Protection and indemnity insurance

Protection and indemnity insurance, more commonly known as "P&I" insurance, is a form of mutual maritime insurance provided by a P&I Club.[1] Whereas a marine insurance company provides "hull and machinery" cover for shipowners, and cargo cover for cargo owners, a P&I Club provides cover for open-ended risks that traditional insurers are reluctant to insure. Typical P&I cover includes: a carrier's third-party risks for damage caused to cargo during carriage;[2] war risks;[3] and risks of environmental damage such as oil spills and pollution. In the UK, both traditional underwriters and P&I clubs are subject to the Marine Insurance Act 1906.

A P&I Club is a mutual insurance association that provides risk pooling, information and representation for its members. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members. Originally, P&I Club members were typically shipowners, ship operators or demise charterers, but more recently freight forwarders and warehouse operators have been able to join.

Whereas the assured pays a premium to an underwriter for cover which lasts for a particular time (say, a year, or a voyage), a P&I Club member instead pays a "call". This is a sum of money that is put into the Club's pool, a kind of "kitty". If, at the end of the year, there are still funds in the pool, each member will pay a reduced call the following year; but if the Club has made a major payout (say, after an oil spillage) club members will immediately have to pay a further call to replenish the pool.

There is an International Group of P&I Clubs based at Peek House, London.[4] These Clubs cooperate to provide funds in the event of huge claims using a complex system to determine liability.

Historical background

The ancient Greeks created the practice of General Average in Rhodos island, and ancient Romans could be said to have had a rudimentary form of marine insurance.[5]

However, a novel type of insurance that one would recognise as modern emerged in the London "coffee shops" in the 19th century. Shipowners and charterers would seek underwriters to insure their ships, and cargo owners (whether shippers, importers or consignees) would insure their cargoes. Carriers soon realised that often they might themselves be at fault should cargo be lost or damaged at sea, and they sought to take out third-party indemnity insurance in respect of cargo liability. Underwriters evinced an unwillingness to take on such open-ended risks, so shipowners responded by forming their own mutual P&I Clubs, acting as a shipowner's co-operative. An advantage was that a Club worked for the shipowners, thereby eliminating the underwriters' profit margins and making P&I Insurance significantly cheaper.[6]

In the second half of the 19th century, the number of claims greatly increased due to the number of passengers emigrating to North America and Australia. Shipowners became aware of their insurers' compensation limits, especially when it came to damages caused by ship collisions. While the UK Merchant Shipping Act 1854 had determined that, when evaluating insurance claims, the value of ships should be no less than £15 per ton, many ships had an actual lower market value and existing insurance policies did not cover this gap in liability. The compensation for collision damages also excluded a quarter of such damages. Existing hull insurance policies included damages to the insured ship and liability for the damages it had caused, while the maximum amount shipowners could recover after collisions was the ship's insured value. injured crew members might seek compensation from their employers. Later, the Fatal Accidents Act 1846 made it easier for passengers or their survivors to file claims. Also, injured crew members might seek compensation from their employers.

Perhaps the first protection association, the Shipowners' Mutual Protection Society, was formed in 1855. It was intended to compensate for loss of life, injuries and collisions that were excluded from marine insurance policies beyond the monetary limit of these policies. Similar associations were later formed within the United Kingdom, in Scandinavia, Japan and the United States.

In 1874, the risk of liability for cargo carried by the insured ship was added to the insurance cover provided by a P&I club. Cargo value had risen and cargo underwriters, encouraged by UK courts, filed more claims to recover their losses from shipowners. These claims were not covered by the current marine insurance class. After 1874, many clubs added a marine indemnity class to respond to these new claims. This class was later merged with the marine insurance class reserved for the original protection risks and the distinction between the two classes virtually disappeared.

After the Torrey Canyon grounding in 1967, covering the liabilities, costs and expenses of oil spills became an increasingly important aspect of P&I insurance.

P & I Clubs today

Relationship with Marine Insurance

Marine insurers offer insurance on measurable risks: hull and machinery insurance for shipowners, and cargo insurance for cargo owners. P&I clubs provide insurance for broader, indeterminate risks that marine insurers usually do not cover, such as third party risks. These risks include: a carrier’s liability to a cargo-owner for damage to cargo, a shipowner’s liability after a collision, environmental pollution and P&I war risk insurance, or legal liability due to acts of war affecting the ship.

Marine insurers are usually for-profit companies that charge customers a premium to fully cover ships and cargo in the time period when the policy applies. In contrast, a P&I club is run as a non-profit and the insurance is financed by “calls”. Club members contribute to the club’s common risk pool according to the Pooling Agreement's rules. If the risk pool cannot cover current claims, the club members will be asked to pay a further call. If the pool has a surplus, the club will ask for a lower call the following year or make a refund to members. Only shipowners with acceptable reputations are allowed to join a P&I club and any P&I club member who incurs reckless or avoidable losses to the club may be asked to leave.

Thus, marine cargo is generally covered twice by insurance standards. The shipper or cargo-owner will be covered by a marine insurer and the carrier or shipowner will be covered by the P&I club. If the cargo is lost or damaged, the cargo-owner needs to first make a claim against the shipowner. However, the shipowner may avoid liability if it did not cause the loss or if the Hague-Visby Rules grant exemption from liability. In that case, the cargo-owner will claim against its own insurance company. If the cargo-owner fails to claim first against the shipowner, but claims instead against its own insurance company, the insurer, having reimbursed its client, will through subrogation pursue the claim in its own right against the shipowner.

Exceptions

The following are the major exceptions to P&I coverage:

Modern developments

European Union Directive 2009/20/EC

The European Union Directive 2009/20/EC[9] was implemented in all 27 Member States by January 1, 2012. The Directive requires compulsory P&I to cover for EU and foreign ships in EU waters and ports. Foreign vessels that do not comply to the Directive may be expelled or refused entry into any EU port, although ships may be allowed time to comply before expulsion. As EU competence does not generally extend to penology, (see Re Tachographs (ECJ) 1979),[10][11][12] the Directive requires the Member States themselves to set penalties for any breach.

The Rotterdam Rules

The Rotterdam Rules are a set of rules designed to replace the Hamburg Rules and the outdated Hague-Visby Rules (both of which are International Conventions to impose duties upon a carrier of goods by sea). Should the Rotterdam Rules come into effect, they would cover not merely the sea voyage, but all parts of any contract of carriage with a sea leg. Thereafter, land carriers, warehouses, and freight forwarders would need P&I cover. This would inevitably lead to an increase in the scope and importance of P&I cover, and might diminish the prevalence of standard cargo insurance.

Non-mutual P&I cover

Conventional P&I cover has been taken up primarily by shipowners and demise charterers, but a new development is P&I cover for time- and voyage-charterers. Since these charterers may have no long-term relationship with any vessel, and may well have periods when they are not chartering at all, the mutual model based on common-pool sharing of liability is not necessarily ideal. Some non-mutual "charterers P&I clubs" have arisen [13] whereby a private company may act as broker to provide 3rd-party cover via underwriters, on payment of as conventional premium, rather than a P&I call. In addition to brokerage services, such a company may offer conventional "our man on the spot" P&I services.

P&I Clubs Worldwide

The following is a list of P&I Clubs around the world.

Bermuda

Japan

Norway

Singapore

Sweden

United Arab Emirates

United Kingdom

USA

South Korea

International Group of P&I Clubs

The International Group of P&I Club (based at Peek House, London) comprises 13 clubs, which provide P&I liability cover for approximately 90% of the world's ocean-going tonnage.[14]

See also

References

  1. ↑ The Mariner's Guide to Marine Insurance - P Anderson - 1999 - Nautical Institute - ISBN 1870077539
  2. ↑ Marine Cargo Insurance - John Dunt - 2009 - Informa - ISBN 9781843117636
  3. ↑ Marine War Risks - Michael D Miller - 1994 - Lloyds - ISBN 1850445168
  4. ↑ The Jackson Parton Miscellany - 2nd ed - 2012 page 77 - www.jacksonparton.com
  5. ↑ Trenerry, Charles Farley (1926). The Origin and Early History of Insurance: Including the Contract of Bottomry. The Lawbook Exchange, Ltd. ISBN 978-1-58477-932-2.
  6. ↑ Law of Marine Insurance - Susan Hodges -Cavendish Publishing - 2001 - ISBN 1-85941-227-0 - pp 323-326
  7. ↑ "Sze Hai Tong Bank Limited v Rambler Cycle Co. Limited (Singapore) [1959] UKPC 14 (22 June 1959)". bailii.org. Retrieved 14 December 2014.
  8. ↑ [1959] AC 576; [1959] 2 Lloyd's Rep. 114 (PC)
  9. ↑ "Directive 2009/20/EC of the European Parliament and of the Council of 23 April 2009 on the Insurance of Shipowners for Maritime Claims ("Insurance Directive")". 2009.
  10. ↑ Re Tachographs 1979 ECR 419
  11. ↑ "Court of Justice of the European Communities: English Legal System". Law Teacher.
  12. ↑ "The role and composition of the European Court of Justice, including Article 234 references".
  13. ↑ ..such as MECO's "Charterers' P&I Club"
  14. ↑ International Group of P&I Clubs. International Group of P&I Clubs http://www.igpandi.org/. Retrieved 2 September 2015. Missing or empty |title= (help)

Further reading

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