1

Insurance law

Carriage of cargo: liabilities and insurance aspects.

(word count 7570)

INTRODUCTION
This paper deals with the international instruments regulating liability and relationship of the
different parties involved in the carriage of goods with regards to claims resulting from damage or
loss of cargo. The essay starts with historical information of the insurance law and its development.
Attention is paid to the different types of cargo carried by sea and what steps the international
community has taken in order to avail those negatively affected by the occurring accidents of
adequate indemnification. It is relevant to notice that although welcome, some of these laws still
have not been adopted by the relevant number of states and thus are not fully efficient. In
conclusion, I will state the negative impact which such non-ratification bears on the people and the
states.

ORIGINS OF MARINE INSURANCE LAW

Insurance is a contract between two parties – the insurer, known also as underwriter, and the insured
or assured person. In terms of this contract, the insurer for a consideration payable by the insured,
called premium, undertakes the responsibility that he will pay an agreed sum of money should the
object of insurance be damaged during a period agreed by the parties.1 The duty on the assured’s side
is that he is obliged to disclose any material facts in relation to the subject-matter of insurance
known by the insured at the time of concluding the contract.2
It is to be noted that whenever dealing with insurance contracts, one must distinguish between a
contract of insurance and an insured object.3 While the contract is payment of money, the object may
be either tangible property or an intangible interest such as liability against third parties arising as a
result of a fault of the assured.4 The insurance policy covers only those risks that are insured against
1
Couch G, Cyclopedia of Insurance Law 2nd ed (1984) 4 read together with pp 287-88.
2
Hardy I, General Principles of Insurance Law 6th ed (1993) 140.
3
At 11.
4
Ibid.
 2

by the assured. However, the assured is not relieved from guarding against these risks because if the
investigation discovers intentional damage of the insured object, he will not be indemnified5
provided that this damage is not caused in order to avoid greater damage. The terms of the insurance
contract are not fixed but flexible and can be varied to fit the requirements of the assured subject to
the condition that they do not conflict with statute.6 All of the above general principles apply also to
marine insurance.

Marine insurance is concerned with insuring vessels, cargoes transported by sea and the related
liabilities.7 It is involved primarily in international trade. Within the group of the interested parties
are the ship owners and cargo owners, the exporter and importer of the goods and the charterer of the
vessel.8 The oldest marine insurance policy document dates back to 1343.9 However, its roots can be
traced back to China 5000 years ago when the Chinese merchants spread their goods among several
vessels in order to reduce the possibility of damage to their products.10 Another form of insurance
was the general average – into existence since at least 916 BC – in terms of which the cargo owner
sailed together with his cargo in order to ascertain that it would not be abandoned or jettisoned.11
However, should throwing overboard have been necessary, the aggrieved party would have been
compensated by the other merchants whose cargo was rescued as a result of the jettison.12

The roots of modern marine insurance law can be traced back to the 17th century in England.13 Due to
the fact that the market of goods transported by sea was constantly developing, the need for assuring
them was increasing. In the beginning, there were no standards applicable to marine insurance.14
Anyone who was wealthy and willing to underwrite a cargo could do so. Furthermore, merchants
themselves acted as insurers. Although risks were shared among several underwriters, sometimes
they were unable to compensate for losses – because of insolvency or due to an accident of a more
devastating nature.15

5
Rose F, Marine insurance – law and practice (2004) 373.
6
Couch (n 2) at 290.
7
Capozzoli C, ‘Guide to US Cargo Insurance’, http://www.aimu.org [accessed on 29.03.2007].
8
Ibid.
9
Singh R, ‘ The scope of marine insurance’, www.insurance.gov.gy/Documents/THE%20SCOPE%20OF%20MARINE
%20INSURANCE%2006%20(News).doc [accessed on 15.03.2007].
10
‘Insurance Company - Types of Insurance - History of Insurance - Marine Insurance’,
http://www.clearleadinc.com/site/insurance.html [accessed on 02.04.2007].
11
Ibid.
12
Ibid.
13
Ibid (n 9).
14
Kingston C, ‘Marine Insurance in Britain and America,1720-1844: A Comparative Institutional Analysis’ at 6,
http://cniss.wustl.edu/workshoppapers/KingstonCNISS.pdf [accessed 03.04.2007].
15
Ibid.
 3

Information relating to the latest events around the world was of vital necessity to those who acted as
underwriters. In times when mail service was slow and unreliable and there were wars, coffee-shops,
being a centre of social activity in London, served as a place for gathering latest news, primarily
because the news was brought by the customers themselves16 who possessed information as to the
exact nature of the risks which created an adverse situation in the particular area of concern.17

The coffee-houses attracted people of a particular class and in those situated along the Thames and
the Royal Exchange met people in the shipping business.18 However, Edward Lloyd’s coffee-shop in
1720s became a focal meeting point for those in the shipping business.19 The underwriting, due to
the presence of lots of insurers there, could be done quickly while the would-be assured were allured
to go to Lloyd’s because of the choice they had in electing different underwriters offering different
insurance policy.20 In addition, Lloyd created a web of informants who supplied him with the latest
updated information as to what was happening around the world.21

During the 18th and 19th century, two types of organisations dealing with underwriting emerged.22
The dominant, Lloyd’s, was situated in England and consisted of wealthy individuals acting as
private underwriters.23 The second, situated in mainland Europe and USA, was corporation-
represented.24 The proponents of the company insurance claimed that the risks for the assured would
be less, that the premiums they had to pay would be less, and that the company capital was at a
greater value than that of a private insurer.25

In England, the Bubble Act from 1720 made it possible only for two companies to participate in
marine insurance while others, including partnerships and firms, were outlawed.26 However, private
individuals, insuring on their own account and accepting unlimited personal liability for losses, did
not fall under the Bubble Act requirements.27 Thus the act enabled Lloyd’s coffee-shop to develop as
a centre where individual underwriting could prosper.28 Furthermore, Lloyd’s had two more
advantages – the mutual belief which existed between the assured and underwriter and secondly, the
16
At 6.
17
At 4.
18
Ibid.
19
At 9.
20
Ibid.
21
Ibid.
22
At 5.
23
Ibid.
24
Ibid.
25
At 8.
26
At 7.
27
Ibid.
28
At 2.
 4

news Lloyd possessed was distributed only among the private underwriters. In addition, the two
corporations did not have the expertise and the knowledge that the underwriters as a group had.29

In 1824 the sections of the Bubble Act prohibiting corporations to be involved in marine insurance
were abolished. Furthermore, no amendments were made as to the risk responsibility of private
individuals. Many people considered these two factors as a step towards overcoming the old private
individual insurance business.30 But, nevertheless, Lloyd’s successfully remained on the market
succeeding most of the new insurance companies.31

In America, the insurance business developed very rapidly in the 18th century. The reasons were
twofold - the wars in Europe during that time and because most of the American fleet was insured in
Britain.32 But by the British laws if a vessel transporting goods to a state that was in war with Britain,
was arrested by the British fleet, it would not be indemnified for the loss suffered. At that time
Britain and France were in war. Although America was neutral, its fleet suffered great losses
because lots of its trade was done with France – American vessels carrying cargo to and from France
were quite often arrested or destroyed by the British Navy, thus losing their right to claim
insurance.33

Unlike Britain, in the USA corporations took the marine insurance business over private
underwriters. The reasons might be found in the fact that corporate and individual underwriting
started developing at relatively the same time. 34 In addition, private insurance businessmen could not
stand against the high risks put before them during those times of uncertainty and wars.35 Similarly,
in Europe in the 18th as the shipping industry developed and the political situation in the continent
was unstable, private insurers were replaced by insurance companies.36

TYPES OF MARINE INSURANCE

Marine insurance is divided into two major classes – property and liability insurance.37 While
property insurance relates to financial recovery of damaged or lost insured property, liability

29
At 11.
30
At 15.
31
Ibid.
32
At 17.
33
At 18.
34
At 20.
35
Ibid.
36
At 29.
37
Singh R (n 9).
 5

insurance covers financial risks of a party which it may incur when a third party has a claim against
it because of injury or property damage for which the insured is supposedly responsible.38

Marine property insurance exists in the following three types: cargo insurance, hull and machinery
insurance and loss of income insurance.39 Cargo insurance relates to the cargo transported by sea.
Hull and machinery insurance protects those having interest in the vessel by assuring them against
expenses which may be incurred for repairing or replacing vessel’s equipment or the vessel itself
damaged as a result of a covered peril.40 Loss of income insurance, known also as freight insurance,
indemnifies the ship-owner against risks of losing freight arising from damage or loss of the vessel.

Liability insurance, on the other hand embraces the concepts of collision liability, protection and
indemnity (P&I) and other liability insurances not falling within these two categories.41 Liability
insurance policy covers those damages for which the insured is responsible and is used for covering
risks which arise due to own vessel’s liability. However, for the purposes of urging the ship owners
and the other interested parties take a greater care, this kind of insurance covers only part of the
risk.42 The residue is left to the assured. Due to the fact that the liabilities incurred may sometimes
amount to large sums of money not even within the financial capability of the ship owners, it became
a practice for them to unite into P&I clubs catering for the uninsured sum.43 However, because the
collision liability and the normal P&I policies cover risks up to the value of the insured vessel, it
means that in case the “defaulting” vessel causes damages exceeding its value, the owner will have
to pay the outstanding amount out of his pocket. In order to cater for similar cases, the P&I clubs add
a further, excess liabilities clause.44

The losses covered by marine insurance are sue and labour charges, total loss, partial loss and
general average.45 Sue and labour charges relate to expenses of taking reasonable steps in order to
avoid or minimize the effect of the loss.46 Total loss exists in two different forms – actual and
constructive.47 While the former occurs when there is complete physical loss of the property, the
latter encompasses those cases where the property is not legally lost, but its recovery expenses would

38
Ibid.
39
Ibid.
40
Ibid.
41
Singh R (n 9).
42
Rose (n 5) at 302.
43
At 302.
44
Ibid.
45
Singh (n 9).
46
Rose (n 5) at 374.
47
At 408-10.
 6

exceed its value pre damage. Partial loss, known also as a particular average,48 takes place when the
vessel is partially damaged49 or when part of the cargo is damaged or partially lost for reasons other
than general average50.

A general average is any voluntary and reasonable sacrifice of cargo or ship in order to preserve the
property in the common adventure.51 Such a loss is to be distributed pro rata among the interested
parties.52 If the element of sacrifice for the common prosperity is missing, the average is particular. 53

General average (GA) is regulated by the York-Antwerp Rules. These rules are widely accepted in
marine insurance.54 They consist of seven lettered rules and 23 specific rules. The lettered rules are
of a general nature and consideration of the specific rules is to be taken.55 The YA Rules are
regularly reviewed – the last review being in 2004. The claimant bears the onus of proving that his
claim falls under YA Rules56 and can insist on a lien which is released on issuance of an average
bond in terms of which the owner of the retained goods undertakes to contribute to the loss suffered
in the form of cash or guarantee by his insurer.57 An average adjuster is appointed to determine the
respective liability.58

INSTITUTE CLAUSES

Because insurance policies vary from place to place, it is difficult to say that insurance contracts
relating to substantially the same subject-matters will be the same and that their interpretation will be
similar.59 However, due to the fact that marine insurance has been evolving for several centuries,
today most insurance contracts are based on standard forms.60
The standard policies were introduced in the 19th century by Lloyd’s and the Institute of London
Underwriters (a group of London company insurers) and have been in use since.61 These are known

48
S 64 of the English Marine Insurance Act of 1906(the EMI Act).
49
Rose (n 5) at 425.
50
At 429-435 read together with s 64 of the EMI Act.
51
s 66(2) of the EMI Act and Rule A of the York-Antwerp Rules of 2004 (the YA Rules).
52
S 66(3) of the EMI Act.
53
Singh (n 9).
54
Chun L, ‘GENERAL AVERAGE EXPLAINED’, http://imcs.blogspot.com/2006_05_10_imcs_archive.html [accessed
20.06.2007]
55
Ibid.
56
Rule E.
57
Ibid.
58
Rule E.
59
Rose (n 5) at 2.
60
Ibid.
61
www.answers.com [accessed on 03.05.2007].
 7

as the Institute Clauses62 because the Institute was responsible for their publication. During the last
century there have been criticisms of these rules and attempts to introduce an international
convention on marine insurance were made. 63 But the response by the Institute was to embrace these
criticisms and contain them in the standard forms.64

What is to be borne in mind is that even though the Institute clauses are used worldwide and their
interpretation is subject to statutory and case law, the assured and the insurer are always free to
determine the terms of their contract which may deviate from the standard Institute terms.65
Whenever they wish to do so and in order to avoid conflicting interpretations of a provision, the
parties are advised to include in their contract a choice of law clause.66 But as the practice shows,
this area of insurance is well established and the standard terms dominate.67

There are three types of Institute clauses – A, B and clauses C provide the least protection for the
assured and includes those risks reasonably attributable to fire or explosion; stranding, capsizing or
collision of the ship, discharge of cargo at a port of refuge; general average sacrifice and jettison.68

Institute clauses B include in themselves clauses C and in addition cover loss or damage arising as a
result of earthquake, volcanic activity or lightening; entry of water inside the place of storage;
washing overboard; total loss of the package lost overboard or dropped while being loaded/
discharged from the vessel.69

Clauses A are broadest in range and cover all risks arising not as a result of willful misconduct of the
assured; ordinary nature or inadequate packaging of the goods insured; insolvency of the carrier;
deliberate damage of the goods insured; loss arising from nuclear weapons;70 delay even though it is
caused by a risk insured against; unseaworthiness of the vessel; war, riots or civil commotions 71
(subject to certain qualifications discussed below).
62
Ibid. What is to be noted, however, is that on 31 December 1998 the Institute and the London International Insurance and
Reinsurance Market Association (LIRMA) merged into the International Underwriting Association of London (IUA).
Nonetheless, we still refer to ‘the Institute Clauses’.
63
Rose (n 5) at 3.
64
Ibid.
65
At 4.
66
Hudson G, The Institute clauses 2nd ed (1995) 35.
67
At 3.
68
‘Institute Cargo Clauses A, B & C - What they cover’, http://www.dtgruelle.com/articles/nuinsabc.html [accessed
15.04.2007].
69
Ibid.
70
Ibid.
71
‘INSTITUTE CARGO CLAUSES (A)’, http://www.royalsunconnect.co.uk/shared/gocargo_clauses.pdf [accessed
15.04.2007].
 8

Having in mind the fact that modern sea-routes pass via areas prone to piracy,72 it would be unjust to
claim that in the attempt of the crew to provide for the most expeditious transportation of the freight,
the carrier or the cargo owner are to bear themselves all the risks emanating from the choice of the
passage plan for the particular voyage of the vessel. In choosing the shortest route, the crew
considers not only the interests of the cargo-owner, but also those of all people related to the freight
in one way or another. In order to balance between these interests and the possibility of a pirate
attack, piracy has been explicitly included in the risks insured against in Clauses A.73 In addition,
there is an option for assuring against risks resulting from wars or strikes.74 These are the Institute
War Clauses and The Institute Strikes Clauses.

What is to be noted, however, is that there is no exception to the common rule that willful
misconduct or inadequate packaging could be insured against. But it is in line with the basic
requirement of insurance law that the assured must act in good faith and disclose all the relevant
information to the underwriter. Furthermore, he is obliged to act like that in order not to avail
himself to indemnification – something which he is not entitled to claim by law.

CARRIAGE OF CARGO
About 90% of the world-wide transport of goods is done by sea.75 Carriage of cargo by sea is
regulated by the Hague Rules, Hague-Visby Rules and Hamburg Rules. Each of these three sets of
rules represents a development in the codification of the relationship between the shipper and the
carrier and their respective liability. The oldest one – the Hague Rules – regulates the liability
relating to damage of cargo transported under a bill of lading or any similar document.76However,
Article 10 stipulates that the Hague Rules apply to all bills of lading issued in any of the contracting
States.

72
For instance The Malacca Straits which, according to the US Energy Information Administration statistics, each year is
used by 50 000 vessels in transit (see http://www.eia.doe.gov/cabs/World_Oil_Transit_Chokepoints/Malacca.html
[accessed 01.09.2007]). Furthermore, between 2000 and 2004 there have been 283 reports of pirate attacks. (see
http://bpa.odu.edu/port/research/talley.piracy.doc [accessed on 04.03.2007])
73
Ibid (n71).
74
Ibid.
75
Chandrasekaran, ‘Anarchy on the Seas - Pirates Flourishing in Asia’, http://www.cdnn.info/news/article/a010618.html
[accessed 19.03.2007].
76
Art 1(b) of the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading ("Hague
Rules"), and Protocol of Signature, http://www.admiraltylawguide.com/conven/haguerules1924.html [accessed
21.06.2007].
 9

According to the Rules, the carrier has to undertake all the necessary actions in order to render the
ship seaworthy and to provide for all the necessary conditions for the safe transportation of the
cargo.77 Any term in the bill of lading excluding liability on the part of the carrier as a result of
negligence, fault or failure to comply with the above duties is considered to be null and void.78
However, there is a long list of exemptions which if present relieve the carrier or his employees from
liability no matter whether they are to be blamed for the appearance of the particular event. 79 As a
result, the shipper bears a greater burden in a situation where it is within the powers of the carrier
and his crew to control the situation.80

During the years after the introduction of the Hague Rules, there was a growing concern that the
allocation of responsibilities and risks between the shipper and the carrier was unfair. In addition, the
Rules were criticized because their interpretation and application was very restrictive and
ambiguous.81 As a result, the Hague rules were amended twice – the first, in 1968 by the Visby
protocol (known as the Hague-Visby Rules) and the second, in 1979 by an additional protocol
dealing only with financial matters. 82

The Visby protocol stipulates that the Hague-Visby Rules apply to international transportation of
goods where the bill of lading is issued in a state member to the Rules, where the carriage is from a
port of the contracting state, where the contract of carriage incorporates the application of the
Hague-Visby Rules or where the rules are incorporated in the national law irrespective of the
nationality of the ship or any interested party. 83 However, whatever the amendments did, the basic
liability regime or the allocation of risks between the shipper and the carrier was not changed.84 In
order to balance this deficiency, the Hamburg Rules85 were introduced. Their application is similar to
the Hague-Visby Rules but the effect broader because they regulate all contracts for the carriage of
goods by sea where one of the ports of loading or discharging are in a state party to the Hamburg
Rules, where a document proving the contract for the carriage by sea is issued in a contracting state,
or when the contract of carriage incorporates the Hamburg rules. 86 Furthermore, the period of

77
Art 3.
78
Art 3(8).
79
Art 4.
80
Lapres D, ‘UNITED NATIONS CONVENTION ON THE CARRIAGE OF GOODS BY SEA (1978)‘,
http://www.lapres.net/seacon.html [accessed 21.06.2007].
81
Ibid.
82
Tetley W, ‘Application of the rules generally’ at 3,
http://www.mcgill.ca/files/maritimelaw/ch1marine.pdf [accessed 21.06.2007].
83
Art 10 of the Hague-Visby Rules.
84
Ibid (n 80).
85
United Nations Convention on the Carriage of Goods by Sea (1978) known also as The Hamburg Rules.
86
Art 2(1) of the Hamburg Rules.
 10

carrier’s liability is extended beyond that of the Hague-Visby Rules – he must take due care of the
goods while they are in his custody.87 This principle replaces the list of carrier’s exemption from
liability under the Hague Rules, and eliminates the possibility that the carrier may bear no
responsibility for loss or damage caused by fault or negligence of his employees.88

However, a problem arises which one of the three sets of rules should be applied when a contract of
carriage of goods by sea lacks a term specifying it. While the Hamburg rules are in force in 26 states,
the Hague or the Hague-Visby Rules are valid in most of the states.89 In addition, there may be a
situation where the contract is subject to two sets simultaneously. In order to avoid court’s
interference with the parties’ intention, it is advisable that there be put an exclusive term in the
contract saying whether the 1924, 1968 or 1978 Rules or particular national law apply.

MEASURES TO LIMIT POSSIBILITIES OF DAMAGES

With the growing concern of the international community about the way people should live their
lives, taking into consideration not only their well-being, but also that the Earth and its resources
should be exploited in a way making it possible for the future generations to avail themselves of
what their predecessors possess, the question about who bears the responsibility when pollution of
the environment or the cargo occurs, is of relevance to the present discussion. Pollution might be as
a result of loading or discharging the vessel or while she is under way. If the latter situation occurs,
the ship is always held liable even if the fault cannot be proven to be on the carrier.90 In order to
avoid unjustified demands, the ship operators take samples of the cargo which are kept aboard91 and
undertake preparation procedures for making the cargo holds fit for storage of the particular type of
shipment.

In order to fight pollution which might also occur as a reaction between different types of substance
which left only to themselves do not constitute pollution, the International Maritime Organisation
(IMO) introduced the Maritime Dangerous Goods Code (IMDG Code).92 It consists of nine chapters,
each one standing for a particular type of dangerous cargo. IMDG Code also sets out the packing,
stowage and segregation requirements of the incompatible substances when transported together.93

87
Art 4(2).
88
Ibid (n 80).
89
Ibid (n 82) at 3.
90
‘Contamination of liquid cargoes’, http://www.british-marine.com/lossprevention/index.htm [accessed on 15.04.2007].
91
Ibid.
92
‘International Maritime Dangerous Goods (IMDG) Code’, http://www.imo.org/Safety/mainframe.asp?topic_id=158
[accessed 14.06.2007].
93
Ibid.
 11

The Code is mandatory94 which means that any voluntary or involuntary breach of the Code may
result in loss of right to claim insurance. The Code aims towards not only protection of the life at
sea, but also avoidance of huge ecological catastrophes.95 However, what is to be borne in mind is
that the IMDG Code is worded in general terms96 and full assessment in relation to the risks of a
particular cargo should be supplied by the shipper so that the carrier makes an informed decision
whether to carry this cargo. But a great part of the insurance claims shows that accidents are mainly
caused due to lack of adequate packing, insufficient documentation, misdeclaration and non-
declaration by shippers.97 In such a case the YA Rules98 and the Hamburg rules99 apply. Rule 19 of
the YA Rules deals with cases where there is damage or loss of undeclared or misdescribed cargo –
such a loss or damage will not be considered general average. Furthermore, where the actual value of
the shipment is more than the declared value, the damage or loss shall be contributed for the declared
value, but these goods shall contribute upon their actual value.100 On the other hand, Article 13 of the
Hamburg Rules holds that when the carrier is misled by the shipper as to the character of the
transported cargo, the shipper is liable for any loss resulting from the shipment of such goods.

A research into the shipping industry shows that there is a tendency that more and more dangerous
goods are transported by containers nowadays.101 But this increase in carriage tends to add negatively
to the factor that today many hazardous substances supplied with poor documentation are still easily
transported.102 In addition, the existence of a dangerous cargo in the container and its poor packaging
may quite easily be undeclared which could have far-reaching effects in case of an accident.103 In
addition, cargo damage as a result of non-compliance with any of the regulations may remain
unnoticed for such a time that any claim against the cargo owner may prescribe. Furthermore, the
greater the distances for delivery, the more ports during transportation, the more people involved in
the transportation chain, and the greater the risk of those involved in the chain to lack knowledge of
the IMDG Code requirements.104

94
Amendments to SOLAS Ch. VII (Carriage of Dangerous Goods) adopted in 2002 make the IMDG Code mandatory from
1 January 2004.
95
IMDG Code is incorporated in Ch. VII of SOLAS and in The International Convention for the Prevention of Pollution
from Ships, 1973 (MARPOL 73/78).
96
‘No harmony for shippers’, http://www.fp-marine.com/press_centre_opinions.html [accessed 14.06.2007].
97
UK P&I Club, ‘Code observation essential as dangerous goods trade grows’,
http://www.ukpandi.com/UkPandi/InfoPool.nsf/HTML/ClubPress20060217 [accessed 14.06.2007].
98
The York-Antwerp Rules of 2004.
99
UNITED NATIONS CONVENTION ON THE CARRIAGE OF GOODS BY SEA, 1978.
100
Rule 19(b).
101
Ibid (n 97).
102
Ibid.
103
Ibid.
104
Ibid.
 12

As a result, some countries introduced their own stricter standards including harsh criminal sanctions
while insurance companies distribute guidebooks among the concerned parties in order to fill the
existing lacuna of lack of knowledge.105 Each guidebook deals with matters relevant to a particular
party in the chain and has a common introduction, informing the concerned parties about the existing
norms and the penalties thereof.106

CLC AND FUND CONVENTIONS

Even though the tendency of transporting general cargoes by way of containers constantly increases
due to their standard packaging, easier, cheaper and faster transportation,107 the worst effect on the
seas has oil spillage.108 This fact was recognized by the international community with the
introduction of the International Convention on Civil Liability for Oil Pollution Damage (CLC) in
1969.

While the Institute Clauses deal with insurance of the assured against losses or damages that will be
recovered by the underwriter, CLC was adopted in order to provide for adequate compensation to
third parties affected by oil spills resulting from casualties involving tankers.109 CLC imposes a duty
on owners of tankers, used for commercial purposes, carrying more than 2000 tons of oil in bulk to
have insurance in respect of an oil pollution accident.110 CLC does not cover those damages resulting
from spills of oil from tankers while in ballast and from vessels other than tankers or the expenses
incurred when the preventative measures undertaken lead to no spill.111

Following the introduction of CLC, in 1971 the Fund Convention was adopted. Its purpose was
threefold: to provide compensation for pollution to the extent that the CLC was inadequate, to
relieve the tanker owners from certain of the burdens imposed by the 1969 convention, and to
provide compensation where the ship owner was unable to meet his liability.112 In terms of the Fund
Convention the ship owner or his insurer was entitled to a portion of the latter’s strict liability in
terms of CLC where the damage suffered by the victims was not foreseeable, subject to the proviso
105
Ibid.
106
Ibid.
107
Dry cargo ships,
http://www.oceansatlas.org/unatlas/uses/transportation_telecomm/maritime_trans/shipworld/cargo_car/drycargo/dry_cargo
_ships.htm [accessed 16.06.2007].
108
Oil Pollution – Prevention, Preparedness, Response and Cooperation,
http://www.oceansatlas.com/unatlas/issues/pollutiondegradation/oil_poll/oil_pollution.htm [accessed 16.06.2007].
109
International Convention on Civil Liability for Oil Pollution Damage, 1969,
http://www.imo.org/Conventions/contents.asp?topic_id=256&doc_id=660 [accessed 16.06.2007].
110
Ibid.
111
The second restriction in the applicability of the CLC was introduced by a Protocol adopted by IMO in 1992.
112
International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage,
1971, http://www.imo.org/Conventions/mainframe.asp?topic_id=256&doc_id=661 [accessed 16.06.2007].
 13

that the damage had not been caused by the owner’s willful misconduct or as a result of the ship’s
non compliance with the international conventions.113 The fund established in terms of the 1971
Convention is financed by the oil receivers in the states which are members to the Fund Convention.

In 1992 two protocols were adopted amending CLC and the Fund Convention, known also as the
1992 CLC and 1992 Fund Convention. These protocols increased the scope of applicability of the
latter conventions and provide higher limits of compensation.114 The new conventions do not change
the status quo, that is the tanker owner and P&I insurer are still obliged to pay compensation in
terms of the CLC, and oil receivers in states that are party to the 1992 Fund Convention have to
contribute to the fund. Due to the fact that more states have become parties to the 1992 Conventions,
the original ones lost significance and the 1971 Fund Convention was repealed in 2002.115 The 1969
CLC convention is not repealed yet, but the number of states party to it decreases and new states
wishing to become members to CLC must subscribe to the 1992 version.116

The 1992 Fund is invoked when a state party to it cannot be fully indemnified under the 1992 CLC
because the ship owner is financially incapable of meeting his obligations in full and his insurance is
insufficient to satisfy the claims or the damage exceeds the ship owner's liability.117 In 2003 an
additional Protocol adopted by IMO established an additional Oil Pollution Compensation
Supplementary Fund. Its purpose is to supplement the compensation available under the 1992
Conventions with a third source of financial support.118 This fund is optional on the members of the
1992 Conventions and is financed by oil receivers in the states that ratify the Supplementary fund.119
The Supplementary fund relieves the oil industry, but does not alleviate the tanker owners of their
obligations should an accident occur. In order to deal with this imbalance, in 2006 the International
Group of P&I Clubs, providing liability insurance of about 98% of the world’s tanker tonnage,
introduced an optional compensatory system comprising two types of agreements – Small Tanker
Oil Pollution Indemnification Agreement (STOPIA) and Tanker Oil Pollution Indemnification
Agreement (TOPIA).120 The STOPIA and TOPIA do not change the function of the 1992 fund and

113
Ibid.
114
‘The Civil Liability and Fund Conventions’, http://www.itopf.com/compensa.html [accessed 17.06.2007].
http://www.itopf.com/compensa.html [accessed 17.06.2007].
115
Ibid.
116
Secretariat of the International Oil Pollution Compensation Funds, ‘THE INTERNATIONAL REGIME FOR
COMPENSATION FOR OIL POLLUTION DAMAGE’ at 6, http://www.iopcfund.org/npdf/genE.pdf [accessed
17.06.2007].
117
At 6.
118
Ibid (n 112).
119
Ibid.
120
Ibid (n 116) at 6.
 14

the Supplementary fund – they still have to indemnify claimants – but the ship owners have to
recompense the funds in accordance with TOPIA and STOPIA.121

Whatever honourable purpose the above conventions have, it is the states who are the ultimate
decision-makers whether to be bound or not by them. In addition, lack of proper national laws makes
the states and their citizens more vulnerable to the risk of not being compensated for damages
suffered due to ecological catastrophes whose effects might become obvious some years after the
accident.122 In addition the 2000-ton limit for determining who is strictly liable under the CLC and
the absence of adequate domestic legislation, makes it possible for evasion the compensation regime
of the CLC.123

PROTECTION AGAINST POLLUTION CAUSED BY HAZARDOUS SUBSTANCES

In 1984 IMO held a meeting having in its agenda an establishment of an instrument that would
adequately deal with claims arising out of accidents with hazardous and noxious substances
(HNS).124 Not until 1996 did any attempt to introduce such an instrument prove to be successful.
However, today the International Convention on Liability and Compensation for Damage in
Connection with the Carriage of Hazardous and Noxious Substances (HNS) is not operational
because it is still not ratified by the required minimum number of states.125

The HNS Convention uses as a model the 1992 CLC and 1992 Fund Convention and purports to
provide sufficient and effective compensation to the affected parties suffering from accidents arising
from carriage by sea of substances not dealt with by the two 1992 Conventions.126 Under it, the
owner of a vessel used for commercial purposes is responsible to the amount covered by his
insurance. Even though the vessel is registered in a state not member to the HNS Convention, the
ship owner must have an insurance cover whenever his vessel visits or leaves a port of a member
state.127 If there is an accident with an outstanding amount to the claim, it is recovered by a HNS
fund established by the HNS Convention.128 The HNS fund is financed by the recipients of HNS
transported by sea and only covers those claims occurring after the cargo has been loaded on the ship
121
Ibid.
122
Chun L, ‘SHORTCOMINGS IN OIL AND CHEMICAL POLLUTION COMPENSATION REGIME– THE CHINA
EXPERIENCE’, http://imcs.blogspot.com/2006_05_10_imcs_archive.html [accessed 20.06.2007].
123
Ibid.
124
‘AN OVERVIEW OF THE HNS CONVENTION’, at 1 http://www.imo.org/Legal/mainframe.asp?topic_id=673
[accessed 17.06.2007].
125
Ibid.
126
At 3.
127
Osnin N, ‘An Overview of The HNS Convention’, at 7, http://www.mima.gov.my/mima/htmls/papers/pdf/apandi/HNS
%20Convention%200605.pdf [accessed 19.06.2007]
128
Ibid.
 15

– incidents taking place during the loading/ discharging of HNS are not subject to the HNS
Convention.129 Furthermore, the application of the HNS Convention is broader than the CLC because
it covers damages caused by any ship flying the flag of a state member to the HNS Convention even
though the accident has occurred outside the territorial waters or the exclusive economic zone of a
member state or a State not party to the Convention.130 In addition, the HNS Convention caters not
only for pollution damages, but also for risks resulting from fire or explosion of NHS including loss
of life, personal injury or damage to property.131

An additional characteristic of the HNS Convention that makes it attractive or at least easier to apply
is that it presents a unification of the various instruments classifying hazardous and noxious
substances – these include Annexes I and II of the MARPOL 73/78 Convention, chapter 17 of the
1973 International Code for the Construction and Equipment of Ships Carrying Dangerous
Chemicals in Bulk, the IMDG Code, chapter 19 of the 1983 International Code for the Construction
and Equipment of Ships Carrying Liquefied Gases in Bulk, appendix B of the Code of Safe Practice
for Solid Bulk Cargoes. 132

THE BUNKER CONVENTION

Considering the fact that not only does oil carried as cargo pollute the seas in case of accidents, but
also fuel oil used for bunker, a necessity for introduction of a new piece of legislation dealing with
the liability of the concerned parties was felt.133 Furthermore, managing oil spills from non-tanker
vessels was more difficult due to the lack of a regime controlling liability and compensation
issues.134 In a 1993 report of the UK P&I Clubs Analysis of Major Claims it was said that half of the
oil pollution claims were as a result of accidents involving vessels carrying oil not as cargo.135

Although the idea about bunker legislation was first discussed during the negotiations of the 1992
CLC and Fund Protocols, the IMO representatives were of the opinion that it was very complicated
for a single convention to deal with different matters such as oil carried as cargo and as bunker fuel

129
At 2.
130
At 5.
131
‘International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and
Noxious Substances by Sea (HNS), 1996’, http://www.imo.org/Conventions/contents.asp?topic_id=256&doc_id=665#4
[accessed 18.06.2007].
132
Ibid (n 127) at 6.
133
International Convention on Civil Liability for Bunker Oil Pollution Damage (The Bunker Convention), 2001.
134
‘IMO adopts bunkers convention’, http://www.imo.org/Newsroom/contents.asp?topic_id=67&doc_id=457 [accessed
19.06.2007].
135
Ibid.
 16

oil.136 A similar proposal was also raised during the discussions of the HNS Convention in 1996.
However, this topic was also omitted.137

The new Bunker Convention requires the owners of commercially used vessels of more than 1000
gross tonnage to maintain a compulsory insurance that will cover the liability for the pollution
damage.138 It also provides that any claim for compensation for pollution damage may be brought
directly against the insurer.139 The Convention’s liability article, among all other clauses, has a
provision for joint and several liability when there are more than one responsible for the damage ship
owners.140 Where the pollution is caused as a result of a wrongful act of any government or other
authority responsible for the maintenance of the navigational aids, the ship owner is excluded from
liability.141 In addition, an IMO resolution urges member states when implementing the Convention,
to exempt from liability those ship owners who undertake reasonable measures to prevent or
minimise the effects of bunker oil pollution and whose fault was not caused by malicious actions.142
As with HNS Convention, the Bunker convention is still not operative because it has not been
ratified by the required minimum number of states.143 Pending its entry in force, liability on the ship
owners and claims for compensation are regulated by either national law or the 1976 Convention on
Limitation of Liability for Maritime Claims (LLMC).144

THE LLMC CONVENTION

The LLMC Convention applies to claims in respect of loss of life or injury or loss of or damage to
property, taking place onboard or in direct connection with the operation of the ship or with salvage
operations and the consequential loss therefrom145 and claims in respect of loss resulting from delay
in the carriage by sea of cargo, passengers and their cargo.146 The Convention does not apply to

136
Ibid.
137
Ibid.
138
Art 7(1).
139
Art 7(10).
140
Art 3(2).
141
Art 3(3)(c).
142
International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001
http://www.imo.org/Conventions/mainframe.asp?topic_id=256&doc_id=666 [accessed 19.06.2007].
143
Ibid.
144
Special Consultative Meeting of the HNS CORRESPONDENCE GROUP held in Ottawa, June 3-5, 2003, at 7,
folk.uio.no/erikro/WWW/HNS/bundle.pdf [accessed 19.06.2007].
145
Art 2(1)(a).
146
Art 2(1)(b).
 17

claims regulated by CLC,147 claims relating to nuclear damages,148 and claims by ship owner’s crew
nor their dependants providing that the contract of service restricts the owner’s liability to an amount
greater than the one specified in the Convention.149 In addition, the Convention requires that the ship
owners establish a limitation fund indemnifying the aggrieved parties.150 However, due to the fact
that the monetary limit of liability was outdated, in 1996 IMO adopted a protocol considering this
issue. The amended LLMC Convention came into force in 2004.151

CARRIAGE OF PASSENGERS AND THE ATHENS CONVENTION

Up to the present moment were discussed the international instruments dealing with liability of and
claims against owners of ships carrying industrial cargo. An IMO conference held in Greece in 1974
adopted the Athens Convention Relating to the Carriage of Passengers and Their Luggage by Sea
(the Athens Convention) that entered into force in 1987. Its purpose is to regulate the carrier’s
liability for damages or losses suffered by a passenger if the damage-causing incident occurred
during the sea-passage and was due to the carrier’s fault or negligence.152 It applies to any
international carriage if the ship is registered in or is flying the flag of a member state, or the contract
of carriage is made in a member state, or the voyage, in terms of the contract, starts or ends in a
member state.153

The Athens Convention distinguishes among the different types of passenger’s luggage and the
carrier’s liability in relation to any one of them.154 The 2002 IMO protocol to the Convention
introduces a compulsory insurance policy required by carriers whose vessels transport more than 12
passengers to cover liability under this Convention in respect of death of and personal injury to
passengers. 155 In case of an accident the aggrieved party may enforce its claim towards the insurer of
the carrier.156 The protocol also raises the limit of liability of the carrier.157 The 1974 Convention and
the protocol further allow a member state to the Convention to introduce its own legislation

147
Art 3(b).
148
Art 3(c). Claims relating to nuclear damages are dealt with by the Convention relating to Civil Liability in the Field of
Maritime Carriage of Nuclear Material (NUCLEAR), 1971.
149
Art 3(e).
150
LLMC Convention – Ch III: The Limitation Fund.
151
1996 Protocol to the Convention on Limitation of Liability for Maritime Claim – LLMC.3/Circ.8 of 17.02.2004,
www.imo.org/includes/blastData.asp/doc_id=3528/8.pdf [accessed 19.06.2007].
152
Athens Convention relating to the Carriage of Passengers and their Luggage by Sea, 1974
http://www.imo.org/Conventions/contents.asp?topic_id=256&doc_id=663 [accessed 19.06.2007].
153
Art 2.
154
Art 8.
155
Art 4bis (1) of the Consolidated text of the Athens Convention relating to the Carriage of Passengers and their Luggage
by Sea, 1974 and the Protocol of 2002 to the Convention.
156
Art 4bis (10).
157
Ibid (n 152).
 18

regulating the carrier’s liability relating to death or personal injury providing that this liability is not
lower than the one stated in the Convention 158 and the Secretary-General of IMO is informed of the
existence of this legislation.159 However, because the new protocol has not been adopted by the
minimum number of states, the original version of the Athens Convention applies and with it the
inadequate limits of liability.160 It means that according to the Athens Convention, the Bunker
Convention and the HNS Convention, the situation as it stands today is that the ship owners are not
required to have a compulsory insurance which may be claimed directly from the insurers.161
Furthermore, the limitation of liability on the wrongdoers where it applies, is regulated by the LLMC
Convention or national law.

From the above discussion it seems that the ship owner and his insurer are strictly liable for
whatever damage they may cause. However, this unlimited liability is subject to certain provisions.
They are not responsible for damages arising as a result of natural disasters, wars162 and actions by
third parties beyond their control.163 The above exclusions are in line with the existing principles of
insurance law164 and strike the right balance between the rights and duties of the ship owner, cargo
owner and insurer. In addition, the contracting parties are free to regulate the terms of their
respective liability, subject to the proviso that they are not in breach of the existing principles of
insurance law.

CONCLUSION
Certain of the discussed laws are firmly settled in the formation of the relationship between the
insurer and the insured and do not concern directly anybody else. However, there are grey areas
where even though strict liability is imposed on the ship owner and his insurers and that they ought
to contribute to the recovery of the losses suffered by third parties, most of the victims’ claims are
left unresolved. In addition, where similar instruments have not been adopted by a state, sometimes
national laws do not cater adequately for the rights and duties of the parties.165

Furthermore, the requirements of compulsory insurance only for those vessels which are above
certain dimensions, do not reflect the present situation correctly – there are accidents involving
158
Art 7(2).
159
Art 7(2) of the Consolidated text of the Athens Convention.
160
Ibid (n 144).
161
At 7.
162
eg Art 3 of the Athens Convention.
163
The Secretariat of the International Oil Pollution Compensation Funds citing CLC’92 in ‘The International Regime for
Compensation for Oil Pollution Damage’ at 2, www.iopcfund.org/npdf/genE.pdf [accessed 15.06.2007].
164
See the Institute Clauses discussed above as well as the Hamburg Rules.
165
Ibid (n 122).
 19

undersize vessels causing as big damage as a ship falling under the requirements of the
regulations.166 In addition, although the international legislation is directed towards deciding
important issues concerning everybody, the obligations which it imposes on the adopting countries,
detracts them from becoming parties to it. It is because of the finances that any receiver is obliged to
contribute to the funds created by these instruments.167 However, what should be known is that even
though such ratification imposes harsh obligations on the states and their economy, when an accident
occurs it is the state that benefits from these funds. Furthermore, non adoption of similar standards
worldwide means that one and the same accident would be treated differently in different countries.
But people neglect the fact that the negative results would affect the Earth the same way even though
appearing in different parts of the planet.

Considering the above summary, it ultimately appears that it is both the ordinary citizen and the
environment that suffer and not the ship and cargo owners for the risks they have created. A
movement towards more unified and updated insurance laws balancing the interests of everybody
should be the guiding light when a state decides whether or not to incorporate an instrument into its
legislation.

166
Ibid.
167
Ibid.