There are legal gaps in protection against military risks of maritime transportation – experts

The lack of legal certainty is due to the use of two mechanisms of guarantees to cover losses at different times

The validity of one mechanism of guarantees of compensation for damage to operators of the Black Sea shipping market ended on December 1, 2023, while the actual work of the second mechanism started only at the end of January 2024. The hasty launch of the second mechanism created legal gaps.

Dmytro Ochkolas, a leading lawyer, attorney at law firm Interlegal, told GMK Center in a commentary.

As of the beginning of the year, the Ukrainian authorities allowed the existence of a legal vacuum (violation of the principle of certainty) regarding guarantees of compensation for losses from war risks to charterers, operators and/or owners of vessels.

At the end of May 2023, the Cabinet of Ministers of Ukraine approved the «Procedure for Providing War Risk Compensation Guarantees to Charterers, Operators and/or Ship Owners». The guarantees applied to situations where the damage caused arises as a result of armed aggression of the Russian Federation, during the vessel’s stay in Ukrainian territorial waters (12 miles), if they transport cargo to or from open ports of Ukraine. The state budget-2023 envisioned UAH 20 billion ($547 million) for compensation for possible damage.

Compensation was expected to be provided to those shipowners who had entered into an insurance contract but were denied compensation for losses by the insurer. In order to receive compensation, the shipowner had to submit a set list of documents to the Ministry of Infrastructure not later than 90 calendar days from the date of receipt of the insurer’s refusal to provide insurance compensation, but not later than December 1, 2023. The resolution was valid until December 1, 2023, and after that no application was subject to consideration. The real workability of this mechanism remained unknown, as there were no facts of compensation payments, i.e. these funds were not used.

Since the end of last year Ukraine started to develop a new mechanism of guarantees to cover losses of ship owners in case of their occurrence. As a result, the Unity ship insurance program was created, which the Ukrainian authorities are implementing jointly with Marsh McLennan and a pool of insurance companies headed by Ascot. The total amount of coverage under the program is $50 million. UAH 2 billion was allocated in the state budget-2024 from the reserve fund for its implementation.

«For almost two months now, there has been legal uncertainty from which date compensation will be calculated in 2024,» says Dmitry Ochkolas.

In addition to the fact that the state has reduced the size of the insurance fund by 10 times for 2024, there are legal gaps in the mechanism of guarantees of compensation to charterers, operators and ship owners.

«As of 15.02.2024, no relevant decree on the provision of guarantees of compensation for damage caused as a result of armed aggression for 2024 has been adopted. Also, the question remains open whether shipowners with whom incidents occurred between December 2, 2023 and January 1, 2024 can count on compensation,» notes Dimitri Ochkolas.

However, the long preparatory work has led to the first practical results and the beginning of insurance of transportation along the sea corridor.

«In the last days of January, among all vessels moving to the ports of Greater Odessa, there was a vessel that was insured against war risks thanks to Unity insurance. The cost of the insurance amounted to 0.75% of the vessel’s value. More than a dozen more insurance applications are in the works. Normalizing the insurance market in trade is a cornerstone of resuming value-added exports. That is why it is so important for us that insurance becomes more accessible and is already actually used for export of Ukrainian products», said Yulia Svyrydenko, First Deputy Prime Minister, Minister of Economy of Ukraine.

The purpose of creating a mechanism of guarantees to cover losses is to return insurance rates for cargo transportation on the Black Sea to the pre-war level of 1% of the value of the cargo. At the same time, the rates may be subject to strong fluctuations depending on the current security situation in the sea corridor.

«Supplementary war risk insurance rates are still high, although there is some inherent volatility depending on the presence and nature of incidents. For example, when there was a missile attack on the bulk carrier Kmax Ruler in November 2023, the rates of additional insurance for ship calls to Ukraine rose sharply. Accordingly, insurers did not even seek to set firm terms and conditions for voyages that had not yet taken place. Rates for Ukraine are dynamic, which means that any current rates may become irrelevant tomorrow if the voyage does not take place within a few weeks,» emphasizes Javor Velchev, partner at Shippossible Ltd.

As GMK Center reported, for half a year of operation of the sea corridor (as of February 13), 736 vessels left the ports of Greater Odesa (ports Odesa, Chornomorsk and Pivdennyi), which transported almost 23 million tons of export cargo, of which more than 2/3 is agricultural products.

In total, in 2023, cargo transshipment in Ukrainian ports increased by 5% y/y –  to 62 million tons. The dynamics of transshipment in the ports of Greater Odessa in 2023 compared to 2022 was multidirectional: the port Odesa showed growth by 9% to 8.4 million tons, while in Chornomorsk and Pivdennyi there was a decrease – by 3%, to 11.4 million tons and by 34%, to 10.1 million tons, respectively.