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Navigating Protection and Indemnity cover in a sea of complexity

By: Grant Fugard, Marsh, Business Unit Leader Marine
Protection and Indemnity cover is an intricate field of insurance within the marine insurance sector, a specialist field in itself, and it’s crucial that client and broker understand exactly the needs and risks of the insured when structuring a policy.
Protection and Indemnity cover, or P&I cover, dates back centuries to the marine trade in which vessel owners began pooling funds into “clubs”, a kitty of sorts, to share losses on a mutual basis. Essentially, it lies at the heart of any insurance policy: contributions by many pays for the losses of a few. However, P&I takes on the risks that more traditional marine insurance policies tend to avoid. These P&I clubs continue to form part of an association, The International Group of P&I Clubs, which remains one of the largest reinsurance programme placements in the world.
A typical P&I limit of liability would be US$500,000,000 although higher limits can be purchased. The clubs charge only the essential premium in order to break even and build reasonable reserves for future losses. Each member pays a “call” to the club which resides in the pool. In the event of a poor claims year, where losses exceed the initial ‘calls’ (or premium), the onus lies with club members to meet this loss with a further call fee (i.e. an additional call).
P&I is foremost designed to protect a vessel owner against any liability that may arise during use of the insured vessel, much in the same way a third party and passenger liability policy would cover the owner of an insured motor vehicle, but with a myriad of other add-ons and considerations relevant only to marine insurance.
At Marsh, we find that the majority of claims stem from collisions between vessels – invariably due to negligence on the part of one or both parties; death or injury to crew or passengers and third parties; damage to third- party property, including damage to cargo; pollution risks; and wreck removal. Claims can vary from the cost of diversion of a vessel to offload a sick crew member, to the medical costs incurred by this crew member, to the possible repatriation of the body of a deceased crew member. Other types of claims, such as pollution spills, will cover the clean- up costs of third-party property which may have been damaged, to fines incurred as a result of an accidental oil spill.
And while some risks are covered in a standard marine insurance policy, such as a hull or cargo policy, the majority of these liability risks relating to the ownership or operation of a vessel are only covered under a suitable P&I insurance policy. It’s important to note that this applies mainly to commercial vessel owners as liability risks for pleasure craft, yachts and other small marine craft are generally covered under a single comprehensive policy that covers both physical damages and liability risks. However, it goes without saying that vessel owners, commercial and other, should contact a broker to confirm which insurance policy best suits their needs.
This is a specialist field of marine insurance and an experienced broker who knows the risks and requirements of P&I is essential in helping vessel owners navigate their often complicated insurance policies. For instance, P&I cover for a fishing vessel operating on the South African coastline will differ considerably from the cover required for a container vessel carrying thousands of containers around the world.
While the wording in many of these P&I policy documents may seem similar, it’s in communicating the intricacies of the policy to the client and the risk to the underwriter, respectively, where a broker’s experience can prove to be pivotal. These experts are familiar with the potential risks to each type of client and how to communicate the details to an underwriter in such a way as to secure the most favourable terms for the client. While most vessel owners require basic P&I cover, the meticulous broker will recognise where the policy needs a tweak or an extra add-on. This, for instance, can include freight, demurrage and defence (FDD) cover, which protects a client against disputes from charter parties; bills of lading; and contract of affreightment. Other important considerations also include special cover for salvors, charterers and specialist operations. Any marine broker worth his salt knows how to steer the ship through these waters.
There is often a slew of legalities in dealing with liabilities, which, again, is where the professional assistance of specialist surveyors and attorneys, working together with a broker, will help in managing the situation and mitigating the outfall. A major benefit for a vessel owner entered into a mutual P&I club, or an established fixed premium P&I insurer, is a vast network of correspondents – usually surveyors, assessors and attorneys – spread across the globe.
Marsh is currently dealing with such a sensitive case in which the work of all parties involved, including the client, broker and attorneys, are crucial in seeing to the correct and fair outcome of the claim, which will very likely proceed to court. These risks need special cover tended to by specialists.
Should an incident occur, the client can immediately contact their broker who then notifies the P&I insurer and arranges the appointment of a local correspondent, i.e. an attorney or surveyor. It is vital, especially in the initial stages, that the claim is handled professionally and the client is well advised on their interactions with the third party claiming against them, as it could be a sensitive legal matter.
P&I cover thus serves as much more than a financial backup for potential losses, it aims to mitigate these losses from the outset, and keep them to a minimum. A specialist broker is central to this process.

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