Marine Contracts: Avoiding Insurance Gaps and Liability Risks

This post originally was published by Marine Log and is reprinted here with permission.

In commercial marine operations, contracts define business relationships and risk allocations. These agreements establish responsibilities, whether chartering a vessel, arranging tow services, or managing a shipyard project. However, they can create challenges and financial exposure if not carefully reviewed for contractual liability, risk transfer, and insurance coverage alignment.

Contractual liability refers to a party's legal responsibility under a contract, often beyond general maritime law. Vessel owners, operators, and marine contractors frequently indemnify, hold harmless, or name another party as an additional insured, taking on contractual liability. Problems arise when these obligations conflict with insurance policy terms, creating gaps and financial exposure.

While insurance is a primary risk transfer tool, contractual risk transfer (CRT) shifts liability through agreements rather than policies. CRT assigns risks to the party best positioned to manage them, such as vendors or subcontractors. Properly implemented, CRT reduces claims and premium costs, strengthening risk management.

Applications of CRT in Marine Operations

CRT is valuable in vessel charters, construction projects, maintenance work, and subcontracting. It allows businesses to allocate liability to those responsible for specific tasks. For example, a towing company may assume liability for damages during transit. The company may face significant uninsured exposure if the agreement includes broad indemnification without matching insurance coverage. Similarly, a shipyard contracting a third party for vessel repairs must ensure liability is appropriately assigned, protecting the shipyard from unnecessary exposure. In marine construction, barge owners leasing vessels may require CRT to transfer liability for crew safety and worksite conditions to the construction firm.

Mechanisms for Effective CRT

Several contractual mechanisms help execute effective CRT. They include the following.

Hold-Harmless Agreements

These agreements release one party from liability, but must be carefully structured.

Indemnification Agreements

These agreements define how one party compensates another for third-party claims.

Waivers of Subrogation

These waivers prevent an insurer from seeking reimbursement from another party’s insurer, reducing disputes.

Additional Insured Endorsements

These endorsements extend one party’s insurance coverage to another. Businesses should obtain certificates of insurance and verify endorsements from subcontractors, vendors, or lessors.

Case Studies Highlighting CRT Challenges

Consider the following: A tug operator signed a towage agreement requiring indemnification of the barge owner for all damages, even if the barge owner’s negligence contributed. When a grounding occurred, the barge owner sued the tug operator under the indemnity clause. The tug operator’s protection and indemnity policy excluded liability assumed under the contract, leaving the operator with significant uninsured legal and settlement costs.

Shipyards and marine contractors often enter into agreements with broad hold-harmless provisions or project-specific additional insured endorsements. Without a thorough contract review, these provisions create dangerous

coverage gaps. A shipyard contracting a welding subcontractor may be required to indemnify the vessel owner for damages. If faulty welds cause a fire, the shipyard could be liable without recourse if its ship repairers’ legal liability policy does not cover contractual indemnity obligations. Similarly, a marine construction firm expanding port infrastructure might accept broad indemnification terms in favor of the port authority. If an accident occurs, the firm could face claims exceeding policy limits.

To mitigate these risks, businesses must ensure contract terms align with insurance policies. Indemnity clauses should not create liability beyond policy limits, valid endorsements must support additional insured requirements, and waivers of subrogation should not compromise future claim recoveries.

Ensuring Effective CRT Implementation

Businesses implementing CRT must consider key factors for effective risk management. Indemnification laws vary, so legal counsel should review contracts for enforceability. Financial obligations must be clearly defined to prevent unexpected disputes. Overly broad indemnities can lead to unanticipated financial burdens, making careful contract assessment essential.

A structured contract review aligns liability and insurance obligations. Involving an insurance broker early helps identify conflicting risk transfer provisions before signing. Comparing contractual obligations to policy terms is crucial, particularly in indemnity, additional insured, and waiver of subrogation clauses. If discrepancies exist, businesses should negotiate contract terms for better alignment, such as limiting indemnity to “to the extent caused by” their negligence. Securing specific endorsements for contractual liability coverage helps address potential gaps. Maintaining proper documentation of contract reviews and insurance decisions ensures compliance and defensibility in the event of a claim.

CRT isn’t just a best practice in marine operations—it’s a necessity. By proactively reviewing contracts, aligning insurance coverage, and strategically transferring risk, vessel owners, operators, shipyards, and marine contractors can safeguard financial stability. The key to avoiding costly surprises isn’t just having insurance—it’s ensuring every contract reflects the expected protections. A well-structured risk transfer strategy is your strongest defense in today's evolving maritime landscape.

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The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.