UK insurer International Transport Intermediaries Club (ITIC) has warned managers to be on their guard after a client was caught up in a long-running legal case arising from a tanker explosion in 2012.

The liability of a ship manager may not always arise from negligent performance of their services, the insurer said.

Nine years ago, an unnamed crude tanker suffered an explosion while undergoing repairs in the United Arab Emirates (UAE).

After an investigation by the UAE authorities, the matter was closed without any action being taken against the master, owner or manager.

The vessel was sold, unrepaired, and a settlement was reached between the owner and the insurer without the involvement of the unnamed ship manager.

Although the company was named as a co-assured, neither the owner nor the insurer asserted any claim over the ship manager, which assumed the matter was now closed.

Unaware of legal action

However, in 2019 the manager became aware that back in 2013 in the UAE, the insurers had started legal proceedings for $26m against the company and five other defendants.

The other defendants were able to appoint lawyers to represent them in court, but as the ship manager was unaware of the claim, it did not do so.

Legal action against the other defendants was dropped, leaving the ship manager liable for $20m plus interest at 9%.

ITIC was brought in to appeal the claim, but its efforts were twice rebuffed.

"However, due to the ship manager having no presence or assets within the UAE, and the UAE having no reciprocal enforcement agreements with the relevant jurisdictions, it was judged to be extremely difficult for the insurers to enforce the award," ITIC said.

ITIC then began arbitration proceedings on behalf of the manager against the shipowner to secure an indemnity against legal action.

A "drop hands" offer was made by the manager, where both parties would agree to cover their own costs and walk away. This was rejected.

"In mid-2020, following many exchanges, the ship manager offered a 'without prejudice' settlement of $540,000, this amount being the manager's contractual liability limit under the management agreement," ITIC said.

After a counter-offer from the insurer of $12.5m and much further negotiation, a full and final settlement of $1m was made and accepted.

As legal costs had amounted to almost $500,000, ITIC covered the full $1.5m.

"In this case, the ship manager had done no wrong but was caught up in an extremely complex and drawn-out legal process," ITIC said.

"Ship managers need to be aware of the pitfalls surrounding their position as a third-party and fully understand the associated liabilities and limits," the insurer added.