HOME - ISM LINKS / PAPERS AND ARTICLES

PAPERS AND ARTICLES - Information available on this page

ACI - Maritime Risk Management Conference

Traditionally Hull and Machinery Insurers appear to have relied upon a number of Sections in the Marine Insurance Act (1906) as a risk control measure - notably the requirements for 'utmost good faith' and 'full disclosure' by the assured and the privity of the assured in sending their ship to sea in an unseaworthy condition. However, it has proved increasingly difficult for Hull Underwriters, and P&I / Liability insurers to find protection in these Sections of the Act. My view is that Insurers need to become much more pro-active and undertake a radical review of how they assess the maritime risks they are prepared to insure. This article will attempt to explore some of the issues involved and, hopefully, point a way forward.

.......................................

Traditionally Hull and Machinery Insurers appear to have relied upon a number of Sections in the Marine Insurance Act (1906) as a risk control measure - notably:

Sec.17. Insurance is uberrimae fidei

A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

Sec.18. Disclosure by the assured

(i) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

Sec.39. Warranty of seaworthiness of ship

(5) In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

However, it had become increasingly difficult for Underwriters to rely upon the protection which, on first sight, appears to be offered by these Sections. In 2001 a dispute between insurers and assured eventually found its way to the House of Lords, having spent the previous six years progressing through the High Court and the Court of Appeal, involving a ship by the name of Star Sea¹. She had become a constructive total loss following a serious fire on board. The High Court had found in favour of the Underwriters but this decision was reversed by the Court of Appeal and the Court of Appeals decision was affirmed by the House of Lords. The Underwriters had failed to prove that the assured had not acted in good faith or that they had failed to disclose important information about the risk or that they (i.e. the alter ego) knew that the Star Sea was unseaworthy. This was in spite of the fact that the ship was indeed unseaworthy on a number of counts including non-functional and badly maintained fire fighting equipment and incompetent and untrained Master, Officers and Crew on board. Further, it was in spite of the fact that only the year previously the very same ship managers who operated the Star Sea had lost two other ships in almost identical circumstances where there had been seriously defective and badly maintained fire fighting equipment and incompetent, inadequately trained Masters, Officers and Crew. The issue of so-called 'blind eye' knowledge had been addressed 25 years earlier in a famous case involving a ship called the Eurysthenes² when it was made quite clear, or so it seemed until Star Sea , that Blind Eye knowledge can be equivalent to actual knowledge.

The situation appears to be³ that a person with bind-eye knowledge has a clear and conscious suspicion of the existence of the relevant circumstances and deliberately refrains from seeking or receiving confirmation that the firm suspicion is true. In contrast, a failure to pursue 'an untargeted or speculative suspicion' amounts to negligence only and cannot sustain a finding of privity⁴. According to Lord Hobhouse, whether the suspicion is sufficiently strong may be revealed by asking why the assured failed to seek further information. There is privity if the reason was to avoid suspicion being transferred into certainty. 'If, on the other hand, he did not enquire because he was too lazy or he was grossly negligent or believed that there was nothing wrong, then privity has not been made out.⁵'

My own view is that if a case with similar facts to the Star Sea were to come before the Courts post ISM Code then the findings would be very different indeed - particularly bearing in mind the role of the Designated Person. However, precedent law being what it is - there may be some difficulty overturning the House of Lords decision or rather distinguishing on facts. In the meantime the legal risk factors are stacking up against the Underwriters.

There is another area where I fear Underwriters may need to stand back and review their traditional position - i.e. reliance upon documentation issued by third parties - whether this be statutory certification by the vessels flag state with regard to construction and maintenance issues, classification status, crew certification and competence and ISM Documents of Compliance and Safety Management Certificates. In many cases this certification may be perfectly in order BUT I am still encountering an alarming number of situations where I am left scratching my head in disbelief that certificates had been issued to ship operating companies, to ships and to individual Masters and sea staff. My experience has told me that it can be dangerous to rely upon this certification at face value. But that is exactly what many underwriters still appear to do.

Interestingly, oil majors and others involved in chartering in tanker tonnage, and some dry bulk cargo commodity trader charterers recognised some of these problems quite some time ago and have been developing an increasingly sophisticated system of vetting inspections of the ships, and the ship operating companies, prior to taking a ship into charter. P&I Clubs have also been involved for many years now with what still tends to be called 'Condition Surveys' although they have increasingly moved beyond the pure inspection of the physical condition of the ships themselves. Whilst they may not always be referred to as such, these activities are basically part of a pro-active risk assessment. Based upon the findings of the vetting inspection or the condition survey, decisions will be made as to whether to take the particular ship into charter or to provide P&I Liability insurance respectively. Sometimes there is a straight rejection - the ship and / or the company are perceived to pose too high a risk. Often, though, it is the case that some problem areas may be identified and these need to be addressed and resolved before the ship is accepted - this is a risk reduction activity. Once the risk has been reduced and falls into the tolerable or acceptable zone the parties can move forward in an informed and controlled way to, hopefully, enjoy a mutually satisfying and productive relationship. Surely, this is no more than good business efficacy in the 21 st century?

Why then should there be reluctance on the part of H&M, and Cargo underwriters, and others to go down the road of pro-active risk management? Other sectors of the insurance industry have been using quite sophisticated risk assessment and risk management tools for years. I would venture some possible explanations:

• The marine insurance market is, by tradition, fragmented such that there is rarely just one single underwriter involved with any one ship or with the cargo on any one ship; often there are many different underwriters involved. Co-ordination is therefore difficult.

• To conduct an effective risk assessment will involve financial outlay - who is going to pay? In one way or another the cost would need to be recovered from the assured. As a consequence, the insurers who were involved in such activities may have to charge, initially at least a higher premium than competitors who might not have such requirements.

• Underwriters may harbour some belief that the more they have actual detailed knowledge about the risk the more difficult it will be for them to reject liability in the event of claims.

There may indeed be other reasons which I have not identified. However, my strong advice to marine underwriters is that if these are the sort of problems inhibiting the adoption of a positive pro-active approach to risk management then ways round, or through or over, those problems must be found. The alternative will be more expensive claims - which could have been prevented - with the underwriters footing the bill.

Let us consider what sort of risk factors could, or rather should, be assessed by underwriters. I think these risk factors would fall under three broad headings - although many risk assessments still only address the first of these in any depth:

• The Ship
• The People
• The Management System

Taking each in turn lets explore some of the areas which may need to be looked at as part of a risk assessment:

The Ship

For sure the type of ship, size of ship, age, cargoes carried, Flag, Classification Society, history will all need to be taken into account - and these things are traditionally disclosed to underwriters in any event. The enhanced risk assessment however needs to look at how well the ship and its equipment and machinery have been built and are being maintained in practice. That can only be effectively achieved by a suitably experienced individual, appointed by or on behalf of the insurers, conducting a physical examination of the ship, equipment and machinery and reviewing on board records.

The People

Which people should be included in a risk assessment? I would suggest there are two main groups - those ashore and those on board ship. We need to build a risk profile.

As far as those ashore are concerned, to some extent, this would depend upon how the various ship operating activities were being conducted. I would suggest the actual ship owner should be on the list, whether they are directly involved in the day to day ship operations or not - they are likely to be the assured under the policy and it is important to understand the level of commitment they may have to the safe management and operation of their asset. The individual(s) or organisation(s) involved in the technical, commercial, safety and crew management should come under the microscope. Often these will be Third Part Ship Managers and / or crewing agents. What experience do they as a company and their staff have, how long have they been in the business, what is the ratio of ships to managers / superintendents? Which other ship operating companies do they work with? How many ships do they manage. What type of ships do they manage / operate. What is the contractual situation with regard to funding operational and maintenance costs? Such things can only be adequately assessed, in my opinion, through face to face meetings and an inspection, by as suitably experienced individual to the operating offices.

The other main category of people who should fall under the risk assessment microscope is the ship staff. Who are the Master, officers and crew? How long have they been employed by the company? How are they recruited? How many individuals are there on board? Is the number adequate for the safe operation of the vessel - irrespective of what the minimum safe manning certificate may say? What checks are made into the certificates and experience of the ship staff? What training and familiarisation is provided to the ship staff? An assessment of the ship staff should be made when on board whilst looking at the physical condition of the ship - provided the risk assessor possesses suitable experience and skills.

The Management Systems

Management Systems and the Systems approach to management are areas which are still relatively new and often misunderstood and consequently not very often, or effectively, put under the risk assessment microscope. It is essential however that an evaluation of the management systems - how they have been set up and how they are working in practice - is undertaken as part of any risk assessment.

There may be a number of Management Systems in place - for example:

• Quality Management,
• Safety Management,
• Security Management,
• Maintenance Management,
• Environment Management,
• Garbage Management

Some of these management systems maybe interwoven into an overriding umbrella Management System. Whatever form they take, a suitably experienced individual should, as part of the risk assessment, review the adequacy of the Systems. Probably through a sample audit of the systems which should be checked to ensure that not only does the Company say what it does, but has indeed brought its systems alive in its day to day operation and that objective evidence is available to prove it. Part of this audit should take place on board ship and part in the office ashore.

By reviewing the management systems in operation a good overall impression should be possible about the effectiveness of maintenance, navigational practices, cargo operations, etc. etc.

For some these ideas / proposals would seem unreasonable, over the top, unrealistic and potentially expensive. For such individuals I would suggest that they undertake a brief, mental, risk assessment - identifying the hazards and considering the risk exposure on the following scenario:

A brand new 150,000 cubic metres LNG ship - value US $300,000,000.

Classed with an IACS society. Flagged with a well known open registry. Recently issued DOC and SMC in place.

It has been bought by an investment company and is to be operated by a ship manager who has traditionally managed fleets of bulk carriers. The ship is to be manned with a mixed nationality crew of 17 - which is in accordance with the minimum safe manning certificate. The Master has spent two months on board another LNG ship as part of a familiarisation programme - his background and experience is 12 years serving onboard oil and product tankers in various ranks. None of the other officers or crew have experience of sailing on board LNG ships.

As it stands, does the risk fall into your tolerable / acceptable zone?

¹Manifest Shipping Co. Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea ) [1995] 1 Lloyd's Rep. 651, [1997] 1 Lloyd's Rep.360 AC, [2001] 1 Lloyd's Rep. 389
²Compania Maritima San Basilio SA v. The Oceanus Mutual Underwriting Association ( Bermuda ) Ltd. (The 'Eurysthenes') [1976] 2 Lloyd's Rep.171
³I am grateful to Professor Howard Bennett for the explanation he set out at sec.19.35 p.578of his masterly work 'The Law of Marine Insurance' Second Edition 2006 - Oxford University Press- ISBN 0-19-927359-6
⁴The Star Sea [2001] ukhl 1, [2003] 1 AC 469, par 116
⁵Ibid para 25

BACK TO TOP

This article explores an issue which still seems to be far from clear - even eight years after Phase 1 - ISM compliance deadline - i.e. in order to comply with the requirements of the ISM Code what should be included within the documented procedures which support the Safety Management System (SMS) and what records should be maintained? Specifically the article considers the relative different requirements of small and larger companies.

The full text of the article (pdf) can be accessed here

BACK TO TOP

ISM and ISPS Codes - Influence on the Evolution of Liabilities

This paper was presented to the International Colloquium on Maritime Legal Liabilities at the Institute of International Shipping and Trade Law - University of Wales - Swansea - which was held on 14 th and 15 th September 2006.

The full text of the article (pdf) can be accessed here

BACK TO TOP

The article starts by asking a rhetorical question; 'How confident are you that you really know how well the Safety Management System is working on board your ships?' The suggestion is that even very well run companies must maintain vigilance.

The full text of the article (pdf) can be accessed here

BACK TO TOP

ReflectionISM and PredictionISM - whatever next!

This article is a personal reflection upon the high and low points of ISM implementation as at the end of year 2005.

The full text of the article (pdf) can be accessed here

BACK TO TOP

This paper was presented at the opening of the Nautical Institute - London and Solent branch ISM Conference held in Southampton in 2006.

A full set of all the speakers papers can be obtained from the Nautical Institute publications - www.nautinst.org

The full text of the article (pdf) can be accessed here

BACK TO TOP

The Errors of our Ways!

Article IV, rule 2(a) of the Hague Visby Rules allows a carrier a defence of 'error in the navigation or management of the ship' - should cargo become lost or damaged whilst in its custody say, for example, following a collision. However, it should not be considered a foregone conclusion that the carrier could automatically rely on the availability of that defence - indeed it may be extremely difficult! This article explores some of the relevant issues.

The full text of the article (pdf) can be accessed here

BACK TO TOP

Paper presented at the Interspill 2006 Conference in London . The paper explores not only the structure and legal framework underpinning marine pollution liabilities but also looks at the potential damage which may be caused by unreasonably criminalising the Master and others who may find themselves involved in an incident.

BACK TO TOP

The ISM Designated Person - Keystone or Scapegoat

Although we are now well over seven years since the deadline for Phase One ISM implementation and rapidly moving towards the 10 th anniversary of the mandatory compliance for RO-RO Passenger ferries in EU waters - there remains many grey areas when it comes to considering the role and responsibilities of the Designated Person. This article explores some of those key issues.

The full text of the article (pdf) can be accessed here

BACK TO TOP

At the 81 st session of the IMO Maritime Safety Committee a report was presented under the title: 'Study on the Impact of the ISM Code and its Effectiveness in the Enhancement of Safety of Life at Sea and Protection of the Marine Environment'. This was an extremely important report for the entire shipping industry throwing down a range of crucially important challenges to the industry. This article argues that it is of vital importance that the industry rises and responds to those challenges.

BACK TO TOP

Philippines : A Record of Shipping Disasters' - BBC News

The Philippines has a history of shipping disasters, but its record had been improving until the Princess of the Orient sank.

The sinking of the 13,935-ton MV Princess of the Orient near Manila could prove to be the worst shipping disaster the country has seen for several years. The full BBC Article can be accessed through the following link:

BACK TO TOP

Shipping Disasters Timeline - BBC News

The BBC News website looks at the world's major peacetime shipping disasters over the past 20 years. The article can be accessed through the following link:

BACK TO TOP

The Effect of Regulations

As an industry we have evolved a compliance culture, reacting to "what" we should do and "how" we should act, set out across prescriptive rules and regulations. This article considers the relevance of that evolutionary process and the difficulties it brings with it.

The full text of the article (pdf) can be accessed here

BACK TO TOP

Lee Seng Kong - Director (Shipping / Corporate Communications) Maritime and Port Authority of Singapore . The full article can be accessed through the following link:

http://www.icons.org.au/images/maritime_PA.pdf

BACK TO TOP

Formal Safety Assessment

a series of very interesting and useful articles have been posted by the UK Maritime and Coast Guard Agency on their website and can be accessed through the following link:

http://www.mcga.gov.uk/c4mca/mcga-safety_information/mcga-formal_safety_assessment/mcga-ds-rap-fsa.htm

BACK TO TOP

This is a very useful and interesting paper published by the UK MCA as the findings from their Research Project 521 and appears as Marine Information Note MIN 215(M&F) and can be accessed through the following link:

http://www.mcga.gov.uk/c4mca/min_215.pdf

BACK TO TOP

Leading For Safety

This is a most enlightening, and at time amusing, publication by the UK MCA into practical leadership skills and based upon a research project conducted by Arthur D. Little. An electronic version of the publication as well as the full report can be accessed through the following link:

http://www.mcga.gov.uk/c4mca/mcga-dqs-rap-human-element-leadership-handbook.htm

BACK TO TOP

This paper sets out the findings and conclusions of the UK MCA Research Project 547 and complements the Driving Safety Culture Project. It is published as Marine Information Note MIN 267 (M) and can be accessed through the following link:

http://www.mcga.gov.uk/c4mca/min_267.pdf

BACK TO TOP