Marine Practice

Charter DefaulT insurance In response to shipowners’ increasing concerns about charterers’ solvency, Marsh has developed an industry-first product that protects owners from damaging financial losses. Backed by both insurers and a leading financial institution, Marsh’s Charter Default product provides a mix of fixed recovery guarantee and credit insurance, tailored to the shipowner’s particular requirements.

Covering both outstanding debt at the time of an insolvency and the loss of future revenue for a set period, the product de-risks important revenue streams, thereby assisting owners to attract better terms fr om lenders by reducing counterparty credit risk.

i • Charter Default Insurance Product Overview Protecting revenue against the risk of financial default

ff Financial default is a recurring problem. Recent high profile cases of shipping companies filing for bankruptcy have again highlighted counterparty risk in the shipping sector

ff Companies with ships on charter are exposed to loss of revenue if their charterer folds or, at best, to enforced renegotiation of charter hire terms

ff The risk of default increases at times of global financial uncertainty

ff Fixed Recovery Guarantees and Credit Insurance protect against the risk of charterer default

ff For a listed company, de-risking the revenue stream can improve stock prospects

ff De-risking the revenue stream can also attract better terms from lenders

Marsh • 1 Credit Insurance Fixed Recovery Guarantee

Key features •• An insurance policy designed to compensate an owner •• A financial instrument designed to transfer counterparty for financial loss as a result of a charterer’s failure to pay risk to a third party financial institution in return for undisputed amounts, typically because of bankruptcy payment of premium

•• The insured will be expected to make every effort to •• The financial institution will pay a pre-agreed sum in the mitigate any loss (eg; by withdrawing the ship from a event the counterparty (the reference obligor) defaulting charter) experiences a credvent

•• The insured will be required to share the risk by retaining •• The credit event will be defined in the terms but can a pre-agreed percentage of all potential losses (typically include bankruptcy, insolvency, Chapter 11 or its 20% - 25%) equivalent

•• All credit insurance policies covering charter default •• The guarantee level is not linked to the actual financial would be expected to cover unpaid daily hire as a result loss and can amortise over the contract to reflect of charterer insolvency (less the self insured retention) reducing risk exposure up to a pre-agreed limit or until the ship is withdrawn from the defaulting charter, whichever occurs first. •• A fixed recovery guarantee is a long term commitment between client and guarantor •• An enhanced charter default credit insurance policy will also provide cover up to a pre-agreed limit for the •• A fixed recovery guarantee can be transferred to an difference between the daily hire earned under the alternative party (e.g. a new owner), but any transfer defaulting charter and the daily hire earned from a must be sanctioned by the provider replacement charter (the Mark to Market Difference) •• A fixed recovery guarentee will normally only be •• In addition to compensating for unpaid hire, an available to cover a counterparty that has publically enhanced charter default credit insurance policy will traded debt (e.g. a bond issue) or which is a public cover unpaid expenses incurred by the insured on the company with actively traded shares. charterer’s behalf (Charterer’s Additional Costs)

•• The MC2 wording also allows for compensation of losses following a commercial settlement between Insured and Charterer, provided the terms of the settlement have been agreed by the Insurers.

•• 12, 18 or, in certain circumstances, 24 month policy periods are offered. Ideally policies will include the provision to cancel and rewrite well before expiry (eg; 6 months before expiry). Although credit insurers can decline to offer renewal terms, the ability to cancel and rewrite minimises the possibility of an insured being left without cover just as the credit risk turns bad.

•• The policy is non-assignable other than in respect of claims proceeds, albeit with strict provisos

2 • Charter Default Credit Insurance Fixed Recovery Guarantee

Key differences

Provided by an insurance company Provided by a bank

Normally short term, typically not exceeding 24 months. Short cover long term - matching length of reference Not linked to duration of reference contract, but capable contract (e.g. 10 years) of rolling forward Premium renegotiated for each period. The policy will Premium fixed at inception for full contract period. typically be renewed six months before expiry to allow Premium payment schedule could be structured over rolling forward full contract period Will compensate an insured’s financial loss if a credit Will pay an agreed sum if a credit event occurs. Actual event occurs to an agreed maximum limit, subject to the losses are not relevant. policy conditions Credit insurers insist on the insured retaining a There is no requirement for the buyer to retain a proportion of each risk – typically 20%-25% proportion of risk The maximum compensation is linked to contracted Can amortize over time to reflect declining contract revenue over the compensation period (e.g.; daily charter value hire x 18 months, less the self insured retention)

Common features of the Fixed Recovery Guarantee and Credit Insurance •• The providers of both these products assess the probability of loss and calculate premium on an assessment of the reference obligor’s credit position.

•• There is finite capacity available for both products and, in general terms, there is a direct correlation between obligor credit rating, available capacity and premium.

•• There is a relatively small market available for both products. The global economic crisis had a negative impact on provider appetite and interest for shipping sector business is only slowly returning.

•• Neither product is intended to bolster a failing charter. They are designed to provide a ‘sleep easy’ for healthy contracts.

Marsh • 3 Credit Insurance Fixed Recovery Guarantee Indicative example (based on the MC2 wording)

•• Ten year time charter at US$27,500 per day Year Present Value Payout upon Annual Cost of Contract credit event •• Policy period: 18 months, renewable after 12 months 50% 1 100,000,000 50,000,000 1,612,500 •• Self insured retention: 25% 2 90,000,000 45,000,000 1,451,250 •• Maximum compensation period: 18 months (540 days) made 3 80,000,000 40,000,000 1,290,000 up of; 4 70,000,000 35,000,000 1,128,750 •• First loss period covering unpaid invoiced hire of up to 90 days 5 60,000,000 30,000,000 967,500 from the Date of Loss (being the first date on which an insured 6 50,000,000 25,000,000 806,250 sum is due and unpaid by the charterer) and 7 40,000,000 20,000,000 645,000 8 30,000,000 15,000,000 483,750 •• Second loss period covering the Mark to Market Difference that 9 20,000,000 10,000,000 322,500 begins at the end of the first loss period and ends 540 days after the Date of Loss 10 10,000,000 5,000,000 161,250 8,868,750 •• Limit for first loss period: US$1,822,500 (calculated at US$27,500 per day less 25% self insured retention multiplied Where revenue from a ten year contract is US$10m per year and the buyer by 90 days) of a fixed recovery guarantee requires coverage for 50%, of the outstanding contract value •• Minimum limit for second loss period: US$5,906,250 (calculated at US$27,500 per day less a ‘floor’ of US$10,000 per day less 25% self insured retention multiplied by 450 days)

•• The floor represents the lower level of daily hire that could be anticipated to be earned if it was necessary to recharter the ship during the policy period. The floor will be agreed between insured and insurer when the initial terms are agreed

•• Overall policy limit: US$8,437,500 (calculated as the limit for the first loss period plus the limit for the second loss period)

•• Sub-limit for unpaid expenses incurred by the insured on charterer’s behalf (Charterer’s Additional Costs): to be agreed, based on previously invoiced or anticipated amounts

•• Indicative premium for an overall policy limit of US$8,437,500 for 18 month policy period: US$180,000

•• The above is for indicative purposes only. The premium actually quoted will depend upon an analysis of the charterer’s credit risk.

Credit insurance Information Fixed recovery guarantee required Information required •• Identity of the charterer. •• Identity of the counterparty.

•• Financial data relating to the charterer. This •• Contract duration, contract value and may be problematic if it is a private company. amortisation schedule.

•• Details of the charter party conditions and details of the ships involved.

•• Trading history and payment experience with the charterer and its group companies.

4 • Charter Default Appendix

Frequently Asked Questions These FAQs should be read in conjunction with the insurance product developed by Marsh and Chaucer - Wording (‘MC2’), to which it refers.

Charter Default Fixed Recovery Guarantee

Q1. Who offers this instrument? Q3. What is Marsh’s role in this Q4. Will Marsh be remunerated for transaction? the introduction?? A: It is a banking product. A: Marsh is not an expert in banking A: It is likely that Marsh will receive products. Where an insurance an introductory commission or solution appears less suitable we can service fee from the bank. Is it transferable or tradeable? Q2. introduce our client to a bank or banks, but are unable to provide A: It can be transferred or traded, advice. but only with the agreement of the provider.

Charter Default Insurance

Q1. If I buy this cover what are the A: Charter default insurance is a A: Policy MC2 is designed to risks of my charterers learning that I trade credit insurance offering compensate for 540 days unpaid have insured against their going protection against unpaid revenue charter hire split between a ‘first loss bankrupt? due to financial default. It may appeal period’ and a ‘second loss period’. because it fits your corporate risk A: Brokers and underwriters are strategy. It could also be a way of During the first loss period unpaid aware that the motivation for buying making the company more attractive daily hire will be reimbursed in full by charter default cover is likely to be in an IPO or potentially be used to get underwriters (less any self insured based around a general de-risking of better rates of interest from lenders. retention). Once the first loss period the business but we do realise that has ended, claims will be reimbursed this cover may be misconstrued as a Q3. What is the purpose of the on a ‘Mark to Market Difference’ basis lack of confidence in a trading ‘waiting period’? up to the limit of the ‘second loss partner. period’. If the charter party is A: The waiting period is intended to cancelled because hire is unpaid, the Confidentiality is in the interests of all allow sufficient time for short term first loss period will end when the parties which is why clause 7.2.2 hire irregularities to be resolved ship is withdrawn from the charter. prohibits disclosure. In addition without involving the underwriter in a brokers and underwriters are claim. Q5. What is ‘Mark to Market prepared to sign confidentiality Difference’? agreements on request. Q4. What is the purpose of the ‘first loss period’ and the ‘second loss A: ‘Mark to Market Difference’ is Q2. Why might I buy this product? period’? defined in the MC2 policy wording. It is the difference between the original

Marsh • 5 charter rate and either the hire being A: Charterer’s additional costs are paid on the replacement fixture or an sums which, under the charter, are for Why do underwriters estimated market rate achievable for the charterer’s account, although Q11. impose a significant retention and the vessel if a replacement fixture they have been initially paid by the why am I prevented from insuring this hasn’t been arranged. (disponent) owner. These may retention? include, for example, additional insurance premiums and port A: Underwriters impose a retention disbursements. They may also Q6. How does ‘Mark to Market to encourage the (disponent) owner include the cost of bunkers where the Difference’ work in practice? to act as a ‘prudent uninsured’, charterer failed to pay and the particularly when pursuing charterers (disponent) owner becomes subject A: Policy MC2 provides for a to recover unpaid hire. shipbroker’s evaluation of what to an ‘in rem’ action against the constitutes an ‘achievable’ market vessel. Cover for charterer’s rate (clause 9.9). additional costs is subject to an agreed sub-limit. Q12. What are our obligations to While charter hire rates are primarily the insurer if they have paid our determined by the pressures of losses and we subsequently make a supply and demand, achievable rates recovery or a partial recovery from Can we make a recovery from will, to an extent, also depend on the Q9. the charterer? perceived quality of the charterer and the insurer even though we are still in practice the replacement charter involved in litigation against the A: Recovery costs incurred during may be in a completely different charterer? the waiting period will be reimbursed trade. Therefore underwriters will first. Insurers and insured will then be If the quantum of hire remains in compensate the owner for the A: reimbursed in proportion to the dispute, litigation has to be difference between the original hire insured share of the risk. Any concluded before the policy rate and a ‘comparable’ new fixture at remaining balance will be reimbursed responds. Reimbursement from a reasonable hire rate as agreed by a to the insured in full. shipbroker. underwriters can be sought before enforcement proceedings commence With underwriters’ agreement, the provided enforcement is not replacement charter may be a unreasonably delayed. Q13. Who pays the legal costs renegotiation of the original fixture. associated with pursuing the This may occur where the charterer is charterer for hire? in administration and the When, other than following renegotiated fixture is a reasonable Q10. A: Legal costs are payable by the the insolvency, liquidation or commercial substitute in the context (disponent) owner (or their FD&D administration of a charterer, would of prevailing market rates. underwriters) but this policy will this policy respond? reimburse pro rata those amounts which relate solely to the The policy would respond where A: enforcement of rights and not to the charterer is still solvent but does Q7. Which of our losses can we disputes of rights or of quantum. recover from the insurer once the not honour an arbitral award or court ‘waiting period’ has passed? judgement or an agreed commercial Q14. Why can’t I buy a multi-year settlement of a legal dispute. The policy that matches the duration of A: Reimbursement of all undisputed (disponent) owner remains my charter party? insured losses, including unpaid hire responsible for enforcing the award if or ‘charterer’s additional costs’ possible (and sharing the recovery A: The underwriters are limiting the (below), suffered up to that date. with the insurer) but this is not always policy duration to 18 months or, Thereafter, further losses can be achievable. This policy would also under certain circumstances, 24 claimed as they occur. respond where payments are months. It will, however, normally be intermittent and the charter still alive, possible to roll policies forward by but undisputed amounts remain ‘cancelling and rewriting’ the policy unpaid after the waiting period. Q8. What is included in the at the anniversary date of policy ‘charterer’s additional costs’? inception.

6 • Charter Default This is a original and proprietary product developed by Marsh and Chaucer, which is subject to copyright.

Trade Credit Insurance – Ship Charter Hire

MC2 Wording September 2011

This insurance is to compensate the Insured in respect of Charterer’s non-payment of Hire and/or Charterer’s Additional Costs accruing under the Charter during the Policy Period, subject to the terms, conditions and exclusions set out below.

1 Compensation: 1.1 Upon expiry of the Waiting Period and subject to the terms and conditions of this Policy, this insurance will pay the following amounts in the event of an Insured Occurrence: 1.1.1 If, with Insurers’ prior written agreement, the Insured does not bring proceedings against Charterer to recover an Insured Sum: a) in respect of Charterer’s Additional Costs, 75% of the amount unpaid; b) in respect of Hire, 75% of the Hire payable during the First Loss Period and 75% of the Mark-to-Market Difference during the Second Loss Period. 1.1.2 If, with Insurers’ prior written agreement, the Insured reaches a commercial settlement with Charterer in relation to the payment of an Insured Sum, 75% of the shortfall (if any) between the settlement figure payable by Charterer and the Insured Sum. 1.2 No Compensation shall be payable hereunder until after expiry of the Waiting Period. 1.3 Thereafter, Compensation: 1.3.1 under clause 1.1.1, in respect of Charterer’s Additional Costs and in respect of the First Loss Period is payable in full upon expiry of the Waiting Period; 1.3.2 under clause 1.1.1 in respect of the Second Loss Period is payable monthly in arrears during the Second Loss Period or as may otherwise be agreed; 1.3.3 under clause 1.1.2, is payable upon expiry of the Waiting Period.

2 Notification: 2.1 As a condition precedent to Insurers’ liability hereunder, the Insured shall notify the Insurers promptly of the occurrence of any of the following: 2.1.1 it becoming apparent to the Insured that Hire and/or Charterer’s Additional Costs may not be paid when due; 2.1.2 non-payment of Hire and/or Charterer’s Additional Costs; 2.1.3 any payment made by the Insured of a debt owed by Charterer and incurred under the Charter, in order to reduce the risk of arrest of the Vessel. 2.2 The Insured shall provide the Insurers with all documents the Insurers may, at any time, reasonably require, including but not limited to:

Marsh • 7 2.2.1 Charter; 2.2.2 invoice for Insured Sum; 2.2.3 correspondence between Charterer and Insured regarding the Insured Sum; 2.2.4 details of any possible mitigation or set-off open to the Charterer or any other reason why the Insured Sum may not in fact be due from Charterers. 2.3 In any claim, action, suit or proceeding to enforce a claim for loss hereunder, the burden of proving that the loss is recoverable under this Policy, that no warranty has been breached and that no exclusion applies shall fall upon the Insured. If such proof of loss has not been submitted within two years of the Date of Loss the Insurers shall be discharged from all liability hereunder in respect of such loss.

3 Warranties: 3.1 The Insured warrants that, at inception of this Policy and at the time of any amendment hereto, and save as disclosed in writing to the Insurers, the Insured has no knowledge of any Insured Occurrence or any fact, matter or circumstance which is likely to give rise to or which indicates a pre-existing Insured Occurrence. If the Insured learns that they are in breach of this warranty above, they must immediately notify the Insurers and the Insurers shall have absolute discretion to: a) waive such breach of warranty; or b) amend the premium, terms and conditions of this insurance as they may in their absolute discretion require; or c) treat themselves as discharged from liability from the moment of breach. 3.2 The Insured warrants that the Insured has obtained all authorisations and licences which the Insured is required to obtain under the regulations of the Insured’s Country for the performance of the Contract of Hire. 3.3 The Insured warrants that the Insured will maintain a minimum uninsured percentage of [●] % of its participation in the Contract of Hire for the duration of this Policy. The Insured will at all times bear the risk of loss for its minimum [●] % uninsured percentage net and unhedged.

4 Exclusions: 4.1 In no case shall this Policy cover loss, liability, damage or expense whether directly or indirectly caused by: 4.1.1 non-payment of any Insured Sum in circumstances where Charterer is entitled to refuse to pay that Insured Sum, including but not limited to where Charterer has an express right of deduction under the Charter; for off-hire periods; or where Charterer can lawfully off-set damages claims against Hire; 4.1.2 failure of any bank and/or guarantor (where applicable) to open, amend, guarantee or extend any applicable instrument except where such failure results from an Insured Occurrence; 4.1.3 material breach of the terms of this insurance by the Insured. 4.1.4 illegal or criminal acts by the Insured. 4.1.5 failure by the Insured to comply with local laws or regulations of which they should reasonably have been aware having the effect of law in the Host Country which were in existence at the inception of this insurance. 4.1.6 currency fluctuations (including devaluations) or due to any foreign currency exchange controls or currency transfer controls; 4.1.7 the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system; 4.1.8 lawful cancellation of the Charter due to non-performance by the ship or of the Insured; 4.1.9 the outbreak of war; civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power; 4.1.10 capture, seizure, arrest, restraint or detainment (barratry and piracy included), and the consequences thereof or any attempt thereat; 4.1.11 derelict mines torpedoes bombs or other derelict weapons of war; 4.1.12 In no case shall this Policy cover loss damage liability or expense directly or indirectly caused by or contributed to by or arising from 4.1.12.1 ionising radiations from or contamination by radioactivity from any nuclear fuel or from any nuclear waste or from the combustion of nuclear fuel 4.1.12.2 the radioactive, toxic, explosive or other hazardous or contaminating properties of any nuclear installation, reactor or other nuclear assembly or nuclear component thereof 4.1.12.3 any weapon or device employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter 4.1.12.4 the radioactive, toxic, explosive or other hazardous or contaminating properties of any radioactive matter. The exclusion in this sub-clause does not extend to radioactive isotopes, other than nuclear fuel, when such isotopes are being prepared, carried, stored, or used for commercial, agricultural, medical, scientific or other similar peaceful purposes 4.1.12.5 any chemical, biological, bio-chemical, or electromagnetic weapon.

4.1.13 insolvency of the Insured or of its group parent, including any voluntary or compulsory winding-up or dissolution or formal protection from creditors under any applicable bankruptcy or insolvency laws or the occurrence of any similar event in any jurisdiction. 4.1.14 amounts due under any variation to the Charter unless such variation is advised promptly to and accepted by Insurers on such additional premium, terms and conditions as the Insurers shall in their absolute discretion require; 4.1.15 any sum accruing or due from Charterer to Owners as at the date of inception hereof; 4.1.16 interest on any Insured Sum or penalty charges of any sort relating to any Insured Sum; or 4.1.17 any Hire or Charterer’s Additional Costs accruing post cancellation, termination or expiry of the Charter. 4.2 No Insurer shall be deemed to provide cover and no Insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that Insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.

5 Loss Prevention/Mitigation: 5.1 The Insured shall promptly give written notice to the Insurers (and in any event within 30 days) after becoming aware of a circumstance material to the ability or willingness of the Charterer to comply with the terms of the Charter. The Insured shall, at its own cost (save as provided in clause 6.1 below), take all reasonable practicable measures to avert or minimise any losses which may be claimable hereunder and act to recover sums unpaid by the Charterer. 5.2 The Insured shall, at its own cost (save as provided in clause 6.1 below), provide prompt assistance to Insurers, including but not limited to: 5.2.1 ensuring that rights against the Charterer and any guarantor or other third party are properly preserved and exercised; 5.2.2 the transfer, assignment and delivery (so far as it is legal and contractually able) to the Insurers of the Insured’s rights of recovery against any person or organisation in respect of the valid claim for which claim payment is made. 5.2.3 withdrawing the Vessel(s) from the Charter, in pursuit of alternative earnings if entitled to do so and where reasonably requested by Insurers to do so; 5.2.4 pursuing proceedings against the Charterer for recovery of an Insured Sum where reasonably requested by the Insurer to do so; 5.2.5 co-operating with Insurers and complying with Insurers’ reasonable requests in relation to the recovery of an Insured Sum from Charterer; 5.2.6 not permitting, insofar as it is within its power, any receivables or other sources of recovery to which the Insurers are or may be subrogated to be subject to any lien, security interest, or other third party claim superior to that of the Insurers; 5.2.7 remitting any Recovery immediately to the Insurers and until such remittance holding same in trust for the Insurers. 5.3 After receipt by the Insurers, any Recovery shall be divided between the Insured and the Insurers in the following order: 5.3.1 a sum equivalent to the Recovery Costs incurred prior to and during the Waiting Period by the Insured in compliance with its obligations under clause 5.1 and 5.2 shall be paid to the Insured (less any such sum previously reimbursed by Insurers); 5.3.2 a sum proportionately equivalent to the compensation per Clause 1 paid by Insurers and their Recovery Costs per Clause 6.1.2 shall be paid to (retained by) the Insurers; 5.3.3 any remaining balance shall be remitted to the Insured by the Insurer.

6 General Conditions: 6.1 Costs 6.1.1 Save as provided in clause 5.3.1, the Insurers shall not be liable for any legal costs incurred by the Insured prior to or during the Waiting Period. 6.1.2 The Insurers will pay 75% of the Recovery Costs incurred after expiry of the Waiting Period, provided such costs have been specifically authorised in advance and in writing by the Insurers. 6.1.3 If the total debts owed to the Insured by the Charterer exceed the limit of Insurers’ liability hereunder, the amount of Recovery Costs to which the 75% may be applied will be reduced to reflect that proportion which the limit bears to the total debts owed. 6.1.4 Any Recovery Costs incurred in currency other than currency of the Charter shall be converted at the rate of exchange listed in the Financial Times as at the date when the Insured pays these costs. 6.2 Assignment This insurance may not be assigned by the Insured other than in respect of the payment of any compensation hereunder if Insurers receive reciprocal assignment of Recoveries. Any such assignment of any compensation payable hereunder does not relieve the Insured from any implied or express term of this insurance, including the payment of premium and the execution of all responsibilities in utmost good faith. 6.3 Automatic Termination 6.3.1 Unless due to an Insured Occurrence or otherwise agreed by the Insurers, the insurance of any declared Charter shall automatically terminate upon: 6.3.1.1 the date of termination or expiry of the Charter but without prejudice to any liability which has accrued as at that date; 6.3.1.2 any change in control of the Insured unless the prior written consent of the Insurers is obtained with such additional premium, terms and conditions as the Insurers shall in their absolute discretion require. 6.3.2 This insurance shall become null and void, and all claims in process of payment hereunder shall be immediately forfeited, and any payments already made hereunder shall be returned to Insurers in full if: 6.3.2.1 the Insured makes any claim knowing the same to be false or fraudulent as regards amounts or otherwise; or 6.3.2.2 the Insured discloses the existence of this insurance to any other party at any time before or after the expiry of this insurance policy, other than on a confidential basis to its own professional, financial or legal advisors, or relevant regulatory authorities as required and, where applicable, the Loss Payee, without the prior written consent of the Insurers. 6.4 Allocation of Monies Received Prior to the Date of Loss Unless otherwise agreed in writing by the Insurers, any monies or other benefits received by or on behalf of the Insured prior to the Date of Loss in connection with any Charter shall be applied to the total amounts of Hire due and owing from the same Charterer in chronological order of due dates. 6.5 Non-Cancellation This insurance is not cancellable by the Insured or the Insurers other than by the exercise of the Payment of Premium Clause or any other provision herein and in these circumstances, no premium is returnable other than as specified in such provision. 6.6 Stop Commitment Unless otherwise agreed, the Insurers shall not accept a declaration of any further charterparty, contract of hire, contract of affreightment or other similar contract should more than 3 Invoices be at that time invoiced but unpaid by that Charterer and overdue for more than 30 days. 6.7 Fraud

This Policy shall become void, and all claims hereunder shall be forfeited, if the insured has made any material statement, report, application or claim under this Policy, where the Insured knew that the statement, report, application or claim was false or fraudulent.

6.8 Insurer Downgrade

The Insured and its representatives reserve the right to review the financial security of insurers hereunder as applicable at any time. The Insured may terminate, subject to daily pro rata return of premium, any insurers participation on this policy at any time should any of the insurers’ financial condition no longer meet the minimum security requirements of the Insured which for the purposes of this contract shall be Standard & Poors “A-“ and/or equivalent rating to “S&P A-“ under A.M. Best. To effect such termination the Insured is required to provide relevant Insurers with 30 days notice of such termination. The Insured shall provide the Insurers with a release of all liability hereunder effective upon the actual date of termination.

6.9 Complete Agreement of the Parties, Amendment and Waivers

The terms of this insurance may not be waived or changed, except by written endorsement issued and signed by the Insurer(s). the failure of the Insurer(s) to exercise any right or remedy shall not be deemed to constitute a waiver of such right or remedy in the future.

6.10 Notice

All notices under any provision of this insurance shall be in writing and given by hand, prepaid express courier, airmail, electronic notice properly addressed to the appropriate party or its designated representative and will be deemed as having been effected only upon actual receipt.

6.11 Third Party Rights

A person who is not a party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this agreement. 6.12 Law and Arbitration The construction, validity and performance of this Policy shall be governed by the laws of England and Wales.

Any dispute arising out of or in connection with this Policy, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into this clause. The tribunal shall consist of three arbitrators with one to be nominated by the Insured, another by Insurers and the third to be agreed by mutual consent by the respective parties within 30 days thereafter without regard to Article 6.1 of the LCIA Rules as to the nationality of the chairman. Where the respective parties cannot agree on a presiding arbitrator as the third the two nominated arbitrators shall appoint the third presiding arbitrator. The chairperson of the tribunal shall be a qualified lawyer under the Laws of England and Wales. The place of arbitration shall be London. The language of the arbitration shall be English.

Nothing contained herein shall be construed to allow the arbitrator(s) or any court or any forum to award punitive, exemplary or any similar damages. By entering into this agreement to arbitrate, the parties expressly waive any claim for punitive, exemplary or any similar damages. The only damages recoverable under this Policy are compensatory damages.

7 Definitions: 7.1 “Charter” means the charterparty, contract of hire, contract of affreightment or other similar contract entered into by the Insured and the Charterer for hire of the Vessel(s) and as declared hereunder. 7,2 “Charterer” means the party hiring or leasing a vessel or vessels from the Insured. 7.3 “Charterer’s Additional Costs” means expenses incurred by the Insured on the Charterer’s behalf or for the Charterer’s account pursuant to the Charter, which are due but unpaid by the Charterer and are not in dispute. 7.4 “Date of Loss” means the first date on which an Insured Sum is due and unpaid by the Charterer (or its guarantor, if any, following explicit demand under any guarantee). 7.5 “First Loss Period” means a maximum of 180 days from the Date of Loss, during which period the Insured Sum continues to be unpaid or until withdrawal for alternate employment or inception of a replacement charter, whichever is the shorter. 7.6 “Hire” means the sum payable under the terms of the Charter by the Charterer to the Insured, during the time that the Vessel(s) is on hire less any counterclaim or set-off which can be lawfully used by the Charterer to reduce or reclaim the hire payable. 7.7 “Host Country” has the meaning ascribed to it in the Risk Details. 7.8 “Insured’s Country” has the meaning ascribed to it in the Risk Details. 7.9 “Insured Occurrence” means any non-payment by the Charterer or by its guarantor of: 7.9.1 An Insured Sum; or 7.9.2 An award handed down by a competent arbitration tribunal or court with regard to the payment of an Insured Sum; or 7.9.3 Sums agreed as due and payable by the Charterer to the Insured in respect of an Insured Sum under a commercial settlement agreement, howsoever recorded. 7.10 “Insured Sum” means any Hire and/or Charterer’s Additional Costs which have accrued during the Policy Period and are due but, in either case, are unpaid and are not in dispute. 7.11 “Mark-to-Market Difference” means the difference between Hire (without deduction or set-off) and 7.11.1 If the Vessel is still subject to the Charter or not earning hire or freight then the estimated market rate achievable for the Vessel(s) on the final day of the First Loss Period, in the opinion of the Shipbroker, for a comparable replacement time charter or the time charter equivalent (“TCE”) rate on a comparable replacement voyage charter, as applicable; or 7.11.2 If the Vessel is employed under a substitute fixture, then the actual replacement hire or TCE rate achieved by the Insured provided such rate is agreed by the Shipbroker to be reasonable, given the nature and type of the Vessel and prevailing market conditions provided always that if the estimated or actual market rate is greater than the Hire, the Mark-to-Market Difference shall be zero and provided always that if the estimated or actual market rate is less than USD10,000 per day, the Mark- to-Market Difference shall be the difference between Hire and USD10,000 per day. 7.12 “Recovery” means all sums recovered in respect of claim moneys paid by Insurers. 7.13 “Recovery Costs” means reasonable legal costs incurred in pursuing a Recovery, but the Insurers will not contribute towards costs incurred in relation to: 7.13.1 the resolution or the settlement of any dispute between the Charterer and the Insured as to the Charterer’s obligation to pay; or 7.13.2 the Insured’s administrative costs and expenses; or 7.13.3 the determination of the amount of Hire or Additional Costs due and owing in case such amount has been disputed by the Charterer. 7.14 “Second Loss Period” means the period commencing on the first consecutive day following the expiry of the First Loss Period and finishing 540 days from the Date of Loss. 7.15 “Shipbroker” means the shipbroker appointed jointly by the Insured and the Insurer. If the Insured and the Insurers cannot agree upon the identity of the Shipbroker, the Shipbroker shall be appointed by the Chairman of the Baltic Exchange in London. 7.16 “Vessel(s)” means the vessel or vessels that the Charterer is hiring from the Insured pursuant to the Charter. 7.17 “Waiting Period” means: 7.17.1 in the case of claims under clause 1.1.1, 180 consecutive days from the Date of Loss; 7.17.2 in the case of claims under clause 1.1.2, 30 consecutive days from the date of a court judgment, arbitral award or commercial settlement agreement in favour of the Insured, whichever is the later.

Charter Default Insurance – Indication Sheet

Charterparty Facts Insurance requests Insurer comments Insured:

Charterer:

Charterer’s Guarantor:

Vessel(s):

Description:

Charter Date:

Inception:

Duration:

Trading intentions:

CP form:

Payment terms:

Withdrawal rights:

Daily Hire (100%): Limit for 1st Loss Period: US$ US$

Charterer’s Additional Costs (100%) Per monthly invoice Limit (in the aggregate): US$

Mark-to-Market Floor Limit for 2nd Loss Period: US$ US$

Self insured retention: 25%

Combined Single Limit: Gross premium:

US$

Shipbroker nomination: Line:

NOTE: this sheet is abbreviated – see email correspondence for full detail, information or representations and offer negotiations. Underwriting information required for Charter Default quotes under MC2 1. The identity of the owner and the charterer as it 8. Details of the anticipated employment of the ship appears on the charter party (where known) If the nominated charterer is a subsidiary or special underwriters will look more favourably on charters purpose company, underwriters will need to where there is a strong underlying business case for understand the link between the contracting party employing the ship and less favourably if the charter and its parent. If they cannot establish a link, any appears speculative. quote will reflect the credit status of the subsidiary, or may result in submissions being declined. 9. Details of the trading history and experience between owner and charterer 2. Financial information relating to the charterer underwriters require disclosure of any other current In order to price charter default risk, underwriters non-insured charter with the same charterer and need to assess the debt profile, gearing and past details of any payment problems in the past. It will also performance of the charterer. Underwriters have help to understand the depth and strength of the access to financial information relating to publically trading relationship between owner and charterer. traded companies and limited information for some private companies. If sufficient information is not readily available, it may be necessary to obtain it to 10. Charter hire payment schedule to date facilitate a quote. The underwriters will want to compare charter hire due dates against actual payment dates under any existing charters and will need to understand the 3. Details of the ship(s) being chartered (type, year reasons for any delays. built, deadweight and IMO number)

11. Details of the owner’s credit control procedures 4. Daily charter hire amounts The underwriters will want to know that the insured has robust procedures in place to monitor prompt 5. Charter party signing date, duration and payment and to enforce payment where necessary. inception date

12. Details of any attempts made by the charterer to 6. Charter party terms – a copy of the charter party renegotiate the charter party terms since it was or ‘fixture recap’ if it includes sufficient signed. information underwriters need to understand the charter hire payment terms and the termination provisions in the event of non-payment.

7. Details of any security provided by the charterer to the owner For example, the charterer’s parent company might guarantee performance of the charter party if the nominated charterer is a subsidiary. This will enable underwriters to price the risk on the parent company’s credit risk. 13. an explanation of the amount requested to be 14. any proposed daily hire ‘floor’ to be applied to covered under Charterer’s Additional Costs the Mark to Market Calculation under the Second Loss Period The MC2 wording includes provision for the insured to recover costs which should have been paid by the When indicating terms, underwriters will assume charterer. These might include War Risk additional market charter hire will not fall below a floor level premium, Kidnap & Ransom premium and the cost of during the policy period. The limit for the Second Loss bunkers. Underwriters will cap the amount Period will be calculated on the difference between recoverable under this section. To arrive at an the contracted daily hire and the floor. The insured appropriate limit they need to know the typical may wish to propose a floor based on their own maximum amount due for reimbursement from market knowledge. charterers at any time plus the maximum amounts due to fuel suppliers, etc for bunkers, etc. 15. any other information that may influence the underwriter when considering the risk all material facts must be disclosed to the underwriters. The non-disclosure or misrepresentation of a material fact will entitle an underwriter to avoid the insurance policy.

18 • Charter Default Proposal Form for Charter Default Insurance

Please supply the following information by carefully completing this questionnaire, in as far as is practical, for an initial indication of insurance costing from underwriters. If a question is not applicable to the operations of the Applicant, please state so by ‘N/A’ and if more space is required to fully answer a question please attach a separate sheet identifying the question to which it responds. More detailed information may be required prior to obtaining a formal quotation.

We would respectfully remind you of your duty to disclose all information, facts or circumstances which are, or ought to be, known to you and which are material to the risk. If you have any doubt whether information is material, you should disclose it to Marsh, as failure to do so might lead to your policy being avoided by insurers.

1. insured a. Name b. Address c. Country

2. charterer a. Name b. Address c. Country d. Ownership (public/private)

3. Vessel a. Name b. IMO Number c. Year built d. Deadweight e. Type f. Flag

4. charterparty a. Charterparty form b. Date executed c. Charterparty inception d. Duration e. Daily hire rate f. Payment terms g. Law of the Charterparty h. Where will and dispute be arbitrated? i. What termination provisions are contained within the Charterparty in the event of non-payment of hire?

Marsh • 19 j. Does the Insured know of any licensing/permit requirements or changes in law which might prevent fulfilment of the Charterparty by the Charterer? k. Is there any additional security/ guarantees in place relating to the charterparty?

5. Insured’s experience a. Please provide details of the Insured’s prior trading experience with this charterer. b. Please identify any instalments that were not received in a timely manner and the reasons for the delay. c. Does the Insured have robust procedures in place to monitor prompt payment of hire? Please describe:

d. Has the Charterer attempted to renegociate any of the Charterparty’s terms since it was signed? If so, what was the outcome of such negociation?

6. Other Information Please provide details of any information, not covered above, that may influence the insurer when considering this risk

20 • Charter Default Additional Information Please supply any additional information you consider relevant to initial risk assessment. It would assist if you would provide copies of any Company brochures, Annual Reports or any other literature describing the aforementioned operations. Please advise internet address if applicable.

DISCLOSURE OF MATERIAL FACTS Every proposer or insured, when seeking new insurance or amending or renewing an existing policy must disclose any information which might influence the insurer in deciding whether or not to accept the risk, what the terms of the policy should be or what premium to charge. If you fail to disclose all material facts, this may render the insurance voidable from inception (the start of the contract) and enable the insurer to repudiate liability (entitle the insurer not to pay your claims). If you are not sure whether a fact is material, you should disclose it.

By ticking here, We declare that all statements and particulars are true, full enquiry having been made, and we have not omitted, suppressed or mis-stated any material facts which may be relevant to the Insurer’s consideration of this insurance proposal and undertake to inform the Insurer of any change to any material fact that occurs prior to the point at which the insurance contract has been concluded and throughout the duration of the contact of insurance. We understand that the information we provide will be used by the Insurer in determining acceptance of the application together with the premium charged for the risk and the terms of any policy provided.

We will process your data in accordance with relevant data protection legislation. Your data will be passed to insurers so that they can assess and provide you with a quote (or cover) if applicable. We may exchange information with members of Marsh & McLennan Companies, Inc. to provide you with services and to process information on your behalf (in jurisdictions inside and outside the European Economic Area where there may be less stringent data protection laws). Wherever it is processed, your information will be protected by a strict code of secrecy and security which all members of Marsh Ltd, their staff and any third parties are subject to and will only be used in accordance with our instructions. To help us to continually improve our service and in the interests of security, we may monitor and/or record your telephone calls with us. Marsh & McLennan Companies, Inc. means Marsh & McLennan Companies, Inc., its subsidiaries, associated and affiliated companies.

It is very important to read and understand the contract you will be entering into when purchasing insurance.

Completion of this proposal form/questionnaire does not imply that insurance cover will be offered by insurers.

Applicant’s Signature

Dated

Position Held

Marsh • 21 Marine Practice Key Locations

EMEA

|Oslo Kristiansand| |Gothenburg Norwich| |Hamburg |Moscow North America London| |Antwerp & Brussels |Vancouver |Paris Seattle| Aix| |Portland Toronto| Madrid| |New York Athens| |Istanbul San Francisco| Cyprus| Seoul| |Tokyo |Los Angeles |Atlanta |New Orleans |Shanghai Bahrain| |Dubai Hong Kong| Taipei |Mumbai |Ho Chi Minh

Kuala Lumpur| |Singapore

Asia |Jakarta

|Johannesburg

Cape Town| |Sydney

For further information, please Hamburg Rotterdam contact your local Marsh office Tel: +49 40 37692 456 Tel: +31 1 0406 0600 or visit our web site at: marsh. Hong Kong San Francisco com Tel: +852 2301 7000 Tel: +1 415 743 8000

Antwerp Istanbul Seoul Tel: +323 286 6411 Tel: +90 212 355 43 00 Tel: +1 714 245-7810

Athens London Singapore Tel: +30 210 8176 000 Tel: +44 20 7357 1000 Tel: +65 6332 0288

Bremen New York Toronto Tel: +49 421 16303 25 Tel: +1 212 345 6000 Tel: +1 416 349 4700

Cyprus Oslo Tel: +357 25 878 100 Tel: +47 2201 1000

Dubai Paris Tel: + 971 2672 2664 Tel: +33 1 4134 5000

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman. The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. In the United Kingdom, Marsh Ltd. is authorised and regulated by the Financial Services Authority for insurance mediation activities only. Copyright © 2011 Marsh Ltd. All rights reserved.