MARINE OIL POLLUTION

In tern atio n ales In stitu t für Umwelt und G esellschaft (IIUG) In tern atio n al In stitu te for Environm ent and Society

W issenschaftszentrum Berlin fü r Sozialforschung

IIUG dp 86-3

INSURANCE FOR CIVIL LIABILITY AND COMPENSATION FOR

MARINE OIL POLLUTION

3an C. B ongaerts Aline F.M. De Bievre*

ISSN 0175-8918

* A ssociate, S.E.A. Foundation, D elft

IIUG, P otsdam er Str. 58, 1000 Berlin 30, Tel.: 030-26 10 71

Sum m ary

I n s u r a n c e f o r C i v i l L i a b i l i t y a n d C o m p e n s a t i o n f o r M a r i n e O i l P o l l u t i o n

D i s a s t r o u s o i l s p i l l s o n t h e h i g h s e a h a v e b e e n a b s e n t i n t h e l a s t fe w y e a r s . T h i s d e v e l o p m e n t i s d u e t o t h e f a c t t h a t v e r y l a r g e a n d l a r g e c r u d e c a r r i e r s h a v e d i s a p p e a r e d . N e v e r t h e l e s s , c a r e f u l m o n i t o r i n g o f t h e t e c h n o l o g y a d v a n c e s i n t h e t a n k e r t r a d e a n d c h a n g e s i n t h e r u l e s o f l i a b i l i t y f o r o i l p o l l u t i o n d a m a g e s i s n e c e s s a r y . I n t h i s p a p e r a n o v e r v i e w o f t h e c u r r e n t l i a b i l i t y a r r a n g e m e n t s a n d c o m p e n ­ s a t i o n r u l e s i s g i v e n . F ro m e v i d e n c e o n t h e i r o p e r a t i o n , we c o n c l u d e t h a t e s p e c i a l l y i n c a s e s o f s e v e r e c a t a s t r o p h e s c o m p e n s a t i o n w a s i n s u f f i c i e n t , n o t w i t h s t a n d i n g t h e c l e a r o b j e c t i v e o f o b t a i n i n g f u l l c o m p e n s a t i o n f o r t h e v i c t i m s . T h e r e a s o n f o r t h i s f a i l u r e i s o b v i o u s : o v e r t i m e t h e s h a r e o f s h i p - o w n e r s o f t h e t o t a l c o m p e n s a t i o n p a y m e n t s h a s d e c r e a s e d w h i l s t t h e m axim um l i m i t s f r o m o t h e r s o u r c e s r e m a i n e d t o o lo w . An a n a l y s i s o f t h e L o n d o n m a r i n e i n s u r a n c e m a r k e t r e v e a l s t h a t s c r e e n i n g r i s k s i s i n s u f f i c i e n t a n d

t h a t , t h e r e f o r e , r i s k a v o i d i n g e f f o r t s a r e s u b o p t i m a l . F i n a l l y , t h e d e f i n i t i o n s o f o i l p o l l u t i o n d a m a g e s u s e d i n l i a b i l i t y r u l e s a n d c o m p e n s a t i o n a r r a n g e m e n t s d o n o t

a l l o w f o r i n t r i n s i c d a m a g e s t o f l o r a a n d f a u n a . F ro m a n e c o l o g i c a l p o i n t o f v i e w , t h e c u r r e n t l i a b i l i t y r u l e s a n d t h e c o m p e n s a t i o n s c h e m e s d e r i v e d f r o m i t a r e t h e r e f o r e i n s u f f i c i e n t i n s t r u m e n t s i n o r d e r t o g u a r a n t e e a n a p p r o ­ p r i a t e t r e a t m e n t o f t h e m a r i n e e c o s y s t e m .

Z u s a m m e n f a s s u n g

H a f t p f l i c h t v e r s i c h e r u n g u n d E n t s c h ä d i g u n g f ü r Ö l v e r s c h m u t ­ z u n g a u f S e e

Ö l k a t a s t r o p h e n a u f h o h e r S e e s i n d i n d e n l e t z t e n J a h r e n n i c h t m e h r v o rg e k o m m e n . D i e s e E n t w i c k l u n g i s t v o r a l l e m d a r a u f z u r ü c k z u f ü h r e n , d a ß d i e g r o ß e n ( v e r y l a r g e u n d l a r g e ) Ö l t a n k e r v o n d e n M e e re n v e r s c h w u n d e n s i n d . D e n n o c h b l e i b t e i n e s o r g f ä l t i g e Ü b e rw a c h u n g d e r t e c h n i s c h e n E n t w i c k l u n g d e r T a n k s c h i f f a h r t u n d d e r G e s t a l t u n g d e s H a f t u n g s r e c h t s i n S a c h e n Ö l v e r s c h m u t z u n g a n g e b r a c h t . I n d i e s e m B e i t r a g w i r d e i n e Ü b e r s i c h t ü b e r d i e z u r Z e i t g ü l t i g e n K o m p e n s a ­ t i o n s r e g e l u n g e n f ü r S c h ä d e n i n f o l g e v o n Ö l v e r s c h m u t z u n g a u f h o h e r S e e g e b o t e n . A n s c h l i e ß e n d w i r d a n H an d v o n D a t e n d a r a u f h i n g e w i e s e n , d a ß g e r a d e b e i s c h w e r e n K a t a s t r o p h e n k e i n e v o l l s t ä n d i g e K o m p e n s a t i o n g e b o t e n w u r d e , o b w o h l

d i e s e v o n d e n R e g e l u n g e n b e a b s i c h t i g t w a r . D e r G ru n d d ü r f t e

d a r i n l i e g e n , d a ß d i e B e r e i t s c h a f t d e r R e e d e r z u r L e i s t u n g

v o n S c h a d e n s e r s a t z z a h l u n g e n im L a u f e d e r Z e i t a b g en o m m en h a t

u n d d i e v o n a n d e r e r S t e l l e z u r V e r f ü g u n g g e s t e l l t e n D e c k u n g s

b e i t r ä g e z u g e r i n g w a r e n . E i n e A n a l y s e d e r L o n d o n e r S c h i f f s ­

v e r s i c h e r u n g s m ä r k t e z e i g t d a r ü b e r h i n a u s , d a ß k e i n e v o l l ­

s t ä n d i g e R i s i k o t r e n n u n g s t a t t f i n d e t . D i e s e M ä r k t e s i n d d a m i t

i n e f f i z i e n t u n d s e t z e n k e i n e s f a l l s A n r e i z e z u r o p t i m a l e n R i s i k o v e r m e i d u n g . S c h l i e ß l i c h g i b t e s i n d e n j e t z i g e n

K o m p e n s a t i o n s r e g e l u n g e n k e i n e g e n ü g e n d w e i t g e f a ß t e D e f i n i t i o n v o n U m w e l t s c h ä d e n , d i e d e n n i c h t u n m i t t e l b a r d e n

M e n s c h e n b e t r e f f e n d e n S c h a d e n a n F l o r a u n d F a u n a u m f a ß t .

A u s d e r S i c h t d e r Ö k o l o g i e e r g i b t s i c h s o m i t d i e S c h l u ß ­

f o l g e r u n g , d a ß d a s j e t z i g e H a f t u n g s r e c h t u n d d i e d a z u

g e h ö r i g e n K o m p e n s a t i o n s r e g e l u n g e n n i c h t a u s r e i c h e n , um

e i n e n s a c h g e r e c h t e n Um gang m i t dem Ö k o s y s te m " M e e r" d u r c h

d i e T a n k s c h i f f a h r t z u e r z i e l e n .

1

Introduction

With the disappearance of the ultra large and very large crude carriers, spectacular oil pollution accidents at sea are more seldom. Moreover, with the progressive installment of appropriate equipment, deliberate oil spills have also diminished. Oil

pollution has not disappeared, however, and efforts are needed in order to guarantee a steadily improving protection of the marine ecosystem, as well as to further reduce pollution. There is no doubt that the relative success of the oil pollution abatement strategies was due to the cooperation of all interest groups, un­

der the guidance of the International Maritime Organisation (IMO, formerly the Intergovernmental Maritime Consultative Organisation IMCO). IMO is the United Nations specialized Agency for matters relating to ship safety and vessel-source pollution control.

The purpose of this paper is not to review all that has been done in this area, but to deal primarily with the compensation of oil pollution damages. In particular, we investigate the different financial arrangements developed by tanker owners and oil

receivers, both on a voluntary as well as a regulatory basis.pol­

lution. We also present an assessment of these arrangements with respect to their usefulness as instruments of international marine oil pollution control policy.

The paper is set up as follows. Section 1 deals with an overview of the oil pollution problem and possible solutions. Section 2 presents some data on compensation for oil pollution damages.

Section 3 is devoted to a discussion of the concept of

environmental damages. In Section 4 we outline the functioning of the marine insurance system with respect to oil pollution

damages. The final section contains the conclusions.

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1. Oil Pollution at Sea: Problems and Solutions

Oil pollution at sea has aroused worldwide attention through a number of spectacular tanker accidents causing severe damages to maritime life and to coastal areas. In 1967 the tanker Torrey- Canyon grounded off the British coast and lost 120,000 tonnes of crude oil, part of which polluted the coasts of Cornwall and Brittany. In 1978 the tanker Amoco Cadiz broke in two on the rocks off the Brittany coast with a total cargo loss of 220,000 tonnes of crude. The damage to this coast was considerable and raised a wave of protests by inhabitants of the distressed area as well as by environmentalists from all over Europe. Another accident involved the 272,450 dwt tanker Castillo de Bellner which had a midship explosion off Cape Town and then broke in two. The stern portion sank and might eventually leak out its load. The bow section which contained an estimate 100,000 tonnes of light crude, was towed into the open sea and sunk.

This enumeration is far from exhaustive and only serves the purpose of showing the extent of the damages committed to the environment as well as the need for a comprehensive preventive international policy. Especially the disaster involving the Amoco Cadiz increased the concern of governments and shipping interests alike. After the accident with the Torrey Canyon claims were settled out of court and compensation was paid for only part of the clean-up costs (See Volkmar Hartje, 1983, Part V.) After the disaster with the Amoco Cadiz, however, the Government of France requested the Legal Committee of IMO to prepare a new set of international rules relating to compensation for damages. Even though the experience of the Torrey Canyon had promoted the development of international rules and agreements, it was felt that stricter regulations were needed and that too many important issues such as the definition of the concept of compensable pol­

lution damage was left to the courts. (See Rouchdy Kbaier and Viktor Sebek, 1985).

Apart from this request the Government of France sued the

responsible oil companies in a Chicago court. In 1984 Judge Frank McGarr ruled that Standard Oil of Indiana, the parent company, and Amoco International Oil Company and the tanker owner Amoco Transport Company of Monrovia, the subsidiary companies, are

jointly and severally liable for the pollution damage.

Besides these spectacular accidents which received substantial media coverage, there are other sources of oil emission into the ocean. First, we have to mention the deliberate emissions of oil products by ships, either resulting from discharging bilge oil or from tanker washings. Second, we notice oil pollution damage from off-shore installations such as oil rigs and platforms. And

third, there is oil pollution from land-based sources. Estimates

T a b le 1: S o u rces o f O il P o l l u t i o n o f th e Sea

1973 1981

M arine T r a n s p o r ta tio n T anker O p e ra tio n s Dry Docking

M arine T e rm in als B ilg e and F u e l O il T anker A c c id e n ts N on-Tanker A c c id e n ts

2.1

1.08 0 .2 5 0 .0003 0 .5 0 .2 0.1

1 .5

0.71 0 .0 3 0 .0 2 0 .3 2 0 .3 9 0-0 2

O ff- s h o r e O il P ro d u c tio n 0 .0 8 0 .0 5

Land-Based S o u rces 2 .7 1.203

R e f in e r ie s 0 .2 0 .2

N o n -R efin ery W aste 0 .3 0 .2

M u n ic ip a l W aste 0 .3 0 .3

Urban Run-Off 0 .3 0 .0 0 3

R iv e r R un-O ff 0 .3 0 .3

N a tu ra l S o u rces 0 .6 0 .3

A tm ospheric 0 .6 0 .3

6.1 3 .3

S o u rce: Y Sasam ura, IMCO C o n v en tio n s R e la tin g t o t h e P r e v e n tio n o f

M arine P o l l u t i o n From S h ip s , IMCO, London, A p r il 1982

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with respect to discharges fron these and other sources are represented in table 1.

Table 1 reveals that overal marine oil pollution is likely to decrease in the next future, if the indicated trend is confirmed.

It also shows that the deliberate and not the accidental oil spills do constitute the largest share of total marine oil

pollution. In order to deal with the problem of oil pollution on the high seas a multitude of instruments has been designed and implemented. Especially after the Torrey Canyon disaster go­

vernments as well as oil transport and trading companies have worked towards the establishment of vessel-source oil pollution prevention and the compensation of damages.

Broadly speaking, we may discern three categories of instruments.

First, there exist technical regulations with respect to navigational facilities aboard ships as well as with special equipment or processes, such as Crude-Oil-Washing and

Load-On-Top, for the purpose of low oil spill tank cleanings.

(See David. W. Abecassis, 1978, Chapter 2 and Volkmar Hartje, 1983, Part V . ) These are dealt with by the International Convention for the Prevention of Pollution from Ships of 1973

(MARPOL) and its 1978 Protocol. Both statutes also set maximal discharge limits for pollutants into the sea. Annex I contains oil spill emission standards. The MARPOL Convention came into force in 1983. In this paper this instrument will not be dealt with, since we confine ourselves to matters of compensation. Yet one should be aware of its existence, since it may contribute to a reduction of oil pollution on its own.

(a ) S h a d e d t a n k s c a r r y s e a w a t e r i n b a l l a s t . O t h e r t a n k s a r e w a s h e d w i t h s e a w a t e r . The w a s h i n g i s s t r i p p e d a n d t h e o i l r e s i d u e s a r e p i p e d i n t o a s l o p t a n k ( 1 2 ) .

(b) A t t h e e n d o f t h e v o y a g e t h e b a l l a s t w a t e r h a s s e t t l e d a n d c a n b e d i s c h a r g e d t o s e a T h e o i l r e s i d u e s a r e c o l l e c t e d i n t h e s l o p t a n k .

(c ) T he new c a r g o i s l o a d e d on t o p o f t h e r e s i d u e s . S o u r c e : D a v id W. A b e c a s s i s , 1 9 7 8 , C h a p t e r 2 . 2

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Second, there are insurance schemes arranged by the ship­

owners in cooperation with the (r e )insurance industry. And third, there are inter-governmental compensation agreements in respect of oil pollution damages. Both compensation schemes are the subject of this paper. They are already covered by a vast amount of literature and we therefore confine ourselves to a brief

description of their characteristics. In 1969, under the guidance of the IMO, an international convention was signed. This

convention, known as the International Convention on Civil Liability for Oil Pollution Damage, or by its acronym CLC,

establishes four principles. (See David W. Abecassis, 1978, for a detailed analysis of C L C . )

(a) Liability for oil pollution damages is strict and channeled to the ship-owner and no one else;

(b) There is a separate liability for oil pollution damages;

(c) Insurance for such damages must be compulsory;

(d) Claimants may apply to a court of their State if it is a Signatory State.

It is obvious that each of the key terms such as "oil", "ship", etc., is well defined in order to facilitate their use. Yet at the same time these precisions led to exceptions not covered by the CLC Convention. (See Malcolm J. Forster, 1984.) A number of these have been waived at a 1984 conference known as the

Conference on Liability and Compensation for Damage in Connection with the Carriage of Oil and Other Hazardous Substances by Sea at the IMO in London. This conference adopted an appropriate

Protocol in order to widen the scope of the CLC Convention.

Besides expanding the liability by broadening the definition of ship in order to include oil spills by tankers in ballast, it also enlarged the geographical area. Henceforth this includes the Exclusive Economic Zones of the Signatory States. Moreover, The Protocol introduced a mimimum amount of liability and raised the maximal amount substantially. It also included a liability for compensation for "impairment of the environment", which is, however, confined to "costs of reasonable measurements of reinstatement". (See Aline F. M. De Bievre for details on the result of this conference.)

The proposal to include compensation for economic loss resulting from oil pollution damages was the subject of intense debate. An agreement was not reached since no exhaustive definition of this type of pollution damages was possible. However, today the

hotelier suffering losses following a contamination of beaches he does not own is entitled to compensation, provided he can prove his case. In other words: he must show that his economic losses are entirely and directly due to the oil pollution.

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Insurance to cover oil pollution damages as stipulated by the CLC Convention is provided by the ship-owners Protection and

Indemnity Clubs ("P & I Clubs"), who act as mutual insurers of their members and form an association (the International Group of the P & I Clubs) to seek for reinsurance. (See T. G. Coghlin, 1984.) Oil pollution damages happen to be the only ones for which insurance cover is limited. This is due to the statutory

limitation of liability and not to the capacity of the insurance market. Indeed, as of today the International Group has been able to obtain reinsurance for whatever heads of damage "without any financial limits". Besides this type of cover, however,

ship-owners also give relief through their Tanker Owners Voluntary Agreement Concerning Liability for Oil Pollution,

TOVALOP. (See ITOPF, 1984.) This privately contracted arrangement actually preceded the CLC Convention until the latter's coming into force in 1975. Today, it is used for offering supplementary compensation for damages not covered by the CLC Convention.

Examples of such damages are those exceeding the limited liability under the CLC Convention and those created by the pollution of non-persistent oils, such as silicones. These hydrocarbons are not covered by the CLC Convention. Most importantly, TOVALOP covers damages suffered by victims of non-CIC States, provided the ship-owner is a party to TOVALOP.

Besides the CLC Convention and the TOVALOP agreement, another compensation scheme known as the International Oil Pollution Compensation Fund was installed in 1971, becoming effective in

1978. It was modified in 1984 during the IMO conference, with a new Protocol being attached. Consequently and in line with the 1984 Protocol to the CLC Convention, the total amount of

liability per incident was raised, a broader definition of pollution damages was accepted and the coverage of the Fund was extended to the 200 nmile Exclusive Economic Zones of the

Signatory states.

The IOPC Fund is different from the CLC Convention in two res­

pects. First, it compensates for oil pollution damages not covered by the CLC Convention. Hence, it does not stand on its own, but it is used as a supplementary source providing relief in case oil pollution damages exceed the limits of CLC, i.e. in case the CLC Convention and TOVALOP do not provide sufficient

compensation. An example would be a ship-owner with a ship of less than 2000 tonnes not having taken out any insurance. Such a small owner cannot be forced to take out insurance, even if his flag-state is a CLC Signatory State. If the ship-owner is not a party to TOVALOP, the victims generally remain uncompensated. In case of an oil spill in the territorial waters of a CLC Signatory State, the IOPC Fund will pay compensation. Cases like this are not rare, and there has been serious concern for oil pollution damages by such small ships since the clean-up costs were often excessively high. The more general case is the one in which damages exceed the CLC Convention liability limits.

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The second difference between the Fund and the CLC Convention deals with the provision of financial means. Whereas the Convention requires compulsory insurance taken out by the

ship-owners, the IOPC Fund is raised by compulsory contributions from the oil receivers in the Signatory States. At first sight this is a strange arrangement, since it does not comply with the generally accepted Polluter-Pays-Principle. Even if one realizes that oil carriers and oil receivers often belong to larger

holding companies with interests in the oil business, one must accept that it is not very common for customers to participate in the damages caused by their suppliers. Yet the accident with the Torrey Canyon led to the conviction of the ship-owners that they could not assume unlimited liability. As a consequence an

additional arrangement was needed in order to give full compensation to the victims.

It is exactly for this reason that the IOPC Fund "tops up" the CLC Convention. In fact, the emergence of this dual compensation scheme is due to the trade-off between strict liability and compulsory insurance on the one hand and the limitation of

liability on the other. It turns out that the former were indeed traded off against the latter since the CLC Convention makes it virtually impossible for the claimant to break the limitation of

liability of the ship-owner. Article 6 (2) exempts the ship-owner from his entitlement to such a limitation only in case his

personal conduct or omission led to pollution damage which he knew was likely to occur. Claimants will find it almost

impossible to give exhaustive evidence of such conduct.

In the same way as the CLC Convention was preceded and sup­

plemented by its private counterpart, TOVALOP, the IOPC Fund was also parallelled by a private arrangement called the Contract Regarding an Interim Supplement to Tanker Liability for Oil Pollution, CRISTAL, which was installed in 1971. This fund was necessary because the IOPC Fund did not become effective until 1978. (See the Oil Companies Institute etc., 1982.) Its relation to the IOPC Fund is similar to the relation of TOVALOP to the CLC Convention. CRISTAL offers compensation to victims of oil

pollution damages by tankers entered in the TOVALOP agreement when they are unable to recover from other sources, including the IOPC Fund. Like the Fund, liability under CRISTAL is limited.

Also like the Fund, there is an arrangement under CRISTAL to com­

pensate for clean-up costs borne by ship-owners after oil spills.

In this way both compensation schemes set incentives to

ship-owners to take immediate action after an oil spill. CRISTAL differs from the Fund in that it also reimburses the ship-owner's costs of prevention of oil spills, i.e. his so-called threat removal measures. In other words: compensation for costs of measures taken before a possible oil spill may be claimed under CRISTAL but not under the IOPC Fund.

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F ig u re 2: P r i v a t e and P u b lic A rrangem ents f o r Com pensation f o r O il P o l l u t i o n Damages

P r i v a t e P u b lic

In s u ra n c e TOVALOP CLC C onvention

C o n trib u tio n CRISTAL IOPC Fund

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For the last fifteen years compensation for marine oil pollution from ships has been awarded according to this double scheme, involving private and public engagement. Before we discuss some of the latest developments, it is be worthwhile to sum up. When assessing the relations among the four compensation schemes one has to bear in mind the following characteristics of

classification.

(1) TOVALOP and CRISTAL are private, voluntary arrangements, whereas the CLC Convention and the IOPC Fund are public and coercive (on Party States and ship-owners and oil receivers.)

(2) TOVALOP and CRISTAL are person-related arrangements since they operate on behalf and for the benefit of the ship-owners and the oil receivers respectively. In con­

trast, the CLC Convention and the IOPC Fund are regional institutions since they apply to oil pollution damages in the territorial waters (and, in the near future, to Exclusive Economic Zones) of the Signatory States.

(3) TOVALOP and the CLC Convention are based upon the principle of insurance by ship-owners, who are the producers of transport services. CRISTAL and the IOPC Fund are financed by contributions fron the oil recei­

vers, who are the beneficiaries of the transport ser­

vices. Hence, in the former two schemes, the financial burden of compensation is "shifted backwards", whereas in the latter two arrangements, this burden is "shifted forwards".

(4) TOVALOP is supplementary to the CLC Convention, in the sense that it offers a CLC-equivalent compensation. The IOPC Fund is supplementary to the CLC Convention, in the sense that it offers compensation in case the limits of liability under the Convention are exceeded. CRISTAL is supplementary to the IOPC Fund, in the sense that it offers Fund-equivalent compensation.

Figure 2 depicts the relations among the four schemes in a diagrammatic way.

The IMO International Conference in 1984 in London did not only raise the limits of liability and widen the definition of

pollution. It was also forced to face the new developments in the oil industry. As a matter of fact, in recent years the oil

companies were gradually less affected by the CLC Convention and the TOVALOP compensation arrangements since they had sold off many of their fleets. In this respect they were no longer tied in the self-interests of ship-owners and oil receivers and therefore critised their share in the compensation of marine oil pollution damages. Among other things, they considered the "minimum flat rate" of USS 3 million for small tankers up to 2000 gross tonnnes as too low. They also found that the maximum compensation of US$

60 million was unrealistic, since it applied to tankers exceeding 140,000 gross tonnes, which had disappeared. In their opinion this tonnage would have to be reduced.

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T able 2: T,i a h i 1 i t y L im its o f Com pensation A rrangem ents f o r M arine O il P o ll u ti o n Damages:

A c tu a l and P roposed P u b lic and P r i v a t e A rrangem ents.

Compensation A rrangem ent

Amount p e r Ton US D o lla r s

Maximum Amount

E n try i n t o Force

Remarks

TOVALOP 147 16.8 m illio n 06.10.1969 w hichever i s l e s s

CRISTAL 3 6 .0 m illio n 01.04.1971

CLC o f 1969 135 13.4 m illio n * 18.6.1975 a p p lic a b le t o ta n k e r s ■>105,000

g ro s s to n s

Fund o f 1971 49.6 m illio n 16.10.1978

CLC P ro to c o l

o f 1984 420* 6 0 .0 m illio n ^ n o t y e t X a p p li e s t o ta n k e r s > 5 ,0 0 0

g ro s s to n s and < 1 3 9 ,9 9 9 g ro s s to n s ;

ta n k e r s < 5 ,0 0 0 g ro s s to n s a re l i a b l e f o r minimum f l a t amount o f 3 .0 m illio n

X X a p p li e s t o ta n k e r s > 1 4 0 ,0 0 0 g ro s s to n s

Fund P ro to c o l

o f 1984 135 to 200

m illio n

n o t y e t upg rad in g in s ta g e s

PLATO 500 t o 600§ 60 to 75

m illio n proposed § a p p li e s t o ta n k e rs 5 ,0 0 0 g ro s s to n s and < 1 0 4 ,9 9 9 g ro s s to n s ;

upg rad in g in s ta g e s ;

ta n k e r s < 5,000 to n s a r e l i a b l e f o r a minimum f l a t amount o f 10 to 15 m illio n (in s t a g e s ) .

"F applies t o ta n k e rs 105,000 g ro s s to n s

NEW CRISTAL 135 to 200

m illio n p roposed P ro p o s a l i n com bination

w ith PLATO

S o u rces: V ario u s O f f i c i a l Documents and o th e r P u b lic a tio n s q u o ted i n th e l i s t o f R eferen ces o f t h i s p a p e r.

NOTE: The f i g u r e s f o r CRISTAL and th e 1971 Fund (in c lu d in g th o s e m entioned f o r th e P ro to c o ls ) do in c lu d e th o s e o f th e CLC C onvention and TOVALOP r e s p e c ti v e ly . Hence, th e y sh o u ld be i n t e r p r e t e d a s shown i n th e fo llo w in g exam ple.

The 1971 Fund f i g u r e o f US d o l l a r s 49.6 m i ll io n in c lu d e s t h e CLC C onvention amount o f US d o l l a r s 16.8 m i l l i o n . The "to p p in g -u p " c a p a c ity o f t h i s Fund i s th e r e f o r e e q u a l t o US d o l l a r s 49.6 m illio n l e s s US d o l l a r s 16.8 m i l l i o n e q u a ls US d o l l a r s 32.8 m i ll io n .

11

would have to be reduced.

As a result the parties to CRTSTAI, are proposing a new TOVALOP scheme called Pollution Liability Agreement among Tanker Owners, PLATO, which would rectify these shortcomings. From table 2, which provides an overview of all existing and proposed

compensation schemes, we see that, under PLATO, small ship-owners must meet higher minimum flat rates and that the maximum

liability limit is raised, whilst the tonnage to which it applies is lowered. Currently the oil companies threaten to abolish

CRISTAL if PLATO is not accepted by the ship-owners. Acceptance will be taken for granted if 50 million gross tons are supporting PLATO by April 1986. By way of acknowledgement, the oil companies would then install a NEW CRISTAL with an updated maximum

liability limit.

Pending the decision on whether PLATO and NEW CRISTAL are ac­

cepted viz. agreed upon in a modified form, we make a few comments on this development.

First, it reflects an increase of bargaining power on the side of the oil receivers.

Second, PLATO obviously aims at compensation for marine oil pollution damages by ship-owners, with oil receivers only intervening in case of large, catastrophic events.

And third, this type of "deal" between the ship-owners and the oil receivers indicates a conflict of goals between the policies of strict liability and compulsory insurannce by ship-owners on the one hand and full compensation of the victims on the other.

Whereas the former policy tends to safeguard an incentive to prevent oil pollution the latter may set an incentive for

striving for a limitation of liability, resulting in incomplete compensation in tragic cases.

This issue is picked up in the next section which presents some data on compensation for marine oil pollution damages.

12 -

2. Compensation under the CLC and the IOPC Fund - Some Data

Given the fact that the IOPC Fund as well as the CLC Convention did not become operational until many years after their install­

ment, jurisprudential as well as claims experience with these funds is not overwhelming. Information on the operation of the IOPC Fund, which is a "public" institution, is available and encouraging. Between 1978 (date of entry into force) and 1984, the Fund has dealt with sane 19 incidents in respect of which claims were made or were in the process of being made. (See R. H.

Granten, 1984.) The Fund has a small staff dealing with the

claims. Staff members negotiate with claimants in order to arrive at an agreement on the justification of claims and the

reasonabless of incurred costs. The IOPC Fund director usually engages the services of legal and other eiwerts and gives advice to claimants in order to avoid unnecessary delays. For that purpose the Fund has also published a Claims Manual. It has

turned out that the handling of the claims in respect of the 1980 Tanio tanker accident was done in a very short period, of time not withstanding the huge amount of administrative work to be

completed.

Besides the IOPC Fund claims were also made against the other com pensation schemes. Our interest lies not so much in learning about the amounts of compensation by various criteria such as ship size, flag state, costs of clean-up etc., but only in the shares of compensation paid by ship-owners, oil receivers and victims. Data on these shares have been provided by Henri Sraets,

1984 and have been completed for the purpose of this paper. They are represented in table 3.

Table 3 shows that total claims steadily increased over a

relatively short period of time and that the tanker owners' share decreased to the detriment of the shares of the oil receivers and the victims. Especially the truly catastrophic events seem to have created costs for which none of the compensation schemes offered a full indemnity. Indeed, the costs borne by the victims as represented in table 3 are probably conservative estimates since they are computed under the tacit assumption that claims in respect of non-catastrophic damages were all met by the

ship-cwners and the oil receivers. Recent developments as

described at the end of the previous section seem to question the validity of this assumption. In fact, PLATO also aims at an in­

crease of a shift of responsibility away frcm the oil receivers to the owners of especially smaller sized tankers. Reactions by representatives of the independant tanker owners organization INTERTANKO and the oil companies respectively showed that the in­

crease of the minimum flat liability is in fact the most con­

troversial issue of the PLATO proposals. (See Seatrade, July 1985.)

T a b le 3,: C laim s A g a in s t T anker Owners and O il R e c e iv e rs

T o ta l C laim s C laim s P o l l u t i o n Unccmpen- C laim s A g a in s t A g a in s t C o sts o f s a te d

T anker O il Re- C a ta - - C laim s Owners c e i v e r s s tr o p h e s 2

1974 6 8 .9 65.75 3 .1 5 4 7 .3 8 . -

1975 4 5 .8 42.82 2.98 3 4 .3 0 -

1976 99 8 96.53 2.27 80.15 , -

1977 37.4 3 4 .5 0 2 .9 0 19.15 -

1978 254.2 211.40 4 2 .8 0 236.38 3 2 .1 8 +

1979 149.6 7 8 .8 0 7 1 .6 0 178.51 28.91

1980 165.3 6 1 .2 0 104.10 194.27 2 8 .9 7 ++

N o te s: - A ll amounts i n c o n s ta n t 1983 US d o l l a r s

- A ll c la im s up t o l i m i t s o f b o th p r i v a t e and p u b lic a rra n g em en ts

§ C a ta s tro p h e s : o i l p o l l u t i o n d i s a s t e r s in v o lv in g c o s t s e x ce e d in g 250,000 US d o l l a r s

+ Amoco C adiz ++ T anio

S o u rce : H en ri Sm ets, Dammages c a u s e s p a r l e s M arees N o ire s - In c id e n c e s

Economiques d ' une R ev iso n d e s L i l i t e s d ' In d e m n is a tio n , E nvironm ent P o li c y and Law, V o l. 12, No. 1 /2 ,

F e b ru a ry 1984, p p . 13 - 36.

14 -

However, it remains unclear whether the figures shown in table 3 offer any perspective for the future. First, we know that the limits of all funds have been increased by the 1984 Protocols.

Second, ultra large and very large crude carriers have mostly disappeared. Moreover, since the emissions regulation Convention of MARPOL became effective in 1983, it is very likely that

tankers have retrofitted to a large extent and are therefore able to reduce their deliberate oil spills by a substantial amount.

The figures from table 3 nevertheless suggest that the entire compensation system in all its complexity did indeed fail to work in those decisive cases for which it was designed and that the purpose of the IOPC Fund Convention of 1971 to offer full compensation to the victims of oil pollution damages was not accomplished. In other words, in cases of so-called cheap oil spill damages valued at US $ 250,000 or less (at constant value of 1974), insurance coverance is usually available and Fund interventions are not required. However, in disastrous events, when Fund money is most welcome, given the prevailing limits, it seems not to be available in sufficient amounts. This was

especially felt after the experience with the accident of the Amoco Cad i z . The question therefore remains whether the

institutional arrangements are efficient in the sense that they serve the purposes they are supposed to serve. In order to gain seme insight into this question we present two related issues in the rest of this paper. In the next section we discuss the

evolution of the definition of marine oil pollution. In the final section we deal with some inefficiencies of the marine insurance market.

- 15 -

3. Compensation for Environmental Damage

The ultimate purpose of any insurance contract is to cover for damages. It is obvious that the way in which this key term is defined influences the way in which compensation is estimated.

(See M. Tomczak Jr., 1984, for an overview of definitions used in international conventions.) As already mentioned, the 1984 inter­

national IMO conference in London took a number of steps towards a broader definition including "economic losses" sustained as a direct result of oil pollution by ships. This proposal was the subject of a controversial discussion leading to an agreement on a much weaker version of the original proposal. One of the

reasons for the controversy must be seen in the fact that compensation for economic loss is not accepted in traditional common law. (See Deana Silverstone, 1985, for an overview of this problem.)

Indeed, in the Common Law countries compensation for economic losses is looked at with suspicion. It is indeed believed that such an arrangement would undermine the long standing tradition that damages can only be compensated if they are "close enough"

to the injuror's act. In this way, the law tends to avoid burdens of liability beyond proportion to the injuror' fault and his ability to pay. Moreover, in this way "excessive" litigation is avoided and property rights are effectively protected. The latter results from the fact that owners of property fit for productive purposes would not be liable for so-called "pecuniary externa­

lities" resulting from market transactions and not from direct in­

terferences with commercial activities of others. As result a suboptimal use of resources or a suboptimal level of risk-taking is avoided.

Single courts have nevertheless attempted to assess economic losses, especially when estimating the costs of restoration of a given ecosystem. The most spectacular case is the one involving the SS Zoe Colocotroni, in which the U.S. Court for the District of Puerto Rico delivered jugdment. (See David W. Abecassis,

1981.) This case was not decided on the basis of the CLC Con­

vention or the IOPC Fund Convention, since the U.S. is not a party to either. Plaintiffs in this case argued that there was a decline of approximately 4,605,486 organisms per acre as a direct result of the oil spill. Hence, it was computed that 92,109,720 marine animals were killed. Since there existed suppliers of

"biological products" such as laboratories generating organisms, market prices of such organisms were known. Therefore, the re­

placement costs of the killed marine organisms could be calcu­

lated amounting to US$ 5,526,583.20. Given the theory that the Commonwealth of Puerto Rico holds title to public property and domain, it could act as parens patriae and seek redress in case of nuisance on behalf of its citizens.

16 -

In its judgment the US Court of Appeals did not follow the

opinion of the Court for the District of Puerto Rico, but it did not reverse the judgment as the appellants had requested.

Instead, the Court said that the damages should be reasonable and not grossly disproportionate to the harm caused and the

ecological values involved. The Court of Appeals also said that the ultimate purpose of any remedy should be the protection of the public interest in a healthy, functioning environment, and not to provide a windfall to the public treasury. Hence it gave a renewed opportunity to both the plaintiffs (the Puerto Rican Environmental Quality Board) and the defendants (the brothers Colocotroni) to design alternative and less expensive ways of restoration.

The question of whether the environment has an intrinsic value which may be diminished due to marine oil spills is difficult to answer. In case marine organisms which are harvested suffer from a marine oil spill, damages may be estimated by calculating the extra effort necessary to restore the stock. In case marine organisms do not (yet) have a market value, due to lack of any known efficient harvesting technologies, it may pay to keep them as species in light of future technological developments. But in the latter case, damages are more difficult to estimate, since these species have no market value. Besides these issues we must also consider the fundamental question concerning the value of conserving a particular species or a specific ecosystem. Hence, one might adhere to the principle that we have a moral obligation to safeguard our environment. But even if this principle would be written into the definition of liability, we still are left with the difficult task of determining compensation in money terms for an individual oil spill.

Indeed, oil spills may kill hundreds if not thousands of marine animals, but they do not cause the extinction of any species. By the same token, oil spills do not entirely destroy the particular ecosystem in which they are discharged. In this way losses are seldom irreparable although regeneration or restoration may emerge only after a long period of time. For this reason the ccmputation of damages from oil spills must be linked to the costs of restoration incurred and not to the loss of (genetic) information due to the extinction of a species. Even these costs are difficult to estimate, since it is unknown how large a share of the damaged species needs to be replaced by artificial tech­

niques in order to reach the normal population levels. As the SS Zoe Colocotroni case has shown, it is certainly wrong to argue that every killed specimen needs to be artificially replaced in order to restore the species.

- 17 -

Without further elaboration on this issue we notice that changes of the ownership structure with respect to marine ecosystems resulting from the extension of the national jurisdictions so as to include the 200 nmile Exclusive Economic Zone may indeed contribute to a reevaluation of the seas. Hence in this respect, governments may express an increased interest in the conservation of their Exclusive Economic Zones and therefore invest resources and efforts in the quality management of "their seas". Whether these activities will eventually lead to reliable estimates on the costs of preservation of these ecosystems remains to be seen.

As things stand today damages to the environment as measured by the plaintiffs in the SS Zoe Colocotroni case are not acceptable to courts nor acknowledged in the international conventions. The only progress made in widening the scope of the definition of oil pollution damages was made in the 1984 Protocols to the CLC

Convention and the IOPC Fund Convention respectively.

In these Protocols "reasonable" expenditures for clean-up and other restorations of the marine environment are considered as ccmpensable. Obviously these expenditures comprise outlays for collecting and handling oil slicks on the sea surface or on beaches, but they also include costs for marine animal rescue operations. However, normally all costs must be actually incurred and "proven", although under the 1984 Protocols provision is made for the advance financing of reasonable measures of reinstatement

"to be" undertaken. This view is different from the one

expressed in the SS Zoe Colocotroni case, which was only based upon theoretically derived estimations of restoration costs. It is obvious that discussions on the appropriate definition of marine oil pollution damages are of importance, since they tend to exert an influence on the determination of liability limits.

18 -

4. Insurance for Oil Pollution Damages and Reduction of Risk

After the digression on the evolution of the notion of marine oil pollution damages, we turn to the system of marine insurance. As already mentioned ship-owners tend to provide their own insurance coverage through their Protection and Indemnity Clubs. These act as non-profit associations collecting fees (referred to as

"calls") from their members in order to reimburse claims brought against them. As T. G. Coghlin (1984) remarks, experience with these claims cannot be predicted and calls are therefore made at the beginning of each year (starting on February 20 th, "when the Baltic is no longer frozen") by means of so called "advances"

which may be augmented by a "supplement". Since supplementary calls turned out be highly volatile in many Clubs, viz. several supplementary calls had to be made in given years, the Clubs have adopted the practice of smoothing out their revenue fluctuations by not returning surpluses to members but using them to reduce deficits in years of bad luck.

Although the P & I Clubs are mutual associations, they are nevertheless part of the market place, i.e. they tend to adopt market rules for pricing the risk they cover. Calls are

negotiated between the members and the managers of the Clubs and are based upon the claims risk each member is supposed to

represent. The managers therefore assess the past claims records together with other factors such as the type, size, flag and trading pattern of the ships. Members may also reduce the risk to their Club by limiting the heads of cover or applying for a

deductible. Once the calls are set for a given year, advances are determined. As the year passes on, supplementary calls are set in form of a fixed percentage of each member,s advance call. Hence the only possibility for a member to have his risk reassessed by the Club is during the annual calls negotiation round and not at the time of setting the supplementary calls.

Finally, the P & I Clubs are keen to keep a steady membership to safeguard assets. This does not only depend on the level of the calls, but also on services offered. The loyalty of mutual

members is such that only a marginal number of them (ten per cent on average) tends to change Clubs for reasons of dissatisfaction with excessive supplementary calls. As to sanctioning bad owners by "kicking them out", their expulsion tends to be extremely difficult as Clubs must be careful about their facts before making allegations about the substandard nature of generally loyal members. Hence, because sanctioning is psychologically difficult, the accepting of new business is very selective and constitutes a form of preventive policy. Clubs may e.g. refuse tankers of fifteen or even twelve years of age or they may do their own ship survey, besides those made by registration of­

fices. However, such measures are not the sole form of risk pre-

19 -

vention. In principle, Clubs look into ship management because most owners tend to stick to the same management. Also, as already mentioned, mutual members tend to remain ninety percent the same.

The International Group of the P & I Clubs was set up as a joint institution of some of the Clubs in order to share risks

exceeding a given amount as well as to seek for reinsurance.

Apparently some 60 to 70 per cent of the claims is covered by the Clubs, with 20 to 30 per cent covered by the International Group.

The remaining part is reinsured. It is obvious, however, that these percentages are valid on average only. If by way of example, large claims exceeding the amount covered by his Club are made against the owner of a given tanker for several times within a few years, they may be entirely covered by the

International Group or even by the reinsurance underwriters. In this case the Club to which this owner belongs has increased its claims risk vis a vis the International Group. Yet if it was sucessful in passing on the "bad luck" onto the International Group, it has no incentive to reconsider the level of the calls obtained from the given owner. Hence the Clubs are able to "pull and share" each other,s claims. (See R. L. Carter, 1979, Chapter 3 for a similar argument.)

For this purpose some rules of discipline have been set by the International Group. Nevertheless, discipline may not always be guaranteed, as there is a tremendous breakdown of the risk over an enormous range of insurers, once reinsurance is taken into account. This is due to the fact that each underwriter is protected by a so-called general reinsurance treaty, which determines how much of the risk is retained by the underwriter and how much is laid off. Underwriters who take on what is laid off again make arrangements of retention and lay-off etc. It is obvious that this cascade type of arrangement tends to reduce the transparency of the risks covered in this manner. In fact, in general, underwriters do not know how often a risk has been split in a retention part and a lay-off when they are invited to offer coverage. Therefore they may not be aware of the professional qua­

lification of the initial insurance customer (the ship-owner) until they are faced with a claim.

Screening or vetting the performance of ship-owners would therefore be needed in order to classify them by claims risk classes. But individual underwriters with an interest in di­

versifying their portfolios will only have a weak incentive to do so. Since they are forced to allocate their funds over as many small sized risks as possible, they will deliberately minimze the efforts to investigate each individual risk thoroughly. Hence the more they diversify, the less they screen each risk separately.

In practice, insurers solve the problem of vetting the risks by offering standardized insurance contracts coupled with standard questionnaires to be filled out by applicants. Another instrument used is a progressive premium system with progression related to

- 20 -

an indirect indicator of risk class, such as age and past perfor­

mance. Such practices are useful in the large retail insurance industry selling health care or life insurance, fire and accident protection insurance and the like. In marine insurance, however, such a standardization is less likely, since the risks are not homogeneous. Underwriters in this branch of the insurance industry thus have to recur to other techniques of screening.

Besides studying the trends in the insurance market they may choose to rely on so-called lead underwriters. These underwriters are experts in offering cover for a particular set of risks, such as oil pollution damages frcm ships, or from oil rigs, or fire protection aboard ships or oil rigs and the like. Their expertise is visible to the market since they write a sizeable portion of the business in which they specialize. For a non lead underwriter the moves of the lead underwriter act as a market signal and therefore help to save information costs. But in following the lead underwriter, his own profitability is connected to the general market trend or to the business cycle of the lead under­

writers. Obviously such a strategy cannot replace direct

screening of the performance of the ship-owners themselves. But since this is not sufficiently done by the P & I Clubs, the

marine insurance market is imperfect. Indeed, the managers of the P & I Clubs do not permanently check the reliability and the pro­

fessional qualification of their members and their agents, nor do they continuously monitor the quality of their members' ships.

They consider themselves as mutual associations with a stable if not longlasting membership. Since they pool the risks without full information on the individual risks, information on the distribution of the risks they cover is irreparably lost.

What this all amounts to is obvious: there are serious market imperfections in the marine insurance industry, since the "first"

insurers (the Clubs) who are best placed to investigate the performance of the insured (the member ship-owners) do not collect all relevant information. Consequently the reinsurance industry is not able to correct for this market imperfection. It can only spread the risk as widely as possible. But this does not result in a cost efficient manner of operation. In other words, given these market imperfections, it is more expensive to provide for one dollar of cover than under conditions of market

efficiency. (See R. L. Carter, 1979, Chapter 12 for a similar treatment of marine insurance.)

Inefficiencies of the marine insurance market need not neces­

sarily involve insufficient compensation for the victims. But we must take into account that such market imperfections may

generate a suboptimal amount of efforts to avoid risks compared to perfect market conditions. If this is the case, the

probability of at least seme accidents is unnecessarily high and the amount of available cover has to be used for compensating more damages than those emerging if better precaution incentives prevail. The question merits attention because liability for oil

- 21

F ig u r e 3: P r o b a b i l i t y o f B isk R ed u ctio n u n d er A l t e r n a t i v e R ules o f L i a b i l i t y

Money U n its

P r o b a b i l i t y o f

R isk R ed u c tio n

- 22 -

pollution damages is limited and therefore cover requested by the ship-owners is also limited by definiton. Under these

circumstances efforts to avoid risk are most welcome from the point of view of the victims. Given the available cover their chances to obtain compensation will increase if the probalility of accidents diminishes.

The influence on the probability of an accident of a strict liability may be illustrated with the help of a diagrammatical representation developed by Clem Tisdell in 1983 and adapted for our purpose. Tisdell deals with the determination of the optimal reduction of risk and the practice of the law. More specifically, he analyses the effect of strict liability on the efforts to reduce risk.

His model shows that the amount of efforts of risk reduction is optimal if the marginal cost of risk reduction is equal to the marginal rate of expected damages. Since the costs of risk reduction and the trend of total reduction of expected damages may be defined as functions of the probability of accident

occuring, the marginal equation yields a solution, referred to as the optimal probability of accident occurring. In figure 3, which is borrowed from Tisdell, this probability is denoted by rl.

Applying the rule of strict liability to this graph involves a new probability level, since the costs of reducing risk must now be equated to the total expected damages. This principle is known as the rule of Learned Hand and dealt with in many textbooks.

(See United States vs. Carroll Towing Co. (1947) 159 F 2d 169 2nd Cir.) In figure 3, the probability corresponding to this rule is represented by r2. Tisdell's point is that the Learned Hand

probability may be larger or smaller than the optimal probability and that this depends on the specifics of the different curves involved. As seen from figure 3, r2 exceeds rl, but if the reduc- tion-of-risk cost function were shaped differently the opposite result might prevail.

Data on the monetary value of marine oil pollution damages and the necessary expenditures for the investment in and the

operation of risk reducing equipment are available to sane extent. But their accuracy is in dispute, given the large

variances of the estimations and the unsolved question of a pre­

cise definition of environmental damages. Without entering into detail, we mention a paper by Jim MacNeill, 1984, in which he summarizes some data on marine oil pollution prevention costs and damages and clean-up costs. The figures show that the latter costs are estimated at some US$ 500 million per annum whereas the annual expenditures for oil prevention are estimated to equal US$

1 billion. The latter figure does include public expenditures worth seme US$ 250 million for the installment and the operation of navigational aid systems and monitoring systems for the

detection of violations as well as for the provision of of rescue aid. It does not include public expenses for dirty ballast water facilities and similar amenities in receiving harbours.

- 23 -

At first sight one might be inclined to conclude on the basis of these figures that ship-owners and governments spend too much on the prevention of oil pollution and that the rule of strict liability for marine oil pollution damages has led to an

excessive reduction of risk. In other words: figure 3 would apply to this case, in the sense that the installement of the rule of strict liability for marine oil pollution damages has resulted in a probability of accidents which is less than the optimal

probability. But we should be very careful before drawing such a conclusion.

First of all, it is not obvious that the ship-owners bear these costs of prevention because of strict liability. As a matter of fact, other international conventions not dealt with in this paper such as the MARPOL Convention regulate the use of

prevention technologies directly. It is therefore impossible to disentangle the effects of the direct regulations and the

liability rule.

Second, we must distinguish between deliberate and accidental oil spills. Whereas the former ones lead to a much larger amount than the accidental ones, we may dispute whether equipment like

Crude-Oil-Washing, Load-on-Top or Segregated-Ballast-Tanks should be considered as risk reducing devices frcm an insurance theoreti­

cal point of view. Indeed, in case all deliberate oil spills would be accurately registered, no cover for the damages resulting from these spills would be obtainable from the

insurance market. Hence, ship-owners would no longer be able to apply the moral hazard principle As a consequence, all oil spills would henceforth be accidental and insurable. Since the bulk of ship-owner prevention expenditures is in deliberate oil spill prevention equipment, which may thus be considered as belonging to the state of the art of the tanker trade, only the remaining expenses should be considered as reducing insurable risks. Esti­

mates on retrofitting entire tanker fleets taken from Volkmar Hartje, 1983, suggest that these remaining expenses are very small.

Lastly, data on the so called tanker fleet ratings as well as on the distribution of major oil spills by flag shew a large

variance. Whereas claims for major oils spills frcm tankers flying the flags of Liberia and Greece amounted to US4 254

million and US$ 100 million respectively, claims against tankers from Japan and Norway totalled US$ 22 million and US$ 10 million respectively. These data correspond to some extent to the tanker fleet ratings, giving Japan the best and Norway a high quality mark, quoting Liberia as a good average and putting Greece at the bottom.(See, again, Jim MacNeill, 1984.) Hence, efforts to reduce risk are not uniformly spread across countries. If the rule of strict liability operating in the realm of an international

insurance market would have led to the exhaustion of all possible prevention strategies, such wide international divergencies would

- 24 -

be very unlikely.

Summing up this section we notice that imperfections in the in­

ternational marine insurance industry are due to insufficient screening of the risk performance by the P & I Clubs and result in a suboptimal amount of marine oil pollution, which is too high. Moreover, data on the the costs of damages and the efforts to prevent marine oil pollution, while suggesting an excess of such efforts over the damages, should be interpreted with care.

- 25 -

5. Conclusion

This paper has dealt with the developments of international public regulations and private arrangements concerning the

compensation for damages in respect of marine oil pollution from ships. After a description of the way these were initiated and interconnected, we discussed the political target of offering full compensation to victims. Data seem to suggest that this target is not met in case of severe accidents with very high clean-up costs such as the one involving the Amoco Cadiz in 1978.

This is due to the fact that the liabilities assumed by the ship-owners as well as the oil receivers (the oil companies) are limited b y statute. Recent developments in the oil business leading to a sale of fleets by the oil companies have also ended the conflict of self-interests they had as ship-owners and oil receivers. As a result the oil companies now require the

ship-owners to increase their share of the compensation costs both through an increase of their maximal liability as well as through higher liabilities for smaller ship-owners.

Another point of interest in this paper is the definition of marine oil pollution damages and, more specifically, the possible inclusion of economic loss. Recent international discussions have shown that the propensity among ship-owners to consider economic loss as a head of damage is weak. Spectacular court cases in this respect, while attempting to set new standards for the determina­

tion of environmental damages and restoration costs, have not led to a revision of traditional practice of the law. Whereas it seems clear that liability for damages to the marine ecosystem as such is found acceptable, opinions on the meaning of reasonable restoration costs are highly diverging.

Lastly, the paper has dealt with the marine insurance system. It was found that very likely the market for this kind of insurance operates imperfectly, in the sense that screening the risk

performance of the ship-owners by their mutual insurance institutions (the P & I Clubs) is insufficient. While the

reinsurance market is able to spread the risk, it cannot correct for the inefficiencies created by the P & I Clubs. As a result, the amount of risk avoiding efforts is suboptimal. Moreover, with liability being strict on the side of the ship-owner, the

incentives to reduce risk are weakened. Victims of marine oil pollution damages will therefore need continuous international regulations in order to obtain compensation.

- 26 -

References

David W. Abecassis: The Law and Practice Relating to Oil Pollution frcm Ships, London, Butterworths, 1978 David W. Abecassis: IMO and Liability for Oil Pollution from

Ships; a Retrospective, Lloyd's Maritime and Commercial Law Quarterly, February 1983 (1), pp.

45 - 59

E. D. B r o w : Making the Polluter Pay for Oil Pollution Dama­

ge to the Environment: A Note on the Zoe Colo- troni Case, Lloyd's Maritime and Commercial Quarterly, August 1981 (3), pp. 323 - 334

R.L. Carter: Reinsurance, Brentford, Kluwer Publishing with the Mercantile and General Reinsurance Company Limited, 1979

T. G. Coghlin: Protection & Indemnity Clubs, Lloyd's Maritime and Commercial Law Quarterly, August

1984 (3), pp. 403 - 416

Commonwealth of Puerto Rico versus SS Zoe Colocotroni, etc., (1980) 628. Fed. R. 2d. 652 (US Ct. A p p . , 1st.

C i r . )

Aline F. M. De Bievre: The International Conference on Lia­

bility and Compensation for Damage in Connection with the Carriage of Oil and Other Hazardous Substances by Sea, North Sea Monitor, No. 4, December 1984, pp. 1 - 8

Malcolm J. Forster: The 1984 Protocols to the Oil Pollution Compensation Convention, Environmental Policy and Law, Vol. 13, No. 2, September 1984, pp. 42 - 45 R. H. Ganten: The International Oil Pollution Compensation Fund, Environmental Policy and Law, Vol. 12, No.

1/2, February, 1984, pp. 5 - 9

Volkmar J. Hartje: Theorie und Politik der Meeresnutzung, eine ökonomisch/institutionelle Analyse, Campus Verlag, Frankfurt, New York, 1983

- 27 -

International Tanker Owners Pollution Federation Limited:

"TOVALOP", Tanker Owners Voluntary Agreement Con­

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