Protection and indemnity insurance
Protection and indemnity insurance, more commonly known as P&I insurance, is a form of international maritime insurance provided by a P&I Club: a mutual insurance association that provides risk pooling, information and representation for its members, typically ship-owners, ship-operators or demise charterers. Unlike a marine insurance company, which reports to its shareholders, a P&I club only reports to its members.
Although marine insurance dates back to the Greeks and Romans, liability insurance for ship-owners initially emerged in Britain in the 19th century when injured crew members began to seek compensation from their employers. The Fatal Accidents Act 1846 made it easier for passengers or their survivors to file claims.
In the second half of the 19th century, the number of claims greatly increased due to the number of passengers emigrating to North America and Australia. Ship-owners became aware of their insurers' compensation limits, especially when it came to damages caused by ship collisions. While the UK Merchant Shipping Act 1854 had determined that, when evaluating insurance claims, the value of ships should be no less than £15 per ton, many ships had an actual lower market value and existing insurance policies did not cover this gap in liability.[clarification needed] The compensation for collision damages also excluded a quarter of such damages. Existing hull insurance policies included damages to the insured ship and liability for the damages it had caused, while the maximum amount ship-owners could recover after collisions was the ship's insured value.
The first protection association, the Shipowners' Mutual Protection Society, was formed in 1855. It was intended to compensate for loss of life, injuries and collisions that were excluded from marine insurance policies beyond the monetary limit of these policies. Similar associations were later formed within the United Kingdom, in Scandinavia, Japan and the United States.
In 1874, the risk of liability for cargo carried by the insured ship was added to the insurance cover provided by a P&I club. Cargo value had risen and cargo underwriters, encouraged by UK courts, filed more claims to recover their losses from ship-owners. These claims were not covered by the current marine insurance class. After 1874, many clubs added a marine indemnity class to respond to these new claims. This class was later merged with the marine insurance class reserved for the original protection risks and the distinction between the two classes virtually disappeared.
Relationship with Marine Insurance
Marine insurers offer insurance on measurable risks: hull and machinery insurance for ship-owners, and cargo insurance for cargo owners. P&I clubs provide insurance for broader, indeterminate risks that marine insurers usually do not cover, such as third party risks. These 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, or legal liability due to acts of war affecting the ship.
Marine insurers are usually for-profit companies that charge customers a premium to fully cover ships and cargo in the time period when the policy applies. In contrast, a P&I club is run as a non-profit and the insurance is financed by “calls”. Club members contribute to the club’s common risk pool according to the Pooling Agreement's rules. If the risk pool cannot cover current claims, the club members will be asked to pay a further call. If the pool has a surplus, the club will ask for a lower call the following year or make a refund to members. Only ship-owners with acceptable reputations are 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.
Thus, marine cargo is generally covered twice by insurance standards. The shipper or cargo-owner will be covered by a marine insurer and the carrier or ship-owner will be covered by the P&I club. If the cargo is lost or damaged, the cargo-owner needs to first make a claim against the ship-owner. However, the ship-owner may avoid liability if it did not cause the loss or if the Hague-Visby Rules grant exemption from liability. In that case, the cargo-owner will claim against its own insurance company. If the cargo-owner fails to claim first against the ship-owner, but claims instead against its own insurance company, the insurer, having reimbursed its client, will through subrogation pursue the claim in its own right against the ship-owner.
The following are the major exceptions to P&I coverage:
- Other insurance: One of the main reasons a claim is rejected by P&I insurance is that the club managers think it should be covered by other types of insurance that the ship-owner should have bought. This usually meant war risks insurance or hull insurance, which pays collision liabilities and, in some cases, liabilities for damages to fixed and floating objects ("FFO").
- Mutuality: Another reason a claim might not be fully covered is that the ship-owner did not take certain steps to limit its liability in order to protect the club. Ship-owners are expected to make sure that the language used in bills of lading and passenger tickets appropriately clears the ship-owner from alleged faults. Today the legal requirements with which ship-owners are expected to comply include all flag state requirements concerning marine safety and environmental protection. Contractual liabilities (those assumed by the ship-owner as a matter of contract) are generally not covered.
- Moral hazard: Liabilities due to the fraudulent nondelivery of cargo, especially deliveries of cargo that do not require 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: Criminal liabilities used not to be covered as a matter of course. Criminal liability was imposed only for intentional misconduct, and the requirement of fortuity generally included the coverage of criminal liabilities. Today, statutes in many countries impose "criminal" liability for negligent conduct that damages the environment, under circumstances that 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 implemented in all 27 Member States by January 1, 2012. The Directive requires compulsory P&I to cover for EU and foreign ships in EU waters and ports. Foreign vessels that do not comply to the Directive are 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.
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- "Directive 2009/20/EC of the European Parliament and of the Council of 23 April 2009 on the Insurance of Shipowners for Maritime Claims (“Insurance Directive”)". 2009.
- Re Tachographs 1979 ECR 419
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- 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