Insurance broker Marsh has taken a close look at freight defence and demurrage (FD&D) cover in an attempt to make sense of the complicated array of services available to shipowners.
FD&D is offered by all the members of the International Group of P&I Clubs. Generally, for a few thousand US dollars premium, it covers the cost of legal support and advice for matters that are not included in the core P&I policy.
The service is becoming increasingly popular.
Issues such as emissions regulations and sanctions are raising new and complicated legal issues between owners and charterers for which FD&D can provide a speedy low-cost resolution.
Traditionally, it has been a way of settling routine disputes such as demurrage.
Marsh head of P&I Mark Cracknell estimates that around half of his shipowner clients are now taking up FD&D cover — but it is not for everyone.
“If you are a shipowner with a large insurance and legal team, you may feel you do not need it,” he said. “If you can do it all in-house, why would you pay for it? But shipowners who are in smaller family businesses routinely take it out.”
Most insurers in the International Group of P&I Clubs limit FD&D cover to P&I mutual members. There are exceptions, such as the West of England P&I Club and UK Defence Club, which are open to all shipowners.
So, where a shipowner has the choice, which cover should it opt for?
“The level of service offered, combined with a club’s policy terms, will be important factors when deciding whether, and from whom, to purchase FD&D coverage,” said Marsh special advisor John Trew, who authored the report.
One issue is that, although FD&D generally offers good value, all clubs to varying degrees require the shipowner to entrust how the case is handled to the P&I club.
Unrealistic or vexatious
Britannia clearly states that the member must “settle, compromise, or otherwise dispose of such proceedings in such manner and on such terms as the managers see fit”.
Some owners may be frustrated by that, but Cracknell suggests the clause is to prevent clubs from running up excessive claims costs with external lawyers for cases that do not merit the expenditure.
“Some of the clubs are very clear that they will take over, in effect, in any legal case they agree to support,” Cracknell said.
“But it is all really about reserving their right not to pursue a claim which does not make sense because it’s either unrealistic or vexatious or whatever.”
Another key area of difference is cover limits. These can range from $5m from clubs such as Skuld and Shipowners’ Club to as high as $15m from the UK Defence Club.
There is also a complicated range of deductibles that form a critical part of what level of claims will be covered.
P&I clubs are keen to promote FD&D services as they are seen as an excellent hook to win P&I business.
Cracknell highlights the North P&I Club — now NorthStandard — as one that has invested heavily in its FD&D team to make it one of the leading services in the country.
But FD&D generally generates only a small proportion — typically between 3% and 8% — of the P&I clubs’ total premium income.
Cracknell said the UK Defence Club — a dedicated FD&D provider, which regularly returns capital to members — shows a good FD&D service can be run profitably.
