MARINE INSURANCE

BACKGROUND
 What is Insurance?
Insurance is the transfer of risk by an individual or an
organization, to the insurance company.

The insurance company receives payment in the form

of premium and will indemnify the party in the event of
losses or damages sustained by him.

Payment of
premium

A person/ Insurance
organization company

Indemnity for
loss suffered
 HISTORICAL BACKGROUND OF MI
In ancient India and Babylon
Loans
Protection for maritime adventure was done through
loans on the security of a vessel or cargo.

Known as bottomry (when the secured property was a

vessel) and respondentia (when the secured property
was cargo)

If the vessel/cargo arrived safely, the loan was repayable

at a high rate of interest.
In the event of total loss of the vessel/cargo, the borrower
was excused from the obligation to repay the loan.
Modern Marine insurance:
Emerged from Lloyds Coffee House(Now is known as
Lloyds of London).
Lloyds clients were mostly seafarers and then
developed as a maritime commercial meeting place.
Today, Lloyds is the worlds specialist insurance market.
It is not a company; it's a market where Lloyds members
join together as syndicates to insure risks.
Is not a company but a society of individuals and
corporate members with strict rules.
Areas: marine 17%, aviation 7%, motor 16%, non
transport 59%.
insurance arranged by brokers and underwriters
 Lets have a tour at
Lloyds of London!!

http://www.lloyds.com/flash/Building-
Virtual-Tour/index.html
Lloyds Coffee House
Lloyds of London
BASIC TERMS IN INSURANCE
TERMS MEANING

INSURER / UNDERWRITER The party who undertakes to indemnify the

assured against loss.

ASSURED/INSURED The party that pays premiums and

receives payment of indemnity.

SUBJECT MATTER INSURED The property/thing insured.

INSURABLE INTEREST Title/interest which the assured has in the

subject matter insured.

PREMIUM Amount of money paid by assured for

insurance coverage.

PERIL A specific risk or cause of loss. E.g. theft,

act of god, fire.
 DEFINITION OF MARINE INSURANCE

A contract of marine insurance is a contract

whereby the insurer undertakes to indemnify the
assured, in manner and to the extent thereby
agreed, against marine losses, that is to say, the
losses incident to marine adventure.

(S.1 Marine Insurance Act 1906 (MIA)

1. Marine insurance is a form of contract

The cover is subject to the terms of the contract.

The details and terms of the marine insurance
contract is written in the policy.

2. The purpose of marine insurance is to provide

indemnity
A contract of insurance is a contract of indemnity.

The insurer is required to restore the insured to the

same financial position as he had enjoyed immediately
before the loss subject to the terms of the contract.

An assured should be compensated only to the extent

of his loss. He shall not be better off than before the
loss.
 Differences between contracts of indemnity and non-
indemnity contracts (contingency insurance).

Contracts of Indemnity Contracts of non-indemnity

Insurance
The underwriter undertakes to The underwriter agrees to pay
pay indemnity to the extent
of loss.
The assured has to prove loss
suffered before making a
claim.
e.g. Marine insurance
House-hold insurance
Travel insurance
or contingency insurance
a fixed sum of money on the
happening of an insured risk.
The assured does not have to
prove loss.
The assured will be covered
once the contingency/incident
stated in the contract
occurred.
e.g. Life insurance
Health insurance
3. The subject matter of any contract of marine
insurance is a marine adventure. (s.3(1) MIA)
The insurer will provide indemnity to assured only if
the loss occurred from a marine adventure.

Meaning of marine adventure:

1. Physical loss due to maritime perils.

e.g. ship damage

2. Pecuniary / financial loss due to maritime perils.

e.g. loss of freight

3. Liability to a third party due to maritime perils.

e.g. liability to a third party after collision.
SOURCES OF MARINE
INSURANCE
CONTRACT
Freedom of contract to the parties.( parties are free to
negotiate whatever terms in the policy that they seem fit)
However, in practice standard institute clauses are
normally used.
e.g. International Hull Clauses 2003.

Marine Insurance Act 1906

Case Law
Clarification of provisions of the MIA 1906
Clarification of the nature and meaning of terms used in
marine policies
 THE DOCTRINE OF
UTMOST GOOD FAITH
 THE DOCTRINE OF UTMOST
GOOD FAITH
The doctrine of utmost good faith is known
as uberrimae fidei.

The word utmost refers to the

highest degree of good faith.

This principle applies to every kind of

insurance.
 SECTION 17 MIA 1906
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 avoided by
the other party.
Points:
The doctrine of utmost good faith is a basis of contract
of marine insurance.
If either party fails to observe utmost good faith, the
contract may be avoided
 CONSEQUENCES OF THIS DOCTRINE

i. Duty of full
disclosure 1. Assured
2. Broker
3. Insurer
ii. Duty to abstain from
misrepresentation
 I. Duty of Disclosure
Every material circumstances known to insured and to
insurer/broker must be disclosed.

What are material facts/circumstances that need to be

disclosed?
The facts / circumstances are material if it would
influence a prudent insurer
in considering the proposed insurance either to take / reject the
risk
in determining premium.

It is a matter of fact. (depends on the facts of that

particular case)
EXAMPLES OF MATERIAL CIRCUMSTANCES THAT
NEED TO BE DISCLOSED

Moral hazard

Assureds background which indicates that the assured

may pose enhanced risk to the insurers.
Dishonesty
Assureds claim history
Serious financial difficulties faced by the assured
Criminal record of the assured
Physical hazard

Risk presented by attributes/qualities of the insured

property.

e.g.
Age and construction of the ship
The voyage that the ship is undertaking
The nature of the cargo that is being carried
PREVIOUS CLAIMS EXPERIENCE

Marc Rich & Co AG v Portman

MR were traders in crude oil who insured their cargoes and
liabilities as charterers of vessel. Demurrage liabilities is a
covered risk. The routes and ports frequented by MRs
vessels were often congested, leading to such liabilities. In
obtaining such cover, MRs broker did not inform, nor were
asked about previous experience of such liabilities.
PREVIOUS CONVICTION
Previous conviction of the assured is material because it
increase the likelihood of fraud or exaggerated claims.
The fact that the assured is under investigation or has been
charged for a crime which he did not commit is a material
fact.

The Dora
A previous conviction of the skipper of a yacht unknown to
the insurer. The insurer can avoid
the policy.
 EXAMPLES OF MATTERS WHICH NEED
NOT BE DISCLOSED -S.18(3)

In the absence of inquiry from the insurer, the

following circumstances need not be disclosed:

(a) Any circumstance which diminishes the risk;

The Dora
The insure yachts was kept in secured mooring as
the security precaution diminished the risk.
b) Any circumstance which is known or presumed to be
known to the insurer.
Circumstances which is in the public domain and
known globally.
e.g.
physical risk- the fact that there was hurricanes,
earthquakes, tsunami
at certain part of the world.
Political risks likelihood of conflict or war.
 ii. Duty to Abstain From
Misrepresentation
REPRESENTATION Representations are statements
made by insured or his agent, during the negotiation
for the contract, and before the contract is concluded.
Misrepresentation:

A representation is material which would influence the

judgment of a prudent insurer in fixing the premium, or
determining whether he will take the risk.
 EFFECT OF FAILURE TO DISCLOSE AND
MISREPERESENTATION

The contract will be avoided.

The premium will be returned to the
assured except in case of fraud.
MARINE INSURANCE
RISKS
 MARINE INSURANCE RISKS
AMONG THE INCLUDED PERILS:
Perils of the sea
Fire
Theft
Piracy

EXCLUDED PERILS
Wilful misconduct
Delay
Ordinary wear and tear
Contractual exclusion
Inherent vice
 Perils of the sea
Elements:
1. Fortuitous accident
2. Of the sea

Examples:
Collision
Unexpected Ice berg
Storms

Not considered perils of the sea:

Illness-
Damage to the donkey engine
Rats and vermin
ordinary action of winds and waves
 Fire
Elements:
Ignition
Combustion

Cannot be claimed under fire:

Damage caused by mere heating/over heating

Case:
Tempus Shipping Co Ltd v Dreyfus & Co Ltd
Mere heating which has not arrived at the stage of
ignition is not within the definition of fire.
 Theft
Elements;
Theft must be violent
Committed by persons from outside the
vessel (stevedore, pilot)
 Piracy
1. Piracy is robbery for personal gain
2. Violence is an essential element for
piracy
3. Piracy could be committed either by
outsiders or passengers
 MAIN TYPES OF
MARINE INSURANCE
 MAIN TYPES OF MARINE
INSURANCE
Hull and machinery

Cargo insurance

Protection and indemnity

Port and Terminal Operator Liability

 HULL AND MACHINERY
It covers loss of or damage to the ship or other sea-and
lake-going vessels itself or the equipment which forms part
of it (for instance, cranes, hydraulic winches etc.).

It is available for all types of ships and vessels and their

equipment, including:
Container ships
Oil & gas tankers
Bulk carriers
Passenger vessels
Fishing vessels
Tugs and barges
Towboats
Offshore energy support vessels
Yachts, mega-yachts and pleasure craft
 This insurance covers :
Costs of repairing physical loss or damage to a
vessel.

Reimbursement following total loss of a vessel (Actual

and Constructive)

Expenses to prevent loss (Sue & Labour,Salvage

expenses and GA contributions)

Expenses associated with claims ( survey fees etc.).

Institute Clauses for H&M

Institute Time Clauses Hulls (1/10/83)

Institute Voyage Clauses Hulls (1/1/95)

International Hull Clauses (01/11/03)

Besides the above-mentioned basic hull clauses, a

number of clauses were used for particular types of hull
risk.
Fishing vessel & yachts have their own dedicated
clauses
port risk clauses cater for vessels that work within
the defined geographical limits of a port, such as tugs
and pilot boats or for vessels that will be laid up for
repair within the port for a period of time.
 Among additional cover offered in H&M policies are:

Increased Value Insurance-(also called Freight Interest

Insurance)
A total loss of the vessel can put the ship-owner in a situation,
where the hull value insured is insufficient to cover the costs
for replacing the lost vessel.
The increased value insurance makes it possible for the ship
owner to replace the vessel and moderate the economic
effects of a total loss. Normally, insured value is maximum
25% of hull & machinery insured value.

Loss of Hire
protects the potential loss of income when a casualty occurs
and vessel is off-hire. The extent of the insurance and the
insurance premium are based upon an agreed daily indemnity
during a certain period per occasion and year.
 War Risks - to provide the vessel owner with insurance
against war and marine terrorism perils such as capture,
seizure, arrest, restraint, detainment, confiscation,
expropriation and any terrorist act or person acting
maliciously or from a political motive.
e.g. Institute War and Strikes Clauses (Hulls-Time) (1/1/83) &
Institute War and Strikes Clauses (Hulls Time) (1/11/95)

Cash onboard - to cover the master's cash on board for

sundries and petty charges. The risk is mainly theft and or
loss in case of fire or total loss of the vessel. This insurance
is designed for cash stored in a safe on board the ship.

Running Down Clause (also referred to as "the collision

liability").The clause protects the owner of the vessel
against legal liability for damage done to another ship or its
cargo resulting from a collision with, and caused by, the
insured vessel.
 Cargo Insurance
Cargo insurance covers the interest of shippers,
consignees, distributors, and others in goods.

This insurance covers loss and/or damage during the

movement of cargo from one port/ country to another.
Mode of transport can be by sea, air or within land.

Coverage can be provided for all risks or on a named

peril basis.
 Coverage can either be effected by the buyer or the seller depending on the
contract of sales.
There are different types of recognised Sale Contracts, the most common
affecting Marine Insurance are:

F.O.B. (Free On Board)

The Seller is responsible for all loss or damage until goods are on board
vessel. Thereafter the goods are at buyer's risks.

C & F (Cost and Freight)

The Seller is also responsible for the loss or damage to goods until delivery
on to the carrying vessel but it is the responsibility of buyer to arrange
insurance

C.I.F. (Cost, Insurance & Freight)

The insurance policy is assigned to the consignee and he can claim under
the policy as though he had arranged the insurance himself.
 Types of coverage available are :

Institute Cargo Clauses ( A ) The All Risks"

provision subject to a list of specified exceptions.

Institute Cargo Clauses ( B ) The cover confined to

named perils subject to a list of specified exceptions.

Institute Cargo Clauses ( C ) The cover confined to

named perils subject to a list of specified exceptions.
It covers only major casualties are covered for
example fire, explosion, vessels being grounded or
capsized etc.
RISKS CLAUSE A CLAUSE B CLAUSE C
Fire & Explosion Yes Yes Yes
Vessel/craft stranded, grounded, sunk or
Yes Yes Yes
capsized
Overturning or derailment of land conveyance Yes Yes Yes
Collision or contact of vessel, craft or
conveyance with external object other than Yes Yes Yes
water
Discharge of cargo at port of distress Yes Yes Yes
Earthquake, volcanic eruption or lightning Yes Yes No
General Average sacrifice Yes Yes Yes
Jettison / Washing Overboard Yes Yes Yes
Entry of sea, lake or river water into vessel,
craft, hold, conveyance, container, liftvan or Yes Yes No
place of storage
Loss of any package lost overboard or dropped
whilst loading onto or unloading from vessel or Yes Yes No
craft
General Average & Salvage Charges Yes Yes Yes
Pirates, thieves & non-delivery Yes No No
 Beside the general cargo clauses, a variant specialised
clauses are used to cater cargoes that carry particular
risks by reason of their own properties or the way they
are traded.
These specialised clauses are ofthen agreed with a
relevant trade association. Examples are for:
Bulk oil
Coal
Commodities (cocoa, coffee, metals, sugar)
FOSFA (oils, seeds and fats)
Frozen meat,
Frozen food
Natural rubber
Timber
jute
 All the cargo clauses exclude war risks
and strikes risks. Such risk are provided
separately under Institute War Clauses
(Cargo) and Institute Strikes Clauses
(Cargo).

Unlike the position in hull insurance, the

two types of risks are addressed
independently.
 Protection & Indemnity

This insurance is usually referred to as "P&I.

The insurance covers the members legal liabilities to
third parties
if the ship, or equipment is damaged, it is a matter for
the owners and their hull underwriters (insurers).
However, if the ship, or the operation of the ship,
causes damage to other property, this is often a matter
for the owners and the P & I club
 Protection and Indemnity Insurance is mutual insurance
which covers shipowners' liability to third parties for
damage to their ship or cargo, and statutory liabilities
such as pollution and wreck removal.

It does not cover direct losses to the shipowner's own

ship or cargo. This will be covered under hull and
machinery and cargo insurance.
 Coverages included in P. & I. are among others;
(i) Protection, which covers a shipowner for claims paid in regard to:
liability for loss of life/personal injury,
(crew, passenger, third parties, stevedores)
Sick wages, Medical costs.

damage to fixed or floating objects (fishing nets, coral reefs)

pollution,
wreck removal (Costs incidental to the raising, removal, destruction, and
liabilities incurred by a member as a result of the raising, removal or
destruction)

collision. - No cover of the members ship

(ii) Indemnity, which reimburses the shipowner for indemnity given to

owners of damaged or lost cargo.