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Marine loss of hire/loss of earnings/passage money and freight insurance

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.

Contents

Overview

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 stream. 

Typical cover provided

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 made.

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 weather.

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. 

Optional extensions

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 he can!

Key exclusions

Loss of income

  • War
  • Strikes
  • Malicious acts 

Rating factors

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. 

Product providers

A large amount of loss of earnings is written in the Nordic market, with some also written in the German, London and Far Eastern markets. 

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