MARINE INSURANCE

Introduction and Overview

What is Marine Insurance?

Historical Development of Marine Insurance Market

Types of Marine Coverage and Policies

Considerations in Underwriting Marine Insurance

The Law of Marine Insurance

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Introduction and Overview

Insurance against the perils of marine commerce

o For example, if a ship sinks in transit, various types of losses are possible: loss of cargo; loss of profit from sale of cargo; damage to ship; third-party liability; personal injury

o Key difference between marine insurance and other types of insurance is that the marine adventure or peril insured must be specifically maritime in nature

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Marine adventure English Marine Insurance Act of 1906: where any goods in shipment are exposed to

maritime perils (e.g., perils of the sea, fire, war, pirates, jettisons)

where the earning of any pecuniary benefit from goods in shipment is endangered by exposure to maritime perils

where any liability to a third party may be incurred by the owner of insurable property (or any party with an interest in the property) by reason of maritime perils

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Marine Insurance Markets English Market began with Lloyds of London in the

1600s

Lloyds is not an insurer; it is a facility for the selling

of insurance by underwriting syndicates at Lloyds

Historically, the capital for Lloyds syndicates was

provided by individual investors

Now, the capital is provided by corporations doing

business as syndicates 5

Marine Insurance Markets Lloyds began in 1688 at Edward Lloyds coffeehouse

in London

Lloyds Coffee House was located near the Tower Wharf and Customs House in London, so it was frequented by shipowners, captains, and merchants

At Lloyds Coffee House, various merchants entered into a side business of underwriting the risk of a ships safe passage to its destination, with its cargo intact

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Marine Insurance Markets By 1696, the Lloyds News and, later, Lloyds List

began publication containing the most authoritative daily journal of shipping intelligence

Over the years, Lloyds set up reporting stations

around the world to provide information on ship movements

Because of the need for buyers and sellers to have the same information about the risk, the doctrine of uberrima fides (meaning utmost good faith) developed in the market, and the law

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Utmost good faith

Insurer must not conceal from insurer any circumstances known to him and which matter.

What is known by due dilligence need not be informed.

What is not known need not be informed.

Nonfulfillment by insurance results into refuting the claim.

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Marine Insurance Markets From modest beginnings in the 1600s, Lloyds has

grown to be one of the largest and most influential marine insurance markets in the world

Over time, other chartered London insurance companies sprang up

London continues to be a major marine insurance center, not only for Lloyds Underwriters, but also London-based insurance companies and P&I Clubs

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Marine Insurance Markets

Marine Insurance today is underwritten by:

o Underwriters at Lloyds

o Insurance companies located in London and throughout the world

o U.S. insurance companies, most of which belong to the American Institute of Marine Underwriters

o P&I (protection & indemnity) Clubs

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Examples of Risks

Market risk Price risk Counterparty risks (non-payment, non-performance,

insolvency, valid documentation, taxation issues, insurance cover)

Credit risks Operational risks Geopolitical risks (piracy, terrorism) Compliance with laws / sanctions regulations Liabilities to third parties

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The Risk Review Process

Forensic review of your business and YOUR risks

Identify risks you can transfer to counterparties, insurers and/or banks

ARE THE REMAINING RISKS ACCEPTABLE AND MANAGEABLE TO YOU?

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Manage Your Risks

YOUR AIM MUST BE A CONTROLLED ENVIRONMENT.

Either manage the risks yourself

OR

Transfer the risk through a contract

OR

Insure the risk

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Risk Management Through a Commercial Contract

Clearly define the objectives and responsibilities of the parties

Use of INCOTERMS includes contract regarding schedule of risk liability

Charterparty and bill of lading are contracts.

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What are Incoterms Created in 1936 by the International Chamber of

Commerce (ICC) Regularly updated, most recently in 2010 but 2000

Rules are still referred to Incoterms DO NOT give you a complete contract

of sale Incoterms do not deal with the transfer of

ownership of goods Incoterms state which party has the obligation to

make carriage or insurance arrangements Specify the place of delivery as precisely as possible

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Your Relationship With Insurers

Meet your lead underwriter

Make sure that the underwriter understands your business and the risks involved

UTMOST GOOD FAITH: you must disclose BEFORE contracting every material circumstance of your business or transaction that you wish to insure: corporate structure, goods, conveyances, geographical regions, limits, etc.

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Operating An Insurance Policy Strictly comply with the policy terms -- e.g., warranties that

some particular thing shall or shall not be done

Keep insurers closely informed about changes to your organization and business

Make sure that the policy is amended to reflect changes

Protect yourself through proactive measure, e.g. use of independent inspectors

In cooperation with insurers/broker get an Emergency Procedure in place

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In Case of An Accident Follow the Emergency Procedure

Take all necessary measures to protect people from injury or death

Protect property from further loss

Alert your brokers/insurers claims department

Duty to mitigate loss (experts on the scene)

DO NOT ACKNOWLEDGE LIABILITY

Start collecting evidence (witness statements, photographs, survey reports, retention of samples, etc.)

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Claims Handling

Pre-contract disclosures

Policy wording

Claim notification/documentation

Appointment of loss adjustor

Close contact with people involved within company

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Types of Marine Coverage and Policies

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Tyoes of Marine Insurance

Cargo Insurance

Hull & Machinery Insurance

Protection & Indemnity (P&I) Insurance

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Unlocking Cargo Terms/Phrases Definitions and/or Translations

Average Loss

Collision 2 vessels running into each other

Franchise Threshold

General Shared

Particular Partial or Individual

Warranty i. Exclusions, e.g. Paramount; ii. Coverage requirements, e.g., loading survey

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Unlocking Cargo Terms/Phrases Definitions and/or Translations

Average Warranty Insuring Terms/Coverage

o FPA Free of Particular Average Total loss only

o WA With Average Total and Partial losses

o WA 3% loss /no loss 3% Franchise Threshold

o All Risks covered unless specifically excluded

General Average Shared Loss

Irrespective of percentage perils added and includes total and partial losses

Sue and Labor Act to avoid/minimize loss

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Cargo Insurance

Provides coverage for cargo in transit (with incidental storage)

Ocean Cargo Insurance/Certificates are an integral part of international trade

Who requires marine cargo insurance?

o Anyone engaged in the movement of goods

o Buyers, sellers, importers, exporters, manufacturers, and banks

The Terms of Sale impact who purchases insurance

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Cargo Insurance

Principal areas of coverage o Perils of the Sea

Most important coverage of marine insurance policies A broad term covering specific types of losses, including:

Stranding; Sinking; Grounding; Collisions with other vessels; Heavy Weather; Ice

o Assailing Thieves o Jettison

Defined as the intentional throwing overboard of the ships cargo, material, or stores in time of peril, for the common safety of the ship and her cargo

o Fire, lightning and earthquake

Exclusions

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Cargo Insurance All Risks

o Shipments of goods insured sufficiently packed to withstand the voyage covered by the policy are insured against all risks of physical loss or damage from any external cause.

Paramount Warranties/Paramount Exclusions

o Free of Capture and Seizure (FC&S) (War Perils)

o Strikes, Riots, and Civil Commotion (SR&CC)

o Radioactive Contamination Exclusion (RACE)

o Chemical, Biological, Biochemical, and Electronic Exclusion (CBE)

o Delay and Inherent Vice

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Cargo Insurance

Unique Coverage Features:

General Average and Salvage Charges (GA)

Seaworthiness (Airworthiness) o Vessel being in sound condition and well maintained

o Vessel being properly manned (number of and qualification of crew)

Sue and Labor o Assured required to take steps to prevent or minimize loss

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Cargo Insurance

Carriers Legal Liability Defenses and Exemptions for loss or damage due to:

o Acts of God

o Acts of government

o Riots and labor disturbances

o Improper or insufficient packing or stowage

o Inherent vice of the cargo

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Charterers Legal Liability

Cargo owner charters a vessel. Under the Charter Party Agreement, the Cargo Owner is responsible for:

o Safe berth at the designated Port(s) of loading

Port(s) of offloading

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Hull Insurance

Basic coverage includes: o Named perils physical damage to the vessels hull and her

machinery o General Average and Salvage Charges o Collision Liability o Sue and Labor

Warranty of Seaworthiness

Amount Insured is Agreed Value

Coverage applies to Named/Scheduled Vessel or Vessels

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Protection & Indemnity Insurance (P&I)

P&I Insurance Policies

o Cover claims for damage or compensation for a large number of categories of loss, including:

Injury to or loss of life of crew members

Removal of wreck of the named vessel

Damage to fixed or floating objects or property (other than vessels)

Liability for loss or damage to cargo

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Key Legal Issues in Marine Insurance

Choice of Forum

Choice of Law

Insurable Interest

The Doctrine of Uberrima Fides

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Insurable Interest

an insurable interest means that the policy holder (or the beneficiary) must stand to suffer a direct financial loss if the event (against which the insurance cover was bought) does occur.

A tenant may not necessarily have a direct insurable interest in the rented property but the landlord may.

An insurable interest in the subject matter insured must exist at time of loss, not at contracting.

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Misrepresentations, Nondisclosure, and Uberrima Fides

Marine insurance is a contract uberrima fides requiring the utmost good faith by both parties o In practice, operates against the insured alone

The insured is bound to disclose every fact within his knowledge that is material to the risk

o This is true even if the insurer does not inquire

o Failure to disclose can void the policy ab initio or even after the risk has attached

o Doctrine operates regardless of insureds intent

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Misrepresentations, Nondisclosure, and Uberrima Fides

This policy is not only harsh, it is broad because of the definition of materiality o Fact considered material if the existence of the fact would

affect the decision of a prudent insurer to underwrite the risk or even charge a different premium

Traditional rule undeniably harsh, but insurers arguments in favor of rule have less force in todays world

Nondisclosure cannot void coverage if it related to a matter of common or public knowledge

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