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The freight rates and insurance premiums for voyages to/from Ukrainian ports could be increased

On February 15 the Lloyd’s Market Association published the Circular JMLA-028, whereby updated the JMC Hull War, Piracy, Terrorism and Related Perils Listed Areas through adding “Ukrainian and Russian waters in the Black Sea and the Sea of Azov”.

Last time the JWC Listed Areas was reviewed in September 2020. The LMA said that the aforesaid Circular is a “precautionary measure” taking into account the situation in the Black Sea and the Sea of Azov. Ukrainian and Russian waters in the Black Sea and Sea of Azov have become the only “potentially dangerous areas for shipping” in Europe, now in “one line” with certain areas of Guinea Gulf, territorial waters of Togo, Somalia, Nigeria and certain areas of the Persian Gulf and adjacent waters.

It should be noted that Protection & Indemnity Terms and Conditions of the major part of insurance companies and P&I Clubs have a special clause regulating insurance against war risks (“War Risks Clause”). This clause incorporates the list of insured war risks, which could arise during the usual operation of the vessel. Under the general rule, the costs and expenses of the insured (the shipowner) caused by war, civil war, revolution, rebellion, insurrection or civil strife, pirates actions, capture, seizure or arrest of the vessel, mines, torpedoes, bombs, rockets, shells, explosives or other similar weapons of war and acts of terrorists are included into the War Risks Clause.

Along with that, the P&I Rules provide that, unless otherwise agreed by the contract of insurance, there shall be no recovery in respect of the Insured’s losses arising out of the events occurred in the so-called “potentially dangerous areas for shipping”. The list of such areas is published by Lloyd’s Market Association and the International Underwriters Association, and is subject to be reviewed from time to time. Certain insurers publish their own lists and incorporate them into the insurance rules. However, the list of areas published by the two aforesaid Associations is the most recognized one in the maritime insurance world market.

In this particular case the “Ukrainian and Russian waters in the Black Sea and the Sea of Azov” without particular coordinates were included into the JWC Listed Areas. What does it mean from a legal point of view?

According to the UN Convention on the Law of Sea of 1982, the breadth of the territorial sea shall not exceed 12 nautical miles. They are followed by the so-called “contiguous zone” with breadth of up to 24 nautical miles. After that there is an exclusive economic zone with breadth up to 200 nautical miles from the sea coast. It should be noted that, according to open sources, the Russian Federation declared military trainings in the certain areas of the Black Sea and the Sea of Azov, which are extended to the territorial waters near the occupied Crimea and also near the exclusive economic zone of Ukraine and Russia. Therefore, if the insurers use the “wide interpretation” of areas listed as potentially dangerous for shipping, the territorial waters of Ukraine (where no military trainings are conducted), the contiguous zone and the exclusive economic zone (where military trainings are conducted) shall be qualified as included into the JWC Listed Areas.

This situation will undoubtedly cause increasing of the freight rates for transportation of cargoes to and from Ukrainian ports because shipowners will include additional expenses for insurance of war risks to the freight rates. We also cannot exclude that inclusion of Ukrainian territorial waters to the list of potentially dangerous areas for shipping will cause increasing of insurance premium for insurance of cargoes, which are transported to or from Ukrainian ports. However, we believe that JWC Listed Areas could be revised upon completion of military trainings or in the closest time after that.