IC-67 Marine Insurance

CHAPTER 1BASIC CONCEPTS Chapter Introduction This chapter introduces the basic concept of marine insurance. It also discusses a brief history of marine insurance and introduces you to the various international bodies that operate in the international marine insurance market. Indian legislative procedures with respect to marine insurance in India are also discussed. Learning Outcomes A. Origins of marine insurance B. Marine insurance market in India C. International marine insurance market IC-67 MARINE INSURANCE 1 CHAPTER 1 ORIGINS OF MARINE INSURANCE Look at this Scenario General Insurance Corporation of India is the national reinsurer of India. In line with the major reinsurers of the world like Swiss Re, Munich Re etc., it has adopted the brand name GIC Re. Wholly owned by the Government of India, it provides comprehensive reinsurance services to all non-life insurers in the Indian market. Besides, it offers its services globally to both life and non-life insurance companies. Talking of marine insurance, it manages the pool for marine hull insurance in India. In fact, GIC Re is the largest capacity provider for marine insurance in the region with a capacity of USD 75 million. GIC Re has won the Marine Insurance Award at the Seatrade Middle East and Indian subcontinent Awards for the year 2011 and 2012. A. Origins of marine insurance 1. Introduction Marine insurance is essential to overseas trade, inland trade and shipping. It is concerned with the insurance of: a) Goods in transit from one place to another by all modes of transport viz. Sea, inland waterways, rail, road, air and also post parcel and couriers, b) Ships i.e. hull insurance covering loss or damage to the hull and machinery of a vessel during construction, maritime operations, lay-ups, repairs and even breakage. c) Various other interests associated with ships e.g. freight, disbursements and liabilities like ship repairers’; charterers’; stevedores’ liabilities etc. d) Premium e) Incidental charges and profits 2. Origins of marine insurance Marine insurance is as old as civilization. There are Indian, Asian and European histories which are very old. a) The writer of Manusmruti had coined the word “yogakshema” meaning risk and safety. Code of Manu contains rules for marine contracts which were observed by traders from Broach and Surat, who set sail in Indian built sailing vessels with merchandise, to Lanka, Egypt and Greece. 2 IC-67 MARINE INSURANCE ORIGINS OF MARINE INSURANCE CHAPTER 1 b) Jokhami Hundi: In olden times, there was a system of executing jokhami hundies which were drawn on or against goods shipped on the vessel mentioned in the hundi. The purpose was twofold: 9 To put the drawer of hundi in funds and at the same time ; 9 Effect insurance upon the goods themselves, by reversing the position of the insurer and the insured. The insurer, being the buyer of the hundi, paid the insurance money and was entitled to receive it with premium (together making up the amount of the hundi) when the vessel arrived safely. c) Chinese merchants engaged in trade on the Yangtze river, used to distribute their cargo to different boats so that the risk was distributed. d) Hammurabi’s code provided that if a Babylonian merchant’s goods did not arrive at destination safely, the debts incurred to finance the transaction were to be written off. e) The Rhodian merchants innovated ‘Bottmry’ and “Respondentia’ bonds. ‘Bottmry’ loans were raised to generate finance to prosecute the voyage by mortgaging the ship and ‘Respondentia’ loans were raised on security of the cargo. If ship and/ or cargo were lost, there was no need to repay the loans but if they reached safely, a part of the profit was to be paid to the moneylender. The interest rates charged for these transactions were higher than normal rates to take care of the risk aspect. f) In the 14th century, Italian merchants broke open these bonds into two parts- financing and risk-taking to be done by separate sets of people. From Italy, the system went to England and there it developed because of coffee house culture. The most famous coffee house was owned by Edward Lloyds. g) Another forerunner of marine insurance was the practice of General Average (GA), whereby losses voluntarily incurred to save the common venture were shared by contributions from all the interests (i.e. ship, freight and cargo) saved by the GA act. This practice dates back to 916 B.C. when the Rhodians practised it in their Mediterranean trade. The objects and functions of marine insurance were aptly described in the preamble to the Elizabethan Act of 1601 in such expressive language, as follows:… by means of which policy of assurance it cometh to pass that upon the loss or perishing of any ship there followeth not the undoing of any man, but the loss alighteth rather easily upon many men than heavily upon few, and rather upon them that adventure not, than those that do adventure, whereby all merchants, especially the younger sort, are allowed to venture more willingly”. IC-67 MARINE INSURANCE 3 CHAPTER 1 ORIGINS OF MARINE INSURANCE 3. Need of marine insurance a) Safety Like any other insurance, marine insurance also provides safety. So it is opted by traders, operators and owners of vessels. Moreover, in international trade, as markets are highly competitive and as profit margins are very thin, insurance is needed to protect risks, otherwise a major loss may wipe off a trader from the business. b) Compliance of terms of sale Many times the seller of goods undertakes to the buyer that he will arrange for insurance of goods in transit. His price also includes insurance premium. In such a case, it is obligatory on the part of the seller to arrange for appropriate transit insurance. Example In CIF contract, the seller undertakes to arrange for insurance up to an agreed place and so, his price includes insurance premium also. It is then obligatory for him to arrange for transit insurance upto that agreed place. c) Customs Laws Under The Customs Act 1962, customs duty is leviable on import of certain items. The duty is to be charged on the CIF value of the imported item. The importer has to prove the CIF value of the goods by filing supporting documents with the customs. If there is not enough proof of insurance premium included in the price, the customs authorities may add some amount ad hoc, say 1.125% of the value of goods as insurance premium, to convert the price to CIF. In such cases, the importer may end up paying higher customs duty and may not get insurance protection also. Taking insurance policy will avoid this. d) Letter of Credit (L/C) transactions In L/C transactions, insurance policy acts as collateral security and a very big majority of transactions will not be possible if support of insurance policy is not there, as bankers will not like to take unnecessary risks without insurance. ( For further details, please refer Chapter 9.) 4 IC-67 MARINE INSURANCE MARINE INSURANCE MARKET IN INDIA CHAPTER 1 Test Yourself 1 In Letter of Credit transactions, what is taken as collateral security by banks? I. Letter of Credit II. Insurance Policy III. Goods IV. Vessels used for transportation B. Marine insurance market in India 1. Companies providing marine insurance in India Prior to nationalisation of general insurance business effective 1st January, 1973, the marine insurance market in India was composed of private companies, both Indian and foreign. Foreign companies operated either as branches of their parent company abroad or through agents. Besides the private companies, the Government controlled companies: 9 The Oriental Fire and General Insurance Co. and 9 Life Insurance Corporation Of India Also transacted general insurance business In all, there were 107 companies operating in India. These were amalgamated and reconstituted into four companies, as follows: a) The National Insurance Co. Ltd. with its H.O. in Calcutta. b) The New India Assurance Co. Ltd with its H.O. in Bombay. c) The Oriental Fire and General Insurance Co. Ltd. with its H.O. in New Delhi. d) The United India Fire and General Insurance Co. Ltd. with its H. O. in Madras. The General Insurance Corporation of India (GIC) was incorporated in November, 1972 as a holding company and the above four companies were designated as its subsidiaries from 1st January, 1973. Along with these companies certain state insurance funds were also constituted e.g.: i. Maharashtra Insurance Fund. ii. Kerala Insurance Fund etc., IC-67 MARINE INSURANCE 5 CHAPTER 1 MARINE INSURANCE MARKET IN INDIA They were also allowed to carry on general insurance business including marine insurance business. Thus, these Companies and Funds were having exclusive privilege of carrying on general insurance business in India. In the year 1999, The Insurance Regulatory and Development Authority Act was passed, under which the exclusive privilege of public sector companies and funds was withdrawn and the sector was opened up to private Indian insurance companies, allowing for a maximum shareholding of 26% for a foreign entity. By the 2002 amendment to the General Insurance Business Nationalisation Act, 1972, GIC was made the only reinsurance company of India and its rights to carry on direct general insurance business were withdrawn. Similarly the public sector insurance companies no more remained subsidiaries of GIC, their holdings were transferred to the Government of India. As on date, there are 17 general insurance companies In India transacting marine insurance. There are no companies doing exclusive marine insurance business. 2. Tariffs Till 31st March 1994, Indian market was governed by All India Marine Cargo Tariff ( AIMCT), which consisted of a section on General Rules and Ragulations, followed by 12 individual tariffs. The rates for Basic covers for inland transit of many cargoes were prescribed under the Tariff, leaving the rates for Wider Covers at the discretion of the Insurers. As regards exports, imports and coastal transits, the rates were prescribed for many items. Issuance of certain policies like Multi Transit, Special Declaration and those at pre-AIMCT terms (under General Regulatuion 10) etc. was controlled by the Tariff Advisory Committee. Effective 1st April 1994, the AIMCT was withdrawn except the Tea Tariff, Advance License insurance policies and the Guidelines for Coffee, Rubber and Cardamom estates. Marine Hull continued to be governed by the Committee, mainly through the Marine Hull Manual. With effect from 1st April 2004 tariffs, guidelines etc. for the following were also withdrawn: 9 Tea, 9 Coffee, 9 Rubber and 9 Cardamom and 9 Advance License policies 6 IC-67 MARINE INSURANCE MARINE INSURANCE MARKET IN INDIA CHAPTER 1 The Tariff Advisory Committee had laid down various rules and regulations, as also several tariffs over the years. All of them were aggregated in the form of the Marine Hull Manual in 1983. However, the rates were withdrawn effective 1st April 2005 but the terms and conditions of the Marine Hull Manual are binding on all Indian insurers. IRDA requires a compulsory cession to be made to GIC on each policy issued by the insurers in India for marine as also other lines of insurance. The percentage of cession is prescribed by IRDA. For the Financial Year 2013-14, it stands at 5%. 3. Reinsurance programme The reinsurance programme of the industry is drawn up with the basic objective of retaining within the country as much business as possible, consistent with safety and risk-bearing capacity. While reinsurance of peak risks is placed in overseas markets, reinsurance is also accepted from abroad. An essential feature of the Indian market’s reinsurance programme is maximisation of the retention capacity through: 9 Obligatory cessions to GIC ( is currently ceded to GIC on all classes of insurance) 9 Pools 9 Individual retentions; and 9 Inter-company exchanges These are suitably protected by Excess of Loss covers. The Programme provides for different classes of business to be ceded to treaties on Quota Share and Surplus basis, depending upon suitability for reciprocal trading or cover requirement. In addition to providing reinsurance capacity, the Indian market has lent its services by way of technical expertise and training facilities to various countries. 4. Intermediaries Intermediaries that operate in the marine market are: i. Brokers, ii. Corporate agents, iii. Individual agents, iv. Surveyors and v. Loss assessors. IC-67 MARINE INSURANCE 7 CHAPTER 1 MARINE INSURANCE MARKET IN INDIA 5. Grievance redressal Unlike UK there are no separate courts trying admiralty cases. They are handled in normal civil courts. There are no P & I Clubs in India. Captive insurance companies are not allowed to operate in India as per the laws. Grievance rederssal cells of companies and that of IRDA, insurance Ombudsman, consumer forums at district, state and national level constitute the grievance mechanism. Arbitrators do not operate in marine market because neither cargo nor hull policies provide for any arbitration mechanism. The Marine Insurance Act Marine insurance in India is transacted subject to the following statutes, rules and regulations: a) The Insurance Act, 1938 and Insurance Rules, 1939, as amended. b) The Marine Insurance Act, 1963. c) The Stamp Act, 1899. d) Exchange Control Regulations relating to insurance in India. e) Marine Hull Manual (except for rates) f) Various laws applicable to carriers and bailees ( For further details see the chapter on Recoveries) The Marine Insurance Act, 1963 (MIA) codifies the law relating to marine insurance. It follows the English law, and is therefore virtually identical to the Marine Insurance Act, 1906 of the U.K. In the U.K., the Act represents the codification of case laws which for several centuries guided the practice of insurance. It is interesting to note that the basic principles of marine insurance which evolved over a long period of many years have as much relevance to Fire and other types of insurance as they have to marine insurance. Salient features of the Act The law is the only specific law in India which governs a particular branch of insurance (Marine Insurance). Other branches in India are governed by common law principles. 8 IC-67 MARINE INSURANCE MARINE INSURANCE MARKET IN INDIA CHAPTER 1 The following are the important features: i. It is concerned about both law and practice of marine insurance. ii. Practice of marine insurance is also important when the law is silent or does not conflict with the prevailing practice. iii. Many sections of law are flexible and can be changed by specific conditions in the policy. At many places, the law says “Unless otherwise stated on the face of the policy….” iv. There are two implied warranties under the Marine Insurance Act- seaworthiness and legality of object. The warranty of seaworthiness under the law is the absolute warranty of seaworthiness i.e. if cargo is sent by an unseaworthy vessel, the insurers are not liable. But considering the hardships faced by the insured due to strict implementation, the warranty was relaxed under 1982 Institute Cargo Clauses and further relaxed under the 2009 Institute Cargo Clauses. v. The warranty of legality cannot be changed, as changing it, will be against the principles of public policy. vi. Usage is also very important; it can alter implied conditions. vii. Insurable interest is required to be present only at the time of loss. The Marine Insurance Act deals with all major aspects of marine insurance like: 9 Definition of “Marine” 9 Insurable interest 9 Insurable value 9 Principle of disclosures 9 The policy – contents 9 Form 9 Construction of terms etc. 9 Contribution (double insurance) warranties 9 Voyage 9 Assignment of policy 9 Premium 9 Statutory exclusions 9 Types of losses 9 Abandonment 9 Measure of indemnity 9 Subrogation, and 9 Return of premium and other provisions Many of these aspects are discussed in the following chapters. IC-67 MARINE INSURANCE 9 CHAPTER 1 INTERNATIONAL MARINE INSURANCE MARKET Test Yourself 2 Which of the following Acts codifies the law relating to marine insurance? I. Insurance Act 1938 II. IRDA Act, 1999 III. Institute Cargo Clauses, 1982 IV. Marine Insurance Act, 1963 C. International marine insurance market It is generally accepted that of all commercial activities, marine insurance is the most international. Most countries the world over have developed marine insurance facilities. The nature, the extent and the capacity of these markets vary considerably. Major international markets exist in the UK, the USA, Norway, France and Germany. Because of certain banking and tax facilities, other markets have also developed in recent times in Switzerland, Bermuda, Channel Islands, Isle of Man etc. In recent times because of economic nationalism, other markets like India, Indonesia, the Philippines, East and West Africa, the Arabian Gulf countries, Middle East countries and others have also developed. In such countries, indigenous insurance markets have developed, which in several instances, cater almost exclusively to their respective domestic markets and usually depend on the reinsurance facilities available in the international markets to generate the required capacity. On the other hand, in some countries, local reinsurance facilities are available and domestic companies are obliged to cede amounts in excess of their prescribed retentions to their respective national reinsurance companies, which in turn arrange reinsurance in the international market. Such reinsurance units also seek to participate in reinsurance from other countries, often by means of reciprocal reinsurance arrangements. Thus reinsurance is widely practiced between countries as a means of achieving a healthy spread of risk and thereby increasing capacity – whether the market functions under conditions of free competition or under limited and controlled competition or as a public sector undertaking in a nationalised set-up. 10 IC-67 MARINE INSURANCE INTERNATIONAL MARINE INSURANCE MARKET CHAPTER 1 1. UK Marine Insurance market The marine insurance market in U.K. has its major centre in London, and the London market includes: 9 Lloyd’s 9 Major British insurance companies 9 Mutual and Captive insurance companies 9 Brokers, Risk Managers, Captive Managers 9 Lawyers, Admiralty Courts, Banks, Surveyors, Average Adjusters 9 Trade Associations and Market Committees a) Lloyd’s i. Organisation of Lloyd’s 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. It is important to note that the Corporation does not itself accept insurance or assume liability for business transacted by its underwriting members. This premier world marine insurance market had its origin in a small coffee house of Edward Lloyd on Tower Street, London in 1680s. As the coffee house was a meeting place for those interested in shipping, it was reasonable to deduce that Lloyd’s as a marine insurance market had its beginnings there. Lloyd’s Act, 1871 gave Lloyd’s its legal status. Lloyd’s Act of 1982 established a Council of Lloyd’s to manage and regulate the Society’s affairs. The Council has 28 members. It is responsible broadly for the management and superintendence of the affairs of Lloyd’s ii. Underwriting members Underwriting members are elected by the Council only after the most careful examination of their financial position. A “means test” has to be passed and each underwriting member, on his election, has to deposit with the Council such security for its underwriting liabilities as the Council, it its discretion, may require. These securities remain in the custody of the Council until the whole of the member’s liabilities have been discharged. The underwriting members, through their underwriting agents, form groups called “Syndicates”. Each Syndicate will have an appointed underwriter to accept business on behalf of the members. The members, in most cases, do not take active part in the day-to-day running of the Syndicate. IC-67 MARINE INSURANCE 11 CHAPTER 1 INTERNATIONAL MARINE INSURANCE MARKET Since each underwriting member at Lloyd’s transacts business on his own behalf, he is legally liable for his engagements under the Lloyd’s policies to the full extent of his means. His liability is, therefore, unlimited in amount. Membership of a Syndicate does not relieve a Lloyd’s underwriter of any part of his liability, neither does he assume any responsibility for the obligations of his fellow members. Following the major crises at the Lloyd’s arising out of asbestos and other liability claims which triggered bankruptcy for many of Lloyd’s members, Lloyd’s changed their regulations to allow only corporate members with limited liability and continued with old individual memberships with the principle of unlimited liability. iii. Lloyd’s brokers All insurances at Lloyd’s must be placed only through the medium of Lloyd’s Brokers. Lloyd’s policies are signed on behalf of the underwriters concerned by the XIS (Xchanging Insurance Services) who provide back office support. Similarly claims process and settlement is looked after by XCS (Xchanging Claims Services) iv. Lloyd’s publications Besides transacting insurance business, Lloyd’s also publish a number of shipping publications which are of great service to the marine insurance market. Some of the important publications are: 9 Lloyd’s Register of Shipping- gives information about ships’ year built, tonnage, classification, flag, ownership etc., 9 Lloyd’s Shipping Index 9 Lloyd’s Confidential Index 9 Lloyd’s Confidential Ports Record 9 Lloyd’s List 9 Lloyd’s Law Reports 9 Lloyd’s Survey handbook- information about types of losses which can occur to different types of cargo and guide about loss minimization. v. Lloyd’s form Lloyd's has also standardised various forms which are used internationally, for example, Lloyd’s Standard Form of Salvage Agreement (also called “Lloyd’s Open Form”) and Lloyd’s Average Bond 12 IC-67 MARINE INSURANCE INTERNATIONAL MARINE INSURANCE MARKET CHAPTER 1 vi. Lloyd’s agents By Act of Parliament in 1871 in U.K., Lloyd’s was incorporated and given the power to appoint Agents in other parts of the world, where permitted by the country concerned. Lloyd’s Agents are found in most major ports and in many cities of the world. The primary duty of the Agent is to keep Lloyd’s informed of shipping movements, casualties and other matters of interest to the maritime community. It is the duty of the Lloyd’s Agent to assist the Master of any ship in distress and thereby protect the interests of the underwriters insuring that ship and her cargo. They also appoint surveyors to survey damage to a ship or cargo and issue Survey Reports for use in claiming against insurers. Moreover, if the policy/certificate makes provision for settlement of claims abroad, the Lloyd’s Agent adjusts and settles such claims on behalf of the underwriters concerned. Their remuneration consists of survey fees, charged on a time and trouble basis for surveys and settling commission for adjustment of claims according to a scale approved by Lloyd’s Lloyd’s Agents are not underwriting agents. Their services are utilised by all underwriters – companies world-wide as well as Lloyd’s. Usually, the Lloyd’s Agent is connected with a leading shipping establishment at that place.Lloyd’s Agency department is responsible for the appointment and control of Lloyd’s Agents and includes a team of inspectors who regularly visit and closely analyse the work of the Agents. A section of this department administers the operations of Lloyd’s Standard Form of Salvage Agreement. 2. The International Underwriting Association of London (IUA) It is the world’s largest representative organization for international and wholesale insurance and reinsurance companies. It was formed on 31st December 1998, through the merger of London International and Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU). This union brought together the representative bodies for the marine and non- marine sectors of the London company insurance market. The IUA is an association representing companies operating in London but outside the Lloyd’s market. The IUA do not have any regulatory authority over the members, whereas Lloyd’s is a society of members both corporate and individuals and Lloyd’s Franchise Board is responsible for commercially managing the Lloyd’s market. The IUA works for promoting the implementation of process reforms and electronic interfaces across the market. IC-67 MARINE INSURANCE 13 CHAPTER 1 INTERNATIONAL MARINE INSURANCE MARKET It also supports the numerous underwriting and claims committees which provide valuable technical inputs to the benefit of members. Many of the Clauses which are being used in marine insurance market have been drafted by ILU and are popularly known as “Institute Clauses”. Now also IUA is involved in the work of improvement and introduction of new clauses along with other institutions like Lloyd’s. The revised Cargo Clauses – 2009 are the result of a joint effort by all. 3. The International Union of Marine Insurance (IUMI) It started its activities in the present form in the later part of the 19th century. In the middle of the 19th century, many insurance companies entered marine insurance market and a fierce competition followed, leading to chaotic use of a variety of rules and policy conditions, many of which lacked conformity of the substance. Recession of 1870 hit these companies and due to cut throat competition, many went into liquidation. The need arose for international cooperation amongst the insurers. German underwriters formed an association on 8th January 1874 in Berlin which later became IUMI. IUMI works for safeguarding and developing insurer’s interests in marine and transport insurance by cooperation of national markets in marine issues, exchanging information relating to marine insurance and technology, promoting quality of underwriting. IUMI is not a decision making body, nor is it involved in the formulation of rating schedules, clauses or conditions. Rather it is a forum to exchange experience, information and statistical data on marine insurance matters, to discuss legislative issues, loss prevention and safety measures, to debate, in an objective and conducive way, the challenges and opportunities facing marine insurers. 4. International Maritime Bureau (IMB) It is a specialized division of the International Chamber of Commerce (ICC). The IMB is a non-profit organization, 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. IMB’s main task is to protect integrity of international trade by seeking out fraud and malpractice. For over 25 years, it has used industry knowledge, experience and access to a large number of well- placed contacts around the world to do this; identifying and investing frauds, spotting new criminal methods and trends, and highlighting other threats to trade. Over the years, it has helped in thwarting many attempted frauds and saved shipping and trading industry many millions of dollars. 14 IC-67 MARINE INSURANCE INTERNATIONAL MARINE INSURANCE MARKET CHAPTER 1 The IMB provides an authentication service for trade finance documentation. It also investigates and reports on a number of other topics, notably documentary credit fraud, charter party fraud, cargo theft, ship deviation and ship finance fraud. IMB also runs training programmes on wide range of topics. It also offers consultancy in ship and port security. One of the IMB’s principal areas of expertise is the suppression of piracy. In 1992 Piracy Reporting Centre was opened at Kuala Lumpur, Malaysia. It maintains round the clock watch on world’s shipping lines, reporting pirate attacks and issuing warnings about piracy hot spots to shipping lines. 5. Tariff Advisory Committee (TAC) TAC is a statutory body constituted under the provisions of Insurance Act ,1938. Its main functions were to formulate tariffs, containing standard terms and conditions as also minimum rates for various products coming under different lines of business viz. Fire, Engineering, Marine Cargo, Marine Hull etc. Accordingly, it had devised tariffs for various products falling under different branches of insurance but with the advent of the detariffing era in 1994, all tariffs stand withdrawn, except for the terms and conditions of hull policies, which continue to be governed by the Manual . 6. General Insurance Council (GI Council) GI Council is a statutory body under the Insurance Act 1938. It is an industry body funded by contributions from member companies. There are currently 22 members of the Council. GI Council membership is automatically extended by invitation to all insurance companies authorized to underwrite non-life business of any class in India. It represents the collective interests of the non-life insurance companies in India. The council speaks out on issues of common interest, helps to inform and participate in discussions related to policy formulation, and acts as an advocate of high standards of customer service in the insurance industry. It leads a number of initiatives, by bringing together experts from its member companies, the national reinsurer and the regulator to a common forum, for debating specific issues from time to time and helps resolve them in a structured fashion. GI Council supports the operation of various insurance related systems and mechanisms, instrumental to insurance companies, such as Commercial Vehicles Third Party insurance pool. It has recently undertaken to revise Inland Transit Clauses (ITC) on the lines of Institute Cargo Clauses 2009. IC-67 MARINE INSURANCE 15 CHAPTER 1 INTERNATIONAL MARINE INSURANCE MARKET 7. General Insurance Corporation of India (GIC Re) General insurance business in India was nationalized by the General Insurance Business Nationalisation Act, 1972 (GIBNA). Prior to nationalization, there were 107 companies operating in India. These were amalgamated and reconstituted into four companies. (Please refer B.1 hereinabove.) The General Insurance Corporation of India (GIC) was incorporated in November, 1972 as a holding company and the said four companies were designated as its subsidiaries effective from 1st January, 1973. In the year 1999, The Insurance Regulatory and Development Authority Act was passed, under which the exclusive privilege of public sector companies and state insurance funds to carry on general insurance business in India was withdrawn and the sector was opened up to private Indian insurance companies. By the 2002 amendment to the GIBNA, 1972, GIC was made the only reinsurance company of India and its rights to carry on direct general insurance business were withdrawn. Similarly the public sector insurance companies no more remained subsidiaries of GIC as their holdings were transferred to the Government of India. GIC is now popularly known as GIC Re. Test Yourself 3 Which of the following is the world’s largest representative organization for international and wholesale insurance and reinsurance companies? I. IUA II. IUMI III. IMB IV. GIC Re 16 IC-67 MARINE INSURANCE SUMMARY CHAPTER 1 Summary a) 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, b) The Marine Insurance Act, 1963 codifies the law relating to marine insurance. c) 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. d) All insurances at Lloyd’s must be placed only through the medium of Lloyd’s Brokers. e) Lloyd’s Agents are found in most major ports and in many cities of the world. The primary duty of the Agent is to keep Lloyd’s informed of shipping movements, casualties and other matters of interest to the maritime community. f) International Underwriting Association (IUA) of London is the world’s largest representative organization for international and wholesale insurance and reinsurance companies. g) The IMB is a non-profit organization 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. h) 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. IC-67 MARINE INSURANCE 17 CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS Answers to TestYourself Answer 1 The correct option is II. In letter of credit transactions, insurance policy is taken as collateral security by banks. Answer 2 The correct option is IV. The Marine Insurance Act 1963 codifies the law relating to marine insurance. Answer 3 The correct option is I. IUA is the world’s largest representative organization for international and wholesale insurance and reinsurance companies. Self-Examination Questions Question 1 Which of the following are incorrect with respect to underwriting members of Lloyd’s ? I. Underwriting members are elected by the Council only after the most careful examination of their financial position. II. An average test has to be passed by each underwriting member for election. III. On election, underwriting members have to deposit with the Council some security for underwriting liabilities. IV. The securities deposited for underwriting liabilities remain in the custody of the Council until the whole of the member’s liabilities have been discharged. 18 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 1 Question 2 _____________ 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 marine insurers. I. IUA II. IUMI III. IMB IV. GIC Re Question 3 Which of the following organisations provides an authentication service for trade finance documentation? I. IUA II. IUMI III. IMB IV. GIC Re Question 4 Who among the following do not operate in the marine insurance market? I. Surveyors II. Arbitrators III. Loss Assessors IV. Brokers Question 5 _____________ is a statutory body constituted under the provisions of the Insurance Act, 1938, whose main function has been to formulate tariffs, containing standard terms and conditions for various products, falling under different branches of insurance. I. GIC Council II. TAC III. GIC Re IV. IUA IC-67 MARINE INSURANCE 19 CHAPTER 1 PRACTICE QUESTIONS AND ANSWERS Answers to Self-Examination Questions Answer 1 The correct option is II. A mean test and not an average test has to be passed by each underwriting member for election. Hence option II is incorrect. Answer 2 The correct option is II. 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 marine insurers. Answer 3 The correct option is III. IMB provides an authentication service for trade finance documentation Answer 4 The correct option is II. Arbitrators do not operate in the marine market because neither cargo nor hull policies provide for any arbitration mechanism. Answer 5 The correct option is II. TAC is a statutory body constituted under the provisions of the Insurance Act, 1938, whose main function has been to formulate tariffs, containing standard terms and conditions for various products, falling under different branches of insurance. 20 IC-67 MARINE INSURANCE  CHAPTER 2 FUNDAMENTAL PRINCIPLES Chapter Introduction Marine insurance follows the fundamental principles of insurance. In this chapter, we will briefly discuss them and their effect on a contract of marine insurance. Learning Outcomes A. Fundamental principles IC-67 MARINE INSURANCE 21 CHAPTER 2 FUNDAMENTAL PRINCIPLES Look at this Scenario Case - Leyland Shipping Co. Ltd. Vs. Norwich Union Fire Insurance Society Ltd, 1918. The vessel "Ikaria" was insured against marine risks only and the policy contained a warranty against all consequences of hostilities. During the Great War, the vessel was torpedoed by a German submarine and was seriously damaged, but managed to take refuge in the port of Le Havre. It was feared that the vessel might sink at the place she was berthed alongside a quay. A gale sprang up and because of the grave danger of the vessel sinking alongside the quay, she was ordered to shift to an outer berth, where, because of the heavy rise and fall of the tides, the vessel broke up and sank. When shipowners presented the claim for loss due to a peril at sea, the House of Lords held that the proximate cause of the loss was torpedoing, a war peril, as the vessel was never out of danger from the time she was hit by the torpedo. War perils were, therefore, held to be the dominant and effective cause of the loss and there was no right of recovery under the policy! It was, thus, established that ‘proximate cause’ need not be the one closest in time to the incident but the one which is proximate in efficiency. A. Fundamental principles Certain principles are fundamental to the contract of marine insurance. These principles have statutory sanction as provided in the Marine Insurance Act, 1963 hereafter referred to as M.I.A. As in all contracts of insurance of other branches, the contract of marine insurance is based on the seven fundamental principles: 9 Principle of utmost good faith 9 Principle of insurable interest 9 Principle of indemnity 9 Principle of subrogation 9 Principle of abandonment 9 Principle of contribution 9 Principle of proximate cause Contrary to other branches, the Principle of Abandonment is applied to marine insurance in a typical way. 22 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 1. Principle of utmost good faith a) Uberrimae fidei Every contract of insurance is a contract "uberrimae fidei", that is, one which requires utmost good faith on the part of both, the insurer and the assured. Sections 19 to 23 of M.I.A (1963) deal with the principle of utmost good faith. Any circumstance which is within the knowledge of the person insuring and is likely to influence the insurer in deciding: 9 Whether he will accept or refuse the risk; or 9 The premium, terms and conditions of insurance, 9 Must be fully disclosed to the insurer before the contract is concluded Example Packing of goods which are to be transported, whether machinery is second hand, or in the case of a ship- its age, tonnage, classification, use etc. must be communicated to the insurer, as these are material facts that have to be properly communicated to the prospective insurers. If this is not done, it will amount to breach of the principle of good faith and the contract will become voidable at the option of the insurers. Not only must every material circumstance, which is known to the assured, be disclosed by him, but the assured is also deemed to know every material circumstance which in the ordinary course of business, ought to be known to him. The question is not only what he ought to have known but also what he can be deemed to have known. In the absence of inquiry, following circumstances need not be disclosed, namely, i. Any circumstance which diminishes the risk ii. Any circumstance which is known or presumed to be known to the insurer iii. Any circumstance as to which information is waived by the insurer iv. Any circumstance which it is superfluous to disclose by reason of any express or implied warranty v. Any question of law vi. Facts of common knowledge e.g. riots in city etc. IC-67 MARINE INSURANCE 23 CHAPTER 2 FUNDAMENTAL PRINCIPLES It is the duty of an agent (or broker) to make a full disclosure of all material facts to the insurer. Not only must he disclose what has been communicated to him by his principal, but he must also disclose any circumstance, of which he himself may have knowledge. Moreover, as an agent (or broker) he is deemed to know not only every circumstance which he ought to know in the ordinary course of his business, but also every circumstance which ought to have been communicated to him by his principal. Representations are communications made during negotiations, for effecting an insurance and before the contract is concluded. They are either verbal or written statements, made to the insurer, either by the assured or his agent (or broker), which may influence the opinion of the underwriter as to the desirability of acceptance or refusal of the risk submitted and as to the rate of premium to be charged, if he accepts the risk. Representations fall into three categories: 9 Material fact 9 Fact and 9 Expectation or belief If a representation relates to" material fact", then the representation must be true. Example Packing of the goods, if it is untrue, then the insurer may decide to rescind the contract. A representation relating to a "fact" is regarded as true if substantially correct, provided that the difference between what was originally represented and what turns out to be the actual fact, does not amount to a "material fact" Example Suppose insurance is arranged on the 10th of a month, the date of dispatch of goods is represented as the 12th of that month and goods are dispatched on the 14th of the same month. This is not ‘material fact’. However, if the actual date of dispatch is past , say, 1st of that month, it is ‘material fact’. As regards expectation or belief, it is sufficient if representations are made in good faith (e.g. if the ship is planned to sail within 2 days but due to port problems it actually sails after 5 days). 24 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 b) Warranties Sections 35 to 43 of M.I.A, 1963 deal with Warranties. Definition 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. A Warranty must be literally complied with, as otherwise the insurer may avoid all liability from the date of the breach. A Warranty is in effect a "safety valve” for insurers by which they can ensure that, in addition to all disclosures and true representations, the risk is exactly the one they intended to accept. There are two types of warranties: 9 Express Warranties; and 9 Implied Warranties i. Express warranties An Express Warranty is one which is appearing in the policy or which is incorporated therein by reference. Example a) Warranted packed in new gunny bags. b) Warranted new drums. c) Warranted professionally packed. d) Warranted sailing within seven days. e) Warranted shipped under deck and under a clean bill of lading. f) Warranted surveyed before shipment. Two important express Warranties in insurance of ships are the Disbursement Warranty and Trading Warranties. These are explained under Hull insurance later in this study course. ii. Implied warranties These are not written on the policies but are deemed to be there. Under MIA there are two implied warranties: 9 Seaworthiness of the vessel at the commencement of the voyage; and 9 Legality of the adventure. IC-67 MARINE INSURANCE 25 CHAPTER 2 FUNDAMENTAL PRINCIPLES iii. Warranty of seaworthiness The first of the two implied warranties is that the ship shall be seaworthy at the commencement of the voyage, or, if the voyage is carried out in stages, at the commencement of each stage. This implied warranty applies to every voyage policy, no matter what the interest insured, whether it is the ship itself or the cargo carried in it or the freight. A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured. In a cargo policy, there is no implied warranty that the goods insured are seaworthy. In a voyage policy on goods, there is an implied warranty that at the commencement of the voyage, the ship is not only seaworthy as a ship, but also that she is reasonably fit to carry the goods to the destination contemplated by the policy. In cargo policies, warranty of seaworthiness is relaxed insofar as it is applicable only when the exporter is aware about the unseaworthiness at the time of shipment (Institute Cargo Clauses 1982). But whether consignee is aware or not, on assignment of the policy, he becomes saddled with the consignor’s knowledge. It is further relaxed in 2009 clauses, which give the benefit of relaxation to consignee also if he is not aware about unseaworthiness. In a time policy on ships however, there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness. The implied warranty of legality, applicable to all marine policies, is that the adventure insured is lawful and that, so far as the assured can control the matter, it shall be carried out in a lawful manner. Marine insurance contracts cannot be used to protect illegal voyages or adventures and such policies are void. c) Breach of warranty Breach of warranty makes the contract voidable at the option of the insurer. However, the breach may be excused at the discretion of the insurers. It is excused by statute where by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any law subsequently enacted. Subject to this, a warranty must be literally fulfilled, whether material to the risk or not. 26 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 2. Principle of insurable interest a) Insurable interest Sections 6 to 17 of Marine Insurance Act, 1963 deal with the subject of insurable interest. The essential features are that there must be a physical object exposed to marine perils and that the insured must have some legal relationship with the object, in consequence of which he should benefit by its preservation and should be prejudiced by its loss or detention or damage happening to it or where he may incur liability in respect thereof. b) When insurable interest must attach An assured is not required to have an insurable interest when the insurance is effected but he must: 9 Have a reasonable expectation of acquiring such interest, and 9 He must have an interest at the time of the loss. The Act provides that where the subject matter is insured on "lost or not lost" basis, the assured may recover the loss, although he may not have acquired his interest until after the loss; unless at the time of effecting the insurance, the assured was aware of the loss and the insurer was not. The expression ‘lost or not lost’ does not appear in the existing cargo and hull policy forms. However, the former “lost or not lost" provision of the policy is given effect to by Clause 11.2 of the Institute Cargo Clauses. They render the protection of the contract, where the voyage has already commenced, retrospective to the commencement of the risk. Thus, where the property suffers loss before the assured acquires his interest, he is protected by the policy, provided the risk in the goods has passed to him. However, as per Indian practice, the insured is supposed to take insurance before commencement of transit and as such, the clause is strictly not applicable to the Indian market. When the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss. For example, when goods are purchased on FOB terms, the purchaser has no insurable interest in such goods during their transit from the seller’s factory to the vessel. After the loss he cannot change the contract to Ex-works to acquire insurable interest and claim from insurers. IC-67 MARINE INSURANCE 27 CHAPTER 2 FUNDAMENTAL PRINCIPLES c) Kinds of insurable interest i. Defeasible interest Definition A "defeasible interest" is one which can be brought to an end during the currency of the insurance by the occurrence of some event other than maritime perils. Example A seller has an insurable interest in the goods up to the time the title passes to the buyer. This passing of title may occur after commencement of the voyage, and when this occurs, the seller's interest ceases. This is called defeasible interest. ii. Contingent interest Definition A "contingent interest” is an interest that attaches during the currency of a voyage on the happening of a contingency. Example In a contract of sale, when the seller’s interest terminates, the buyer's interest attaches. However, contracts of a sale usually contain provisions which entitle the buyer to exercise the right to reject the goods, if, say, the delivery is delayed or goods do not correspond to the sample. In such instances, the buyer's interest terminates and the risk in the goods returns to the seller. This is a contingency which can be insured under "Sellers' Interest Contingency Insurance" in order to protect the seller's interest for loss or damage to the goods rejected by the buyer under FOB, CFR, FCA etc. terms of sale. iii. Reinsurance The insurer has an insurable interest in the risk he has accepted and so, he may reinsure the same. 28 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 iv. Advance freight Normally, freight on cargo is payable to the ship-owner in advance, either wholly or in part. Where the contract of carriage provides that such freight shall be payable "ship lost or not lost", that is, where the ship-owner is entitled to payment of freight whether or not the cargo arrives at destination, this gives the cargo owner an insurable interest in respect of the freight, so advanced. In practice, advance is merged in the value of cargo for insurance purposes. Also, the assured has an insurable interest in the charges of any insurance (premium) which he may effect. v. Crew’s wages Crew members have insurable interest in their wages and hence, they can insure the same. vi. Passage of interest and assignment of policies of marine insurance A clear distinction must be drawn between transfer of interest in the subject matter of insurance and the assignment of interest in the policy itself. One does not automatically follow upon the other. Section 17 of M.I.A, 1963 provides: "Where the assured assigns or otherwise parts with his interest in the subject matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there is an express or implied agreement with the assignee to that effect. But the provisions of this section do not effect a transmission of interest by operation of law. " Marine insurance policy is not an incident of the contract of sale. It is , therefore, necessary to have regard to the terms of the sale of contract to determine the precise position with regard to the assignment of the policy. If at the time of transfer of interest, there is no express or implied agreement to assign the policy, it cannot subsequently be assigned, because the cover thereunder would terminate immediately on the transfer of interest and cannot subsequently be revived. Sections 52 and 53 of the Marine Insurance Act, 1963 deal with assignment of policy. A marine policy is freely assignable unless it contains terms expressly prohibiting assignment. IC-67 MARINE INSURANCE 29 CHAPTER 2 FUNDAMENTAL PRINCIPLES Example Following policies are not assignable / transferable by an express condition included in them prohibiting assignment: i. Duty Insurance Policy ii. Increased Value Insurance Policy iii. Sellers' Interest Contingency Insurance ( can be assigned only to bankers) iv. Special Storage Risk Insurance To summarise, the policy may be assigned at any time, even after a loss has occurred, but the assignment is not valid if it takes place after the assured has parted with his insurable interest in the goods, unless the terms of sale indicate an intention to assign the policy (e.g. CIF terms). In that case, the policy can be assigned any time. The assignee of the policy is entitled to sue in his own name for recovery of loss thereunder. The insurer is entitled to make any defence which would have availed him if, instead of the assignee, the action had been brought by the original assured. In other words, the underwriter has the same defence against the assignee as he had against the assignor. Assignment of a policy is usually effected by endorsement and delivery or in any other customary manner. In practice, cargo policies are endorsed (signed on back side of the policy) in blank by the original assured and handed over to the assignee. However Marine Hull Policy cannot be assigned without insurer’s agreement and following the process enumerated in the policy (Clause 5 of ITC Hulls dt. 1.10.1983). (For more details on how to find out insurable interest in cargo insurance. please refer to the next chapter.) 3. Principle of indemnity a) Marine insurance policy A marine insurance policy, in common with other insurance contracts, is a contract of indemnity, the object of which is that the assured shall be indemnified against loss. But it is slightly different from other policies because of provisions of Sec.3 of the MIA, 1963, which provide for the indemnity to be “in the manner and to the extent agreed” making it an Agreed Value Policy. Since the insurers do not undertake to replace or reinstate cargo or vessels in the event of loss, they pay a sum of money, agreed in advance, that will provide reasonable compensation. 30 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 The insured property in marine insurance is moving property- ships and cargo -- and in case of cargo, it is in course of delivery under a contract of sale. Values keep fluctuating and cargo appreciates in value, as it reaches closer to its destination. A reasonable indemnity is achieved by an agreement in advance as to the insured value, based on the CIF value of the goods and so, it is customary to add an agreed percentage, which is intended to indemnify in respect of general overheads and provide a margin of profit on the transaction. In any case, for a property in transit, it is difficult to decide the market or reinstatement value of goods at the time of loss. In fact, to ascertain the place and time of loss, which are the basis of market value, is very difficult in most of the cases. So, generally, Agreed Value concept is adopted in marine insurance. However the MIA also provides for issuance of unvalued policies. b) Valued and Unvalued policies A valued policy specifies the agreed value of the subject-matter insured. Example 20 bales of cotton insured for Rs.1,00,000 so valued or "Hull and Machinery insured for Rs.30,00,000 valued at Rs.40,00,000" .. Though there is no bar on the amount of insurance, as per international practice, cargo insurance is generally arranged for 110% of CIF (Cost, Insurance and Freight) value. However, the value of a ship depends on various factors e.g. age, prevailing conditions etc.. Hence, it is done on Agreed Value basis. Where a valued policy is used, the value is agreed between the assured and the insurer, so that for ships, a fair value to the shipowners can be insured irrespective of the market value, and for cargoes the assured is enabled to insure the cost, charges and a reasonable margin of profit. In practice, invariably, valued policies are used, except for insurance of freight, disbursements, customs duty on import cargo and similar interests. Where the value has not been agreed, the policy is an unvalued policy (e.g. Customs Duty policy for cargo) and, in the event of loss, the insurable value is computed in accordance with Section 18 of MIA, 1963. An unvalued policy does not specify the value of the subject insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained. In an unvalued policy, the sum which the subject- matter of insurance is "valued at" , is not inserted. IC-67 MARINE INSURANCE 31 CHAPTER 2 FUNDAMENTAL PRINCIPLES An agreed value policy has the advantage of a fixed insured value conclusive for all claims. Only when fraudulent intention is proved is it permissible to open an agreed value on a policy; otherwise such value is regarded as conclusive and binding on both the insurer and the assured as representing the value of the subject-matter insured. Such policies are known as valued policies and the agreed value is referred to as the insured value. If there is a fraud, not only the valuation but the whole of the policy can be avoided. A deliberate over-valuation with the intention to deceive the underwriter will of course, if discovered, nullify the contract. Or if the valuation is so excessive that an ordinary risk is converted into a speculative one, the insurer may likewise avoid the contract, but on the ground of non- disclosure of a material fact. 4. Principle of subrogation Definition Subrogation is the right by which an insurer, having settled a claim for loss or damage, is entitled to place himself in the position of the insured to the extent of acquiring all rights and remedies in respect of the loss which the insured may have received. Subrogation is the corollary of the principle of indemnity and the right of subrogation, therefore, applies to policies which are contracts of indemnity. Subrogation is a matter of equity, the purpose of which is to ensure that the assured shall not make a profit out of a loss in respect of which he has been indemnified by the insurers by reimbursement, either wholly or partly, from another source. In marine insurance, subrogation applies only after payment of a loss. Section 79 of MIA, 1963, which deals with the right of subrogation, draws a clear distinction between cases where an insurer has paid a total loss and cases where he has paid only a partial loss. Where a total loss is involved, the insurer is entitled to take over the interest of the assured in whatever may remain of the subject - matter so paid for. In case of a partial loss claim he has no such entitlement. In either case, whether the loss is total or partial, the insurer, on payment of such claims, is subrogated to all the rights and remedies of the assured in respect of the subject- matter insured, with the qualifications that, in cases for payment of a partial loss, the insurer's rights extend only so far as the assured has been indemnified. Thus, in case of partial loss the insurer is entitled to recover only up to the amount which he has paid, in respect of rights and remedies. 32 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 By their right of subrogation, insurers are entitled to the whole amount of any recovery from a third party up to, but not exceeding, the amount of the claim they have paid. When a recovery from a third party is based on a value higher than the insured value, then the insured cannot participate in the recovery until the insurers have been fully reimbursed. Subrogation rights are of immense value to the insurers in reducing their net claims. For the most part, recoveries under subrogation are against carriers. In case of cargo claims when there is any possibility of a recovery from a third party, insurers will take a Letter of Subrogation from the insured when settling the loss. Such express authority is superfluous, as the right of subrogation is a statutory right which is automatically vested in the insurer on the settlement of the claim. However the Letter of Subrogation formally authorises the insurers to institute proceedings to effect the recovery in the name of the insured and at insurers’ expense. (Recoveries are dealt with in Chapter ……). 5. Principle of abandonment Definition Abandonment is transfer of rights, titles, interests and property, including liabilities in favour of the insurers. It is much wider than subrogation which is only transfer of rights. Abandonment is compulsory in case of Constructive Total Loss claims on cargo and ship. In practice, insurers reject such abandonment and treat the insured as if abandonment procedure is completed. Once accepted, the insurers cannot reject the abandonment. If any liabilities are attached to the abandonment, the insurers have to pay for those liabilities, irrespective of sum insured under the policy. 6. Principle of contribution Section 34(1) of the MIA, 1963, defines "Double Insurance" and states that where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by the Act, the insured is said to be over-insured by double insurance. However, ‘Double’ is not to be interpreted in the mathematical sense. As provided by Section 34(2) of the Act, the assured has the right to claim under the policies in any order he may choose, but ultimately each insurer is responsible for only his due proportion of the loss. IC-67 MARINE INSURANCE 33 CHAPTER 2 FUNDAMENTAL PRINCIPLES Any insurer, who has paid more than his proportionate share, is entitled to enforce rateable contribution from the other insurers. If the insured has recovered more than the permitted indemnity, normally based upon the highest insured value agreed in any of the various policies, he holds the excess in trust in accordance with the insurers' rights of mutual contribution. 7. Principle of proximate cause Proximate cause is the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source. Insurers are liable if an insured peril is the proximate cause of the loss. If an insured peril is only the remote cause of the loss, the proximate cause being an insured or excepted peril, the insurers are not liable. Many interesting cases illustrate the principle of “proximate cause” or the "causa proxima". Example Where a ship was deliberately scuttled with the connivance of the owner, it was pleaded by an innocent mortgagee that the proximate cause of the loss was the actual incursion of the water, a peril of the sea, but the court held that it was absurd to look at any nearer cause then the actual act of scuttling. (Samuel Vs. Dumas, 1924). Example In the case of Pink vs. Fleming (1890), the insurance was on a cargo of oranges and lemons and was warranted covering partial losses, only if such loss or damage was consequent upon collision with other ship. The vessel collided with another ship and she had to put into a port for repairs. In order to effect the repairs, it was necessary to discharge the fruit into lighters and later reload it. When the vessel arrived at the destination, it was found that the fruit was considerably damaged, partly by handling and partly from natural decay, in consequence of its perishable nature (inherent vice) which arose due to a delay in voyage. It was held that the proximate cause of the loss was not collision or any peril of the sea, but the perishable character of the cargo combined with handling and delay. 34 IC-67 MARINE INSURANCE FUNDAMENTAL PRINCIPLES CHAPTER 2 Speaking generally, the onus of the proof is on the assured to prove that the loss or damage claimed for was due to an insured peril. When a vessel is posted at Lloyd's as "missing", the presumption would be that the loss was due to maritime perils, though the onus of the proof is on the assured, to show that the loss occurred during the currency of the policy. The M.I.A provides that where a ship is missing and after a lapse of reasonable time no news of her has been received, an actual total loss may be presumed. Where, however, the policy excludes War Risks, if the insurer pleads that loss was due to a War peril, then the onus would be on the insurer to show that the loss had, in fact, been so caused and was, therefore, excluded. Broadly, when a vessel disappears at sea and it is necessary to decide whether the loss was due to a marine or war peril, and no direct evidence is available, then the balance of probabilities has to be resorted to. Under Institute Cargo Clauses the theory of Proximate Cause is relaxed under Clauses ‘C’ and Clauses ‘B’; Sub-clause 1.1, where the losses reasonably attributable to insured perils are covered and not proximately caused by them. Test Yourself 1 ______________ 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. I. Indemnity II. Contract III. Warranty IV. Subrogation Test Yourself 2 A _____________ is one which can be brought to an end during the currency of the insurance by the occurrence of some event other than maritime perils. I. Defeasible interest II. Contingent interest III. Warranty IV. Valued policy IC-67 MARINE INSURANCE 35 CHAPTER 2 SUMMARY Summary a) Every contract of insurance is a contract "uberrimae fidei", that is, one which requires utmost good faith on the part of both, the insurer and the assured. b) 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. c) A "defeasible interest" is one which can be brought to an end during the currency of the insurance by the occurrence of some event other than maritime perils. d) A "contingent interest” is an interest that attaches during the currency of a voyage on the happening of a contingency. e) A marine insurance policy, in common with other insurance contracts, is a contract of indemnity, the object of which is that the assured shall be indemnified against loss. f) Subrogation is the corollary of the principle of indemnity and the right of subrogation therefore applies to policies which are contracts of indemnity. g) Abandonment is transfer of rights, titles, interests and property, including liabilities in favour of the insurers. h) Insurers are liable if an insured peril is the proximate cause of the loss. If an insured peril is only a remote cause of the loss, the proximate cause being an insured or excepted peril, the insurers are not liable. 36 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 2 Answers to TestYourself Answer 1 The correct answer is III. 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. Answer 2 The correct option is I. A defeasible interest is one which can be brought to an end during the currency of the insurance by the occurrence of some event other than maritime perils. Self-Examination Questions Question 1 “Marine insurance policy is an Agreed Value Policy”. What does this statement imply? I. The insurers undertake to replace or reinstate cargo or vessels in the event of loss, with full compensation. II. The insurers do not undertake to replace or reinstate cargo or vessels in the event of loss, and do not provide any compensation. III. The insurers do not undertake to replace or reinstate cargo or vessels in the event of loss; instead, they cancel the policy. IV. The insurers do not undertake to replace or reinstate cargo or vessels in the event of loss; they pay a sum of money, agreed in advance, that will provide reasonable compensation. Question 2 A ______________ is an interest that attaches during the currency of a voyage on the happening of a contingency. I. Defeasible interest II. Contingent interest III. Warranty IV. Valued policy IC-67 MARINE INSURANCE 37 CHAPTER 2 PRACTICE QUESTIONS AND ANSWERS Question 3 __________ is the right by which an insurer, having settled a claim for loss or damage, is entitled to place himself in the position of the insured to the extent of acquiring all rights and remedies in respect of the loss which the insured may have received. I. Subrogation II. Abandonment III. Contribution IV. Proximate cause Question 4 ______________ is the transfer of rights, titles, interests and property, including liabilities in favour of the insurers. I. Subrogation II. Abandonment III. Contribution IV. Proximate cause Question 5 In which of the following policies there is no implied warranty that the goods insured are seaworthy? I. Cargo policy II. Voyage policy on goods III. Duty insurance policy IV. Increased value insurance policy 38 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 2 Answers to Self-Examination Questions Answer 1 The correct option is IV. “Marine insurance policy is an Agreed Value Policy”. This means: The insurers do not undertake to replace or reinstate cargo or vessels in the event of loss; they pay a sum of money, agreed in advance, that will provide reasonable compensation. Answer 2 The correct option is II. A contingent interest is an interest that attaches during the currency of a voyage on the happening of a contingency. Answer 3 The correct option is I. Subrogation is the right by which an insurer, having settled a claim for loss or damage, is entitled to place himself in the position of the insured to the extent of acquiring all rights and remedies in respect of the loss which the insured may have received. Answer 4 The correct option is II. Abandonment is transfer of rights, titles, interests and property, including liabilities in favour of the insurers. Answer 5 The correct option is I. In cargo policy, there is no implied warranty that the goods insured are seaworthy. IC-67 MARINE INSURANCE 39 CHAPTER 2 PRACTICE QUESTIONS AND ANSWERS 40 IC-67 MARINE INSURANCE  CHAPTER 3 UNDERWRITING Chapter Introduction The chapter discusses the various factors that are considered by underwriters before accepting a risk in marine insurance. It also briefly discusses the various documents that are required to be completed and submitted by proposers for availing themselves of marine insurance. In the end, we will also look at the importance of information technology in marine underwriting. Learning Outcomes A. Arranging for insurance: proposal form, declaration, premium etc. B. Underwriting factors C. INCOTERMS 2000 D. Documents E. Use of IT in marine underwriting IC-67 MARINE INSURANCE 41 CHAPTER 3 ARRANGING FOR INSURANCE: PROPOSAL FORM, DECLARATION, PREMIUM ETC. Look at this Scenario Recent mishaps in the coastal areas prompted the government to implement the Merchant Shipping (Regulation of Entry of Ships into Ports, Anchorages and Offshore facilities) Rule, 2012. Under this new rule, it has been made mandatory for foreign ships which intend to enter its ports, to have third party liability cover against maritime claims. In shipping, third-party liabilities arising from operating ships can be on account of oil pollution, wreck removal, damage to port property etc. With the implementation of this new rule in 2012, India has approved four new ship underwriters – QBE Insurance (Europe) Ltd, represented by British Marine, Amlin Corporate Insurance NV, represented by RaetsMarine Insurance BV, Korea Shipping Association and Korea shipowners’ mutual Protection and Indemnity Association. These companies’ liability covers address risks that include oil spills and collisions with foreign ships that enter Indian ports. The ‘term’ of each of these liability covers is one year. Premium for the cover can be paid quarterly, and in case of default, the cover will cease. Valid insurance certificates are issued to the shipowners, as a proof of them having valid liability cover. In order to gain entry into Indian ports, these ships will have to submit these insurance certificates to the authorities as an assurance of their compliance with global standards of safety and pollution prevention. A. Arranging for insurance: Proposal form, declaration, premium etc. 1. The proposal The process of arranging insurance starts with submission of a proposal to the underwriter. The proposal may be in a particular format or may be in the form of a letter or may be verbal. In India, an underwriter is an insurer or an official of an insurance company who has the authority to accept the risk detailed in the proposal and decide the terms and conditions as also the premium which may be adequate to insure the risk offered. 2. Declaration As per IRDA regulations the proposal form is not compulsory and proposal submitted even verbally is a good proposal but it is to be recorded properly by the receiver. For good order it is better to collect a proposal in the form of a suitably designed proposal form which is also called Declaration. 42 IC-67 MARINE INSURANCE ARRANGING FOR INSURANCE: PROPOSAL FORM, DECLARATION, PREMIUM ETC. CHAPTER 3 Under Reserve Bank of India Regulations (General Insurance Memorandum) on exports and imports premium can be collected in Indian Rupees only if Declaration, containing information on the prescribed points is submitted to the insurers. The Proposal Form or Declaration contains information such as: i. The name and address of proposer ii. Transit details iii. Details about the goods to be insured iv. Packing v. Markings on the packages vi. Terms of cover required vii. Conveyance mode etc. These details enable the underwriter to judge the risk involved and decide the terms, conditions and rates for the insurance sought. 3. Premium Definition Premium is the consideration which the insurers receive for accepting a risk. As per Indian practice the premium is to be paid in advance before commencement of transit. It can be by way of: i. Cash, ii. Cheque, iii. Bank Guarantee, iv. Cash deposit, or v. Through credit card. Acceptance of risk without receiving full premium in advance is prohibited under Insurance Act 1938, Section 64 VB. However, exceptions are allowed as per provisions of Rules 58 and 59 of Insurance Rules, 1939 e.g. 59(ii) In the case of exports overseas, risk may be assumed subject to the condition that the premium shall be paid within fifteen days from the date of sailing of the overseas vessel. 59(iii) In the case of imports, risk may be assumed subject to the condition that the premium shall be paid within fifteen days of the receipt of declaration in India from the insurer or insurer’s representative overseas. However, these two relaxations shall apply to Marine Cover Notes only and not Marine Policies. IC-67 MARINE INSURANCE 43 CHAPTER 3 UNDERWRITING FACTORS Test Yourself 1 As per the Insurance Act 1938, for marine insurance taken in India, when should the proposer submit premium for his policy to the insurance company? I. Before commencement of transit II. After commencement of transit III. At the completion of transit IV. At the time of loading of goods B. Underwriting factors 1. Underwriting factors Generally the following factors are considered by an underwriter to decide about acceptance: 9 The vessel 9 The voyage or transit 9 The nature of cargo and its packing 9 The conditions and terms of insurance. 2. The Vessel Whilst the insured goods are on board the carrying vessel, neither the assured nor the underwriter has any control over their safety, the goods being entirely in the hands of the operators of the ship and largely dependent on the fitness and the seaworthiness of the ship and the competence of the master, officers and crew to carry the goods safely and deliver them in a sound condition to destination. a) Physical condition of vessel The physical condition of the vessel is frequently a reflection of its age. After a certain point, the age of the vessel would indicate a progressively reduced ability to withstand the diverse hazards of ocean navigation, although this adverse feature may to a large extent be mitigated by careful maintenance and sound management of the vessel. b) Size of vessel The size of a vessel is also an important factor. For example, a 15,000 tonner (Vessel, whose Gross Tonnage is 15,000) will normally ride through an Atlantic storm or an Indian Ocean cyclone with greater stability than a 2,000 tonner. 44 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 c) Types of cargo vessel General cargo vessels may be subdivided into "liners" and "tramps". i. Liners The 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 varying number of ports according to a particular service in which she is engaged. ii. Tramps The "tramp", on the other hand, carries mostly bulk cargo, very often seasonal in character, for which she is specially chartered. Tramps will carry any cargo anywhere so long as adequate freight is offered. A cargo "liner" is a better risk than a "tramp". d) Vessel under charter Another factor which should receive the attention of the underwriter is whether or not a vessel is chartered. A vessel under charter will need a closer scrutiny as to the integrity, bonafides and reputation of the charterer and these are material aspects deserving careful assessment. e) Classification Societies An important consideration of the underwriter is that the vessel be fully classed, which means that she be entered in an approved ship classification society whose rules for initial registration and subsequent periodical inspections provide the necessary technical safeguards Most of the vessels plying the high seas are entered in one or the other of these classification societies and whose classification and other details are readily available to underwriters by a reference to the: 9 " Lloyd’s Register Of Ships" ; 9 "Lloyd's Shipping Index" ; or 9 On website www.equasis.org. Under open covers, where the vessel's identity will not be known prior to declaration, control is exercised by inclusion of Institute Classification Clause, whereby the carrying vessel must comply with the highest classification standards awarded by any one of the societies, who are Members or Associate Members of the International Association of Classification Societies. Indian Register of Shipping (IRS) is a Member. IC-67 MARINE INSURANCE 45 CHAPTER 3 UNDERWRITING FACTORS f) Age of vessel Age of the vessel is generally restricted to 10 years for Tankers, Bulk Carriers and Combination Carriers and 15 years for other vessels, except that for "liner" vessels operating to regular advertised itineraries the age limit is extended to 25 years. Containerized vessels operating as liners are accepted up to 30 years. Shipment by any vessel failing to meet these requirements is "held covered" subject to additional premium for the adverse features, such as: 9 Overage; 9 Non-classification; and 9 Where the vessel is registered in a "flag of convenience" (FOC) country. Underwriters remain seriously concerned regarding Flag of Convenience (FOC) vessels. A large proportion of world fleet is registered under flags of convenience. By registering his vessels in F.O.C countries, the shipowner enjoys tax advantage and is able to effect considerable savings in tax. Also, the standards of safety and crew competence required by FOC countries are below the high standards set by other countries. Thus, when a ship is registered under F.O.C., there is generally a tendency to employ crew of lower competence, because by doing so, the shipowner may effect savings on wages. The result of all this is recorded in world casualty records which indicate a higher proportion of major losses on tonnage represented by F.O.C. vessels. Flag of convenience countries are: 9 Costa Rica, 9 Malta, 9 Cyprus, 9 Morocco, 9 Dominican Republic, 9 Nicaragua, 9 Greece, 9 Panama, 9 Honduras, 9 Singapore, 9 Lebanon, 9 Somalia, 9 Liberia, 9 Sri Lanka, 9 Maldives islands, 9 Vanuatu and many others 46 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 g) Adverse features Adverse features as regards the carrying vessel will attract extra premium under the following situations:- i. When a vessel is not on a regular trading pattern and is over 15 years old.( over 10 years for tanker vessels) ii. When the vessel is on a regular trading pattern, but is over 25 years old.( 30 years in case of containerized vessels) iii. Where the vessel is not a mechanically propelled steel vessel. iv. Where the vessel is classed below the minimum, as set out in the Institute Classification Clause, or is classed with a v. Register other than those approved or is unclassed. vi. Where a vessel is chartered and she is not classed and is 15 year old. 3. The Voyage or transit Except for War risks, the cover granted under Institute Cargo Clauses (ICC) is from "warehouse to warehouse" involving whole duration and extent of the transit. This will include all or most of the following stages and concerns: a) Land transit by rail or road from the time the goods leave the consignor's warehouse to the port of shipment. Under the Transit Clause of ICC , there is no cover during any period before transit actually commences, such as, whilst the goods are in transit to and in a packer's premises, unless a special provision is made in the policy, in which event, underwriters may also consider including a period in the packer's premises. b) Transit to a container terminal or a period in the port warehouse awaiting customs formalities. What are the storage and handling facilities available in the ports? Will the goods be stacked in the open exposed to the elements or will they be stored under cover in a shed? c) Will there be direct quayside loading into the carrying vessels or will loading involve lighterage? The latter will mean greater exposure to loss or damage. Stowage into vessels is another factor to be considered. d) Next comes transit by carrying vessel to destination port, perhaps involving transhipment(s). The longer the voyage, longer the cargo on board will be exposed to the accidents and perils of the sea. Fewer the ports of call en route, faster will be the delivery. In this respect, therefore, "liner" service is a better risk than carriage by other vessels in general trade. e) Each transhipment involved will mean additional handling, storage and mode of on-carriage from the transhipment port or place and so there will be greater exposure to loss or damage. IC-67 MARINE INSURANCE 47 CHAPTER 3 UNDERWRITING FACTORS f) Weather conditions can be significant in relation to the size of the vessel. Monsoons are a feature to be carefully considered, particularly for country craft and coastal voyages between ports in India. g) On-deck cargo, that is, cargo stored on deck is a substandard risk for two reasons : i. It is more exposed to weather; and ii. There are virtually no prospects of recovery from carriers, under subrogation, as deck cargo does not come within the purview of the Carriage Of Goods by Sea Act, 1925 and therefore, in practice, the carrier invariably exempts himself from liability (except in respect of container cargo stored in deck). Deck cargo will, therefore, attract higher rate of premium and possibly a restricted form of cover. h) At destination port will there be discharge direct onto quay or will discharge take place in mid-stream involving lighterage? Will there be storage in sheds or in the open? What are the handling facilities, effectiveness of security, delay in customs, etc.? i) After discharge, there is the inland transit by rail or road to the consignee’s final warehouse. Here the underwriter should take into consideration the nature of such interior transits in terms of distances from ports and methods of conveyance employed. j) Has the proposer declared the entire transit for the insurance or is the insurance proposed relates only to part of the whole transit, say, the latter part or the "tail -end " of the transit ? An underwriter who accepts tail- end of the risk, should obviously have the subject -matter inspected before accepting the risk; otherwise he will be saddled with a claim for loss or damage which could have occurred during the earlier sector of the transit before he came on risk. In ordinary course, it would be wiser to avoid the" tail-end" of the risk. But if compelled to accept by way of accommodation, any damage revealed by pre-acceptance survey/inspection (at proposer's cost) should be excluded from scope of the policy and a restricted form of cover should be granted. A good underwriter must be well informed of current world events, like the prevalence of hostilities between countries, political tensions, civil wars, riots, strikes and labour disturbances. He should be well versed in geography and should have a keen interest in world affairs, both political and economic. 48 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 4. Nature of cargo and its packing a) Cargo In cargo insurance, the nature of the product or commodity insured, from the point of view of its susceptibility to damage through various causes, is a vital consideration for an underwriter to take into account. The purpose of even the most comprehensive insurance is to cover a "risk", that is, a fortuity and not a certainty. Therefore, loss, damage or expense caused by inherent vice is not covered unless the policy specially so provides, as in the case of Institute Coal Clauses which expressly include the risk of spontaneous combustion. All policies also exclude ordinary or inevitable losses, such as: 9 Ordinary leakage; 9 Ordinary breakage; 9 Ordinary loss in weight or volume; or 9 Ordinary wear and tear of the subject matter insured. Some commodities naturally lose weight, say, by evaporation of their moisture content. In some trades customary ullage (shortage) has been fixed by usage. There are commodities like fruits and vegetables which sweat if shipped in poor condition and loaded too soon after harvesting. There are cargoes that gain in bulk during the voyage if shipped in imperfect condition, for example, grain. Most cargoes which contain excess of humidity when shipped are susceptible to heating and spontaneous combustion, for example, jute fibres and cotton in fully pressed bales. Refined spirits evaporate and other cargoes have chemical affinities with various commodities, for example, salt & sugar, sulphur & nitrates. There are cargoes that are subject to fermentation or caking or crystallisation. There are cargoes which are odorous or aromatic, for example, oranges & lemons, nitrates, fertilizers, cloves, cheese, essential oils, soap, rubber, spices, tobacco, garlic, hides & skins. Many others become odorous if damaged by contact with water, often causing extensive damage to other cargoes. There are commodities which are susceptible to "other cargo" damage, whilst others would remain unaffected. Some cargoes are hydroscopic, that is, deliquescent, becoming liquid, for example, caustic soda, nitrates, salt & sugar. Others are inflammable, e.g. naphtha, alcohol, kerosene, paints, turpentine etc. IC-67 MARINE INSURANCE 49 CHAPTER 3 UNDERWRITING FACTORS Thus, each commodity has its own peculiar characteristics. In cargo insurance, the susceptibility of goods to damage by various causes is a vital consideration. A skilled underwriter should be familiar with such knowledge. A wealth of information is available to underwriters by a reference to "Lloyds Survey Handbook" which lists a number of commodities and their individual characteristics and susceptibilities to loss or damage. Importantly, this useful publication also suggests measures by which: 9 Loss or damage could be prevented or minimised, and 9 Damaged goods could be reconditioned and salvaged. b) Packing The purpose of packing goods for transit overseas or inland is to ensure as far as possible that the goods reach destination in the same perfect condition in which they were when they left the shippers’ premises. One way to ensure the safety of the goods is for the shipper to make absolutely certain that the goods are packed in the manner which will enable them to withstand normal handling during transit. In this context, there are some identifiable hazards to which all cargo normally will be subject during transit. Example a) Internal movement during lifting and lowering of packages b) Dropping during manual handling c) Pushing, dragging and lifting due to improper use and handling of aids and equipment d) Compression pressures due to high stacks e) Rolling, surging, pitching, swaying, yawing and heaving motions on seas f) Pressures, jolts, impacts and vibrations during railroad transits g) Rain water or sea water entry h) Condensation because of ship's sweat or cargo sweat, temperature changes and variations in humidity i) Theft and pilferage Packing, therefore, is an important factor in almost all preventable cargo losses. Shippers, who are primarily concerned with this aspect, have a major role to play in this area. Packing, serving as a link between production and consumption, does require special attention. Insufficient, inadequate, improper, unsuitable and defective packing is a source of much concern to an underwriter, because it can turn what might have been a small loss into a large one. 50 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 The condition and the standard of packing used is described in the surveyor's report, when a claim arises. If goods are normally packed in a certain manner considered standard, and if the same goods, which are subject matter of insurance, are packed less soundly, failure to disclose this fact would be non-disclosure of a material fact. The underwriter then may, at his discretion, avoid the contract, whether or not inadequate packing contributed toward the loss. Under Institute Cargo Clauses there is an express exclusion regarding "packing". The exclusion reads as under: "In no case shall this insurance cover loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured ("packing" shall be deemed to include stowage in a container or lift van, but only when such stowage is carried out prior to attachment of this insurance or by the assured or their servants)." However, under the 2009 clauses, if packing is done by independent contractors the exclusion is not applicable. A question arises; what would constitute proper, suitable and adequate packing? A practical approach would be to consider packing as adequate if previous sendings have arrived regularly without loss resulting from packaging over a reasonable period of time when the goods were packed in the same way. Variations do occur in the packing requirements of particular types of goods involving particular transits, but certain basic factors are always present, and these are: 9 Strength of the packing material. 9 Weight of the package unit. 9 Handling mobility of the package unit. 9 Inherent qualities of the commodities or product packed. 9 Hazards involved in a transit. This brings us to an examination of the use and merits of various types of packing in relation to the nature of the commodity packed and the risks involved in transit. i. Corrugated fibreboard (cf) boxes / cartons CF Boxes and Cartons are light in weight and economical. Though they may be adequate for domestic use and for air transit, they are not always suitable for export cargo on ocean voyages or for shipments likely to be exposed to much moisture. CF boxes should not be used for pilferable products. IC-67 MARINE INSURANCE 51 CHAPTER 3 UNDERWRITING FACTORS ii. Wooden boxes/cases A wooden box is strong and in many ways the most convenient packing for many commodities provided the wood is of appropriate quality, thickness and correct moisture content. It is preferable to reinforce all wooden boxes and cases with tension metal straps to provide additional strength. To protect against water damage, cases should be lined with waterproof barrier material. iii. Bags Many commodities can be packed in bags, even paper bags. Coffee and cocoa beans are carried in sacks. Cements and chemicals in granules or powder form can be carried in multi-ply paper bags. Polythene-lined jute bags are often used to pack chemicals. The two main hazards to bagged goods are: 9 Exposure to weather; and 9 Tearing of bags. Bagged goods should be stored on platforms and under cover. Stevedores' hooks can hold and tear the bags from which the contents may then run or flow out. Heavy bags are difficult to handle and dropped bags are often split. It is therefore advisable to use bags of reasonable size and to provide "Ears" at corners to facilitate handling. An underwriter should know that bagged cargo, generally through various causes, suffers a heavy incidence of loss. iv. Bales Goods which cannot be damaged by impact or knocks are usually packed in bales, e.g. cotton and wool. A well-made or pressed bale withstands many of the transit hazards better than other packages. But bales require special attention to minimise losses, particularly from hooks, country damage, water damage and pilferage. It is advisable to use an inner wrap of waterproof paper below a primary cover of fibreboard over which a heavy jute or hessian wrapping can be provided before strapping. For smaller bales, it is advisable to provide handling "Ears" at corners to avoid compulsive use of hooks. On heavier bales, temptation to use hooks in handling is considerable. For example, hooks used to move a bale of carpets can rip the outer carpets making them unsaleable except at reduced prices. 52 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 v. Unitising the packages Many products and commodities can be economically palletised or unitised to facilitate handling, stowage and general protection of cargo. Definition "Palletising" is the assembly of one or more packages on a pallet (platform, usually wooden) base and properly secured to it. Definition "Unitising" is the assembling of one or more packages or items into a compact load, secured together and provided with skids for easy handling. These methods have following advantages: 9 They eliminate the multiple handling of individual items. 9 They speed up loading and unloading operations. 9 They compel greater use of mechanical handling, reducing possible damage from multiple manual handling. 9 They facilitate applications of waterproofing protection for the entire load. 9 They reduce the incidence of lost or straying items. 9 Speedy loading and discharge operations lead to improved "turn around" of ships and savings in dock dues for the shipowner. The concept of unit carriage is important because it is increasingly becoming a common method of cargo transportation and therefore deserves a closer study. vi. Pallets Packages are fastened to a platform and firmly secured to it through the transit. The platform is called a "pallet" and is lifted into and out of the ship as a complete unit. This facilitates loading and discharge operations, causing considerable reduction in delay. Some pallets are fitted with rollers for ease in movement. Fork lift trucks are used for moving the pallets in the dock areas and within a ship's hold vii. Lift van Where cargo has to be handled package by package, railways suffer delays and long lines of wagons stand idle whilst awaiting loading and discharge. IC-67 MARINE INSURANCE 53 CHAPTER 3 UNDERWRITING FACTORS A system was, therefore, developed to speed up the "turnaround" of wagons. The system consisted of constructing vans in two separate parts - the whole of the container unit to be detachable from the chassis, and by standardisation, to be readily usable on any other chassis. The van part was called a "lift van" and the chassis was called a "flat'. An extension of the system allowed the lift vans to be placed on road transport flats. Although the lift van could also be loaded directly on to the ship from the flat, the holds are not designed to take the lift vans. So the lift vans have to be stowed on deck. A further difficulty is that the vans are not designed to be stacked over each other, as the roof is curved as in a standard railway wagon. Therefore, whilst the lift vans are still used infrequently for some coastal voyages, their main use is confined to inland transit by rail or road. viii. Bulk cargo Cargo which is normally not packed and carried either full load in vessel or even container, without any packing, is called Bulk Cargo. Fertilizers, cement, grains, sugar, liquids etc., are carried as bulk cargo. Bulk cargo has its own risks, like unreliable method of weighment by draught survey, no protection against weather conditions etc. ix. Container transport Containerisation is a wider application of the concept of unitisation. The use of intermodal containers for transport of a variety of cargoes has become increasingly common in recent years. Intermodal transport involves rapid movement and transport of standard cargo containers by sea, land and air. It has reduced cargo handling, particularly in Door-to-Door shipments. "Containers" in this context mean large boxes of regulated sizes, constructed of strong light-weight metal, specifically designed for carriage by custom- built cellular container ships. A fully laden container ship will normally include one or two tiers of container cargo "on deck". Containers vary in size and in designs according to the requirements of the container operators and shippers. Generally accepted standard sizes by the ISO (International Standards Organisation) are: 8 or 8.5 feet high by 8 feet wide and 10 or 20 or 30 or 40 feet long. 54 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 The main standard used is 20 feet in length expressed as TEU (" Twenty Foot Container Equivalent Unit”). Such containers fit into the specially constructed holds of container vessels as well as in the holds of most conventional ships and can be placed on a suitable transport for rail or road haulage. For the purpose of shipping, the contents of a container are described as Full Container Load (FCL) or a Less-than-Container Load (LCL). 9 FCL implies a full load for a single shipper. 9 LCL is the term used for a smaller consignment consolidated with goods of other exporters to fill the container. A shipper who plans to dispatch a full load can take delivery of an empty container at his own premises for loading by in-house staff. If it is then intended for delivery to a single consignee, the ideal of door-to-door transportation is possible, i.e. from the consignor's to the consignee's premises without breakdown of contents. If, however, the shipper chooses to use the packing services of an outside freight forwarder, a groupage depot or a container packing station or if the contents are to be distributed to various consignees after the container arrives at the destination container terminal, an element of conventional transportation at both the shipping and destination ends cannot be avoided. Therefore, all LCLs begin and end their transit by conventional conveyances. An underwriter should always inquire in this aspect and the rating should reflect which of these alternatives will apply - that is, whether FCL or LCL and whether door-to-door or conventional handling and delivery. Exclusion 4.3 of Institute Cargo Clauses goes further in case of FCL containers and excludes losses occurring due to faulty or improper stowage inside the container, provided such storage is carried out prior to attachment of insurance or by the Assured or their servants or employees. In case of LCL, since stowage is generally done by shipping company, defective stowage is not the insured’s fault and so exclusion may not apply to LCL. c) Containerisation in India In India, advanced container handling facilities exist in major ports like Mumbai, Chennai, Kochi, Haldia and Kolkata. Jawaharlal Nehru Port at Nhava Sheva off Mumbai has one of the most automated container terminal management systems in the world. Facilities for bulk cargoes and containers are very well planned. The port has three container berths, 2 bulk carrier berths and one repair berth. IC-67 MARINE INSURANCE 55 CHAPTER 3 UNDERWRITING FACTORS Door-to-door concept has not yet caught on in India and a large number of containers are meant to be destuffed and stuffed in the port. For that purpose, extensive shed space facilities exist. In this country, containerisation will remain for some time to come, a form of "unitisation between ports", that is, a port-to-port service. This is because inland movement is almost in the form of break - bulk. It must, therefore, be accepted - and this is very important - that containerisation does not do away with the need for adequate cargo protection. In other words, it should not be assumed that the container is a substitute for adequate packing or for proper stowage or handling. Maximum export packing standards are required when shipping containers port-to- port. In many countries there are packaging consultants. These consultants design specialised containers for all types of goods. They also advise on the elimination of loss and damage and devise methods for the safe transit of goods. In India, we have the Indian Institute of Packaging at Mumbai to assist a shipper on packing. Inland Container Depots (ICD) were established mainly through the initiative of Indian Railways at Delhi, Bengaluru, Coimbatore, Guntur, Ludhiana, Amingaon and other places ( 246 places) for serving the shippers and consignees located in different parts of India’s hinterland. d) Advantages and disadvantages A container is essentially a ship's hold on a reduced scale. The cargo stored in a container is subject to the same stress and strain and damage hazards while at sea that effect cargoes shipped in break-bulk method. Hence the same principles and techniques which govern export packing and cargo storage of break - bulk shipments, are equally valid when preparing cargo for container shipment and when stuffing it in a container. Sufficient knowledge of container usage has now been accumulated to realise that disadvantages always arrive with advantages. Containerisation may enhance the risk of damage as well as reduce such risks. Advantages i. Quick and efficient carriage of cargo (especially when door-to-door) by custom- built container vessels between custom - built container terminals. ii. Multiple handling is minimised or eliminated, particularly for FCLs and door - to -door containers. 56 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 iii. Theft and pilferage risks are reduced though not entirely eliminated. iv. Economies in individual packing contents. This does not apply to present Indian conditions where containerisation is primarily a method of unitisation from port-to-port, resulting in break-bulk handling after the container arrives at the destination port. Superior export packing, therefore, becomes indispensable even for containerised cargo. v. Protection against external contract damage. vi. Protection against sea and / or fresh water damage. vii. A container is a better protection against fire risk as well as against water damage during fire extinguishing operations. viii. Reduced risk of misdelivery. Disadvantages i. A carrier may decide to stow a container on deck. Containers shipped to the deck are exposed to the elements and to the risk of being washed overboard in severe weather. In practice, the difficulty is compounded when frequently the shipper is not aware that deck stowage has taken place. ii. There are problems of container maintenance, when inadequate inspections for condition may leave damaged containers in service, thus negating the potential benefits and exposing the contents to water damage in particular. iii. The concentration of values in a single container load of consumer goods has become a convenient target for thieves and hijackers. iv. Inadequate or defective ventilation may increase the risk of sweat damage and condensation. v. Container shipments may encourage a lower standard of individual packing of contents and this could spell disaster particularly when LCL containerload is involved and transit is not door-to-door. vi. Incomplete filling of a container or defective stuffing may allow excessive free movement of contents in transit resulting in self-damage. vii. A large variation in weight, where containers are stowed on deck, can effect stability and unevenly weighted containers can cause problems for the driver of a truck during inland transit. IC-67 MARINE INSURANCE 57 CHAPTER 3 UNDERWRITING FACTORS viii. Bulky goods cannot be reasonably carried economically in containers. Difficulties in stuffing arise where one, or perhaps two, large items occupy a container leaving much space in the container unused. ix. Contamination risks, if incompatible cargo is stowed in the same container. Also there is the risk of contamination by residual material or odours from previous cargo. x. Transhipment problems, when a container is damaged in transit and another container is not available. xi. Damage to the contents of a container remains concealed until arrival at final destination. So, no remedial measures can be taken during the voyage or transit. xii. Most container vessels do not have on-board lifting equipment, and loading and discharge are done by gantry or jib crane equipment located on the dockside. In the event of a major casualty at sea, say, a stranding or collision, cargo can only be moved by specially equipped salvage vessels or floating cranes, if at all they become available in time soon after the mishap. Also, following a serious casualty, structural distortions can make the removal of containers impossible. xiii. Conclusion: In the early days of containerisation, shippers expected underwriters hopefully to reduce rates for containerised goods on the grounds that such carriage must reduce claims. Regrettably, this expectation did not materialise. xiv. Apart from losses, often heavy, recovery prospects from the carriers became difficult. In such a situation the underwriter prefers to charge possibly higher rates and leave the experience to show whether a reduction in rate is justified. xv. In any event, containerisation will continue to expand, but it will never be all pervasive and it is unlikely that it will come up totally to the ideal and the perfections expected of it in theory. 5. Conditions of insurance Rating should take into consideration each material element of the risk involved, whether it be the characteristics of a given vessel carrying the goods or the voyage or the nature of cargo and packing. These characteristics vary considerably from risk to risk. 58 IC-67 MARINE INSURANCE UNDERWRITING FACTORS CHAPTER 3 Example A proposal to ship heavy machinery of a cement plant on deck rather than under deck will highlight the risk of washing overboard in heavy weather. Under ICC (B) cover, this is a material factor which must be included in rating because the risk is covered, but under ICC(C)-where "Washing Overboard" is not specifically covered and may be considered as covered only if reasonably attributable to one of the several major named perils - this factor will be of far less significance. Likewise, in a consignment of consumer electronic articles, the risk of theft and pilferage will be a major factor to include in the rating under ICC (A), whereas it would be an immaterial factor under the narrower coverage of either ICC (B) or (C). However, there is one common area of risk (applicable under all the three sets of clauses), namely, the major perils to which cargo is exposed during transit, which pose a uniform threat to all interests on board. These are the perils and casualties covered under ICC (C)-namely, fire, explosion, vessel/craft being stranded, grounded, sunk or capsized, overturning or derailment of land conveyance, etc. - which importantly lie at the base of all Institute Cargo Clauses. In view of the catastrophic nature of these basic risks, an insurer will seek to set aside an appropriate proportion of each premium as a reserve for "Catastrophe Funds" in order to mitigate the severity of the strain on his underwriting account. It follows, therefore, that every premium should necessarily include in the rate calculation, a provision for ICC (C) risks, i.e. for the basic cover. Each progressive stage of rating for the widening scope of cover should then supplement that base, so as to produce finally a composite rate which adequately takes into consideration all the material components of the risks. An interesting feature of ICC (B) and (C) covers is the "impersonal" nature of the risks covered, i.e., risks which are closely related to the process of transit itself and which are largely beyond the control of the assured. At the ICC (A), i.e., "All risks" stage, "personal" influences get highlighted as several extraneous perils are also covered over and above the basic and major perils of ICC (B) and (C). This personal influence relates to the shipper, the manner in which his goods are prepared and packed for shipment, his choice of carriers, etc. These are additional considerations which an underwriter has to take into account when rating a risk under ICC (A) and these considerations contribute materially to the ultimate underwriting results. IC-67 MARINE INSURANCE 59 CHAPTER 3 UNDERWRITING FACTORS 6. The other underwriting considerations It is important to keep regular statistics- clientwise, according to the nature of the commodity, type of loss, etc. Statistics provide a specific and logical base to underwriting and assist in monitoring the trend of an account and in exercising control over our underwriting policy. Renewal of open covers and open policies should be based on what the past experience reveals. Watch commitments (sum insured) for specific voyages/transits so that acceptances do not exceed the underwriting limits. Where any risk is beyond the prescribed underwriting limits, acceptance should not be confirmed unless a reference is first made to the appropriate Department at the H.O. and their approval obtained. Rates for wars and strikes risks and other extras should be quoted separately from Marine premium rates. Last, but not the least, is the Moral Hazard and Morale Hazard factors, which should not be ignored. Moral Hazard relates to honesty and integrity of the insured whereas Morale hazard relates to the attitude of the insured. An honest insured, if negligent or careless towards losses, is equally bad compared to a person with bad moral hazard. What is the attitude of the assured towards buying his insurance? No insurer minds his client trying to find the cheapest cover, but some clients feel that they have failed if they do not have sufficient claims to cover the cost of that insurance. The purpose of insurance is to provide protection, which is what insurers are selling, and the assured, having bought that protection, should accept the cost and not feel that his insurance manager is failing him in his job, if, at the end of the year, there have been no claims or if the claims do not exceed the premium. The aim of the underwriter is to achieve a reasonable margin of profit in relation to the net premium, taking into account affordable loss minimisation measures and prospects of recovery from carriers and bailees. Sometimes competition amongst the insurers to grab more business will determine the rates and terms ignoring all other aspects. This is acceptable in short run when the market is opening up or developing but in long run it is not good for all- insurers as well as insureds. Insurance operates on the system of sharing of the losses. If the insurers do not have sufficient funds (if they charge very low premiums) how can they pay the claims? 60 IC-67 MARINE INSURANCE INCOTERMS 2000/2010 CHAPTER 3 Test Yourself 2 Which type of cargo vessels loads at an advertised berth and runs to an advertised schedule between her home port and her overseas terminus, calling en route at a varying number of ports according to a particular service in which she is engaged? I. Cargo liners II. Tramps III. Chartered vessel IV. FOC Vessels C. INCOTERMS 2000/2010 In Marine cargo insurance insurable interest is required at the time of loss. At the time of taking the insurance insured may or may not have the same. If there is no insurable interest at the time of loss, the contract is void and insurers cannot pay any claim to the insured. In international transactions, buyers and sellers enter into contracts of sale and purchase. These contracts may be in any form but if they are not in the form which is acceptable to both the parties, there may be many disputes and the main purpose of doing the business may be lost. As such, generally the standard forms of contracts which are entered into are in the form of International Commerce Terms (INCOTERMS). The latest version is 2000, which is in force from 1st January 2000. The contract is written only in three letters and obligations of buyer and seller along with price formation is decided by the term selected. The interpretation of obligations is as per the brochure of International Chambers of Commerce, France who have drafted the terms. However, in case of any dispute the matter is to be decided by the court and not by ICC. There were 13 INCOTERMS in the ‘2000’ set while there are only 11 in the ‘2010’ set. 2010 INCOTERMS are effective from 1st January 2011. While interpreting INCOTERMS it is important to understand the passing of the risk, which is connected with the movement of the goods and affects the Insurable Interest aspect. Whosoever, either buyer or seller, is having the risk in the goods is said to have insurable interest in the goods. Any loss taking place during the duration of risk of the insured is recoverable under the marine policy subject to the terms of cover. Strictly speaking the marine policy covers insured’s insurable interest in the goods in transit and not the goods. IC-67 MARINE INSURANCE 61 CHAPTER 3 INCOTERMS 2000/2010 Under a ‘warehouse to warehouse’ policy goods are insured for full duration of transit but the cover is available to insured only during the duration when the goods are at his risk. a) Ex-Works (EXW), Ex Warehouse, Ex-Factory etc. In accordance with this term, the seller’s responsibility is to prepare the goods as per specification and pack the same and keep ready for delivery at his warehouse gate. Buyer has to arrange for taking delivery from seller’s warehouse and on his taking delivery the seller’s risk is over. During transit from seller’s warehouse to buyer’s warehouse, the goods are at buyer’s risk. Moreover the buyer has to bear all the expenses of transportation etc., in carriage of goods up to his warehouse. The sale price quoted by seller includes his cost, packing charges and profit, so generally it is low. In this terms transit insurance is to be taken by the buyer from seller’s warehouse to buyer’s warehouse. If seller takes marine insurance policy it is of no use and any claim in transit will not be payable thereunder. b) Free on board (FOB) Here, the responsibility of the seller is from his warehouse till loading of the cargo in the ship till the goods pass ship’s rails. If the goods are lost or damaged before becoming FOB the seller has to replace the goods. It is advisable to take insurance up to FOB point (FOB Insurance policy) but it is not compulsory for him to insure after goods cross ship’s rails (outside imaginary border of the ship). c) Cost and freight (CFR) For insurance purpose this is like FOB as the seller’s responsibility is only up to the ship’s rails, the difference being in the price. CFR value consists of sea freight also as the seller undertakes to arrange for services of shipment up to destination port also. d) Cost, insurance & freight (CIF) Contrary to normal belief the seller’s responsibility is only up to FOB point and thereafter it is buyer’s responsibility. However, under these terms, seller is supposed to give one more service and that is to arrange for insurance. If contract is silent the policy is required to be taken up to final port for ICC (C). only. In case of loss or damage to goods when they are rejected by the buyer or on his refusal to pay, insurable interest reverts to the seller who can claim in his own name under the policy. 62 IC-67 MARINE INSURANCE INCOTERMS 2000/2010 CHAPTER 3 e) Delivered to duty paid (DDP) DDP is reverse of Ex Works. For seller it is door delivery contract, his responsibility does note ceases till he delivers the good to buyer’s nominated place in buyer’s country. Seller is advised to take insurance on warehouse to warehouse basis but it is not compulsory. Buyer will not take insurance as he does not have any insurable interest during transit of goods. f) Delivered at place (DAP) This is the new term which has been introduced in the ‘2010’ set of 11 terms. The seller is responsible for delivery of the goods, ready for unloading from the arriving conveyance, at the nominated place. There is no obligation on seller to arrange for any insurance but it is advisable to insure goods upto the agreed place as in the event of any loss he has to replace the goods, if they are lost/damaged before delivery. If delivery place is short of buyer’s place, the buyer may arrange for insurance for balance of transit to safeguard his interest. g) Delivery at Terminal (DAT) The seller is responsible to deliver goods (including unloading) at the agreed port or terminal. After delivery, the risk is transferred to the buyer. The insurance is not compulsory but both may insure their own part of responsibility to cover the risks. Test Yourself 3 In cost and freight policy, the seller’s responsibility is up to_________________. I. The warehouse gate II. The FOB point III. The Ship’s rails IV. The delivery of goods to buyer’s nominated place in buyer’s country. IC-67 MARINE INSURANCE 63 CHAPTER 3 DOCUMENTS D. Documents 1. Marine cargo declaration form There is no standard proposal form for marine cargo insurance, except in case of: 9 Special Declaration Policy 9 Annual Policy 9 Duty and Increased Value insurances etc. The risk is assessed by the underwriter on the basis of the information given on the Declaration Form, which is to be completed and signed by the proposer. The Declaration form contains following details: a) Name and address of the proposer and his business. If bankers have an interest in the transaction, as would be the case in documentary credits, the name and address of the concerned bank is also given. b) Description of the goods to be insured, number of packages, nature of packing, marks and numbers. c) Value for insurance, that is, the Sum Insured which is normally the CIF value plus 10%. Duty Increased Value components are indicated separately. d) Name of the carrying vessel or mode of other conveyances, like rail, road or air, as applicable. e) Description of voyage or transit and transhipments, if any. f) B/L No., R.R. or L.R. No., Air Consignment Note No., etc. as applicable. g) Type of insurance cover required. h) Signature of proposer and date of declaration. Details in the Declaration Form enable the insurer to assess and rate the risk offered for insurance. When a proposal results in a policy, the details in the Declaration Form are incorporated in the policy document. 64 IC-67 MARINE INSURANCE DOCUMENTS CHAPTER 3 2. Marine cover note Definition Marine cover note is a temporary document evidencing that insurance has been granted pending the issue of the policy. There is a contract of marine insurance from the time Cover Note is issued, but from a legal point of view, the Cover Note is only an advice and as such it cannot be used as a legally valid document in a lawsuit against the insurer until the contract is expressed in a Policy. In practice, it would be unthinkable for a reputable insurer to repudiate a Cover Note issued by him on the ground that no policy has been issued. a) The Cover Note is the basis of the contract and Courts have the power to order the rectification of the policy to express the intentions of the parties to the contract as evidenced by the terms of the Cover Note. b) Cover Notes are not stamped and are initially issued when full details for the issue of a policy are not immediately forthcoming. Later, when full required details become available, a policy is issued, and, in the meantime, insurers consider themselves bound, in honour, by the contract evidenced by the Cover Note. c) A Cover Note being temporary in nature, should always specify its validity period and the relative Policy Number allotted to it. As far as possible, such period should not exceed 30 days, and the underwriter should endeavour, by follow-up activity, to obtain from the insured the missing details soonest possible, so that every Cover Note does result in a policy document. d) The details contained in the Cover Note are taken from the Declaration Form. The Cover Note, in addition, mentions also the terms, conditions and warranties under which the risk is accepted and the premium. The Cover Note also contains two special conditions :- i. The insured is required to submit to the insurer full details of shipment as soon as the shipment is effected, so that a policy can be issued. ii. In the event of loss/damage prior to declaration and/or shipment, the basis of valuation shall be the prime cost of the goods plus charges actually incurred and for which the insured is liable. For example, if freight is not incurred, there is no liability for freight. IC-67 MARINE INSURANCE 65 CHAPTER 3 DOCUMENTS 3. Standard form if marine policy Definition The Policy (also called MAR Policy Form) is a simple document containing the name of the insurer and a clause binding the insurer to the performance of the contract. All information identifying the risk concerned and the amount insured are contained in the Schedule of the policy. As per Section 24 of the MIA, 1963, a contract of marine insurance shall not be admitted in evidence unless it is embodied in a Marine Policy. The policy may be executed and issued either at the time the contract is concluded or afterwards. The policy document must be stamped as required by the Indian Stamp Act, 1899. Stamp duty, which is shown on the policy, is recoverable from the assured. The policy is issued covering individual shipments from named starting point to named final destination point. The same policy form is used to cover all shipments, whether by sea, rail, road, air or post. Appropriate clauses affixed to the policy and the scope of the cover should be designated correctly in the appropriate space in the policy. The cargo policy may be assigned by a blank endorsement: “For and on behalf of ….” Followed by the name of the assured and his signature The Schedule of the policy form shows following details: a) Policy number, place and date of issue. b) Name of the assured with address. When a transaction is financed by a bank, the name of the bank will also appear here, as the bank will have insurable interest in the adventure. c) Name of the carrying vessel. If the name is not immediately available, the “Vessel” will be made subject to Institute Classification Clause. d) Description of the voyage/transit, e.g. from Pune to Manchester via Mumbai and Liverpool. e) The subject-matter insured and description of packing, e.g.100 cases said to contain cotton textiles. 66 IC-67 MARINE INSURANCE DOCUMENTS CHAPTER 3 f) Type of insurance cover granted and any special conditions and warranties. g) Description of marks and numbers as also B/L No., Air Consignment Note No., Railway or Lorry Receipt No., Post Parcel Receipt No., as applicable. The purpose is to identify the insured goods. h) The Sum Insured. A marine cargo policy is a valued policy and the value fixed by the policy is generally conclusive and binding on the parties to the insurance contract, in the absence of fraud. The components of the Sum Insured may well be CIF value, plus 10% customs duty plus increased value. All these components should be indicated in the policy to facilitate correct adjustment of claims. Duty and Increased Value insurances are not valued policies. i) The premium. War and Strikes premium is shown separately from marine premium. j) Name and address of the Surveyor and Claims Settling Office at destination point, so that the claim could be surveyed, serviced, processed and ultimately settled on behalf of the insurer concerned. 4. Endorsements Definition An endorsement is a memorandum attached to the policy document which records alterations in the contract. Example Alterations may relate to: 9 Change in the sum insured, 9 Change in the description of the voyage, 9 Addition or deletion of risks covered, etc. Needless to stress that the alterations can be effected only before the end of the transit and before insurance ceases under a policy. IC-67 MARINE INSURANCE 67 CHAPTER 3 USE OF INFORMATION TECHNOLOGY IN MARINE UNDERWRITING Test Yourself 4 ______________ is a temporary document evidencing that insurance has been granted pending the issue of the policy. I. Declaration form II. Marine cover note III. Standard form of marine policy IV. Endorsement E. Use of Information Technology in marine underwriting Information technology helps the insurance companies and marine underwriters in many ways: 1. Proposal form is made available on insurers’ website which client can download and forward to insurers or complete online and attach documents (like invoice, hull registration or valuation certificate etc.) by scanning them. 2. Insurers can scrutinize the proposal and communicate their decision by e mail to the client. While scrutinizing a proposal, additional information like ship’s particulars, whereabouts of the vessel etc., can also be obtained on line. 3. The insurers can thereby record and store details of the proposal and the premium rate charged. 4. The past data of the client can be accessed from company’s data bank or industry data bank (if maintained). The information about the commodity’s past claim experience can also be found out. 5. Client can pay premium on line through credit card or instruct the insurer to deduct premium from cash deposit maintained with them. 6. Insurer can issue policy and send its soft copy to the insured which can be either downloaded by them or printed at insured’s end. 7. Client’s particulars and other information can be fed to data bank by the insurer to update the data. 8. E-marine: If insured is given facility of e-marine, the insured can generate certificate through his computer against open policy/ open cover. The e- marine will maintain the premium balance and other data. In this system there is no need of sending proposal to insurer. The system follows the principle of pre underwriting and up to a limit and for pre-set parameters the certificates can be generated by the insured himself. 68 IC-67 MARINE INSURANCE USE OF INFORMATION TECHNOLOGY IN MARINE UNDERWRITING CHAPTER 3 Test Yourself 5 In _______________, the system follows the principle of pre-underwriting - up to a limit and for preset parameters, the certificates can be generated by the insured himself. I. E-data II. E-marine III. E-underwriting IV. E-certificate IC-67 MARINE INSURANCE 69 CHAPTER 3 SUMMARY Summary a) 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. b) As per the Indian practice, the premium is to be paid in advance before the commencement of transit. It can be in the form of cash, cheque, Bank Guarantee, Cash deposit or through credit card. c) The factors that are considered by an underwriter to decide about acceptance of risk are: The vessel, the voyage or transit, the nature of cargo and its packing and the conditions and terms of insurance. d) In international transactions, the buyer and seller enter into a contract of sale and purchase. Generally, the standard form of contract entered into is in accordance with the International Commerce Terms (INCOTERMS). e) Marine cover note is a temporary document evidencing that insurance has been granted pending the issue of the policy. f) 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. g) An endorsement is a memorandum attached to the policy document which records alterations in the contract. h) If the insured is given the facility of e-marine, the insured can generate a certificate through his computer against the open policy/ open cover. 70 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 3 Answers to TestYourself Answer 1 The correct answer is I. As per the Insurance Act 1938, for marine insurance taken in India, the proposer needs to submit premium in advance before commencement of transit. Answer 2 The correct option is I. 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 varying number of ports according to a particular service in which she is engaged. Answer 3 The correct answer is III. In cost and freight policy, the seller’s responsibility is up to the ships’ rail. Answer 4 The correct answer is II. Marine cover note is a temporary document evidencing that insurance has been granted pending the issue of the policy. Answer 5 The correct answer is II. In e-marine, the system follows the principle of pre-underwriting; up to a limit and for preset parameters, the certificates can be generated by the insured himself. IC-67 MARINE INSURANCE 71 CHAPTER 3 PRACTICE QUESTIONS AND ANSWERS Self-Examination Questions Question 1 Cargo that is normally not packed and carried either full load in vessel or even containerised without any packing is called ___________ I. Bulk cargo II. Container transport III. Lift van IV. Unitising the packages Question 2 Which of the following goods can be packed in bales? I. Oil II. Chemicals III. Fruits IV. Cotton Question 3 What is the restricted age limit for tankers, up to which underwriters will charge regular premium for providing them with insurance cover? I. 5 years II. 10 years III. 15 years IV. 25 years Question 4 In which of the following contracts will the seller be responsible for the delivery of the goods to a nominated place? I. DAP II. CIF III. CFR IV. FOB 72 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 3 Question 5 The __________is a document containing the name of the insurer and a clause binding the insurer to the performance of the contract. I. Declaration form II. Marine cover note III. Endorsement IV. MAR policy form Answers to Self-Examination Questions Answer 1 The correct option is I. Cargo which is normally not packed and carried either full load in vessel or even containerised without any packing is called bulk cargo. Answer 2 The correct option is IV. Goods which cannot be damaged by impact or by being knocked around are usually packed in bales. Hence, cotton is the correct answer. Answer 3 The correct option is II. Restricted age limit for tankers is 10 years, beyond which underwriters will charge additional premium for acceptance of risk. Answer 4 The correct option is I. In DAP contracts, the seller is responsible for the delivery of the goods to the nominated place. IC-67 MARINE INSURANCE 73 CHAPTER 3 PRACTICE QUESTIONS AND ANSWERS Answer 5 The correct option is IV. The MAR policy form is a document containing the name of the insurer and a clause binding the insurer to the performance of the contract. 74 IC-67 MARINE INSURANCE  CHAPTER 4 CARGO INSURANCE COVERAGES – PART 1 Chapter Introduction In this chapter, you will learn about the rules of interpretation applicable to marine insurance policies. Then you will learn about the Institute Cargo Clauses (ICC) drafted by the International Underwriting Association (IUA) of London. Finally, this chapter will discuss some miscellaneous Institute Clauses as well as incidental clauses and warranties. Learning Outcomes A. Rules of interpretation B. Institute Cargo Clauses (A), (B) and (C) C. Miscellaneous Institute Clauses D. Incidental clauses and warranties IC-67 MARINE INSURANCE 75 CHAPTER 4 RULES OF INTERPRETATION A. Rules of interpretation 1. Contra Proferentem Rule The drafting of policies requires great care because while the principal rule of construction is that the intention of the parties to the contract must prevail, that intention itself must be gathered from the policy document itself and the clauses, endorsements, warranties, etc. attached to it and forming part of the contract. If there is any ambiguity, then the policy is construed against the insurers and in favour of the assured, because the insurers are the drafters of the contract. This rule is called Contra Proferentem Rule. The general rule is that the phraseology must be construed in the plain, ordinary and popular sense, unless the context indicates some special meaning. While the rules of grammar must be observed in interpretation, what is important is that the intention of the parties to the contract must predominate. Technical terms must strictly be given their technical meaning, unless there is an indication to the contrary. 2. Additional rules of interpretation / construction The following additional rules of interpretation / construction are used to construe the terms of a policy document: a) Printed wording is over-ridden by typewritten wording or wording impressed by an inked rubber stamp. E.g. inclusion of an Add-on Cover. b) Handwriting takes precedence over typed or impressed wording. E.g. Correction of spelling mistake, addition of BL No. etc. c) Clauses printed or typed in the margin of the policy are to be given more importance than the wording within the body of the policy. E.g. Institute Cargo Clauses 1982. However in the 2009 Clauses, this is done away with. Now there are no clauses in the margin. d) Clauses attached or gummed to the policy override both marginal clauses and the clauses in the body of the policy. E.g. Add-on Cover of Strikes, Riots and Civil Commotions (SRCC) e) An express term in a policy overrides an implied term, except when there is an inconsistency by so doing. E.g. relaxation of warranty of seaworthiness. f) It is usual to consider that clauses in italics override the ordinary printed wording where they are inconsistent. 76 IC-67 MARINE INSURANCE RULES OF INTERPRETATION CHAPTER 4 g) A “Clause Paramount” can only be removed from the policy by physical deletion; otherwise it overrides all other wording, notwithstanding the rules of interpretation. h) There are no grounds for believing that clauses printed in red override those printed in black. Printing in red colour is aimed at emphasis only. E.g. Important Notice. i) Whenever in marine insurance there is an agreement to “hold covered”, mutual obligation is implied. The assured is obliged to give notice to insurers promptly on receipt of advices and the insurer then is bound to give insurance protection at a “reasonable” rate of premium, and, when clearly indicated in the policy, subject to revised terms and conditions, if required. Example Change of Voyage Clause: If it is not subject to Held Covered provision, cover will cease on ship changing the voyage. Subject to notice, premium etc., cover continues because of the “Held Covered” provision. 3. Stamp duty for cargo policies A marine cargo policy should be stamped as per the Indian Stamp Act, 1899 and amendments thereto. Stamp duty is recoverable from the assured. The scale of stamp duties in force for voyage policies is as under: a) For sea voyage and transit by country craft, 10 paise for every Rs. 3,000/- or part thereof, subject to the following: i. When the rate charged is 1/8th percent (i.e. 0.125%) or less, the stamp duty is only 05 paise regardless of the sum insured. Total premium charged under the policy, inclusive of premium for war and strikes risks, is taken into account when determining whether the rate is 1/8th percent or less. ii. When Inland Transit (Rail of Road) is covered in conjunction with a sea voyage, the policy must be stamped according to the scale for sea voyages. b) For other than sea voyage (i.e. transit purely by rail, road or air): i. 25 paise when the sum insured is Rs. 5,000 or less. ii. 50 paise when the sum insured is over Rs. 5,000. c) For postal sendings: i. Scale as per (a) above, if involving sea voyage ii. Scale as per (b) above for transits by rail, road or air IC-67 MARINE INSURANCE 77 CHAPTER 4 INSTITUTE CARGO CLAUSES (A), (B) AND (C) Test Yourself 1 Which of the following statements is correct with regard to policies printed in red colour? I. Clauses printed in red override those printed in black II. Clauses printed in red override those printed in any other colour III. Clauses printed in red donot override those printed in black; printing in red colour is aimed at emphasis only IV. None of the above B. Institute Cargo Clauses (A), (B) and (C) 1. International and Domestic Clauses a) International Clauses In world market, since 1779, standard terms and conditions are used for marine insurance, beginning with the SG form of policy. Presently three types of standard terms and conditions are in vogue. They are: i. Institute Clauses drafted by International Underwriting Association of London (IUA) ii. American Clauses drafted by the American Underwriters; and iii. German Clauses drafted by German Underwriters. As the American Clauses follow American jurisprudence and the American system of law; and the German Clauses are in German language; both are not used very widely. The most popularly used clauses are the Institute Clauses. The “Institute” Clauses are drafted by the Technical and Clauses Committee of the Institute of London Underwriters (ILU) and they are adopted for use the world over by all insurers. The last set of clauses was introduced in 1982 (in India 1983) and the same was revised in the year 2009. Doubtless, this uniformity is desirable when we are dealing with international trade involving different modes of transit. Incidentally, the Institute of London Underwriters (ILU) merged with the London International Insurance and Reinsurance Market Association (LIRMA) in 1998 to form the International Underwriting Association (IUA). b) Domestic Clauses On the other hand, where pure inland transit is concerned i.e. transit within the country by rail or road (not in conjunction with overseas voyage), Inland Transit Risks Clauses drafted by the Tariff Advisory Committee (TAC) are used. Recently these clauses have been revised by the General Insurance Council, a body represented by all the general insurers in India. The salient features of the principal Cargo Clauses will now be examined. 78 IC-67 MARINE INSURANCE INSTITUTE CARGO CLAUSES (A), (B) AND (C) CHAPTER 4 2. Institute Cargo Clauses (A), (B) and (C) – 1982 and 2009 versions In each of the sets of clauses the provisions are grouped under the main headings of: 9 Risks Covered, 9 Exclusions, 9 Duration, 9 Claims, 9 Benefit of insurance, 9 Minimising losses, 9 Avoidance of delay and 9 Law and Practice ICC (C) provides a basic standard cargo cover against major casualties; whilst ICC (B) provides a wider intermediate form of cover and ICC (A) provides the broadest cover on an “all risks with exceptions” basis. In other words ICC (C) and ICC (B) are named perils clauses i.e. with the perils being listed therein. However, ICC (A) are on “All Risks with exceptions” basis, with no list of perils but covering all accidental losses in transit other than those caused by exclusions. 3. Risks Covered by ICC (C) The insurance under Institute Cargo Clauses (C) covers: a) i. Loss or damage to the subject-matter insured reasonably attributable to: 9 Fire or explosion 9 Vessel or craft being stranded, grounded, sunk or capsized 9 Overturning or derailment of land conveyance 9 Collision or contact of vessel, craft or conveyance with any external object other than water 9 Discharge of cargo at a port of distress ii. Loss / damage to the subject-matter insured caused by: 9 General average sacrifice 9 Jettison b) General Average and Salvage Charges incurred to avoid loss from any cause(s) except those excluded c) Liability under “Both to Blame Collision” Clause of the contract of affreightment. IC-67 MARINE INSURANCE 79 CHAPTER 4 INSTITUTE CARGO CLAUSES (A), (B) AND (C) 4. Risks covered by ICC (B) The insurance under Institute Cargo Clauses (B) covers the aforesaid risks of ICC (C) i.e. as mentioned under (a), (b) and (c) and additionally, also covers the following risks: i. Loss / damage reasonably attributable to earthquake, volcanic eruption or lightning; ii. Loss / damage caused by: 9 Washing overboard 9 Entry of sea, lake or river water into the vessel, craft, hold, conveyance, container, lift van or place of storage 9 Total loss of any package lost overboard or dropped whilst loading onto, or unloading from vessel or craft. 5. Risks covered by ICC (A) The insurance covers all risks of loss or damage to the subject-matter insured except those specifically excluded. The expression “all risks” is not to be construed as embracing loss or damage which is inevitable. The loss or damage, in order to be recoverable, must have occurred fortuitously. 6. Exclusions a) General Exclusions (applicable to ICC (A), (B) and (C)) MIA contains statutory exclusions. They will be applicable if the policy is silent. However any of these can be covered by specific mention in the policy. The Institute Clauses more or less retain these exclusions. In no case shall this insurance cover: i. Loss, damage or expense attributable to willful misconduct of the assured ii. Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear of the subject-matter insured iii. Loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured (“packing” shall be deemed to include stowage in a container or lift van but only when such stowage is carried out prior to attachment of this insurance or by the assured or their servants). In the 2009 version, this has been changed to exclude only when the packing etc. is done by the insured. If it is done by outside agency there is no exclusion. 80 IC-67 MARINE INSURANCE INSTITUTE CARGO CLAUSES (A), (B) AND (C) CHAPTER 4 iv. Loss, damage or expense caused by inherent vice or nature of the subject-matter insured v. Loss, damage or expense proximately caused by delay, even though the delay be caused by a risk insured against (except expenses payable in respect of GA or Salvage Charges) vi. Loss, damage or expense arising from insolvency or financial default of the owners, managers, charterers or operators of the vessel. vii. Loss, damage or expense arising from the use of any weapon of war employing like reaction or radioactive force or matter. b) Unseaworthiness and Unfitness Exclusion i. In no case shall this insurance cover loss, damage or expense arising from: 9 Unseaworthiness of vessel or craft 9 Unfitness of vessel, craft, conveyance, container or lift van for the safe carriage of the subject-matter insured. ( In 2009 Clauses the word lift van has been removed) Where the assured or their servants are privy to such un seaworthiness or unfitness at the time the subject-matter insured is loaded therein. ii. The underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject- matter insured to destination, unless the assured or their servants are privy to such un seaworthiness or unfitness. In 2009 Clauses this relaxation is given to the assignee of the policy who is not aware about the un seaworthiness etc. In other words, in 1982 Clauses if seller is aware about un sea worthiness and the buyer is not, the seller’s knowledge is transferred to buyer on assignment even though he is innocent. In 2009 Clauses innocent buyer gets protection. c) War Exclusion The insurance shall not cover loss, damage or expense caused by: i. War, civil war, revolution, insurrection or civil strife arising therefrom or any hostile act by or against a belligerent power; ii. Capture, seizure, arrest, restraint or detainment and the consequences thereof or any attempt thereat; iii. Derelict mines, torpedoes, bombs or other derelict weapons of war. IC-67 MARINE INSURANCE 81 CHAPTER 4 INSTITUTE CARGO CLAUSES (A), (B) AND (C) d) Strikes Exclusion This insurance shall not cover loss, damage or expense: i. caused by strikers, locked-out workmen or persons taking part in labour disturbances, riots or civil commotions; ii. resulting from strikes, lock-outs, labour disturbances, riots or civil commotions; iii. caused by any terrorist or any person acting from a political motive Notes: i. Deliberate damage or destruction by the wrongful act of any person(s): This exclusion appears in ICC (B) and ICC (C). If the assured desires this risk to be covered, the underwriter may do so, at his discretion, after close examination of the bonafides, reputation and financial standing of the carrier. This exclusion under ICC (B) and ICC (C) can then be deleted by inserting the “Malicious Damage Clause” whereby the cover will also include the additional risks of “Malicious Acts”, “Vandalism” and “Sabotage” subject to additional premium. ii. This exclusion does not apply to ICC (A) because the risks would be included within the term “all risks”. iii. Risk of piracy: Whilst pirates are generally included in the risks covered by ICC (A), a pirate who is a rioter and who attacks the ship from the shore, is covered by the Strikes Clauses but not by ICC (A). There is no cover at all in ICC (B) and ICC (C) for piracy. iv. Other clauses are identical in all the 3 sets of Institute Cargo Clauses. 7. Duration of cover Transit clause Transit Clause of ICC (A), ICC (B) and ICC (C) defines the duration of the risk as attaching from the time the goods leave the warehouse or other place of storage at the place named in the policy to commence transit. The risk then continues during the ordinary course of transit to terminate on delivery a) To consignee’s or other final warehouse or place of storage at the destination named in the policy; or b) To any other warehouse or place of storage (either at or prior to reaching the policy destination) which the assured may use for: 9 Storage other than in the ordinary course of transit; 9 Allocation or distribution; or 82 IC-67 MARINE INSURANCE INSTITUTE CARGO CLAUSES (A), (B) AND (C) CHAPTER 4 c) Upon expiry of 60 days of completion of discharge over-side of the insured goods from the oversea vessel at the final port of discharge, whichever shall first occur If, before the expiry of the policy, but after discharge at destination, it is decided to forward the goods to another destination, the policy shall not extend beyond the commencement of transit to the other destination. The insurance remains in force during: i. Delay beyond the control of the assured ii. Any deviation iii. Forced discharge iv. Reshipment v. Transhipment, or vi. Any variation of adventure arising from the exercise of liberty granted to the shipowner or charterers under the contract of affreighment. In 1982 Clauses there is ambiguity about the exact time of commencement and ending of transit which is now removed in 2009 Clauses which clearly state that the transit commences on shifting of cargo in the place of storage for commencement of transit and ends on unloading of cargo at final destination subject to above clauses and time limits. 8. Termination of Contract of Carriage Clause If, owing to circumstances beyond the control of the assured, either the contract of carriage is terminated at a port or place other than the policy destination, or the transit is otherwise terminated before delivery of the goods, then the insurance terminates automatically, unless the assured takes positive action to continue the insurance by giving prompt notice to the insurers and requesting continuation of the cover. Provided notice is given promptly and an additional premium, if required, is paid, the insurer will agree to continue the insurance, either: a) until the goods are sold and delivered at such port of place or, unless otherwise specially agreed, until the expiry of 60 days after arrival of the goods at such port of place, whichever shall first occur, OR b) if the goods are forwarded within the said period of 60 days (or any extension agreed) to the policy destination or to any other destination, until terminated in accordance with the provisions of the transit clause above. It should be noted that unless the reason for resorting to the intermediate port or place where the contract of carriage is terminated, is the operation of an insured risk, the insurer would not be liable for forwarding charges. IC-67 MARINE INSURANCE 83 CHAPTER 4 MISCELLANEOUS INSTITUTE CLAUSES 9. Change of Voyage Where, after attachment of the insurance, the destination is changed by the assured, the insurance is held covered at a premium and on conditions to be arranged, subject to prompt notice being given to underwriters. This is part of Held Covered provisions. Test Yourself 2 Ordinary wear and tear of the subject matter insured is covered under which of the following set of clauses ? I. Insurance under Institute Cargo Clauses (A) II. Insurance under Institute Cargo Clauses (B) III. Insurance under Institute Cargo Clauses (C) IV. Excluded under all the above 3 clause sets C. Miscellaneous Institute Clauses 1. Institute War Clauses (Cargo) a) Risks / Contingencies covered by the Cargo War Clauses i. The insurance covers loss or damage to the subject-matter insured caused by: 9 War, civil war, revolution, rebellion, insurrection or civil strife arising therefrom, or any hostile act by or against a belligerent power; 9 Capture, seizure, arrest, restraint or detainment arising from risks covered under point mentioned above i.e. warlike only; 9 Derelict (meaning abandoned or drifting) mines, torpedoes, bombs or other derelict weapons of war ii. General Average and Salvage Charges incurred to avoid a loss from a risk covered. iii. Under Duty of the Assured Clause, charges reasonably and properly incurred to avert or minimise an insured loss and to preserve and pursue recovery rights, are also covered. b) Exclusions Note: Most of the exclusions expressed in these war Clauses, as in the other sets of clauses that follow, are the same as in Institute Cargo Clauses (A), (B) and (C). However, there is an additional exclusion which reads as follows: 84 IC-67 MARINE INSURANCE MISCELLANEOUS INSTITUTE CLAUSES CHAPTER 4 The insurance shall not cover any claim based upon loss of or frustration of the voyage or adventure. Example When goods are prevented from reaching their destination by reason of operation of war risks, a constructive total loss may occur, although the goods are not lost or damaged in any way; this frustration of the adventure or voyage is excluded from the scope of the cover. Also, no Forwarding Charges would be payable. c) Duration of the War Risks Cover The period of the cover afforded by the Institute War Clauses (Cargo) is considerably more restricted than the period of the cover provided by the Institute Cargo Clauses (A), (B) and (C). It was agreed many years ago that underwriters would restrict cover for war risks to the period of transit when the goods are waterborne and not on land. This resulted in the Waterborne Clause, which, in effect is embodied in the War Clauses as the Transit Clause. War cover, therefore, does not attach until the goods are loaded on the overseas vessel, and it ceases when the goods are discharged from the oversea vessel. If the vessel arrives at destination, but unloading is delayed, war cover is limited upto 15 days, counting from the mid-night of the day of arrival. If the goods are transhipped, cover continues during the transhipment but subject to a limit of 15 days counting from the date of arrival of the vessel at the transhipment port. If the 15 days limit expires before the goods are loaded onto the on-carrying vessel, the war cover is suspended until the goods are loaded onto the on- carrying vessel, when the cover re-attaches. This extension during transhipment applies only whilst the goods remain within the port area of the transhipment port. Thus a relaxation of the Waterborne Clause is allowed whilst the goods are being transhipped at an intermediate port, but this is subject to restrictions both in location and time, as already explained. Whilst full cover does not apply when the goods are in craft in transit to or from the overseas vessel, cover is extended during such transit to embrace the risks of mines and derelict torpedoes only, whether these be floating or submerged. Such cover is limited to a period of 60 days after discharge, unless the underwriters have agreed specially to extend the time limit. IC-67 MARINE INSURANCE 85 CHAPTER 4 MISCELLANEOUS INSTITUTE CLAUSES It may happen that the contract of carriage may be terminated and goods are discharged short of destination. In these circumstances, the goods may be sold locally or forwarded by some other means to the destination named in the policy or to some alternative destination. If the goods are disposed of locally, the port of discharge is treated as the destination port and the war cover ceases on discharge or 15 days after arrival of the ship, as the case may be. If the goods are forwarded to the original destination by another ship, war cover will continue and/or is suspended and re-attaches as for transshipment. The cover ceases on discharge at the destination or alternative destination or 15 days after arrival of the ship, it the goods are not discharged. 2. Institute Strikes Clauses (Cargo) a) Coverage The insurance covers: i. Loss or damage to the subject-matter insured caused by: 9 Strikers, locked-out workmen or persons taking part in labour disturbances, riots and civil commotions; 9 any terrorist or any person acting from political motive ii. General Average and Salvage Charges incurred to avoid loss from a risk covered iii. Under Duty of the Assured Clause, charges reasonably and properly incurred to avert or minimise an insured loss and to preserve and pursue recovery rights. b) Exclusions These are the same as under ICC (A), (B) and (C) Clauses, with two additional exclusions: i. Loss, damage or expense arising from absence, shortage or withholding of labour resulting from strike, lock-out, labour disturbance, riot or civil commotion; ii. Any claim based upon loss of or frustration of the voyage or adventure (“forwarding charges” are therefore not covered); 86 IC-67 MARINE INSURANCE MISCELLANEOUS INSTITUTE CLAUSES CHAPTER 4 c) Duration of the Cover The Transit Clause in the Cargo Strikes Clauses is the same as the Transit Clause in ICC (A), (B) and (C). Cover is “Warehouse to Warehouse” with the customary 60 days’ time limit after discharge, as discussed earlier. The “Termination of Contract of Carriage” and “Change of Voyage” Clauses are also reproduced in the Strikes Clauses. So they require no further comment. 3. Termination of Transit (Terrorism) Clause After the terrorists attacked the World Trade Center (WTC) in 2001, the underwriters over the world, have introduced this clause as part of transit clause to the extension of Strikes Clauses. Under Strikes Clauses, terrorism is covered during transit and storage incidental to transit. But under this clause terrorism is withdrawn during storage places and is covered only during transits. This clause is issued as Clause Paramount to it does not clash with Strikes Clause and the Contra Proferentem Rule does not apply. 4. Institute Cargo Clauses (AIR) These exclude sendings by post. a) Risks / Contingencies covered i. Cover is against “all risks” as in ICC (A) except that General Average and Salvage Charges and Both to Blame Collision Clauses are omitted, as these are not concerned with air transit. ii. Under Duty of the Assured Clause, charges reasonably and properly incurred to avert or minimise an insured loss and preserve and exercise recovery rights are also covered. Forwarding charges would be covered under this item, being sue and labour in nature. Note: The exclusions are the same as under ICC (A). b) Duration of cover Cover attaches as in ICC (A) and continues during the ordinary course of transit to terminate when the goods are delivered to the final warehouse. The same provisions apply to allocation or distribution of the goods prior to delivery, the only difference being in the time limit. The Air Cargo Clauses apply a 30 days’ time limit after unloading from the aircraft as against, 60 days after completion of discharge of insured goods from against the oversea vessel as in ICC (A). IC-67 MARINE INSURANCE 87 CHAPTER 4 MISCELLANEOUS INSTITUTE CLAUSES The “Change of Transit” Clause in the Air Cargo Clauses is effectively the same as the “Change of Voyage” Clause in ICC (A). The remaining clauses in the air cargo clauses are identical to their counterparts in the ICC (A), so require no further comment. In 2009 set this is also revised to clarify commencement and ending of transits as done in ICCs stated above. 5. Institute War Clauses (Air Cargo) These exclude sendings by post The cover provided by the Air Cargo War Clauses is almost identical to the cover in the Marine Cargo War Clauses, although the format is slightly different and the equivalent to the Waterborne Clause relates to circumstances of air transit as against carriage by water. a) Risks Covered Clause 1 of the Air Cargo War Clauses is identical to Clause 1 of the Marine Cargo War Clauses, even to the extent that it includes the unlikely risk of “mines and torpedoes”. General Average and Salvage Charges are omitted, as they will not apply to air transit. The exclusions are the same as under Marine Cargo War Clauses. b) Duration of Cover The period of the cover is effectively the same as in the War Clauses used for marine transit, but reworded to apply to carriage by air rather than by sea. The insurance attaches as the insured cargo is loaded on the aircraft for the commencement of the air transit. Cover continues during the ordinary course of transit and terminates as the goods are discharged from the aircraft at the destination airport, but subject to a time limit of 15 days from midnight of the day of arrival of the aircraft at such place. Variations of the transit are covered as in the Marine Cargo War Clauses, but in so far as they relate to air transit, subject to prompt notice to underwriters and payment of additional premium, if required. 88 IC-67 MARINE INSURANCE MISCELLANEOUS INSTITUTE CLAUSES CHAPTER 4 6. Institute Strikes Clauses (Air Cargo) a) Risks Covered These are the same as in the Marine Cargo Strikes Clauses, that is, loss or damage to the subject-matter insured caused by: i. Strikes, locked-out workmen or persons taking part in labour disturbances, riots and civil commotions; ii. Any terrorist or any person acting from a political motive Note: The exclusions are the same as in Marine Cargo Strike Clauses b) Duration The duration embraces the “warehouse to warehouse” concept as in the Institute Cargo Clauses. The only difference between the duration of the cover in the Marine Strikes Clauses and Air Strikes Clauses lies in the time limit after discharge at the destination airport. In marine transit, the time limit is 60 days, but in the air transit it is 30 days. Apart from the variations referred to above, the remaining clauses in the Air Strikes Clauses are identical to their counterparts in the Strikes Clauses used for marine transit. Note: If Termination of Transit (Terrorism) Clause is attached, terrorism is withdrawn in storage places. 7. Registered Mail and Postal Sendings by Air a) Risks Covered This insurance covers; (notwithstanding anything to the contrary in the Institute Cargo Clauses attached hereto) i. All risks of physical loss or damage to the subject-matter insured except as provided in the exclusions; or ii. Total Loss only: Insured against actual total loss of the parcel except as provided in the exclusions (To delete what is not applicable above.) b) Duration The insurance attaches from the time the goods hereby insured are deposited / registered at the Post Office at the place named in the policy and continues until the goods are delivered to the addressee or his representative at the destination named in the policy or until expiry of 15 days counting from the midnight of the day on which the notice of arrival of the goods is given to the addressee by the Post Office at the destination, whichever shall first occur. IC-67 MARINE INSURANCE 89 CHAPTER 4 MISCELLANEOUS INSTITUTE CLAUSES c) Claims In case of loss, claim in the form of an affidavit must be immediately filed against the postal authorities and a copy thereof and of the reply thereto must accompany any claim presented under the policy. Immediate notice of claim must be given to the insurance company. i. P.O. Receipt will be required as proof in case of claim for non-delivery. ii. No claim for loss or damage will be admitted if proved to be due to incorrect and/or ambiguous and/or insufficient description of the address on the package, nor for loss or damage resulting from any disposal by the postal authorities by reason of the interest having become undeliverable to, or having been unaccepted by, the addressee. iii. No claim will be admitted for loss of contents from packages delivered with seals intact. d) Warranty It is warranted that the goods insured are also insured with the postal authorities for the maximum amount as per the prevailing postal regulations. Test Yourself 3 What is the duration of the cover of an insurance policy provided under the Institute War Clauses (Air Cargo)? I. Cover continues during the ordinary course of air transit and terminates as the goods are discharged from the aircraft at the destination airport II. Cover continues during the ordinary course of air transit and terminates as the goods are discharged from the aircraft at the destination airport, but subject to a time limit of 3 days from midnight of the day of arrival of the aircraft at such place III. Cover continues during the ordinary course of air transit and terminates as the goods are discharged from the aircraft at the destination airport, but subject to a time limit of 7 days from midnight of the day of arrival of the aircraft at such place IV. Cover continues during the ordinary course of air transit and terminates as the goods are discharged from the aircraft at the destination airport, but subject to a time limit of 15 days from midnight of the day of arrival of the aircraft at such place 90 IC-67 MARINE INSURANCE INCIDENTAL CLAUSES AND WARRANTIES CHAPTER 4 D. Incidental clauses and warranties Following incidental Clauses and Warranties are commonly seen in cargo insurance contracts. 1. Comprehensive Clause This clause includes the risks of theft, pilferage and non-delivery, fresh water and rain water damage, hooks, oils, mud, acid and other extraneous substances or heating and sweating and damage by other cargo. This clause, containing specific extraneous risks, is used to extend the cover afforded by Institute Cargo Clauses (B), when required. 2. Institute Replacement Clause In the event of loss / damage to any part(s) of an insured machine caused by a peril covered by the policy, the sum recoverable shall not exceed cost of replacement are repair of such part(s) plus charges for forwarding and refitting, if incurred, but excluding duty unless the full duty is included in the amount insured, in which case loss, if any, sustained by payment of additional duty shall also be recoverable. Provided always that in no case shall the liability of insurers exceed the insured value of complete machine The loss of small but integral part of a machine may cause the machine to be useless for the purpose for which it was intended and may give rise to a claim for total loss. Therefore when machinery is to be insured, underwriters include this “Replacement Clause” which limits there liability, in case of loss / damage to the cost of repairing or replacing the damaged part, including forwarding and refitting charges. Import duty may have been paid on the machine. A similar duty will be imposed on any spare part imported. Unless the full duty was included in the sum insured on the machine, the underwriter is not liable for duty of the spare part. It is therefore advisable for the assured to specify the amount of duty in the value shown on the policy. In any event, the liability of the underwriter should not exceed the insured value of the machine. 3. Second hand Replacement Clause Institute Replacement Clause is to be applied for new machinery whereas second hand replacement clause is to be applied to second hand machinery. Under the clause full cost of new parts, in case of damage are payable, on new for old basis. The depreciation is not applied on period basis but if the sum insured is less than new replacement value it is applied in the proportion of insured value / sum insured X loss. Care is to be taken to put appropriate condition to pay for depreciated value in case of Total Loss/ Construction Total Loss, otherwise the insured will receive more than indemnity. IC-67 MARINE INSURANCE 91 CHAPTER 4 INCIDENTAL CLAUSES AND WARRANTIES 4. Pair and Set Clause “Company’s liability shall not exceed the value of any particular part or parts which may be lost or damaged, without reference to any special value which such article(s) may have as part(s) of such pair or set, nor more than a proportionate part of the insured value of the pair or set.” Where the value of a pair or set, for example, objects of art or jewellery, etc. depends on their continuance as a pair or set, the value is drastically diminished if one of the pair or the set is damaged or destroyed. In such an event, the claimant would prefer to abandon the remaining item(s) to the underwriter and claim total loss. Therefore, by using the “Pair and Set Clause” the underwriter limits his liability to the insured value of the lost or damaged part. 5. Cutting Clause “Warranted that the damaged portion should be cut off and the balance utilised.” This is used in policies covering pipes or similar items of length. The object is to limit underwriter’s liability to the proportionate insured value of the damaged part cut off and the cost of cutting. 6. Label Clause Canned or bottled goods are identified to the consumer by the attached paper level. Exposure of cans / bottles to moisture may cause discolouration of the labels or it might cause the labels to come off. However, such damage to the labels does not impair the quality of the contents of the can or bottle, which is the subject-matter of insurance. It does, however, make it difficult if not impossible to identify such goods, if the label is the only means of identification. In present times, most canners stamp a code number on the can so that whatever happens to the label, the embossed code number will identify the contents of the can, and the consignee can attach fresh label to replace those lost / damaged and his only loss will be the cost of the new labels and re- labelling labour charges, if any. Of course, the cause of the damage to the labels must be an insured peril. The most commonly used form of Label Clause limits the insurer’s liability to the cost of re-labelling and re-packing the affected goods. Another form of Label Clause states: “Excluding damage to the labels on tinned or bottled goods unless the goods themselves are damaged at the same time.” 92 IC-67 MARINE INSURANCE INCIDENTAL CLAUSES AND WARRANTIES CHAPTER 4 7. Brand and Trade Marks Clause The aim of this clause is to prevent inferior quality or damaged goods being sold as salvage in the market to the detriment of the insured’s reputation and to avoid potential product liability claims. If the damaged goods are to be sold as salvage the brand or trade mark is to be removed from the goods alternatively the insured may offer some reasonable salvage value and destroy the damaged goods. 8. Concealed Damage Clause Many times after delivery, long time is taken to open the goods for inspection/ use and that time the loss is noticed. The clause allows certain number of days say 45 for delayed opening and notifying the loss to insurers. 9. Debris Removal Clause The policy is extended to cover cost of removal of debris. Sometimes the limit of expenses is put as percentage of sum insured. 10. Picking Clause Cotton, wool and similar fibrous commodities are shipped in bales. Country damage to which these bales may be exposed is usually restricted to the outer surface of these bales and is often superficial. By picking out the damaged fibres, the remainder of the bale may be considered as sound. The sound part of the bales affected may be re-baled and consolidated to make whole bales. The “Picking Clause” provides that the insurer will pay the cost of picking and the cost of re-baling both sound and damaged material, because the damaged material does have salvage value. Provided the loss is caused by an insured peril, the insurer is liable for the insured value of the pickings less the salvage proceeds of the picked material. 11. Garbling Clause “Garble” means to sift, to cleanse, to separate sound from the whole, which may have got mixed up with some other material. Generally, this term is applied to insurance of tobacco, but it could be applied to most cargoes, like coffee beans or grain. The “Garbling Clause” provides that the insurer will pay the cost of garbling, as such an exercise prevents further damage and reduces the claim. 12. Institute Classification Clause 1/1/2001 The clause is to be applied where the name of the cargo carrying vessel is not known- namely in cover notes and open covers/policies. The clause lays down certain standards taking into consideration which, the insurers charge normal premium and in case of any non compliance of any of the terms of the clause, IC-67 MARINE INSURANCE 93 CHAPTER 4 INCIDENTAL CLAUSES AND WARRANTIES the insurers have the right to charge additional premium on “Held Covered” basis. The text of the clause is copied below to enable the reader to clearly understand its various provisions pertaining to construction, classification, type wise age requirement etc. Qualifying Vessels 1. This insurance and the marine transit rates as agreed in the policy or open cover apply only to cargoes and/or interests carried by mechanically self-propelled vessels of steel construction classed with a Classification Society which is: 1.1 a Member or Associate Member of the International Association of Classification Societies (IACS*), or 1.2 a National Flag Society as defined in Clause 4 below, but only where the vessel is engaged exclusively in the coastal trading of that nation (including trading on an inter-island route within an archipelago of which that nation forms part). Cargoes and/or interests carried by vessels not classed as above must be notified promptly to underwriters for rates and conditions to be agreed. Should a loss occur prior to such agreement being obtained cover may be provided but only if cover would have been available at a reasonable commercial market rate on reasonable commercial market terms. Age Limitation 2. Cargoes and/or interests carried by Qualifying Vessels (as defined above) which exceed the following age limits will be insured on the policy or open cover conditions subject to an additional premium to be agreed. Bulk or combination carriers over 10 years of age; or other vessels over 15 years of age unless they : 2.1 have been used for the carriage of general cargo on an established and regular pattern of trading between a range of specified ports, and do not exceed 25 years of age, or 2.2 were constructed as containerships, vehicle carriers or double-skin open-hatch gantry crane vessels (OHGCs) and have been continuously used as such on an established and regular pattern of trading between a range of specified ports, and do not exceed 30 years of age. 94 IC-67 MARINE INSURANCE INCIDENTAL CLAUSES AND WARRANTIES CHAPTER 4 Craft Clause 3. The requirements of this Clause do not apply to any craft used to load or unload the vessel within the port area. National Flag Society 4. A National Flag Society is a Classification Society which is domiciled in the same country as the owner of the vessel in question which must also operate under the flag of that country. Prompt Notice 5. Where this insurance requires the assured to give prompt notice to the Underwriters, the right to cover is dependent upon compliance with that obligation. (For a current list of IACS Members and Associate Members please refer to the IACS website at www.iacs.org.uk ) 13. Cargo ISM Endorsement i. This endorsement is about safety aspect to be compulsorily complied with, among others, by cargo ships of 500 Gross Tonne (GT) or more (with effect from 1st July 2002) ii. The vessel should comply with ISM Code and have the papers thereof on board the vessel iii. If consignor and / or his agents are aware about non-compliance then loss, damage, expenses not covered iv. The exclusion does not apply to buyer of cargo in good faith if he was not aware of non-compliance. 14. Loading / Unloading Clause Institute Cargo Clauses do not cover loading / unloading on to the truck or railway wagon. The clause which is taken as “Add On”, covers goods during loading and unloading. Cover under this clause attached at the time the goods are lifted from the ground or loading dock immediately adjacent to the conveyance, continues during the ordinary course of transit as per Institute Clauses and terminates once the goods have been lifted from the conveyance and placed on the ground immediately adjacent hereto. IC-67 MARINE INSURANCE 95 CHAPTER 4 INCIDENTAL CLAUSES AND WARRANTIES 15. Other miscellaneous clauses and warranties a) “Excluding shortage from sound bags / packages unless such shortage is cause by an insured peril.” This clause is generally used with bagged cargo in order to eliminate ordinary or inevitable loss. b) “Warranted excluding the blowing of tins.” This clause is generally used with insurance of tinned foodstuffs c) “Warranted excluding natural loss in weight and / or trade shortage.” d) “Warranted excluding the risks of rejection by Government authorities.” e) “Warranted excluding the risks of pitting and oxidisation.” This clause is used when corrugated / galvanised iron sheets or tin plates are insured, if the intention is to exclude rust damage. f) “Warranted shipped under deck and under a clean bill of lading.” If the intention is to limit the scope of ICC (A), following warranties, as applicable, may be used: i. “Warranted excluding breakage, chipping, denting and scratching.” ii. “Warranted excluding mould and mildew.” iii. “Warranted excluding sweating, heating and fresh water damage.” Test Yourself 4 The Cargo ISM Endorsement is about the safety aspect to be compulsorily complied with by, among others, cargo ships of _________ or more. I. 250 Gross Tonne (GT) II. 500 Gross Tonne (GT) III. 750 Gross Tonne (GT) IV. 1000 Gross Tonne (GT) 96 IC-67 MARINE INSURANCE SUMMARY CHAPTER 4 Summary a) In insurance policies, the general rule is that the phraseology must be construed in the plain, ordinary and popular sense, unless the context indicates some special meaning. b) In a policy document, handwriting takes precedence over typed or impressed wording. c) There are no grounds for believing that clauses printed in red override those printed in black. d) A marine cargo policy should be stamped as per the Indian Stamp Act, 1899 and amendments thereto. e) 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. f) In case of pure inland transit i.e. transit within the country by rail or road (not in conjunction with overseas voyage), Inland Transit Risks Clauses drafted by Tariff Advisory Committee (TAC) are used. g) ICC (C) provides a basic standard cargo cover against major casualties. h) ICC (B) provides a wider intermediate form of cover. i) ICC (A) provides the broadest cover on an “all risks with exceptions” basis. j) Transit Clause of ICC (A), ICC (B) and ICC (C) defines the duration of the risk as attaching from the time the goods leave the warehouse or other place of storage at the place named in the policy to commence transit. k) Institute War Clauses (Cargo) insurance covers loss or damage to the subject-matter insured caused by War, civil war, revolution, rebellion, insurrection or civil strife arising therefrom, or any hostile act by or against a belligerent power. l) 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 disturbances, riots and civil commotions. m) Under the Termination of Transit (Terrorism) Clause terrorism is covered only during transits. n) Institute Cargo Clauses (AIR) Cover is against “all risks” as in ICC (A) except that General Average and Salvage Charges and Both to Blame Collision Clauses are omitted, as these are not concerned with air transit. IC-67 MARINE INSURANCE 97 CHAPTER 4 SUMMARY o) Institute Strikes Clauses (Air Cargo) covers loss or damage to the subject- matter insured caused by strikes, locked-out workmen or persons taking part in labour disturbances, riots and civil commotions. p) Registered Mail and Postal Sending by Air: This insurance covers all risks of physical loss or damage to the subject-matter insured except as provided in the exclusions. q) 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. r) The aim of the Brand & Trade Marks Clause is to prevent inferior quality or damaged goods being sold as salvage in the market to the detriment of the insured’s reputation and to avoid potential product liability claims. s) By using the Debris Removal Clause, the policy is extended to cover cost of removal of debris. Sometimes, the limit of expenses is put as percentage of sum insured. t) The “Garbling Clause” provides that the insurer will pay the cost of garbling; as such an exercise will prevent further damage and reduce the claim. 98 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 4 Answers to Test Yourself Answer 1 The correct option is III. Clauses printed in red do not override those printed in black. Printing in red colour is aimed at emphasis only. Answer 2 The correct option is IV. Ordinary wear and tear of the subject-matter insured is neither covered under ICC (A) nor ICC (B) nor ICC (C). It is a general exclusion. Answer 3 The correct option is II. The Cargo ISM Endorsement is about the safety aspect to be compulsorily complied with by, among others, cargo ships of 500 Gross Tonne (GT) or more. Answer 4 The correct option is IV. Cover continues during the ordinary course of air transit and terminates as the goods are discharged from the aircraft at the destination airport, but subject to a time limit of 15 days from midnight of the day of arrival of the aircraft at such place. Self-Examination Questions Question 1 How much will be the stamp duty payable for a cargo policy for voyage other than sea voyage and where the sum insured is Rs. 2,000? I. 25 paise II. 50 paise III. 75 paise IV. Re. 1 IC-67 MARINE INSURANCE 99 CHAPTER 4 PRACTICE QUESTIONS AND ANSWERS Question 2 A marine cargo policy is stamped as per the provisions of which Act? I. The Marine Insurance Act, 1963 II. The Indian Stamp Act,1899 III. The Insurance Act,1938 IV. The IRDA Act, 1999 Question 3 Which of the below policy can also be called an ‘All Risks’ policy based on the maximum number of risks covered as compared to other policies? I. Insurance under Institute Cargo Clauses (A) II. Insurance under Institute Cargo Clauses (B) III. Insurance under Institute Cargo Clauses (C) IV. Insurance under Institute Cargo Clauses (D) Question 4 For pure inland transit within the country by rail or road (not in conjunction with overseas voyage), Inland Transit Risks Clauses drafted by _____ are used. I. Indian Insurance Association (IIA) II. Insurance Regulatory and Development Authority (IRDA) III. Tariff Advisory Committee (TAC) IV. General Insurance Council (GIC) Answers to Self-Examination Questions Answer 1 The correct option is I. The stamp duty payable for a cargo policy for voyage other than sea voyage, and where the sum insured is Rs. 2,000, will be 25 paise. Answer 2 The correct option is II. A marine cargo policy is stamped as per the provisions of the Indian Stamp Act, 1899. 100 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 4 Answer 3 The correct option is I. Insurance under Institute Cargo Clauses (A) can also be called an ‘All Risks’ policy as it covers all risks of loss or damage to the subject-matter insured except those specifically excluded. Answer 4 The correct option is III. For pure inland transit within the country by rail or road (not in conjunction with overseas voyage), Inland Transit Risks Clauses drafted by the Tariff Advisory Committee (TAC) are used. IC-67 MARINE INSURANCE 101 CHAPTER 4 PRACTICE QUESTIONS AND ANSWERS 102 IC-67 MARINE INSURANCE  CHAPTER 5 CARGO INSURANCE COVERAGES - PART 2 Chapter Introduction In this chapter, you will learn about institute trade clauses and some other important clauses such as insurance cover for cargo carried in sailing vessels, insurance of containers etc. Learning Outcomes A. Institute trade clauses B. Other important clauses IC-67 MARINE INSURANCE 103 CHAPTER 5 INSTITUTE TRADE CLAUSES Look at this Scenario In October 2011, Container Ship ‘Rena’, carrying 1368 containers on board, as well as 1700 tonnes of heavy fuel oil and 200 tonnes of marine diesel oil in its tanks, ran aground off the New Zealand coast and ultimately broke in two in the sea itself . That led to a serious oil spill which caused severe environmental pollution to the coastal areas of New Zealand. Also, 74 containers sank into the sea, 649 were washed ashore and 43 containers are still missing. Rena’s P&I risks were insured by the Swedish Club, a member of the International Group of P&I clubs. P&I cover for liability claims included, loss due to damage to cargo, loss due to environmental damage, and cost incurred for removal of wreck. A massive salvage operation was conducted for disposing the debris/scrap. This salvage operation was carried out after an agreement between the shipping company and salvage contractors under Lloyd’s Open Form standard contract including SCOPIC Clause (Special Compensation P&I Club Clause), which guarantees compensation to the salvage contractors, if they succeed in preventing or minimizing damage to environment. The ship’s liability cover was capped with the pollution liability being limited to about $1.4 billion. Damage to the vessel was covered under hull and machinery policy. Apart from basic cover, the policy also included cover for increased value for the protection of the shipowner against discrepancy between the insured value and market value of the vessel! The policy also covered the costs incurred for rescue events. Cargo was insured with different cargo insurers. A. Institute trade clauses 1. Institute trade clauses Whilst the Institute Cargo Clauses, along with other ancillary clauses, fulfil the insurance needs of various types of cargoes of a general nature, there are a number of commodities which require special clauses to provide for the particular hazards and the usages of the trade concerned. Standard Clauses have been drafted and agreed between the Institute of London Underwriters (ILU) - now (IUA)* - and the concerned Trade Associations, in order to bring about uniformity of practice in international trading operations for selected trades and commodities. (* Please refer Chapter 4 – 1(a) International Clauses.) Such mutually agreed insurance conditions become immediately acceptable for automatic inclusion in the trading contracts between buyers and sellers of these commodities the world over. 104 IC-67 MARINE INSURANCE INSTITUTE TRADE CLAUSES CHAPTER 5 Following are some of the important Trade Clauses currently in use, with their salient features highlighted: 2. Institute Commodity Trades Clauses (A), (B) and (C) These are agreed with the Federation of Commodity Associations for the insurance of shipments of: 9 Cocoa, 9 Coffee, 9 Cotton, 9 Fats and Oils not in bulk, 9 Hides, 9 Skins and Leather, 9 Metals, 9 Oil Seeds and Sugar (raw and refined), and 9 Tea. Much of the cover in these Clauses is the same as provided in the standard ICC (A), (B) and (C), respectively. The only differences lie in the following: a) The Commodity Trades Clauses exclude loss caused by insolvency, etc. only where the assured are aware at the time of loading that insolvency or financial default of the shipowner, etc. could prevent the normal prosecution of the voyage. b) In the treatment of unseaworthiness/unfitness, etc., this exclusion in the Commodity Trades Clauses applies only where the assured or their servants actually load the container, lift van, etc. or where it is loaded prior to the attachment of the cover. c) The other difference is that the innocent assignee (for example, a bank, advancing payment for the goods under documentary credit) or buyer is protected against this exclusion. 3. Institute coal clauses These Clauses cover named perils similar to ICC (B) with an important difference- namely; the Clauses extend the Fire and Explosion cover to include heating even when caused by spontaneous combustion and inherent vice or nature of the subject matter insured. IC-67 MARINE INSURANCE 105 CHAPTER 5 INSTITUTE TRADE CLAUSES 4. Institute jute clauses The cover is similar to Institute Commodity Trades Clauses (B) with the following main differences: a) Earthquake, volcanic eruption and lightning are not covered. b) The cover attaches only when jute is loaded on board the vessel. i. The time limit of 60 days after discharge at destination port is reduced to 30 days in Jute clauses. ii. In the Termination of Contract of Carriage Clause, the time limit is reduced from 60 days to 15 day only. 5. Institute bulk oil clauses Cargo of bulk oil can be insured either under ICC (C), (B) or (A) or it can be also insured under Institute Bulk Oil Clauses (IBOC). a) Cover The cover provided under IBOC is identical to ICC (B) with additional cover for the following: i. Leakage from connecting pipelines in loading transhipment or discharge ii. Loss and contamination of oil by negligence of master officers or crew in pumping cargo, ballast or fuel iii. Contamination of the subject-matter insured resulting from stress of weather. b) Exclusions Exclusions are identical to ICC but the exclusion about packing (4.3) does not appear here as the bulk cargo is not supposed to be packed; so exclusion is irrelevant. c) Duration Duration is from Tank to Tank and not warehouse to warehouse. The time limit after vessel reaching final port is 30 days for the validity of the cover. 106 IC-67 MARINE INSURANCE INSTITUTE TRADE CLAUSES CHAPTER 5 d) Claims adjustment clause The clause contains a unique adjustment clause for leakage and shortage claims. i. The shortage to be decided by comparing the quantity of oil leaving tank at the load port and the quantity of oil received at final port. The claim is to be calculated proportionately of these quantities. ii. If policy contains Excess, it will take care of ordinary losses; otherwise deduction for ordinary losses to be made. There are other Trade Clauses in use, for example, Institute Natural Rubber Clause, Institute Timber Trade Federation Clauses, various Institute Frozen Food Clauses, etc. It is not intended to cover all Trade Clauses in this course. Suffice it to say that once these clauses are adopted at Trade Association level, the relevant Trade Trade Clauses become an obligatory item in the trade contract. Others, who are not members of such Trade Associations, remain free to opt for any insurance conditions that may be mutually acceptable. 6. Package policy for coffee: TAC withdrew the Package Policies for Coffee, Cardamom and Rubber Estates effective 1st April 2004. However, insurers do still write these businesses as per their internal guidelines and so, the readers will get a fair idea of the subject by going through the erstwhile provisions, as summarized below. Four types of policies are available as follows: Table 5.1 1 Type I Full Package Policy (with 120 days’ storage cover) Policies commencing from the time of plucking and continuing 2 Type II during transit up to the Curing House(s) – with 60 days’ storage cover. Policies commencing from Curing House(s) and continuing up to 3 Type III FOB point (with 60 days’ storage cover). Policies commencing from Curing House(s) and continuing till 4 Type IV delivery to buyers any where in India (with 60 days’ storage cover). IC-67 MARINE INSURANCE 107 CHAPTER 5 INSTITUTE TRADE CLAUSES a) Term of policies ALL policies issued shall be Annual Policies only based on estimated turnover and value of the crop. Premium adjustment will be based on actual turnover and actual realised value for the crop. b) Risk covered The risks covered and exclusions are as per Inland Transit (Rail or Road) – Clause ‘A’. S.R.C.C. cover may be offered at prevailing Tariff rates. c) Basis of settlement The basis of settlement of claims shall be the market value of coffee insured less unincurred expenses as per formula prescribed in the Tariff. d) Duration of cover The risk commences from the time of plucking in the Estate, whilst stored in the Estate and continues whilst in transit to the Pulping House(s), whilst undergoing pulping and drying, whilst in transit to curing House(s) and during processing therein and whilst in transit to insured’s godown including storage therein. The risk also continues during further transit until delivered to buyers anywhere in India. e) Period of storage The total period of storage not to exceed 120 days in case of Type I Policy and 60 days in case of other Policies. 7. Package policy for cardamom estates Three covers are available for cardamom insurance: Table 5.2 1 Type I Full package Policy with 120 days’ storage cover. Policies commencing from picking to insured’s godown/ auction 2 Type II centres anywhere in India with 90 days’ storage cover. 3 Type III Transit Policies 108 IC-67 MARINE INSURANCE INSTITUTE TRADE CLAUSES CHAPTER 5 a) Term of policies All policies shall be annual policies only, based on estimated turnover and value of the Crop. Premium adjustments based on actual turnover and actual realised value of crop. b) Risk covered Risks covered and exclusions shall be as per Inland Transit (Rail or Road) – Clause ‘A’. SRCC cover at Tariff rates. c) Basis of valuation Basis of valuation shall be previous year’s average price, if available, or previous year’s average of maximum and minimum prices plus 10%, subject to final adjustment on the basis of actual realised value on the same. d) Warranties Insurance shall be subject to following special warranties: i. Warranted that claims arising out of loss/damage caused by moth, mildew, vermin, insects and natural driage shall not be paid. ii. Warranted that the cardamoms shall be in customary packings. e) Basis of settlement of claims In the event of loss before manufacture, 4 kgs. of raw cardamom shall be considered equal to 1 kg. of dried cardamom. 8. Package policy for rubber estates Three types of covers for insurance of Rubber Estates are: Table 5.3 1 Type I Full Package Policy (with 120 days’ storage cover) Full Package Policy up to FOB point (with 120 days’ storage 2 Type II cover. Transit Policies of Centrifuged Latex to be issued to 3 Type III traders/buyers. IC-67 MARINE INSURANCE 109 CHAPTER 5 INSTITUTE TRADE CLAUSES a) Term of policies All policies shall be annual policies only based on the estimated turnover and value of the crop. Premium adjustment is based on actual turnover and actual realised value for the crop. b) Risk covered and exclusions Risks covered and exclusions as per Inland Transit (Rail/Road)- Clause ‘A’ with duration of cover amended as under: c) Duration of cover The insurance attaches from the time Latex is collected from collection centres/ estates named in the policy, whilst in transit to factory/smoke houses located at specified places, whilst during course of processing in the smoke-house or factory including storage therein and continues whilst in transit to insured’s godown including storage therein and further continues until delivered to buyers anywhere in India. The total period of storage at various places not to exceed 120 days. In case of Type II Policy, the insurance further continues during transit until placed on board the oversea vessel. d) Basis of Valuation Invoice value plus 10% e) Declarations of Value Total value shall be declared within 15 days of close of a month. Such declarations shall be in the form of certified statements and final premium shall be adjusted either upward or downward on receipt of final declaration. f) Basis of settlement of claims Market value less unincurred expenses 9. Tea crop insurance TAC withdrew this policy effective 1st April 2004. However, insurers do still write these businesses as per their internal guidelines and so, the readers will get a fair idea of the subject by going through the erstwhile provisions, as summarized below. Tea Crop Insurance Policies shall be issued gardenwise only. In case of factories which do not have any gardens, policies may be issued factorywise. 110 IC-67 MARINE INSURANCE INSTITUTE TRADE CLAUSES CHAPTER 5 a) Terms of cover The insurance is against all risks of physical loss or damage to tea subject to specified exclusions. b) Risk covered Inland Transits are subject to Inland Transit (Rail or Road) – Clause ‘A’ and Inland Transit (Inland Vessels) Clause, as applicable. Overseas shipments are subject to ICC (A) or Institute Cargo Clauses (Air), as applicable. c) Exclusions: Special exclusions include the following: i. Loss/damage caused by absence or shortage, withholding or withdrawal of labour. ii. Loss/damage attributable to any fault/neglect/defect in the manufacturing process and/or packing materials used. iii. Loss due to interruption in manufacture consequent upon stoppage of power supply or breakdown of machinery, howsoever arising. iv. Any trade loss including chest allowance as agreed by the tea brokers. v. Any loss/damage pertaining to previous season’s manufactured tea held back at garden. vi. Any foreign acquired taint damage to teas arising from any established and proven external cause, except such taint damage as caused by an insured peril. vii. No cover shall be granted for loss/damage to standing crops or Tea bushes or plants arising out of whatsoever peril other than Hail. d) Duration of cover The insurance attaches from the time the Green Leaf is plucked at the insured’s estate, whilst being processed at factory and further continues whilst in transit by approved conveyances and/or vessel until sold at auction centers in India or overseas or until delivered to agents or buyers anywhere in India or overseas, as applicable or until placed on board the oversea vessel if the sale is FOB – all these subject to specified time limits at destination points. IC-67 MARINE INSURANCE 111 CHAPTER 5 INSTITUTE TRADE CLAUSES Insurance provided by the policy can be extended, at additional premium, to include cover against the risk of any foreign acquired taint damage to the tea arising from any established and proven external cause, but liability can attach in respect of such tea which may have been affected in any way or deteriorated in quality due to absorption of moisture, atmospheric conditions or climatic changes. e) Tea Crop Hail Insurance Cover against the risk of hail damage to standing Tea Crops may be granted only as an extension of the Tea Crop Policy at additional premium. Such cover may be granted limiting the liability of the Company either to 50% or 25% of agreed insured value of the crop so damaged, calculated on the basis of 4 Kgs. of Green Leaf being equivalent to 1 Kg. of made Tea. Amongst other matters, the Tariff lays down in detail the basis of valuation, limits and conditions of settlement of claims and Bonus/Malus (loading) Scale based on the loss ratio relevant for the particular renewal. Crop Insurance Department of GIC issues a Comprehensive Policy for Standing Tea Crop against All Risks, including Hail damage cover. In view of this, if at the time of any claim, there be such insurance, the Company will be liable to pay or contribute only such amount as is payable after deducting the compensation, if any, payable under the said Policy. Test Yourself 1 For which of the following, insurance cover for “Transit Policies of Centrifuged Latex” to be issued to traders/buyers is offered? I. Rubber estates II. Tea crop III. Cardamom IV. Coffee 112 IC-67 MARINE INSURANCE OTHER IMPORTANT CLAUSES CHAPTER 5 B. Other important clauses 1. Insurance cover for cargo carried in sailing vessels a) Sailing vessels Sailing Vessels include country crafts which are mechanised or non- mechanised. A mechanished Sailing Vessel is registered with government authorities as having auxiliary engines. There is a fair amount of traffic by Sailing Vessels which ply between Indian ports and ports in the Arabian Gulf, Middle East and along the East African Coast. A variety of goods are carried by them, such as: 9 Onions, 9 Potatoes, 9 Mangoes, 9 Roof tiles, 9 Sawn timber, 9 Dates, etc. Following three types of covers are available: Table 5.4 Total Loss Constructive Total Loss of cargo due to Total Loss 1 Clause ‘A’ or Constructive Total Loss of the vessel only i. Loss/damage to cargo reasonably attributable to: 9 Vessel being burnt 2 Clause ‘B’ 9 Vessel being sunk ii. Loss of cargo caused by jettison if necessitated by stress of weather only. i. Loss/damage to cargo reasonably attributable to: 9 Vessel being burnt 3 Clause ‘C’ 9 Vessel being stranded or sunk ii. Loss of cargo caused by jettison due to stress of weather, stranding or sinking or burning or collision at sea. IC-67 MARINE INSURANCE 113 CHAPTER 5 OTHER IMPORTANT CLAUSES b) Exclusions These apply to all the 3 types of covers: i. General Average contribution. ii. Loss, damage or expense wilfully caused by or due to unlawful conduct, negligence, misbehaviour of tindal, crew, owner of craft, shippers or consignees. iii. Loss, damage or expense arising out of detention or seizure by government in consequence of vessel being engaged in illicit or contraband trade. (Note: The other exclusions are as in ICC, (B) & (C) ) c) Duration of cover The insurance attaches from the time of loading of cargo onto the vessel, continues during the ordinary course of transit and ceases on landing of cargo at the final port of discharge or 8 days after arrival of the vessel at the final port of discharge, whichever occurs earlier. In the event of termination of adventure at an intermediate port short of destination following accident, mishap or stress of weather, the insurance ceases from the time the cargo is discharged at such port of refuge or directly into another vessel. If the voyage is not abandoned and the cargo remains in the vessel, cover continues up to 30 days from the time the vessel takes refuge. d) Minimising losses Expenses properly and reasonably incurred by the assured or their servants to avert or minimise loss are reimbursed by the insurers, if such loss is otherwise recoverable under the policy. 2. Inland transit clauses (Rail or Road): These clauses apply to insurance of goods during inland transit only, whether by rail or by road. There are three types of cover available, as follows: a) Clause ‘A’ (All Risks): i. Risks covered All risks of loss or damage to the subject-matter insured, except those caused by risks expressly excluded. The loss or damage, in order to be recoverable, must occur fortuitously. 114 IC-67 MARINE INSURANCE OTHER IMPORTANT CLAUSES CHAPTER 5 ii. Exclusions In no case shall the insurance cover: 9 Loss, damage or expense attributable to wilful misconduct of the assured; 9 ordinary / inevitable loss or damage to the subject-matter; 9 loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the goods insured (“packing” shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the assured or their servants); 9 Proximately caused by delay, even it the delay be caused by a risk insured against; 9 Inherent vice or nature of the subject-matter insured; 9 War perils exclusion; 9 Direct as well as consequential loss caused by strikers, locked-out workmen or persons taking part in labour disturbances, riots or civil commotions or by terrorists or any person acting from a political motive. iii. Duration of the cover The insurance attaches from the time the goods leave the warehouse for the commencement of the transit and continues during the ordinary course of transit, including customary transhipment, if any- 9 Until delivery at final warehouse at destination point, or 9 In respect of transit by rail only or by rail and road, until expiry of 7 days after arrival of railway wagon at final destination railway station, or 9 In respect of transit by road only, until expiry of 7 days after arrival of road vehicle at the destination town, whichever shall occur, Note: The period of 7 days to be reckoned from mid-night of the day of arrival of railway wagon / vehicle, as applicable. b) Clause ‘B’ (Basic Cover) i. Risks Covered Physical loss / damage to subject-matter insured caused by: 1 2 i. Fire i. Collision ii. Lighting ii. Overturning of the carrying vehicle iii. Breakage of iii. Derailment or accidents of like nature to the bridges carrying railway wagon / vehicle. IC-67 MARINE INSURANCE 115 CHAPTER 5 OTHER IMPORTANT CLAUSES ii. Exclusions These are identical to those appearing Clause ‘A’, PLUS Deliberate damage / destruction of subject-matter insured by wrongful act of any person or persons. (An underwriter, at his discretion, may delete this exclusion by charging additional premium and making the insurance subject to the ‘Malicious Damage Clause’). The duration of cover is identical to the duration as in Clause ‘A’ c) Clause ‘C’ (Fire Risk Only): i. Risks covered Physical loss / damage to the subject-matter insured caused by: 9 Fire 9 Lightning ii. Exclusions The exclusions are identical to those of Clause ‘B’ iii. Duration of cover The insurance attaches with the loading of each package into wagon / truck for the commencement of the transit, and continues during the ordinary course of transit, including customary transhipments, if any, and ceases immediately on unloading: 9 At destination railway station in respect of rail transits, or 9 At destination point in respect of transit by road. Note: Monetary claims against railway / road carriers and bailees must be lodged within 6 months from the date of the railway / lorry receipts, as prescribed by relevant statutes. Other clauses, for example, Insurable Interest Clause, Duty of the Assured Clause, Reasonable Despatch Clause, etc. are identical in the 3 sets of Inland Transit Clauses and are substantially similar to those of the Institute Cargo Clauses described earlier. Note: This clause is being withdrawn from Indian Market as there is hardly any demand for the same. 116 IC-67 MARINE INSURANCE OTHER IMPORTANT CLAUSES CHAPTER 5 3. Strikes, riots and civil commotions clause (For inland transit not in conjunction with ocean voyage) a) Risks covered Loss or damage to the subject-matter insured caused by – i. Strike, ii. Locked-out workmen or persons taking part in labour disturbances, iii. Riots and iv. Civil commotions; v. Any terrorist or any person acting from a political motive) b) Exclusions i. Loss, damage or expense proximately caused by delay or inherent vice of the subject-matter insured. ii. Loss, damage or expense proximately cause by the absence, shortage or withholding of labour during any strike, lock-out, labour disturbance or civil commotion. iii. Any claim for expenses arising from delay or other consequential or indirect loss of damage of any kind. c) War perils exclusion (Note: As per the Waterborne Agreement, explained earlier, property on land cannot be covered against war risks). The duration of cover corresponds to the respective Inland Transit Clause ‘A’, ‘B’ or ‘C’ as applicable. d) Warranty In case of road transports, all Inland Transit Policies shall be subject to the warranty that the insurer’s liability shall be limited to 75 % of the assessed loss: i. Where the Consignment Note is issued by a Private Carrier (other than the vehicle belonging to the owner of the goods) or Freight Broker; or ii. Where the Consignment Note is issued limiting the liability of the carrier by special contract duly signed by the consignor, consignee or their duly authorised representative or agent. Of course this warranty would not apply where loss or damage occurred whilst the goods were not in the custody of the carriers. IC-67 MARINE INSURANCE 117 CHAPTER 5 OTHER IMPORTANT CLAUSES e) New version of inland clauses The following changes have been introduced under new version of inland transit clauses i. ITC (C) Fire only clause, has been withdrawn. ii. The air transits and carriage by couriers within India are also included under ITC (B) and ITC (A). iii. Packing exclusion is changed as per ICCs. I e exclusion does not apply if packing done by independent agency. iv. Transit commencement and ending clarified like ICCs. Commencement on shifting of cargo for commencement of transit and termination on unloading at final place subject to other limitations. v. Introduction of major exclusion about fitness of carrying vehicle or container to carry the cargo, on the lines of seaworthiness of the vessel warranty. It is like Roadworthiness of vehicle warranty. 4. Insurance of Containers Insurance for containers is of two types: a) Inland In case of inland transits the containers are treated like cargo and they are insured under Inland Transit Clauses (ITC) generally ITC (B). The policy may extend storage cover on weekly basis covering the containers awaiting stuffing at the exporter’s premises. As the containers do not belong to exporter the insurance is taken in joint names – of exporter and shipping company. Secondly, they being old one underwriting precautions are also required, like putting appropriate Replacement clause or changing policy to Unvalued Policy etc. b) Overseas For overseas transits Containers are treated as Hull and insured subject to Institute Container Clauses (1.1.1987), the scope of which is as follows: 118 IC-67 MARINE INSURANCE OTHER IMPORTANT CLAUSES CHAPTER 5 c) Risks covered All risks of loss or damage provided there is a fortuity and provided the risk is not expressly included. General average and salvage charges incurred to avoid a loss from any cause except those excluded. There is a liability for loss/damage to the machinery of a container only under following circumstances: i. When the container is a total loss (actual or constructive) ii. When such damage is caused by : 9 Fire or explosion originating externally to the machine; 9 Vessel or craft being stranded, grounded, capsized or sunk; 9 Overturning, derailment or other accidents to land conveyance or aircraft; 9 Collision or contact of vessel or craft with any external object other than water; 9 General average sacrifices. d) Exclusions: i. Willful misconduct of the assured. ii. Ordinary wear and tear, ordinary corrosion and rust or gradual deterioration of the containers. iii. Mysterious disappearances, unexplained loss. iv. Inherent vice or nature of the subject matter insured. v. Proximately caused by delay even if such delay is caused by an insured peril. vi. Arising from insolvency or financial default. vii. Unseaworthiness or unfitness of the vessel or craft or conveyance, where the assured or their servants are privy. viii. War, strikes or nuclear weapon exclusion. e) Limits clause Each container is covered, including whilst on deck, within the sea and territorial limits specified in the Schedule of the policy. Breach of these limits is held covered at a premium to be agreed and subject to prompt notice to the insurer. IC-67 MARINE INSURANCE 119 CHAPTER 5 OTHER IMPORTANT CLAUSES f) Sale or hire If the insured container(s) is sold leased or hired to a party not named as the assured, the insurance in the container shall terminate automatically, unless the insurer agrees in writing to continue the cover. g) Claims Claims for damage to a container, which is not a total loss, shall not exceed reasonable cost of repairing such damage. The deductible under the policy shall apply in respect of each container any one accident or series of accidents arising from one event. The deductible shall not apply to: i. The total loss ( actual or constructive ), ii. GA, iii. Salvage or salvage charges and iv. Sue and labour charges. The insurer shall not be liable for unrepaired damage for more than the insured value at the time the insurance terminates, nor for unrepaired damage in the event of subsequent total loss during the period of the policy. h) Schedule The schedule of the policy shows the following details: i. It is a condition of the insurance that each container bears clear and distinct marks o identification. ii. Type of container and value. iii. Sea and territorial limits. iv. Names of the overseas vessels which will carry these containers. v. Deductible. The insurance is subject to the usual Sue and Labour clause. The insurance may be cancelled by either party giving 30 days' notice. Test Yourself 2 Which of the following clauses of Inland transit provides risk cover against physical loss caused by fire only? I. Clause A II. Clause B III. Clause C IV. Clause D 120 IC-67 MARINE INSURANCE SUMMARY CHAPTER 5 Summary a) Standard Clauses have been drafted and agreed between the Institute of London Underwriters (I.L.U.) - now (IUA) - and the concerned Trade Associations, in order to bring about uniformity of practice in international trading operations for selected trades and commodities. b) Institute Commodity Trades Clauses (A), (B) and (C) are agreed with the Federation of Commodity Associations for the insurance of shipments of Cocoa, Coffee, Cotton, Fats and Oils not in bulk, Hides, Skins and Leather, Metals, Oil Seeds and Sugar (raw and refined) and Tea. c) In Insurance cover for cargo carried in sailing vessels, the insurance attaches from the time of loading of cargo onto the vessel, continues during the ordinary course of transit, and ceases on landing of cargo at the final port of discharge or 8 days after arrival of the vessel at the final port of discharge, whichever occurs earlier. d) Inland Transit Clauses (Rail or Road) apply to insurance of goods during inland transit only, whether by rail or by road. e) Risks covered under Strikes, Riots and Civil Commotions Clause includes Loss or damage to the subject-matter insured, caused by – strike, locked-out workmen or persons taking part in labour disturbances, riots and civil commotions; any terrorist or any person acting from a political motive. IC-67 MARINE INSURANCE 121 CHAPTER 5 PRACTICE QUESTIONS AND ANSWERS Answers to Test Yourself Answer 1 The correct option is I. Insurance cover for transit policies of Centrifuged Latex to be issued to traders/buyers is offered for rubber estates. Answer 2 The correct option is III. Clause C provides risk cover against physical loss caused by fire only. Self-Examination Questions Question 1 What is the maximum period of storage for Type I policy under package policy of coffee? I. 30 days II. 60 days III. 90 days IV. 120 days Question 2 What is the basis of settlement for package policy for coffee? I. Market value of coffee insured less unincurred expenses as per formula prescribed in the Tariff II. Future value of coffee insured less incurred expenses as per formula prescribed in the Tariff III. Swap value of coffee insured less unincurred expenses as per formula prescribed in the Tariff IV. Spot value of coffee insured less incurred expenses as per formula prescribed in the Tariff 122 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 5 Question 3 What is the basis of settlement of claims in the case of package policy for cardamom estates? I. In the event of loss before manufacture, 2 Kgs. of raw cardamom shall be considered equal to 1 Kg. of dried cardamom. II. In the event of loss before manufacture, 6 Kgs. of raw cardamom shall be considered equal to 2 Kg. of dried cardamom. III. In the event of loss before manufacture, 4 Kgs. of raw cardamom shall be considered equal to 1 Kg. of dried cardamom. IV. In the event of loss before manufacture, 4 Kgs. of raw cardamom shall be considered equal to 2 Kg. of dried cardamom. Question 4 What is the basis of valuation in the case of package policy for rubber estates? I. Invoice value plus 10%. II. Invoice value minus 10%. III. Market value less unincurred expenses. IV. Market value less incurred expenses. Question 5 Which of the following is incorrect with respect to tea crop insurance policy? I. Tea crop insurance policy is issued garden wise only II. The insurance is against all risks of physical loss or damage to tea subject to specified exclusions. III. The insurance attaches from the time the green leaves are sent for processing at the factory. IV. No cover shall be granted for loss/damage to standing crops or tea bushes or plants arising out of any peril (other than hail). IC-67 MARINE INSURANCE 123 CHAPTER 5 PRACTICE QUESTIONS AND ANSWERS Answers to Self-Examination Questions Answer 1 The correct option is IV. Maximum period of storage for Type I policy under a package policy for coffee is 120 days. Answer 2 The correct option is I. Basis of settlement for package policy of coffee is - market value of coffee insured less unincurred expenses as per formula prescribed in the tariff. Answer 3 The correct option is III. The basis of settlement for package policy for cardamom estates - in the event of loss before manufacture, 4 Kgs. of raw cardamom shall be considered equal to 1 Kg. of dried cardamom. Answer 4 The correct option is I. Basis of valuation for package policy for rubber estates is invoice value plus 10%. Answer 5 The correct option is III. In the case of crop insurance policy, the insurance attaches from the time the green leaves are plucked at the insured’s estate. Hence, statement III is incorrect. 124 IC-67 MARINE INSURANCE  CHAPTER 6 TYPES OF COVERS Chapter Introduction In this chapter, we will discuss the different types of covers available in marine insurance in India. We will also briefly learn about insurance covers available internationally in marine insurance. Learning Outcomes A. Types of cover in India B. International covers IC-67 MARINE INSURANCE 125 CHAPTER 6 TYPES OF COVERS IN INDIA A. Types of covers in India 1. Specific policy Specific policies cover specific transits only, on case to case basis and, as many policies are taken for as many dispatches. As per Indian market practice the cover is to be arranged before commencement of transit; so the policy is to be taken in advance. However, there is no compulsion on the part of the Insured to insure all the consignments or stick to only one company for insuring all his consignments. He can change insurance companies and if he so wishes, may not insure at all. When there are many transits during a period of time, it is very difficult to control the operational part, as it is not easy to arrange for many policies before commencement of the individual transits. By mistake, if any insurance is wrongly taken or not taken, there may not be any scope for rectification. If the consignments are to be dispatched during holidays, it will be difficult to arrange insurance for each of them. The rates, terms and conditions are also not fixed; in fact, they will vary with market conditions, seasons etc., and till insurance is arranged, there is no certainty that the cover will be granted. Insurers may refuse to grant the cover, which means that there is no continuity either. 2. Open covers Unlike a specific policy, an open cover is issued to provide automatic and continuous insurance protection to a regular exporter/importer engaged in international trade. Definition Open cover is an agreement, whereby the insurer undertakes to insure all shipments declared by the assured, which come within the scope of the open cover. a) Features of an open cover i. An open cover is not a policy and is, therefore, not stamped. ii. Premium is payable on each declaration, against which specific stamped certificate/policy is issued covering the shipment declared. iii. There is no sum insured in an open cover. 126 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 There are, however, two limits, namely: 9 Limit per bottom: Meaning, limit of aggregate value of shipments/consignments per vessel or other conveyance at any one time, as per the requirements of the assured. 9 Limit per location: The Location Clause seeks to limit the value of pre-shipment accumulation which may happen, say, because of strikes or labour disturbances in the port area. Such accumulation of cargo in a particular location may create for the insurers, a catastrophic exposure in the event of, say, a conflagration at the docks or a hurricane, widespread riots, etc. Usually, the clause limits only pre-shipment accumulations, as such accumulations may, to some extent, be controlled by the assured by regulating his sendings forward to the port of shipment. If accumulations do take place exceeding the location limit, it is for the assured to approach his insurer and arrange for such additional protection as may be required. Thus, an open cover is a convenient arrangement for clients engaged in substantial international trade and having considerable turnover. Once arranged, the insured enjoys guaranteed protection on the agreed basis for all shipments falling within its provisions, subject to declaration of full shipping details of each shipment. The client is relieved of the necessity to negotiate insurance of every shipment individually. Also, the insurer obtains assured continuity of interest in the client’s global business activities. b) The advantages of an open cover i. As the agreement is automatic and continuous, the insured is not exposed to the risk of any shipment remaining uninsured due to oversight, inadvertent omission or delayed receipt of shipment advices from abroad. ii. The necessity of buying specific policies for each individual shipment is obviated, resulting in savings in administrative costs both for insurers and their clients. iii. The premium rates are agreed at inception and this assists the insured in identifying his costs of insurance right at the outset, which he could include in his total costs for the goods under CIF contracts. IC-67 MARINE INSURANCE 127 CHAPTER 6 TYPES OF COVERS IN INDIA c) Salient conditions of an open cover Following are some of the salient conditions that appear in an Open cover: i. Basis of valuation The basis of valuation is the prime cost of the goods plus expenses of shipping; freight, for which the assured is liable and cost of insurance, plus 10 percent ii. Loss prior to declaration and/or shipment In the event of loss or damage prior to declaration and/or shipment on board the vessel, the basis of valuation shall be the prime cost of the goods plus charges actually incurred and for which the assured is liable. iii. Declaration The assured is bound to declare each and every shipment individually or in batches and obtain a Certificate of Insurance from the insurer, as required, either for individual shipments or for groups of shipments. The Certificates/Policies issued against declarations will bear stamp duty and show appropriate premium. Unintentional failure to report shipments will not void the open cover and such shipments will be held covered. However, should the assured wilfully fail to report shipments (he may do so when the shipments have arrived safely), the open cover, at insurer’s option, will become null and void as to subsequent shipments. iv. Inspection of records The insurer has the right at any time during business hours to inspect the records of the assured as respect shipments coming within the terms of the open cover. v. Under-deck warranty “Warranted shipped under-deck. On-deck shipments held covered at rates and terms to be agreed upon”. vi. Cancellation Open cover may be cancelled by either party giving 30 days’ notice in writing for marine risk, provided the risk has not already attached. War and Strikes risks, are usually subject to 48 hours’ notice of cancellation. vii. Closing particulars To be declared to the underwriter immediately upon receipt of shipping documents. 128 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 3. Open policies An Open Policy is also known as a Floating Policy. Clients having substantial turnover and a large number of dispatches can obtain continuous insurance cover under an Open Policy. An Open Policy is issued, duly stamped, for an amount representing the insured’s estimated annual turnover in respect of a series of consignments which may be declared against the open policy, with the result that the Sum Insured will gradually diminish by the amount of each declaration until the total Sum Insured under the Open Policy is finally exhausted. If the assured desires, unstamped Certificates may be issued against each declaration showing the values in respect of each dispatch and the balance of the Sum Insured remaining under the Open Policy. a) Features of open policies i. The cover under an Open Policy ceases on expiry of one year from the date of its issue, or, exhaustion of the total sum insured prior to the expiry of the Open Policy period of 12 months, whichever first occurs. If the sum insured is likely to be exhausted prior to the expiry of the Open Policy period of 12 months, it may be increased by issuing an endorsement and charging appropriate extra premium. ii. An Open Policy is usually issued for insurance of goods dispatched within the country by rail/road/air freight/registered post parcels. iii. It is issued on the standard form of the policy subject to applicable rates and clauses. iv. Premium is worked out and charged on the total sum insured. b) Standard conditions of open policies: Open Policies are issued subject to following standard conditions: i. Basis of valuation: Invoice cost of goods, the freight for which the insured is liable, and the cost of insurance, plus 10%. ii. Inspection of records: The insurer will have the right at any time during business hours to inspect the insured’s records of dispatches made within the terms of the Open Policy. iii. Per conveyance limit: Warranted that the limit of insurer’s liability in respect of any one accident or series of accidents arising from the same event shall not exceed a specified sum, any one rail/road/air/postal dispatch transit, as applicable. IC-67 MARINE INSURANCE 129 CHAPTER 6 TYPES OF COVERS IN INDIA iv. Location limit: Underwriter’s liability in respect of any one accident or series of accidents from the same event in any one location shall not exceed a specified sum. v. Policy period: The Open Policy is to remain in force for a period of 12 months from ……to ….. unless the total sum insured is exhausted earlier, by declarations. c) Declarations: It is a condition of this insurance that the assured is bound to declare each and every dispatch coming under the scope of the Open Policy within 24 hours (or as may be agreed) from the time of issue of the RR/LR/Airway Bill/Registered postal receipt, as applicable. Declarations must be made in the order of dispatch. They must comprise all consignments within the terms of the Open Policy and the value of the goods dispatched must be honestly stated; but an omission or erroneous declaration may be rectified even after loss or arrival, provided the omission or declaration was made in good faith. Where a declaration of value is not made until after notice of loss or arrival, the policy must be treated as an unvalued policy as regards the subject- matter of that declaration (i.e. the prime cost of the goods plus charges actually incurred and for which the assured is liable). 4. Annual policy Annual Policy (AP), the period of which is 12 months, is issued to cover goods belonging to the assured or held in trust by the assured, not under contract of sale or purchase, which are in transit by rail or road from specified depots/processing units to other specified depots/processing units. a) It is warranted that: i. The depots from which the transit commences and at which the transit ends are owned or hired by the assured and; ii. The insured goods are owned by the assured or held in trust by him continuously throughout the period and course of the transit. b) The policy is not assignable or transferable. c) Annual policies are subject to appropriate Inland Transit (Rail or Road Risk) covers and clauses. d) Sum Insured: The AP is not subject to any declaration by the assured as under an Open Policy. The Sum Insured represents maximum value of goods on risk at any one time during the policy period and remains constant in the event of no claim. 130 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 It is the aggregate maximum estimated value on rail/road at any one time of all insured goods in respect of each specified transit. If several specified transits are involved, the aggregate sum insured shall be the sum total of the aggregate maximum estimated value on rail/road at any one time for each of the specified transits. All these are subject to minimum limits of sum insured, as stated below: Table 6.1 Percentage of Single carrying Distance of specified transit estimated limit turnover 80 Kms. or less Twice Or 1% Over 80 Kms. up to 500 Kms. Four times Or 2% Over 500 Kms. Six times Or 3% -- whichever is more a) The annual Policy shall be subject to a condition of average stipulating that if at the time of any loss/damage, the total value of goods in transit is more than the sum insured in respect of that specified transit, the assured shall be considered as being his own insurer for the difference, and shall bear a rateable proportion of the loss accordingly. e) Rating i. Minimum rate of premium for the basic cover shall be 30 times the single journey rates. Wider than basic cover may be granted subject to specified additional premium. ii. Minimum premium for an Annual Policy is Rs.5,000. f) Reinstatement i. The sum insured shall stand reinstated on a valid claim arising, subject to payment of pro-rata additional premium on the reinstated amount by the assured, counting from the date of the loss, till the expiry of the insurance. ii. Total liability of the insurer during the policy period shall not exceed twice the sum insured stated in the Annual Policy. g) Basis of Valuation: Prime cost plus expenses incidental to transit and charges of insurance. IC-67 MARINE INSURANCE 131 CHAPTER 6 TYPES OF COVERS IN INDIA 5. Duty and increased value insurances a) General regulations Applicable to both Duty and I.V. Insurances i. Cover may be granted only in respect of goods imported in India. The insurance shall be granted only if there exists insurance on CIF value of cargo itself and against the same risks as the basic cargo insurance. ii. If cargo is imported on CIF basis because of a contractual obligation to insure abroad, insurance on Duty and Increased Value may be granted on terms and conditions wider than the overseas CIF insurance. iii. The insurance should be granted only to the party in whose favour the import licence has been issued or officially endorsed. Such policies may also be issued in favour of “actual users” who purchase from recognised Export Houses under the Export Promotion Scheme, provided an allotment letter/certificate from a recognised Export House is produced as a proof. Alternatively, the policy issued in favour of the Export House from which the goods have been purchased may be assigned in favour of ‘actual users’. iv. The scope and duration of the cover shall be identical to that of the original cargo policy. v. No insurance on “Duty” or “Increased Value” shall be granted after arrival of the carrying ship at the destination port. This, however, shall not apply to such insurances granted under Open Covers. vi. These policies are not assignable. vii. No claim shall be paid for Duty and Increased Value Insurances unless the claim under the CIF value insurance policy is payable and proof of liability for loss under that policy shall be furnished to the insurer. This provision need not apply to cases where CIF value is insured overseas due to contractual obligations. b) “Duty” insurance This insurance is on increased value of cargo by reason of payment of customs duty at destination and is subject to the same clauses and conditions as the insurance on cargo and pays the same percentage of loss (excluding charges and expenses) as may be paid thereon, but excluding claims in respect of: i. Total loss of whole or part of cargo prior to Duty becoming payable. 132 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 ii. General Average, Salvage and/or Salvage Charges arising from any casualty occurring prior to Duty becoming payable. iii. The Sum Insured for Duty shall be adjusted on the basis of actual assessed Duty and the policy shall be one of pure indemnity and subject to the “Duty Insurance Clause”. iv. A “Duty” Policy is not a valued policy as defined in the Marine Insurance Act. Claims are payable on the basis of actual Duty paid or on the basis of the Sum Insured, whichever is less. In ascertaining the amount of claim recoverable, credit should be given for any rebates or refund of Duty which may become allowable. v. The rate of premium for insurance of Duty shall be 75% of the rate charged (including 75% of the applicable extras and 75% of War and SRCC rates) for covering the CIF value of the cargo itself. Where CIF insurance is effected with another insurer, the rate of premium for covering “Duty” shall be 75% of the appropriate CIF value insurance premium rate of the insurer covering “Duty”. vi. The assured should lodge a claim with the Customs Authorities within the stipulated time (6 months from the date of payment of Duty) for refund of Duty, where admissible, and with carriers or others as applicable, and any refund obtained should go to reduce the claim under the policy. c) “Increased Value” insurance i. This insurance is on increased value by reason of market value of the goods at destination on the date of landing, being higher than the CIF and Duty value of the cargo and is subject to the same clauses and conditions as the insurance on CIF value of the cargo, and to pay 75% of the actual loss suffered in the market or realisable value of cargo, not exceeding 75% of the sum insured, because of the operation of any of the perils insured against, after taking credit for claims recovered under the basic cargo (CIF value) and Duty insurance. ii. This is not a valued policy as defined in the Marine Insurance Act. If the total insured value under the cargo policy covering CIF value, the Duty policy and all Increased Value Policies together, shall exceed the market value of the goods at destination, then the claim payable together shall not exceed the specified proportion of the market value of the goods at destination. iii. On the other hand, where the total sum insured under the CIF value insurance policy, Duty policy and all policies for Increased Values is less than the market or realisable value of the cargo in good condition at destination, the assured shall be considered to be his own insurer to the extent of such shortfall in the sum insured. IC-67 MARINE INSURANCE 133 CHAPTER 6 TYPES OF COVERS IN INDIA iv. Thus, the insurance shall not be for an agreed value but shall be for an amount not exceeding the actual difference between the market value at destination on the date of arrival of the goods in India, and the total of CIF value plus Duty, subject to establishment of a higher market value or controlled price as notified by appropriate statutory authority. v. The assured is required to bear 25% of the claim amount payable under this component of the policy. vi. Increased Value insurance shall not be granted for more than 100% of the CIF insurance, except in exceptional circumstances. vii. The rate of premium shall be 100% of the normal rate applicable to CIF insurance. viii. Increased Value insurance on cargo in inland transit (where not in conjunction with overseas transit) in excess of the established market value or controlled price of the commodity concerned, whichever is lower, shall not be granted under any circumstances. 6. Insurance of cargo sold on FOB terms of sale When the terms of sale are FOB, the insurance is arranged by the buyer overseas for his own account and benefit. Risk under the buyer’s policy commences on loading of the cargo on the overseas vessel, because it is at that juncture of transit that risk passes from the seller to the buyer. The buyer’s policy thus does not protect the seller in the absence of any specific agreement to do so. The seller or exporter, therefore, has to bear the risk of loss or damage to his goods from the time they leave his warehouse till such goods are loaded on the overseas vessel. Exporters shipping goods under FOB or C&F terms of sale, can protect their interests by obtaining following insurance covers: a) Appropriate Inland Transit (Rail or Road risks) cover commencing from the time goods leave the exporter’s warehouse and extended to cover the interest insured until the goods are placed on board the overseas vessel or LASH barges (including sling loss) or until expiry of two weeks after arrival of goods at place of storage at the port town and/or docks awaiting shipment, whichever shall first occur. b) If the cover is subject to Inland Transit (Rail or Road) – Clause ‘B’, that is, Basic Cover and, if loading is done mid-stream by craft, raft or lighter, the insurance will also cover loss or damage reasonably attributable to: i. Craft, raft or lighter being stranded, grounded, sunk or capsized; 134 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 ii. Fire, lightning, collision or contact of craft, raft, lighter or conveyance with any external object other than water; iii. Total loss of any package in loading, transhipment or discharge; iv. Including the risk of jettisoning due to stress of weather only. c) Shut-out cargo: Shut-out cargo relates to goods which arrive too late for a vessel at a loading port or else the goods are not loaded because the vessel has a full cargo load. Goods which could not be loaded on the designated vessel for some reason or other and are therefore detained at the port warehouse or docks or shut-out mid-stream due to strike or lock-out, require further extension of cover at additional premium. When goods are returned to shipper’s warehouse involving Rail/Road transit, appropriate Inland Transit cover may be granted for the return journey at additional premium. 7. Exports incentives insurance Under FOB exports insurance, the basis of valuation is invoice value (FOB) + 10%. But there are many cases where the exports are made on less than market value. If the loss occurs before shipment, the insurance company will pay loss on proportion of invoice value. This may not provide full indemnity, as the attraction for exporting at less than market value is to earn on export incentives, which are earned only if the cargo is exported. Export Incentives policy provides for cover which is equivalent to: FOB value + Export incentives +10%. So, in the event of loss, the insured gets full indemnity. But the insured has to prove that he has lost export incentives by documentary evidences. 8. Sellers’ interest contingency insurance Sellers under FOB and C&F contracts may effect a contingency insurance to cover their interest, if the consignee refuses damaged goods or is unable to take delivery by paying for the goods because of insolvency. It has been explained that when goods are sold on FOB or C&F terms, insurance on the goods is effected by the buyer to cover the buyer’s interest. In the absence of a specific arrangement, the buyer’s policy does not cover the interest of the seller. IC-67 MARINE INSURANCE 135 CHAPTER 6 TYPES OF COVERS IN INDIA a) If the rejection of the shipping documents or of the goods is valid, the risk and ownership revert to the seller and he has to make alternative arrangements for disposing of the goods. b) If, however, such goods are lost or damaged, the situation is much worse for the seller – unless he has made provision for such contingency – because he will have the double handicap of an uninsured loss to unwanted goods. Some risks of such rejection of goods are covered by the Credit Insurances, granted by Export Credit Guarantee Corporation of India, but they are concerned only with the financial aspects. They are not concerned with any loss or damage suffered by the goods. Physical loss or damage can be covered only by marine insurance. So, it is advisable for these contingent risks to be insured when goods are sold on FOB or C&F basis. One method of covering these contingent risks is for the seller to effect a special contingency insurance called “Sellers’ Interest Contingency Insurance”, to cover all his FOB and C&F shipments. Often this contingency insurance is combined with the insurance covering the goods from the seller’s warehouse until they are loaded on board the ship at the port of shipment. Thus, during the pre-shipment transit, the seller has insurance against the risks of transit, and, after loading, the insurance remains in suspense. If the sale is repudiated by the buyer during the transit, the Sellers’ Risk Insurance re- attaches retrospectively to the commencement of the voyage, and any loss or damage by the insured perils is recoverable. However, it should be remembered that the insurance itself still covers only the risks of physical loss or damage. The extra expenses incurred by the seller following a reversion of the goods to him are not covered. Example Warehousing charges and the cost of re-shipping the goods are not covered. Depending on the reason for the repudiation of the sale by the buyer, these expenses may be recoverable from insurers covering the Credit risk, namely, the Export Credit Guarantee Corporation of India. It is warranted that the insured shall not change the terms of the contract of sale, subsequent to the operation of a peril insured against, for the purpose of securing indemnity under the policy. This insurance is not assignable except to a banker operating in India. 136 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 The Policy prohibits disclosure of its existence to any other party – the buyer in particular. An important underwriting feature of this insurance, which an underwriter should weigh carefully is the increased moral hazard inherent in this type of coverage, including the danger of a mutually profitable collusion between the seller and the buyer. This makes a careful appraisal of each proposal very essential. For this reason, policies covering sellers’ interest contingency risks may be issued to known valued clients only. 9. Special storage risks insurance – (SSRI) The cover under the SSRI Policy takes into consideration the requirements of the consignor of goods, for insurance, to protect his goods during storage at destination railway yard or carrier’s premises, pending clearance by the consignees on termination of cover under an Open Policy. This cover may be granted to the consignor in conjunction with an Open Policy covering the transit of goods by rail or road. The salient features of the policy are as follows: a) Risks: Risks under this Policy shall be similar to those under the Open Policy, except in case of SRCC risks, where riot, strike and malicious damage cover would be granted as per the provisions of the erstwhile All India Fire Tariff. Insurance shall be granted by a separate policy indicating the reference number of the corresponding Open Policy. b) Issue of policy: Policy may be issued to the consignor or the supplier of the goods only. Interest under the policy is not transferable. c) Duration of cover: Insurance under the SSRI Policy commences on expiry of 7 days reckoned from the midnight of the day on which the goods are discharged from the train/road vehicle and terminates at the time delivery is taken by the consignee or payment is received by the consignor, whichever is earlier. d) Location: Cover is granted on goods stored at Railway Yard or Carriers’ premises awaiting clearance by consignees on termination of cover under Open Policy. Storage in Port Trust premises is not covered. e) Period of Insurance: One year, corresponding to the Open Policy. Short term policies are not permitted. f) Sum Insured: As may be fixed by the client but not less than 10% of the estimated annual dispatches to be covered under the Open Policy, or Rs.20 lakh, whichever is higher. IC-67 MARINE INSURANCE 137 CHAPTER 6 TYPES OF COVERS IN INDIA g) Limit of liability any one location: As may be fixed by the insured, but not exceeding 10% of the Sum Insured under the SSRI or Rs.1 crore, whichever is lower. h) Payment of premium: Full premium is payable at the inception of the policy. No instalment or adjustment facility is allowed. 10. Package policy under Duty Exemption Scheme: This is a package policy issued to exporters, who are granted an Advance License for import of duty-free items specified in the Duty Exemption Scheme, as incorporated in Chapter VII of the Export & Import Policy of the Government, for imports of duty free raw materials, parts, spares, etc. required for the purpose of export production. a) There are 3 sections in the Policy as follows: i. Inward Transit shall commence from the time goods are cleared from the port/airport and taken charge of by the licensee or his agent and shall continue during the ordinary course of transit by rail/road/air, including customary transhipment, if any, until delivery to the notified Warehouse/Processing House named in the Licence. ii. Storage & Processing Risks shall be covered only at the Processing House(s) named in the Licence. iii. Outward Transit shall commence from the time the goods are dispatched from the warehouse of the Processing House(s) mentioned in (b) above and shall continue during ordinary course of transit by rail/road/air until delivery to the registered port/airport or until loaded on board the vessel or LASH barges (including sling loss) or until the goods are delivered to the Airlines or until expiry of 2 weeks after arrival of the goods at the port/airport, whichever shall first occur. Note: The Policy shall be subject to satisfactory pre-dispatch survey at the port/airport warehouse at the Insured’s cost and submission of satisfactory Report as to the condition of the cargo. b) The Sum Insured in respect of each Section of the Policy shall be as under:- i. Section (a): Market value of the entire raw materials imported as per the Licence. ii. Section (b): As may be fixed by the insured but not less than 20% of the Sum Insured under Section (c). 138 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 iii. Section (c): Market value of the entire finished products to be exported under the Licence. Market value of the goods or Sum Insured, whichever is less, is the basis of indemnity. Sum Insured under this Section shall stand reduced by the amount of loss paid unless pro-rata extra premium is paid to reinstate the Sum Insured. c) Scope of cover For Sections (a) and (c): All risks of loss or damage as per the Inland Transit (Rail or Road) – Clause ‘A’ or Institute Cargo Clauses (Air), as applicable. For Section (b): The risks covered are: i. Fire, lightning, explosion/implosion. ii. Riot, Strike, Malicious Damage and Terrorism. iii. Impact of any rail/road vehicle. iv. Aircraft or articles dropped therefrom but excluding loss or damage occasioned by pressure waves caused by such aircraft. v. Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation. vi. Subsidence, landslide, rockslide. vii. Earthquake, fire and shock. viii. Burglary or housebreaking. ix. Accidental physical loss or damage. 11. Multi transit policy Normally, during the transit period, if cargo comes within control of the insured and/or their agents, the cover ceases. Storage, thereafter, is to be covered under storage (Fire) policy and transit, thereafter, to be covered after pre- dispatch survey under marine inland transit policy. To obviate the problem of multiple insurances, Multi Transit Policy is to be issued, which can cover transit+ storage/ process + transit under the same policy without any break in cover. This policy can cover processing also. The rating is as under: Basic rate for transit +50% (multi transit) + 0.01% per week or part thereof (Storage) / 0.03% for per week or part thereof (process). 12. Stocks throughput insurance policy The policy covers goods against physical loss or damage while in Insured’s control anywhere in the global supply chain, in transit, in storage as company owned inventory. IC-67 MARINE INSURANCE 139 CHAPTER 6 TYPES OF COVERS IN INDIA The policy combines traditional marine insurance and Fire & Allied perils insurance The policy covers from the time raw materials are in transit upto delivery of final goods to the buyer’s place, including all incidental and non-incidental storages. Generally, there are no time limits for storage periods and cover is like “cradle to grave”. Many underwriters restrict storage cover to Fire and allied perils and burglary. 13. Sales turnover insurance This is like an open policy but without any obligation on part of insured to make periodic declarations and pay the premium on value of goods in transit. In this policy there is no need to make periodic declarations as Full Annual Sales Turnover (or projected turnover) is covered for which the premium is paid in advance. Secondly the basis of transit is not the value of the goods but the sales turnover. So value of goods in transit and value on which premium charged, are two different aspects and not related to each other. Policy can cover imports, exports, inland transits, inter-depot transfers, incidental storages and depending upon the need of client it may cover other Clauses like Seller’s interest etc. too. 14. Marine (advanced) loss of profits insurance Marine Loss of Profit insurance policy is to be issued in conjunction with project insurance policy. The policy covers Loss of Profits arising out of operation of insured peril, delay in the project giving rise to loss of profits. a) The policy basically covers delay in transit due to: i. Loss/ damage to cargo ii. Loss/ mechanical breakdown/ damage to carrying vessel/ aircraft/ its machinery. iii. Loss/ mechanical breakdown of any conveyance in which insured property is being carried, conveyance involved in general average (GA) or salvage charges (SC) or life-saving operations. 140 IC-67 MARINE INSURANCE TYPES OF COVERS IN INDIA CHAPTER 6 b) Other features i. There is no time limit anywhere and the cover is available upto property reaching final site. ii. Time excess of 30 days. iii. Indemnity for loss of profits. Cargo and other losses are not covered. iv. Only one claim per project. All delays are to be combined, non-insured delays are excluded, and from that figure, excess of 30 days is excluded and the loss of profits for the balance days is paid. c) Exclusions i. Loss / damage to property. ii. Delay because of unreasonable withholding of guarantee. 15. Buyer’s contingency insurance The policy is reverse of Sellers’ Contingency Interest Insurance. The cover is available for imports on CIF, CIP (Carriage and Insurance Paid to) or other similar terms of purchase. When the loss is not covered under the Seller’s Policy, which is assigned to the buyer, this policy pays subject to its terms. Pre-shipment losses (concealed damages) which are not known at the time of shipment but are subsequently proved to have happened before shipment, are also covered. a) Important conditions i. Existence of insurance not to be disclosed to seller or other parties. This will not be deemed to be double insurance. ii. Immediate notice of cover becoming effective. iii. Subrogation against seller and third parties. As the risk is much less than normal marine insurance cover; premium of around 1/3rd of normal rates is charged. b) Difference in conditions cover i. In CIF or other similar terms, the seller’s obligation is to arrange for insurance only for ICC (C ) and unless request is made and premium paid by the buyer he may not arrange for wider cover. ii. In such cases, the buyer can take ICC (A) or wider than the cover arranged by the seller. iii. In the event, any claim is caused by ICC (C ) perils, the same is to be recovered under seller’s policy ( assigned) and in case of any other peril, if the same is insured under the buyer’s policy, buyer will recover from that insurance company. IC-67 MARINE INSURANCE 141 CHAPTER 6 INTERNATIONAL COVERS Test Yourself 1 Which of the following is known as a ‘Floating policy’? I. Specific policy II. Open policy III. Annual policy IV. Package Policy under Duty Exemption Scheme B. International covers 1. Freight contingency insurance When freight is on ‘to pay’ basis, invoice will not contain freight charges and accordingly it is not insured with cargo value. For some bulk cargoes like timber, freight is payable only when earned (cargo reaches) on arrival. Freight may be insured separately under this policy, but the cover attaches only on cargo discharged i.e. when the freight becomes payable. Total loss is not covered. a) Strikes expenses/War expenses i. Institute Cargo Clauses A, B and C exclude loss, damage and expenses due to War and Strikes from scope of the cover. ii. When War and Strikes cover are taken as “Add Ons” Institute War Clauses and Institute Strikes Clauses are attached to the Policy. iii. War & Strikes Clauses cover only loss or damage to the cargo because of War and Strikes perils. They do not cover expenses arising out of War or Strikes etc., iv. In the event of port strike or war, nearby ship may have to be diverted or voyage may be terminated- extra expenses will then be incurred by the insured for onward carriage of cargo. The cover is granted on a very selective basis as it is selection against the underwriters. 142 IC-67 MARINE INSURANCE INTERNATIONAL COVERS CHAPTER 6 b) Special features i. Cover is granted on annual basis. ii. Policy contains Non-cancellation Clause, i.e. once the cover is taken, it cannot be cancelled by the insured. iii. All shipments covered- no selection. iv. No standard clauses are there for the cover. v. Generally there is 20% cap on liability (of value of goods). 2. Increased Value insurance a) This policy is different than the increased value insurance policy which is commonly used in India. b) The policy is taken mainly for commodity trade where sales on high seas is very common. c) When during the voyage, the high seas sales take place and with successive sales, if the price of the commodity increases, the purchaser takes policy for difference in the value i.e. his purchase price and the amount of insurance policy assigned to him. d) In case of loss or damage, the final buyer will claim under all assigned policies and policy taken by him independently, if any. e) In case of over insurance, contribution condition applies. Test Yourself 2 Which international policy is taken mainly for commodity trade where sales on high seas is very common? I. Sales turnover insurance II. Buyers contingency insurance III. Increased value insurance IV. Freight contingency insurance IC-67 MARINE INSURANCE 143 CHAPTER 6 SUMMARY Summary a) Specific policies cover specific transits only, on case to case basis and, as many policies are taken for as many dispatches. As per Indian market practice the cover is to be arranged before commencement of transit; so the policy is to be taken in advance. b) An open cover is issued to provide automatic and continuous insurance protection to a regular exporter/importer engaged in international trade. c) An Open Policy is usually issued for insurance of goods dispatched within the country by rail/road/air freight/registered post parcels. d) Annual Policy (AP), the period of which is 12 months, is issued to cover goods belonging to the assured or held in trust by the assured, not under contract of sale or purchase, and which are in transit by rail or road from specified depots/processing units to other specified depots/processing units. e) When the terms of sale are FOB, the insurance is arranged by the buyer overseas for his own account and benefit. Risk under the buyer’s policy commences on loading of the cargo on the overseas vessel, because it is at that juncture of transit that risk passes from the seller to the buyer. f) Sellers under FOB and C&F contracts may effect contingency insurance to cover their interest if the consignee refuses damaged goods or is unable to take delivery by paying for the goods because of insolvency. g) The cover under the SSRI Policy takes into consideration the requirements of the consignor of goods for insurance to protect the goods during storage at the destination railway yard or carrier’s premises, pending clearance by the consignees on termination of cover under Open Policy. h) Multi Transit Policy is to be issued which can cover transit, storage/ process and transit under the same policy without any break in cover. IC-67 MARINE INSURANCE 144 PRACTICE QUESTIONS AND ANSWERS CHAPTER 6 Answers to Test Yourself Answer 1 The correct option is II. Open policy is also known as floating policy. Answer 2 The correct option is III. A person has no direct insurable interest in his friend. Self-Examination Questions Question 1 Which of the following is not a policy, but is an agreement, whereby the insurer undertakes to insure all shipments declared by the assured? I. Specific policy II. Open cover III. Exports incentive insurance IV. Multi Transit policy Question 2 Which of the following is incorrect with respect to ‘increased value insurance’? I. In increased value insurance, the assured is required to bear 25% of the claim amount payable under this component of the policy. II. Increased Value insurance shall not be granted for more than 100% of the CIF insurance, except in exceptional circumstances. III. The rate of premium shall be 80% of the normal rate applicable to CIF insurance. IV. Increased Value insurance on cargo in inland transit (where not in conjunction with overseas transit) in excess of the established market value or controlled price of the commodity concerned, whichever is lower, shall not be granted under any circumstances. Question 3 What is the minimum premium for an annual policy? I. Rs 1,000 II. Rs 5,000 III. Rs 10,000 IV. Rs 15,000 IC-67 MARINE INSURANCE 145 CHAPTER 6 PRACTICE QUESTIONS AND ANSWERS Question 4 _________, the period of which is 12 months, is issued to cover goods belonging to the assured or held in trust by the assured, not under contract of sale or purchase, and which are in transit by rail or road from specified depots/processing units to other specified depots/processing units. I. A specific policy II. An open policy III. An annual policy IV. A multi transit policy Question 5 What is the notice period for cancellation of ‘open cover’ for marine risk? I. 15 days’ notice II. 30 days’ notice III. 40 days’ notice IV. 48 days’ notice Answers to Self-Examination Questions Answer 1 The correct option is II. Open cover is not a policy, but is an agreement, whereby the insurer undertakes to insure all shipments declared by the assured. Answer 2 The correct option is III. The rate of premium shall be 100% (and not 80%) of the normal rate applicable to CIF insurance. Hence, option III is incorrect. Answer 3 The correct option is II. The minimum premium for an annual policy is Rs 5000. Answer 4 The correct option is III. Annual policy, the period of which is 12 months, is issued to cover goods belonging to the assured or held in trust by the assured, not under contract of sale or purchase, and which are in transit by rail or road from specified depots/processing units to other specified depots/processing units. Answer 5 The correct option is II. The notice period for cancellation of open cover for marine risk is 30 days. 146 IC-67 MARINE INSURANCE  CHAPTER 7 HULL INSURANCE - PART 1 Chapter Introduction In this chapter, you will learn about the categorization and classification of vessels. You will also learn about various hull insurance policies, subsidiary interests and various Institute Clauses related to hull covers. Learning Outcomes A. Classification of vessels B. Insurance of hull and machinery and subsidiary interests IC-67 MARINE INSURANCE 147 CHAPTER 7 CLASSIFICATION OF VESSELS Look at this Scenario MT Omvati Prem was the name of the tanker which was contracted for carrying 85,000 metric tons of crude oil from Iran to India in 2012 following the European sanctions, when European insurance companies declined to provide third party insurance cover. The event was important for two reasons: a) It was the first Indian ship to carry oil after European sanctions. b) India and Japan jointly provided government backed insurance cover to ships carrying Iranian crude oil and bypassed European sanctions. Mercator, the owner of MT Omvati Prem, insured the vessel with United India insurance company for $50 million to protect the ship against physical damage. A further Insurance cover of $50 million was taken for P&I risks to cover the vessel against pollution damage, cargo damage, wreck removal and personal injury claims. With Indian government backed insurance (United India Insurance Company), Indian shippers, who were in a quandary after European sanctions, thus got some respite. A. Classification of vessels a) Introduction to Hull Insurance Shipowners resort to marine insurance for protection of their ships, freight, disbursements and other interests against marine perils. Heavy capital values are locked up in ships, the loss of which can prove financially crippling to the strongest of steamer companies. Hull insurance refers to the insurance of hull and machinery and other interests, known as subsidiary interests, of ocean-going vessels, fishing vessels, sailing vessels, trawlers, barges etc. Subsidiary interests are generally freight and disbursements. Hull insurance for vessels when they are under construction is called “construction / builders’ risks” insurance. Also, there are certain special types of hull covers like Charterer’s Liability Risks, Ship Repairer’s Liability Risks, etc. Relatively recent development of hull insurance is insurance of Oil Drilling Rigs and Offshore Oil Platforms as well as allied construction risks. 148 IC-67 MARINE INSURANCE CLASSIFICATION OF VESSELS CHAPTER 7 b) Broad categorisation of vessels Vessels are broadly categorised into following 2 groups: Mechanically self-propelled vessels of steel construction classed with Lloyd’s Register of Shipping or any other internationally recognised Classification Society including Indian Register of Shipping (IRS). These vessels may be liners or tramps carrying cargo and or passengers employed in home or foreign trade. Smaller crafts, generally of local origin, built of steel, wood or fiber-glass which may or may not be classed. Normally such crafts are used in inland waters, coastal waters or within port areas. Earlier, when IRS was not a full-fledged classification society, classification for the smaller vessels with IRS warranted prescribed discounts. Now as IRS has become a full-fledged classification society, discount, if any, is to be decided by the concerned insurer. c) Features of hull policies i. Hull Policies can be issued either on time basis or voyage basis. As per the Marine Insurance Act 1963, a time policy cannot be issued for a longer period than 12 months. ii. The subject matter of Hull Insurance is the Vessel or Ship. Most of the ships are of steel construction and are mechanically propelled; however small vessels may be of wooden constructions. iii. Registration: Under Merchant Shipping Act 1958, every Indian ship, exceeding fifteen tons net and employed solely in navigation on the coast of India, is required to be registered and a certificate to that effect is to be obtained from Director General of Shipping. iv. Tonnages: 9 The Gross Tonnage (GT) of a ship comprises the moulded volume of all enclosed spaces of the shipments to which a formula is applied in accordance with the 1969 International Convention of Tonnage Measurements of Ships. No unit of measurement is assigned to it and the figure attained is simply referred to as the ship's "Gross Tonnage" (GT). 9 Net Tonnage (NT) is also a measurement which takes into consideration the volume of the ship but for measuring the NT, out of GT, engine room space, crews’ accommodation place, fuel space etc., are to be deducted to find out the actual usable area. 9 Dead Weight Tonnage (DWT) refers to cargo carrying capacity of the vessel in terms of weight. It also refers to submerging of the ship with cargo up to its load line. It is expressed in tons. IC-67 MARINE INSURANCE 149 CHAPTER 7 CLASSIFICATION OF VESSELS d) Classification Classification is like quality certification i.e. certification about the shipowner having followed a particular standard of construction and maintenance. When a ship is classified with a particular Classification Society, it has to follow their rules of construction and maintenance for the ship. By periodic surveys the classification society monitors the maintenance of the ship. Wherever there is shortcoming, the shipowner is advised by the society to rectify the same, which, if not done, the classification may be suspended or even withdrawn. Indian Register of Shipping (IRS) is the Indian classification society which attained the full-fledged membership of International Association of Classification Societies (IACS) in June 2010. e) Types of vessels The vessels are classified into two major types: 9 Ocean-going vessels; and 9 Sundry vessels a) Ocean-going vessels These vessels are further classified into the following main categories. i. General cargo vessels They generally measure more than 500 GT and include container vessels, barge carriers, Lighter Aboard Ship (LASH), Roll On - Roll Off (RO - RO) ships, Refrigerated ships (Reefers), Car Carriers, Livestock Carriers, etc. ii. Liner vessels These operate as per advertised schedules. At any given port, they will not wait beyond a fixed time because they have to maintain an advertised time schedule. So their services are more reliable. They are also better managed. Investments in liner services are more and, so, to protect the investment, the owners have to employ efficient crew. They command higher than market freight because of their reliability in services. Insurance companies accept liners with higher age for insurance (generally 25 years) without any extra premium. 150 IC-67 MARINE INSURANCE CLASSIFICATION OF VESSELS CHAPTER 7 iii. Tramp vessels Tramps, on the other hand, do not operate on any advertised route and generally they are engaged in chartered trade. They go wherever the cargo is available, as time for completion of any voyage is not important. They operate seasonally, so crew is also not permanent and are not very well paid either. So higher standard of efficiency cannot be expected from them. Insurance companies accept tramps for insurance at normal rates if their age is not more than 15 years. For older vessels extra premium is charged for both cargo and hull insurance. iv. Dry bulk carriers These are large vessels with very high GT (say 70000 GT) and engaged in bulk cargo trade (cargo without any packing, in loose form) like iron ores, coal, sugar, bauxite, fertilizers etc. They generally have single decks and large holds and hatches to facilitate faster loading and unloading operations. The wide hatches are potential source of danger in case of heavy weather. v. Liquid bulk carrier Tanker vessels are liquid bulk carriers. They carry liquid cargo like oils, chemicals etc. The stability of vessel is more important because of the nature of the cargo they carry. Generally they are single bottom. Tanks have many compartments instead of single compartment, to maintain the stability of the vessel. The cargo has corrosive effect and so the life of tankers is much lesser than other vessels. Cargo Underwriters charge normal premium for cargo being carried by tankers upto 10 years of age and above that, extra premium is charged. vi. Super tankers The term VLCC (Very Large Crude Carriers) is used for the tankers of the size of 75,000 to 1,50,000 DWT Tons. The term ULCC (Ultra Large Crude Carrier) is used for tankers of the capacity of 1,50,000 Tons DWT to 3,00,000 Tons DWT. These large vessels cannot enter ports with insufficient draught. There are also difficulties in passing through narrow areas like Suez Canal and may have to take longer sea routes instead. Maneuvering problems are also there. At the time of heavy weather there may be tremendous stress on the body of the vessel and lack of repair facilities at many ports is also a problem connected with these vessels. IC-67 MARINE INSURANCE 151 CHAPTER 7 CLASSIFICATION OF VESSELS vii. Combination carriers These are used for carriage of dry as well as liquid bulk cargoes. They are classified as OBOs (Oil Bulk Ore or Ore Bulk Oil Vessels) and are generally in the range of 70,000 to 1,50,000 and 1,50,000 to 2,50,000 Tons DWT respectively. They are used for seasonal trades where dispatch of liquid or dry cargo is only for the part of the year. For remaining part the vessels can be switched over to other types of use -- liquid or dry cargo. viii.Container vessels These are specially built to carry containers and are normally engaged in liner trade. They also have sophisticated loading and discharge facilities. They generally carry containers up to 4 tiers and should have adequate lashing and securing facilities. Some general cargo vessels also can carry containers, in addition to normal cargo. For such vessels, engaged in liner operation, upto 30 years of age, normal premium is charged. ix. Lighter aboard ship (LASH) These ships carry containers in the forms of barges. Such ships have massive cranes and elevators for loading and unloading operations. At destination, barges are lowered into the water and towed to the shore. x. Roll on - Roll Off (RO – RO) Ships: A RO-RO vessel does not have any cranes. The vehicles like lorries, trailers etc. are driven on board with the cargo and once they reach the destination, they are driven out. Cars and other vehicles also can be transported by them. These vessels are very useful where there is inadequate handling facility. Stowage of vehicles is very important to maintain stability of the vessel. xi. Passenger vessels These are cruises and pleasure crafts carrying passengers to places of tourist interest. They operate on modern navigational systems like satellite navigation, GP System etc. Some of the biggest and well-equipped ships in the world are Passenger Ships. b) Sundry vessels i. Coastal Vessels They operate in coastal waters, plying between ports and thus cater to an important sector of India’s trade. These are generally small in size and many are engaged in carriage of bulk cargoes. They operate as Liners or Tramps. Being smaller in size they do not have to worry about high stress during heavy weather. 152 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 ii. Fishing Vessels These are built of steel, fibreglass etc.as compared to wood in the days gone by. There may be combination of steel and fibreglass . Depending on their construction, they can operate in inshore waters as also in the open seas. So the hazards of both types are associated with them. iii. Dredgers Dredgers are used mainly to dig up sand, mud, gravel etc. from the sea, river, canal etc. bottoms in order to deepen channels and make them navigable. The crafts are fitted with the machinery and appliances for dredging work. iv. Barges A relatively small flat-bottomed vessel. They are generally used in port waters to carry cargo and passengers. They are widely used to lighten big ships, which lay anchor outside port limits, for reasons of their big size or unavailability of berths. v. Launches Open or half-decked utility boats, used to carry tourists and regular passengers over short distances. Test Yourself 1 Which of the following types of vessels is best suited for carrying cargo like iron ore? I. Barge carrier II. Dry bulk carrier III. Liquid bulk carrier IV. Lighter Aboard Ship B. Insurance of hull and machinery and subsidiary interests 1. Types of Policies a) Hull and machinery (H&M) insurance Policy covers hull, machinery, equipments and stores etc. on board the vessel. It does not cover cargo. The cover granted is for: 9 Total Loss whether actual or constructive 9 Partial Loss 9 General Average and Salvage Charges 9 Sue and Labour Charges, and 9 Ship’s liability for collision IC-67 MARINE INSURANCE 153 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS However collision liability is covered for 3/4ths (which can be extended in certain cases to 4/4ths). Sometimes P&I cover is also granted under the policy. For vessels operating in port areas only; cover for liability towards removal of wreck etc. may also be granted under the P&I cover. b) Disbursements insurance Disbursements are shipowner’s expenses to run the vessel. They can be insured upto a maximum of 25% of sum insured on H&M insurance, provided other supplementary interests are not insured. The cover is generally for Total Loss/Constructive Total Loss, with excess liabilities for Collision (3/4ths Liability), General Average, Salvage and Salvage Charges, Sue and Labour Charges etc. c) Freight insurance Freight, whether chartered or anticipated, time hire, passage money etc. can be insured under a Voyage or Time policy. As it is a supplementary insurance it is allowed up to 25% of H&M insurance, provided other supplementary interests (e.g. Disbursements, Managers’ Commissions, Profits or Excess or Increased value of item) are not insured. The cover provided is as per Institute Time Clauses Freight 1.10.1983, covering loss of freight, upto the extent of gross freight lost. Losses resulting from loss of time are excluded. Partial losses are covered subject to 3% franchise. Franchise does not apply to GA, fire, sinking, stranding or collision claims. In total loss claims also, there is no deduction. Policy also covers contribution towards GA, Salvage Charges, Sue and Labour Expenses etc. For details see subsequent paragraphs. d) Premium reducing insurance Insurance premium under hull policy is insured separately. The policy covers loss of premium against Total Loss and Constructive Total Loss. The indemnity reduces on monthly pro rata basis i.e.1/12th per mensem. e) Return of Premium Under an H&M policy, proportionate premium is returned for lay ups of the vessel, but only at the end of the policy and that too if the vessel is not a total loss during the policy period. This loss of premium in case of total loss can be insured under this policy but in practice, this insurance is not granted. 154 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 f) Ship repairers’ liability A ship repairer needs to cover his legal liability towards loss or damage to vessels under his care, custody and control, including whilst being worked upon, being towed etc. The cover is granted as per Ship Repairers’ Liability Clause as per the wording normally in vogue in the London Market. g) Ship Builders’ insurance The cover is granted as per the Institute Clauses for Builders’ Risks 1.6.88 and covers the full period of construction from the time keel is laid, upto the completion of vessel as also to include the trial run and launching. The policy may be longer than 12 months and sum insured should be actual completion value. The premium has two components – one is chargeable upfront on the completed value and the other one is chargeable for the construction period at a monthly rate. h) Charterers’ liability insurance A Charterers’ contractual obligations are generally set out in the Charter Party Agreement, which is the contract under which the vessel is chartered. Basically, a charterer is required to return the vessel to its owners in the condition in which the vessel is taken. So, a Charterers’ Liability policy usually covers Charterers’ Liability for Hull & Machinery damage and also the Charterers’ Liability for Protection & Indemnity claims. Coverage can also be extended to include Liability to Cargo, as well as other extensions, including Freight, Defence and Demurrage cover. i) Loss of hire insurance Loss of Hire policy covers the loss of hire suffered by a shipowner if the vessel is laid up for repairs following a loss covered under H&M Insurance Policy. The cover is given when the vessel is under charter. The cover is for other than Total Losses. There is a special condition under the policy making it mandatory to commence repairs within 12 months of expiry of the policy. j) Loss of profits insurance The policy covers the charterers’ loss of profits over the period of charter, if the vessel is time-chartered or voyage-chartered, if the vessel becomes total loss during the period of charter. The loss of vessel gives rise to loss of profits for the charterer that is covered under the policy. k) War and strikes risks Indian flag vessels can be insured under the Government War Risks Insurance Scheme which is administrated by the General Insurance Corporation of India. Policy can be issued by both private and public sector insurance companies. IC-67 MARINE INSURANCE 155 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS 2. Institute time clauses – Hulls 1.10.83 Institute Time Clauses – Hulls provide the widest cover – referred as “on full conditions” -- for hull and machinery interests. They contain 26 clauses and we will now study some of the more important clauses. These clauses have been subject to revision over the years. The Indian marine hull market at present follows the 1.10.83 version although the Joint Hull Committee in London (representing the International Underwriting Association and Lloyd’s Underwriters’ Association) has issued a revised version of ITC-Hulls dated 1.11.95. As there were certain provisions in the clauses which were not acceptable to the shipowners, the Indian market has not accepted the same. In 2002 The International Hull Clauses were introduced which were amended in 2003. The latest version is effective from 1/11/2003. The Indian market mainly uses the 1983 version of the clauses. Given below is an analysis of the 1983 clauses. a) Perils covered Clause number 6 specifies the perils in two groups: 6.1 and 6.2 Section 6.1: This insurance covers loss / damage to the subject-matter insured caused by: i. Perils of the seas, rivers, lakes or other navigable waters ii. Fire, explosion iii. Violent theft by persons from outside the vessel iv. Jettison v. Piracy vi. Breakdown of or accident to nuclear installations or reactors vii. Contact with aircraft or similar objects or objects falling therefrom, land conveyance, dock or harbour equipment or installation viii. Earthquake, volcanic eruption or lightning The perils contained in Section 6.1 of the clause are perils over which the assured has little or no control. Section 6.2: This insurance covers loss / damage to the subject-matter insured caused by: i. Accidents in loading, discharging or shifting cargo or fuel ii. Bursting of boilers, breakage of shafts or any latent defect in the machinery or hull iii. Negligence of Master, Officers, Crew or Pilots iv. Negligence of repairers or charterers provided they are not the Assured hereunder v. Barratry of Master, Officers or Crew 156 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 Provided such loss / damage has not resulted from want of due diligence by the assured, owners or managers The perils enumerated in Section 6.2 of the clause are perils over which the assured may have some control and for this reason are made subject to the “due diligence” provision. The onus of proof is upon the insurers if they wish to avoid a claim on the grounds of the assured’s want of “due diligence”. b) Pollution hazard (Clause 7) This clause provides cover if the vessel is damaged or destroyed by a Government authority to avoid or mitigate pollution. For example, a badly damaged tanker leaking oil and polluting the environment is deliberately set on fire. The act of the Government must flow directly from the casualty which is covered by the insurance, and the assured must have used his best endeavours to prevent pollution. c) General average and salvage (Clause 11) This clause provides that general average and / or salvage will be paid if the loss was incurred to avoid, or in connection with the avoidance of, an insured peril. d) Duty of the assured (Sue and Labour) – (Clause 13) A sue and labour charge is an expense incurred by the assured, their servants or agents, with the intention of preventing or minimising any loss or damage that would be recoverable under the policy. The Hull and Machinery Policy pays sue and labour charges in addition to any other claim under the policy, even in addition to a total loss. e) Collision liability (Clause 8) This clause covers legal liability, which the assured may incur by way of damages paid to the owners of the other vessel and cargo thereon, owing to a collision between the insured vessel and the other vessel. The insurers provide this supplementary cover to the assured (in addition to the insurance on the vessel itself) to the extent of 3/4ths of such liability. In no case shall the total liability of insurers exceed 3/4ths of the Sum Insured, any one collision. The insurers will also pay 3/4ths of the legal costs incurred by the assured, with the insurer’s consent, in contesting liability or taking proceedings to limit liability. IC-67 MARINE INSURANCE 157 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS Exclusions There is no liability under this clause in respect of: i. Removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever; ii. Any real or personal property or thing whatsoever except other vessels or property on other vessels ; iii. Cargo or other property on, or the engagements of, the insured vessel; iv. Loss of life, personal injury or illness; v. Pollution or contamination of any real or personal property or thing whatsoever (except other vessels with which the insured vessel is in collision or property on such other vessels). These excluded liabilities, apart from the engagements of the insured vessel, are customarily covered, together with the remaining one-fourth of the collision liabilities and costs by entry in a Protection and Indemnity (P&I) Association. This clause is a supplementary agreement to the policy and any claim thereunder is recoverable in addition to a claim for total loss. f) Sistership (Clause 9) This clause provides that if the insured vessel is in collision with or receives salvage services from a vessel under common ownership or management, the assured's rights under the policy are assessed as if the other vessel was of separate ownership. g) Deductible (Clause 12) An amount specified in the Deductible Clause is deducted from the total amount of claim caused by an insured peril arising out of each separate accident or occurrence. The deductible is an “excess” and only the amount in excess of the amount of claim is payable. If the amount of the claim is less than the deductible, nothing is payable. The deductible applies to all claims in respect of damage to the ship, collision liability claims, GA and salvage charges and sue and labour charges. The deductible shall not apply to a claim for total loss - actual or constructive, of the vessel. However, when a sue and labour expense is incurred but a total loss results despite attempts to save the vessel, the deductible is not applied to sue and labour charges, nor to any expense of service in the nature of salvage. 158 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 h) Notice of claim and tenders (Clause 10) In the event of an accident, the assured must give notice to insurers and also, if the vessel is abroad, to the nearest Lloyd's agent, so that the insurers can arrange for a survey. Under the clause, the insurer may veto a place of repair or repairing firm or may decide, to which port or firm the repair is entrusted. Insurers are also given the right to take tenders and when they exercise this right, the assured is entitled to an allowance at the rate of 30% per annum on the insured value for time lost between the dispatch of invitations to tender and the acceptance of a tender. Failure to comply with conditions of this clause warrants a deduction of 15% from the ascertained claim. i) Navigation (Clause 1) The clause allows the vessel to assist or tow vessels in distress or to be towed when it is customary or to the first safe port when in need of assistance. Otherwise, it is warranted that the vessel shall not be towed, or shall not undertake towage or salvage services under a contract previously arranged by the insured. j) Breach of warranty (Clause 3) The assured is held covered in the event of a breach of warranty as to cargo, trade, locality, towage, or salvage service. 'Held covered' means cover can be arranged, subject to due notice and payment of additional premium. k) Disbursements Warranty (Clause 21) The object of this express warranty is to restrict the amount of ancillary insurances, which a shipowner may effect on limited conditions, as additional cover to the amount insured on hull and machinery subject to ITC-Hulls. The measure of indemnity for partial losses under ITC-Hulls is the reasonable cost of repairs. Underinsurance does not affect the amount recoverable, subject only to the sum insured being sufficient to cover the loss. The rate of premium payable for insurance on “full conditions” (under which repair costs are payable in full upto the insured value) is higher than that for “limited conditions”, such as Total Loss Only. IC-67 MARINE INSURANCE 159 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS Unless a restriction is imposed, a shipowner may insure his vessel on “full conditions” for a sum considerably less than its true value and the balance under the “limited conditions”, thereby obtaining almost complete insurance cover at low cost. Further, the lower the value insured on hull and machinery, the easier it is for the assured to prove a CTL. The Disbursements Warranty was, therefore, framed to prevent this abuse and to ensure an adequate sum insured on H&M Policy. For example, the clause provides that sum insured under Disbursements Insurance cannot exceed 25% of the sum insured under H&M interest. Disbursements are a shipowner’s costs in fitting out and provisioning the vessels and towards other items of a nebulous or indescribable nature, but which are very real in case of loss. Similarly, the clause allows freight to be insured for time only upto 25% of the Hull & Machinery value less any amount covered on disbursements. l) Termination (Clause 4) Unless the insurers agree to the contrary in writing, the insurance shall terminate automatically, if any of the following occur during the policy period: i. Change of Classification Society ii. Change, suspension, discontinuance, withdrawal or expiry of Class of the vessel. If the vessel is at sea, such automatic termination shall be deferred until arrival at her next port of call. iii. Change, voluntary or otherwise, in the: 9 Ownership or flag 9 Transfer to new management etc. When the Termination Clause operates, a pro-rata daily net return of premium is allowed. m) Other Clauses i. Assignment of policy is made subject to underwriters’ agreement (Clause 5) ii. Returns for Lay-up and Cancellation (Clause 22) provides for pro-rata return of premium: 9 When the policy is cancelled for reasons other than sale or transfer or 9 When the vessel is laid up in port 160 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 However, no return of premium is allowed if the vessel is a total loss during the period of insurance. Therefore, settlement of returns is postponed until after the expiry of the insurance. iii. Clauses 23 to 26 exclude war, strikes, malicious acts and nuclear risks 3. International hull clauses (IHC) 1/11/2003 Major provisions of these clauses, highlighting the areas of difference as compared to ITC Hulls 1.10.83, are as below: a) Perils i. Named perils (perils of the sea, fire, explosion etc.) plus “due diligence” perils of latent defect, crew negligence etc. ii. Cover for accidents in loading etc. and contact with satellites etc. not subject to ‘due diligence’ proviso. iii. Cover for common costs given at 50% where loss / damage caused by burst boiler, broken shaft or latent defect iv. Optional Additional Perils Cover provides cover for costs of correcting the latent defect and repairing the burst boiler / broken shaft and the remaining 50% of common costs. b) Leased equipment Cover for equipment not owned by the assured, but for which the assured is responsible given as standard cover. c) Parts taken off Cover for parts taken off the vessel given as standard cover. d) Pollution hazard Covers loss and damage caused by governmental authority to prevent pollution and environmental damage / threat, consequent upon damage to the vessel for which underwriters liable. e) 3/4ths RDC i. Cover for 3/4ths of insured value in respect of legal liability arising out of a collision. ii. Cover for legal costs limited to 25% of the insured value (save where agreed in writing otherwise). iii. Pollution exclusion does not extend to other vessel or property on other vessel nor to an Art 13(1)(b) salvage award. Optional 4/4ths and Fixed & Floating (FFO) cover available. IC-67 MARINE INSURANCE 161 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS f) GA Cover for vessel’s proportion of salvage, salvage charges, general average. No reduction where the vessel is underinsured. g) Sue and labour Duty of assured to sue and labour and cover for charges properly and reasonably incurred. No reduction where the vessel is underinsured. h) Navigation Navigating provisions no longer expressed as warranties; rather, underwriters not liable during period of breach. Cover resumes post breach. i) Continuation Cover to next port in good safety at pro-rata monthly premium continues where vessel in distress/missing (at sea) or in distress (in port) and where notice given as soon as possible j) Class/ISM Vessel must be classed (and comply with class recommendations as to seaworthiness) with an agreed classification society and must hold valid certificates. Automatic termination, save where the vessel at sea or loss of class etc. results from insured loss/damage k) Management Automatic termination on change of ownership, sailing on scrap voyages. Duty to comply with statutory requirements, failing which underwriters not liable for causative failures l) Constructive Total Loss CTL payable where costs of repair / recovery exceed 80% of the insured value m) Navigating Limits The vessel shall not enter, navigate or remain in certain areas, between certain times. Not expressed as warranties. Bering Sea Transit cover free. 162 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 Optional Covers: i. Fixed and Floating Cover ii. 4/4 ths RDC iii. Lay up returns iv. G A Absorption v. Additional perils: repair cost of bursting of boilers due to latent defect, losses due to negligence etc. n) Notice of claims Within 180 days of knowledge of loss . o) Duties of assured – in the event of a claim. p) Duties of underwriters - in the event of a claim. 4. Institute voyage clauses – Hulls 1.10.83 a) Use of voyage clauses Institute Time Clauses – Hulls are used when a vessel is insured for a period of 12 months or less. In case the insurance is for a particular voyage, then Institute Voyage Clauses – Hulls are incorporated in the policy. These differ from ITC – Hulls in the inclusion of “Change of Voyage Clause” (No. 2) and the omission of some clauses which have provisions peculiar to the time insurance only, namely Termination Clause, Breach of Warranty Clause, etc. The “Change of Voyage Clause” is a held covered situation in case of deviation or change of voyage or any breach of warranty as to towage or salvage services, provided notice be given to the insurers immediately after receipt or advices and any amended terms of cover and any additional premium required by them to be agreed. b) Limited covers The ITC – Hulls provide the widest cover on hull and machinery interests. Covers with ‘limited conditions’ are available, the examples of which are given below: i. ITC – Hulls – Total Loss, General Average and 3 /4 ths collision liability (including Salvage, Salvage Charges and Sue and Labour) ii. ITC – Hulls – Total Loss only (including Salvage, Salvage Charges and Sue and Labour) iii. ITC – Hulls – Disbursements (Total Loss only) IC-67 MARINE INSURANCE 163 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS c) Insurance of freight i. Concept of freight Freight is the remuneration received by the shipowner for carriage of goods from one port to another. The Marine Insurance Act, 1963 refers to freight as follows: “The term ‘freight’ includes the profit derivable by the shipowner from the employment of his ship to carry his own goods or movables as well as freight payable by a third party, but does not include passage money.” The shipowner may also receive remuneration by hiring his vessel out to another party who, in turn, will make a profit by carrying their own goods or those of others. Such arrangements to carry cargo or hire a vessel for time or voyage are embodied in contracts of affreightment, such as bills of lading, time charters and voyage charters. ii. Loss of freight Where freight is paid in advance, it is not returnable no matter what happens to the cargo subsequently . Therefore, pre-paid freight is at the risk of the owner of the goods and is included in the value of the goods insured under a cargo policy. A loss of freight to the carrier (who may be shipowner or charterer) can therefore only arise when the freight is payable at destination and the carrier runs the risk of not receiving it by reason of the loss of ship and/or damage to or loss of cargo. The shipowner obviously has insurable interest and so he can insure such freight. The form of policy used for insurance of freight is the Hull form with the Institute Time Clauses – Freight or Institute Voyage Clauses – Freight attached to it. iii. Comparison of time and voyage freight clauses The Institute Time Clauses – Freight and Institute Voyage Clauses – Freight are identical except that the following clauses, which do not apply to voyage insurances, are omitted from the Institute Voyage Clauses – Freight: 9 Continuation Clause 9 Termination Clause 9 Returns for Lay-up and Cancellation The perils covered under both the Freight Clauses are the same as those covered under the Perils Clause of Institute Time Clauses - Hulls and Institute Voyage Clauses – Hulls. 164 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 iv. Valued and unvalued policies Freight policies may be issued on valued basis or unvalued basis. In practice, unvalued policies are issued. Section 18(2) of the Marine Insurance Act, 1963 provides that the insurable value of freight is the gross amount of freight at the risk of the assured plus the charges of insurance. The gross amount includes the expenses of earning the freight. The “Measure of Indemnity Clause” of Time and Voyage Clauses provides, inter alia, that “the amount recoverable under this insurance for any claim for loss of freight shall not exceed the Gross Freight actually lost.” This clause may be explained with the following examples. Example Example 1 Valued policy for sum insured on freight Rs. 10,00,000 Gross freight at risk Rs. 8,00,000 Loss of freight by insured perils Rs. 1,00,000 Claim on policy (equal to 1/8th of gross freight Rs. 1,00,000 at risk) i.e. 1/8th of Rs. 8,00,000 Because of the provisions of this clause limiting the claim to the proportion of the gross freight actually lost, the insured is entitled to only Rs. 1,00,000 and not Rs. 1,25,000 (1/8th of Rs. 10,00,000). This explains why valued policies are not used for freight insurances. Example 2 Unvalued Policy for sum insured on freight Rs. 8,00,000 Gross freight at risk Rs. 10,00,000 Loss of freight by insured perils Rs. 2,00,000 The claim is adjusted as follows: Insurable value of freight Rs. 10,00,000 pays Rs. 2,00,000 1/5th Therefore, sum insured of Rs. 8,00,000 pays in Rs. 1,60,000 proportion: 8/10 of Rs. 2,00,000 This is a case of underinsurance. If the amount insured was Rs. 10,00,000, the loss would have been recovered in full. IC-67 MARINE INSURANCE 165 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS v. Partial loss of freight Partial loss may occur, for example, when there is a non-delivery of part of the goods on which freight is payable on delivery. The Franchise Clause of Institute Freight Clauses provides that partial loss is not covered if the amount of loss falls below 3% of insurable amount. The 3% limit does not apply: 9 to general average loss (this is beyond the control of the shipowner) 9 when the partial loss is caused by the sinking, stranding or collision with another vessel (this is so because the object of the franchise is to eliminate small and frequent claims) vi. Total loss of freight Total loss of freight can occur when the cargo being carried is totally lost, say by fire, and the shipowner consequently does not receive the freight due to him under the contract. The same situation would arise if the ship and the cargo were totally destroyed, say, by sinking in heavy weather. Clause 15 (Total Loss) of the Institute Freight Clauses provides: In the event of total loss (actual or constructive) of the vessel named herein, the amount insured shall be paid in full, whether the vessel is fully or partly loaded or in ballast, chartered or unchartered. An insurable interest in freight arises as soon as the contract of affreightment is concluded, the fulfillment of which may be prevented by maritime perils. The whole amount insured by the freight policy becomes payable in the event of TL or CTL of the vessel, whether the vessel is chartered or not or whether she is fully or only partly loaded at the time of the loss. Thus it is possible for the shipowner to arrange his main policy on Hull and Machinery on full conditions (ITC–Hulls) for a lower sum insured and additionally Total Loss Only Insurance on freight at a lower rate of premium. Therefore, the disbursements warranty of ITC–Hulls restricts such sum insured to 25% of sum insured on H&M Insurance. vii. Loss of time clause This clause reads as follows: 9 “This insurance does not cover any claim consequent on loss of time, whether arising from a peril of the sea or otherwise”. 9 This clause effectively excludes losses proximately caused by delay. If a vessel is damaged and can be repaired, no claim can arise on the ground that the vessel cannot be repaired in time to earn the freight. 166 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 viii.Claim documents The documents required for freight claims are: 9 Bills of lading, Charterparty, other contracts of affreightment. These are required to establish insurable interest. 9 Freight Account: This is a document dealing with the whole freight for the voyage. It shows the exact amount of freight earned, and the loss may be determined by deducting this sum from the whole freight at risk. 9 Policy covering freight. 9 Other documents, such as protest, log books, hull and cargo survey reports etc. d) Port risks insurance In times of full shipping employment, vessels would be unlikely to lay-up for long periods. However, during economic recession, when there is less demand on tonnage, vessels may be laid–up in port, perhaps for long periods. Also, vessels engaged in seasonal trades, such as holiday steamers, are frequently covered on “Port Risks” Clauses while out of commission and under ITC–Hulls during, their operating period. Such vessels laid-up in port or other sheltered waters can be insured subject to Institute Time Clauses – Port Risks. These conditions give cover very similar to ITC–Hulls but wider in scope with 4/4ths Collision Liability and a certain degree of P&I cover, generally referred to as Limited P&I. 5. Institute fishing vessels clauses 20.7.87 Coverage Fishing Vessels are normally covered subject to Institute Fishing Vessels Clauses 20.7.87. The cover provided by these Clauses bears a close resemblance to the ITC-Hulls 1.10.83, but with some major differences which are listed below: i. Fishing Gear (Clause No. 15): No claim is payable for loss / damage to fishing gear unless: 9 Caused by fire, lightning or violent theft by persons from outside the vessel 9 Totally lost following total loss of vessel by insured perils IC-67 MARINE INSURANCE 167 CHAPTER 7 INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS ii. Collision liability (Clause No. 18): Unlike the similar clause in ITC-Hulls, this covers 4/4ths Collision Liability. iii. Protection and Indemnity (Clause No. 20): Various Protection and Indemnity (P&I) risks are covered under this clause. There is no P&I Clause in ITC-Hulls. Protection and Indemnity (P&I) Associations and Mutual Clubs i. Role of P&I Clubs in marine insurance P&I Clubs are by far the largest and most important of the mutual marine insurance associations, because vessels and freight are mainly insured with underwriters in the open insurance market and the P&I Clubs are, therefore, ancillary to the marine insurance market. Almost all the owners of ocean- going ships obtain insurance for their liabilities to others from a P&I Club – which is essentially a non-profit association for collective self-insurance. ii. Liabilities covered The liabilities that are covered by these mutual associations include: 9 Personal injury, illness, loss of life of crew members and passengers 9 Life salvage 9 One-fourth of collision liability not included in the hull policies under the ITC Hulls 3/4ths Collision Liability Clause. 9 Damager to docks, piers, jetties and other fixed and floating objects other than ships 9 Pollution by oil or other substances escaping from the ship 9 Wreck removal charges 9 Loss of or damage to cargo carried on the ship It will be observed that the above are not covered by the policies issued in the open marine market. 168 IC-67 MARINE INSURANCE INSURANCE OF HULL AND MACHINERY AND SUBSIDIARY INTERESTS CHAPTER 7 iii. Management of P&I clubs Each P&I Club is controlled by a Board of Directors elected from among its shipowner and charterer members, but day-to-day operations are entrusted to full-time professional managers, who, among other duties, determine the amount to be paid by each member, help members to deal with the claims made against the Club and give advice on a wide range of shipping problems. There are no P & I Clubs in India, and hence a shipowner in India may enter in a P&I Club abroad. Test Yourself 2 The Government War Risks Insurance Scheme under which Indian flag vessels can be insured is administrated by _______________. I. The State Governments for their respective states II. The Central Government III. The General Insurance Corporation of India IV. The General Insurance Council IC-67 MARINE INSURANCE 169 CHAPTER 7 SUMMARY Summary a) Hull insurance refers to the insurance of hull and machinery and other interests, known as subsidiary interests, of various vessels b) Vessels are broadly categorised into the following 2 groups: 9 Vessels that are classed with any internationally recognised Classification Society and 9 Smaller crafts which are not subject to classification c) Hull Policies can be issued either on time basis or voyage basis. The subject matter of Hull Insurance is the Vessel or Ship. d) Sea going vessels are classified into the following main categories: 9 General cargo vessels 9 Liner vessels 9 Tramp vessels 9 Dry bulk carrier 9 Liquid bulk carrier 9 Super tankers 9 Combination carriers 9 Container vessels 9 Lighter Aboard Ships (LASH) 9 Roll On – Roll Off (RO – RO) Ships 9 Passenger vessels e) Sundry hulls are classified into the following main categories: 9 Coastal vessels 9 Fishing vessels f) The policies under hull insurance and subsidiary interests include: 9 Hull and machinery (h&m) insurance 9 Disbursements insurance 9 Freight insurance 9 Premium reducing insurance 9 Return of premium 9 Ship repairer’s liability 9 Ship builders’ insurance 9 Charterers’ liability insurance 9 Loss of hire insurance 9 Loss of profits insurance 9 War & strikes risks insurance 170 IC-67 MARINE INSURANCE SUMMARY CHAPTER 7 g) Institute Time Clauses – Hulls provide the widest cover for hull and machinery interests or in other words, they cover hull and machinery “on full conditions”. h) The Indian marine hull market at present follows the Institute Time Clauses – Hulls 1.10.83. i) ITC – Hulls Clause number 6 specifies the perils covered in two groups: Section 6.1 and Section 6.2. j) Pollution Hazard Clause (Clause No. 7) provides cover if the vessel is damaged or destroyed by a government authority to avoid or mitigate pollution. k) As per Deductible Clause (Clause No. 12), the specified deductible amount is deducted from the total amount of claim caused by an insured peril arising out of each separate accident or occurrence. l) As per the Breach of Warranty Clause (Clause No. 3) the assured is held covered in the event of a breach of warranty as to cargo, trade, locality, towage, or salvage service. m) The International Hull Clauses 1/11/2003 have clauses, inter alia, with regard to: 9 Perils covered, 9 Continuation 9 Leased equipment 9 Class/ISM 9 Parts taken off 9 Management 9 Pollution hazard 9 Constructive Total Loss 9 3/4ths RDC 9 Navigating limits 9 GA 9 Notice of claims 9 Sue and labour 9 Duties of assured clause 9 Navigation 9 Duties of underwriters n) Institute Voyage Clauses – Hulls 1.10.83 are used when the insurance is for a particular voyage. o) Freight policies may be issued on a valued basis or unvalued basis. In practice, unvalued policies are issued. p) Protection & Indemnity (P&I) Clubs are by far the largest and most important of the mutual marine insurance associations, because vessels and freight are mainly insured with underwriters in the open insurance market and the P&I Clubs are therefore ancillary to the marine insurance market. q) Almost all owners of ocean-going ships join P&I Clubs, which are essentially non-profit associations for collective self-insurance a variety of situations. IC-67 MARINE INSURANCE 171 CHAPTER 7 PRACTICE QUESTIONS AND ANSWERS Answers to Test Yourself Answer 1 The correct answer is II. A dry bulk carrier is best suited to carrying cargo like iron ore. Answer 2 The correct option is III. The Government War Risks Insurance Scheme under which Indian flag vessels can be insured is administrated by the General Insurance Corporation (GIC). Self-Examination Questions Question 1 Which vessel is best suited to carrying cargo like oil? I. Barge carrier II. Dry bulk carrier III. Liquid bulk carrier IV. Lighter Aboard Ship Question 2 A hull policy issued on time basis cannot be for a period longer than 12 months, as it is prohibited under ______________. I. The Insurance Act, 1938 I. The Marine Insurance Act, 1963 II. The IRDA Act, 1999 III. The General Insurance Business Nationalisation Act (GIBNA), 1972 Question 3 Which vessel is best suited to carrying cars and other vehicles? I. Barge carrier II. Dry bulk carrier III. Lighter Aboard Ship IV. RO-RO Ship 172 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 7 Question 4 Which of the following statements is correct with regard to Ship Builders’ Insurance? I. The cover should be for 12 months and the sum insured should be the actual loss incurred at the time of occurrence of an event leading to the loss II. The cover should be for 12 months and the sum insured should be the actual completion value III. The cover may be longer than 12 months and the sum insured should be the actual loss incurred at the time of occurrence of an event leading to the loss IV. The cover may be longer than 12 months and the sum insured should be the actual completion value. Question 5 In the case of Institute Time Clauses – Hulls 1.10.83, if there is a claim then with regard to Deductible (Clause no. 12), which of the following statements is true? I. If the amount of claim is more than the deductible, then only the amount which is in excess of the deductible is payable II. If the amount of claim is less than the deductible, then the entire amount is payable III. If the amount of claim is more than the deductible, then the entire claim amount is payable IV. If the amount of claim is more than the deductible, then nothing is payable. Answers to Self-Examination Questions Answer 1 The correct option is III. A liquid bulk carrier is best suited to carrying cargo like oil. Answer 2 The correct option is II. A hull policy issued on a time basis cannot be for a period longer than 12 months as that is prohibited under the Marine Insurance Act 1963. Answer 3 The correct option is III. RO-RO ship is best suited to carrying cars and other vehicles. IC-67 MARINE INSURANCE 173 CHAPTER 7 PRACTICE QUESTIONS AND ANSWERS Answer 4 The correct option is IV. In the case of Ship Builders’ Insurance, the cover may be longer than 12 months and the sum insured should be the actual completion value. Answer 5 The correct option is I. V. If the amount of claim is more than the deductible, then only the amount which is in excess of the deductible is payable 174 IC-67 MARINE INSURANCE  CHAPTER 8 HULL INSURANCE-PART 2 Chapter Introduction This chapter deals with the underwriting aspect of hull insurance such as proposal form, other relevant documents, valuation, classification, rating and other important factors related to underwriting. We will also touch upon the IRDA guidelines regarding the use of Marine Hull Manual for insurance of different types of vessels. Learning Outcomes A. Underwriting B. Marine hull manual IC-67 MARINE INSURANCE 175 CHAPTER 8 UNDERWRITING Look at this Scenario In 2008, Bunga Melati Dua, a Chemical/Palm Oil Tanker was seized by Somalian pirates in the Gulf of Aden during its voyage from Malaysia to Rotterdam, and taken to Somalian coasts. A ransom was demanded for release of the vessel by pirates. During the period of negotiations (between shipowners and pirates), a dispute arose between cargo owners and cargo insurers as regards the loss by piracy and theft. Once the negotiations were complete, the ransom amount was paid by the shipowners and the vessel was released by the pirates. It safely reached Rotterdam, where cargo was safely discharged from the vessel. Even though cargo was returned safely, cargo owners refused to take delivery of cargo and instead filed for total loss claim on the policy. The matter went to trial in the commercial court to decide whether the capture by pirates rendered a vessel and its cargo either an Actual Total Loss (ATL) or Constructive Total Loss (CTL). The judgment on the matter was given in February 2010 and the trial judge ruled that it was neither ATL nor CTL as both cargo owners and shipowners had every intention of recovering the cargo and the vessel and so, negotiations between shipowners and pirates had commenced soon after seizure of the vessel to obtain release! A. Underwriting Underwriting of marine hull takes into consideration many technical and non- technical aspects. Contrary to the practice for cargo insurance, hull underwriters invariably use proposal forms. 1. Proposal Form A duly completed proposal form is invariably obtained from the shipowner. There are three types of proposal forms, as follows: i. Proposal Forms for sundry hulls like Fishing Vessels, Sailing Vessels, Dredgers, Inland Vessels, etc. ii. Detailed Proposal Forms in respect of Ocean-going Vessels. iii. Specialised Proposal Forms for certain types of policies e.g. Builders’ Risks Insurance, Ship Repairers’ Liability Insurance, etc. The Proposal Form elicits information mainly in respect of the following: 176 IC-67 MARINE INSURANCE UNDERWRITING CHAPTER 8 a) Technical details of the vessel i. Type of vessel, e.g. tanker, general cargo, dry bulk carrier, dredger, passenger liner, container vessel, fishing vessel/trawler, etc. ii. Construction of vessel (steel, wood, composite or fibreglass) iii. Name of builders and place built iv. Age of vessel (year built) v. Tonnage (GT and DWT) or Break Horse Power (for Supply Vessels, Tugs etc.) vi. Dimensions (to verify the tonnage information) i.e. length, breadth, draught, etc. vii. Whether the vessel is equipped with (I) Twin Screws (ii) Double Bottom and (iii) Collision Bulkhead. viii. Method of propulsion and particulars of engine/machinery (main, auxiliary or refrigerating). ix. Particulars of fire extinguishing equipment. Definition Gross Tonnage (GT) indicates that the ship has been measured in accordance with the requirements of the 1969 International Convention on Tonnage Measurement of Ships. It is different from Gross Register Tonnage (GRT). GT is a unitless index related to a ship's overall internal volume. It is calculated based on the moulded volume of all enclosed spaces of the ship and is used to determine things such as a ship's manning regulations, safety rules, registration fees, and port dues, whereas the older GRT is a measure of the volume of certain enclosed spaces. Definition DWT means “Deadweight Tonnage”. Deadweight means the capacity in tons of the cargo required to load a ship to her loadline level. b) Other details of vessel i. Valuation of the vessel. ii. If entered with a Classification Society for hull and machinery, dates of survey and whether the recommendations of the Society related to each aspect have been complied with in order to maintain Class. When was the vessel last surveyed and by whom? iii. Is the vessel registered with the competent authority in accordance with the provisions of the Indian Merchant Shipping Act 1958? iv. Port of Registry and Registration Certificate number. v. Flag (to ascertain if the vessel is registered in a Flag of Convenience – F.O.C. – country ) IC-67 MARINE INSURANCE 177 CHAPTER 8 UNDERWRITING c) Trade related details i. Trade, the vessel is engaged in, and whether as liner or tramp. Trading warranties and navigational limits. ii. Nature of cargo usually carried. iii. Whether single ship – “singleton” – or part of a fleet of two or more vessels. iv. Record of ownership and quality of management. v. Whether the vessel is given on charter and if so, details. vi. Whether the vessel is mortgaged for any loan, and if so, details and arrears of repayment, if any. vii. If laid up in monsoon, place and period. d) Insurance related details i. Conditions of insurance required and the size of deductible. ii. Period of insurance for time policy and details of voyage for a voyage policy. iii. Claims experience of last 5 years (net premium and claims paid and outstanding, statistics). iv. Previous insurance history and whether cover was declined at any time by any insurer. v. Whether the vessel is covered against Protection & Indemnity (P & I) risks, say, by way of a membership of a P&I Club? The underwriter will also take into account prevailing repair costs and underwriting experience of similar risks. Known losses are published regularly in Lloyd’s of London Press and annually by the Institute of London Underwriters. 2. Supporting documents Normally, along with the Proposal Form, following supporting documents are called for: a) Registration Certificate / Licence of the vessel. b) Valuation Certificate on Hull and Machinery and accessories. c) Pre-insurance Survey Report, when required by underwriters. d) Additional queries on the vessel, as may be considered relevant. e) In case of Fishing and Sailing vessels, details of arrears of loan payments to the Bank/ Financier and also confirmation that there is no default. 3. Valuation of ship for insurance Of prime importance to the underwriter is the value of the vessel proposed for insurance. A marine hull policy is a valued policy. Therefore, the value declared for cover must be adequate. 178 IC-67 MARINE INSURANCE UNDERWRITING CHAPTER 8 Underwriters are liable for the cost of repairing Particular Average or General Average, damage irrespective of the insured or the actual value of the ship, except that the insured value constitutes a maximum for any one casualty. On the other hand, in the event of total loss of the vessel, the sum insured becomes payable. With this in mind, the underwriter must remember that a low valuation will produce a situation following a major casualty when a constructive total loss (CTL) would easily be arrived at. Conversely, when a highly valued modern vessel is involved in a major casualty, it is less likely for a CTL to be possible. However, the costs of repair will result in very heavy particular average claims. Section 29 (3) of Marine Insurance Act, 1963 states: “Subject to the provisions of this Act and in the absence of fraud, the value fixed by the policy is, as between the insurer and the assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.” The normal method is to insure the ship for its current market value. However, in case the ship is mortgaged to the government, it is necessary to insure for the value fixed by the government for the purpose of insurance. Normally, the underwriter insists on a Valuation Certificate from a recognized valuer, who would normally be on their panel . 4. Classification of vessels The main objective of ship classification is to promote safety at sea, for life, for ships and their cargoes as also for the environment. Ship Classification Societies establish standards, guidelines and rules for the design, construction and survey of ships and of other marine structures. The Classification Certificate is the document confirming that a ship has been built according to the rules and standards of the relevant Classification Society, and that it has both structural and mechanical fitness for its intended service. Although such classification is not obligatory, it would be impossible to trade without it in the modern world. Certainly an owner would be unlikely to obtain insurance cover for his ship without meeting such standards. Like all standards, which have to be met, classification requires periodical surveying by shore-based personnel in order to ensure that the ship meets the requirements of the Society. Failing to meet these terms, or not complying with recommendations issued by the Society, may result in the suspension, withdrawal or cancellation of its class, which could cause automatic termination of its insurance. (Please refer the Termination Clause under Chapter 7.) IC-67 MARINE INSURANCE 179 CHAPTER 8 UNDERWRITING 5. Indian Register of Shipping (IRS) This is a Classification Society established in India in 1975. Till very recently as IRS was not a full-fledged member of the International Association of Classification Societies (IACS). Indian insurers were accepting their classification only up to Rs. 10 Crores per vessel but now it has become a full-fledged member and so, its classification is valid for any amount. . Services of IRS are also available for the following purposes: a) Damage surveys of ships, offshore structures and related equipment and containers. b) Warranty surveys for marine transportation and installation of offshore structure. c) Design appraisal, inspection and certification of fixed offshore platforms during construction on behalf of underwriters. d) Survey of damage repairs; preparation of repair specifications; evaluation of tender bids; supervision of repairs; endorsement of repairers’ bills ; etc., whether in India or abroad. 6. Rating Normally, every fleet starts with one vessel and over a period of time more vessels attach to it. To start with, every vessel is rated individually, and that is called Initial Rating. Twelve months later, when the time for renewal comes, all vessels of the fleet are rated collectively, which is known as Renewal Rating. (a) Initial Rating At the time of Initial Rating, mainly, following factors are taken into account: i. Management and ownership with their corresponding claims experience. ii. Type, trade, age, tonnage, all aspects of machinery, whether main, auxiliary or refrigerating. iii. Valuation of the vessel. iv. If entered with a Classification Society for Hull and Machinery, the dates of survey related to each aspect and whether the Society’s recommendations have been carried out to maintain Class. v. Conditions of insurance being opted, including the Deductible. vi. Trading Area known as Trading Warranty vii. Prevailing repair costs. viii. Underwriting experience of similar risks. 180 IC-67 MARINE INSURANCE UNDERWRITING CHAPTER 8 The underwriter has to fix a rate which should take care of the following losses: 9 Total Loss 9 Particular Average i.e. accidental partial loss 9 General Average contributions 9 Collision liabilities 9 Salvage Charges and Sue and Labour Charges etc. The rate has two components: i. Rate for Risk of ‘Total Loss’ ii. Rate for Risk of ‘Other than Total Loss’ (also known as ‘Average Loss’ or ‘ Ex TL’). The two components are then combined to arrive at the overall rate that will appear in the policy. Definition The Total Loss rate is a rate percent applied to the insured value of the vessel and is thus conditioned mainly by the value factor of the ship. The “ex TL” element of the risk is mainly determined by the size of the ship. It is fixed as a certain amount, says Rs. 30/- multiplied by the Deadweight Tonnage (DWT) or the Gross Tonnage (GT) of the vessel. Deadweight tonnage represents a vessel’s carrying capacity in terms of weight and Gross Tonnage in terms of volume. Therefore, they give a more reliable indication of the size and earning potential of an ocean-going vessel . GT is the volume of the interior of the vessel. With cruise/passenger vessels the GT is more likely to be used for calculation. Since the purpose of these vessels is to transport people, the vessel is devoted to cabin services and social accommodation: as this varies greatly, the GT is the most consistent feature to use in case of cruise/passenger liners. Both the premiums are combined and the resultant premium, divided by the insured value, is then expressed as a rate percent on that insured value, and that single rate (called the “Slip Rate”) will be quoted to the client. IC-67 MARINE INSURANCE 181 CHAPTER 8 UNDERWRITING Example Following example will illustrate how the rates are applied and the premium is calculated: Shipping Company National Shipping Line Vessel M.V. “RATNA” Year built 1997 GT 10,000 Insured value Rs. 30,00,00,000 Type General Cargo Carrier Conditions of insurance ITC Hulls 1/10/83 Deductible under Clause No. 12 Rs. 15,00,000/- Trading Warranties Institute Warranties 1.7.76 Total Loss rate 0.75% Ex TL rate Rs. 40/- per GRT Calculation of Premium Total Loss Premium @ 0.75% On Rs. 300,000,000 Rs. 2,250,000 Ex TL Premium @ Rs. 40 /- Per GRT i.e. 40 x 10,000 Rs. 400,000 Total Premium i.e. ‘A’ plus ‘B’ Rs. 2,650,000 “Slip Rate” is expressed as: = 0.883% p.a. (2,650,000 x 100) / 300,000,000 Thus, the premium payable is arrived at by applying the above rate to the insured value of the vessel. a) Renewal rating During the tariff era, renewal rating for Indian fleets consisting of ocean- going vessels was done as per an elaborate formula, which was largely based on the London Market practice. The formula took into account various factors viz. number of vessels in the fleet; their total sum insured; five years’ premium and claims experience etc. The formula enabled one to decide whether the rating level of the fleet needed to be enhanced, reduced or left untouched i.e. allowed to continue “as expiring”.However, following detariffing of hull business effective 1st April 2005, the insurers can decide for themselves whether and what methodology to follow in this regard. 182 IC-67 MARINE INSURANCE UNDERWRITING CHAPTER 8 7. Underwriting: a) Types of hazard i. Physical Hazard: If the physical hazard reveals adverse features, the insurer may insist on : 9 Pre-insurance survey 9 Compliance of Warranty Survey (e.g. In case of a tow, the underwriter imposes a warranty to the effect that the “tug, tow and towage arrangements be approved by a named surveyor and all recommendations complied with.”) 9 Limiting the scope of cover 9 Imposition of adequate excess to be borne by the assured 9 Loading of premium ii. Moral Hazard: However, if moral hazard is indicated, the proposal will be declined. Superior or inferior types of vessels can be rated, but moral hazard cannot be rated. The nature of perils in hull insurance is such that investigation of most of the claims presents difficulties. A total loss of an insured vessel may be engineered at times but, even after the most exhaustive investigation, proof of wilful misconduct or fraud can rarely be obtained. b) Risks having adverse underwriting features Each insurance company will have a list of hull risks not to be favourably considered. Example Some examples of risks which have adverse underwriting features are: i. Older country crafts, small boats, yachts etc. ii. Vessels over 20 years old. iii. Shipbreaking risks. iv. Vessels belonging to the owner with a background of very adverse claims experience or where there is default in repayment of outstanding mortgage loan. IC-67 MARINE INSURANCE 183 CHAPTER 8 UNDERWRITING 8. Warranties Hull policies are invariably subject to various warranties relating mainly to the use of the vessel. Some warranties frequently used are the following: a) Employment or use of the vessel for a specific trade or trades. b) The area of operation e.g. Warranted employed for fishing on East and West Coasts of India but not to proceed beyond 300 nautical miles into the sea (for Deep Sea Fishing Trawlers). Normally, ocean-going ships are insured subject to Institute Warranties dated 1.7.1976, which allow them to trade in the widest possible geographical area. However, these warranties do impose certain specific restrictions with respect to area, period of year and a combination of the two. They also restrict carriage of Indian coal during certain parts of the year. Any breach of these restrictions requires prior agreement of insurers and appropriate additional premium. c) Registration/Licensing warranty for fishing/sailing vessels. The warranties must be strictly observed. Ocean-going vessels are also invariably subject to the warranty that they are classed and class maintained throughout the currency of the policy period. Test Yourself 1 _______________ establish standards, guidelines and rules for the design, construction and survey of ships and of other marine structures. I. Marine classification societies II. Vessel classification societies III. Craft classification societies IV. Ship classification societies 184 IC-67 MARINE INSURANCE MARINE HULL MANUAL CHAPTER 8 B. Marine hull manual In India, insurance of ships and shipowning interests are governed by the Marine Hull Manual, issued by the Tariff Advisory Committee in 1983. As per IRDA directives, the Indian insurers have to follow the terms and conditions as laid down in the Manual whereas they can charge their own premium rates which are discretionary. The Manual contains detailed provisions for the insurance of ocean-going as also the following types of vessels. i. Fishing Vessels ii. Sailing Vessels iii. Inland Vessels iv. Dredgers v. Jetties, Pontoons, Wharves, etc. vi. Builders’ Risks vii. Ship Repairers’ Liabilities (SRL), Charterers’ Liabilities (CRL) etc. Though manual provides for reference of certain risks to TAC, after detariffing there is no such need and insurers can take their own decisions. 1. Insurance of fishing vessels The manual provides scheme for insurance of fishing vessels which is for all Fishing Vessels/Trawlers (mechanised or non-mechanised) valued up to Rs.100 lakhs and engaged in fishing operations only (including towage) and plying up to 100 nautical miles (NM) into the sea from shore (1NM = 1.852 Km.). a) Conditions of insurance Fishing vessels can be insured as per the following terms: i. Institute Fishing Vessels Clauses (IFVC) 20.7.87 but limited to pay only TL/CTL (including Salvage, Salvage Charges and Sue and Labour) ii. IFVC, 20.7.87 with P & I risks (clause 20) deleted, iii. IFVC, 20.7.87 , All policies have to be subject to the warranty: “Warranted Vessel to comply with local laws and regulations with regard to registration and licensing.” No cover shall be granted on Fish Catch on board the Fishing Vessel/Trawlers. Fishing Nets whilst on shore under repair or whilst stored in godowns, can be covered against perils like Fire, Theft and Burglary in other than Hull departments and no cover shall be granted under a Marine Hull policy. IC-67 MARINE INSURANCE 185 CHAPTER 8 MARINE HULL MANUAL Whilst vessels are laid-up for repair or painting, cover for fishing nets on board the Vessel shall continue subject to the relevant insurance covering the Vessel. However, when the net is not on the Vessel, the sum insured of the Vessel shall not be reduced. During such times, if the Vessel becomes a total loss, claims will be paid subject to deduction for the net. It is, therefore, essential that the value of the fishing net(s) should be ascertained at inception. Facility to pay premium in instalments as per the “Premium Instalment Clause” can be agreed for fishing vessels with H&M Sums Insured exceeding Rs. 20 lakhs. For vessels upto H&M Sum Insured Rs. 20 lakhs, there is a provision to charge 40% of Annual premium for 3 months cover, which can be renewed for next 3 months by collecting another 30% and then again for 6 monts by collecting another 30% . This has been done to discourage those owners of small fishing vessels who may be in the habit of taking policies for short terms and then cancelling them; and again asking for a short term policy and again cancelling mid-term and so on. b) Adverse weather warranty All Fishing Vessels/Trawlers shall contain the following warranty: i. Warranted Vessel, when not employed, shall be safely anchored or moored or secured. ii. Warranted Vessel shall not be employed during adverse weather conditions notified by the concerned Port Authorities and/or Directorate of Fisheries. 9 Warranted during adverse weather, vessel shall remain in safe waters properly moored ; and 9 if already at sea, shall return forthwith as soon as they become aware of the adverse weather warnings; and 9 vessel shall be manned adequately at all times except when in harbour, sheltered/safe waters, when it should be secured properly and adequate watch and ward maintained throughout the period it remains therein. c) Deductible The deductible for vessels valued upto Rs.100 lakhs is 0.50% of their respective sums insured or 10% of the assessed loss, whichever is higher. 186 IC-67 MARINE INSURANCE MARINE HULL MANUAL CHAPTER 8 2. Insurance of sailing vessels Insurance of Sailing Vessels (commonly known as “Country Crafts”) is governed by this part of the Manual. The Sailing Vessel may be mechanised or non- mechanised, valued upto Rs.50 lakhs and employed for the carriage of cargo and operations connected therewith. Conditions of insurance Sailing Vessels can be covered on the following terms: i. As per ITC-Hulls-Total Loss Only (Including Salvage, Salvage Charges and Sue and Labour), ii. Wider conditions incorporating the P & I liabilities risks of ITC-Hulls –Port Risks 20.7.87 are also possible. Deductible -- 33 1/3% of assessed loss or Rs.1,000, whichever is higher, each claim. iii. Subject to ITC Hulls 1.10.83 with deductible as above. Note: Salvage Charges and Sue & Labour expenses shall be subject to the deductible stipulated above. 3. Insurance of Inland Vessels Examples of Inland Vessels are: 9 Barges, 9 Pontoons, 9 Flats, 9 Floating Cranes, 9 Launches, Passenger Vessels, 9 Tugs etc. employed in Inland Waters . Inland waters are all sheltered and protected waters such as harbour waters, back waters, sea water within a radius of 12 NM from the entrance to harbour/port, river waters, canal waters, lake waters, and the like. Conditions of insurance The Manual provides that the insurances on H & M interests be granted subject to one of the following sets of conditions: i. ITC Hulls TLO (Including Salvage, Salvage Charges and Sue & Labour) dated 1.10.83. Subject to deductible of one-fourth of sum insured or Rs.800 or Rs.10 per GRT, whichever is the highest, all claims other than TL/CTL, each occurrence. IC-67 MARINE INSURANCE 187 CHAPTER 8 MARINE HULL MANUAL ii. ITC Hulls 1.10.83 with deductible as above. iii. ITC Hulls 1.10.83 with the ¾ths Collision Liability Clause amended to 4/4ths and deductible as above. iv. ITC -Hulls Port Risks 20.7.87 and deductible as above. 4. Insurance of dredgers Dredger is a craft used to bring up sand, mud, gravel, etc. from the sea, river and canal bottoms in order to open and deepen channels and make them navigable. These crafts are fitted with the machinery and appliances for dredging work. a) Conditions of insurance As per the Manual provisions, insurance on H & M interests may be granted subject to one of the following sets of conditions: i. ITC Hulls TL Only (Including Salvage, Salvage Charges and Sue and Labour) 1.10.83. ii. ITC-Hulls 1.10.83. iii. ITC-Hulls 1.10.83 with the ¾ths Collision Liability Clause amended to 4/4ths. iv. ITC Hulls Port Risks 20.7.87. b) Deductible For Dredgers valued upto rupees one crore and falling within the purview of the Manual -- ¼ % of the Sum Insured for H & M interests or Rs.1,500, whichever is higher, all claims other than TL/CTL, each accident or occurrence. 5. Insurance of Jetties, Pontoons, Wharves, etc. The Manual has a provision for the captioned risks too. Conditions of insurance: All Jetties, Pontoons, Wharves, etc. in river, canal or sea waters and shall be insured subject to one of the following sets of conditions. i. Wider Cover The insurance covers all structural losses or damage to the Jetty, Pontoon, wharf, etc. and cranes and other equipment fitted thereon, occasioned by collision with vessels or any floating objects, cyclone, flood, tidal bore, fire, earthquake, explosion of boilers insured under this policy, including Salvage Charges in connection with the insured peril. 188 IC-67 MARINE INSURANCE MARINE HULL MANUAL CHAPTER 8 ii. Limited cover TL/CTL of Jetty, Pontoon, Wharf, cranes and/or boilers fitted thereon occasioned by collision with vessels/floating objects, cyclone, flood, tidal bore, fire, earthquake, including Salvage Charges. The insured must produce a satisfactory Survey Report every 3 years at their own cost and such surveys are to be conducted by surveyors approved by the underwriters. iii. Valuation Certificate This certificate obtainable by the assured at his cost, must be produced at the inception of the cover. Thereafter, the insured will be at liberty to increase/decrease the sum insured according to market conditions. Where the insurance is for an amount less than the appropriate value as determined above, the Condition of Average shall apply. Test Yourself 2 Which of the following is not an example of an inland vessel? I. Barges II. Pontoons III. Country Crafts IV. Launches IC-67 MARINE INSURANCE 189 CHAPTER 8 SUMMARY Summary a) GT is a unitless index related to a ship's overall internal volume. It is calculated based on the moulded volume of all enclosed spaces of the ship and is used to determine things such as a ship's manning regulations, safety rules, registration fees, and port dues, whereas the older Gross Register Tonnage is a measure of the volume of certain enclosed spaces. b) DWT means “Deadweight Tonnage”. Deadweight means the capacity in tons of the cargo required to load a ship to her loadline level. c) 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. d) The main objective of ship classification is to promote safety at sea, with respect to life, ships, their cargoes and the environment. e) Ship Classification Societies establish standards, guidelines and rules for the design, construction and survey of ships and of other marine structures. f) The Classification Certificate is the document confirming that a ship has been built according to the rules and standards of the relevant Classification Society, and that it has both structural and mechanical fitness for its intended service. g) The Total Loss rate is a rate percent applied to the insured value of the vessel and is thus conditioned mainly by the value factor of the ship. h) The ‘Average Loss’ element or “ex T.L.” element of the risk is mainly determined by the size of the ship. i) In India, insurance of ships and shipowning interests are governed by the 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. 190 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 8 Answers to Test Yourself Answer 1 The correct option is IV. Ship Classification Societies establish standards, guidelines and rules for the design, construction and survey of ships and of other marine structures. Answer 2 The correct option is III. ‘Country Crafts’ is a popular expression used for Sailing Vessels. They are not Inland Vessels. Self-Examination Questions Question 1 _____________ means the capacity in tons of the cargo required to load a ship to her load line level. I. GT II. DT III. DWT IV. PWT Question 2 __________ is calculated based on the moulded volume of all enclosed spaces of the ship. I. GT II. DT III. DWT IV. PWT Question 3 Insurance is purchased to ______________. I. Obtain financial security II. Invest money III. Place a bet IV. Lower tax liability IC-67 MARINE INSURANCE 191 CHAPTER 8 PRACTICE QUESTIONS AND ANSWERS Question 4 The__________ is a rate percent applied to the insured value of the vessel and is thus conditioned mainly by the value factor of the ship. I. Total Loss rate II. Ex TL III. DWT IV. GT Question 5 Which of the following elements of risk is mainly determined by the size of the ship? I. Total Loss rate II. Ex TL Rate III. DWT IV. GT Answers to Self-Examination Questions Answer 1 The correct option is III. DWT or Deadweight Tonnage refers to the capacity in tons of the cargo required to load a ship to her loadline level. Answer 2 The correct option is I. GT or Gross Tonnage is calculated based on the moulded volume of all enclosed spaces of the ship. Answer 3 The correct option is I. Classification Certificate is issued for confirming that a ship has been built according to the rules and standards of the relevant Classification Society, and that it has both structural and mechanical fitness for its intended service. 192 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 8 Answer 4 The correct option is I. The Total Loss rate is a rate percent applied to the insured value of the vessel and is thus conditioned mainly by the value factor of the ship. Answer 5 The correct option is II. Ex TL is an element of the risk which is mainly determined by the size of the ship. IC-67 MARINE INSURANCE 193 CHAPTER 8 PRACTICE QUESTIONS AND ANSWERS 194 IC-67 MARINE INSURANCE  CHAPTER 9 MARINE CLAIMS Chapter Introduction In this chapter, you will learn about the types of marine insurance claims and the procedure for marine claims. Finally, you will learn about General Average and Salvage. Learning Outcomes A. Types of marine insurance claims B. Cargo claims - Procedure and evidence C. General average and salvage IC-67 MARINE INSURANCE 195 CHAPTER 9 TYPES OF MARINE INSURANCE CLAIMS A. Types of marine insurance claims A claim upon a policy of marine insurance goods may arise upon the happening, as the result of insured perils, of any of the following: 1. Total loss: actual or constructive 2. Particular average, that is, partial loss 3. General Average (GA) loss 4. Expenses which are: a) Sue and labour charges and particular charges b) Salvage charges c) Forwarding expenses d) Extra charges Subject to the risks covered and excluded by the clauses, all the above types of loss are recoverable under appropriate sets of Institute Clauses for Hull (e.g. Institute Time Clauses Hull 1.10.83) and Cargo (Institute Cargo Clauses 1.1.82). 1. Total loss Marine total losses fall into two categories: actual total loss (ATL) and constructive total loss (CTL). a) Actual total loss Actual total loss of the subject matter is said to have occurred: i. When it is destroyed, that is, physical destruction by a peril insured against, such as sinking in deep during heavy weather sea or after collision or destruction by fire or by enemy in times of war; or, ii. When it loses its species, that is, it is so damaged that it is no longer a thing of the kind insured, e.g. where a shipment of dates is so badly damaged by sea perils that they are condemned as unfit for human consumption, or when cement turns into concrete following contact with water; or, iii. When the assured is irretrievably deprived thereof, as when a ship and cargo are captured and condemned in the times of war. Destruction thus is not essential to a claim for actual total loss or, iv. When the goods are in a ship that has been posted as "missing". A missing ship may be presumed an actual total loss when after the lapse of a reasonable time, no news of her is received. Section 56 of the Marine Insurance Act, 1963 provides that where goods reach their destination in specie, but by reason of obliteration of marks or otherwise, they are incapable of identification, the loss, if any, is not a total loss but must be dealt with as a partial loss. 196 IC-67 MARINE INSURANCE TYPES OF MARINE INSURANCE CLAIMS CHAPTER 9 Indemnity: Measure of indemnity for actual total loss is the insured value under the policy. b) Constructive total loss (CTL) This arises should all or any of the following occur: i. When the actual total loss of the goods appears to be unavoidable. ii. When the goods could not be preserved from actual total loss without an expenditure that would exceed their value. iii. When the assured is deprived of the possession of his goods and it is unlikely that he can recover them or the cost of recovery would exceed their value when recovered. iv. Where the cost of repairing damage and forwarding the goods to their destination would exceed their value on arrival. v. Where there is a loss of voyage namely, where there is a practical and effective impossibility of ever sending the goods to their port of destination. c) Difference between actual total loss and constructive total loss Broadly, a CTL may be better understood where it is recognised that an actual total loss is a physical total loss and it is absolute; whereas a CTL may be termed a commercial total loss. Thus 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. For cargo, the criteria are the cost of recovery, reconditioning the cargo and forwarding it to its destination. If the costs of these exceed the value on arrival at destination, a CTL may be claimed. d) CTL claim notice to insurer To substantiate a claim for CTL, the assured must give notice of his intention to abandon the goods or the ship as the case may be, to the underwriter and claim a CTL. The notice must be given without delay because the purpose is to give the insurer the opportunity to reduce or prevent the loss. This duty is waived only when the notice cannot benefit the insurer or when he waives the duty. e) Acceptance of notice by insurer If the insurer accepts the notice, he admits liability for the claim and accepts the responsibility for whatever may remain of the goods. In practice, the insurer always rejects the notice in the first instance, thereby reserving his position until all the facts have become or the underwriters available. IC-67 MARINE INSURANCE 197 CHAPTER 9 TYPES OF MARINE INSURANCE CLAIMS By the Waiver Clause of the ICC – 1.1.82 (clause 17), measures taken by the assured with the object of saving, protecting or recovering the subject- matter shall not be considered as a waiver or acceptance of abandonment or otherwise prejudice the rights of either party. The Duty of Assured (Sue and Labour) clause under ITC hull 1.10.82 (Clause 13.3) provides the same in respect of ship facing a CTL situation. Insurers are entitled to whatever remains of the property once they have accepted abandonment, and it does not matter if the proceeds exceed the insured value. However, insurers are not bound to take over the property on abandonment if, by doing so, they would incur liabilities in excess of the value of the property (salvage). f) Indemnity Measure of indemnity for CTL is the sum insured less any proceeds of sale which are due to the insurers. 2. Particular Average 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. The measure of indemnity for Particular Average to cargo varies according to: i. Whether it takes the form of loss of part of the cargo or ii. cargo arriving damaged at the destination a) 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. A policy is apportionable where different species of goods are insured by the same contract, e.g. tobacco and coffee or where separate valuations of the goods are agreed. The loss of a whole species or of all the goods clubbed in one valuation is recoverable as a total loss. In other words, where the insurance is apportionable, it is treated as a separate contract for each apportionable part. In these circumstances, it is only necessary to establish the insured value of the particular commodity lost and this will be the measure of indemnity under the policy. 198 IC-67 MARINE INSURANCE TYPES OF MARINE INSURANCE CLAIMS CHAPTER 9 Where packages of cargo are of equal value, it is a simple matter to ascertain the amount of the claim, but where there are different goods or qualities of goods insured under one valuation, the insurable values of each must be computed in order to ascertain the insured value of the packages lost. In practice, the apportionment is on the invoice values where the invoice distinguishes the separate values of different qualities or descriptions of goods, and over the net arrived sound value in all other cases, e.g. goods sent on consignment. Example 100 chests of tea, each chest of equal value, are insured for Rs. 1,00,000, so valued, under ICC (A). During the voyage, 10 chests get damaged by contact with sea water as a result of heavy weather and are a total loss. The claim payable under the policy would be: 100 chests of tea are insured for Rs.1,00,000 Therefore 10 chests are insured for Rs.10,000 Thus, the measure of indemnity for total loss of part is the insured value of the part totally lost. Example A consignment of 100 cartons coffee and 100 cartons jam are insured for Rs. 1,00,000, so valued, under ICC (B). One carton of coffee and one carton of jam are lost overboard during unloading operations and are a total loss. The invoice shows following values: CIF Invoice Value 100 cartons coffee Rs. 70,000 100 cartons jam Rs. 25,000 CIF Rs. 95,000 Claim payable under the policy Invoice value Insured value 100 cartons coffee Rs. 70,000 Rs. 73,684 100 cartons jam Rs. 25,000 Rs. 26,316 CIF Rs. 95,000 Rs. 1,00,000 Claim Payable Insured value of 1 carton coffee Rs. 736.84 Insured value of 1 carton jam Rs. 263.16 IC-67 MARINE INSURANCE 199 CHAPTER 9 TYPES OF MARINE INSURANCE CLAIMS Thus, where different types of goods are insured under one sum insured, Section 72(1) of the Marine Insurance Act 1963 provides the basics for division of the sum insured, that is, in proportion of insurable value. The insurable value according to Section 18(3) of the Act is the prime cost of the property insured plus expenses of and incidental to shipping and the charges of insurance upon the whole. This is known as the CIF value. b) Damaged cargo Where the whole or any part of the goods insured is delivered damaged at destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value. i. Gross value Means the wholesale price, or if there be no such price, the estimated value with, in either case, freight, landing charges and duty paid before hand; provided that, in case of goods customarily sold in bond, the bonded price is the gross value. ii. Gross proceeds Means the actual price obtained at a sale where all charges on sale are paid by the sellers. The use of "gross" values is to insure that the insurer's liability for the loss is not prejudiced by fluctuations in market values. Thus, the insurer’s liability for particular average is ascertained by comparing the gross sound and damaged values of the goods on arrival and applying the percentage of depreciation thus revealed to the insured or insurable value. The percentage of depreciation of goods arriving damaged is not necessarily determined by sale or auction. In fact, insurers prefer the consignee to take delivery of the damaged goods and to agree with the surveyor the percentage of depreciation suffered. The reason for this is that the actual market price is seldom realised when there is a forced sale of damaged goods and a compromised estimate of depreciation is frequently in the best interest of the insurers. Example Ten cases of cotton textiles, each case of equal value, railed from Mumbai to Delhi, are insured for Rs. 1,20,000, so valued. One case, lost in transit, was not available for delivery. Contents of three cases were damaged by contact with rain water. As an allowance cannot be agreed between the surveyor and the consignee, it was found necessary to sell the damaged goods for the best value obtainable. Gross arrived sound value of the three cases was Rs.40,000 and the gross proceeds of sale was Rs. 18,000. Survey fee was Rs. 200. 200 IC-67 MARINE INSURANCE TYPES OF MARINE INSURANCE CLAIMS CHAPTER 9 The claim payable under the policy which was subject to Inland Transit (Rail or Road) - Clause 'A' is arrived at as follows: 10 cases of cotton textiles are insured for Rs. 1,20,000 Therefore one case of textiles is insured for Rs. 12,000 Claim Claim for non-delivery of 1 case of textiles (i) Rs. 12,000 3 cases damaged by rain water Insured value of 3 cases of textiles is Rs. 36,000 Gross Arrived Sound Value (GASV) Rs. 40,000 Gross Arrived Damaged Value (GADV) Rs. 18,000 Difference Rs. 22,000 Therefore, depreciation is 22 X 100 = 55% 40 55% of insured value of 3 cases i.e. 55% of Rs. 36,000 Rs. 19,800 Survey Fees Rs. 200 Total (Rs. 19,800 + Rs. 200) (ii) Rs. 20,000 Total Claim Payable (i + ii) Rs. 32,000 Damage to certain commodities may be customarily dealt with in special ways on arrival at destination ports, and insurers use specific clause in their policies to follow such customs. Example a) Damaged cotton may be picked off the bale; b) Bags of damaged coffee may be "skimmed" by removing the damage beans; c) Tobacco may be "garbled" when the damaged portion is cut off; Broken pipes may be cut at the ends and the balance utilised. Appropriate clauses: "Pickings Clause", "Cutting Clause", etc. are inserted in the policies by which the insurers agree to pay for such losses irrespective of percentage and they are credited with proceeds, if any. Where goods are liable to "ullage", that is, customary trade loss in transit, care is taken in the adjustment of a claim for shortage by insured perils to insure that the ordinary loss is not included in the claim. iii. Salvage Loss It may happen in the event of cargo sustaining damage that it can be sold in it's damaged state at a place short of its destination to better advantage than if it is reconditioned and forwarded. In such an event, in the interests of all concerned, it is frequently agreed to sell the cargo at the intermediate port at the best price available. IC-67 MARINE INSURANCE 201 CHAPTER 9 TYPES OF MARINE INSURANCE CLAIMS The decision is usually taken with the approval of the insurers and the assured, and necessary arrangements are made by Lloyd's or company agent at that place. The settlement on the policy is made by the insurers paying the difference between the insured value and the NET proceeds of sale. This is known as "Salvage Loss". By such a method of settlement, insurers are involved in market fluctuations. This method of settlement is never adopted when loss is assessed at destination. Example 100 tons of potatoes were shipped on a vessel from Mumbai to Jeddah and were insured for Pound 20,000 subject to Institute Cargo Clauses (A). The vessel stranded near Bab-Al-Mandeb. Water entered cargo holds. Entire consignment of potatoes was damaged and began sprouting. The vessel, seriously disabled, put in at Aden, where the voyage was abandoned. It was decided to sell the potatoes at Aden to avoid a later total loss. The sale proceeds were at the rate of Pound 60 per ton with sale charges of 1% of gross proceeds of sale. Survey fees were Pound 40. Adjust the claim payable. The claim was settled on "Savage Loss" basis as under: Insured value of the consignment (i) Pound 20,000 Gross sale proceeds 100 tons X Pound 60 Pound 6000 Less: (i) Sale charges 1% of Pound 6000 Pound 60 (ii) Survey fees Pound 40 Net sale proceeds (ii) Pound 5900 Claim payable for (i) - (ii) Pound 14100 3. General average (GA) loss Since general average (GA) arises independently of insurance and concerns losses other than losses of goods, it is dealt with in more detail under part III of this chapter to which reference should be made. 4. Expenses a) Sue and labour charges A duty is imposed on the assured by common law that he should at all times act as if he were uninsured. In other words, he should take all reasonable measures to avert or minimise a loss to his property. 202 IC-67 MARINE INSURANCE TYPES OF MARINE INSURANCE CLAIMS CHAPTER 9 To give the obligation practical expression and to encourage the assured - himself and through his servants and agents, - to take all practical steps to avert or minimise loss or damage, the ICC clause contain what is known as the Duty of Assured Clause" (clause 16). Similar provision appears under clause no. 13 of “Duty of Assured” (Sue and Labour). ITC hull 1.10.83 under title “Duty of Assured” (Sue and Labour) This clause not only draws the attention of the assured to the common law obligations revolving upon him, but also contains an undertaking on the part of the insurers to meet all reasonable expenses incurred in averting or minimising a loss recoverable under the policy. Such expenses are known as sue and labour charges, and are a form of particular charge. For there expenses to be admissible there must have been operation of a peril insured against and the expenses must have been reasonably incurred with the object of averting or diminishing the loss by that peril. Subject to these considerations, sue and labour charges are payable by insurers apart from any other claim under the policy, this clause is accordingly treated as an independent contract. Indemnity: The indemnity for sue and labour charges is not conditioned by the relative insured value of the subject matter. The charges are payable in full, if reasonably incurred, irrespective of the insured value or of any other loss- even total loss - falling upon the insurers under the terms of the policy. If there be in the policy any provision as to "Excess" or "Franchise", sue and labour charges are not governed by such arrangement; they are payable irrespective of percentage of loss, whether the franchise or excess be exceeded or not. The essential qualification is that the expenses must be incurred by the assured himself, or by his factors, servants or assigns. Expenses or charges incurred by other parties, for e.g. salvors, are excluded. Sue and labour charges to be admitted must be in respect of the particular subject matter insured, and must be unusual or extraordinary; for e.g. a ship owner cannot claim in respect of charges which fall upon him in pursuance of his obligations under the contract of affreightment. General average expenses are not included as sue and labour charges. Sue and labour charges are incurred short of destination. If incurred at destination, they may be merely a method of assessing loss. For e.g. if hides damaged by sea water are reconditioned at an intermediate port to prevent further damage and probable total loss the cost of reconditioning will be a sue and labour expense. IC-67 MARINE INSURANCE 203 CHAPTER 9 TYPES OF MARINE INSURANCE CLAIMS b) Particular charges Definition Section 64 (2) of Marine Insurance Act, 1963 states that expenses incurred by or on behalf of the assured for the safety or preservation of the subject matter insured, other than GA and Salvage Charges, are called Particular Charges. Particular charges are not included in particular average. In theory, particular charges embrace charges in addition to sue and labour charges, the difference being that sue and labour charges are incurred short of destination whereas particular charges may be incurred at destination. Insurers may pay reconditioning charges at destination to avoid a greater partial damage claim. Difference between Sue & Labour Charges and Particular Charges In practice, sue and labour charges and particular charges are synonymous terms and to draw any distinction between them is of merely academic interest. Modern tendency is to treat all such charges as sue and labour charges. If a distinction were to be upheld, the effect would be that payment of any particular charge not in the nature of sue and labour would be conditional on the attainment of franchise percentage of loss, whereas sue and labour charges would be payable irrespective of insured value or of other loss - even of total loss - falling within the terms of the policy. The second difference is that sue and labour follows upon loss or damage, whereas particular charges may be incurred when the loss is threatened or imminent but is avoided by expenses for that purpose. c) Salvage charges Third parties who voluntarily and independently of contract render services to maritime property at sea which are of material assistance in saving the imperiled property are entitled under maritime law, to claim salvage. More details are given subsequently under part III of this chapter d) Forwarding charges The Institute Cargo Clauses (ICC) include a Forwarding Charges Clause (clause – 12) which states that when the insured transit is terminated at a port or place other than the policy destination as a result of the operation of an insured peril, the insurers agree to reimburse the assured for any extra charges properly and reasonably incurred in unloading, storing and forwarding the insured goods to the policy destination. 204 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 It is important to note that these expenses are reimbursed only when the transit is terminated short of destination by an insured risk and such reimbursement is subject to any exclusions specified in the clauses. The Forwarding Charges Clause does not apply to general average or salvage charges, nor shall it include charges arising from the fault, negligence, insolvency or financial default of the assured or their servants. e) Extra charges The expenses of protests, survey and other proofs of loss, including the commission or other expenses of a sale by auction are examples of "extra charges". These expenses are not admitted to make up the percentage of a claim, and are only paid by the insurers in case the loss amounts to a claim without them. Marine underwriters are liable for such extra charges only if the claim is admissible. In other words, they are not met at all if any franchise stipulated in the policy is not reached without their inclusion. If the claim is admitted, the extra charges are said to "follow the claim" and are paid in full as underwriters are liable for any such charges so far as they relate to goods found to be in a sound condition or to damage which does not give rise to a claim under the policy. The underwriters liability does not exceed the policy sum insured by the policy for both the loss and the extra charges in respect of any one loss/event. Test Yourself 1 Which of the following statements is correct with regards to measure of indemnity for actual total loss? I. Measure of indemnity for actual total loss is the sum insured less any proceeds of sale which are due to the insurers. II. Measure of indemnity for actual total loss is the insured value under the policy. III. The indemnity for actual total loss is not conditioned by the relative insured value of the subject matter; the charges are payable in full. IV. The measure of indemnity for actual total loss is the insured value of the part totally lost B. Cargo claims - Procedure and evidence Expeditious settlement of claims should be the main objective of an insurer, but such settlement should be effected within the terms and conditions of the insurance contract and as per the norms and laid down policy of the company. To achieve this objective, judicious processing of claims is essential. IC-67 MARINE INSURANCE 205 CHAPTER 9 CARGO CLAIMS - PROCEDURE AND EVIDENCE By marine insurance practice and also because of policy conditions, the claimant has to do two procedures for claim: 9 One with insurers; and 9 Other with carriers and bailees The procedure with carriers and bailees is required because they are the primary parties who handle the cargo and loss, if any, arises because of their improper handling of the cargo. Moreover, under various laws, they are liable to make good the loss. The general procedure for a marine cargo claim is explained in detail below. 1. Intimation of claim If the consignment is in apparently sound condition prompt clearance from the docks should be effected. For this, "prior entry" facilities may be availed of. 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. It is the duty of the assured and his agent to take all necessary and reasonable measures to avert or minimise a loss and to ensure that all rights of recourse against carriers / bailees are properly protected, preserved and exercised. a) Goods arrived by sea In respect of goods arrived by sea the assured or his agent is required: i. To claim immediately on the Carriers, Port Authority or other bailees for any missing packages; ii. To apply immediately for a survey by the ocean carrier / Port Authority, if any loss or damage be apparent and claim on them for any actual loss or damage found on such survey. iii. In respect of containerised cargo, the insured must ensure that the container and its seals are examined immediately on discharge from the overseas vessel. iv. If the container is delivered damaged or with seals broken or missing or with seals other than those as stated in the shipping documents, the Delivery Receipt should be claused accordingly and the insured should retain all defective or irregular seals for subsequent identification. v. In no circumstances, except under written protest, the insured should give clean receipts to carriers / bailees / other third parties where goods are in doubtful condition. vi. The insured should give written notice to the carriers / bailees within three days of landing of the goods, if loss or damage thereto was not apparent at the time of taking delivery. 206 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 b) Goods arrived by rail In respect of goods arrived by rail: i. The consignee should take examined delivery from the Railways of any packages, which are outwardly damaged or appear to have been tampered with and obtain a certificate of damage and / or shortage. If examined delivery is refused, suitable remarks as to the condition of the packages and contents thereof should be made in the Railway Station Delivery Book or on the negotiable copy of the Consignment Note in case of despatches by road or aircraft. ii. In the case of packages which are in a outwardly sound condition, but deficient in weight, the consignee should take weighment / examined delivery and obtain a Certificate of Shortage from carrier if deficiency in weight is proved. iii. The consignee should issue notice of claims against the carriers within the statutory time limits, as applicable. 2. Insurance surveys a) Provisions of Insurance Act 1938 The Insurance Act,1938 requires that claims exceeding Rs. 20,000 should be surveyed by a surveyor holding a valid license from the Controller of Insurance. b) When is a surveyor not required to be appointed It is not necessary to appoint any surveyors in respect of: i. Short landing or landed but subsequently missing cargo claims; or ii. Those arising from sinking of vessel; or iii. Where documentary evidence of value of the loss is available in the form of police reports, short landing/non delivery certificates issued by port trust, railways or other public or semi government authorities; or iv. Sling loss claims certified by harbour authorities. c) Survey fees Survey fees are paid initially by the claimant and will be reimbursed with the claim amount, if the claim is admissible under the policy. There is no specified scale of fees. IC-67 MARINE INSURANCE 207 CHAPTER 9 CARGO CLAIMS - PROCEDURE AND EVIDENCE The fees payable depends upon: i. The type of survey, i.e. Whether it is of technical nature or not requiring a degree of technical skill, ii. Time spent, iii. Labour required, iv. Place of survey, v. Proficiency and experience of surveyor employed, and vi. Whether any help was taken from a specialist or consultant 3. Survey reports (cargo) The survey report is an important document. It briefly indicates not only the facts concerning the loss but also the whole outline of the voyage. In general, the surveyor acts as an independent and impartial third party certifying the circumstances of the loss. A standard form of survey report seeks to obtain all the necessary information relating to the circumstances of the voyage and of the loss. It deals with the insurable interest of the claimant; the course of the voyage; the existence of delay and its cause; unusual circumstances during the voyage; terms of sale where and how the loss occurred and the extent of the loss. Some of the salient details contained in a standard survey report are discussed below. In case of partial loss / damage: i. Open assessment report by the carrier and / or ii. Survey report of surveyor appointed by insurers iii. Ship survey report (sea consignment) iv. Claim form and claim bill v. Copies of correspondence exchanged with carriers, wherever recovery from carriers is possible Bankers Certificate confirming non receipt of export proceeds in India in an approved manner (in case of claims under export policies settled in India). 4. Claims payable abroad In respect of marine claims arising and payable outside India, they are adjusted and settled by Claims Settling Agents named in the Policy. The Claim Settling Agents will have to be reimbursed with the amount of the claim settled by them. Alternatively, the settling agents collect complete documents in support of the claim and forward them to the underwriting office after adjustment, for payment. In either case, the permission of the Foreign Exchange Control Authorities in India has to be obtained, by making an application for remittance. 208 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 The company's bankers in India assist in obtaining the necessary approval and prepare the draft for the claim amount in foreign currency. This draft is then sent to the claimants abroad or to the Claim Settling Agents, as the case may be. The remittance must also cover the survey and settling fees of the agents (this is normally as per Lloyd's Scale of Fees). For certain Claim Settling Agents, the underwriting office in India has opened Letter of Credit in favour of these agents, and they are authorised to settle the claim direct with the claimants, and draw the amount from the Letter Of Credit established in their favour. Advices of such claims paid are sent to the underwriting office periodically. 5. Recoveries from third parties in case of hull insurance claims Prospects of recovery should be actively followed up as they help to reduce the claims ratio. A separate chapter in this study course deals with recovery of claims under subrogation. Recovery aspect is dealt with under a separate chapter. There may be a claim under a hull insurance policy when, by the operation of insured perils, any of the following occurs: a) Total loss Total loss may be actual total loss or constructive total loss (CTL). Where a claim is admitted under the policy, the amount recoverable for a total loss is the value insured by the policy. In aaddition, there may be amounts to be paid towards collision liability always with the related cost and Sue and Labour charges b) Partial loss For a partial loss, the amounts payable under the policy, subject to any “deductible” provided therein, are as follows: This includes claims for the followings: i. Particular average (PA) ii. General average (GA) iii. Salvage charges (SC) iv. Sue and labour charges (SLC) v. Collision liability (CL) vi. Particular average The reasonable cost of repairs effected, but not exceeding the sum insured in respect of any one casualty. Under ITC-Hulls 1.10.83, there is no deduction “new for old”. IC-67 MARINE INSURANCE 209 CHAPTER 9 CARGO CLAIMS - PROCEDURE AND EVIDENCE In respect of unrepaired damage, the reasonable depreciation in the value of the ship by reason of damage remaining unrepaired at the expiry of the policy, not exceeding the estimated reasonable cost of repairs and provided the ship has not become a total loss during the period of the policy. In the every of a subsequent total loss, the underwriters are liable only for the total loss and not for the unrepaired damage, as the owner has suffered no loss thereby. Successive losses are payable even though the total amount of such losses may exceed the sum insured. In respect of temporary repairs: When a vessel is lying damaged at a port where repairs are not practicable and temporary repairs have to be effected to make her seaworthy to sail to a repair port, they are properly recoverable as part of the reasonable cost of repairs. vii. General average (GA) In respect of sacrifices of the ship, the amount payable is computed in the same way as for Particular Average less the contribution received from other parties. For GA expenditure incurred by the ship owner, the amount payable by the hull underwriter is the proportion which falls upon the insured ship owner. For GA contribution, the policy will pay the proportion attaching to the ship. In both these instances i.e. in case of GA expenditure as well as GA contribution, the claim is subject to the contributory value of the ship being fully insured, and if it is not, the claim will be reduced in proportion to the underinsurance. viii. Salvage charges (SC) The amount payable under the policy is computed in the same way as for general average expenditure. ix. Sue and labour charges (SLC) The full sum expended subject to the ship being fully insured. (Note: G.A. and Salvage are dealt with in Chapter 10) x. Collision liability (CL) This is a supplementary cover over and above the insurance on the vessel itself, to the extent of ¾ths of such liability but not exceeding ¾ths of the sum insured on the vessel. Legal costs are also payable. 210 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 Most forms of hull insurance provide that claims for partial loss will be subject to a “deductible”, which the assured has to bear in respect of each claim to which the “deductible” is applicable as per the teams of cover 6. Burden of proof In all cases, whether a claim is presented upon a policy of marine insurance or is submitted in general average, the claimant has the burden of proving his claim. This means that the assured must produce evidence to show: 9 That loss / damage was caused by an insured peril; and 9 the extent of the claim In cases of general average, a similar standard of proof that the loss or expenses claimed is allowable in general average, will be required from the claimant. 7. Claim procedure for various vessels a) Ocean-going vessels i. Notice to insurer When any ocean-going ship is involved in an accident and has sustained damage, it is essential that the owners and / or their agents give prompt notice, with such details as are available, to the insurers. In addition, when the vessel is abroad, the master should notify the nearest Lloyd’s Agent. ii. Penalty for non-compliance The purpose of giving notice is to enable the insurers or their agents to appoint a surveyor to attend the vessel and survey the damage. Hull policies contain an express provision regarding notice to insurers and the ITC-Hulls, for example, provides that 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. There is also a provision to give an allowance to the shipowner should there be loss of time in starting the repair following the procedure for tenders, as required by the insurers. iii. Notice to P&I association Owners should give notice also to the P&I Association in any case involving loss or damage to cargo and when there is possibility of a claim for GA contribution from cargo interests and they should possible liability claims arising from the accident. IC-67 MARINE INSURANCE 211 CHAPTER 9 CARGO CLAIMS - PROCEDURE AND EVIDENCE iv. Role of superintendent If the casualty is serious, the ship owner will wish to send a marine superintendent and / or an engineer superintendent to the casualty or to port to which the damaged ship is proceeding, in order to obtain their reports on the situation and extent of damage. v. Joint survey and agreement on repairs It is desirable at this stage that the damage sustained by the ship be surveyed jointly and concurrently by the ship owner’s superintendent(s) and the surveyor appointed by the insurers. As far as possible they should agree upon: 9 The recommendations for repair, 9 Instructions to be given to the repairers, and 9 When the repair accounts are submitted by the shipyard / repairers, these should be examined critically by both the surveyors to check the level of pricing and negotiate any reduction that may appear necessary and fair vi. Average adjuster Adjustment of the claim is recorded by the Average Adjuster in a statement which is carefully prepared after going through all the aspects of the claim, insurance cover, surveyors’ recommendations and other evidences. vii. Commitments and final disbursements in foreign exchange Claims relating to ocean-going vessels, involve commitments and final disbursements in foreign exchange, particularly under following circumstances: 9 Guarantees provided on behalf of the assured for Salvage Charges and / or Collision Liability 9 Satisfying arbitration awards relating to salvage remunerations 9 Reimbursement of collision liabilities 9 Legal expenses relating to Salvage Award, Arbitration and Collision Liability Exchange Control Regulations of the Reserve Bank of India have to the complied with. 212 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 b) Fishing vessels i. Admissibility of claim On receipt of a claim notice, it necessary to ascertain: 9 If the loss has taken place within the currency of the policy; 9 Whether the peril giving rise to the loss, as also the loss itself are covered under the policy; 9 That the ownership of the vessel has not changed without the knowledge of the insurers; 9 That no premium is due for the period of cover during which the date of the casualty falls, etc. On the basis of the above, if it can be reasonably assumed that there is an admissible claim under the policy, then the below procedure needs to be followed. ii. Appointment of surveyor A licensed competent surveyor or an investigator depending upon whether or not physical inspection of the damaged vessel or its wreck is possible, is to be appointed immediately. iii. Protecting the damaged vessel / wreck Pending inspection by the surveyor, the insured is informed in writing to protect the damaged vessel/wreck and ensure that there is no further aggravation of the loss. iv. Salvage In case of a sunken vessel, wherever practicable the insured should be advised in writing to make reasonable efforts to refloat / salvage the vessel. v. Searching the missing vessel In case the vessel is missing, the insured should be advised to make efforts to search for the missing vessel. vi. Letter of Abandonment A claim for CTL must be preceded by a Letter of Abandonment from the insured, which is usually declined by the insurers in writing. However, this does not legally diminish the insured’s claim for CTL once the Letter of Abandonment has been issued by him and received by the insurer. Notwithstanding this, the insurer must still refuse acceptance of abandonment of wreck till the liabilities attaching to the wreck (Port and other dues, statutory requirement of wreck removal in case of vessels sunk in navigable channels, etc.) are fully ascertained. IC-67 MARINE INSURANCE 213 CHAPTER 9 CARGO CLAIMS - PROCEDURE AND EVIDENCE vii. Ascertaining claim in case of a missing vessel Since a missing vessel will not be available for inspection, a competent investigator, preferably a retired senior Police Official, both experienced in the ways of investigation and familiar with the concerned locality, may be appointed to investigate and ascertain whether or not the claimed version of the loss may be accepted as reasonably true. viii.Partial loss claims If covered under the policy, claims for partial losses are to be settled on the basis of surveyor’s findings and recommendations, if found reasonable. ix. Certifying expenditures Repair bills, cash memos in support of purchases of parts, etc. and all such documents in support of expenditures are to be verified and certified by the surveyor to be reasonable and admissible for the purpose of adjusting the payable claims. x. Assessments net of salvage Wherever possible, the surveyor should be advised to achieve assessments net of salvage. This is because it is difficult and not always economical for the underwriters to get involved in salvage disposal. However, where this is not possible, arrangements should be made to take over the salvage from the insured before settlement of the claims, and the same should be disposed of at the best price available, as per company’s rule in this regards. xi. Complying with statutory rules and regulations Where applicable, the surveyor should ensure that statutory rules and regulations have been fully complied with and he must report thereon. xii. Documents for claim settlement The documents required for the settlement of Fishing Vessels Hull claims are as follows: 9 Survey and / or Investigation Report 9 Registration Certificate, if any, issued by the concerned authorities 9 Weather Report for the relevant date and time from the competent authority in case adverse weather conditions are involved 9 Affidavits and / or statements by the Owner, Tindal or any member of the crew, if made to any of the authorities 9 Certificate of cancellation of registration of vessel in respect of Total Loss claims 214 IC-67 MARINE INSURANCE CARGO CLAIMS - PROCEDURE AND EVIDENCE CHAPTER 9 c) Sailing Vessels The preliminary and subsequent steps to be followed on receipt of a claim intimation with regard to Sailing Vessels is virtually the same as that indicated above for Fishing Vessels. Documents for claim settlement: The documents required for settlement of Sailing Vessels’ Hull claims are as follows: A certified copy of the Tindal’s Note of Protest or declarations made before a Notary Public, a Magistrate or any Customs / Port Authorities nearest to the scene of the casualty. Since Sailing Vessels, in the course of their usual deployment, often visit foreign ports, in the event of a loss taking place in foreign waters, the Note of Protest or declarations made before a foreign Notary Public or Magistrate or similar authorities, will have to be produced in support of the claim. Casualty Form No. 6, issued by the Mercantile Marine Department, when the vessel is totally lost. Alternatively, a Certificate issued by the Mercantile Marine Department confirming the total loss of the vessel. Survey Report from a competent surveyor showing details of the loss, circumstances giving rise to the loss and signed statements of owners, crew, etc. regarding the loss, and assessment of the loss. An Investigator may be appointed wherever necessary to ascertain whether or not the reported loss of the vessel is substantially true in view of the circumstantial evidences. In the event of partial losses, claims for Salvage Charges or Sue and Labour Charges, original repair bills, cash memos and similar documents, duly verified and certified by the surveyor. In the event of TL/CTL being admitted, the original insurance policy duly discharged, by the insured. A certified copy of the Meteorological Department’s Report on the weather conditions at the time of the casualty, and particulars about weather signal provided during 24 hours before the casualty. Sometimes the owners and / or the crew of the affected vessel or the vessel rendering rescue / salvage services file affidavits in connection with the casualty or the rescue operation. Where such affidavits are filed, certified copies thereof are to be obtained before settlement of the claim. In addition, following documents may be called for, if required: i. Certificate of Inspection – SVIC - III ii. Certificate of Inspection – SVRC iii. Free Board Certificate before commencement of voyage iv. Cargo Manifest v. Load Line Certificate vi. Port Clearance Certificate vii. Certificate of cancellation of Registration of vessel in case of Total Loss claims. IC-67 MARINE INSURANCE 215 CHAPTER 9 GENERAL AVERAGE AND SALVAGE d) Inland Vessels The procedure to be followed for settlement of claims, both partial and total, under this group will be the same as indicated for Sailing and Fishing Vessels. However, considering the fact that very large vessels involving substantial sums insured may have to be considered under this group, the processing of claims, including appointment of Surveyors, Adjusters, furnishing of guarantees, etc. are to be viewed at times in the same dimension as in the case of ocean-going vessels. Verifying the actual load against the DWT is very important. e) Fixed Jetties and Pontoons Since these are fixed structures, it is advisable to process such claims as “engineering claims”, as per the relevant guidelines. C. General Average and Salvage 1. Concept of general average (GA) A definition of GA is found in Section 66 of Marine Insurance Act, 1963 and in Rule A of the York-Antverp Rules, 1974. Definition 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 the maritime adventure. When all these essentials are present, there is said to be a GA act. Example Some examples of GA are: a) A loaded vessel which has stranded and is fast running aground, may jettison part of her cargo into the sea to lighten her draft for refloating purposes. b) Occasionally, cargo is jettisoned to reach the seat of a fire and the resulting losses will all be treated as GA sacrifice. 2. Amount made good When there is a GA act on a voyage, all interests at risk, namely, ship, cargo and freight, which have been saved from loss by GA measures, are liable to contribute rateably to make good the sacrifice and expenditure. These values are known as contributing values and the sum necessary to reimburse the interest which have suffered the GA loss, is called "Amount Made Good" or "Allowance". 216 IC-67 MARINE INSURANCE GENERAL AVERAGE AND SALVAGE CHAPTER 9 The amount made good in respect of a sacrifice shall itself contribute to the loss, otherwise it would be in a relatively better position by reason of being fully reimbursed for a loss, which the other interests are bearing. Cargo shall contribute on its value at the time of discharge, ascertained from the commercial invoice rendered to the receiver or if there is no such invoice, then from the shipped value. This value includes pre-paid freight and insurance charges, but does not include freight at carriers risks, nor does it include landing charges. Any loss or damage suffered prior to discharge must be deducted and any amount "Made Good" must be added. 3. Contributory values It is important to note that the GA loss must have been successful and the ship and cargo should actually arrive at destination. If, due to either the original or some subsequent accident, the ship and cargo are lost, there are no arrived values at destination and therefore no GA. As stated above, the GA values adopted are those at destination- damage or not. In general terms, these are referred to as the "Contributory Values". 4. Application to insurance- GA contribution Section 73 of Marine Insurance Act, 1963 states that where the assured has paid or is liable for any GA contribution, the measure of indemnity is the full amount of such contribution, if the subject-matter liable to contribute, is insured for its full contributory value; but if such subject-matter be not insured for its full contributory value, or only part of it be insured, the indemnity payable by the insurer must be reduced in proportion to the under-insurance; and where there has been a particular average loss, which constitutes a deduction from the contributory value, and for which the insurer is liable, that amount must be deducted from the insured value in order to ascertain what the insurer is liable to contribute. It is obviously necessary that this should be so, as otherwise accidental damage by reducing the contributory value, would obscure any actual under insurance. In practice, all losses and charges for which the underwriters are liable, and which have reduced the contributory value, are deducted. Amounts made good: The amount to be made good as GA for damage to or loss of cargo sacrificed shall be the loss which has been sustained thereby based on the value at the time of discharge, ascertained from the commercial invoice rendered to the receiver of the goods, or if there is no such invoice, from the shipped value, the value at the time of discharge shall include the cost of insurance and freight, except insofar as such freight is at the risk of interest other than cargo. IC-67 MARINE INSURANCE 217 CHAPTER 9 GENERAL AVERAGE AND SALVAGE When cargo so damaged is sold and the amount of damage has not been otherwise agreed, the loss to be made good in GA shall be the difference between the net proceeds of sa.le and the net sound value as computed above. This means that the invoice is used as a "Sound Value" where damaged cargo is sold to realise the proceeds unless the depreciation in value is otherwise agreed. 5. Application to insurance - GA sacrifice Section 66 of Marine Insurance Act, 1963 provides that the insurer is liable for any GA loss only where the GA act was incurred in respect of an insured peril. But the Institute Cargo Clauses override this provision by making the insurer liable for all GA losses subject to the specified exclusions in the clauses. Insurers are directly liable for GA sacrifices sustained, regardless of the contribution from the other parties to the adventure. GA sacrifices may be recovered in full from insurers, when incurred in avoiding a peril not excluded by the cargo policy, subject only to the limit of the insured or insurable value and in calculating the extent of insurers’ liability, they are treated in the same manner as particular average losses. It is essential to bear in mind that, by virtue of their right of subrogation, insurers will ultimately be credited with the amount made good in respect of the sacrifice when the adjustment has been made up. 6. Adjustment of general average In the absence of any stipulation in the contract of carriage, the adjustment of GA is made according to the law and practice of the place where the voyage ends. English Law is reflected in the Rules of Practice of the Association of Average Adjusters. Usually, the contract of carriage provides for adjustment according to latest York-A-Antwerp rules, The drawing up of the GA statement is sometimes a lengthy task when a major casualty is involved and there are many different consignments of cargo. The adjustment is entrusted to an average adjuster who is a professional and he must obtain all the information he requires, from the parties involved in order to complete the adjustment. 7. Salvage Maritime salvage is the remuneration or reward payable according to maritime law to salvors, who voluntarily and independently of contract, render services to save maritime property at sea. Although salvage has been defined as the reward payable to salvors who render services independently of contract, salvage services are usually undertaken after the parties have subscribed to the Lloyd’s Standard Form of Salvage Agreement – also called “Lloyd’s Open Form” (LOF). 218 IC-67 MARINE INSURANCE GENERAL AVERAGE AND SALVAGE CHAPTER 9 In the absence of agreement, salvage award in UK is made by the Admiralty Court and it is based on the values actually saved. In India, the award for salvage is governed by the provisions of The Indian Merchant Shipping Act, the provisions of which are similar to those of the corresponding UK Act. The jurisdiction for salvage cases is exercised by the ordinary Courts in India. Unlike the position in UK, there is no special Court in India exercising Admiralty jurisdiction. Salvage can be claimed for services in saving maritime property, that is, ships, cargoes and freight-at-risk. Where lives are saved jointly with property, the salvor may claim life salvage, but it is a claim rarely made. Life salvage awarded as such is not recoverable from underwriters, but it is a liability usually covered by P&I Clubs. To support a claim for salvage, it is necessary to prove that the salved property was in peril and that the services were of material assistance. No reward for services or payment for loss or expenses can be claimed where the services were unsuccessful and the property has been lost. The salvage is paid by and out of salved property. Hence, the reward is limited by the value of the property saved. Salvors have a maritime lien on the property salved, which enables them to retain the property in their possession till security for salvage is forthcoming. Lloyd’s Standard Form of Salvage Agreement (Lloyd’s Open Form) is a “NO CURE – NO PAY” contract and in the event of successful conclusion to the services, the salvors receive the sum agreed in the contract, or in the event of disagreement, the matter will be decided by an Arbitrator appointed by the Committee of Lloyd’s. 8. Underwriters’ liability for salvage Salvage is apportioned over the values on which it has been assessed, and provided the services were incurred in preventing a loss covered by the policy, the underwriters insuring the respective interests are liable for their proportion of the salvage. The measure of indemnity for salvage charges is the same as for GA contributions. If the insured value is less than the salved value, on which the salvage has been awarded, underwriters pay only their rateable proportion. 9. Use of information technology in marine claims a) Claim intimation: Insured can intimate claim to the insurer by e mail. b) Insurer can register the claim in their system and communicate to the insured the claim number and procedure to be adopted including claim documents required. IC-67 MARINE INSURANCE 219 CHAPTER 9 GENERAL AVERAGE AND SALVAGE c) If the claim is for damage, the insurer will send mail to surveyor to conduct survey copy to insured to inform him about the appointment of surveyor. d) After survey is completed surveyor may send e mail about documents/ information required. He can send the preliminary report to the insurer through e-mail. e) Insured can send scanned documents to surveyor who will scrutinize them and finalise his report and send it to insurer through e-mail with copy to the insured. f) Insurer can scrutinize the documents and report and prepare note to concerned office and send it through e-mail with their recommendations. g) The concerned authority in insurance company will go through the documents submitted and send his approval / queries through mail. h) The policy issuing office settles the claim with the client, by sending him loss voucher through regular mail. i) Insured returns loss voucher and letter of subrogation duly signed j) Insurer makes payment directly to insured’s bank account and advises insured about the same. Test Yourself 2 Documents may be filed with the customs _______ before the expected arrival of the vessel and custom formalities completed to facilitate easy clearance of cargo after landing. I. 1 day II. 7 days III. 15 days IV. 30 days 220 IC-67 MARINE INSURANCE SUMMARY CHAPTER 9 Summary a) Marine total losses fall into two categories: actual total loss and constructive total loss. b) Actual total loss of the subject matter insured may occur where it is destroyed or where it loses its species or where the goods are in a ship that has been posted as "missing". c) CTL implies that whilst the subject matter is not destroyed and is not an actual total loss, it would not be worth the cost or efforts to save or repair or recondition the property. d) 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. e) Total loss of part of cargo: Where part of the goods are totally lost, the amount payable under the insurance is such proportion of the insured value as the insurable value of the part lost bears to the insurable value of the whole. f) Salvage loss: It may happen in the event of cargo sustaining damage that it can be sold in damaged state at a place short of destination to better advantage than if it is reconditioned and forwarded. g) Sue and Labour Charges are all reasonable expenses incurred by the insured in averting or minimising a loss and are recoverable under the policy. h) 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. i) The ICC includes a Forwarding Charges Clause (No.12) which states that when the insured transit is terminated at a port or place other than the policy destination, as a result of the operation of an insured peril, the insurers agree to reimburse the assured for any extra charges properly and reasonably incurred in unloading, storing and forwarding the insured goods to the policy destination. j) The expenses of protests, survey and other proofs of loss including the commission or other expenses of a sale by auction are examples of "extra charges". k) In case of a loss, the insured needs to intimate the insurer. l) In case of a claim exceeding Rs. 20,000, a surveyor needs to be appointed. IC-67 MARINE INSURANCE 221 CHAPTER 9 SUMMARY m) In respect of marine claim arising and payable outside India, they are adjusted and settled by Claims Settling Agents named in the Policy. n) 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 insurers. o) 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. p) In case of fishing vessels on receipt of claim notice, the insurer examines if the claim can be admitted and accordingly appoints a surveyor. q) An essential documents should be submitted for claim settlement. r) 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. s) 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 these essentials are present, there is said to be a GA act. 222 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 9 Answers to Test Yourself Answer 1 The correct answer is II. Measure of indemnity for actual total loss is the insured value under the policy. Answer 2 The correct option is III. 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. Self-Examination Questions Question 1 ____________ 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. I. Section 64 (1) II. Section 64 (2) III. Section 64 (3) IV. Section 64 (4) Question 2 The Insurance Act, 1938 requires that claims exceeding Rs. 20,000 should be surveyed by a surveyor holding a valid license from the controller of insurance. I. Rs. 20,000 II. Rs. 40,000 III. Rs. 50,000 IV. Rs. 10,000 Question 3 In respect of marine claims arising and payable outside India, they are adjusted and settled by _____________. I. The insurance company on behalf of the insured II. The insured himself III. Claim Settling Agents IV. Insurance Brokers IC-67 MARINE INSURANCE 223 CHAPTER 9 PRACTICE QUESTIONS AND ANSWERS Question 4 Collision liability is a supplementary cover over and above the insurance on the vessel itself to the extent of _________ of such liability but not exceeding 3/4ths of the sum insured on the vessel. I. 1/4th II. 1/2 III. 2/3rds IV. 3/4ths Question 5 When any ocean-going ship is involved in an accident and has sustained damage, it is essential that the owners give prompt notice to the insurer. In the event of non-compliance with the terms of the Notice of Claim & Tenders Clause (No. 10), a penalty of _____ is to be deducted from the ascertained claim. I. 10% II. 15% III. 20% IV. 25% Answers to Self-Examination Questions Answer 1 The correct option is II. Section 64 (2) of the Marine Insurance Act, 1963 states that expenses incurred by or on behalf of the assured for the safety or preservation of the subject matter insured, other than GA and Salvage Charges, are called Particular Charges. Answer 2 The correct option is I. The Insurance Act, 1938 requires that claims exceeding Rs. 20,000 should be surveyed by a surveyor holding a valid license from the Controller of Insurance. Answer 3 The correct option is III. In respect of marine claims arising and payable outside India, they are adjusted and settled by Claim Settling Agents. 224 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 9 Answer 4 The correct option is IV. This is a supplementary cover over and above the insurance on the vessel itself to the extent of 3/4th of such liability but not exceeding 3/4ths of the sum insured on the vessel. Answer 5 The correct answer is II. 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. IC-67 MARINE INSURANCE 225 CHAPTER 9 PRACTICE QUESTIONS AND ANSWERS 226 IC-67 MARINE INSURANCE  CHAPTER 10 MARINE RECOVERIES Chapter Introduction In this chapter, we will learn about the various Acts that govern the rules and regulations related to claim process in case goods are lost or damaged during transit. We will also discuss various Acts and their regulations for carriage of goods by rail, road and air as also for multimodal transportation. In the end, we will also briefly study the liabilities of port authorities, postal authorities and customs authorities. Learning Outcomes A. Marine recoveries B. Carriage of goods by rail, road and air as also for multimodal transportation C. Liability of port authorities, postal authority and customs authorities. IC-67 MARINE INSURANCE 227 CHAPTER 10 MARINE RECOVERIES A. Marine recoveries 1. Marine recoveries Cargo moves through carriers and bailess involving various modes of transport and storages en route. During transportation and storage, carriers and bailees are required to take care of the cargo and if the cargo is damaged or lost whilst in their custody, they are required to make good the sender’s loss under various laws may be applicable. Primarily it is the senders’ right to recover their losses from carriers and bailees but once the marine insurers pay ship claim, they get vested with the rights of recovery under subrogation. a) Right of subrogation The right of subrogation arises under common law and also under Marine Insurance Act 1963. Under subrogation the insurers step into the shoes of the insured and thereby get vested with the rights of recovery from the carriers and bailees. In other words, the claimants’ rights are transferred to insurers on payment of a claim by the latter under an insurance policy. b) Cargo claims Case of cargo claims, when there is any possibility of recovery from a third party, insurers will obtain a Letter of Subrogation from the claimant when settling the claim. Even otherwise, subrogation is a statutory right which is automatically vested in the underwriters on payment of the claim, but this Letter of Subrogation authorises the insurers to institute proceedings to effect recovery in the name of the assured and at the expense of the insurer. c) Recovery It is of vital importance to underwriters that prospects of recovery from third parties are actively pursued after a cargo claim is settled. Any recovery of a claim paid will go to reduce the claims ratio and thus directly benefit the cargo underwriting results. To achieve this objective, the recovery official of the insurance organisation should be well conversant with the laws relating to carriage of goods by sea, rail, road and air and the law governing Multimodal Transport Operations. 228 IC-67 MARINE INSURANCE MARINE RECOVERIES CHAPTER 10 To succeed in recovering a claim from the carrier or other , it is necessary to show that: i. The goods were in the care of the carrier or other bailee at the time the loss or damage occurred; ii. The goods were in sound condition, with no packages missing, when received by the carrier or other bailee; iii. The carrier or other bailee failed to deliver the goods or delivered them in a damaged condition. d) Documents Documents submitted with a claim, in general, supply the information necessary to establish the above. In principle, the person who has custody of the goods is responsible for safe delivery to the next custodian. In the process, goods shipped conventionally, pass through a chain of bailees before they reach the consignee. Parties involved may be: 9 Professional packers, 9 Inland rail or road carriers, 9 Freight forwarders, 9 Warehousemen, 9 Port authority, 9 Stevedores, 9 Lightermen, 9 Customs authorities, 9 Clearing agents and others at destination. Any of these parties may incur a liability whilst the goods are in his care. The insurer will require proof of receipt and delivery of the goods by each party, at each stage of transit, in sound or damaged condition, in order to establish as far as possible, the stage at which the loss or damage occurred, in order to pursue his subrogation rights of recovery. 2. The Indian Carriage of Goods by Sea Act, 1925 (COGSA, 1925) As Amended COGSA, 1925 was amended effective from 16th October, 1992. The salient features of the Act are as follows: a) Ship owner’s responsibilities and liabilities i. To exercise due diligence and care to make the ship seaworthy, properly man, equip and supply the ship and to make the ship fit to carry the cargo. ii. Properly and carefully to load, handle, stow, carry, keep, care for and discharge the goods carried, subject to the various immunities provided. IC-67 MARINE INSURANCE 229 CHAPTER 10 MARINE RECOVERIES iii. On demand and after receipt of the goods, to issue a bill of lading showing: 9 Leading marks necessary for the identification of the cargo; 9 Number of packages, pieces, with quantity or weight, as furnished in writing by the shipper; and 9 The apparent order and condition of the goods, provided there is no obligation to show such details if the carrier suspects the accuracy, or he has no reasonable means of checking. iv. Such a bill of lading (B/L) shall be prima facie evidence of receipt by the carrier of the goods described therein. v. The shipper shall be deemed to have guaranteed to the carrier the accuracy of marks, numbers, quantity and weight of the goods as furnished by him; otherwise the shipper shall indemnify the carrier against all loss, damage and expenses arising from inaccuracies in such particulars. b) Shipowner’s rights and immunities The carrier shall be relieved from liability for loss/damage arising or resulting from unseaworthiness of the ship, unless caused by want of due diligence on the part of the carrier to make the ship seaworthy, to secure that the ship is properly manned, equipped and supplied and to make the ship fit to carry cargo. Thus, when loss or damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence shall be on the carrier or other person claiming exemption from liability. Neither the carrier nor the ship owner shall be responsible for loss or damage arising or resulting from: i. Negligent navigation or management of the ship ii. Fire, unless caused by the actual fault or privity of carrier iii. Perils, dangers and accidents of the sea or other navigable waters iv. Act of god, act of war, act of public enemies v. Arrest or restraint of princes, rulers or people or seizure under legal process vi. Quarantine restrictions vii. Act or omission of the shipper or his agent or representative viii. Strikes, lock-outs, stoppage or restraint of labour ix. Riots and civil commotions x. Saving or attempting to save life or property at sea xi. Inherent defect or vice of the goods xii. Insufficiency of packing xiii. Insufficiency or inadequacy of marks xiv. Latent defects not discoverable by due diligence xv. Any other cause arising without the actual fault or privity of the carrier, or without the fault or neglect of the agents or servants of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception. 230 IC-67 MARINE INSURANCE MARINE RECOVERIES CHAPTER 10 The carrier shall not be liable for any loss or damage resulting from any deviation in saving or attempting to save life or property at sea or any reasonable deviation. The carrier shall not be liable for loss or damage to the goods if the nature or value thereof has been knowingly misstated by the shipper in the bill of lading. i. Dangerous Cargo Goods of an inflammable, explosive or dangerous nature, to the shipment whereof the carrier or master has not consented with knowledge of their nature and character, may at any time be landed at any place or destroyed or rendered innocuous by the carrier without compensation and the shipper shall be liable for all damages and expenses arising out of or resulting from such shipment. If any such goods are shipped with the knowledge and consent of the carrier and they become a danger to the ship or cargo, they may, in like manner, be landed at any place or destroyed or rendered innocuous by the carrier without liability on the part of the carrier, except to general average, if any. ii. Limitation of monetary liability of the carrier Liability of the carrier for loss of or damage to cargo is limited to 666.67 SDR (Special Drawing Rights) per package or unit of freight or 2 SDR per kg. of gross weight of the goods lost or damaged, whichever amount is higher, unless the nature and value of such goods are declared by the shipper and inserted in the B/L. Where a container, pallet or similar article of transport is used to consolidate the goods, the number of packages or units enumerated in the B/L as packed in such article of transport, shall be deemed to be the number of packages or units for the purpose of this paragraph, as far as these packages or units are concerned. In that case, the limit of liability will apply to each package or unit contained in the pallet or container. If the B/L does not show how many separate packages there are, then each article of transport (pallet or container) will be deemed to be an entire package or unit of freight for the purpose of applying the limit of liability. IC-67 MARINE INSURANCE 231 CHAPTER 10 MARINE RECOVERIES c) Notice of loss or damage Unless notice of loss or damage be given in writing to the carrier at the port of discharge or at the time of removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, or if loss/damage be not apparent, within three days, such removal shall be prima facie evidence of delivery by the carrier of the goods as described in the B/L. Such notice in writing need not be given if the state of the goods at the time of their receipt was the subject of joint survey or inspection. d) Time limit for legal action The ocean carrier is discharged from all liability in respect of loss or damage, unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. This period may, however, be extended if the parties so agree after the cause of action has arisen; provided that a suit may be brought after the expiry of the period of one year referred to above, within a further period of not more than three months as allowed by the Courts. e) General COGSA, 1925 applies to “goods” and “goods” are defined as “including goods, wares, merchandise, containers, pallets or similar articles of transport used to consolidate goods if supplied by the shipper and articles of every kind whatsoever, except live animals and cargo which by the contract of carriage is stated as being carried on deck and is so carried.” Note: The SDR (Special Drawing Rights) is a “currency basket” made up of five currencies as follows: Currency Weighing U.S. Dollar 42% German DM 19% Pound Sterling 13% French Franc 13% Japanese Yen 13% It is a relatively stable unit, since a fall in the value of one currency usually means a rise in value of the others. Its actual value is re-calculated daily by the International Monetary Fund which promulgates the SDR as a currency unit. The Convention holds that the conversion to national currencies for compensation payable as a result of judicial proceedings shall be at the rate announced for the Day of Judgement. Value of an SDR is published daily in important financial dailies and in the Lloyd’s List in terms of £ Stg. and U.S. Dollars. Currently, 1 SDR = 1.47638USD 232 IC-67 MARINE INSURANCE CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION CHAPTER 10 Test Yourself 1 What is the time limit for initiating legal action against ocean carriers in the event of loss or damage to goods? I. Within one year after delivery of goods or the date when the goods should have been delivered II. Two years after delivery of goods or the date when the goods should have been delivered III. Three years after delivery of goods or the date when the goods should have been delivered IV. Five years after delivery of goods or the date when the goods should have been delivered B. Carriage of goods by rail, road, air and Multimodal Transportation 1. Carriage of goods by rail Effective from 1st July, 1990, the new Indian Railways Act, 1989 came into force. It replaced the earlier Act of 1890. a) Responsibilities of railway administration as carriers Under Provisions of The Railways Act 1989 there are two types of freights. 9 Railways’ Risk Rate (RRR) and 9 Owners’ Risk Rates(ORR) ORR being lower the liability of railway is lower whereas under RRR the liability of railways is like the road carrier’s, making them liable for nearly every loss in transit The Railway Administration is responsible for all loss, damage, deterioration in transit or non-delivery of any consignment, arising from any cause except the following, namely – i. Act of God ii. Act of War iii. Act of public enemies iv. Arrest, restraint or seizure under legal process v. Orders or restrictions imposed by government vi. Act/omission/negligence of consignor or consignee or their agents/servants. vii. Natural deterioration or wastage in bulk or weight due to inherent defect, quality or vice of the goods viii. Latent defects ix. Fire, explosion or any unforeseen risk. IC-67 MARINE INSURANCE 233 CHAPTER 10 CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION Even after it is established the loss, damage, etc. had resulted from any of the above causes, the Railway Administration shall not be relieved of its responsibility unless it further proves that it had used reasonable foresight and care in the carriage of goods. In case of consignments carried at Owners’ Risk Rates the railway will not be liable for any loss or damage unless the same is caused by negligence or misconduct on the part of the railways. For Railways Risk rates except the perils stated under Para 17 above, the railway is liable for all the losses. b) Monetary liability Where any consignment is entrusted to the Railway Administration without declaring its value, 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. By a notification, the government has limited the liability of the Railways to Rs.50/- per kg. weight of the goods lost, damaged, etc. A higher limit of Rs.100/- per kg. is applicable to baggage only, that is, bonafide booked luggage of a passenger. On the other hand, where the consignor declares the value and pays the prescribed percentage charge, the liability of the Railway Administration will not exceed the value so declared, subject to the requisite proof being furnished thereof. c) Notice of claim for compensation Such notice is required to be preferred in writing within SIX MONTHS from the date of entrustment of goods for carriage by railways. d) Time limit on legal action i. A suit can only be filed against the railway administration after the claimant has served a statutory notice of 2 months under Section 80 of the Civil Procedure Code for final reply to the party by the railway. ii. Suit for non-delivery or delay in delivery can be filed within 3 years from the probable date when the goods ought to have been delivered. For loss, damage, etc., the suit can be filed within 3 years from the date of such loss, damage, etc. iii. Application for compensation is to be made to Railways Tribunal operating in the area of jurisdiction, where the notice of claims was given to the railways. 234 IC-67 MARINE INSURANCE CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION CHAPTER 10 2. Carriage of goods by road a) Liability of Road transporters Liability of road transporters is 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. The common carrier may limit his liability by a special contract if he chooses to do so. Otherwise, his liability is absolute “as of an insurer” of the goods. Recently parliament has passed a law – The Carriage by Road Act, 2007, which governs carriage by road and also by courier. The Act involves certain administration; which requires framing of Rules which are in process and yet not finalized. So when the Rules are finalised and notified, the Act and Rules will come in force. Till then the 1865 law will be in force. The common carrier has only three immunities to escape liability as against quite a number granted to Railways under the Railways Act, 1989. These immunities are: i. Act of God ii. Act of war or public enemy iii. Riots and civil commotion iv. Arrest restraint or seizure under legal process v. Order or restriction or prohibition imposed by Central Government or State Government Other than for immunities, road carrier is liable for every loss occurring while goods are in their custody. Secondly, like Railways Act, 1989, there are no different freight rates. Everything is to be carried at one rate i.e. Carriers’ Risk Rate. The burden of proving negligence on the part of the carrier is not on the claimant and it is the carrier who has to establish that there was no negligence on his part. Notice of loss, damage, etc. must be given to the carrier within six months from the date of knowledge of loss. (Under Carriage by Road Act, 2007 within 180 days of booking of the consignment.) If the claim is not settled by the road carrier, suit must be failed within three years from the knowledge of loss as (or from date of booking –Carriage by Road Act 2007) prescribed by the Limitation Act. IC-67 MARINE INSURANCE 235 CHAPTER 10 CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION b) Carriage by Road Act 2007 The Act amending the Carriers Act, 1865 has been passed by the Indian parliament but the implementation is delayed, pending framing of the Rules for implementation of the Act. The salient features of the Act are as under: i. Definition of “Common carrier” widened. Now includes couriers also. ii. Registration with prescribed authority compulsory. iii. Vehicle cannot be loaded beyond registered carrying capacity. iv. Lorry Receipt to be issued in prescribed format only. v. Liability of carrier limited, depending upon value, freight and nature of goods. vi. If agreed, carrier liable for delay also but up to value of freight only. vii. Higher liability can be accepted by carrier after charging higher freight. viii. For losses, negligence of the carrier is to be proved and the liability is not presumed. ix. Time limit of 180 days from date of LR to lodge monetary claim on carrier. x. The implementation of Act subject to Carriage by Road Act Rules 2010. 3. Carriage of goods by Air The Warsaw Convention of 1929, as amended at the Hague in 1955, is the international agreement governing the liability of the air carrier in case of loss or damage to cargo and passenger’s baggage carried from one country to another. This Convention and the later Montreal version of the Warsaw Rules have been ratified by almost all countries of the world, including India. It governs all cases of international carriage by air. In India, for domestic flights, the liability of the air carriers is governed by the Indian Carriage of Goods by Air Act, 1972. The Act has been recently amended by The Carriage by Air Act 2007. a) Notice of loss or damage Such notice should be given in writing within 14 days from receipt of goods in case of damage to cargo and 7 days from receipt of baggage in case of damage to passengers’ luggage. In case of delay either to goods or luggage, the time limit is 21 days from the date when the consignment was expected to be delivered. b) Liability of the air carrier The carrier is liable for loss or damage to cargo sustained during carriage by air (whether in an aircraft or an aerodrome or in the event of forced landing, anywhere else), so long as it was not due to causes such as: i. Inherent vice of the air cargo; ii. Defective packing by some person other than the carrier, his servants or agents; iii. Act of war or armed conflict; iv. Act of public authority in connection with the entry, exit or transit of cargo. 236 IC-67 MARINE INSURANCE CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION CHAPTER 10 The onus of proof that loss/damage occurred while goods were not in an aircraft or aerodrome rests on the party alleging it. The carrier is liable for damage occasioned by delay of both baggage and cargo, but not if he can prove that he took all reasonable measures to avoid the damage or that it was impossible to take such measures. c) Limitation of monetary liability i. 17 SDR per kg. gross of lost or damaged goods, unless a higher value has been declared and a supplementary charge paid. ii. As per Indian Carriage of Goods by Air Act, the limit is Rs.450/- per kg. for domestic carriage within India. The goods or luggage are placed at the disposal of the airline for the air transit. If notice is not given within the time limits specified, the claim would be time-barred and cannot be legally enforced. Time limit for legal action is two years reckoned from the date of booking of the cargo or luggage. 4. Multimodal transportation In India, the Multimodal Transportation of Goods Act, 1993 was enacted on 2nd April, 1993 and it came into force from 16th October, 1993. Broadly, the Act seeks to regulate the business of Multimodal Transportation and delineate the responsibilities and liabilities of the Multimodal Transport Operator (MTO). a) Responsibilities and liabilities of the MTO The MTO remains responsible for the goods throughout the period from the time he takes them in his charge until the time of their delivery. The MTO shall be liable for loss resulting from: i. Any loss of or damage to the consignment ii. Delay in delivery of the consignment and any consequential loss/damage arising from such delay While such loss, damage or delay in delivery took place while the consignment was in his charge. It is, however, provided that the MTO shall not be liable if he proves that no fault or neglect on his part or that of his servants or agents had caused or contributed to such loss, damage or delay in delivery. IC-67 MARINE INSURANCE 237 CHAPTER 10 CARRIAGE OF GOODS BY RAIL, ROAD, AIR AND MULTIMODAL TRANSPORTATION b) Limits of monetary liability: Where the MTO becomes liable for loss/damage to any consignment, the nature and value whereof have not been declared by the consignor before such consignment was taken in charge by the MTO and if the stage of transport at which such loss or damage occurred is not known, then the liability of the MTO shall not exceed 2 SDR per kg. of gross weight of the goods lost or damaged, or 666.67 SDR per package or unit lost or damaged, whichever is higher. For the purpose of this limitation, where a container, pallet or similar article of transport is loaded with more than one package or unit, the packages or units enumerated in the MT document as packed in such container, etc. shall be deemed as packages or units. Example One container containing 20 packages (declared as such) total weight 1500 kgs. Liability: On the basis of packages: 20 X 666.67 = 13333.40 SDRs On the basis of weight: 1500 X 2 = 3,000.00 SDRs So, the MTO’s liability will be 13333.40 SDRs, which is higher of the two. If no sea or inland waterway leg is involved in the transit, then the limitation is based solely on weight, that is, 8.33 SDR per kg. of gross weight of goods lost or damaged. If the stage of transport at which such loss/damage occurred is known, then the limit of liability of the MTO shall be determined in accordance with the provisions of the relevant law applicable in relation to the mode of transit, during the course of which such loss or damage occurred. Thus, if the location of loss/damage cannot be ascertained, then the MTO’s liability, based on presumed fault, will be uniform throughout, as will be the limitation provisions outlined above. On the other hand, if the damage can be located on a particular leg, then, although liability will remain uniform throughout, limitation will apply as provided by the law or Convention governing limitation of liability on that stage of transit. Where delay in delivery of the consignment occurs under any of the above circumstances or any consequential loss or damage arises from such delay, and then the liability of the MTO shall be limited to the freight payable for the consignment so delayed. 238 IC-67 MARINE INSURANCE LIABILITY OF PORT AUTHORITIES, POSTAL AUTHORITIES AND CUSTOMS CHAPTER 10 c) Notice of loss/damage to the goods Such notice should be given by the consignee in writing to the MTO at the time the goods are delivered to the consignee. Otherwise, the delivery shall be treated as prima facie evidence of delivery as described in the MT document. However, where loss/damage is not apparent, such notice should be given within 6 days from the date of delivery. d) Limitation The MTO shall not be liable under any of the provisions of the Act unless legal action against him is brought within 9 (nine) months of the date of delivery of the goods or the date when the goods should have been delivered. Test Yourself 2 In which type of freight is the liability of railways the highest? I. RRR II. ORR III. ROR IV. RRO C. Liability of port authorities, postal authorities and customs 1. Liability Of port authorities a) Major ports The Port Trust established under an Act of Parliament, are liable for loss or damage to the goods whilst they are in their care and custody. However, the cargo interests have to strictly comply with port formalities as per the regulations and bye-laws framed by each port authority or port trust. The Port Trust is liable for goods landed but subsequently missing as well as for goods found damaged and for shortages if the packages in which there are shortages or damage had landed in a sound condition without any qualifying remarks as per the Port Trust Landing Remarks Certificate. The relevant legislation is the Major Port Trusts Act, 1963 and Rules, which apply to all major ports in India, namely, Kandla, Mumbai, Nhava Sheva, Marmugao, Mangalore, Paradeep, Cochin, Tuticorin, Chennai, Visakhapatnam, Haldia and Calcutta. IC-67 MARINE INSURANCE 239 CHAPTER 10 LIABILITY OF PORT AUTHORITIES, POSTAL AUTHORITIES AND CUSTOMS Under the Major Port Trusts Act and the Rules, the Board of Trustees are not liable under the following circumstances: i. No liability attaches to the Board under Sec.43 after a period of 7 clear working days of taking charge of the goods by the Board. ii. The notice of loss or damage should be given to the Board within a period of 7 days from the date of taking charge of such goods by the Board. iii. If the goods are not cleared in 7 days from the date of landing, the same will remain on the premises of the Board at the sole risk and expense of the owner. iv. Sec.61 provides that the Port Trust may sell the goods by auction if Port dues and other charges including demurrage are not paid. Before taking such action, the Port Trust has to give 10 days’ notice in Port Gazette or in a principal daily newspaper. Liability will be for market value of the goods. Normally, the Port Trust escapes liability on technical grounds of above limitations. It would be advisable for the consignee, therefore to write a letter to the Port Trust within 7 days from the date when the vessel is given berth that they had approached the Port Trust for taking delivery but the goods were not available for delivery. Writing of such a letter would comply with the requirement of giving notice in 7 days under Section 43(b) 2. If the goods are not traceable or available for delivery within 7 days, the consignee must file a log entry. If the log entry is not allowed to be filed, on the same day, a registered letter should be addressed to the Board of Trustees for the Port concerned, recording the fact that the Shed Superintendent had refused to allow filing of log entry for goods not traceable or not available. In such cases, notice of suit must be given forthwith. A suit must be filed against the Port Trust within 7 months (inclusive of one month’s notice period) from the date of accrual of cause of action. Notice must be addressed to “The Trustees of the Port of ………” b) Other ports in India Ports which are not major ports are governed by the Indian Ports Act, 1908. Such ports are controlled by the respective State Governments. Under the Act, no provision is made as regards the time for applying for delivery of goods and giving notice to the Port in case of loss or damage to the goods. Similarly, no provision is made under the Act as regards the time limit for filing suit. Therefore, provisions of the Indian Limitation Act will apply and suit must be filed within 3 years of the accrual of the cause of action against the State Government, which owns the port premises, after notice to the State Government of 60 days under Section 80 of the Civil Procedure Code (CPC) 240 IC-67 MARINE INSURANCE LIABILITY OF PORT AUTHORITIES, POSTAL AUTHORITIES AND CUSTOMS CHAPTER 10 Gujarat Government has enacted the Gujarat Maritime Board Act, 1981 which is applied to all ports in Gujarat except Kandla, which is under the Major Port Trust Act. Time limit for filing suit is 6 months provided one month’s prior notice is given to the Board. 2. Postal authority Indian Post Office Act, 1898 limits the liability of the postal authority to Rs.25/- per package for loss, short-delivery, delay or damage, unless the parcel is insured. Notice of claim must be given within 6 months from the booking date. Suit should be filed within 3 years from the knowledge of loss subject to 60 days notice under Sec.80 of CPC. 3. Customs Under Section 27 of the Customs Act, 1862, refund of duty is allowed for shortage due to pilferage and for goods lost or destroyed or for shortlanded cargo or landed but missing cargo. Application for refund should be made to the Assistant Controller of Customs within 6 months of the payment of duty. However, time limit for making such application in respect of personal effects of individuals, and property of government, educational, research, charitable institutions and hospitals is one year from the date of payment of duty. This time limit will not apply where duty has been paid under protest or where duty has been recovered by Customs without jurisdiction or authority of law. Such time limitation also will not apply in case of shortlanded goods. Similarly, where duty has been wrongly worked out or collected at a higher rate by applying wrong Tariff rate, the limitation provided under Section 27 will not apply. Duty paid under "Mistake in law" would fall within Section 72 of the Contract Act 1872 and, therefore, limitation in such an event would be 3 years. Appeal can be made to the Collector of Customs (Appeals) on a prescribed form within 3 months of the date of receipt of communication of the decision of the Assistant Collector of Customs. The Collector may condone delay in filing appeal for further 3 months, where justified by sufficient cause. Appeal against the decision of the Collector of Customs can be filed with the Appellate Tribunal within 3 months of the receipt of the decision from the Collector of Customs. 4. Market value The correct basis to work out liability of carrier, Port Trust or other bailees is the market value, subject to maximum liability as may be restricted by the respective laws. The value taken is the market value as on the date of the loss at the place where the goods are to be delivered. IC-67 MARINE INSURANCE 241 CHAPTER 10 LIABILITY OF PORT AUTHORITIES, POSTAL AUTHORITIES AND CUSTOMS 5. Other important points a) Recoveries from third parties All recovery claims should be properly followed up and if no settlement is received form the carriers within a reasonable period or if carriers repudiate liability, legal opinion should be obtained on the question of filing a suit based on possible chances of success and the cost involved compared to the claim amount. After a suit is filed, close watch should be kept to ensure its proper conduct by producing necessary witnesses and adducing adequate evidence. When a suit is filed, the legal advisor should be requested to give a list of documents that will be required as evidence in a court of law, and action should be taken to collect such documents from the claimant or request the claimant to preserve such documents, as otherwise when the case comes up for hearing after a lapse of some time, the important documents may not be available. b) Salvage disposal Insurers are involved in disposal of salvage when a claim is settled on “total loss” basis and the insurer takes over whatever remains of the subject- matter insured. The other circumstances where insurers are directly or indirectly involved in the disposal of salvage may be as follows: i. When a loss is assessed on a “net” basis after deducting the value of salvage, which is retained by the insured himself. In such cases, utmost care should be taken to ensure that the value of salvage brought into account is reasonable. ii. When the insured subject matter suffers irrepairable damage, and though not a total loss, it becomes necessary to dispose it off for the benefit of all concerned. iii. When the damaged parts of an insured machine become the property of the insurer, when replaced by new parts. Test Yourself 3 Ports that do not come under ‘major ports of India’ are governed by the _____________ I. Major Port Trust Act II. Indian Ports Act 1908 III. Section 80 of CPC IV. Gujarat Maritime Board Act 1981 242 IC-67 MARINE INSURANCE SUMMARY CHAPTER 10 Summary a) 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. b) The right of subrogation arises under common law and also under the Marine Insurance Act 1963. Under subrogation, the insurers step into the shoes of the insured and are vested with the rights of recovery from the carriers and bailees. c) 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. d) Liability of road transporters is 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. e) In India, for domestic flights, the liability of the air carriers is governed by The Carriage by Air Act 1972. f) 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. g) The relevant legislation is the Major Port Trusts Act, 1963 and Rules, which apply to all major ports in India, namely, Kandla, Mumbai, Nhava Sheva, Marmugao, Mangalore, Paradeep, Cochin, Tuticorin, Chennai, Visakhapatnam, Haldia and Calcutta. h) Ports which are not major ports are governed by the Indian Ports Act, 1908. i) Under Section 27 of the Customs Act, 1862, refund of duty is allowed for shortage due to pilferage, for goods lost or destroyed or for shortlanded cargo or landed but missing cargo. IC-67 MARINE INSURANCE 243 CHAPTER 10 PRACTICE QUESTIONS AND ANSWERS Answers to Test Yourself Answer 1 The correct option is I. Legal action against ocean carriers in the event of loss or damage to goods can be brought within one year after the delivery of goods or the date when the goods should have been delivered. Answer 2 The correct option is I. In case of Railways’ Risk Rate (RRR), the liability of the railways is higher as compared to that in case of the Owners’ Risk Rate. Answer 3 The correct answer is II. Ports that do not come under ‘major ports of India’ are governed by the Indian Ports Act 1908. Self-Examination Questions Question 1 Which of the following values is taken to work out the liability of the carrier, Port Trust or other bailees? I. Current value as on the date of establishing liability II. Future value as on the date the goods are to be delivered III. Net value as on the date of the loss at the place IV. Market value as on the date of the loss at the place where the goods are to be delivered Question 2 Under the Customs Act, to whom will an application need to be written for refund of customs duty, for shortage due to pilferage and for goods lost or destroyed? I. Customs officer II. Assistant Controller of Customs III. Collector of Customs IV. Appellate Tribunal 244 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 10 Question 3 In case one is dissatisfied with the decision of the Collector of Customs, to which authority can the appeal be filed? I. Appeal cannot be filed as the decision of the Collector of Customs is final II. Assistant Controller of Customs III. Appellate Tribunal IV. Commissioner Question 4 What is the maximum period for filing suits for claim against the Indian post office in case of short-delivery, delay or damage to the parcel? I. Six months II. One year III. Two years IV. Three years Answers to Self-Examination Questions Answer 1 The correct option is IV. Market value as on the date of the loss at the place where the goods are to be delivered is used to work out the liability of the carrier, Port Trust or other bailees. Answer 2 The correct option is II. Under the Customs Act 1962, an application needs to be written to the Assistant Controller of Customs for refund of customs duty, for shortage due to pilferage and for goods lost or destroyed. Answer 3 The correct option is III. In case one is dissatisfied with the decision of the Collector of Customs, an appeal can be filed with the Appellate Tribunal. IC-67 MARINE INSURANCE 245 CHAPTER 10 PRACTICE QUESTIONS AND ANSWERS Answer 4 The correct option is IV. 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. 246 IC-67 MARINE INSURANCE  CHAPTER 11 ROLE OF BANKER IN MARINE INSURANCE Chapter Introduction In this chapter, we will learn about the various methods of payment in international trade along with their advantages and disadvantages. This chapter also briefly discusses UCP 600, a set of rules on the issuance and use of letters of credit developed by the International Chamber of Commerce. Learning Outcomes A. Methods of payment in international trade B. UCP 600 IC-67 MARINE INSURANCE 247 CHAPTER 11 METHODS OF PAYMENT IN INTERNATIONAL TRADE A. Methods of payment in international trade In international trade various methods are used for payment for goods and services viz: a) Consignment purchase b) Cash-in-advance (Pre-payment) c) Down payment d) Open account e) Documentary collection f) Letter of credit a) Consignment purchase Consignment purchase terms can be the most beneficial method of payment for the goods. In this method of purchase, importer makes the payment only once the goods or imported items are sold to the end user. In case of no selling, the same item is returned to the foreign supplier. Consignment purchase is considered the most risky and time consuming method of payment for the exporter. b) Cash-in-advance (Pre-payment) 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 goods. The importer must trust that the supplier will ship the product on time and that the goods will be as advertised. Cash-in-Advance method of payment creates a lot of risk factors for the importers. However, this method of payment is inexpensive as it involves direct importer-exporter contact without commercial bank involvement. c) Down payment In the method of down payment, an importer pays a fraction of the total amount for, the items to be imported in advance. The down payment methods have both advantages and disadvantages. The advantage is that it induces the exporter or seller to begin performance without the importer or buyer paying the full agreed price in advance and the disadvantage is that there is a possibility, that the seller or exporter may never deliver the goods even though it has the buyer's down payment. 248 IC-67 MARINE INSURANCE METHODS OF PAYMENT IN INTERNATIONAL TRADE CHAPTER 11 d) Open account In case of an open account, an importer takes delivery of the good assures and the supplier make payment at some specific date in the future. Importer is not required to issue any negotiable instrument as evidence towards his legal commitment to pay at the appointed time. This type of payment method is mostly seen in cases where the importer/buyer has a strong credit history and is well-known to the seller. Open Account method of payment offers no protection in case of non- payment to the seller. There are many merits and demerits of open account terms. Furthermore, there may be a time delay in payment; depending on how quickly documents are exchanged between Seller and Buyer. While this payment term involves the fewest restrictions and the lowest cost for the Buyer, it also presents the Seller with the highest degree of payment risk and is employed only between a Buyer and a Seller who have a long- term relationship involving a great level of mutual trust. e) Documentary collection Documentary Collection is an important bank payment method under which the sale transaction is settled by the bank through an exchange of documents. In this process, the seller instructs his bank to forward documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer. The buyer may obtain possession of goods and clear them through customs, if the buyer has the shipping documents such as original bill of lading, certificate of origin, etc. However, the documents are only given to the buyer after payment has been made (documents against payment) or payment undertaking has been given – the buyer has accepted a bill of exchange issued by the seller and payable it at a certain date in the future (maturity date) (documents against acceptance). Documentary collections make easy import – export operations within low cost. But if does not provide some lend of protection as the letter of credit as it does not involve any kind of bank guarantee like letter of credit. IC-67 MARINE INSURANCE 249 CHAPTER 11 METHODS OF PAYMENT IN INTERNATIONAL TRADE Documentary collection by the bankers can be compared with Cash On Delivery (COD) transaction. However, it differs from COD in two ways. 9 Instead of an individual shipping company or postal service collecting the payment; bank handles the transaction; and 9 Instead of cash on delivery of goods, it is cash on delivery of title document (Bill of Lading). Goods can then be claimed from the shipping company against the document of title. Banks, therefore, act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. The procedure is easier than in documentary credit and the bank charges are lower. The bank however, does not act as surety of funds for documents. There are three types of documentary collections, and each relates to a buyer option for payment for the documents at presentation. The second and third, however, are dependent upon the seller’s willingness to accept the option and his specific instructions in the collection order. The three types are as follows: i. Documents against payment (D/P) In D/P terms, the collecting bank releases the documents to the buyer only upon full and immediate cash payment. D/P terms most closely resemble traditional Cash on Delivery transactions. The buyer must pay the presenting/ collecting bank the full amount in freely available funds in order to take possession of the documents. This type of collection offers the greater security to the seller. ii. Documents against acceptance (D/A) In D/A terms, the collecting bank is permitted to release the documents to the buyer against acceptance (signing) of the Bill of Exchange or signing of a Time Draft at the bank promising to pay at a later date (usually 30, 60 or 90 days). The completed draft is held by the collecting bank and presented to the buyer for payment at maturity, after which the collecting bank sends the funds to the remitting bank, which in turn sends them to the principal/ seller. The seller should be aware that he gives up the title to the shipment in exchange for the signed bill of exchange that now represents his only security in the transaction. 250 IC-67 MARINE INSURANCE METHODS OF PAYMENT IN INTERNATIONAL TRADE CHAPTER 11 iii. Acceptance of documents against payment An acceptance document against payment has features of both D/P and D/A. It works like this: Step 1: The collecting bank presents a Bill of Exchange to the buyer for acceptance. Step 2: The accepted Bill of Exchange remains at the collecting bank together with the documents up to maturity, Step 3: The buyer pays the Bill of Exchange at maturity. Step 4: The collecting bank releases the documents to the buyer who takes possession of the shipment Step 5: The collecting bank sends funds to the remitting bank, which then sends them to the seller. This gives the buyer time to pay for the shipment, and at the same time gives the seller security that the title to the shipment will not be handed over until the payment has been made. If the buyer refuses acceptance of the Bill of Exchange or does not honor the payment on maturity, the seller takes over arrangements to sell his goods. This type of collection is seldom used in actual practice. f) Payment notes If the buyer draws ( takes possession of ) the documents against acceptance of a Bill of Exchange , the collecting bank send the acceptance back to the remitting bank or retains it on fiduciary basis up to maturity. On maturity, the collecting bank collects the bill and transfers the proceeds to the remitting bank for crediting to the seller. g) Letter of credit (L/C) The LC is an undertaking given by the bank at the request of its customer in favor of a third party to the effect that it (the bank) will accept these bills up to the amount and subject to the terms outlined in the LC. According, when the bills are presented for payment strictly as per terms of the LC, the bank is subject to honor it. Buyers and sellers negotiate the sale and purchase of goods. Sellers demand cash or the LC from the buyer’s make a guarantee for payment. The LC reinforces the buyer’s undertaking to pay. IC-67 MARINE INSURANCE 251 CHAPTER 11 METHODS OF PAYMENT IN INTERNATIONAL TRADE i. Documentary credit Definition A documentary credit is a duly signed instrument, embodying an undertaking by a buyer’s bank to pay his seller a certain sum of money upon presentation of documents evidencing shipment of specified goods and subject to the stipulated terms and condition being comprised with. A documentary credit requires that drafts drawn there under must be accompanied by other documents as stipulated therein, giving title to the goods, providing protection to loss or damage to the goods and furnishing other information and particulars such as: 9 Bill of lading , 9 Marine insurance policy, 9 Commercial invoice, 9 Customs invoice, 9 Certificate of origin, 9 Weight list, 9 Packing list, 9 Inspection certificate, 9 Certificate of analysis and/or 9 Other documents as stipulated ii. Working of letter of credit Step-by-step process: Step 1: Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment. Step 2: Buyer applies to his bank for a letter of credit in favor of the seller. Step 3: Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary). Step 4: Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary). Step 5: Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company. 252 IC-67 MARINE INSURANCE METHODS OF PAYMENT IN INTERNATIONAL TRADE CHAPTER 11 Step 6: Seller presents the required documents to the advising or confirming bank to be processed for payment. Step 7: The advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit. Step 8: If the documents are correct, the advising or confirming bank will claim the funds by: 9 Debiting the account of the issuing bank 9 Waiting until the issuing bank remits, after receiving the documents 9 Reimbursing on another bank as required in the credit Step 9: The advising or confirming bank will forward the documents to the issuing bank. Step 10: The issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account. Step 11: The issuing bank then forwards the documents to the buyer. iii. Documentary collection Vs documentary credits In a documentary collection, the seller prepares and presents documents to the bank in much the same way as for a documentary letter of credit. However, there are two major differences between a documentary collection and documentary credit: a) The draft involved is not drawn by the seller (the drawer) upon a bank for payment, but rather on the buyer itself (the drawee) and b) The seller’s bank has no obligation to pay upon presentation, but more simply, acts as a collecting or remitting bank on behalf of the seller, thus earning a commission for its service. Test Yourself 1 In which of the following methods of purchase does the importer make the payment only once the goods or imported items are sold to the end user? I. Consignment purchase II. Cash in advance III. Down payment IV. Open account IC-67 MARINE INSURANCE 253 CHAPTER 11 UCP 600 B. UCP 600 1. Uniform Customs & Practice for Documentary Credits 600 (UCP 600) The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. The UCP is utilised by bankers and commercial parties in more than 175 countries in trade finance. Some 11-15% of international trade utilise letters of credit, totalling over a trillion dollars (US) each year. Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance. This practice has been standardized by the ICC (International Chamber of Commerce) by publishing the UCP in 1933 and subsequently updating it over the years. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600. The result is the most successful international attempt at unifying rules ever, as the UCP has substantially universal effect. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, formally commenced on 1 July 2007. A significant function of the ICC is the preparation and promotion of its uniform rules of practice. The ICC’s aim is to provide a codification of international practice occasionally selecting the best practice after ample debate and consideration. The ICC rules of practice are designed by bankers and merchants and not by legislatures with political and local considerations. The rules accordingly demonstrate the needs, customs and practices of business. since the rules are incorporated voluntarily into contracts, the rules are flexible while providing a stable base for international review, including judicial scrutiny. International revision is thus facilitated, permitting the incorporation of the changing practices of the commercial parties. ICC, which was established in 1919, had as its primary objective facilitated the flow of international trade at a time when nationalism and protectionism threatened the easing of world trade. It was in that spirit that the UCP were first introduced – to alleviate the confusion caused by individual countries’ promoting their own national rules on letter of credit practice. The aim was to create a set of contractual rules that would establish uniformity in practice, so that there would be less need to cope with often conflicting national regulations. The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is a testament to the rules’ success. 254 IC-67 MARINE INSURANCE UCP 600 CHAPTER 11 “Banks deal with documents, other parties deal with documents and/ or goods” This is the basic principle of UCP. Documentation is very important and if banks rely on proper documents presented to them, they do not incur any liability as regards the goods but if the documents are faulty and if they deal with them in the event of any default, they are liable. The same principle applies to insurance documents. 2. UCP 600 Article 28 Article 28 of UCP 600 deals with Insurance Documents and other factors pertaining thereto. a) Article 28 a Insurance documents are described in this article. b) Signatories Insurance documents must appear on their face to be issued and signed by insurance companies or underwriters or their agents. In India, underwriter is insurance company is the underwriter and generally agents are not allowed to sign marine insurance documents. This Article requires that whoever signs as to the authority marine document should put endorsement in the document under which he is signing. Example For ABC Insurance Co Ltd., Manager etc. c) Number of originals If the insurance document indicates that it has been issued in more than one original, all the originals must be presented unless otherwise authorised in the Credit. This is more or less redundant practice. Earlier, more than one original document were being issued, so this provision came into force. Only one original is issued. If more than one originals are issued then insurance company should indicate that on the policy Example Originals -3 + copies 3 etc. IC-67 MARINE INSURANCE 255 CHAPTER 11 UCP 600 d) Cover note Cover notes issued by brokers will not be accepted, unless specifically authorised in the Credit. Till introduction of UCP 600, cover notes were freely accepted by the bankers. It is common practice that when the insurance is arranged well in advance to comply with L/C formalities, cover notes were being issued as proof of insurance having been arranged. The cover note is not the final insurance document; probably that is why it is not to be accepted. e) Insurance certificate Unless otherwise stipulated in the Credit, banks will accept an insurance certificate or a declaration under an open cover, pre-signed by insurance companies or underwriters or their agents. If a Credit specifically calls for an insurance certificate or a declaration under an open cover, banks will accept, in lieu thereof, an insurance policy. As per Indian system, insurance policy and certificate are the best documents. Other documents are not reliable, if there is no balance under the policy declaration etc., are not valid. f) Insurance documents and coverage Unless otherwise stipulated in the Credit, or unless it appears from the insurance document that the cover is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods, banks will not accept an insurance document which bears a date of issuance later than the date of loading on board or dispatch or taking in charge as indicated in such transport document. Under Art 28 (e) the date of insurance document should be either prior to shipment or the date of shipment. Subsequent date is not to be accepted. Under open policy/ cover the date of document will be invariably after the date of shipment, in that case the insured should insist that insurers endorse the document to state “risk to commence from date of shipment” etc. g) Currency of coverage Unless otherwise stipulated in the Credit, the insurance document must be expressed in the same currency as the Credit. The currency of coverage should be the currency of L/C. As per insurance practice the insurance cover can be taken in any currency 256 IC-67 MARINE INSURANCE UCP 600 CHAPTER 11 h) Amount of coverage Unless otherwise stipulated in the Credit, the minimum amount for which the insurance document must indicate the insurance cover to have been effected is the CIF or CIP value of the goods, as the case may be, plus 10%, but only when the CIF or CIP value can be determined from the documents on their face. Otherwise, banks will accept as such minimum amount of 110% of the amount for which payment, acceptance or negotiation is requested under the Credit, or 110% of the gross amount of the invoice, whichever is greater. LC stating “insurance for 110%” = minimum of insurance coverage. If LC is silent minimum insurance required to be taken is 110% of CIF value or if CIF can’t be properly ascertained from the documents, 110% of invoice value. i) Port to port cover Sub-article 28 (f) (iii) states that the insurance document must indicate that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit. Insurance must be covered at least between the two places/ports/airports stated in the credit j) Ambiguity in writing the cover required Insurance Documents Credits should stipulate the type of insurance required and, if any, the additional risks which are to be covered. Imprecise terms such as “Usual Risks” or “customary risks” shall not be used; if they are used, banks will accept insurance documents as presented, without responsibility for any risks not being covered. k) Exclusion clause Banks will accept insurance documents with any exclusion clause covered in Article 28(j), e.g. Termination of Transit (Terrorism) Clause. l) Excess / Franchise Unless otherwise stipulated in the Credit, banks will accept an insurance document which indicates that the cover is subject to a franchise or an excess. But if Credit stipulated “irrespective of percentage”, excess/ franchise not to be accepted. IC-67 MARINE INSURANCE 257 CHAPTER 11 UCP 600 m) Unpaid vendor certificate In addition to above, the bankers also issue ‘Unpaid vendor certificate’, which is required for the settlement of the claim in case of exports on FOB,CFR,FCA or other similar terms and a claim is lodged under Sellers’ Interest Insurance Policy; certifying that the money has not been received in India by the buyer. n) Export transaction In case of letter of export transaction (whether under LC or otherwise) when the bankers makes payment to the seller but are unable to recover the amount from buyer or their bankers and if goods are lost or damaged in transit, if the bakers are holding original insurance policy either assigned in blank or in their favor, bankers can recover claim directly from insurers as they would be having insurable interest. Test Yourself 2 What is the basic principle of UCP? I. Banks deal with money; other parties deal with money and/or goods. II. Banks deal with parties; other parties deal with documents and/ or goods III. Banks deal with documents; other parties deal with documents and/ or goods IV. Banks deal with documents; other parties deal with parties and/ or goods 258 IC-67 MARINE INSURANCE SUMMARY CHAPTER 11 Summary a) In the consignment method of payment, the importer makes the payment only once the goods or imported items are sold to the end user. b) 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 goods. c) In the method of down payment, an importer pays a fraction of the total amount of the items to be imported in advance. d) In case of an open account, an importer takes the delivery of good and ensures that the supplier to makes the payment at some specific date in the future. e) Documentary Collection is an important bank payment method under which, the sale transaction is settled by the bank through an exchange of documents. f) 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. g) The Uniform Customs and Practice for Documentary Credits (UCPDC) is a set of rules on the issuance and use of letters of credit. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600. IC-67 MARINE INSURANCE 259 CHAPTER 11 PRACTICE QUESTIONS AND ANSWERS Answers to Test Yourself Answer 1 The correct answer is I. In consignment purchase, importer makes the payment only once the goods or imported items are sold to the end user. Answer 2 The correct option is III. The basic principle of UCP is “Banks deal with documents, other parties deal with documents and/ or goods”. Self-Examination Questions Question 1 In _____________, an importer pays a fraction of the total amount of the items to be imported in advance. I. Consignment purchase II. Cash in advance III. Down payment IV. Open account Question 2 In _____________ method an importer makes the payment for the items to be imported in advance prior to the shipment of goods. I. Consignment purchase II. Cash in advance III. Down payment IV. Open account Question 3 In which of the following payment methods, does an importer takes the delivery of good and ensures that the supplier to makes the payment at some specific date in the future? I. Consignment purchase II. Cash in advance III. Down payment IV. Open account 260 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 11 Question 4 In _________ payment method, title to the goods usually passes from the seller to the buyer prior to payment and subjects the seller to risk of default by the Buyer. I. Consignment purchase II. Cash in advance III. Down payment IV. Open account Question 5 _____________ 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. I. Documentary credit II. Payment notes III. Documentary collection IV. Customs invoice Answers to Self-Examination Questions Answer 1 The correct option is III. In Down payment method an importer pays a fraction of the total amount of the items to be imported in advance. Answer 2 The correct option is II. In cash advance method an importer makes the payment for the items to be imported, in advance, prior to the shipment of goods. Answer 3 The correct option is IV. In the open account method, an importer takes the delivery of goods and ensures that the supplier makes payment at some specific date in the future. IC-67 MARINE INSURANCE 261 CHAPTER 11 PRACTICE QUESTIONS AND ANSWERS Answer 4 The correct option is IV. In the open account method, title to the goods usually passes from the seller to the buyer prior to payment, and subjects the seller to risk of default by the buyer. Answer 5 The correct option is I. 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. 262 IC-67 MARINE INSURANCE  CHAPTER 12 LOSS PREVENTION, REINSURANCE, MARITIME FRAUDS Chapter Introduction In this chapter, you will learn about the various ways in which cargo loss can be prevented or controlled. Then you will learn how marine risks are reinsured. Finally, we will discuss the types of maritime fraud and precautions that can be taken against that. Learning Outcomes A. Cargo loss control / prevention B. Reinsurance of marine risks C. Maritime fraud IC-67 MARINE INSURANCE 263 CHAPTER 12 CARGO LOSS CONTROL / PREVENTION A. Cargo loss control / prevention 1. Meaning of loss control / prevention Loss control / prevention mean a systematic approach to reduce loss of or damage to property with the purpose of minimising waste to the owner. As loss is often compensated by insurance, a reduction in the overall level of loss leads to less waste for the entire community. Of course it is impossible to eliminate loss entirely because of dangers inherent in cargo transportation. Maritime perils and the risk of fire or flood are always present and cannot always be avoided. Major losses in transportation are due to: 9 Theft, pilferage and non-delivery 9 Handling and stowage losses 9 Water damage and 9 Maritime perils (comparatively a small percentage) After advent of containerisation, another type of loss which is becoming very common is “Skillful Pilferage” in which though container seals are intact, cargo is either stolen or replaced by inferior cargo by using dubious methods. 2. Theft, pilferage and non-delivery With almost one-third of preventable losses attributable to pilferage, theft and non-delivery, the shipper should be advised to take following simple precautions: a) New and well-constructed packing Use only new, well-constructed packing for the product. Early deterioration or collapse of flimsy or used cartons, boxes or bags invites pilferage through exposure of contents. Corrugated fasteners will add to the security of wooden boxes. Shrink wrapping, strapping and banding will further contribute to package security. b) Usage of coding Do not advertise your product to thieves and pilferers. Descriptive labeling, illustrations or prominent display of trademarks and well-known company names on any type of cargo simplifies the pilferer’s task. Instead, coded markings should be used and codes should be changed frequently. 264 IC-67 MARINE INSURANCE CARGO LOSS CONTROL / PREVENTION CHAPTER 12 c) Clear and complete delivery and handling instructions Instruction should appear on at least three surfaces of the exterior package. Limiting marks to only one or two surfaces invites rolling, tumbling and flipping of packages in search for marks and delivery information. Bright colour coding of sides or corners facilitates identification and minimises the number of strayed parcels. d) Unitising and palletizing These as well as use of intermodal containers will help to keep the cargo together and also make it inconvenient to thieves and pilferers. e) Insist on prompt pick-up and delivery The longer the cargo rests on piers, in terminals, port sheds or in truck bodies, the more it is exposed to loss by theft or pilferage. 3. Handling and Stowage Damage a) Insufficient or Unsuitable Packing Cargo handling in various sea ports and airports of the world, ranges from highly professional and sophisticated, to totally unskilled. Rough seas, turbulent air, heavy traffic and sub-standard roads subject the cargo to every imaginable kind of motion and impact. The consignor must pack for the toughest leg of the journey. Marine insurers resist claims that arise from insufficient or unsuitable packing. It is for the consignor to ensure that adequate protection for the goods is provided. One of the exclusions in Institute Cargo Clauses and Inland Transit Clauses (Rail or Road) reads as under: “In no case shall this insurance cover loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured (for the purpose of this clause, “packing” shall be deemed to include stowage in a container or lift van but only where such stowage is carried out prior to attachment of this insurance or by the assured or their servant).” b) Selection of packing Wise selection of packing depends on the nature of the cargo. Items which completely fill the box or carton and contribute to the strength of the package are normally the easiest and the most economical to package. Articles, which do not completely fill the selected container must be cushioned, braced, fastened or blocked to prevent damage to the article itself or destruction of the container. Do not exceed whatever capacity the box, bag or carton was designed to accommodate. IC-67 MARINE INSURANCE 265 CHAPTER 12 CARGO LOSS CONTROL / PREVENTION c) Unitise, palletise or assemble cargo Unitise, palletise or assemble cargo into the largest practical unit consistent with handling, weight and dimension requirements. Packaging should be strong enough to withstand the weight of other cargo that might be stowed on top of it, and to withstand the pressures created by both movements in transit and handling. d) Objectives of good stowage Greater part of damage that occurs to cargo during ocean voyage is attributable to improper stowage. Stowage means placing and securing of cargo in the holds of a vessel. The main objectives of good stowage are: i. The general stability of the ship, safety of personnel on board and observance of load-line regulations. ii. To make optimum use of cargo space available in the vessel. iii. To facilitate loading, unloading and handling operations. iv. The prevention of damage to cargo by shifting, contact, sweat, bad stowage and similar causes. v. To arrange the cargo shipped to different ports in such a way that it can be promptly and readily unloaded upon arrival at respective ports. e) Layout of cargo The layout of the cargo is carefully considered with due allowance given to bottom stowage and avoidance of space wastage. Goods are securely lashed and wedged to avoid displacement by the rolling and pitching of the vessel during the voyage. f) Even distribution of the weight of cargo During loading, the weight of the cargo loaded is checked by the vessel’s draft markings, which are situated on both sides of the stem and stern of the vessel. As far as possible, it is endeavored to keep the vessel on an even keel, with possibly a slightly deeper immersion at the stern. There must be no list in the vessel, caused by greater weight of cargo on one side than the other. Discharging operations also should proceed without disturbing the stability of the vessel. Heavy machinery is usually stowed in the lower holds to assist stability of the vessel, whereas light goods should occupy top stowage. To avoid contact / contamination damage “dunnage” (consisting of mats, wooden planks and similar materials) is used to give the necessary protection. 266 IC-67 MARINE INSURANCE CARGO LOSS CONTROL / PREVENTION CHAPTER 12 g) Proper placement of cargo Cargo likely to be damaged by heat must be stowed away from boilers and the engine room. Odorous cargo, such as tobacco, must be kept apart from other cargo likely to be damaged by taint. Acids must be kept separately, away from other cargo, preferably on deck, casks must be stowed with their bungs (stoppers) up, and earthenware must be given top stowage. h) Stowage plan Before the cargo is loaded, a “stowage plan” is prepared so that the master of the vessel has an adequate knowledge of the location of various types of cargoes stowed and the holds. Copies of the stowage plan are sent to steamer agents at each port of call of the vessel. 4. Water damage Rain, high humidity, condensation and sea water separately or all of these in combination can reduce otherwise stable cargo into a ruin of soggy, stained, mildewed, rusty or delabelled merchandise. Salt spray driving across the deck of an exposed lighter, a rain-swept customs compound, an open truck in torrential downpour, dripping of condensation from the chilled interior of a ship’s hold or sweat forming on the cargo itself, are all common hazards. Each commodity has its own unique characteristics, which react differently when exposed to water. Cargo should be protected from water damage from external sources such as rain, sea-water, high humidity and ship’s sweat by adequate preparation and packing. Preventive measures: a) Apply preservatives, corrosion inhibitors or water-proof wrapping directly to the item. b) Use of desiccants (that is, moisture absorbent materials) and water- proof barriers, liners and wraps is particularly effective in protecting moisture-sensitive items. c) Shield cargo on top and sides by use of waterproof shrouds. d) Provide adequate skids, pallets or dunnage to keep cargo items above collecting drainage. e) Crates and other large containers should have drain holes in the bottom to preclude collection of water within the packing. This is particularly important where cargo is subject to formation of condensation, that is, cargo sweat. IC-67 MARINE INSURANCE 267 CHAPTER 12 CARGO LOSS CONTROL / PREVENTION 5. Containerised Cargoes Multimodal transportation – a concept which embraces the movement and transfer of standardised cargo containers by sea, air and land – has enhanced the rapid movement of cargo. 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. a) Inspecting the multimodal container Once the shipper has decided on the container service best suited to his needs and has selected the type of container, which will adequately accommodate his cargo, he must inspect the container to be sure that it will properly protect the cargo while in transit. Following checklist will assist the shipper in inspecting a container to ensure that it will properly protect his cargo: i. The container should be free from splinters, snags, dents, bulges or other damage. These may interfere with loading, damage the cargo and create safety hazard for personnel. ii. It should be free of residue from previous cargoes, particularly odours which may taint cargo. iii. To inspect its watertight quality, enter the container, have the doors closed and look for light leaks. Also check whether previous patches / repairs are watertight. iv. Cargo tie-down cleats or rings should be in good condition and well secured. Check that the ventilator openings are not blocked off and that they are equipped with baffles to prevent rain or seawater entry. v. Be sure that the doors can be securely locked and sealed and remain watertight when closed. Door gaskets should be in good condition and watertight when closed. vi. Check the lifting fittings at each corner of the container and the fittings that secure the container to the trailer chassis. They should be in working order. In case of opentop containers, check the hatch panels for close watertight fit. b) Preparing the cargo A container is essentially a ship’s hold on a reduced scale. When containers are placed on board a ship for the ocean voyage, the cargo stowed in them is subject to the same movement forces and damage hazards that affect cargoes, which are shipped in break-bulk fashion. 268 IC-67 MARINE INSURANCE CARGO LOSS CONTROL / PREVENTION CHAPTER 12 It is, therefore, very important to bear in mind that the same principles and techniques, which apply to export packing and cargo stowage of break-bulk shipments are equally valid when preparing cargo for Multimodal shipment and when stowing the cargo in containers. Following are useful suggestions: i. Pack for the toughest leg of the journey. Be certain that the merchandise cannot move within the carton, box or other container in which it is packed. Immobilise the contents by blocking or bracing or provide adequate cushioning. ii. Packages like cartons or boxes should be able to withstand the weight pressure of cargo stacked up to 8 feet high. Such packages should be able to bear lateral pressures also exerted by adjacent cargo in order to prevent crushing. iii. Heavy items like machinery and items not uniform in shape should be crated, boxed or provided with skids to permit ease of handling and compact stowage. c) Stowing cargo in the container i. Plan the stow. Observe weight limitations. Do not exceed the rated capacity of container. ii. Distribute weight equally. Avoid concentrating heavy weights at one side or one end. Stow heaviest items on the bottom. iii. Avoid mixing incompatible cargo. Cargo which exudes odour or moisture should not be stowed with cargo susceptible to taint or water damage. iv. Cargo subject to leakage or spillage should not be stowed on top of other cargo. v. Observe hazardous materials regulations. vi. Stow cargo in reverse order of desired cargo discharge. vii. Cargo for multiple consignees should be physically separated by partitions, dividers, paper or plastic sheets. viii. Forklift openings in pallets or skids should face doors of containers. Due to heavy losses, because of “skillful pilferage” in containerised cargo, particularly precious cargoes, it is advisable to arrange for supervised stuffing, video shooting or even taking photographs at the time of stuffing the containers. If transit is through lonely areas, security is also to be arranged en route and trucks carrying containers to be moved in convoy to avoid hijacking etc. of the trucks. IC-67 MARINE INSURANCE 269 CHAPTER 12 REINSURANCE OF MARINE RISKS Test Yourself 1 What is the reason for major losses in transportation of cargo? I. Theft, pilferage and non-delivery II. Handling and stowage losses III. Water damage IV. All of the above B. Reinsurance of marine risks 1. Need for marine reinsurance Section 9 of the Marine Insurance Act 1963 states that an insurer under a contract of marine insurance has an insurable interest in his risk and may reinsure in respect of it. Unless the policy otherwise provides, the original assured has no right or interest in respect of such reinsurance. Reinsurance is effected mainly: a) To reduce an underwriter’s line on any particular risk to an amount which he desires to retain on his own account; b) To offload all or part of an undesirable or doubtful risk; c) To protect against catastrophe loss; d) To increase market capacity by spreading the risk over the international market and creating reciprocity, that is, an exchange of business for comparable business from another insurer; e) To provide an underwriting capacity, which also means ability to participate in risks which are not otherwise available; f) To stabilise the underwriting results of a company; a well-planned reinsurance programme can ensure profitability as well as maintenance of solvency margin. Reinsurance of marine risks may be prompted by several factors. If an underwriter finds that he has an accumulation of risks on any one vessel or in any one location, he will obviously wish to reduce his overall liability to within his underwriting limits and capacity. Also it is possible that he may wish to lay off an undesirable or doubtful risk, either partly or in full. Moreover, to avoid the effects of major losses, catastrophe reinsurances are placed which provide protection under the Excess of Loss arrangement. 270 IC-67 MARINE INSURANCE REINSURANCE OF MARINE RISKS CHAPTER 12 2. Methods of reinsurance The methods or types of reinsurance can be broadly divided into two main sections, namely, proportional and non-proportional contracts a) Proportional reinsurance Under proportional reinsurance the reinsurer accepts liability for a proportionate share of each risk ceded. There is a common apportionment between the ceding company and the reinsurer of original sum insured, of premiums and losses according to a pre-determined percentage or share. In consequence, the reinsurer’s loss experience on individual risks will follow that of the direct insurer. Such contracts include Facultative, Quota Share Treaty, Surplus Treaty, Facultative Obligatory Arrangements and Pools. b) Non-proportional reinsurance Under this arrangement, the reinsurer pays the ceding company only when the original loss has exceeded the limit of retention of the ceding company. Consequently, the reinsurer is not directly concerned about the original rates charged by the ceding company, as the premium rates he charges are calculated independently, mainly on the basis of the past experience of the account. c) Facultative and treaty reinsurance Both proportional and non-proportional reinsurances can be transacted on a facultative or a treaty basis. Therefore, another way of dividing methods of reinsurance is to categorise them as facultative and treaty contracts. The main distinctions between these two are as under: Facultative Treaty (a) Reinsurer has the option to Reinsurer is obliged to accept accept or decline any risk cessions within the scope of the offered to him. agreement. (b) Reinsurance is on individual Any number of risks can be ceded basis and details of risk offered within the scope of the treaty and are provided. not individual details are provided, except as agreed. (c) Mostly placed on proportional Placed on both proportional and basis. non-proportional basis. (d) Cover commences and Cover is usually annual or terminates along with the continuing with provision for original policy. cancellation. IC-67 MARINE INSURANCE 271 CHAPTER 12 REINSURANCE OF MARINE RISKS d) Facultative reinsurance 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. When the general reinsurance treaty is in existence, facultative reinsurance may be effected to cede either the excess over the treaty limits or to offload whole or part or an undesirable risk. Facultative covers are also in demand for reinsurance of hulls against total loss only. The rate of premium may be fixed by the reinsurer or he may be content to accept the risk at the original rate of premium if the reinsurance is effected on identical conditions of the original policy. The main drawback of this method is that the ceding company cannot give immediate cover on risks which are beyond its retention limits, as the underwriter must first contact several reinsurers to complete the placement of the amount exceeding his retention. Despite this drawback, facultative reinsurance has its uses for the following main reasons: i. To reinsure amounts exceeding the treaty facilities. ii. To reinsure special types of risks which are outside the scope of usual treaties. iii. To reduce the exposure in areas where, because of accumulation of risks, the ceding company is already heavily committed. iv. To facilitate reciprocal exchange of business and seek the expertise and experience of reinsurers on risks of special nature. e) Treaties Under this 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. The reinsurer no longer examines each risk individually and he has no power to decline a risk as long as it falls within the agreed scope of the treaty. He has to accept good risks with bad risks. The reinsurer, therefore, becomes totally dependent on the ceding company’s underwriting judgement. It would appear that the reinsurer is underwriting the ceding company instead of the risk. Consequently, the ceding company’s management methods, underwriting procedures, past loss experience, etc. become very important consideration. 272 IC-67 MARINE INSURANCE REINSURANCE OF MARINE RISKS CHAPTER 12 3. Proportional treaties a) Quota share treaty Under this treaty, a fixed proportion of every risk in a given class of business is ceded. The reinsurer thus shares proportionately in all losses and receives the same proportion of all premiums. In a quota share treaty, the reinsurer in effect follows the fortunes of the ceding company. The quota share arrangement specifies a definite upper monetary limit, any one risk. Example For example, quota share arrangement limit could be expressed as: “To accept 80% of every risk insured, not to exceed Rs. 30 lakhs any one risk.” The main disadvantage of the quota share method to the ceding company is that the ceding company cannot vary its retention for any particular risk and thus it pays away premiums on small risks, which it could very well retain for its own account. Another disadvantage, which follows form the first, is that the sizes of risks retained by the ceding company are not homogeneous, as it retains a fixed percentage of all risks written, and such risks are of varying sizes. b) Surplus treaty A Surplus (also called “excess of line”) treaty allows the ceding company to reinsure under the treaty any part of the risk which it is not retaining for its own account. A surplus treaty is arranged for, say, four, five or more lines, a “line” being the amount of the ceding company’s retention. This means that the surplus treaty can automatically accept a maximum of four, five or more times the size of the ceding company’s retention. For any larger risks, the balance must be reinsured facultatively. The premium for the risk is ceded in the same proportion as the sum insured of the risk. The “line” or the “limit of retention” is the maximum which the ceding company can retain, and it is possible for it to retain a smaller amount than the limit, thus enabling the ceding company to arrange its retention in relation to the quality of the risk it is reinsuring. Thus, the ceding company may keep a higher retention on a risk of superior quality and a lower retention on an inferior risk. However, when the retention of the ceding company is high, a larger amount is ceded to the treaty than if the retention is smaller. IC-67 MARINE INSURANCE 273 CHAPTER 12 REINSURANCE OF MARINE RISKS i. Advantages of surplus treaty The advantages of the surplus treaty to the ceding company are as follows: 9 Only the proportion of the risk exceeding the ceding company’s retention is reinsured, so that smaller risks within the ceding company’s retention are not ceded. 9 As the ceding company retains a fixed monetary limit (as opposed to fixed percentage proportion under quota share arrangement), the portfolio it retains becomes homogeneous. 9 By retaining a larger amount of good risks and a smaller amount of poor ones, the ceding company can keep better quality of business to itself than it cedes to reinsurers. ii. Disadvantages of surplus treaty The main disadvantage to the reinsurer is that not only does he receive larger share of poor risks, he also receives a larger share of peak risks, as the ceding company will have retained whole or large proportion of the smaller risks for its own account. For this reason, commission rates to the ceding company under surplus treaty are less than those under quota share treaty. c) Facultative obligatory treaty These treaties are also called “Auto-fac treaties”. As the name indicates, the Facultative Obligatory Treaty (Fac-Oblig) has the features of both facultative cessions and obligatory treaties. This treaty is defined as an agreement whereby the ceding company has the option to cede (no compulsion) as for facultative risks, and the reinsurer is bound to accept (that is, having no option to decline) as under a treaty arrangement, a share of the specified risk offered by the ceding company. A minimum retention, however, is usually imposed on the ceding company to reduce the risk of unfair anti-selection, and cessions must be made prior to attachment of a risk. Fac-Oblig arrangement comes after a surplus treaty and gives automatic reinsurance facilities to the ceding company when the capacity of the surplus treaty has been exhausted. 274 IC-67 MARINE INSURANCE REINSURANCE OF MARINE RISKS CHAPTER 12 d) Pooling arrangements These arrangements create a capacity to handle risks of a catastrophic nature or risks of special category, for example atomic energy risks. Pooling arrangements are also created in certain countries with a view to make available local facilities and reduce the flow of reinsurance business outside the country. All members of the pool contribute all or part of their premiums for a specified category of business into a common fund and they share the aggregate claims in the same proportions as their premiums or in any other agreed manner. Profits, losses and expenses are shared in the same way. 4. Non-proportional treaties a) Excess of loss treaty This 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. He thus arranges by way of reinsurance to be relieved of the amount of loss which exceeds that limit for any one event. There may be an upper limit to the treaty, so that if the direct insurer, for instance, is prepared to bear, say the first Rs. 50,000/- of any loss, the treaty reinsurers will bear any loss over Rs. 50,000/-, but not exceeding, say Rs. 5 lakhs. For cover beyond that limit, a further excess of loss treaty may be negotiated. An excess of loss arrangement helps to reduce the ceding company’s exposure on individual risks more efficiently than proportional reinsurances and it also deals more effectively with the problems of accumulations and catastrophe risks. Excess of loss is often placed in layers. A marine insurer seeking protection for his hull account may arrange Excess of Loss treaties in the following way, for example: Retains for own account all losses from Reinsurer’s liability under Excess of any one accident upto Rs. 2,00,000/-. Loss arrangements. Lower Limit Upper Limit First Excess of Loss layer Rs. 2,00,000/- Rs. 5,00,000/- Second Excess of Loss layer Rs. 5,00,001/- Rs. 20,00,000/- Third Excess of Loss layer Rs. 20,00,001/- Rs. 50,00,000/- IC-67 MARINE INSURANCE 275 CHAPTER 12 REINSURANCE OF MARINE RISKS There are two types of Excess of Loss covers: Working covers and catastrophe covers. i. Working covers are Excess of Loss treaties under which the ceding company as well as the reinsurer agree to protect the normal exposure of the business covered that is normal losses which occur with some regularity. ii. Catastrophe covers, on the other hand, protect the ceding company against the risk of accumulation in the event of one catastrophe, for example, total losses, cyclone, earthquake, port godown fires, explosions in the port area, etc. When this cover is attracted, the event involves more than one risk by the very nature and extent of cover it affords. b) Stop loss treaty This type of reinsurance cover (also called “Excess of Loss Ratio”) prevents the ceding company from losing more than a specified amount of loss for a given class of business. Stop Loss Reinsurance makes it possible to limit the ceding company’s loss ratio to an agreed percentage. In other words, as the name implies, the loss ratio of the ceding company is stopped at an agreed percentage, and if in any one accounting year, the loss ratio exceeds that percentage, and then the reinsurers pay the difference. There is an upper limit of liability under the treaty. This limit is also expressed in the form of a loss ratio. This type of reinsurance is of a catastrophic nature and seldom starts at less than 70% or 80% loss ratio. For example, the treaty may cover “amounts in excess of 80% loss ratio upto 130% (alternatively expressed as: “amounts in excess of 80% loss ratio upto a further 50%). It is a wrong notion to think that this method of reinsurance guarantees a profit to the ceding company. In practice, the loss ratio above which the cover will operate is sufficiently high to ensure that the ceding company has already made a loss before the cover operates. Reinsurers also do not give unlimited stop loss cover. Stop loss cover may be arranged in addition to the normal Surplus or Excess of Loss treaties to protect the net retained account of the company. c) Aggregate excess of loss treaty An Aggregate Excess of Loss treaty works on the same principle as a Stop Loss Treaty, but instead of expressing the loss ratio limit as a percentage of the annual premium, it is stated in actual figures. 276 IC-67 MARINE INSURANCE REINSURANCE OF MARINE RISKS CHAPTER 12 Example The treaty may cover annual losses in excess of Rs. 5 crores upto a further Rs. 4 crores. The ceding company pays all losses upto Rs. 5 crores and the reinsurer pays all losses over Rs. 5 crores but not more than Rs. 4 crores. Then any amount in excess of Rs. 9 crores will revert to the ceding company. d) Open cover Under this method the direct insurer is free to choose within the terms of the treaty, which risks he wishes to cede. He can do this at his own discretion e.g. pass on only those risks that appear particularly exposed, can not be placed elsewhere or exceed the capacity of the other reinsurance methods. The reinsurer is obliged to accept all the cessions he is offered. This arrangement can pose a significant risk to the reinsurer as only bad or risky, risks may be ceded to him. In this method there are no lines. The limits are expressed in terms of the amounts only. It is mainly used for marine cargo. Because of its peculiar nature, it is difficult to get this type of cover. e) Alternative risk transfer This is a recent method of reinsurance. It usually extends over a period of 3- 5 years and covers a combination of areas where the ‘risk exposure’ is very low. It is a contract with customised terms. Reinsurer agrees to ‘finance’ the insurer to cover against unexpected large losses (with very low probability) and the insurer agrees to pay a fixed premium plus a penalty premium in the event of a loss, to make good the deficit spread over the period of the contract. 5. Cargo reinsurance a) Marine open covers One of the most common forms in which cargo business is underwritten is by means of Marine Open Covers. Under this 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. When a number of Open Covers are issued, it is quite possible that several clients may be shipping full lines perhaps by the same vessel, and an underwriter may not know the full extent of his cargo commitments on a vessel before the risk commences. Also, advices of shipments which may emanate from several overseas branches and agencies of the insurer are often communicated to him after the risk has attached. Often the name of the carrying vessel is unknown, or known only after the completion of the voyage. Particular difficulties, therefore, occur in accumulation control, especially in case of cargo insurance. IC-67 MARINE INSURANCE 277 CHAPTER 12 REINSURANCE OF MARINE RISKS b) Treaty reinsurance arrangements Under such circumstances, it is not possible for an underwriter with general cargo account to protect himself against unduly heavy commitments on any particular vessel, by means of facultative reinsurance alone. Facultative reinsurance is effected only in special cases for specific risks, while general protection is obtained by treaty reinsurance arrangements. An underwriter’s entire cargo account may be covered under a Surplus or Excess of Line Treaty whereby the ceding company gives off, generally, on original conditions, all amounts upto a specified maximum, in excess of the “line” which it retains for its own account. The “line” which an underwriter intends to retain for his own account on various classes of vessels and risks, whether hull or cargo, must be decided with considerable care. The “line” must bear a relation to the underwriter’s probable net premium income for the year, so that a loss on any one risk shall not unduly strain his whole underwriting account for the year. c) Quota share arrangements Alternatively, Quota Share Arrangements may be resorted to especially when there is need to create reciprocal treaties. Specie and registered post sendings of valuable items, like diamonds, involve values which are considerably higher than ordinary general cargo. It is usual to reinsure these risks separately under Surplus and other treaties and facultatively when the treaty limits are exceeded. d) Growing popularity of non-proportional reinsurance In recent years, non-proportional reinsurances have become more popular than in the past years. The main reason for this is the increasing use of Excess of Loss treaty under which the ceding office bears all claims arising out of and due to one occurrence disaster of upto a specified amount. Only when this ultimate net loss (that is, after taking into account all recoveries whether from the assured or under other reinsurance arrangements) exceeds the retention limit, can the ceding office recover from his reinsurers upto a specified maximum limit. On the other hand, an Excess of Loss treaty may protect the ceding company’s gross lines or his net lines after cessions to Surplus and/or Quota Share. Excess of Loss reinsurance is placed in layers. It protects the ceding company’s net retained account where the ceding company’s basic reinsurance arrangements are on proportional basis, to reduce the impact of accumulations and catastrophe exposures. 278 IC-67 MARINE INSURANCE REINSURANCE OF MARINE RISKS CHAPTER 12 6. Hull Reinsurance In the field of marine hull, an underwriter has greater control over his commitments because each vessel or fleet is evaluated and underwritten individually and not under Open Covers as is usually the case in cargo insurance. The demand for reinsurance on facultative basis is confined mainly for limited conditions, usually, Total Loss Only. Before making any cession, the underwriter must determine his own net retention for the best category of vessel, graded down, and obtain Excess of Loss facility. As with cargo interests, the present trend is away from proportional treaties towards Excess of Loss methods of protection. However, Quota Share and Surplus Treaties are still encountered, particularly for those engaged in domestic or national markets, but the emphasis is increasingly on Excess of Loss arrangements, particularly for “catastrophe” covers. Wherever Excess of Loss is the chosen method of protection, the agreement is to pay the excess of an ultimate net loss to the ceding company in respect of each and every loss or series of losses arising out of the same “loss occurrence”. The hull underwriter must take care to obtain sufficiently high reinsurance limits (advisedly on a vessel basis), since it must be borne in mind that the hull policy may cover liability risks in addition to physical damage to the vessel. He should pay special attention to the overall constitution of his reinsurance programme – both proportional and non-proportional – the objective being to obtain most extensive coverage at a cost which leaves him capability of making a profit on his retained account. 7. Common Reinsurance Programme for Indian Business a) Objectives of common reinsurance programme Main objectives of common reinsurance programme are: i. To retain as much business as possible within the country consistent with safety and underwriting safeguards and prudence. ii. To obtain the best possible terms for reinsurance placed outside the country. IC-67 MARINE INSURANCE 279 CHAPTER 12 REINSURANCE OF MARINE RISKS b) Structure of the reinsurance programme The main structure of the reinsurance programme is broadly as follows: i. 10% obligatory cessions in each class of business to GIC which is retained entirely within the country, protected by Excess of loss arrangements. ii. Net retentions of individual companies. iii. Cessions upto specified limits to Market Pools in Fire and Marine Hull departments. The Pool cessions are protected by Excess of Loss covers and retroceded back to the companies and are retained fully within the country. These Pools have been formed with the primary purpose of increasing the net retained premium within the country. iv. First and Second Surplus treaties of the 4 companies, which are traded outside the country by the companies themselves, mostly on reciprocal basis. v. Market Surplus Treaty to take the balance surplus in case of huge industrial risks, large marine cargo commitments and exposure on high valued vessels. vi. Any balance after the treaties are exhausted is reinsured facultatively. Facultative reinsurances upto specified limits are absorbed within the country and are protected by Aggregate Excess of Loss cover. vii. Net retained accounts of the companies in individual departments are protected by Excess of Loss covers. The reinsurance programme is reviewed periodically and, within the broad framework of the original programme, changes are effected to ensure suitable rantion of retentions and benefits. Test Yourself 2 ____________ of the Marine Insurance Act, 1967 states that an insurer under a contract of marine insurance has an insurable interest in his risk and may reinsure in respect of it. I. Section 7 II. Section 8 III. Section 9 IV. Section 10 280 IC-67 MARINE INSURANCE MARITIME FRAUDS CHAPTER 12 C. Maritime Frauds 1. Meaning of maritime fraud Definition An international trade transaction involves several parties – exporter, importer, ship owner, charterer, ship’s master, officers and crew, insurer, banker, broker or agent, freight forwarder, etc. Maritime fraud occurs when one of the above mentioned parties succeeds, unjustly and illegally, in obtaining money or goods from another party. In some cases, several of these parties act in collusion to defraud another. Banks and insurers are often the victims of such frauds. The sinking of an over-insured vessel carrying a highly valued non-existent cargo has been encountered at regular intervals. During periods of economic and political upheaval and depression in the shipping business, there have been incidents of unusual losses. In the last several years, these and other factors have led to a significant escalation in the number of incidents that can be termed “maritime fraud”. When authorities in Greece and Cyprus clamped down on unscrupulous operators, the fraudsters shifted their attention to Lebanon and West Africa. At the same time, a spate of suspicious losses occurred in the Far East. No part of the world is immune from instances of maritime fraud. 2. Types of maritime fraud Maritime fraud has many guises and its methods are open to infinite variations. Majority of these crimes can be classified into following categories: i. Scuttling of ships (deliberate sinking of older vessels with / without cargo to claim insurance also called Rust Bucket Fraud) ii. Documentary frauds (the illegal manipulation of shipping documents) iii. Cargo thefts (ship deviation and subsequent theft of cargo) iv. Fraud related to the chartering of vessels v. Piracy A measure of overlapping must necessarily occur between these broad groups in many cases, and in fact there are many occasions when an element of each classification may exist in a single crime. Let us look at each of these types of maritime frauds in detail. IC-67 MARINE INSURANCE 281 CHAPTER 12 MARITIME FRAUDS a) Scuttling frauds Also known as “rust bucket” frauds, this involves deliberate sinking of vessels in pursuance of fraud against both cargo and hull interests. With occasional exceptions, these crimes are committed by ship owners in a situation where a vessel is approaching or has the end of its economic life, taking into account the age of the vessel, its condition and the prevailing freight market. The crime can be aimed at hull insurers alone or against both hull and cargo interests. Example For example, a dishonest ship owner may approach an exporter and offer to carry his next large cargo consignment on his vessel. The exporter is to arrange the contract and the proposed buyer to open a letter of credit in his favour to pay for them. No goods are actually to be supplied or shipped, but the ship owner agrees to supply bills of lading to show that the goods have ostensibly been loaded on the vessel. The bills of lading together with such other documents as are required are presented to the bank negotiating the letter of credit. The banker pays against documents and not against goods. After ascertaining that the cargo description corresponds to the requirements as stipulated in the L/C, the bank, in the normal course of events, releases the funds under the terms of the L/C. The ship, without its, by now paid-for, but non-existent cargo, leaves port. It should not of course reach its destination, because should it do so, the missing cargo would lead immediately to the discovery of the fraud. To avoid this eventuality, the ship is deliberately scuttled in a suitable location, so as to remove the evidence on the non-existent shipment beyond any prospect of subsequent investigation. The ship owner enters an insurance claim on his hull underwriters and he also receives a share of the proceeds from the letter of credit from exporter, leaving the hapless buyer to pursue an insurance claim for loss/non-delivery of his cargo. b) Documentary frauds This type of fraud involves the sale and purchase of goods on documentary credit terms, and some or all of the documents specified by the buyer to be presented by the seller to the bank, in order to receive payment, are forged. Bankers pay against documents. The forged documents attempt to cover up the fact that the goods actually do not exist or that they are not of the quality ordered by the buyer. When the unfortunate purchaser of the goods belatedly realises that no goods are arriving, he starts checking, only to find that the alleged carrying vessel either does not exist or was loading at some other port at the relevant time. 282 IC-67 MARINE INSURANCE MARITIME FRAUDS CHAPTER 12 Banks deal with documents and not in the goods covered by them. A bank which accepts, under a letter of credit; a set of documents, which appear to be regular on their face, is not liable to its principal if the documents turn out to be forged or to be containing false statements. Thus a confirming bank is entitled to obtain reimbursement against such documents from the issuing bank and the issuing bank is entitled to obtain payment against them from the buyer. Thus the loss is usually borne by the buyer. It is precisely to discourage the activities of fraudsters relating to export cargoes that GIC evolved of approval of ship operators system. The vessels usually employed by fraudsters are: i. Vessels flying a flag of convenience ii. Vessels over 15 - 20 years of age iii. Usually small sized ships of 7000 to 10,000 GRT iv. Vessels having changed their names and owners a few months before the last voyage. c) Cargo thefts There are several variations in the modus operandi of cargo thefts. In a typical example, the vessel, having loaded a cargo, deviates from its route and puts into a port of convenience. Such ports are Tripoli, Beirut, Almina, Jounieh, Ras Salaata and others along the coasts of Greece, Lebanon and Syria. The cargo may be discharged and sold on the quayside or in a more sophisticated manner. Such an act is often accompanied by a change of the vessel’s name or a subsequent scuttling in order to hide the evidence of theft. The whole process of investigation is proved difficult, as by the time the loss is known, the cargo disappears and the actual recovery of goods is unlikely. The owners of these ships are “paper companies” set up a few days prior to the operation. d) Fraud related to the chartering of vessels This is also known as “charter-party fraud”. Establishing a chartering company requires modest initial financial commitment and is usually subject to little regulation. In depressed conditions of shipping market, there is no heavy demand on tonnage and owners, anxious to avoid laying up their vessels, are tempted to charter them to unkown companies without demanding any substantial financial guarantee for the performance of the charter contract. IC-67 MARINE INSURANCE 283 CHAPTER 12 MARITIME FRAUDS The fraudulent charterer can turn this situation to his advantage. Having chartered a vessel from an unsuspecting owner, the charterer canvasses for cargo. Knowing that in a depressed economy, shippers will be willing to cut corners in the hope of reducing transport costs and thus saving on freight so that their goods can be more attractively priced the charterer offers low freight rates on pre-paid basis. He can afford to do that, as he has no intention of completing the voyage. Soon after the vessel sails from the port, the charterer disappears. He may have paid his first month’s hire or he might not have paid any hire charges as are due from him. Meanwhile the ship owner may find himself with substantial bills to meet, from port authorities, along the ship’s route as well as for crew’s wages and for provisioning the ship. Worse, the ship owner may find that his ship, not having delivered the cargo to the consignees, has been arrested and this leads to protracted and expensive legal wrangle. In order to get their goods to destination, shippers may agree to pay a freight surcharge or they will agree to a diversion and a sale of the goods to cover costs and then start the export process all over again. Sometimes, when no such compromise can be reached, the ship owner will instruct the master to divert his ship and sell the cargo wherever he can, thus becoming as much of a criminal as the charterer. e) Piracy Piracy is a war-like act committed by private parties (not affiliated with any Government) engage in acts of robbery and / or criminal violence at sea. The term can include acts committed in other major bodies of water or on a shore. Definition Piracy is the act of boarding any vessel with an intent to commit theft or any other crime, and with an intent or capacity to use force in furtherance of that act. In order to distinguish it from simple highjacking, a piracy crime requires that two vessels are involved in the incident. The second requirement is that the crime has been undertaken for private, not political purposes. These can be important considerations when determining coverage under a policy of marine cargo insurance. Pirate attacks are largely confined to four major areas: 9 The Gulf of Aden, near Somalia and the southern entrance to the Red Sea; 9 The Gulf of Guinea, near Nigeria and the Niger River Delta; 9 The Malacca Strait between Indonesia and Malaysia; 9 The Indian Subcontinent, particularly between India and Sri Lanka 284 IC-67 MARINE INSURANCE MARITIME FRAUDS CHAPTER 12 3. Maritime fraud and marine insurance The question arises, as to how is loss, damage or expense arising from an incident of maritime fraud dealt with in cargo and hull insurance? a) Cargo insurance Clause 4.7 of ICC (B) and (C) excludes “deliberate damage to or deliberate destruction of the subject-matter insured by the wrongful act of any person or persons”. However, if the insured desires these risks to be covered, he may request the cover from his insurers, who may grant the same at their discretion subject to additional premium. If cover is granted, then ICC (B) and (C) policies are made subject to the “Malicious Damage Clause” which reads as under: “In consideration of an additional premium, it is hereby agreed that the exclusion “deliberate damage to or deliberate destruction of the subject- matter insured by the wrongful act of any person or persons” is deemed to be deleted and further that this insurance covers loss/damage caused by malicious acts, vandalism or sabotage, subject always to the other exclusions contained in this insurance”. As regards cover under ICC (A) the risks would be included within the term “all risks”. So the exclusion does not apply to ICC (A). It should be noted that under all the 3 sets of ICC, loss, damage or expense attributable to wilful misconduct of the assured is excluded. Whilst “piracy” is generally included in the risks embraced within the term “all risks” of ICC (A), a rioter who attacks the ship from shore is covered by the Institute Strikes Clauses (Cargo) and not by ICC (A). There is no cover at all in ICC (B) and ICC (C) for piracy. As regards the risks of theft, pilferage and non-delivery, these would be included under ICC (A) but not under ICC (B) and (C). But ICC (B) and (C) may be extended specifically to include the risks of theft, pilferage and non- delivery at the discretion of the insurer and subject to additional premium. b) Hull insurance Under the Institute Hull Clauses (1.10.83), loss or damage to the insured vessel caused by, inter alia, the following perils is covered: 6.1.3: Violent theft by persons from outside the vessel, 6.1.5: Piracy, 6.2.5: Barratry of master, officers or crew IC-67 MARINE INSURANCE 285 CHAPTER 12 MARITIME FRAUDS Definition “Barratry” can be defined as every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer. For e.g. running away with the ship, sinking her, deserting her, steeling the congo, etc. The paramount clause no. 25 of the Institute Time Clauses – Malicious Acts Exclusions – excludes loss, damage, liability or expense arising from: 9 the detonation of an explosive 9 any weapon of war and caused by any person acting maliciously or from a political motive. 4. Precautionary measures for fraud prevention There are certain basic precautions against maritime fraud that commercial interests like exporters and importers, banks and insurance companies, should be aware of and should be able to implement. a) Importers (buyers) and Exporters (sellers) The checks and precautions that buyers and sellers can implement are: i. Care should be exercised when dealing for the first time with unknown parties. Careful inquiries should be made as to their standing and integrity before entering into a binding agreement. ii. Shipment should be by well-established shipping lines. iii. The cargo owner should be wary: 9 If the freight rate is too attractive; 9 If the ship owner owns one vessel only (‘singleton’); 9 If the vessel is over 15 years of age; 9 If the vessel has passed through various owners iv. Payment by irrevocable documentary credit, confirmed by a bank in seller’s country, provides the best safeguard to the seller. Should the seller have any doubt about the authenticity of the documentary credit, he should immediately consult his bank before parting with the goods. v. As far as the buyer is concerned, he should ensure that he receives the documents he has stipulated in his documentary credit application. Therefore, the buyer must consider carefully which documents he requires. For example, an independent “loading certificate” would add significantly to his protection as would detailed instructions on which shipping line or forwarding agent is to be used. The inspection of cargo should be as close to the time of loading on board as possible. 286 IC-67 MARINE INSURANCE MARITIME FRAUDS CHAPTER 12 vi. In order to ensure that the subject cargo is in fact loaded on the specified carrying vessel, the buyer may stipulate for a “report on the vessel” from an independent third party. vii. Conference or national lines bills of lading should be used and marked “freight prepaid” with the amount of freight clearly stated in the bill of lading. viii. Services of dependable and well-known forwarding agents, who are also members of a national association, should be engaged. ix. Buyers and sellers should attempt to identify whether the carrying vessel is on charter and who the charterers and owners are and whether chartering is done only through agents of reputable institutions. b) Banks Banks abide by the “Uniform Customs and Practice for Documentary Credits” issued by the International Chamber of Commerce (ICC). These clauses state: i. In documentary credit operations, all parties deal in documents and not in goods. ii. Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents. So, it is unfortunate that banks have little, if any, responsibility to check the authenticity of documents, although one could be excused for thinking that as the bank is the point of exchange, they should indeed have such a responsibility. Banks cannot afford to be complacent. Instances do arise when bankers become victims of maritime fraud, especially when they pay against forged documents for non-existent cargo, supposed to be on a vessel which is scuttled. In such a case, insurers will not pay if they are able to prove that the goods covered under the policy were never at risk. In that case, the bankers will find it very difficult to recover from openers of the credit all the money they had advanced or remitted under the letter of credit. Bankers should take following precautions against maritime fraud: i. Bankers should make use of Lloyd’s Shipping Index. Important points to check with regard to the carrying vessel are ownership, age, size and, importantly, the position of the vessel at the time the bill of lading was dated. ii. If such checks are considered difficult for a bank because of the volume of work involved, then perhaps a “super-service” at additional cost to the customers, should be considered with the actual checks being carried out by outside agents or brokers retained at an annual fee. IC-67 MARINE INSURANCE 287 CHAPTER 12 MARITIME FRAUDS iii. Methods should be examined of improving documentary credit operations by the application of computerised and modern business methods. c) Insurers Where the name of the carrying vessel is not known at the point when insurance is effected, the insurance is made subject to the Institute Classification Clause and the requirement that the vessel carrying the goods conforms to the provisions of the Clause. The assured is required to declare to the insurers the name of the carrying vessel as soon as it is known. When the carrying vessel complies with the requirements of the Classifications Clause, standard rate of premium is charged. Otherwise, extra premium is attracted for over-age, under-tonnage, non-classification and F.O.C. registration of a vessel. In India, the exporter used to be encouraged to use vessel operators “approved by GIC” to carry the export cargo. This system also applies to import cargo when the carrying vessel is bringing a full load of import cargo to India as also to imports on vessels from Singapore, Malaysia and Far East (excluding Japan and Mainland China). However, the system has been discounted of GIC and it is for the individual insurance companies to formulate their system. 5. Conclusion In nearly all incidents of maritime fraud, it is evident that dishonesty of one party is combined with misplaced trust and short-sightedness of the other. Traders should beware of low freight rates. There is no such thing as a “bargain”. In business, everything, including the bargain, has a price tag. The present emphasis on the incidence of maritime fraud has highlighted the cargo problem, but in most cases, a ship is also involved and it is likely that the insurers’ interest also extends to it. Problems of a different nature arise with the ship, but the principle that the insurer must exercise every care to check background details of the vessel itself, of ownership and management and of its trading record is the same. Test Yourself 3 Which of the following places is more prone to pirate attacks? I. Suez Canal II. Gulf of Aden III. Gulf of Mexico IV. Panama Canal 288 IC-67 MARINE INSURANCE SUMMARY CHAPTER 12 Summary a) Loss control / prevention means a systematic approach to reducing loss of or damage to property with the purpose of minimising waste to the owner. b) Major losses in transportation are due to: 9 Theft, pilferage and non-delivery; 9 Handling and stowage losses, 9 Water damage and 9 Maritime perils (comparatively a small percentage of damage) c) 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. d) Stowage means placing and securing of cargo in the holds of a vessel. e) The layout of the cargo should be carefully considered with due allowance given to bottom stowage and avoidance of space wastage. f) Water can reduce otherwise stable cargo into a ruin of soggy, stained, mildewed, rusty or delabelled merchandise. g) 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. h) The methods or types of reinsurance can be broadly divided into two main sections, namely, proportional and non-proportional contracts. i) Under proportional reinsurance, the reinsurer accepts liability for a proportionate share of each risk ceded. Under non-proportional reinsurance arrangement, the reinsurer pays the ceding company only when the original loss has exceeded the limit of retention of the ceding company. j) Both proportional and non-proportional reinsurances can be transacted on a facultative or a treaty basis. Therefore, another way of dividing methods of reinsurance is to categorise them as facultative and treaty contracts. k) 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. l) 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. m) Under Quota Share Treaty a fixed proportion of every risk in a given class of business is ceded. IC-67 MARINE INSURANCE 289 CHAPTER 12 SUMMARY n) A Surplus (also called “excess of line”) treaty allows the ceding company to reinsure under the treaty any part of the risk which it is not retaining for its own account. o) The Facultative Obligatory Treaty (Fac-Oblig) has the features of both facultative cessions and obligatory treaties. p) Pooling arrangements create a capacity to handle risks of a catastrophic nature or risks of special category; for example, atomic energy risks. q) Excess Loss of Treaty arrangement is basically a form of reinsurance, whereby the direct insurer sets a monetary limit to the amount he is prepared to bear of any one loss as a result of any one event, on the class or classes of business concerned. r) There are two types of Excess of Loss covers: Working Covers and Catastrophe Covers. s) Stop Loss Treaty type of reinsurance cover (also called “Excess of Loss Ratio”) prevents the ceding company from losing more than a specified amount of loss for a given class of business. t) An Aggregate Excess of Loss treaty works on the same principle as a Stop Loss Treaty, but instead of expressing the loss ratio limit as a percentage of the annual premium, it is stated in actual figures. u) Under Open Cover method, the direct insurer is free to choose, within the terms of the treaty, what risks he wishes to cede. v) Under Marine Open Cover arrangement, the underwriter automatically accepts from his assured all his shipments coming within the scope of the Open Cover upto an agreed amount per vessel / conveyance. w) In the field of marine hull, an underwriter has greater control over his commitments because each vessel or fleet is evaluated and underwritten individually and not under Open Covers, as is usually the case in cargo insurance. The demand for reinsurance on facultative basis is confined mainly for limited conditions, usually, Total Loss Only. x) Maritime fraud occurs when one of the parties (exporter, importer, ship owner, charterer, ship’s master, officers and crew, insurer, banker, broker or agent, freight forwarder) succeeds, unjustly and illegally, in obtaining money or goods from another party. y) Majority of the maritime frauds can be classified into the following categories: 9 Scuttling of ships (deliberate sinking of older vessels with / without cargo to claim insurance, also called Rust Bucket Fraud) 9 Documentary frauds (the illegal manipulation of shipping documents) 9 Cargo thefts (ship deviation and subsequent theft of cargo) 9 Fraud related to the chartering of vessels 9 Piracy 290 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 12 Answers to Test Yourself Answer 1 The correct answer is IV. Major losses in transportation are due to: i. Theft, pilferage and non-delivery; ii. Handling and stowage losses, iii. Water damage and iv. Maritime perils (comparatively a small percentage of damage) Answer 2 The correct option is III. Section 9 of the Marine Insurance Act states that an insurer, under a contract of marine insurance, has an insurable interest in his risk and may reinsure in respect of it. Answer 3 The correct option is II. The Gulf of Aden is more prone to pirate attacks as compared to the other 3 places mentioned. Self-Examination Questions Question 1 After the advent of containerisation, another type of loss which is becoming very common is _________, in which, though container seals are intact, cargo is either stolen or replaced by inferior cargo using dubious methods. I. Non-delivery II. Skillful Pilferage III. Stowage IV. Water damage IC-67 MARINE INSURANCE 291 CHAPTER 12 PRACTICE QUESTIONS AND ANSWERS Question 2 There are two types of excess of loss covers: Working Covers and _________ I. Non-working Covers II. Open Covers III. Catastrophic Covers IV. Pooling Covers Question 3 ABC Insurance Company has got into an Aggregate Excess of Loss Treaty with XYZ Reinsurance Company. The treaty covers annual losses in excess of Rs. 5 crores upto a further Rs. 4 crores. Which of the following statements is incorrect? I. ABC Insurance Company will cover all losses upto first Rs. 5 crores II. XYZ Reinsurance Company will cover all losses above first Rs. 5 crores upto a further Rs. 4 crores. III. Any amount in excess of Rs. 9 crores will be shared equally among ABC Insurance Company and XYZ Reinsurance Company. IV. Any amount in excess of Rs. 9 crores will revert to ABC Insurance Company. Question 4 For marine insurance, banks abide by the “Uniform Customs and Practice for Documentary Credits” issued by the ___________. I. Reserve Bank of India (RBI) II. Insurance Regulatory and Development Authority (IRDA) III. Institute Cargo Clauses (ICC) IV. International Chamber of Commerce (ICC) Question 5 As a precaution against maritime fraud, banks should make use of the _________. I. Lloyd’s Shipping Index II. Baltic Dry Index III. Indian Shipping Index IV. Global Shipping Index 292 IC-67 MARINE INSURANCE PRACTICE QUESTIONS AND ANSWERS CHAPTER 12 Answers to Self-Examination Questions Answer 1 The correct option is II. After advent of containerisation, another type of loss which is becoming very common is skillful pilferage, in which, though container seals are intact, cargo is either stolen or replaced by inferior cargo using dubious methods. Answer 2 The correct option is III. There are two types of excess of loss covers: Working Covers and Catastrophic Covers. Answer 3 The correct option is III. Any amount in excess of Rs. 9 crores will be shared equally among ABC Insurance Company and XYZ Reinsurance Company. This is incorrect. Answer 4 The correct option is IV. For marine insurance, banks abide by the “Uniform Customs and Practice for Documentary Credits” issued by the International Chamber of Commerce (ICC). Answer 5 The correct answer is I. As a precaution against maritime fraud, banks should make use of the Lloyd’s Shipping Index. IC-67 MARINE INSURANCE 293 CHAPTER 12 PRACTICE QUESTIONS AND ANSWERS 294 IC-67 MARINE INSURANCE