• QA 067
    In shipping, who decides what constitutes a war risk zone? And, how is this implemented?
    In QA 063 you explain who in the end pays the costs of increased insurance premiums when a stretch of ocean is declared a 'war risk area'. You may be aware that in June 2005 Lloyd's declared the Malacca Straits to be such an area. Can you explain how such decisions are arrived at and how they are implemented?
    Asked by:
    Commodity trader - Indonesia

    The decision to declare the Malacca Straits a 'war risk zone' was taken by the Joint War Committee - JWC, part of the Lloyd's Market Association. We understand this decision was based on a report on shipping security commissioned by the Association because of piracy attacks. For more see www.the-lma.com.

    The implementation of such a move, i.e. the levying of higher insurance premiums for 'war risk', was previously arranged jointly by the underwriters concerned who then advised the relevant shipping conferences. [1] Usually, this resulted in a standard, across-the-board charge applicable to all shipping lines. Today however this is no longer the case, mostly as a result of the introduction of strict anti-cartel legislation that forbids 'joint price setting' by underwriters and shipping companies alike.

    We would point out that, strictly speaking, 'war' means a dispute between nations, conducted by military and/or naval attack. Of course this is not the case in the Malacca Straits, nor along the Somali coast: these maritime zones are plagued by piracy attacks on shipping, not by war.

    The Institute War Clauses (Commodity Trades)[2]speak of 'loss or damage to the coffee caused by war, civil war, revolution, rebellion, insurrection or resulting civil strife or any hostile act by or against a belligerent power'.  But 'war' does not equal piracy… Yet, where such acts occur frequently, underwriters have to consider this additional risk and do so by declaring the area in question to be a 'war risk zone'. Individual insurance companies then determine what level of additional premium to apply - this calculation will depend on their assessment of the situation as well as the reinsurance arrangements they have in place.

    Individual shipping companies, faced with demands for additional premium on vessels sailing through or passing the declared danger zone, basically have three options:

    • Purchase the additional insurance cover
    • Cover it themselves through their in-house insurance pool
    • Do nothing and take the risk

    Within all three options a commercial decision then has to be made on whether or not to charge 'war risk' as a separate, additional freight cost to shippers. As is done with bunker surcharges for example. By quoting freight and surcharge together the 'war risk' issue in question automatically becomes part of the contract of carriage, the bill of lading.

    However, insuring cargo against 'war risk' is not the responsibility of the shipping company: the conditions of the contract of carriage firmly place the onus on the owners of the goods. Thus the additional premium we speak of here is that payable for insurance of the vessel. A premium paid by the shipping company that may result in a surcharge on the ocean freight it in turn charges to shippers. And of course the owners of the cargo most likely also have to pay additional 'war risk' insurance to cover the goods they ship…

    Finally, the foregoing only provides a brief overview of what usually takes place between declaring that 'war risk' exists, and being asked to pay a surcharge for this. The legal definitions and interpretations of what constitutes 'war risk' are extremely complicated and cannot be explained here, nor can we discuss the level of surcharges individual companies might apply.

    Posted 10 January 2006


    [1] See 05.01.02 for an explanation of 'shipping conferences'.

    [2] The insurance industry utilises a number of acknowledged definitions of what covers certain types of  risk - this is one of them.  War Clauses also deal with capture, seizure, damage due to derelict mines etc. as well as general average or salvage charges (see QA 061). Other Clauses relevant to the trade in coffee are the Institute Commodity Trades Clauses (A),  dealing with loss/damage to goods, general average and salvage charges, and liability under the  'both to blame collision' clause which appears in some bills of lading; and the Institute Strikes  Clauses (Commodity Trades) dealing with loss/damage caused by strikers, locked-out workers or people taking part in labour disturbances, riots or civil commotions, and any terrorist or person acting from a political motive in addition to general average or salvage charges connected with the  foregoing.

    Related chapter(s):
    Related Q & A:
    QA 063