What Is Loss of Hire Insurance?
Loss of Hire (LOH) insurance addresses loss of income, within the scope of cover, that arises when a vessel is unable to continue its income-earning activity because of an insured peril defined in the policy. The income element covered (for example hire income), the daily amount and the conditions are set out in the policy wording.
The cover does not respond to the physical damage to the vessel or the cost of repair; separate covers (for example Hull & Machinery insurance) address those. Loss of Hire concerns the loss of income, calculated in the manner defined in the policy, once the conditions required by the wording are met.
The scope of cover is contractual. This page is general information only and does not represent the scope, price or any guarantee of payment under a particular policy.
Who Is It For?
Shipowners and operators, particularly businesses that could struggle to meet their financial obligations when the vessel's income-earning activity (for example employment under a charter) is interrupted, may need Loss of Hire cover. Whether a financing party requires this cover depends on the financing agreement. Eligibility, acceptance and terms rest with the relevant insurer. For the charterers' contractual liabilities, see Charterers' Liability Insurance.
Which Income-Loss Risks Does It Address?
LOH addresses the financial consequences, within the scope of the policy, of a vessel's interruption in its income-earning activity. The following elements are set out in the policy:
- Insured peril: The event giving rise to the loss of income is defined in the policy. In some wordings the peril is linked to defined damage events, such as hull and machinery damage; the form of that link varies by wording.
- Interruption of activity: The vessel's inability to continue its income-earning activity because of the insured peril, determined by the criteria in the policy.
- Daily indemnity: Indemnity is calculated on the daily amount set out in the policy, within the limits of the waiting period and the indemnity period.
- The assured's loss of income: The cover concerns the loss relating to the income element and the assured as defined in the policy.
Relationship with Hull & Machinery (H&M)
| H&M | Loss of Hire | |
|---|---|---|
| Subject | Physical damage to the vessel's hull and machinery | Loss of income arising from an event defined in the policy |
| Basis of indemnity | Damage and repair cost (according to the policy terms) | Daily indemnity set in the policy (within the waiting period and indemnity period) |
| Governed by | The H&M policy and wording | The Loss of Hire policy and wording |
H&M and Loss of Hire meet different insurance needs: H&M addresses physical hull and machinery damage, while Loss of Hire addresses loss of income once its conditions are met. Neither replaces the other.
Which damage events the LOH cover is linked to varies by wording. In some structures LOH may be linked to a damage event within H&M cover; the form of that link, and whether a separate H&M policy in force is required at all, must be verified from the wording and should not be assumed as a general rule. Damage that could fall within H&M cover is also not the same as damage actually paid under an H&M insurance; which of the two the LOH conditions look for depends on the policy. For the H&M side, see Marine Hull & Machinery Insurance.
How It Differs from Off-Hire
| Charterparty off-hire clause | Loss of Hire policy | |
|---|---|---|
| Basis | A clause in the charterparty | The insurance contract (policy wording) |
| Parties | Owner and charterer | Assured and insurer |
| Trigger | Off-hire events as defined in the charterparty | The insured peril and conditions defined in the policy |
| Result | Right to suspend or reduce hire payments | Indemnity calculated under the policy if its conditions are met |
| Duration | As provided in the charterparty | Waiting period and indemnity period in the policy |
The off-hire clause in a charterparty and the payment conditions of a Loss of Hire policy are not the same. Not every off-hire situation automatically gives rise to an insured loss, and not every loss of income falls within LOH cover.
Waiting Period and Indemnity Period
The waiting period is the time for the assured's own account before indemnity begins to be paid. The daily indemnity amount and the maximum indemnity period are also set in the policy. There is no single standard for these elements; periods and amounts differ according to the type of vessel, its trade, the charterparty and the insurer's assessment.
At the quotation stage, the following in particular need to be clarified:
- How the waiting period is counted (for example per event or over consecutive days) and from which date it starts
- The daily indemnity amount and the income element it represents
- The maximum indemnity period and any overall limit within the policy period
- How alternative income earned during the repair period, or mitigation expenses, affect the indemnity
Important Exclusions and Limits of Cover
The following are examples; the list is not exhaustive and varies by policy.
- Total Loss and Constructive Total Loss: How LOH cover operates in an Actual Total Loss or Constructive Total Loss varies by policy; no general promise of cover is made for these situations.
- Piracy, arrest/detention, war and strike: Piracy, arrest/detention, war, strike and similar perils are not automatically covered; different insurance structures, special clauses or extensions may be required.
- Events and income not defined in the policy: Losses that are not defined as an insured peril or as insured income may fall outside cover.
- Waiting period and limits: Loss within the waiting period remains with the assured; indemnity beyond the daily indemnity, the maximum indemnity period or the limit is not payable.
- Compliance with policy conditions: Notification obligations and compliance with other policy conditions may affect the indemnity.
Some standard contract regimes, such as the Nordic Marine Insurance Plan, set their own rules for loss of hire (Chapter 16 of the Plan deals with loss of hire insurance). Which regime or wording applies depends on the policy; no text should be assumed to be standard across all LOH policies.
Information and Documents Needed for a Quotation
- Vessel type, flag, class, tonnage and age
- Trade and trading areas
- Existing Hull & Machinery (H&M) insurance details
- Charterparty details (type of charter, hire rate, off-hire clause)
- Daily income and the requested daily indemnity amount
- The requested waiting period and maximum indemnity period
- Claims and off-hire history
This list is illustrative; the information and documents requested vary by insurer and product. Acceptance, requests for further information and terms rest with the relevant insurer.
Frequently Asked Questions
What is Loss of Hire insurance for?
Is Loss of Hire the same as Hull & Machinery (H&M) insurance?
Is off-hire time automatically an insured loss?
How long are the waiting period and the indemnity period?
Are total loss, piracy, arrest/detention, war and strike covered by Loss of Hire?
Neolife's Role
Neolife Group provides brokerage services to maritime clients by assessing their income-loss exposures and existing insurance arrangements, exploring suitable Loss of Hire cover options and comparing the quotations received.
Acceptance of cover, its scope, limits and the payment of indemnity are subject to the rules of the relevant insurer and the policy terms.