150.4-6
PROTECTION AND INDEMNITY (P&I) CLUBS
(January 2023)
INTRODUCTION
Protection and Indemnify (P&I) Clubs are associations of vessel owners and charterers owned and controlled by the insured vessel owner or charterer "members." They operate as non-profit mutuals, meaning that the members combined (pooled) their resources to meet losses sustained by individual members with only a consideration for handling losses and expenses.
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Again, they operated on the basis that the contributions paid in a given year should be sufficient to meet the Club's claims, reinsurance and administrative expenses for that year. If there is a shortfall because of higher than anticipated claim activity, a pro rata "additional call" may be required. If there is a surplus, that surplus can either be returned to the members or transferred to a reserve fund for future losses. This is very similar to the mutual insurance companies in the United States.
ORIGIN
The first mutual Clubs were formed in England in the mid-18th Century to cover hull and machinery losses. At that time, two hull insurance companies and Lloyds monopolized the market and forced vessel owners to pay high premiums. In response, the vessel owners established their own self-governing Hull Clubs to insure hulls on a mutual basis. There was no apparent need for liability insurance at the time because vessel owners had minimal exposure to third party claims.
As years passed, the need for hull coverage was increasingly accompanied by a market need for liability protection. The first need was coverage for that 1/4th liability for collisions and liability for damage to fixed objects excluded from hull policies. This was referred to as "protection" insurance. In the late 19th century statutory liability for loss of life and injury to passengers gave rise to a new liability covered by the newly established "indemnity" mutuals.
Liability for cargo could still be avoided by inserting various clauses in contracts of carriage but legal developments in the late 19th Century resulted in vessel owners facing exposure to cargo claims, regardless of contract of carriage terms. Indemnity Clubs began insuring liabilities for loss of or damage to cargo in 1874. Merging the "Protection" and "Indemnity" mutual associations gave rise to Protection & Indemnity Clubs, which have continued ever since to adapt their coverage to the developing requirements of the shipping industry.
CALLS
At first, all vessel owners in a Club contributed "calls" to claims suffered by Club members. The contributions were made on a pro rata basis, according to the tonnage of the vessels "entered" in the Club. As claims and exposures increased in complexity, a cash reserve was needed to pay claims. Members were charged a mutual premium in advance of claims at a fixed rate per entered ton that applied to the entire membership. As the shipping industry developed, diversified, and became more international, the need to charge different vessel owners different rates became apparent. As a result, while "calls" are still charged at a rate per ton, the rate now varies according to the risk the individual member's vessels represent to the Club. Relevant factors include the extent of coverage required, the type and size of vessel, trade, and nationality of the crew.
While the vast majority of P&I remains on a call basis, a fixed premium P&I product was introduced in 2007.
COVERAGE/SERVICES
P&Is offer a variety of coverage and related services such as loss to cargo, bodily injury or death claims involving passengers or crew, cost of repatriating stowaways, liability to third parties due to collisions (to other vessels and to fixed objects), some contractual liability, salvage costs, and limited pollution liability.
OPERATIONAL CONTROL
Traditionally, P&Is are controlled by boards composed of representatives (directors) of the participating vessel owners and charterers. They may secure the services of experts in marine law, insurance and even mariners to manage activities. P&Is meet regularly and may involve themselves with large claims reviews, arranging random inspections of ships owned/chartered by its members and issue certificates of entry.