IMO 2020-Impact on cargo insurance

Cricket fans round the world are eagerly looking forward to 2020 with excitement as the ICC T20 World Cup is scheduled to be held in October. On the other hand, vessel owners, charterers, P & I Clubs and even cargo owners are looking at 2020 with a lot of suspicion, apprehension, doubt and what not as the IMO 2020 regulations are set for implementation from 1st January 2020. Everyone talks about a race against time and a leap into the unknown. What is all this fuss about IMO 2020?

In simple terms, IMO 2020 aims to reduce air pollution arising out of the exhaust fumes from vessels due to burning of diesel. The main component of the exhaust is sulphur oxide and the regulation of the International Maritime Organisation states that the sulphur content in ships’ fuel (bunker) should be brought down drastically. Reasons are not far to seek — while sulphur emissions on land have been declining, emissions from vessels show a rising trend, setting alarm bells ringing. The maximum sulphur content permissible in ships’ fuel which is 3.5% now has to be brought down to 0.50% from 1st January 2020 onwards. It may be noted that this regulation would apply to rest of the world apart from the ECA (Emission Control Areas) comprising the Baltic Sea, North Sea, North American area & United States Caribbean Sea area, where the sulphur content prescribed for ships’ fuel is already 0.10% . Ships strictly conform to these specifications in ECA, so what is the fuss about now? 

• Even though the permissible sulphur limit is set at 0.50% against the 0.10% in ECA, problem is that now it is worldwide, so almost all vessels have to fall in line.
• The manner in which the limit of 0.50% sulphur content in fuels can be achieved are either by  a) switching over to Marine diesel or LNG b) Sufficient volume of Very Low Sulphur Fuel Oil ( VLSFO) to be made available by refineries c) Vessels to be fitted with scrubbers which would help bring down the sulphur content from the emissions.
• There are challenges for each of the above options. Marine diesel can be readily used but it is the costliest option. Use of LNG would involve modifications to ship engines ( additional cost) plus ensuring storage of LNG cylinders on board, which will again be a new challenge. Refineries do not appear to have the wherewithal to immediately ramp up production and supply VLSFO. Time is the constraint. Fitting vessels with scrubbers is being done by some but again this involves a huge cost plus most most shipyards are packed to capacity and scrubber-fitting on all vessels before 1st January 2020 is impossible.
• The maritime industry is also waiting and watching as to what penalties, each of the flag nations would impose for non-compliance with IMO 2020. Singapore and Hong Kong have spelt out that non-compliance could be looked at, as a criminal act and the owners/charterers/Master could be imprisoned and also fined. Not all countries are expected to be uniformly tough, at least initially.
• Vessel owners and charterers are mulling over each others responsibilities and how the charter parties should be worded to protect their respective interests.
• The general feeling gaining ground is that both capital and operating expenditure will go up and hence freight rates need to be hiked.

What could be the repercussions from the insurance standpoint in case of non-compliance with IMO 2020 for both Hull & Machinery and subsequently cargo? Some wordings are being developed to state the consequences for non-compliance in a marine policy. Frightening it may sound, but one thought process is that in the absence of compliance with IMO 2020 regulations, the vessel could be declared ‘unseaworthy’. If this is done, all insurance covers would cease as ‘vessel’s seaworthiness’ is an implied warranty ( Section 41 of the Marine Insurance Act, 1963)

What could be the fate of cargo interests on board a vessel which does not comply with IMO 2020 regulations? Clause 5.1 of ICC-A-2009 echoes Section 41 of the Marine Insurance Act,1963 that if the vessel is unseaworthy, the insurance cover would not operate. However, this will be applicable only if the Assured is privy to the fact that the vessel was unseaworthy. Though no separate clauses or wordings are contemplated as of now, am sure, sooner than later, there will be additional clauses in cargo policies to give effect to IMO 2020. This will be so, even if non-compliance to IMO 2020 may not necessarily be construed as ‘unseaworthiness of the vessel’ but still expose the vessel owners/charterers/managers/Master to other penalties. The clause could simply state that if the assured (cargo owner) was privy to the fact that the vessel chosen by him was not IMO 2020 compliant, cover under the cargo policy would be rendered ineffective. A broad simile can be drawn to the Cargo ISM endorsement where it does not directly enhance the risk to the cargo on board the vessel, but all the same, the cargo owner is cautioned to ensure that this has been complied with, by the vessel.