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Legal Regime of Marine Insurance in Arctic Shipping: Safety and Environmental Implications

  • Proshanto K. Mukherjee
  • Huiru Liu
Chapter
Part of the WMU Studies in Maritime Affairs book series (WMUSTUD, volume 7)

Abstract

The primary driver of Arctic shipping and maritime operations is the development of natural resources in the Arctic. The melting of Arctic sea ice as a result of global warming and climate change is providing greater maritime access and potentially longer navigation seasons. This combined with advancements in ice-breaking technology benefitting commercial carriers are translating into shorter sea routes and reduced shipping costs. This chapter is concerned with safety and environmental implications of insurability and indemnifiability of enhanced Arctic shipping risks attributable to the presence of ice. The specific focus is on examination of relevant provisions in marine insurance contracts subject to English marine insurance law and the Nordic Marine Insurance Plan (NMIP). The discussion begins with a synoptic overview of the fundamental principles of marine insurance and then moves on to the regulatory dimension of Arctic shipping as manifested in the IMO Polar Code. Whether a violation of the Code leads to a potential breach of the implied warranty of seaworthiness entrenched in the UK Marine Insurance Act 1906 (MIA) operating through the Institute warranties is examined together with the corresponding elements in the NMIP regime. A comparative analysis is carried out of the MIA and Institute Clauses and Warranties on the one hand, and the NMIP legal framework on the other, which includes premium considerations, and ice class and notification requirements. The environmental implications for Arctic shipping are examined through the concept of protection and indemnity (P&I) insurance focusing on compulsory cover for third party liability required under relevant ship-source pollution conventions. Finally, the emerging concept of environmental salvage particularly in relation to Arctic waters is discussed peripherally.

Keywords

Arctic shipping Marine insurance Polar code P&I clubs STCW convention 

1 Introduction

1.1 Background and Preliminary Observations

Shipping in the Arctic is a contemporary issue of increasing significance in the current maritime milieu. The primary driver of Arctic shipping and maritime operations is the development of natural resources in the Arctic. Global warming and consequential climate change is reportedly the cause of Arctic ice melting rapidly to the delight of some and chagrin of others. The warming of Arctic waters and consequential retreat of sea ice is opening up new waterways hitherto ice-bound and un-navigable providing greater maritime access and potentially longer navigation seasons. This, combined with growing ice-breaking navigational technology particularly of benefit to commercial carriers, is translating into shorter sea routes and dramatic decreases in shipping costs. All these point to positive prospects for the shipping industry. As well, increased fishing opportunities in northern waters are a welcome development for communities where fisheries resources are vital for their economies and the fishing industry in the Arctic region.

On the other side of the spectrum, however, there are the downsides; the safety of ships and the detriment suffered by the pristine Arctic environment. The shift in the fragile ecological balance due to the changing configuration of ice infestations compounded by the increasing intrusion of vessels can result in irreparable environmental harm. The international maritime community would wish a reconciliation of the two extremes of relative benefit and detriment and an optimum balance being reached by the utilization of scientific and technological tools at its disposal. To that end, Arctic shipping must involve multi-disciplinary action including law and economics in addition to science and technology.

At the centre of all the above observations and concerns lies the element of risks for shipowners operating in the Arctic. While it is conceded that shipping as a maritime adventure is inherently a risky business, the risks associated with the Arctic are more because of the presence of ice, remoteness, increased navigational difficulties in the high North, and lack of salvage equipment. Maritime risks are protected through marine insurance which consists of three basic components, namely, hull and machinery (H&M), cargo and third party liability (P&I). There are the safety-associated risks pertaining to the shipowner, that is, damage suffered by the hull and machinery of the ship and the cargo carried on board covered by H&M and cargo insurance. There is also the risk of damage caused to the Arctic marine environment which comprises liability of the shipowner as the polluter to third party claimants who are those who have legal rights in respect of the polluted environment. These risks are covered by P&I insurance.

1.2 Purpose

The principal purpose of this chapter is to examine the marine risks attributable to increased shipping in the Arctic and discuss the legal implications pertaining to their insurability and indemnifiability through the application of norms and practices of marine insurance. In specific terms, the chapter focuses on examining relevant provisions in marine insurance contracts pertaining to risks caused by Arctic ice through a comparative analysis of the so-called Institute Clauses under English marine insurance law and the corresponding provisions of what is currently known as the Nordic Marine Insurance Plan (NMIP) which is the law which prevails in Norway. Clauses developed by the Institute of London Underwriters are used widely throughout the maritime world. The UK legislation governing marine insurance is the Marine Insurance Act 1906 (MIA). Recently the UK Insurance Act, 2015 has been enacted which in effect has resulted in some changes to the MIA 1906. Even so, the 1906 Act is still the model legislation for numerous common law jurisdictions worldwide. The NMIP is the Norwegian version of a regime common to all the Nordic countries. From the time of its establishment in 1996 it was known as the Norwegian Marine Insurance Plan. In 2013 the name was changed to Nordic Marine Insurance Plan. The “Plan” has the status of legislation corresponding to the MIA.

These two jurisdictions have been selected for discussion because they represent two major systems of law and practice in the field of marine insurance. The English law in substance has considerable international application through the national legislation of virtually all common law jurisdictions while the Norwegian law represents the common platform used in all the Nordic states. The aspect of cargo insurance in Arctic marine transportation will not be addressed in this discussion mainly because it involves a substantial amount of law which falls much beyond the intended scope of this work.

It is hoped that this chapter will stimulate continuing discussion in the international maritime arena and instigate further consciousness of a highly dynamic and contemporary subject. Needless to say, this effort is aimed at fostering a regime of marine insurance for the Arctic consistent with safe and sustainable shipping.

1.3 Structure

Following this brief introduction, a synoptic review of the historical evolution of marine insurance and its fundamental precepts is presented. It is deemed necessary to provide at least a sketchy backdrop to the detailed discussion to follow for the benefit of a multi-disciplinary readership and audience; to afford an adequate appreciation of the peculiarities of marine insurance in general and issues pertaining to Arctic shipping. The discussion then moves on to introducing the concept of risks, their insurability and indemnifiability and the basic principles and doctrines of marine insurance law. It is pointed out that marine insurance has important commercial implications. Next, the central theme of the chapter is brought into focus. The insurance implications for Arctic shipping are discussed in light of enhanced risks in terms of safety and environmental protection issues. The specific clauses in the UK marine insurance regime mainly governed by Institute Clauses and the relevant corresponding provisions in the NMIP are examined through a focused comparative analysis. The very topical issue of environmental salvage is then addressed synoptically given its relevance to the environmental dimension of indemnifiability for pollution damage caused in ice-infested Arctic waters. A summary is presented in conclusion together with comments touching on the need for consistency and uniformity in the marine insurance regime in consideration of the changing parameters relating to shipping safety and the need for sustainability of the Arctic environment.

2 Marine Insurance and Regulation of Arctic Shipping

2.1 Evolution and Precepts of Marine Insurance

The origins of marine insurance are said to be “veiled in antiquity and lost in obscurity” (Gold et al. 2003, p. 297). The progenitor of the maritime mortgage and marine insurance is the notion of bottomry and its cargo counterpart known as respondentia pursuant to which a shipowner in ancient times pledged the security of his ship or cargo in exchange for a loan for the purpose of prosecuting the ship’s voyage. If the ship failed to return from its voyage the loan did not have to be repaid; in effect therefore, the lender became the insurer of the pledged ship or cargo. The practice of bottomry prevailed in ancient Babylon as recorded in the Code of Hammurabi dating back to the period 2000-1600 bc and in Hindu India around 900 bc as recorded in the Manu Samhita (Mukherjee 2002, pp. 11–12; Reddie 1841, pp. 482 and 493). The Greeks also practiced bottomry and respondentia during the turn of the first millennium and contracts of foenus nauticum or usury, considered specifically as precursors of the marine insurance contract of subsequent times, were in vogue which were enforced by the Athenian courts (Mukherjee 2002, pp. 11–12; Reddie 1841, pp. 482 & 493). Modern marine insurance practice started with the Jewish merchants of Lombardy and Florence in Italy moving to London and setting up business in the shipping district of the city near the Tower of London. In the late seventeenth century, Edward Lloyd’s coffee house in Tower Street evolved as a venue from where marine insurance business began to be transacted. Even though it has long since disappeared physically, it is famous as the original forerunner of the present day Lloyd’s marine insurance market (Gold et al. 2003, pp. 298–300). Incidentally, there is at present a coffee house at the bottom of the Lloyd’s Building at 1 Lime Street in London where insurers, brokers and others still meet to transact business.

The conceptual essence of marine insurance which came before any other kind of insurance was ever perceived, and which has existed since time immemorial, is the notion of “spreading of risk” in a common maritime adventure so that upon the collection of a relatively small premium from multiple shipowners, each known as an assured, a singular entity known as the insurer contracts to indemnify each assured in the event of a loss caused by an insured peril to the extent to which the subject matter (ship, cargo or freight) is insured (Gold et al. 2003, p. 308). Today, however, in many instances there is one ship owner (the assured) with one premium but multiple insurers sharing the risk by providing cover for the shipowner’s whole fleet. This is the norm for hull and machinery, and cargo insurance. Notably, the concept of small premium paid by multiple ship owners mainly prevails in the field of protection and indemnity (P&I) insurance discussed under Sect. 3.4 of this chapter. In this context, risk is indubitably associated with safety. In contrast, third party liability insurance provided by the P&I regime, in large part relates to the risk of environmental damage caused by ship-source pollution, injury to crew, passengers and third parties, and wreck removal. As may be gleaned from the discussion so far, in legal terms marine insurance involves a contractual relationship between insurer and assured manifested through an instrument known as the “policy”. Marine insurance is an integral feature of commercial shipping and aside from the contractual element is also governed by legislation. There is no international convention and it is unlikely that it will ever be necessary to have one. The significance of marine insurance in relation to Arctic shipping is the presence of ice as a navigational and environmental risk which does not exist in other commercially navigable waters although it is recognized that there are ice-infested areas in waters south of the Arctic region where ships regularly operate but the Arctic is unique in several respects. Other risks include remoteness, increased navigational difficulties in the high northern latitudes and lack of salvage equipment.

2.2 Regulation of Arctic Shipping

The Arctic region is shared by several countries1 which all have interests at stake in terms of safety and pollution concerns instigated by enhanced navigational risks in the marine environment which is at once potentially hostile and fragile, resulting from the melting of ice and consequential increase in maritime traffic. Of the eight states which are members of the Arctic Council five are Arctic Coastal States, namely, the US, Canada, Russia, Norway, and Denmark (Greenland). It is therefore expected and inevitable that Arctic states will impose regulatory controls over ships traversing through national waters overlying the purely private contractual legal regime of marine insurance which, as mentioned above, is not governed by any international convention instrument, and it is recognised that the commercial viability of marine insurance in the Arctic region is heavily dependent on adequate and stringent regulatory standards properly enforced by the Arctic states (Johannsdottir and Cook 2014, p. 3; Sarrabezoles et al. 2014, p. 2). National regulatory regimes naturally impact on indemnifiability of losses arising from insured risks and perils under private law contractual relationships between the assured and insurer. Any tension between national regulatory regimes and the private law legal framework of marine insurance is potentially detrimental to the smoothness and functional efficiency of commercial shipping operations in the Arctic. In view of this verity, harmonization of national safety standards is invariably of utmost importance and virtually indispensable for the maintenance of sustainability. It seems the quest for harmonization has finally been achieved through the emergence and adoption of the International Code for Ships Operating in Polar Waters (Polar Code) under the auspices of the International Maritime Organization (IMO) following lengthy and protracted negotiations.

2.3 Salient Features of the IMO Polar Code

The principal object of the Polar Code, is to standardize the technical requirements for ships operating in waters that fall within the definition of Polar Waters, as well as implementing environmental requirements, crew training requirements, and search and rescue provisions The Code is being implemented by way of amendments to the IMO’s International Convention for Safety of life at Sea (SOLAS) in respect of the safety requirements in the Polar Regions, the International Convention for the Prevention of Pollution from Ships (MARPOL) in respect of the environmental provisions, and the International Convention for Standards of Training, Certification and Watch-Keeping (STCW) Convention in respect of the crew training provisions. The safety aspects of the Polar Code were adopted at the 94th session of the Maritime Safety Committee (MSC) in November 2014 through amendments to SOLAS (Resolution MSC.385 (94)). The amendments entered into force on 1 January 2017 through the tacit acceptance procedure of the convention. The amendments to MARPOL related to the Code were adopted by the Marine Environment Protection Committee (MEPC) in May 2015 and the date of their entry into force is aligned with that of SOLAS, that is, 1 January 2017, again through the tacit acceptance procedure of MARPOL (Resolution MEPC.264 (68)). The Code is a mandatory instrument for state parties to SOLAS and MARPOL in respect of commercial ships operating in polar waters. The marine insurance industry together with the classification societies are the entities responsible for evaluation of risks for ships operating in polar waters for whom the Code ostensibly provides uniform standards through a regulatory framework for enhanced maritime safety and environmental protection (Brigham 2013).

The first point of observation is that the application of the Code is not confined to the Arctic but rather is applicable to “Polar Waters”, a term that is not specifically defined in the Code but its import may be gleaned from the words in preambular clause 6 which states, inter alia, that “the Code is intended to apply as a whole to both Arctic and Antarctic…”. Notably, the Code in its “Introduction” following paragraph 4—Structure, contains figures illustrating the applications of maximum extents of the Antarctic area and Arctic waters as those terms are defined in various provisions in the relevant Annexes of SOLAS and MARPOL. The goal of the Code as expressed in paragraph 1 of the Introduction is “to provide for safe ship operation and the protection of the polar environment”. The manner in which this goal is to be achieved is reflected in the words “by addressing risks present in polar waters and not adequately mitigated by other instruments…”. Ship categories A, B and C are defined in paragraph 2 of the Definitions by reference to design for operation in young ice, first year ice, medium first year ice and old ice defined in temporal terms and according to thickness. The Code refers to hazards in terms of “elevated levels of risk”, “increased probability of occurrence” of those risks and “more severe consequences” which recognizes the likelihood of enhanced risks in the Arctic. This is provided in paragraph 3.1 of the Introduction to the Polar Code. It is also recognized that risk levels may vary according to geographical location, amount of daylight according to the time of year and ice-coverage. As well, measures for mitigating specific hazards can be different.

The concept of “Polar Class” (PC) is introduced which is basically the ice class assigned to a ship by its flag state Administration or the ship’s classification society recognized by the Administration based upon IACS Unified Requirement as provided in paragraph 1.2.10 of Part I-A bearing the title “Safety Measures”.

The International Association of Classification Societies (IACS) has developed and adopted a set of unified requirements for polar class ships designated as classes ranging from PC 1 to PC 7 based on the times of operation of a ship in the run of the year in ice-infested waters (Brigham 2013, pp. 3–4). It is notable in this context that the table of IACS polar class ship categories contains ice descriptions taken from the sea-ice nomenclature of the World Meteorological Organization.

In the usual manner of IMO instruments, there are requirements for surveys and certification. Each ship to which the Code applies must have on board a Polar Ship Certificate issued by the flag state Administration or an organization recognized by it which in most cases is a classification society after an initial or renewal survey has been carried out in accordance with Regulation 1/1 of Chapter XI of SOLAS, and must be in the prescribed form as provided in Chapter 1 paragraph 1.3 of the Polar Code. A Code-compliant ship must also carry on board a Polar Water Operational Manual (PWOM) as per Chapter 2 of the Polar Code.

In Chapter 1 Part 1–A of the Code, it appears that there is no specific provision relating to what ships or ship types are subject to the Code. However, the Code being a part of SOLAS, it would apply to ships engaged on international voyages as provided in Regulation 1 of Chapter 1 Part A, including cargo ships of 500 tons or greater and passenger ships as defined in SOLAS, i.e., ships carrying more than 12 passengers as provided in Regulation 2 of that Chapter. SOLAS does not apply to inter alia, fishing vessels and pleasure yachts not engaged in trade as per Regulation 3 of that chapter. The Code is also associated with MARPOL which applies to “ships” which in turn carries a broader definition in Article 2 of the Convention. Thus, in the Code itself, there is no clear application clause in respect of ships. There is a reference to operational limitations being established taking account of hazards referred to in paragraph 3 of the Introduction and additional hazards if they are identified. This is provided in Chapter 1 paragraph 1.5 of the Polar Code. It is anticipated that such hazards will affect the insurability of ships operating in polar waters. Chapter 2 provides for an operational manual; namely, the PWOM referred to above, which sets out functional requirements in relation to regulations in paragraph 2.3 of this Chapter. They essentially provide that specified risk-based procedures must be included in the manual to facilitate compliance with the functional requirements relating to specific procedures to be followed for normal operations of ships. The procedures include measures to be taken in the event the ship encounters conditions exceeding the ship’s specific capabilities and procedures or operational limitations in respect of which assessments have been made, and procedures to be followed when ice breaker assistance is used. Chapter 2 paragraphs 2.2 and 2.3 of the Polar Code provides for this. Chapters 3 to 6 deal respectively with ship structure, subdivision and stability, watertight and weathertight integrity and machinery installations. The contents of these Chapters provide for structural and safety matters. In terms of Chapter 3, additional guidance provided in Part I-B for determination of equivalents of ice class for categories A and B, new and existing ships, which involves comparisons of other ice classes with IACS polar class. Notably, for category C ice classes, additional information regarding comparisons of strengthening levels are available in the annex to HELCOM Recommendation. 25/7. It appears that some classification societies have developed user-friendly tools for determining compliance with IACS polar class structural requirements. Some Administrations and other third parties have done the same. Paragraph 4 “Additional Guidance to Chapter 3” of Part I-B bearing the title “Additional Guidance regarding the Provisions of the Introduction and Part I-A” of the Polar Code contains the details to be followed.

Chapters 7 to 11 deal with fire safety protection, life-saving appliances and arrangements, safety of navigation, communication and voyage planning. Among these, safety of navigation is of crucial importance in the context of this work in view of the fact that the prescriptions for equipment may potentially affect the seaworthiness requirements of the ship under a marine insurance contract. Chapter 12 deals with manning which also has an impact on seaworthiness as an extension of the issue of safety. Masters and navigation officers must be suitably qualified in accordance with the STCW Convention and STCW Code appropriate for ship operations in polar waters. Part II–A of the Code addresses pollution prevention measures; it consists of Chapters 1 to 5 which correspond to the five Annexes of MARPOL, namely, prevention of pollution relating to the five types of ship-source pollutants. They are oil, noxious liquid substances, packaged harmful substances, sewage and garbage. Air pollution dealt with in Annex 6 of MARPOL is not addressed in the Polar Code. These provisions are obviously preventive measures against pollution damage that may be suffered by polar waters falling within the jurisdictions of polar states. In the context of this chapter, these are the Arctic coastal states that are members of the Arctic Council.

The Polar Code is indeed a laudable effort on the part of the IMO and its member states to supplement existing IMO Conventions, SOLAS, STCW and MARPOL relating to safety and environmental protection. In that sense, the Code strengthens and supplements the relevant international conventions in terms of their application to polar waters including the Arctic which is the subject of this chapter. It is assumed that through the instrumentality of this Code, Arctic states will give effect to these specialized technical and regulatory requirements in their national legal regimes. Although no such objective is expressly stated in the Code itself, the fact that the Code is now in force is ample evidence that it has gained universal acceptance. No doubt it serves to create harmonization in this emerging and contemporary issue in shipping despite some perceived lack of clarity. Hopefully the instrument will be revisited so that it can get as close to perfection as possible and its acceptability reaffirmed as a uniform and non-discriminatory set of international standards providing a level playing field for all marine and maritime activities in polar waters.

2.4 Principles of Marine Insurance

Aside from the basic precepts of marine insurance referred to above, there are a number of legal principles usually referred to as the doctrines of marine insurance. These are set out below in introductory synoptic form for the benefit of those who are uninitiated in this highly specialized field of commercial maritime law; for a fuller understanding and clear perception of the discussion on specific provisions pertaining to cover for enhanced risks in Arctic shipping addressed in this chapter.

The starting point of the discussion must be the notions of insurability and indemnifiability of risks and losses. Insurability refers to the condition whereby the subject matter to be insured such as a ship, and the risks against which the insurance is to be effected meet the basic requirements of the law and are insurable. Insurability occurs before the fact; it must be determined before insurance is placed, in other words, before the parties enter into a contractual relationship. By contrast, indemnifiability signifies the condition under which following a loss or damage suffered by the subject matter such as the ship, the insurer becomes liable to indemnify the assured. Thus, the concept of indemnifiability operates ex post facto or after the fact. In light of these fundamental propositions, the basic principles or doctrines of marine insurance must be viewed and appreciated.

The first principle is the notion of indemnity. A marine insurance contract is a contract of indemnity which means that the insurer is liable to pay the assured only to the extent of the value of his pecuniary loss resulting from an insured peril up to the level of indemnity which may not always be the full value of the property. This is relatively simple in the case of a valued policy where the parties agree on the value of the subject of insurance at the time they enter into the insurance contract. But where the policy is unvalued, the loss must be evaluated by a professional valuer or loss adjuster after the occurrence of the loss or damage and the insurer pays accordingly. The essence of the doctrine of indemnity is that the assured cannot make a profit from the loss he suffered and the insurer is not obliged to pay beyond the amount equivalent to that loss.

The second principle is that the assured must have an insurable interest in the subject to be insured recognized at law. It is related to insurability of the subject of insurance mentioned above. Where a person stands in an equitable position in relation to a maritime adventure or to any insurable property at risk such as a ship so that he stands to benefit from its safe arrival or is prejudiced by its loss, damage or detention, he is said to have an insurable interest in the subject of the insurance. (See Canadian Marine Insurance Act, 1993, s. 8, S.C. 1993, c.22.) Aside from the shipowner, entities such as the cargo owner, charterer, master and crew and the mortgagee have insurable interests in a ship. In the absence of an insurable interest the transaction amounts to a wager or gamble which is prima facie unlawful. (See Marine Insurance Act, s. 4.)

Mutual disclosure of material facts between insurer and assured otherwise referred to as the doctrine of utmost good faith or uberrimae fidei, is a remarkable feature of marine insurance law. The rationale for this requirement applicable to both the insurer as well as the assured is that the information to be disclosed is solely in the possession of one or the other party to the marine insurance contract, which is why “utmost” good faith and not merely good faith, as required in contracts generally, has been deemed to be necessary in the legal regime of marine insurance. Disclosure of material facts and representations allows the insurer to decide whether to accept the assured for providing insurance, and if so, to determine what premium to charge. The assured for his part needs disclosure from the insurer to decide whether he should contract with the particular insurer or choose some other on the basis of the insurer’s reputation and track record. While it is not necessary to disclose non-material facts, materiality must be determined by objective criteria. The traditional position under English law has been that any fact deemed to be material that the underwriter would have taken into account, even if he would not have changed this decision to insure that risk, that becomes subsequently known to the insurers gives him the right to avoid the insurance policy as if it never existed. Information that is readily available in the public domain or a fact that is a commonly known verity is not necessarily subject to disclosure even if it is material to the transaction. In recent times, further to papers and reports published by the English and Scottish Law Commissions, there has been considerable discussion regarding whether the doctrine of uberrimae fidei should be retained in the current milieu of marine insurance. The upshot is that by virtue of section 14 of the new U.K. Insurance Act 2015, non-observance by one party of the requirement of utmost good faith is no longer a ground for avoidance of the contract by the other although a marine insurance contract remains based on that doctrine under section 17 of the MIA. Incidentally, uberrimae fidei as depicted in the original MIA continues to operate in its totality in other jurisdictions.

Subrogation is a concept peculiar to insurance law in general and features significantly in marine insurance as a fundamental doctrine. It is best described by the expression “stepping into the shoes” of the assured by the insurer to pursue the perpetrator of the wrong that caused the loss or harm suffered by the assured after the assured is indemnified. (See Castellain v. Preston (1883), 7 A.C. 333 (Q.B.)) Subrogation gives to the insurer only a right of action in the name of the assured and does not vest in him any proprietary right or interest (Gold et al. 2003, p. 327). Closely related to subrogation, sometimes featuring as an outfall thereof is the concept of windfall. This occurs when for reasons such as, for example, a drastic alteration of a currency exchange rate the proceeds of insurance turn out to be greater than the contracted amount. The question then arises as to who benefits from the windfall, insurer or assured. (See Yorkshire Insurance Co. v. Nisbet Shipping Co., [1961] 2 All E.R. 487.)

Sometimes confused with subrogation is the doctrine of abandonment which stems from the nature of a loss. In marine insurance law, losses are of the partial or total variety. Partial losses are subdivided into particular average losses arising from fortuitous incidents at sea and general average losses which are basically voluntary acts such as sacrifices made in the interest of saving the whole maritime adventure. Total losses are also divided into two groups, namely, actual total loss (ATL) and constructive total loss (CTL). An ATL takes place when the assured is irretrievably deprived of the subject of insurance or it undergoes a change in specie so that it is no longer a thing of the kind insured. A CTL happens when recoverability of the property is unlikely or the cost of retrieval is grossly prohibitive being far in excess of its market value. In such situation, the doctrine of abandonment becomes applicable under which the assured abandons the physical property and its associated legal rights in favour of the insurer after the latter has paid for a total loss. To effectuate this, the assured must issue a notice of abandonment, acknowledgement or acceptance of which the insurer may decline, to avoid inheriting liabilities associated with the property such as wreck removal obligations. The distinction between abandonment and subrogation is that abandonment results in the insurer acquiring a proprietary interest in the property but in subrogation he only acquires a right of legal action (Khurram 1994, p. 95).

3 Arctic Shipping, Enhanced Risks and Marine Insurance Implications

3.1 Marine Insurance in Arctic Shipping: General Issues and Considerations

The reduction of sea ice cover in the Arctic is invariably a great incentive for increased economic and shipping activity there. Although the volume of traffic in the Northern Sea Route has decreased notably between 2014 and 2016, it is relatively minor in global terms. Although shipowners are free to assume the risk of trading on Arctic routes subject to obtaining suitable marine insurance (Østreng et al. 2013, p. 331), it is the norm for marine insurance contracts to exclude or limit the coverage of Arctic marine perils through imposing navigating limits on the ship because of the extraordinarily high risks, manifested by the Institute Warranties 1976 (See Appendix 1) and the International Navigating Limits (INL) in the International Hull Clauses (IHC) 2003 (Bennett 2006, p. 553). The INL are an alternative to the Institute Warranties 1976 made by the Institute of Chartered Underwriters. They became effective as Clause 32 of IHC 2003 (See Appendix 2). Needless to say, there are limitations on navigation outside the UK regime as evident from Clause 3-15 and the Appendix to the 2013 NMIP (See Appendix 3) (Liu 2016, pp. 83–88).

A pertinent observation is that marine insurance with respect to the Arctic is disadvantaged by limited knowledge and information exemplified by a lack of adequate empirical data which makes it rather difficult for insurers to determine appropriate assessment parameters for the risks likely to be encountered in the various shipping routes. General risks in shipping are known to insurers but with respect to those associated with Arctic transportation there remains a dearth of understanding, particularly regarding their identification (Østreng et al. 2013, p. 332; Tamvakis et al. 1999, pp. 221–280).

Underwriters usually establish premiums based on accident statistics Thus they are prompted to carry out a strict scrutiny of a ship’s track record in relation to safety, and expect to see evidence that it is capable of sound performance in Arctic waters (Sarrabezoles et al. 2014, p. 4; Østreng et al. 2013, p. 332). As a corollary to the concerns of insurers, shipowners expect reliable and consistent rules, standards and provision of services from their insurance providers (Chircop 2009, pp. 355–380). They face rigid conditions imposed by insurers such as increased deductibles for ice-related damage which can be quite onerous. But insurers consider this to be quite justified given that the Arctic is a high risk market to cover in the face of uncertainty and lack of reliable data (Johannsdottir and Cook 2014, p. 21). Because of the lack of information at present, save in respect of very experienced operators, insurers currently consider Arctic risks on a case by case basis.

The insurance industry perceives a whole range of multifarious risk factors; the principal one being the presence of ice whether it is concealed or visible. Perils of the sea in Arctic waters in a legal context are addressed in academic literature. (See Liu 2016, pp. 88–92) To deal with this, ice-breaker assistance is viewed as a solution recognizing the fact that most ships presently operating in the Arctic and those under construction are designed to operate independently of icebreaker support. An exception is the Russian mode of transportation where ice-breaker escort and movement in convoys remains prevalent. Other risks include inadequacy of search and rescue (SAR) and salvage facilities, hydrographic parameters including bathymetric and seabed mapping information, unreliable communication networks at the higher latitudes, crew competence, including Arctic knowledge and experience, and language deficiencies. Ice class requirements are a must and the industry is not prepared to support any dilution of requirements by national authorities in the Arctic region on the basis of season and amount of ice. However, certain cruise ships and cargo ships (under Category C of the Polar Code) are capable of operating in ice-infested waters in the same manner as in clear waters without having to comply with any additional Polar Code requirements, if following an assessment no additional requirements are deemed to be required. Additionally, any reduction of safety-related regulatory measures by such authorities is viewed from the perspective of insurers as hugely increasing the risk factor (Normann and Mikkelsen 2014; Sarrabezoles et al. 2014, p. 2).

It is evident that the international marine insurance market is prepared to underwrite shipping risks in the three Arctic corridors, namely, the Northeast Passage (NEP), Northwest Passage (NWP) and Transpolar Passage (TPP). However quite understandably, the premiums charged by them would be different. Also, it appears that the premiums for the NWP and TPP would be higher than those for the NEP based on the variously differentiated risk factors involved. Premiums are difficult to calculate due to complexities relating to, inter alia, the vagaries of the Arctic environment. Every risk is different and must be determined on a case-by-case basis depending on such factors as the nature of the operation, time of the year, etc. In addition, a vessel venturing into the high Arctic may need to obtain a separate policy for each separate passage (Østreng et al. 2013, p. 331; Johannsdottir and Cook 2014, pp. 23–24; Lajeunesse 2012, pp. 521–537). In so far as the NSR is concerned it seems premiums have been more or less settled. Even so, given that the essential factors governing the determination, premiums are subject to international as well as national law and policy. The associated uncertainties including the bearing of costs of necessary infrastructure and the investments relating to those costs are a cause of anxiety for the insurance industry (Normann and Mikkelsen 2014).

3.2 English Marine Insurance H&M Regime

3.2.1 Institute Clauses and International Hull Clauses in H&M Policies

Marine insurance policies contain standard form clauses covering varieties of risks. As such, this discussion must of necessity begin with an explanation of the terms “Institute Clauses” and “Institute Warranties” for the benefit of those who are unfamiliar with the typical jargon of English marine insurance law and practice. These terms refer to clauses and warranties articulated by what was originally known as the Institute of London Underwriters (ILU), designed to be used in conjunction with the old Lloyd’s Ship and Goods (SG) policy and subsequently with the Lloyd’s Marine policy (MAR 91). They appeared primarily as cargo, voyage and time clauses in respect of hulls and freight; and war and strikes clauses associated with the foregoing. The ILU subsequently evolved into the International Underwriting Association (IUA) and the International Hull Clauses were formulated initially in 2002 and amended in 2003 as a modernized version of the Institute Hulls Time Clauses under its auspices. In 2009, the Institute Cargo Clauses and War Clauses were revised. Also a new IUA Marine Policy was formulated for accommodating the IHC 2003 and the other modernized Institute Clauses (Rose 2012, pp. 3–4 and 695–840).

H&M policies are subject to limitations on navigation so that cover is denied in the event that the insured vessel enters certain specified waters. Such limitations have traditionally been expressed as promissory warranties (Bennett 2006, p. 553). By way of explanation it is useful to note that in the MIA, a warranty is referred to as a “promissory warranty” and is “a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts” (Rose 2012, p. 188).

While there are no navigating limits in the Institute Time Clauses-Hulls (ITC-H) 1983 and 1995, both sets of clauses refer to the Institute Warranties 1976 which exclude perils of the seas in certain areas and contain a list of warranties relating to geographical limits of navigation. These limits cover most of the Arctic waters.2 Under these Institute warranties, the assured warrants (promises) that his vessel will not navigate in areas prohibited under the contract. These prohibitions are stipulated by the insurer and apply to certain months of the year within certain areas the perimeters of which are defined by geographical coordinates. According to section 33 of the MIA, the insurer is automatically discharged from liability under the contract from the time of a breach of such warranty. In contrast, section 10(2) of the 2015 Insurance Act stipulates that a breach of such warranty only suspends rather than discharges the insurer’s liability from the time of the breach, until the breach is remedied; that is, until the vessel ceases to navigate in the prohibited area. In such case, the insurer is not liable for anything which occurs, or which is attributable to something occurring, during the period of suspension.3 However, pursuant to sections 16 and 17 of the 2015 Insurance Act the insurer can contract out of such consequences of the breach of warranty; in other words, if he contracts out, he may be discharged from liability.

From the shipowner’s perspective, to cover Arctic marine risks as the assured, he must have in his favour “held covered” provisions in the contract to avoid consequences of breaching the warranty of navigation limits (Liu 2016, p. 94). The inclusion of such provisions requires special notification to and arrangements with the insurer. Thus, a “held covered” clause is almost always used in conjunction with a trading limits warranty. Such a clause gives to the assured the right to retain cover when operating within the prohibited area, subject to prompt notification to the insurer and payment of additional premium (Hodges 1996, p. 120). The notion is illustrated by Clause 3 of the Institute Time Clauses-Hulls 1983 and 1995 which is worded—“[H]eld covered in case of any breach of warranty as to cargo, trade, locality, towage, salvage services or date of sailing, provided notice be given to the Underwriters immediately after receipt of advices and any amended terms of cover and any additional premium required by them be agreed”. The “held covered” clause leads to compulsion on the part of the assured to notify and negotiate with the insurer if the ship is going to enter into Arctic waters.

Notably, “held covered” clauses fall under the concept of post-contract duty of good faith. In effect, a “held covered” clause in an existing policy represents an extension or variation of the contract in respect of which additional premium may be payable by the assured where such an extension or variation is found to be well-established. There is a duty of disclosure applicable to the assured which is effectuated through his duty to provide prior notification to the insurer as mentioned above. However, a failure of this duty does not vitiate the whole contract (Rose 2012, pp. 108–109).

In so far as the IHC 2003 is concerned, its Clause 10 provides that the ship must comply with any provisions as to locality mentioned in Clause 32 (an additional clause in Part 2 of the IHC), which prohibits entry into inter alia, the Arctic (depicted as north of 70 degrees north latitude) unless agreed by the underwriters. Clause 11 releases underwriters from liability in the event of non-compliance with Clause 10 but they would be liable if they were given notice under Clause 11. Clause 32 in turn cross-refers to Clause 33 which provides that the ship may breach Clause 32, in which case Clause 11 is not applicable so long as prior permission of the underwriters is obtained and the requisite additional premium is agreed. The net effect of the foregoing maze of provisions is that it is incumbent on the assured to obtain permission from the underwriters before engaging in shipping in the Arctic. Incidentally, unlike the warranty in Institute Time Clauses, Clause 11 read in conjunction with Clause 32 in the IHC 2003 indicates that the navigating limits including Arctic waters are no longer warranties but rather are “suspensive conditions” (Bennett 2006, p. 553).

3.2.2 Seaworthiness

Seaworthiness is a concept peculiar to maritime law and consists of a public law component, usually referred to as statutory seaworthiness, and a private law component within the sphere of commercial maritime law, namely, carriage of goods under bills of lading and charterparties, and marine insurance (Schroeder et al. 2006, pp. 21–28). Violation of statutory seaworthiness leads to sanctions as illustrated in sections 457 and 463 of Merchant Shipping Act 1894 and in section 457 under which sending an unseaworthy ship to sea is a misdemeanor, whereas a breach of seaworthiness in commercial maritime law including marine insurance leads to available remedies in the relevant law. While safety and seaworthiness are correlated, the relationship in legal terms is somewhat tenuous. The term “unsafe” as distinguished from “unseaworthy” was used in section 459 of the Merchant Shipping Act 1894 although the virtual meaning of unsafe is almost the same as that of unseaworthy, namely, “… defective condition of her hull, equipments, or machinery, or by reasons of her under manning, or by reason of overloading or improper loading, unfit to proceed to sea without serious danger to human life, having regard to the nature of the service for which she is intended, …”. It is further notable that an unsafe ship as described above is subject only to detention. The reason for the change of terminology is unclear since the definitions for both terms are the same. The editors of Temperley’s Merchant Shipping Acts note that the degree of danger associated with sending a ship to sea in an unseaworthy state is lower than the standard required to make a vessel an unsafe ship. Its only practical implication is that in the case of the former the burden of proof is at a lower threshold (Thomas and Steel 1976, p. 130).

Furthermore, maritime safety is unquestionably regulatory in scope whereas seaworthiness primarily has private law connotations, the definitions of which can be gleaned from case law jurisprudence reflected in seminal texts on commercial maritime law. In UK legislation, that is, sections 94 and 95 of the Merchant Shipping Act 1995, the term “unsafe ship” has been changed to “dangerously unsafe ship” following the recommendations made in the Donaldson Report relating to the official investigation of the sinking of the Herald of Free Enterprise. It is noteworthy that whereas seaworthiness is mentioned in Article 94 of UNCLOS, there is no such reference in SOLAS which exclusively deals with safety. The reason for pointing this out is that the foregoing discussion is relevant to any conclusion regarding the status of the Polar Code, or at least the provisions relating to safety, manning and environmental protection. The object here is to discuss whether non-compliance by a ship operating in the Arctic is likely to render a ship unseaworthy for the purposes of the implied warranty in a marine insurance contract.

In this context it would be instructive to look at the legal positions of the ISM and ISPS Codes in terms of seaworthiness by analogy. In respect of the ISM Code notably IHC 2003 clause 13 requires ships to be classed and shipowners to comply with Chapter IX of SOLAS. Non-compliance with this provision automatically terminates the insurance under clause 13.2. With regard to the ISPS Code it is instructive to look at relevant academic literature (Andrewatha and Stone 2004, p. 370) where the authors refer to deficiency in ISPS compliance, in particular, lack of crew security training, deficient ISPS documentation and master or crew negligence as possibly constituting unseaworthiness.

In the context of the present discussion, it is incumbent on us to first look carefully at the issue of the implied warranty in marine insurance contracts tempered by relevant statutory provisions (Schroeder et al. 2006, pp. 21–28). In this vein, it can be stated that seaworthiness itself is a cornerstone element in a marine insurance contract in that it is an implied warranty which is explained in detail in section 39 of the MIA as follows:
  1. (1)

    In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured.

     
  2. (2)

    Where the policy attaches while the ship is in port, there is also an implied warranty that she shall, at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the port.

     
  3. (3)

    Where the policy relates to a voyage which is performed in different stages, during which the ship requires different kinds of or further preparation or equipment, there is an implied warranty that at the commencement of each stage the ship is seaworthy in respect of such preparation or equipment for the purposes of that stage.

     
  4. (4)

    A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.

     
  5. (5)

    In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

     

Sub-sections (1), (2) and (3) are statements of law pertaining essentially to a voyage policy and include the notion of the so-called “stages” doctrine in relation to seaworthiness (Soyer 2001, pp. 92–95). Sub-section (5) is also a statement of law in relation to a time policy to state that there is no implied warranty but the ship must be seaworthy at any stage of the maritime adventure; and the insurer is not liable if the assured sends the ship to sea in an unseaworthy state. Perhaps most importantly, sub-section (4) provides a statutory definition of seaworthiness.

Judicially, a seaworthy ship has been described as one that is “…in a fit state as to repairs, equipment, crew and in all other respects, to encounter the ordinary perils of the sea of the voyage”. (See Dixon v. Sadler (1839), 5 M & W 414.)

Another authoritative definition of “seaworthiness” is found in the case of F.C. Bradley & Sons Ltd. v. Federal Steam Navigation Co. ((1926), 24 Ll.L.R. 446 at p. 454) where approving a statement in the classic text Carver on Carriage by Sea, the court held that “[T]he ship must have that degree of fitness which an ordinary careful owner would require his vessel to have at the commencement of her voyage having regard to all probable circumstances of it.” It has also been held that “[S]eaworthiness is not an absolute concept; it is relative to the nature of the ship, to the particular voyage or even to the particular stage of the voyage on which the ship is engaged.” (The Fjord Wind [1999] 1 Lloyd’s Rep. 307 at p. 315 per Moor-Bick J. approved by Clark J. in the Court of Appeal in [2000] 2 Lloyd’s Rep. 191 at p. 197.) The standard for the implied warranty of seaworthiness is based on whether or not factually a ship is reasonably fit in all respects to encounter the ordinary perils of the sea, which is a condition which must be determined on a case-by-case basis and is not something that can be considered as a constant parameter. In this context, the question arises as to whether or not the presence of ice in Arctic waters is an “ordinary peril of the sea”. Arguably, sea ice may be considered an ordinary peril if it exists in the normal course of a voyage in the Arctic. But it may not be considered an ordinary peril if it exists only in certain “ice-infested” waters posing extraordinary unpredictable navigational hazards. In Popham and Willet v. St. Petersburg Insurance Co., ((1904), 10 Com Cas 31 at p 34) it was held by Walton J. that “the obstruction by ice was accidental and unexpected” causing “extraordinary difficulty and danger”. He reached the conclusion that “the obstruction and danger and difficulty from the ice … was a peril of the sea … covered by the policies”. Notably, an alternative opinion is expressed by one author (Torrens 1994, pp. 91–92). But it can be equally argued that if a ship is equipped for ice navigation in accordance with the Polar Code, then for its purposes, the presence of ice could be an ordinary peril in that context.

Flowing from the above discourse, for a vessel entering Arctic waters, can it be concluded that non-compliance with the Polar Code constitutes unseaworthiness? The answer should be in the affirmative if non-compliance with the Code leads to the vessel not being fit in all respects for its intended purpose, namely, traversing the waters of the Arctic. As mentioned earlier, several crucial elements of the Polar Code reflect requirements of SOLAS and MARPOL in respect of structural integrity and equipment of a ship as well as STCW in respect of safe manning and seafarer qualifications. Inasmuch as the ISM Code is an extension of Chapter IX of SOLAS, if non-compliance with SOLAS requirements leads to unseaworthiness, then non-compliance with the ISM Code would also constitute the same. While the ISM Code does not set the standards for seaworthiness; it does for safety management. The Code was not designed to address unseaworthiness arising from fortuitous circumstances. But if there is proper maintenance and management in accordance with the requirements of SOLAS and the ISM Code, undoubtedly a vessel would be better equipped to maintain its seaworthy condition and counter the negative effects of any fortuitous circumstances (Honka 2004, p. 2). The standards for seaworthiness must be derived from case law and by reference to safety-related instruments such as SOLAS. Unfortunately, there is no clear or definitive judicial opinion in this matter. The ISM Code features only peripherally in The Patraikos 2. ([2002] 4 SLR 232.) In The Eurasian Dream ([2002] 1 Lloyd’s Rep. 719) liability was imposed on owners for failure of “due diligence” under the Hague-Visby Rules not on non-compliance with the ISM Code. One commentator has opined that failure to comply with the ISM Code is by no means conclusive evidence of a breach of the seaworthiness requirement (Soyer 2001, p. 122).

Be that as it may, the ISM Code is highly relevant as an evidentiary tool and is of probative value for a claimant seeking to prove breach of seaworthiness by the shipowner. In light of the above observations, it cannot be stated with any degree of certainty whether non-compliance with the Polar Code may amount to a breach of the implied warranty of seaworthiness for a vessel purporting to operate in the Arctic. If there is such a breach, the insurer will be relieved of his liability to indemnify the assured shipowner. It has been stated that ISM Code compliance has the effect of making ships safer as a consequence of which it is likely that there will be a reduction in allegations of unseaworthiness (Soyer 2001, p. 131).

In the view of the present authors, in the first instance, the same can be said about the Polar Code given that its object is to ensure, inter alia, ship safety in Polar waters including the Arctic. Having said that, the Polar Code provides for the issuing by the flag state Administration or a recognized organization (RO) of a Polar Ship Certificate after a an initial or renewal survey of a ship purporting to operate in polar waters meets the relevant requirements of the Code (paragraph 1.3 of Chapter 1—General in PART 1-A Safety Measures). A ship not in possession of a valid Polar Ship Certificate may prima facie be deemed to be unseaworthy for purposes of obtaining marine insurance cover, but whether or not a ship was seaworthy for purposes of indemnifiability by the insurer will remain subject to the various factors discussed above and the applicable marine insurance regime.

3.3 Nordic Marine Insurance Regime: NMIP Clauses

Unlike the Institute Clauses, the NMIP 2013 constitutes quite a different marine insurance regime without warranties and held-covered clauses but bears similar stipulations regarding the coverage of Arctic marine risks. Under Clause 3-15 of NMIP 2013 (See Appendix 3), the trading areas are divided into into three types, namely, the ordinary, conditional and excluded trading areas. Sub-paragraph 1 of Clause 3-15 provides that the assured shall notify the insurer before the ship proceeds beyond the ordinary trading limit. According to sub-paragraph 2, the ship is allowed to continue to sail in the conditional trading areas but the insurer may require an additional premium and also may stipulate other conditions. Based on sub-paragraph 3, if the ship proceeds into an excluded trading area, in principle, the insurance ceases to have effect, unless the insurer has given permission in advance. The Appendix to Clause 3-15 sets out the conditional and excluded trading areas geographically associated with relevant charts and maps, in which Arctic waters are included. Therefore, if the assured wishes to embark on Arctic shipping under NMIP 2013, he has to notify the insurer and enter into a special agreement with him, as in the case of Institute Time Clauses or the IHC.

Notably, sub-clause 1 of Clause 3-22 (See Appendix 4) provides by way of definition that “[A] safety regulation is a rule concerning measures for the prevention of loss, issued by public authorities, stipulated in the insurance contract, prescribed by the insurer pursuant to the insurance contract, or issued by the classification society”. Sub-clause 3 (See Appendix 4) in turn provides that “[T]he rules prescribed by the classification society regarding ice class constitute a safety regulation under sub-clause 1.” The breach of such safety regulations, as pointed out in Clause 3-25, can produce the result that the insurer is only “…liable to the extent that the loss is not a consequence of the breach, or that the assured has not breached the safety regulation through negligence.” Needless to say, only rules issued by a public authority or classification society that are binding on the assured will qualify as safety regulations under Clause 3-22. Public authorities may adopt rules, recommendations or guidelines similar to classification society ice class rules for application in ice-infested waters within their jurisdiction. Whether they are binding on the assured in terms of the insurer’s obligation to indemnify for losses depends on whether they are made mandatory. It appears that Finnish and Swedish ice-surveillance authorities issue recommendations but they are not mandatory. Ships are free to not comply with them. Thus, they would not be binding and not be considered as safety regulations for insurance purposes. But if a ship does not comply with the recommendations, it will not be entitled to assistance from a state-owned icebreaker if stuck in ice (Cefor 2013).

In the above context, the official commentary of The Nordic Association of Marine Insurers (Cefor) is pertinent. It states—Sub-clause 3 is new in the 2007 version. The classification society’s ice class is a voluntary supplementary classification. Consequently, it is doubtful whether these rules qualify as safety regulations under sub-clause 1. Sub-clause 3 therefore expands the definition of a safety regulation in sub-clause 1 to include ice classes (Cefor Archive 2013).

In light of the above comment, it is the view of the present authors that while ice class notation is voluntary, it becomes a safety regulation once a ship obtains it from the classification society and the ice class rules then become mandatory. Thus, the entry of a vessel into ice-infested waters may lead to a safety regulation contravention if the ship in question has ice class and is not in compliance with its ice class requirements under Clause 3-15 in NMIP 2013. (See Appendix 3).

Given that ice class is acquired voluntarily, class designations do not include ice class notation. Such notation is additional; it simply identifies the vessel and documents the fact that it is designed to operate in specifically described conditions of ice. The ice class is dictated by the thickness of the ice which essentially means that a higher ice class vessel is designed to operate in ice of commensurate thickness. How a vessel is to be operated in ice-infested waters is not regulated as such by the rules of the classification society (Cefor 2013).

In view of the doubt expressed in the official commentary cited above, changes have been effectuated in the 2016 version of NMIP 2013. Cefor has introduced a new clause as an amendment to NMIP clause 3-15 together with removal of sub-clause 3 of clause 3-22 as part of the 2016 revision of the Plan (See Appendix 5). Incidentally, the new wording has been in place since 26 November 2013. The removal of sub-clause 3 of clause 3-22 means that whether the ice class prescribed by the classification society constitutes a safety regulation requiring compliance by the assured depends on how “safety regulation” is defined. Whether the public authorities require the ship to have a certain ice class to allow it to pass through their jurisdiction or the insurer has consented to the ship trading in a conditional trading area subject to a certain ice class, the requirement of ice class will constitute a safety regulation that will apply in addition to any safety regulation that might apply by virtue of Clause 3-22, sub-clause 1 of the Plan.

Following the entry into force of the Polar Code on 1 January 2017, a ship will require the appropriate ice class to enable it to enter into Arctic waters. In such case the ice class requirement will surely fall within the scope of “safety regulation” under the NMIP. In this regard it must be noted that in the Polar Code guidance is provided to facilitate the determination of national equivalency standards using a simplified approach by reference to the newly developed IACS Polar Classes as provided in Paragraph 4.2 of Part I-B of the Polar Code.

Also, the insured must refer to an Ice Regime System on their Polar Ship Certificate explaining how the system or methodology has been applied in their Polar Waters Operation Manual. It must be a system such as the Canadian AIRS System, the Russian Ice Passport System or the newly developed IMO Polar Operational Limitation Assessment Risk Indexing System (POLARIS), recognized by the relevant flag state authority. There is no doubt that the CEFOR guidelines will be amended to reflect this, as will the Lloyd’s Market Association Guidelines for Insurers.

Incidentally, in the NMIP, until 2007, there were specific provisions in § 45 relating to unseaworthiness but there was no definition of that term. However, a definition in the Seaworthiness Act 1903 of Norway is stated in negative terms relating to conditions that are virtually the same as those found in English law (Torrens 1994, p. 92). It is important to note that the NMIP no longer has any provisions relating to unseaworthiness because the term is no longer used in the new Norwegian Ship Safety and Security Act of 2007. Amendments to that effect were made to the Plan in 2007.4

As discussed above, a violation of the Polar Code under the present legal regime will certainly be considered a violation of a safety regulation in NMIP 2013 which could lead to both sanctions in public law as well as a breach of obligations in the context of marine insurance. The clarity of the position regarding provisions of the Polar Code relating to prevention of loss ostensibly characterized as safety regulations under the NMIP regime is in contrast to the uncertain position of the Code in terms of seaworthiness under English law which, in the view of the present authors, is unfortunate.

3.4 Third Party Liability in Respect of Environmental Risks and P&I Cover

In view of the fragility of the Arctic environment, P&I insurance is of particular significance in relation to various risks relating to non-H&M cover, not the least of which is third party liability of the shipowner for pollution damage causing harm to the marine environment (Østreng et al. 2013, p. 331). In the cited publication other risks covered by P&I insurance are mentioned as well. The principal claimants are state entities whose claims emanate from their rights and interests founded in the international law of the sea. This is the essence of environmental risks in the Arctic that the shipowner has to bear if he chooses to venture into Arctic waters. In that vein, he also has to consider the issue of navigating limits from an insurance viewpoint.

Similar to H&M insurance, there are also implications involving navigating limits in respect of P&I cover. Any restrictions imposed on the type of trade or geographical limits of an entered ship are generally endorsed on the member’s Certificate of Entry rather than in the rules of the P&I Club but the endorsements must be construed in light of the Club rules. Again, as in the case of H&M insurance, navigation limits are usually regarded as promissory warranties, a breach of which relieves the Club from all liability based on the relevant provisions of the MIA (Hazelwood and Semark 2010, p. 202). As mentioned earlier, the Insurance Act 2015 which entered into force in August 2016 has altered this position. Therefore, if the shipowner plans to take his ship into Arctic waters, he has to notify not only his H&M insurer but also his P&I Club.

3.4.1 P&I Clubs

The P&I Clubs are at the centre of third party liability insurance and the UK legislation, the MIA 1906 conspicuously governs P&I insurance as much as it governs H&M insurance. By contrast, it is notable that the Norwegian Clubs are less affected by the NMIP compared with the H&M insurance. It is particularly notable that the Gard Club has certain club rules relating to cover and limits of exposure that are fairly autonomous. The English Clubs are greatly tempered by the MIA because of the Act’s legal status but they are free to articulate their own rules provided they are not contrary to the MIA as the governing legislation. As a result, whether the clubs are of English or Norwegian vintage, there is reasonable opportunity for them to create “custom built” cover for shipping in the Arctic sea routes to meet the needs of the shipping industry (Torrens 1994, pp. 129–130).

A fundamental characteristic of P&I clubs is that they operate on a non-profit basis as distinguished from H&M insurance providers who operate in the insurance market. Mutuality is the cornerstone of the P&I system simply because the shipowners as assureds are themselves the members of P&I clubs. The so-called “omnibus rule” is an important feature of P&I insurance which allows a claim to be covered even if it does not fit squarely into the list of specific risks which would allow a member to invoke a P&I claim even if he encountered a situation in an Arctic sea route which was unanticipated. In effect P&I insurance is not bound by any rules of precedent as may be the case with H&M insurance. If there is a dispute between a member and the club in which a certain ship owned by him is entered, dispute resolution would in most cases be carried out through arbitration which would often be in accordance with the so-called “Scott v. Avery rule” (1856), 5 H.L. Cas. 811; 10 E.R. 1121 (H.L.) pursuant to which arbitration would be a condition precedent to court proceedings taken by a party to the agreement. In Norwegian clubs such as Skuld or Gard the rules would in all likelihood stipulate that arbitration would be subject to Norwegian law. Even though there is a sizeable amount of case law in the field of arbitration, cases involving Arctic sea routes would be dealt with through the application of analogous situations (Østreng et al. 2013, p. 331). Notably, in the field of P&I insurance there are no differences in principle between the treatment of claims in Arctic waters and non-Arctic waters. The distinctions would lie in the manner in which liability would arise and the quantum of indemnification involved in the claims. Indeed, it is at present uncertain whether P&I calls in respect of Arctic shipping would be higher than their counterparts in relatively southern waters (Østreng et al. 2013, pp. 131–132). At any rate, there is no evidence that potential liability exposure would be significantly higher in respect of sea routes in the Arctic as compared with other types of cover. Thus, insurers at present view third party liability cover for shipping in the Arctic routes as more of an academic issue although with increases in traffic, this position may be subjected to change; the crucial question being whether the liability risks involved will be more conspicuously enhanced. While it is a matter of speculation, the risks will likely remain static because Arctic traffic will only increase with improved maritime infrastructure which at present is grossly deficient. One characteristic of mutuality in this regard is that the assessment of risk in Arctic sea routes would have to be assessed by all P&I clubs under the auspices of the International Group of P&I Clubs and also the measure of the risk. In other words, the group will assume a risk taken on by an individual member of the group. Finally, it is important to note that with regard to shipping in Arctic sea routes a condition precedent for P&I insurance cover is that in the first place there must be full value H&M cover with respect to the subject ship (Østreng et al. 2013, pp. 132–133).

3.4.2 Indemnification of Pollution Liability

While this work is not concerned with the role of P&I insurance with regard to varieties of non-H&M risks including collision liability, it is pertinent to observe that pollution liability often arises out of a collision, and if it happens in the Arctic, it will concern the present subject matter. It is well known that P&I insurance at least within the English marine insurance regime, has traditionally covered only 25% as the residual portion of collision liability, the lion’s share of 75% being covered by H&M insurance under the so-called “running down clause (RDC)”. It is evident, however that P&I Clubs are increasingly bearing all 100% of collision liability as a matter of choice as liability in respect of matters falling outside the scope of the RDC such as the costs of salvage of wrecks and wreck removal, and most importantly in the context of this chapter, pollution damage.5 It is evident that among others, the English and Norwegian Clubs cover oil pollution damage done to other vessels and their cargo as well as other property on board such vessels. This, for example, is provided in Gard Rule 38 (See Gold 2002, p. 455).

Unlike H&M insurance involving the first party proprietary interests of the shipowner, it is unlikely that P&I insurance with its indemnification mechanism for environmental pollution will rely on voluntary action of shipowners. Thus, mandatory insurance, usually in the form of P&I cover, is required in both international and the domestic laws of numerous jurisdictions in respect of potential liability of the shipowner for ship-source pollution damage in respect of Arctic shipping. International conventions concerning such pollution liability apply in Arctic waters falling within the geographical scope of application of these conventions that require ships to carry compulsory third-party liability insurance. The conventions in question are the CLC 1992 and the FUND l992, Bunkers and HNS Conventions. At the domestic law level, Russia and Canada have enacted relevant laws giving effect to Article 234 of the United Nations Convention on the Law of the Sea, 1982 (UNCLOS) to control pollution in Arctic waters. Through Article 3 of the Federal Law of Shipping on the Water Area of the Northern Sea Route, 2012, the Merchant Shipping Code, 1999 of Russia was amended by adding Article 5.1.4 to the Code requiring vessels navigating in the area of the Northern Sea Route to have in their possession insurance or other financial security relating to civil liability for pollution damage caused by the vessel. The Arctic Waters Pollution Prevention Act, 1970 (AWPPA) of Canada in section 8(1)(d) requires the same before ships are permitted to enter Arctic waters within the Canadian jurisdiction.

The international regime of liability for oil pollution damage had its genesis in the adoption and eventual entry into force of the International Convention on Civil Liability for Oil Pollution Damage, 1969 revised in 1992 (CLC) and subsequently, the International Convention on the establishment of an International Fund for Compensation for Oil Pollution Damage, 1971 revised in 1992 (FUND Convention) as a companion instrument. As indicated, both conventions initially adopted in 1969 and 1971, respectively, were revised and upgraded in 1992 which is the year by which they are identified at present. The conventions were articulated in response to the infamous Torrey Canyon incident which occurred in 1967 when the Liberian tanker by that name ran aground on Seven Stones Reef off the west coast of England.

The CLC is designed to provide for liability and compensation for oil pollution damage on the part of the registered shipowner of the polluting vessel. By contrast, the Fund Convention has been adopted to provide for additional compensation beyond the limit of liability of the shipowner through the establishment of the International Oil Pollution Compensation (IOPC) Fund financed through the imposition of levies on importers of oil, essentially representing the oil industry. The CLC comprises a strict liability regime which means that the claimant as a pollution victim does not have to prove fault on the part of the polluting ship for its owner to be liable under the convention. This chapter is concerned exclusively with the compensation payable by the liable shipowner through a system of compulsory insurance (Hazelwood and Semark 2010, p. 393). As mentioned above, the state whose environment has suffered pollution damage and the cost associated with its mitigation is a major seeker of remedy together with various public and private entities. The convention requirement for compulsory insurance is to ensure that adequate compensation is made directly available to victims of pollution damage up to the shipowner’s limit of liability. Viewed together, the object and purpose of the two conventions is to establish a uniform and comprehensive international liability and compensation regime for ship-source oil pollution victims (Xu 2013, p. 107). Notably, there are two other pollution liability conventions, namely, the International Convention on Liability and Compensation for Damage in connection with the Carriage of Hazardous and Noxious Substances by Sea, 1996 (HNS Convention, 1996) governing liability and compensation in relation to pollution damage from hazardous and noxious substances as defined by the convention and the International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001 (Bunkers Convention, 2001) which provides for liability and compensation in respect of oil pollution damage from the bunkers of non-tankers.

Against the above brief background, it is of prime significance in the context of this section of this chapter that the compulsory insurance required by the CLC is provided by the polluting ship’s P&I Club. Inevitably, in Arctic waters, the P&I clubs face payment of indemnification associated with enhanced risks due to the presence of ice which has the potential for engendering casualties including collisions and groundings and consequential pollution in an environment that is at once ecologically fragile and where the pollutant does not readily dissipate.

Most notably, the convention regimes mentioned above provide for two significant features. One relates to the requirement of certificates evidencing financial responsibility undertaken by the registered shipowner. In other words, in respect of each ship of a shipowner to which a particular convention such as the CLC applies, must be in possession of a certificate known as a certificate of insurance or security without which the ship may be prevented from entering a port or offshore installation of a convention state. In practical terms with respect to the CLC, the owner of a tanker will be issued a “Blue Card” upon application to the ship’s P&I club which is evidence to a state party to the CLC that the ship is covered for pollution liability by insurance as required by the convention. This enables the flag state of the ship to issue the CLC certificate which is required by the convention. Usually a CLC state party will not issue a CLC certificate without a “Blue Card” from the P&I club (Hazelwood and Semark 2010, p. 398). Indeed, quite apart from the convention regimes, such certificates are required by virtue of the national legislation of a state. In the Arctic region, the states in question undoubtedly require such certificates regardless of whether they are parties to pollution conventions. As mentioned earlier, P&I clubs have traditionally covered their members for pollution caused by vessels, and therefore they would be the providers of such convention certificates or certificates required under national legislation (Hazelwood and Semark 2010, p. 398).

The other essential feature is the right of direct action against the insurer who provides the certificate of insurance or financial security required by the relevant convention. This means that a claimant who is the victim of pollution damage, be it cargo or bunker oil or HNS, can proceed directly against the insurer, that is the P&I Club, for payment of compensation. These two important elements apply to ships traversing the waters of the Arctic in the same manner as they would apply to ships in other waters. The combined effect of the provision of compulsory insurance together with issuing of a convention certificate and the direct action against the P&I Club is expressed in the following words:

… to the extent P&I clubs agree to provide such certificates, they relinquish their right to rely on the “pay-to-be-paid” rule under the first party indemnity principle and other defenses available to them under their Rules, or which may otherwise have been available in the event the member concerned had breached a condition or warranty (Hazelwood and Semark 2010, p. 398).

As in any other waters, if there is an oil spill in Arctic waters, as a practical matter, the P&I Club of the ship acting on behalf of the shipowner will, as soon as possible meet with the representative of the IOPC Fund to sort out the details regarding making compensation available to victims with immediate effect based on their respective liabilities under the conventions. Speed of functionality in respect of both entities would be crucial in the event of a catastrophe in the Arctic. It is therefore imperative that the responsible parties act in due haste in consonance with the operational teams which will be on site to mitigate the pollution damage and prevent it from spreading.

4 Environmental Salvage in the Arctic and Its Marine Insurance Implications

It is no intention of this chapter to delve deep into the legal regime of marine salvage but it is recognized that it is a crucial element associated with casualties. As such, salvage has an impact on the safety and environmental implications of shipping in the Arctic in a more pronounced way than in non ice-infested waters because salvage operations in the Arctic environment are more difficult and costly to conduct. As discussed above, violations of the Polar Code can lead to casualties which in turn would concern indemnifiability under marine insurance law. In this respect, the role of salvage is indispensable from the viewpoint of marine insurance especially in terms of the measure of indemnity. Thus, in the inter-link between the Polar Code and the relevant marine insurance contract, salvage is a significant element which cannot be overlooked.

In this chapter, in the context of salvage, the focus is on protection of the marine environment which involves the applications of relevant provisions relating to the environment, particularly Article 14 of the International Salvage Convention which deals with the phenomenon of special compensation payable to salvors to recover their costs in cases where they mitigate pollution damage but are unable to collect a salvage reward. While it is beyond the scope of this work to enter into a critical analysis of Article 14 and the associated case law, their importance must be noted in view of the emerging concept of environmental salvage. A good elaboration of the concept of environment salvage can be found in academic literature on the subject. (See for example, Bishop 2012a, b, pp. 65–105) Whether or not a new and separate regime of environmental salvage should be introduced is a matter of contemporary interest and is understandably conducive to debate and discussion. Whatever may be the final outcome, there will undoubtedly be implications for the indemnifiability of salvage charges in respect of Arctic waters given its particularly sensitive marine environment and the need to prevent and mitigate potential pollution damage from shipping accidents.

5 Summary and Conclusion

In this chapter the authors have attempted to provide an overview of marine insurance implications for shipping in the Arctic in relation to safety and environmental concerns. Given the expansive nature of the law and practice of marine insurance not all areas of marine insurance law, even if they may be relevant to Arctic shipping, have been within the contemplation of the authors. The scope of discussion has been limited to selected areas of focus to allow for as much narrow analytical treatment as possible. Thus, the law and practice regarding cargo insurance in Arctic transportation has been left unaddressed. In terms of a central theme, it has been considered expedient to examine from a comparative law perspective, how provisions pertaining to risks in the Arctic are dealt with under English and Norwegian law through the respective instrumentalities of the English Institute Clauses and Warranties in conjunction with the MIA and the corresponding Norwegian counterpart, the NMIP.

To begin with, in recognition of the antiquity of marine insurance, the fundamental age-old principles and legal doctrines governing this discipline have been introduced in synoptic form to provide a backdrop for the ensuing discussion. Next the emergence and recent adoption of the Polar Code under IMO auspices has been addressed with regard to its status as international regulatory law and its impact on indemnifiability of risks faced by ships navigating in Arctic waters. In particular, the thorny issue of seaworthiness is examined with a view to determining by analogy with the ISM Code whether non-compliance with the Polar Code constitutes unseaworthiness for the purposes of the implied warranty found in marine insurance contracts pursuant to the MIA in the English legal system and whether it amounts to a violation of a safety regulation under the Norwegian NMIP regime. No definitive conclusion can be drawn in this regard in terms of the English law in the absence or insufficiency of case law given the fact that neither the Codes nor their parent conventions actually set standards for seaworthiness.

The seaworthiness issue is discussed in the context of marine insurance implications for enhanced risks in Arctic shipping. The operations of the relevant Institute Clauses and Warranties and the IHC, and their counterpart provisions in the NMIP regime are examined in contextual detail and a comparative analysis of the two regimes is presented as the central focus of the chapter. The examination of the English marine insurance regime delves into the legal implications of “held-covered” clauses in view of limitations and prohibitions appearing in H&M policies in respect of entry of ships into Arctic waters. The NMIP regime does not have warranties or “held-covered” clauses as in the English regime but consists of numerous provisions pertaining to navigating or trading limits including the Arctic and safety regulations for prevention of loss. Sub-clause 3 therefore expands the definition of a safety regulation in sub-clause 1 to include ice classes. Doubt has been expressed in the Cefor Commentary regarding whether ice class rules qualify as safety regulations under Clause 3-22 of NMIP 2013. This has been dealt with by deleting the ice class requirement in the new Cefor Trading Areas Clause and NMIP 2016. The provisions are germane to vessels purporting to operate in Arctic waters and seeking marine insurance coverage for enhanced risks.

Following this detailed discussion, the chapter addresses the role of P&I Clubs and third party liability in respect of pollution damage centering on Arctic environmental peculiarities characterized by the presence of ice. An introduction to P&I insurance is presented followed by the requirement for compulsory insurance or evidence of financial security by relevant international ship-source pollution conventions as well as national jurisdictions exemplified by Canadian and Russian legislation. It is recognized that the role of the P&I Club is crucial to indemnification of pollution damage which is the second prong of the overall legal regime of marine insurance. The implications of salvage law in relation to marine insurance are briefly presented emphasizing the environmental dimension of salvage and mention is made of the emerging concept of environmental salvage which connects to the central focus of the chapter. It is envisaged that the efforts of the authors in providing an exposé of Arctic shipping that is at once contemporary and topical infused with the traditional subject matter of marine insurance, albeit one that is assuming new orientations, will evoke and instill interest in the minds of all involved in safety and sustainability in Arctic shipping.

Footnotes

  1. 1.

    Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the United States are the eight members of the Arctic Council. See “Member States, Arctic Council”, available at http://www.arctic-council.org/index.php/en/about-us/member-states, accessed on 22 September 2016 and “Arctic Council”, available at http://en.wikipedia.org/wiki/Arctic_Council, accessed on 22 September 2016. Notably, 12 non-Arctic states have permanent observer status in the Council. They are China, France, Germany, India, Italy, Japan, South Korea, Netherlands, Poland, Singapore, Spain and United Kingdom are observer states in the Council. Turkey and the European have ad-hoc observer status. See “Observers, Arctic Council”, available at http://www.arctic-council.org/index.php/en/about-us/arctic-council/observers, accessed on 22 September 2016.

  2. 2.

    The Polar Code does not contain a definition of Arctic Waters although in the original draft the following definition was available. “Arctic waters” means those waters which are located north of a line from latitude 58°00′0 N and longitude 042°00′0 W to latitude 64°37′0 N, longitude 035°27′0 W and thence by a rhumb line to latitude 67°03′9 N, longitude 026°33′4 W and thence by a rhumb line to Sørkapp, Jan Mayen and by the southern shore of Jan Mayen to the Island of Bjørnøya, and thence by a great circle line from the Island of Bjørnøya to Cap Kanin Nos and hence by the northern shore of the Asian Continent eastward to the Bering Strait and thence from the Bering Strait westward to latitude 60°N as far as Il'pyrskiy and following the 60th North parallel eastward as far as and including Etolin Strait and thence by the northern shore of the North American continent as far south as latitude 60°N and thence eastward along parallel of latitude 60°N, to longitude 56°37′1 W and thence to the latitude 58°00′0 N, longitude 042°00′0 W”. See Regulation 1—Definitions in “Draft International Code for Ships Operating in Polar Waters”, Annex 2 in Guidance on Arctic Navigation in the Northeast Route published by the Maritime Safety Administration of China.

  3. 3.

    UK Parliament. (2015). Explanatory Notes, Insurance Bill [HL], para.88, available at http://www.publications.parliament.uk/pa/bills/lbill/2014-2015/0039/en/14039en.htm, accessed on 22 September 2016.

  4. 4.

    Preface to the Norwegian Marine Insurance Plan of 1996, Version 2007, item (10), available at http://www.nordicplan.org/Documents/Archive/Plan-2007/Norwegian%20Plan%20of%201996,%20Version%202007%20-%20English.pdf, accessed on 11 October 2016.

  5. 5.

    Since the 1989 grounding of the Exxon Valdez in the sub-Arctic waters of Alaska, there have been several serious shipping casualties in the Arctic region involving sinkings and groundings and collisions of the Maxim Gorky (1989) near Svalbard the Clipper Adventurer in the NWP and the Nanny in the Canadian Arctic (both in 2010), and the Nordvik (2013), respectively.

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Copyright information

© Crown 2018

Authors and Affiliations

  1. 1.World Maritime UniversityMalmöSweden
  2. 2.Juris Dr. Honoris Causa, Lund UniversityLundSweden
  3. 3.Dalian Maritime UniversityDalianPeople’s Republic of China

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