MARINE INSURANCE
MARINE INSURANCE
Executive Summary
Objective
My prime objective is to foray in to the origins, history and roots of
Marine Insurance. To explain why Marine Insurance assumed great significance
in era of globalization and trade. The concept of cargo and hull insurance which
are explained in the project are a separate field related to marine.
Sub Objective
Marine Insurance is a vast subject worth studing. Just like Life Insurance
there are many legal provisions clauses related to marine insurance which I have
tried to clarify in my project. My sub-objective it to know about the different
clauses of Marine Insurance.
Primary Data
Visited a authorised agent of Oriental Insurance co.Ltd
Secondary Data
Books on IRDA
Marine Insurance 1 c-67
Internet
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MARINE INSURANCE
Introduction to Insurance
INSURANCE -Insurance or assurance, device for indemnifying guaranteeing
an individual against loss. Reimbursement is made from a fund to which many
individuals exposed to the same risk have contributed certain specified amounts,
called premiums. Payment for an individual loss, divided among many does not
fall heavily upon the actual loser. The essence of the contract of insurance
called a policy, is mutuality. The major operations of an insurance company are
underwriting, the determination of which risks the insurer can take on; and
ratemaking, the decisions regarding necessary prices for such risk. The
underwriter is responsible for guarding against adverse selection, wherein there
is excessive coverage of high risk candidates in proportion to the coverage of
low risk candidates. In preventing adverse selection the underwriter must
consider physical, psychological, and moral hazards in relation to applicants.
Physical hazards include those dangers which surround the individual or
property, jeopardizing the well-being of it insured. The amount of the premium
is determined by the operation the law of averages as calculated by actuaries.
By investing premium payments in a wide range of revenue-producing projects,
insurance companies have become major suppliers of capital, and they rank
among the nation’s largest institutional investors.
Common Types Of Insurance: Life insurance, originally conceived to protect a
man’s family when his death left them without income, has developed into
variety of policy plans In a "whole life policy fixed premiums are paid
throughout the insured’s lifetime; this accumulated amount, augmented by
compound interest, is paid to a beneficiary in a lumsum upon the insured’s
deaths; the benefit is paid even if the insured had terminated the policy. Under
"Universal Life,' the insured can vary the amount and timing of the premiums;
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the fund compound to create the death benefit. With Invariable Life," the fixed
premiums are invested in a portfolio and the death benefit is based on the
performance of the investment. In "term Life," coverage is for a specific time
period (e.g ,5-10 years); such plans do not build up value during the term .
Annuity policies, which pay the insured a yearly income after certain age, have
also been developed. In the 1990s life insurance companies began to allow early
payouts to terminally ill patients.
Fire insurance usually includes damage from lightning; other insurance
against the elements includes hail, tornado, flood, and drought. Complete
automobile insurance includes not only insurance against fire and theft but also
compensation for damage to the car and for personal injury to the victim of an
accident; many car owners, however, carry only partial insurance. In many
states liability insurance is compulsory, and a number of states have instituted
so-called no-fault insurance plans, whereby Automobile accident victims
receive compensation without having to initiate a liability law suit, expect in
special cases. Bonding or fidelity insurance, is designed to protect an employer
against dishonesty or default on the part of an employee. Title insurance is
aimed at protecting purchaser of real estate from loss the failure of customers to
meet their obligations. Marine insurance protects shipping companies against
the loss of a ship or its cargo, as well as many other items, and so-called inland
marine insurance covers a vast miscellany of items, including tourist baggage
express and parcel-post packages, truck cargoes, goods in transit and even
bridges and tunnels.
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History of Insurance
The roots of insurance might be traced to babylonia, where traders were
encouraged to assume the risks of the caravan trade through loans that were
repaid (with interests) only after the goods had arrived safely-a-practice
resembling bottomry and given legal force in the code of Hammurabi (c.2100
BC). The Phoenicians and the greeks applied a similar system to their seaborne
commerce. The Romans used burial clubs as a form of life insurance, providing
funeral expenses for member and later payments to the survivors.
With the growth of towns and trade in Europe, the medieval guild
undertook to protect their members from loss by fire and shipwreck, to ransom
them from captivity by pirates, and to provide decent burial and support in
sickness and poverty. By the middle of the 14th cent., a evidenced by the
earliest known insurance contract (Genoa, 1347), marine insurance practically
universal among the maritime nations of Europe. In London, Lloyds Coffee
House (1688) was a place where merchants, ship-owners, and underwriters met
to transact business. By the end of the 18th century. In 1693 the astronomer
Edmond Halley constructed the first mortality table, based on the statistical laws
of mortality and compound interest. The table, corrected (1756) by joseph
dodson, made possible to scale the premium rate to age; previously the rate had
been the same for all ages.
Insurance developed rapidly with the growth of British commerce in the
17th and 18th century. Prior to the formation of corporations devoted solely to
the business of writing insurance, policies were signed by a number of
individuals, each of whom wrote his name and the amount of risk he we
assuming underneath the insurance proposal, hence he was the term
underwriter. The first stock companies to engage in insurance wet chatered in
England in 1720, and in 1735, the first insurance company in the American 4
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Colonies was founded at Charleston, S.C.Fire Insurance Corporation were
formed in New York city (1787) and in Philadelphia (1794). The Presbyterian
Syond of Philadelphia sponsored (1759) the first life insurance corporation in
America, for the benefit of Presbyterian ministers and their dependents. After
1840, with the decline of religion prejudice against the practice, life insurance
entered a boom period. In to 1830s the practice of classifying risks was begun.
In the l9th century many friendly or benefit societies were founded to insure the
life and health of their members, and many fraternal orders were created to
provide low-cost, members-only insurance. Fraternal order continue to provide
insurance coverage, as do most labour organization. Many employers sponsor
group insurance policies for their employee; such policies generally include not
only life insurance, but sickness and accident benefits and old-age pensions, and
the employees usual contribute a certain percentage of the premium.
Since the late 19th century there has been a growing tendency for the state to
enter the field of insurance, especially with respect to safeguarding workers
against sickness and disability, either temporary or permanent, destitute old age
and unemployment U.S. government has also experimented with various types
of crop insurance, a landmark in this field being the Federal Crop Insurance Act
of 1938. In World War II to government provided life insurance for members of
the armed force since then it has provided life insurance for members of the
armed force; Since then it has provided other forms of insurance such as
pensions for veterans and for government employees.
After 1944 the supervision and regulation of insurance companies previously an
exclusive responsibility of the states become subject to regulation by Congress
under the interstate commerce clause of the U.S. Constitution. Until the 1950s,
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most insurance companies in the United States were restricted to providing only
one type of insurance, but the legislation was passed to permit fire and casualty
companies to underwrite several clauses of insurance. Many firms have since
expanded, many mergers have occurred and multiple-line companies now
dominate the field. In 1999 congress repealed banking laws that had prohibited
commercial banks from being in the insurance business; the measure was
expected to result in expansion by major banks in to the insurance arena.
In recent years insurance premiums have increased rapidly, leaving
unprecedented numbers of American uninsured. Many blame the insurance
conglomerates, contending that U.S. citizens are paying for bad risks made by
the companies. Insurance companies place the burden guilt on law firms and
their clients, who they say have brought unreasonably large civil suits to court,
trend that has become so common in the United States that legislation has
become so common in the United States that legislation has been proposed to
limit lawsuit awards. Catastrophic earthque and wildfires in late 1980s and the
90s have also strained many insurance company reserves.
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Origin of Marine Insurance
The origins of marine insurance law were in the law merchant, with the
establishment in England in 1601 of a specialised chamber of assurance
separate from the other courts. Lord Mansfield, Lord Chief Justice in the mid-
eighteen century, began the merging of law merchant and common law
principles. The establishment of Lloyds of London, competitor insurance
companies, a developing infrastructure of specialist and the growth of the
British Empire gave English law a prominence in this area which it largely
maintains and forms the basis of almost all practice. The growth of the London
insurance market led to the standardization of policies and judicial precedent
further developed marine insurance law. In 1906 the Marine Insurance Act was
passed which codified the previous common law; it is both an extremely
thorough and concise piece of work. Although the title of the Act refers to
marine insurance, the general principles have been applied to all non-life
insurance.
In the l9th century, Lloyds and the Institute of London Underwrite
developed between them standardised clauses for the use of marine insurance,
and these have been maintained since. These are known the Institute Clauses
because the Institute Clauses parties retain a considerably freedom to contract
between themselves.
Marine insurance is the oldest type of insurance. Out of it grew no marine
insurance and reinsurance. It traditionally formed the majority of business
underwritten at Lloyds. Nowadays, Marine insurance is often grouped with
Aviation and Transit (ie, cargo) risks, and in this form known by the acronym
MAT.
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Marine insurance
Marine insurance, the oldest branch of insurances comprises (a) cargo
insurance and (b) hull insurance
Cargo insurance provides insurance cover in respect of loss of or damage
to goods during transit by rail, road, sea or air, thus cargo insurance
concerns the following:
a) Export and import shipments by ocean-going vessels of all types,
b) Coastal shipments by steamers, sailing vessels, mechanized boats etc.
c) Shipments by inland vessels or country craft, and
d) Consignments by rail, road or air and articles sent by post.
Hull insurance, on other hand, concerns the insurance of ships (hull,
machinery etc) this is highly technical subject and therefore, will be dealt
with briefly later in the study course.
Cargo insurance plays a important role in domestic trade as well as in
international trade. Most contracts of sale require that the goods must be
covered, either by the seller or the buyer, against loss damage.
Who effects the insurance
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A contract of sale involves mainly a seller and a buyer, apart from other
associated parties like carriers, banks, clearing agents etc. The question to who
is responsible for effecting insurance of goods, which are the subject for sale,
depends on terms of sale contract. The principal types of sale contracts, in so far
as marine insurance is directly concerned are as follows:-
A) Free on board
(F. O.B . contracts)
The seller is responsible
till the goods are placed
on board the steamer.
the buyer is responsible
thereafter, he can get the
insurance done insurance
wherever he likes
B) Free on Rail
(F.O.R. contract)
The provisions are the
same as in (a) above.
This is mainly relevant to
internal transaction.
C) Cost, Insurance &Freight
(C.I.F. contract)
In this case, the seller is
responsible for arranging
the insurance. He
included the premium
charge as part of the cost
of goods in the invoice.
D) Cost and Freight (C&F Contract) Here also, the buyer’s
responsibility normally
attaches once the goods
are placed on board. He
has to take care of the
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insurance from that point
onwards.
The normal practice in export / import is for the exporter to ask the
importer to open a letter of credit with a bank in favour of the exporter. As and
when the goods are ready for shipment by the exporter, he hands over the
documents of title to the bank and gets the bill of exchange drawn by him on the
importer, discounted with the bank. In this process, the goods which are the
subject of the sale are considered by the bank as physical security against the
monies advanced by it to the exporter. A further security by way of an insurance
policy is also required by to protect its interests in the event of the goods
suffering loss or damage in transit, in which case the importer may not make the
payment.
The terms and condition of insurance are specified in the letter of credit.
Marine Insurance Act, 1963
This Act provides the legal framework for transaction of marine insurance- both
cargo and hull. The act deals with basic principles basic of valuation under the
policies basic of settlement of losses etc.
Marine Policies
A contract of marine insurance is evidenced by the policy and the clause
attached to it. The policy form contains only details such as name of the insured,
detail of shipment or consignment, sum insured, etc. It is the clauses which
specify the risk covered, risks excluded and other terms and condition of
insurance.
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For export / import policies, the Institute Cargo Clauses (I.C.C) are used. These
clauses are drafted by the Institute of London underwriters and are used by
insurance companies in a majority of countries including India. For inland
transit the clauses drafted by the Tariff Advisory Committee are used.
. The Marine Policy Form
The form contain the following particulars:
(a) Name of insured.
(b)Policy number
(c) Sum insured
(d)Premium.
(e) Stamp duty.
(f) Steamer or other conveyance
(g)Voyage or journey
(h)Number and date of bill of lading rail or lorry or registered post or air
fight receipt (as the case may be).
(i) Interest to be insured.
(j) Clauses to which the insurance is subject.
(k)Name and address Settling agents to whom notice of claim if any, is to be
given.
(l) Place where claims are payable.
(m) Place of issue of policy and date.
(n)Signature of the authorised person signing on behalf of the insurers.
Every marine policy must be stamped I accordance with the provision of the
Indian Stamp Act.
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CLAUSES
Lost or not clause
Where the subject matter is insured "lost or not lost” and the loss has
occured before the contract is concluded the risk attaches unless at such time the
assured was aware of the loss, and the insurer was not.
At and form clause
The risk starts as soon as the contract of insurance is concluded provided
the ship in good safety at that same time. If the ship is not in good safety at that
time, the risk will begin on her till arriving in good safety at the port of
depature. where freight, other than chatered freight is payable without special
conditions and is insured at and from a particular place, the risk attaches pro
rata as the goods or merchandise are shipped, provided that if there be cargo in
readiness which belongs to the ship-owner or which some other persons had
contracted with him to the risk attaches as soon as the ship is ready to receive
such cargo.
Transit clause or warehouse to warehouse clause
This clause provides with respect to goods, for the risk to attach "from the
loading thereof abroad the ship" and for the insurance to continue untill the
goods are discharged and safety landed at the port of discharge. Modern trading
conditions call for a policy which provides cover during the entire period of
transit, for which reason this clause is designed to extend the period of cover
from the time the goods leave the exporters warehouse until they are delivered
to the importers ware house at the named destination, or to any other
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warehouse, whether prior to or at the named destinations which the assured
elect to use either for storage for allocation or distribution, or on the expiry of
60 days after discharge from the overseas vessel at the final port of discharge
which ever first occurs.
Change of voyage or deviation clause
The Marine Insurance Act, provides that where there is a change of
voyage then unless the policy otherwise provides the insurer is discharged from
the liability as from the time of the change. Through this clause policy does
provide otherwise, and the event is held covered at a premium to be arranged.
Reinsurance Clause
There are various reason why an underwriter may it deem it prudent to
reinsure part or all of a risk for which he accepted liability. For instance he may
find that his commitments on any one vessel or in any locality have become
burdensome, Declaration under open covers or floating policies and accepting
by his agent in other markets may give him an accumulated liability
considerably in excess of his usual retention. He may have accepted a line on
"all risk" terms and then desire to reinsure in respect of total loss only.
Memorandum Clause
This clause is meant to provide a minimum limit to the underwriter’s
liability regarding claims for particular average by exempting him from such
claims.
Bottomry bond
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It is a bond representing monetary loan raised by the master of the ship so
as to meet certain urgent expenses like repairing a ship on the security of a ship
or ship and cargo. It is repayable after certain agreed number of days after the
arrival of the ship as specified in the bond. If the vessel is lost before it arrives
at destination, the lender losses his money.
Institute Cargo Clauses (C)
These clauses attached to the policy Mom, corer the following risks:
(a) Fire or explosion
(b) Vessel or crap being stranded, grounded, sunk or capsized
(c) Overturning or derailment of land conveyance
(d) Collision or contact of vessel, craft or conveyance with any external object
other then water
(e) Discharge of cargo at a port of distress
(f) General average sacrifice
(g) Jettison
Institute Cargo Clauses (B)
Risks covered
LC.C. (B) provide cover as under I.C.C. (C) and also the following additional
risks are covered.
(a) Earthquake, Volcanic eruption or lightning 14
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(b) Washing overboard
(c) Entry of sea, lake or river water into vessel, craft, hold, conveyance,
container, liftvan or place or storage
(d) Total loss of any package lost overboard or dropped whilst loading on to, or
unloading from vessel or craft.
Apart from the risks covered under these clauses cargo is also subject to
many other risks which are known as 'extraneous risks'. These risks, which can
be added to I.C.C. (E) on payment of extra premium are:
(a) Theft, pilferage and / or non- delivery.
(b) Fresh water and rainwater damage
(c) Hook and / or oil damage.
(d) Heating and sweating.
(e) Damage by mud, acid and other extraneous substance.
(f) Breakage.
(g) Leakage.
(h) Country damage.
(i) Bursting / tearing of bags.
Institute Cargo Clauses (A)
These clauses provide cover for all risks of loss or damage, to the subject
matter insured. The terms 'all risks' means losses which are caused by accidental
circumstance only. Under I.C.C. (C) and (B), the risks covered are specified;
Under 'A' clauses the risks covered are not specified and ‘all risks’ are covered.
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Exclusion
All three sets of clauses contain general exclusions. The more important
exclusions are:
a) Loss caused by willful misconduct of the insured.
b) Ordinary leakage, ordinary losses in weight or volume or ordinary wear or
tear.
These are normal ‘trade’ losses which are inevitable and not accidental in
nature.
c) Loss caused by inherent vice or nature of the subject matter. For example,
perishable commodities like fruits, vegetable, etc. may deteriorate without any
accidental cause. This is known as 'inherent vice'
d) Loss caused by delay, even though the delay be caused by an insured risk.
e) Deliberate damage by the wrongful act of any person. This is called
'malicious damage' and can be covered, at extra premium under (B) and (C)
clauses. Under 'A' clauses, the risk is automatically covered.
f) Loss arising from insolvency or financial default of owner, operators etc. of
the vessel. Many ship-owners, especially tramp vessel owners, fail to perform
the voyage due to financial troubles with consequent loss or damage to cargo.
This is not an accidental loss. The insured has to be cautious in selecting the
vessel for shipment. (This is dealt with later).
g) Loss or damage due to inadequate packing
h) War and kindred perils.
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i) Strikes, riots, lock-out, civil commotions and terrorism.
(Note: These risks under (h) & (i) can be covered on payment of extra premium.
The Institute War and Strikes clauses are attached to the policy.)
Duration of cover
As against “time policies” issued in the other classes of insurance which
cover the subject matter for a specified period, usually one year, cargo policies
are issued for specified voyage or transit whatever the time takes. It is necessary
to be clear as to when exactly risk commences and terminates under a voyage
policy.
The duration of cover is defined in the Transit Clause (Popularly known as
Warehouse to Warehouse Clause) of the I.C.C.
The cover commences from the time the goods leave the warehouse at the
placed named in the policy. Continues during the ordinary course of transit and
terminates either.
a) On delivery to the consignees’ or other final warehouse at the destination
named.
b) On delivery to any intermediate warehouse used by the insured for
purposes of storage or distribution or
c) On the expiry of 60 days after discharge from the vessel at the final port
of discharge whichever shall first occur.
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(Note: The time limit of 60 days is prescribed to ensure early clearance of goods
by the consignee. Insurer extends the time limit, at extra premium, in genuine
circumstances causing delay in clearance.)
The duration of cover for war risks is restricted to the time when the goods are
water borne and not on land. War risks on land is not covered under insurance
policies.
Institute Cargo Clauses (Air)
(Excluding Sending by Post)
The risks covered are all risks of loss or damage and the exclusions are
more or less the same as under ICC(A) Clauses.
The duration of cover is the same under ICC(A) except that the period of
cover after unloading of cargo from the aircraft at the final place of discharge is
limited to 30 days (as against 60 days under ICC(A) War and SRCC risks cart
be covered at extra premium.
Inland Transit (Rail / Road) Clause 'C'
Risks Covered
Risks of physical loss / damage caused by:
(a) Fire (b) Lightning
Duration of cover
Insurance attaches with the loading of each bale/package into the
wagon/tuck for commencement of transit and continues during ordinary course
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of transit, including customary transhipments and cease immediately on
unloading of each bale / package
(a) at destination railway station for rail transit
(b)at destination named in the policy in respect of road transit.
Inland Transit (Rail/Road) Clause (B)
Risks Covered
Physical loss or damage to the insured goods by
(a) Fire
(b) Lighting
(c) Breakage of bridges
(d) Collision with or by the carrying vehicle
(e) Overturning of the carrying vehicle Off Derailment or accidents of like
nature to the carrying railway wagon / vehicle.
Extraneous risks like theft, pilferage, non-delivery etc. can be added to
the cover at extra premium. SRCC risks can also be added.
Inland Transit (Rail/Road Clause ‘A’
Risks covered
All risks of loss or damage to the insured goods
Exclusions
All three sets of clauses have the same exclusions as are found in ICC Clauses. .
Duration of cover
Under both clauses the risk attaches from the time the goods leave the
warehouse and/or the store at the time place named in the policy for the
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commencement of transit ad continues, during the ordinary course of transit,
including customary transhipment, if any,
(i) until delivery to the final warehouse at the destination named in the police, or
(ii) respect of transits by rail only or rail and road, until expiry of 7days after
arrival of the railway wagon at the final destination railway station, or
(iii) in respect of transits by Road only, until expiry of 7 days after arrival of the
vehicle at the destination town named in the policy, whichever shall first occur .
Registered Postal Sendings
There is no standard set of clauses. ICC or Inland Transit Clauses may be used.
The cover attaches from the time of issue of the registered pot receipt post
receipt and terminates on delivery of parcel to the addressee (consignee). For
interests which are valuable it is warranted that the parcel is insured with the
postal authorities.
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Rating and Underwriting
In cargo insurance, it is not the practice to use proposal forms. Instead, a
declaration form has to be filled up by the proposer. The form does not contain
any statement required to be made by the proposer warranting that all the
statements made in the form are true. The declaration form is not incorporated
by reference into the policy as is done in other departments.
The form elicits the following information:
(a) Name of the shipper or consignor ( the insured ).
(b)Full description of goods to be insured. The nature of the commodity to
be insured is important for rating and underwriting. Different types of
commodities are susceptible for different types of damage during transit.
Sugar, cement, etc. are easily damaged by sea water; cotton is liable to
catch fire; liquid cargoes are susceptible to the risk of leakage and
crockery, glassware to breakage; electronic items are exposed the risk of
theft, and so on.
(c) Method and types of packing: The possibility of loss or damage depends
on this factor. Generally, goods are paced in bales or bags, cases or bundles,
crates, drums or barrels, loose packing, paper or cardboard cartons, or in
bulk etc.
(d) Voyage and mode of transit: Information will be required on the
following point:-
(i) The name of place from where transit will commence and the name of the
place where it is to terminate.
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(ii)Mode of conveyance to be used in transporting goods, i.e. whether by
rail, lorry, air, etc., or a combination of two or more of these. The name
of the vessel is to be given when an overseas voyage is involved. In land
transit by rail, lorry or air, the number of the consignment and the date
thereof should be furnished. The posts receipt number and date thereof is
required in case of goods sent by registered post.
(iii) If a voyage likely to involve transhipment, it enhances the risk.
This fact should be informed while seeking insurance.
(e)Cover required: The risks against which cover is required should be
stated.
Merely stating that "full cover" is required is not enough. The risks must be
fully described.
(f) Name of steamer: The correct name of the steamer is necessary to known
the details of the age, tonnage, classification, ownership, etc. Shipments
effected per old vessels or vessels of small tonnage are not considered
attractive. If such business is to be accepted, it may warrant charging an
additional / higher rate of premium.
Shipments made by 'first class' vessels attract normal rate of premium.
These vessels are approved by ship classification societies such as Lloyds
Register, American Bureau of Shipping, Indian Register of Shipping, etc.
The so-called “tramp” vessels do not follow a fixed schedule but carry
cargo wherever it is available and wherever required (often offering 22
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inducements of lower freight) unlike liner vessels which carry cargo according
to an advertised schedule between home port and overseas port of destination,
calling enroute at intermediate ports on the voyage.
Shipments by “tramp” vessels are charged heavy extra premium under
cargo policies. Normal or standard rates may be charged if the insurers are
satisfied about the financial standing and stability of the “tramp” vessel owner,
his reputation, standard of management and maintenance of the vessels,
experience of earlier voyage, etc. for this purpose, an “approval” procedure is
followed.
To summarise, the rates of premium depend upon:
a) Nature of commodity.
b) Method of packing
c) The vessel
d) Type of insurance cover
Cargo insurance rates are largely non-tariff. The All India Marine cargo
Tariff introduced in 1983, no longer applies. Nevertheless, the provisions of the
Tariff are adopted by the companies as guidelines for rating and underwriting.
(Note: Some cargo insurances are governed by tariff and are referred to later in
course)
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The Practice of Cargo Insurance
The various documents used in cargo insurance are now explained.
Cover Note
A cover note is a document granted provisionally pending the issue of a
regular policy. It happens frequently that all details required for the purpose of
issuing a policy are not available. For instance, the name of steamer, the number
and date of the railway receipt, the number of packages involved in transit, etc.,
may not be known
Marine Policy
This is document which is an evidence of the contract of marine
insurance. It contains the individual details such as name of the insured, details
of good etc. These have been identified earlier. The policy makes specific
reference to the Clauses attached e.g. ICC (A), War and SRCC clauses, etc. any
specific warranties Applicable etc. Apart from the clauses, a slip printed in red
and marked “Important” Known as 'red slip' is also attached. The slip draws the
attention of consignees to certain procedures to be followed by them to preserve
rights of recovery against carriers etc. A policy covering a single shipment or
consignment is known as specific policy.
Open policy
An open policy is also known as 'floating policy'. It is worded i] general
terms and is issued to take care of all shipments coming within its scope. It is
issued for a substantial amount to cover shipments or sending during a
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particular period of time. Declarations are made under the open policy and these
go to reduce the sum insured.
Open policies are normally issued for a year. If they are fully declared
before that a fresh policy may be issued, or an endorsement placed on the
original policy for the additional amount. On the other hand, if the policy has
run its normal period and is cancelled, a proportionate premium on the
undeclared balance is refunded to the insured if the full premium had been
earlier collected. On receipt of each declaration, a separate certificate of
insurance is issued. An open policy is a stamped document, and, therefore,
certificates of insurance issued there-under need not be stamped. Open policies
are generally issued to cover inland consignments.
There are certain advantages of an open policy compared to specific policies
there are:
(a) Automatic and continuous insurance protection.
(b) Clerical labour is considerably reduced
(c) Some saving in stamp duty. This may be substantial, particularly in the case
of inland sending.
Open cover
An open cover is particularly useful for large export and import firms
making numerous regular shipments who would otherwise find it very
inconvenient to obtain insurance cover separately for each and every shipment.
It is also possible that through an oversight on the part of the insured a
particular shipment may remain uncovered and should a loss arise in respect of
such shipment, it would fall on the insured themselves to be borne them. In
order to overcome such a disadvantage, a permanent form of insurance
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protection by means of an open cover is taken by big firms having regular
shipments.
An open cover describes the cargo, voyage and covers in general terms
and takes care automatically of all shipments which fall within its scope. It is
usually issued for period of 12 months and is renewable annually. It is subject to
cancellation on either side, i.e., the insurers or the insured, by giving due notice.
Since no stamps are affixed to the open cover, specific policies or
certificates of insurance are issued against declaration and they are required to
be stamped according to the Stamp Act.
There is no limit to the total number or value of shipments that can
declared under the open cover.
The following are the important features of an open policy / open cover:
(a)Limit per bottom or per conveyance:
The limit per bottom means that the value of single shipment declared
under the open cover should not exceed the stipulated amount.
(b)Basis of valuation:
The basis normally adopted is the prime cost of the goods, freight and
other charges incidental to shipment, cost of insurance, plus 10% to cover
profit, (the percentage to cover profits may be sometimes higher by prior
agreement with the clients.
(c) Location Clause:
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While the limit per bottom mentioned under (a) above is helpful in
restricting the commitment of insurers on any one vessel, it may happen in
actual practice that a number of different shipments falling under the scope of
the open cover may accumulate at the port of shipment. The location clause
limits the liability of the insurers at any one time or place before shipment.
Generally, this is the same limit as the limit per bottom or conveyance
specified in the cover, but sometimes it maybe agreed at an amount, say up to
200% thereof.
(d) Rate:
A schedule of agreed rates is attached ton each open cover.
(e) Terms:
There may be different terms applying to different commodities covered under
the open cover and they are clearly stipulated.
(f) Declaration Clause:
The insured is made responsible to declare each and every shipment coming
within the scope of the open cover. An unscrupulous insured may omit a few
declaration, to save premium, especially when he knows the shipment has
arrived safely. Hence the clause
(g) Cancellation Clause:
This clause provides for cancellation of the contract with a certain period of
notices e.g., a month's notice on either side. In case of War & S.R.C.C. risks, the
period of notice is much shorter.
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The open policy differs from an open cover in certain important respect. They
are:
(a) The open policy is a stamped document and is, therefore, legally enforceable
in itself, whereas an open cover is unstamped and has no legal validity unless
backed by a stamped policy.
(b) An open policy is issued for a fixed sum insured, whereas there is no such
limit of amount under an open cover. As and when shipments are made under
the open policy, they have to be declared to the insurers and the sum insured
under the open policy reduces by the amount of such declarations. When the
total of the declarations amounts to the sum insured under the open policy, the
open policy stands exhausted and has to be replaced by a fresh one.
Certificate of Insurance
A certificate of Insurance is issued to satisfy the requirements of the
insured or the banks in respect of each declaration made under an open cover
and / or open policy. The certificate, which is substitute for specific policy, is a
smile document containing particulars of the shipment or sending. The number
of open contract under which it is issued is mentioned and occasionally, terms
and conditions of the original cover are also mentioned. Certificates need not be
stamped when the original policy has been duly stamped.
Endorsements
Whenever it becomes necessary to incorporate a change in the original
policy, endorsements are issued. Such endorsements may be in respect of
changes relating to sum insured or interest or premium or conditions. The
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endorsement should be attached to the original document. Otherwise, the holder
thereof may not be aware of the changes effected.
Special Declaration Policy
This form of floating policy issued to client whose annual estimated
dispatches (i.e. turnovers by rail / road / inland waterways exceeds Rs. 2 crores.
Declaration of dispatches shall be made at periodical intervals and
premium is adjusted on expiry of the policy based on the total declared amount.
When the policy is issued sum insured should be based on previous
year’s turnover or in case of fresh proposals, on a fair estimate of annual
dispatches. A proposal form is used.
A discount in the rates of premium based on turnover amount (e.g.
exceeding Rs.5 crores etc) on a slab basis and loss ratio.
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Kinds of Insurance
Special Storage Risks Insurance
This insurance is granted in conjunction with an open policy or a special
declaration policy.
The purpose of this policy is to cover goods lying at railway premises or
carrier's godown after termination of cover under open or special declaration
policies but pending clearance by the consignee the cover terminates when
delivery is taken by the consignee or payment is received by the consignor,
whichever is earlier
Annual policy
This policy issued for 12months, covers goods belonging to the insured,
which are not under contract of sale and which are in transit by rail or road from
specified depots/processing units to other specified depots /processing units.
Cover is provided in terms of inland transit (rail/road) clauses as desired.
A special rating formula is applied to the policy. A proposal form is used
“Duty” insurance
Cargo imported into India is subject to payment of customs duty, as per
the customs act. This duty can be included in the value of cargo insured under a
marine cargo policy, or a separate policy can be issued in which case the duty
insurance clause is incorporated in the policy. Warranty 3 provides that the
claim under duty policy would be payable only if to claim under duty policy
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would be payable only if the claim under cargo policy is payable. The insured
has therefore to produce proof of the cargo claim having been settled or liability
admitted by cargo insurers. But this provisions is not applied where CIF
insurance is arranged by the exporter as required by the contract of sale. This
insurance shall not be valid if effected after the arrival of the vessel at the
destination port.
"Increased value" insurance
Insurance may be arranged to cover increased value of the cargo, if the
market value of the goods at destination port on the date of landing is higher
than the CIF and duty value of the cargo.
The policy incorporates a clause which reads as follows:
This insurance is on increased value by reason of the market value of the
goods at destination on the date landing being higher than CIF and duty value of
the cargo and is subject to same clause and conditions as the insurance on CIF
value on cargo and to pay 75% of the sum insured of Rs............because of the
operation of any of the perils insured against.
This insurance shall not be valid if effected after the arrival of the vessel at the
destination port.
(Note These two policies are issued only on import)
Tariff Policies
The Tariff Advisory committee has formulated package policies which
cover transit risks as well as storage risks incidental to transit foe tea, coffee,
cardamom and rubber.
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The cover under tea policy attaches from the time green leaf is plucked at
the insured's estate and continues during processing at the factory and during
further transit until delivered to buyers in India or abroad. The cover is as per
the Inland transit clauses (rail/road) and Institute cargo clauses.
The cover for Coffee, Cardamom and rubber is more or less, along the
saw lines as for tea.
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Claims
An insured takes out insurance cover to enable him to recover losses
when they arise. They are payable according to the terms and conditions of
policy. The marine perils discussed earlier give rise to different types of losses.
The liability under the policy depends firstly, on the loss being caused by an
insured peril and secondly, on being proximately caused by such insured peril.
Total loss
Goods may be totally lost by the operation of the marine peril. The measure
of indemnity in the event of total loss of the goods is the full insured value. The
insurers are entitled to take over the salvage, if any.
An actual total loss takes place where the subject matter is entirely destroyed
or damaged to such an extent that it is no longer a thing of the kind insured.
As against actual total loss a constructive total loss of the goods is full
insured value. The insurer is abandoned on account of actual total loss being
inevitable, or where the expenditure to be incurred for repairs or recovery would
exceed the value of subject matter after repairs of recovery.
Particular Average
These are partial losses caused by marine perils. The particular average
losses caused by marine perils. The particular average losses occur when there
is total loss of part of the goods covered, e.g. A consignment consist of 100
packages of which 5 packages may be lost completely. Another way in which 5
packages may be lost completely. Another way in which particular average loss
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occurs is when there is damage to the goods. Where there is damaged to goods.
Where whole or any part of the goods insured is delivered damaged at
destination, the percentage of depreciation is ascertained by a surveyor
appointed for the purpose, by comparing on the one hand the gross sound
market value and, on the other, the gross damaged market value on arrival of the
goods at destination. The depreciation is expressed as a percentage of the
insured value under the policy.
Settlement of claims, may also be subject to:
(a) Frachise
(b) Excess, if incorporated in the policy
General Average
General average is a loss caused by a general average act An act is
referred to as general average act. An act is referred to as general average act
when an extraordinary sacrifice or expenditure is made. Such an act should be
voluntary and the expenditure reasonable. It should be undertaken with the sole
idea of preserving the property imperilled in an adventure. Whenever there is a
general average, the party on whom it falls, get a rateable contribution from the
other parties, who are interested in the adventure and who have benefitted by
the voluntary sacrifice or expenditure.
The following are examples of general average loss:
(a) cargo jettisoned in an effort to refloat the vessel.
(b) Tugs employed to tow the vessel to safety.
As mentioned earlier, general average act, the ship-owner declares
"general average". He has a lien on the goods for general average contribution. 34
MARINE INSURANCE
Therefore before goods are released at the destination, the ship-owner insists on
the consignees to execute a bond. The consignee may have to pay a general
average deposit in cash or present a guarantee given by a bank or an insurance
company.
Thus, there are two types of losses resulting from a general average act:
Sacrifice and expenditure. These losses are payable under the marine policy
provided an insured peril was the cause of the general average act. Cargo which
is sacrificed is a loss payable under cargo policy. Similarly, contributions to be
made by owners of Cargo saved are also paid as a loss under their cargo
policies.
The adjustement of general average is done by specialists Mown as G.A
adjusters
Salvage loss
When the goods insured are damaged during transits and the nature of the
goods is such that they deteriorate further and would be worthless by the time
the vessel arrives at destination, it woul prudent and sensible way of dealing
With the situation by disposing of the same at an intermediate port for the
best price obtained. The term 'salvage loss' refers to the amount payable which
is the difference between the insured value and the net proceeds of the sale.
This is a practical method of settlement.
Sue and labour charges
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Insurers expect that the insured should at all times act as if he was uninsured
and take such steps as Prudent person would normally take. In view of this, if
there be any expenses incurred by the insured or his agents to minimise the loss
or damage payable under the policy, the same are reimbursed by insurers.
Examples of such charges, known as sue and labour charges, are landing,
warehousing reconditioning, reforwarding and similar charges.
Extra charges
Under this expression come survey fees, settling agents fees, etc. They are
payable if the claim is admitted. Whenever a survey is arranged, the fees are
paid by the claimant initially and are reimbursed when the claim is paid.
Claims documents:
Claims under marine policies have to be supported by certain documents
which vary according to the types of loss as also the circumstances of the claim
and the mode carriage.
The documents required for particular average claims are as under:
(a) Policy: The original policy or certificate of insurance is to be submitted to
the company. This document establishes the claimant’s title and also serves as
an evidence of the subject matter being actually insured.
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(b) Bill of lading: Bill of lading is a document which serves as evidence that
the goods were actually shipped. It also gives the Particulars of cargo. It
contains the terms of contract of Carriage.
(c) Invoice: An invoice evidences the terms of sale. It also contains complete
description of goods, prices etc. The invoices Enables the insurers to see that the
insured value of the cargo is not unreasonably in excess of its cost, ad that there
is no gross over-valuation. The original invoice (or a copy thereof) is required in
support of claim.
(d) Survey report: Survey report shows the cause and extent of loss and is
absolutely necessary for the settlement of claims. The findings of the surveyors
relate to the nature and Extent of loss or damage particulars of the sound values,
damaged values, etc it is normally issued with the remarks “without prejudice”,
i.e. without prejudice To the question of liability under the policy.
(e) Debit note: The claimant is expected to send a debit note showing the
amount claimed by him in respect of loss or damage. This is sometimes referred
to as claim bill.
(f) Copy of protest: If the loss or Damage to cargo has been caused by a
peril of the sea, the master of the vessel usually makes a protest arrival at
destination before a Notary Public Through this protest, he informs that he is
not Responsible for the loss or damage. Insured sometimes Require to see the
copy of the protest to satisfy Themselves about the actual cause of the loss.
(g) Letter of Subrogation: This is legal document (supplied by insurers)
which transfers the rights of the claimant against a third party to the insurers. 37
MARINE INSURANCE
On payment of claim, the insurers may wish to pursue recovery from a carrier
or other third party who, in their opinion, is responsible for the loss. The
authority to do so is derived from this document. It is required to be duly
stamped. Some of the other, documents required in support of particular average
claims are ship survey reports L.O.B CERTIFICATE or LOST OVERBOARD
CERTIFICATE if cargo is lost during loading and unloading operation, short
landing certificate etc. The important documents a bill of entry issued by the
customs authorities showing therein to amount of duty paid, the date of arrival
of the steamer etc. account sales showing the proceeds of the sale of the goods if
they have been disposed of, repairs or replacements bills in case of damages or
breakage and copies of correspondence exchanged between the carriers and
claimants for compensation in case of liability resting on carriers.
Inland Transit Claims Rail/road
In regard to claims relating to inland transit, the documents required to be
submitted to the insurers in support of the claim are:
(a) Original policy or certificate of insurance duly endorsed
(b) Invoice, in original, or copy thereof.
(c) Certificate of loss or damage (original) issued by carriers.
(d) If goods are totally lost or not delivered, the original railway receipt and or
on-delivery certificate / consignment note.
(e) Copy of the claim lodged against the railways/road carriers.
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(f) Letter of subrogation, duly stamped.
(g) Special power of Attorney duly stamped. (railway claims)
(h) Letter of Authority addressed to the railway authorities signed by the
consignors in favour of consignees whenever loss is claimed by consignees.
(i) Letter of Authority addressed to the railway authorities signed by the
consignors in favour of the insurers.
(j) Letter of undertaking from the claimant in case of non-delivery of
consignment
Recovery from carriers
As stated earlier, in many marine claims, there are possibilities of
recovery from the carriers, i.e. road carriers railways steamer companies etc.
After payment of claims the insurers are subrogated to the rights and remedies
available to the insured against the carriers or third parties responsible for the
loss. The insured is expected to behave at all times as though he was uninsured.
He should not, therefore prejudice the rights of insurers in regard to
recovery and must take all steps to preserve such rights.
In order to preserve the rights of recoveries against the ocean carriers the
following steps are essential to be taken:
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(a) when loss or damage is apparent at the time of taking delivery, an
application must be made immediately for survey in the docks by the carrier's
representatives and a claim on the carriers must be filed for any actual loss or
damage found at such survey by to insurer's and carrier’s surveyors.
(b) If the loss or damage is not apparent at the time of taking delivery, notice in
writing must be given to the carrier's representative within three days of
delivery. If notice is not given as required, it constitutes primma facie evidence
that the cargo was discharged in good order and condition, ad it would become
very direct subsequently to fix any liability on the carriers. When any packages
are missing, a claim must be immediately lodged on the carriers and on the port
authorities.
Any suit against the carriers for any loss or damage for which they are to be
held responsible must be filed within one year of the date on which the goods
are delivered or should have been delivered.
For consignments sent by rail, the provisions of the Indian railway act are
applicable.
In order to preserve the rights of recovery against the railway, the consignee
must take following steps:
(a) Where loss or damage is apparent, an open delivery should be taken.
(b) A survey should be obtained from the railway authority at destination in
respect of the loss or damage.
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A formal claim in respect of any loss or damage for which the railways are to be
held responsible must filed within six months of the date of the railway receipt.
The notice of the claim must be given to all railways over which the
consignment travels. Suit must be filed within 3 years from accrual/knowledge
of loss after giving 64 days notice under Sec 80 of C.P.C (Civil procedure code)
Similar procedure applies to consignments sent by roads but under carriers act.
Marine Insurance Schemes
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MARINE INSURANCE
The new guidelines issued by the Insurance Regulatory and Development
Authority (IRDA) for war risk and marine hull insurance schemes have
shattered shipping companies hopes to gain from lower insurance cost in the
current fiscal.
These two important marine insurance schemes have been freed from the
administrative tariff regime, Since January 2005 for war risk and April 1, for
marine hull. This implies shipping companies, which were covered by tariff
schemes for several years, have the freedom to bargain premium and insure
their fleet with any Indian Insurance Company public or private.
However, the post-deregulation guidelines issued by IRDA have retained
for existing terms and conditions for both schemes, thereby leaving little scope
for negotiation of shipping companies.
Although this can be amended by IRDA later, shippers say that the timing
is pertinent as insurance deals are usually closed between April and July.
“Unless IRDA modifies this before July, our insurance costs will be hit for this
year fur certain,” said a ship owner.
According to shipping companies, since insurers will have to follow the
existing terms and conditions, they may not be in a position to offer market
related competitive premium. Now, in the case of war risk insurance, the
existing schemes provide for maximum claim amount of Rs 10 crore
irrespective of the value of the ship, said a shipping company official.
Shipping companies have decided to approach IRDA seeking
amendments to its guidelines. It is alleged that IRDA has decided to retain the
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existing the terms and conditions under pressure from PSU insurance companies
which have been opposing the move de-tariff marine insurance schemes.
According to shipping companies, as of now, their insurance cost has been 25-
30 per cent higher as compared to that of their competitors abroad. "In the
international market, we can get a discount of at least 30 per cent over the rate
being charged by the Indian companies” said a shipping company official.
Insurance cost of Indian companies, based on the current value of ships,
varies between 10 percent and 20 percent of their total operational cost, he said.
Marine hull and machinery insurance business in India is estimated to be
around Rs 350-400 crore annually.
Hull Insurance
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Hull Insurance with the ship, wharves, machinery etc used in sea
transport. The ship on the seas carrying goods, peoples etc is subject to
Loss/Damage by:
Capture, seizure, arrest, restraints etc also from consequences of
hostilities, or war like operation, whether there by a declaration of war or
not.
Civil war, revolution, strikes, insurrection.
Mines, torpedoes bombs, or other engines of war all these subject to the
exclusions of nuclear risks.
Direct physical damages or any other indirect damages.
In India, insurance of ships and ship owning and interest are governed by
Hull Tariffs like:
Fishing Vessels Tariff
Sailing Vessels Tariff
Inland Vessels Tariff
Jetties, Pontoons, Wharves Tariff
Builders Risks Tariff
Ship Repaires Liabilities Tariff
Charters Liabilities Tariff
These tariff indicate the rate of premium for various types of covers,
additional premium for extra risks and for breach of trading and other
warranties fleet and other discount for favourable features and agent
commission and owner discounts.
DOCUMENT USED IN HULL INSURANCE:
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The Proposal Form:
a) Techinical Details Of Vessels
b) Trade Related Details Of vessels
c) Insurance Related Details Of Vessels
d) Other Details Of Vessels
Registration / License Certificate Of Vessels
Valuation Certificate On Hull and machinery and accessories
Pre-Insurance Survey Report
From “B” when rate is to be fixed by Tariff Advisory Committee Additional
Queries need to be answered if the vessels is not listed in Llyods Register of
Shipping.
Details of arrears of loan payments to the Bank / Financer and also
confirmation that there is no default.
BIBLOGRAPHY
BOOKS-45
MARINE INSURANCE
Insurance Regulatory and Development Authority.
WEBSITE-
www.surfindia.com
www.commolii.org
www.irdaindia.org
www.wikipedia.com
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