Calls for reform of shipowners’ insurance

Date: 09/05/1996

By Tim Jones

INCREASED litigation against polluters risks bankrupting the European merchant fleet unless reforms are made to their protection and indemnity (P&I) mutual insurance system, shipowners have warned the European Commission.

P&I clubs - associations of shipowning firms formed under an umbrella insurance organisation known as the International Group to provide protection against risks not covered by normal marine insurance - have benefited for ten years from a Commission block exemption from rules outlawing anti-competitive behaviour.

Grouped together, they offer a uniform 16-billion-ecu limit of insurance, with a much smaller reinsurance coverage of 1.2 billion ecu. If a claim is greater than the reinsurance amount, this excess or 'overspill' is paid out of shipowners' assets.

The owners pay a tariff to meet overspill claims in proportion to the size of the vessels, taking no account of whether the shipowner is exposed to the possibility of very large claims and refusing to vary the levels of coverage.

This kind of agreement would normally fall foul of Article 85 of the Treaty of Rome, which outlaws agreements that restrain free competition in the EU, since it fixed prices and conditions.

The anti-trust immunity it was granted in 1985 is now up for renewal, and DGIV, the Directorate-General for competition, has asked for information about the changes to the market since the last clearance.

Investigators are taking into account the effect on the European maritime transport industry and its customers of a claim exceeding the group's reinsurance and the fact that shipowners do not have a choice between insurance products with different coverage.

Commission investigators want to know how the market has changed since the exemption was last granted, given independent research showing the potential catastrophic effects of a massive overspill claim.

Responding to questions from the Commission, the Greek Shipping Cooperation Committee (GSCC) pointed to developments in civil litigation for pollution and personal injury in the US since the mid-Eighties.

These are having a profound effect on the insurance industry. As civil suits for asbestosis increased in the Eighties, firms began to revive liability policies from the Forties. As a result, during the Eighties and Nineties, claims have soared on policies underwritten decades before, even though analysts had previously suggested that there would be no further claims.

The size of the damages awarded has rocketed as a reflection of the increased number of class actions brought by groups of plaintiffs and the generosity of US juries.

Consequently, the chances of major claims against shipowners have increased markedly, particularly since the Exxon Valdez oil tanker disaster in Alaska at the end of the Eighties.

The clubs commissioned a report from a Cambridge University professor which concluded that the P&I arrangements, combined with a major overspill claim, “might end up by bankrupting over half the world's shipping fleets” and cause “chaos in shipping equivalent to a world-wide port strike of indefinite length”.

To help offset these risks and provide more choice within the P&I club system, the GSCC originally proposed the creation of a two-tier system to give shipowners a choice of unlimited or low-limit cover, or a cap on the insurance cover as far as it could be reinsured.

The Commission is still investigating the clubs' tariff structure and how they would react to an overspill claim.

The European Parliament has recently become involved in the inquiry after passing a resolution urging the Commission to consider whether the low level of reinsurance could actually undermine the cherished 'polluter pays' principle.