P&I insurance
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Protection and indemnity insurance, commonly known as P&I, is marine insurance against third party liabilities and expenses arising from owning ships or operating ships as principals. It is distinct from other forms of marine insurance purchased by shipowners such as hull insurance and war risk insurance.
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[edit] 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 Lord Campbell's Act of 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.
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.
[edit] Coverage today
More than 90% of oceangoing ships today are insured by the mutual P&I Clubs that are members of the International Group of P&I Clubs, [1]. These organizations are the successors of the associations founded in the 19th and early 20th centuries. P&I Club coverage is generally as broad as the liabilities faced by a shipowner qua shipowner. The following are the major exceptions to this rule.
[edit] 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.
[edit] Mutuality
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.
[edit] 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. [1959] A.C. 576; [1959] 2 Lloyd's Rep. 114 (P.C.)
[edit] Willful misconduct
Losses intended by the insured, or to which it "turned a blind eye" knowing they were likely to happen.
[edit] 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.
