MARINE INSURANCE

The insurance markets in the UK. are sited in the principal port cities. E.g.
Liverpool, Glasgow and the largest London.

As with any market, that of marine insurance consists of “buyers”, such as

shipowners and cargo owners and, “sellers”, such as Lloyds and the marine
departments of various insurance companies.

Presently Lloyds Corporation (under an Act of Parliament) conducts world-wide

marine insurance and is governed by a committee elected by members, under a
Chairperson. The functions of the committee are as follows:

Provides premises for members to conduct business

Provides staff
Provides shipping intelligence
Appoints agents world-wide to safeguard members’ interests.
Elects new members having regard to their financial standing.
Ensures all members comply with relative Statutes in force.

Ordinary insurance companies – specialising in marine insurance are owned by

shareholders and are able to limit their liability. The chief conductor of business is
called an underwriter. Underwriters at Lloyds each trade for their own account
and each underwriter’s liability is unlimited.

The two interested parties are brought together through the services of a Broker.
This is necessary when dealing with Lloyds because:

The constitution of Lloyds prevents underwriters dealing with the public

direct.

Marine insurance is usually undertaken by more than one underwriter thus

sharing the heavy risk. The services of the broker are free to the person
seeking insurance cover, but it must be remembered that the broker does
not accept risks, but he/she must be “au fait” with the insurance market
and very skilled in obtaining proper cover for their client’s needs on he
best possible terms.
Effecting Insurance on a Single Ship

Owner obtains an up to date survey by an approved surveyor.

Owner ensures that the broker can place insurance with Lloyds.
Owner supplies broker with his requirements (ship’s “agreed” value for insurance
purposes, the period for which cover is required and the risks against which it is to
be insured) making sure that information given to the broker (registration,
dimensions, machinery, names of owners) is accurate in every detail.
These details are noted on the SLIP and the broker carefully selects the “lead” u/w
(this person is a specialist in the type of insurance cover being sought) and
between them they negotiate the premium.
Broker contacts client and informs them how much the insurance will cost.
If client agrees to the premium, broker returns to lead u/w who endorses on the
slip what the percentage rate will be and then he writes his line, i.e. the amount of
risk he is prepared to underwrite.
Broker takes slip to second and subsequent u/w’s who will underwrite their
amount of risk until the total value has been covered. All u/w’s follow the lead’s
line. i.e. They cannot each negotiate their own rate.
When the slip is completed, i.e. the agreed value has been underwritten, the
broker send his client a “cover note” informing him that insurance has been
effected by the named underwriters.
Owners check that cover obtained is as required and that it totals 100%

Franchises

These are various percentages of damage, below which underwriters will not pay,
but once the stipulated percentage has been reached, the u/w pays the whole
claim. E.g. If consignment was valued at £10000 with 3% franchise (£300), if
damage was less than £300 the u/ws are not liable, but if damage amounted to
£500, u/ws pay all the claim.

Excesses

With an excess (like motor insurance) the stipulated figure is deducted from all
claims.

Marine Insurance Defined

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.
Marine Adventure and Marine Perils Defined
Subject to the provisions of the Marine Insurance Act, 1906, every lawful marine
adventure maybe the subject of a contact of marine insurance. In particular there
is a marine adventure where “Any ship, goods or other moveables are exposed to
maritime perils”. Such property is in the Act referred to as “insurable property”;
The earning or acquisition of any freight, passage money, commission, profit, or
other pecuniary benefit, or the security for any advances, loan, or disbursements,
is endangered by the exposure of insurable property to marine perils; Any liability
to a third party may be incurred by the owner of, or other person interested in or
responsible for, insurable property by reason of maritime perils “Maritime Perils”
means the perils consequent on or incidental to, the navigation of the sea, that is to
say, perils of the seas, fire, war perils, pirates, rovers, thieves, capture, seizures,
restraints and detainments of princes and peoples, jettisons, barratry, and any
other perils of the like kind or which may be designated by the policy.

The Three Principles of Marine Insurance

1 Indemnity

In marine insurance a contract of Indemnity is one whereby the assured is placed

in the same financial position after suffering a loss as he would have been has the
loss not occurred.

For a ship under an ‘unvalued policy’ her insured value would be:

(a) Her value at the commencement of the voyage, plus

(b) Costs of fitting her out, plus
(c) Costs of fuel and stores aboard.

It is very difficult to assess the market value of any ship after she has been lost
and it is for this reason that the theory of perfect indemnity, as recommended in
the Marine Insurance Act (MIA) has been replaced by that of “Agreed Indemnity”
whereby the assured and the underwriters agree to the insurable value of the ship
and it is this sum that would be payable in the event of a total loss. For goods
( cargo ) their insured value is to be taken as the prime costs of the goods plus the
cost of shipping and insuring them under an unvalued policy. This takes no
account of profit, however, if an agreed valued policy is adopted, an agreed
margin e.g. profit may be included. The freight in such a policy is the gross freight
at risk plus charges for insurance.
2 Insurable Interest

In order for a loss to have occurred or have been suffered, the property must have
been owned by the assured; thus insurance may only be effected by those persons
who are in a position to suffer financially by the loss, damage or detention of the
property or who may incur liability in respect of such property.

Any person who has no such interest and effects an insurance on such a property
has taken out a ‘gaming or wagering’ policy which is illegal under the MIA.
Certain policies are issued which do come under this heading, one of which is for
the insurance of disbursements by shipowners; such as the cost of fuel and stores
lost when a total loss occurs. This is usually done under an ‘agreed sum policy’
which underwriters will pay in the event of a total loss and underwriters will
honour such a policy even though it is a gaming policy of a kind. It has become
known as Proof Policy of Interest.

3 Utmost Good Faith

As can be seen, underwriters are dependent on the information regarding a

proposed policy given by the assured. Normally a statement is included that “what
the proposer has said is to the best of his knowledge true”, so that if it
subsequently turns out not to be true then the contract becomes void.

Under the MIA, the assured and his broker must disclose to the underwriters, all
material circumstances relating to the proposed insurance before concluding the
contract ie. before the underwriter ‘subscribes his line’. Material circumstances
are those that would influence a prudent underwriter in deciding whether or not to
accept the risk or in fixing the premium. It also includes any circumstances which
the owner or broker ‘ought’ to have known. Failure to make such a disclosure
entitles the insurer to avoid the contract. Very closely allied is
‘misrepresentation’; if a statement is made, e.g. “The goods will be packed in
wooden boxes” and if they were, in fact, packed in cardboard boxes, this would be
misrepresentation.

Whilst the above are the three basics of marine insurance, some authorities extend
them to include “subrogation” which is closely linked to Indemnity.

Subrogation

When an underwriter settles a claim for total loss he is entitled not only to any of
the property which may remain, but also to all the rights and remedies of the
assured against third parties who may have contributed through negligence to the
loss. He is thus able to reduce his loss.
The Policy

Three types of documents

A letter of Insurance or Cover Note

Issued by a broker to provide notice that steps are being taken to issue an
insurance policy or certificate.

A certificate of Insurance
Shows value and details of shipment and risks covered, in an abbreviated form. It
is signed by the exporter and insurance company. (Exporter completes form pre-
signed by insurance company provided the insurance is “open cover”). Note an
insured person cannot take legal action against an insurer where the only evidence
of a contract is a certificate of insurance. The legal proof is the insurance policy
itself.

An insurance Policy
This gives full details of risks covered and IS evidence of a contract.

Under the statute of the MIA. every contract must be embodied in a ‘policy’ and
this basically is a standard policy which may be adapted to cover any sort of risk
for ships, for a voyage or for a period of time; for cargo, freight, insurance,
shipbuilding or harbour risks. All variations may be accomplished by the addition
of standard clauses to the basic policy.

Different Policies:-

International Hulls Clauses

From 1st November 2002 many of the following Institute Time Clauses have been
replaced by a new set of standard clauses to be known as the International Hull
Clauses.

Institute Time Clauses Hulls – Total Loss, General Average and Three Fourths
Collision Liability (including Salvage, Salvage Charges and Sue & Labour)

Institute Time Clauses Hulls – Total Loss Only (including Salvage, Salvage
Charges and Sue & Labour)

Institute Time Clauses Hulls – Disbursements and Increased Value (Total Loss
Only including Excess Liability)

Institute Time Clauses Hulls – Excess Liability

Institute Time Clauses Hulls – War and Strikes Clause

Institute Time Clauses Hulls – Port Risks

Institute Cargo Clauses

Institute Cargo Clauses Set A

Institute Cargo Clauses Set B

Institute Cargo Clauses Set C

Institute War Clauses (Cargo)

Institute Strikes Clauses (Cargo)

WARRANTY

A warranty is a promise required by the underwriters from the assured. If the

promise is not kept, the underwriters come off risk from the date the promise is
broken. It can be seen that a warranty must be literally and strictly complied with,
whether it is material or not. There are two types of warranty:-

1 Implied Warranty

One not written into the policy, but forms and integral part of the contract. Two
very important implied warranties are:

(a) In every policy it is implied that the adventure shall be lawful.

(b) In every voyage policy it is implied that the vessel shall be seaworthy
when the risk commences, or if the voyage is by stages, she must be seaworthy at
the commencement of each stage. Seaworthiness in this context refers to structure,
equipment, crew, bunkers, stores, engines and cargo-worthiness of the cargo
spaces.

At first glance (b) seems hard on cargo owners because they are required to see
that their cargo is carried in a seaworthy ship which is difficult for them to
guarantee. However breach of the warranty of seaworthiness is waived only where
the assured can demonstrate that he did not knowingly load the insured goods on
an unseaworthy vessel.

In a Time policy the only implied warranty is that of legality, because of it being
impractical for the shipowner to guarantee that his ship will be seaworthy in say
twelve months hence. However if the ship is sent to sea by the owner knowing
that she is unseaworthy, the underwriters will not be liable for any loss caused by
unseaworthiness. Note the difference between Time and Voyage policies (hulls).
Under a voyage policy no claim would be allowed if the v/l were unseaworthy but
under a time all claims would be processed other than losses caused by
unseaworthiness unknown to the assured.

2 Expressed Warranties

Any number of these may be incorporated into the contract but must be
WRITTEN into it. If an underwriter wants something done or not done, he inserts
a warranty into the ‘slip’. By doing so he will know that if the warranty is
breached, he will not be liable. There are some 25 Standard warranties and the
shipowner selects the required cover from the list. Such as ‘Warranted Class
maintained’, or ‘Warranted to sail on or before a certain date’, or ‘Warranted
neutral’.
There are two statutory exceptions when a breach of warranty does not affect the
underwriters liability under the contract:

(a) Where owing to change of circumstances, the warranty ceases to be

applicable;

(b) Where compliance would be unlawful owing to a subsequent enactment of

the law.

HULLS

Here are some of the more important Institute clauses that are usually inserted into
marine insurance Institute Time Clauses (Hulls) policies.

Navigation

The first clause which lays out the main cover:

The vessel is covered subject to the provisions of this insurance at all times and
has leave to sail or navigate with or without pilots, to go on trial trips and to assist
and tow vessels or craft in distress, but it is warranted that the vessel shall not be
towed, except as is customary or to the first safe port or place when in need of
assistance, or undertake towage or salvage services under a contract previously
arranged.

Sue and Labour Clause

Now often called Duty Assured Clause The assured is required by law to do all
that he can to minimise loss and any reasonable expenses incurred in doing so will
be recoverable under the policy, even if his efforts were in vain. Should his efforts
be successful (ie the vessel is lost) then this is the only time that a payment made
by the underwriters under a Total Loss Claim can exceed the agreed insured value
of the property.

Continuation Clause (sometimes known as the ‘Held Covered’ Clause)

If a vessel is at sea or in distress when the policy expired, the underwriters will
hold the vessel covered on the same terms at a pro-rata monthly basis until her
point of destination, provided previous notice is given.

Breach of Warranty (also known as the ‘Held Covered’ Clause)

Any breach of warranty regarding cargo, trade, locality, towage, salvage services
or date of sailing will be covered by the policy until her port of destination,
provided previous notice is given and any additional premium is paid.
Termination
Whilst a cargo insurance policy is assignable, the policy covering a ship is, as a
rule, NOT. This clause specifically sates that if a vessel is ‘transferred’ to new
ownership or flag or management the policy is cancelled unless the underwriters
agree in writing. If transference occurs at sea, cancellation will take place on
arrival next port. The policy shall similarly terminate if there is any change of
Classification Society or loss, withdrawal or expiry of Class. If loss of Class is
due to one of the Perils insured against then the policy will not be terminated
unless she sails from her next port without Classification Society approval.

General Average Clause

This provides that General Average and salvage will be adjusted according to the
law of the country where the voyage ends or if it is stated in the contract it shall be
according to the York-Antwerp Rules.

Notice of Claims Or Tender Clause

This clause allows the underwriter to choose both the repair port and the repairing
firm in the event of accident to the ship, but any additional expenses incurred in
complying with their requirements will be refunded to the assured. Failure to
comply with this clause renders the assured liable to a 15% reduction in this
claim.

3/4ths Collision Liability

If the assured was in a collision with another vessel then the damage sustained to
herself would be covered under the policy. It is very likely that she will also
become liable for some of the costs caused to the other vessel. Under the policy
the underwriters agree to pay three-quarters of the damages to which the assured
become liable, up to a maximum of ¾ of the sum insured. (The fourth quarter is
usually covered through a P and I Club, although it is possible to obtain 4/4ths
coverage.

Sister Ship Clause

Should the vessel insured collide with, or receive salvage services from, another
vessel from the same company she would have the same rights under this
insurance as she would have done if the other vessel was owned by someone else.

Exclusion Clauses

The following four exclusion clauses are paramount. In each case the insurance
does not cover loss damage liability or expense caused by:
War, civil war, revolution, rebellion, insurrection; derelict mines torpedoes or
bombs. Strikes, strikers, locked out workmen; terrorist or any person acting from
a political motive. Malicious Acts, detonation of an explosive or a weapon of war.
Nuclear weapon
Cargo Policies

Steps entailed in effecting insurance on cargo is basically the same as for hulls but
because of the continuous nature of import /export cargo business, single
shipments are not usually covered. Instead insurance is obtained in advance, by
means of:

Open Cover – which is for a period of time, usually 12 months, for a particular
type of cargo (say, wheat or coal). However because the underwriter does not
know in which ship the goods will be loaded, he usually inserts the Classification
Clause which has the effect of restricting shipments to classed vessels less than 15
years old. The u/w next concern is the quantity of cargo to be shipped at any one
time and this is dealt with by including the Limit Any One Vessel which gives the
maximum amount of cargo the shipper thinks will be put in any one vessel. If
several shipments are waiting in a dock area, there total value may be in excess of
the agreed limit, but the u/w’s would still be liable. They may restrict their
liability by a “Location clause” which limits their liability to …% of their limit
per vessel.

Floating Policy – An alternative to “open cover” for shipments over a period of

time. This provides cover for a specified sum of money, say £1 million, and will
remain valid until a million pounds worth of goods have been insured and sent.

Within a Lloyds MAR Cargo Policy there is a choice of 3 sets of Institute Cargo
Clauses A, B, C.

Set A is an “All Risks” policy

Set B covers only specified risks
Set C covers less risks than “B”

Other than the risks covered the clauses in the policies are similar and here are
some of the clauses contained.

Transit Clause
Goods are usually covered from the time they leave the warehouse or place of
storage through the ordinary course of transit until delivery at the consignees final
warehouse or the expiry of 60 days after completion of discharge overside at the
final port of discharge.

Deviation Clause
Deviation of the ship is deemed to be beyond the control of the assured, so
underwriters permit the cover to continue in the event of any form of deviation as
per the “Transit” Clause.
Change of Voyage (change of voyage after sailing)
Theoretically in this case the underwriter come off risk from the moment of
change. Practically this change is “held covered”, provided prompt notice is given
and any additional premium paid.

Note – if destination changes after discharge, cover is terminated and there is no

“held covered” provision.

General Average Losses

Which include both GA sacrifice of part or the whole of the goods insured and/or
GA contributions for which the cargo assured may be liable, are covered by all
three sets of clauses and, it is likely that, a “General Average in Full” clause will
deal with the situation where the contribution is more than the assured value.

Constructive Total Loss Clause

No claim for CTL shall be recoverable hereunder, unless the subject-matter
insured is reasonably abandoned either on account of its actual total loss
appearing to be unavoidable or because the cost of recovering, reconditioning and
forwarding the subject-matter to the destination to which it is insured would
exceed its value on arrival. It is very important to note that the cargo assured must
give immediate notice of their intention to unconditionally abandon the subject-
matter to the underwriters via the broker. The purpose of this is to allow the u/w
the opportunity to minimise the loss. Failure to give such notice may mean that
the loss will be treated as a partial loss until Actual Total Loss is proved.

Seaworthiness and Fitness

In no case shall this insurance cover loss damage or expense arising from
unseaworthiness of vessel or craft, unfitness of vessel, craft, conveyance,
container4 or lift-van, for the safe carriage of the subject-matter insured where the
assured or their servants are privy to such unseaworthiness or unfitness, at the
time the subject-matter insured is loaded therein. The u/w waive any breach of the
implied warranties of seaworthiness and fitness of the ship to carry the subject-
matter insured unless the assured or their servants are privy to such
unseaworthiness or unfitness. This means that if the assured or their servants
knew of any condition, the warranty stands and u/w is discharged from liability
from all loss from date goods area shipped whether or not loss was due to
condition of ship and would include expenses such as GA which would not be
recoverable where a GA act resulted from unseaworthiness.

Strikes Exclusion Clause

This prevents the u/w covering the loss damage or expense caused by the people
on strike or by strikes, lockouts, labour disturbances. It also excludes riots or civil
commotions, terrorist activities or actions from a political move.
MARINE LOSSES

Marine losses may be classified as follows:-

TOTAL LOSS – Actual, Presumed and Constructive

PARTIAL LOSS – Particular Average and General Average (see next section)

Total Loss
This section applies to clauses for total loss suffered by the assured and these may
be divided into three categorise:-

Actual Total Loss

This is defined as when the subject matter insured is:

(a) Destroyed by perils insured against,

(b) Where it is so damaged by the peril insured against that it is no longer
the kind of thing originally insured,
(c) Where the assured is irretrievably deprived of possession of the subject
matter insured.

If underwriters settle on actual total loss claim, they become entitled to all rights
and remedies of the assured against third parties and also the proceeds (if any) of
the wreck; i.e. subrogation.

Presumed Total Loss

When the ship concerned in the adventure is missing her total loss may, after the
lapse of a reasonable time, be presumed. Normally it will be assumed the loss
arose from a “peril of the sea” which is an ordinary marine risk, but if the ship
was last known to be in a war-infested area then, in the absence of other evidence,
the presumption will be that she was lost through war risk.

Constructive Total Loss

May be defined as when the subject matter insured is reasonably abandoned
because:

(a) Actual total loss becomes avoidable

(b) Because it could not be saved without expenditure which would be greater
than it’s repaired and recovered value.

From the above it can be seen that Constructive Total Loss is a commercial loss
rather than a physical loss. In order to claim a C.T.L. the assured must first
abandon the subject matter insured to the underwriters. ‘Abandonment’ also
includes any rights and interests.
ADDITIONAL READING

R H BROWN Marine Insurance Witherby

Vols 1 and 2

N ROGERS & A guide to Marine Hull Richards

J AH Insurance Claims Hogg Limited
ERN