Third Party Claims against P&I Clubs and the “pay to be paid” Rule

Abstract: The “pay to be paid” Rule is a fundamental component of Protection & Indemnity (hereinafter referred to as “P&I”) insurance policies, which requires a Club Member to discharge his liabilities to the injured third party before he can be indemnified by the P&I Club. If the Club Member cannot compensate the third party as a result of insolvency, the third party is denied full satisfaction of his judgment against the Member. The Third Parties (Rights against Insurers) Act 1930 transfers to the injured third party the rights of the insolvent insured against the insurer in relation to the insured’s liability; however the Club is entitled to rely on the “pay to be paid” Rule against the third party, which will effectively defeat the third party’s claim. This thesis analyses the “pay to be paid” Rule in English law and its relationship with the aforementioned statute as well as the impact of the new Third Parties (Rights against Insurers) Act 2010 on the Rule. The approaches taken by a number of States in the U.S.A. to the “pay to be paid” Rule and measures adopted in International Maritime Organization (hereinafter referred to as “IMO”) Conventions relating to direct action against insurers are also considered in this thesis. The thesis will conclude by exploring the future of the “pay to be paid” Rule and determining whether the P&I Clubs should still be permitted to rely on this Rule in relation to third party claims where a Club Member is insolvent.