Marine Insurance adds financial security against the risk of an accident occurring during transportation in international trade. Its purpose is to relieve the shipowner and the buyer/seller of goods, at least partly, of the burdensome financial consequences of their property being lost as a result of various risks/perils of the high seas.
Without marine insurance cover, the various interests involved in international trade, namely, the owners of the ships, owners of Goods, institutions financing the acquisition of vessels, or banks extending credit for the sale of the goods cannot ensure that at least the monetary equivalent of the property insured will be able to cover their financial risk in the event of an accident causing loss or damage to property.
An insurer subscribes to the risk which includes loss of or damage to the vessel, cargo, financial losses resulting from loss of freight, passenger fare, liabilities incurred to third parties, etc. Insurance policy or contract will usually stipulate the type of occurrences for which the insurer will pay an indemnity. Such occurrences are called insured risks of insured perils. Marine Insurance policies also cover losses caused by acts of war (War risk policy), damage caused to other property by insured property (vessels involved in a collision), total losses, and partial losses (particular or general average, etc.)
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In return for the indemnity given by an insurer for losses/damages incurred, the assured ( Owner of ship and cargo) agrees to pay a premium, as compensation for running the risk of loss of insured property. It is normally retained and non-refundable, whether or not the insured property is lost. The quantum of premium will depend on the insurer’s estimation of the degree of risk that the insured property will entail and the amount of indemnity he will have to pay. Among the factors determining the amount of premium are
- Insured value,
- Coverage required,
- Age, type, and a class of ships/crafts,
- Past claim record of the assured,
- Ownership of the ship/goods, and
- Trading limits
TYPES OF MARINE INSURANCE
Both Hull and Cargo insurance are international because goods move from one country to another and ships trade from one country to another. Marine insurance is divided into two broad categories;
- Commercial Insurance
- Mutual Insurance, (also known as P & I)
Commercial insurance involves both cargo and hull insurance.
Marine Insurance Policies
The policies must be drawn in accordance with the M.I.A. 1906 and must specify the name of the assured, or some other person who affects the insurance on his behalf, the subject matter, and the risks insured against, and the name or names of the Insurers. Where a policy is subscribed by two or more insurers, each subscription constitutes a distinct contrast with the assured. Normally if the insurer singly insures a ship and the potential risks/liabilities are vast and varied he will invariably re-insure with other underwriters to cover his account in part or fully.
Types of Policies
- Time policies- Time policy insures the subject matter (ship) for a definite period of time and the policy will state the commencement and termination date and time. In a time policy, there is no implied warranty of seaworthiness.
- Voyage policy- A voyage policy (ship) covers the period when the vessel departs from a port and proceeds for her destination until she arrives there. In a voyage policy, there is an implied warranty that at the commencement of the voyage the ship will be seaworthy for the purpose of the particular adventure insured.
- Floating policy- Also known as open or declaration policy for cargoes this is one which is issued for a substantial amount and as the shipments are made, declarations concerning details of the value, quantity, and details of carrier ships, etc. are sent to the underwriters and the amount (remaining) of the open policy reduced accordingly.
- Valued policy- One in which the value of the subject matter, be it cargo, freight, hull & machinery, has been mutually agreed between the assured and the insurer and it is stated in the policy.
- Unvalued policy- One in which the value of the cargoes is not declared through all other details including those of shipments and the carrier(s) are provided. In all such cases, the maximum amount of indemnity amount in case of loss shall be determined by the insurable value of the goods in question.
Risks Covered by a Marine Insurance Policy
- The main risks covered by the Standard form of Lloyd’s policy, both for the ship and cargo insurances are as follows:
- Perils of the seas, all fortuitous accidents, and casualties of the seas;
- Enemies, Pirates, Rovers, Thieves;
- Jettison: throwing overboard goods or ship’s gear/equipment in times of peril;
- Arrests, restraints, and detainment of Kings, Princes, and people;
- Barratry of the Master and crew, every wrongful act willfully committed by the master or crew to the prejudice of the owner or charterer;
- All other perils of a similar nature to the above.
Principles of Marine Insurance Contracts
- Indemnity- The Act provides that the insurer would indemnify the assured against marine losses, that is to say, losses incidental to a marine adventure insured against. If the policy is unvalued, the maximum amount of indemnity is the insurable value. If it is a valued policy then the maximum amount of indemnity is the insured value.
- Insurable interest- An assured must be interested in the subject matter of the insurance at the time of a loss, although he may not be interested at the time the insurance is effected. The Act states that every person who is interested in a marine adventure has an insurable interest, be it the ship’s hull & machinery, cargo, or freight. Even the interest of the underwriter in respect of any re-insurance which he may deem necessary to protect his underwriting account. Others like lien holders, Master and Crew for wages, Mortgagor and Mortgagee, lenders of money, Shipwrights, and ship repairers also have an insurable interest.
- Subrogation- The Act provides that, upon payment of a claim by the insurer, he is subrogated to all the rights and remedies of the assured in respect of that claim as from the time of the casualty, causing the loss.
- Utmost Good faith- A marine insurance contract is based on utmost faith which if not observed by either, the contract may be voided by either party. In practice, this onus falls most heavily upon the assured who must disclose all material facts concerning the insurance to the underwriters to enable him to determine whether or not to accept risk and the rate of premium. Every representation/statement made by the assured must be true.
- Proximate cause (causa Proxima)- The proximate cause is the most direct cause of loss or damage to the insured party. It is not necessarily the nearest cause in time or physical proximity but it is the nearest cause in effect. The further cause is causa remote. The loss may be preceded by the operation of two distinct and separate perils, one may be insured and the other uninsured. The burden of proof that the cause of loss is the insured peril rests with the claimant.
Nature of Marine Losses
Losses can generally be categorized as Total loss and Partial loss. When dealing with cargo the loss claims would either be for a total loss, Particular Average, or General Average.
- Total loss – In Marine Insurance total loss can be either Actual Total Loss (ATL) or Constructive Total Loss (CTL).
- Actual Total Loss-
- Due to destruction,e.g. sinking into deep waters, burnt due to fire
- Loss of species- so damaged as to cease to be a thing of the kind insured, e.g. cement becoming concrete.
- Irretrievable Deprivation- like precious cargo sunk in the bottom of the deep ocean, impossible to recover.
- Presumed Total Loss – When nothing is heard of from a ship for a reasonable time she is posted as ‘Missing’. If after a further reasonable period (3-6 months), she is presumed to be a “Presumed Total Loss”. The proximate cause of the will has to be established to make a claim under the policy. The assured will have to prove that the loss occurred during the period covered by the policy.
- Constructive Total Loss– When the cost of repair of a badly damaged ship is more than the value of the repaired ship (as Asset) or the value of the damaged cargo on arrival; at the destination, it is deemed to be “Constructive Total Loss”.
- Partial Loss- The Particular Average loss covers all types of partial losses including a General Average loss and a particular charge (like Sue and labor cost). The main difference between a particular average and the general average is: General Average is commonly used to express what is chargeable on all-ship, cargo and freight while Particular Average is to express a charge against only a single thing. Both of these averages must be caused by an insured peril.
Warranties Under Marine Insurance
Marine Insurance Act defines a warranty as a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. A warranty may be expressed or impressed, and two very important implied warranties are as follows:
- In every voyage policy it is implied that the vessel shall be seaworthy at the beginning of the voyage when the risk commences, and where the voyage is performed in stages the ship is, at the commencement of each stage, is seaworthy for that stage.
- In every policy (voyage, time, or mixed) it is implied that the adventure shall be lawful
- EXPRESS WARRANTIES– The Act provides that an express warranty may be in any form of words from which the intention to warrant is to be inferred; and that an express warranty does not exclude an implied warranty unless it is inconsistent therewith.
Important Points to Disclose
The Marine Insurance Act lays down that a contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be voided by either party. Accordingly, the assured must disclose to the underwriter every material fact and circumstance known to him, that is everything that would influence the judgment of a prudent insurer in fixing the premium or in deciding whether or not to accept the risk. In the absence of inquiry, the following need not be disclosed-
- Any circumstance which lessens the risk;
- Any circumstance known or presumed to be known by the insurer; that is anything which he ought to know in the ordinary course of his business;
- Any circumstance as to which information is waived by the insurer;
- Any circumstance which it is superfluous to disclose by reason of an express or implied warranty.
- Excessive additional insurances by policies on freight and disbursements must be disclosed, also over-valuation of cargo.
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