Many post-2020 fuel risks will not be covered by insurance, North P&I Club warns

Paul Gunton
Paul Gunton
ShipInsight

24 April 2019


“The vast majority of the risks created by the fuel switch will be of a commercial nature,” but “the underlying losses will not usually fall within P&I cover,” a senior P&I executive has told ShipInsight.

Tiejha Smyth, deputy director for freight, demurrage and defence (FD&D) at North Group, which includes the North P&I Club, said that these could include additional costs arising in connection with bunker tank cleaning or, if compliant fuel is in short supply or not widely available, there could be voyage delays, she said.

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Other commercial risks could be caused by fluctuating bunker markets, which could create economic difficulties, she said. There could also be conflicts between owners and charterers as to when and where would be best to prepare for the transition to new fuels and when compliant fuel should be supplied to the vessel. “All of these matters have the potential to result in disputes under charterparties,” she said, but if they are not covered by P&I, “they will be for the accounts of owners or charterers.”

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They may be able to recover some costs, however. “Those with FD&D cover will receive legal assistance for dealing with the disputes.” Those without FD&D cover, however, “will have to deal with the disputes themselves or pay external lawyers to do so.”

Costs arising from enforcement action, such as fines, for breaching MARPOL Annex VI may also not be reimbursed. At all clubs in the International Group, P&I cover is only available for such liabilities at the discretion of the club’s board of directors, she said.

She mentioned some situations that could lead to non-compliance, for example if fuel supplied to a vessel appears to be compliant but later turns out not to be, or if the fuel becomes accidentally contaminated at some point.

Lack of availability of compliant fuel could mean that the only option for the vessel is to use non-compliant fuel, she said and “if compliance cannot be achieved then it might be possible for enforcement action to be avoided by filing a fuel oil non-availability report,” she suggested.

Physical problems caused by fuel compatibility and stability failings will fall within P&I cover for charterer members who have charterers’ damage to hull (DTH) cover and if poor quality bunkers cause significant engine damage, it is likely that the loss will be covered by hull & machinery (H&M) insurance, she said.

But she pointed out that H&M deductibles are often at least US$100,000 “so any damage with a value of less than the H&M deductible will be for the owners’ account,” although FD&D cover “would assist in such cases to deal with the resulting dispute against either time charterers or bunker suppliers.”

Ms Smythe made her remarks soon after the club published additional guidance last week (18 April) to help its members prepare for the fuel but has made the material publicly available.

It has produced three guides to expand the ‘2020 vision’ area of its website. They cover the three main methods of achieving compliance with IMO’s 0.5% sulphur requirement: using distillates (MGO/MDO); using blended very-low-sulphur fuel oils (VLSFO) or installing scrubbers. In a statement to accompany their release, Ms Smyth said “it’s vital to make sure that the technical objectives of the transition plan are reflected in the charterparty.” For vessels fitted with scrubbers, “there will be additional considerations,” she said.

All the guides stress that “it is important to avoid a scenario where the technical department makes transition arrangements that conflict with agreements already made by the chartering department” but the ‘scrubber’ version gives as an example the impact that a scrubber has on fuel consumption. It can increase by up to 5%, the guide notes, so “the performance warranties in the charterparty may need to be reviewed.” It also advises that the charterparty should make it clear who is to supply compliant fuel in the event of scrubber breakdown.

In its guide for those choosing to use compliant distillate fuels, the P&I club develops Ms Smyth’s comment about agreeing when the ship will switch to compliant fuel. Most shipowners will want to switch well before 1 January, but a charterer may want to keep providing cheaper high-sulphur residual fuel as close to the deadline as possible, it says. Most specifically, “what about a time charter that finishes end of December 2019?” it asks. This must be discussed at an early stage, it advises.

It makes the same points in its guide for those planning to use blended very-low-sulphur fuel oils (VLSFOs) but warns of geographic differences in fuels that could make them incompatible. European fuels “are anticipated to contain significant volumes of low sulphur atmospheric residues, whereas Asian volumes will contain significant portions of cracked and straight-run vacuum residues, with North American volumes comprising of more fluid catalytic cracking products, such as slurries and cycle oils,” it says.

North’s statement also highlighted a safety risk while preparing a ship to carry different fuels and included advice from its loss prevention executive, Mark Smith. Tank cleaning is likely to be needed and these must be subject to a risk assessment and a permit-to-work system. “Too many people die in enclosed or confined spaces,” Mr Smith said. But if tanks and fuel systems are not properly cleaned, they “could contaminate several hundreds of tonnes of subsequently bunkered expensive fuel,” resulting in enforcement action, delays and disputes.

“Our loss prevention and FD&D departments have already helped our members with a large number of queries about technical and legal issues relating to 2020,” Ms Smyth told ShipInsight. “We expect that we will be called upon to assist with more queries and issues as they arise on the approach to 2020 and throughout Q1 and Q2 in 2020.”