The U.S. District Court for the Southern District of New York recently issued a decision finding that a shipowner member was bound to a P&I Club’s board of directors’ decision to deny coverage for that member’s losses arising from a maritime casualty.

In Transatlantic Lines LLC v. American Steamship Owners Mutual Protection and Indemnity Association, Inc., a shipowner (Transatlantic) had chartered a barge from McAllister Towing Co. Inc. (McAllister) that brought the barge under the coverage afforded by rules of a P&I club, known as the American Club. The American Club’s rules provide that a member can appeal a denial of coverage only to the association’s board of directors, made up of officers from other shipowner members. The appeal is considered at a regular meeting of the board, which in turn issues a final, binding written decision.

In the underlying incident, Transatlantic chartered a barge from McAllister and Transatlantic used the barge to transport certain cargo, which later fell overboard. Cargo interests commenced suit against McAllister and Transatlantic to recover their damages. Pursuant to the terms of the charter, Transatlantic was obligated to pay for McAllister’s defense costs. Transatlantic, in turn, sought coverage from the American Club for a number of items including the reimbursement of McAllister’s defense costs and certain other expenses. After the American Club’s board had denied its appeal, Transatlantic filed suit in federal court, arguing the American Club’s rules were fundamentally unfair. In general, Transatlantic complained that the American Club’s rules were deliberately designed to prevent a member from challenging any coverage determination, especially in this instance, since Transatlantic was no longer a member of the club by the time it challenged the board’s decision. The court equated the board hearing to an ADR proceeding, subject only to an “arbitrary and capricious” standard of review. Since Transatlantic agreed to the American Club’s rules and voluntarily participated in the hearing, the court ruled Transatlantic effectively had waived its right to object to being bound by the outcome.

Shipowner members can and do challenge coverage determinations by their respective P&I clubs. However, unlike a typical insurance company, P&I clubs are regarded as mutual insurance associations that are not governed by state insurance laws or regulations. Rather, P&I clubs are governed by their rules that their members voluntarily agree to abide by upon accepting membership in the club. As such, a shipowner member cannot seek to overturn a P&I club’s rules based on traditional notions of fairness that would govern a normal insurance policy. Accordingly, the shipowner member is stuck with those rules, including the dispute resolution provisions thereof, notwithstanding any perceived bias inherent in those rules.

Source: Cozen O’Connor