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Its Almost July of this year. Whats so special in July, you may
ask.
This is the time I have to shell out a huge chunk of money for my
car insurance. Year after Year, each year.
These costs are for the insurance of ships hull and machinery.
The good part in this insurance is that costs are known to the
shipowner and they can plan for that.
For example, a port can claim that ship damaged its fenders or a
buoy while berthing. Or the port can claim that ship polluted their
waters.
In this post, we will discuss where P&I clubs fit in the marine
insurance and how do these work.
H&M insurance policies have few important clauses that shipowners have to abide
by.
For example, H&M policy has International Navigation Limits. The international
navigation limits define the geographical limits within which the ships can trade
without any additional premium.
Another example, H&M policy restricts the ship to proceed to war zones without
informing the H&M underwriters. Again, this is because of additional risk that
these areas pose.
Cargo insurance
The shipper has shipped the cargo and the cargo gets damaged during the voyage.
Can shipper claim all the costs from the shipowner or carrier?
If you understand the Hague-Visby rules you will know that these rules provide
many defenses to the shipowner.
So if these defenses apply to a case, the shipper would have nobody to claim these
damages from.
This is the reason that shipper insures the cargo at each leg of the voyage.
P&I Insurance
P&I insurance is used for the third party claims towards the ship owners.
Shipowners provide a service of carrying the cargo of the shipper.
While providing this service, a shipowner may be subjected to a number of claims
from third parties.
These claims could be damage to the jetty, pollution from the ship or even the fines
to the ship from authorities.
Shipowners need to insure for all these third party claims. P&I clubs provide
insurance to the shipowners for all these claims.
This was the time when most of the ships were sailing vessels.
The chances of collision between two sailing vessels were less. But as more and
more steamships came to the sea, the chances of collision between ships increased.
To take care of part of this risk, they introduced a clause in their policies.
This clause was called 3/4th Collision Clause or Running down clause. As per
this clause, the underwriters will only pay 3/4th of the total liability or claims
against the ship owners in a collision incident.
This clause is there in the Hull & Machinery policies even today.
Let us see this with an example. Let us say there has been a collision between two
ships. The hull & machinery insurance of both the ships will study the
investigation of the collision to set up the percentage of blame.
So ship A need to pay USD 145,000 to ship B apart from USD 100,000 damages to
its own ship which will be covered by H&M insurance.
As per 3/4th collision clause, the H&M insurance company will pay only 3/4th of
this amount.
The ship owners wanted to insure this amount too without exorbitantly increasing
their insurance premium.
Shipowners could get this 1/4th liability insured but for that, they needed to pay an
additional premium. Shipowners wanted to avoid that.
This led to the formation of P&I clubs which works on the principle of mutual
sharing or pooling of the risk.
With time the P&I clubs insured many other risks the owners were subjected to in
their business of running the ships.
P&I clubs work on a non-profit basis. It is the club of shipowners who are acting
both as assured and insurers.
P&I clubs work on the principle of mutual sharing and pooling of the risk.
What does this mean? Let us understand this with a simple and most basic
example.
10 shipowners form a club for sharing each others risk. All these 10 shipowners
have one ship each which is of the same type, size and value.
At the end of the year, one ship had third party claim of USD 1000 to pay. This
claim of USD 1000 will be shared by all the 10 shipowners equally.
So each shipowner would contribute USD 100 to pay this claim. This means that
with just USD 100, each shipowner was able to cover the risk of the third party
claims.
Now that we know the basic principle of working of P&I clubs, let us understand
few basic terms used in P&I clubs.
Calls
In more realistic situation P&I club cannot afford to ask the contribution of each
owner only when there are some claims to settle.
In our example, the claim of USD 1000 would need to be paid immediately to
avoid the delays to the ship. This means that P&I club needs to have money in its
account to pay for the third party claims.
P&I clubs maintain a fund and ask the shipowners to contribute to this fund
when the fund money goes down because of the claims settles.
All these requests to the shipowners for the payment are called Calls.
So these may be
Advance calls (Paid when a shipowner joins the club or at the beginning of year)
Supplementary calls (Paid when the funds have gone down because of claims paid
)
Release calls (to settle the account of a ship that is sold or scraped or shipowner
leaves the P&I club)
Deductibles:
Deductibles in a claim is a common practice in all kind of insurances.
The deductible is the pre-set amount deducted from the insured loss.
Let us say that a P&I club has set the deductibles for claims arising from damage
to the jetty as USD 5000.
Now if the claim towards the shipowners for one of such incident is USD 30000.
Then the P&I club would pay USD 25000 after USD 5000 as deductible from this
claim.
It ensures that shipowners have increased interest in minimizing the casualties and
claims
Now let us see this from the perspective of a ship owner who just bought a ship
and needs to enter a P&I club.
So the ship owner would first approach the P&I club for including him and his ship
into the club.
The P&I Club will assess all the factors before deciding if it is OK to include this
ship owner and this ship into the club. Some of the factors the club would be
looking for are
The details would include the call rate and deductibles for each type of risk. Call
rate is expressed as amount per gross tonnage.
If agreed the ship owner will pay the advance call and P&I club will issue the
certificate of entry to the ship owner.
Incomes
As discussed, the P&I Club maintains a fixed amount of fund which is used for the
settlement of claims.
The P&I Club maintains this fund through the payments of the advance calls and
supplementary calls from the members.
Some part of this money is also invested to earn some profit which again goes into
the fund. This all becomes the income part of the P&I club.
Apart from that, another expenditure of the P&I clubs is the management cost of
running the club. Management cost would include the salaries of the employees
and rent of the offices etc.
P&I clubs also reinsure some of its risks. The cost of such reinsurance also comes
under expenditures.
Management costs
Reinsurance costs
Balance of Income and Expenditures
Once the incomes and expenditures are known, the balances are just the game of
addition and subtraction.
At the end of the year, the amount short of the agreed amount to maintain in the
fund is contributed by each ship owner.
The contribution paid by a ship owner is equal to the call rate multiplied by
the total gross tonnage of his ships insured by the P&I club.
The call rate would be different for different owners and for different ships.
The call rate for a ship owner depends upon factors like
Provide a pooling agreement between clubs for claims exceeding USD 10 million
So any claim that exceeds USD 10 million, the excess amount will be shared by
the member clubs of this group.
As this is a huge group, it allows the group to economically share the large claims.
Conclusion
It is not uncommon for the seafarers to deal with P&I club correspondents. When
there is a claim or an incident, we are asked to call for the attendance of P&I club
representative.
If we know how the P&I club functions and more importantly that they are on our
side, dealing with these situations becomes easy.
This makes the knowledge about the functioning of P&I clubs so much important.