FLAGSHIP CASE GIVES INSURANCE ‘NECESSARY’ STATUS

The recent admiralty case of Flagship Group Ltd. (1192 AMC 815) in the federal court of the Eastern District of Virginia clarifies the meaning of the word “necessaries” as used in the Federal Maritime Lien Act, 46 U.S.C. Sec 31341 et, seq. This statute states that “a person providing necessaries to a vessel on the order of the (ship) owner or a person authorized by the (ship) owner has a maritime lien on the vessel.”

By way of background a maritime lien is a privileged claim upon a vessel for services rendered to it. One of the purposes of the lien is to encourage credit advances to vessels for nessearies that permit ships to complete voyages. The non-recorded lien arises the instant services are rendered to the vessel and it follows the ship throughout the world. This security device effectively prevents ships from sailing away from their monetary obligations.

The significance of the maritme lien is that the lien holder receives a special non-possessory interest in the ship for an unpaid debt. The lien can be judicially discharged only by an admiralty proceeding in any country where the ship may be found, arrested and judicially sold to satisfy the debt.

The Federal Maritime Lien Act defines “necessaries” to include repairs, supplies, towage and the use of a dry dock or maritime railway. The issue raised in the Flagship Group Ltd. case is whether marine insurance is also a “necessary” under the statute.

Historically, admiralty law held that claims of an insurer for unpaid marine insurance premiums did not give rise to a maritime lien. An insurance policy on a ship was traditionally viewed as a contract for the personal benefit of the vessel owner, not the ship. Therefore, no lien would arise for unpaid insurance premiums.

In 1986 the Fifth Circuit Court of Appeals in the Equalease case (1986 AMC 1826) broke tradition by recognizing that marine insurance is something that every vessel needs in order to carry on normal business. The court held that because insurance is essential to keep a vessel in commerce, it equates to a necessary under the Federal Maritime Lien Act.

In the 1991 Flagship Group Ltd. case, the plaintiff insurance broker claimed maritime liens against three cruise ships for unpaid hull and protection and indemnity (P & I) insurance premiums. The plaintiff expanded on the Equalease case rationale and asserted in its motion papers that modern day business realities make marine insurance for cruise ships as much a necessary as an anchor or a propeller:

Passengers need to be covered by insurance once they arrive aboard…No prudent (mortgage) lender would allow these vessels to operate without insurance… All preferred mortgages on all three vessels make both hull and P & I insurance mandatory. . . These vessels would no more leave port without marine insurance than they would without fuel for their engines.”

The Virginia District Court accepted the plaintiff’s arguments and held that unpaid insurance premiums give rise to a maritime lien as “necessaries” under the Federal Maritime Lien Act.

It now seems clear that there is a developing trend to accept the fact that marine insurance is an absolute necessary in the world of international shipping. Claims of an insurer for unpaid insurance premiums will now, in all likelihood, give rise to maritime liens under the Federal Maritime Lien Act.


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