Table of contents
1 The Association may decline to cover under a Defence entry all or part of the Member’s costs, where it is of the opinion that:
a there is no reasonable relation between the amount in dispute and the costs which are likely to be incurred;
b there is no reasonable relation between the prospects of succeeding in establishing a claim or of having the claim enforced or the liability averted and the costs which are likely to be incurred;
c the Member has failed to carry out his obligations under these Rules;
d the claim is unreasonable or tainted with illegality or other improper conduct;
e for any other reason Defence cover should not apply.
2 The Association shall be under no liability to reimburse a Member for costs incurred:
a before the Association has been notified of a claim under the Defence cover;
b by the employment of lawyers, experts and other advisers appointed by the Member without the Association’s approval.
(A) … The Association may decline to cover under a Defence entry all or part of the Member’s costs, where it is of the opinion that … (Rule 67.1)
Subject to the comments that are made in (C) below the Association has a wide discretion to decline to make Defence cover available under Rule 67.1, and such discretion will normally be exercised by the Association after consideration of any submissions that may be made on behalf of the Member. Furthermore, even if the Association does not decline cover in toto, it has a wide discretion to determine the maximum level of costs that are recoverable under any particular Defence entry and the maximum level of costs that are recoverable in any particular case.
The general right of discretion that the in-house lawyers of the Association have to determine the exclusion or restriction of Defence cover, or the control or direction of the handling of Defence cases, on a case-by-case basis must be distinguished from the right that the Board of Directors has under the Articles of Association to exercise its discretion to pay compensation for claims that are not covered under the Rules. However, the right that the in-house lawyers have to decline cover is itself subject to the overriding right of discretion that is vested in the Board of Directors of the Association under the Articles of Association.
(B) …there is no reasonable relation between the amount in dispute and the costs which are likely to be incurred… (Rule 67.1.a)
Rule 67.1.a gives the Association the right to exercise control over the manner in which costs are incurred to ensure that they are not disproportionate to the quantum of the claim that is the subject matter of the dispute. Therefore, in deciding how much use should be made of legal or other assistance, the Association is usually influenced and guided by what a prudent Member would have done if he did not have insurance cover for legal costs.
The Association has the right to retain control of the conduct of the claim and, in particular, to deal with cases internally whenever it is deemed appropriate to do so in order to avoid or minimise the expense of external lawyers and other consultants. Furthermore, if external lawyers, surveyors and other experts are to be appointed, the Association will require to be consulted before this is done since the Association has the overriding right to decide who is to be appointed, retained or dismissed.1
(C) …there is no reasonable relation between the prospects of succeeding in establishing a claim or of having the claim enforced or the liability averted and the costs which are likely to be incurred… (Rule 67.1.b)
When administering the availability of the Defence cover the Association is guided by the fundamental principle that the resources of the Association must not be dissipated to the disadvantage of the membership as a whole by supporting cases the merits of which do not justify such support. Accordingly, if the Association is of the opinion that there is no reasonable correlation between the prospects of success in establishing or defending a claim and the costs that are likely to be incurred in order to do so, the Association has the right to decline cover for the Member’s costs either in whole or in part.
Similarly, even though it may be possible to obtain a default or summary judgment or award at an acceptable cost, the expense of enforcing such a judgment or award may not be cost-effective particularly if enforcement procedures in the opponent’s country of domicile would require certain issues to be relitigated or proved. Therefore, the Association has the right to decline to cover costs, not only when the Member’s opponent is bankrupt, but also when that party is no longer able to pay his debts or is likely to have to cease trading if the Member’s case succeeds.
(D) …Member has failed to carry out his obligations under these Rules… (Rule 67.1.c)
In considering how discretion should be exercised in any particular case, the Association will take account of whether the Member has complied with his obligations under the Rules. A distinction is drawn in this respect between 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,2 and other less fundamental obligations. For example, if the Member is in breach of the obligation that is imposed upon him by Rule 8 in relation to the classification or certification of his Ship, the Association does not have the discretion to make Defence cover available to any extent for claims that arise as a result. However, if the Member is in breach of his obligation to provide the Association promptly with all documents and information that are necessary in order to evaluate the merits of the case, or to allow the interview of relevant persons,3 the Association has the discretion either to reject the claim or to reduce the sum that is payable to the Member.4 Such a distinction is equally relevant to P&I cover as well as to Defence cover.
(E) …the claim is unreasonable or tainted with illegality or other improper conduct… (Rule 67.1.d)
Rule 67.1.d permits the Association to decline cover for a claim for which the Member seeks Defence cover if the claim is either unreasonable or tainted with illegality or other improper conduct. Therefore, Rule 67.1.d should be read in conjunction with other Rules such as Rules 72 and 74. Consequently, the Association is unlikely to support a claim that is brought by a Member as owner against a charterer for demurrage that has been incurred by the Ship whilst loading a cargo that the Member knew to be a prohibited export since such a claim is likely to be considered to be ‘tainted with illegality or other improper conduct.’ Furthermore, although the Association has a discretion whether or not to support a claim that is tainted with ‘improper conduct,’ should such ‘improper conduct’ amount to ‘wilful misconduct’ of the Member, the Association has no such discretion since cover is automatically excluded in such circumstances under Rule 72.5
Rule 67.1.d is broadly drafted to permit the Association, in the interests of the membership as a whole, to exclude claims which do not, in its opinion, deserve support under the Defence cover. Therefore, even if the claim for which Defence cover is being sought does not amount to illegality or improper conduct, the Association has the discretion to exclude claims that it considers to be unreasonable and which do not, therefore, deserve support under the Defence cover. For example, the Association is unlikely to support a claim that is brought by a Member as charterer against the owner of the Ship for breach of charterparty speed and consumption warranties, if the Member, having just sold the Ship to the new owner, has chartered it back in the full knowledge that the Ship cannot comply with the charterparty warranties.
Finally, Rule 67 should be read in conjunction with Rule 69 which gives the Association further rights to decline to provide Defence cover based on the manner in which the Member has conducted himself in relation to a particular case.
(F) …for any other reason Defence cover should not apply… (Rule 67.1.e)
Whilst the Association has a very wide discretion to exclude cover under Rule 67.1.e, it will not normally refuse to make Defence cover available if the Member has acted prudently and has complied with the terms and conditions of entry.
(G) …costs incurred…before the Association has been notified of a claim… (Rule 67.2)
Rule 67.2 is intended to remind Members of their obligation to report claims to the Association promptly and makes it clear that the Association has the right to refuse to reimburse a Member for expenditure that the Association considers to have been unnecessarily incurred.
(H) …costs incurred…by the employment of lawyers, experts and other advisers appointed by the Member without the Association’s approval. (Rule 67.2)
This Rule makes it clear that the Association is not obliged to reimburse costs that have been incurred by the Member in relation to the appointment of external lawyers, advisers and experts unless such appointment has been approved by the Association.6 This provision underlines the right and duty of the Association to control the handling of Defence cases for the benefit of the membership as a whole by ensuring that membership funds are used only to secure the appointment of competent support services at a cost effective price.
1 See the Guidance to Rules 82.3 and 67.2.b.
2 See the Guidance to Rules 6-9.
3 See the Guidance Rule 82.1.d and e.
4 See the Guidance Rule 82.
5 For commentary on the identity of the ‘Member’ for these purposes, see (C) of the Guidance to Rule 72.
6 A similar requirement applies in the case of P&I cover. See the Guidance to Rule 44.