Frequently Asked Questions for US Certificates of Financial Responsibility (COFR) Guarantees 1. What is the Standard Club s position on US COFRs? US COFRs are required in respect of ship-sourced pollution liabilities under the US Oil Pollution Act of 1990 (OPA 90) and under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). A company which guarantees a COFR guarantees to the US Coast Guard that the limitation amounts under OPA 90 or CERCLA will be paid if the shipowner does not do so. The club believes that it and ideally the IG clubs generally should guarantee the obligations under US COFRs for club members instead of members having to obtain, and pay for, COFR guarantees from third-party companies. 2. Why does the Standard Club believe that clubs should become involved in the issuance of COFRs? The club believes that the current system creates unnecessary cost and administrative inconvenience to shipowners. The current system has cost shipowners around $0.75bn over the past 19 years, for no, or very little, benefit. 3. Why do you say that the current system has caused unnecessary cost? The clubs provide shipowners with $1bn of oil pollution cover. The clubs therefore pay for shipowners pollution liability claims, up to that limit, in the US and elsewhere. The COFR is evidence that insurance is in place and that the limitation amounts under OPA 90 and CERCLA will be paid if the responsible shipowner does not pay those amounts. By refusing to guarantee the COFRs, the clubs have obliged shipowners to pay COFR companies to provide the COFR guarantees, but the underlying cover is still provided by the clubs, so the shipowners are effectively paying twice for the same cover. Clubs anyway confirm to the third-party COFR guarantee providers they are providing the actual underlying cover. The third-party guarantee providers then guarantee the COFR obligations based on the cover provided by an IG club. Since OPA 90 came into force, clubs have always paid all US pollution claims anyway; COFR companies have never had to pay anything for a pollution claim covered by an IG club, and nor do we think they will ever have to do so.
4. Why has the club come to this view now? The club believes that, although in 1994 reasons were put forward why clubs should not guarantee COFRs, with the benefit of experience and hindsight a number of those reasons no longer remain valid. If the current system continues, shipowners will continue to pay millions of dollars every year into the future for very little benefit. Please also see question 10. 5. Isn t the current cost quite small? While the cost of COFRs has come down over the years, the shipping community as a whole is still currently paying close to $40m each year for these documents, for little benefit. That will amount to another $0.75bn over the next 20 years if nothing is changed. That money could be largely saved, or at the least, be put to better use. We do not wish to see shipowners wasting money where it can be saved. 6. What is actually proposed and how does it differ from the current arrangements? The club proposes that it should guarantee the obligations of its members under US COFRs direct to the USCG. The club would also guarantee its members obligations under CERCLA. The club would also be able to provide ICBs (International Carrier Bonds) required by the US Customs and Border Protection agency (CBP). The COFRs and ICBs are currently guaranteed by specialist COFR companies, at extra cost to shipowners, but the underlying cover is still provided by the clubs, which have to confirm to the COFR companies that the shipowner is insured by the club for US pollution liabilities and for customs fines. 7. Is there any additional liability or exposure on a club as a COFR provider compared to the current liability or exposure of the club? The COFR guarantor may not be allowed to plead some insurance policy defences (e.g. the club might want to refuse to pay a claim if the insurance premium has not been paid) and the COFR provider must give 30 days notice of cancellation of the COFR, so it could be exposed after the underlying insurance has been terminated. The COFR guarantor is subject to direct action as the guarantor of the shipowner s pollution liabilities up to the limitation amount under OPA or CERCLA. However, these limitation amounts are well below the $1bn of club cover. These points are dealt with in further detail in question 10 below. 8. Is there a financial limit on the COFR? Is there any risk that this limit might be broken? The liability of a COFR guarantor is limited in accordance with OPA 90 and CERCLA. The US legislation is very clear that a COFR guarantor cannot, in his capacity as the COFR guarantor, be made to pay more than the limitation amount under OPA or
CERCLA. As far as we are aware, no third-party COFR guarantor has ever had to pay more than the limitation amount under OPA or CERCLA. In fact, as far as we are aware no third-party COFR guarantor has ever had to pay any amount in a claim involving an IG club member; the club providing the actual, underlying, cover has funded the OPA or CERCLA payments due so that the COFR guarantee provider has never been called upon to pay on its guarantee. As above, clubs already provide cover of $1bn for oil pollution claims which is far more than the OPA 90 and CERCLA COFR limits. The shipowner cannot always successfully limit his liability to the OPA 90 limit amount, and the clubs have on a number of occasions paid claims over those limits, but within the $1bn club cover limit. 9. Has there been a change in the legislation to alter the thinking of the club? No, there has been no change to the legislation to alter the thinking of the club. This approach could have been taken by the club at any time since the introduction of OPA 90, but we think that with the benefit of experience now is the right time to review its position. 10. If the IG clubs had reasons in 1994 not to give COFRs, please can you explain the club s current position on those reasons? The chief objections to providing COFRs in 1994 are set out below, with explanations, and we also set out why we now think that those objections are no longer worthwhile maintaining. IG objection: COFRs involve submission to US jurisdiction Explanation: The issuer of the guarantee agrees to US jurisdiction The reality is that a club insuring a shipowner for pollution risks in a large pollution claim in the USA is likely to become subject to US jurisdiction anyway Many clubs (including the Standard) have presences in the US through club or management offices Nearly all clubs have members in or trading to the USA and all clubs have agreements with the USCG on the handling of pollution claims
IG objection: In US litigation, there is a risk that the courts will not respect the COFR or policy limits and clubs will find themselves exposed to extra liability and cost Explanation: Some IG clubs believe that there are unresolved legal issues and fear that, in a big casualty, claimants will try to exploit these perceived issues to try to make the club pay more than the COFR limit and more even the insurance policy limits. In a big casualty, the club will become involved anyway as the pollution insurer, whether or not the club has also issued the COFR If there are such issues, they exist under the present system In the last 19 years, no COFR guarantor of an IG ship has had to pay any amount under its guarantee In the last 19 years, no COFR guarantor or ship pollution liability insurer has been found liable for more than it guarantees or insures The US court system has applied the OPA 90 system correctly in all cases, and limits have been respected, including in high profile cases The IG clubs main reinsurer, Lloyd s of London, gives COFR guarantees and does not seem to have the same objections that the other IG clubs have. IG objection: To the extent a club guarantees COFRs directly, the club, as guarantor, will not be allowed to invoke defences under the club s insurance policy Explanation: The issuer of the guarantee agrees to waive most policy defences which would in theory be available to the club as a matter of contract The reality is that clubs are highly unlikely to take a policy defence, i.e. refuse to pay a claim, in a major US oil spill However, the policy defence of wilful misconduct remains a defence under OPA and CERCLA as well The IG clubs issue other pollution blue cards under the CLC and Bunker Conventions and accept the loss of policy defences; and they also issue blue cards for other conventions, waiving policy defences The liability of the COFR guarantor is limited to the amount under OPA 90 or CERCLA, not the full amount of the club cover Reinsurance is available to cover payment of a claim in the unlikely event that there would be a valid policy defence
IG objection: COFRs involve direct action Explanation: The issuer of the guarantee faces claims direct from third parties The IG clubs accept claims direct from third parties under other conventions and in respect of crew injury, death and repatriation The clubs have said to the USCG that they won t take the pay-to-be-paid point anyway in relation to US pollution claims i.e. they will pay claims direct Louisiana, Puerto Rico, and Guam have direct action statutes in any event Some clubs are anyway, owing to their nationality, subject to direct actions by third parties where the member is insolvent (which would likely be the case if a club refused to cover the claim) Clubs routinely give guarantees in casualties that involve the club becoming directly liable (including sometimes in relation to US oil spills) Being directly liable is not a big problem the club is going to pay the claim anyway IG objection: Providing COFRs for domestic liability regimes, rather than only for International Conventions, such as the Civil Liability Convention (CLC), undermine those conventions and encourage countries to take unilateral action to the detriment of international shipping Explanation: By refusing to provide OPA COFRs the IG thought that the USCG would back down and not require OPA COFRs and/or eliminate the consent to jurisdiction provisions. The IG has long supported international conformity through ratification of international conventions such as IMO conventions including CLC, instead of countries introducing their own liability regimes. The IG believed that guaranteeing US COFRs would encourage other states to introduce unilateral legislation. The clubs refusal to guarantee US COFRs did not result in the USCG backing down. Instead, new COFR providers emerged to provide COFRs at additional cost to shipowners. Despite the existence of these third-party COFR guarantors, who, presumably, would be willing and eager to provide COFRs for other countries liability regimes, there has been no proliferation of other states requiring COFRs for domestic legislation The clubs are there to keep shipowners insurance costs to a minimum. This purpose will not be achieved if the IG refuses to respond to domestic legislative changes in major markets leaving the shipowners to pay twice for cover which the IG clubs should, do, and will cover. The clubs can still fight to promote international solutions, primarily those sponsored by IMO
11. Did the Standard Club agree with the position of the IG in 1990? Yes, the club agreed with the position of the IG in 1990, but subsequent experience has shown that, in our view, for the reasons explained above, the better position is now for the club to provide US COFR guarantees itself. We believe that, if it had been realised back in 1994, when the clubs refused to give COFRs, that the cost to the shipping community of the refusal would amount to $0.75bn over the next couple of decades, the clubs might very well not have come to the decision that they came to then. 12. Do the other IG clubs agree with your current position? A number of other clubs do not agree with our views on this. The matter is currently under discussion in the IG. 13. If the Standard Club provides US COFRs, will members have to pay anything for them? The greatest cost benefit would be achieved if all IG clubs were to guarantee US COFRs, and agree to pool liabilities under them, as they do for liabilities arising out of certificates for the CLC, Bunkers Convention, PLR, STOPIA, and, almost certainly, very soon, for the Nairobi Wreck Removal Convention. This would mean that there would not need to be any, or any significant, extra reinsurance cost. If the other IG clubs don t agree to guarantee US COFRs, and the Standard Club does so, or arranges to do so, the club would need to buy some additional reinsurance; so although there would still be a meaningful cost saving as the club would not charge anything for the administration (or to make a profit), as the COFR-providing companies do, the saving would not be so great. 14. If the Standard Club guarantees US COFRs, what will the guarantees respond to? The guarantees will respond to the liabilities under OPA 90 and CERCLA, which the cover provided by the Standard Club already does. 15. Other COFR providers currently organise the provision of International Carrier Bonds. Can the club also provide them? Yes. 16. Would I be able to change from my current provider? You buy an annual cover from your existing provider and you can change at the renewal of that policy.
17. Does the club have the infrastructure and resources to provide this service? Yes, the club has all the right knowledge, infrastructure and resources to do so. 18. What is the current position with this initiative by the club to provide COFR guarantees? The current position is set out in our special bulletin of December 2013. We are currently discussing the matter with other IG clubs, and all clubs are discussing it with their boards. We will provide an update once that process has taken place.