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1 Unless the Association shall in its absolute discretion otherwise determine, it is a condition precedent to a Member’s right to recover from the Association in respect of any liability, loss, cost or expense that he shall first have discharged or paid the same.
2 The Association shall not be obliged to compensate a Member for a payment made to a third party unless the Member’s liability to make that payment has been determined by:
a a final judgment or order of a competent court; or
b a final arbitration award (if settlement of the dispute by arbitration was agreed upon before the dispute arose, or was, with the consent of the Association, agreed upon subsequently); or
c a final settlement of the dispute approved by the Association.
3 Notwithstanding sections 1 and 2 above, where a Member has failed to discharge a legal liability to pay damages or compensation for personal injury, illness or death of a member of the Crew, or in respect of repatriation under any statutory enactment giving effect to the Maritime Labour Convention 2006 as amended or any materially similar enactment, the Association shall discharge or pay such claim on the Member’s behalf directly to such member of the Crew or dependant thereof, provided always that;
a the member of the Crew or dependant has no enforceable right of recovery against any other party and would otherwise be uncompensated; and
b the amount payable by the Association shall under no circumstances exceed the amount which the Member would otherwise have been able to recover from the Association under the Rules and the Member’s terms of entry
c with regard to liability, costs and expenses falling within Rule 27.3 above any payment made by the Association shall be made as agent only of the Member, and the Member shall be liable to reimburse the Association for the full amount of such payment.
(A) ...it is a condition precedent to a Member’s right to recover...in respect of any liability, loss, cost or expense that he shall first have discharged or paid the same... (Rule 87.1)
It is a fundamental characteristic of a contract of marine insurance that it is a contract of indemnity, and the contract between the Member and the Association is a contract of marine insurance in this sense. Consequently, unless the Association in its absolute discretion determines otherwise, the Member is not entitled to be indemnified by the Association until he has either incurred the relevant loss, cost or expense or discharged his liability to the third party claimant. This is generally referred to as the ‘pay to be paid’ or ‘payment by the Member first’ principle.
It follows that no third party has any right to claim compensation directly from the Association in relation to claims that the third party has against the Member except in the limited circumstances described below. Except in those limited circumstances, the Association will pay compensation to the Member only, and will do so only when the Member has first paid or otherwise discharged his liability, loss etc.
However, the Association may decide ‘in its absolute discretion’ to waive this provision in individual cases1 and to compensate a third party directly on behalf of the Member. This is normally done when the matter is straightforward and there are no unusual or complicating factors, as this facilitates prompt settlement which benefits all parties. However, the fact that this may occur in individual cases cannot be treated as a general waiver by the Association of the ‘pay-to-be-paid’ principle.
In limited circumstances, the ‘pay to be paid’ principle cannot apply. In some circumstances, a third party may be entitled to bring a claim directly against the Association pursuant to the applicable law, e.g. if the Member has become insolvent and is, therefore, unable to discharge his liability.2 If such ‘direct action’ is permitted under the applicable law, the Association will usually be entitled to rely on all defences that are, or would have been available, to the Member in relation to the third party claim, and on all policy defences3 that the Association would have been entitled to invoke in relation to the Member’s claim under the contract of insurance had the Member first discharged his liability to the third party and, thereafter, sought compensation from the Association.
In other circumstances, the Association will provide guarantees, certificates or undertakings to various authorities pursuant to international conventions or local laws that make the Association directly liable to such authorities for claims that such authorities or other third parties have against the Member, e.g. certificates that may be provided by the Association under the CLC, Bunkers4, Nairobi Wreck Removal5 and Maritime Labour6 Conventions or the 2002 Protocol to the Athens Convention,6 or undertakings that are given pursuant to the STOPIA Agreement,8 or guarantees or other undertakings that are given to the Federal Maritime Commission under Section 2 of US Public Law 89-7779 or to the European Commission pursuant to the EU Passenger Liability Regulation (EC) No. 392/2009.10
(B) The Association shall not be obliged to compensate a Member for a payment made to a third party unless the Member’s liability to make that payment has been determined… (Rule 87.2)
Cover is available only for liabilities, losses, costs and expenses for which the Member is legally liable, and cover is not available for liabilities, losses etc., that have been incurred by the Member in circumstances where there is no legal liability to do so. Consequently, Rule 87 is intended to ensure that membership funds are used by the Association only when the Association is satisfied that it is reimbursing the Member for liabilities, losses, costs and expenses for which the Member is legally liable.
The Member’s liability may be determined for this purpose by a judgment or order of a competent court, or if the dispute is subject to arbitration, by an award of a competent arbitration tribunal, or by a settlement that has been agreed with the prior approval of the Association. In all cases, the judgment, award or settlement must be final in the sense that it is a final determination of the rights of the parties without the necessity for further legal proceedings, and without the possibility of any further appeal.
Rule 87.2 states that the Association ‘shall not be obliged to compensate,’ which means, in effect, that the Association has the discretion to compensate the Member in circumstances other than those set out in sub-paragraphs a to c of the Rule. For example, if the Member is obliged, pursuant to the applicable law, to pay compensation or damages to a third party against a judgment that is not a final judgment in the sense that the Member is entitled to recover that amount if the judgment were to be overturned on appeal, the Association has the discretion to compensate the Member at the time that he makes the payment, rather than obliging the Member to remain ‘out-of-pocket’ until the case is finally resolved.
(C) ...where a Member has failed to discharge a legal liability to pay damages or compensation for personal injury, illness or death of a member of the Crew, the Association shall discharge or pay such claim on the Member’s behalf directly to such member of the Crew or dependent thereof... (Rule 87.3)
The International Group of P&I Clubs has agreed that the ‘payment by Member first’ principle11 may be waived by those Associations that are members of the International Group in the case of claims that are brought against Members by the Crew or their dependants for personal injury, illness or death12 subject to the provisos in Rule 87.3 a and b. Therefore, Rule 87.3 aligns the Rules of the Association to the terms and conditions that are applied by the other International Group Clubs and obliges the Association to discharge or pay such claims if the Member has failed to do so. In other words, the Association is obliged to treat such claims as if the Member had discharged its legal liability to do so and had thereafter made a claim for recovery against the Association. Consequently, it enables members of the Crew or their dependants, as the case may be, to make a claim directly against the Association in these limited circumstances.
(D) ... provided always that; a the member of the Crew or dependent has no enforceable right of recovery against any other party and would otherwise be uncompensated; (Rule 87.3.a)
Rule 87.3 is subject to two provisos, the first of which restricts the ability of the Association to discharge the Member’s legal liability to pay such damages or compensation to circumstances in which the Crew member or his or her dependent, as the case may be, has no enforceable legal right of recovery from any other party. Consequently, the first proviso mirrors the policy that underpins Rule 71 and the phrase ‘any other party’ could either be a person or entity that is legally co-responsible with the Member for the occurrence that caused the injury, illness or death, or any social, public or private insurer that is required to indemnify the Crew member or his or her dependants by the legislation or collective wages agreement that governs the contract of employment of the Crew.13
It also follows logically that if a social security provider or some other third party has compensated the Crew member and wishes to seek an indemnity from the Association by way of subrogation, or as a result of an assignment of the claim by the Crew member, the Association has no liability for such claim since it is clear in such circumstances that the Crew or dependent did have an enforceable right of recovery against another party and has not been uncompensated.
(E) ...the amount payable by the Association shall under no circumstances exceed... (Rule 87.3.b)
The second proviso to Rule 87.3 provides that the Association’s ability to discharge the Member’s legal liability to pay such damages or compensation cannot exceed the amount to which the Member would otherwise have been entitled to recover from the Association under the Rules and the Member’s terms of entry.
Consequently, if the Member has excluded14 liability in respect of Crew from the scope of P&I cover under his terms of entry, Rule 87.3 is inapplicable and does not enable the Association to discharge or pay such claim on the Member’s behalf directly to the relevant Crew member or dependant. Similarly, the right to claim under Rule 87.3 does not extend to any deductible that may apply to the Member’s terms of entry.
Proviso (b) also makes it clear that the Association is entitled to apply against the claim any defences that it could have applied against the Member if the Member had made a claim against the Association after discharging his liability to the Crew member or dependants. The purpose of this proviso is to ensure that the third party claimant does not acquire any better legal rights against the Association than the Member would have had if the Member had discharged his legal liability and made a recovery claim against the Association. Therefore, the Association is entitled to utilise any available policy defence to the subject claim, e.g. that the personal injury, illness or death has been caused by non-compliance by the Member with the rules, recommendation and requirements of the classification society, or by non-compliance with the statutory requirements of the vessel’s flag state relating to e.g. the safe operation or security of the Ship.15
Rule 87.3 is likely to be relevant in most cases where the Member has failed to discharge its legal liability to the Crew as a result of insolvency, or the winding up of the operation or some other financial difficulty. In such circumstances, the Member may also have failed to pay premiums, calls or other sums to the Association when due so that, if the claim were to be brought by the Member against the Association, the Association would have the right under Norwegian law,16 to set off such unpaid premiums etc., against any sums that were being claimed by the Member. Consequently, the Association is entitled to set off against any damages or compensation that is payable to Crew members or dependants pursuant to Rule 87.3, any unpaid premiums that are owed by the Member that have fallen due for payment in the two years prior to the time when the Association is called upon to pay damages or compensation to the Crew or dependents.17
(F) Notwithstanding sections 1 and 2 above, where a Member has failed to discharge a legal liability to pay damages or compensation..., or in respect of repatriation under any statutory enactment giving effect to the Maritime Labour Convention 2006 as amended or any materially similar enactment, the Association shall discharge or pay such claim on the Member’s behalf directly to such member of the Crew or dependent thereof... c with regard to liability, costs and expenses falling within Rule 27.3 above any payment made by the Association shall be made as agent only of the Member, and the Member shall be liable to reimburse the Association for the full amount of such payment. (Rule 87.3)
The 2014 amendments to the Maritime Labour Convention 2006 entered into force on 18 January 2017. After this date ships, that are subject to the Maritime Labour Convention 2006 as amended, are required to display certificates issued by an insurer or other financial security provider confirming that insurance or other financial security is in place for liabilities in respect of:
The International Group of P&I Clubs, including the Association, provide the necessary certification (MLC Certificates) on the terms set out in the MLC Extension Clause 2016, which are set out in section 4 to Appendix IV. When MLC certificates are issued to Members, the conditions set out in the MLC Extension Clause 2016 apply and Rule 27.3 and Rule 87.3 c are deemed redundant. . However, should the Association be obliged to pay pursuant to an MLC Certificate a liability that falls outside standard P&I cover, the Member is obliged to indemnify the Association to that extent. Furthermore, the MLC Undertaking that Members are required to sign in order to obtain their Certificates explicitly binds all Co-Assureds, Members and Joint Members to the terms of the MLC Extension Clause 2016, and the Undertaking includes a warranty that the party signing the MLC Undertaking has the authority of all those parties to so bind them. Therefore, since all Co-Assureds, Members and Joint Members are jointly and severally liable to reimburse the Association for any MLC liabilities that fall outside standard P&I cover, the Association is entitled to look to, and will look to, all Co-Assureds, Members and all other Joint Members on the policy to make good the debt if the Member fails to meet that obligation.18
1 Such discretion can be exercised by administrative officers of the Association.
2 For example, Section 7-8 of the Norwegian Insurance Contract Act of 1989 [Forsikringsavtaleloven].
3 The scope of policy defences available to the Association in such circumstances would depend on the merits of the case and under which laws the ‘direct action’ claim was made.
4 See (A) to the Guidance to Rule 38.
5 See the Introduction to the Guidance to Rule 40.
6 More detailed commentary is found in the Guidance to Rule 27.4.
7 See (H) to the Guidance to Rule 28.
8 See (J) to the Guidance to Rule 38.
9 See (T) to the Guidance to Rule 58
10 See (H) to the Guidance to Rule 28.
11 See further comments on this principle in (A) above.
12 See the Guidance to Rule 27.1 (c) in relation to the cover that is available for claims for compensation or damages for personal injury, illness or death of a member of the Crew.
13 See Guidance to Rule 71.1.c for further comments concerning such insurances.
14 The Member may either have relied on other insurance to cover such liabilities or had a crew supply agreement with a crew manager whereby the manager had responsibility for placing insurance for such liabilities.
15 See Guidance to Rule 8 for further details.
16 The Rules are subject to Norwegian law. See the Guidance to Rule 90 in this regard.
17 See the Norwegian Insurance Contract Act 1989 §8-3, § 7-8 and § 7-6.
18 See Member Circular No. 10/2017 – Maritime Labour Convention 2006 As Amended (MLC) – Liability for Uninsured MLC Liabilities.