The continuing conflict in the Middle East has resulted in lots of legal questions to the BDM team.
Whilst most shipowners with ships outside the PG have successfully deviated and landed cargoes elsewhere, those with ships inside the PG face more serious problems. A recent example is what happened in the Black Sea in the wake of the Russian invasion of Ukraine in 2022. Many ships were stranded and some became constructive/ deemed total losses under their hull insurance. Others (in some cases assisted by hull underwriters) managed to get out by successfully utilising what became known as the “grain corridor” allowing exports of grain from Ukraine and Russia.
What is clear is that shipowners and insurers who have ships trapped inside the PG need to find a way to get out. Whilst there are ongoing legal issues about who should pay additional war risk premiums (in most cases those costs are for charterers’ account), at some point charters are likely to become frustrated if the vessel is unable to exit the PG. When that happens, there is an obvious exposure for the ship owner and hull insurer. The ship owner faces the risks of the vessel being targeted inside the PG (and the costs of insuring that risk in circumstances where cover may be revoked). The hull underwriter faces the risk of a total loss if the vessel remains trapped and becomes a constructive/deemed total loss.
To make matters worse, there is a paucity of insurance cover for those who want to get their ships out. Few seem prepared to rely on the US backstop scheme. One possible solution is exit via state-to-state negotiations and through the IRGC approved corridor. To date this has been used for some ships laden with Iranian oil cargoes heading for China and India. However, it is not clear if this solution will work for ships not carrying Iranian cargoes and/or regarded as beneficially owned by states that are deemed hostile to Iran.
One helpful development is that the insurance market is reacting, albeit that this is a very difficult time for war risk underwriters with premiums changing by the hour based on perceived risks as the conflict develops. It is vital for those placing additional cover to carefully check the terms of the cover and comply with all the relevant approvals, warranties and conditions when exiting the PG. One mistake could be very costly as insurers generally look to find a way out of paying claims if they see any basis to decline cover.
We are now in the eye of the storm and dealing with ongoing legal questions relating to how ships can exit the PG. However, the legal battles will likely come later if claims arise. Of course, if the conflict abates then normal trading may resume albeit that the insurance costs will remain elevated for some time.
Nick Burgess
Partner
