Floating charges

Stop-and-search procedures on ships have sparked a slew of insurance claims in the wake of 11 September. Brendan Malkin reports on the P&I giant at the sharp end of the action

Protection & Indemnity (P&I) clubs are one of the UK’s oldest mutual insurance businesses. First founded in the mid-19th century, their members are shipowners who each pay an annual ‘premium’, from which most of the members’ liabilities are paid. The world’s largest is the North of England Club which, with 22 lawyers, is equivalent in size to a boutique law firm.

For the P&I club’s legal counsel Mike Salthouse, who is second in command in the legal department, the work still fascinates even after 15 years in the job. A large chunk of his work involves seeking to pass both the losses and liabilities of shipowners (and thus of the club as their effective insurer) on to ‘other parties’.

There is a particularly large demand for these skills at present. In the wake of the global terrorism threat, vessels are frequently stopped and searched by UN and state patrols looking for suspicious cargoes. This can lead to at best ships being stopped and delayed, and at worst arrested and kept out of circulation for many weeks, or even indefinitely. As a result, by being unable to rent out their ships (the current going rate for the largest vessels are up to $1m (£530,000) a day) shipowners are suffering considerable losses. Salthouse seeks to limit these losses by passing them on to charterers – those companies renting the ships when disaster strikes, such as at the time of a ship’s arrest.

“It’s possible for you to claim that the charterers are liable. This way you share the risk. Certainly, with freight rates [the costs paid by companies to rent ships] being high, shipowners are happy to settle quickly these sorts of cases,” says Salthouse.

Other options include, in the case of an arrested ship, negotiating for it to be released as early as possible, or suing the government responsible for stopping a ship. The latter is “difficult”, says Salthouse, despite there being “ways of doing this”.

This work falls within the remit of the club’s freight, demurrage and defence (FD&D) department, which also handles claims brought by companies for the late delivery of their cargoes, as well as for losses that the shipowner was not insured for.

So-called ‘bulk’ work involving claims by ‘third parties’, such as crew members or companies whose cargo has been destroyed during voyages, is dealt with by the club’s rather confusingly titled P&I department (as opposed to, but a part of, the P&I club).

Salthouse uses external counsel mainly in overseas jurisdictions where the club’s lawyers are unfamiliar with local law, although he also occasionally instructs local firms in Newcastle, such as Eversheds. However, when forced to instruct outside lawyers he prefers to use barristers rather than solicitors. “They offer very good value for money and they’re used to quickly dropping in and out of cases,” he says.

Salthouse can also rein in costs simply by avoiding litigation, which is something his department has been successful at. During his 15 years at the club, Salthouse has hardly ever gone to court and has only once attended one arbitration personally.

This is extraordinary considering the club’s lawyers are dedicated solely to dispute-related work, whether it is shifting liabilities for a shipowner’s loss to a third party or handling a personal injury dispute. Furthermore, the current climate in which there are high numbers of ship arrests and piracy – described by Salthouse as a “real problem” – would ordinarily drive up the potential for litigation.

Effective case management has kept the need for litigation at bay, says Salthouse. “We adopt a very proactive approach,” he explains. “Very few charter parties refer matters to court. We almost always end up arbitrating matters and only a small number of arbitrations end up in a hearing, as most are document-based. We also have high success rates in reaching compromises before awards are issued.”

Luck has also come into the equation as, according to Salthouse, North of England has not been involved in any of the recent large shipping disasters, such as the sinking of the Prestige off Spain and the grounding of the Tasman Spirit in Pakistan, both of which have become deeply litigious affairs. “The last big one was the Marchioness disaster,” he says.

He has also avoided litigation by negotiating with third parties, although this route can involve an element of danger. Recently, for example, Salthouse travelled to Dubai to negotiate with a company that was demanding around $700,000 (£369,700) in compensation from one of the shipowner members of the North of England Club. The company claimed its cargo had been damaged during a voyage. “There were guns dotted about the ship. It wasn’t altogether pleasant,” recalls Salthouse. “They claimed the damage was about $700,000, while we claimed it was $80,000 [£42,200].”

In the end, “a sum of money” was paid to the cargo owner, some of which came from the shipowner and the rest from the club. This money was later fully recovered by the club from the company that originally chartered the ship and caused the damage to the cargo.

Such tense negotiations involve a lot of skill and patience, and Salthouse has become something of an expert. He has had to – after all, the high sea, as he points out, is a dangerous place.

Mike Salthouse
North of England Protection and Indemnity Association

Organisation North of England Protection and Indemnity Association
Sector Marine insurance
Annual premium $156m (£82.4m)
Annual UK legal spend £1.5m
Employees 140
Legal capability 22
Legal counsel and company director Mike Salthouse
Reporting to Head of freight, demurrage and defence Stephen Purvis
Main law firms Eversheds, Mills & Co and Rayfield Mills