Understanding the "Pay to be Paid" Rule

One of the key principles of Protection & Indemnity cover is the 'pay to be paid' rule. This rule states that a Member is insured only for sums it has paid to satisfy covered liabilities, losses, costs, or expenses (unless the Directors decide otherwise.) Additionally, a Member must first pay these amounts from its own funds, unconditionally and not as a loan to recover from the Club's funds.

The rule also makes clear that a Club’s relationship, and liability, is to an insured Member and not to a third party claimant.

Position Under English Law

Under English law, direct action against a Club is generally not possible, except for injury and illness claims. The basic principle is that there is not a contractual or tortious nexus between the Club and a third party claimant. This rule was confirmed by the House of Lords in the landmark "Fanti" and "Padre Island" cases in 1990, which barred third-party claimants from recovering directly from the Club. However, the Lords hinted that personal injury cases might be treated differently.

Over time, the 'pay to be paid' rule has seen significant changes. Since 2009, Club Rules have waived this requirement for seafarers' claims. The Third Parties (Rights against Insurers) Act 2010 extended this waiver to stevedores and to passengers for claims after August 1, 2016. However, the rule remains an effective defence against other third party actions against a Club, as recently enforced in a July 2024 High Court decision (MS Amlin Marine NV v King Trader).

Position Under French Law

In a recent landmark decision, the French Supreme Court ("Cour de Cassation") paved the way for claimants to bring direct actions against maritime insurers, challenging the long-standing 'pay to be paid' rule. French law traditionally allows litigants to sue the liability insurer of the person responsible for the damage, as enshrined in the French Insurance Code for non-marine insurance. Historically, claimants have avoided direct actions in France against P&I Clubs, opting instead for ship arrests to secure their claims against owners. This reluctance may well have stemmed from concerns about overcoming the 'pay to be paid' rule.

However, in December, 2024, the "Cour de Cassation" ruled in a dock damage case that P&I Clubs may now face direct actions from third party claimants in France for damages caused by an insured ship owner. This development is limited to instances where liabilities arise from tortious acts where the claimant is not bound by any contractual terms between the Club and the Member.

Position Under Greek Law

Greek law is similar to English law. Greek courts consistently maintain that the right to payment under a policy only arises when a liability to a third party has been paid, as determined by a final court decision. If the Member does not pay any compensation then no claim arises against the P&I Club. Thus a third party claimant cannot request a P&I Club to pay an insurance benefit that has not yet accrued.

This practice was affirmed by the Supreme Court Decision 381/2008, which held that the assured is considered a creditor of the insurer, only after they have made the payment.

The Enduring Legacy of the "Pay to be Paid" Principle in Maritime Insurance

In the world of maritime insurance, the "pay to be paid" principle has been recognised by many major shipping nations. The rule may yield, in some jurisdictions where direct action against an insurer is allowed. However, in the absence of a statutory right of action, third party claimants will face significant challenges in bringing a claim against a Club where the rule is upheld.