Protection and Indemnity Insurance

First & Second Quarter, 2005

With the advent of new Canadian Marine Liability Act in 2001, we thought it would be in order to discuss in some detail the nature and function of both Protections and Indemnity Insurance and Protection and Indemnity Clubs.

History of P and I Insurance

P & I Insurance is the traditional name of the insurance of third party liabilities and certain contractual liabilities which arise in connection with the operation of ships.

The forerunners of P and I Clubs were Mutual Hull Clubs which were first formed at the beginning of the 18^th Century by Shipowners in England to insure hull risks on a non-profit making basis, so as to avoid paying the high premiums charged by the market insurers at that time.

The first P and I Clubs were formed in England in 1855.

The new P and I Clubs were mutual Clubs, that is to say that their Members agreed to share each other's liabilities on a non-profit making basis. In this field, the mutual format proved to be particularly suitable. The Clubs started their activities by insuring the one/fourth collision liability, damage to fixed objects (such as jetties and quays) excluded from hull cover, and liability for death and personal injury. This cover was called Protection Insurance. Shipowners at that time felt no need for more extensive cover because the remaining three/fourths of the collision liability was carried by the hull underwriters and liability for cargo could be avoided by appropriate exemption clauses in bills of lading. However, in 1870, the owners of a ship which was lost off the Cape of Good Hope, the "WESTENHOPE", was held liable for the loss of cargo because it had been carried beyond its destination and the exemption clauses in the bill of lading did not cover such an eventuality. As a result, in 1874, one of the Clubs, The North of England Association, started to insure liability for loss of or damage to cargo. Such insurance was called Indemnity Insurance and was soon adopted by the other Clubs. Thereafter, the Clubs became known as Mutual Protection and Indemnity Clubs.

Over the years the insurance offered by P&I Clubs has been extended to cover third party risks which have been imposed on Shipowners by new legislation for which frequently no insurance was offered by the market. The cover presently afforded by P and I Clubs is extremely comprehensive. A brief summary of the types of P&I liability risks presently covered by Clubs are: cargo, crew, passenger, other personal injury and death, collision, damage to fixed and floating objects, pollution, miscellaneous liabilities ie stowaways and crew deserters, and bail.

Approximately 90% of the tonnage of the world's ocean going merchant fleet, flying the flags of some 80 different countries, is entered in the International Group of P & I Clubs.

Management of Clubs

The Member of a P and I Club are the owners, charterers, managers and operators of ships who insure with it. Each Club is controlled by a Board of Directors who represent, and are appointed by the Members. The Directors comprise a cross-section of the Members and reflect the differing flags, types of ship, trades and sizes of the Club's fleets.

The Board's responsibilities include the formation of Club policy in relation to cover, calls, claims and investment of Club funds, and matters relating to the general conduct of the Club's business.

The policies of the Board are implemented by the Managers, who are responsible for the day-to-day conduct of the Club's business in accordance with the Board's instructions. The Managers are either employees of the Club or are separate legal entities formed as companies or partnerships.

Club Cover

Each club has its own set of Rules. The Rules, which are subject to the Memorandum and Articles of Association of the Club, contain the terms upon which the Club conducts its business and the scope of P and I risks that it covers. The cover is constantly changing and developing to meet the needs and requirements of Members.

Although application of the Rules in individual cases may vary, depending on the attitude of the Managers and Directors of the Club concerned, the Clubs cover most of a shipowners' legal liabilities and statutory obligations to third parties.

The Policy Years of the Clubs commence at noon GMT on the 20^th of February each year.

One of the most important aspects of the insurance offered by the Clubs is the very high limit of liability, currently at US$500 million, any one occurrence, any one vessel. The Clubs are able to offer such cover because of their participation in the Pool and Reinsurance arrangements noted below.

The Mutual Call System

Members contribute in respect of each Policy year only towards the total amount required to meet claims and expenses in that year. The system by which a member contributes to his P and I Club is as follows.

Before the beginning of each Policy year each Club decides the total income which it expects will be required for the next Policy year. The Managers are then responsible for determining the proportion of that income which each Member should pay for his vessels and this is expressed as an Advance Call per g.r.t.

Claims arising from liabilities covered by the Clubs may give rise to issues of technical or legal complexity: many parties may be involved; very substantial sums of money may be at stake; evidence may be required from a number of witnesses who may be in different parts of the world. Many claims, therefore, take several years to settle. Moreover, many claims are not notified to the Club or even known by a Member until after the end o f the Policy year.

The Pooling Agreement and Reinsurance Contract

It must be appreciated that the Clubs can be faced with claims for very substantial sums arising from any one casualty since they cover so many liabilities, several of which can be involved in one incident. For example, a vessel becoming a total loss can involve the Clubs in crew claims for loss of life and effects, repatriation, shipwreck, unemployment indemnity, liability to cargo, wreck removal and pollution.

During the 19^th Century there was a tremendous expansion in international trade. This led to a corresponding increase in the quality and value of merchant's fleets and their cargoes. The potential liabilities of shipowners were increased accordingly. The Clubs therefore sought ways to minimize the exposure of their Members. The result, in 1899, was the first Pooling agreement between the Clubs, whereby claims on one Club in excess of a certain figure were to be shared proportionately amongst all the Clubs. Thus any heavy claim made against a particular Club did not fall only on the Members of that Club, but beyond a certain figure was shared proportionately by Members of all Clubs which were parties to the agreement. In this way the fundamental principle of all insurance, the spreading or "pulverization" of risk, was carried an important stage further than could be achieved by any individual Club acting on its own.

The liability of parties to contribute under the Pooling Agreement is equally very large. There comes a point, however, at which the incidence of occasional large claims can destroy the balance of pooling which rests on the premise of sharing many medium size claims of a similar nature. Therefore, the Clubs have arranged to reinsure collectively a substantial slice of their liability for large claims in the Market under the Excess Loss Reinsurance Contract.

Settlement of Claims

Apart from the provision of cover for their Members' P and I risks, the Clubs' most important role is the handling and settlement of their Members' claims. Liabilities are incurred by Members throughout the world and claims which arise are subject to the laws of various different jurisdictions. This necessarily involves problems and uncertainties for the shipowners. The Clubs play a major role in reducing theses problems for their Members and settling claims on their behalf as quickly and as cheaply as possible.

A Member of a P and I Club receives advice and assistance from his Club as soon as any incident occurs which might give rise to a claim against him. For this purpose, each Club has established a worldwide network of correspondents, and advice and assistance is given to the owner by the Club or by its correspondent. If a particularly complicated problem arises, for example a case involving oil pollution or wreck removal, the Club often sends out one of its own experts (or an independent expert) to assist the Club's local correspondent and to resolve the problem on the spot.

Conclusion

As you can see from the above commentary, shipowners and operators are exposed to liabilities that are greater today than ever before. The object of a P and I Club is the sharing of those liabilities equitably among all Members of the Club. As there is no profit element, a Member contributes only toward the total amount required to meet the liabilities of all the Members of his Club and to the cost of its administration.

It is said that "the proof of the pudding is in the eating" and the advantage and benefit of Club insurance from the point of view of cost, cover and services are reflected in the fact that approximately 90-95 per cent of the world's ocean tonnage is entered with Clubs in the International Group.

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Ontario: Atlantic Marine Underwriters Inc.
Atlantic House
223 Kent Street West
Lindsay, Ontario B3K 3W6
Telephone: 705-878-9014 Fax: 705-878-4387

Maritimes: Atlantic Marine Underwriters (Maritimes) Inc.
2453 James Street, Suite 3
Halifax, Nova Scotia B4A 4J4
Telephone: 902-832-0425 Fax: 902-832-2159