The IMO 2020 sulphur cap – what might it mean for marine insurers?
With the new International Maritime Organisation (IMO) sulphur limit in marine fuels (IMO 2020) only a few months away, should the insurance market be braced for a flood of new claims? All those we have canvassed seem to think so, given the consensus that the shipping market is generally still under-prepared for implementation.
From 1 January 2020, the MARPOL permitted limit for sulphur content in marine fuel used on board ships will be reduced from 3.5% to 0.5% for ships operating outside existing designated emission control areas. From 1 March 2020, there is a ban on the carriage in fuel tanks of non-compliant fuel. As many as 70,000 ships may be affected.
Shipowners or operators have limited options:
- Installing wet or dry scrubbers
- Burn only compliant low sulphur fuels
- Switch to burning alternative fuels such as LNG
- Not to comply with IMO 2020 at all.
The financial implications for major ship operators just in terms of fuel costs alone will run into billions of dollars. If that cannot be passed to their customers then they will look to claw that cost back by cutting spend in other areas, including insurance. The IMO leaves it to individual Member States as to how to implement their own regulations and penalties, so the non-compliance risks will vary from country to country, flag to flag.
Increased risk and exposures for insurers
Hull, increased value and loss of hire market
There seems to be an obvious risk prior to January 2020 from testing fuels or equipment being installed to comply with the sulphur cap; and thereafter of a substantial increase in machinery damage claims, engine breakdowns, groundings, salvage and General Average (GA) claims. Compliant fuel blends are likely to have higher catalytic fines content, and the industry is well familiar with the claims these cause.
Claims could arise from losses arising out of groundings, salvage and GA; increased fuel and compliance costs are likely to be carried through to higher freight rates, which means higher cost and freight values.
P&I and FD&D
There is likely to be cover for fines for accidental discharge of non-compliant emissions. P&I insurers may face cargo claims for delays, and unrecoverable GA claims for unseaworthiness.
A glut of claims relating to tank cleaning, bunker quality and adjustment disputes and recourse actions can be expected as parties attempt to allocate risk between owners and charterers.
Other marine insurers
Bunker suppliers, shipyards, manufacturers and charterers and their liability insurers are likely to see an increase in recourse claims against them, and ever more inventive ways to get around restrictive terms and conditions.
Ports may face potential bad bunkerclaims, or business interruption claims for berths or approaches being blocked following machinery breakdowns or groundings. Non-compliant ships may be detained, even abandoned.
Potential coverage issues
Any loss caused by deliberate non-compliance with the sulphur cap could result in a loss of hull, war or P&I cover for a ship, for lack of fortuity or wilful misconduct, although the mechanism by which this result is achieved may differ depending on the circumstances and terms of the insurance.
Unseaworthiness issues will be relevant for cargo policies, less so for hull where there will be more focus on due diligence of the assured, owners and managers (and possibly onshore superintendents) as to the planning for and training in IMO 2020 compliance and how such is compliance is maintained. Fuel is normally supplied by time-charterers, so due diligence defences to claims from bad bunkers may not be readily available and subrogation waivers are commonly granted to charterers. Termination of cover for loss of Class certification may also become relevant.
A warranty of compliance with IMO 2020 might seem like a simple and attractive solution, but under English law could be satisfied by mere documentary compliance. Under the Insurance Act 2015 breach will only suspend cover if the warranty defines or describes the risk as a whole; if it addresses a specific type of risk cover may be lost only if the breach was causative.
Unless the relevant risks can be appropriately priced at a premium insureds will accept bespoke exclusions from cover are a better option than relying on existing wordings or IMO 2020 warranties. Careful drafting is required.
The sulphur cap is here to stay. It is unlikely there will be an extension of the time for compliance. Given the current emissions zones, none of the issues raised are entirely new, but the scale of the problem is. Compliance with IMO 2020 will not remove the risks for insurers and may increase them.
Insurers in all classes of marine business should be looking to understand now what their insureds are doing by way of compliance, loss prevention and their contract terms, not just for the transitional period but beyond; as well as considering whether the additional risks posed should be reflected in enhanced premium or tighter wordings.
All changes in the regulatory rules applicable to shipping bring new risks and challenges for the market, but also new opportunities for those that have best understood those risks and how well their insureds are prepared for IMO 2020.