Commercial insurance, as both a concept and fundamental business necessity, has its roots in the shipping industry of the Middle Ages. Transportation enterprises have been among the most dangerous and necessary throughout most of history, so it’s not surprising that players stepping into this business, from early on, have wanted help shouldering their risks. And given that water carriage was the most practical and efficient mode until very recently in the timeframe of humanity, it’s not surprising that marine insurance is the oldest and largest aspect of transportation insurance.
In the mid-Eighteenth Century, vessel owners and operators, mostly in England, began to realize that profit-seeking insurance companies weren’t the best option for their unique needs. Coverage had become a major operating expense, and most ocean carriers were pretty much in the same boat when it came to the varieties of risk they faced. These British owners pooled themselves together into what became a less expensive and more efficient alternative to traditional marine insurance.
The loose, non-profit associations of vessel operators originally provided coverage for hull and machinery losses (roughly comparable to the collision coverage on your car), affording “protection” against certain hull losses. They basically cut the traditional insurer out as a middle man by agreeing that a group would collectively pay the costs of any loss suffered by any of its members pro rata (based on each member’s total insured tonnage).
In the next century or so, liability for cargo loss and personal injury became greater concerns as the world in general, and England in particular, became more litigious. The mutuals expanded their coverage plans to include liability to third parties, or “indemnity.” As the cottage industry took hold, the moniker “Protection & Indemnity Club” became an integral part of the ocean shipping industry. Today, some 90% of ocean carriers enjoy private marine insurance coverage through thirteen P&I Clubs headquartered worldwide. The clubs collect “mutual premiums” at the commencement of fiscal years based on loss prediction. “Calls” for additional funding are made if those predictions turn out to be low, and occasionally refunds are paid out if the club has a good year.
Over the centuries, P&I Clubs have evolved to be full-service programs addressing all aspects of marine risk. Their personnel provide legal and marine adjusting services, sometimes in house and often in coordination with networks of approved outside specialists. To the extent risks become less manageable or more threatening, some P&I Clubs purchase reinsurance on the commercial market. Risk assessment has become more sophisticated than in the early days, with individual members’ circumstances, operations and histories being evaluated to determine levels of responsibility to the group. Bad apples are kept out of membership by an application process that scrutinizes a prospective carrier member’s loss history and safety programs. Club “Rules” require that members abide by certain operational measures to minimize risk of loss. This mechanism promotes an attitude of the club keeping its members in line for the group’s collective benefit.
Everything’s not always crystal clear and problem free in this form of risk protection. Coverage disputes sometimes erupt over who stands under the club’s umbrella, for what, and to what extent. A recent example of such a disagreement, which led to litigation before the U.S. District Court for the Southern District of New York, was American Boat Company’s beef with P&I Club American Steamship Owners Mutual Protection and Indemnity Association, Inc., the so-called “American Club.” There, club member American Tugs had brought in its American Boat Company, apparently a related company, as an “additional assured” under its club membership.
When an injured employee sued American Boat in Illinois, an ensuing coverage dispute evolved into a fight over which court should adjudicate the coverage matter. Club rules provided that any such litigation must be in the Southern District of New York, but American Boat tried to dodge that provision by showing it wasn’t an actual member. In a nutshell, the court concluded it had jurisdiction, because if American Boat was a covered entity entitled to indemnity from the club, then it also must be subject to the club’s rules. This finding was based on analogous rulings from courts addressing traditional insurance policies. Take a look at the opinion for a nice overview of how club rules are structured.
P&I Club-style mutuals have developed within other sectors, including public agencies and non-shipowner aspects of the ocean shipping industry. A non-profit program that provides the same benefits as one facilitated by a commercial provider certainly is attractive from a cost perspective. The more closely aligned the needs and circumstances of a group’s members, the more convenient and efficient having an industry-centered organization administered by knowledgeable and experienced personnel becomes. This is why it works so well for cost and efficiency-conscious ocean carriers, as well as similarly situated players in other industries.
The model loses some of its appeal when a group’s members’ circumstances aren’t so similar. Divergent interests render a one-size-fit-all cost allocation and service plan less efficient. The more intertwined a group’s interests are, the more say-so its members and group representatives want in all that goes on. Some business models just aren’t very receptive to that kind of external meddling, and at some point the cost savings aren’t justified. In any event, the P&I Club model has seen growth and promises to be a developing business option that, like many others, has its roots in the shipping industry.
Ref: American Steamship Owners Mutual Protection and Indemnity Association, Inc. v. The American Boat Company, Inc., 2012 WL 527209 (SDNY 2012).
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