War risks cover for ships trapped in Ukraine – CTL and the Nordic perspective
The Russian invasion of Ukraine continues to cause uncertainty in the marine insurance market, in particular as a result of a potentially large number of total loss claims from owners of vessels that have been trapped beyond 24 February 2023, which marks the one-year anniversary of the full-scale invasion.
About 100 vessels were originally estimated to have been caught in Ukrainian ports and rivers as a result of Russia’s invasion on 24 February 2022. Whilst some of the vessels managed to make their escape when the UN negotiated the grain corridor in the summer of 2022, it is assumed that around 70 vessels still remain trapped in Ukrainian waters.
Several of the trapped vessels were insured against war risks pursuant to the Nordic Marine Insurance Plan. The Nordic Plan offers cover for all standard non-P&I insurances for vessels and has comprehensive cover for war risks in Chapter 15, which includes damage, total loss, loss of hire and liability.
Although the circumstances relating to each affected vessel must be assessed individually, in the Nordic marine insurance market the general view has long been that the vessels which have been prevented from leaving Ukrainian waters since the outbreak of the war, are there on account of war risks as defined by the Nordic Plan, which under Cl. 2-9 includes “war” and “war-like conditions”, as well as “interventions” by a foreign state power for political purposes.
There are two possible grounds on which owners may claim that their vessel is a constructive total loss (CTL) under the war risks insurance in the Nordic Plan:
- Under Cl. 15-11 the owners may claim for a CTL when they have been “deprived of the vessel by an intervention of a foreign State power” for a period of more than 6 months. It does not matter if the intervention is permanent or temporary as long as it lasts for over 6 months. In the 2023 version of the Nordic Plan, the period was extended to 12 months, but for the trapped vessels it is of course the policy in place at the time of the invasion which applies. Some of the policies underwritten in the Nordic market provided for a 12 month period, which was also the typical period in several other markets.
- Under Cl. 15-12 the owners have the same right to claim for a CTL if the vessel has been “prevented from leaving a port or a similar limited area due to blocking” if the obstruction lasts for more than 12 months. The blocking clause is primarily aimed at physical obstructions, such as the laying of mines or a collapsed bridge blocking the way out from a port, but it also includes detention by a foreign state due to fear that the vessel will fall into enemy hands without physical measures being implemented.
If the assured has brought a claim for a total loss and the relevant time-limit stipulated has expired, it is irrelevant for the assured’s claim under the Nordic Plan that the vessel is subsequently released, see Cl. 15-11 (3) and 15-12 (2).
We have seen examples of vessels insured in the Nordic market which owners have claimed as a CTL on expiry of the six-month period with war risks insurers consequently accepting the claim without much discussion.
There are also examples of cases where questions have been raised as to whether the owners have fulfilled their obligations to take reasonable measures to avert or minimise losses by securing the release of the vessel, for example in connection with the grain initiative.
Strategic considerations for owners and insurers
Given the rise in vessel values over the last year for certain types of tonnage, some ships have a market value higher than their insured value. Most of the ships remain intact and many owners have been able to engage local seafarers for maintenance and security purposes in place of crews that were extracted from the region, especially at the beginning of the conflict. This has led to some owners being reluctant in claiming for a CTL and rather wanting to retain their assets with the aim of retrieving them later, instead of handing them to insurers against a CTL payout lower than the vessel value.
When claiming for a CTL, the total loss claim will absorb any loss of hire claims beyond the first month of loss of time, see Cl. 15-17 (2), which means that the owners cannot recover the CTL payout as well as retaining the full loss of hire payments.
If the insurers accept the assured’s claim for a CTL, the insurers will need to decide whether to take ownership or tender notice of abandonment. Under the Nordic Plan the insurers will be automatically subrogated to the ownership of the vessel upon payment of the total loss compensation, unless they waive ownership before at the time of payment, see Cl. 5-19. The title comprises the vessel with all appurtenances that were covered under the insurance at the time of the total loss.
If insurers waive their right to become subrogated, ownership remains with the owners. They will then need to decide whether to retain the vessel or whether to sell it off to a third party.
If the insurers take title to the vessel, they will assume the responsibilities and liabilities of an owner, which includes having to ensure crewing and maintenance of the vessel, and will also expose the insurer to risks such as pollution or wreck removal liability. Owning a vessel in a war-torn region carries with it a range of risks, but there are examples of war risks insurers having taken title to ships trapped in Ukraine and have therefore become shipowners.
It is of course possible for insurers to take title and sell the vessel at a later stage to a third party.
Other options include compromised solutions between the insurers and owners, for example the assured keeping the vessel for a discount in the CTL payment or the sale of the vessel to a third party with insurers receiving the sales price or keeping an economic interest in the vessel.
Resolving the CTL claims will most certainly require thoughtful analysis and planning in each case as well as close cooperation between insurers and owners.