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 itsfnancialobligations 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
1148 TULANE LA W REVIEW [Vol. 87:1147

I. INTRODUCTION

When 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
from the most minor to the catastrophic. Maritime law has ancient
origins because ships ran into problems from the beginning. The
familiar list of dangers includes acts of God, perils of the seas, acts of
public enemies, inherent vice of the goods, and faults of the shipper.
Then there is the risk of unseaworthiness, which likely is the most
frequently used word in maritime law.
Because of these dangers, no prudent shipowner would allow its
vessel to operate without having insurance coverage. Equally, no
prudent cargo owner would ship its goods across the sea without
having insurance. No responsible charterer would accept a vessel
without knowing it is insured and without covering its own liability
risks.
The focus of this Article is protection and indemnity (P&I)
insurance, a form of coverage by which shipowners and charterers are
protected against the risk of liability to third parties. P&I insurance
plays a central role in maritime law. This Article will consider the
extent to which U.S. courts enforce and give effect to P&I insurance,
especially in situations where the shipowner is unable to meet its
financial obligations or has gone into bankruptcy.

II. MUTUALITY
P&I coverage is premised on the concept of "mutuality." The
main idea is very simple: a group of shipowners whose vessels face
common perils join together in an insurance association, or "club," that
enables them to spread their risk. As members of the club, the
shipowners agree to insure one another against third-party liabilities
caused by the marine risks they all face. Because people are people, as
a condition to sharing their exposure, the shipowners operate under a
set of rules and have certain requirements for one another. 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. Many clubs have rules calling for disputes first to be
submitted to a board of directors appointed by the members of the
association, followed by arbitration if the directors and member cannot
resolve the dispute. Another key rule requires each member to first
2013] CENTRAL ROLE OFP&IINSURANCE 1149

pay its liabilities and only then look to the club to share in the cost.' In
English law, this concept often is referred to as the "pay-to-be-paid
rule."'
Consistent with their purpose, the clubs are nonprofit
associations. Some are organized and exist as nonprofit associations
under Bermudan law and some are organized in other places such as
the United Kingdom, Norway, Sweden, China, Japan, South Korea,
and the United States.
To further spread the risk, the clubs reinsure together through a
larger association known as the International Group of P&I Clubs.
Today, the clubs insure about 95% of the world's ocean-going tonnage
and the International Group has thirteen different clubs as members.'

III. WHY P&I INSURANCE IS DIFFERENT FROM LIABILITY

INSURANCE

In a liability insurance policy, the insured pays premiums and

usually has a deductible, but the insurer assumes responsibility for
dealing with claims and paying liabilities with no further contribution
by the insured.
The arrangement under P&I policies is different. The insured
must first satisfy its liabilities and may only seek indemnity once it has
done so. In an indemnity policy, it is a condition of coverage that the
insured satisfy claims before it can seek indemnity. The insured will
also have a deductible that must be satisfied before any payment will
be made by the club."

IV. 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. The state of
New York, for example, gives statutory recognition to the indemnity
concept in marine insurance policies and prohibits direct actions
against marine insurers.'

1. See STEVEN J. HAZELWOOD & DAVID SEMARK, P&I CLUBS: LAW AND PRACTICE
11112.15, 5.18-.20, 11, 20.16-.17 (4th ed. 2010).
2. / d 1120.16-. 17.
3. For information about the International Group of P&I Clubs, see INT'L GRP. OF
P&I CLUBS, http://www.igpandi.org/ (last visited May 15,2013).
4. HAZELWOOD & SEMARK, supra note 1, HU 12.82,20.1.
5. fee N.Y. INS. LAW 1113(a)(21), 2117(b), 3420(b), 3420(i) (2013). 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, but section 3420(i) states that the
direct action provisions "shall not apply . . . to the kinds of insurances set forth in [section
1150 TULANE LAW REVIEW [Vol 87:1147

The pay-first rule is also firmly established as a matter of English

law. The leading case on this point is Firma C-Trade S.A. v. Newcastle
Protection & Indemnity Ass'n!'
There are cases decided under the general maritime law in which
U.S. courts have recognized the validity of the pay-first rule in P&I
policies. For example, in Psarianos v Standard Marine, Ltd.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. The vessel sank in international waters near Japan while
carrying a cargo of steel products. Claims were made against the
vessel's owner, Eagle Transport Limited, Inc.; its manager, Standard
Marine Limited; its alleged alter ego, an individual named Peter Kikis
of New York; and the American Bureau of Shipping. A jury awarded
the death and injury claimants damages of $22 million. The claimants,
however, faced a major challenge in that the vessel's P&I club denied
coverage on various grounds, including unseaworthiness. Eagle,
Standard Marine, and Kikis brought a third-party action against the
club for indemnification for the amount they were required to pay the
claimants. The third-party action, however, was stayed, and the court
enforced the club's right to have the matter adjudicated by its directors
and then arbitrated in London. 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.

2117(b)]." Id. 3420(i). Section 2117(b) describes "marine insurance of the following kind
or kinds":
(A) insurance against perils of navigation, transit or transportation upon hulls,
freights or disbursements, or other shipowner interests, goods, wares,
merchandise and all other personal property and interests therein, in course
of exportation from or importation into any country, or transportation
coastwise, including transportation by land or water from point of origin to
final destination and including warrisksand marine builders'risks;and
(B) insurance in connection with ocean going vessels against any of the risks
specified in [section 1113(a)(21)].
/'.2117(b).
Section 1113(a)(21) defines "[m]arine protection and indemnity insurance" as:
insurance against, or against legal liability of the insured for, loss, damage or
expense arising out of, or incident to, the ownership, operation, chartering,
maintenance, use, repair or construction of any vessel, craft or instrumentality in
use in ocean or inland waterways, including liability of the insured for personal
injury, illness or death or for loss of or damage to the property of another person.

6. [1991J2A.C. 1 (H.L.), 1991 AMC 607 (U.K.) (appeal laken from Eng.).
7. 12F.3d46I, 1994AMC208I (5thCir. 1994).
2013] CENTRAL ROLE OFP&IINSURANCE 1151

which never happened. The U.S. court confirmed the London

arbitration award and held Eagle could not recover from the club.'
The London arbitration award posed a major obstacle for the
death and injury claimants. When the claimants indicated an intention
to sue the club in state court in Texas, the club responded by bringing a
declaratory judgment action requesting a ruling that the claimants had
no standing to claim against it.' The district court ruled against the
claimants, and the Fifth Circuit affirmed.'" 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." 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.'^ Because
payment is a condition precedent to coverage under Enghsh law, the
claimants could not seek coverage under English law.'^ Equally, the
court ruled that the claimants had no standing to sue the club under
Texas law.'" The court noted that Texas law requires '"a direct and
close relationship' between the party and the insurer," which did not
exist between the claimants and the club.'^ As a result, the court held
the claimants had no standing to sue the club."

V. NOTICE OF CLAIM PROVISIONS

As a general rule, U.S. courts enforce notice requirements in P&I

club rules. In Weeks Marine, Inc. v American Steamship Owners
Mutual Protection & Indemnity Ass'n,^^ for example, an injured crew
member obtained a judgment against the shipowner in Texas. The
owner first notified its P&I club of the claim two days after the
judgment was entered. The club refused to indemnify the owner,
citing a failure to provide prompt notice ofthe claim as required by its
rules. The owner sued the club for coverage, and the club, in turn,
moved for summary judgment based on the absence of timely notice
of the claim. The owner opposed the motion on the grounds that the

8. Id at 462-63,1994 AMC at 2082-83.

9. Id at 463,1994 AMC at 2082-83.
10. /d, 1994 AMC at 2083.
11. Id at 464-65,1994 AMC at 2084-86.
12. Id at 464,1994 AMC at 2084-85.
13. /d, 1994 AMC at 2085.
14. Id at 464-65,1994 AMC at 2085-86.
15. Id at 465, 1994 AMC at 2086 (citing Warfield v. Fid. & Deposit Co., 904 F2d
322, 326-27 (5th Cir. 1990)).
16. Id
17. No. 11-3774-cv, 2013 WL 377979 (2d Cir. Feb. 1,2013).
1152 TULANE LAW REVIEW [Vol. 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. The court ruled in favor
of the club, 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, Inc. 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.
The club rules required members to give notice of claims within three
years of learning of the claim, which the owner had not done. The
ovmer contended that the "prompt notice requirement" in the rules
displaced the three-year notice requirement.^" The court concluded that
the three-year notice requirement provided a "general, outer-limit time-
bar" for members to notify the club of any claims on which they may
seek to recover.^' The court went on to find the prompt notice
requirement regarding claims by crew members was not in conflict
with, but rather could be read in conjunction with, the outer-limit,
three-year time bar. As a result, the owner's claim for coverage was
denied for late notice."

VI. ENFORCING ARBITRATION CLAUSES

As a general principle, 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. This is the case whether the club
rules provide for arbitration in New York or in a foreign forum."

18. Id at *2 (citing Unigard Sec. Ins. Co. v. N. River Ins. Co., 79 N.Y.2d 576, 581
(1992)).
19. No. 12-1752-cv, 2013 WL 466271 (2d Cir. Feb. 8,2013).
20. Id at *2.
21. Id
22. fd
23. See, e.g., Montauk Oil Transp. Corp. v. S.S. Mut. Underwriting Ass'n (Berm.), 79
F3d 295, 298, 1996 AMC 1379, 1382-83 (2d Cir. 1996); //? /e Arbitration Between U.S.
Lines, Inc. & Liverpool & London S.S. Prot. & Indem. Ass'n, 833 R Supp. 350, 352-53
(S.D.N.Y. 1993); London S.S. Owners Mut. Ins. Ass'n v. UN Diavoiezza, 1991 US. Dist.
LEXIS 16400, at 2-3 (E.D. Pa. Nov. 12, 1991); Wells Fargo Bank Int'l v. London S.S.
Ownere' Mut. Ins. Ass'n, 408 F Supp. 626, 629-30, 1976 AMC 592, 595-97 (S.D.N.Y. 1976);
Sea Trade Mar. Corp. v. Hellenic Mut. War Risks Ass'n (Berm.), 776 N.Y.S.2d 255, 256-57
(App. Div. 2004).
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, l Todd v.
Steamship Mutual Underwriting Ass'n,^" a seafarer who had a
judgment against a bankrupt shipowner sued the shipowner's P&I club
under the Louisiana direct action statute." The court held the seafarer
was bound by the club's London arbitration provision just as the
member would be. 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. & Consulting, Inc." which held that
the Federal Arbitration Act did not require direct action plaintiffs to
arbitrate their claims.^*

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. This
problem most often arises when a shipowner becomes insolvent or
goes into bankruptcy. Todd, discussed above, is just one example of
this, and other cases are discussed below. Circumstances in which the
shipowner is not subject to in personam jurisdiction, but the P&I club
is subject to suit, can also lead to problems.
A number of jurisdictions have laws that permit tort claimants to
bring direct actions against the insurers of the party responsible for the
injury; these include Connecticut, Alabama, Louisiana, and Puerto
Rico.^' Courts have repeatedly noted that general maritime law neither
authorizes nor prohibits a third party's right to directly sue an insurance
company.'" Direct actions are troublesome for P&I clubs, in part
because they may conflict with the pay-first rule. One of the legal
issues that has arisen in direct action cases is whether the state law
involved should be deemed substantive or procedural. The difference
is critical.

24. No. 08-1195, 2011 U.S. Dist. LEXIS 38638, 2011 AMC 1126 (E.D. La. Mar. 28,
2011).
25. LA. REV. STAT. 22:655, : 1269 (2012).
26. Todd V. S.S. Mut. Underwriting Ass'n (Berm.), 601 E3d 329, 335, 2010 AMC
1143, 1147 (5th Cir. 2010).
27. 107 E3d 344, 346 (5th Cir. 1997).
28. Todd, 601 E3d at 335, 2010 AMC at 1147. The Eifth Circuit held it also was
overruling its prior decision in In re Talbott Big Foot, Inc., 887 E2d 611 (5th Cir. 1989).
29. ALA. CODE 27-23-1 to -2 (2013); CONN. GEN. STAT 38a-321 (2013); LA.
REV STAT 22:1269; PR. LAWS ANN. tit. 26, 2001 (2008).
30. See, e.g., Steelmet, Inc. v Caribe Towing Corp., 779 E2d 1485, 1487 (11th Cir.
1986).
1154 TULANE LA W REVIEW [Vol. 87:1147

For example, in State Trading Corp. of India v.

Assuranceforeningen Skuld^^ the court held that Connecticut's direct
action statute was substantive and, therefore, 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. The underlying cargo claim
arose from the sinking of a tanker carrying a load of soybean oil en
route from Brazil to India. The ship sank in the Indian Ocean. The
cargo owner was an Indian company, the shipowner was a Panamanian
corporation, and the ship was managed by a Belgian corporation. The
court applied the choice-of-law analysis mandated by Lauritzen v
Larseii^ and concluded Connecticut law had no bearing on the matter.
As a result, the claimants could not rely on Connecticut law."
The court in Morewitz v. West of England Ship Owners Mutual
Protection & Indemnity Ass'n^^ however, 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.
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 Morewitz, 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.'^ 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."" Notwithstanding this provision
of Alabama law, 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] ."^^ The P&I club policy
provided that disputes should be arbitrated in London, and the club
sought to compel arbitration there. However, 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. 921 F.2d 409, 1991 AMC 1147 (2d Cir. 1990) (interpreting CONN. GEN. STAT.
38a-321 (formerly 38-175)).
32. 345 US. 571,583-93, 1953 AMC 1210, 1219-27(1953).
33. State Tiding Corp. of India, 921 F.2d at 416-17,1991 AMC at 1158-60.
34. 62F.3d 1356, 1996 AMC 707 (11th Cir. 1995).
35. ALA. CODE 27-23-1 (2013).
36. A/o/ew/te, 62 F.3d at 1360,1996AMCat712.
37. / d a t l 3 6 3 , 1996AMCat717.
38. Idza 1364, 1996AMCat717.
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." 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. The court considered,
but did not decide, whether claimants could be held to an arbitration
clause that they did not bargain for, even though the representative
plaintiff "stands in the shoes" of the owner versus the P&I club."
Although the court did not decide the issue, it "questioned" whether
the arbitration clause applied."" Ultimately, however, 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."

vm UNITED STATES BANKRUPTCY ISSUES

When a shipovmer goes into bankmptcy in the United States,

either in a Chapter 11 reorganization or a Chapter 7 liquidation, the
P&I club is presented with an array of problems. The problems may
be more acute if there are unpaid premiums that are due and owing. 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. 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."^

A. Cesser Clauses
P&I club rules typically provide that the policy is terminated if
the member goes into bankruptcy. Is this rule enforceable? The
answer of one U.S. bankruptcy court was "no." LaMonica v. North of
England Protecting & Indemnity Ass'n {In re Probulk, Inc)'^ involved
seventy-three consolidated cases in which the debtors were owners,
operators, or managers of vessels. A trustee was appointed to wind up
the debtors' affairs expeditiously. The P&I clubs covering the vessels
asserted that the "cesser clauses" in their contracts, which provided

39. Id at 1364-65,1996 AMC at 719-20.

40. /i/., 1996 AMC at 720.
41. /d at 1365-66, 1996 AMC at 721 -22.
42. LaMonica v. N. of Eng. Protecting & Indem. Ass'n (A/eProbuUc, Inc.), 407 B.R.
56,60-63 (Bankr. S.D.N.Y. 2009).
43. Id at 59-64.
1156 TULANE LAW REVIEW [Vol. 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,'" provide for termination of coverage even before bankruptcy or
insolvency proceedings begin."'* The court found that the cesser
clauses were in conflict with the Bankruptcy Code, 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.""' The court stated that 28 U.S.C. 1334(e)(I)
gives it exclusive jurisdiction over the debtors' property, wherever
located, and that the debtors' worldwide insurance rights were the
property of the respective estates, regardless of the wording of the
insurance policies. With respect to irreparable injury, the court found:
Even though the Trustee is winding down the debtors' business, he has
to act reasonably in the interests of all stakeholders. Without insurance
he would have to abandon the vessels, some of them in mid-voyage,
resulting in the possibility of loss of cargo and loss of the vessels
themselves Under the circumstances, the loss of insurance would
clearly constitute irreparable injury.**^
Thus, 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, substantial, direct and foreseeable impact on U.S. 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. daims Administration
The fact that a shipowner goes into bankruptcy does not relieve
its P&I club from the obligation to cover claims. P&I insurance
remains an important asset of the estate, and as long as the policy's
terms and conditions are satisfied, the debtor can look to the club for
reimbursement of claims it has paid. In some cases, with the club's
agreement, the P&I policy has been transferred to a trust created for
the sole purpose of managing and paying third-party liability claims.

44. Id at 60.
45. /rf at61.
46. /at 63.
47. Id at 64.
2013] CENTRAL ROLE OF P&I INSURANCE 1157

The obligation to pay dductibles and the pay-first rule remain in

place."* As the cases discussed below indicate, however, debtors and
claimants have resorted to various payment arrangements to endeavor
to comply with these basic obligations.
United States Lines, Inc. v. American Steamship Owners Mutual
Protection & Indemnity Ass'n {In re United States Lines, Inc)^'^
involved a bankruptcy trust established to handle marine claims
against the debtor! More than 18,000 asbestos-related claims were
filed against the trust. The trust asserted that the claims were covered
by various P&I policies, all of which were issued before United States
Lines, Inc. and United States Lines (S.A.) Inc. sought bankruptcy
relief As the court observed, "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 insured pays the claim of the personal injury
victim."^" The court ftirther noted, however, that the proceeds of the
P&I policies were the only funds "potentially available" to cover the
personal injury claims." After entering into a conditional settlement
with a group of 106 claimants, the trust brought an adversary
proceeding seeking a declaratory judgment of the parties' rights under
the P&I policies."
A key issue in the case was whether, as some of the clubs
contended, 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. The court articulated the underlying
problem:
[UJnder the pay-first provisions of the P & I policies, [the insurance]
proceeds will not be made available until the Trust has paid the claims.
[The Trust's] lack of assets leaves them unable to pay all of the claims
first and seek indemnification later.... The insolvent insured is
therefore often forced to satisfy the pay-first requirement by means of
complex, creative payment schemes [and] faces a significant risk that
the payment scheme ultimately employed will be deemed not to satisfy
the pay-first requirement."
Thus, the court concluded, "[I]n order to effectuate an equitable
distribution of the bankruptcy estate, a comprehensive declaratory

48. See infra notes 49-53, 60-61 and accompanying text.

49. 197F.3d631(2dCir. 1999).
50. /d at 635.
51. Id
52. Id
53. Id at 638.
1158 TULANE LAW REVIEW [Vol. 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."^"
The court rejected the clubs' assertion that the bankruptcy court
could not enjoin arbitration of the proceedings." The court noted that
the arbitration agreements were valid and that arbitration is favored in
our Judicial system.^* Indeed, the court observed that the preference for
arbitration is especially strong with respect to intemational arbitration
agreements." The court further held, however, that the needs of the
bankruptcy case were great enough to override the arbitration
agreements. As stated by the court, "[T]he declaratory judgment
proceedings are integral to the bankruptcy court's ability to preserve
and equitably distribute the Trust's assets."^^ Furthermore, the court
concluded, "[BJankruptcy court is the preferable venue in which to
handle mass tort actions involving claims against an. insolvent debtor,"
and cited the need for a centralized proceeding to streamline "multiple
claims, policies and insurers."^''
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. While the
court described that payment structure as being "elaborate and
cumbersome," 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."^' 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."
Approximately 10,000 asbestos claims were filed against it." The trust
created to deal with the asbestos claims had only $300,000, a sum not
nearly large enough to satisfy the claims." The case was complicated
by a prior ruling that the club was entitied to a setofF of $1.2 million

54. Id at 639.
55. Id
56. Id
57. Id
58. //.at64l.
59. Id
60. 533 F.3d 151, 2008 AMC 1665 (2d Cir. 2008).
61. /i/.at 156, 2008AMC at 1670.
62. /t, 2008 AMC at 1666.
63. Id
64. /tat 154, 2008 AMC at 1667.
2013] CENTRAL ROLE OF P&I INSURANCE 1159

for unpaid premiums and assessments owed by Prudential." 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, simultaneous with the receipt of payment
of a claim, each claimant then would lend the money received back to
the trustee." This was to be accomplished by the issuance of a
nonrecourse note to the claimant, rather than an exchange of actual
cash. The recycling plan quickly amounted to $60 million, although
none ofthat amount actually was paid."
The replacement pajonent plan was different in that it provided
for actual payments. Thus, as described by the court:
(1) Within the limits of the $300,000 retention, the Trustee pays claims
of Claimants. (Presumably, 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.)
(2) These Claimants return to the Trustee (in exchange for a deferred
claim) the portion of the payment attributable to the deductible amount,
plus their pro-rata share of any setofF. (3) The Trustee seeks and
receives indemnification from the Insurer in the amount of the claim
payment, minus the deductible and the Claimant's ratable share of the
setoff. (4) The Trustee uses the reimbursed funds to make further
payments to Claimants. (5) The process repeats itself until all Claimants
are paid. (6) After this process is complete, 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.**
According to the Second Circuit, because the trustee would not
submit a claim to the club until after payment was made, it passed
muster under the pay-first rule. The fact that multiple payments were
planned in advance did not alter the outcome.*'
One of the most diificult issues \n In re Prudential Lines Inc.
concerned the club's right of setoff for unpaid premiums. 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 $1.2 million setoff. In return for doing
so, 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.

65. /d at 154-55,2008 AMC at 1667-68.

66. Id at 154, 2008 AMC at 1668.
67. Id at 157, 2008 AMC at 1670-71.
68. Id at 155,2008 AMC at 1668.
69. Id at 160,2008 AMC at 1675.
1160 TULANE LAW REVIEW [Vol. 87:1147

The court approved this arrangement. In doing so, the court concluded
it did not violate the pay-first provision of the applicable policies.'"
Prudential was covered by the American Club for forty-one years,
but it failed to pay certain premiums and assessments for four of those
years. One of the arguments made by the club was that it should be
allowed to deny any coverage of claims for those years. This
argument, however, 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. In those circumstances, the club
further argued that the unpaid premiums should allow it to deny
coverage for any claims under all of the policies or, in the alternative,
that it should be allowed the setoff against payments on fully paid
years, as well as unpaid 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, consistent with the
Bankruptcy Plan, to allow the setoff of the Unpaid Premiums against all
policy years prorated among all Claimants, and not to interpret it as an
absolution, parlaying the Insurer's immunity as to four unpaid policy
years into an immunity also covering thirty-seven fiilly paid years."
In so holding, the Second Circuit relied on its own ruling in
Liman v American Steamship Owners Mutual Protection & Indemnity
Ass'n.^^ There, the court upheld a payment scheme by which each
claimant, upon receiving payment of their claim, was to lend back to
the debtor the amount of any deductible under the applicable policy.
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."

IX. CONCLUSION

As this discussion of case law shows, U.S. courts generally give

effect to and enforce P&I club rules. 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
71. Id at \ 59,2008 AMC at 1674.
72. 299 F. Supp. 106 (S.D.N.Y), a^'d, 417 F.2d 627 (2d Cir. 1969).
73. / a t 109-10.
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."

X. SAMPLE PAY-FIRST RULES OF SELECTED P & I CLUBS

A. Steamship Mutual: Rules and List of Correspondents 2013/2014

If any Member shall become liable in damages or otherwise or shall
incur any liabilities, costs or expenses as hereinafter set out in Rules 25
and 28, in respect of a ship which was entered in the Club at the time of
the casualty or event giving rise to such liabilities, costs or expenses,
such Member shall be entitled to recover, out of the fiinds of the Club,
the amount of such liabilities, costs or expenses to the extent and upon
the terms, conditions and exceptions provided by these Rules and by the
Certificate of Entry;
Provided always that:
i. Unless the Directors otherwise determine, it shall be a
condition precedent of a Member's right to recover from the
inds of the Club in respect of any liabilities, 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 ....'*

B. The London P&I Club: P&I Rules 2011-2012

Rule 3 : Right to Recover and Subrogation
3.1. . If any Assured shall incur habilities, costs or expenses for which
he is insured he shall be entitled to recovery from the Association
out of the funds of this Class,
PROVIDED that
3.1.1 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, costs and
expenses shall be a condition precedent to his right of
recovery;
3.1.2. any Assured who fails to pay promptly any amount due
by him to the Association on account of Calls or

74. See Morewitz v. W. of Eng. Ship Owners Mut. Prot. & Indem. Ass'n, 62 F.3d
1356, 1363, 1996 AMC 707, 717(11th Cir. 1995).
75. 5eeLaMonica v. N. of Eng. Protecting & Indem. Ass'n (7reProbulk, Inc.), 407
B.R. 56, 51 (Bankr. S.D.N.Y. 2009).
76. Rules & List of Correspondents 2013/2014, S.S. MUT. 40 (2013), http://www.
simsl.com/Downloads/Rules-and-Maps-/SteamshipBennuda2013Interactive.pdf.
1162 TULANELA W REVIEW [Vol. 87:1147

otherwise shall thereupon without further notice cease to

have any rights of recovery, notwithstanding that the
Habihties, 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, 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.
3.2 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. 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, including the execution of any assignment of such rights
or claims in favour of the Association. Until any such assignment,
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. 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.

C. Standard P&I and Defence Rules 2012-2013

6.15 Unless the managers otherwise determine, 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.'^

D. UK P&I Club Rules & Bye-Laws 2012

Rule 5: Conditions, Exceptions and Limitations
A. Payment First by the Owner
Unless the Directors in their discretion otherwise decide, it is a
condition precedent of an Owner's right to recover from the fimds
of the Association in respect of any liabilities, costs or expenses
that he shall first have discharged or paid the same out of fimds

77. P&I Rules 20II-20I2, LONDON P&I CLUB 6-7 (2011), http://www.londonpandi.
com/_common/updateable/downloads/documents/5rules2011 .pdf.
78. P&I and Defence Rules & Correspondents, STANDARD CLUB 23 (2012), http://
www.standard-club.com/docs/P%26IandDefenceRulesandCorrespondents2012-13.pdf
2013] CENTRAL ROLE OF P&I INSURANCE 1163

belonging to him unconditionally and not by way of loan or

otherwise."

79. Rules 2012, UK P&I CLUB 31 (2012), http://www.ukpandi.com/fileadmin/

uploads/uk-pi/Latest_Publications/2012_Con:espondents/Rules%202012.pdf
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