Collision of MSC Chitra with MV Khalijia III - the Insurance Angle - Who is the real loser ??

Dear (s)

The collision between vessels MSC Chitra and MV Khalijia III has thrown open many issues - the nature and extent of damages to vessels, whether Chitra would salved, if it sinks will it pose hazard for navigation, hazard posed by floating containers to boats and ships, containment of oil spill, loss to cargo, the business loss arising out of closure of Ports, the damage to cargo awaiting shipment arising out of delay and the financial loss arising out of commitments not being meant, the logistics, expenses and trouble involved in shifting the cargo for operations to nearby Ports, as also receiving the goods intended for delivery at Mumbai in nearby Ports - there could be numerous other angles also.

                                            Chitra in listed  and Khalijia in damaged condition

My first post was more about the collision news   - collision near Mumbai  collision near mumbai ;   The second one arose from news item of floating containers and consignments of biscuits, pesticides and chemicals hitting the shore and wondered on floatation of containers :  -will containers float ? will containers float ?  . The present one is more about the Insurance angle.

The cargo owners would be keeping their fingers crossed as the whereabouts of the container carrying cargo would remain unknown longer – whether they are on board the vessel, fallen into sea whether they can be saved – whether the delay would impact the consignee accepting cargo and making payment, would there market fluctuations in exchange that might affect – whether any other competitor would plunge closing their share in the market – more questions would remain unanswered.

From the Insurance angle the losses could be : claim for cargo, claim for container, claim for hull, loss of stoppage of business in Port and more. Of course, delay is an excluded peril and loss arising out of this is not indemnifiable. The coverage under Cargo Policies subject to Institute Cargo Clauses, the vessel insured under Institute Hull clauses all provide indemnity for loss or damage arising out of collision. In fact in some ways, the policies offer protection against liability also going by the ‘Both to blame clause’ of cargo policies and 3/4th Collision liability in Hull Policy, the coverage by Protection & Indemnity Clubs all would be in play.

The cargo owners, Vessel owners, Insurers, P&I Club, Port, Govt. Agency and other varied interests look forward to salvaging of the vessel and floating containers. The salvage contract is given to SMIT who boast to have a good record in maritime salvage. Years ago, this Company salved Tasman Spirit, the afromax tanker which ran aground near Karachi Port.

That the professional Salvors could not make much headway and had to be abandoned due to choppy sea, barge breaking anchor and bottles of pesticides started hitting the shores of Raigad and Mumbai – is not encouraging news. The floating containers blocking the navigational channel has prevented crude liners entering the Port. The bottles of pesticides that reportedly were washed ashore could be from an opened up container.

This being a loss arising out of collision, the blame will have to be fixed – but the blame game appears to be already on. It is a news to me that Ships also have the black box that is so famously associated with aircrafts. They are known as Voyage data recorder – the maritime black box. The IMO specifies that every ship should have VDR located in suitable enclosure capable of data storage and retrieval. Some reports suggests that MSC Chitra was proceeding outbound within main navigation channel when Khalijia 3 crossed the fairway ahead. This struck Chitra on the Port side while it was navigating in the main channel. There are also reports of Khalijia crew stating they they did not receive any signal from the Port Vessel Traffic management system. As ill-luck would have it the bulk carrier Khalijia 3 was right out of another accident that occurred on July 19th.

The web of Mediterranean Shipping Company SA – the owners of MSC Chitra states that Khalijia 3 had recently been salvaged from 3 week long grounding and was proceeding into Port to discharge her cargo, still under the control of professional salvors. The report further states that there were no injuries to crew but Chitra suffered extensive damage and grounded close to the point of collision. Assistance of professional salvors have been sought as some containers are floating. Some of the fuel tanks were ruptured by the collision and stopping pollution was their priority. They claim to have formulated plans to stabilise the vessel and recover the cargo laden containers. It concludes that going by the preliminary review, MSC Chitra was properly navigating and it would appear that Khalijia 3 was significantly in error.

There are newspaper reports that master of MSC Chitra has secured anticipatory bail, even as Mumbai Police are said to have registered cases against Master and Crew of both vessels under IPC.

The Exporters apprehend that some point of time, traders might be asked to pay demurrage, detention and other charges like congestion for no fault of theirs. An informed source suggested that Chitra was carrying dangerous cargo ‘Sodium Meta’ - Sodium silicate (Na2SiO3) better known as water glass or liquid glass would mix with water easily and contaminate it easily.

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From Insurance point of view, whether it was the containers or the cargo inside, mostly would have been insured under the terms of Institute Cargo Clauses (A)

Loss or damage arising out of collision would indeed present a valid claim under the cargo policy. Whilst liability is almost unknown in many forms of insurance, Marine Cargo policies do provide for liability arising out of cargo – again caused by a marine peril arising during the transit covered by the Policy.

Cl 3 is Both to Blame Collision clause. It reads “ This insurance is extended to indemnify the Assured against such proportion of liability under the contract of affreightment “Both to Blame Collision” Clause as is in respect of a loss recoverable hereunder. In the event of any claim by shipowners under the said Clause the Assured agree to notify the Underwriters who shall have the right, at their own cost and expense, to defend the Assured against such claim.”

AS could easily be understood, this is a policy where the subject matter insured is cargo carried in one vessel and this clause actually speaks of liability of the assured (cargo owner when covering consignment of cargo). Why and how the cargo owner would become liable for something is the primary question.

• The first prerequisite is the collision that too ‘both to blame collision’ occurring.

• When two vessels collide, it is possible that one of the vessels were to be blamed entirely i.e., loss occasioned entirely by the mistake of one of the vessel involved. In another angle, the collision could have been occasioned by both the vessels (or more vessels) – though the blame need not be 50:50.

• Also there is specific reference to contract of affreightment – which in effect is the clause contained in the Bill of lading

• Though this is unlikely to be attracted under normal circumstances, this would become applicable when the collision liability is determined to American legislation. In general, the settlement of liability in case of collision is determined by the degree of blame of each vessel. This is the so called proportional responsibility. When vessel LMN is found guilty of 40%, the owner of goods from vessel PQR will be able to claim that 40% share from vessel LMN. The owner of goods on vessel LMN cannot claim anything from the same vessel as the provisions of the contract of carriage will provide immunity to them for faults committed in navigation of the ship.

• It is stated that American Courts instead of determining and fixing the % of blame according to the extent of fault committed, would hold each vessel responsible for 50% (both equally to blame)

• BUT, the Shipper of goods have the right to claim 100% of their damage from the non carrying vessel, notwithstanding the 50% blame. The non carrying vessel, would then reclaim 50% of compensation paid from the carrying vessel – in the end both vessel would end up paying 50% of damage of the cargo carried by themselves.

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Complicated as it might appear, it affects the recovery prospects of the Insurer also. Here is what the Both to Blame collision clause incorporated in Bill of Lading :

Both to Blame Collision Clause. If the Vessel comes into collision with another ship as a result of the negligence of the other ship and any act, neglect or fault of the master, mariner, pilot or servant of the Carrier in the navigation or in the management of the Vessel, the Merchant will indemnify the Carrier against all loss of liability to the other or non-carrying ship or her owners insofar as such loss or liability represent loss of, or damage to, or any claim whatsoever of the Merchant paid or payable by the other or non-carrying ship of her owners as part of their claim against the Vessel or the Carrier. The foregoing provisions shall also apply where the owners, operators or those in charge of any ship or ships or objects other than, or in addition to, the colliding ships or objects are at fault in respect of a collision or contract.

- By incorporating such clause, the Carriers clearly ensure their right of proportionate recovery from the cargo owner (merchant) – subject ofcourse to

- There being a collision – arising out of result of negligence of other ship, neglect or fault of the master, mariner, pilot or servant……

- Loss or liability of any claim payable to other or non carrying ship.

However, in the same collision, they by law have excuse of not paying their liability as the Hague Visby Rules (COGSA also) provide that

Neither the Carrier nor the ship shall be liable for loss or damage arising or resulting from

unseaworthiness unless caused by want of due diligence ……… further

(a) act, neglect, or default of the master, mariner, pilot or the servants of the carrier in the navigation or in the management of the ship;

(b) fire, unless caused by the actual fault or privity of the carrier;

(c) perils, dangers and accidents of the sea or other navigable waters; &…………

Thus it is a double edged protection excepting the carrier of any liability but at the same time providing them enough ammunition to recover their share of liability to the other ship from the unassuming cargo owner.

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The Institute Time Hull Clauses under which the Ships are normally protected provide for, in addition to indemnity for loss or damage to the ship – liability arising out of collision also.

This clause known as Running Down clause provides only 3/4th liability (the balance 1/4th is recoverable from P&I Club) The Hull clause reads :

8.1 The Underwriters agree to indemnify the Assured for three-fourths of any sum or sums paid by the

Assured to any other person or persons by reason of the Assured becoming legally liable by way of

damages for

8.1.1 loss of or damage to any other vessel or property on any other vessel

8.1.2 delay to or loss of use of any such other vessel or property thereon

8.1.3 general average of, salvage of, or salvage under contract of, any such other vessel or property

thereon,

where such payment by the Assured is in consequence of the Vessel hereby insured coming into

collision with any other vessel.

The sum insured is not the restriction as the indemnity provided by this clause 8 is in addition to the indemnity provided by the other terms and conditions of this insurance. This clause further adds that in case of both to blame, unless the liability of one or both the vessels become limited by law, the indemnity under this section shall be calculated on the principle of cross-liability as if the respective owner had been compelled to pay each other such proportion of each other’s damages as may have been properly allowed in ascertaining the balance or sum payable by or to the Assured in consequence

of the collision

However, it comes with the restriction that the Underwriter’s total liability under this clause shall not exceed their proportionate part of 3/4th of the insured value of the vessel hereby insured arising out of any one collision.

This Section of the Hull Policy has specific exclusions one of which is ‘the cargo or other property on, or engagements of the insured vessel’ as also ‘removal or disposal of obstructions, wrecks, cargoes’.

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In the end, the cargo owner gets full indemnity. The Carrier and Ship owner who are responsible for the loss are immune and have incorporated clauses to exempt and protect themselves. The only affected person who seemingly suffers on all counts is the poor INSURER - who many a times finds that even the rating is not under his control, having divested his authority to market forces.

it is another irony that quite often the Insurer is criticized for having terms in fine prints – rules of construction stating that wherever there is ambiguity, it will be construed against the party who has drafted it. The odds are always against the Insurer and every loss makes him poorer.

Look forward to your views

- S. Sampathkumar