Shipbuilding and Shiprepairers Risks

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Liability and cover for vessels under construction and/or repair

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Due to an increasing number of claims (mainly fire) during construction phase or repair/reconstruction/modification works, this short article is intended to clarify some aspects of liability and cover to be provided for such activities, including shipbuilders, shiprepairers, and of course, shipowners.

This kind of activities include of course, use of hot work, which means an increasing risk of fire, as reflected by Norwegian Hull Club in following article (special thanks to NHC): 

https://www.norclub.com/blog/page-1063/

Shortly, some aspects have to be considered:

1. The type of vessel and risk (work to be done) has to be considered
2. Hot work procedures and checklist have to be in place
3. A safe space for hot works, should be provided, if possible. If not, working area shall be carefully prepared and isolated, and fire extinguishers and other systems foreseen. Risk shall be monitored until it disappears.
4. In case of hot works at yards, complete set of drawings shall be available in order to detect any fire risk
5. Owner’s and shipyard’s checklist shall be merged, in order to have a full picture of the fire risk, and hot work execution shall be coordinated between owner’s and shipyard’s personnel.
6. Fire extinguishing systems have to be checked before starting work.

Liability during shipbuilding/reconversion

Traditionally, shipowners entered into a shipbuilding contract with a shipyard, but in case of damages and/or loss, insurance company claimed against shipyard after payment. Liability for damages to the vessel are on shipbuilder, and for that purpose, the shipbuilder signed a policy for the full value of the vessel and full period of construction. Shipyard shall be considered as policyholder, and Owner as insured, avoiding the previous scenario of liability.

Most common policy used for this purpose, are the Institute Clauses for Builders’ Risks, which have to be completed with W&S risks, and other adaptions, such as limited navigation for trials (usually 250 miles), transport of equipment to shipyard if necessary, and premium for extending period in case of delay during construction.

In case of damages to vessel during construction, monies will be used for repairing damages and delivery of the vessel at the specified time. In case of total or construction loss, indemnity will be paid to shipyard and/or shipowner, depending on amounts already used in the building, once these are proved. For the case of penalties or non delivery of the vessel, there are other possibilities, but these are not the object of this article.

Most common exclusions: worker’s compensation, personal damages/death to third parties, punitive damages, damages to shipbuilder’s equipment, etc. (see cl. 19.3 ICBR) 

In case of a reconversion of the vessel, depending on period and value, also a shipbuilding policy should be considered, for the full value of the works, or even the vessel in case of complex works, in order to avoid disputes if a total loss happens.

Liability during shiprepair 

First of all, is considered that the vessel has a valid H&M policy in place, and a notification to insurers is highly recommended. In this case, there are two ways of getting indemnified: by the H&M policy (usually Institute Time Clauses Hulls, cl. 6, or Institute Fishing Vessel Clauses, Cl. 6) first, and then company has to claim against shiprepairer, or directly against the shiprepairer, as shipowner has signed a shiprepair contract with shipyard and there is a direct contractual relationship. 

It is important not to extend a waiver of subrogation toward the Shipyard, usually requested, unless it is approved by H&M company, and also not to include the shipyard as co-insured under H&M policy, as insurance company would have no way of claiming against shipyard in case of fault of them, as being a part of the insurance policy. 

Therefore, I suggest to ask shipyard for a proper shiprepairer’s policy (Shiprepairer’s liability claueses), with special emphasis on insured limits/values, as these are usually below vessel’s value and maybe should be increased for specific projects. We should bear in mind, that this is a “liability” policy, and therefore, shiprepairer has to be liable for the damages. In certain cases of lack of liability (shipowner’s crew negligence, for example,), H&M policy cover would be necessary. 

In any case, always bear in mind that entering into a shipbuilding/repairing contract, is a complex situation, which could mean different and crossed liabilities, with also different policies in force, therefore the assistance of an expert to identify, analyze and provide proper cover for risks, is highly recommended.