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Rule 2 The cover 

1 A Member shall be covered for such of the risks specified in Parts II, III and IV of these Rules as are agreed between the Member and the Association.

2 A Member with P&I cover shall be covered for such of the additional risks specified in Appendix I as are either:

a expressed in Appendix I to be available to such a Member; or

b expressly agreed between the Member and the Association.

Note: The risks specified in Appendix I are separately treated as they are excluded from the Pooling Agreement and are subject to a separate reinsurance programme.

3 The cover afforded by the Association to a Member shall be subject to the Articles of Association and to these Rules and to any special conditions agreed between the Association and the Member.

4 A Member is only covered in respect of liabilities, losses, costs and expenses incurred by him which arise:

a in direct connection with the operation of or, in the case of Defence cover, acquisition or disposal of the Ship; and

b in respect of the Member’s interest in the Ship; and

c out of events occurring during the period of entry of the Ship for the relevant risk in the Association.

5 Subject always to the provisions of Rule 2.4, the Association may in its absolute discretion exercise powers conferred in the Articles of Association to pay compensation in respect of a liability, loss, cost or expense which is not otherwise covered under these Rules.

6 It shall be a condition of Defence cover that the Ship has valid and subsisting P&I cover with the Association, except in the case of building or purchase contracts where there must be an undertaking by the Member to enter the Ship for P&I cover at the latest on taking delivery of the same.

Guidance

A) …such of the risks…as are agreed between the Member and the Association. (Rule 2.1)
The insurance cover provided by the Association is not a general liability cover. It is ‘named risk insurance’ which provides cover only against the specific risks identified in the Rules and agreed in writing1 with the Association. P&I cover for Ships are available under Part II of the Rules, with optional additional cover for Defence risks under Part IV. A Member may also be covered for additional risks as specified in Rule 2.2.2 However, the cover for mobile offshore units available under Part III is outside the scope of this Guidance.  

It follows that the Association does not cover any risks not specified in the Rules. However, the Association may, nevertheless, in its absolute discretion pay compensation in such circumstances under Rule 2.53 provided that the particular risk otherwise complies with the provisions of Rule 2.4 and does not extend beyond the purpose of the Association.  

Some of the P&I risks specified in Part II may be excluded from cover as a result of special terms of entry agreed with the Member. Any such exclusion will be set out in the Certificate of Entry or an endorsement note.4 

(B) …the additional risks specified in Appendix I… (Rule 2.2)
The principal scope of P&I cover for Ships offered by the Association is set out in Part II. These are traditional P&I risks insured by all the P&I clubs that are members of the International Group of P&I Clubs, and, consequently, the Association is able to reinsure these risks under the terms of the Pooling Agreement. 

The Association may also make cover available for the risks set out in Appendix I to the Rules. These risks are either covered by the Association itself and not reinsured or reinsured by it outside the Pooling Agreement, or arranged by the Association on behalf of the Member as agent only through market facilities which have been negotiated by the Association. The Association has no liability under the terms of cover arranged by it as agent only. 

Cover for certain of the risks itemised in Appendix I is automatically available to a Member who has P&I cover with the Association. However, cover for other risks which are not automatically available to a Member in Appendix I, is available only if specifically agreed and are normally subject to payment of additional premium.5 

Finally, the Association is also able to provide cover on specified terms and in appropriate circumstances for risks that are not traditional P&I risks that are covered on a mutual basis by the P&I clubs that are members of the International Group of P&I Clubs. Such cover is not reinsured under the Pooling Agreement and is subject to the payment of additional premium. Further details can be obtained in the Gard publication Additional Covers – Terms and Conditions a detailed commentary on which can be found in the Chapter on Additional Covers in this Guidance.

(C) The cover…shall be subject to the Articles of Association…these Rules and to any special conditions… (Rule 2.3)
The contract of insurance between the Member and the Association is governed by the Bye-Laws of Gard P. & I. (Bermuda) Ltd. for entries with Gard P. & I. (Bermuda) Ltd., the Statutes of Assuranceforeningen Gard -gjensidig- for entries with Assuranceforeningen Gard -gjensidig- and the Rules and any special terms of entry agreed in writing between the Member and the Association. The Member and the Association are, in general terms, free to enter into such special terms as are considered necessary in respect of the contract of insurance, subject only to the mandatory sections of the Norwegian Insurance Contract Act of 19896 and Article 3 of the Statutes.  

(D) A Member is only covered…which arise… (Rule 2.4)
The conditions itemised in sub-sections a, b and c of Rule 2.4 are cumulative. Members will therefore be covered only for those liabilities, losses, costs and expenses which satisfy all of these conditions. These conditions represent the fundamental principles of P&I cover. 

(E) …liabilities, losses, costs and expenses… (Rule 2.4)
‘Liabilities’ means legal liabilities. The Association does not cover voluntary payments made by the Member to third parties for the Member’s own commercial or other reasons in the absence of any legal liability to do so. Legal liabilities can arise under contract, in tort, bailment, or statute. The basis of the legal liability and the law or jurisdiction under which it arises, is immaterial for the purpose of cover.7 Such liability may be based on negligence, e.g. in the case of a collision,8 or on strict or absolute liability created by statute and imposed without negligence, e.g. as sometimes happens in the case of damage to fixed or floating objects.9 

Liabilities, losses, costs or expenses which would not have arisen but for the terms of a contract or indemnity entered into by or on behalf of the Member are not covered unless the terms have previously been approved by the Association.10 Similarly, no cover is available for liabilities which arise as a result of contractual terms prohibited by the Association or which arise where a Member has omitted to use contractual terms required by the Association.11

The words ‘losses, costs and expenses’ cover not only losses which arise as a result of a Member’s liability to a third party but also losses, costs and expenses incurred by the Member himself, where the Rules permit the Member to recover them from the Association. Examples include diversion expenses,12 extra handling costs,13 expenses incurred in dealing with stowaways and refugees,14 the costs and expenses of wreck removal,15 irrecoverable general average expenditure,16 the cost of measures taken to avert or minimise loss17 and disinfection and quarantine expenses.18 However, some losses, costs and expenses may be recoverable only when incurred with the prior approval of the Association (e.g. pursuant to Rule 32 (Stowaways, Refugees or Persons saved at sea) or Rule 44 (Legal Costs). 

(F) …incurred by him… (Rule 2.4)
The liabilities, losses, costs and expenses must be ‘incurred’ either by the Member directly or by servants, agents or independent contractors for whose acts or omissions the Member is held vicariously liable.19 

For example, the Member may have a direct liability to a third party for loss or damage caused by the acts or omissions of his employees, on the basis that an employer is vicariously liable for the acts of his employees which are performed in the course of their employment. 

Where a servant, agent or independent contractor of a Member incurs a direct liability to a third party in the course of his employment, the Member may be obliged to indemnify him for that liability. This obligation may arise under a specific term of the contract between the Member and the servant, agent or independent contractor, or under general law.20 The Association does not insure the servant, agent or independent contractor directly and will, therefore, not reimburse him for liabilities that he incurs. However, cover is available to the Member for his liability to indemnify the servant etc., if the third party liability incurred by the servant etc., would have been covered by the Association had it been incurred by the Member.  

The liability must be incurred by the Member. The Association will not cover in rem claims21 against the Ship incurred by someone other than the Member, e.g. a previous owner or a bareboat charterer that was not entered with the Association at the time when the incident giving rise to that party’s liability occurred.  

The Association does not require any liability incurred by a Member to a third-party claimant to have been determined by a competent court or arbitration tribunal before compensation can be paid. It is sufficient that the Association is satisfied after investigation that the Member is liable (or likely to be liable) to the claimant. Frequently, particularly in the case of cargo and personal injury claims, it is arguable whether or not the Member is liable to the claimant and it is therefore possible to settle the claim on a compromise basis. In such circumstances, cover is available for the Member’s compromised liability, provided that the Association has approved the settlement.22 If, however, a Member admits liability for a claim or settles a claim without prior reference to the Association, this may prejudice his cover for that claim.23 

The Member’s right of recovery is usually dependent on the liability, loss, cost or expense first being discharged or paid by the Member.24 In certain circumstances, however, the Association may make or commit itself to making a payment to a third party on behalf of the Member either by provision of the ’Blue Cards’ that are mandatory pursuant to various international conventions25 or otherwise in anticipation of a liability, loss, cost or expense being incurred. Examples of the latter situation are where:

a the Association makes a payment into court with the approval of the Member;

b the Association, at the request of the Member, provides its letter of undertaking or other form of security to a third-party claimant as security for its claim against the Member.  

The making of such a payment or the provision of such security is, however, entirely discretionary on the part of the Association, and the Member may ultimately be obliged to indemnify the Association for any payment made, or liability incurred, by the Association.26

 

(G) …direct connection with the operation…acquisition or disposal of the Ship… (Rule 2.4.a)
The insurance cover that is provided by the Association mirrors that of the Pooling Agreement and is limited to liabilities, losses, costs and expenses which are incurred in direct connection with the operation of a Ship. In the case of Defence cover, liabilities, losses, costs and expenses incurred in direct connection with the acquisition or disposal of the Ship are also covered.27 

There must, therefore, be a direct causal link between the operation of the Ship or, in the case of Defence cover only, its acquisition or disposal, and the incident giving rise to the relevant liability, loss, cost or expense. The cover “follows the Ship” rather than any other operations or activities of the Member that are possibly connected to the operation of the Ship but do not arise in direct connection with the operation of the Ship. For example, the Member may also have an interest in the operation of a terminal that is used in connection with the operation of a Ship and may incur losses or liabilities in that capacity when the terminal has been used to store cargo that has been carried on the Ship. However, such losses or liabilities are not incurred in direct connection with the operation of the Ship and cover is not, therefore, available under the P&I Rules. However, separate cover may be available from the Association for such risks under Gard’s Additional Covers.28 

The liability, loss, cost or expense must relate specifically to the entered Ship. For example, the Association will not cover liabilities incurred in connection with personnel who form part of the Member’s general workforce, but who are not serving on any particular entered Ship at the time the liability is incurred. 

(H) …the Member’s interest in the Ship… (Rule 2.4.b)
The Association provides cover only for liabilities, losses, costs and expenses which arise in respect of the Member’s interest in the Ship. This will generally be taken to mean the capacity in which the Member has been insured by the Association.29 For example, a Member who is the charterer of the Ship and also the owner of the cargo on board the Ship, will be covered only in his capacity as charterer and not as cargo owner.  

(I) …events occurring during the period of entry… (Rule 2.4.c)
The cover provided by the Association is limited to liabilities, losses, costs and expenses which arise as a result of events which occur during the period of entry of the Ship in the Association. 

In many cases, the loss or damage will be manifest at the time of, or immediately after the causative event. In other cases, however, the physical loss or damage may not occur or become apparent until some time after the causative event. In order for cover to be available for the liability, loss, cost or expense, the Member must demonstrate that the causative event has occurred during the period of entry even if the loss or damage has not become manifest during the period of entry. 

It can sometimes be very difficult to establish when a causative event has occurred, but this may nonetheless be crucial in order to determine whether cover is available for the event. Ships may be sold during a cargo voyage, or the P&I entry of a Ship may change if a cargo voyage crosses into the new Policy Year. Accordingly, see the Guidance to Rule 80 which has provisions which are intended to determine when an event giving rise to certain types of claim is deemed to have arisen. 

(J) …compensation in respect of a liability…not otherwise covered… (Rule 2.5)

This Rule is commonly called the Omnibus Rule. It enables the Association, upon the application of a Member, to pay compensation in respect of a claim which falls outside the classes of liability, loss, cost and expense specified elsewhere in the Rules. The Omnibus cover is a particular feature of P&I insurance and provides the Association with some measure of flexibility to meet the changing needs of its Members. 

Claims put forward for consideration under the Omnibus Rule must be within the spirit of, or closely related to, existing heads of cover and must be consistent with the mutual interests of the Members. Furthermore, the exercise of discretion by the Association under the Rule can only be exercised in respect of liabilities, losses, costs and expenses which satisfy the conditions set out in Rule 2.4. 

Certain Rules make reference to cover not being available ‘…unless and to the extent that the Association in its discretion shall decide otherwise…’ or by words of a similar nature.30 Those provisions should be read in conjunction with Rule 2.5.  

It is entirely in the discretion of the Association whether a Member shall be indemnified in respect of a claim under this Rule. Such discretion is exercised by the Board of Directors of the Association under the terms of Article 6 of the Bye-Laws for Gard P. & I. (Bermuda) Ltd. and/or Article 9 of the Statutes of Assuranceforeningen Gard.31 The decision of the Board of Directors is final and subject to judicial review only when it is alleged that the Directors have exceeded their authority or have failed to apply the rules of natural justice.32 A court will normally assume that the Directors have acted in good faith and the onus of proving otherwise is on the party making the allegation.33 

(K) …condition of Defence cover that the Ship has…P&I cover… (Rule 2.6)
Defence cover34 is available to all Members, Co-assureds and Affiliates. Cover is available only in respect of a Ship which is entered for P&I cover, except that cover is available for disputes arising under contracts to build or buy a Ship,35 on the basis that P&I cover is not available before the Ship has been delivered to the Member and therefore is not yet operated by him. In such circumstances, Defence cover is available if the Member undertakes to enter the Ship for P&I cover no later than the date on which he takes delivery of the Ship. Since P&I cover is stated to be a condition of Defence cover, the Defence cover will lapse automatically if the P&I cover is terminated or ceases for any reason.


 

1 See the Guidance to Rule 1.6.
2 See (B) below.
3 See (J) below.
4 See Rule 5.
5 See the Guidance to Rule 10.3.
6 See the Guidance to Rule 90.
7 The Association has never to date refused to cover a liability because of onerous provisions of the
governing law, but special provisions may apply. See for example the Guidance to Rule 53.2, concerning
pollution liabilities pursuant to the US Oil Pollution Act 1990.
8 See the Guidance to Rule 36.
9 See the Guidance to Rule 37.
10 See Rule 55.a.
11 See Rule 55.b and Appendix IV.
12 See Rule 31.
13 See the Guidance to Rule 35.
14 See Rule 32.
15 See Rule 40.
16 See Rule 41.
17 See Rule 46.
18 See Rule 48.
19 See the Guidance to Rule 72 for discussion on how a Member is identified with the acts or omissions
of others.
20 The relation of principal and agent or employer and employee raises by implication a contract on the
part of the principal or employer to reimburse the agent or employee for all expenses, and to indemnify
him against all liabilities, incurred in the reasonable performance of the agency or employment, provided
that such implication is not excluded by the express terms of the contract between them, and provided
that such expenses and liabilities are in fact occasioned by his employment
21 A lawsuit against an item of property, not against a person.
22 See the Guidance to Rule 87.
23 See the Guidance to Rule 82.2.
24 See the Guidance to Rule 87.
25 See the Guidance to Rules 27 (Liabilities in respect of passengers), 38 (Pollution), 87 (Payment first by
the Member).
26 See the Guidance to Rule 88.
27 See the Guidance to Rule 66.
28 See the Gard publication Additional Covers – Terms and Conditions, a detailed commentary on which can be found on page 607 of this Guidance.
29 A Member with full cover will enter a Ship in his capacity as owner, operator or charterer of the Ship. A
Co-assured or Affiliate may be insured in a different capacity. See Rule 78.
30 See, for example, Rule 34.1 concerning cargo liability and Rule 47.2 concerning fines and penalties.
31 See Article 6.2.h of the Bye-Laws for Gard P. & I. (Bermuda) Ltd. and Article 9.2.g of the Statutes of
Assuranceforeningen Gard -gjensidig-.
32 See Vainqueur Jose (1979) 1 LL Rep 557. This is a decision of the English court but other courts and tribunals are likely to follow the same approach.
33 See Hazlewood, Steven J. P&I Clubs Law and Practise, 3rd edition, London, Lloyd’s Press 2000 pp. 25-32.
34 See the Guidance to Rules 65 – 70 for a further understanding of the nature and scope of the Defence cover.
35 See the Guidance to Rule 66.