How Shipping Insurance Really Works During a War

What It Covers

Dorothea Iwanoo and Steve Ocalukian from the American P&I Club explain how maritime liability insurance works through nonprofit mutual clubs, how war risk coverage is structured across separate insurance towers, and why the Iran conflict triggered premium resets rather than actual coverage cancellations for ships in the Persian Gulf.

Key Questions Answered

• •P&I Club Structure: Protection and Indemnity clubs are nonprofit mutual associations where ship owners pool liability risks — crew injuries, pollution, wreck removal, collision damage to third parties — at cost. Twelve international group clubs collectively cover 90% of ocean-going tonnage and purchase what is reportedly the world's largest reinsurance policy, covering incidents up to $8 billion per event.
• •Separate Insurance Towers: Ship owners must maintain two distinct coverage layers: hull and machinery insurance covering the vessel's physical value, and P&I insurance covering third-party liabilities. War risk is excluded from both standard policies and purchased separately. Understanding this separation prevents misreading headlines about "canceled coverage" — cancellations typically reset rates, not eliminate protection entirely.
• •War Risk Premium Reset Mechanics: War risk policies contain standard cancellation clauses allowing underwriters to reprice when vessels enter conflict zones. A vessel paying roughly $15,000 annually for war coverage before the Iran conflict faced approximately $60,000 for a single seven-day exit transit. Ships already trapped inside received significantly lower rates — around 0.5% of hull value — versus 3–10% for vessels voluntarily entering.
• •Excess War PNI Coverage: P&I clubs fill a critical gap above the hull insurer's war coverage limit. Every ship owner entered in an international group club pays a small annual contribution for collective war PNI reinsurance, covering liabilities like wreck removal and pollution that can far exceed a vessel's market value. This pooled excess layer activates automatically without requiring separate negotiation during conflicts.
• •Underwriting Risk Factors: P&I clubs price risk per gross ton, but the rate per ton varies significantly by vessel type, trade route, and claims history. Container ships carry elevated catastrophe risk because sunken containers float to coastlines and require hazardous waste disposal. Human error drives most average claims, which run $20,000–$30,000 each, not the headline oil spills that dominate public perception.