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Wednesday, January 17, 2018

OPA 90 UPDATE: COFRs β€” Tanker Industry Deadline Is Near

On July 1, 1994 the U.S. Coast Guard (USCG) issued its interim final rule (IFR) pertaining to Certificates of Financial Responsibility (COFRs) under OPA 90. Unfortunately for vessel owners and their insurers, the International Group of P&I Clubs, the IFR more or less mirrored the USCG's proposed COFR rule of September 1991. In short, it requires that the vessel's oil pollution liability insurer act as a guarantor under the certificate.

The International Group of Pd Clubs, maintaining their origin position, have refused to act as su< guarantors. Accordingly, the ce tificates cannot be obtained by e\ dencing the P&I Clubs as the ii surer. However, the P&I Clubs ha^ indicated that they would contini to provide their Members with sue coverage, albeit without the require certification.

OPA 90 COFRs have raised th minimum limits of financial respor sibility a vessel owner is required t evidence. A tank vessel (regardles of whether it is carrying an oil carg or not) must have certification c $1,200 per grt or $10 million, which ever is greater, for pollution plu $300/grt or $5 million, whichever i greater, for CERCLA (Comprehen sive Environmental Response, Com pensation, and Liability Act). Non tank vessels must be certified fo: $600/grt or $500,000 whichever ii greater for oil pollution plus fo; CERCLA, $300/grt or $5 million whichever is greater when carrying hazardous substances as cargo oi $300/grt or $500,000, whichever is greater when not carrying such hazardous cargoes.

In essence then, any tanker in excess of 6,500 grt must have financial responsibility equal to $1,500/ grt. Any non-tank vessel over 5,500 grt engaged in carrying hazardous cargoes would have to evidence financial responsibility for $900/grt.

The amount of such certification need only be equal to the maximum OPA 90 limit for the largest vessel in a fleet or group of vessels. For instance, if a vessel owner has six tankers and three non-tankers in his fleet with the largest tanker being 10,000 grt and the largest non-tanker being 100,000 grt, then the amount of the certificate that would cover all nine vessels would have to be $90 million (100,000 grt x 900/grt). In that same fleet, if the largest non-tanker were only 15,000 rt, then the amount of the certifiate would be $15 million (10,000 "rt x $l,500/grt).

As most everyone expected, the FR of July 1 did provide for an implementation period. Tankers are required to obtain the new certificates by December 28, 1994, tank jarges by July 1, 1995 and non- tank vessels/barges on expiry of their existing COFR β€” but no later than December 28, 1997.

The IFR does allow for alternatives to the P&I Clubs or insurance per se. The vessel owner could provide evidence of financial responsibility by self-insurance, financial guarantees (letters of credit) or surety bonds.

In order to qualify for self-insurance, the vessel owner must demonstrate that its net assets in the U.S. are greater than its worldwide liabilities. A financial guarantee such as a letter of credit drawn on an approved U.S. bank is another possibility. Again, in order to do so, one must have sufficient capital deposited in the bank to cover that letter of credit. For foreign operators, the letter of credit must be drawn on a U.S. bank.

The final alternative is the surety bond route. One bond for an amount equal to the largest OPA 90 limit in a vessel owner's fleet would cover all the vessels in that fleet. The bond would have to be written by an approved U.S. Treasury surety(s). However, most bonding companies require sufficient collateral in the form of a letter of credit or the like making their cost prohibitive, especially for vessel owners with smaller fleets.

Recognizing the limitations of these alternatives and the opportunities available as a result, a number of firms have entered the picture proposing a myriad of solutions. These are Shoreline, OPAClub and First Line. Shoreline is a mutual insurer similar to a P&I Club. It is registered in Bermuda and unlike OPAClub and First Line, is offering primary cover with limits of $300 million. That would have included certification as well. However, with most tanker owners having already paid their U.S. surcharge to their P&I Club for the 1994-5 policy year, the cost of Shoreline's primary cover was seen as a duplication of what had already been in place and had been incurred/paid.

Shoreline has since amended their proposal to offer their $300 million coverage in excess of what the P&I Clubs have in place. With Shoreline as excess insurer, providing certification from the ground up and the P&I Club cover remaining as primary, Shoreline has been able to reduce its rates from $0.87/ dwt/voy to $.46/dwt/voy for a 20- year-old dirty oil tanker. However, as mutual insurer, Shoreline can charge supplementary calls in case of catastrophic losses similar to a P&I Club.

Shoreline's reinsurance details had been brought into question but the USCG has reviewed that reinsurance program and offered its conditional approval of it. Shoreline has only to provide the USCG with its financial guaranty bond before being formally authorized as acceptable. OPAClub will issue a single master surety bond for approximately $300 million to cover all the vessels entered in the Club. OPAClub offers certification only and therefore only members in good standing with their P&I Clubs will be allowed to participate in this program. As a rate, OPAClub will charge $l/grt for a tanker and $.60/ grt for a non-tanker. There are certain minimum rates on a per vessel and a per fleet basis but these are subject to change as OPAClub's negotiations continue. In addition, OPAClub requires that each vessel owner execute a letter of credit equal to ten times the amount of the premium. OPAClub intends to use those Letters of Credit to provide the USCG with enough bonding capability to be deemed an acceptable insurer. OPAClub has been conditionally approved by the USCG. OPAClub believes they will need a subscription of 30 million tons to be viable. This subscription is required to provide the letter of credit capacity required to support the master bond.

As with Shoreline, OPAClub is a mutual insurer with the prospect of supplementary calls in the case of a catastrophic loss. OPAClub is pres- ently working on reinsurance to alleviate this problem.

First Line is offering certification plus breach of warranty cover. In other words, they will cover when the P&I Club does not β€” i.e., nonpayment of calls, vessel out of class, unseaworthiness within the knowledge and privity of the vessel owner.

Unlike Shoreline and OPAClub, First Line is not mutual insurance. Therefore, the premium is fixed with no risk of supplementary calls. The rate is $.50/grt per year for tankers carrying persistent oil, plus a pervoyage charge of between $.25/grt and $.40/grt, dependent on age. As of this writing, Shoreline, OPAClub and First Line have not been formally and unconditionally approved by the USCG, although approval for all of these is expected. None have written an OPA 90 COFR.

Yet, negotiations with the USCG, P&I Clubs, vessel owners and reinsurers continue. Reports range from optimism to pessimism and back again on a daily basis. Some OPA 90 COFRs have been issued to date, but the great majority have gone to U.S.-flag vessels.

All have used either self-insurance or financial guarantees. Much pressure has been brought upon the USCG to postpone the Dec. 28 deadline. Lacking Congressional or presidential intervention, the next few weeks will determine which vessels obtain certification and from whom.

Maritime Reporter Magazine Cover Dec 2017 - The Great Ships of 2017

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