February 2024

Communicable Disease Exclusion Clauses in Hull & Machinery and Loss of Hire Policies need to go

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

Communicable disease exclusion clauses found their way into marine insurance policies very quickly after Covid-19 began its spread in the spring of 2020.

In the early phase of this most recent pandemic, these clauses served an important function and allowed insurers to manage the uncertainty associated with what was an unprecedented situation. Now, four years later, the time has come to ask the marine insurance market if the exclusion of communicable disease is still warranted. We would argue that the answer is ‘no’ and will challenge the market to remove any such clauses going forward. Our justification for this position is as follows:

  1. Exclusion is much too simple a solution.
    Pandemics and communicable diseases have been around forever and always posed a threat to trade and shipping. However, until 2020 these risks were never excluded from marine insurance policies. To do so was a strategy that could be excused in the frantic and uncertain period in the early part of the Covid-19 pandemic. Four years on, our industry has accumulated a meaningful amount of experience and data on how a communicable disease influences marine insurances. It is not acceptable to use this data to support a continued exclusion, it should rather be incorporated within existing underwriting models.
  2. The insurers should be more concerned about offering a comprehensive product.
    Communicable disease and pandemics are an infrequent occurrence that is part of the natural risk picture faced by ship owners. The insurances they buy should reflect that and insurers should be focused on responding to that demand.
  3. It goes against the all-risks nature of the Nordic market.
    The Nordic Plan is the backbone of Hull & Machinery and Loss of Hire underwriting in the Nordic market; and for many shipowners around the world. This is an all-risks form that is very careful to only include very specific exclusions, largely ones that are uninsurable. There has never been a communicable disease exclusion under the Nordic Plan, nor was one introduced in the latest (2023) revision.
  4. It is not a systemic risk for a Hull & Machinery and Loss of Hire insurer.
    The strongest argument for excluding communicable disease is that it is by definition, a systemic risk and one that can create aggregated claims that are impossible for an insurer or a reinsurer to handle. However, under a Hull & Machinery – or a Loss of Hire – policy, a communicable disease can only appear contingent a peril already insured against. The most prominent examples are repairs that are either prolonged or made more expensive by lockdowns or the spread of a disease. In a worst-case scenario then, ordinary claims could be made more expensive – but not uncontrollably so – nor is there any reason to believe that claims will occur more frequently due to a communicable disease. To the contrary, we believe that the data collected during the Covid- 19 pandemic will show that claims occurred with lower frequency in view of lay ups or inactivity as a consequence of lockdown; or loss of market.
  5. The reinsurers should not dictate what is offered by specialist, direct insurers.
    As reinsurers often cover a lot of risks where communicable disease might be a direct peril (life, health, events etc.) an exclusion makes a lot of sense from their perspective. However, for the direct, marine insurer, where the risk for reasons set out above is manageable, it does not. Some of the specialist marine insurers have a significant self-retention, which should be leveraged to allow them to write marine without the exclusion for the benefit of their clients or members. For the world’s largest Loss of Hire insurers, the risk is largely retained anyway and thus the reinsurance pressures should be negligible. It is also worth mentioning that the P&I clubs, where communicable disease is a far more direct risk have resisted the inclusion of any exclusions for the benefit of their members.

Anders Langeland Johannessen
Anders Langeland Johannessen
Global Head of Project Risk