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Gard your best defense

Gard offers several additional insurance covers besides P&I, including Defence cover. In this special feature we explain what this type of insurance covers, how it works in practice and describe the service on offer.

Historically, Defence insurance began to evolve at the end of the last century. The cover was first offered in 1889 to Nordic shipowners by Nordisk Skibsrederforening (Northern Shipowners’ Defence Association). During the twentieth century shipowners increasingly felt the need for legal costs insurance as well as a general advisory and claims handling service for non-P&I matters. To meet this growing need, in 1977 the Association introduced Defence cover as a supplementary insurance to P&I. Over the years, the number of Members taking Defence cover has grown considerably, particularly among the Nordic Members, some of them prefering to have a one-stop insurance for both P&I and Defence. Today Gard has Defence Members in Norway, Sweden, Denmark and Finland, as well as in North and Latin America, Europe, Southeast Asia and the Far East.

What is Defence cover?
Whereas the P&I cover insures actual liabilities as well as the legal costs of defending them, Defence cover enables shipowners and charterers to buy insurance for legal and other costs incurred in establishing and resisting claims which typically arise out of their business operations, as well as claims handling and general advisory services.

Defence insurance covers legal and other costs incurred in establishing or resisting named claims which have arisen out of an event occurring during the period of entry of the ship in the Club in direct connection with the operation, acquisition or disposal of an entered ship, or in respect of the Member’s interest in the ship.

The cover has certain safeguards to ensure that hopeless and uneconomic cases are not pursued or defended. The Defence Rules allow the Club to deny cover when, for example, the legal costs which are likely to be incurred in pursuing and/or enforcing or defending the claim unreasonably outweigh the amount in dispute. Furthermore, the insurance does not cover costs and expenses which are covered by the Member’s hull policies or other insurances. Finally, the Defence Rules provide that the Club has an element of control over the handling of the claim, such as deciding which lawyers and experts should be appointed and when a case should be settled.

Nowadays, the cost of legal advice and representation – even to handle relatively small, uncomplicated disputes – may run into tens of thousands of dollars. Some shipowners and charterers face a continuous flow of such disputes in their business operations, others may face one major dispute which can make or break the company. Defence insurance enables shipowners and charterers to carry out their business in the comfort of the knowledge that should something go wrong, they have insurance cover to assist them in protecting their rights, both in terms of covering legal and other costs and claims handling and general advisory services.

Defence insurance is something of a misnomer. The cover is not restricted to defending cases brought against the Member, nor to claims for freight and demurrage, which might appear from the fact that it is commonly referred to as “Freight, Demurrage and Defence” (FD&D). It includes also the costs of pursuing claims, and despite it being a “named risks” cover, the list of Defence risks which Gard insures has evolved to include all types of claims arising under charterparties and bills of lading and claims concerning the purchase and sale of ships.

What are the named risks?
Freight and demurrage are only two examples of various types of claim which Defence insurance covers. Other examples include:

  • contracts of affreightment, charterparties, bills of lading and other contracts of carriage;
  • loading, lightering, stowing, trimming and discharge of cargo;
  • passengers and passenger monies;
  • loss of or damage to the ship or general average;
  • delay of the ship;
  • property damage, personal injury and loss of life;
  • repairs and deliveries to the ship;
  • salvage and towage unless the ship is a salvage vessel or tug;
  • agents and brokers;
  • insurance contracts pertaining to the ship;
  • customs, harbour and other public or quasi-public authorities (excluding certain taxes);
  • building, purchasing, mortgaging and selling the ship;
  • converting and altering the ship (by special arrangement).

Cover for claims concerning the building, purchase and mortgaging of a ship is not available unless it is taken out before the relevant contract has been signed. This protects the Association from providing retrospective insurance and enables it to assess the inherent risks involved. At the same time the Member is provided with a review of the liability aspects of the building, purchase or mortgaging contract by the Legal Department at no extra cost.

Disputes regarding alterations or conversion contracts are also treated as special risks. Cover for such disputes will only be available if a separate agreement, under which the Association may accept to provide limited cover, has been entered into at the latest on the signing of the alterations or conversion contract. This provides the Club with an opportunity to review the risk and the Member receives free legal advice on the liability provisions of the relevant contract.

How does the cover work?
1) The insurance
Suppose a Member is facing a large, complex claim in London arbitration proceedings brought by a charterer, for example concerning the deviation of a vessel under a time charterparty. The insurance cover will reimburse the Member for:

a) Legal costs necessarily incurred These may include costs of an English law firm retained to represent the Member in the arbitration proceedings, recoverable costs of the charterer should the Member unsuccessfully defend the claim and costs of the arbitration proceedings.

b) Other costs necessarily incurred These may include costs of any expert retained to provide evidence and costs involved in assisting, investigating and obtaining evidence (e.g., Club correspondents around the world).

Technically speaking, external advisers are appointed by the Association on behalf of the Member, although the Club is responsible for payment of their costs. The deductible is 25 per cent of legal and other costs incurred, subject to a minimum contribution by the Member of USD 2,500. Consequently, a close partnership between the Club and Member is formed to ensure that the Member gets the best possible legal advice and representation.

The Association will exercise control over the conduct of the claim, decide whether or not external lawyers should be instructed, and has the right to select which external lawyers and other advisers are retained, albeit in consultation with the Member. In such cases, the Club plays an important role as the case manager and strategist, being the link between the Member and the external lawyers and well placed to advise on which course of action to take. This role is particularly important when, for instance, litigation and/or arbitration proceedings are on-going at the same time in several jurisdictions around the world.

2) The service
Gard’s Legal Department is one of the largest within the International Group Clubs and prides itself on being one of the most service-oriented. The department offers an in-house claims handling service as well as legal and practical in-house advice on a range of problems. The service provided is akin to that of a Member’s own Legal Department. Each Member is designated a Gard lawyer, who is the Member’s Defence claims handler and legal adviser. Consequently, a close and trusting relationship is built up between the Member and the Gard lawyer.

The Legal Department comprises 10 qualified lawyers from England, Norway, Sweden and Denmark. Although these lawyers have primary areas of expertise in English and Scandinavian law and practice, they also have general knowledge of the law and experience in a wide range of jurisdictions around the world, which puts them in the unique position of being “international” maritime lawyers. In-house lawyers from the US, Canada, Brazil and Colombia also provide support to the Legal Department on a case-by-case basis. Resources are also available in the form of the Association’s P&I claims handlers, who have expertise in most areas of international trade and shipping. Furthermore, in addition to its global network of P&I correspondents, the Association has extensive experience and knowledge of lawyers, arbitrators and experts throughout the world.

a) Claims handling Due to the Legal Department’s expertise, most of Gard’s Defence cases are handled in-house. The great majority of Defence disputes are governed by English law and the most usual forum for their resolution is London arbitration. Arbitration conducted under the London Maritime Arbitrators Association (LMAA) Small Claims Procedure and LMAA documents-only arbitration can be expected to be run in-house. This results in a saving of costs for the Club and its Members, which is of particular relevance to disputes involving relatively insubstantial sums. Furthermore, the in-house costs of handling such cases or general inquiries do not appear on the Member’s loss record.

b) Advisory service In addition to claims handling, the Association provides legal and practical advice on a range of problems which shipowners and charterers face in their daily operations. This enables the Member to consider potential problems at an early stage. Guidance and assistance given by the Member’s designated lawyer can often avert a dispute, promote a settlement, achieve quick payment of a debt and enable a Member to mitigate its losses. The Association’s lawyers are available on a 24-hour basis should their assistance be required.

Further details
It is a condition of Defence cover that the ship is entered with the Association for P&I cover. In the case of Defence cover for the acquisition of a ship, the Member must undertake to enter the vessel for P&I insurance upon delivery.

The premium for Defence insurance is quoted according to general underwriting criteria depending on the Member’s risk exposure factors, such as area of trade, scope of contractual obligations, jurisdiction exposure, size of fleet and relevant loss record.

The cover is afforded at cost without any contemplated profit element. It is available to both shipowners and charterers. The cover for charterer Members is charged on a fixed premium basis. Any supplementary calls levied on the mutual shipowning Members follow the calls levied for P&I. The Association is one of the world’s most financially strong Clubs: its supplementary calls have been lower than budgeted since 1992 and no calls were levied in the 1996 and 1997 policy years. There is no general increase in premium for Defence cover for the 1999 policy year.

For further information on Defence rates please contact the Insurance Department. For any other information on Gard’s Defence cover please contact the Legal Department.

Gard News is published quarterly by Assuranceforeningen Gard, Arendal Norway.