COVID-19 impacts the wider maritime industry, including marine insurance. So far insurance claims have been reduced, though insurers are bracing for a potential influx through novel exclusion clauses.
This article is the second in our series dedicated to the impact of the ongoing COVID-19 pandemic on the wider maritime sector. It explores the pandemic’s effects on the marine insurance industry, and the extent to which insurance policies provide cover.
Shipping comprises of three essential interconnected elements: the ship, the seafarers, and the cargo. A common thread that runs through all three is the concept of ‘risk’ in transporting the cargo on the ship by the seafarers. Marine transport is subject to the elements, and other major occurrences such as piracy. Marine insurance is designed to counteract this combined risk, through tailor-made policies adapted to the size and type of the ship, the nature of the cargo, and the routes taken. Broadly it falls into three categories: insurance for the ship (Hull and Machinery); insurance for the cargo; and insurance against third party claims (commonly through P&I clubs).
Though much uncertainty remains, to understand the potential impact of COVID-19 on marine insurance, one needs to break down the latter to its constituents. In terms of cargo insurance, global disruptions in the supply chain are linked to cancellations of sales and shipping contracts, late delivery, port congestion, and warehouse overflow, as ports remain open albeit with limited workforce hence operating at reduced capacity, or even face temporary closure. In terms of Hull & Machinery, one needs to factor in reduced availability of spare parts, reduced demand for newbuilds, and changing voyage patterns. Regarding third party claims, one notes quarantine expenses, seafarers’ illness and even death, repatriation costs and substitute expenses, passenger liability, diversion expenses, fines and cargo-related claims all come into play. Overall, one envisages a reduction in insurance premiums, linked to reduced turnover in consequence of the global economic downturn.
To what extent have these concerns materialised? On 15 September 2020, the International Union of Marine Insurance (IUMI) presented its analysis on the latest marine insurance market trends during its annual conference. Though the numbers reported covered the 2019 underwriting year and hence were pre-COVID, some interesting COVID-19 related analysis was delivered by the Chair of IUMI’s Facts & Figures Committee, Philip Graham. Mr. Graham noted an abnormally low level of claims incidents recorded in recent months, linked to reduced utilisation of certain vessel types such as containerships, cruise ships, and yachts. As he put it “one consequence of COVID is that people are travelling less and buying less”. The Vice-Chair of the Committee Mr. Astrid Seltmann conceded this reduced utilisation had been positive for claims, stressing however that underwriters should beware of a potential future increase due to lapsed maintenance routines, the delay of spare parts or surveys, and an unusual accumulation of high-value vessels in areas exposed to natural catastrophes. The insurance premiums reported did in fact demonstrate a modest annual reduction of 0.9%.
On insurance cover, marine insurance policies are typically triggered by physical loss or damage, though recent pre-COVID trends reveal policy extensions to non-physical loss. It is hard to pursue a case that COVID-19 causes direct physical damage to cargo, as like most viruses it may potentially be removed through appropriate disinfection. Similarly, an assured who fails to pick up cargo owing to warehouse overflow, or even chooses to abandon the goods because of loss of market, does not fall under ‘physical loss’ in terms of insurance. As for non-physical damage, examples can be seen in clauses relating to extra expense, forwarding charges or access to property in cargo policies, and in hull loss of hire policies triggered through vessel quarantine or port entry denial.
Assureds have so far attempted to rely on cargo policies including their forwarding charges clauses, liabilities policies, and business interruption policies, to cut their losses. Cargo policies usually contain a delay exclusion clause, which covers loss or damage to goods owing to delayed delivery, as in the case of perishable goods. Similarly, relying on forwarding charges clauses, which cover extra charges in unloading, storing, and forwarding goods to their final destination when voyages are cut short, is subject to the double proviso of physical loss or damage to the goods, owing to an insured risk. At the same time, business interruption cover on cargo insurance is also normally subject to physical loss or damage, though each case should be judged on its merits. Regarding liabilities policies, a party is seldom liable to guarantee performance of a carriage contract, or to cover delay expenses.
The insurance industry has so far reacted to the COVID-19 pandemic in various ways. Some insurers have elected to cover owners’ and charterers’ loss of earnings and additional expenses following ship quarantine or ports closure, by securing limited market capacity on a voyage-by-voyage basis. Similarly, recently published clauses such as the Lloyd’s Market Association (LMA) LM5392 clause are designed to prolong cover in case Lloyd’s market becomes overwhelmed, should things take a turn for the worse.
On the flip side, novel exclusion clauses directly or indirectly targeting COVID-19 have been published, such as LM5391 which currently features in port and terminal insurance policies, designed to shield insurers against an influx of claims. The industry is already amending LM5391 to extend its scope beyond COVID-19 and its mutations, irrespective of concurrent contributory causes, or WHO pandemic status declaration. LMA has so far published a total of six clauses which directly or indirectly target the pandemic, namely LMA5391, LMA5393, LMA5394, LMA5395, LMA5396, and LMA5397.
As explained in Crowden & Anor v QBE Insurance (Europe) Ltd, exclusion clauses in insurance are not designed to exclude, restrict or limit insurer liability , but rather to define the risk which the insurer is prepared to accept by way of the insurance contract. In determining whether COVID-19 exclusion clauses are triggered, the precise wording of the exclusion clause in terms of causation is key. As such, clauses structured in terms of ‘loss, damage, cost or expense caused by / resulting from’ denote the proximate cause. By contrast, ‘loss, damage, cost or expense arising from / out of’ could denote the proximate cause and/or include an excluded risk which is but one of the effective causes of the loss. Wider still, ‘loss, damage, cost or expense directly or indirectly caused by’ extends well beyond the proximate cause.
In sum, the impact of COVID-19 on marine insurance is potentially wide, though an increase in insurance claims is yet to filter through. Marine insurance claims are normally triggered by physical loss or damage, though non-physical damage wordings crept in policies pre-COVID-19, providing extension of cover. The insurance industry’s response has been mixed, though assureds should increasingly look out for COVID-19 related exclusion clauses prior to policy acquisitions / renewals.
 Crowden v QBE Insurance (Europe) Limited  EWHC 2597
 Coxe v Employers' Liability Assurance Corpn Ltd  2 KB 629.; Lloyds TSB General Insurance Holdings & Ors v. Lloyds Bank Group Insurance Company Ltd  UKHL 48
Scott -v- Copenhagen Reinsurance Co. (UK) Ltd  Lloyd’s Rep IR 696;  2 All ER (Comm) 190