Marine insurance

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which
property is transferred, acquired, or held between the points of origin and final destination.

Cargo insurance—discussed here—is a sub-branch of marine insurance, though Marine also includes Onshore and
Offshore exposed property (container terminals, ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine
Liability.

edit] Origins of formal marine insurance

Maritime insurance was the earliest well-developed kind of insurance, with origins in the Greek and Roman
maritime loan. Separate marine insurance contracts were developed in Genoa and other Italian cities in the
fourteenth century and spread to northern Europe. Premiums varied with intuitive estimates of the variable risk from
seasons and pirates.[1]

The modern origins of marine insurance law in English law were in the law merchant, with the establishment in
England in 1601 of a specialised chamber of assurance separate from the other Courts. Lord Mansfield, Lord Chief
Justice in the mid-eighteenth century, began the merging of law merchant and common law principles. The
establishment of Lloyd's of London, competitor insurance companies, a developing infrastructure of specialists
(such as shipbrokers, admiralty lawyers, and bankers), and the growth of the British Empire gave English law a
prominence in this area which it largely maintains and forms the basis of almost all modern practice. The growth of
the London insurance market led to the standardisation of policies and judicial precedent further developed marine
insurance law. In 1906 the Marine Insurance Act was passed which codified the previous common law; it is both an
extremely thorough and concise piece of work. Although the title of the Act refers to marine insurance, the general
principles have been applied to all non-life insurance.

In the 19th century, Lloyd's and the Institute of London Underwriters (a grouping of London company insurers)
developed between them standardised clauses for the use of marine insurance, and these have been maintained since.
These are known as the Institute Clauses because the Institute covered the cost of their publication.

Within the overall guidance of the Marine Insurance Act and the Institute Clauses parties retain a considerable
freedom to contract between themselves.

Marine insurance is the oldest type of insurance. Out of it grew non-marine insurance and reinsurance. It
traditionally formed the majority of business underwritten at Lloyd's. Nowadays, Marine insurance is often grouped
with Aviation and Transit (ie. cargo) risks, and in this form is known by the acronym 'MAT'.

[edit] Practice

The Marine Insurance Act includes, as a schedule, a standard policy (known as the 'SG form'), which parties were at
liberty to use if they wished. Because each term in the policy had been tested through at least two centuries of
judicial precedent, the policy was extremely thorough. However, it was also expressed in rather archaic terms. In
1991, the London market produced a new standard policy wording known as the MAR 91 form and using the
Institute Clauses. The MAR form is simply a general statement of insurance; the Institute Clauses are used to set out
the detail of the insurance cover. In practice, the policy document usually consists of the MAR form used as a cover,
with the Clauses stapled to the inside. Typically each clause will be stamped, with the stamp overlapping both onto
the inside cover and to other clauses; this practice is used to avoid the substitution or removal of clauses.

Because marine insurance is typically underwritten on a subscription basis, the MAR form begins: We, the
Underwriters, agree to bind ourselves each for his own part and not one for another [...]. In legal terms, liability
under the policy is several and not joint; ie. The underwriters are all liable together, but only for their share or
proportion of the risk. If one underwriter should default, the remainder are not liable to pick his share of the claim.

Typically, marine insurance is split between the vessels and the cargo. Insurance of the vessels is generally known
as 'Hull and Machinery' (H&M). A more restricted form of cover is 'Total Loss Only' (TLO), generally used as a
reinsurance, which only covers the total loss of the vessel and not any partial loss.

Cover may be on either a 'voyage' or 'time' basis. The 'voyage' basis covers transit between the ports set out in the
policy; the 'time' basis covers a period of time, typically one year, and is more common.

[edit] Protection and indemnity

Main article: Protection and indemnity insurance

A marine policy typically covered only three-quarter of the insured's liabilities towards third parties. The typical
liabilities arise in respect of collision with another ship, known as 'running down' (collision with a fixed object is an
'allision'), and wreck removal (a wreck may serve to block a harbour, for example).

In the 19th century, shipowners banded together in mutual underwriting clubs known as Protection and Indemnity
Clubs (P&I), to insure the remaining one-quarter liability amongst themselves. These Clubs are still in existence
today and have become the model for other specialised and uncommercial marine and non-marine mutuals, for
example in relation to oil pollution and nuclear risks.

Clubs work on the basis of agreeing to accept a shipowner as a member and levying an initial 'call' (premium). With
the fund accumulated, reinsurance will be purchased; however, if the loss experience is unfavourable one or more
'supplementary calls' may be made. Clubs also typically try to build up reserves, but this puts them at odds with their
mutual status.

Because liability regimes vary throughout the world, insurers are usually careful to limit or exclude American Jones
Act liability.

[edit] Actual total loss and constructive total loss

Fire aboard MV Hyundai Fortune resulting in a constructive total loss

These two terms are used to differentiate the degree of proof where a vessel or cargo has been lost. An actual total
loss refers to the situation where the position is clear and a constructive total loss refers to the situation where a loss
is inferred. In practice, a constructive total loss might also be used to describe a loss where the cost of repair is not
economic; ie a 'write-off'.

The different terms refer to the difficulties of proving a loss where there might be no evidence of such a loss. In this
respect, marine insurance differs from non-marine insurance, where the insured is required to prove his loss.
Traditionally, in law, marine insurance was seen as an insurance of 'the adventure', with insurers having a stake and
an interest in the vessel and/ or the cargo rather than, simply, an interest in the financial consequences of the subject-
matter's survival. Marine insurance costs less than auto insurance.

[edit] Average

The term 'Average' has two meanings:

(2) In the situation where an insured has under-insured, ie. insured an item for less than it is worth, average will
apply to reduce the amount payable. There are different ways of calculating average, but generally the same
proportion of under-insurance will be applied to any payout due.

An average adjuster is a marine claims specialist responsible for adjusting and providing the general average
statement. He is usually appointed by the shipowner or insurer.

[edit] Excess, deductible, retention, co-insurance, and franchise

An excess is the amount payable by the insured and is usually expressed as the first amount falling due, up to a
ceiling, in the event of a loss. An excess may or may not be applied. It may be expressed in either monetary or
percentage terms. An excess is typically used to discourage moral hazard and to remove small claims, which are
disproportionately expensive to handle. The equivalent term to 'excess' in marine insurance is 'deductible' or
'retention'.

A co-insurance, which is typically applied in non-proportional treaty reinsurance, is an excess expressed as a

A franchise is a deductible below which nothing is payable and beyond which the entire amount of the sum insured
is payable. It is typically used in reinsurance arbitrage arrangements.

[edit] Tonners and chinamen

These are both obsolete forms of early reinsurance. Both are technically unlawful, as not having insurable interest,
and so were unenforceable in law. Policies were typically marked P.P.I. (Policy is Proof of Interest). Their use
continued into the 1970s before they were banned by Lloyd's, the main market, by which time, they had become
nothing more than crude bets.

A 'tonner' was simply a 'policy' setting out the global gross tonnage loss for a year. If that loss was reached or
exceeded, the policy paid out. A 'chinaman' applied the same principle but in reverse: thus, if the limit was not
reached, the policy paid out.

[edit] Specialist policies

Various types of specialist policy exist, including:

Newbuilding risks: This covers the risk of damage to the hull whilst it is under construction.
Yacht Insurance: Insurance of pleasure craft is generally known as 'yacht insurance' and includes liability
coverage. Smaller vessels, such as yachts and fishing vessels, are typically underwritten on a 'binding
authority' or 'lineslip' basis.
War risks: Usual Hull insurance does not cover the risks of a vessel sailing into a war zone. A typical
example is the risk to a tanker sailing in the Persian Gulf during the Gulf War. War risks cover protects, at
an additional premium, against the danger of loss in a war zone. The war risks areas are established by the
London-based Joint War Committee, which has recently moved to include the Malacca Straits as a war
risks area due to piracy [1]. If an attack is classified as a "riot" then it would be covered by war risk
insurers[2].
 Increased Value (IV): Increased Value cover protects the shipowner against any difference between the
insured value of the vessel and the market value of the vessel.
Overdue insurance: This is a form of insurance now largely obsolete due to advances in communications.
It was an early form of reinsurance and was bought by an insurer when a ship was late at arriving at her
destination port and there was a risk that she might have been lost (but, equally, might simply have been
delayed). The overdue insurance of the Titanic was famously underwritten on the doorstep of Lloyd's.
Cargo insurance: Cargo insurance is underwritten on the Institute Cargo Clauses, with coverage on an A,
B, or C basis, A having the widest cover and C the most restricted. Valuable cargo is known as specie.

[edit] Warranties and conditions

A peculiarity of marine insurance, and insurance law generally, is the use of the terms condition and warranty. In
English law, a condition typically 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. By contrast, a warranty is not fundamental to the
performance of the contract and breach of a warranty, whilst giving rise to a claim for damages, does not entitle the
non-breaching party to terminate the contract. The meaning of these terms is reversed in insurance law. Thus, the
Marine Insurance Act 1906 refers to implied warranties, one of the most important of which is that the vessel is
seaworthy.[3]