MUTUALITY

THE STORY OF THE UK P & I CLUB

PETER YOUNG


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CONTENTS

Foreword

List of Illustrations

Self-starters

Underway

Hard Men

At War

Weathering

Growing

Claiming

1967 - Annus horribilis

Entries

Correspondents

Benefits

Underwriting

Self-adjustment

Pressures

Strategy

Audit at 125

Appendices

I. Chairmen

II. Fleet List

III. Sources and Acknowledgements

Index



CHAPTER 1

SELF STARTERS

Self help, the business ethic prevailing in Britain in the nineteenth century and espoused by Samuel Smiles, was the model on which the mutual associations were based. For shipowners in the 19th century, liability was unlimited until the Merchant Shipping Act 1854, but that only limited liability for the ship and freight. Shipowners were still exposed to potentially large claims in respect of loss of life or injury as well as collision damage claims which could bankrupt them. They had to find a way to protect themselves.

Mutual insurance companies had been established in London for fire after the Great Fire of 1666, and for life from the early 18th century. Shipowners had themselves formed mutual associations to cover hull risks on a non-profit basis. In a co-operative, an owner was both an insured member and an insurer of all others. As the new shipowner mutuals came into being, a division of responsibility emerged, with Lloyds and marine insurance companies covering ships and their cargoes, and mutual protection clubs insuring shipowners' third party liabilities. The new protection societies were a version of the former hull clubs and continued the tradition of taking 20 February, the date when ships in the Baltic that had been laid up for the winter began to be made ready for the new sailing season, as the first day of the insurance year.

The United Kingdom Mutual Steam Ship Assurance Association which became the UK P & I Club - was formed in 1869, the year in which the Suez Canal opened. Initially, it insured hull and machinery risks and then added protection in 1871 and indemnity in 1886. Most P & I (Protection & Indemnity) clubs were formed in Britain by the end of the 19th century.

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CHAPTER 2

UNDERWAY

This chapter discusses the UK Club's first rules, its early members and the arrival of Thomas Miller in 1886 as joint manager. He was a shipowner himself and gained the reputation of being 'The King of Clubs'.

From its foundation, the UK P & I Club was based in London although on its first committee, representatives from firms in the North-East of England outnumbered those from London.

The theory of P & I clubs was that the owners who paid the calls established the policy, and the managers carried policy out. In practice it was not always quite so, not least because there was not an absolute distinction between the owners and the managers.

There were two distinct classes of insurance, protection and indemnity. Protection covered four risks: personal injury to crew, passengers and others; crew liabilities (medical); collision liability not covered in hull and machinery policies; damage to docks. Indemnity covered the shipowners' liability for cargo, for short delivery, loss or damage. As described in Chapter 3, the UK P & I Club ceased to insure hulls as the business was diminishing.

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CHAPTER 3

HARD MEN

The advent of Thomas Miller brought additional cover to an increased membership and he took over the sole management of the UK Club in 1894.

With increased ship sizes, such as the 3,564 ton Murex, purpose-built in 1892 and the first bulk oil tanker to meet new requirements for going through the Suez Canal, the scale of risks increased. This led inevitably to discussions on the impact this would have on shipowners and how higher claims might be met. In 1899, the UK Club joined with five others in a reinsurance pool under the 'Pooling Agreement' which aimed at stabilising the impact of large claims.

Under Thomas Miller's leadership, the UK P & I Club grew in size and confidence. By 1900, one million tons were entered in both protection and indemnity in the UK Club: by 1904 indemnity had overtaken the tonnage of the protection class. Its increasing influence was demonstrated by action being taken on its behalf by the UK Foreign Office in specific instances of port disputes.

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CHAPTER 4

AT WAR

When the First World War broke out on 4th August 1918, arrangements had already been made for cooperation between governments and existing war associations. The role of P & I clubs was reduced, but they were far from redundant during these years. They continued to defend the interests of shipowners on a variety of issues, for example, where government tried to increase load capacity beyond a reasonable or safe level and where government departments claimed against owners for shortfalls in cargo in ships which had been requisitioned and were not under the owners' control.

During the war, British shipping lost half its pre-war fleet, declining from 41.6% to 35.2% of the world fleet. In future, the P & I clubs had to look beyond Britain for their business.

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CHAPTER 5

WEATHERING

Immediate post-war chaos and losses resulted in increasing claims, some of them spurious, for cargo losses through theft and personal injury. All claims were examined in meticulous detail to ensure that the small funds available were not wasted.

The shipping industry faced a variety of challenges during this period. A brief trade boom gave way to a long slump. New legislation, such as the internationally agreed Hague Rules which were embodied in the UK's Carriage of Goods by Sea Act, 1924, and the Immigration Act 1924 (which made shipowners liable to pay fines for deserters and stowaways), began to have an effect. The industry and P & I cover became increasingly complicated as a result of issues specific to particular countries (such as prohibition laws in the US) and the technical changes which were leading to bigger and more specialised ships.

By the late 1920s some shipowner members were clearly subsidising others and the UK Club had to rethink the mutuality principle, whereby shipowners contributed according to their tonnage, irrespective of the types of ships they owned or they trade they plied.

The depression of the 1930s and the onset of the Second World War brought a repeat of the problems experienced during and immediately after the First World War, made all the more complicated by the increased numbers of members outside Britain.

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CHAPTER 6

GROWING

The aftermath of the Second World War mirrored the problems experienced by the shipping industry after the First World War in some ways, but new factors had a bigger effect. For example, the status of the UK in the world was changing rapidly as countries within the British Empire gained their independence. As local shipowners began to ply their own trade new issues emerged.

The value of P & I expertise became increasingly recognised in the late 1940s and 1950s with high profile casualties such as the Grandcamp in 1947, the Wagon Mound in 1951 and the collision between the Ellin and Claiborne in 1957, which highlighted the complications arising from claims and counterclaims.

There were two changes in the way in which claims were handled by the UK Club. The first one, made in 1948, drew a distinction between 'undisputed claims' and 'claims for consideration and report'. The second, made in 1955, divided claims into three categories: claims that could only be made by the Club on the authority of the directors; claims where there was no doubt about the Club's liability and claims which were pool liabilities. In this last case, the retention of claims agreed by the Pooling Agreement in 1899 had remained at 10,000 until 20th February 1953, when it was raised to 20,000. The collision of the Andrea Doria and the Stockholm, with considerable loss of life, resulted in an overall claim on the London Group of P & I clubs of 650,000, causing a rethink in the pooling arrangements.

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CHAPTER 7

CLAIMING

Post-war prosperity resulted in increasing trade, but it also brought increasing claims, both in number and size, for damage to cargo and theft. Although there was nothing new about claims for damaged cargo, the shipowner was blamed unless ventilation and stowage were perfect and higher and higher standards were expected.

Technical advances brought additional pressure: where foodstuffs may have been damaged by weather conditions in the nineteenth century, in the twentieth they could be tainted by fuel oil. In one case, a cargo of coffee was contaminated by the weed killer dichlorophenol; not something which would have occurred in the nineteenth century. The vastly increased volumes of cargo being carried also contributed to the claims.

In 1961, the first of the UK Club's Carefully to Carry reports were issued, a collection of technical papers on how to prevent cargo damage. Carefully to Carry is now a heavy volume containing intricate instructions on the needs of specific types of cargo, prevention being judged less expensive than a cure.

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CHAPTER 8

1967 - Annus Horribilis

The 1960s were a time of considerable technical advances in the shipping industry with the building of bigger and more specialised ships. VLCCs of up to 300,000 tons were being built to carry oil economically with UCCLs of 500,000 tons on the drawing board. There were parallel developments in bulk carriers, ro-ros and container ships.

The year 1967 was a difficult one. On 18th March, the Torrey Canyon, carrying 120,000 tons of crude oil, struck Pollard's Rock off England's Cornish coast, with devastating effects on the local environment. Discussions on the liability for such events resulted in the International Convention on Civil Liability for Oil Pollution Damage 1969, under which responsibility was placed firmly on the shipowners. Under TOVALOP, the Tanker Owners Voluntary Agreement concerning Liability for Oil Pollution, owners in the International Group agreed voluntarily to compensate governments for clean up costs in cases of pollution, provided at least half the world's tankers tonnage participated.

The Six-Day War, between Israel on the one hand and Egypt, Syria and Jordan on the other, broke out in June of that year. Israel's military victory was swift, but the shutting of the Suez Canal for the next eight years had a long-term affect on trade and shipping.

In November 1967, sterling was devalued, resulting in considerable loss for the UK Club. To combat damaging exchange controls the decision was taken to move the UK Club's legal domicile offshore to Bermuda. As well as providing a legitimate shelter from exchange control regulations, the move was also recognition of the UK Club's international membership, British directors now being a minority among its 31 strong board.

With the death of Dawson Miller in 1969, the UK Club's management as a family run enterprise ended and a new chapter began.

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CHAPTER 9

ENTRIES

The lack of fleet lists for the UK Club's earliest years make it impossible to tell when the first non UK based ship was entered. Certainly by 1876 the Katherina II, built in St Petersburg two years previously, and two newbuilds from Rotterdam appeared in the list of the UK Club's 418 vessels. By 1887, ships from France, Belgium, Sweden, Greece and the Ottoman Empire could be counted among the entries.

The numbers of Greek ships entered grew steadily after the first world war, and by the 1990s, they accounted for one quarter of the UK Club's tonnage. Ships from other nations came and went according to national and world politics. For example, Russian ships were entered under the Tsarist regime, but left after the Bolshevik revolution, and did not return until the late 1960s, at which time other countries from the Eastern bloc also entered their ships. The first Japanese entry in the UK Club was Tokyo Tanker in 1956. In the mid 1960s, the Japan P & I Club ran into difficulties over indemnity cover and the UK Club were asked to step in to fill the gap. In 1973, the People's Insurance Company of China negotiated for several COSCO tankers to join the UK Club.

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CHAPTER 10

CORRESPONDENTS

The P & I Club term for an 'on the spot' representative is a correspondent, whose task it is to deal with the myriad of issues, great or small, which arise from any ship incident. A correspondent must act for clients, usually previously unknown, at very short notice and must take great care not to prejudice his interests. For this reason, many correspondents have a legal background or are people experienced in the legal aspects of maritime affairs as well as in the commercial and technical side of shipping.

This chapter talks about a number of individual correspondents and their experiences, including Jacques Langlois, the Club's first correspondent, who was an international law agent in Antwerp. By 1921 the Club had a network of 94 correspondents stretching to Southern Australia. Appointments were usually made by recommendation and in some cases, for example in the Mordiglia family in Genoa, the role passed from father to son.

Tasks which a correspondent must undertake range from on-scene investigations to legal representation of the master, from co-ordination of clean-up operations, to direct negotiations with coastguards, port and state officials. Rules, languages and customs can all differ according to the port involved and the correspondent must have first rate local knowledge.

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CHAPTER 11

BENEFITS

This chapter describes the benefits to shipowners of belonging to a P & I Club and provides specific examples of instances where the UK Club's intervention has made a difference.

The principal reason for a shipowner to be a member of a P & I Club is for protection against financial damage from claims. The Club acts as a guarantor and its reputation, financial strength, stability and longevity often carry greater weight than the shipowner's.

The ability of the Club to respond rapidly to a member's call, whether it be for a guarantee or a bond to lift an arrest, or for aid in the event of a serious shipping incident, is essential. Club people can minimise or even stop a claim by providing immediate information to a master and guidance through the complexities of rules and regulations which govern shipping, locally, nationally and internationally. In essence, the UK Club provides a mixture of claims handling and advisory skills.

The Club provides a considerable amount of education and training by arranging seminars and courses for owners and correspondents, and by disseminating information to a wider audience. The UK Club keeps abreast of all new developments and ensures that its members are aware of them by inviting arranging regular meetings, covering far more than P &I; issues. The UK Club participates in and has influence on most international maritime organisations and is heard at government level on matters of national policy.

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CHAPTER 12

UNDERWRITING

The Wahine, an inter-island ferry, struck a reef in Wellington Harbour during a severe storm in April 1968, losing 51 lives and the ship. The resulting claims amounted to $2.88million, the biggest ever up to that date. In addition to this, there were a number of other moderate to large claims in the late 1960s, as a result of which the UK Club had to make large supplementary calls on shipowners to fill the breach. The trend for claims to be more expensive was due to a number of factors, which included spiralling inflation, bigger ships and therefore bigger cargoes, wage costs and more onerous legislation. It became increasingly clear that underwriting, which hitherto had largely been a reactive process, needed to be reappraised.

The UK Club had been run by predominantly legal minds and the decision was taken to bring in the much needed professional input of experienced underwriters. The result was the introduction of a new policy which adhered to the emphasis on mutuality, but which used the past record of individual member shipowners in terms of exposure and coverage to gauge the risk they might present to the Club as a whole, and which would therefore decide their call rate.

The achievement of the input by the underwriters could be measured by the fact that the Club no long had to ask for large supplementary calls in excess of the originally estimated amount, thus avoiding unbudgeted costs for its shipowners.

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CHAPTER 13

SELF-ADJUSTMENT

The Arab-Israeli War of 1973, and the decision by oil-producing Arab countries to cut production and quadruple the price of oil, produced a world slump which lasted through the 1970s and affected the shipping industry badly. With a sharp drop in demand, there was a considerable surplus of tonnage, exacerbated by the reduced need for VLCCs after the Suez Canal reopened in 1975. Freight rates dropped and a further rise in oil prices in 1979 added to the problems.

However, there were new markets for the UK Club: oil rigs set up for the exploration and production of North Sea Oil needed to be covered and there was a rise in the leisure cruise market. New risks came with this new business, and in the cruise industry, these centred on health risks for operators and small personal claims. In general, the risks insured became far more complex to deal with, as ships became bigger and faster, competition became tighter and more and more regulations on issues of safety, security and the environment were imposed. Faced with a tide of extra regulations, the UK Club formed a management team in 1976 to provide greater support to its 15 partners.

The increasingly unstable financial markets, with fluctuations in a number of different currencies, challenged the ability of P & I clubs to function and changed the way in which they worked with each other. Hitherto, there had always been competition between the clubs, but it had been conducted on the bases of agreement between gentlemen and on the type and quality of the services they provided to their members. There had been no undercutting of rates, an issue which became the target of anti- competition laws as described in the next chapter.

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CHAPTER 14

PRESSURES

The world-wide slump continued into the 1980s and the shipping industry consolidated to cut costs and survive.

The changes and difficulties highlighted in the 1980s became more prominent in the 1990s. In the 20 years to 1979, the annual total of ship losses as a percentage of those in worldwide service doubled from 0.28% to 0.58%. Age, type of trade and treatment of a ship were factors in the growth of these figures and it became clear that 'good' members of the UK P & I Club would not wish to continue to pay for claims from members less conscientious than themselves and ways were needed to be found to rectify this.

The International Group, in which risks bigger than the ability of an individual Club were pooled, was challenged by the European Commission as being in breach of the anti-competitive articles in the Treaty of Rome. It was an unwritten rule of the Group that it was unacceptable for one Club in the pool to undercut another to obtain business, when any large claim would have to be paid by everyone in the pool. The International Group's submission to the EEC, in which the principle of mutuality and its benefits to shipowners was explained, was accepted by the Commission in 1985 and the Group was exempted from the Treaty of Rome for a period of ten years.

The period of 1988 into the early 1990s was one of high claims and an era of increasing complexity for P & I clubs. Occupational claims, on the basis of asbestosis, benzene, deafness through excessive noise, and trauma syndrome surged. Stricter rules of liability were applied in property, personal and environmental claims. Stowaways people fleeing economic or political hardship - became a big issue, with shipowners becoming liable for the costs, often in situations over which they had no control. The need to balance the scales between members with a low ratio of claims and those with a higher incidence put emphasis on the requirement to stamp out substandard shipping. Pressure increased on the classification societies and ship inspections made by the P & I clubs became the norm with warnings issued to recalcitrant shipowner members.

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CHAPTER 15

STRATEGY

The number of claims continued to rise. Whereas they rose at an annual rate of between 1 to 2% a year before 1987, they rose to 12% between 1987 and 1991. The UK Club was the biggest P & I Club in the pool and therefore had the greatest exposure. It was time to take stock.

A high level working group of directors, managers and external research bodies was set up to carry out a full review. It took 18 months and covered issues such as security, the limit of cover, quality of membership, financial planning, the level of reserves and communications with members. It produced a detailed strategy for the future which was confirmed by the Board in October 1992. There were three essential objectives: to be financially strong, which would make the Club more secure against risks and less exposed on the pool: to give value for money to members, by providing a fair and excellent service, especially in claims handling: to ensure the quality of the membership, a key point in reducing exposure to risks and a reason to continue to developing the ship inspection programme.

The UK Club's board of directors was more active and business oriented than it had been in earlier years and represented the membership in terms of geography, type of fleet, trade and experience. It took decisions based on the thorough advice of the managers, whose job it was to carry out the decisions.

As part of the new strategy, the UK Club disseminated information not only to the shipowners, but also to the masters, superintendents and operators of their ships. In order to be constantly up-to-date with the latest information, the Club instituted a process of continuing training and learning for staff, so that they could be confident of a working knowledge of many aspects of the industry. The revolution in communications increased the UK Club's ability to give rapid responses based on individual member needs

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CHAPTER 16

AUDIT AT 125

When the UK Club began, its members and directors were all English, most hailing from one part of the UK. They either knew or knew of each other and they had much in common, enough to base the Club on the principles of self help. 125 years later, the Club has survived with its principals of mutuality intact, through huge technical, political and economic changes. It has outlived the age of steamships and the decline of Britain as a maritime power and it has accommodated new types of ships in ever increasing sizes, business cycles and changing trade patterns.

The UK Club has been a success story and it has grown into a multinational organisation, retaining its mutual principle in an increasingly commercial world. Over 800 fleets are entered into the Club today from all corners of the globe, represented by a multinational board meeting quarterly at locations all around the world. Directors are appointed to the board to represent the Club as a whole, not their own individual companies. The ethic of self help has endured.

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Copyright © Thomas Miller & Co. 1995, 2006

Originally published 1995 in hard copy by Granta Editions