Introduction to P&I –

The background, the rules and the wet stuff

- Part one-

Nordisk Institutt for Sjørett

23.4.2009
Andreas Brachel
Gard
 Background:

How did P&I Clubs come about?

Insurance history

215 BCConcept of protection against maritime

perils (Romans)

1347 First marine insurance policy

(Lombards)

1688 First known reference to Edward Lloyd’s

coffee house in Tower Street

1836 Collision liability - case Vaux v Salvador

1855 First P&I club, now called Britannia

1870 Cargo liability – case Westenhope

1899 Creation of International Group of P&I

clubs

1906 English Marine Insurance Act

Introduction and Background

• Hull Underwriters were the first “modern day” marine insurers.

• The first ”Protection Societies” were created during the mid 1800s as an adjunct to
the Hull Clubs because of increased exposure to risk.

• One-quarter damage to hull

• Cargo liabilities

• Passenger liabilities
(Lord Campbell’s Act)
Interface H&M and P&I

• The P&I Clubs have expanded their scope of cover over the last 150 years.

• How?
• H&M clubs have narrowed their scope of cover over the same period by excluding
certain risks with which they have lost money.
• The shipping industry responds by adding these risks to the named risk insurance
products offered by P&I Clubs.

• P&I insurance is meant to provide a seamless cover with the H&M insurance
• The interface between H&M and P&I is of great practical importance for several
types of claims
 Coverage

• Hull and Machinery (H&M): Protect the value of property

Asset insurances • Increased value (IV)
• War Risks: Covers H&M and P&I Risks caused by war risks
Marine
• Loss of hire (LoH):
Income insurances Protects the owner against loss of income
• Strike

• Protection and Indemnity (P&I):

Liability insurances Protects the owner against third party claims P&I
• Freight, Defence & Demurrage (FD&D)
P&I Clubs as a Legal Entity

The Corporate Structure of P&I Clubs

• Mutual associations – owned by the members (the insureds) for the
members
• Operated on a not for profit basis meaning in practice that the
claims and operating costs in a policy year shall be covered by the
premium and investment income in that year
• Any surplus will be allocated to the reserves
• No external capital owners involved expecting a return on their
investments
• Mutual insurance means insurance at cost – no profit is ceded to
external capital owners
 The International Group of P&I Clubs

The IG consists of 13 Clubs covering 90% of the world’s merchant fleet

• Norway: Gard, Skuld

• UK/Bermuda: UK Club, Britannia, Standard, Steamship,
West of E, North of E, London Club,
Shipowners

• Sweden: Swedish Club

• Japan: Japan Club
• USA: American Club
Co-operation between P&I Clubs

• London Group of P&I Clubs established in 1899 for the purpose

of agreeing a claims sharing arrangement

• Renamed the International Group when non-English Clubs

became members

• Collective purchase of market reinsurance since 1951

Co-operation between P&I Clubs (IG)

• Functions
— Claims sharing
— Collective purchase of market re-insurance cover
— Pressure group acting on shipowners’ behalf

• Legal Framework
— Pooling Agreement (governing claims sharing and purchase of
market re-insurance)
— International Group Agreement (securing the discipline required to
operate the Pool)

• Club Rules
— Terms of entry agreed between the P&I Club and the Member;
must include exemptions and exclusions in the Pooling Agreement
Claims Handling

• The Pooling Agreement for P&I claims does not ”kick in” until the claim has reached
the USD 7 million level (net of deductible), so the vast majority of claims never
go into the Pool (or above).
• In the normal course, the Member notifies the Club of an incident, the file is
registered and a reserve is set on the file.
• The reserve is based on the
estimated liability exposure
(including costs and expenses)
and the deductible.
• Further handling involves
information gathering and
settlement negotiations.
 The rules:

The starting point

Rules

• Rules 3 to 5 – Entries and duration of cover

• Rules 6 to 9 – Conditions of cover
• Rules 23 to 26 - Termination and cesser
• Rules 27 to 50 – P&I cover
• Rules 51 to 63 – Limitations etc. on P&I cover
• Rules 71 to 77 – General limitations
• Rules 80 to 88 – Claims etc.
The scope of the P&I cover

Gard Statutes & Rules

• As a pre-requisite to any named risk P&I cover, the insured’s liability has to arise
from the operation of the ship.

Gard Rule 2(4)(a):

A Member is only covered in respect of liabilities, losses, costs and

expenses incurred by him which arise in direct connection with the
operation of the ship.
Claims related to ship operations

• ’People’ claims - Rules 27-33

• Cargo claims - Rules 34 & 35

• ’Striking’ claims - Rules 36 & 37

• Pollution claims - Rule 38

• GA and salvage - Rules 41 & 42

• Other claims/liabilities

• Remember: P&I is a legal liability insurance. ‘Commercial’ payments are

not covered.
 The rules:

Personal injury and crew claims

P&I Claims Related to Persons

• What people are on board a ship?

• crew Rule 27

• passengers Rule 28

• others carried on board Rule 29

• people not carried on board Rule 30

• stowaways, refugees etc. Rule 32

 All Claim Types 1996-2007:
Owners entries at 20 February, 2008 (gross of reinsurance)

400,000 35,000

350,000 30,000
300,000
25,000
Severity ($000's)

250,000

Frequency
20,000
Severity
200,000
15,000 Frequency
150,000
10,000
100,000

50,000 5,000

0 0

r
e
o

FO

ew

n
ry
er
s

s
ve
nc
rg

ay
ne

tio
ju
th

Co
Cr
,F
Ca

fe

In

l lu

aw
Fi

O
De
DC

Po
al
d

ow
ar

on
R

St
G

rs
n,

Pe
io

id
s
lis

ut
l
Co

O
Rule 27 | Liabilities in respect of Crew
1 The Association shall cover:
Part I
a) liability to pay hospital, medical, maintenance, funeral and other costs and expenses
incurred in relation to the injury to, or illness or death of, a member of the Crew,
including costs and expenses of repatriating the member of the Crew and his
personal effects, or sending home an urn of ashes or coffin and personal effects in
the case of death, and costs and expenses necessarily incurred in sending a
substitute to replace the repatriated or dead man;

b) liability to repatriate and compensate a member of the Crew for the loss of his
employment caused in consequence of the actual or constructive total loss of the
Ship or of a major casualty rendering the Ship unseaworthy and necessitating the
signing off of the Crew;
Rule 27 | Liabilities in respect of Crew

c) liability to pay compensation or damages in relation to the injury to, or illness or

death of, a member of the Crew;

d) liability for costs and expenses of travelling incurred by a member of the Crew
when the travelling is occasioned by a close relative having died or become
seriously ill after the Crew member signed on, and costs and expenses necessarily
incurred in sending a substitute to replace that Crew member;

e) liability for wages payable to an injured or sick member of the Crew or on death to
his estate;

f) liability in respect of loss of or damage to the personal effects of a Crew member.

Rule 27 | Liabilities in respect of Crew

Provided:
• Where the liability is contractual (e.g. sick wages), the terms of contract (e.g. CBA)
are previously approved by the Club.

• Reviewing CBA’s is a large part of the job in the Crew Department!

• Reference to “personal effects” excludes valuables and non-essential items.

Exclusions:
• No recovery for liability arising under a contract of indemnity or guarantee
between the Member and a third party. E.g. a shipyard

• No recovery arising out of the carriage of specie, bullion, precious or rare metals
or objects, plate, bank notes, negotiable instruments, etc. unless previously agreed
to with the Club.
The scope of the cover

Part II
2 The Association shall cover:

a) costs and expenses which are not recoverable under Rule 27.1 and which are
necessarily incurred in sending a substitute to replace a member of the Crew who
has been left behind; (deserters)

b) costs and expenses which are not recoverable under Rule 27.1, which are
necessarily incurred under a statutory obligation in repatriating a member of the
Crew of the Ship and in sending a substitute to replace him and which would not
have been incurred had there been no such statutory obligation; and

c) costs and expenses incurred as a direct consequence of complying with an order

for the deportation of a member of the Crew and in sending a substitute to replace
him …

Subject to 4 provisos
 Evaluating risk: crew contracts and CBAs

• The contract will be checked for the following benefits:

• A) Medical Treatment: Treatment at the shipowner’s account.

Often subject to a time limit (120 days), or, where there is no time limit, a permanent disability assessment
clause.

• B) Sick wages: Usually equivalent to a % of the basic wage.

Often subject to time limits (POEA 120 days maximum), but could have no limit (ITF injury).
Evaluating risk: crew contracts and CBAs
• C) Disability Compensation – usually in case of injury, but also occupational illness may be
included (ITF/AMOSUP).

POEA also covers work-related illness cases.

Usually found as a Table in the Appendix of the CBA.

• Note! Most contracts have maximum amounts

ranging from USD 50,000 (POEA) to USD 175,000.

• D) Death Compensation: Usually payable for any reason while under contract. However,
some CBAs exclude compensation for suicide.

Range from USD 50,000 to 250,000 depending on rank and CBA.

Often includes payment to children under 21 years old (max. 3 or 4 children)
 Evaluating risk: crew contracts and CBAs

• E.) Personal Effects.

Compensation payable following a maritime
casualty such as a sinking, grounding, etc.,
The maximum payment is usually USD 3,000.

• F.) Compensation for Termination of

Employment
In cases of grounding, sinking, fire, etc…
It is usually 2 months basic wages.

• G.) Jurisdiction Clause.

Jurisdiction is most often subject to the courts and laws of the ship’s flag state and/or the country of the
seafarer’s domicile.
Rule 28 | Liabilities in respect of passengers

• The Association shall cover:

• a) liability for injury to, or illness or death of, or loss of or damage to the effects of
passengers and hospital, medical or funeral expenses incurred in relation to such injury,
illness or death;
b) liability to pay damages or compensation to passengers on board the Ship where such
liability arises in consequence of a casualty, including any liability to return passengers to
their port of departure or to forward them to their port of destination and to pay for their
maintenance ashore;
c) liability pursuant to mandatory rules of law for loss caused by delay in the carriage of
passengers and their effects;
d) costs and expenses incurred as a direct consequence of complying with an order for the
deportation of a passenger which would not have been incurred had no such order been
made,
Rule 28 | Liabilities in respect of passengers

• provided that:
• i) the Association's liability under paragraphs (a) and (b) above shall not exceed what it
would have been had the passage contract relieved the Member of liability to the
maximum extent permitted by applicable law;
ii) the Association's liability under paragraph (d) above shall be subject to the provisos to
Rule 27.2; and
iii) the cover shall be subject to proviso (iii) to Rule 27.1.
iv) for the purpose of Rule 28(b) above a casualty shall be defined as an incident involving
either collision, stranding, explosion, fire or other cause rendering the Ship incapable of safe
navigation to its intended destination or a threat to the life, health or safety of passengers.
Rule 29 | Liability for other persons carried on
board

• 1 The Association shall cover liability arising out of the injury to, or illness or death of, or
liability for loss of or damage to the effects of persons carried on board other than Crew or
passengers provided that:
• i) in the case of a person other than a close relative of a member of the Crew, the
Association has approved the presence of such persons on board;
ii) the cover shall be subject to proviso (iii) to Rule 27.1.
• 2 The Association shall cover costs and expenses incurred as a direct consequence of
complying with an order for the deportation of any such other person carried on board
which would not have been incurred had no such order been made, subject to the provisos
to Rule 27.2.
Rule 30 | Liability for persons not carried on board

• The Association shall cover liability resulting from the injury to, or illness or death of
persons, other than Crew, passengers and other persons carried on board, provided that
where the liability arises under the terms of a contract or indemnity and would not have
arisen but for those terms, the liability shall only be covered when and to the extent that
those terms have been approved by the Association.
Rule 31 | Diversion expenses

• The Association shall cover extra costs of fuel, insurance, wages, stores, provisions and port
charges attributable to a diversion, over and above the costs that would have been incurred
but for the diversion, where these are incurred solely for the purpose of securing treatment
for an injured or sick person on board, or for the purpose of searching for a person missing
from the Ship, or necessarily incurred while awaiting a substitute for such person, or for the
purpose of saving persons at sea.
Rule 32 | Stowaways, refugees or persons saved at
sea

• The Association shall cover costs and expenses directly and reasonably incurred in
consequence of the Ship having stowaways, refugees or persons saved at sea on board, but
only to the extent that the Member is legally liable for the costs and expenses or they are
incurred with the approval of the Association. The cover does not include consequential loss
of profit or depreciation.
Rule 33 | Life salvage

• The Association shall cover sums legally due to third parties by reason of the fact that they
have saved or attempted to save the life of any person on or from the Ship, but only if,
and to the extent that, such payments are not recoverable under the Hull Policies or from
cargo owners or underwriters.
 Cover quiz:

Personal injury and crew claims

”The drunken sailor”

• Senior Engineer Augusto Costa was given 12 hour land leave in Boston, Massachusetts and
took the opportunity to visit a bar in the harbor area together with some of the other
crewmembers from the ship on which he was employed. After a few hours, they were all
intoxicated with alcohol to various extents. What happened next is unclear, but Mr. Costa
got at some stage involved in a fight and was stabbed with a knife.
• Due to his injuries, Mr. Costa was hospitalized for three weeks in Boston before being
repatriated back to his home in the Philippines.
• Mr. Costa’s employment contract which was based on a CBA had a clause excluding any
recovery or payments for “self-inflicted wounds”.

• How would you consider the matter as a P&I claims executive?

”The tourist”

• While attending a two weeks cruise out of Southampton, UK Mr. John Roberts arrived in the
port of Oslo, Norway. In the cruise terminal at Festningskaia Mr. Roberts noticed a poster
advertising a sightseeing bus trip with a local sightseeing company. The ticket was to be
paid on the bus which left regularly from the cruise terminal. While visiting the Operahouse,
Mr. Roberts fell from a structure on the roof, broke his neck and died. Mr. Robert’s relatives
claimed the cruise line for damages.

• How would you consider the matter as a P&I claims executive?