Circular /95: Possible Limit on Club Cover



Dear Sirs,


In my letter of 18th February, 1994 I said I would keep you advised of the result of the Board's further consideration of this issue.

In that letter, and my previous letter, I explained the background to your Board's consideration of this issue and the reasons why your Board decided in October, 1992 to start a process designed to lead to the placing of an overall limit on the cover provided by the Club.

I outlined the efforts we have made to persuade other Clubs in the Group that the position taken by your Board is correct and the further steps we had authorised the Managers to take in the context of the International Group, following the realisation that a straightforward financial limit on the cover would not be universally accepted by all Clubs in the Group.

Your Board remains of the view that the Group constitutes a most valuable asset, providing for the Club and its Members the basis of a reinsurance structure which gives us all as shipowners the benefits of very substantial reinsurance protection at a cost which would otherwise be difficult to match. The benefits of the tonnage base which the Group is able to bring to the commercial reinsurance market is of great value, particularly while the reinsurance market remains as troubled as it currently is.

My last letter referred to the possibility of a compromise, which would take account of many of the concerns which led your Board to decide that a limit should be imposed while at the same time preserving the unity of the Group. This possible compromise was being developed by reference to the imposition of a limit on the Members' open-ended liability to pay catastrophe calls, including the calls that would be necessary to make good any failure to collect from the Pool or other Members of the Club.

The details of this proposal have now been fully developed by the Group Managers and considered by your Board. It is currently being considered by the Boards of all other Clubs in the International Group.

The Proposed Compromise

The proposal is that each Member's liability to pay catastrophe calls should be limited by reference to the 1976 Limitation Convention. Under the proposed compromise, each Member would have a finite limit on his liability to pay catastrophe calls set at 20 per cent of the property damage limitation fund for each entered ship. Illustrative values for individual ships' limitation under the Convention are as follows:

Convention Provision Ship Size   Proposed
Limit at
20 per cent
500 gt (minimum tonnage)
167,000 SDRs
(at 30/05/95: 1 SDR = $1.54)
500gt   $51,436  
plus 167 SDRs ($257.18) per gt
(excess of 500 up to 30,000 gt)
30,000gt   $1,568,798  
plus 125 SDRs ($192.5) per gt
(excess of 30,000 gt up to 70,000 gt)
70,000 gt   $3,108,798  
plus 83 SDRs ($127.82) per gt
(excess of 70,000 gt)
150,000gt   $5,153,918  

In addition, the liability of the Club to pay a catastrophe claim to a Member would itself be limited by reference to the aggregate amount of all its Members' limits plus contributions from all other Clubs in the Pool which would similarly be limited in aggregate. The limit on the cover produced by this calculation would be reduced by a deduction of any amount which the Club was unable to recover by way of catastrophe call either from its own Members or under the Pooling Agreement.

When your Board considered this proposal, the Board recognised that the level of the Member limit is far higher than the Board had originally envisaged. The Board also considered that there are inherent difficulties in assessing the point at which attempts to recover catastrophe calls would become unreasonable. Nevertheless, your Board also bore in mind that amongst those Clubs in favour of maintaining the current basis of cover, there remain strong objections to a limit on cover either by reference to a defined financial amount or to a range as low as your Board would favour.

In these circumstances, the Board gave strong support to this compromise as representing substantial progress towards the Board's aim whilst preserving the cohesion of the Group and all the benefits which that brings.

If, as the Board hopes will be the case, the proposal is accepted by the other Clubs in the Group, it will secure by 20th February, 1996 a finite limit on the liability of Members to pay catastrophe calls: the corresponding limit on the Club's liability to pay a catastrophe claim will also be defined in a way which does not put at risk the Club's ability to meet its obligations to pay all other claims for Members.

Your Board is currently awaiting the outcome of the consideration of the same proposal by the Boards of the other Clubs in the Group. If the result enables us to proceed further with this compromise, the necessary changes to the Rules of the Association to implement the proposal will be presented to you, the Members, prior to the commencement of the 1996 Policy Year.

In the meantime, the Managers would be pleased to answer any questions you may have on the technical details of the proposal.

Yours faithfully,

M. A. Kulukundis


Staff Author