Circular 4/98: US Oil Pollution - Certificates of Financial Responsibility (COFRS)

TO THE MEMBERS

US OIL POLLUTION - CERTIFICATES OF FINANCIAL RESPONSIBILITY (COFRS)

Review of COFR facilities

Since the establishment of the Shipowners' Insurance and Guaranty Company Limited (SIGCo) in November 1996, which was reported to Members in

SIGCo was established with the assistance of Thomas Miller & Co. Ltd. and the managements of two other International Group Clubs with a view to creating an improved COFR facility for those shipowners who were unable or unwilling to obtain their COFRs by means of self-insurance or by procuring a bond from an approved US surety company. Up to that time, the only realistic alternative to these methods were provided by FirstLine and Shoreline Mutual who could provide the necessary guaranty to the US Coast Guard based on "difference in conditions" insurance which was compatible with the continued cover from the Association for the owner's oil pollution liabilities under OPA 90. However, neither of these vehicles was entirely satisfactory for different reasons. Shoreline Mutual, structured on the lines of a traditional mutual insurance company, brought to its members the advantages of shipowner influence over the company, but at the same time potential liability for supplementary calls to meet the liabilities of Shoreline Mutual whether through a claim on Shoreline as guarantor of the owner's OPA liabilities or otherwise. Although Shoreline Mutual has bought reinsurance in respect of a claim on the guarantor, uncertainty still exists as to the extent of the guarantor's exposure, particularly in circumstances where the owner whose ship has the incident cannot recover from his P&I Club. Conversely, FirstLine as a fixed premium insurer did not bring any exposure to additional calls, but was operated by commercial underwriters for their own profit without any influence from its shipowner clients. The structure of SIGCo, which replaced FirstLine from 28 December 1996, was therefore designed both to provide a capitalised fixed premium facility and the added benefit of an element of shipowner influence and financial interest in the company.

Since the establishment of SIGCo as an alternative vehicle to Shoreline Mutual, two further facilities for COFR guaranties have been established in Bermuda - Arvak and Cofrsure. Also, and most recently, a general bonding facility has been established by International Sureties Limited but only for dry cargo ships.

The following comments concentrate on recent developments in the individual facilities and are not intended to be an exhaustive analysis of the merits of each scheme. It is up to each Member, and his broker, to assess the scheme most suited to his needs and to satisfy himself that there is sufficient information on the relevant facilities.

1. SIGCo Limited

SIGCo's structure has not changed and SIGCo remains the market leader in providing COFRs both to tankers and dry cargo ships. SIGCo's new standard terms and conditions effective 28 December 1997 incorporate the changes effected to the terms during 1997.

The previous provisions regarding a power of attorney have been deleted. This decision took effect as of 26 September 1997, but applied retrospectively to all powers of attorney which have been supplied in connection with prior applications. SIGCo has deleted the provision in respect of legal costs incurred in excess of US$50,000. SIGCo will now be responsible for all costs and expenses incurred to the extent not recoverable from the owner's P&I Club or other insurer.

In addition, SIGCo is now prepared to handle all aspects of the COFR application or renewal procedure on behalf of the owner, including the completion of the US Coast Guard form CG 5585. SIGCo will pay all fees to the US Coast Guard without additional charge.

Further details of the documents and application procedures can be obtained directly from:

The Shipowners Insurance and Guaranty Company Ltd
The Toddings Building (2nd Floor)
10-12 Burnaby Street
P.O.Box HM 3398
Hamilton
HM PX
Bermuda

Telephone: (441) 298 0600
Fax: (441) 298 0610

2. Shoreline Mutual/Arvak

Both Shoreline Mutual and Arvak continue to offer COFR guaranties on the same basis as before. However, the board of directors of Arvak has appointed Shoreline Mutual Management as managers of Arvak. The facilities will nevertheless remain separate, Shoreline as a mutual and Arvak as a fixed premium facility.

Arvak has also announced that it no longer requires a power of attorney to be completed by the owner.

Further details of the documents and application procedures can be obtained directly from:

Shoreline Mutual Management (Bermuda) Ltd
44 Church Street
P.O. Box 2064
Hamilton HM HX
Bermuda

Telephone: (441) 296 2324
Fax: (441) 296 2327

3. Cofrsure

This fixed premium commercial facility is operated by Terra Nova Underwriting Agency Limited in Bermuda, with COFR guaranties being provided to the US Coast Guard by Scandinavian Reinsurance Company Limited. The terms of the agreement provide for a power of attorney, a complete indemnity from the owner to the guarantor and also for the guarantor to effect payments under the guaranty without prior reference to the owner and despite any objection by him. Since the agreement also provides that a payment by the guarantor is conclusive evidence that the guarantor was liable to pay, in the amount and manner demanded, there is an increased risk that the Member would be unable to recover such a claim under the terms of his cover with the Association.

Further details of the documents and application procedures can be obtained directly from:

COFRSURE
c/o Terra Nova Underwriting Agency Ltd
Richmond House (2nd Floor)
12 Par-la-Ville Road
P.O. Box HM 664
Hamilton HM CX
Bermuda

Telephone: (441) 292 6320
Fax: (441) 292 1454

4. Bonding scheme

International Sureties Limited (ISL), a bonding agent based in New Orleans, has arranged a bonding facility up to $70 million which is available only to dry cargo ships. The surety bond in the appropriate amount will be issued to the US Coast Guard by or on behalf of eight US surety companies, upon completion by the owner of the application procedures and payment of the cost, presently $1,000 per ship.

The application documents consist of the bonding guaranty form and an indemnity, the terms of which provide for reimbursement to the bonding companies of any amounts paid including fees and expenses. No collateral is required, but ISL will need to see two letters from the Club in the same terms as those issued to Members in respect of other COFR applications.

Further details of the documents and application procedures can be obtained directly from:

International Sureties Limited
210 Baronne Street, Suite 1700
New Orleans
Louisiana 70112
USA

Telephone: (504) 581 6404
Fax: (504) 581 1876

General

All the facilities referred to above require the Member to provide letters from the Association in the terms which have been previously agreed. Members requiring these letters should contact the Managers' London Agents:

John Joslin
Thomas Miller P&I Ltd.
International House
26 Creechurch Lane
LONDON
EC3A 5BA

Telephone: (44) 171 204 2035
Fax: (44) 171 204 2089

circular no. 13/96, and the subsequent creation of Arvak, a number of developments have occurred in the facilities available to shipowners requiring certificates of financial responsibility under OPA 90 to trade to the United States.