We are reminded almost daily of the threat the Houthi militia poses to vessels and their crews in the Red Sea and Gulf of Aden. When threat becomes reality insurance is the essential mechanism that makes it possible not just to ameliorate the economic consequences but also to manage the immediate practical challenges that arise including the worst-case scenario – the crew being harmed or taken hostage. The Houthis have provided a salutary stress test for the war insurance segment of the marine insurance industry. War insurance conditions and emergency response capabilities must be fit for purpose but also brokers and insurers must show that they can use available tools to provide Assureds with the cover they need.
Recently some misleading statements have been published about the scope of cover under the Nordic Plan especially for LOH in a case involving the capture of a vessel by the Houthis. In this memo, we show that there should be no doubt that the Nordic Plan provides a comprehensive solution to conceivable loss scenarios in the event of an attack or a detention by the Houthis. If problems have arisen it is more likely that they relate not to the Plan conditions as such but to the way in which they have been used. The way the Plan and its unique institutional infrastructure work reflects the culture and tradition established and maintained by the Nordic market for decades. As we will show, the way Nordic leaders interpret and apply the Plan to practical realities is part of that culture and tradition.
Part 1: War insurance is normally written as a package
The market for war risks insurance is divided between five specialist mutual war risk clubs and a “commercial” market with London and Nordic insurers being the most active. To meet the needs of shipowners and by extension their mortgagees, war insurance is normally written as a package insurance covering the vessel’s asset value, the shipowner’s income and liabilities including crew liabilities.
Each of the five clubs has its own set of rules providing a package that covers H&M, LOH and liabilities. DNK rules are based on Nordic Plan Chapter 15 which is also used to a provide a standard well-coordinated package for war risks in the commercial market. Co-ordination in chapter 15 relates to the relationship:
- between the H&M cover for the vessel and cover for the ship owner’s income and liabilities covered by reference to International Group P&I rules with an additional section for crew liabilities and
- between war and standard marine (non-war) risks. The fact that the Plan covers marine risks on an all-risks basis makes it possible to ensure that the ship owner has seamless cover; losses that are not covered as a war risk are covered as a marine peril unless they belong in the category of risk, such as nuclear risks that cannot be insured or re-insured at all in the commercial market, as further described below.
Outside of the war clubs, the Plan’s Ch. 15 is the only properly coordinated war package available in commercial markets. Assureds looking for cover on non-Plan conditions usually take out H&M war cover using Institute War and Strikes Clauses which then have to be supplemented with some form of home-made broker arrangement for LOH and P&I cover. Problems that can arise from these set-ups are sometimes compounded by using different sets of insurers to cover different interests such as LOH.
Part 2: Facts about the Houthis for marine insurance purposes
Although there has been no direct intervention by the Iranian government in Yemen, the civil war is widely regarded as part of the Iran-Saudi proxy conflict. Houthi insurgents currently control the capital Sanaa and all of former North Yemen except for eastern Marib Governorate. At year's end, the Houthis continued to control approximately one-third of the country's territory, containing 70 to 80 percent of the population. Their aim is to take control of the whole of Yemen.
Their declared aim in attacking international shipping is to support the Palestinian cause and harm the interests of Israel or any nation that supports Israel. Clearly, this is an “overriding political objective” for the group consistent with the political aims of Iran whose financial support is the main reason that the Houthis can operate as they do. Iran and some other states regard the exercise of state power by the Houthis in parts of Yemen as legitimate whereas many other states regard it as illegal.
Part 3: Wording of Plan 2-9.1b. with relevant words highlighted in blue
An insurance against war perils covers:
- war or war-like conditions, including civil war or the use of arms or other implements of war in the course of military exercises in peacetime or in guarding against infringements of neutrality,
- capture at sea, confiscation, expropriation and other similar interventions by a foreign State power, provided any such intervention is made for the furtherance of an overriding national or supranational political objective. Foreign State power is understood to mean any State power other than own State power as defined in Cl. 2-8 (b), second sentence, as well as organisations and individuals exercising supranational authority or who unlawfully purport to exercise public or supranational authority,
State power referred to in Cl. 2-8(b), second sentence “own state power”, that is “State power in the vessel’s State of registration or in the State where the major ownership interests are located”.
There is a short paragraph in the Commentary on the issue of persons purporting to exercise state power:
On the other hand, not only ordinary State powers are brought in under this term, but also all persons and organisations which unlawfully pass themselves off as being authorised to exercise public or supranational authority. In the case of interventions by groups of rebels or insurgents it may at times be doubtful whether the situation is covered by the wording or whether it is a case of pure piracy. However, in practice this will normally not create difficulties, as Cl. 2-9, sub-clause 1 (d) also refers piracy to the war-risk insurer’s scope of cover.
The tradition among Nordic insurers which reflects Nordic legal traditions for interpreting insurance conditions is to look to background, context and the underlying purpose of the contract. A formalistic, reductive approach is not appropriate. The facts on the ground (and at sea) show that the Houthis are the de facto state power in some parts of Yemen. This is a practical reality and should be sufficient by itself to bring them within the wording of Plan 2-9.1b., without the need to spend time discussing what percentage of states do or do not recognise them as legitimate. 2-9.1b. also applies to organisations that are unlawfully purporting to exercise state power. Either way their actions undoubtedly fall within the ambit of Plan 2-9.1 a. and b. It would also be perfectly reasonable to regard their actions as the actions of the State of Iran as part of its ongoing conflict with Israel. In any event as the Commentary points out if an organisation like the Houthis are not exercising state power lawfully or unlawfully then their actions, boarding and taking control of a vessel at sea, certainly qualify as “piracy”.
Part 4: Possible LOH scenarios
Scenario 1
Houthis board a vessel and take over control from captain and crew and bring the vessel to a place under control of their armed forces in Yemen or Houthi war vessels force an insured vessel to a place in Yemen that they control.
Scenario 2
The insured vessel is damaged by a Houthi attack and seeks refuge at a place outside their direct control but is unable to leave the area and resume normal trading because there is a very high likelihood that the vessel will be captured or destroyed by the Houthis if it tries to leave.
Scenario 3
The vessel is at a location for some non-war related reason but is unable to leave the area and resume normal trading because there is a very high likelihood that it will be captured or destroyed by the Houthis if it tries to leave.
Scenario 4
A vessel is unable to reach a scheduled port for loading or unloading because off the imminent danger of an attack or capture by the Houthis or has to make a detour around an area that is effectively controlled by the Houthis.
Part 5: Loss of Hire Coverage under the Nordic Plan
Clause 15-16. Relationship to Chapter 16
The provisions contained in this Section shall apply in addition to the provisions in Chapter 16. Instead of Cl. 16-1, sub-clause 2 (b), the following shall apply: The insurer is liable for loss due to the vessel being wholly or partly deprived of income because it is prevented from leaving a port or a similar limited area.
Clause 15-17. Loss in connection with a call at a visitation port, a temporary stay, etc.
The insurer is also liable for loss of time if the vessel is brought to a port by a foreign State power for the purpose of:
- visitation and search of cargo, etc.
- capture and temporary detention
Plan 15-1 states that Ch. 15 insurance covers war perils as defined in 2-9. 15-16.2 above therefore covers cases where the insured vessel is prevented from leaving any port or similar limited area by any war peril, that is all the war perils named in 2-9.1a. – e. Cover under 15-16.2 is not limited to cases of state intervention. Another crucial difference from marine LOH is that war cover unlike the cover for LOH against marine risks in 16-1, sub-clause 2 (b) it is not restricted to cases where the vessel is blocked or trapped by a physical obstruction. Cover under 15-16 extends to cases where the vessel is prevented from leaving a port or similar area by any of the war perils including the threat of violence or capture by any entity engaged in war like activities, civil war, terrorism, politically motivated use of violence or threats of the use of violence or piracy. This means that the context and the underlying purpose of the insurance is very different.
Since the operation of the vessel must be hindered by a physical obstruction the location involved, whether port or not must necessarily be of limited physical extent. Furthermore, being blocked and trapped by a physical obstruction prevents the vessel from performing its planned trading operations but does not otherwise limit the owner’s ability to exercise its legal ownership rights. While it lasts, capture of a vessel whether by a state, rebels or pirates prevents the vessel from carrying out any form of trading operation and deprives the owner from exercising any of its rights in the vessel. Many ports are so large and so configured that it is not possible for the whole port to be blocked by a physical obstruction. In the context of war insurance, a “similar limited area” to a port must simply mean any area where vessels can be moored while they are not trading.
There is no place in the Nordic tradition for a formalistic discussion of what constitutes a “similar limited area” to a port and no requirement that the vessel should remain in a single location. As long as the capturers keep control of the vessel to the exclusion of the rights of the Owner so that the vessel is unable to earn income Plan 15 section 6 must apply. DNK and the other leading Nordic insurers which are also ship owner mutuals have made it clear that they would have taken a different approach because their expertise and focus is on the practical realities of the maritime transport industry, as per the below.
For the sake of completeness, the text of 15-17 has been included above. 15-17 a. applies to temporary measures carried out for purposes of control and inspection while 15-17 b. is much more general so that it becomes unnecessary to spend time discussing the precise reasons for any form of temporary detention. Foreign State power in 15-17 must be read as meaning foreign state power as defined in 2-9. Given the facts of the case that triggered the misleading statements that have been made about the Plan and what has been said about the scope of cover under 15-16. 2 it is unnecessary to focus on 15-17 whose primary purpose is to avoid doubts about the scope of cover where a vessel has been temporarily detained for whatever reason.
In Scenario 1 therefore, LOH would be triggered for the whole period of the capture with a claim for total loss being triggered after 12 months.
Similarly, in Scenario 2 except that it would be necessary to establish that the risk of harm to the vessel if it left the area was real, continuous, and imminent – a requirement that would apply under all conditions.
It is also possible that Scenario 3 could trigger a claim under Plan 15 Section 6 provided that the Owner is unable to exercise its rights of ownership and that as in the case of Scenario 2 the threat of harm to the vessel is real, continuous, and imminent.
On the other hand, Scenario 4 would not trigger a claim under chapter 15 or other standard clauses unless the diversion had been ordered by the war insurers – see Plan 15-18. The rules of all the mutual war associations contain similar provisions. In the absence of specific instructions from war insurers diversions to avoid war risk threats is a trade disruption issue rather than a LOH issue.
Part 6: The bigger picture
We are aware that there are high profile cases currently being handled in the market, which have caused tendentious publicity in recent weeks. In this context it would be wrong not to point out some of the very real benefits of the seamless cover provided by the Plan system. A good illustration of the shortcomings of alternative solutions is provided by the well-known B Atlantic case. This involved a vessel detained in Venezuela for a long period after discovery drugs fastened to the hull below the waterline. The owner claimed for a total loss under its war insurance after more than a year had elapsed. H&M war cover was subject to Institute War and Strikes Hull Time Clauses and the Assured claimed that the vessel had been lost because its detainment was due to the “malicious act” of an unknown third party, ref. Cl. 1.5. It was common ground that neither the Owner nor the crew had been in anyway involved in the attempted smuggling. Insurers relied on the exclusion in cl. 4.1.1 for loss caused by breach of customs regulations. The Court of Appeal held that the detainment was indeed the result of a “malicious act”, but liability was excluded by clause 4.1.1. The Supreme Court found that the action of the unknown smugglers were not “malicious” in the sense that the word was used in the war clauses because there was no malicious intent to harm the vessel or its owners. The case is an important clarification of the meaning of the war clauses under English law but for present purposes the important point is that the war risks policy was the only possible source of cover for the Assured. It was quite clear that ITC (Hulls) which is a named risks cover did not have any wording that would provide cover. Under the Plan it is of course clear that the detainment of the vessel was not related to any “overriding national political objective”. It might have been an abuse of state power, but this is not enough to turn it into a war risk. However, since all risks principle applies to marine cover under Plan 2-8 insurers are liable unless they can point to a specific exclusion. Plan 3-16 Illegal undertakings states:
The insurer is not liable for loss which results from the vessel being used for illegal purposes, unless the assured neither knew nor ought to have known of the facts at such a time that it would have been possible for it to intervene.
On the facts therefore the Assured would have been able to claim for a total loss under the marine H&M policy not automatically after 12 months as is the case under the war risks cover but once it had become clear that there was no prospect that the vessel would be recovered which was certainly the case by the time litigation was commenced. In any event physical damage to the vessel resulting from the detention would be covered under chapter 12 of the Plan.
Use and abuse of state power whether related to a state's overriding political objectives, to corruption or for other reasons has become a real issue for ship owners. The exclusions from the all-risk principle in Plan 2-8 that might apply in such cases are very specific and limited.
2-8.c. excludes requisition by any state, This exclusion is included in all standard marine policies.
2-8.d. excludes “insolvency or lack of liquidity of the assured or the operation of ordinary legal process to enforce payment of any fine, penalty, debt or right to security unrelated to a claim or liability covered by the insurance,”
Ordinary legal processes unrelated to any insured event obviously fall outside the scope of insurance cover. Otherwise, state interventions that are not covered by 2-9 as a war peril are covered as a marine peril subject only to the terms of 3-16 quoted above. This ensures that the total cover provided by the Plan is properly aligned with shipowners needs. The B Atlantic and similar cases show that total insurance packages based on English market conditions fail to provide the same level of cover.
Part 7 and conclusion: A matter of culture
In our opinion there should be no doubt that the Nordic Plan provides a comprehensive solution to most every conceivable loss scenario in the event of an attack or a detention by the Houthis. As discussed above, this is not only evidenced by the conditions themselves, but also the culture and tradition established and maintained by the Nordic market for decades.
The market’s most high-profile Houthi related case is one that would, based on the publicly available information, fit within one of the scenarios described above. The handling of this matter has caused significant controversy and allowed parties to spread doubt about the merits of the Nordic Plan’s war coverage. In our opinion, there is no need for either shipowners or their mortgagees to have any qualms about the comfort of war coverage provided by the Plan. This is evidenced by our deliberations above, and the leading, Nordic war insurers’ clarifications below:
DNK
Our members and their co-insureds (mortgages) should have full confidence that the Plan, along with the DNK supplementary policy conditions, provides adequate balance sheet protection for war and war-like conditions. Furthermore, our mutual commitment, cooperative claims handling practices, and support from reinsurers favour our members in scenarios like the one under consideration. Without knowledge of the specifics of the case that led to this situation and frustration, I can confidently say that we would have approached this differently than the leader in this particular war case.
Norwegian Hull Club
Regarding the “vessel being kept in a port or similar limited area”, Clauses 15-16 and 15-17 are quite separate provisions aimed at distinct circumstances which might arise in a War context. Clause 15-16 is aimed at covering ‘blocking and trapping’ type scenarios. Under traditional (non-War) LOH cover, the reason for not being able to leave must be a physical obstruction. However, War LOH extends this to cover ‘blocking and trapping’ by reason of intervention of a foreign state power. In other words, the obstruction need not be physical. For example, at the outbreak of the war in Ukraine, the Ukrainian government ordered that all ports be closed leaving a number of ships stuck inside. Whilst there were also possible physical obstructions in certain areas (mines, etc.), the intervention by the Ukrainian government would have been sufficient in and of itself to trigger a claim under clause 15-16.
However, just by the very nature of being blocked/ trapped necessitates this to be in an area that is possible to block or prevent a ship from leaving. The exact nature of the “port or similar limited area” will vary greatly depending on the geography and nature of the obstruction/intervention which prevents the ship from leaving. If the ship can still sail from the area, then it is probably not a sufficiently limited area, and equally it cannot be said that she is “prevented from leaving”. Trying to define this is incredibly difficult, especially where the reason for not being able to leave might effectively be administrative (i.e. an order from a hostile or wartime government) without any physical obstruction.
Further, under 15-16 the obstruction is unlikely to be specific to one vessel and would more likely any number of vessels which happen to be in the area at the time.
Clause 15-17 is dealing with a different situation where it is the insured vessel, which is directly affected, i.e. capture, detention, etc. Whilst “port” is mentioned in the wording of the clause, this seems to be less of a key feature of the peril than in 15-16 where the vessel must be trapped somewhere. In fact, the Commentary for this clause does not even discuss the “brought to a port” wording in terms of capture, etc. Instead, the essential ingredients are that the vessel has been captured/ detained and that this was carried out by a foreign state power.
Naturally, when a vessel is captured or detained by a state entity, it will be “brought to a port” although we would give a wide interpretation to this provided it is clear that the vessel has been captured/ detained and that it was a foreign state power that has carried this out.
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