What is FD&D Cover? And, why operators need it?

Freight, Demurrage & Defence (FD&D) Cover began to evolve during the latter part of the 19th century, and during the twentieth century, ship-owners and operators increasingly felt the need for a “legal costs” cover as well as a general advisory and claims handling service for non-P&I matters. To meet this growing need various P&I Clubs within the International group of P&I Clubs introduced a Defence Cover as a supplement to P&I.

Our FD&D facility was formed in response to the growing demand by shipping companies for a “stand alone” insurance coverage for legal services, loss prevention, claims assistance and cost containment in the area of shipping disputes. Under the trade name “British European & Overseas FD&D” the facility offers a classic freight, demurrage and defence cover for a very reasonable fixed annual premium.
British European & Overseas FD&D is entirely independent of but also compatible with existing Defence and P&I Clubs, their insurance arrangements thereof. The FD&D facility is a “stand alone” facility and does not need one of the P&I vehicles attached.

The British European & Overseas FD&D is underwritten by a well known “AA” rated European insurance company, which is one of Europe’s largest and leading specialist underwriters and managed by DGS Marine Management Services, a member of the DGS Marine Group, is an established innovator of, new insurance concepts for the transport industry. Combining the worldwide resources of these renowned marine insurance experts British European & Overseas FD&D offers operators a board variety of expertise and knowledge of local rules and laws. The British European & Overseas FD&D through its Managers is a member of Bimco.

The FD&D Department comprises a team of qualified lawyers from the major jurisdictions dealing in shipping law. Although these lawyers have primary area of expertise in English law and practice, they also have a general knowledge of the law and practice in a wide range of jurisdictions worldwide. This places them in the unique position of being “international” maritime lawyers. In-house lawyers from Germany, France, Italy, the United States, Canada and South America also provide support to the FD&D Department on a case-by-case basis. Resources are also available in the form of our P&I claims handlers, who have considerable experience from many areas of international trade and shipping. Furthermore, in addition to its global network of P&I correspondents, the FD&D facility has extensive experience with and knowledge of lawyers, arbitrators and experts throughout the world.

Moreover, the Manager’s team committed to the FD&D facility will also be comprised of fully accredited lawyers. It enjoys widespread international contacts and can be approached by the Assureds of the facility and potential clients on any matter of concern to them.

The purpose of the Defence Cover

Whereas P&I cover insures actual liabilities as well as the legal costs of defending such liabilities, the FD&D cover insures ship-owners and charterers for legal and other costs incurred in establishing and defending claims arising out of their business operations, as well as providing claims handling and general advisory services.
The FD&D Policy covers legal and other costs necessarily incurred in establishing or defending claims which arise out of an event occurring during the period of entry of the ship in the FD&D Facility in direct connection with the operation, acquisition or disposal of an entered vessel, or in respect of the Assured’s interests in the vessel. The cover is at the sole discretion of the Managers and the Managers as the right to control or direct the conduct or handling of any case.

Today, the cost of legal advice and representation – even when handling relatively small, uncomplicated disputes – may run into tens of thousands of Euro. Some ship-owners and charterers face a continuous flow of disputes in their business operations, the costs of which may constitute a considerable strain on the company’s finances. Others may face one major dispute, which could bankrupt the company. FD&D cover enables ship-owners and charterers to carry out their business secure in the knowledge that should something go wrong, they have cover available to assist in protecting their rights. This security comes in the form of a policy covering legal and other costs, as well as providing claims handling and general advisory services.

Although the cover is commonly referred to as “Freight, Demurrage and Defence” (FD&D), it is not restricted to defending cases brought against the Assured, nor to claims for freight and demurrage. The Cover also includes cover for costs incurred in pursuing claims. The list of FD&D risks covered have evolved over the years to include numerous types of claims arising under charter-parties and bills of lading as well as claims arising in the sale and purchase of ships.

Examples of Risks covered without Special Agreement

The following risks are covered under the FD&D Cover without the need for express approval of, or declaration to the Managers: Legal and other costs necessarily incurred in establishing or resisting claims concerning:

• Contracts of affreightment, charterparties, bills of lading and other contracts of carriage;
•  Loading, lightering, stowing, trimming and discharge of cargo;
• Passengers and passenger monies;
• Loss of/or damage to the vessel or general and particular average;
• Delay or detention of the vessel;
• Property damage, personal injury and loss of life;
• Repairs and deliveries to the vessel;
• Salvage and towage unless the vessel is a salvage vessel or tug;
• Agents and brokers;
• Insurance contracts pertaining to the vessel;
• Customs, harbour and other public or quasi-public authorities
  (excluding certain taxes).
• Liability for damage to or loss of the chartered
• Vessel hire, freight, dead-freight
• Demurrage or despatch
• Supply of inferior bunkers
• Overcharges in accounts
• Crew
• Sale, purchase and mortgage
• Investigations and enquiries
• Legal advice

Examples of problems

An Owner faces a large, complex claim in London arbitration proceedings brought by a Charterer, for example, concerning the deviation of a vessel under a time charter-party. The FD&D Cover will reimburse the Assured for:

a) Legal costs necessarily incurred

These may include:

• The costs incurred in retaining an English law firm to represent the Assured in the arbitration proceedings;
• The Charterer’s recoverable costs should the Assured be unsuccessful in defending the claim;
• The costs of the arbitration proceedings.

b) Other costs incurred

These may include:

• The costs of any experts retained to provide evidence and
• The costs involved in investigating and obtaining evidence (e.g. the costs of instructing the FD&D Facilities correspondents world-wide).

External advisers such as lawyers and experts are appointed by the Managers on behalf of the Assured, although the Assured can expect prompt reimbursement of any costs incurred in settling their fees.

The Managers’ exercises control over the conduct and general handling of the claim, including deciding whether external lawyers should be instructed and if so, when this will take place, as well as the right to withdraw cover in certain cases. The Managers’ retains the right to select which external lawyers and other advisers are to be retained, albeit in consultation with the Assured. In these circumstances, the Managers’ plays an important role as case manager and strategist, being the link between the Assured and the external lawyers

Consequently, a close partnership is formed between the Mangers’ and the Assured to ensure that the Assured receives the best possible legal advice and representation. The Managers’ are well placed to advise on the course of action to be taken. This role is particularly important when litigation and/or arbitration proceedings are ongoing in several jurisdictions around the world at the same time.

The Service

The Managers of British European & Overseas FD&D Facility has one of the largest independent claims departments amongst the other Fixed FD&D Premium Facilities, and prides itself on being one of the most service-oriented, offering an in-house claims handling service as well as legal and practical advice on a wide range of issues. The service provided is akin to that of an Assureds’ own Legal Department. Each Assured is assigned an Executive, who will be the Assureds’ Defence claims handler, legal adviser and main point of contact. Consequently, a close and trusting relationship is built up between the Assured and the Executive.

The service includes:

Claims Handling

Due to the Group’s expertise, the Managers’ Defence cases can be handled in-house. The vast majority of FD&D disputes are governed by English law and, the most common forum for their resolution is London arbitration. Arbitration conducted under the London Maritime Arbitrators Association (LMAA) Small Claims Procedure and LMAA documents-only arbitration can be expected to be handled in-house. This results in a cost saving for both the FD&D Facility and the Assured, which is particularly important in disputes involving relatively insubstantial sums. Furthermore, the costs of handling such cases in-house or acting upon the Assureds’ general inquiries do not appear on the Assureds’ loss record.

Advisory Service

In addition to claims handling, the Managers’ provides legal and practical advice on a range of issues which ship-owners and charterers face in their daily operations. This facility enables the Assured to consider potential conflicts at an early stage. Guidance and assistance provided by the Assureds’ designated in-house Executive may, avert a dispute, promote a settlement, achieve quick payment of a debt or enable an Assured to mitigate its losses. The Managers’ lawyers and Executives are readily available should their assistance be required.

Who is Eligible?

FD&D Cover is ordinarily available (subject to the Managers’ discretion) to any kind of operator, whether an owner or a charterer, and they do not need P&I attached to the facility, as the FD&D Facility is a “Stand alone” without P&I being attached.
The Structure of the Cover

Legal Framework

The terms of the FD&D Cover are contained in the facilities “Terms and Conditions” namely the “Rules” and Cover for vessel and other floating structures, copies of the “Rules” can be obtained from the Managers. The “Rules” are, governed by English law and, any disputes arising between the Assured and the FD&D Facility shall be resolved by arbitration in London.

Deductibles

Unless otherwise agreed, all legal and other costs incurred under the FD&D Cover are subject to a deductible of 15%, subject to a minimum USD 3,000 or EUR 2,000 with a maximum of USD 20,000 or EURO 15,000. One deductible applies in respect of all liabilities, losses, costs and expenses arising out of any one event. In short a capped deductible, where the other FD&D Facilities deductibles are NOT capped. However the Managers’ may decide that a separate deductible shall apply in respect of certain risks. Furthermore in the event that an Assured is successful in any legal action and makes a recovery from a third party the Assured will be entitled to retain a pro-rata portion of any costs recovered.

Limits of Cover

The limit of the FD&D cover is Euro 1 million per event although the Managers’ have the discretion to extend cover on a case-by-case basis.

Premiums and Record

The premium for FD&D Cover is quoted according to standard underwriting criteria depending on the Assureds’ risk exposure factors, such as area of trade, scope of contractual obligations, jurisdiction exposure, size of fleet and relevant loss record.
The cover is afforded at cost without any profit element for the Managers’. It is available to both ship-owners and charterers, and is charged on a fixed premium basis.

Conditions and Exclusions

The FD&D cover is subject to several conditions to ensure that unviable cases are not pursued or defended. The FD&D Rules allow the Managers’ to deny cover when, for example, the legal costs which are likely to be incurred in pursuing, enforcing and/or defending the claim unreasonably outweigh the amount in dispute. Furthermore, thev FD&D Cover does not protect against costs and expenses covered by the Assureds’ hull policies or other insurance covers. Finally, the FD&D Rules provide that the Managers has an express right to control and direct the handling of the claim.
It is important to note that the FD&D Cover is intended to assist with normal commercial risks and not sub-standard or fraudulent operations. Should a case arise where there has been wilful misconduct on the part of the Assured, the Managers’ will deny cover.

Practical examples of the FD&D Cover in operation

1) Time Charterers’ vessel is ordered off the berth by the port authorities following Master's refusal to load

The FD&D Cover can respond as follows:

i) Review and advise the Assured on his time charter obligations. Provide the Assured with assistance in negotiations with Owners.
ii) Review and advise the Assured on his sub-voyage charter obligations (if any). Provide assistance with any negotiations with the voyage charterer.
iii) If required, appoint and cover the costs of Facilities local correspondent to assist and provide advice locally.
iv) If required, appoint and cover the costs of a local lawyer.
v) If required, appoint and cover the costs of an expert lawyer from the appropriate dispute resolution jurisdiction to advise. The appointed expert lawyer will have a track record of good quality advice at a reasonable cost
vi) Appoint a local surveyor or, if required, appoint an expert surveyor, from, for example, London, who specialises in the area in question.
vii) If the dispute proceeds to arbitration The FD&D Facility will cover the legal costs of the Assureds’ lawyers and those of the other party or parties to the dispute in the event the Assured is unsuccessful, as well as the arbitrators’ fees and the costs of any experts appointed. If required, the Managers’ may at its discretion issue a Club letter of undertaking as security in respect of the other side’s costs of defending the claim.

2) Owners’ vessel collides with a berth. The damage falls below the Owners’ Hull & Machinery deductible.* The vessel is arrested by the Port Authorities for security

The FD&D Cover can respond as follows:

i) Instruct our local correspondent to provide assistance.
ii) Instruct a suitable surveyor to advise on the damage.
iii) Instruct a local lawyer to advise and assist vis-à-vis the Port Authorities.
iv) Review and advise the owners on possible claims against their contractual partners.
* The deductible shall be deemed not to exceed one per cent of the vessel’s insured value.

3) Owners have voyage chartered a vessel and having loaded the vessel are owed substantial sums in respect of freight

The FD&D Cover can respond as follows:

i) Review the owners’ contractual relations to ascertain what action can be taken to protect their position, e.g. exercising a lien.
ii) Instruct a local lawyer to advise on the owner’s position under local law.
iii) Instruct the local correspondent to locate suitable warehousing facilities should it be necessary to discharge the cargo into secure premises.
iv) Assist the owner with wording of communications with their various contractual partners.

Further examples of disputes, which may activate the FD&D Defence Cover:

1 A charter-party is amended by the deletion of its laytime and demurrage provisions. A question then arises as to whether charterers are liable for damages for detention due to the delays in getting into berth.
2 A collapse of stow at sea. A dispute arises between owners and charterers as to whether the vessel is off-hire and who is liable for the costs incurred in connection with the deviation to a port of refuge.
3 There is a delay in the discharge of cargo. Questions are asked whether the shippers are under an implied duty to effect discharge within a reasonable time
4 A vessel takes a longer route than necessary due to the Master’s fear of bad weather during the hurricane season. A dispute arises as to whether or not the vessel deviated and whether or not the deviation was justified.
5 A crane is destroyed by a vessel whilst manoeuvring into berth in bad weather. The disputes arising range from whether the vessel was responsible to whether damages should be awarded on a cost of replacement or market value basis.
6 Disputes as to whether services rendered by a harbour tug to a vessel whose mooring lines parted constituted salvage.
7 The negotiations for the proposed sale of a ship break down. Had the negotiations resulted in a binding contract of sale?
8 A Port Authority delivers invoices containing errors to the owners’ port agents. These errors resulted in the owner being overcharged. The port agents pay the invoices on owners’ behalf and then seek reimbursement from the owners. Were the owners entitled to refuse to pay agents for the amount overcharged?