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Rule 19 Reserves

1 The Association may establish and maintain such reserves as it may deem appropriate and may decide that any part of such reserves shall be applied to reduce Deferred Calls and Supplementary Calls including Overspill Calls.

2 Reserve funds may not be distributed to the Members except as provided for in the Articles of Association.

Guidance

(A) …such reserves as it may deem appropriate… (Rule 19.1)
The basic function of reserves is to enable the Association to ensure that it has sufficient funds available to indemnify Members for liabilities that they have incurred, and for which the Association is liable to indemnify them under the Rules and individual terms of entry, and to cover the Association’s administrative costs and any direct liability that it may be obliged to incur to third parties pursuant to certificates of financial security such as those that may be required under the CLC, Bunkers, Athens or Nairobi Wreck Removal Conventions.1 The Association has the right to allocate funds to the reserves by transferring to the reserves any excess funds that have been generated in a Policy Year or by levying Supplementary Calls for that purpose.2 

The Board of Directors will determine the amount, if any, that is to be allocated to the reserves after having approved the financial statements of the Association. In doing so, the Board will usually have regard to factors such as the level of accounted surplus of premium and other income earned over claims and other costs expended, the current and desired solvency margin of the Association and the desirability of calling for less premium than originally forecast. 

(B) …applied to reduce Deferred Calls and Supplementary Calls including Overspill Calls. (Rule 19.1)
It can sometimes take years for claims which are made against the Association to be finally determined and compensated. Therefore, the Association will, in the meantime, invest the accrued reserve funds. The investment return generated thereby is a very important part of the Association’s overall income and has over the years served to strengthen its reserves and to avoid the necessity of making any Supplementary Call.3 It has also made it possible for the Association not to charge, or to reduce, the forecast Deferred Call in some Policy Years. Investment activities are administered by a number of selected professional investment managers in accordance with guidelines determined by the Board of Directors.4 A sufficient proportion of the funds is invested in such a way that it can be easily liquidated as and when necessary in order to generate cash for e.g. large claim payments. 

The Association has a wide discretion to utilise reserves to pay claims and/or other outgoings which would otherwise have to be funded by Supplementary Calls. Furthermore, the reserves may, at the discretion of the Association,5 be applied inter alia:

i to meet any deficit which occurs in respect of a Policy Year that has been closed;

ii to stabilise the level of Calls;

iii to pay losses arising from a shortfall in any reinsurance cover;

iv to cushion the Association against investment losses;

v to eliminate or reduce the need for an Overspill Call or Calls. 

(C) Reserve funds may not be distributed… (Rule 19.2)
Whilst reserves can be used to meet claims and thereby reduce Calls, they cannot be paid out to Members except upon the dissolution of the Association.6


1 Further commentary can be found in para. (A) to the Guidance to Rule 38 regarding the CLC and Bunkers Conventions, para. (J) to the Guidance to Rule 28 regarding the Athens Convention and para. (B) to the Guidance to Rule 40 regarding the Nairobi Convention.
2 See the Guidance to Rule 13.
3 The Association has not levied any Supplementary Call since 1992 (in respect of the 1991 Policy Year.)
4 See Article 9.2.c of the Bye-Laws of Gard P. & I. (Bermuda) Ltd. and 9.2.b of the Statutes of Assuranceforeningen Gard -gjensidig-.
5 Such discretion is exercised by the Board of Directors. See Article 6.2.e of the Bye-Laws of Gard P. & I. (Bermuda) Ltd. and Article 9.2.d of the Statutes of Assuranceforeningen Gard -gjensidig-.
6 See Article 18.2 of the Statutes of Assuranceforeningen Gard -gjensidig-. and Article 12.2 of the ByeLaws of Gard P. & I. (Bermuda) Ltd.