It is almost July of this year. You wonder what's so special about July.
Naaa.. It's not my birthday and it's not my son's birthday.
This is the time when I have to pay a huge amount of money for car insurance. Year after year, every year.
Now, if I'm so worried about my car insurance premium, imagine boat owners.
Imagine how much money they have to pay to insure their boats. But it is a cost that I cannot avoid.
These costs refer to the insurance of the ship's hull and machinery. The good thing about this insurance is that the owner knows the cost and can plan for it.
But when a ship navigates the sea, carries cargo, and engages in all these activities, it is subject to many claims against the shipowner.
For example, a port may claim that a ship damaged fenders or a buoy during berthing. Or the port can claim that the ship polluted its waters.
Therefore, it is not only about insuring damage to the hull and its machinery, but also about all the claims that the shipowner may have against it.
There may be many other types of requests. Some logical and some illogical. But boat owners need to make sure they're insured for all of that.
In this post we will look at where P&I clubs fit into marine insurance and how they work.
Let's go in.
Where do P&I clubs fit in in marine insurance?
Generally, there are three types of marine insurance.
- Ship insurance (Hull and machinery)
- Cargo insurance (by the sender)
- Third party damage insurance
Insurance of the hull and machinery of the ship.provided by H&M sponsors. This is the oldest type of marine insurance and, at the same time, the most basic.
It is an insurance for damage to the hull and machinery of the ship.
H&M's insurance policies have several important clauses that shipowners must adhere to.
For example, the H&M shelf hasInternational navigation restrictions. International shipping limits define the geographic limits within which ships can trade without an additional premium.
Another example is H&M's policy that prohibits shipping to war zones without notifying H&M's contractors. Again, this is due to the additional risk these areas present.
The carrier shipped the cargo and the cargo was damaged during the trip. Can the shipper claim all costs from the shipowner or carrier?
If you understand"The Hague-Visby RulesYou will know that these rules offer many defenses to the shipowner.
Therefore, if this defense were applied to the case, the shipper would have no one to claim those damages from.
That is why the carrier insures the cargo for each leg of the journey.
P&I insuranceit is used for third party claims against the shipowner. Carriers provide carrier cargo transportation service.
When providing this service, the shipowner may be subject to certain third party requirements.
These claims can be damage to the pier, pollution of the ship or even fines on the ship by the authorities.
Shipowners must insure against all these third party claims. P&I clubs insure shipowners against all these claims.
Why P&I clubs?
Prior to the 19th century, the term "marine insurance" meant only the insurance of the ship's hull and machinery.
It was a time when most of the ships were sailboats.
The chances of two sailboats colliding were less. But as more and more steamships went to sea, the chances of collision between the ships increased.
Insurers were concerned about this increased risk. Rightly so, because in the event of a collision between two ships, H&M's insurers not only have to cover damage to the insured ship, but also pay for damage to the other ship if the insured ship is responsible.
To address some of that risk, they inserted a rider into their policies.
This clause exists in the Hull & Machinery regulations even today.
Let's see this with an example. Let's say there is a collision between two ships. The "hull and machinery insurance" of both vessels will study the collision investigation to determine the percentage of liability.
Let's say the fault is listed below.
Vessel A: 70% responsible for the collision
Vessel B: 30% responsible for the collision
The repair costs for both ships are as follows.
Brod A: 100.000 USD
Brod B: 250.000 USD
Total cost to repair: $350,000
It will be the responsibility of both boats.
Shipment A: USD 245,000 (70% of the total price)
Shipment B: USD 105,000 (30% of the total price)
Therefore, ship A must pay $145,000 to ship B in addition to the $100,000 damage to its own ship covered by H&M's insurance.
Under the 3/4 collision clause, H&M's insurance company will only pay 3/4 of this amount.
So H&M insurance pays: $108,750
Owner's pay: $36,250
The owners wanted to secure that amount without increasing the premiums too much.
Carriers could insure that quarter of the liability, but they had to pay an additional premium for it. The owners wanted to avoid it.
This led to the formation of P&I associations that work tothe principle of mutual distribution or risk concentration.
Over time, P&I associations insured many other risks owners were exposed to while operating boats.
How P&I Clubs Work
P&I clubswork nonprofit. It is the shipowners' club that acts both as a safe and as an insurer.
P&I clubs work on the principle of mutual exchangeand risk concentration.
What does that mean? Let's understand this with a simple and more basic example.
Ten owners form a club to share the risk among themselves. All 10 owners of these ships have a ship of the same type, size and value.
At the end of the year, the ship had to pay a third party claim for $1,000. This $1,000 claim will be shared equally by all 10 boat owners.
Therefore, each owner would contribute $100 to pay this claim. This means that with only $100 each owner can cover the risk of a claim from a third party.
Now that we know the basic principle of how P&I clubs work, let's understand some basic terms used in P&I clubs.
In a more realistic situation, a P&I association cannot afford to ask each owner for a contribution only when there are a few claims to settle.
In our example, the $1,000 claim must be paid immediately to avoid delays on board. This means that the P&I Club must have money in your account to pay third party claims.
P&I associations maintain a fund and ask shipowners to contribute to that fund
- when a new owner enters the club or
- when money in the fund is reduced due to settled claims.
- Annually or according to P&I Club rules
All of these payment requests to carriers are called "Calls."
So this could be it
- Advance calls (paid when the owner joins the club or at the beginning of the year)
- additional indications(Payment when funds are reduced due to paid damages)
- Release the calls(to settle the account of a vessel that has been sold or scrapped or the owner leaves the P&I club)
Demand discounts are aCommon practicein any type of insurance.
A deductible is a predetermined amount that is deducted from an insured loss.
Let's say the aP&I Club has set deductibles for claims arising from damage to the pier at $5,000.
Now if the claim against the owner for one of these incidents is $30,000. The P&I club would then pay $25,000 after $5,000 as a deduction from this claim.
The discount has two purposes.
- Discourages shipowners from ordering small quantities.
- Guarantees the greatest interest of shipowners in reducing losses and claims
Now let's look at this from the perspective of a boat owner who just bought a boat and needs to join the P&I club.
A new point guard arrives at the club
It is important that the owner insures himself against all risks related to the management of the ship. In addition to the 'Hall & Machinery' insurance, the entry of the boat into the P&I club is also important.
Therefore, the owner of the boat would first approach the P&I club to include him and his boat in the club.
The P&I Club will evaluate all factors before deciding whether it is appropriate to include that owner and vessel in the club. Some of the factors that the club would look for are;
- Adequacy of cargo spaces for the anticipated cargo.
- crew skill
- history of the owner and/or manager of the ship;
- Classification standards
Once the club has decided that the vessel can be covered, the details of the cover provided by the club will be communicated to the owner.
The detail will include the price of the call and discounts for each type of risk. The price of the call is expressed as an amount for total capacity.
If agreed, the shipowner will pay a "deposit" and the P&I Club will issue a "registration slip" to the shipowner.
P&I Club Finance
Let's see how they manage the finances of the club P&I
As mentioned, the P&I Club maintains a fixed amount of capital that is used to resolve claims.
The P&I Club maintains this fund through advance payments and additional member calls.
Some of this money is also invested for profit that goes back into the treasury. All of this becomes part of the income of the P&I club.
So, in summary, part of the income of the P&I club includes
- Annual contribution from members.
- Contribution of new members or new boats that enter the club
- Interest/Earnings on Fund Investments
It is very obvious to say that the P&I clubs will have a lot of expenses. Most of which goes to resolving complaints from its members.
Apart from this, another cost of P&I clubs is the cost of running the club. Management costs will include staff salaries and office rents, etc.
P&I clubs also reinsure some of their risks. The cost of such reinsurance is also included in the costs.
So the cost part includes
- payments made as compensatory settlements;
- Management costs
- reinsurance cost
Balance of income and expenses
Once the income and expenses are known, the rest is just a game of addition and subtraction.
At the end of the year, each owner pays an amount less than the amount contracted, which is kept in the fund.
The contribution paid by the shipowner is equal to the "call rate" multiplied by the total gross tonnage of their ships insured by the P&I club.
The scale price would be different for different owners and for different boats.
The cost of the scale for the owner depends on factors such as;
- past shipowner claims
- the age of the ship
- experience and knowledge of the crew
- standards for commercial vessels
I know we don't hear these terms often enough. But there is this group of P&I associations that play an important role in liability insurance.
This is a group of 13 P&I clubs. All these P&I groups are subject to an agreement called "International collective agreement".
The purpose of this group is
- defines the rules of confrontation and cooperation between clubs
- It provides a unique and invaluable forum for the exchange of information on matters of interest to clubs and their members.
- Provision of pooling agreements between clubs for claims greater than 10 million dollars
Thus, any request that exceeds 10 million dollars, the surplus will be shared among the member clubs of that group.
Since it is a large group, it allows you to financially share large claims.
It is not uncommon for sailors to deal with the correspondents of the P&I club. In the event of a claim or incident, we are obliged to call a representative of the P&I association.
If we know how the P&I club works and the most important thing is that it is on our side, dealing with these situations becomes easy.
That is why it is so important to know how P&I clubs work.