Modern Law of Marine Insurance Volume Five, The

Professor D; Rhidian Thomas

Document

CHAPTER 3 Page 41

Direct and third-party claims against P&I Clubs

D Rhidian Thomas

Introduction to P&I Clubs and insurance 1

3.1 Third-party liabilities to which the global shipping industry is exposed are insured primarily by mutual Clubs (Associations) that are members of the International Group of Protection and Indemnity Clubs (IGP&I).2 Collectively the 13-member Group Clubs insure about 90% of the global shipping fleet.3 They are geographically dispersed around the globe with one domiciled in the USA4 and Japan,5 respectively, three in Scandinavia,6 and the remainder in England.7 In this chapter the focus is on Group Clubs domiciled in England, and to avoid unhelpful repetition and excessive technicality, the Rules of the North of England Club (hereafter “the Rules”), when the occasion arises, are cited as illustrative of the general position adopted by the English Clubs in relation to Class 1 Protecting and Indemnity insurance.8 The individual Group Clubs act as independent, not-for-profit, mutual insurers and provide liability insurance in a competitive environment, even as between each other.9 By contrast the IGP&I is a distinct corporate entity that

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assumes a broader representative and international role relating to international shipping and the marine environment, and also in placing and the management of reinsurance.10 3.2 Collectively the Group Clubs provide their members, predominantly shipowners and operators, with substantial and secure insurance cover.11 This availability has also served the international public interest by underwriting the international maritime liability regime that has emerged over the last 60 or so years, which also witnessed the introduction of mandatory insurance and third party direct rights of action against insurers.12 All the major liabilities are covered, including high risk areas such as ship-source pollution, wreck removal, collisions, salvage, death and personal injury, passenger and cargo claims. In some instances this will result in P&I insurance working in close association with market insurance, as in the case of collisions and salvage liabilities, where hull and machinery insurance may also be involved.13 In the case of oil pollution from ships, P&I insurance operates in close association with the International Oil Pollution Compensation Fund.14 3.3 The Group Clubs continue to be mutual associations but are much changed from their historical ancestors.15 The corporate form has been adopted and with the percentage rating of calls individually assessed on the basis of risk.16 Unlike a fixed premium obligation, the obligation of a member to respond to calls is continuous and cumulative, albeit that Clubs do their utmost to ensure that this prospect is more theoretical than real, but this is not always possible.17 The modern Group Clubs have developed into significant international business and financial organisations employing or contracting in a range of professional and skilled directors, managers, lawyers and insurance personnel. The biggest Group Clubs each insure around 20% of global shipping, covering the full range of modern shipping and also accompanying diversity of risk.18 Beyond insurance, the Clubs provide their members with a wide range of services which include general information, and advice and assistance on maritime, managerial, commercial, documentary and legal

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matters.19 In the face of difficulties, a member may reasonably consider its Club as a source of assistance. The relationship may also suggest a more tolerant response to claims without amounting to carte blanche.20 3.4 The insurance provided is within the broad designation of marine insurance and takes the form of time policies.21 Traditionally the cover is for 12 months, commencing from 12 noon GMT on the 20 February.22 English law is expressly adopted as the governing law of the Rules and insurance contracts,23 with disputes referred to London arbitration and English law the curial law of the arbitration.24 Consequently the full gambit of the relevant statutory and common law applies, including the Marine Insurance Act 1906 and subsequent amendments, in particular the amendments and additional provisions enacted by the Insurance Act 2015.25 Where the option to contract out of the statutory provisions has been recognised by the 2015 Act, it has been adopted by the Clubs.26 Consequently the Clubs are not party to most of the recent default reforms of English insurance law.27 In the event of arbitration, the Arbitration Act 1996 and related common law will be of central significance.28 3.5 The contractual terms of cover are set out in the Certificate of Entry issued by the managers following the acceptance of a proposal for insurance.29 The certificate indicates the precise provisions in the Rules that have been agreed by the parties as well as any other conditions.30 Of these matters the Certificate of Entry is conclusive evidence of the “entire agreement” between the parties.31 The geography of the contract follows general market practice with the terms relating to matters such as the identification of the insurable interest; date issued and the commencement date of the period of cover, risks insured, exclusions, limitations, conditions and warranties, claims procedure, governing law, and dispute resolution procedures.32 3.6 The cover provides an indemnity to members in respect of liabilities, costs and expenses arising as a result of the member's interest in an entered ship, arising out of

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events occurring during the period of the entry of the ship and in connection with the operation of the ship.33 The question of liability is established by judgment, arbitration award or agreement with the consent of the managers.34 It predominantly takes the form of an obligation to pay damages/compensation to a third party.35 But also extends to individual items of expenditure which the member has incurred, referred to as costs and expenses in the Rules.36 3.7 With regard to the nature of the cover, there are two distinctive characteristics which merit attention. 3.8 First, there is some uncertainty whether the cover should be described as third-party liability insurance or third-party indemnity insurance. The two are closely allied but there is a significant legal difference. Where liability is insured, the cause of action arises once liability is established by any of the procedures previously identified.37 Where it is the compensation paid to the third party that is insured, the cause of action is deferred until payment in discharge of the liability is made.38 It would appear to be clear that P&I insurance falls into the latter category.39 3.9 The Rules in defining the member's right of recovery indicate that “the Member shall be entitled to recover out of the funds of the Association the amount of such liability, costs or expenses”.40 This form of words focuses on payment and not the incurring of liability. There is also the provision in the Rules which is customarily described as the “pay first” or “pay to be paid” rule. The effect of this clause is to render the payment of the third party liability or other payment obligation a condition precedent to the right to recover under the insurance. Further, the discharge must be from funds belonging to the member, and not borrowed for the purpose.41 This is a particularly demanding requirement usually supported on the ground that the financial viability of members is an essential prerequisite of mutual insurance. The clause expressly recognises that the directors in their discretion may waive the condition precedent, but there is little understanding about how this discretion is exercised.42 The condition precedent does not apply to death and personal injury claims,43 nor does it apply to all aspects of the cover.44 From this it follows that a claim made by a member under the insurance is for the reimbursement of monies paid.45

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3.10 The second characteristic is that to a large extent cover is either conditional or discretionary. Significant parts of the cover are conditional on obtaining the express agreement of the managers, often required to be in writing,46 or the approval of the managers, for example for the adoption of a particular contract.47 Presumably the consent or agreement of the managers may be expressed in the Certificate of Entry or subsequently, but prior to the occurrence of the risk. 3.11 The discretionary nature of the cover is even more pervasive and may be dependent on the favourable exercise of discretion by the directors, Members Board or managers, as might be the case. Thus an exclusion or condition or limitation to the cover may be dispensed with by the exercise of discretion. It has previously been observed that the directors may waive the “pay first” condition precedent.48 More widely the directors may admit a claim which is not expressly covered by the Rules, under the omnibus rule, provided the risk is consistent with P&I class cover.49 Also, more particularly, if a member fails to have a vessel surveyed within a specified period of time, cover is lost “save in the sole discretion of the Member's Board”.50 There are many more examples peppered throughout the Rules which could be cited. 3.12 This significant discretionary characteristic of the cover has caused some doubt to be expressed as to whether P&I cover can properly be regarded as insurance.51 This query immediately confronts the problem of precisely how a contract of insurance is to be defined, a question which has generated much discussion and diversity of response.52 One line of argument is that a contract of insurance establishes a right to payment in prescribed circumstances, which is very different from the qualified and discretionary nature of P&I insurance. But it is doubtful if it can be said that the cover is wholly based on discretion. In many instances the discretion functions to modify the application of conditions and limitations, much in the same way a waiver and estoppel might do in the context of market insurance. The wide discretion may also be claimed to be consistent with the mutual character of the insurance. But whatever the merits of the debate, the issue appears to be no longer relevant. The courts and insurance markets have long accepted P&I insurance to be a category of marine insurance and the foundation of the insurance to be the contract of marine insurance.53 3.13 To understand how claims are dealt with by Group Clubs and the legal issues that may arise, it is necessary to have an understanding of the managerial structure and associated decision-making procedures. All are governed by the constitution of the individual

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Clubs, in particular the Articles of Association and Rules, with the former the superior document.54 3.14 The management of claims is allocated primarily to the directors, who may delegate the function to the Members Board (or equivalent body) or managers.55 The primary responsibility is delegated to the managers who may be directly employed by the Club or a management company engaged under contract.56 Whatever the form of organisation, the “Claims” sector is a distinct and significant sector of Club management. Although the managers assume the major role, some decisions may be directed to the Members Board or directors, who may also have powers to override the decisions of managers. This may bring into existence an interaction between two or more managerial strands of decision-making, with the exercise of discretion an additional ingredient.57 The legal nature of the various interrelationships and the exercise of discretion will be analysed at various stages in the text that follows.58 3.15 Club correspondents are not members of the internal management of a Club, nor are they agents of the Club or any party connected with the Club.59 Nonetheless, they may, on an ad hoc basis, be authorised to receive claims and respond, as may be appropriate, on behalf of the Club.60

Direct claims against Clubs

The claim

3.16 Save where the pay to be paid rule has been waived,61 a claim under P&I cover is for reimbursement of loss in the form of damages or compensation paid to a third party (including related costs and expenses)62 or the recovery of specific expenses or costs incurred.63 Of course, the precise nature and quantum of the loss will depend on the facts and circumstances of individual cases. The claimant, however, may not include a claim for interest unless the Members Board, in its discretion, determines otherwise.64 3.17 There are a number of factors that may influence the quantum of a claim beyond its precise measure.65 Save for one, all derive from general legal principles:

(a) If a Member is entitled to limit liability, the liability of the Club does not exceed the amount of the limitation.66

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(b) If a deductible has been agreed, the assured is self-assured to that amount.67
(c) In the event of underinsurance, the assured may recover only a proportion of the loss, namely the proportion that the entered tonnage bears to the full tonnage of the entered ship.68
(d) If the insured is in breach of the duty to mitigate loss following the occurrence of an incident out of which a claim may arise, any recovery under the insurance may be reduced by the amount that would have been saved had the duty been properly discharged.69
(e) The Club may set off any sum due from a member against any sum due from the Club to that member.70
(f) There are circumstances when the Directors or Members' Board or managers are vested with discretion under the Rules to refuse payment or reduce the sum otherwise payable under the Rules.71 To give one example: If a claimant is in breach of the duty to use best endeavours to comply with a circular issued by the Club aimed at promoting safety and good practice, the Members' Board has discretion to reject or reduce the claim to the extent that it would not have arisen if the recommendation in the circular had been complied with.72

3.18 The Rules appear to say nothing about the settlement of claims and yet it may be anticipated that settlements are not an unusual experience in the ordinary course of business. This matter would presumably fall within the delegated authority of managers in relation to the claims process. In the absence of any rule to the contrary, under a settlement the Club might agree to a remedy that otherwise would not be expressly available under the Rules, for instance to effect repairs or reinstate damaged or lost property belonging to a third party.73

Obligations of a member prior to making a claim against the Club

3.19 The period between the occurrence of an incident out of which the member may incur liability and the making of a claim is of significance to the Club. It is the period when important preparatory and protective steps may be taken in the interests of the Club and member. For the Club to defer any involvement until the time a claim is actually made

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or even later when the liability of the member is established could be prejudicial in both strategic and financial terms. 3.20 The terms of the insurance will usually empower the Club to act in its best interests by taking necessary steps to manage and control an incident which has occurred and from which a liability may arise, and to preclude the member from acting contrary to its interests. The member may be under a general obligation to cooperate and specific obligations to give notice and information of events and developments. The potential benefits are many. An early involvement may place the Club in a position to better assess the evidence and validity of any eventual claim. To give directions aimed at mitigating the loss suffered and to give consideration to rights of recovery open to it by way of subrogation and reinsurance. It is widely recognised that the duties and responsibilities assumed are of commercial and legal significance.74 3.21 In the case of P&I Clubs there may also be wider benefits. In the face of significant potential liabilities the Club may consider it prudent to make an early assessment of existing financial reserves and the necessity to make additional calls. It may also be prudent to formulate a judgment on appropriate future percentage call ratings. Additionally, the information acquired may contribute to effective record keeping and the preparation of accident and loss prevention programmes.75 3.22 It is now proposed to analyse the customary procedural obligations of members. These obligations as drafted in the Rules give rise to many questions of construction. In responding to them it must be borne in mind that the established rules for the construction of commercial agreements apply.76

(i) Obligation to give notice and provide information of an incident out of which a claim may arise

3.23 NR 33 (1), titled NOTICE, provides:

Every Member shall be bound to give prompt notice in writing to the Managers of every incident which could reasonably be expected to give rise to a claim under these Rules and shall furnish the Managers as soon as reasonably possible with all documents or information relevant thereto.

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Modern Law of Marine Insurance Volume Five, The

CHAPTER 3

Page 41 Direct and third-party claims against P&I Clubs

Page 41

Introduction to P&I Clubs and insurance1