Table of contents
1 The Association may agree, subject to the provisions of this Rule 78 and to such other terms as may be required, to extend the cover afforded by the Association to the Member to:
a any person who is affiliated to or associated with the Member (not being a Co-assured or other Affiliate), and who shall not be specifically named in the terms of entry; and
b any other named co-assured.
2 Affiliates and Co-assured shall not be entitled to membership of the Association.
3 The cover afforded to a Co-assured in categories (a), (b) and (c) below shall extend only to liabilities, losses, costs and expenses (or, in respect of Defence cover, to costs incurred in connection with claims) arising out of operations and/or activities customarily carried on by or at the risk and responsibility of shipowners (or, in the case of a Charterer’s Entry, charterers):
a any person interested in the operation, management or manning of the Ship;
b the holding company or the beneficial owner of the Member or of any Co-assured falling within category (a) above;
c any mortgagee of the Ship.
4 The cover afforded to a Co-assured who is a charterer of the Ship and who is affiliated to or associated with the Member (other than a Co-assured expressly given cover by the Association in accordance with Rule 78.6) shall extend only to the risks, liabilities, losses, costs and expenses in respect of which that Member has cover, and shall be limited in accordance with Rule 52.
5 The cover afforded to a Co-assured who has entered a contract with the Member for the provision of services to or by the Ship, and any sub-contractor of the Co-assured shall extend only to liabilities, losses, costs and expenses which are to be borne by the Member under the terms of the contract and which to the extent only they would, if borne by the Member, be recoverable by the Member from the Association, provided that
a the contract has been approved by the Association; and
b the contract provides that each party shall be similarly responsible for any loss or damage to its own (or its sub-contractors’) property or loss of life or personal injury to its own (or its sub-contractors’) personnel.
6 The cover afforded to all other categories of Co-assured, other than those referred to in Rules 78.3, 78.4 and 78.5, shall only extend insofar as such Co-assured may be found liable to pay in the first instance for loss or damage which is properly the responsibility of the Member (or, in the case of Defence cover, insofar as such Co-assured may be required to resist a claim arising from such a liability), and nothing herein contained shall be construed as extending cover in respect of any amount which would not have been recoverable from the Association by the Member had the claim in respect of such loss or damage been made or enforced against him.
7 The cover afforded to an Affiliate shall extend only, in the case of P&I cover, to claims made or enforced through the Affiliate in respect of any liabilities for which the Member has cover and, in the case of Defence cover, to costs incurred in resisting claims which, if brought against the Member, would be within his cover, and nothing herein contained shall be construed as entitling an Affiliate to recover any amount which would not have been recoverable from the Association by the Member had the claim been made or enforced against the Member.
8 To the extent that the Association has indemnified a Co-assured (other than a Co-assured in the categories referred to in Rules 78.3 and 78.4) or an Affiliate in respect of a claim, it shall not be under any further liability and shall not make any further payment to any person whatsoever, including the Member, in respect of that claim or of the loss or damage in respect of which that claim was brought.
(A) The Association may agree…to extend the cover… (Rule 78.1)
The owner, operator or charterer of a Ship becomes a Member of the Association when the Ship is entered in the Association.1 Where a Ship is entered on behalf of more than one owner, operator or demise charterer, the parties on whose behalf the Ship has been entered become Joint Members of the Association.2
The Association also allows certain categories of Co-assureds3 to be made parties to the contract of insurance subject to the requirements of Rule 78. Co-assureds are usually companies that are involved with the operation of the Ship or companies that are associated with the Member, and who may, therefore, incur liabilities to third parties in connection with that involvement or association, e.g. a charterer that is part of the same group of companies as the Member and who may be sued by third parties instead of, or in addition to, the Member.
Members, Joint Members and Co-assureds will be named in the Certificate of Entry whereas Affiliates cannot, and will not, be so named.
(B) …such other terms as may be required… (Rule 78.1)
The Association has the right to impose special terms of cover for Co-assureds or Affiliates, but will not usually do so since the cover that is made available to them is normally substantially the same as the cover that is provided to the Member.
(C) …any person who is affiliated to or associated with the Member… (Rule 78.1.a)
Cover may be extended to any person that is affiliated to, or associated with, the Member, but not to anyone who is affiliated to, or associated with, a Co-assured.
The words ‘affiliated’ and ‘associated’ are not defined, but include individuals and companies in a conglomerate of companies which includes the Member, and who may incur liability as a result of the operation of the Ship despite the fact that such liability should properly be borne by the Member, e.g. the holding company or beneficial owner of the Member or the subsidiaries of that holding company or beneficial owner.
The Member has the right to name as Co-assureds in the Certificate of Entry all companies etc., that, in his view, run the risk of incurring liability in relation to the operation of the Ship. However, this may be impractical in the case of large conglomerates that include several companies that are substantially at ‘arms length’ from the operation of the Ship. It should also be appreciated that if such companies were to become Co-assureds, they would become jointly and severally liable for sums that are due to the Association under the contract of insurance.4 Therefore, the Member may prefer not to name such companies as Co-assureds in the Certificate of Entry, but to rely instead on the Association's discretionary right to extend cover to such a company as an Affiliate should it incur liability in relation to the operation of the Ship.
An Affiliate is not a party to the contract of insurance and does not have any right to recover from the Association. Therefore, the Association is under no obligation to extend cover to any Affiliate at any time. However, the Association has the discretion to do so in the limited circumstances described in Rule 78.7.5 The application for cover may be made by either the Member or the Affiliate, but will not usually be made until a claim has been brought, since it is only at such time that the Member and/or Affiliate will know the company or companies against which a claim has been brought. If the application is made by the Affiliate, the Association will not extend cover unless the Member also agrees, since any compensation that is paid to the Affiliate will affect the Member’s loss record.6
The Association is entitled to set off against any compensation that is paid to an Affiliate any amount that is due to the Association from the Member.
(D) …any other named co-assured… (Rule 78.1.b)
In principle any individual or company can be insured under Rule 78.1.b as a named Co-assured. However, the cover that is available to a Co-assured differs depending on the type of Co-assured that is involved. The cover that is available in the majority of cases is set out in Rules 78.3, 78.4 and 78.5, but it is important to note that the scope of cover that is available to other Co-assureds is narrower. Please see (L) below in this regard.
(E) …not...entitled to membership… (Rule 78.2)
Affiliates and Co-assureds are not entitled to membership7 of the Association and are, consequently, not entitled to attend or vote at General Meetings or to share in any surplus upon the dissolution of the Association.
(F) ...cover afforded to a Co-assured in categories a, b and c... (Rule 78.3)
The cover that is made available to Co-assureds is designed to protect those persons that are most likely to incur liability, as a result of their direct involvement with the operation of the Ship, for liabilities, losses, costs and expenses that arise as a result of activities that are customarily undertaken by shipowners, or, where such persons are Co-assureds under a Charterer’s Entry, as a result of activities that are customarily undertaken by charterers.
For example, cover is available to the managers of a Ship who are responsible for bunkering arrangements, and who receive a claim from a bunkering company for the damage that has been caused to their barge by the allegedly negligent navigation of the Ship by its Crew during the course of bunkering operations.
It is important to note that the cover that is available to a Co-assured is not wider than the cover that would have been available to the Member had he incurred the subject liability, loss, cost and/or expense.
(G) …any person interested in the operation, management or manning of the Ship… (Rule 78.3.a)
Companies to whom the Member has delegated ship management functions either in full or in part can be Co-assureds, as can the sub-contractors of such managers, e.g. a crewing agent that has a contract with the owner’s crew manager and who is responsible for the supply of Crew members from a certain country or region.
The number of Co-assureds that may be entered on the Certificate of Entry, and the different functions for which any particular Co-assured may be responsible, will depend on the Ship’s type and trade and the nature of the operation in which the Ship is engaged.
(H) …holding company or...beneficial owner… (Rule 78.3.b)
A ‘holding company’ is a company that is empowered to direct or control another company by virtue of being a controlling shareholder or otherwise. A ‘beneficial owner’ is a person who is entitled to the benefit of property and is, in the case of a Member that is a corporation, a shareholder or, if the shareholder is a mere nominee or trustee, a person for whom he holds the shares in trust.
(I) …any mortgagee of the Ship… (Rule 78.3.c)
Mortgagee banks customarily seek to secure their loans by receiving an assignment of the benefit of the Member’s cover and by having a ‘loss payee’ clause endorsed onto the Certificate of Entry. This gives the mortgagee the right to receive the proceeds of any claim that may be made pursuant to the Member’s entry. However, such an assignment8 does not protect the mortgagee against any liabilities that the mortgagee may incur to third parties in relation to the operation of the Ship. Consequently, a mortgagee may also require protection from the Association against such potential liabilities.
Rule 78.3.c entitles a mortgagee of a Ship to become a Co-assured and, thereby, to gain protection against liabilities, losses, costs and expenses that it incurs provided that such liabilities, losses etc., arise out of operations and/or activities that are customarily carried on by, or at the risk and responsibility of, shipowners. Therefore, a mortgagee who is a Co-assured is protected against claims that are made against it because, as a result of the control that it has exercised over the shipowner, it is held responsible for the acts and omissions of the shipowner in relation to the operation of the Ship. However, mortgagees do not often seek to become a Co-assured pursuant to Rule 78.3 since they would, thereby, become jointly and severally liable with the Member for payment of the premium and other sums that are due to the Association.9
If a mortgagee enforces his mortgage and enters into possession of a Ship, the cover for the Ship will cease automatically10 from the time that the mortgagee assumes such possession. In such an event, the entry of the Member and that of the mortgagee, if he is Co-assured pursuant to Rule 78.3, will both cease. Therefore, if the mortgagee wishes thereafter to secure protection from the Association, he must apply for the entry of the ship in his own name, and submit a new application for entry.
(J) The cover afforded to a Co-assured who is a charterer of the Ship and who is affiliated to or associated with the Member… (Rule 78.4)
If a Member that is the owner of a Ship enters into a time, voyage, slot or other charterparty11 with a company that is affiliated to, or associated with, the Member, Rule 78 entitles such a charterer12 to be included on the Owner’s Entry as a Co-assured. Cover will, thereby, be available to the charterer for all risks, liabilities, losses, costs and expenses for which the shipowner Member has cover. However, the cover that is available to a Co-assured charterer is subject to additional limitations.13
For the purpose of this Rule 78.4, a charterer shall only be affiliated to or associated with the Member if both the Member and the charterer have the same parent or one of them is the parent of the other. A parent is a company which directly or indirectly owns at least 50 percent of the shares in and voting rights of another company. A company will also be treated as a parent if it otherwise has ability to procure that another company is managed and operated in accordance with its (the parent’s) wishes.
Charterers who are not affiliated to, or associated with, the shipowner Member are not entitled to be a Co- assured on the Owner’s Entry.14 They must insure their interest under a separate Charterer’s Entry.15
(K) The cover afforded to a Co-assured who has entered into a contract with the Member for the provision of services to or by the Ship… (Rule 78.5)
Operators and contractors that are engaged in the offshore industry and their respective sub-contractors frequently enter into contracts on terms whereby the various parties agree that the risk and responsibility for death, personal injury and loss or damage to property is to be borne by the party (including his sub-contractors) that suffers the injury, loss or damage regardless of which party actually caused or contributed to that injury, loss or damage, without any recourse against the other party. This is called the ‘knock-for-knock’ principle. It is agreed among the International Group Clubs that a contract will satisfy the definition of a ‘knock for knock’ agreement even if it contains a reciprocal gross negligence ‘carve out’, i.e. a provision excluding from the ‘knock for knock’ agreement claims arising out of gross negligence.
A Member who enters into this type of contract may wish to give protection to the other party to the contract, against liabilities, losses, costs and expenses for which the Member would have had a right of recovery from the Association if the claim had been made against the Member rather than against the other party pursuant to the ‘knock-for-knock’ agreement. Such protection can be achieved by naming the contractual party as a ‘Protective Co-assured’16 in the Member’s Certificate of Entry for the Ship to or from which that party may render or receive services. The cover that is available under Rule 78.5 is, in many respects, similar to the ‘misdirected arrow’ cover for other Co-assureds and Affiliates that is described in more detail below under Rules 78.6 and 78.7.17 The sub-contractors of the contractual party may also be named as ‘Protective Co-assureds’ in the Certificate of Entry.
Cover is available to ‘Protective Co-assureds’ subject to two specific conditions, i.e.:
1 the Association has approved the contract that determines the allocation of responsibility between the Member and his contractual party;18 and
2 the relevant contract is on terms which provide that each party is to be responsible for injury, loss or damage to their own personnel and property, i.e. ‘knock-for-knock’ terms.
Cover is not available for liabilities, losses etc., that the Member’s contractual party, rather than the Member, is to bear under the ‘knock-for-knock’ agreement, i.e. claims for loss of life or personal injury to his own personnel or to the personnel of his sub-contractors, or for the loss of, or damage to, his own property or to that of his sub-contractors. He is expected to arrange his own insurance as protection against such liability.
For example, if several members of the Crew of a semi-submersible oil platform that is entered in the Association (the Ship) are injured as a result of the tortious acts of the crew of an anchor handling vessel that is rendering services to the Ship, then, if the contract between the Member and the operator of the anchor handling vessel is on ‘knock-for-knock’ terms, the Member should, by virtue of those terms, bear the responsibility for the injuries, notwithstanding the fact that the cause of the injuries was the tortious acts of the operator of the anchor handling vessel. Nevertheless, if the Crew of the entered Ship were to commence legal proceedings against the operator of the anchor handling vessel then, if that operator is named as a ‘Protective Co-assured’ on the Member’s Certificate of Entry for the Ship, cover is available to the operator in respect of any liabilities, losses, costs and expenses that it may incur for the personal injury claims that are made by the Crew of the entered Ship. Such cover is available since the operator of the anchor handling vessel would, upon payment of such liabilities, losses etc., be entitled to claim reimbursement from the Member pursuant to the ‘knock-for-knock’ terms of their contract, and, if so, the Association would have covered the Member’s liability to reimburse him.
On the other hand, if members of the crew of the anchor handling vessel are injured as a result of the tortious acts of the Crew of the entered Ship, the Member will be protected against liability for such claims by the operator of that vessel by virtue of the ‘knock-for-knock’ terms. Therefore, the injury to the crew members of the anchor handling vessel will not give rise to ‘…liabilities, losses, costs and expenses which are to be borne by the Member under the terms of the contract…’ with the result that cover is not available from the Association for any liabilities, losses etc., that the operator of the anchor handling vessel may incur in this regard.
(L) The cover afforded to all other categories of Co-assured, other than those referred to in Rules 78.3, 78.4 and 78.5, shall only extend insofar… (Rule 78.6)
Rule 78.6 makes cover available to all categories of Co-assureds that are named on the Certificate of Entry for the Ship other than those described above in relation to Rules 78.3, 78.4 and 78.5. Therefore, Rule 78.6 makes it possible for the Member to name as Co-assureds in the Certificate of Entry persons that have no involvement in, but who might, nonetheless, be exposed to liabilities arising from, the operation of the Ship. However, the Rule does not apply to charterers19 that are not affiliated to, or associated with, the Member.20
For example, the type of Co-assured to which Rule 78.6 refers might be a company that is part of the same group as the Member but which has no involvement in the operation of the Member’s Ship. If such a company has property or other assets in a country where a claim may be brought against the Ship as a result of the fact that the Ship trades to that country, the Member may wish to name that company as a Co-assured in the Certificate of Entry since there is a risk that such property or other assets might be seized or arrested in connection with liabilities that may arise in relation to the Ship.
The Member is entitled to add or delete the Co-assureds that are named on the Certificate of Entry by endorsement during the course of the Policy Year, but any such Co-assured will be protected only for liabilities that arise as a result of incidents that occur whilst he is named as a Co-assured and after the time that he has been so included in the Certificate of Entry.21
Cover is available to such Co-assureds to the extent that they are held liable to pay in the first instance for loss or damage that is properly the responsibility of the Member. The cover that is available under Rule 78.6 is sometimes referred to as ‘misdirected arrow cover’, i.e. an ‘arrow’ (the claim) that is directed against the wrong target. Therefore, in order to recover from the Association pursuant to Rule 78.6, the Co-assured is required to demonstrate that the Member would have been held liable for the relevant loss or damage had the original claim been brought against him rather than against the Co-assured.
The cover that is available to a Co-assured under Rule 78.6 is limited to that which the Member could have recovered from the Association had the claim been made or enforced against the Member. Therefore, the right that the Co-assured has to recover from the Association is no better than the right which the Member would have had in the same circumstances, and the Association is entitled to invoke any and all rights against the Co-assured that it could have invoked against the Member, e.g. the right under Rule 21.1 to set off any amount that is due from the Member to the Association against any compensation that is payable by the Association.
(M) The cover afforded to an Affiliate… (Rule 78.7)
The Association has the discretion to extend cover to any Affiliate,22 but the cover that can be extended is restricted, in the case of P&I cover, to the liabilities for which the Member has cover, and in the case of Defence cover, to the costs for which the Member has cover, and the amount payable to the Affiliate by the Association must not exceed the amount that would have been paid to the Member had the claim been made or enforced against the Member. This reflects the same principle that applies in the case of the ‘misdirected arrow’ cover under Rule 78.6 which is discussed in (L) above.
For similar reasons, the Affiliate will be required to demonstrate that the Member would have been liable if the relevant claim had been brought against him rather than against the Affiliate. However, the cover that is available under Rule 78.7 does differ from the ‘misdirected arrow’ cover in that it extends to situations where the Affiliate is a legitimate target for the claim, albeit an additional target to the Member. For example, the Rule applies in circumstances where the claimant has succeeded in ‘piercing the corporate veil’ and has persuaded the court that a group of companies should be considered to be a single entity, and that each company in the group is a legitimate target that should share the particular liability in full or part.
(N) To the extent that the Association has indemnified a Co-assured…or an Affiliate… (Rule 78.8)
Rule 78.8 is intended to protect the Association against the risk that multiple recovery claims may be brought against the Association in respect of the same third party liabilities, losses, costs or expenses by different parties that are either insured by, or offered protection by, the Association under the contract of insurance. Therefore, once the Association has indemnified a Co-assured (other than a Co-assured that is insured pursuant to Rules 78.3. and 78.4), or an Affiliate, for a claim, it has no further liability to indemnify any other person whatsoever, including the Member, in relation to that same claim, or the loss or damage in respect of which the claim was brought.
The Rule applies regardless of the knowledge of the different parties of their respective claims against the Association. For example, the Member may have compensated a third party for a claim in ignorance of the fact that a Co-assured had already paid compensation for the same claim. If the Association has indemnified the Co-assured for that claim, the Member is not able to demand recovery from the Association for the compensation that has also been paid by the Member.23
However, Rule 78.8 applies only to Co-assureds other than those described in Rules 78.3 and 78.4, and to all Affiliates, i.e. to those who have ‘misdirected arrow’ cover and who are, therefore, covered only in relation to the acts or omissions of the Member. The Rule does not apply to any Co-assured that is insured under Rules 78.3 and 78.4, i.e. to those that are assumed to have some involvement in the operation of the Ship, and whose own acts or omissions may give rise to liability.
1 See Article 2 of the Bye-Laws of Gard P&I (Bermuda) Ltd and Article 4 of the Statutes of Assuranceforeningen Gard -gjensidig-.
2 See Article 1 of the Bye-Laws of Gard P&I (Bermuda) Ltd and Article 2.1 of the Statutes of Assuranceforeningen Gard -gjensidig-.
3 See the introductory comments to the Guidance to this Rule.
4 See the Guidance to Rule 79.1.
5 The discretion can be exercised by the administrative officers of the Association.
6 See the Guidance to Rule 21.1. The rationale for this provision is that an Affiliate should not be entitled to recover any sums that would not have been paid to the Member, had the Association been requested to pay compensation to the Member in the same circumstances.
7 See Article 2 of the Bye-Laws of Gard P&I (Bermuda) Ltd and Article 4 of the Statutes of Assuranceforeningen Gard -gjensidig-.
8 See also the Guidance to Rule 89.
9 See the Guidance to Rule 79.1.
10 See the Guidance to Rule 25.2.g
11 A charterparty does not mean a demise or bareboat charter in this context. A demise or bareboat charterer can be insured as a Joint Member on an Owner’s Entry. See the Guidance to Rule 1.3.
12 See the Guidance to Rule 3.
13 See the Guidance to Rule 52 and Appendix II.
14 This distinction reflects the fact that Ships are chartered to companies which are affiliated to or associated with the shipowners more for internal, administrative reasons rather than for commercial ‘at arm’s length’ reasons.
15 For the definition of Charterer’s Entry see the Guidance to Rules 1.1 and 3.1.
16 The term ‘Protective Co-assured’ is not used or described in Rule 78.5, but is frequently used in the Certificate of Entry. This is to distinguish ‘Protective Co-assureds’, whose rights of cover pursuant to Rule 78.5 are more limited than the cover available to other Co-assureds who fall within the categories described in Rules 78.3 and 78.4. ‘Protective Co-assureds’ may also, pursuant to special terms of entry, be free from liability for sums that are due to the Association pursuant to Rule 79.1
17 See (L) and (M) below.
18 This condition reinforces the general requirement in Rule 55 concerning approval of contracts.
19 The Association will not agree to name a charterer as a Co-assured under Rule 78.6. A charterer must either be entered separately under a Charterer’s Entry or must be a Co-assured as a company that is affiliated to or associated with the Member pursuant to Rule 78.4.
20 See section (J) above.
21 See also the Guidance to Rule 6 concerning the Member’s duty of disclosure. If, at the time of adding another company as a Co-assured in the Certificate of Entry, the Member is aware that that company already is or may be exposed to liability which may give rise to cover pursuant to Rule 78.6, the Member has a duty to disclose that information to the Association.
22 See the Guidance to Rule 78.1 above under (C) above.
23 See also the Guidance to Rule 79.2.