10 Reasons for Not Buying Charterers’ Liability Insurance

Often companies are reluctant to buy insurance with the assumption they are paying for something they may not actually need.

Before buying any kind of insurance, it is naturally important to think about why you need it; is it a must-have or a nice-to-have for your business continuity?

Whilst the purchase of this type of insurance is a charterer’s prerogative, it is important to first analyse and assess the risks relating to chartering a vessel, both in likelihood and in magnitude, prior to taking a decision on the need for Charterers’ Liability insurance.

1. “I have been in this business for more than 20 years and I never had any problems.”

Regrettably results of the past are no guarantee for the future and a small mistake could easily be made. Besides, it does not have to be your mistake in order to become your problem.

2. “I only do business with reputable owners.”

A reputable owner with a flawless reputation is a good starting point, however, it is definitely no guarantee for a claims-free adventure. Besides, a negligent action by stevedores often triggers charterer’s responsibilities under the charter party and such actions mostly lie outside the influence of a shipowner or charterer.

3. “I am on back-to-back terms.”

It is indeed recommended for charterers to charter on back-to-back terms, i.e. use exactly the same charterparty terms with your sub-charterers like the ones you have with your owners.

Assuming this can be done, this back-to-back situation would only protect a charterer 100% if your commercial parties would always meet their contractual obligations and would not cease to exist or go bankrupt before the claim is settled. Unfortunately, there are no guarantees in that respect.

Besides, in a time charter party under an Inter-Club Agreement, a recourse against sub-charterers for shortage claims is contractually limited to a maximum of 50%, whereby the remaining 50% rests with the charterers themselves (or their charterers' liability insurers).

4. “I am neither the owner of the vessel nor the owner of the cargo, so I do not have any responsibility.”

Imagine renting a car at the airport during your holidays. Even though you are not the owner of the car, you still have responsibilities as a driver and need to make sure that the car is returned in the same state as you rented it.

Same principles apply to chartering a vessel. Standard charterparties such as the Gencon, NYPE, or Baltime require charterers to send the vessel to safe ports and berths, that they (or the stevedores employed by them) diligently load, stow and discharge the cargo and that they return the vessel in the same state as they hired her.

Failing to do so will expose the charterers to liability claims. The situation can be significantly aggravated if the vessel gets damaged or becomes a wreck as a result of a breach of safe port warranties. Such types of claims can be very costly.

On a separate note, owners may also demand bank security from charterers for their claim which charterers may not always be able or willing to put up. One of the services under a Charterers' Liability policy is that charterers can ask their insurers to provide a letter as guarantee for the owners’ claim.

5. “I already have Cargo insurance.”

FOB buyers or CIF/CFR sellers wear two hats, namely on the one hand that of a shipper under the contract of sale and on the other that of a charterer under the charter party.

Each contract contains risks and liabilities apportioned as between the parties to the sale of the goods and the chartering of the vessel, respectively.

Cargo insurance is a property insurance purchased by the cargo interest (sellers or buyers), and its cover applies and is limited to the damage to the cargo itself. Cargo insurance neither covers third party liabilities caused by the cargo nor the liabilities for chartering a vessel as laid down in a charter party.

When you in your capacity as cargo interests submit a cargo claim against the carrier under the bill of lading (usually the shipowners), this claim may come back to bite you. This is because the shipowner may subsequently seek recourse for this cargo claim against their charterer under the charter party, for example, for damage to the cargo caused by the stevedores.

6. “I am co-assured with the owners on their P&I insurance.”

Whilst it is recommended in certain businesses (such as in the off shore world) to be added to the owners’ P&I insurance, a co-assured under the owners’ P&I policy is likely to be limited to the so-called ‘misdirected arrow’ claims only, i.e. claims that involve owners’ responsibilities but mistakenly end up on the charterers’ desk. Such limited access to the owners’ P&I cover is unlikely to also cover you in your capacity as charterer.

7. “I already have a General Liability insurance.”

General Liability insurance is very useful when liabilities occur ashore. Generally, it will exclude from cover any liabilities that have to deal with ‘wet’ liabilities such as those of a charterer of a vessel.

8. “I always solve any potential claims/issues amicably with the parties involved (gentlemen’s agreement).”

Even small mistakes or omissions can sometimes result in large claims, and in such instances, the involvement of insurance companies would be inevitable. Such claims would require special expertise and negotiating skills.

9. “I made sure to contract out of any liability.”

Especially in today’s world where there is often little balance between offer and demand, one party is unlikely to have the commercial power to successfully contract out of all liabilities. In a hypothetical situation where a party would be able to contract out of any liability, this would only work when every counterparty will always meet their contractual obligations without ceasing to exist or going bankrupt before the claim is settled. Again, there are no guarantees in that respect.

10. “I find no value for money in a Charterers’ Liability insurance.”

Compared to all the available insurance products for the maritime adventure such as Hull, P&I and Cargo insurance, the premium payable for a Charterers’ Liability insurance is relatively modest. Buying a Charterers’ Liability insurance is not simply buying a policy, but you are also buying peace of mind, with experienced claims specialists handling your charterers’ liability claims which can save you the costs of hiring a lawyer.

This article is contributed by MSIG Specialty Marine, underwriting agent for MSIG Insurance in Protection & Indemnity (P&I) risks.