A brief introduction to marine hull and machinery insurance


Iran hull and machinery insurance tanker


Hull & Machinery insurance provides physical loss or damage insurance for not only the hull (or shell) of a ship but also her propulsion machinery and any equipment used for activities such as cargo handling. 

Typical cover provided

Hull and Machinery insurance usually covers loss or damage caused by major named perils such as collision, grounding, fire and explosion, earthquakes (and the tidal waves that might follow them), as well as general perils of the sea, lakes or rivers - which must be shown to be extraordinary in nature rather than just the fact that the sea was a bit rough that day! Some Hull and Machinery policies also cover loss caused by piracy which is quite an important issue currently, with the situation in various parts of the world such as the coasts of East and West Africa as well as parts of South East Asia.

This type of policy also covers loss or damage to the vessel caused by accidents in moving cargo or fuel around (such as capsizing (tipping over) the ship), or arising because a piece of machinery has broken, or a boiler has burst. Negligence by the crew, or a repairer, is also covered. However there is a requirement for the Assured to exercise something known as due diligence, which means that if there is engine type damage, insurers will be looking for examples to make sure that the regular maintenance was up to date and undertaken properly, or that the crew have been trained properly.

Under this coverage, whilst the damage caused by the piece of machinery breaking or the boiler bursting is covered, the actual boiler or piece of machinery is not.

Sometimes ships collide - both with other ships and other objects, such as navigation buoys. In many cases the ship will be liable in law for any damage caused to the other ship or object. The hull and machinery policy, although mainly a physical damage policy, does provide an element of liability cover so long as the collision is with another ship.

The cover is for the damages that the insured ship will have to pay not only to the other ship, but also any property such as cargo (goods) on the other ship. The cover in some policies however is limited to 75% of the actual liability of the shipowner. The original aim of insurers was that by bearing the other 25% themselves, the shipowners might take more care in the operation of their ships. What has happened in practice is that the shipowners have organised other insurance for that 25%.

Most hull and machinery policies will also cover sue and labour expenses, which are those costs incurred by an insured when trying to solve a problem for himself - although the loss may in fact be covered by the insurers. A hull example would be a ship whose engine breaks down in the middle of the English Channel. The insured might call for some tugs to come and help tow the ship into the nearest port -which would be very prudent as a ship without power is a danger to itself and also other vessels. As this action has probably reduced or even removed an insurance claim, the insurers will pay those reasonable tug costs.

Particular to maritime law, and by reference therefore marine insurance, are the concepts of salvage and general average. Salvage is the concept of someone voluntarily rescuing you who then earns a reward. General Average is the concept of all parties (for example ship and cargo) contributing to the costs or expenses one of them makes in order to save everyone. An example of this would be if a ship grounded and damaged her engines trying to refloat herself. By doing this she has being trying to save the cargo as well, and so the cargo will pay a share towards the engine repairs.

These obligations exist in law, irrespective of insurance but the insurers will cover these costs under most insurance policies. 

Optional extensions

It is possible to buy 100% cover for collisions from your hull insurers as well as extending the policy to cover collisions with other objects (known as fixed and floating objects cover).

It is also possible to purchase top up insurances to ensure that if the ship is completely lost, that the indemnity is adequate to actually replace the vessel. This type of insurance is known as Increased Value and is generally capped at 25% of the agreed value on the main policy to prevent over-insurance.

War and Strikes in particular are actually perils which are insurable and will often be purchased as an extension to the main marine cover, which almost but not quite replaces the exclusion that will be found in the main marine hull policy wordings.

Key exclusions

The standard exclusions in a hull and machinery policy are

  • War- which also includes damage caused by bumping into a disused mine or torpedo floating around in the sea
  • Strikes- which includes not only damage caused by strikes and strikers but also terrorist type risks
  • Malicious acts -loss or damage caused by people acting maliciously or from a political motive and either detonating explosives or using weapons of war
  • Nuclear - loss or damage arising from a weapon of war employing atomic or nuclear reactions 

Rating factors

There are many different types of ships in existence, from old wooden sailing ships to the most modern cruise vessels, but the basic things that the insurers are considering are the same for all of them. These points include the ship's age, when and where she was built, her construction material, what she is used for and where she is being operated in the world.

Insurers will also look at the regulatory regime the ship is operating under (known as her Flag) as this will give a good indicator as the rigour by which the ship is regularly checked for compliance with International law, and hence the general operational standards applied.

Obviously insurers will also look at the individual loss record as well as their previous experience with any particular type of vessel.