Why should shipowners and charterers invest in Freight, Demurrage and Defence Insurance?

by Alvin Looi, Director (Freight, Demurrage and Defence) Singapore, and Steven Cockburn, Group Director (Freight, Demurrage and Defence) at North P&I Club first published in Asia Insurance Review, September 2017

Shipping is a global industry and world events – be it a natural, political, military or market event – can often have a direct impact on the shipowners and charterers we insure. As a consequence, we advise on a wide variety of topical, interesting and challenging international issues and claims.

Quite often, such events can’t be predicted and shipowners and charterers are put under pressure to move quickly to adapt to change in order to comply with a new regulation and to avoid interruption to their operations, for example. However, this invariably comes at a cost and our assureds (known as “members”) are faced with increased costs, operating expenses and other economic exposures in an increasingly litigious environment and this is where the support of our Freight, Demurrage and Defence (FD&D) team is invaluable, as responding to routine, high-value or complex legal claims, or issues resulting from new global matters, requires thorough consideration of the legal, commercial and practical challenges that shipowners and charterers face.

The value of Freight, Demurrage and Defence Insurance

FD&D is a discretionary legal costs insurance that protects members’ interests and assets by supporting them in recovering any proper claims for uninsured losses and/or in defending and resisting any actions improperly brought against them, for those claims which fall within the remit of North’s FD&D Rules.

For some members, FD&D serves another purpose, namely, as a proactive loss prevention tool; shipowners and charterers who recognise the value of impartial and objective advice, use North’s FD&D specialists as a regular sounding board for the challenges they’re facing.

Taking a recent scenario, when Egypt, Saudi Arabia, the United Arab Emirates and Bahrain imposed trade restrictions on Qatar, it meant that vessels with cargo bound to or from Qatar faced sudden restrictions in completing their intended voyages. The aggregates import trade that Qatar previously enjoyed with its neighbouring states in the Gulf literally ceased overnight. Container lines which had been using Dubai in the U.A.E as a transhipment hub found themselves saddled with container boxes that could not be shipped direct to Qatar, and vessels that had just discharged/loaded cargoes at Qatar found that they were unable to bunker at Fujairah in the U.A.E., the Gulf’s biggest hub for fuelling ships. North P&I Club was able to provide rapid guidance on the practicalities and legalities of alternative ways of bringing cargo into Qatar, as well as advice on interpreting shipping contracts in light of these developments.

Some shipowners and charterers face a steady flow of legal challenges in the course of operations. Others may face one unforeseen dispute of such magnitude that it could bankrupt their company if handled badly. All may benefit from FD&D support.

Take for example disputes relating to the sale and purchase of vessels (whether second hand or newbuildings), which are frequently very complex, littered with factual issues and often require expert evidence. The cases can be worth many millions of dollars and the costs of dealing with them can quickly accumulate. Having an experienced team on hand to advise and guide members can help resolve such cases effectively, without adding to members’ losses by incurring significant legal expense.

Fighting for every cent

Low freight and hire rates and sustained overcapacity have also created a market that is increasingly litigious, as owners fight for every cent. As a result, North has seen a growing requirement for FD&D assistance.

Much of the assistance required is on traditional FD&D disputes for charterparty hire, freight or demurrage, under standard form time or voyage charterparties (such as the NYPE, Shelltime, Gencon, Asbatankvoy or BPvoy forms) and those disputes may range in size from a few thousand to millions of dollars. In addition, however, we continue to see new types of issues and disputes, with sanctions, changing regulations and ever-changing technology all playing a part in the disputes referred to us.

What is clear in all cases is that keeping on top of changes in the environment members operate in; following guidance on good practice; understanding the terms of contracts; and – crucially – collating evidence and quick access to expert legal advice when problems do occur, is crucial for our members.

At North, our FD&D team of 34 English-qualified solicitors and overseas-qualified attorneys across offices in the UK, Singapore and Greece handled more than 3,000 claims and enquiries from our shipowner members in 2016. Handling this volume and variety each day is only possible because we have the largest team of specialist lawyers dealing exclusively with FD&D issues.

By solely employing qualified lawyers, our team is able to deal cost-effectively with more than 95% of legal work in-house, and we regularly handle all aspects of London arbitrations, from beginning to end. This matters because the challenges shipping operators face can occur 365 days a year, at any time of the day or night. The expense of legal advice and representation – even when handling relatively small, uncomplicated cases – can quickly run into tens of thousands of dollars at law firm rack rates.

North’s FD&D cover provides our members with immediate access to legal expertise. We can advise when to proceed with a claim and when to step back and avoid unnecessary legal costs. We spend money wisely, pick the right battles to fight or defend, and achieve sensible and commercial settlements.

Looking to the future

Technological advances are bringing fundamental changes to the way in which shipowners and operators do, and will do, business. Recently, as businesses engage more technological services and internet banking facilities, we have seen an increasing number of cyber-crimes and have worked alongside our members not only to help them deal with these crimes when they do arise, but also to provide support and guidance to stop them happening in the first place. And this is just the tip of the iceberg. With autonomous vehicles and virtual and augmented reality on the horizon, the coming decades will reveal new issues, regulations, disputes and problems all of which will need expert support to navigate. We are already starting to consider such issues and working closely with our members to prepare for the future.

In the challenging economic environment, we have seen a spike in the number of disputes that hasn’t yet fully dissipated. We can expect the environment to remain litigious as shipowners and operators fight for every dollar – as this can mean the difference between profitable and unprofitable ventures, between business survival and collapse. In such an unstable and uncertain economic and political environment, FD&D support is essential for businesses that wish to protect fully their assets; with more than 250 years of collective FD&D experience, we are well placed to support our members as we understand first-hand the impact of world events on the maritime industry and our shipowner and charterer members.