Protection and indemnity insurance
Protection and indemnity insurance, more 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 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 only responsible to its members.
Although early marine insurance dates back to the Greeks and Romans, liability insurance for ship-owners emerged first in Britain in 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 that emigrated to North America and Australia in the second half of the 19th century. Ship owners also became increasingly aware of the inadequacy of the available insurance cover in respect of damage caused by collisions with other ships. The usual cover for collision damage excluded a quarter of such damage and, more importantly, 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 marine policies of the time, 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 aboard the insured ship was first added to the cover provided by a protection club. The values of cargo had risen and cargo underwriters, encouraged by the courts, had become keener on recovering their losses from ship-owners. 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. Following the grounding of the Torrey Canyon in 1967, coverage for the liabilities, costs and expenses arising from oil spills became an increasingly important aspect of P&I insurance.
Relationship with marine insurance
Marine insurers provide cover for known quantifiable risks, mainly hull & machinery insurance for ship-owners, 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 usually do not cover. Third party risks include a carrier’s liability to a cargo-owner for damage to cargo, a ship-owner’s liability after a collision, environmental pollution and P&I war risk insurance, that is to say legal liability arising out of acts of war affecting the ship.
Marine insurers are usually for-profit companies that charge customers a premium in return for guaranteeing the assured full cover during the validity of the policy. In contrast, a P&I club is run as a non-profit-making business and the insurance is financed 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. If the pool is in surplus, the club will ask for a reduced call the following year or may make a refund to members. Only ship-operators with a sufficient reputation are typically permitted 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.
Cargo is, therefore, generally covered twice. The shipper/cargo-owner will hold conventional cover and the carrier will hold P&I cover. If the cargo is lost or damaged, the cargo-owner may first make a cargo claim against the carrier. However, the carrier may avoid liability if it did not cause the loss or the Hague-Visby Rules grant exemption from liability. In such a case, the cargo-owner will claim against its own insurer. If the cargo-owner fails to claim first against the carrier, but claims against its own insurer, the insurer (having reimbursed its client) will, through subrogation, pursue the claim in its own right against the carrier.
Exceptions to coverage
The following are the major exceptions to P&I coverage:
- 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 ship-owner 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 ship-owner had not taken certain steps to limit its liability in order to protect the club. The principal steps expected of ship-owners were making sure that the appropriate exculpatory language was inserted in bills of lading and passenger tickets. Today the legal requirements with which ship-owners 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 ship-owner as a matter of contract) are not generally covered.
- Moral hazard: Liabilities arising out of the fraudulent misdelivery of cargo, especially delivery of cargo without demanding the production of an original bill of lading, are usually not covered by P&I insurance. This view is reflected in the decision of the English courts in Sze Hai Tong Bank v. Rambler Cycle Co.  UKPC 14;  AC 576;  2 Lloyd's Rep. 114 (PC)
- 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. 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 rise to the level of "willful misconduct" under the law of marine insurance.
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 ships may be allowed time to comply before expulsion. The directive requires Member States to set penalties for breach Re Tachographs (ECJ) 1979.
- "Shipowners' Mutual Protection Society".
- Re Tachographs 1979 ECR 419
- "Court of Justice of the European Communities: English Legal System". Law Teacher.
- "The role and composition of the European Court of Justice, including Article 234 references".
- 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