Ship Management : Tuesday 3rd October

09.10 - 09.40 Stuart Munro - ITIM

DESIGNATED PERSON INSURANCE OR NOT

I have been giving presentations to ship management companies over the last two years about the impact of the ISM Code is likely to have upon them, not so much on the operational side but on the types of claims that they are likely to face as a result of the Code. Within that presentation I would discuss the role of the designated person (DP). In fact I used to ask anyone in the room who is a DP to put up their hand up, and would then explain in some detail ITIC’s position about the insuring of the DP. As far as ITIC is concerned, as the DP is an employee of the ship management company, any negligence of the DP would be covered under the insurance of the ship manager. This seemed to re-assure almost all the ones that I spoke to at these seminars. However, other companies thought that this was an opportunity to make some money and so sell an insurance to DPs. Before I give my thoughts on this insurance, I want to discuss where a DP may be exposed.

The suggestion appeared to be that cover is required for DP’s for the following risks:

1. misdirected arrow;
2. failure of primary insurances (in particular P&I, but also hull cover);
3. failure of the ship owning company (bankruptcy);
4. failure of the ship management company (bankruptcy).

All of this may be true but what is the real level of risk? It has always been the case that negligent individuals can be sued in their individual capacity, notwithstanding that the negligent act was performed in the course of employment or business. Usually individuals are not sued personally because the employer, who is vicariously liable, has more assets and in most cases the benefit of insurance cover. The ISM Code makes no difference to this point of principle, but there appears to be a growing belief that the "buck stops" with the DP. The ISM Code did not create the role of the DP in order to provide a suitable target in the event that some negligence is involved in the operation of the vessel. This individual is not necessarily the person who is personally negligent if something goes wrong.

Let us talk about the concept of the DP. Although the ISM Code is up and running for certain types of ships, there is still a great deal of confusion as to how the DP is treated. The concept of the DP was introduced because owners or senior management were able to distance themselves from events that occurred onboard through the protection offered to them by the concept of "actual fault or privity", the old defence of "I did not know about it, therefore you cannot hold me liable". From the prospective of maritime safety, and of course governments looking for scapegoats, the distancing of the owner or senior manager on the shipboard operations is unsatisfactory, and the whole thrust of the ISM Code is to prevent senior management from being able to disassociate themselves from responsibility for an accident by claiming that they left everything to a superintendent to manage and that they had no personal knowledge of what was happening onboard the ship. The aim of the ISM Code was to create a clear chain between shipboard activities and the owner or senior management of the company by appointing a person who could "provide a link between the company and those onboard", and that the company should then appoint someone ashore who has "direct access to the highest level of management".

Therefore, the role of the DP is to provide the link in responsibility between the ship and the highest level of management that was missing in many organisations (particularly owning ones), prior to the implementation of the Code. We do not believe that it was intended that the DP should be the person who is deemed to be personally responsible if something goes wrong onboard the ship. Furthermore, Peter Martyr who is going to speak later, also agrees with that. Therefore, it must be right. The DP has responsibilities and could be negligent in a personal capacity in the same way that any individual within a company could be negligent. The responsibility for that negligence is no different in principle to the position prior to the ISM Code. The fact that the DP exists actually makes it rather more difficult for senior management to disassociate themselves in any event from the running of the ship. We believe that it is important to recognise that the responsibility and authority of the DP "should include monitoring the safety and pollution prevention aspects of the operation of each ship". This does not make the DP responsible for the proper operation of the ship, which remains the ultimate responsibility of the senior management. They are responsible for the proper operation of the ship.

Enough of the theory, what happens if a DP is actually sued. It will probably be because their identities are (or may be) easy to discover. At present the owner or senior manager of say, a Maltese flag ship, may be difficult to identify after a major casualty. (That sounds familiar!). Finding the right superintendent or pool captain may be equally difficult for the purposes of bringing legal proceedings after such an accident. The DP may be more of a visible target. That said, personal negligence will need to be proved. If a claimant did commence proceedings and obtain a judgment against a DP (either alone or using a scattergun approach as in the United States), so far as the ships’ insurers (P&I Clubs) are concerned, any liability which falls upon the DP would surely fall into the same category as a liability upon the master or the ship managers. In other words the overall liability for the insurers will be no greater than if the ship owner alone had been held liable, and therefore should be covered. Of course, it is common for the manager to be named as a full co-assured, but we would not expect to see an employee or master named in the policy.

Therefore, the role of the DP is not intended to interfere with the normal operation of the principle of vicarious liability and if anyone is at a greater risk of personal suit under the ISM Code it is going to be the ship owner or the senior manager (Managing Director, Technical Director etc), because it is he (or she), as a result of the existence of the DP, who has less opportunity to defend himself in the event of a shipboard accident. It is he (i.e. M.D. etc.) in the normal event to whom the claimant will almost likely turn if personal liability is an issue. The circumstances in which a DP will prove a valid target (except for tactical reasons) are limited and quite difficult to envisage.

We mentioned the failure of the ship owning company and/or the failure of the ship management company. Either of those two situations could lead to the loss of insurance because of non-payment of premium. If the DP was then personally negligent in the exercise of his duty, leading to a loss to a third party, he could face a liability, but then his exposure is no greater to a case being presented against a Managing Director, in his personal capacity and is far more likely to be held to be personally negligent. Therefore, just being a DP should not, in legal terms, attract personal liability any more than any other employee in a shipping company who is responsible for carrying out other duties in relation to the ship.

I asked Peter Martyr when putting together an article about DP’s in the last Intermediary whether a DP could be entitled to the benefit of limitation. He felt that it would be a curious result if a claimant could circumvent a ship limitation by suing individuals.

I am not convinced of the need for a special cover for DP’s; I do not take out a personal insurance in my own name because I am a Director of the management company of ITIC. That does not mean that I do not have an exposure if the ITIC Board decided to sue me personally rather than Thomas Miller, the management company. However, I do not wake up in the middle of the night worrying about this.

Admittedly, shipping is an international business and you can never cover all the possibilities. However, if your management company insures with a reputable insurer who would deal with any claim against a DP in the same way as if it was being brought against the company, then you should not worry.

If you are still worried and still want to pay an extremely modest amount of money, then we can provide you with a DP insurance in your own name, not naming the ship management company on your policy. However, after discussing this with the Members, designated persons and their brokers, so far, I am pleased to say, I haven’t sold one DP insurance yet. I have named DP’s as a joint Member on the ITIC policy of their employers and that has reassured them, even though, in reality it doesn’t extend them any greater cover than they had before. I believe in concentrating on offering insurance to people who have a genuine exposure and not wasting their time and money otherwise.

Any questions?