This article was last updated by the author in October 2016.
A brief introduction to marine loss of hire/loss of
earnings/passage money and freight insurance.
A shipowner can purchase hull insurance to cover the damage to
his ship, and some liability, however this insurance will not be of
any assistance if the ship is lost or damaged and this negatively
impacts the ship-owners business and specifically his income
Loss of income
There are three main ways in which a shipowner can earn income
from his ship.
- Hiring the vessel out to another party to use for their own
purposes (subject of course to the terms and conditions of the hire
agreement). This contract will be for a period of time is known as
chartering. The ship owner can earn charter hire which will
normally be paid on a monthly basis for however long the
arrangement is, which might be a year or might be far longer such
as 5 years.
- Carrying cargo - this is where a ship may be hired for a single
voyage by one party who has a large amount of cargo to transport,
or the shipowner just hires out space within the ship to a large
number of different parties. He will charge each party freight -
which is the price for getting the goods to destination.
Unless the agreement says anything different the freight, or price
being paid for the goods to be transported is only due and payable
when the goods arrive at their destination. Even if the goods
are damaged, as long as they are recognisable, the freight is due
and payable although the shipowner often finds himself in a
situation where the cargo owner wants to make a claim for damage to
the goods and at the same time refuses the pay the freight even
though the two issues are separate and distinct.
- Carrying passengers each of whom will have purchased a ticket
for their journey
If a ship is damaged then she cannot be used to earn money and
the shipowner will potentially be losing income whilst still having
to pay outgoings such as crew wages. The shipowner can therefore
purchase loss of income insurance which is known by different names
depending on the type of income
- Loss of hire, if the income is Charter Hire
- Passage money, if the income is from passenger traffic
These types work on the same basis in that there must have been
some physical loss or damage to the ship, and usually that loss or
damage must be caused by a peril covered under one of the main
market hull and machinery physical damage wordings, or be something
like electrical breakdown. There is no coverage for loss of
earnings, just because there is no work available for the ship at
any one time.
The ship does not need to be completely out of service for a
claim to be made, as for example if one crane is not working, thus
making it difficult to load into part of the ship's cargo space,
the charterers (the party that has hired out the ship) will want to
deduct a portion of the regular hire payment as they are not
getting full use of the ship. They will continue to deduct
the hire until they have a fully working ship made available to
them, which might require a period of repairs, for which they will
often have to pay no hire at all, hence the shipowner is losing
money all the time.
If there is a loss there will normally be a period of days
before a claim can be made - known as the waiting period, which
operates like an excess in any other type of insurance, and there
will be maximum number of days for which reimbursement will be
As freight is earned for delivery of the cargo, the trigger for
a claim on a freight policy is something happening usually to the
cargo which means that the freight will not be paid, in whole or in
part. It might be that the cargo has been damaged in a larger
casualty or just that some of the cargo fastenings have broken
during the journey and some has been lost overboard in bad
In many cases however the shipowner will require
the cargo interests to enter into contracts of carriage which
provide firstly that the freight will be paid up front and secondly
that it will not be returnable even if the cargo is lost. If
that is the case then the shipowner has no risk of loss of freight
and the value of the freight forms part of the cargo valuation
insured on those policies.
Loss of income - there are no particular extensions
that are regularly provided for these types of insurance, although
the shipowner will want to try and get the waiting period for loss
of hire insurance as low as he can and the payout period as high as
Loss of income
- Malicious acts
Loss of income
- Earnings history of the vessel - the insurance should ideally
cover the likely loss of earnings going to be made, hence a review
of what she has earned in the past is helpful, although care should
be taken to ensure that the cover is only for actual provable loss,
rather than a fixed amount per day.
- General state of the market in which it operates - which
relates to the point above about the volatility of rates of both
freight and hire.
- Whether for freight insurance, the shipowner asks for payment
up front and even whether he makes the agreement subject to no
return of freight even if the cargo does not arrive.
A large amount of loss of earnings is written in the Nordic
market, with some also written in the German, London and Far