Marine Cargo Insurance

University of Warsaw, Institute of International Relations

Graduate Masters Program in International Relations (GMAPIR)

Fall Semester (2010-2012)

A Term Paper Submitted to Prof. Dr. David Jones Law of International Trade

By Yam Prasad Chaulagain 17 January, 2011

Table of Content
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Page No. What is Marine Cargo Insurance?...............................................................................1 Why is it Important?....................................................................................................3 Principles of Marine Insurance Law4 Risk in Marine Cargo Insurance .6 Total Loss in Marine Cargo 8 Types of Marine Cargo Policy 8 Types of Marine Cargo Insurance Coverage 10. Tips for Shipping Fragile Goods11 Claim Documents for Marine Cargo Insurance 13 Marine Cargo Insurance: A Case Study.14

What is Marine Cargo Insurance?

After the end of Cold war, the importance of political relation has shifted to economic relationship between the states. Nations are in the race to become economic super power and of course, economic soundness insures stability and ability to exercise influence in world affairs. In this regard, international trade in the form of global economic relations has been gaining meaningful existence in the contemporary scenario. In fact, international trade demands free flow of goods among the nations and most of such cross border transactions could be possible only through the sea-route. The commencement of the 17th century formed the starting of a new period in the history of marine insurance in Great Britain (Noussia 2007). What is marine cargo insurance? English Marine Insurance Act, 1906 (MIA) states- A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, losses incident to the marine adventure. The Act doesnt specifically mentions air travel or pure land- based transit. Therefore to ensure the Act applies to all modes of transit it is useful to see a clause in the policy document confirming its authority in all circumstances. As mentioned in Act, Undertaking to indemnify means a duty to cover a loss suffered by the assured to the extent, and only to the extent of his actual loss. Marine insurance Act in its opening section also includes maritime perils and marine adventure. Maritime perils are perils consequent on or incidental to the navigation to the sea, including perils of the seas, fire, war perils, pirates, rovers, captures, seizures, restrain any other like perils.(Chuah 2005). Similarly, marine adventure exists when- i) any ship or goods are exposed to maritime perils; ii) the earning or acquisition of any freight, passage money, commission, profit or other pecuniary benefit or the security for any advances is
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endangered by the exposure of insurable property to maritime perils; iii) liability to a third party may be incurred by the owner of any other person interested in insurable property by reasons of maritime perils. Thus, Marine cargo insurance is an insurance policy taken up to protect against loss of or damage to the goods while they are being transported. Goods, merchandise and other movable properties which may be exposed to marine hazards or perils during their transportation from one location to another can be insured under marine cargo insurance. A vital element of international sales involves protecting the merchandise against loss or damage while in transit. Whether the importer or exporter is required to purchase or pay for the insurance for the merchandise depends on the terms agreed upon between the parties. For example, if the seller is contracted to deliver merchandise the buyer FOB (Free On Board), then the buyer is responsible for insuring the goods against risks while in transit. Carrier and shipper firms are not automatically required to provide insurance for cargo they are contracted to deliver.1 Insured, Insurer, Insurance and Premium are the key terms for every kind of insurance contract. Under the marine cargo insurance, the party interested in the property insured is called insured or assured, the party undertaking to indemnify the assured against loss is called the insurer or underwriter, the agreed consideration or stipulated sum for which the underwriter to indemnify the assured is called the premium and the property insured itself is called the subject of insurance. ( Dixon 1866).

1Encyclopedia of Credit, Free Credit Ressource for Credit Management Asssociation, As retrieved on 10th Jan. 2011
http://www.encyclopediaofcredit.com/Marine-Cargo-Insurance

Why is it important? Its true that risk can never be eliminated but the level or degree of risk can be minimized if appropriate precaution applied in time. Of course, traders face great many risks in handling business internationally. Even established trader has been facing many potential practical problems while transporting the goods through marine route in international market. In this context, insurance is about the traders aversion of risk. There are many different things that can potential happen during shipment of cargo and container on a ship. The loading cranes could damage the containers, theft and piracy, weather damage, as well as potentially losing the cargo overboard or other marine disasters. All of these possible issues are exactly why the traders need marine cargo insurance.2 The marine cargo insurance can be described as follows: 1). Importance Of Marine Insurance For The Individual: A person has to import goods from another country which is located on the other side of sea for his business. While carrying goods from sea- side, goods may be damaged because of sinking of ship into the water. So businessman has to experience economic loss. By the result of loss person may be discouraged to engage in business. But when one insures his/her property in marine insurance does not have to face with economic problem because marine insurance provides compensation to the insured against the loss of property. 2). Importance Of marine Insurance for Ship-owner: Expensive ship may be destroyed due to different types of risks on the marine venture. Ship-owner may have to experience with larger amounts of loss due to the destruction of the ship. Marine insurance provides compensation of loss to the ship-owner. So, marine insurance is important insurance for ship-owner.
2 Hub Page Inc., retrieved on 9th Jan. 2011
http://hubpages.com/hub/Cargo-Insurance

3). Importance Of Marine Insurance For Freight: Freight insurance is also included under the marine insurance. Freight refers to the revenue that a cargo ship earns or the money which is paid to the ship-owner for transportation of goods from one part to another. If businessman does not pay freight of his goods to the ship-owner, ship-owner may have to experience economic loss. If such types of loss occur insurance company indemnifies the ship-owner to marine insurance. So marine insurance is very important for the freight. 4) Importance Of Marine Insurance For Cargo Owner: A businessman wants to be secured for his goods. Especially countries which are located on the other side of sea, businessman may have to use marine venture. Marine insurance keeps them away from worry and fear or all responsibility of cargo owner is transferred to the hand of insurance company that provides compensation to the cargo owner if loss occurs. 5) Importance Of Marine Insurance For The Government: International trade has been increased due to the marine insurance. As international trade increases government also can receive economic profit. Government increases revenue by including extra income tax. So marine insurance is important for the government also. (Based on Insurance Studies)3

Principles of Marine Cargo Insurance Traders should have a basic understanding of some of the fundamental principles of insurance. These principles of insurance are equally applicable for marine cargo insurance as well. They are as follows:

3 Insurance Studies, retrieved on 9th Jan. 2011. http://insurancestudies.blogspot.com/2010/01/importance-of-marine-insurance.html

1) Utmost good faith: The principle of utmost good faith is essential in any insurance contract. Insurers are almost totally dependent on the insured to disclose any relevant information regarding the insured risk. Good faith works both ways. Both parties (insurer and the insured) in the contract must disclose all material facts for the benefit of each other. False information or non- disclosure of any important fact makes the contract avoidable. So,utmost good faith are very strict on the part of the insured. 2) Insurable Interest: The title or interest which the assured has in his property, is called insurable interest.( Dixon 1866). The principal of insurable interest is a vital one to all forms of insurance. In order to take out a policy the policy holder must have an insurable interest in the insured matter. In the case of cargo insurance this means that they must benefit from the safe arrival of the goods or be prejudiced by their loss. So an insurance contract without the existence of insurable interest is not legally valid and cannot be claimed in a Court. The object of this principle is to prevent insurance from becoming a gambling contract. 3) Principle of indemnity: Marine cargo insurance is a contract of indemnity, that is, to compensate for the loss or damage in terms of the value of the insured goods. The amount insured as agreed between the insurer and the assured forms the basis of indemnity. All types of contracts except life and personal accident insurance are contract of indemnity. According to them, the insurer undertakes to indemnify the insured against a loss of the subject matter of insurance due to insured cause. In life assurance the question of loss and, therefore, of its indemnification does not rise. Because the loss of life cannot be estimated in term of money.4 The principles of indemnity are based on the idea that the assured in the case of loss only shall be
4Hub Page Inc., retrieved on 10th Jan. 2011
http://hubpages.com/hub/Principles-of-Insurance

compensated against the actual total loss. But if no event happens, the insured has not to receive any amount, so in this case the premiums paid by him become the profit of the Insurer. 4) Doctrine of subrogation: Subrogation is the process in insurance law whereby an insurer, having indemnified an assured, has transferred to himself all the writes and remedies of the assured with respect to the subject matter as from the time of causality(Hodges 1999). It lays down a principle which is quite equitable. 5) Doctrine of proximate cause: This principle is found very useful when the loss occurred due to series of events. It means that in deciding whether the loss has arisen through any of the risks insured against, the proximate or the nearest cause should be considered. In fact many claims fail simply because the cause of the loss is not an insured risk. Just what the insured is not covered for is listed below, but first the principle of Proximate Cause needs to be explained. Risk in Marine Cargo 1) Physical Risk: Marine cargo in international trade never free from possible casualties Goods moving internationally faces a very real risk of physical loss or damage. This may simply be damage caused to the goods in handling and transit, possibly due to inadequate packing or bad handling, or loss due to accidental diversion or deliberate pilferage or theft. When these risks occur, they may result in either total loss or partial losses.5 2) Exchange Risk: In some countries exchange controls limit the buyer so that dollars are not available until the goods have actually cleared customs.6 Even if we are able to deliver goods in
5 National Insurance Company Ltd.( A Government of India Undertaking), As retrieved on 7th Jan. 2011 http://www.nationalinsuranceindia.com/nicWeb/nic/PolicyServlet?id=9999&name=2101.html 6 Export Insurance Service, Georgia(Representatives also in Florida, North Carolina, Illinois and Texas), As retrieved on 7th Jan. 2011 http://www.exportinsurance.com/minsurancem.htm

good condition to the buyer and the satisfied buyer pays us on time it is still possible for the unwary exporter to lose money. In the event that the exporter is invoicing in a foreign currency it is possible that the pounds sterling funds eventually received, following exchange of the foreign currency revenues, are less than was anticipated because of fluctuations in the relevant exchange rates. It is not possible for the exporter to arrange insurance cover for such risks. It is however possible to manage the contingency for such risks 3) Credit Risk: Even if the goods arrive complete and undamaged the problems do not stop there because there is the risk that the buyer will not actually pay for the goods. This may create contractual dispute between buyer and seller; after all, the exporter may have shipped total rubbish to the importer. However we must accept that non-payment may be the result of a dishonorable intention of the buyer. This takes many forms from non-acceptance of the goods, through taking over the goods and deliberately delaying payment, to simply not paying for the goods.

Total Loss in Marine Cargo 1)Actual Total Loss: A loss of cargo in which the subject matter is destroyed or damaged to such an extent that it can no longer be used for its purpose, or when the insured is irretrievably deprived of it. (Martine. 2009). There is physical destruction of physical characteristics of the cargoes insured. The things ceases to be the thing insured The object becomes irretrievably lost.

2) Constructive Total Loss: A marine insurance term indicating that the cost of repairing damage to a ship will exceed its total value. In such case the insurance payment is the total sum for which it has been insured, and not the estimated cost of repairs.7

Actual total loss is unavoidable Cargo cannot be preserved without incurring expenditure that is garter than the value of the cargo. Types of Marine Cargo Insurance Policy

Cargo insurance policy primarily protects against loss or damage of the goods while they are being transported. The policy helps to indemnify if there is any loss or damage on cargo. The marine cargo insurance policy can be designed to meet the individual needs of the exporter or importer in an international transaction.8 Commonly used cargo insurance policies are as follows 1) Time Policy:Marine Insurance Act, sec.25(1) provides that where the contract is to insure the subject matter for a definite period of time the policy is called time policy. This policy cover risks during a stated period of time. An insured vessel is not bound to a particular route and all voyages within the stated policy period are covered. Where there is not certainty, the contract will not be classified as a time policy. 2) Voyage Policy: A voyage policy is defined by s. 25 as one where the subject matter is insured at and from or from one place to another or other places. Voyage policies protect a

7Encyclopedia.com, As retrieved on 6th Jan. 2011 http://www.encyclopedia.com/ 8 Guide to US Cargo Insurance, American Institute of Marine Underwriter(2005), 14 Wall Street New York, As retrieved on 6th Jan. 2011 http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=aimu+cargo+guid

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certain ship traveling a certain route regardless of length of time. In these cases the insurance would not be effective until the voyage begins and would terminate when the voyage ends. 3) Valued Policy: The valued policy is one where the parties agree to the limit or amount of cover regardless of the actual value of goods. There should be a specific agreed value proposed by a assured and accepted by the underwriter. 4) Unvalued Policy: Section 28 describes The unvalued policy is one which doesnt specify the value of subject matter insured and leaves the insurable value to be subsequently ascertained in the manner set out in s. 16. Section 16(3) provides that the insurable value of goods is the prime cost of property insured, plus expenses of an identical to shipping and the charge of the insurance. Those with an undermined value of stated property are called unvalued or open policies. 5) Floating Policy: According to s. 29, A floating policy describes the insurance in general terms, but leaves the name of the ship or other particulars to be defined by subsequent declaration. The value of the goods must be honestly stated. This policy designed primarily for merchants and exporters who frequently ship large amounts of mixed goods. It allows the insured to buy a certain dollar amount of protection and declare particular ships, voyages and cargoes later on. Types of Marine Cargo Insurance Coverage (Institute Cargo Clauses A, B and C) Cargo insurance is usually provided by the means of one of three Institute Cargo Clauses - A, B or C. The A clauses cover all risk, subject to specific exclusion. The B and C clauses cover the risks stated, subject to specific exclusion. In simple terms, Cargo clauses A are equivalent

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of all risks, B covers less than A and C covers less than B, with a corresponding decrease in the insurance premium. 1)Institute Cargo Clauses C: It covers the losses -from warehouse to warehouse, total loss of the cargo due to perils of the sea, partial losses caused by the sinking, fire or explosion, overturning or derailment, collision, discharge of cargo at point of distress, Jettison etc. It doesnt cover loss, damage or expense caused by- willful misconduct of assured. ordinary leakage , loss of weight or volume, wear and tear, unsuitable packing, inherent vice, delay, insolvency or financial default of owners, managers, chatterers or operators of vessel, Atomic weapon, of war, radioactivity, deliberate damage to or destruction of subject-matter insured. 2) Institute Cargo Clauses B: It covers losses- from warehouse to warehouse, total loss of the cargo due to perils of the sea, partial losses caused by the sinking, fire or explosion, overturning or derailment, collision, discharge of cargo at point of distress, jettison, loss of entire package whilst loading, unloading and during transshipment, entry of water into vessel, earthquake, volcanic eruption etc. It doesnt cover loss, damage or expense caused by- Willful misconduct of Assured. Ordinary leakage, loss of weight or volume, wear and tear, unsuitable packing, inherent vice, delay, insolvency or financial default of owners managers, chatterers or operators of vessel, Atomic weapon of war, radioactivity, deliberate damage to or destruction of subject-matter insured. 3) Institute Cargo Clauses A: It covers the losses- from warehouse to warehouse, covers all risks of loss to the cargo, both partial loss and total loss except if caused by: Willful

misconduct of Assured, ordinary leakage, loss of weight or volume, wear and tear, unsuitable packing, inherent vice, delay ,radioactivity , atomic weapon of war, insolvency or financial default of owners, managers, chatterers or operator of vessel.

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Tips for Shipping Fragile Goods Insurer and insured both parties should have appropriate knowledge of fragile goods and their techniques of management while making the contract of marine cargo insurance. People shipping antique, artworks, or luxurious items that may cost thousands of dollars, might discover that the container holding the goods was damaged due to rough handling or accidents. 9 Therefore, some tips for a simple way to safely send fragile packages are as follows: 1)Choose the right cardboard box: 1) Use only high quality heavy duty boxes made from corrugated cardboard. 2) Use boxes with a double or triple corrugated wall. 3) Try to get the box size as close to the item size as possible 4) Avoid packing fragile items in used boxes 2) Use cushioning packing materials: Bubble wrap fragile items the more layers the better. Use packing peanuts to fill corners and small spaces within the box. Use proper packaging tape, not masking or cellophane tape, as these arent as strong.

3) Pack fragile items safely: Place the item in the centre of the box (make sure it doesnt touch the edges) Pack padding material in all spaces and corners and ensure the box is totally full Never pack heavy items in the same box as fragile items.

9 Cargo Insurance, As retrieved on 10th Jan. 2011

http://www.cargoinsurance.com/tips-shipping-fragile-goods/

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Tape all seams of the box for extra security.

5)Label package appropriately: Clearly mark your package with clear fragile and/or handle with care notices. This warns shipping handlers that your item is fragile.

Clearly label your package with an address. (Based on Boxability Performance Packaging)10

Claim Documents for Marine Cargo Insurance 1). Original policy or certificate: Bearing in mind that the policy is proof of interest (ie, insurable interest), this is essential. It also describes the subject matter, Insured value and appropriate clauses. 2) Invoices and packing specifications:. Needed to assess the percentage of a part loss and specifically where lost or damaged goods were packed. 3) Original bill of lading or other transport document:. Proves the goods were in apparent good order and condition when shipped and evidences the contract of carriage should action be later taken against the carrier. 4) Survey report or other evidence of loss or damage: An independent report of the nature and extent of the loss should ideally be produced by an approved agency, eg Lloyds agent.

10 Boxability is a Division of Welsh Boxes Company Limited. It supplies conventional and heavy duty
performance packaging throughout the UK and Ireland, As retrieved on 11th Jan.2011 http://www.boxability.co.uk/fragile-goods/

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5) Landing account/weight notes at destination: The carriers or stowage brokers record of the out-turn of the goods at destination. Useful for identifying where damage took place in the container or on the vessel or haulage unit. 6) Any correspondence with the carrier/other parties: Obviously the insurers wish to maintain any legal rights against other parties and insist that the insured do not give them away. Not an unreasonable set of documents to require and every one there for a specific, and understandable, purpose.

Marine Cargo Insurance: A Case Study February 1994, China Textile Import and Export Corporation and Dalian in a maritime companies have signed a 1000 transport protocol silk shirts to Marseilles. After signing the contract, the insurance company to import and export companies Youxiang transport of the goods insured single FPA. February 20, after loading the goods set sail on February 25, loading the goods in the ship suddenly encountered a rare storm at sea, the hull badly damaged, sank on February 26, March 20 . Textiles Import and Export Company for the goods to the insurance company claims, the insurance company to the goods caused by natural disasters, refused compensation for the loss, then, import and export company to court to require insurance companies to pay insurance. Question: Does this case the insurance company liable The insurance company liable. According to the Chinese Peoples Insurance Company of marine cargo insurance provisions, marine cargo insurance, the basic insurance coverage is divided into
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two major categories and additional insurance, the basic insurance is insurance for insurance alone. Main Cheng Baohai the loss of goods on the risk of causing, including the FPA, WPA and general insurance. FPA on the part of the loss caused by natural disasters are generally not responsible, unless the transit occurred stranded, sunk, and burnt and other accidents. Although FPA part of the loss caused by natural disasters liable, but all the losses caused by natural disasters should be liable, in this case, the import and export companies covered is FPA, and the security of cargo the ship sank due to storms when the total loss, there was an actual total loss, so the insurance company liable, the reason put forward is not established.
(Honesty Cargo (China) Ltd.)

Bibliography

Chuah, Jason. (2005). Law of International Trade, Sweet & Maxwell Dixon, Francis B. (1866). Marine Insurance and Average, 133 Pearl and 80 Beaver Street Martin, Elizabeth A.( 2009). Dictionary of Law, Oxford press Inc. New York Hodsan, Susan . (1999). Case Study and Materials on Marine Insurance Law, Cavendish Publishing Limited, Britain Noussia, Kyriaki. (2007). The principles of indemnity in marine insurance contract: a comparative approach, Spring Verlag Berlin Heidelberg Boxability is a Division of Welsh Boxes Company Limited. It supplies conventional and heavy duty performance packaging throughout the UK and Ireland, As retrieved on 11th Jan.2011 http://www.boxability.co.uk/fragile-goods/ Cargo Insurance, As retrieved on 10th Jan. 2011
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http://www.cargoinsurance.com/tips-shipping-fragile-goods/ Encyclopedia of Credit, Free Credit Ressource for Credit Management Asssociation, As retrieved on 10th Jan. 2011 http://www.encyclopediaofcredit.com/Marine-Cargo-Insurance Encyclopedia.com, As retrieved on 6th Jan. 2011 http://www.encyclopedia.com/ Export Insurance Service, Georgia(Representatives also in Florida, North Carolina, Illinois and Texas), As retrieved on 7th Jan. 2011 http://www.exportinsurance.com/minsurancem.htm Guide to US Cargo Insurance, American Institute of Marine Underwriter(2005), 14 Wall Street New York, As retrieved on 6th Jan. 2011 http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=aimu+cargo+guid

Hub Page Inc., retrieved on 10th Jan. 2011 http://hubpages.com/hub/Principles-of-Insurance Hub Page Inc., retrieved on 9th Jan. 2011 http://hubpages.com/hub/Cargo-Insurance Insurance Studies, retrieved on 9th Jan. 2011. http://insurancestudies.blogspot.com/2010/01/importance-of-marine-insurance.html National Insurance Company Ltd.( A Government of India Undertaking), As retrieved on 7th Jan. 2011 http:/ /www.nationalinsuranceindia.com/nicWeb/nic/PolicyServlet?id=9999&name=2101.html

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