p&iclubs – compensation of victims of an oil pollution accident

P&ICLUBS – COMPENSATION OF VICTIMS OF AN OIL POLLUTION ACCIDENT

Name – Ognyan Savov

Student N – 781030-T072

Course code - JASN02

Due date – 13.01.2009

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CONTENTS

1. INTRODUCTION.

2. INSURANCE V P&I.

3. REASONS FOR THE EXISTENCE OF P&I CLUBS.

4. COMPENSATION REGIMES

4.1.1 FIRST TIER LIABILITY

4.1.2 CHARTERER AND OWNER

4.2 THE FUND CONVENTION

5. HOW THE P&I CLUBS OPERATE. INTERNATIONAL GROUP OF P&I CLUBS.

WHAT ARE THE BENEFITS/ DRAWBACKS OF THE MEMBERSHIP IN THE IG OF

P&I CLUBS.

5.1 POOLING AGREEMENT BETWEEN P&I CLUBS

6. ASSESSMENT OF DAMAGE – P&I CLUBS AND THE IOPC FUND

7. CONCLUSION

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1. INTRODUCTION.

This essay is concerned with discussing the P&I clubs and the mechanisms for compensating the

victims of oil carried as cargo by oil tankers. For the purpose, comparison is made between the

existing and the old legislation as well as the voluntary agreements of the participants in the oil

industry.

The paper starts with a brief introduction of the difference between insurance and the function of

the P&I clubs and the need for their existence. A section is devoted to the relationship between

the P&I clubs and the compensatory regimes, following which the operation of the International

Group of P&I clubs is described. Attention has also been paid to the regulatory regime

concerning the state of affairs between the charterers and the owners. Certain thoughts are

devoted to the weak sides of the way the compensatory regimes govern the industry today. The

final part of the essay deals with the steps undertaken by the P&I clubs and the funds in

calculating the claims.

2. INSURANCE V P&I.

A person (assured) enters a contract of marine insurance with the insurer (underwriter) in order

the former to be indemnified against loss or damage to his property occurring during the

maritime adventure.1 However, this damage cover is not unlimited, that is the property is insured

only against the risks specified in the insurance policy. Such property insurance is known by the

name Hull and Machinery insurance (of relevance to the shipowner/ charterer)2 and cargo

insurance (of relevance to the shipper/ cargo owner).

On the other hand, sometimes of greatest concern to the assured is the possibility that he might

be held liable for damages to third parties incurred as a result of a collision or failure of the ship

equipment. Of concern to the present discussion are the consequences of marine pollution. While

with property insurance the underwriters play with certain figures, that is they know the value of

indemnity should the property be damaged, with third party liability (hereinafter referred to as 3P

liability) the extent of the damage suffered is never certain and may often take catastrophic

1 UNCTAD, ‘Legal and documentary aspects of the marine insurance contract’, TD/B/C.4/ISL/27/Rev.1, New York, 1982 ат 8.

2 The Swedish Club ‘Slot Charter Insurance’, available on http://www.swedishclub.com/main.php?id=174&menuid=43&sid=194&stat=on [accessed 15.12.2008].

http://www.swedishclub.com/main.php?id=174&menuid=43&sid=194&stat=on


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dimensions.3This latter form of insurance is known by the name Protection and Indemnity

(P&I).4

3. REASONS FOR THE EXISTENCE OF P&I CLUBS.

The notion of the P&I insurance is based on the mutual agreement between different ship-owners

to enter into a multi-party contract. In terms of this contract each party undertakes the

responsibility to bear a share of the liability incurred towards a 3P even though it cannot be held

legally liable for the loss suffered. The reasons for the survival of this type of insurance have not

changed since the time when it was first introduced – hull and machinery insurance cover is

limited only to the value of the ship insured meaning that damages to 3P property must be

reimbursed by the guilty party himself, that is the ship-owner;5 transportation of cargo by sea is a

risky business and, for instance, a heavy oil spill might lead to the winding up of a shipping

company due to its inability to deal with the flow of claims against it following the pollution.

Attention must be paid to the fact that P&I insurance covers liabilities, losses and expenses

incurred as a result of the discharge of oil or the preventive measures to avoid such a discharge.6

From the above statements one could be quite correct in concluding that the greater the number

of owners entering into a single P&I agreement, the greater the distribution of risk and thus the

lesser the financial consequences for the wrongdoer.

Modern P&I insurance is available to the ship-owner through the P&I clubs.7 These are mutual

non-profit associations with their own memorandum and articles of association. Each member

subscribes to the rules of its club and undertakes the responsibility to pay amount of money,

known as a call, into the common pool which is used for covering the 3P liability.

Additional service which a P&I club may provide to its members is a letter of undertaking.

Although this service is not provided for in the club’s constitution and is not available on

request, it is of great convenience to the ship owners as it reduces the possibility of a vessel

being detained in a port and thus suffering financial losses.8 This is of importance to the present

3 Eg the oil spill by m/t Hebei Spirit off the coasts of south Korea in December 2007. 4

P&I insurance, http://www.ingos.ru/en/corporate/hull/liability_shipowner/ [accessed 16.12.2008].5 Hill C, Robertson B, Hazelwood S Practical guides – introduction to P&I, 2nd ed (1996) 6.6 At 71.7 At 11.8 At 181.

http://www.ingos.ru/en/corporate/hull/liability_shipowner/

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discussion in the following scenario: a tanker spills oil and the authorities of the state-victim

arrest it. Before the investigation is concluded and the degree of owner’s liability is calculated,

the vessel should be kept arrested. However, with this letter of undertaking, the P&I club stands

as a security for its member and thus the vessel is let go.

4. COMPENSATION REGIMES

With the development of transportation technology, there are more and more instruments that

provide for the technical regulation of the safety issues. However, with the progress, instead of

enhancing the safe side of our lives, uncertainty and increase of incidents prevail.9 And there

comes the need for compensating more and more victims of a pollution incident.

Such compensation is provided by international instruments whose drafters have to find the

balance among the rights of the affected parties – the victims, the ship- and cargo- owners.10 In

order this to be done, certain levels of certainty in this area of speculation regarding what might

happen if an oil tanker causes a spill had to be introduced.

4.1.1 FIRST TIER LIABILITY

Strict liability is placed on the tanker-owner carrying oil to and from states parties to the Civil

Liability Convention (CLC) of 1969 and/or its Protocol of 1992.11 By virtue of these documents,

no responsibility is placed on charterers and ship operators.12

In order to be sure that the 3P will be compensated for its damages suffered, the owner must

carry out a compulsory insurance.13 The P&I clubs provide for evidence of an existing insurance

policy as per CLC14 in the form of a Blue Card15. It constitutes the insurer’s consent to be a

9 Couviour C ‘ The HNS Convention: A new challenge for international maritime law’ in Scandinavian Institute of Maritime Law Year Book (2000) 157 at 158.

10 At 159.11 Art 3(1) CLC, 1969.The 1992 CLC entered in force on 30.05.1996.12 The Secretariat of the IOPC Funds ‘THE INTERNATIONAL REGIME FOR COMPENSATION FOR OIL

POLLUTION DAMAGE’, December 2008.13 Art 7.14 Couviour C ‘(n 9) at 166.15 Hare J, ‘A P&I perspective on pollution claims’ – paper delivered at the Oil Pollution Conference “Claims

Handling and Clean-up Response”, April 2002.

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guarantor for the purposes of the convention. On the basis of this Blue Card, the appropriate

administration issues a certificate carried on board the tanker at all times.16

However, this insurance recovers damages only up to a certain amount.17 But even a neglectful

amount of oil, depending on the area where it is spilled, may cause grievous damages with lots of

victims and thus the insurance being insufficient to recover the losses suffered. Does it mean that

the limited liability insurance is of no use or that the states, taking preventive measures, cannot

be indemnified for their expenses? Here the 1969 and the 1992 CLC must be distinguished.

While the 1969 CLC version compensates only the victims of an oil spill, the 1992 Protocol also

recovers the expenses incurred by a state-party in order to prevent an oil spill or pollution by

tankers in ballast passage as long as they carry oily residues.18 Prior to 1997, a voluntary

agreement between tanker owners and their P&I clubs (TOVALOP) took care for compensating

the expenses of any state and indemnified victims for oil spills caused by tankers in

ballast.19Each owner (inclusive a demise charterer) member to TOVALOP was required to

maintain insurance, usually evidenced by his membership in a P&I club.20 The reason why

TOVALOP gained a quick momentum was because of the fear that public pressure would lead

to the coastal states introducing unilaterally legislative actions unless a voluntary compensation

regime could be introduced quickly.21

In the instances of P&I clubs the principle of ‘pay-to-be-paid’ applies. It means that a member of

a club can enforce his claim against his club for indemnification only once he has settled the

claim against himself with the victim. However, nowadays there is a tendency that the clubs

themselves handle these claims.22 Furthermore, whatever the club’s duties and rights are, the

CLC, unlike TOVALOP, allows a victim to claim directly against the insurer of a tanker-

owner.23 However, what is to be noted is that in case the owner is prevented from limiting his

liability under CLC, the right of direct action against the P&I club is still available only up to the

16 De la Rue, Anderson C, Shipping and the environment, LLP (1998) London at 113.17 Art 5.18 Ibid (n 10). See also Art. 2, CLC of 1992.19 Hill C et al (n 5) at 72. TOVALOP’s members consisted of 98% of the world’s tanker tonnage.20 De la Rue C, Anderson C (n 16) at 234.21 Gold E, Gard Handbook on P&I insurance, 5th ed (2002) 407.22 Hill C et al (n 5) at 109.23 Art 7.

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ship’s liability limit.24 Any claims above that level depend on the law of the state that governs the

insurance.25

When dealing with P&I liability further consideration must be taken in account. Because at this

moment both the 1969 and the 1992 CLC are in force, their application must be discussed.

Where a state is simultaneously a member to the two conventions,26 liability under 1992

Convention is discharged whenever the limitation fund constitutes the financial limit as per the

1969 CLC.27 Furthermore, due to the fact that TOVALOP is no more in existence, states where

the 1969 CLC is the only one in force (at 01.12.2008 32 states-members to the 1969 CLC have

not ratified the 1992 CLC), are estopped from claiming expenses for the successful removal of

an oil threat.

4.1.2 CHARTERER AND OWNER

According to the TOVALOP agreement, the charterers were obliged to take reasonable measures

to decrease the damage as a result of an oil accident. The expenses for those activities could be

reimbursed by the owners. However, since the introduction of CLC, the charterers may take (but

have no duty to take) such actions. Moreover, their claim would be treated pro rata with the

claims of the victims28 since both of them fall under the common definition of claimants.

It has been stated that an attempt to enforce by contract the TOVALOP terms, that is to treat the

charterers with preference to the victims, would be equal to circumventing the CLC and the P&I

clubs would, as a result, disregard that provision.29 It means that even though there were a desire

to work for the benefit of the common good, there would be no incentive for those on whom the

undertaking of positive steps depends. In addition, in case there were any provisions within CLC

for compensating the charterers who undertake voluntary cleaning/ preventive measures, the

investigation into the accident would take several years – time during which lots of things

change. Therefore, if one would like to impose any duty on the charterers, there is the need to

24 De la Rue C, ‘Oil pollution from ships: current legal issues’ - paper delivered at the Oil Pollution Conference “Claims Handling and Clean-up Response”, April 2002

25 Ibid.26 At 01.12.2008 only Cambodia, Georgia, Ghana, Latvia and Maldives are members to the two conventions. 27 Art XII bis, CLC’92.28 Groom A, ‘Tanker Charterparties Oil Pollution Addendum’ - Standard Steamship Owners’ P&I Association

(Europe) Ltd, available on http://www.standard-club.com/Uploads/1202-20%20Feb%202007%20Std%20Eur%20Circular.pdf [accessed 22.12.2008].

29 Ibid.

http://www.standard-club.com/Uploads/1202-20%20Feb%202007%20Std%20Eur%20Circular.pdf


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put this requirement in strict terms with the resultant consequences for both, the owners and their

P&I clubs.

One must admit that sometimes the charterer (eg a demise charterer) is the one with ultimate

control over the vessel and her crew and who has the final say as well. And in order to deal in the

best way with the issue described in the previous paragraph, the contract between the owner and

the charterer provides for the latter to maintain a compulsory P&I insurance. But one must be

cautious in distinguishing liability in terms of international vs domestic legislation. Because

sometimes domestic laws may impose joint and several liability on charterers and owners.30 And

a club providing a joint cover for the both, even though its absolute right to limit liability,31 might

face the difficult task to provide double the amount which it would have been obliged to provide

should the parties have been insured by different clubs.32

4.2 THE FUND CONVENTION

Another institution which is indirectly linked to the P&I clubs is the International Oil Pollution

Compensation Fund (IOPCF) whose contributors are the oil receivers. It is regulated by the Fund

Convention, introduced in 1971 and amended by the 1992 Fund Protocol.33 The Fund regime is

of importance because its purpose is to distribute proportionately any liability for oil pollution

between all the parties benefiting from the transportation of oil – the tanker owners and the oil

receivers. It serves as a second tier in paying compensation for pollution claims. The Fund

regime can be enforced only in those cases where the limitation ceiling provided for by the CLC

is insufficient or where the shipowner is absolved from liability by any of the exemptions stated

in the CLC.

Due to the complex fact that the increase of the transportation of oil during the recent years as

well as the cost of the clean-up operations and the monetary claims of the victims have risen up,

the compensatory regimes provided for by the international instruments have proved to be

inadequate. As a result, in 2000 a working team set up by the Fund considered the adequacy of

the international compensation regime.34 In 2003 the group proposed a third tier of the

30 Eg USA Oil Pollution Act of 1990 which differs from the CLC.31 Art 5, CLC.32 De la Rue, Anderson C (n 16) at 652. 33 From 2002 the 1971 Fund has come into extinction.

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compensation regime to be funded by the oil receivers– the Supplementary Fund - which entered

into force in 2005.

In order to return the status quo and address the imbalance created by the introduction of the

latter fund, the International Group of P&I clubs (IG) 35 proposed in 2005, during the last

meeting of the working group, the introduction of two voluntary agreements – TOPIA and

STOPIA (Small Tanker Oil Pollution Indemnification Agreement).36 The latter agreements have

been in force since 2006.

STOPIA is an agreement between tanker owners below a certain size, insured in the International

Group of the P&I Clubs, whose purpose is to increase the limitation amount imposed by the

1992 CLC.37 However, the purpose of STOPIA is not defeated due to the fact that even though

tanker owners are free to decide whether to enter STOPIA, the calls to be paid by each of them

will not be reduced. 38That is the members enter into STOPIA by virtue of their membership to

the International Group of P&I clubs.

Given the fact that the Fund pays the balance uncovered by the CLC, incidents caused by some

tankers may result in the Fund bearing much larger proportion of the compensation to be paid

than if the owners’ liability cover was higher.39 Therefore, it has been decided that the liability of

the members to STOPIA should be USD 30 mln under the CLC.40

TOPIA, on the other hand, purports to relieve the oil receivers of the burden imposed by the

Supplementary Fund by making the tanker owners obliged to recover 50% of the expenses made

to the claimants against the Supplementary Fund.41 Membership in TOPIA is also based on a

voluntary basis subject to the condition that the owners are members to the International Group

of P&I Clubs and are reinsured through the pooling system of the International Group.42 Both,

TOPIA and STOPIA, come into operation once it is clear that the IOPCF will be enforced in

order to cover the claims of the victims. An interesting fact is that the parties to these agreements

34 Nesterowicz A, ‘Economic analysis of compensation for oil pollution damage- recent developments in respect of International Oil Pollution Compensation funds’ 37JMLC (2006) 559 at 561.

35 The functions of the international group of P&I clubs is discussed further in this paper.36 Ibid(n 33) at 562. See also Thomas R Liability regimes in contemporary maritime law (2007) 13-14.37 IOPCF Assembly ‘TOPIA and STOPIA’ 92Fund/A.ES.10/13 of 01.02.200638 Ibid. 39 Thomas R (n 36) at 351-63.40 Art 4, STOPIA 2006.41 Thomas R (n 36) at 15.42 IOPCF Assembly ‘STOPIA 2006 and TOPIA 2006’ 92Fund/A.13/23 of 02.10.2008.

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agree to be legally bound to repay a proportion of the expenses incurred by the IOPC and

Supplementary funds as a result of the oil spill.43

However, one may ask the question – “What is the purpose of providing extra P&I cover only for

those ships insured in the International Group of P&I clubs?” First of all, even though about 98%

of the vessels are indemnified by a member to the International Group,44 what happens to the

other two per cent? One may argue that the latter are neglectfully small number and they should

be ignored from the discussion. But it does not mean that they (among which there are tankers

absolved from the compulsory insurance cover required by the CLC), may not cause a huge

ecological catastrophe. And this is quite obvious from the actions of the parties presenting during

the introduction of TOPIA and STOPIA by agreeing to increase ship owner’s liability.

A recent incident shows the drawbacks of the non-universal applicability of these regimes. In

2007 a Russian tanker broke in two in the Kerch Strait connecting the Black with the Azov Seas

causing an oil spill.45 The owner of the tanker did not have to maintain a compulsory 3P liability

insurance as the oil carried as cargo was below the required by the CLC minimum. However, it

had P&I insurance by a club not member to the International Group, that is STOPIA/ TOPIA

undertaking did not apply to the compensation of IOPC and Supplementary funds. As a result,

the owner’s liability was limited to a smaller amount.

Although the IG is the major 3P insurer and the shipping companies tend to use its members’

services due to the complex insurance and reinsurance mechanisms which will be discussed

further, membership to any of these clubs is voluntary and people may choose to assure

themselves in other clubs offering lower calls.

An additional concern is that the CLC requires only compulsory insurance for tankers above a

certain size. It means that, unless there are other mechanisms of regulation, smaller vessels can

transport oil without maintaining liability insurance. According to the CLC, the owner of the

latter type of tankers must provide financial security after an incident has occurred in order to

avail himself of the limitation privileges.46 However, no account is taken of those cases where the

tanker owner goes into liquidation after the accident, as was the case with the owner of the tanker

which caused the spill in the Kerch Strait.

43 Thomas R (n 36) at 351-63.44 The Secretariat of the IOPC Funds (n 10) at 6.45 m/t Volgoneft 139 accident occurred on 12.11.2007.46 Art 5.

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There is also a decision to that flaw – the direct action against the P&I clubs allowed by law

entailing which no P&I club will accept an owner as its member unless he can pay the call

providing him the limitation of liability cover. The answer would be different if one considers

that the CLC speaks only about liability of insurers providing pollution coverage. If a P&I club

does not provide such a protection, then the tanker owner could not avail himself of the limit

allowed by the CLC unless he has an additional pollution insurance policy. However, should

such a club have this restrictive insurance cover of liability, it is unclear how it would remain

competitive on the insurance market.

The drawbacks of the CLC, namely the monetary inadequacy of strict liability, are compensated

by the second and third tiers or by the fact that the national legislation imposes harsher laws

relating to the transportation of oil47 than the international regimes. But it is still strange why the

representatives of the IOPC and CLC funds do not work towards tightening the requirements of

the CLC. It seems that the argument that the states will disapprove of that and might give up

their membership is unwarranted. It is because, firstly TOPIA and STOPIA were proposed by the

IG of P&I Clubs whose members are private as well as government owners, and secondly, the

third tier of compensation is already in force48. Furthermore, the better view is that the voluntary

agreements TOPIA and STOPIA should simply become incorporated in the CLC by simply

increasing the liability limits. Thus the complication which always occurs when one deals with a

multitude of documentation in order to build a full picture of his obligations, will be removed. In

addition, all the P&I clubs will be put on equal terms.

Does the argument that the smaller tanker owners would go bankrupt due to the increased calls

because of the inclusion of TOPIA and STOPIA into legislation? It does not seem that the

answer would be a conclusive yes. Considering the contractual nature of the things around us, it

is not difficult for one to conclude that should the compulsory insurance cover become higher,

the transport costs as well as the final product would be more expensive. However, then one

would be more tempted to believe that the seas would be clearer or at least the liability regimes

would be more appropriate.

An additional factor worth considering is the issue of applicability of the Fund and the CLC

conventions. The extent of liability regime regulated by them is dependent on them being ratified

47 Eg Japan reqires compulsory insurance for tanker of much smaller capacity than the CLC requires – see http://www.mlit.go.jp/english/maritime/Web/brochure_english.pdf [accessed 20.12.2008].

48 At least for some states.

http://www.mlit.go.jp/english/maritime/Web/brochure_english.pdf

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by a state. The differentiation of victims starts at this stage. For instance there are two

neighbouring states, A and B which suffer from the same oil spill. A is a signatory to the

conventions, but B is not and does not have its domestic regulatory regime. Then only A’s

citizens are entitled to claim compensation from the owner/ P&I club and the IOPC fund while

B’s not.

When oil pollution occurs, common sense shows that piecemeal cleaning procedures are

ineffective. The negative consequences for the area would be decided once B’s territory has also

been cleaned. Therefore, tanker owners as well as oil receivers must be held liable for any

pollution caused by them – not only for pollution which occurs within a jurisdiction of a state-

member. What is to be done, therefore, even at the risk of a more stringent regime, is to reinforce

TOVALOP (in the case of CLC) and CRISTAL’s49 (in the case of Fund convention) provisions

that the industry would indemnify victims no matter who they are and where they live. There

might be an argument that states are not obliged to comply with regulations not approved by

them. However, considering that almost 98% of the tanker fleet is insured by the IG, it would be

right to conclude that there is the agreement that the polluter must always be held accountable for

whatever he causes.

5. HOW THE P&I CLUBS OPERATE. INTERNATIONAL GROUP OF P&I CLUBS.

WHAT ARE THE BENEFITS/ DRAWBACKS OF THE MEMBERSHIP IN THE IG OF

P&I CLUBS.

Originally the P&I clubs were simply unions of ship owners having dual role as insurers and

assureds.50 However, there was the issue that the clubs did not have a separate legal entity. When

it came to a dissatisfied member who wanted to enforce his rights against the club, he had to

institute court actions against every other member – a hard and onerous task. At later stage they

were established as companies limited by guarantee, that is non-profit institutions with their

members serving as guarantors. Their articles of association constitute the insurance provisions

to which each member must subscribe.

49 CRISTAL is an acronym of Contract Regarding a Supplement to Tanker Liability for Oil Pollution – it was a voluntary agreement between the oil receivers to indemnify oil victims. It is the predecessor of the Fund Convention.

50 Gold E (n 21) at 98.

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P&I deals with insuring mutually against damages to 3P with uncertain extent which ship owners

might incur. As an insurer, the member has to pay sufficient premiums, and when required, to

pay additional calls in order to absolve the P&I club from further liability.51 It means that for the

prosperity of a single club where the members are dependent on each other, of necessity is to

know who is admitted as a member and in what way he does his business.52 As an assured, the

member has the right to be indemnified by the club for losses insured against.

The insurance of risks is calculated on the basis of balancing the club’s assets against its

liabilities at the beginning of each financial year. The income of the club is determined in such a

way that it is sufficient to cover the liabilities of the club for that year and provide for the

maintenance of sufficient reserves.53 For a bystander it is difficult to understand how the P&I

clubs determine the value of the calls to be paid, on condition that they insure claims of 3P which

can never be calculated even with a slightest accuracy. That is the moment when these reserves

come into play.

Each year the calls that go unspent, that is the liabilities incurred are less than the calls paid by

the members, are not distributed among the members in the form of dividends but are entered in

the reserve. Whenever a pollution accident happens, the reserve helps in compensating the

claimants without any major disturbances for the club members.

It is obvious that huge claims against the assured are indemnified with the assistance of the

reserve which goes against the principle of mutuality54because a ship owner who is no more a

member of the club in question, has to pay for liability of a new member. However, this is the

only available way to avoid a sudden crisis on the P&I insurance market. Furthermore, each and

every person subscribes to the same rules and knows how the money he pays is operated.

However, some P&I societies have a provision saying that if there is a surplus at the end of the

policy year, it may be repaid to the members who have entered in that year.55

5.1 POOLING AGREEMENT BETWEEN P&I CLUBS

51 At 99.52 Ibid.53 At 99.54 Hill C et al (n 5). See also Robertson B, Hazelwood S Practical guides – introduction to P&I, 2nd ed (1996) 11.55 Eg Gard.

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In order to strengthen their market standing, today 13 P&I clubs have entered into a pooling

agreement which might be compared to a P&I club on a higher level whose members are the 13

clubs themselves. As per their agreement, which later became to be known as the International

Group Agreement, there has to be no competition within the International club.56In addition, as

one may guess, IG also serves as a reinsurance tool.

Each club always bears responsibility for claims up to a certain amount (USD 7 mln) which is

known as the club retention. For claims over that amount, the pooling layer comes into play. 57

It has two levels. The first covers amounts from USD 7 to 30 mln while the upper is from USD

30 mln to 50 mln. Each club’s share is based on tonnage insured by each club, premium income

and the club’s loss record in the pool.58 In addition, the club whose member caused the accident

is subject to a 20 % surcharge regarding its upper level liability with a pro rata reduction of the

premium paid by the other P&I clubs.59 Furthermore, the second part of the pooling agreement,

as well as 25% of the level from USD 50 mln to 550 mln is reinsured by the International

Group’s Bermuda captive - Hydra Insurance Company.60 A captive company is a subsidiary to

the parent company (in this case the IG) and its purpose is to provide insurance and reinsurance

to the parent.61

For claims exceeding the pool limit, the IG is reinsured under the so-called General Express Loss

Reinsurance Contract from commercial insurers with cover up to USD 2 bln (overspill),62 except

oil pollution, where the limit is USD 1 bln. Claims exceeding the overspill are regulated by the

pooling arrangements of the clubs and are shared by them.63 Moreover, the first billion of the

overspill claim is covered by additional reinsurance.

What is to be noted from the above is that STOPIA extended the shipowners’ liability to the

amount of USD 30 mln under CLC which falls under the lower limit of the pooling agreement,

that is the compensation of the oil victims is totally undertaken by the members of the IG. It

56 Gold E (n 20) at 105.

57 De la Rue, Anderson C(n 16) at 700 read with Steamship Mutual website, available on http://www.igpandi.org/downloadables/2008%20Reinsurance%20Model%20v2.pdf [accessed 20.12.2008].

58 Gold E (n 21) at 106.59 Gold E (n 21) at 107.60 De la Rue, Anderson C(n 16) at 700.61 ‘What is captive insurance’, available on http://www.wisegeek.com/what-is-captive-insurance.htm [accessed

25.12.2008].62 Gyselen L, ‘P&I insurance: the EU commission’s decision’ Marine insurance at the turn of the millennium

Antwerp 1999 (1) 181 at 183.63 Steamship mutual website (n 43).

http://www.wisegeek.com/what-is-captive-insurance.htm

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means that, should several non-dependent oil pollution incidents occur, the pool would bear all

the expenses without recourse to the reinsurance policy. To relieve the negative effects of this

situation, either additional calls by the members must be made in order to replenish the shortfall

of funds or reinsurance of the lower level of the pool for cases involving oil pollution should be

made.

Would reinsurance at these lower levels bring a desired effect? Such a step would have the

following outcome – either incompetency of the IG to manage lower levels of claims or tendency

to accept as members of the clubs shipowners whose fleet is in bad condition. The effect would

be a decreased trust of the interested in insuring/ reinsuring their property with IG and breach by

the members of the IG to operate for the common benefit of the other members. That is why in

order to keep the limit at which reinsurance starts, the calls charged by each P&I group are

largely dependent on the state of the ship to be insured, its manning, the type of the vessel – the

older the vessel and the more its history of claims is, the higher the calls.

On the other hand, if one considers that reinsurance serves the purpose to limit the negative

effect on both, the assured and the insurer, as well as the world market, the decrease of the upper

limit at which reinsurance should take place, might not be as bad an idea as it might seem.

However, the above argument is not valid as far as the IOPCF and the Supplementary fund are

concerned because their claims against the IG are always for damages exceeding the limit from

which reinsurance starts.

6. ASSESSMENT OF DAMAGE – P&I CLUBS AND THE IOPC FUND

Whenever it comes to the stage of indemnification, the question as to who falls under the

category a victim of an oil spill and who must be indemnified for taking ‘reasonable measures’ in

removing/ restricting the negative effect of the spill, must be answered. There have been

innumerable claims under the CLC and the Fund Convention which made the P&I clubs as well

as the IOPC fund interpret very narrowly the qualifying criteria for these claims.64 Only the

claimants residing in a state-party to either CLC’69 or CLC’92 can seek relief from the

shipowner and his P&I club alone.65 As was shown earlier, it is a drawback of the compensation

regime due to the discriminatory treatment of victims.

64 De la Rue, Anderson C (n 16) at 464.65 IOPCF 1992 ‘Claims manual 2005 ed’ at 15.

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The P&I clubs that are involved into the claims dispute, work in close cooperation with the IOCP

fund. Due to the fact that the second tier of compensation, that is IOCP fund, comes into play

once the tanker owner’s liability has been exhausted, the claims are submitted first to the owner,

his P&I club or the club’s correspondents (the clubs representatives in the particular

state).66Whenever there is a huge number of claims, their processing is much easier and cheaper

by opening local offices at the scene of the accident.67 Furthermore, there is a practice within

P&I clubs and the IOPCF that even if the claim settlement has not been finalized, they would pay

the victim an amount should the latter suffer undue hardship.68

P&I clubs as well as owners are absolved from any liability whatsoever six years after the date of

the accident even though the consequences of the damage have been felt by the victims some

time after the incident.69 Due to the fact that the IOPC fund and the owner’s club have the mutual

concern into resolving the pollution claims into quick and exact manner, they employ on-scene

experts who look after the interests of the both.70These are employees of the International Tanker

Owners Pollution Federation (ITOPF) – funded by the insurers on behalf of their members.

ITOPF has substantial expertise in dealing with oil spills and has the knowledge of the fund’s

admissibility criteria of claims.71

Upon finalization of the calculations, the P&I club and the IOPCF present a document to the

claimant regarding his compensation.72 Should he consent with the offered compensation, he

must sign it as a proof of acceptance. However, if he disagrees, additional calculation of the

claim may be requested. If no agreement can be reached, the claimant may institute actions in a

court of the state in whose territory the incident occurred.73

7. CONCLUSION

The purpose of this essay was to describe the way P&I clubs function as regards cases involving

oil pollution. It was shown that it is insufficient to look only at the clubs’ policy in relation to the

66 At 15.67 Eg the Erika oil spill – claims office opened in Lorient, France.68 IOPCF – ‘Claims manual 2005 ed’ at 18.69 Art 8, CLC.70 Ibid (n 68) at 17.71 Ibid.72 IOPCF – ‘CRITERIA FOR THE ADMISSIBILITY OF CLAIMS FOR COMPENSATION – note by the IG of

P&I clubs’ – FUND/WGR.7/18, 19.04.1994.73 Ibid (n 68) at 17.

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above matters but regard must also be had to the international legal regime in respect of

environmental protection. In addition, although the organization and the purpose of the IG of

P&I clubs is quite welcome, the non-universal applicability of the agreements between IG and

the pollution funds works to the detriment of the common good. Furthermore, the steps that

must be taken by the both, the clubs and the organizations whose work is connected directly or

indirectly with the function of the P&I clubs, is to work towards acknowledging the factor that

by taking piecemeal actions74 when dealing with a pollution issue, nothing is done effectively.

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p&iclubs – compensation of victims of an oil pollution accident

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