When is a ship’s earning capacity threatened? “A controlled income can be the key to success”

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MMaritime risk management is not an easy task, which requires specific knowledge and expertise on the subject itself. Usually, large ship management companies, operating a large number of ships, employ a small army of marine professionals, occupying different shipping departments, i.e. charter, marine insurance, technical, finance, Accounting, ISM, S&P, IT, Crew, Commerce, Legal, Projects, Administration and Operations, which must synchronize, if necessary, working together to discover the optimal solution(s) to manage risk in a timely manner, at the lowest possible cost , for the benefit of their shipowners.

On the other hand, small companies that manage a handful of vessels usually have limited access, or cannot even afford to employ the same specialized and highly paid shipping staff, which makes risk management for them terra incognita or, if not impossible, a difficult task to plan and organize – mainly due to a lack of knowledge – proactively and efficiently.

One of the many risks that a shipping company must manage is the uninterrupted earning power of its ships, especially during a downturn in freight.

Maintaining cash flow is literally the key to survival and growth for any shipping company. Freight, or charter, is the revenue from ships, which is often at risk, especially when the ship is considered “unchartered” by its charterers, for various reasons. That said, one could check in the terms of a ship’s charter party what are the causes that trigger the activation of the “non-lease clause”.

WHEN IS A VESSEL CONSIDERED “NOT LEASED”? and when a ship’s earning capacity is temporarily blocked and its treasury is threatened? What can a ship manager do in their efforts to eliminate or at least minimise, if there has not been a successful risk prevention plan, the negative results of this likely risk?

Let’s go: a vessel, in general, will be considered “unleased” if there is an event preventing the full operation of the vessel due to, among other things:

• operational deficiencies;
• the removal of a vessel from the water for repair, maintenance or inspection, which
is called dry docking;
•equipment breakdowns;
•delays due to accidents or route deviations;
• occurrence of hostilities in the flag State of the vessel;
• external factors, such as health regulations (i.e. Covid-19), legal or political reasons, could trigger the non-rental clause insofar as they impose restrictions which affect the nature of the ship itself and its performance.

• the closure of waterways or maritime routes for natural or man-made reasons, or other cases of force majeure;
• crew strikes, labor boycotts, detention of certain vessels or similar issues;
•failure to keep the vessel in compliance with its specifications, contractual standards and the applicable country of registry and international regulations or to provide the required crew;
• (“Any other cause” which is generally considered to be related to the condition of the vessel or its crew) and or;
• Piracy, WAR, K&R, hijacking, vessel detention.

It should be noted that the Non-Charter Event must: a) Not be the result of a breach of contract by the Charterer and b) Be fortuitous and not a natural result of the Charterers’ orders.

Some of the above risks can be avoided (as explained below) and others are worth passing on to marine insurers, in return for a fair price (insurance premium).

Risk probability (%) and premium cost (rate %) are closely related, however, as mentioned earlier, there are risks that a ship manager can afford and keep, especially if prevention plans appropriate risks have been put in place for the prevention and avoidance of risks.

Now let’s see what is insurable and worth transferring to underwriters, for a ship manager, so that they can proactively act wisely in purchasing the traditional REVENUE LOSS INSURANCE or REVENUE LOSS INSURANCE plus (the traditional Loss of Hiring insurance policy, enhanced by a couple add-on benefits), to protect its principal/owner’s cash flow.

THE LOH (LOSS OF LOCATION) traditional insurance coverage provides owners/managers with compensation in the event of an accident covered by the H&M policy. The Loss of Rental cover responds to a shipowner’s loss of earnings following physical damage to a vessel. It includes protection against grounding, physical obstruction of the vessel, preventing it from leaving port (ice free) and salvage or removal of damaged cargo, offering full support to shipowners. A vessel revoked by charterers due to damage is generally considered “deprived of revenue” as a result of that damage, which is the trigger for compensation under a charter loss policy (minimum deductible usually 14 days).

STRIKE AND DELAY RENTAL LOSS INSURANCE COVERAGE (this is an addition) protects ship operators against otherwise uninsured losses caused by unforeseen delays in port and at sea. Complementing both P&I cover and hull and machinery cover, it helps shipowners protect their revenues and to control the costs of specific events on board and ashore delaying their vessels. These risks constitute a permanent danger for navigation.

PIRACY / K&R / HIjacking / SHIP DETENTION / WAR RELATED RENTAL LOSS INSURANCE
In the event that a vessel is seized by pirates, the charterer may suspend charter payments until the vessel is freed.

A charterer may also claim that a vessel seized by pirates was not “on charter” for a number of days which exceeds a specific requirement in the relevant charter contract and therefore the charterer is in right to cancel the charter-party contract. Although many shipowners/ship managers maintain insurance against these risks, they may not be sufficiently insured to cover losses resulting from these incidents, which could have a material adverse effect on their cash flow. In addition, any detention and/or diversion of their vessels as a result of an act of piracy, or an increase in costs or the unavailability of insurance for their vessels could have a material adverse impact on their business, financial, their daily operating results. Currently, the market cost is very low compared to the coverage offered, the probability is the same (% risk), but not eliminated.

War and war-related events causing deprivation of the vessel by its owner may give reason to the charterer to withhold charter payments. War LOH can be included in the War Risk policy at a cost/premium.

Planning ahead and being proactive has proven to be the best strategy for success in the shipping industry and, since healthy cash flow is key to survival and growth, planning for “flow protection cash flow” is a cost-effective solution for any ship management company that wants to better manage and control its fleet revenue on an ongoing basis.
Source: Marasco Marine, by Anastasios Maraslis, founder and president of Marasco Marine Ltd*

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