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The Association shall cover legal costs and expenses relating to any liability, loss, cost or expense which, in the opinion of the Association, is (or, apart from any applicable deductible, would be) likely to result in a claim on the Association, but only to the extent that such legal costs and expenses have been incurred with the agreement of the Association.
It is necessary to distinguish between, on the one hand, Defence cover1 which provides insurance for legal and other costs that are necessarily incurred in establishing or defending claims in which the Association has no proprietary interest and, on the other hand, the cover that is made available under Rule 44 in relation to P&I cover. In the case of P&I cover, the Association has a proprietary interest in the liability, loss, costs or expense that have been incurred by the Member since it provides insurance against such matters. The pursuit or defence of such claims against, or by, the Member will result in cost and expense which can be substantial depending on the size and complexity of the underlying claim or claims. Consequently, cover is also made available under Rule 44 for legal costs and expenses that are incurred in order to resist or pursue such claims.
(A) …legal costs and expenses… (Rule 44)
Cover is available for legal costs and expenses that are incurred by the Member in order to ascertain and protect the Member’s legal rights in relation to a claim for which cover is available under the P&I entry for the Ship. Cover is available not only for the legal costs and expenses that may be incurred by the Member in order to resist or pursue recoverable claims but also for any liability that the Member may have to compensate a third party for the legal costs and expenses that the third party has incurred when pursuing his claim against the Member. The legal costs and expenses incurred by each party can be substantial depending on the size and complexity of the underlying claim or claims.
The phrase ‘legal costs and expenses’ includes the cost of advisory services that are provided by external lawyers, barristers, associates, paralegals etc., at any stage of the case, as well as the cost of legal representation in arbitration or before a court or other tribunal. Furthermore, whilst it is not expressly stated, cover is also available for costs and expenses that are incurred for services that are provided by persons who do not have legal qualifications, e.g. P&I correspondents, surveyors, consultants or experts.
The phrase ‘legal costs and expenses’ also includes costs that are incurred in relation to the provision of financial security, such as bank guarantee commissions, and the service fees and disbursements that are charged by service providers, including those charged by sub-contractors or appointees of a service provider, and charged to that provider in the first instance, e.g. a local surveyor appointed and paid firstly by the P&I correspondent. However, cover is not available for the Member’s internal administrative costs and expenses, such as the wages of those employees that are deputed to deal with the case, or any extra costs that are incurred by the Member as a result of their absence from normal duties.2
(B) …relating to any liability, loss, cost or expense which…is… (or, apart from any applicable deductible, would be) likely to result in a claim on the Association… (Rule 44)
Cover is available for costs and expenses only where they are incurred in connection with any liability, loss, cost or expense which, in the opinion of the Association, is likely to result in a claim for which cover is available under the Rules or any other special terms that may apply to the P&I entry of the Ship. If the underlying liability etc is recoverable in principle under the Rules it does not matter that the particular claim is within the deductible that has been agreed in the terms of entry and will, therefore, be retained by the Member in whole or in part. Cover is available for legal costs and expenses that relate to a liability etc., that would have been recoverable from the Association but for the agreed deductible.
If the legal and other costs that the Member has incurred relate to liability etc., that is not likely to be recoverable from the Association under the P&I entry for the Ship, they may nevertheless be recoverable from the Association if the Ship has been entered for Defence risks, subject to the Defence Rules3 and any special terms of Defence Entry.
If lawyers or other service providers are instructed to act partly in relation to a matter that is likely to result in, or has resulted in, a claim on the Association, and partly in relation to another matter, it is important that a distinction is made between the two matters, since the cover that is available under Rule 44 will be available for one of them, but not for the other.
The Association may agree to allow a Ship to be entered on terms which provide that the legal costs and expenses that are recoverable pursuant to Rule 44 are not to be subject to any deductible and are consequently, compensated in full. However, the usual rule is that the legal costs and expenses that may be incurred shall be added to the relevant liability, loss, cost or expense for the purpose of calculating the applicable deductible for that liability etc.4
C) …only to the extent that such legal costs and expenses have been incurred with the agreement of the Association. (Rule 44)
Cover is not available for legal costs and expenses that have been incurred without the Association’s agreement. This provision should be read in conjunction with the obligations that the Member has under Rule 82 in relation to incidents that may result in claims against the Association. In particular, the Association has the right to control legal costs and expenses similar to that which it has in relation to the conduct of Defence claims. Accordingly, the Association has the right, if it so decides, to control or direct the conduct of any claim or legal or other proceedings and to instruct lawyers and other advisers and experts on the Member’s behalf.5
Since the Association has considerable knowledge of the experience, expertise and cost of lawyers worldwide it will normally be able to recommend suitable legal representation for the particular claim or dispute.
1 See Part IV of Chapter 1 and the Guidance to Rules 65-70.
2 See the Guidance to Rules 77 and 82.4.
3 See the Guidance to Rules 65 and 70.
4 See Appendix V, paragraph 2.b.
5 See the Guidance to Rule 82.3.