Marine insurance is the distribution of risk, the majority each being prepared to contribute a small amount to mitigate the misfortunes of the minority. The majority (insurance company or mutual association) alleviate the calamities of the minority (insured).
In the shipping business, the types of risks to be considered:
1- Loss of or damage to a ship (Hull Insurance)
2- Loss or damage caused by a ship (Protection and Indemnity)
3- Several ancillary risks such as Loss of Hire and Cost of Strikes
Marine insurance is placed through several channels:
1- Syndicated Markets (Lloyds of London)
2- Insurance Companies
3- Mutual Associations (P&I Clubs)
4- GA (General Average) where the risk of a particular voyage may be distributed by those involved in specific situations
Hull and Machinery Insurance (H&M Insurance)
Hull and Machinery Insurance (H&M Insurance) provides compensation for loss of or damage to a ship arising out of an accident (marine peril) such as sinking, grounding, fire, or mechanical damage. Hull and Machinery Insurance (H&M Insurance) is placed by insurance brokers. The insurance broker’s job is to find the most suitable deal for the shipowner. Normally, a large risk such as a fleet of ships are spread broadly over the insurance market. The shipowner discuss with several competing insurance brokers when an insurance placing is being negotiated or renewed. Some fleets are split between more than one insurance broker. Some fleets are split between London and overseas markets. These combinations ensure the broadest possible spread of risk. Customarily, shipowners establish good relationships with underwriters in the long-term.
Placing the Marine Insurance
Insurance brokers place insurance partly with Lloyds and partly with the insurance companies belonging to the Institute of London Underwriters. In London, the Lloyds insurance market comprises a large number of individuals (names), each individual has been prepared to risk their fortunes as insurance underwriters. The individuals (names) are organized into underwriting syndicates who appoint professional managing agents operating from a series of railed-off wooden boxes situated on the floor of the Lloyds Building.
The Institute of London Underwriters (ILU) comprises several commercial insurance companies and has a building near Lloyds of London. An insurance broker who wants to place insurance would approach Lloyd’s underwriting syndicates and companies. An insurance broker specifies full particulars of the risk to be placed, that is information about the ships, the values, management, and previous insurance claims record. The doctrine of Utmost Good Faith applies in the insurance marine market. The Insurance Policy becomes voidable if all relevant facts are not thoroughly disclosed.
In this case, Insurance Underwriters can at any time void the Contract of Insurance. This might be unfortunate for a shipowner particularly as the shipowner could be faced with a major casualty with no insurance cover. The insurance broker negotiates with the leading underwriters for the cover to be placed and once all is agreed, the leading underwriters will take a small percentage of the risk. The insurance broker completes the insurance by obtaining the following lines from other insurers, either additional Lloyds Syndicates or Institute of London Underwriters (ILU) companies. Each line will comprise of a few percentage points of the total risk so that the maximum spread is obtained. Shipowners may place the insurance with a local insurance broker, who will in turn place the risk, through his correspondent, on the London or another leading insurance market. In some countries the shipowner may be required by law to place the risk with a local, often national, insurance company, who might or might not then re-insure the risk on a leading market. In the marine insurance policy, the shipowner is the principal assured, whilst the ship manager, if an independent entity, should appear as co-assured.
Marine Insurance Premium
Marine Insurance Premium, the cost of insurance, is usually expressed as a percentage of the shipowners’ declared ship valuation. The shipowners’ declared ship valuation should never be less than the reasonable market value. Generally, the shipowners’ declared ship valuation represents the limit of the underwriters’ indemnity. Marine insurance premium , the cost of insurance, rating is negotiable depending on several factors:
1- Type and size of the particular fleet overall
2- Reputation of shipowners and ship-managers
3- Claims record over previous years
The general state of the insurance market also affects the marine insurance premium, the cost of insurance, rating. In the short term, insurance price cuts help shipowners, however underwriters do need to build up a reasonable reserve against the inevitable bad years with heavy claims.
Insurance Deductible is the amount that the shipowner is prepared to accept for his account. Ordinarily, the insurance deductible amount is applied to every claim, but sometimes Annual Aggregate Deductibles are also applied.
Generally, individual ship valuations are rated with a Base Value on full conditions due to the fluctuation of the second-hand price of ships. Consequently, if the ship’s price goes up, increased value insurance can be taken out for Total Loss Only (TLO) risks at a lower premium rating. London insurance market limits increased value to 25% of the base value but other mechanisms such as Anticipated Earnings also exist to allow for additional Total Loss Only (TLO) cover. Therefore, the fluctuations in ships’ values can be catered for, the crucial point is always to ensure that the insurance aggregate valuation surpasses the reasonable market value of the asset. The method of assessing ship values is a matter of choice. Some shipowners consider ship market resale prices only while others prefer to improve this with an element of newbuilding replacement cost.
Usually, if a ship is subject to a mortgage, the lender (bank) stipulates a minimum value and the lender’s interest will be endorsed on the Insurance Policy. Ship-managers should watch the second-hand ship market and discuss with shipowners as values fluctuate to ensure that all the ships are properly covered. When considering Hull and Machinery Insurance Policy terms, it is crucial to consider that there are several different insurance policy versions. In the London insurance market, International Hull Clauses (IHC) are broadly used. American Institute Hull Clauses and Norwegian Plan is also used. Some large shipping companies have been able to negotiate alterations to the standard conditions. Ship-managers must be knowledgeable of the different types of insurance cover available in the insurance market and of the main distinctions between insurance covers. London marine insurance conditions are governed by the UK Marine Insurance Act of 1906.
International Hull Clauses (IHC) Clause 13 stipulates the obligation for the ship to be classed. Moreover, International Hull Clauses (IHC) Clause 13 states that the Clause cannot be over-ridden by inconsistent amendments to the insurance. The perils insured against are set out in International Hull Clauses (IHC) Section 2:
Total Loss takes place when the ship is destroyed or the shipowner is irretrievably deprived of the use of the ship. Nevertheless, in some situations, the ship is not destroyed or lost but where the ship becomes so badly damaged that the cost of repair exceeds the ship’s insured value. In such situations, the ship may be declared a Constructive Total Loss (CTL) in International Hull Clauses (IHC) Clause 21.
Constructive Total Loss (CTL) must be done transparently in full consultation and agreement with the underwriter in which event the shipowners would be obliged to tender Notice of Abandonment of the ship to the underwriters involved. In this event what is left of the ship becomes the property of the underwriters. The policy wording will normally allow for the insured value of the ship to be substituted for the repair value to determine when the ship can be considered a Constructive Total Loss (CTL).
Particular Average (PA)
Particular Average (PA) means a Partial Loss caused by a peril insured against as distinct from Total Loss or General Average (GA).
The word average in Particular Average (PA) and General Average (GA) does not have its everyday meaning in this context and its origins are somewhat unclear.
Particular Average (PA) is the most common type of claims under a marine insurance policy. Particular Average (PA) occurs when a ship sustains damage as a result of one of the perils insured against and the cost of repairs is less than the level of indemnity allowed for in the policy. In the marine insurance policy, the perils insured against are stipulated. Additionally, most shipowners elect to extend their policy employing an Additional Perils Clause which grants shipowners greater flexibility and scope to submit claims.
Historically, this was known as the Inchmaree Clause. Inchmaree Clause owes its name to a case that went to the House of Lords in 1887. In SS Inchmaree case, it was held that damage was done to the ship was due to inadvertence on the part of a member of the crew, was not a peril insured against under the normal marine insurance policy of the day. Today, under such Additional Perils Clauses, it is sufficient for the shipowner to demonstrate that the loss or damage was caused by an accident during the currency of the policy. The insurers are protected by the clause that the loss must not have resulted from want of due diligence by the assured, shipowners or ship-managers.
In Particular Average (PA) the standard model is the reasonable cost of repairs to the ship, considering that the shipowner had acted as a prudent uninsured. Reasonable cost of repairs could include the cost of transporting the ship to the shipyard including bunkers and relevant port charges, drydocking and repair costs, spare parts, superintendence, surveyors’ fees, and wages and maintenance of the crew. In certain situations in liner ships, temporary repairs can also be recovered, although it requires to be demonstrated that by carrying out temporary repairs the shipowners were able to save the underwriters’ money. Unrepaired Damage can also form part of a Particular Average (PA) claim because there would have been a depreciation of the ship’s value. In such cases, the underwriters’ surveyor must agree on the estimated cost of unrepaired damage, and an allowance is then negotiated in full and final settlement with the insurers.
Hull and Machinery (H&M) Insurance Policy will also cover expenses and liabilities incurred by the shipowner if the ship comes into collision with another vessel. American and Scandinavian insurance markets permit full recovery of such costs and liabilities, London insurance market has for historical reasons taken a somewhat different attitude. Before the days of steamships, collisions between two sailing ships competently handled and subject to the same natural influences of wind, tide, and current were comparatively rare. However, during the 1850s, the London insurance market underwriters became more concerned regarding the number of occasions when steamships ran down or collided with sailing ships.
Consequently, the London insurance market underwriters introduced a running down clause into their policies issued to steamship owners by which the underwriters would only pay 3/4 of the liability arising out of such collisions. 3/4 collision liability provision carries through to the present day under London conditions. During the 1850s, British shipowners come together to form mutual Protection and Indemnity (P&I) Associations which was the direct result of the imposition of the running down clause.
Protection and Indemnity (P&I) Associations were originally specifically established to provide mutual insurance cover for the remaining 1/4 collision liability. In any event, the question of the division of liability for a collision is almost invariably the subject of arbitration. It is particularly crucial to protect the shipowners’ interests by ensuring that nothing is admitted before the arbitration. Additionally, policies provide under a sister ship clause for the situation where two ships under the same ownership coming into collision with one another are also dealt with by an impartial arbitrator.
General Average (GA)
General Average (GA) is a peculiarity of marine insurance tracing its origins back over many centuries when the concept of the common venture incorporating both the shipowner and cargo owner began. General Average (GA) is another model of the sharing or spreading of risk because both the shipowner and the cargo owner contribute to any extra-ordinary cost of action taken to preserve the property of both from peril. General Average (GA) exists regardless of insurance although in practice the insurers of the various interested parties do become heavily involved such as hull insurers, Protection and Indemnity (P&I) Clubs, or cargo underwriters. General Average (GA) only arises in certain very special circumstances. English law lays down that a General Average Act takes place only when any extraordinary sacrifice or expenditure is voluntarily and reasonably made in time of peril to preserve property involved in a maritime adventure. The crucial words in that definition are that the sacrifice must be extraordinary, must be voluntary and reasonable, and it must be incurred in time of peril. For example:
1- Cargo is jettisoned for common safety
2- Ship suffers a fire and cargo is damaged by efforts to extinguish the fire e.g. a hold being flooded
3- The ship is in difficulty and requires the assistance of a salvage tug to remove the ship from danger
A further type of allowable General Average (GA) expenditure would be the costs of making for a port of refuge, including the cost of cargo handled at the port of refuge specifically to enable repairs to the ship to be carried out for the safe prosecution of the voyage. York-Antwerp Rules govern the procedures for defining and dealing with General Average (GA).
Whenever a potential General Average (GA) situation arises, it is important that the ship managers quickly consult an experienced Average Adjuster who will advise on arrangements for collecting security from cargo interests etc. Average Adjusters are experts who undertake the careful task of determining what expenses may justifiably be included in the General Average (GA) settlement.
Additionally, Average Adjusters have to calculate the value at the material time not only of the ship itself but of every piece of cargo in the ship. A challenging task when one realizes that in a modern cargo liner the number of separate consignments can run into several thousand. Average Adjusters arrange through their local correspondents or agents at destination for cargo interests, ordinarily the consignees, to be contacted after a General Average (GA) declaration so that the necessary documentation can be arranged. Firstly, Average Adjusters collect Average Bond signed by each of the consignees and either an Average Guarantee signed by the cargo insurers or the payment of a General Average (GA) Deposit where cargo is uninsured. Average Adjusters collect a copy of the commercial invoice for the cargo to present the value. When all costs and values have been fully analyzed, the Average Adjusters prepare a General Average (GA) Statement.
General Average (GA) Statement splits the total allowable General Average (GA) expenditure into shares in proportion to the value of ship, cargo and bunkers involved. Afterward, each party is called upon to pay their share or General Average (GA) contribution to the General Average Fund which is in turn redistributed to the parties who incurred the sacrifice, usually the shipowner and cargo interests whose cargo may have been lost or damaged in the common interest. Commonly, shipowners’ hull and machinery policies contain a Partial Waiver Clause whereby hull underwriters agree to pay cargoes’ General Average (GA) contribution up to a specific amount. Partial Waiver Clause is designed to speed up the adjustment process when comparatively tiny amounts are involved.
Ship salvage expenses are usually dealt with similarly. Wherever a ship receives salvage assistance either from a professional salvor or another commercial vessel, the salvage costs are again shared between both ship and cargo interests. To avoid the risk of a quickly worsening situation when a ship is obviously in distress, Masters are authorized and should be encouraged to engage salvage services without delay under an Open Form contract. Generally, The Lloyds No Cure No Pay form is practiced for this purpose. The basis of this form is that the salvor gets nothing if unsuccessful in the salvage attempts, but is rewarded by a payment of a percentage of the total value of the property saved if successful. The percentage of the total value of the property saved depends on the level of danger faced and the level of skill required to salvage the property. This enables the practical work of salvage to get started instantly, the Salvage Contract providing for the Salvage Award to be fixed by an arbitration panel at a later date when all-important facts are known.
In signing an Open Form, the Master is acting on behalf of both ship and cargo as Agent of Necessity. Master’s position is fully protected under international law. It is common practice for an Average Adjuster to be involved in salvage cases. Average Adjuster prepares the important adjustment when all costs are achieved. Lloyds Open Form Salvage Agreement provides a tool whereby salvors may be granted an increase on the Salvage Award to cover the reasonable costs of preventing or mitigating pollution damage where salvage activities involve laden tankers. This critical provision is a departure from the no cure no pay principle. After several cases where tankers were so severely damaged that salvors were obliged to tow them out to sink them. Under the old method, salvors got nothing for their pains in such circumstances since there was no cure, and this was an extremely disappointing state of affairs. Currently, the new Salvage Convention enlarged this principle to cover not only laden oil tankers but also other types of pollution prevention activity.
Lately, it has become more common for cargo interests to raise objections for ship seaworthiness when called upon for General Average (GA) contributions. In some circumstances, cargo owners may employ lawyers and seek ways of proving the unseaworthiness of the ship at the commencement of the voyage. Therefore, cargo owners limit their obligation to contribute to General Average (GA) or Salvage.
In most accidents at sea, personal error or misjudgment is a major factor that is completely recognized by insurers. Consequently, crew negligence and faulty navigation are both long-standing and acceptable defenses acknowledged by the courts. However, the lack of due diligence on the part of shipowners is not. So, modern cases set a heavy responsibility on the ship manager to choose crew with maximum care and to supervise the operation of the ship meticulously.
In insurance policies, the assured has to take all reasonable steps to minimize the costs for underwriters which involves the responsibility of the assured to try to recover from third parties wherever applicable. For example, when a ship suffers damage at a berth to which the ship has been ordered by a charterer who has warranted that is it safe, the costs incurred should be recoverable from the charterer because of the safe berth clause in the charter-party. Likewise, repair expenses may be recovered from repairers due to negligent workmanship and cross liabilities must be pursued from the other party following a collision. The shipowner must act as a prudent uninsured and protect the underwriters’ interests at all times.
Ship Navigating Limits
Ship insurance markets lay down several navigational limitations, both permanent and seasonal. Predominantly, Arctic, Antarctic, Baltic, St. Lawrence are considered dangerous principally due to ice at certain seasons of the year. Navigating Limits are conditions that the ship will not trade in the selected regions during some seasons. Nevertheless, it is customarily possible to apply to underwriters for permission to breach Navigating Limits against payment of an Additional Premium (AP).
Commonly, Additional Premium (AP) is charged voyage by voyage. All standard marine policies specifically exclude damage resulting from wars and hostile acts, capture, seizure, arrest or strikes, etc. From time to time marine underwriters declare certain ports and areas of the world where hostilities are taking place or threatened as War Zones, in which normal marine policy cover is suspended. However, some market underwriters specialize in providing specific cover for War Zones for which an Additional Premium (AP) is charged. When a ship is required to enter a War Zone, insurance brokers should be consulted without delay so that particular War Risk cover can be arranged at rates that vary in direct proportion to the level of war-like activity in that area and thus to the level of risk. For ships flying certain flags, including British, Norwegian, and Greek, special War Risk cover is partly underwritten by the national governments and can be arranged customarily through Protection and Indemnity (P&I) Club channels. Frequently, shipowners arrange for their ships to be held covered for War Risks on a permanent worldwide basis at a reasonable cost during peace-time.
Ship Insurance Claims
When a ship involves in an accident, normally the master notifies the superintendent. Immediately, the superintendent should pass details to the insurance manager. Insurance manager informs:
1- Insurance broker so that the underwriters can be advised and arrangements made for the underwriters’ surveyor to inspect any damage
2- Protection and Indemnity (P&I) Club if there is any personal injuries, if cargo is lost or damaged, if third parties are involved, or if there is any threat of pollution.
3- Average Adjuster if appropriate
4- Shipowner and charterer, proceeding to keep both informed
5- Maritime Lawyer in conjunction with the Protection and Indemnity (P&I) Club.
The shipowner’s technical department will be in communication with the ship. The technical department evaluates the extent of damage and expressing plans for dealing with the urgent situation. The technical department decides on temporary or permanent repairs. Meanwhile, the Classification Society will have to be informed. Crew members ensure that full records of their actions relating to an accident are thoughtfully kept. Photographs, logbooks, course recorders, echo sounder data must be saved. These documents are only made available to shipowners or shipowners’ representatives, not to charterers, charterers’ solicitors, foreign port authorities, or the newspapers. Meanwhile, the ship arrives at the repair port if necessary, including drydocking.
Superintendent attend the ship, together with Salvage Association and Classification surveyors. Protection and Indemnity (P&I) Club surveyor may also be required if cargo has been damaged.
Salvage Association is an institution with worldwide representation established to look after underwriters’ interests. Salvage Association has to certify the cost of any repairs as being fair and reasonable. After repairs, the Salvage Association surveyor submits a report to Salvage Association, shipowner, ship manager, and all relevant parties. Customarily, the Salvage Association surveyor report covers an opinion on the cause of the casualty. Salvage Association report and all expenses are posted by the ship manager to the Average Adjuster. Even though the Average Adjuster is appointed by the shipowner, the Average Adjuster is rigorously neutral. Average Adjuster must prepare a statement of claim in an unbiased manner and by customary practice. Average Adjuster requests ship logbooks, reports, and any other relevant documents from the ship manager that has to reveal all the relevant facts.
The Salvage Claim Statement or Salvage Adjustment includes copies of Salvage Association’s reports and other reports, summaries of all expenses showing average and other costs, details of policy conditions showing that the casualty was the consequence of an insured peril, and finally a calculation of the amount to be recovered from insurers less the owners’ deductible. The Salvage Claim Statement or Salvage Adjustment is sent to the insurance brokers who arrange collection from the underwriters. In the case of a large claim, to assist the shipowners, a payment on account may be arranged at underwriters’ discretion of, for example, 80% of the estimated total, since the finalization of a major claim adjustment can take several months to complete. The London Insurance Market does not allow interest payments on Particular Average (PA) claims, although Scandinavian Conditions do. Nevertheless, the London Insurance Market does pay interest on General Average (GA) payments.
Protection and Indemnity (P&I)
In the 1850s, British shipowners clubbed together to form mutual Protection and Indemnity (P&I) Associations mainly to provide the one fourth Third Party collision liability cover which the London Hull underwriters had refused to offer. These mutual associations, or Protection and Indemnity (P&I) Clubs took wider liabilities on behalf of their members, including personal injury claims from crews and in particular, claims for loss of or damage to cargo. This was at a time when the regulations relating to the carriage of goods by sea were gradually being codified and placed on a more equitable basis as between shipping companies and their customers. Over the years the modern Protection & Indemnity insurance industry has built up which, alongside hull insurance, now form the two main areas of marine underwriting activity.
Protection and Indemnity Clubs (P&I Clubs) are always non-profit-making associations. On the other hand, Lloyd’s underwriters and the commercial insurance companies, collectively referred to as the Insurance Market. Protection and Indemnity Clubs (P&I Clubs) have no outside shareholders and are in effect owned by the shipowner-members themselves who are acting both as assured and insurers. Protection and Indemnity Clubs (P&I Clubs) obtain their income from the members through advance and supplementary cash Calls (the equivalent to the premium under conventional insurance ) and any revenue which is surplus to immediate requirements is prudently invested. On the expenditure side claims are paid, management costs are incurred and re-insurance is arranged through the market for the major catastrophe situations.
Protection and Indemnity Clubs (P&I Clubs) INCOME = Advance Calls + Supplementary Calls + Investment Income
Protection and Indemnity Clubs (P&I Clubs) EXPENDITURE = Claims Paid+ Management Cost + Cost of Re-insurance
Protection and Indemnity Clubs (P&I Clubs) are controlled by a BOD (Board of Directors), drawn from the senior management of the shipowner-members of that club. Protection and Indemnity Clubs’ (P&I Clubs) BOD (Board of Directors) meets frequently to inspect and approve members’ claims, to control the investment program, and to analyze how the scope of the insurance cover being offered by the club can be improved. Day to day management of the Protection and Indemnity Clubs’ (P&I Clubs) operations are managed with a permanent staff or with a professional management company employing experienced claims handlers, lawyers, underwriting specialists, etc. A further special feature of Protection and Indemnity Clubs’ (P&I Clubs) cover is that, except for pollution liabilities, there is no upper limit to the level of indemnity provided. Furthermore, Protection and Indemnity Clubs (P&I Clubs) reimburse (indemnify) their members against claims paid by the members to third parties, Protection and Indemnity Clubs (P&I Clubs) do not take over the claim, as do insurance companies. The aforementioned situation has prompted obstacles in the United States which has laws permitting direct action by the claimant against the insurers if the defendant is considered financially weak or un-contactable.
As Protection and Indemnity Clubs (P&I Clubs) are not insurance companies, action against them in this context has hit obstacles. The world’s largest Protection and Indemnity Clubs (P&I Clubs) operate within a framework called the International Group Agreement (IGA). Under the International Group Agreement (IGA), each club is responsible for paying its claims up to a maximum per claim of $1.2 million which is referred to as the club retention. Protection and Indemnity Clubs (P&I Clubs) are free to re-insure part of their retention should they so wish. Any claim above $1.2 million is then pooled with the other members of the International Group Agreement (IGA) thus spreading the risk of such claims over a very large part of the international shipping industry. Due to the size of the International Group Agreement (IGA), it can place very advantageous market re-insurance for the pooled claims. In the event of a claim surpassing the upper limit of market re-insurance, the cost would fall back on the clubs, however the unlimited liability principle remains in place.
Protection and Indemnity Club (P&I Club) Calls
The Protection and Indemnity Clubs (P&I Clubs) evaluate their premium income requirements (calls) by using criteria broadly similar to those of hull insurers. Protection and Indemnity Clubs (P&I Clubs) analyze the type and size of the ship, the quality of the ownership and management, crew nationality, anticipated trading pattern, and the claims record over previous years. Since there is no limit to the liability based on value, the rating is more closely related to the type of risk envisaged. For example, a higher rate would apply if the ship intends to carry general cargo, with a higher risk of cargo claims, as compared to operating in the bulk trades. Similar to hull insurance, the shipowner will bear a deductible for every claim and the size of the deductible will be taken into consideration in fixing the call rate.
The Protection and Indemnity Clubs’ (P&I Clubs) Call Rate is normally expressed as so many dollars or cents per gross ton for the ship in question. Commonly, claims settlements are spread over a substantial time, so there is no need for the clubs to be put fully in funds at the outset. Most Protection and Indemnity Clubs’ (P&I Clubs) attempt to support members’ cash flow positions by levying an Advance Call for a limited proportion of the estimated total requirement for the year in question. Consequently, Supplementary Calls relating to the year will be made at a later stage. The size and timing of Supplementary Calls will be a matter for the Club Directors to decide as will the length of time policy years remain open. Commonly, if a ship is sold, the Protection and Indemnity Club (P&I Club) offer the shipowner a once-off Release Call relating to that ship so that the shipowner can tidy up his books without the risk of Supplementary Calls being made many years after the ship has been disposed of.
Practically all Protection and Indemnity Club (P&I Club) Policy years start on 20th February, a curiosity which dates from the time that ice was supposed to have melted to allow trading into the Baltic Sea to recommence. There is competition between the Protection and Indemnity Clubs (P&I Clubs) for membership, the larger the club the greater the economies of scale in management and the bargaining position for re-insurance. This has led to periods when some Protection and Indemnity Clubs (P&I Clubs) cut their rates to attract more business. Under the mutual system, this practice is only of short term benefit to shipowners as the other mutual members will be obliged to make up any uncovered losses through Supplementary Calls for unclosed years. Protection and Indemnity Clubs (P&I Clubs) that are members of the International Group Agreement (IGA) have developed a system to discourage a member from switching Clubs to get a better deal or to eliminate bad claims from shipowners’ fleet which is called Record Dumping.
Protection and Indemnity Club (P&I Club) Management
Protection and Indemnity Clubs (P&I Clubs) compete effectively in the quality of service offered to their members. Many Protection and Indemnity Clubs (P&I Clubs) are either managed directly or through managing agents in London. All Protection and Indemnity Clubs (P&I Clubs) have accredited correspondents at ports throughout the world staffed by experts who know their areas and can provide back-up practical and legal advice whenever a ship is in trouble.
Usually, Club Guarantees can be arranged very quickly if a ship is threatened with arrest. Protection and Indemnity Club (P&I Club) Managements are also able to support shipowners on a consultancy basis in drafting documentation such as Bills of Lading (B/L), passenger tickets, crew agreements, Letters of Indemnity (LOI) etc. General advice to club members is often contained in Club circular letters, and most ship managers arrange to distribute copies to ships in their fleet. Therefore, Protection and Indemnity Club (P&I Club) Managements can in effect become extensions of the shipowners’ office. Another way in which Protection and Indemnity Clubs (P&I Clubs) can compete with each other is in the Accuracy and Reliability of their underwriting forecasts, avoiding unexpectedly heavy Supplementary Calls.
Joining a Protection and Indemnity Club (P&I Club)
If a shipowner wants to enter his ships with a Protection and Indemnity Club (P&I Club), the shipowner must first apply to the Club for membership. Club application can either be done through a broker or by direct contact. The Protection and Indemnity Club (P&I Club) Management will require the applicant to provide full details of the ship in question. In some cases, Protection and Indemnity Club (P&I Club) Management will instruct an experienced nautical surveyor to carry out a condition survey. This condition survey goes beyond a classification survey since the Protection and Indemnity Club (P&I Club) Surveyor is specifically seeking to satisfy himself about the sort of risks that the Protection and Indemnity Club (P&I Club) will be asked to underwrite. Condition Surveyor will be looking for proper qualification of crew and satisfactory condition of cargo spaces. Similarly, whilst preserving the right to inspect a member’s ship at any time, the Protection and Indemnity Club (P&I Club) may well want to hold a full survey of a ship, even though the ship has not changed hands, when the ship reaches an age of 10 years, and thereafter at regular intervals. The gaps between which depend upon the findings of the previous survey. When the ship is accepted by the Protection and Indemnity Club (P&I Club) an Entry Certificate will be provided setting out the main details of the cover, call rate, deductible, etc. Similar to the hull insurance, the shipowner will appear as principal assured, with the ship managers, if ship managers are a separate entity, appearing as a joint co-assured.
Principal Risks Covered by Protection and Indemnity Club (P&I Club)
1- Crew Members:
Illness, injury, or death of crew members, including costs associated with replacing crew members and deviation from route to receive medical assistance.
2- Passengers and Others:
Illness, injury, or death of passengers and other persons connected with the ship such as stevedores. Passengers’ luggage are also covered. In these days of exorbitant compensation awards following marine accidents, particularly by the United States Courts, these first two sections of the cover are clearly of great importance. Costs associated with stowaways can also be covered.
Collision liabilities such as the one fourth Third Party liability arising out of the London ITC Hull Policy Clauses. In addition to collision claims the Protection and Indemnity Club (P&I Club) also provide cover for claims of non-contact damage, such as wash damage, to other ships.
4- Fixed and Floating Objects:
Liabilities incurred in respect of damage done to Fixed and Floating Objects (FFO) such as buoys, jetties, pipelines, etc. Cover is also offered in respect of removal of wreckage following a marine casualty.
Subject to an upper limit, costs and liabilities arising out of environmental pollution are recoverable from the Protection and Indemnity Club (P&I Club.
Liabilities in respect of cargo loss, shortage, or damage provided such cargo is carried under a Bill of Lading (B/L) comprising approved conditions. The Protection and Indemnity Clubs (P&I Clubs) also lay down specific and detailed provisions relating to cargo liabilities and the delivery of cargo against proper documentation.
7- General Average (GA)
The Protection and Indemnity Clubs (P&I Clubs) will cover for General Average (GA) contributions unrecoverable from cargo and other interests where failure to obtain contributions resulted from a breach of contract on the part of the carrier.
Fines and other penalties imposed by authorities against the ship, including confiscation, technical offenses can be recovered from the Protection and Indemnity Clubs (P&I Clubs) subject to certain provisos.
Shipowners’ liabilities for deviation from the projected route to pick up stores, bunkers, change crew, etc. can be covered by the Protection and Indemnity Club (P&I Club) provided notice is given and additional premium, if required, is paid.
10- Risks Incidental to Ship Owning:
Protection and Indemnity Clubs (P&I Clubs) offer cover under an Omnibus Rule for any other expenditure which has not been specifically allowed for in any of the printed rules, strictly at the Club Directors’ discretion.
Handling of Protection and Indemnity Club (P&I Club) Claims
Immediate notification to the Protection and Indemnity Club (P&I Club) of claims or potential claims, full co-operation with Protection and Indemnity Club (P&I Club), and disclosure of all relevant facts by the assured is essential. In contrast to hull claims, where only two parties are concerned shipowners and underwriters, Protection and Indemnity Club (P&I Club) claims involve three or more parties with shipowners and underwriters being on the same side. The processing of the Protection and Indemnity Club (P&I Club) claim is characterized by close consultation between the shipowner and his club when the merits of each claim are assessed and tactics agreed.
Depending upon individual cases, a settlement may be negotiated with the claimant either by the shipowner or his manager or by the Protection and Indemnity Club’s (P&I Club) claims handling staff. Alternatively, the claim may be resisted in which event litigation may follow. Provided the Protection and Indemnity Club (P&I Club) agrees to support the member the legal costs will be paid by the Protection and Indemnity Club (P&I Club). Customarily, minor routine claims are dealt with by the claims handling staff in the Protection and Indemnity Club (P&I Club) management office, but the more important cases, and those where principles are at stake, will be referred to the Protection and Indemnity Club (P&I Club) Directors at one of their periodic meetings. Indeed, any claim can be referred to the Directors if a member so wishes. Thus it is a group of fellow shipowners, not insurance people, who decide on the nature of the mutual cover to be provided by the Protection and Indemnity Club (P&I Club) in the final analysis.
Pollution is a significant area of Protection and Indemnity Club (P&I Club) activity. Pollution does not only mean the major ship incidents but also the accidental spillage of bunker fuel, the discharge of sewage, or the careless disposal of galley garbage. Pollution liability is the one area where the Protection and Indemnity Club’s (P&I Club) cover is not unlimited. Two international conventions were placed namely the International Convention on Civil Liability for Oil Pollution Damage (1969 Civil Liability Convention) and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (1971 Fund Convention). These conventions were subsequently updated to provide a satisfactory insurance framework for compensating victims of marine pollution by tankers. These conventions entered force in 1975 and 1978 respectively. From the Protection and Indemnity Club’s (P&I Club) position, the principal element that initially developed from this framework was the Tanker Owners’ Voluntary Agreement concerning Liability for Oil Pollution (TOVALOP).
In 1969, TOVALOP was introduced and tankers were entered into the TOVALOP scheme through their respective Protection and Indemnity Clubs (P&I Clubs) which assumed the responsibility for underwriting the coverage limit and for providing necessary documentary evidence of cover. There was a separate agreement between oil companies Contract Regarding a Supplement to Tanker Liability for Oil Pollution (CRISTAL) which was designed to provide a further voluntary layer of compensation above that provided by TOVALOP. Tanker Owners’ Voluntary Agreement concerning Liability for Oil Pollution (TOVALOP) and Contract Regarding a Supplement to Tanker Liability for Oil Pollution (CRISTAL) were discontinued on the introduction of the CLC and the Fund Convention, these were all based on the premise that the costs resulting from a major oil spill should be shared between the shipowner and the cargo owner (oil company). There is still a notable portion of the world’s tankers directly or indirectly owned by the oil companies and most of the balance, the independent tanker fleets only exist because the oil companies need them. Unlike dry bulk carriers, tankers are locked into one commodity, not being able to switch to other cargoes.
In 1992, the International Oil Pollution Compensation Funds (IOPC) was introduced. The conventions apply to persistent oil and exclude light oils such as gasoline, light diesel, or kerosene. Those conventions only apply to tankers and not to bunkers carried on dry cargo ships. Under the 1992 convention compensation is payable for expenses incurred in taking successful measures against a grave and imminent threat of pollution as well as dealing with actual polluting incidents. The conventions apply a strict liability regime against the tanker owner who can avoid liability only if it can prove that the pollution was directly due to the act or negligence of another party such as war, sabotage, or negligence of authorities in maintaining navigational aids. If the incident occurs as a result of the shipowner’s actual recklessness or intent the limitation of liability is forfeit. All tankers carrying more than 2,000 metric tonnes of persistent oil as cargo must carry a certificate on board attesting that appropriate insurance cover is carried.
The USA is not a signatory to the Conventions. Instead, the USA relies on its enactment of The Oil Pollution Act (OPA1990), which achieves the same ends although with similar although potentially higher penalties under some circumstances. Ships entering US waters must carry a Certificate of Financial Responsibility (COFRs) issued by their insurers. The IMO International Convention for the Prevention of Pollution from Ships (MARPOL) 1973 and its protocol of 1978 cover regulations and liability relating to spillage of other pollutants including garbage and sewage.
Cargo Liabilities of a Ship
In 1924, following an international convention in Brussels, a framework was agreed for the distribution of liabilities between shipowners and shippers. The convention was called the Hague Rules which subsequently received worldwide approval, being incorporated into most national legal rules (Carriage of Goods by Sea Acts). In 1968, an amended version called the Hague-Visby Rules covered developments in the industry, particularly containerization, rather than any change in fundamental principle.
Most Bills of Lading (B/L) used in international trade incorporate either Hague or Hague-Visby Rules. The conception behind both the Hague and Hague-Visby affirms that misfortune risks to cargo should be borne by the cargo owner, whilst misfortune risks to the ship should be borne by the shipowner. As far as human error risks are concerned, a compromise was reached in the rules whereby responsibility for the ship before the commencement of the voyage lay with the shipowner since the shipowner had some direct control over the situation, while risks of events during the voyage would be borne by cargo. This ancient concept is under some pressure today due to the efficiency of modern communications whereby a ship can be in virtual constant touch with her owners. Therefore, the Hague-Visby Rules as incorporated for example in the current UK Carriage of Goods by Sea Act (1971) oblige the shipowner to exercise due diligence at the beginning of the voyage to make the ship seaworthy, properly to man, equip and supply the ship, and to make the cargo spaces fit for the carriage of the intended cargo.
There is an absolute onus on the shipowner properly and carefully to load, handle, stow, carry, keep, care for, and discharge the cargo. Nevertheless, provided due diligence has been exercised (the burden of proof in this respect resting with the shipowner, the establishment of which is becoming increasingly difficult in today’s legal climate), a wide range of defenses becomes available under the Rules. These include error in navigation or management of the ship, perils of the sea, fire, act of God, war, seizure, quarantine, strikes, riots, inherent vice, insufficiency of packing or marking of goods, latent defects (not discoverable by due diligence) and any other cause without the actual fault or privity of the carrier.
The Hague-Visby Rules’ further part lays down a monetary limit of carrier’s liability per package or unit. This is expressed in Special Drawing Rights (SDRs) and the limit now stands at 666.67 SDRs per package or unit or 2 SDRs per kg. whichever is greater. The Hague and Hague-Visby Rules allocates risks sensibly between both cargo insurers and shipowners’ liability insurers (Protection and Indemnity Clubs – P&I Clubs). The shipowner is declaring to the cargo interests through the Hague and Hague-Visby Rules is that here is the point where my insurance underwriters’ cover stops so your insurers should cover you from this same point onwards. Furthermore, cargo owners’ insurers know their clients’ goods and can assess the risk well enough to charge competitive premiums, whereas if the shipowner had to carry insurance to cover all the different kinds of cargo that may be loaded, then the premium, which would have to be recovered via the freight rate, would be far higher than the shipper would otherwise have to pay.
Consequently, the practice is both fair and economic. Nevertheless, in 1978 a new cargo liability convention regime was adopted by UNCTAD called the Hamburg Rules. Hamburg Rules provision for a shift of liability to the benefit of cargo interests. The traditional defenses in the Hague/Hague-Visby Rules such as navigational error, are removed in favor of a provision to the effect that the carrier can only avoid liability if the carrier can prove that he took all reasonable measures to avoid the occurrence. Amongst other provisions, higher limits of liability are included and the carrier becomes liable for delayed delivery. The Hamburg Rules have come into force in a few countries that have enacted them.
The Hague and Hague-Visby Rules apply to cargo loaded in the ratifying country, Hamburg Rules apply to cargo loaded or discharged. Therefore, a particular Bill of Lading (B/L) might be subject to both conventions leading to jurisdiction shopping by a claimant. Usually, the InterClub Agreement clause is inserted into Time Charter-parties which states that liability for cargo claims is to be shared between the shipowner and the time charterer. The exact proportion to be borne by each party depending upon the circumstances giving rise to the claim.
Protection and Indemnity Club (P&I Club) and Narcotics
Narcotics is another area in which the Protection and Indemnity Clubs (P&I Clubs) have been active on their members’ behalf. The provisions of the United States Anti Drug Abuse Act placed very serious responsibilities onto shipowners trading to the United States, and the Protection and Indemnity Clubs (P&I Clubs) were quick to respond with advice and support for their members. Shipping companies were urged by their Protection and Indemnity Clubs (P&I Clubs) to enter into a Carrier Initiative Agreement with the United States Customs, while Club Rules were promptly re-drafted to ensure that adequate cover was available for all members. This is an excellent example of the flexibility inherent in the mutual system, where insured and insurer are the same and share a common interest.
Protection and Indemnity Club (P&I Club) and Defence
Many Protection and Indemnity Clubs (P&I Clubs) offer defense cover to shipowners as a separate class of insurance running parallel to Protection and Indemnity (P&I) Cover. Defense Cover, sometimes termed Freight, Demurrage and Defence, is in respect of legal costs incurred by the shipowner in defending claims or bringing actions against other parties. Defense Cover is arranged on a mutual basis and the same principles of mutuality apply. Legal costs arising out of Protection and Indemnity (P&I) Claims are paid by the Protection and Indemnity Club (P&I Club) in any case, but Defence Cover as a separate entity comes into play in commercial situations where Protection and Indemnity (P&I) Rules do not apply. But, there are sometimes grey areas in which Protection and Indemnity Club (P&I Club) support is usually available.
Protection and Indemnity Club (P&I Club) Defence Cover can be applied to charter-party disputes, claims against contractors such as stevedores or ship repairers, claims against shipbuilders for ships failing to meet specifications, and many others. When handling Defense Claims, the Protection and Indemnity Clubs (P&I Clubs) reserve the right to appoint, or at any rate approve, the appointment of lawyers and other experts acting on behalf of the member. Defense Claims are almost invariably considered individually by the Club Board of Directors at each stage of the case as it progresses.
Protection and Indemnity Club (P&I Club) and Through Transport
Containership operators can arrange insurance for Through Transport liabilities again on a mutual basis. The leader in this field is the Through Transport Mutual Insurance Association (T.T. Club) which is jointly operated by three of the major London managed Protection and Indemnity Clubs (P&I Clubs). Through Transport Cover incorporates risks arising out of the movement of cargo from inland depots by rail or road to the seaport, operations at the terminals, and likewise inland haulage to the final destination at the other end of the route. Through Transport Cover extends to loss of or damage to the containers themselves (Container Shell Cover) also trailers and similar equipment and personal injury risks at container freight stations during container stuffing and un-stuffing. Through Transport Cover is available not only to containership operators but also to Non-Vessel Operating Carriers (NVOCs) who operate on a slot-chartering basis.
Protection and Indemnity Club (P&I Club) and Strikes
There are certain mutual associations, some of which are linked to Protection and Indemnity Clubs (P&I Clubs), that provide shipowners with Strike Indemnity Insurance. Strike Cover incorporates either crew strikes or shore (stevedores) strikes. The shipowner indicates a daily sum based on the ship’s normal operating costs which becomes the basis of the insurance indemnity and pays a premium calculated on that daily sum. If a strike takes place and his ship is delayed, the shipowner submits a claim and if approved receives payment per the daily entered sum. For shore strikes the Protection and Indemnity Club (P&I Club) obtains a report from their local correspondent at the port in question confirming the strike.
Protection and Indemnity Club (P&I Club) and Loss of Hire
Loss of Hire Cover is more closely akin to Hull Insurance. Usually, Loss of Hire Cover is placed in the insurance market. Nevertheless, as with Strike Cover, a daily indemnity is agreed upon, reasonably equivalent to the actual charter hire rate, and a premium is calculated accordingly. There is an excess, or deductible and an agreed maximum number of days lost per claim and in all over the policy year. For instance, the Loss of Hire Cove Policy might read 15/90/180 which indicates no claim for the first 15 days, then up to 90 days any one accident and 180 days in all during the year. Claims are only paid for time lost as a direct result of a marine accident as defined in the Hull Policy conditions, so that a report from the Salvage Association or a similar organization is required to support the claim.