Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo which property is transferred, acquired, or held between the points of origin and final destination. Cargo Insurance is a branch of Marine Insurance. Marine Insurance also includes onshore or offshore exposed property (container terminals, pots, oil platforms, pipelines) hull, marine casualty, and marine liability.
Typically, Marine Insurance is split between the vessels and the cargo. Insurance of vessels generally known as “Hull and Machinery” (H & M). A Total Loss Only Insurance Policy will cover total loss of the vessel and not any partial loss.
The Coverage will of on either of “Voyage or Time” basis, or a combination of both. The “Voyage Basis” covers transit between the ports set out in the Policy. The “Time Basis”, covers a period of time of Voyage. A time policy should be not more than one year.
The Marine Insurance business is mostly international and subject to law and international regulations at every stage of its operation. It is governed by the Marine Insurance Act, 1963 in India and guided by various clauses formulated by Institute of London Underwriters (ILU) and the International Commercial Terms, known as “INCOTERMS” developed by International Chambers of Commerce, Paris.
The Marine Insurance Act, 1963 was introduced in India on 1st August, 1963 and is designed to regulate the transactions of marine insurance businesses of hull, cargo and freight. The voyages undertaken are subjected to specified Institute of London Underwriters (ILU) Clauses, defining inception and termination of insurance covers, and the perils insured against.
SALIENT FEATURES OF MARINE INSURANCE
SECTION 3: defines “Marine Insurance “as A Contract of Marine Insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against Marine Losses, that is to say, the losses incidental to Marine Adventure.
SECTION 2(d): defines “Marine Adventure”, includes any adventure where-
(i) Any insurable property is exposed to maritime perils;
(ii) The earnings or acquisition of any freight, passage money, commission, profit or other pecuniary benefit, or the security for any advances, loans, or disbursements is endangered by the exposure of insurable property to maritime perils;
(iii) Any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property by reason of maritime perils.
TYPES OF MARINE INSURANCE;
i) Hull Insurance;
ii) Cargo Insurance;
iii) Freight Insurance; and
iv) Liability Insurance.
MAIN FEATURES OF MARINE INSURANCE
SECTION 19: provides that “A Contract of Marine Insurance is a contract based upon the utmost good faith (Uberrimae Fldei), and if at most good faith be not observed by either party, the contract may be avoided by the other party.
Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it is untrue the insurer may avoid the contract.
The Material facts disclosed should be true, because on the basis of facts disclosed by the assured or his agents the insurer will decide the amount of premium and the value of risk the insurer it will take.
INSURABLE INTEREST (SECTION 7, MIA 1963)
A person is said to have an Insurable Interest if he is to benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.
“Insurable Interest”, in the subject matter insured must exist at the time of loss. It need not exist at the time of the insurance policy was taken under the Marine Insurance.
The following persons would have deemed to have “Insurable Interest”, in a Marine Insurance Policy;
i) The Owner of the Ship;
ii) The Owner of the Cargo;
iii) A Creditor who have advances money on the security of the ship or cargo;
iv) The mortgagor and mortgagee;
v) The master and crew of the ship have “Insurable Interest”, in respected of their lives and wages;
vi) In case of advance freight, the person advancing the freight has an “Insurable Interest”, if such freight is not repayable in case of loss.
WARRANTIES AND CONDITIONS;
A Contract of Marine Insurance generally subject to various Conditions and Warranties.
A CONDITION; describes a part of the contract that is fundamental to the performance of that contract, and, if breached, the non-breaching party is entitled not only to claim damages but to terminate the contract on the basis that it has been repudiated by the party in breach.
A WARRANTY; A warranty is not fundamental to the performance of the contract. Breach of warranty, while giving rise to a claim for damages, does not entitle the non-breaching party to terminate the contract.
NOTE: The definition of” Warranty” in Insurance Act,1938 is just opposite. The Insurance Law provides that a Warranty if not strictly complied with will automatically discharge the insurer from further liability under the contract of insurance.
The Assured has no defence to his breach, unless he can prove that the insurer, by his conduct has waived his right to invoke the breach, possibility provided in section 34(3) of the Marine Insurance Act, 1963.
A “Warranty”, is a promise by the assured to the underwriter that something shall or shall not be done or certain of affairs does or does not arise. A Warranty is a condition which must be exactly complied with, whether it is material to the risk or not. If it is not so complied with, then, the insurer is discharged from the liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.
TYEPS OF WARRANTIES
i) Express Warranties; -it appears in the policy documents itself
ii) Implied Warranties; -it not expressed but must be complied with.
Examples of Express Warranties;
Example of some implied warranties;
INCOTERMS REULES AND INSURANCE: the basic function of the Incoterms Rules is to simplify the quotation of prices in international trade, to define the responsibilities and rights of sellers and buyers under each of terms of sale. Some of the most frequently employed terms in international trade are
FOB: Free on Board;
CIF: Cost, Insurance and Freight
it is common for exporters in many transactions, even though selling as FAS or FOB, terms to control the placing or arrangement of marine and war risk insurance on a “Warehouse to Warehouse basis” for account to whom it may concern as an additional provision in the overall contract of sale. This may be arranged as a matter of convenience. In this situation the cost of insurance is charged to the buyer as a separate item of expense in addition to the FAS or FOB Price. It is a fact that the exporter has sold the goods on extended payment terms, meaning that he is financially at risk, while the goods are in transit to overseas destination. When financially at risk he can benefit from the security of the marine and war risk insurance arranged through his own insurance agent or broker with a sound insurance company.
Following are the advantages of a trader having his own ocean cargo policy;
1. Automatic “warehouse to warehouse protection is provided with proper terms of insurance specifically designed for the “Assured Goods”, and methods of shipment. Such insurance provides coverage for full exposure, at proper values and adequate limits.
2. Rates will be competitive and reflect the Assured’s own experience.
3. Worldwide Claims service is available by claims representatives appointed by underwriters.
4. A trader is free to choose his own insurance company.
OPEN CARGO POLICY
An Open Cargo Policy can be written to cover all cargoes shipped by the Assured in foreign trade by overseas vessels, aircraft and foreign parcel post. Coverage is afforded while goods are in transit from the seller’s warehouse to buyer’s warehouse in the course of transit. The contract is tailor -made to fit requirements of the individual Assured’s Shipment and can be written to cover broad or named perils.
The basic Open Cargo Policy includes;
1. The Perils Clause;
2. One or more average clause and;
3. Additional basic coverage clauses including general average.
A. PERILS CLAUSE the majority of risks covered under this clause come within the comprehensive term, perils of the seas, that is, loss or damage due to heavy weather, standing, collision, sinking, contact with seawater, etc.
Other perils normally covered include:
1. FIRE: both direct and consequential damage whether from smoke or steam or efforts to extinguish a fire (spontaneous combustion occurring in the insured shipment is exclude unless specifically assumed by the underwriter).
2. ASSAILING THIEVES: Forcible taking of a shipment rather than mysterious disappearance or pilferage.
3. JETTISON: Voluntary dumping overboard of cargo.
4. BARRATRY: Fraudulent, criminal or wrongful act of the Ship’s caption or crew that causes loss or damage to the ship cargo.
5. ALL OTHER LIKE PERILS: Perils of the same nature as those specifically mentioned above, but not “all risks” in the customary usage of the term.
B. THE AVERAGE CLAUSE: while total losses from any of the hazards listed in the perils clause are fully recoverable up to the policy limits, partial losses (other than general average) known as “Particular Average” from the perils are recoverable only as specified by the average clause.
The Assured is free to select best suited Average Clause based on his circumstances;
There are Five Principal Average Clauses;
1. Free of Particular Average American Conditions (FPAAC): Limits recovery on partial losses to those directly caused by fire, stranding, sinking or collision of the vessel. This is the most limited Average Clause.
2. Free of Particular Average English Conditions (FPAEC): similarly, to FPAAC, except that it is not necessary that the damage to cargo be a direct result of specified peril, it is being sufficient that one of these has occurred.
3. With Average, if amounting to 3%: Provides protection for partial loss from the perils of the seas. The percentage is called a franchise and is the minimum amount of the claim.
4. Average irrespective of percentage: all partial losses due to perils of the sea are fully recoverable regardless of percentage.
NOTE: the foregoing average clauses may be extended to include additional perils depending upon type of commodity to be insured, packaging, voyage, stowage, etc. These extensions may include theft, pilferage, non-delivery, sweat or steam in the ship’s hold, fresh water, leakage, breakage etc.
5. All Risk Conditions; this coverage insures against “All Risks”, of physical loss or damage from any external cause.
NOTE: Below mentioned losses are not covered by “All Risks” Clause in the Policy.
Policies can be written with other specific exclusions or limitations. This might happen, for example, when goods or merchandise are highly susceptible to damage. Coverage may then be limited to make the risk insurable or in order to avoid the payment of high premiums. This flexibility is the major advantage of an Open Cargo Property.
C. ADDITIONAL COVERAGE CLAUSE; In addition to the Perils Clause and the Average Clause, the typical Open cargo Policy contains following clauses;
i) Explosion Clause;
ii) Inchmaree Clause;
iii) Fumigation Clause;
iv) Warehousing and Forwarding Packages Lost in Loading, etc. Clause;
v) Shore Clause;
vi) Both to Blame Collision Clause;
vii) General Average and Salvage Clause;
viii) Sue and Labour Clause.
D. DURATION OF COVERAGE: Normally under Open Cargo Policy the goods are insured from the moment they leave the point of shipment, being at the risk of the Assured, and the coverage continues in due course of transit until they are delivered to the final warehouse at destination.
In absence of special arrangement, this period of coverage is determined by the Warehouse to Warehouse and /or Marine Extension Clause.
The Marine Extension Clause extends the coverage in certain circumstances by superseding the time limitations imposed by the Warehouse-to-Warehouse Clause. The Marine Extension Clause continues the coverage during the ordinary course of transit including deviations, delays, re-shipments, transhipments or any other variations in the voyage so long as the Assured does not exercise control over such interruptions of normal transit.
E. STRIKES, RIOTS AND CIVIL COMMOTATIONS (SR & CC) Strikes, Riots and Civil Commutations are covered by an Optional Endorsement to the Open Cargo Marine Policy. The SR & CC endorsement covers loss or damage to the property insured cause by the strikers, locked-out-workmen, those taking part in labour disturbances, riots or civil commutation, or persons acting maliciously.
F. WAR RISK An Open Policy insuring against war and similar risks is usually issued as a companion to the Marine Open Policy. It covers most of the perils arising from hostilities, but excludes loss of damage resulting from the hostile use of nuclear weapons.
It is recommended that both marine and war risk coverage be obtained from the same underwriters, thus obviating disputes when the actual cause of loss is in question, as in case of missing vessel.
G. AMOUNT OF INSURANCE; The Open Cargo Policy contains a Valuation Clause- a formula for determining the amount of insurance in advance of shipment. This formula can be tailored to conform to trade customs or to follow variations in the value of commodity which is subject to price fluctuations.
A common form of valuation clause: “Valued at amount of invoice including all charges in the invoice and including prepaid and/or advanced and /or guaranteed freight not included in the invoice, plus ten per cent.
H. COST OF INSURANCE COVER; Its usual practice of all insurers to issue with an Open Cargo Policy a Schedule of Marine Rates, which can be used by the Assured, while calculating amount of insurance based the destination of his supply. The type, nature, destination and some other factors determined amount of premium to be paid by the Assured for an Open Cargo Policy.
CONCLUSION: We have gone through different aspects of Marine Insurance. We know that there are two types of Marine Insurance, one is Vessels and other is Cargo Insurance. The Marine Insurance Business generally deals with overseas or international boundaries. It is governed by provisions of The Marine Insurance Act, 1963 as well as by various clause formulated by Institute of London Underwriters (ILU) and International Commercial Terms, known as “INCOTERMS”, developed by International Chambers of Commerce, Paris.
DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.