An Introduction to P&I Clubs

2022-05-02 15:23

There are three basic types of marine insurance: Hull and Machinery, Cargo, and Protection & Indemnity (P&I) insurance. This article is an overview of P&I and coverage concerns related to it.

A P&I club is a mutual insurance association that provides risk pooling, information and representation for its members. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members.

P&I insurance is liability coverage for vessel owners. The primary providers of P&I insurance for oceangoing vessels are “Clubs”, mostly overseas-based assessable mutual associations controlled by the vessel owners they insure. Clubs can assess members for additional premium if the original premium is insufficient to pay the Club’s losses and expenses for a coverage period. Most of the Clubs are based in London. In the U.S., conventional insurance companies write P&I insurance mainly on inland and coastal waters.

P&I is subject to many exclusions and special conditions. P&I Clubs do not use a standardized form of policy. Each Club has its own “Club Rules”.

Subject to exclusions and conditions, the typical P&I policy covers loss of life, injury and illness of crewmembers, passengers, and other third parties, damage to cargo on board the vessel, 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, putting in costs, cargo’s proportion of general average, and defense costs.

The most significant and costly exposure covered by P&I insurance is liability for loss of life, injury or illness, particularly the injury or death of crewmembers. P&I insurers cover their Assureds with very high limits of liability. The need for these high limits was the original motivating factor for the formation of the Clubs.

The Club is involved in case of an accident onboard, either underway at sea or while at port, such as collision, grounding, property damage, pollution, environmental damage and removal of wrecks. A major aspect of P&I cover is also human life, so P&I compensation is provided in case of accident onboard leading to injury or death as well as illness. Of course, the Master is expected to notify the respective P&I Club also in case of any other perils, issues relating to immigration and crew matters, illegal anchoring etc. More specifically, P&I may cover:

Illness, injury and death of crew, passengers and other third parties onboard
Stowaways, deserters and refugees
Collisions
Damage to property (FFO)
Pollution
Wreck removal
Cargo loss and damage
Fines
Costs incurred in criminal proceedings
Sue and labour expenses
General Average
Salvage

A glance of history

Marine insurance has its roots in the 18th century, when the first clubs -then known as “Hull Clubs” were set up by ship owners with the goal to provide insurance cover for physical damage to ships of their members. This was based on the idea that the hull of a ship is among the most important factors for the safe operation of a ship and required some form of insurance. As club members, each ship owner would pay for a share of the total risk that was covered for all the ships owned by all the ship owner members.

At the time, the place where the shipping industry community regularly came together to discuss maritime insurance, shipbroking and foreign trade, was the Lloyd’s Coffee House in London. The dealings that took place at this coffee house led to the establishment of the insurance market Lloyd’s of London, Lloyd’s Register and several related shipping and insurance businesses. This is where the so-called “underwriters” gradually gained ground over the traditional hull clubs for being more responsible.

The gap in covering cargo claims and an increase in trade created a need for providing insurance cover for liability for cargo loss or damage, leading to the establishment of the first indemnity club in 1874. This “indemnity cover” began to be included to the underwriting risks, giving birth to the first the Protection and Indemnity (P&I) Clubs.

The International Group of P&I Clubs

With an observer status at the IMO, the London-based International Group of P&I Clubs is comprised by 13 global P&I Clubs that provide marine liability cover for approximately 90% of the world’s ocean-going tonnage. These are: