Loss of hire insurance covers the income derived from the vessel and is therefore relevant to commercial vessels. Such income might be loss of hire of the vessel, freight, and any other income. If a vessel is damaged and unable to be chartered, or does not sail its usual cargo routes, this loss of income can be insured against.
There are two requirements for loss of hire insurance:
- The loss of hire must result from damage that would be a covered peril under the hull and machinery policy, and
- The loss of hire must have resulted in actual loss of income.
Loss of hire insurance is closely tied to hull insurance as loss of hire is only claimable in relation to damage that is covered by the hull policy. Should the vessel suffer damage that is not claimable under the hull insurance policy, then loss of hire insurance will equally not cover the loss. For more information on hull insurance please see our Hull and Machinery Insurance factsheet (insert hyperlink).
The connection with damage under the hull insurance is vital in the current shipping market where many vessels are in layup as they are unable to find work. Loss of income from such circumstances is not covered by loss of hire insurance.
Loss of hire insurance will often operate with an agreed number deductible days. If the deductible period is for example 14 days, then only after 14 days off-hire will loss of hire insurance be payable. There will be an agreed upper limit to each claim also. This period may be 60 days or 180 days or any period agreed in the policy between the insured and insured. Loss of hire insurance will also usually have an upper limit for the year policy period. In an exceptional year when the policy limit is used and the insured requires additional protection the insurer will offer an option to purchase new cover for the remaining period of the policy year.
Loss of hire insurance is important for vessels financed by bank loan. Often banks will insist that loss of hire insurance be taken out to ensure that loan repayments will continued. The loss of hire insurance will provide income allowing payment to be made on the bank loan even at times when the vessel is unable to be operated.