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LONDON-Insurers soon may refuse to cover large numbers of merchant shipowners.

That action, combined with warnings from governments of key trading countries, including the United States and the European Union, that they will bar their ports to certain ships would effectively prevent merchant shipowners from plying their trade.

The potentially dire situation results from a code adopted by the International Maritime Organization, the London-based shipping unit of the United Nations. The code, which goes into effect in less than a year, is designed to force the operators of substandard ships to improve the quality of their vessels and management systems.

Known as the International Ship Management Code, it takes effect July 1, 1998, by means of amendments to the IMO's Safety of Life at Sea Convention of 1974, to which 134 countries, including the United States, are parties.

So far, only about 11%, or slightly more than 2,000, of the approximately 19,000 merchant ships the ISM Code will affect next July have compliance certificates. Many of the remainder may not be able to meet the deadline, because it takes an estimated 12 to 14 months to meet compliance criteria.

P&I clubs, the protection and indemnity mutuals that provide liability coverage for most of the world's merchant ships, have not decided if they will continue to cover members that have not received their ISM certificates by next July.

John Riley, chairman of the International Group of P&I Clubs, which represents 15 clubs accounting for 90% of world merchant shipping, says the subject still is under discussion within the group.

"The question of cover is a point we're still working on," he said, adding that "at the moment I wouldn't say that we've got conformity of view."

The United Kingdom Mutual Steam Ship Assurance Assn. (Bermuda) Ltd., the world's largest P&I club and a member of the international group, also has not decided if it will make ISM Code compliance a condition of coverage. Hareward Lawford, a director of the club's managers, Thos R. Miller & Son (Bermuda), said a decision is unlikely before the club's annual meeting in October.

Hull underwriters, too, are considering what position to adopt on ISM Code compliance.

Richard Palengat, an underwriter in London Jansen Green Ltd. and a member of the Joint Hull Committee representing underwriters in the insurance company and Lloyd's of London markets, said the committee "will shortly be forming a view on what we think is the way to proceed on this matter."

It is waiting first to hear what is said on the subject at the annual meeting next month in Paris of the International Union of Marine Insurers.

However, the committee only can make recommendations to underwriters rather than agree to any binding policy.

In a press statement last May about the ISM Code, the U.S. Coast Guard said, "U.S. companies and their ships which operate with safety management systems (a requirement of the Code) also would see reductions in company liability insurance costs; P&I insurance claims; lost man-hours; hospitalized personnel; medical sign-off of ship's personnel; pollution discharges and accidents; fines from pollution spills; ship casualties; cargo damage claims; and in claims associated with damaged containers."

To comply with the ISM Code, a shipowner or ship management company and its vessels must pass inspection, usually by a body such as one of the independent ship classification societies that already inspect ships and issue classification certificates proving their seaworthiness.

The leading societies are members of the International Assn. of Ship Classification Societies; the association has yet to decide if its members should make ISM compliance a condition of ships meeting their general classification requirements.

IACS Chief Executive James Bell said he expects the association to reach a decision at a meeting in December. He emphasized that if IACS were to make ISM compliance a condition of class and a ship were to fail to get its ISM certificate by next July, it would be suspended from class, which certainly would invalidate its insurance.

As of next July, ISM Code compliance becomes compulsory for tankers, bulk carriers, gas carriers, high-speed cargo vessels and passenger ships of 500 gross tonnage or more.

This amounts to about 19,000 ships globally. From July 2002, another 21,000 ships will be affected when the Code is extended to merchant ships and mobile offshore drilling units above 500 gross tonnage.

IACS said that as of mid-1997, just 2,010 of the 19,000 ships subject to the code in July had been certified-despite the fact that the ISM code was adopted in May 1994.

Given that it takes an average of at least 12 months to bring a vessel into compliance, this suggests that the bulk of affected shipping will not be certified by the July 1 deadline.

This prompted the IMO General Secretary William O'Neil to write in July to the heads of the 25 countries with the largest tonnage of merchant ships registered to express his concerns about the slow rate of ISM compliance.

In his letter Mr. O'Neill states, "From the information we have received, we are uneasy that some shipping companies and ships concerned will not have obtained the necessary certification under the code."

Mr. O'Neill has asked countries where ships are registered to provide the IMO with details of compliance by Sept. 15 and to estimate prospects for compliance by the deadline.

U.S. authorities have declared that, come next July, they will not allow ships without ISM certificates into U.S. waters.

Rear Admiral Robert North, assistant U.S. Coast Guard commandant for marine safety and environmental protection, has said there will be no exemptions or grace period. Vessels without ISM certificates from July 1 will be either denied entry into U.S. waters or detained and fined, he warned.

The roots of the ISM Code go back largely to the Herald of Free Enterprise ferry disaster of 1987, when a roll-on/roll-off passenger ferry capsized in the English Channel.

While the vessel's operators and operating procedures were proven to be at fault, an unclear line of command made it difficult to pin down the blame. Therefore, a key principle of the ISM Code is that shipping companies must designate a person ultimately responsible for safety matters.

Shipowners and managers also must establish a safety management system designed to ensure compliance with all internationally agreed upon safety requirements.

The SMS must include:

A safety and environmental protection policy.

Defined levels of authority and established lines of communication between shore and shipboard personnel.

Procedures for reporting accidents.

Procedures for responding to emergencies.

Procedures for internal audits and management reviews.

A shipowner or operator who passes inspection is issued a document of compliance and a safety management certificate, copies of which must be kept on ship.