SHIP OWNER’S LIABILITY AND MARINE INSURANCE

SUBMITTED TO:-
DR. Y. PAPA RAO
(Faculty: Insurance Laws)
SUBMITTED BY:-
Praharsh Gour
(Student Semester X)

SUBMITTED ON:-
6TH APRIL, 2018

HIDAYATULLAH NATIONAL LAW UNIVERSITY

(RAIPUR)

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ..................................................................................................... 3

RESEARCH METHODOLOGY........................................................................................... 4

INTRODUCTION ................................................................................................................ 5

ORIGINS OF MARINE INSURANCE ................................................................................. 7

TYPES OF MARINE INSURANCE ..................................................................................... 8

PARTIES IN MARINE INSURANCE ................................................................................ 11

TYPES OF MARINE LOSSES ........................................................................................... 13

WARRANTIES IN MARINE INSURANCE CONTRACTS .............................................. 14

TYPES OF MARINE POLICY ........................................................................................... 16

SHIP OWNER’S LIABILITY IN MARINE INSURANCE ................................................. 18

LIMITATION TO SHIP OWNERS LIABILITY ................................................................ 22

CURRENT POSITION OF SHIP OWNERS LIABILITY INSURANCE ............................ 24

CONCLUSION ................................................................................................................... 27

BIBLIOGRAPHY ............................................................................................................... 28

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 ACKNOWLEDGEMENT

This is not just a customary acknowledgement of help that I received but a sincere
expression of gratitude to all those who have helped me complete this project and made it
seem apparently more readable than otherwise it would have been.

I am in debt to my faculty advisor Dr.Y. Papa Rao for giving such an interesting and
amazing topic “S
SHIP OWNER’’S LIABILITY AND MARINE INSURANCE” and making it seem
easy by lucidly explaining its various aspects. I am also grateful to all my friends who have
given valuable suggestions pertaining to the topic and have been a constant source of help
and support.

Last but not the least I would like to thank the library staff and computer lab staff of my
University for their valuable support and kind cooperation.

Thanking everyone.

Praharsh Gour
Semester X

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RESEARCH METHODOLOGY

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation:

The method of writing followed in the course of this research paper is primarily
analytical. The researcher has followed Uniform method of citation throughout the course of
this research paper.

Research Technique:

The research methodology used is secondary and the researcher has basically relied
on books, articles on various sites concerning Private International Laws.

Source of Data:

The following secondary sources of data have been used in the project-

1. Articles

2. Books

3. Websites

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INTRODUCTION

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or
cargo by which property is transferred, acquired, or held between the points of origin and
final destination. Cargo insurance—discussed here—is a sub-branch of marine insurance,
though Marine also includes Onshore and Offshore exposed property (container terminals,
ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.

The Marine Insurance Act includes, as a schedule, a standard policy (known as the 'SG
form'), which parties were at liberty to use if they wished. Because each term in the policy
had been tested through at least two centuries of judicial precedent, the policy was extremely
thorough. However, it was also expressed in rather archaic terms. In 1991, the London market
produced a new standard policy wording known as the MAR 91 form and using the Institute
Clauses. The MAR form is simply a general statement of insurance; the Institute Clauses are
used to set out the detail of the insurance cover. In practice, the policy document usually
consists of the MAR form used as a cover, with the Clauses stapled to the inside. Typically
each clause will be stamped, with the stamp overlapping both onto the inside cover and to
other clauses; this practice is used to avoid the substitution or removal of clauses.

Because marine insurance is typically underwritten on a subscription basis, the MAR form
begins: We, the Underwriters, agree to bind ourselves each for his own part and not one for
another [...]. In legal terms, liability under the policy is several and not joint; i.e. the
underwriters are all liable together, but only for their share or proportion of the risk. If one
underwriter should default, the remainder are not liable to pick his share of the claim.

Typically, marine insurance is split between the vessels and the cargo. Insurance of the
vessels is generally known as 'Hull and Machinery' (H&M). A more restricted form of cover
is 'Total Loss Only' (TLO), generally used as a reinsurance, which only covers the total loss
of the vessel and not any partial loss.

Cover may be on either a 'voyage' or 'time' basis. The 'voyage' basis covers transit between
the ports set out in the policy; the 'time' basis covers a period of time, typically one year, and
is more common.

The sources of the law of liability for maritime accidents in India are: (1) international
custom transformed into Indian common law. (2) treaty law based on international
conventions to which India is a party (as incorporated into the Indian domestic law by

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legislations), (3) the decisions of the Indian courts and those of foreign countries as
recognized by the Indian courts. The main basis of maritime law in India today is the
Constitution of India and such of the laws in force before 26 January 1958 as are in
conformity with the Constitution and parliamentary enactments. Under the Constitution of
India, Merchant Shipping is a Central Subject.

Presently, in India, maritime activities are governed by a host of heterogeneous laws many of
which are of colonial vintage. The law relating to liability for maritime accidents was
codified in India by the Merchant Shipping Act, 1958. The basic structure visualized in this
Act is similar to the statutes of many Commonwealth countries with certain essential
modifications to suit the Indian conditions.

A maritime accident may result in loss of life, personal injury and other impairment of health,
loss of or damage to property, and short term or long term damage to the environment. Major
issues include who is to be held liable for damage caused, the basis for determining liability,
and the level of compensation for damage.

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ORIGINS OF MARINE INSURANCE
Marine insurance as we know it today can be described as mother of all insurances. It is
believed to have originated in England owing to the frequent movement of ships over high
seas for trade.

Maritime insurance was the earliest well-developed kind of insurance, with origins in the
Greek and Roman maritime loan. Separate marine insurance contracts were developed
in Genoa and other Italian cities in the fourteenth century and spread to northern Europe.
Premiums varied with intuitive estimates of the variable risk from seasons and pirates.

The modern origins of marine insurance law in English law were in the law merchant, with
the establishment in England in 1601 of a specialized chamber of assurance separate from the
other Courts. Lord Mansfield, Lord Chief Justice in the mid-eighteenth century, began the
merging of law merchant and common law principles. The establishment of Lloyd's of
London, competitor insurance companies, a developing infrastructure of specialists (such as
shipbrokers, admiralty lawyers, and bankers), and the growth of the British Empire gave
English law a prominence in this area which it largely maintains and forms the basis of
almost all modern practice. The growth of the London insurance market led to the
standardization of policies and judicial precedent further developed marine insurance law. In
1906 the Marine Insurance Act was passed which codified the previous common law; it is
both an extremely thorough and concise piece of work. Although the title of the Act refers to
marine insurance, the general principles have been applied to all non-life insurance.

In the 19th century, Lloyd's and the Institute of London Underwriters (a grouping of London
company insurers) developed between them standardized clauses for the use of marine
insurance, and these have been maintained since. These are known as the Institute Clauses
because the Institute covered the cost of their publication.

Within the overall guidance of the Marine Insurance Act and the Institute Clauses parties
retain a considerable freedom to contract between themselves.

Marine insurance is the oldest type of insurance. Out of it grew non-marine insurance
and reinsurance. It traditionally formed the majority of business underwritten at Lloyd's.
Nowadays, Marine insurance is often grouped with Aviation and Transit (i.e. cargo) risks,
and in this form is known by the acronym 'MAT'.1

1
MARINE INSURANCE; Christopher J. Giaschi; UBC Law 332

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In India, insurance has been in vogue for several centuries. History holds proof that these
people had a system of pooling their contributions, if any one of their clan were to meet a
tragedy in their voyages. There is evidence that marine insurance was practiced in India
since long time. In earlier days travellers by sea and land were exposed to risk of losing their
vessels and merchandise because of piracy on the open seas. It was the British insurers who
introduced general insurance in India, in its modern form. The first company known as the
Sun Insurance Office Ltd. Was set up in Calcutta in the year 1710. This followed by several
insurance companies of different parts of the world, in the field of marine insurance. In India
marine insurance is transacted by the subsidiaries of the General Insurance Corporation of
India- New India Assurance, National Insurance, Oriental Insurance and United India
Insurance. Marine and hull insurance contribute 20% to the total premium of the general
insurance industry in India. Today marine insurance has assumed a vast canvas due to the
expanding trade across the globe, which involves large shipping companies that require
protection for their fleet against the perils of the sea. 2

TYPES OF MARINE INSURANCE

In basic terms there are three main types of marine insurance:

2
Non-Life Insurance; Kavita Goel

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1. Hull and Machinery Insurance:

Hull and machinery insurance is to protect the ship owner’s investment in the ship. It is
basically a property insurance which covers the ship itself, the machinery and equipment. The
owner will be protected for losses caused by loss of or damage to the ship and its equipment.
Loss of time following damage to the ship is covered under Loss of Hire insurance.
Furthermore, the insurance covers some liabilities, normally collision liability with another
ship (known as RDC – “Running Down Clause”) and sometimes also liability for colliding
with other objects than another ship (known as FFO - “Fixed and Floating Objects). Since the
conditions vary, it is recommended that the Master finds out how the insurance is placed for
the ship. Very often these liabilities are handled by the owner’s P&I club.
The third part of the insurance is cover for salvage and general average contributions.
Typical hull and machinery claims include:
 Total loss of the ship
 Damage to the ship, engines and equipment
 Explosions and fires
 Groundings – damage to the ship, salvage of the ship and possible contribution in
general average.
 Collisions – damage sustained to the ship and sometimes also liability towards the
other ship (RDC)
 Striking other objects – damage inflicted to own ship and sometimes also liability
towards the owners of the other object (FFO)

The hull and machinery cover will include a “Trading Warranty”, a clause stipulating where
the vessel may trade. This has nothing to do with any trading agreement in any charter party.
It is important to check these trading limits as a breach may jeopardise the cover. Life saving
is normally accepted even if trading limits are breached.

The insurers will pay the ship owner for the cost of repairs to the ship after the damage has
been surveyed and tenders from repair yards submitted. The ship owner will, however, have
an agreed amount referred to as the “deductible” which has to be paid by him before a claim
against his insurance policy is submitted. For example, if the deductible is USD 100,000 and
a claim for repairs is USD 300,000, the insurers will compensate the owner for USD 200,000.

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Hull and machinery cover is often arranged and placed in the insurance market by a
professional insurance broker. It is quite common that the insurance cover is spread to many
insurers in various countries. The insurers in the hull and machinery market are either
companies or syndicates. The company or the syndicate will have an underwriter who signs
the policy or the slip produced by the broker for his share of the cover. The biggest single
market for marine insurance is Lloyd’s in
London. Lloyd’s consists of a number of syndicates writing shares on insurance covers.

2. Cargo Insurance:

The owners of cargo, which is to be transported by sea, usually cover their financial exposure
against loss of, or damage to cargo for a declared value. Cargo insurance is provided by the
Syndicates at Lloyd’s but more commonly by professional insurance companies around the
world. They keep records of their losses and use this information to help them calculate
premiums for insurance of certain types of cargo in varying kinds of marine transportation,
i.e. in bulk, packaged, containerised, refrigerated, chilled, in tanks etc. The cargo insurer will
compensate the owner of the cargo for any loss or damage to the cargo. Thereafter they may
claim compensation for their loss from the carriers of the cargo.

3. Protection and Indemnity Insurance:

In basic terms, Protection and Indemnity insurance, or “P&I” as it is usually called, is a ship
owner’s insurance cover for legal liabilities to third parties. “Third parties” are any person,
apart from the ship owner himself, who may have a legal or contractual claim against the
ship. P&I insurance is usually arranged by entering the ship in a mutual insurance
association, usually referred to as a “club”. Ship owners’ are members of such clubs. Legal
liability is decided in accordance with the laws of the country where an accident takes place.
The P&I insurance cover for contractual liability is agreed at the time the owner requests
insurance cover from the club and is usually in accordance with the owner’s responsibility
under crew contracts or special terms relating to the trading pattern of the vessel. P&I
insurance is mainly concerned with the liability of ship owners. This type has been discussed
in the chapter ahead.

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 PARTIES IN MARINE INSURANCE

i. Assured
The assured, also called the insured, is the person who has taken out the policy and is obliged
to pay the premium.

ii. Additional Assureds

Policies of marine insurance frequently either name additional assureds or contain a clause
that extends the insurance to additional assureds by description.

iii. Underwriters
Underwriters are the entities that agree to indemnify the assured upon the happening of an
insured loss. They are also called insurers. Underwriters can be individuals or corporations.
Underwriters at Lloyds are represented by various syndicates who negotiate and sign policies
on behalf of the “names” they represent. It is not unusual for a policy of marine insurance to
have more than one underwriter. In fact, it is usual for there to be more than one. The policy
will name the underwriters and specify the extent of each underwriters interest. The first
underwriter named on the policy is the “lead” underwriter. This is the underwriter that will
make most decisions that are required to be made in the event of a loss.

iv. Underwriting Agents

Underwriting agents are entities that have the authority to enter into or sign insurance policies
on behalf of the underwriters. They sign as agent on behalf of the underwriters and, because
they are agents only, they are not personally liable to the assured under the insurance
contract. An underwriting agent may represent more than one underwriter and may sign on
behalf of more than one underwriter.

v. P&I Clubs
P&I Clubs are similar to a mutual insurance company that offers third party liability coverage
to shipowners. The members of a P&I Club are shipowners. In a sense, the shipowners are
both insurers and assureds. P&I Clubs do not normally issue policies of insurance. Rather, the
terms of the coverage they provide are usually set out in the club's Rules.

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vi. Insurance Companies
The traditional insurance companies also operate in the marine insurance field as
underwriters. They may or may not use an underwriting agent.

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TYPES OF MARINE LOSSES

A loss arising in a marine adventure due to perils of the sea is a marine loss.
Marine loss may be classified into two categories:

1) Total loss
A total loss implies that the subject matter insured is fully destroyed and is totally lost to its
owner. It can be Actual total loss or Constructive total loss. In actual total loss subject
matter is completely destroyed or so damaged that it ceases to be a thing of the kind insured.
e.g. sinking of ship, complete destruction of cargo by fire, etc.
In case of constructive total loss the ship or cargo insured is not completely destroyed but is
so badly damaged that the cost of repair or recovery would be greater than the value of the
property saved. e.g. a ship dashed against the rock and is stranded in a badly damaged
position. If the expenses of bringing it back and repairing it would be more than the actual
value of the damaged ship, it is abandoned.

2) Partial loss
A partial loss occurs when the subject matter is partially destroyed or damaged. Partial loss
can be general average or particular average. General average refers to the sacrifice made
during extreme circumstances for the safety of the ship and the cargo. This loss has to be
borne by all the parties who have an interest in the marine adventure. e.g. A loss caused by
throwing overboard of goods is a general average and must be shared by various parties.
Particular average may be defined as a loss arising from damage accidentally caused by the
perils insured against. Such a loss is borne by the underwriter who insured the object
damaged. e.g. If a ship is damaged due to bad weather the loss incurred is a particular
average loss.

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WARRANTIES IN MARINE INSURANCE CONTRACTS

Besides the three important principles i.e. good faith, indemnity, and insurable interest, it is
necessary that all the marine insurance contracts must fulfil the warranties also. Warrantee
means a condition which is basic to the contract of insurance. The breach of which entitles
the insurer to avoid the policy altogether. If the warranty is not complied with by the insured,
the contract comes to an end. There are two exceptions where the breach of warranty is
excused and does not affect that insurer’s liability:
(i) Where owning to change in the circumstance the warranty is inapplicable and
(ii) Where due to enactment of a subsequent law the warranty becomes unlawful.

Kinds of Warranties
Warranties are of two types:
(i) Express
(ii) Implied

An express warranty is one which is expressed or clearly stated in the contract and it can be
easily ascertained whether it has been fulfilled or not.
For instance a marine policy usually contains the following express warranties:
(i) The ship will sail on a specified day.
(ii) The ship is safe on a particular day.
(iii) The ship will proceed to the port of destination without any deviation.
(iv) The ship is neutral and will remain so during the voyage.

The implied warranty, on the other hand, is not expressly mentioned in the contract but the
law takes it for granted that such warranty exists. An express warranty does not exclude
implied warranty unless it is inconsistent therewith. Implied warranties do not appear in the
policy documents at all, but are understood without being put into words, and as such, are
automatically applicable. These are included in the policy by law, general practice, long
established custom or usage. The important implied warranties are discussed below:

(a) Sea-Worthiness of the ship.

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A ship is sea worthy when it is in a fit condition as to repair, equipment, crew, etc. to
encounter the ordinary perils of the voyage. This implies that the ship must be suitably
constructed, properly equipped and manned, sufficiently fuelled and provisioned and capable
of withstanding the ordinary strain and stress of the voyage. It must not be overloaded.

(b) Legality of Voyage.

The journey undertaken by the ship must be for legal purposes. Carrying prohibited or
smuggled goods is illegal and therefore, the insurer shall not be liable for the loss.

(c) Non-deviation of the ship route.

It is assumed that the ship will maintain the same route as stated in the policy in ordinary
course, but in case of peril it is permitted to deviate. If the ship does not follow the usual
route, the insurer will not be liable even if the ship regains her route before any loss takes
place. However, the insurer remains liable for any loss which might have occurred prior to
the deviation.

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TYPES OF MARINE POLICY

There are different types of marine policies known by different names according to the
manner of their execution or the risk they cover. They are: 3

1. Voyage Policy
Under the policy, the subject matter is insured against risk in respect of a particular voyage
from a port of departure to the port of destination, e.g. Mumbai to New York. The risk starts
from the departure of ship from the port and it ends on its arrival at the port of destination.
This policy covers the subject matter irrespective of the time factor. This policy is not
suitable for hull insurance as a ship usually does not operate over a particular route only. The
policy is used mostly in case of cargo insurance.

2. Time Policy
It is one under which the insurance is affected for a specified period of time, usually not
exceeded twelve months. Time policies are generally used in connection with the insurance
of ship. Thus if the voyage is not completed with in the specified period, the risk shall be
covered until the voyage is completed or till the arrival of the ship at the port of call.

3. Mixed Policies
It is one under which insurance contract is entered into for a certain time period and for a
certain voyage or voyages, e.g., Kolkata to New York, for a period of one year. Mixed
Policies are generally issued to ships operating on particular routes. It is a mixture of voyage
and time policies.

4. Valued Policies
It is one under which the value of subject matter insured is specified on the face of the policy
itself. This kind of policy specifies the settled value of the subject matter that is being
provided cover for. The value which is agreed upon is called the insured value. It forms the
measure of indemnity in the event of loss. Insured value is not necessarily the actual value. It
includes (a) invoice price of goods (b) freight, insurance and other charges (c) ten to fifteen
percent margin to cover expected profits.

3
Non life Insurance; Kavita Goel

16
5. Unvalued policy
It is the policy under which the value of subject matter insured is not fixed at the time of
effecting insurance but has to be ascertained wherever the subject matter is lost or damaged.

6. Open policy
An open policy is issued for a period of 12 months and all consignments cleared during the
period are covered by the insurer. This form of insurance Policy is suitable for big companies
that have regular shipments. It saves them the tedious and expensive process of acquiring an
insurance policy for each shipment. The rates are fixed in advance, without taking the total
value of the cargo being shipped into consideration. The assured has to declare the nature of
each shipment, and the cover is provided to all the shipments. The assured also deposits a
premium for the estimated value of the consignment during the policy period.

7. Floating Policy
A merchant who is a regular shipper of goods can take out a ‘floating policy’ to avoid
botheration and waste of time involved in taking a new policy for every shipment. This policy
stands for the contract of insurance in general terms. It does not include the name of the ship
and other details. The other details are required to be furnished through subsequent
declarations. Thus, the insured takes a policy for a huge amount and he informs the
underwriter as and when he makes shipment of goods. The underwriter goes on recording the
entries in the policy. When the sum assured is exhausted, the policy is said to be “fully
declared” or “run off”.

8. Block Policy
This policy covers other risks also in addition to marine risks. When goods are to be
transported by ship to the place of destination, a single policy known as block policy may be
taken to cover all risks. E.g. when the goods are dispatched by rail or road transport for
shipment, a single policy may cover all the risks from the point of origin to the point of
destination.

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SHIP OWNER’S LIABILITY IN MARINE INSURANCE

As discussed before Ship owners liability or Liability Insurance is mainly covered under
Protection and Indemnity Insurance. It is usually written as a separate contract that provides
comprehensive liability insurance for property damage or bodily injury to third parties. It is
also known as protection and indemnity insurance which protects the ship owner for damage
caused by the ship to docks, cargo, illness or injury to the passengers or crew, and fines and
penalties.

Explanation of the term” Protection and Indemnity”

The word protection simply means that the insurance also covers assistance when a ship is
involved in an accident and the shipowner and his Master need help. Often the club’s early
intervention and assistance will help to head off problems and serve to protect the shipowner
from inflated claims.
P&I insurance is an indemnity type of insurance, which means the shipowner (or member of
the club) must demonstrate his loss before the club will pay out (or indemnify him) under the
terms of the insurance policy. It is important to bear in mind that the club never assumes the
owner’s liability, therefore technically the owner (or member) is always responsible for
payments (the “pay to be paid” principle). In practice, the club takes over the business of
handling claims and ensuring that payments are correctly made.

Running down clause (RDC) and Fixed or Floating Objects (FFO)

The P&I cover may include liability for collisions (“RDC”), for example when the member’s
ship is in collision with another ship, or when the entered ship strikes a fixed object, i.e. a
quay, dock or buoy (“FFO”). However, collision and striking liabilities are often included in
the ship’s hull and machinery cover, for instance under the Norwegian Insurance Plan.
Therefore, it is important for a Master to ascertain whether his vessel’s collision insurance
(collision between ships) and striking insurance (i.e. when a ship strikes a fixed or floating
object which is not another ship) is covered under his P&I policy or under his hull and
machinery policy. To be safe, it is always wise for a Master to inform the P&I club, or the
club correspondent, if his vessel is in collision with another vessel or a fixed object.

Death and Personal Injury on Board the Vessel

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P&I insurance covers as owner’s liability for all deaths, personal injuries and illnesses which
occur on board, including death or injury to crew, passengers, stevedores, pilots and visitors
to the ship.

Repatriation of Sick or Injured Crew and Hospital Expenses

P&I insurance also covers a shipowner’s liability to pay for the costs of repatriating crew
members who become sick or are injured on board. The insurance also covers the crew’s
hospital bills and costs of sending replacement personnel to the ship if necessary.

Loss of Crew Members’ Personal Effects

P&I insurance also covers the owner’s liability for loss of crew belongings in cases of
shipwreck or fi re on board. The cover only applies to items which are deemed to be
reasonable for any crew member to have with him on board. A crew member travelling with
unusually expensive items, such as laptop computers, gold watches etc should make sure that
he has such items separately insured.

Loss of or Damage to Cargo

One of the major functions of Protection and Indemnity insurance is to cover a shipowner, or
the charterer of a ship, for liability for loss of, or damage to, cargo if there has been a breach
of the contract of carriage. This breach of contract usually means that something has
happened to the cargo while it was on board the ship or being loaded or discharged, and for
which the owner or charterer can be held responsible, i.e. shortage or damage to the cargo.
Therefore, if a Bill of Lading is signed and states that 10,000 sacks of potatoes are loaded and
only 9,500 are discharged – then the ship (the owner or charterer, or both) may be held liable
for the loss. Usually, the cargo insurers will pay the person or company who owns the cargo
(the receiver) for the costs of loss or damage to that cargo. The cargo underwriters will then
seek to recover their losses from the shipowner or charterer. The P&I club will usually take
over the handling of such claims on behalf of the assured. This is one of the reasons why
evidence in the form of documentation, copies of the log book, surveys of damaged cargo,
copies of tally books, dated photos of loading in the rain etc are very important in
establishing the exact reason for the damage. There are certain defences open to the ship
owner, such as being able to establish that the packaging of the cargo was not good enough to
protect it during transportation.

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Other P&I Covered Risks
Other risks covered include liability for stowaways, liability for oil pollution and other types
of pollution and legal liability for wreck removal if the ship sinks and is blocking free
navigation for other vessels. In short, P&I insurance is a very comprehensive type of
insurance cover which makes it easier for a shipowner or charterer to trade in international
shipping transportation. P&I is as important to a prudent shipowner as his Hull and
Machinery insurance cover. A summary of the main risks covered is to be found at the back
of this booklet.

P&I is a special type of marine insurance. It is a liability insurance that a prudent shipowner,
manager or charterer needs, particularly if the ship is employed in international trade. P&I
insurance cover a shipowner or charterer for liabilities and losses in direct connection with
the operation of the ship. We often use the term “third party insurance” to explain P&I.

P&I Clubs
The organisations providing P&I cover are always called 'Clubs' or 'Associations' instead of
Insurance Company. 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, legal developments in the late 19th Century resulted in
shipowners 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.4

P&I Clubs have the following advantages compared with commercial insurance providers:

4
Ernst Russ-NewsMail 5/2010 / December 23, 2010

20
1. Control: The P&I Clubs are owned and controlled by their shipowner members.
Accordingly they will provide an insurance facility that is actually required by their
members;
2. Profit: P&I Clubs have no profit element. All premiums paid by the members will be used
to cover the members' own risks and necessary administration costs. Therefore the premium
could be controlled at the minimum level;
3. Premiums: P&I Clubs reserve the right to make additional calls on their members if there
is a particularly bad claims experience for the Club as whole. That means a P&I Club is able
to offer members cover with very high limits, which is very important for liability insurance
because, unlike hull insurance, the value of shipowners' liabilities are always unpredictable
and could be very substantial;
4. Provision of Security: P&I clubs' letter of undertaking can be provided at minimum cost
for provision of security and are generally accepted worldwide;
5. Scope of Cover: The scope of cover of P&I Clubs is not limited to the listed risks in the
published Club Rules. In many circumstance, even the loss or damage are suffered due to an
issue which is not specifically mentioned in the Rules, the managers and directors are entitled
to exercise their discretion to decide whether or not this claim should be covered;
6. Service: P&I Clubs employ well experienced and highly qualified claims handling staff
that can provide the members with free advice or assistance on a wide range of matters, no
matter whether the matter is covered by the Club or not. Meanwhile, the members can also
benefit from the Club's worldwide network of correspondents to resolve the problems they
face in a remote area.

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LIMITATION TO SHIP OWNERS LIABILITY

Unlike most individuals in business, shipowners and some others connected with shipping
can rely on a very favourable concession granted to them by a number of statutes; this
privilege is limitation of liability. More than 90% of the World's oceangoing tonnage is
insured by the mutual P&I Clubs that are members of the International Group of P&I Clubs.
These organisations are the successors of the associations founded in the 19th and early 20th
centuries. The P&I clubs are mainly situated in the U.K. but also in USA, Japan, Sweden,
Norway and the Netherlands. The Clubs vary considerably in size and currently the largest
club is the Norwegian based Gard. P&I Club coverage is generally as broad as the liabilities
faced by a shipowners. The following are the major exceptions to this rule.

 Other insurance

Traditionally, one of the main reasons a claim was not covered by P&I insurance was that the
managers of the Club thought it should be covered by other insurance that the shipowner
should have taken out. That usually meant hull insurance, which paid collision liabilities and,
in some cases, liabilities for damage to fixed and floating objects ("FFO"), or war risks
insurance.

 Mutuality

Another reason a claim might not be covered, or at least not covered in full, is that the
shipowner had not taken certain steps to have limited his liability in order to protect the Club.
The principal steps expected of shipowners were making sure that the appropriate
exculpatory language was inserted in bills of lading and passenger tickets. Today the legal
requirements with which shipowners are expected to comply include all the requirements of
the flag state concerning marine safety and environmental protection. Another illustration of
this principle is the rule that contractual liabilities (those assumed by the shipowner as a
matter of contract) are not generally covered.

 Willful misconduct

Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely
to happen.

 Moral hazard

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P&I Clubs have always taken pains to point out to members that liabilities arising out of the
fraudulent misdelivery of cargo, especially delivery of cargo without demanding the
production of an original bill of lading, were not covered by P&I insurance. Club managers
evidently thought that commerce would grind to a halt if there was a risk that shipowners
would conspire with shippers to defraud receivers and their banks, so they refused to
indemnify shipowners under these circumstances.

This view was shared by the English courts. Sze Hai Tong Bank v. Rambler Cycle Co. [1959]
A.C. 576; [1959] 2 Lloyd's Rep. 114 (P.C.) 5

 Public policy

There was a time when criminal liabilities were not covered as a matter of course. To say
otherwise might even make the underwriter liable for facilitating the crime. It was understood
that criminal liability was imposed only for intentional misconduct, and the requirement of
fortuity generally foreclosed any question of coverage for criminal liabilities. Today, the
situation is vastly more difficult. Statutes in many countries impose "criminal" liability for
negligent conduct that damages the environment, under circumstances which do not even rise
to the level of "willful misconduct" under the law of marine insurance. Shipowners justifiably
expect their Clubs to pay the fines and penalties thus incurred.

Limitation of liability has been justified on protectionist and historical grounds. It has been
said that:

“The aim was to strengthen the international competitiveness of national merchant fleets.
Since shipping was a risky enterprise and a shipowner lacked effective means of
communication with his vessel, potential entrepreneurs might easily be dissuaded from
entering shipping. Consequently efforts were made by means of global limitation of liability
to attract people to invest in the branch and so build up a competitive mercantile marine.”

5
A clause in a bill of lading providing that "the responsibility of the carrier... shall be deemed... to cease
absolutely after the goods are discharged" does not excuse the carrier if, after discharge, he delivers them to the
consignee without production of the bill of lading. A bill of lading required goods to be delivered "unto order or
his or their assigns." Cl.2(c) of the bill of lading provided that "the responsibility of the carrier, whether as
carrier or as custodian or bailee of the goods shall be deemed... to cease absolutely after they are discharged"
from the ship. After discharge the carrier delivered the goods to the consignee without production of the bill of
lading but against an indemnity from the consignee's bank. Summary: Held, cl.2(c) did not protect the carrier as
it must impliedly be limited so as to give effect to the main object and intent of the contract; the bank must
indemnify the carrier.

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While such an incentive may have been necessary in the early days of shipping, it is no
longer so today. Investment in shipping may be considered as widespread enough not to
require any discriminatory stimulant. A limitation statute can also produce grotesque results,
as in the case of the Torrey Canyon6 where the limitation ceiling was US$50 as salved value,
i.e. the value of one lifeboat. Moreover, the widespread use of insurance and particularly third
party insurance considerably reduces any possible risk.

CURRENT POSITION OF SHIP OWNERS LIABILITY INSURANCE

Over 90% of the world's merchant fleet is entered with the P&I clubs which provide third
party liability insurance to the ship owners. The ship owners not entered with P&I clubs are
some large shipping companies that have their own insurance arrangement (like captive
insurance) and those ship owners who insure their liability with the commercial insurance
market together with hull insurance or separately. The question:“ Is the ship owners liability
insurance voluntary?“, could be answered:“ Yes, it is, but as a rule of thumb a ship owner
will not be able to trade his ship without purchasing such insurance“. Namely, in principle the
charterers as a precondition to chartering a ship require evidence of valid liability insurance,
which is regularly given in the form of P&I certificate of entry, by the ship owners or directly
by the respective P&I club. The financing banks require such insurance as a precondition to
grand a loan secured by mortgage over a ship.

In order to obtain International Transport Workers’ Federation Blue Card for a ship the
shipowner must insure his liability for payment of sums agreed in contract with the union for
death or permanent disability of the crew.
Some states (Greece, Australia, Sri Lanka) request evidence of liability insurance for wreck
removal (they accept P&I certificate of entry) to allow ships to enter their territorial waters.
Other states as United Sates of America (under Oil Pollution Act 90) and California
(under State law, California S.B. 1644) require evidence of financial responsibility
(Certificate of Financial Responsibility) for oil pollution. Compulsory insurance for ships
above 400 GT (except for tankers covered by CLC) is prescribed in Australia from 2001.
Alaska by its Financial Responsibility Act of 7.06. 2000 require evidence of insurance of oil
pollution liability for non tanker ships over 400 GT for permission to enter its territorial

6
Limitation of liability in maritime law: an anachronism?; Gotthard Gauci; Marine Policy, Vol. 19, No. 1, pp.
65-74, 1995

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waters. It could be P&I Certificate of Entry, bank guarantee, surety, deposit or similar
instrument. Fom 1 March 2005 Japan has introduced compulsory insurance for non tanker
vessels lager than 100 GT which enter its territorial waters. From 20 April 2005 those ships
must posses original polices of insurance (P&I Certificate of Entry are acceptable) as
evidence of financial securities. Taiwan did the same under Marine Pollution Control
Act which entered into force on 1 July 2005.

International maritime conventions have introduced compulsory insurance for the

shipowner’s liability. The first was International Convention on Civil Liability for Oil
Pollution Damage, 1969 (“CLC”); followed by International Convention on Liability and
Compensation for Damage in Connection with the Carriage of Hazardous and Noxious
Substances by Sea, 1996; International Convention on Civil Liability for Bunker Oil
Pollution Damage, 2001; Nairobi International Convention on the Removal of Wrecks, 2007.
All of these conventions require compulsory insurance for tortuous, non contractual, liability
towards third parties. The Athens Convention relating to the Carriage of Passenger and their
Luggage by Sea, 1974 is first the first convention to introduce compulsory insurance
for contractual liability of the shipowner, in this case liability towards the passengers is
based on the contract of transportation concluded between the shipowner and the passenger.
Maritime Labour Convention 2006 introduced compulsory insurance for contractual liability
of the shipowner towards the seafarers based on the employment agreement and ML
Certificate and Declaration as prima facie evidence of conformity with the rules of the
Convention.

IMO has recommended to the shipowner’s insurance of their liability. It is acceptable that
the insurer pays insurance money only if shipowner’s liability has been established by law
(by a judgement or in other way) and if the shipowner as insured has fulfilled all his
obligations towards the insurer under the insurance contract.7

Argument against compulsory insurance is that the claimant would get direct action against
liability insurance providers (i.e. P&I clubs) in which case the insurers might loose their
defence under the insurance contract which they might have against insured for payment of
the insurance money. Defences are for breach of the conditions like that the ship was not in
class, that insurance contract has been terminated for non payment of premium, that
insurance money has to be sett off against unpaid premium, that the insured did not notify the
7
IMO Resolution A.898 (21) Nov. 1999

25
insurer of the accident or claim, that the insured did not pay the claim (pay to be paid rule)
and so forth.8

Under CLC, P&I Clubs issue certificates of insurance („The Blue Card“) to the governments
of the convention countries who in turn on basses of such Blue Cards issue their state
certificates to the ships. As the insurer is liable under the articles of the Convention, and can
not in principle, which has exceptions, use defences from the insurance contract against the
claimant.

Any claim … may be brought directly against the insurer …. In such case the defendant may,
irrespective of the actual fault or privity of the owner, avail himself of the limits of liability
prescribed in Article V, ... He may further avail himself of the defences (other than the
bankruptcy or winding up of the owner) which the owner himself would have been entitled to
invoke. Furthermore, the defendant may avail himself of the defence that the pollution
damage resulted from the wilful misconduct of the owner himself, but the defendant shall not
avail himself of any other defence which he might have been entitled to invoke in
proceedings brought by the owner against him.9

According to the compromise reached in the drafting of CLC the insurer can use wilful
misconduct of the shipowner as an defence, not only against the insured, but even against the
claimant10. Therefore wilful misconduct risk falls onto the claimant.

Further, in order to prevent the defence that that the insurance contract has been cancelled
before the expiry date shown in the Certificate of insurance placed on board the ship CLC
provides that an insurance shall not satisfy the requirements of that convention if it can cease,
for reasons other than the expiry of the period of validity of the insurance specified in the
certificate, before three months have elapsed from the date on which notice of its termination
is given to the authorities, unless the certificate has been surrendered to these authorities or a
new certificate has been issued within the said period 11.

8
Compulsory insurance for shipowner’s cargo liability; 06/10/2009; Dr Peter Kragic
9
CLC Čl. VII (8)
10
Wu Chao: Pollution from the Carriage of Oil by Sea: Liability and Compensation, London 1966. str 70-72.
11
CLC, Čl. VII (5

26
CONCLUSION

Introduction of the compulsory insurance would change the nature of P & I insurance. It
would ceased to be an indemnity insurance and would become liability insurance. First type
of insurance makes good the loss in the asset of the insured caused by payment of the damage
to the claimant, and the later type, by payment of the insurance money makes good damage
12
sustained by the claimant itself .

The P&I Clubs have adapted to loss of certain defences which they might have used before
introduction of CLC and continued to provide liability insurance for oil pollution liability
regulated by the CLC. We can assume that the Clubs shall adapt to the other conventions
which call for compulsory insurance when they enter into force. The evidence of that is the
Bunker Convention for which the Clubs started issuing their certificates. It will be seen
weather the clubs will change their rules to avoid cretin risks, for example requiring advance
payment of the premium for the whole period of validity of the certificate in order to avoid
situation were liability attaches and premium is not paid. Maybe future convention will give
more defences to the liability insurer, allowing them to use some defences from the insurance
contract against the third party claimant.

12
Steven J. Hazelwood: P&I Clubs – Law and Practice, London 1994, str. 323

27
BIBLIOGRAPHY

Articles

 Compulsory insurance for shipowner’s cargo liability; 06/10/2009; Dr Peter Kragic

 Steven J. Hazelwood: P&I Clubs – Law and Practice, London 1994, str. 323
 MARINE INSURANCE; Christopher J. Giaschi; UBC Law 332
 Non life Insurance; Kavita Goel
 Ernst Russ-NewsMail 5/2010 / December 23, 2010
 Wu Chao: Pollution from the Carriage of Oil by Sea: Liability and Compensation,
London 1966. str 70-72.
 Limitation of liability in maritime law: an anachronism?; Gotthard Gauci; Marine
Policy, Vol. 19, No. 1, pp. 65-74, 1995
 An Introduction to P&I Insurance and Loss Prevention, North of England P&I
Association, Newcastle-upon-Tyne, UK, 2008

Websites

 [Link]/.../ShipShipownersLiability
 [Link]/upload/174/[Link]-shipowners-liability
 [Link]/law/o_liability
 [Link]/[Link]
 [Link]/.../A7.1-Shipowners%20liability
 [Link]
 [Link]/.../Ships_hull_and_marine_liability_insurance

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