Marine Insurance 2007

Umschlag_A4 14.11.
2003 9:54 Uhr Seite U1
Marine insurance
Technical publishing
Marine
37219ks_Marine_insurance_ih_e 14.11.2003 9:44 Uhr Seite 1
Marine insurance
Some of the things you’ve always wanted to

know but never got around to asking
Contents
1 What you may and must not expect from this publication 5
2 History of marine insurance 6
3 What is …? 11
Cargo 11
Hull 12
Offshore 15
Marine liability 18
4 What can go wrong? 20

Total loss/constructive total loss 20
Partial loss 22
Perils of the sea/perils on the sea/extraneous risks 23
War, strikes, riots and civil commotion (WSRCC) 27
General average 29
Salvage, sue and labour 30
Fraud 32
5 Risk factors 34
Marine generally 34
Hull 36
Cargo 37
6 Inseparability of premium (necessity for underwriting year) 39
7 The long-tail nature of marine business 40
8 Current marine insurance conditions 42

General observations 42
Cargo conditions and rates 43
Hull conditions and rates 46
Political risks, conditions and rates 49
9 Usually uninsurable risks 53
10 Reinsurance 55
11 Epilogue 58
Appendix 59
1 What you may and must not expect

from this publication
How often have we all heard the questions: What is marine insurance anyway?
What sets it apart from other types of insurance? Is it really as special as some
marine experts would like us to believe? Do they really need special sets of statis-
tics in marine or is this just a gimmick to plague poor accountants? What’s so
special about shipping cargo around the world or running a ship? Why all the fuss
about flags, years of construction, packing? Why all the questions about clients’
records, commodity statistics, fleet lists, owners’ records, underwriting year
statistics?
In short, does the marine branch deserve the special status it always claims, or is
it just another form of insurance with clever specialists who managed to fool just
about everybody?
There are probably thousands of essays and publications available on the subject
of marine insurance, aimed at making the marine specialist who reads them an
even greater specialist – or thoroughly confusing him. However, for the marine
layman – and this includes insurers of other branches – there seems to be very
little reading material available. This is why we decided to sit down and write this
publication.
To keep it as simple as possible, we have restricted our comments to the usual

English marine conditions, seen in the light of English law and practice. Local cir-
cumstances, including judgments passed by local courts, may of course lead to
a great variety of often contradictory conclusions. Further, it goes almost without
saying that many of the absolute statements contained in this publication are
made for dramatic effect and reflect the rule. There are, of course, many excep-
tions (which again serve to confirm that there is a rule in the first place). Suffice it
to add that there would be too many of them to comment on.
What you are holding in your hands should be seen as an attempt to answer
some of those repetitive questions in a written, easily understandable form and
give the interested non-specialist a broad insight into what makes marine insur-
ance tick.
Any notion of attaching specialist status to this publication would be definitely

wrong. Although equally flattering, it would be wholly inappropriate for the reader
of this publication to consider himself a marine specialist, simply by having read it.
Thus forewarned, we hope that you will find the following interesting enough to
finish, even if you have not received orders to do so. If you end up enjoying it, we
have more than fulfilled our ambitions.
5 Swiss Re: Marine insurance

2 History of marine insurance
As there is no school, college, university or other educational institution in real life

where every participant is not bored nearly to death with long elaborations about
the history of things before proceeding to the present (the one and only thing that
really is of interest), we felt that we did not want to break with old tradition and
decided to do the same.
Yet, as we would not want to lose your attention before we even gained it, we
compromised with tradition and made the history short and therefore – hope-
fully – palatable.
Have you ever asked yourself why there is insurance? Who was the first to think of
such a concept anyway? Well, if you ask a marine insurer that question, he will
answer you with considerable pride: “We did, of course; who else?”
Although this may sound a bit presumptuous, he is quite right. As a matter of fact,
long before there was fire, accident, liability and even life insurance, there were
forms of marine insurance.
Way back at the time of the ancient Greeks and – later – the Romans, maybe
even as early as the Phoenicians, there was a system that allowed the shipowner
to borrow money on his ship and cargo based on the agreement that if the voyage
went well, he would repay his banker the loan plus interest. However, should fate
have other things in store (which it quite often had in those days) such as storms,
pirates, wars, plagues and other unpleasantnesses, causing the vessel to sink, dis-
appear or otherwise go astray, the banker could of course no longer collect either
his loan or the interest. This transaction therefore constituted the first successful
risk transfer from the shipowner to another party, namely the moneylender, and
seems to be very closely related to that “new invention” on the global (re)insurance
markets referred to as ART (alternative risk transfer).
It goes without saying that the moneylenders, being the clever people they are,
charged considerably higher interest rates for loans on ships and goods than on
other less exposed and dangerous ventures. The difference between regular inter-
est rates and those charged for maritime adventures could therefore be related to
the risk premium charged by modern day insurance companies.
Completely separately and based solely on the noble thought of solidarity, there
developed on the Greek island of Rhodes a few centuries BC another concept
of risk transfer/risk sharing still in active use today: the principle of “general aver-
age”.

… when sails still billowed

To illustrate the working of this special and rather peculiar system, it is best to use
an example:
A Rhodian shipowner sails with his vessel and three boxes of cargo, each belong-
ing to a different owner and each valued at 100 ancient currency units (acu),
from Rhodes with the intention of going to Athens. Fate intends differently and
causes the 400 ancient currency unit adventure (three boxes plus one vessel at
100 each) to run aground on a sandbar in a particularly nasty area. To add insult
to injury, fate further mobilises a storm of major proportions causing our Rhodian
friend to fear for his life, his vessel and maybe even for the three boxes entrusted
to him. Thinking fiercely, and acting with speed, determination and desperation,
our friend grabs two of the three boxes and throws them overboard, thereby light-
ening the ship sufficiently to refloat her and enabling him to flee from the threat-
ening storm.
What has happened? To save the adventure, the shipowner has sacrificed 200 acu
(ancient currency units), ie after the arrival of our friend in Athens there were
200 acus saved and 200 acus were missing, with the shipowner and one cargo
owner rejoicing at the expense of the other two, whose boxes were jettisoned. To
do away with this obvious injustice, the “Lex Rhodia de iactu”, still applicable today
(even if in a slightly more refined form) under the name of “general average”,
comes into play, specifying that the property saved shall contribute to the damage
suffered by those parties whose property was sacrificed in the interest of all par-
ties to the adventure. To guarantee an equitable sharing of the loss, it is further
indicated that the contribution shall be in proportion to the interest at stake. This
would present the following picture:
Interest Value % Amount % Amount Amount received Loss

at stake sacrificed contributed in contribution in %
Ship 100 25 — 0 50 — 50
Box 1 100 25 — 0 50 — 50
Box 2 100 25 100 100 — 50 50
Box 3 100 25 100 100 — 50 50
Total 400 100 200 50 100 100 50
Plain, simple and fair are attributes that immediately spring to mind when reading
the above example. After all, everybody in that adventure ended up suffering the
same financial loss with no one profiting at the expense of someone else.
So, there were these two perfectly working systems, one of which is still more or
less unchanged today, the other no longer practised. Why?
Well, in the year 1236 AD, Pope Gregory IX decided to start a thinking process
within the shipping and trading community by declaring the charging of interest
illegal, thus making it impossible to continue the practice of borrowing money on
ship and goods that had been successful for so many centuries.

Obviously, people were thinking hard and, as so often happens with new and
revolutionary ideas, it took some time. For it was only in the year 1369, or
roughly 140 years down the road, that the new term “assecuramentum” was
first heard in Genoa, Italy. The very same maritime city was also the birthplace
of the word “polizza” or policy as known today. From then on, development sped
up. A sea ordonnance was passed in Barcelona, Spain, in 1435, ie 57 years
before Columbus discovered America and helped develop marine insurance sim-
ply by giving a very strong impetus to the growth of shipping and trade with the
New World.
At first, the risk carriers, ie those who issued the first “polizzas”, were independ-
ent, wealthy traders; it took until 1668 to see the founding of the first marine insur-
ance company in Paris, France. This was followed by the famous “London Assur-
ance” and “Royal Exchange Assurance”, both established as marine insurers in
1720 and protected by royal decree against corporate competition for their first
100 years of operation.
An even more important factor for the rather dominant role played by the “London
market” in respect of the further refinement of marine insurance in the coming
200 years was, no doubt, a coffee house rebuilt in London after the Great Fire of
1666 which belonged to a certain Edward T. Lloyd.
It was in his house that the shipping and trading intelligentsia of the time met and
exchanged information, gossip, capital and, last but not least, risks.
For this, the rather wealthy individuals who, after Lloyd’s was eventually incorpo-
rated in 1871, became known as “members”, agreed to accept the various risks
associated with the transportation of goods and the running of vessels against
a proper remuneration, or insurance premium payable in advance. The reliability
of these risk transfers was based on the principle of unlimited personal liability
of each member, a fact which had to be subtly altered after disastrous losses
prompted Lloyd’s also to allow corporate (limited liability) capital in 1994. As of
the turn of the millenium, the vast majority of capital providers come from the cor-
porate community – private names becoming an endangered species.
In addition, Lloyd’s provided a number of additional services such as cargo and

vessel surveys, vessel classification, vessel registration, shipping intelligence,
shipping publications and claims settling etc, most of which are still in existence
today. Lloyd’s was also instrumental in developing its own marine policy, the
so-called SG form first released in 1779. It is stunning to think that this policy
remained in active use almost worldwide for over 200 years until a general revision
of conditions finally broke its time-worn backbone in early 1982.
We’ve made it into the present! And, in the process, we have found that marine
insurance really is the mother (or the father if you so wish) of all branches of insur-
ance. Thus, even though it is true that sometimes children grow taller than their
parents, something which certainly happened a long time ago if one compares
the premium income of marine against other branches of insurance, we are still
very proud mothers and fathers.

Yet, even admitting that marine insurers’ relative importance is shrinking, there is
confidence, because no one trader is financially capable or willing to send the
tremendous value concentrations represented by a ship and her cargo on a per-
ilous voyage without insurance protection. And, in a time when wealth is often
built on debts, no bank will ever be willing to lend money or grant credit on unin-
sured ships or cargo.
The future of marine insurance will therefore not be one of a big and rising star
having a lead on everyone else, but rather remain somewhat in the background,
not too small mind you, but happy to maintain the marine insurers’ present global
market share of 2% to 3%.
Don’t be fooled by that low average percentage; there are enormous fluctuations
from area to area. Developing countries, whose economies are dominated by
imports that need to be insured, compared to very little money spent by private
individuals on personal insurance, show a much higher marine market share,
sometimes reaching 50%.
In any event, disregarding shifts in income, importance in terms of premium pro-

duction and market shares, ships will continue to sink, be stranded, collide and
catch fire sometimes, and cargo will never cease to break, disappear, rust and get
stolen. This fills our hearts with happiness, since it assures our future right to exist.
There will always be marine insurance!

3 What is …?
Cargo
Basically anything that is loaded onto any type or form of vehicle for the purpose
of being transported from A to B, always provided that the “thing” doesn’t happen
to be a human being – nowadays generally classified as passengers. This classifi-
cation is, however, of quite recent date; just short of 150 years ago, cargo policies
were issued on the transportation of slaves from West Africa to the West Indies!
Within the term “cargo”, there is a further differentiation governed by how easy or
difficult it is to steal the cargo. It would quite obviously be much more convenient
to walk off with a million’s worth of diamonds than it would be to steal coal worth
the same amount. At least with the first, you don’t have to worry about dirty hands.
Therefore, on a more serious and scientific basis, the eggheads in marine insurance
decided that any cargo with a value/weight ratio exceeding that of silver would
be called “valuables” or “specie”. Because of the extreme susceptibility of such
valuables to changing ownership without the actual permission of the rightful
owner, it is clear that, as a risk offered for insurance, they deserve special consid-
eration and distinct treatment. It would, for example, be very inappropriate indeed
to notify your local Mafia or other friendly neighbourhood thug organisation of
exact circumstances and details relating to the transportation of valuables – tight
security being one of the most important loss prevention measures in forwarding
them.
To summarise, “it” must be carried by “something” for the purpose of transporta-

tion to be a cargo within the definition of marine insurance. If it moves on its own,
it does not qualify.
This may lead to the rather strange situation where a helicopter that would nor-
mally be regarded as an aviation risk would suddenly become cargo if it were
loaded into an aircraft or onto a ship. On arrival, it would of course revert back to
its original state, ie become a helicopter and thus an aviation risk again.
This principle similarly includes such oddities as cars, trucks, planes, boats and
trains on vessels, locomotives, cars and boats on trains and trucks, ships on ships
and sometimes even aircraft on aircraft: just think of NASA’s piggyback space
shuttle transports.

Hull
Basically, anything that floats and moves, from simple little rowing boats to very
large and ultra-large ocean-going tankers. In terms of carrying capacity, usually
expressed in dead weight tons (DWT), this may cover a wide range, starting at a
few hundred kilos and going as high as 560 000 tons for the largest of the ultra-
large crude oil carriers (ULCC) ever built.
Seen from the criterion of navigation, hulls are considered insurable in the marine
market as long as they move occasionally, ie floating lighthouses, buoys, markers,
fireships and other permanently moored floating devices (with the exception of
offshore structures for oil production) would normally not be insured in the marine
hull market.
As we are now talking of ships and the like, it might be timely to ask a silly ques-
tion: how come ships are invariably addressed as “she” by anyone except the
most ignorant landlubbers?
Here’s the answer:

“A ship is called a she because there is always a great deal of bustle around her,
there is usually a gang of men about, she has a waist and stays; it takes a lot of
paint to keep her good looking, it is not the initial expense that breaks you, it is
the upkeep; she can be all decked out; it takes an experienced man to handle her
correctly; without a man at the helm, she is absolutely uncontrollable. She shows
her topsides, hides her bottom and, when coming into port, always heads for the
buoys!”
That point settled, why the reference to “hull”, ie the ship’s outer skin? This is to
be understood in the historical context of marine insurance. Initially, when agree-
ing to insure a vessel, one was only covered for the ship and its masts, rather
than for the whole kit and caboodle including ship’s stores, nets, lines, equipment,
bunkers, etc. To make this intention clear, the covered “thing” was referred to as
the “hull”.
Today, with the great days of the tea clippers and other sailing ships unfortunately
long gone, the term has been widened to “hull and machinery” (H+M), which
again illustrates the original intention of granting cover for the skin and the propul-
sion equipment only.
In today’s marine hull insurance environment, the term “hull” is however quite
commonly deemed to embrace two other major groups of vessel owners’ inter-
ests: “disbursements and collision liability”.
The first, disbursements, includes such things as the ship’s stores, bunker fuels
and freight-earning capacity up to an agreed maximum of 25% of the total value
insured for hull and machinery.

Giant hatch covers open to receive cargo

The second, the so-called “running down collision” liability (RDC), provides cover
to the shipowner for 3 ⁄4 of his liability to other ships if he happens to accidentally
“run them down” ie collide with them. Again, being the cautious group it is, the
marine insurers’ community decided to limit this particular liability to 3 ⁄4 of the
value insured for hull and machinery. Sometimes this 3 ⁄4 is extended to 4⁄4 but not
beyond, the excess RDC liability of the shipowner would therefore have to be
insured outside the normal marine policy.
A further, rather important part of “hull” business is construction and conversion

of ships. These involve all the risks encountered in the actual building of ships,
commencing from the day the keel is laid up to the day the ship is delivered to
her proud owners. This may take a few years, especially when it comes to building
specialised vessels such as submarines. A rather infamous one in this category,
the “Walrus”, was conceived on the drawing boards way back in 1976; the keel
was laid and insurance placed in 1979. Eight years later, the nearly completed
“Walrus” caught fire, extensively damaging the complex piece of equipment,
surprising quite a few insurers who, up to that fateful day in August 1986, had
believed that the underwriting year 1979 had, in fact, been profitable.
Incidentally, construction risk policies are the only marine policies with a duration
longer than 12 months, the 3 and even 5-year policies on H+M sometimes seen
usually appear and disappear as the markets turn from soft to hard and vice versa.
Even though it seems to clash with the term “marine”, some markets consider
land risks, such as mobile cranes and rolling stock of railroads, to be hull risks
insurable under marine policies.
To summarise, “it’’ must float (or at least be intended to), should move about once
in a while and may include a couple of side interests to qualify for the name “hull”
within the terminology of marine insurers.

Offshore
This is a relatively recent addition to the marine insurer’s vocabulary, simply
because a rather young industry is covered by it. The meaning is quite simple:
it is oil exploration and production carried out at sea, away from land, ie offshore.
The rest tends to be complex, complicated and – most of all – very expensive.
In 1859, the world’s first oil well was successfully completed somewhere in
Pennsylvania. Only 38 years later, in 1897, at or about the time of the last great
gold rush in Alaska, did the world’s first offshore well come on stream. However,
as far as technology is concerned, this well was little different from its cousins on
land; as a matter of fact, it was just an onland drilling rig built on a pier reaching
90 metres into the Pacific, offshore California. Thus, apart from having wet feet,
it was – for all practical purposes – a land risk and would, had there been a need
for insurance at the time, have been covered in the engineering market (if any).
Yet, as often happens with slow evolutionary processes, they speed up, get more
extreme and suddenly – everybody being caught unawares – we have something
completely different on our hands, something that certainly warrants special treat-
An island in the storm
ment. That’s exactly the story of offshore insurance. Water got deeper and deeper,
distances to the beach longer and longer, the environment tougher and technology
more complex, quickly making the concept of drilling from piers, wharfs, jetties,
barges and similar rather primitive contraptions obsolete.
Naturally, these developments didn’t happen overnight. Therefore, the first more
complex drilling platforms, which were constructed on land to be later towed out
and installed on location, were still insured in the engineering market. It did not
take them very long, however, to find out that the navigational part (especially
for the later generation of self-propelled semi-submersibles and jack-up rigs) the
installation phase and the actual drilling/production operations had many similari-
ties to the running of a ship. They therefore (quite justifiably) felt that these risks
would be better taken care of by the marine boys, who, in turn, were of the opinion
that either they get the whole thing (ie including the construction on land, the
pipelines and pumping stations, from day one up to and including the operation
period) or nothing. That’s how the “offshore” industry risks ended up in the marine
book.

Today, this part of the marine business is probably the most spectacular, in that
it bristles with superlatives of the biggest and most expensive. To let you share
that pride and glory, here are a few mind-boggling facts: Drillships nowadays can
drill 25 000-foot exploratory holes in 25 000 feet of water. Oil is actively produced
from fixed platforms standing in over 1000 feet of water. Semi-submersibles,
jack-ups and drill ships may have values well in excess of USD 200 million, where-
as the largest production platforms have price-tags in excess of USD 4 billion.
Apart from the actual drilling contraptions, pipelines and other associated hard-
ware, the term “offshore” also includes financial side interests, such as liabilities
to third parties (eg pollution) and consequential losses, such as loss of earnings,
loss of hire or costs caused by blowouts, craterings and similar mishaps. These
consequential losses are often summarised as “operators’ extra expenses” (OEE).
Last but not least, all the supply boats cruising around the oil fields are, of course,
also part of the story. The numerous helicopters shuttling between shore and
platforms we graciously (and quite gratefully) leave for the aviation market.
To summarise, if it drills for oil and has wet feet, it is essentially a marine offshore
risk.

Workmen dwarfed by the enormous, bulbous

bow of a vessel under construction

Marine liability
Again, this is a rather young chapter in the history of marine insurance, especially
as far as its excesses are concerned. This is primarily due to the growing liability
awareness of people in general, following the principle “if something goes wrong,
somebody must be at fault – let’s sue them”, making insurance protection neces-
sary where previously there was none. In addition, the fact that a lot of the general
liability insurers raised their prices in the mid-1980s due to losses of catastrophic
proportions may also have been partially instrumental in the shift of some of the
less desirable liability business to the marine market.
Traditionally, the term marine liability (apart from the collision liability covered
under “hull”) was used to embrace straightforward professional, legal liabilities
of such people as carriers, forwarders, wharfingers, stevedores, ship repairers,
longshoremen, charterers etc. In other words, cover was provided for a rather
well-defined and limited group of professionals all engaged in an occupation
closely related to maritime trade, against legal liability claims, arising out of the
operation of their business.
Another group was the legal liabilities of owners of small vessels, namely yachts,
speedboats, harbourcraft and the like. The reason for this is that very small vessels
cannot join one of the so-called P and I clubs, (protection and indemnity) which
traditionally provide the liability cover not obtainable in the marine market. Most
P and I clubs, in contrast to the usual run-of-the-mill insurance companies, work
on a mutual basis, ie the insured – or better yet the club member – participates
in his and his fellow members’ losses by being called upon to make additional
payments or calls, if first calls paid by all members into the common fund are
insufficient to cover all losses sustained during a given year. Legal liability thus
protected for this particular group would normally include all aspects of damage,
ie property damage (PD) as well as bodily injury (BI), whereas all other traditional
marine liabilities are usually restricted to property damage only.
Those were the classic days of small, relatively uncomplicated and quite trans-
parent covers with manageable if unexciting results. And then, things started to
evolve …
First came the inclusions of gradual, non-accidental pollution (again widely ex-
cluded a little later, due to some rather spectacular judgments) and other basically
uninsurable non-risks. Later, in addition to the cover for legal liabilities, lots of
insurance companies agreed to cover also “all contractual liabilities”, often with-
out knowing exactly what they were. At the same time, awards granted by courts
(especially in US jurisdiction) for pain and suffering or punitive damages grew to
astronomical levels.

To complicate matters even further, competition among marine insurers led to the
abominable state where, in order to get the business, insurers sometimes agreed
to include non-marine liabilities in marine packages; more often than not without
extra premium.
This “evolution” combined with the proverbial “long tail” nature (claims often
become evident only years after the policy was issued and the premium collected)
of liability business has caused some people to lose quite a bit of money, with the
result that the end of the 1980s saw moves to disentangle the whole mess, only
to be again partially reversed in the mid-1990s. You probably won’t be surprised
to hear that there was another such cyclical move, reversing the reversal in 2002!
To summarise, if it covers the legal liability of professionals engaged in a maritime

operation or if it involves owners of vessels too small to join P and I clubs, then it
is undoubtedly a marine liability.
If it goes beyond, you’re well advised to examine it very carefully before deciding
what kind of animal it really is.

4 What can go wrong?
Usually just about everything that shouldn’t, in particular things unforeseen!
Nevertheless, there may be a possibility of bringing some order into all the proba-
ble and possible misfortunes that may besiege ship and cargo, by trying to
squeeze them into the following, quite loose framework:
Total loss/constructive total loss

The first of these two terms, the actual total loss (TL), is probably easiest to under-
stand, so let’s start with that. In brief: If your property is destroyed completely or
damaged to the extent that it actually no longer resembles the thing it originally
was, or if it has simply gone with the wind without the slightest possibility of ever
reappearing again, then you have suffered a total loss of your property.
If, on the other hand, your ship limps into a port of refuge after a severe storm,
presenting such a sorry sight, with sails torn, railings and rudder broken, masts
and anchors lost, that it would indeed cost more to repair her than she would be
worth afterwards – then we have a situation called constructive total loss (CTL).
In other words, if you lose a dollar by accidentally dropping it into a gully, it has
neither been destroyed nor has it disappeared, nor is it impossible to retrieve. As
a matter of fact, you can still see your hard-earned dollar and it bothers you like
hell that your arm is too short to reach it.
After thorough contemplation of your misfortune, you find that you have two
possibilities:
1 You can call the department of road maintenance (cost: USD .50) and have
a technician drive over, remove the gully cover and retrieve your dollar. Trouble
is, that the very same maintenance department will probably present you with a
bill of no less than USD 100, leaving you with a net loss of USD 99.50 and the
distinct feeling of having done something rather unwise.
2 You declare the dollar a constructive total loss (even if uninsured) or, if it
appeases your soul even more, a tax-deductible contribution to the city sewer
system, and walk away with a smile.
It is quite obvious that the principle of constructive total loss (CTL) is one of reason
and common sense. After all, who in his right mind would throw good money
after bad?

All hands at diving stations!

For the purpose of insurance, there are a number of special rules applying to CTLs
such as the one that the insured must abandon his property to the insurer before
claiming for a CTL. The insurer, in turn, is absolutely free to decide whether or not
to accept such notice of abandonment – most will refuse, since accepting also
means accepting any possible liabilities for the removal of wreck and other conse-
quential liabilities falling on the owner of the damaged property. It is interesting to
note that this acceptance or refusal on the part of the insurer in no way affects the
insured’s right to claim.
To avoid ambiguities as to when a CTL really is a CTL, it is frequently the practice

to agree already in the policy that, should estimates for repair approach or exceed
say 70 % to 80 % of the value insured, a CTL settlement will be arranged. These
CTL settlements are therefore also referred to as arranged/compromised total
losses. (This is not to be confused with the kind of arranged total loss where the
captain “accidentally” opens the floodvalves in his vessel to collect his insurance!)
To summarise, total losses (TL) and constructive total losses (CTL) are losses
beyond repair.
Partial loss
Logic and the Marine Insurance Act 1906 both agree: If it’s a loss, but neither a
total nor a constructive total loss, it must be a partial loss! This sounds rather sim-
ple, but examined a bit more closely, there are a number of possible problems,
especially when we think of covers in cargo that do not pay for partial losses.
Take a bulk carrier loaded with a cargo of loose wheat. Theoretically, if the whole
cargo is damaged but one grain of wheat arrives in mint condition, there is only a
partial loss. Hard to believe, especially for that poor unfortunate who only bought
total loss (TL) cover.
Needless to say, practice tends to be considerably more flexible, yet it is often

still quite useful to ask such provocative questions in order to arrive at “creative”
solutions. More on the same point: a palletised “package” of 25 bags of cement
dropping overboard with 24 bags lost, and one bag miraculously saved – total or
partial loss? A 20-ft container with 99 boxes of Wedgwood china and one box of
cotton balls again dropped with the expected result – total or partial loss of the
package, which is insured against total loss only?
In practice, a lot will depend on how the bill of lading, the cargo’s travelling ticket,
is worded. If it says: one container with Wedgwood china and cotton balls, the
chances are the whole container will be treated as one package. If, on the other
hand, the bill of lading states: 99 boxes of Wedgwood china and one box of cotton
balls shipped per container, we probably have 100 packages.

Another quite important aspect is the frequent marriage of partial losses with
deductibles and franchises. The thought behind this is that, more often than not,
small petty losses are avoidable, and the insured must therefore be encouraged
to do whatever he can to actually avoid the avoidable. Yet, following regular human
behaviour patterns: Where there is no incentive, there is no will. And what happens
when there is no will? We all know – nothing. Thus, by making the insured partici-
pate in his avoidable small losses by means of a deductible, a powerful incentive
to practise loss prevention is the immediate by-product. To sweeten the bitter pill
of having to share in his own losses, the insured is usually granted a discount on
his premium. Deductibles basically come in two styles:
■ Deductible
Plain and simple, straightforward deductibles expressed as a percentage of the
total value or, more often, as a specific amount that is deducted from each and
every claim.
■ Franchise
Usually a fixed percentage, say 3%, of the sum insured to be paid by the insured
before he can collect from his insurance. If, however, the partial claim is in
excess of that percentage, the insurance will pay the whole thing.
To summarise, partial losses happen quite often, are frequently avoidable, call for
deductibles (competition between marine insurers permitting) and sometimes
come very close to being total losses.
Perils of the sea/perils on the sea/extraneous risks

What a title! Well, the last two sub-chapters dealt with the physical well-being
of the ship or cargo after an accident or the operation of an insured peril, ie the
consequences of “something”. It would thus seem about time to say a few words
about those “somethings” – also referred to as risks or perils – that make it all
happen.
Let’s start out by stressing that risks or perils are things which may happen, ie
they are fortuitous or subject to chance. If something is bound to happen it
becomes a certainty, ceases to be a risk and is therefore not covered – yes, even
under an all-risks policy.
If, for example, you load a sensitive piece of machinery (insured against all risks)
without packing and lash it on deck where waves and spray can easily reach it,
and, surprise, surprise, it rusts and becomes useless, there is no cover, as there
was never a risk of the machinery rusting; that was a certainty, ie no risk = no risk-
transfer = no claim.
In addition to being fortuitous, the “force” causing the damage must act from the
outside. Forces present within the property insured that suddenly activate and
cause damage are – even though there may be an element of fortuitousness
involved – not risks within the classic framework; they are usually referred to as
“inherent vice” and invariably appear under the heading “exclusions” in your policy.
(Example: fishmeal is known to overheat and catch fire spontaneously when trans-
ported under adverse conditions.)

Yet even the genuine risks come in a number of different shapes and sizes, so we
will again attempt to sort them roughly as follows:
Perils of the sea

These are the truly classic maritime incidents such as:
“Stranding”: A ship becomes immobilized for some time on partially submerged

sea bed, be it a sandbar, coral reef or rocks. (Remember the Soviet Whisky class
submarine stranded on the Swedish coast? Whisky on the rocks?)
“Sinking”: Requires little comment; if she was meant to float on water and sud-
denly starts acting like a non-returnable submarine, you’re obviously in trouble.
“Collision”: May either be a collision with another vessel or floating object such as
an iceberg (remember the night of the 14 April 1912 when the un[th]sinkable
happened – no? Let us give you a hint: Titanic!) but can also include collisions
with fixed objects, such as submerged wrecks, reefs, lighthouses, buoys, piers,
jetties, bridges and, heaven forbid, oil platforms.
“Extraordinary heavy weather”: Why extraordinary and not just plain simple heavy
weather? Well, if you travel the Strait of Magellan around the tip of South America,
probably the world’s stormiest place, you have to reckon with very heavy weather
every day of the year, ie the prospect that your ship and cargo will be shaken and
tossed around is a certainty and not a risk! You are therefore expected to take the
necessary precautions allowing you to cope with anticipated circumstances; your
insurance should and will only take care of the unexpected!
Perils on the sea

“Fire”: The seaman’s greatest fear. Even though one is surrounded by a non-flam-
mable element, instrumental in fighting fires, fires aboard ships are still very fre-
quent and usually tremendously destructive to both cargo and vessel. At the same
time, they are also scary experiences for the crew, as there is nowhere to run.
As most fires aboard ships are fought by using seawater, sometimes even by
actually flooding the burning compartments, it is clear that there will be addi-
tional damage to cargo and the ship’s machinery and equipment by the extin-
guishing water. As a matter of fact, the extinguishing water damage to cargo
often approaches or even surpasses the damage wreaked by the fire itself.
“Thieves”: This involves the use of brute force, ie armed robbers or other unwel-
come guests of the violent kind. Petty theft or pilferage such as a harbour worker
diverting a bottle of whisky out of a case of twenty-four into his lunch box because,
after all, the day was a very hot one, would not qualify as a peril on the sea.

Modern pirates with customised loot

“Jettison”: Throwing things overboard, either because they are posing a threat
to the ship (fire, leakage, destabilisation), or to lighten the ship after stranding to
escape from a coming storm. In both cases, the act of jettison having been a sac-
rifice of one to save all others, it is usually followed by the declaration of “general
average” already touched upon in the history chapter.
“Barratry”: This comes right out of the storybooks we read when we were children.
It’s another word for what happened when Fletcher Christian decided in 1789
that Her Majesty’s Ship “Bounty” sailing under the command of Captain Bligh
should forthwith belong to him and his followers. Even the cargo of breadfruit
saplings was misappropriated, however not for keeps; it was jettisoned to free
again the rationed potable water for crew consumption.
Extraneous risks
This includes all other risks (remember, not all other claims) except war and politi-
cal risks discussed in the next chapter that may threaten ship and cargo. There
are but a few extraneous risks concerning the hull itself, such as, for example, the
peeling of the ship’s paint, or the bursting of boilers and breakage of shafts. The
majority of these risks concern the transportation of cargo, and include:
Breakage, chipping, denting, rust, oxidation, discoloration, heating, leakage, theft,

pilferage, non-delivery, staining, freshwater damage, ship’s-sweat (another word
for moisture condensation, as ships are hardly ever seen working up a decent
sweat from an honest day’s work) and so on.
Delay, on the other hand, is not a peril, just a consequence of circumstances.

Losses proximately caused by delay are therefore never covered in even the widest
form of marine policy. For example, a cargo of oranges that quietly rots aboard a
Fire: the seaman’s greatest fear stranded ship, rots not because of the stranding, but because of the delay. That’s
built into the oranges’ genetic make-up and thus referred to as “inherent vice”,
another exclusion always seen in marine cargo insurance (please also refer to
chapter 9).
So far, we have talked about ships and cargos carried aboard them; what about
cargo carried on trucks, aeroplanes or trains? The reason for having seemingly
neglected these categories stems from the fact that, in the evolution of marine
insurance, they were certainly latecomers. This led in turn to the situation where
everybody in marine insurance agreed to treat them in the time-honoured fashion
as if they were nothing new. Terms and conditions specifically developed for cargo
on ships were deemed to be applicable also to cargo carried on, for example,
trucks, using common sense to translate specific terminology. Thus, capsizing
became synonymous with overturning when it came to trucks.
To summarise, risks come in all shapes and sizes, they may be remote or run-of-
the-mill – yet they must be fortuitous to qualify for the name. Things that are bound
to happen are neither perils nor risks!

War, strikes, riots and civil commotion (WSRCC)

Seems the titles are getting longer the further we go along.
Way back, when it all began, there was little concern about strikes, riots and civil
commotion (lucky world it was) but there was a definite preoccupation with war
and warlike operations in the 18th century when the famous SG form was intro-
duced. There was specific mention of such romantic terms as:
“…Men of War, Enemies, Pirates, Rovers, Letters of Mart and Countermart, Sur-
prisals, Takings at Sea, Arrests, Restraints and Detainments of all Kings, Princes
and People of what Nation, Condition and Quality soever”,
illustrating the relative importance of these perils at the time. Times have changed
somewhat since then, although there are of course still some armed conflicts (and
always will be), yet all those free enterprising spirits described in such a flowery
way above have all but disappeared. There are still some pirates roaming the sea
in a few corners of the world, but they no longer fly the Jolly Roger and are, if
reports are to be believed, no longer the well-mannered gentlemen they suppos-
edly were when Errol Flynn learned his act. So much has their reputation suffered
over the past 200 years that they are nowadays treated as if they were plain ordi-
nary robbers, ie a common peril on the sea, rather than a respectable war risk as
in the past.
In today’s marine insurer’s vocabulary, war is restricted to the real thing, ie more
or less organised governmental action, declared or not declared, or civil wars,
whereby the borderline between riots and civil wars is often very hazy indeed.
Even though we are not really talking about insurance conditions, just about what
really may go wrong, it is too important not to mention it here also:
War cover is always restricted to war risks affecting insured property while
it is afloat. War cover for property on land is a definite no-no! (Rare exceptions
usually granted for rather small amounts to limit the effects of accumulation con-
firm that there is a rule.) The reason for this safeguard is that goods on land or
vessels in dry dock are immobile and usually very concentrated in harbour areas,
ie easy targets for devastating air attacks. The magnitude that war losses on land
may reach is of such proportions that it would exceed the financial strength of any
insurance industry. It is, therefore, quite common to the government to provide
some protection for the transportation and storage of vital goods on land. Water-
borne property, on the other hand, is fairly mobile and can run for safety if the
political situation in a given area suddenly heats up.
In addition to the obvious war perils, such as open attacks, the term also includes
warlike confiscation of either ship or cargo. It further includes accidents caused by
derelict mines, torpedoes and other discarded grown-ups’ toys.

“… the dockstrikes today took a ugly turn with

disgruntled workers looting and pillaging …”
Strikes, riots and civil commotion are perils covered waterborne as well as on
land. However, cover is always restricted to actual loss of or damage to the prop-
erty. Loss of market or other losses caused by the delay encountered because of
a strike are not insurable.
Common to both the war and the strikes covers is the possibility of short (between
48 hours and 14 days) notice of cancellation, which, however, does not affect
voyages already under way. This allows an underwriter to rethink, for example, a
vessel’s navigational limits (if there is a war somewhere, why should she go there,
risk her neck and the underwriter’s wallet?) or at least adjust his premium to the
aggravated risk. If you believe that the chances of the ship and her cargo actually
making it there and back are about fifty/fifty, you will charge a premium rate of
55 percent of value insured (5% for your overhead). We all realise that this looks
a lot like the betting quotes you receive from your local neighbourhood bookie,
but when result fluctuations are as great and unpredictable as in wartime, that’s
unfortunately the only way.
To summarise, war and strike risks are concerned with the direct, physical loss of
or damage to the property insured. War is covered only while waterborne. Both
covers are given either for a single voyage only or with the possibility to cancel at
very short notice.

General average
Actually most of what can be said about general average, without becoming
exceedingly technical, can be read in the chapter on the history of marine insur-
ance. However, in order not to create the shortest chapter ever written, we here-
with reprint the official (Marine Insurance Act 1906) definition of what constitutes
a general average act.
“There is a general average act where any extraordinary sacrifice or expenditure

is voluntarily and reasonably made or incurred in time of peril for the purpose of
preserving the property imperilled in the common adventure.”
It being quite difficult to explain a very good and largely self-explanatory definition
without causing confusion, we’ll restrict ourselves to a few additional remarks:
1 General averages (like revolutions) must be successful to be recognised as

such. A general average that fails to save anything is a total loss and no longer
a GA. Thus, if there are two successive GAs on a single voyage, the last one will
have to be settled first, since without it, the first one’s original success would
have turned into a total loss.
2 For the marine insurer to pick up the tab, the GA must have been incurred to
avoid the consequences of an insured peril.
3 GAs take a very long time to be settled, since contributory values of each indi-
vidual piece of cargo, as well as of the vessel and freight (if freight was not
already prepaid and therefore not at risk), must be assessed and their individual
contributions to the values sacrificed must be calculated.
To save time and assure later payment of contributions, a GA deposit is requested

by the GA adjuster, usually appointed by the shipowner, from all prospective con-
tributors, before their property is released.
4 GAs as such are really quite separate and distinct from marine insurance; they
are an institution under maritime law. It is the financial consequences of a GA
that may be (and mostly are) covered within a marine insurance contract.
5 GA deposits are the duty of the insured, not his insurer, who is only liable for
the final contribution. Most insurers will, however, provide a guarantee on
behalf of their clients (or will ask their reinsurers to do so for them) usually
insisting on the assured’s counter guarantee that he will reimburse his insurer
for any amount paid by him in excess of his legal obligation.

This may, for instance, happen in cases where there is underinsurance, ie the sum
insured under the policy is in fact lower than the contributory value of that very
same piece of property assessed by the GA adjuster. In this case, the insurer’s
liability to pay would be reduced in the same proportion as the property was
underinsured.
Here we go again, good resolutions (not unlike the ones we all make at New Year’s
parties) usually backfire. We wanted to keep it short and uncomplicated – yet look
back again at point 5!
To summarise, general average is the embodiment of the principle of solidarity.

Its existence and technical adjustment involves above all a lot of common sense,
and, last but not least, it works.
As a matter of fact it has worked for a few thousand years. There are but a few
things in this world of equal reliability!
Salvage, sue and labour

Both of the above concern costs, expenses or awards that may be payable follow-
ing the operation of a peril insured against, ie in the aftermath of a claim. To start
with the last one first, the term sue and labour originates from a rather peculiar
sentence in the old “SG” form reading as follows:
“… and in case of any Loss or Misfortune it shall be lawful to the Assured, their
Factors, Servants and Assigns, to sue and labour, and travel for, in and about the
Defence, Safeguard and Recovery of the said Goods and Merchandise and Ship,
&c., or any part thereof, without Prejudice to this Insurance; to the Charges
whereof we, the Assurers, will contribute each one according to the Rate and
Quantity of his sum herein assured.”
Quite a mouthful: in short, it means that the ideal assured should act as if he did
not have insurance, ie he should do everything in his power, (which sometimes
entails the spending of money in liberal quantities) to safeguard his property and
prevent further damage. To make this duty more palatable to the insured, the
insurer agrees to pay the costs of such endeavours.

Never take a grain carrier to go shopping!

(Collision of “Brightfield” with shopping centre
on a pier in New Orleans in December 1996)
To explain salvage, it is probably best to tell you a short story:
On a beautiful, semi-stormy day (a seaman’s delight) brand new vessel “A” leaves
her construction yard to be delivered to her happy new owners. A few days later,
vessel “A’s” rudder breaks (curse the engineer!). The wind gets a bit stronger, and,
because there are some menacing rocks nearby, vessel “A” drops one of her two
anchors – the chain parts (shoddy workmanship) and the anchor is lost. And,
even though this may be hard to believe, the second anchor follows its brother’s
fate. What’s to be done now? Well, the captain charges into the wireless cabin
(it is here that we leave fact for fiction) and sends out his “Mayday” or “SOS”. A
salvage tug with her blond, muscular, suntanned hero-captain, on standby in the
area, picks up the distress signal and, with heroic disregard for his own life and
ship, the captain changes course and races through the windswept seas at full
steam, steadily closing the gap between vessel “A” and himself.
As is usual with heroes, he just manages to get there in the nick of time, success-
fully attaches a line to the stricken vessel and, practically single-handedly, tows
her to safety. You will no doubt agree that our hero deserves more than just a big
hand and a few cheers – in fact he deserves salvage money or a salvage award.
This salvage award is usually determined in arbitration, taking account of the dan-
ger involved, the salvage skill required, expenses incurred and, last but not least,
the actual values saved. It has thus happened that the salvage award has almost
reached the value of the property saved.

Considering that many salvage operations are undertaken to preserve ship as well
as cargo, they usually result in the declaration of general average.
There are three different forms of salvage:
1 Lloyd’s open form “No cure no pay”. This, as the name suggests, only pays if
and when the salvage operation has been successfully completed. The risk for
the salvor is quite pronounced, yet to balance, the award is usually much better.
2 Contractual salvage. In this case, the salvage fee is contractually fixed either as
a lump sum, or time and expense ad infinitum.
3 Fraudulent salvage. Brother “A” and brother “B”, each owning fishing vessels,
sail out to sea one morning. There they find that the fish have left the area and
that fishing is hard work anyway. So brother “A” sends out a distress signal,
which brother “B” immediately heeds. Brother “B” then saves brother “A”, by
towing him back into port, just in time for supper. Next day brother “A” and
brother “B” go to brother “C”, the local arbitrator, who fixes a good salvage
award, which is then split three ways. (After it has been paid by brother “A’s”
insurance company, of course!)
To summarise, salvage and sue and labour are expenditures incurred by the
insured to minimize a loss. As an incentive to make the insured actually spend
that money if he has got insurance cover for the loss, the insurance company
quite unselfishly agrees to refund such expenses.
Fraud
Don’t expect a recipe on how to commit the perfect marine insurance fraud.
Although it is probably the one field in crime where your aunty’s saying “crime
doesn’t pay” is very much removed from the truth, it is still not a recommendable
way of earning an income. Sometimes it does unravel and you get prosecuted.
Considering the known frauds and making some guesstimates about all those that
were never found out, we must face the harsh reality that maritime fraud is a
multi-billion-dollar industry. This fact, originating in the relative ease with which
such frauds can be orchestrated, points in one direction: Know your trading part-
ners and choose your carrier well; cheap freight doesn’t pay.

The following example will give you an idea of how easy it can be to make a lot of
money fast:
Step I
A state organisation for food imports goes to the market, looking for 1000 tons of
palm oil. They soon enough make contact with a prospective supplier in Europe,
negotiate, like the price and strike a deal. They open an irrevocable letter of credit
for the amount of USD 560 000 with their national bank, which in turn corre-
sponds with a large Swiss bank.
Step II
The European supplier hires “M”, a friend and part-time shipowner, who issues a
bill of lading, certifying that the palm oil has been loaded in Copenhagen onto the
vessel “Cool Girl”.
Step III
At the time of doing this, the oil is, however, still in Malaysia and “Cool Girl” rests
her hull in a dry dock in Holland. “M” nevertheless succeeds in obtaining payment
of USD 560 000 against presentation of his fake bill of lading. Pleased with the
administrative ease with which this order had been placed with our European
supplier, the State Organisation for Food Imports orders 1500 tons of beef (price
tag USD 1.6 million). “M” proceeds as usual, fakes a bill of lading and obtains
payment in full. Now he is USD 2.15 million richer. Yet he is still waiting for the
real coup! Therefore, to really win the State Organisation’s trust he actually ships
the palm oil; “M” still has USD 1.6 million in the kitty.
Step IV
The plan works, the State Organisation orders peanuts worth USD 6.3 million.
“M” fakes and collects as usual.
The story could go on and on, and it did too – for a while. “M” got caught eventu-
ally and served a 5-year prison term, his “European supplier friends” remained
anonymous, and the money was never returned.
The moral of the story: Beware of fly-by-night carriers, take your time to check
your trading partners. Or, as the boy scouts would say: Be prepared!.

5 Risk factors
Marine generally
Risk factors are the ingredients that make up a risk. The question that usually
arises is whether or not the final product, ie the individual risk, has brothers or at
least cousins of a like kind. In other words, is there a reasonable possibility to form
large, statistically meaningful groups of homogeneous risks?
That’s exactly where marine insurance becomes very much different from other
branches. Whereas there are probably 13 765 311 brick houses owned by mid-
dle class blue-collar working families with a fire hydrant within 100 metres, likeli-
hood has it that there will only be one 35-year-old thoroughly rusted steamship,
managed by a Liechtenstein managing company for Japanese interests, flying a
Panamanian flag and employing an illiterate captain and an equally uneducated
crew in turn entrusted with a sensitive cargo of milk chocolates to be transported
from Rotterdam across the equator to Rio de Janeiro in mid-December – insured
against all risks of course. No doubt you will agree that this scenario represents an
absolutely unique combination of individual risk factors making the risk as a whole
non-repeatable, at least not within a reasonable time period. The logical conclu-
sion to be drawn from this would no doubt be that a book of marine insurance
business is a collection of non-homogeneous risks, just very loosely related by the
fact that somewhere along the line, there is some form of transport involved.
Statistically, this implies that correlation of data will be low, whereas fluctuations
of the unpredictable kind will be high – not exactly the mathematician’s dream.
On a more down-to-earth note, it further illustrates that marine insurance is a risky

business, difficult to assess and therefore requiring a high degree of experience,
know-how, imagination and, last but not least, “gut feeling” from its underwriters.
To shed a bit more light on some of the individual risk factors involved in the
ocean-going trade, let’s examine them by class:

… to navigate safety in frigid waters

Hull
Age or year of construction/refitting of the vessel may be indicative of its condi-
tion. Yet even here there are no absolute statements; some vessel types such as
tankers age faster than others, whereas excellent maintenance may ensure that
an antique ship (such as a Mississippi paddle wheeler) is still in perfect working
order after more than a century.
Types such as bulker, tanker, gas carrier, ro-ro ferry, coastal trader, car carrier,
river barge, tug, dredger etc. A liquefied natural gas (LNG) carrier with a crew of
incorrigible cigarette smokers may have a shorter life expectancy than a tugboat
working in a sheltered harbour area.
Tonnage: Some people would rather be in a large ship riding out a winter storm
on the North Atlantic than in a rowing boat – but that’s also a question of taste.
On the other hand, especially large ships have been known to break in two when
wave-oscillation was particularly adverse. (Imagine a very long ship being sup-
ported by one short wave at the bow and another at the stern and nothing but
cold air in between – your ship will bend. Now repeat that same process a few
thousand times and you will probably have enough metal fatigue to cause the
ship to break up.)
Construction, ranging from welded steel, riveted steel, fibre-glass, concrete,

copper-plated teak right down to the good old-fashioned wooden dug-out canoe.
Needless to say, some of these materials are obviously preferable to others when
it comes to certain jobs.
Flag: The shipowner’s decision as to what flag he lets his ship sail under is entirely
his own. It may be influenced by the lower taxes levied by certain countries or
by the less encumbering manning requirements and labour union regulations.
Patriotism or government subsidies may sometimes override the desire to opt for
a so-called flag of convenience. On the other hand, it is also often very difficult
indeed to point a finger at the “real country of ownership”, in view of the frequently
rather entangled ownership, management, mortgagee and other financial interest
domiciles involved. Suffice it to say that vessels sailing under certain flags seem to
have rather bad claims records.
Trade: Be it bananas or dynamite, pig iron or wheat, it may have quite an influence
on the longevity of the ship. Ownership of a vessel is of immense importance. A
vessel belonging to a rather shady character whose only asset is that vessel and
who has been known to have his ships sink in the past at convenient moments is
certainly a heavier risk than a vessel belonging to a well-known shipping line with
a good record and a reputation to lose.

Trading limits, such as coastal trade, river trade, North Atlantic, South Pacific,
Cape Horn, typhoon areas, ice conditions etc, influence the severity of the risk.
Propulsion, whether sails, diesel engines, turbines with oil, gas, coal, wood or even
nuclear-fired boilers, which may have an influence on reliability, manoeuvrability
and power, and are often instrumental in either fighting or running from a storm.
Socio-economic environment: This is possibly the most difficult of all risk factors
to assess adequately, as it strongly involves the human element, also known as
the moral hazard. Shrimping is hard work, but when the price for shrimp is high,
rewards are good and shrimp boats float. With falling shrimp prices and mortgage
payments on shrimp boats remaining constant, shrimp boats often miraculously
develop leaks and sink, never to be seen again. Fraud? Coincidence!
The combination of all the above (and more) risk factors make up the final individ-
ual hull risk, just as long as none of the factors changes. As a total, they of course
also represent a very important risk factor for the cargo, being its mode of trans-
portation.
Cargo
Mode of transportation: Refer to the last paragraph of the previous chapter.
Type of goods: Again, think of bananas, dynamite, pig iron and wheat and then
imagine what different sorts of damage a small fire would cause.
Packing is easily the most important loss prevention aspect in cargo transportation.
It definitely makes a difference whether you pack your eggs loosely in a basket
and then stack the baskets 20 high or whether you wrap each egg individually
and pack them in specially designed cardboard boxes, which, in turn, are profes-
sionally stowed in a sturdy container. Similarly, ocean-going packing ought to be
water-resistant at least to a certain degree, as there will be plenty of moisture
around.
Size/weight/value obviously play a role in how easy it is to steal the property and
walk away with it. It would therefore be necessary to ask for much better security
precautions in the case of a shipment of diamonds than would be called for with a
consignment consisting of a huge crane.
Especially heavy and large cargo, on the other hand, requires a lot of specialised
handling equipment which may or may not be available at destination, thus possi-
bly causing some problems and maybe even an accident.
Trip route: As with trading or navigation limits for hull, different routes also present
different problems for cargo, such as temperature, weather and handling equip-
ment at ports on the way.

Trip duration: The longer it is, the longer the cargo remains exposed to perils. If
the cover is given “warehouse to warehouse”, as it most often is, there may be
extensive trips on good or bad roads or railroads inland from the warehouse to the
port and the other way around.
Season: Just think of the seasonal occurrence of monsoons, hurricanes, typhoons,

tornados, mistrals as well as the less exotic but equally fearsome winter storms on
the North Atlantic.
Socio-economic environment: Here we go again, the moral hazard described

under the heading “hull” is equally applicable to cargo. Just imagine the tempta-
tion for the owner of an unwanted, suddenly unfashionable cargo (bathing cos-
tumes in early autumn) to “sell” it to his insurance company!
To summarise, risk factors are too numerous and varied ever to be fully cata-
logued. It is an infinitely variable combination of all these risk factors (each in the-
ory actually deserving its own fraction of the insurance premium) that make up
the risk covered by a marine policy. Exact repetitions are rare if not entirely impos-
sible.
It is therefore essential for a marine underwriter to maintain detailed and informa-

tive statistics that differentiate say per commodity, per client, per shipping agent,
per country of origin, to name just a few possibilities, allowing him to see adverse
developments and react before it is too late.

6 Inseparability of premium
(necessity for underwriting year)
At the end of the last chapter, there was a little hint of the beginning of a logical
chain employed to answer the frequently asked question: “Why is it necessary to
apply the underwriting year method to marine insurance?” Somebody just asked
the question: “What is the underwriting year method, anyway?” This is a difficult
one to answer briefly; any very short explanation is bound to be incomplete, but
the following is an attempt to provide a general idea.
There are basically two different ways of looking at insurance premiums and
claims in terms of statistics:
1 The accounting or calendar year, where all premiums received or claims paid
are booked into the year in which they are handled by the accountant. As some
insurance policies have durations that carry them over the end of the calendar
year, a proportion of the premiums booked is then transferred to the next year
as unearned premium.
2 The underwriting year, where the bad things (claims) are actually compared
with the good things (premiums) that in fact caused the bad things to be cov-
ered in the first place, ie a claim, no matter how late it is paid, is always booked
into its source year, the year the corresponding premium was produced.
This may be a bit brief to satisfy everyone. However, for those who are really
interested, another Swiss Re publication, “The underwriting year in marine insur-
ance“, gives full and detailed explanations on the pros and cons of each system.
Let’s go back to our logical chain, starting with the statement that the risk pre-
mium is (should be) a unique conglomerate of individual premiums charged for
the numerous risk factors that make up a risk. If this statement is correct (and we
sincerely believe so), then it follows that it would be impossible to determine the
unearned premium portion at the end of a calendar year for those policies still
running. If, however, these transfers are not feasible, we are left with one choice
only: the risk must be allowed to run off completely, ie all claims must be allocated
to the year to which the premium was booked.
To give you an idea of the proverbial longevity of marine business (more about
that subject in the next chapter), imagine that at Swiss Re, in 2000, we were still
dealing with underwriting years having active movements, such as claims pay-
ments or recoveries, dating back to the 1950s.

7 The long-tail nature of marine business
In this context, we find the analogy apt that the tail sometimes wags the dog, as
may indeed be the case in marine business that the tail catches you by surprise
after what most people would consider an unreasonably long period of time.
Sometimes that surprise may be so big – and not provided for by reserves – that
it can indeed shake the dog. But let’s move away from dogs and their tails – why
is it that marine business takes such a long time to run off?
Take general average as one example and suppose that a modern cellular con-
tainer vessel with, for argument’s sake, 4000 20-foot containers aboard is
involved. Now let’s further assume that most of these containers were not full
container loads (FCL) but stuffed with boxes and parcels belonging to various
consignees. To further complicate matters, let’s also assume that there were a
great number of different container types involved in greatly varying condition,
of different values and, to add further problems, belonging to a large number of
shipping agents and container operators dispersed worldwide.
If you think this is already complicated, let us in addition assume that the reason
for declaring general average was a large and very complicated salvage operation,
so that it takes the arbitrators several years to fix the award.
Now, the whole story must be unravelled by assessing contributory values involv-
ing thousands of bills of lading and an equal number of consignees, some of them
having moved without a forwarding address, and a final contribution schedule
must be calculated for each contributory item – and the whole operation must be
done within a “reasonable” time of, say, five years. You’ll probably encounter more
than a few problems along the way, and it is more than likely that you won’t finish
the task in time.
On a more pleasant note, thinking of claims that actually diminish some decades
after they are first paid, scenarios are even longer and completely open to even
the wildest of imaginations. Take the Spanish galleons that took Pizarro’s and
Cortez’s gold from the New World to the Old in the 16th and 17th centuries and
remember that quite a few did not make it back, among them the famous Santa
Margarita and the Nuestra Señora de Atocha that sank within sight of each other
off Florida on 6 September 1622.
Now, to make it really interesting for our purpose, we have to bend the truth
somewhat and suppose that these fabulous cargos had actually been insured at
the time. Insurers way back in the 17th century would then have very reluctantly
paid some hefty sums of money, ruining the result of underwriting year 1622.
Throughout the centuries, the unfortunate insurance company remembers under-
writing year 1622 as the worst disaster year ever, until just about 350 years later,
a 20th century adventurer by the name of Melville A. Fisher finds and lifts the
treasure, leading to a recovery for underwriting year 1622. (After a proper and
generous deduction for salvage awards, of course).

You are absolutely right, this is high-flying theory in its purest form, yet when you
really think about it, there is more fact to the story than fiction. The sinking and
the recovery are both true, as is the time period. It is farfetched, it may be unbe-
lievable but it is basically possible.
Now, how’s that for a tail?

To get back to the nitty-gritty, unrepaired damage in hull insurance may be another
source of a few years’ long-tail, if the shipowner decides not to effect repairs
immediately because the damage does not affect the ship’s seaworthiness and
he is too busy to want to let his ship spend a few idle and unproductive days in
dry dock. He also decides against his other option of getting a money equivalent
to the ship’s depreciation from his insurers. He just wants to have his ship repaired
when he is ready, and that may take some time!
Collision liabilities (RDC) are another area where bills take a long time to reach the
debtor, because of the complex and often very complicated investigations and
legal procedures that have to completed before the claims can finally be settled.
Examples tend to be extreme, point taken, but they also illustrate just how far
“normality” can, under certain circumstances, be stretched. They should also
serve as a warning to those who talk loudly of “profits” produced by very young
underwriting years, conveniently forgetting that sometimes the tail really does
wag the dog!
This time there is not much to summarise except that there definitely is an unpre-
dictable tail to marine insurance. Globally and on average that tail measures about
five years for cargo and ten years for hull; extremes, however, are unlimited.
The moral of the story: “Underwriting years, like good wines, must be allowed
sufficient time to mature before decanting!”

8 Current marine insurance conditions
General observations
Without wanting to slip back into the history of marine insurance (please refer to
the relevant chapter), it is still necessary to dwell a bit in the past before talking
about the pragmatic present. For a lot has changed since the old SG form (some
people believe it meant “ships and goods”, some said it implied “security guaran-
teed”, whereas others suggested it possibly could have meant “salutis gratia”)
was introduced in 1779. Well, at least in recent years that is, because for the first
200 years of its existence, the SG form remained what it was in most markets: the
top form to be used when issuing a marine policy. This is not to say that these first
200 years were uneventful – by no means. There were thousands and thousands
of court cases testing and retesting the policy word-for-word, to become case
laws under the common law system, serving as a basis for subsequent judgments.
Just before the turn of the century (1900 that is) a very industrious judge, by the
name of Lord Chalmers, decided that it was quite cumbersome to always refer to
case laws and he introduced a bill to the House of Lords, aimed at collecting the
dicta of old cases into a short, easy-to-understand work which was eventually
placed on the Statute Book in 1906, thus becoming the Marine Insurance Act
1906, still eminently applicable today.
In about the same era, the Institute of London Underwriters, later renamed the
International Underwriting Association (IUA), became more and more important
as the organisers of standardised marine insurance clauses. These so called “Insti-
tute Clauses” became a widely accepted standard and prevailed, always attached
to the good old SG form, with very few changes until 1982 when “revolutionary”
revised clauses and policy forms were released by the Institute, basically in
response to the ever-growing number of complaints in UNCTAD and other inter-
national bodies about policy wordings that were so difficult to read and under-
stand.
It is these new Institute Clauses and Policy Forms (a few specimens are attached
in the Appendix) that we shall try to introduce you to in the next few paragraphs.
If you want to know more about technical details and/or have specific academic
queries, you will either have to actually read the clauses and/or get in touch with
your friendly insurance or reinsurance company.

Cargo conditions and rates

If you check the appendix inside the back cover, you will find among other good-
ies a sample marine policy form, as well as two sets of cargo clauses entitled
Institute Cargo Clauses, (A) and (C). (There is also a set of (B) clauses providing
slightly wider cover than the (C) clauses but structured along the same lines as
the (C) clauses, and therefore not included in this booklet.) The policy form serves
as a cover or receptacle for the numerous individual, special and risk relevant
clauses. It also personalises the policy document by including such important data
as names of insured and vessel, descriptions of subject matter insured and voyage,
sum insured and premium, and, last but not least, the securities or guarantors of
the policy with their individual proportions.
It therefore follows that, although the policy form is an important part of the con-
tract of insurance, it would be quite useless if taken on its own, ie without the
special conditions provided by the clauses to be attached to it.
Incidentally, the marine policy form, because of its practical, noncommittal design,
may be used for all forms of marine insurance, be it cargo, hull, liability, offshore
or construction risks.
Turning to the special conditions for cargo, there are a whole bundle of different
clauses in use today. There are special trade clauses for shipments of coal, oil,
corn, rubber, jute, timber, frozen food and meat, as well as a variety of special
extension clauses, yet at the bottom of all this specialisation are the basic Institute
cargo clauses (ICC) widely used for all sorts of general and special cargo. These
basic clauses are offered in three variations or “qualities”, briefly commented upon
below:
ICC (A): This is the all-risks clause of old. (Remember: it’s all risks, not all losses!)
This set of clauses grants protection against all losses and damage caused by
external, fortuitous events, including piracy (used to be a war peril), happening
during the ordinary course of transit.
War and strike risks are always excluded in the basic form of cover, and must, if
desired, be expressly included again with special clauses and against payment of
an extra premium; but more about these political risks in a later chapter.
The ordinary course of transit starts the moment the goods are first touched and
moved within the warehouse at the place of origin with the intention of transport-
ing them to destination, and continues until the goods reach the consignee’s final
warehouse.
There are a number of exclusions listed which are, however, only a reconfirmation
of the principle that only fortuitous losses are covered. The remainder of the clause
regulates such things as the assured’s duty in the case of a claim and the Law
applicable to the policy. To do proper justice to these terms and conditions and
the experience from which they evolved, English Law and Practice is the choice
of most companies utilising the Institute clauses.

Wrapped, sealed, stacked and delivered

One major aspect setting the all-risks clause apart from the other, narrower clauses
is the question of burden of proof. If there is damage to cargo and the assured has
bought all-risks cover, it is the insurer who has to prove that the cause of the loss
was an excluded one if he wants to refuse payment. In a restricted, named perils
cover, it is the insured who must prove that the damage was really caused by one
of the covered perils. This may at times be very difficult indeed!
ICC (C): This is the named perils type of cover just mentioned in connection with
the onus of proof. Insured are the classic maritime perils such as fire, explosion,
sinking, capsizing, grounding, collision, general average, jettison and discharge of
cargo at port of distress.
The rest of the clauses are completely identical to the (A) clauses, with two
notable exceptions:
■ piracy covered in (A) where it is excluded from the exclusion, is not covered
in (C);
■ deliberate or malicious damage not mentioned under (A) is expressly excluded

under (C), but may of course be included upon request, usually upon payment
of an additional premium.
Rates in marine insurance are a difficult topic, for there is plenty of competition!
Very few countries have tariffs or rating guidelines which everyone abides by,
resulting in continuous rate cutting until, quite often, rates become entirely uneco-
nomical.
As an indication, we may at least say that rates in marine are usually expressed as
a percentage of the sum insured. Percentages may range from 25 % for all-risk
insurance on eggs including breakage, to 0.05 % for all-risk cover on crude oil in
bulk. Both are extremes, with the usual lying somewhere in between. Technically
speaking, we tend to believe that a proper risk rate for (C) conditions should not
be below 0.2 % with all-risk rates correspondingly higher.
Reality unfortunately often proves, however, that competition has considerably

more clout than technique!

Hull conditions and rates

Again, we’ll have to ask you to go to the appendix and have a look at the Institute
Time Clauses Hulls 1.11.95 for in-depth information and guidance. Our own con-
tribution to your learning process will have to be restricted to some comments on
a few highlights, as an extensive discussion of this set of clauses would probably
fill more than a good-sized book by itself.
Let’s start by mentioning that there are a whole collection of different, specialised
sets of hull clauses catering to the various sub-groups of hulls floating around
worldwide. There are fishing vessel clauses, port risk clauses for tugs, dredgers,
cranes, etc, and yacht clauses, to name just a few. Apart from these, there are var-
ious national hull conditions such as the Spanish, French, German, Dutch, Ameri-
can, Japanese and Italian hull forms, again, just to name a few. Duration of cover
is another factor influencing hull forms; there are 12-month policies usually called
“time” clauses and there are voyage clauses, covering just that, one single voyage.
Restriction or widening of protection below or above the “normal” cover chosen
by most is another source of special hull clauses, as are financial considerations,
dealing with such problems as ships’ mortgages.
Yet despite this seemingly Babylonian mêlée, there is a surprising uniformity of

basic conditions. This thought, combined with the fact that the English hull form,
ie the Institute Time Clauses (ITC) Hulls 1.10.83 and its revised version 1.11.95
(a new version called the “International Hull Clauses” is currently being drafted
and improved, the majority of terms and conditions remaining), are probably still
the most widely used, has led us to restrict our comments to the latter.
Unlike the situation in cargo, there is no such thing as a true “all-risks” cover in
marine hull. Also, the ITC hulls have a named perils basis, quite a wide one, admit-
tedly, but still named perils rather than “all risks, ...except”. This has the advantage
(or disadvantage, depending on which side of the desk you are sitting) that the
assured must prove that the damage was caused by a peril insured against, ie the
burden of proof rests with the assured and not with the underwriter.
The perils as listed are straightforward and should in most cases be self-explana-
tory. Still, careful reading of the perils is advised in order not to trip over the finer
details. To give you an example, if you perfunctorily read clause 6.2.1., you could
possibly assume that burst boilers and broken shafts would be paid by underwrit-
ers. Not quite the case, for if you read paragraph 6.2., you will find that only “loss
of or damage to the ship and caused by the bursting of boilers …” is covered, the
broken part itself is not. At least not without extra premium and the Institute Addi-
tional Perils Clause – Hulls attached.
This is a small point, but it can make a tremendous difference to your wallet if
Murphy’s law, “Everything that can go wrong eventually will”, holds true.

Similarly, if you read the title of paragraph 7, you may initially think that the ship’s
liability for pollution hazard is covered. Far from it, that kind of pollution liability
even if incurred as a direct consequence of a collision (for which there would be
3
⁄4 collision liability cover under clause 8) is expressly excluded under paragraph
8.4.5. save for a small loophole in connection with salvage remuneration. What
clause 7 does cover is the loss of your vessel through government action taken
to prevent or minimise pollution damage, ie only the damage done to your ship
when they send out the Air Force to bomb your stranded tanker, as they did with
the “Torrey Canyon” in 1967 when the global pollution awareness campaign really
started, would be recoverable from underwriters.
To prevent the shipowner from claiming petty damage mostly caused by the
everyday use of the vessel, such as small dents and scratches due to rough
berthing, clause 12 provides for a deductible to be paid by the assured in each
and every claim before underwriters are requested to open their wallets. As a rule
of thumb, this deductible is usually fixed at about 0.5% of the total sum insured
for hull and machinery. In the case of total loss (TL) or constructive total loss (CTL),
the deductible is not applied; this kind of loss is usually considered to be beyond
the control and risk management influence of the insured; the educational benefit
of a deductible would therefore be wasted.
Clause 14, “new for old”, is a rather nice one for shipowners. A decrepit, 90%
rusted and due to be replaced rudder lost in a grounding will be replaced at
underwriter’s expense with a brand new one that will probably outlast the old
ship’s life expectancy in the first place. But that’s how it’s done.
Lay up return premiums are granted by underwriters when the vessel is not work-
ing, ie not navigating but resting in an approved lay up area for at least 30 con-
secutive days (paragraph 23), based on the assumption that the risk of loss or
damage is greater when the ship is plying the oceans.
Following usual practice, political risks, ie war, strikes and malicious damage, are
strictly excluded (paragraphs 24, 25, 26). If cover for these risks is expressly
requested by the assured, special inclusion clauses will be issued, upon payment
of an additional premium of course. Radioactive contamination and damage done
by nuclear warhead explosions (paragraph 27) are not coverable at all, and are
also excluded risks in the special war re-inclusion clauses, looked at more closely
in the next chapter.
Having come this far, we only need to say a few things about the pricing or rating
of hull insurance. In doing so, let’s stick to the usual merchant marine, yachts, fish-
ing vessels and port risks being an entirely different breed with different rating
considerations.

Salvage efforts at sea
For the rating of regular merchant marine vessels, a two-pillar system is usually
applied. One of the pillars is the value (represented by the sum insured) of the
ship, the other its tonnage. Considering that, with few exceptions, marine policies
are valued policies, ie in case of total loss, it is the sum insured that will be paid,
even if it is higher or lower than the market value of the ship at the time of the
loss, and partial losses are, unlike in a household policy, paid without applying
the proportional rule, should there be underinsurance. This may seem unethical
to some degree, yet if you consider that the shipowner is not really insuring the
vessel but its money-earning capacity, it becomes understandable.
Take a very good shipping market with each and every vessel employed. Freight
rates are high and the owner of a very old rustbucket earns a fortune. He is there-
fore interested in keeping his vessel running as he would have to pay a lot of
money for a replacement and probably have to wait some time to get it. There
is thus a genuine need for the shipowner to insure his ship for a sum quite a bit
higher than its actual value. In addition, it is commonly assumed that marine in-
surers are professionals in their trade and should thus be in a position to evaluate
whether the sum insured declared for a particular ship makes sense or whether it
is grossly exaggerated with possible fraudulent intent.
In any event, total loss and sum insured are irrevocably linked when it comes to a
claim. It is thus only reasonable to link them for rating purposes also. The premium
charged for the total loss element in hull insurance is expressed as a percentage
of the sum insured. Around 25 years ago, when underwriting technique still tri-
umphed over competition, these total loss rates were in the region of 0.375 %,
which just about corresponds to the actual total loss experience worldwide. Since
that time, this rate has fluctuated with market cyclicity, sometimes dropping well
below 0.2 %.

The tonnage, on the other hand, becomes very important when we start talking
about partial losses or damage to the ship. After all, it would logically cost the
same amount of money to fix a 2-metre hole in the sides of two identical vessels,
irrespective of the fact that one vessel may have a sum insured of 100 million as
opposed to 50 million for the other. The rate for the partial loss element is thus
tied to the tonnage of the vessel and usually expressed as a dollar amount per ton.
To give you an indication, a technical rate for a crude oil tanker should be in the
neighbourhood of USD 1.25 per dead weight ton (DWT).
To finally arrive at one single percentage rate to be applied to the sum insured,
one simply expresses the dollar amount calculated for particular losses as a per-
centage of the sum insured, adds it to the total loss rate determined earlier, and
hey, presto, we have the final rate.
To summarise, hull conditions are on a named perils basis, include limited colli-
sion liability and are never valid for a period exceeding 12 months. (Exceptions:
builders’ risks and cyclically appearing “long-term policies”). Rating is built on a
two-pillar system, total losses being linked with the sum insured, partial losses
with the tonnage of the ship. Example rates used in this chapter are indications
only and do not consider individual risk factors that would warrant surcharges or
(rarely) discounts.
Political risks, conditions and rates

Political risks in marine insurers’ terminology basically fall into two categories: the
war risks and the strike, riot and civil commotion (SRCC) risks. At first sight, it
would seem quite easy to distinguish between the two, war being state-organised
violence against another state and strike the more-or-less organised disobedience
of civilian workers and other frustrated private individuals, both causing damage
to property. Unfortunately, things are never quite so black and white; there are a
large number of grey zones. Just think of how close some riots are to civil war or
how some terrorist actions resemble war operations.
Therefore, to get the gist of the intentions of the different clauses covering politi-
cal risks, we have again no choice but to ask you to have an intensive look at
them in the appendix of this publication.
To bring some order into the way you do the looking, we would propose starting
with cargo, where there are two sets of clauses: one for war, the other for strikes,
riots and civil commotions. The main difference between the two sets lies in the
risks covered, listed on a named perils basis and largely self-explanatory even if
sometimes difficult to interpret, and the duration of the protection provided.
Let’s have a closer look at the term riot as covered within the strikes clauses.
Where does it begin and when does it blossom into a full-scale civil war? One
semi-official definition of riot reads as follows: “a tumultuous disturbance of the
peace by three persons or more assembled together of their own authority, with
an intent mutually to assist one another against anyone who shall oppose them
in the execution of some enterprise of a private nature, and afterwards actually
executing the same in a violent and turbulent manner, to the terror of the people,
whether the act intended were of itself lawful or unlawful”.

Quite a mouthful, especially if you consider that civil commotion is then defined as
“being somewhere in between riot and civil war”! The essence of these uncertain
grey zones is undoubtedly that each and every “happening” must be examined
and judged on its own merits, it being virtually impossible to draft universally
applicable and valid definitions.
When it comes to the duration of cover, things luckily become clear cut again.
The strikes clauses (cargo) have an identical duration to the regular Institute cargo
clauses, ie the cover lasts warehouse to warehouse. This is very different in the
war clauses (cargo) where cover is strictly restricted to the time when the cargo
is waterborne. This fact is clearly stipulated in paragraph 5 of the war clauses,
where it is stated that the cover shall commence upon loading on the overseas
vessel and that it shall terminate upon discharge. If cargo is not immediately dis-
charged at the final port, the cover will last for only 15 days after arrival, even if
the cargo remains aboard the vessel and is thus waterborne.
Contrary to the procedure in cargo, the risks of war and strikes for hull business
are combined in one form, the Institute War and Strike Clauses (Hulls-Time),
1.11.95, which is also contained in the appendix.
The perils covered are virtually identical to those of the respective cargo clauses
with the exception of the expressly mentioned confiscation and expropriation risk
for hulls. Yet, following the usual principles of logic and common sense, confisca-
tion and expropriation by the country in which the ship is registered and whose
flag it flies, as well as because of infringements of customs or other regulations,
are expressly excluded (5.1.2., 5.1.3. and 5.1.4.). If you use your car to smuggle
drugs, get arrested and your car is confiscated, it would after all be rather cheeky
to claim compensation from your comprehensive car insurance, wouldn’t it?
Talking about arrest and detainment, clause 3 is rather interesting in that it speci-
fies exactly when a shipowner may claim a constructive total loss (CTL) for his
ship if she is immobilized by a war peril that she is insured against. He must be
deprived of her services for a continuous period of 12 months before the claim
may be made. This clause has its origins in the 15 vessels that were trapped in
the Bitter Lake area of the Suez Canal in 1967 and released only upon the canal’s
reopening on 5 June 1975. At the time, there was no such provision in hull poli-
cies, leading to endless discussions, especially since some of the vessels were
not damaged at all. The German flag vessel MS Münsterland was even able to
steam out of the canal under her own power, her owners having kept a skeleton
maintenance crew during the ship’s entire eight-year detention.
Following the Suez Canal crisis, the market started issuing upon shipowner’s
demand so-called “detainment clauses”, later also referred to as “blocking and
trapping” clauses, specifying that the detention must last at least twelve continuous
months before a claim can be made.
These clauses had their first practical pay-off when local events closed the Shatt
al Arab shipping lanes at the northern end of the Arabian or Persian Gulf in
September 1980 trapping 80 vessels, most of which were eventually settled
as constructive total losses.

Of ships and broken noses

The exclusions listed under paragraph 5 are basically self-explanatory. Of minor

importance but still interesting is the fact that piracy, a historical war peril, is
expressly excluded. This is not because piracy is regarded as uninsurable, but
because it has been decided to treat it as a marine peril coverable within the reg-
ular marine conditions for hull and cargo.
Since the Institute War and Strikes Clauses (Hulls-Time) are designed for an annual
contract, it is absolutely essential that the war and strike risks can be cancelled
at very short notice (seven days) or even automatically and immediately if a conflict
involves nuclear weapons or when two of the five atomic powers and permanent
members of the UN Security Council get into each other’s hair.
These cancellations, apart from the automatic termination of cover (ATC) in para-
graph 6.2., are not really meant to withdraw protection entirely; they give the
underwriter an opportunity to rethink and most of all re-rate the war business with
regard to current developments.
Although the term “waterborne” never really appears in the war clauses for hulls,
it would only seem sensible to apply the same principles regarding mobility and
the ability to run from danger as is the case in cargo. To illustrate this point, ships
under construction are immobile until they are launched. As a consequence, war
conditions for builders’ risks attach only upon launching.
The rating of political risks is, for most markets, customarily determined by London-
based war risks rating committees. These committees (there used to be one each
for hull and cargo until the hull committee dissolved over a rating dispute in
November 1984) meet as frequently as the development of world affairs warrants
and issue rating schedules for trips to the various areas. In addition to this system,
there are a number of national and regional war schemes such as the Arab War
Risks Insurance Syndicate (AWRIS), founded in late 1980 and catering to member
clients in the Middle East.
A typical cargo peacetime rate for war and strike risks would be around 0.0275 %
of the sum insured, sometimes going as high as 1% for trips to exposed regions.
For hull business, the peacetime rate may be somewhere in the neighbourhood
of 0.025 %, with only the sky being the limit for especially risky ventures. (Rates
between 5 % and 10 % for a seven-day trip have been charged and paid under
certain circumstances.)
Following 11 September 2001, both the cargo and hull shock war rates were
increased to 0.05 % with gradual competitive erosion commencing its time hon-
oured work right afterwards.
To summarise, war, strikes riots and civil commotion cover protects against physi-
cal loss or damage only. Frustration, delay or prevention of voyage are indirect
consequences and not covered by the usual war, SRCC clauses. If political risks
are covered for a longer period than one single voyage, a short term cancellation
possibility is imperative. War covers for trips to highly dangerous areas are diffi-
cult to rate technically due to the lack of sufficient numbers of similar risks, so that
a substantial gambling element is sometimes involved.

9 Usually uninsurable risks
If we quote just one of Dr B. Berliner’s definitions as discussed in detail in his book

“Limits of Insurability of Risks” (available on request from Swiss Re), it would really
seem quite simple:
“A risk which is not considered subjectively insurable by any professional risk car-
rier is objectively uninsurable”.
However, considering the fact that the professionalism of risk carriers is often
heavily influenced by the marketplace (competition after all, tends to lower stand-
ards and sometimes provokes unreasonable “compromise” solutions, with only
one party doing the compromising), the formula becomes quite flexible. We shall
therefore not try to enumerate those risks which are really, objectively and under
all circumstances uninsurable, but try to define those risks which are usually, and
from a technical point of view, insurable. All others would then be uninsurable
from the same vantage point only, implying that it will always be possible to find
some innocent, if slightly unprofessional, risk carrier willing to stick out his neck
and give it a try.
Technically insurable are the risks of physical loss of or damage to the property
insured (as well as some limited forms of liabilities discussed earlier) caused by
fortuitous/external events beyond the assured’s control.
That’s basically it; there are of course some grey zones, especially when it comes
to the phrase “beyond the assured’s control” – just think of negligence in navigat-
ing a ship, customarily acceptable as an insurable risk.
The really important component of the above definition is, however, the fact that
only the actual physical loss is considered insurable, refusing the status of techni-
cal insurability to a whole string of consequential financial losses such as loss of
market, loss of profits, guarantee risks, weight and outturn guarantees and fines
for late delivery, to name just a few.
This principle is further anchored in the virtue of fortuity. Which, in turn, bans all
“non-risks” or things which are bound to happen. This may not always be so obvi-
ous as to be immediately recognised. Take a ship with a cargo of oranges that is
stranded on a sandbar and is consequently delayed by one month. Upon arrival,
the rather ripe smell does not bode well. Suspicion is confirmed when the hatches
are opened: the whole cargo is rotten to the very core and thus a total loss.
Everybody is surprised when the insurance company politely declines to pay the
bill; after all, it was an accident and thus fortuitous, wasn’t it?

Let’s look at the sequence of events and their immediate results. The ship was
stranded without damage being caused to the oranges. The fortuitous accident of
stranding is thus not responsible for the oranges’ dire condition. If not, what is?
Time and the oranges’ inherent disposition to rot when kept too long!
Although time may sometimes be perceived as crawling or running away from us,
this is entirely subjective. Objectively, there is absolutely nothing fortuitous about
the passage of time. The same applies, of course, to inherent disposition, or inher-
ent vice as the insurers like to call it. Simple and understandable logic, although it
may have been an altogether shattering experience for the unfortunate owner of
the oranges.
To summarise, insurability on a technical basis is pretty well definable, with lim-

ited grey zones only. The influence exercised by market forces is, however, not to
be underestimated, price and thus attractiveness often being the only force limit-
ing an otherwise unchecked cover expansion.

10 Reinsurance
We’re now leaving the realm of direct underwriting to take a quick dip in the com-
plex and often unnecessarily complicated sea of marine reinsurance.
It goes without saying that it will be absolutely impossible to solve any real rein-
surance problems and answer all questions in a short chapter. Permit us, how-
ever, to use this opportunity to invite you to get in touch with us any time you
have a question or problem regarding marine insurance and/or reinsurance
(which we shall do our very best to answer or help solve). You’ll find our address,
e-mail address, website, telephone and fax numbers at the end of this publication.
Don’t hesitate, try us!

Having snuck our little commercial in, we had better continue with the more seri-
ous business of sharing our experience.
Reinsurance in marine is available in two very distinct categories: proportional and

non-proportional. As this is virtually the same in other branches, and considering
that you probably know all about the basic concepts of risk sharing (proportional)
and loss sharing (non-proportional), we won’t waste your time by repeating plati-
tudes and shall refrain from discussing the workings of quota shares, surpluses
and excess of loss covers. Instead, we shall try to highlight some marine reinsur-
Your risk is our business! ance peculiarities not usually encountered in the reinsurance of other branches.
Starting with the proportional side, where risk, premium and claim on any given
risk unit are split in the same proportion between insurer and reinsurer (hence the
name), the question arises: What is a risk unit in marine?
In hull business, the question is quickly settled: it is the ship with its machinery
(hull and machinery, or H+M), plus side interests, which is looked at when deter-
mining the company’s retention as well as the cession to the reinsurer.
With cargo business, it becomes slightly more complicated: The classic way
would no doubt be to add all boxes, crates, barrels and bags aboard the same
conveyance and fix cession and retention on the total of all cargo at risk. This
method is referred to as the “any one vessel/ bottom/craft/conveyance/risk
method” and is blessed with the following pros and cons:
Advantages
If the ship sinks, you know how much was on it, ie the commitment for retention
and cession should bring no surprises. Because of this, insurers can write to much
higher limits, with excess of loss protection to safeguard the balance sheet becom-
ing of secondary importance and usually reasonably priced.

Disadvantages
The identity of the conveyance must be known before departure to allow you to
do the adding of all the boxes, crates and bags aboard the same ship. This adding
process, also known as “accumulation control”, is cumbersome, labour-intensive
and thus expensive. On the other hand, there is the possibility of considering each
policy issued (or declaration received under open covers), to be the relevant risk
unit for reinsurance distribution, referred to as the “per policy/declaration/bill of
lading” method. This relatively recent way of handling cessions was basically
introduced wherever an effective accumulation control was rendered impossible,
usually because of lack of shipping information. Naturally, this method also has its
advantages and disadvantages as follows:
Advantages
The identity of the conveyance is immaterial, accumulation control superfluous,
administration easy and cheap; no headaches.
Disadvantages
The accumulated commitment aboard one and the same ship is unknown for
retention and reinsurance cession. This dictates smaller underwriting limits and a
good but often costly excess of loss programme protecting the insurer’s unknown
number of retentions. After all, it could easily happen that a ship sinks with cargo
covered by ten different policies, forcing the insurer to bear ten times his usual
retention in one single loss.
The issue of reinsuring cargo either on an any one risk or on a per policy basis is
the topic of another Swiss Re publication entitled “Marine cargo reinsurance”
available, as usual, on request.
On the non-proportional side, we are basically talking about working and catastro-
phe excess of loss covers on an “any one event” basis only. In this form of protec-
tion, the total ultimate net loss of the insurer is caused by one single event (for
instance the whole cargo lost on two vessels due to sinking following a collision).
What constitutes a single event is sometimes rather difficult to define, as was the
case when two vessels sank roughly 500 miles apart within twelve hours of one
another. At first sight, one would tend to treat each sinking as a separate event,
however, meteorological surveys revealed that the storm that caused both vessels
to sink was due to one and the same low pressure area, ie one event.
On the difference between working (WXL) and catastrophe (Cat XL) excess of
loss covers in marine, there are a number of different theories, one of the more
simple ones reading as follows: If it takes more than one vessel (or more than the
risk units normally presumed to be on one vessel) to operate the excess of loss
cover, it is a Cat XL. This may happen when two vessels collide, or when extraor-
dinary circumstances lead to a great and unexpected number of policies on one
vessel due to some unforeseen transhipment. Port and warehouse fires involving
cargos of a number of vessels are further examples.
Following logic, a WXL would thus be an excess of loss cover “working” already
with only one vessel being involved in an accident.

Unfortunately, things are never just black and white, there are numerous shades
of grey in between, and it will probably remain wishful thinking to believe that one
day all reinsurers will get together and agree on a uniform definition.
The duration of the large majority of marine excess of loss contracts is formulated
for losses occurring during the twelve-month contract period. marine XL’s covering
losses attached to an underwriting year, irrespective of when they happen, are
rare and rather problematic exceptions. The “claims made” basis, much discussed
recently, is, because of the relative ease with which the actual source of marine
claims may be dated, only of secondary importance in the marine field (special
liability covers excluded).
The category of stop loss covers limiting the insurer’s annual overall underwriting
loss to a certain percentage, is, because of the proverbial imbalance of most
marine portfolios, an absolute “don’t”. One year you lose a vessel and your results
are a disgrace, the other you’re lucky and are able to show a 25 % profit. That’s
the case (and also the game) for even quite large books of marine business, ie an
entrepreneurial risk which should best be left with the entrepreneur.
To top it off, there is, of course, always the risk that a stop loss reinsurer of a
marine portfolio whose results behave like the proverbial pumphandle (up and
down), may fall prey to cleverly manipulated reserve tactics or may decide to
accept a piece of business where reserves are insufficient, to say the least.
In this context, allow us a final abbreviation: IBNR! In plain English this reads:
“incurred but not reported,” referring to losses and the respective funds set aside
for their payment. Whereas it is quite easy to understand the principle of setting
aside reserves for claims announced and reported, it becomes very difficult
indeed to assess and set aside reserves for those “unknown” future obligations.
IBNRs are probably one of the most controversial issues in insurance and reinsur-
ance (marine in particular), in addition to being the favourite headache of auditors
and tax authorities. Still, properly and professionally done, provisions for IBNRs
are calculable with a fair degree of reliability and without the help of any crystal
ball. They are thus immensely important when it comes to judging the ultimate
performance of a particular marine account.
This brings us to the end, as far as the technical aspects of marine reinsurance are
concerned. Forgive us for adding a few personal remarks: Reinsurance should be
like a good suit, custom tailored to the needs and requirements of its wearer, the
insurance company. Custom tailoring is, however, only possible if “measure” can
be taken and this implies mutual confidence, trust and utmost good faith. In short:
partnership.
True partnership, on the other hand, requires continuity, a long-term relationship

as opposed to short-term benefits possibly obtainable by shopping around. A
successful symbiosis, because both need one another and admit it.
This doesn’t just happen, it needs time to grow!

11 Epilogue
We certainly take it as a compliment that you are still reading and we are very
pleased if you have found some topics and stories interesting enough to perma-
nently store them in your biological personal computer for future reference.
As already mentioned in the prologue on page 5, we are aware of the fact that in-
depth coverage of a highly complex subject matter is well-nigh impossible. We
therefore regret any difficulty on your part to find solutions to involved technical
problems between the covers of this publication.
On the other hand, especially with an eye to novices and newcomers, we sin-
cerely hope that we have been successful in providing a small glimpse into the
exciting world of marine insurance.
Turning to the “old hands”, we would be more than happy if you’ve actually fin-
ished reading this publication (which quite obviously you have, unless you always
start reading from the back!) and maybe fondly recognised some of the stories as
cases encountered in your own career.
Now, to all those who are still frustrated because of unanswered technical marine
questions, we would extend a cordial invitation to get in touch with us and give
us the opportunity to come up with ideas; after all, we’re only a phone call (or a
mouse click at www.swissre.com/Services & Solutions/Property & Casualty/Marine)
away!
Swiss Reinsurance Company

P.O. Box
8022 Zurich
Switzerland
Telephone +41 43 285 2121
Fax +41 43 285 5493
publications@swissre.com

Appendix
Companies Marine Policy

Institute Cargo Clauses (A) 1.1.82
Institute Cargo Clauses (C) 1.1.82
Institute War Clauses (Cargo) 1.1.82
Institute Strikes Clauses (Cargo) 1.1.82
Institute Time Clauses (Hulls) 1.11.95
Institute War and Strike Clauses (Hulls-Time) 1.11.95

Other publications in the “Technical publishing” series
Flight to quality – Financial security in the Who’s in control? The brochure entitled Swiss Re Publications
aviation insurance market How can co-operation in aviation be improved includes a complete overview of all available
This publication highlights the complex inter- to ensure safety both on the ground and in the Swiss Re publications. Order no.:
actions of the volatile aviation re/insurance aircraft? Several perspectives are scrutinised: 1492220_03_en
market and how they are coinciding with a the respective responsibilities for every stage
general downturn in financial markets world- of flight operations and the great challenge of
wide, creating a situation in which many monitoring ground and air traffic. New tech-
re/insurers could experience serious financial nologies are also examined in light of short and
difficulties. This publication is addressed to all long-term efficiency.
participants in the aviation insurance and rein- Order no.: 206_9681_en
surance market and emphasises the need for
vigilance and an uncompromising approach Marine cargo insurance
when selecting the quality of the security This publication guides the reader through the
offered by insurers and reinsurers. key steps in marine cargo, giving insight into
Order no.: 1492369_02_en the thinking practices at the reinsurance end,
and offering a few ideas about the reader’s
The underwriting year in marine insurance own cargo reinsurance arrangements. Written
and reinsurance in an animated, and highly readable style, the
This popular work, which distinguishes itself for publication may well affect the way one views
its useful marine insights and highly readable quality cargo underwriting
style, is now available in a revised edition. The Order no.: 206_9674_en/pt/es
publication addresses key questions which
confront the marine underwriter with ruthless Communicating in aviation
regularity: What is an accounting or balance The effectiveness of communication in the
year? What is an accident year? How do we aviation industry, which is central to this publi-
allocate underwriting years and how long cation, is determined, among other things, by
should they be kept alive? A statistical com- whether those involved recognise each other’s
parison – with its several possibilities for inter- common interests and the goals they pursue.
pretation – points to the pockets of trouble This publication raises several issues of com-
which the marine underwriter would do well mon interest to the aviation and insurance
to avoid. industries.
Order no.: 206_9351_en Order no.: 206_9446_en/de
PEN or the ART of marine underwriting

The author convincingly argues that no single
underwriting tool will ever replace the overall,
balanced assessment of all risk factors done by
an underwriter, using all available intellectual
and emotional faculties to arrive at a final deci-
sion. Written in an engaging tongue-in-cheek
style, the publication offers insight into the
demanding task of underwriting complex and
potentially volatile risks. Further, it contains
some practical hands-on exercises to help
bridge familiar decision-making processes
which those underwriters must use to meet
their personal and business benchmarks opti- How to order
mally. To order a copy of a publication, please send
Order no.: 207_00238_en/es an email to publications@swissre.com. You
can also place your order via our portal at
www.swissre.com. Please include the title of
the publication, the order number and the
language abbreviation. The language versions
are indicated at the end of the order number
as follows:
English _en
German _de
French _fr
Italian _it
Portuguese _pt
Spanish _es
Japanese _ja
Swiss Re’s P&C publications are edited and

produced by Technical Communications,
Chief Underwriting Office.
Walter M. Mellert
Chartered insurer
After some seven years of direct insurance experience

in property and casualty, both in Switzerland and in
Canada, Walter Mellert joined Swiss Re's marine
department in 1974. He obtained his associateship
of the Chartered Insurance Institute in 1978 in the
marine branch. After developing and marketing
marine reinsurance products for clients in the Middle
East, the Indian subcontinent, the Far East and the
United Kingdom for over 25 years, he joined the Chief
Underwriting Office as a senior product specialist
responsible for Marine Product Management, training
and publications.
© 2003
Zurich
Title:
Marine insurance
Author:
Walter M. Mellert
Chief Underwriting Office
Editing and production:

Technical Communications
Chief Underwriting Office
Graphic design:
Logistics/Media Production
Photographs were selected from those

in the 1st edition, supplied by:
The Image Bank, Zurich
Tony Stone & Hulton Getty, Munich
Bildagentur Baumann, Würenlingen
Ringier Dokumentationszentrum, Zurich
Presseagentur L. Dukas, Zurich
Key-Color, Zurich
The material and conclusions contained in this publi-

cation are for information purposes only, and the
author(s) offers no guarantee for the accuracy and
completeness of its contents. All liability for the
integrity, confidentiality or timeliness of this publica-
tion or for any damages resulting from the use of
information herein is expressly excluded. Under no
circumstances shall Swiss Re Group or its entities be
liable for any financial or consequential loss relating
to this product.
Order number: 206_98103_en
1st edition CC, 12/97, 3000 en

2nd edition Property & Casualty, 11/2003, 3000 en
Umschlag_A4 14.11.2003 9:54 Uhr Seite U4

Mythenquai 50/60
P.O. Box
8022 Zurich
Switzerland
Telephone +41 43 285 2121

Fax +41 43 285 5493
publications@swissre.com
Swiss Re publications can

also be downloaded from
www.swissre.com

Marine Insurance 2007

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2003 9:54 Uhr Seite U1

Some of the things you’ve always wanted to

2 History of marine insurance 6

4 What can go wrong? 20

6 Inseparability of premium (necessity for underwriting year) 39

7 The long-tail nature of marine business 40

8 Current marine insurance conditions 42

9 Usually uninsurable risks 53

1 What you may and must not expect

To keep it as simple as possible, we have restricted our comments to the usual

Any notion of attaching specialist status to this publication would be definitely

5 Swiss Re: Marine insurance

2 History of marine insurance

As there is no school, college, university or other educational institution in real life

6 Swiss Re: Marine insurance

… when sails still billowed

7 Swiss Re: Marine insurance

Interest Value % Amount % Amount Amount received Loss

8 Swiss Re: Marine insurance

In addition, Lloyd’s provided a number of additional services such as cargo and

9 Swiss Re: Marine insurance

In any event, disregarding shifts in income, importance in terms of premium pro-

There will always be marine insurance!

10 Swiss Re: Marine insurance

To summarise, “it” must be carried by “something” for the purpose of transporta-

11 Swiss Re: Marine insurance

Here’s the answer:

12 Swiss Re: Marine insurance

Giant hatch covers open to receive cargo

13 Swiss Re: Marine insurance

A further, rather important part of “hull” business is construction and conversion

14 Swiss Re: Marine insurance

15 Swiss Re: Marine insurance

16 Swiss Re: Marine insurance

Workmen dwarfed by the enormous, bulbous

17 Swiss Re: Marine insurance

18 Swiss Re: Marine insurance

To summarise, if it covers the legal liability of professionals engaged in a maritime

19 Swiss Re: Marine insurance

4 What can go wrong?

Usually just about everything that shouldn’t, in particular things unforeseen!

Total loss/constructive total loss

20 Swiss Re: Marine insurance

All hands at diving stations!

21 Swiss Re: Marine insurance

To avoid ambiguities as to when a CTL really is a CTL, it is frequently the practice

Needless to say, practice tends to be considerably more flexible, yet it is often

22 Swiss Re: Marine insurance

Perils of the sea/perils on the sea/extraneous risks

23 Swiss Re: Marine insurance

Perils of the sea

“Stranding”: A ship becomes immobilized for some time on partially submerged

Perils on the sea

24 Swiss Re: Marine insurance

Modern pirates with customised loot

25 Swiss Re: Marine insurance

Breakage, chipping, denting, rust, oxidation, discoloration, heating, leakage, theft,

Delay, on the other hand, is not a peril, just a consequence of circumstances.

26 Swiss Re: Marine insurance

War, strikes, riots and civil commotion (WSRCC)

27 Swiss Re: Marine insurance