P&I Clubs: Law and Practice

David Semark

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781135117825
• Edition: 4
• Topic: Law
• Subtopic: Maritime Law
• Index: Law

This fourth edition is a detailed but easy-to-follow account of the constitution, workings and daily practice of protection and indemnity clubs. Designed to be a practical reference source for anyone who is in any way involved with mutual insurance, it offers comprehensive guidance on the complex area of P&I Clubs. The new fourth edition has been fully revised and updated since the last edition was written in 1999. New areas emphasised in the fourth edition include: • Piracy • Charterers' liability insurance • Defence Cover • Disputes concerning the Inter-Club Agreement • Enforceability of arbitration agreements in the Club's Rules. • The Club's obligation to (i) make direct payments under certificates, (ii) pay death/ personal injury claims in the event of a member's insolvency, and (iii) make indivisible personal injury claims.

Chapter 1
Introduction and History

A. What is a P&I Club?

1.1 A P&I Club is an association of commercial shipowners and charterers and other associated parties, which provides protection against a number of risks inherent in industrial ship operation. The essence of P&I Clubs is that they are mostly mutual associations, where the members are both insured and insurers, contributing to claims via so-called "calls". Whereas a shipowner’s hull and machinery insurance is designed primarily to protect the assured against losses to his vessel, the protection and indemnity insurance offered by P&I Clubs indemnifies an owner in respect of the discharge of legal liabilities he has incurred in operating his vessel.

B. The Hull Clubs

1.2 Today’s P&I Clubs are the direct descendants of the hull clubs. Many of the practices of the modern P&I Clubs are at least parallels, and often derivatives of, those of the hull clubs.

1.3 Numerous accounts exist detailing the history of marine underwriting in the United Kingdom from its humble beginnings in the coffee-houses of the City of London.¹ Without detracting from its praiseworthy past, the traditional market of the eighteenth century also had a number of deficiencies and it was as a reaction to these drawbacks that eighteenth-century shipowners decided to club together in mutual hull insurance associations. The poor state of marine insurance at the close of the eighteenth century is detailed in the minutes of evidence to and the report of the Select Committee of the House of Commons on Marine Insurance of 1810.² The major criticisms of marine underwriting at this time can be presented as follows: first, there was a lack of security in recovering averages. Failures occurred after claims from heavy losses in the late seventeenthn century and again in 1780 during the American War of Independence. The number and sizes of losses were such that many underwriters were bankrupted and assureds left unpaid. The marine insurance market was expanding to cope with the expanding interest in overseas trade and the expanding marine insurance business drew in many undesirable merchants looking for the "fast buck" —at best incompetent, at worst men of straw and rogues.³

1.4 A second criticism of eighteenth-century marine underwriting related to the monopolistic situation in the market. In June 1720, the Bubble Act⁴ was enacted providing for the creation of two corporations, the Royal Exchange Assurance and the London Assurance, for the purpose of transacting marine insurance business. Also the statute prohibited the following⁵:

" . . . all other corporations... and all such societies and partnerships as now are, or hereafter shall or may be entered into by any person or persons, for assuring ships or merchandises at sea... "

1.5 The ability of "private or particular persons" to transact marine insurance was specifically preserved and the Act, therefore, put individual underwriters in a more protected position and led to the pre-eminence of the private market at Lloyd’s but prevented any form of marine insurance on a combined security. Over a century after this statute, Pollock B described the situation in the following terms⁶:

"At common law any individual or association of individuals might be insurers of ships, but in the beginning of the last century it was thought expedient, partly with the view of preventing the evil which arose from insurance by insufficient persons, and partly to enable the government to raise money by the sale of a monopoly, to prohibit any partnership or association insuring, except two corporations, which, in the year 1720 received charters from the Crown, under the titles of the Royal Exchange Assurance. This statute was repealed in the year 1824 by 5 Geo. IV, c.114 but even during its existence there was nothing to prevent mutual insurance associations, or clubs, as they were sometimes called, mutually insuring ships belonging to their members... and the fact that but two companies were allowed to insure was probably one of the reasons which led to the establishment of such mutual associations."

1.6 The findings of the 1810 Report regarding the monopoly were that the contribution to marine insurance from the two corporations was insignificant⁷ and there could be little doubt "of the absurdity of suffering a monopoly to exist",⁸ and a Bill to repeal the Act of 6 Geo. 1 received the Royal Assent on 24 June 1824, which ended the " absurd restrictions". While the monopoly persisted, however, the lack of competition resulted in inevitable increases in premiums and an inflexibility in accepting risks.

1.7 A third accusation made against the traditional market was the litigious disposition of underwriters causing delays in recoveries.⁹

1.8 Another cause of dissatisfaction with the underwriters of the coffee-houses was their habit of absenting themselves from their businesses during periods of greatest risk.¹⁰

1.9 A further problem concerned provincial shipowners. Shipowners at the outports of Britain were a long distance from London, which was the centre of the insurance market, and were unable to ascertain the integrity and solvency of underwriters and there was among provincial shipowners a perhaps parochial attitude of distrust of big city underwriters.¹¹ The distance from London also necessitated the use of brokers, a class of person much criticised by assureds at the time for their lack of integrity and heavy charges.¹² Another problem for provincial assureds was the fact that the insurers in London tended to cater mainly for the trade at that port.

1.10 Another complaint against the market was in respect of the cautious underwriting practices and limited range of insurable risks. The two corporations pursued a very cautious policy with regard to the variety of maritime risks to be underwritten¹³ and the private underwriters were also inflexible and conservative in their acceptance of risks.¹⁴

1.11 It has been said that the Parliamentary Committee of 1810 was "a sort of Grand Assize and Lloyd’s was in the dock accused of inefficiency, inadequacy, and insolvency".¹⁵ From the Report of the 1810 Inquiry came a call for greater facilities for effecting marine insurances and it is in this atmosphere that the hull clubs were developed.¹⁶

1.12 The unsatisfactory state of the marine insurance market, particularly for those shipowners of the provinces, led to groups of shipowners at various outlying ports associating together to insure their hull risks between themselves on a mutual basis. Towards the end of the eighteenth century¹⁷ there were established a number of friendly associations among shipowners for the mutual insurance of their ships; they were particularly abundant in the north-east of England¹⁸ especially in the coal transport trade. The north of England did not hold a monopoly in hull clubs, however, and a few associations were conducting business in London and other ports.¹⁹

1.13 In addition to the hull clubs which covered standard hull risks often by using a modified Lloyd’s S.G. policy, there existed other classes of clubs covering other forms of risks not covered by the traditional market or covered only at prohibitively high premiums; for example, Cargo and Outfit Clubs, Cargo and Freight Clubs, and Small Damage Clubs.

1.14 A great deal of doubt surrounded the legitimacy of the hull clubs, particularly as to whether they had been established in contravention of the prohibitions of the Act of 1720. The Select Committee, having discussed the inconvenience and injustice of the monopoly continued in the following terms²⁰:

" . . . the rights of the Companies have been disregarded; and it appears, that notwithstanding the prohibition and the penalties by which it is protected, that there are upwards of twenty known Associations in different parts of England for the purpose of Marine Insurances."

1.15 In Marine Mutual Insurance Association v Young,²¹ Pollock B alluded to the possible illegality of the old hull clubs where he said²²: "A further effect of the exclusive privilege has been to drive shipowners into a course which is illegal but which ought not to be suffered to remain so."²³

1.16 It would appear that the cost to the shipowner was cheaper through these clubs than through Lloyd’s and that the clubs would not have existed had there been a greater facility for doing business at Lloyd’s or with companies. It is noteworthy that in other countries at this time companies for the purpose of marine insurance were developing unhampered whereas in this country, because of the prohibition, shipowners were forced to take the independent line and form themselves into illicit associations.

1.17 These early hull clubs were very local friendly affairs usually managed by only a secretary and a manager or a small committee. The clubs afforded an immediate, local and intimate means of taking insurance on ships. Personal acquaintance between members was an advantage in itself and not only were these clubs insurance concerns but they were places where "men of the sea pooled their difficulties and where help (both financial and otherwise) was given in sorting things out".²⁴ The club system of calls also met with the approval of shipowners as it amounted to a form of insurance on credit or insurance by instalments or at least deferred payments. Also the small clubs were so simple in their administration they were very economical and, being mutual in character, profits were not part of the calculations in underwriting.

1.18 At first they insured only vessels owned by shipowners in the immediate vicinity of the club. Some clubs, however, began to look further afield and admitted vessels from more distant ports. This may have been so either because the shipping of their own port was not of a sufficient volume to support a club with a sufficient ...