Dire Straits: Commercial Policyholders are Navigating Troubled Waters in the Persian Gulf

The current U.S.-Israel-Iran conflict, including the effective closure of the Strait of Hormuz, has created an unprecedented convergence of marine insurance exposures. As of the date of this Commentary, reports indicate that more than a dozen vessels have been attacked by Iranian drones and missiles, and that Iran has also attempted to mine the Strait of Hormuz. Approximately 1,000 vessels, including roughly 500 oil and gas tankers and 500 container ships, are currently trapped or stalled on either side of the Strait of Hormuz. The Lloyd's Market Association has estimated that the value of ships alone (not including cargo) stranded in the Persian Gulf is no less than $25 billion. Disruptions in various markets are taking place as a result of damaged commercial and other infrastructure.

For companies involved in the shipment of products in and out of the Persian Gulf, there are a variety of risks that must be successfully navigated while the conflict is ongoing. In the event of an actual or constructive loss of either ships or cargo, companies should fully assess their options for recovery, both from insurance and other counterparties.

Potential sources for obtaining insurance recoveries for losses arising out of the U.S.-Israel-Iran conflict include the following.

Hull and Machinery ("H&M") Insurance

H&M insurance covers physical damage to a vessel's structure (hull), machinery, engines, and equipment caused by perils of the sea, such as collisions, grounding, fire, and explosions. However, some H&M insurance policies exclude war risk claims, unless specifically added by endorsement. In all events, an insured needs to make a prompt determination as to whether to provide notice of a loss under an H&M policy, as such notice is often required within 24 to 72 hours after the incident.

Marine Cargo Insurance

Marine cargo insurance is the primary type of insurance policy that covers the loss of cargo during transport by sea. Marine cargo insurance typically covers all shipments made by a business over a set period, usually annually. Typical coverages include physical damage to cargo on vessels, spoilage or deterioration of perishable or time-sensitive goods on stranded container ships, and total loss claims in cases where recovery of the cargo in all or in part is not possible, such as cargo aboard vessels that caught fire. In addition, marine cargo insurance generally includes clauses allowing shipowners to claim a constructive total loss if vessels are trapped or detained for a certain period (e.g., 12 months).

However, marine cargo insurance policies often contain cancellation provisions applicable in the event of emergent war risks. As recently reported in the press, war risk cancellation notices were issued earlier this month by marine insurers, which have formally taken effect, marking a shift from rising premium warnings to actual coverage withdrawals in the Gulf region. Those cancellations impair the position for shipowners transiting the Persian Gulf. Notably, most cancellations do not apply to shipments as to which the insurance has already attached. Whether a cancellation is effective for a specific shipment will require an analysis of the relevant policy language and the facts.

Property Insurance (Business Interruption and Contingent Business Interruption)

The cascading effects of the U.S.-Israel-Iran conflict are negatively impacting commercial operations, including disruptions arising from port infrastructure damage and energy facility shutdowns. These events may generate claims under energy and commercial property insurance policies with business interruption extensions. In addition, many commercial property policies contain contingent business interruption coverage that may be applicable to when a supplier or customer's business has suffered physical damage. Accordingly, businesses dependent on goods transiting the Strait of Hormuz may trigger contingent business interruption claims under their property or marine cargo policies.

P&I Indemnity

A Protection and Indemnity (P&I) Club is a mutual, nonprofit maritime insurance association owned by shipowners and charterers to cover third-party liabilities not covered by standard H&M insurance. Members pool funds to cover risks such as crew death and injury, pollution liability, third-party property damage caused by a vessel, and wreck removal.

Kidnap, Ransom, and Detention Insurance

Iran's Islamic Revolutionary Guard Corps has a history of seizing vessels, and the current conflict heightens the risk of crew detentions. Specialized kidnap and ransom or detention policies may be triggered if crew members are taken hostage or vessels are seized by Iranian forces. Care should be taken with respect to the use of these policies, including compliance with Office of Foreign Assets Control ("OFAC") sanctions.