Unit 7

MARINE CARGO
INSURANCE
Insurance
 Insurance is a contract whereby, in return for
the payment of premium by the insured, the
insurers pay the financial losses suffered by
the insured as a result of the occurrence of
unforeseen events.
 A contract between two parties whereby one
party called insurer undertakes in exchange
for a fixed sum called premiums, to pay the
other party called insured a fixed amount of
money on the happening of a certain event.
Parties involved
 The party to an insurance arrangement who
undertakes to indemnity for losses. - insurer/
underwriter
 an insured or policyholder is the person or
entity buying the insurance and receiving
indemnity on happening of unforeseen
events.
 The person, group, or property for which an
insurance policy is issued: the subject-
matter insured
Insurance premium
 Payments to the insurance company to buy a
policy and to keep it in force.
 Financial cost of obtaining an insurance
cover, paid as a lump sum or in installments
during the duration of the policy.
 A failure to pay premium when due
automatically cancels the insurance policy
which, upon payment of the outstanding
amount within a certain period, may be
restored.
Principles of Insurance
 Insurable Interest
 Indemnity
 Utmost good faith
 Subrogation
 Insurable Interest
 In order to take out a policy the policy-holder must
have an insurable interest in the insured matter.
 In the case of cargo insurance this means that they
must ‘benefit from the safe arrival of the goods or be
prejudiced by their loss’.
 The insurable interest is the financial interest in the
property, in that if the property is uninsured,
damaged, or destroyed, the owner would have to
find the necessary funds out of their own pocket to
have it repaired or replaced.
 One may have an insurable interest by being
responsible for damage to property owned by
another person,
 Insurable Interest
 The legal right enjoyed by the owner of a property
to insure is called ‘Insurable Interest’. The insurance
will become null and void, without the insurable
interest.
 The insured must be in a position to loose
financially if a covered loss occurs.
 Purposes:
• To prevent gambling (gambling contract)

• To reduce moral hazard

• To measure the amount of the insured’s loss in

property insurance.
 Indemnity
 Most insurance is based on the fact that the
insurers promise to indemnify the insured; that is,
they promise to put them back into the situation
they were in before the loss.
 The indemnity on cargo insurance policies is
expressed as an amount of money, the insured
value of the goods.
 Whilst it is possible that the insurers could replace
lost or damaged goods with exact equivalents, it is
clearly impractical, and therefore cargo insurance
is invariably based on valued policies.
 Purposes:
• To prevent the insured from profiting from a loss
• To reduce moral hazard
Utmost good faith
 The insurers are almost totally dependent on
the insured to disclose any relevant
information regarding the insured risks.
 There is an important application of "utmost
good faith” to the type of open (declaration)
policies commonly used for cargo insurance.
 A contract of marine insurance is a contract
based upon the utmost good faith, and, if the
utmost good faith be not observed by either
party, the contract may be avoided by the
other party.
Utmost good faith
Breach of duty of utmost good faith:
• Non-disclosure

• Concealment

• Innocent misrepresentation

• Fraudulent misrepresentation
Subrogation
 Subrogation means that once a claim has been
paid, and not before, the insurer is entitled to
place themselves in the position of the assured
to the extent of acquiring all the assured's rights
and remedies in respect of the loss against any
third parties who may be concerned.
 Therefore, when an underwriter has paid a
claim, either for partial or total loss, they
automatically gain subrogation rights against the
third parties but only 'in so far as the insured
has been indemnified by such payment for the
loss'.
Subrogation
 This means that any recovery effected by the
underwriter from a third party is limited to the
amount of the claim they have settled.
 Subrogation allows the insurance company to
take action against liable carriers in the name
of the insured
Subrogation
 The principle of subrogation strongly supports
the principle of indemnity
 The insurer is entitled to recover from a
negligent third party any loss payment made
to the insured.
 Purposes:
• Prevent the insured from collecting twice for the same
loss
• Is used to hold the negligent person responsible for
the loss
• Help to hold down insurance rate.
Marine insurance
Marine Insurance covers the loss or damage of
ships, cargo, terminals, and any transport or
property by which cargo is transferred,
acquired, or held between the points of origin
and final destination.
 Needs for Marine Insurance

 Exporters and importers face all the time

uncertainties of loss of their goods.
 Insurance is used to protect their financial
interests against such risks and actual losses.
 Without adequate insurance and protection of
the interests of those with goods in transit,
international trade would be negatively
affected.
 Liability of carriers to the goods is very limited.
 General Average
 General Average covers the situation where
‘there is extraordinary sacrifice or expenditure,
intentionally and reasonably incurred, for the
purpose of preserving the imperiled property
involved in the common maritime adventure’.
 General Average includes situations where
goods are jettisoned to save the ship, or are
damaged by water used to extinguish a fire, or
the vessel is diverted to a port of refuge, and
many other situations where loss of certain
goods preserves the rest of the cargo and the
conveyance.
General Average
 The basic principle is that all the parties involved,
including the vessel owners, contribute to the loss.
 ‘General average’ is declared and an ‘average
adjuster’ will, eventually, calculate the amount of the
claim.
 It is often necessary for the cargo owners to sign a
‘general average bond’ and for the insurers to
provide a ‘general average guarantee’ in order to
obtain possession of the goods from the carrier.
 As all standard policies cover general average
claims, the cost of the claim will be met by the
insurers.
Marine Insurance Claim
Procedure
 In case of loss/damage in transit, a monetary
claim should be lodged with the carrier within the
time limit to protect recovery rights.
 Appointment of surveyor or claim representative
in agreement with the insurer to determine the
nature, cause and extent of loss/damage.
 The surveyor informs the insurer of the
approximate value of loss incurred.
 The claim procedure takes from one to three
weeks
Insurance Policy

 Tailor made policy

 Floating policy - Open cover
 Valued policy - Unvalued policy
 Time policy - Voyage policy
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.
Risks excluded from the policy
 Delay
 Wear and tear

 Inherence vice

 Ullage

 Willful misconduct of the assured

Delay
 If any loss occurs because of the late arrival
of the goods, then there is no claim.
 It may be in this case that action is possible
against the carrier, the transport conventions
defining what would be considered
unreasonable delay in delivery, but not
against the insurers.
Wear and tear
 The exporter has to plan for predictable
factors that could lead to loss, perhaps of
value, to the goods.
 Normal wear and tear is never covered by
the policy and the exporter has to prepare for
the possibility of, for example, a rough sea
voyage.
 In fact the consequences of ‘the ordinary
action of the wind and waves’ is not covered.
Inherence vice
 This describes things that goods are apt to do
and are therefore predictable.
 For example, it is obvious that metal has a
tendency to rust, particularly in damp
conditions, and the exporter must take steps
to avoid such damage, by priming or the use
of silicone gels or shrink-wrap, rather than
rely on the insurance policy.
Ullage
 This is almost a form of inherent vice but is
specifically applied to liquids.
 In the context of cargo insurance it describes
loss of liquid due to evaporation or ‘ordinary
leakage or loss in weight or volume’, which is
excluded from policies.
 Willful misconduct of the assured
 This may be obvious but is extremely important
in that the documentation supporting claims
must prove that the claimant has acted
prudently and that the loss is not the
consequence of their direct actions or their
negligence.
 A clear example would be to attempt to make a
claim for damaged goods that included bills of
lading that were claused ‘inadequate packing’.
Any claims where there is evidence of
insufficient or unsuitable packing are likely to
fail.
Claims documents
The documents typically requested for claims
 Original policy or certificate.

 Invoices and packing specifications.

 Original bill of lading or other transport

document.
 Survey report or other evidence of loss or
damage.
 Landing account/weight notes at destination.

 Any correspondence with the carrier/other

parties.
Original policy or certificate
 Bearing in mind that the policy is ‘proof of
interest’ (i.e, insurable interest), this is
essential.
 It also describes the subject matter, insured
value and appropriate clauses.
Invoices and packing specifications
Invoices and packing specifications are needed
to assess the percentage of a part loss and
specifically where lost or damaged goods were
packed.
Original bill of lading or other transport
document

Original bill of lading or other transport

document proves the goods were in apparent
good order and condition when shipped and
evidences the contract of carriage should
action be later taken against the carrier.
Survey report or other evidence of loss
or damage

An independent report of the nature and extent

of the loss should ideally be produced by an
approved agency, eg Lloyd’s agent.
Landing account/weight notes at
destination
 The carrier’s or stowage broker’s record of
the out-turn of the goods at destination.
 Useful for identifying where damage took
place in the container or on the vessel or
haulage unit.
Any correspondence with the
carrier/other parties
 Obviously the insurers wish to maintain any
legal rights against other parties and insist
that the insured do not give them away.
 Not an unreasonable set of documents to
require and every one there for a specific,
and understandable, purpose.
 How to claim
 Take immediate steps to minimize loss.
 Inform nearest office of the insurance company or claim settling
agent mentioned on the policy.
 In case of damage to goods whilst on ship or port, arrange for joint
ship survey or port survey.
 Lodge monetary claim with carrier within stipulated time period.
 Submit duly assigned insurance policy/certificate along with the
original invoice and other documents required to substantiate the
claim such as:
 • Bill of Lading
• Packing list
• Copies of correspondence exchanged with carriers.
• Copy of notice served on carriers along with
acknowledgment/receipt.
• Shortage/Damage Certificate issued by carriers.