Ecuador: Builders' RIsks And Marine Insurance

Last Updated: 14 September 2016
Article by Leonidas Villagran

The process of building a vessel or a floating object involves a series of risks. Both the entity who orders the construction and the shipyard are exposed to considerable losses if a casualty takes place. Accidents can occur at any of the construction phases involving people and property and also affecting the environment. These events can happen during construction, at the moment the vessel is launched and while sea trials are executed and even just before delivery to the buyer.
Under English law the process of building a ship under the shipbuilding contract is at the end considered a contract for the sale of goods . Lord Diplock stated" seems well settled by authority that, although a shipbuilding contract is , in form, a contract for the construction of the vessel, it is in law a contract for the sale of goods..." (Mc. Dougal v Aeromarine of Emsworth Ltd , 1958) Therefore its provisions depend on the Sale of Goods Act 1979.

As the shipbuilding contract is an agreement of sale a future good, the vessel, which does not exist at the moment of the agreement, it appears impossible to pass property to the buyer before the vessel has been built. This is the principle of the Sale of Goods Act 1979 which states that no property of unascertained goods is transferred to the buyer "unless and until the goods are ascertained". Basically this is the approach by Lord Diplock: " the construction of the vessel had not yet commenced and there was nothing physically in presence, no materials intended for use had been identified and consequently no property in the goods passed on the payment of the first installment". (Mc. Dougal v Aeromarine of Emsworth Ltd , 1958)

This means that once the vessel is built and delivered the risk will pass to the buyer.The builder is the party who bears the risk while in construction. Anyway under the Sale of Goods Act 1979 is possible to agree otherwise in relation of the holding of the risk.

This situation is ratified in the standard shipbuilding contracts, as the clause 31 of the Bimco Newbuildcon:
"Title and risk of loss of or damage to the Vessel shall rest with the Builder until exchange of the Protocols of Delivery and Acceptance is effected, immediately upon which title and risk shall pass to the buyer"

Under clause 38 of the Bimco Newbuildcon the Builder has the obligation to contract insurance on terms "no less wide than Institute Clauses for Builder's Risk terms (1/6/88) including Institute War and Institute Strike Clauses" Insurers are also to be "reasonable accepted" by buyers. The coverage of the insurance is to be contracted "from the time of first steel cutting or equivalent (or delivery of Buyer's Supplies, whichever is earlier) until the Vessel is completed, delivered to and accepted by the Buyer" . (BIMCO, 2007) Bimco is the largest shipping association in the world representing around 2,200 members and provides standard contract and clauses for the industry. (BIMCO, 2016)

As a good policy the prospective shipowner can also request the builder to be included as co-assured in the policy since he may hold an interest in the insured object if for example the buyer has supplied equipment for the vessel. (Williams, 2013)

The mentioned Institute Clauses are written in a form of marine policies, therefore provisions of the Marine Insurance Act 1906 apply. Builder´s risks clauses, as Hull and Protection and Indemnity clauses are nowadays written as "time policies" (Attard, Fitzmaurice, Arroyo, Martinez, & Belja, 2016)

Sea Trials

NEWBUILDCON clause 3 states that the builder's obligation is to design, construct, test and survey, and deliver the vessel according to applicable laws, rules, regulations and requirements of the appointed Classification Society.

Tests are fundamental to verify that a vessel is safe to be sent to sea for sea trials. Tests are related to safety systems and equipment, communications and navigation systems and equipment including emergency electrical equipment .

Instructions for surveyors issued by the Australian Maritime Safety Authority on 2015 provide the explanation why tests to electrical systems are fundamental:
"The vessels electrical systems should be tested to ensure its operation; including verifying the functionality of the vessels emergency electrical supply and emergency switchboard. After the surveyor verifies that the vessel has been; isolated from any shore power connections, operational generators and the main switchboard is isolated to simulate a power failure. They should check to ensure that all essential systems and navigation equipment remain operational..." (Australian Maritime Safety Authority, 2015)

Therefore mentioned tests would diminish any possibility of blackouts, and if they happen the solution will be on the emergency electrical supply to allow continued control of the vessel.

Under NEWBUILDCON The Buyer's representative has the right to participate in all tests, trials and inspections and has total access to the shipyard to verify the construction process but also the relevant warehouse.

Sea Trials constitute the end of the building process and from their results depend the acceptance or rejection of the vessel. These are to be conducted with representatives of the Classification Society and Regulatory Authorities. The Buyer has the right to be present at such trials and is to be notified by the Builder with at least 14 days in advance.

The Institute Clauses for Builder's Risks

The Institute Clauses for Builder's Risks (1/6/88) ICFBR were issued by the Institute of London Underwriters ILU and they represent the standard clauses for Shipbuilder's risks in the English market. On 1998 The ILU merged with the London Insurance and Reinsurance Market Association LIRMA, giving birth to a new Association known as the International Underwriting Association of London IUA . The IUA currently holds the copyright of all the Institute Clauses which are published in their website to be reviewed by the public .

The Institute Clauses for Builder's Risks include cover for Hull and Machinery, Collision Liability and Protection and Indemnity.

Since the English market standard characteristic is to only insure for denominated perils against, the Builder's risk cover is for "all risks", excluding earthquake and volcanic eruption. The cover is also available for damages due to faulty design. Other exclusions are War, Strikes, Malicious Acts and Nuclear exclusions. War and Strikes risks are considered in different Institute clauses.

Standard cover is available whilst the vessel is on sea trials or delivery but only with a limit of 250 nautical miles distance from the port or place of place of construction. This clause can be held covered for excess distance if additional premium is arranged.

Held covered clauses at a premium are also available for Transit clauses not provided in the contract, delayed delivery, deviation or change of voyage and movement in tow outside the port or place of construction.

In the case of collision liability the English Hull insurance market standard is to provide cover only for three fourths of the loss while the builder's risk policy does not provide this limit. Liabilities for damages in a collision are to be related to "loss or damage to any other vessel or property" on such other vessel, "delay to or loss of use of any such other vessel or property" and "general average or salvage of any such other vessel or property" in such vessel. Legal costs for contesting liability or taking proceedings to limit liability previously authorized by insurers are also included.

The Protection and Indemnity clause in the ICFBR which is not standard in a Hull Policy mainly provides cover for liability on the assured related to damages to FFOs, customary towage, loss of life, personal injury, illness and payments incurred for life salvages. Payments on punitive damages, workmen's compensation or employer's liability, pollution or contamination of any real or personal property, etc. are expressly excluded.

Hypotethical case

A shipyard built a freezer stern-trawler and is executing sea trials without total completion of all test of machinery and equipment. While at trials a blackout takes place during full speed producing a collision with a cargo ship at anchor on the roads outside the port. Both trawler and cargo ship suffer considerable damage as well as the cargo on the cargo ship and four members of the crew are injured. This incident is to be analised in regard to insurance cover.

As mentioned the English Market provides cover for Builder's Risks under the Institute Clauses for Builder's Risks (1/6/88). Prima facie appears that the builder was negligent in executing the sea trials without verifying with previous machinery and equipment tests that the vessel was safe for navigation. This may constitute a breach of the contract between the builder and the buyer but also a question of responsibility on the buyer and the classification society taking in consideration that the buyer under the contract is to be informed on all tests to be performed including the sea trial. The classification society is to verify that all phases and requirements are complied. Anyway, the Institute Clauses for Builder's Risk is an "all risk" policy and there is no exclusion on negligent acts by the builder of the vessel. No causation is to be analyzed in an all risks policy.

A question of unseaworthiness is raised. As this is a time policy there is a need to verify if the lack of certain land tests specially those related to the sudden blackout meant that the vessel was unseaworthy. The other factor is to verify if the vessel was sent to sea in that condition with the privity of the assured. If these factors are both present and the loss is atributable to the unseaworthy condition then the insurer may not be liable for any related loss as stated in section 39 (5) of the Marine Insurance Act, 1905.

The incident took place on the roads outside the port. If the distance is more than 250 nautical miles the builder should have asked for a help covered clause at a special premium to extend said distance for cover.

Loss of or damage to the insured vessel (the freezer stern-trawler) are to be covered under the provisions of the Builder's risks policy. This is a partial loss by which the insurer assumes liability taking in consideration the deductible.

The insured duty is to provide promp notice to the insurer or a Lloyd´s Agent if the construction is abroad even before any repair. The vessel should be inspected by a surveyor who may also be appointed to represent the insurer.

Loss of or damage to the cargo vessel will be covered by the Hull insurer of the cargo vessel. It includes salvage costs, legal costs, and sue and labour costs. It may include loss of hire if agreed to be included in the package. The cargo vessel can also be insured for specific cover in relation to freight with the Institute Time Clauses – Freight or Institute Voyage Clauses – Freight . Hull insurers, as well any other insurer will forward the claim to the shipyard as owners of the colliding vessel exercising their subrogation rights or defense duty. This may be the time when the Builder's Risks insurer will decide to accept or to deny liabilities. If may be possible that parties agree to go to arbitration or trial or also negotiate an amicable solution.

The Builder's Risks collision liability clause provides cover for all payments done by the insured in relation to liabilities for the collision to any other vessel and property on any other vessel, including legal costs to contest liability. Costs for salvage will also be considered.

The owners of the cargo in the cargo vessel will report the incident to their cargo insurers. Standard Cargo policies in their three options provide cover for cargo loss as a result of a collision. Once surveys are executed they are able to pay and/or forward this claim to the Builder's Risks insurer for consideration. The Builder's Risks Policy provides cover for liabilities in regard to loss of or damages as a result of a colision to any other vessel and property in any other vessel.

In regard to the injured crewmembers in the cargo vessel, the Protection and Indemnity Club in which the Cargo vessel is member provides cover for payments by the member related to liabilities with the crew including costs related to personal injury or illness, repatriation, wages and compensation.

The shipyard may be asked by the Club or the crew attorneys to pay these costs and/or any other applicable costs as workers compensation or punitive damages due to their negligence. The owners of the shipyard will be indemnified by their insurer on their payments based on liability according to The Indemnity and Protection Clause in the policy in relation to personal injury and illness of affected people. The shipyard will not be indemnified for costs related to workers compensation nor punitive damages.

It is important to consider that the shipyard will not be allowed to recognize any liability in relation to the collision without express consent of the insurer. This is common to every cathegory of cover in which there is a potential liability of the insured as the collision lialibity clause and the P&I clause.

The same is in regard of the duty under the Sue and Labour clause by the insured in order to avert or minimise a loss duly covered under the policy. The application of a deductible previously agreed is also common to all claims in the policy.

Finally, the liability of the insurer will be determined by the current insured value, and any applicable limitation of liability right from the insured. Specific clauses for collision liability, protection and indemnity cover and sue and labour state that each indemnity is to be considered in addition to the indemnity provided by the other terms and conditions. Any sums in excess to the insured value will not be recoverable.
The International Underwriting Association of London. (2016). Retrieved from
Attard, D., Fitzmaurice, M., Arroyo, I., Martinez, N., & Belja, E. (2016). The IMLI Manual on International Maritime Law: Volumen II: Shipping Law. New York: Oxford University Press.
Australian Maritime Safety Authority. (2015). Retrieved from
Baskid, E., Osborne, G., & Roach, L. (2016). Commercial Law. Oxford: Oxford University Press.
BIMCO. (2007). Retrieved from file:///C:/Users/Hu%C3%A9sped/Downloads/Sample_Copy_NEWBUILDCON.pdf
BIMCO. (2016). Retrieved from
Curtis, S. (2012). The Law of Shipbuilding Contracts. London: Informa.
Institute of London Underwriters. (2013). Retrieved from
Institute of London Underwriters. (2016). IUA Clauses. Retrieved from Institute Clauses:
Mc. Dougal v Aeromarine of Emsworth Ltd , (1958) 2 Lloyd's Rep. 345 (Queen' Bench Division (Commercial Court) 1958).
Meland, O., & Rasting, K. O. (2012). International Law Office. Retrieved from
Williams, R. (2013). Gard Guidance on Maritime Claims and Insurance. Arendal: GARD.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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