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IC 67 Marine Insurance
IC 67 Marine Insurance
IC 67 Marine Insurance
AB
WWW.AMBITIOUSBABA.COM
1/13/2019
CHAPTER 1
BASIC CONCEPTS
Chapter Introduction
This chapter introduces the basic concept of marine insurance. It also discusses
a brief history of marine insurance and introduces you to the various
international bodies that operate in the international marine insurance market.
Indian legislative procedures with respect to marine insurance in India are also
discussed.
Learning Outcomes
Talking of marine insurance, it manages the pool for marine hull insurance in
India. In fact, GIC Re is the largest capacity provider for marine insurance in the
region with a capacity of USD 75 million.
GIC Re has won the Marine Insurance Award at the Seatrade Middle East and
Indian subcontinent Awards for the year 2011 and 2012.
1. Introduction
a) Goods in transit from one place to another by all modes of transport viz.
Sea, inland waterways, rail, road, air and also post parcel and couriers,
b) Ships i.e. hull insurance covering loss or damage to the hull and
machinery of a vessel during construction, maritime operations, lay-ups,
repairs and even breakage.
d) Premium
Marine insurance is as old as civilization. There are Indian, Asian and European
histories which are very old.
The insurer, being the buyer of the hundi, paid the insurance money and
was entitled to receive it with premium (together making up the amount of
the hundi) when the vessel arrived safely.
f) In the 14th century, Italian merchants broke open these bonds into two
parts- financing and risk-taking to be done by separate sets of people.
From Italy, the system went to England and there it developed because
of coffee house culture. The most famous coffee house was owned by
Edward Lloyds.
The objects and functions of marine insurance were aptly described in the
preamble to the Elizabethan Act of 1601 in such expressive language, as
follows:… by means of which policy of assurance it cometh to pass that upon the
loss or perishing of any ship there followeth not the undoing of any man, but the
loss alighteth rather easily upon many men than heavily upon few, and rather
upon them that adventure not, than those that do adventure, whereby all
merchants, especially the younger sort, are allowed to venture more willingly”.
a) Safety
Many times the seller of goods undertakes to the buyer that he will arrange
for insurance of goods in transit. His price also includes insurance premium.
In such a case, it is obligatory on the part of the seller to arrange for
appropriate transit insurance.
Example
c) Customs Laws
Under The Customs Act 1962, customs duty is leviable on import of certain
items. The duty is to be charged on the CIF value of the imported item.
The importer has to prove the CIF value of the goods by filing supporting
documents with the customs. If there is not enough proof of insurance
premium included in the price, the customs authorities may add some
amount ad hoc, say 1.125% of the value of goods as insurance premium, to
convert the price to CIF.
In such cases, the importer may end up paying higher customs duty and may
not get insurance protection also. Taking insurance policy will avoid this.
Test Yourself 1
I. Letter of Credit
II. Insurance Policy
III. Goods
IV. Vessels used for transportation
In all, there were 107 companies operating in India. These were amalgamated
and reconstituted into four companies, as follows:
b) The New India Assurance Co. Ltd with its H.O. in Bombay.
c) The Oriental Fire and General Insurance Co. Ltd. with its H.O. in New
Delhi.
d) The United India Fire and General Insurance Co. Ltd. with its H. O. in
Madras.
Along with these companies certain state insurance funds were also constituted
e.g.:
They were also allowed to carry on general insurance business including marine
insurance business.
Thus, these Companies and Funds were having exclusive privilege of carrying on
general insurance business in India.
In the year 1999, The Insurance Regulatory and Development Authority Act was
passed, under which the exclusive privilege of public sector companies and
funds was withdrawn and the sector was opened up to private Indian insurance
companies, allowing for a maximum shareholding of 26% for a foreign entity.
2. Tariffs
Till 31st March 1994, Indian market was governed by All India Marine Cargo
Tariff ( AIMCT), which consisted of a section on General Rules and Ragulations,
followed by 12 individual tariffs. The rates for Basic covers for inland transit of
many cargoes were prescribed under the Tariff, leaving the rates for Wider
Covers at the discretion of the Insurers. As regards exports, imports and coastal
transits, the rates were prescribed for many items. Issuance of certain policies
like Multi Transit, Special Declaration and those at pre-AIMCT terms (under
General Regulatuion 10) etc. was controlled by the Tariff Advisory Committee.
Effective 1st April 1994, the AIMCT was withdrawn except the Tea Tariff,
Advance License insurance policies and the Guidelines for Coffee, Rubber and
Cardamom estates. Marine Hull continued to be governed by the Committee,
mainly through the Marine Hull Manual.
With effect from 1st April 2004 tariffs, guidelines etc. for the following were
also withdrawn:
Tea,
Coffee,
Rubber and
Cardamom and
Advance License policies
The Tariff Advisory Committee had laid down various rules and regulations, as
also several tariffs over the years. All of them were aggregated in the form of
the Marine Hull Manual in 1983. However, the rates were withdrawn effective
1st April 2005 but the terms and conditions of the Marine Hull Manual are binding
on all Indian insurers.
3. Reinsurance programme
The reinsurance programme of the industry is drawn up with the basic objective
of retaining within the country as much business as possible, consistent with
safety and risk-bearing capacity. While reinsurance of peak risks is placed in
overseas markets, reinsurance is also accepted from abroad.
These are suitably protected by Excess of Loss covers. The Programme provides
for different classes of business to be ceded to treaties on Quota Share and
Surplus basis, depending upon suitability for reciprocal trading or cover
requirement.
In addition to providing reinsurance capacity, the Indian market has lent its
services by way of technical expertise and training facilities to various
countries.
4. Intermediaries
i. Brokers,
ii. Corporate agents,
iii. Individual agents,
iv. Surveyors and
v. Loss assessors.
5. Grievance redressal
Unlike UK there are no separate courts trying admiralty cases. They are handled
in normal civil courts.
There are no P & I Clubs in India. Captive insurance companies are not allowed
to operate in India as per the laws.
f) Various laws applicable to carriers and bailees ( For further details see
the chapter on Recoveries)
The Marine Insurance Act, 1963 (MIA) codifies the law relating to marine
insurance. It follows the English law, and is therefore virtually identical to the
Marine Insurance Act, 1906 of the U.K. In the U.K., the Act represents the
codification of case laws which for several centuries guided the practice of
insurance.
The law is the only specific law in India which governs a particular branch of
insurance (Marine Insurance). Other branches in India are governed by common
law principles.
ii. Practice of marine insurance is also important when the law is silent or
does not conflict with the prevailing practice.
iii. Many sections of law are flexible and can be changed by specific
conditions in the policy. At many places, the law says “Unless otherwise
stated on the face of the policy….”
iv. There are two implied warranties under the Marine Insurance Act-
seaworthiness and legality of object. The warranty of seaworthiness
under the law is the absolute warranty of seaworthiness i.e. if cargo is
sent by an unseaworthy vessel, the insurers are not liable. But
considering the hardships faced by the insured due to strict
implementation, the warranty was relaxed under 1982 Institute Cargo
Clauses and further relaxed under the 2009 Institute Cargo Clauses.
The Marine Insurance Act deals with all major aspects of marine insurance like:
Definition of “Marine”
Insurable interest
Insurable value
Principle of disclosures
The policy – contents
Form
Construction of terms etc.
Contribution (double insurance) warranties
Voyage
Assignment of policy
Premium
Statutory exclusions
Types of losses
Abandonment
Measure of indemnity
Subrogation, and
Return of premium and other provisions
Test Yourself 2
Which of the following Acts codifies the law relating to marine insurance?
Major international markets exist in the UK, the USA, Norway, France and
Germany. Because of certain banking and tax facilities, other markets have also
developed in recent times in Switzerland, Bermuda, Channel Islands, Isle of Man
etc.
On the other hand, in some countries, local reinsurance facilities are available
and domestic companies are obliged to cede amounts in excess of their
prescribed retentions to their respective national reinsurance companies, which
in turn arrange reinsurance in the international market.
The marine insurance market in U.K. has its major centre in London, and the
London market includes:
Lloyd’s
Major British insurance companies
Mutual and Captive insurance companies
Brokers, Risk Managers, Captive Managers
Lawyers, Admiralty Courts, Banks, Surveyors, Average Adjusters
Trade Associations and Market Committees
a) Lloyd’s
i. Organisation of Lloyd’s
It is important to note that the Corporation does not itself accept insurance
or assume liability for business transacted by its underwriting members.
This premier world marine insurance market had its origin in a small coffee
house of Edward Lloyd on Tower Street, London in 1680s. As the coffee
house was a meeting place for those interested in shipping, it was
reasonable to deduce that Lloyd’s as a marine insurance market had its
beginnings there.
Lloyd’s Act, 1871 gave Lloyd’s its legal status. Lloyd’s Act of 1982
established a Council of Lloyd’s to manage and regulate the Society’s
affairs. The Council has 28 members. It is responsible broadly for the
management and superintendence of the affairs of Lloyd’s
Underwriting members are elected by the Council only after the most
careful examination of their financial position. A “means test” has to be
passed and each underwriting member, on his election, has to deposit with
the Council such security for its underwriting liabilities as the Council, it its
discretion, may require. These securities remain in the custody of the
Council until the whole of the member’s liabilities have been discharged.
Following the major crises at the Lloyd’s arising out of asbestos and other
liability claims which triggered bankruptcy for many of Lloyd’s members,
Lloyd’s changed their regulations to allow only corporate members with
limited liability and continued with old individual memberships with the
principle of unlimited liability.
All insurances at Lloyd’s must be placed only through the medium of Lloyd’s
Brokers. Lloyd’s policies are signed on behalf of the underwriters concerned
by the XIS (Xchanging Insurance Services) who provide back office support.
Similarly claims process and settlement is looked after by XCS (Xchanging
Claims Services)
v. Lloyd’s form
Lloyd's has also standardised various forms which are used internationally,
for example, Lloyd’s Standard Form of Salvage Agreement (also called
“Lloyd’s Open Form”) and Lloyd’s Average Bond
By Act of Parliament in 1871 in U.K., Lloyd’s was incorporated and given the
power to appoint Agents in other parts of the world, where permitted by the
country concerned. Lloyd’s Agents are found in most major ports and in
many cities of the world. The primary duty of the Agent is to keep Lloyd’s
informed of shipping movements, casualties and other matters of interest to
the maritime community.
It is the duty of the Lloyd’s Agent to assist the Master of any ship in distress
and thereby protect the interests of the underwriters insuring that ship and
her cargo. They also appoint surveyors to survey damage to a ship or cargo
and issue Survey Reports for use in claiming against insurers.
Lloyd’s Agents are not underwriting agents. Their services are utilised by all
underwriters – companies world-wide as well as Lloyd’s. Usually, the Lloyd’s
Agent is connected with a leading shipping establishment at that
place.Lloyd’s Agency department is responsible for the appointment and
control of Lloyd’s Agents and includes a team of inspectors who regularly
visit and closely analyse the work of the Agents. A section of this
department administers the operations of Lloyd’s Standard Form of Salvage
Agreement.
The IUA do not have any regulatory authority over the members, whereas
Lloyd’s is a society of members both corporate and individuals and Lloyd’s
Franchise Board is responsible for commercially managing the Lloyd’s market.
The IUA works for promoting the implementation of process reforms and
electronic interfaces across the market.
Many of the Clauses which are being used in marine insurance market have been
drafted by ILU and are popularly known as “Institute Clauses”. Now also IUA is
involved in the work of improvement and introduction of new clauses along with
other institutions like Lloyd’s. The revised Cargo Clauses – 2009 are the result of
a joint effort by all.
It started its activities in the present form in the later part of the 19 th century.
In the middle of the 19th century, many insurance companies entered marine
insurance market and a fierce competition followed, leading to chaotic use of a
variety of rules and policy conditions, many of which lacked conformity of the
substance.
Recession of 1870 hit these companies and due to cut throat competition, many
went into liquidation. The need arose for international cooperation amongst the
insurers. German underwriters formed an association on 8th January 1874 in
Berlin which later became IUMI.
IUMI works for safeguarding and developing insurer’s interests in marine and
transport insurance by cooperation of national markets in marine issues,
exchanging information relating to marine insurance and technology, promoting
quality of underwriting.
IUMI is not a decision making body, nor is it involved in the formulation of rating
schedules, clauses or conditions. Rather it is a forum to exchange experience,
information and statistical data on marine insurance matters, to discuss
legislative issues, loss prevention and safety measures, to debate, in an
objective and conducive way, the challenges and opportunities facing marine
insurers.
IMB also runs training programmes on wide range of topics. It also offers
consultancy in ship and port security.
TAC is a statutory body constituted under the provisions of Insurance Act ,1938.
Its main functions were to formulate tariffs, containing standard terms and
conditions as also minimum rates for various products coming under different
lines of business viz. Fire, Engineering, Marine Cargo, Marine Hull etc.
Accordingly, it had devised tariffs for various products falling under different
branches of insurance but with the advent of the detariffing era in 1994, all
tariffs stand withdrawn, except for the terms and conditions of hull policies,
which continue to be governed by the Manual .
In the year 1999, The Insurance Regulatory and Development Authority Act was
passed, under which the exclusive privilege of public sector companies and
state insurance funds to carry on general insurance business in India was
withdrawn and the sector was opened up to private Indian insurance companies.
By the 2002 amendment to the GIBNA, 1972, GIC was made the only reinsurance
company of India and its rights to carry on direct general insurance business
were withdrawn. Similarly the public sector insurance companies no more
remained subsidiaries of GIC as their holdings were transferred to the
Government of India. GIC is now popularly known as GIC Re.
Test Yourself 3
I. IUA
II. IUMI
III. IMB
IV. GIC Re
Summary
b) The Marine Insurance Act, 1963 codifies the law relating to marine
insurance.
d) All insurances at Lloyd’s must be placed only through the medium of Lloyd’s
Brokers.
e) Lloyd’s Agents are found in most major ports and in many cities of the
world. The primary duty of the Agent is to keep Lloyd’s informed of
shipping movements, casualties and other matters of interest to the
maritime community.
Answers to TestYourself
Answer 1
Answer 2
The Marine Insurance Act 1963 codifies the law relating to marine insurance.
Answer 3
Self-Examination Questions
Question 1
I. Underwriting members are elected by the Council only after the most
careful examination of their financial position.
II. An average test has to be passed by each underwriting member for election.
III. On election, underwriting members have to deposit with the Council some
security for underwriting liabilities.
IV. The securities deposited for underwriting liabilities remain in the custody of
the Council until the whole of the member’s liabilities have been
discharged.
Question 2
I. IUA
II. IUMI
III. IMB
IV. GIC Re
Question 3
I. IUA
II. IUMI
III. IMB
IV. GIC Re
Question 4
Who among the following do not operate in the marine insurance market?
I. Surveyors
II. Arbitrators
III. Loss Assessors
IV. Brokers
Question 5
I. GIC Council
II. TAC
III. GIC Re
IV. IUA
Answer 1
A mean test and not an average test has to be passed by each underwriting
member for election. Hence option II is incorrect.
Answer 2
Answer 3
Answer 4
Arbitrators do not operate in the marine market because neither cargo nor hull
policies provide for any arbitration mechanism.
Answer 5
TAC is a statutory body constituted under the provisions of the Insurance Act,
1938, whose main function has been to formulate tariffs, containing standard
terms and conditions for various products, falling under different branches of
insurance.
FUNDAMENTAL PRINCIPLES
Chapter Introduction
Learning Outcomes
A. Fundamental principles
Case - Leyland Shipping Co. Ltd. Vs. Norwich Union Fire Insurance Society
Ltd, 1918.
The vessel "Ikaria" was insured against marine risks only and the policy
contained a warranty against all consequences of hostilities. During the Great
War, the vessel was torpedoed by a German submarine and was seriously
damaged, but managed to take refuge in the port of Le Havre. It was feared
that the vessel might sink at the place she was berthed alongside a quay.
A gale sprang up and because of the grave danger of the vessel sinking alongside
the quay, she was ordered to shift to an outer berth, where, because of the
heavy rise and fall of the tides, the vessel broke up and sank.
When shipowners presented the claim for loss due to a peril at sea, the House of
Lords held that the proximate cause of the loss was torpedoing, a war peril, as
the vessel was never out of danger from the time she was hit by the torpedo.
War perils were, therefore, held to be the dominant and effective cause of the
loss and there was no right of recovery under the policy! It was, thus,
established that ‘proximate cause’ need not be the one closest in time to the
incident but the one which is proximate in efficiency.
A. Fundamental principles
a) Uberrimae fidei
Any circumstance which is within the knowledge of the person insuring and
is likely to influence the insurer in deciding:
Example
If this is not done, it will amount to breach of the principle of good faith and
the contract will become voidable at the option of the insurers.
Not only must every material circumstance, which is known to the assured,
be disclosed by him, but the assured is also deemed to know every material
circumstance which in the ordinary course of business, ought to be known to
him. The question is not only what he ought to have known but also what he
can be deemed to have known.
It is the duty of an agent (or broker) to make a full disclosure of all material
facts to the insurer. Not only must he disclose what has been communicated
to him by his principal, but he must also disclose any circumstance, of which
he himself may have knowledge.
Material fact
Fact and
Expectation or belief
Example
Packing of the goods, if it is untrue, then the insurer may decide to rescind the
contract.
Example
b) Warranties
Definition
i. Express warranties
Example
These are not written on the policies but are deemed to be there. Under MIA
there are two implied warranties:
The first of the two implied warranties is that the ship shall be seaworthy at
the commencement of the voyage, or, if the voyage is carried out in stages,
at the commencement of each stage. This implied warranty applies to every
voyage policy, no matter what the interest insured, whether it is the ship
itself or the cargo carried in it or the freight.
In a cargo policy, there is no implied warranty that the goods insured are
seaworthy.
In a time policy on ships however, there is no implied warranty that the ship
shall be seaworthy at any stage of the adventure, but where, with the
privity of the assured, the ship is sent to sea in an unseaworthy state, the
insurer is not liable for any loss attributable to unseaworthiness.
c) Breach of warranty
Breach of warranty makes the contract voidable at the option of the insurer.
However, the breach may be excused at the discretion of the insurers. It is
excused by 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 unlawful by any law
subsequently enacted. Subject to this, a warranty must be literally fulfilled,
whether material to the risk or not.
a) Insurable interest
The Act provides that where the subject matter is insured on "lost or not
lost" basis, the assured may recover the loss, although he may not have
acquired his interest until after the loss; unless at the time of effecting the
insurance, the assured was aware of the loss and the insurer was not.
The expression ‘lost or not lost’ does not appear in the existing cargo and
hull policy forms. However, the former “lost or not lost" provision of the
policy is given effect to by Clause 11.2 of the Institute Cargo Clauses. They
render the protection of the contract, where the voyage has already
commenced, retrospective to the commencement of the risk. Thus, where
the property suffers loss before the assured acquires his interest, he is
protected by the policy, provided the risk in the goods has passed to him.
When the assured has no interest at the time of the loss, he cannot acquire
interest by any act or election after he is 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. After the loss he cannot change the contract to Ex-works to acquire
insurable interest and claim from insurers.
i. Defeasible interest
Definition
A "defeasible interest" is one which can be brought to an end during the
currency of the insurance by the occurrence of some event other than maritime
perils.
Example
A seller has an insurable interest in the goods up 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 seller's interest ceases. This is called defeasible
interest.
Definition
Example
In a contract of sale, when the seller’s interest terminates, the buyer's interest
attaches. However, contracts of a sale usually contain provisions which entitle
the buyer to exercise the right to reject the goods, if, say, the delivery is
delayed or goods do not correspond to the sample.
In such instances, the buyer's interest terminates and the risk in the goods
returns to the seller.
iii. Reinsurance
The insurer has an insurable interest in the risk he has accepted and so, he
may reinsure the same.
v. Crew’s wages
Crew members have insurable interest in their wages and hence, they can
insure the same.
Sections 52 and 53 of the Marine Insurance Act, 1963 deal with assignment
of policy. A marine policy is freely assignable unless it contains terms
expressly prohibiting assignment.
Example
Following policies are not assignable / transferable by an express condition
included in them prohibiting assignment:
To summarise, the policy may be assigned at any time, even after a loss has
occurred, but the assignment is not valid if it takes place after the assured
has parted with his insurable interest in the goods, unless the terms of sale
indicate an intention to assign the policy (e.g. CIF terms). In that case, the
policy can be assigned any time.
The assignee of the policy is entitled to sue in his own name for recovery of
loss thereunder. The insurer is entitled to make any defence which would
have availed him if, instead of the assignee, the action had been brought by
the original assured. In other words, the underwriter has the same defence
against the assignee as he had against the assignor.
(For more details on how to find out insurable interest in cargo insurance.
please refer to the next chapter.)
3. Principle of indemnity
Example
Where a valued policy is used, the value is agreed between the assured and the
insurer, so that for ships, a fair value to the shipowners can be insured
irrespective of the market value, and for cargoes the assured is enabled to
insure the cost, charges and a reasonable margin of profit.
In practice, invariably, valued policies are used, except for insurance of freight,
disbursements, customs duty on import cargo and similar interests.
Where the value has not been agreed, the policy is an unvalued policy (e.g.
Customs Duty policy for cargo) and, in the event of loss, the insurable value is
computed in accordance with Section 18 of MIA, 1963.
An unvalued policy does not specify the value of the subject insured, but,
subject to the limit of the sum insured, leaves the insurable value to be
subsequently ascertained. In an unvalued policy, the sum which the subject-
matter of insurance is "valued at" , is not inserted.
An agreed value policy has the advantage of a fixed insured value conclusive
for all claims. Only when fraudulent intention is proved is it permissible to
open an agreed value on a policy; otherwise such value is regarded as
conclusive and binding on both the insurer and the assured as representing
the value of the subject-matter insured. Such policies are known as valued
policies and the agreed value is referred to as the insured value.
If there is a fraud, not only the valuation but the whole of the policy can be
avoided. A deliberate over-valuation with the intention to deceive the
underwriter will of course, if discovered, nullify the contract. Or if the
valuation is so excessive that an ordinary risk is converted into a speculative
one, the insurer may likewise avoid the contract, but on the ground of non-
disclosure of a material fact.
4. Principle of subrogation
Definition
Subrogation is the right by which an insurer, having settled a claim for loss or
damage, is entitled to place himself in the position of the insured to the extent
of acquiring all rights and remedies in respect of the loss which the insured may
have received.
Section 79 of MIA, 1963, which deals with the right of subrogation, draws a clear
distinction between cases where an insurer has paid a total loss and cases
where he has paid only a partial loss. Where a total loss is involved, the insurer
is entitled to take over the interest of the assured in whatever may remain of
the subject - matter so paid for. In case of a partial loss claim he has no such
entitlement.
In either case, whether the loss is total or partial, the insurer, on payment of
such claims, is subrogated to all the rights and remedies of the assured in
respect of the subject- matter insured, with the qualifications that, in cases for
payment of a partial loss, the insurer's rights extend only so far as the assured
has been indemnified. Thus, in case of partial loss the insurer is entitled to
recover only up to the amount which he has paid, in respect of rights and
remedies.
By their right of subrogation, insurers are entitled to the whole amount of any
recovery from a third party up to, but not exceeding, the amount of the claim
they have paid. When a recovery from a third party is based on a value higher
than the insured value, then the insured cannot participate in the recovery until
the insurers have been fully reimbursed.
Subrogation rights are of immense value to the insurers in reducing their net
claims. For the most part, recoveries under subrogation are against carriers.
In case of cargo claims when there is any possibility of a recovery from a third
party, insurers will take a Letter of Subrogation from the insured 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
the claim.
5. Principle of abandonment
Definition
6. Principle of contribution
Section 34(1) of the MIA, 1963, defines "Double Insurance" and states that 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 exceed the
indemnity allowed by the Act, the insured is said to be over-insured by double
insurance. However, ‘Double’ is not to be interpreted in the mathematical
sense.
As provided by Section 34(2) of the Act, the assured has the right to claim under
the policies in any order he may choose, but ultimately each insurer is
responsible for only his due proportion of the loss.
Any insurer, who has paid more than his proportionate share, is entitled to
enforce rateable contribution from the other insurers.
If the insured has recovered more than the permitted indemnity, normally
based upon the highest insured value agreed in any of the various policies, he
holds the excess in trust in accordance with the insurers' rights of mutual
contribution.
Proximate cause is the active, efficient cause that sets in motion a train of
events which brings about a result, without the intervention of any force
started and working actively from a new and independent source.
Insurers are liable if an insured peril is the proximate cause of the loss. If an
insured peril is only the remote cause of the loss, the proximate cause being an
insured or excepted peril, the insurers are not liable.
Example
Where a ship was deliberately scuttled with the connivance of the owner, it was
pleaded by an innocent mortgagee that the proximate cause of the loss was the
actual incursion of the water, a peril of the sea, but the court held that it was
absurd to look at any nearer cause then the actual act of scuttling. (Samuel Vs.
Dumas, 1924).
Example
In the case of Pink vs. Fleming (1890), the insurance was on a cargo of oranges
and lemons and was warranted covering partial losses, only if such loss or
damage was consequent upon collision with other ship. The vessel collided with
another ship and she had to put into a port for repairs.
In order to effect the repairs, it was necessary to discharge the fruit into
lighters and later reload it. When the vessel arrived at the destination, it was
found that the fruit was considerably damaged, partly by handling and partly
from natural decay, in consequence of its perishable nature (inherent vice)
which arose due to a delay in voyage.
It was held that the proximate cause of the loss was not collision or any peril of
the sea, but the perishable character of the cargo combined with handling and
delay.
Speaking generally, the onus of the proof is on the assured to prove that the
loss or damage claimed for was due to an insured peril. When a vessel is posted
at Lloyd's as "missing", the presumption would be that the loss was due to
maritime perils, though the onus of the proof is on the assured, to show that
the loss occurred during the currency of the policy.
The M.I.A provides that where a ship is missing and after a lapse of reasonable
time no news of her has been received, an actual total loss may be presumed.
Where, however, the policy excludes War Risks, if the insurer pleads that loss
was due to a War peril, then the onus would be on the insurer to show that the
loss had, in fact, been so caused and was, therefore, excluded.
Under Institute Cargo Clauses the theory of Proximate Cause is relaxed under
Clauses ‘C’ and Clauses ‘B’; Sub-clause 1.1, where the losses reasonably
attributable to insured perils are covered and not proximately caused by them.
Test Yourself 1
I. Indemnity
II. Contract
III. Warranty
IV. Subrogation
Test Yourself 2
I. Defeasible interest
II. Contingent interest
III. Warranty
IV. Valued policy
Summary
h) Insurers are liable if an insured peril is the proximate cause of the loss. If an
insured peril is only a remote cause of the loss, the proximate cause being
an insured or excepted peril, the insurers are not liable.
Answers to TestYourself
Answer 1
Answer 2
A defeasible interest is one which can be brought to an end during the currency
of the insurance by the occurrence of some event other than maritime perils.
Self-Examination Questions
Question 1
“Marine insurance policy is an Agreed Value Policy”. What does this statement
imply?
Question 2
I. Defeasible interest
II. Contingent interest
III. Warranty
IV. Valued policy
Question 3
I. Subrogation
II. Abandonment
III. Contribution
IV. Proximate cause
Question 4
I. Subrogation
II. Abandonment
III. Contribution
IV. Proximate cause
Question 5
In which of the following policies there is no implied warranty that the goods
insured are seaworthy?
I. Cargo policy
II. Voyage policy on goods
III. Duty insurance policy
IV. Increased value insurance policy
Answer 1
“Marine insurance policy is an Agreed Value Policy”. This means: The insurers
do not undertake to replace or reinstate cargo or vessels in the event of loss;
they pay a sum of money, agreed in advance, that will provide reasonable
compensation.
Answer 2
Answer 3
Subrogation is the right by which an insurer, having settled a claim for loss or
damage, is entitled to place himself in the position of the insured to the extent
of acquiring all rights and remedies in respect of the loss which the insured may
have received.
Answer 4
Answer 5
In cargo policy, there is no implied warranty that the goods insured are
seaworthy.
UNDERWRITING
Chapter Introduction
The chapter discusses the various factors that are considered by underwriters
before accepting a risk in marine insurance. It also briefly discusses the various
documents that are required to be completed and submitted by proposers for
availing themselves of marine insurance.
Learning Outcomes
Recent mishaps in the coastal areas prompted the government to implement the
Merchant Shipping (Regulation of Entry of Ships into Ports, Anchorages and
Offshore facilities) Rule, 2012. Under this new rule, it has been made
mandatory for foreign ships which intend to enter its ports, to have third party
liability cover against maritime claims.
With the implementation of this new rule in 2012, India has approved four new
ship underwriters – QBE Insurance (Europe) Ltd, represented by British Marine,
Amlin Corporate Insurance NV, represented by RaetsMarine Insurance BV, Korea
Shipping Association and Korea shipowners’ mutual Protection and Indemnity
Association. These companies’ liability covers address risks that include oil spills
and collisions with foreign ships that enter Indian ports.
The ‘term’ of each of these liability covers is one year. Premium for the cover
can be paid quarterly, and in case of default, the cover will cease.
1. The proposal
2. Declaration
As per IRDA regulations the proposal form is not compulsory and proposal
submitted even verbally is a good proposal but it is to be recorded properly by
the receiver. For good order it is better to collect a proposal in the form of a
suitably designed proposal form which is also called Declaration.
These details enable the underwriter to judge the risk involved and decide the
terms, conditions and rates for the insurance sought.
3. Premium
Definition
Premium is the consideration which the insurers receive for accepting a risk.
i. Cash,
ii. Cheque,
iii. Bank Guarantee,
iv. Cash deposit, or
v. Through credit card.
However, these two relaxations shall apply to Marine Cover Notes only and not
Marine Policies.
Test Yourself 1
As per the Insurance Act 1938, for marine insurance taken in India, when should
the proposer submit premium for his policy to the insurance company?
B. Underwriting factors
1. Underwriting factors
The vessel
The voyage or transit
The nature of cargo and its packing
The conditions and terms of insurance.
2. The Vessel
Whilst the insured goods are on board the carrying vessel, neither the assured
nor the underwriter has any control over their safety, the goods being entirely
in the hands of the operators of the ship and largely dependent on the fitness
and the seaworthiness of the ship and the competence of the master, officers
and crew to carry the goods safely and deliver them in a sound condition to
destination.
b) Size of vessel
i. Liners
ii. Tramps
The "tramp", on the other hand, carries mostly bulk cargo, very often
seasonal in character, for which she is specially chartered. Tramps will carry
any cargo anywhere so long as adequate freight is offered. A cargo "liner" is
a better risk than a "tramp".
e) Classification Societies
Most of the vessels plying the high seas are entered in one or the other of
these classification societies and whose classification and other details are
readily available to underwriters by a reference to the:
Under open covers, where the vessel's identity will not be known prior to
declaration, control is exercised by inclusion of Institute Classification
Clause, whereby the carrying vessel must comply with the highest
classification standards awarded by any one of the societies, who are
Members or Associate Members of the International Association of
Classification Societies. Indian Register of Shipping (IRS) is a Member.
f) Age of vessel
Overage;
Non-classification; and
Where the vessel is registered in a "flag of convenience" (FOC) country.
The result of all this is recorded in world casualty records which indicate a
higher proportion of major losses on tonnage represented by F.O.C. vessels.
g) Adverse features
Adverse features as regards the carrying vessel will attract extra premium
under the following situations:-
Except for War risks, the cover granted under Institute Cargo Clauses (ICC) is
from "warehouse to warehouse" involving whole duration and extent of the
transit. This will include all or most of the following stages and concerns:
a) Land transit by rail or road from the time the goods leave the
consignor's warehouse to the port of shipment. Under the Transit Clause
of ICC , there is no cover during any period before transit actually
commences, such as, whilst the goods are in transit to and in a packer's
premises, unless a special provision is made in the policy, in which
event, underwriters may also consider including a period in the packer's
premises.
c) Will there be direct quayside loading into the carrying vessels or will
loading involve lighterage? The latter will mean greater exposure to
loss or damage. Stowage into vessels is another factor to be considered.
g) On-deck cargo, that is, cargo stored on deck is a substandard risk for
two reasons :
j) Has the proposer declared the entire transit for the insurance or is the
insurance proposed relates only to part of the whole transit, say, the
latter part or the "tail -end " of the transit ? An underwriter who accepts
tail- end of the risk, should obviously have the subject -matter inspected
before accepting the risk; otherwise he will be saddled with a claim for
loss or damage which could have occurred during the earlier sector of
the transit before he came on risk. In ordinary course, it would be wiser
to avoid the" tail-end" of the risk. But if compelled to accept by way of
accommodation, any damage revealed by pre-acceptance
survey/inspection (at proposer's cost) should be excluded from scope of
the policy and a restricted form of cover should be granted.
A good underwriter must be well informed of current world events, like the
prevalence of hostilities between countries, political tensions, civil wars,
riots, strikes and labour disturbances. He should be well versed in geography
and should have a keen interest in world affairs, both political and
economic.
a) Cargo
Ordinary leakage;
Ordinary breakage;
Ordinary loss in weight or volume; or
Ordinary wear and tear of the subject matter insured.
There are cargoes that gain in bulk during the voyage if shipped in imperfect
condition, for example, grain. Most cargoes which contain excess of
humidity when shipped are susceptible to heating and spontaneous
combustion, for example, jute fibres and cotton in fully pressed bales.
Refined spirits evaporate and other cargoes have chemical affinities with
various commodities, for example, salt & sugar, sulphur & nitrates.
b) Packing
One way to ensure the safety of the goods is for the shipper to make
absolutely certain that the goods are packed in the manner which will
enable them to withstand normal handling during transit. In this context,
there are some identifiable hazards to which all cargo normally will be
subject during transit.
Example
The condition and the standard of packing used is described in the surveyor's
report, when a claim arises. If goods are normally packed in a certain
manner considered standard, and if the same goods, which are subject
matter of insurance, are packed less soundly, failure to disclose this fact
would be non-disclosure of a material fact. The underwriter then may, at his
discretion, avoid the contract, whether or not inadequate packing
contributed toward the loss.
"In no case shall this insurance cover loss, damage or expense caused by
insufficiency or unsuitability of packing or preparation of the subject-matter
insured ("packing" shall be deemed to include stowage in a container or lift
van, but only when such stowage is carried out prior to attachment of this
insurance or by the assured or their servants)."
CF Boxes and Cartons are light in weight and economical. Though they may
be adequate for domestic use and for air transit, they are not always
suitable for export cargo on ocean voyages or for shipments likely to be
exposed to much moisture. CF boxes should not be used for pilferable
products.
A wooden box is strong and in many ways the most convenient packing for
many commodities provided the wood is of appropriate quality, thickness
and correct moisture content. It is preferable to reinforce all wooden boxes
and cases with tension metal straps to provide additional strength. To
protect against water damage, cases should be lined with waterproof barrier
material.
iii. Bags
Many commodities can be packed in bags, even paper bags. Coffee and
cocoa beans are carried in sacks. Cements and chemicals in granules or
powder form can be carried in multi-ply paper bags. Polythene-lined jute
bags are often used to pack chemicals.
Heavy bags are difficult to handle and dropped bags are often split. It is
therefore advisable to use bags of reasonable size and to provide "Ears" at
corners to facilitate handling. An underwriter should know that bagged
cargo, generally through various causes, suffers a heavy incidence of loss.
iv. Bales
Definition
Definition
vi. Pallets
Although the lift van could also be loaded directly on to the ship from the
flat, the holds are not designed to take the lift vans. So the lift vans have to
be stowed on deck. A further difficulty is that the vans are not designed to
be stacked over each other, as the roof is curved as in a standard railway
wagon.
Therefore, whilst the lift vans are still used infrequently for some coastal
voyages, their main use is confined to inland transit by rail or road.
Cargo which is normally not packed and carried either full load in vessel or
even container, without any packing, is called Bulk Cargo. Fertilizers,
cement, grains, sugar, liquids etc., are carried as bulk cargo.
Bulk cargo has its own risks, like unreliable method of weighment by draught
survey, no protection against weather conditions etc.
The main standard used is 20 feet in length expressed as TEU (" Twenty Foot
Container Equivalent Unit”). Such containers fit into the specially
constructed holds of container vessels as well as in the holds of most
conventional ships and can be placed on a suitable transport for rail or road
haulage.
A shipper who plans to dispatch a full load can take delivery of an empty
container at his own premises for loading by in-house staff. If it is then
intended for delivery to a single consignee, the ideal of door-to-door
transportation is possible, i.e. from the consignor's to the consignee's
premises without breakdown of contents.
If, however, the shipper chooses to use the packing services of an outside
freight forwarder, a groupage depot or a container packing station or if the
contents are to be distributed to various consignees after the container
arrives at the destination container terminal, an element of conventional
transportation at both the shipping and destination ends cannot be avoided.
Therefore, all LCLs begin and end their transit by conventional conveyances.
An underwriter should always inquire in this aspect and the rating should
reflect which of these alternatives will apply - that is, whether FCL or LCL
and whether door-to-door or conventional handling and delivery.
c) Containerisation in India
Door-to-door concept has not yet caught on in India and a large number of
containers are meant to be destuffed and stuffed in the port. For that
purpose, extensive shed space facilities exist.
In this country, containerisation will remain for some time to come, a form
of "unitisation between ports", that is, a port-to-port service. This is because
inland movement is almost in the form of break - bulk.
Inland Container Depots (ICD) were established mainly through the initiative
of Indian Railways at Delhi, Bengaluru, Coimbatore, Guntur, Ludhiana,
Amingaon and other places ( 246 places) for serving the shippers and
consignees located in different parts of India’s hinterland.
Hence the same principles and techniques which govern export packing and
cargo storage of break - bulk shipments, are equally valid when preparing
cargo for container shipment and when stuffing it in a container.
Advantages
iii. Theft and pilferage risks are reduced though not entirely eliminated.
iv. Economies in individual packing contents. This does not apply to present
Indian conditions where containerisation is primarily a method of
unitisation from port-to-port, resulting in break-bulk handling after the
container arrives at the destination port. Superior export packing,
therefore, becomes indispensable even for containerised cargo.
Disadvantages
vii. A large variation in weight, where containers are stowed on deck, can
effect stability and unevenly weighted containers can cause problems for
the driver of a truck during inland transit.
xii. Most container vessels do not have on-board lifting equipment, and
loading and discharge are done by gantry or jib crane equipment located
on the dockside. In the event of a major casualty at sea, say, a stranding
or collision, cargo can only be moved by specially equipped salvage
vessels or floating cranes, if at all they become available in time soon
after the mishap. Also, following a serious casualty, structural distortions
can make the removal of containers impossible.
xiv. Apart from losses, often heavy, recovery prospects from the carriers
became difficult. In such a situation the underwriter prefers to charge
possibly higher rates and leave the experience to show whether a
reduction in rate is justified.
xv. In any event, containerisation will continue to expand, but it will never
be all pervasive and it is unlikely that it will come up totally to the ideal
and the perfections expected of it in theory.
5. Conditions of insurance
Rating should take into consideration each material element of the risk
involved, whether it be the characteristics of a given vessel carrying the goods
or the voyage or the nature of cargo and packing. These characteristics vary
considerably from risk to risk.
Example
A proposal to ship heavy machinery of a cement plant on deck rather than under
deck will highlight the risk of washing overboard in heavy weather.
Under ICC (B) cover, this is a material factor which must be included in rating
because the risk is covered, but under ICC(C)-where "Washing Overboard" is not
specifically covered and may be considered as covered only if reasonably
attributable to one of the several major named perils - this factor will be of far
less significance.
However, there is one common area of risk (applicable under all the three sets
of clauses), namely, the major perils to which cargo is exposed during transit,
which pose a uniform threat to all interests on board. These are the perils and
casualties covered under ICC (C)-namely, fire, explosion, vessel/craft being
stranded, grounded, sunk or capsized, overturning or derailment of land
conveyance, etc. - which importantly lie at the base of all Institute Cargo
Clauses.
In view of the catastrophic nature of these basic risks, an insurer will seek to
set aside an appropriate proportion of each premium as a reserve for
"Catastrophe Funds" in order to mitigate the severity of the strain on his
underwriting account.
It follows, therefore, that every premium should necessarily include in the rate
calculation, a provision for ICC (C) risks, i.e. for the basic cover. Each
progressive stage of rating for the widening scope of cover should then
supplement that base, so as to produce finally a composite rate which
adequately takes into consideration all the material components of the risks.
An interesting feature of ICC (B) and (C) covers is the "impersonal" nature of the
risks covered, i.e., risks which are closely related to the process of transit itself
and which are largely beyond the control of the assured.
At the ICC (A), i.e., "All risks" stage, "personal" influences get highlighted as
several extraneous perils are also covered over and above the basic and major
perils of ICC (B) and (C).
This personal influence relates to the shipper, the manner in which his goods
are prepared and packed for shipment, his choice of carriers, etc. These are
additional considerations which an underwriter has to take into account when
rating a risk under ICC (A) and these considerations contribute materially to the
ultimate underwriting results.
IC-67 MARINE INSURANCE 59
CHAPTER 3 UNDERWRITING FACTORS
Rates for wars and strikes risks and other extras should be quoted separately
from Marine premium rates.
Last, but not the least, is the Moral Hazard and Morale Hazard factors, which
should not be ignored. Moral Hazard relates to honesty and integrity of the
insured whereas Morale hazard relates to the attitude of the insured. An honest
insured, if negligent or careless towards losses, is equally bad compared to a
person with bad moral hazard.
What is the attitude of the assured towards buying his insurance? No insurer
minds his client trying to find the cheapest cover, but some clients feel that
they have failed if they do not have sufficient claims to cover the cost of that
insurance.
Test Yourself 2
I. Cargo liners
II. Tramps
III. Chartered vessel
IV. FOC Vessels
C. INCOTERMS 2000/2010
In international transactions, buyers and sellers enter into contracts of sale and
purchase. These contracts may be in any form but if they are not in the form
which is acceptable to both the parties, there may be many disputes and the
main purpose of doing the business may be lost.
As such, generally the standard forms of contracts which are entered into are in
the form of International Commerce Terms (INCOTERMS). The latest version is
2000, which is in force from 1st January 2000. The contract is written only in
three letters and obligations of buyer and seller along with price formation is
decided by the term selected.
Whosoever, either buyer or seller, is having the risk in the goods is said to have
insurable interest in the goods. Any loss taking place during the duration of risk
of the insured is recoverable under the marine policy subject to the terms of
cover. Strictly speaking the marine policy covers insured’s insurable interest in
the goods in transit and not the goods.
Under a ‘warehouse to warehouse’ policy goods are insured for full duration of
transit but the cover is available to insured only during the duration when the
goods are at his risk.
During transit from seller’s warehouse to buyer’s warehouse, the goods are
at buyer’s risk. Moreover the buyer has to bear all the expenses of
transportation etc., in carriage of goods up to his warehouse. The sale price
quoted by seller includes his cost, packing charges and profit, so generally it
is low. In this terms transit insurance is to be taken by the buyer from
seller’s warehouse to buyer’s warehouse.
If seller takes marine insurance policy it is of no use and any claim in transit
will not be payable thereunder.
Here, the responsibility of the seller is from his warehouse till loading of the
cargo in the ship till the goods pass ship’s rails. If the goods are lost or
damaged before becoming FOB the seller has to replace the goods. It is
advisable to take insurance up to FOB point (FOB Insurance policy) but it is
not compulsory for him to insure after goods cross ship’s rails (outside
imaginary border of the ship).
For insurance purpose this is like FOB as the seller’s responsibility is only up
to the ship’s rails, the difference being in the price. CFR value consists of
sea freight also as the seller undertakes to arrange for services of shipment
up to destination port also.
This is the new term which has been introduced in the ‘2010’ set of 11
terms. The seller is responsible for delivery of the goods, ready for
unloading from the arriving conveyance, at the nominated place. There is no
obligation on seller to arrange for any insurance but it is advisable to insure
goods upto the agreed place as in the event of any loss he has to replace the
goods, if they are lost/damaged before delivery. If delivery place is short of
buyer’s place, the buyer may arrange for insurance for balance of transit to
safeguard his interest.
Test Yourself 3
D. Documents
There is no standard proposal form for marine cargo insurance, except in case
of:
The risk is assessed by the underwriter on the basis of the information given on
the Declaration Form, which is to be completed and signed by the proposer.
a) Name and address of the proposer and his business. If bankers have an
interest in the transaction, as would be the case in documentary credits,
the name and address of the concerned bank is also given.
c) Value for insurance, that is, the Sum Insured which is normally the CIF
value plus 10%. Duty Increased Value components are indicated
separately.
d) Name of the carrying vessel or mode of other conveyances, like rail, road
or air, as applicable.
f) B/L No., R.R. or L.R. No., Air Consignment Note No., etc. as applicable.
Details in the Declaration Form enable the insurer to assess and rate the risk
offered for insurance. When a proposal results in a policy, the details in the
Declaration Form are incorporated in the policy document.
Definition
Marine cover note is a temporary document evidencing that insurance has been
granted pending the issue of the policy.
There is a contract of marine insurance from the time Cover Note is issued, but
from a legal point of view, the Cover Note is only an advice and as such it
cannot be used as a legally valid document in a lawsuit against the insurer until
the contract is expressed in a Policy.
a) The Cover Note is the basis of the contract and Courts have the power to
order the rectification of the policy to express the intentions of the
parties to the contract as evidenced by the terms of the Cover Note.
b) Cover Notes are not stamped and are initially issued when full details for
the issue of a policy are not immediately forthcoming. Later, when full
required details become available, a policy is issued, and, in the
meantime, insurers consider themselves bound, in honour, by the
contract evidenced by the Cover Note.
d) The details contained in the Cover Note are taken from the Declaration
Form. The Cover Note, in addition, mentions also the terms, conditions
and warranties under which the risk is accepted and the premium. The
Cover Note also contains two special conditions :-
Definition
The Policy (also called MAR Policy Form) is a simple document containing the
name of the insurer and a clause binding the insurer to the performance of the
contract.
All information identifying the risk concerned and the amount insured are
contained in the Schedule of the policy. As per Section 24 of the MIA, 1963, a
contract of marine insurance shall not be admitted in evidence unless it is
embodied in a Marine Policy. The policy may be executed and issued either at
the time the contract is concluded or afterwards.
The policy document must be stamped as required by the Indian Stamp Act,
1899. Stamp duty, which is shown on the policy, is recoverable from the
assured.
The policy is issued covering individual shipments from named starting point to
named final destination point. The same policy form is used to cover all
shipments, whether by sea, rail, road, air or post. Appropriate clauses affixed
to the policy and the scope of the cover should be designated correctly in the
appropriate space in the policy.
g) Description of marks and numbers as also B/L No., Air Consignment Note
No., Railway or Lorry Receipt No., Post Parcel Receipt No., as
applicable. The purpose is to identify the insured goods.
h) The Sum Insured. A marine cargo policy is a valued policy and the value
fixed by the policy is generally conclusive and binding on the parties to
the insurance contract, in the absence of fraud. The components of the
Sum Insured may well be CIF value, plus 10% customs duty plus increased
value. All these components should be indicated in the policy to
facilitate correct adjustment of claims. Duty and Increased Value
insurances are not valued policies.
4. Endorsements
Definition
Example
Needless to stress that the alterations can be effected only before the end of
the transit and before insurance ceases under a policy.
Test Yourself 4
I. Declaration form
II. Marine cover note
III. Standard form of marine policy
IV. Endorsement
6. Insurer can issue policy and send its soft copy to the insured which can be
either downloaded by them or printed at insured’s end.
7. Client’s particulars and other information can be fed to data bank by the
insurer to update the data.
Test Yourself 5
In , the system follows the principle of pre-underwriting - up
to a limit and for preset parameters, the certificates can be generated by the
insured himself.
I. E-data
II. E-marine
III. E-underwriting
IV. E-certificate
Summary
b) As per the Indian practice, the premium is to be paid in advance before the
commencement of transit. It can be in the form of cash, cheque, Bank
Guarantee, Cash deposit or through credit card.
h) If the insured is given the facility of e-marine, the insured can generate a
certificate through his computer against the open policy/ open cover.
Answers to TestYourself
Answer 1
As per the Insurance Act 1938, for marine insurance taken in India, the proposer
needs to submit premium in advance before commencement of transit.
Answer 2
Answer 3
In cost and freight policy, the seller’s responsibility is up to the ships’ rail.
Answer 4
Marine cover note is a temporary document evidencing that insurance has been
granted pending the issue of the policy.
Answer 5
Self-Examination Questions
Question 1
Cargo that is normally not packed and carried either full load in vessel or even
containerised without any packing is called
I. Bulk cargo
II. Container transport
III. Lift van
IV. Unitising the packages
Question 2
I. Oil
II. Chemicals
III. Fruits
IV. Cotton
Question 3
What is the restricted age limit for tankers, up to which underwriters will
charge regular premium for providing them with insurance cover?
I. 5 years
II. 10 years
III. 15 years
IV. 25 years
Question 4
In which of the following contracts will the seller be responsible for the delivery
of the goods to a nominated place?
I. DAP
II. CIF
III. CFR
IV. FOB
Question 5
I. Declaration form
II. Marine cover note
III. Endorsement
IV. MAR policy form
Answer 1
Cargo which is normally not packed and carried either full load in vessel or even
containerised without any packing is called bulk cargo.
Answer 2
Answer 3
Restricted age limit for tankers is 10 years, beyond which underwriters will
charge additional premium for acceptance of risk.
Answer 4
In DAP contracts, the seller is responsible for the delivery of the goods to the
nominated place.
Answer 5
The MAR policy form is a document containing the name of the insurer and a
clause binding the insurer to the performance of the contract.
Chapter Introduction
In this chapter, you will learn about the rules of interpretation applicable to
marine insurance policies. Then you will learn about the Institute Cargo Clauses
(ICC) drafted by the International Underwriting Association (IUA) of London.
Finally, this chapter will discuss some miscellaneous Institute Clauses as well as
incidental clauses and warranties.
Learning Outcomes
A. Rules of interpretation
B. Institute Cargo Clauses (A), (B) and (C)
C. Miscellaneous Institute Clauses
D. Incidental clauses and warranties
A. Rules of interpretation
The drafting of policies requires great care because while the principal rule of
construction is that the intention of the parties to the contract must prevail,
that intention itself must be gathered from the policy document itself and the
clauses, endorsements, warranties, etc. attached to it and forming part of the
contract.
If there is any ambiguity, then the policy is construed against the insurers and in
favour of the assured, because the insurers are the drafters of the contract.
This rule is called Contra Proferentem Rule.
The general rule is that the phraseology must be construed in the plain,
ordinary and popular sense, unless the context indicates some special meaning.
While the rules of grammar must be observed in interpretation, what is
important is that the intention of the parties to the contract must predominate.
Technical terms must strictly be given their technical meaning, unless there is
an indication to the contrary.
h) There are no grounds for believing that clauses printed in red override
those printed in black. Printing in red colour is aimed at emphasis only.
E.g. Important Notice.
Example
A marine cargo policy should be stamped as per the Indian Stamp Act, 1899 and
amendments thereto. Stamp duty is recoverable from the assured. The scale of
stamp duties in force for voyage policies is as under:
a) For sea voyage and transit by country craft, 10 paise for every Rs.
3,000/- or part thereof, subject to the following:
i. When the rate charged is 1/8th percent (i.e. 0.125%) or less, the stamp
duty is only 05 paise regardless of the sum insured. Total premium
charged under the policy, inclusive of premium for war and strikes risks,
is taken into account when determining whether the rate is 1/8th percent
or less.
ii. When Inland Transit (Rail of Road) is covered in conjunction with a sea
voyage, the policy must be stamped according to the scale for sea
voyages.
b) For other than sea voyage (i.e. transit purely by rail, road or air):
Test Yourself 1
Which of the following statements is correct with regard to policies printed in
red colour?
a) International Clauses
In world market, since 1779, standard terms and conditions are used for
marine insurance, beginning with the SG form of policy. Presently three
types of standard terms and conditions are in vogue. They are:
The “Institute” Clauses are drafted by the Technical and Clauses Committee
of the Institute of London Underwriters (ILU) and they are adopted for use
the world over by all insurers. The last set of clauses was introduced in
1982 (in India 1983) and the same was revised in the year 2009. Doubtless,
this uniformity is desirable when we are dealing with international trade
involving different modes of transit. Incidentally, the Institute of London
Underwriters (ILU) merged with the London International Insurance and
Reinsurance Market Association (LIRMA) in 1998 to form the International
Underwriting Association (IUA).
b) Domestic Clauses
On the other hand, where pure inland transit is concerned i.e. transit within
the country by rail or road (not in conjunction with overseas voyage), Inland
Transit Risks Clauses drafted by the Tariff Advisory Committee (TAC) are
used. Recently these clauses have been revised by the General Insurance
Council, a body represented by all the general insurers in India. The salient
features of the principal Cargo Clauses will now be examined.
2. Institute Cargo Clauses (A), (B) and (C) – 1982 and 2009 versions
In each of the sets of clauses the provisions are grouped under the main
headings of:
Risks Covered,
Exclusions,
Duration,
Claims,
Benefit of insurance,
Minimising losses,
Avoidance of delay and
Law and Practice
ICC (C) provides a basic standard cargo cover against major casualties; whilst
ICC (B) provides a wider intermediate form of cover and ICC (A) provides the
broadest cover on an “all risks with exceptions” basis. In other words ICC (C)
and ICC (B) are named perils clauses i.e. with the perils being listed therein.
However, ICC (A) are on “All Risks with exceptions” basis, with no list of perils
but covering all accidental losses in transit other than those caused by
exclusions.
a)
i. Loss or damage to the subject-matter insured reasonably attributable to:
Fire or explosion
Vessel or craft being stranded, grounded, sunk or capsized
Overturning or derailment of land conveyance
Collision or contact of vessel, craft or conveyance with any external
object other than water
Discharge of cargo at a port of distress
b) General Average and Salvage Charges incurred to avoid loss from any
cause(s) except those excluded
The insurance under Institute Cargo Clauses (B) covers the aforesaid risks of ICC
(C) i.e. as mentioned under (a), (b) and (c) and additionally, also covers the
following risks:
Washing overboard
Entry of sea, lake or river water into the vessel, craft, hold,
conveyance, container, lift van or place of storage
Total loss of any package lost overboard or dropped whilst loading
onto, or unloading from vessel or craft.
The insurance covers all risks of loss or damage to the subject-matter insured
except those specifically excluded.
6. Exclusions
ii. Ordinary leakage, ordinary loss in weight or volume or ordinary wear and
tear of the subject-matter insured
vii. Loss, damage or expense arising from the use of any weapon of war
employing like reaction or radioactive force or matter.
c) War Exclusion
The insurance shall not cover loss, damage or expense caused by:
i. War, civil war, revolution, insurrection or civil strife arising
therefrom or any hostile act by or against a belligerent power;
ii. Capture, seizure, arrest, restraint or detainment and the
consequences thereof or any attempt thereat;
iii. Derelict mines, torpedoes, bombs or other derelict weapons of war.
d) Strikes Exclusion
Notes:
i. Deliberate damage or destruction by the wrongful act of any person(s):
This exclusion appears in ICC (B) and ICC (C). If the assured desires this
risk to be covered, the underwriter may do so, at his discretion, after
close examination of the bonafides, reputation and financial standing of
the carrier. This exclusion under ICC (B) and ICC (C) can then be deleted
by inserting the “Malicious Damage Clause” whereby the cover will also
include the additional risks of “Malicious Acts”, “Vandalism” and
“Sabotage” subject to additional premium.
ii. This exclusion does not apply to ICC (A) because the risks would be
included within the term “all risks”.
iii. Risk of piracy: Whilst pirates are generally included in the risks covered
by ICC (A), a pirate who is a rioter and who attacks the ship from the
shore, is covered by the Strikes Clauses but not by ICC (A). There is no
cover at all in ICC (B) and ICC (C) for piracy.
iv. Other clauses are identical in all the 3 sets of Institute Cargo Clauses.
7. Duration of cover
Transit clause
Transit Clause of ICC (A), ICC (B) and ICC (C) defines the duration of the risk as
attaching from the time the goods leave the warehouse or other place of
storage at the place named in the policy to commence transit. The risk then
continues during the ordinary course of transit to terminate on delivery
If, before the expiry of the policy, but after discharge at destination, it is
decided to forward the goods to another destination, the policy shall not extend
beyond the commencement of transit to the other destination.
In 1982 Clauses there is ambiguity about the exact time of commencement and
ending of transit which is now removed in 2009 Clauses which clearly state that
the transit commences on shifting of cargo in the place of storage for
commencement of transit and ends on unloading of cargo at final destination
subject to above clauses and time limits.
If, owing to circumstances beyond the control of the assured, either the
contract of carriage is terminated at a port or place other than the policy
destination, or the transit is otherwise terminated before delivery of the goods,
then the insurance terminates automatically, unless the assured takes positive
action to continue the insurance by giving prompt notice to the insurers and
requesting continuation of the cover. Provided notice is given promptly and an
additional premium, if required, is paid, the insurer will agree to continue the
insurance, either:
a) until the goods are sold and delivered at such port of place or, unless
otherwise specially agreed, until the expiry of 60 days after arrival of
the goods at such port of place, whichever shall first occur, OR
b) if the goods are forwarded within the said period of 60 days (or any
extension agreed) to the policy destination or to any other destination,
until terminated in accordance with the provisions of the transit clause
above.
It should be noted that unless the reason for resorting to the intermediate port
or place where the contract of carriage is terminated, is the operation of an
insured risk, the insurer would not be liable for forwarding charges.
9. Change of Voyage
Test Yourself 2
Ordinary wear and tear of the subject matter insured is covered under which of
the following set of clauses ?
ii. General Average and Salvage Charges incurred to avoid a loss from a risk
covered.
iii. Under Duty of the Assured Clause, charges reasonably and properly
incurred to avert or minimise an insured loss and to preserve and pursue
recovery rights, are also covered.
b) Exclusions
Note: Most of the exclusions expressed in these war Clauses, as in the other
sets of clauses that follow, are the same as in Institute Cargo Clauses (A),
(B) and (C). However, there is an additional exclusion which reads as
follows:
The insurance shall not cover any claim based upon loss of or frustration of the
voyage or adventure.
Example
The period of the cover afforded by the Institute War Clauses (Cargo) is
considerably more restricted than the period of the cover provided by the
Institute Cargo Clauses (A), (B) and (C). It was agreed many years ago that
underwriters would restrict cover for war risks to the period of transit when
the goods are waterborne and not on land. This resulted in the Waterborne
Clause, which, in effect is embodied in the War Clauses as the Transit
Clause.
War cover, therefore, does not attach until the goods are loaded on the
overseas vessel, and it ceases when the goods are discharged from the
oversea vessel.
If the goods are transhipped, cover continues during the transhipment but
subject to a limit of 15 days counting from the date of arrival of the vessel
at the transhipment port.
If the 15 days limit expires before the goods are loaded onto the on-carrying
vessel, the war cover is suspended until the goods are loaded onto the on-
carrying vessel, when the cover re-attaches. This extension during
transhipment applies only whilst the goods remain within the port area of
the transhipment port. Thus a relaxation of the Waterborne Clause is
allowed whilst the goods are being transhipped at an intermediate port, but
this is subject to restrictions both in location and time, as already
explained.
Whilst full cover does not apply when the goods are in craft in transit to or
from the overseas vessel, cover is extended during such transit to embrace
the risks of mines and derelict torpedoes only, whether these be floating or
submerged. Such cover is limited to a period of 60 days after discharge,
unless the underwriters have agreed specially to extend the time limit.
It may happen that the contract of carriage may be terminated and goods
are discharged short of destination. In these circumstances, the goods may
be sold locally or forwarded by some other means to the destination named
in the policy or to some alternative destination.
If the goods are disposed of locally, the port of discharge is treated as the
destination port and the war cover ceases on discharge or 15 days after
arrival of the ship, as the case may be.
If the goods are forwarded to the original destination by another ship, war
cover will continue and/or is suspended and re-attaches as for
transshipment. The cover ceases on discharge at the destination or
alternative destination or 15 days after arrival of the ship, it the goods are
not discharged.
a) Coverage
ii. General Average and Salvage Charges incurred to avoid loss from a risk
covered
iii. Under Duty of the Assured Clause, charges reasonably and properly
incurred to avert or minimise an insured loss and to preserve and pursue
recovery rights.
b) Exclusions
These are the same as under ICC (A), (B) and (C) Clauses, with two
additional exclusions:
ii. Any claim based upon loss of or frustration of the voyage or adventure
(“forwarding charges” are therefore not covered);
The Transit Clause in the Cargo Strikes Clauses is the same as the Transit
Clause in ICC (A), (B) and (C). Cover is “Warehouse to Warehouse” with the
customary 60 days’ time limit after discharge, as discussed earlier.
After the terrorists attacked the World Trade Center (WTC) in 2001, the
underwriters over the world, have introduced this clause as part of transit
clause to the extension of Strikes Clauses. Under Strikes Clauses, terrorism is
covered during transit and storage incidental to transit. But under this clause
terrorism is withdrawn during storage places and is covered only during transits.
This clause is issued as Clause Paramount to it does not clash with Strikes Clause
and the Contra Proferentem Rule does not apply.
i. Cover is against “all risks” as in ICC (A) except that General Average and
Salvage Charges and Both to Blame Collision Clauses are omitted, as
these are not concerned with air transit.
ii. Under Duty of the Assured Clause, charges reasonably and properly
incurred to avert or minimise an insured loss and preserve and exercise
recovery rights are also covered. Forwarding charges would be covered
under this item, being sue and labour in nature.
b) Duration of cover
Cover attaches as in ICC (A) and continues during the ordinary course of
transit to terminate when the goods are delivered to the final warehouse.
The same provisions apply to allocation or distribution of the goods prior to
delivery, the only difference being in the time limit. The Air Cargo Clauses
apply a 30 days’ time limit after unloading from the aircraft as against, 60
days after completion of discharge of insured goods from against the oversea
vessel as in ICC (A).
The “Change of Transit” Clause in the Air Cargo Clauses is effectively the
same as the “Change of Voyage” Clause in ICC (A).
The remaining clauses in the air cargo clauses are identical to their
counterparts in the ICC (A), so require no further comment.
The cover provided by the Air Cargo War Clauses is almost identical to the cover
in the Marine Cargo War Clauses, although the format is slightly different and
the equivalent to the Waterborne Clause relates to circumstances of air transit
as against carriage by water.
a) Risks Covered
Clause 1 of the Air Cargo War Clauses is identical to Clause 1 of the Marine
Cargo War Clauses, even to the extent that it includes the unlikely risk of
“mines and torpedoes”.
General Average and Salvage Charges are omitted, as they will not apply to
air transit. The exclusions are the same as under Marine Cargo War Clauses.
b) Duration of Cover
The period of the cover is effectively the same as in the War Clauses used
for marine transit, but reworded to apply to carriage by air rather than by
sea.
The insurance attaches as the insured cargo is loaded on the aircraft for the
commencement of the air transit. Cover continues during the ordinary
course of transit and terminates as the goods are discharged from the
aircraft at the destination airport, but subject to a time limit of 15 days
from midnight of the day of arrival of the aircraft at such place.
Variations of the transit are covered as in the Marine Cargo War Clauses, but
in so far as they relate to air transit, subject to prompt notice to
underwriters and payment of additional premium, if required.
a) Risks Covered
These are the same as in the Marine Cargo Strikes Clauses, that is, loss or
damage to the subject-matter insured caused by:
b) Duration
Apart from the variations referred to above, the remaining clauses in the Air
Strikes Clauses are identical to their counterparts in the Strikes Clauses used
for marine transit.
a) Risks Covered
ii. Total Loss only: Insured against actual total loss of the parcel except as
provided in the exclusions
(To delete what is not applicable above.)
b) Duration
The insurance attaches from the time the goods hereby insured are
deposited / registered at the Post Office at the place named in the policy
and continues until the goods are delivered to the addressee or his
representative at the destination named in the policy or until expiry of 15
days counting from the midnight of the day on which the notice of arrival of
the goods is given to the addressee by the Post Office at the destination,
whichever shall first occur.
IC-67 MARINE INSURANCE 89
CHAPTER 4 MISCELLANEOUS INSTITUTE CLAUSES
c) Claims
iii. No claim will be admitted for loss of contents from packages delivered
with seals intact.
d) Warranty
It is warranted that the goods insured are also insured with the postal
authorities for the maximum amount as per the prevailing postal
regulations.
Test Yourself 3
What is the duration of the cover of an insurance policy provided under the
Institute War Clauses (Air Cargo)?
I. Cover continues during the ordinary course of air transit and terminates as
the goods are discharged from the aircraft at the destination airport
II. Cover continues during the ordinary course of air transit and terminates as
the goods are discharged from the aircraft at the destination airport, but
subject to a time limit of 3 days from midnight of the day of arrival of the
aircraft at such place
III. Cover continues during the ordinary course of air transit and terminates as
the goods are discharged from the aircraft at the destination airport, but
subject to a time limit of 7 days from midnight of the day of arrival of the
aircraft at such place
IV. Cover continues during the ordinary course of air transit and terminates as
the goods are discharged from the aircraft at the destination airport, but
subject to a time limit of 15 days from midnight of the day of arrival of the
aircraft at such place
1. Comprehensive Clause
This clause includes the risks of theft, pilferage and non-delivery, fresh water
and rain water damage, hooks, oils, mud, acid and other extraneous substances
or heating and sweating and damage by other cargo.
This clause, containing specific extraneous risks, is used to extend the cover
afforded by Institute Cargo Clauses (B), when required.
Provided always that in no case shall the liability of insurers exceed the insured
value of complete machine
The loss of small but integral part of a machine may cause the machine to be
useless for the purpose for which it was intended and may give rise to a claim
for total loss. Therefore when machinery is to be insured, underwriters include
this “Replacement Clause” which limits there liability, in case of loss / damage
to the cost of repairing or replacing the damaged part, including forwarding and
refitting charges.
Import duty may have been paid on the machine. A similar duty will be imposed
on any spare part imported. Unless the full duty was included in the sum insured
on the machine, the underwriter is not liable for duty of the spare part. It is
therefore advisable for the assured to specify the amount of duty in the value
shown on the policy. In any event, the liability of the underwriter should not
exceed the insured value of the machine.
“Company’s liability shall not exceed the value of any particular part or parts
which may be lost or damaged, without reference to any special value which
such article(s) may have as part(s) of such pair or set, nor more than a
proportionate part of the insured value of the pair or set.”
Where the value of a pair or set, for example, objects of art or jewellery, etc.
depends on their continuance as a pair or set, the value is drastically diminished
if one of the pair or the set is damaged or destroyed. In such an event, the
claimant would prefer to abandon the remaining item(s) to the underwriter and
claim total loss. Therefore, by using the “Pair and Set Clause” the underwriter
limits his liability to the insured value of the lost or damaged part.
5. Cutting Clause
“Warranted that the damaged portion should be cut off and the balance
utilised.”
This is used in policies covering pipes or similar items of length. The object is to
limit underwriter’s liability to the proportionate insured value of the damaged
part cut off and the cost of cutting.
6. Label Clause
Canned or bottled goods are identified to the consumer by the attached paper
level. Exposure of cans / bottles to moisture may cause discolouration of the
labels or it might cause the labels to come off. However, such damage to the
labels does not impair the quality of the contents of the can or bottle, which is
the subject-matter of insurance. It does, however, make it difficult if not
impossible to identify such goods, if the label is the only means of
identification. In present times, most canners stamp a code number on the can
so that whatever happens to the label, the embossed code number will identify
the contents of the can, and the consignee can attach fresh label to replace
those lost / damaged and his only loss will be the cost of the new labels and re-
labelling labour charges, if any. Of course, the cause of the damage to the
labels must be an insured peril.
The most commonly used form of Label Clause limits the insurer’s liability to
the cost of re-labelling and re-packing the affected goods.
Another form of Label Clause states: “Excluding damage to the labels on tinned
or bottled goods unless the goods themselves are damaged at the same time.”
The aim of this clause is to prevent inferior quality or damaged goods being sold
as salvage in the market to the detriment of the insured’s reputation and to
avoid potential product liability claims. If the damaged goods are to be sold as
salvage the brand or trade mark is to be removed from the goods alternatively
the insured may offer some reasonable salvage value and destroy the damaged
goods.
Many times after delivery, long time is taken to open the goods for inspection/
use and that time the loss is noticed. The clause allows certain number of days
say 45 for delayed opening and notifying the loss to insurers.
The policy is extended to cover cost of removal of debris. Sometimes the limit
of expenses is put as percentage of sum insured.
Cotton, wool and similar fibrous commodities are shipped in bales. Country
damage to which these bales may be exposed is usually restricted to the outer
surface of these bales and is often superficial. By picking out the damaged
fibres, the remainder of the bale may be considered as sound. The sound part of
the bales affected may be re-baled and consolidated to make whole bales.
The “Picking Clause” provides that the insurer will pay the cost of picking and
the cost of re-baling both sound and damaged material, because the damaged
material does have salvage value. Provided the loss is caused by an insured
peril, the insurer is liable for the insured value of the pickings less the salvage
proceeds of the picked material.
“Garble” means to sift, to cleanse, to separate sound from the whole, which
may have got mixed up with some other material. Generally, this term is
applied to insurance of tobacco, but it could be applied to most cargoes, like
coffee beans or grain. The “Garbling Clause” provides that the insurer will pay
the cost of garbling, as such an exercise prevents further damage and reduces
the claim.
The clause is to be applied where the name of the cargo carrying vessel is not
known- namely in cover notes and open covers/policies. The clause lays down
certain standards taking into consideration which, the insurers charge normal
premium and in case of any non compliance of any of the terms of the clause,
the insurers have the right to charge additional premium on “Held Covered”
basis.
The text of the clause is copied below to enable the reader to clearly
understand its various provisions pertaining to construction, classification, type
wise age requirement etc.
Qualifying Vessels
1. This insurance and the marine transit rates as agreed in the policy or
open cover apply only to cargoes and/or interests carried by
mechanically self-propelled vessels of steel construction classed with
a Classification Society which is:
1.2 a National Flag Society as defined in Clause 4 below, but only where
the vessel is engaged exclusively in the coastal trading of that nation
(including trading on an inter-island route within an archipelago of which
that nation forms part).
Age Limitation
2.1 have been used for the carriage of general cargo on an established
and regular pattern of trading between a range of specified ports, and do
not exceed 25 years of age, or
Craft Clause
3. The requirements of this Clause do not apply to any craft used to load
or unload the vessel within the port area.
Prompt Notice
(For a current list of IACS Members and Associate Members please refer
to the IACS
website at www.iacs.org.uk )
Cover under this clause attached at the time the goods are lifted from the
ground or loading dock immediately adjacent to the conveyance, continues
during the ordinary course of transit as per Institute Clauses and terminates
once the goods have been lifted from the conveyance and placed on the ground
immediately adjacent hereto.
Test Yourself 4
Summary
c) There are no grounds for believing that clauses printed in red override those
printed in black.
d) A marine cargo policy should be stamped as per the Indian Stamp Act, 1899
and amendments thereto.
f) In case of pure inland transit i.e. transit within the country by rail or road
(not in conjunction with overseas voyage), Inland Transit Risks Clauses
drafted by Tariff Advisory Committee (TAC) are used.
g) ICC (C) provides a basic standard cargo cover against major casualties.
i) ICC (A) provides the broadest cover on an “all risks with exceptions” basis.
j) Transit Clause of ICC (A), ICC (B) and ICC (C) defines the duration of the risk
as attaching from the time the goods leave the warehouse or other place of
storage at the place named in the policy to commence transit.
n) Institute Cargo Clauses (AIR) Cover is against “all risks” as in ICC (A) except
that General Average and Salvage Charges and Both to Blame Collision
Clauses are omitted, as these are not concerned with air transit.
o) Institute Strikes Clauses (Air Cargo) covers loss or damage to the subject-
matter insured caused by strikes, locked-out workmen or persons taking part
in labour disturbances, riots and civil commotions.
p) Registered Mail and Postal Sending by Air: This insurance covers all risks of
physical loss or damage to the subject-matter insured except as provided in
the exclusions.
r) The aim of the Brand & Trade Marks Clause is to prevent inferior quality or
damaged goods being sold as salvage in the market to the detriment of the
insured’s reputation and to avoid potential product liability claims.
s) By using the Debris Removal Clause, the policy is extended to cover cost of
removal of debris. Sometimes, the limit of expenses is put as percentage of
sum insured.
t) The “Garbling Clause” provides that the insurer will pay the cost of garbling;
as such an exercise will prevent further damage and reduce the claim.
Answer 1
Clauses printed in red do not override those printed in black. Printing in red
colour is aimed at emphasis only.
Answer 2
Ordinary wear and tear of the subject-matter insured is neither covered under
ICC (A) nor ICC (B) nor ICC (C). It is a general exclusion.
Answer 3
Answer 4
Cover continues during the ordinary course of air transit and terminates as the
goods are discharged from the aircraft at the destination airport, but subject to
a time limit of 15 days from midnight of the day of arrival of the aircraft at such
place.
Self-Examination Questions
Question 1
How much will be the stamp duty payable for a cargo policy for voyage other
than sea voyage and where the sum insured is Rs. 2,000?
I. 25 paise
II. 50 paise
III. 75 paise
IV. Re. 1
Question 2
Question 3
Which of the below policy can also be called an ‘All Risks’ policy based on the
maximum number of risks covered as compared to other policies?
Question 4
For pure inland transit within the country by rail or road (not in conjunction
with overseas voyage), Inland Transit Risks Clauses drafted by are used.
Answer 1
The stamp duty payable for a cargo policy for voyage other than sea voyage,
and where the sum insured is Rs. 2,000, will be 25 paise.
Answer 2
A marine cargo policy is stamped as per the provisions of the Indian Stamp Act,
1899.
Answer 3
Insurance under Institute Cargo Clauses (A) can also be called an ‘All Risks’
policy as it covers all risks of loss or damage to the subject-matter insured
except those specifically excluded.
Answer 4
For pure inland transit within the country by rail or road (not in conjunction
with overseas voyage), Inland Transit Risks Clauses drafted by the Tariff
Advisory Committee (TAC) are used.
Chapter Introduction
In this chapter, you will learn about institute trade clauses and some other
important clauses such as insurance cover for cargo carried in sailing vessels,
insurance of containers etc.
Learning Outcomes
Rena’s P&I risks were insured by the Swedish Club, a member of the
International Group of P&I clubs. P&I cover for liability claims included, loss due
to damage to cargo, loss due to environmental damage, and cost incurred for
removal of wreck.
A massive salvage operation was conducted for disposing the debris/scrap. This
salvage operation was carried out after an agreement between the shipping
company and salvage contractors under Lloyd’s Open Form standard contract
including SCOPIC Clause (Special Compensation P&I Club Clause), which
guarantees compensation to the salvage contractors, if they succeed in
preventing or minimizing damage to environment.
The ship’s liability cover was capped with the pollution liability being limited to
about $1.4 billion. Damage to the vessel was covered under hull and machinery
policy. Apart from basic cover, the policy also included cover for increased
value for the protection of the shipowner against discrepancy between the
insured value and market value of the vessel!
The policy also covered the costs incurred for rescue events. Cargo was insured
with different cargo insurers.
Whilst the Institute Cargo Clauses, along with other ancillary clauses, fulfil the
insurance needs of various types of cargoes of a general nature, there are a
number of commodities which require special clauses to provide for the
particular hazards and the usages of the trade concerned.
Standard Clauses have been drafted and agreed between the Institute of London
Underwriters (ILU) - now (IUA)* - and the concerned Trade Associations, in order
to bring about uniformity of practice in international trading operations for
selected trades and commodities. (* Please refer Chapter 4 – 1(a) International
Clauses.)
Following are some of the important Trade Clauses currently in use, with their
salient features highlighted:
These are agreed with the Federation of Commodity Associations for the
insurance of shipments of:
Cocoa,
Coffee,
Cotton,
Fats and Oils not in bulk,
Hides,
Skins and Leather,
Metals,
Oil Seeds and Sugar (raw and refined), and
Tea.
Much of the cover in these Clauses is the same as provided in the standard ICC
(A), (B) and (C), respectively. The only differences lie in the following:
c) The other difference is that the innocent assignee (for example, a bank,
advancing payment for the goods under documentary credit) or buyer is
protected against this exclusion.
These Clauses cover named perils similar to ICC (B) with an important
difference- namely; the Clauses extend the Fire and Explosion cover to include
heating even when caused by spontaneous combustion and inherent vice or
nature of the subject matter insured.
The cover is similar to Institute Commodity Trades Clauses (B) with the
following main differences:
b) The cover attaches only when jute is loaded on board the vessel.
Cargo of bulk oil can be insured either under ICC (C), (B) or (A) or it can be also
insured under Institute Bulk Oil Clauses (IBOC).
a) Cover
The cover provided under IBOC is identical to ICC (B) with additional cover
for the following:
b) Exclusions
Exclusions are identical to ICC but the exclusion about packing (4.3) does
not appear here as the bulk cargo is not supposed to be packed; so exclusion
is irrelevant.
c) Duration
Duration is from Tank to Tank and not warehouse to warehouse. The time
limit after vessel reaching final port is 30 days for the validity of the cover.
The clause contains a unique adjustment clause for leakage and shortage
claims.
ii. If policy contains Excess, it will take care of ordinary losses; otherwise
deduction for ordinary losses to be made.
There are other Trade Clauses in use, for example, Institute Natural Rubber
Clause, Institute Timber Trade Federation Clauses, various Institute Frozen Food
Clauses, etc. It is not intended to cover all Trade Clauses in this course. Suffice
it to say that once these clauses are adopted at Trade Association level, the
relevant Trade Trade Clauses become an obligatory item in the trade contract.
Others, who are not members of such Trade Associations, remain free to opt for
any insurance conditions that may be mutually acceptable.
TAC withdrew the Package Policies for Coffee, Cardamom and Rubber
Estates effective 1st April 2004. However, insurers do still write these
businesses as per their internal guidelines and so, the readers will get a fair
idea of the subject by going through the erstwhile provisions, as summarized
below.
Table 5.1
a) Term of policies
ALL policies issued shall be Annual Policies only based on estimated turnover
and value of the crop. Premium adjustment will be based on actual turnover
and actual realised value for the crop.
b) Risk covered
The risks covered and exclusions are as per Inland Transit (Rail or Road) –
Clause ‘A’. S.R.C.C. cover may be offered at prevailing Tariff rates.
c) Basis of settlement
The basis of settlement of claims shall be the market value of coffee insured
less unincurred expenses as per formula prescribed in the Tariff.
d) Duration of cover
The risk commences from the time of plucking in the Estate, whilst stored in
the Estate and continues whilst in transit to the Pulping House(s), whilst
undergoing pulping and drying, whilst in transit to curing House(s) and
during processing therein and whilst in transit to insured’s godown including
storage therein. The risk also continues during further transit until
delivered to buyers anywhere in India.
e) Period of storage
The total period of storage not to exceed 120 days in case of Type I Policy
and 60 days in case of other Policies.
Table 5.2
a) Term of policies
All policies shall be annual policies only, based on estimated turnover and
value of the Crop. Premium adjustments based on actual turnover and
actual realised value of crop.
b) Risk covered
Risks covered and exclusions shall be as per Inland Transit (Rail or Road) –
Clause ‘A’. SRCC cover at Tariff rates.
c) Basis of valuation
d) Warranties
Table 5.3
a) Term of policies
All policies shall be annual policies only based on the estimated turnover
and value of the crop. Premium adjustment is based on actual turnover and
actual realised value for the crop.
Risks covered and exclusions as per Inland Transit (Rail/Road)- Clause ‘A’
with duration of cover amended as under:
c) Duration of cover
The insurance attaches from the time Latex is collected from collection
centres/ estates named in the policy, whilst in transit to factory/smoke
houses located at specified places, whilst during course of processing in the
smoke-house or factory including storage therein and continues whilst in
transit to insured’s godown including storage therein and further continues
until delivered to buyers anywhere in India. The total period of storage at
various places not to exceed 120 days.
In case of Type II Policy, the insurance further continues during transit until
placed on board the oversea vessel.
d) Basis of Valuation
e) Declarations of Value
TAC withdrew this policy effective 1st April 2004. However, insurers do still
write these businesses as per their internal guidelines and so, the readers
will get a fair idea of the subject by going through the erstwhile provisions,
as summarized below.
Tea Crop Insurance Policies shall be issued gardenwise only. In case of factories
which do not have any gardens, policies may be issued factorywise.
a) Terms of cover
The insurance is against all risks of physical loss or damage to tea subject to
specified exclusions.
b) Risk covered
Inland Transits are subject to Inland Transit (Rail or Road) – Clause ‘A’ and
Inland Transit (Inland Vessels) Clause, as applicable. Overseas shipments are
subject to ICC (A) or Institute Cargo Clauses (Air), as applicable.
c) Exclusions:
iv. Any trade loss including chest allowance as agreed by the tea brokers.
vi. Any foreign acquired taint damage to teas arising from any established
and proven external cause, except such taint damage as caused by an
insured peril.
d) Duration of cover
The insurance attaches from the time the Green Leaf is plucked at the
insured’s estate, whilst being processed at factory and further continues
whilst in transit by approved conveyances and/or vessel until sold at auction
centers in India or overseas or until delivered to agents or buyers anywhere
in India or overseas, as applicable or until placed on board the oversea
vessel if the sale is FOB – all these subject to specified time limits at
destination points.
Cover against the risk of hail damage to standing Tea Crops may be granted
only as an extension of the Tea Crop Policy at additional premium. Such
cover may be granted limiting the liability of the Company either to 50% or
25% of agreed insured value of the crop so damaged, calculated on the basis
of 4 Kgs. of Green Leaf being equivalent to 1 Kg. of made Tea.
Amongst other matters, the Tariff lays down in detail the basis of valuation,
limits and conditions of settlement of claims and Bonus/Malus (loading) Scale
based on the loss ratio relevant for the particular renewal.
Test Yourself 1
For which of the following, insurance cover for “Transit Policies of Centrifuged
Latex” to be issued to traders/buyers is offered?
I. Rubber estates
II. Tea crop
III. Cardamom
IV. Coffee
a) Sailing vessels
There is a fair amount of traffic by Sailing Vessels which ply between Indian
ports and ports in the Arabian Gulf, Middle East and along the East African
Coast.
Onions,
Potatoes,
Mangoes,
Roof tiles,
Sawn timber,
Dates, etc.
Table 5.4
b) Exclusions
c) Duration of cover
The insurance attaches from the time of loading of cargo onto the vessel,
continues during the ordinary course of transit and ceases on landing of
cargo at the final port of discharge or 8 days after arrival of the vessel at
the final port of discharge, whichever occurs earlier.
d) Minimising losses
These clauses apply to insurance of goods during inland transit only, whether by
rail or by road. There are three types of cover available, as follows:
i. Risks covered
ii. Exclusions
The insurance attaches from the time the goods leave the warehouse for the
commencement of the transit and continues during the ordinary course of
transit, including customary transhipment, if any-
i. Risks Covered
ii. Exclusions
i. Risks covered
Fire
Lightning
ii. Exclusions
The insurance attaches with the loading of each package into wagon / truck
for the commencement of the transit, and continues during the ordinary
course of transit, including customary transhipments, if any, and ceases
immediately on unloading:
Note: Monetary claims against railway / road carriers and bailees must be
lodged within 6 months from the date of the railway / lorry receipts, as
prescribed by relevant statutes.
Other clauses, for example, Insurable Interest Clause, Duty of the Assured
Clause, Reasonable Despatch Clause, etc. are identical in the 3 sets of
Inland Transit Clauses and are substantially similar to those of the Institute
Cargo Clauses described earlier.
Note: This clause is being withdrawn from Indian Market as there is hardly
any demand for the same.
a) Risks covered
i. Strike,
ii. Locked-out workmen or persons taking part in labour disturbances,
iii. Riots and
iv. Civil commotions;
v. Any terrorist or any person acting from a political motive)
b) Exclusions
iii. Any claim for expenses arising from delay or other consequential or
indirect loss of damage of any kind.
d) Warranty
In case of road transports, all Inland Transit Policies shall be subject to the
warranty that the insurer’s liability shall be limited to 75 % of the assessed
loss:
ii. Where the Consignment Note is issued limiting the liability of the carrier
by special contract duly signed by the consignor, consignee or their duly
authorised representative or agent.
Of course this warranty would not apply where loss or damage occurred
whilst the goods were not in the custody of the carriers.
IC-67 MARINE INSURANCE 117
CHAPTER 5 OTHER IMPORTANT CLAUSES
The following changes have been introduced under new version of inland
transit clauses
ii. The air transits and carriage by couriers within India are also included
under ITC (B) and ITC (A).
iii. Packing exclusion is changed as per ICCs. I e exclusion does not apply if
packing done by independent agency.
4. Insurance of Containers
a) Inland
In case of inland transits the containers are treated like cargo and they are
insured under Inland Transit Clauses (ITC) generally ITC (B).
The policy may extend storage cover on weekly basis covering the containers
awaiting stuffing at the exporter’s premises.
b) Overseas
For overseas transits Containers are treated as Hull and insured subject to
Institute Container Clauses (1.1.1987), the scope of which is as follows:
c) Risks covered
All risks of loss or damage provided there is a fortuity and provided the risk
is not expressly included.
General average and salvage charges incurred to avoid a loss from any cause
except those excluded.
e) Limits clause
Each container is covered, including whilst on deck, within the sea and
territorial limits specified in the Schedule of the policy. Breach of these
limits is held covered at a premium to be agreed and subject to prompt
notice to the insurer.
f) Sale or hire
If the insured container(s) is sold leased or hired to a party not named as the
assured, the insurance in the container shall terminate automatically, unless
the insurer agrees in writing to continue the cover.
g) Claims
Claims for damage to a container, which is not a total loss, shall not exceed
reasonable cost of repairing such damage.
The deductible under the policy shall apply in respect of each container any
one accident or series of accidents arising from one event. The deductible
shall not apply to:
h) Schedule
v. Deductible.
The insurance is subject to the usual Sue and Labour clause. The insurance may
be cancelled by either party giving 30 days' notice.
Test Yourself 2
Which of the following clauses of Inland transit provides risk cover against
physical loss caused by fire only?
I. Clause A
II. Clause B
III. Clause C
IV. Clause D
Summary
a) Standard Clauses have been drafted and agreed between the Institute of
London Underwriters (I.L.U.) - now (IUA) - and the concerned Trade
Associations, in order to bring about uniformity of practice in international
trading operations for selected trades and commodities.
b) Institute Commodity Trades Clauses (A), (B) and (C) are agreed with the
Federation of Commodity Associations for the insurance of shipments of
Cocoa, Coffee, Cotton, Fats and Oils not in bulk, Hides, Skins and Leather,
Metals, Oil Seeds and Sugar (raw and refined) and Tea.
c) In Insurance cover for cargo carried in sailing vessels, the insurance attaches
from the time of loading of cargo onto the vessel, continues during the
ordinary course of transit, and ceases on landing of cargo at the final port of
discharge or 8 days after arrival of the vessel at the final port of discharge,
whichever occurs earlier.
e) Risks covered under Strikes, Riots and Civil Commotions Clause includes
Loss or damage to the subject-matter insured, caused by – strike, locked-out
workmen or persons taking part in labour disturbances, riots and civil
commotions; any terrorist or any person acting from a political motive.
Answer 1
Answer 2
Clause C provides risk cover against physical loss caused by fire only.
Self-Examination Questions
Question 1
What is the maximum period of storage for Type I policy under package policy
of coffee?
I. 30 days
II. 60 days
III. 90 days
IV. 120 days
Question 2
Question 3
What is the basis of settlement of claims in the case of package policy for
cardamom estates?
Question 4
What is the basis of valuation in the case of package policy for rubber estates?
Question 5
Which of the following is incorrect with respect to tea crop insurance policy?
Answer 1
Maximum period of storage for Type I policy under a package policy for coffee is
120 days.
Answer 2
Answer 3
The basis of settlement for package policy for cardamom estates - in the event
of loss before manufacture, 4 Kgs. of raw cardamom shall be considered equal
to 1 Kg. of dried cardamom.
Answer 4
Basis of valuation for package policy for rubber estates is invoice value plus
10%.
Answer 5
In the case of crop insurance policy, the insurance attaches from the time the
green leaves are plucked at the insured’s estate. Hence, statement III is
incorrect.
TYPES OF COVERS
Chapter Introduction
In this chapter, we will discuss the different types of covers available in marine
insurance in India. We will also briefly learn about insurance covers available
internationally in marine insurance.
Learning Outcomes
1. Specific policy
Specific policies cover specific transits only, on case to case basis and, as many
policies are taken for as many dispatches. As per Indian market practice the
cover is to be arranged before commencement of transit; so the policy is to be
taken in advance.
However, there is no compulsion on the part of the Insured to insure all the
consignments or stick to only one company for insuring all his consignments. He
can change insurance companies and if he so wishes, may not insure at all.
When there are many transits during a period of time, it is very difficult to
control the operational part, as it is not easy to arrange for many policies
before commencement of the individual transits. By mistake, if any insurance is
wrongly taken or not taken, there may not be any scope for rectification.
The rates, terms and conditions are also not fixed; in fact, they will vary with
market conditions, seasons etc., and till insurance is arranged, there is no
certainty that the cover will be granted. Insurers may refuse to grant the cover,
which means that there is no continuity either.
2. Open covers
Definition
Limit per location: The Location Clause seeks to limit the value of
pre-shipment accumulation which may happen, say, because of
strikes or labour disturbances in the port area. Such accumulation of
cargo in a particular location may create for the insurers, a
catastrophic exposure in the event of, say, a conflagration at the
docks or a hurricane, widespread riots, etc.
ii. The necessity of buying specific policies for each individual shipment is
obviated, resulting in savings in administrative costs both for insurers
and their clients.
iii. The premium rates are agreed at inception and this assists the insured in
identifying his costs of insurance right at the outset, which he could
include in his total costs for the goods under CIF contracts.
Following are some of the salient conditions that appear in an Open cover:
i. Basis of valuation
The basis of valuation is the prime cost of the goods plus expenses of
shipping; freight, for which the assured is liable and cost of insurance, plus
10 percent
iii. Declaration
The assured is bound to declare each and every shipment individually or in
batches and obtain a Certificate of Insurance from the insurer, as required,
either for individual shipments or for groups of shipments. The
Certificates/Policies issued against declarations will bear stamp duty and
show appropriate premium.
Unintentional failure to report shipments will not void the open cover and
such shipments will be held covered. However, should the assured wilfully
fail to report shipments (he may do so when the shipments have arrived
safely), the open cover, at insurer’s option, will become null and void as to
subsequent shipments.
The insurer has the right at any time during business hours to inspect the
records of the assured as respect shipments coming within the terms of the
open cover.
v. Under-deck warranty
vi. Cancellation
3. Open policies
i. The cover under an Open Policy ceases on expiry of one year from the
date of its issue, or, exhaustion of the total sum insured prior to the
expiry of the Open Policy period of 12 months, whichever first occurs. If
the sum insured is likely to be exhausted prior to the expiry of the Open
Policy period of 12 months, it may be increased by issuing an
endorsement and charging appropriate extra premium.
ii. An Open Policy is usually issued for insurance of goods dispatched within
the country by rail/road/air freight/registered post parcels.
iii. It is issued on the standard form of the policy subject to applicable rates
and clauses.
iv. Premium is worked out and charged on the total sum insured.
i. Basis of valuation: Invoice cost of goods, the freight for which the
insured is liable, and the cost of insurance, plus 10%.
ii. Inspection of records: The insurer will have the right at any time during
business hours to inspect the insured’s records of dispatches made within
the terms of the Open Policy.
iii. Per conveyance limit: Warranted that the limit of insurer’s liability in
respect of any one accident or series of accidents arising from the same
event shall not exceed a specified sum, any one rail/road/air/postal
dispatch transit, as applicable.
Declarations must be made in the order of dispatch. They must comprise all
consignments within the terms of the Open Policy and the value of the goods
dispatched must be honestly stated; but an omission or erroneous
declaration may be rectified even after loss or arrival, provided the omission
or declaration was made in good faith.
Where a declaration of value is not made until after notice of loss or arrival,
the policy must be treated as an unvalued policy as regards the subject-
matter of that declaration (i.e. the prime cost of the goods plus charges
actually incurred and for which the assured is liable).
4. Annual policy
Annual Policy (AP), the period of which is 12 months, is issued to cover goods
belonging to the assured or held in trust by the assured, not under contract of
sale or purchase, which are in transit by rail or road from specified
depots/processing units to other specified depots/processing units.
a) It is warranted that:
i. The depots from which the transit commences and at which the transit
ends are owned or hired by the assured and;
ii. The insured goods are owned by the assured or held in trust by him
continuously throughout the period and course of the transit.
If several specified transits are involved, the aggregate sum insured shall be
the sum total of the aggregate maximum estimated value on rail/road at any
one time for each of the specified transits. All these are subject to minimum
limits of sum insured, as stated below:
Table 6.1
Percentage of
Single carrying
Distance of specified transit estimated
limit
turnover
e) Rating
i. Minimum rate of premium for the basic cover shall be 30 times the single
journey rates. Wider than basic cover may be granted subject to
specified additional premium.
f) Reinstatement
i. The sum insured shall stand reinstated on a valid claim arising, subject
to payment of pro-rata additional premium on the reinstated amount by
the assured, counting from the date of the loss, till the expiry of the
insurance.
ii. Total liability of the insurer during the policy period shall not exceed
twice the sum insured stated in the Annual Policy.
a) General regulations
iii. The insurance should be granted only to the party in whose favour the
import licence has been issued or officially endorsed. Such policies may
also be issued in favour of “actual users” who purchase from recognised
Export Houses under the Export Promotion Scheme, provided an
allotment letter/certificate from a recognised Export House is produced
as a proof. Alternatively, the policy issued in favour of the Export House
from which the goods have been purchased may be assigned in favour of
‘actual users’.
iv. The scope and duration of the cover shall be identical to that of the
original cargo policy.
vii. No claim shall be paid for Duty and Increased Value Insurances unless the
claim under the CIF value insurance policy is payable and proof of
liability for loss under that policy shall be furnished to the insurer. This
provision need not apply to cases where CIF value is insured overseas
due to contractual obligations.
b) “Duty” insurance
ii. General Average, Salvage and/or Salvage Charges arising from any
casualty occurring prior to Duty becoming payable.
iii. The Sum Insured for Duty shall be adjusted on the basis of actual
assessed Duty and the policy shall be one of pure indemnity and subject
to the “Duty Insurance Clause”.
iv. A “Duty” Policy is not a valued policy as defined in the Marine Insurance
Act. Claims are payable on the basis of actual Duty paid or on the basis
of the Sum Insured, whichever is less. In ascertaining the amount of
claim recoverable, credit should be given for any rebates or refund of
Duty which may become allowable.
v. The rate of premium for insurance of Duty shall be 75% of the rate
charged (including 75% of the applicable extras and 75% of War and SRCC
rates) for covering the CIF value of the cargo itself. Where CIF insurance
is effected with another insurer, the rate of premium for covering
“Duty” shall be 75% of the appropriate CIF value insurance premium rate
of the insurer covering “Duty”.
vi. The assured should lodge a claim with the Customs Authorities within the
stipulated time (6 months from the date of payment of Duty) for refund
of Duty, where admissible, and with carriers or others as applicable, and
any refund obtained should go to reduce the claim under the policy.
ii. This is not a valued policy as defined in the Marine Insurance Act. If the
total insured value under the cargo policy covering CIF value, the Duty
policy and all Increased Value Policies together, shall exceed the market
value of the goods at destination, then the claim payable together shall
not exceed the specified proportion of the market value of the goods at
destination.
iii. On the other hand, where the total sum insured under the CIF value
insurance policy, Duty policy and all policies for Increased Values is less
than the market or realisable value of the cargo in good condition at
destination, the assured shall be considered to be his own insurer to the
extent of such shortfall in the sum insured.
iv. Thus, the insurance shall not be for an agreed value but shall be for an
amount not exceeding the actual difference between the market value
at destination on the date of arrival of the goods in India, and the total
of CIF value plus Duty, subject to establishment of a higher market value
or controlled price as notified by appropriate statutory authority.
v. The assured is required to bear 25% of the claim amount payable under
this component of the policy.
vi. Increased Value insurance shall not be granted for more than 100% of the
CIF insurance, except in exceptional circumstances.
vii. The rate of premium shall be 100% of the normal rate applicable to CIF
insurance.
When the terms of sale are FOB, the insurance is arranged by the buyer
overseas for his own account and benefit. Risk under the buyer’s policy
commences on loading of the cargo on the overseas vessel, because it is at that
juncture of transit that risk passes from the seller to the buyer.
The buyer’s policy thus does not protect the seller in the absence of any
specific agreement to do so. The seller or exporter, therefore, has to bear the
risk of loss or damage to his goods from the time they leave his warehouse till
such goods are loaded on the overseas vessel.
Exporters shipping goods under FOB or C&F terms of sale, can protect their
interests by obtaining following insurance covers:
b) If the cover is subject to Inland Transit (Rail or Road) – Clause ‘B’, that
is, Basic Cover and, if loading is done mid-stream by craft, raft or
lighter, the insurance will also cover loss or damage reasonably
attributable to:
c) Shut-out cargo: Shut-out cargo relates to goods which arrive too late for
a vessel at a loading port or else the goods are not loaded because the
vessel has a full cargo load. Goods which could not be loaded on the
designated vessel for some reason or other and are therefore detained at
the port warehouse or docks or shut-out mid-stream due to strike or
lock-out, require further extension of cover at additional premium.
When goods are returned to shipper’s warehouse involving Rail/Road
transit, appropriate Inland Transit cover may be granted for the return
journey at additional premium.
Under FOB exports insurance, the basis of valuation is invoice value (FOB) +
10%. But there are many cases where the exports are made on less than market
value.
If the loss occurs before shipment, the insurance company will pay loss on
proportion of invoice value. This may not provide full indemnity, as the
attraction for exporting at less than market value is to earn on export
incentives, which are earned only if the cargo is exported.
So, in the event of loss, the insured gets full indemnity. But the insured has to
prove that he has lost export incentives by documentary evidences.
Sellers under FOB and C&F contracts may effect a contingency insurance to
cover their interest, if the consignee refuses damaged goods or is unable to take
delivery by paying for the goods because of insolvency.
It has been explained that when goods are sold on FOB or C&F terms, insurance
on the goods is effected by the buyer to cover the buyer’s interest. In the
absence of a specific arrangement, the buyer’s policy does not cover the
interest of the seller.
b) If, however, such goods are lost or damaged, the situation is much
worse for the seller – unless he has made provision for such contingency –
because he will have the double handicap of an uninsured loss to
unwanted goods.
Some risks of such rejection of goods are covered by the Credit Insurances,
granted by Export Credit Guarantee Corporation of India, but they are
concerned only with the financial aspects. They are not concerned with any loss
or damage suffered by the goods. Physical loss or damage can be covered only
by marine insurance. So, it is advisable for these contingent risks to be insured
when goods are sold on FOB or C&F basis.
One method of covering these contingent risks is for the seller to effect a
special contingency insurance called “Sellers’ Interest Contingency
Insurance”, to cover all his FOB and C&F shipments. Often this contingency
insurance is combined with the insurance covering the goods from the seller’s
warehouse until they are loaded on board the ship at the port of shipment.
Thus, during the pre-shipment transit, the seller has insurance against the risks
of transit, and, after loading, the insurance remains in suspense. If the sale is
repudiated by the buyer during the transit, the Sellers’ Risk Insurance re-
attaches retrospectively to the commencement of the voyage, and any loss or
damage by the insured perils is recoverable.
However, it should be remembered that the insurance itself still covers only the
risks of physical loss or damage. The extra expenses incurred by the seller
following a reversion of the goods to him are not covered.
Example
Warehousing charges and the cost of re-shipping the goods are not covered.
Depending on the reason for the repudiation of the sale by the buyer, these
expenses may be recoverable from insurers covering the Credit risk, namely,
the Export Credit Guarantee Corporation of India.
It is warranted that the insured shall not change the terms of the contract of
sale, subsequent to the operation of a peril insured against, for the purpose of
securing indemnity under the policy. This insurance is not assignable except to a
banker operating in India.
The Policy prohibits disclosure of its existence to any other party – the buyer in
particular. An important underwriting feature of this insurance, which an
underwriter should weigh carefully is the increased moral hazard inherent in
this type of coverage, including the danger of a mutually profitable collusion
between the seller and the buyer.
This makes a careful appraisal of each proposal very essential. For this reason,
policies covering sellers’ interest contingency risks may be issued to known
valued clients only.
The cover under the SSRI Policy takes into consideration the requirements of
the consignor of goods, for insurance, to protect his goods during storage at
destination railway yard or carrier’s premises, pending clearance by the
consignees on termination of cover under an Open Policy.
This cover may be granted to the consignor in conjunction with an Open Policy
covering the transit of goods by rail or road.
a) Risks: Risks under this Policy shall be similar to those under the Open
Policy, except in case of SRCC risks, where riot, strike and malicious
damage cover would be granted as per the provisions of the erstwhile All
India Fire Tariff. Insurance shall be granted by a separate policy
indicating the reference number of the corresponding Open Policy.
f) Sum Insured: As may be fixed by the client but not less than 10% of the
estimated annual dispatches to be covered under the Open Policy, or
Rs.20 lakh, whichever is higher.
g) Limit of liability any one location: As may be fixed by the insured, but
not exceeding 10% of the Sum Insured under the SSRI or Rs.1 crore,
whichever is lower.
i. Inward Transit shall commence from the time goods are cleared from the
port/airport and taken charge of by the licensee or his agent and shall
continue during the ordinary course of transit by rail/road/air, including
customary transhipment, if any, until delivery to the notified
Warehouse/Processing House named in the Licence.
ii. Storage & Processing Risks shall be covered only at the Processing
House(s) named in the Licence.
iii. Outward Transit shall commence from the time the goods are dispatched
from the warehouse of the Processing House(s) mentioned in (b) above
and shall continue during ordinary course of transit by rail/road/air until
delivery to the registered port/airport or until loaded on board the
vessel or LASH barges (including sling loss) or until the goods are
delivered to the Airlines or until expiry of 2 weeks after arrival of the
goods at the port/airport, whichever shall first occur.
i. Section (a): Market value of the entire raw materials imported as per
the Licence.
ii. Section (b): As may be fixed by the insured but not less than 20% of
the Sum Insured under Section (c).
Market value of the goods or Sum Insured, whichever is less, is the basis of
indemnity.
Sum Insured under this Section shall stand reduced by the amount of loss
paid unless pro-rata extra premium is paid to reinstate the Sum Insured.
c) Scope of cover
For Sections (a) and (c): All risks of loss or damage as per the Inland Transit
(Rail or Road) – Clause ‘A’ or Institute Cargo Clauses (Air), as applicable.
Normally, during the transit period, if cargo comes within control of the insured
and/or their agents, the cover ceases. Storage, thereafter, is to be covered
under storage (Fire) policy and transit, thereafter, to be covered after pre-
dispatch survey under marine inland transit policy.
Basic rate for transit +50% (multi transit) + 0.01% per week or part thereof
(Storage) / 0.03% for per week or part thereof (process).
The policy covers goods against physical loss or damage while in Insured’s
control anywhere in the global supply chain, in transit, in storage as company
owned inventory.
The policy combines traditional marine insurance and Fire & Allied perils
insurance
The policy covers from the time raw materials are in transit upto delivery of
final goods to the buyer’s place, including all incidental and non-incidental
storages.
Generally, there are no time limits for storage periods and cover is like “cradle
to grave”. Many underwriters restrict storage cover to Fire and allied perils and
burglary.
This is like an open policy but without any obligation on part of insured to make
periodic declarations and pay the premium on value of goods in transit.
In this policy there is no need to make periodic declarations as Full Annual Sales
Turnover (or projected turnover) is covered for which the premium is paid in
advance.
Secondly the basis of transit is not the value of the goods but the sales
turnover. So value of goods in transit and value on which premium charged, are
two different aspects and not related to each other.
b) Other features
i. There is no time limit anywhere and the cover is available upto property
reaching final site.
ii. Time excess of 30 days.
iii. Indemnity for loss of profits. Cargo and other losses are not covered.
iv. Only one claim per project. All delays are to be combined, non-insured
delays are excluded, and from that figure, excess of 30 days is excluded
and the loss of profits for the balance days is paid.
c) Exclusions
The cover is available for imports on CIF, CIP (Carriage and Insurance Paid to) or
other similar terms of purchase. When the loss is not covered under the Seller’s
Policy, which is assigned to the buyer, this policy pays subject to its terms.
Pre-shipment losses (concealed damages) which are not known at the time of
shipment but are subsequently proved to have happened before shipment, are
also covered.
a) Important conditions
As the risk is much less than normal marine insurance cover; premium of
around 1/3rd of normal rates is charged.
Test Yourself 1
I. Specific policy
II. Open policy
III. Annual policy
IV. Package Policy under Duty Exemption Scheme
B. International covers
When freight is on ‘to pay’ basis, invoice will not contain freight charges and
accordingly it is not insured with cargo value.
For some bulk cargoes like timber, freight is payable only when earned (cargo
reaches) on arrival.
Freight may be insured separately under this policy, but the cover attaches only
on cargo discharged i.e. when the freight becomes payable.
ii. When War and Strikes cover are taken as “Add Ons” Institute War
Clauses and Institute Strikes Clauses are attached to the Policy.
iii. War & Strikes Clauses cover only loss or damage to the cargo because of
War and Strikes perils. They do not cover expenses arising out of War or
Strikes etc.,
iv. In the event of port strike or war, nearby ship may have to be diverted
or voyage may be terminated- extra expenses will then be incurred by
the insured for onward carriage of cargo.
b) Special features
ii. Policy contains Non-cancellation Clause, i.e. once the cover is taken, it
cannot be cancelled by the insured.
a) This policy is different than the increased value insurance policy which is
commonly used in India.
b) The policy is taken mainly for commodity trade where sales on high seas
is very common.
c) When during the voyage, the high seas sales take place and with
successive sales, if the price of the commodity increases, the purchaser
takes policy for difference in the value i.e. his purchase price and the
amount of insurance policy assigned to him.
d) In case of loss or damage, the final buyer will claim under all assigned
policies and policy taken by him independently, if any.
Test Yourself 2
Which international policy is taken mainly for commodity trade where sales on
high seas is very common?
Summary
a) Specific policies cover specific transits only, on case to case basis and, as
many policies are taken for as many dispatches. As per Indian market
practice the cover is to be arranged before commencement of transit; so the
policy is to be taken in advance.
c) An Open Policy is usually issued for insurance of goods dispatched within the
country by rail/road/air freight/registered post parcels.
e) When the terms of sale are FOB, the insurance is arranged by the buyer
overseas for his own account and benefit. Risk under the buyer’s policy
commences on loading of the cargo on the overseas vessel, because it is at
that juncture of transit that risk passes from the seller to the buyer.
f) Sellers under FOB and C&F contracts may effect contingency insurance to
cover their interest if the consignee refuses damaged goods or is unable to
take delivery by paying for the goods because of insolvency.
g) The cover under the SSRI Policy takes into consideration the requirements of
the consignor of goods for insurance to protect the goods during storage at
the destination railway yard or carrier’s premises, pending clearance by the
consignees on termination of cover under Open Policy.
h) Multi Transit Policy is to be issued which can cover transit, storage/ process
and transit under the same policy without any break in cover.
Answer 2
Self-Examination Questions
Question 1
Which of the following is not a policy, but is an agreement, whereby the insurer
undertakes to insure all shipments declared by the assured?
I. Specific policy
II. Open cover
III. Exports incentive insurance
IV. Multi Transit policy
Question 2
Which of the following is incorrect with respect to ‘increased value insurance’?
Question 3
I. Rs 1,000
II. Rs 5,000
III. Rs 10,000
IV. Rs 15,000
Question 4
, the period of which is 12 months, is issued to cover goods belonging
to the assured or held in trust by the assured, not under contract of sale or
purchase, and which are in transit by rail or road from specified
depots/processing units to other specified depots/processing units.
I. A specific policy
II. An open policy
III. An annual policy
IV. A multi transit policy
Question 5
What is the notice period for cancellation of ‘open cover’ for marine risk?
I. 15 days’ notice
II. 30 days’ notice
III. 40 days’ notice
IV. 48 days’ notice
Chapter Introduction
In this chapter, you will learn about the categorization and classification of
vessels. You will also learn about various hull insurance policies, subsidiary
interests and various Institute Clauses related to hull covers.
Learning Outcomes
A. Classification of vessels
B. Insurance of hull and machinery and subsidiary interests
MT Omvati Prem was the name of the tanker which was contracted for carrying
85,000 metric tons of crude oil from Iran to India in 2012 following the European
sanctions, when European insurance companies declined to provide third party
insurance cover.
a) It was the first Indian ship to carry oil after European sanctions.
b) India and Japan jointly provided government backed insurance cover to
ships carrying Iranian crude oil and bypassed European sanctions.
Mercator, the owner of MT Omvati Prem, insured the vessel with United India
insurance company for $50 million to protect the ship against physical damage.
A further Insurance cover of $50 million was taken for P&I risks to cover the
vessel against pollution damage, cargo damage, wreck removal and personal
injury claims.
A. Classification of vessels
Hull insurance refers to the insurance of hull and machinery and other interests,
known as subsidiary interests, of ocean-going vessels, fishing vessels, sailing
vessels, trawlers, barges etc.
Subsidiary interests are generally freight and disbursements. Hull insurance for
vessels when they are under construction is called “construction / builders’
risks” insurance. Also, there are certain special types of hull covers like
Charterer’s Liability Risks, Ship Repairer’s Liability Risks, etc. Relatively recent
development of hull insurance is insurance of Oil Drilling Rigs and Offshore Oil
Platforms as well as allied construction risks.
Smaller crafts, generally of local origin, built of steel, wood or fiber-glass which
may or may not be classed. Normally such crafts are used in inland waters,
coastal waters or within port areas. Earlier, when IRS was not a full-fledged
classification society, classification for the smaller vessels with IRS warranted
prescribed discounts. Now as IRS has become a full-fledged classification
society, discount, if any, is to be decided by the concerned insurer.
i. Hull Policies can be issued either on time basis or voyage basis. As per
the Marine Insurance Act 1963, a time policy cannot be issued for a
longer period than 12 months.
ii. The subject matter of Hull Insurance is the Vessel or Ship. Most of the
ships are of steel construction and are mechanically propelled; however
small vessels may be of wooden constructions.
iii. Registration: Under Merchant Shipping Act 1958, every Indian ship,
exceeding fifteen tons net and employed solely in navigation on the
coast of India, is required to be registered and a certificate to that
effect is to be obtained from Director General of Shipping.
iv. Tonnages:
The Gross Tonnage (GT) of a ship comprises the moulded volume of all
enclosed spaces of the shipments to which a formula is applied in
accordance with the 1969 International Convention of Tonnage
Measurements of Ships. No unit of measurement is assigned to it and the
figure attained is simply referred to as the ship's "Gross Tonnage" (GT).
d) Classification
e) Types of vessels
a) Ocean-going vessels
These vessels are further classified into the following main categories.
They generally measure more than 500 GT and include container vessels,
barge carriers, Lighter Aboard Ship (LASH), Roll On - Roll Off (RO - RO) ships,
Refrigerated ships (Reefers), Car Carriers, Livestock Carriers, etc.
These operate as per advertised schedules. At any given port, they will not
wait beyond a fixed time because they have to maintain an advertised time
schedule. So their services are more reliable. They are also better managed.
Investments in liner services are more and, so, to protect the investment,
the owners have to employ efficient crew. They command higher than
market freight because of their reliability in services. Insurance companies
accept liners with higher age for insurance (generally 25 years) without any
extra premium.
Tramps, on the other hand, do not operate on any advertised route and
generally they are engaged in chartered trade. They go wherever the cargo
is available, as time for completion of any voyage is not important. They
operate seasonally, so crew is also not permanent and are not very well paid
either. So higher standard of efficiency cannot be expected from them.
Insurance companies accept tramps for insurance at normal rates if their
age is not more than 15 years. For older vessels extra premium is charged
for both cargo and hull insurance.
Tanker vessels are liquid bulk carriers. They carry liquid cargo like oils,
chemicals etc. The stability of vessel is more important because of the
nature of the cargo they carry. Generally they are single bottom. Tanks have
many compartments instead of single compartment, to maintain the
stability of the vessel. The cargo has corrosive effect and so the life of
tankers is much lesser than other vessels. Cargo Underwriters charge normal
premium for cargo being carried by tankers upto 10 years of age and above
that, extra premium is charged.
The term VLCC (Very Large Crude Carriers) is used for the tankers of the size
of 75,000 to 1,50,000 DWT Tons. The term ULCC (Ultra Large Crude Carrier)
is used for tankers of the capacity of 1,50,000 Tons DWT to 3,00,000 Tons
DWT.
These large vessels cannot enter ports with insufficient draught. There are
also difficulties in passing through narrow areas like Suez Canal and may
have to take longer sea routes instead. Maneuvering problems are also
there. At the time of heavy weather there may be tremendous stress on the
body of the vessel and lack of repair facilities at many ports is also a
problem connected with these vessels.
These are used for carriage of dry as well as liquid bulk cargoes. They are
classified as OBOs (Oil Bulk Ore or Ore Bulk Oil Vessels) and are generally in
the range of 70,000 to 1,50,000 and 1,50,000 to 2,50,000 Tons DWT
respectively. They are used for seasonal trades where dispatch of liquid or
dry cargo is only for the part of the year. For remaining part the vessels can
be switched over to other types of use -- liquid or dry cargo.
These are specially built to carry containers and are normally engaged in
liner trade. They also have sophisticated loading and discharge facilities.
They generally carry containers up to 4 tiers and should have adequate
lashing and securing facilities. Some general cargo vessels also can carry
containers, in addition to normal cargo. For such vessels, engaged in liner
operation, upto 30 years of age, normal premium is charged.
These ships carry containers in the forms of barges. Such ships have massive
cranes and elevators for loading and unloading operations. At destination,
barges are lowered into the water and towed to the shore.
A RO-RO vessel does not have any cranes. The vehicles like lorries, trailers
etc. are driven on board with the cargo and once they reach the destination,
they are driven out. Cars and other vehicles also can be transported by
them. These vessels are very useful where there is inadequate handling
facility. Stowage of vehicles is very important to maintain stability of the
vessel.
These are cruises and pleasure crafts carrying passengers to places of tourist
interest. They operate on modern navigational systems like satellite
navigation, GP System etc. Some of the biggest and well-equipped ships in
the world are Passenger Ships.
b) Sundry vessels
i. Coastal Vessels
They operate in coastal waters, plying between ports and thus cater to an
important sector of India’s trade. These are generally small in size and many
are engaged in carriage of bulk cargoes. They operate as Liners or Tramps.
Being smaller in size they do not have to worry about high stress during
heavy weather.
152 IC-67 MARINE INSURANCE
INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7
These are built of steel, fibreglass etc.as compared to wood in the days
gone by. There may be combination of steel and fibreglass . Depending on
their construction, they can operate in inshore waters as also in the open
seas. So the hazards of both types are associated with them.
iii. Dredgers
Dredgers are used mainly to dig up sand, mud, gravel etc. from the sea,
river, canal etc. bottoms in order to deepen channels and make them
navigable. The crafts are fitted with the machinery and appliances for
dredging work.
iv. Barges
v. Launches
Test Yourself 1
Which of the following types of vessels is best suited for carrying cargo like iron
ore?
I. Barge carrier
II. Dry bulk carrier
III. Liquid bulk carrier
IV. Lighter Aboard Ship
Policy covers hull, machinery, equipments and stores etc. on board the
vessel. It does not cover cargo. The cover granted is for:
b) Disbursements insurance
c) Freight insurance
Insurance premium under hull policy is insured separately. The policy covers
loss of premium against Total Loss and Constructive Total Loss. The
indemnity reduces on monthly pro rata basis i.e.1/12th per mensem.
e) Return of Premium
Under an H&M policy, proportionate premium is returned for lay ups of the
vessel, but only at the end of the policy and that too if the vessel is not a
total loss during the policy period. This loss of premium in case of total loss
can be insured under this policy but in practice, this insurance is not
granted.
A ship repairer needs to cover his legal liability towards loss or damage to
vessels under his care, custody and control, including whilst being
worked upon, being towed etc. The cover is granted as per Ship Repairers’
Liability Clause as per the wording normally in vogue in the London Market.
The cover is granted as per the Institute Clauses for Builders’ Risks 1.6.88
and covers the full period of construction from the time keel is laid, upto
the completion of vessel as also to include the trial run and launching. The
policy may be longer than 12 months and sum insured should be actual
completion value. The premium has two components – one is chargeable
upfront on the completed value and the other one is chargeable for the
construction period at a monthly rate.
Loss of Hire policy covers the loss of hire suffered by a shipowner if the
vessel is laid up for repairs following a loss covered under H&M Insurance
Policy. The cover is given when the vessel is under charter. The cover is for
other than Total Losses. There is a special condition under the policy making
it mandatory to commence repairs within 12 months of expiry of the policy.
The policy covers the charterers’ loss of profits over the period of charter, if
the vessel is time-chartered or voyage-chartered, if the vessel becomes
total loss during the period of charter. The loss of vessel gives rise to loss of
profits for the charterer that is covered under the policy.
Indian flag vessels can be insured under the Government War Risks Insurance
Scheme which is administrated by the General Insurance Corporation of
India. Policy can be issued by both private and public sector insurance
companies.
Institute Time Clauses – Hulls provide the widest cover – referred as “on full
conditions” -- for hull and machinery interests.
They contain 26 clauses and we will now study some of the more important
clauses.
These clauses have been subject to revision over the years. The Indian marine
hull market at present follows the 1.10.83 version although the Joint Hull
Committee in London (representing the International Underwriting Association
and Lloyd’s Underwriters’ Association) has issued a revised version of ITC-Hulls
dated 1.11.95. As there were certain provisions in the clauses which were not
acceptable to the shipowners, the Indian market has not accepted the same. In
2002 The International Hull Clauses were introduced which were amended in
2003. The latest version is effective from 1/11/2003. The Indian market mainly
uses the 1983 version of the clauses. Given below is an analysis of the 1983
clauses.
a) Perils covered
Clause number 6 specifies the perils in two groups: 6.1 and 6.2
Section 6.1: This insurance covers loss / damage to the subject-matter
insured caused by:
The perils contained in Section 6.1 of the clause are perils over which the
assured has little or no control.
Provided such loss / damage has not resulted from want of due diligence by
the assured, owners or managers
The perils enumerated in Section 6.2 of the clause are perils over which the
assured may have some control and for this reason are made subject to the
“due diligence” provision. The onus of proof is upon the insurers if they wish
to avoid a claim on the grounds of the assured’s want of “due diligence”.
This clause provides that general average and / or salvage will be paid if the
loss was incurred to avoid, or in connection with the avoidance of, an
insured peril.
This clause covers legal liability, which the assured may incur by way of
damages paid to the owners of the other vessel and cargo thereon, owing to
a collision between the insured vessel and the other vessel.
The insurers provide this supplementary cover to the assured (in addition to
the insurance on the vessel itself) to the extent of 3/4ths of such liability.
In no case shall the total liability of insurers exceed 3/4ths of the Sum
Insured, any one collision.
The insurers will also pay 3/4ths of the legal costs incurred by the assured,
with the insurer’s consent, in contesting liability or taking proceedings to
limit liability.
Exclusions
f) Sistership (Clause 9)
This clause provides that if the insured vessel is in collision with or receives
salvage services from a vessel under common ownership or management, the
assured's rights under the policy are assessed as if the other vessel was of
separate ownership.
The deductible shall not apply to a claim for total loss - actual or
constructive, of the vessel. However, when a sue and labour expense is
incurred but a total loss results despite attempts to save the vessel, the
deductible is not applied to sue and labour charges, nor to any expense of
service in the nature of salvage.
In the event of an accident, the assured must give notice to insurers and
also, if the vessel is abroad, to the nearest Lloyd's agent, so that the
insurers can arrange for a survey.
Under the clause, the insurer may veto a place of repair or repairing firm or
may decide, to which port or firm the repair is entrusted.
Insurers are also given the right to take tenders and when they exercise this
right, the assured is entitled to an allowance at the rate of 30% per annum
on the insured value for time lost between the dispatch of invitations to
tender and the acceptance of a tender.
i) Navigation (Clause 1)
The measure of indemnity for partial losses under ITC-Hulls is the reasonable
cost of repairs. Underinsurance does not affect the amount recoverable,
subject only to the sum insured being sufficient to cover the loss. The rate
of premium payable for insurance on “full conditions” (under which repair
costs are payable in full upto the insured value) is higher than that for
“limited conditions”, such as Total Loss Only.
For example, the clause provides that sum insured under Disbursements
Insurance cannot exceed 25% of the sum insured under H&M interest.
Disbursements are a shipowner’s costs in fitting out and provisioning the
vessels and towards other items of a nebulous or indescribable nature, but
which are very real in case of loss.
Similarly, the clause allows freight to be insured for time only upto 25% of
the Hull & Machinery value less any amount covered on disbursements.
l) Termination (Clause 4)
Unless the insurers agree to the contrary in writing, the insurance shall
terminate automatically, if any of the following occur during the policy
period:
Ownership or flag
Transfer to new management etc.
m) Other Clauses
ii. Returns for Lay-up and Cancellation (Clause 22) provides for pro-rata
return of premium:
When the policy is cancelled for reasons other than sale or transfer
or
When the vessel is laid up in port
iii. Clauses 23 to 26 exclude war, strikes, malicious acts and nuclear risks
a) Perils
i. Named perils (perils of the sea, fire, explosion etc.) plus “due diligence”
perils of latent defect, crew negligence etc.
ii. Cover for accidents in loading etc. and contact with satellites etc. not
subject to ‘due diligence’ proviso.
iii. Cover for common costs given at 50% where loss / damage caused by
burst boiler, broken shaft or latent defect
iv. Optional Additional Perils Cover provides cover for costs of correcting
the latent defect and repairing the burst boiler / broken shaft and the
remaining 50% of common costs.
b) Leased equipment
Cover for equipment not owned by the assured, but for which the assured is
responsible given as standard cover.
d) Pollution hazard
e) 3/4ths RDC
i. Cover for 3/4ths of insured value in respect of legal liability arising out
of a collision.
ii. Cover for legal costs limited to 25% of the insured value (save where
agreed in writing otherwise).
iii. Pollution exclusion does not extend to other vessel or property on other
vessel nor to an Art 13(1)(b) salvage award.
f) GA
Duty of assured to sue and labour and cover for charges properly and
reasonably incurred. No reduction where the vessel is underinsured.
h) Navigation
i) Continuation
j) Class/ISM
k) Management
CTL payable where costs of repair / recovery exceed 80% of the insured
value
m) Navigating Limits
The vessel shall not enter, navigate or remain in certain areas, between
certain times. Not expressed as warranties. Bering Sea Transit cover free.
Optional Covers:
n) Notice of claims
Institute Time Clauses – Hulls are used when a vessel is insured for a period
of 12 months or less. In case the insurance is for a particular voyage, then
Institute Voyage Clauses – Hulls are incorporated in the policy. These differ
from ITC – Hulls in the inclusion of “Change of Voyage Clause” (No. 2) and
the omission of some clauses which have provisions peculiar to the time
insurance only, namely Termination Clause, Breach of Warranty Clause, etc.
b) Limited covers
The ITC – Hulls provide the widest cover on hull and machinery interests.
Covers with ‘limited conditions’ are available, the examples of which are
given below:
i. ITC – Hulls – Total Loss, General Average and 3 /4 ths collision liability
(including Salvage, Salvage Charges and Sue and Labour)
ii. ITC – Hulls – Total Loss only (including Salvage, Salvage Charges and Sue
and Labour)
c) Insurance of freight
i. Concept of freight
“The term ‘freight’ includes the profit derivable by the shipowner from the
employment of his ship to carry his own goods or movables as well as freight
payable by a third party, but does not include passage money.”
The shipowner may also receive remuneration by hiring his vessel out to
another party who, in turn, will make a profit by carrying their own goods or
those of others. Such arrangements to carry cargo or hire a vessel for time
or voyage are embodied in contracts of affreightment, such as bills of
lading, time charters and voyage charters.
The shipowner obviously has insurable interest and so he can insure such
freight. The form of policy used for insurance of freight is the Hull form with
the Institute Time Clauses – Freight or Institute Voyage Clauses – Freight
attached to it.
The Institute Time Clauses – Freight and Institute Voyage Clauses – Freight
are identical except that the following clauses, which do not apply to
voyage insurances, are omitted from the Institute Voyage Clauses – Freight:
Continuation Clause
Termination Clause
Returns for Lay-up and Cancellation
The perils covered under both the Freight Clauses are the same as those
covered under the Perils Clause of Institute Time Clauses - Hulls and
Institute Voyage Clauses – Hulls.
Example
Example 1
Because of the provisions of this clause limiting the claim to the proportion of
the gross freight actually lost, the insured is entitled to only Rs. 1,00,000 and
not Rs. 1,25,000 (1/8th of Rs. 10,00,000). This explains why valued policies are
not used for freight insurances.
Example 2
This is a case of underinsurance. If the amount insured was Rs. 10,00,000, the
loss would have been recovered in full.
Partial loss may occur, for example, when there is a non-delivery of part of
the goods on which freight is payable on delivery. The Franchise Clause of
Institute Freight Clauses provides that partial loss is not covered if the
amount of loss falls below 3% of insurable amount.
Total loss of freight can occur when the cargo being carried is totally lost,
say by fire, and the shipowner consequently does not receive the freight due
to him under the contract. The same situation would arise if the ship and
the cargo were totally destroyed, say, by sinking in heavy weather.
Thus it is possible for the shipowner to arrange his main policy on Hull and
Machinery on full conditions (ITC–Hulls) for a lower sum insured and
additionally Total Loss Only Insurance on freight at a lower rate of premium.
Therefore, the disbursements warranty of ITC–Hulls restricts such sum
insured to 25% of sum insured on H&M Insurance.
“This insurance does not cover any claim consequent on loss of time,
whether arising from a peril of the sea or otherwise”.
This clause effectively excludes losses proximately caused by delay.
If a vessel is damaged and can be repaired, no claim can arise on the
ground that the vessel cannot be repaired in time to earn the freight.
Other documents, such as protest, log books, hull and cargo survey
reports etc.
Such vessels laid-up in port or other sheltered waters can be insured subject
to Institute Time Clauses – Port Risks. These conditions give cover very
similar to ITC–Hulls but wider in scope with 4/4ths Collision Liability and a
certain degree of P&I cover, generally referred to as Limited P&I.
Coverage
i. Fishing Gear (Clause No. 15): No claim is payable for loss / damage to
fishing gear unless:
ii. Collision liability (Clause No. 18): Unlike the similar clause in ITC-Hulls,
this covers 4/4ths Collision Liability.
iii. Protection and Indemnity (Clause No. 20): Various Protection and
Indemnity (P&I) risks are covered under this clause. There is no P&I
Clause in ITC-Hulls.
P&I Clubs are by far the largest and most important of the mutual marine
insurance associations, because vessels and freight are mainly insured with
underwriters in the open insurance market and the P&I Clubs are, therefore,
ancillary to the marine insurance market. Almost all the owners of ocean-
going ships obtain insurance for their liabilities to others from a P&I Club –
which is essentially a non-profit association for collective self-insurance.
Life salvage
Damager to docks, piers, jetties and other fixed and floating objects
other than ships
It will be observed that the above are not covered by the policies issued in
the open marine market.
Each P&I Club is controlled by a Board of Directors elected from among its
shipowner and charterer members, but day-to-day operations are entrusted
to full-time professional managers, who, among other duties, determine the
amount to be paid by each member, help members to deal with the claims
made against the Club and give advice on a wide range of shipping
problems.
There are no P & I Clubs in India, and hence a shipowner in India may enter
in a P&I Club abroad.
Test Yourself 2
The Government War Risks Insurance Scheme under which Indian flag vessels
can be insured is administrated by .
Summary
a) Hull insurance refers to the insurance of hull and machinery and other
interests, known as subsidiary interests, of various vessels
c) Hull Policies can be issued either on time basis or voyage basis. The subject
matter of Hull Insurance is the Vessel or Ship.
d) Sea going vessels are classified into the following main categories:
Coastal vessels
Fishing vessels
g) Institute Time Clauses – Hulls provide the widest cover for hull and
machinery interests or in other words, they cover hull and machinery “on
full conditions”.
h) The Indian marine hull market at present follows the Institute Time Clauses
– Hulls 1.10.83.
i) ITC – Hulls Clause number 6 specifies the perils covered in two groups:
Section 6.1 and Section 6.2.
k) As per Deductible Clause (Clause No. 12), the specified deductible amount
is deducted from the total amount of claim caused by an insured peril
arising out of each separate accident or occurrence.
l) As per the Breach of Warranty Clause (Clause No. 3) the assured is held
covered in the event of a breach of warranty as to cargo, trade, locality,
towage, or salvage service.
m) The International Hull Clauses 1/11/2003 have clauses, inter alia, with
regard to:
n) Institute Voyage Clauses – Hulls 1.10.83 are used when the insurance is for a
particular voyage.
p) Protection & Indemnity (P&I) Clubs are by far the largest and most
important of the mutual marine insurance associations, because vessels and
freight are mainly insured with underwriters in the open insurance market
and the P&I Clubs are therefore ancillary to the marine insurance market.
q) Almost all owners of ocean-going ships join P&I Clubs, which are essentially
non-profit associations for collective self-insurance a variety of situations.
Answer 1
A dry bulk carrier is best suited to carrying cargo like iron ore.
Answer 2
The Government War Risks Insurance Scheme under which Indian flag vessels
can be insured is administrated by the General Insurance Corporation (GIC).
Self-Examination Questions
Question 1
I. Barge carrier
II. Dry bulk carrier
III. Liquid bulk carrier
IV. Lighter Aboard Ship
Question 2
A hull policy issued on time basis cannot be for a period longer than 12 months,
as it is prohibited under .
Question 3
I. Barge carrier
II. Dry bulk carrier
III. Lighter Aboard Ship
IV. RO-RO Ship
Question 4
I. The cover should be for 12 months and the sum insured should be the actual
loss incurred at the time of occurrence of an event leading to the loss
II. The cover should be for 12 months and the sum insured should be the actual
completion value
III. The cover may be longer than 12 months and the sum insured should be the
actual loss incurred at the time of occurrence of an event leading to the loss
IV. The cover may be longer than 12 months and the sum insured should be the
actual completion value.
Question 5
In the case of Institute Time Clauses – Hulls 1.10.83, if there is a claim then
with regard to Deductible (Clause no. 12), which of the following statements is
true?
I. If the amount of claim is more than the deductible, then only the amount
which is in excess of the deductible is payable
II. If the amount of claim is less than the deductible, then the entire amount is
payable
III. If the amount of claim is more than the deductible, then the entire claim
amount is payable
IV. If the amount of claim is more than the deductible, then nothing is payable.
Answer 1
Answer 2
A hull policy issued on a time basis cannot be for a period longer than 12 months
as that is prohibited under the Marine Insurance Act 1963.
Answer 3
Answer 4
In the case of Ship Builders’ Insurance, the cover may be longer than 12 months
and the sum insured should be the actual completion value.
Answer 5
V. If the amount of claim is more than the deductible, then only the amount
which is in excess of the deductible is payable
HULL INSURANCE-PART 2
Chapter Introduction
This chapter deals with the underwriting aspect of hull insurance such as
proposal form, other relevant documents, valuation, classification, rating and
other important factors related to underwriting.
We will also touch upon the IRDA guidelines regarding the use of Marine Hull
Manual for insurance of different types of vessels.
Learning Outcomes
A. Underwriting
B. Marine hull manual
In 2008, Bunga Melati Dua, a Chemical/Palm Oil Tanker was seized by Somalian
pirates in the Gulf of Aden during its voyage from Malaysia to Rotterdam, and
taken to Somalian coasts. A ransom was demanded for release of the vessel by
pirates.
Once the negotiations were complete, the ransom amount was paid by the
shipowners and the vessel was released by the pirates. It safely reached
Rotterdam, where cargo was safely discharged from the vessel.
Even though cargo was returned safely, cargo owners refused to take delivery of
cargo and instead filed for total loss claim on the policy.
The matter went to trial in the commercial court to decide whether the capture
by pirates rendered a vessel and its cargo either an Actual Total Loss (ATL) or
Constructive Total Loss (CTL).
The judgment on the matter was given in February 2010 and the trial judge
ruled that it was neither ATL nor CTL as both cargo owners and shipowners had
every intention of recovering the cargo and the vessel and so, negotiations
between shipowners and pirates had commenced soon after seizure of the
vessel to obtain release!
A. Underwriting
Underwriting of marine hull takes into consideration many technical and non-
technical aspects. Contrary to the practice for cargo insurance, hull
underwriters invariably use proposal forms.
1. Proposal Form
i. Proposal Forms for sundry hulls like Fishing Vessels, Sailing Vessels,
Dredgers, Inland Vessels, etc.
ii. Detailed Proposal Forms in respect of Ocean-going Vessels.
iii. Specialised Proposal Forms for certain types of policies e.g. Builders’
Risks Insurance, Ship Repairers’ Liability Insurance, etc.
i. Type of vessel, e.g. tanker, general cargo, dry bulk carrier, dredger,
passenger liner, container vessel, fishing vessel/trawler, etc.
ii. Construction of vessel (steel, wood, composite or fibreglass)
iii. Name of builders and place built
iv. Age of vessel (year built)
v. Tonnage (GT and DWT) or Break Horse Power (for Supply Vessels, Tugs
etc.)
vi. Dimensions (to verify the tonnage information) i.e. length, breadth,
draught, etc.
vii. Whether the vessel is equipped with (I) Twin Screws (ii) Double Bottom
and (iii) Collision Bulkhead.
viii. Method of propulsion and particulars of engine/machinery (main,
auxiliary or refrigerating).
ix. Particulars of fire extinguishing equipment.
Definition
Gross Tonnage (GT) indicates that the ship has been measured in accordance
with the requirements of the 1969 International Convention on Tonnage
Measurement of Ships. It is different from Gross Register Tonnage (GRT). GT is a
unitless index related to a ship's overall internal volume. It is calculated based
on the moulded volume of all enclosed spaces of the ship and is used to
determine things such as a ship's manning regulations, safety rules, registration
fees, and port dues, whereas the older GRT is a measure of the volume of
certain enclosed spaces.
Definition
i. Trade, the vessel is engaged in, and whether as liner or tramp. Trading
warranties and navigational limits.
ii. Nature of cargo usually carried.
iii. Whether single ship – “singleton” – or part of a fleet of two or more
vessels.
iv. Record of ownership and quality of management.
v. Whether the vessel is given on charter and if so, details.
vi. Whether the vessel is mortgaged for any loan, and if so, details and
arrears of repayment, if any.
vii. If laid up in monsoon, place and period.
The underwriter will also take into account prevailing repair costs and
underwriting experience of similar risks. Known losses are published regularly
in Lloyd’s of London Press and annually by the Institute of London Underwriters.
2. Supporting documents
Normally, along with the Proposal Form, following supporting documents are
called for:
Of prime importance to the underwriter is the value of the vessel proposed for
insurance. A marine hull policy is a valued policy. Therefore, the value
declared for cover must be adequate.
Underwriters are liable for the cost of repairing Particular Average or General
Average, damage irrespective of the insured or the actual value of the ship,
except that the insured value constitutes a maximum for any one casualty.
On the other hand, in the event of total loss of the vessel, the sum insured
becomes payable. With this in mind, the underwriter must remember that a
low valuation will produce a situation following a major casualty when a
constructive total loss (CTL) would easily be arrived at.
The normal method is to insure the ship for its current market value. However,
in case the ship is mortgaged to the government, it is necessary to insure for
the value fixed by the government for the purpose of insurance. Normally, the
underwriter insists on a Valuation Certificate from a recognized valuer, who
would normally be on their panel .
4. Classification of vessels
The main objective of ship classification is to promote safety at sea, for life, for
ships and their cargoes as also for the environment.
Ship Classification Societies establish standards, guidelines and rules for the
design, construction and survey of ships and of other marine structures.
The Classification Certificate is the document confirming that a ship has been
built according to the rules and standards of the relevant Classification Society,
and that it has both structural and mechanical fitness for its intended service.
Although such classification is not obligatory, it would be impossible to trade
without it in the modern world. Certainly an owner would be unlikely to obtain
insurance cover for his ship without meeting such standards.
Indian insurers were accepting their classification only up to Rs. 10 Crores per
vessel but now it has become a full-fledged member and so, its classification is
valid for any amount. .
6. Rating
Normally, every fleet starts with one vessel and over a period of time more
vessels attach to it. To start with, every vessel is rated individually, and that is
called Initial Rating. Twelve months later, when the time for renewal comes,
all vessels of the fleet are rated collectively, which is known as Renewal Rating.
At the time of Initial Rating, mainly, following factors are taken into account:
The underwriter has to fix a rate which should take care of the following
losses:
Total Loss
Particular Average i.e. accidental partial loss
General Average contributions
Collision liabilities
Salvage Charges and Sue and Labour Charges etc.
The two components are then combined to arrive at the overall rate that will
appear in the policy.
Definition
The Total Loss rate is a rate percent applied to the insured value of the vessel
and is thus conditioned mainly by the value factor of the ship.
The “ex TL” element of the risk is mainly determined by the size of the ship. It
is fixed as a certain amount, says Rs. 30/- multiplied by the Deadweight
Tonnage (DWT) or the Gross Tonnage (GT) of the vessel. Deadweight tonnage
represents a vessel’s carrying capacity in terms of weight and Gross Tonnage in
terms of volume. Therefore, they give a more reliable indication of the size and
earning potential of an ocean-going vessel .
GT is the volume of the interior of the vessel. With cruise/passenger vessels the
GT is more likely to be used for calculation. Since the purpose of these vessels
is to transport people, the vessel is devoted to cabin services and social
accommodation: as this varies greatly, the GT is the most consistent feature to
use in case of cruise/passenger liners.
Both the premiums are combined and the resultant premium, divided by the
insured value, is then expressed as a rate percent on that insured value, and
that single rate (called the “Slip Rate”) will be quoted to the client.
Example
Following example will illustrate how the rates are applied and the premium is
calculated:
Calculation of Premium
Thus, the premium payable is arrived at by applying the above rate to the
insured value of the vessel.
a) Renewal rating
During the tariff era, renewal rating for Indian fleets consisting of ocean-
going vessels was done as per an elaborate formula, which was largely based
on the London Market practice. The formula took into account various
factors viz. number of vessels in the fleet; their total sum insured; five
years’ premium and claims experience etc. The formula enabled one to
decide whether the rating level of the fleet needed to be enhanced,
reduced or left untouched i.e. allowed to continue “as expiring”.However,
following detariffing of hull business effective 1st April 2005, the insurers
can decide for themselves whether and what methodology to follow in this
regard.
7. Underwriting:
a) Types of hazard
Pre-insurance survey
Loading of premium
ii. Moral Hazard: However, if moral hazard is indicated, the proposal will
be declined. Superior or inferior types of vessels can be rated, but
moral hazard cannot be rated.
Each insurance company will have a list of hull risks not to be favourably
considered.
Example
8. Warranties
Hull policies are invariably subject to various warranties relating mainly to the
use of the vessel.
b) The area of operation e.g. Warranted employed for fishing on East and
West Coasts of India but not to proceed beyond 300 nautical miles into
the sea (for Deep Sea Fishing Trawlers). Normally, ocean-going ships are
insured subject to Institute Warranties dated 1.7.1976, which allow them
to trade in the widest possible geographical area. However, these
warranties do impose certain specific restrictions with respect to area,
period of year and a combination of the two. They also restrict carriage
of Indian coal during certain parts of the year. Any breach of these
restrictions requires prior agreement of insurers and appropriate
additional premium.
Test Yourself 1
In India, insurance of ships and shipowning interests are governed by the Marine
Hull Manual, issued by the Tariff Advisory Committee in 1983. As per IRDA
directives, the Indian insurers have to follow the terms and conditions as laid
down in the Manual whereas they can charge their own premium rates which are
discretionary.
The Manual contains detailed provisions for the insurance of ocean-going as also
the following types of vessels.
i. Fishing Vessels
ii. Sailing Vessels
iii. Inland Vessels
iv. Dredgers
v. Jetties, Pontoons, Wharves, etc.
vi. Builders’ Risks
vii. Ship Repairers’ Liabilities (SRL), Charterers’ Liabilities (CRL) etc.
Though manual provides for reference of certain risks to TAC, after detariffing
there is no such need and insurers can take their own decisions.
The manual provides scheme for insurance of fishing vessels which is for all
Fishing Vessels/Trawlers (mechanised or non-mechanised) valued up to Rs.100
lakhs and engaged in fishing operations only (including towage) and plying up to
100 nautical miles (NM) into the sea from shore (1NM = 1.852 Km.).
a) Conditions of insurance
i. Institute Fishing Vessels Clauses (IFVC) 20.7.87 but limited to pay only
TL/CTL (including Salvage, Salvage Charges and Sue and Labour)
ii. IFVC, 20.7.87 with P & I risks (clause 20) deleted,
iii. IFVC, 20.7.87 ,
Fishing Nets whilst on shore under repair or whilst stored in godowns, can be
covered against perils like Fire, Theft and Burglary in other than Hull
departments and no cover shall be granted under a Marine Hull policy.
IC-67 MARINE INSURANCE 185
CHAPTER 8 MARINE HULL MANUAL
Whilst vessels are laid-up for repair or painting, cover for fishing nets on
board the Vessel shall continue subject to the relevant insurance covering
the Vessel.
However, when the net is not on the Vessel, the sum insured of the Vessel
shall not be reduced. During such times, if the Vessel becomes a total loss,
claims will be paid subject to deduction for the net. It is, therefore,
essential that the value of the fishing net(s) should be ascertained at
inception.
c) Deductible
The deductible for vessels valued upto Rs.100 lakhs is 0.50% of their
respective sums insured or 10% of the assessed loss, whichever is higher.
Conditions of insurance
ii. Wider conditions incorporating the P & I liabilities risks of ITC-Hulls –Port
Risks 20.7.87 are also possible. Deductible -- 33 1/3% of assessed loss or
Rs.1,000, whichever is higher, each claim.
Note: Salvage Charges and Sue & Labour expenses shall be subject to the
deductible stipulated above.
Barges,
Pontoons,
Flats,
Floating Cranes,
Launches, Passenger Vessels,
Tugs etc. employed in Inland Waters .
Inland waters are all sheltered and protected waters such as harbour
waters, back waters, sea water within a radius of 12 NM from the entrance
to harbour/port, river waters, canal waters, lake waters, and the like.
Conditions of insurance
The Manual provides that the insurances on H & M interests be granted subject
to one of the following sets of conditions:
i. ITC Hulls TLO (Including Salvage, Salvage Charges and Sue & Labour)
dated 1.10.83. Subject to deductible of one-fourth of sum insured or
Rs.800 or Rs.10 per GRT, whichever is the highest, all claims other than
TL/CTL, each occurrence.
iii. ITC Hulls 1.10.83 with the ¾ths Collision Liability Clause amended to
4/4ths and deductible as above.
4. Insurance of dredgers
Dredger is a craft used to bring up sand, mud, gravel, etc. from the sea, river
and canal bottoms in order to open and deepen channels and make them
navigable. These crafts are fitted with the machinery and appliances for
dredging work.
a) Conditions of insurance
i. ITC Hulls TL Only (Including Salvage, Salvage Charges and Sue and
Labour) 1.10.83.
ii. ITC-Hulls 1.10.83.
iii. ITC-Hulls 1.10.83 with the ¾ths Collision Liability Clause amended to
4/4ths.
iv. ITC Hulls Port Risks 20.7.87.
b) Deductible
For Dredgers valued upto rupees one crore and falling within the purview of
the Manual -- ¼ % of the Sum Insured for H & M interests or Rs.1,500,
whichever is higher, all claims other than TL/CTL, each accident or
occurrence.
i. Wider Cover
The insurance covers all structural losses or damage to the Jetty, Pontoon,
wharf, etc. and cranes and other equipment fitted thereon, occasioned by
collision with vessels or any floating objects, cyclone, flood, tidal bore, fire,
earthquake, explosion of boilers insured under this policy, including Salvage
Charges in connection with the insured peril.
The insured must produce a satisfactory Survey Report every 3 years at their
own cost and such surveys are to be conducted by surveyors approved by the
underwriters.
Test Yourself 2
I. Barges
II. Pontoons
III. Country Crafts
IV. Launches
Summary
e) Ship Classification Societies establish standards, guidelines and rules for the
design, construction and survey of ships and of other marine structures.
g) The Total Loss rate is a rate percent applied to the insured value of the
vessel and is thus conditioned mainly by the value factor of the ship.
h) The ‘Average Loss’ element or “ex T.L.” element of the risk is mainly
determined by the size of the ship.
Answer 1
Ship Classification Societies establish standards, guidelines and rules for the
design, construction and survey of ships and of other marine structures.
Answer 2
‘Country Crafts’ is a popular expression used for Sailing Vessels. They are not
Inland Vessels.
Self-Examination Questions
Question 1
I. GT
II. DT
III. DWT
IV. PWT
Question 2
I. GT
II. DT
III. DWT
IV. PWT
Question 3
Insurance is purchased to .
Question 4
The is a rate percent applied to the insured value of the vessel and is
thus conditioned mainly by the value factor of the ship.
Question 5
Which of the following elements of risk is mainly determined by the size of the
ship?
Answer 1
DWT or Deadweight Tonnage refers to the capacity in tons of the cargo required
to load a ship to her loadline level.
Answer 2
Answer 3
Classification Certificate is issued for confirming that a ship has been built
according to the rules and standards of the relevant Classification Society, and
that it has both structural and mechanical fitness for its intended service.
Answer 4
The Total Loss rate is a rate percent applied to the insured value of the vessel
and is thus conditioned mainly by the value factor of the ship.
Answer 5
MARINE CLAIMS
Chapter Introduction
In this chapter, you will learn about the types of marine insurance claims and
the procedure for marine claims. Finally, you will learn about General Average
and Salvage.
Learning Outcomes
A claim upon a policy of marine insurance goods may arise upon the happening,
as the result of insured perils, of any of the following:
Subject to the risks covered and excluded by the clauses, all the above types of
loss are recoverable under appropriate sets of Institute Clauses for Hull (e.g.
Institute Time Clauses Hull 1.10.83) and Cargo (Institute Cargo Clauses 1.1.82).
1. Total loss
Marine total losses fall into two categories: actual total loss (ATL) and
constructive total loss (CTL).
ii. When it loses its species, that is, it is so damaged that it is no longer a
thing of the kind insured, e.g. where a shipment of dates is so badly
damaged by sea perils that they are condemned as unfit for human
consumption, or when cement turns into concrete following contact with
water; or,
iii. When the assured is irretrievably deprived thereof, as when a ship and
cargo are captured and condemned in the times of war. Destruction thus
is not essential to a claim for actual total loss or,
iv. When the goods are in a ship that has been posted as "missing". A missing
ship may be presumed an actual total loss when after the lapse of a
reasonable time, no news of her is received.
Section 56 of the Marine Insurance Act, 1963 provides that where goods
reach their destination in specie, but by reason of obliteration of marks or
otherwise, they are incapable of identification, the loss, if any, is not a total
loss but must be dealt with as a partial loss.
Indemnity: Measure of indemnity for actual total loss is the insured value
under the policy.
For cargo, the criteria are the cost of recovery, reconditioning the cargo and
forwarding it to its destination. If the costs of these exceed the value on
arrival at destination, a CTL may be claimed.
To substantiate a claim for CTL, the assured must give notice of his
intention to abandon the goods or the ship as the case may be, to the
underwriter and claim a CTL. The notice must be given without delay
because the purpose is to give the insurer the opportunity to reduce or
prevent the loss. This duty is waived only when the notice cannot benefit
the insurer or when he waives the duty.
If the insurer accepts the notice, he admits liability for the claim and
accepts the responsibility for whatever may remain of the goods. In
practice, the insurer always rejects the notice in the first instance, thereby
reserving his position until all the facts have become or the underwriters
available.
By the Waiver Clause of the ICC – 1.1.82 (clause 17), measures taken by the
assured with the object of saving, protecting or recovering the subject-
matter shall not be considered as a waiver or acceptance of abandonment or
otherwise prejudice the rights of either party. The Duty of Assured (Sue and
Labour) clause under ITC hull 1.10.82 (Clause 13.3) provides the same in
respect of ship facing a CTL situation.
Insurers are entitled to whatever remains of the property once they have
accepted abandonment, and it does not matter if the proceeds exceed the
insured value. However, insurers are not bound to take over the property on
abandonment if, by doing so, they would incur liabilities in excess of the
value of the property (salvage).
f) Indemnity
Measure of indemnity for CTL is the sum insured less any proceeds of sale
which are due to the insurers.
2. Particular Average
The measure of indemnity for Particular Average to cargo varies according to:
Where part of the goods are totally lost, the amount payable under the
insurance is such proportion of the insured value as the insurable value of
the part lost, bears to the insurable value of the whole.
The loss of a whole species or of all the goods clubbed in one valuation is
recoverable as a total loss. In other words, where the insurance is
apportionable, it is treated as a separate contract for each apportionable
part.
Example
100 chests of tea, each chest of equal value, are insured for Rs. 1,00,000, so
valued, under ICC (A). During the voyage, 10 chests get damaged by contact
with sea water as a result of heavy weather and are a total loss. The claim
payable under the policy would be:
Thus, the measure of indemnity for total loss of part is the insured value of the
part totally lost.
Example
A consignment of 100 cartons coffee and 100 cartons jam are insured for Rs.
1,00,000, so valued, under ICC (B). One carton of coffee and one carton of jam
are lost overboard during unloading operations and are a total loss. The invoice
shows following values:
Claim Payable
Insured value of 1 carton coffee Rs. 736.84
Insured value of 1 carton jam Rs. 263.16
Thus, where different types of goods are insured under one sum insured,
Section 72(1) of the Marine Insurance Act 1963 provides the basics for
division of the sum insured, that is, in proportion of insurable value. The
insurable value according to Section 18(3) of the Act is the prime cost of the
property insured plus expenses of and incidental to shipping and the charges
of insurance upon the whole. This is known as the CIF value.
b) Damaged cargo
Where the whole or any part of the goods insured is delivered damaged at
destination, the measure of indemnity is such proportion of the sum fixed by
the policy in the case of a valued policy, or of the insurable value in the
case of an unvalued policy, as the difference between the gross sound and
damaged values at the place of arrival bears to the gross sound value.
i. Gross value
Means the wholesale price, or if there be no such price, the estimated value
with, in either case, freight, landing charges and duty paid before hand;
provided that, in case of goods customarily sold in bond, the bonded price is
the gross value.
Means the actual price obtained at a sale where all charges on sale are paid
by the sellers. The use of "gross" values is to insure that the insurer's liability
for the loss is not prejudiced by fluctuations in market values. Thus, the
insurer’s liability for particular average is ascertained by comparing the
gross sound and damaged values of the goods on arrival and applying the
percentage of depreciation thus revealed to the insured or insurable value.
Example
Ten cases of cotton textiles, each case of equal value, railed from Mumbai to
Delhi, are insured for Rs. 1,20,000, so valued. One case, lost in transit, was not
available for delivery. Contents of three cases were damaged by contact with
rain water. As an allowance cannot be agreed between the surveyor and the
consignee, it was found necessary to sell the damaged goods for the best value
obtainable. Gross arrived sound value of the three cases was Rs.40,000 and the
gross proceeds of sale was Rs. 18,000. Survey fee was Rs. 200.
The claim payable under the policy which was subject to Inland Transit (Rail or
Road) - Clause 'A' is arrived at as follows:
Example
It may happen in the event of cargo sustaining damage that it can be sold in
it's damaged state at a place short of its destination to better advantage
than if it is reconditioned and forwarded. In such an event, in the interests
of all concerned, it is frequently agreed to sell the cargo at the
intermediate port at the best price available.
The decision is usually taken with the approval of the insurers and the
assured, and necessary arrangements are made by Lloyd's or company agent
at that place. The settlement on the policy is made by the insurers paying
the difference between the insured value and the NET proceeds of sale. This
is known as "Salvage Loss". By such a method of settlement, insurers are
involved in market fluctuations. This method of settlement is never adopted
when loss is assessed at destination.
Example
100 tons of potatoes were shipped on a vessel from Mumbai to Jeddah and were
insured for Pound 20,000 subject to Institute Cargo Clauses (A). The vessel
stranded near Bab-Al-Mandeb. Water entered cargo holds. Entire consignment
of potatoes was damaged and began sprouting.
The vessel, seriously disabled, put in at Aden, where the voyage was
abandoned. It was decided to sell the potatoes at Aden to avoid a later total
loss. The sale proceeds were at the rate of Pound 60 per ton with sale charges
of 1% of gross proceeds of sale. Survey fees were Pound 40. Adjust the claim
payable.
4. Expenses
A duty is imposed on the assured by common law that he should at all times
act as if he were uninsured. In other words, he should take all reasonable
measures to avert or minimise a loss to his property.
ITC hull 1.10.83 under title “Duty of Assured” (Sue and Labour)
This clause not only draws the attention of the assured to the common law
obligations revolving upon him, but also contains an undertaking on the part
of the insurers to meet all reasonable expenses incurred in averting or
minimising a loss recoverable under the policy. Such expenses are known as
sue and labour charges, and are a form of particular charge.
Indemnity: The indemnity for sue and labour charges is not conditioned by
the relative insured value of the subject matter. The charges are payable in
full, if reasonably incurred, irrespective of the insured value or of any other
loss- even total loss - falling upon the insurers under the terms of the policy.
If there be in the policy any provision as to "Excess" or "Franchise", sue and
labour charges are not governed by such arrangement; they are payable
irrespective of percentage of loss, whether the franchise or excess be
exceeded or not.
General average expenses are not included as sue and labour charges. Sue
and labour charges are incurred short of destination. If incurred at
destination, they may be merely a method of assessing loss. For e.g. if hides
damaged by sea water are reconditioned at an intermediate port to prevent
further damage and probable total loss the cost of reconditioning will be a
sue and labour expense.
b) Particular charges
Definition
Section 64 (2) of Marine Insurance Act, 1963 states that expenses incurred by or
on behalf of the assured for the safety or preservation of the subject matter
insured, other than GA and Salvage Charges, are called Particular Charges.
In practice, sue and labour charges and particular charges are synonymous
terms and to draw any distinction between them is of merely academic
interest. Modern tendency is to treat all such charges as sue and labour
charges.
The second difference is that sue and labour follows upon loss or damage,
whereas particular charges may be incurred when the loss is threatened or
imminent but is avoided by expenses for that purpose.
c) Salvage charges
d) Forwarding charges
It is important to note that these expenses are reimbursed only when the
transit is terminated short of destination by an insured risk and such
reimbursement is subject to any exclusions specified in the clauses. The
Forwarding Charges Clause does not apply to general average or salvage
charges, nor shall it include charges arising from the fault, negligence,
insolvency or financial default of the assured or their servants.
e) Extra charges
The expenses of protests, survey and other proofs of loss, including the
commission or other expenses of a sale by auction are examples of "extra
charges". These expenses are not admitted to make up the percentage of a
claim, and are only paid by the insurers in case the loss amounts to a claim
without them.
Marine underwriters are liable for such extra charges only if the claim is
admissible. In other words, they are not met at all if any franchise
stipulated in the policy is not reached without their inclusion.
If the claim is admitted, the extra charges are said to "follow the claim" and
are paid in full as underwriters are liable for any such charges so far as they
relate to goods found to be in a sound condition or to damage which does
not give rise to a claim under the policy. The underwriters liability does not
exceed the policy sum insured by the policy for both the loss and the extra
charges in respect of any one loss/event.
Test Yourself 1
I. Measure of indemnity for actual total loss is the sum insured less any
proceeds of sale which are due to the insurers.
II. Measure of indemnity for actual total loss is the insured value under the
policy.
III. The indemnity for actual total loss is not conditioned by the relative insured
value of the subject matter; the charges are payable in full.
IV. The measure of indemnity for actual total loss is the insured value of the
part totally lost
The procedure with carriers and bailees is required because they are the
primary parties who handle the cargo and loss, if any, arises because of their
improper handling of the cargo. Moreover, under various laws, they are liable to
make good the loss. The general procedure for a marine cargo claim is
explained in detail below.
1. Intimation of claim
ii. To apply immediately for a survey by the ocean carrier / Port Authority,
if any loss or damage be apparent and claim on them for any actual loss
or damage found on such survey.
iii. In respect of containerised cargo, the insured must ensure that the
container and its seals are examined immediately on discharge from the
overseas vessel.
vi. The insured should give written notice to the carriers / bailees within
three days of landing of the goods, if loss or damage thereto was not
apparent at the time of taking delivery.
206 IC-67 MARINE INSURANCE
CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9
i. The consignee should take examined delivery from the Railways of any
packages, which are outwardly damaged or appear to have been
tampered with and obtain a certificate of damage and / or shortage.
ii. In the case of packages which are in a outwardly sound condition, but
deficient in weight, the consignee should take weighment / examined
delivery and obtain a Certificate of Shortage from carrier if deficiency in
weight is proved.
iii. The consignee should issue notice of claims against the carriers within
the statutory time limits, as applicable.
2. Insurance surveys
The Insurance Act,1938 requires that claims exceeding Rs. 20,000 should be
surveyed by a surveyor holding a valid license from the Controller of
Insurance.
c) Survey fees
Survey fees are paid initially by the claimant and will be reimbursed with
the claim amount, if the claim is admissible under the policy. There is no
specified scale of fees.
The survey report is an important document. It briefly indicates not only the
facts concerning the loss but also the whole outline of the voyage. In general,
the surveyor acts as an independent and impartial third party certifying the
circumstances of the loss. A standard form of survey report seeks to obtain all
the necessary information relating to the circumstances of the voyage and of
the loss.
It deals with the insurable interest of the claimant; the course of the voyage;
the existence of delay and its cause; unusual circumstances during the voyage;
terms of sale where and how the loss occurred and the extent of the loss. Some
of the salient details contained in a standard survey report are discussed below.
In respect of marine claims arising and payable outside India, they are adjusted
and settled by Claims Settling Agents named in the Policy. The Claim Settling
Agents will have to be reimbursed with the amount of the claim settled by
them.
The company's bankers in India assist in obtaining the necessary approval and
prepare the draft for the claim amount in foreign currency. This draft is then
sent to the claimants abroad or to the Claim Settling Agents, as the case may
be. The remittance must also cover the survey and settling fees of the agents
(this is normally as per Lloyd's Scale of Fees).
For certain Claim Settling Agents, the underwriting office in India has opened
Letter of Credit in favour of these agents, and they are authorised to settle the
claim direct with the claimants, and draw the amount from the Letter Of Credit
established in their favour. Advices of such claims paid are sent to the
underwriting office periodically.
There may be a claim under a hull insurance policy when, by the operation of
insured perils, any of the following occurs:
a) Total loss
Total loss may be actual total loss or constructive total loss (CTL). Where a
claim is admitted under the policy, the amount recoverable for a total loss
is the value insured by the policy. In aaddition, there may be amounts to be
paid towards collision liability always with the related cost and Sue and
Labour charges
b) Partial loss
For a partial loss, the amounts payable under the policy, subject to any
“deductible” provided therein, are as follows:
The reasonable cost of repairs effected, but not exceeding the sum insured
in respect of any one casualty. Under ITC-Hulls 1.10.83, there is no
deduction “new for old”.
Successive losses are payable even though the total amount of such losses
may exceed the sum insured.
For GA expenditure incurred by the ship owner, the amount payable by the
hull underwriter is the proportion which falls upon the insured ship owner.
For GA contribution, the policy will pay the proportion attaching to the ship.
The amount payable under the policy is computed in the same way as for
general average expenditure.
The full sum expended subject to the ship being fully insured.
This is a supplementary cover over and above the insurance on the vessel
itself, to the extent of ¾ths of such liability but not exceeding ¾ths of the
sum insured on the vessel. Legal costs are also payable.
Most forms of hull insurance provide that claims for partial loss will be
subject to a “deductible”, which the assured has to bear in respect of each
claim to which the “deductible” is applicable as per the teams of cover
6. Burden of proof
In cases of general average, a similar standard of proof that the loss or expenses
claimed is allowable in general average, will be required from the claimant.
a) Ocean-going vessels
i. Notice to insurer
Owners should give notice also to the P&I Association in any case involving
loss or damage to cargo and when there is possibility of a claim for GA
contribution from cargo interests and they should possible liability claims
arising from the accident.
If the casualty is serious, the ship owner will wish to send a marine
superintendent and / or an engineer superintendent to the casualty or to
port to which the damaged ship is proceeding, in order to obtain their
reports on the situation and extent of damage.
b) Fishing vessels
i. Admissibility of claim
If the loss has taken place within the currency of the policy;
Whether the peril giving rise to the loss, as also the loss itself are
covered under the policy;
That the ownership of the vessel has not changed without the
knowledge of the insurers;
That no premium is due for the period of cover during which the date
of the casualty falls, etc.
iv. Salvage
In case the vessel is missing, the insured should be advised to make efforts
to search for the missing vessel.
If covered under the policy, claims for partial losses are to be settled on the
basis of surveyor’s findings and recommendations, if found reasonable.
Repair bills, cash memos in support of purchases of parts, etc. and all such
documents in support of expenditures are to be verified and certified by the
surveyor to be reasonable and admissible for the purpose of adjusting the
payable claims.
Where applicable, the surveyor should ensure that statutory rules and
regulations have been fully complied with and he must report thereon.
The documents required for the settlement of Fishing Vessels Hull claims are
as follows:
c) Sailing Vessels
d) Inland Vessels
Definition
Example
Some examples of GA are:
a) A loaded vessel which has stranded and is fast running aground, may jettison
part of her cargo into the sea to lighten her draft for refloating purposes.
b) Occasionally, cargo is jettisoned to reach the seat of a fire and the resulting
losses will all be treated as GA sacrifice.
When there is a GA act on a voyage, all interests at risk, namely, ship, cargo
and freight, which have been saved from loss by GA measures, are liable to
contribute rateably to make good the sacrifice and expenditure. These values
are known as contributing values and the sum necessary to reimburse the
interest which have suffered the GA loss, is called "Amount Made Good" or
"Allowance".
The amount made good in respect of a sacrifice shall itself contribute to the
loss, otherwise it would be in a relatively better position by reason of being
fully reimbursed for a loss, which the other interests are bearing.
Cargo shall contribute on its value at the time of discharge, ascertained from
the commercial invoice rendered to the receiver or if there is no such invoice,
then from the shipped value.
This value includes pre-paid freight and insurance charges, but does not include
freight at carriers risks, nor does it include landing charges. Any loss or damage
suffered prior to discharge must be deducted and any amount "Made Good" must
be added.
3. Contributory values
It is important to note that the GA loss must have been successful and the ship
and cargo should actually arrive at destination. If, due to either the original or
some subsequent accident, the ship and cargo are lost, there are no arrived
values at destination and therefore no GA.
Section 73 of Marine Insurance Act, 1963 states that where the assured has paid
or is liable for any GA contribution, the measure of indemnity is the full amount
of such contribution, if the subject-matter liable to contribute, is insured for its
full contributory value; but if such subject-matter be not insured for its full
contributory value, or only part of it be insured, the indemnity payable by the
insurer must be reduced in proportion to the under-insurance; and where there
has been a particular average loss, which constitutes a deduction from the
contributory value, and for which the insurer is liable, that amount must be
deducted from the insured value in order to ascertain what the insurer is liable
to contribute.
Amounts made good: The amount to be made good as GA for damage to or loss
of cargo sacrificed shall be the loss which has been sustained thereby based on
the value at the time of discharge, ascertained from the commercial invoice
rendered to the receiver of the goods, or if there is no such invoice, from the
shipped value, the value at the time of discharge shall include the cost of
insurance and freight, except insofar as such freight is at the risk of interest
other than cargo.
When cargo so damaged is sold and the amount of damage has not been
otherwise agreed, the loss to be made good in GA shall be the difference
between the net proceeds of sa.le and the net sound value as computed above.
This means that the invoice is used as a "Sound Value" where damaged cargo is
sold to realise the proceeds unless the depreciation in value is otherwise
agreed.
Section 66 of Marine Insurance Act, 1963 provides that the insurer is liable for
any GA loss only where the GA act was incurred in respect of an insured peril.
But the Institute Cargo Clauses override this provision by making the insurer
liable for all GA losses subject to the specified exclusions in the clauses.
7. Salvage
Salvage can be claimed for services in saving maritime property, that is, ships,
cargoes and freight-at-risk. Where lives are saved jointly with property, the
salvor may claim life salvage, but it is a claim rarely made. Life salvage
awarded as such is not recoverable from underwriters, but it is a liability usually
covered by P&I Clubs.
To support a claim for salvage, it is necessary to prove that the salved property
was in peril and that the services were of material assistance. No reward for
services or payment for loss or expenses can be claimed where the services
were unsuccessful and the property has been lost.
The salvage is paid by and out of salved property. Hence, the reward is limited
by the value of the property saved. Salvors have a maritime lien on the property
salved, which enables them to retain the property in their possession till
security for salvage is forthcoming.
Lloyd’s Standard Form of Salvage Agreement (Lloyd’s Open Form) is a “NO CURE
– NO PAY” contract and in the event of successful conclusion to the services, the
salvors receive the sum agreed in the contract, or in the event of disagreement,
the matter will be decided by an Arbitrator appointed by the Committee of
Lloyd’s.
Salvage is apportioned over the values on which it has been assessed, and
provided the services were incurred in preventing a loss covered by the policy,
the underwriters insuring the respective interests are liable for their proportion
of the salvage.
b) Insurer can register the claim in their system and communicate to the
insured the claim number and procedure to be adopted including claim
documents required.
c) If the claim is for damage, the insurer will send mail to surveyor to
conduct survey copy to insured to inform him about the appointment of
surveyor.
f) Insurer can scrutinize the documents and report and prepare note to
concerned office and send it through e-mail with their
recommendations.
h) The policy issuing office settles the claim with the client, by sending him
loss voucher through regular mail.
Test Yourself 2
Documents may be filed with the customs before the expected arrival
of the vessel and custom formalities completed to facilitate easy clearance of
cargo after landing.
I. 1 day
II. 7 days
III. 15 days
IV. 30 days
Summary
a) Marine total losses fall into two categories: actual total loss and
constructive total loss.
b) Actual total loss of the subject matter insured may occur where it is
destroyed or where it loses its species or where the goods are in a ship that
has been posted as "missing".
c) CTL implies that whilst the subject matter is not destroyed and is not an
actual total loss, it would not be worth the cost or efforts to save or repair
or recondition the property.
e) Total loss of part of cargo: Where part of the goods are totally lost, the
amount payable under the insurance is such proportion of the insured value
as the insurable value of the part lost bears to the insurable value of the
whole.
f) Salvage loss: It may happen in the event of cargo sustaining damage that it
can be sold in damaged state at a place short of destination to better
advantage than if it is reconditioned and forwarded.
g) Sue and Labour Charges are all reasonable expenses incurred by the insured
in averting or minimising a loss and are recoverable under the policy.
i) The ICC includes a Forwarding Charges Clause (No.12) which states that
when the insured transit is terminated at a port or place other than the
policy destination, as a result of the operation of an insured peril, the
insurers agree to reimburse the assured for any extra charges properly and
reasonably incurred in unloading, storing and forwarding the insured goods
to the policy destination.
j) The expenses of protests, survey and other proofs of loss including the
commission or other expenses of a sale by auction are examples of "extra
charges".
m) In respect of marine claim arising and payable outside India, they are
adjusted and settled by Claims Settling Agents named in the Policy.
Measure of indemnity for actual total loss is the insured value under the policy.
Answer 2
Self-Examination Questions
Question 1
I. Section 64 (1)
II. Section 64 (2)
III. Section 64 (3)
IV. Section 64 (4)
Question 2
The Insurance Act, 1938 requires that claims exceeding Rs. 20,000 should be
surveyed by a surveyor holding a valid license from the controller of insurance.
I. Rs. 20,000
II. Rs. 40,000
III. Rs. 50,000
IV. Rs. 10,000
Question 3
In respect of marine claims arising and payable outside India, they are adjusted
and settled by .
I. The insurance company on behalf of the insured
II. The insured himself
III. Claim Settling Agents
IV. Insurance Brokers
Question 4
Collision liability is a supplementary cover over and above the insurance on the
vessel itself to the extent of of such liability but not exceeding 3/4ths
of the sum insured on the vessel.
I. 1/4th
II. 1/2
III. 2/3rds
IV. 3/4ths
Question 5
When any ocean-going ship is involved in an accident and has sustained damage,
it is essential that the owners give prompt notice to the insurer. In the event of
non-compliance with the terms of the Notice of Claim & Tenders Clause (No.
10), a penalty of is to be deducted from the ascertained claim.
I. 10%
II. 15%
III. 20%
IV. 25%
Answer 1
Section 64 (2) of the Marine Insurance Act, 1963 states that expenses incurred
by or on behalf of the assured for the safety or preservation of the subject
matter insured, other than GA and Salvage Charges, are called Particular
Charges.
Answer 2
The Insurance Act, 1938 requires that claims exceeding Rs. 20,000 should be
surveyed by a surveyor holding a valid license from the Controller of Insurance.
Answer 3
In respect of marine claims arising and payable outside India, they are adjusted
and settled by Claim Settling Agents.
Answer 4
This is a supplementary cover over and above the insurance on the vessel itself
to the extent of 3/4th of such liability but not exceeding 3/4ths of the sum
insured on the vessel.
Answer 5
In the event of non-compliance with the terms of the Notice of Claim & Tenders
Clause (No. 10), a penalty of 15% is to be deducted from the ascertained claim.
Chapter Introduction
In this chapter, we will learn about the various Acts that govern the rules and
regulations related to claim process in case goods are lost or damaged during
transit. We will also discuss various Acts and their regulations for carriage of
goods by rail, road and air as also for multimodal transportation.
In the end, we will also briefly study the liabilities of port authorities, postal
authorities and customs authorities.
Learning Outcomes
A. Marine recoveries
B. Carriage of goods by rail, road and air as also for multimodal transportation
C. Liability of port authorities, postal authority and customs authorities.
A. Marine recoveries
1. Marine recoveries
Cargo moves through carriers and bailess involving various modes of transport
and storages en route. During transportation and storage, carriers and bailees
are required to take care of the cargo and if the cargo is damaged or lost whilst
in their custody, they are required to make good the sender’s loss under various
laws may be applicable.
Primarily it is the senders’ right to recover their losses from carriers and bailees
but once the marine insurers pay ship claim, they get vested with the rights of
recovery under subrogation.
a) Right of subrogation
The right of subrogation arises under common law and also under Marine
Insurance Act 1963. Under subrogation the insurers step into the shoes of
the insured and thereby get vested with the rights of recovery from the
carriers and bailees.
b) Cargo claims
Case of cargo claims, when there is any possibility of recovery from a third
party, insurers will obtain a Letter of Subrogation from the claimant when
settling the claim.
c) Recovery
i. The goods were in the care of the carrier or other bailee at the time the
loss or damage occurred;
ii. The goods were in sound condition, with no packages missing, when
received by the carrier or other bailee;
iii. The carrier or other bailee failed to deliver the goods or delivered them
in a damaged condition.
d) Documents
Professional packers,
Inland rail or road carriers,
Freight forwarders,
Warehousemen,
Port authority,
Stevedores,
Lightermen,
Customs authorities,
Clearing agents and others at destination.
Any of these parties may incur a liability whilst the goods are in his care.
The insurer will require proof of receipt and delivery of the goods by each
party, at each stage of transit, in sound or damaged condition, in order to
establish as far as possible, the stage at which the loss or damage occurred,
in order to pursue his subrogation rights of recovery.
COGSA, 1925 was amended effective from 16th October, 1992. The salient
features of the Act are as follows:
i. To exercise due diligence and care to make the ship seaworthy, properly
man, equip and supply the ship and to make the ship fit to carry the
cargo.
ii. Properly and carefully to load, handle, stow, carry, keep, care for and
discharge the goods carried, subject to the various immunities provided.
iii. On demand and after receipt of the goods, to issue a bill of lading
showing:
Neither the carrier nor the ship owner shall be responsible for loss or
damage arising or resulting from:
The carrier shall not be liable for any loss or damage resulting from any
deviation in saving or attempting to save life or property at sea or any
reasonable deviation.
The carrier shall not be liable for loss or damage to the goods if the nature
or value thereof has been knowingly misstated by the shipper in the bill of
lading.
i. Dangerous Cargo
If any such goods are shipped with the knowledge and consent of the carrier
and they become a danger to the ship or cargo, they may, in like manner, be
landed at any place or destroyed or rendered innocuous by the carrier
without liability on the part of the carrier, except to general average, if
any.
Liability of the carrier for loss of or damage to cargo is limited to 666.67 SDR
(Special Drawing Rights) per package or unit of freight or 2 SDR per kg. of
gross weight of the goods lost or damaged, whichever amount is higher,
unless the nature and value of such goods are declared by the shipper and
inserted in the B/L.
If the B/L does not show how many separate packages there are, then each
article of transport (pallet or container) will be deemed to be an entire
package or unit of freight for the purpose of applying the limit of liability.
Unless notice of loss or damage be given in writing to the carrier at the port
of discharge or at the time of removal of the goods into the custody of the
person entitled to delivery thereof under the contract of carriage, or if
loss/damage be not apparent, within three days, such removal shall be
prima facie evidence of delivery by the carrier of the goods as described in
the B/L. Such notice in writing need not be given if the state of the goods at
the time of their receipt was the subject of joint survey or inspection.
This period may, however, be extended if the parties so agree after the
cause of action has arisen; provided that a suit may be brought after the
expiry of the period of one year referred to above, within a further period
of not more than three months as allowed by the Courts.
e) General
COGSA, 1925 applies to “goods” and “goods” are defined as “including
goods, wares, merchandise, containers, pallets or similar articles of
transport used to consolidate goods if supplied by the shipper and articles of
every kind whatsoever, except live animals and cargo which by the contract
of carriage is stated as being carried on deck and is so carried.”
Note: The SDR (Special Drawing Rights) is a “currency basket” made up of
five currencies as follows:
Currency Weighing
U.S. Dollar 42%
German DM 19%
Pound Sterling 13%
French Franc 13%
Japanese Yen 13%
It is a relatively stable unit, since a fall in the value of one currency usually
means a rise in value of the others. Its actual value is re-calculated daily by
the International Monetary Fund which promulgates the SDR as a currency
unit.
The Convention holds that the conversion to national currencies for
compensation payable as a result of judicial proceedings shall be at the rate
announced for the Day of Judgement. Value of an SDR is published daily in
important financial dailies and in the Lloyd’s List in terms of £ Stg. and U.S.
Dollars. Currently, 1 SDR = 1.47638USD
232 IC-67 MARINE INSURANCE
CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION CHAPTER 10
Test Yourself 1
What is the time limit for initiating legal action against ocean carriers in the
event of loss or damage to goods?
I. Within one year after delivery of goods or the date when the goods should
have been delivered
II. Two years after delivery of goods or the date when the goods should have
been delivered
III. Three years after delivery of goods or the date when the goods should have
been delivered
IV. Five years after delivery of goods or the date when the goods should have
been delivered
Effective from 1st July, 1990, the new Indian Railways Act, 1989 came into
force. It replaced the earlier Act of 1890.
Under Provisions of The Railways Act 1989 there are two types of freights.
ORR being lower the liability of railway is lower whereas under RRR the
liability of railways is like the road carrier’s, making them liable for nearly
every loss in transit
i. Act of God
ii. Act of War
iii. Act of public enemies
iv. Arrest, restraint or seizure under legal process
v. Orders or restrictions imposed by government
vi. Act/omission/negligence of consignor or consignee or their
agents/servants.
vii. Natural deterioration or wastage in bulk or weight due to inherent
defect, quality or vice of the goods
viii. Latent defects
ix. Fire, explosion or any unforeseen risk.
Even after it is established the loss, damage, etc. had resulted from any of
the above causes, the Railway Administration shall not be relieved of its
responsibility unless it further proves that it had used reasonable foresight
and care in the carriage of goods.
In case of consignments carried at Owners’ Risk Rates the railway will not be
liable for any loss or damage unless the same is caused by negligence or
misconduct on the part of the railways. For Railways Risk rates except the
perils stated under Para 17 above, the railway is liable for all the losses.
b) Monetary liability
On the other hand, where the consignor declares the value and pays the
prescribed percentage charge, the liability of the Railway Administration
will not exceed the value so declared, subject to the requisite proof being
furnished thereof.
i. A suit can only be filed against the railway administration after the
claimant has served a statutory notice of 2 months under Section 80 of
the Civil Procedure Code for final reply to the party by the railway.
ii. Suit for non-delivery or delay in delivery can be filed within 3 years from
the probable date when the goods ought to have been delivered. For
loss, damage, etc., the suit can be filed within 3 years from the date of
such loss, damage, etc.
Recently parliament has passed a law – The Carriage by Road Act, 2007,
which governs carriage by road and also by courier. The Act involves certain
administration; which requires framing of Rules which are in process and yet
not finalized. So when the Rules are finalised and notified, the Act and Rules
will come in force. Till then the 1865 law will be in force.
The common carrier has only three immunities to escape liability as against
quite a number granted to Railways under the Railways Act, 1989. These
immunities are:
i. Act of God
ii. Act of war or public enemy
iii. Riots and civil commotion
iv. Arrest restraint or seizure under legal process
v. Order or restriction or prohibition imposed by Central Government or
State Government
Other than for immunities, road carrier is liable for every loss occurring
while goods are in their custody. Secondly, like Railways Act, 1989, there
are no different freight rates. Everything is to be carried at one rate i.e.
Carriers’ Risk Rate.
The burden of proving negligence on the part of the carrier is not on the
claimant and it is the carrier who has to establish that there was no
negligence on his part.
Notice of loss, damage, etc. must be given to the carrier within six months
from the date of knowledge of loss. (Under Carriage by Road Act, 2007
within 180 days of booking of the consignment.)
If the claim is not settled by the road carrier, suit must be failed within
three years from the knowledge of loss as (or from date of booking –Carriage
by Road Act 2007) prescribed by the Limitation Act.
The onus of proof that loss/damage occurred while goods were not in an
aircraft or aerodrome rests on the party alleging it.
The carrier is liable for damage occasioned by delay of both baggage and
cargo, but not if he can prove that he took all reasonable measures to avoid
the damage or that it was impossible to take such measures.
i. 17 SDR per kg. gross of lost or damaged goods, unless a higher value has
been declared and a supplementary charge paid.
ii. As per Indian Carriage of Goods by Air Act, the limit is Rs.450/- per kg.
for domestic carriage within India.
The goods or luggage are placed at the disposal of the airline for the air
transit. If notice is not given within the time limits specified, the claim
would be time-barred and cannot be legally enforced.
Time limit for legal action is two years reckoned from the date of booking of
the cargo or luggage.
4. Multimodal transportation
In India, the Multimodal Transportation of Goods Act, 1993 was enacted on 2nd
April, 1993 and it came into force from 16th October, 1993.
The MTO remains responsible for the goods throughout the period from the
time he takes them in his charge until the time of their delivery. The MTO
shall be liable for loss resulting from:
While such loss, damage or delay in delivery took place while the
consignment was in his charge.
It is, however, provided that the MTO shall not be liable if he proves that no
fault or neglect on his part or that of his servants or agents had caused or
contributed to such loss, damage or delay in delivery.
Where the MTO becomes liable for loss/damage to any consignment, the
nature and value whereof have not been declared by the consignor before
such consignment was taken in charge by the MTO and if the stage of
transport at which such loss or damage occurred is not known, then the
liability of the MTO shall not exceed 2 SDR per kg. of gross weight of the
goods lost or damaged, or 666.67 SDR per package or unit lost or damaged,
whichever is higher.
Example
One container containing 20 packages (declared as such) total weight 1500 kgs.
Liability:
On the other hand, if the damage can be located on a particular leg, then,
although liability will remain uniform throughout, limitation will apply as
provided by the law or Convention governing limitation of liability on that
stage of transit.
Where delay in delivery of the consignment occurs under any of the above
circumstances or any consequential loss or damage arises from such delay,
and then the liability of the MTO shall be limited to the freight payable for
the consignment so delayed.
Such notice should be given by the consignee in writing to the MTO at the
time the goods are delivered to the consignee. Otherwise, the delivery shall
be treated as prima facie evidence of delivery as described in the MT
document.
d) Limitation
The MTO shall not be liable under any of the provisions of the Act unless
legal action against him is brought within 9 (nine) months of the date of
delivery of the goods or the date when the goods should have been
delivered.
Test Yourself 2
I. RRR
II. ORR
III. ROR
IV. RRO
a) Major ports
The Port Trust established under an Act of Parliament, are liable for loss or
damage to the goods whilst they are in their care and custody. However, the
cargo interests have to strictly comply with port formalities as per the
regulations and bye-laws framed by each port authority or port trust.
The Port Trust is liable for goods landed but subsequently missing as well as
for goods found damaged and for shortages if the packages in which there
are shortages or damage had landed in a sound condition without any
qualifying remarks as per the Port Trust Landing Remarks Certificate.
The relevant legislation is the Major Port Trusts Act, 1963 and Rules, which
apply to all major ports in India, namely, Kandla, Mumbai, Nhava Sheva,
Marmugao, Mangalore, Paradeep, Cochin, Tuticorin, Chennai,
Visakhapatnam, Haldia and Calcutta.
Under the Major Port Trusts Act and the Rules, the Board of Trustees are not
liable under the following circumstances:
If the goods are not traceable or available for delivery within 7 days, the
consignee must file a log entry. If the log entry is not allowed to be filed, on
the same day, a registered letter should be addressed to the Board of
Trustees for the Port concerned, recording the fact that the Shed
Superintendent had refused to allow filing of log entry for goods not
traceable or not available. In such cases, notice of suit must be given
forthwith.
A suit must be filed against the Port Trust within 7 months (inclusive of one
month’s notice period) from the date of accrual of cause of action. Notice
must be addressed to “The Trustees of the Port of ………”
Ports which are not major ports are governed by the Indian Ports Act, 1908.
Such ports are controlled by the respective State Governments. Under the
Act, no provision is made as regards the time for applying for delivery of
goods and giving notice to the Port in case of loss or damage to the goods.
Similarly, no provision is made under the Act as regards the time limit for
filing suit. Therefore, provisions of the Indian Limitation Act will apply and
suit must be filed within 3 years of the accrual of the cause of action against
the State Government, which owns the port premises, after notice to the
State Government of 60 days under Section 80 of the Civil Procedure Code
(CPC)
Gujarat Government has enacted the Gujarat Maritime Board Act, 1981
which is applied to all ports in Gujarat except Kandla, which is under the
Major Port Trust Act. Time limit for filing suit is 6 months provided one
month’s prior notice is given to the Board.
2. Postal authority
Indian Post Office Act, 1898 limits the liability of the postal authority to Rs.25/-
per package for loss, short-delivery, delay or damage, unless the parcel is
insured. Notice of claim must be given within 6 months from the booking date.
Suit should be filed within 3 years from the knowledge of loss subject to 60 days
notice under Sec.80 of CPC.
3. Customs
Under Section 27 of the Customs Act, 1862, refund of duty is allowed for
shortage due to pilferage and for goods lost or destroyed or for shortlanded
cargo or landed but missing cargo.
This time limit will not apply where duty has been paid under protest or where
duty has been recovered by Customs without jurisdiction or authority of law.
Such time limitation also will not apply in case of shortlanded goods. Similarly,
where duty has been wrongly worked out or collected at a higher rate by
applying wrong Tariff rate, the limitation provided under Section 27 will not
apply. Duty paid under "Mistake in law" would fall within Section 72 of the
Contract Act 1872 and, therefore, limitation in such an event would be 3 years.
Appeal against the decision of the Collector of Customs can be filed with the
Appellate Tribunal within 3 months of the receipt of the decision from the
Collector of Customs.
4. Market value
The correct basis to work out liability of carrier, Port Trust or other bailees is
the market value, subject to maximum liability as may be restricted by the
respective laws. The value taken is the market value as on the date of the loss
at the place where the goods are to be delivered.
After a suit is filed, close watch should be kept to ensure its proper conduct
by producing necessary witnesses and adducing adequate evidence.
When a suit is filed, the legal advisor should be requested to give a list of
documents that will be required as evidence in a court of law, and action
should be taken to collect such documents from the claimant or request the
claimant to preserve such documents, as otherwise when the case comes up
for hearing after a lapse of some time, the important documents may not be
available.
b) Salvage disposal
Test Yourself 3
Ports that do not come under ‘major ports of India’ are governed by the
Summary
b) The right of subrogation arises under common law and also under the Marine
Insurance Act 1963. Under subrogation, the insurers step into the shoes of
the insured and are vested with the rights of recovery from the carriers and
bailees.
e) In India, for domestic flights, the liability of the air carriers is governed by
The Carriage by Air Act 1972.
g) The relevant legislation is the Major Port Trusts Act, 1963 and Rules, which
apply to all major ports in India, namely, Kandla, Mumbai, Nhava Sheva,
Marmugao, Mangalore, Paradeep, Cochin, Tuticorin, Chennai,
Visakhapatnam, Haldia and Calcutta.
h) Ports which are not major ports are governed by the Indian Ports Act, 1908.
i) Under Section 27 of the Customs Act, 1862, refund of duty is allowed for
shortage due to pilferage, for goods lost or destroyed or for shortlanded
cargo or landed but missing cargo.
Answer 1
Legal action against ocean carriers in the event of loss or damage to goods can
be brought within one year after the delivery of goods or the date when the
goods should have been delivered.
Answer 2
In case of Railways’ Risk Rate (RRR), the liability of the railways is higher as
compared to that in case of the Owners’ Risk Rate.
Answer 3
Ports that do not come under ‘major ports of India’ are governed by the Indian
Ports Act 1908.
Self-Examination Questions
Question 1
Which of the following values is taken to work out the liability of the carrier,
Port Trust or other bailees?
Question 2
Under the Customs Act, to whom will an application need to be written for
refund of customs duty, for shortage due to pilferage and for goods lost or
destroyed?
I. Customs officer
II. Assistant Controller of Customs
III. Collector of Customs
IV. Appellate Tribunal
Question 3
Question 4
What is the maximum period for filing suits for claim against the Indian post
office in case of short-delivery, delay or damage to the parcel?
I. Six months
II. One year
III. Two years
IV. Three years
Answer 1
Market value as on the date of the loss at the place where the goods are to be
delivered is used to work out the liability of the carrier, Port Trust or other
bailees.
Answer 2
Under the Customs Act 1962, an application needs to be written to the Assistant
Controller of Customs for refund of customs duty, for shortage due to pilferage
and for goods lost or destroyed.
Answer 3
Answer 4
The maximum period for filing suits for claim against the Indian post office in
case of short-delivery, delay or damage to the parcel is three years.
Chapter Introduction
This chapter also briefly discusses UCP 600, a set of rules on the issuance and
use of letters of credit developed by the International Chamber of Commerce.
Learning Outcomes
In international trade various methods are used for payment for goods and
services viz:
a) Consignment purchase
b) Cash-in-advance (Pre-payment)
c) Down payment
d) Open account
e) Documentary collection
f) Letter of credit
a) Consignment purchase
b) Cash-in-advance (Pre-payment)
c) Down payment
d) Open account
While this payment term involves the fewest restrictions and the lowest cost
for the Buyer, it also presents the Seller with the highest degree of payment
risk and is employed only between a Buyer and a Seller who have a long-
term relationship involving a great level of mutual trust.
e) Documentary collection
In this process, the seller instructs his bank to forward documents related to
the export of goods to the buyer's bank with a request to present these
documents to the buyer for payment, indicating when and on what
conditions these documents can be released to the buyer.
The buyer may obtain possession of goods and clear them through customs,
if the buyer has the shipping documents such as original bill of lading,
certificate of origin, etc.
However, the documents are only given to the buyer after payment has been
made (documents against payment) or payment undertaking has been given –
the buyer has accepted a bill of exchange issued by the seller and payable it
at a certain date in the future (maturity date) (documents against
acceptance).
In D/P terms, the collecting bank releases the documents to the buyer only
upon full and immediate cash payment. D/P terms most closely resemble
traditional Cash on Delivery transactions.
The buyer must pay the presenting/ collecting bank the full amount in freely
available funds in order to take possession of the documents.
The completed draft is held by the collecting bank and presented to the
buyer for payment at maturity, after which the collecting bank sends the
funds to the remitting bank, which in turn sends them to the principal/
seller.
The seller should be aware that he gives up the title to the shipment in
exchange for the signed bill of exchange that now represents his only
security in the transaction.
An acceptance document against payment has features of both D/P and D/A.
It works like this:
Step 1: The collecting bank presents a Bill of Exchange to the buyer for
acceptance.
Step 4: The collecting bank releases the documents to the buyer who takes
possession of the shipment
Step 5: The collecting bank sends funds to the remitting bank, which then
sends them to the seller.
This gives the buyer time to pay for the shipment, and at the same time
gives the seller security that the title to the shipment will not be handed
over until the payment has been made. If the buyer refuses acceptance of
the Bill of Exchange or does not honor the payment on maturity, the seller
takes over arrangements to sell his goods. This type of collection is seldom
used in actual practice.
f) Payment notes
On maturity, the collecting bank collects the bill and transfers the proceeds
to the remitting bank for crediting to the seller.
Buyers and sellers negotiate the sale and purchase of goods. Sellers demand
cash or the LC from the buyer’s make a guarantee for payment. The LC
reinforces the buyer’s undertaking to pay.
i. Documentary credit
Definition
Bill of lading ,
Marine insurance policy,
Commercial invoice,
Customs invoice,
Certificate of origin,
Weight list,
Packing list,
Inspection certificate,
Certificate of analysis and/or
Other documents as stipulated
Step-by-step process:
Step 1: Buyer and seller agree to conduct business. The seller wants a letter
of credit to guarantee payment.
Step 2: Buyer applies to his bank for a letter of credit in favor of the seller.
Step 3: Buyer's bank approves the credit risk of the buyer, issues and
forwards the credit to its correspondent bank (advising or
confirming). The correspondent bank is usually located in the same
geographical location as the seller (beneficiary).
Step 4: Advising bank will authenticate the credit and forward the original
credit to the seller (beneficiary).
Step 5: Seller (beneficiary) ships the goods, then verifies and develops the
documentary requirements to support the letter of credit.
Documentary requirements may vary greatly depending on the
perceived risk involved in dealing with a particular company.
Step 8: If the documents are correct, the advising or confirming bank will
claim the funds by:
Step 9: The advising or confirming bank will forward the documents to the
issuing bank.
Step 10: The issuing bank will examine the documents for compliance. If
they are in order, the issuing bank will debit the buyer's account.
Step 11: The issuing bank then forwards the documents to the buyer.
a) The draft involved is not drawn by the seller (the drawer) upon a bank
for payment, but rather on the buyer itself (the drawee) and
b) The seller’s bank has no obligation to pay upon presentation, but more
simply, acts as a collecting or remitting bank on behalf of the seller,
thus earning a commission for its service.
Test Yourself 1
In which of the following methods of purchase does the importer make the
payment only once the goods or imported items are sold to the end user?
I. Consignment purchase
II. Cash in advance
III. Down payment
IV. Open account
B. UCP 600
1. Uniform Customs & Practice for Documentary Credits 600 (UCP 600)
The Uniform Customs and Practice for Documentary Credits (UCP) is a set of
rules on the issuance and use of letters of credit. The UCP is utilised by bankers
and commercial parties in more than 175 countries in trade finance.
The ICC has developed and moulded the UCP by regular revisions, the current
version being the UCP600. The result is the most successful international
attempt at unifying rules ever, as the UCP has substantially universal effect.
The latest revision was approved by the Banking Commission of the ICC at its
meeting in Paris on 25 October 2006. This latest version, called the UCP600,
formally commenced on 1 July 2007.
A significant function of the ICC is the preparation and promotion of its uniform
rules of practice. The ICC’s aim is to provide a codification of international
practice occasionally selecting the best practice after ample debate and
consideration. The ICC rules of practice are designed by bankers and merchants
and not by legislatures with political and local considerations.
ICC, which was established in 1919, had as its primary objective facilitated the
flow of international trade at a time when nationalism and protectionism
threatened the easing of world trade. It was in that spirit that the UCP were
first introduced – to alleviate the confusion caused by individual countries’
promoting their own national rules on letter of credit practice.
The aim was to create a set of contractual rules that would establish uniformity
in practice, so that there would be less need to cope with often conflicting
national regulations. The universal acceptance of the UCP by practitioners in
countries with widely divergent economic and judicial systems is a testament to
the rules’ success.
254 IC-67 MARINE INSURANCE
UCP 600 CHAPTER 11
“Banks deal with documents, other parties deal with documents and/ or goods”
This is the basic principle of UCP. Documentation is very important and if banks
rely on proper documents presented to them, they do not incur any liability as
regards the goods but if the documents are faulty and if they deal with them in
the event of any default, they are liable. The same principle applies to
insurance documents.
Article 28 of UCP 600 deals with Insurance Documents and other factors
pertaining thereto.
a) Article 28 a
b) Signatories
Example
Manager etc.
c) Number of originals
If the insurance document indicates that it has been issued in more than one
original, all the originals must be presented unless otherwise authorised in
the Credit.
This is more or less redundant practice. Earlier, more than one original
document were being issued, so this provision came into force. Only one
original is issued. If more than one originals are issued then insurance
company should indicate that on the policy
Example
d) Cover note
Till introduction of UCP 600, cover notes were freely accepted by the
bankers. It is common practice that when the insurance is arranged well in
advance to comply with L/C formalities, cover notes were being issued as
proof of insurance having been arranged. The cover note is not the final
insurance document; probably that is why it is not to be accepted.
e) Insurance certificate
As per Indian system, insurance policy and certificate are the best
documents. Other documents are not reliable, if there is no balance under
the policy declaration etc., are not valid.
Under Art 28 (e) the date of insurance document should be either prior to
shipment or the date of shipment. Subsequent date is not to be accepted.
Under open policy/ cover the date of document will be invariably after the
date of shipment, in that case the insured should insist that insurers endorse
the document to state “risk to commence from date of shipment” etc.
g) Currency of coverage
h) Amount of coverage
Unless otherwise stipulated in the Credit, the minimum amount for which
the insurance document must indicate the insurance cover to have been
effected is the CIF or CIP value of the goods, as the case may be, plus 10%,
but only when the CIF or CIP value can be determined from the documents
on their face.
Sub-article 28 (f) (iii) states that the insurance document must indicate that
risks are covered at least between the place of taking in charge or shipment
and the place of discharge or final destination as stated in the credit.
Insurance must be covered at least between the two places/ports/airports
stated in the credit
k) Exclusion clause
Banks will accept insurance documents with any exclusion clause covered in
Article 28(j), e.g. Termination of Transit (Terrorism) Clause.
l) Excess / Franchise
n) Export transaction
Test Yourself 2
I. Banks deal with money; other parties deal with money and/or goods.
II. Banks deal with parties; other parties deal with documents and/ or goods
III. Banks deal with documents; other parties deal with documents and/ or
goods
IV. Banks deal with documents; other parties deal with parties and/ or goods
Summary
g) The Uniform Customs and Practice for Documentary Credits (UCPDC) is a set
of rules on the issuance and use of letters of credit. The ICC has developed
and moulded the UCP by regular revisions, the current version being the
UCP600.
Answer 1
In consignment purchase, importer makes the payment only once the goods or
imported items are sold to the end user.
Answer 2
The basic principle of UCP is “Banks deal with documents, other parties deal
with documents and/ or goods”.
Self-Examination Questions
Question 1
I. Consignment purchase
II. Cash in advance
III. Down payment
IV. Open account
Question 2
I. Consignment purchase
II. Cash in advance
III. Down payment
IV. Open account
Question 3
In which of the following payment methods, does an importer takes the delivery
of good and ensures that the supplier to makes the payment at some specific
date in the future?
I. Consignment purchase
II. Cash in advance
III. Down payment
IV. Open account
Question 4
In payment method, title to the goods usually passes from the seller
to the buyer prior to payment and subjects the seller to risk of default by the
Buyer.
I. Consignment purchase
II. Cash in advance
III. Down payment
IV. Open account
Question 5
I. Documentary credit
II. Payment notes
III. Documentary collection
IV. Customs invoice
Answer 1
In Down payment method an importer pays a fraction of the total amount of the
items to be imported in advance.
Answer 2
In cash advance method an importer makes the payment for the items to be
imported, in advance, prior to the shipment of goods.
Answer 3
In the open account method, an importer takes the delivery of goods and
ensures that the supplier makes payment at some specific date in the future.
Answer 4
In the open account method, title to the goods usually passes from the seller to
the buyer prior to payment, and subjects the seller to risk of default by the
buyer.
Answer 5
Chapter Introduction
In this chapter, you will learn about the various ways in which cargo loss can be
prevented or controlled. Then you will learn how marine risks are reinsured.
Finally, we will discuss the types of maritime fraud and precautions that can be
taken against that.
Learning Outcomes
Use only new, well-constructed packing for the product. Early deterioration
or collapse of flimsy or used cartons, boxes or bags invites pilferage through
exposure of contents. Corrugated fasteners will add to the security of
wooden boxes. Shrink wrapping, strapping and banding will further
contribute to package security.
b) Usage of coding
These as well as use of intermodal containers will help to keep the cargo
together and also make it inconvenient to thieves and pilferers.
The longer the cargo rests on piers, in terminals, port sheds or in truck
bodies, the more it is exposed to loss by theft or pilferage.
Cargo handling in various sea ports and airports of the world, ranges from
highly professional and sophisticated, to totally unskilled. Rough seas,
turbulent air, heavy traffic and sub-standard roads subject the cargo to
every imaginable kind of motion and impact. The consignor must pack for
the toughest leg of the journey.
“In no case shall this insurance cover loss, damage or expense caused by
insufficiency or unsuitability of packing or preparation of the subject matter
insured (for the purpose of this clause, “packing” shall be deemed to include
stowage in a container or lift van but only where such stowage is carried out
prior to attachment of this insurance or by the assured or their servant).”
b) Selection of packing
Wise selection of packing depends on the nature of the cargo. Items which
completely fill the box or carton and contribute to the strength of the
package are normally the easiest and the most economical to package.
Articles, which do not completely fill the selected container must be
cushioned, braced, fastened or blocked to prevent damage to the article
itself or destruction of the container. Do not exceed whatever capacity the
box, bag or carton was designed to accommodate.
Unitise, palletise or assemble cargo into the largest practical unit consistent
with handling, weight and dimension requirements. Packaging should be
strong enough to withstand the weight of other cargo that might be stowed
on top of it, and to withstand the pressures created by both movements in
transit and handling.
v. To arrange the cargo shipped to different ports in such a way that it can
be promptly and readily unloaded upon arrival at respective ports.
e) Layout of cargo
The layout of the cargo is carefully considered with due allowance given to
bottom stowage and avoidance of space wastage. Goods are securely lashed
and wedged to avoid displacement by the rolling and pitching of the vessel
during the voyage.
During loading, the weight of the cargo loaded is checked by the vessel’s
draft markings, which are situated on both sides of the stem and stern of
the vessel. As far as possible, it is endeavored to keep the vessel on an even
keel, with possibly a slightly deeper immersion at the stern. There must be
no list in the vessel, caused by greater weight of cargo on one side than the
other. Discharging operations also should proceed without disturbing the
stability of the vessel.
Cargo likely to be damaged by heat must be stowed away from boilers and
the engine room. Odorous cargo, such as tobacco, must be kept apart from
other cargo likely to be damaged by taint. Acids must be kept separately,
away from other cargo, preferably on deck, casks must be stowed with their
bungs (stoppers) up, and earthenware must be given top stowage.
h) Stowage plan
Before the cargo is loaded, a “stowage plan” is prepared so that the master
of the vessel has an adequate knowledge of the location of various types of
cargoes stowed and the holds. Copies of the stowage plan are sent to
steamer agents at each port of call of the vessel.
4. Water damage
Rain, high humidity, condensation and sea water separately or all of these in
combination can reduce otherwise stable cargo into a ruin of soggy, stained,
mildewed, rusty or delabelled merchandise. Salt spray driving across the deck of
an exposed lighter, a rain-swept customs compound, an open truck in torrential
downpour, dripping of condensation from the chilled interior of a ship’s hold or
sweat forming on the cargo itself, are all common hazards. Each commodity has
its own unique characteristics, which react differently when exposed to water.
Cargo should be protected from water damage from external sources such as
rain, sea-water, high humidity and ship’s sweat by adequate preparation and
packing.
Preventive measures:
e) Crates and other large containers should have drain holes in the bottom
to preclude collection of water within the packing. This is particularly
important where cargo is subject to formation of condensation, that is,
cargo sweat.
5. Containerised Cargoes
Once the shipper has decided on the container service best suited to his
needs and has selected the type of container, which will adequately
accommodate his cargo, he must inspect the container to be sure that it will
properly protect the cargo while in transit. Following checklist will assist the
shipper in inspecting a container to ensure that it will properly protect his
cargo:
iii. To inspect its watertight quality, enter the container, have the doors
closed and look for light leaks. Also check whether previous patches /
repairs are watertight.
iv. Cargo tie-down cleats or rings should be in good condition and well
secured. Check that the ventilator openings are not blocked off and that
they are equipped with baffles to prevent rain or seawater entry.
v. Be sure that the doors can be securely locked and sealed and remain
watertight when closed. Door gaskets should be in good condition and
watertight when closed.
vi. Check the lifting fittings at each corner of the container and the fittings
that secure the container to the trailer chassis. They should be in
working order. In case of opentop containers, check the hatch panels for
close watertight fit.
It is, therefore, very important to bear in mind that the same principles and
techniques, which apply to export packing and cargo stowage of break-bulk
shipments are equally valid when preparing cargo for Multimodal shipment
and when stowing the cargo in containers. Following are useful suggestions:
i. Pack for the toughest leg of the journey. Be certain that the
merchandise cannot move within the carton, box or other container in
which it is packed. Immobilise the contents by blocking or bracing or
provide adequate cushioning.
ii. Packages like cartons or boxes should be able to withstand the weight
pressure of cargo stacked up to 8 feet high. Such packages should be
able to bear lateral pressures also exerted by adjacent cargo in order to
prevent crushing.
iii. Heavy items like machinery and items not uniform in shape should be
crated, boxed or provided with skids to permit ease of handling and
compact stowage.
i. Plan the stow. Observe weight limitations. Do not exceed the rated
capacity of container.
ii. Distribute weight equally. Avoid concentrating heavy weights at one side
or one end. Stow heaviest items on the bottom.
iii. Avoid mixing incompatible cargo. Cargo which exudes odour or moisture
should not be stowed with cargo susceptible to taint or water damage.
iv. Cargo subject to leakage or spillage should not be stowed on top of other
cargo.
Test Yourself 1
Section 9 of the Marine Insurance Act 1963 states that an insurer under a
contract of marine insurance has an insurable interest in his risk and may
reinsure in respect of it. Unless the policy otherwise provides, the original
assured has no right or interest in respect of such reinsurance.
Also it is possible that he may wish to lay off an undesirable or doubtful risk,
either partly or in full. Moreover, to avoid the effects of major losses,
catastrophe reinsurances are placed which provide protection under the Excess
of Loss arrangement.
2. Methods of reinsurance
The methods or types of reinsurance can be broadly divided into two main
sections, namely, proportional and non-proportional contracts
a) Proportional reinsurance
b) Non-proportional reinsurance
Under this arrangement, the reinsurer pays the ceding company only when
the original loss has exceeded the limit of retention of the ceding company.
Consequently, the reinsurer is not directly concerned about the original
rates charged by the ceding company, as the premium rates he charges are
calculated independently, mainly on the basis of the past experience of the
account.
Facultative Treaty
(a) Reinsurer has the option to Reinsurer is obliged to accept
accept or decline any risk cessions within the scope of the
offered to him. agreement.
(b) Reinsurance is on individual Any number of risks can be ceded
basis and details of risk offered within the scope of the treaty and
are provided. not individual details are
provided, except as agreed.
d) Facultative reinsurance
Facultative covers are also in demand for reinsurance of hulls against total
loss only. The rate of premium may be fixed by the reinsurer or he may be
content to accept the risk at the original rate of premium if the reinsurance
is effected on identical conditions of the original policy.
The main drawback of this method is that the ceding company cannot give
immediate cover on risks which are beyond its retention limits, as the
underwriter must first contact several reinsurers to complete the placement
of the amount exceeding his retention. Despite this drawback, facultative
reinsurance has its uses for the following main reasons:
ii. To reinsure special types of risks which are outside the scope of usual
treaties.
iv. To facilitate reciprocal exchange of business and seek the expertise and
experience of reinsurers on risks of special nature.
e) Treaties
3. Proportional treaties
Under this treaty, a fixed proportion of every risk in a given class of business
is ceded. The reinsurer thus shares proportionately in all losses and receives
the same proportion of all premiums. In a quota share treaty, the reinsurer
in effect follows the fortunes of the ceding company. The quota share
arrangement specifies a definite upper monetary limit, any one risk.
Example
For example, quota share arrangement limit could be expressed as: “To accept
80% of every risk insured, not to exceed Rs. 30 lakhs any one risk.”
The main disadvantage of the quota share method to the ceding company is
that the ceding company cannot vary its retention for any particular risk and
thus it pays away premiums on small risks, which it could very well retain
for its own account. Another disadvantage, which follows form the first, is
that the sizes of risks retained by the ceding company are not homogeneous,
as it retains a fixed percentage of all risks written, and such risks are of
varying sizes.
b) Surplus treaty
A Surplus (also called “excess of line”) treaty allows the ceding company to
reinsure under the treaty any part of the risk which it is not retaining for its
own account. A surplus treaty is arranged for, say, four, five or more lines, a
“line” being the amount of the ceding company’s retention.
This means that the surplus treaty can automatically accept a maximum of
four, five or more times the size of the ceding company’s retention. For any
larger risks, the balance must be reinsured facultatively. The premium for
the risk is ceded in the same proportion as the sum insured of the risk.
The “line” or the “limit of retention” is the maximum which the ceding
company can retain, and it is possible for it to retain a smaller amount than
the limit, thus enabling the ceding company to arrange its retention in
relation to the quality of the risk it is reinsuring.
Thus, the ceding company may keep a higher retention on a risk of superior
quality and a lower retention on an inferior risk. However, when the
retention of the ceding company is high, a larger amount is ceded to the
treaty than if the retention is smaller.
The advantages of the surplus treaty to the ceding company are as follows:
The main disadvantage to the reinsurer is that not only does he receive
larger share of poor risks, he also receives a larger share of peak risks, as
the ceding company will have retained whole or large proportion of the
smaller risks for its own account.
For this reason, commission rates to the ceding company under surplus
treaty are less than those under quota share treaty.
These treaties are also called “Auto-fac treaties”. As the name indicates,
the Facultative Obligatory Treaty (Fac-Oblig) has the features of both
facultative cessions and obligatory treaties.
This treaty is defined as an agreement whereby the ceding company has the
option to cede (no compulsion) as for facultative risks, and the reinsurer is
bound to accept (that is, having no option to decline) as under a treaty
arrangement, a share of the specified risk offered by the ceding company.
d) Pooling arrangements
All members of the pool contribute all or part of their premiums for a
specified category of business into a common fund and they share the
aggregate claims in the same proportions as their premiums or in any other
agreed manner. Profits, losses and expenses are shared in the same way.
4. Non-proportional treaties
There may be an upper limit to the treaty, so that if the direct insurer, for
instance, is prepared to bear, say the first Rs. 50,000/- of any loss, the
treaty reinsurers will bear any loss over Rs. 50,000/-, but not exceeding, say
Rs. 5 lakhs. For cover beyond that limit, a further excess of loss treaty may
be negotiated.
Retains for own account all losses from Reinsurer’s liability under Excess of
any one accident upto Rs. 2,00,000/-. Loss arrangements.
There are two types of Excess of Loss covers: Working covers and
catastrophe covers.
i. Working covers are Excess of Loss treaties under which the ceding
company as well as the reinsurer agree to protect the normal exposure
of the business covered that is normal losses which occur with some
regularity.
ii. Catastrophe covers, on the other hand, protect the ceding company
against the risk of accumulation in the event of one catastrophe, for
example, total losses, cyclone, earthquake, port godown fires,
explosions in the port area, etc. When this cover is attracted, the event
involves more than one risk by the very nature and extent of cover it
affords.
This type of reinsurance cover (also called “Excess of Loss Ratio”) prevents
the ceding company from losing more than a specified amount of loss for a
given class of business. Stop Loss Reinsurance makes it possible to limit the
ceding company’s loss ratio to an agreed percentage. In other words, as the
name implies, the loss ratio of the ceding company is stopped at an agreed
percentage, and if in any one accounting year, the loss ratio exceeds that
percentage, and then the reinsurers pay the difference.
There is an upper limit of liability under the treaty. This limit is also
expressed in the form of a loss ratio. This type of reinsurance is of a
catastrophic nature and seldom starts at less than 70% or 80% loss ratio. For
example, the treaty may cover “amounts in excess of 80% loss ratio upto
130% (alternatively expressed as: “amounts in excess of 80% loss ratio upto a
further 50%).
Stop loss cover may be arranged in addition to the normal Surplus or Excess
of Loss treaties to protect the net retained account of the company.
Example
The treaty may cover annual losses in excess of Rs. 5 crores upto a further Rs. 4
crores. The ceding company pays all losses upto Rs. 5 crores and the reinsurer
pays all losses over Rs. 5 crores but not more than Rs. 4 crores. Then any
amount in excess of Rs. 9 crores will revert to the ceding company.
d) Open cover
Under this method the direct insurer is free to choose within the terms of
the treaty, which risks he wishes to cede. He can do this at his own
discretion e.g. pass on only those risks that appear particularly exposed, can
not be placed elsewhere or exceed the capacity of the other reinsurance
methods. The reinsurer is obliged to accept all the cessions he is offered.
This arrangement can pose a significant risk to the reinsurer as only bad or
risky, risks may be ceded to him.
In this method there are no lines. The limits are expressed in terms of the
amounts only. It is mainly used for marine cargo. Because of its peculiar
nature, it is difficult to get this type of cover.
e) Alternative risk transfer
When a number of Open Covers are issued, it is quite possible that several
clients may be shipping full lines perhaps by the same vessel, and an
underwriter may not know the full extent of his cargo commitments on a
vessel before the risk commences. Also, advices of shipments which may
emanate from several overseas branches and agencies of the insurer are
often communicated to him after the risk has attached. Often the name of
the carrying vessel is unknown, or known only after the completion of the
voyage. Particular difficulties, therefore, occur in accumulation control,
especially in case of cargo insurance.
The “line” which an underwriter intends to retain for his own account on
various classes of vessels and risks, whether hull or cargo, must be decided
with considerable care. The “line” must bear a relation to the underwriter’s
probable net premium income for the year, so that a loss on any one risk
shall not unduly strain his whole underwriting account for the year.
Only when this ultimate net loss (that is, after taking into account all
recoveries whether from the assured or under other reinsurance
arrangements) exceeds the retention limit, can the ceding office recover
from his reinsurers upto a specified maximum limit. On the other hand, an
Excess of Loss treaty may protect the ceding company’s gross lines or his net
lines after cessions to Surplus and/or Quota Share.
6. Hull Reinsurance
In the field of marine hull, an underwriter has greater control over his
commitments because each vessel or fleet is evaluated and underwritten
individually and not under Open Covers as is usually the case in cargo insurance.
The demand for reinsurance on facultative basis is confined mainly for limited
conditions, usually, Total Loss Only.
Before making any cession, the underwriter must determine his own net
retention for the best category of vessel, graded down, and obtain Excess of
Loss facility. As with cargo interests, the present trend is away from
proportional treaties towards Excess of Loss methods of protection.
However, Quota Share and Surplus Treaties are still encountered, particularly
for those engaged in domestic or national markets, but the emphasis is
increasingly on Excess of Loss arrangements, particularly for “catastrophe”
covers.
The hull underwriter must take care to obtain sufficiently high reinsurance
limits (advisedly on a vessel basis), since it must be borne in mind that the hull
policy may cover liability risks in addition to physical damage to the vessel.
ii. To obtain the best possible terms for reinsurance placed outside the
country.
iii. Cessions upto specified limits to Market Pools in Fire and Marine Hull
departments. The Pool cessions are protected by Excess of Loss covers
and retroceded back to the companies and are retained fully within the
country. These Pools have been formed with the primary purpose of
increasing the net retained premium within the country.
iv. First and Second Surplus treaties of the 4 companies, which are traded
outside the country by the companies themselves, mostly on reciprocal
basis.
vi. Any balance after the treaties are exhausted is reinsured facultatively.
Facultative reinsurances upto specified limits are absorbed within the
country and are protected by Aggregate Excess of Loss cover.
Test Yourself 2
I. Section 7
II. Section 8
III. Section 9
IV. Section 10
C. Maritime Frauds
Definition
In the last several years, these and other factors have led to a significant
escalation in the number of incidents that can be termed “maritime fraud”.
When authorities in Greece and Cyprus clamped down on unscrupulous
operators, the fraudsters shifted their attention to Lebanon and West Africa. At
the same time, a spate of suspicious losses occurred in the Far East. No part of
the world is immune from instances of maritime fraud.
Maritime fraud has many guises and its methods are open to infinite variations.
Majority of these crimes can be classified into following categories:
a) Scuttling frauds
Example
For example, a dishonest ship owner may approach an exporter and offer to
carry his next large cargo consignment on his vessel. The exporter is to arrange
the contract and the proposed buyer to open a letter of credit in his favour to
pay for them. No goods are actually to be supplied or shipped, but the ship
owner agrees to supply bills of lading to show that the goods have ostensibly
been loaded on the vessel.
The bills of lading together with such other documents as are required are
presented to the bank negotiating the letter of credit. The banker pays against
documents and not against goods. After ascertaining that the cargo description
corresponds to the requirements as stipulated in the L/C, the bank, in the
normal course of events, releases the funds under the terms of the L/C.
The ship, without its, by now paid-for, but non-existent cargo, leaves port. It
should not of course reach its destination, because should it do so, the missing
cargo would lead immediately to the discovery of the fraud. To avoid this
eventuality, the ship is deliberately scuttled in a suitable location, so as to
remove the evidence on the non-existent shipment beyond any prospect of
subsequent investigation.
The ship owner enters an insurance claim on his hull underwriters and he also
receives a share of the proceeds from the letter of credit from exporter, leaving
the hapless buyer to pursue an insurance claim for loss/non-delivery of his
cargo.
b) Documentary frauds
This type of fraud involves the sale and purchase of goods on documentary
credit terms, and some or all of the documents specified by the buyer to be
presented by the seller to the bank, in order to receive payment, are
forged. Bankers pay against documents. The forged documents attempt to
cover up the fact that the goods actually do not exist or that they are not of
the quality ordered by the buyer. When the unfortunate purchaser of the
goods belatedly realises that no goods are arriving, he starts checking, only
to find that the alleged carrying vessel either does not exist or was loading
at some other port at the relevant time.
Banks deal with documents and not in the goods covered by them. A bank
which accepts, under a letter of credit; a set of documents, which appear to
be regular on their face, is not liable to its principal if the documents turn
out to be forged or to be containing false statements.
c) Cargo thefts
The fraudulent charterer can turn this situation to his advantage. Having
chartered a vessel from an unsuspecting owner, the charterer canvasses for
cargo. Knowing that in a depressed economy, shippers will be willing to cut
corners in the hope of reducing transport costs and thus saving on freight so
that their goods can be more attractively priced the charterer offers low
freight rates on pre-paid basis. He can afford to do that, as he has no
intention of completing the voyage.
Soon after the vessel sails from the port, the charterer disappears. He may
have paid his first month’s hire or he might not have paid any hire charges
as are due from him. Meanwhile the ship owner may find himself with
substantial bills to meet, from port authorities, along the ship’s route as
well as for crew’s wages and for provisioning the ship. Worse, the ship
owner may find that his ship, not having delivered the cargo to the
consignees, has been arrested and this leads to protracted and expensive
legal wrangle.
In order to get their goods to destination, shippers may agree to pay a
freight surcharge or they will agree to a diversion and a sale of the goods to
cover costs and then start the export process all over again. Sometimes,
when no such compromise can be reached, the ship owner will instruct the
master to divert his ship and sell the cargo wherever he can, thus becoming
as much of a criminal as the charterer.
e) Piracy
Piracy is a war-like act committed by private parties (not affiliated with any
Government) engage in acts of robbery and / or criminal violence at sea.
The term can include acts committed in other major bodies of water or on a
shore.
Definition
Piracy is the act of boarding any vessel with an intent to commit theft or any
other crime, and with an intent or capacity to use force in furtherance of that
act.
a) Cargo insurance
Clause 4.7 of ICC (B) and (C) excludes “deliberate damage to or deliberate
destruction of the subject-matter insured by the wrongful act of any person
or persons”. However, if the insured desires these risks to be covered, he
may request the cover from his insurers, who may grant the same at their
discretion subject to additional premium. If cover is granted, then ICC (B)
and (C) policies are made subject to the “Malicious Damage Clause” which
reads as under:
It should be noted that under all the 3 sets of ICC, loss, damage or expense
attributable to wilful misconduct of the assured is excluded.
Whilst “piracy” is generally included in the risks embraced within the term
“all risks” of ICC (A), a rioter who attacks the ship from shore is covered by
the Institute Strikes Clauses (Cargo) and not by ICC (A). There is no cover at
all in ICC (B) and ICC (C) for piracy.
b) Hull insurance
Under the Institute Hull Clauses (1.10.83), loss or damage to the insured
vessel caused by, inter alia, the following perils is covered:
Definition
“Barratry” can be defined as every wrongful act wilfully committed by the
master or crew to the prejudice of the owner, or, as the case may be, the
charterer. For e.g. running away with the ship, sinking her, deserting her,
steeling the congo, etc.
The paramount clause no. 25 of the Institute Time Clauses – Malicious Acts
Exclusions – excludes loss, damage, liability or expense arising from:
There are certain basic precautions against maritime fraud that commercial
interests like exporters and importers, banks and insurance companies, should
be aware of and should be able to implement.
The checks and precautions that buyers and sellers can implement are:
i. Care should be exercised when dealing for the first time with unknown
parties. Careful inquiries should be made as to their standing and
integrity before entering into a binding agreement.
vi. In order to ensure that the subject cargo is in fact loaded on the
specified carrying vessel, the buyer may stipulate for a “report on the
vessel” from an independent third party.
vii. Conference or national lines bills of lading should be used and marked
“freight prepaid” with the amount of freight clearly stated in the bill of
lading.
viii. Services of dependable and well-known forwarding agents, who are also
members of a national association, should be engaged.
ix. Buyers and sellers should attempt to identify whether the carrying vessel
is on charter and who the charterers and owners are and whether
chartering is done only through agents of reputable institutions.
b) Banks
Banks abide by the “Uniform Customs and Practice for Documentary Credits”
issued by the International Chamber of Commerce (ICC). These clauses
state:
So, it is unfortunate that banks have little, if any, responsibility to check the
authenticity of documents, although one could be excused for thinking that
as the bank is the point of exchange, they should indeed have such a
responsibility.
ii. If such checks are considered difficult for a bank because of the volume
of work involved, then perhaps a “super-service” at additional cost to
the customers, should be considered with the actual checks being
carried out by outside agents or brokers retained at an annual fee.
c) Insurers
Where the name of the carrying vessel is not known at the point when
insurance is effected, the insurance is made subject to the Institute
Classification Clause and the requirement that the vessel carrying the goods
conforms to the provisions of the Clause. The assured is required to declare
to the insurers the name of the carrying vessel as soon as it is known. When
the carrying vessel complies with the requirements of the Classifications
Clause, standard rate of premium is charged. Otherwise, extra premium is
attracted for over-age, under-tonnage, non-classification and F.O.C.
registration of a vessel.
5. Conclusion
The present emphasis on the incidence of maritime fraud has highlighted the
cargo problem, but in most cases, a ship is also involved and it is likely that the
insurers’ interest also extends to it. Problems of a different nature arise with
the ship, but the principle that the insurer must exercise every care to check
background details of the vessel itself, of ownership and management and of its
trading record is the same.
Test Yourself 3
I. Suez Canal
II. Gulf of Aden
III. Gulf of Mexico
IV. Panama Canal
Summary
a) Loss control / prevention means a systematic approach to reducing loss of or
damage to property with the purpose of minimising waste to the owner.
f) Water can reduce otherwise stable cargo into a ruin of soggy, stained,
mildewed, rusty or delabelled merchandise.
h) The methods or types of reinsurance can be broadly divided into two main
sections, namely, proportional and non-proportional contracts.
m) Under Quota Share Treaty a fixed proportion of every risk in a given class of
business is ceded.
n) A Surplus (also called “excess of line”) treaty allows the ceding company to
reinsure under the treaty any part of the risk which it is not retaining for its
own account.
o) The Facultative Obligatory Treaty (Fac-Oblig) has the features of both
facultative cessions and obligatory treaties.
p) Pooling arrangements create a capacity to handle risks of a catastrophic
nature or risks of special category; for example, atomic energy risks.
q) Excess Loss of Treaty arrangement is basically a form of reinsurance,
whereby the direct insurer sets a monetary limit to the amount he is
prepared to bear of any one loss as a result of any one event, on the class or
classes of business concerned.
r) There are two types of Excess of Loss covers: Working Covers and
Catastrophe Covers.
s) Stop Loss Treaty type of reinsurance cover (also called “Excess of Loss
Ratio”) prevents the ceding company from losing more than a specified
amount of loss for a given class of business.
t) An Aggregate Excess of Loss treaty works on the same principle as a Stop
Loss Treaty, but instead of expressing the loss ratio limit as a percentage of
the annual premium, it is stated in actual figures.
u) Under Open Cover method, the direct insurer is free to choose, within the
terms of the treaty, what risks he wishes to cede.
v) Under Marine Open Cover arrangement, the underwriter automatically
accepts from his assured all his shipments coming within the scope of the
Open Cover upto an agreed amount per vessel / conveyance.
w) In the field of marine hull, an underwriter has greater control over his
commitments because each vessel or fleet is evaluated and underwritten
individually and not under Open Covers, as is usually the case in cargo
insurance. The demand for reinsurance on facultative basis is confined
mainly for limited conditions, usually, Total Loss Only.
x) Maritime fraud occurs when one of the parties (exporter, importer, ship
owner, charterer, ship’s master, officers and crew, insurer, banker, broker
or agent, freight forwarder) succeeds, unjustly and illegally, in obtaining
money or goods from another party.
y) Majority of the maritime frauds can be classified into the following
categories:
Scuttling of ships (deliberate sinking of older vessels with / without
cargo to claim insurance, also called Rust Bucket Fraud)
Documentary frauds (the illegal manipulation of shipping documents)
Cargo thefts (ship deviation and subsequent theft of cargo)
Fraud related to the chartering of vessels
Piracy
Answer 1
Answer 2
Section 9 of the Marine Insurance Act states that an insurer, under a contract of
marine insurance, has an insurable interest in his risk and may reinsure in
respect of it.
Answer 3
The Gulf of Aden is more prone to pirate attacks as compared to the other 3
places mentioned.
Self-Examination Questions
Question 1
I. Non-delivery
II. Skillful Pilferage
III. Stowage
IV. Water damage
Question 2
There are two types of excess of loss covers: Working Covers and
I. Non-working Covers
II. Open Covers
III. Catastrophic Covers
IV. Pooling Covers
Question 3
ABC Insurance Company has got into an Aggregate Excess of Loss Treaty with
XYZ Reinsurance Company. The treaty covers annual losses in excess of Rs. 5
crores upto a further Rs. 4 crores. Which of the following statements is
incorrect?
I. ABC Insurance Company will cover all losses upto first Rs. 5 crores
II. XYZ Reinsurance Company will cover all losses above first Rs. 5 crores upto a
further Rs. 4 crores.
III. Any amount in excess of Rs. 9 crores will be shared equally among ABC
Insurance Company and XYZ Reinsurance Company.
IV. Any amount in excess of Rs. 9 crores will revert to ABC Insurance Company.
Question 4
For marine insurance, banks abide by the “Uniform Customs and Practice for
Documentary Credits” issued by the .
Question 5
Answer 1
Answer 2
There are two types of excess of loss covers: Working Covers and Catastrophic
Covers.
Answer 3
Any amount in excess of Rs. 9 crores will be shared equally among ABC
Insurance Company and XYZ Reinsurance Company. This is incorrect.
Answer 4
For marine insurance, banks abide by the “Uniform Customs and Practice for
Documentary Credits” issued by the International Chamber of Commerce (ICC).
Answer 5
As a precaution against maritime fraud, banks should make use of the Lloyd’s
Shipping Index.