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The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.
Each allowance gives the holder the right to emit:
There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20230605
https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en
https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en
To the attention of our business partners;
We have raised the questions we have been receiving from the Shipowners as well as the issues we were considering on the above matter and have applied the London Solicitors, CJC Law and obtained their following advice. We should remind, however, this advice is issued on the basis of general assumptions and policy conditions and should be taken as a general reference only.
A. Problems
1. We have been asked to advise on two issues arising out of Russia’s invasion of Ukraine and concerning war risk insurance.
2. These two issues are:
3. This advice is in general terms and so we shall assume that the terms of cover are the Institute Time Clauses Hulls (the “Hulls Clauses”) and the Institute War & Strikes Clauses Hulls (the “War Clauses”). We should add that every case will require close consideration of the policy wording and the surrounding facts. These are not easy issues and so it is very difficult to give a one size fits all advice.
B. Executive Summary
4. In our view, we think there is no argument that can be used against the Underwriters in regard to the Premium Issue. Quite simply the Underwriters are at liberty to offer what commercial terms they see fit. There is no basis on which they can be compelled to provide cover or the price for any such cover.
5. As to the Coverage Issue, the risk in question being experienced by the Owners in the Sea of Azov appears to be detention by Russian forces, in that the Vessels are not permitted to leave. The Hulls Clauses exclude war risks and so a policy on these terms alone will not respond to the risk. The War Clauses probably do respond to the detention and give rise to a claim under such policies, this being an insured peril under clause 1.2 of the War Clauses. If Class becomes an issue as a result of this peril, the policy will not automatically terminate by virtue of clause 5 of the Hulls Clauses, which is incorporated by into the War Clauses by virtue of Clause 2 of the War Clauses. This is however subject to a number of caveats:
6. If the Vessels are detained for a period of 12 months or more, the Owners may be able to declare the Vessels to be constructive total loss.
7. There is probably also an appreciable risk that another one or more of the perils specified in the War Risk Clauses may be engaged as events develop. At all times, in any case, the Owners should act as a prudent uninsured and make efforts to reduce losses (by virtue of the sue and labour clause).
8. This advice is given in general terms. Each case is likely to be fact sensitive and require close consideration of all policy terms and facts and for such specific cases reliance should not be placed on this general note.
C. The Premium Issue
9. We have found no basis on which to argue that hull insurers are required to offer War Risks insurance on any particular terms or at any particular rate. Indeed, it seems to be well recognised that at times of conflict that war risk premiums can become highly volatile, and rates increase drastically.
10. Further, even if there was an obligation only to offer insurance at specific rates, there is no basis on which an Underwriter can be compelled to take on a risk. Accordingly, an insurer may simply not offer insurance in a situation where they cannot obtain a premium desired.
11. It may be the case (although this would be unusual in our experience) that there is an existing policy in place which contains specific provisions which oblige an Underwriter to offer further coverage on commercial rates. We would need to review any policy in question to determine if there were any such rates.
D. The Coverage Issue
12. The Coverage Issue arises by virtue of Russia closing the Kerch Strait and thereby precluding access to the Sea of Azov, we understand.
13. The risk will not fall under any of the insured perils under clause 6 of the Hulls Clauses. It may be an insured risk under the War Clauses.
14. The risks covered by War Clauses include loss of or damage to the vessels caused by:
15. We understand that the concern you would like us to consider at this juncture is not so much the situation where a vessel has been damaged as a result of an act of war, such as being fired upon. The Coverage Issue solely arises from the Vessels being unable to leave the Sea of Azov. With that in mind, the only risk that could potentially be triggered is “detainment”, under clause 1.2.
16. There a number of cases that concern detainment in the context of embargoes, these cases are focused on embargoes in ports or countries. We have been unable to find an authority where there was such an embargo over a geographic area as arguably extensive as the Sea of Azov. Despite this we think the broad principles are still applicable.
17. The Bamburi (see 1982 Lloyd’s LR 312) was employed to carry a cargo of cement from Mombasa to Shatt-al-Arab, Iraq, where she arrived on 22 September 1980. On the same date Iraq invaded Iran. Hostilities were taking place close to the vessel over the next few days. The Master of the Bamburi was informed that no merchant shipping was permitted to depart the port (which was accessed via waterways). The primary reasons was fear of attack by Iranian aircraft and it was stated that the Iraqi authorities feared this would risk the navigability of the channels. A few days later, in light of the hostilities, the Master decided to evacuate the crew and repatriate them. The Master and the Chief Engineer stayed nearby and made regular visits to the Vessel, but were not on board at all times, until 10 October. After 10 October they too were repatriated. On 22 December 1980, a skeleton crew attended on board the Vessel and continued to do so until the time of judgment (1982). The insured tendered a notice of abandonment on 30 September 1981 and again on 14 October 1981 (so around a year later). At the time of the award the Vessel had not received leave to sail by the Iraqi authorities. The Vessel was entered for war risks and had paid additional war risks premium.
18. In the Bamburi the policy provided cover for the insured peril of “… arrest, restraint, and detainments of all kings, princes, and people, of what nation condition, or quality soever”. The Tribunal concluded that, as prohibition on sailing was issued by the Iraqi government, this was sufficient to constitute a restraint of princes (or rather people). Dealing with the current scenario, it is clear that Russia has directly imposed the restraint of movement into and out of the Sea of Azove. Further it is probably the case that Russia will use force to enforce the restriction, but even if that wasn’t the case, it is not necessary that actual force be used. It is sufficient that there is the power to exercise the restriction and that the use of force is probable.
19. There is an argument therefore that the restriction on movement into and out of the Sea of Azov is an insured risk under the War Clauses (clause 1.2).
20. The War Clauses, at clause 2, incorporate parts of the Hulls Clauses, in particular clauses 4 and 5. The relevant sections of which are:
21. The above means that there is an obligation to maintain Class, including safe manning, failing which, the insurance will terminate automatically. However, if the vessels in the Sea of Azov are detained and the risk is insured under 1.2 of the War Clauses and it is because of that peril that Class cannot be maintained, then the insurance will not be terminated. The vessel in question will need to remain at the port, but given the vessels are likely not to be crewed, that should be the case in any event.
22. It is important to note that the peril will need to be causative. So if it is possible that Class can be maintained then it will need to be. This means that if it is simply difficult to find crew, that will not be sufficient. If the Owners can locate crews from different jurisdictions that can crew the vessels, such crews should be obtained. This is the case even if it will be costly to the Owners (even if it is extremely costly).
23. The Owners should put the insurers on notice of the peril (see clause 13 of the Hulls Clauses which is also incorporated in the Wars Clauses).
24. Further the Owners will be under obligations of sue and labour, so should there be an opportunity to reduce the losses (such as getting the Vessel out of the Sea of Azov), those steps should be taken (see clause 12 of the Hulls Clauses). We cannot emphasize enough that such steps should be taken. If there is a dispute with Underwriters concerning coverage, efforts to mitigate loss under the Sue and Labour Clause, as well as general questions of causation, are likely to be fertile ground for litigation. The Owners should document such efforts well.
25. The question can be anticipated as to what is to be done if the access into and out of the Sea of Azov continues for a prolonged period. Clause 3 of the Wars Clauses provides that if the Vessel is subject to the peril of detention and “the Assured shall thereby have lost the free use and disposal of the vessel for a continues period of 12 months then for the purpose of ascertaining whether the vessel is a constructive total loss the assured shall be deemed to have been deprived of the possession of the vessel without any likelihood of recovery”. This provision is provided in order to clarify the position under section 60 of the Marine Insurance Act 1906, which provides so far as relevant:
“(1)Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.
(2)In particular, there is a constructive total loss—
(i)Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered…”
26. Therefore if the owners are deprived of “the free use and disposal of the vessel” for a continues period of 12 months, the Vessel will be a constructive total loss under section 60 the Marine Insurance Act.
27. The issues of what would constitute deprivation of the free use and disposal of the vessel was considered in the Bamburi (among other issues). In that case, as mentioned above, the Vessel was at no point boarded by the Iraqi authorities and was, at times, manned to some extent and there was no bar to manning the vessel. It was accepted therefore that on a very narrow interpretation, it could be said that the owners had not been deprived of possession. However, the court took a more pragmatic approach, finding that as the Owners were deprived of the “free use and disposal of their vessel”, that being considered the test. In the Bamburi case, the Vessel was not permitted to move anywhere. In the present case, the position is perhaps more ambiguous in that the owners probably have the option of more movement around the Sea of Azov. If the Owners were trading within the Sea of Azov (which seems extremely unlikely) then there might be an argument that while the free use and disposal was constrained, it was not completely undermined, such that the Owner was not totally deprived of use of the Vessel. That would be extremely fact sensitive we expect. However, if it is the case that the Vessels are simply laid up in the Sea of Azov and unable to trade anywhere (or even be manned), there is a good argument that they have been deprived of the free use and disposal of the Vessel and if that continues for a period of 12 months, then the Owners may well be able to claim the Vessel in question is a constructive total loss.
28. Finally, we should probably add that as the situation in and around Ukraine develops there will be increasing likelihood of other perils being engaged under the War Clauses, including confiscation, expropriation, and seizure. As and when these events arise or look likely to arise, further careful consideration of the surrounding facts and policy terms will require consideration.
29. We hope this assists, but should you have any questions or wish to have a call to discuss the above, please do not hesitate to let us know.
