Expand Your Book of Marine Business with Charterers’ Liability

Most agents and brokers who are trying to grow a book of ocean marine business have familiarized themselves with the open cargo policy, which meets the cargo insurance needs of organizations that are engaged in international trade. When an organization ships goods on a vessel operated by a common carrier, the open cargo policy may be the only ocean marine policy the organization needs.

What some aspiring marine insurance agents may not know is that when a customer doesn’t use a common carrier, but instead enters into a chartering arrangement with a vessel owner, the customer usually takes on a set of subtle and sometimes misunderstood liability exposures, which are not covered by the open cargo policy. The appropriate insurance treatment for these additional exposures is a less well-known type of ocean marine coverage called charterers’ liability insurance.

Types of charters
There are three basic types of vessel charters: voyage charter, time charter and bareboat charter. In each case, the contract between the shipper (or charterer) and the shipowner is called the “charter party.”

In a voyage charter, the vessel is chartered for a one-way voyage (or a series of consecutive voyages) between specified ports at a negotiated freight rate. The charterer agrees to have the cargo available for loading at the place and time agreed, and the shipowner agrees to have the vessel available for loading at the same place and time. Although the charterer is often responsible for loading or unloading the vessel, the shipowner is responsible for navigation of the vessel and all expenses incurred during the voyage.

Under a time charter, the vessel is chartered for a particular period of time such as a year. As under a voyage charter, the shipowner remains responsible for navigation of the vessel and payment of operational expenses. In some time charters, however, the charter party makes the charterer responsible for buying the vessel’s fuel.

A bareboat charter (or demise charter) is very different from a voyage or time charter. Under a bareboat charter, the shipowner delivers the vessel to the charterer for a specified period of time without crew, stores, insurance or any other provisions. The charterer is then responsible for navigating, crewing, and insuring the vessel as if it were owned by the charterer. Bareboat chartering is much less common in commercial shipping than are voyage and time chartering.

Because bareboat charterers actually operate the chartered vessel, they usually purchase a full-fledged protection and indemnity (P&I) policy to cover their liabilities arising out of operating the vessel, just as they would if they owned it. The situation is different for a voyage or time charterer, both of which merely lease the use of a vessel that remains under the possession and control of the owner. Still, voyage and time charterers do have some potentially severe liability loss exposures.

Charterers’ liability loss exposures
The liability loss exposures of a voyage or time charterer arise mainly out of the terms of the charter party.

The charter party typically permits the charterer to order the chartered vessel to a particular port or berth for loading. However, most charter parties also contain a safe port/safe berth clause stating that the selected port or berth must be safe or must allow the vessel to lie “safely afloat” at all times. If the vessel is damaged by some unsafe port condition the charterer did not warn the shipowner about, the charterer can be held liable for the resulting loss, which could include both physical damage to the vessel and resulting loss of use.

The charter party also typically obligates the charterer to arrange and pay for loading, stowing, and unloading of cargo and to be responsible for loss or damage caused to the vessel or the shipowner by improper or careless loading, stowing or unloading. In some cases, the charterer’s own employees may load or unload the chartered vessel. In those cases, the charterer will be liable for any losses caused by the employees’ negligence, even if the charter party does not specifically place responsibility on the charterer.

The charter party may also prohibit certain dangerous cargoes. If the charterer loads a cargo in violation of such a prohibition, the charterer can be held liable for resulting damage to the vessel, injury to the crew, damage to the environment, and the costs of disposing of the cargo and cleaning the vessel.

Some charter parties require the charterer to pay for and provide fuel for the vessel. If the quality of the fuel is substandard, the charterer can be held liable for any consequences, such as damage to the vessel’s engine. In addition to this liability exposure, the charterer can suffer a financial loss if the fuel is lost in an accident. This property loss exposure is sometimes insured by extension of a charterers’ liability policy.

Charterers’ liability policy forms
In the American market, two standard insurer forms for charterers’ liability insurance are designated, SP-42A and SP-43A.

SP-42A is designed for insuring single voyages, and SP-43A is a term policy normally written to cover for a year. These forms contain exclusions that may leave several of a charterer’s liability exposures uninsured. For example, both forms exclude:

Liability assumed under contract other than liability relating to safe berths/safe ports and loading/unloading.

Liability for loss to cargo carried by the chartered vessel.

Liability arising out of cargo of a kind prohibited by the charter party. This exclusion applies not only to damage to the cargo itself but also to any other loss arising out of the cargo, such as bodily injury of crew members.

Liability resulting from the insured’s ordering the vessel to enter any icebound port or any place “where there is risk that ordinarily the vessel will not be able on account of ice to enter, reach or leave such port or ports.” This could leave the charterer uninsured for breaching the charter party’s safe port/safe berth warranty.

Because these industry standard forms do not provide coverage that is as broad as many charterers would like, some brokers who specialize in marine insurance have drafted their own charterers’ liability forms for their clients. A broker’s own form could omit some or all of the preceding exclusions.

Underwriting information
An agent or broker who wishes to place charterers’ liability insurance should know what information underwriters are likely to request. The most important source of information is the charter party, which stipulates the liabilities assumed by the charterer.

Other information that underwriters ordinarily consider includes the following:

• A description of the vessel, including name, gross tonnage, flag, registry and value.
• The intended ports of call.
• The principal cargo carried and its value.
• The number of voyages anticipated.
• Who will direct cargo stowage.
• Who will perform loading and unloading.
• The time of year for the voyage(s).
• The number of crew.
• The captain’s experience.
• The charterer’s experience (and loss history) in the trade to be conducted with the chartered vessel.
• The limit of liability and deductible requested.

Underwriters often use a marine surveyor to conduct “on-hire and off-hire inspections” of the chartered vessel. These inspections describe any damage existing when a vessel goes on hire and when it goes off hire. Such inspections serve to separate preexisting damage from damage sustained during the period of time to be covered.

Editor’s Note: This article is adapted from Ocean Marine Insurance, 3rd ed., one of the textbooks assigned for the Associate in Marine Insurance Management program offered by the American Institute for CPCU and Insurance Institute of America.

Arthur L. Flitner, CPCU, ARM, AIC, is an assistant vice president at AICPCU/IIA. He serves as the director of the Associate in the
Marine Insurance Management program and is responsible for several other courses offered by AICPCU/IIA on commercial insurance and risk management.