ON
SAFER SEAS – STEAMING TOWARD THE ISPS CODE
(Published October
2003)
When
an underwriter pays a loss under a policy of insurance, it is entitled, within
the terms of such insurance, to seek reimbursement of its subrogated interests
in paying a loss against third parties who caused or contributed to the loss.
Interestingly, numerous insurers have done just that with respect to the losses
sustained from the 9/11 terrorist attacks. Many filed suits last month in New
York and Washington, D.C., against Al-Qaeda, and other terrorist groups and
countries, including Saudi Arabia, seeking to recover billions of dollars,
including $454 billion in treble and punitive damages. While not likely to
deter the terrorist themselves, the potential for such an award against Saudi
Arabia, for example, might encourage cooperation in fighting terrorism and
strengthening the new post-9/11 regimes now being implemented globally to increase
security.
Although 9/11 raised the consciousness of the specter of terrorism for the American public, terrorism itself is not a new threat, especially in maritime commerce. Seafarers and ships have faced security threats ever since sea trade began. Protection by government against such maritime loss caused by terrorist attack is also not new. But the dualistic approach between government, as protector of public interests, and the insurance market, as a mechanism for reallocating private loss, may present an approach to combating and ensuring a safer and more secure maritime trading environment.
Following the 9/11 attacks by air, increased concern arose almost immediately with respect to an attack by sea, using vessels as instruments to further terrorist evil. So too did concern develop with respect to both marine, as well as non-marine, insurance coverage for such future heinous acts. Such marine insurance generally excluded acts which were the result of intentional conduct, such as malicious acts or vandalism directed to promote some political objective, for example under the War, Strikes and Related Exclusions clauses common to marine insurance policies. Before the 9/11 attacks, insurers generally neither priced nor reserved for losses arising from a terrorist attack. As a result of a lack of coverage available, the U.S. government responded by passing the Terrorism Risk Insurance Act, establishing a new program under which the federal government shares the risk of loss with the insurance industry, and mandates that coverage be provided.
In addition to searching for ways to spread the risk of loss, new regimes have also been implemented to minimize the potential likelihood of another catastrophic terrorist attack. Recall that in maritime commerce, terrorism had already once claimed victim a passenger aboard the ACHILLE LAURO off the coast of Egypt in 1985. Following that incident, the International Maritime Organization ("IMO") adopted a set of security guidelines that provided recommendations for increased security. However, it was generally left to individual countries, ports or ship owners to develop their own specific security provisions. After 9/11, the situation changed.
At the end of last year, the IMO amended the 1974 Safety of Life at Sea Convention ("SOLAS") to strengthen maritime security. The principal amendment provides new detailed security-related requirements for governments, port authorities and shipping companies under a new International Ship and Port Facility Security Code ("ISPS"). U.S. Coast Guard requirements, implementing the ISPS, are now codified in the Code of Federal Regulations, 33 CFR Part 104. The new ISPS Code will come into force by July 2004, and according to the American Bureau of Shipping ("ABS"), it will likely impact almost 43,000 ships and mobile offshore drilling units.
In essence, the ISPS Code takes the approach that ensuring the security of ships and port facilities is basically a risk management activity. As such, to determine what security measures would be appropriate, an assessment of the risks must first be made. Accordingly, the Code aims to create a standardized, consistent framework for evaluating such risks.
The risk assessment management concept is embodied in the ISPS Code through a number of minimum functional security requirements for ships. These requirements will include ship security plans, ship security officers, company security officers, and certain onboard equipment. With respect to the latter, regulation XI-2/5 of the ISPS Code requires all vessels covered by the Code to be equipped with a ship security alert system, which when activated, transmits a ship-to-shore security alert to advise the appropriate authority of the identification of the ship, its location and indicating that the security of the ship is under threat.
Because each ship (or class of ships) presents different risks, the method in which they must meet the specific requirements of the Code will be determined, and eventually approved, by the particular governing state (or by its Recognized Security Organization [RSO]) and also by particular port authorities upon vessel entry. The ship security system, equipment and plan will all be subject to verification to ensure that they comply with the requirements of SOLAS and the ISPS Code. Upon a satisfactory initial verification, an International Ship Security Certificate (ISSC) will be issued and remain valid for five years, after which it will require renewal. After June 30, 2004, non-U.S. flag vessels that have on board a valid ISSC that attests to the vessel’s compliance with SOLAS and the ISPS will be deemed to be in compliance with Coast Guard regulations.
ABS,
a classification society that already determines the structural and mechanical
fitness of ships, seeks designation as an RSO from the leading flag state administrations
so as to be able to approve ship security plans, perform security audits of
ships and issue the necessary ISSCs. It has also now published its September
2003 Guide for Ship Security to assist companies and individuals in achieving
compliance with the security provisions (see http://www.eagle.org/absdownloads/downloads/senddownload.cfm?id=212).
In addition to auditing to the ISPS Code, ABS provides an optional class
notation,
SEC, which may be issued to an ABS-classed vessel that meets all of the requirements
of the ABS Guide for Ship Security. This SEC notation becomes part of the vessel’s
history in the ABS Record.
As noted above, further implementation of the ISPS Code will include inspection by local port and security authorities upon a vessel call to port. Along with presentment of the ISSC, local authorities may also require a Declaration of Security to be signed by the Master or Ship Security Officer (SSO) and a representative of the shore-side authority, confirming the security measures that will be taken and identifying certain security issues, such as where people may move on and off the ship and where cargo is to be loaded or discharged. The declaration will also designate the person aboard ship who is responsible for implementing the security measures. Although a declaration may not be required in every circumstance, a prudent master and SSO will be prepared to implement such an agreement upon arrival at a port, especially when the level of threat is at a heightened stage.
While the new Code and its requirements place new costs on shipowners, noncompliance is not likely to be a profitable venture. In addition to possible delay, detention, refusal for entry, as well as fines for lack of compliance, there is yet another, less obvious potential downside for noncompliance. Insurance coverage may be voided by a marine insurer for failure by the shipowner to obtain a required inspection and certificate. Under the law applicable to marine insurance, breach of an express warranty, such as a failure to obtain required surveys and certificates, for example, has given rise to a defense to coverage. Even if not provided for as an express warranty in the policy itself, the doctrine of utmost good faith in revealing all material facts in placing coverage may also give rise to a defense of voiding a policy should an assured mislead an insurer about its compliance with the ISPS Code and inspection certificates.
Not all the issues involved in the complexity of the problem presented by terrorism can be addressed within the scope of a single article. Nonetheless, insurers and shipowners assessing and managing risk should realize the need for further analysis on the subject and planning for compliance before next July. There are a number of additional resources available via the internet, as well as conferences scheduled to discuss marine security and compliance, including the U.S. Maritime Expo, which will be held October 29-30 in New York, with panel presentations on risk management (for more information, see www.maritimesecurityexpo.com). Similarly, Lloyd’s List is sponsoring a conference on Maritime Security & Safety early next year in London (see www.lloydslistevents.com/lm1452). With respect to particular legal issues, consultation with counsel knowledgeable in this developing area is likewise recommended in charting a course that minimizes risk and ensures compliance.
