At its meeting on 6 February 2007, our Club's Board approved the proposal for Double Retention/Designated Vessel Procedure which the International Group of P&I Clubs (Group) has developed as one of a series of measures against sub-standard ships. The Procedure aims to enforce disciplined underwriting activities amongst the Group Clubs and will be introduced into the Pooling Agreement.This proposal has already been approved by the requisite majority of the Group Clubs and will come into effect on 20 February 2007.

1.Background

Some of the proposals adopted by the Group emerged from a study commissioned by the Maritime Transport Committee of the OECD,in May 2004, on how P&I Clubs could contribute to minimize impacts of substandard shipping on safety at sea.

The Group and its Ships' Standards Sub-Committee(SSSC) considered the recommendations which were developed into a formal submission, on behalf of the Group, to the February 2005 meeting of the IOPC Fund Working Group on revision to the 1992 CLC/Fund regime.It should be noted that the submission included, among other things, reference to the possibility of a provision whereby the insurance of a ship, deemed to be substandard, could be made subject to a double retention for Pooling purposes. A retention is the initial amount each Club is required to absorb before a claim becomes Poolable, and hence, shared amongst Group Clubs. (The retention for the 2007/8 policy year is US$7 million. A double retention would be US$14 million).

The features and operation of the Double Retention/Designated Vessel Procedure are described in more detail below.

2.Outline of Double Retention/Designated Vessel Procedure

The purpose of Double Retention/Designated Vessel Procedure is to provide a process by which a Club that considers vessel unfit to underwrite may seek to reduce the risk of having to share in Pool claims for that vessel, should the vessel then be entered with another Group Club.The procedure has two stages:- first a sub-standard vessel is "designated" by a committee of experts, (appointed jointly by the Group and the Owner). Once designated, a "double retention" applies to claims arising from the vessel, for as long as the unfitness remains..

Designated Vessel

In this procedure, a Club which has either declined, or terminated, the entry of a ship which it considers to be unfit, may give notice to the Group Secretariat and the Owner requesting that the condition of the ship be assessed by a "Committee". The Committee will determine whether the ship should be designated (a "Designated Vessel") as one for which any insuring Club should bear a double retention. It should be noted that the term "Condition" is widely defined to include matters such as operation and management as well as physical structure. The Club is also obliged to explain to the Owner the implications of the process.

The Committee, comprising two independent surveyors and a lawyer, would then be appointed, to determine the vessel's Condition and, if appropriate, assess if the ship be properly regarded as a Designated Vessel. The Committee members are chosen from a shortlist of surveyors and a shortlist of lawyers. The Owner has a right to select one of the two individuals to be chosen from the surveyors' shortlist.The shortlists are being drafted with input from all Clubs represented on the SSSC.

The Owner is required to make the ship available for inspection within 45 days of the completion of the selection of the committee.Failure to make the ship available will result in it automatically becoming a Designated Vessel.

If the Committee decides that a ship shall be a Designated Vessel, that status will attach only from the time of the Committee's determination. A new Club that insures a ship which is determined to be a Designated Vessel would therefore bear only a single retention in respect of claims arising prior to the determination.

A ship that has become a Designated Vessel will remain so until it is re determined no longer to be a Designated Vessel as a result of a material change in her condition.It is therefore always open to an Owner to take steps to have the 'Designated' status removed by improving the condition of the ship.

The Double Retention/Designated Vessel Procedure including Proscribed Vessel Procedure mentioned below shall not prejudice the right of claims to the Club that the Owner possesses under the valid insurance contract even for a Designated Vessel or Proscribed Vessel.

Proscribed Vessel

In the event that a vessel remains a Designated Vessel for more than one year from the date of becoming a Designated Vessel, such vessel shall then be deemed a "Proscribed Vessel". In such event a Club that insures a Proscribed Vessel cannot recover claims arising thereafter in respect of that vessel from the Pool. It will, of course, remain open to the owner of such vessel to apply for the vessel to be submitted for re- determination with a view to removing the Proscribed Vessel and Designated Vessel status. This mechanism should provide an additional incentive on an Insured Owner to take prompt measures to remove the Proscribed and Designated status of his vessel.

Competition Law Issues

In preparing the Procedure, the SSSC has had regard to advice previously received regarding competition law issues. The form of the Appendix to the Pooling Agreement has been subject to legal review and the Group's lawyers have confirmed that such issues have been safely addressed.

3.Summary

How often the Procedure, if implemented, would in practice be used is a matter of conjecture at this stage, though the potential benefit of the Procedure in terms of positively addressing issues of ship standards is likely to stem as much from the existence of the Procedure, as from its usage in appropriate cases. The Procedure does not make it mandatory for a Club to nominate a vessel for determination on grounds of condition but provides for the right, and the mechanism, to do so. This is in recognition of the fact that, in certain cases, nomination may not be appropriate or necessary-for example where, to the knowledge of the Club, the vessel is about to undergo works to address the defects in condition, or alternatively is about to be scrapped.

The Group has repeatedly pointed out, and continues to point out, that the Clubs as insurers are not, and cannot fulfil the role of, front-line policemen of ship quality and standards issues. Nevertheless, we have to be aware of the continuing keen and positive interest of governments, IGOs, NGOs and of industry associations, in the steps being taken by the Group to ensure it has mechanisms to discourage insurance of substandard shipping, most recently demonstrated in the meeting of the IOPC Fund Working Group on "Non-technical measures to promote quality shipping for carriage of oil by sea. Under the circumstances it would be of considerable benefit for the purpose of maintaining the progress in this area that the Group will implement the Double Retention/Designated Vessel Procedure with effect from 20 February 2007.

4.New provision of Club Rule 17. 5

In the event the Club terminates the insurance contract of an entered ship or declines to enter a ship for insurance on grounds of condition and then nominates a ship for assessment and determination as a Designated Vessel pursuant to the Double Retention/Designated Vessel Procedure, the Club will need to report such termination or declination along with the results of any condition survey to the Group and other related parties under this Procedure.In order to ensure this proceeding, new provision Rule 17.5 will be added to Rule 17 with effect from 20 February 2007 (Please see attached). Further details are shown in a separate Circular No.06-011 "Alteration of the Rules of Association".