The Owner of a vessel (a shipping company) has, as is the case for a large part of any type of vehicle, 2 kinds of insurance:

  • One covering the risk of the ship-owner for damage to the vessel itself (casco- or hull insurance).
  • One providing cover for the ship-owner against third party liabilities relating to the use and operation of ships, also known as “liability insurance”.

The first mentioned insurance is, in case of a vessel, provided by a “Hull and Machinery insurer”. The name of the insurer for liability insurance is “Protection and Indemnity Club”. In the maritime industry generally known as “P&I Club” or occasionally “PandI-Club”.

A P&I Club is an independent, non-profit making, mutual insurance association, providing cover for its ship owner and charterer members against third party liabilities.

Structure of a P&I Club

The fundamental difference between a mutual and other types of insurance company is that a mutual is not trying to make a profit, has no shareholders and exists purely for the benefit of the insured ship owner. Mutual insurance is a collective self-insurance which operates at cost.

Under the idea of mutualism, various ship owners pool their resources together in order to meet losses suffered by each individual ship owner who is a member of the same mutual insurance.

The basic principle is that the contributions / mutual premium paid by the ship owners in relation to any one year should be sufficient to meet all the claims, reinsurance and administrative expenses of the P&I-Club for that year.

A ship owner / shipping company who is insured with a P&I-Club is called a “Member”. The premium paid by a Member is a “call”.

If there is a shortfall because claims are high, the Members may pay a pro rata "additional call" (also called “back call”) and if there is a surplus, a return may be made to the Membership, or the surplus transferred to reserve to meet losses on other years. The funds of the mutual are invested and the investment return is used to benefit the Members. The Members are both the insurer and the insured.

The supplement “Club” to the name of the kind of insurer originates from the fact that ship owners decided to join forces and form a well-defined group with the same interests.

Each club is controlled by its members through a board of directors or a committee, elected from the membership.

The day to day management of the Club, handling of the claims, investment and administration is done by a management company, often originating from a law firm.

History

Around the mid 18th century, ship-owners could insure their vessels with two hull insurance companies and Lloyds. At that time, there was no perceived need for liability insurance as ship-owners' exposure to third party claims was negligible. However, legal developments during the latter half of the 19th century resulted in a significant increase in ship-owners liabilities; the need for additional and specific insurance was generally acknowledged. The first liability insurance Club was founded in 1855 as an offshoot of a mutual hull Club, and this was soon joined by others. The Clubs started their activities by insuring the 1/4th liability for collisions and liability for damage to fixed objects (such as docks) which were excluded from the hull cover. This cover was called "protection" insurance. The introduction of statutory liability for loss of life and injury to passengers gave rise to a new liability which was covered by the establishment of "indemnity" mutuals.

Liability for cargo could at that time still be avoided by appropriate exemption clauses in contracts of carriage. However, further legal developments in the late 19th century resulted in ship-owners facing an exposure to cargo claims, notwithstanding the terms of the contracts of carriage, and in 1874 the “Indemnity Clubs” started to insure liabilities for loss of or damage to cargo. Fusion of the functions of the "Protection" and "Indemnity" mutual associations gave rise to the “Protection & Indemnity Clubs”, which have continued ever since to adapt their cover to the developing requirements of the shipping industry.

P&I Clubs Today

Approximately 90% of all the world's ocean-going merchant tonnage is entered with 13 P&I Clubs and their affiliates who make up the International Group of P&I Clubs.28

Tonnage is a measurement of quantity to describe the cargo carrying capacity of a vessel. The higher the tonnage, the more cargo it can carry and the larger the vessel is.

These 13 Clubs are based variously in England, Scandinavia, Bermuda, Luxembourg, the United States and Japan. There are in addition a number of small independent Clubs, as well as some P&I facilities in the commercial market. The International Group of P&I Clubs is a "Club of Clubs" which exists to provide a forum for discussion of legal and technical issues affecting the member Clubs, to provide a mutual reinsurance scheme for the member Clubs through the International Group Pool and its associated Excess Loss Reinsurance contracts, and to monitor the transfer of business between member Clubs under the terms of the International Group Agreement. It also acts from time to time as a lobbying organization in relation to the development of maritime law and practice internationally.

The 13 members of the International Group of P&I Clubs are:

  1. with its subsidiary Gard P&I (Bermuda) Ltd.
  1. with its subsidiary Skuld Mutual Protection and Indemnity Association (Bermuda) Ltd.

with its subsidiaries :

  1. The Standard Steamship Owners’ Protection and Indemnity Association (Europe) Ltd.,
  2. The Standard Steamship Owners’ Protection and Indemnity Association (London) Ltd.
  3. The Standard Steamship Owners’ Protection and Indemnity Association (Asia) Ltd.
    - A reinsured subsidiary association
  1. with its subsidiary The Steamship Mutual Underwriting Association Ltd.
  1. with its subsidiary United Kingdom Mutual Steam Ship Assurance Association (Europe) Ltd.
  • West P&I Club
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What do P&I Clubs cover for?

Clubs cover a wide range of liabilities including:

  • Personal injury to, illness or death of crew, passengers and others on board,
  • Cargo loss and damage,
  • Oil pollution,
  • Wreck removal
  • Collision damage and
  • Dock damage.

Clubs also provide a wide range of services to their members on claims, legal issues and loss prevention, and often play a leading role in the management of casualties.

Demands of a P&I Club to guarantee cover

In order to guarantee a full cover, a P&I Club has some demands on the technical condition of an entered vessel. So does a P&I Club require that an entered vessel is and remains classed with a classification society approved by the P&I Club (and thus complies with the rules, recommendations and requirements of that classification society). A P&I Club also asks that Members shall comply with all statutory requirements of the state of the Ship's flag.

These statutory requirements do relate to the construction, adaptation, condition, fitment, equipment, manning, safe operation, security and management of the vessel.

Furthermore, a P&I Club may at any time during the period of entry appoint a surveyor to inspect the vessel.

Such an inspection by or on behalf of a P&I Club is focused on the cargo worthiness of a vessel, but may also cover on the conditions of the working environment for the crewmembers and longshoremen, living conditions of crewmembers, standards of housekeeping, condition of personal safety equipment, condition of firefighting equipment, condition of life boats and rafts,.

Furthermore a P&I Club inspection is aiming to find confirmation of the actual implementation of procedures such as those to prevent accidental oil discharge, for evacuation of the vessel, for maintenance of lashing and securing equipment, and also prove of regular drills and training into the use of firefighting equipment, life saving applications, life boats, emergency steering. A P&I Club works according the principal of “pay to be paid”.

In practice this means that a ship Owner has to pay costs, compensations or settlement funds for claims first and can then recover these costs from the P&I Club based on the rules of the P&I Club and the terms of entry.

The rules of the P&I Club are the general conditions which are basically the same for all Clubs. The terms of entry are the custom made clauses of a contract of entry of a Member which stipulates issues as deductibles, height of the call (premium), ...

However, since ship-owners do not like to pay more than necessary and/or since they want to be sure that they can recover all costs from the P&I Club and/or they want to use the P&I Clubs expertise, they often involve the P&I Club in the decision making, the costs control process, the management of casualties or claims and the (legal) claims handling.

For this reason, a P&I Club will take the lead in handling of P&I related matters.

By its nature, the shipping industry is a global industry. Ship-owners are based worldwide and vessels sail from port to port, from country to country. For this reason, the P&I Clubs have, apart from their head office, opened branch offices in geographically strategic ports or in countries where an important number of Members are located.

Apart from this, each P&I Club has a worldwide net of Correspondents who can provide immediate and first line assistance to Masters of an entered vessel, have knowledge of local law, rules, regulations and customs, have local contacts, know the local service providers, are familiar with local geographical, maritime conditions, etc.

P&I Club versus crew member

A P&I Club is involved in crew matters since a crew member has, in certain circumstances, to be considered as a “third party”.

Not only has a ship-owner, as employer, obligations against a crewmember under the terms of the contract of employment, but a crewmember can also be entitled to compensation for illness or injury or can issue a claim against his employer.

A P&I Club will compensate a Member for the costs the insured had, such as:

  • Medical costs, hospitalization, maintenance and other costs related to injury to or illness of a crew member.
  • Costs and expenses for the repatriation of a crew member and his personal belongings.
  • Costs for funeral and other costs related to the death of a crew member or the costs and expenses of the repatriation of the remains (coffin / urn) and personal effects.
  • Costs and expenses for sending a substitute to replace the repatriated or dead crew member or crewmember who has to be left behind (hospitalization).
  • The payment of compensation or damages related to the injury, illness or death of a crewmember.
  • The payment of wages of an injured, ill crewmember.
  • Costs related to the loss or damage to personal effects of a crewmember.