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MARINE INSURANCE
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Introduction and Overview
What is Marine Insurance?
Historical Development of Marine Insurance Market
Types of Marine Coverage and Policies
Considerations in Underwriting Marine Insurance
The Law of Marine Insurance
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Introduction and Overview
Insurance against the perils of marine commerce
o For example, if a ship sinks in transit, various types of losses are possible: loss of cargo; loss of profit from sale of cargo; damage to ship; third-party liability; personal injury
o Key difference between marine insurance and other types of insurance is that the marine adventure or peril insured must be specifically maritime in nature
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Marine adventure English Marine Insurance Act of 1906: where any goods in shipment are exposed to
maritime perils (e.g., perils of the sea, fire, war, pirates, jettisons)
where the earning of any pecuniary benefit from goods in shipment is endangered by exposure to maritime perils
where any liability to a third party may be incurred by the owner of insurable property (or any party with an interest in the property) by reason of maritime perils
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Marine Insurance Markets English Market began with Lloyds of London in the
1600s
Lloyds is not an insurer; it is a facility for the selling
of insurance by underwriting syndicates at Lloyds
Historically, the capital for Lloyds syndicates was
provided by individual investors
Now, the capital is provided by corporations doing
business as syndicates 5
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Marine Insurance Markets Lloyds began in 1688 at Edward Lloyds coffeehouse
in London
Lloyds Coffee House was located near the Tower Wharf and Customs House in London, so it was frequented by shipowners, captains, and merchants
At Lloyds Coffee House, various merchants entered into a side business of underwriting the risk of a ships safe passage to its destination, with its cargo intact
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Marine Insurance Markets By 1696, the Lloyds News and, later, Lloyds List
began publication containing the most authoritative daily journal of shipping intelligence
Over the years, Lloyds set up reporting stations
around the world to provide information on ship movements
Because of the need for buyers and sellers to have the same information about the risk, the doctrine of uberrima fides (meaning utmost good faith) developed in the market, and the law
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Utmost good faith
Insurer must not conceal from insurer any circumstances known to him and which matter.
What is known by due dilligence need not be informed.
What is not known need not be informed.
Nonfulfillment by insurance results into refuting the claim.
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Marine Insurance Markets From modest beginnings in the 1600s, Lloyds has
grown to be one of the largest and most influential marine insurance markets in the world
Over time, other chartered London insurance companies sprang up
London continues to be a major marine insurance center, not only for Lloyds Underwriters, but also London-based insurance companies and P&I Clubs
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Marine Insurance Markets
Marine Insurance today is underwritten by:
o Underwriters at Lloyds
o Insurance companies located in London and throughout the world
o U.S. insurance companies, most of which belong to the American Institute of Marine Underwriters
o P&I (protection & indemnity) Clubs
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Examples of Risks
Market risk Price risk Counterparty risks (non-payment, non-performance,
insolvency, valid documentation, taxation issues, insurance cover)
Credit risks Operational risks Geopolitical risks (piracy, terrorism) Compliance with laws / sanctions regulations Liabilities to third parties
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The Risk Review Process
Forensic review of your business and YOUR risks
Identify risks you can transfer to counterparties, insurers and/or banks
ARE THE REMAINING RISKS ACCEPTABLE AND MANAGEABLE TO YOU?
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Manage Your Risks
YOUR AIM MUST BE A CONTROLLED ENVIRONMENT.
Either manage the risks yourself
OR
Transfer the risk through a contract
OR
Insure the risk
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Risk Management Through a Commercial Contract
Clearly define the objectives and responsibilities of the parties
Use of INCOTERMS includes contract regarding schedule of risk liability
Charterparty and bill of lading are contracts.
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What are Incoterms Created in 1936 by the International Chamber of
Commerce (ICC) Regularly updated, most recently in 2010 but 2000
Rules are still referred to Incoterms DO NOT give you a complete contract
of sale Incoterms do not deal with the transfer of
ownership of goods Incoterms state which party has the obligation to
make carriage or insurance arrangements Specify the place of delivery as precisely as possible
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Your Relationship With Insurers
Meet your lead underwriter
Make sure that the underwriter understands your business and the risks involved
UTMOST GOOD FAITH: you must disclose BEFORE contracting every material circumstance of your business or transaction that you wish to insure: corporate structure, goods, conveyances, geographical regions, limits, etc.
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Operating An Insurance Policy Strictly comply with the policy terms -- e.g., warranties that
some particular thing shall or shall not be done
Keep insurers closely informed about changes to your organization and business
Make sure that the policy is amended to reflect changes
Protect yourself through proactive measure, e.g. use of independent inspectors
In cooperation with insurers/broker get an Emergency Procedure in place
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In Case of An Accident Follow the Emergency Procedure
Take all necessary measures to protect people from injury or death
Protect property from further loss
Alert your brokers/insurers claims department
Duty to mitigate loss (experts on the scene)
DO NOT ACKNOWLEDGE LIABILITY
Start collecting evidence (witness statements, photographs, survey reports, retention of samples, etc.)
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Claims Handling
Pre-contract disclosures
Policy wording
Claim notification/documentation
Appointment of loss adjustor
Close contact with people involved within company
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Types of Marine Coverage and Policies
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Tyoes of Marine Insurance
Cargo Insurance
Hull & Machinery Insurance
Protection & Indemnity (P&I) Insurance
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Unlocking Cargo Terms/Phrases Definitions and/or Translations
Average Loss
Collision 2 vessels running into each other
Franchise Threshold
General Shared
Particular Partial or Individual
Warranty i. Exclusions, e.g. Paramount; ii. Coverage requirements, e.g., loading survey
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Unlocking Cargo Terms/Phrases Definitions and/or Translations
Average Warranty Insuring Terms/Coverage
o FPA Free of Particular Average Total loss only
o WA With Average Total and Partial losses
o WA 3% loss /no loss 3% Franchise Threshold
o All Risks covered unless specifically excluded
General Average Shared Loss
Irrespective of percentage perils added and includes total and partial losses
Sue and Labor Act to avoid/minimize loss
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Cargo Insurance
Provides coverage for cargo in transit (with incidental storage)
Ocean Cargo Insurance/Certificates are an integral part of international trade
Who requires marine cargo insurance?
o Anyone engaged in the movement of goods
o Buyers, sellers, importers, exporters, manufacturers, and banks
The Terms of Sale impact who purchases insurance
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Cargo Insurance
Principal areas of coverage o Perils of the Sea
Most important coverage of marine insurance policies A broad term covering specific types of losses, including:
Stranding; Sinking; Grounding; Collisions with other vessels; Heavy Weather; Ice
o Assailing Thieves o Jettison
Defined as the intentional throwing overboard of the ships cargo, material, or stores in time of peril, for the common safety of the ship and her cargo
o Fire, lightning and earthquake
Exclusions
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Cargo Insurance All Risks
o Shipments of goods insured sufficiently packed to withstand the voyage covered by the policy are insured against all risks of physical loss or damage from any external cause.
Paramount Warranties/Paramount Exclusions
o Free of Capture and Seizure (FC&S) (War Perils)
o Strikes, Riots, and Civil Commotion (SR&CC)
o Radioactive Contamination Exclusion (RACE)
o Chemical, Biological, Biochemical, and Electronic Exclusion (CBE)
o Delay and Inherent Vice
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Cargo Insurance
Unique Coverage Features:
General Average and Salvage Charges (GA)
Seaworthiness (Airworthiness) o Vessel being in sound condition and well maintained
o Vessel being properly manned (number of and qualification of crew)
Sue and Labor o Assured required to take steps to prevent or minimize loss
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Cargo Insurance
Carriers Legal Liability Defenses and Exemptions for loss or damage due to:
o Acts of God
o Acts of government
o Riots and labor disturbances
o Improper or insufficient packing or stowage
o Inherent vice of the cargo
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Charterers Legal Liability
Cargo owner charters a vessel. Under the Charter Party Agreement, the Cargo Owner is responsible for:
o Safe berth at the designated Port(s) of loading
Port(s) of offloading
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Hull Insurance
Basic coverage includes: o Named perils physical damage to the vessels hull and her
machinery o General Average and Salvage Charges o Collision Liability o Sue and Labor
Warranty of Seaworthiness
Amount Insured is Agreed Value
Coverage applies to Named/Scheduled Vessel or Vessels
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Protection & Indemnity Insurance (P&I)
P&I Insurance Policies
o Cover claims for damage or compensation for a large number of categories of loss, including:
Injury to or loss of life of crew members
Removal of wreck of the named vessel
Damage to fixed or floating objects or property (other than vessels)
Liability for loss or damage to cargo
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Key Legal Issues in Marine Insurance
Choice of Forum
Choice of Law
Insurable Interest
The Doctrine of Uberrima Fides
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Insurable Interest
an insurable interest means that the policy holder (or the beneficiary) must stand to suffer a direct financial loss if the event (against which the insurance cover was bought) does occur.
A tenant may not necessarily have a direct insurable interest in the rented property but the landlord may.
An insurable interest in the subject matter insured must exist at time of loss, not at contracting.
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Misrepresentations, Nondisclosure, and Uberrima Fides
Marine insurance is a contract uberrima fides requiring the utmost good faith by both parties o In practice, operates against the insured alone
The insured is bound to disclose every fact within his knowledge that is material to the risk
o This is true even if the insurer does not inquire
o Failure to disclose can void the policy ab initio or even after the risk has attached
o Doctrine operates regardless of insureds intent
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Misrepresentations, Nondisclosure, and Uberrima Fides
This policy is not only harsh, it is broad because of the definition of materiality o Fact considered material if the existence of the fact would
affect the decision of a prudent insurer to underwrite the risk or even charge a different premium
Traditional rule undeniably harsh, but insurers arguments in favor of rule have less force in todays world
Nondisclosure cannot void coverage if it related to a matter of common or public knowledge
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