Protection and indemnity insurance
Protection and indemnity insurance, commonly known as P&I insurance, is a form of marine insurance provided by a P&I club. A P&I club is a mutual (i.e. co-operative ) insurance association that provides cover for its members, who will typically be ship-owners, ship-operators or demise charterers. Unlike a marine insurance company, which is answerable to its shareholders, a P&I club is the servant only of its members.
Both P&I clubs and conventional marine insurers are governed by the provisions of the Marine Insurance Act 1906. Marine insurers provide cover for known quantifiable risks, mainly Hull & Machinery insurance for shipowners, and Cargo Insurance for cargo owners. By contrast, P&I Clubs provide insurance cover for broader indeterminate risks, such as third party liabilities that marine insurers are loath to cover. Third party risks include a carrier’s liability to a cargo-owner for damage to cargo, a ship’s liability after a collision, environmental pollution and war risk insurance; (although some marine insurers are also prepared to cover war risks).
It follows that any given cargo may be insured twice: the shipper/cargo-owner will take out conventional cover, and the carrier will have P&I cover. If the cargo is lost or damaged, the cargo-owner should first make a cargo claim against the carrier; but the latter may avoid liability because either (i) he did not cause the loss, or (ii) the Hague-Visby Rules grant exemption from liability . In such a case, the cargo owner will claim against his own insurer. If the cargo-owner fails to claim first against the carrier, but claims against his own insurer, the latter (having reimbursed their client) will, through subrogation, be able to pursue the claim in their own right against the carrier.
Marine insurers charge a premium, which guarantees to the assured full cover during the validity of the policy; but P&I insurance is financed not by premiums but by “calls”. Club members contribute to the club’s common pool, out of which claims are paid. If the pool is insufficient, the club members will be asked to pay a further call; but if the pool is in surplus, the club will ask for a reduced call the following year, or may even make a refund to members. (Only ship operators with a sound reputation will be allowed to join a P&I club; and any P&I club member who incurs reckless or avoidable losses to the club may be asked to leave)
Whereas a marine insurer will, on average, pay out £70 for every £100 received in premiums, a P&I club seeks to run as a non-profit-making business. Curiously, the largest P&I club, Norway’s Gard, manages to combine mutual P&I business with conventional marine insurance. Should the Rotterdam Rules come into force, third-party liabilities will increase; and this may result in conventional insurers losing more and more business to P&I clubs.
 Growth of third party liabilities
Although marine insurance dates from the Middle Ages, British shipowners did not feel the need to purchase liability insurance until the 19th century when injured crew members began to seek compensation from their employers, and the Fatal Accidents Act 1846 facilitated claims by passengers or their survivors. The likelihood of claims was greatly increased by the vast numbers of passengers who constituted the flood of emigrants to North America and Australia in the second half of the century. Shipowners were also becoming increasingly aware of the inadequacy of the available insurance cover in respect of damage caused by their ships in collisions with other ships. The usual cover for claims by other ships and their cargo for collision damage excluded altogether one fourth of such damage and, more seriously, was limited in amount. (The maximum recovery under hull policies, including both damage to the insured ship and liability for the damage it had caused, was the insured value of the ship).
The first protection association, the Shipowners' Mutual Protection Society, was formed in 1855. It was intended to cover liabilities for loss of life and personal injury and also the collision risks excluded from the current marine policies, particularly the excess above the limits in those policies. Similar associations were subsequently formed in various cities and towns within the United Kingdom, and later in Scandinavia, Japan, and the United States.
In 1874, the risk of liability for loss of or damage to cargo carried on board the insured ship was first added to the cover provided by a protection club. The values of cargoes had risen and cargo underwriters, encouraged by the courts, had become keener on recovering their losses from shipowners. After 1874 many Clubs added an indemnity class to provide the necessary cover. Subsequently, most of these separate classes were amalgamated with the class reserved for the original protection risks, and the distinction between the two classes virtually disappeared.
 Coverage today
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, as follows.
- American Steamship Owners Mutual Protection and Indemnity Association, Inc
- Assuranceforeningen Skuld
- Gard P&I (Bermuda) Ltd.
- The Britannia Steam Ship Insurance Association Limited
- The Japan Ship Owners' Mutual Protection & Indemnity Association
- The London Steam-Ship Owners' Mutual Insurance Association Limited
- The North of England Protecting & Indemnity Association Limited
- The Shipowners' Mutual Protection & Indemnity Association (Luxembourg)
- The Standard Club Ltd
- The Steamship Mutual Underwriting Association (Bermuda) Limited
- The Swedish Club
- United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited
- The West of England Ship Owners Mutual Insurance Association (Luxembourg)
These organisations are the successors of the associations founded in the 19th and early 20th centuries. The 13 P&I clubs are mainly situated in the UK but also in USA, Japan, Sweden and Norway. The clubs vary considerably in size and currently the largest club is the Norwegian-based Gard followed by UK-based North. P&I club coverage is generally as broad as the liabilities faced by a shipowner. 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.
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.
 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.  A.C. 576;  2 Lloyd's Rep. 114 (P.C.)
 Willful misconduct
Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen.
 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.
 European Union Directive 2009/20/EC
The European Union Directive 2009/20/EC was required to be implemented in all 27 member States by 1 January 2012. The Directive requires compulsory P&I Cover both for EU ships and for foreign ships in EU waters and ports. Foreign vessels that do not comply will be expelled and refused entry into any EU port, although the ships may be allowed time to comply before expulsion. The Directive requires Member States to set penalties for breach, as enacting criminal penalties is beyond the EU's normal ambit - Re Tachographs (ECJ 1979).
 Further reading
- An Introduction to P&I Insurance and Loss Prevention, Second Edition, North of England P&I Association, Newcastle upon Tyne, UK, 2012, ISBN 978-0-9558257-8-1