Marine Insurance

H&M Policies Exclusions

and Law
H&M Policies - Exclusions

The following risks are not covered by H&M Policies:

Increased Value, Disbursements and Excess Liabilities

These are covered in separate policies designed to provide an additional source of recovery
over and above the H&M value in event of a total loss. They also give cover on any balance
owing of GA, salvage, sue and labor, and collision liabilities which are not recoverable under
the H&M policy because of under-insurance.

Protection and Indemnity Risks

These are insured with a protection and indemnity association.

Loss of Charter Hire

This may occur if a time-chartered ship is placed off-hire or is unable to trade because of
damage sustained due to an insured peril. Loss of hire policies is obtainable from Lloyds or
other insurance markets.

Loss of Freight Cover

This is also available under a separate policy to which the Institute Time Clauses - Freight are
usually attached.

War Risks Cover

It is a supplementary insurance against the operation of war risks that are generally excluded
from H&M policies. They contain standard clauses such as the Institute Time Clauses, Hulls
Clauses, and also many P&I policies.

The London Underwriters Association decides on the operation of a war zone in any particular
area from time to time. Once that is decided, normal cover in that area is suspended and
additional premiums are required for ships entering that zone. Some underwriters specialize
in giving war risk covers for an additional premium. Institute War and Strikes Clauses are
available for use in Lloyd’s or Company policies. The P&I clubs also offer war risks cover

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H&M Policies Exclusions
and Law
under their own terms. Owners usually arrange for their ships to be held covered for war
risks on a permanent worldwide basis, but should consult their broker when a vessel is
going to enter a war zone.

Variations in Hull & Machinery (H&M) Cover

To accommodate the rules concerning CTL in the Norwegian Marine Insurance Plan and, to
reduce the total premium cost, shipowners usually split the total value of the vessel into
Hull & Machinery, Hull Interest, and Freight Interest. These components either apply to a
Partial Loss, or come into being during a Total Loss.

The total value US$ 30.000.000 (100%)

Hull & Machinery US$ 20.000.000

Hull Interest US$ 5.000.000 (25%)

Freight Interest US$ 5.000.000 (25%)

However, if a shipowner decides to split the insurance values as above, there may be
problems in relation to Constructive Total Loss (CTL). According to NMIP §11-3, section 2,
the vessel is condemnable if the casualty damage is so extensive that the cost of repairing
the ship will amount to at least 80% of the insurable value, or of the value of the ship after
repairs, if the latter is higher than the insurable value.

The vessel in the above example will only be a Constructive Total Loss if the repair cost
amounts to at least US$ 24.000.000 (80% of the total value). If there is a major casualty
with an estimated repair cost of US$ 23.000.000 the insured is only entitled to recover
repair costs up to an amount of US$ 20.000.000, which leaves him US$ 3.000.000 short
to cover the full repair cost. One alternative would be to drop the repairs and negotiate a
compromised total loss with both Hull & Machinery and Hull/Freight Interest underwriters.

This will however reduce the total payment in case of a total loss below than that initially
anticipated.

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H&M Policies Exclusions
and Law
To overcome this, many owners split the total value as follows, by incorporating Freight
Interest. This helps to insure future freight earnings and costs relating to replacement, etc:

The total value US$ 30.000.000 (100%)

Hull & Machinery US$ 24.000.000 (80%)

Hull Interest US$ 6.000.000 (20%)

Freight Interest US$ 6.000.000 (20%)

The maximum insurable amount under IV in the above example would in this respect be US$
6.000.000 each. The total sum insured would therefore be US$ 36.000.000.

In times when the value of the vessels are changing, due to conversion / upgrading or
general market changes, it is important to ensure maintaining a correct sum insured on the
different covers. If the value of the vessel increases more than 25% there may be a “gap”
in your cover. It is also sometimes a requirement from the mortgagee to insure at a higher
value than the actual value

Note:

A maximum of 25% of the value applicable to hull insurance can be covered under each
interest without any special agreement with the underwriters.