Mind the gap between the train and the platform – anyone who has visited London knows this announcement in the London Underground. If someone enters into co-assurance, gaps in such co-insurance are unwelcome. However, co-insurance may not only have gaps and provide less cover than expected; in certain situation it may even expose the co-assured to a liability, he would not have had but for the co-insurance. This article will identify such a trap in certain scenarios of co-insurance in the field of P&I. 

Co-insurance may have very different reasons. Some may take it out without any closer consideration, merely because everybody else in the industry or sector does so. Others may intend to avoid recourse by the insurer against him as a co-assured. Others might think that co-insurance is a way of getting cheap cover for their own liability risks, or even get it for free. In some cases, contractual agreements provide for co-insurance of the contractual partner. Examples for this are clause 17 of the BARECON 2017 charter party form1, or clause 4 of the recently released SHIPMAN 2024 ship management contract form2, both documents drafted by the renowned Baltic and International Maritime Council (BIMCO). 

P&I Club Rules widely address co-insurance. One may find references to persons interested in the operation, management or manning of the vessel; holding companies or beneficial owners of the member; mortgagees of the insured vessel; charterers of the vessel; or simply and generally other persons. Milton Friedman is known for his statement that “there’s no such thing as a free lunch”. And there neither is in P&I insurance. While co-assureds usually do not have to pay premium for their cover, they are usually jointly liable with the Member for premium payable by the member. In fact, this is even partly recognized in contract forms. See clause 4 (c) SHIPMAN 2024, which states that it “is understood that in some cases, such as protection and indemnity, the normal terms for such cover may impose on the Managers and any such third party a liability in respect of premiums or calls arising in connection with the Owners’ Insurances”. 

So far, so good, and acceptable. However, some Club Rules provide for joint liability for more than just premium. In the following example, a Ship Manager is co-insured under the owner’s P&I entry. The vessel causes damage to cargo on board. The cargo owners arrest the Vessel and start action (only) against the Owners – in this example the Co-assured Ship Manager shall not liable in law. The P&I Club puts up security by way of a Letter of Undertaking and thereafter finds out that cover is prejudiced. The Club has to pay under its Letter of Undertaking and turns around to recover from Owner and the Co-assureds. Is the co-insured Ship Manager liable? 

Typical lawyer’s speech would be: it depends. However, here it is correct, because it does indeed depend. It does depend on with what Club the co-insurance was taken out. Despite the fact that all IG Clubs pool their claims beyond a certain self- retention (currently USD 10,000,000)3, the Club Rules show remarkable differences when it comes to obligations of parties they accept as co-assureds under their Rules. What follows is not meant to be a complete exercise, but only examples. When in the following Rules of Clubs are quoted, then only to demonstrate concepts, not to single out individual Clubs. 

With this in mind, if the co-insurance in our example were with Britannia Steamship, then the Britannia Rules provide in Rule 8.1.1.1 that their shall be a joint liability of the Senior Member and all Joint Members.4 In our example, the Ship Manager is not a joint member, but a co-assured. Under the Britannia Rules, there is no liability of the co-assured for recourse claims of the Club. Accordingly, a co-insurance with Britannia would not expose the Ship Manager to a liability.  

Looking to another Club, just for discussing the problem, and picking Skuld, the Skuld Rules 45.1 does not refer to (Members and) Joint Members, but to Joint members and co-assureds. Therefore, in our example the Ship Manager should better continue reading. If he does so, he will find, first, the joint liability of co-assureds for premiums – something, which BIMCO had so well warned of in its SHIPMAN and CREWMAN contract forms. However, he will find a joint liability also for “other sums”: Joint members and co-assureds named on any one Certificate of Entry shall be jointly and severally liable in respect of all premiums, calls and other sums due to the Association in respect of the entered vessel.5 

The question now is what other sums are. Can they be any other sums, and thereby include liability for recourse claims of the Club against the Member, even in a scenario like ours, in which the co-insured Ship Manager did not benefit from the Club’s settlement of the cargo claims simply because the Ship Manager had not been liable to the cargo claimants in the first place? Or would there be some kind of limitation, perhaps along the lines of the ejusdem generis principle, so that other sums must be comparable to premiums and calls? Here is not the place to discuss this, safe for the remark that it will depend on the law applicable to the Club Rules – which generally differs from Cub to Club and is usually linked to the place from where the Club is managed.  

However, the Ship Manager in our example could even be worse off, if he became Co-assured with a Club, the Rules of which are even more onerous to him. Such a Rule, again only quoted here for demonstration purposes, could be found in the Rules of the American Club. Section 3.14 stipulates (shortened here) that Joint Members, Co-assureds … and Affiliates insured on any one insurance or in respect of any fleet …, shall be jointly and severally liable for all sums due to the Association… . 6 Here, the Co-assured will find it even more difficult to argue that the recourse liability is not part of all sums due to the Association. There seems to be no room for the application of anything like an ejusdem generis rule. Finally, New York law (cf. Section 3.51) will determine, whether the Co-assured can avoid having to pay to the Club what the Club had paid to settle its Member’s, not the Ship Manager’s, liability.  

To make things worse in such a scenario, if the Ship Manager had intended being better protected by being co-assured with the Owner’s Club, in certain situations this may not be the case. To the contrary, the Ship Manager might have better off had he refrained from co-insurance. The reasons is that his contract with the Owner may include a limitation of his liability towards the Owner. In ship management agreements, this is usually the case. Clause 17 (b) (i) SHIPMAN 2024, just gives an example when stating that, save for cases of severe fault, the Managers’ liability for each incident or series of incidents giving rise to a claim or claims shall never exceed a total of ten (10) times the annual management fee payable. Slightly changing our example shows where the problems lie. If the Ship Manager had negligently caused the situation, which later led to the cargo damage, he may be liable to the Owner, but that would be a limited liability. Had the Ship Manager not been co-assured under the Owner’s P&I entry, the Club might have been subrogated to the Owner’s rights against the Ship Manager. The Club would have been in no better position than the Owner himself. The subrogated claim would still be a claim for limited liability only. However, in case of co-insurance, the Club Rules stipulating the Co-assured’s liability provide a separate basis of claim, which – on the face of the Club Rules – may not be subject to any limitation. Certainly an unpleasant surprise for the Ship Manager, who will probably never have imagined that taking out (co-) insurance exposes him to greater liabilities than he would have had without such insurance. The Ship Manager affected will now need a good lawyer. Such lawyer might argue that there must be a relationship between the Club Rules on subrogation and those on the Co-assured’s liability to the Club, which at the end of the day should result in the Co-assured not being exposed to a greater liability than that to his customs, the Owner. Whether such an argument succeeds, will depend on the applicable law. 

Anyone who is about to become a co-assured under a P&I entry is well advised to carefully study what the Club Rules provide. And mind you: the trap may open up along the way. Ship management contracts, just as bareboat charter contracts or any other contract, may, and often are, be concluded for more than one year. P&I entries, to the contrary, are usually for a 12 months period. Any change in the P&I insurance of the Owner, thus, gives reason for the Co-assured to reconsider what continued co-insurance will mean for him.