Amid the tragic human impact of COVID-19 and governments’ restrictions on travel and commerce, businesses are feeling the economic consequences of the pandemic.
COVID-19 has reshaped the marine sector’s risk landscape, and raised questions about shipowners’ protection and indemnity (P&I) coverage and how this may be triggered.
The rules of the International Group (IG) Clubs are very similar, so there should be little difference in the P&I coverage they provide. But COVID-19 has highlighted some discrepancies, particularly relating to quarantine.
Giving definitive answers on all aspects of cover is not possible, as many claims will be subject to Club boards’ discretion. This will leave many shipowners in a difficult position, with one Club possibly covering a risk that is rejected by another.
For this commentary, we have referenced the rules of the UK Club, although we strongly recommend that you check the rules of your specific Club(s) when considering any of the issues referenced below[note 1].
As an “infectious disease,” COVID-19 is most likely to trigger claims under the following aspects of cover:
Liability to persons other than seamen (including passengers).
Illness and death of seamen.
Repatriation and substitute expenses.
Loss of or damage to the effects of seamen and other persons on board.
There may also be claims that give rise to enquiry expenses, “expenses incidental to the operation of ships,” sue and labour costs, and expenses incurred “at the direction of” the Club. Some of these claims will, by their very nature, be entirely discretionary.
Liability to pay damages or compensation to persons other than seamen owing to COVID-19 seems most likely to arise in respect of passengers, although cover will also exist where a shipowner is deemed to have a liability to, say, shore workers (such as stevedores), state personnel, and third-party surveyors attending the ship.
Passenger risk has received much media coverage and several Clubs are handling significant claims. Liability to passengers covers illness and death claims, and also extends to damages and compensation to passengers on board (our emphasis) “as a consequence of a casualty to that ship.” A casualty is defined in the UK Club rules, inter alia, as “a threat to the life, health or safety of passengers in general.” A COVID-19 outbreak clearly falls under that definition and would therefore, in our opinion, fall under Club cover. Cover can also include “the cost of forwarding passengers to destination or return to port of embarkation” and “maintenance of passengers ashore.”
Illness and Death of Seamen
Liability to seamen again has illness or death triggers, and is likely to be defined under a contract of employment, although liability could additionally arise in tort. Cover for seamen should also extend to repatriation and substitution expenses arising from a statutory obligation, to which COVID-19 could clearly give rise. Claims for mental injury might also arise as a result of an outbreak of COVID-19 — especially after an extended period of quarantine (this applies equally to passengers, seamen, and “others”).
Loss of or Damage to the Effects of Seamen and Other Persons on Board
Liability to pay compensation for the loss or damage to the “effects of seamen or others” could result from quarantine and disinfection — although these costs may equally be recoverable under the quarantine rule itself (see below).
Diversion expenses (like quarantine expenses) do not require a liability on the part of the shipowner to trigger cover. These are covered where they represent the net loss to the member above what would otherwise have been incurred in respect of fuel, insurance, wages, and so on, and where they are incurred “solely for the purpose of securing treatment for an injured or sick person…” Some vessels (mainly passenger) appear to have been diverted for this purpose, but it could equally happen with cargo vessels.
How cover for quarantine expenses is triggered varies between the Clubs, with the UK Club covering “additional expenses incurred…as a direct consequence of an outbreak of infectious disease…including quarantine and disinfection expenses,” without any requirement for a formal quarantine order. Other Clubs’ rules, however, require one. In practice, this should not be a problem, as it seems unlikely a ship would be quarantined due to COVID-19 without the close attention of a government authority. As mentioned above, the disposal of crew or passenger effects could potentially be a recoverable cost under the quarantine rule.
Shipowners could be subject to fines because of COVID-19 — for example, for breaches of the Maritime Labour Convention regulations on crew changes, or allegations of misdeclarations about the true health of all the crew/passengers on board. Except in a limited number of specified circumstances, P&I cover for fines is discretionary, so careful examination of the rules and circumstances will be necessary in each case.
For most heads of claim, P&I cover requires that the shipowner has a legal liability to pay a claim — quarantine being an exception. All Clubs will therefore expect shipowners to preserve all potential defenses, both as regards liability and quantum, and keep accurate records of expenses incurred and their decision-making processes. In respect of illness and death claims, the Clubs have a wealth of experience from which to assess whether it is best to defend or settle a claim and, if settling, how much to pay. It is therefore important always to follow their advice.
COVID-19 is causing severe imbalances in world trade and shipowners (especially in the liner trades) are increasingly facing port congestion, requiring containerised cargos to be offloaded short of their ultimately intended port of delivery and stored pending delivery at a later date. Although this is a normal feature of the container trades, much-longer-than-usual delays are anticipated, making it more difficult to assess what constitutes reasonable dispatch.
This may result in a technical deviation under the contract of carriage, the potential loss of Hague-Visby (or similar) defenses, and the risk of a breach of Club cover. With banks physically closed in more than a third of the world, there is also the problem of Bills of Lading not being processed by the banking system, resulting in pressure on shipowners to release cargo without production of the Bill of Lading. Any resultant claims will generally only be covered by the Clubs at the discretion of their boards of directors.
Finally, while it is inevitable that some of the extra expenditure falling on shipowners is simply the enhanced cost of operating vessels (albeit in these most unusual circumstances), a considerable amount of additional expense will be incurred in order to mitigate claims that would otherwise fall under P&I Club cover. In these unprecedented times, we believe strongly it is incumbent on the P&I Clubs to do all they can to exercise their discretion in favor of their members.
So how can a shipowner best cope in a sea of uncertainty?
The Clubs have built a reputation for providing quick and clear advice and, in all the situations described above, they should be consulted as to the best course of action and involved as much as possible in the decision-making process. This is especially true where potential claims may be at the board’s discretion. Even if a Club cannot say what will and what will not be covered, it can advise on the best reasonable course of action and highlight any actions that might risk prejudicing a claim.
Any questions? Please don’t hesitate to contact one of our team.