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Protection and indemnity clubs can learn many lessons from the problems that have beset Lloyd's of London in recent years, says a new report.

To begin with, the tradition of unlimited liability for the shipowners that are P&I club members may be coming to an end. "Such exposure is increasingly coming to be regarded as an anachronism," says the 1995 annual review issued by the West of England Ship Owners Mutual Insurance Assn.

Lloyd's underwriters have found an answer to the same problem in the form of limited liability corporate capital; for the P&I clubs, proposals for a limit on coverage offered last spring by the International Group of P&I Clubs, an association of 14 mutual insurance companies for shipowners, could be the best solution.

These proposals, which would limit catastrophe exposures to 20% of a shipowner's reserve, or limitation, fund-placing the aggregate exposure for members of the International Group at about $20 billion-are being implemented by some P&I clubs for next month's renewals but do not have universal support.

The steady escalation of P&I losses over the past 10 years, as well as "more onerous legislation and compensation scales," are a threat, the report said. And, because reinsurance protection of the clubs is finite, larger claims are eating up a bigger portion of members' retentions.

But, West of England endorsed the proposals for a 20% cap on the basis that "at the very least it set a financial limit on club cover, albeit at an unrealistically high level....In the opinion of the board and the managers, this would be better than no limit at all."

The Greek shipowning community has displayed a similar opinion of the proposed limit, lobbying for the limit to be dropped from 20% to 1% or 2% (BI, July 17, 1995; July 3, 1995).

"The argument is that shipowners should not be forced to participate in the underwriting of risks, remote though they may be, at levels which they believe they cannot....sustain as underwriters," West of England said.

Litigation brought by Lloyd's members against their underwriters has shown the P&I clubs that courts "require more of the reasonably competent underwriter," said the review.

Three central underwriting principles have been at the heart of the Lloyd's litigation, the review contends. To avoid liability, an underwriter:

Must have a plan, and the underwriter must adhere to it.

Must develop and follow a policy about the exposure of club members or Lloyd's names.

Must keep principals informed of decisions.

"In today's litigious world, should catastrophe strike, the P&I clubs will not expect to be immune from the type of litigation which has so bedeviled the Lloyd's market over the past few years," the report warned.

This can be prevented by ensuring club underwriters stick to the principles, it says, but adds that without a realistic coverage limit, claims that exceed available reinsurance will lead to suits.

Free copies of the report are available from Ken Norman, West of England Ship Owners Mutual Insurance Services Ltd, Tower Bridge Court, 224-226 Tower Bridge Road, London SE1 2UP United Kingdom; 171-716-6006.