UNIT 2 CLAIMS, P&I CLUBS(6 HRS)

• Insurance Claims.
• Maritime Frauds,
• Flags Of Convenience.
• Safeguards to be taken to prevent frauds with
special reference to shipping industry, by the
operators and seafaring personnel.
• Risks Covered by P&I Clubs.
• Role of P&I Clubs,
• Calls,
• Assistance to Master in Claims ,
• Defense.
INSURANCE CLAIMS: Risk covered by a Marine Insurance Policy-
The main risks covered by the Standard form of Lloyd’s policy,
both for the Hull & Machinery and cargo insurances are as
follows:
a) Perils of the seas, all fortuitous accidents and casualties of the
seas;
b) Fire;
c) Enemies, Pirates, Robbers, Thieves;
d) Jettison: throwing overboard goods or ship’s gear/equipment in
times of peril;
e) Arrests, restraints and detainment of Kings, Princes and people;
f) Barratry of the Master and crew, every wrongful act willfully
committed by the master or crew to the prejudice of the owner
or charterer;
g) All other perils of a similar nature to the above.
Manner of Execution of Marine Insurance Policies:
Cover slips- When the terms and conditions and the
premium rates have been agreed between a ship
owner/cargo owner and a Underwriter, a ‘cover slip’
is endorsed by the Underwriter. This slip records the
material facts and is initiated by each company and
the Underwriter of the Lloyd’s Syndicate (any of the
Insurance company) taking any part of the risk.
Subsequently policies are issued for the Companies
and one for all the Lloyd’s syndicate. In the formal
policy the appropriate Institute and other clauses are
attached. Cover slips or cover notes have no
individual legal status but may, however be used as
evidence in conjunction with a duly stamped policy.
Process of settlement of claims-
• Whenever a loss or damage occurs to insured property which results in a
claim, the assured will request a broker to proceed with the mechanics of
the settlement. For complicated cargo claims and for most hull claims, the
broker submits the claim to an Average Adjuster who calculates or adjusts
the claim according to his professional expertise and in an impartial
manner. The claim will then be submitted to the Claims Adjuster of the
insurer, who has the responsibility of determining whether the insurer has
a liability under the policy to pay the claim. If he finds so, he will adjust the
claim himself if it has not already been adjusted. If it has already been
adjusted he will review the adjustment to see if everything is in order.
• Upon payment of an indemnity in respects of the claim to the assured
under the policy, any claims the assured may have against the third party
who may have caused the damage are subrogated to the insurer.
Subrogation means that an insurer having settled the claim is entitled to
all the rights and remedies in respect of the loss/damage which are
enjoyable by the assured. Thus the insurer may recover from the third
parties amount not more than the indemnity paid by him to offset his
indemnity.
MARITIME FRAUD: Maritime Frauds have co-existed with Maritime Trade and can
be traced back to 215 B.C.
What is a Maritime fraud?
• Single party or many parties acting in collusion to defraud another by
misrepresenting facts in an unethical manner.
• There is no firmly accepted definition of a maritime fraud. However, the term is
usually used to indicate any act in connection with sea-transportation, by and
large; it covers documentary fraud, charter party fraud, marine insurance fraud
and some general miscellaneous fraud. Such miscellaneous frauds are under the
broad definition of fraud of a custom and also theft within the port area.
• Generally all kinds of maritime frauds either there is direct claim against the
carrier or they are indirectly involved as party to be claimed / legal proceedings.
• From time immemorial society has been plagued by fraud and the shipping
industry is no exception. Fraud has always been known to exist in shipping
services. Crime in maritime world is not a new phenomenon, but it has grown in
a rapid pace over the past 30 years. The aspiring maritime fraudsters have no
jurisdictional binding in its activities. Such activity is to a considerable extent
influenced by the economic condition prevailing at a given time in a given
geographical area. E.g. Somalia.
Types of Maritime frauds:
1) Sinking of an over-valued ship flying F.O.C. flag carrying a highly valued
non-existent cargo during periods of economic and political upheavals
and depression in shipping business. (Insurance fraud)
2) Ship owners /Charterers fearing heavy losses due to serious port
congestion (W. African & Middle East ports in 1970’s and 1980’s)
discharging cargo elsewhere, selling it and getting ships released for
further trading. (Contract fraud)
3) 1 or 2 ships owner continue operating old ships de spite mounting debts
(Mortgages, loans and liens etc.) until arrested by court order and then
owner declaring insolvency. (Insolvency fraud by ‘fly by night’ operators)
4) Forging by the seller of export documents, required by the buyer of
goods under documentary credit system, when goods either did not exist
or of inferior quality. (Documentary frauds common in Greece, Cyprus,
Lebanon & Nigeria)
5) Issuance of false certificates/ documents by corrupt Customs/Port/Bank
officials & Surveyors etc. acting in collusion with the cargo owners. (Fraud
by corrupt practice)
Common features of Maritime fraud cases:

• Ships of over 15 years of age involved.

• Single ship owner or common management company

involved.

• Ships on single voyage charter flying flag of Greece,

Panama/Liberia/other FOC states, Cyprus, Spain,
India, S’pore, S. Korea and Sharjah (U.A.E.) involved.

• Ships had frequent and/or recent change of

ownership/name etc.
SHIP’S FLAG: Various Types of Flags:
1. National flags
2. Flags of convenience
3. Second register Flags
4. Bareboat Charter or dual register flags
National flags (closed register flags): National flags are flown
on traditional (UK Register; Indian Register) where there is
a genuine link between the flag State and the owner or
operator as required by UNCLOS.
Flags of convenience (FOC): These are also called open register flags
and free flags. Flag of Convenience (FOC) are deemed by ITF to exist
where beneficial ownership and control of vessel is found to be
elsewhere than the country of the flag the vessel is flying. These are
designated by ITF Fair Practices Committee. The criteria for entry in
the list are the’ Rochdale Criteria’, which were laid down by British
Committee of enquiry in 1970.
The criteria include:
• Whether the country allows non-citizens to own and control vessels.
• Whether access to and transfer from registry is easy.
• Whether taxes on shipping income are low or non-existent.
• Whether country of registration does not need the shipping tonnage
for its own purposes but is keen to earn the tonnage fees.
• Whether manning by non-nationals is freely permitted
• Whether the countries lack the power or willingness to impose
national or international regulations on the ship owners, flying its
flag.
Second register flags (offshore register flags and international register flags):
They are in some cases established under a separate legislation as a second
register in the ‘parent’ state e.g. NIS established in Norway to run alongside
the Norwegian first register. In some cases established in an off-shore
territory with legal links to the State e.g. Kerguelen (linked to France); Isle of
Man (linked to U.K)
These are different from FOC in that while manning, taxation and other laws
may be relaxed under the second register, ship owners must still have a
genuine link with the flag state and are subjected to supervision and
jurisdiction of the Flag State.
The ships have their status determined by ITF.
Bareboat Charter or dual register flags: Some countries have relaxed their
registration laws to allow for the bareboat chartering of ships into and out of
the national flags. In UK the bareboat registry is allowed only for five years.
These ships which are allowed to fly the flag of these countries are to abide by
the laws of these countries as regard to name approval, carving and marking
etc., and are to abide by the national legislation of these countries whose flag
they are flying.
Recommended Precautionary measures to be taken by buyer/seller of
goods:
• Ship goods only by well established shipping companies/lines.
• Issuing bank of Letter of Credit and Advising bank negotiating shipping
documents must be mutually acceptable by buyer & seller so that they
enjoy absolute mutual trust.
• Custom House Agent deployed must be duly licensed and member of
National Association and must know how to protect seller/buyer interests.
• Shipper must confirm whether carrier vessel is chartered, who the owners
are and whether ship is duly approved by reputed Insurance Authority.
RECOMMENDED PRECAUTIONARY MEASURES TO BE TAKEN BY
BANKS/MORTGAGER:
Basically there are two types of frauds:
1) Presentation of genuine documents but subsequent fraudulent action by a
3rd party in respect of goods/ship.
2) Presentation of fraudulent documents in respect of inferior or non-existent
goods or ship.
• L/C (opened by buyer) must clearly specify all the documents to be
presented to the bank before payment is made to the seller of the goods or
ship.
• Careful choice of Shipping Line and reputed freight forwarder (CHA) &
transporter helps greatly in reducing risk of fraud.
• Careful scrutiny of ship’s register in Registrar’s office, where all mortgages
and Liens are required to be registered by the Banks/ Salvours/ Master &
crew to learn of all the encumbrances attached to ship, before advancing
any funds to owner in respect of the ship or continuing on the voyage.
Recommended measures to be taken by the Ship owners & Charterers:
• Ship owner should check on the reputation and financial status of the
charterer, using reputed ship broker, before fixing a charter and insist
upon Bank guarantee from the charterer covering estimated charter
hire. Institutions like BIMCO, Baltic Exchange and NYPE can often assist
with enquiries about charterer etc.
• Avoid giving the Time charterer authority to sign Bs/L on behalf of
Master. As far as practicable Master should himself sign the Bs/L after
verification with the Mate’s Receipt otherwise give letter of Authority
to the charterer agent to sign Bs/L strictly in accordance with the Ms/R.
• Similarly Charterer should know the reputation of the ship
owner/disponent owner before entering into a Charter party contract.
• Cargo must be delivered only against the original duly discharged Bs/L
or against adequate bank guarantee acceptable to the carrier and his P
& I club.
Recommended Precautions to be taken by the Insurance Companies:

• In case of Hull Insurance, Insurer must exercise every care in checking

the background details of both the ownership as well as it’s
management and their trading record.

• Requirement of Standard Classification, retention of class by regular

surveys/inspection & maintenance of ship is a standard practice but
strict compliance is essential.

• Cargo Insurers must insist upon Institute Classification clause

(ensuring that ship is properly classed) and approval by Regulatory
Authority (G.I.C. in India) will ensure proper maintenance by the
owner/carrier.
Some of the area where we give, special attention to eliminate possibility
of maritime fraud are:-
1. Fortification of manifest, Document of title, delivery of documents etc.,
2. Mis-description of goods
3. Process of wrong marks or no marks on packages
4. Re-bundeling/ dis-bundelingof packages and pallets .
5. Discharging of other ports Cargo.
6. Opening, resealing and substitution of loaded containers.
7. Adjustment of un-manifested Cargo.
8. Delivery of left behind Cargo
9. Issuance of loading condition certificates .

Generally in all terms maritime fraud either there is a direct claim against
the carrier or they are indirectly involved as a party to the claim and legal
proceedings. Documentation is an extremely important matter in
shipping requiring thorough knowledge and accurate preparation of the
contents of the B/L.
Hull and Machinery Insurance provide physical damage protection
for the ships or vessels and the machinery which is part of them
Characteristics of Hull and Machinery Insurance
• Hull and machinery insurance is a type of ocean marine
insurance. This coverage protects the insured vessel or fleet
against physical damage caused by a peril of the sea or other
covered perils while the vessel is in transit over water.
• Although the most commonly insured vessels are those
operating in the ocean or the sea, hull and machinery insurance
can cover vessels that work in any kind of waterway. For
example, tugboats, barges, floating machinery, and even oil rigs
which operate in coastal areas.
• Hull and machinery insurance policies can be written to cover a
single vessel or the whole fleet of a ship owner.
• A deductible specified in the policy declarations is payable in the
event of a hull and machinery insurance claim.
Cargo Insurance is designed to provide indemnity cover for goods/cargo
carried through different modes of transport and transit.
A lot of money goes in packaging and transporting shipments.
Any loss or damage would mean a huge loss.
To cover up such losses, it is important to have cargo insurance in place.
Protection and indemnity (P&I) liability insurance is specifically designed
to address the unique needs of the marine industry.
It covers practically all maritime liability risks associated with the
ownership and operation of a vessel, including third-party risks for
damage caused to cargo during transit, risks of environmental damage
such as oil spills and pollution, war, and political risks.
What is the difference between marine and cargo insurance?
Marine insurance includes cover for the hull, machinery, third-party
liability, the shipment/goods carried in the vessel, etc. In the case of
cargo insurance, insurable interest lies in the cargo or goods carried
from the place of origin to the final destination.
H&M and P&I insurance are the Marine insurances.
What does P&I Liability Insurance cover?
Subject to exclusions and conditions, the typical P&I policy covers
1. Loss of life, injury and illness of crewmembers, passengers, and other third
parties,
2. Damage to cargo on board the vessel,
3. Damage to other floating objects not caused by collision,
4. Wreck removal costs,
5. Collision liability, damage to fixed objects,
6. Repatriation expense,
7. Damage to any other property,
8. Fines and penalties,
9. Costs of resisting mutiny or misconduct,
10.Quarantine expenses, putting in costs,
11.Cargo’s proportion of general average,
12.Civil liabilities imposed due to pollution or oil spill
13.Liability under approved towage contracts
14.Salvage operations and
15.Defense costs.
• The most significant and costly exposure covered by
P&I insurance is liability for loss of life, injury or
illness, particularly the injury or death of
crewmembers.
• P&I insurers cover their Assureds with very high
limits of liability.
• The need for these high limits was the original
motivating factor for the formation of the Clubs.
What are the functions of P & I Clubs?
• Ensure ship owners and operators against third-party liabilities not covered by
hull and machinery policies obtained. The club will usually only accept risks on
chartered-in-tonnage where the member also has owned vessels entered with
the organization. Charterers club exists to offer similar cover for charterers
• Often ensure entire company fleets, but tend to prefer owners with similar
types and standards of fleet
• May subject owners vessels to inspection before entry into the club and during
membership
• Strive to keep ‘calls on their members’ at a minimum through loss prevention
methods such as information bulletins aimed at owners insurance officers
• Disseminate information aimed at keeping members premiums down
• Produce lists of correspondents and reliable lawyers and surveyors
• Produce standard forms of letters of indemnity and protest
• May post bonds against members, ships when under arrest
• Issue handbooks containing club rules and lists of correspondents, which are
very useful to master seeking advice and assistance when in any kind of
trouble