P&I cover is a type of insurance shipowners can take out for claims made against them by third parties. It would cover, for instance, claims for damage to cargo, for injury to passengers or crew and for damage to other ships in collisions. The cover is provided through mutual insurance orgnaisations known as P&I Clubs. They are ‘mutuals’ in so far as they do not set out to make a profit, but merely to ‘pool’ or ‘spread’ the risks of all their clients.
The world of P&I has its own unique terminology. Risks are not underwritten but ‘covered’. There is not an insurer but a ‘Club’. There are not clients or assured, but ‘Members’. Vessels are not insured by the Club but ‘entered’ with it. There is not an insurance policy, but a ‘certificate’. There is not a policy excess but a ‘deductible’. There are not premiums but ‘Calls’.
Usually P&I cover pays the full third party liability claim less the deductible. However, in respect of collision claims the Club only typically pays 1/4 of the claim, providing an extra deterrent for the Member to avoid collisions. Although today many Clubs will cover full liability (known as 'four fourths') for an extra fee.
As P&I Clubs are only generally concerned with third party liabilities they are not concerned with covering damage to the Member’s own vessel. This damage will be covered under a separate ‘Hull’ or ‘Hull & Machinery’ policy.
The 'Pay to be Paid' Rule
As the Clubs are indemnity organisations, they generally compensate the Member for claims they have had to pay to third parties for liabilities incurred in the operations of the vessel. For that reason the Member will usually have to pay a claim and then ask the Club to compensate them for the amount of that payment; they cannot just ask the Club to pay the claim directly. One exception is in personal injury claims where the Club will often agree to pay the claim without the Member having first paid it.
Many of the Clubs now provide FD&D Cover as an optional extra. This stands for Freight, Demurrage & Defence. Essentially it means the Club will represent the Member in respect of extra elements of legal claims not typically covered by general P&I insurance.
The International Group
There is an International Group of P&I Clubs who have agreed to pool their very high value losses (in excess of USD 8 Million) to provide yet further security to their Members. They also work together for the benefit of their Members as a whole. There are currently 13 Clubs who are members of the group; with The Shipowners' Club being the largest in terms of number of vessels entered and GARD being the largest in terms of Gross Tonnage of vessels entered.
Sometimes it can be quite confusing to an outsider to understand all the Club's referred to in the market, as all have a 'management company' which runs the day to day business on behalf of the Club; it will underwrite business and pay claims and the surplus is held for the Club to cover catastrophic losses or years when a very high level of claims are made. Technically, or at least theoretically, the Clubs (being the Members acting as a group) could withdraw or fail to renew their management contract and appoint a new management company, but the relatively small size of the market and shortness of relevant skills amongst the workforce as a whole mean that such an event would be extremely rare.
Many of the management companies share similar names to their insurer accordingly, but some do not. As a brief guide the Members of the group with significantly different management company names and some nicknames are therefore as follows:
- The American Club
- Japan Club
- The London Club - Managed by Bilbrough
- The North of England (North, NEPIA)
- The Shipowners' Club (Shipowners, SOP, SMP)
- The Standard Club - Managed by Charles Taylor
- Steamship Mutual
- The Swedish Club
- UK Club - Managed by Thomas Miller
- The West of England (the West)
Each Club has its own set of Club Rules, which act like a copy of the insurance policy would if the risk were underwritten by a commercial insurer. Typically the certificate will merely state that the Member is entered with the Club subject to the Club Rules and confirm any variances, exclusions or additions, i.e. rather than recite those rules in full.
All of the Clubs publish a copy of their own rules on their website but the International Group clubs, due to their pooling arrangements must have essentially common insurance cover in their standard Rules (in other words, despite using their own wording, the same risks are overall covered, and the same items are excluded or limited within that cover).