P&I Overview

P&I Overvie

Historical Overview

Hull Underwriters

By the second half of the 17th century, the shipowners did not appear to have a real concern about third party liabilities. They had complete freedom to unilaterally exclude liabilities in the contracts and cargo underwriters would very rarely bring sub-rogation claims against them, perhaps because maritime trade was regarded as a true adventure in those days and the legal system was not as developed as it is today. The interest of the shipowners seems to be confined to the ship, by far the most valuable asset in the maritime venture.

Those willing to trade overseas would come to buy vessel and cargo insurance in exchange of a fixed sum of money, the premium, at Lloyd’s Coffee House, opened by Edward Lloyd in 1688 in the city of London. Despite not being involved with insurance, Lloyd contributed heavily with the growth of such activity by providing premises, trustworthy shipping news and services to his clientele, formed by shipowners, city merchants and captains who met there to take a share of the a risk in the maritime venture. They wrote the insured amount in the policy and signed underneath the wording – because of this, they were known as underwriters.

It is worth mentioning that as it had one of the largest merchant fleets of that time and was then the dominant power, Britain was the centre of shipping where the modern marine insurance was born. Despite the decline in its merchant fleet, it still retains a worldwide importance at it hosts almost all the P&I clubs and global insurance companies as well as the Lloyd’s insurance market that evolved from the early days in Lloyd’s Coffee House in London City.

Hull Mutual Clubs

Apart from obtaining insurance for the ship, the owners were covered by the hull underwriters for collision damage and given that they did not need to worry much about cargo claims, it seems that such arrangement worked satisfactorily for both vessel and freight. That was until the British Government passed a law (Act of Parliament) in 1719 granting the monopoly of marine insurance to two companies, the Royal Exchange Assurance and the London Assurance, the individual underwriters at Lloyd’s of London being also allowed to operate in the insurance business.

Naturally, the lack of competition led to a substantial increase in the insurance cost thereby affecting overseas trading as a whole. Many shipowners then decided to get together in a self-help effort and instead of leaving themselves at the mercy of the holders of the monopoly, they grouped on a not for profit arrangement to insure each other’s hull risks on a mutual basis, forming what was termed as the “Hull Mutual Clubs”, unincorporated associations whose members were the shipowners being both the insured and the insurer sharing the risks involved.

Although this was an illegal form of insurance, the law was not effectively enforced, perhaps not to displease the influential merchants and shipowners of those days and avoid halting the growing expansion of the British Empire. The monopoly was repealed in 1827 and due to the introduction of real competition in the marine insurance market, where many insurance companies came in with very competitive rates, the activities of the hull clubs declined, though a few of them still exist with an insignificant share of the market.

Protecting Mutual Clubs

In the milestone collision case “de Vaux x Salvador”, 1836, the English court decided that damage caused to another vessel was not covered under the standard form of the hull policy widely in use in the London market for the cover was restricted to the insured ship. This decision left many shipowners trading under the ordinary policies uninsured against such a great risk.

The market responded by extending the hull insurance to cover damage to the other ship’s hull, but only to ¾ of the damage through a “running down” clause (collisions were reportedly at rise with the introduction of the steamers replacing sailing ships and overall increase of the world fleet). The shipowner had to bear the remainder portion of the liability and the eventual excess of the insured value, which was limited to the value of the vessel and freight. It worth mentioning that the captain of the vessel would seldom be his owner or a major shareholder and in the event of a large claim, he could even have to abandon his property to satisfy the claimants when his liability exceeded the limits of the hull insurance policy.

Another factor that according to most of the historical accounts on the formation of the P&I clubs that was decisive in the fate of the dying hull clubs, was the growth in the emigration flows from Europe, chiefly to America and Australia. An unprecedented number of people, fleeing from starvation and diseases, were losing their lives on board the vessels and there were no financial limits on the liability of the shipowner. The passing of the Lord Campbell’s Act, in 1846, gave dependants of persons killed onboard the vessel the right to pursue unlimited claims against the shipowners where such loss of life was caused by wrongful act, neglect or default of another person. The subsequent year saw the introduction of a further element of liability on the shipowners’ shoulders: the Harbour, Docks and Piers Clauses Act that entitled port authorities to sue shipowners for damages caused to the port whether negligently or not. Eventually, the Merchant Shipping Act of 1854 limited liability to the value of the vessel and freight.

Additional “protection” was clearly needed to deal with the increasing liabilities and the hull clubs rose to the challenge. Whereas they did not manage to regain shipowners for hull insurance, they offered third party insurance in respect of damage to other ship not covered under commercial hull policies and for death or injury to officers, crewmembers, passengers and others.

In 1855, the very first “Protection Mutual Club”, the Shipowners’ Mutual Protection Society, today the Britannia P&I Club, came to existence. Its operation was similar to that of the forerunners hull clubs, save that instead of providing hull cover, it only provided cover for loss of life and personal injury, damage to property, ¼-collision liability and the excess of the sum insured under the hull policy. Other protection clubs soon followed for sharing risks.

Indemnity Mutual Clubs

The hull and protection clubs provided sufficient security to the shipowners who continued to be legally entitled to limit liabilities for the cargo in the contracts. However, another legal turn changed the profile of the mutual protection clubs. The vessel Westerhope was carrying cargo to be discharged in a South African port, back in 1870. Instead of discharging the cargo there on the first occasion, the vessel went pass that port in order to load extra cargo in another port in that country with the intention of discharging the first cargo on the way back, but she sunk en route and lost the entire cargo.

The cargo interests sued the owners arguing that despite the wide range of limitation contained in the contract of carriage, by deviating the vessel from the port of discharge agreed therein, the owners breached the contract – had the vessel discharged the cargo on the first time she passed by the nominated port of discharge, the loss would not have happened. The court found in favour of the claimants and condemned the shipowners for the full amount of the cargo lost.

The protection club in which the owners of the Westerhope were entered declined to remedy their burden on the grounds that “indemnity” clearly fell outside the scope of “protection” cover.

Such an important court decision was a determining factor for the shipowners to realise that apart from hull and protection cover, they also necessitated indemnity cover for a number of liabilities towards cargo owners and underwriters. It did not take long until the first ever “Indemnity Mutual Club” was formed. The Steamship Owners’ Mutual Protection and Indemnity Association was established in Newcastle, England, in 1874, but it no longer exists as such.

Protection and Indemnity Mutual Clubs

After 1874, most of the protection clubs started to provide indemnity as a separate cover and later amalgamated it into one class and this was the period in which the P&I industry started to flourish not only in the United Kingdom but also in Scandinavia, where the first hull clubs emerged in the 1830’s.

In 1886, the indemnity club Steamship Owners’ Mutual Protection and Indemnity Association merged with the protecting club the North of England Iron Steamship Protection Association, a club established in Newcastle in 1860, giving birth to the first full “Protection and Indemnity Mutual Club”, named North of England Protecting and Indemnity Association, still based in Newcastle.

Nowadays, the clubs make no distinction between protection and indemnity covers and offer hull and defence covers, amongst others.

Over the last century, the P&I clubs have grown in size and complexity and their policies are constantly developed in line with the international maritime law and trade.

The nature of the P&I Clubs and the Risks Covered are reviewed on the next chapters.

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