How P&I clubs deal with discretionary claims and disputes

When faced with protection and indemnity (P&I) claims, ship owners and charterers want to know quickly whether or not they will be covered. Sometimes, the answer is not straightforward. In this article, we examine the types of risks covered on a discretionary basis, the processes P&I clubs use to deal with discretionary claims and disputes, and the key issues.

Obtaining early advice from a specialist broker can be essential in ensuring a fair outcome in the event of a discretionary or disputed claim.

P&I claims payments: Discretionary or ‘as of right’?

Most P&I claims are covered by International Group (IG) clubs ‘as of right.’ A risk is set out in the club’s rules and, providing the member has appropriate coverage, they are able to recover the cost of their liability from the club - subject to the terms of entry and applicable limits.

However, some liabilities are not covered as of right, and are only recoverable at the discretion of the club’s board.

For example, a ship owner may have coverage for liabilities arising out of collision with another ship. But if it appears to the managers that the owner’s ship was not insured for a ‘proper’ value — it was potentially undervalued — the extent of any recovery for excess collision liabilities will be solely at the board’s discretion.

Where a ship owner experiences a loss that appears to be covered under the rules, they may still find the claim on the club deemed discretionary due to the possible breach of another rule. For example, where an owner faces a cargo claim, but the ship is alleged to have been engaged in ‘imprudent trading’, the question of whether that was the case (and whether the claim was therefore payable) would be subject to the board’s discretion.

Finally,  certain types of fines or any claim where coverage is sought by the member under the ‘omnibus’ rule, may only be covered on a discretionary basis.

The omnibus rule (also referred to as ‘risks incidental to ship owning’) is often trumpeted by clubs as a benefit of the mutual system, giving a ship owner hope of coverage for a risk that is not explicitly covered under the club’s rules. For example, Skuld’s omnibus clause, begins:

"The Association may cover, in its absolute discretion, the member’s liability, loss, expense or costs which would not otherwise be covered under the Rules, to the extent that the Association considers that such cover would be appropriate and consistent with the purpose of the Association."

Both Gard and Standard have produced guidance notes on the operation of their omnibus rules; interestingly both stress the role the rule plays in meeting ‘the changing needs’ of the membership.[1] Standard goes further to say ‘…. the cover offered by clubs … has to be flexible enough to grow and develop and to be in a position to respond to the changing needs of members. The ultimate expression of this flexibility is the omnibus rule’.[2]

This is a somewhat restrictive view of the rule’s use and purpose. The rule is most often used for those grey area claims that cannot easily be categorised or where the managers feel that the board’s authority is preferable. Omnibus claims once passed by a club’s board, rarely result in changes to the clubs’ rules.

What does ‘discretionary’ claims mean?

Some clubs’ rules set out the powers of the board in relation to the settlement of claims[3], while others clarify these in their articles of association or bylaws[4].

Some clubs delegate authority to consider discretionary claims to a special committee. For example, Britannia’s Members’ Representative Committee has authority to consider discretionary claims up to USD2 million; claims in excess of this must be decided by the club’s board. Other clubs delegate such authority, to a limited degree, to the club managers.

All clubs’ rules stress that the deciding body has absolute authority to pay any discretionary claim in full, in part, or not at all.