Charterers Liability

Charterers Liability Insurance can be either be arranged through a P&I Club or in the commercial market using the Standard London market wording. The London Charterers Liability Wording 1996 is widely used and the policy would therefore cover (This wording is for all Chartered vessels other than demise or bare boat charters):

• the liability of the charterer for damage to the hull
• the liability of the charterer for damage to cargo
• other P & I risks as per the rules of the United Kingdom Mutual Steamship Assurance Association Ltd.

Alternatively should the charterer already have the benefit of P & I Club protection either in his own right or through an entry arranged by the Ship owner the cover afforded by this policy would be:

• the liability of the charterer for damage to the hull
• P & I and cargo liability in excess of the owners P & I Club Imitation for charterers risks (usually approx. US$50,000,000).

There are a number of special extensions to the basic charterers liability wording which can be included as appropriate and as may be negotiated:

• Wide definition of vessel damage
• Trapping and Blocking
• Charterers Bunkers
• Back-to-back sub-charters
• Substitute vessels
• Detention
• Transhipments.

The main exclusions from the policy are the risks of General Average, Salvage and Salvage Charges. Demurrage is only covered subject to details of the number of days indemnity and daily indemnity required and then only following a marine peril covered by the policy.

Under Time and Voyage Charter Parties charterers are exposed to substantial area of risk where damages are caused to the vessel itself. Such damage may occur in a number of ways.

First, a charterer may supply the ship with defective or contaminated bunkers, which will cause either a main engine breakdown or excessive wear and tear. In an extreme case the situation can be disastrous if, as a result, the ship runs aground and becomes a total loss; the charterer maybe liable not only for the loss of the ship but also for any wreck removal, oil pollution, loss of life and cargo claims which may occur.

Second, in most charter parties charterers warrant that the vessel will always be employed in lawful trades "between good and safe ports or places" and generally this will involve the vessel in arriving, discharging and leaving in complete safety. If, therefore, charterers nominate a port where the vessel runs aground they may well be liable for the damage caused even where the loss occurs not on the berth itself but within the port limits.

Next, the third major area of exposure and perhaps the most common under this heading is damage caused to the vessel by stevedores during loading or discharging operations. It is a popular misconception that damage caused by stevedores is for owners' and their hull underwriters' account since owners are obliged to maintain full Insurances under some charter party clauses. However, where the stevedores are charterers' servants, agents or independent contractors this is simply not so. Owners will be entitled to sue either the stevedores directly in tort for their negligence or the charterers under the charter party; in practice they frequently choose the second option.

Another aspect of damage to the vessel caused by stevedores is damage resulting from over-loading. The classic examples are distorted hatch covers and dented tank tops caused very often by improperly declared weights. Again the consequences can be serious resulting in extreme cases to stability problems and even total losses for which the charterer may be liable and, finally, the fourth category of loss under this heading concerns damage caused to the ship by a particular kind of cargo. Very often charterers will defend a claim brought by owners for damage caused by cargo on the basis of an inherent vice in the cargo for which they are not responsible. However, in cases where they do not succeed they must bear responsibility themselves or seek an indemnity from the shipper.

The terms, which underwriters quote, can vary quite considerably depending on the nature of the Charter Party wording, the type of vessel and cargo to be carried. In recent years Lloyd's Underwriters have suffered considerable losses on this class of insurance particularly under the liability to cargo section. In this respect it is usually advantageous for the assured to obtain protection with a P & I Club - since Lloyd's Underwriters generally impose high excesses on the liability to cargo section of the policy - and only use Lloyd's for the damage to vessel aspect, which the Club's cannot cover.

Demurrage insurance is obtainable on a wider basis only in conjunction with the main Charterers Liability insurance but is generally very expensive and all quotations are subject to prevailing conditions at the time of obtaining the terms.

There is inevitably a certain amount of confusion surrounding the question of when cargo liability cover is necessary, particularly when cargo "all risks" insurance also exists. There is no set formula for determining the need for cargo liability cover, as circumstances differ in each instance, but as a general rule of thumb, the following may be used as a guideline:

(A) Where a complete vessel is chartered

(i) If the charterer owns the cargo, he cannot be legally liable for loss/damage to his own property, thus cargo liability cover would not be required in a charterers liability policy. The charterer, (in his capacity of cargo owner) would still require protection for his cargo and would therefore arrange cargo "all risks" cover.

(ii) If the charterer is shipping cargo belonging to a third party (customer) or has sold the cargo prior to shipping, then be would generally have a liability to that cargo as third party property. Even if the consignee has arranged cargo "all risks" cover, the charterer would still incur a subrogated claim under the terms of the charter party.

(B) Where a charterer books only a proportion of a vessel's, cargo space
The above comments still apply in respect of "own" cargo shipped, but as there would be other cargoes on board the same vessel the charterer could incur a liability for any loss/damage to cargoes belonging to others. In these circumstances, cargo liability cover would normally be required within the charterer's policy.

It should be stressed that the above is a guideline only, and the position may differ depending on individual circumstances and notwithstanding the above, it is always prudent for cargo interests to arrange "all risks" cover in the event that charterers are able to limit their liability - See comments below re Bills of Lading.

The other aspect worthy of mention when placing this type of insurance in the London market is that of who issues the Bill of Lading. Underwriters generally warrant that a ship owners bill is used; or if a charterers bill is issued, a Demise Clause be inserted in the charter party.

The reason for this is quite simple. Under the Merchant Shipping Act, a vessel owner is able to limit his liability for, inter alia, cargo claims, and where a ship owner's bill of lading is issued the liability limitation is automatic. Thus in the event of a claim, cargo interests would initially proceed against the ship owner (as he issued the bill of lading), who in turn would claim against the charterer under the terms of the charter party. Any claim made by the ship owner against the charterer therefore would only be for the amount of his limited liability under the Merchant Shipping Act; hence underwriter's exposure is similarly reduced.

On the other hand, a Charterer's bill of lading would result in cargo interests claiming directly against the charterer, and as he is not the owner of the vessel be cannot gain the benefit of limitation in his own right. The insertion of a Demise Clause has the effect of reverting the original liability to the ship owner who would again "subrogate" against the charterer for the restricted amount of the claim.

In either case, the charterer is ultimately liable, but the final amount of a claim would be limited to the amount applicable to the ship owner under the Merchant Shipping Act provisions. Obviously it is possible for a court to override owner's limitation, in which case underwriters would be liable for the legally determined amount.

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