Down the hatch

It’s all change in the marine cargo insurance market, with policy wordings changes resulting from new insurance contract law due to take effect in 2016. Graham Buck takes a look at the changes and the details the headline considerations

• From August the new Insurance Act 2015 becomes the default regime for all commercial insurance contracts subject to English law, but who are the real winners when it comes to the new Act, and how will the changes reflect in marine cargo insurance policy wordings specifically?
• A number of other developments are impacting the cargo market, including the losses from carrier Höegh Osaka and Tianjin

Can a piece of insurance law introduced when the Titanic was still on the drawing board still meet the demands of 21st century global trade? Not surprisingly, the Law Commission’s lengthy review of the UK’s insurance law regime – principally its 109-year old cornerstone, the Marine Insurance Act 1906 (MIA) – concluded ‘no’ and that an overhaul was overdue.

The Commission’s reforming Insurance Bill 2014 secured Royal Assent in February this year and was retitled The Insurance Act 2015 – although most of it does not come into effect until August next year in the expectation that the market will by then have adjusted to the shake-up.

The key changes brought by the insurance act to marine cargo insurance affect the duty to disclose, says Camila Chandra, marine cargo underwriter at Zurich Global Corporate. This has now become the duty to give a fair presentation of the risk, the abolition of draconian remedies in respect of breach of warranties in insurance contracts, and a framework to clarify when insurers can justifiably avoid a contract of insurance.

Gemma Pearce, a partner at law firm Berrymans Lace Mawer, explains that Section 17 of the MIA provides that insurance contracts are governed by the doctrine of utmost good faith, to be exercised by both the insured and the insurer. If the obligation is not observed by either party, then the contract may be avoided ab initio. In other words, the parties are to treat the contract as though it was never entered into, with the insurer returning all premiums paid and the insured returning all monies received for any previously paid claims. Thereafter, the contract is deemed as truly terminated.

Now, under the new Act, insurance contracts still remain contracts of good faith, but the remedy for breach is no longer total avoidance of the contract from inception. Additionally, while the onus still remains largely on the insured – who is still required in pre-contract negotiations to disclose every ‘material circumstance’ which s/he knows or should know of under the Act, an insured will also satisfy the duty of utmost good faith (and pre-contract disclosure) if ‘sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal such material circumstances’ is provided.

A win-win situation?

Who benefits from the new Act? “The reforms are regarded as more of a win-win situation in that they redress the balance between clients and insurers and will be similar to some of the protection already afforded to retail customers under personal lines contracts,” says Chandra. “Zurich fully supports the changes. In fact, in line with the essence of Treating Customers Fairly and our own code of conduct, Zurich Basics, we have historically taken to heart the spirit of the new law as our own way of working with corporate customers.”

How will the changes reflect in marine cargo insurance policy wordings? From August the new Act becomes the default regime for all commercial insurance contracts subject to English law, although it is possible for the parties to contract out of the Act if it is a commercial contract of insurance says Pearce. “However, under the Act, any more disadvantageous term for the insured, when compared with the Act, must be clear and unambiguous as to its effect and the insurer is obliged to bring such a term to the insured’s or the broker’s attention before the contract is entered into.”

This is not the only legislation scheduled for 2016. The International Association of Classifications Societies (IACS) will introduce new Unified Requirements (UR S11A) next July intended to improve the safety of large container ships, including minimum loading conditions (UR S34). The new rules are, in part, a response to the loss in June 2013 of the modern container ship MOL Comfort, which split into two while in transit from Singapore to Jeddah. UR S34 requires a Global (full ship) analysis for ships with length of 290 metres and a cargo hold analysis for ships with length of 150 metres. “The costs of owners implementing the changes to ensure compliance are likely to have a knock-on effect; unfortunately the costs are indirectly likely to be passed onto the shipper,” says Pearce.

One welcome development for insurance buyers has been a decrease in rates over many marine classes. A spike in premiums that followed the grounding of the Costa Concordia in 2012 and resulting salvage operation proved short-lived.
After last year, which underwriters reported as relatively quiet in terms of natural catastrophes and major losses, 2015 got underway with a major loss in the opening week. Car carrier Höegh Osaka was en-route for Bremerhaven when it was deliberately grounded in the Solent to prevent it from capsizing. While this avoided a greater disaster, the resulting loss of and damage to vehicles was estimated at £35m.

However, this loss was dwarfed by the impact of chemical explosion at a container storage depot in the Chinese port of Tianjin in August. The tragedy is still being assessed in terms of capital and human costs, with more than 150 people killed and several hundred injured. The cost to the insurance industry is estimated at up to US$1.4bn and it will probably take several more months before investigators and able to assess the cause and any salvage possibilities in what remains a contaminated area.

“What we have begun to see in the cargo market is various stances on car transporting risks: both Osaka and Tianjin represent significant losses to the cargo market and cargo insurers will simply be looking to recoup that cost,” says Chandra. “Indeed we have seen some insurers take a very reserved approach to new cargo accounts and as a result rates have begun to rise in this particular sector. Whether these rate increases will be seen across the market is yet to materialise.”

The risk of contango

Underwriters are also becoming uneasy about the prolonged sharp fall in the price of oil, even if it is good news for many firms and consumers. Steve Harris and Marcus Baker of Marsh recently issued a paper, ‘The contango conundrum’, noting that crude oil, a commodity widely traded on global futures markets, fell below US$50 a barrel in January 2015 from US$100 only months earlier.

Investors, traders and financiers, who had bought ‘long’, suddenly found their market to be in contango: when the delivery date arrived, their options were to sell and incur a substantial loss or keep possession and hope the oil price recovered. This raised two questions: where would traders keep the oil in the meantime; and if banks or other financiers were involved in funding did they realise the risks of storing crude oil at sea?

In tandem with a lower crude oil price, the oversupply has also reduced maritime freight prices for the carriage of oil. Oil tanker operators find it more difficult to obtain good charters for their vessels at a time when oil traders are looking for somewhere to keep their newly delivered – or soon to be delivered – oil.

The result, say Harris and Baker is that two willing partners enter a “maritime contango marriage of convenience”. Traders charter idle tanks to store their oil and shipowners find a cheap way of employing their tankers, simply anchoring the vessels and offering them as floating storage units.

“Contango can indeed become a concern for cargo insurers as we have come to understand that oil tanker operators often store crude oil for a length of time until the market price stabilises,” says Pearce.

Using tankers as floating storage units increases the risk of their cargo either being lost or damaged in some way as the vessels were never built for long-term storage. One potential scenario could be see an accumulation of full oil tankers moored in the same port, not only creating additional traffic and risk of collision, but also increased likelihood of a series of total losses in one location in the event of fire, explosion or even a major weather event.

Another is around the quality of the cargo: crude oil stored for a length of time will eventually deteriorate. Elements can escape in the form of vapour or sediment may form at the bottom of the vessel. This may lead to an increase in shortage and quality claims from buyers at the other end of the chain. So underwriters could breathe a sigh of relief if the current era of cheap oil proves temporary.

This article was published in the November 2015 issue of CIR Magazine.

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