Risk Of War And The Shipping Industry

Co Written By Chester D. Hooper And Brian D. Starer

The risk of war may increase insurance rates, cause charter parties to be cancelled, and change the ports of discharge or places of delivery designated in charter parties, bills of lading, and service contracts. It will probably increase freight rates. A carrier may have questions regarding whether its vessel may avoid certain ports or whether it may increase its freight rates to cover the additional war risk insurance premium. This article will briefly summarize the principles involved. Please contact us directly for more particular information.

Insurance Coverage And The Risk Of War

A Shipowner will generally insure his vessels for Hull War Risks at the value of the ship, and this hull policy traditionally includes a protection and indemnity (P&I) endorsement for an independent value, which again is the ship value. Where this cover is in place, the P&I Clubs in the International Group have traditionally offered an excess P&I War risk cover of $100 million, which cover acts as an excess to the traditional hull and P&I cover, not as a primary cover.

As an example, let us assume that a vessel had the traditional Hull war risks policy with the P&I endorsement, and that both elements carried independent limits equivalent to the ship's value, say $25 million. If the vessel paid $60 million for cargo lost due to war, the Hull war risks P&I endorsement would pay it's limit of $25 million and the P&I war risk cover would then pay the balance of $35 million.

War risk cover is provided world wide at one base rate - but underwriters will exclude the more dangerous areas. These "excluded zones" can then be insured for an additional premium - usually at an enhanced rate - for the periods ships enter the zones and as declared by the shipowners. The "excluded zones" are subject to change as decided by the underwriters and instantly applicable as soon as declared by the underwriters. They have recently been expanded as a result of the attack on the World Trade Center in New York City and the Pentagon in Washington, D.C. Carriers traveling within these excluded zones must declare each voyage in the excluded zone and purchase extra war risk coverage for that voyage.

The effects of war risk are not, however, limited to an increase of insurance premium. War risks may cause charter parties to be cancelled, voyages to be frustrated and cargo to be discharged and declared delivered at alternate ports. Carriers may wish to avoid certain ports and to increase their freight rates to ports excluded from the usual war risk coverage. The general doctrine of "frustration" may allow a carrier to avoid certain ports, while the terms of carriers' contracts and tariffs may allow a carrier to increase freight rates.

Frustration

The leading United States decision on the issue of frustration is Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966). In Transatlantic, the vessel had been chartered to carry grain from the United States to Iran. The usual and customary route of the voyage was through the Suez Canal. Given the outbreak of hostilities there, the vessel was required to transit around the Cape of Good Hope, and the owner subsequently asserted a claim for the increased costs. In considering the issue of the impossibility of performance, the court set forth the guiding principles:

When the issue is raised, the court is asked to construct a condition of performance based on the changed circumstances, a process which involves at least three reasonably definable steps. First, a contingency - something unexpected - must have occurred. Second, the risk of the unexpected occurrence must not have been allocated either by agreement or by custom. Finally, occurrence of the contingency must have rendered performance commercially impracticable.

Id. at 315-16 (emphasis added).

In that case, and in many other cases, the owner was...