Tagged: charterer, legal costs, liabilities, losses

Many charterers on time charter trip (TCT), short term time or voyage charters are seeing a downturn in volumes, freight rates and consequently profits.  Costs are being squeezed all the way down the chain and charterers are looking to find ways of reducing their expenses, but if their insurance seems a tempting cost to sacrifice, it would be worth considering that liability claims are likely to increase significantly as parties seek to offload the inevitable rise in losses.

Charterers who have been lucky enough to have had no claims in recent years may consider discarding the cover as an easy to decision to make.

However, as the volume of trade reduces, so do the margins for everyone involved – the receiver, the shipper, the shipowner and, of course, the charterer. As projects are mothballed or cancelled completely, more cargo is being rejected that would have been otherwise acceptable. Previously, minor damage to the cargo would have made little difference in a climbing economy where the value at discharge was significantly higher, but this no longer holds true as values and demand fall.

So, what happens to these losses? To protect their margins, receivers will claim from their cargo insurance, where they previously did not. Cargo insurers will be more interested in pursuing a recovery against the carrier using recovery consultants or lawyers working on a ‘no-win, no-fee’ basis. Carriers will then look to pass on those losses to charterers.

Similar issues arise with damage to hull claims by owners. Previously, owners were too busy trading and enjoying high charter rates to consider off-hiring vessels or conducting minor repairs. However, these same owners are now suffering from a lack of income, which in some cases is making slow repairs a more attractive option than trading at a daily loss. Owners will now be seeking to make those repairs and recover their losses from the charterers.

In addition to the above physical loss exposures of a charterer, there are also the legal costs implications for charterers in any position in a long charter-chain. Most owners and charterers are currently saying “I am fine as long as my counterparties continue to trade and pay”. However, if one charterer fails, then the whole chain is very quickly exposed to losses as each party tries to protect themselves and/or frustrate the contract. If one party in a multi-charter chain goes bankrupt and is left owing others, then extricating yourself from the intricacies of the chain will be time-consuming and expensive – the legal process is almost certain to be protracted and potentially multi-jurisdictional.

Whilst FD&D (Freight, Demurrage and Defence – legal costs insurance) doesn’t cover the underlying exposure to pay or recover charter hire, it does provide cover for the legal costs of both defending the incoming claim/frustration of the charter and the costs of pursuing the bankrupt charterer for unpaid losses.

Charterers are more exposed to risk now than they have been for some time, from cargo losses, hull losses and legal bills.  Whilst the need to cut costs is weighing heavily on charterers minds, it is as important as ever to be protected.

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