MARINE INSURANCE, GENERAL PRINCIPLES OF INSURANCE

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Marine insurance includes the loss or damage of ship, cargo, terminals & any transport or cargo by which property is transferred, received, or held between the points of origination & final destination. Cargo insurance is a sub-branch of marine insurance, though Marine also covers onshore & offshore unprotected property(container terminals, ports, oil platforms, pipelines), Hull, Marine Casualty, & Marine Liability. When goods are carried by mail or courier, shipping insurance is used instead.

Protection and indemnity

A marine policy generally includes only 3/4 of the insured’s dues towards third parties. The normal dues emerge in terms of collision with another ship, called as “running down” (collision with the fixed object is called “allision”), & wreck removal (a wreck may serve to block a port). In 19th century, shipowners banded together in common underwriting clubs called as Protection & Indemnity Clubs (P&I), to assure the remaining one quarter liability amongst themselves. These Clubs are still in reality today & have become the model for other special & noncommercial marine & non-marine mutuals, e.g. in relation to oil pollution & nuclear risks. Clubs work on the basis of consent to accept a shipowner as a member & impose an initial “call” (premium). With the fund collected, reinsurance will be purchased; but, if the loss experience is adverse one or more “supplementary calls” may be made. Clubs also usually try to build up reserves, but this puts them at odds with their mutual status. Because dues systems vary around the world, insurers are generally careful to limit or exclude American Jones Act liability.

Actual total loss and constructive total loss

These two terms are used to modify the degree of proof where a ship or cargo has been lost. An actual total loss happen where the damages or cost of reconstruction clearly equal or exceed the value of the property. A constructive total loss is a condition where the cost of repairs plus the cost of salvage equal or exceed the value. The use of these terms is conditional on there being property keeps to evaluate damages, which is not always possible in losses to ships at sea or in total theft situations. In this terms, marine insurance differs from non-marine insurance, where the insured is needed to prove his loss. Conventionally, in law, marine insurance was perceived as an insurance of “the adventure”, with insurers having a stake & an interest in the vessel and the cargo rather than simply an interest in the financial importance of the subject matter’s survival.

Average

Average in Marine Insurance Terms is “an fair allocation among all the involved parties of an such an expense or loss.”

General Average stands apart for Marine Insurance. In order for General Average to be properly announced,

  • there should be an event which is beyond the shipowners control, which endanger the entire adventure;
  • there should be a voluntary sacrifice,
  • there should be something saved.

The voluntary sacrifice may be the jettison of some cargo, the use of tugs, or salvors, or harm to the ship, be it, discretional grounding, intentional working the engines that will result in faults. “General Average” needs all parties involved in the maritime venture to furnish to make good the voluntary sacrifice. They share the cost in proportion to the ‘value at risk” in the adventure. “Particular Average” is the title employ to limited loss may be hull or cargo.

Average – is the condition where an insured has under insured, e.g., insured an item for less than its value, average will apply to decrease the declare amount payable. An average adjuster is a marine claims expert accountable for modifying & giving the general average statement. An Average Adjuster in North America is the ‘member of the association of Average Adjusters’ To assure the fairness of the adjustment a General Average adjuster is employed by the shipowner & paid by the insurer.

Excess, deductible, retention, co-insurance, and franchise

An excess is the amount provided by the insured & is generally shown as the first amount of money falling due, up to a ceiling, in the case of the loss. An surplus may or may not be followed. It may be shown in either financial or percentage terms. An excess is generally used to prevent moral hazard & to eliminate small claims, which are disproportionately costly to handle. The term “excess” means the “deductible” or “retention”. A co-insurance, which normally controls non-proportional treaty reinsurance, is an excess shown as the proportion of a claim in % terms & applied to the entirety of the claim. Co-insurance is the fine put on the insured by the insurance carrier for under reporting the value of physical property. The fine depends on a % specified within the policy & the amount under reported. For example: a vessel usually valued at $1,000,000 has an 80% co-insurance clause but is insured for only $750,000. Since its insured value is less than(<) 80% of its real value, when it experience a loss, the insurance payout will be depends on the under reporting fine, the insured will receive 750000/1000000th (75%) of the request made less the deductible.

Tonners and chinamen

These are both outdated forms of early reinsurance. Both are technically illegal, as not having insurable benefits, and so were unenforceable in law. Policies were generally marked P.P.I. (Policy is Proof of Interest). Their use continued into the 1970s before they were restricted by the Lloyd’s, the main market, by which time, they had become nothing more than crude bets. A “tonner” was generally a “policy” setting out the global gross tonnage(GT) loss for the year. If that loss was  exceeded, the policy paid out. A “chinaman” applied in the same concept but in reverse: thus, if the limit was not exceeded, the policy paid out.

Specialist policies

Various specialist policies exist, including:

Newbuilding risks: This covers the risk of damage to the hull while it is under construction.

Open Cargo or Shipper‘s Interest Insurance: This policy may be purchased by a carrier, freight broker, or shipper, as insurance for the shipper‘s goods. In case of loss or damage, this type of insurance will pay for the true value of the shipment, rather than only the legal amount that the carrier is accountable for.

Yacht Insurance: Insurance of pleasure craft is normally known as “yacht insurance” and covers liability coverage. Smaller ships such as yachts & fishing vessels are typically underwritten on a “binding authority” or “lineslip” basis.

War risks: General hull insurance does not include the risks of a vessel operating into a war zone. A typical example is the risk to the tanker operating in the Persian Gulf during the Gulf War. The war risks areas are confirmed by the London based Joint War Committee, which has recently moved to cover the Malacca Straits as a war risks area due to piracy. If an attack is categorized as a “riot” then it would be insured by war risk insurers.

Increased Value (IV): Increased Value cover saves the shipowner against any difference between the insured value of the ship & the market value of the ship.

Overdue insurance: This is a form of insurance now largely outdated due to advances in communications. It was an old form of reinsurance & was procured by an insurer when a ship was late at arriving at her destination port & there was a risk that she might have been lost. The delayed 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 insurance on an A, B, or C basis, A having the extensive cover & C the most limited. Valuable cargo is called as specie. Institute Clauses also subsist for the insurance of certain types of cargo, such as frozen food, frozen meat, & certain commodities such as bulk oil, coal, & jute. Often these insurance requirements are formed for the particular group as is the case with the Institute Federation of Oils, Seeds & Fats Associations (FOFSA) Trades Clauses which have been accepted with the Federation of Oils, Seeds & Fats Associations & Institute Commodity Trades Clauses which are implemented for the insurance of shipments of cocoa, coffee, cotton, fats & oils, hides & skins, metals, oil seeds, refined sugar, & tea and have been accepted with the Federation of Commodity Associations.

Warranties and conditions

A characteristic of marine insurance, & insurance law normally, is the use of the terms condition & warranty. In English law, a condition generally explains a part of the contract that is basic to the performance of that contract, &, if breached, the non breaching party is allowed not only to claim damages but to end the contract on the basis that it has been rejected by the party in breach. By contrast, a warranty is not basic to the performance of the contract & breach of a warranty, while giving rise to the claim for damages, does not allow the non breaching party to end the contract. The meaning of these terms is swap in insurance law. A warranty if not strictly followed with will automatically discharge the insurer from further liability under the contract of insurance. The assured has no defense to his breach, except if, he can show that the insurer, by his conduct, has ignore his right to supplicate the breach, feasibility given in section 34(3) of the Marine Insurance Act 1906 (MIA). In the lack of express warranties the MIA will recommend them, generally a warranty to provide a seaworthy ship at the starting of the voyage in a voyage policy (section 39(1)) & a warranty of legality of the insured voyage(section 41).

Salvage and prizes

The term “salvage” refers to the practice of providing help to the ship in distress. Apart from the thought that the sea is conventionally “a place of safety”, with sailors honour bound to provide aid as needed, it is clearly in underwriters’ benefits to promote help to ship in danger of being wrecked. A policy will generally covers a “sue & labour” clause which will cover the applicable expenses incurred by the shipowner in his avoiding a greater loss.

At sea, a vessel when in distress will normally agree to “Lloyd’s Open Form” with any potential salvor. The Lloyd’s Open Form (LOF) is the standard contract, even though other forms exist. The Lloyd’s Open Form is headed “No cure — no pay”; the aim being that if the tried salvage is failed, no award will be made. But, this principle has been deteriorate in recent years, & awards are now allowed in cases where, even though the ship might have sunk, pollution has been avoided.

In other case the “salvor” may request the SCOPIC terms(most new & commonly used execution is SCOPIC 2000) in contrast to the LOF these basis mean that the salvor will be paid even if the salvage attempt is failed. The amount of money the salvor get is limited to cover the costs of the salvage attempt & 25% above it. One of the main negative factors in supplicating SCOPIC (on the salvor’s behalf) is if the salvage attempt is successful the amount of money at which the salvor can claim under article 13 of LOF is deducted.

The Lloyd’s Open Form, once accepted, permit salvage attempts to begin now. The extent of any award is found out later; even though the standard wording refers to the Chairman of Lloyd’s arbitrating any award, in practice the role of arbitrator is transferred to specialist admiralty QCs. A ship captured in war is mentioned as a prize, & the captors qualified to prize money. Again, this risk is insured by the standard policies.