PROTECTION & INDEMNITY INSURANCE Whereas Hull & Machinery insurance covers shipowners against loss of or damage to their own ship, Protection & Indemnity Insurance (P&I) protects the Owner for his / her liabilities to other parties arising out of the use of that ship. Protection and Indemnity Insurance has evolved over the past 150 years, ever since shipowners were first held to be liable for the losses suffered by third parties arising out of the operation of a vessel. Over 90% of the World s tonnage is now entered with a Protection and Indemnity Club (P&I Club), who are predominantly based in the United Kingdom, although there are major Clubs in Scandinavia, with one in America and another in Japan. Although these Clubs are based in the United Kingdom they cover vessels from all parts of the World. 16 of these P&I Clubs (which is the vast majority) are Members of the International Group of Clubs and operate within the terms of the International Group Agreement (IGA). The IGA principally governs the terms, under which one Club can quote to insure vessels for an Owner, who is already a Member of another Group Club. Effectively, this agreement prevents one Club undercutting the rates charged by the Owner s existing Club (the Holding Club). This agreement applies irrespective of whether the Owner wishes to transfer his / her existing vessels to another Club, or is purchasing new vessels that he / she wishes to place elsewhere. The main reason for this non- competition agreement is that all of the International Group Clubs operate a pooling arrangement amongst themselves for claims. The Group as a whole purchases re- insurance on behalf of all the Clubs to buy large amounts of re- insurance for the lowest cost. At present, the members of the Pool Club each bear their own claims up to a maximum of US$ 9 million. Claims in excess of the amount up to US$ 80 million are shared amongst the members of the Pool. The amount each Club contributes is based on a pre- agreed basis over 4 layers (i.e. 1 st layer US$ 21 million excess US$ 9 million 2 nd layer US$ 15 million excess US$ 30 million 3 rd layer US$ 15 million excess US$ 45 million 4 th layer US$ 20 million excess US$ 60 million). It is claims over US$ 80 million that fall under the Club s combined reinsurance programme. This is placed in International insurance markets of the highest caliber up to a limit of US$ 1.080 billion. This excess of loss reinsurance contract is placed in 2 layers US$ 500 million excess US$ 80 million and US$ 500 million excess US$ 580 million. Claims above US$ 1.080 billion would fall back onto individual members by way of an overspill call. The Group Clubs currently offer unlimited cover for non- oil pollution claims. Oil pollution claims are subject to a limit of US$ 500,000,000 each accident. The above structure is also shown on the Graph that follows:
Graph 3.3.1 Reinsurance Diagram for 2014 Source: www.igpandi.org Unlike nearly all other Insurers, P&I Clubs are Mutual organizations and are owned by Members. Any shipowner who is insured by a P&I Club would automatically be a Member of that Club. As P&I Clubs would have hundreds or even thousands of Members, the strategic control of the Club is left with a board of Directors, who are also Members of the Club and elected by the Club Membership as a whole. Day to day running of the Club including underwriting and claims handling is carried out by Club Managers who are the normal point of contact for Members.
All Members of a particular Club contribute to a central fund, which is handled by the Managers appointed by the members. If further funds are required, the members are circulated and charged a supplementary call, conversely if there is a surplus a return is made. The contributions to the fund are calculated on size, type of vessel and the liabilities, which it brings to the Club. The initial contribution is called the Advance or Initial Call, which is payable in instalments during the first policy year. Supplementary calls are made (as required) over a period of 2 to 3 years, after which the financial year is closed. To enable the Clubs to calculate annual accounts for all its members, it is essential that all members have the same renewal date, traditionally 20 th February. All Clubs use this same date and it is only in exceptional circumstances that a member of an Association can change his / her terms or change Club at any other date. Club Cover and Services As the Clubs share their pooling and re- insurance arrangements the cover they provide is effectively identical. The basic areas of cover are as follows: Liabilities in respect of injury, illness & death of seamen and persons other than seamen (e.g. passengers and stevedores) Repatriation and Substitution expenses Wages and shipwreck unemployment indemnity Diversion expenses and expenses arising from landing stowaways, refugees, deserters etc. Life salvage expenses to third parties for saving or attempting to save people on member s vessel. Loss of and damage to the effects of seamen and others. Liabilities arising from collision with other vessels. Liabilities for loss or damage to property. Pollution liabilities limited to US$ 500 million. Liability under towage contracts etc. Liabilities arising under indemnities and contracts for hire of cranes and / or stevedores etc. Wreck liabilities. Quarantine expenses. Liabilities in respect of cargo and property on board member s vessel Ship s and cargo s proportion of General Average where not recoverable elsewhere. Fines. Expenses from enquiries and criminal proceedings. General Labour and Legal Costs. In addition to paying claims the Clubs offer additional services including the following: Network of correspondents Worldwide to provide local assistance. Assistance in disputes between members and other third parties. Issuance of guarantees to third parties when a member is held liable for damage to cargo, property and other vessels. Advice on avoidance of losses.
Circulars issued to members warning of particular problems relating to a specific cargo or area. Assistance, where possible, in obtaining a member s Freight or Demurrage from a third party. Defence costs in disputes with third parties. Full collision liabilities. Provision of certificates As P&I Clubs exist for the benefit of their Members, all of whom operate vessels, the Clubs are able to cover claims that are not specifically covered under the Rules of the Club, subject to specific agreement by the Club Directors. This is known as the Omnibus Rule. International Group Agreement (I.G.A.) Principal Points Pure Charter Members (no Owned vessels in a Club) not subject to I.G.A. Shipowner can only move vessel from one Club to another at 20 February. Where an Owner has vessels entered in a Group Club, any additional vessels taken on can be entered elsewhere, but the new Club cannot improve the holding Club s terms for those vessels. If an Owner moves existing vessels from one Club to another at 20 February the new Club cannot improve on the renewal terms from the old Club. Requirement to follow old Club terms lasts up to 12 months. Initial Cost savings (if any) comes from Club Supplementary Call Performance. Alternatives to the International Group These Clubs form their own Mutual Membership and Reinsurance protection arrangements, enabling them to offer Protection and Indemnity coverage for limited amounts in direct competition with Pool Clubs: 1. BRITISH MARINE 2. CEYLON P&I CLUB 3. CHARTERERS P&I CLUB 4. CHARTERAMA BV 5. CHINA P&I CLUB 6. EAGLE OCEAN MARINE 7. HANSEATIC P&I 8. HELLENIC P&I MUTUAL 9. INGOSSTRAKH 10. NORWEGIAN HULL CLUB 11. KOREA P&I CLUB 12. HYDOR 13. LODESTAR MARINE LTD 14. NAVIGATORS P&I 15. OSPREY UNDERWRITING AGENCY 16. RAETSMARINE BV 17. ROSGOSSTRAKH LTD Differences in the Clubs We mentioned above that the Group Clubs have a mutual anti- competition strategy among them. However, there are certain differences among them, that can be summarised to the following areas:
Laid up returns o Amount of return o Notice Period o Survey on re- commencement of trading Surveys o Pre- entry Surveys o Cost of steel surveys o Cost of reefer cargoes Premium o Instalment dates and premium splits o Cost of FD&D Cover o Acceptable loss ratios o Cost of additional covers (eg. Charterers damage to hull) Claims servicing o Quality of service o Network of correspondents o Attitudes to guarantees / security The Nairobi Wreck Removal Convention The Nairobi Wreck Removal Convention 2007 (the Convention ) permits a Party State to take measures to remove a wreck that is a hazard to navigation or the marine environment 1. The Convention will enter into force twelve months after ratification by ten states. So far, Bulgaria, Germany, India, Iran, Malaysia, Morocco, Nigeria, Palau and the UK have ratified the Convention and on 14 April 2014, Denmark became the tenth. The Convention will therefore enter into force on 14 April 2015. The Convention permits a Party State to remove a wreck that is a hazard to navigation or the marine environment. The Master of the Vessel or the owners/ operators must report the marine casualty in accordance with article 5 to the State Party. They will then use the criteria at article 6 to determine whether the wreck poses a hazard to navigation or the marine environment. If the Party State concludes that the wreck poses a hazard, article 9 of the Convention places the onus on the registered owner to remove it. While the owner is at liberty to engage salvors, the Party State may dictate conditions for its removal but only to ensure the safety and the protection of the marine environment. The Party State may intervene but only to ensure the protection of the marine environment, to arrange removal where owners do not respond or to arrange immediate action in an emergency. All related costs will be recoverable from the owner. Article 10 of the Convention holds the owner liable for the cost of locating, marking and removing the wreck without specific reference to any limitation to these costs save that such costs must be reasonable and proportional to the hazard faced. Liability is excluded in the event of an act of war, or the usual IMO description of hostile activity or through force majeure described as a natural phenomenon of an exceptional, inevitable and irresistible character. Incidents where the maritime casualty is intentionally caused by a third party or the failure of a government to properly maintain navigational routes are also excluded. The onus of proof lies with the owner/insurer/guaranteeing party. 1 British Marine, (2014), "Nairobi Wreck Removal Convention 2007 to Enter into Force on 14 April 2015", June, 19.
Under article 10 the owner may limit liability pursuant to any applicable limitation regime. This will not be applicable in jurisdictions that have ratified and incorporated into law the International Convention on Limitation of Liability for Maritime Claims, 1976, as amended (more recently the London Protocol with increased limits) which specifically excludes the right to limit in respect of wrecks. As per article 11, liabilities that would otherwise be in conflict with other IMO Conventions, such as CLC, HNS, Nuclear Damage and Bunker Oil Pollution are excluded under the Wreck Convention. Article 12, requires the owner of a ship of 300 GT and above flying the flag of a Party State to maintain insurance or other acceptable forms of financial security to cover liability under the Convention. The value is to be determined by the applicable legal limitation regime but in any event not to exceed the limits determined by the 1976 LLMC. Each ship is to carry a certificate, which complies with the requirements of article 2 of the LLMC. The Convention insists that no ship registered in a Party State is permitted to operate unless it has a certificate and that each Party State is to ensure that any ship, whether of a Party State or not, on entering its jurisdiction has such a certificate as evidence of insurance or other financial security. Ships not registered in a signatory Party State may obtain certificates from any of the Party States. Under article 12, a Party State can pursue a claim for costs arising out of the provisions of the Convention directly against the insurer or guarantor stated in the certificate. That party may invoke the same defences and / or seek to limit liability that the Owner may invoke except the defence of bankruptcy of the Owner or that the cover as evidenced by the certificate has in some way been prejudiced. However, an Insurer is permitted to defend his / her position where it can be shown that the maritime casualty was caused by the wilful misconduct of the Owner. In conclusion, the Convention could make Owners trading within the territorial waters of the Party States financially liable in the event of a wreck removal. Owners would be well advised to ensure that their insurance policy for 2015/16 covers the potential costs under the Convention further to the usual P&I wreck removal provisions. Alternatively, owners should arrange other financial security to cover the costs of wreck removal. With the rising cost of wreck removal operations all Clubs continue to be proactive in assuming control of any wreck removal from the outset. P&I Clubs engage with the authorities of any Party State but most importantly it is the Clubs responsibility to keep them advised of every step so that they have confidence in Clubs actions thus minimizing or negating any interference from the authorities, which is likely to increase.