Regardless of which legislation is passed, as with any commitment, the implementation of greenhouse gas regulations involves climate-related litigation risk. Any increase in the quantity and severity of regulation raises a ship operator’s potential exposure to liabilities. In particular, companies’ risk high fines for regulatory breaches and future IMO regulations are set to create compliance obligations for ship owners and operators. If companies publicly commit to certain targets – even though non-binding – this can result in future shareholder legal action taken against the business in question if they fail to reach them, as has been evidenced in the doubling of climate change actions between 2017 and 2020. Whilst protection & indemnity cover related to fines imposed pursuant to a breach of the IMO’s regulations is typically discretionary, it will certainly be an exposure that cannot be overlooked by both the ship operators themselves and their insurers.
Further, if companies fail to disclose key business risks from alternative fuels and emissions reductions or to set clear targets, this could also lead to disclosure litigation over withholding information vital to the business.
What’s more, the specialist technology options currently being explored by the maritime industry to reduce its carbon footprint are relatively novel and have never been produced or deployed on any great scale. As a result, new ship and shore-side technologies introduced to measure against any regulations will inevitably carry IP risks and – with operating complications or specialist parts accounted for – will, in turn, increase the insurable value of vessels. As a result, hull insurance premiums may increase.
But more than this, new technologies also carry uncertainty which insurers may find difficult to underwrite: calculating the exposure and cost of the associated risk will be the key challenge of hull and machinery underwriters in order to determine the appropriate premium.
Depending on the timeline and ambition of future IMO regulation on greenhouse gas emissions, this could lead to early scrappage and expensive retrofits affecting profitability in the industry. There will be renewed requirements for specialist parts and repairs, therefore increasing the need for manufacturers and ship companies to undertake the relevant cover. For example, retrofitting engines to make them compatible with new, carbon-neutral fuels will be costly, aside from the significant investment required to develop and acquire such low emission fuels. And aside from this, alternative fuels such as hydrogen, ammonia and methanol are not yet able to be produced at the necessary scale without generating significant and overall counterproductive levels of emissions.
Considering these risks, there are significant insurance implications for almost any business operating within the global maritime industry. Critical months lie ahead for ship decarbonisation, with world leaders currently gathering for COP26 in Glasgow and the next large IMO climate change meeting taking place later in November. It’s clear that decisive action needs to be taken now if any target is to be reached – and that regulations to mandate such action are imminent. And while much has been said about the impact cars, planes and trains are having on the environment, the conversation surrounding the impact of the shipping industry is no doubt about to get even louder, both within the sector and more widely.
By Alexander Gray, Head of Marine P&I, Lockton