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Protection and indemnity insurance, more commonly known as P&I insurance, is a form of mutual maritime insurance provided by a P&I club. Whereas a
marine insurance Marine insurance covers the physical loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. Cargo insurance is the sub-branch o ...
company provides "hull and machinery" cover for shipowners, and cargo cover for cargo owners, a P&I club provides cover for open-ended risks that traditional insurers are reluctant to insure. Typical P&I cover includes: a carrier's third-party risks for damage caused to cargo during carriage; war risks; and risks of environmental damage such as oil spills and pollution. In the UK, both traditional underwriters and P&I clubs are subject to the Marine Insurance Act 1906. A P&I club is a
mutual insurance A mutual insurance company is an insurance company owned entirely by its policyholders. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or re ...
association that provides risk pooling, information and representation for its members. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members. Originally, P&I club members were typically
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
s, ship operators or demise charterers, but more recently freight forwarders and warehouse operators have been able to join. Whereas the assured pays a premium to an underwriter for cover which lasts for a particular time (say, a year, or a voyage), a P&I club member instead pays a "call". This is a sum of money that is put into the club's pool, a kind of "kitty". If, at the end of the year, there are still funds in the pool, each member will pay a reduced call the following year; but if the club has made a major payout (say, after an oil spillage) club members will immediately have to pay a further call to replenish the pool. The International Group of P&I Clubs is based on Leadenhall Street in London. These clubs cooperate to provide funds in the event of huge claims using a complex system to determine liability.


Historical background

The ancient Greeks created the practice of general average in
Rhodos In Greek mythology, Rhodos/Rhodus () or Rhode (), was the goddess and personification of the island of Rhodes and a wife of the sun god Helios. Parentage Various parents were given for Rhodos. Pindar makes her a daughter of Aphrodite with no ...
island, and ancient Romans could be said to have had a rudimentary form of marine insurance. However, a novel type of insurance that one would recognise as modern emerged in the London "coffee shops" in the 19th century. Shipowners and charterers would seek underwriters to insure their ships, and cargo owners (whether shippers, importers or consignees) would insure their cargoes. Carriers soon realised that often they might themselves be at fault should cargo be lost or damaged at sea, and they sought to take out third-party indemnity insurance in respect of cargo liability. Underwriters showed an unwillingness to take on such open-ended risks, so shipowners responded by forming their own mutual P&I clubs, acting as a shipowner's co-operative. An advantage was that a club worked for the shipowners, thereby eliminating the underwriters' profit margins and making P&I Insurance significantly cheaper. In the second half of the 19th century, the number of
claims Claim may refer to: * Claim (legal) * Claim of Right Act 1689 * Claims-based identity * Claim (philosophy) * Land claim * A ''main contention'', see conclusion of law * Patent claim * The assertion of a proposition; see Douglas N. Walton * A ri ...
greatly increased due to the number of passengers emigrating to North America and Australia.
Shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
s became aware of their insurers' compensation limits, especially when it came to damages caused by ship collisions. While the UK
Merchant Shipping Act 1854 The Merchant Shipping Act 1854 (17 & 18 Vict c. 104) is an Act of the Parliament of the United Kingdom. It was passed on 10 August 1854, together with the Merchant Shipping Repeal Act 1854 (17 & 18 Vict c. 120), which together repealed several c ...
had determined that, when evaluating insurance claims, the value of ships should be no less than £15 per ton, many ships had an actual lower market value and existing insurance policies did not cover this gap in liability. The compensation for collision damages also excluded a quarter of such damages. Existing hull insurance policies included damages to the insured ship and liability for the damages it had caused, while the maximum amount
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
s could recover after collisions was the ship's insured value, injured crew members might seek compensation from their employers. Later, the Fatal Accidents Act 1846 made it easier for passengers or their survivors to file
claims Claim may refer to: * Claim (legal) * Claim of Right Act 1689 * Claims-based identity * Claim (philosophy) * Land claim * A ''main contention'', see conclusion of law * Patent claim * The assertion of a proposition; see Douglas N. Walton * A ri ...
. Perhaps the first protection association, the Shipowners' Mutual Protection Society, was formed in 1855. It was intended to compensate for loss of life, injuries and collisions that were excluded from marine insurance policies beyond the monetary limit of these policies. Similar associations were later formed within the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, in
Scandinavia Scandinavia; Sámi languages: /. ( ) is a subregion in Northern Europe, with strong historical, cultural, and linguistic ties between its constituent peoples. In English usage, ''Scandinavia'' most commonly refers to Denmark, Norway, and S ...
,
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...
and the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
. In 1874, the risk of liability for cargo carried by the insured ship was added to the insurance cover provided by a P&I club. Cargo value had risen and cargo underwriters, encouraged by UK courts, filed more claims to recover their losses from shipowners. These claims were not covered by the current marine insurance class. After 1874, many clubs added a marine
indemnity In contract law, an indemnity is a contractual obligation of one Party (law), party (the ''indemnitor'') to Financial compensation, compensate the loss incurred by another party (the ''indemnitee'') due to the relevant acts of the indemnitor or ...
class to respond to these new claims. This class was later merged with the marine insurance class reserved for the original protection risks and the distinction between the two classes virtually disappeared. After the ''
Torrey Canyon SS ''Torrey Canyon'' was an LR2 Suezmax class oil tanker with a cargo capacity of of crude oil. She ran aground off the western coast of Cornwall, United Kingdom, on 18 March 1967, causing an environmental disaster. At that time she was the ...
'' grounding in 1967, covering the liabilities, costs and expenses of oil spills became an increasingly important aspect of P&I insurance.


SCOPIC

Following on from the innovations of the LOF 1980, the 1989 International Salvage Convention permitted salvage rewards to be made to salvors who acted to limit damage to the coastal environment after oil spills. Articles 13 & 14 of the Convention made provision for "Special Compensation", but the UK
House of Lords The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminst ...
case of the ''Nagasaki Spirit'' revealed that the convention had been poorly drafted, thereby limiting the amount that environmental salvors could be paid to mere "out-of-pocket expenses", with no allowance for any profit margin. As an antidote to this, the marine insurance industry and P&I clubs jointly developed the "SCOPIC clause", which is a codicil that may be appended to an LOF and invoked should the statutory payment provisions prove inadequate. The first SCOPIC clause was in 2000, and there have been several iterations since.


P & I clubs today


Relationship with marine insurance

Marine insurers offer insurance on measurable risks: hull and machinery insurance for shipowners, and cargo insurance for cargo owners. P&I clubs provide insurance for broader, indeterminate risks that marine insurers usually do not cover, such as third party risks. These risks include: a carrier’s liability to a cargo-owner for damage to cargo, a
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
’s liability after a collision, environmental pollution and P&I war risk insurance, or legal liability due to acts of war affecting the ship. Marine insurers are usually for-profit companies that charge customers a
premium Premium may refer to: Marketing * Premium (marketing), a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products * Premium segment, high-price brands or services in marketing, ...
to fully cover ships and cargo in the time period when the policy applies. In contrast, a P&I club is run as a
non-profit A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
co-operative A cooperative (also known as co-operative, co-op, or coop) is "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-control ...
and the insurance is financed by “calls”. Club members contribute to the club’s common risk pool according to th
Pooling Agreement's rules
If the risk pool cannot cover current
claims Claim may refer to: * Claim (legal) * Claim of Right Act 1689 * Claims-based identity * Claim (philosophy) * Land claim * A ''main contention'', see conclusion of law * Patent claim * The assertion of a proposition; see Douglas N. Walton * A ri ...
, the club members will be asked to pay a further call. If the pool has a surplus, the club will ask for a lower call the following year or make a refund to members. Only
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
s with acceptable reputations are allowed to join a P&I club and any P&I club member who incurs reckless or avoidable losses to the club may be asked to leave. Thus, marine cargo is generally covered twice by insurance standards. The shipper or cargo-owner will be covered by a marine insurer likely with 'all risks' cover. The carrier or shipowner will be covered by the P&I club but will typically limit their liability to goods owners to a small fraction of the retail value of goods. If the cargo is lost or damaged, the cargo-owner needs to first make a claim against the shipowner. However, the shipowner may avoid liability if it did not cause the loss or if the Hague-Visby Rules grant exemption from liability. In that case, the cargo-owner will claim against its own insurance company. If the cargo-owner fails to claim first against the shipowner, but claims instead against its own insurance company, the insurer, having reimbursed its client, will through subrogation pursue the claim in its own right against the shipowner.


Exceptions

The following are the major exceptions to P&I coverage: * Other insurance: A P&I insurance claim may be rejected if club managers think the risk should have been covered by other types of insurance that the
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
should have obtained, such as war risks insurance or hull insurance, which pays collision liabilities and, in some cases, liabilities for damages to fixed and floating objects ("FFO"). * Mutuality: A claim may be rejected in part or full if the
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
took insufficient steps to limit its liability in order to protect the club. The club requires
shipowner A ship-owner is the owner of a merchant vessel (commercial ship) and is involved in the shipping industry. In the commercial sense of the term, a shipowner is someone who equips and exploits a ship, usually for delivering cargo at a certain f ...
s to ensure that the text within bills of lading and passenger tickets minimises the shipowner's liability faults (within the scope of section 2 of the
Unfair Contract Terms Act 1977 The Unfair Contract Terms Act 1977c 50 is an Act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. It extends to nearly all forms of contract and one of its most im ...
). The club expects shipowners comply with all
flag state The flag state of a merchant vessel is the jurisdiction under whose laws the vessel is registered or licensed, and is deemed the nationality of the vessel. A merchant vessel must be registered and can only be registered in one jurisdiction, but ma ...
requirements concerning marine safety and environmental protection. * Moral hazard: Liabilities due to the fraudulent non-delivery of cargo, especially deliveries of cargo that do not require an original
bill of lading A bill of lading () (sometimes abbreviated as B/L or BOL) is a document issued by a carrier (or their agent) to acknowledge receipt of cargo for shipment. Although the term historically related only to carriage by sea, a bill of lading may toda ...
, are usually not covered by P&I insurance. This view is reflected in the decision of the English courts in ''Sze Hai Tong Bank v. Rambler Cycle Co.'' 959UKPC 14; * Willful misconduct: Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen. * Public policy: Criminal liabilities used not to be covered as a matter of course. Criminal liability was imposed only for intentional misconduct, and the requirement of fortuity generally included the coverage of criminal liabilities. Today, statutes in many countries impose "criminal" liability for negligent conduct that damages the environment, under circumstances that do not rise to the level of "willful misconduct" under the law of marine insurance.


Modern developments


European Union Directive 2009/20/EC

The European Union Directive 2009/20/EC was implemented in all 27 member states by January 1, 2012. The directive requires compulsory P&I to cover for EU and foreign ships in EU waters and ports. Foreign vessels that do not comply to the directive may be expelled or refused entry into any EU port, although ships may be allowed time to comply before expulsion. As EU competence does not generally extend to
penology Penology (from "penal", Latin '' poena'', "punishment" and the Greek suffix '' -logia'', "study of") is a sub-component of criminology that deals with the philosophy and practice of various societies in their attempts to repress criminal activiti ...
, (see ''Re Tachographs'' (CJEU) 1979), the directive requires the member states themselves to set penalties for any breach.


The Rotterdam Rules

The Rotterdam Rules are a set of rules designed to replace the Hamburg Rules and the outdated Hague-Visby Rules (both of which are international conventions to impose duties upon a carrier of goods by sea). Should the Rotterdam Rules come into effect, they would cover not merely the sea voyage, but all parts of any contract of multimodal carriage with a sea leg. Thereafter, land carriers, warehouses, and freight forwarders would also need P&I cover. This would inevitably lead to an increase in the scope and importance of P&I cover, and might diminish the prevalence of standard cargo insurance.


Non-mutual P&I cover

Conventional P&I cover has been taken up primarily by shipowners and demise charterers, but a new development is P&I cover for time- and voyage-charterers. Since these charterers may have no long-term relationship with any vessel, and may well have periods when they are not chartering at all, the mutual model based on common-pool sharing of liability is not necessarily ideal. Some non-mutual "charterers P&I clubs" have arisen whereby a private company may act as broker to provide third-party cover via underwriters, on payment of a conventional premium, rather than a P&I call. In addition to brokerage services, such a company may offer conventional "our man on the spot" P&I services.


P&I clubs worldwide

The following is a list of P&I clubs around the world.


Bermuda

* Steamship Mutual Management (Bermuda) Limited * Gard P. & I. (Bermuda) Ltd


China

* China Shipowners Mutual Assurance Association


Japan

* Japan Shipowners P&I Association


Norway

*
Assuranceforeningen Gard Gard is a mutual company and operates around the world within marine insurance. It is the largest Protection & Indemnity insurer of the 12 P&I Clubs that are members of the International Group of P&I Clubs. Gard's customers are shipowners and o ...
*
Assuranceforeningen Skuld Assuranceforeningen Skuld is an international marine insurance company based in Oslo, Norway that specializes in protection and indemnity insurance and marine insurance. Total premium income for 2018/19 was US$402 million. In addition to Oslo, Sku ...


Singapore

* Standard Steamship Owners Protection & Indemnity Association (Asia)


Sweden

* Sveriges Angfartygs Assurans Forening (The Swedish Club)


United Arab Emirates

* Islamic P&I Club


United Kingdom

* London P&I Club aka London Steam-Ship Owners Mutual Insurance * The Britannia P&I Club, founded in 1855; the club is managed by Tindall Riley. * Michael Else & Co * North of England P&I Association * West of England Shipowners Insurance Service * Shipowners P&I Association * Steamship Mutual Underwriting Association * Standard Steamship Owners Protection & Indemnity Association (abbreviated to The Standard Club), founded in 1884 * ''The Liverpool & London P&I Club (which insured the
Titanic RMS ''Titanic'' was a British passenger liner, operated by the White Star Line, which sank in the North Atlantic Ocean on 15 April 1912 after striking an iceberg during her maiden voyage from Southampton, England, to New York City, Unite ...
) is no longer operating and merged with North in 1999'' * The UK P&I Club, founded in 1869; the club is managed by Thomas Miller.


United States


American Steamship Owners Mutual Protection & Indemnity Association, Inc. (The American Club)


South Korea

* The Korea Shipowners' Mutual Protection and Indemnity Association


International Group of P&I Clubs

The International Group of P&I Clubs (based on Leadenhall Street, London) comprises thirteen clubs, which provide P&I liability cover for approximately 90% of the world's ocean-going tonnage.


See also

* Deviation (law) * Seaworthiness (law)


Notes


References


Further reading

*
An Introduction to P&I Insurance and Loss Prevention, Second Edition
', North of England P&I Association, Newcastle upon Tyne, UK, 2012, {{ISBN, 978-0-9558257-8-1 Types of insurance Marine insurance