Rate this article:  
Gard Guidance Masters

2.16.1 PROVIDING SECURITY – LETTER OF UNDERTAKING

The P&I insurer is sometimes requested to provide a P&I Club Letter of Undertaking (LOU) to prevent the vessel being arrested by a claimant. This situation may arise when

  • persons other than the crew are injured whilst on board the vessel
  • when cargo is damaged during the voyage
  • pollution has occurred and has caused damage to the environment or third party property
  • there has been a collision between the own vessel and another vessel.

    Claimants may threaten to arrest the vessel in order to seek security for their alleged claim. To prevent the vessel from being delayed, the P&I insurer usually provides a LOU, if certain conditions are fulfilled, e.g. the claim must fall under the P&I cover provided, the premiums be fully paid up etc. It should, however, be noted that the P&I insurer is not obliged to do so.

    In most jurisdictions, the claimants accept a LOU rather than insisting upon being provided with a bank guarantee or security posted in the form of cash. A LOU can often be provided within a very short time, whereas providing a bank guarantee or posting security in the form of cash can often be very time consuming as well as costly. There is also the fact that in some countries posting cash as security may lead to a wait of several years before the security is released, and may in the meantime have lost value due to currency fluctuations.

    The P&I insurer may also be requested by claimants to provide a P&I Club LOU to cover liability that should more properly fall on the hull underwriters, e.g. in a collision case where the hull underwriters cover three-fourths of the liability.

    One reason for such a request is that a LOU from an International Group P&I Club is often more widely accepted than a LOU from the hull underwriters, and can also be arranged more quickly and with less costs involved. Gard’s policy in these circumstances is that a P&I Club LOU can be injected as security for liabilities covered by the hull underwriters if Gard Marine & Energy has the claims lead on the Hull and Machinery policy. Gard P&I may do so against countersecurity in the form of a letter of indemnity from Gard Marine & Energy, covering all hull underwriters.

    Gard P&I as P&I insurer and Gard Marine & Energy as Hull and Machinery insurer are together in the position of being able to provide the full range of insurance covers and services the shipowners may need when it comes to collision and FFO risks.