Issue 28 - Winter 2001

International Group assists in developing transport conventions Quality recognition for the Club's managers Changes in P&I war risks cover The future of UK Club News

Value for money Premium statements - online Potential savings from mediation 2002 general increase

Sun Jia Kang, Adamantios Lemos and Ola Lorentzon

Three members of the UK P&I Club were elected to the Board at the annual meeting in Zurich in October.

They were Adamantios Lemos of Ceres Hellenic Shipping Enterprises, Ola Lorentzon of Frontline Management and Sun Jia Kang of China Ocean Shipping Group. Mr. Lemos has been vice chairman of Ceres since January 2000. He has extensive experience in vessel construction, ship management, oil spill response and clean up, commercial management, and sale and purchase. This has been gained through tanker operations with Seagroup Inc, supervising the construction of Capesize bulk carriers in Korea for Carras (Hellas) Ltd, managing Carras (Hellas) and working for Braemar Shipbrokers in London in tanker chartering and sale and purchase.

Mr. Sun became assistant president of Cosco in 2000. His 20 years with the company have embraced operational experience in bulk carriers, tankers, containers and general cargo vessels. Since 1989, he has occupied a series of management posts in container operations. In the mid 1990s, he played a leading role in reorganising the container fleets and launched the Pan-Atlantic liner service. In 1997, he became managing director of the transportation division and has been developing Cosco's logistics operations.

Mr. Lorentzon is chief executive officer of Frontline Management A/S in Oslo. He was formerly managing director of ICB Tankers in Stockholm before Frontline acquired the company. Frontline and subsidiaries Knightsbridge Tankers and Golar LNG have steadily increased the tonnage placed with the UK Club.

Mr. Tullio Biggi was elected a deputy chairman and vice-president, succeeding Nils-Gustaf Palmgren who has retired from the board. Chairman and president Aleco Kairis and deputy chairmen and vice-presidents Klas Kleberg and Tom Moore were re-elected.

The Chairman recorded the thanks of the Board to Messrs. N.-G. Palmgren and Yang Bin who retired at this Annual General Meeting for their dedicated service to the Club. The Board's thanks were also extended to Messrs.

A. Gagarin of Northern Shipping in Archangel and D.A. Manthos of Admanthos Shipping Agency in Stamford, USA who had left the Board since the previous Annual General Meeting. These Directors had contributed greatly to the success of the Club and they would be much missed.

Photo courtesy of Lloyds Ship Manager

At its meeting in October the Board was brought up to date with the steps that have been taken towards new international legislation in two areas of maritime law. The International Group of P&I Clubs has been involved in both.

Nigel Carden reports as follows.

CMI, UNCITRAL and transport law

Current regimes relating to Carriage of Goods by Sea owe much to a Conference in 1922. This was sponsored by the Comite Maritime International (CMI), an international organisation of maritime law associations. The Conference agreed a uniform international regime governing the liability of shipowners under bills of lading. Before then it had been easy for shipowners to avoid responsibility to the owners of cargo they carried by use of contracts which exempted them from liability for loss or damage.

The result of the Conference was the adoption in 1924 of the international convention we familiarly know as the Hague Rules. It contained obligations that carriers could not avoid by contract, balanced by a right to limit liability on a package basis and by exceptions from liability, identifying causes of damage for which carriers would not be held responsible.

The principal obligations of the carrier were to exercise due diligence before and at the beginning of the voyage to make the ship seaworthy. He was to man, equip and supply the ship properly; and to make fit for their purpose those parts of the ship in which goods were carried. He was obliged to act properly and carefully in carrying out whichever tasks he had agreed to perform under the carriage contract, typically the loading, handling, stowing, carrying, caring for, and discharging of goods. Certain duties were also imposed on the shipper. This regime was updated, but not fundamentally altered, by the 1968 Hague-Visby Rules. These Rules are expressly referred to in many carriage contracts today.

Concern about whether the right balance had been struck between the interests of cargo owners and of carriers led to the development of the Hamburg Rules in 1978. However, few countries have been willing to adopt the Hamburg principle of "presumed fault", whereby the carrier is automatically liable for loss caused while the cargo is in his care, unless he proves that all reasonable measures were taken to avoid the cause of the loss.

It was against this background that the United Nations Commission on International Trade Law (UNCITRAL) turned in 1996 to the CMI to find an acceptable way of updating international law on carriage of goods. A project to undertake this, known as 'Issues of Transport Law', has been developed by the CMI, who have consulted with many industry bodies including the International Group.

Club managers have taken the view that the new instrument should include the best features of the existing regime, including fault-based liability and retention of most existing defences. Even if, in the era of ISM, a defence of 'error in management' seems not to be appropriate, it remains arguable that the related defence of 'error in navigation' should be retained, especially where loss is caused by the errant navigation of a pilot.

On the other hand, the Group has supported the need for change, by provisions in the draft instrument to facilitate e-commerce, a wider period of carrier's responsibility from receipt to delivery of cargo, and application of the instrument to multi-modal transport (using the 'network' principle that liability should be governed by the regime compulsorily applicable to the mode of transport and place where loss occurs).

There have been many other issues under discussion, including, to name only a few examples, the information required to be included in transport documents, the (now less likely) possibility of distinguishing 'performing' from contracting carriers, rights of control of cargo, and liability for delay.

The CMI will forward a completed Outline Instrument to UNCITRAL before the year's end. But some of the issues will remain in play as UNCITRAL proceeds to develop the CMI document towards a new Convention. This it will do in consultation with governments over the next 2 or 3 years.

Athens convention

Since 1998, the managers have regularly reported to the Board on initiatives within IMO to introduce a new Protocol to the 1974 Athens Convention, which establishes liability of shipowners for death and injury claims to passengers on a sea-going vessel.

The existing 1974 Convention is a fault-based regime, which allows the carrier to limit liability to SDR46,666 (US$ 59,125 as at Dec. 2001) per passenger, unless the carrier acted with intent to cause the damage, or acted recklessly and with knowledge that such damage would probably result. This limit is regarded by many States as being too low and was raised to SDR175,000 ( US$ 221,725 as at Dec 2001) in a 1990 Protocol to the Convention. The 1990 Protocol, however, is not in force, and the aim of increasing the limits has now been joined with that of achieving some element of financial security.

The Group has been working with IMO to seek ways to achieve these twin aims. There have been complicating difficulties, some of which - such as a proposal to reverse the burden of proof in passenger claims, and a requirement on the insurer to waive policy defences in cases of wilful misconduct - have now been dropped.

However, other difficulties remain, arising out of the desire of some states to include in the Protocol strict liability and direct rights of action against insurers. These in turn have implications for the basis of limitation and the amount of any increase in limits.

Despite these problems, at the October 2001 meeting of the IMO Legal Committee, the text of a Draft Protocol was adopted for submission to a Diplomatic Conference scheduled for October 2002. The outstanding issues must be resolved at the Diplomatic Conference if the Protocol is to succeed. The International Group will therefore continue its discussions with IMO through 2002, in the hope that a satisfactory solution can be found.

Further reports will be made on both the above subjects to the Club's Board and thus information on their progress will appear in future editions of UK Club News. In the meantime, any Member desiring further information on either can contact Nigel Carden on +44 0207 204 2147 or by e-mail on nigel.carden@thomasmiller.com

David Moorhouse, Marion Mitchell, Peter Donnellan, Hugo Wynn-Williams

The Club's managers have been approved to the international quality management system standard ISO 9001: 2000. This standard, introduced at the end of last year, is designed to ensure that companies focus their management systems on meeting the needs and service requirements of customers.

Certification has been awarded for all the managers' offices worldwide which are involved in providing services for the Club and its Members. These include the London head office; local offices in Piraeus, Antwerp, Genoa, Dubai and the Isle of Man; the regional hub in Hong Kong; sub offices in Singapore, Taiwan and Sydney; and, serving the Americas, the Jersey City office and sub-offices in Miami and San Francisco.

The assessment was carried out by Lloyd's Register Quality Assurance. David Moorhouse, Lloyd's Register Chairman, presented the certificate to Peter Donnellan and Hugo Wynn-Williams on August 23rd. Achieving certification recognises the managers' determination to develop a system which reflects their commitment to the service of Members.

To reach the high standards required by ISO 9001:2000, Millers has had to demonstrate how all elements of its management system work together to meet Members' requirements. This includes linking the business with regional and local targets and individual performance standards; identifying training needs; and listening and acting on feedback from Members about performance. Hugo Wynn-Williams explained:

"Thomas Miller has always prided itself on first-rate service to the Club's Members. Our core values include integrity, independence of judgment and advice, expertise, commercial focus, cost consciousness and a willingness to accept change. As these have never been more important, we had no hesitation in exposing this management philosophy to rigorous third party assessment. The growing practice among shipowners of applying the ISO 9001/2 standard to their own businesses has helped sharpen our focus on achieving high standards."

In her role as Group Director of Quality, Marion Mitchell led Thomas Miller's two-year programme of preparation for ISO 9001:2001 certification. Any Member desiring further information can contact Marion on +44 20 7402 2142 or by e-mail on marion.mitchell@thomasmiller.com.

Following the tragic events of 11 September, the Directors resolved to make a change to the special war risks P&I cover which the Club provides to all Members.

Luke Readman explains the background to this decision and the consequent need for Members to maintain market war risks P&I cover up to a minimum of their ship's proper value.

The war risks P&I cover provided by the Club dates back to 1987 and has been given without any additional cost to Members by an annual resolution of the Directors using the power given them in the proviso to Club Rule 5E. This is the rule which excludes all claims arising out of an event which is categorised in general terms as a "war risk". The proviso, added to the Rules in 1987, allows the Directors to restore cover for these ordinary P&I claims which would otherwise be excluded by Rule 5E on terms which form part of the Directors' resolution.

This change to the Rules was introduced after the London marine insurance market changed the wording of the traditional war risks exclusion used in market hull policies, the so-called FC&S clause "Free of capture and seizure..." which had also been incorporated in the Club Rules almost from time immemorial. The wording of the new "war risks" exclusion adopted in London market hull policies was followed by the P&I Clubs in the International Group in part - the language of parts (i) and (ii) of Rule 5E is identical, but the P&I Clubs consciously adopted in sub-paragraph (iii) a different wording for the rest of their "war risks" exclusion. This confines the exclusion to claims arising as a result of incidents involving "mines, torpedoes, bombs, rockets, shells, explosives or other similar weapons of war...".

The Clubs deliberately did not adopt the additional language of the new hull policy exclusions which refer to "persons acting maliciously or from a political motive." The main reason for this deliberate omission was the difficulty which could be expected to arise in trying to determine the motive of a person who deliberately causes damage which gives rise to a liability or uses physical violence, for instance to injure or kill a crew member. In order to be able to take a quick decision on whether an incident fell within the "war risks" exclusion or was covered in the ordinary way, the Clubs decided they would only look to what happened and what sort of weapon was used, and not to try to guess the motive of the perpetrator.

However, the Club also realised that by adopting this different language for the "war risks" exclusion, a gap might arise between ordinary P&I cover from the Club and the cover available to Members from market war risks underwriters. Although traditional war risks insurance predominantly covers hull damage and associated expenses, it is normal for hull war risks policies to be extended to cover risks of a traditional P&I nature, such as crew claims, when the relevant liability arises out of one of the defined "war risks" perils. Not uncommonly, these are defined by reference to the war risk exclusion in the hull policy and not by the wording of the Club's Rule 5E.

The purpose of the Club's special war risks P&I cover was therefore to give Members at least some protection against what would otherwise be an ordinary P&I claim, but was excluded by the Club's war risks rule and not picked up under the terms of the market war risks cover which the Member had taken out. Obviously, if the Member's war risks cover from the market would pay the claim, there was no need for the Club's cover unless the claim was for more than the limit on the war risks underwriting policy. In these circumstances the cover from the Club would still be available to the Member but only to top up (in excess of) the maximum recovery from the market underwriters.

In addition, the new Club cover enabled the Managers to respond rapidly to an incident involving a Member's ship if it was not absolutely clear in the early stages whether the war risks exclusion would apply to the incident. Although some of the terms in the exclusion have long histories of interpretation by the English courts, it is not always easy to tell whether a particular incident is caught by the wording of the exclusion. This is particularly so in some of the more imaginative scenarios involving terrorist activity and its consequences. If the Member has some cover from the Club, even if the exclusion applies, it is possible for the Managers to start helping the Member as soon as the incident occurs, and investigate the extent of the Member's war risks cover at a later stage when the facts become clearer. Unlike the normal cover, the Club's war risks cover is limited to a maximum of $100 million per accident, but this is unlikely to be relevant to the initial response.

Circulars to Members at the time and subsequently have always made it clear that the Club's special war risks cover was not intended as a substitute for market cover, but was there as a safety net for Members if the claim was not covered under their market war risks cover or exceeded the limit on that market cover. Because of the remote nature of the risk, the cover provided by the International Group Clubs for this eventuality was separately reinsured in the London market at a modest cost which could be absorbed by the Club without making an additional charge to individual Members. If and when events rendered an area of the world particularly dangerous from a war risks point of view, the terms of the cover provide that the Club could then exclude that area from the cover.

This is what happened in the Arabian Gulf after the Iraqi invasion of Kuwait in 1990. The Club did not try to charge additional premiums for the cover in that area. It merely excluded it altogether and left those Members whose ships were still trading there to buy all the war risks cover they needed for P&I claims from the market.

The events of 11 September in New York and Washington created different problems for the Club. First, there was and remains some doubt about whether a similar terrorist attack in a marine context would be excluded by the Club's war risks exclusion rule. Since the marine insurance market generally, and the Club's reinsurers in particular, would regard all similar terrorist acts as "war risks", some further amendment to the Club's Rules will be necessary for the new policy year beginning on 20 February 2002. A satisfactory definition of "terrorism" is notoriously hard to achieve and most foreseeable acts of terrorism would almost certainly be excluded from normal P&I cover either by virtue of a "seizure" of the entered ship or by the use of explosives or a weapon of war. However, a specific reference to "terrorism" in Rule 5E now seems to be inevitable following the events of 11 September.

The immediate problem which necessitated the Directors' resolution in October was the reaction of market war risks underwriters to the new threat of further terrorist attacks or of retaliatory war-like action. Using the market war risks underwriters' power to cancel and reinstate policies on different terms or to charge additional premiums for entering perceived high risk areas, the war risks market changed dramatically and many owners faced substantial additional costs to maintain their full war risks hull and P&I cover on the market.

In order to ensure that the Club's special war risks P&I cover remained available to all Members on an equal basis, the Directors decided that it was right to impose a mandatory level of market war risks P&I cover on all Members and that the special cover from the Club should only be available to Members in excess of that mandatory level, even if a Member chose not to buy the requisite minimum cover from the market. Although conscious that ship values have little relevance to most P&I claims, the Directors decided on the "proper value" of the entered ship as the standard minimum for the limit of war risks P&I cover which Members are now required to have taken out on the market before they can make use of the Club's war risks P&I cover.

If Members choose not to take out that cover, they cannot now look to the Club to provide it at that level. The Directors have, however, retained a discretion to pay a claim falling below the proper value of the ship, but will doubtless require to be satisfied that there were very good reasons for the Member's failure to effect war risks P&I cover on the market to a minimum limit of the ship's proper value.

World Trade Center

At the Zurich meeting the Board authorised a donation to the New York State World Trade Center Relief Fund.

Any Member desiring further information can contact Luke Readman on +44 20 7204 2142 or by e-mail on luke.readman@thomasmiller.com

A primary purpose of UK Club News is to be a bridge between the Members and the Club's Board of Directors.

Accordingly it will in future be published four times a year, each edition following one of the four regular meetings of the Board. These meetings are normally scheduled for January, May, July and October. This will allow UK Club News to keep Members up to date with issues that have been reported to and considered by the Board. Breaking news will continue to be delivered through the UK Club website. In the main this will be via the publicly available website www.ukpandi.com. Where it is desired to provide news to Members before it reaches that public domain, some items will be published on the registration-only website www.epandi.com.

Advice on loss prevention will not usually appear in UK Club News. This will continue to reach Members through the Club's Loss Prevention Bulletins (which are available on paper, by email and via the Club's website), "Loss Prevention News" and "Carefully to Carry", as well as through videos such as "Taking Care" and "Any Fool can Stuff a Container".

Members will also continue to receive analytical studies, such as "Analysis of Major Claims" and "The Human Factor", that are based on the Club's store of information on the causes of accidents. "Tanker Risk Profile" and "Analysis of Major Claims" are available in CD-ROM to for use with personal computers.

The UK Club news team are eager to hear Members' views on the format and content of this newsletter. Please forward your comments and questions to Nick Whitear either by telephone on +44 20 7204 2334 or by e-mail to nick.whitear@thomasmiller.com

The UK Club puts great emphasis on the quality of the service that it provides. The Members rightly expect excellence is this area. But as they must ultimately bear the cost, it is also important to the Members that this service be provided in a cost-effective way.

Claims executives, charged with protecting the interests of Members and Club while achieving settlement goals, have always tried to match the demands of individual cases with the skills of particular suppliers. Increasingly they are also focusing on the value delivered by those suppliers.

Fees paid to external suppliers of claims handling services are the Club's largest expense after the sums actually paid in settlements to claimants. The three key groups of suppliers to the Club are lawyers, surveyors and correspondents. Managing those suppliers strategically is a complex task as some 4,360 companies currently provide such services to the Club. In search of greater value for money, the managers have undertaken a review of how and how effectively the Club purchases the services of lawyers, surveyors and correspondents.

Lawyers

The majority of shipping and trading contracts provide for litigation or arbitration in the UK or in the USA. This is a major reason why lawyers in these two jurisdictions provide an important part of the service delivered to UK Club Members. They are frequently involved in the higher profile cases. The Club is therefore concentrating on increasing the productivity of relationships within these two areas.

The Mahoney Consulting Group has been retained to assist the Club. Dan Mahoney, the principal, is a specialist in obtaining high service and productivity standards from law firms. A former general counsel at DuPont, he developed the Law Firm Partnering Programme for the purchase and supply of legal services. Mahoney is looking at four main aspects of claims handling in pursuit of improvements in productivity:

1. The selection and evaluation of lawyers to ensure that only the best equipped are instructed.

2. The development of fee structures with preferred suppliers that align the interests of those law firms, of the Members and of the Club. Whilst the hourly rate is likely to remain the main basis for charging, it can reward inefficiency. The programme will focus on reward structures that concentrate on early cost-effective settlement and reduction in the level of claims paid.

3. Using technology to reduce the administrative costs of buying legal services and to help the Club's managers to evaluate the productivity of the providers. OASIS, the electronic workflow system used by the London-based P&I claims executives, can be enhanced to monitor and control the process more effectively.

4. Reviewing work practices of all participants in the claims process, especially as performed in offices, and coordinating them.

The managers reported on this programme to the Board in October.

Surveyors

In 1994, the managers set up a database of approved surveyors worldwide, which identifies those surveyors who provide very good value for money. The database monitors costs and has prompted discussions, particularly with larger firms, about more innovative fee arrangements.

Over the last five years, many larger firms of expert surveyors have merged, partly to develop work with larger clients. The managers intend to preserve access to this top-class expertise, whilst implementing more creative ways of managing the associated costs.

Correspondents

The Club has about 360 correspondents on its list, which is published annually in print and maintained continually up-to-date online on its website. Most have acted for the Club for many years. Commercial correspondents have the necessary expertise to deal with the majority of disputes. In recent years, the managers have been moving away from using legal correspondents for disputes that do not need their special (and generally expensive) expertise. The expertise within the correspondent network is a valuable support to handling claims and it is in the best interests of the Club to maintain the system. But it must be cost-effective. Efforts are being concentrated on the workflow processes between the Club managers' and the correspondents' offices, using IT to eliminate repetitive administrative processes and to improve the speed of service delivery.

Millers are involved with other managers of clubs in the International Group in the development of a unified system for submitting correspondents' fees to the clubs over the internet. It aims to save costs and speed up processes by avoiding unnecessary re-keying of data in the correspondents' and Club managers' offices.

Premium statements - online Premium statement of accounts have now been added to the Underwriting Reports area of ClaimsTrac on www.epandi.com. Paid, due and overdue debit note details can be viewed together with summaries of amounts due by due date. The reports can be printed directly from the browser or data downloaded to a spreadsheet. Furthermore the premium ratings are now shown against each ship on the Fleet List reports. Issues 26 & 27 of Club News explain the Club's online facilities. Alternatively contact Nick Whitear on +44 20 7204 2334 or e-mail on nick.whitear@thomasmiller.com.

In recent lectures in Greece and Cyprus, Tony Fielder of the Club managers Piraeus office described the potential of mediation to help the Club reduce its expenditure on legal services and thus contribute to its search for greater cost-effectiveness, described in an earlier article.

Tony pointed out how increasingly complex procedures have driven up the costs of both arbitration and litigation, increasing the relative attraction of this alternative method of dispute resolution. In the pure form of mediation, a neutral person helps the parties to dispose of their dispute through a settlement that they negotiate.

In the two jurisdictions in which the Club spends most on legal services, it is increasingly common for parties to obliged to try mediation before resorting to the courts. The courts in the USA were the first to require litigants to try to settle their disputes by mediation. In the UK, recent changes in court procedure recommend an attempt be made pre-trial to settle, and the commonest method is by mediation. The Club now has enough experience of mediation to make some assessment of achievable benefits from mediation. Some of them are:

• realistic settlements
• no inflated jury awards
• saving on legal costs
• privacy
• assists business continuity between the parties

• slow
• costly
• adversarial
• risky

The saving on legal costs can be considerable. Most mediated disputes so far undertaken have involved large sums of money. The available statistics suggest that the average saving on legal costs in court - referred mediation in the UK has been $160,000 per case with some savings amounting to $2.4 million per case compared to normal litigation in the High Court. The bulk of the savings are the trial costs. The Club has, through mediated settlements, made a total saving of $500,000 in the predicted cost of a recent series of US claims arising out of a collision.

For the stage to be set for mediation it is desirable that the preparations for litigation have progressed far enough for the issues and evidence to be identified. This requires the case to be prepared at an early stage, which in any event accelerates the litigation should mediation subsequently fail to produce a settlement.

Mediation is presently scheduled in the court process after the discovery process is substantially complete. Discovery is the major cost component of litigation. Unfortunately, recent attempts to mediate disputes at an earlier stage have met with only limited success.

For mediation to work, the litigants have to move their mind-set from considering