24 February 2023 marked the one-year anniversary of Russia's invasion of Ukraine.
In an insurance context, the date is an important trigger as a typical war risk policy stipulates that a vessel becomes a constructive total loss (CTL) after the assured has lost the "free use and disposal" of the vessel or it is "blocked" or "trapped" for one year.
Once an assured issues a "notice of abandonment", advancing the claim for a CTL, insurers have to make important decisions on the validity of the claim based on the policy wording, the situation surrounding the vessel and the actions of the assured.
In some cases, insurers might question whether a valid CTL had actually occurred: had the assured performed their obligations (under statute and the policy) to "sue and labour", that is, to take all reasonable measures to try to avert or minimise the loss? In some cases, perhaps, no effort would have secured the vessel’s release. However, where a vessel was in a "permitted" port under the Black Sea Grain Initiative (BSGI), that is, Odessa, Chornomorsk and Yuzhny, but had a cargo loaded that fell outside of the BSGI, the insurers may question whether the assured could have discharged the cargo, loaded a "permitted" cargo and sailed under the BSGI, thus avoiding a CTL?
The majority of vessels stranded in Ukraine did not have this option. Upon payment of a CTL, insurers are entitled to take over the assured's interest in the vessel. Insurers are typically reluctant to become "shipowners" themselves, so among their options are:
(a) agree to a “compromised total loss” with the assured, whereby the assured keeps the vessel in consideration for a discount off the pay-out;
(b) sell the vessel to a third party;
(c) transfer the vessel to a third-party warehousing company, but retain an economic interest in the vessel; or
(d) disclaim the vessel and leave it with the assured.
This requires careful planning and, ideally, good coordination with the assured.
HFW is widely regarded as the leading global law firm with the expertise to respond to incidents in complex and hostile environments. Our Complex Environments team specialises in advising those operating in high-risk jurisdictions. The team (working in conjunction with our Shipping Team) represents the insurers of 25 vessels that were stranded as a result of the war in Ukraine.