ABSTRACT
A club letter of guarantee is a form of assurance that can be obtained based on the insurance provided by Protection and Indemnity (P&I) clubs providing a comprehensive claims handling service to club members, which is a de facto obligation as vessels are subject to a wide range of risks during their voyages.
I. INTRODUCTION
Maritime trade has been playing a key role in fulfilling the trade and transportation needs of mankind since ancient times. In modern times, it continues to be the backbone of global trade. In this industry, owners and operators are consuetudinary exposed to various risks.
Considering the significant value of both the vessels and the cargoes carried, it becomes apparent that the relevant parties will want to take measures against possible risks to ensure that the vessels and cargoes are transported without any damage. In this respect, P&I (Protection and Indemnity) clubs, which provide a momentous assurance in maritime trade, and the letters of guarantee issued by these clubs serve an important role in the industry and in maritime law. Such clubs are private insurance associations that are established to provide protection against diverse risks for owners, cargo owners and other relevant parties.
This article will provide information on the history of marine insurance, the operating mechanisms of P&I clubs, the guarantees they offer and the rights and obligations of the P&I clubs and members. Furthermore, the extent to which P&I letters of guarantee can be used in the collection of maritime claims, the benefits of these letters of guarantee and the matters to be taken into consideration will be discussed.
II. MARINE INSURANCES
A. History Of Marine Insurances
Whilst maritime transportation allows long distances to be crossed faster and at a lower cost in comparison to the road transportation, it is exposed to potential risks due to a range of factors such as the impact of weather conditions and piracy acts. Thus, the first insurance practices were embodied in marine transportation.
The first marine insurance activities, typically based on gentlemanly and credit or mutuality, are known to have been observed in Phoenician, Ancient Greek and Roman civilizations1. It is known that insurance law had the characteristics of customary law in the periods of its emergence, and the first written regulations in this field were mostly based on existing commercial practices2. Considering that the first national regulation on insurance law was enacted in the Code of Maritime Trade Law (Ticaret-i Bahriye Kanunnâme-I Hümâyun) dated 21 August 1863, it can be stated that insurance was practiced on commercial precedents in Türkiye for a long time.
The Industrial Revolution in the 18th and 19th centuries resulted in significant advances in ships, as well as in all other types of engineering systems; ships that were stronger, faster, capable of carrying more cargo, and with greater range were produced and used in trade. In parallel with the insurance sector, which has grown in both quality and quantity as a result of technological advancements, marine insurance has made similar strides, even pioneering the insurance sector’s development. Today, the most common types of marine insurance are hull insurance, cargo insurance, liability insurance, and club insurance, which is discussed in this article and is now a de facto requirement.
B. Differences Of Club Insurance To Other Marine Insurances
Club insurance is distinguished from other marine insurances primarily by its focus on the liability of the members. Although club letters of guarantee are essentially divided into Letter of Undertaking (LOU) and Letter of Guarantee (LOG), in practice, there is not a significant distinction among these two guarantee letters and the term “letter of guarantee” is used to refer to both. While other marine insurances typically cover physical damages, club insurance mainly covers the liability of members to third parties. While this scope depends on the contractual agreement between the club and the member, it provides broad protection against a wide spectrum of risks, particularly in relation to crew, cargo and environmental liabilities. Other marine insurances that are commonly used can be summarized as below:
1. Hull and Machinery Insurance:
Covering damages that may occur on the hull and machinery of the insured vessel, its scope is usually determined by the special terms and conditions attached to the policy and provides insurance against any decrease in the assets of the owner.
2. Cargo Insurance:
Cargo insurance is a type of insurance that can be provided for all kinds of cargo being transported in all means of carriage, thus it is not a type of insurance specific to marine insurance. Since it is an insurance that covers the damages that the cargo may be prone to, the cargo owner and/or the parties who have an interest in the cargo not being damaged are the beneficiaries of this insurance.
3. Maritime Vessels Liability Insurance
Under Turkish law, this insurance is compulsory and covers the death or injury of passengers or third parties on board a marine vessel, as well as damage to passengers’ possessions.
III. OBLIGATIONS OF THE PARTIES IN CLUB INSURANCE
A. Obligations Of The P&I Club
1. Claims Handling
The international aspects of maritime trade cause the vessels to be in the waters and ports of states subject to foreign legal systems. Accordingly, this situation enhances the risk of loss of rights in disputes that the vessels may encounter in a foreign state. Indeed, in case of a dispute, it is necessary to take immediate action in order to avoid exceeding the period of prescription and to gather the evidence. Furthermore, the foreign party might suffer major disadvantages in the territory when it is considered that the parties who may submit a claim are mostly performing their commercial activities in the relevant state and are familiar with the legislation and procedures of the country in question, as opposed to the other party.
As a result of the aforementioned, P&I clubs’ claims handling activities play a significant role when a vessel gets involved in a dispute, particularly in international seas. In the claims settlement procedure, the club operates as an insured member, almost as if it were the party in dispute. While the club does not directly act as the member’s representative or as if it has “taken over” the dispute, the member is required to guide the dispute in line with the club’s directives, to assign representatives nominated by the club and, in sum, to fully comply with all the directives of the P&I club. As the member’s behaviour contrary to the club’s directives may adversely affect the amount of payment that the club will provide to the member, complying with the club’s instructions is mutually beneficial for both parties. Thus, at the end of the period, the member will either indemnify the third party to whom it has caused damages and recover the compensation from the club, or the P&I club will pay the third party directly.
2. Providing Fiscal Assurance
Arresting the ship is the most drastic measure that will put the greatest amount of pressure on the owner to allow the claimant to collect its receivables from the owner. When considering the fact that the arrested ship’s regular expenses will continue to be incurred, as well as the lost earnings due to the vessel’s inoperability, it is clear that an arrested vessel will cause significant damage to its owner.
Pursuant to Article 1353/1 of the Turkish Commercial Code No. 6102 (“TCC”) (“Only provisional seizure of the ship may be ordered to secure maritime receivables. For these receivables, a precautionary injunction may not be imposed on the ship, or the ship may not be prohibited from voyage by any other means.”) Ships that have the characteristics of movable property under Turkish law, can only be arrested by way of provisional seizure. Since a provisional seizure order can only be taken due to claims arising from monetary claims, the disputes to which Turkish law applies, the claim relied upon to arrest the vessel must be a monetary claim.
If such arrest occurs or is imminent, the member may regain the control of the vessel by providing a club letter of guarantee issued by the P&I club. In addition to this option, the club is under no obligation to issue a letter of guarantee, as described below under the heading “P&I Club’s Discretionary Power”. The club provides letters of guarantee (and practically all of its operations) in the exercise of almost complete discretion.
3. Paying Compensation
The possibility of receiving compensation from the club in the event of a potential damage is one of the main reasons for becoming a member of a P&I club. Thus, the member can have the P&I club reimburse the costs arising from the claims submitted by third parties under specified conditions.
Whilst there is no unified set of rules for the payment of compensation by P&I clubs, the requirements generally consist of the following3:
• The risk must have occurred while the member was registered to the club,
• The risk must be covered by the club insurance,
• The risk must be related to the owner of the vessel that is registered in the club,
• The damage caused by the occurrence of the risk must have been caused by an act of the owner of the registered vessel,
• Under the “payment first” rule, also known as the “pay to be paid” rule, the member must have paid the required premium to the club.
Although the above conditions have been fulfilled, in order for the member to receive compensation from the P&I club, as a rule, the member must have made the payment in full to the third party, but for various reasons, particularly the fact that the club is already in charge of the claims handling process, this rule is not strictly interpreted by the clubs4.
B. Obligations Of The Member
Liabilities of the member in club insurance are relatively simple in comparison to the liabilities of the club and are mainly limited to the payment of the premium and providing the necessary information to the club. These obligations can be expanded at the discretion of the parties, whereby the member may have various further obligations by mutual agreement.
1. Premium Payment
Whilst it is possible for the P&I club to receive payment on both fixed and mutual premium basis, in order not to exceed the scope of this article, only the mutual premium, which is more common in practice, will be discussed.
The structure of modern P&I clubs operating on a mutual system, which has existed since the first clubs, is that the income and expenses of the club should be equal at the end of the financial year; if the income is greater than the expenses, the surplus should be returned to the members, and if the expenses are greater than the income, additional premiums shall be collected from the members5. In this respect, the member is responsible for paying the premium as determined by the valuation in accordance with the qualifications of the registered vessel and, if necessary, to fulfil the uncovered expenses of the club jointly with the other members.
As it has been stated under the title “Obligations of the P&I Club”, pursuant to the “pay to be paid” rule, the member must have paid the premium to be able to fulfil any claim. The first consequence that may arise if the member defaults in the premium payment obligation is that the club will not meet any claim submitted by the member. In addition to the aforementioned situation, in case of default in payment of the insurance premium; the insurance contract may be terminated by the club with retrospective effect, the former member may have difficulties to become a member of a different club due to the liaison between P&I clubs, and the most serious consequence, the club may have a right of retention over the registered vessel6.
2. Notice Obligation
The potential member’s obligation to notify starts before the signing of the contract and lasts until the termination of the contract. As stated in Article 1435 of the TCC7, the policyholder, and within the scope of this study, the member, is required to notify the insurer of any important issues regarding the subject matter. Given that the information provided by the member on the application form creates the foundation of the insurance contract between the member and the club, the member is therefore required, like in any other insurance contract, to notify the club of any changes to the crucial terms of the policy8. This phase of the notification duty includes the obligation that exists prior to the occurrence of the risk.
In the event of the occurrence of a risk that is covered by the insurance, the member is obliged to notify the club immediately and in writing, unless otherwise agreed, but subject to the time limit specified in the rules of most clubs9. In fact, as stated above under the title of Claims Handling, the club takes control and directs the process upon notification. The member who breaches the obligation to notify will incur a risk that may prevent the collection of the compensation demanded from the club. In this respect, the obligation to notify is similar to the burden institution, and this is essentially a consequence of the equitable principle, since it would not be proper for the club, which is not informed of the risk due to the member’s lack of notification and therefore cannot carry out activities to minimise the damage that will arise, to compensate for the damage in question.
IV. COVERAGE OF THE CLUB LETTER OF GUARANTEE
The club letter of guarantee extends to all kinds of damages unless otherwise stated or proved by the club, and the burden of proof falls on the club to prove that the damage is caused by a risk that is not covered by the insurance10. However, because such a broad scope of liability of P&I clubs cannot be de facto continuous, in practice, the insurance coverage is established in detail in the contract with the member11. At the same time, as will be discussed below, the fact that P&I clubs have a comprehensive discretion in almost every act carried out, indicates that the club has a wide initiative regarding the scope of the letter of guarantee.
A. Validity Period Of The Club Insurance
Club insurances cover risks that occur only during the period in force. In principle, club insurances start on 20 February and end on 20 February the following year. These dates are based on the fact that the first P&I clubs in history customarily set 20 February, the date of ice melting in the Baltic Sea, as the policy renewal date, but the parties may agree on a different date.
Therefore, policy years in P&I clubs also begin on 20 February each year and continue until 20 February of the following year. However, even though policy years end on 20 February and a policy year begins anew, the policy account for the policy year that has ended is often kept open for two years after the expiry date. That is because the costs for the expiring policy year are not finalised during the policy year in question12.
The policy is deemed to be renewed each year ex officio and on the terms of the previous year unless the parties agree otherwise. There is no unified procedure for the termination of the insurance covering all clubs. The member is required to make a valid termination in accordance with the rules of the relevant club.
B. P&I Club’s Power Of Discretion
It is recognised that P&I clubs have an absolute discretion to take (or not to take) action on claims submitted by their members. However, in practice, in circumstances where the member has paid the premiums and there is no wilful misconduct, the club will act in accordance with the member’s needs.
Besides the extensive authority, the discretionary power exercised in a certain direction in a specific case does not establish a precedent for another case. It is not possible to force the club to fulfil the request in cases where any request made by the member is rejected by the club. As a matter of fact, no such coercion is encountered in practice.
We believe that there are two main reasons for such a wide discretionary power of P&I clubs. Primarily, the fact that there is no regulation at the level of a code on P&I clubs or club insurances in any country in the world, and the lack of compulsory legal rules to a significant extent, has allowed the sector to develop in a mostly free manner. As for the second point, we consider that the fact that both parties are merchants, and therefore there is no other person between the parties, such as an employee, tenant or consumer, who should be protected by legislation or courts, has a positive effect on the liberty of contract granted to the parties. Since the parties have the obligation to act as prudent merchants, unfair exploitation (lesion) principle has a restricted area of application in disputes between the club and the member.
Considering the aforementioned circumstances, despite the low possibility of success, it is permissible to appeal against the actions of the club to the board of directors of the club concerned. In the event that the request to the board of directors is rejected, it may be appealed to the judicial authorities; however, arbitral tribunals and/or courts typically decide to dismiss the case on the grounds that the club’s discretionary power is absolute.
C. Types And Limitations Of The Assurance
P&I (Protection & Indemnity) clubs, contrary to their name, offer various kinds of coverages other than protection and indemnity, such as demurrage and war risks, and engage in reinsurance operations with other insurers. However, for the sake of not exceeding the scope of this study, the protection and indemnity category, which are the main activities of the clubs, will be emphasised. Meanwhile, since it would be beyond the scope of this study to list all kinds of claims that are covered by protection and indemnity, information will be given on the most common types of coverage.
1. Coverages for Seamen:
The definition of seamen set out in Article 934 of the TCC13 includes captains, officers, crew, and other persons employed on board, and the main reason for clubs to obtain a club guarantee for seamen is to secure the legal liability of the member. The scope of the guarantee is determined according to the existence of the member’s liability to the seaman in question and the amount for which the member is liable, and the mentioned criteria depends on the law applicable to the contract between the member and the seafarer14.
2. Coverages for Passengers:
Passenger is defined in Article 1249/1 of the TCC as follows: “Persons transported on the ship with the consent of the carrier, on the basis of a passenger carriage contract by sea, or with regard to vehicles or livestock that are the subject of a freight contract that is not subject to the provisions of this Section, are considered passengers.” In principle, the club insurance covers the damages incurred by the passengers only if they occur within the ship15.
3. Coverages for Cargo:
The operations of merchant ships are mostly dedicated to the carriage of cargo. Thus, cargo claims have been one of the most common claims submitted against clubs throughout the history of P&I clubs. As in regular insurance contracts, if an “All Risks” clause is included in the contract between the club and the member, the coverage provided for the cargo will cover all kinds of damages as a rule, and the provisions with a narrower scope will limit the liability in different and limited ways, just as in other insurance contracts.
V. COLLECTION OF MARITIME CLAIMS WITH P&I LETTER OF GUARANTEE
The primary use of the letters of guarantee obtained by members from P&I clubs can be considered as the collection of the relevant letter of guarantee, like other letters of guarantee. However, the club letter of guarantee is not primarily provided for collection, but for the sake of providing benefits to the member in the settlement of a possible claim. During the settlement process of these claims, which is carried out without an attorney-client relationship between the parties, the principal function of the club letters of guarantee is not to obtain a financial compensation, unlike the letters of guarantee provided by banks or insurance companies, but to take preventive measures against the claims that the member may encounter, to carry out technical inspections, to serve as a fully organised law firm and, if necessary, to mediate between the parties of the dispute16, basically, to eliminate the negative position that the member is experiencing.
Another important benefit of the club letter of guarantee is the release of arrested vessels. Remedies for the release of vessels arrested for reasons arising from private law in return for a letter of guarantee in sufficient amount are applied both in Turkish law and in various other legal systems. However, while the letters of guarantee provided by banks and insurance companies are obtained through relatively long processes, the clubs provide such service free of charge and more rapidly, so that the damages arising from the arrest of the vessel, where even short periods are important, are terminated as early as possible. Furthermore, it should be noted that, occasionally, the clubs demand a collateral guarantee from the member in the form of a “counter-guarantee”. This is because the club does not take over the dispute by providing a letter of guarantee in accordance with a concrete case and is protected from the unfair income that the member may obtain from the club thanks to the counter-guarantee.
As stated above under the heading “P&I Club’s Power of Discretion”, the club has an absolute discretion in all matters, including its activities regarding the letter of guarantee. Accordingly, it would be erroneous to conclude that the letter of guarantee in question can be unconditionally collected from the club by treating it as a customary letter of guarantee, when even providing a letter of guarantee is not included among the debts of the club17. The club shall use its absolute discretion in the collection requests made based on the letter of guarantee, just as it did when providing the letter of guarantee.
To summarise, as a rule, it can be said that it is not possible to collect the letter of guarantee unconditionally. Whilst it is possible to demand the collection from the club, such collection can only be realised if the club uses its discretionary power in that respect.
VI. CONCLUSION
During the operation of maritime trade, the insurance and the letters of guarantee provided by P&I clubs are vital for the whole industry stakeholders. In this respect, the history of marine insurance, obligations of the parties in club insurance, discretionary power of the club, which has a significant role in the granting and execution of club insurance, and the collection of claims subject to maritime law with a club letter of guarantee have been examined in this article.
As explained in this article, although the collection of letters of guarantee is not as unconditional or common as the letters of guarantee provided by banks or insurance companies, especially in a foreign state’s sovereign territory, club insurance has been the optimal remedy for hundreds of years for those who face claims under the maritime law.
BIBLIOGRAPHY
DİDEM ALGANTÜRK WHİTE, Deniz Sigorta Hukukunda Kulüp Sigortası, İstanbul 2006.
GÖKTUĞ BURUCUOĞLU, Kulüp Sigortası (P&I) Çerçevesinde Eşyanın Ziyaı veya Hasarı Halinde Teminatın Kapsamı, (Date Accessed: 18.12.2023) https://dspace.ankara.edu.tr/xmlui/bitstream/handle/20.500.12575/68554/?sequence=1.
HACI KARA, Sigorta Hukuku, Second Edition, İstanbul 2021.
İLKNUR ULUĞ CİCİM, “Tarihsel Gelişim Süreci Bağlamında Deniz Sigortaları”, Elektronik Sosyal Bilimler Dergisi, C. 22, S. 86, 2023.
SERDAR ACAR, Kulüp Sigortası (P&I), (Date Accessed: 18.12.2023) http://nek.istanbul.edu.tr:4444/ekos/TEZ/43189.pdf.
ZEHRA ŞEKER, Deniz Yoluyla Yük Taşınmasında Sigorta Himayesinin Kapsamı, (Date Accessed: 18.12.2023) http://nek.istanbul.edu.tr:4444/ekos/TEZ/34315.pdf.
FOOTNOTE
1 Oktay Karaaslan, Deniz Sigortalarının Tarihçesi ile İlgili Derleme, Prof. Dr. Tahir Çağa’nın Anısına Armağan, First Edition, İstanbul 2000, p. 279-280 and Elif Çelik Partal, Tekne Sigortalarında Teminatın Rizikolar Bakımından Kapsamı, First Edition, Ankara 2021, p. 22; cited from İlknur Uluğ Cicim, “Tarihsel Gelişim Süreci Bağlamında Deniz Sigortaları”, Elektronik Sosyal Bilimler Dergisi, Vol. 22, p. 86, 2023.
2 Hacı Kara, Sigorta Hukuku, Second Edition, İstanbul 2021, p. 6 ff.
3 Didem Algantürk White, Deniz Sigorta Hukukunda Kulüp Sigortası (Kulüp Sigortası), İstanbul 2006, p. 124.
4 Serdar Acar, “Kulüp Sigortası (P&I)” (P&I), İstanbul 2007, p. 401 ff.
5 Acar, P&I, p. 279.
6 Algantürk White, Kulüp Sigortası, p. 99 ff.
7 “The policyholder shall inform the insurer of all important circumstances of which it is or ought to be aware at the time of conclusion of the contract. Circumstances that are not so disclosed at all or disclosed insufficiently or wrongly to the insurer shall be deemed of importance if they could lead to the non-conclusion of the contract or to its conclusion with different terms (had the insurer known the truth). Circumstances asked by the insurer orally or in writing shall be deemed as important until proof of the contrary.”.
8 Algantürk White, Kulüp Sigortası, p. 102.
9 Göktuğ Burucuoğlu, Kulüp Sigortası (P&I) Çerçevesinde Eşyanın Ziyaı veya Hasarı Halinde Teminatın Kapsamı (P&I Çerçevesinde Teminatın Kapsamı), p. 47.
10 Zehra Şeker, Deniz Yoluyla Yük Taşınmasında Sigorta Himayesinin Kapsamı, p. 33.
11 Algantürk White, Kulüp Sigortası, p. 42.
12 Burucuoğlu, P&I Çerçevesinde Teminatın Kapsamı, p. 44.
13 “Shipmen; captain, ship’s officers, crew and other persons employed on board.”.
14 Acar, P&I, p. 117.
15 Acar, P&I, p. 123 ff.
16 Acar, P&I, p. 9.
17 Acar, P&I, p. 378.
