Protection and Indemnity Insurance

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There are three basic types of marine insurance: a) Hull and Machinery; b) Cargo; and c) Protection and Indemnity (P&I) Insurance. Hull and Machinery (H&M) insurance protects the shipowner’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. Cargo insurance covers loss or damage to the goods carried.

P&I is a mutual maritime insurance offered by P&I Clubs. It is mutual because it is formed by oceangoing shipowners, ship operators or demise charterers, and recently, freight forwarders and warehouse operators themselves. It has been said of a P&I Club, “under such a regime each member was both an assured—as to his own vessels entered in the club—and an insurer, in the proportion of his entered vessels in the club for the interests of each of his fellow members.” P&I is a special type of marine insurance.

Its existence came about because of the reluctance of traditional marine insurers to cover certain risks or to provide very high limits of liability. Indeed, collision liabilities have been excluded by hull insurers. Shipowners acquire marine insurance as protection against legal liability claims from crew, passengers and third parties. A P&I coverage complements the risks covered by Hull and Machinery policies. In actuality, shipowners need both H&M and P&I insurance.

As it is today, P&I Clubs provide cover for open-ended risks such as a carrier’s third-party risks for damage caused to cargo during carriage, war risks, and risks of environmental damage such as oil spills and pollution. It may also cover damage to other floating objects not caused by collision, wreck removal costs, collision liability, damage to fixed objects, repatriation expense, damage to any other property, fines and penalties, costs of resisting mutiny or misconduct quarantine expenses, among others. The largest P&I insurance
pay-out recorded was $1.44 billion for the loss of Italian cruise ship Costa Concordia which ran aground and overturned after striking an underwater rock in Isola del Giglio, Tuscany, on January 13, 2012.

As a mutual insurer, P&I Clubs insure only its members. It is a nonprofit and co-operative group. Members are not issued insurance policies but a “certificate of entry.” In lieu of paying premiums, the members pay a “call,” the amount collected in a pool. Since the risks are borne by the members of the club, only shipowners with acceptable reputations are accepted. Consequently, those with lesser credentials are left out without sufficient insurance cover—an all too familiar situation in the Philippines. In contrast, the European Union Directive 2009/20/EC has made it compulsory for the EU and foreign ships in EU waters and ports to have P&I insurance cover. P&I clubs each have their own “club rules.” The P&I insurance is renewed every year.

There are very few P&I Clubs around the world; there is none in the Philippines. Among these are: a) In Bermuda—Steamship Mutual Management Ltd., and Gard P&I Ltd.; b) China—China Shipowners Mutual Assurance Association; c) Japan—Japan Shipowners P&I Association; d) Norway—Assuranceforeningen Gard, and Assuranceforeningen Skuld; e) Singapore—Standard Steamship Owners P&I Association; f) Sweden—Sveriges Angfartygs Assurans Forening; g) United States—American Steamship Owners P&I Association; and h) South Korea—Korea Shipowners’ Mutual P&I Association. The very first club came about in 1855 as a “Protection Club” with the creation of the Shipowners’ Mutual Protection Society (later called the Britannia Steam Ship Insurance Association or the Britannia Club) in response to the British Merchant Shipping Act of 1854. Its first concept was as protection against collision liability. The Britannia Club is the oldest P&I market in the world.

As much as 90 percent of the world maritime tonnage is covered by P&I Clubs. There is an international association called the International Group of P&I Club composed of the major 13 clubs based in Peek House, London. The club funds are managed by asset managers.

To illustrate the extent of its coverage, P&I Clubs provide insurance coverage of up to $1 billion for compensation of damages by oil pollution from laden oil tankers to be paid out in accordance with the International Convention on Civil Liability for Oil Pollution Damage. It brings to mind the Exxon Valdez tragedy in 1989 where 11 million gallons of oil spilled on the beaches in Alaska.

*****

Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: [email protected]

 

 

 

 

 

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