As the International Maritime Organization’s 2020 0.5% global sulfur cap draws ever nearer there are plenty of questions that remain unanswered, one of which is the impact on insurance policies.
The implications of the IMO cap will be widespread from the issue of obtaining credit, the question of supply, to what fuel to use and whether shippers should install scrubber technology. However one thing is clear, there is no one-size-fits-all solution for the best approach to the 0.5% cap.
Distillate fuels such as marine gas oil and other low flash point fuels are included as a compliant fuel and are expected to be the prime bunker products in 2020. However, the failure to utilise compliant fuels is likely to result in a vessel be deemed "unseaworthy", key members of the insurance industry have warned.
The concept of seaworthiness has been debated and expanded on by the maritime insurance industry for several hundred years, and binds together the many different parties involved in each voyage; shipowners guarantee to charterers that the vessel being chartered is seaworthy, and the party taking out insurance must also guarantee to the insurer that the vessel is seaworthy.
Some market participants have said non-compliance with the sulfur cap could allow a ship to be declared "unseaworthy", relieving the insurance provider of liability for any claim the owner might want to make.
Edmund Hughes, head of air pollution and energy efficiency at the IMO, raised this concern in November.
However, insurance broker Marsh has emphasized that non-compliance with the new global sulfur cap for shipping in 2020 could threaten a vessel’s insurance cover, stressing that it is the responsibility of the flag state and the vessel could be at risk of losing its classification status on non-compliance.
"If a vessel fails to comply with the requirements of the MARPOL Convention, then it would effectively be in breach of the flag state national law, and the vessel's MARPOL certificate may be withdrawn, or at least suspended, by the flag state," a report by Marsh said in December.
"Underwriters may claim that breaching international conventions and losing flag state convention certification status (and possibly having class withdrawn or suspended) is so fundamental to the risk that such a breach alters their understanding of the 'risk as a whole,' regardless of any link with the loss that happened," the report added.
The strength of penalties imposed on owners for non-compliance comes largely down to the stance of the flag states.
All of the top 10 flag states by tonnage - Panama, Liberia, the Marshall Islands, Hong Kong, Singapore, Malta, the Bahamas, Greece, China and Cyprus - have ratified the MARPOL Annex VI dealing with emissions levels.
Many in the bunker and shipping industry say privately that they expect some of these flag states to take a lax approach to enforcement of the 0.5% global sulfur cap, as it will be extremely expensive for shipowners, or that some flag states will simply lack the capability to effectively enforce it.
Insurers do not anticipate a change in policy wordings but they may approach the insured with further questioning prior to binding business or renewal, Steve Harris, senior vice president in the marine practice at Marsh - regularly ranked the largest insurance broker in the world - told S&P Global Platts in February.
Insurers are heavily reliant on the Duty of Disclosure, expecting complete transparency between the insured and assured on fuel compliance. Classification societies will be expected to oversee the maintenance of shipowners to ensure their vessel class status within their register, Harris said.
"Shipowners are advised not to assume that insurance cover will continue to remain in place under all circumstances following a breach of the MARPOL Convention Annex VI after January 1, 2020," the Marsh report added.
THE QUESTION OF 'GRACE'
Despite the strong stance led by the IMO on the implementation of the 0.5% sulfur cap, some members of the industry still believe there will be a "grace period" to allow market players to keep up with the change - namely smaller players.
"Insurers are not going to risk denying claims over non-compliance issues freely, in fear of business renewal rate reductions," the underwriter added.
Harris stressed that a soft-handed approach is not an option.
"We do not currently see any likelihood of a similar relaxation in the sulfur cap to the one we have seen with the Ballast Water Convention (BWC)."
The International Convention for Control and Management of Ships Ballast Water and Sediments was adopted in 2004 to enforce global regulations to control the transfer of potentially invasive species into habitats where they could cause destruction. This entered into force on September 8, 2017, the original implementation date being January 1, 2017.
A grace period was given during the BWC implementation leading to the belief that something similar might happen again.
"The Ballast Water Management convention came into force and the insurers said yes you have to comply but we’re giving you some time," said the managing director at one insurance broking agency.
However, Harris emphasizes that the two conventions cannot be compared, as the delay in implementing the BWC was due to technological and software limitations, postponing its enforcement until late 2017. In comparison, the technology needed to adhere to the 0.5% sulfur cap is readily available, as exhibited by the ECA zones.
The discrepancy in opinions largely lies between market leaders and small players as the majors have already taken initiatives towards compliance. For example, container line CMA CGM announced in November 2017 its decision to have its future 22,000 TEU vessels fueled by LNG in support of environmental concerns.
In comparison, those who have less influence on the market take the view that, in the words of an insurance broker, “it’s an extensive thing. For example, if an owner has a dry docking in 2019, they might get away with [not complying] till 2024 and have an extension.”
There is a similar stance on the delivery of newbuilds in 2019/2020.
Shipowners are already assessing alternative ways of running their new vessels. Although there is still a substantial percentage of shipowners that have yet to decide how best to approach the sulfur cap, it is imperative that careful attention is given to vessels ordered from 2018 onwards.
Regardless of shipowners reluctance to state their preparation plans for 2020, they seem to be adopting a wait-and-see approach.
NO CHANGE FOR ECA PARTICIPANTS
While the introduction of the 0.5% sulfur cap has been disputed and has caused concern among the shipping industry, some regions will already be relatively prepared for the cap.
"Vessels are able to meet the even more stringent requirements of 0.1% Sulfur emissions in the current Emission Control Areas (ECAS) of North America and Northern Europe," Harris said.
ECAs were designated under regulation 13 of MARPOL Annex VI to ensure that ships operating in certain control regions must use fuel on board with a sulfur content of a maximum of 0.1% from January 2015. These areas extend to the Baltic Sea area, the North Sea area, the North American area (covering designated coastal areas off the US and Canada), and the US Caribbean Sea area (around Puerto Rico and the US Virgin Islands), according to an IMO document on 2020 global sulfur limit frequently asked questions.
"The interpretation of ‘fuel oil used on board’ includes use in main and auxiliary engines and boilers," the IMO document specifies.
Vessels that operate in these zones will already be used to complying with the regulations by running on low sulfur fuels in the ECA zones, so the switch to the 0.5% sulfur will not be too noticeable.
"The political climate towards maritime pollution generally (of the atmosphere as much as of the sea) has continued to evolve in the past 2-3 years and it is unlikely that the IMO will back-track on the commitments made in this important field," Harris said.
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