Charterers Liability: The Coverage Most Charterers Do Not Carry

In October 2006, the capesize bulk carrier Ocean Victory was discharging iron ore at Kashima in Japan when weather deteriorated. A long swell combined with a northwesterly gale reaching Force 9 on the Beaufort scale. The master decided to leave the berth, lost control of the vessel in the Kashima fairway, and she was driven onto the breakwater and became a total loss.

The vessel's hull insurers paid, took an assignment of the owners' and demise charterer's rights, and brought a claim in excess of $135 million against the time charterers for breach of the safe port warranty, passing it down the chain to the sub-charterers.

Nobody in that chain owned the ship. Every one of them was exposed to a nine figure claim for her loss.

The charterers ultimately won, for reasons discussed below, and the litigation ran eleven years all the way up to the Supreme Court. Along the way the court settled a question that should concentrate the mind of anyone who charters tonnage. A charterer cannot limit its liability for damage to the chartered vessel.

Why the Charterer Is a Separate Exposure

Start with the structure, because the gap is created by how the standard covers are drawn rather than by any oversight.

The owner's hull and machinery policy insures the owner's vessel. When the vessel is damaged, the underwriters pay the owner and then stand in the owner's shoes to pursue whoever caused it. If that is the charterer, the charterer is the subrogation target. The owner's hull policy is not protection for the charterer. In a case like Ocean Victory it is the source of the claim.

The owner's P&I entry covers the owner's liabilities to third parties. Crew, cargo, pollution, collision, wreck removal. It does not cover the charterer's liabilities, because the charterer is a different legal person with a different set of obligations arising from a different contract.

The charter party allocates responsibility between the two. Safe port warranties, cargo responsibilities, bunker supply obligations, and stevedore damage provisions all place duties on the charterer, and every one of those duties is a potential liability.

The result is that a charterer sits between two comprehensive insurance programs, neither of which is for its benefit, carrying contractual obligations that generate claims which land on it directly.

Damage to Hull Is the Core Exposure

Of everything a charterers liability policy covers, damage to the chartered vessel is the head that matters most, and it is the one that traditional P&I cover was never designed to address.

Four scenarios generate most of these claims:

(1) Unsafe Port or Berth: The charterer warrants that the vessel will be sent only to safe ports. Where the port turns out to be unsafe and the vessel is damaged, the charterer is in breach and liable for the loss. Ocean Victory is the paradigm.

(2) Stevedore Damage: In practice, this is the most common source of hull claims against charterers. Crane strikes, dropped cargo, improper securing of equipment, and damage from loading gear the charterer arranged. Under most time charter forms the charterer is responsible for stevedore performance.

(3) Off-Spec Bunkers: Under a time charter the charterer supplies and pays for the fuel. Bunkers that damage the engine produce two claims against the charterer, one for the repair and one for the lost time. As we covered in our piece on ISO 8217, the specification protects the buyer less than most assume and the obligation on the charterer may be absolute. Cover for the cost of removing off-spec bunkers likely to damage the vessel's machinery is a standard head under a comprehensive charterers policy.

(4) Cargo that Damages the Vessel: Dangerous, corrosive, or improperly declared cargo that damages holds, tanks, or coatings.

Good damage to hull cover responds to loss of or damage to the vessel and to the consequential losses that follow, which are frequently the larger number. It also covers the charterer's liability to pay freight or hire arising out of that loss or damage, which is a specific and easily overlooked exposure.

The definition of vessel in these covers typically extends beyond the hull to the engines and the equipment used in her operation.

The Limitation Problem

Here is the finding from Ocean Victory that makes this coverage difficult to do without.

Shipowners and salvors have the right to limit liability for maritime casualties under the 1976 Limitation Convention, and the definition of shipowner in that regime extends to charterers, managers, and operators. What the Convention left unclear was whether a charterer could limit its liability to the owner for loss of or damage to the chartered vessel itself.

The Court of Appeal answered that in The CMA Djakarta in 2004, holding that charterers could not. The reasoning was that the vessel cannot be both the victim and the perpetrator, and that the property contemplated by the relevant article of the Convention must be third party property, either aboard the vessel such as cargo, or external to her.

That decision remained unresolved at the highest level until the Supreme Court unanimously endorsed it in Ocean Victory.

The consequence is stark. A charterer facing a claim for damage to the chartered vessel has no tonnage limitation to fall back on. A time charterer of a capesize bulk carrier is exposed to the full value of that vessel and the consequential losses, without the limitation regime that protects the owner.

That is the single strongest argument for carrying purpose-built cover, and it is the point most charterers have never had explained to them.

The Defense That Saved Them

Ocean Victory also produced a second holding that charterers should understand, because it is a drafting opportunity rather than an insurance one.

The demise charter was on a Barecon 89 form whose clause 12 obliged the demise charterers to effect and pay for marine and war risks insurance in respect of the vessel for the joint benefit of both parties.

The courts held that this reflected the parties' intention for an insurance-funded result in the event of loss or damage by marine risks. The parties had agreed to look to the insurer for indemnification rather than to each other. Once the insurance monies were paid, liability between the parties was discharged and the demise charterer had no further liability to pass down the chain.

Where a charter party contains a genuine joint insurance scheme, that arrangement can bar a subrogated recovery entirely. It is a powerful defense and it depends on the wording, which makes the insurance clause in a charter party worth negotiating with the same attention as the safe port warranty.

The charterers also won on the primary issue. The Supreme Court held that the test for breach of a safe port undertaking is whether the damage was caused by an abnormal occurrence, assessed as at the date the port was nominated, and that the coincidence of long waves and an exceptional storm at Kashima was abnormal. A port is not rendered unsafe by damage arising from an abnormal occurrence rather than from its ordinary characteristics.

That is a meaningful protection for charterers, but it is not one to rely on. The claim still took eleven years and reached the Supreme Court.

The Other Heads of Cover

Damage to hull is the centerpiece. A comprehensive charterers policy covers considerably more.

Cargo Liability: Where the charterer is the contractual carrier under bills of lading, or is liable to the owner for cargo claims under the charter party.

Pollution: Bunkers stemmed by the charterer, cargo pollution, and pollution arising from the charterer's orders. The treatment of pollution limits differs substantially between products and is one of the main reasons to compare them.

General Average, Salvage, and Special Charges: The charterer's contribution where a general average is declared, which as we covered separately can run to substantial percentages of value.

Third Party Liabilities: Collision and damage to fixed and floating objects where the charterer is liable.

Defense Costs: Legal and professional costs in charter party disputes, which is FD&D cover in the charterer's own right.

Loss of Freight: Where the vessel becomes a total loss and the charterer loses the freight it expected to earn.

Two Market Structures

Charterers have a genuine choice about where to place this cover and the two routes behave differently.

A charterers entry with an International Group club provides P&I risks on a mutual basis within the club's rules. The structure brings the club's global network of correspondents, lawyers, and surveyors, and the mutual model has operated successfully for over 150 years. The trade-offs are that premiums involve calls that can be supplemented if claims exceed projections, that larger claims may require committee approval before settlement, and that damage to hull is not part of standard P&I cover for charterers.

A comprehensive charterers liability product on a fixed premium basis was developed specifically to address those limitations. Gard introduced its Comprehensive Charterers' Liability Cover in 1989 with separate reinsurance, and it now accounts for the majority of that club's charterers entries. It offers single limits from $50 million to $500 million with no sub-limits, no aggregate limitation for pollution liabilities, and no restrictions relating to the shipowner's contractual right to limit liability, which can be decisive in certain jurisdictions. Damage to hull cover runs to the same limit, with deductibles individually agreed.

Other clubs offer comparable products. West of England's Charterers Comprehensive Cover is modular, allowing charterers to select the heads they need, with overall limits available up to $1 billion and a separate sub-limit for fuel stores and supplies.

The commercial differences beyond coverage are worth weighing. Fixed premium terms give predictable cost with no supplementary call exposure. Specialist charterers underwriters frequently hold settlement authority and can respond immediately rather than referring to a committee.

The Charter Party Can Void the Cover

One trap deserves specific attention because it connects the insurance to the fixture.

Club rules generally provide that liability arising from charter agreements on unusually burdensome terms, not approved by the club, may not be covered.

A charterer who accepts an aggressive safe port warranty, an unusually broad indemnity, or a bunker quality obligation that goes beyond market terms may have assumed a liability its insurance will not answer for.

That makes the insurance position a fixture question rather than a renewal question. Where a charter party contains terms outside the ordinary, they should be put to the underwriter before the fixture is concluded rather than after a claim.

Who Does Not Need It

One clarification. Bareboat and demise charterers occupy a different position, because their risks align closely with those of shipowners. They crew, operate, and effectively control the vessel. The consistent advice from the market is that a bareboat charterer is better served by a conventional owners P&I entry, which fits those exposures, than by a charterers comprehensive product.

This article is about time and voyage charterers, and about traders and cargo interests who charter tonnage as part of a commodity operation.

What to Check

Confirm you have cover in your own name. Being named as a co-assured on the owner's policies is not the same as carrying your own. Co-assured status has limits and the interests it protects are the owner's.

Check whether damage to hull is included and at what limit. This is the head most likely to be missing and most likely to produce a catastrophic claim.

Match the limit to the tonnage you charter. A charterer of capesize or VLCC tonnage needs a limit that reflects those values, and a low limit on a large vessel is a gap disguised as coverage.

Look at the pollution treatment specifically. Aggregate limitations and sub-limits on pollution differ materially between products and jurisdictions.

Put unusual charter party terms to underwriters before fixing.

Negotiate the insurance clause in the charter party. A joint insurance scheme can bar subrogated recovery entirely, as Ocean Victory demonstrated, and the wording determines whether it does.

Confirm off-specification bunker removal costs are covered if you are supplying fuel under time charters.

The Bottom Line

A charterer operates a vessel it does not own, under a contract that imposes real obligations, between two insurance programs that exist for somebody else's benefit.

When something goes wrong with the ship, the owner's hull underwriters pay the owner and then come looking for the charterer. And because a charterer cannot limit liability for damage to the chartered vessel, there is no tonnage cap standing between that claim and the charterer's balance sheet.

Charterers liability cover exists precisely for that structure. It is widely available, it is written on predictable fixed premium terms, and the limits available reach a billion dollars.

The charterers in Ocean Victory faced a $135 million claim and spent eleven years getting to the answer. They were right on the law. Being right on the law is an expensive way to be protected.