8 January 2021

5 important points about the Hull & Machinery insurance

1. Due Diligence

Within the Hull & Machinery insurance you, as the assured, have an obligation to perform your due diligence. If you do not do this, it could be that a claim would not be paid by the insurance company. And the due diligence is not only important for the insurance, but also for commercial reasons. It is not only mentioned in the insurance policy, but it is also stated in the Hague Visby Rules and Hague Rules. In the rules it is stated that the carrier is required to exercise his “due diligence.

But what does this mean? In shipping it may mean that you, as the carrier and as the assured on the Hull & Machinery policy, must be careful, reasonable and honest in your duty to make the vessel seaworthy. You should show reasonable and ordinary care before and at the beginning of the voyage to make the vessel seaworthy. “Seaworthy” means that the vessel must be physically sound, she must have proper equipment and supplies and efficient and sufficient manpower. The vessel must also be “cargoworthy”, that is completely fit and safe to receive, carry and protect the cargo.


2. Warranties

In Hull & Machinery policies you will find warranties. A warranty is a contractual obligation to perform a certain duty or to ascertain or to negate a certain state of facts. A warranty must be exactly complied with and does not need to be material to the risk. Where you, as the assured, fail to fulfil the warranty, the insurer will be discharged from any liability under the contract from the date of the breach.

An example of a warranty in a Hull & Machinery Insurance policy is the warranty that the vessel needs to be class and class maintained, ISM and ISPS compliant and Doc Maintained.
Another warranty that you can find is a ‘trading warranty’ that says which area is excluded from your  cover. If you will sail into one of the excluded area’s you need to inform your broker who can discuss this with the underwriter.

So, always make sure you check your policy which warranties are stated in there


3. Additional Perils Clause

Within Hull & Machinery policies you have the so called ‘named perils coverage’ like the Institute Times Clauses Hulls. A named perils cover defines a specific type of damage or loss that is stated by “name” in your policy. You can think of grounding, storm, jettison, crew negligence etc.. In such a policy it is advisable to include the “Additional Perils Clause”.

The benefit of this clause is that it makes your “named perils” hull and machinery cover into an “all risks” policy, extending cover to insure any accident or negligence whatsoever and not just the perils named in the conditions. Some underwriters might charge additional premium, but since it gives you a much wider cover, it is worth it.

The main advantage of this extension to cover is that it allows a claim for any accident or act of negligence regardless of what or who caused it. For example:  if you have a part of machinery which breaks down only due to a defect in its material and you do not have the ‘additional perils clause’ then you can claim for the cost of any consequential damage but NOT for the cost of repairing/replacing the defective part itself. While this might be inconsequential if it is a washer or a bearing, the cost can be quite high if it is a crankshaft, an engine block or a boiler.

Make sure to check If your policy has the additional perils clause.


4. Cyber Exclusion

In the last decades our world has changed and we are now living in an era where technology plays an important role. Technology has also brought tremendous benefits to the safe and efficient operation of shipping. With it, there is also an increase in the interconnectivity of onboard, shore-based systems and the interdependency of operational and information technology.

But our technology brings new risks and challenges. Cyber hazards are no longer limited to financial institutions and others that hold and manage personal data. The increase in financially motivated ransomware that targets systems and physical assets is agnostic of industry sectors.

Just think about the possibility that hackers have embedded ransomware within the Automatic Voltage Regulator software that could prevent generators from providing power. And because of this the maximum speed has been reduced to a level that is insufficient for the tide and has resulted in the ship running aground.

Above example could become a significant financial loss and, unfortunately, it will not be paid by Hull Underwriters. And why not? Because this damage is caused by a cyber-attack and cyber is always excluded from the Hull & Machinery policy.

Luckily, the marine insurance market has acknowledged this issue and there are insurance companies that are offering cyber insurance that can ‘buy back’ the Hull & Machinery coverage. That means that you will take out a cyber-risk policy that will cover whatever is in the hull policy. With this specific cyber-cover the above mentioned example of a grounding due to the cyber-attack would be paid by the insurance company.


5. General Average Absorption Clause

What is General Average?

General Average is an internationally recognised system of casualty management where losses or expenses are shared and paid for by all those involved in the common maritime adventure.

And when an general average loss is incurred, the parties to the adventure, such as the vessel, cargo, freight at risk, contribute to that loss on the basis of their value at the end of the adventure. Each party that is involved wants to save their assets to minimize their financial loss as much as possible. Thus all parties are required to contribute to the costs and repairs that have to be made in order to save their assets.

But you can also have a general average loss which will not result in a large loss for all parties. Then what do you do? Because it could be that the cost of preparing a full adjustment and collecting all the small contributions from the parties involved would be disproportionate to the amount that would be the claim. And don´t forget the time and effort that parties involved need to put in.

Hence for various (commercial) reasons it would then be better that the ship-owner may decide to bear the full amount of the general average. It would prevent a lot of annoyance between the ship-owner, charterer and/or cargo-owner.

For these reasons is it advisable to have an `absorption clause´ in the Hull & Machinery policy. The clause will have an agreed limit up to which the insurance company of the ship-owner will bear the claim-amount. It will make it easy to deal with these relatively small general average claims.

So, always make sure that your Hull & Machinery policy has a general average absorption clause and ask yourself if the mentioned limit is sufficient for you.