Marine Insurance: An Conceptual OverviewBy Joachim Saldanha - 210080 He that will learn to pray, let him go to sea. An old English proverb.

Introduction:There are many perils associated with the sea. These range from natural calamities like hurricanes and tropical typhoons to icebergs and thunderstorms. The purpose of marine insurance is to insure property against these losses that arise at sea i.e. maritime perils consequent or incidental to navigation at sea. A ship which is engaged in the earning or acquisition of any freight, commission or other pecuniary benefit or a ship and cargo which have been offered as security for a loan are endangered by maritime perils in the course of navigation of the sea and such property is insurable property by marine insurance.[footnoteRef:2] [2: Banque Financiere de la cite SA v. Westgate Insurance Co. Ltd., [1987] 1 Lloyds Rep 69.]

Ever since the dawn of commerce on the high seas, marine insurance has proved to be an invaluable aid to merchants and businessmen, serving to protect their cargoes and vessels, often of immense value, against the unpredictabilities of the sea. In modern times, the value of ship and cargo has only increased, while the risks to which the ships and cargo are exposed on each maritime voyage have diminished by none, despite innovations in technology.[footnoteRef:3] [3: Hodges, Susan, CASES AND MATERIALS ON MARINE INSURANCE LAW, Cavendish Publishing Limited.]

Marine insurance does not serve to eliminate or even to mitigate the risk exposed to the cargo or property being carried,[footnoteRef:4] but only to protect the pecuniary interest of the assured in the insured property.[footnoteRef:5] [4: http://www.acs.ucalgary.ca/MGMT/inrm/industry/marine.htm.] [5: See, Black King Shipping Corporation v. Massie, Litsion Pride, [1985] 1 Lloyds Rep 437.]

Section 3 defines a contract of marine insurance as an agreement whereby the insurer undertakes to indemnify the assured in the manner and to the extent agreed, against maritime losses, that is to say, the losses incidental to marine adventure. The amount by which the assured is to be indemnified is therefore determined by contract, and such amount may be more or less than the value of the property lost. Thus in the case of Goole and Hull Steam Towing Co Vs. Ocean Marine Ins. Co[footnoteRef:6] the vessel was valued at and insured for 4000. She suffered partial damage by collision which the assured repaired by spending 5000. An agreement may similarly limit the indemnity of the insurer in many ways, say to 75% of the loss only or by requiring the assured to bear the first Rs.1000 of the loss himself and so on. [6: (1928) 1 KB 589]

Marine adventure, Maritime Perils and Insurable Interest:The indemnity given is against losses incident to marine adventure. There is a marine adventure where:1. insurable property, i.e. ships, goods or other moveable property is exposed to maritime perils, or2. By reason of insurable property being exposed to maritime perils, the earning or acquisition of any freight, passage money, commission, loan or disbursements, is endangered, or 3. The owner or other person interested in or responsible for insurable property may incur any liability to third parties by reason of maritime perils.[footnoteRef:7] [7: Section 2(d), Indian Marine Insurance Act, 1963.]

Maritime peril is defined in Section 2(e) to mean the perils consequent on or incidental to the navigation of the sea, that is to say, perils of the sea, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints, detainment of princes and people, jettisons, barratry and any other perils, which are either of the like kind or may be designated by the policy.[footnoteRef:8] The loss must result on account of an insured peril or at least approximately caused by an insured peril.[footnoteRef:9] In such a case, the burden of proof would fall upon the assured to show that the loss could be attributed, at least approximately to the occurrence of an insured peril.[footnoteRef:10] In the absence of such proof the insurer would not be held liable in respect of the loss suffered by the owner.[footnoteRef:11] [8: LIC v. Ajit Gangadhar Shanbhay, AIR 1997 Kant. 157.] [9: JMA Sea Foods V. National Insurance Co Ltd AIR 1992 Ker. 202.] [10: Rhesa Shipping Company V. Edmonds (1985) 2 All ER 712 (HL).] [11: Bihar Supply Syndicate V. Asian Navigation AIR 1993 SC 2054.]

A valid contract of insurance can only be entered into by a person having an insurable interest with the subject matter of the insurance contract.[footnoteRef:12] Otherwise, it will be a wagering contract.[footnoteRef:13] For an insurable interest: [12: Section 7(1) Indian Marine Insurance Act, 1963.] [13: Section 6(2) Indian Marine Insurance Act, 1963.]

1. There should be a physical object which is exposed to maritime perils; and2. The assured must have some legally recognised relationship with that object in consequence of which he benefits by its preservation and is prejudiced by its loss or damage.In maritime insurance insurable interest need not exist at the time of inception of the contract. It is enough if at that time the insured has an expectation of acquiring such interest. Excluded Losses or the Losses not regarded as Maritime Perils:Wear and Tear: This term refers to the ordinary decay that all ships suffer due to prolonged exposure to the elements i.e. the wind and the waves. It means a decay of the body of the ship and its appurtenances, e.g., splitting of a sail, breakage of anchor, rope or cable etc.[footnoteRef:14] [14: http://www.acs.ucalgary.ca/MGMT/inrm/industry/marine.htm.]

Springing a Leak: Leakages, unless sustained due to a marine peril, will not be insured against. Breakage of Goods: Any breakage caused due to the ordinary movement of the ship will not be insured against. However, where such breakage is caused due to violent waves brought about by a storm at sea, this would be a result of a maritime peril and insurable. Inherent Vice: Losses brought about by inherent defects in the goods carried will not be insured, e.g., the decay of fruits and vegetables.

Types of Marine Insurance: Hull Insurance: covers the insurance of the vessel and its equipment i.e. furniture and fittings, machinery, tools, fuel, etc. It is the ship owner who generally seeks this. Cargo Insurance: includes the cargo or goods contained in the ship and the personal belongings of the crew and passengers.[footnoteRef:15] [15: Hodges, Susan, CASES AND MATERIALS ON MARINE INSURANCE LAW, Cavendish Publishing Limited, p. 213.]

Freight Insurance: Most times, the owner of goods is contractually required to pay freight only upon the deliverance of goods at the port of destination. But if the ship is lost, or the cargo is damaged or stolen, the ship owner loses the freight. Freight insurance is taken to guard against such risk.[footnoteRef:16] [16: http://www.acs.ucalgary.ca/MGMT/inrm/industry/marine.htm.]

Liability Insurance: is one in which the insurer undertakes to indemnify against the loss which the insured may suffer on account of liability to a third party caused by collision of the ship and other similar hazards.

Contents of a Marine Insurance Policy: Section 25 of the Act, 1963, states that a marine insurance policy must specify: i. The name of the insured, or of some person who affects the insurance on behalf of the insured; ii. The subject-matter insured and the risk insured against losses; iii. The voyage or period of time or both, as the case may, covered by the insurance; iv. The sum or sums insured; and v. The name or names of the insurer or insurers.

Types of Marine Insurance Policies: Voyage policy: is a policy that insures a particular voyage, regardless of its duration. The liability commences upon commencement of the voyage. Time policy: is a policy that is issued for a particular period of time during which a ship may chart any course it chooses. Such policies generally are not given for a period of more than a year, however they may, where required by drafted to include a continuation clause.The 'continuation clause' means that if the voyage is not completed within the specified period, the risk shall be covered until the voyage is completed, or till the arrival of the ship at the port of call.[footnoteRef:17] [17: Stewart v. New Zealand, (1912) 16 C.W.N. 991, 996]

Mixed policy: it is a combination of voyage and time policies and covers the risk during particular voyage for a specified period of time.[footnoteRef:18] [18: Kulukundis v. Norwich Union Fire Insurance Society, (1937) 1 K.B. 1, 34 C.A]

Valued policy: it is a policy in which the value of the subject matter insured is agreed upon between the insurer and the insured and it is specified in the policy itself.[footnoteRef:19] [19: Hodges, Susan, CASES AND MATERIALS ON MARINE INSURANCE LAW, Cavendish Publishing Limited, p. 213.]

Open or Un-valued policy: it is the policy in which the value of the subject matter insured is not specified. Subject to the limit of the sum assured, it leaves the value of the loss to be subsequently ascertained.[footnoteRef:20] [20: Cf. Rickards v. Porestal, (1942) A.C. 50, 79 H.L.]

Floating policy: it is a policy which only mentions the amount for which the insurance is taken out and leaves the name of the ship(s) and other particulars to be defined by subsequent declarations. Such a policy greatly benefits regular maritime traders. Wagering or Honour policy: it is a policy in which the assured has no insurable interest and the underwriter is prepared to dispense with the insurable interest. Such policies are also known as 'Policy Proof of Interest or P.P.I.

Loss and Abandonment:A loss may be total or partial. A total loss may further be either actual or constructive. Section 57(1) defines a partial loss as any loss other than a total loss as hereinafter defined is a partial loss.[footnoteRef:21] There is actual total loss where the subject matter insured is: [21: Section 56(3) Indian Marine Insurance Act, 1963.]

1. Destroyed. This may occur due to sinking or burning. 2. So damaged as to cease to be a thing of the kind insured, for example, cement becoming hardened by sea water or cargo of dates becoming unfit for human consumption due to damage in bad weather at sea;[footnoteRef:22] or [22: Asfar v. Blundell (1896) 1 QB 123.]

3. Where the assured is irretrievably deprived of the subject matter insured, for example cargo of gold sinking to the bottom of the deep sea.[footnoteRef:23] [23: Section 57(1) Indian Marine Insurance Act, 1963.]

Actual total loss may be presumed, where the ship concerned in the adventure is missing and after the lapse of a reasonable time no news of her is received.[footnoteRef:24] In practice, the Lloyds Organisation will endeavour to ascertain about the missing ships and if no news is received they notify that the ship is missing. On the basis of this notification insurers settle claims for total loss. [24: Section 58 Indian Marine Insurance Act, 1963..]

Constructive total loss is a total loss in the commercial sense and not a physical loss of the subject matter insured. There is a constructive loss where the subject matter is abandoned:1. On account of its actual loss appearing to be unavoidable; or2. Because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred;[footnoteRef:25]or [25: Section 60(1) Indian Marine Insurance Act, 1963.]

3. The assured is deprived of the possession of his ship or goods by a peril insured against and it is unlikely that he can recover the ship or goods, or the cost of recovering the sip or goods would exceed their value when recovered; or4. In the case of damage to a ship where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired;[footnoteRef:26]or [26: Section 60(2)(ii) Indian Marine Insurance Act, 1963.]

5. In the case of damage to goods, where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival( i.e the conventional value as agreed upon).[footnoteRef:27] [27: Section 60(2)(iii) Indian Marine Insurance Act, 1963.]

When there is a constructive total loss as defined in Section 60(1) or (2), two courses are open to the assured. He can treat it as a partial loss and claim indemnity from the insurer on that basis retaining the wreck or the proceeds therefrom himself.[footnoteRef:28] In the alternative he can treat the loss as if it were an actual total loss, in which case he must give notice of abandonment to the insurer with due diligence as required under section 62 and abandon the subject matter insured to the insurer unconditionally. If he fails to give the notice of abandonment, the loss can only be treated as a partial loss.[footnoteRef:29] [28: Stewart v. New Zealand, (1912) 16 C.W.N. 991] [29: Section 62(1) Indian Marine Insurance Act, 1963.]

Notice of abandonment must be given with reasonable diligence in reasonable time after the receipt of reliable information of the loss, but where the information is of a doubtful character, the insurer is entitled to a reasonable time to make inquiry.[footnoteRef:30] Conditional notice is not valid. Notice of abandonment may be oral or in writing and in any manner, but must clearly indicate the intention to abandon unconditionally.[footnoteRef:31] The purpose of giving notice is to give the insurer reasonable time to assess the situation, and to prevent the assured from changing his mind, if it were to seem profitable. [30: Section 62(3) Indian Marine Insurance Act, 1963.] [31: George Cohen Sons v. Standard Mar. Ins. Co (1925) 21 LIL Rep. 30.]

Fundamental Principles Governing Marine Insurance:There are mainly five fundamental principles which govern the marine insurance contracts;Principle of Utmost Good Faith (Uberrimae fides): A marine insurance contract is based on the principle of utmost good faith i.e., a higher degree of honesty is imposed on both parties to an insurance contract than it is imposed on parties to other contracts. The principle has its historical roots in ocean marine insurance. An ocean marine underwriter had to place great faith in statements made by the applicant for insurance concerning the cargo to be shipped. The property to be insured may not have visually inspected and the contract may have been formed in a location far removed from the cargo and ship.[footnoteRef:32] The practical aspect of this principle of utmost good faith takes the form of the positive duty of the proposer or his agent to disclose all material circumstances and not to make untrue representation to the insurer during the negotiations for the contract. Every circumstance is material, which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. [32: http://www.acs.ucalgary.ca/MGMT/inrm/industry/marine.htm.]

Principle of Insurable Interest: The principle of insurable interest states that the insured must be in a position to lose financially if a loss occurs. Thus the ship-owner, the cargo-owner and the person who has advanced loan on the security of the ship or on any goods arriving by the ship and even the insurer of the ship or cargo have insurable interest to the extent of their several interests.[footnoteRef:33] [33: Hodges, Susan, CASES AND MATERIALS ON MARINE INSURANCE LAW, Cavendish Publishing Limited, p. 213.]

Principle of Indemnity: The principle of indemnity is one of the most important legal principles in insurance. The principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss.Principle of Proximate Cause (Causa Proxima): This principle is based on the maxim in jure non remota causa, sed proxima, spectatur, which means in law the immediate and not the remote cause, is to be considered in measuring the damages.[footnoteRef:34] To make a marine insurer liable the insured must prove three things- 1) that the loss is caused by the perils of the sea; 2) that the peril is one that is insured against in the policy; and 3) that the peril insured against is the proximate cause for the loss sustained. This principle implies that the insurer becomes liable to pay for loss if the insured peril or risk is the proximate cause of loss.[footnoteRef:35] [34: Stewart v. New Zealand, (1912) 16 C.W.N. 991] [35: British & Foreign Marine Insurance Co. v. Sanday, (1916) 1 A.C. 650]

Principle of Subrogation: The principle of subrogation strongly supports the principle of indemnity. Subrogation means substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for loss covered by insurance. The insurer is therefore entitled to recover from a negligent third party any loss payments made to the insured.[footnoteRef:36] [36: Hart v. Standard Marine Insurance Co., (1889) 22 Q.B.D. 499]