Sea calls rocketed to all-time highs of 5%-10%, sparking accusation of price gouging. But premiums have since fallen to levels more normally associated with shooting wars.
S.60 of the Marine Insurance Act 1906 provides that constructive total loss occurs “where the assured is deprived of the possession of his ship or goods by a peril insured against, and it is unlikely that he can recover the ship or goods”.
But no time period is spelled out, and the matter therefore turns on the precise wording of the war risk policy.
This has subsequently been influenced by case law dating back to the Iran/Iraq war of the 1980s, when a number of ships were trapped in the Shatt al Arab waterway by Iraqi forces.
Shipowners attempted to claim CTLs under war policies citing s.60, and a vessel called the Bamburi was selected for arbitration.
While it was clear the owners had been “deprived of possession” by an insured peril, it was not clear that it was “unlikely they could recover” their ships, given that s.60 sets no time limit for recovery.
The arbitrators held that the words “within a reasonable time” should be seen as implicit, and a reasonable time was defined as 12 months. The Bamburi case gave rise to the so-called detainment clause found in modern war risk policies.
One standard detainment clause, taken from the Institute War and Strikes Clauses - Hulls 1.10.83, reads: “In the event that the vessel shall have been the subject of capture, seizure, arrest, restraint, detainment, confiscation or expropriation, and the assured shall thereby have lost the free use and disposal of the vessel for a continuous period of 12 months, then for the purpose of ascertaining whether the vessel is a constructive total loss, the assured shall be deemed to have been deprived of the possession of the vessel without any likelihood of recovery.”
Clauses, of course, are subject to negotiation by brokers, and some in some cases offer CTL payout after just six months.
According to data from Lloyd’s List Intelligence, there are approximately 190 vessels alongside at Ukrainian ports. This figure only includes vessels transmitting AIS from the beginning of May. Some vessels may have turned off AIS on account of the fighting, making greater precision difficult.
Of those reporting an AIS message stamp with a registered IMO number, LLI believes 70 arrived before the conflict began. Some 17 of them are in Chornomorsk, eight in Odessa, and nine in Kherson, which is now occupied by Russian forces.
“There’s no underlying common law rule that at six months or 12 months you’re entitled to a total loss,” said a lawyer at a leading London shipping firm.
“There is some debate here as to what is happening. Are [the ships] subject to an embargo? Is there a blockade, are they trapped?
“But it really doesn’t matter if the terms of the policy set out that if you can’t get your ship out, you may be entitled to a total loss.”
Word from the market is that some vessels will become CTLs in August, but insurers know that and have already factored the likely losses in.
In legal terms, it appears that no policy defences would be available, and everything will turn on the wording.
A war risk insurer, who asked not to be named, confirmed that underwriters are well aware of what could be coming down the track and are fully expecting to pay out on 12 to 15 ships unless peace is reached.