What is Marine Insurance
Marine Insurance
MARINE INSURANCE POLICY
The fundamental principles of Marine Insurance are
drawn from the Marine Insurance Act, 1963* As in all contracts of insurance on
property, the contract of Marine Insurance is based on the fundamental
principles of Indemnity, Insurable Interest, Utmost Good Faith, Proximate
Cause, Subrogation and Contribution. Practitioners of Marine Insurance must
familiarize themselves with the Act and uphold these Principles when
negotiating Contracts and settling claims under the contract.
INDEMNITY:
The object of an insurance contract is to place the
assured after a loss in the same relative financial
position in which he would have stood
had no loss occurred. By the Marine Insurance
Act, the indemnity that is provided is “in manner and to the extent agreed.” A
“commercial” indemnity is thus provided. Because insurers cannot undertake to
reinstate or replace cargo in the event of loss or damage, they pay a sum of
money, agreed in advance, that will provide reasonable compensation. In
practice, this is achieved by agreeing in advance the insured value, based on
C.I.F., value of the goods to which it is customary to add an agreed ten
percent which is intended to include the general overheads and perhaps a margin
of profit on the transaction.
Upon total loss of the entire cargo by an insured
peril the sum insured is paid in full, and if part of the cargo is a total
loss, the appropriate proportion of the insured value is paid.
Claims for damage are settled by ascertaining the
percentage of depreciation and applying this percentage to the insured value.
The percentage of depreciation is calculated by comparing the value the goods
would realize in their damaged state with their gross sound value on the date
of the sale. The same date is used for both values to avoid distortion of the
result arising from fluctuations in the market prices.
In Marine insurance it is customary to issue agreed
value policies. The agreed value is conclusive between the Insurer and the
Assured except in the event of the unintentional error or where fraud is
alleged.
“Duty” and “Increased Value” policies are not agreed
value policies. They provide pure indemnity only.
INSURABLE INTEREST:
The Marine Insurance Act contains a very clear
definition of insurable interest. It states that there must be a physical
object exposed to marine perils and that the insured must have some legal
relationship to the object, in consequence of which he benefits by its
preservation and is prejudiced by loss or damage happening to it or where he
may incur liability in respect thereof.
Whereas in fire and accident insurance an insurable
interest must exist both at inception of the
contract and at the time of loss, the interest in respect
of a marine contract must exist at the time of loss, though it may not have
existed when the insurance was affected. This is necessary when one considers
the mercantile practice under which there is every possibility of sale and
purchase of goods during transit. However, the MIA has provided that where the
goods are insured “lost or not lost” the assured may recover the loss, although
he may not have acquired his interest until after the loss, unless at the time
of effecting insurance he was aware of the loss and the insurer was not. If the
assured had no interest at the time of the loss, he cannot acquire interest by
any act or election after he is aware of the loss. Arising from this, both a
contingent and a defeasible interest are insurable. A partial interest is also
insurable.
Unless like the normal indemnity policy of other
classes of insurance, a marine cargo policy is freely assignable either before
or after loss provided of course the assignee has acquired insurable interest.
The type of sale contract also determines the
Insurable Interest. A separate chapter has been devoted to most common terms of
contracts known as “Inco Terms”. The terms dictate which of the two
parties to the contract, is responsible to insure the goods.
GOOD FAITH:
Every contract of insurance is a contract “uberrimae
fidei” i.e. one which requires utmost good faith on the part of both the
insurer and the assured. In Marine Insurance, it is the duty of the proposer to
disclose clearly and accurately all material facts related to the risk. A
material fact is a fact, which would affect the judgement of a prudent
Underwriter in considering whether he would enter into a contract at all or
enter into it at one rate of premium or another and subject to what terms.
Apart from the duty of disclosure, the insured must act towards the insurer in
good faith throughout the duration of the contract.
It is customary to classify breaches of the duty of
utmost good faith under four headings: non- disclosure, concealment, innocent
misrepresentation, and fraudulent misrepresentation. The first two are termed
passive breaches and the other two are termed active breaches. The Marine
Insurance Act places a statutory duty on the assured to disclose to the insurer
all material circumstances known to him or which he should know in the ordinary
course of his business.
Whether non-disclosure is intentional or inadvertent,
the effect is the same and the policy may be avoided, although deliberate and
material non-disclosure would usually amount to fraud and render the policy
void.
Over-valuation, for example, must be communicated to
the insurers; if it is not so communicated, it is a concealment of a material
fact and voids the insurance.
PROXIMATE CAUSE:
“Proximate cause means the active, efficient cause
that sets in motion a train of events which brings about a result, without the
intervention of any force started and working actively from a new and
independent source.”
Insurers are liable if an insured peril is the
proximate cause of the loss. If an insured peril is only the remote cause of
the loss, the proximate cause being an uninsured or excepted peril, the
insurers are not liable.
The proximate cause is not necessarily that which is
proximate in time, but that which is proximate in efficiency. It is the
dominant, effective and operative cause of the loss.
In case of concurrent causes, following rules apply:
-
a) If one of the causes contributing to the loss is an
insured peril, and no excepted peril is involved, the loss is cov
b) If one of the causes is an excepted peril, the loss is
not covered at all, unless the consequences of the insured peril can be
separated from those of the uninsured peril, in which event the former, but not
the latter, is cover.
SUBROGATION:
“Subrogation is the right which one person has of
standing in place of another and availing himself of all the rights and
remedies of the other, whether already enforced or not.”
Subrogation is a corollary of the principle of
indemnity and the right of subrogation therefore applies only to policies,
which are contracts of indemnity. Subrogation is a matter of equity, the
purpose of which is to ensure that the insured is not over-indemnified for the
same loss.
(a) In Marine insurance, where an insurer
pays for a total loss:
1i) he is entitled to take over the
interest of the assured in whatever may remain of the subject-matter so paid
for (abandonment);
1.ii) and he is subrogated to all the
rights and remedies of the assured as from the time of the loss (subrogation)
(b) Where an insurer pays for a partial
loss, he acquires no title to the subject-matter insured or to such part of it
as may remain, but he is subrogated to all the rights and remedies of the
assured as from the time of the loss, and in so far as the assured has been
indemnified.
In marine insurance subrogation applies only after
payment of a loss. The insurer is entitled to recover only up to the amount,
which he has paid, in respect of rights and remedies.
On payment of a total loss, the insurer is entitled
to assume rights of ownership of the subject- matter insured. The right is
conferred upon him by abandonment (not by rights of subrogation) and the effect
is that if the property is subsequently salvaged or recovered the insurer is
entitled to retain the whole of the proceeds of sale even though they may
exceed the sum paid out under the policy, always assuming the property is
fully insured and that the assured was not bearing part of the risk himself.
In addition to this right of exercising ownership of
the property, the insurer is subrogated to “all rights and remedies of the
assured” as from the time of casualty causing the loss. This simply means that
if the loss has been caused by the negligence of a third party, against whom
the assured has the right of action in tort – say, against a carrier or bailee
– then the Insurer is entitled to succeed to any recovery (whereby the loss is
reduced) the assured may affect from such third party. This principle applies
equally to total and partial losses and has nothing whatever to do with the
doctrine of abandonment.
CONTRIBUTION
Sometimes one risk may be covered by more than one
insurer. In that case it is desirable not only to ensure that the insured does
not receive more than an indemnity but that any loss is fairly spread between
all the insurers involved. The principle of contribution is a method of
distributing fairly among insurers the burden of claims for which each shares
some responsibility.
Following factors are required to exist before a loss is
shared among the insurers
a) There must be at least two policies of
insurance.
b) All insurances must be policies of
indemnity
c) The policies must cover
i)The same interest
ii)The same subject
matter
iii)The same peril
d) A loss must occur
e) The policies must be in force at the
time of loss.
f) All policies must cover the
g) The policies must be legally
enforceable.
A contract of marine insurance is an agreement whereby the
insurer undertakes to indemnify the insured, in the manner and to the extent
thereby agreed, against transit losses, losses incidental to transit. A
contract of marine insurance may by its express terms or by usage of trade be
extended to protect the insured against losses on inland waters or any land risk
which may be incidental to any sea voyage. In simple words the marine insurance
includes
A) Cargo insurance which provides insurance cover in
respect of loss of or damage to goods during transit by rail, road, sea, air or
by post. Thus, cargo insurance concerns the following:
(i) export and import shipments by ocean-going
vessels of all types,
(ii) coastal shipments by steamers, sailing vessels,
mechanized boats, etc.,
(iii) shipments by inland vessels or country craft, and
(iv) Consignments by rail, road, or air and articles sent
by post.
B) Hull insurance which is concerned with the insurance of
ships (hull, machinery, etc.). This is a highly technical subject and is not
dealt in this module. Simply speaking this part of marine insurance which is
called Hull Insurance is dealing with insurance of Ships, barges launches,
boats and offshore installations.
FEATURES OF MARINE INSURANCE
Offer & Acceptance: It is a prerequisite to any
contract. Similarly, the goods under marine (transit) insurance will be insured
after the offer is accepted by the insurance company.
2) Payment of premium: An owner must ensure that the
premium is paid well in advance so that the risk can be covered.
3)Contract of Indemnity: Marine insurance is contract of
indemnity and the insurance company is liable only to the extent of actual loss
suffered.
4) Utmost good faith: The owner of goods to be transported
must disclose all the relevant information to the insurance company while
insuring their goods.
5) Insurable Interest: The marine insurance will be valid
if the person is having insurable interest at the time of loss.
6) Contribution: If a person insures his goods with two
insurance companies, then in case of marine loss both the insurance companies
will pay the loss to the owner proportionately.
7)Period of marine Insurance: The period of insurance in
the policy is for the normal time taken for a transit. Generally, the period of
open marine insurance will not exceed one year.
8) Deliberate Act: If goods are damaged or loss occurs during
transit because of deliberate act of an owner then that damage or loss will not
be covered under the policy.
9) Claims: To get the compensation under marine insurance
the owner must inform the insurance company immediately so that the insurance
company can take necessary steps to determine the loss.
OPERATION OF MARINE INSURANCE Marine insurance plays an
important role in domestic trade as well as in international trade. Most
contracts of sale require that the goods must be covered, either by the seller
or the buyer, against loss or damage.
Type of contract Responsibility for insurance Free on Board
The seller is responsible till the goods (F.O.B. Contract)
are placed on board the steamer. The buyer is responsible thereafter. He can
get the insurance done wherever he likes.
Free on Rail The provisions are the same as in (F.O.R.
Contract) above. This is mainly relevant to internal transactions.
Cost and Freight Here also, the buyer’s responsibility
(C&F Contract) normally attaches once the goods are placed on board. He
must take care of the insurance from that point onwards.
Cost, Insurance & In this case, the seller is
responsible Freight for arranging the insurance up to (C.I.F. Contract)
destination. He includes the premium charge as part of the cost of goods in the
sale invoice.
Practice in International Trade
The normal practice in export /import trade is for the
exporter to ask the importer to open a letter of credit with a bank in favor of
the exporter.
The terms and conditions of insurance are specified in the
letter of credit. For export/import policies, the-Institute Cargo Clauses
(I.C.C.) are used. These clauses are drafted by the Institute of London
Underwriters (ILU) and are used by insurance companies in most of countries
including India.
Types of Marine Cargo Insurance
a) Specific voyage policy: A specific voyage policy covers
transportation of goods through inland transport, import and export for
specific destinations.
b) Open policy/Open cover: An open policy or an open cover
is an undertaking to cover all shipments/transits that will be made during the
year. At inception the insurer will have only general details of the cargoes,
estimated sum insured, voyages and the quality of vessels that will be used.
Specific details are provided for each shipment in the order of dispatch or in
the form of periodic declarations.
c) Annual Sales Turnover Policy An Annual Sales Turnover
Policy has become very popular in India. This is no different from any open
policy except that the rate of premium is charged only on the sales turnover
(and any other components not captured by the term ‘sales turnover’). It is
also known as Sales Turnover Policy (STOP) and Annual Turnover Policy (ATP) in
different companies
d) “Duty” Insurance Cargo imported into India is subject to
payment of Customs Duty, as per the Customs Act. This duty can be included in
the value of the cargo insured under a Marine Cargo Policy, or a separate
policy can be issued in which case the Duty Insurance Clause is incorporated in
the policy.
e) Contingency Insurance( Buyer’s or Seller’s): This policy
extends to cover the assured’s contingent financial interest in any goods where
the assured has no responsibility to insure under the Terms of Sale or where
the cover provided is more restrictive than that afforded under this policy.
The important exclusions under marine cargo policies are:
i)Loss caused by willful misconduct of the insured.
ii)Ordinary leakage, ordinary loss in weight or volume or
ordinary wear and tear. These are normal ‘trade’ losses which are inevitable
and not accidental in nature
iii. Loss caused by ‘inherent vice’ or nature of the
subject matter. For example, perishable commodities like fruits, vegetables,
etc. may deteriorate without any ‘accidental cause’. This is known as ‘inherent
vice’.
iv)Loss caused by delay, even though the delay be caused by
an insured risk.
v). Loss or damage due to inadequate packing.
vi)Loss arising from insolvency or financial default of
owners, operators, etc. of the vessel
vii) War and kindred perils. These can be covered on
payment of extra premium.
viii)Strikes, riots, lock-out, civil commotions and
terrorism (SRCC) can be covered on payment of extra premium.
MARINE HULL INSURANCE
Types of Marine Hull Insurance
Insurance of vessel and its equipment’s are included under
hull insurance, there are several classifications of vessels such as ocean
steamers, sailing vessels, builders, risks fleet policies and so on.
It is concerned with the insurance of hull and machinery of
ocean-going and other vessels like barges, tankers, Fishing and sailing
vessels.
A recent development in hull insurance has been the growth
of insurance of offshore oil/gas exploration and production units as well as
connected construction risks.
It is covered with specialized class of business
particularly for Fishing Vessels, Trawler’s, Dredgers, Inland and Sailing
Vessels are available.
The subject matter of hull insurance is the vessel or ship.
There are many types of designs of ships. Most of them are constructed of steel
and welded and are capable of sailing on the sea in ballast in with cargo.
The ship is to be measured with GRT (Gross Register
Tonnage) and NRT (Net Register Tonnage). GRT is calculated by dividing the
volume in cubic feet of the ship’s hull below the tonnage dock, plus all spaces
above the deck with permanent means of closing.
NRT is the gross tonnage less certain spines for machinery,
crew accommodation ballast spaces and is intended to encompass only those
spinning used for carriage of cargo.
DWT (Dead Weight Tonnage) means the capacity in tons of the
cargo required in load a ship to her load line level.
Subdivision of Hull Insurance
The Hull Insurance is further Subdivision into;
General Cargo vessels.
Dry Bulk Carriers.
Liquid Bulk Carriers.
Passenger Vessels.
These can be further divided into ocean going and coastal
tonnage. Ocean going general cargo vessels is usually in the 5000 to 15000 GRT
range, coasters are smaller in size and one engaged in the carriage of bulk
cargoes.
Coastal tonnage does not withstand the same strains as
ocean going vessels.
General Cargo Vessel
The general cargo vessels may be container ships, large
carriers (LASH – Lighter Abroad Ship) Ro-Ro (Roll on Roll off) vessels, Refers
(Refrigerated Vessels General Cargo)
Dry Bulk Carriers
Dry Bulk Carriers are specially constructed vessels in the
size range of thousands GRT for coasters and 70,000 GRT for ocean going
tonnage. The main bulk cargoes carried are iron ore, coal, grain bauxite and
phosphate
Liquid Bulk Carriers
Tankers are strongly constructed to carry bulk liquid. The
tankers have using tanks which do not extend across the breadth of the tanker.
Passenger Vessels
There are cruise vessels or passenger liners which sail on
voyages to distant areas of scenically beautiful but rocky or shallow coasts or
near the icy waters of the Arctic and Antarctic. They possess modem
navigational systems.
Other Vessels
There are other types of vessels such as fishing vessels,
offshore oil vessels and others.
Fishing Vessels
Fishing vessels bulk of steel and fiberglass (GRP) are much
more prevalent.
Geographical/physical features of the area of operations
vary from comparatively sheltered waters of inshore fishing to the full rigors
of the open seas with exposure to gales, heavy seas fog ice and snow.
Offshore Oil Vessels
The offshore oil vessels are used for explanation or for
commercial production of oil from the ocean beds.
Hull and Machinery Insurance
The policy covers the hull, machinery and equipment and stores
etc. on board but do not cover cargo.
The insurance cover, the requirements of the individual
ship owner and protects him against partially loss, total loss, ship’s
proportion of general average and salvage charges, sue and labor expenses and
ship-owner’s liability towards other vessels arising from collisions.
Hull Underwriting
Hull underwriting requires the following information to
assure the risk: Type, construction, builders, age, tonnage, dimension,
equipment, propulsion machines, engine, fire extinguisher; classification
society, merchant shipping act, warranties, navigation physical and moral
hazard.
What is Marine Insurance?
Marine insurance is a must for ship owners, shipping corporations, and cargo owners to protect their interests. Here is all you need to know about marine insurance and the various structures.
Introduction to marine insurance
Are you looking for a guide to help you understand what marine insurance is?
If yes, then you are in the right place. Insurance is an important aspect, no matter which industry you belong to, and the marine sector is no different.
After all, the marine industry has the logistical responsibilities of transporting and protecting people’s and companies’ cherished goods and valuable assets. Hence marine insurance becomes a requirement. Let us dive a little deeper into marine insurance, how it works, and all you may need to know.
What is marine insurance?
Marine insurance offers coverage for any damage or loss related to ships, cargo, terminals, transports, or transfer. Simply put, a marine insurance policy will cover any loss or damage surrounding the boat or watercraft.
Of course, certain criteria define the coverage and what it may entail, such as whether your boat or vessel is on-shore, out of the water, sitting in your garage, or stored at a boat club. This will determine the safety aspect impacting your coverage premiums.
What Does a Marine Insurance Cover?
Marine Insurance will mostly cover the following:
- Physical or structural damage to your vessel due to collision with another submerged or above-water vessel.
- Damage to your or others’ property on board and bodily injuries.
- Towing, assistance, and gas delivery in case you find yourself stranded on the boat.
Marine insurance will also cover your ship and cargo if you face any problems while transporting goods. Moreover, it will cover liabilities in the event of damage or loss of the goods.
That said – it is your responsibility to ensure that you have adequate marine insurance, especially when dealing with commercial transportation of customers’ goods and belongings. This will help you gain a customer’s trust by providing an insured service.
How Does Marine Insurance Work?
When you purchase marine insurance coverage, it transfers all the liability from you and other stakeholders to the insurance provider. That said –you, as intermediary handling the transported goods, have limited liability to begin with. However, as an exporter, buying an insurance policy helps you protect the cargo against any loss or damage.
In most cases, the export contracts come with an obligation that the exporter must have marine insurance. Therefore, if you are an exporter, you need to take out marine insurance to fulfill the agreement’s terms and conditions, such as Carriage and Insurance Paid (CIP) or Cost Insurance and Freight (CIF).
These will help you protect your customers’ interests/property and abide by the contractual policies.
Types of Marine Insurance
There are several types of marine insurance cover to cater to different needs. Let us see what they are.
· Freight Insurance
Freight insurance protects a merchant ship’s owning corporation, because they are prone to losing money in freight. For example, if you lose the cargo due to an accident, freight insurance will cover the losses.
· Freight Demurrage and Defense Insurance
This one is commonly known as FD&D or defence. This marine insurance covers legal costs claims and handling assistance for a broad range of disputes not covered by P&I, Hull, or machinery insurance.
· Hull Insurance
This marine insurance covers your vessel’s hull and torso, along with other pieces and articles of the ship’s furniture. You can take out hull insurance as an owner to avoid any damage or loss to your ship, boat, or vessel in case of an accident.
· Liability Insurance
A liability marine insurance policy offers compensation for any liability caused due to your ship colliding or crashing, or any form of induced attacks.
· Marine Cargo Insurance
If you are a cargo owner, you are at risk of mishandling the cargo at any stage, i.e., from handling at the terminal or during the voyage. This may result in loss, misplacement, or damage to the goods. Therefore, to protect your interest as the cargo owner, marine cargo insurance will cover your losses against an adequate premium payment.
· Machinery Insurance
This insurance coverage gives you protection for all essential machinery on-board. The insurance company will compensate for any operational damage to the ship. However, it will require a survey and approval from the surveyor.
· P&I Insurance
P&I stands for Protection and Indemnity Insurance, provided by P&I club. This club is a shipowners’ mutual insurance coverage service to focus on the damages or losses to third-party goods that other standard marine insurance policies may not cover.
Other Policies
Apart from the above-mentioned marine insurances, you can also avail several policies with the flexibility to choose as per your need. These include:
- Block Policy – this marine insurance policy falls under maritime insurance. If you are a cargo owner, the block policy will cover you against loss or damage to the cargo throughout its journey.
- Fleet Policy – if you are an owner of several ships, you are better off drawing out a fleet policy.
- Floating Policy – is a policy issued to the shipping line mentioning the marine insurance policy’s maximum insurance limit. Other details will be provided to the insurance company when the vessel starts its voyage. If a cargo owner frequently transports goods, this is one of the best policies and will help you save both time and money.
- Mixed Policy – a combination of both voyage and time policy.
- Port Risk Policy – this offers insurance to the ship while it is docking at a port.
- Single Vessel Policy – suitable for small ship owners and covers one ship’s insurance.
- Time Policy – valid for a limited or certain time-period, typically for a year.
- Voyage Policy – valid for specific voyages.
- Valued Policy – mentions the value of cargo in a document to make the value of reimbursement clear.
- Unvalued/Open Policy – is the opposite of the valued Policy, as no cargo value was written prior to the incident. It is only after an incident that they inspect the extent of damage or loss for reimbursement.
- Wager Policy – Involves no fixed terms of reimbursement, and it is upon the discretion of the insurance provider if they find damage to be genuine and worth reimbursement. However, you must remember that this is not a written policy and has no legal standing in the court of law.
Marine insurance - frequently asked questions
Several stakeholders are eligible for marine insurance, including the following:
- Manufacturers
- Importers and exporters
- Cargo owners
- Buying agents
- Buyers
Some of the documents you may need to make a marine insurance claim are:
- Claim form
- Insurance certificate and the policy number
- Bill of lading
- Missing certificate or survey report
- Invoices, packaging lists, and shipping details
- Xerox of correspondences exchanged
Now that you know about all the marine insurance coverages and policies and their benefits, certain exemptions apply. They are as follows:
- Planned or intentional damage or misconduct
- Riots, strikes, and war damages
- Damage due to inadequate packaging of the cargo
- Delays in transportation and associated costs
- Wear and tear or leakage of the cargo
- Insolvency or financial distress of a shipping company
- Removal of wreck
Whether you are an independent shipowner, a shipping corporation, or a cargo owner, marine insurance can assist with protecting your goods and investments. Therefore, you must always draw marine insurance and seek experts’ advice to ensure that you are getting the right insurance to cover all your requirements.
There are four types of marine insurance covers that you can get -
Hull and Machinery insurance
Hull is the main structure of the ship or vessel. A hull policy covers the ship’s torso and any damages to it. Since not only the ship but also the machinery installed are equally important, a hull policy is generally bundled as Hull and Machinery Policy. It is usually opted for by shipowners.
Cargo Insurance
The consignment owners face the risk of their cargo being damaged, lost or mishandled during the journey. Hence, to protect against such risk that may lead to a financial loss, a cargo policy is issued. It covers damages at the port, ship, railway track or while loading and unloading your consignment. The coverage that a cargo policy offers is far more as compared to the premiums charged for it.
Liability Insurance
During transit, the ship along with its cargo may be exposed to risks of a crash, collision or other kinds. Where the factors are beyond the control of the shipowner, a liability marine insurance policy protects the owner against the claims made by cargo owners.
Freight Insurance
In case of damage to the freight, the losses shall are required to be borne by the shipping company. Freight insurance safeguards the interest of the shipping company in this regard. The risk associated with the transportation of goods is different for each type of journey. Thus different customers require different types of marine insurance coverage. Here are a few common types of coverage that are available -
- Any loss or damage while loading or unloading the cargo.
- Jettison or washing overboard of the vessel.
- Sinking and stranding of the vessel.
- Loss due to fire.
- Natural calamities.
- Collision, derailment or accidents
- Total loss coverage.
While most marine insurance coverage includes damage or loss to cargo, a few plans have limitations with regards to cross-border civil disturbances or pirate attacks. Let us understand the exclusions to your marine insurance coverage-
- Any regular tear and wear are excluded under your insurance cover.
- Damage suffered due to inadequate and incorrect packaging of goods.
- Costs that are incurred due to delay in transportation are not under the purview of your commercial insurance
- Any wilful damage with the intention to create losses.
- Damages caused due to political unrest, war, riots and similar situations.
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