Table of contents
1 The Association may terminate the entry with effect from the end of the Policy Year in respect of one or more Ships by giving written notice thereof prior to 20 January.
2 The Association may also terminate the insurance of any or all of the Ships entered by a Member:
a without notice, where a casualty or other event has been brought about by wilful misconduct on the part of the Member, as defined in Rule 72;
b on three days’ notice, where the Member has failed to pay when due and demanded any Estimated Total Call, Last Instalment, Supplementary Call or other amount due from him to the Association;
c on 14 days’ notice, where the Member has neglected a duty of disclosure under Rule 6 or Rule 7 or where there has been an alteration of the risk after the conclusion of the contract of insurance;
d on 45 days’ notice, without giving any reason
3 Notwithstanding and without prejudice to Rules 24.1 and 24.2 and Rule 25.4, the Association may, on such notice in writing as the Association may decide, terminate the entry in respect of any and all Ship(s) in circumstances where the Member has exposed or may, in the opinion of the Association, expose the Member or the Association to the risk of being or becoming subject to any sanction, prohibition or adverse action in any form whatsoever by the State of the Ship(s) flag, by any State where the Association has its registered office or permanent place of business or by any State being a Major Power or by the United Nations or the European Union. For the purpose of this Rule 24.3 ”Major Power” means any of the following States: United Kingdom, United States of America, France, the Russian Federation and the People’s Republic of China.
(A) The Association may terminate... (Rule 24.1)
Rule 24.1 is the ‘mirror image’ of the right to terminate that is given to the Member by Rule 23. Unless an entry is terminated in accordance with the Rules, the cover provided by the Association continues automatically from Policy Year to Policy Year.1 Rule 24.1 sets out the circumstances in which the Association may unilaterally terminate the entry at the end of the Policy Year. Provided it complies with the formal requirements of the Rule, the Association has the right to terminate an entry for any reason whatsoever and need not give reasons for the termination. The effect of termination of cover is described in Rule 26.
(B) ...terminate...with effect from the end of the Policy Year... (Rule 24.1)
Provided written notice is given prior to 20 January, the termination will take effect from the end of the Policy Year, i.e. from noon GMT on 20 February. If the Association wishes to terminate the entry before noon GMT on 20 February it must comply with the procedures stipulated in Rule 24.2.
(C) ...written notice... (Rule 24.1)
In order to exercise its right to terminate the entry unilaterally pursuant to Rule 24.1, the Association must give notice in writing prior to 20 January. Such notice of termination is deemed sufficient for the purpose of termination of entry pursuant to Rule 24.1 when it is received at the Member’s address2 that has been notified most recently by the Member to the Association. When the entry has been made through a broker, a notice of termination that has been sent by the Association to the broker is to be deemed to have the same effect as if it had been sent to the Member as a broker is deemed to be the agent of the Member.3
(D) ...in respect of one or more Ships... (Rule 24.1)
The Association may terminate the entry of one, some or all of the Ships that have been entered by a Member, by sending one single written notice of termination.
(E) ...may also terminate the insurance of any or all of the Ships... (Rule 24.2)
Whereas Rule 24.1 entitles the Association to terminate an entry for any reason at the end of the Policy Year, Rule 24.2 gives the Association the right to terminate during the course of the Policy Year the insurance4 of any or all of the Ships that have been entered by a Member either immediately or on the giving of notice depending on the particular circumstances. Rule 24.2 gives the Association the right to do so even though the circumstances giving rise to the termination may relate to only one or some of the Ships that have been entered by him.
(F) ...without notice where a casualty or other event has been brought about by wilful misconduct on the part of the Member, as defined in Rule 72... (Rule 24.2.a)
Rule 24.2.a states expressly that the Association has the right to terminate an entry ‘without notice’ where a casualty or other event has been brought about by the wilful misconduct of the Member. The term ’wilful conduct’ is defined in Rule 72 as: “...an act intentionally done, or a deliberate omission by the Member, with knowledge that the performance or omission will probably result in injury, or an act done or omitted in such a way as to allow an inference of a reckless disregard of the probable consequences”.
Whilst it is inevitable in practise that some form of notice will need to be given to the Member at some point in time, the right to terminate ‘without notice’ in Rule 24.2.a represents a material and important distinction. Where the Rules require the giving of notice as a pre-requisite for termination, the termination will not take effect until the notice is received by the Member,5 whereas under Rule 24.2.a, termination takes effect upon the occurrence of the event and before the Association has given notice confirming the termination.
(G) ...a casualty...brought about by wilful misconduct... (Rule 24.2.a)
The right to terminate immediately without notice is restricted to the most serious of circumstances namely, where the wilful misconduct6 of the Member has brought about a casualty or other event. The phrase ‘other event’ is construed restrictively and includes only those events similar in nature to a casualty. However, in order to justify termination of cover, the relevant misconduct must be that of the Member himself, or that of the ’alter ego’ of the Member, i.e. the person(s) whose “action is(are) the very action of the company itself”. This would normally include the directors of the company but could also, depending on the circumstances, include other senior personnel and independent contractors to whom important functions relating to the management and operation of the Ship have been delegated.7 Therefore, the wilful misconduct of other personnel who cannot be considered to be the ’alter ego’ of the Member is not sufficient to justify termination pursuant to Rule 24.
The fact that the Member’s wilful misconduct has brought about the event is sufficient to cause the Association to invoke this provision regardless of whether the relevant event has resulted in the making of a claim on the Association. However, if the event does result in a potential claim against the Association, the Association also has the right under Rule 72 to decline cover for liabilities, losses, costs or expenses caused by such conduct.
(H) ...the Member has failed to pay...any...amount due... (Rule 24.2.b)
Rule 20 lays down strict time limits for payment of amounts that are due to the Association8 and payment is deemed to have been made by the Member only when funds have been received in the Association’s account in an immediately useable form.9 Therefore, the sending of a cheque or the giving of bank instructions does not amount to payment for these purposes since no funds have been received at that point by the Association in readily useable funds.
When the Member is in breach of his duty to make payment under the Rules the Association has the right to terminate an entry under Rule 24.2.b at any time by giving three days’, i.e. 72 running hours, notice. The period of notice is calculated from the time that the notice is served,10 and includes Saturdays, Sundays and Bank Holidays. The entry will terminate at the expiry of the three days’ notice even though the Member may have paid the overdue amount during the course of the three days’ notice period.11 However, the Association may exercise its discretion to continue the entry in such circumstances.
Since the entry is not terminated until the expiry of the three days’ notice period the Association remains at risk for events that give rise to recoverable claims during the notice period. Similarly, the Member remains liable for any premium that is payable up to the date of termination, and the Association may be obliged to repay any premium which has been pre-paid by the Member in respect of the period after the date of termination.12
(I) ...the Member has neglected a duty of disclosure or...there has been an alteration of the risk... (Rule 24.2.c)
A failure to disclose material facts whether before or after the Ship’s Entry in the Association or an alteration of the risk after Entry can affect the exposure of not only the Member but that of the membership as a whole. Therefore, Rule 24.2.c gives the Association the right to terminate the entry in such circumstances. If the Member has neglected to disclose material facts before the conclusion of the contract of insurance,13 or if there has been an alteration of the risk after Entry,14 the Association is not only protected against liability to the extent that Rules 6.3 and 7.2 allow but also has the right to terminate the insurance by giving 14 days’ notice, i.e. 14 running days. For example, there would be an alteration of risk if a passenger ship that had been trading solely between the UK and France were to be relocated during the course of the Policy Year to operate solely on US to Caribbean roundtrips. Since the exposure of the Member and that of the membership as a whole to personal injury and pollution liabilities would increase substantially as a result of the change in the Ship’s trading area, the Association has a right to terminate cover under Rule 24.2.c.
(J) ...without giving any reason. (Rule 24.2.d)
The Association has the right to terminate an entry during the course of a Policy Year in circumstances other than those described above by giving 45 days’ notice to the Member, i.e. 45 running days. It is rare for the Association to make use of this provision, but it may be invoked, for example, where the relationship between the Member and Association has become adversarial and it is, therefore, considered to be in the best interest of the membership as a whole that the entry is terminated. The Association does not need to give any reason for the termination and 45 days is considered to be a sufficiently long period of time to enable the Member to arrange alternative insurance cover.15
(K) Notwithstanding and without prejudice to Rules 24.1 and 24.2 and Rule 25.4, the Association may, on such notice in writing as the Association may decide, terminate the entry (Rule 24.3)
Rule 24.3 was introduced in 2010 to give the Association power to terminate an entry or entries if the relevant Ship(s) is(are) involved in activities that have exposed or may expose the Association or the Member to the risk of being, or becoming, the target of, or subject to, any sanction, prohibition or adverse action in any form whatsoever from the state of the Ship’s flag, the state where the Association has its registered office or has a permanent place of business or a state that is a permanent member of the UN Security Council, or from the United Nations or the EU.16
However, further international sanctions have been introduced since 2010 against a number of countries which the international community has deemed to have broken internationally accepted norms of behaviour and the US have introduced further enhanced sanctions against Iran. Therefore, the Association is of the opinion that the scope for yet further sanctions, whether against these or other countries, and the potential impact of such sanctions, is extremely wide and constitutes a substantial increase in risk in that it envisages, inter alia, the imposition of sanctions on organisations and individuals ”underwriting or otherwise providing insurance or reinsurance” relating to such trade.17 Consequently, the Association considers that it is necessary to protect the membership and itself against a risk which may otherwise be beyond the control of the Association and the membership and the purpose of Rule 24.3 is to protect the Association as much as possible against a charge that it is providing insurance for a prohibited activity and, thereby, being itself subject to sanctions.
Rule 24.3 entitles the Association to terminate the entry of ”any and all Ship(s)” if the Member has by his conduct either exposed or may expose the Member and/or the Association to the risk of ”any sanction, prohibition or adverse action in any form” by any one or more of the states identified in the Rule. For example, the Association would invoke this provision where it becomes apparent that the Member is or will be using the vessel in activities that violate any applicable sanctions legislation, as would be the case for example if a EU based member and/or a EU flagged vessel had participated in the supply or export of goods and technology for the Iranian oil and gas industry as prohibited pursuant to EU Council Regulation 267/2012 Article 8.
In such circumstances, the Association is entitled to terminate the entry by giving notice in writing for such period as the Association considers to be appropriate. However, Rule 24.3 must be read in conjunction with Rule 25.4 and is expressly stated to be without prejudice to Rule 25.4 which provides for immediate and automatic cesser in the circumstances described in that Rule (subject to the discretion given to the Association to continue or reinstate cover under Rule 25.5).
The imposition of sanctions may also have an impact on the ability of the Association to indemnify the Member against liabilities, costs or expense.18
1 See the Guidance to Rule 4.
2 See also the Guidance to Rule 23. Communications sent to one Joint Member or Co-assured shall be deemed to be sent to all insured under that entry. See Rule 79.3.
3 See the Guidance to Rule 3.
4 Whilst the phrase ‚terminate the insurance’ has been used in Rule 24.2, as opposed to the phrase ‘terminate the entry’ in Rule 24.1, no material difference is intended.
5 See (C) above.
6 See the Guidance to Rule 72.
7 See paragraph (C) to the Guidance to Rule 72.
8 See the Guidance to Rule 20.
9 Payment by the Member to his broker is not usually sufficient as a broker is normally deemed to be the agent of the Member not of the Association. See the Guidance to Rule 3.
10 See (C) above.
11 By virtue of Rule 90, the Association has excluded the application of the Norwegian Insurance Contract Act of 1989 and, thereby, a provision in that Act which provides that payment during a notice period will cure the default.
12 See the Guidance to Rule 26.
13 See the Guidance to Rule 6.
14 See the Guidance to Rule 7.
15 For the responsibilities of the Association and the Member during the period of notice, see (H) above.
16 A corresponding amendment was also introduced in relation to Rule 25.5 regarding cesser of cover. See Guidance to that Rule.
17 See Gard Circulars Nos. 1/2010, 7/2010, 24/2010, 12/2011, 15/2011, 18/2011, 1/2012, 7/2012, 20/2013 and 24/2013 for further information. See also the International Group of P&I Club’s Frequently Asked Questions dated 8 February 2012, 25 May 2012, 15 August 2012, 1 November 2012 and 29 January 2013.
18 See the Guidance to Rule 77.2 and 77.3.