Suzanne Sharma
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Staying Afloat | Canadian Insurance

Staying Afloat

The Costa Concordia tragedy has drawn attention to the huge liability concerns for passenger-carrying ships from human error and human cargo

Global cruise company Carnival Corporation made major headlines this year. In January, its cruise ship Costa Concordia capsized after hitting a rock—a tragic disaster that has been compared to a modern day Titanic. There were 25 fatalities and 7 people are still missing. The ship remains grounded, lying on its side off the western coast of Italy.

Not long after, another Carnival ship, Costa Allegra, lost power after a fire in its engine room and was adrift in Somalian Pirate-ridden waters with about 1,000 people aboard. Luckily, there were no fatalities and the ship was eventually towed to a port in Seychelles.

As Carnival continues to recover from back-to-back disasters, the liabilities are just beginning to surface. Experts state it could be at least a year before the insurance industry feels the after affects in terms of rates and reinsurance costs.

The renewal period of Protection & Indemnity (P&I) clubs, which international cruise liners enter with, was at the end of February 2012, according to Matthew Yeshin, marine practice leader at Marsh Canada, and rates were set prior to the Carnival incidents.

“There were no last minute adjustments to P&I rating,” he says. “So it’ll be another year before the P&I clubs get a shot at making any significant adjustments to rates, and by then we’ll have a better idea of what real costs of the [Concordia] were and what real reinsurance costs and results are.”

Gary Moore, marine practice leader at Integro Insurance Brokers, predicts pricing in the marine market will be impacted as a result of the Concordia.

“It’s going to be the largest hull loss ever and marine liability wise, largest as well, so premiums will go up,” he says.

According to Moore, it’s very hard to judge what liability costs from the Concordia disaster will be because there were so many deaths, many people experienced hypothermia from having to jump in the water to escape, and one woman even miscarried shortly after. However, he estimates liability could be up to half a billion dollars depending on whether people are successful in suing the company.

Liability at Sea

Liability is the number one risk for the international cruise market because of the sheer number of passengers that are on these ships, comparable to a mini city, says Yeshin.

“It can become a very expensive cost for cruise lines and how they choose to manage that from a passenger compensation perspective may or may not be insured,” he says. “In the [Concordia] case the indication is that they offered passengers 14,000 Euros for the inconvenience, but we heard in the media that they started this proposal by offering passengers a free trip.”

Losses from the Concordia disaster will be significant from all angles, especially since the wreck will have to be removed, according to Claudio Verconich, vice president, marine at Liberty International.

“The cost to remove the Costa Concordia, especially if they have to break her up into pieces, can easily be a couple hundred million dollars,” says Verconich.

Pollution is another major concern in the Concordia case because the ship is still submerged in water and releasing pollutants.

One major risk for cruise liners that was luckily not suffered by passengers on either of Carnival’s ships is hot tub and water-borne illnesses.

“Hot tubs can be a hot bed of bacteria if under-chlorinated and one of the cruise ships’ biggest issues is they’ve got all these passengers, and all you need is one not so healthy passenger to use the hot tub and the next thing you know you’ve got e-coli spread all over the ship and a lot of very unhappy passengers,” says Yeshin.


International P&I clubs handle the majority of business in the marine market because they offer broad coverage and high limits for passenger liability, removal of wreck and pollution. There are 13 P&I clubs in total based on a membership structure. Unlike a standard policy, which can vary from insurer to insurer, each P&I club “rulebook” (policy) is similar in coverage, and includes the majority of risks the common vessel owner will encounter. The main variants are the deductibles and how much a P&I member absorbs themselves before the policy responds.

“The reason for so little variance is that each individual [club] has their own board of directors and directors are composed of the major shipowners in that club,” explains Cameron Berrington, senior vice president at Marsh Canada. “So basically it’s the people buying the insurance that are making the decisions about what’s going to be covered, and what the premium for that coverage will be.”

P&I clubs offer a $3 billion capped exposure for passenger carrying vessels. This compares to freight and oil tankers, which are capped at approximately $6 billion. Pollution liability is limited to $1 billion and is included for both classes, says Paul O’Reilly, vice president, Marsh Canada.

Loss of use cover is also available as an additional coverage in addition to the hull & machinery coverage, however it comes at a significant cost so many companies choose not to purchase it. This covers any expenses the company may incur if they can no longer use the vessel for profit, adds Yeshin. 

The tragedy of the Concordia case has created buzz in the marine industry since it seems likely that human error is to blame. While potential charges against the captain for multiple manslaughter and abandoning ship are up to the courts to decide, Carnival has announced it will perform a thorough internal review of its safety procedures.

Moore states safety and training are top of mind in the marine market at the moment.

“The biggest problem is that about 80% of all accidents are due to some form of human error, so it’s critical to ensure staff are properly trained,” he says.

He adds that modern ships are equipped with every type of safety feature imaginable, including a Safety Management System (SMS), so if a ship approaches an object too closely a collision warning will sound. Also, ships built after 2010 can usually still keep afloat even if some of the compartments flood.

“What they’re trying to do is make sure the ship itself is like a lifeboat so that wherever it is, it can still somehow limp home to the nearest port somewhere in the world,” says Moore.

Canadian Waters 

In Canada, large passenger carrying vessels come in the form of ferries and tour boats, which are a desirable risk because these ships are inspected on an annual basis and safety management is key, according to Verconich.

Brokers are advised to provide underwriters with as much information as possible when placing these clients, including how often the client inspects their vessels and what their loss record is, he adds.

There is one major change that will occur within the market in the next six months to one year. The Canadian government is establishing compulsory insurance for all types of passenger carrying vessels (excluding private pleasure boats unless the boat is used for business). This means that passenger carrying vessels will be required to carry proof of insurance, similar to pink slips in the auto market, or face fines, says Verconich.

Losses for Canadian passenger vessels are not on the same scale as international cruise ships because there are fewer passengers and the ship size is smaller. However, many of the risks are the same, including passenger liability, hull and machinery, wreck removal and pollution.

“Wreck removal is a huge concern most people overlook,” says O’Reilly. “If your vessel sinks in a navigable channel and Transport Canada deems it’s a hazard to navigation, you have to remove the vessel. Last fall a vessel off the east coast of Canada became grounded and the cost to remove that wreck was approximately $25 million.”

Yeshin adds wreck removal is typically only covered under P&I if Transport Canada requires the operator to remove it. If the coast guard does not require removal then the policy may not pay so he suggests purchasing an extension to the coverage under voluntary wreck removal.

One example in recent history that resulted in significant claims is 2006’s BC ferry, Queen of the North. This was another classic case where human factors were the primary cause of the ship sinking, resulting in two deaths, and hull, machinery, pollution and liability claims.

Hull and machinery coverage was placed through Lloyd’s, according to West Coast Ferries, while the remaining insurance was with P&I clubs, as well as BC Ferries in-house insurance.

Within five weeks of the disaster, BC Ferries claimed an insurance payout, and Business Today reported this helped improve the company’s bottom line in 2006. Profit for the company jumped to $110 million in 2006, compared with $49.9 million in 2005, and insurance proceeds accounted for about $61.3 million of 2006’s net earnings.

In addition to many large claims, the Queen of the North tragedy resulted in several lawsuits, including a class action that was launched by the survivors. Jim Hanson, partner at Hanson Wirsig Matheos and NDP candidate in North Vancouver, represented approximately 50 surviving victims in a class action suit. The total settlement was about $348,000.

“The issue for the class action lawsuit was whether we could prove recklessness under the Marine Liability Act,” explains Hanson. “Under this Act there are certain limits as to what you’re entitled to unless you can prove recklessness—defined in a very specialized way through the ‘unbreakable test,’ which is very hard to meet.”

Hanson says there was only one case in history where he can recall recklessness was proven, and this was when a captain went the wrong way in a shipping lane in order to get to the shipping grounds before other boats.

“In the BC case we abandoned trying to prove recklessness,” he says. “In the end it wasn’t about fault, it was about compensation.”

Hanson adds that this case continues to be a political issue in BC.

“The NDP thinks it’s an entirely unsatisfactory state of affairs that a ferry crashed into an island and sunk and we’ve never been told why,” he says.

It was a failure of the officer of the watch, who was in charge at the time, according to Hanson. The navigational equipment was working and weather conditions weren’t a factor. There was one passenger who claimed he was on deck and the island was visible to the naked eye.

“The Queen of the North story proves that very unusual things can happen,” adds Hanson.


Copyright 2012 Rogers Publishing Ltd. This article first appeared in the March 2012 edition of Canadian Insurance Top Broker magazine.