Marine Insurance PDF - MA0120 - Protection and Indemnity Clubs

Lesson 6 Marine Insurance MA0120 Singapore Maritime Academy Diploma in Maritime Business 3rd Year Full-Time MA0120 – Marine Insurance...

Lesson 6 Marine Insurance MA0120 Singapore Maritime Academy Diploma in Maritime Business 3rd Year Full-Time MA0120 – Marine Insurance LESSON Protection and Indemnity Clubs 6 F. Protection and Indemnity Clubs Objectives:  Describe the Features of Mutual Insurance Associations  Explain the Various Reasons that Can Terminate P&I Cover  Describe the Various Coverages Granted by P&I Clubs  Describe the Fines Imposed on the Shipowner Which Are Covered by P&I Clubs  State the Reason for P&I Club to Impose Deductibles on the Shipowner  Describe the Effect of the P&I Club’s “Pay to be Paid” Rule in Relation to Third Party Claims Reference Materials: JERVIS, BARRIE G (2005) Reeds Marine Insurance 1st ed. London: Adlard Coles Nautical HODGES, SUSAN (1996) Law of Marine Insurance 1st ed. London: Cavendish Publishing Limited Marine Insurance Act 1906 (Cap. 387) Third Parties (Rights against Insurers) Act (Cap. 395) Apr2021 SP-SMA 1 An association where it is formed by a group of companies. Purpose: come tgt to join this club to form mutual insurance. This means that they share the risk How to join: pay membership called "advance call" If the money is not fully utilised, can be rolled over to next year Lesson Every ship must have Hull6 & Insurance and P&I Club Marine Insurance MA0120 Why must have P&I: bc they provide third party coverage Hull & Machinery" cover damages of the ship 6. Protection and Indemnity Clubs Protection and indemnity clubs can be traced back to early Chinese times, when river merchants ‘averaged’ (this word is thought to come from the Arabic word awariya meaning ‘damaged goods;) their losses by distributing their cargoes over a number of vessels by loading half of their cargo on their own vessel and the other half on another’s vessel. This had the effect of reducing the risk of the whole cargo being lost. Traders in India, Babylonia, Chaldea, Egypt and Phoenicia also took similar precautions. It is form these early beginnings that the sophisticated systems of the current protection indemnity clubs (P&I clubs) have developed. The P&I club is a mutual insurance society, whereby the members of that society spread the risk of loss or claim among themselves – in other words, throughout the whole of the society’s membership. 6.1 Mutual Insurance Associations A mutual insurance association has three major features that distinguish it from a proprietary insurer:  It is an association of individuals with a common interest.  It is owned by the members.  It provides insurance at cost (almost). This mutual system has distinct advantages. It is driven by the insured, responsive to their needs, stable, and providing a ‘club’ concept of assistance, loyalty and service. The first evidence of the existence of P&I clubs in the UK were the Mutual Hull underwriting associations, which came into existence in the early part of the 18th century. Many present-day practices of P&I clubs owe their origins to the ideas, systems and practices developed 300 years ago by these hull clubs. They were founded as friendly associations for the mutual insurance of their ships, and were abundant in the north-east of England, especially in those parts where coal transport predominated. However, by the end of the 18th century and the middle of the 19th century, there was a substantial reduction in the number of clubs in the north-east and an increase in the clubs in London, with some specializing in sailing vessels, iron ships, coasters and various worldwide trades. Additionally, there was a desire by shipowners to cover other forms of risk either not covered by traditional insurance markets, or only covered at a prohibitively high premium. Some clubs developed to cover cargoes that were carried for the shipowners’ account, and other owners’ freight when carrying other persons’ goods. A club, like any other organisation, needs money to function, and today’s shipowners have to pay a fairly substantial sum of money when they join a club. This advance payment is known as a call. It is based partly on the risks covered, the loss record, and the tonnage of the ship involved. This call provides the funds from which losses and running costs are paid. Many of the early clubs failed because they were not demanding sufficient advance calls. Apr2021 SP-SMA 2  Lesson 6 Marine Insurance MA0120 6.2 Termination of Cover TSM/ TBP The club cover can terminate for various reasons: 1. A member may wish to terminate of his own free will. 2. The member’s ship may become a total loss. auto terminated 3. The member may have sold his interest in the ship. auto terminated 4. The ship may have been reported missing without trace. auto terminated 5. The member may have become bankrupt or gone into liquidation. 6. The member does not want to or will not pay his premiums. Termination because of 2, 3 and 4 is automatic; termination for the other reasons must be by 30 days’ notice, to expire at noon on 20 February. Must KNOW! 6.3 Coverage Granted by Clubs Historically, P&I clubs or associations have restricted themselves to covering shipowners’ liabilities not otherwise insured. Within a club, not all shipowners face or choose to have the same liability coverages, and as a result of this there has developed a system of surcharges or rebates so that owners are only charged for the coverage actually taken out. The call is applied to the gross registered tonnage of the vessel entered into the club, and then the standard rate of premium is applied to this contributing tonnage. However, this system has undesirable side-effects that developed as a result of owners operating many different types of ship in different types of trade. Some owners varied the terms of their coverage from the basic offered by the club by means of either a deductible or by self-insurance for certain risks. Over a period of time, this meant that the standard rate on the contributing tonnage became an unmanageable system. This led to the premium rating system, whereby each vessel is individually assessed at a premium rating per gross registered ton, based on the exposure to risk involved with that particular member. Loss of Life, Personal Injury, Illness of Crew Members This not only covers members of the crew but also includes wives and children of the crew should they be on board ship with their husbands/ fathers. This section covers the member’s liability to pay damages or compensation for injury or death resulting from injury and the member’s obligation to pay compensation, sickness wages, and medical, repatriation and substitution expenses for crew illness of any seaman, including hospital, medical, funeral, repatriation and substitution expenses while in the employ of the club member. Normally, the club’s local correspondent will be requested to assist in arranging the hospitalisation of an injured crew member. The club’s correspondent will also be responsible for ensuring that proper treatment is provided at a reasonable cost. In most circumstances, it is only necessary for the hospital to treat the seaman until he is fit for repatriation. When a permanent disability is involved it is usual for a lump sum compensation payment to be made. This will, however, depend upon the relevant law as well as provisions of the contract of employment. For death claims, the contract or relevant law may stipulate the compensation payable to dependants. In most death cases, it is common practice for the deceased to be repatriated home so that the next of kin may hold a suitable funeral Apr2021 SP-SMA 3 fines are covered by P&I ONLY if u did the work as owner's representative within the scope of his employment Lesson 6 Marine Insurance MA0120 services. As far as repatriation and substitution expenses are concerned, owners and or charterers have a statutory obligation to repatriate seamen following desertion from the ship and this section covers those expenses. This duty also applies when the ship becomes a total or constructive total loss. Personal Injury or Loss of Life to Stevedores and Persons other than Seamen Categories of people to whom a member of a club may have a liability and that are covered under this section of the rule include: visitors, non-fare paying passengers, surveyors, customs officers, immigration officers, and ship’s agents. The claim or expenses may include loss of earnings, compensation for pain and suffering, medical expenses and legal fees. It should be noted that persons do not need to be on board the ship (such as line handlers) when they are injured. This section usually covers liability to cargo handlers who are injured or killed. There may be times when the accident occurs in a ‘strict liability’ regime and the owner or charterers may be liable without proof of negligence. Personal Injury, Illness or Loss of Life to Passengers This section covers personal injury, illness and death of any passenger to whom the ship may have a liability. The passenger does not necessarily have to be on board the ship at the time of the incident, i.e. the passenger may be on a shore excursion. Damages under this section include medical expenses, compensation for pain and suffering, loss of earnings, repatriation where applicable, refund of passage money, and loss of enjoyment of a holiday. Loss of Personal Effects of Crew and Passengers It is common for the seaman’s employer to be liable to compensate for personal effects lost or damaged not only while on board the ship, but also while travelling to and from the ship. The clubs generally do not cover the loss of cash, jewellery and other valuables. Ship Expenses Incurred in Diversion to Land Sick or Injured Persons, Stowaways or Refugees When an entered ship deviates to land a sick or injured person or to land a stowaway or refugee, the member may recover from the club the net costs of the diversion. The recoverable costs are fuel, insurance, wages, stores, provisions and port charges. These are usually calculated on the basis of daily running costs and then pro rated for the entire time of the diversion. Life Salvage A salvage reward for saving life alone is not payable under general maritime law, although there is a statutory provision in the Merchant Shipping Act (Cap. 179) making it obligatory. Therefore the clubs normally use the words in their rules ‘to indemnify life salvage not recoverable under the hull and machinery policies of an entered ship, or from cargo owners or underwriters’. Claims for life salvage are rarely Apr2021 SP-SMA 4 Lesson 6 Marine Insurance MA0120 made. In order for a life salvage award to be made it is necessary not only for life to have been salved, but also property. In normal circumstances, the claim for life salvage will form part of the arbitrator’s award for the property salvage. In the event that the life salvage proportion of the award is not recoverable form the owner’s hull policy, the owner may recover from the club. Collision Liability The intention of this section of the rules is to cover the one-quarter liability not normally included in the Institute Cargo Clauses (Hulls) three-quarters liability collision clause. It covers liability to third parties for property damage (and subsequent consequential loss) arising as a consequence of a collision between the entered ship and any other ship, but only to the extent that such liability is not recoverable under the entered ship’s hull insurance policy. Damage to Docks, Piers, and other Floating Objects other than Ships The club provides cover under this section for any liability to pay damages or compensation for loss of or damage to property (including infringement of rights) whether on land or water and whether fixed or movable, except to the extent that the liability arises only by reason of a contract or indemnity. Damage to Ships without Contact (i.e. caused by Wash) The club covers loss or damage to another ship or any property therein ‘occasioned otherwise than by collision’. This is the so-called wash damage rule, which covers damage to another ship that is not caused by a collision, and that is therefore not covered by the hull insurance on the entered ship. The law in most countries is that a shipowner has a duty to make sure that his ship proceeds at such a speed that she does not cause loss of, or damage to, other ships. Pollution by Oil or Other Substances Escaping from the Ship Cover is given in respect of liabilities, losses, damages, costs and expenses in so far as they are caused or incurred by reason of discharge or escape of oil or any other hazardous substance from the ship. These costs may also be incurred as a result of the threat of such discharge or escape. Prior to February 1997, there were two agreements, TOVALOP (Tanker Owners Voluntary Agreement concerning Liability for Oil Pollution) for the shipowners, and CRISTAL (Contract Regarding an Interim Supplement to Tanker Liability for oil pollution) for the cargo owners. Both were mutual funds, devised to voluntarily increase the limit of liability (and thus the funds available to pay compensation) or damage caused by oil pollution. The P&I clubs were not concerned with monies paid out either by CRISTAL or TOVALOP schemes. Cover is given under this section of the rules for liability, loss, damage, costs and expenses incurred as a result of the discharge or escape of oil or any other substance from an entered ship. It applies both to tankers and to dry cargo ships. Cover is also given for costs and expenses incurred in response to a threat of a discharge or escape of oil or other substance from the entered ship, or in minimizing the effect when such Apr2021 SP-SMA 5 Lesson 6 Marine Insurance MA0120 a discharge/ escape takes place. Penalties and fines imposed for pollution are also covered by the club, under the rule concerning fines. There is an international convention (the International Convention on Civil Liability for Oil Pollution Damage, 1969 – known as CLC) that imposes strict liability for oil pollution on the owners of ships carrying persistent oil as bulk cargo. However, not all countries are signatories and some apply their own domestic liability regimes to tanker spills. The Oil Pollution Act of 1990 of the USA is the best-known example of this. The 1969 Convention provides certain defences for shipowners. There is no internationally agreed system of compensation for loss or damage caused by oil escaping from dry cargo or passenger ships, but most maritime countries have their own domestic legislation to cover this eventuality. L: Located within the jurisdiction of port limits whereby port authorities request wreck to be removed Removal of Wreck Charges E: entered ship: the wreck is a enter ship of the P&I Club T: The wreck not caused by third-party liability This section provides cover to members for their liabilities, costs and expenses relating to the raising, removal, destruction, lighting or marking of the wreck of an entered ship. However, it should be noted that this cover is only provided when: wrecked ship is covered by the P&I (need to  An entered ship (or a part of it) is confirmed to be wrecked. check if have P&I or not  The wrecked ship is located within the jurisdiction of a port or state whose law contains a valid and enforceable regulation to compel the member to remove the wreck. has to be within the port limit whereby port authority request to be removed  The wreck removal is not the liability of some third party – e.g. the person or ship that caused it to sink. The cover can include costs of raising, removal or destruction of property being carried on an entered ship – such as containers or other dry cargo; cover can also extend to the liability of the owner arising from his failure to raise, remove, destroy or mark the wreck. Liabilities Arising Under Towage Contracts Members are covered under this section for their liabilities under the terms of a contract for the customary towage of an entered ship, i.e.  Towage for the purpose of entering, leaving port or manoeuvring within the port during the ordinary course of trading, or  The towage of such entered ships as are habitually towed (e.g. barges) in the ordinary course of trading. This cover is normally restricted to liabilities arising under customary, ordinary, routine towage operations, under the terms of whatever towage agreement is usual and customary for the port or place where the towage happens. Apr2021 SP-SMA 6 Lesson 6 Marine Insurance MA0120 Loss or Damage to Cargo Carried by the Ship This section of the rules cover liabilities incurred in relating to cargo intended to be, or being or having been, carried on an entered ship. Cover is for liability arising out of the loss, shortage or damage to cargo, or ‘other responsibility’ arising out of the owner’s breach of duties or responsibilities imposed upon him by the contract of carriage. Such other responsibilities might include claims for losses resulting from delays experience during a voyage. Cover would not extend to indemnifying the owner for liabilities arising out of the failure to arrive, or late arrival of an entered ship at a port of loading, or the failure to load any particular cargo. Such matters would only be recoverable from the club at the directors’ discretion. Cover is also given to the owner for the additional costs that may be incurred in discharging or disposing of damaged or worthless cargo, but only to the extent that he is unable to recover these costs from any other party. Additional costs are those in excess of the costs that would have been incurred by the member normally in dealing with that particular cargo. The additional costs incurred would be recoverable from the club if no other party (such as a charterer) was liable to pay them. Additional costs incurred in restowing sound cargo are not recoverable from the club except at the discretion of the directors as provided under the so-called Omnibus Rule. Liability to or claims made by cargo owners arising from deviation are normally excluded by the club except at the discretion of the directors, and there is no right of recovery from the club in respect of any claim that arises out of, or as a consequence of, a deviation that deprives the owner of the right to rely on defences or limitation(s) that he would otherwise have had under the contract of carriage. The carriage, on deck, of cargo that is not customarily carried on deck, may be considered a deviation if the bill of lading does not specifically record on its face the fact of shipment on deck. This practice is commonly called ‘carriage on deck with under-deck bills’. Claims Payable only at the Directors’ Discretion (the so-called Omnibus Rule) This section of the rules gives directors the freedom to react on members’ behalf in an ever-changing litigious business environment provided that they are within the general scope of the club cover and are not expressly excluded elsewhere within the rules. This is a provision not found in insurance policies and is a reminder that clubs exist, not as profit-making insurance companies, but as organizations for the benefit of the shipowners who are their members. Generally speaking, these claims will only be paid if the member has been a ‘good member’, i.e. someone who has not previously incurred the wrath of the club managers/ directors. The Omnibus Rule gives the opportunity to the directors to move rapidly in response to the needs of the members, particularly where a new risk suddenly arises or when an exceptional case appears to fall outside the express provisions of the rules. Ato special rule found in P&I Club: refers to director discretion in respond the needs of the members directors are allowed to make discretion for eg. under three conditions: Restowage at the Directors’ Discretion 1) good books of the club 2) outside the express provision (eg smtg that is not clearly stated that is covered 3) within the scope of the P&I Club (related to third-party liabilities) Occasionally an owner may be obliged to arrange for the restowage of undamaged cargo during the voyage, usually as a result of heavy weather. In such cases the Apr2021 SP-SMA 7 Lesson 6 Marine Insurance MA0120 member may seek reimbursement of the costs incurred, but this can only be agreed at the discretion of the directors under the Omnibus Rule. 6.4 Fines Fines are covered by P&I ONLY if u did the work as owner's representative within the scope of his employment This section provides in part cover for fines imposed on the owner in respect of the entered ship. Cover is also provided to the owner in respect of fines imposed on a seaman, but only to the extent that the owner is legally obliged to reimburse the seaman or does so with the managers’ consent. Generally, such consent may be given if the seaman is fined for acts or omissions, or if he (often the master) is fined in his capacity as the representative within the scope of his employment of the owner. The cover is not intended to include fines imposed on seamen for personal acts of misconduct, outside the scope of their duties in respect of the entered ship. This section also provides a discretionary cover for an owner’s claim for loss of an entered ship in the event that it is confiscated by reason of breach of Customs laws or regulations. Reasons for fines being imposed  The breach of statutory regulations relating to the provision of safe working systems and conditions.  Short-or over-delivery of cargo, or failure to comply with regulations as to the declaration or goods or documentation as to cargo.  Smuggling or infringement of Customs regulations.  Breach of immigration regulations.  Incidents in respect of discharge or escape of oil or other hazardous substances from the entered ship.  Any act or negligence of the seamen, of the entered ship, or any other servant or agent to the member. 6.5 Excesses It is quite common for the club to impose deductibles on the shipowner in order to reduce the number of claims and the amount of paperwork. Deductibles would be made under the following sections. The size of the deductible may vary from time to time, and from ship to ship, depending on the loss experience of that particular owner/ club/ trade. The sums quoted below are purely for illustration purposes. Cargo  Approximately $25,000, but this may vary from club to club and member to member, mainly to cover the possibility of the tainting of the cargo.  Approximately $5,000, for injury or loss of life to crew. Collision  Approximately $30,000; this is only for the proportion of the claim paid out by the club, and would be in addition to any deductibles under the hull policy. Apr2021 SP-SMA 8 Lesson 6 Marine Insurance MA0120 6.6 Third Party Claims and the “Pay to be Paid” Rule special provision only found in P&I club have to pay third party even before crew is injured The “Pay to be paid” Rule is a fundamental component of Protection & Indemnity insurance policies, which requires a Club Member to discharge his liabilities to the injured third party before he can be indemnified by the P&I Club. If the Club Member cannot compensate the third party as a result of insolvency, the third party is denied full satisfaction of his judgment against the Member. The Third Parties (Rights against Insurers) Act (Cap. 395) transfers to the injured third party the rights of the insolvent insured against the insurer in relation to the insured’s liability; however the Club is entitled to rely on the “Pay to be paid” Rule against the third party, which will effectively defeat the third party’s claim. 6.7 The Fixed Premium Market Unlike mutual clubs, who can call for additional monies when required, commercial underwriters provide the same cover at a fixed rate. Competition ensures a competitive premium and as they are a commercial enterprise, cost effectiveness is the order of the day. However, their share of the market is relatively small compared to that of the International Group. Five years ago, fixed premium was seen as very peripheral. With the introduction of new players, it has become more mainstream, giving the fixed premium market more credibility. With more than 75,000 ships of varying types, trades and sizes seeking P&I cover, the two options allows shipowners (and charterers) to seek the more economical solution. The big cruise liner or a VLCC fleet would probably not fancy the lower limits of the fixed premium providers, whereas shipowners with a lower risk profile are welcoming the fixed premium alternatives. Some fixed premium providers are InterCoastal, AXA Paris, Terra Nove, Osprey and BMM. Apr2021 SP-SMA 9 Lesson 6 Marine Insurance MA0120 Tutorial 6 1. Shipowners will be required to pay a substantial sum of money in advance to join a P&I Club which is also known as a: a) premium. b) deductible. c) call. d) membership fee. 2. The club cover can be terminated automatically when the: a) member’s ship became a partial loss. b) member had sold part of his interest in the ship. c) member had been paying his premiums late on a regular basis. d) member’s ship had been reported missing without any trace. 3. Coverage that is not granted by P&I Club includes: a) pollution by oil or other substances escaping from the ship. b) liabilities arising out of the fraudulent misdelivery of cargo. c) damage to docks, piers, and other floating objects other than ships. d) liabilities arising under towage contracts. 4. For a life salvage to be awarded under the general maritime law, it is necessary for a life to be salved as well as: a) property. b) successful removal of wreck. c) freight. d) pollution prevention. 5. P&I Club’s Cover are intended to include fines imposed on a seaman: a) for the criminal acts committed by him in his personal capacity. b) in his capacity as the owner’s representative within the scope of his employment. c) in his capacity as the owner’s representative outside the scope of his duties. d) for his personal acts of misconduct. Apr2021 SP-SMA 10 Lesson 6 Marine Insurance MA0120 6. P&I Club would indemnify its members for liabilities arising out of their failure to: a) employ qualified and competent crew to operate the ship. b) prevent loss or damage to cargo caused by severe storm. c) declare dangerous goods to the port authority at the port of discharging. d) give notice of readiness to the Charterers to load/discharge cargo within the allowed period. 7. The 'pay to be paid rule' is a standard form clause inserted into P&I Contracts which obliges the insured to: a) pay the outstanding premium to the Club first before seeking its indemnity. b) first pay the claim to the injured third party before seeking the payment from the Charterers. c) first pay the fines to the port authority before seeking reimbursement from the crew. d) first discharge its liability to the injured third party claimant before seeking the Club's indemnity. 8. The P&I Club provides cover to members for wreck charges if: a) an entered ship is confirmed not to be wrecked. b) the wrecked ship is located in the high sea where there is no law to compel the member to remove the wreck. c) the wreck removal is not the liability of some third party. d) an entered ship is not owned by the members. 9. Explain the functions of the “pay to be paid” rule that are generally found in the Rulebooks of P&I Clubs. special provision whereby club member must discharge liability by their third-party claimant (eg shipping company) before can be indemnified by the club 10. Write short notes on: (a) Omnibus rule. (b) Insurance excess. excess = act as a deductible Apr2021 SP-SMA 11