Principles of Marine Insurance
- Insurable Interest
- Utmost Good Faith
- Proximate Cause
Section six to 17 of the MIA are concerned with the principle of insurable interest. This principle provides that;
- There must be a physical object exposed to marine perils
- The assured has some legal relationship to the object, in consequence of which they are interested in its preservation
- The assured is prejudiced by its loss or detention or damage happening to it
In marine insurance, the assured is not required to have insurable interest when insurance is effected but they must have a reasonable expectation of acquiring such interest. However, they must have insurable interest at the time of loss.
Historically, marine policies were effected on “lost or not lost” basis and these words were written tin the policy. the expression “lost or not lost” does not appear in the existing cargo or hull policy forms. However, they are given effect by Clause 11.2 of the Institute Cargo Clauses. They render the protection of the contract where the voyage has already commenced and retrospective to the commencement of the risk. Thus where property suffers loss before the assured acquires interest, they are protected by the policy, provided the risk in the goods has passed to them
It provides that the assured shall be entitled to recover for the insured loss occurring during the policy period, even though that loss occurred before the insurance contract was concluded unless the assured was are of the loss.
When the assured has no interest at the time of loss, they cannot acquire interest by any act or election after they are aware of the loss. for example, when goods are purchased on FOB terms, the purchaser has no insurable interest in such goods during their transit from the seller’s factory to the vessel.
Others who have insurable interest in the cargo are:
- Carriers by land and /or air and /or sea
- Warehouse operators
- Container operators
- Cargo handlers
- Barge handlers
- Port/or harbor authorities
A defeasible interest is one which can be brought to an end during the currency of the insurance by the occurrence by of some event other than marine time perils. E.g. a seller has an insurable interest in the goods is to the time the title passes to the buyer. This passing of title may occur after commencement of the voyage. And when this occurs, the sellers interest ceases.
Contingent interest is an interest that attaches during the currency of the voyage on the happening of a contingency. E.g. in contract of sale, when the seller’s interest terminates, the buyer’s interest attaches. However, contracts of sale usually contain provisions which entitles the buyer to exercise the right or reject the goods, if, say the delivery is delayed or goods are not according to the sample. In such instances, the buyer’s interests terminate the interests and the risk in the goods return to the seller. This is a contingency which can be insured under the “seller’s contingency insurance in order to protect the sellers interest for loss or damage to the goods rejected by the buyer under FOB and C&F terms of sale.
Any person may reinsure a liability which would rise from the operation of any marine time peril. The underwriter who insures a marine risk has such potential liability in claims they may be called upon to pay under a marine insurance contract. They therefore have insurable interest in the risks they have accepted and therefore can take out policy of reinsurance on them.
Freight on cargo is normally payable to the ship-owner in advance. Where the contract of affreightment provides that such freight shall be payable “ship lost or not lost”, that is where the ship owner is entitled to payment of freight whether cargo is delivered at the destination or not. This gives the cargo owner insurable interest in respect of the freight so advance. In practice, advance freight is merged in the value of cargo for insurance purposes. Also the assured has an insurable interest in the charges of any insurance which may effect.
Utmost Good Faith
Every contract of insurance is a contract of “uberrimae fidei” I.e. one which requires utmost good faith on the part of both the insurer and the assured. Sections 19 to 23 of MIA deal with this principal of insurance. The basic position is that any circumstance which is within the knowledge of the person insuring and is likely to influence the insurer in deciding whether to accept or to refuse the risk or influence the in assessment of the rate of premium to be charged needs to be fully disclosed to the insurer before the contract is concluded. E.g. over valuation of cargo. This requires to be disclosed to the insurer and if it is not, gives the insurer to avoid the contract.
The basic assumption of this principle is that every material circumstance which is known to the to the proposer or assured needs to be disclosed and they are deemed to know every material circumstance which in ordinary course of business ought to be known by them. In marine insurance, the subject matter of insurance (ship or cargo) will be far away in high seas or distant lands. Because of this, the duty is imposed on the agent or broker to make full disclosure to their insurer on all material facts. Not only should they disclose what has been communicated to them by the proposer but they must also disclose any circumstance which they are aware of. Facts which are material may be representations or warranties.
These are statements made during negotiation for the insurance before the contract is concluded. They can be written or verbal and can be made to the insurer either by the insured representations can be classified as;
- Material facts
- Expectation or belief
If it is a representation relating to material facts, then it must be true, if it is untrue, then the insurer can avoid the contract. A representation relating to a fact is regarded as true if it is substantially correct, provided that the difference between what was originally represented and what turns out to be the actual facts do not amount to a material fact
Section 35 to 43 of MIA deals with warranties. A warranty is a promise by the assured to the insurer that something shall or shall not be done or that a certain state of affairs does or does not exist. A warranty must be literally compiled with or the insurer may avoid the contract as from the date of breach. Examples of express warranties
- Warranted packed in containers
- Warranted shipped under deck or under a clean bill of lading
- Warranted new drums
- Warranted surveyed before shipment
- Warranted sailing in 7 days
- Warranted packed in new qunny bags.
Implied warranties are those not mentioned in the policy but nevertheless are understood to apply. They are few to apply.
- Seaworthiness of the vessel at the commencement of voyage
- Legality of adventure
A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the sea for the adventure insured. However, in cargo policy, there is no implied warranty that the goods insured are seaworthy
In a voyage policy on goods, there is implied warranty that at the commencement of the voyage, the ship is not only seaworthy as a ship but also that she is reasonably fit to carry the goods to the destination contemplated by the policy.
The Unseaworthiness and unfitness clause provides that the policy does not cover loss or damage arising from unseaworthiness of the ship, however, it provides that underwriters shall waive any breach of the implied warranties of seaworthiness of the ship for cargo, unless the assured and their servants are privy of such unseaworthiness. This is in recognition of the fact that cargo owners have no control over the vessel owners or operators in ensuring the seaworthiness of the ship.
In time policy. There is no implied warranty that the vessel shall be sea worthy any stage of the adventure, but where, with the privity of the assured, the ship is send to sea in unworthy state. The insurer is not liable for any loss attributable to seaworthiness
Breach of warranty makes the contract voidable at the option of the insurer. It is exercised by the statute where, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract. Or when compliance with the warranty is rendered unlawfully by any law subsequently enacted. Subject to this, a warranty must be literally fulfilled whether material to the risk or not.
The principle of proximate cause is the one that defines the peril covered by the policy and the extent to which the operation of the peril is covered. The Institute Clauses therefore clearly states the perils for which they provide cover, details the exclusion, the commencement of the risk and other particulars which specifies when cover commences and when it terminates. E.g. the Institute Cargo Clause C restricts cover for the effect of major perils i.e. fire or explosion, stranding, sinking or capsizing, collision or contact of vessel, overturning or derailment of land conveyance. It also covers general average and jettison.
The exclusions common in all clauses are:
- Willful misconduct of the assured
- Wear and tear
- Ordinary leakage and breakage
- Inherent vice or nature
- Rats and vermin
- War, strike, unseaworthiness etc.
Proximate cause is the active, effective cause that sets in motion a train of events which bring about a result, without the interference of any force started and working actively from a new and independent source. Insurer are liable if the insured peril ids the proximate cause of the loss. if the insured peril is only the remote cause of the loss, the proximate cause being an uninsured or excepted peril, insurers are not liable.
The rule of law is that; the onus of proof is on the assured to show that the loss or damage claimed for was due to an insured peril. When a vessel is posted on Lloyds’ as “missing” the presumption would be that, the loss was due to marine time perils though the onus of proof is on the assured to show that the loss occurred during the currency of policy. The MIA provides that where a ship is missing and after a lapse of reasonable time, no news in her have been received, an actual total loss may be presumed.
A marine insurance policy, in common with other contracts of insurance is a contract of indemnity. The object of which is that the insured shall be placed in the same financial position after the loss as they were immediately before the loss, Section 3 of MIA provides that the indemnity shall be provided in manner and extend of thereby agreed. However, as the underwriters cannot undertake to replace or reinstate cargo or vessels in the event of loss, they pay the sum of money usually agreed in advance, that will provide a reasonable compensation.
The MIA includes rules for the definition of insurable value of different marine subject matters where the same is not expressly agreed on by the parties. Further, section 67 provides that marine polices may be valued or unvalued.
A valued policy is one which specifies amount of subject matter insured and the payment of this sum is indemnity in the event of total loss. the amount is agreed upon between the insured and insurer. Whether or not, it is the true value. Further, the same value provides that the amount recoverable is the full extent of the value fixed in the policy.
Values fluctuate constantly and cargo appreciates in value as it gets closer to its destination. A reasonable indemnity can only therefore be achieved by agreeing in advance the insured value based on cost, insurance and freight and the value of goods to which it customary to add an agreed percentage which is intended to to identify in respect of general overheads and provide a margin of profit on the transaction.
An agreed value policy has the advantage of a fixed insured value conclusive for all claims. Only if fraud is proved, it is permissible to open the agreed value on a policy. However, even this happens only for the cargo as the underwriter is assumed to know the value of hulls as the owners themselves.
An unvalued policy does not specify the value of the subject matter insured, up to the limit of sum insured, it leaves the insurable value to be subsequently ascertained. Subject to adequacy of the sum insured, the maximum amount recoverable under an unvalued policy is the insurable value. Average applies in case of underinsurance.
The provisions of the Act as to the measure of insurable value are applicable only to unvalued policies. For hulls, this is the value at the commencement of the risk which is the basis of computing the insurable value, plus the insurance charges. For cargo, this is the market value of the goods when they come on risk or the cost of goods whichever is lower. Hence the ‘insured value” is the amount specified in the policy as the value of the insured property while the sum insured is the total amount for the subscriptions to the insurers in the policy. Where the property is insured, for its value, both the sum insured and the insured value will be identical.
- Measure of Indemnity (total loss)
This is the sum insured by the policy for the valued policy. For the unvalued policy, this is the insurable value of the subject matter insured.
Measure of Indemnity (partial value of cargo or ship)
Partial loss to the Ship
This is the reasonable costs of repair, less customary deductions but not exceeding the sum insured. If there are several accidents during the period of insurance, the insurer is liable for the reasonable costs of repair for each in each case up to the sum insured
Partial Loss to the Freight
Freight is the remuneration paid to a carrier in either the following circumstances:
- Hire of the ship
- Hire of space in the ship
- For carrying the goods of the shipper
It includes profit made against safety delivery of goods by the vessel. Freight is paid in advance and is un returnable in the event of non-delivery. This is called pre- paid freight and is included in the insured value of the goods and claim for partial loss of goods automatically included as a proportion for the freight paid for carriage of the goods.
Partial loss of goods.
This is called particular average and is any loss which is not total loss. e.g. are damage to cargo by heavy rain, collision or fire, in this case the insured value of a part must be compared with insurable value of the whole cargo insured and the proportion thus established is applied to the insured value in the policy to determine the claim. In a valued policy, the indemnity is the corresponding proportion of sum insured. In the case of unvalued policy, it is the insured value of the part lost.
If damage is discovered on delivery, the insured loss is the difference between the gross sound value of the goods and their damaged value. It will be appreciated that insurance covers actual damage to the goods not prejudice or suspicion damage. If under the same policy, unrepaired partial loss is followed by a total loss, the insured can recover only in respect of the total loss.
Subrogation is the corollary of the principle of indemnity and, therefore, applies to policies which are subject to the principle of indemnity. subrogation is a matter of equity, the purpose of which is to ensure that the assured shall not make profit out of the loss in respect of which they have been indemnified by the insurers by reimbursement, either wholly or partly from another source. In marine insurance, subrogation applies only after the settlement of a loss by the insurer.
Where a total loss is paid, the insurer is entitled to take over the interest of the assured in what may be left of the subject of insurance. In case of partial loss, the insurer has no rights
In either the case of total or partial loss payment, the insurer, on payment of a claim, is entitled all the rights and remedies of the assured in respect of the subject matter insured. With the qualifications that, in cases for payment of partial loss, the insurer is entitled to recover only up to the amount which has paid in respect of the rights and remedies. By the right of subrogation, insurers are entitled to the whole amount of recovery from a third party up to, but no exceeding the amount of claim they have paid.
Subrogation rights are of value to the insurers as they reduce the net amount of claims paid. For the most part, recoveries under subrogation are against carriers, professional packers, inland rail or road carriers, freight forwarders, warehousemen, port authorities, custom authorities, clearing agents and others. To recover, the insured and insurer must show that the goods were damaged in the care of the party from whom they are claiming and may fortify this by showing that the goods were in good condition when the party received them.
In cargo claims, when there is any possibility of a recovery from a third party, insurers will take a Letter of Subrogation from the assured when settling the loss. such express authority is superfluous, as the right of subrogation is a statutory right which is automatically vested in the insurer on the settlement of a claim. However, the letter of subrogation formally authorizes the insurers to institute proceedings to effect the recovery in the name of the assured and the insurers expenses.
Contribution arises in case of double insurance. The MIA states that there is a double insurance where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceeds the indemnity allowed by the Act, the assured is said to be over insured by double insurance.
If over insurance is intentional, it is fraudulent. However, it may inadvertently occur when one effects the policy and another party has taken one on their behalf. In such cases, the assured has the right to claim under the policies in any order they may choose, but ultimately, each co-insurer is responsible for only their due proportion of loss. any insurer who has paid more than their proportionate share is entitled to enforce ratable contribution from the co- insurers.