Marine Insurance

Marine Insurance

The international trade is subject to many risks. Ships may sink or consignments be damaged in transit, exchange rates may alter, buyers default or government suddenly impose an embargo. Therefore, exporters and importers have to insure themselves against many of these risks.

The history of insurance goes back as far as the twelfth century, when marine insurance was known to exist in North Italy. In the fourteenth century, Italian merchants came to Britain and brought their system of insurance to safeguard ships and cargo with them. In those days, of course, there were no insurance companies; merchants would group together and write their names under a promise to pay for ships or cargoes lost in storms or taken by pirates, and this is how the term “underwriters” came into existence. It the ship was lost, the financial loss was spread and no single merchant risked all his money.

The ship-owners, merchants and captains were customers at a coffee house opened in 1688 by Edward Lloyd in Gomer Street, near the River Thames in the City of London. It was here that they all discussed business, and would underwrite marine insurance whilst drinking their cups of coffee. Lloyd's is still in existence, although the premises are not the same, and is an important section of the insurance market; it is the centre of the world's shipping intelligence and is an international market for marine and other forms of insurance. It provides the facilities but does not transact insurance business itself l one does not, therefore, insure with Lloyd's but at Lloyd's.

There are some five or six thousand underwriters in Lloyd's, all organized in syndicates. Whether it consists of only a few members, or several hundred, each syndicate has a representative who accepts business in the Room from accredited Lloyd's brokers. The brokers approaches the representative with an original ship, and the representative initials it for the proportion of the risk he is prepared to take on behalf of his syndicate. Lloyd's brokers, like other insurance brokers, most of whom are organized in societies, are also free to approach the insurance company to place their business. Now in almost every country there are insurance companies, either state owned or private insurance companies or branch offices or branch office or subsidiaries of their countries, which deal in insurance business.

When an exporter under, a CIF contract or an importer under an FOB contract wants to take out insurance, the first step he should take is to contact an insurance company whose agent, known as the “insurance man” or insurance broker, will bring along a printed proposal form, with spaces for names and amounts to be filled by the exporter or importer, also called the insured. This gives full details of ownership, value, length of time insurance will be for risks and coverage, etc., and if agreeable to both parties, an agreement called a policy is signed by the party who is being insured and the representative of the insurance company (the insurer). The policy records the premiums (that is, regular payments) which the insured party promises to pay, and the compensation for a stated misfortune which the insurer promises to pay.

Generally speaking, the value to be insured is based on the value of the commercial invoice. There commended minimum amount is                                                         the total CIF value plus 10% for other fees and normal margin of profit on the importer's part. A higher additional percentage of value can also be insured provided that an extra premium is paid.

In the insurance business, loss is referred to in most cases as the special term "average", which actually has nothing to do with its normal meaning. It all goes back to the situation where a ship is in danger, and, for the safety of the ship and most of the cargo it carries, and somebody’s cargo has to be jettisoned (thrown overboard into the sea). Whose cargo should it be? It is the captain who has, to make a decision as to which one of the shippers will suffer. To cover this situation the concept of general average was introduced. The idea is to spread me losses suffered by the shipper in time of peril in the voyage so that all interested parties assume their share. It means that whichever shipper loses all or part of his cargo, all the others will club together to recompense for his loss. In such cases it is well established that those whose property was saved must contribute proportionally to cover the losses of the one whose property was voluntarily sacrificed. Nowadays all the marine policies taken out automatically include General Average.

Average in marine insurance simply means loss. General Average is a voluntary and deliberate loss and refers to sea hazards that affect all the cargo on a ship, though only one shipper, perhaps, actually suffers, while Particular Average is an involuntary and accidental loss, a partial loss which is suffered by the one whose goods are partly lost or damaged, but not voluntarily incurred, such as by jettisoning, which are covered by General Average. When there is a particular average loss, other interests in the voyage do not contribute to the partial recovery of the one suffering the loss. The cargo owner whose goods were damaged has to look to his insurance company for payment, provided his policy covers the specific type of loss suffered.

The most serious loss in marine insurance is a total loss of the entire shipment resulting from the perils on the sea such as beaching, grounding, stranding, collision, natural calamities, fire, etc. Total Loss falls into two kinds: “actual total loss” where the thing insured is completely lost or is so badly damaged that it is not worth repairing, and “constructive total loss” where a ship or her cargo is so badly damaged that the cost of repair would be greater than the market value, they are treated as totally lost, and the insurers are bound to pay the total sum for which the damaged ship or cargo was insured.

Exporters or importers arrange insurance cover for their shipments according to the type of goods and circumstances. There is a wide range of standard types of coverage, the three basic ones being as follows:   

Free of Particular Average (F.P.A.)    This is an insurance term meaning that goods are covered only against hazards to which all the consignments on the same vessel (or other means of transport)are subject, and not against hazards affecting only the insured's consignment. FPA is the minimum and most restrictive coverage and partial loss is not covered. In other words, the insured must therefore assume the risk for any and all partial loss.

With Particular Average (W. P. A.) or With Average (W. A.)     This insurance term is more comprehensive than both General Average and FPA. It means that in addition to General Average and total loss, goods are covered against partial loss due to major perils, but not due to minor perils.

All Risks     This is the most comprehensive coverage of the three. Under this coyer, the insurer is responsible for all total or partial loss of, or damage to, the insured goods arising from natural elements or from sea perils, including all losses caused by accidents to the carrying vessel or craft or any external causes. But it is not what the name suggests. Businessmen must not be misled by the terminology of all risks. In reality, it gives the fullest possible cover, but only against those risks actually stated in the policy.

Whether the additional risks which All Risks policy does not cover are necessary depends on a number of factors. For instance, delicate goods, such as breakable crockery, cotton piecegoods or perishable foodstuffs, obviously have to be covered against more risks than sturdy articles like steel girders and iron ores. General additional risks usually are: Theft, pilferage, and non-delivery (TPND), fresh water or rain water damage, short weight, intermixture and contamination, leakage, breakage, hook damage, rust, sweating and heating, etc. It must be noted that, in China, all these general additional risks are included in "all risks".

Special additional risks that are not included in All Risks and have to be taken separately are mainly: Failure to Delivery Risk, War Risk, and Strikes, Riot and Civil Commotions (S. R. & C. C.).

The most commonly used document in marine insurance is the insurance policy. Regular exporters who make many shipments a year often go in for Floating Policies or Open Cover. They estimate the number of shipments they are likely to make in the coming year, and the total value. They can then take out a Floating Policy for this figure, under which every shipment is automatically covered (though it must, eventually, be declared). The value of each shipment reduces the total amount covered under the Floating Policy, until it is exhausted.

Open Cover is slightly different. For one thing it is non-reducing; although it is usually only valid for twelve months, there is no total figure for all shipments within that period, only a maximum figure for any individual shipment. Such a contract is negotiated annually, at fixed rates for each type of goods. Shippers must declare each shipment when made, and the underwriters will issue separate policies for each of them.                           

A Floating Policy, on the other hand, cannot be lodged with other negotiable documents for every shipment, so a certificate of insurance takes its place. The document issued in place of a policy certifies the grant of cover, but since it does not have the legal standing of a policy, it must be backed by or ultimately be replaced by a policy.

Whenever an actual loss occurs it is important for the party having an interest in the goods to get a fair, efficient, and rapid adjustment of his claims. The right to lodge a claim usually belongs to whomever has the actual possession of the policy. The one who files a claim should get the survey report conducted by the expert, together with a copy of the bill of lading, the commercial invoice, the insurance policy, a covering letter requesting payment, and send them to the insurance company for processing. Settling a claim is not so easy, and it needs patience, evidence and knowledge.