Shipping in wartime: how the compensation mechanism for damaged ships works

The Russian war in Ukraine provoked many challenges for the shipping industry. In particular, the danger to ships in the Black Sea forced the Ukrainian government to look for ways to solve the problem. Yes, already in summer, the Cabinet of Ministers introduced the Procedure, which regulates the provision of compensation to shipowners and not only that.

USM spoke with Interlegal lawyers, who explained how the compensation mechanism works today.

Details regarding compensations

In June 2023, the Cabinet of Ministers of Ukraine introduced an Order that guarantees compensation for damage caused to shipowners, operators of sea and river vessels, as well as charterers who may suffer significant losses as a result of armed aggression by the Russian Federation.
Lawyers emphasize that this applies to any cases where the damage is caused by the armed aggression of the Russian Federation during the stay of the vessel in the territorial waters of Ukraine, if they transport non-military goods to or from the open ports of Ukraine.
That is, it can be both, the fact that the ship ran across a mine, damage due to missile fire or hitting a UAV.
Damage subject to compensation includes:

• damage caused to the ship due to death or destruction, which is not subject to restoration;
• expenses for the elimination of structural damage to the vessel, due to which the vessel lost its seaworthiness;
• losses due to the loss and/or damage of cargo;
• expenses related to damage to the health or life of a passenger or a member of the ship’s crew.
  “It is important that the state provides compensation only if the insurance company refused to provide insurance compensation. In the absence of a refusal of compensation by the insurance company, the corresponding compensation is paid by the latter. First of all, the ship owner will receive compensation if the ship is damaged. If the crew became a victim, compensation will be given to the crew themselves or their family, and so on, according to the injured parties,” Interlegal lawyers note.
  In turn, in order to receive compensation, the owner of the ship must submit an application to the Ministry of Infrastructure, together with supporting documents, no later than within 90 calendar days from the moment the insurer refused insurance compensation.

Compensations and Danube

It is important to note that the navigable route on the Danube passes through seven countries.
According to lawyers, according to established practice and legislation, the state border of Ukraine, unless otherwise stipulated by international agreements of Ukraine, is established, in particular, on navigable rivers — in the middle of the main fairway or thalweg of the river.
“Therefore, if the vessel suffered damage while on the territory of Ukraine, this Order also applies to vessels moving along the Danube,” the law firm explains.

Monetary component

According to the provisions of Article 36 of the Law of Ukraine “On the State Budget for 2023”, the amount of compensation was up to UAH 20 billion.
“However, the amount of compensation for damage cannot exceed the amount of insurance compensation provided for in the insurance contract or R&I (Protection and Indemnity) policy,” notes Interlegal.
At the same time, it recently became known that the size of the insurance fund for civil marine vessels was reduced 10 times. That is, in the state budget for 2024, the amount of compensation amounts to UAH 2 billion.
In turn, according to lawyers, the evaluation of the amount of compensation is carried out by the subject of evaluation activity.
“From a practical point of view, such an assessment is carried out by a surveyor. From a more official and legal point of view, this assessment can be provided by a forensic expert, according to his methods and instructions,” experts say.

Compensation practice in Ukraine

It is also worth mentioning the Kmax Ruler ship, which was hit by a Russian missile in the port of Odesa on November 8. After the incident, Deputy Minister of Community Development, Territories and Infrastructure Yuriy Vaskov said that the shipowner did not request compensation from the military risk insurance fund.

According to the official, the ship had a classic insurance package covering military risks.

Also, Interlegal said that the company’s lawyers are currently conducting about 15 lawsuits regarding compensation for damages as a result of Russian aggression related to the destruction of maritime transport.

“Fortunately, we did not have support for receiving compensation, and as far as we know, it did not exist in Ukraine at all. We are glad that the temporary corridor is functioning, and business participants and the state can carry out their economic activities,” Interlegal shared.

Leading lawyer Taras Dragan and junior lawyer Dmytro Karetnikov worked on the comments under the guidance of associate partner Karina Horova.