Felix Goebel
Arnecke Sibeth Dabelstein, Hamburg

Marco Remiorz
Arnecke Sibeth Dabelstein, Hamburg

Introduction

The drafters of the international maritime law recognised early on that a conflict of interest can arise when a ship operating under a foreign flag sails in the waters of a coastal and port state, but the safety of the ship is to be ensured by the flag state (cf Article 94 United Nations Convention on the Law of the Sea (UNLCOS)). This is because, due to the international nature of shipping, the danger of a ship is often realised less in the flag state (eg, Panama) and more in the coastal or port state (eg, Germany). This reduces the incentive of the flag state to properly monitor the qualitative condition of the ship.

Unfortunately, shipping accidents, such as the sinking of the oil tankers Erika (1999) and Prestige (2002), can lead to considerable environmental damage at sea and on the coast. These major damage risks are made liable and insurable by international conventions like the International Convention on Civil Liability for Oil Pollution Damage ('CLC') 92, as well as the Bunkers and Nairobi Conventions, whereby the insurance certificate to be carried on board is called a Blue Card. The shipowner or insurer then has to bear only part of the environmental damage by fixing the maximum liability amounts in the conventions. If the damage exceeds the maximum amount of liability to be borne by the shipowner, the injured parties can turn to the International Oil Pollution Compensation (IOPC) Funds, which offer further compensation.

Certificates of insurance by the state of registry of the ship

If the shipowner receives a Blue Card from the insurance company, the next step is for the state of the (bareboat) ship's registry to check the conformity of the insurance policy taken out with the requirements of the conventions. If all the requirements are met, the (bareboat) ship's registry state issues a certificate authorising the operation of the ship or trade with the ship. Although the conventions only contain the requirement with regard to insurance that it must cover the established maximum liability amounts, Circular Letter No 3464 of the Legal Committee of the International Maritime Organization (IMO) contains more precise guidelines that the (bareboat) ship's registry state can follow when issuing a certificate. However, reliance on this governmental approval process requires objective and conscientious examination by the (bareboat) ship's registry state.

Effects of sanctions on compulsory insurance and certificates

The exclusion of Russian banks from payment systems, such as SWIFT, could cause Russian insurers to cancel concluded compulsory insurance contracts with foreign shipowners. The form of the insurance certificate is uniformly regulated in the conventions and always requires the name of the insurer. Furthermore, it is stipulated that a certificate may not be effective for longer than the insurance. It follows that if the insurance contract is cancelled, the certificate that allows the ship to operate and trade no longer meets the necessary requirements and could therefore be withdrawn. In this case, the shipowner is practically only left with the choice of taking out a new insurance policy in order to obtain a new certificate from the (bareboat) ship's registry state. Without a new insurance policy, the ships concerned are also not able to call at coastal states that are parties to the international conventions. This already follows from the coastal states' obligation to (formally) check the ships' compulsory insurance certificates during port state inspections.

It is probably more problematic if a (Russian) insurer wants to maintain the insurance contracts, but sanctions imposed have a negative impact on the insurer's solvency. The consequence is an uncertain legal situation regarding whether the compulsory insurance policies still meet the requirements of the international conventions. The Legal Committee of the IMO therefore now also pleads for a renewed review of insurance by the (bareboat) ship registry states. Circular Letter No 3464 contains criteria against which Blue Cards are to be measured. For example, the financial documents of the last three years can be looked at, which have been prepared by a certified auditor of the insurer. However, since the beginning of the Ukrainian war, these have been unlikely to provide a reliable indication of the insurer's financial solvency.

Another criterion is the existence of reinsurance. Even if a reinsurance system were in place for Russian insurers, the execution of claims payments would still be problematic. The danger is that any payment obligations would then be offered by Russia in Russian rubles. Only the criterion listed in Circular Letter No 3464, the rating of an independent and internationally recognised rating agency, seems to reliably disclose the current financial solvency of a Russian insurer so that the certifying states could be guided by this. However, rating agencies that conduct business in the European Union were prohibited from rating Russian companies in the EU's fourth sanctions package of 15 March 2022. Shortly afterwards, the rating agencies S&P Global, Moody's and Fitch also announced the discontinuation of ratings for Russian companies. This will make it difficult for the (bareboat) ship registry states to assess existing Blue Cards.

Conclusion

The conclusion on the impact of sanctions on the certification process of insurers under the CLC 92, Bunkers and Nairobi Conventions is mixed. On the positive side, the IMO Legal Committee has recognised the conflict of interest inherent in the conventions. Specifically, the conventions assume that the sovereigns (contracting states to the conventions) comply with the rules agreed in the conventions and control any private actors (eg, the insurers issuing Blue Cards); that is, the (bareboat) ship registry state monitors the solvency of the insurers against the criteria outlined above and, in the event of non-compliance, does not accept the Blue Card issued, which is tantamount to withdrawing the operating licence for the merchant ship. The Ukrainian war could now lead to Russia subordinating the objective and guideline-orientated solvency control of insurers to state interest, which would undermine confidence in the regulatory mechanism of the conventions. To restore this loss of confidence, Russia already refers to a reinsurance system by the Russian state. However, it is not clear in which currency a Russian reinsurance company that might be obliged to provide cover would settle a loss event. Although the drafters of the conventions probably assumed settlement in the world reserve currency (United States dollar) or comparable currency (the conventions also refer, at best, only to the International Monetary Fund's Special Drawing Rights), we would not be surprised if Russia, similar to the gas payment debates, were to pay any damages in Russian rubles. The consequence would be a possible circumvention of sanctions and the burdening of the injured party (recipient of the damage payments) with the exchange rate risk.

In the event that the insurer is unable to compensate for environmental damage, a practical solution, also discussed by the Legal Committee, is likely to be to make the IOPC Funds pay the claim directly in order to, at least, cushion the negative externalities resulting from a damaging event. The even more practical answer has recently been given by US President Biden, who has decreed that Russian-flagged ships are no longer allowed to call at US ports, which also significantly reduces the risk of environmental damage in US waters and means that the US no longer needs to see this risk fully covered by the IOPC Funds.

We suspect that, in the medium to long term, this economic incentive will lead shipowners to try to reflag their vessels in order to continue operating any sanctioned vessels worldwide, which could also have a positive impact on Blue Card certification if the new (bareboat) ship registry state no longer accepts a Russian insurer. It remains to be seen, however, whether the flag-outs will then take on a form similar to the covert continued operation of ships of the temporarily sanctioned Iranian state-owned Islamic Republic of Iran Shipping Line (IRISL).