CINEC Foreign Trade Insurance*

7. EFFECTING MARINE INSURANCE

The general procedure adopted in overseas trade is that buyer will initially negotiate the trade terms with the
seller (e.g. C & F, CIF. FOB...etc.) and conclude a sales contract with payment generally arranged by documentary
credit instead of paying the exporter immediately, the buyer sends a letter of credit (LC) obtained from a bank
(Issuing Bank). The LC is a letter of authority from the issuing bank to the exporter’s bank to honour the draft
(usually a Bill of Exchange against the value of the shipment) of the person named in it on production of specified
documents. The exporter will then dispatch the goods to the buyer.

When the bill of exchange is accompanied by other documents specified, the Bank will be prepared to discount
the bill. Specified documents are usually, Bill of lading (ship owner’s receipt of acceptance of goods), export
invoice (shows description, quality and price of goods) and Marine Insurance Policy or Certificate (to ensure that
the goods are adequately insured against maritime perils).

 The Bank will pay the exporter (a discounted value of the Bill).
 Exporter’s Bank will forward documents to the Issuing Bank and get the money reimbursed.
 Issuing Bank will recover the money from the buyer as pre agreed and will release the shipping document to
take delivery of goods.

In the process, the exporter gets paid instead of waiting a remittance from the buyer. The advance made by the
Bank is secured on the goods as they are adequately insured against marine risks.

The importance of Marine Insurance in this credit process is that the Bank will not honour the bill of exchange
unless goods under reference are insured in a manner acceptable to the Bank; and the policy is lodged with the
Bank as collateral security.

Factor’s taken into consideration by the underwriters (in deciding acceptance, rate to be
charged and conditions to apply)

1. Type of cargo carried.

2. Details of packing including whether the goods are containerised for the transit.
3. The voyage to be undertaken.
4. The method of transport to be used, i.e. road, rail, sea, air or post.
5. Conditions of insurance.
6. Suitability of vessel for cargo carried. – age and fitness of purpose, classification
7. Reputation of ports.
8. Management of cargo owner and past claims experience.
9. Sum/Sums to be insured (basis of valuation)

Designs of Coverages

Specific Policy
A specific policy is an insurance cover accorded to a single consignment for a single voyage. The duration of
cover will be in accordance with the Duration Clause of the Institute Clauses attached to the policy.

Open Cover
A Floating policy covers a number of specific transits. In practice it is called as an Open Policy. However, to
cover imports and exports an MOU is drawn out between the Insurer and the Insured which is known as an
'Open Cover'. It is not convenient for a business concern whose turnover is considerable and shipments

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frequent to arrange separately for insurance of individual shipments as specific policies for each shipment.
Hence Open Covers are issued.

An Open Cover is an agreement between the insurer and the insured, where the insurer agrees to cover all the
declared shipments of the insured at specified rates, terms and conditions. A Deposit Premium is either paid
in advance, or the actual premium paid on each declaration, against which a specific certificate of insurance is
issued covering each shipment. There is no Sum Insured specified in an open cover.

The advantages of having an open cover are as follows:-

1. Automatic and Continuous insurance protection is available to the insured.
2. Saving in Administrative overheads and elimination of hassles in taking specific insurance policy for
each transit.
3. Rates, terms and conditions being agreed in advance, the insured is able to identify costs and plan
accordingly.

There is no mention of Sum Insured in an open cover. However, the following are some of the salient
conditions that appear in an open cover.

1. Limit Per Bottom

This means the aggregate value of shipments/consignments per vessel or other conveyance at any one
time, as per requirements of the insured.

2. Limit Per Location

The location clause seeks to limit the value of pre-shipment accumulation which may take place.

3. Basis of valuation
The basis of valuation is usually the prime cost of goods plus expenses of shipping, fright etc for which the
assured is liable, cost of insurance if any and plus ten percent. Marine policies are agreed value policies
and hence the basis of valuation should be agreed in advance.

4. Loss prior to declaration and/or shipment

If the loss occurs prior to declaration or prior to shipment of the consignment, the basis of valuation will
be restricted to the prime cost of the goods only plus the charges which are actually incurred till the point
of loss and for which the assured is liable.

5. Declaration
The assured is bound to declare each and every shipment individually or in batches as they go forward
and obtain a certificate of insurance from the insurer as required, either for individual shipments, or for
groups of shipments.

6. Specific Warranties
If the cover is subject to specific warranties, the same is expressly mentioned.

7. Cancellation Clause
Open cover can be cancelled by either party by giving notice. Time periods specified.

8. Vessel
Conditions of the Vessel that shall be engaged for transportation are specified in this section. Usually the
requirement is mechanically self propelled vessels of steel construction subject to Institute Classification
Clause.

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9. Period
Generally, open covers are effected for a period of 12 months and thereafter renewed annually.

10. Basis of Declaration

It is a condition of this insurance that until expiry of the contract, the insured is bound to declare each
and every shipment or dispatch whether arrived or not and to obtain certificate of insurance for the
same.

11. Rate and Premium Payment

This is agreed upon in advance. The list of rates applicable for different transits and the mode of payment
of premium is subject to the prevailing rules and regulations of the regulating authority.

Multi Transit/Multiple Warehousing Policy

A Multi transit policy is normally issued in conjunction with an open policy covering inland transits. Subject
to additional premium this clause covers the goods when in process or storage at an intermediate point
stated in the policy. The cover shall be for the purpose of distribution, allocation and or incidental processing ,
irrespective of the number of such storage points but limited to specified number of weeks in all.

Stock throughput Policy

Standard Marine Cargo policies cover goods in the ordinary course of transit from warehouse to warehouse.
If at any intermediate point, the goods come under the control of the insured for
allocation, redistribution, processing, etc. the normal transit policy would cease to operate and further transit
will be treated, as a fresh transit. Risks during storage at such intermediate points will
be considered as a separate non-marine risk. Likewise goods when in process houses (without the existence
of a sale contract) have to be covered separately under annual policies or multi transit
policies.

To effect a continuous comprehensive cover, the Stock Throughput policy has been developed to provide a
SINGLE POLICY for clients with multiple storage and processing locations (eg. Tea trade). One policy
covers all transportable assets involved in a manufacturing chain. It is a combination of a regular cargo policy,
multi transit and multi warehouse policy. The basis of valuation has to be worked out for
each part or stage of transit. It can cover sales in transit, and also stock transfer to distributors and then to the
retailers before reaching the final consumer. Transits to process houses and back are also
sought to be covered under the same policy. The policy seeks to give a complete coverage from point to point
without any gaps. The perils covered at every stage; that is when the goods are in transit, when they are in the
go down/storage or when they are under process should be specifically agreed prior to insurance. A Stock
Throughput policy cannot be a standardized product; it has to be tailor-made to suit each particular client's
specific coverage needs.

Claims Procedure

When a loss is intimated to the insurer, the first point to investigate is whether it is admissible under the
terms of the policy. For large claims it is advisable to appoint a competent independent surveyor to ascertain
the exact cause and extent of loss. If the case indicates a possibility of recovery from carriers. A claim should
be lodge with the carrier by the insured within the time limit.

Total loss: The insurers are liable for the full insured value when there is a total loss of the consignment and
they are entitled to take over the salvage.

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Particular Average: Claims under Particular Averages or Partial Loss arise in either of two ways.

1) Loss
2) Damage

(i) In (1) the claim is payable in terms of the conditions of the Policy. For instance, the claim is
payable for the Total Loss of one package out of ten packages.
(ii) When the cargo arrives damaged at port of destination.
The gross sound market value of the damaged consignment and its gross damaged market value
are first ascertained. The difference represents loss.

Sue & Labour Charges: These are expenses incurred by the assured or his agents for the benefit
of the subject-matter insured to avert or minimize a loss covered under the policy.