Insurers have reacted to the introduction of the ISM Code in a variety of ways. Cargo underwriters have issued a limited exclusion clause; some hull underwriters require sight of a SMC prior to handling a claim. This article addresses the attitude the International Group of P& I Clubs has taken to the introduction of the ISM Code.

The International Group consists of thirteen mutual insurance clubs, which covers the third party risks of their shipowner members. Clubs are owned by their shipowner members and overseen by Boards of Directors or Committees drawn from their shipowner members. The day-to-day running of clubs is delegated to professional managers. The International Group pools the cost of claims above USD 5 million any one incident up to a limit of USD 30 million. Claims in excess of USD 30 million are reinsured up to USD 2.03 billion. Claims in excess of this figure are again pooled up to a limit determined as a percentage of the property fund under the 1976 Limitation Convention - currently equivalent to about USD 4,25 billion.

For some time Clubs have endeavoured to warn Members of the introduction of this Code and to assist them in developing an awareness of its requirements. In the case of the Gard Club, it issued warnings as early as 1994 and has assisted Members through a resource group, which not only offered technical and legal advice, but also organised workshops and issued circulars. A survey shortly before 1st July this year revealed that nearly all the Gard Members which were required by the Code to have an ISM Certificates, actually had them.

Prior to the 1998 P & I renewal, Club Managers of the International Group of P & I Clubs reviewed the status of compliance with the Code. Since the Group pools its claims it is in the interests of all Members of the Group to ensure that claims costs are kept as low as possible The International Group managers perceived compliance with the ISM Code as another means of reducing such costs. It also recognised that costs would be incurred in obtaining ISM Certification. Since the effect of mutual membership is the sharing of cost it was considered inequitable to provide cover for members who had not incurred costs of certification, one possible consequence of which was increased claims.

Club Managers therefore agreed to recommend to Shipowner Club Boards/Committees that with effect from 20th February 1998 each club ensures that its Rules made the possession of an ISM Certificate obligatory. They also recommend that Clubs include in their existing programmes of ship visits and inspections, checks that effective safety management systems were in operation in compliance with ISM Code requirements. All Club Boards/Committees agreed to these recommendations although their method of implementation varied.

Prior to 1998, Club Rules contained a sanction for failure to comply with certain statutory requirements of the vessels of flag state and for failure to maintain the validity of statutory certificates issued by or on behalf of the state of the ship's flag. Most Clubs inserted in this particular rule a requirement for ISM compliance. The relevant Gard Rule reads:

"Rule 8.1(f)
    It shall be a condition of the insurance of the Ship that:
        ...(f) The Member shall comply with all statutory requirements of the state of the Ship's flag relating to the construction, adaptation, condition, fitment and equipment of the Ship and all times shall maintain the validity of such statutory certificates as are issued by or on behalf of the State of the Ship'“.

Thus, there will be no Club cover if it is shown that the claim arose as a result of the owner's failure to maintain ISM certificates. Other Club rules provide likewise. Nonetheless it is recognised that, particularly in the early years of the ISM Code, an owner may not be able to comply with the Code through no fault of his own. This could arise due to the fact that the Flag State has failed to adopt procedures for certification of ISM compliance. In such circumstances Clubs have retained a discretion to permit cover where circumstances merit it.

The fact that a third party claim has arisen as a consequence of a crew member not having followed procedure laid down in the SMS will not in itself automatically result in termination of P & I cover. If the owner has endeavoured to train the crew members in such procedures but a crew member has failed to carry them out, cover could well remain in place. One should not forget that one of the purposes of P & I insurance is to protect shipowners against third party claims caused by the personal fault or negligence of the crew. However, if the claim has arisen through lack of effort on the owner's part in carrying out the necessary procedures, there will be no cover.

Thus, the Club requires a Member to take all necessary precautions to protect his position by endeavouring to ensure that ISM routines are maintained. Precautions should extend to checking that any feeder vessels are ISM certified if cargo is on-carried in such vessels, whilst carried under a through bill of lading issued by the Member.

Another consequence of the rule is that the Club will not accept new entries unless the relevant ship has a valid ISM Certificate.

All Clubs within the International Group seek to assist their Members in reducing claims by means of loss prevention schemes. One means of so doing is to carry out technical surveys of ships. These surveys are carried out independently of any Class surveys. In the past such surveys have assisted in reducing the number of claims but it is nonetheless recognised that a large number of claims arise due to the lack of any satisfactory routines in respect of the safe management and operation of the ships both on board and ashore. The lack of such routines is not easy to establish by means of a simple survey. An approved SMS sets a standard by which the actual management of the ship can be gauged. Similarly, the technical requirements of the flag state set a standard with which the ship has to comply in respect of its construction, adaptation, etc. (see Rule 8 above). The introduction of the ISM Code will certainly highlight such deficiencies and make the task of checking that such routines are in place, much easier. Against this background the ISM Code will become an important tool for the Clubs when carrying out claims prevention work in the future and Club inspectors are asked to check that SMS routines are in place when they perform technical surveys of ships.

The ISM Code has only been in force for two months. It is thus too early to gauge its effects on claims. In the short term, claims may rise, since the existence of the Code will make it easier for claimants to prove unseaworthiness. This is because in part a claimant will be able to demand discovery of documents required by the SMS, which prior to the Code, did not exist. Claimants will seek to prove that procedures laid down by the company in those documents have not been adhered to. However, in the long term, the positive effects of increased efforts for loss prevention, may be marked by a decrease in claims.

Sarah Burgess
Director
+44 (0)171-283 5991