April 5, 2017

LAY UP – Insurance risks, considerations & premium return

In periods of economic recession, when there is an imbalance between the supply and demand of ships, taking a ship ‘out of service’ is an attractive option for shipowners. When the hire rates fall to such low levels that not even daily operating costs can be met, this practice makes commercial sense until the market picks up again.

IS P&I AND H&M COVER NECESSARY DURING LAY UP

There is a false assumption that while a vessel is out of service, the reduced operations result in reduced incidents and risks. Although this is true to an extent with the main risks relating to cargo and crew removed, the reality has shown there can be claims (often large) arising from vessels in lay-up. This is also evident in the fact that all P&I Clubs and Classification Societies have guidelines in place in respect of the preparation of a vessel for a safe lay-up, how to maintain it throughout the lay-up period, and how to prepare to enter back into service.

TYPES OF LAY UP

There are 2 different categories of laying up depending on the duration and extent of the suspended operations and crew of a vessel:

– Hot lay-up: The vessel is temporarily out of service. There is no cargo and the crew remaining on board is less than half of the number required by the Flag State minimum safe manning certificate. The engine and machinery keep running and the vessel is maintained in such condition that it can be back in service on short notice. Minimum period 30 days.
– Cold lay-up: The vessel is taken completely out of service, usually for longer than a year, no cargo or crew on board, only professional watchmen. It is moored/anchored at a safe place and is only supplied with emergency energy for lights, mooring winches and fire extinguishers. Depending on the duration of cold lay-up and the condition of the hull and machinery, a minimum period of 4-5 weeks should be expected before the vessel can be brought back to service.

MAIN RISKS RELATED TO LAY UP

There are a number of incidents which may occur not only during the lay-up but also following the vessel’s reactivation.

During the lay-up, the main root cause is usually the limited manning and the reduced supervision on board which makes it difficult to respond to emergency situations at a crucial time. Examples are:

– Collision with other vessels: Even if the laid up vessel is safely and properly moored, there is always a risk of breaking loose, shifting and hitting another vessel. There is also the risk of being struck by another ship where the other ship limits liability and the laid up vessel ends up with unrecoverable costs.
– Grounding/ Sinking: Dragging of the anchor and breaking of moorings are the most frequent causes for grounding or sinking. There is an increased risk when a vessel is laid up close to the shore hence the mooring location is recommended to be approved by the Class and P&I Club.
– Wreck removals: In the worst cases, incidents as listed above may result in the removal of the wreck being necessary.
– Pollution: Leakages of bunkers, lube oil, garbage, emissions etc. often go unnoticed due to the reduced/lack of supervision, causing environmental damage.
– Damage to underwater cables, bridges, beaches, aquaculture, reefs etc: Such events are possible if the vessel breaks loose of its moorings.
– Personal injury to the crew (hot lay-up): Often the vessel’s crew is engaged in heavy maintenance work on board and therefore are exposed to greater risk than usual.

Incidents that may arise following the reactivation of the vessel are mostly connected with the preservation of the hull, the vessel’s engine and equipment during the lay-up period and the maintenance carried out before breaking the lay-up. Such risks can be avoided with thorough inspections and by adhering to the recommendations of the manufacturers. For example:

– Equipment deterioration and failure due to humidity
– Starting up problems on electronic and hydraulic systems due to corrosion
– Problems with various machinery components which have not been properly lubricated, cleaned or aired for months out of operation

REQUIREMENTS UNDER P&I AND H&M INSURANCE

Upon notice of lay-up, the P&I Club will expect their Member to maintain the security and safety of the vessel, crew and the environment. The H&M underwriters will be concerned with the steps taken to preserve the hull and machinery by providing protection against corrosion and deterioration of the equipment. To establish this, both P&I club and the H&M insurers will request confirmation that the vessel maintains its classification throughout the lay-up period; suspension of the Class at any time constitutes breach of warranty and may lead to loss of both P&I and H&M covers. In addition to the Class certificate, both insurers will request to review the Shipowner’s lay-up plan to see how the ship is laid up and how it will be maintained during the lay-up period.

The lay-up plan is a risk assessment report usually approved by the Class and covers the location and suitability of the lay-up location, and how the vessel will be maintained during the lay-up. It will also describe the general procedures to be followed at reactivation.

Reactivation of the vessel is the trickiest time in a lay-up. The complexity depends on the duration of the lay-up period and the extent of the preservative measures taken during the lay-up. If the vessel is not thoroughly prepared to resume its operation, it is after the reactivation when most incidents leading to insurance claims occur, mainly due to engine and systems failure. The P&I Clubs recommend that reactivation is carefully planned and performed in accordance with Class and equipment manufacturers’ recommendations. The insurers may require to carry out their own reactivation survey (especially following a long cold lay-up) but they usually only request a Class certificate confirming the vessel’s good condition to go back into service.

Throughout the lay-up, from the preparation till the sailing of the vessel after reactivation, it is important that all measures for the preparation, preservation and maintenance are properly documented. It is these records that the insurers will request to examine for processing a claim that occurred during or following the lay-up the vessel.

P&I Clubs and Classification societies have extensive guidelines to help ship owners with the considerations to make before, during and after the lay-up. It is good practice to notify the insurers as soon as the decision for taking the ship out of service is made.

EFFECT ON PREMIUM

A properly laid up vessel represents a lower risk to the insurers and on that basis, they may agree to return a percentage of the agreed premium to the ship owner for the period of the lay-up. The percentage of the premium return is usually discretionary and the decision of the insurers. It depends upon the terms of the policy and the duration and the condition of the vessel during the lay-up period. It is important that a policy is not on a Cancelling Returns Only (CRO) basis; if it is, premium return in respect of lay-up will not be granted.

To claim the premium return which the vessel may be eligible, every P&I Club and H&M insurer will have a standard laid-up return application form which the ship owner needs to complete providing information on the vessel, the duration of lay-up period, the number of crew on board and the location and movements of the vessel during the period in question. Again, as any premium return lies at the discretion of the insurer, they may ask for additional information and documents as above.

Kallina Gougouli
Tel: +44 (0) 20 73750002
kallina.gougouli@pacifics.co.uk

www.pacifics.co.uk

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