Nordisk Sjforsikrings dager

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Nordisk Sjøforsikrings dager

• Insurance values in HM and total loss insurances
• Nicolas Wilmot

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Starting point

• The Assureds needs irrespective of any
  particular set of conditions
• Identify the practical reality for the Assured if
  the vessel becomes a total loss

3
Analysis of economic consequences for the Assured

• Value of the vessel market or replacement cost
• Net loss of income during time needed to put a
  replacement vessel in service or net cost of
  chartering substitute tonnage to fulfil COA
  obligations
• Additional costs associated with handling
  practical consequences of the total loss
• LESS
• Interest on Assureds share of insurance
  recoveries

4
Factors to be considered

• Time needed and cost of a replacement vessel
• Amount needed to carry out repairs to an
  irreplaceable vessel
• Value of a favourable income stream
• Contractual obligations and trading pattern

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Conclusion - the Assureds total economic loss
will usually exceed the market value

• A realistic assessment of all the factors
  mentioned above will normally result in a figure
  that does not exceed 120 of the market
  value/contributory value at least for standard
  vessels
• It is this element that Freight Interest
  insurance in Norway is designed to cover.

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The Total Amount Insured entirely fixed or
partly fixed, partly open

• Standard replaceable vessel makes for high degree
  of predictability easy to fix TAI
• Special purpose or high earning vessels can give
  rise to uncertainty as to time needed to obtain
  and/or cost of a replacement uncertainty can be
  handled by a partly open TAI

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We are no longer trying to fool each other or
ourselves are we?

• The total cost to the Assured for any given TAI
  should always be the same.
• Rates for changes in all amounts insured should
  be agreed and coordinated

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The GA dimension

• The Norwegian Hull conditions cover GA and
  salvage in full irrespective of the contributory
  value
• In other systems the shortfall is covered by a
  tlo policy- a significant pitfall for u/ws of
  such policies
• The Norwegian solution is more practical and is
  often adopted for other conditions especially
  German
• HM insurers under the Norwegian system are
  strongly disadvantaged if the HM value is
  significantly below the GA contributory value

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Threshold for claiming a ctl

• Basic principle is that insurance should not
  affect the nature of the evaluation that has to
  be made
• Given all available facts would an uninsured
  owner choose to repair
• The UO would weigh total investment value of
  wreck and cost of repair against value of
  repaired vessel
• Insurance rules are a rough approximation of this
  principle

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Threshold for claiming a ctl cont.

• All standards conditions set this limit at a
  percentage of the hull value and some have a
  reservation relating to the actual market value
• The 80 rule is a practical rule of thumb
  compensates for the fact that the value of the
  wreck is not taken into account.
• The rule has been grossly abused in more recent
  practice especially where the hull value is well
  below the market value or contributory value in GA

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The collision liability dimension

• Where collision liability is covered under HM
  (plus IV) excess cover is provided by the
  vessels PI club but such cover is conditional
  upon the underlying cover being equal to the
  vessels market value.
• Collision liability excess of that provided by
  HM is provided by Hull Interest insurance
  (Norwegian) and by IV/Disbursements policies

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Apportionment of TAI between hull and TLO
insurances four simple rules

• TLO insurances should not exceed 1/3 of the TAI
  except in cases with open element irrespective
  of conditions chosen
• Threshold for claiming a ctl should not be less
  than two thirds of TAI subject to same exception
  as above
• Irrespective of the above HM value should not be
  less than 80 of the market value - ref.
  contributory value in GA and requirements of PI
  where collision liability is covered by HM
• In normal circumstances the TAI should not exceed
  120 of the market value/contributory value in GA

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The value of the wreck argument - an example

• ASSUME
• Value 100, TAI 120 split 80 20 20
• 80 of hull value as ctl limit 64 53.33 of TAI
• Cost of repairs 54
• HM pays 80 but receives value of wreck -46?
  34??
• HI FI pay 20 each 40
• Assured receives 120
• Also claim for a ctl excludes recovery under LOH
• Total cost for insurers 120 vs 54 plus any LOH
  payments

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Some points to note

• HM insurer with 100 of LOH and no participation
  on tlo insurances can benefit at expense of other
  insurers
• What if HM, TLO and LOH are in one package with
  equal shares for all participants? Fairer perhaps
  as between participating insurers but still more
  expensive in total
• Insurer with small share of hull and 100 of tlo
  is in very poor position even with large share of
  any LOH
• Ctl threshold and GA significantly affect real
  risk for tlo insurers but are never taken into
  account in price setting
• Insurers are not ship owners - taking over a
  valuable wreck that will be repaired will
  normally be a loss making enterprise

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Example 2

• Value 100, TAI 110 split HM77, TLO33
• 80 of hull value as ctl limit 61.655.99 of
  TAI
• Cost of repairs 62
• HM pays 77 receives value of wreck 38? total
  39
• TLO pays 33
• Assured receives 110
• No recovery under LOH
• Total cost for insurers 110 vs 62 plus any LOH

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Total loss of a special purpose vessel

• Repair up to a very high level can easily be the
  best option
• Time needed for repair can easily exceed normal
  LOH limits
• Solutions??