You are on page 1of 18

The Central Role of P&I Insurance in

Maritime Law
John D. Kimbair

Wien a ship proceeds to sea, it is beset by danger on all sides. The scope of risks
involved is just as vast as the ocean. They range nom the most minor to the catastrophic. The
focus of this Article is protection and indemnity (P&I) insurance, a form of coverage under
which shipowners and charterers are protected against the risk of liability to third parties and
which plays a central role in maritime ¡aw. This Article considers the extent to which courts in
the United States enforce and give effect to P&I insurance, especially in situations where the
shipowner is unable to meet itsfínancialobligations or has gone into bankruptcy

I. INTRODUCTION 1148
IL MUTUALITY 1148
ni. WHY P&I INSURANCE Is DIFFERENT FROM LIABILITY
INSURANCE 1149
LV RECOGNITION OF THE VALIDITY OF INDEMNITY
INSURANCE 1149
V NOTICE OF CLAIM PROVISIONS 1151
VL ENFORCING ARBITRATION CLAUSES 1152
VIL WHEN CLAIMS COME INTO CONFLICT WITH P&I CLUB
RULES 1153
vm UNITED STATES BANKRUPTCY ISSUES 1155
A Cesser Clauses 1155
B. Claims Administration 1156
LX. CONCLUSION 1160
X. SAMPLE PAY-FIRST RULES OF SELECTED P&I CLUBS 1161
A. Steamship Mutual: Rules and List of
Correspondents 2013/2014 1161
B. The London P&I Club: P&IRules 2011-2012. 1161
C Standard P&I and Defence Rules 2012-2013 1162
D. UK P&I Club Rules & Bye-Laws 2012. 1162

* © 2013 John D. Kimball. Partner, Blank Rome LLP, and Adjunct Professor, New
York University Law School. The legal research assistance of my associate, Emma Jones, is
gratefully acknowledged.
1147

" The main idea is very simple: a group of shipowners whose vessels face common perils join together in an insurance association. Then there is the risk of unseaworthiness. Equally. The scope of risks involved is just as vast as the ocean. 87:1147 I. the shipowners operate under a set of rules and have certain requirements for one another. courts enforce and give effect to P&I insurance. INTRODUCTION When a ship proceeds to sea. which likely is the most frequently used word in maritime law. the shipowners agree to insure one another against third-party liabilities caused by the marine risks they all face. The focus of this Article is protection and indemnity (P&I) insurance." that enables them to spread their risk. no prudent cargo owner would ship its goods across the sea without having insurance. especially in situations where the shipowner is unable to meet its financial obligations or has gone into bankruptcy. acts of public enemies.1148 TULANE LA W REVIEW [Vol. it is beset by danger on all sides. Another key rule requires each member to first . and faults of the shipper. as a condition to sharing their exposure. a form of coverage by which shipowners and charterers are protected against the risk of liability to third parties. MUTUALITY P&I coverage is premised on the concept of "mutuality. no prudent shipowner would allow its vessel to operate without having insurance coverage. The familiar list of dangers includes acts of God. followed by arbitration if the directors and member cannot resolve the dispute. They range from the most minor to the catastrophic. This Article will consider the extent to which U. or "club. Many clubs have rules calling for disputes first to be submitted to a board of directors appointed by the members of the association. II. perils of the seas. Because people are people. As members of the club. inherent vice of the goods. No responsible charterer would accept a vessel without knowing it is insured and without covering its own liability risks. Among the key provisions are rules that state the governing law of the club and determine how disputes between the members and the club are to be decided. Because of these dangers.S. P&I insurance plays a central role in maritime law. Maritime law has ancient origins because ships ran into problems from the beginning.

/ d 1120. China.20. for example. 4. In an indemnity policy. Some are organized and exist as nonprofit associations under Bermudan law and some are organized in other places such as the United Kingdom. P&I CLUBS: LAW AND PRACTICE 11112.15. WHY P&I INSURANCE IS DIFFERENT FROM LIABILITY INSURANCE In a liability insurance policy. it is a condition of coverage that the insured satisfy claims before it can seek indemnity. 2117(b). the clubs are nonprofit associations. fee N. 5. See STEVEN J. LAW §§ 1113(a)(21). The insured will also have a deductible that must be satisfied before any payment will be made by the club. For information about the International Group of P&I Clubs." IV. Norway. HAZELWOOD & SEMARK. http://www. but section 3420(i) states that the direct action provisions "shall not apply . 11. .Y.20. gives statutory recognition to the indemnity concept in marine insurance policies and prohibits direct actions against marine insurers. HAZELWOOD & DAVID SEMARK. the clubs insure about 95% of the world's ocean-going tonnage and the International Group has thirteen different clubs as members.2013] CENTRAL ROLE OFP&IINSURANCE 1149 pay its liabilities and only then look to the club to share in the cost. 3420(i) (2013).' III. RECOGNITION OF THE VALIDITY OF INDEMNITY INSURANCE The indemnity insurance concept has been recognized as valid under the general maritime law and various state laws.2013). to the kinds of insurances set forth in [section . see INT'L GRP. Sweden.17 (4th ed. Japan. but the insurer assumes responsibility for dealing with claims and paying liabilities with no further contribution by the insured. 20. Today. 3420(b). INS. To further spread the risk.igpandi.16-. The insured must first satisfy its liabilities and may only seek indemnity once it has done so. .org/ (last visited May 15.1. The arrangement under P&I policies is different. 3.' 1.16-.18-. Section 3420(b) of the New York Insurance Law gives injured individuals a direct right of action against the insurers of those responsible for the injuries."' Consistent with their purpose. the insured pays premiums and usually has a deductible.' In English law.82. 17. 2010). South Korea. and the United States. HU 12. the clubs reinsure together through a larger association known as the International Group of P&I Clubs. 5. The state of New York. supra note 1. OF P&I CLUBS. 2. this concept often is referred to as the "pay-to-be-paid rule.

6. an individual named Peter Kikis of New York.S.). 7. or other shipowner interests. The London arbitration panel ruled the club was entitled to deny coverage and further found the club's obligation to pay would arise only when Eagle paid the claimants. chartering. Eagle Transport Limited. including transportation by land or water from point of origin to final destination and including warrisksand marine builders'risks. § 3420(i). was stayed. 2117(b)]. and the American Bureau of Shipping. The third-party action. however. Inc. For example. or incident to. and Kikis brought a third-party action against the club for indemnification for the amount they were required to pay the claimants. merchandise and all other personal property and interests therein.A. Claims were made against the vessel's owner. 1994AMC208I (5thCir. in course of exportation from or importation into any country. and the court enforced the club's right to have the matter adjudicated by its directors and then arbitrated in London. [1991J2A.and (B) insurance in connection with ocean going vessels against any of the risks specified in [section 1113(a)(21)]. 1994). A jury awarded the death and injury claimants damages of $22 million. the ownership. faced a major challenge in that the vessel's P&I club denied coverage on various grounds.1150 TULANE LAW REVIEW [Vol 87:1147 The pay-first rule is also firmly established as a matter of English law. maintenance. The vessel sank in international waters near Japan while carrying a cargo of steel products..l the United States Court of Appeals for the Fifth Circuit dealt with death and personal injury claims arising from the tragic sinking of the MTV THOMAS K.K. Section 1113(a)(21) defines "[m]arine protection and indemnity insurance" as: insurance against. illness or death or for loss of or damage to the property of another person. The leading case on this point is Firma C-Trade S.§2117(b). loss. craft or instrumentality in use in ocean or inland waterways. Newcastle Protection & Indemnity Ass'n!' There are cases decided under the general maritime law in which U. goods. 1991 AMC 607 (U.L. including unseaworthiness. Eagle.C.3d46I. however. Ltd. or against legal liability of the insured for. courts have recognized the validity of the pay-first rule in P&I policies. freights or disbursements. v.). its alleged alter ego. Standard Marine. repair or construction of any vessel. /ö'. transit or transportation upon hulls. operation. . use. or transportation coastwise. 1 (H." Id. in Psarianos v Standard Marine. Section 2117(b) describes "marine insurance of the following kind or kinds": (A) insurance against perils of navigation. wares. The claimants.) (appeal laken from Eng. including liability of the insured for personal injury. Standard Marine Limited. 12F. its manager. damage or expense arising out of.

When the claimants indicated an intention to sue the club in state court in Texas. 904 F2d 322. The owner first notified its P&I club of the claim two days after the judgment was entered. Id at 465.' The district court ruled against the claimants. the court held the claimants had no standing to sue the club. 1994 AMC at 2086 (citing Warfield v.1994 AMC at 2082-83. /d. the club responded by bringing a declaratory judgment action requesting a ruling that the claimants had no standing to claim against it. 13.'^ Because payment is a condition precedent to coverage under Enghsh law. in turn. 16. & Deposit Co. U. Id 17.^^ for example. 1.1994 AMC at 2082-83. The club refused to indemnify the owner. No. and the Fifth Circuit affirmed. 11-3774-cv. 1994 AMC at 2083. Id at 464-65. an injured crew member obtained a judgment against the shipowner in Texas. /d. 12. Id at 463. Id at 464-65." which did not exist between the claimants and the club. moved for summary judgment based on the absence of timely notice of the claim. court confirmed the London arbitration award and held Eagle could not recover from the club." V.'" The court noted that Texas law requires '"a direct and close relationship' between the party and the insurer. 15. In Weeks Marine. 1990)). and the club. v American Steamship Owners Mutual Protection & Indemnity Ass'n. the claimants could not seek coverage under English law. the court ruled that the claimants had no standing to sue the club under Texas law.S. Feb. Id at 462-63.'^ As a result.1994 AMC at 2084-86. 11. 14.S.'^ Equally.2013). Fid. 1994 AMC at 2085. courts enforce notice requirements in P&I club rules.1994 AMC at 2084-85. The U. 2013 WL 377979 (2d Cir.2013] CENTRAL ROLE OFP&IINSURANCE 1151 which never happened.. Id at 464. NOTICE OF CLAIM PROVISIONS As a general rule. citing a failure to provide prompt notice ofthe claim as required by its rules.'" The court held both as a matter of English law and Texas state law that the claimants had no right to make a claim against the club. Inc. 9. The owner sued the club for coverage. 10. The owner opposed the motion on the grounds that the 8.' The London arbitration award posed a major obstacle for the death and injury claimants. . 326-27 (5th Cir." The court noted that the claimants could not proceed as a matter''of English law because they were blocked by Eagle's failure to satisfy the pay-first rule.1994 AMC at 2085-86.

UN Diavoiezza. Wells Fargo Bank Int'l v. Corp. See. 79 N. outer-limit time- bar" for members to notify the club of any claims on which they may seek to recover. 21. London S. Ins. 1991). Lines.^' The court went on to find the prompt notice requirement regarding claims by crew members was not in conflict with. N.Y. & Indem. 2013 WL 466271 (2d Cir. & Liverpool & London S. 12. Ins. S. .N.1152 TULANE LAW REVIEW [Vol.. War Risks Ass'n (Berm.S. the outer-limit. 19.Y.Y. 626. Inc. Underwriting Ass'n (Berm.2d 255. The club rules required members to give notice of claims within three years of learning of the claim. 8. federal and state courts in the United States enforce arbitration clauses in P&I club rules when disputes arise between a member and the club. but rather could be read in conjunction with. Feb.D. 12-1752-cv.S. 1993).N. Corp. Owners Mut. Ass'n.). 581 (1992)). LEXIS 16400. Ins.S. which the owner had not done. Ownere' Mut. Co. The court ruled in favor of the club. v. 1976). Hellenic Mut. London S. 595-97 (S. three-year time bar. No. 350. 408 F Supp. Id at *2 (citing Unigard Sec.).S. Nov. 79 F3d 295. Id 22. 352-53 (S. 1996 AMC 1379. Pa. Ass'n v.g.Y.^" The court concluded that the three-year notice requirement provided a "general. v. 87:1147 notice provision in the club rules was not a condition precedent to coverage and argued that the club had to show it was prejudiced by the lack of notification in order to deny coverage. 20. 298. e. Sea Trade Mar. the owner's claim for coverage was denied for late notice. Prot. 2004). fd 23. Co. 629-30. v. 256-57 (App. Mut.S.2013). As a result." VI. Id at *2. 833 R Supp. Dist. //? /e Arbitration Between U. Montauk Oil Transp.. 1996). holding it was "settled New York law that the notice provision for a primary insurer operates as a condition precedent and that the insurer need not show prejudice to rely on the defense of late notice"" Weeks Marine. Ass'n.S.D. v American Steamship Owners Mutual Protection & Indemnity Ass'ii^ was an unrelated action with the same name and involving the same parties in which the shipowner sought indemnity and reimbursement for defense costs and settlement of a tort claim by a crew member who was assaulted aboard the vessel. 1976 AMC 592. at •2-3 (E. Inc. This is the case whether the club rules provide for arbitration in New York or in a foreign forum. Div.2d 576.D. ENFORCING ARBITRATION CLAUSES As a general principle. River Ins. The ovmer contended that the "prompt notice requirement" in the rules displaced the three-year notice requirement. 1382-83 (2d Cir." 18. 1991 US. 776 N.

1997). 335.S.). One of the legal issues that has arisen in direct action cases is whether the state law involved should be deemed substantive or procedural.. ¿l Todd v. 1487 (11th Cir. The court's opinion followed from a remand by the Fifth Circuit* that overruled the court's own prior decision in Zimmerman v International Cos. REV. 27. 2011 AMC 1126 (E. v Caribe Towing Corp. 1986). Inc. 887 E2d 611 (5th Cir. §§22:655. 346 (5th Cir. 25. REV STAT § 22:1269. discussed above. LEXIS 38638.'" Direct actions are troublesome for P&I clubs. Louisiana. 08-1195." which held that the Federal Arbitration Act did not require direct action plaintiffs to arbitrate their claims. Steelmet. and other cases are discussed below. 779 E2d 1485. these include Connecticut. 1147 (5th Cir.g. ALA. tit. Dist. 26. PR. 601 E3d 329. . GEN. & Consulting. Todd. Todd V. Todd. Steamship Mutual Underwriting Ass'n. Mut. Circumstances in which the shipowner is not subject to in personam jurisdiction. and Puerto Rico. CONN.^' Courts have repeatedly noted that general maritime law neither authorizes nor prohibits a third party's right to directly sue an insurance company.S. 601 E3d at 335. La.. Alabama.^* VIL WHEN CLAIMS COME INTO CONFLICT WITH P&I CLUB RULES The P&I concept becomes problematic for third-party claimants when the shipowner is unable or unwilling to satisfy its liabilities. e. 2010 AMC 1143.D. : 1269 (2012). 2010 AMC at 1147. A number of jurisdictions have laws that permit tort claimants to bring direct actions against the insurers of the party responsible for the injury. S.. 107 E3d 344. in part because they may conflict with the pay-first rule. can also lead to problems. § 2001 (2008). No. LAWS ANN. STAT § 38a-321 (2013). Mar. 2010). LA. 1989). 28. 26. is just one example of this. 2011 U.^" a seafarer who had a judgment against a bankrupt shipowner sued the shipowner's P&I club under the Louisiana direct action statute. STAT. CODE §§ 27-23-1 to -2 (2013). Inc. LA. 29. The difference is critical. 28. This problem most often arises when a shipowner becomes insolvent or goes into bankruptcy.2013] CENTRAL ROLE OF P&I INSURANCE 1153 Arbitration has been ordered even when a shipowner goes bankrupt and a direct action is brought against the club by a party who has an underlying maritime claim against the shipowner. 2011)." The court held the seafarer was bound by the club's London arbitration provision just as the member would be. 30. Inc. 24. See. Underwriting Ass'n (Berm. but the P&I club is subject to suit. The Eifth Circuit held it also was overruling its prior decision in In re Talbott Big Foot.

35.1991 AMC at 1158-60. 1995). 34. and the ship was managed by a Belgian corporation. the claimants could not rely on Connecticut law.1154 TULANE LA W REVIEW [Vol. the court considered whether the administrator for the estates of several crew members who died when the MA^ INBROS disappeared at sea had a cause of action against the vessel's P&I club under the Alabama direct action statute.2d at 416-17. The ship sank in the Indian Ocean. 38. therefore. 33. CODE § 27-23-1 (2013). 921 F. 1996 AMC 707 (11th Cir. 571.583-93.'^ The court concluded that the Alabama direct action statute "mandate[s] a direct action provision into every insurance contract and create[s] a method of executing upon the proceeds of the insurance policy.3d at 1360. ALA. 1990) (interpreting CONN. reached a different conclusion and held that Alabama's direct action statute is procedural and must be applied to whatever substantive law governs the claim. Idza 1364. A/o/ew/te. 32. § 38a-321 (formerly § 38-175)). As a result. and the club sought to compel arbitration there. STAT. The cargo owner was an Indian company. The underlying cargo claim arose from the sinking of a tanker carrying a load of soybean oil en route from Brazil to India. GEN.1996AMCat712. 62 F. 1991 AMC 1147 (2d Cir. 87:1147 For example.3d 1356. / d a t l 3 6 3 . in State Trading Corp. the shipowner was a Panamanian corporation." The court in Morewitz v. . of India v."^^ The P&I club policy provided that disputes should be arbitrated in London."'' In Morewitz. 1219-27(1953). 1953 AMC 1210. 62F.2d 409. State Tiding Corp. Assuranceforeningen Skuld^^ the court held that Connecticut's direct action statute was substantive and. 1996AMCat717. could not be used by cargo claimants who were seeking to enforce a $14 million arbitration award against the shipov^er's P&I club. However. 36. The court applied the choice-of-law analysis mandated by Lauritzen v Larseii^ and concluded Connecticut law had no bearing on the matter. 345 US."" Notwithstanding this provision of Alabama law. 37. the court noted that the P&I club "is able to assert any defenses that would have been available to it as if the present action had been brought by [the club member] . of India. West of England Ship Owners Mutual Protection & Indemnity Ass'n^^ however. 921 F. 1996AMCat717. Alabama's direct action statute states that recovery "shall not depend upon the satisfaction by the insured of a final judgment against him for loss. in determining the applicability of the arbitration provision. the court had to determine the extent to which the club rules applied to the plaintiff as a representative 31.

Ass'n (A/eProbuUc. 407 B. S. 1996 AMC at 720." Although the court did not decide the issue. Id at 59-64. which provided 39.N. /i/. Cesser Clauses • P&I club rules typically provide that the policy is terminated if the member goes into bankruptcy. .S. 42. 41. either in a Chapter 11 reorganization or a Chapter 7 liquidation." LaMonica v." Plaintiff argued that the deceased crew members were not parties to the arbitration agreement because they were not owners and thus their claims should not be mandated to arbitration."^ A. 1996 AMC at 721 -22. N. the P&I club is presented with an array of problems. but did not decide. 43. North of England Protecting & Indemnity Ass'n {In re Probulk." vm UNITED STATES BANKRUPTCY ISSUES When a shipovmer goes into bankmptcy in the United States.).Y. /d at 1365-66. It has become standard practice in Chapter 11 proceedings for the debtor to obtain an immediate order from the bankruptcy court giving it leave to continue its P&I insurance and pay premiums when and as they fall due. 56.1996 AMC at 719-20. operators. it "questioned" whether the arbitration clause applied. the court found that the P&I club had waived its right to compel arbitration because it did not initiate arbitration proceedings with the actual owner when it had the opportunity to do so in earlier litigation in the United States District Court for the Eastern District of Virginia. Inc)'^ involved seventy-three consolidated cases in which the debtors were owners. 40."" Ultimately.. The court considered. or managers of vessels. Protecting & Indem.R.2013] CENTRAL ROLE OF P&I INSURANCE 1155 of the deceased crew members because the express wording of the policy applied only between "owners" and the "association. whether claimants could be held to an arbitration clause that they did not bargain for. Inc. The problems may be more acute if there are unpaid premiums that are due and owing.D. Id at 1364-65. Is this rule enforceable? The answer of one U. LaMonica v. even though the representative plaintiff "stands in the shoes" of the owner versus the P&I club.60-63 (Bankr. however. A trustee was appointed to wind up the debtors' affairs expeditiously. bankruptcy court was "no. This is so because the creditors and the court recognize it is vital to the continued operation of the shipowner to have P&I coverage. 2009). of Eng. The P&I clubs covering the vessels asserted that the "cesser clauses" in their contracts.

**^ Thus.C. 87:1147 that "insurance automatically terminates in the event that a member of the Club (the insured) passes *a resolution for a voluntary winding up. with the club's agreement. Id at 64. the P&I policy has been transferred to a trust created for the sole purpose of managing and paying third-party liability claims. direct and foreseeable impact on U. P&I insurance remains an important asset of the estate. 47. the court concluded: [T]he Trustee ha[d] adequately established that termination of the debtors' insurance because of an insolvency event would have an immediate.S. In some cases.1156 TULANE LAW REVIEW [Vol. the loss of insurance would clearly constitute irreparable injury. the debtor can look to the club for reimbursement of claims it has paid. debtors that §541(c)(l)(B) and § 362(a) were designed to prevent— Termination of insurance would also subvert the interest of the United States in administering bankruptcy proceedings of domestic corporations in one forum/' B. the court found: Even though the Trustee is winding down the debtors' business. With respect to irreparable injury."'* The court found that the cesser clauses were in conflict with the Bankruptcy Code.S. 45.""' The court stated that 28 U. daims Administration The fact that a shipowner goes into bankruptcy does not relieve its P&I club from the obligation to cover claims.'" provide for termination of coverage even before bankruptcy or insolvency proceedings begin. Without insurance he would have to abandon the vessels. § 1334(e)(I) gives it exclusive jurisdiction over the debtors' property. /¿at 63. 46. wherever located. some of them in mid-voyage. /rf at61. holding. "There is thus no question that the debtors' insurance rights continued notwithstanding the Clubs' attempt to deem them terminated as a consequence ofthe resolutions ofthe boards of directors ofthe debtors authorizing a bankruptcy filing and the prospective appointment of a trustee or custodian. regardless of the wording of the insurance policies. and that the debtors' worldwide insurance rights were the property of the respective estates. substantial. . Id at 60. 44. resulting in the possibility of loss of cargo and loss of the vessels themselves Under the circumstances. he has to act reasonably in the interests of all stakeholders. and as long as the policy's terms and conditions are satisfied.

60-61 and accompanying text.. "At the heart of each of the P & I policies is a pay-first provision by which the insurers' liability is not triggered until. the parties' disputes should be submitted to arbitration in accordance with the clubs' rules or whether the bankruptcy court had the authority to enjoin arbitration. and United States Lines (S. debtors and claimants have resorted to various payment arrangements to endeavor to comply with these basic obligations." After entering into a conditional settlement with a group of 106 claimants. See infra notes 49-53. all of which were issued before United States Lines.. The insolvent insured is therefore often forced to satisfy the pay-first requirement by means of complex. American Steamship Owners Mutual Protection & Indemnity Ass'n {In re United States Lines. as some of the clubs contended. however. The court articulated the underlying problem: [UJnder the pay-first provisions of the P & I policies. . Id 53. [The Trust's] lack of assets leaves them unable to pay all of the claims first and seek indemnification later. a comprehensive declaratory 48. Id at 638. that the proceeds of the P&I policies were the only funds "potentially available" to cover the personal injury claims. the court concluded. however. 51. [the insurance] proceeds will not be made available until the Trust has paid the claims." A key issue in the case was whether. creative payment schemes [and] faces a significant risk that the payment scheme ultimately employed will be deemed not to satisfy the pay-first requirement. v."^" The court ftirther noted..) Inc. sought bankruptcy relief As the court observed. 197F. the trust brought an adversary proceeding seeking a declaratory judgment of the parties' rights under the P&I policies.2013] CENTRAL ROLE OF P&I INSURANCE 1157 The obligation to pay déductibles and the pay-first rule remain in place. Inc)^'^ involved a bankruptcy trust established to handle marine claims against the debtor! More than 18. United States Lines. Inc." Thus. The trust asserted that the claims were covered by various P&I policies. 49. Inc. "[I]n order to effectuate an equitable distribution of the bankruptcy estate. /d at 635. 50."* As the cases discussed below indicate. 1999). the insured pays the claim of the personal injury victim.000 asbestos-related claims were filed against the trust.3d631(2dCir. Id 52.A.

000. "[T]he declaratory judgment proceedings are integral to the bankruptcy court's ability to preserve and equitably distribute the Trust's assets. the court concluded." The trust created to deal with the asbestos claims had only $300. insolvent debtor." The court further held. 2008). 55. Id at 639." The case was complicated by a prior ruling that the club was entitied to a setofF of $1. Id 58." The court noted that the arbitration agreements were valid and that arbitration is favored in our Judicial system. 63. Id 64." Approximately 10.1158 TULANE LAW REVIEW [Vol. 62. /tí. that the needs of the bankruptcy case were great enough to override the arbitration agreements. 533 F. /£/. As stated by the court. 2008AMC at 1670. Id 56.^* Indeed.2 million 54. 87:1147 judgment is required to determine (1) whether a chosen payment plan will trigger the indemnification obligation and (2) the amounts payable under the insurance contracts. 59. Id 57."^'' In Asbestosis Claimants v American Steamship Owners Mutual Protection & Indemnity Ass'n {In re Prudential Lines Inc)^ the United States Court of Appeals for the Second Circuit upheld a payment structure by which third-party asbestos claimants sought to obtain the benefits of Pi&I club coverage of their claims."^^ Furthermore. policies and insurers.at 156."^' Prudential Lines Incorporated was a shipowner that went bankrupt in 1986 and had been insured by the American Club on a nearly continuous basis for forty-one years. the court observed that the preference for arbitration is especially strong with respect to intemational arbitration agreements. 61. /tíat 154. 2008 AMC at 1667." it further observed this was necessary in order to accommodate "the Insurer's right to pay on account of a claim only after the insured has paid the claim. 2008 AMC 1665 (2d Cir. .3d 151. a sum not nearly large enough to satisfy the claims.000 asbestos claims were filed against it. however.at64l." and cited the need for a centralized proceeding to streamline "multiple claims. Id 60."^" The court rejected the clubs' assertion that the bankruptcy court could not enjoin arbitration of the proceedings. "[BJankruptcy court is the preferable venue in which to handle mass tort actions involving claims against an. 2008 AMC at 1666. While the court described that payment structure as being "elaborate and cumbersome. /i/.

(Presumably. rather than an exchange of actual cash." The replacement pajonent plan was different in that it provided for actual payments. 65. Thus.) (2) These Claimants return to the Trustee (in exchange for a deferred claim) the portion of the payment attributable to the deductible amount. The recycling plan quickly amounted to $60 million.2008 AMC at 1667-68. as described by the court: (1) Within the limits of the $300. /d at 154-55. it passed muster under the pay-first rule.2 million setoff.*' One of the most diificult issues \n In re Prudential Lines Inc.** According to the Second Circuit. (6) After this process is complete. 68. although none ofthat amount actually was paid.2013] CENTRAL ROLE OF P&I INSURANCE 1159 for unpaid premiums and assessments owed by Prudential. 2008 AMC at 1670-71. 66. The fact that multiple payments were planned in advance did not alter the outcome. plus their pro-rata share of any setofF. the claimant was to receive a limited right to recover a ratable share of any money remaining in the trustee's account after all claims had been paid and indemnification was made to the trustee by the club. because the trustee would not submit a claim to the club until after payment was made. any remaining cash will be distributed to the Claimants pro-rata on their limited claims for recovery of the amounts attributable to the deductible and setoff. the Trustee pays claims of Claimants. the Trustee would not pay until it received the Insurer's approval (or a court order) as to the validity and amount of the particular claim and the propriety of the payments structure. .2008 AMC at 1668. 69. (3) The Trustee seeks and receives indemnification from the Insurer in the amount of the claim payment. The payment plan approved by the court included a somewhat complex arrangement by which a claimant who was paid for their claim was to return to the trustee his pro rata share of the $1. 2008 AMC at 1668.000 retention. (5) The process repeats itself until all Claimants are paid. Id at 155. minus the deductible and the Claimant's ratable share of the setoff.2008 AMC at 1675. Id at 160. each claimant then would lend the money received back to the trustee. (4) The Trustee uses the reimbursed funds to make further payments to Claimants. Id at 157. 67. simultaneous with the receipt of payment of a claim." The payment plan approved by the Second Circuit replaced an earlier plan that the court had described as a "sham" because it involved a "recycling plan" by which. In return for doing so." This was to be accomplished by the issuance of a nonrecourse note to the claimant. Id at 154. concerned the club's right of setoff for unpaid premiums.

417 F. parlaying the Insurer's immunity as to four unpaid policy years into an immunity also covering thirty-seven fiilly paid years. One of the arguments made by the club was that it should be allowed to deny any coverage of claims for those years. to allow the setoff of the Unpaid Premiums against all policy years prorated among all Claimants. as well as unpaid years. aß^'d. This argument.Y).D.1160 TULANE LAW REVIEW [Vol. In those circumstances.2008 AMC at 1674. that it should be allowed the setoff against payments on fully paid years. was to lend back to the debtor the amount of any deductible under the applicable policy. 106 (S. the court concluded it did not violate the pay-first provision of the applicable policies. however. the club further argued that the unpaid premiums should allow it to deny coverage for any claims under all of the policies or. 72. was of no benefit with respect to asbestos claims that could be deemed to have arisen on any one of a number of policy years and that could trigger a right to payment in full under whatever policy year the insured selected. courts generally give effect to and enforce P&I club rules. Id 71. .'" Prudential was covered by the American Club for forty-one years. The court rejected these arguments and stated: It seems most reasonable to interpret the ambiguous (or incomplete) provision of the setoff order as intending. 87:1147 The court approved this arrangement. U. The concept was that the funds of the member's bankruptcy estate should not be diminished by the receipt of indemnity payments from the club that were in amounts less than the amounts paid to the claimants. upon receiving payment of their claim." In so holding. consistent with the Bankruptcy Plan.^^ There. the court upheld a payment scheme by which each claimant. the Second Circuit relied on its own ruling in Liman v American Steamship Owners Mutual Protection & Indemnity Ass'n. in the alternative.2d 627 (2d Cir. and not to interpret it as an absolution. CONCLUSION As this discussion of case law shows. / ¿ a t 109-10." IX. There are limited exceptions to this general rule where direct action statutes create a right that exists outside the insurance contract and permits a claimant to seek recourse 70. Id at \ 59.N.S. Supp. 299 F. 1969). but it failed to pay certain premiums and assessments for four of those years. In doing so. 73.

1996 AMC 707. 5eeLaMonica v.'* B. 40 (2013). 2009). costs or expenses for which he is insured he shall be entitled to recovery from the Association out of the funds of this Class. such Member shall be entitled to recover. Ass'n (Ü7reProbulk.. the amount of such liabilities. it shall be a condition precedent of a Member's right to recover from the ñinds of the Club in respect of any liabilities. MUT." X.2013] CENTRAL ROLE OFP&IINSURANCE 1161 directly against an insiirer/" Another exception to the general rule arises in bankruptcy cases where the rights of third-party creditors may be unfairly prejudiced by strict adherence to the policy terms. See Morewitz v. Protecting & Indem. S. conditions and exceptions provided by these Rules and by the Certificate of Entry. costs or expenses.Y.1 actual payment (out of monies belonging to him absolutely and not by way of loan or otherwise) by the Assured of the full amount of such liabilities.1. 56. out of the fiinds of the Club. costs or expenses that he shall first have paid the same out of funds belonging to him absolutely and unconditionally and not by way of loan or otherwise . 62 F.R.2. Ship Owners Mut. If any Assured shall incur habilities. Rules & List of Correspondents 2013/2014.D. costs and expenses shall be a condition precedent to his right of recovery.. Prot.N. Unless the Directors otherwise determine. 75. 51 (Bankr. . W. . SAMPLE PAY-FIRST RULES OF SELECTED P & I CLUBS A. 407 B. any Assured who fails to pay promptly any amount due by him to the Association on account of Calls or 74. The London P&I Club: P&I Rules 2011-2012 Rule 3 : Right to Recover and Subrogation 3.1. costs or expenses as hereinafter set out in Rules 25 and 28. N. Ass'n. 3.S. Steamship Mutual: Rules and List of Correspondents 2013/2014 If any Member shall become liable in damages or otherwise or shall incur any liabilities. 1363.. Provided always that: i.1. Inc. http://www. S. simsl. PROVIDED that 3.3d 1356. of Eng. costs or expenses to the extent and upon the terms. in respect of a ship which was entered in the Club at the time of the casualty or event giving rise to such liabilities. & Indem.pdf.). of Eng.com/Downloads/Rules-and-Maps-/SteamshipBennuda2013Interactive. 76. 717(11th Cir. 1995).

it is a condition precedent of an Owner's right to recover from the fimds of the Association in respect of any liabilities. Until any such assignment.15 Unless the managers otherwise determine. All of the foregoing provisions of this Rule shall be without limitation of and without prejudice to any right of subrogation which the Association may have by operation of law. LONDON P&I CLUB 6-7 (2011). Payment First by the Owner Unless the Directors in their discretion otherwise decide. http:// www. Each Assured shall notify the Association of any such rights or claims immediately upon becoming aware of the same and shall do all such things and execute all such documents as the Association may require in relation to such rights and claims.pdf . UK P&I Club Rules & Bye-Laws 2012 Rule 5: Conditions. P&I and Defence Rules & Correspondents. notwithstanding that the Habihties.pdf. or may have been incurred during periods of cover or in respect of an entered Ship for which all amounts so due may similarly have been paid. costs or expenses in relation to which such rights of recovery would otherwise have been exercisable may have been incurred by the Assured at a time when all amounts due to the Association may have been paid by the Assured in full.standard-club. including the execution of any assignment of such rights or claims in favour of the Association.londonpandi. com/_common/updateable/downloads/documents/5rules2011 . Standard P&I and Defence Rules 2012-2013 6. STANDARD CLUB 23 (2012). an Assured shall hold all such rights and claims on trust for the benefit of the Association to the extent of any right of recovery by that Assured from the Association from the time of the relevant incident. it is a condition precedent of a member's right to recover in respect of any liabilities that he must have first discharged or paid the same out offimdsbelonging to him unconditionally and not by way of loan or otherwise. P&I Rules 20II-20I2.2 The Association shall be subrogated to all rights and claims which an Assured may have against any person in relation to any matter giving rise to a right of recovery by that Assured against the Association.'^ D.1162 TULANELA W REVIEW [Vol. 87:1147 otherwise shall thereupon without further notice cease to have any rights of recovery.com/docs/P%26IandDefenceRulesandCorrespondents2012-13. C. Exceptions and Limitations A. 3. http://www. 78. costs or expenses that he shall first have discharged or paid the same out of fimds 77.

ukpandi. UK P&I CLUB 31 (2012).com/fileadmin/ uploads/uk-pi/Latest_Publications/2012_Con:espondents/Rules%202012. http://www." 79.pdf . Rules 2012.2013] CENTRAL ROLE OF P&I INSURANCE 1163 belonging to him unconditionally and not by way of loan or otherwise.

. download. users may print. However. or email articles for individual use.Copyright of Tulane Law Review is the property of Tulane Law Review and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission.