Loss of Hire
Anna F. Erlandsen – Norwegian Hull Club
Oslo, 8th November 2013
The Nordic Association of Marine Insurers
What we will try to achieve during this session:
• Introduction to the basic principles of Loss of Hire
insurance
• Introduce the special features related to Loss of Hire
insurance
• Present and discuss some practical examples
• Discuss risk assessment for Loss of Hire insurance
• Briefly introduce market dynamics

NOT to provide an indepth education in interpretation of
Loss of Hire insurance clauses and claims adjusting
The Nordic Association of Marine Insurers
The vessel as an insured object
•
•
•
The vessel is an asset = Risk of loosing monetary
(financial) value through
physical damage
The vessel is a generator of
income –
= Risk of loosing income (cash
flow)
The vessel is a carrier of goods –
= Risk of damage to the cargo
The Nordic Association of Marine Insurers
The vessel as an insured object
•
•
•
The vessel is an asset = Risk of losing monetary
(financial) value through
physical damage
The vessel is a generator of
income –
= Risk of losing income (cash
flow)
The vessel is a carrier of goods –
= Risk of damage to the cargo
= Liability exposure
The Nordic Association of Marine Insurers
It all started in 1957 with the Suez crisis
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The Nordic Association of Marine Insurers
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The effects of the crisis

Soaring freight rates

Demand for protection of high earnings

First Loss of Hire covers developed at Lloyd’s

Immature terms and conditions lead to large losses for
underwriters

The Nordic market, lead by Vesta, adapted the product,
adjusted the conditions and has a leading position today
The Nordic Association of Marine Insurers
What is Loss of Hire Insurance?

Covers loss of income

Indemnity is agreed at a certain amount per day

Covers loss of income due to a claim recoverable under
the Hull & Machinery policy

No cover if the vessel is a total loss
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What type of damage will trigger a claim?

Loss of time (and) income resulting from a claim
recoverable under the Hull & Machinery policy, e.g.
• Machinery breakdowns
• Stranding / grounding
• Collision
• Fire
• Heavy weather damage
• (Special occurences listed in the conditons)
….starting at the time of the incident

Deductible days
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What type of damage will NOT trigger a claim?

Total Loss
• Actual total loss
• Constructive total loss
• Compromised total loss

Wear and tear (non-accidential incidents)

Outbreak of war

Detainment, arrest, strike etc.

Ice
The Nordic Association of Marine Insurers
The daily indemnity

The amount agreed to be paid per day the vessel is out
of service
 Earning capacity:
• Time charter or unchartered
• Daily indemnity adjustable during the policy period, if
required
The Nordic Association of Marine Insurers
Deductible days

The Assured must assume part of the loss, deductible
days

Always the first days of any delay

The deductible days apply to each single casualty (or
incident)

The number of deductible days vary (and have an
influence on the premium)
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Indemnity days

A maximum number of days, stating the days an Assured
may claim:
• Per claim
• Per policy period
• Fleet limit
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The duties of the Assured

Give notice, for the underwriter to:
• Register a potential claim
• Arrange for surveys

Provide evidence
• T/C: Off-hire certificate
• Unchartered: Proof of actual time lost and evidence of
freight rates during the period of time lost
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Conditions

A B Stewart

Lazard Form

Norwegian / Nordic Marine Insurance Plan – Chapter 16
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Characteristics (the Plan Chapter 16)

Loss of Hire claims: loss of time arising from any damage
recoverable under the hull policy as a particular average
(§16-1.1) and/or as listed (§16-1.2)

If a vessel is a Total Loss (actual, constructive or
compromised), the Loss of Hire insurer is not liable for
loss of time (§16-2)

If Hull & Machinery is written on conditions other than the
Plan and accepted by the insurer in writing, chapters 10
to 12 are replaced by the actual Hull & Machinery
conditions (§16-1)
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Characteristics (the Plan Chapter 16)

Loss of Hire claims: loss of time arising from any damage
recoverable under the hull policy as a particular average
(§16-1.1) and as listed (§16-1.2)

Claims are measured in days, hours and minutes
(§16-4.1)

Indemnity is an amount per day (§16-5)

Charter-parties serve as proof of loss (§16-5.1) or
average freight rates (§16-5.2)

Daily indemnities may be assessed (§16-6)
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Daily Amount
Two systems provided in the Plan:
 ’Open policy’ – Ref. § 16-5
 ’Assessed daily amount’ – Ref. § 16-6
For all practical purposes, policies are written with assessed
Daily Indemnities (d/i’s) – but be aware of §16-14.2
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Characteristics (the Plan Chapter 16)






Loss of Hire claims: loss of time arising from any damage
recoverable under the hull policy as a particular average
(§16-1.1) and as listed (§16-1.2)
Indemnity is an amount per day (§16-5), - claims are
measured in days, hours and minutes (§16-4.1)
Charter-parties serve as proof of loss (§16-5.1) or
average freight rates (§16-5.2)
Daily indemnities may be assessed (§16-6)
Deductible in number of days (§16-7) – always the first
days of any delay and applied to each single casualty
Specific regulations as to how repairs are carried out
(§§16-9 to 16-14)
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Basis
The Loss of Hire basis is expressed in (number of) days
Structure:
Deductible / Cover per claim / Cover in all
Example:
14 / 90 / 90
Time in days
14
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90
Basis
Structure:
Deductible / Cover per claim / Cover in all
Example:
14 / 90 / 90
Daily Indemnity: USD 10,000
Cover:
USD 900,000 cover per claim
USD 900,000 cover in all per policy period
in excess of 14 deductible days
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Features
Automatic Reinstatement Clause
Secures the reinstatement of the total number of days under the policy.
Automatic Reinstatement Clause:
All claims for which Underwriters are liable hereunder shall, to the extent
thereof, reduce the limit of liability under this policy from the date of damage to
the vessel. However, this policy shall after such damage be automatically
reinstated back to the original limits of liability at an additional premium of
100% of the annual net premium pertaining to the vessel involved calculated
pro rata on the amount reinstated irrespective of time.
What is the rationale behind this clause?
The Nordic Association of Marine Insurers
Features
Additional deductibles

AMD – Additional Machinery Deductible

Ice deductible (conditional trading)

Cranes, spare parts, etc.
Notation:
14(21)/90/90
Time in days
14
7
21
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90
Examples
1. Notification for:
◦ 60 days cover any one incident
◦ 60 days cover per policy period
◦ 14 days deductible period
2. Notification for:
◦ Sum insured USD 3,600,000
◦ Daily indemnity USD 40,000
◦ 45 days cover any one incident
◦ 10 days deductible period
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Examples
3. Notification for:
◦ 30 days machinery deductible
◦ 60 days cover any one incident
◦ 60 days cover per policy period
◦ 21 days deductible period
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Pricing & Risk assessment
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Pricing
The most common way of expressing premium is as a percentage of the
sum insured:
(Sum insured = d/i x annual indemnity days)
Sum Insured x % = Premium
Another method is to express the premium in number of (indemnity) days:
Premium / Daily indemnity = Days
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Pricing % – LoH Scale
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Example
Basis:
Daily indemnity:
Sum insured:
14 / 90 / 90
USD 15,000
USD 15,000 x 90 = USD 1,350,000
Rate:
Premium:
3%
USD 1,350,000 x 3% = USD 40,500
or
in No. of days:
USD 40,500 / USD 15,000 = 2,7
Case: underwriting
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Risk assessment
For the ship owner:
1.
The probability of a claim resulting in loss of earnings.
2.
Expected consequence of a Loss of Hire claim.
3.
Ability and willingness to absorb risk
What are the relevant, unique features of Loss of Hire?
The Nordic Association of Marine Insurers
Risk assessment – Probability of a claim
Roughly 1/3 vessels experience a H&M claim each year.
Roughly 1/5 H&M claim results in a LOH claim.
i.e.: Approximately 1/15 vessels experience a LOH incident.
Which conclusions can be made from these
observations?
The Nordic Association of Marine Insurers
Brief discussion…
•
You are a shipowner and together with your risk
manager you are considering whether or not to take out
Loss of Hire insurance for your fleet. Identify various
fleet- and market specific factors that you consider
relevant to the discussion.
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Risk assessment – Expected consequences
(as assessed by the Assured)
Probability
High
 Higher retention (?)
 Buy at all?
Low
High retention
Cover the
catastrophe
Low
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Minimize number of
days for own account
Maximize number of
covered days
 Retention more
than 14 days?
or
 Limit the cover?
High
Consequence
Risk assessment – Fleet records
What would the underwriter look for?
 Burning cost?
 Trends?
 Clean record?
Claims
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
Claims type
Machinery
Collission
Grounding
Fire
2005
2006
2007
2008
Risk assessment – Fleet composition/dynamics
H&M quote
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LOH quote
Market

In terms of premium volume, Loss of Hire is a ”small” line
of marine business
The Nordic market has a leading position

Some variations:

• Loss of Earnings
• Business interuption
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Case - Tankship Ltd.
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