The provisions on insurance are contained mainly in ‘BARECON 2017’ Clause 17, which envisages two types of insurance of interest to the parties. On the one hand, the hull and machinery (H&M) insurance, and on the other hand, the protection and indemnity (P&I) insurance. Hull and machinery policy protect the assured against the damages or losses caused to the ship, including its equipment, machinery, boilers, fixtures and fittings. On the other hand, P&I insurance is liability insurance covering the liability, both in contract and tort, of the shipowner or the charterer in case of damages caused to third parties. P&I insurance is characterised by the fact that, in many cases, the insurers are the owners and charterers themselves, who are grouped in a mutual society called P&I Club.
The obligation to take out insurance
Marine insurance is the oldest of the insurance contracts, dates from the fourteenth century, and was born in Italy. However, the first regulation of marine insurance appears in the Ordinances of Barcelona’s Magistrates of 1484, a compilation of customary uses (Ruiz Soroa et al., 1993). Furthermore, marine insurance is of great importance in the maritime industry, in general, and in charter parties in particular. For this reason, concerning bareboat charter agreements, the forms have traditionally established a clause regarding the obligation to take out and maintain insurances. In this sense, in its first version, model A of ‘BARECON 1974’ already established that the party obliged to procure insurance for the ship against both marine/war and indemnity risks was the bareboat charterer (Gorina Ysern, 1986; García-Pita, 2005). However, there was an alternative clause that, if included, imposed the obligation to take out H&M insurance on the shipowner, but the demise charterer was always responsible for contracting P&I insurance (Gorina Ysern, 1986). This same option was applied by the subsequent drafters of the BIMCO form in 1989, 2001 and 2017.
In this regard, Clause 17 (b) of ‘BARECON 2017’ establishes that: “(i) During the Charter Period the Vessel shall be kept insured by the Charterers at their expense against hull and machinery, war and protection and indemnity risks (and any risks against which it is compulsory to insure for the operation of the Vessel, including maintaining financial security in accordance with subclause 13(c) (Financial Security))”. An alternative option is established in Clause 17 (c), according to which “(d) uring the Charter Period the Vessel shall be kept insured by the Owners at their expense against hull and machinery and war risks. The Charterers shall progress claims for recovery against any third parties for the benefit of the Owners’ and the Charterers’ respective interests”, but that it “shall be kept insured by the Charterers at their expense against Protection and Indemnity risks (and any risks against which it is compulsory to insure for the operation of the Vessel, including maintaining financial security in accordance with subclause 13(c) (Financial Security))”. When the parties take none of these options (i.e., unless otherwise agreed), it shall be the charterer who shall take out all the insurances mentioned in the clause.
Indeed, the parties are free to select any one of the possibilities mentioned above. However, the literature has documented commercial and legal circumstances where insurance options under BARECON form may be more suitable. In this sense, there are at least three criteria on which the parties may rely upon when determining who has to procure insurance for the ship. They are 1) the criterion linked to the obligation of maintenance, 2) the criterion linked to the insurable interest, and 3) the criterion linked to the contract’s duration.
The criterion linked to the obligation of maintenance
According to the first criterion, the clauses’ design is linked to the duty to maintain the ship. As seen, both the nautical and the commercial management of the vessel fall within the charterer’s responsibility. The logical consequence of the fact that the bareboat charterer is, during the term of the contract, the “de facto” owner is that he also assumes the maintenance and repair costs (Petit Lavall Mª.V., 2015), and this is also the solution adopted in ‘BARECON 2017′ Clause 13(a). However, this obligation is limited in principle to damages produced because of the ship’s operation, and special rules are established for structural repairs and those due to the ship’s defect. Its natural wear and tear are also excluded (Pulido Begines, 2015; Girvin, 2017). To ensure adequate compliance with the maintenance obligation, the owner is allowed to carry out inspections on the ship during the term of the contract, as long as they do not affect the ship’s normal operation. The owner must bear the expenses incurred due to the survey (Clause 14) (Petit Lavall Mª.V., 2015).
Furthermore, the bareboat charterer is bound to return the vessel in the same condition in which she was received. When the agreement is terminated, and the parties have not extended it, the charterer must therefore return the ship in the same condition and with the same qualities with which she was received, except, as seen, for normal tear and wear (Clause 10). Consequently, where the parties opt for the criterion linked to the obligation of maintenance, it is reasonable to place the obligation of insuring the vessel on the bareboat charterer (Gabaldón García and Ruiz Soroa, 2006).
The criterion linked to the insurable interest
The second criterion links the obligation to insurance, not to maintenance, but with the insurable interest. Moreover, although the charterer is responsible for maintaining and repairing the ship, the owner must still guarantee that the charterer is entitled to the vessel’s peaceful enjoyment (Petit Lavall Mª.V., 2015). In this sense, by virtue of the indemnity clause (Clause 22), the charterer must neither be disturbed by the exercise of maritime liens against the vessel nor by seizures derived from events before the bareboat charter agreement. If these were the case, the shipowner would have to adopt all reasonable measures to hold the charterer harmless, who will have the right to be compensated for breach of a warranty (Pulido Begines, 2015). Furthermore, the demise charterer has a lien on the ship for those amounts paid in advance to the owner that the latter is not entitled to collect (Clause 20).
Arguably, both parties to the charter agreement have insurable interests related to the ship: They have obligations that, although they are different, are similar in their material scope. Indeed, according to MIA Section 5(1), it has an insurable interest “every person [ …] who is interested in a marine adventure”. In particular, Section 5(2) establishes that “a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof”. Thus, given that the shipowner and the charterer can both be affected in their assets by claims, which are potentially burdensome for each of them, it can be said that both parties are holders of insurable interest (García-Pita, 2005; Gilman et al., 2018).
The question then is who has the main interest in each case, since it should arguably be him who has to insure the vessel against the risks that affect this particular interest. Indeed, the insurable interest of the shipowner is proprietary: he is the owner of the ship. On the contrary, that of the demise charterer is probably his desire not to be liable to the owner in case of damage to or the vessel’s loss (Aikens, 2017; Blackburn and Dinsmore, 2018). Although it seems logical to cover such interest with recourse to liability insurance, it can also be insured under a hull policy (See Feasey v Sun Life Ass Corp of Canada  EWCA Civ 885). Indeed, considering the literal wording of ‘BARECON 2017’ Clause 17, the intention of the parties arguably is that the liability of the charterer vis-à-vis the owner is covered by the hull policy, while the P&I insurance would cover the liability of the former (and the owner) to third parties.
Besides, during the contract term, the charterer may be held liable to third parties for damages caused by himself and his agents and servants, both in contract and tort (Petit Lavall Mª.V., 2015). Such risks are included in the scope of coverage of P&I insurance (Hazelwood and Semark, 2013), which is why it is arguably the charterer who, as the party who faces them, should contract and maintain this insurance. However, there are occasions on which, even though it is the charterer who possesses the vessel, liability for the damage caused is attributed ex lege to the shipowner (García-Pita, 2005). This is the case, for example, concerning damages caused by oil pollution from tankers, which are also included among the risks insurable under P&I policies. However, even where the owner is prima facie liable for the damage caused to third parties, he will have an action against whoever is responsible for the loss, which, in the present case, will usually be the charterer, as he is in charge of the nautical management of the ship. Consequently, if the parties chose this criterion, it would seem logical that the owner should be responsible for contracting and maintaining H&M insurance, while the charterer would be under a duty to provide P&I insurance (García-Pita, 2005; Rodríguez, 1984).
The criterion linked to the duration of the contract
Finally, the last criterion that may assist the parties when determining who is responsible for contracting insurances is linked to the contract’s duration. In this sense, according to BIMCO the owner should be responsible for insuring the vessel against the hull, machinery and war risks in those cases in which the ship is chartered for short periods, between four and six months (e.g. cruise ships and ferries). In all other cases, it would be the charterer who would be obliged to contract insurances. (Petit Lavall Mª.V., 2015; Davis, 2005). In the author’s opinion, this criterion seems logical because it is normal for the shipowner to have already assured the ship before the demise charter is agreed. For this reason, it seems more reasonable for the interests of the parties, both from an economic and practical point of view, that, in short-term contracts, the ship stays insured by the owner, without prejudice that the latter passes on the insurance cost to the charterer through an increase in the hire. Indeed, since there is previous hull insurance arranged by the shipowner, it would make no sense that the charterer would have to arrange an identical hull policy. Neither would it be practical for the owner to terminate or interrupt his insurance policy for a four to six months period. Indeed, after finishing the charter agreement, he would have to arrange another policy again. Therefore, under short-term contracts, the most reasonable option is that the owner is the party who shall contract the hull insurance, without prejudice to who will have to pay for the premiums.
The breach of the duty to take out and maintain the insurances
Be that as it may, whoever is the party responsible for taking out and maintaining the insurance, the breach of such obligation will give the innocent party the right to repudiate the charter party (cl. 31(a)(ii)(2)) and sue for damages (Gorina Ysern, 1986). English literature and case law has established that the injured party is entitled to terminate the contract if the contract expressly envisages this consequence or, failing that when it derives from the content of the contract (Grand China Logistics Holding (Group) v Spar Shipping AS  EWCA Civ 982,). Otherwise, it should be considered an innominate or intermediate-term (Bunge Corp v Tradax Export SA  1 W.L.R.), so that the intention of the parties when they concluded the contract has to be taken into account (Sarll, 2017). However, as seen, the ‘BARECON 2017’ Standard Agreement expressly provides that the obligation to take out and maintain the insurance is a condition, so any breach in this regard will give the other party the right to terminate the bareboat charter.
The situation is different when, without fault of the parties to the charter agreement, the insurer does not pay the compensation due, even though the risk is covered by the policy; for example, in the event of insolvency of the underwriters. In this regard, it appears to be necessary to distinguish between two cases, depending on when the insolvency occurs: before or after the casualty. In the first case, the insolvency of the insurer before the casualty arguably entails a breach of the ‘insurance’ clause, since it requires not only to take out insurance, but also to maintain it during the term of the contract (Blackburn and Dinsmore, 2018; Gürses, 2017).
On the other hand, if bankruptcy occurs after the casualty, the obligation to maintain the insurance should not be considered to have been breached, given that – at least after the total loss of the ship – the bareboat charter agreement is deemed to be terminated (cl. 31 (c)). The termination of the contract also implies the termination of the obligation to take out and maintain the insurance (Gard Marine and Energy Ltd & Anor v China National Chartering Company Ltd & Anor  UKSC 35) (which, furthermore, could no longer be made effective, as the risk intended to be covered had previously materialised). Accordingly, if the insolvency occurs after the loss, liability lies with the party who causes such loss (The Ocean Victory  UKSC 35).
A different situation would arise in case of partial loss, i.e. the ship is simply damaged, and the cost of repairing such damages is less than the sum insured. On the one hand, the charterer would have to compensate for the damages caused (without insurance, given the underwriters’ insolvency). This is so because, under ‘BARECON 2017′ clause 13(a), the charterer is responsible for the vessel’s maintenance and repairs during the contract term. On the other hand, since the contract is still in force, it may also be considered to have been breached by the party responsible for contracting and maintaining the insurance, by virtue of clause 17, from the moment at which the insolvency is known to the party obliged to take out the insurance (The Ocean Victory  UKSC 35).
Subrogation of the insurer
Another issue that arises concerning the insurance clause is that of the subrogation of the insurer. Subrogation is an institution whereby the underwriters acquire the rights and remedies the insured may have against the persons responsible for the damage or loss, once compensation has been paid, up to the limit of that compensation.
Accordingly, for the subrogation of the insurer to occur, two conditions are necessary: (i) that the underwriters compensate the insured for the damage suffered in the subject-matter insured (Tato, 2002), and (ii) that there is a third party who is responsible for causing the damage compensated by the insurer (Martín Osante, 2012). Concerning road transport insurance, the Spanish literature occasionally adds a third condition: the underwriters’ willingness to subrogate to the insured’s rights and remedies. However, concerning marine insurance, it is considered unanimously accepted that subrogation operates ipso iure (Arroyo Martínez and Rueda Martínez, 2017; Romero Matute, 2018). In any case, it does not seem to be very relevant as to the fact that subrogation is not an obligation but an insurers’ right.
A particular problem that may arise about the insurer’s subrogation in the bareboat charter agreements is the one that occurs when both owner and charterer are insured jointly under composite insurance. In the event of a casualty, the charterer is responsible for loss of or damages to the ship. This has been a controversial issue over the years because the parties’ insurable interests under a bareboat charter agreement are different, at least in what the hull insurance is concerned. While the shipowner’s insurable interest is the ship’s property, that of the charterer lies in the desire not to be held liable vis-à-vis the owner in the event of the ship’s damage or loss. Consequently, the situation is not that of joint insurance but that of composite insurance.
We are under a joint policy when the insurable interests of the parties in the subject matter insured are the same. It would be the case of co-ownership, where all insured parties would have the same insurable interest (i.e. a proprietary interest) In those cases all co-insureds are exposed to the same risks and they suffer a joint loss when a casualty due to an insured peril occurs (Gürses, 2016). Consequently, it is considered that the co-insureds’ rights and obligations are indivisible (Merkin and Stuart-Smith, 2004; Dewar, 2011), and any damage or loss affects them all. Likewise, any of the co-insureds’ negligence or fraud will affect all of them, regardless of who caused the damage (Clarke, 2014). Conversely, where the insurable interests are different (as it happens, for example, in a bareboat charter, where the insurable interests of both the shipowner and the bareboat charterer are different), the situation is that of composite insurance. In these cases, despite the fact that the parties are insured under the same policy, it is held that there are as many insurance contracts as insurable interests. Therefore, each party retains its rights and obligations (Eide UK Ltd & Anor v Lowndes Lambert Group Ltd & Anor  EWCA Civ 3005,). For that reason, it is considered that the breach or fraud of one of the parties does not affect the other co-insured(s) (Harris, 2011).
Regarding this issue, English literature and jurisprudence have developed three doctrines to solve it: the theory of circuity of action, the theory of the implicit term in the insurance contract, and the doctrine of the construction of the main contract.
The theory of circuity of action
According to the theory of circuity of action, under a joint or a composite policy, the insurer cannot recover the co-insured’ compensation from who caused the damage. This is so because the amount that the insurer could claim by way of subrogation would be the same as that the co-insured charterer could request from the insurer under the hull insurance policy (which, as shown above, also arguably covers his interest in not being held liable vis-à vis the owner) (The Yasin  2 Lloyd’s Rep. 45; Petrofina (UK) Ltd v Magnaload Ltd  2 Lloyd’s Rep. 91). For this theory to apply, two conditions must be met: (i) identity between the parties that are claiming; and (ii) that the amounts which are reciprocally claimed are the same (Rose, 2013; Jing, 2016).
However, given that the insurable interest of the charterer (in avoiding liability to the owner) can be insured both under a P&I and a hull policy, if the latter only covered the owner’s proprietary interest but not the charterer’s liability causing the damage, his interest would not be insured under the H&M insurance. If the bareboat charterer is responsible for the casualty, the insurer could proceed against him once the compensation has been paid to the owner. Therefore, in those insurance contracts in which the only insured interest is the ship’s ownership (proprietary interest), the theory of ‘circuity of action’ would not prevent the insurer’s subrogation (Gürses, 2016). Likewise, in cases where the sum insured is less than the damage caused, the circuity of action would not prevent the insurer from claiming the amount of those damages not covered by the policy.
The theory of the implicit term in the insurance contract
Due to the limitations of the ‘circuity of action’ doctrine, a second theory arose by which, in the event of composite insurance, the insurer cannot take the position of the owner and claim against the co-insured charterer because the insurance contract itself prevents him from doing so (Mead, 1998; Thomas, 2016). In this sense, in Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd  2 Lloyd’s Rep. 578, the High Court held that in cases where the party in breach appears in the insurance policy as co-insured and has an interest in the vessel, the insurer cannot exercise the right of subrogation against the co-insured who caused the damage or loss. The Court understood that there is an implicit term in the insurance contract under which the insurer waives the right to exercise such remedy. A couple of years later, the same judge upheld the ‘implicit term’ theory in National Oilwell v Davy Offshore  2 Lloyd’s Rep. 582.
The theory of the construction of the main contract
Subsequently, in Co-operative Retail Services v Taylor Young Partnership  UKHL 17, the then House of Lords confirmed, albeit in obiter dictum, the opinion expressed in Hopewell Project Management. Nevertheless, the Court held that the explanation for the underwriters’ lack of standing was rather to be found in the underlying contract. In other words, the House of Lords held that there was an implicit term in the main contract, by virtue of which the co-insured parties waived the right to claim from each other the damages covered by the insurance policy (Gürses, 2016). Thus, a third theory was born, that of the ‘construction of the main contract’. According to this theory, to decide whether or not the insurer can be subrogated into the owner’s rights, it is necessary to analyse the parties’ provisions in the main or underlying contract, in this case, the bareboat charter agreement. If the liability between the parties is excluded, either explicitly or implicitly (Merkin and Stuart-Smith, 2004; Lowry et al., 2011), such exclusion affects the insurer, who will then lack standing to sue. Conversely, if the liability between the parties is not excluded, there will be no impediment, in principle, for the insurer to bring a subrogated claim against the co-insured who caused the loss (Gürses, 2016; Ter Haar, et al., 2016).