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Terms of FD&D cover varies between clubs, Marsh study finds

Legal expenses insurance is good value for money, but buyers should consider options before purchases, according to prominent marine broker

Defence makes up only a limit proportion of overall club premium income. But members value the service

THE nuts and bolts of legal expenses insurance — historically known as freight, demurrage and defence — varies significantly between P&I clubs, and buyers need to choose their provider carefully, according to a report from a prominent insurance broker.

Issues that should be weighed up include service levels, exclusions, payout limits, deductible structures, flexibility, the extent of discretion granted to managers and the inevitable trade-offs between narrower terms at lower costs and an all risks approach, Marsh contends.

But outlays on premiums are generally justified, as unlimited free advice from in-house club lawyers is thrown in on top of payouts in the event of litigation, the broker adds.

The research also found that defence premiums represent only a modest proportion of overall premium income for International Group clubs.

In percentage terms, the figure ranges from 1.4% for the Japan Club and 2.9% for Britannia to 6.3% at Skuld and 7.3% at London Club.

However, it is valuable to clubs in their relationships with their members because members regard it as an important service.

In its essentials, FD&D insurance covers the cost of legal advice and representation in relation to a range of shipping claims and disputes not covered under a core P&I policy.

In the first instance, in-house claims handlers typically offer an assessment of how to proceed with a dispute, an evaluation of the chances of success and, if appropriate, guidance on which lawyers or experts to appoint.

Such expertise can often obviate the need to appoint an independent lawyer, which saves on cost and encourages prompt resolution of the claim or dispute.

Ten of the 12 International Group affiliates offer members with a P&I policy the option of taking defence coverage as a bolt-on.

In practical terms, that limits the choice of providers for most shipowners and charterers. However, West of England will in principle sell FD&D irrespective of where P&I is placed.

The only International Group affiliate not to offer defence cover is the UK Club. This is because of its relationship with sister marine mutual UK Defence Club, which is solely in the FD&D business, and the largest single facility.

In terms of total defence premium income in 2022–2023, the leaders among P&I clubs were North and Gard. In the current policy year, the NorthStandard merger will probably see the new entity overtake UKDC.

Deductibles are typically in the order of 25%, representing a significant contribution from owners in an era when litigation bills can easily run to six or seven figures.

But deductibles may never come into play, as all clubs try to handle most claims without consulting external lawyers.

Britannia estimates that about 95% of their defence notifications are resolved within the first $7,500 of any dispute, a sum that is absorbed by the club. UKDC offers cover with no deductible, although premiums inevitably reflect that.

There are also upper limits to the cover, running from $7.5m at the London Club  and $10m at the American Club to $1bn at West and $1.5bn at UKDC.

Unlike almost any other insurance product, the insurer has control over whether to provide the coverage, and, if it does, to what extent. All clubs have similar provisions in their rulebooks.

Britannia retains powers to require a member to settle or compromise, while Gard can decline cover where there is no reasonable relation between the amount in dispute and the costs likely to be incurred.

But in practice, there are usually few disputes over whether a claim has sufficient merit or not.

There are also important specific differences in the small print of the terms.

North’s policy makes no mention of bills of lading or waybills, although the club maintains that its coverage is as broad as any other facility, as claims under bills of lading to recover freight, demurrage, or hire are covered under other rules.

Skuld requires contracts of affreightment first be approved by the club, while Steamship requires that a vessel must already have been nominated in writing to perform under the COA. Other clubs’ rules are silent on the point.

Clubs take different approaches to disputes involving seafarers. For instance, Steamship’s rules exclude “disputes in respect to masters, officers and crew under, or in connection with their contract of employment or collective agreement.”

But this is not a blanket ban, Steamship insists. Where there is a connection with the operation of the entered vessel, crew disputes can be supported.

Gard does not mention crew in its defence policy and does not cover claims under contracts of employment.

But West covers agency and employment disputes, if the dispute relates to an entered ship and arose during the period of entry.

Skuld excludes disputes arising under a management agreement. Other clubs will cover such disputes, as long as the management company is not also named on the certificate of entry as a joint assured.

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