Marine Insurance

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Marine Insurance.

JNU, JaipurFirst Edition 2013

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Index

ContentI. ...................................................................... II

List of FiguresII. ..........................................................IX

List of TablesIII. ............................................................ X

AbbreviationsIV. .........................................................XI

Case StudyV. .............................................................. 140

BibliographyVI. ......................................................... 145

Self Assessment AnswersVII. ................................... 147

Book at a Glance

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Contents

Chapter I ...................................................................................................................................................... 1Introduction to Marine Insurance .............................................................................................................. 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction .............................................................................................................................................. 21.2 History...................................................................................................................................................... 21.3 Formation of Marine Insurance ............................................................................................................... 2 1.3.1 First Lloyd’s Act ...................................................................................................................... 2 1.3.2 Second Lloyd’s Act .................................................................................................................. 21.4 Meaning of Marine Insurance .................................................................................................................. 31.5 Maritime Perils ......................................................................................................................................... 3 1.5.1 Meaning of Marine Perils ........................................................................................................ 31.6 Assignment of Marine Policy ................................................................................................................... 41.7 Warranties ............................................................................................................................................... 4 1.7.1 Kinds of Warranties ................................................................................................................. 41.8 Types of Marine Losses ........................................................................................................................... 51.9 Underwriting ........................................................................................................................................... 7 1.9.1 Role of the Underwriter ........................................................................................................... 7 1.9.2 Fundamental Factors When Underwriting Marine Cargo Insurance ....................................... 81.10 Scope of Marine Insurance ................................................................................................................... 91.11 Subject Matter of Marine Insurance ....................................................................................................... 91.12 Nature and Functions of Marine Insurance ......................................................................................... 101.13 General Features of Marine Insurance ..................................................................................................111.14 Insurance Market ................................................................................................................................. 13Summary ..................................................................................................................................................... 14References ................................................................................................................................................... 14Recommended Reading ............................................................................................................................. 14Self Assessment ........................................................................................................................................... 15

Chapter II ................................................................................................................................................... 17Legal Aspects of Insurance with Specific Reference to Marine Insurance ........................................... 17Aim .............................................................................................................................................................. 17Objectives .................................................................................................................................................... 17Learning outcome ........................................................................................................................................ 172.1 Introduction .......................................................................................................................................... 182.2 Evolution of Legal Framework for Marine Insurance ........................................................................... 182.3 Insurance Contracts ................................................................................................................................ 19 2.3.1 Contract of Insurance ............................................................................................................ 19 2.3.2 Subject Matter of Contract of Insurance ................................................................................ 20 2.3.3 Proposal ................................................................................................................................. 20 2.3.4 Non-Marine Insurance ........................................................................................................... 20 2.3.5 Marine Insurance ................................................................................................................... 20 2.3.6 Cover Note ............................................................................................................................. 212.4 Principle of Utmost Good Faith ............................................................................................................. 21 2.4.1 Insurer’s Duty of Disclosure .................................................................................................. 23 2.4.2 Inherent and Contractual Duties of Good Faith ..................................................................... 23 2.4.3 Importance of Proposal Form ................................................................................................ 23 2.4.4 Material Facts ........................................................................................................................ 24 2.4.5 Prudent Insurer Test of Materiality ........................................................................................ 24 2.4.6 Duration of Duty of Disclosure ............................................................................................. 24 2.4.7 Revival of Duty ...................................................................................................................... 242.5 Insurable Interest .................................................................................................................................... 24

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2.5.1 Meaning of Insurable Interest ................................................................................................ 25 2.5.2 Time When Insurable Interest must Exist .............................................................................. 262.6 Indemnity ............................................................................................................................................. 262.7 Subrogation ............................................................................................................................................ 27 2.7.1 Insured’s Rights and Remedies .............................................................................................. 27 2.7.2 Exercise of Right of Subrogation ........................................................................................... 28 2.7.3 Subrogation and Abandonment .............................................................................................. 282.8 Contribution ........................................................................................................................................... 28 2.8.1 Conditions Necessary for Right of Contribution ................................................................... 282.9 Doctrine of Proximate Cause ................................................................................................................. 28 2.9.1 Tests for Determining Proximate Cause ................................................................................ 292.10 Fundamentals of Marine Insurance Contract ....................................................................................... 302.11 Marine Insurance ................................................................................................................................. 312.12 Insured Risks: Perils of the Sea ........................................................................................................... 312.13 Marine Insurance Policy ...................................................................................................................... 31 2.13.1 Subject-Matter .................................................................................................................... 32 2.13.2 Assignment of Policy .......................................................................................................... 322.14 Principles of Marine Insurance ............................................................................................................ 32 2.14.1 Principle of Utmost Good Faith ........................................................................................... 32 2.14.2 Principle of Insurable Interest .............................................................................................. 32 2.14.3 Principle of Indemnity ......................................................................................................... 33 2.14.4 Principle of Subrogation ...................................................................................................... 33Summary ..................................................................................................................................................... 34References ................................................................................................................................................... 34Recommended Reading ............................................................................................................................. 35Self Assessment ........................................................................................................................................... 36

Chapter III .................................................................................................................................................. 38Marine Insurance Act, 1963 ...................................................................................................................... 38Aim .............................................................................................................................................................. 38Objectives .................................................................................................................................................... 38Learning outcome ........................................................................................................................................ 383.1 Introduction ............................................................................................................................................ 393.2 Various sections of Marine Insurance Act, 1963.................................................................................... 39 3.2.1 Section 2 Definitions ............................................................................................................. 39 3.2.2 Section 3 Marine Insurance Defined ..................................................................................... 39 3.2.3 Section 4 Mixed Sea and Land Risks .................................................................................... 39 3.2.4 Section 5 Lawful Marine Adventure ...................................................................................... 40 3.2.5 Section 6 Avoidance of Wagering Contracts .......................................................................... 40 3.2.6 Section 7 Insurable Interest Defined ...................................................................................... 40 3.2.7 Section 8 When Interest must Attach ..................................................................................... 40 3.2.8 Section 9 Defeasible or Contingent Interest .......................................................................... 40 3.2.9 Section 10 Partial Interest ...................................................................................................... 40 3.2.10 Section 11 Reinsurance ........................................................................................................ 40 3.2.11 Section 14 Advance Freight ................................................................................................. 41 3.2.12 Section 15 Charges of Insurance.......................................................................................... 41 3.2.13 Section 16 Quantum of Interest ........................................................................................... 41 3.2.14 Section 18 Measure of Insurable Value ............................................................................... 41 3.2.15 Section 20 Disclosure by Assured ....................................................................................... 41 3.2.16 Section 21 Disclosure by Agent Effecting Insurance .......................................................... 42 3.2.17 Section 23 When Contract is Deemed to be Concluded ...................................................... 42 3.2.18 Section 24 Contract must be Embodied in Policy ............................................................... 42 3.2.19 Section 25 What Policy must Specify .................................................................................. 42 3.2.20 Section 26 Signature of Insurer ........................................................................................... 42 3.2.21 Section 33 Premium to be Arranged .................................................................................... 42

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3.2.22 Section 35 Nature of Warranty............................................................................................. 42 3.2.23 Section 36 When Breach of Warranty Excused ................................................................... 43 3.2.24 Section 37 Express Warranties ............................................................................................. 43 3.2.25 Section 39 No Implied Warranty of Nationality .................................................................. 43 3.2.26 Section 40 Warranty of Good Safety ................................................................................... 43 3.2.27 Section 41 Warranty of Seaworthiness of Ship .................................................................... 43 3.2.28 Section 42 No Implied Warranty that Goods are Seaworthy ............................................... 43 3.2.29 Section 43 Warranty of Legality .......................................................................................... 43 3.2.30 Section 44 Implied Condition as to Commencement of Risk .............................................. 44 3.2.31 Section 45 Alteration of Port of Departure .......................................................................... 44 3.2.32 Section 46 Sailing for Different Destination ....................................................................... 44 3.2.33 Section 47 Change of Voyage .............................................................................................. 44 3.2.34 Section 48 Deviation ............................................................................................................ 44 3.2.35 Section 49 Several Ports of Discharge ................................................................................. 44 3.2.36 Section 50 Delay in Voyage ................................................................................................. 44 3.2.37 Section 51 Excuse for Deviation or Delay ........................................................................... 45 3.2.38 Section 52 When and How Policy is Assignable ................................................................. 45 3.2.39 Section 53 Assured Who has no Interest cannot Assign ...................................................... 45 3.2.40 Section 54 When Premium Payable ..................................................................................... 45 3.2.41 Section 55 Included and Excluded Losses ........................................................................... 45 3.2.42 Section 56 Partial and Total Loss ......................................................................................... 46 3.2.43 Section 57 Actual Total Loss ............................................................................................... 46 3.2.44 Section 58 Missing Ship ...................................................................................................... 46 3.2.45 Section 59 Effect of Transhipment, etc. ............................................................................... 46 3.2.46 Section 60 Constructive Total Loss Defined ....................................................................... 46 3.2.47 Section 61 Effect of Constructive Total Loss ...................................................................... 46 3.2.48 Section 62 Notice of Abandonment ..................................................................................... 46 3.2.49 Section 63 Effect of Abandonment ...................................................................................... 47 3.2.50 Section 64 Particular Average Loss ..................................................................................... 47 3.2.51 Section 65 Salvage Charges ................................................................................................. 47 3.2.52 Section 66 General Average Loss ........................................................................................ 47 3.2.53 Section 67 Extent of Liability of Insurer for Loss ............................................................... 48 3.2.54 Section 68 Total loss ............................................................................................................ 48 3.2.55 Section 69 Partial Loss of Ship ............................................................................................ 48 3.2.56 Section 70 Partial Loss of Freight ........................................................................................ 48 3.2.57 Section 71 Partial Loss of Goods, Merchandise, etc. ......................................................... 49 3.2.58 Section 72 Apportionment of Valuation ............................................................................... 49 3.2.59 Section 73 General Average Contributions and Salvage Charges ....................................... 49 3.2.60 Section 74 Liabilities to Third Parties ................................................................................. 49 3.2.61 Section 75 General Provisions as to Measure of Indemnity ................................................ 49 3.2.62 Section 76 Particular Average Warranties ............................................................................ 50 3.2.63 Section 77 Successive Losses .............................................................................................. 50 3.2.64 Section 78 Suing and Labouring Clause .............................................................................. 50 3.2.65 Section 79 Rights of Subrogation ........................................................................................ 50 3.2.66 Section 80 Right of Contribution ......................................................................................... 50 3.2.67 Section 81 Effect of Under-Insurance .................................................................................. 51 3.2.68 Section 82 Enforcement of Return ....................................................................................... 51 3.2.69 Section 83 Return by Agreement ......................................................................................... 51 3.2.70 Section 84 Return for Failure of Consideration ................................................................... 51 3.2.71 Section 85 Ratification by Assured ...................................................................................... 51 3.2.72 Section 86 Implied Obligation Varied by Agreement or Usage ........................................... 52 3.2.73 Section 87 Reasonable Time, etc., a Question of Fact ......................................................... 52 3.2.74 Section 88 Covering Note as Evidence ................................................................................ 52 3.2.75 Section 89 Power to Apply Act with Modifications, etc., in Certain Cases ........................ 52 3.2.76 Section 90 Certain Provisions to Override Transfer of Property Act, 1882 ........................ 52

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3.2.77 Section 91 Savings ............................................................................................................... 52Summary ..................................................................................................................................................... 53References ................................................................................................................................................... 53Recommended Reading ............................................................................................................................. 53Self Assessment ........................................................................................................................................... 54

Chapter IV .................................................................................................................................................. 56 Types of Marine Insurance in India ........................................................................................................ 56Aim .............................................................................................................................................................. 56Objectives .................................................................................................................................................... 56Learning outcome ........................................................................................................................................ 564.1 Introduction ............................................................................................................................................ 574.2 Marine Cargo Insurance ......................................................................................................................... 57 4.2.1 Mode of Conveyance ............................................................................................................. 57 4.2.2 Voyage .................................................................................................................................... 57 4.2.3 Conditions of Insurance ......................................................................................................... 58 4.2.4 Cargo Inland Transit and Export/Import ................................................................................ 58 4.2.5 Other Provisions Applicable to Marine Insurance ................................................................. 584.3 Hull Insurance ........................................................................................................................................ 59 4.3.1 Hull and Machinery of Hull ................................................................................................... 59 4.3.2 Ship Classification ................................................................................................................. 59 4.3.3 Insurable Interest .................................................................................................................... 60 4.3.3.1 Ship Owners’ Interests ............................................................................................ 60 4.3.3.2 Subsidiary Interests ................................................................................................. 60 4.3.3.3 P & I Interests .......................................................................................................... 60 4.3.4 Classification of Marine Hull ............................................................................................... 61 4.3.5 Scope of Marine Hull Insurance ............................................................................................ 61 4.3.6 Underwriting Aspects of Marine Hull Insurance ................................................................... 62 4.3.6.1 Hull Underwriting and Rating ................................................................................. 62 4.3.7 Hull Insurance Covers ........................................................................................................... 62 4.3.8 General Rules and Regulations of Marine Hull Tariff ........................................................... 634.4 Ordinary Freight ..................................................................................................................................... 634.5 Chartered Freight ................................................................................................................................... 634.6 Liabilities ............................................................................................................................................. 644.7 Loss of Charter Hire ............................................................................................................................... 644.8 Partial Loss of Ship ................................................................................................................................ 644.9 Warranty of Seaworthiness .................................................................................................................... 64 4.9.1 Trading Warranties ................................................................................................................. 65 4.9.2 Lost or Not Lost ..................................................................................................................... 654.10 Stamp Duty .......................................................................................................................................... 65Summary ..................................................................................................................................................... 66References ................................................................................................................................................... 66Recommended Reading ............................................................................................................................. 66Self Assessment ........................................................................................................................................... 67

Chapter V .................................................................................................................................................... 69Marine Insurance Policies ......................................................................................................................... 69Aim .............................................................................................................................................................. 69Objectives .................................................................................................................................................... 69Learning outcome ........................................................................................................................................ 695.1 Introduction ............................................................................................................................................ 705.2 Marine Insurance Policies ...................................................................................................................... 705.3 Marine Insurance ................................................................................................................................... 715.4 Types of Marine Policies ........................................................................................................................ 71 5.4.1 Time and Voyage Policies ...................................................................................................... 71

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5.4.1.1 Special Rules for Voyage Policies .......................................................................... 71 5.4.1.2 Time Policy ............................................................................................................. 72 5.4.1.3 Mixed Policy ........................................................................................................... 72 5.4.2 Floating Policy ....................................................................................................................... 72 5.4.3 Valued Policy ......................................................................................................................... 72 5.4.4 Unvalued Policy (Open Policy) ............................................................................................ 73 5.4.5 Builder’s Risk Policy ............................................................................................................ 73 5.4.6 Blanket Policy ....................................................................................................................... 73 5.4.7 Port Risk Policy .................................................................................................................... 73 5.4.8 Wager Policy ......................................................................................................................... 73 5.4.9 Special Hazards Policy ......................................................................................................... 73 5.4.10 Composite Policy ................................................................................................................. 73 5.4.11 Block Policy ........................................................................................................................ 73 5.4.12 Vessel Insurance Policy........................................................................................................ 73 5.4.13 Special Storage Risks Policy ............................................................................................... 74 5.4.14 Annual Policy ...................................................................................................................... 74 5.4.15 Duty Insurance Policy ......................................................................................................... 74 5.4.16 Increased Value Insurance Policy ....................................................................................... 74 5.4.17 Package Policy .................................................................................................................... 745.5 Guideline on Most Important Parts of the Policy .................................................................................. 745.6 Features and Benefits of Marine Policies .............................................................................................. 755.7 Procedure for Obtaining Marine Insurance Policy ................................................................................ 75 5.7.1 Procedure for Filing Marine Insurance Claim ....................................................................... 75 5.7.2 Immediate Action after Loss .................................................................................................. 75 5.7.3 Claim Procedure .................................................................................................................... 765.8 Features of Marine Cargo Insurance [New India Assurance Policy] ..................................................... 76 5.8.1 Scope of Policy ...................................................................................................................... 76 5.8.2 Add-on Covers ....................................................................................................................... 77 5.8.3 Who Can Take the Policy? ..................................................................................................... 77 5.8.4 How to Decide the Sum Assured? ......................................................................................... 77 5.8.5 How to Claim? ....................................................................................................................... 775.9 Features of Marine Hull Policy (New India Assurance Policy) ............................................................. 78 5.9.1 Who can Take the Policy? ...................................................................................................... 78 5.9.2 What is Covered in the Policy? .............................................................................................. 78 5.9.3 Scope of Risk Cover .............................................................................................................. 78Summary ..................................................................................................................................................... 79References ................................................................................................................................................... 79Recommended Reading ............................................................................................................................. 79Self Assessment ........................................................................................................................................... 80

Chapter VI .................................................................................................................................................. 82Marine Clauses ........................................................................................................................................... 82Aim .............................................................................................................................................................. 82Objectives .................................................................................................................................................... 82Learning outcome ........................................................................................................................................ 826.1 Marine Clauses ....................................................................................................................................... 836.2 Analysis of ICC- A/B/C Clauses ............................................................................................................ 846.3 Jettison ................................................................................................................................................... 856.4 Both to Blame Collision Clause ............................................................................................................. 85 6.4.1 In Addition to the Above, the Following Expenses are also Paid .......................................... 866.5 Institute Cargo Clause ‘B’ (ICC ‘B’) ..................................................................................................... 866.6 Institute Cargo Clauses ‘A’ ICC-‘A’ ....................................................................................................... 876.7 The Losses / Damages Excluded under ICC ‘A’ ‘B’ and ‘C’ ................................................................ 876.8 Cover for War and SRCC Risks ............................................................................................................. 886.9 Sub Clauses Common to ICC A/B/C ..................................................................................................... 89

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6.9.1 Duration of Cover or Transit ‘Insurance Clause’ ................................................................... 89 6.9.2 Termination of Carriage Clause ............................................................................................. 89 6.9.3 Change of Voyage Clause ...................................................................................................... 89 6.9.4 Insurable Interest Clause ........................................................................................................ 89 6.9.5 Forwarding Charges Clauses ................................................................................................. 89 6.9.6 Constructive Total Loss Clause ............................................................................................. 89 6.9.7 Increased Value Clause .......................................................................................................... 89 6.9.8 Not to Inure Clause ................................................................................................................ 89 6.9.9 Duty of Assured Clause ......................................................................................................... 90 6.9.10 Waiver Clause ...................................................................................................................... 90 6.9.11Reasonable Dispatch Clause ................................................................................................. 90 6.9.12 Law and Practice Clause ...................................................................................................... 906.10 Duration of Cover for ‘War Risks’ ....................................................................................................... 90 6.10.1 Duration of Cover for SRCC Risks ..................................................................................... 906.11 Inland Transit Rail/Road Clauses ......................................................................................................... 90 6.11.1 Common Exclusions under Clause A/B/C ........................................................................... 906.12 War Exclusion Clause .......................................................................................................................... 916.13 Strike Exclusion Clause ....................................................................................................................... 916.14 Incidental Clauses ................................................................................................................................ 916.15 Duty Insurance Clause ......................................................................................................................... 936.16 Increased Value – Insurance Clause ..................................................................................................... 936.17 Institute Classification Clause .............................................................................................................. 936.18 Institute Theft Pilferage and Non Delivery (Insured Value) Clause .................................................... 936.19 Institute Replacement Clause ............................................................................................................... 946.20 Institute Clauses – Trade Clauses ........................................................................................................ 946.21 Institute Coal Clauses .......................................................................................................................... 946.22 Institute FOSFA Trade Clauses (A) (B) and (C) .................................................................................. 956.23 Institute Container Clauses .................................................................................................................. 956.24 Marine Clauses – Hull ......................................................................................................................... 95 6.24.1 Institute Time Clauses – Hull (ITC Hulls) ........................................................................... 95 6.24.1.1 Scope of Perils Cover ............................................................................................ 96 6.24.1.2 8 Other Important Provisions ................................................................................ 97 6.24.2 Institute Time Clauses Hulls – Only Total Loss ................................................................. 98 6.24.3 Institute Voyage Clauses – Hulls ........................................................................................ 98 6.24.4 Institute Time Clauses Hulls – Port Risks .......................................................................... 98 6.24.5 Collision Liability is Payable in Full (4/4ths) ...................................................................... 986.25 Institute Fishing Vessel Clauses ........................................................................................................... 986.26 Institute War and Strikes Clauses Hulls-Time ..................................................................................... 99Summary ................................................................................................................................................... 100References ................................................................................................................................................. 100Recommended Reading ........................................................................................................................... 100Self Assessment ......................................................................................................................................... 101

Chapter VII .............................................................................................................................................. 103Reinsurance .............................................................................................................................................. 103Aim ............................................................................................................................................................ 103Objectives .................................................................................................................................................. 103Learning outcome ...................................................................................................................................... 1037.1 Introduction to Reinsurance ................................................................................................................. 1047.2 History of Reinsurance ........................................................................................................................ 104 7.2.1 Beginning of Reinsurance .................................................................................................... 1047.3 Need for Reinsurance ........................................................................................................................... 1057.4 Risk Distribution through Reinsurance ................................................................................................ 106 7.4.1 Reinsurance – Process Flow ................................................................................................ 106 7.4.2 Difference between Coinsurance and Reinsurance .............................................................. 107

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7.5 Risk Management through Reinsurers ................................................................................................. 1077.6 Underwriting - Assessment, Capacity Allocation and Pricing ............................................................. 108 7.6.1 Risk Assessment and Terms and Conditions ....................................................................... 108 7.6.2 Principles of Insurability ...................................................................................................... 109 7.6.3 Capacity Allocation, Accumulation Control and Peak Risks .............................................. 109 7.6.4 Natural Catastrophe Loss Potentials .................................................................................... 109 7.6.5 Pricing and Wording ............................................................................................................ 1097.7 Asset Management ............................................................................................................................... 109 7.7.1 Capital Management ............................................................................................................ 109 7.7.2 Diversification .....................................................................................................................1107.8 Benefits of Reinsurance ........................................................................................................................110 7.8.1 Effect of Reinsurance on the Direct Insurer .........................................................................110 7.8.2 Effect of Reinsurance on the Reinsurer ................................................................................1117.9 Reinsurance Firms: Names and Business Numbers ..............................................................................1117.10 Functions of Reinsurance ....................................................................................................................1127.11 Categories of Reinsurance ..................................................................................................................113 7.11.1 Facultative Reinsurance ......................................................................................................113 7.11.2 Treaty (Obligatory) Reinsurance .........................................................................................1137.12 Types of Reinsurance .........................................................................................................................114 7.12.1 Proportional Reinsurance ...................................................................................................114 7.12.2 Non-Proportional Reinsurance: Excess of Loss (XL) Reinsurance ...................................1157.13 Comparative Analysis: Direct Insurers and Reinsurers ......................................................................1167.14 Marine Reinsurance ............................................................................................................................1187.15 Cargo Reinsurance ..............................................................................................................................1187.16 Hull Reinsurance .................................................................................................................................1187.17 Common Reinsurance Programme for Indian Business .....................................................................1197.18 Regulating the Reinsurance ................................................................................................................119Summary ................................................................................................................................................... 121References ................................................................................................................................................. 121Recommended Reading ........................................................................................................................... 121Self Assessment ......................................................................................................................................... 122

Chapter VIII ............................................................................................................................................. 124Maritime Frauds and Miscellaneous Features ..................................................................................... 124Aim ............................................................................................................................................................ 124Objectives .................................................................................................................................................. 124Learning outcome ...................................................................................................................................... 1248.1 Port Procedure ...................................................................................................................................... 1258.2 Procedure for the Clearance of Cargo .................................................................................................. 125 8.2.1 Clearance Inward of Vessel .................................................................................................. 125 8.2.2 Clearance Outward of Vessel .............................................................................................. 126 8.2.3 Documents to be Carried by a Ship ..................................................................................... 126 8.2.4 Special Features of Loading and Discharge of Cargo.......................................................... 1268.3 Import/Export Procedure ..................................................................................................................... 1278.4 Customs Clearance Procedure and Refund of Duty ............................................................................ 1288.5 Maritime Frauds ................................................................................................................................... 130 8.5.1 Types of Maritime Frauds .................................................................................................... 1308.6 Prevention of Maritime Fraud .............................................................................................................. 1328.7 Documentary Frauds ............................................................................................................................ 135Summary ................................................................................................................................................... 137References ................................................................................................................................................. 137Recommended Reading ........................................................................................................................... 137Self Assessment ......................................................................................................................................... 138

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List of Figures

Fig. 1.1 Kinds of warranties ........................................................................................................................... 4Fig. 1.2 Types of marine losses ...................................................................................................................... 5Fig. 1.3 Categories of marine insurance ...................................................................................................... 10Fig. 7.1 Three main concerns of risk management ................................................................................... 108Fig. 7.2 Basic types of reinsurance .............................................................................................................114

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List of Tables

Table 1.1 Actual total cost and constructive total cost ................................................................................... 6Table 1.2 General average and particular average ......................................................................................... 6Table 6.1 Perils covered under institute time clauses .................................................................................. 97Table 7.1 Top professional reinsurers ranked by net premiums written in 2006 .......................................112Table 7.2 Comparisons between direct insurer and reinsurer .....................................................................117

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Abbreviations

C & F - Cost & FreightCHS - Continuous Hull SurveyCIF - Cost, Insurance & FreightCMS - Continuous Machinery SurveyFOB - Free on BoardFOSFA - Federation of Oils, Seeds and Fats AssociationsGIC - General Insurance CorporationICC - Institute Cargo ClauseIFV - Institute Fishing VesselILU - Institute of London UnderwritersIRDA - Insurance Regulatory & Development AuthorityIRS - Indian Register of ShippingITC - Institute Time ClausesMIA - Marine Insurance ActOTL - Other than Total LossPPI - Policy Proof of InterestSRCC - Strike, Riot and Civil CommotionTL - Total LossTPND - Theft, Pilferage and Non-Delivery

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Chapter I

Introduction to Marine Insurance

Aim

The aim of this chapter is to:

describe historical development of marine insurance•

definemeaningofmarineinsurance•

explain scope of marine insurance•

Objectives

The objectives of this chapter are to:

discuss purpose of marine insurance•

state the subject matter of marine insurance•

defineHullinsurance•

Learning outcome

At the end of this chapter, you will be able to:

discuss the history of marine insurance•

explain marine insurance•

definethetypesofmarineinsurance•

Marine Insurance

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1.1 IntroductionMarine Insurance has developed over many years. Eventualities are always there in the human mind. The concept ofinsurancecameacrossfromthefearagainstriskanduncertaintyandtheaspirationtoseekfortificationforthesame. In Marine Insurance, it is found that this notion of spreading the risk over a larger group was established since very ancient times. It is believed that, 5000 years ago the Chinese traders, transferred their goods via boats from the Yangtze River to the other parts of the world.

1.2 HistoryMore than 2500 years ago, the Rhodians were involved in advancing of loans under Respondentia and Bottomry •Bonds. Bottomryisdefinedasaloanrosebythecaptainofthevesselwhenmoneywasurgentlyneededfortheprosecution•of the voyage. The loan was for the protection either of the vessel or both, vessel and cargo. The loan was not repayable if the venture was lost.Respondentiaisdefinedasanadvanceoncargoaloneandwasrepayableonlyifthecargoreachedtheendsafe•and sound. Thefinancierschargedtherateofinterestunderbothtypesofloanswhichweresufficientlyhighandalsotook•care of the risk element, i.e., accidental loss at sea. As the name suggests, this policy originally provided for loss of damage to the Hull as well as to the cargo arising •out of maritime perils. Maritime perils (the perils of the seas) against which the insurance cover was provided werefire,enemies,jettison,barratryofthemasterorcrew,pirates,thieves,arrestsbyprinces,etc.Nowadays,marineinvolveslargeshippingcompaniesthatrequireshieldfortheirfleetagainsttheperilsof•the sea.

1.3 Formation of Marine InsuranceMarine insurance emerged in the Coffee Club of Edward Lloyd in 1779 AD. S.G. (Ship and Goods) policy form •was issued by Edward Lloyd. This establishment was a popular place for sailors, merchants, and ship owners, and Lloyd catered to them with reliable shipping news. The shipping industry community gathered at this place to discuss insurance deals among themselves. Due to the focus on marine business, during the formative years of Lloyd’s (between 1688 and 1807), one of •the primary sources of Lloyd’s business was the insurance of ships engaged in slave trading.

1.3.1 First Lloyd’s Act

In1871,thefirstLloyd’sActwaspassedinParliamentwhichgavethebusinessasoundlegalfooting.The•Lloyd’s Act of 1911 set out the Society’s objectives, which included the promotion of its members’ interests and the collection and distribution of information.The membership of the Society, which was largely made up of market participants, was actually to be too small •in relation to the market’s capitalisation and the risks that it was underwriting. Lloyd’s response was to commission a secret internal inquiry, known as the Cromer Report, which reported •in 1968. This report advocated the widening of membership to non-market participants, including non-British subjects and women, and to reduce the onerous capitalisation requirements. The Report also drew attention to thedangerofconflictsofinterest.

1.3.2 Second Lloyd’s Act

In 1980, Sir Henry Fisher was commissioned by the Council of Lloyd’s to produce the foundation for a new •Lloyd’sAct.TherecommendationsofhisReportaddressedthe‘democraticdeficit’andthelackofregulatorymuscle.TheLloyd’sActof1982furtherredefinedthestructureofthebusiness,andwasdesignedtogivethe‘external•names’, introduced in response to the Cromer Report, a say in the running of the business through a new

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governing Council.Immediately after the passing of the 1982 Act, evidences encouraged the commencement of internal disciplinary •proceedings against a number of individual underwriters who had siphoned sums from their businesses to their own accounts. These individuals included a Deputy Chairman of Lloyd’s, Ian Posgate, and a Chairman, Sir Peter Green.In 1986, the UK government commissioned Sir Patrick Neill to report on the standard of investor protection •available at Lloyd’s. His report was produced in 1987 and made a large number of recommendations but was never implemented in full.

StructureLloyd’s is not an insurance company. It is an insurance market of members. Lloyd’s has retained some unusual •structures and practices that differ from all other insurance providers today.Originally created as an unincorporated association of subscribing members in 1774, it was incorporated by the •Lloyd’s Act 1871, and it is currently governed under the Lloyd’s Acts of 1871 through to 1982.Lloyd’s itself does not underwrite insurance business, leaving that to its members (see below). Instead the Society •operates effectively as a market regulator, setting rules under which members operate and offering centralised administrative services to those members.

1.4 Meaning of Marine InsuranceMarineinsuranceisdefinedasaformofinsurancecoveringlossordamagetovesselsortocargoduringtransportationto the high seas. It allows the insurer to undertake the cover insured in the form and to the position thereby approved against the marine losses, incidental to marine adventures.

1.5 Maritime PerilsMarine Insurance policies protect the assured against maritime perils. “Maritime Perils” are perils consequent •on,orincidentalto,thenavigationofthesea,thatistosay,perilsofthesea,fire,warperils,piratesandrovers,thieves, captures, seizures, restraints and detainment of princes and peoples, jettisons, barratry and any other perilswhichareeitherofthelikekindormaybespecifiedbythepolicy.Perils of the seas cover losses caused by seawater, stranding, cyclone, storm, lightning, fog, and rough weather, •collision with other ship, striking upon a sunken rock or icebergs.War Perils cover loss sustained owing to hostile acts of an enemy.•Pirates and rovers mean sea robbers and rioters who attack the ship from the shore.•Jettison refers to throwing a part of the goods overboard with a view to lighten the ship and residue of the •cargoes in an emergency.Barratry means wrongful act willfully committed by the captain or crew in contravention of their duties, thereby •causingprejudicetotheowners.Forexample,intentionallysettingfiretoshiporrunningagroundtheship.Perils of the sea refer only to fortuitous accidents or casualties of the seas. It does not include the ordinary wear •and tear, for example, bursting or breakage of shaft because of inevitable action of the winds and waves. By the implied warranty of sea-worthiness, it is understood that a ship will be in such a condition as to withstand •the ordinary waves and winds and therefore if the ship is sunk because of unseaworthines (for example, defective boiler and machinery) at the commencement of voyage, the peril is not a sea peril and the insurer is not liable for any loss. On the other hand, the ship owner shall be liable to compensate the insurer, for any moneys payable to cargo •owners, whose cargoes might have been damaged. Perils of the seas usually relate to casualties which might occur, and not to those which must occur.•

1.5.1 Meaning of Marine PerilsMaritimeperilscanbedefinedastheunexpected(anelementofchanceorillluck)accidentsorlossesofthesea

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caused without the willful intervention of human agency. The perils are incidental to the sea journey that arises inconsequence of the sea journey. There are different forms of perils, of which only a few are covered by insurance while others are not. There are two types of marine perils. They are as follows:

Insured perils: • Insured perils are storm, collision of one ship with another ship, again strocks, burning and sinking of the ship, spoilage of cargo from sea water, mutiny, piracy or willful destruction of the ship and cargo by the master (captain) of the ship or the crew, jettison etc.Uninsured perils: • Uninsured perils are regular wear and tear of the vessel, leakage (unless it is caused by an accident), breakage of goods due to bad movement of the ship, damage by rats and loss by delay. All losses and damages caused due to reasons not considered as perils of the sea are not provided insurance cover.

1.6 Assignment of Marine PolicyA marine insurance policy may be transferred by assignment unless the terms of the policy expressly prohibit •the same. The policy may be assigned either before or after the loss. The assignment may be made either by endorsement •on the policy itself or on a separate document. The insured need not give a notice or information to the insurer or underwriter about assignment. •Incaseofdeathof theinsured,amarinepolicyisautomaticallyassignedtohisbeneficiary.At thetimeof•assignment, the assignor must possess an insurable interest in the subject matter insured. An insured who has parted with or lost interest in the subject matter insured can not make a valid assignment. •After the occurrence of the loss, the policy can be assigned freely to any person. The assignor merely transfers •his own right to claim to the assignee.

1.7 WarrantiesBesides the three important principles, i.e., good faith, indemnity and insurable interest, it is necessary that all the marineinsurancecontractsmustfulfilthewarrantiesalso.Warranteemeansaconditionwhichisbasictothecontractof insurance. The breach of which entitles the insurer to avoid the policy altogether. If the warranty is not complied with by the insured, the contract comes to an end. There are two exceptions where the breach of warranty is excused and does not affect that insurer’s liability:

where owning to change in the circumstance, the warranty is inapplicable and •where due to enactment of a subsequent law, the warranty becomes unlawful.•

1.7.1 Kinds of WarrantiesWarranties are of two types:

Fig. 1.1 Kinds of warranties

Kinds of Warranties

Express warranty

Implied warranty

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An express warranty•It is one which is expressed or clearly stated in the contract and it can be easily ascertained whether it has been fulfilledornot.Forinstanceamarinepolicyusuallycontainsthefollowingexpresswarranties:

Theshipwillsailonaspecifiedday. �The ship is safe on a particular day. �The ship will proceed to the port of destination without any deviation. �The ship is neutral and will remain so during the voyage. �

The implied warranty•The implied warranty is not expressly mentioned in the contract but the law takes it for granted that such warranty exists. An express warranty does not exclude implied warranty unless it is inconsistent therewith. Implied warranties do not appear in the policy documents at all, but are understood without being put into words, and as such, are automatically applicable. These are included in the policy by law, general practice, long established custom or usage. The important implied warranties are discussed below:

Sea-Worthinessoftheship:Ashipisseaworthywhenitisinafitconditionastorepair,equipment,crew,and �so on, to encounter the ordinary perils of the voyage. This implies that the ship must be suitably constructed, properlyequippedandmanned,sufficientlyfuelledandprovisionedandcapableofwithstandingtheordinarystrain and stress of the voyage. It must not be overloaded.Legality of Voyage: The journey undertaken by the ship must be for legal purposes. Carrying prohibited or �smuggled goods is illegal and therefore, the insurer shall not be liable for the loss.Non-deviation of the ship route: It is assumed that the ship will maintain the same route as stated in the �policy in ordinary course, but in case of peril it is permitted to deviate. If the ship does not follow the usual route, the insurer will not be liable even if the ship regains her route before any loss takes place. However, the insurer remains liable for any loss which might have occurred prior to the deviation.

1.8 Types of Marine LossesAlossarisinginamarineadventureduetoperilsoftheseaisamarineloss.Marinelossmaybeclassifiedintotwocategories:

Fig. 1.2 Types of marine losses

Total loss•A total loss implies that the subject matter insured is fully destroyed and has completely lost its owner. Total loss can be Actual total loss or Constructive total loss.

Marine Losses

Total loss

Partial loss

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Actual total cost Constructive total cost

In actual total loss subject matter is completely destroyed or so damaged that it ceases to be a thing of the kind insured.

In case of constructive total loss, the ship or cargo insured is not completely destroyed but is so badly damaged that the cost of repair or recovery would be greater than the value of the property saved.

For example, sinking of ship, complete destruction ofcargobyfire,etc.

E.g., a ship dashed against the rock and is stranded in a badly damaged position. The expenses of bringing it back and repairing it would be more than the actual value of the damaged ship, it is abandoned.

Table 1.1 Actual total cost and constructive total cost

Partial loss•A partial loss occurs when the subject matter is partially destroyed or damaged. Partial loss can be general average or particular average.

General average Particular average

Generalaveragereferstothesacrificemadeduringextreme circumstances for the safety of the ship and the cargo. This loss has to be borne by all the parties who have an interest in the marine adventure.

Particularaveragemaybedefinedasalossarising from damage accidentally caused by the perils insured against. Such a loss is borne by the underwriter who insured the object damaged.

For example, a loss caused by throwing overboard of goods is a general average and must be shared by various parties.

For example, if a ship is damaged due to bad weather, the loss incurred is a particular average loss.

Table 1.2 General average and particular average

The salient features of a contract of marine insurance are as follows:It is based on utmost good faith. Both, the insured and the insurer must disclose• everything which is in their knowledge which can affect the contract of insurance.It is a contract of indemnity. The insured is entitled to recover only the actual amount of loss from the insurer.•Insurable interest in the subject-matter insured must exist at the time of the loss. It need not exist when •the insurance policy is taken. Under marine insurance, the following persons are deemed to have insurable interest:

The owner of the ship �The owner of the cargo �A creditor who has advanced money on the security of the ship or cargo. �The mortgagor and mortgagee �The master and crew of the ship have insurable interest in respect of their wages. �In case of advance freight, the person advancing the freight has an insurable interest if such freight is not �repayable in case of loss.

It is subject to the doctrine of cause a proximal. Where a loss is brought by several causes in succession to one •another, the proximate or nearest cause of loss must be taken into account. If the proximate cause is covered by the policy, only then the insurance company will be liable to compensate the insured.

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It must contain all the essential requirements of a valid contract, e.g. lawful consideration, free consent, capacity •of the parties, etc.

1.9 Underwriting The word “Underwriting” refers to protecting by way of insurance. Marine underwriting refers to providing •marine insurance to the necessary clients. In today’s highly complex marine business, it is very important to have marine underwriting service.Marine underwriting is a very tricky concept. This is because there are many different dimensions to it. The loss •to the body or hull of the ship and the cargo it contained, the reasons or the causes of the loss, the place where the loss occurred and most importantly the amount that needs to be settled are the main areas that a marine underwriter needs to focus on. It is a well-known fact that insurance claims are very uncertain and there needs to be a complete knowledge of •all the elements involved before placing a claim for compensation purposes.A marine underwriter therefore needs to be aware of not just rules and regulations of the country to which the •ship belongs but also about other countries where potential incidents could occur. To explain it in simple terms, the maritime rules and regulations of all countries needs to be noted down by a •marine underwriter so that the clients do not face any problems regarding the settlement of the claim.SomeofthefamouscompaniesincludetheChubbGroupandtheUnitedMarineUnderwritersfirm.•Additionally, it has to be noted that in some countries there are associations of marine underwriters set up in •order to gain more exposure and experience through a group effort.Such associations are majorly present in countries like the United States. Examples of such marine underwriting •associations would be the Association of Marine Underwriters (this is based in San Francisco) and the American Institute of Marine Underwriters, also known as the AIMU (this is an association based throughout the nation).These organisations ensure that the profession of marine underwriting gets more knowledge on a more regular •basis and that the professionals engaged in marine underwriting get to learn more. It is a very interactive concept and the success of such organisations proves the scope and spread of marine •underwriting.An insurance contract is really a contract entered between the insured, the party who pays premiums in exchange •for insurance coverage and the insurer, or the party who manages the premium and pays the policy holder the insuranceproceedsataspecifiedtime.Insurancecompaniesoperatenotbecauseofcharityorforanythingelsebutforprofit.Theymakeprofitby•investingthepremiumspaidbythepolicyholders,invariousfinancialmarkets.Andsincetheunderwritingcompanyisabusinessentityexistingforprofit,acontractofinsurancebecomes•thecentreofacourtcasebetweentheinsuredorhisbeneficiarieswhoisinneedofmoneyandanunderwritingcompany who does not want to part with its money.The insurance company is known as the underwriter as it underwrites or manages the risks paid for by the •insured or policy holder. By underwriting an insurance policy, an insurance company makes itself responsible for the risks being insured by the policy holder. In some cases, underwriters or insurance companies also have their companies insured and this is called re-•insurance.The growing safety and health concerns all around the world is expected to make the insurance business a bigger •industry than it already is. The business of underwriting risks has never been much lucrative than now when population is growing and the risk increasing.

1.9.1 Role of the Underwriter

In order to make the process of marine underwriting simple and feasible, many professional marine underwriting •companies have been set up in many countries. These companies hire professional marine underwriters to make

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theclientsgetmorereliabilityandbenefit.The person who provides marine underwriting is known as a marine underwriter. The main expertise of these •professionals is to ensure that their client is protected by unforeseen losses and casualties.Marine underwriting is not a new profession. It is a profession that has existed from the very past though the •profession is a relatively unknown one. For people who aspire to be professionals and experts in varied and unique areas, a career of being a marine underwriter is something that could offer them uniqueness and complete satisfaction.Underwriting is a big business but it is very risky as underwriters promise to provide protection to individuals •orcompanieswhomaysufferorfacefinanciallossesinthefuture.Tomakeunderwritingaprofitablebusiness,it must make use of underwriters who are able to analyse risk factors and insurability factors.Underwriters are the front liners who decide on the insurability of a certain individual or company. These •underwriters are responsible for the proper premiums to be paid up, the calculation of the policyholder’s risk and the writing of the insurance policies that are aimed at covering these risks.There are professionals who work as risks analysts and they collaborate with the underwriters while deciding •on the insurability of a client. Sometimes, the risk analysts work as underwriters themselves. Underwriters are the people who know the ins and outs of an insurance business and they can give good advice •to prospective policyholders who would like to be guided in getting the right insurance plans. Underwriters are, however, guided by computers in assessing the risks involved for particular clients.Underwritersareveryinfluentialpeopleandtheycanswayaninsurancecompanyintoapprovingtheinsurance•policy of a person. They are the main people behind the approval of thousand, if not millions of policy loans, that they are responsible for the rise and fall of many insurance companies.Underwriters sometimes have specialisations but they can also work on all insurance categories like health, •casualty,lifeandproperty.Propertyunderwriterscanbefurtherdividedintotheareasofautomobile,fire,liability,homeowners or marine insurance.A good underwriter must be a good analyst and must place high importance on details and good research skills. •Majorityofthoseintheunderwritingbusinessearnbigbucksandhaveverycomfortableofficesthatallowthem to think and analyse. Underwriters study a potential policy holder’s life history, hobbies, preferences and even his family and friends, to arrive at a safe estimate or conclusion of that person’s insurability. Otherwise, the insurance company suffers the effects of a wrongful underwriting analysis.

1.9.2 Fundamental Factors When Underwriting Marine Cargo Insurance Marine cargo insurance, unlike most types of insurance, is custom tailored to protect individual shipments and is not standardised across international borders. Because cargo insurance is so diverse, and can vary so broadly depending on the types of goods being shipped, the origin and destination of the goods and the method of shipment factors used to craft a policy are equally diverse. There are some fundamental factors similar to most policies of this type.

Origin/Destination•Goods typically begin and end their journey in warehouses and utilise several methods of transportation to ship from one place to another. Marine cargo insurers want to know the origin and destination of the cargo they are insuring to consider potential claims problems. For example, if one insurer protects the cargo from origin warehouse to port, another protects during transit at sea, and a third protects from port to destination warehouse, a claim could be delayed while the respective insurers decide who accepts liability for the loss. By contrast, an insurer who protects the shipment from “warehouse-to-warehouse” does not run into these problems.

Types of goods•Different types of goods face different insurance risks. Perishable goods like certain produce must remain refrigerated during transit, while non-perishable goods like clothing don’t require this. An insurer will want to verify that any necessary loss prevention techniques are in place to minimise the risk of damage in transit.

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Value of goods•Insurers need a value of the goods in order to write an insurance policy on them. Some insurers may want itemised descriptionsofspecificgoodsandspecificvalues,whileothersmayacceptablanketvaluethatappliestoalltypesof goods being shipped at once. The value of the goods is determined by the person buying the insurance policy, and usually considers the cost of production, any advance payments made by the importer, a certain percentage markup for retail or a combination of these things.

Duration/Location of journey•The journey itself is important to underwriters. A week long journey poses a smaller risk than one which lasts several weeksormonths.Often,policiesarecraftedtocoverspecificdatesofjourney,oraremadetocoveraspecificvoyageregardless of duration to accommodate for unexpected delays. Also, because certain areas of the world are more dangerous than others, insurers want to know where the marine vessel will travel and what the risks are of weather, piracy or other losses in that area.

1.10 Scope of Marine Insurance The scope of marine insurance is determined by reference to S. 6 of the Marine Insurance Act and by the •definitionsofmarineadventureandmaritimeperils.It is a convention of protection but the extent of the insurance is determined by the contract. It relates to losses •incidental to a marine adventure or to the building, repairing or launching of a ship. Any situation where the insured property is exposed to maritime perils is known as a marine adventure.•Maritime perils are perils subsequent or subsidiary to routing.•MIA (Marine Insurance Act) states that a contract of marine insurance is a contract whereby the insurer undertakes •to cover the insured, in the manner and to the extent agreed in the contract, against

losses that are secondary to a marine adventure or an adventure equivalent to a marine adventure, including �losses arising from a land or air peril incidental to such an adventure if they are provided for in the contract or by usage of the tradelosses that are incidental to the building, repair or launch of a ship �

According to this Act, any legalised marine adventure may be the subject of a contract.•Marine Adventure states that any situation where insurable property is exposed to maritime perils, and includes •any situation where

theearningoracquisitionofanyfreight,commission,profitorotherbenefit,orthesecurityforanyadvance, �loan or disbursement, is endangered by the exposure of insurable property to maritime perils, andany 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

MaritimePerilsstatesthatperilsresultingonorincidentaltonavigation,includingperilsoftheseas,fire,war•perils, acts of pirates or thieves, captures, seizures, restraints, detainments of princes and peoples, jettisons and battery.

1.11 Subject Matter of Marine InsuranceThe insured may be the owner of the ship, owner of the cargo or the person interested in freight. In case the ship carrying the cargo sinks, the ship will be lost along with the cargo. The income that the cargo would have generated would also be lost. Based on this, we can classify the marine insurance in to four categories:

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Fig. 1.3 Categories of marine insurance

Hull insurance•Hull refers to the ocean going vessels (ships trawlers etc.) as well as its machinery. The hull insurance also covers the construction risk when the vessel is under construction. A vessel is exposed to many dangers or risks in the sea during the voyage. An insurance affected to indemnify the insured for such losses is known as hull insurance.

Cargo insurance•Cargo refers to the goods and commodities carried in the ship from one place to another. The cargo transported by sea is also subject to manifold risks at the port and during the voyage. Cargo insurance covers the insurance of goods if they are damaged or lost. The cargo policy covers the risks associated with the trans-shipment of goods. The policy can be written to cover a single shipment. If regular shipments are made, an open cargo policy can be used which insures the goods automatically when a shipment is made.

Freight insurance•Freight refers to the fee received for the carriage of goods in the ship. Usually the ship owner and the freight receiver are the same person. Freight can be received in two ways- in advance or after the goods reach the destination. In the former case, freight is secure. In the latter, the marine laws say that the freight is payable only when the goods reach the destination port safely. Hence, if the ship is destroyed on the way the ship owner will loose the freight along with the ship. That is why, the ship owners purchase freight insurance policy along with the hull policy.

Liability insurance•It is usually written as a separate contract which provides comprehensive liability insurance for property damage or bodily injury to third parties. It is also known as protection and indemnity insurance which protects the ship owner fordamagecausedbytheshiptodocks,cargo,illnessorinjurytothepassengersorcrew,andfinesandpenalties.

1.12 Nature and Functions of Marine Insurance Marine Insurance is regulated under The Indian Marine Insurance Act, 1963 (enforced on 1st August, 1963) which is based on the original Marine Insurance Act, 1906 of U.K. Marine Insurance has been made mandatory in export and import business. The document containing the contract of insurance is known as the Marine Policy or Sea Policy.

Hull Insurance

Freight Insurance

Liability Insurance

Cargo Insurance

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It essentially provides cover for the losses suffered due to Marine Perils.

The perils of the seaA Peril of the Sea is stated to cover everything that happens to the ship in the course of voyage by the immediate act of God without the intervention of human agency. Examples:

Foundering at Sea•Shipwreck •Stranding•Collision•

Losses not regarded as Perils of the Sea (Excluded Losses) are:Wear and Tear•Breakage of Goods•Inherent Vice (defects in goods)•Death of Animals etc. due to nature’s causes•Loss by Rats and Vermin•Loss by Delay •

AcontractofmarineinsuranceunderSection3ofTheMarineInsuranceAct,1963isdefinedasanagreementwhereby the insurer undertakes to covers the assured, in the manner and to the extent thereby agreed, against marine losses, namely, the losses incidental to marine adventure.

The marine adventureIn a contract of marine insurance, what is insured is not the property exposed to peril but only the risk or adventure of the assured. The statute therefore states that every lawful marine adventure may be the subject matter of a contract of marine insurance. Marine adventure includes any adventure where

any insurable property is exposed to maritime perils•theearningsoracquisitionofanyfreight,passagemoney,commission,profitorotherpecuniarybenefit,or•the security for any advances, loans, or disbursements is endangered by the exposure of insurable property to maritime perilsany 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

A slip in marine insuranceA Slip or Cover Note is an informal note or memorandum which is drawn at the time when the contract is entered into.ASlipitselfactsasacontractofinsurance.Itisacompleteandfinaldraft/agreementbetweenthepartiesininsurance. A slip acts as evidence. It is admissible only to prove the agreement since in practice the slip is never stamped.

1.13 General Features of Marine InsuranceMarine Insurance Act – 1963 states that a contract of Marine Insurance is an agreement in which the insurer •undertakes to cover the assured, in the manner and to the extent thereby agreed against marine losses, to be precise, the losses incidental to marine adventure. As a result of its utter provisions or by the usage of trade, a contract of marine insurance may be extended to keep •the secured against losses on inland water or on any land risk which may be incidental to any sea voyage. The business of marine insurance is highly specialised. Its conduct requires skilful comprehension as the •underwriting of the marine insurance business has certain peculiarities of its own. Marine insurance plays an important role in the activities of international trade and commerce. The sale and •

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purchase of goods and merchandise between countries has become possible due to marine insurance which acts as a collateral security. The basic principles of greatest good faith, insurable interest, indemnity and subrogation/contribution are required •tobeobservedinamarineinsurancecontract.TheseprincipleshavebeenmodifiedintheMarineInsuranceAct, 1963, of India. In the event of violation or break of any of these principles, the marine policy will not serve the intended purpose. Thus a contract may either become invalid or treated as voidable, depending upon the circumstances of the case. For the purpose of transacting marine insurance business in India, every insurer is required to observe the •provisions of:

The Marine Insurance Act - 1963 �Underwriting/RatingGuidelinesissuedbytheheadofficeofthecompany �

In addition to the above, the following statutes have an indirect bearing on the insurance contract and their •knowledge is essential for the pursuit of recovery from the carriers.

The Carriage of Goods by Sea Act, 1925ThisActdefinestheminimumrights,liabilitiesandimmunitiesofashipownerinrespectoflossordamagetothecargo carried. Broadly speaking, the Act deals with three aspects of the ship owner’s liability.

Circumstances when the ship owner is deemed to be liable for loss or damage to the cargo, unless he can �prove otherwise.Circumstances when the ship owner is exempted from liability, i.e., when the loss is caused by events beyond �his control, for example, perils of the seas.Limit of the ship owner’s maximum liability for loss or damage calculated in monetary terms as per a �package or per unit limit.

The Merchant Shipping Act, 1958 This Act provides for some protection to the ship owner, whereby liability is limited to a certain maximum sum, provided the incident giving rise to such claims has arisen without the actual fault or privatise of the ship owner. These claims relate to the loss of life, personal injury or loss or damage to property on land or water.

The Bill of Lading Act, 1855ThisActdefinesthecharacteroftheBillofLadingasanevidenceofthecontractofaffreightmentofgoodsbetweenthe ship owner and the shipper. It serves as an acknowledgement of the receipt of the goods on board the ship and as a document holding title to the goods. The Bill of Lading is one of the various documents required in connection with the settlement of marine insurance claims.

The Indian Ports (Major Ports) Act, 1963The Act mentions about the liability of Port Trust authorities for the loss of or damage to the goods whilst in their custody.Italsoprescribesthetimelimitswithinwhichthemonetaryclaimistobefiled;asalsotimelimitsandproceduresforafilingsuitagainstthePortTrustauthorities.

The Indian Railway Act, 1890 ( Latest Amendment in 1989)The duties, obligations and responsibilities of the railways are governed by the provisions of Chapter – VII of the Indian Railway Act, 1890 and (Amendment) Act, 1961 and 1989. It also prescribes the time limit and the procedure forlodgingclaimsandfilingsuits.

The Carriers Act, 1865ThisActdefinestherightsandliabilitiesoftruckowners/operatorswhocarrygoodsforhireorreward,inrespectof loss or damage to the goods whilst in their custody. It also prescribes the time limit for the intimation of loss and forfilingasuit.

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TheIndianPostOfficeAct,1898ThisActdefinestheliabilityofthepostalauthoritiesforloss,non-delivery,delayordamagetoanyarticleinthecourse of transmission by registered post.

The Carriage by Air Act, 1972This Act gives effect to the provision of the Warsaw Convention, 1929 and the Hague Protocol, 1955 relating to the internationalcarriageofpassengersandgoodsbyAir.TheActdefinestheliabilityoftheAirCarriersfordeathorinjury to passengers and for the loss of or damage to registered luggage and cargo. The Act prescribes the maximum limits of liability for death, injury, damage, etc. It also mentions the time limits within which the claim notice is to beservedandsuittobefiled.TheprovisionsofthisActalsoapply,withcertainmodifications,todomesticcarriage,i.e., carriage within India.

1.14 Insurance MarketInsurance is not a tangible commodity for sale but a contractual service obtainable from an insurer for a price called the premium. The parties operating in the insurance market, in the conduct of insurance on a commercial basis are:

The insuring public are individuals as well as associations, unions, companies, societies, etc., who may need •insurance.The insurers usually are •

Lloyd’s underwriters �Insurance Companies �Mutual Insurers, but not individuals. �

The Insurance Intermediaries are the insurance brokers, individual agents, corporate agents, etc.•

Lloyd’s is a market for insurance. It is also the world centre of shipping intelligence. Lloyd’s underwriters are membersoftheCorporationofLloyd’s;aninstitutionwhosemembershipisconfinedtopersonsofprovedintegrityandfinancialstanding.Therearenowover5,000underwritingmembersworkingingroupsorsyndicates.TheydonotexecutebusinessdirectlywiththepublicbutonlythroughLloyd’sBrokersofwhichthereareover200firms.Lloyd’s underwriters transact either marine or non-marine business but not both. This institution is peculiar to the U.K. Insurance Companies are:

CompaniesregisteredundertheCompaniesAct,transactingoneclassofbusinessonly,i.e.,lifeornon-life; �or transacting more than one class of business (also called composite Insurers).Mutual Insurers, i.e., organisations of policy holders transacting business on a cooperative basis and �contributing to the fund whenever calls are made to cover claims and expenses etc.

In India, until nationalisation, there were the above classes of insurers. After nationalisation, only the Government •undertaking namely, the L.I.C. and the G.I.C. with its four subsidiaries were the insurers, other than a few insurers like the P and F Insurance Fund and some State Government Insurance Schemes. Private insurers have been again permitted under the Insurance Regulatory and Development Authority Act, 1999.Insurance Brokers are highly competent professional advisers on insurance matters. Only Lloyd’s Brokers, that •is, those who are approved by a Committee of Lloyd’s can place business with the Lloyd’s underwriters. Brokers act on behalf of proposers for insurance, but are remunerated by way of commission by the underwriters with whom the business is placed. In marine insurance practice, the broker is responsible to the underwriter for payment of the premium, and •underwriters are directly responsible to the assured for claims and returns of premium, and cannot set off against this any premium not received from the broker. The broker is given a lien on the policy against the non-payment of premium by the assured. As the assured will require the policy for obtaining bank credit, he will have to pay the premium due to the broker. In this way, the interests of all are safeguarded.

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SummaryBottomry is defined as a loan rose by the captain of the vesselwhenmoneywasurgently needed for the•prosecution of the voyage.Respondentiaisdefinedasanadvanceoncargoaloneandwasrepayableonlyifthecargoreachedtheendsafe•and sound. Marine insurance emerged in the Coffee Club of Edward Lloyd in 1779 AD. S.G. (Ship and Goods) policy form •was issued by Edward Lloyd.In1871,thefirstLloyd’sActwaspassedinParliamentwhichgavethebusinessasoundlegalfooting.•Cromer report advocated the widening of membership to non-market participants, including non-British subjects •and women, and to reduce the onerous capitalisation requirements.In 1980, Sir Henry Fisher was commissioned by the Council of Lloyd’s to produce the foundation for a new •Lloyd’s Act.Marine insurance isdefinedas a formof insurancecovering lossordamage tovesselsor to cargoduring•transportation to the high seas.There are two types of marine perils called insured peril and uninsured peril.•There are two types of warranties, namely, expressed warranty and implied warranty.•A total loss implies that the subject matter insured is fully destroyed and has completely lost its owner.•The word “Underwriting” refers to protecting by way of insurance. Marine underwriting refers to providing •marine insurance to the necessary clients.A Slip or Cover Note is an informal note or memorandum which is drawn at the time when the contract is •entered into.

ReferencesGupta, S. M., • Marine Insurance [Online] Available at: <http://www.slideshare.net/smgupta1947/marine-insurance>. [Accessed 22 June 2011].International Trade Rules: MIA (Marine Insurance Act), 1906• [Online] Available at: <http://www.tradegoods.com/helper/03rules/rules_301.html>. [Accessed 22 June 2011].Goel, K., • Marine Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-MARINE-PERILS>. [Accessed 22 June 2011].Gauci, G., • Marine Insurance 01. [video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>. [Accessed 4 June 2011].Gauci, G., • Marine Insurance 02.[ video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>. [Accessed 4 June 2011].

Recommended ReadingHodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.Huebner, S. S., 2010. • Marine Insurance. Nabu Press, p. 284.Martin, F., 2007. • The History of Lloyd’s and of Marine Insurance in Great Britain: With an Appendix Containing Statistics Relating to Marine Insurance, Macmillan and Co., 1876, p. 416.

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Self Assessment

______isdefinedasaloanrosebythecaptainofthevesselwhenmoneywasurgentlyneededfortheprosecution1. of the voyage.

Bottomrya. Respondentiab. Perilsc. Warrantiesd.

Whatisdefinedasanadvanceoncargoaloneandwasrepayableonlyifthecargoreachedtheendsafeand2. sound?

Bottomrya. Respondentiab. Perilsc. Warrantiesd.

More than 2500 years ago, the _______were involved in advancing of loans under Respondentia and Bottomry 3. Bonds.

Rhodiansa. Chineseb. Indiansc. Britishd.

Maritime ________is stated as the fortuitous (an aspect of chance or ill luck) accidents or casualties of the sea 4. causedwithoutthefirminvolvementofhumanaction.

insurancea. perilsb. warrantiesc. risksd.

Marine __________is a very tricky concept.5. insurancea. goodsb. underwritingc. perilsd.

Which of these is not considered as the peril of the sea?6. Breakage of goodsa. Shipwreck b. Strandingc. Collisiond.

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Which of these are known as excluded losses?7. Death of animals etc. due to nature’s causesa. Loss by rats and verminb. Loss by delay c. Wreckage of shipd.

Which is usually written as a separate contract that provides comprehensive liability insurance for property 8. damage or bodily injury to third parties?

Liability Insurancea. Freight Insuranceb. Cargo Insurancec. Hull Insuranced.

An insurance affected to indemnify the insured for such losses is known as________.9. Liability Insurancea. Freight Insuranceb. Cargo Insurancec. Hull Insuranced.

What refers to the goods and commodities carried in the ship from one place to another?10. Cargoa. Freightb. Liabilityc. Hulld.

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Chapter II

Legal Aspects of Insurance with Specific Reference to Marine Insurance

Aim

The aim of this chapter is to:

explain • evolution of legal framework for marine insurance

defineinsurancecontracts•

discuss principle of utmost good faith•

Objectives

The objectives of this chapter are to:

explain • insurable interest

discuss indemnity•

definesubrogation•

Learning outcome

At the end of this chapter, you will be able to:•

discuss doctrine of proximate cause•

definefundamentalsofmarineinsurancecontract•

explain pr• inciples of marine insurance

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2.1 Introduction Modern insurance started in late 17th century in England. Originally, traders, merchants, ship owners and underwriters met to thrash out deals at Lloyd’s Coffee House, precursor to the famous Lloyd’s of London. The growth of life insurance as a tool of family security, synchronised with the development of prosperous families in England during the industrial revolution. As an effect of the economic boom brought in by the industrial revolution, the merchants andmanufacturersofEnglandbecameawealthy,importantandinfluencedsectionofthecommunity.Theyenjoyedastandardoflivingwhichtheirfamilieswouldhavefounddifficulttomaintainattheeventoftheirdeath,unlessspecial provisions were made. To such people, life insurance offered a special attraction as a provider and protector offamilyfinancialsecurity.

2.2 Evolution of Legal Framework for Marine InsuranceInsurancelawinIndiahaditsoriginsinBritishlawwiththeestablishmentofaBritishfirm,theOrientalLife•Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras EquitableLifeInsuranceSocietyin1829andtheOrientalLifeAssuranceCompanyin1874.Thefirstgeneralinsurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in Calcutta. ThefirstgeneralinsurancecompanyestablishedbyanIndiawasIndianMercantileInsuranceCompanyLtd.•inBombayin1907.ThefirstlegislationinIndiatoregulatethelifeinsurancebusinesswasin1912withthepassing of the Indian Life Assurance Companies Act, 1912.Other classes of non-life insurance business were left out of the scope of the Act of 1912, as such non-life •insurance was still in elementary form and regulating them was not considered necessary. Eventually, with the growthoffire,accidentandmarineinsurance,theneedwasfelttobringsuchkindsofinsurancewithinthepurview of the regulations. While there were a number of attempts to introduce such legislation over the years, lawonnon-lifeinsurancewasfinallyenactedin1938withthepassingoftheInsuranceAct,1938.The general insurance business was nationalised in 1973, through the introduction of the General Insurance •Business (Nationalisation) Act, 1972. Under the provisions of the GIC Act, the shares of the existing Indian general insurance companies and undertakings of other existing insurers were transferred to the General Insurance Corporation (“GIC”) to secure the development of the general insurance business in Indian and for the regulation and control of such business.The GIC was established by the Central Government in accordance with the provisions of the Companies Act, •1956 in November 1972 and it commenced business on January 1, 1973. Earlier to 1973, there were a hundred and seven companies, including foreign companies offering general insurance in India. These companies were compound and grouped into four subsidiary companies of GIC i.e. the National Insurance Company Ltd., the New Indian Assurance Company Ltd., the Oriental Insurance Company Ltd., and the United India Assurance Company Ltd. GIC undertakes mainly re-insurance business apart from aviation insurance. The volume of thegeneralinsurancebusinessoffire,marine,motorandmiscellaneousinsurancebusinessisundertakenbyfollowing subsidiaries.From1991onwards, the IndianGovernment introducedvarious reforms in thefinancial sectorpaving the•way for the liberalisation of the Indian economy. Consequently, in 1993, the Government of India set up an eight-member committee chaired by Mr. R. N. Malhotra, to review the existing formation of guideline and administration of the insurance sector. The Committee submitted its report in January 1994. The major solutions of the Committee incorporated the •privatisation of the insurance sector by permitting the entry of private players of enter the business of life and general insurance and the establishment of an Insurance Regulatory Authority. Subsequently, the recommendations of the Malhotra Committee were implemented by the Indian government by allowing private investments in the insurance sector and establishing a regulatory body through the enactment of the Insurance Regulatory and Development Act, 1999. The aim of the Insurance Regulatory and Development Act, 1999 was “to provide for the establishment of an •Authority, to protect the interests of the policy holders, to regulate, promote and ensure systematic growth of the insurance industry and to alter the Insurance Act 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972”.

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Insurance Act 1938, as amended over the years regulates the principal legislation of the insurance business in •Indiaandregulatesgeneralinsuranceandlifeinsurance.Generalinsurancehasbeendefinedtocomprise“fireinsurance business”, “marine insurance business” and “miscellaneous insurance business”. Severalexistinglegislationinthefieldisasfollows:•

the Life Insurance Corporation Act, 1956, �the Marine Insurance Act, 1963, �the General Insurance Business (GIB) (Nationalization) Act, 1972 �the Insurance Regulatory and Development Authority (IRDA) Act, 1999 �

The provisions of the Indian Contract Act, 1872 are applicable to the contracts of marine insurance. In the •same way, the provisions of the Companies Act, 1956 are relevant to the companies’ continuation insurance business.Marine insurance business is mostly international and subject to law and international regulations in every stage •of operations. Marine Insurance Act, 1963, governs the marine insurance business in India. The Institute of London Underwriters (ILU) and the International Commercial Terms, known as ‘Inco terms’ developed by ICC (International Chamber of Commerce) guides marine insurance business with the help of various clauses.Marine Insurance Act, 1963, is planned to standardise the transaction of marine insurance business of hull, cargo •and freight. They also have to execute the provisions of section 64VB of the Insurance Act 1938 on payment ofpremiuminadvanceofriskcommencement.ThevoyagesundertakenaresubjectedtospecificInstituteofLondonUnderwriters (ILU)clauses,defining inceptionand terminationof insurancecovers,and theperilsinsured against.

2.3 Insurance ContractsInsurance contracts are governed by principles which belong to the class of contracts. These are a special class of contracts having characteristics like utmost good faith, insurable interest, indemnity subrogation, contribution and proximate cause which are common to all types of insurances. Each class of insurance also has individual characteristics of its own. The law governing insurance contracts is divided in three parts:

general characteristics of insurance contracts, as contracts•special characteristics of insurance contracts, as contracts of insurance•individual characteristics of each class of insurance•

2.3.1 Contract of Insurance

Contract of insurance, as described in • Prudential Ins. Co. v. Inland Revenue Commrs is stated as a contract in which one party (the insurer) assures in return for a money consideration (the premium) to pay to the other party (the insured) money or money’s worth on the happening of an uncertain event more or less unfavourable to the interest of the insured.As stated in the Indian Contract Act, 1872• , “A contract is an agreement between two or more parties to do or to abstain from doing an act. It is intended to create a legally binding relationship”.A contract is an agreement but an agreement cannot be called a contract. It is the legal binding intention that •raises an agreement to the level of a contract.Insurance is a contract. The insurer and the policyholder are two parties involved in the contract. The insurer •agrees to pay to the policyholder a certain amount of money, if the incident mentioned in the contract happens, provided the policyholder on his part, pays the premium. The insurance policy, which is the proof of the insurance contract, includes the following:

The risk which is the subject matter of the contract. �The incident upon which the liability of the insurer would arise. �The nature of the liability of the insurer, amount and manner of payment. �The amount and manner of payment of premium by the policyholder. �Other obligations, if any, of the policyholder. �

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Consequences of any default in obligations by the policyholder. �Other terms and conditions affecting the operation of the contract. �

A valid and enforceable contract has to deal with matters which are legal and are not against public policy. The •subject matter of an insurance contract must be legal. Also personal accident policy does not include disability ordeathcausedbyself-inflictedinjuries,becausethatiscausedpurposely.Insurancepolicieswillnotcoverfinespayablefortrafficoffences.Alltheseexclusionsareongroundsoflegalityaswellasongroundsthattheinsured peril must be random and accidental.Thepartiesinvolvedinacontractmustbemajorandproficienttocontract.Minorchildrenarenoteligiblefor•contracts. If a child has to be insured, the contract will be entered into by the parents or guardian. An individual, who have criminal records or have psychological problem, is not eligible to contract. The insurer, being a legally constituted corporation or company is competent to contract for insurance, if it is licensed to transact insurance business.

2.3.2 Subject Matter of Contract of InsuranceAsthesubject-matterofcontractofinsuranceismoney;theresponsibilityoftheinsureristomakegoodthelossby a payment of money. In reality, the subject-matter of insurance is not the same. It is the car or house or other physical object which may be broken or injured in an accident causing loss to the insured. It is to protect the insurer against such loss that he takes a policy of insurance. What is insured in a contract of insurance is the interest of the insured in the subject-matter of insurance. The subject-matter of insurance may be:

a physical object such as a house, motor vehicle, ship or stock in trade or in a personal accident policy the �body of a persona chose-in-action such as a debt, the risk of non-payment of which may be insured �a liability which the insured may incur to third parties by the use of a motor vehicle or the public carrier �etc.

2.3.3 ProposalOne of the necessities for a contract of insurance is the mutual agreement between the insured and insurer. An offerbyoneandanunqualifiedacceptanceofitbytheother;whenacknowledgedtogetherformanagreement.Anagreement that has a legal binding on both the parties constitutes a contract. Therefore, a proposal is the basis of an insurance contract.

2.3.4 Non-Marine Insurance

For insurance, applicant is to complete a proposal form containing a number of situations of the risk to be •assessed and covered. The applicant states that he agrees with the information given in the proposal form and agrees that it shall be the •basis of the contract and that he will accept the usual form of the policy issued by the insurer in such cases. On the basis of this declaration, the insurer believes in the statements in the proposal form, calculates the risk •and secures the premium. The applicant is informed by the insurer that he is agreed to enter into a contract if theproposerpaysthefirstpremiumquotedintheacceptanceletter.Theunqualifiedacceptanceofthisofferisindicatedbytheproposerbyhispayingthepremiuminaccordance•with the letter. This gives rise to the contract of insurance from the date of such payment. The terms of the contractarethenpersonifiedinapolicyissuedbytheinsurer.

2.3.5 Marine Insurance

In marine insurance, there is no practice of taking a proposal form from the proposer. On the other hand, under •instructions from the proposer, the broker prepares an original slip mentioning all the bare essentials of the proposedriskandtheclausesdefiningtheliabilitiestobeassumedbytheunderwriterandsubmitsit.Inthefirstinstancetoanunderwriterwhohasareputationinthemarketasanexpertinthekindofcoverrequiredandwhose lead is likely to be followed by other insurers in the market and tries to get the most favourable terms

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for his client. The broker supplements the facts on the slip with all the material information furnished by the proposer. The •broker and the underwriter go through the slip together and agree on any amendments to the broker’s draft and fixthepremium.Whenthisleadingunderwritersignifiestheacceptanceoftheriskbywritingtheamountheisprepared to accept and signing the slip, the broker offers the balance to be covered to other underwriters willing to accept until the full amount is covered. The contract is concluded with the underwriters from the moment each of them signs the slip, but the insurance •commences from the date when the voyage commences in the case of a voyage policy. The broker prepares thepolicyinconformitywiththeslipandlodgesitwiththeLloyd’spolicysigningofficeforverificationandsignature, and in the meantime sends a cover note to the proposer advising the terms of the insurance affected. This is the practice at Lloyd’s in the U.K.

2.3.6 Cover Note

A cover note is a temporary and limited agreement. It may be self contained or it may incorporate by reference •the terms and conditions of the future policy. The cover note is a distinct contract of insurance for the short period and should be properly stamped according •to the Stamp Act. It automatically expires at the end of the stated period unless it is earlier outdated by the issue of a regular policy •or the proposal is declined by the insurer. The cover does not usually mention that the provisional cover is under the same terms and conditions as the •policy which is usually issued for such proposals. The insurer then examines the proposal and if acceptable issues a policy for the required period or declines the proposal and informs the proposer before the cover note period expires. Any claim arising during the currency of the cover note will be determined by reference to the terms of the •cover note and not to the terms of the subsequent policy.Insurance contracts are a special class of contracts, having distinctive features such as utmost good faith, •insurable interest, protection, subrogation and contribution and doctrine of proximate cause which are more or less common to all branches of insurance. ThesedoctrinesaregovernedbythecommonlawandcertainaspectsarealsomodifiedbystatutessuchasS.30•oftheIndianContractAct,1872;theIndianMarineInsuranceAct1963andChapterVIIoftheMotorVehiclesAct, 1939 (now Motor Vehicle Act, 1988) and the Railways Act, 1989. Theyarealsomodifiedbycontract,asinthecaseofcontractualdutyofgoodfaith,andthedoctrinesofsubrogation•and contribution. Each class of insurance also has individual features of its own.

2.4 Principle of Utmost Good FaithIf contract has to be considered as valid both the parties in the contract has to be of the same mind. Equal •awareness of the subject and terms of contract should be clear to the both the parties. Else the contract would be considered as invalid. On the other hand, it is not permissible that either party has to disclose all information. Ordinary commercial contracts are governed by the principle of Caveat Emptor or ‘Let the Buyer Beware’. It is the buyer’s duty to be careful before entering into the arrangement to buy. The buyer should make the necessary enquiries and do the necessary inspections. He can ask for proofs. Afterward he cannot complain that the seller hadnotdisclosedallthefacts.Thisisnotsointhecaseofinsurancecontracts,whichareofafiduciarynatureand based on trust.In insurance, the relevant facts relating to the subject matter of insurance are known to one party to the contract, •the policy holder, and cannot be known to the other party, the insurer, unless disclosed. A person seeking life insurance may be suffering from heart problem or blood pressure. These may not be •detected through medical examination. Appropriate medication can suppress all the symptoms for some time. The goods in a go-down can be re-located at the time of inspection. It is not practical for the insurer to verify the values of all the items to be covered by insurance. If goods are packed and are in transit, the insurer cannot

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havethevaluesverified.Evenifverificationisdonebeforepacking,itisnotpossiblefortheinsurertoensurethatwhatwaspackedandsentwasthesameaswhatwasverified.Theinsurerhastodependonthestatementsof the person asking for insurance to decide on the terms of the cover. The normal commercial principle, if applied to insurance, would be prejudicial to the interests of the insurer, and therefore, to the community of policyholders.Under the Principle of Good Faith, the policyholder is obliged to disclose all facts, which are material to the •assessment of the risk. A fact is said to be material, if it is relevant to the assessment of risk and determination of premium. Non-disclosure of a material fact puts the insurer at a disadvantage. When a policy holder knowingly putsaninsurerandthecommunityofpolicyholdersatadisadvantage;thereissaidtobeadverseselectionoranti selection. This principle has been upheld by Courts all over the world.When material facts are withheld by the proposer, the two parties to the contract are not of the same mind. •Even if the suppression had happened through a mistake, yet the underwriter is deceived and the risk accepted is really different from the risk understood and intended to be accepted by the insurer. This situation violates an important requirement of a contract and is therefore, voidable. “Voidable” means that a party to the contract has the right to declare that the contract is void and invalid. He may choose not to exercise that right. If at any time it is proved that some material facts had not been disclosed, the insurer is within his rights to •declare the policy as null and void and forfeit all the premiums paid there under. This right, which is absolute, canbeenforcedinIndiaonlyduringthefirsttwoyearsofthepolicy.Aftertwoyears,fraudmustbeestablished,to void the policy and forfeit the premiums. This is because of the provision in Section 45 of the Insurance Act 1938. Similar provisions exist in the regulations of many countries. This is referred to as the ‘Indisputability’ or ‘Incontestability’ clause (applicable to life insurance policies).

Following are the conditions in which non-disclosure is suspected:

the fact must be known to the proposer �the fact must not have been known to the insurer �the fact, if made known to the insurer, may have affected the decision to grant cover �the fact must have been deliberately held back with the intention to obtain better terms of insurance �

The principle of utmost good faith is not violated if the following are not disclosed:Facts relating to law. Everyone is supposed to know the law. �Facts of common knowledge. �Facts possible of discovery by insurer’s surveyor during risk inspection �

Following are some examples of material facts:Life Insurance: Own medical history, family history, habits, absence from work, even age, because risk �depends on age.Fire Insurance: Construction and usage of building, nature of goods in the premises. �Marine Insurance: Description of goods, method of packing. �Motor Insurance: Description of vehicle, how used, details of driver. �

The duty to disclose material facts operates differently in different insurances. In the case of life insurance, the •duty ends with the completion of the contract. Any material fact emerging after the risk has commenced does not have to be disclosed. For example, any change in occupation after the cover has commenced, may affect the risk, but is not required to be communicated. The existing cover will continue as it is.The duty to disclose revives at renewal of the policy, if there is virtually a fresh contract, but not if the renewal •is regarded as the continuation of the original contract. In life insurance, when the renewal premium is paid, the original contract continues. In non-life insurance, the contract would stipulate whether changes are required to be intimated or not. Whenever a non-life insurance policy is renewed – and this would be annually – the duty for disclosure will arise. When an alteration is made to the original contract affecting the risk, the duty to disclose will come into operation.

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The duty of disclosure of material facts is on the insurer also as much as it is on the policyholder. Policyholders •arenotawareofbenefitsavailableandobligationsunderthevariouspolicies.Agents,whorepresenttheinsurers,may not disclose the facts or may provide wrong information in order to get the business. The Insurance Regulatory & Development Authority of India (IRDA) has provided that a policyholder has the right to withdraw fromthecontractwithinaspecifiedperiodof15daysofreceiptofpolicyifhefindsthetermsandconditionsof the policy issued to him unacceptable. This is referred to as the ‘free-look’ provision. This practice exists in many countries.

2.4.1 Insurer’s Duty of Disclosure

TheActdidnotdefinethedutyofdisclosurefallingontheinsurerasitdidthatoftheinsured.Theoccasions•where disclosure by the insurer is required may in practice be rare since the circumstances material to the insurance will ordinarily be known only to the proposed insured. Nevertheless, such occasions do arise.The duty failing on the insurer must at least extend to disclosing all facts known to him which are material •either

to the nature of the risk sought to be covered, or �the recoverability of a claim under the policy which a prudent insured would take into account in deciding �whether or not to place the risk for which he seeks cover with the insurer

The insurer must also inform the insured about the terms and conditions of the policy that is going to be issued •to him and must strictly conform to the statements in the prospectus etc., if any, or made through his agents. He must issue the policy in conformity with the terms mutually agreed with the insured. The proposer is entitled to ask for the draft policy though in the proposal form he has agreed to accept the policy in the usual forms used by the insurer, for that class of insurance. But if he does not ask for it, he will be considered to have accepted the policy that is issued.In case of fraud, the party defrauded not only can avoid the contract but can claim damages also. In the case •of non-disclosure of facts, the insurer can avoid the contract. Section 19 of the Contract Act gives to the party defrauded an option to enforce the performance of the promise made by the defrauding party or to clam damages for breach of contract. The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure of lapsed policies by the insured, which had no bearing on the risk undertaken by the insurer.

2.4.2 Inherent and Contractual Duties of Good FaithIn contract of utmost good faith, contracting parties are placed under a special duty towards each other, not merely to refrain from active misrepresentation but to make full disclosure of all material facts within their knowledge and the principle of caveat emptor is not applicable. This is the inherent or common law duty of good faith and is distinct from the contractual duty of good faith. The common law duty is the basis and it is open to the parties entering into an insurance contract to extend the duty or restrict it by the terms of the contract. The inherent duty of the insurer invariably got extended as his contractual duty, by requiring him to declare that he warrants the truth of his answers in the proposal form, etc.

2.4.3 Importance of Proposal Form

In practice, the duty of the insured to observe utmost good faith is enforced in non-marine insurances by •requiring the proposer to complete a proposal form framed to obtain all the relevant information necessary in normal circumstances, with true and complete answers, incorporating it in the policy and making it the basis of the contract. Theremaybenospecificquestionintheproposalformthatmaybeapplicabletothefactsofaparticularcase;•yet the proposer must disclose all the material facts which he knows or ought to know are material to his risk, so that the insurer is not misled. He is also required to declare that he warrants the truth of the statements made therein and that he has not misrepresented or concealed any material fact.The contractual duty so imposed is such, that any suppression or untruth or inaccuracy in the statements in •the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer whether the statement was made innocently or fraudulently and whether it relates to a material

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matter or not. Aninsuranceproposalformis,therefore,notlikemanyaformthatisfilledupforvariousotherpurposes.Great•caremustbeexercisedinfillinguptheproposalform.Itispreferabletorevealtoomuchratherthantoolittlein the proposal form.

2.4.4 Material FactsSection20(2)ofMarineInsuranceAct,1963definesmaterialfactsasfactswhichwouldinfluencethejudgmentofa‘prudentinsurer’ inassessingtheriskandfixingtheappropriatepremiumtobechargedorindeterminingwhether he will take the risk or reject it. As the assured alone knows them, he is deemed to know every circumstance whichintheordinarycourseofbusinessoughttobeknownbyhim;heisunderadutytodisclosethemfullytotheinsurerwhetherornotthereisaspecificquestionaboutitintheproposalform.Questionsintheproposalformarepresumed to relate to material circumstances, though there is no presumption that other matters not so dealt with are notmaterial.Evenintheabsenceofspecificquestions,theproposermustdisclosevoluntarilythefollowingfactsor circumstances because they are material:

Facts which render or tend to show that the risk is greater than normal.•Facts which suggest any special motive for taking the insurance.•Facts which suggest the existence of moral hazards which relate to the moral integrity of the proposer or which •suggest that the proposer is himself abnormal, that is which indicate his accident proneness, etc. Any fact is material which leads to the inference that the particular proposer is a person or one of a class of persons whose proposal for insurance ought to be subjected to special consideration before it can be decided whether it should be accepted at all or accepted at normal rate. This is usually referred to as the moral hazard.

2.4.5 Prudent Insurer Test of MaterialityMarine Insurance Act, section 20 (2) says that the test of materiality is the “Judgment of a prudent Insurer”. The same test generally applies in non-marine Insurance also. In relation to the duty of disclosure falling on the insured, everyfactismaterialwhichwouldinfluencethejudgmentofaprudentinsurer-nottheparticularinsurer.Thetestiswhetherthecircumstanceinquestionwouldinfluencetheprudentinsurerandnotwhetheritmightinfluencehim.

2.4.6 Duration of Duty of DisclosureThe duty of full disclosure continues throughout the period of negotiations and up to the time ‘the contract is concluded.’ This is so according to S.20 (1) Marine Ins. Act 1963 also. If there is any alteration in the risk disclosed in the proposal during the negotiation stage, that must be brought to the notice of the insurer, as otherwise it will be presumed that the risk accepted is the disclosed in the proposal. After the contract comes into force, there is no duty toinformtheinsureraboutchangestakingplaceinthenatureoftherisk,unlessthecontractspecificallyrequiresit, as in the case of personal accident policies which normally contain such a condition where the change is to be agreed to by the insurer if the policy is to continue.

2.4.7 Revival of DutyThisdutytodisclosereviveswhenthepolicyendsandhastoberenewedforafurtherperiodasinthecaseoffireand motor insurances. In life insurance it arises again if the policy lapses and is to be revived.

2.5 Insurable InterestAll risks are not insurable. Previously, it was explained that temporary risks are not insurable. Speculative contracts are wagering contracts and are illegal. A subject matter of a valid contract has to be legal. The difference between an insurance contract and a wagering contract is that the insured must have an insurable interest in the subject of insurance;thisdifferencemakesitnon-speculative.Insimplewords,theproposermusthaveastakeinthecontinuanceof the subject matter insured and could suffer a loss, if the risk occurred. Normally it is believed that everything can be insured but all risks are not insurable until they have certain characteristics such as:

Theymustbecapableoffinancialmeasurement.•Theremustbesufficientnumberofsimilarrisks.•

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There must be pure and particular risks.•The occurrences of the event insured must not be against public policy.•The premium payable must be reasonable.•There must be insurable interest of the person insuring the risk.•

For any insurance contract, the existence of insurable interest is an essential ingredient. This is an important and fundamental principle of insurance.

2.5.1 Meaning of Insurable Interest

“In every contract of insurance, it is essential that the insured must have a monetary interest in subject matter •ofinsurance.”ThisishowInsurableinterestisdefined.Theinsuredmustbeinsuchaposition,thattheinjuryto the subject matter would affect him adversely or he must own part or whole of its insurance.Insurableinterestmeansthattheproposercouldsufferafinancialloss,ifthesubjectinsuredisphysicallyharmed•in any way. Financial interest is the only thing which can be insured. Theproposermustbeinarelationshipwiththesubjectofinsurancewherebyhe/shebenefitsfromitssafety•and well being.The legal right of the insured to effect insurance is known as Insurable interest. It is pecuniary interest of the •insured in the property insured. In absence of any pecuniary interest, he is said to have no insurable interest. It is this pecuniary interest of the insured in the property which is actually insured and not the property itself.An insurable interest is not created by a mere mortal claim. In the same way, mere hope or expectation which may •be frustrating in the future by the happening of some event, does not contribute to insurable interest. A contract of insurance affected without insurable interest is void. To summit this point, following is the example:

Theownerofthefactoryhasafinancialinterestinthesafetyofhisfactoryandherunsariskoflossincase,thefirebreaksoutinitspremises.Ifhewantstotakeafireinsurancepolicytocovertheriskofhisfactory,hewillbeconsidered to have an insurable interest in the subject matter of insurance because he runs a risk and he has something at stake, something to lose by the happening of the insured peril.

TheInsuranceAct1938doesnotdefine“InsurableInterest”.However,itsnatureandextentwasdeter-mined by subsequent case laws established by the courts. Mere effecting of a policy of insurance carries with it no right to recover there under simply because of the happening of an insured event. An insurable interest should get recovered by the insured. This differentiates life insurance contracts and wagering agreements.

The following principles have to be established:A person affecting the policy (proposer) must have an insurable interest in the life to be assured. �Theproposershouldbeinsucharelationshipwiththelifeassured,thatheshouldsufferafinancialloss �incasethelifeassureddies,i.e.,theproposershould;eventhoughhehasaffectedthepolicy,notwishtheevent to happen, and to gain from it. He should wish for the well being and safety of the life insured at all times.The policy must expressly state on whose behalf it has been effected. �The sum assured cannot exceed the extent of the interest when the policy is effected. �Interest must exist at the time of inception, i.e., when the contract is entered into. �To prove insurable interest at death is not required. �

Whatisinsuredisthefinancialorpecuniaryinterestofthepolicyholderinthesubjectmatterofinsurance.•Whenabuildingisinsuredagainstfiredamage,thecontinuedexistenceofthebuildinginitspresentformisnot the issue. The issue is the interest of the insuring person in the continued existence of the building and the loss he will acquire if the building is damaged. The insured must be in a relationship with the subject matter of insurance, whereby he has an interest in its safety and well-being and would be prejudiced by its loss or damage.

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This relationship is acknowledged by law. If there is no such relationship, which is called ‘insurable interest’, there cannot be an insurance contract.A wager is what is commonly called a ‘bet’. The risk is called a speculative risk and is not insurable. The party •concerned could have avoided the loss. He got into that situation fully aware that he may incur a loss. He created the peril. Insurance assumes that the event insured against (peril) is not subject to the control of the insured. Thus, for a contract of insurance to be valid, it is not enough that the parties to it are competent to contract, that •it is made with their free consent and that the consideration is lawful. It is necessary in addition that the insured has insurable interest in the subject-matter of the Insurance. (Even if it is called incontestable). Otherwise, it willamounttoawagerandwillbevoidaccordingtoS.30,IndianContractAct1872.Especiallyinfire,marineand life insurances, the question of insurable interest is of particular importance.

2.5.2 Time When Insurable Interest must ExistIn life and personal accident, insurances it is enough if insurable interest exists at the time the policy is affected. Infireandmotorinsurances,itmustexistbothattheinceptionofthecontractandatthetimeofloss.Inmarineinsurance it must exist at the time of the loss, though not when the insurance is affected. When the contract is entered the insured must at least have an expectation of acquiring such an interest.

2.6 IndemnityInsurance is meant to indemnify, which means, to compensate for losses. The amount paid by the insurer as a •claimshouldnotexceedtheamountoflossincurred.Insuranceshouldplacetheinsuredinthesamefinancialposition after a loss, as he enjoyed before it, not better. This broadly is the Principle of Indemnity. By implication, themechanismofinsurancecannotbeusedtomakeaprofit.There is a link between indemnity and insurable interest. It is the interest of the insured in the subject matter •of insurance that is insured. Therefore, the amount of claim cannot exceed the extent of interest. If a bank has taken an insurance policy against the default in loan repayments, the insurer is required to pay only to extent of the default and not more. Insurance companies provide cover against fraud or misappropriation by employees. If misappropriation occurs, only the actual loss will be paid as insurance claim. In case of damage to cars or equipment in factories, the loss will be determined after providing for depreciation. This amount will be less than the cost of replacement.Intheabsenceoftheprincipleofindemnity,insurancemaybetakenwiththefraudulentintentionofinflicting•damage on property and making exaggerated claims of losses. This would not only be illegal but also against public policy.In some cases, the potential future losses are also compensated for. For example, it will take some time before •a factory which is damaged, is put back into operation. In the meanwhile, there is a loss of production and therefore,lossofincomeandprofits.Insurancecancoverthislossaswell.Similarly,anindividualtakingapersonal accident cover, either separately or as a part of a life insurance policy, would be compensated for loss of earnings if he is unable to report for work due to the accident.Because of the principle of indemnity, there are often disputes in settling claims in general insurance. Losses •havetobeassessedbyqualifiedsurveyors.Theseassessmentsarechallengedasunfair.Policyholdersdonotunderstand why the insurance company refuses to reimburse the entire cost of repair.Such problems do not exist in life insurance. There is no need to assess the extent of loss, because the insurable •interest (on own life) is assumed to be unlimited. It is not possible to make a precise valuation of a human life. The principle of indemnity does not apply in life insurance. Almost all insurances other than life and personal accident insurances are contracts of indemnity.The object of the contract of insurance is principally to place the insured as far as possible in the same position •in which he would be if the insured event causing the loss had not occurred. It is not a contract to make a gain. It is to leave him neither a loser nor a gainer subject to his insuring the property for its full value.“Everycontractofmarine,fireinsuranceisacontractof indemnityandof indemnityonly, themeaningof•which is that the assured in case of a loss is to receive a full indemnity but is never to receive more. Every rule of Insurance Law is adapted in order to carry out this fundamental rule.”

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The principle of indemnity which means that the insured can in no event make a gain out of that transaction is •a salutary rule of law to keep in check a human weakness. The insured would otherwise be tempted to destroy the property himself or connive at its destruction and claim the sum insured. Even by over insurance he cannot recover more than an indemnity from all the policies put together.Indemnity is such a fundamental principle of insurance that the doctrines of subrogation and contribution are •corollariesofthisprincipletofurtherensurethattheinsureddoesnotmakeanyprofitoutoftheinsurancetransaction.Also, this is the reasonwhy the insuredwho is indemnified for a total lossmust abandon thesubject matter of the insurance to the insurer. Even the need for existence of insurable interest at the time of loss arisesoutofthisprinciple,foriftheinsuredhasnoinsurableinterest;helosesnothinganddoesnotneedtobeindemnified.Thus,wherehehastransferredtheinsuredpropertyanditislostbytheinsuredperilthereafter,heincurs no loss and needs no indemnity.

2.7 SubrogationThis distinctive feature of insurance contract supports the principle of indemnity in its objective of preventing the •insured from recovering more than his loss under an insurance policy. For example, the insured under a marine cargo policy may have rights of recovering from other parties such as carriers, for instance, truck operators, railways, shipping companies etc. for loss or damage to insured cargo. The principle of subrogation provides that the insurers are entitled to succeed to the rights and remedies of the insured. Having paid the loss to the insured the insurers recover the loss from the parties responsible for the loss. The insured cannot recover his lossfromtwosourcesinwhichcasehewillmakeaprofit.In insurance law, subrogation is the name given to the right of the insurer who has paid a loss to be put in the •place of the assured so that he can take advantage of any means available to the assured to extinguish or diminish thelossforwhichtheinsurerhasindemnifiedtheassured.Thedoctrineofsubrogationconferstwospecificrightsontheinsurer:•

All rights and remedies of the assured against third parties incidental to the subject matter of the loss, by the �exercise of which the insurer may recoup his loss. The insurer can compel the insured to take proceedings againstthethirdpartiesforthebenefitoftheinsurer.Allbenefitsreceivedbytheassuredfromthirdpartieswithaviewtocompensatetheassuredfortheloss �whichtheinsurerhasindemnifiedhim.Theinsurerisentitledtogeteventhemoneysreceivedbytheassuredex-gratiaexceptthosethataregiventobenefittheassuredexclusively.

Limitations on the doctrine•According to the common law, the right of subrogation arises when the insured’s claim has been fully paid �and not till then. It is from actual payment that the right springs. The right of subrogation arises only in respect of rights incidental to the subject matter of the loss. Payment for loss of the ship does not entitle the insurer to be subrogated for the owner’s right of action for loss of freight. The right of subrogation does not arise where the assured himself has no cause of action against the third party.Illustration: There was a cr � ash between two ships which were owned by the same person, for the fault of one of the ships. The owner could not recover from the ship at fault as that was also owned by him. Hence the insurer of the ship not at fault could not sue the ship at fault under the right of subrogation.

2.7.1 Insured’s Rights and RemediesWhen the subject matter of insurance suffers loss or damage from an insured peril, the insured has these rights:

Against the insured, to obtain indemnity under the insurance contract. �Against the Third Party, who caused the loss, to recover compensation for the loss caused, under the law �of tort.By Virtue of a Contract, against a third person, to make good the loss, for example with the lessee of the �premises insured, to repair it in case of damage.

The insured cannot recover from both the insurer and the third party who has caused the loss. If he proceeds against

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the insurer, the insurer cannot avoid liability on the ground that the insured has the right to claim against the third party and conversely if he proceeds against the third party, the third party cannot avoid liability on the ground that theinsuredhasbeenorwillbefullyindemnifiedbytheinsurer.

2.7.2 Exercise of Right of SubrogationOn being subrogated, the insurer can enforce the right against the third party, only in the name of the insured and can regain the amount paid to the insured. If they recover more than that, the excess must be paid over to the insured. The insurer cannot recover under the doctrine of subrogation anything more than he has paid.

2.7.3 Subrogation and Abandonment

Abandonment is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter •of insurance incaseofa total lossacceptedby the insurer.The insurer thereafter isentitled toallbenefitsflowingoutofthesubjectevenexceedingtheamountofindemnitypaidtotheassured.Inmarineinsurance,itis governed by Sections 61 to 63 of the Marine Insurance Act, 1963. In other indemnity insurances, on being paid for a total loss the assured is required to abandon his interest •in the subject-matter of the insurance to the insurer. But in contracts of indemnity insurance, the insurer gets subrogation rights automatically on payment of indemnity whether the loss is total or partial.

2.8 ContributionThe Principle of Contribution ensures that if there is more than one policy on the same subject matter, the insured •cannot recover his loss from all the insurers in which case he will recover more than his loss. Contribution principle provides that each insurer pays only his proportionate share of the loss.This is also a result of the doctrine of indemnity designed to ensure that the indemnity provided is proportionately •borne by the several insurers of the risk. Though a person has taken out more than one policy on the same risk with several insurers, he cannot recover altogether more than a full indemnity from all or any of them. The insured can select the policy from which he can recover his full indemnity. When that insurer has discharged his liability, he is entitled to call upon the other insurers of the same risk to contribute their share of the loss.In order that a claim for contribution should arise, there must be two or more insurances fully covering the •samerisksinrespectofthesameinterestinasubjectmatter.Ifoneinsurerindemnifiestheinsuredinfull,hecanclaimcontributionhalforone-thirdofitasthecasemaybefromothercoinsurers;notbecausethereisanysuch contract between them whether express or implied.Therightofcontributionisdefinedas,“Therightofcontributionisbasednotincontractbutonwhathasbeen•said to be the plainest equity that burdens should be shared equally. It would be inequitable for any of the insurers toreceivethebenefitofthepremiumwithoutbeingliablefortheirshareoftheloss.”

2.8.1 Conditions Necessary for Right of ContributionInorderthattherightofcontributionmayarise,followingconditionsmusthesatisfied:

The area under discussion of insurance, in respect of which the claim to contribution arises, must be common •to all the policies, though they may include other properties.The peril which causes the loss must be common to all the policies, though they may include other perils.•All the policies must be affected by or on behalf of the same assured. It is not enough that they all relate to the •same physical object.All the policies must be real contracts and be in force at the time of the loss.•The policy must not contain any stipulation by which it is• excluded from contribution.

2.9 Doctrine of Proximate CauseThe concept of Proximate Cause is used to determine whether the cause of loss is an insured peril. If there •are two causes for the loss, whether operating simultaneously or in sequence, the immediate cause, called the

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proximate cause for damage, must be the insured peril. The proximate cause must be determined in order to avoid paying a claim on a loss which has occurred due to a peril which is uninsured or excluded.The need to identify the proximate cause is not important if the concurrent causes are all insured and not excluded •perils. If one of the causes is an excepted peril and its effects can be separated from the results of the operations of the insured peril, there is a liability for the latter and not for the former. If the perils cannot be so separated, there is no liability at all. If there are different causes occurring in sequence, the liability will be decided upon the sequence, which one preceded which, and so on.Theproximatecauseisdefinedastheactiveandefficientcausethatsetsinmotionatrainofeventswhichbrings•about a result, without the intervention of any force started and working actively from a new and independent source. This is not always obvious and cannot be determined as part of the process of assessing the loss. It needs professional knowledge about the effects of the different causes relevant to the case. Judicial intervention is often sought.Aproximatecauseneednotbethenearestorthelatest,butmustbethedirect,dominant,operativeandefficient•cause, of which loss is the natural consequence. The time lag between cause and effect is not material. Example:• A hunter falling in the wet ground after meeting with an accident and being unable to move, contracted pneumonia and died. It was decided that the proximate cause of death was the accident and not pneumonia. Becauseofthisdecision,accidentbenefitsbecamepayableinthatcase.The practical effect of the concept of proximate cause is to keep the scope of the insurance within the limits •intended by the parties, when the contract was made.Thereisnodifficultyifasingleperilactsandcausestheloss.Oftentheseperilsdonotoperateinisolation,but•actinsuccessionorsimultaneouslyanditwillbedifficulttoassesstherelativeeffectofeachperilorpickoutone of these perils as the actual cause of the loss. For instance, damage to a cargo of rice was caused by sea water escaping through a pipe gnawed by rats. The existence of the rats on board, their thirst, the hardness of theirteeth,theincapacityofthepipetoresistthegnawing,theshipbeingafloatandsoon,whichofthesecanbe said to be the cause of the effect namely the damage of the rice cargo, will be a lengthy assessment.Theclassicdefinitionofproximatecausecanbesummedupas:•‘Proximatecausemeanstheactive,efficientcausethatsetsinmotionatrainofeventswhichbringsabouta•result, without the intervention of any force started and working actively from a new and independent source’. The doctrine of proximate cause is common to all branches of insurance and is based on the presumed intention of the parties expressed in the contract.

2.9.1 Tests for Determining Proximate CauseIn Yorkshire Dale SS Co. v. Minister of War Transport,LordWrightobservedthat“Thechoiceoftherealorefficientcause must be made by applying commonsense standards. Causation is to be understood as the man in the street, and not as either the scientist or the metaphysician would understand it”. Courts have accordingly formulated some general rules for determining the proximate cause in cases where perils are acting consecutively or concurrently, as follows:

Where perils are acting consecutively in unbroken sequence, that is, one peril is caused by and follows from another peril:

If there is one insured peril, but no excepted peril, • insurer is liable for losses caused by the insured peril.If an excepted peril, is involved, and •

Theexceptedperilprecedesaninsuredperil,theinsurerisnotliable;forexample, � Tootal Broadhurst Lee & Co. v. London and Lancashire Fire Ins. Co.,whereanearthquakefire(anexceptedperil)spreadbynaturalmeans and burnt the insured premises, the insurer was not liable as the loss was proximately caused by the excepted peril.The excepted peril follows an insured peril; the insurer is not liable if the loss caused by each is �undistinguishable. If the loss caused is distinguishable, the insurer is liable for the damage caused by the insuredperiluptothehappeningoftheexceptedperil.Forexample,wherefirecausesanexplosionandexplosionisanexceptedperil,theinsurerwillbeliableforfiredamageuptothetimeofexplosion.

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Where perils are acting consecutively in broken sequence, that is, each peril is independent of the other:If no excepted peril is involved, the insurer will be liable for losses caused by the insured peril.•If an excepted peril is involved, and precedes an insured peril, the insurer is liable for the loss caused by the •insuredperil.Thus,aplateglassinsurancepolicycoveredbreakagesfromanyriskexceptfire.Afireoccurredin a neighbouring premise and taking advantage of it a mob broke the insured plate glass to commit theft. It was heldthatthemobactionwasthecauseofthelossandnotthefireandsotheinsurerwasliable.If the excepted peril follows the insured peril, as an independent cause, the insurer is liable only for the loss •caused by the insured peril up to the time of the intervention of the excepted peril.

Where the perils are acting concurrently, that is simultaneously:The insurer is liable if: •

One of them is an insured peril and none of them is an excepted peril �The losses caused by the insured and excepted perils can be distinguished �

The insurer is not liable if the losses cannot be distinguished. Where the cases are very complicated, the strict •legal position is not invoked, but settled by compromise usually by the insurers by a generous interpretation of the facts.

Exclusion of proximate cause ruleThe application of the proximate cause rule will be excluded where wide terms are used in policy exclusions, •such as ‘directly or indirectly’ and so on. Thus, in • Coxe v. Employers’ Liability Assurance Corporation (UK),anArmyOfficerwasaccidentallyrunoverby a train and killed when he was walking along a railway line during inspection of guards and sentries guarding the track in war time. The place of accident was also dark because of blackout in compliance with defence regulations. His personal accident policy had excluded death ‘directly or indirectly caused by, arising from or traceable to …war’. The train was really the proximate cause of the loss, but the proximate cause rule had been modifiedbythewidewordingoftheexclusionandsotheofficer’srepresentative’sclaimforthesumassuredwasrejected by the court on the ground that the insured’s death was not directly but indirectly the result of war.

2.10 Fundamentals of Marine Insurance ContractMarine insurance business means the business of effecting contracts of insurance upon vessels of any description, •including cargoes, freights and other interests which may be legally insured in or relation to such vessels, cargoes and freights, goods, wares merchandise and property of whatsoever description insured for any transit by land or water or air or all the three. The same may include warehouse risks or similar risks in addition or as incidental to such transit and includes •any other risks which are customarily included among the risks insured against in marine insurance policies.Thus, insurance is a business of takingover others’ risks; and accordingly, the commitments that insurers•undertake should be honoured as and when they fall due. Insurers manage their risk to tolerable levels by adopting such measures as pooling of independent risks, •spreading and reinsuring large risks, exercising control over fraudulent claims, designing suitable asset liability managementetc.Inorderthatinsurersarecapableoffulfillingthepromisesunderthecontracts,theycharge‘premium’ from the assured, depending upon their estimation of degree of the risk, and are mandated to maintain asufficientlevelofcapital.In other words, the purpose of any form of insurance is to replace what has been lost. It is not intended that •assuredshouldmakeaprofitfromhislossbutthatheshouldmerelybeinworsesituationthanhewasbeforethe loss occurred. Further, it is not practicable to expect the insurer to replace an object which is lost, nor it is reasonable to expect him to remove the damage thus restoring the damaged object to the whole sound object. As a compromise, any recompense must be of a monetary nature and this system of reimbursement is called “indemnifying”.

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2.11 Marine Insurance Definition:A contract or policy ofmarine insurance is an arrangementwherebyone person called insurer orunderwriter,agrees,accordingtospecifictermsofcontract,toindemnifyanotherperson,calledassured,forthelosses incurred in connection with property, such as ship, goods or other movables, in maritime transport.

Section3ofMarineInsuranceAct,1963,defines‘marineinsurance’asfollows:Acontractofmarineinsurance•is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine adventure.“Marine adventure” includes any adventure where any insurable property is exposed to maritime perils, i.e., •perils consequent to navigation of the sea. It also includes the earnings or acquisition of any freight, passage money,commission,profitorotherpecuniarybenefit,orthesecurityforanyadvances,loans,ordisbursementsis endangered by the exposure of insurable property to maritime perils. Marine adventure also includes 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.A contract of marine insurance may, be its express terms, or by usage of trade, be extended so as to protect the •assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.

2.12 Insured Risks: Perils of the SeaAn insurer underwrites or subscribes to a risk in return for the payment of ‘premium’ by the assured. The premium •is considered compensation for running risks of the insured property and is normally retained whether or not the insured property is lost or not. The size of the premium depends upon the insurer’s estimation of degree of the risk that the insured property will incur a loss and on amount of indemnity he will have to pay. Generally, the insurersspreadtheirpotentialliabilitiesinarelativelysmallamountoveranumberofrisksinordertobenefitfrom the probability that only a limited percentage will experience losses by ‘law of averages’.The word “risk” being in this context to refer to the risk of loss occurring in connection with insured property, •and the risk of loss can include not only actual property in return for the payment of premium by the assured lossesbutalsofinanciallosses,suchasthoseresultingfromthelossoffreight,passagemoney,commissionorprofitaswellascertaintypesofliabilitiesincurredtothirdparties.Thespecificationofinsurancecontractusuallystipulatescertainlimitationsastothetypeofoccurrencesthatmay•cause losses for which the insurer will pay indemnity. Such occurrences are called “insured risks” or “insured perils”. The term “perils of the sea” refers only to accidents or causalities of the sea, and does not include the ordinary action of the winds and waves. Besides,maritimeperilsinclude,fire,warperils,pirates,seizuresandjettison,etc.Amarineinsurancepolicy•may specify that only certain maritime risks, or “perils of the sea”, are covered.

2.13 Marine Insurance PolicyA marine insurance policy is a document which embodies all the particulars and the terms and conditions for the construction of the policy. Contract must be embodied in policy. A contract of marine insurance shall not be admitted in evidence unless it is embodied in a marine policy in accordance with section 25 of the Marine Insurance Act 1963. The policy may be executed and issued either at the time when the contract is concluded, or afterwards. The policy must be signed by or on behalf of the insurer. It must contain the following:

The name of the assured•The subject-matter insured and the risk insured against•The voyage, or period of time, or both, as the case may be, covered by the insurance•The sum or sums insured•The name or names of the insurer or insurers•

In India, the practice is to issue ‘cover notes’ which are similar to slips. As the practice is not to stamp a ‘cover note’ it is admissible only to prove the agreement. It cannot be used for any purpose except to compel the delivery of a

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policy in accordance with its terms.

2.13.1 Subject-Matter The subject-matter insured must be designated in a marine policy with reasonable certainty. The nature and extent oftheinterestoftheassuredinthesubject-matterinsuredneednotbespecifiedinthepolicy.Wherethepolicydesignates the subject-matter insured in general terms, it shall be construed to apply to the interest intended by the assured to be covered.

2.13.2 Assignment of Policy

A marine insurance policy is assignable either before or after the loss, unless it contains terms expressly •prohibiting assignment. A policy on goods is generally freely assignable. Merchandise like tea, jute and wheat etc., change hands before they reach their destination and policies on ship or on freight are subject to restrictions on assignment.An assignment by the insured of his interest in the subject-matter insured does not transfer his rights in the •policy of insurance thereon to the assignee, unless there is an express or implied agreement to that effect. But a transmissionofinterestinthesubject–matterinsuredbyoperationoflaw;suchasbydeathorinsolvencywilloperate as a transfer of the policy also.An assured who has assigned or lost his interest in the insured property cannot subsequently assign the policy •ofinsurancethereon;unlessbeforeoratthetimeofassigningtheproperty,hehasexpresslyorimpliedlyagreedto assign the policy. However, he can always assign the policy after loss. The marine policy may be assigned by endorsements on the policy itself or in any other customary manner. On •theassignmentofthebeneficialinterestinthepolicy,theassigneeisentitledtosuethereoninhisname.

2.14 Principles of Marine InsuranceThe various principles which fall under Marine insurance are as discussed below:

2.14.1 Principle of Utmost Good Faith

There is no difference between a contract of insurance and any other contract, except that in a contract of •insurance, there is a requirement of utmost good faith. According to Section 19, a contract of marine insurance is a contract based upon utmost good faith and if the •utmost good faith is not observed by either party, the contract may be avoided by the other party. Under section 20, the assured must disclose to the insurer, before the contract is concluded, every material •circumstance which is known to the assured and the assured is deemed to know every circumstance. Under Section 21, the agent must disclose to the insurer every material circumstance which is known to him, •and an agent to insurer is deemed to know every circumstance where insurance is affected for the assured by an agent. Very importantly, the duty of disclosure continues to apply even after the conclusion of the contract.

2.14.2 Principle of Insurable Interest

Insurableinterestmeansthattheproposercouldsufferafinanciallossifthesubjectinsuredisphysicallyharmed•inanyway.Onlyfinancialinterestcanbeinsured.Buttheprincipleofinsurableintereststatesthattheinsuredmustbeinapositiontolosefinanciallyifaloss•occurs. In a contract of marine insurance, the assured must be interested in the subject-matter insured at the time of the loss, though he need not be interested when the insurance is affected. A contract of marine insurance is deemed to be a wagering contract, where the assured has not an insurable •interest, and the contract is entered into with no expectation of acquiring such an interest.According to the Marine Insurance Act, every person has an insurable interest who is interested in a marine •adventure. In particular, a person is interested in a marine adventure where he stands in any legal or equitable relationtotheadventureortoanyinsurablepropertyatrisktherein,inconsequenceofwhichhemaybenefit

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by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof. The following persons are deemed to have insurable interest:•

The owner of the ship has an insurable interest in the ship. �The owner of the cargo has insurable interest in the cargo. �A creditor who has advanced money on the security of the ship or cargo has insurable interest to the extent �of his loan.The master and crew of the ship have insurable interest in respect of their wages. �If the subject matter of insurance is mortgaged, the mortgagor has insurable interest in the full value thereof, �and the mortgagee has insurable interest in respect of any sum due to him.A trustee holding any property in trust has insurable interest in such property. �In case of advance freight the person advancing the freight has an insurable interest in so far as such freight �is repayable in case of loss.The insured has an insurable interest in the charges of any insurance policy which he may take. �

2.14.3 Principle of IndemnityMost kinds of insurance policies other than life and personal accident insurance are contracts of indemnity whereby the insurer undertakes to indemnify the insured for the actual loss suffered by him as a result of the occurring of the event insured against. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured to the extent agreed upon. Although the insured is to be placed in the same position as if the loss has not occurred, the amount of indemnity may be limited by certain conditions as follows:

Injury or loss sustained by the insured has to be proved. �Theindemnityislimitedtotheamountspecifiedinthepolicy. �Theinsuredisindemnifiedonlyfortheproximatecauses. �The market value of the property determines the amount of indemnity. �

2.14.4 Principle of Subrogation

The principle of subrogation is a corollary of 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.In the marine policy, the insurer must have paid the claim before they are entitled to rights of subrogation. Whether •the loss paid is total or partial insurers subrogated to all the rights and remedies of the insured. However, the insurercanretainonlyuptotheamounttheyhaveindemnifiedtheinsuredundersubrogation.Suchrightsandremedies include right of recovery from third parties. In the event of loss of goods at the destination, the sum insured which is the agreed value will be paid. In case •the goods are damaged during transit, the amount payable is arrived as a proportion of the sum insured according tothepercentageofdepreciation,sufferedbythegoodsascertifiedbysurveyors.

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Summary

The GIC was established by the Central Government in accordance with the provisions of the Companies Act, •1956 in November 1972 and it commenced business on January 1, 1973.ThefirstgeneralinsurancecompanyestablishedbyanIndiawasIndianMercantileInsuranceCompanyLtd.•in Bombay in 1907. ThefirstlegislationinIndiatoregulatethelifeinsurancebusinesswasin1912withthepassingoftheIndian•Life Assurance Companies Act, 1912.Generalinsurancehasbeendefinedtocomprise“fireinsurancebusiness”,“marineinsurancebusiness”and•“miscellaneous insurance business”.Contract of insurance, as described in • Prudential Ins. Co. v. Inland Revenue Commrs is stated as a contract in which one party (the insurer) assures in return for a money consideration (the premium) to pay to the other party (the insured) money or money’s worth on the happening of an uncertain event more or less unfavourable to the interest of the insured.Anoffer by one and an unqualified acceptance of it by the other;when acknowledged together form an•agreement.A cover note is a temporary and limited agreement. It may be self contained or it may incorporate by reference •the terms and conditions of the future policy. Under the Principle of Good Faith, the policyholder is obliged to disclose all facts, which are material to the •assessment of the risk.Section20(2)ofMarineInsuranceAct1963definesmaterialfactsasfactswhichwouldinfluencethejudgment•ofa‘prudentinsurer’inassessingtheriskandfixingtheappropriatepremiumtobechargedorindeterminingwhether he will take the risk or reject it.InsurableInterest isdefinedas,“Ineverycontractof insurance, it isessential that the insuredmusthavea•monetary interest in subject matter of insurance.”Insurance is meant to indemnify, which means, to compensate for losses.•According to the common law, the right of subrogation arises when the insured’s claim has been fully paid and •not till then.Abandonment is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter •of insurance in case of a total loss accepted by the insurer.The Principle of Contribution ensures that if there is more than one policy on the same subject matter, the insured •cannot recover his loss from all the insurers in which case he will recover more than his loss.The concept of Proximate Cause is used to determine whether the cause of loss is an insured peril.•The term “perils of the sea” refers only to accidents or causalities of the sea, and does not include the ordinary •action of the winds and waves.A marine insurance policy is a document which embodies all the particulars and the terms and conditions for •the construction of the policy.

ReferencesInterLog.• Characteristics of Marine Insurance [Online] Available at: <http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p182.htm>. [Accessed 20 June 2011].wiseGeek• . What is Indemnity? [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>. [Accessed 21 June 2011].wiseGeek• . The Principle of Indemnity [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>. [Accessed 18 June 2011].Knowledge Series.• Introduction to Life Insurance [pdf] Available at: <http://www.cifplearning.com/introduction%20of%20life%20insurance.pdf>. [Accessed 18 June 2011].

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Chip Merlin Insurance Subrogation Teleconference 11/16/2010• [video online] Available at: <http://www.youtube.com/watch?v=2uJkgnDl-B8>. [Accessed 22 June 2011].Insurance Contracts: Good Faith and Bad Faith• [video online] Available at: <http://www.youtube.com/watch?v=WGykHhOwYgQ>. [Accessed 22 June 2011].

Recommended ReadingStempel, J. W., 2006. • Stempel on Insurance Contracts, Vol.1, 3rd ed., Aspen Publishers Online.Carr, I. & Stone, P., 2009. • International Trade Law, 4th ed., Taylor & Francis, p. 738.Hodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.

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Self Assessment

What are governed by principles which govern contracts in general and also belong to the class of contracts?1. Insurance contractsa. Proposalb. Insurer’s duty of disclosurec. Material factsd.

ThefirstgeneralinsurancecompanyestablishedbyanIndiawasIndianMercantileInsuranceCompanyLtd.2. in ________in 1907.

Bombaya. Madrasb. Delhic. Chandigarhd.

A _______is an agreement between two or more parties to do or to abstain from doing an act.3. warrantya. good faithb. contractc. proposald.

A cover note is a temporary and limited_________.4. agreementa. insuranceb. proposalc. claimd.

Which of the statement is FALSE?5. All risks are insurable.a. Speculative contracts are wagering contracts and are illegal.b. A subject matter of a valid contract has to be legal.c. For any insurance contract, the existence of insurable interest is an essential ingredient.d.

Which of the statement is FALSE?6. A person affecting the policy (proposer) must have an insurable interest in the life to be assured.a. Insurance is not a contract.b. Each class of insurance also has individual characteristics of its own.c. ThefirstlegislationinIndiatoregulatethelifeinsurancebusinesswasin1912withthepassingoftheIndiand. Life Assurance Companies Act, 1912.

Which of these is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter 7. of insurance in case of a total loss accepted by the insurer?

Abandonmenta. Subrogationb. Contributionc. Indemnityd.

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Subrogation means _________of the insurer in place of the insured for the purpose of claiming indemnity from 8. a third person for loss covered by insurance.

additiona. subtractionb. substitutionc. multiplicationd.

________principle provides that each insurer pays only his proportionate share of the loss.9. Abandonmenta. Subrogationb. Contributionc. Indemnityd.

_______underwrites or subscribes to a risk in return for the payment of premium by the assured.10. Underwritera. Insurerb. Ownerc. Creditord.

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Chapter III

Marine Insurance Act, 1963

Aim

The aim of this chapter is to:

definecontractofmarineinsurance•

explain different sections of Marine Insurance Act, 1963•

definesection2oftheact•

Objectives

The objectives of this chapter are to:

highlight the important sections of the Marine Insurance Act, 1963•

defineinsurableinterest•

explain the concept of disclosure•

Learning outcome

At the end of this chapter, you will be able to:

explain liabilities•

discuss warranties•

talk about vario• us different section of the Marine Insurance Act, 1963 in detail

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3.1 IntroductionAcontractofMarineInsurance,aspertheMarineInsuranceAct-1963,hasbeendefinedasacontractinwhichthe insurer agrees to cover the assured, in the manner and to the extent thereby agreed, against marine losses supplementary to marine adventure. The Act offers that a contract of marine insurance may be widened so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage. Every lawful marine adventure may be the matter of a contract of marine insurance. Subject to the provisions of this Act, every person has an insurable concern who is involved in a marine adventure.

3.2 Various sections of Marine Insurance Act, 1963Different sections of Marine Insurance Act, 1963 are discussed below:

3.2.1Section2DefinitionsIn this Act, unless the context otherwise requires:

“contractofmarineinsurance”meansacontractofmarineinsuranceasdefinedbysection3;a. “freight”includestheprofitderivablebyaship-ownerfromtheemploymentofhisshiptocarryhisowngoodsb. orothermovables,aswellasfreightpayablebyathirdparty,butdoesnotincludepassagemoney;“insurableproperty”meansanyship,goodsorothermovableswhichareexposedtomaritimeperils;c. “marine adventure” includes any adventure where-d.

anyinsurablepropertyisexposedtomaritimeperils;i. theearningsoracquisitionofanyfreight,passagemoney,commission,profitorotherpecuniarybenefit,ori. the security for any advances, loans, or disbursements is endangered by the exposure of insurable property tomaritimeperils; any liability to a third party may be incurred by the owner of, or other person interested in or responsible ii. for,insurablepropertybyreasonofmaritimeperils;

e. “maritime perils” means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils, oftheseas,fire,warperilspirates,rovers,thieves,captures,seizures,restraintsanddetainmentsofprincesandpeoples, jettisons, barratry and any other perils which are either of the like kind or may be designed by the policy;

f. “movables” means any movable tangible property, other than the ship, and includes money, valuable securities andotherdocuments;

g. “policy”meansamarinepolicy;h. “ship”includeseverydescriptionofvesselusedinnavigation;i. “suit” includes counter-claim and set-off.

3.2.2 Section 3 MarineInsuranceDefinedA contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine adventure.

3.2.3 Section 4 Mixed Sea and Land RisksA contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the 1. assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.Where a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure, 2. is covered by a policy in the form of a marine policy, the provisions of this Act, in so far as applicable, shall apply thereto, but, except as by this section provided, nothing in this Act shall alter or affect any rule of law applicabletoanycontractofinsuranceotherthanacontractofmarineinsuranceasbythisActdefined.

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Explanation - ‘An adventure analogous to a marine adventure’ includes an adventure where any ship, goods or other movables are exposed to perils incidental to local or inland transit.

3.2.4 Section 5 Lawful Marine AdventureSubject to the provisions of this Act, every lawful marine adventure may be the subject of a contract of marine insurance.

3.2.5 Section 6 Avoidance of Wagering ContractsEvery contract of marine insurance by way of wagering is void.1. A contract of marine insurance is deemed to be a wagering contract:2.

wheretheassuredhasnotaninsurableinterestasdefinedbythisAct,andthecontractisenteredintowitha. noexpectationofacquiringsuchaninterest;or b. (b) where the policy is made “interest or no interest”, or “without further proof of interest than the policy c. itself”,or“withoutbenefitofsalvagetotheinsurer”,orsubjecttoanyotherliketerm:

Provided that,wherethereisnopossibilityofsalvage,apolicymaybeaffectedwithoutbenefitofsalvagetotheinsurer”.

3.2.6 Section 7 InsurableInterestDefinedSubject to the provisions of this Act, every person has an insurable interest who is interested in a marine 1. adventure.In particular, a person is interested in a marine adventure where he stands in any legal or equitable relation to 2. theadventureortoanyinsurablepropertyatrisktherein,inconsequenceofwhichhemaybenefitbythesafetyor due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

3.2.7 Section 8 When Interest must AttachThe assured must be interested in the subject-matter insured at the time of the loss, though he need not be 1. interested when the insurance is effected:

Provided that, where the subject- matter is insured “lost or not lost”, the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.

Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after 2. he is aware of the loss.

3.2.8 Section 9 Defeasible or Contingent InterestA defensible interest is insurable, as also is a contingent interest.1. In particular, where the buyer of goods has insured them, he has an insurable interest, notwithstanding that 2. he might, at his election, have rejected the goods, or have treated them as at the seller’s risk, by reason of the latter’s delay in making delivery or otherwise.

3.2.9 Section 10 Partial InterestA partial interest of any nature is insurable.

3.2.10 Section 11 ReinsuranceThe insurer under a contract of marine insurance has an insurable interest in his risk, and may reinsure in respect 1.

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of it.Unless the policy otherwise provides, the original assured has no right or interest in respect of such 2. reinsurance.

3.2.11 Section 14 Advance FreightIn case of advance freight, the person advancing the freight has an insurable interest, in so far as such freight is not repayable in case of loss.

3.2.12 Section 15 Charges of InsuranceAn insurable interest has been assured in the charges of any insurance which he may affect.

3.2.13 Section 16 Quantum of InterestWhere the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, 1. and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf 2. andforthebenefitofotherpersonsinterestedaswellasforhisownbenefit.The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding 3. that some third person may have agreed, or be liable to indemnify him in case of loss.

3.2.14 Section 18 Measure of Insurable ValueSubject to any express provision or valuation in the policy, the insurable value of the subject-matter insured must be ascertained as follows:-

In insurance on ship, the insurable value is the value, at the commencement of the risk, of the ship, including 1. heroutfit,provisions,andstoresfor theofficersandcrew,moneyadvancedforseamen’swages,andotherdisbursements(ifany)incurredtomaketheshipfitforthevoyageoradventurecontemplatedbythepolicy,plus the charges of insurance upon the whole:The insurable value, in the case of a steamship, includes also the machinery, boilers, and coals and engine stores 2. ifownedbytheassured;inthecaseofashipdrivenbypowerotherthansteamincludesalsothemachineryandfuelsandenginestores,ifownedbytheassured;andinthecaseofashipengagedinaspecialtrade,includesalsotheordinaryfittingsrequisiteforthattrade:In insurance on freight, whether paid in advance or otherwise, the insurable value is the gross amount of the 3. freight at the risk of the assured, plus the charges of insurance.In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the 4. expenses of and incidental to shipping and the charges of insurance upon the whole.In insurance on any other subject- matter, the insurable value is the amount at the risk of the assured when the 5. policy attaches, plus the charges of insurance.

3.2.15 Section 20 Disclosure by AssuredSubject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, 1. every material circumstance which, is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract.Everycircumstanceismaterialwhichwouldinfluencethejudgmentofaprudentinsurerinfixingthepremium,2. or determining whether he will take the risk.In the absence of inquiry, the following circumstances need not be disclosed, namely:-3.

anycircumstancewhichdiminishestherisk;a. any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know b. matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his businessassuch,oughttoknow;anycircumstanceastowhichinformationiswaivedbytheinsurer;c.

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anycircumstancewhichitissuperfluoustodisclosebyreasonofanyexpressorimpliedwarranty.d. Whether any particular circumstance, which is not disclosed, be material or not is, in each case, question of 4. fact.The term “circumstance” includes any communication made to, or information received by, the assured.5.

3.2.16 Section 21 Disclosure by Agent Effecting InsuranceSubject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer-

every material circumstance which is known to himself, and an agent to insure is deemed to know every a. circumstance which in the ordinary course of business ought to be known by, or to have been communicated to,him;andevery material circumstance which the assured is bound to disclose, unless it comes to his knowledge too b. late to communicate it to the agent.

3.2.17 Section 23 When Contract is Deemed to be ConcludedA contract of marine insurance is deemed to be concluded when the proposal of the assured is ac-ceptedbytheinsurer,whetherthepolicybethenissuedornot;andforthepurposeofshowingwhenthe proposal was accepted, reference may be made to the slip, covering note or other customary memorandum of the contract, although it be unstamped.

3.2.18 Section 24 Contract must be Embodied in PolicyA contract of marine insurance shall not be admitted in evidence unless it is embodied in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards.

3.2.19 Section 25 What Policy must SpecifyA marine policy must specify:

the name of the assured, or of some person who effects the insurance on his behalf1. the subject-matter insured and the risk insured against2. the voyage, or period of time, or both, as the case may be, covered by the insurance3. the sum or sums insured4. the name or names of the insurer or insurers.5.

3.2.20 Section 26 Signature of InsurerA marine policy must be signed by or on behalf of the insurer.1. Where a policy is subscribed by or on behalf of two or more insurers, each subscription, unless the contrary be 2. expressed, constitutes a distinct contract with the assured.

3.2.21 Section 33 Premium to be ArrangedWhere an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable premium 1. is payable. Where an insurance is effected on the terms that an additional premium is to be arranged in a given event, and 2. that event happens out no arrangement is made, then a reasonable additional premium is payable.

3.2.22 Section 35 Nature of WarrantyA warranty, in the following sections relating to warranties, means a promissory warranty, that is to say a warranty 1. by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shallbefulfilled,orwherebyheaffirmsornegativestheexistenceofaparticularstateoffacts.A warranty may be express or implied.2.

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Awarranty,asabovedefined,isaconditionwhichmustbeexactlycompliedwith,whetheritbematerialto3. the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as form the date of the breach of warranty, but without prejudice to any liability incurred by him before that data.

3.2.23 Section 36 When Breach of Warranty ExcusedNon- compliance with a warranty is excused when by reason of a change of circumstances, the warranty ceases 1. to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law. Where a warranty is broken, the assured cannot avail himself of the defense that the breach has been remedied, 2. and the warranty complied with, before loss. A breach of warranty may be waived by the insurer.3.

3.2.24 Section 37 Express WarrantiesAn express warranty may be in any form of words from which the intention to warrant is to be inferred. 1. An express warranty must be included in, or written upon the policy, or must be contained in some document 2. incorporated by reference into the policy. An express warranty does not exclude implied warranty, unless it be inconsistent therewith.3.

3.2.25 Section 39 No Implied Warranty of NationalityThere is no implied warranty as to the nationality of a ship or that her nationality shall not be changed during the risk.

3.2.26 Section 40 Warranty of Good SafetyWherethesubject-matterinsurediswarranted“well”or“ingoodsafety”onaparticularday,itissufficientifitbesafe at any time during that day.

3.2.27 Section 41 Warranty of Seaworthiness of ShipIn a voyage policy, there is an implied warranty that at the commencement of the voyage the ship shall be 1. seaworthy for the purpose of the particular adventure insured. Where the policy attaches while the ship is in port, there is also an implied warranty that she shall, at the 2. commencementoftherisk,bereasonablyfittoencountertheordinaryperilsoftheport.Where the policy relates to a voyage which is performed in different stages, during which the ship requires 3. different kinds of or further preparation or equipment, there is an implied warranty that at the commencement of each stage the ship is seaworthy in respect of such preparation or equipment for the purposes of that stage. Ashipisdeemedtobeseaworthywhensheisreasonablyfitinallrespectstoencountertheordinaryperilsof4. the seas of the adventure insured. In a time policy, there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but 5. where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer in not liable for any loss attributable to unseaworthiness.

3.2.28 Section 42 No Implied Warranty that Goods are SeaworthyIn a policy on goods or other movables, there is no implied warranty that the goods or movables are 1. seaworthy. In a voyage policy on goods or other movables, there is an implied warranty that at the commencement of the 2. voyagetheshipisnotonlyseaworthyasaship,butalsothatsheisreasonablyfittocarrythegoodsorothermovables to the destination contemplated by the policy.

3.2.29 Section 43 Warranty of LegalityThere is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner.

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3.2.30 Section 44 Implied Condition as to Commencement of RiskWhere the subject-matter is insured by a voyage policy “at and from” or “from” a particular place, it is not 1. necessary that the ship should be at that place when the contract is concluded, but there is an implied condition that the adventure shall be commenced within a reasonable time, and that if the adventure be not so commenced the insurer may avoid the contract. The implied condition may be negative by showing that the delay was caused by circumstances known to the 2. insurer before the contract was concluded, or by showing that he waived the condition.

3.2.31 Section 45 Alteration of Port of DepartureWheretheplaceofdepartureisspecifiedbythepolicyandtheshipinsteadofsailingfromthatplacesailsfromanyother place, the risk does not attach.

3.2.32 Section 46 Sailing for Different DestinationWherethedestinationisspecifiedinthepolicy,andtheship,insteadofsailingforthatdestination,sailsforanyother destination, the risk does not attach.

3.2.33 Section 47 Change of VoyageWhere, after the commencement of the risk, the destination of the ship is voluntarily changed from the destination 1. contemplated by the policy, there is said to be a change of voyage. Unless the policy otherwise provides, where there is a change of voyage, the insurer is discharged from liability 2. asfromthetimeofchange,thatistosay,asfromthetimewhenthedeterminationtochangeitismanifested;and it is immaterial that the ship may not in fact have left the course of voyage contemplated by the policy when the loss occurs.

3.2.34 Section 48 DeviationWhere a ship, without lawful excuse, deviates from the voyage contemplated by the policy, the insured is 1. discharged from liability as from the time of deviation, and it is immaterial that the ship may have regained her route before any loss occurs.There is a deviation from the voyage contemplated by the policy-2.

wherethecourseofthevoyageisspecificallydesignatedbythepolicy,andthatcourseisdepartedfrom;a. orwherethecourseofthevoyageisnotspecificallydesignedbythepolicy,buttheusualandcustomarycourseb. is departed from.

Theintentiontodeviateisimmaterial;theremustbeadeviationinfacttodischargetheinsurerfromhisliability3. under the contract.

3.2.35 Section 49 Several Ports of DischargeWhereseveralportsofdischargearespecifiedbythepolicy,theshipmayproceedtoalloranyofthem,but,in1. theabsenceofanyusageorsufficientcausetothecontrary,shemustproceedtothem,orsuchofthemasshegoes to, in the order designated by the policy. If she does not there is a deviation. Where the policy is to “ports of discharge” within a given area, which are not named, the ship must, in the 2. absenceofanyusageorsufficientcausetothecontrary,proceedtothem,orsuchofthemasshegoesto,intheirgeographical order. If she does not there is a deviation

3.2.36 Section 50 Delay in VoyageIn case of a voyage policy, the adventure insured must be prosecuted throughout its course with reasonable dispatch, and;ifwithoutlawfulexcuseitisnotsoprosecuted,theinsurerisdischargedfromliabilityasfromthetimewhenthe delay became unreasonable.

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3.2.37 Section 51 Excuse for Deviation or DelayDeviation or delay in prosecuting the voyage contemplated by the policy is excused-1.

whereauthorisedbyanyspecialterminthepolicy;ora. wherecausedbycircumstancesbeyondthecontrolofthemasterandhisemployer;orb. wherereasonablynecessaryinordertocomplywithanexpressorimpliedwarranty;orc. wherereasonablynecessaryforthesafetyoftheshiporsubject-matterinsured;ord. forthepurposeofsavinghumanlifeoraidingashipindistresswherehumanlifemaybeindanger;ore. where reasonably necessary for the purpose of obtaining medical or surgical aid for any person on board f. theship;or where caused by the barratrous conduct of the master or crew, if barratry be one of the perils insured g. against.

When the cause excusing the deviation or delay ceases to operate, the ship must resume her course, and prosecute 2. her voyage, with reasonable dispatch.

3.2.38 Section 52 When and How Policy is AssignableA marine policy may be transferred by assignment unless it contains terms expressly prohibiting assignment. 1. It may be assigned either before or after loss.Whereamarinepolicyhasbeenassignedsoastopassthebeneficialinterestinsuchpolicy,theassigneeof2. thepolicyisentitledtosuethereoninhisownname;andthedefendantisentitledtomakeanydefensearisingout of the contract which he would have been entitled to make if the suit had been brought in the name of the person by or on behalf of whom the policy was effected.A marine policy may be assigned by endorsement thereon or in other customary manner.3.

3.2.39 Section 53 Assured Who has no Interest cannot AssignWhere the assured has parted with or lost his interest in the subject-matter insured, and has not, before or at the time of so doing expressly or impliedly agreed to assign the policy, any subsequent assignment of the policy is inoperative: Provided that nothing in this section affects the assignment of a policy after loss.

3.2.40 Section 54 When Premium PayableUnless otherwise agreed, the duty of the assured or his agent to pay the premium, and the duty of the insurer to issue the policy to the assured or his agent, is concurrent conditions, and the insurer is not bound to issue the policy until payment or tender of the premium.

3.2.41 Section 55 Included and Excluded LossesSubject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss 1. proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.

In particular-2. the insurer is not liable for any loss attributable to the willful misconduct of the assured, but, unless the policy a. otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the losswouldnothavehappenedbutforthemisconductornegligenceofthemasterorcrew;unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately b. causedbyalthoughthedelaybecausedbyaperilinsuredagainst;unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage c. and breakage, inherent vice or nature of the subject-matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.

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3.2.42 Section 56 Partial and Total LossAlossmaybeeithertotalorpartial.Anylossotherthanatotalloss,ashereinafterdefined,isapartialloss.1. A total loss may be either an actual total loss, or a constructive total loss.2. Unless a different intention appears form the terms of the policy, an insurance against total loss includes a 3. constructive, as well as an actual, total loss.Where the assured brings a suit for a total loss and the evidence proves only a partial loss, he may, unless the 4. policy otherwise provides, recover for a partial loss.Where goods reach their destination in specie, but by reason of obliteration of marks, or otherwise, they are 5. incapableofidentification,theloss,ifany,ispartialandnottotal.

3.2.43 Section 57 Actual Total LossWhere the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or 1. where the assured is irretrievably deprived thereof, there is an actual total loss.In the case of an actual total loss, no notice of abandonment need be given.2.

3.2.44 Section 58 Missing ShipWhere the ship concerned in the adventure is missing, and when no news of it has been received, after the lapse of a reasonable time, an actual total loss may be presumed.

3.2.45 Section 59 Effect of Transhipment, etc.Where, by a peril insured against, the voyage is interrupted at intermediate port or place, under such circumstances as, apart from any special stipulation in the contract of affreightment, to justify the master in landing and reshipping the goods or other movables, or in transshipping them, and sending them on to their destination, the liability of the insurer continues, notwithstanding the landing or transhipment

3.2.46Section60ConstructiveTotalLossDefinedSubject to any express provision in the policy, there is a constructive total loss where the subject-matter insured 1. is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred. In particular, there is a constructive total loss-2.

i. where the assured is deprived of the possession of his ship or goods by a peril insured against, and a. it is unlikely that he can recover the ship or goods, as the case may be, or b. the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered;or

ii. in the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repair-ing the damage would exceed the value of the ship when repaired.

In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any futuregeneralaveragecontributionstowhichtheshipwouldbeliableifrepaired;or

iii. 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.

3.2.47 Section 61 Effect of Constructive Total LossWhere there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.

3.2.48 Section 62 Notice of AbandonmentSubject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the 1. insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.

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Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word 2. of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer.Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the 3. loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make enquiry.Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the 4. insurer refuses to accept the abandonment.The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere 5. silence of the insurer after notice is not an acceptance.Where notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice 6. conclusivelyadmitsliabilityforthelossandthesufficiencyofthenotice.Notice of abandonment is unnecessary where at the time when the assured receives information of the loss, 7. therewouldbenopossibilityofbenefittotheinsurerifnoticeweregiventohim.Notice of abandonment may be waived by the insurer.8. Where an insurer has reinsured his risk, no notice or abandonment need be given by him.9.

3.2.49 Section 63 Effect of AbandonmentWhere there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever 1. may remain of the subject-matter insured, and all proprietary rights incidental thereto.Upon the abandonment of a ship, the insurer thereof is entitled to any freight in course of being earned, and which 2. is earned by her subsequent to the casualty causing the loss, less the expenses of earning it incurred after the casualty;and,wheretheshipiscarryingtheowner’sgoods,theinsurerisentitledtoareasonableremunerationfor the carriage of them subsequent to the casualty causing the loss.

Partial losses (including salvage and general average and particular charges)

3.2.50 Section 64 Particular Average LossA particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and 1. which is not a general average loss. Expenses incurred by or on behalf of the assured for the safety or preservation of the subject-matter insured, 2. other than general average and salvage charges, are called particular charges. Particular charges are not included in particular average.

3.2.51 Section 65 Salvage ChargesSubject to any express provision in the policy, salvage charges incurred in preventing a loss by perils insured 1. against may be recovered as a loss by those perils.“Salvage charges” are the charges recoverable under maritime law by a salvor independently of contract. They do 2. not include the expenses of services in the nature of salvage rendered by the assured or his agents, or any person employed for hire by them, for the purpose of averting a peril insured against. Such expenses, where properly incurred, may be recovered as particular charges or as a general average loss, according to the circumstances under which they were incurred.

3.2.52 Section 66 General Average LossA general average loss is a loss caused by or directly consequential on a general average act. It includes a general 1. averageexpenditureaswellasageneralaveragesacrifice.Thereisageneralaverageactwhereanyextraordinarysacrificeorexpenditureisvoluntarilyandreasonablymade2. or incurred in time of peril for the purpose of preserving the property imperiled in the common adventure.Where there is a general average loss, the party on whom it falls is entitled, subject to the conditions imposed 3. by maritime law, to a rateable contribution from the other parties interested, and such contribution is called a general average contribution.Subject to any express provision in the policy, where the assured has incurred a general average of expenditure, 4.

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hemayrecoverfromtheinsurerinrespectoftheproportionofthelosswhichfallsuponhim;andinthecaseofageneralaveragesacrifice,hemayrecoverfromtheinsurerinrespectofthewholelosswithouthavingenforcedhis right of contribution from the other parties liable to contribute.Subject to any express provision in the policy, where the assured has paid, or is liable to pay, a general average 5. contribution in respect of the interest insured, he may recover therefor from the insurer.In the absence of express stipulation, the insurer is not liable for any general average loss or contribution where 6. the loss was not incurred for the purpose of avoiding, or in connection with the avoidance of a peril insured against.Where ship, freight, and cargo, or any two of those interests, are owned by the same assured, the liability of the 7. insurer in respect of general average losses or contributions to be determined as if those interests were owned by different persons.

3.2.53 Section 67 Extent of Liability of Insurer for LossThe sum which the assured can recover in respect of a loss on a policy by which he is insured, in the case of an 1. unvalued policy to the full extent of the insurable value, or, in the case of a valued policy to the full extent of thevaluefixedbythepolicy,iscalledthemeasureofindemnity.Where there is a loss recoverable under the policy, the insurer, or each insurer if there be more than one, is liable 2. forsuchproportionofthemeasureofindemnityastheamountofhissubscriptionbearstothevaluefixedbythe policy in the case of a valued policy, or to the insurable value in the case of an unvalued policy.

3.2.54 Section 68 Total lossSubject to the provisions of this Act, and to any express provision in the policy, where there is a total loss of the subject-matter insured-

ifthepolicybeavaluedpolicy,themeasureofindemnityisthesumfixedbythepolicy;1. If the policy be an unvalued policy, the measures of indemnity is the insurable value of the subject-matter 2. insured.

3.2.55 Section 69 Partial Loss of ShipWhere a ship is damaged, but is not totally lost, the measure of indemnity subject to any express provision in the policy, is as follows-

where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary 1. deductions,butnotexceedingthesuminsuredinrespectofanyonecasualty;where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs, 2. computedasabove,andalsotobeindemnifiedforthereasonabledepreciation,ifany,arisingfromtheunrepaireddamage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed asabove; where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is 3. entitledtobeindemnifiedforthereasonabledepreciationarisingfromtheunrepaireddamage,butnotexceedingthereasonablecostofrepairingsuchdamage,computedasabove;where the ship has not been repaired, and has been sold in her damaged state during the risk, the assured is 4. entitledtobeindemnifiedforthereasonablecostofrepairingthedamage,computedasabove,butnotexceedingthe depreciation in value as ascertained by the sale.

3.2.56 Section 70 Partial Loss of FreightSubject to any express provision in the policy, where there is a partial loss of freight, the measure of indemnity is suchproportionofthesumfixedbythepolicyinthecaseofavaluedpolicyoroftheinsurablevalueinthecaseof an unvalued policy, as the proportion of freight lost by the assured bears to the whole freight at the risk of the assured under the policy.

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3.2.57 Section 71 Partial Loss of Goods, Merchandise, etc. Where there is a partial loss of goods, merchandise, or other movables, the measure of indemnity, subject of any express provision in the policy, is as follows:-

where part of the goods, merchandise or other movables insured by a valued policy is totally lost, the measure 1. ofindemnityissuchproportionofthesumfixedbythepolicyastheinsurablevalueofthepartlostbearstotheinsurablevalueofthewholeascertainedasinthecaseofanunvaluedpolicy;where part of the goods, merchandise or other movables insured by an unvalued policy is totally lost, the measure 2. ofindemnityistheinsurablevalueofthepartlost,ascertainedasincaseoftotalloss;where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination, 3. themeasureofindemnityissuchproportionofthesumfixedbythepolicyinthecaseofavaluedpolicy,orofthe insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged valuesattheplaceofarrivalbearstothegrosssoundvalue;“Gross value” means the wholesale price, or, if there be no such price, the estimated value, with, in either 4. case,freight,landingcharges,anddutypaidbeforehand;providedthat,inthecaseofgoodsormerchandisecustomarily sold in bond, the bonded price is deemed to be the gross value. “Gross proceeds” means the actual price obtained at a sale where all charges on sale are paid by the sellers.

3.2.58 Section 72 Apportionment of ValuationWhere different species of property are insured under a single valuation, the valuation must be apportioned over 1. the different species in proportion to their respective insurable values, as in the case of an unvalued policy. The insured value of any part of a species is such proportion of the total insured value of the same as the insurable value of the part bears to the insurable value of the whole, ascertained in both cases as provided by this Act.Where a valuation has to be apportioned, and particulars of the prime cost of each separate species, quality, 2. or description of goods cannot be ascertained, the division of the valuation may be made over the net arrived sound values of the different species, qualities, or descriptions of goods.

3.2.59 Section 73 General Average Contributions and Salvage ChargesSubject to any express provision in the policy, where the assured has paid, or is liable for, any general average 1. contribution, the measure of indemnity is the full amount of such contribution if the subject-matter liable to contribution is insured for its full contributoryvalue;but, if such subject-matterbenot insured for its fullcontributory value, or if only part of it be insured, the indemnity payable by the insurer must be reduced in proportion to the under-insurance, and where there has been a particular average loss which constitutes a deduction from the contributory value, and for which the insurer is liable, that amount must be deducted from the insured value in order to ascertain what the insurer is liable to contribute.Where the insurer is liable for salvage charges, the extent of his liabilities must be determined on the like 2. principle.

3.2.60 Section 74 Liabilities to Third PartiesWhere the assured has affected insurance in express terms against any liability to a third party, the measure of indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party in respect of such liability.

3.2.61 Section 75 General Provisions as to Measure of IndemnityWhere there has been a loss in respect of any subject-matter not expressly provided for in the foregoing 1. provisions of this Act, the measure of indemnity shall be ascertained as nearly as may be, in accordance with those provisions, in so far as applicable to the particular case.Nothing in the provisions of this Act relating to the measure of indemnity shall affect the rules relating to double 2. insurance, or prohibit the insurer from disproving interest wholly or in part, or from showing that at the time of the loss the whole or any part of the subject-matter insured was not at risk under the policy.

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3.2.62 Section 76 Particular Average WarrantiesWhere the subject-matter insured is warranted free from particular average, the assured cannot recover for 1. alossofpart,otherthanalossincurredbyageneralaveragesacrifice,unlessthecontractcontainedinthepolicybeapportionable;but,ifthecontractbeapportionable,theassuredmayrecoverforatotallossofanyapportionable part.Where the subject-matter insured is warranted free from particular average, either wholly or under a certain 2. percentage, the insurer is nevertheless liable for salvage charges, and for particular charges and other expenses properly incurred pursuant to the provisions of the suing and laboring clause in order to avert a loss insured against.Unless the policy otherwise provides, where the subject-matter insured is warranted free from particular average 3. underaspecifiedpercentage,ageneralaveragelosscannotbeaddedtoaparticularaveragelosstomakeupthespecifiedpercentage.Forthepurposeofascertainingwhetherthespecifiedpercentagehasbeenreached,regardshallbehadonlyto4. the actual loss suffered by the subject-matter insured. Particular charges and the expenses of and incidental to ascertaining and proving the loss must be excluded.

3.2.63 Section 77 Successive LossesUnless the policy otherwise provides, and subject to the provisions of this Act, the insurer is liable for successive 1. losses, even though the total amount of such losses may exceed the sum insured.Where under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed 2. by a total loss, the assured can only recover in respect of the total loss :

Provided that nothing in this section shall affect the liability of the insurer under the suing and laboring clause.

3.2.64 Section 78 Suing and Labouring ClauseWhere the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be 1. supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-matter may have been warranted free from particular average, either wholly or under a certain percentage.Generalaveragelossesandcontributionsandsalvagecharges,asdefinedbythisAct,arenotrecoverableunder2. the suing and labouring clause. Expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable 3. under the suing and labouring clause. It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the 4. purpose of averting or minimizing a loss.

3.2.65 Section 79 Rights of SubrogationWhere the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of 1. the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss. Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-2. matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in sofarastheassuredhasbeenindemnified,accordingtothisAct,bysuchpaymentfortheloss.

3.2.66 Section 80 Right of ContributionWhere the assured is over-insured by double insurance each insurer is bound, as between himself and the other 1. insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. If any insurer pays more than his proportion of the loss, he is entitled to maintain a suit for contribution against 2. the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt.

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3.2.67 Section 81 Effect of Under-InsuranceWhere the assured is insured for an amount less than the insurable value, or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance.

3.2.68 Section 82 Enforcement of ReturnWhere the premium, or a proportionate part thereof, is, by this Act, declared to be returnable-

if already paid, it may be recovered by the assured from the insurer, and, a. if unpaid, it may be retained by the assured or his agent.b.

3.2.69 Section 83 Return by AgreementWhere the policy contains a stipulation for the return of the premium, or a proportionate part thereof, on the happening of a certain event, and that event happens, the premium, or, as the case may be, the proportionate part thereof, is thereupon returnable to the assured.

3.2.70 Section 84 Return for Failure of ConsiderationWhere the consideration for the payment of the premium totally fails, and there has been no fraud or illegality 1. on the part of the assured or his agents, the premium is thereupon returnable to the assured.Where the consideration for the payment of the premium is apportionable and there is a total failure of any 2. apportionable part of the consideration, a proportionate part of the premium is, under the like conditions, thereupon returnable to the assured. In particular-3.

where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium a. isreturnable,providedtherehasbeennofraudorillegalityonthepartoftheassured;butiftheriskisnotapportionable,andhasonceattached,thepremiumisnotreturnable;where the subject-matter insured, or part thereof, has never been imperiled the premium, or, as the case may b. be, a proportionate part thereof, is returnable :

Provided that where the subject-matter has been insured “lost or not lost”, and has arrived in safety at the time when the contract is concluded, the premium is not returnable unless, at such time, the insurer knew of the safe arrival;

where the assured has no insurable interest throughout the currency of the risk the premium is returnable, c. providedthatthisruledoesnotapplytoapolicyeffectedbywayofwagering;where the assured has a defensible interest which is terminated during the currency of the risk, the premium d. isnotreturnable;where the assured has over-insured under an unvalued policy, a proportionate part of the premium is e. returnable;subject to the foregoing provisions, where the assured has over-insured by double insurance, a proportionate f. part of the several premiums is returnable:

Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.

3.2.71Section85RatificationbyAssuredWhere a contract of marine insurance is in good faith effected by one person on behalf of another, the person on whose behalf it is effected may ratify the contract even after he is aware of a loss.

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3.2.72 Section 86 Implied Obligation Varied by Agreement or UsageWhere any right, duty, or liability would arise under a contract of marine insurance by implication of law, it 1. may be negative or varied by express agreement, or by usage, if the usage be such as to bind both parties to the contract. The provisions of this section extend to any right, duty, or liability declared by this Act which may be lawfully 2. modifiedbyagreement.

3.2.73 Section 87 Reasonable Time, etc., a Question of FactWhere by this Act, any reference is made to reasonable time, reasonable premium, or reasonable diligence, the question what is reasonable is a question of fact.

3.2.74 Section 88 Covering Note as EvidenceWhere there is a duly stamped policy, reference may be made, as heretofore, to the slip or covering note, in any legal proceeding.

3.2.75Section89PowertoApplyActwithModifications,etc.,inCertainCasesTheCentralGovernmentmay,bynotificationintheOfficialGazette,directthattheprovisionsofthisActshall,intheir application to contracts of marine insurance relating to any class of ships exclusively used in inland navigation, besubjecttosuchconditions,exceptionsandmodificationsasitmayspecifyinthenotification.

3.2.76 Section 90 Certain Provisions to Override Transfer of Property Act, 1882Nothing in clause (e) of section 6 of the Transfer of Property Act, 1882, shall affect the provisions of sections 17, 52, 53 and 79.

3.2.77 Section 91 SavingsThe rules of law, including the law merchant, which applied to contracts of marine insurance immediately before the commencement of this Act, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to contracts of marine insurance.

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SummaryAcontractofMarineInsurance,aspertheMarineInsuranceAct-1963,hasbeendefinedasacontractinwhich•the insurer agrees to cover the assured, in the manner and to the extent thereby agreed, against marine losses supplementary to marine adventure.The Act offers that a contract of marine insurance may be widened so as to protect the assured against losses •on inland waters or on any land risk which may be incidental to any sea voyage."Contractofmarineinsurance"meansacontractofmarineinsuranceasdefinedbysection3;•"Freight"includestheprofitderivablebyaship-ownerfromtheemploymentofhisshiptocarryhisowngoods•orothermovables,aswellasfreightpayablebyathirdparty,butdoesnotincludepassagemoney;"Insurableproperty"meansanyship,goodsorothermovableswhichareexposedtomaritimeperils;•"Maritime perils" means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils, •oftheseas,fire,warperilspirates,rovers,thieves,captures,seizures,restraintsanddetainmentsofprincesandpeoples, jettisons, barratry and any other perils which are either of the like kind or may be designed by the policy;

ReferencesAdvocate Khoj.• Marin Insurance Act, 1963 [Online]. Available at: <http://www.advocatekhoj.com/library/bareacts/marineinsurance/9.php?Title=Marine%20Insurance%20Act,%201963&STitle=Defensible%20or%20contingent%20interest>. [Accessed 18th June 2011]. InterLog.• Effecting a Marine Insurance Policy [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p196.htm>. [Accessed 16 June 2011].Slideshare• . Practice of General Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-principles-and-practice-of-general-insurance>. [Accessed 17 June 2011].Marine INsurance Zone. • Principles of Marine Cargo Insurance [Online] Available at: <http://marineinsurance2u.com/marine-cargo/principles-of-marine-cargo-insurance/>. [Accessed 18 June 2011].LES 306 BUSINESS LAW ASU WEST • [video online] Available at: <http://www.youtube.com/watch?v=ePv5QapHaxs&feature=related>. [Accessed 18 June 2011].Legal Rights under Implied Warranties • [video online] Available at: <http://www.youtube.com/watch?v=ePv5QapHaxs&feature=related>. [Accessed 18 June 2011].

Recommended ReadingTyagi, L., Tyagi, M. & Tyagi, M., 2007. • Insurance Law and Practice, C. Publisher Atlantic Publishers & Dist, p. 400.Hodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.Bose, C., • Business Law, PHI Learning Pvt. Ltd.Soyer, B., 2005. • Warranties in Marine Insurance. 2nd ed., Routledge, p. 312.

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Self Assessment

The earnings derivable by a ship-owner from the service of his ship to carry his own goods or other movables 1. are known as________.

freighta. insurable propertyb. marine adventurec. maritime perilsd.

Any ship, goods or other movables which are exposed to maritime perils is known as__________.2. freighta. insurable propertyb. marine adventurec. maritime perilsd.

Any movable tangible asset, other than the ship which includes valuable securities, money and other documents 3. is called as_____.

movablesa. shipb. perilsc. adventured.

Every _________of the marine insurance is invalid by means of wagering.4. contracta. claimb. sectionc. perilsd.

Defeasible or contingent interest is described in _____ of Marine Insurance Act, 1963.5. Section 3a. Section 9b. Section 10c. Section 11d.

Section 11 of Marine Insurance Act, 1963 includes ________.6. Reinsurancea. Partial interestb. Marine insurancec. Contingent interestd.

Which term _________includes any communication made to, or information received by, the assured?7. Quantum of interesta. Charges of insuranceb. Advance freightc. Circumstanced.

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Freight does not include passage money and also payable by the ______party.8. thirda. firstb. secondc. fourthd.

Which of the statements is false?9. The original assured has the right or interest regarding such reinsurance except the policy offers.a. The insurer may reinsure under a contract of marine insurance and also has an insurable interest in his b. risk. Any partial interest is insurable.c. A defeasible interest is insurable, like is a contingent interest.d.

Which of the statements is true?10. A contract of marine insurance shall be admitted in evidence unless it is embodied in a marine policy in a. accordance with this Act.A marine policy must be signed by or on behalf of the creditor.b. Where an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable c. premium is payable.A warranty may not be expressed or implied.d.

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Chapter IV

Types of Marine Insurance in India

Aim

The aim of this chapter is to:

introduce the concept of marine cargo insurance•

discuss the conditions of insurance•

state the ship owner’s interest•

Objectives

The objectives of this chapter are to:

explain the peculiarities of marine cargo insurance•

highlight other provisions applicable to marine insurance•

classify marine hull•

Learning outcome

At the end of this chapter, you will be able to:

explain hull and the machinery of hull•

illustrate the scope of marine hull insurance•

discu• ss stamp duty

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4.1 IntroductionMarine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property istransferred,acquired,orheldbetweenthepointsoforiginandfinaldestination.Cargoinsuranceisasub-branchof marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals, ports,oilplatforms,pipelines);Hull;MarineCasualty;andMarineLiability.Inthischapter,wewillstudydifferenttypes of Marine Insurance in India.

4.2 Marine Cargo InsuranceThe peculiarities of Marine Cargo Insurance are as mentioned under:

A policy of Marine Cargo Insurance is freely assignable. A foreign exporter might arrange insurance and raise •a CIF Invoice. After dispatch of the cargo and submission of documents to his banker, he releases his sale proceeds. Once the sale proceeds are paid by the Indian buyer, he gets an insurable interest in the goods. The loss or damage to the cargo after that point is a loss to the importer even though the policy stands in the name of the foreign supplier. The supplier simply endorses the policy in favour of the buyer upon which all the rights and remedies under the policy are transferred to the buyer, including the proprietary rights. Therefore, unlike other policies, the Marine Cargo Policy is freely assignable or freely transferable, with the transfer of ownership.Under the Marine Cargo insurance, insurable interest need not be there at the time of the proposal or at the time •of policy issuance. However, insurable interest is a must at the time of a claim.MarineCargoInsuranceisalwaysonAgreedValueBasis.Thesuminsuredunderthepolicyisfixedonthebasis•of agreement between the insured and the insurer.The indemnity provided under the Marine Cargo Policy is one of commercial indemnity unlike other policies •which are contracts of pure indemnity.Allotherpoliciesareforadefiniteperiodoftime.Butthemarinecargopolicycoversthecargoonlyduring•the time of its transit from warehouse to warehouse. Once the consignment reaches its destination, the policy automatically ceases, subject to the limitations under the transit clause.Stamp duty is recovered from the insured in marine insurance.•Policies are issued on Lost or Not Lost Basis.•Surveyors fees are payable only if the claim is admissible under the policy.•

4.2.1 Mode of Conveyance

For transportation of cargo, different modes of conveyance are used by the shipper, depending upon the •contemplated voyage. A Marine underwriter is required to analyse various features involved in different types of transportation systems. With regard to shipment by an Ocean going vessel, the underwriter is required to consider the period of transit •involved and the type of vessel engaged for the carriage of cargo. The name and age of the vessel, its tonnage (capacity)classificationandownership,etc.,arerequiredtobechecked.An over age vessel or an under tonnage vessel can lead to greater hazard from the insurance point of view. It •is also important to check whether the vessel is classed or not. From the underwriting point of view, classed vessels are considered safer in comparison to non-classed vessels.

4.2.2 Voyage

The conditions prevailing at ports of shipment and destination have a bearing on the rates of premium charged •for cargo insurance. Some ports are highly congested causing delay in shipment and discharge. Other ports are notorious for theft and pilferages. Yet others may be prone to labour unrest. Other factors to be considered by the underwriter are political unrest, administrative laxity in enforcement of •law, lack of adequate facilities for safe handling of cargo, proper storage and movement. Some ports do not allow berth to a damaged ship or a ship with damaged cargo, some prohibit discharge of damaged pellets, cases, whereas in some, the turnaround time is high. Some ports have handling and warehousing facilities like shore tank farms, forklifts, cranes etc. and provide separate terminals for bulk cargo, containerised cargo, etc.

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The season or period of voyage also has a bearing or premium rates e.g., insurances on coastal shipments during •the monsoon period attract extra premium, as the cargo is exposed to enhanced perils due to adverse weather conditions.In transit from one port to another, the vessel is likely to pass through various zones which are associated with •specifictypesofweather.Anexperiencedunderwriterisexpectedtohaveabroadideaofthegeographicandeconomic aspects and the major changes in the weather prevailing in various parts of the world during different seasons. Maritime losses are closely related to general climatic and local weather conditions, monsoons, cyclones, storms, •etc. The occurrence of wind storms which depends on the various latitudes and the pattern of Trade winds would provide a reliable guide to the Underwriter in assessing the safety of the cargo on a said voyage.

4.2.3 Conditions of InsurancePremium rates vary according to the terms and conditions of insurance. Thus, if insurance cover is sought on the basis of Institute Cargo Clauses (C), the rates will be the lowest, whereas, they will be the highest for Institute Cargo Clause (A), i.e., ‘All Risks’ cover.

Past claims experience•Premiumratesaregenerallyfixedonthebasisofpast lossexperience.Theratewillvaryfromclient toclient,depending on their claims experience, approach to packaging and business attitude.

4.2.4 Cargo Inland Transit and Export/Import

The movement of cargo within the country is known as Inland Transit. The inland transit of the cargo may be •by Rail or Road or Inland water -ways and Coastal shipments. Sending by Air and Post are also likely.Manufacturersrequiretransitinsurancecoverforrawmaterialpurchasedbythemandfinishedgoodssuppliedto•their customers. An open policy is issued to cover a number of incoming and outgoing consignments automatically, if the insurance is required only for inland transit. For regular exporters and importers, continuous and automatic insurance protection is afforded by the Open •Cover. The Open Policy is an ordinary cargo policy expressed in general terms and the sum insured affected for anamountsufficienttocoveranumberofdispatches.Thus,thesuminsuredisadjustedagainsteachsendingandsoitiscalledafloatingpolicy.

4.2.5 Other Provisions Applicable to Marine Insurance

The Marine Policy cannot be issued to transport companies, transport contractors, freight forwarders or clearing/•forwarding and commission agents, except on goods owned by them.Loading on the carrying vehicle/wagon in the warehouse before the commencement of the transit may be •coveredonthepaymentofappropriateextrapremium.Thisshouldbespecificallymentionedonthefaceofthe policy.In case of dispatches by private carriers or under special contracts where the carriers limit their liability, the •liability of the insurers shall be limited to 75% of the assessed loss. However, if in the above circumstances, the insured choose to pay an additional premium of 50% over and above the appropriate premium, the company’s liability will be 90% of the assessed loss. Marine covers other than Hulls are:

In the case of inland shipments and transit risks, risk may be assumed under open policies in respect of �seasonal crops such as tea on the payment of a provisional premium based on a fair estimate.In the case of exports overseas, risk may be assumed subject to the condition that the premium shall be paid �withinfifteendaysfromthedateofsailingoftheoverseasvessel.In the case of imports, risk may be assumed subject to the condition that the premium shall be paid within �fifteendaysofthereceiptofdeclarationinIndiafromtheorinsured’srepresentativeoverseas.Providedthat the relaxation under sub-clauses (ii) and (iii) shall apply to marine cover notes only and not to marine policies.approvalofvesselsloadingexportcargoatIndianportsvesselsotherthanundertheIndianflagarerequired �

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to be approved by G.I.C. either in their own name and for the voyage or in the name of the operating shipping company. For this purpose, it is necessary for the ship owner or the shipping company to submit an application to G.I.C. in the prescribed form, well in advance of sailing of the vessel. If the shipping company is approved by G.I.C., all vessels belonging to them stand approved for all voyages until further notice. There are over 20 such shipping companies on G.I.C.’s approved list. If the vessel alone is approved, the approval is valid only for that voyage.Insurance of imports per vessel from Singapore, Malaysia and the Far East (Excluding Japan and Mainland �China) the vessel should either be (a) approved by the G.I.C. for loading export cargo in India and coming backwithnochangeinownershipandoperationor(b)fixedbyTranchartonaccountofpublicsectorundertakings such as STC, MMTC, SAIL, etc. Otherwise, the assured will have to get the vessel designated to load the cargo approved by the insurer in India. The second requirement is that the loading of cargo at the port of shipment on board the vessel should be supervised by a surveyor approved by the insurers in Indiaandtheproductionoftheirsurveyreport/certificateinregardtothequantityofcargoloadedonthevessel.

Approval of vessels bringing full load import cargo to India. The system of approval of vessels carrying the full load of import cargo to India was introduced as a loss minimisation method. Approval of vessels bringing import cargo is required for all vessels from any country in the world, for both public and private sector clients for the purpose of insurance in India.

4.3 Hull InsuranceAmerchantshipisanelongatedfloatingboxmadeofwelded(occasionallyriveted)steelframesandplates.Thebody of this structure is known as the Hull.

4.3.1 Hull and Machinery of Hull

The structure of a ship is called the hull. It is divided into three parts, fore, mid ship and aft. Hull and machinery, •as per policy includes superstructures, bunkers / coal stores, provisions, chains, cables, anchors, etc.The curved surface of the fore part is called the Bow and the curved surface of the rear or aft is called the stern. •The left hand side (when you are facing the Bow) is the Port side and the right hand side is the starboard side. The engine room and navigation deck are at the stern. The cargo is stowed in the Holds and the openings of the •holds are protected by hatch covers. double bottom tanks are used for carrying ballast and fuel.

4.3.2ShipClassificationClassification of ships is a devicewhichhas been in use for over 200years to informnot only the insuranceunderwriter, but all other interested parties that a particular ship and her equipment comply with the accepted standardsofstructuralandmechanicalreliability.Ashipmustnotonlybeefficientlydesigned,butitmustalsobesoundly built and properly maintained. When a ship has been given a “Class” it means, in effect that structurally the shipissoundandfitforthecarriageofappropriatebodycargoessolongastheclassismaintainedbytheowner.Therequirementsfortheclassificationofashipare:

The plans of the ship should be submitted for prior approval of the society before commencing construction.•All the steel and other material to be used in the construction of a ship should be approved by recognised •surveyors of the society.The surveyors watch / inspect the construction of a ship (from time to time).•When the construction of a ship is complete, the surveyors assign a ‘class’ to the ship and induct the ship in the •society “Register” under the particular class assigned for the ship. Such a ship is called “Built under Survey”. Thesocietywillissuea“Certificateofclass”.To maintain class, a ship must undergo periodical survey of Hull and Machinery termed as Continuous Hull •Survey (CHS) and Continuous Machinery Survey (CMS).Thecertificateofclasscanbewithdrawnorsuspendedatanytimeifthevesselfallsbelowtherequiredstandard•formulated by the society.

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Periodical survey of ship•Annual Survey-usually carried out concurrently with statutory load line surveys and inspection. �Dry Docking Survey – maximum interval normally for 2 years but under approved conditions 2 ½ years. �Special Survey – 4 yearly intervals with a period of grace of up to 12 months. �

4.3.3 Insurable InterestHull insurance is a highly specialised branch of marine insurance which offers protection against the risks of loss ordamagetotheshipsandtheconsequentfinancialdetrimentsufferedbyvariousparties.Whilethesubjectmatterofthisinsuranceremainsthesame,viz.,HullandMachineryofships,manyandvariedfinancialinterestsevolve,develop and co-exist with the ship requiring insurance protection. Some such interests covered under Hull Insurance are summarised below:

4.3.3.1 Ship Owners’ Interests

Hull and Machinery:• The ship owner has an insurable interest in the Hull and Machinery of the ship in view ofhisfinancialstaketherein.Thisinterestremainsunaffectednotwithstandingthefactthatthehireroftheshiphas agreed to indemnify the ship owner in the event of her loss. “Hull & Machinery” includes the hull, materials andoutfit,storesandprovisionsfortheofficersandcrew,ordinaryfittingsrequiredforthetrade,machinery,boilers/bunkers and engine stores owned by the ship owner.Freight:• It includes

Theprofitderivablebyashipownerfromtheemploymentofhisshiptocarryhisowngoods. �Freight payable by a third party to carry his goods. Freight however, would not include the passage money �that is earned by carrying passengers.

4.3.3.2 Subsidiary Interests

Disbursements: • Thisembracestheshipowner’scostsinfittingoutthevesselincludingthecostofprovisionsand stores made available on board the ship, port dues, and expenses of loading and unloading at a port of call etc. Even though these items are nebulous in character, the expenses incurred by the ship owner will be a real loss in case the ship itself has been lost after these expenses are incurred.Premium reducing:• Where the ship owner has taken a time policy on his ship for a period of one year, he pays the premium for the entire one year period. Even if the ship be lost soon after commencement of the risk, the premium relating to the balance period after the loss will not be refunded by the insurers. If the ship had existed, the ship owner would recover the premium through his freight earnings during the one year period. Since the ship has become a loss, and there are no freight earnings thereafter, the owner would not be able to recover the premium for the balance period. Since the premium is deemed to be recovered from the freight earned, the insurable interest reduces as time goes on.

4.3.3.3 P & I InterestsEven though all the above mentioned ship owner’s interests are valid insurable interests, insurers do not insure all of them. It has therefore become the practice for ship owners to join into mutual clubs to protect themselves from loss in respect of these interests. These clubs are known as Protection & Indemnity Clubs (P & I Clubs). The club covers:

1/4th Collision Liability not borne by the insurer•Loss of life and personal injury•Damage to harbours, wharves and other objects•Removal of wreck•Infringement of rights•Quarantine Expenses•Shipwreck indemnity to crew members•

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Liability to cargo and•Other interests not covered by insurers: • These interests are termed as P & I interests. As an exception to the abovegeneralrule,insurersunderwriteP&Iinterestsinthecaseofsmallcraftssuchasfishingboats,barges,etc., ships under construction and port risks under their hull insurance policies for these vessels leaving other areas to be covered by the club.Removal of Wreck: • Where a vessel has sunk in the harbour area, obstructing the navigational fairway, the ship owner may be ordered by the Port Authorities to remove the wreck at his own cost. Besides the above, the ship owner may face liabilities in respect of life, personal injury, damage to wharves, piers and other objects, pollution or contamination of the environment, infringement of rights, quarantine expenses, etc.

4.3.4ClassificationofMarineHullMarineHullmaybeclassifiedunderthefollowingheads:

General Cargo/ Dry-Cargo vessels �RO/RO, LO/LO, LASH �Bulk Carriers/ Mini Bulk Carriers �Container Ships �Tankers/ VLCC/ ULCC �Combination Carriers �Whale factory ships �Coal Carriers, Cable Laying Ships, etc. �

4.3.5 Scope of Marine Hull Insurance

Hull Insurance is concerned with the insurance of Hull and Machinery of Ocean-going vessels and other sundry •vesselslikebarges,trawlers,fishingvesselsandsailingvessels.Itisalsoconcernedwiththeshipowners’otherinterests known as subsidiary interests like “freight” and “disbursements”. The subject matter of Hull Insurance is the vessel.There are many types and designs of a ship. The design and construction of a modern ship is normally subject •totherulesoftheClassificationSocietywhoapprovestheplansandmaterialintheconstructionofship.InIndia,theIndianRegisterofShipping(IRS)isarecognisedClassificationSociety.VesselsareregisteredandthecertificateofregistryisobtainedtocomplywiththerequirementsoftheMerchantShippingAct.Thehullpolicy covers the hull, machinery, equipment/stores, etc. on board against total loss (actual or constructive), partial loss, ships proportion of G.A. Major Hulls Sundry Hulls Builders Risk Ply in ocean and carry cargo/passengers or both and include the following types of ships ply in inland waters or coastal waters e.g. barges, tugs,dredgers,fishingtrawlers/sailingvessels,pleasurecraftsetc.Include land based (on-shore) risks during ship building / ship breaking and salvage charges, sue and labour •charges and ship owners’ liabilities towards other vessels arising out of the collision. The policy covers 3/4th ofsuchliability;thebalance1/4thisusuallycoveredbytheshipownerswiththeirP&IClubs.The coverage, terms, conditions are governed by IVC or ITC (Hulls) depending upon whether the vessel is •insured for a single voyage or for a time period which is normally one year. The earnings of the vessel described as ‘Freight’ for time can be covered upto 25% of Hull and Machinery value (provided no additional insurances on thedisbursementsareplaced).TheShipowners’expensesincurredinfittingoutandprovisioningthevesselandother items not included in the hull valuation are covered under ‘Disbursement and Increased value’ Insurances. The sum insured is limited to 25% of the Hull and Machinery values (provided no additional insurances on freight are placed). The cover usually provided is on ‘total loss only’ condition including ‘excess liabilities’.It is permitted to insure ‘Premium’ of insurance under ‘Premium Reducing Cover’ as the cost of insurance is •considerable. The cover provided is on ‘total loss only’ condition on a reducing basis which means the amount of indemnity is reduced by 1/12th monthly. The ‘Laid-up Returns’ which are earned can also be insured. Such earned returns due to the lay-up of the vessel or whilst under repairs are recoverable from the Insurers only at the expiry of the policy period, as the returns are payable provided the vessel has not become total loss within

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the policy period.The ‘G.A. Disbursement’ insurance covers the interest of the ship owner who has incurred G.A. Disbursement •at a Port of Refuge. Contribution to this disbursement by the saved interests will depend upon the values on arrival. It is possible that between the port of refuge and the destination of the ship, there is another accident which may reduce the contributory value of the respective saved interests. It may also happen that the ship with cargo sinks before reaching the destination. In this case, nothing is left over to apportion the G.A. Hence, the need to protect the ship owners against such eventualities.The insurers also cover the insurance of ‘Floating Dry docks’, ‘Jetties’, ‘P & I Liabilities’ in certain cases, •the vessels on their last voyage to the ship breaking yard and while awaiting break-up etc. in the Marine Hull Department. War and Strikes’ risks in respect of hull and machinery and subsidiary interests like freight, disbursement/increased value, etc. are covered under the Government War Risk Insurance Scheme in India.

4.3.6 Underwriting Aspects of Marine Hull Insurance

Contract: Marine Hull Insurance is essentially a ‘Contract’ and embodied in the policy document which is •duly stamped according to the provisions of the Stamp Act. The essential elements viz. Offer, Acceptance, Consideration, Agreement between parties and legality of the contract are prerequisites.Policyform:Thepolicyisissuedinthesimplified“MAR”form.TheInstituteClauses(TimeorVoyageasthe•casemaybe)areaffixedtodefinecover,terms,etc.ThewidestcoveristheInstituteTimeClausesHulls.Fundamental principles: The Fundamental Principles of insurance viz. Utmost Good Faith, Indemnity, Insurable •interests, etc. are also very much applicable to this class of insurance. The provision of “Assignment” is related to the concept of Insurable Interest. Hull Policies are not freely assignable. Hence, for assignment, the underwriter’sconsentisessential.TheprincipleofIndemnityismodifiedinMarineHullInsurance.Policiesare issued on “Agreed Value” basis. In Marine Hull Insurance, a “commercial” rather than “pure” indemnity is provided. The Marine Insurance Act provides that the principle of indemnity may be applied “In a manner and to the extent thereby agreed”. In Total Loss case, the full sum insured is payable without deduction for wear and tear. Even for partial loss claims there is a provision of “new for old”. The customary deduction of thirds for wear and tear is also done away with under the I.T.C. Hulls. The Collision Liability (3/4th) i.e. for loss/damage to the other vessel is covered in addition to the loss/damage to the insured vessel. This is in the nature of supplementary contract.The sue and labour charges are a supplementary contract and are paid in addition to the claim amount payable •under the policy. Even if the policy only covers total loss/constructive total loss, such charges are payable if the vessel sinks but are salvaged and there is no total loss/ constructive total loss.Survey fee is payable by the Insurer even if it is later found that the claim is not payable.•

4.3.6.1 Hull Underwriting and Rating

Rating Aspects: Total loss rate (TL) – Other than Total Loss Rate (OTL) Total Loss rate is usually based on the •age of vessel and is quoted as a certain rate percentage to be applied on the Sum insured. The OTL premium is usually based on the tonnage of the vessel and is quoted as rupees per GRT of the vessel. Rating of Ocean-going vessels: Decided by TAC•Rating of Sundry Vessels: As per Marine Hull Manual•

4.3.7 Hull Insurance Covers

Institute clauses for insurance of ships:•Until 1983, hull insurers were using the age-old S.G. (Ship & Goods ) form of form policy to cover hull interests, ofcourse,withsuitablemodificationsbyattachingvarioussetsofclausestosuittheneedsoftheshippingindustry.The Institute of London Underwriters (ILU) have since introduced a new simplied policy form and various hull clauses for covering ships of different types and other related interests.

Some of the important Institute Hull Clauses are listed below:•Institute Time Clauses-Hulls �

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Institute Time Clauses-Hulls total loss, General Average and 3/4th Collision Liability. �Institute Time Clauses-Hulls Disbursements and Increased Value (Total Loss only including Excess �Liabilities).Institute Time Clauses – Hulls Total loss only �Institute Time Clauses – Freight �Institute Voyage Clauses – Hulls �Institute Voyage Clauses- Freight �Institute Fishing Vessels Clauses �Institute Time Clauses-Hulls Port Risks �Institute War and Strike Clauses covering Hull Voyage/ Time, Freight Voyage/Time Interests. �

4.3.8 General Rules and Regulations of Marine Hull Tariff

Hull, Machinery and Accessories of the vessel are deemed to be one interest and insured less than one sum. •Splitting of the sum insured is not permitted.No change in the conditions of insurance is permitted during the currency of the policy.•The tariff provides for a maximum 15% discount (which includes 5% Special Discount in lieu of Agency •Commission where no agency is involved).Payment of premium in 4 equated quarterly instalments is permitted for a policy issued on an annual basis.•There is a system of “Bonus” and “Malus” i.e., reduction in the premium is available for a good claims experience •and penalty by way of loading in the premium is livable for adverse claims experience.There is also a provision for major casualty deduction and also limiting the rating level to 300%.•Standard policy forms are used and insurance is made subject to appropriate standard sets of clauses.•There is a provision for the increase or decrease in the sum insured during the currency of the policy or at •renewal and the rules for computing the extra premium due to the increase in the sum insured and refund due to the decrease in the sum insured have been prescribed.Policies issued to Owner/Charterers, etc.: In case of Bareboat Charter, Hull Policy is issued only to the Bareboat •Charterers (interest of the owner can be protected by attaching the Loss Payable clause on receipt of the dated notice from the Bareboat Charterer). For other Charter parties, hull policies shall be continued or issued only in the name of owner. For Charterers other than the Bareboat Charterer, only the Charterers liability Policy can be issued. The rules provide for Lay-up refunds for vessels laid up in Indian Ports or Foreign ports.

Note: The Insurance Regulatory and Development Authority have decided to Detariff the Marine Hull Portfolio w.e.f. 01.04.2005.

4.4 Ordinary FreightThis is the freight payable by the cargo owner to the ship owner for transporting his goods. In the normal •circumstances, the ship owner will receive the price for the carriage of the goods only on their arrival at the port of destination. The ship owner therefore, has an insurable interest in this freight. In many cases, the shipper of goods under a •bill of lading is required to pay freight in advance at the time of issuance of the bill of lading and the same is not repayable by the ship owner in case of loss. The ship owner does not have any insurable interest in respect of such freight.

4.5 Chartered FreightChartered freight means the hire paid by the charterer to the ship owner for the use of the ship for a voyage or •for a period of time.Whether the ship owner has an insurable interest in the chartered freight or not depends on the terms of charter •

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agreement which is called the charter party. If the payment of chartered freight is contingent on some event which may be frustrated by maritime or other perils, the ship owner is entitled to insure the same.

4.6 LiabilitiesThere are many ways in which a ship owner may incur liabilities arising from the employment of his ship. In all these cases, he has an insurable interest. Some of his liabilities are:

Carrier’s liability to cargo owners•A ship owner who undertakes to carry goods is called a “common carrier” and he has an absolute liability to make good the loss sustained by the cargo whilst in his care. His liability to the cargo owner is both contractual and statutory and is governed by the provisions of the Carriage of Goods by Sea Act, 1924.

Collision liability•The ship owner would be held liable for the losses sustained by the other colliding vessel or the property on board that other vessel etc. depending upon the degree of blame attaching to his vessel.

4.7 Loss of Charter HireWhen a vessel under charter is so damaged that she must be withdrawn from service for repairs, the ship owner will lose the amount which the vessel would have earned as charter hire during this period. The ship owner is entitled to insure this risk.

Charterer’s liabilities: • Under Demise or Bareboat Charters, the charterer takes over full control of the ship from the ship owner. As a result, all the liabilities that may arise out of the employment of the ship would have to be met by the charterers. The charterer is also responsible for the safety of the ship whilst it is in his care. Charterers therefore are entitled to insure their liabilities.Loss of freight: • Where a charterer pays the charter hire in advance to the ship owner, no part of it would be refunded in the event of loss as per the provisions of the charter party. Sometimes, the charterers may not pay the hire in advance but may agree to pay the same if the vessel is lost. In both the circumstances, the charterer has an insurable interest in the money paid or payable by him.Mortgagee’s interests: • A mortgagee is one who lends money to the ship owner on the security of the ship. He hasavalidfinancialinterestinthehullandmachineryoftheshiptotheextentofhisfinancialstaketherein.Crew’s Interest:• The master and any member of the crew of a ship can insure their wages/earnings.Ship Builder’s interests:• During the course of construction of the ships in his yard, a ship builder has to contendwithseriousrisksoflossordamagetothoseshipsbyfireorotheraccidents.Thevalueatriskduringthe construction period, however, does not remain constant but goes on increasing from zero to the contracted price as work progresses. The Builder’s interests can be insured from the time the keel is laid till the launching of the ship, which includes the maiden voyage for delivery to the owner at his place. Ship Repairer’s interest: The ship repairer is entitled to insure his legal liabilities to the ship owners during the ship repairs.

4.8 Partial Loss of ShipWhere the ship is damaged, the assured is entitled to the reasonable cost of the repairs not exceeding the sum insured in respect of any one casualty. It may be noted that while a total loss payment under a hull policy is a one-time affair, partial loss payments are of recurring nature each time up to the limit of the sum insured, the total of which may reach an amount much more than the sum insured during the policy period.

4.9 Warranty of SeaworthinessAshipisdeemedtobeseaworthywhensheisreasonablyfitinallrespectstoencountertheordinaryperilsoftheseas. In a voyage policy on ship, there is an implied warranty that at the commencement of the voyage, the ship should be seaworthy. There is no such implied warranty in a time policy on the ship that she must be seaworthy at any stage of the adventure. But, where, with the privity of the assured, the ship is sent to sea in an unseaworthy

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condition, the insurer is not liable for any loss attributable to unseaworthiness.

4.9.1 Trading WarrantiesThe degree of hazard in certain geographical areas is higher than in others. For example, certain areas suffer ice conditions, either seasonally or permanently, which can provide a serious hazard to a ship navigating in such waters. In the absence of any limit in the insurance, the ship is at liberty to navigate on any waters world-wide. It may be that either the insured or the insurer prefers to limit the area of operations of the ship from the risk point of view. Ifso,atradingwarrantyhastobeintroducedinthepolicyclearlydefiningthegeographicalareasinwhichtheship is permitted to navigate. Breaches of institute warranties may be held covered on the payment of additional premium.

4.9.2 Lost or Not LostThe Hull policies are customarily issued on lost or not lost basis, the effect of which is to protect the insured where the ship insured may have been lost before the insurance has been affected. However, the Principle of Utmost Good Faith still prevails in as much as the insured cannot claim for a loss of which he is aware when the insurance is placed.Thebenefitfromthisretrospectivecoveragewillaccruetotheinsuredonlywhenheisfoundtobeignorantof the loss while proposing for insurance

4.10 Stamp DutyEvery Hull insurance policy must be duly stamped as per the provisions of The Indian Stamp Act, 1899. Failure to comply with this requirement will not only render the contract unenforceable in law but also make the person committing the breach liable for penalty. The stamp duty applicable to hull policies depends on whether they are time policies or voyage policies. The relevant provisions are:If drawn in singly duplicate for each part

For Voyage policies•Where premium does not exceed 0.10 0.05 the rate of 1/8th per cent �In all other cases, for every full 0.10 0.05 sum of Rs.1500 and part thereof of sum insured �

For time policies:•Up to a period of 6 months For every full sum of Rs.1000 and part 0.15 0.10 thereof of sum insured �Exceeding 6 months but not exceeding 12 months For every full sum of Rs.1000 and part 0.25 0.15 thereof �of sum insured

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Summary

A policy of Marine Cargo Insurance is freely assignable.•Under the Marine Cargo insurance, insurable interest need not be there at the time of the proposal or at the time •of policy issuance. However, insurable interest is a must at the time of a claim.Marine Cargo Insurance is always on Agreed Value Basis.•For transportation of cargo, different modes of conveyance are used by the shipper, depending upon the •contemplated voyage.The conditions prevailing at ports of shipment and destination have a bearing on the rates of premium charged •for cargo insurance.The movement of cargo within the country is known as Inland Transit.•For regular exporters and importers, continuous and automatic insurance protection is afforded by the Open •Cover.The Marine Policy cannot be issued to transport companies, transport contractors, freight forwarders or clearing/•forwarding and commission agents, except on goods owned by them.Amerchantshipisanelongatedfloatingboxmadeofwelded(occasionallyriveted)steelframesandplates.•When the construction of a ship is complete, the surveyors assign a ‘class’ to the ship and induct the ship in the •society “Register” under the particular class assigned for the ship. Such a ship is called “Built under Survey”.Avaluedpolicyisapolicywhichspecifiestheagreedvalueoftheship.•Ashipisdeemedtobeseaworthywhensheisreasonablyfitinallrespectstoencountertheordinaryperilsof•the seas.The Hull policies are customarily issued on lost or not lost basis, the effect of which is to protect the insured •where the ship insured may have been lost before the insurance has been affected.Every Hull insurance policy must be duly stamped as per the provisions of The Indian Stamp Act, 1899.•

ReferencesInterLog.• Cargo Insurance [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p176.htm>. [Accessed 20 June 2011].SurfIndia. • Marine Insurance [Online]Availableat:<http://www.surfindia.com/finance/marine-insurance.html>.[Accessed 20 June 2011].Goel, K.,• Non-Life Insurance. [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-MARINE-PERILS>. [Accessed 20 June 2011].Gauci, G., • Marine Insurance 09 . [video online] Available at: <http://www.youtube.com/watch?v=PuMsQsYJ1zQ>. [Accessed 20 June 2011].

Recommended ReadingHodges, S., 1996. • Law of Marine Insurance. Routledge, p.647.Sherlock, J., 1994. • Principles of International Physical Distribution, Wiley-Blackwell, p.327.Hinkelman, E. G., 2005. • Dictionary of International Trade: Handbook of the Global Trade Community Includes 21 Key Appendices, World Trade Press, p.688.

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Self Assessment

Which of these means the hire paid by the charterer to the ship owner for the use of the ship for a voyage or 1. for a period of time?

Chartered freighta. Liabilitiesb. Ordinary freightc. Collision liabilityd.

A__________policyisapolicywhichspecifiestheagreedvalueoftheship.2. insureda. valuedb. sum insuredc. time d.

Protection & Indemnity Clubs (P & I Clubs) do not cover _________.3. 1/6th collision liability not borne by the insurera. loss of life and personal injuryb. damage to harboursc. removal of wreckd.

There is a provision for major casualty deduction and also limiting the rating level to _________%.4. 300a. 100b. 200c. 120d.

Standard policy forms are used and insurance is made subject to appropriate standard sets of__________.5. claimsa. clausesb. charterc. rulesd.

What is recovered from the Insured in Marine Insurance?6. Stamp dutya. Surveyors feesb. Cargo lossc. Liabilitiesd.

Which of the statements is FASLE?7. Thepolicyisissuedinthesimplified“MAR”form.a. Hull insurance is concerned with the insurance of hull and machinery of ocean-going vessels.b. Freightincludestheprofitderivablebyashipownerfromtheemploymentofhisshiptocarryhisownc. goods.Premiumratesaregenerallyfixedonthebasisofpresentlossexperience.d.

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Which of the statements is FASLE?8. The degree of hazard in certain geographical areas is lower than in others. a. Ashipisdeemedtobeseaworthywhensheisreasonablyfitinallrespectstoencountertheordinaryperilsb. of the seas.When a loss takes place, the sum which the assured can recover under the hull policy is known as the c. “measure of indemnity”.The stamp duty applicable to hull policies depends on whether they are time policies or voyage policies.d.

A __________is one who lends money to the ship owner on the security of the ship.9. mortgageea. crewb. chartererc. ship builderd.

Marine hull insurance is essentially a _______and embodied in the policy document which is duly stamped 10. according to the provisions of the Stamp Act.

contracta. claimb. principlesc. premiumd.

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Chapter V

Marine Insurance Policies

Aim

The aim of this chapter is to:

explain marine cargo insurance•

list different types of marine policies•

discuss the features of marine hull policy•

Objectives

The objectives of this chapter are to:

list the exclusions from the marine insurance policies•

elaborate various different marine policies•

highlight the special rules for voyage policies•

Learning outcome

At the end of this chapter, you will be able to:

discuss marine insurance•

illustratethefeaturesandbenefitsofmarinepolicies•

explain the gui• deline on most important parts of the policy

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5.1 IntroductionUnderwriters are insurers who are affected due to a policy of marine insurance. Each individual who acts as an insurersignshisnameattheendofthepolicyandstatestheamountforwhichheistoberesponsible;thatiswhythetermUnderwriterisused.Hemayinsurethevesselorthegoodsforaspecificvoyageorforsomeperiodoftime. The insurer is covered against loss, with the help of the contract from the underwriter. The underwriters by the contract agree with the terms of the policy. The provisions of the policy are organised by an insurance broker, who is appointed by insurer to systematise with the underwriters. The person insured must have an insurable interest intheshiporitscargo;orelsethecontractisnotlegallyrequired.Aninsurancecertificateissometimesattachedto a bill, and is a declaration by an insurance company that the goods are insured under a policy which also covers other goods.

5.2 Marine Insurance PoliciesMarine Cargo Insurance provides coverage for damage or loss of goods in transportation by any means like road, rail, air, courier, sea, post, etc. It can be inland purchases/sales or international imports/exports. Marine insurance cover can be provided for export and import shipments by seagoing vessels of all types, sailing vessels, coastal shipments by steamers, shipments by inland vessels or country crafts, mechanised boats, and consignments by rail, road, air or post etc. It basically covers the following:

ICC (C)•Fire �Lightning, �Stranding, �Grounding, �Sinking or capsizing of vessel or craft �Overturning or derailment of land conveyance �Collision or contact of vessel �Craft or conveyance with any external object other than water �Discharge of cargo at a port of distress �Generalaveragesacrificeandjettisoning �

ICC (B)•Earthquake �Volcanic eruption or lightning �Washing overboard �Entry of sea �Lake or river water into vessel �Craft �Hold �Conveyance �Container �Lift van or place of storage, in addition to the perils of ICC (C) �

ICC (A) •Allrisks,subjectonlytothespecifiedexclusions. �

Exclusions•Following are the exclusions of this insurance:

Wilful misconduct �Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear �Inherent vice or nature of the subject-matter �

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Delay howsoever caused �Insolvencyorfinancialdefaultofcarrier �Inadequate packing, war and kindred perils, strikes, riots, lock-out, civil commotion and terrorism. (War �and SRCC during ocean voyage and SRCC/T for inland transits may be covered at extra premium).

5.3 Marine InsuranceThetypesofmarineinsuranceavailableforthebenefitofaclientaremanyandallofthemarefeasibleintheirownway. Depending on the nature and scope of a client’s business, he can opt for the best marine insurance plan and enjoy the advantage of having marine insurance.

Marine insurance is a blanket term used to describe any policy that covers crafts or goods relating to the water. •Though this can include pleasure craft such as yachts and personal watercraft, it most commonly refers to the insuring of vessels and inventories engaged in the shipping business. You would buy a marine insurance policy to protect your goods as they are shipped from one country to another over a water route.Marine insurance policies differ from most other types of insurance because the risks that maritime voyagers •facearesovariedanduniquetoindividualvoyagesthateachpolicyhastobecraftedtomeetspecificneedsatspecifictimes.Marine insurance is a contract under which the insurer undertakes to indemnify the insured against losses, caused •due to perils of the sea. Here perils of sea include:

Sinking of ship �Damage to ship and cargo due to dashing of waves �Dashing of the ships on the rocks �Fire or explosion on the ship �Spoilage of cargo due to sea water �Destruction of the ship and cargo by crew, captain, piracy etc. �

5.4 Types of Marine PoliciesThe different types of marine policies are discussed below:

5.4.1 Time and Voyage Policies

It is a policy in which the subject matter is insured for a particular voyage irrespective of the time involved in •it. In this case the risk attaches only when the ship starts on the voyage. Acommontypeofmarineinsuranceisthevoyagepolicy.Thesepoliciesinsurespecificvoyagesbyspecific•vesselsalongspecificroutes.Theydonotoftenhaveasettimelimit,asseavoyagescanbedelayedforanumberof reasons. However, if the vessel deviates from the prescribed voyage, the policy becomes void. Cargo shipments are •almost always insured by voyage.A marine policy may be a voyage or time policy. If it uses the words “at and from” or “from” a particular place •to another place it is a voyage policy. If it insures the subject matter for a period of time it is a time policy.A voyage policy comes to an end at the conclusion of the voyage. A time policy comes to an end upon the •expiryofthetimespecified.

5.4.1.1 Special Rules for Voyage Policies

For a voyage policy there is an implied term that the marine adventure will commence within a reasonable time •and if it is not, the insurer may avoid the contract unless the insurer waived the right to avoid or was aware of the circumstances causing the delay. (S.40 MIA)Avoyagepolicywillnotattachiftheshipsailsfromortoplacesdifferentfromthosespecified.(S.41MIA)•Where after the commencement of the risk the destination of the ship is voluntarily changed the insurer is •discharged from all liability for any loss occurring on or after the time the intention to change is manifested,

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unless the policy provides otherwise. (S.42 MIA)A deviation without lawful excuse from the agreed course or customary course discharges the insurer from •liability for any loss occurring on or after the deviation. Failure to call at the ports of discharge in the order specifiedorintheirgeographicalorderwillbeadeviation.(S.43MIA)A voyage policy must be carried out with reasonable dispatch and the insurer is discharged from all liability for •any loss occurring on or after the time when the delay becomes unreasonable. (S.44 MIA)

5.4.1.2 Time Policy

Itisapolicyinwhichthesubjectmatterisinsuredforadefiniteperiodoftime.Theshipmaypursueanycourse•itlikes;thepolicywouldcoveralltherisksfromperilsoftheseaforthestatedperiodoftime.A time policy cannot be for a period exceeding one year, but it may contain a ‘continuation clause’. •The‘continuationclause’meansthatifthevoyageisnotcompletedwithinthespecifiedperiod,theriskshall•be covered until the voyage is completed, or till the arrival of the ship at the port of call.

5.4.1.3 Mixed Policy

Itisacombinationofvoyageandtimepoliciesandcoverstheriskduringparticularvoyageforaspecified•period of time. Itoffersaclientthebenefitofbothtimeandvoyagepolicy.•

5.4.2 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)andotherparticularstobedefinedbysubsequentdeclarations.Such policies are very useful to merchants who regularly dispatch goods through ships. Floating policy is taken •for a relatively large sum by the regular suppliers of goods. It covers several shipments which are declared afterwards along with other particulars. This policy is most situated to exporter in order to avoid trouble of taking out a separate policy for every •shipment. Afloatingpolicyisonewhichleavesthenameoftheshiporotherparticularstobeprovidedatalatertimeby•declaration or endorsement. Floating policies are frequently used by shippers who routinely ship cargo. Floating policies avoid a shipper •having to negotiate a new policy for every shipment. Usingafloatingpolicytheessentialtermsoftheinsurancecontractareagreedinadvance.Thereafter,allof•the shippers goods will be covered by that policy provided the shipper declares the goods as required by the contract. The shipper must declare all of the goods that are covered by the policy and their value. A failure to properly •declarewilljeopardizetheinsurancecoveragealthoughanomissionorerrormadeingoodfaithmayberectifiedeven after a loss or the arrival of the goods.If a declaration of value is not made until after a loss or arrival of the goods, the indemnity is calculated as •though the policy was an unvalued policy.

5.4.3 Valued Policy

Under its terms, the agreed value of the subject matter of insurance is mentioned in the policy itself. In case •of cargo this value means the cost of goods plus freight and shipping charges plus 10% to 15% margin for anticipatedprofit.The said value may be more than the actual value of goods. •In the event of a total loss under a valued policy, the amount of the indemnity is the agreed value.•

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5.4.4 Unvalued Policy (Open Policy)

Where the value of the subject matter of insurance is not declared but left to be ascertained and proved later it •is called unvalued policy. Itisthepolicyinwhichthevalueofthesubjectmatterinsuredisnotspecified.Subjecttothelimitofthesum•assured, it leaves the value of the loss to be subsequently ascertained. In the event of a total loss under an unvalued policy, the amount of the indemnity is calculated pursuant to S. •(19 MIA) When a loss occurs the value has to be proved. Goods are usually included in an open policy. The description •in the policy should agree with that in the bill of lading.

5.4.5 Builder’s Risk Policy

This policy is issued for more than one year. •This covers the risk of damage to vessels from the time its construction commences until its trail is •completed.

5.4.6 Blanket Policy

Under the condition of the blanket policy the maximum limit of the required amount of protection is estimated •which is purchased in lump sum. Theamountofpremiumisusuallypaidinadvance.Thispolicydescribesthenatureofgoodsinsured,specific•route, ports and places of the voyages and covers all the risk accordingly.

5.4.7 Port Risk Policy This policy covers all the risk of a vessel while it is standing at a port for particular period of time.

5.4.8 Wager 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 (P.P.I).Where the assured has no insurable interest in the subject matter of insurance that is know as wager policy. As •this policy has no legal effect so it cannot be taken to a court of law. If underwrite refuses to accept the claim the policy holder cannot take any legal action against him. It is, •therefore, also called as gambling policy.

5.4.9 Special Hazards Policy This policy covers special risks incident to piracy and war. It provides protection to insured under agreement against seizure, capture, detention and other war risks.

5.4.10 Composite PolicyThis type of policy is purchased from more than one under writers. If there is no motive of fraud then insured will beindemnifiedbyeachunderwriterseparatelyincaseofloss.

5.4.11 Block Policy

This policy is particularly purchased to gold diggers. It covers all the risks of damage to gold from the time of •its recovery to its distinction. ThesetypesofpolicyhavebeenintroducedinAfricaandareverypopularintheminefieldsofgold.•

5.4.12 Vessel Insurance Policy

Vessel insurance policies insure the vessels themselves against physical damage. This is sometimes called hull •insurance.

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Because vessels are often used to execute a multitude of shipments throughout the year, often along several •differentroutes,vesselpoliciesusuallyprotecttheinsuredboatforaspecifiedperiodoftime,oftenonanannualbasis. Thesepoliciescanprotectasinglecraftoranentirefleet.Cargoontheshipistypicallyinsuredseparately.•

In addition to these types of marine insurance, there are also various types of marine insurance policies which are offeredtotheclientsbyinsurancecompaniessoastoprovidetheclientswithflexibilitywhilechoosingamarineinsurance policy. The availability of a wide array of marine insurance policies gives a client a wide arena to choose from, thus enabling him to get the best deal for his ship and cargo. The different types of marine insurance policies are detailed below:

5.4.13 Special Storage Risks PolicyItisgrantedinconjunctionwithanOpenPolicy,SpecificPolicyoropencover.

5.4.14 Annual Policy It is issued for 12 months, covers goods belonging to the Insured, which are not under contract of sale and which areintransitbyrail/roadfromspecifieddepots/processingunitstootherspecifieddepots/processingunits.

5.4.15 Duty Insurance Policy It covers customs duty alone if so required by the Insured.

5.4.16 Increased Value Insurance Policy It covers increased value of the cargo if the market value of the goods at destination port on the date of landing is higher than the c.i.f. and duty value of the cargo.

5.4.17 Package Policy It is also available to cover transits and storage risks incidental to transits for tea, coffee, cardamom and rubber.

5.5 Guideline on Most Important Parts of the PolicyFollowing are few very important guidlines:

Insurable interest• : You must have an interest in cargo, in other words you must be owner, seller / buyer, shipper / receiver of the goods in transit. Instructions to insure the shipment must be done prior to shipment departure or prior to any known or reported loss or incident.Shore coverage• : Your cargo is insured while it’s on land (at the pier, dock, wharf, etc.) waiting to be loaded on ocean vessel or aircraft.Container shipments:• Goodsandmerchandiseshippedincontainers,orflatracks,ortrailersisinsuredsubjectto Under Deck terms. It doesn’t matter if such goods are stowed under- and/or on-deck as long as the carrier issues an Under-Deck Bill of Lading. Most of the container carriers will provide an under-deck bill of lading due to the provisions that goods stowed on-deck are considered or deemed stowed under-deck.Marine Extension:• The coverage begins as soon as the shipment leaves the warehouse/store/location at the place of origin and continues until the shipment reaches the warehouse/store/location at the place of destination. Goods mustreachtheirfinaldestinationwithin15daysofthedischargefromthevesselattheportofdestination.ForCISandAfricancountriesthecoveragestopsassoonasthecargoisoffloadedfromtheship/aircraftattheportof arrival. Insurance will not cover any losses or damages caused by carrier delays or inherent vice of cargo.Control of damaged merchandise• : It is understood and agreed that in case of damage to goods the assured is to retain control of all damaged goods.Partial loss:• The insurance will replace the value of the damaged portion of the goods and not the whole shipment unless total loss is reported.Returned or refused shipments• :Thispolicyspecificallycoversthereturntripofthecargoincasetheconsigneeor assured refused to accept the delivery.

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Non-delivery and shortage• : In case the goods are overdue and unaccounted for the period of 30 days, then they will be considered lost and assured can recover under this policy. Claims for shortages caused by theft, pilferage and non-delivery must be supported by documentary evidence.Insufficiencyofpacking• :Iftheclaimismadeforlossordamagecausedbyinsufficientorunsuitablepackingor preparation carried out by a 3rd party the underwriters do not agree to use it as a defence against the claim. This is very important because most of other cargo insurance companies will deny any claim due to improper packaging. However, you should use extreme care in selecting professional packers. Assured agrees to assist underwriters to pursue rights of recovery against seller and/or other responsible parties.Notice of loss• : The Assured must report every loss and damage that may become a claim as soon as may be practical after it becomes known. Failure to report loss or damage promptly shall invalidate any claim under this policy. War risk• : This policy protects your cargo against the risk of capture, seizure, destruction or damage by men-of-war, piracy, arrests, restrains, and other warlike operations.

5.6FeaturesandBenefitsofMarinePoliciesCargo policies are freely assignable.•Existence of insurable interest needs to be established only at the time of loss.•Marine policies are agreed value policies•Anelementofprofitcanalsobeincludedinthesuminsured,whichisallowedbytheinsurers.•Marinepoliciesaretransit/voyagepoliciesandnotlimitedtoanyspecificperiod.•The interpretation and applicability of various statutes, the legislation in various countries, the port conditions, •customs procedures and the legal systems in various parts of the world, govern the operation and interpretation of a Marine Insurance Policy.

5.7 Procedure for Obtaining Marine Insurance PolicyFollowing is the procedure for obtaining a marine insurance policy:

Selecting the insurance company �Deciding appropriate type of policy �Application to the insurance company �Payment of premium �Issue of the insurance policy �Processing of the policy �

5.7.1 Procedure for Filing Marine Insurance Claim

Intimation of loss �Appointment of the surveyor �Landing Remarks �Submission of claim �Finalisation of claim �

5.7.2 Immediate Action after Loss

Intimatetheinsurancecompanyimmediately,witharoughestimateofthelosstotheirnearestofficeoroverseas•agents mentioned in the policy and also obtain a claim form.Ensure that all the rights of recovery against carriers, bailees or other third parties are preserved and •exercised.In case of Carriage by Sea, you should send an application for survey to the Shipping Company (ship survey) •

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within 3 days of taking delivery.Obtaindamagecertificate/opendeliverycertificate/landingremarkscertificatefromcarriers/porttrust/airlines/•transporter etc.Incaseofdamageduetonaturalcalamitieslikestorm,floods,lightning,obtainthemeteorologicalreportfor•the weather broadcast at the time of disaster.Do not dispose the salvage until advised by the surveyor or insurance company. •

5.7.3 Claim Procedure

In Marine Insurance claims, all the documents of the claim are to be submitted to the insurance company. •The documents should be submitted in original. Wherever original documents are not available second copy / •printed copy may be accepted but photocopies are not acceptable.The documents are to be submitted preferably in one lot and within reasonable time limit of occurrence of the •claim and under all circumstances before claim becomes time barred against carrier etc. Following is a list of claim documents which are generally required for any marine claim. The insurance company •may ask for other additional documents depending upon the nature of claim. Basic documents required for ocean transit are:

Claimformdulyfilledinandsigned �Originalpolicy/certificate �ShortLandingCertificate/LandedbutMissingCargo/DamageCertificate(asapplicable). �Suppliers invoice �Packing list �Quadruplicate copy of Bill of Entry �Steamer Survey report in original.(if arranged) �Copy of Claim Notice served on Carrier/Port authorities along with postal acknowledgement card. �Copy of correspondence with the carrier/Port authorities/Customs authorities. �Copies of Correspondence exchanged with the suppliers (reply from suppliers is a must) in connection with �short packing (if applicable).LostOverboardCertificatefromthePortTrustcountersignedbythemasterofthevesselorsteameragents �(in respect of Loss Over Board /Sling Losses).Original Repair Bills with receipt/Performa Invoice for value of items lost/damaged. �Copyofapplicationfiledwithcustomsforrefundofduty(ifapplicable). �Photographs if arranged. �Letter of subrogation along with special power of attorney. �

5.8 Features of Marine Cargo Insurance [New India Assurance Policy]This policy covers goods, freight and other interests against loss or damages to goods same as being transported •by rail, road, sea and/or air.Different policies are available depending on the type of coverage required ranging from an all risk cover to a •restrictedfireriskonlycover.This policy is freely assignable and is basically an agreed value policy.•

5.8.1 Scope of PolicyTransportationofgoodscanbebroadlyclassifiedintothreecategories:

Inland transport•Import•Export•

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The types of policies issued to cover these transits are:For inland transit•

Specificpolicy:Forcoveringaspecificsingletransit. �Open policy: For covering transit of regular consignments over the same route .The policy can be taken �for an amount equivalent to three months dispatches and premium paid in advance. As each consignment is dispatched, a declaration giving details of the dispatch including GR/RR No. is to be sent to the insurer and the sum insured gets reduced by the amount of the declared dispatch. The sum insured can be increased anynumberoftimesduringthepolicyperiodofoneyear;butcareshouldbetakentoensurethatadequatesum insured is available to cover the consignment to be dispatched.Special declaration policy: For covering inland transit of goods wherein the value of goods transported during �one year exceeds Rs.2 crores. Although the premium for the estimated annual turnover [i.e., the estimated value of goods likely to be transported during the year] has to be paid in advance, attractive discounts in premium are available.Multi-transit policy: For covering multiple transits of the same consignment including intermediate storage �andprocessing.Fore.g.coveringgoodsfromrawmaterialsupplier’swarehousetofinaldistributor’sgodownoffinalproduct.

For import/export•Specificpolicy:Forcoveringaspecificimport/exportconsignment. �Open cover: This policy which is issued for a policy period of one year indicates the rates, terms and conditions �agreed upon by the insured and insurer to cover the consignments to be imported or exported. A declaration is to be made to the insurance company as and when a consignment is to be sent along with the premium at theagreedrate.Theinsuranceco.willthenissueacertificatecoveringthedeclaredconsignment.Custom duty cover: This policy covers loss of custom duty paid in case goods arrive in damaged condition. �This policy can be taken even if the overseas transit has been covered by an insurance company abroad, but it has to be taken before the goods arrive in India.

5.8.2 Add-on CoversInland transit policies can be extended to cover the following perils on payment of additional premium:

SRCC: Strike, riot and civil commotion (including terrorist act)•FOB: Where the inland transit is required to be extended to cover the goods till they are loaded on board the •vessel, this extension can be taken.

Export /Import policies can be extended to cover War and /or SRCC perils on payment of an additional premium.

5.8.3 Who Can Take the Policy?The contract of sale would determine who buys the policy. The most common contracts are:

FOB (Free on Board) �C & F (Cost & Freight) �CIF (Cost, Insurance & Freight) �

In FOB and C&F contracts, the buyer is responsible for insurance. Whereas, in CIF contracts, the seller is responsible for insurance from his own premises to that of the purchaser.

5.8.4 How to Decide the Sum Assured?The sum insured or value of the policy would depend upon the type of contract. Usually, in addition to the contract value 10/15% is added to take care of incidental cost.

5.8.5 How to Claim?The following steps should be taken in event of a loss or damage to goods insured:

Take immediate steps to minimise loss.•Informnearestofficeoftheinsurancecompanyorclaimsettlingagentmentionedonthepolicy.•

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In case of damage to goods whilst on ship or port, arrange for joint ship survey or port survey.•Lodge monetary claim with carrier within stipulated time period.•Submitdulyassignedinsurancepolicy/certificatealongwiththeoriginalinvoiceandotherdocumentsrequired•to substantiate the claim such as :

Bill of Lading / AWB/GR �Packing list �Copies of correspondence exchanged with carriers. �Copy of notice served on carriers along with acknowledgment/receipt. �Shortage/DamageCertificateissuedbycarriers. �

A survey fee is to be paid to the surveyor appointed by the insurance company. This fee will be reimbursed •along with the claim if the claim is otherwise admissible.

5.9 Features of Marine Hull Policy (New India Assurance Policy)Thepolicycoversanylossordamagetoships, tankers,bulkcarriers,smallervessels,fishingboatsandsailingvessels.

5.9.1 Who can Take the Policy?Shipowners,charterers,Shipbuilders,bankers,financiersofshipsorvesselswhohaveinsurableinterestareeligibleto take this policy.

5.9.2 What is Covered in the Policy?Following is the list of aspects which are covered in this policy:

All types of Oceangoing vessels•All type of Coastal/Inland vessels•Yard and pleasure crafts•Port crafts•Shipbuilding- construction of vessel•Ship repairers’ liabilities•Charterers liabilities•Breaches of warranties / voyage cover•Freight- at -risks insurance for voyages•Dredgers•Fishing vessels / Trawlers•Sailing vessels•Jetties(withorwithoutcranes),fixedpontoons/PontoonsJetties,wharvesetc.•Ship breaking•

5.9.3 Scope of Risk CoverAll risks relating to Vessels, Floating Dry Docks, Jetties and Ship owners’ Interests including Hull & Machinery (H&M), Freight, Disbursements, Increased Value, Premium Reducing, Excess Liabilities, Protection and Indemnity (P&I) Liabilities, Charterers’ Liabilities, Charterers’ Freight, Charterers’ Hire and/or Disbursements, General Average Disbursements, Ship Repairers’ Liabilities, Shipbuilding Risks, Ship breaking Risks and other allied interests of whatsoever nature required to be insured in India.

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SummaryMarine Cargo Insurance provides coverage for damage or loss of goods in transportation by any means like •road, rail, air, courier, sea, post, etc.Thetypesofmarineinsuranceavailableforthebenefitofaclientaremanyandallofthemarefeasibleintheir•own way.Marine insurance is a blanket term used to describe any policy that covers crafts or goods relating to the •water.Marine insurance policies differ from most other types of insurance because the risks that maritime voyagers •facearesovariedanduniquetoindividualvoyagesthateachpolicyhastobecraftedtomeetspecificneedsatspecifictimes.Time and voyage is a policy in which the subject matter is insured for a particular voyage irrespective of the •time involved in it.The‘continuationclause’meansthatifthevoyageisnotcompletedwithinthespecifiedperiod,theriskshall•be covered until the voyage is completed, or till the arrival of the ship at the port of call.Mixed policy is a combination of voyage and time policies and covers the risk during particular voyage for a •specifiedperiodoftime.Floating policy is one which only mentions the amount for which the insurance is taken out and leaves the name •oftheship(s)andotherparticularstobedefinedbysubsequentdeclarations.Where the value of the subject matter of insurance is not declared but left to be ascertained and proved later it •is called unvalued policy.In Marine Insurance claims, all the documents of the claim are to be submitted to the insurance company.•

ReferencesMagnum Archieve. • Marine Insurance Policy [Online] Available at: <http://www.magnumarchive.com/c/dictionary-of-banking/Marine-Insurance-Policy.html>. [Accessed 21 June 2011].Marine Insurance • [Online] Available at: <http://www.bostonapartments.com/archive/insure/marine_insurance.html>. [Accessed 20 June 2011].Gupta, S. M., • Marine Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-principles-and-practice-of-general-insurance>. [Accessed 18 June 2011].Goel, K., • Non-Life Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-MARINE-PERILS>. [Accessed 18 June 2011].Gauci, G., • Marine Insurance 02 [video online] Available at: <http://www.youtube.com/watch?v=KJt41Wfn8Jc>. [Accessed 18 June 2011].

Recommended ReadingHodges, S., 1999. • Cases and Materials on Marine Insurance Law, Routledge, p. 962.Hodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.Malbon, J. & Bishop, B., 2006. • Australian Export: a Guide to Law and Practice, Cambridge University Press, p. 318.

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Self Assessment

Underwriters are insurers who are affected due to a _________of marine insurance.1. policya. claimb. clausec. sectiond.

Marine insurance is a ________term used to describe any policy that covers crafts or goods relating to the 2. water.

legala. blanketb. valuedc. unvaluedd.

Which refers to a policy in which the subject matter is insured for a particular voyage irrespective of the time 3. involved in it?

Time and voyage policya. Floating policyb. Valued policyc. Mixed policyd.

Which policy is one which leaves the name of the ship or other particulars to be provided at a later time by 4. declaration or endorsement?

Time policya. Floating policyb. Valued policyc. Mixed policyd.

Which policy is issued for more than one year?5. Builder’s risk policya. Blanket policy b. Unvalued policy c. Port risk policy d.

Which policy is the one in which the assured has no insurable interest and the underwriter is prepared to dispense 6. with the insurable interest?

Wager policy a. Port risk policy b. Composite policyc. Block policy d.

Which type of policy is purchased from more than one under writers?7. Wager policy a. Port risk policy b. Composite policyc. Block policyd.

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Which policies insure the vessels themselves against physical damage?8. Vessel insurancea. Wagerb. Post riskc. Blockd.

WhatisgrantedinconjunctionwithanOpenPolicy,SpecificPolicyoropencover?9. Special storage risks policya. Annual Policy b. Duty Insurance Policy c. Increased Value Insurance Policy d.

Which is also available to cover transits and storage risks incidental to transits for tea, coffee, cardamom and 10. rubber?

Package policya. Annual Policy b. Duty Insurance Policy c. Block policy d.

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Chapter VI

Marine Clauses

Aim

The aim of this chapter is to:

explain in detail the marine clauses•

enlist the areas which are excluded from the marine clause•

definejettison•

Objectives

The objectives of this chapter are to:

analyse the ICC ‘A’ ‘B’ and ‘C’ clauses•

explain both to blame collision clause•

illustrate cover for war and SRCC risks•

Learning outcome

At the end of this chapter, you will be able to:

enlist the sub clauses common to ICC A/B/C•

discuss the duration of cover for ‘War Risks’•

talk about different marine clauses•

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6.1 Marine ClausesThe Clauses used for Ocean Transit are ICC ‘A’, ’B’ and ’C’ and the scope of cover is as given below:

Institute Cargo Clause (C)•Fire or Explosion �Vessel/craft being stranded , grounded, sunk or capsized �Overturning or derailment of land conveyance �Collision or contact of vessel/craft or conveyance with any external object (other than water) �Discharge of cargo at a port of distress �Generalaveragesacrifice �Jettison �General average contribution and salvage charges �Liability under both to blame collision clause �

Institute Cargo Clause (B)•In addition to the perils mentioned above, the following perils are also covered:

Washing overboard �Earthquake, volcanic eruption or lighting �Entry of sea, lake or river water into vessel, craft, hold, container, lift van or place of storage. �Total loss of any package lost overboard or dropped whilst loading onto or unloading from vessel or �craft.

Institute Cargo Clause (A)•All risks of loss or damage to the cargo (other than exclusions) �

Exclusions•The marine clauses exclude the following areas:

Wilful misconduct of the insured �Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear �Inherent vice or nature of the subject matter �Delay �Insolvencyorfinancialdefaultofowners,operators,etc.ofthevessel �Insufficiency/unsuitabilityofpacking �War and allied perils �Strikes, riots, civil commotion and terrorism �

In addition to exclusions which are given above, ICC- B and C Clauses also exclude malicious damage. However, the same can be covered by the payment of additional premium.

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6.2 Analysis of ICC- A/B/C ClausesDifferent clauses have been discussed below:

Clause No.1: The Risk Clause of the Institute Cargo clauses ‘C’ will pay for loss or damage reasonably attributable to the following perils:

Fire or explosion•Stranding, sinking, grounding, capsizing of the vessel/craft•Overturning or derailment of land conveyance•Collision or contract of vessel, craft or conveyance with any object (other than water)•

Marine CargoCarriage by Sea

(Including Incidental Inland Transit)

ICC-A IWC-Cargo

Carriage by Air(Including incidental Inland Transit)

Inland Transit (Rail/Road)

Marine Hull

ISC-Cargo

ICC-B

ICC-C

ICC-Air Cargo

IT(R/R)C-A

Time

ITC – HULLS IVC – HULLS I B/R CLAUSE

Voyage Builders Risk

IT(R/R)C-B IT(R/R)C-C IT SRCC

IWC-Air Cargo ISC-Air Cargo

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Discharge of cargo at a port of distress•Generalaveragesacrifice•Jettison•

Clause No.2: General average clause provides cover for general average and salvage charges adjusted or determined according to the contract of affreightment and/or the governing law and practice incurred to avoid or in connection with the avoidance of loss caused by any insured perils mentioned above.

Clause No.3:BothtoBlameCollisionClause,indemnifiestheassuredagainstliabilityfallingonhimunderthe‘Both to Blame Collision’ Clause incorporated in the bill of lading. On examination of the above 3 clauses it will be observed that the cover granted under ICC(C) is essentially for major maritime perils and major transit risks with regard to incidental inland transit such as overturning or derailment of inland conveyance.

6.3 JettisonJettison means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to vesselorotherpropertyinthevessel.Ifgoodsarejettisonedduetoinherentvice,thelosswillnotbeindemnified.Toillustrate,jettisoningaconsignmentofvegetablesandfruitstolightenastrandedvesselwillbeindemnified.However, if vegetables and fruits in a vessel decay, compelling them to be dumped into the sea, then the loss will not be compensated.

6.4 Both to Blame Collision ClauseWhere two vessels collide on high seas, the maritime law of various countries provides that the liability for •damagestoeachotherbefixedaccordingtothedegreeofnegligencee.g.20:80,40:60,50:50.Accordingtooneof the conditions in the Bill of Lading, the cargo owners cannot claim damages from the vessel in the event of a collision of the carrying vessel with another vessel (non-carrying vessel). Under maritime law of certain countries inclusiveofU.S.A.,apportionmentofblameforcollisionisdeterminedon50:50basis.Thissituationoffixingthe liability of 50:50, sometimes leads to a peculiar position which is explained by the following example:

Insured Cargo is carried in Ship ‘A’. The two ships ‘A’ and ‘B’ are in collision. They are held to be blamed �equally. So, the liability between these two ships is decided on 50:50 basis. Though as per the Conditions of the Bill of Lading, the cargo owner cannot recover from his Ship ‘A’ but under International Maritime Law he can recover 100% from Ship ‘B’. However, the non-carrying vessel may include a proportion of this amount in his claim against the carrying vessel.Anticipating this possibility, the carrier incorporates the ‘both to blame collision clause’ in his contract of �carriage whereby he claims reimbursement of this amount from the Cargo owner. Both to blame collision clause is one of the conditions in the Bill of Lading according to which the Cargo owners are liable to indemnify the Ship owners for any amount which the carrying vessel is required to pay to the non-carrying vessel. This Clause under ICC (C) promises to indemnify the insured as and when any liability arises in the event of a claim by the ship owners under the Both to Blame Collision Clause.

AsregardstheGeneralAverageClause,itprovidesindemnificationtotheinsuredasandwhenanygeneralaverage•lossintheshapeofanysacrificeorexpensesareincurredandtheinsuredisrequiredtocontributetowardsthesame under the International Maritime Law. According to Section 66(i) of the Marine Insurance Act, General AverageLosshasbeendefinedas“alosscausedbybeingdirectlyconsequentialonaGeneralAverageAct.Itincludesgeneralaverageexpenditureaswellasgeneralaveragesacrifice.”WhilstGeneralAveragesacrificeisa covered peril under the Risk Clause, General Average Contribution is payable under this clause.Section66(ii)furtherstates“thereisaGeneralAverageActwhereanyextraordinarysacrificeorexpenditureis•voluntarily and reasonably made or incurred at the time of the peril for the purpose of preserving the property imperiled in the common adventure.”

Salvage Charges are the reward or remuneration paid to Third Parties called Salvors who voluntarily and •independent of contract, render services to save maritime property which is in danger. The salvage charges are paid by and out of saved property e.g. ship or cargo, etc. However, these charges are paid on ‘No Cure No Pay Basis’.

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6.4.1 In Addition to the Above, the Following Expenses are also PaidThe Forwarding Charges Clause (Clause No.12) provides for the payment of any extra charges reasonably and •properly incurred in unloading, storing and forwarding the insured subject matter to the destination named in the policy, when as a result of the operation of an insured peril, the insured transit is terminated at a port or place other than the original destination. The Duty of the Assured Clause (Clause No.16) contemplates reimbursement of any expenses or charges •reasonably and properly incurred by the assured or their servants/agents, in averting or minimising a loss/or damage covered under the policy and also in preserving and enforcing recovery rights against carriers or third parties.A close look at the above reveals that ICC ‘C’ aims at granting protection for losses/ damages resulting from •casualties to the carrying vessel or vehicle.

6.5 Institute Cargo Clause ‘B’ (ICC ‘B’)The set of clauses offers a slightly wider cover and provides coverage against the following risks in addition to what is covered as per ICC ‘C’.

Earthquake, volcanic eruption or lightning•Washing overboard•Entry of sea, lake or river water into vessel, craft hold conveyance, container, lift-van or place of storage•Total loss of any package lost overboard or dropped whilst loading/ unloading.•

Besides, any loss or damage caused due to earthquake, volcanic eruption or lightning, the additional risk covered under ‘B’ are:

Loss arising due to the cargo having been washed away from the vessel due to heavy/ rough weather or high •tideofthesea;Loss or damage to the cargo due to the entry of sea water during ocean voyage or lake or river water whilst •being carried inland or the entry of lake/river water in the place of storage.Total loss of the complete package when dropped, during the loading or unloading operation.•

The scope of cover under the above ICC ‘B’ OR ‘C’ can be widened according to the requirements of the insured by including extraneous perils subject to suitable additional premium. Some of the common extraneous perils are mentioned below:

Malicious damage: Loss or damage to the insured cargo caused by a person acting with malicious intentions •can be covered subject to the Malicious Damage Clause.Theft, Pilferage and Non-delivery (TPND): Loss of the insured cargo due to theft or pilferage during the insured •transit will be compensated. The risk of non-delivery of cargo by the carriers is also accepted by the insurers. Itshouldbeborneinmindthatanytypeofmajorloss,saysinkingorfiremayresultinnon-delivery.Buttherisk of non-delivery here refers to non-delivery due to unascertainable or unexplained cause. The risk of theft, pilferage and non-delivery are covered subject to the institute Theft, Pilferage and Non-delivery clause.Fresh or rain water damage: This may be caused during any portion of the insured transit.•Damage by hooks, oil, mud, acid and other extraneous substances.•Heating and sweating: The former risks exist in respect of cargo prone to heating by spontaneous combustion. •Coal or oilcakes shipped in bulk are susceptible to self-heating or spontaneous combustion. “Sweating refers to the water damage caused by the deposit or condensation of water in the vessel or container hold, as a consequence of different climatic/ atmospheric conditions. This is referred to as ship sweat or container sweat. If however, internal moisture trapped in certain cargo like grains or cocoa beans or oilseeds escapes on its own, it is termed cargo-sweat. Then it is regarded as an inherent vice which is an inevitable loss and hence not payable.Leakage/ contamination: Liquid cargoes are exposed to the risk of leakage. Edible goods and chemicals are •susceptible to contamination.

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Breakage: This is very common to shipments of machinery and spares, glass and porcelain items.•Country damage: This may arise to cotton shipments due to weather conditions and exposure to the country •climate/dust during inland transit prior to shipment or whilst awaiting shipment.Bursting and tearing of bags•Shortage•

6.6 Institute Cargo Clauses ‘A’ ICC-‘A’The widest of all covers is provided by the ICC ‘A’ clause. In its broad sweep and wide scope, it encompasses •cover against the risks referred to in ICC ‘B’ and the extraneous perils enumerated above. All risks of physical lossordamage,otherthancertainexceptionsspecificallynamedintheclausesarecovered.The losses which are beyond the scope of the cover are enumerated in the Exclusion Clause nos. 4, 5, 6 and •7. Most of the exceptions listed out in Clause No. 4 are statutory exceptions as per the Marine Insurance Act. Section 55 (i) of the Marine Insurance Act states “subject to the provisions of this act and unless the Policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.”Section 55 (ii) discusses the excluded losses:•

The Insurer is not liable for any loss attributable to Wilful misconduct of the assured, but, unless the Policy �otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct of the Master or Crew.Unless the policy otherwise provides, the Insurer of the ship or goods is not liable for any loss proximately �caused by delay, even though the delay be caused by a peril insured against.Unless the policy otherwise provides, the Insurer is not liable for Wear and Tear. Ordinary leakage and �breakage, inherent vice or nature of the subject matter insured or for any loss proximately caused by rats or vermin.

6.7 The Losses / Damages Excluded under ICC ‘A’ ‘B’ and ‘C’ The losses/ damages excluded under ICC ‘A’, ‘B’ and ‘C’ are discussed in detail below:

Wilful misconduct of the assured: • All Insurance contracts are designed with the intention to indemnify the Insured for only accidental losses. Therefore, no loss which is deliberately caused by the Wilful misconduct of the insured can be paid. It would also be against public policy to pay for such type of losses and the Act, therefore says, such losses are not to be paid.Ordinary leakage, ordinary loss in weight or volume, ordinary wear and tear of the subject matter: • The above types of losses can generally be termed as “Trade” losses which are not accidental in nature. Generally, certain liquid cargo (Benzene) may evaporate and fall short of their original quantity. Some unaccounted for shortages may occur when some liquid cargo may stick to the walls of the carrier, without the operation of any Insured peril. Similarly, ordinary leakage, breakage, loss in weight/volume are called ullage losses and not payable under the policy.Insufficiencyorunsuitabilityofpacking:• Here, it also includes stowage in a container or a lift van but only when such stowage is carried out before the commencement of the risk under the policy or is carried out by the insuredorhisagents.Itisnaturalthatwherethepackingispoor,unsuitableorinsufficient,theinsuredisliablefor losses arising out of the bad packing. The yardstick that can be applied is that the packing should be able to withstand the hazards of the journey it intends to traverse. To explain, for the same type of goods the strength and the durability of the packing will differ between a short journey and a long journey and also the type of people who are to handle it in the various spells of transits. In India for a particular cargo, the packing approved by the Indian Packaging Institute will be treated as standard /customary packing for that type of cargo.Inherent vice or nature of the subject matter insured: • Inherent vice can be described as a tendency of a particular commodity to deteriorate or decay, depending upon the duration of the journey, season in question and other factors. These losses are of an inevitable nature and as such cannot be considered by the insurer. For example – vegetables/fruits may decay merely because of lapse of time without any external agency being

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responsiblefortheloss.Grainmaybedamagedbyinsects;theremaybeachangeinthephysicalandchemicalproperties of certain cargo during the course of transit.Delay, even though delay is caused by risk insured against: • Sometimes a voyage may be delayed and if because of that some perishable goods (fruits/vegetables etc.) deteriorate, such losses are not payable. However, if there is any physical loss or damage to the goods due to collision, the insurer will be liable to that extent.Insolvencyorfinancialdefaultoftheshippingcompany:• Exclusion of loss/damage due to insolvency or financialdefaultofvesselowners,charterers,etc.wasanewexclusionintroducedintherevisedInstituteCargoClauses, because there was an unprecedented spurt of maritime frauds and a series of mysterious sinking of vessels resulting in claims of a complicated and dubious nature. The mushroom growth of tramp vessel and single vessel owners added yet another dimension to this problem. Faced with claims of fantastic size and alarming proportions, underwriters had to devote the best of their attention and wisdom to this fearsome trend which spelt doom for their future. The shippers have to be more careful in the selection of vessels and the reliability andfinancialsoundnessoftheshippingcompany.Unseaworthinessandunfitnessexclusionclause:• Theunseaworthinessandunfitnessexclusionclauseprovidesthat the insurer will not admit liability for any loss or damage caused by the unseaworthiness of the vessel or thecraftandunfitnessofthevessel,craft,conveyance,containerorliftvanforthesafecarriageofcargo,ifassuredortheiragentsareprivyorpartytosuchunseaworthinessorunfitnessatthetimethesubjectmatterisloadedtherein.InallcontractsofMarineInsurance,seaworthinessandfitnessoftheshipforthepurposeof carriage of the goods insured to the destination, is an implied warranty. According to Section 42 (2) of the Marine Insurance Act “In a voyage policy on goods or other movables, there is an implied Warranty that at the commencementofthevoyage,theshipisnotonlysea-worthy,butalsothatsheisreasonablyfittocarrygoodsor other movables to the destination contemplated by the policy”. By sea worthiness, we mean that the vessel shouldreasonablybefittoprosecutethevoyageandencountertheordinaryperilsofthesea.CargoWorthinessmeansthattheshipisreasonablyfitforthepurposeofcarriageofthegoodsinsured.War exclusion clause: • This clause excludes losses or damages due to war and allied perils.Strikes exclusion clause: • It exempts liability for losses or damages due to Strikes and kindred perils.Malicious damage loss exclusion: • Besides the above mentioned exclusions, there is one more exclusion under ICC (B) and (C) which says – “deliberate damage to or deliberate destruction of the subject matter or any part thereof by the wrongful act of any person or persons” is excluded. This exclusion is also termed as “Malicious Damage Loss Exclusion”. However, there is a provision whereby, the Insured can get this coverage by the payment of extra premium and subject to the “Malicious Damage Clause”.

6.8 Cover for War and SRCC RisksThough the Institute Cargo Clauses exclude the risk of War and SRCC cover against such perils, these are provided at additional premium. The Institute War Clauses grant cover against War risks and the Institute Strikes Clauses against strike perils.

The Institute War clauses cover loss or damage to the subject matter caused by:War, Civil War, revolution, rebellion, resurrection or civil strike arising there from or any hostile act by or •against a belligerent power.Capture seizure, arrest, restraint or detainment arising from risks covered in above 1 and the consequences •thereof or any attempt there at.Derelict mines, torpedoes, bombs or other derelict weapons of war.•

The Institute Strikes Clauses cover loss or damage to the subject matter insured caused byStrikes, lock-outs, workmen or persons taking part in labour disturbances, riots or civil commotions.•any terrorist or any person acting with a political motive.•

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6.9 Sub Clauses Common to ICC A/B/CThe sub clauses are:

6.9.1 Duration of Cover or Transit ‘Insurance Clause’The duration of cover is the same under all the three sets of clauses ICC ‘A’ ‘B’ and ‘C’. They contemplate cover on ‘warehouse to warehouse (WW)’ basis i.e., the cover will commence from the time the insured goods leave the consignor’s warehouse for the purpose of transit and terminates on delivery to the consignee’s warehouse at the place named in the Policy. Though the cover is obviously continuous, warehouse to warehouse cover is not automatic and it is subject to the Insured’s acting with reasonable dispatch in all circumstances within their control. There isalimitationperiodwithinwhichtheinsuredsubjectmatterisexpectedtoreachthefinalwarehouse.Thecoverunder above clauses ‘A’ ‘B’ and ‘C’ attaches from the time the Insured goods leave the consignor’s warehouse for the purpose of transit, continues during the ordinary course of the transit and terminates either

OndeliverytothefinalwarehouseoftheconsigneeatthedestinationnamedinthePolicy.•On deliver y to any other warehouse /place of storage before the named destination where the consignee takes •delivery for storage for allocation / distribution purposes. On expiry of 60 days after the completion of discharge from the vessel at the Port of discharge•

- Whichever Shall First Occur.

6.9.2 Termination of Carriage ClauseIf due to circumstances beyond the insured’s control, the Contract of Carriage or Transit is terminated before the delivery of goods as envisaged under the Transit Clause, the insurance shall also terminate unless prompt notice is given and additional premium paid for continuation of cover in which case, the insurance will remain in force:

Until goods are sold and delivered at such port or place subject to a limit of 60 days from discharge over side •the vessel.If the goods are forwarded within the said period of 60 days to the original destination named in the Policy or •any other destination, until termination in accordance with the transit clause.

6.9.3 Change of Voyage ClauseThe Insurance covers change of voyage at an additional premium and subject to prompt notice to the underwriters.

6.9.4 Insurable Interest ClauseTheAssuredmusthaveInsurableInterestatthetimeofloss.LostorNotLostbenefitisavailable.

6.9.5 Forwarding Charges ClausesIf due to the operation of an Insured peril, the transit is terminated at a port or place other than the destination under the policy, the Insurers will reimburse to the Insured, any extra charges reasonably incurred in unloading, storing and forwarding the cargo to the insured destination. This clause will not apply to G.A. and Salvage Charges.

6.9.6 Constructive Total Loss ClauseClaim for Constructive Total Loss will be recoverable only when cargo is reasonably abandoned because either Actual Total Loss is unavoidable or the cost of recovering, reconditioning and forwarding to the original destination would exceed its value on arrival.

6.9.7 Increased Value ClauseDeals with the provision for settling claims for Increased Value Insurance of the Cargo insured under the policy.

6.9.8 Not to Inure ClauseTheInsurancewillnotinuretothebenefitofthecarrierorotherbailee.

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6.9.9 Duty of Assured ClauseIt is the duty of the Assured to prevent/minimise losses and protect recovery rights from carriers/bailees. Underwriters will reimburse the charges for loss prevention/ minimisation in addition to any loss payable.

6.9.10 Waiver ClauseLoss minimisation measures, undertaken by the insurer/insured shall not be treated as waiver or prejudice the rights of any party.

6.9.11Reasonable Dispatch ClauseThe assured must act with reasonable dispatch in all circumstances beyond their control.

6.9.12Law and Practice ClauseInsurance is subject to English Law and practice.

6.10 Duration of Cover for ‘War Risks’Where war perils are also covered subject to the Institute War Clauses, the war cover attaches from the time the cargo is loaded on the vessel at the port of loading and continues in the ordinary course of transit and terminates upon the discharge of cargo from the vessel at the port of discharge or on the expiry of 15 days from the midnight ofthedateofarrivalofthevesselattheportofdischarge,whichevershallfirstoccur.Thislimitedcoverisgrantedin view of the Waterborne Agreement.

6.10.1 Duration of Cover for SRCC RisksThe duration of cover for SRCC risk is the same as the duration under Institute Cargo Clauses ‘A’ or ‘B’ or ‘C’.

6.11 Inland Transit Rail/Road ClausesThese clauses are attached to policies covering transit by Rail/Road. There are 3 types of clauses viz.,

Inland Transit Rail/Road Clause “C”: This clause covers the perils of:•Fire �Lightning �

Inland Transit Rail/Road Clause “B” :This clause covers the perils of:•Fire �Lightning �Breakage of bridges �Collision with or by the carrying vehicle �Overturning of the carrying vehicle �Derailment or Accidents of like nature to the carrying railway wagon/ vehicle. �

Inland Transit Rail/Road Clause “A”•This clause covers all risks of Loss or damage to the subject matter insured except the excluded risks �mentioned below:

6.11.1 Common Exclusions under Clause A/B/C

Willful Misconduct•Ordinary Leakage/ breakage/ shortage etc. i.e., Ullage Losses•Insufficiency/unsuitabilityofpacking•Delay•Inherent Vice•

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6.12 War Exclusion ClauseWar, civil war, revolution, insurrection and allied perils cannot be covered under inland transit.

6.13 Strike Exclusion ClauseLosses caused by or resulting from the acts of strikers, locked out workmen or persons taking part in labour disturbances, riots or civil commotions are excluded along with losses caused by any terrorists or any person’s action with a political motive. However, this Strike risk exclusion can be deleted by paying additional premium, whereas other ‘exclusions cannot be removed. The Inland Transit SRCC clause will be attached to the Policy in such cases. The Sub clauses which are common to Inland Transit A/B/C Clauses are as follows:

Transit Insurance Clause (Duration of the Cover Clause)•The transit insurance coverage attaches from the time the cargo leaves the warehouse or the storage place �named in the policy for the commencement of transit and continues during the ordinary course of transit includingcustomarytransshipment(ifany)andterminatesonthedeliveryofthecargotothefinalwarehouseat the destination. If the cargo is transported by road, delivery of the goods should be taken within 7 days from the date of �arrival of the truck at the destination town and if the consignment/cargo is transported by rail or rail/road, the delivery must be taken within 7 days from the arrival of the railway wagon at the destination railway station. The period of 7 days is calculated from the midnight of the day of arrival of the railway wagon at the destination railway station or the vehicle at the destination town.

Insurable Interest Clause• On the same lines as ICC A/B/C. �

Not to Inure Clause•On the same lines as ICC A/B/C. �

Duty of Assured Clause •On the same lines as ICC A/B/C with minor changes. �

Waiver Clause•O � n the same lines as ICC A/B/C.

Reasonable Dispatch Clause•On the same lines as ICC A/B/C �

6.14 Incidental ClausesAccessories clauses: Motor vehicles and similar other cargo have sets of tools and small accessories shipped •with them. If these tools, etc. are sent in separate packages, pilferage risk is high. Further, parts of the vehicle not attached securely to the vehicle, may be easily removed. The accessories clause provides that underwriters shall not be liable for the loss of loose spare parts and/or accessories unless these are lost or stolen with the whole vehicle.Country damage: A condition in a policy covering baled or bagged goods which may be exposed to wind, grit, •mud, etc. prior to loading. The clause covers deterioration or damage occurring prior to loading on to the overseas vessel caused by the absorption of excessive moisture from damp ground, exposure to weather or grit, dust or sand forced into the subject matter by windstorm or inclement weather.Cutting clause:• It is used in policies covering pipes or similar cargoes of length. It provides that the damaged lengths be cut off, leaving the undamaged lengths for the account of the assured. The underwriter’s liability is limited to the insured value of the damaged part cut off and the cost of cutting. Continental insurances often provide that if the damage extends to more than an agreed amount (e.g. three metres), the insurer will pay the insured value of the whole length without cutting.Dangerous drugs clause:• Underwritersareconsciousoftheundesirabilityofencouragingtheillicittrafficindangerous drugs. Many of these drugs, however, have a legitimate medicinal use and are imported for that purpose. The clause excludes all claims for drugs which are shipped without the necessary authorisation papers

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or which are shipped by any route other than the customary route.Garbling clause:• To garble is to sift, or to cleanse, or to select that which is sound from the whole. Generally, the term is applied in the insurance of tobacco, although it could be applied to most other cargoes. The clause provides that the underwriter will pay the cost of garbling. This is because garbling of tobacco usually prevents further loss of the sound tobacco.Label clause:• Cannedandsimilargoodsareidentifiedtotheconsumerbytheattachedpaperlabel.Exposureof the cans to moisture may cause discolouration of the labels or obliteration of the painting on the labels, or it might cause the labels to come off the cans. In any event, such damage to the labels does not impair the quality ofthecontentsofthecanwhichisthesubjectmatterofinsurance.Itdoes,however,makeitdifficultifnotimpossibletoidentifysuchgoodsifthelabelistheonlymeansofidentification.Today,mostconsumersstampa code number into one end of the can so that whatever happens to the label, the raised metal of the stamped code number will identify the contents of the can. Thus the consignee can attach fresh labels to replace those damaged by moisture and his only loss is the cost of the labels and the re-labelling labour costs. The cause of damage to the labels may not be restricted to sea water. Condensation can cause such damage as also can juice from other cans which may be blown and leaking or leaking following damage to the cans. The label clause excludes claims for lost or damaged labels and limits the underwriter’s liability to the cost of re-labelling and repacking the goods.Pair and sets clause:• Where the value of the “objects” or jewellery depends on their continuance as a pair or set, the value is drastically diminished if one of the pair or set is damaged or destroyed. Examples would be a set ofrareantiqueporcelainfiguresorapairofdiamondearrings.Naturally,theassuredwouldprefertoabandonthe other earring to the underwriters and claim a total loss. Anticipating this, the underwriter will insist on the “Pair and Sets Clause” appearing in the policy whereby they limit their liability to the insured value of damaged part or lost object.Picking cause:• Cotton,woolandsimilarfibrouscargoesmaybeshippedinbaleswhichexposetheouterpartof each bale to the risk of damage. The bales are usually large so, overall, the damage, when restricted to the outerpartofabale,issuperficial.Thusbypickingoutthedamagedfibres,theremainderofthebaleissaleableas sound cargo. When a number of bales are so damaged, the sound part may be re-baled to make whole bales. Thefibrespickedoutasdamagedarecalled“pickings”and,providedthelosswascausedbyaninsuredperil,the insurer is liable for the insured value of the pickings. The “pickings clause” also provides that the insurers shall pay the cost of picking and the cost of re-baling both sound and picking material. The damaged material may still be saleable in which case the insurer who paid the claim is entitled to the proceeds of the sale less sale costs.Second-handreplacementclause:Ifacargointerestisspecified• simplyas“Machinery”,withoutqualification,itis deemed to be new machinery. However, when second-hand machinery is sent say for repairs, etc., the insurer, will attach the “second-hand replacement clause”. This allows them to replace any part broken or lost, for which they are liable, with second-hand material i.e. charging depreciation on the new value of the part replaced for age, usage, wear and tear, etc.Spotting clause:• Soft leather goods such as gloves react unfavorably when stored in a poorly ventilated, damp, atmosphere and are particularly vulnerable to spotting by mildew and staining. This peril is inevitable and should not be embraced within the term “risk” except when the circumstance giving rise to the situation was an accident. The “spotting clause”, attached by under writers to policies on soft leather goods, excludes liability for spotting and staining unless it is caused by the vessel being stranded, sunk or burnt.Stripping clause:• When goods are damaged, underwriters may be prepared to accept a surveyor’s estimate of the percentage of depreciation or it may be necessary to sell the whole or part of the goods to establish the difference inmarketvaluebetweenthesoundanddamagedgoods.Thisdifferenceisthetruelosstotheassuredbuttofindthe difference, damaged goods must be sold, which goods may carry a “brand” wrapping. The term “branded” goods is applied to goods which are well known as having a good reputation for consistent quality. The brand is readily recognisable by the wrapper and when branded goods are sold in a damaged state, there is a risk that where the damage is not immediately apparent, these will be sold in the retail markets represented as sound goods and thus impairs the reputation of the manufacturers or producers. The stripping clause provides that wrappers must be removed before damaged goods are sold. The underwriter is liable for the cost of removing

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the wrapping and further, the clause provides that the underwriter must pay the difference between the insured value of the goods sold and the price realised by the sale. This clause is sometimes called the “brand clause”.

6.15 Duty Insurance ClauseThe salient features of the Duty Insurance Clause are summarised below:

Cover is granted on goods imported into India.•Policy issued to import license holders only (High seas sales by state agencies is an exception) and the policy •is not assignable.Covers losses on duty portion due to damage to goods.•In order to admit claim under the “Duty policy”, claim under the cargo policy must be admissible.•No claims are entertained in respect of the Total Loss of the whole or part of the cargo prior to the Duty becoming •payable.Claims are payable on the basis of actual duty paid or on the basis of the sum insured, whichever is less. Thus •the policy is one of pure indemnity.The Marine Cargo policy on the CIF value of the cargo should exist and be in force simultaneously.•The “Duty” policy covers the same risks as covered by the basic cargo policy.•Policy to be given on the basis of a signed proposal form.•The Duty policy should be issued prior to the arrival of the ship at the destination port. Thus only Duty paid •under the Prior Entry system can be insured under the Duty Policy.The rate of premium shall be 75% of the rate applicable for covering the CIF value of the cargo itself.•War and SRCC rates as applicable will also be on 75% basis but they shall not be below the prevailing Inland •Transit SRCC rates.Where the CIF insurance is affected with another insurer, the rate of premium for covering Duty shall be 75% •of the appropriate marine rates of the insurer covering Duty.

6.16 Increased Value – Insurance ClauseIncreased Value Insurance as already explained above, is on increased value by reason of the market value of the goods at the destination of the date of landing being higher than the CIF and the duty value of the cargo and is subject to the same clauses and conditions as the insurance of the CIF value of cargo. The Insurance will pay 75% of the actual loss suffered in the market of realizable value of cargo not exceeding 75% of the sum insured. Thus, this Insurance is Pure Indemnity and not an Agreed Value Policy. Similarly, the insurance shall not be valid if affected afterthearrivalofthevesselatthedestinationport.Theclausealsoprovidesforspecificwarrantieswhichmustbe complied with by the Insured.

6.17InstituteClassificationClauseThe Marine Transit Rates normally apply only to cargoes and/or interests carried by mechanically self propelled vessels ofsteelconstructionclassedbyoneoftherecognisedclassificationsocietiesandprovidedsuchvesselsare:

not over 15 years of age or �Over 15 years of age but not over 25 years of age and have established and maintained a regular pattern of �tradingonanadvertisedscheduletoloadandunloadatspecifiedports.

Chartered vessels and also vessels under 1000 G.R.T. which are mechanically self-propelled and of steel construction mustbeclassedbyClassificationSocietiesandmustnotbeover15yearsofage.TherequirementsoftheInstituteClassificationclausedonotapplytoanycraftorlighterusedtoloadorunloadthevessel,whilsttheyarewithintheport area. Cargoes and/or interests carried by mechanically self-propelled vessels not falling within the scope of the ClassificationClausemaybecoveredsubjecttoadditionalpremiumandonconditionstobeagreed.

6.18 Institute Theft Pilferage and Non Delivery (Insured Value) ClauseThe clause extends the policy to cover the risk of theft and/or pilferage irrespective of percentage. There will be no liability for loss unless notice of survey has been given to the Underwriter/ Agents within 10 days of the expiry of

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the risk under the policy. The clause also covers the risk of Non-delivery of an entire package of which the liability of the ship owner or other carrier is limited, reduced or negated by the Contract of Carriage by reason of the nature and value of the goods. Subrogation Rights will apply.

6.19 Institute Replacement ClauseThe wordings of the Clause are reproduced are as: “In the event of loss of or damage to any part or parts of an insured machine caused by a peril covered by the policy, the sum recoverable shall not exceed the cost of replacement or repairofsuchpartorpartspluschargesforforwarding=andrefitting,ifincurred,butexcludingdutyunlessthefull duty is included in the amount insured, in which case loss, if any, sustained by the payment of additional duty shall be recoverable. Provided that in no case shall the liability of the underwriter exceed the insured value of the complete machine.”

6.20 Institute Clauses – Trade ClausesInstitute Frozen Food Clause (A) (excluding Frozen Meat)•Institute Frozen Food Clause (C ) (excluding Frozen Meat)•

As with the Institute Cargo Clauses (C) The Institute Frozen Food Clauses (C) have been drafted to provide �major casualty cover and the Institute Frozen Food Clause (A) has been designed to provide standard cover for the insurance of Frozen food.Risk Clause 1 in the Institute Frozen Food Clauses (A) reads: �

This insurance covers except as provided in exclusion clauses 4,5,6 and 7 the perils/contingencies �mentioned below:

All risks of loss of or damage to the subject matter insured other than loss or damage - resulting from any variation in temperature howsoever caused.Loss of or damage to the subject matter insured resulting from any variation in temperature - attributable to.Breakdown of refrigerating machinery resulting in its stoppage for a period of not less than - 24 consecutive hours.Fire or explosion.- Vessel or craft being stranded, grounded, sunk or capsized.- Overturning of derailment of land conveyance.- Collision or contact of vessel craft or conveyance with any external object other than water.- Discharge of cargo at a port of distress.-

6.21 Institute Coal ClausesThese clauses were issued to cater to the basic requirement of the growing international trade in coal. The joint Cargo Committee have stressed the importance in view of the inherent qualities of coal, the diversity of types and sources of production of expert supervision at the time of loading and of the employment of specialist coal surveyors in the event of claims. The insurance attaches on loading on board the overseas vessel and terminates on discharge over side there from. The coverage is as follows:

This insurance covers, except as provided in exclusion Clauses 4,5,6,7 the perils / contingencies mentioned •below:

Loss of or damage to the subject matter insured reasonably attributable to �Fire explosion or heating, even when caused by spontaneous combustion, inherent vice or nature of the �subject-matter insured.Vessel being stranded, grounded, sunk or capsized. �Collision or contact of vessel with any external object other than water. �Discharge of cargo at a port of distress. �Earthquake, volcanic eruption or lightning �Loss of or damage to the subject matter insured caused by �Generalaveragesacrifice. �

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Jettison or washing overboard. �Entry of sea, lake or river water into vessel holds container or place of storage. �

6.22 Institute FOSFA Trade Clauses (A) (B) and (C)These clauses were designed for Oil, Seeds and Fats after an agreement with the Federation of Oils, Seeds and Fats Associations. The terms of these clauses are identical to those of the corresponding Institute Commodity Trade Clauses agreed with the Federation of Commodity Associations. In Addition, four separate Institute FOSFA Supplementary Clauses were issued also under date for use with the appropriate FOSFA Trade clauses to extend the cover there under.

6.23 Institute Container ClausesThe clauses used for containers fall into two categories:

Institute Container Clauses – Time (All Risks) �Institute Container Clauses – Time (Total Loss General Average, Salvage Charges, Sue and Labour) �

Since a container may be treated as part ‘Cargo’ and part ‘Hull’ in character, these Clauses have been adapted from the Institute Cargo and Hull Clauses and contain a few provisions which are peculiar to the Container Clauses. The ‘All Risks’ Clauses provide cover against all risks of loss of or damage to the subject-matter insured including whilst on deck within the sea and territorial limits set out in the Schedule but claims arising on oversea vessels not specifiedintheSchedulearenotcovered.Lossofordamagetothemachineryofthecontainerisonlycoveredif

the container is a total loss or �the damage is proximately caused by stranding or sinking of the vessel or craft or by collision, overturning �orotheraccidenttothelandconveyanceoraircraftorbygeneralaveragesacrificeorThedamageisreasonablyattributabletofireorexplosionoriginatingexternallytothemachineryorto �collision or contact of the vessel or craft with any external substance (ice included) other than water.

The measure of indemnity for a damaged container (not a total loss) is the reasonable cost of repairing the damage. Underwriters are only liable for any amount in excess of that entered on the Schedule as the deductible in respect of each container, each accident or series of accidents arising out of the one occurrence but the deductible does not apply to:

Total loss. �General average salvages charges and sues and labours. �

The Unrepaired Damage Clause excludes (as in the I.T.C. Hulls) payment for unrepaired damage in addition to a total loss during the currency of the insurance.TheTotalLoss,GeneralAverageSalvageCharges,SueandLabourClauses’coverwithinthespecifiedlimitincludingwhilst on deck against:

All risk of total loss of the subject matter insured. �General average salvages and salvages charges. �

Sue and labour charges incurred for the purpose of averting or minimising any loss covered by the insurance. Both setsofclausesstipulatethatthecontainermustbearclearmarksofidentificationandthatbreachesoftheSeaandTerritorial Limits are held covered at an additional premium to be agreed subject to prompt notice.

6.24 Marine Clauses – HullThe types of Clauses attached to Hull policies are as follows:

6.24.1 Institute Time Clauses – Hull (ITC Hulls)ITC Hulls cover both total and partial losses but it must be clearly understood that this cover offers indemnity only forlossescausedbyspecifiedperils.ITCHullscomprise26clauses,eachdealingwithadifferentaspectofthisinsurance. A list of these clauses is set out below:

Navigation•Continuation•

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Breach of Warranty•Termination•Assignment•Perils•Pollution Hazard•3/4th Collision Liability•Sistership•Notice of Claim and Tenders•General Average and Salvage•Deductible•Duty of Assured (Sue and Labour)•New for Old•Bottom Treatment•Wages and Maintenance•Agency Commission•Unrepaired Damage•Constructive Total Loss•Freight Waiver•Disbursement Warranty•Returns for Lay-up and Cancellation•War Exclusion•Strikes Exclusion•Malicious Acts Exclusion and•Nuclear Exclusion•

6.24.1.1 Scope of Perils Cover

The perils covered under this policy are divided into two sections as under:•

Section I Section II

Perils of the seas, rivers, lakes or other navigable waters

Accidents in loading, discharging or shifting cargo or fuel

Fire ExplosionBursting of boilers, breakage of shafts, or any latent defect in themachinery or hull

Violent theft by persons from outside the vessel NegligenceofMaster,Officer,CreworPilots

Jettison Negligence of Repairers or Charters

Piracy BarratryofMaster,OfficersorCrew.

Breakdown of or accident to nuclear installations or reactors

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Contact with aircraft or similar objects, or objects falling there from, land conveyance, dock or harbour equipment or installation

Earthquake, Volcanic Eruption or Lightning

Table 6.1 Perils covered under institute time clauses

The perils enumerated in section II above are covered provided the loss or damage does not result from the want of due diligence of the assured, owners and managers. This condition however is not applicable to section I. All losses whether total or partial, proximately caused by the above perils will be paid under the policy.

The following charges are also payable:•Sue and Labour charges �Salvage charges �General Average �

Collision liability:•The liability arises where the insured vessel causes damage to other vessel or vessels due to its negligence. This insuranceindemnifiestheinsuredtotheextentof3/4thofhisliabilitytotheothervesselorvesselssubjecttoamaximum of 3/4th of the sum insured under the policy. The contract covering collision liability is a supplementary one to the main contract and hence claims for this loss are payable in addition to the other losses the insured vessel itself may sustain.

Exclusions:•Apart from the usual exclusions contained in the Marine Insurance Act such as willful, misconduct of the assured, delay,normalwearandtear,ratsandvermin,thefollowingspecificexclusionsaresetoutinthepolicy.

War Exclusion �Strikes Exclusion �Malicious Damage Exclusion �Nuclear Exclusion �

Deductible:•An agreed sum is inserted in the policy as a deductible to be applied in respect of each separate accident or occurrence. This deductible does not however apply to claims for total loss/constructive total loss and any claims associated with sue and labour charges.

6.24.1.2 8 Other Important Provisions

New for old• : Where damages payable under the policy have been sustained by the vessel and replacements are required, settlement will be for the full cost of replacement without reference to the depreciation suffered by the replaced items.Lay-up returns• : If the insured vessel is laid up in a port for a considerable period, the insured will be entitled to the return of the premium on a pro-rata monthly basis for each period of 30 consecutive days of lay up. This return is allowed because there is substantial reduction in risk whilst the vessel is laid up in protected waters.Constructive total loss• : It is provided that to claim a constructive total loss under the policy, the cost of recovery or repair should exceed the insured value.Assignment:• Since the magnitude of the risk greatly depends upon the ownership and management of the ship, any change therein may place the insurers in a dangerous situation. The ITC Hulls, therefore stipulate that no assignment of interest in the policy shall be binding unless due notice is given to the insurers and the assignment is endorsed by the latter on the policy.Termination of cover• : The cover granted under ITC Hulls will terminate automatically in the following circumstances unless the insurers agree to the contrary in writing.

Whentheclassificationoftheshipischangedorwithdrawnand �

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Whentheownership,managementorflagoftheshipischanged. �

6.24.2 Institute Time Clauses Hulls – Only Total LossWhile this policy covers all the perils that are incorporated in the ITC Hulls, indemnity is restricted to actual or constructive total loss of the vessel proximately caused by those perils. In addition to a Total Loss, the following charges are reimbursable:

Salvage charges incurred to avoid a peril insured against and �Sue and Labour expenses incurred by the insured for purpose of averting or minimising a loss which is �recoverable under this insurance

6.24.3 Institute Voyage Clauses – HullsWheretheownerdesirestoinsurehisshiponlyforaspecificvoyage,hecandoso.Theinsuranceinthateventwould be subject to the Institute Voyage Clauses which provide a cover similar to the ITC Hulls excepting that it applies to a voyage only and not for a time.

6.24.4 Institute Time Clauses Hulls – Port Risks

When the ship is fully employed, wider cover offered under ITC Hulls would be appropriate for protecting the •interest of the ship owner fully. However, there may be periods when the vessel is taken off from service and laid-up for some time until it is •sold or re-employed. There are seasonal trades which also result in lay-up of vessels. Ifavesselhasnoemploymentandhastobeconfinedinaverylimitedareaofaportforconsiderableperiods•oftime,itwouldbeworthwhileiftheownerinsuresherforherrestrictedmovementsonlywithinthespecifiedharbour area, as against her hazardous sailing into the high seas.Institute Time Clauses Hulls – Port Risks are used to afford the necessary coverage for the restricted use of the •vessel. All the perils that are covered under ITC Hulls excepting earthquake and volcanic eruption are covered under the Port Risks Clauses as well. In addition, the Protection and Indemnity Clauses (Clause No.9 ) of the Port Risk Clauses offer indemnity •against various liabilities of the ship owners in respect of:

Damagetofixedormovableproperties �Removal of Wreck of the insured vessel �Loss of life, personal injury, illness and liabilities not governed by statutes like the Workmen’s Compensation �Act.

6.24.5 Collision Liability is Payable in Full (4/4ths)Thechiefsinglehazardinportriskinsuranceisfire,andbecauseofthis,vesselswithpassengeraccommodationare normally not a good risk as cargo vessels. There is also the possibility of vessels dragging their anchors in exposed berths and causing damage to them and other vessels. Collision between vessels is not uncommon due to the movement of a large number of vessels within a limited area of the harbour. Port risks may also be covered under the ITC Hulls policy through the operation of the lay-up returns clause, in which case, the usual conditions regarding the payment of 3/4th collision liability with the exclusion of P & I risks will apply. All inland vessels such as barges, launches, passenger vessels and tugs employed in inland waters (Sheltered and protected waters) are usually covered in terms of Port Risks Clauses.

6.25 Institute Fishing Vessel ClausesThecoveragecontemplatedundertheseclausesisascomprehensiveasITCHulls.Asfishingvesselsmaynotgetthe protection from P & I Clubs, the IFV Clauses provide additional indemnity for the following liabilities of the vessel owner which are usually covered by the clubs in the case of major cargo vessels.

1/4th Collision Liability•P & I Interests such as•

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damage to external objects �wreck removal expenses �loss of life, personal injury, illness �

Removal ashore: Cover is extended to parts of the insured vessel whilst they are ashore for the purpose of repairs, •overhaulorrefittingincludingtransitfromandtothevessel.Coverforfishinggear:Lossordamagetofishinggearwouldbepayableonlyinthefollowingcircumstances•

When it is caused by Fire, lightning or violent theft by persons from outside the vessel and �When it is a total loss of the gear resulting from the total loss of the vessel by insured perils. �

Machinery damage additional deductible: Apart from the overall policy deductible, provision for the incorporation •of a separate deductible is made under this clause in respect of claims for partial losses of machinery, shaft, etc.

6.26 Institute War and Strikes Clauses Hulls-TimeThese clauses cover loss of or damage to the vessel caused by:

War or warlike operations•Capture, seizure, arrest, restraint or detainment•Derelict mines, bombs or other weapons of war•Strikers, Locked-out workmen, or persons taking part in labour disturbances, riots and civil commotions.•Terroristsoranypersonactingmaliciouslyorfromapoliticalmotive,confiscationorexpropriation.•

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SummaryThe Clauses used for Ocean Transit are ICC ‘A’, ’B’ and ’C’.•Jettison means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to •vessel or other property in the vessel.Where two vessels collide on high seas, the maritime law of various countries provides that the liability for •damagestoeachotherbefixedaccordingtothedegreeofnegligencee.g.20:80,40:60,50:50.AccordingtoSection66(i)oftheMarineInsuranceAct,GeneralAverageLosshasbeendefinedas“aloss•caused by being directly consequential on a General Average Act. It includes general average expenditure as wellasgeneralaveragesacrifice.”Section66(ii)furtherstates“thereisaGeneralAverageActwhereanyextraordinarysacrificeorexpenditureis•voluntarily and reasonably made or incurred at the time of the peril for the purpose of preserving the property imperiled in the common adventure.”Though the Institute Cargo Clauses exclude the risk of War and SRCC cover against such perils, these are •provided at additional premium.

ReferencesInstitute Marine Cargo Clauses • [Online] Available at: <http://www.jus.uio.no/lm/institute.marine.cargo.clauses.a.1982/doc.html>. [Accessed 21 June 2011].Institute Marine Cargo Clauses-A • [Online] Available at: <www.natlaw.com/treaties/global/global/global31.htm>. [Accessed 21 June 2011].Info about Insurance.• Institute Marine Cargo Clauses-A [Online] Available at: <http://www.infoaboutinsurance.com/Marine_Insurance.shtml#cargo>. [Accessed 18 June 2011].Transit Insurance - Moving Glossary - Movers.com • [video online] Available at: <http://www.youtube.com/watch?v=8OoYZ2jjR8o>. [Accessed 23 June 2011].Gauci, G., • Marine Insurance 01. [video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>. [Accessed 4 June 2011].

Recommended ReadingHodges, S., 1999. • Cases and Materials on Marine Insurance Law, Routledge, p. 962.Hodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.Board, N., 2003. • SecretsforMakingBigProfitsfromYourBusinesswithExportGuidelines, National Institute of Industrial Re, p. 270.

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Self Assessment

An agreed sum is inserted in the policy as a __________to be applied in respect of each separate accident or 1. occurrence.

deductiblea. attributableb. reasonablec. liabled.

The duration of cover is the same under all the ______sets of clauses.2. threea. fourb. twoc. sixd.

Ordinary leakage, ordinary loss in weight or volume or volume or ordinary wear and tear of the subject matter 3. types of losses can generally be termed as _____ losses.

tradea. accidentalb. physicalc. ullaged.

The widest of all covers is provided by the ICC ‘_______’ clause.4. Aa. Bb. Cc. Dd.

Loss or damage to the insured cargo caused by a person acting with malicious intentions can be covered subject 5. to which of the following?

Fresh or rain water damagea. Malicious damage clauseb. Heating and sweatingc. Breakaged.

Edible goods and chemicals are susceptible to which of the following?6. Breakagea. Heatingb. Contaminationc. TPNDd.

What means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to 7. vessel or other property in the vessel?

Jettisona. TPNDb. Unseaworthinessc. Strippingd.

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The _________attached by under writers to policies on soft leather goods, excludes liability for spotting and 8. staining unless it is caused by the vessel being stranded, sunk or burnt.

spotting clausea. stripping clauseb. picking clausec. pair and sets claused.

What can cause such damage as also can juice from other cans which may be blown and leaking or leaking 9. following damage to the cans?

Condensationa. Sublimationb. Navigationc. Continuationd.

Which of the following is not included in the Section II?10. Accidents in loadinga. Discharging b. Shifting cargo or fuelc. Fire explosiond.

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Chapter VII

Reinsurance

Aim

The aim of this chapter is to:

introduce the concept of reinsurance•

discuss the need for reinsurance•

explain risk management through reinsurance•

Objectives

The objectives of this chapter are to:

definereinsurance•

explain asset management•

highlight the functions of reinsurance•

Learning outcome

At the end of this chapter, you will be able to:

state the history of reinsurance•

enlistthebenefitsofreinsurance•

classify the categori• es of reinsurance

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7.1 Introduction to ReinsuranceOneofthemajorriskandcapitalmanagementtoolsavailabletoinsurersisReinsurance.It’ssignificanceishoweverhardly known outside the insurance sector. Reinsurance is insurance for insurers. Insurers buy reinsurance for the risks they cannot or do not wish to retain fully themselves. Reinsurers help the industry to provide protection for a wide range of risks, including the largest and most complex risks covered by the insurance system. They have wide rangingbenefitsinotherareasofinsurancetoo,includingunderwriting,assetmanagementandcapitalmanagement.Reinsurancealsomakesinsurancelessexpensiveandmoresecure,thusbenefitingpolicyholderswhogetmoreprotection at a lower cost. Reinsurers apply sophisticated risk management processes, including risk monitoring and risk modeling to ensure that the promise to pay future possible claims is honoured. In this unit, we discuss various issuesrelatingtoreinsurance;includingitsconcept,benefits,applications,methods,functions,forms,types,andhowreinsurers deal with risk. The unit concludes with a snapshot of how reinsurance applies to marine insurance.

Reinsurance simply means “Insurance for Insurance Companies”. More precisely Reinsurance transfers insurance underwriting risk to third-party organisations. Reinsurance is an insurance of insured risk where the insurer retains a part and cedes the balance of a risk to the reinsurer. This is done to facilitate a greater spread and reduce liability on the part of the insurer. In other words, reinsurance is insurance of insured risk taken by insurance companies to protect their liability commitments beyond their net capacity. Reinsurance is one of the major risk and capital management tools available to primary insurance companies.

Reinsurance Financial StrategiesThe following strategies are used by reinsurers:

Pooling: Large number of small risks are pooled, where individual premiums are inadequate to cover individual •lossesFunding:Individualrisks’premiumsaresethighenoughtocoverlikelylosses(plusexpensesandprofit)•Speculating:Securitisationstrategyappliedincaseoflarge,uniqueexposure;lowchanceofloss;potentialvalue•loss is very high. Low enough likelihood that expected return will be greater than cost of capital.

7.2 History of ReinsuranceItwasman’sdesireforsecurity,bothpresentandfuture;forhimselfandhisfamily;thathestartedlivingin•groups, developed clans, and later the concept of society. It is this notion of community, of “one for all and all for one”—that forms the base of insurance. In the early days of insurance, as there was no facility of reinsurance, an insurer accepted only those risks that could be entirely handled by him. The origin of reinsurance dates back to the fourteenth Century when the Lombardians began to develop the concept of reinsurance. Theneedforreinsurancewasfirstfeltinmarinebusiness,wheretherewasaconcentratedriskwitharecognised•catastrophe hazard. The oldest known contract with the legal characteristics of a reinsurance contract occurred in Genoa in 1370. Soon marine insurance developed rapidly and became a common practice throughout Europe. Marineinsurancewasthefirstgreatstepinthehistoryoftheinsuranceindustry,thesecondwasinsuranceagainst•fire.AnumberofseriousfiresstruckHamburgbetween1672and1676,afterwhichtheHamburgerFeuerkasse(Hamburg Fire Fund) was set up. Even today, it is the oldest existing insurance company. In 1706, the Amicable or Perpetual Assurance was founded in London, signaling the breakthrough of actuarial •sciences as a means of assessing risks and setting rates. The 19th century saw the rapid evolution of technology, the remodeling of society, the change in ways of thinking and the increased need for security brought by the new age. This paved for the origin of the insurance business as we know it today.

7.2.1 Beginning of Reinsurance

Astradeexpandedinthelatemiddleagesandtheeconomyflourished–especiallyintheItaliancity-states;the•need for insurance grew. Insurers of the period worked without statistics, rates or calculations of probability, relying solely on their personal assessment of the risks. Thus, when news of a loss came through, many an insurer had to ask himself fearfully whether he had taken on too much risk. To protect himself against such situations,

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he soon learned to transfer all or part of the risk to another insurer willing to accept it by way of reinsurance. Besides reinsurance, which at that time covered only individual risks, the period’s other main risk-sharing •instrument was co-insurance. English law virtually prohibited reinsurance and as such direct insurers had to bandtogetherintosyndicatesiftheyweretocoverrisksbeyondtheirindividualfinancialmeans.Thusthelawunintentionally strengthened Lloyd’s of London, the world’s most famous insurance institution. Oneoftheearliestreinsurancecompanies;theCologneReinsuranceCompanywasestablishedin1846and•started operations six years later. The Company is still in existence and is thus the oldest professional reinsurance company.ThecompanywasfoundedasanimmediateimpulseasaresultofanothercatastrophicfireinHamburgin 1842. The reserves of the locally-based Hamburg Fire Fund (only 5, 00,000 German marks), had not been sufficienttocoverthelossof18millionmarks.Thus,asaresultofthisevent,insurersfinallyaddressedtheneed to distribute entire portfolios of policies among several risk carriers. Thoughatfirstitwasthefinanciallystrongerdirectinsurerswhoengagedinreinsurance,theCologneReinsurance•Companywasthefirstinalonglineofprofessionalreinsurancecompaniesfoundedsoonafter;amongthesewere the Aachen Re in 1853, Frankfurt Re in 1857, Swiss Re in 1863, and Munich Re in 1880. The Swiss ReinsurancecompanywasthefirstreinsurancecompanytobefoundedinSwitzerland.Thedisruptionofthetwo world wars resulted in London developing into a substantial reinsurance market. The development was further aided by Lloyds’ increased involvement in reinsurance and the spread of excess of loss covers which were predominantly written by Lloyds. Of the total business written at Lloyds now, reinsurance constitutes a significantproportion.From1863totheWorldWarI,isconsideredthepioneeringageofReinsurance.AftertheHamburgfireof•1842andtheGlarusfirein1861,Switzerlandmadeitclearthatthereservesnormallysetasidebyinsurancecompanies were inadequate for severe catastrophes. To better prepare for such risks, the Swiss Reinsurance company was founded in 1863 by the Helvitia General Insurance Company, Credit Suisse of Zurich and the Basle Commercial Bank. The Swiss Reinsurance company’s reputation gained worldwide after the devastating SanFranciscoearthquakeandfireof1906.SwissResettleditsclaimspromptlyandfairly.Theresultwasasubstantial increase in business.In the beginning, reinsurance was done mostly in the area of facultative transactions. With the progress of industry •and commerce in 19th Century the innovative forms of coverage came into operation, giving rise to automatic forms of reinsurance known as treaties, which has become an indispensable part of a company’s operations today. By the time of World War-I, proportional treaties became the main vehicle replacing facultative reinsurance thatprovedcostlytoadministerandslowtooperatebesidesbeinginflexible.Theinventionandtechniqueofexcessoflosscover(non-proportionalreinsurance)wasthemostsignificantdevelopmentinreinsuranceinthepast100years.Thisformofreinsurancefilledarealgapforpropertypolicieswhichwereextendedtocovercatastrophe hazards.Reinsurance too, in its modern form, was the product of the technological changes that changed insurance. •Industrialisation produced ever greater concentrations of value, prompting insurance companies to demand ever more reinsurance cover. Treaty reinsurance, which provided cover for portfolios (group of risks), took its place beside the single-risk, facultative form of reinsurance that had been customary until that time.

7.3 Need for ReinsuranceA direct insurer needs reinsurance for the following reasons:

tolimit(asmuchaspossible)annualfluctuationsinthelosseshemustbearonhisownaccount•to be protected in case of catastrophe•

Reinsurance allows direct insurers to free themselves from the part of a risk that exceeds their underwriting capacity, orriskswhich,theydonotwishtobearalone,forsomereasons.Directinsurersfindrelieffromparticularlylargeindividual risks by ceding them individually in the form of facultative reinsurance. However, entire portfolios containingalloftheinsurer’srisks;forexample,alloftheinsurer’sfire,motorormarineinsurancepoliciesarealso object of reinsurance. These insurance portfolios are covered by blanket agreements, so-called obligatory reinsurance treaties.

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How much Reinsurance is Necessary?The question of how much reinsurance is necessary to buy is a matter of judgment. Every direct insurer must answerthataspartofhisbusinessdecision-making.Hisfinaldecisionwilldependonfactorssuchaswillingnesstotakerisks,hiscompany’sfinancialstrength,andmarketpractice.However,thereisnoabsolutesecurityagainstbankruptcy. Reinsurance is merely an instrument that can help a company reduce its probability of ruin (Swiss Re: An introduction of reinsurance).

Who Buys Reinsurance?Reinsurers deal with professional corporate counterparties such as primary insurers, reinsurance intermediaries, multinational corporations and their captive insurers of banks. The main clients of reinsurers are primary insurers, from all classes of insurance. The amount of business an insurer will reinsure depends on the insurer’s business model, its capital strength and risk appetite, and prevailing market conditions. Among those who buy reinsurance includes:

Insurers whose portfolios are heavily exposed to catastrophic events such as earthquakes, storms etc.•Small local insurance players having low client base need more reinsurance than larger international insurers •who can diversify their insurance covers over a bigger client base.Insurers writing many different lines of business (Multiline insurers) need relatively less reinsurance covers •thanthosethatfocusonafewbusinesslinesorselltoaspecificcustomergroupCommercial lines portfolios with a small number of risks with large exposures (e.g. aviation industry) need •more reinsurance than personal lines portfolios with a large number of small and homogeneous risks (e.g. motor insurance)Life insurers with a greater proportion of term cover contracts including mortality or disability risk element •tend to cede more than life insurers with a high level of savings premium (i.e. endowment and unit linked portfolios).Insurersexpandingintonewproductsorenteringnewgeographicalregionsusereinsurancetobenefitfrom•reinsurer’sexpertiseandfinancingRegulatoryandratingagencyconsiderationsalsosignificantlyinfluencetheindividualdemandforreinsurance•cover, as reinsurance is a means to provide capital relief and to improve balance sheet strength.

7.4 Risk Distribution through ReinsuranceRisk is transferred from policyholder to a retrocessionaire, through a series of distribution strategies collectively referred to as the risk distribution strategy in insurance.

7.4.1 Reinsurance – Process Flow

Reinsurancemaybedefinedasacontractualarrangementunderwhichoneinsurer,knownastheprimaryinsurer,•transfers to another insurer, known as the reinsurer, some or all of the losses to be incurred by the primary insurer under insurance contracts it has issued or will issue in the future. Reinsurance is a contract of indemnity, even in life insurance and personal accident insurance. The primary insurer •is sometimes referred to as the ceding insurer, ceding company or reinsured. Reinsurers also may reinsure some of the loss exposures they assume under reinsurance contracts. Such a transaction is known as retrocession. The insurer or reinsurer to which the exposure is transferred is known as a retrocessionaire and the reinsurer •transferring the exposure is called the retrocedent. Retrocession agreements do not differ greatly in detail from reinsurance agreements. In almost all cases, the reinsurer does not assume all of the liability of the primary insurer. The reinsurance agreement usually requires the primary insurer to keep or retain a portion of the liability. This is known as the insurer’s retention and may be expressed as a percentage of the original sum insured or a specifiedquantum.In other words, reinsurance is insurance of the insured risk taken by insurance companies to protect their liability •commitments beyond their limit.

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Reinsurance premium: Consideration paid by a ceding company to a reinsurer for the coverage provided by •the reinsurer.Treaty: A reinsurance contract under which the reinsured company agrees to cede and the reinsurer agrees to •assume a particular class or classes of insurance business automatically.

7.4.2 Difference between Coinsurance and Reinsurance

Coinsurance: A form of reinsurance is a system whereby reinsurer shares direct responsibility for a risk with •one or more insurance companies. The Cedent’s liability is limited to the amount it underwrites on the original policy. The system is used especially for covering big industrial risks and certainly has many advantages. However, •to apply it to the underwriting of thousands of medium and small risks would only mean high administrative costs and inconvenience. In co-insurance the relationships are between the primary insured and each insurance company separately. If •one company/insurer fails to pay its share of a claim, the others are not liable to pay more than their share of claims. In other words, their liability is limited to extent of share accepted by them individually.Reinsurance is basically passing on the risk to some other insurer and therefore it does not absolve the insurance •company from making payment irrespective of receipt of payment from reinsurer. In reinsurance the reinsured has a contractual relationship with the reinsurers. The insurer must pay valid claims, •even if he fails to recover from his reinsurers.

7.5 Risk Management through ReinsurersThe concept of risk management: • When insurers allow part of their business to reinsurers, they reduce their underwriting risk. In exchange they assume counterparty credit risk – which is the risk that the reinsurer cannothonouritsfinancialobligations.Fortheinsureritis,therefore,crucialthatitsreinsurersarefinanciallysecure.Core competence: • Risk management is the core competence of any reinsurer. Reinsurers have implemented sophisticatedriskmanagementprocessestoensuretheirabilitytohonourfinancialobligations.Theoverarchingrole of risk management is to guarantee the long term survival of the reinsurance company. The role of risk management is to identify, monitor, and model the risks and their interdependence and to ensure that risks are in line with what the company can bear. To meet its tasks, close cooperation with the underwriting units, assets management,andcapitalmanagement is thekey.Thefigurebelowdepicts the threemainconcernsofriskmanagement.

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Fig. 7.1 Three main concerns of risk management (Source: Swiss Re publications: Understanding Reinsurance: How reinsurers create value and manage risks)

Risk modelling: the basis of risk management•In risk modelling, different forms of quantitative and qualitative analysis are applied. A list of risks affecting �reinsurers include all risks that affect direct insurers, such as credit risk, insurance risk, market risk, interestratesrisk,terrorismrisks,inflationrisks,epidemicrisksetc.Basedontheanalysisoftheserisks,asufficientlyrepresentativesubsetischosenandmappedusingstochasticmodelswhichtakeintoaccountpossible interdependencies among various sources of risk. Finally, these models are used to quantify the impact of the risk factors on the reinsurer’s balance sheet.Quantitative modelling has to be complemented by the analysis of risks which are less suited to formal �modelling. These include socio-political risks, regulatory risks and most prominently operational risks. Operationalriskistheriskoflossresultingfromexternaleventssuchasfiresandpowerfailures.Internalguidelines and appropriate management processes are used to minimise such risks.

7.6 Underwriting - Assessment, Capacity Allocation and PricingUnderwriting is the process of examining, classifying and pricing risks, for example a book of motor business, or a single risk that is submitted by the primary insurer for reinsurance, as well as concluding the contract for risks which are accepted. The main task of the underwriting process is to ensure that:

risks are assessed properly, and terms and conditions are adequate•the limits of assigned capacity are respected•there are controls for accumulation and peak risks•pricing and wording are appropriate•

7.6.1 Risk Assessment and Terms and Conditions

Risk assessment starts with assessing the data provided by the primary insurer and determining whether additional •information about the characteristics of the insured objects or persons is required. In life reinsurance, risk assessment will consider information that helps to determine the risk of death or illness, •such as age, gender, smoker status, medical and lifestyle factors.Only risks which meet the general conditions of insurability can be reinsured. Terms and conditions under which •the risks are insured have an important function in making risks insurable, as they limit the cover provided in such a way that the process of insurability are met.

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7.6.2 Principles of Insurability(Re)insurancecanonlyoperatewithinthelimitsofinsurability.Insurabilityhasnostrictformula;ratheritissetofbasiccriteriawhichriskmustfulfilltobe(re)insurable.Thesecriteriacanbebroadlyclassifiedasfollows:

Assessability: It must be possible to quantify the probability that the insured event will occur, as well as its •severity, in order to calculate the potential exposure and the premium necessary to cover it. In addition, it must be possible to allocate the loss to a particular insurance period.Randomness: The time at which an insured event occurs must not be predictable, and the occurrence itself must •be independent of the will of the insured.Economicefficiency:Primaryinsurersandreinsurersmustbeabletochargeapremiumcommensuratewith•the accepted risk.

7.6.3 Capacity Allocation, Accumulation Control and Peak RisksReinsurers only accept risks if these are in line with the capacity limits they have set. Capacity is the maximum amount of coverage that can be offered by a reinsurer over a given period. In the case of risks with low accumulation potential,suchasaportfolioofdifferentfirepolicies,underwritersaregenerallyabletocommitadefinedamountof capacity for a certain line of product and client/country. Risk demanding more capacity is typically escalated for specialapprovalbyseniorunderwritersforriskcommittees.Somerisks–especiallyinthefieldofnaturalperils– have a greater accumulation potential. In order to control these risks successfully, it is important that they be identifiedanddealtwithintheunderwritingprocess.

7.6.4 Natural Catastrophe Loss PotentialsOn a worldwide scale, the exposure to natural catastrophe is rising due to higher population density at locations exposed to natural perils, as well as due to the increasingly complex economic environment. Reinsurers play an important role in managing these risks.

7.6.5 Pricing and Wording

Thepricehastobesufficienttocovertheexpectedcostofacquiringthebusiness,administeringitandpaying•claims. Clearly the price must also provide the reinsurer with an appropriate return on the capital allocated to the risk. To arrive at a price, underwriters employ experience- and exposure based models. Experiencebasedmodelsusehistoricalclaimsexperienceappliedtopricerisks,e.g.firerisks–wherealong•history of incidents exists – or mortality risks where the pricing can be based on mortality tables and experience studies. When such data series are missing – for instance in the case of natural perils where events are relatively rare – the correct price has to be determined by using exposure-based modelling. Thesemodelsusescientificinformationandexpertopinion.Claimsexperienceisonlyusedtocheckandcalibrate•the model. When the primary insurer accepts the price and the terms and conditions offered by the reinsurer, a contract is drawn up between the two parties. This document, often called a wording, describes the rights and duties of the contract parties, as well as the terms and conditions that accompany it. When the agreement is reached, the risk is accepted into the reinsurer’s portfolio.

7.7 Asset ManagementReinsurers invest the premiums they receive for providing reinsurance cover in the capital markets, which is the responsibility of the asset management department. Asset management is part of the risk management process as it delivers portfolio data to risk management and has to respect limits and guidelines on where to invest. This is to ensure that assets are allocated in a way that matches the characteristics of the corresponding liabilities.

7.7.1 Capital Management

Areinsurer’scapitalhastobeappropriateforitsspecificriskprofileandappetite.Capitalisneededforthose•adverse situations when payments exceed premiums and investment income, or when shocks from inadequate reserving or asset impairments, such as the severe stock market slump experienced in 2001-2003, and 2008, have to be absorbed. Capital thus acts as a buffer against unexpected losses.

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Intheriskmanagementprocess,capitalmanagementhasthesignificanttaskofaligningcapitalandrisksassumed•through insurance and investment activities. If risk monitoring reveals a gap between risk assumed and the maximum risk bearing capacity of the insurer (that can be borne by the existing capital base), then either the necessary capital must be increased or underwriting or investment risks have to be reduced. The latter can be achieved by reducing underwriting and investment capacity or transferring the risks outside the company using retrocession or securitisation.

7.7.2Diversification

A well established risk management process will result in a reinsurer’s portfolio where underwriting and •investmentrisksarealignedwiththecapitalavailable;thusensuringthelong-termsurvivalofthereinsurer.Reinsurersachieveahighdegreeofdiversificationbyoperatinginternationally,acrossawiderangeofmanylines of business, and by assuming a large number of independent risks. Diversificationacrosstimealsoisanimportantfactor.Thebasicprinciplebehinddiversificationisthe“law•of large numbers”. This statistical principle states that the more independent risks are added to a reinsurer’s portfolio, the less volatile its results become. In terms of capital, lower volatility translates into lower capital needsandinturnlowercapitalcosts,forthesameprotectionlevel.Betterdiversificationhelpsreinsurerstoofferreinsuranceatlowerpriceand;giventhelevelofcapital;provideahigherlevelofprotection.

7.8BenefitsofReinsuranceThebenefitsofreinsuranceareaslistedbelow.

Stabilisationofunderwritingresults,financialflexibilityandexpertise.•Stabilisation of underwriting results is a dominant driver for non-life insurers to buy reinsurance. •Reinsuranceallowsinsurerstobenefitfromeconomiesofscale•Reinsurance expertise supports insurers in controlling their risks•Reinsuranceprovideslong-termsecurityasabenefitforprimarylifeinsurers•Benefitingfromreinsurers’expertiseisamajordrivertobuyinglifereinsurance•Reinsurance helps to ease insurers’ capital strains•Reinsuranceallowsefficientriskandcapitalmanagement•Reinsurance facilitates economic growth and social welfare•

7.8.1 Effect of Reinsurance on the Direct InsurerThe reinsurer adds value in many ways to the services a direct insurer provides to his clients.

The reinsurer reduces the probability of the direct insurer’s ruin by assuming his catastrophe risks. •Hestabilisesthedirectinsurer’sbalancesheetbytakingonapartoftheriskofrandomfluctuation,riskof•change, and risk of error. He improves the balance of the direct insurer’s portfolio by covering large sums insured and highly exposed •risks. He enlarges the direct insurer’s underwriting capacity by accepting a proportional share of the risks and by •providing part of the necessary reserves. He increases the amount of capital effectively available to the direct insurer by freeing equity that was tied up •to cover risks. He enhances the effectiveness of the direct insurer’s operations by providing many kinds of services•

Reinsurancebenefitsthedirectinsurerinthefollowingways:Through facultative reinsurance, insurer:•

reduces his commitments for large individual risks such as car factories and large department stores �Protects himself against large liability exposures, whose extent often cannot be properly estimated before �a loss occurs, as in the case of product liability for pharmaceuticals.

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Through non-proportional treaty reinsurance, insurer:•Receivescoverforcatastropheriskssuchaswindstorm,earthquake,tsunami,floodsaswellaslargeroad, �aviation and marine accidents

Through proportional treaty reinsurance, insurer:•Findsprotectionagainstmajordeviationsinthelossexperienceofentireportfolios(riskofrandomfluctuation, �orriskofchangeduetoeconomiccycles;ornewlawsandregulations,orsocialchange)

Throughfinancialreinsurance,insurer:•Procures cover for difficult-to-insure ormarginally insurable individual risks or portfolios in order to �guarantee liquidity and income. The majority of claims incurred are balanced on a medium to long term basis by the direct insurer and reinsurer operating in tandem.

7.8.2 Effect of Reinsurance on the Reinsurer

The reinsurer is offered highly exposed risks, catastrophe risks and other severe or hazardous business. The •reinsurance company’s task is to give the client the cover he wants (as much as possible) and at the same time tostructureandsafeguarditsownreinsuranceportfoliotoachievebalance–andtomakeaprofitdoingit.The reinsurer thus seeks to balance his portfolio by spreading his activities over many countries (geographical •distribution) and throughout all branches of the insurance business. The reinsurer keeps its probability of ruin low by:

Exposure and accumulation control together with a suitable acceptance and underwriting policy, �Maintaininglong-termclientrelationships,toachievecompensationintime; �Underwriting, when possible, the more balanced portions of the direct insurer’s business (e.g. motor insurance, �thirdpartyliability,personalthirdpartyliability,homeinsuranceetc.);Further reinsuring (retroceding) those risks which exceeds its own capacity �

7.9 Reinsurance Firms: Names and Business NumbersA number of large direct insurers write reinsurance business, either through their own reinsurance departments •or through reinsurance subsidiaries. However, it is the professional reinsurance companies that offer reinsurance services on a major scale. Lloyds of London has established a reputation for marine insurance and the coverage of unusual risks. For special types of risks, such as aviation or nuclear energy, insurance pools have been created. These are •mainly designed to balance risks as well as possible at the national level, while attempting to secure further international cover with reinsurers or foreign pools. Reinsurance brokers act as intermediaries in providing direct insurers with reinsurance cover. They play an •especiallysignificantroleintheworld’sEnglishspeakingmarkets.StandardandPoor,theratingmajor;listsapproximately250reinsurancefirmsin50countries(GlobalReinsurance•Highlights2004edition);alongwithmanysmallcompaniesincludingprimaryinsurersofferingreinsurance.The world’s top 10 reinsurance companies listed in order of net premium volume (year 2006) is given in table 7.1 (Source: Swiss Re publication: An introduction to Reinsurance). World’s top 10 reinsurance companies listed (In order of net premium volume):•

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No. Reinsurer Total Property/ casualty

Life/ Health

1. Swiss Re 26014 16439 9575

2. Munich Re 24526 16358 8168

3. Berkshire Hathaway 11051 8687 2364

4. Hannover Re 8886 5912 2974

5. SCOR 4520 1907 2613

6. RGA 4346 4346

7. Everest Re 3853 3853

8. Partner Re 3667 3180 487

9. Transatlantic Re 3604 3604

10. XL Re 3151 2592 559

Table 7.1 Top professional reinsurers ranked by net premiums written in 2006 (source: Swiss Re)

7.10 Functions of ReinsuranceThere are four main functions of reinsurance as discussed below:

Finance•An insurance company’s growth may be limited because of unearned premium reserve requirement(s). A �company is forced to put all written premium into a reserve account while still paying business (acquisition) costs, (agents’ commissions must be paid on written premium). The premium on an annual policy is earned at the rate of 1/12th per month. Because acquisition costs must be paid immediately, there can be a substantial drain on surplus, particularly when premium volume is expanding rapidly.Theaccountingsystemusedbyinsurancecompaniesisdesignedtoenhancefinancialstrength,withstate �insurance regulators monitoring such items as the ratio of written premium to surplus. A general rule of thumb used to be 3 to 1, but now 2 to 1 is more often used. A ratio above 2.5 to 1 (varies by Company) could result in a company being viewed as over extended, leading to rating agency action.Pro rata reinsurance enables a company to continue to write polices without draining capital and surplus. It �reduces written premium and increases the surplus, by means of a ceding commission recouping pre-paid acquisition expenses.

Capacity•Theabilitytooffersignificantcapacityonanygivenriskallowsaninsurancecompanytocompeteinthe �market. Most companies require greater capacity than their own resources can provide. By reinsuring portions of risk, through pro rata and/or excess of loss, a company can compete in the market.A company writing to a maximum policy limit of, say, $10,000,000 could double that capacity by arranging �a surplus share reinsurance treaty. Thus, a $20,000,000 policy can be written with 50% of $10,000,000 ceded to a surplus share reinsurer(s).Alternatively, a per risk excess of loss contract of $10,000,000 has similar effect. On a $20,000,000 policy, �all losses over $10,000,000 are paid by the reinsurers for a predetermined premium.

Stabilisation•Insurance companies generally prefer stable year-to-year underwriting results, rather than wide �fluctuations.Excess of loss reinsurance enables a company to determine the loss it will assume on any one risk, in any �one occurrence, or in the aggregate for the entire year. Thus, losses are stopped at a certain level above which reinsurers pay.

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Catastrophe•Surplusneedstobeprotectedagainstseverityofmajorcatastrophe,suchashurricanes,tornadoes,floods, �earthquakes, hail, etc.Most reinsurance arrangements provide some degree of coverage for these occurrences, but catastrophe �excessoflossspecificallyaddressestheaccumulationofsmalllosses,someorallorwhichwouldnotbecovered under any of the company’s other reinsurance.

7.11 Categories of ReinsuranceFollowing are the basic categories of reinsurance:

7.11.1 Facultative Reinsurance

There is no single kind of reinsurance that effectively serves all purposes. While reinsurance contracts can be •categorised in several ways, one basic categorisation is between facultative reinsurance and treaty reinsurance. Facultative form of reinsurance is the oldest form and still used in certain cases. In facultative reinsurance, the primary insurer and reinsurer negotiate reinsurance contract for each risk separately. •There is no compulsion for the primary insurer that it should purchase reinsurance on a policy that it does not wish to insure. Likewise, there is no obligation on the part of the reinsurer to reinsure proposals submitted to it. That is why it is termed as facultative. The reinsurer has the option of either accepting or declining a proposal. Today, however, facultative reinsurance is used mainly as a complement to treaty (obligatory) reinsurance, in •whichentireportfoliosofrisksarecededaccordingtostandingagreementscalledtreaties;whicharemuchmoreconvenientandefficientthanthefacultativemethod.However,treatymethodisnotsuitableforallrisksand therefore it is still necessary to reinsure some risks facultative.Facultative reinsurance may be either proportional or non-proportional type. When seeking proportional •facultative reinsurance, the direct insurer must offer the risk at original conditions: that is, on the same terms and for the same premium that he himself received from the policyholder. Thus, the conditions of the reinsurance agreement largely correspond with those of the original policy, even •though the two contracts are entirely independent. There is no contractual relationship of any kind between the policyholder and the reinsurer, and thus there is no legal obligation at all between them. Facultative reinsurance is now widely used for reinsuring hazardous risks not covered by treaty arrangements, •for the purpose of reducing the insurance in certain area, for reducing the treaty reinsurers’ liability, to augment risk capacity and to get advice of the reinsurer on risks that are considered new and complicated.

7.11.2 Treaty (Obligatory) Reinsurance

Treaty reinsurance is also referred to as Obligatory reinsurance. In Treaty reinsurance, the direct insurer is •obligedtocedetothereinsureracontractuallyagreedshareoftherisksdefinedinthereinsurancetreaty;thereinsurerisobligedtoacceptthatshare;hencethetermobligatory.In the treaty reinsurance there is a prior agreement between the primary insurer and reinsurer whereby the former •reinsures certain lines of business in accordance with the terms and conditions of the treaty and the latter agrees to accept the business that falls within the scope of the agreement. An obligation is imposed that all policies that come within the terms of the treaty are required to be placed with •the reinsurer. Similarly, the reinsurer can not decline risks that come within the terms of the treaty. Given that thetreatyreinsuranceguaranteesadefiniteamountofreinsuranceprotectiononeveryriskwhichtheprimaryinsurer accepts, treaty reinsurance works out to the cheaper than the facultative reinsurance.Treaty reinsurance has become popular with primary insurers because of its several advantages over facultative •reinsurance. As the reinsurer has to necessarily accept all business that falls within the terms of the treaty, the primary insurer, with no prior consultation with the reinsurer, can underwrite, accept and reinsure such business on each application submitted to him. As a rule, treaty reinsurance is terminable on an annual basis. Because of the absence of prior negotiations •with the reinsurer, the transaction cost on each policy is lower under treaty reinsurance than under facultative

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reinsurance.

7.12 Types of Reinsurance Following are the basic types of reinsurance:Both forms of reinsurance (facultative and treaty) may be either proportional or non-proportional in type.

Fig. 7.2 Basic types of reinsurance

7.12.1 Proportional Reinsurance

In all varieties of proportional reinsurance, the direct insurer and the reinsurer divide premiums and losses •(claims)betweenthematacontractuallydefinedratio.Accordingtothetypeoftreaty,thisratiomaybethesame for all risks covered by the contract (quota share reinsurance), or it may vary from risk to risk (all other proportional reinsurance types).In all cases, however, the reinsurer’s share of the premiums is directly proportional to his obligation to pay •any losses. For example, if the reinsurer accepts 75% of a particular risk and the direct insurer retains 25%, the premium is apportioned at a ratio of 75:25.There are two kinds of treaties in the proportional reinsurance category:•

Quota Share Reinsurance

Reinsurerassumesanagreed-upon,fixedquota(percentage)ofalltheinsurancepolicieswrittenbyadirect•insurerwithin theparticularbranchorbranchesdefined in the treaty. Thisquotadetermineshowliability,premiums and losses are distributed between the direct insurer and the reinsurer. Thequotasharearrangementissimpleaswellascost-effective.Thedisadvantageisthatitdoesnotsufficiently•address the direct insurer’s various reinsurance requirements, since it measures everything by the same yardstick. Thesetreatiescannotbeusedtobalanceportfolios;thatis,theydonotlimittheexposureposedbypeakrisks(i.e.highsumassuredrisks).Suchatreatymayalsoprovidecoverswherestrictlyspeakingnoneisneeded;thusrestrictingthedirectinsurer’sprofit-makingoptions.However, quota share reinsurance is suitable for young, developing companies or new companies to a certain •classofbusiness.Astheirlossexperienceislimited,theyoftenhavedifficultiesindefiningthecorrectpremium;with a quota share treaty, the reinsurer takes the risk of any correct estimates. It is also suited for limiting the riskofrandomfluctuationandriskofchangeacrossanentireportfolioofrisks.

Treaty Reinsurance

Pro Rata Treaties(Proportional Reinsurance)

Quota Share Reinsurance

Surplus Share Reinsurance

Excess of Loss Reinsurance Treaties

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Surplus ReinsuranceSurplus reinsurance is more sophisticated form of proportional reinsurance. In this case, the reinsurer does not participateinallrisks;asinthequotasharetreaty.Instead,thedirectinsurerhimselfretainsallrisksuptoacertainamountofliability(hisretention).Thisretentionmaybedefineddifferentlyforeachtype(class)ofrisk.

The reinsurer will accept the surplus: the amount that exceeds the direct insurer’s retention. This limit is usually definedasacertainmultipleofthedirectinsurer’sretention,knownaslines.Foreachreinsuredrisk,theratiothatresults between the risk retained and the risk ceded is the criterion for distributing liability, premiums and losses between the direct insurer and the reinsurer.

Surplus reinsurance is usually arranged in terms of number of lines of retention. The amount retained by the ceding company for its own account is called the net retention or a line. Thus a surplus treaty may be of ten or twenty lines capacity, which means that the ceding company can assume cover on risks with sums insured ten or twenty times its own retained line.

The main advantage to the primary insurer of the surplus share treaty is the avoidance of ceding insurance on small loss exposures as he can afford to retain them. The primary disadvantage in comparison with quota share treaty is the increased administrative expense.

7.12.2 Non-Proportional Reinsurance: Excess of Loss (XL) Reinsurance

Non-proportional reinsurance is structured like a conventional insurance policy: the reinsurer pays all or a •predeterminedpercentageoftheclaimswhichfallbetweenadefinedloweranduppercoverlimit.Forthepartsofclaims below or above limits, the primary insurer has to carry the risk on its own or it may reinsure it under other contracts. Different to proportional reinsurance, the premium is set independently of the original business.Non-proportional reinsurance arrangements are characterised by a distribution of liability between the cedent •and the reinsurer on the basis of losses rather than sums insured, as in case of proportional arrangements. In fact,noinsuranceamountiscededunderexcessof loss treaties;what iscededis lossesandpremiums.Ascompensation for the cover granted, the Reinsurer receives part of the original premiums and not part of the premium corresponding to the sum reinsured as in proportional reinsurance. The following common characteristics differentiate them from proportional treaties.

The size of cession is not determined case by case. �Administrative costs are substantially reduced. �Usuallythereisnoprofitcommission. �Reinsurance premium is worked out on the basis of exposure and past loss experience. �

In this type of reinsurance, there is no set, pre-determined ratio for dividing premiums and losses between the •direct insurer and the reinsurer. The share of losses that each pays will vary depending on the actual amount of loss incurred. Thetreatydefinesanamountuptowhichthedirectinsurerwillpayalllosses;thatistheexcesspoint(other•terms used include deductible/net retention/ priority). For his part, the reinsurer obliges himself to pay all losses abovethedeductible(excesspoint)amount,uptoacontractuallydefinedcoverlimit.Asapriceforthiscover,thereinsurerdemandsasuitableportionoftheoriginalpremium.Indefiningthisprice,•the reinsurer considers the loss experience of past years (experience rating) as well as the losses to be expected from that type and composition of risk (exposure rating).Excess of loss (or XL) reinsurance is structured quite differently from the proportional types of treaty discussed •above. Cessions, in case of proportional treaties are linked to the sums insured, whereas in case of excess of loss reinsurance, it is the loss that is the deciding factor. No matter what the sum insured, the direct insurer carries for his own account all losses incurred in the line of •business named in the treaty – up to a certain limit known as the deductible (excess point). The reinsurer pays the entire loss in excess of this amount, up to the agreed cover limit. Thus, it differs from proportional reinsurance in that the reinsurer pays only when the loss exceeds the deductible or excess point. When this happens, he will

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pay that part of the loss in excess of the deductible, up to the agreed cover limit.

Classes of Excess of Loss (XL) Reinsurance

Excess of loss treaties meets the needs of those direct insurers who want reinsurance protection (at least against •largelosses);whileretainingasmuchasoftheirgrosspremiumaspossible.However,theseinsurersarealso‘buying’ a risk that is greater than with proportional insurance, for the reinsurer provides no relief from losses below the deductible amount. Thus, non-proportional insurance covers greatly increase the danger that the direct insurer will actually have to •pay in full, and for his own account, any losses near or at the agreed deductible amount. XL reinsurance has a much shorter history than proportional insurance, and established itself only after the 1970s. One of the main disadvantagesisthattreatywordingsdonotexplicitlydefinethewaypremiumsaretobesharedbythedirectinsurer and the reinsurer. Excess of loss reinsurance written on a facultative basis is always per risk or per policy excess basis. Per occurrence •and aggregate excess of loss reinsurance relate to a class of business, a territory, or the primary insurer’s entire bookofbusinessratherthanaspecificpolicyoraspecificlossexposure.Afinancialreinsuranceagreementcanbe written for any of the above types of reinsurance. There are three general classes of excess of loss treaties (sometimes referred to as non-proportional treaties). They are:

Per risk excess treaty or per policy excess treaty (WXL/R): �Aperriskexcesstreatyisapplicabletopropertyinsurance;theretentionandlimitapplyseparatelytoeachriskinsuredbytheprimaryinsurer.Aperpolicyexcesstreatyappliestoliabilityinsurance;theretentionand limit apply separately to each policy sold by the primary insurer. The retention under each of these policiesisspecifiedasarupeeamountofloss.Further,thereinsurerisobligatedforallorpartofalosstoany single exposure in excess of the retention and up to the accepted reinsurance limit. Per occurrence of loss treaty (Cat XL): �Per occurrence excess of loss reinsurance gives indemnity against loss sustained in excess of the net retention of the primary insurer, subject to the reinsurance limit, irrespective of the number of risks involved in respect of one accident, event or occurrence. This kind of reinsurance when applied to property coverage is called catastrophe excess and when applied to liability coverage is called clash cover.Aggregate excess treaty: �Aggregate excess treaties, also called excess of loss ratio or stop loss treaties are not common. They are used generally in crop hail insurance and for small insurers in other lines.

7.13 Comparative Analysis: Direct Insurers and ReinsurersThe Swiss Re report titled “Understanding Reinsurance” sums up the main points of difference between direct or primary insurers and reinsurers as given in the table 7.2 below. It demonstrates that the relationship between the two risk carriers is founded primarily on mutual trust, as is the founding principle of insurance itself, involving the policyholder and the primary insurer.

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Sr. No. Points of Difference Direct Insurer Reinsurer

1 Company Organisation

Internal (own staff) and External organisation (agents)

No external organisation (network of individual agents)

2 Contractual Obligation Direct obligation to the policyholder

Obligation solely to the direct insurer, for a part of the direct insurer’s “guarantee obligation”. No contractual relationship with the policyholder.

3Right to claim for policyholder

Yes, right to claim is the essence of the contractual relationship between the policyholder and the direct insurer.

No right to claim for the policyholder, since there is no contractual relationship with the reinsurer.

4 Risk Assessment Risk assessment of the subject matter of insurance is done directly before insuring the risk.

Makes assessment using information given by direct insurer on basis of “Utmost good faith”. Assessment is based on an entire portfolio from one or more insurance lines, and not the individual risk (except in facultative reinsurance).

5 Underwriting policy

Directlyinfluencesindividualriskthroughacceptanceorrefusal;and risk distribution through selection.

Normallynodirectinfluenceon individual risk. However, reinsurer can include participation clauses and exclusions, as well as the refusal to grant cover.

6 Loss Occurrence

Direct contact with the policyholder and the loss location. Claim settlement easier in case of life and personal lines business (based on sum assured) and incaseofnon-lifeinsurance;based on loss estimation (motor insurance) or actual expenses incurred (mediclaim).

Relies on data from the direct insurer.Onclaimnotification,reinsurer transfers the reinsured portion of the indemnity to the direct insurer. The right to participate in claims adjustment negotiations may be reserved by the reinsurer in case of large losses.

Table 7.2 Comparisons between direct insurer and reinsurer

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7.14 Marine ReinsuranceReinsurance of Marine Risks: Section 9 of Marine Insurance Act 1963 states that an insurer under a contract •of marine insurance has an insurable interest in his risk and may reinsure in respect of it. Unless the policy otherwise provides, the original assured has no right or interest in respect of such reinsurance.Reinsurance ofmarine risksmay be prompted by several factors. If an underwriter finds that he has an•accumulation of risks on anyone vessel or in any one location, he will obviously wish to reduce his overall liability to within his underwriting limits and capacity. Also it is possible that he may wish to layoff an undesirable or doubtful risk, either partly or in full. Moreover, to avoid the effects of major losses, catastrophe reinsurances are placed which provide protection under the Excess of Loss arrangement.

7.15 Cargo ReinsuranceOne of the commonest forms in which cargo business is underwritten is by means of Marine Open Covers. •Under this arrangement the underwriter automatically accepts from his assured all his shipments coming within the scope of the Open Cover up to an agreed amount per vessel/conveyance. When a number of Open Covers are issued, it is quite possible that several clients may be shipping full lines perhaps by the same vessel, and an underwriter may not know the full extent of his cargo commitments on a vessel before the risk commences. Also, advices of shipments which may emanate from several overseas branches and agencies of the insurer are •often communicated to him after the risk has attached. Often the name of the carrying vessel is unknown or knownonlyafterthecompletionofthevoyage.Particulardifficultiesthereforeoccurinaccumulationcontrol,especially in case of cargo insurance.Under such circumstances, it is not possible for an underwriter with general cargo account to protect himself •against unduly heavy commitments on any particular vessel by means of facultative reinsurance alone. Facultative reinsuranceisaffectedonlyinspecialcasesforspecificrisks,whilegeneralprotectionisobtainedbytreatyreinsurance arrangements.An underwriter’s entire cargo account may be covered under a Surplus or Excess of Line treaty whereby the •cedingcompanygivesoff,generally,onoriginalconditions,allamountsuptoaspecifiedmaximum,inexcessof the “line” which it retains for its own account.The “line” which an underwriter intends to retain for his own account on various classes of vessels and risks, •whether hull or cargo, must be decided with considerable care. The “line” must bear a relation to the underwriter’s probable net premium income for the year, so that a loss on any one risk shall not unduly strain his whole underwriting account for the year.Alternatively, Quota Share arrangements may be resorted to especially when there is need to create reciprocal •treaties. Specie and registered post sending of valuable items, like diamonds, involve values which are considerably higher than ordinary general cargo. It is usual to reinsure these risks separately under Surplus and other treaties and facultative when the treaty limits are exceeded.In recent years, non-proportional reinsurances have become more popular than in the past years. The main reason •forthisistheincreasinguseofExcessofLosstreatyunderwhichthecedingofficebearsallclaimsarisingoutofandduetoonedisasterofoccurrenceuptoaspecifiedamount.Onlywhenthisultimatenetloss(thatis,aftertaking into account all recoveries whether from the assured or under other reinsurance arrangements) exceeds theretentionlimitcanthecedingofficerecoverfromhisreinsurersuptoaspecifiedmaximumlimit.On the other hand, an Excess of Loss treaty may protect the ceding company’s gross lines or his net lines after •cessions to Surplus and/or Quota Share. Excess of Loss reinsurance is placed in layers. It protects the ceding company’s net retained account where the ceding company’s basic reinsurance arrangements are on proportional basis, to reduce the impact of accumulations and catastrophe exposures.

7.16 Hull ReinsuranceInthefieldofmarinehull,anunderwriterhasgreatercontroloverhiscommitmentsbecauseeachvesselorfleet•is evaluated and underwritten individually and not under open covers as usually the case in cargo insurance.Thedemandforreinsuranceoffacultativebasisisconfinedmainlyforlimitedconditions,usually,TotalLoss•

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Only. Before making any cession, the underwriter must determine his own net retention for the best category ofvessel,gradeddown,andobtainExcessofLossfacility.Aswithcargointerests;thepresenttrendistomoveaway from proportional treaties towards Excess of Loss methods of protection.However, Quota Share and Surplus treaties are still encountered, particularly for those engaged in domestic or •national markets, but the emphasis is increasingly on Excess of Loss arrangements, particularly for “catastrophe” covers. Wherever Excess of Loss is the chosen method of protection, the agreement is to pay the excess of an ultimate net loss to the ceding company in respect of each and every loss or series of losses arising out of the same “loss occurrence”.Thehullunderwritermusttakecaretoobtainsufficientlyhighreinsurancelimits(advisedlyonavesselbasis),•since it must be borne in mind that the hull policy may cover liability risks in addition to physical damage to the vessel. He should pay special attention to the overall constitution of his reinsurance programme -- both proportional and non-proportional -- the objective being to obtain most extensive coverage at a cost which leaveshimcapableofmakingaprofitonhisretainedaccount.

7.17 Common Reinsurance Programme for Indian BusinessMain objectives of common reinsurance programme are:

To retain as much business as possible within the country consistent with safety and underwriting safeguards �and prudence.To obtain the best possible terms for reinsurance placed outside the country. �

The main structure of the reinsurance programme is broadly as follows:•20% Quota Share cessions in each classes of business to GIC which is retained entirely within the country �protected by Excess of loss arrangements.Net retentions of individual companies. �CessionsuptospecifiedlimitstoMarketPoolsinFireandMarineHulldepartments.ThePoolcessionsare �protected by Excess of Loss covers and retrocede back to the companies and are retained fully within the country. These Polls have been formed with the primary purpose of increasing the net retained premium within the country.First and Second Surplus treaties of the 4 companies (Indian public sector general insurers) which are traded �outside the country by the companies themselves, mostly on reciprocal basis.Market Surplus treaty to take balance surplus in case of huge industrial risks, large marine cargo commitments �and exposure on high valued vessels.Anybalanceafterthetreatiesareexhaustedisreinsuredfacultative.Facultativereinsurancesuptospecified �limits are absorbed within the country and are protected by Aggregate Excess of Loss cover.Net retained account of the companies in individual departments is protected by Excess of Loss covers. �

The reinsurance programme is reviewed periodically and, within the broad framework of the original programme, changes are effected to ensure suitable revision of retentions and limits.

7.18 Regulating the ReinsuranceEveryinsurershouldretainriskproportionatetoitsfinancialstrengthandbusinessvolumes.•Certain percentage of the sum assured on each policy by an insurancecompany is to be reinsured with the •National Reinsurer. National reinsurer has been made compulsory only in the non-life sector. 3. The reinsurance programmewillbeginatthestartofeachfinancial.yearandhastobesubmittedtotheIRDA,forty-fivedaysbeforethestartofthefinancialyear.Insurersmustplacetheirreinsurancebusiness,inexcessoflimitsdefined,outsideIndiawithonlythosereinsurers•whohavearatingofatleastBBB(S&P)fortheprecedingfiveyears.ThislimithasbeenderivedfromIndia'sown sovereign rating, which currently stands at BBB.

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Private life insurance companies cannot enter into reinsurance with their promoter company or its associates, •though the LIC can continue to reinsure its policies with GIC.The objective of these regulations is to expand retention within India, ensure the best protection for the reinsurance •costs incurred and simplify administration.

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SummaryOne of the major risk and capital management tools available to insurers is Reinsurance. Reinsurance •is insurance for insurers.More precisely Reinsurance transfers insurance underwriting risk to third-party organisations.•Reinsurance allows direct insurers to free themselves from the part of a risk that exceeds their underwriting •capacity, or risks which, they do not wish to bear alone, for some reasons.Reinsurers deal with professional corporate counterparties such as primary insurers, reinsurance intermediaries, •multinational corporations and their captive insurers of banks.Risk is transferred from policyholder to a retrocessionaire, through a series of distribution strategies collectively •referred to as the risk distribution strategy in insurance.The insurer or reinsurer to which the exposure is transferred is known as a retrocessionaire and the reinsurer •transferring the exposure is called the retrocedent.In risk modelling, different forms of quantitative and qualitative analysis are applied.•Quantitative modelling has to be complemented by the analysis of risks which are less suited to formal •modelling.Underwriting is the process of examining, classifying and pricing risks.•Asset management is part of the risk management process as it delivers portfolio data to risk management and •has to respect limits and guidelines on where to invest.Thebasicprinciplebehinddiversificationisthe“lawoflargenumbers”.•In facultative reinsurance, the primary insurer and reinsurer negotiate reinsurance contract for each risk •separately.Fourbasicfunctionsofreinsurancearefinance,capacity,stabilityandcatastrophe.•Facultative reinsurance and treaty (obligatory) reinsurance are the two basic categories of •reinsurance.

ReferencesGiaschi, C. J., 1997. • Warranties in Marine Insurance [Online] Available at: <www.admiraltylaw.com/.../Marine%20Insurance%20Act.htm>. [Accessed 18 June 2011].Basic Types of Reinsurance • [Online] Available at: <http://fa2f2.voila.net/intro_reinsurance.pdf>. [Accessed 22 June 2011].Lala Lajpatrai Collage Of Commerce & Economics.• Introduction to Reinsurance [Online] Available at: <http://www.scribd.com/doc/29209663/Re-Insurance>. [Accessed 22 June 2011].Reinsurance • [video online] Available at: <http://www.youtube.com/watch?v=mgF2wLgQWfk>. [Accessed 22 June 2011].

Recommended ReadingRolski, T., 1999. • Stochastic Processes for Insurance and Finance, John Wiley and Sons, p. 654.Banks, E., 2004. • Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and the Capital Markets, Wiley, p. 226.Thoyts, R., 2010. • Insurance Theory and Practice, Taylor & Francis, p. 344.

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Self Assessment

Which of these is one of the major risk and capital management tools available to insurers?1. Reinsurancea. Insuranceb. Insurance systemc. Insurance companiesd.

Reinsurers help the industry to provide protection for a wide range of_______.2. policiesa. risksb. threatsc. fluctuationsd.

Reinsurance is merely the __________that can help a company reduce its probability of ruin.3. instrumenta. claimb. policyc. riskd.

Large number of small risks are_______, where individual premiums are inadequate to cover individual 4. losses.

pooleda. fundedb. speculatedc. insuredd.

Whichinsurancewasthefirstgreatstepinthehistoryoftheinsuranceindustry?5. Firea. Lifeb. Marinec. Healthd.

Theneedforreinsurancewasfirstfeltin________business.6. marinea. property b. casualty c. aviation cargod.

Risk is transferred from ________to a retrocessionaire, through a series of distribution strategies collectively 7. referred to as the risk distribution strategy in insurance.

policyholdera. primary insurerb. reinsurersc. companyd.

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Theinsurer’sretentionmaybeexpressedasa_________oftheoriginalsuminsuredoraspecifiedquantum.8. percentagea. proportionb. multiplec. functiond.

The reinsurance agreement usually requires the __________ to keep or retain a portion of the liability.9. policyholdera. primary insurerb. reinsurersc. companyd.

Which of the statements is FALSE?10. The insurer or reinsurer to which the exposure is transferred is known as a retrocedent.a. Reinsurers also may reinsure some of the loss exposures they assume under reinsurance contracts. Such a b. transaction is known as retrocession. Reinsurance is a contract of indemnity, even in life insurance and personal accident insurance.c. Reinsurance is insurance of the insured risk taken by insurance companies to protect their liability d. commitments beyond their limit.

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Chapter VIII

Maritime Frauds and Miscellaneous Features

Aim

The aim of this chapter is to:

discuss port procedure in detail•

classify the types of ports•

explain the procedure for the clearance of cargo•

Objectives

The objectives of this chapter are to:

state the stages of clearance inward of vessel •

illustrate the customs clearance procedure and refund of duty•

explain maritime frauds•

Learning outcome

At the end of this chapter, you will be able to:

enlist the stages of clearance outward of vessel•

classify different types of maritime frauds•

highlight the • precautionary measures for fraud prevention

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8.1 Port ProcedureA port is the converging point where the sea and inland transit meet. There are two types of ports namely, natural andartificial.TheImportantfeaturesofaPortare:

geographical and physical features•range of tides•depth of channels•

Types of port:Overside Craft /barges are used, e.g. Kakinada Port.•Quay/wharves (cargo goes ashore)•

Number of wharves/landing stages (They are provided with berths for loading/unloading). �Facilities for dredging operations to remove silt e.g. Kolkata Port. �Facilities for inward/outward pilotage of vessels to/from the respective berths. �Facilities for stevedoring/ loading and unloading of specialised cargo e.g. Bulk Cargo, Containerized Cargo, �etc.Facilities for warehousing/storage in bond �Number of cargo terminals �Safety features/arrangements �

8.2 Procedure for the Clearance of CargoFollowing is the procedure for the clearance of cargo:

8.2.1 Clearance Inward of VesselThe stages are as follows:

Before the arrival of the vessel, the Shipping Agent performs the following tasks:•Advises the local harbour authorities/Port Trust/Steamer Agent �Engages suitable berths �Secures pilot/tugs for Inward /Outward pilotage �Arranges for competent stevedores for the loading / unloading of cargo. �

Vessel enters port (Entered in)•All necessary documentary formalities are completed (Cleared Inward)•The master prepares the report (most import document). This gives particulars/description of:•

All Cargo carried �Whence loaded and where to be unloaded �Names of Consignees �Thereportistobesignedbeforethecustomsofficerandthecustomsofficeratteststhereport/signatures. �

Customsofficerinspectsandthenissuesabill/certificateofhealthwhichiscalledthepratigue.Nocargois•discharged/passenger landed until the master receives the pratigue.TheDeckCargoCertificateisseparatelyissuedbycustomsofficials.•Inward Pilotage includes:•

Pilot Tug tows vessel Inward to the designated Berth �Pilotage Charges are calculated and Pilot card handed over to the Port Authority �Pilotage charges are paid by Steamer Agent �

ReportsignedbyMasterandcountersignedbyCustomsOfficer•Berthing will depend upon type of cargo and port facilities for loading/unloading•

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Risk of collisions during towing is very high due to port congestion.•Payment of Tonnage Dues: These charges are levied by port authorities and help towards upkeep of wharves / •port installations, etc.Ship register: • This is the passport of the vessel and gives

GRT �Port of registration �Name of owner/master/crew and their nationality �

Log Book entries: • A master may note protest if there has been damage to cargo by perils of the sea. This is made as a declaration on oath before a Notary. The protest is substantiated by LOG BOOK details and Underwriters may refer to these details at the time of claim.

8.2.2 Clearance Outward of Vessel The stages are as follows:

Entry outward forms are prepared by the Steamer Agent. They provide details of the Cargo and particulars as •to the vessel’s destination.Master’s declaration for vessel outward bound with cargo (declaration that all requirements of the Merchant •Shipping Act have been complied with).Special Declaration when vessel sails outward in Ballast.•Pilotage Dues (Outward) + Tonnage Dues (if pending) to be paid.•Customs clearance.•Ship cleared outward and ready to sail.•

8.2.3 Documents to be Carried by a ShipCertificateofRegistryisthelegalproofoftheVessel’sNationality.Thisisalsocalledthepassportofthevessel.

Log Books which are of the following types•OfficialLogBook:whichisrequiredaspertheBoardofTrade �ShipLog:whichismaintainedbytheChiefOfficerandprovidesdetailsofnavigation,damage,during �loading / unloading of cargo, etc?Engineers Log: which provides details of the fuel consumption, working and repair/ maintenance of �engines?Refrigeration Log - when the ship carries Refrigerated Cargo like meat, milk products, etc. �

Ship articles which should be carried are:•Crew list and muster roll �Bill of health �Ships copies of bill of lading �

8.2.4 Special Features of Loading and Discharge of CargoThe special features are:

Loading /unloading is done normally by stevedores in the major Indian Ports. Loading/unloading operations •are performed by the Port TrustSpecial arrangements for bulk cargo/ pallets/containers /crude oil•Breaking bulk means commencement of discharge•Forced discharge means compulsory discharge of cargo short of the destination due to extraneous •circumstances

The steps in the loading of cargo are:Cargo arrives at the transit shed (Shed Superintendent keeps a record as to the condition and outward appearance •

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of the Cargo)Mate’s Receipt is issued by the Steamer Agent•

One portion with shipper and �Another portion with ship owner �

Preparation of the Bill of Lading on the basis of the Mate’s Receipt•Stowage in the ship as per the stowage plan which depends upon•

avoidance of space wastage and cargo loading / unloading port �lashing and wedging of goods �Ventilation of fruits/coal, etc. �Vessel to be kept on even keel and avoidance of list �Avoidance of taint damage/sweat damage �

8.3 Import/Export ProcedureTheimportandexportprocedureisbrieflydescribedbelow:

Export is performed by: •Manufacturers �Export Commission House representing overseas buyers �Export Merchants �Export Agencies who act on behalf of sellers �Govt. Organisations e.g. STC/MMTC, etc. �

The export procedure involves:•Buyer’s enquiry with seller �Seller’s quotation to buyer �Buyer indents/places �Purchase order with seller �Seller’s packing/ forwarding �Shipment to buyer �

Shipment procedure consists of:•Reservation of Space on Ship �Confirmationasto“AlongsideDate”forCargo �Shipping note to Dock Superintendent �Preparation of weight note/measurement note �Handing over of cargo to the steamer agent and obtaining the mate’s receipt �Payment of Port dues which include charges for cranes etc. �PreparationofcustomsspecificationandclassificationasperI/EList �Preparation of Bond Warrant for goods shipped from Bond. �Ship owner assesses freight and shipper pays freight charges as per freight note �Obtaining Bill of Lading in return for Mate’s Receipt �Arrange Insurance as per Sale contract �Cargo passes into the hands of ship owner/steamer agent and loaded as per procedure �Preparation of Shipping documents and negotiation of the documents through Bank �

The shipping documents which are important include:•Bill of exchange �Sale invoice and packing list �

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Bill of lading �Insurancepolicy/certificate/covernote �Certificateoforigin(ifrequired) �Consular Invoice (if required): This is prepared as per the requirements of customs authorities of the importing �country and must be signed by the consulate of the exporting country.

Documents required for Import are:•Enquiry �Quotation �Order (Purchase Order) �Orderconfirmation �Catalogue/Technicalliterature/Drawingetc.settingoutthespecifications/dimensions,etc. �“Letter of Credit” established by the importer in favor of the supplier with amendments thereof (wherever �applicable) or other documents setting out the ‘Terms of Payment’ such as D/P, D/A, advance payment, etc.Commercial Invoice of the supplier �Packing List/Weight and measurement list giving gross/net weight �Analysis“report/Manufacturer’sTestcertificateetc.and/orindependentInspectionAgency’sCertificate �BillofLading/AirwayBilland/orFreightCertificate �Insurance policy with premium receipt �CertificateofOrigin �Importer’s Declaration �CopyofIndustrialLicense–suchasDGTD/SSIcertificatewhereverapplicable �OGL declaration wherever applicable �Valid ‘ Import License’ �NotmanufacturedinIndiaCertificateetc. �

The above documents are required by the customs/port authorities:•Tosatisfythemselvesthattheimportistheresultofabonafidecommercialtransaction. �Tostudythedescriptionofgoods,specifications,etc.andensurethatthegoodsareauthorisedtobeimportedas �per the ‘Import Trade Control and other regulations in force’, quantity/ value wise and description wise.To arrive at the ‘correct CIF value of goods’ for the assessment of customs duty and for valuation �purposes.To ensure that no under/over invoicing has taken place in the entire transaction and the CIF value is in �accordance with the price prevalent ‘in internal markets’.To arrive at the correct Customs Tariff heading and ‘Classify’ the goods accordingly for the ‘Levy of �duty’.Goods are discharged from the vessel into the custody of the Port Trust and released after the payment of �Port Dues/ Customs Dues, if any.

8.4 Customs Clearance Procedure and Refund of DutyWhen any imported goods are removed from the customs area, directly on the payment of duty for use or •consumption, the clearance is known as “Home Consumption”.When any imported goods are not required immediately for use or consumption after landing, such goods are •permitted to be deposited in a warehouse, without payment of duty, for subsequent clearance on the payment of duty. In such cases, the goods may be deposited in a customs bonded warehouse, a private bonded warehouse or the importer’s own bonded warehouse. When these bonded goods are cleared on the payment of duty, they are said to be ex-bonded.

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WhethertheclearanceisforHomeConsumptionorWarehousing,theimporterofthecargomustfileanImport•Bill of Entry with the Customs. The Import Bill of Entry presented to the customs is stamped by them with the serial number and date and then compared with the Import General Manifest (I.G.M). AnImportGeneralManifestisrequiredtobefiledbythecarrierorhisagentforanyconveyancearrivingatany•customs station (port) in India, giving all details of cargo, etc. on board for discharge and/or on carriage. If the Bill of Entry is found in order, it becomes acceptable to the customs for assessment, which is in three parts:

Scrutiny of the documents presented (such as the invoice Packing List, Bill of Lading, Insurance Policy, �Import License, etc, with the Bill of Entry).Appraisement of value of goods. �Determinationofclassificationandindicationoftheeffectivedateofduty. �

For completing the assessment, the customs may need to examine the goods, test them and/or examine the •contract of sale/purchase, etc. It should be noted that under Section 17 of The Customs Act, there is an obligation on the customs to complete their formalities without undue delay.Assessment of goods declared in the Bill of Entry on the basis of documents produced subject to the examination of •the goods subsequent to the payment of duty is known as the 2nd check appraisement. When the goods are assessed after examining and testing them and the duty is paid thereafter, it is known as 1st check appraisement. The1stcheckprocedureisfollowedbythecustomsinrespectofgoodswhichcannotbecorrectlyidentifiedby•physical inspection and are not of the type which are imported regularly. The2ndcheckprocedureisfollowedbythecustomsforgoodswhicharewellknownandcanbeclassifiedand•assessed readily.Appraisementmeanstofixthepriceorarriveatthepriceofthegoodsforthelevyofduty.Theassessedpriceor•valuehastobeattheplaceofdelivery;henceitwillincludethecost,insurance,freightandlandingcharges.Under Section 15 of the Customs Act, the relevant date for charging custom duty is as under:•

In the case of goods entered for Home Consumption, the rate of duty applicable on the date of presentation �of the Bill of Entry to the Customs.In the case of goods cleared from a (Bonded) warehouse, the rate applicable on the date of physical removal �of the goods.In any other case, the rate applicable on the date of payment of duty. �

The assessed bill of entry is then audited by the customs and if found in order, forwarded to the Assistant •Collector for his signature. Some other internal procedures are also completed after which the Bill of Entry is ready for the payment of duty. Goods released for delivery by customs after the completion of customs clearance formalities are said to be out of customs charge.The custom clearance procedure may be delayed on account of the objections raised by them for various reasons •such as :

Difference in the shipping marks and numbers or number of packages or their serial numbers. �Difference in the description of goods �Port of destination not the same as shown in the documents �Classificationdiffers �Under/over invoicing �Import License not valid �Difference in weight �Catalogue not produced �

ThecustomsmayissueaDetentionCertificatestatingtheperiodandthecauseforwhichthegoodsweredetained•bythem,beforerelease(outofcharge);butsuchacertificateisissuedonlywhenthegoodsaresentbythemfor analytical tests or they are detained for no fault of the importer or in the event the documents are lost by customs due to which the goods cannot be released.Delay in clearance may also occur due to the following reasons:•

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Non-payment of cost of the goods by the importer to the bank for the latter to release the original �documents.Importers or their agents’ laxity in completing the procedures. �Goods not traceable. �Congestion at the port. �Survey procedures. �Funds not readily available for the payment of duty. �

8.5 Maritime FraudsOverthelastfivedecades,numerousincidentsofmaritimefraudshavecometolightandmanytradersallover•the world have lost vast sums of money. Sellers, buyers, ship owners, insurers, bankers in these countries and other areas of the world have also suffered major losses. As a percentage of the value of the total worldwide sea-borne trade transactions, the incidence of maritime fraud would not appear to be high, but the problem is very serious and it is increasing. If not controlled, it will jeopardise the entire system of maritime trading.An international trade transaction involves several parties – the exporter, importer, ship owner, charterer, ship’s •master,officerandcrew,insurer,banker,broker/agent,freightforwarder,etc.Maritimefraudoccurswhenoneof these parties succeeds, unjustly and illegally, in obtaining money or goods from another party connected in thecarriage,tradeandfinancialobligations.In some cases, several of these parties act in collusion to defraud another. Banks and insurers are generally •the victims of such frauds. In some examples of suspected fraud, there may not “technically” be any illegal action involved, but one of the parties may nevertheless have defrauded another by purposely confusing and misrepresenting facts. For example, in documentary frauds, where there is manipulation of documents, perpetration of frauds is both frequent and easier.

8.5.1 Types of Maritime FraudsMaritimefraudhasmanyguisesanditsmethodsareopentoinfinitevariations.Themajorityofthesecrimescanbeclassifiedintofourgroups:

Scuttling Frauds

Also known as “rust bucket” fraud, this involves deliberate sinking of vessels in pursuance of fraud against both •cargo and hull interests. With occasional exceptions, these crimes are committed by ship owners in a situation where a vessel is approaching or has passed the end of its economic life, taking into account the age of the vessel, its condition and the prevailing freight market. The crime can be aimed at hull insurers alone or against both hull and cargo interests. A dishonest owner may •either pay his own crew to scuttle the ship during the course of voyage, or he may hire a different crew who will be paid to sink the vessel. Divers can operate effectively only at relatively shallow depths, whereas in the oceansthereare“deeps”or“trenches”whosefloorisfarbeyondreachbyordinarydevices.Itusuallyintooneof these inaccessible areas that a scuttled ship will settle. Ontheotherhand,ifthescuttlingcrewisunabletoreachasuitableplace,theship’spositionwillbefinalisedin•the casualty report in order to mislead investigators. Alternatively, the scuttling may take place in deep waters off the coasts of countries where there is absence of law and order the objective being to hamper investigations under such conditions.

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Documentary Frauds

The work of FERIT did much to reveal the nefarious activities of the scuttlers. In response to this, the fraudsters •turned their attention to a variation of this practice which does away with the potentially risky business of actually sinking a ship. This is what has come to be known as a “documentary fraud” which involves the manipulation of therelevantdocuments,letterofcredit,certificatesofequality,certificateoforigin,invoicesandpackinglists,bills of lading, all may be manipulated in the successful preparation of a documentary fraud.This type of fraud involves the sale and purchase of goods on documentary credit terms, and some or all of •thedocumentsspecifiedbythebuyertobepresentedbythesellertothebankinordertoreceivepayment,are forged. Bankers pay against documents. The forged documents attempt to cover up the fact that the goods actually do not exist or that they are not of the quality ordered by the buyer.The documents are presented to the bank for the payment of the credit in the normal manner. After checking the •details against those required by the credit, the bank releases the funds, believing that the documents presented are genuine.When the unfortunate purchaser of the goods belatedly realises that no goods are arriving, he starts checking, •onlytofindthattheallegedcarryingvesseleitherdoesnotexistorwasloadingatsomeotherportattherelevanttime. It is a sad fact that the use of forged documents has become increasingly popular over the last decade. This can be attributed to the simplicity by which documents can be forged and the small expenditure required by the fraudsters.It is unfortunate that fraudsters exploit the concept of trust which has been such an important and integral part •of international trade. Though their activities are most often directed against insurers, traders, banks and the like, their crimes are economic in nature and must thus be treated as an attack on the state. This situation can pose a very serious threat to those developing countries which can least afford it.

Cargo Thefts

In a typical example, the vessel having loaded a cargo, deviates from its route and puts into a port of convenience. •Such ports are Tripoli, Beirut, Almina, Jounieh, Ras Salaata and others along the coasts of Greece, Lebanon and Syria.Such deviation relies of course on the existence of suitable ports at which to illegally discharge the cargo. The •cargo may be discharged and sold on the quayside or in a more sophisticated manner. Such an act is often accompanied by a change of the vessel’s name or a subsequent scuttling in order to hide the evidence of theft. Thewholeprocessofinvestigationisproveddifficult,as,bythetimethelossisknown,thecargodisappears•and the actual recovery of goods is unlikely. The owners of these ships are “paper companies” set up a few days prior to the operation.The International Marine Bureau holds a data bank listing the viability and track record of ship owners, charterers •and companies involved in illegal deviations. In every case, prudence should be applied. Since the essence of these crimes is the use of falsely registered vessels, cargo owners and underwriters should check in on the vessel’s pedigree and the ship owner’s back-ground. One should be wary of offers involving low freight charges.

Fraud Related to the Chartering of Vessels

This is also known as Charter-Party fraud. The chartering of vessels presents considerable scope for the fraudulent •operator.Establishingacharteringcompanyrequiresmodestinitialfinancialcommitmentandisusuallysubjectto little regulations. In the present depressed conditions of the shipping market, there is no heavy demand on tonnage and owners, anxious to avoid laying up their vessels, are tempted to charter them to unknown companies withoutdemandinganysubstantialfinancialguaranteefortheperformanceofthechartercontract.The fraudulent charterer can turn this situation to his advantage. Having chartered a vessel from an unsuspecting •owner, the Charterer canvasses for cargo. Knowing that in a depressed economy, shippers will be willing to cut corners in the hope of reducing transport costs and thus saving on freight so that their goods can be more attractively priced, the charterer offers low freight rates on a pre-paid basis. He can afford to do that, as he has no intention of completing the contract of affreightment.

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Soonafterthevesselsailsfromtheport,thechartererdisappears.Onemightcallhima“flybynightoperator”.•Perhapshemayhavepaidhisfirstmonth’shireorhemightnothavepaidanyhirechargesasareduefromhim.Meanwhiletheshipownermayfindhimwithsubstantialbillstomeetfromtheportauthoritiesalongtheship’sroute, as well as for the crew’s wages and for provisioning the ship. Worse,theshipownermayfindthathisship,nothavingdeliveredthecargototheconsignees,hasbeenarrested,•and this leads to a protracted and expensive legal wrangle.The problems connected with charter-party fraud have been resolved in various ways. Sometimes the shippers •will agree to pay a freight surcharge to get their goods to destination. Sometimes they will agree to a diversion and a sale of the goods to cover costs, and then start the export process all over again. Sometimes when no such compromise can be reached, the ship owner will instruct the master to divert his ship •and sell the cargo wherever he can, and thus becomes as much of a criminal as the charterer.

8.6 Prevention of Maritime FraudCommon Characteristics of Maritime Frauds are as mentioned below.

In a majority of the incidents of fraud, the buyer of the goods has been initially attracted by exceptionally •favourable prices and conditions quoted by the seller.In these cases, there is a clear notion of “apparent bargain”, and this fact seems to account for the trader’s neglect •of precautionary measures to avoid fraud. A study of cases reported and examined have indicated the following common features:•

A majority of vessels involved �have been over 15 years of age �were on a single – voyage charter �Belonged to single – vessel owners (singletons) although in some cases a common management was �established.

Quite a few of the vessels changed ownership just before the incident or shortly afterwards. This often involved •a change of name, sometimes several times, of the vessel. This is also called the Paint Brush Policy.TherewasageographicalpatterntothelossesconfinedinitiallytoSouthEastAsiaandtheFarEast.However,•this pattern has changed and will continue to change in the future.

Precautionary Measures for Fraud PreventionThere are certain fundamental precautionary measures those commercial parties should be aware of and certain procedures of international trade that they should clearly understand. The following paragraphs set out these basic elements of precautions with respect to the different parties involved namely:

Exporters and Importers•Embassy Commercial Sections and Chambers of Commerce•Freight forwarders•Banks•Insurance Companies•Vessel Owners and Charterers•Maritime and Port authorities.•

Exporters and ImportersSome of the more obvious losses and additional charges/expenses that shippers or consignees may have to incur as a result of maritime fraud perpetrated on them are:

Delayindeliveryofgoodsresultinginlossofmarketanddissatisfiedcustomers.•Where goods do not arrive directly at destination port or are carried to another port.•

Storage charges at that port and forwarding charges from the same to the destination port. �

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Additional freight surcharges, whether or not the goods are transshipped, to bring them to their �destination.

Physical loss or damage to the goods during transit, trans-shipment and onward carriage operations.•Cost of “buying back” or retrieving the goods after they have been “sold” to third parties at a port other than •the destination port.Total loss of the goods resulting from their “disappearance” following the arrest of the vessel or fraudulent •sale.Possible charges and legal costs involved in the arrest of the vessel and other connected expenses. •

The checks and precautions that buyers and sellers can implement to guard against being victims of Maritime Frauds are suggested below:

Traders and commercial interests generally should protect themselves by being extremely careful when dealing •forthefirsttimewithunknownparties.Theyshouldmakeenquiriesastotheirstandingandintegritybeforeentering into a binding agreement.Shipment should be by well-established shipping lines. In India, shipments on vessels “approved” by GIC should •bepreferred.Before“approving”avessel,GICmakesaclosescrutinyofthefinancialstandingreputation,standards of management, past claims history, ownership, etc. The cargo owner should be wary:

If the freight rate is too attractive �If the ship owner owns only one vessel �If the vessel is over 15 years of age �If the vessel has passed through various owners. �

Concerningthemethodofpaymentforthegoods,fromtheseller’spointofview,adocumentarycreditconfirmed•by a bank acceptable to him, provides the greatest safeguard. Should the seller have any doubt about the authenticity of the documentary credit, he should immediately consult his bank before parting with the goods.As far as the buyer is concerned, he should ensure that he receives the documents he has stipulated in his •documentary credit application and against which his bank will have paid on his behalf. In turn, his bank will look to him for reimbursement. Therefore, it is very essential that the buyer must consider very carefully which documents he requires. An Independent third party document called “report on vessel” can be called for, reporting on the carrying vessel, •verifying its presence at the loading port on the bill of lading date and attesting that the goods as listed in the bills of lading have actually been loaded on the vessel. In the documentary credits, the name of the organisation requiredtoissuethis“reportonthevessel”shouldbespecified,asalsothedatacontentofthedocument.Thisistoensurethatthesubjectcargoisinfactloadedonthespecifiedcarryingvessels.Conference or national lines bills of lading should be used and marked “Freight Prepaid” with the amount of •the freight clearly stated on the bill of lading.Small traders, in particular, would be well advised to seek the services of dependable and well known forwarding •agents. Moreover, an agent at loading and discharge points who is a member of a national association should be appointed.Buyers should attempt to identify whether the carrying vessel is on charter and who the charterers and owners •are. Sellers should take similar precautions.When chartered vessels are used, traders should insist on knowing whether chartering is done only through •agents of reputable institutions.

Banks

Banks are vulnerable to Documentary Frauds as follows:•Presentation of genuine documents but with subsequent fraud by a third party in respect of the goods. �Presentation of fraudulent documents in respect of inferior goods or nonexistent goods. �

In both types of frauds, documents are presented under documentary credits. •

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Banks abide by the “Uniform Customs and Practices for Documentary Credits” issued by the International •Chamber of Commerce (ICC).Bankers become victims of maritime frauds, especially when they pay against forged documents for non-existent •cargo supposed to be on a vessel which is scuttled. In such a case, the insurer will not pay if they are able to prove that the goods covered under the policy were •neveratrisk.Thebankerswillfinditverydifficulttorecoverfromtheopenersoftheletterofcredit,allthemoney they had advanced or remitted under the letter of credit.

The following precautions are suggested:Bankers should make use of the Lloyd’s Register and Lloyd’s shipping Index and makes their documentary •credit department aware of these publications. Important points to check with regard to the carrying vessel are ownership, age, size and the position of the vessel at the time the bill of lading was dated.Ifsuchchecksareconsidereddifficult forabankbecauseof thevolumeofwork involved, thenperhapsa•“super-service” at additional cost to the customers should be considered with the actual checks being carried out by outside agents or brokers retained at annual fees.Methods should be evolved for improving documentary credit operations by the application of computerised •and modern business methods.

Insurers

The CIF purchaser should be advised by the Insurers to instruct the Seller that the goods must be carried on a •vesselapprovedunderthetermsoftheclassificationclause.Wherethenameofthecarryingvesselisnotknownatthepointwhentheinsuranceisaffected,thepolicyismadesubjecttotheInstituteClassificationClauseandthe requirement that the assured must inform the insurers the name of the carrying vessel as soon as the same is known to the assured.In India, the exporter is encouraged to use vessels “approved” by the GIC to carry the export cargo. This system •also applies to import cargo when the carrying vessel is bringing a full load of import cargo to India as also to imports on vessels from Singapore, Malaysia and the Far East (excluding Japan and Mainland China).

Vessel Owners and CharterersFor vessel owners, to avoid their involvement in incidents of fraud, it is essential for them to make the necessary enquiriesastothestandingandintegrityandbonafidesofthepartieswithwhomtheyintendtodeal.Thisshouldbe done prior to entering into any binding commitments.The following suggestions are made in this respect:

Ship owners should seek advice on the prospective time for charters before agreeing to a charter. BIMCO (Baltic •& International Maritime Conference), the Baltic Exchange and similar organisations often assist with enquiries. Only reputed ship brokers should be used.Shipownersshouldcheckonthefinancialstatusofacharterer,andincertaincircumstancesshoulddemanda•bank guarantee covering the estimated hire before signing the charter-party.Shipownersshouldveryfirmlyresistrequestsbyunknowntimecharterersfortheinclusionofaclauseinthe•time charter-party that gives the time charterer or their agents the right to sign the bill of lading on behalf of the master. In fact, the vessel owner should specify in the charter party that bills of lading can only be signed by the master of the vessel.The master should ensure that the cargo signed for, is on board the vessel. Masters should ensure that the cargo •is released only against the original bill of lading. Delivery of the cargo without the presentation of the original bill of lading renders invalid any defenses or limitations under the contract of carriage, and therefore presents a considerable commercial risk. Where the release of the cargo is requested against a letter of indemnity, such letter of indemnity should cover •200percentoftheCIFvalueandbeguaranteedbyafirstclassbankacceptabletothecarrierandowner’sP&I Club.

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The master should be advised to radio his position through certain periods of the voyage. For valuable cargoes, •the master should be instructed to report to the Lloyd’s Agents at each port of call giving his estimated time of arrival (ETA) at the next port.

Maritime and Port Authorities

They should prevent voyage termination unless the ship owner deposits with reputed agents, money for onward •carriage together with all other handling and insurance expenses. It would be advisable to prevent voyage termination, and allow the same only in connection with force majeure. This could be an effective step towards the control of wrongful deviation where the object of taking a ship from •its planned route is to terminate the voyage at a port where the goods are to be stolen or criminally disposed off. If effective agreements against such voyage terminations were universally applied, wrongful deviation would becomedifficult.

8.7 Documentary FraudsHow they are perpetrated and how they can be prevented:

In a majority of international trade transactions, certain commercial documents such as the bill of lading, are •treated as documents of title. Documentary fraud occurs when one or more parties to the transaction are deprived of goods and / or the •purchase price.The buyer and the seller are often separated by political, legal and geographical barriers. The seller is reluctant •to part with the goods until the purchase price is paid. Conversely, the buyer prefers to pay on delivery of goods. The gap between payment and delivery of goods is bridged by the documentary credit system. The buyer instructs •his bank (the issuing bank) to open a letter of credit in favour of the seller. The issuing bank instructs the paying bank in the seller’s country to hand over the purchase price when the •sellertendersdocumentsconfirmingtheshipmentofgoods.Inacollectionarrangement,paymenttakesplacein the buyer’s country. The seller instructs a bank in the buyer’s country to hand over the documents of title to the goods to the buyer •upon the receipt of payment.Both the documentary credit and collection arrangement rely entirely on the honesty of the trading partners and •the system is easily abused. A fraudulent seller can cash the letter of credit by presenting bogus documents for a nonexistent cargo. •Alternatively, the cargo can be of lesser quality or quantity.Some sellers have gone to the extent of selling the same cargo to two or more parties and collecting money •from all the buyers. On the other hand, a fraudulent buyer can present forged bills of lading in a D/P (documents on payment) •transaction and collect the cargo without any payment.Although this fact is not recognised or accepted as widely as it should be, fraud is often initiated when commercial •negotiations begin. When entering into contact with a previously unknown seller, a prudent buyer will supplement his own experience, •instinct and commonsense with the knowledge of others, including banks, trade circles and organisations such astheInternationalMaritimeBureau.Thisinformationwillhelpthebuyeronthecreditrating,andthefinancialand moral standing of the prospective seller, and his likely trustworthiness in correctly performing his side of the contract, by delivering the right goods at the right place and at the right time. Inabilitytoobtainbankinginformation,orgettinginformationwhichisasflatandinconclusiveasnottoinform,•can often signal danger. The impact of the buyer’s own instinct, experience and commonsense should be to make him suspicious, rather than avaricious, in transactions which indicate need for caution.

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In conclusion, whilst the incidence of documentary fraud shows no signs of abating, there is no doubt that buyers can go a long way towards reducing their vulnerability through increased care, vigilance and common sense.

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SummaryA port is the converging point where the sea and inland transit meet.•CertificateofRegistry is the legalproofof theVessel’sNationality.This is alsocalled thepassportof the•vessel.Customsofficerinspectsandthenissuesabill/certificateofhealthwhichiscalledthepratigue.•When any imported goods are removed from the customs area, directly on the payment of duty for use or •consumption, the clearance is known as “Home Consumption”.Also known as “rust bucket” fraud, this involves deliberate sinking of vessels in pursuance of fraud against •both cargo and hull interests.There are certain fundamental precautionary measures those commercial parties should be aware of and certain •procedures of international trade that they should clearly understand. Documentary fraud occurs when one or more parties to the transaction are deprived of goods and / or the •purchase price.For vessel owners, to avoid their involvement in incidents of fraud, it is essential for them to make the necessary •enquiriesastothestandingandintegrityandbonafidesofthepartieswithwhomtheyintendtodeal.Thisshouldbe done prior to entering into any binding commitments.

ReferencesAnderson, P., 1999.• The Mariner’s Guide to Marine Insurance, The Nautical Institute, p. 94.Noussia, 2007.• The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach, Springer, p. 295.Maritime Frauds • [Online] Available at: <http://www.documentfraud.org/22-document-fraud-institute.html>. [Accessed 20 June 2011].The UK Ship Register • [video online] Available at: <http://www.youtube.com/watch?v=Hy-vNdP76XI>. [Accessed 20 June 2011].

Recommended ReadingTempleman, 2008. • Marine Insurance: Its Principles And Practice, Qureshi Press, p. 140.Hodges, S., 1999. • Cases and Materials on Marine Insurance Law, Routledge, p. 962.Huebner, S. S., 2010• . Marine Insurance, Nabu Press, p. 284.

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Self Assessment

Which of these is not a type of maritime fraud?1. Scuttling of shipsa. Documentary fraudsb. Breakage of goodsc. Frauds in connection with chartersd.

Which of the following is not one of the reasons for delay in clearance?2. Traceable goods a. Congestion at the portb. Survey proceduresc. Funds not readily available for the payment of dutyd.

Scuttling frauds are also known as ______fraud.3. rust bucketa. documentary b. charter-party c. maritime d.

Which of the statements is false?4. Banks are vulnerable to documentary frauds.a. Bankers should make use of the Lloyd’s Register and Lloyd’s shipping Index and make their documentary b. credit department aware of these publications.Bankers become victims of maritime frauds, especially when they pay against forged documents for non-c. existent cargo supposed to be on a vessel which is scuttled. Banks abide by the “Uniform Customs and Practices for Documentary Credits” issued by the GIC.d.

Which of the statements is false?5. A port is the converging point where the Sea and Inland Transit meet.a. There are three types of ports.b. Customsofficerinspectsandthenissuesabill/certificateofhealthwhichiscalledthepratigue.c. No cargo is discharged/passenger landed until the master receives the pratigue.d.

Ship Register is the passport of the vessel and does not give _________.6. GRTa. Port of Registrationb. Name of Owner/Master/Crew and their Nationalityc. DeckCargoCertificated.

Inward pilotage does not include __________.7. pilot tug tows vessel inward to the designated bertha. pilotage charges are calculated and pilot card handed over to the port authorityb. pilotage charges are paid by steamer agentc. reportsignedbymasterandcountersignedbycustomsofficerd.

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Which of the following is not a type of log book?8. Officiallogbooka. Ship log bookb. Engineers log book c. Registration log bookd.

Export is not performed by_________.9. manufacturersa. export commission house b. customsofficerc. government organisations d.

Who prepares the entry outward forms?10. Customsofficera. Steamer agentb. Local harbour authoritiesc. Port trustd.

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Case Study I

International Cargo Transportation Insurance Case

Thefollowingcasestudyreferstotheinternationalcargotransportationinsurance.ThecasewasfiledinSupremeCourt of India between United India Insurance Co. Ltd. as the appellant was and was Great Eastern Shipping Co. Ltd. as the respondent. The respondent claimant was engaged in the import of sugar and other items. In connection with the import of 12,000 metric tons of sugar from China to Calcutta, the respondent had taken an insurance policy for which the cover note dated 09/06/1994 and policy was valid from 23/09/1994 and policy was valid from 23/09/1994, i.e. from the date of issue. The policy was further extended by endorsement dated 28/09/1994 for up-country destinations in India. Extension of insurance coverage was granted on 28/09/1994. Relevant provisions of Institute Cargo clause, which was one of the terms of the insurance policy by incorporation inter alia provided that the policy cover extended to the point of delivery of the delivery to the consignee’s or other finalwarehouse,orplaceofstorageatthedestinationnamedtherein.Itfurtherlaiddownthatthecoverwouldexpireon expiry of 60 days after completion of discharge overside of the goods insured from the overseas vessels at the finalportofdischarge,whicheveroccurredfirst.

The claimant alleged that after taking delivery of sugar, the bags could not be transported from the dock area because of Durga Puja celebrations as a result of which all activities including transportation facilities virtually came to a standstill from 10/10/1994. Therefore, all 82,237 bags of sugar were temporarily stored in T-sheds in the Calcutta port area to en route up-country destinations.

On21/10/1994,afirebrokeoutinthegodownanddestroyedtheentirestockofsugarbags.Hence,anFIRwaslodgedandtheappellantInsuranceCompanywasalsoinformedbytherespondent.Theappellantappointedtwofirmsofsurveyors.Since,theclaimwasnotsettledbytheappellantInsuranceCompany,therespondedfiledacomplaintbefore the national consumer commission. Sometime after that the appellant insurer repudiated the claim of the respondent. The ground taken by the appellant Insurance company for repudiating the claim was that the goods were destroyed in general storage other than in the ordinary course of transit and it was also observed that what was covered was transit risk and not storage risk. Therefore, it was held that the claim was not maintainable. The commission examined the relevant provision and took the view that as per the Institute cargo clause and extended coverage to the policy on payment of additional amount, the insurance coverage was valid till the goods weredeliveredtothefinalwarehouseortheplaceofstorageatthedestination.Finally,theappealwasdismissedby the Supreme Court.

In the present case, as apparent from the Institute cargo clause and the coverage, terms of the policy and the extendedcoverage,theintentionthatappearsfromthetermsandconditionsisthatthegoodswerefirstcoveredfrom the port in China to the destination in Calcutta port and thereafter extended coverage was sought and in that it was extended to any part of the Republic of India. Since the goods were covered from Calcutta port till the same reached their destination and they were laying in storage, that would cover the goods by the extended policy and the insurer cannot defeat the claim of the claimant that the goods once reached the destination at Calcutta the policy stood discharged. Case study source: (Source: www.bhojvirtualuniversity.com/ss/sim/llm_pre_pap5_U3.doc)

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Questions:Who were the appellant and the respondent in the international cargo transportation insurance case?1. Why was the transport of goods delayed? Which incident occurred during the cargo transportation and what 2. was the legal action undertaken?What was the action taken by the Supreme Court in the international cargo transportation insurance case? 3.

AnswersThecasewasfiledinSupremeCourtofIndiabetweenUnitedIndiaInsuranceCo.Ltd.astheappellantwas1. and was Great Eastern Shipping Co. Ltd. as the respondent.The transport of the sugar bags were delayed because of Durga Puja celebrations as a result of which all 2. activities including transportation facilities virtually came to a standstill. All the 82,237 bags of sugar were temporarily stored in T-sheds in the Calcutta port area to en route up-country destinations. But eventually, afirebrokeoutinthegodownanddestroyedtheentirestockofsugarbags.Hence,anFIRwaslodgedandtheappellantInsuranceCompanywasalsoinformedbytherespondent.Theappellantappointedtwofirmsof surveyors.The commission examined the relevant provision and took the view that as per the Institute cargo clause 3. and extended coverage to the policy on payment of additional amount, the insurance coverage was valid till thegoodsweredeliveredtothefinalwarehouseortheplaceofstorageatthedestination.Theappealwasdismissed by the Supreme Court.

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Case Study II

Trans Ocean Marine Cargo Transit Insurance Case Global logistics is exposed to numerous risks caused by the environment, technology and people. A European client wasinsuredbyagenericcompanyliabilitypolicythatcoveredtheirwholecompany(notlogisticsspecific).TheyhadarelativelyminortrafficaccidentneartheirdestinationportinChina.Theyneededassistancetocheckthecargo,review documentation with local authorities and ensure the safe onward journey of the cargo.

Whilst attempting to process the claim, they came across various problems. There were delays and increased costs whilst claim information was collected over different time zones. As the policy was held in Europe, all authorisations had to come directly from the European client. The claim was minor but the company had a minimum excess fee payable of 5,000 Euro’s. Due to poor communication, further delays and costs were encountered in arranging local support in China. The European resources of the client were stretched.

Risk management using Trans Ocean’s marine cargo transit insurance was a structured approach to manage risk relatedtothreatswhetheritisphysical,financialorlegal.WheninsuredwithTransOcean,authorisationsweregiven to minimise damage and give peace of mind to the customer. Prompt action and communication were given through the global and multi-lingual network.

As authorisation was sanctioned by Trans Ocean personnel at the point of the problem, immediate inspection and reports could take place. There were zero excess payments.

If required, support could be given from regional emergency response teams. All claims were handled and processed by the insurance team to ensure that resources of European clients were not over compromised. A technical review and report was also conducted to see if the situation could have been avoided or the supply chain improved for future shipments. Case study source: (Source: http://www.transoceanbulk.com/en/case-study.aspx?CaseStudyId=8)

Questions: What problems did the client face while attempting to process the claim?1. When was the authorisation sanctioned?2. Which actions were taken after the Trans Ocean insurance was sanctioned?3. Why was the technical review taken?4.

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Case Study III

Best Trading Co Pty Ltd

In January 2002, Best Trading Co Pty Ltd contracts with Double Happiness Pte Ltd of Hong Kong for the sale of 15MT of stilton cheese, 15 MT of gorgonzola cheese and 30 MT of cheese spread in jars, all on terms CIF Hong Kong. Best trading engages Sendit & Hope Forwarders Pty Ltd to arrange for door to door carriage from its Melbourne cool store to Double Happiness’s Hong Kong cool store.

The consignment of cheese is stuffed into 4 reefer containers by Sendit & Hope at Best Trading’s Melbourne cool store. The stilton is in one container, the gorgonzola in another and the cheese spread in two others. All of the cheese is to be carried chilled but the stilton and the gorgonzola are to be carried at much lower temperature than the cheese spread.

BestTradingfillsout an insurancecertificate in the standard InstituteFrozenFoodClausesA form, issuedbyInherently Equitable Insurance Co., which is in identical terms to the Cargo a Risks form except for Clause 1 which provides: 1. This insurance covers, except as provided in Clauses 4, 5, 6 and 7 below,

1.1 all risks of loss of or damage to the subject-matter insured, other than loss or damage resulting from any variation in temperature howsoever caused.

1.2 Loss of or damage to the subject-matter insured resulting from any variation in temperature attributable to

1.2.1 breakdown of refrigerating machinery resulting in its stoppage for a period of not less than 24 consecutive hours

1.2.2 fireorexplosion

1.2.3 vessel or craft being stranded grounded sunk or capsized

1.2.4 overturning or derailment of land conveyance

1.2.5 collision or contact of vessel craft or conveyance with any external object other than water

1.2.6 discharge of cargo at a port of distress

Thecertificaterefersto30MTcheesespreadand30MT“cheesevarious”.BestTradingsendsacopyofthecompletedcertificatetoInherentlyEquitable.Sendit&HopearrangesroadcarriageoftheourcontainerstoMelbournecontainerterminalwheretheyremainforfivedaysawaitingarrivalofthe“Platter”,theshiponwhichtheyaretobecarriedto Hong Kong. During their stay at the container terminal, the settings and Partlow charts on the containers are monitored by Amnesiac Monitors Pty Ltd. The weather is very hot and unseasonably humid.

On arrival of the “Platter” at Melbourne, the containers are shipped on board and Three Monkey’s Inc, the operator of the “Platter”, issues a bill of lading naming Sendit & Hope as the shipper. The ship’s departure is delayed for three days because of engine problems. The weather continues to be hot and humid. Finally, the “Platter” departs Melbourne.

After departure from Melbourne, the “Platter” experiences further engine trouble necessitating a salvage tow to Sydney, the next port of call. The vessel is detained there for a week, while 24spares are air-freighted from Singapore and repairs are undertaken. Sydney is now experiencing hot and humid weather. Finally, the “Platter” departs Sydney. By the time the vessel arrives in Brisbane, nearly three weeks after leaving Melbourne, the crew members have noticed an overpowering and unpleasant smell of decay from two of the four containers. Three Monkeys contacts Sendit & Hope, saying that the ship’s crew is revolting (as, by their smell, are the contents of the containers), and that the containers should be discharged from the ship in Brisbane. Sendit & Hope contacts Best Trading. Further

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investigation reveals three things: thatthepowerfulsmelliscomingfromthetwocontainerscontainingthestiltonandthegorgonzola;1. thatthetemperaturesettingonthosetwocontainersisatthelevelintendedtochillthecheesespread;2. that the temperature setting on the two containers containing the cheese spread is at a level colder than that 3. intended for the stilton and the gorgonzola.

Best Trading agrees that the two foul smelling containers should be discharged from the ship at Brisbane, saying that it wishes to protect its commercial relationship with Double Happiness. It also requests the discharge of the two containers of cheese spread as it suspects it may have been damaged by over chilling. Three Monkey’s discharges the goods in return for the original bill of lading which had not yet been sent to Hong Kong.

When the containers are opened in Brisbane, it is found that the stilton and the gorgonzola are in an advanced state of decay. Much, but not all of the cheese spread has frozen solid. When thawed, the frozen cheese spread separates into a thick curd sludge and an unpleasant astringent whey. Case study source: (Source:http://www.fpp.edu/~mlas/slo/files/IMLI-Marine%20Insurance%20Law.pdf) Questions:

In January 2002, Best Trading Co Pty Ltd made a contract with which company and for which commodities?1. For how many days and for what reason is there a departure in the ship from Melbourne? 2. Which three things did the further investigation reveal?3. Discuss the insurance implications.4.

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Bibliography

ReferencesAdvocate Khoj.• Marin Insurance Act, 1963 [Online]. Available at: <http://www.advocatekhoj.com/library/bareacts/marineinsurance/9.php?Title=Marine%20Insurance%20Act,%201963&STitle=Defensible%20or%20contingent%20interest>. [Accessed 18th June 2011]. Anderson, P., 1999.• The Mariner’s Guide to Marine Insurance, The Nautical Institute, p. 94.Basic Types of Reinsurance • [Online] Available at: <http://fa2f2.voila.net/intro_reinsurance.pdf>. [Accessed 22 June 2011].Chip Merlin Insurance Subrogation Teleconference 11/16/2010• [video online] Available at: <http://www.youtube.com/watch?v=2uJkgnDl-B8>. [Accessed 22 June 2011].Gauci, G., • Marine Insurance 09 . [video online] Available at: <http://www.youtube.com/watch?v=PuMsQsYJ1zQ>. [Accessed 20 June 2011].Giaschi, C. J., 1997. • Warranties in Marine Insurance [Online] Available at: <www.admiraltylaw.com/.../Marine%20Insurance%20Act.htm>. [Accessed 18 June 2011].Goel, K., • Marine Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-MARINE-PERILS>. [Accessed 22 June 2011].Goel, K., • Non-Life Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-MARINE-PERILS>. [Accessed 18 June 2011].Gupta, S. M., • Marine Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-principles-and-practice-of-general-insurance>. [Accessed 18 June 2011].Info about Insurance.• Institute Marine Cargo Clauses-A [Online] Available at: <http://www.infoaboutinsurance.com/Marine_Insurance.shtml#cargo>. [Accessed 18 June 2011].Institute Marine Cargo Clauses • [Online] Available at: <http://www.jus.uio.no/lm/institute.marine.cargo.clauses.a.1982/doc.html>. [Accessed 21 June 2011].Insurance Contracts: Good Faith and Bad Faith• [video online] Available at: <http://www.youtube.com/watch?v=WGykHhOwYgQ>. [Accessed 22 June 2011].InterLog.• Cargo Insurance [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p176.htm>. [Accessed 20 June 2011].InterLog.• Characteristics of Marine Insurance [Online] Available at: <http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p182.htm>. [Accessed 20 June 2011].InterLog.• Effecting a Marine Insurance Policy [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/marine_insurance_main_p196.htm>. [Accessed 16 June 2011].International Trade Rules: MIA (Marine Insurance Act), 1906• [Online] Available at: <http://www.tradegoods.com/helper/03rules/rules_301.html>. [Accessed 22 June 2011].Knowledge Series.• Introduction to Life Insurance [pdf] Available at: <http://www.cifplearning.com/introduction%20of%20life%20insurance.pdf>. [Accessed 18 June 2011].Lala Lajpatrai Collage Of Commerce & Economics.• Introduction to Reinsurance [Online] Available at: <http://www.scribd.com/doc/29209663/Re-Insurance>. [Accessed 22 June 2011].Legal Rights under Implied Warranties • [video online] Available at: <http://www.youtube.com/watch?v=ePv5QapHaxs&feature=related>. [Accessed 18 June 2011].LES 306 BUSINESS LAW ASU WEST • [video online] Available at: <http://www.youtube.com/watch?v=ePv5QapHaxs&feature=related>. [Accessed 18 June 2011].Magnum Archieve. • Marine Insurance Policy [Online] Available at: <http://www.magnumarchive.com/c/dictionary-of-banking/Marine-Insurance-Policy.html>. [Accessed 21 June 2011].Marine Insurance • [Online] Available at: <http://www.bostonapartments.com/archive/insure/marine_insurance.html>. [Accessed 20 June 2011].

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Marine INsurance Zone. • Principles of Marine Cargo Insurance [Online] Available at: <http://marineinsurance2u.com/marine-cargo/principles-of-marine-cargo-insurance/>. [Accessed 18 June 2011].Maritime Frauds • [Online] Available at: <http://www.documentfraud.org/22-document-fraud-institute.html>. [Accessed 20 June 2011].Noussia, 2007.• The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach, Springer, p. 295.Reinsurance • [video online] Available at: <http://www.youtube.com/watch?v=mgF2wLgQWfk>. [Accessed 22 June 2011].Slideshare• . Practice of General Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-principles-and-practice-of-general-insurance>. [Accessed 17 June 2011].SurfIndia. • Marine Insurance [Online]Availableat:<http://www.surfindia.com/finance/marine-insurance.html>.[Accessed 20 June 2011].The UK Ship Register • [video online] Available at: <http://www.youtube.com/watch?v=Hy-vNdP76XI>. [Accessed 20 June 2011].Transit Insurance - Moving Glossary - Movers.com • [video online] Available at: <http://www.youtube.com/watch?v=8OoYZ2jjR8o>. [Accessed 23 June 2011].wiseGeek• . The Principle of Indemnity [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>. [Accessed 18 June 2011].wiseGeek• . What is Indemnity? [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>. [Accessed 21 June 2011].

Recommended ReadingBanks, E., 2004. • Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and the Capital Markets, Wiley, p. 226.Board, N., 2003. • SecretsforMakingBigProfitsfromYourBusinesswithExportGuidelines, National Institute of Industrial Re, p. 270.Bose, C., • Business Law, PHI Learning Pvt. Ltd.Carr, I. & Stone, P., 2009. • International Trade Law, 4th ed., Taylor & Francis, p. 738.Hinkelman, E. G., 2005. • Dictionary of International Trade: Handbook of the Global Trade Community Includes 21 Key Appendices, World Trade Press, p.688.Hodges, S., 1996. • Law of Marine Insurance. Routledge, p. 647.Hodges, S., 1999. • Cases and Materials on Marine Insurance Law, Routledge, p. 962.Huebner, S. S., 2010• . Marine Insurance, Nabu Press, p. 284.Malbon, J. & Bishop, B., 2006. • Australian Export: a Guide to Law and Practice, Cambridge University Press, p. 318.Martin, F., 2007. • The History of Lloyd’s and of Marine Insurance in Great Britain: With an Appendix Containing Statistics Relating to Marine Insurance, Macmillan and Co., 1876, p. 416.Rolski, T., 1999. • Stochastic Processes for Insurance and Finance, John Wiley and Sons, p. 654.Sherlock, J., 1994. • Principles of International Physical Distribution, Wiley-Blackwell, p.327.Soyer, B., 2005. • Warranties in Marine Insurance. 2nd ed., Routledge, p. 312.Stempel, J. W., 2006. • Stempel on Insurance Contracts, Vol.1, 3rd ed., Aspen Publishers Online.Templeman, 2008. • Marine Insurance: Its Principles And Practice, Qureshi Press, p. 140.Thoyts, R., 2010. • Insurance Theory and Practice, Taylor & Francis, p. 344.Tyagi, L., Tyagi, M. & Tyagi, M., 2007. • Insurance Law and Practice, C. Publisher Atlantic Publishers & Dist, p. 400.

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Self Assessment Answers

Chapter I a1. b2. a3. b4. c5. a6. d7. a8. d9. a10.

Chapter IIa1. a2. c3. a4. a5. b6. a7. c8. c9. b10.

Chapter IIIa1. b2. a3. a4. b5. a6. d7. a8. a9. c10.

Chapter IVa1. b2. a3. a4. b5. a6. d7. a8. a9. a10.

Marine Insurance

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Chapter Va1. b2. a3. b4. a5. a6. c7. a8. a9. a10.

Chapter VIa1. a2. a3. a4. b5. c6. a7. a8. a9. d10.

Chapter VII a1. b2. a3. a4. c5. a6. a7. a8. b9. a10.

Chapter VIII c1. a2. b3. d4. b5. d6. d7. d8. c9. b10.