The lack of legal security is due to the use of two guarantee mechanisms to cover losses at different times
The validity of one mechanism for guarantees of compensation for damage to operators of the Black Sea maritime market ended on December 1, 2023, while the actual work of the second mechanism began only at the end of January 2024. The hasty launch of the second mechanism created legal gaps.
Dmytro Ochkolas, a leading lawyer at the law firm Interlegal, told Compraço in a comment.
Since the beginning of the year, the Ukrainian authorities have allowed a legal vacuum to exist (violation of the principle of certainty) with regard to guarantees of compensation for losses arising from war risks to ship charterers, operators and/or owners.
At the end of May 2023, the Cabinet of Ministers of Ukraine approved the «Procedure for Providing War Risk Compensation Guarantees to Charterers, Operators and/or Shipowners». The guarantees apply to situations where the damage caused results from armed aggression of the Russian Federation, during the ship's stay in Ukrainian territorial waters (12 miles), if they transport cargo to or from open ports of Ukraine. The state budget for 2023 provided for UAH 20 billion ($547 million) in compensation for possible damages.
Compensation was expected to be provided to shipowners who had entered into an insurance contract but were denied compensation for losses by the insurer. To receive compensation, the shipowner had to submit a set of documents to the Ministry of Infrastructure within a maximum period of 90 calendar days from the date of receipt of the insurer's refusal to provide insurance compensation, but no later than December 1, 2023. The resolution was valid until December 1, 2023, and from then on, no request was subject to consideration. The real functionality of this mechanism remained unknown, since there were no facts of compensation payments, that is, these funds were not used.
Since the end of last year, Ukraine has started to develop a new guarantee mechanism to cover shipowners' losses in the event of an incident. As a result, the Unity marine insurance program was created, which the Ukrainian authorities are implementing together with Marsh McLennan and a group of insurance companies led by Ascot. The total coverage value of the program is US$50 million. 2 billion UAH was allocated in the State Budget-2024 from the reserve fund for its implementation.
“For almost two months now, there has been legal uncertainty as to the date from which compensation will be calculated in 2024,” says Dmitry Ochkolas.
In addition to the State having reduced the size of the insurance fund by 10 times for 2024, there are legal gaps in the mechanism for guaranteeing compensation to charterers, operators and shipowners.
«As of 15.02.2024, no relevant decree has been adopted on the provision of guarantees of compensation for damage caused as a result of armed aggression for 2024. Furthermore, the question remains open whether the shipowners with whom incidents occurred between December 2, 2023 and January 1, 2024 can count on compensation», notes Dimitri Ochkolas.
However, the long preparatory work led to the first practical results and the beginning of transport insurance in the maritime corridor.
«In the last days of January, among all the vessels moving to the ports of Greater Odessa, there was one vessel that was insured against war risks thanks to Unity insurance. The insurance cost was 0.75% of the value of the vessel. More than a dozen insurance claims are in progress. The normalization of the insurance market in trade is a cornerstone for the resumption of value-added exports. That is why it is so important for us that insurance becomes more accessible and is already effectively used for export of Ukrainian products», said Yulia Svyrydenko, First Deputy Prime Minister, Minister of Economy of Ukraine.
The purpose of creating a guarantee mechanism to cover losses is to return insurance rates for cargo transportation in the Black Sea to the pre-war level of 1% of the value of the cargo. At the same time, rates may be subject to strong fluctuations depending on the current security situation in the maritime corridor.
“Supplemental war risk insurance rates are still high, although there is some inherent volatility depending on the presence and nature of incidents. For example, when there was a missile attack on the bulk carrier Kmax Ruler in November 2023, additional insurance rates for ship calls to Ukraine increased sharply. Consequently, insurers did not even seek to establish firm terms and conditions for trips that had not yet taken place. Fares to Ukraine are dynamic, which means that any current rates could become irrelevant tomorrow if the trip does not take place within a few weeks,” emphasizes Javor Velchev, partner at Shippossible Ltd.
As Compraço reported, during half a year of operation of the maritime corridor (as of February 13), 736 ships left the ports of Greater Odesa (ports Odesa, Chornomorsk and Pivdennyi), which transported almost 23 million tons of export cargo , of which more than 2/3 are agricultural products.
In total, in 2023, cargo transshipment in Ukrainian ports increased by 5% in annual terms – to 62 million tons. The dynamics of transshipment in the ports of Greater Odessa in 2023 compared to 2022 was multidirectional: the Odesa port showed a growth of 9% to 8.4 million tons, while in Chornomorsk and Pivdennyi there was a decrease – from 3%, to 11, 4 million tons and by 34% to 10.1 million tons, respectively.
