Contracts can be terminated for several reasons including insolvency of charterer (see Charterers Default Insurance). Both parties to the contract are protected by the Force Majeure provisions of the contract, but market fluctuations cause each party's interest in cancelling the contract to fluctuate with the market. A physical damage triggering an offhire claim under a Loss of Hire policy may, although cancellation provisions are triggered, be perfectly acceptable to the charterer when charter rates are increasing. In situations where charter rates plummet (for example, the 2016 offshore services collapse) an event of this nature may lead to cancellation –or at best renegotiation – of charter contract.
Short-term exposure is protected through the Loss of Hire policy but the long term value of the contract is lost and the vessel must be redeployed at lower rates or at worst go into layup. Contract Termination insurance can be structured to respond from a catalogue of risks which starts with the total (or constructive) loss of the vessel and escalates through a medium-sized to large casualty (this depends on the cancellation provision of the contract) and takes into account the full Force Majeure Catalogue and includes Political Risk.
Scope:
Contract termination insurance covers a loss of some significance which is collectible from an existing Loss of Hire policy. When market conditions are poor and an event causes a charterer to lawfully terminate a contract, you risk losing the long-term value of the contract and may have to redeploy at lower rates – or at worst layup. Contract Termination Insurance protects you against this amongst other risks.
Applies to:
Operators where one or several contracts are particularly valuable to the overall operation of the company; and whereby termination of these contracts would have a considerable adverse effect on the company.
If client buys Loss of Hire cover, it makes sense to take out a Contract Termination insurance under the circumstances described.
How it works:
Contracts can be terminated for several reasons including insolvency of charterer (see Charterers Default Insurance). Both parties to the contract are protected by the Force Majeure provisions of the contract, but market fluctuations cause each party's interest in cancelling the contract to fluctuate with the market. A physical damage triggering an offhire claim under a Loss of Hire policy may, although cancellation provisions are triggered, be perfectly acceptable to the charterer when charter rates are increasing. In situations where charter rates plummet (for example, the 2016 offshore services collapse) an event of this nature may lead to cancellation –or at best renegotiation – of charter contract.
Short-term exposure is protected through the Loss of Hire policy but the long term value of the contract is lost and the vessel must be redeployed at lower rates or at worst go into layup. Contract Termination insurance can be structured to respond from a catalogue of risks which starts with the total (or constructive) loss of the vessel and escalates through a medium-sized to large casualty (this depends on the cancellation provision of the contract) and takes into account the full Force Majeure Catalogue and includes Political Risk.
Markets:
Norway, Lloyd’s.
Price Range:
0.1% for loss of vessels, 0.5 - 0.75% for physical damage, around 1.5% for Force Majeure risks.
Self Retention:
None for total loss, CP Cancellation trigger for casualty and Force Majeure risks. (typically 30 to 90 days).
Time to market:
Up to 60 days depending on scope; total loss and physical damage 14 days.
