Hull Insurance according NMIP
Professor Svante O. Johansson
Chapter 10 NMIP
Scope of
H&M
Trading areas NMIP
3
Objects covered
Radiostation
Art
Hydraulic oil
Lub. oil
Anodes
Bottompaint
Money
Cargo/containers
Lashings
Tarpaulins
Mooringropes
Bunkers
Dunnage
The vessel with spare parts and equipment and parts
borrowed or hired. Temporarily removed ashore
for repairs, to be returned onboard prior to
departure.
4
Example on objects covered
 Insured ship A assessed value 10 000 000
 Due to hard weather the following losses and
damages was claimed from the insurer
Loss of life boats
20 000
Damages to hatches
14 000
Destroyed lashings
4 000
Two barrels of lub.-oil fell and were
destroyed
500
 Fork lift came loose and was destroyed 1 000
Total claim
39 500




How much shall the insurer pay if the deductible is set at
20 000?
5
Example on objects covered (cont.)
Losses and Costs
Insurer
 Loss of life boats (§ 10-1, 1 b)
20 000
 Damages to hatches (§ 10-1, 1 a) 14 000
 Destroyed lashings (§ 10-1,2 c)
 Two barrels of lub.-oil fell and
were destroyed (§ 10-1, 1 c)
500
 Fork lift came loose and destroyed
(§ 10 -1, 1 b)
1 000
Total 35 500
Deductible
-20 000
Grand total
15 500
Owner
4 000
4 000
20 000
24 000
6
Cover provided - point of depature
All Risk Insurance
 §2-8 All perils covered except

 a) war
 b) intervention by state power
 c) insolvency
 d) perils covered by the RACE II clause
7
Liability of the insurer – an overview




Total loss




Actual
Constructive
Presumed
Compromised
§ 11-1
§ 11-3

Repair costs (Particular average)
§ 12-1


Third Party – Collisions (RDC)
Fixed and Floating Object (FFO)
§ 13, 4-14
§ 13






Cost for security
Litigation
Settlement of claims and establishing loss
General Average – Assumed G.A.
Salvage
Mitigating Loss
§ 4-3
§ 4-4
§ 4-5
§ 4-8, 4-11
§ 4-12
§ 4-12
Physical damage
Collision and striking
Costs to avert or minimise loss
§ 11-7
8
Limit of liability of the insurer
1. Liability up to the sum insured
 by any one casualty
2. Equivalent amount for costs of measures taken to
avert or minimise loss
 Also if the sum in 1 is not exhausted
3. Equivalent amount for collision
 Cannot use 1 or 2 even if not exhausted
 Even if the sum insured is exceeded
 Loss for security, litigation and settlement of claims
 interest
9
Example on max liability
 Insured ship A assessed value 10 000 000
 Collision with ship B




Damages
Salvage
Collision liability
Litigation
6 500 000
4 000 000
14 000 000
500 000
How much shall the insurer pay?
10
Example on max liability (cont.)
Costs
1. Damage (§4-18, 1:1)
2. Salvage (§4-18, 1:2)
Balance from 1: 3 500 000
Balance from 2: 6 000 000
3. Collision (§4-18,2 13-3)
4. Litigation (§4-19, 4-4)
Total
Deductible
Grand total
Insurer
6 500 000
4 000 000
10 000 000
500 000
21 000 000
-100 000
20 900 000
Owner
4 000 000
4 000 000
100 000
4 100 000
11
Chapter 11 NMIP
Total Loss
The assured may claim
compensation for a total
loss if the ship is lost
without there being any
prospect of it being
recovered or if the ship is
so badly damaged that it
cannot be repaired.
No deductions shall be
made in the claims adjustment for unrepaired
damage sustained by the
ship in connection with an
earlier casualty.
Actual total loss
 Two forms (§11-1)
 No prospect of recover
 Sinking, not salvageable, ceases to be a thing of the kind
insured
 Assessed from an economical point of view
 Unrepairability
 Difference between repair and new building
 Assessed from a technical point of view
13
Total loss due to salvage attempt
 Conflict of interests
 Insured value low
 Owner wants to salvage
 Insurer pay and leave (§4-21)
 Insured value high
 The insurer has a right to attempt to salvage (§11-2)
 Total loss if not salvaged in time
 Six months time limit (§ 11-2)
 From notification
14
Condemnation or
Constructive Total Loss
 The assured may claim compensation for a total
loss if the conditions for condemnation are met
(§11-3)
 Met when
 Cost of repair exceeds 80 % of
1. Insured value or
2. Value after repair, if higher
15
Example on condemnation
 Cost of repair
 Assessed value
 Value of the ship repaired
 Value of the wreck
Can the owner claim total loss?
 No!

8
11
14
7
Cost of repair (8)/value of the ship (14) = 57 %

The value of the wreck is left outside
 NB!


Value added due to repair is only 7 (14-7) even though the cost
of repair was higher (8)
Makes it economic sense to repair?
16
Some criteria for condemnation
 Casualty damage
 Only ”casualty damage” counts
 Only covered damages
 Other damages included (§11-3, 4)
 Reported and
 Surveyed
 In the course of three years prior this casualty
 Cost of repairing the ship (§11-3, 4:2)
 Cost of repair
 Actual costs
 Cost of removal (but not salvage)
 Important factor in some instances
17
Example on
condemnation
 Ship A is running heavily aground on a voyage from
Oslo to Göteborg. The ship is salvaged and taken to a
safe harbour. The salvage award was settled at 1,5
mill. The market value of the ship was 11 mill., while
the assessed value was 10 mill. According to an
estimation the scrap value of the ship was 2 mill. The
cost of repairs was estimated to 9 mill.
 Calculate the insurers liability.
18
Example on
condemnation (cont.)
 Calculation if ship is condemned instead of repaired
 Cost of repair
9 mill. divided by (not salvage)
 Market value
11 mill. give
 81 % and the ship can be declared a constructive total loss
Costs
1. Total loss
2. Salvage
Deductible n/a
Grand total
Insurer
10 mill.
1,5 mill.
Total 11,5
0
11,5
Owner
19
Example on
condemnation when reparing
(cont.)
 Now the owner in the example has chosen to repair
the ship, which gives the following figures
Costs
Insurer
Owner
1. Damage repair
8 mill.
1 mill
(10 mill. less 2 mill. §12-9)
1. Salvage
1,5 mill.
Total 9,5
Deductible
-0,05
0,05
Grand total
9,45
1,05
20
Other total loss situations
 Presumed total loss (§11-7—8)
 Missing
 During three months from expected port entry
 Ice bound extends the period to twelve months
 Abandoned
 During three months from abandonment
 Ice bound twelve months
 If it is clear that she will not be recovered
 Claim at once
 May not reject after the period even if recovered
 Compromised total loss
21
Other total loss insurances
 Hull interest insurance (§ 14-1)
 Total loss
 Liability for collision in excess the sum insured in the Hull
policy
 Freight interest insurance (§ 14-2)
 Against loss of long term freight income
 Limitation by the sum insured (§ 14-4)
 Cannot cover more than 25 % of the assessed insurable
value of Hull policy
 Owner can claim 100 % from Hull, 25 % from Hull interest
and 25 % of Freight interest
22
Chapter 12 NMIP
Damage.
Main rule damage § 12-1
 What is a damage?
 Vessel damage without rules relating to total loss being
applicable.
 Right to repair
 Insurer liable for restoring the vessel to the condition it
was prior to the occurrence, § 12-1, 1
 Duty to repair
 Liability arises as and when the repair costs are incurred
(“indemnity insurance”), § 12-1, 2
 Deduction for improvements, § 12-1, 3
 Complete repairs unreasonable/impossible
 Claim for depreciation in value, § 12-1, 4
24
Unrepaired damage § 12-2
 Can claim for unrepaired damage when the
insurance period expires
 Based on estimated reduction in ship’s market value at
the time of expiry, not exceeding estimated cost of
repairs.
 Total loss absorbs partial loss
 No cover for unrepaired damage if vessel becomes an
actual or constructive total loss before policy expiry.
 The assured may transfer claims for known damage
to a new owner
25
Excluding inadequate maintenance
The insurer is not liable
for costs incurred in
renewing or repairing a
part or parts of the
hull, machinery or
equipment which were
in a defective condition
as a result of wear and
tear, corrosion,
rottenness, inadequate
maintenance and the
like.
26
Excluding error in design

If the damage is a result of error in
design or faulty material, the insurer is
not liable for the costs of renewing or
repairing the part or parts of the hull,
machinery or equipment which were not in
proper condition, unless the part or parts
in question had been approved by the
classification society.
27
Example maintenance and
error in design
 Stena Carisma ND 2002 s. 31




Built in 199X in aluminium. Shelving and frames were made of a
different kind of alloy mixture. Later on it was discovered that
the frames had corroded. It could be ascertained that the alloy
was not able to stand salt water in the same way as the shelving
aluminium. Was this excluded from cover?
It was held that the aluminium frames were made in the
ordinary way and the alloy was not different from others of the
same kind. Ergo: not faulty material and thus not excluded.
However, choosing an alloy that was sensitive to salt water was
regarded as error in design and thus excluded (in that particular
case).
The damage was also held to amount to corrosion and thus
excluded as inadequate maintenance. Obiter said that it might
be covered in extreme cases
28
Not recoverable losses
 The insurer is not liable for costs of ordinary
operation (§12-5):
 (a) crew wages and maintenance and other ordinary
expenses connected with the running of the ship during
the period of repair, unless this is specially agreed,
 (b) expenses of shifting, storing and removal of cargo,
 (c) accommodation of passengers,
29
 Nor for losses connected to ordinary maintenance or replacement

(d) objects which must normally be replaced several times during the
expected life of the ship and which and have been used for mooring, towing
and the like, unless the loss is a consequence of the ship having sunk, or is
attributable to collision, fire or theft. The same applies to tarpaulins,

(e) zinc slabs, magnesium slabs and the like fitted for protection against
corrosion,

(f) loss due to lubricating oil, cooling water or feed water becoming
contaminated, unless proper measures were taken as soon as possible after
the assured, the master or the chief engineer became, or must be deemed to
have become, aware of the contamination, and in any event not later than
three months after one of them should have become aware of the
contamination
30
Time and cost in repair
 The conflicting interests in choice of yard
 Prompt repair raises the costs
 (not an interest of insurers)
 Prolonged repairs leads to loss of hire or freight
 (not an interest of owners)
 The compromise
 The insurer liable for the cheapest alternative
 It will cost for the owner if he or she chooses the more
expensive yard
31
Survey of damage § 12-10
 Survey is to take place


Before any damage is repaired
a representative of the assured and a representative of the
insurer shall participate
 The representatives shall submit survey reports, in which
they shall




describe the damage and
state their opinions as regards the probable cause of each
individual item of damage,
the time of its occurrence and
the costs of repair.
 Remedies if the assured repaired without any survey being
held or without notifying the insurer of such survey,

the burden of proving that the damage is not attributable to
causes not covered by the insurance
32
Temporary repairs § 12-7

The insurer is liable for the costs of
necessary temporary repairs when
permanent repairs cannot be carried
out at the place where the ship is
located.

If temporary repairs of the damaged
part are carried out in other cases,
the insurer is liable for costs up to
the amount he saves through the
postponement of the permanent
repairs, or up to 20 % p.a. of the hull
valuation for the time the assured
saves, if the latter amount is higher.
33
Example on temporary repair
 Sokna is a small coaster trading on the west coast of Sweden
and Norway. Her sum insured under H&M is 1 000 000.
 Temporary repairs are carried out on Sokna in Bergen on the
rational that the Owner has booked a scheduled docking in
Göteborg within a month. The price of the docking is 10 000
per day and the time calculated in dock was 2 days.
 A surveyor estimated that permanent repairs in Bergen would
have cost 100 000 during 10 days.
 Permanent repairs was later fulfilled in Göteborg at the
amount of 110 000. In total the work continued for 10 days,
whereof owners work would have taken 6 days and casualty
work 9 days if made separately.
34
Example on
temporary repair (cont.)
Costs
1. Temporary repair
Insurer
2 740
Owner
17 260
110 000
112 740
-50 000
62 740
17 260
No savings! Repair more expensive in Göteborg.
Actual time saved:
2 days in Bergen, add 3 days in Göteborg
(9 days average repair less 6 days owners work)
compared with 10 days, gives 5 days saved
1 000 000 * 20 % * 5 days/360 =
2. Permanent repair
Total
Deductible
Grand total
50 000
67 260
35
Invitation to tender § 12-11
 A right of the insurer
 The insurer may demand that tenders be obtained
from the repair yards of his choice. If the assured
does not obtain such tenders, the insurer may do
so.
 If the time taken to obtain tenders exceeds ten
days as from the date the invitation to submit
tenders is sent out, the insurer is liable to
compensate the loss of time at the rate of 20% p.a.
of the hull valuation during the excess period.
36
Removal cost § 12-13
 The insurer is liable for the costs of




moving the ship to the repair yard,
wages and maintenance for necessary crew, and
bunkers and similar direct expenses
all if it has connection with the running of the ship during
the period of time involved.
 If the removal results in costs savings for the
assured, a corresponding amount shall be deducted.
37
Choice of repair yard § 12-12
 The assured decides which yard shall be used
 Limitation of the insurer’s liability for the costs of
repairs and the removal
 Limit
 An amount corresponding to the amount that would have
been recoverable if the lowest adjusted tender had been
accepted, with an addition of 20% p.a. of the hull
valuation for the time the assured saves by not choosing
that tender
38
Example on repair yard
 Assessed value 1 000
 Tender yard 1
 Repair cost
 Removal cost
 55 days
100
5
 Tender yard 2
105
 The insurer pays
 Repair yard 1
 20 % *1 000 * 5/360 =
Total
 Repair cost
 Removal cost
 50 days
90
20
110
105 with an additional of
2,777
107,8
39
Cost incurred in expediting repairs
 Limit loss of time of the assured if he

expedites repairs by extraordinary measures

Mobile team

Overtime payment

Spare parts by flight

Another ship taken out from dock
 The insurer’s liability for the costs thereby incurred is
limited to 20 % p.a. of the hull valuation for the time saved
by the assured.
 Deciding factors

Total time period of repairs (both casualty and other)

Compared with the actual time the ship lies idle
40
Apportionment of common expenses
 § 12-14 NMIP
1.
If expenses have been incurred which are common to repair
work for which the insurer is liable and work which is not
covered by the insurance, these expenses shall be
apportioned on the basis of the cost of each class of work
2. However, common expenses which depend on the length of
the period of repairs shall be apportioned on the basis of the
time that the recoverable and the non-recoverable work
would have required if the two classes of work had been
carried out separately
41
Apportionment of common expenses
over cost
Expenses
Tank cleaning
Removal
Ca Ow
x
Wages/maint.
Bunkers
Towage
Towage certificate
Pilotage to repair quay
Tuggage –”Overtime in and out
x
x
x
x
x
x
x
42
Apportionment of common expenses
over cost (cont.)
Expenses
Port disbursements
Ca Ow
Harbor dues
x
Customs
x
Pilotage in/out
x
Tuggage in/out
x
Telephone agent/sup.in. x
Agency fee
x
Gas freeing certifi.
x
Fire watch
x
Fire line
x
Gangway
x
Class society
x
Expenses
Port disbursements
Adj radio directed
Crane rental
Heaters in enginge room
Adjusting compass
Shifting boatmen
Garbage galley
Cooling water
Watchmen gangway
Fresh water
Telephone
Electr. connect/heat
Owners superint
Ca Ow
x
x
x
x
x
½
½
x
x
x
x
x
½
½
43
Apportionment of common expenses
to be divided over repair time











Ballastwater
Pilotage to/from dry-dock
Tuggage to/from dry-dock
Boatmen
Dock master
In and out of dry-dock
Standing in dry-dock
Adjusting of blocks
Lightning conductor
Coke-fires in dry-dock
Etc.
44
Example on
apportionment of common expenses
Casualty
50 000
Owners
35 000
Days in dry-dock
Dry-dock cost
30 000
Port disbursement 25 000
Casualty
15
Owners
10
Σ 25
Common expenses over time
Casualty 15/25 * 30 000 = 18 000
Owners 10/25 * 30 000 = 12 000
Common expenses over cost
Casualty (50 000 + 18 000) * 25 000 /115 000 = 14 783
Owners (35 000 + 12 000) * 25 000/115 000 = 10 217
45
Insurer to pay 82 783 and Owner’s part 57 217
Example on settelment
 Vessel Ingo with insurance sum 10 000 000
 Ingo encountered shallow waters and received heavy damages
to the propeller. Survey showed that it had to be replaced by
a new. The costs for this was calculated thus.
 New propeller
100 000
 Work excl. owner’s part
of common expenses
60 000
 Owners superintend (casualty)
5 000
Total claim
165 000
Scrap value of the old propeller was 20 000
Calculate the insurer liabIlity.
46
Example on settlement (cont.)
Costs



New propeller
Work
Owners superintend.
Deductible
Grand total
Insurer
Total
100 000
60 000
5 000
165 000
-50 000
115 000
Return on sale of old propeller
20 000. Insurer has paid 110/160
of the new one and proportioned
Insurer 110/160 * 20 000 or
-13 750
Owner 50/160 * 20 000 or
Total
101 250
(§ 5-19 cf. § 5-13 para. 2)
Owner
50 000
50 000
- 6 250
43 750
47
Chapter 13 NMIP
Collision
and
striking
The insured event
 The insurer is liable for liability imposed on the
assured for loss which is a result of collision or
striking by the ship, its accessories, equipment or
cargo, or by a tug used by the ship.
 NB!
 Liability
 Collision or striking
49
The insurer is not liable for
a) liability arising while the ship is engaged in towing,
or caused by the towage,
 Cover if it takes place in connection with a salvage
operation (§3-12, subparagraph 2)
b) liability for personal injury or loss of life,
c) other loss suffered by passengers or crew
on the insured ship,
d) liability for damage to or loss of cargo, other
effects on board the insured ship, or equipment
which the ship uses,
e) liability to charterers or others who have an
interest in the insured ship
50
The insurer is not liable for
f) liability for pollution damage and damage resulting
from fire or explosion caused by oil or other liquid
or volatile substances, and contamination damage
caused by radioactive substances.
However, if the insured ship has collided with another
ship, liability for such damage to the other ship with
equipment and cargo is covered,
g) liability for loss caused by cargo or bunkers after
grounding or striking against ice,
51
The insurer is not liable for
h) liability for loss caused by the ship’s use of anchor,
mooring and towing gear, loading and discharging
appliances, gangways and the like, and liability for
damage to or loss of these objects,
i) liability for removal of the wreck of the insured
ship and for obstructions to traffic created by the
insured ship,
j) refund of amounts which a third party has paid by
way of compensation for loss as mentioned under
letters a) to i) above.
52
Single or cross liability
 Single or cross liability does not normally
matter
 Two cases were it matters:
 Single Liability when Limitation is
calculated (sec. 9:2 SMC)
 Cross Liability when the Hull
Underwriter’s Liability for collision
liability is settled
 § 14-4
53
Example on Single and Cross liability
 Collision between A and B. Equally to blame.
 Sustained damage
 A = 100
B = 200
 Limitation
 A = 20
 Adjust the external collision settlement as well as
the internal insurance settlement for A.
54
Example on Single and Cross liability
Collision settlement (external)
 A to bear:
 50 % of total losses (100+200)
150
 Less A’s own damages
-100
Balance
50
 Limitation applied
20
 Reduction in balance
due to limitation
30
 A pays to B
limitation amount
20
55
Example on Single and Cross liability
insurance settlement (internal)
Costs
Insurer
 Damage
 Less deductible
100
-5
 50 % of B’s damage
 Less reduction in balance
due to limitation
100
-30
 50 % of own damage
Total
-47,5
117,5
A’s own losses
Liability
Recovers from B
Owner
5
-2,5
2,5
56
Deductibles
Particular average deductible § 12-18
 For each casualty the amount stated in the policy
shall be deducted.
 Damage caused by heavy weather or navigating in
ice which has occurred during the period between
departure from one port and arrival at the next
one shall be regarded as a single casualty.
 Costs in connection with the claims settlement, cf.
§ 4-5, and loss through measures to avert or
minimise the loss, see §§ 4-7 to 4-12, are
recoverable without any deductible.
58
Deduction for ice and machinery
§ 12-15. Ice damage deductions

Damage due to striking against or contact with ice - excluding collision with
icebergs on the open sea - is recoverable subject to a deduction of one
fourth.
§ 12-16. Machinery damage deductions

Damage to machinery and accessories and to pipelines and electrical cables
outside the machinery is recoverable subject to deductions as set out in the
policy.

To this shall be added the deductible referred to in § 12-18, subparagraph 1
for particular damage. However, no machinery damage deduction shall be
made if the damage is a consequence of:

(a) the ship having been involved in a collision or striking,

(b) the engine room having been completely or partly flooded,

(c) a fire or explosion originating outside the engine room.
59
Collision deductible § 13-4
 For each casualty the amount stated in the policy
shall be deducted.
 Litigation costs, cf. § 4-4, costs in connection with the
claims settlement, cf. § 4-5, and loss caused by measures
to avert or minimise the loss, cf. §§4-7 to 4-12, are
recoverable without any deductible.
60
Compensation without deduction
 No deduction is applicable to total loss
 Recoverable without deductions in accordance with
§12-15 (ice) and §12-16 (machinery) are:
 a) loss recoverable under
 §12-1, subparagraph 4 (depreciation in value),
 §12-11, subparagraph 2 (time exceeding tender), and
 §12-13 (removal of ship),
 b) unused spare parts that are damaged or lost,
 c) temporary repairs
61
Example on engine breakdown and
Assumed General Average
On a ballast voyage from Turku to Trondheim in order to loading oil
the m/t Hyvä had a black out in the main engine on the Baltic Sea.
After some prelimary repair by the crew the ship could return to
Turku. It was decided that permanent repairs should be conducted
in Turku due to the safety of the ship on the North sea. After
permanent repairs the ship fulfilled the voyage. The owners filed
the following claim with the insurers.
 Permanent repairs Turku
30 000
 Wages and maint. in/out Turku
15 000
 Wages and maint. during repair
10 000
 Bunkers in/out Turku
8 000
 Bunkers during repair
3 000
 Port fees in/out Turku
12 000
 Port charges Turku
10 000
 Class survey perm. Repair
5 000
93 000
62
What shall the insurer pay?

Example on engine breakdown and
Assumed General Average (cont.)
Costs








Permanent repairs Turku
Wages and maint. in/out Turku
Wages and maint. during repair
Bunkers in/out Turku
Bunkers during repair
Port fees in/out Turku
Port charges Turku
Class survey perm. Repair
AGA
PA
OWN
30 000
15 000
10 000
8 000
3 000
12 000
10 000
48 000
Deductible
Total
48 000
Insurer pays 48 000 according to § 4-11
5 000
35 000 10 000
-35 000 35 000
0
45 000
63