Table of contents
1 The Association shall not cover:
a liabilities, losses, costs or expenses which are covered by the Hull Policies or would have been covered by the Hull Policies had the Ship been fully insured on standard terms, without deductible, for an insured value which is at all times not less than the market value from time to time of the Ship without commitment, provided that costs relating to claims for damage sustained by the Ship shall be covered under a Defence Entry to the extent that such damage is not recoverable under the Hull Policies by reason only of a deductible, and for the purposes of this proviso the deductible shall be deemed not to exceed one per cent of the Ship’s insured value;
b liabilities, losses, costs or expenses recoverable under any other insurance or which would have been so recoverable:
i apart from any term in such other insurance excluding or limiting liability on the ground of double insurance; and
ii if the Ship had not been entered in the Association with cover against the risks set out in these Rules;
c liabilities, losses, costs or expenses in relation to a person performing work in the service of the Ship covered by social insurance or by public or private insurance required by the legislation or collective wages agreement governing the contract of employment of such person, or which would have been so covered if such insurance had been effected.
2 The Association shall not cover under a Defence entry costs which are or can be covered under a P&I entry.
A shipowner will normally require several types of insurance to give protection both for his interest in the ship and against the liabilities that he may incur to third parties in connection with the operation of the ship. Typically, the shipowner will take out marine hull and machinery insurance to safeguard the value of his investment in the structure of the ship, war risk hull insurance to protect him against the war risks that are normally excluded from cover under the marine hull and machinery policies, loss of hire insurance to protect him against loss of revenue, P&I cover to protect him against the claims that may be brought against the ship by third parties, and Defence cover as protection against the legal and other costs that he will incur when prosecuting or defending claims that are not covered under the P&I cover. He may also choose to take out additional insurances.1
These insurances are usually provided by separate insurers on various terms in different insurance markets. Consequently, the shipowner and his various insurers will wish to avoid overlapping or ‘double’ insurance. The shipowner will not wish to pay premium twice for the insurance of the same risk whilst the insurers will wish to avoid risks that they expect to be insured elsewhere.
(A) The Association shall not cover: a liabilities, losses, costs or expenses which are covered by the Hull Policies… (Rule 71.1.a)
Rule 71.1.a states expressly that the cover that is provided by the Association does not extend to liabilities, losses, costs and expenses that are covered by the Hull Policies,2since the cover that is provided by the Association is intended to complement, but not to replace, such cover.3
(B) …would have been covered under standard terms had the Ship been fully insured on standard terms, without deductible… (Rule 71.1.a)
The exclusion applies not only to the liabilities, losses, costs and expenses that are actually covered by the Hull Policies that have been taken out by the Member, but also to the liabilities, losses, costs and expenses that would have been covered if the Ship had been insured under Hull Policies that comply with the requirements of Rule 71.1.a.
Many different ’standard’ forms of Hull Policies are commonly used in the industry and these can provide cover, not only for the loss of, or for damage to the Ship, but also for liability to third parties, e.g. for damage that has been caused by collisions with other ships, or with fixed or floating objects or other property. Since it is a fundamental requirement for a mutual association that there be uniformity of cover, Rule 71.1 emphasises that cover is not available under the Rules for liabilities, losses, costs and expenses that can be covered under standard Hull Policy terms.
The Association considers on a case-by-case basis whether the particular liability etc., is, or could have been covered, under ‘standard’ hull terms. However, for the purpose of the Rules, the Association considers that the full cover that is available under the standard Nordic, English, American, German, Japanese and French conditions is deemed to be cover on standard terms.4
Cover is also excluded if the relevant liability, loss etc., is covered under the Hull Policy, or would have been covered under standard terms, were it not for the applicable deductible(s). For example, if the Member’s liability resulting from a collision exceeds USD 100,000 and the Member is insured under a Hull Policy that gives cover for such liability subject to a deductible of USD 100,000 per incident, cover is not available from the Association for the sum of USD 100,000 that is not recoverable under the Hull Policy. Similarly, if the Member’s liability is less than USD 100,000 so that he cannot claim cover under the Hull Policy because of the deductible, cover is not available from the Association for such liability. The reason for this is that whilst the level of deductible is a private decision for the Member, the acceptance of a deductible is a means of reducing the premium that is payable under the particular policy. Consequently, it would be contrary to the spirit of mutuality to enable the Member to, on the one hand, obtain such a financial benefit but to, on the other hand, ask the other mutual Members to bear the increased risk that would result as a result of doing so.
(C) …for an insured value which is at all times not less than the market value from time to time of the Ship without commitment… (Rule 71.1.a)
Furthermore, cover is not available for any liability, loss etc., that is incurred by the Member which he cannot recover under the Hull Policies because he has failed to keep the Ship insured for its full market value. The Ship’s insured value is normally based on its market value at the time that the Hull Policies are agreed or renewed. However, the market value of a Ship may fluctuate considerably during the period that it is insured under the Hull Policies. Therefore, the Member is required to monitor the state of the second-hand market closely and to make certain that the value for which the Ship is insured under the Hull Policies continues to reflect whatever the current market value of the Ship should be from time to time.
For example, if a Ship that has a market value of USD 1 million but is only insured for a value of USD 800,000, incurs a liability following a collision of USD 950,000, the cover that is available under the Hull Policy may be restricted to USD 800,000 because of the failure of the shipowner to insure the Ship for its full market value. In such circumstances, Rule 71.1.a provides that the Member cannot recover the balance of USD 150,000 from the Association. However, if the Ship is also insured under a standard Increased Value (IV) Hull Policy (which is normally subject to a maximum of 25 per cent of the Hull Policy value), the Member is covered under the two Hull Policies up to a maximum of USD 1 million and can, therefore, recover the balance of USD 150,000 under the IV policy and has no need to make a claim against the Association for the balance.
However, the Ship’s commercial commitments are not taken into consideration when assessing its market value since such factors might well distort its true intrinsic market value.
(D) …provided that costs relating to claims for damage sustained by the Ship shall be covered under a Defence entry to the extent that such damage is not recoverable under the Hull Policies by reason only of a deductible… (Rule 71.1.a)
Whereas the commentary that is found in (B) relates to the impact that a deductible may have in relation to the cover that is available for the claim that occasions the liability, costs etc., (i.e. the collision liability), the commentary in (D) explains the impact that the deductible may have in relation to the costs that may be incurred by the Member in relation to claims for damage to the Ship.
The normal rule is that costs that are incurred by a Member in such circumstances are apportioned between the Member and the Hull Insurers according to whatever the correlation may be between the deductible and the quantum of the claim. For example, should there be a claim for USD 200,000 under a Hull Policy that is subject to a deductible of USD 50,000, 25 per cent of the costs would be borne by the Member and 75 per cent by the insurers. Because such costs are normally recoverable, at least in part, under the Hull Policies, they are, therefore, excluded from cover by Rule 71.1.a. However, if the claim is for a sum that is below the deductible that is applicable to the Hull Policies, the costs that are incurred in relation to that claim, e.g. the costs of surveys, legal advice and/or of pursuing the claim, are not normally recoverable under such Policies. In such circumstances, Rule 71.1.a provides that Defence cover is, nevertheless, available pursuant to Rule 65.d for survey, legal and other costs that are incurred in relation to recourse claims that are made as a result of damage that has been caused or sustained by the Ship but not for survey and other costs that are incurred purely in relation to the hull claim e.g. for the repair of the Ship.
Defence cover is available either when the entire claim falls below the Hull Policy deductible, or when the claim exceeds that deductible but the Member is, nevertheless, required to contribute towards the costs of pursuing the claim by reason of the applicable deductible. For example, some hull terms provide that any recovery that is made from a third party is to be apportioned between the hull underwriter and the assured and consequently members are required to contribute proportionately towards to the costs of pursuing the recovery. In this case, Defence cover may be available for these costs.
For example, if a ship is insured under a Hull policy that has a deductible of USD 100,000 were to suffer damage costing USD 60,000, Defence cover would be available for the whole of the costs that the Member might incur in relation to claims that arise as a result of such damage. On the other hand, if the claim for damage to the ship was USD 300,000, Defence cover would only be available for that proportion of the costs that would not be recoverable under the Hull Policy because of the deductible, i.e. one-third of the costs.
(E) …for the purposes of this proviso the deductible shall be deemed not to exceed one percent of the Ships insured value… (Rule 71.1.a)
The level of deductible that Members may choose to agree under their Hull Policies may be substantially different depending on their subjective requirements. However, this subjective entitlement can create a problem for a mutual association that strives to provide cover to its Members that is as uniform as possible since the level of deductible could affect the level of Defence cover that can be made available under Rule 71.1.a. Consequently, Rule 71.1.a provides that the relevant deductible shall be deemed not to exceed one per cent of the Ship’s value and, thereby, introduces a cap on the deductible that is relevant for these purposes. This ensures that the level of available Defence cover is not increased as a result of the fact that Members have agreed an unusually high deductible under their Hull Policies and the availability of Defence cover is based on either the actual deductible or a deemed deductible of one per cent of the vessels insured value, whichever is the lower.
For example, if a Ship that has an insured value of USD 40 million has a deductible under the Hull policies of USD 1 million (2.5 per cent of the ship’s insured value), the relevant deductible for the purpose of Rule 71.1.a is USD 400,000, i.e. one per cent of the Ship’s value. However, to enable the Association to determine the deductible that is relevant in any particular case, the Member is obliged to disclose the relevant Hull Policy terms to the Association.
(F) …liabilities, losses, costs or expenses recoverable under any other insurance… (Rule 71.1.b)
Whilst a Member is not obliged by the Rules to take out insurances that provide additional cover to that which is provided by the Hull Policies, many shipowners and charterers do so in practise in order to protect their interests.
However, cover is not available under the Rules if there is a duplication or overlap of insurance (commonly called ‘double insurance’) between the P&I cover and such other insurances. In the event of ‘double insurance’, the Member is required by the Rules to claim under his other (primary) insurance rather than under the Rules, since the cover that is provided by the Rules is intended merely to complement the Member’s other insurances.
(G) …or which would have been so recoverable apart from… (Rule 71.b.i and ii)
The principle that is explained in (F) also applies in the event that any such other insurance contains a ‘double insurance’ provision; i.e. a term which provides that such other insurance is considered to be complementary or subsidiary to P&I insurance or any other insurance that covers the same risk. The Association is not privy to the terms of other insurances and is not prepared in the interests of mutuality5 to bear the financial consequences of such terms. Therefore, the onus is on the Member and his insurance broker to ensure that such a situation is avoided.
(H) …a person performing work in the service of the Ship covered by social insurance… (Rule 71.1.c)
For the purposes of Rule 71.1.c, the term ‘social insurance’ means a national or state insurance scheme that entitles the claimant to claim benefits in the event of death, injury or illness. Cover is not available for liabilities, losses, costs or expenses that are covered by such insurance schemes, or which could have been covered by such social insurance if this had been put into effect.
Cover is excluded under Rule 71.1.c for claims that are brought by any persons that are performing work in the service of the Ship, regardless of whether such persons are employed by the Member. Such persons include Crew members, stevedores, longshoremen, surveyors, pilots, repair workers and other independent contractors, and the purpose and aim of the Rule is to ensure that such persons make claims to the maximum extent that is possible under the appropriate social insurance scheme and not against the Member or the Association. However, the Association will usually reimburse a Member for claims that he has paid in respect of such liabilities, losses, costs and expenses provided that the claims are reduced by whatever compensation that is, or should have been available, under the applicable social insurance schemes.
(I) …public or private insurance required by the legislation or collective wages agreement… (Rule 71.1.c)
The terms of an employment contract, or a collective bargaining agreement,6 or the applicable law that governs such contracts or agreements, may require a shipowner or charterer to take out public or private insurance to cover their liability for the death, injury or illness of Crew members or other persons that are working on board the Ship. Cover is not available for liabilities, losses, costs or expenses that are covered by such insurance schemes, or which would have been covered by such insurance schemes if the Member had complied with his obligations to take out such insurance. However, the Association will usually reimburse a Member for claims that he has paid in respect of such liabilities, losses, costs and expenses provided that the claims are reduced by whatever compensation is or should have been available under the applicable public or private insurance scheme.
(J) The Association shall not cover under a Defence entry costs which are or can be covered under a P&I entry. (Rule 71.2)
If cover is available for costs under a Member’s P&I entry, in particular under Rules 44 and 45, the Rules require the Member to claim such costs under his P&I entry and not under his Defence entry. Furthermore, if cover is available for costs under the P&I cover that is provided by the Association, but the Member has chosen to exclude certain of those risks from his P&I entry pursuant to special terms of entry, he cannot recover legal and other defence costs that have been incurred in respect of those risks under his Defence entry. Similarly, (apart from the costs that are discussed above in relation to Rule 71.1.a Defence cover is not available for costs that have been incurred in relation to a claim that, would be covered under the P&I entry but for the fact that the claim is less than the applicable deductible.
However, if the costs are incurred in relation to risks that are subject to a specific exclusion under the Rules for P&I cover, such costs may be recoverable under a Defence entry. For example, if a Member has opted to exclude cover for cargo liability under Rule 34, he cannot recover under his Defence entry any costs that he has incurred in connection with claims that are brought against him for the loading, lightering, stowing, trimming or discharge of cargo. However, cover is available under a Defence entry for costs that have been incurred by him in relation to a claim for delivery of cargo without production of a Bill of Lading, notwithstanding the fact that P&I cover for such specific risk is excluded by Rule 34.1.i.
If a particular case involves issues that involve both P&I and Defence cover it is possible that work may be conducted, and legal costs incurred, that benefit both P&I and Defence, e.g. a collision case that involves claims for damage to the other vessel and claims for loss of earnings as a result of the collision. In such cases costs may are normally divided between P&I and Defence. Such a division is normally based on the amount of work that can be attributed to each claim or, if no such division is possible, based on the values that are involved in each claim. If neither approach is possible, the costs may be split 50/50 between P&I and Defence.
1 For example, loss of hire, strikes and extended cargo liability insurance.
2 Hull Policies are defined in Rule 1 as ‘the insurance policies effected on the hull and machinery of the Ship, including any excess liability policy’.
3 See also the Guidance to Rule 36.
4 See the Appendix to the Guidance to Rule 36 for a comparison of the cover provided by different Hull Policy conditions.
5 See also the comments made at the end of (B).
6 See Rule 76 and Appendix V Rule 3.a