The complex legal fallout for shipping from the 2008 financial crisis and the collapse of OW Bunker in 2014 were turning points in the take-up of freight defence & demurrage (FD&D) insurance.
There has seemingly been no let-up since then in major global incidents for which owners and operators need access to the expert advice and protection available through FD&D cover.
Russia’s invasion of Ukraine and Covid are live issues. But there have also been serious bunker contamination incidents in Singapore and Houston, sanctions against Iran and IMO 2020 to contend with over the past few years.
Upcoming decarbonisation regulations could also potentially throw charterers and owners into dispute.
The UK Defence Club — part of the stable of mutuals managed by Thomas Miller — has 4,100 ships signed up to its defence cover worldwide, with a strong following in Singapore, Hong Kong, China and Japan.
UK Defence Club chief executive Daniel Evans said FD&D cover can provide value in terms of keeping legal costs down and preventing disputes from escalating.
Of 400 Covid-related claims the club received, for example, very few went to arbitration.
“We have seen a marked increased interest in defence cover in recent years, even from companies which historically may not have purchased the cover,” Evans said.
“While the 2008 financial crisis and collapse of OW Bunkers led to significant increases in claims, events like those do highlight to shipowners and operators the value of defence cover where such claims can impact all of those in the contractual chain.”
- Gross written premium in 2021: £17.3m ($21.7m)
- Ships under cover: 4,100 (230m gt)
- Free reserves at the end of 2021 policy year: £37.5m
- Profit in 2021 policy year: £1m
- Five-year average combined ratio: 98%
- Provision for claims reserves: £26.7m
- Invested assets and cash: £64.2m
While the risks of owners being caught up in legal disputes are rising, in theory it makes sense to take up insurance rather than contract lawyers on an ad-hoc basis where fees run into hundreds of dollars an hour.
The UK Defence Club has a $15m limit on claims with no sub-limits, mandatory deductibles or, despite being mutual, release calls.
Through a continuity credit scheme, it has also returned about $12m, or 20% of current free reserves, to members since 2015, according to chief financial officer Willem Van Der Westhuysen.
“Why some owners and operators do not purchase defence cover is one of those life mysteries which may never be answered satisfactorily,” Evans said.
Why some owners and operators do not purchase defence cover is one of those life mysteries which may never be answered satisfactorily
— Daniel Evans
However, the case for defence cover is not as clear-cut as he suggests. Some owners say they have concerns that by using FD&D cover they will lose control over how their case is handled.
There are also worries that the insurer will seek to settle disputes quickly to limit claims costs, rather than allow the owner or operator to freely pursue commercial justice and eventually to have its “day in court”.
The UK Defence Club handles about 70% of its cases through its in-house legal team, but it says it is open to handling cases using shipping law firms, depending on the case.
“We have a wealth of experience in managing litigation in a variety of forums and jurisdictions,” chief operating officer Susanne Murphy said.
“It’s almost always the case that when a member has a significant amount of its own money at stake in a dispute, it wants the freedom to choose the legal team that will pursue or defend the claim.
“It’s all about ‘horses for courses’ — getting the right team together from lawyers, counsel and experts is of paramount importance. This can make the difference between winning a dispute or ending with an unsatisfactory conclusion.”
FD&D insurers can also provide information and advice to members to mitigate possible legal disputes.
This was shown in the case of IMO 2020: comprehensive advice and preparation from the UK Defence Club helped limit the number of contractual charter disputes that emerged out of the regulation to limit the sulphur content of fuel.
In the 18 months leading up to the introduction of IMO 2020, the club prepared members for the regulation through training and reviewing and drafting contract clauses.
“In the event, whilst over 370 IMO 2020 cases were opened, the cost of dealing with those cases was not prohibitive and did not have a material impact on the club’s finances,” Murphy said.
The club is going through the same process to limit potential claims linked to the Energy Efficiency Existing Ship Index and Carbon Intensity Indicator emissions regulations that are due next year and that are expected to result in disputes over existing charter contracts.
“Many owners and operators are looking for guidance in this area to plan ahead for 2023. This will be a crucial area where we will be assisting our members in order to place them in the best position for the challenges ahead,” she said.