Magazine article Risk Management

The P&I Club Saga

Magazine article Risk Management

The P&I Club Saga

Article excerpt

News Item. June 17, 1994: The U.S. Coast Guard today reiterated that oil tankers trading to and from U.S. ports must carry certificates of financial responsibility (COFRs) to prove they have enough money to pay for oil spill damage claims.

News Item. July 1, 1994: Protection and indemnity (P&I) clubs, the mutual insurance facilities owned by shipowners, reaffirmed their resolve not to provide the mandated COFRs. The clubs further claimed their members will cease shipping to the United States if the Coast Guard does not moderate its position.

News Item. July 11, 1994: A report issued by the Coast Guard cautioned that the U.S. economy will be "disrupted" if shipowner insurance clubs refuse to obtain COFRs. The report maintained that oil tankers will be barred from venturing into U.S. waters unless they have the

Last year's impasse between the U.S. Coast Guard and the P&I clubs (which insure third-party liabilities for about 95 percent of the world's shipowners) had all the elements of a paperback thriller. The insurance saga, complete with behind-the-scenes maneuvering and last-minute developments, pitted international maritime interests and the oil industry against the Coast Guard. The stakes certainly were huge: keeping imported oil and other merchandise flowing into the United States.

As the dispute remained unsettled, the questions increased. Were the P&I clubs bluffing? Would they really cut off the oil spigot? Would the Coast Guard give in to the shipowners' demands? Would it really turn away any ship that lacked certification? Would the White House intercede? By late summer, all parties in the dispute were expressing concern about what they called the "train wreck" scenario: the very real possibility that the standoff would persist through the deadline, forcing the shipowners to show their hand and actually halt trade to the United States.

While the Coast Guard and the clubs traded salvos, the insurance brokerage industry developed a market-based solution that thwarted disaster. Days before the deadline, the brokers pieced together two new insurance facilities to provide shipowners with the necessary COFRs. The establishment of the new facilities--First Line and Shoreline Mutual--indicate that even the most problematic risk is not insolvable from an insurance market perspective. "Any problem has a solution if you gel the right minds working together," said D. Darby Duryea, managing principal at Johnson Higgins, the sponsor of First Line.

THE VOID

The impasse between the Coast Guard and the clubs grew out of the 1989 grounding of the Exxon Valdez oil Lanker off the coast of Alaska. That disaster awakened U.S. public consciousness to the environmental threat posed by marine transportation of hazardous cargoes. The following year, after months of often-contentious debate, the U.S. Congress passed the Oil Pollution Act of 1990 (OPA 90), which directed the Coast Guard to issue regulations governing the statutory limits of financial responsibility for vessel owners plying U.S. waters. The Coast Guard released several drafts for industry observation and input. Each was rejected by the shipping industry as onerous.

The final regulations required all vessels over 300 tons, from oil tankers to ships carrying dry goods, to have COFRs to enter or trade within U.S. waters. The purpose of the COFRs was to give the U.S. government quick access to funds in the event of an oil spill. Owners of a large tanker, for example, would need to provide evidence that they could pay about $400 million to cover damages. COFRs could be established by a guaranty of insurance, a surety bond guaranty, a financial guaranty or a demonstration of self-insurance.

The limits prescribed by the Coast Guard were but one factor in the clubs' rejection of the COFRs, however. Luke Readman, director of London-based Thomas Miller P&I, the agents for the managers of the 125-year-old United Kingdom P&I Club, said that because the clubs were forced to I vide evidence of financial responsibility, they were being asked to be guarantors. …

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