Circular 2/95: US Oil Pollution - Certification Under OPA



Dear Sirs,


This circular is intended to summarise the position regarding COFRs following the 28 December 1994 deadline.

COFR Regulations

All Members owning or operating self-propelled tank vessels which are in United States waters after 28 December 1994 should have already submitted new evidence of financial responsibility under the Interim Final Regulation of 1 July 1994.

The "old" COFR for self-propelled tank vessels is not valid after 28 December 1994, unless new evidence of financial responsibility has been submitted. Members with an "old" COFR which expired on 28 December 1994 (because new evidence of financial responsibility was not submitted prior to that date) or requiring a new COFR for self- propelled tank vessels must now apply on the new form and submit appropriate new evidence of financial responsibility. Members who have already revalidated their existing COFR by submitting new evidence of financial responsibility must also make a new application for a new COFR before the existing COFR expires and in any event not later than 28 December 1995.

Members owning or operating non self-propelled tank vessels have until 30 June 1995 to comply with the new evidence of financial responsibility requirements. "Old" COFRs with an expiry date after 30 June 1995 must be replaced by a new COFR by that date.

Members owning or operating non-tank vessels trading to the US may continue to use existing COFRs until their expiry, but must then submit new evidence of financial responsibility and apply on the new form for renewal. Similarly application on the new form is required to obtain a COFR for a new ship, if the operator wishes to continue to trade to the United States.

Penalties for non-Compliance

Vessels entering US waters without a valid COFR can expect to be detained and denied permission to transfer oils or other hazardous substances, and the owners subjected to fines of up to $25,000 per day under each of OPA 90 and CERCLA. Vessels transiting U.S. navigable waters on innocent passage are not exempt and may be fined and ordered to leave U.S. waters.

It is understood that the Coast Guard will liaise closely with the National Pollution Funds Center (NPFC) and, provided that all necessary evidence of financial responsibility has been received by the NPFC, it will be possible for the vessel to be treated as being in compliance even if the relevant paper work has not been finally completed. Members are advised to request their agents to check the position with the local Coast Guard office prior to the ship's arrival.

Application Form

The new application form (CG 5585) is available from the NPFC (US Coast Guard).

Amongst other information the applicant is required to nominate an agent for service of process in the United States. In the past Members regularly nominated Transport Mutual Services Inc (TMS), the Association's exclusive general correspondent in the United States, as their agent for service of process under the previous Federal Water Pollution Control Act, but it is not thought prudent that this should be done under OPA 90, in view of the need for the Association to avoid taking any action which could undermine or in any way compromise the Association's refusal to become a guarantor under OPA 90. Accordingly it is suggested that Members appoint their ordinary US agent or attorney as agent for service of process.

Alternatively, consideration could be given to appointing a specialist entity such as CT Corporation Systems which has nationwide facilities. Further details may be obtained directly from TMS in New York (fax: 212 509 7929).

"New" evidence of Financial Responsibility

As all Members are aware from our numerous circulars in the latter half of 1994, there are currently two generally available schemes for obtaining the necessary guaranties to be submitted to the US Coast Guard, the First Line programme and Shoreline Mutual Insurance. Members are, of course, also entitled to establish their own evidence of financial responsibility through self-insurance or by means of a financial guarantor or surety bond.

First Line

Under this fixed-premium programme, sponsored by brokers Johnson & Higgins, Stockton Reinsurance Limited of Bermuda (Stockton Re) is authorised by the US Coast Guard and able to provide guaranties on behalf of Members up to $300 million with higher amounts potentially available on request.

Stockton Re is reinsured both in Bermuda and in the London market. However, the terms and scope of this reinsurance are not of direct concern to participants in First Line who have no exposure to Stockton Re in the event of a claim under a guaranty given on behalf of another participant.

First Line offers no insurance to participants, being a guaranty facility only, and each participant is required to indemnify First Line against any amounts paid under a guaranty in respect of the participant's own ship.

The First Line application procedure also requires certain documentation from the Association to be submitted by the Member. The relevant letters, which are described in the schedules to the First Line application form, can be obtained from the Managers' London agents. In addition, it is understood that First Line will require evidence from the Member that his entry in the Association has been renewed from 20 February 1995, and this will be provided by the Managers' London agents upon confirmation of renewal. Members are advised to submit this evidence to First Line as soon as possible prior to 20 February so as to avoid any problems with their entitlement to benefit from First Line's guaranty to the US Coast Guard.

All documentation required from the Association in relation to applications should be requested by fax from the Managers' London agents (fax: +44 171 204 2089, attention J Joslin).

Details of the premium structure and the application form are available from First Line in Bermuda (tel: 809 292 1552; fax: 809 292 2091). Members wishing to use the First Line scheme to obtain guaranties are advised to ensure that they are obtaining the most advantageous terms for this facility.


Shoreline is now sponsored jointly by brokers Willis Corroon, Willis Faber & Dumas, and Sedgwick Marine & Cargo and is authorised by the US Coast Guard to issue guaranties up to $395 million. It made significant changes in its structure late in December 1994, following the absorption of the reinsurance protection originally developed for OPAClub.

Shoreline remains structured as a mutual club, but its management advises that reinsurance has been arranged with the Bermudian reinsurer, Centre Re, which in turn is protected by a "difference in defences" policy placed in the London market. The sponsoring brokers' comments on the protection provided by these arrangements are as follows:

"Centre Reinsurance (Bermuda) Limited (ultimately 100% owned by Zurich Insurance) reinsures Shoreline up to $395 million per COFR, subject to an adjustable aggregate which is initially set at $600 million. Centre Re is in turn protected by an unlimited "Difference in Defences" coverage which has been fully placed in the London market. The "Difference in Defences" coverage responds in circumstances where the usual P & I cover is denied for most defences commonly available to P & I Clubs under their Rules. One risk which is not covered is cessation of the P & I cover due to insolvency or winding up of a member. The "Difference in Defences" cover has a small annual aggregate deductible of $10 million.

Loss payments under the Centre Re reinsurance which are not covered by the London "Difference in Defences" coverage will be the subject of additional premiums which will finance the loss payments over a two year period. Any such loss is considered to be remote. The additional premiums are structured so that NO supplementary calls will be required of members during the first 12 month period under the reinsurance. No release calls related to the reinsurance will be required of Shoreline's members unless additional premiums are payable to Centre Re."

Shoreline no longer offers to the owner a layer of US oil pollution cover in excess of the Association's policy limit of $500 million. Its insurance cover is currently restricted to the relevant COFR guaranty limit and in respect of claims not recoverable under P & I Club cover. However, if Shoreline pays a claim under the COFR guaranty which is not recoverable by the owner under his P & I Club cover, Shoreline may still be entitled to an indemnity from that owner to the extent that the owner is also in breach of Shoreline's own rules.

Shoreline has also changed its management following the agreement of Mutual Risk Management Ltd to acquire the shares of Shoreline Mutual Management (Bermuda) Ltd.

The new management advises that there is no debt for borrowed funds at 28 December 1994 and there are no present plans to borrow funds by way of a bond offering or otherwise.

Shoreline will also require letters from the Association in similar form to those agreed with First Line. These are available on request from the Managers' London agents (Fax: +44 171 204 2089, attention: J Joslin).

Shoreline's newly amended rules have been seen in draft by the Managers who can confirm to Members that there is no problem of double insurance with the Association's cover. Members are however advised themselves to review these new rules which will form the basis of the contract to which Members will be bound on acceptance of an application to Shoreline.

Details of the advance call premium structure, application forms and further information can be obtained from:

Shoreline Mutual Management, Bermuda - Telephone: 809 296 2324 - Fax: 809 296 2327

Willis Faber & Dumas Limited, London - Telephone: 071 860 9703 - Fax: 071 860 9742

Sedgwick Marine & Cargo - Telephone: 071 377 3174 - Fax: 071 377 3166

OPAClub and Federal Insurance Co Ltd

The Managers have been advised that neither of these potential providers of COFRs, on which reports have been issued in previous circulars, will be in a position to provide the guaranties necessary to obtain COFRS.

General Observations

In compliance with the instructions of the Board at their meeting on 17 October 1994, a "fixed premium" solution to the COFR problem was available to Members requiring COFRs prior to the deadline of 28 December 1994, as was also a mutual vehicle for providing the necessary guaranties, backed by a reinsurance from the market.

Both are fully compatible with existing P & I cover from the Association for US pollution risks. There is no additional cover for Members from the First Line scheme and the scope of the cover afforded by Shoreline Mutual to its members is minimal, even in the event that the relevant claims are not recoverable from the Association.

The cost of each scheme is attributed solely to the requirement for a COFR. Members will be well able to assess the relative cost of each scheme in the light of their own individual circumstances.

Both facilities will provide the guaranty necessary to obtain a COFR. Although the legal position will never be entirely free from doubt in the United States courts for as long as the Association continues to give cover for the relevant pollution risks, every effort has been made not to undermine or in any way compromise the Association's refusal to become a "guarantor" under OPA 90.

As indicated in previous circulars, neither the Association nor the Managers guarantee the underlying financial strength of either scheme or its long term viability. In particular, the Association has no direct knowledge of the reinsurance arrangements made and has only been able to pass on the information which has been made available to them. It will be for each Member, and his broker where relevant, to assess the scheme most suited to his needs and to satisfy himself that he has sufficient information on the scheme for which he is applying with regard to financial viability and otherwise. The Managers' London agents are pleased to try to assist Members, where possible, with any queries they may have.

The Managers and Board will continue to keep all developments with respect to OPA 90 and CERCLA under close scrutiny with a view to determining whether a more satisfactory long term solution to the problems of certification and of OPA 90 itself can be developed in the future.

Yours faithfully

Staff Author