- Here is All You Wanted to Know About P&I Clubs
- Where do P&I clubs fit in marine insurance?
- Hull & Machinery policy
- Cargo insurance
- P&I Insurance
- Why P&I Clubs?
- How do the P&I clubs work?
- A new shipowner entering into the club
- Finances of a P&I club
- Balance of Income and Expenditures
- International group of P&I clubs
- what is a p&i club ? Covers, Claims, Liability?
- Covers provided by the P and I club
- What is “call money” and how is decided by the P and I Club?
- Who are P&I club correspondents and what are their functions?
- How are claims of P& I clubs paid?
- Updated Club Limits as of 2016/17
- How does a ship owner register his claim?
- Which liabilities are normally not covered by the P & I clubs?
- What are the P&I covers for pollution?
Here is All You Wanted to Know About P&I Clubs
It’s Almost July of this year. What’s so special in July, you may ask.
Naaa.. It’s not my birthday and it’s not my son’s birthday.
This is the time I have to shell out a huge chunk of money for my car insurance. Year after Year, each year.
Now if I am so much worried about my Car’s insurance premium, Imagine about the ship owners.
Imagine how much money they need to pay for the insurance of their ships. But that is the cost they cannot avoid.
These costs are for the insurance of ship’s hull and machinery. The good part in this insurance is that costs are known to the shipowner and they can plan for that.
But when a ship is navigating at sea, carrying cargo and is involved in all these activities, it is subjecting itself to a number of claims against the ship owners.
For example, a port can claim that ship damaged its fenders or a buoy while berthing. Or the port can claim that ship polluted their waters.
So it is not about only insurance of damage to the hull and its machinery but also about all the claims that ship owner can get against him.
There can be a number of other kinds of claims. Some logical and some illogical. But ship owners have to make sure that they are insured for all of these.
In this post, we will discuss where P&I clubs fit in the marine insurance and how do these work.
Let us jump in.
Where do P&I clubs fit in marine insurance?
Broadly there are three types of marine insurance.
- Insurance for the ship (Hull and Machinery)
- Insurance for the cargo (Taken by the shipper)
- Insurance for the third party claims
Hull & Machinery policy
Insurance for the ship’s hull and machinery is provided by H&M underwriters. This is the oldest kind of marine insurance and most basic one too.
This is the insurance for the damage to the ship’s hull and machinery.
H&M insurance policies have few important clauses that shipowners have to abide by.
For example, H&M policy has International Navigation Limits. The international navigation limits define the geographical limits within which the ships can trade without any additional premium.
Another example, H&M policy restricts the ship to proceed to war zones without informing the H&M underwriters. Again, this is because of additional risk that these areas pose.
The shipper has shipped the cargo and the cargo gets damaged during the voyage. Can shipper claim all the costs from the shipowner or carrier?
If you understand the “Hague-Visby rules” you will know that these rules provide many defenses to the shipowner.
So if these defenses apply to a case, the shipper would have nobody to claim these damages from.
This is the reason that shipper insures the cargo at each leg of the voyage.
P&I insurance is used for the third party claims towards the ship owners. Shipowners provide a service of carrying the cargo of the shipper.
While providing this service, a shipowner may be subjected to a number of claims from third parties.
These claims could be damage to the jetty, pollution from the ship or even the fines to the ship from authorities.
Shipowners need to insure for all these third party claims. P&I clubs provide insurance to the shipowners for all these claims.
Why P&I Clubs?
Before the 19th century, the term “marine insurance” only meant the insurance for the ship’s hull and machinery.
This was the time when most of the ships were sailing vessels.
The chances of collision between two sailing vessel’s were less. But as more and more steamships came to the sea, the chances of collision between ships increased.
Underwriters became concerned about this increased risk. Rightly so because in collisions between two vessels, H&M insurers not only have to cover the damages of the insured ship but also pay for the damages of the other ship if the blame is on the insured vessel.
To take care of part of this risk, they introduced a clause in their policies.
This clause was called “3/4th Collision Clause” or “Running down clause“. As per this clause, the underwriters will only pay 3/4th of the total liability or claims against the ship owners in a collision incident.
This clause is there in the Hull & Machinery policies even today.
Let us see this with an example. Let us say there has been a collision between two ships. The “hull & machinery insurance” of both the ships will study the investigation of the collision to set up the percentage of blame.
Let us say the blame was set as below
Ship A: 70% responsible for the collision
Ship B: 30% responsible for the collision
The repair costs for both the ships are as follows
Ship A: USD 100,000
Ship B: USD 250,000
Total cost of repairs: USD 350,000
The liability of both the ships will be
Ship A: USD 245,000 (70% of the total costs)
Ship B: USD 105,000 (30% of the total costs)
So ship A need to pay USD 145,000 to ship B apart from USD 100,000 damages to its own ship which will be covered by H&M insurance.
As per 3/4th collision clause, the H&M insurance company will pay only 3/4th of this amount.
So payable by H&M insurance: USD 108,750
Payable by shipowner: USD 36,250
The ship owners wanted to insure this amount too without exorbitantly increasing their insurance premium.
Shipowners could get this 1/4th liability insured but for that, they needed to pay an additional premium. Shipowners wanted to avoid that.
This led to the formation of P&I clubs which works on the principle of mutual sharing or pooling of the risk.
With time the P&I clubs insured many other risks the owners were subjected to in their business of running the ships.
How do the P&I clubs work?
P&I clubs work on a non-profit basis. It is the club of shipowners who are acting both as assured and insurers.
P&I clubs work on the principle of mutual sharing and pooling of the risk.
What does this mean? Let us understand this with a simple and most basic example.
10 shipowners form a club for sharing each other’s risk. All these 10 shipowners have one ship each which is of the same type, size and value.
At the end of the year, one ship had third party claim of USD 1000 to pay. This claim of USD 1000 will be shared by all the 10 shipowners equally.
So each shipowner would contribute USD 100 to pay this claim. This means that with just USD 100, each shipowner was able to cover the risk of the third party claims.
Now that we know the basic principle of working of P&I clubs, let us understand few basic terms used in P&I clubs.
In more realistic situation P&I club cannot afford to ask the contribution of each owner only when there are some claims to settle.
In our example, the claim of USD 1000 would need to be paid immediately to avoid the delays to the ship. This means that P&I club needs to have money in its account to pay for the third party claims.
P&I clubs maintain a fund and ask the shipowners to contribute to this fund
- when a new shipowner joins the club or
- when the fund money goes down because of the claims settles.
- Annually or as per the rules of the P&I Club
All these requests to the shipowners for the payment are called “Calls”.
So these may be
- Advance calls (Paid when a shipowner joins the club or at the beginning of year)
- Supplementary calls (Paid when the funds have gone down because of claims paid )
- Release calls (to settle the account of a ship that is sold or scraped or shipowner leaves the P&I club)
Deductibles in a claim is a common practice in all kind of insurances.
The deductible is the pre-set amount deducted from the insured loss.
Let us say that a P&I club has set the deductibles for claims arising from damage to the jetty as USD 5000.
Now if the claim towards the shipowners for one of such incident is USD 30000. Then the P&I club would pay USD 25000 after USD 5000 as deductible from this claim.
Deductible serves two purposes
- It discourages the shipowners from claiming the small amounts.
- It ensures that shipowners have increased interest in minimizing the casualties and claims
Now let us see this from the perspective of a ship owner who just bought a ship and needs to enter a P&I club.
A new shipowner entering into the club
It is important for the shipowner to insure all risk involved with the operation of a ship. Apart from “Hull & Machinery” insurance, entry of the ship into a P&I club is important.
So the ship owner would first approach the P&I club for including him and his ship into the club.
The P&I Club will assess all the factors before deciding if it is OK to include this ship owner and this ship into the club. Some of the factors the club would be looking for are
- Suitability of the cargo spaces for the intended cargo
- Proficiency of the crew
- previous track record of the ship owner and/or Ship managers
- Standards of classification society
Once the club decides that the ship can be covered, the details of the cover provided by the club would be shared with the ship owner.
The details would include the call rate and deductibles for each type of risk. Call rate is expressed as amount per gross tonnage.
If agreed the ship owner will pay the “advance call” and P&I club will issue the “certificate of entry” to the ship owner.
Finances of a P&I club
Let us see how the finances of a P&I club are handled?
As discussed, the P&I Club maintains a fixed amount of fund which is used for the settlement of claims.
The P&I Club maintains this fund through the payments of the advance calls and supplementary calls from the members.
Some part of this money is also invested to earn some profit which again goes into the fund. This all becomes the income part of the P&I club.
So in short, the income part of the P&I club include
- The Annual contribution from the members.
- Contribution of new members or new ships entering the club
- Interest/Profit earned on the investments of the fund
It is too obvious to say that P&I clubs will have many expenditures. The major chunk of which goes in the settlement of claims against its members.
Apart from that, another expenditure of the P&I clubs is the management cost of running the club. Management cost would include the salaries of the employees and rent of the offices etc.
P&I clubs also reinsure some of its risks. The cost of such reinsurance also comes under expenditures.
So the expenditure part includes,
- payments made as claims settlements,
- Management costs
- Reinsurance costs
Balance of Income and Expenditures
Once the incomes and expenditures are known, the balances are just the game of addition and subtraction.
At the end of the year, the amount short of the agreed amount to maintain in the fund is contributed by each ship owner.
The contribution paid by a ship owner is equal to the “call rate” multiplied by the total gross tonnage of his ships insured by the P&I club.
The call rate would be different for different owners and for different ships.
The call rate for a ship owner depends upon factors
- past history of claims of the ship owners
- the age of the ship
- crew proficiency and knowledge
- trading patterns of the ship
International group of P&I clubs
I know we don’t hear this terms quite often. But there is this group of P&I clubs that plays an important role in the third party claim insurance.
This is the group of 13 P&I clubs. All these P&I clubs are bound by the agreement called “International Group Agreement“.
The purpose of this group is to
- set the rules of engagement and cooperation between the clubs
- provide a unique and invaluable forum for sharing information on matters of concern to clubs and their members
- Provide a pooling agreement between clubs for claims exceeding USD 10 million
So any claim that exceeds USD 10 million, the excess amount will be shared by the member clubs of this group.
As this is a huge group, it allows the group to economically share the large claims.
It is not uncommon for the seafarers to deal with P&I club correspondents. When there is a claim or an incident, we are asked to call for the attendance of P&I club representative.
If we know how the P&I club functions and more importantly that they are on our side, dealing with these situations becomes easy.
This makes the knowledge about the functioning of P&I clubs so much important.
what is a p&i club ? Covers, Claims, Liability?
The roots of the Protection & Indemnity Club or a P&I club were founded in 18th century England. Those were the days of sailing ships and extremely slow and inefficient communication system. Ship owners and the underwriters had limited contact and the hull insurance did not cover all aspects of loss on board.
A group of ship owners formed an association to provide each other insurance cover. This association was a non-profit making body controlled by a group of close-knit ship owners. These associations were named as Mutual Hull Insurance Clubs.
The basic principle of the club was that each member of the group of ship owners would share with other members the cost of any hull claim, which an individual member suffered. It was paid rate ably according to the value of the vessel or vessels owned by that member of the club.
This spread the risk over a number of owners and provided the cover, which was otherwise lacking in the insurance market. Pooling of risks made the cover cheaper than what was available in the market.
In addition, the club was able to have greater control over the handling of claims when compared to the insurance cover provided by underwriters. The increase in the volume and the complexities of world trade expanded the risks covered.
In due course, the mutual insurance organisations joined forces to form the present date Protection and Indemnity Club. Most of the Protection & Indemnity Clubs were established by the beginning of 20th century. They were administered by a group of members, the committee, which met periodically to decide on the payment of claims and the levying of calls (premium).
Covers provided by the P and I club
Following are the typical covers provided by a P and I club:
- personal injury, claims to cover third party liabilities covering death or injury to crew, passenger and stevedores. etc.
- crew claims to cover repatriation
- collision liabilities
- fixed and floating objects claims
- cargo claims
- environmental pollution claims
- miscellaneous claims e.g. wreck removal, customs fines etc.
- freight, demurrage and defence for disputes under charter parties.
Claims other than above can also be considered under the so-called ‘Omnibus Rule’, in which the club committee has the discretion to consider deserving claims from any member at any time.
What is “call money” and how is decided by the P and I Club?
The premium rates to be paid to the club by a ship owner are called the “call money”. The amount is decided by the committee the fleet’s ship types, ages, gross tonnage, trades, flags, crew nationality, exposure to risks, and other factors including the member’s claims record and the lihood of large claims in the coming year.
The member is advised of the total estimated call for the next 12 months; this comprises of an advance call and a supplementary call.
Advance calls are levied on all members at the start of the P & I year, which is February 20th (on this date sailing vessels would depart for the Baltic from ports on the north-east coast of England following their winter lay-up and by tradition and still is the date from which insurance was required).
Later in the year, if claims have been heavier than expected, the managers will ask the members for a supplementary call to “balance the books”. Clubs aim to be accurate in their predictions of future claims so as not to burden owners with supplementary calls. Refunds are made when income (calls + investments) exceeds outgoing (claims + expenses).
Related Article: The Procedure For Transferring The Registry
Who are P&I club correspondents and what are their functions?
P & I clubs retain correspondents at numerous “ports worldwide. In the USA, a correspondent is normally a law firm with maritime lawyers. The correspondents:
- Are for legal reasons, representatives and not agents of the club;
- Will attend member vessels when so requested by the master or agent in order to protect a member’s interests;
- Are generally well acquainted with the club’s rules and policy, etc.;
- Will report any occurrence ly to result in claim on the club;
- May, pending instructions, appoint surveyors to inspect damages;
- Maybe instructed by the club “to offer letter of undertaking in case of possible liability. In most cases of bunkering oil pollution or damage to jetty etc., a bond is to be posted to avoid arrest.
Most clubs provide the ships with a list of correspondents.
How are claims of P& I clubs paid?
~Club LIMITS have been updated. Below for understanding purposes only~
When a member of a P & I club has a claim, the first $5 million will be met by the club’s own fund.
In excess of $5 million and up to $30 million the claim is divided among the member clubs in the International Group Pool (including the club making the claim), with the pooling contribution of each club being calculated taking into account its entered tonnage, premium income and claims record in the Pool.
For claims in excess of the Pool limit, the International Group arranges an Excess of Loss reinsurance contract in the market; this currently provides cover for $2000 million ($2 billion) in excess of $30 million in relation to all types of claim except oil pollution, where the limit is $1000 million ($1 billion).
Should the claim ever exceed the upper limit of the Excess of Loss Contract, it should fall back on the Pool and be borne by each club pro rata according to its entered tonnage.
Such a claim is called an “overspill claim” and would be funded either from the club reserves or by making a special “overspillcall” on the membership.
For most of the history of die P & I clubs, there is no upper limit to cover, but there is an upper limit of $4.25 billion on overspill claims. Some clubs extensive reinsurance for overspill claims.
Updated Club Limits as of 2016/17
Club cover continues to contain a standalone cover limit for oil pollution of US $1 bn, a limit on passenger claims of US $2 bn, and a combined limit on passenger and crew claims of US $3 bn.
For 2016/17, the individual club retention has been increased from US $9 million to US $10 million, the previous upper and upper-upper pool layers have been merged into a single upper pool layer from US $45 million to US $80 million, and the GXL programme attachment remains at US $80 million.
A further 5% multi-year US $ 1 billion (excess of US $100 million) private placement has been effected, and the Hydra coinsurance within the first GXL layer (US $500 million excess of US $80 million) has been slightly increased to include an additional 5% in the layer US $80 million-US $100 million.
Hydra is a segregated cell captive reinsurance company, established in Bermuda in 2005, through which the Group clubs collectively reinsure exposure in the lower and upper pool layers, and co-insure exposure in the first layer of the market GXL placement (US $80 million- US $580 million).
How does a ship owner register his claim?
A ship owner, who is a member of the club, must give immediate notification of any incident, which could result in a claim or liability within the scope of the club’s cover. Once a claim or a potential claim has been notified the club takes over the investigation and handling of the claim. It takes the help of the correspondents, surveyors and lawyers appointed by the club.
In liaison with the member, the club will handle the claim to its logical conclusion. If there is a third party claim where the member has to pay, the club will ask the member to pay for the liability.
Once the member pays the amount, an indemnity (i.e. reimbursement) is asked for from the club in accordance with the club rules and the member’s terms of entry. The amount recoverable is subject to a deductible i.e.
an amount agreed by the member to bear himself before he can claim from the club.
Which liabilities are normally not covered by the P & I clubs?
Clubs will not normally cover:
- Ad valorem bill of lading
- Delivery of cargo to a port other than the port specified in the bill of lading;
- Failure to arrive or late arrival at a port of loading;
- Delivery of cargo without production of bill of lading;
- Ante-dated or post-dated bill of lading;
- Clean bills of lading in case of damaged cargo;
- Deck cargo carried on terms of an under-deck bill of lading;
- Arrest or detention of an entered ship.
What are the P&I covers for pollution?
P & I cover for pollution liabilities is generally to the extent that the pollution is as a result of an escape or discharge or threatened escape or discharge of oil or any other substance. Clubs have traditionally covered:
- Liabilities for damages or compensation;
- Costs of reasonably-taken measures for preventing, minimizing or cleaning up pollution;
- Costs or liabilities incurred as a result of compliance with government directions during a pollution incident;
- Special compensation payable to salvers;
- Fines for pollution.
- Ad Valorem Bills
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