Marine insurance is built around commercial, business concepts where the buyer of the insurance protection (the assured) enters into a contract with the seller of the protection (the insurer or underwriter).
Intermediaries can be used to negotiate the contract (the brokers). Any lawful marine adventure can be the subject of the contract. There is a marine adventure when any liability to a third party may be incurred by the owner of insurable property because of a maritime peril. For example, an insured vessel may collide with another vessel (a maritime peril). The owner of the insured vessel may be indemnified by the insurer but also becomes liable to the owner of the other vessel. This liability can lead to a financial loss and this can be indemnified by marine insurance.
However in the early 19th century, shipowning in England did not attract large scale liabilities and shipowners did not need sophisticated liability insurance. In DeVaux v. Salvador, 1836, however, it was decided that a shipowner’s liability for collision damage was not recoverable under the ordinary wording of the marine policy then in force. Underwriters swiftly introduced a clause by which they could indemnify the assured for three-quarters of his liability to the other vessel’s owner. This was called the “Running Down Clause” but is now still found in hull policies as the “3/4ths Collision Liability” clause.
For shipowners in those days this was insufficient cover so they formed into “Hull Clubs” to carry the remaining one-fourth liability. The members of the “Club” would mutually cover one another’s liability. They also competed with the hull insurers for hull policies.
Then, in 1846, the British Parliament passed the Fatal Accidents Act which gave new rights to the dependants of persons who died because of the wrongful acts of others. At that time shipowners were operating services carrying thousands of emigrants across the Atlantic and the implications for the owners were alarming. Moreover, the shipowners who previously had no liability for the death of their employees, could now become liable. This liability was not covered by hull insurance.
In 1855, the first Shipowners’ Mutual Protecting Society was created to cover this liability and the collision liability. The societies were solely “protecting” societies. In 1870, the Westonhope, bound for Cape Town, deviated to Port Elizabeth and sank. The shipowners could not limit their liability under the contract of carriage because of the breach by the deviation. They became liable for the loss of cargo. Cargo liability was not covered because carriers could generally exclude liability under their contracts of carriage. This exclusion was threatened.
Therefore, in 1874, the first indemnity club was formed to cover the liability for cargo loss or damage; this was called “indemnity risks”. The protecting societies amended their rules to become “protecting and indemnity clubs”, still as loose associations of shipowners.
These are now called “mutual associations and today’s P. & I. organisation is clearly a corporation; each member contracts with the corporation. The corporation “carries out insurance business”. This covers all aspects of the transaction of insurance business and includes: underwriting decisions; keeping accounts, receipt of premium payments (“Calls”), notification of claims and payment of claims, etc.
The constitution of a “club” is laid down in a memorandum and articles of association. These provide for: government of the club, members’ qualifications, termination of entry, member’s withdrawal, liability to pay calls or contribution to assets in case of winding up and so on.
Members are bound by articles through “rules” which are distributed and should be adhered to.
The supreme body of the club is called the “general meeting”. It meets annually. Voting tights are provided in the articles. The rights are linked with tonnage entered (this also governs the premium rating and level of calls). In most clubs the voting is graded to prevent unreasonable domination by small groups of members with large tonnages. The members of a club have the entire overall conduct of the club in their hands by voting ability in general meetings.
However, the more routine business of the association is conducted by a committee of members who are elected at a general meeting, and called the “board of directors”. The main duties of the directors include:
Approval of larger claims (smaller ones are settled by “managers”) plus ratification of some large claim settlements made by managers.
Fixing amount and frequency of calls.
Deciding on opening and closing of policy years.
Remuneration for managers.
Application of “Omnibus Rule” to claims submitted for Committee decision.
The structure includes: Members and group affiliate members and a network of correspondents (or “representatives”). These can be commercial and/or legal persons.
The correspondents’ duties include claims handling, obtaining statements from claimants, assisting the master and appointing surveyors for cargo damage.
The “managers” are a separate firm of professional managers or professional executives directly employed by the club itself. They can be based in any country while the mutual association itself may be based in a place where the taxation system is benign.
The managers’ functions include:approval of new applications, handling claims, investment, record keeping, selection and supervision of worldwide correspondents, amendment of rules and giving letters of security, e.g., to release an arrested vessel.
Calls or Premiums.Some mutual associations term the payments for cover as “calls” while others term them as “premiums”. The concept of mutuality is that each member protects the others and this is done by levying “calls” rather than the businessman’s “premium”. Indeed, section 85(2) of the Marine Insurance Act prevents “premium” being used for mutual insurance but a guarantee or such other arrangement may be substituted for the premium.
When calculating the size of the calls the club needs to consider the call income required to cover a member’s claims within the club’s own retention, a contribution to claims, a proportion of the excess reinsurance premium, together with management expenses and investments.
The basic rate achieved by weighing all these factors will be multiplied by the contributing or gross tonnage for the period of cover and this produces the rate of “advance call”. Advance is usually payable in two or more installments.
The rules also permit the club to levy supplementary or additional calls. An estimate of this is advised at the beginning of the year.
Other calls are:
Release calls – this allows a terminating or retiring member to be released from obligations for future calls on payment of an agreed amount.
Return calls or laid up returns – if the vessel is laid up with no cargo in a safe port, usually for at least 30 days after berthing, the laid up return of advance call can be as much as 90 per cent.
Typical risks covered. Although clubs are flexible in respect of members’ risk cover requirements, the standard risks insured by most clubs fall into the following headings:
Crew and personal claims. Loss of life, personal injury claims, hospital, medical and funeral expenses. Repatriation expenses and costs of sending substitutes abroad. Loss of crew’s personal effects as a result of marine peril. Costs of deviating a ship to land a sick or injured seaman. Loss of life or injury to stevedores (or other people on board or near the entered ship arising out of negligence of the shipowner or his servants), as well as crew or other person in another ship arising out of collision.
Collision and dock damage. Excess collision liability. Proportion of collision liability relating to wreck removal, dock damage or oil pollution caused by the other ship.
Cargo liabilities. Loss of or damageto cargo carried in the member’s ship. Cargo proportion of general average or salvage not recoverable by virtue of a breach of the contract for carriage.
Fines. Imposed on the owner for breach by his servants of regulations such as immigration, customs, smuggling by crew members, pollution. Fines for overloading are specifically excluded.
Pollution. Legal liability of shipowner for clean-up costs and damages caused by pollution. Special extension for tanker owners to cover their liabilities under TOVALOP Agreement. Most topically, the United States Oil Pollution Liability legislation in 1990 will need to be covered but in many cases the lack of a limit may lead to the cover being far too expensive.
Contractual liabilities. Liabilities incurred under contracts necessary for the normal operation of a ship, such as towage contracts, indemnities to port authorities, indemnities to stevedoring companies.
Costs and expenses. Legal, technical or otherwise, incurred in investigating, defending, or pursuing a claim against which a member is covered by the club may also be payable by the club.
Some clubs have a further rule called the “Omnibus Rule” whereby they will pay any claim or expense not specifically covered by the rules which the directors in their discretion consider should be reimbursed by the club. But the rule does not cover risks specifically excluded, and in practice is rarely exercised.
From 1990 a new cover is required under the Lloyd’s Open Form of Salvage Agreement 1990 (LOF 90) where special compensation payable to salvors who may fail in the salvage of the vessel is to be paid by the owners. These owners are expected to obtain the cover for these expenses from their mutual associations.
Other mutual insurance. In the 1990s mutual protection is no longer exclusive to shipowners. Other cover for liability can be mutual, for example, for professional negligence by shipowners or the liability of freight forwarders. Special mutual associations exist for these and for many other persons in the industry. Some categories of risk may be covered by entirely separate mutual association. Protection and indemnity is one type of mutual association. Others include: Hull and machinery; Freight, defence and demurrage; War risk; Strikes; Through transport connected risks.
“Few owners except the very rich or the bankrupt would consider operating without adequate P. & I. cover.” Such was how one senior P. & I. executive summed up the penetration of the P. & I. cover throughout the shipowning community. The cover that the clubs provide is comprehensive, flexible and reasonably priced, but it is not necessarily true that an owner would at all times turn to the clubs for all his insurance needs, save hull and machinery. The fixed premium markets can often be very responsive, particularly to novel risks. P. & I. cover, on the other hand,-is there to afford the members of the club a protection against the sorts of liabilities that they encounter in the normal course of their business.