Section 6 Liabilities in respect of fines
126.96.36.199 Purpose of cover for fines
Fines are generally regarded as well-deserved penalties imposed to punish offences committed against the law and regulations that have been adopted for the common good. As a result, there is normally no insurance protection available since providing cover against fines would contradict the very purpose of them. The shipping industry has, however, seen a tendency for countries to use fines indiscriminately as a source of additional public revenue. The fines may then be imposed for trivial violations of obscure administrative regulations and applied arbitrarily and outside the due process of law. Additionally, the shipowner may become the innocent target of sanctions against his ship which has been used, without his knowledge, and often by persons unknown, as a vehicle for illegal activities. The fines may be of an amount that bears no reasonable relation either to the offence committed or to the involvement of the shipowner. The fines may even be for the full value of or result in the confiscation of the ship. In such a situation Rule 7 Section 9 applies.
In such situations there may, therefore, be a justified need for insurance protection against fines in shipping. The purpose of the cover is to allow an innocent shipowner to continue trading his ship where he becomes the victim of exorbitant fines for breaches of legislation he could not reasonably know about or for actions he could not control or foresee the extent of cover under P&I Insurance is defined in this section. The nature of the risk justifies a restrictive interpretation of the cover provided.
The cover is for liability in respect of fines. Great imagination is shown by those who draft administrative regulations: sanctions similar to fines are often called dues, penalties or charges. Accordingly, you have to look more at the nature and purpose of the sanction than its legal label. So, one of the sanctions for oil pollution in Sweden is called a charge (vattenföroreningsavgift) and as a result, it may be covered.
188.8.131.52 Cover is for fines against Member
The cover is primarily in respect of fines against the Member for which he can be held legally liable by applicable law and for the non-payment of which the ship can be arrested. Fines arising out of the personal misconduct of the Member may amount to intent or gross negligence and, as such, be excluded under Rule 11 Section 1.
Fines against the ship are often formally directed against the Master, chief engineer or other members of the crew. Where the individual fined could be regarded as a stand in, substitute or scapegoat for the Owner, the same cover applies as if the fine had been imposed on the Member directly. The proviso is that the Member has either a legal or contractual obligation to reimburse the crew member against personal fines arising out of an act or omission committed within the scope of his employment or that it was otherwise reasonable for the Member to reimburse him. A further requirement for recovery under this Rule is that the Club approves the reimbursement. This underlines the need for close contact between the Member and the Club from the outset of any such case.
When the fine is imposed for smuggling of goods or cargo or any attempt thereat, the availability of cover is subject to the Club’s absolute discretion. It is important for the Member to immediately notify the Club.
Cover is not provided for actions against the ship for violations or infringements that took place when the ship was owned by a shipowner other than the Member.
Finally, for a fine to be covered, it should be imposed on the Member by a court, tribunal or a legally empowered authority such as a customs authority or coast guard. In most countries there is a possibility to appeal a fine to a higher court or authority. Whether however a Member should pay the amount fined directly or lodge an appeal, requires a number of factors to be taken into account. The circumstances leading to the fine, the applicable law, and the costs involved in defending the matter as well as the jurisdiction in question (in terms of whether one can expect an objective decision. Discussion with the Association on the above issues is necessary for a decision to be made.
7.6.2 Fines covered
184.108.40.206 Short or over-delivery of cargo – Rule 7 Section 6 1. (a)
220.127.116.11.1 Evidence required to oppose fines for short or overlanded cargo
This is a classic situation for fines against shipowners. The terms “goods” and “cargo “as used in this section are both meant to refer to cargo. The pretext for such fines is that customs authorities assume that the shipowner has caused any goods, which he cannot account for properly, to have entered the country illegally. In order to oppose such fines it is necessary to produce proper documentation. A shortlanding requires a short shipment certificate from the port of loading or other evidence to prove that the missing goods were never shipped, were wrongly discharged in another port or were lost overboard at sea. The last-mentioned situation should be supported by log extracts or by a sea protest noted at the port of discharge. In short, the authorities imposing the fine should be satisfied that the cargo did not enter the country illegally. For bulk cargoes it is important to check that ullage tables are correct and that draft readings are recorded properly.
Customs officers in some countries may be poorly paid and may be allowed to retain a certain percentage of fines collected as part of their salary or as a reward. This does not help the situation.
18.104.22.168.2 Late filing of cargo related fines
Fines may be imposed years after the completion of the voyage. It may be within the authorities’ discretion to decide when a voyage should be considered as having been completed and the fines are to be due for assessment and payment. This could be ten years or more after discharge, which makes it difficult or impossible for an Owner to trace the documents needed to prepare a proper defence. In some countries, customs files may be destroyed, say, 5 years after the vessel’s arrival whereas the time for filing claims for fines may not expire until years later. It has happened, in such circumstances, that customs will have kept the documents, which support their claims for fines but destroyed the rest. Although it is not reasonable to ask Members to have documents available after such a long time, it must be kept in mind that the presenting of counterevidence in the form of ship’s documents, is the only defence available to an Owner.
22.214.171.124.3 Usual defences and limitations are not applicable to fines
Liability to compensate the owners or underwriters for lost cargo and liability to pay fines imposed in respect of such lost cargo, follow different legislation. This can produce unexpected and unfavourable results. A shipowner may be able to reject the cargo claim and still have an obligation to pay the related fines. In a shortage case, an Owner may be able to limit his liability for the cargo claim by application of package limitation whereas the fine for the same shortage may amount to several times the value of the missing goods.
126.96.36.199.4 Deficiency of documents
Documentary deficiencies can also result in fines. Failure to present an accurate cargo declaration or the improper manifesting of dangerous cargo frequently results in fines. Delay by the carrier in presenting the cargo manifest can also give rise to a fine. Such manifests are often drawn up by a Charterer or operator of the ship. Still the Owner may have to pay the fine under threat of arrest of the ship. By proper clauses in the charterparty, the burden of ultimate liability should be passed to the party whose negligence caused the fine to be imposed.
Fines are not recoverable under this section where the cause of the fine is excluded elsewhere in these Rules. So, for example, a fine imposed for a wrongly dated bill of lading is excluded from cover by application of Rule 4 Section 3 (a).
The cover does not include fines imposed because certificates which the vessel is supposed to carry were missing or had expired. See the comments under 188.8.131.52.
184.108.40.206 The exception of fines or penalties arising from the smuggling of goods or cargo or any attempt thereat – Rule 7 Section 6 1. (a)
220.127.116.11.1 General comments
Smuggling of goods or cargo or any attempt thereat is a frequent cause of fines being imposed. This exception means that cover is always subject to the Club’s absolute discretion. It is aimed at what is commonly understood to be smuggling, performed by crew members or third parties. It might also be applicable to a failure to declare ship stores or used lube oil in the engine room.
If a crew member is fined for smuggling the fine will not be covered in any event but if a fine imposed consequently on the Member it might be covered provided the Member itself is not involved. Where the Member is involved, cover is excluded in any event under Rule 11 Section 1 and Rule 11 Section 2 (k).
The discretionary cover for the consequences of smuggling is mirrored in Rule 7 Section 9. According to that provision, the Club has the discretion to compensate in whole or in part the Member’s loss of the entered ship by confiscation, for infringement of any customs law or regulation. See the comments under 7.9.4.
18.104.22.168.2 Drug smuggling
Drug trafficking is a big problem for shipping. Ships are often used as vehicles for drug smuggling. Drugs or illegal substances can be hidden on the ship or in its cargo. An example would be drugs hidden in a container. Customs authorities all over the world try different means to prevent drugs from getting on board ships. To achieve this, they have intensified the search for drugs on board. They impose heavy fines and sanctions on the Owner when drugs are found. The intention is to force upon Owners utmost awareness at all levels to keep drugs off the ships.
22.214.171.124.2.1 The U.S. Anti-Drug Abuse Act 1986
126.96.36.199.2.1.1 Assessment of fine
According to the U.S. Anti-Drug Abuse Act 1986 (the “Act”) a tariff has been fixed on a per weight basis as a fine for each kind of drug found on board a ship or in its cargo. The tariff multiplied by the weight of the quantity found on board constitutes the fine against the ship. Cases have been reported where the U.S. Customs Service has, on this basis, filed claims under the act for amounts of nearly USD 500 million.
This fine can be enforced as a lien against the ship and result in the seizure of the vessel. A fine can be mitigated only if the Owner can prove his innocence. Such burden of proof is difficult to satisfy. The Owner or operator, Master, pilot and other employees responsible for maintaining and ensuring the accuracy of the cargo manifest must show that “the highest degree of care and diligence” was exercised.
188.8.131.52.2.1.2 Sea Carrier Security Criteria
It is difficult to define what “the highest degree of care and diligence” means in practice. In 2006, the U.S. Customs and Border Protection (“CBP”) issued a document entitled Sea Carrier Minimum Security Criteria in which it describes the routines and procedures which the CBP expects an Owner and officers to implement. The level of security on board the ships should be adjusted in accordance with each ship’s itinerary. Compliance with the criteria can be accepted as proof that the Owner exercised “the highest degree of care and diligence” which may result in a reduction or withdrawal of the fine. Additional information can be obtained from the CBP’s website.
It is important that the Sea Carrier Minimum Security Criteria is available on board all ships calling at U.S. ports whether only occasionally or regularly, that it is studied closely by those on board and that its terms are implemented.
184.108.40.206.2.1.3 Upgrading of all routines
Detailed plans must be made by the Owner to exercise necessary control of the ship, crew and cargo. The plans must also be enforced in practice. This requires the education of all staff ranging from the operational and technical directors to the youngest hand on board. Safe routines for booking and handling of cargo and containers must be introduced, involving agents, stevedore companies, terminals and others. The ship must be examined in detail to eliminate the possibility of bringing and hiding drugs on board. Plans must be drawn up and enforced to check the credentials and records of officers and crew hired as well as the background and status of shippers, the security in terminals, including the checking of containers and their seals, the gangway and ramp security and even the waterborne activities around the vessel.
220.127.116.11.2.1.4 Upgrading must be possible to prove
It is not enough to take all these steps. An Owner must be able to prove afterwards what precautions he took. If drugs are found on a ship in a U.S. port, the Owner will have to satisfy the CBP that full and adequate steps were taken to comply with the Act. Each step taken from the broad planning at management level to the practical enforcement of protective actions, such as welding shut a bolted plate in the engine room behind which drugs might have been hidden, must be possible to prove. Everything must be properly documented and the documents kept up-to-date and easily available for presentation to the authorities.
18.104.22.168.2.1.5 Effect of failure to upgrade
The amount of the fine will relate directly to the performance of the Owner. A Member who fails to take adequate action may further jeopardise his cover under these Rules since such decisions or the lack of them will be considered to be attributed to the managerial level in the Member’s organisation and may invoke the general exception from cover under Rule 11 Section 1. One of the options available to the CBP is confiscation of the ship. As stated in the comments under 7.9.7, compensation in case of confiscation will be considered only if the Member can satisfy the Club “that he took such steps which in the opinion of the Association were reasonable to prevent infringement of the customs law or regulation giving rise to the confiscation”. This means that a Member can lose his ship without insurance compensation if he cannot convince the Club that he lived up to the standards of the Act. The Club is not obliged to give a reason for its decision.
22.214.171.124.2.1.6 Customs-Trade Partnership Against Terrorism (C-TPAT) and the Sea Carrier’s Initiative Agreement
In 2001, CBP merged the Sea Carrier’s Initiative Agreement into the C-TPAT. Much of the same benefits that existed under the Sea Carrier’s Initiative Agreement exist under C-TPAT. Membership and compliance with the security procedures under C-TPAT still allow for potential mitigation of fines under the Act. The real value of membership under C-TPAT in relation to the Act comes when trying to prove that proper procedures were in place to prevent illegal substances form coming on board. In addition, membership in C-TPAT provides a reduced number of CBP inspections (since C-TPAT members are considered to be a low risk), priority in the processing of CBP inspections, services of a Supply Chain Security Specialist and eligibility in the CBP Importer Self-Assessment program.
126.96.36.199.2.1.7 No cover for time lost
The discretionary cover under this section is limited to the fine. According to Rule 11 Section 2 (j) the loss of time or hire is not covered nor are the running costs during the time a ship is lying idle as a consequence of an arrest or other delay caused by authorities’ investigations of drug smuggling.
188.8.131.52.2.1.8 Posting of security
If the Club in its discretion under Rule 12 agrees, in principle, to put up security to release a ship arrested by customs, the posting of such security may take longer than usual as it will be necessary to await the outcome of the investigation into the background of the smuggling and the steps taken by the Member to avoid it. If these steps are found to be inadequate, there may be no cover under the Rules as described under 184.108.40.206.2.1.5. Then the Club is unable to provide security.
220.127.116.11.2.1.9 Charterparty clauses regarding drug smuggling
Various charterparty clauses have been drafted to allocate liability for drug smuggling fines as between the Owner and the Charterer.
18.104.22.168.3 Spirits, cigarettes, firearms
Smuggling or illegal possession of spirits and cigarettes also inevitably lead to fines. The ship’s inventory must be properly declared. This is especially important when it comes to articles in the bonded store.
In most countries, any firearms or other weapons including ammunition should be declared to the authorities even before the ship’s arrival and remain in the Master’s care and protection for the duration of the stay. Members should be familiar with any such applicable regulations in ports to be called at. They should be strictly adhered to.
22.214.171.124.4 Dogs, pets and other animals
Fines for dogs or pets having been brought illegally on or off the ship or for smuggling of protected species of animals, may be compensated under this item. The section was applied when a cruise ship was fined because a passenger took her dog on an urgent yet unlawful walk to a lamp post on shore.
126.96.36.199.5 Recourse against smuggler
Before fines for smuggling are paid, it should be investigated whether the money could be paid by or recovered from the smuggler, if apprehended. If the Member is compensated under these Rules, the Club acquires the Member’s right of recovery against the party who caused the loss. Rule 14 applies.
188.8.131.52 Violation of immigration regulations – Rule 7 Section 6 1. (b)
This covers fines imposed against the ship in connection with detainees, deserters, stowaways or other situations where immigration regulations have been violated. An example would be a fine imposed personally on a crew member that stays in a country for a period of time longer than the time stipulated in his visa. See the further comments regarding detainees under 3.10.2, deserters under 3.10.3 and stowaways under 3.8.2.
184.108.40.206 Pollution – Rule 7 Section 6 1. (c)
Pollution fines are one of the risks increasing in number and extent. Most countries have enacted legislation under which an Owner can be fined heavily in connection with oil, chemical or other pollution. For cover to be provided, the escape or discharge of oil or other substance must be accidental. Tank overflow as a result of crew negligence is an example of liability covered under this section. Discharge of steam, smoke, fumes, sewage, garbage or water used to clean a hold or the deck, may have the same consequences. The unauthorised use of detergent from ships to clean pollution on a do-it-yourself basis can also result in fines as high as those for the pollution itself. For cover to respond, it is necessary that the act itself is ‘accidental’. Fines for discharging ballast water and burning bunkers with excessive sulphur content are examples of pollution fines which are not covered since the ‘act’ of ballast water exchange or burning of bunkers is intentional.
Fines of this kind are often formally imposed on the Master or chief engineer. The defence of such claims is generally undertaken by the Club, provided the Master acted reasonably and within the scope of his employment. When a Master or chief engineer deliberately discharges oil into the sea after tank washing and is personally fined, the insurance does not pick up such fines. However, in such circumstances there is still cover for the Member in respect of the clean-up costs of such a spill. However, if the discharge was on the Member’s instruction, there is clearly no cover for either the fines or the clean-up. The issuance of orders deliberately to cause pollution in order to save time and costs, would involve the general exclusion from cover under Rule 11 Section 1.
This section provides cover also for fines due to an accidental escape of oil from a source other than the insured ship as a result of an incident involving the insured ship. Pollution coming from the shoreside, for example a terminal’s loading arm, as a consequence of contact with a vessel is an example of such a situation. Fines due to escape of oil as a result of a collision or grounding are also considered to be covered under this section.
To prepare the Member’s defence against fines for oil pollution, precautions have to be taken immediately as described in the comments in respect of Rule 6 Section 1. It is important to immediately contact the local Club correspondent for assistance and advice.
7.6.3 Club’s discretionary right to cover other fines – Rule 7 Section 6 2. (a)
Pursuant to Rule 7 Section 6 sub-paragraph 2, the Club may, in its absolute discretion, decide to cover fines, other than those mentioned in sub-paragraph 1, provided the fine is not mentioned in sub-paragraph 3 which specifies fines that are always excluded. Such other fines may be recoverable provided the Member has satisfied the Club that he took such steps as appeared to be reasonable in order to avoid the event giving rise to such fines.
It is stressed that any amount claimed in respect of such fines shall only be covered where the Club in its sole discretion so decides. Such decision will be taken after careful review and consideration of the circumstances of each case and creates no precedent. It follows that similar events will not necessarily be assessed in the same way. The Club is under no obligation to give reasons for its decision.
7.6.4 Fines not covered – Rule 7 Section 6 3.
220.127.116.11 No cover for overloading (i)
The first exception (i) is for fines in respect of overloading of the ship. Overloading is a serious violation of the safety of the ship, its crew and cargo. No attempt to earn additional freight by such a violation can be condoned.
Overloading means bringing a ship below her marks. It does not matter whether this was caused by excessive intake of cargo, ballast water, bunkers or fresh water.
This exception includes fines for the local overloading of decks or hatches. Rule 11 Section 2 (c) contains further exclusions in respect of overloading. See the comments under 18.104.22.168.
22.214.171.124 No cover for excessive number of passengers (ii)
Exception (ii) is applicable to fines where restrictions or limitations on the right to carry passengers have been violated. This exception is also justified by important safety aspects.
126.96.36.199 No cover for illegal fishing (iii)
Fines for illegal fishing are excluded from cover under exception (iii). The exception applies to fines for fishing in prohibited zones, use of prohibited equipment or the catching of prohibited species.
188.8.131.52 No cover for substandard lifesaving and navigational equipment (iv)
The Club is an underwriter for Hull & Machinery risks and for P&I. The concept of mutuality, on which both types of insurance are founded, puts a special obligation on the Club and its Members to promote loss prevention. To compensate a Member for fines which have been rightly imposed by authorities for violation of basic lifesaving and navigational regulations would be inconsistent with the Club’s aims and a contradiction of its adopted policy.
It follows that exception (iv) will be given a fairly wide interpretation. The word “upkeep” means lack of repairs and maintenance and includes lack of prescribed equipment. “Navigational equipment” includes necessary and applicable charts corrected to date.
This exception ties in with the general exception of liability under Rule 11 Section 1 (but each claim will be decided on its merits).
184.108.40.206 No cover for lack of valid or prescribed certificates (v)
According to Rule 10 Section 1, the entered ship shall comply with statutory regulations and obligations relating to its construction, adaption, condition, fitness and equipment. The provision further states that the validity of certificates issued to cover such requirements must at all times be maintained. Where a Member is in breach of these conditions, the Club may reject any claim or reduce any sum payable under these Rules. See the comments under 10.1.6.
The requirements regarding certificates are followed up by exception (v) of this section for fines imposed for lack of valid or prescribed certificates.
The purpose of certificates is to show evidence of compliance with officially adopted standards for the safety of the ship, crew, cargo, environment and the public. For reasons mentioned under 220.127.116.11 above, Club money should not be spent compensating those who disregard such regulations.
The exception applies to fines for lack of prescribed certificates and also to fines where there is a certificate which for any reason is not valid.
For the section to apply, the word “certificate” may not necessarily appear on the document or in the regulation under which it is issued. The decisive factor is that the document serves a purpose similar to that described in Rule 10 Section 1.
Members should urge those ashore and on board to adhere closely to any applicable regulations which require the issuance of certificates, to keep them accessible for presentation and to take action in time to renew them before they expire.
18.104.22.168 Infringement of MARPOL regulations (vi)
Exception (vi) deals with fines imposed by Port State Control for MARPOL violations where the ships’ oily water separators have been bypassed or rendered inoperable, see our circular P&I 2440/2005. MARPOL regulates that only 15 ppm of oil residues can be discharged through the oily water separator. This limited amount of oil makes it tempting to tamper with the oily water separator to increase the flow of oil over board. Port State authorities in various countries but most notably in the U.S.A. take a very hard line in respect of breaches of the MARPOL Regulations.
The U.S. Coast Guard (“USCG”) has launched multiple inspections on foreign flag vessels to ascertain whether the oily water separator is being used improperly or is being bypassed. The U.S. Coast Guard is particularly interested in finding flexible hoses hidden in the engine room which may have been used to bypass the oily water separator and pump oil directly overboard. Furthermore the overboard discharge valve and piping is of great interest to the USCG and if oil residues are found inside this is used as justification for a bypass of the oily water separator.
Another way of establishing that the oily water separator has been bypassed in violation of the MARPOL regulations is in finding incorrect entries in the oil record book, incinerator log or records of port discharges. The USCG is especially interested in discrepancies in the oil record book for instance regarding quantities of water pumped overboard through the oily water separator compared with the vessel’s pumping capacity. Furthermore, the USCG is interested in miscalculations of quantities of oil contaminated bilge waste and sludge discharged or remaining on board. Incorrect entries in the oil record book are considered by USCG to be a false statement and an obstruction of justice which is subject to criminal proceedings against the relevant crew members.
Sanctions imposed by the U.S. authorities are penalties, fines or imprisonment. Fines have been imposed on a massive scale. A reward of 50% of the fine imposed is offered as an incentive to those who report an alleged violation (so-called “whistle-blowers”). In one case the 12 whistle-blowers each received USD 437,500. During the lengthy investigation of an offence by the U.S. Department of Justice crew members charged usually remain in custody. If sentenced, imprisonment of up to ten years may follow.
Fines or penalties imposed for breaches of MARPOL regulations are not covered by the Club other than in the case of purely accidental discharge and, even then, never where the oily water separator or similar device has been bypassed or rendered inoperable. As a result, whilst investigations are still underway the Club can only provide security in exchange for counter security in the form of cash or bank guarantee from the Member. If the Club is asked to fund costs in defending criminal or civil proceedings, additional security will also be required.
As part of their Safety Management System, Members are recommended strongly to carry out periodic reviews on board their ships to check that waste oil treatment equipment and ship’s records such as the oil record book comply with MARPOL regulations and to avoid being targeted by USCG.
7.6.5 Punitive damages
On the subject of exclusion of cover for fines, in cases of Member’s intent or gross negligence under Rule 11 Section 1, the question arises as to the extent of cover, if any, under these Rules for punitive damages.
Punitive damages are akin to a penalty in excess of and unrelated to the actual extent of a loss caused to third parties. They can be imposed under U.S. law against companies guilty of wilful, malicious or wanton conduct. The wrongful act must have been committed by or on behalf of the company and not by an individual acting in excess of his express authorisation unless subsequently ratified by his employer.
The question of cover has to pass the test under Rule 11 Section 1 based on the circumstances of the individual case. Considering the prerequisites under U.S. law for the application of punitive damages, it seems unlikely that punitive damages would ever be covered.