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P. &.

I CLUBS LAW AND PRACTICE - CHAPTER 2 Structure of a Modern P&I Club

4th Edition

Chapter CHAPTER 2

Structure of a Modern P&I Club

2.42 Historically a large number of owners and charterers have dealt directly with their P&I Club when renewing their membership or discussing claims. The close working relationship between members and the clubs managers makes direct dealing easier than in other sectors of the insurance industry. In more recent times the use of brokers has increased, especially at times when members consider changing clubs. The decision as to whether or not an insurance broker is required is ultimately the choice of the members. 2.43 As far as clubs and brokers based in the European Union1 are concerned, the relationship between clubs and brokers is regulated by the Insurance Mediation Directive.2 For clubs operating in England which have been approved by the FSA under Part IV of the Financial Services and Markets Act 2000, it is a requirement that all intermediaries from whom it accepts business are appropriately authorised under the Directive. 2.44 Where brokers are used they perform much the same functions as they would in arranging normal insurance on the proprietary market. The broker recommends the association which will provide an owner with the most suitable terms applicable to the class of vessel and its trading pattern. The broker will be expected to advise on the choice of clubs available, the terms of entry, clubs records and the capacity and willingness of the different clubs to vary the terms of entry to meet the particular owners need. The broker may negotiate the final terms of entry on behalf of the owner and may present his own slip to the club underwriters and issue his own cover note to the owner, setting out the main terms of the cover arranged with the club in conjunction with the clubs Certificate of Entry and all other club documentation. 2.45 In some markets, brokers do far more than place cover. They also serve as a claims-handling interface between the club and its members, and liaise with both local and foreign lawyers appointed by the club to handle claims brought by or against their clients. 2.46 The custom recognised by section 53 of the Marine Insurance Act 1906, that it is the broker and not the assured that is liable to the insurer for premium has no application to P&I Club insurance. Further, where a broker is used in the case of normal insurance on the market it is the insurer who is responsible for paying brokerage even though the broker is the agent for the assured.3 This is not the case with P&I Club insurance. In those instances where entry is effected through a broker, brokerage is usually payable by the assured member and not by the club. Most clubs also stipulate in their rules that they will look to the principals and emphatically contract with the principals as well as their agents. So it is that clubs, by means of their own rules, can recover calls from their members even where entry is effected through the medium of a broker. 2.47 However, one issue which has attracted the attention of insurance regulators in recent years is the practice of some insurers of paying commissions to some brokers of which the brokers clients are unaware. Critics, most notably former New York attorney general Eliot Spitzer, have characterised these as undisclosed or secret commissions, and classic cartel behaviour. Brokers in turn have defended these as placement service commissions and as legitimate, long-standing, and common in the insurance industry generally. 2.48 Whilst the extent of the practice in the sphere of P&I is not known, it is thought that as a matter of English civil law, any such payment is unlikely to be unlawful if it is customary, or not extraordinary, in the P&I industry generally for a club to pay such a commission to a members broker prior to the establishment or renegotiation of the insurance contract.4 However, in an American decision it was held that payment of retrospective commissions to a broker by a club in respect of business already written in previous years did not fall within any customary payment exception to the general prohibition in English law against the payment of a secret commission to anothers agent. The effect of this was to allow the member to set off the amount of commissions paid to the broker against the clubs claim for unpaid calls.5 2.49 On 16 February 2010, the New York Insurance Department reversed its ban on contingent commissions, following appeals by several large brokers.6
1 And also Norway, Liechtenstein, Switzerland and Iceland. 2 Directive 2002/92/EC. 3 See Empress Assurance Corporation v Bowring (1905) 11 Com Cas 107. 4 Baring v Stanton, (1876) 3 Ch D 502; Great Western Ins. Co v Cunliffe, (1874) 9 Ch App 525. 5 Steamship Mutual Underwriting Assn (Bermuda) Ltd v Cove Shipping, Inc., 36 F. Supp.2d 940, 945946, 1998 AMC 2985 (S.D. Al. 1998), affd, 180 F.3d 274 (11th Cir. 1999). 6 Bloomberg Business Week, 17 February 2010.

Stephen J Hazelwood