Impacts of The "Pay to Be Paid" Rule On P&I Insurance under Compulsory Insurance and Direct Action

Since the dawn of civilisation onwards, and especially following marine disasters, marine risks have become more complicated, and so has the issue of increasing third-party liabilities of shipowners. İt was, therefore, noticed that there was a need for a legal regulation in that regard, which resulted in the adoption of international conventions and the implementation thereof into national laws, in order to protect third parties to the contract of P&l insurance, weaker ones vis-â-vis the strong clubs and shipowners.

First and foremost, providing financial security, which is usually provided by P&l clubs in the form of an insurance contract in practice, for the liability of shipowners under those conventions was imposed on them. That being the case, third parties might remain out of pocket provided that shipowners are insolvent. Furthermore, there is an absence of a contractual relationship between clubs and third parties due to the principle of inter partes,more precisely, privity of contract, i.e., claimants cannot sue clubs. Thus, in addition to compulsory insurance, the right of direct action was granted to third parties for them to proceed against clubs, which are financially stronger than shipowners and, thanks to mutuality underpinning the basis of P&l clubs, other insurers.

Neither making insurance compulsory nor granting the right of direct action properly solves this problem having regard to the fact that clubs might rely on the defence of "pay to be paid", in accordance with which the member shall make the necessary payments he is liable for to be reimbursed by his club, also in direct actions against third parties. For that very reason, "pay to be paid" has been waived in the specific fields of maritime law. From a contrario aspect, it is stili retained in some other fields. The ideal solution should be to establish a direct connection between clubs and claimants, where clubs cannot rely on such defence. Even then, the extent should be determined in respect of which claims and to what extent they should be protected thus and so. İn sum, claims covered under P&l insurance was analysed to that end.