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Feb 16, 2024
Lockton P.L. Ferrari

Red Sea and War Cover

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

The continued conflict between Ukraine and Russia, as well as the more recent conflict in the Middle East, has led shipowners, charterers and operators of vessels to exercise extreme caution when calling within or in close proximity to those regions recently designated by the Joint War Committee (JWC) as having an elevated likelihood of war, piracy or terrorism. While the situation continues to evolve, as of this writing, the designated areas encompass those highlighted on the Lockton Marine War map at the end of this circular. Sailing in a designated area requires shipowners to notify their underwriters inadvance of the voyage, typically resulting in a supplemental (breach) premium.


Red Sea and Gulf of Aden

Following the recent Houthi attacks on vessels transiting the Red Sea, shipowners,operators and charterers have raised questions as to the P&I implications should a ship owner or operator elect to continue a voyage through the Red Sea vs. deviate to avoid the problematic area. At present, P&I mutual cover is not prejudiced by the decision to continue a voyage through the Red Sea; however, the decision to reroute a vessel to avoid the Red Sea – while not prejudicial to P&I cover on its face – could give rise to cover implications if the deviation is deemed unjustified. It is, therefore, essential that the deviation plan be discussed with the relevant P&I insurer well in advance to avoid any exclusion on cover (or arrange for deviation cover if the deviation is deemed unjustified and therefore P&Icover is prejudiced). As with many decisions taken by P&I Clubs, determinations of justified vs unjustified deviations are made on a case-by-case basis.

Standing somewhat contrary to the Clubs, some reinsurers – many of whom provide reinsurance for Club non-poolable programs and reinsurance on P&I War cover– appear to be moving toward a blanket exclusion for trade through the Red Sea. As we saw this same strategy with regard to the Russia/Ukraine conflict in2023, we expect that shipowners, operators and charterers will continue to enjoy mutual P&I cover while trading through the Red Sea but War P&I cover may no longer be available for Red Sea transits. NB that the positions being taken by reinsurers is fast evolving and continues to develop.

Any shipowner or operator planning to undertake a voyage through Red Sea or rerouting around it should also carefully review the War Risk clauses in any applicable charterparty in place to determine their rights and obligations concerning rerouting a vessel away from the Red Sea as there are a number of grounds for deviating from traditional geographical routes.

The CONWARTIME 2013 and VoyWar 2013 are the most common clauses typically utilized. Under a CONWARTIME 2013 clause, an owner has the right to refuse to proceed through any port, place area or zone s/he (or the vessel master) reasonably believes that the vessel, her crew or cargo may be exposed to War Risks and may request alternate instructions from the charterers. VoyWAR 2013 affords anowner similar, though not identical, rights.

If the charterparty does not contain a War Risk clause, an owner may be able to rely on common law principles in support of a refusal to transit an area which would expose the vessel to imminent peril or other unreasonable risk to the vessel or her crew


Interplay of P&I, Primary War and Excess P&I War Covers

With more frequent designations by the JWC, and increasing global tension, we also take this opportunity to remind ship owners and operators of the interplay between Primary War Cover, War P&I Cover and standard P&I Cover.

Most marine insurance expressly excludes cover for War Risks, and P&I insurance provided by the International Group of P&I Clubs is no exception. This coverage specifically excludes liabilities, costs and expenses: war, civil war,revolution, rebellion, insurrection or civil strife arising there from, or any hostile act by or against a belligerent power (undefined), or mines, torpedoes,bombs, rockets, shells, explosives or other similar weapons of war.

For the WarRisks exclusion to be triggered, the P&I liability must be proximately caused by war or similar events noted above. Indeed, even if a ship was in or near a JWC-designated area, the War Risks exclusion would only be triggered ifthe incident occurred as a result of a listed War Risk. For example, if a shipallied with a berth as a result of navigational error and the berth happened tobe in a war zone, ordinary P&I cover would customarily respond. The incident would not trigger the War Risk exclusion simply because it occurred ina designated area.

Normally, shipowners procure standalone war insurance (Primary War cover) that provides cover for war-related perils that are otherwise excluded from standard Hull& Machinery (H&M) and P&I placements. This Primary War cover typically carries a War P&I limit of the lesser of either the agreed value of the vessel or US$500M.

In excess of the vessel’s value/US$500M, all P&I Clubs in the International Group provide Excess War Risks P&I cover with a limit of US$500M each vessel, anyone event. It is important to note that this cover is always in excess of thevalue of the vessel/US$500M; where an owner does not purchase Primary Warcover, the Excess War limit provided by the Clubs will attach at the value ofthe vessel/US$500M (with the underlying value treated as a Self-Insured Retention).

However,vessels trading in Russia, Ukraine and Belarus (RUB) are subject to the totalexclusion War Risk area, and International Group, to assist their Members,purchased an aggregate sub-limit of USD 80 million from the reinsurance market.This limit is always in excess of the value of the vessel/500 m whichever the lesser.

It is alsoimportant to note that certain risks are excluded from Primary and Excess Warcover, such as loss or damage caused by nuclear, chemical, biochemical or electromagnetic weapons. However, the International Group provides asupplemental cover insuring this type of risk with an aggregate limit ofUS$30M.

For all the above War Risk policies, there is an automatic termination of cover upon the outbreak of war (whether there be a formal declaration of war or not) between any of the following countries: UK, USA, France, Russian Federation, Peoples Republic of China – the so-called Five Powers War Exclusion. At this juncture, however, it is unclear whether this termination would be triggered by a conflict between Russia (or another of the Five Powers) and another NATO ally, given NATO’s policy that an attack on one NATO member is an attack on all.

Given that this area is fast-developing, we recommend that shipowners ensure that they have obtained War Risk cover with separate limits for primary H&M War and P&I War. As mentioned above, P&I War Risk cover provided by the Clubs sit excess of the value of the vessel (or US$500M). Accordingly, where a shipowner has only one aggregate primary war limit, combined hull and thirdparty damages may not be sufficient to cover all damages and claims.


Our teams at Lockton P.L. Ferrari and Lockton Marine remain ready to assist and clarify any P&I or H&M aspect related to the covers discussed above as well as the developing situation in the Red Sea.


Red Sea and War Cover
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