IC – 67 Marine Insurance

Chapter 01 – Basic Concepts

 Marine insurance is concerned with the insurance of

goods in transit from one place to another by all modes
of transport viz. sea, inland waterways, rail, road,
air and also post parcel and couriers.
 The Marine Insurance Act, 1963 codifies the law
relating to marine insurance.
 The Corporation of Lloyd`s is a corporate entity,
financed primarily by subscriptions from underwriting
members. The subscriptions help to provide the premises
administrative staff and services which enable the
underwriting members to transact insurance business.
 All insurances at Lloyd`s must be placed only through
the medium of Lloyd`s Brokers.
 Lloyd`s Agents are found in most major ports and in
many cities of the world. The primary duty of the Agent
is to keep Lloyd`s informed of shipping movements,
casualties and other matters of interest to maritime
community.
 International Underwriting Association (IUA) of London
is the world`s largest representative organization for
Insrurance and wholsale insurance and reinsurance
companies.
 The IMB is a non-profit organisation established in
1981, to act as a focal point in the fight against all
types of maritime crimes and malpractices and also
combating maritime frauds.
 GIC was created under General Insurance Business
Nationalisation Act in 1972 as holding company for four
public sector insurance companies created by the Act.
By 2002 amendment, GIC was made a Reinsurance company
and its authority to carry on general insurance
business was withdrawn.
 In letter of credit transactions, insurance policy is
taken as collateral security by banks.
 A mean test has to be passed by each underwriting
member for election.

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 IUMI is a forum to exchange experience, information and

statistical data on marine insurance matters and to
debate, in an objective and conducive way, the
challenges and opportunities facing insurers.
 IMB provides an authentication service for trade
finance documentation.
 Arbitrators do not operate in the marine market because
neither cargo nor hull policies provide for any
arbitration mechanism.
 TAC is a statutory body constituted under the
provisions of the Insurance Act, 1938, whose main
function has been to formulate tariff, containing
standard terms and conditions for various products,
falling under different branches of insurance.
 Brief words used - The International Underwriting
Association of London (IUA), The International Union of
Marine Insurance (IUMI), International Maritime Bureau
(IMB) and Tariff Advisory Committee (TAC).

Chapter – 02 Fundamental Principles

 Every contract of insurance is a contrct "uberrimae

fidei", that is, one which requires utmost good faith
on the part of both, the insurer and the assured.
 A Warranty is a promise by the assured to the
underwriter that something shall or shall not be done
or that a certain state of affairs does or does not
exist. There are two types of warranties : Express
Warranties and Implied Warranties.
 A "defeasible interest" is one which can be brought to
an end during the currency of the insurance by the
occurence of some event other than maritime perils.
 A "contingent interest" is an interest that attaches
during the currency of a voyage on the happening of a
contingency.
 A marine insurance policy, in common with other
insurance contract, is a contract of indemnity, the

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object of which is that the assured shall be

indemnified against loss.
 Subrogation is the corollary of the principle of
indemnity and the right of subrogation therefore
applies to policies which are contracts of indemnity.
 Abandonment is transfer of rights, titles, interests
and property, including liabilities in favor of the
insurers.
 Insurers are liable if an insured peril is the
proximate cause of the loss. If an insured peril is
only a remote cause of the loss, the proximate cause
being an insured or excepted peril, the insurers are
not liable.
 "Marine insurance policy is an Agreed Value Policy".
This means : the insurers do not undertake to replace
or reinstate cargo or vessels in the event of loss;
they pay a some of money, agreed in advance, that will
provide reasonable compensation.
 Subrogation is the right by which an insurer, having
settled a claim for loss or damage, is entitled to
place himself in the position of the insured to extent
of acquiring all rights and remedies in respect of the
loss which the insured may have received.
 In cargo policy, there is no implied warranty that the
goods insured are seaworthy.

Chapter – 03 Underwriting

 The process of arranging insurance starts with

submission of the proposal to the underwriter. Proposal
may be in a particular format or in the form of a
letter, or may be verbal.
 As per the Indian practice, the premium is to be paid
in advance before the commencement of transit. It can
be in the form of cash, cheque, Bank Guarantee, Cash
deposit or through credit card.
 The factors that are considered by an underwriter to
decide about acceptance of risk are : The vessel, the

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voyage or transit, the nature of cargo and its packing

and the conditions and the terms of insurance.
 In international transactions, the buyer and seller
enter into a contract of sale and purchage, generally,
the standard form of contract entered into is in
according with the International Commerce Terms
(INCOTERMS).
 Marine cover note is a temporary document evidencing
that insurance has been granted pending the issue of
the policy.
 The standard form of marine policy is a simple document
containing the name of the insurer and a clause binding
the insurer to the performance of the contract.
 An endorsement is a memorandum attached to the policy
document which records alterations in the contract.
 If the insured is given the facility of e-marine, the
insured can generate a certificate through his computer
against the open policy/open cover.
 As per the Insurance Act 1938, for marine insurance
taken in India, the proposer needs to submit premium in
advance before commencement of transit.
 A cargo liner loads at an advertised berth and runs to
an advertised schedule between her home port and her
overseas terminus, calling en route at a verying number
of ports according to a perticular service in which she
is engaged.
 In cost and freight policy, the seller`s responsibility
is up to the ship`rail.
 In e-marine, the system follows the principle of pre-
underwriting; up to a limit and for pre-set parameters,
the certificates can be generated by the insured
himself.
 Cargo which is normally not packed and carried either
full load in vessel or even containerised without any
packing is called bulk cargo.
 Goods which can not be damaged by impact or by being
knocked around are usually packed in bales.

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 Restricted age limits for tankers is 10 years, beyond

which underwriters will charge additional premium for
acceptance of risk.
 In DAP Contracts, the seller is responsible for the
delivery of the goods to the nominated place.
 The MAR policy form is a document containing the name
of the insurer and a clause binding the insurer to
performance of the contract.

Chapter – 04 Cargo Insurance Coverages – Part 1

 In insurance policies, the general rule is that the

phraseology must be construed in the plan, ordinary and
popular sense, unless the context indicates some
special meaning.
 In a policy document, handwriting takes precedence over
typed or impressed wording.
 There are no grounds for believing that clauses printed
in red override those printed in black.
 A marine cargo policy should be stamped as per the
Indian Stamp Act, 1899 and amendments there to.
 The "Institute" Clauses are drafted by the
International Underwriting Association of London (IUA)
and they are adopted for use the world over by all
insurers.
 In case of pure inland transit i.e. transit within the
country by rail or road (not in conjuction with
overseas voyage), Inland Transit Risks Clauses drafted
by Tariff Advisory Committee (TAC) are used.
 ICC (C) provides a basic standard cargo cover against
major casualties.
 ICC (B) prvides a wider intermediate form of cover.
 ICC (A) provides the broadest cover on an “all risks
with exceptions” basis.
 Transit Clause of ICC (A), ICC (B) and ICC (C) defines
the duration of the risk as attaching from the time the
goods leave the warehouse or other place of storage at
the place named in the policy to commence transit.

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 Institute War Clauses (Cargo) insurance covers loss or

damage to the subject-matter insured caused by War,
civil, revolution, rebellion, insurrection or civil
strife arising therefrom, or any hostile act by or
against a belligerent power.
 Institute Strikes Clauses (cargo) insurance covers loss
or damage to the subject-matter insured caused by
strikers, locked-out workmen or persons taking part in
labour distrubances, riots and civil commotions.
 Under the Termination of Transit (Terrorism) Clause
terrorism is covered only during transits.
 Institue Clauses (AIR) Cover is against “all risks” as
in ICC(A) except that General Average and Salvage
Charges and Both to Blame Collision Clauses are
omitted, as these are not concerned with air transit.
 Institue Strikes Clauses (Air Cargo) covers loss or
damage to the subject-matter insured caused by strikes,
locked-out workmen or persons taking part in labour
ditrubance, riots and civil commotions.
 Registered Mail and Postal Sending by Air: This
insurance covers all risks of physical loss or damage
to the subject-matter insured except as provided in the
exclusions.
 Comprehensive Clause includes the risks of theft,
pilferage and non-delivery, fresh water and rain water
damage, hooks, oils, mud, acid and other extraneous
substances or heating and sweating and damage by other
cargo.
 The aim of the Brand & Trade Marks Clause is to prevent
inferior quality or damaged goods being sold as salvage
in the market to detriment of the insured`s reputation
and to avoid potential product liability cliams.
 By using the Debris Removal Clause, the policy is
extended to cover the cost of removal of debris,
sometimes, the limit of expenses is put as percentage
of sum insured.

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 The “Garbling Clause” provides that the insurer will

pay the cost of garbling; as such an exercise will
prevent further damage and reduce the claim.
 Ordinary wear and tear of the subject-matter insured is
neither covered under ICC(A) nor ICC (B) nor ICC (C).
It is a general exclusion.
 Cover continues during the ordinary course of air
transit and terminates as the goods are discharged from
the aircraft at the destination airport, but subject to
a time limit of 15 days from midnight of the day of
arrival of the aircraft at such place.
 The Cargo ISM Endorsement is about the safty aspact to
be compulsorily complied with by, among others, cargo
ships of 500 Gross Tonne (GT) or more.
 The Stamp duty payable for a cargo policy for voyage
other than sea voyage (i.e. transit purly by rail, road
or air):
a. 25 paise when the sum insured is Rs. 5000 or less
b. 50 paise when the sum insured is over Rs. 5000.

Chapter – 05 Cargo Insurance Coverages – Part 2

 Standard Clauses have been drafted and agreed between

the Intitute of London Underwriters (ILU) – now (IUA) –
and the concerned Trade Associations, in order to bring
about uniformity of practice in international trading
operations for selected trades and commodities.
 Institute Commodities Trade Clauses (A), (B) and (C)
are agreed with the Federation of Commodity
Associations for the insurace of shipments of Cocoa,
Coffee, Cotton, Fats and Oils not in bulk, Hides, Skins
and Leather, Metals, Oil seeds and Suger (raw and
refined) and Tea.
 In insurance cover for cargo carried in sailing
vessels, the insurance attaches from the time of
loading of cargo onto the vessel, continues during the
ordinary course of transit, and ceases on landing of
cargo at the final port of discharge or 8 days after

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arrival of the vessel at the final port of discharge,

whichever occurs earlier.
 Inland Transit Clauses (Rail or Road) apply to
insurance of goods during inland transit only, whether
by rail or by road.
 Risks covered under Strikes, Riots and Civil Commotions
Clause includes Loss or damage to the subject-matter
insured, caused by strike, locked-out workmen or
persons taking part in labour distrubances, riots and
civil commotions; any terrorist or any person acting
from a political motive.
 Insurance cover for transit policies of Centrifuged
Latex to be issued to traders/buyers is offered for
rubber estates.
 Clause C provides risk cover against physical loss
caused by fire only.
 Maximum period of storage for Type I policy under a
package policy for Coffee is 120 days.
 Basis of settlement for package policy of Coffee is -
market value of Coffee insured less unincurred expenses
as per formula prescribed in the tariff.
 The basis of settlement for package policy for cardamom
estates - in the event of loss before manufacture, 4
Kgs. for raw cardamom shall be considered equal to 1 Kg
of dried cardamom.
 Basis of valuation for package policy for rubber
estates is invoice value plus 10%.
 In the case of crop insurance policy, the insurance
attaches from the time the green leaves are plucked at
the insured`s estate.

Chapter – 06 Types of Covers

 Specific policies cover specific transit only, case to

case basis and as many policies are taken for as many
dispatches. As per Indian market practice the cover is
to be arranged before commencement of transit; so the
policy is to be taken in advance.

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 An open cover is issued to provide automatic and

continuous insurance protection to a regular
exporter/importer engaged in international trade.
 An open policy is usually issued for insurance of goods
dispatched within the country by rail/road/air
freight/registered post parcels. Open policy is also
known as floating policy.
 Annual policy (AP), the period of which is 12 months,
is issued to cover goods belonging to the assured or
held in trust by the assured, not under contrct of sale
or purchase, and which are in transit by rail or road
from specified depots/processing units to other
specified depots/processing units.
 When the terms of sale are FOB, the insurance is
arranged by the overseas for his own account and
benefit. Risk under the buyer`s policy commences on
loading of the cargo on the overseas vessel, because it
is at that juncture of transit that risk passes from
the seller to the buyer.
 Sellers under FOB and C&F contracts may effect
contingency insurance to cover their interest if the
consignee refuges damaged goods or is unable to take
delivery by paying for goods because of insolvency.
 The cover under the SSRI policy takes into
consideration the requirements of the consignor of
goods for insurance to protect the goods during storage
at destination railway yard or carrier`s premises,
pending clearance by the consignees on termination of
cover under Open Policy.
 Multi Transit Policy is to be issued which can cover
transit, storage/process and transit under the same
policy without any break in cover.
 Increased value insurance, international policy is
taken mainly for commodity trade where sales on high
seas is very common.
 The minimum premium for an annual policy is Rs. 5000.

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 The notice period for cancellation of open cover for

marine risk is 30 days.

Chapter – 07 Hull Insurance – Part 1

 Hull Insurance refers to the insurance of hull and

machinery and other interests, known as subsidiary
interests, of verious vessels.
 Vessels are broadly categorised into the following 2
groups:
 Vessels that are classed with any internationally
reorganised Classification Society and
 Smaller crafts which are not subjects to
classificatin.
 Hull Policies can be issued either on time basis or
voyage basis. The subject matter of Hull Insurance is
the Vessel or Ship.
 Sea going vessels are classified into the following
main categories:
 General cargo vessels
 Liner vessels
 Tramp vessels
 Dry bulk carrier
 Super tankers
 Combinatin carrier
 Lighter Aboard Ships (LASH)
 Roll On – Roll Off (RO–RO) Ships
 Passenger vessels
 Sundry hull are classified into the following main
categories:
 Coastel vessels
 Fishing vessels
 The policies under hull insurance and subsidiary
interests include:
 Hull and machinery (H&M) insurance
 Disbursements insurance
 Freight insurance

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 Premium reducing insurance

 Return of premium
 Ship repairer`s liability
 Ship builder`s insurance
 Charterers` liability insurance
 Loss of hire insurance
 Loss of profits insurance
 War & strikes risks insurance
 Intitute Time Clauses – Hulls provide the widest cover
for hull and machinery interests or in other words,
they cover hull and machinery “on full conditions”.
 The Indian marine hull market at present follows the
Intitute Time Clauses – Hulls 01.10.83.
 ITC – Hulls Clause number 6 specifies the perils
covered in two groups: Sectin 6.1 and Sectin 6.2.
 Pollution Hazard Clause (Clause No. 7) provides cover
if the vessel is damaged or destroyed by a government
authority to avoid or mitigate pollution.
 As per deductible Clause (Clause No. 12), the specified
deductible amount is deducted from the total amount of
claim caused by an insured peril arising out of each
separate accident or occurrence.
 As per Breach of Warranty Clause (Clause No. 3), the
assured is held covered in the event of a breach of
warranty as to cargo, trade, locality, towage, or
salvage service.
 The International Hull Clauses 1/11/2003 have clauses,
inter alia, with regard to:

 Perils covered  Continuation

 Leased equipment  Class/ISM
 Parts taken off  Management
 Pollution hazard  Constructive Total Loss
 3/4ths RDC  Navigating limits
 GA  Notice of claims
 Sue and labour  Duties of assured clause
 Navigation  Duties of underwriters

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 Institue Voyage Clauses – Hulls 1.10.83 are used when

the insurance is for a particular voyage.
 Freight policies may be issued on a valued basis or
unvalued basis. In practice, unvalued policies are
issued.
 Protection & Indemnity (P&I) Clubs are by far the
largest and most important of the mutual marine
insurance associations, because vessels and freight are
mainly insured with underwriters in the open insurance
market and the P&I Clubs are therefore ancillary to the
marine insurance market.
 Almost all owners of ocean-going ships join P&I Clubs,
which are essentially non-profit associations for
collective self-insurance a variety of situations.
 A dry bulk carrier is best suited to carrying cargo
like iron ore.
 The Government War Risks Insurance Scheme under which
Indian flag vessels can be insured is administrated by
the General Insurance Corporation (GIC).
 A liquid bulk carrier is best suited to carrying cargo
like oil.
 A hull policy on a time basis cannot be for a period
longer than 12 months as that is prohibited under
Marine Insurance Act 1963.
 RO-RO ship is best suited to carrying car and other
vehicles.
 In the case of Ship Builder`s Insurance, the cover may
be longer than 12 months and the sum insured should be
the actual completion value.
 If the amount of claim is more than the deductible,
then only the amount which is in excess of the
deductible is payble.

Chapter – 08 Hull Insurance – Part 2

 GT is unitless index related to ship`s overall internal

volume. It is calculated based on the moulded volume of
all enclosed spaces of the ship and is used to

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determine things such as a ship`s manning regulations,

safety rules, registration fees and port dues, whereas
the older Gross Register Tonnage is a measure of the
volume of certain enclosed spaces.
 DWT means "Deadweight Tonnage". Deadweight means the
capacity in tons of the cargo required to load a ship
to her loadline level.
 Underwriters are liable for the cost of repairing
Particular Average or General Average damage,
irrespective of the insured or the actual value of the
ship except that the insured value constitutes a
maximum for any one casualty.
 The main objective of ship classification is to promote
safety at sea, with respect to life, ships, their
cargoes and the environment.
 Ship Classification Societies establish standards,
guidelines and rules for the design, construction and
survey of ships and of other marine structures.
 The Classification Certificate is the document
confirming that a ship has been built according to
rules and standards of the relevant Classification
Society and that it has both structural and mechanical
fitness for its intended service.
 The Total Loss rate is a rate percent applied to the
insured value of the vessel and is thus conditioned
mainly by the value factor of the ship.
 The 'Average Loss' element or "ex T.L." element of the
risk is mainly determined by the size of the ship.
 In India, insurance of ships and shipowning interest
are governed by th Marine Hull Manual. As per IRDA
directives, the Indian insurers have to follow the
terms and conditions as laid down in the Manual, but
they can charge their own premium rates, which are
discretionary.
 'Country Crafts' is a popular expression used for
sailing vessels. They are not Inland Vessels.

Chapter – 09 Marine Claims

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 Marine total losses fall into two categories: actual

total loss and constructive total loss.
 Actual total loss of the subject matter insured may
occur where it is destroyed or where it loses its
species or where the goods are in a ship that has been
posted as “missing”.
 CTL implies that whilst the subject matter is not
destroyed and is not an actual total loss, it would not
be worth the cost or efforts to save or repair or
recondition the property.
 Particular average is partial loss or partial damage
caused fortuitously by a peril insured against and thus
does not include damage voluntarily incurred, such as
General Average damage.
 Total loss of part of cargo: Where part of the goods
are totally lost, the amount payable under the
insurance is such proportion of the insured value as
the insurable value of the part lost bears to the
insurable value of the whole.
 Salvage loss: It may happen in the event of cargo
sustaining damage that it can be sold in damaged state
at a place short of destination to better advantage
than if it is reconditioned and forwarded.
 Sue and Labour Charges are all reasonable expense
incurred by the insured in averting or minimising a
loss and are recoverable under the policy.
 Expenses incurred by or on behalf of the assured for
the safety or preservation of the subject matter
insured, other than GA and Salvage Charges, are called
Particular Charges.
 The ICC includes a Forwarding Charges Clause (No.12)
which states that when the insured transit is
terminated at a port or place other than the policy
destination, as a result of the operation of an insured
peril, the insurers agree to reimburse the assured for
any extra charges properly and reasonably incurred in

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unloading, storing and forwarding the insured goods to

the policy destination.
 The expenses of protests, survey and other proofs of
loss including the commission or other expenses of a
sale by auction are examples of “extra charges”.
 In case of loss, the insured needs to intimate the
insurer.
 In case of a claim exceeding Rs. 20000, a surveyor
needs to be appointed.
 In respect of marine claim arising and payable outside
India, they are adjusted and settled by Claims Settling
Agents named in the Policy.
 When any ocean-going ship is involved in an accident
and has sustained damage, it is essential that the
owners give prompt notice to the insurer. In the event
of non-compliance with the terms of the Notice of Claim
& Tenders Clause (No.10), a penalty of 15% is to be
deducted from the ascertained claim.
 Adjustment of the claim is recorded by the Average
Adjuster in a statement which is carefully prepared
after going through all aspects of the claim, insurance
cover, surveyors` recommendations and other evidence.
 In case of fishing vessels on receipt of claim notice,
the insurer examines if the claim can be admitted and
accordingly appoints a surveyor.
 An essential documents should be submitted for claim
settlement.
 The preliminary and subsequent steps to be followed
upon receipt of a claim intimation with regard to
Sailing Vessels is virtually the same as that for
Fishing Vessels.
 A GA loss may be either a sacrifice or an expenditure,
extraordinary in nature, voluntarily and reasonably,
incurred, in time of general peril, for the common
safety of maritime adventure. When all thse essetials
are present, there is said to be an GA act.

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 Measure of indemnity for actual total loss is the

insured value under the policy.
 Documents may be filed with the customs, 15 days before
the expected arrival of the vessel and custom
formalities completed to facilitate easy clearance of
cargo after landing.
 Section 64(2) of the Marine Insurance Act, 1963 states
that expenses incurred by or on behalf of the assured
for the safety or preservation of the subject matter
insured, other than GA and Salvage Charges, are called
particular Charges.
 Collision liability is a supplementary cover over and
above the insurance on the vessel itself to the extent
of 3/4ths of such liability but not exceeding 3/4ths of
the sum insured on the vessel.

Chapter – 10 Marine Recoveries

 Cargo moves through carriers and bailees involving

various modes of transport and storages en route.
Primarily, it is the senders` right to recover their
losses from carriers and bailees but once the marine
insurers pay the claim, they get vested with the rights
of recovery under subrogation.
 The right of subrogation arises under common law and
also under the Marine Insurance Act 1963. Under
subrogation, the insurers step into shoes of the
insured and are vested with the rights of recovery from
the carriers and bailees.
 Where any consignment is entrusted to the Railway
Administration without declaring its value, then the
Railway Administration may restrict its liability for
loss, damage, etc. to the goods it carries, to a
particular amount based on the weight of the goods.
 Liability of road transporters, governed by the
Carriers` Act, 1865 according to which anyone who
carries goods not belonging to him for hire or reward
is a common carrier.

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 In India, for domestic flights, the liability of the

air carriers is governed by The Carriage by Air Act,
1972.
 In India, the multimodal Transportation of Goods Act,
1993 seeks to regulate the business of Multimodal
Transportation and delineate the responsibilities and
liabilities of the Multimodal Transport Operator.
 The relevent legislation is the Major Port Trusts Act,
1963 and Rules, which apply to all major ports in India
namely, Kandla, Mumbai, Nhava Sheva, Marmugao,
Manglore, Paradeep, Cochin, Tuticorin, Chennai,
Visakhapatnam, Haldia and Calcutta.
 Ports which are not major ports are governed by the
Indian Ports Act, 1908.
 Under Section 27 of the Customs Act, 1862, refund of
duty is allowed for shortage due to pilferage, for
goods lost or destroyed or for shortlanded cargo or
landed but missing cargo.
 Legal actions against ocean carriers in the event of
loss or damage to goods can be brought within one year
after the delivery of goods or the date when the goods
should have been delivered.
 In case of Railways` Risk Rate (RRR), the liability of
the railway is higher as compared to that in case of
the Owners` Risk Rate.
 Ports that do not come under 'major ports of India' are
governed by the Indian Ports Act, 1908.
 Market value as on the date of the loss at the place
where the goods are to be delivered is used to work out
the liability of the carrier, Port Trust and or Other
bailees.
 Under the Customs Act 1962, an application needs to
written to the Assistant Controller of Customs for
refund of customs duty, for shortage due to pilferage
and for goods lost or destroyed.

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 In case one is dissatisfied with the decision of the

Collector of Customs, an appeal can be filed with the
appellate Tribunal.
 The maximum period for filing suits for claim against
the Indian post office in case of short delivery, delay
or damage to the parcel is three years.

Chapter – 11 Role of Banker`s in Marine Insurance

 In the consignment method of payment, the importer

makes the payment only once the goods or imported items
are sold to the end user.
 Cash in Advance is a pre-payment method in which, an
importer makes the payment for the items to be imported
in advance, prior to the shipment of the goods.
 In the method of down payment, an importer pays a
fraction of the total amount of the items to be
imported in advance.
 In case of an open account method, an importer takes
the delivery of goods and ensures that the supplier to
makes the payment at some specific date in the future
which subjects the supplier to risk of default by the
importer.
 Documentary Collection is an important bank payment
method under which the sale transaction is settled by
the bank through an exchange of documents.
 A documentary credit is a signed instrument, embodying
an undertaking by the banker of a buyer to pay his
seller a certain sum of money on presentation of
documents, evidencing shipment of specified goods and
subject to compliance with the stipulated terms and
conditions.
 The Uniform Customs and Practice for Documentary
Credits (UCPDC) is a set of rules on the issuance and
use of letters of credit. The ICC has developed and
moulded the UCP by regular revisions, the current
version being the UCP600.

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 The Basic principle of UCP is "Banks deal with

documents, other parties deal with documents and / or
goods".

Chapter – 12 Loss Prevention, Reinsurance, Maritime Frauds

 Loss control/prevention means a systematic approach to

reducing loss of or damage to property with the purpose
of minimising waste to the owner.
 Major losses in transportation are due to:
 Theft, pilferage and non-delivery;
 Handling and stowage losses;
 Water damage and
 Maritime perils (comparatively a small percentage
of damage)
 Almost one-third of preventable losses are attributable
to pilferage, theft and non-delivery. Coded markings
should be used and codes should be changed frequently
by shippers.
 Stowage means placing and securing of cargo in the
holds of a vessel.
 The layout of the should be carefully considered with
due allowance given to bottom stowage and avoidance of
space wastage.
 Water can reduce otherwise stable cargo into a ruin of
soggy, stained, mildewed, rusty or delabelled
merchandise.
 Development of specialised containers has provided the
modern shipper with a selection of types, sizes and
configurations, thereby permitting containerisation of
almost any type of cargo.
 The methods or types of reinsurance can be broadly
divided into two main sections, namely, proportional
and non-proportional contracts.
 Under proportional reinsurance, the reinsuer accepts
liability for a proportionate share of each risk ceded.
Under non-proportional reinsurance arrangement, the
reinsurer pays the ceding company only when the

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original loss has exceeded the limit of retention of

the ceding company.
 Both proportional and non-proportional reinsurances can
be transacted on a facultative or a treaty basis.
Therefore, another way of dividing method of
reinsurance is to categorise them as facultative and
treaty contracts.
 For facultative placement, each risk is considered
separately by the reinsurer who has the option to
either accept the full risk or a part of it, or decline
it altogether.
 Under treaty method, an agreement is entered into
between the ceding company and the reinsurer whereby
the ceding company agrees to cede and the reinsurer
agrees to accept automatically all insurance offered
within the limits of the treaty.
 Under Quota Share Treaty a fixed proportion of every
risk in a given class of business is ceded.
 A Surplus (also called “excess of line”) treaty allows
the ceding company to reinsure under the treaty any
part of the risk which it is not retaining for its own
account.
 The facultative Obligatory Treaty (Fac-Oblig) has the
feature of both facultative and obligatory treaties.
 Pooling arrangement creates a capacity to handle risks
of a catastrophic nature or risks of special category;
for example, atomic energy risks.
 Excess Loss of Treaty arrangement is basically a form
of reinsurance, whereby the direct insurer sets a
monetary limit to the amount he is prepared to bear of
any one loss as a result of any one event, on the class
or classes of business concerned.
 There are two types of Excess of Loss covers: Working
Covers and Catastrophe Covers.
 Stop Loss Treaty type of reinsurance cover (also called
“Excess of Loss Ratio”) prevents the ceding company

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from losing more than a specified amount of loss for a

given class of business.
 An Aggregate Excess of Loss treaty works on the same
principle as a Stop Loss Treaty, but instead of
expressing the loss retention limit as a percentage of
the annual premium, it is stated in actual figures. For
example:
 The treaty may cover annul losses in excess of
Rs. 5 Crores upto a further Rs. 4 Crores. The
ceding company pays all losses upto Rs. 5 Crores
and the reinsurer pays all losses over Rs. 5
Crores but not more than Rs. 4 Crores. Then any
amount in excess of Rs. 9 Crores will revert to
the ceding company.
 Under Open Cover method, the direct insurer is free to
choose, within the terms of treaty, what risks he
wishes to cede.
 Under Marine Open Cover arrangement, the underwriter
automatically accepts from his assured all his
shipments coming within the scope of the Open Cover
upto an agreed amount per vessel/conveyance.
 In the Marine hull, an underwriter has greater control
over his commitments because each vessel of fleet is
evaluated and underwritten individually and not under
Open Covers, as is usually the case in cargo insurance.
The demand for reinsurance on facultative basis is
confined mainly for limited conditions, usually, Total
Loss Only.
 Maritime fraud occurs when one of the parties
(exporter, importer, ship owner, charterer, ship`s
master, officers and crew, insurer, banker, broker or
agent, freight forwarder) succeeds, unjustly and
illegally, in obtaining money or goods from another
party.
 Majority of the maritime frauds can be classified into
the following categories:

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 Scuttling of ships (deliberate sinking of older

vessels with/without cargo to claim insurance,
also called Rust Bucket Fraud)
 Documentary frauds (the illegal manipulation of
shipping documents)
 Cargo thefts (ship deviation and subsequent theft
of cargo)
 Fraud related to the chartering of vessels
 Piracy
 Section 9 of the Marine Insurance Act states that an
insurer, under a contract of marine insurance, has an
insurable interest in his risk and may reinsure in
respect of it.
 Pirate attacks are largely confined to four major
areas:
 The Gulf of Aden, near Somalia and the southern
entrance to the Red Sea;
 The Gulf of Guinea, near Nigeria and the Niger
River Delta;
 The Malacca Strait between Indonesia and
Malaysia;
 The Indian Subcontinent, particularly between
India and Sri Lanka.
 After the advent of containerisation, another type of
loss which is becoming very common is Skillful
Pilferage, in which, though container seals are intect,
cargo is either stolen or replaced by inferior cargo
using dubious methods.
 For marine insurance, banks abide by the “Uniform
Customs and Practice for Documentary Credits” issued by
the International Chamber of Commerce (ICC).
 As a precaution against maritime fraud, banks should
make use of the Lloyd`s Shipping Index.

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