PROJECT

ON

SHIP OWNERS LIABILITY AND MARINE INSURANCE

Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. INTRODUCTION ...................................................................................................................... 3 ORIGINS OF MARINE INSURANCE ...................................................................................... 5 TYPES OF MARINE INSURANCE .......................................................................................... 7 PARTIES IN MARINE INSURANCE ...................................................................................... 9 TYPES OF MARINE LOSSES ................................................................................................ 11 WARRANTIES IN MARINE INSURANCE CONTRACTS .................................................. 12 TYPES OF MARINE POLICY ................................................................................................ 14 SHIP OWNERS LIABILITY IN MARINE INSURANCE .................................................... 16 LIMITATION TO SHIP OWNERS LIABILITY ................................................................... 20

10. CURRENT POSITION OF SHIP OWNERS LIABILITY INSURANCE ................................. 22 11. CONCLUSION .............................................................................................................................. 25 BIBLIOGRAPHY................................................................................................................................. 26

1. 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 insurancediscussed hereis 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 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.

2. 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 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
1

MARINE INSURANCE; Christopher J. Giaschi; UBC Law 332

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

Non-Life Insurance; Kavita Goel

3. TYPES OF MARINE INSURANCE

In basic terms there are three main types of marine insurance: 1. Hull and Machinery Insurance: Hull and machinery insurance is to protect the ship owners 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 owners 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.

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 Lloyds in London. Lloyds 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 Lloyds 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 owners 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 owners 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.

4. 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.

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.

5. 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.

6. 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 insurers liability: (i) (ii) Where owning to change in the circumstance the warranty is inapplicable and 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. 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.

7. 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.

5. Unvalued policy

Non life Insurance; Kavita Goel

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.

8. SHIP OWNERS 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 clubs 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 owners 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 members 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 ships hull and machinery cover, for instance under the Norwegian Insurance Plan. Therefore, it is important for a Master to ascertain whether his vessels 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

P&I insurance covers as owners 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 shipowners liability to pay for the costs of repatriating crew members who become sick or are injured on board. The insurance also covers the crews 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 owners 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.

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: 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;

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

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.

9. 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 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.

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.

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

10. 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 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 shipowners 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 shipowners insurance of their liability. It is acceptable that the insurer pays insurance money only if shipowners 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 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

7
8

IMO Resolution A.898 (21) Nov. 1999 Compulsory insurance for shipowners cargo liability; 06/10/2009; Dr Peter Kragic

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 period11.

CLC l. VII (8) Wu Chao: Pollution from the Carriage of Oil by Sea: Liability and Compensation, London 1966. str 70-72. 11 CLC, l. VII (5
10

11. 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 sustained by the claimant itself
12

. 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

BIBLIOGRAPHY
Articles Compulsory insurance for shipowners 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