Protection and indemnity insurance

Protection and indemnity insurance, commonly known as P&I, is a form of marine insurance provided by a P&I Club. A P&I Club is a mutual (i.e. co-operative) insurance association that provides cover for its members, who will typically be ship-owners, ship-operators or demise charterers. Unlike a marine insurance company, which is answerable to its shareholders, a P&I Club is the servant only of its members.

Both P&I Clubs and conventional marine insurers are governed by the provisions of the Marine Insurance Act 1906. Marine insurers provide cover for known quantifiable risks, mainly Hull & Machinery insurance for shipowners, and Cargo Insurance for cargo owners. By contrast, P&I Clubs provide insurance cover for broader indeterminate risks, such as third party liabilities that marine insurers are loath to cover. Third party risks include a carrier’s liability to a cargo-owner for damage to cargo, a ship’s liability after a collision, environmental pollution and war risk insurance; (although some marine insurers are also prepared to cover war risks).

It follows that any given cargo may be insured twice: the shipper/cargo-owner will take out conventional cover, and the carrier will have P&I cover. If the cargo is lost or damaged, the cargo-owner should first make a cargo claim against the carrier; but the latter may avoid liability because either (i) he did not cause the loss, or (ii) the Hague-Visby Rules grant exemption from liability . In such a case, the cargo owner will claim against his own insurer. If the cargo-owner fails to claim first against the carrier, but claims against his own insurer, the latter (having reimbursed their client) will, through subrogation, be able to pursue the claim in their own right against the carrier.

Marine insurers charge a premium, which guarantees to the assured full cover during the validity of the policy; but P&I insurance is financed not by premiums but by “calls”. Club members contribute to the club’s common pool, out of which claims are paid. If the pool is insufficient, the club members will be asked to pay a further call; but if the pool is in surplus, the Club will ask for a reduced call the following year, or may even make a refund to members. (Only ship operators with a sound reputation will be allowed to join a P&I club; and any P&I cub member who incurs reckless or avoidable losses to the club may be asked to leave)

Whereas a marine insurer will, on average, pay out £70 for every £100 received in premiums, a P&I Club seeks to run as a non-profit-making business. Curiously, the largest P&I Club, Norway’s Gard, manages to combine mutual P&I business with conventional marine insurance. Should the Rotterdam Rules come into force, third-party liabilities will increase; and this may result in conventional insurers losing more and more business to P&I Clubs.