Protection and Indemnity Insurance (P&I) protects shipowners from the maritime liability risks associated with owning and operating a vessel.
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What is Protection and Indemnity Insurance?
Protection and Indemnity Insurance (P&I) protects shipowners from the maritime liability risks associated with owning and operating a vessel. It is one of the key coverages of Ocean Marine Insurance, alongside Hull Coverage and Cargo Coverage. For P&I insurance, underwriters will work with owners of vessels to tailor the specific coverages based on the risks involved in their voyages and the desired coverage amount.
Protection and Indemnity Insurance emerged from a need among shipowners for coverage beyond the traditional Hull Coverage and Cargo Coverage, namely the third-party liabilities that can arise from crew members and passengers, other vessels, and properties. There is no standard insurance form for P&I coverage, though most will cover losses related to illness, injury, loss of life, medical expenses, damage to other vessels and property, damage to cargo, wreckage removal, and quarantine expenses.
Why do I need Protection and Indemnity Insurance?
Vessel owners are exposed to a variety of unique third-party liabilities that could result in costly claims and lawsuits. The physical threat that ocean vessels can pose to other ships on the water, the dangers of carrying crew and passengers on board a moving vessel, and other potential damages for which the vessel may be responsible makes Protection and Indemnity Insurance an important aspect of any shipowner’s comprehensive coverage plan.
Gripping stories in the news about ocean voyages taking a devastating turn illustrate how important liability insurance is for owners and operators of ships. The Deepwater Horizon oil spill in 2010 discharged 4.9 million barrels of oil into the Gulf of Mexico and instigated one of the largest environmental disasters in U.S history. The MW Sewol passenger ferry in South Korea capsized near the Jeju coast and resulted in the death of 304 passengers and crew in 2014. More recently, a Norovirus outbreak sickened 475 passengers on a Caribbean cruise ship in January 2019.
What unique risks does a vessel pose to the people, property, and the environment around it? In the case of the tanker’s oil spill, it would be millions of dollars worth of environmental damages that could generate numerous civil lawsuits. The deaths and injuries of the people on board the ferry would lead to claims and lawsuits. Similarly, the outbreak of the virus on the cruise ship could result in a significant number of claims and legal settlements for medical expenses. As an owner of a vessel, are you prepared to face liabilities that could be financially devastating? P&I insurance will cover the third-party liabilities that might arise from owning and operating a vessel.
What does Protection and Indemnity Insurance cover?
Common categories of coverage for Protection and Indemnity Insurance are the following:
Illness, Injury, and Loss of Life
This is the primary coverage for P&I insurance. The coverage for illness, injury, and loss of life will apply to crew members, passengers not covered by an injury compensation act, and even stowaways. People working in close proximity to the ship are also covered, e.g. longshoremen working on the docks.
Example: Two harbor workers are injured when a luxury yacht runs into the docks without slowing down sufficiently.
This covers hospital and other related medical expenses for passengers, crew, and nearby workers who have suffered injuries or illness as a result of the ship in question.
Example: When two longshoremen are severely injured by a docked ship, they sue for $200,000 worth of medical expenses.
Damage to Other Vessels or Property
This covers damage to other vessels and fixed properties in the water such as piers, docks, and harbor equipment, both by collision and other causes, excluding coverage already provided by Hull Insurance.
Example: A tugboat crashes into the pier and severely damages the pier and nearby storage facilities.
Damage to Cargo
This coverage applies to cargo and passenger baggage.
Example: As a cruise ship is loading passengers for its maiden voyage, a porter loses control of a luggage cart off the pier, and several pieces of luggage fall into the harbor. Passengers end up suing the cruise line over the damaged luggage.
This covers clean up costs of wreckages, which is often required by law even if the shipowner is not at fault for the wreckage.
Example: A sailboat is totaled when it is caught in a violent storm. The remains of the boat wash up onto shore, and the owner of the boat must pay for clean up and removal costs.
This covers the losses resulting from imposing a quarantine on board a vessel.
Example: A cruise ship sailing to Alaska is struck by a breakout of the measles. The crew quarantines all affected passengers and diverts the ship to the nearest port. The remainder of the cruise is cancelled and the ship must be disinfected.
Other coverages include:
This covers the cost of repatriating any member of the crew.
Example: A cruise ship in the Caribbean suffers an outbreak of Norovirus, and several crew members fall ill. The cruise line pays for the affected crew members to be returned to their home countries, including the costs of repatriation.
Oil Spill and Pollution Civil Liabilities
This covers the cost of defending and settling civil lawsuits that arise out of oil spills and pollution caused by the vessel.
Example: An explosion on an oil tanker in the Gulf of Mexico expels millions of barrels of oil into the Gulf, causing significant damage to the coast. A group of citizens who own property along the coastline sues the oil company for the property damage it has caused.
War and Political Risks
This covers war and marine terrorism risks, including capture, seizure, detainment, and other politically motivated actions.
Example: Two U.S. oil tankers are attacked by Iranian naval ships in the Gulf of Oman during a time of escalating tension between the two countries.
A Note on Exclusions
It should be noted that Protection and Indemnity Insurance is not a “catch-all” that covers every single type of third-party liability against shipowners. For example, courts have ruled previously that P&I coverage will not apply to some employer liability claims or to claims by crew members who have suffered from accidents in proximity to the ships.
What entities provide Protection and Indemnity Insurance?
Most Protection and Indemnity Insurance policies are provided by non-governmental, nonprofit mutual or cooperative associations called P&I clubs. Comprised of shipowners, operators, charters, and seafarers, P&I clubs trace their roots back to 19th century England. Since insurance underwriters in that era were reluctant to take on third-party cargo liability risks, shipowners responded by forming their own mutual P&I clubs. As shipping became a more popular mode of transportation in the latter part of the 19th century, third-party liability claims increased, and larger protection associations formed. P&I clubs originated in London, but spread to other major shipping hubs including China, Japan, Norway, Singapore, Sweden, United Arab Emirates, the U.S., and South Korea.
Today, 13 P&I clubs around the world have joined together as the International Group of P&I Clubs, an association that provides insurance coverage for 90 percent of the world’s ocean-going tonnage. Club members contribute to a risk pool that pays out funds when a member’s ship faces losses. P&I Clubs offer very high insurance limits that protect against devastating losses on the sea. The individual clubs in the International Group of P&I Clubs have a $10 million limit on claims, while more costly claims up to $100 million will be shared among the 13 clubs.
Ocean Marine Insurance
As mentioned previously, Protection and Indemnity insurance is also one of the three key coverages of Ocean Marine Insurance, alongside Hull Coverage and Cargo Coverage. Unlike a P&I club, an insurance company is a for-profit entity that charges a premium to protect policyholders against risk. The limits of P&I coverage provided by marine insurance may not be as high as that of a P&I club—which can also call upon members to make supplementary contributions in the case of an extraordinary loss.
Shipping is a complex undertaking that involves many risks. As a matter of survival, shipowners and operators must anticipate the potential claims and lawsuits that may arise from crews and passengers, other vessels, and property. Under Ocean Marine Insurance, Hull Coverage and Cargo Coverage will provide protection from losses to the physical body of the ship and its cargo. Protection and Indemnity Insurance covers a wide array of third-party liabilities, including threats to the physical well-being of people on board, damage to other vessels or properties, damage to cargo not covered by cargo insurance, and costs associated with quarantines, wreckage removal, repatriation, and pollution. For any shipowner, Protection and Indemnity Insurance is a critical part of a full coverage plan.