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.

The importance of the pooling agreement

Discretionary claims within a club’s retention (currently, USD10 million) are largely a private matter for that club and its members. The board may feel that it can be more flexible on a claim where it will be bearing 100% of the cost. However, where a claim is potentially going to exceed the club retention and fall on the IG pool, the club’s board must consider its ability to pool the claim. In particular, the board must be careful to follow the ‘Minimum Procedural Requirements’ set out in Appendix XI of the Pooling Agreement (see below).

Different omnibus rules mean that some clubs may occasionally pass discretionary claims that others cannot. For example, Skuld specifically states that their board has the authority, in exceptional circumstances, to exercise its discretion to cover liabilities, losses, expenses or costs, which are otherwise expressly excluded.

Although SOP and the West of England have similar provisions, their omnibus rule states that in such circumstances, the decision of the board must be unanimous[5].

On the other hand, Standard’s omnibus clause (Rule 3.20) states that the club can cover ‘any liabilities which the board may determine to be within the scope of club cover.’ Their June 2018 Discretionary Claims Bulletin states:

‘The deciding factor when considering omnibus claims is usually whether the new ‘risk’ or liability is of a P&I nature. The test is sometimes put this way: Had the claims been known to the club at the time its rules were drafted, would the club have included it within their cover?'

Given that interpretation, it is difficult to see how Standard’s board could agree to pass claims that were overtly excluded elsewhere in the risks covered section of their Rules (Section C). However, Standard maintains that claims made under their excluded risks rule (Rule 5) can be considered by the board (see Rule 5.18), providing they can be considered as a sue and labour cost (recoverable under their rule 3.19). And, they have emphasised that any claim can be submitted to their board for consideration.

The role of the managers

The role of the P&I club managers is critical in any discretionary claim. It is the managers who make all initial decisions on coverage. This can place the member in a difficult position if they disagree with those decisions. If the claim is not stated to be discretionary under the rules, it becomes the responsibility of the member to challenge decisions on coverage and decide whether or not to request that the claim be placed before the board.

In the example given above relating to a collision, the question as to whether the owner’s ship was insured with hull underwriters for a proper value will first be considered by the managers, not the board. Initially, the managers will determine whether or not the difference in value was material.

Likewise, under their rules concerning loss and damage to cargo, all clubs have a proviso relating to deviations. It is the responsibility of the managers to determine whether a deviation which has already been undertaken prejudiced coverage or not. If the deviation is judged to have been unreasonable and prejudiced coverage, the member may challenge that decision by petitioning the board[6].

But the most important role played by club managers is a result of the fact that they usually write the case report that is presented to the board. Even if a member is permitted to see the manager’s report and make their own written submissions, they will not see how their claim is actually presented or hear any comments or recommendations the managers may make. For example, although managers will generally not voice an opinion as to whether the board should exercise its discretion, they may refer to prior similar decisions and give a detailed briefing to the club’s chairman. Their contribution may be quite influential in the decision-making process.

The role of the board in descretionary claims

Appendix XI of the Pooling Agreement lays down guidance (Rule 3.10(a)) to all IG clubs on the minimum procedural requirements a board should follow when considering a discretionary claim impacting the pool. The six main requirements for the club bringing the claim are as follows:

  1. The club must confirm that all circumstances of the claim have been properly investigated.
  2. The decision must be taken by the full board and must not be delegated.
  3. The managers must prepare a comprehensive, written report that adequately explains the facts, legal and coverage issues.
  4. The member or their adviser must not be present at the meeting.
  5. Any board member having a conflict should not be present during discussion of the claim.
  6. A discretion should not be exercised by the board until the claim/issues have been finalised, except in exceptional circumstances.

Yet again, this emphasises the central role of the managers in preparing any claim. In Standard’s Bulletin of June 2018, there is reference to their procedural requirements in respect of discretionary claims. These provide that “the member concerned shall, prior to the meeting of the board, have been given the opportunity to review the agenda note and other materials which may be placed before the board in order for the member to comment. Any such comments shall be brought to the attention of the board.” Today, most IG clubs provide their members the same opportunity.

Given that all club rules emphasise that their boards have ‘absolute discretion’ in deciding the extent to which a discretionary claim is recoverable, does this mean that they enjoy total freedom in the decision-making process and what they ultimately decide? There is little English legal precedent on this matter, but in the The “Vainqueur Jose,”[7] Mocatta J. held that contractual discretions are subject to common law principles requiring fairness, reasonableness, good faith (bona fides) and the absence of misdirection in law. He also commented that consideration of a claim by the board of a P&I club cannot be expected to replicate that of a court or arbitration by requiring the detailed examination of disclosed documents, the hearing of oral evidence and the careful consideration of the arguments of counsel.

Therefore, while boards can rely to a large extent on the submissions prepared by the managers of a club, their decisions, after thorough enquiry, must have a sound basis. They should not be capricious.

This principle works both ways, because not only should they be adopting a rational approach when declining cover, but they should also be applying an equally rational approach when they are granting it. The funds paid to cover any discretionary claim are taken from the mutual funds of the association, so they equally cannot cover a claim without a rational basis, which would otherwise be to the detriment of the membership as a whole.

Once again, this emphasises the importance of how the claim is presented to the board. Steamship, perhaps in recognition of this fact, emphasises in its rules that “…. adjudication shall be on the basis of documents and written submissions alone and conducted in accordance with such procedures as the managers decide from time to time in their absolute discretion” (Rule 48(i)(a)).

Finally, there may be a question of a board’s competence where the matter relates to a complex legal interpretation of the club’s rules. What happens where a club has received legal advice on coverage and the member ship owner has received contradictory advice? Is it appropriate (fair) for a ship owner board to make the decision on which opinion is right? Do they have the necessary expertise to make a decision?

Disputes and differences

If the member does not agree with the decision of the board, what further option do they have under their club’s rules?

To a certain extent, the answer depends on the club.

The process of how to resolve disputes will also depend on the provisions in each club’s rules. The differences are too detailed to set out for each and every club, but the following examples will demonstrate the point:

Steamship’s Rule 48 relates to dispute resolution and adjudication. It runs to two pages and is the most complicated set of provisions of all the clubs. However, it also provides that disputes may, at the discretion of the managers, be resolved through proceedings before the High Court in London or by arbitration in London, without prior adjudication by the board. Doubtless, this process could be used to resolve the sort of complex legal dispute referred to above.

Perhaps the most difficult aspect of achieving a final resolution by taking the matter to arbitration is that the member is at a disadvantage when making an appeal. They cannot know what was discussed at the board meeting or how the board’s decision was reached, unless the managers are prepared to advise them. They cannot, therefore, know whether the process was actually fair or what was taken into consideration by the board. This may make preparation for any arbitration very difficult.

Conclusions

When considering claims within their retention, clubs may exercise a fairly wide discretion, less so, perhaps, when the Pool is involved. The role of club managers can be crucial in the way that a claim is handled and the degree to which support is given to the member. Club rules are not always perfectly drafted and it is important that members are able to challenge those interpretations with confidence.

If in doubt, clients should always reach out to their Marsh Specialty advisor for advice and guidance at an early stage.

 

[1] Gard: Guidance to the Rules 2020
[2] Standard Club Bulletin, June 2018
[3] See Britannia’s Rule 32 and Steamship’s Rule 30
[4] See Gard’s Rule 2(5)
[5] SOP Rule 5(A) & West of England Rule 5 proviso (i)
[6] See, for example, North’s Rule 19(17) proviso (B): ‘Nevertheless, the Members’ Board may allow such a claim either in part or whole, if in its discretion, it considers that the Member had reasonable grounds for believing that no deviation was to be or had been made.’
[7] C.V.G. Siderurgicia del Orinoco SA v. London Steamship Owners’ Mutual [1979] 1 Lloyd's Rep. 557