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burning oilrig, marine pollution

Insuring ships and oil rigs against pollution risks

The transport of crude oil by supertankers is in decline and so major oil spills, like that from the Torey Canyon in 1978 when 120,000 tonnes of crude oil polluted the coasts of Cornwall and Brittany, are becoming a thing of the past. Each international incident sees a call for better regulation, improved risk mitigation, improvements in process, machinery and navigation. The International Convention For The Prevention Of Pollution From Ships (1973) places the onus for clean-up on the ship owners unless they are able to show that exceptional circumstances, such as an act of war, caused the incident. Broadly speaking the same issues apply to oil rigs. The leak of oil from an installation in the Gulf of Mexico in 2010 almost caused the demise of British Petroleum (BP) a multinational which had limited external insurance and had largely self-insured. As a result BP had to pay over £50 billion in compensation. The strong message is that ship owners and oil rig operators must make sure they have enough insurance to cover pollution caused by their vessels or installations. Marine pollution specialist insurance relates mainly to pollution from persistent-oil or bunker oil. Pollution can of course occur from non-persistent oil as well as other hazardous or noxious substances, and so vessel owners and operators must ensure adequate insurance provision according to a number of international agreements.
Cover for Ships
Overall insurance cover against marine pollution for ships has developed over the past fifty years with each revision incorporating the lessons learned from the most recent major environmental disaster. Cover is provided through a combination of private insurance schemes and international compensation agreements. Following the discharge of a pollutant, ship owners will be responsible for:
  • Clean-up and preventive measures;
  • Property damage;
  • Economic loss; and
  • Environmental damage.
Ship owners must have enough insurance cover for environmental damage when their vessel carries more than 2000 tonnes of oil. The extent of their liability varies in relation to tonnage. Each vessel must hold a State issued certificate detailing the insurance cover and including:
  • The name and identification number of the vessel (VIN);
  • Gross tonnage;
  • Dimension;
  • Horsepower;
  • Cargo carried;
  • Hull construction;
  • Value;
  • Date built; and
  • Area of operation.
The Marine liability Act sets out the full liability of ship owners and operators.
World wide, thirteen Protection and Indemnity clubs provide cover for 95% of tanker owners. The clubs operate on a mutual basis with liability being shared amongst members who pay into the club according to the annual value of cargo transported. P&I clubs issue operators with a Blue Card as evidence that the necessary insurance is in place. It must be borne in mind that the full consequences of a major disaster may take years to fully emerge. When the full cost is know there is the possibility that it may be many times higher than the cost of the actual vessel that cause the pollution. Prudence demands that there must be a limit on liability otherwise premiums would simply be too expensive and operators would cease to trade.
International Agreements
Three international agreements relate to marine pollution by tankers carrying persistent-oil as cargo. They are:

(i) The International Convention On Civil Liability For Oil Pollution Damage 1992 (CLC);
(II) The International Convention On The Establishment of an International Fund For Oil Pollution Damage 1992 (IOPC); and
(iii) The Protocol to the above which established a supplementary fund to the IOPC in 2003.
As of 2014, 133 states with responsibility for 96.7% of the world fleet are contracted parties to the CLC. The CLC aims are, in the first instance, regulatory, establishing strict liability on ship owners to take every measure to prevent pollution occurring. The CLC provides for claimants to claim directly from owners' insurers or to enter into litigation against them. In this way it aims to improve the processes by which claimants can seek redress, ensuring that adequate compensation is available where oil pollution is caused by spillage from tankers. Under the CLC there is no limit on the liability of ship owners unless they can prove that they were not at fault and the incident was the result of an exceptional circumstance, e.g. an act of war. Where this is the case limited liability based on the tonnage of the vessel in question may apply, in which case the Convention will make arrangements for additional compensation.
Compensation Funds
The International Convention on the Establishment Of An International Fund For Oil Pollution Damage or IOP provides additional compensation when the limit of a ship owner's liability under CLC has been exceeded, or when ownership of the vessel cannot be established or the owning company is insolvent. The fund can cover for loss of income as a direct result of pollution on fishing or tourism for example. The fund is financed by levies on companies which land the oil, with contributions relating to tonnage of oil landed each year.
The 2003 Protocol established a supplementary fund which can make additional compensation payments when the total value of the damage claimed exceeds what is available from the ship owners' P&I or the IOPC.
Bunker Oil
Pollution from Bunker Oil is covered under the above provisions providing that the vessel has persistent-oil or it's residues on board, and tonnage exceeds 1000 gross tonnes. Where this is not the case, coverage for pollution arising from the discharge of bunker oil comes under the Bunker Convention of 2001. The Bunker Convention is modelled on the CLC with the primary aim being to regulate the industry and ensure that marine carriers of bunker oil are properly insured and take all necessary safeguards and precautions against spillage.
Other Hazardous or Noxious Substances.
The International Convention On Liability And Compensation for Damage In Connection With The Carriage Of Hazardous Or Noxious Substances By Sea (1996); or HNS; establishes a two tier system similar to that operating under the CLC. To cover any liability ship owners take out compulsory insurance related to gross tonnage . Where insurance subsequently transpires to be insufficient to cover the cost of compensation it can be supplemented by the HNS Fund up to a stated maximum. Like the IOPC Fund, HNS is financed by contributions from those organisations landing hazardous and noxious substances.
Oil Rigs
Oil rigs are one of the most complex and difficult commercial undertakings to insure. Their operation is subject to climatological hazards, possible collision with another vessel and the vagaries of the ocean. It is unsurprising that, unlike pollution caused by shipping, there is a lack of international concordance. Nevertheless, rig owners must maintain appropriate insurance cover against pollution risk for the period when they are operating. This should include any clean-up costs and third party damages. There are a number of major insurers which will provide tailored insurance packages for oil rig operators. Members of the industry also form mutual organisations, paying into a common fund from which compensation can be made, should an incident occur.
The Off-Shore Pollution Liability Agreement (1975) - OPOL
One example of international co-operation is OPOL which applies to all off-shore rigs in the waters of those countries which have signed up to the provision. Whilst OPOL does not pay compensation it ensures that members are compliant with existing legislation, and seeks to ensure that, should a spillage or escape of oil occur, costs are met. Operating companies must accept liability up to a specified maximum limit and establish that they have sufficient insurance cover or financial assets to meet the costs of compensation.
Insurance provision for transporting pollutants by sea, or the extraction of oil by off-shore rigs, are very complex areas. Major incidents of pollution are in decline as technology and operating practices improve and, whilst this provides tremendous hope for the future, operators must ensure that they source the best advice with regard to insurance cover and compliance with the different international agreements and pertaining legislation. The damage to a company's reputation that can ensue from a major ecological disaster caused by pollution is immense and the last thing it needs is for the fact that it is under insured to reach the public domain.

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