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The Defence cover provides insurance to shipowners and charterers for legal and other costs that are necessarily and reasonably incurred by them in pursuing or defending claims that arise1in direct connection with the operation, insurance, acquisition or disposal of an entered Ship2as a result of events that occur during the period that the Ship is entered in the Association. However, like P&I cover, Defence cover is a ’named risk’ cover and is restricted to the disputes that are itemised in Rules 65 and 66.Under the Defence cover, the Association does not insure the Member against the claim in respect of which the legal or other costs are incurred, but merely against the legal and other costs that are incurred in dealing with that claim. Cover is available not only for the costs that may be incurred by the Member but also for any legal liability that the Member may have to pay the costs of the opposing party to the dispute should the Member lose the case. However, if the claim in question is a claim for which P&I cover is available, cover is available under the P&I cover not only for the underlying claim but also for the legal and other costs that are incurred by the Member in order to defend or pursue the claim.3
Defence cover is not available for a Ship unless that Ship has valid and subsisting P&I cover with the Association. However, this condition does not apply in the case of a ship which is under construction or which is being bought. Such a ship can be entered for ‘Pre-delivery Defence Cover’ pursuant to special terms and conditions provided that the Member has undertaken to enter the ship for P&I cover in the Association no later than the time when he takes delivery of the ship.4
Defence cover is sometimes referred to as ‘Freight, Demurrage and Defence (FD&D) cover’. However, the cover is not restricted to such matters. The majority of Defence cover claims arise under contracts that govern the operation of the Ship, e.g. charterparties and Bills of Lading and also the insurance of the Ship. However, Defence cover is also available for claims that do not arise in connection with a contract, e.g. for the defence of allegations that may be made by port authorities that the Ship is in breach of local regulations. The particular risks for which Defence cover is available are itemised in Rules 65 and 66. Rule 65 itemises the risks that relate to the operation of the Ship whereas Rule 66 itemises the risks that relate to the acquisition or disposal of the Ship.
One important feature of the Defence cover is that it enables the Association to provide advisory and financial support to a Member that may be involved in a large and/or complicated case that may involve substantial legal and other costs including, in some jurisdictions, a potential liability to pay for the legal and other costs that may be incurred by the Member’s opponent should the Member lose the case, e.g. a dispute between the Member and a shipyard in relation to the construction and delivery of a new ship. Furthermore, the Association’s in-house lawyers frequently act on behalf of the Member in correspondence and in negotiations with opponents, and may, in certain circumstances, also represent the Member in arbitration proceedings.
However, such financial and other support is not given unquestionably or without limit. The Association is given the authority to exercise a wide discretion when deciding whether or not to cover legal and other costs that either have already been incurred or which can be expected to be incurred; to control and direct the handling of any case; and to withdraw cover at any stage of the handling of the case if the nature or character of the case, or the manner in which the Member wishes to pursue or defend it, is considered to be contrary to the best interests of the membership as a whole. In other words, the Defence cover is not intended to provide support whatever be the merits of the case. The in-house lawyers of the Association monitor the merits and Defence cover is available only if they are of the view that a prudent uninsured would have considered it worthwhile to pursue the matter even if insurance cover had not been available for the costs of doing so.
The Association will also take account of whether the Member has complied with his obligations under the Rules. If the Member is in breach of such obligations, the Association is unlikely to exercise its discretion in favour of the Member at least until the Member has rectified such breaches, However, should the Member have failed to comply with those obligations that are considered to be fundamental Conditions of Cover for both P&I and Defence cover, such as those that are specified in Chapter 3 of Part 1 of the Rules (e.g. those that relate to the classification or certification of the Ship pursuant to Rule 8), the Association does not have any discretion to make cover available to any extent for claims that arise during a period when the Member is not fulfilling, or has not fulfilled, such obligations.
In contrast with the P&I cover that is available under Part II, the Member is normally obliged under the Defence cover to bear a proportion of the costs that are incurred, even if they are substantial. The standard deductible for a Defence Entry is currently 25 per cent of the costs incurred subject to a minimum of USD 5,000.5Such a provision is intended to encourage the Member to act reasonably and to protect the Members as a whole against the unreasonable use of the Defence cover.
See Rule 2.4.c.
2 See Rule 2.4.a.
3 See Rule 44.
4 See the Guidance to Rules 2.6 and 66
5 See Appendix V Rule 3.a. The quid pro quo is that the Member is entitled to receive the same proportion of any recovery made of legal and other costs. See the Guidance to Rule 84.2.c