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Underwriter – Marine, AXA XL

In the maritime industry, the term "cold lay-up" refers to a vessel berthed for an extended period with the engines turned off. Ben Healey, Marine Underwriter at AXA XL describes the risks shipowners need to keep in mind when planning to lay-up a vessel.

In February 2020, a day charter/party boat used for private and corporate entertainment in the smooth waters of the Brisbane River tied-up at its usual berth in a local marina. And there it stayed as the COVID pandemic hit. To accommodate a renovation project at the marina in October that year, the vessel needed to be moved. One problem though: the port engine wouldn't start.

While sitting idle, saltwater had drained out of the exhaust manifold back into the cylinder block, causing extensive corrosion in the cylinder linings and piston heads, meaning the engine had to be removed and rebuilt. 

Fortunately, the owners’ Hull insurance covered the direct costs plus loss-of-earnings. However, indirect costs, such as loss of reputation and profits, as well as uninsured repair costs, amounted to several hundred thousand dollars, a considerable sum for a small business.

So, how can shipowners help keep these costs down? 

Cold vs. hot lay-ups
A vessel berthed or not operating for an extended period, such as the case of the party boat in Brisbane, is referred to as a "cold lay-up". The vessel is moored, anchored or hauled ashore, its engines and machinery turned off, and the crew stood down, effectively placing the vessel in hibernation.

A “hot lay-up” on the other hand is an idle vessel that is maintained in a way that it can return to service quickly, with the engines and operating systems kept on or regularly warmed up, and a full or partial crew remaining onboard.

Depending on external factors, one approach can prove more beneficial than the other.

Weather
Vessels operating seasonally, for instance, regularly spend a portion of the year in cold lay-up. These would include whale-watching and fishing charters off Australia's Northeast coast, vessels plying routes that are iced-over for part of the year, or barges on inland waterways that are sometimes unnavigable. The effects of climate change are also adding an element of uncertainty to the seasonality of these activities. 

Storms
Vessels servicing offshore oil and gas facilities that are not already in service tend to go into hot lay-up before a cyclone or hurricane hits as it is only a matter of time before they need to leave port and take avoiding actions.

Economics
Then there are the economics. With cold lay-ups, the primary objective is to reduce overhead expenses while ensuring that the vessel can eventually return to service. With hot lay-ups, shipowners want to accomplish two things: reduce overhead costs and maintain their vessels in a state that will allow them to resume operations quickly. Because the engines and machinery continue running and at least some of the crew remain on board, a hot lay-up is naturally costlier in the short term. Poor procedures prior to a vessel entering cold lay-up may cost more in the long run.

Weighing each approach's pros and cons is the challenge shipowners face when demand for a vessel's services disappears or rates fall to a level where keeping it in operation is no longer economical. Owners must also consider how long these conditions are likely to persist. 

And finally, there are unexpected events such as global pandemics. As with virtually all other industry sectors, the COVID-19 pandemic has caused massive disruptions in the global maritime industry. There are currently any number of container vessels idling offshore—a form of hot lay-up—due to congestion at major ports.

The situation has been vastly different for vessels in other parts of the industry, including the travel/leisure/hospitality sector; case in point, the Brisbane party boat. It had previously operated year-round, excepting brief intervals for scheduled maintenance, refurbishing and the occasional repair. Its sudden cold lay-up was a new and unusual experience. The speed at which the pandemic emerged also meant that the company had virtually no time to plan and prepare for the lay-up.

Preparing for the unexpected
A client once told me, "boats are meant to be moving, and it’s when they are not moving that they have problems". However, boats that are moving also face "problems" such as accidents, fires, equipment failures and, of course, the general perils associated with being at sea. So, it is more accurate to say that boats that aren't moving face different problems.

The first is where to berth or moor the vessel. Ideally, that would be somewhere with:

  • Adequate shelter from open seas and high winds and, if anchored, good holding grounds and consistently deep water; 
  • in areas where it is impossible to avoid cyclones/hurricanes/severe storms, shipowners should be mindful of the fact that restarting the vessel on short notice to move to a more secure location often isn’t possible;
  • Ample security—a laid-up vessel is a far easier target for piracy, vandalism and/or theft;
  • Readily available utilities, freshwater, fuel and provisions;
  • Access to spare parts and repair workshops; and
  • Reasonable wharf or anchorage fees.

Other considerations involve the engines and mechanical systems. Marine engines are designed for essentially continuous operation. When they aren't running, seals and shafts start to expand or contract, allowing for:

  • Water ingress and rapid corrosion;
  • Reduced cylinder compression; or
  • Failing exhausts.

Fluids can also deteriorate. Some fuels begin to go bad within seven days, and some oil starts to break down and separate after six weeks of inactivity.

Another major issue relates to moisture and humidity. Engine rooms with limited or no airflow and high temperatures are humidity traps where corrosion and rust can accelerate, with gaskets, seals and filters deteriorating much more quickly. Battery terminals and onboard electrical boards also suffer corrosion in highly humid environments.

Finally, some Vessel Classification societies, such as the American Bureau of Shipping (ABS), don't have a "laid-up" provision within their terms. Thus, a laid-up vessel could be considered out-of-class which, in turn, could affect its implied or expressed state of seaworthiness. In other cases, a vessel could be withdrawn from its class, affecting its implied seaworthiness and the terms of its insurance coverages.

Because there are so many variables, no standard guidance applies to every vessel about to be laid-up. However, in collaboration with my colleague Jarek Klimczak, a Master Mariner and Senior Risk Consultant with AXA XL Marine Risk Consulting, we have developed a questionnaire to support shipowners in preparing vessels for a safe, secure cold lay-up, which helps minimise the need for extensive repairs/rebuilds before a vessel is returned to service.

Shipowners have always faced the prospect of taking vessels out of service temporarily due to factors beyond their control, but the COVID-19 pandemic has highlighted some of the challenges and complexities of this process, emphasising the need for shipowners to better plan and prepare for the unexpected.

Ben is a Marine Underwriter with over 12 years’ experience across both underwriting and broking, and has worked with some of Australia’s leading Maritime operators. He is based in Sydney, and can be contacted at ben.healey@axaxl.com.

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