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Protection and indemnity insurance, commonly known as P&I, is a form of marine insurance provided by a P&I Club. A P&I Club is a mutual (i.e. co-operative) insurance association that provides cover for its members, who will typically be ship-owners, ship-operators or demise chatterers. Unlike a
marine insurance company, which is answerable to its shareholders, a P&I Club is the servant only of its members.
Both P&I Clubs and conventional marine insurers are governed by the provisions of the
Marine Insurance Act 1906. Marine insurers provide cover for known quantifiable risks, mainly Hull & Machinery insurance for ship-owners, and Cargo Insurance for cargo owners. By contrast, P&I Clubs provide insurance cover for broader indeterminate risks, such as third party liabilities that marine insurers are loath to cover. Third party risks include a carrier’s liability to a cargo-owner for damage to cargo, a ship’s liability after a collision, environmental pollution and
war risk insurance; (although some marine insurers are also prepared to cover war risks).
It follows that any given cargo may be insured twice: the shipper/cargo-owner will take out conventional cover, and the carrier will have P&I cover. If the cargo is lost or damaged, the cargo-owner should first make a cargo claim against the carrier; but the latter may avoid liability because either (i) he did not cause the loss, or (ii) the
Hague-Visby Rules grant exemption from liability. In such a case, the cargo owner will claim against his own insurer. If the cargo-owner fails to claim first against the carrier, but claims against his own insurer, the latter (having reimbursed their client) will, through subrogation, be able to pursue the claim in their own right against the carrier.
Marine insurers charge a premium, which guarantees to the assured full cover during the validity of the policy; but P&I insurance is financed not by premiums but by “calls”. Club members contribute to the club’s common pool, out of which claims are paid. If the pool is insufficient, the club members will be asked to pay a further call; but if the pool is in surplus, the Club will ask for a reduced call the following year, or may even make a refund to members. (Only ship operators with a sound reputation will be allowed to join a P&I club; and any P&I cub member who incurs reckless or avoidable losses to the club may be asked to leave)
Whereas a marine insurer will, on average, pay out £70 for every £100 received in premiums, a P&I Club seeks to run as a non-profit-making business. Curiously, the largest P&I Club, Norway’s Gard, manages to combine mutual P&I business with conventional marine insurance. Should the
Rotterdam Rules come into force, third-party liabilities will increase; and this may result in conventional insurers losing more and more business to P&I Clubs.
Growth of third party liabilities
Although marine insurance dates from the
Middle Ages, British ship-owners did not feel the need to purchase liability insurance until the 19th century when injured crew members began to seek compensation from their employers, and the
Fatal Accidents Act 1846 facilitated claims by passengers or their survivors. The likelihood of claims was greatly increased by the vast numbers of passengers who constituted the flood of emigrants to North America and Australia in the second half of the century. Ship-owners were also becoming increasingly aware of the inadequacy of the available insurance cover in respect of damage caused by their ships in collisions with other ships. The usual cover for claims by other ships and their cargo for collision damage excluded altogether one fourth of such damage and, more seriously, was limited in amount. (The maximum recovery under hull policies, including both damage to the insured ship and liability for the damage it had caused, was the insured value of the ship).
The first protection association, the Ship owners’ Mutual Protection Society, was formed in 1855. It was intended to cover liabilities for loss of life and personal injury and also the collision risks excluded from the current marine policies, particularly the excess above the limits in those policies. Similar associations were subsequently formed in various cities and towns within the
United Kingdom, and later in
Scandinavia,
Japan, and the
United States.
In 1874, the risk of liability for loss of or damage to cargo carried on board the insured ship was first added to the cover provided by a protection Club. The values of cargoes had risen and cargo underwriters, encouraged by the courts, had become keener on recovering their losses from ship-owners. After 1874 many Clubs added an indemnity class to provide the necessary cover. Subsequently, most of these separate classes were amalgamated with the class reserved for the original protection risks, and the distinction between the two classes virtually disappeared.
Following the grounding of the
Torrey Canyon in 1967, coverage for the liabilities, costs and expenses arising from
oil spills became an increasingly important aspect of P&I insurance.
Coverage today
More than 90% of the World's oceangoing tonnage is insured by the mutual P&I Clubs that are members of the International Group of P&I Clubs. These organizations are the successors of the associations founded in the 19th and early 20th centuries. The 13 P&I clubs are mainly situated in the U.K. but also in USA, Japan, Sweden, Norway and the Netherlands. The Clubs vary considerably in size and currently the largest club is the Norwegian based Gard. P&I Club coverage is generally as broad as the liabilities faced by a ship-owner
qua ship-owner. The following are the major exceptions to this rule.
Other insurance
Traditionally, one of the main reasons a claim was not covered by P&I insurance was that the managers of the Club thought it should be covered by other insurance that the ship-owner should have taken out. That usually meant hull insurance, which paid collision liabilities and, in some cases, liabilities for damage to fixed and floating objects ("FFO"), or war risks insurance.
Mutuality
Another reason a claim might not be covered, or at least not covered in full, is that the ship-owner had not taken certain steps to have limited his liability in order to protect the Club. The principal steps expected of ship-owners were making sure that the appropriate exculpatory language was inserted in bills of lading and passenger tickets. Today the legal requirements with which ship-owners are expected to comply include all the requirements of the flag state concerning marine safety and environmental protection. Another illustration of this principle is the rule that contractual liabilities (those assumed by the ship-owner as a matter of contract) are not generally covered.
Moral hazard
P&I Clubs have always taken pains to point out to members that liabilities arising out of the fraudulent misdelivery of cargo, especially delivery of cargo without demanding the production of an original bill of lading, were not covered by P&I insurance. Club managers evidently thought that commerce would grind to a halt if there was a risk that ship-owners would conspire with shippers to defraud receivers and their banks, so they refused to indemnify ship-owners under these circumstances. This view was shared by the English courts.
Sze Hai Tong Bank v. Rambler Cycle Co. [1959] A.C. 576; [1959] 2 Lloyd's Rep. 114 (P.C.)
Willful misconduct
Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen.
Public policy
There was a time when criminal liabilities were not covered as a matter of course. To say otherwise might even make the underwriter liable for facilitating the crime. It was understood that criminal liability was imposed only for intentional misconduct, and the requirement of fortuity generally foreclosed any question of coverage for criminal liabilities. Today, the situation is vastly more difficult. Statutes in many countries impose "criminal" liability for negligent conduct that damages the environment, under circumstances which do not even rise to the level of "willful misconduct" under the law of marine insurance. Ship-owners justifiably expect their Clubs to pay the fines and penalties thus incurred.
Clubs work on the basis of agreeing to accept a ship-owner as a member and levying an initial 'call' (premium). With the fund accumulated, reinsurance will be purchased; however, if the loss experience is unfavorable one or more 'supplementary calls' may be made. Clubs also typically try to build up reserves, but this puts them at odds with their mutual status.
Because liability regimes vary throughout the world, insurers are usually careful to limit or exclude American
Jones Act liability.
Actual total loss and constructive total loss
These two terms are used to differentiate the degree of proof where a vessel or cargo has been lost. An actual total loss refers to the situation where the position is clear and a constructive total loss refers to the situation where a loss is inferred. In practice, a constructive total loss might also be used to describe a loss where the cost of repair is not economic; i.e. a 'write-off'.
The different terms refer to the difficulties of proving a loss where there might be no evidence of such a loss. In this respect, marine insurance differs from non-marine insurance, where the insured is required to prove his loss. Traditionally, in law, marine insurance was seen as an insurance of 'the adventure', with insurers having a stake and an interest in the vessel and/ or the cargo rather than, simply, an interest in the financial consequences of the subject-matter's survival.
Average
The term 'Average' has two meanings:
(1) In marine insurance, in the case of a partial loss, or emergency repairs to the vessel, average may be declared. This covers situations, where, for example, a ship in a storm might have to jettison certain cargo to protect the ship and the remaining cargo. '
General Average' requires all parties concerned in the venture (Hull/Cargo/Freight/Bunkers) to contribute to compensate the losses caused to those whose cargo has been lost or damaged. 'Particular Average' is levied on a group of cargo owners and not all of the cargo owners.
(2) In the situation where an insured has under-insured, i.e. insured an item for less than it is worth, average will apply to reduce the amount payable. There are different ways of calculating average, but generally the same proportion of under-insurance will be applied to any payout due.
An
average adjuster is a marine claims specialist responsible for adjusting and providing the general average statement. He is usually appointed by the ship-owner or insurer.
Excess, deductible, retention, co-insurance, and franchise
An excess is the amount payable by the insured and is usually expressed as the first amount falling due, up to a ceiling, in the event of a loss. An excess may or may not be applied. It may be expressed in either monetary or percentage terms. An excess is typically used to discourage
moral hazard and to remove small claims, which are disproportionately expensive to handle. The equivalent term to 'excess' in marine insurance is 'deductible' or 'retention'.
A co-insurance, which is typically applied in non-proportional treaty reinsurance, is an excess expressed as a proportion of a claim, e.g. 5%, and applied to the entirety of a claim.
A franchise is a deductible below which nothing is payable and beyond which the entire amount of the sum insured is payable. It is typically used in reinsurance
arbitrage arrangements.
Tonners and chinamen
These are both obsolete forms of early reinsurance. Both are technically unlawful, as not having
insurable interest, and so were unenforceable in law. Policies were typically marked P.P.I. (Policy is Proof of Interest). Their use continued into the 1970s before they were banned by Lloyd's, the main market, by which time, they had become nothing more than crude bets.
A 'tonner' was simply a 'policy' setting out the global gross tonnage loss for a year. If that loss was reached or exceeded, the policy paid out. A 'chinaman' applied the same principle but in reverse: thus, if the limit was not reached, the policy paid out.
Specialist policies
Various types of specialist policy exist, including:
New building risks: This covers the risk of damage to the hull whilst it is under construction.
Yacht Insurance: Insurance of pleasure craft is generally known as 'yacht insurance' and includes liability coverage. Smaller vessels, such as yachts and fishing vessels, are typically underwritten on a 'binding authority' or 'line slip' basis.
War risks: Usual Hull insurance does not cover the risks of a vessel sailing into a war zone. A typical example is the risk to a tanker sailing in the
Persian Gulf during the
Gulf War. War risks cover protects, at an additional premium, against the danger of loss in a war zone. The war risks areas are established by the London-based Joint War Committee, which has recently moved to include the
Malacca Straits as a war risks area due to
piracy [1]. If an attack is classified as a "riot" then it would be covered by war risk insurers.
[2] Increased Value (IV): Increased Value cover protects the ship-owner against any difference between the insured value of the vessel and the market value of the vessel.
Overdue insurance: This is a form of insurance now largely obsolete due to advances in communications. It was an early form of reinsurance and was bought by an insurer when a ship was late at arriving at her destination port and there was a risk that she might have been lost (but, equally, might simply have been delayed). The overdue insurance of the
Titanic was famously underwritten on the doorstep of Lloyd's.
Cargo insurance: Cargo insurance is underwritten on the Institute Cargo Clauses, with coverage on an
A,
B, or
C basis,
A having the widest cover and
C the most restricted. Valuable cargo is known as
specie.
Warranties and conditions
A peculiarity of marine insurance, and insurance law generally, is the use of the terms
condition and
warranty. In English law, a condition typically describes a part of the contract that is fundamental to the performance of that contract, and, if breached, the non-breaching party is entitled not only to claim damages but to terminate the contract on the basis that it has been repudiated by the party in breach. By contrast, a warranty is not fundamental to the performance of the contract and breach of a warranty, whilst giving rise to a claim for damages, does not entitle the non-breaching party to terminate the contract. The meaning of these terms is reversed in insurance law. Indeed, a warranty if not strictly complied with will automatically discharge the insurer from further liability under the contract of insurance. The assured has no defense to his breach, unless he can prove that the insurer, by his conduct has waived his right to invoke the breach, possibility provided in section 34(3) of the Marine Insurance Act 1906 (MIA). Furthermore in the absence of express warranties the MIA will imply them, notably a warranty to provide a seaworthy vessel at the commencement of the voyage in a voyage policy (section 39(1)) and a warranty of legality of the insured voyage (section 41). .
[3]
Salvage and prizes
The term '
salvage' refers to the practice of rendering aid to a vessel in distress. Apart from the consideration that the sea is traditionally 'a place of safety', with sailors honour-bound to render assistance as required, it is obviously in underwriters' interests to encourage assistance to vessels in danger of being wrecked. A policy will usually include a 'sue and labour' clause which will cover the reasonable costs incurred by a ship-owner in his avoiding a greater loss.
At sea, a ship in distress will typically agree to 'Lloyd's Open Form' with any potential salvor. The Lloyd's Open Form is the standard contract, although other forms exist. The Lloyd's Open Form is headed 'No cure - no pay'; the intention being that if the attempted salvage is unsuccessful, no award will be made. However, this principle has been weakened in recent years, and awards are now permitted in cases where, although the ship might have sunk, pollution has been avoided or mitigated. In other circumstances the "salvor" may invoke the SCOPIC terms (most recent and commonly used rendition is SCOPIC 2000) in contrast to the LOF (Lloyd's Open Form) these terms mean that the salvor will be paid even if the salvage attempt is unsuccessful. The amount the salvor receives is limited to cover the costs of the salvage attempt and 15% above it. One of the main negative factors in invoking SCOPIC (on the salvors behalf) is if the salvage attempt is successful the amount at which the salvor can claim under article 13 of LOF is discounted.
The Lloyd's Open Form, once agreed, allows salvage attempts to begin immediately. The extent of any award is determined later; although the standard wording refers to the Chairman of Lloyd's arbitrating any award, in practice the role of arbitrator is passed to specialist admiralty
QCs.
A ship captured in war is referred to as a prize, and the captors entitled to
prize money. Again this risk is covered by standard policies.
