Friday, 25 February 2011

GUIDE: Hull & Machinery Insurance

Hull and Machinery insurance is a form of marine insurance which pays the owner for damage done to the ship itself or the equipment which forms part of it (for instance, cranes, hydraulic winches etc.). it is often simply known as hull insurance or hull cover.

It is possible to buy a much cheaper insurance ('TLO') for the hull risk, which covers Total Loss Only. In other words, if the vessel is damaged you must repair it at your own cost; the policy will only respond if the vessel is a total loss (by paying you what it was worth so that you can purchase a new one).

Most hull brokers will be able to obtain the best overall cover by blending an H&M policy which excludes total loss with a standalone Total Loss Only policy. The latter policy would find most vessels never making a claim and could therefore be bought relatively cheaply and as the H&M policy excludes the largest risk possible (for loss of the vessel) it too would be comparatively cheap.

The rationale from an underwriting side is that both insurers can more accurately identify the risk in what they are underwriting and can therefore be more specific in how much premium they charge.

Linked Insurances 
Increased Value - For well known reasons, the Marine Insurance Act only allows you to buy cover for things in which you have an 'insurable interest'.  For this reason, H&M insurance is limited to the market value of your vessel. However, it was gradually realised that as a shipowner, if you lose your vessel, you will incur a great deal of costs which exceed the mere cost of buying a new one. Therefore, a new insurance became available, calling 'hull interest' or 'increased value' or 'IV', to provide cover for this. It generally entitles you to a payment of 20% - 25% of the vessel's value in the event the vessel is a total loss. This will be paid in addition to the main H&M settlement for the vessel's value.

War & Strikes - Losses related to war and strikes are excluded from normal H&M cover, but you can buy an additional cover which replaces this exclusion (albeit some elements of the exclusion like Nuclear cannot be bought back).

K&R - Kidnap and ransom insurance became more popular again in the 2000s, with an upsurge in attacks in Somalia, South East Asia and West Africa. It pays the cost of negotiating release of the crew and / or ship, in the event they are taken by pirates.

RDC/FFO - Most H&M policies include only 3/4ths cover for collision risk, and none for FFO (damage to fixed of floating objects) risk. However, today many H&M insurers allow you to add full cover for collision risk or cover for FFO risks to their policy. It is important to ensure your P&I then excludes these risks, in a way which dovetails with your additional H&M cover, as otherwise you will have a Double Insurance position, which will be procedurally and legally problematic in the event of a claim; and you will obviously not be paying premium efficiently if you are paying to insure the same risk twice, but can only claim once.

5 comments:

Anonymous 15 May 2011 at 15:11  

I thought TLO policies were less common nowadays in the London market?

Editor 19 February 2012 at 14:12  

They are a lot less common nowadays with the developments in size and cost of vessels. The market itself has also become a lot more sophisticated.

Muhammad Amir 2 January 2013 at 22:00  

The latter policy would find most vessels never making a claim and could therefore. Best PPI Claims Service

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