‘ Distr. GHNEPAL 0/8/C.3/120 9 May 1375 Original: ENGLISZ as Conference on Trade and Development ‘TRADE AND DEVELOPMENT 80430 Committee on Invisibles and Financing related to Trade Seventh session Geneva, 27 October 1975 Item 7 of the provisional agenda INSURANCE Mazine cargo insurance Study by the UNCTAD secretariat GE.75-4510019/3/c. 3/120 Paragraphs G) - Gx) page ii CONTENTS INTRODUCTION Chapter I: THE ROLE OF MARINE CARGO INSURANCE IN WORLD TRADE Perils of the sea and other reasons for cargo loss or damage Marine insurance instrumental tc world trade financing Chapter If: MARINE INSURANCE COVER AVAILABLE FOR CARGO LOSS OR DAMAGE Ingurable interest in the goods Types of marine cargo insuzance cover Specific trade clauses Cover of war and political risks Commencement (attachment) and termination of cover ‘he marine insurance policy Cargo policies Limitation of cover Chapter IIT: COST OP MARINE CARGO INSURANCE Rating in marine cargo insurance Scope of the insurance cover Insured value of the cargo Nature of the cargo Voyage and carrying vessel. oss record of the shipper Individual risk judgement and tariff rating Rating of war risks Influence of recoveries on rating Chapter Iv: SETTLEMENT OF CLAINS FOR CARGO LOSS OR DAMAGE Claims for cargo loss or damage Total loss clains Particular average claims General average claims Sue and labcar charges Salvage Recoveries from third parties Jurisdiction ard litigation Ghapter UV: CARRIER'S LIABILITY AS REGARDS CARGO LOSS OR DAMAGE Professional liability Historical background Carriers! liability under the Hague Mules Applicability of the Hague Rules The Brussels Protocol, 1968 al 83 Be 3, 96 97 = 99 - 101 - Goud 104 107 a m9 63 65 cd Fages u 12 12 13 15 17 » 19 1 21 a 24 24 24 25 26 28 29 30 osem/2/2.3/120 page iii Ghapter YI: INSURANCE COVER AVAILABLE FOR CARRIER'S LIABILITY Protection and Indemity Clube 38 Mode of operation of Protection and Indemnity 39 Conditions of Protection and Indemity ccver 9 Exceptions and limitations 40 Deductibles 2 Underwriting and rating 42 Claims 43 Carriers' liability cover outside the Protection and Indemnity Clubs 140 - 142 43 Chapter VII: CO-EXISTENCE OF MARINE CARGO INSURANCE aND CARRIER'S LIABILITY COVER Respective roles of property insurance and of liability cover - 149 45 Is there any overlapping between marine cargo insurance and Frotection and Intemnity cover? + 154 47 chanisn of subrogation - 158 48 Problems related to recourse of cargo insurers against carriers - 161 49 Chapter VIII: OTHER POSSIBLE SOLUTIONS FOR CARGO LOSS OR DAMAGE COVER Radical changes as regards the carrier's liability 162 - 169 2 Insured bill of lading 170 - 176 53 Specific liability probleus of container traffic LTT = 182 55 Partial revision of carrier's liability regime 183 - 189 56 PART Two Chapter i: MARINE INSURANCE MARKETS IN DEVELOPING COUNTRIES Marine cargo insurance tusiness in general 190 - 203 59 Trade patterns affecting the marine cazgo insurance business _ 204 - 208 62 Insurance of imported goods by the buyer 209 = 212 64, Shapter IZ: PROMOTION OF MARINE CARGO INSURANCE MARKETS THROUGH REGULATORY MEASURES Regulatory measures in general 213 = 214 66 Measures aimed at insuring imports in the local mazket 215 - 227 66 Measures concerning the insurance of exports 228 - 232 70 Degree of enforcement of regulatory measures 33 = 237 12m/3/c.3/120 page iv Paragraphs Pages LY OF MARINE CARGO INSURANCE COVER Ghaster IIT: Local su ated to local supply of marine cargo insurance cover 258 7 rence 239 = 245 g countries 206 - 255 countries 251 = 256 Problems rel Underwriting of marine cargo in: ‘Types of cover offered in deve! Narine cargo rating in develop: Level of marine cargo insurance costs in developing count 257 - 259 Control of marine cargo insurance rates 260 = 263 Underwriting results of marine cargo ins 264 ~ 268 Servicing marine cargo claias 269 - 273 Litigation and recovery of marine cargo clains 274 - 276 Chapter IV: INTERNATIONAL AND REGIONAL FACILITIES Weed for international co-operation 2qT - 21a Ci Facilities related to undervriting and rating 219 - 283 a7 Facilities related to handling of claims 264 - 265 85 Recoveries from carriers 286 83 287 - 290 a9 Regional facilities and co-operation‘90/2/c.3/120 page ¥ EyTRODUCT LO: (4) kt dts Zourth session (July 1970) the Gomuittee on Invisitles end Financing related to Trede, taking note of 2 decision of the Trade and Development Board pursuing its own programe of work in the field of insurance, requested the secretariat to undertake a study on marine insurance to serve the requirements both of the Committee /6n Invisibles and Finencing related to Trade? and of ths Working Group on Internetionel Shipping Legislation". 2/ (4d) To meet the requirements of the Working Group on International shipping Legislation which, et its first session, held in 1969, included marine cergo insurence in its programme of work, the study was to involve research into the present murance and to operational methods end practices of international cargo marine in anelyse these methods and practices with a view to permitting conclusions as to the in adequacy of the present structure and possible improvements in favour of si general and shippers in developing countries in particular. Sbles and Financing (441) The programe of work in insurance of the Committee on Invi pelated to Trade is mainly based on the principle that "developing countries should take steps to enable their domestic insurance markets to cover in these markets - teking into account their national economic interests es well as the insured interests ~ the insurance operations generated by their economic activities, including their foreign trade, as fer as is technically feasible". 3/ To meet the requirements of such an insurance policy, the study, in addition to its generel analytical part es descrited in the preceding paragraph, would have to deal with the specific problems arising in the marine insurance markets of developing countries and the ways and means of promoting these markets. (iv) For the above reasons, the present study on marine insurance is divided into tuo perts, the first dealing with the current terms end practices of international narine cergo insurance and the second with specific marine insurance problems in developing countries. : 1/ Officiel Records of the General Assembly, Twenty-fourth session, scontbeont eke apres Pert three, para. 103. 2/ Official Records of the Trade and Develonment Board, Tenth Session Suoplenent io, £ (1D/8/318), paras. 91 and 92. 3/ Conference resolution 42 (III), para, 1.mp/3/c.3/120 page vi 4 that marine cargo 1g it developed spectal (v) as regards Part One of the study, it should be recall Amsurence is the oldest form of modern insurance. Over ths ‘sks inherent in shipping operations and influenced features stemming from perils and by 2 specific legal background, mainly based on British common law, Althougi: 4 long ago, many of these features still exist and continue estat: fon provided against the economic consequences of cargo Amaurence pr: in international trade. Knowledge of the normal methods end practices under international marine cargo insurance is carried out, as set out in Part One of ) tsy prove very useful to present and prospective marine insurers in developir to operate in congormity with the generally accepted countries, who might internationsl standards, On the other hand, the description of the current structure is Likely to pave the way for inprovements, sined in particular et better protection of the conmercial and transportation interests of the developing countries, (wi) Regarding the specific problleus of developing countries as providers of f insurance (including fire, motor insurance, the fact is that in dest classes vehicle, accident end crop insurance), the developing countries can inplemext the general insurance policy recommended by UNCTAD, that of covering locally the risks generated by their economic activities in a streightforvard and direct manner, through appropriate regulations and an active promotion of their domestic insurance markets. 4 domestic insurance market should be made strong enough te provide adequate insurance cover of the risks erisiag in the country. If this condition is fulfilled, ‘the right to purchase insurance directly abroad should be restricted. Measures should also te taken to encourage local investment of insurance funds derived fron local insurance transactions. The UNCTAD secretariat has prepared a mumber of studies analysing ways and means of inplenenting this general policy. (vit) For some classes of insurance (including reinsurance and arine cargo insurance) international considerations tend to complicate a straightforvard implementation of the policy. advocated in the preceding paragraph. An UNCTAD secretariat study 4/ analysed the problems facing the developing countries in the specific field of reinsurance and arrived at sone conclusions which were considered by the Committee on Invisibles and Financing related to Trade at its sixth session and recommended for adoption by the Governments of developing countries. 5/ Part Two of atries (1D/B/C.3/106/Rev.1), 2/ Reinsurance croblems in develoning co United Netions publication, sales tio. B.74.D. 5/ Official Records of the Trade end Development Board. Thirteenth Session, gupplement io. 2 (10/8/64), amex 1, resolution 7 (VI).10/8/c. 3/120 page vii oblens the present study hes a similar purpose, nenely to enslyse the specific » developing countries in the f1elé of marine cargo insurance and to suggest appropriate solutions to these problems, with a view to promoting a lerger participation of the insurance markets of developing countries in international marine cargo insurance. (vidi) The study ia its p: by the UNCTAD secretariat, In the preparation of the draft the secreteriet was assisted by li. B, Pinckernelle (Hemburg); li. J.P, Penthekey (India); li. G. Elhekin (Baypt); He. P.A, Segueira (Ireq); tr. A. Kunz (Guitzerland); tar. R, Rivera (Wexteo); and Mr. G. Chéreau (France), ‘The éraft was revised in the light of comments end observations nade during the meting of an informal expert group held in Geneva fron 3 to 7 Naren 1975, in which the following experts, acting in personal ceyacity, . R, Dulzaides, Gerente de C.A, "La Segurided” (Caraces); form is a revised version of an earlier dreft prepared participeted: i Hr, Gamal Eihelcim, General Hanager of the Kuvait Reinsurance Coupeny; 1% Overseas Haneger of the T: farine and Fire Insurance Coupany Limited (Tokyo); Dr. Ricardo Kuffler, Presidente de la Gduare de Aseguradores Meritimos (Buenos Aires); . Alwin Minzler, Chaizman of the Gargo Committee cf the International Union of jarine Insurance (Zurich); Mir. Pierre Letron, Legal Adviser, Syndicat des Sociétés . Ernesto iartfines, Senior Vice-President Hitoshi Tkeya, ck Frangaises d'assurances Maritimes (Paris); I of the 7.G.U. Insurance Group (Rizal/tianile); ir. Carl MeDowell, President of the gmerican Institute of harine Underwriters (lew York); lir. Stephen Ogunniyi, General ianeger of the iiarine end General Assurance Company Limited (Lagos); Mr, Raymond Porter of Lloyd's (London); ii. Alexander Renkov, Director in the State Economic Interprise npulevacht" (Sofia); ir. R, Sidharta, General Henager of UMMRE PT Reesurensi (Jakarta). (ix) The secretariat is grateful to all who helped it to prepare and finalize the study by malcing 2 nost valuable contribution, but is alone responsible for the final text of this document.m/8/c.3/120 page 1 PaRT ONE INSURANCE PROTECTION FROVIDED TO GOODS TRANSFORTED BY SEA Chapter I THE ROLE OF MARINE CARGO INSURANCE IN WORLD TRADE Perils of the sea and other reasons for cargo loss or damage The need to insure property against the economic consequences of its loss or damage is a fundamental feature of modern society. The more valuable the property and the more serious consequences of its loss or damage to the owner, the more imperative it is to insure it adequately. Particularly in the case of property representing substantial investuents in commodities, manufactured goods and industrial plants, and involving outside financing, the ower of the goods as well as his ngurance cover. Credit is becoming more difficult to creditors insist on ample obtain without such cover. Thus, merchants insure their goods in stock, farmers their crops, end industries their products, plants and machinery. The scope of the insurance cover sought in each case depends, of course, on the type of perils to which the goods concerned are exposed and on the degree of security their owners wish to attain. 2. Goods in transit are generally exposed to considerable additional perils, against which adequate insurance cover becomes even more essential. This explains ‘the early development of marine insurance, which has been practised by merchants since the early days of overseas trade. It continues to play a very important role in world trede. In practically every import or export transaction, besides the main partners ~ the seller and the buyer of the goods and the indispensable carrier — insurers have an essential role to play both economically, through providing’ insurance cover and settling claims (with or without recourse against third parties possibly liable for loss of or damage to cargo), and financially, where-the marine insurance policy is an ancillary document indispensable to the negotiability of the goods while in traneit. 3+ The main purpose of merine cargo insurance being to provide insurance protection against the econonic consequences of cargo loss or danage, this study will now proceed to review the perils to which cargo is exposed and the loss or damage it can suffer while in transit. 4. The carrying vessel-may eink or capsize with cargo on board as a result of such fortuitous accidents of the sea as heavy weather conditions, hurricanes and tycoons. The loss of the vessel tay also be caused ty its unseaworthiness, or ty = navigational error on the part of the master or pilot. Finally, the sinking of the vessel may be the result of an act of a third party (in the case of collision) or of an act of war, riots and other warlike operations.m/B/0.3/120 pogo 2 5s hile these an other accidents are @ joint menace to ship and cargoy “he cargo dézel? can be totally lost in a munber of cases shen the ship is only damaged or has aot teen exposed to any danger at alle water at the tine of Loading or u2 For instance, cargo may fall fron the sling \g, without salvage or otherwise fall into # op reconditioning being bi seidle. including containers, may be washed overboard or goods endanger the safety of the ship or other cargo. sed (and not released), seized by the authori gation. ‘They may be damaged by acts of war or loading or t. Deck cargo, Several parties may be at fa jettisoned in he: 3, lawful or 6. Goods may be arr otherwise, or ve the subject of Lit: Destruction of cargo on board at the moment of nm the action of strikers, locked-out workers, warlike operations. soharging occurs in rare cases throug! saboteurs, or in riots or civil commotions. Theft of complete units on boar’ or loss of = P at the time of loading or unlosdiag is = to A special case of total logs is the non-arrival of goods due to overcarriagsy (inadvertent carriage Deyond the port of destination) unless the cargo or part of it is found later. 7. The incidence of danage to, or partial loss of, goods carried is much nore 2 of total loss of cargo. The frequent and on the whole more costly than in the cas Rust and/or oxydation damage causes, kinds, and consequences of damage are many+ 'g sweat or other cargo. nay occur through contact with freshvster, seaweter, ship Some goods are easily damaged vy heating. Tea, coffee, cocoa, s, groundnuts and similar products are most suscept raw sugar, rice, coconuts, pala kernel: e to this kind of danage. Stowage of such goods requires knowledge and experience. Proper ventilation is of vital importance to the safe crossing of different clinatic There is imminent danger of sweat damage when 2 cargo is loaded in hot aoness othe air is high, and the ship then enters 2 more moderate weather and the humidity o: zone or even encounters low temperatures. 3, Breakage occurs frequently, machinery being the main sufferer. If machines cannot be repaired at destination, even slight damage often causes heavy losses. 4 for repair, the labour situation in the In fact, if the machines must be return o feight and costs incidental to their return and country of origin, added +: xeensive than a complete replacement. Breakage peshipment, can make the repair mori enanelvare, and glass, unless occasioned by 2 major accident, of china, earthenware, within reasonable limits if the racking is adequate. The same is generally kept «But breakegs, bending, applies to liquids in bottles or leakage of drums or cas! denting and scratching occur frequently on uncrated motor vehicles, tubes or other heavy materials.1/8/0.3/120 page 3 gs Some gocds are particularly vulnerable to theft and pilferage. The most coveted items are watches, cutlery, plated articles, expensive spare parts and accessories for motor vehicles, high quelity textiles, clothing and clothing accessories and, mest of all, canned food and bottled spirits, in cther words anything that has e relatively ation ree and rare in the countries of destin gh value per weight end volume, is ve disposed of on the black market called "general or in ports of call or can cas: 10. Loss or damage often arises under a rule peculiar to shippi average’. Goods are sacrificed in order to free the ship and cargo from an imminent comon danger. This secrifice can reeult in loas, damage, or both. Decl: cargo is jettisoned to aake the ship more stable (less top-heaw) in o storm and is generally lost. A ship is lightened when she is stranded or has ran aground and ds being refloated. The goods can be damaged more or less seriously. They can ve damaged or completely spoilt ty water when fire breaks out on board ship. though under the York-dntwerp Rules applicable to general average, loss or damage may have affected only a few consignments on board the ship, and/or parts and equipment of the ship, all participants - the sbipoumer end all shippers, even those who had not sustained danage - must contribute proportionately to their vested interest in the venture. 11, The types of loss or damage to cargo, and their possible causes, that shipowmers, exporters, importers and underwriters have to deal with in the daily routine of their Dusiness nave been covered in the preceding parsgraphs. There are, of course, other dangers, risks and perils, other kinds of damage and other causes. Tne variety of cargo shipped from and to all parts of the world is practically unlimited. New ent cute woth ways. Cargo commodities come on the market. Technological devel is carried which ty its nature is more susceptible to loss or damage. Ships tend to ecome larger and the higher value of goods shipped is higher. The vessels, their machinery and their equipment are becoming more powerful but also more complicated. The sane applies to navigation instruments. Navigable waters become more crowded, voyages take less time, turnover of cargoes is heavier, labour becomes scarcer though Sometimes better trained, but often reinforced ty less qualified hands, and nore frequently working under stress. Hew kinds of loss or damage occur which were not experienced before. Therefore the somewhat conventional list of possible incidents given here is far from complete. Marine insurance instrumental to world trade financing fe already mentioned in paragraph 2 above, marine insurance plays an important is role, the prevailing role in the financial field as well. In order to understand %3 pattern of financing in world trade should be described. What interests the exporterm/B/c.3/120 pege 4 of merchandise is to get back the price he has paid as quickly as he can, for the le turnover of his capital is as vital to him as it is to any other h the documents of title to the fastest possil wusinessman. On the other hand, he camot par goods, particularly the bill of lading, before he has received payment. There are’ ash. If 2 seller is forme of payment, however, almost as valuable to him as ready pted and can therefore be negotiated wd sure that his draft has been or will be his bank, it is ee though the tuyer has paid cash. ‘The consignee, too, is naturelly interested in 2 quick turnover of his funds. He, therefore, wishes to postpone payment of the gocds until he has sold them and has received payment in his turn. This is where bank credit comes in, act between the seller and the buyer will contain a payment clause. 13. The sales contr The most important and most frequently used clauses and documentary credits respectively. Under a collection arrangement, the vank acts ise under collecticn arrangements oa the instructions of the exporter, and the documents of title representing the gocds are exchanged at the importer's domicile and payment is made there. The services of a correspondent bank or of a branch office of the bank are required. In the case of a documentary credit, on the other hand, the instructions to the ‘Yank are given by the importer and the documents of title are exchanged, and payment made, at the exporter's headquarters. Here, too, the services of a correspondent vank will be required. 14. A collection arrangement may provide for (a) an exchange of the documents for payment in cash, the respective draft containing the clause "Documents against payment" (D/P); (b) delivery of the documents against acceptance of the seller's draft at 30, 60, 90 or more days after sight. The draft will then contain the clause "Documents against acceptance" (D.AsA.)+ _ Under the documentary credits clause documents may also be exchanged for cash, but much more business is transacted under an agreement between the bank and the tuyer whereby the bank, through its overseas branch or 2 correspondent bank, promises to accept, honour, or negotiate bills of exchange - drafts ~ drawn ty the seller. ‘The seller or buyer can rarely dispense with the services of a bank. This is true where the buyer is a branch of the seller or vice verse, or where the volume of shipments is relatively small measured ty the financial capacity of the seller or the buyer or where two-way dealings are involved, shipments of industrial or consumer products or investment goods going one way and, in exchange, raw material or tropical products going the other. The two parties may, in such cases, settle the balances through current account.m/3/c.3/ page 5 15s The technical details of the collection arrengenent and the documentary credit, and how they are wound up, need not be gone into here, However, it should be very strict about the documents involved, for the two following reasons: 1. strict compliance must be insisted upon becau: the risk of the documents being refused and the drafts unhonoured by otherwise the banks run ‘the consignees on the grounds of a discrepancy between the documents and ‘the instructions given, or in the event of a claim for damages being made, which mey happen frequently in a falling market; 2. the documents are more often than not negotiated for the purpose of financing the underlying commercial transaction. inoiple is generally observed, that of a strict In this o an inportant 5 separation of the "documentary aspect" of the commercial transaction from the "goods aspect", the banks being concerned only with the former and never with the latter, 4 bank deals in finance, not in goods. Normally it has no expert knowledge of the usages and practices of a particular trade, The documentary character of a banker's credit, es used in the international trade, cannot be overenphesised and on it is besed the predominance of the tvo main instruments, the Dill of loding and the insurance policy. 16. The complete set of documents (bill of lading, insurance policy, contract of sale, commercial invoices, coasular invoices, certificates of origin and, in some trades, other documents as well) is not only 2 means of collecting the purchase price or of satisfying the bark thet the gcods are shipped end insured, but is also a security for financing of the commercial transaction enabling the venk to brid: the time lag betueen shipment and arrival of the cargo. In the cese of a collection arrangement, the exporter would ask his bank to make an advance on the seourity of anded over to the bank for collection. In the instance of a a documentary bill 4 vank's documentary credit, the exporter would ask the correspondent of his customer's bank, or his om hank, or a different benk altogether — depending on the conditions the banks can offer him ~ to discount or purchase the draft which he is entitled to draw under the doounentary credit opened in his favour ty the consignes. In all ‘these Cages the batking institutions will satisfy themselves first that the goods represented ty the documents are insured, either by the surrender of an insurance policy together with-other documents, or through confirmation ty an insurer that such goods are adequately covered under @ mar10/2/0.3/120 page 6 17. In normal circumstances a foreign trade bank will not negotiate a draft unless it is accompanied ty: a complete set of documents. There are cases, of cour.e, where banks are in current business relations with importers of high standing and will icies or certificates for each individusl shipment. dispense with the production of po 1 then setisfy themselves that an open cover for their cli he LL have undertaken not to make any payment of claims + insurrs will always have to honour a policy or certificate with the consent, but insurer pearer if the bearer clause is written into the policy or if the policy is endorsed in blank or to the bearer. In international trade, however, commodities often change more than ence while on their way from the place of production to the place nation, and as it is not yossible to deliver them physically to the respective ded of dest: ‘uyer, the docunent are used es substitutes for the comoditie: In these cases a duly endorsed policy or certificate is required in the same overs coments. countrie: Lic; way as the bill of lading and the other d able, is not a negotiable prover, although it may be ass: practice of business it is accepted as such. In fact, both the bill of lading and ‘the insurence policy represent the cargo, or respectively the right to claim for lost or damaged cargo and, therefore, cen be negotiated in the same wey, but more easily of course, then the cargo itself.™D/3/c. 3/120 page 7 Chapter IZ MARINE INSURANCE COVER AVAILABLE FOR CARGO LOSS OR DAMAGE st in the goods 18. The perils to which cargo is exposed have been discussed in Chapter I. In so ble, the cargo owner may take out an insurance against far as these risks are insur has free hand i t least some of then, The shipper ge: all or what cover to choose among those offered by the marine insurance market, unless, of course, his consignee or banker have committed him to insure his consignments on specific tems. The types of marine insurance covers available, their limitetions and the foms of contracts are analysed in this Chapter. nal trade quite a munber of people or corporate bodies wey require 19. In internat: hi 1 insurance in securing the indemnification of the cargo omer he services of ma: loss he may suffer if his goods are lost or damaged in transit, while for any finance: x delivery or tion, or while weiting in the port of destination. insurance, the party effecting the avaiting transp. transit to the consignee's warehouses. ract is in force. Then, insurance is generally called "the proposer until the c the proposer becomes "the Insured” or "the policy holder", He mst have at the tine in the goods to be transported. Such insurable of the loss an insurable interes enefits from their preservation, that ie to say from their safe interest exists if he arrival in an undamaged condition, or if te were to suffer a financial loss through ix being lost or danaged. 20. The insurable interest in the gcods can be original or derivative. The owner of a cargo at the time of shipment, or at the beginning of the joumey, has an originel jortgagees, insurable interest and is, therefore, entitled to insure that interest. 1 financing banks and confiming houses have an interest up to the amount of their mortgage, advance paynents or surety offered. The ownership of the goods is sometimes passed more than once from one party to another and, therefore, the policy is made assignable in the same way as the bill of lading. QL. It is incumbent upon the party requiring the insurance cover to disclose to the insurer every material fact he is entitled to have conceming the risk proposed for coverage, including the nature of the cargo, its quantity and packing end the name of the carrying vessel. This information is intended to enable the underwriter to decide whether he is prepared to accept the risk and against what preniun. This obligation imposed on the proposer is fair and reasonable because the uaderwriter does isk cffered. He has therefore to rely 4 not conduct investigations into every general on the proposer's statements and good faith, aad usually receives from him alone the necessary informaticn conceming the risk.m/B/C. 3/120 page 8 e proposer aay negotiate the insurance cover directly with the insurance ‘broker. 2. 2 coupeny of his choice or avail himself Sf the services of an insurance Insurance brokers are expected te act in the interest of the insured. They give advice as raganis the mest suitable cover’ for a pacticular risk, present all the features of such a risk to the underwriters and negotiate on tehalf of the propeser the terms, conditions and rates of the insurance cover. However, many markets cperate without the intervention of brekers and prefer a direct relationship between insurers and their clients. insurance cover ‘Types 23. In ell insurance maxkets providing marine cargo insurance cover, there are many ted. Such a broad marine we to rest: ing fcom comprehe: ety of goods transported and the dis: typesof cover available, r: needs ects the vass va Be of cov of tae shippers, the insurance being tailored to these needs. The various types o: insuren’ + countriss kave mch in commen, ses are often not identical, depending inter alia on the basic 5 ples of the risk" princ. aarine insurance law of sach country, Some countries follow the ey 1 risks are insured unless specifically excluded by the uses oF which means that the wording of the insurance contract. Other countries azply the principle of ‘a perils are covered as are expressly named “named pezils", which xeans that only su in clauses, of othervise, in the text of the insurance contract. 24. Although in the end the two systeus provide the same types of cover, the principle of naned perils as practised in the United Kingdon is the one most commonly used, In fact, the British maxket has for long been the intemational centre for marine insurance and British practices in this field have influenced many countries on all the continents. It may therefoze be useful at this poidt to provide an analysis of the systen of clauses set up by the London uarket, which has been accepted and practised by a relatively lange maber of countries. 25. In Britain, cango was traditionally covered on "vith average" (Vi) or "free from particular average" (FPA) terms. The perils insured against were generally those of the "ship and gods" (SG) policy as specified in the Marine Insurance Act, joy fom that vas‘used both for mull and cazgo. Its scope was limited 1906, 2 Po because it wes: tased on practices and usages developed at a tine when damage to cange played minor part as compazed with total loss, constzctive total loss, general ge charges. The policy was fommlated in the days of sail when average, and sal y in grave accidents due to stom, fire, ful. voyage when nothing cargo was lost or heavily damaged cost. eion, and stranding rather than during an uneven ant happened to the ship herself. ca: signi:10/8/c. 3/120 page 9 26. But long before the Marine Insurance Act was passed, competition on the world markets had drawn the attention of importers, waolesalers, retailers and even consumers, to ordinary damage and deterioration in quality. Profit margins of traders grew narrover and smaller losses or damage could therefore no longer be considered minor trading risks. troduced the "ship and goods abisfactory to cargo owners. This led to the introduction of the proved FPA and the WA Institute Cargo Cl strove to restrict the cover to protection against loss and damage caused by fortuitous risks end to avoid cover against ordinary losses and those which are inevitable, such es natural wastage of certain commodities by evaporation, ullage, ordinary breakege of bri’ inary leakage of recepta ‘ree competition on the London insurance mazket occasioned a uses mentioned above. But even then underwriters ‘le commodities, and on 27. Subsequently, considerable extension of the FPA and WA clauses, free agreenents betwe contracting parties being quite legal under the provisions cf the Marine Insurance Act, igeé. periie” vere included in the cover, such as petty theft and pilferag and non-delivery, sling and hook risks, md and/or oil damage, freshwater damage, mould, zildew, and vermin damage, damage by other cargo and sweat damage. Admittedly, the denand for cover against 2 mmber of these extraneous risks was and is quite a lazge variety of wording of new policy clauses, a numoer of "extraneous short-delivery legitimate. In other cases, it was and is not, especially when less or damage is rough inherent caused by trading rieks such as loss of market, delay, detezioration t! vice, penalties, or lose, damage or deterioration due to mistakes in manufacture, production, or packing, or damage done by the shipper himself in good or in bad faith. Such risks were considered as uninsurable, and some of then still are. 28. The widest cover provided in marine cargo insurance is the "sll risks" cover. For quite a long time conservative undervriters opposed official recognition of the Nall visks" clauses for cango, but then such cover was frequently given by the majority of the market. In view of the pressing demand for a cover cf all insuratle risks which were outside the sphere of influence of the insured ~ especially those riske which were not caused wilfully or through gross negligence of the cargo owner, nor connected with inherent vice, delay, or loss of market - the Institute "all risks" cargo clauses were drawn up and officially approved for "voluntary" adoption. It was hoped that, if the clauses caze into general use, all reasonable demands of the shippers would be satisfied; . "reasonable demands" in this cuntext meaning demands did not trespass upon the field of urinsursble risks.m/3/c. 3/120 page 10 29. The following two clauses of the "all risks" cover are typical of this kind of = This insurance is against all risks of physical loss or damage to the subject matter insured but shall in no case be deemed to cover loss, damage, or natal tely caused by delay or inherent vi: ject-matter = Claims for loss or damage with irrespective of percentage. The word "risks above is used deliberately, Cover is not given for "all loss or damage arising from whatsoever cause", but only for losses ty extemal fortuitous oat fh do not constitute ¢ losses - wi causes. Claims for ” ry" or "inevitable’ risks" - aren: or expense proxinately ceused by delay, ded. ‘Therefore, inherent goods are expressly ex x, by successive which they have evolved from eac! extension, the three prevailing types of marine cargo insurance cover, namely the “free from particular average (FPa)", the “with average (Wa)" and the "all risks" cover, ave a great nurber of clauses in common, but om the other hand, some very substantial jegarding the forner, all three types of cover provide comprehensive differences. insurance against: (a) total less of the whole cargo, constrictive total less of same, and total less of any apportionable part. (bv) dizect liability for general average sacrifice, and general average contributions. (c) salvage charges, particular charges, and sue and laboyr charges. (4) particular average irrespective of percentage of loss, if it is caused by the vessel veing stranded, sunk or burnt, or if the loss is attributable to fize or collision,'or to discharge of cargo at a port of distress. 31. Ts is precis eld of particular average due to causes other than those mentioned in point (4) that the three main types of marine cargo insurance cover r average (vhich is a partial loss or damage of cargo differ most. In fact, particul proximately caused by an insured peril) is fully covered by an "all risks" contract, with the exception of ondinary losses, such as customary ullage or less in weight. A “with average" cover includes particular average only if it attains a certain stipulated percentage and only as a result of heavy weather vhile a "f. a etely, unless, of course, they average" cover excludes partial losses cor circumstances described in point (a).70/3/c.3/120 page 11 nile the "free from 32. for instance, the "all risks" claw particular average" ané the “with average" (unless due to cizcuastances stated above) cover Zor partial losses caused by leakage and breakage, heating, fxesh water damage, danage by other cargo, petty theft, pilferage and non ‘three prevailing types of cargo insurance cover exclude, of delivery. or nature of the goods, as ed by delay ox damage ca deliv. damage caused wilfully ty the cargo owner. ery oF none delivery, referring to the failure of cargo, or of part of it, to arrive at the destination without any evidence to show the cause of loss, can be insured as extensions to "FPA" and "Wa" clauses, but these are not covered unless they are specially mentioned as insured perils, 33. In France and other European countries the “all risks" policy 1 the policy es being excluded. Under such a policy overs all losses except those listed explicitly all the insured has to do in case of a claim is to fumish evidence that loss or ex vish to refuse the claim on the grounds of it should the i damage occurre deing due to an excluded risk, it is then up to t ese countries is tased on the opposite principle and only covers insurer to prove this fact. The "Fratpelicy sacse risks which are expressly listed in the policy, thus excluding all other loss or damage. Both types of policies, however, cover contributions to general average, in a very comprehensive manner. Specific trade clauses uses of the three above types of ccver are designed to meet the zequirenents 34. The of shippers of general merchandise. They can be applied to all sorts of goods. In some special cases, however, shippers have found these standard clauses inadequate for ons had to be negotiated and the protection of their interests. Special cond. agreed between shippers and undervriters to provide policy conditions adapted to the specific nature of the particular commodity shipped. 35. Marine markets generally consider it appropriate to agree trade associations on standard forms of clauses. The perils insured against these clauses are typical for each commodity and are concurrent with losses from rtuitous risks. The flour trade clause, just to give an example, covers "all clains whatever - irrespective of percentage - for damage to the flour insured, arising fron all dangers and hazards of transportation including loss from short t, but excluding claims caused by th the respective nder weight through tags being broken or tom in trans: weevils, insects, worms and grubs". Such specification of details of the perils fic trade covered and perils excluded cannct be provided for except under such speci: clauses, Similar trade clauses exist for such items as coal, corn, jute, rubber, sugar, frozen products and timber.™/3/0.3/120 page 12 Underwriters drawn up to shipnente 36. ‘The trade clauses adopted by the Jointly with Lloyd's and the Liverpool Underwriters’ Association app: to and from the United Kingdon. However, many markets use these clauses or similarly tailored clauses because they have, in practice, proved to serve the terests bo the traders and the underwriters alike. They make unmistakably x whet is and what is not covered. Gover of war and»: val risks 37. In the aggregate "all risks" Institute Cargo Clauses there are two which exclude war and other politicel risks, namely cargo loss or damage due,on the one hand, to s, labour ptuze, seizure, arrest, restraint or detainment, and, on the other, Should either of these clauses, oz both, vil commotion. S! disturbances, riots or be deleted in the contract, then the current Institute War Clauses and/or the current Institute Strike Clauses are deemed automatically to form part of the contract in sar necessazy to quote here the wording of the relevant Institute War and Strike Clauses. However, there are varieties of the feraer in crder to cover the many forms of transportation. The Institute War Clauses simply reinstate the exclusions of war risks and include expressly loss of or damage due to hostilities, waz-Like operations, civil war, revolution, rebellion, insurrection or civil strife arising therefzoz, as well as mines, torpedoes, boubs, or other engines of war. lade The Institute Strike Clauses reinstate the exclusions of strike risk, and i expressly theft and pilferage or other loss of, or damage to the property, oy the persons listed in the exclusion, It is worth noting in this connexion that the american War Risk Clauses exclude arrest or seimure of the carga by the country of origin or of destination. Roughly speaking, war cover is only given while the eurgo is watervorne, i.e. excluding pre-shipment and post-discharge risks, a limitation which, incidentally, does not apply to mines and derelict torpedoes. Special provisions are usde for the case of a trans-shipment. In the Institute Strike Clauses no "watezborne" restriction to the protection is made. Commencenent (attachment) and termination of cover 39. Although originally marine insurance only covered the cargo vhile waterbome - whence its name - today the cargo owner often requires cover for the entire period from his supplier to their final destination. In order to kis goods are en rout ensure inclusion in the cover of the inland portion of the transit at both ends, the “warenouse to warehouse" clauses were drafted. These clauses vary according to the means of transport on the uain voyage. In special trades a "transit clause" is usedjtead of a “warehouse to warehouse" clause, ¢ for goods insured from the moment they leave the the policy and continue while goods are transport during loading operations, sea-voyage, dischazgir delivery to the consignee at the place indicated 40, he insured afte: destination for the stipulated is longer if the final destination is area. The coverage terminates on expizy of the of the goods to the consignee at the place of des However, the cover may A time-Limit is granted to scharging operation and cus whichever ocours first. clauses, but notice must be ¢ provided for in of the cover within the meaning of the respective additional preniun. The marine insurance policy 41. 4 marine insurance contract is usually made insurance policy. The policy serves as evidence relations between the insured and the insurers ar the marine insurance contract : This is the ce In some countries incorporated in a marine policy. countries which follow the Anglo-Saxon pattem o: France and Germany, the marine insurance contrac consent of the parties. In spite of this diffe: insurance contract, the marine insurance policy : necessary document for the transaction of intem: Though the particulars which every cargo pol lation of the country where the po! 42. national le nolude the following items: (4) nase of the insurad o name of the pers insurance on his own or another's beha! (44) name of the insurer or insurers; (444) subject-matter of the insurance, nazel; ~ their nature, packing,—quality, etory ~ (iv) the sum insured; . (v) voyage or peziod of tie, or both, as + (vi) name of the vessel or description of ar are transported, including the proposed 7/3/C. 3/120 page 13 1 Kinds of clauses provide cover arehouse of the shipper named in a by land, awaiting shipuent, and inland transit, until final a the policy. arrival of the goods at the port of ous clearence, The time-linit nland or at least outside the port plicable time-limit or on delivery ination es stated in the policy, @ extended beyond the time-linit ven to the insurer before expiry oleuse and on payment of an n writing and referred to in the of the existence of the contractual sets forth what these relations are. not valid unless it is @ in the United Kingdom end other law. In other count: acquires validity through the mere nee in the legal character of the s, such as universally recognized as a ional trade. ay should contain are a matter of cy is issued, it is commen practice a or body who contracts ped or to be shipped, 2 case may be; her conveyance by which the goods sailing date or the attachnent of the‘10/3/0. 3/220 page 14 nature, cannot be covered by an ordinary insurance policy. Tuis applies to livestock, ullion, specie and other valuables, explosives, and narcotic drugs, (illegal shipment of the matter being uninsurable altogether). Although goods shipped on deck are not ey because of their exposure to greater hazaris, normally covered by an ordinary y can ve declared specifically in order to enable the under: peril and fix an appropriate rate. of countries 34 ind policy in order to insured person's interest in his cargo Its of sum insured gust correspond to 44. because a aarine insurance policy is a contract of indemi. ject is to place the person insured in the same financial position as he enjoyed before the occurrence of the loss. 4 cargo insurance contract must not serve as a means to realise a profit, The insured, hovever, is the only one who can estimate his financial interest because he has calculated the price of the goods shipped, the cost of shipment g the principle and the expected profit if the goods arrive safe and sound. Consideri: that it is not the cargo that is insured but the owner's interest in it, underwriters will not contest the cargo owner's valuation unless the expected profit included in the valuation appears exaggerated because it is unobtainable in the market even in the most favourable circumstances. This would tum the policy into a gambling contract, at least for that part of the sum insured which exceeds the value of the ‘cazgo and the reasonably expected profit. 45. Most single shipment policies are voyage policies and the ports of shipment and ‘of destination are shown in them. Preliminary and additional voyages, if any, must also-be-roughly designated, Cango "time-polictes" are mostly “declaration” policies m covers", and for the purposes of the insured shipper, certificates or or issued which become part of the shipping documents. The name of endorsements a: tion of the cargo in case of loss or damage. the vessel is important for identifi:mD/B/c. 3/120 page 15 f the vecsel or conveyance affects the premium zate, Pires, the qua c ‘the nane of the vessel mist also be declared in onier to enable the insurer to check scel; in fact, he way be committed through bi ‘various channels on shipments of several cazgo-owners using the same vessel. aggregate commitae) f the perils insured and the perils excluded is the policy teade most policies are made payable at all-importan destination, and the settling agent mst be avaze of the conditions stipulated, He can only do so if the conditions are specified in the policy or certificate. qhe insertion of the premium rate is optional in ost countries. When policies change hands by assignnent, as they frequently do in intemational trade, the forms part of his cal lation as a matter of his shipper may consider the rate whic own concer. Cargo policies 47. The above explanation of the par policies refers culars to be contained 2 the convenience of both mostly to ordinary single shipment policies. Howew: nipgers and undervriters the markets have developed Labour-saving systems which at the same time ensure that the merchant is covered at any time for all his shipments if he is an exporter, and for all consignments if he is an importer, or for a certain re he becomes aware of group of his business, as soon as he runs the risk, even bi fail to insure or his interest in a carge, or in case he or his staff inaéverte: t of the risk, or cuit the insurance or declare his interest prior to the ettachner declaration altogether. These systems are: (4) floating policies; (44) open covers: (444) block policies. 48. & floating policy is issued for en agreed value covering all future shipments of the insured. The shipments mst however be declared. Each tine 2 shipment is y is reduced according to the value of the goods. nade the sum insured by the poli This procedure continues until the total value of the goods declared has reached the gum insured as indicated in the floating policy, in other words, until the policy expizes. The premium is paid in advance for the full sum insured and not cn each shipment. 4 floating policy always contains the following stipulations: pilferage and no: gh transported from India to ¢ rate is paid. have ample storage a —ULr—™—OOSOSCSséS(é) the extent of loss or damage;TD/B/o. 3/120 page 27 (c) thet the loss or demage occurred within the tine the insurance was in force (under a warehouse to warehouse clause, for exampls) and where the 2oss or damage occurred; (4) the fact thet survey vas applied for end nede within the prescribed tine~ mit if the policy conteins such a tine-linit, 89. If the policy or certificate includes a paynent clause, suck as 1 st destination ly ...", the consignee will present the documents to the settling agent (in most cases he is also the clains agent), who will have te consider the claim. If a Payment clause is not incluied tn the policy, the dccunents must be sent to the office watch issued the insurance docment, or to the insurer's hoad effice, The clains ‘laizs payable documents will consist of: - the policy or certificate; ~ the bill of lading; ~ the supplier's invoice end paciting list; - the survey report; - the claimant's clains invoice; - the port authorities! certificate; ~ the correspondence, or copy thereof, with the Iccal shipping agent concerning the loss or damage, 90. In cargo insurance, as in many other property insurance Classes, clains are based on the insured value which is agreed and, in case of a total Joss, the amount insured in the poltey 4s paid, less non-inourred expenses, as explicable, In the event of partial loss, the percentage of depreciation mist be determined. This will te applied naged Se the insured value. In many markets, when goods azrive at destination in a 4 state, the percentage of depreciation is determined ty comparing the gross sound- arrived value with the gross daneged-errived value. These values are based on the market values on arrival, The surveyor will agree the depreciation with the consignee, Hf they are unable to reach agreement, it may be necessary to sell the goods, mostly by suotion, in order to find the percentage of depreciation. Ir this becones necessary, the gross proceeds are conpered with the gross anount which the goods would have Feallzed if sold in sound coudition at the same place and on ‘the same dey, and the Percentage of depreciation is caloulated accordingly. ‘The insurer then pers the sar Percentage of the insured value plus reconditioning charges, If any, plus the cost of the sale and the survey and other fees. St The procedure 4s ditverent if e danagéd cargo can be repaired or reconditioned, thus Tegeining {ts fall value, The damege then is the actual cost of repair or reconditioning and forwarding to destination. This ccst is, of course, borne by the fnsurer, No caleulation, such es described above, will be necessary, that is to say,mp/3/C. 3/120 page 28 the cost will nob be fixed in relation to the sound value and the vespective percentage paid of the insured value, since such procedure would probably put the cargo owner in a better position than he would have been dn hed no damage occurvei. If, however, the dmgured value is lover than the sound-arrived value - instead of higher - then there is 2 case of underinsurence, and the cargo ower will only be able tc recover from the ingurer such peroentage of the repair or reconditioning cost as th: underinsured value pears on the somd arrived value, The cargo owner then has to bear that pert of the cost for which he went uninsured. 92. In general, the procedure followed in cases of underinsurance can be more easily understood if one recells the principle that in such cases the policy holder is his cum insurer for the uninsured part, The cleins settlenent will be nade as if the interest were n the case of a fully insured, but the totel indemity due will be shared cut just as in his capa coninsurance between the insurer or insurers and the policy h and self-insurer, This procedure, which is provided for by the insure in ful. if they received a of ell countries, is tc avoid having insurers pay the cla: visk, This is also why the underuritor, when issuing or premiua for only part of th countersigning a genezal average bond, will investigate whether th> cargo subject to general average is fully insured or not, If it is not, he will require e counter~ guarantee from the cargo ower, undertaking to indemnify bis insure: for eny amount: paid on the grounds of the general average settlenent to the general av2rage commmnity in excess of what he is responsitle for in accordance with the amount insured. Under the san principle the policy holder reneins entitled to his share in any recoveries because he is considered a co~insurer in that respect as well. General average claims 6/ 93. Handling of general average claims is very different from the procedure connected with clains for total loss and particular average. Ceneral averse? is basically meonnected with insurance lav. It is part of the contract of affreightment which governs the relations between shipowmer and shipper in respect of sacrifices and expenses, made by the ship's naster whenever the comon venture ic imerilled or an accident is imminent or has ectually happened. ‘The object of suck sacrifice or expense must be preservation of the comon venture. Therefore, any losses resulting from yacréinary voluntery sacrifices or from expenses incurred in or er to preserve the her cargo come within general average and must be borne ¢ ‘oportionately by all sted in the venture.: T0/8/c. 3/120 page 29 94. The parties having to contribute to the secrifices ere, of course, those which were interested - at the time when the sacrifices were decided upon and made by the ship's naster - in the successful completion of the common venture, that is to say in saving the ship and her cargo. Thess perties are the ship (the shipcwner); the cargo ily the shipovner). Gf these, the ship (the (the cargo ower) and the freight (us: shipowner) and the cargo (the cargo owner) are self-explanatory. But the freight (or the perty interested in the freight) my also benefit from the safe arrival of the cargo and, therefore, be a perty to the venture in those cases where the contract of affreightment provides for freight to be earned by the shipowner not tefore the delivery of the cargo or before the cargo is ready for delivery e+ the stipulated port of destination, irrespective of whether the freight hes been prepaid or not. In such cases the shipowner is interested in the safe arrival of the ship end cargo and, therefore, he or whoever is entitled to the freight, is party to the common venture. It is, therefore, quite fair thet he should contribute to the sacrifices and other losses or damage caused by general average measures in the interest of all the parties, proportionately to the value of the freight due to him, 95. #11 the parties named can take out insurance against the risk of general average. The cargo owner slvays does, because cases of general average are quite frequent. Moreover, by insuring the general everege, the cargo owner receives from the insurer an important service, nanely 2 guarantee for payment of the contributions to the shipowner, which facilitetes immediate delivery of the cargo to the policy holder. Tt should be remembered that in case of underinsurance, the insurer will require a counter- guarantee from the cargo omer for the uninsured portion, The shipowner, who is legally considered a trustee of the general average commmity, will require either payment in cash of a general average deposit, or e gusrantee, before delivering the goods, and a guerantes is acceptable to him if issued directly, or endorsed, by the insurer. General averages nay be complicated to draw up. The normal practice is for a general average adjuster to be eppointed to prepare the report and negotiate the settlement. Frequently the exercise takes up to one or several years, depending on the complications and negotiations involved in reaching agreement among the parties. The report sometines reaches the proportions of a thick volune, especially when a full cargo of breal-bulk shipment is involved. Sue end Isto 96, Almost all marine cargo insurance policies contain a proviso to the effect that 4t is the insured's duty to make every effort to avert 4 claim upon his insurer and to inet this obligation the insurer showld ges minimize losses covered ty the policy. 4 indemnify the insured for all expenses incurred by hin cn this count. Tals proviso is0/3/0.3/220 page. 30 called the "sue and labour clause" and it allows the refund of expenses actually paid ty the’ insurer to avert the claim or minimize the loss irresrective of any other loss which the insurer may be called upon te bear even when there was a total loss of the cargo insured. salvaze = 97, In marine insurance the term "salvege" means not only what has been recover ship or cargo after an acoident at sea, but also. the amount or remmeration to a selvor who has rescued e ship and/or cargo under a contract. Such a contract is mostly made in the form of the Lloyd's Standard Form of Salvage Agreement, Standardization is a useful practice because, in an emergency, neither the shipowner nor the master - who frequently has to act on his own responsibility - have tins to bargein or negotiate the salvage who hes saved, or helped from, conditions. Alternatively, salvage tay be averded to 2 salv to save, the ship and/or her cargo independently of eny contract. 98. Salvage charges are neither general average nor sus and latour charges. In ioned as if they were and are recoverable from the practice hovever, they may be eppor insurer if incurred in connexion with en insured peril. There are several salvags associations, one of the most prominent being the Salvage Assccfaticn in London. The Association does not itself take part in salvage activities and, indeed, does not own salvage equipment. Ite activities consist of surveying and supervising of salvaging operations, end the services of the association ere frequently required in preparing the insurer's case for litigation. The purpose of the Association is to protect comercial interests as regards wrecked and damaged property, but it does not intervene except at the request of the owners or insurers of maritime property. coveries from third parties 99. Shippers or other cargo owners may have certain rights or renedies against a third party who may be responsible for loss or damage sustained by the cargo. If shippers exercise these rights and renedies thenselves, the insurer is only liable for the Gifference between the insured value and the smount recovered froma third party, In rare cases of a cargo owner going uninsured for sone reason or other, he will exercise these rights himself. If he is insured and for practical reasons refrains from exercising his rights and remedies, he will claim under his marine insurance against ‘the insurer, who in turn will take recourse against the third perty liable. In mst cases, but not in all, the party possibly Mable will be the carrier, as well as varehousenen and port end customs authorities. A party not in contractual relations with the cargo owner may in some cases be lable for loss or damage. Other shipowners, instance, or other cargo owners who have shipped dangerous cargo, may be liable in @ of collision,10/B/c. 3/120 page 31 100. In practice, the insurer will act for the Insured party because as 2 rule he is better qualified and equipped to do so, His intervention has a twofold advantage. He Provides a valuable service to his insured end he oan conduct the recourse as he thinks best and need not instruct his client as to how he should Proceed, which ne would be entitled to do ty lav, or under policy conditions. The intervention of the insurer is Usually based on "subrogation", The use of subsogation ty the insurer on behale of the insured will be explained latex, since it 4s better to do so after the question of carriers! Liability has been dealt with, as recourse is moétly taken against the carrier rather than ageinst other third perties, Turisdiction and litigation A0L, Cases of litigation are relatively rare in marine cargo insurance jab any rate, in number they represent only a fraction of the cases brought before the courts by cargo Owners or their insurers against carriers, If, however, @ difference o opinion arises between the insurer and the insured and the insurer refuses to Pay the cleim or part of it, the insured may take the case to court. Causes for Gisagreenent may be: whether o2 not an insurable interest existed, warranties heve been complied with, the policy vas in force vhen the loss or damage occurred, and/or the loss or danage resulted from a peril ‘ton, illegality of the shipnent or occurrence of insured against, possible misrepresen: a total loss. 102, Marine cargo policies coveriag international cargo shipments do not always contain ooe——s—s—s—r—“‘CSCSOONCs—CSC—C=CON contract, Failing a specific provision in the policy, the lev of the country in which the policy was issued vill generally apply. This does not Mean, however, that legal —r—“—s—OOOSOSOSOSOSSC'—sSsS Tes henely the law applicable, 4s one thing, legal dorictle, or the place where an insurer can be sued, is another, Tegel action cen be brought ageinst the insurer in any country, but in practice an insurer vill be sued only in a countuy where he has funds avallatie against which Judgement can be enforced. In other vords, @ legal title 49 net worth such in e country where the defendant who lost his cese is not in funds. 203. In this consexton, 1% should also be remombered that lavsulte betveen the insured and the insurers are rare. Consequently, international insurance sarkete have hardly G2y cxperience of the court's attitude in the field of jurisdiction and legal domicile in cases of litigation between insurer and insured, The meertainty of the legal Situstion in this respect has one great advantage in thet it hea addea to the natural Teluctance of inswers to resort to legal action, quite apart fron the very high cost of ee ———————= of the Goubtful claims therefore are either compromised, or an ex gratia paynent is made by the insurer,70/8/C. 3/120 page 32 chapter ¥ CARRIER'S LIABILITY aS REGARDS CARGO LOSS OR DAMAGE rofessional Liability lod. In aost professions, and especially in those servicing a wide public, there is ¢ very widespread practice of insuring professional liability against loss of life, ge to property that might be caused to clients or thizé boatly injury, and loss or 4: parties, The person taking out insurance cover for hie professional Liability obviously does not imow in advance the identity of the persons vho might suffer death on injury, nor what property might be lost through his fault, neglect, omission or error, Professional liability insurance does not cover life or property of clients on third parties, but only serves to insure the policy holder against possible clains arising out of his inadvertent fault or omissions. 105. A shipowner's business is complex and difficult, Neny are the risks end perils ty va, other property and, Sois his liabi to which ship, crew, passengers and cargo ars expos: towards t! Jast but not least, tovazds the shippers and consignees. It is the latter form of persons mentioned above, towards other shipo professional liability of the chipowmer, that is to say tovands the omers of the transported goods and their business partners, vhich falls within the scope of the present study and will be dealt with here. 106. 4a in all professional liability, carrier's Liability for cargo losa or damage, in 1e only to the theory, conforms to the general rule that e carrier is to be held respon: extent to which 1 omission or error. In practice, however, both for historical reasons and because of ss or damage can be considezed as resulting from his fault, neglect, the inherent difficulties in proving fault or omission on the part of the shipownez, ‘the situation is much more complex. Instead of it being a matter of fact - which is eften difficult to prove - carrier's liability has become a legal matter, subject to special national and/or international law. Historical backeround 7. Until the beginning of the last century, merchants end shipowners were mostly one and the same person. Shipmasters were as often as not the merchant-shipowners' partners in the venture the ship embarked upon, and in most cases they not only had a share in the ship under their command but also in the cargo carried. The question of cargo liability then hardly arose. If a contract of carriage was nade between a shipowner or a master-shipowmer and an independent merchant, it usually covered the ynole capacity of tue ship; in other words, the ship was given im charter, Liner shipping wes practically unknown in the age of sail.12/B/C. 3/120 page 33 108, Furthermore, in thoss days seafaring meant fignting against the elements of nature, and shippers - whether or not they were co-owners of the carrying vessel - were cheir venture. Compared with the frequency of conscious of the hazards connected with loss or damage caused by the perils of the see, the cases where t Were negligivle, Most accidents could be attributed in good faith te the perils of P vas responsible ins seas Cargo could easily be checked and carefully handled, tide vere relatively Snail, ‘he assortment of comodities limites, and loading, stoxing, and unloading cperaiions were effected unhurriedly. Under these cirounstances, oven if readily siaitting Liability, except for accidents beyond control of a competent shipmaster or an efficient and conscientious shipowmer, the carcier still aid not lay himect? open fo the Tisk of shouldering a heavy burden of liability. 205, Towards the middle of the last century, however, things began to change quickly. She vessels and their loading capacity became larger and the tumover of cargo grey in quantity and speed, The value of vessels and cargoes increased and consequently tine became an important factor in the cargo owers' and the shipowners’ calculations. Srr—~—t—‘“—OSC—OO—SS—OSOSONOCS—i—CSCSéCsCstrs—Cr~sCSCN received fox Se rrr—~—‘“—OSOO——Os—OC—C—s—OC——sCNSCOCS;SsSCS<( liability by @ court g/ For carriers! ineurance protection provided outside the Protection and Indemnity Clubs see paragraphs 140 and 141.- 1D/B/C. 3/120 page 39 ecision (the "West Hope" case) which declared as null and void the very narrow limitation of the owner's cargo liability in the contract of carriage. It is through fhe Cazrlage of Goods ty Sea dct of 1924, that the Indemnity Clase acquired the great importance it has to this day. 125. In view of the fact that the bulk of protection and indemnity cover is placed » this study mainly refers to the English Frotection and Indemnity Clubs in Engl, Mutuals. However, it should be mentioned that the Protection and ‘Indemity Clubs in Scandinavia, their rules, practices and organization, are moze or less, but rather Bore ‘han less, modelled on the English. the same is true of the Clute in the ‘hough the latter's activities are limited to protection, United States and Japan, Mode of operation of Protection and Indemnity Clubs 126. Because of the mutual character of the Clubs, menbere are both insurers and ‘nsured, The relation between the Club and a menber acting in his capacity of the The ‘nsured is governed by the Rules, which are drawn up by the General Meeting. Rules deal with the entry of ships by members, xiske covered, exceptions and Limitations, These contain clauses the equivalents of which are often found in Conventional insurance policies. It should te uentioned that the Articles of Association, on the one hand, and the Rules, on the other do not very clearly draw *he line between the rights and duties of the shipowers as menbers and as insured, @ fact which is characteristic of mutual insurance schenes. 127. Compared to insurance companies Protection and Indemnity Clubs operate in quite different ways both in the field of premiums and in thet of ‘building up reserves, instead of providing cover at fixed rates, the Clubs apply the systen of “Calls”. on the basis of its past experience, at the veginning of each business year a Club makes Oh estimate of the approxinate requirements expected for clains, individual expenses and costs, as well as overhead charges. That total anount is apportioned between the members, In earlier days of protection and indemnity Bistory, the allotment was made im equal shares per gross registered ton, but today the principle of individual underwriting is apglied, Each aenber's share is called the "Advance Call" and must ve prepaid. Subsequently, the Club may collect one or more “Supplementary Calls", as ‘she sanagenent may think fit, on the grounds of the claims meambile reported and the cotimated financial requirements for then. Claims not reported but expected must be included in the estimate. Conditions of rrotection and indemnity cover 25, The cover offered ty Protection and Indemity Clube to their nembers ~ or in isolated cases also to non-members - is a wide one, applying to toth Protection andro/B/0. 3/220 page 49 Indemity Classes®/, Tt shold be remembered that under the Protection Class, cover is given for risks resulting from carriage of passengers, liabilities, cost and expenses connected with ships' crews and consequences of collisions. The Indemnis Class covers claims connected with carriers’ cargo liability, as well as fines, cost oz expenses arising fron infringenent of laws and regulations, such as customs regu! Conpared with the great variety of cover provided by the Protection and Indemnity Clubs for all kinds of the shipower's liability, cover for cargo loss damage is only a minor part thereof. Bearing in mind the purpose of the present study, the rules which refer to cargo liability, are as follows: loss or shortaze of cago or other prozerty ing or having been oss of cargo or other property intended to be or | carried in an entered ship arising out of any breach by the owner or by any person for whose acts, neglect or default he may be legally liable of bis obligation or duty ac a carrier by sea properly to load, handle, stow, carry, Keep, care for, disdharge and deliver such cargo or property, or out of unseaworthiness or unfitness of the entered ship. Liability for damage to or responsibility in respect of cargo ov other property Danage to or responsibility in respect of cazgo or other property intended to be or being or having been carried in an entered ship arising out of any preach by the ower or by any person for whose acts, neglect or default he may ve legally liable of his obligation or duty asa carrier by sea properly to lead, handle, stow, carry, keep, care for, discharge and deliver such cargo oz property, or cut of unseavorthiness or unfitness of the entered ship. 129. Furthermore, the shipowner is entitled also to recover the extra cost (in excess of the cost which vould normally have been incurred by him under the contract of carciage) of discharging or disposing of damaged or worthless cargo, provided that he iis liable for such cost and that he cannot recover the same through recourse from any other party. Exceptions and limitations 130. There are, of course, a number of exceptions and limitations to the protection and indemnity cover. Only such exceptions and limitations as refer to carriers! cargo liability will be dealt with within the framework of this study. Here the most important prerequisite for cover is the incorporation cf the provisions of the g/ some Clube have abolished the distinction between the Protection Class and the Teiennity Claes and offer instead a unified cover, known as Class 2 cover.1D/B/C.3/120 page 41 Hegue Rules in the contract of carriage. Failing such incorporation, the Protection and Indemity Club is liable only for such indeméftcation as vould have arisen 4f the Hague Mules hed been claused in the bills of lading. The shipowmer can, hovever, give notice in writing to the managers stating the tems of the contrast of carriage, the nonent he becomes avare of his extended Mebility, This vill then be ineured by the Association, at the shipowner's expenss. 151. There are further limitations in che case of cargo being shipped under a "Through Fill of Lading" and only part of the carriage is effected on the “entered (covered) Ships 4 shipowner "shall be entitled to recover from the Association loss of or damage to or responsibility in respect of cargo or other property being carried by a Seans of transport other than the entered ship, for which the shipowner may be liable wader a Through or Transhipment Bill of Lading or other form of Contract of Carriage assued for a carriage partly to be performed by an entered ship; but the Club shall bave power at any tine to prohibit, for use in any particular trade, any form of ‘Through or Trenshirment Bill of Lading or other form of Contract of Carriage under ble for loss of or damage to cargo by which the owner of an entered ship may become 4 Means of transport other than the entered ship". 132. Furthermore, for goods carried under an “Ad Valoren" Bill of Lading the shipowner #8 mot entitled to recover liability costs and expenses in excess of 2 macimin of US$ 2,400.00 per unit, piece or package unless the excess value is declared by the shipomer to the Club prior to shipment and the necessary particulars of the shipment given, The managers of the Club may grant such cover and effect corresponding Snewrance as they think fit, at the expense of the shipowmer. “Ad Veloren” Bills of Tading are, however, zare. Shippers nostly ship theiz valuable gocds as ordinary Genres ota memes tneeeelbe ro) eli pownerst! | Gey (ape ret teeere ey congo insurance policy declaring the right value including expected profit and expenses at destination. In fact, an insurance policy covering the full value of the goods is Ssnerally mich cheaper than the loading for obtaining an "Ad Valorem! freight vate. 293. The Rules concerning deviation are somevhat complex. Opinions vary on vhat is Geened to constitute deviation, but asa rule the shipomer will rely upon being #8 beyond his control, The most frequent reason for a deviation covered if deviatil As the offer of a contract of carriage of goods waiting for shipment in a port off the shortest route, In this case, as indeed alao in the event of a deviation not authorised by the shipowner, the latter's notification to the Club vill restore his Srewrance Protection, probably against payment of an insurance premium, or part thereof, at the managers! discretion. Shipment of cargo on deck without a corresponding remark in the Bill of lading is deened to constitute deviation in a number of countries,0/8/0.3/129 page 42 ptions and linitations 134. It will have beon obsexved that most of the atove & concern acts and omissions from which a qualified and conscientious shipowner would either abstain altogether, or notify his club. Tn most cases such notification ~ possibly against payment of, oz participation in an insurance prenius will remedy the situation, Theze i2 broad scope for the managers’ discretion in the settlement of 1 exercise their diseretion wherever the event underlying en clains, and they » exception or Limitation vas beyond the shipowner's control, or if the managers 37° satiafied that the shipowner acted or made the omission in goed faith, In any event the shipowner's position appears to be strong. Deductibles 335. The Rules of all Protection and Indemnity Clubs provide for certain deductibles. Theiz rates vary according to the Club and according to the risk insured under the various clauses of the Rules. Higher deduotibles can of course be sgreed between the neaber and the undervriter in order to save part of the contribution or in order to improve the loss experience of the menber. The deductible is the priority amount in excess of which the member is The Club, that is to say the community of members, wants to give the emnified by the Cluv. Deductibles serve a double purpose. individual member only sueh cover as he really needs in onder to be able at any tine and in any cizcunstences to carry on vith his shipping business, de shall not make Glains for loss, liability, cost, or expenses which can never endanger his solvency no aatter how often that happens. Secondly, the administrative expenses of the Club are to be kept as low as possible in the interest of all members, and the administration must not be encumbered with a very lerge number of small claims. Underwriting and rating 136. In the early days of Mutual Protection and Indemity Clubs, say a hundred years ago, until sometime in the first quarter of this century, shipomers operated comparable ships in comparable trades and everyone was sore or less exposed to the same risks and jes. Bach Club member, therefore, paid the same rate per gross registered ton abilities. The debi: and these contributions formed a fund to meet the expected total supplementary and final calls, too, were apportioned equally per gross registered ton. ‘This system proved inadequate and no longer equitable when shipping developed. Types of ships, théir size and propulsion, their cargo and trade became auch aoze 4) ied. The claine records of members began to show considerable differences and, last but not least, shipownera varied the terms of their coverage from the basic terms either Py reason of deductibles om because they wanted to bear some of the risks and perils themselves. Individual underwriting and rating became necessery+1D/3/c. 3/120 page 43 = change in the system of calls. often toth the Clubs and their members wanted to avoid the Sncertainty of future calls. In some countries taxation may also have played a part. he Present practice in some of the larger Clubs is to charge larger advance and Sormespondingly sualler supplementary and fina) Tat least the routine claim calls. The advance call made on a member is to eo Likely to be made by hin, a contribution tovande exceptional claims - exceptional in Ssount and nature - in respect of ali the ships entered, towards reinsurance costs and towards cost of management, Claims 238. Cargo claims are presented to shipowners almost exclusively by cargo insurers, Some writers speak of 95 per cent. this is due to the need for marine cargo insurance an international trade, particularly as regards the methods of financing imports and Simorts, he claims departments of insurance companies ave better qualified to handle Clains than most cargo omers, be they shippers, cousigees, bankers, or other parties, who alt find this sexvice given ty insurers extrenely usefur They present claias to ‘She insurance companies, receive payment Felatively quickly and leave it to the “Reurance companies to fall back on the carmier under the Principle of subrogation. 199, It is only when a clain is Likely to exceed the deductitle that the shipower will act upon instructions of his Protection and Indemnity insurer, If confronted with a Potential Liability claim that would fat] on his Cub ne is requized by the Rules to Sensult with the wanagers without delay. If abroad, he vill contact his Club's Correspondents, The network of correspondents runs into many hundreds and no port of any importance anywhere in the world is vithout correspondent. Once a nember gives notice of @ claim that goes beyond the daily routine or is likely to develop to a certain size, the Club takes over conduct of the Proceedings. The bigger Protection and Indemnity Clubs have a lange staff wholly concerned with assisting members, Depending on the merits of each case the clain is either settled, compromised, or defended in arbitration or in judicial Proceedings, Gersiers! Liability cover outside the Protection and Indemnity Clubs iM» Acting one request from the French Governont, the French market recently drafted tyo nev insurance policies designed to cover the liability of shipowmers and both groups to obtain, on the dabilities. These BSrine cargo operators so as to make it possible for French market, the guarantee of cover for their respective public 1. Policies cover most of the misks accepted by the Protection and Indennity Clubs.mp/3/C.3/120 page 44 e Clubs" pr! it should be stressed that, contrary to the axe Limited in value and might the French market covers Eowever, globally unlimited covers, powers. ‘therefore not fully meet the requirements of shij idl. A similar cover, based on protection and indemity terms tut provided by Tnnine ingurance underwriters at fixed premiums, bas been ir existence for many ‘the United States of America. Hovever, the results of the few stock tual which have been providing this protection and and the bulk of the American years in companies and of one large mut very encouraging so far, indemnity cover have not been th Protection and Indemity Clubs in the shipowners’ Liability business is placed wii United Kingdom.70/B/C.3/120 Fege 45 CHAPTER VII CO-EXISTINCE OF MARINE CARGO INSURNCE AND CARRTER'S LIABILITY COVER ity cover sive roles of vroverty insurance and of ‘Ithough both covers - one provided by marine ineurers to cargo owmers andthe 83 142. other provided mainly by the Protection and Indemnity Clubs to shipowners — concern cargo loss or danage, they are cf a very different nature and serve clearly different Purposes. Both are nevertheless essential. Without the former, shippers would ve emposed to the danger of lose of or damage to their goods due to many fortuitous canses beyond their control and would be unlikely to find eredit for their business frensactions, Without the latter, shipomers vould have to bear risks far exceeding *heiz financial capacity and the shipping market vould become sc narrow that it would cargo StNTance and of carrier's liability cover seems indispensable. This co-existence in ", Decause two different Re way constitutes a duplication in cover or "double ineuranc Parties are protected, one against loss of property and the other for professional Liability. other. These differences are to be found: (2) in the relation between the insured Party and the subject-matter that is exposed to certain Perils; (4i) in the existence of 2 sum insured in property insurance, and of a limit 1ity in liability insurance; (iii) in the rating or premium caleulation; (1v) in the handling and settlenent of clains. 144. 48 regards marine cargo insurance, the subject-matter to be insured is well know to the proposer, who must have a legitimate interest in its preservation. The insured eer——S—s—S—s—SC—OSCSC—CSCsi*t—tétét*tN is exposed evaluated and a premium tate based on all the above factors calculated. In case of jose; the marine ineurer will satisfy hinself that the lose secoseea and that it vas insured against. Payment of the clain will te made proximately caused by a pe without undue delay, settlement having been negotiated between two parties - the jnsured end his insurer — who know each other and who have entered into business relations because they trust one another.TD/3/c,3/120 page 46 the case of the carrier's liability cover, 1g§. The situation is quite different in qhe carrier takes outa policy to protest himself against finenctal toss if he has to used to goods transported by him, but in so doing he does not pay indemity fo: know vho these shippers will be and what property will be exposed * perils of loss or der sces no sun insured can demege through hie fault or nesligense. bo evatuated; sustesd, 0 sovcelled "Limit of Liability” may be fixed, which is a difficult end sometimes hazardous decision. 1gé. For the above reasons, rating in carrier's licbility cover 4s a greatt probles than in merine cargo insurance. Ligbility claims and of the anounts involved leads to hicher safety margins. sured pays a premium for the exect value The uncertainty as to the nature of possible In other words, vaile in marine cargo insurance the ins x, the carrier's liability cover has ovide a of the subject-matter es sufficiently high global limit, end 2 correspondingly high premiua Fas <0 5S dation uumstances chance that en accumy ten renote sinply to cover the lead to an extreordinarily high Hiebility claim. ig liability cover exe alvays dealt with between the shipper surer, and the Protection and Indemnity Club of can 147. Claims in carrie: who suffered the less, or his cargo int go to speak, steps into the shoes of the carrier claimed on. two complete strangers have beccme > than the the carrier. ‘The Club, ‘me question of goodvill does not come in, where Yothing more and nothing less can be expected from earvier, is legelly Liable to pay in dame, as an indemnity under its Rules ana contract. These two prerequisites for an indemnity will be very carefully involved, and Litigation is the antagonists. amount his client, at ell liable - and the emount the Club has to pay es - provided he is examined by the Club. Questions of fact and of law are @ loss suffered or the damage done is substantial and therefore ana legal not infrequent if te worth the cost and expense of a thorough investigation, including exper advice. 14. It should be recalled that the protection and indemity cover isa In fact, although the shipomer receives a lial professional ity Liability insurance sui generis. cover for lows of or damage to any cargo he may have mimown total value of cargo accumulated on bis ship at eny given moment on his carrier ig cleerly defined both qualitatively and impact of to carry, izrespective of the professional liability as quantitatively, according to the Hague Rules apslicable in Bis cas Th on the functioning of the Protection and Indemnity Clubs is Clubs coula hardly provide these clear delimitations of paremount importance. Without such delinitations, the carriers! liebility cover in such « siz sophisticated insurance institutions.1/3/0.3/120 page 47 149- However, irrespective of the special features of the protection and indennity cover ~ specific limits of liability due to the Hague Rules, and substitution of fixed s" ~ the protection and indemnity cover shares one so-called "cel preniuns by fundamental characteristic with all otter liebility inst operty insurance in providing absolu e ané unconditic: ances! it cannct replace al security to the omers of i of, or full the foods, to banks and other credit institutions aa regards safe indemity for, lost or damaged cargo. s pointed out in Chapter I of this study, the bill of lading accompanied ty a marine insurance policy constitute a nerotiable set of documents representing the cargo to its full agreed value. No merchant or bank would be willing to acquire instead e pending lisbility claim with all its inherent uncertainties. ie there any overlapping between marine cargo insurance end protection and indemnity cover? 290. Tf both the cargo omer and the carrier are adequately covered by nerine cargo insurance and by the protection and indemity cover respectively, it may appear that th covers seem to protect there is some overlapping in the two covers, In fact, ¥ ‘the interest in the goods on their way overseas, the former as a property insurance by indemnifying the respective omers of the cargo for loss of or damage to their iebility cover by making it possible for the shipowmers to Property, the latter as a 1: Reet their obligations if and when reccurse against then under their legel liability as carriers is taken. 151, In onder to reply to the above question, a distinction mst be drawn between iS: end reference made to the system of subrogation as formal and real risk bea: applied in practice. It is precisely for practical reasons that the marine cargo insurer formally provides a full cover "as if" the carrier's liability and the frotection ané indemity cover did not exist. Thus protected, the cargo omer need not worry about the carrier's liability, his gocd or bad will, or even his solvency. He can negotiate his goods on the basis of the bill of lading and of the marine ‘insurance policy end receive the agreed indemnity in case of loss cr damage. However, should the carrier be liable for the loss or damage, the cergo oumer then surrenders to his insurer - from whom he has received full payment for his claim - all his richts Vis-b-vis the carrier, 152. The system of subrogation prevents any overlap in risk bearing vecause it Precludes the cargo owner from obtaining more than the full indemity. Jny cargo joss will be paid ultimately only once, either by the marine insurer or, if the carrier is liable, ty him or his Protection and Indemity Club to the extent of his iiabili™9/B/c.5/120 page 48 It is only to that latter extent thet the carrier buys the protection and indemnity cover corresponding to a clearly defined volume of risk bearing. 4s regards the nerine insurer, although his cover is complete, in fact the risk bearing which it involves does not include that part of risk borne by the carrier's liability cover. ng of both the aly stated in 153. The above facts of risk sharing are fully reflected in neure! Protection and Trdemnity Clube ané the marine cargo Chapter III, rating in marine cargo insurance is based on past experience, and vart of that past experience is related to recoveries of claims following recourses against carriers and their Protection and Indemnity Clubs. In other words, although the marine cargo policy may show a very extensive range of risks covered, the respective rating is based on the experienced net cost of this kind of cover after deduction of there is no overlap in argo insurance the usual recoveries from third parties. Thus, the fact thet the bearing of risks means that there is none in the premiums veid for and the protection and indemnity cover. 154. in entirely different question is whether the present limits of the carrier's ined by the Hague Rules, are optimal from the point ‘of view of the Liability, ae 4 aggregate cost of premiune paid for insurance protection, or whether ly increasing or reducing the carrier's liability (which would automatically place a measure of risk bearing on the cargo insurer) a lower total cost could be obtained. This important question will be analysed in Chapter VIII. Mechanism of subroga 155. Subzogation is not a subject of insurance alone, but it is met with very frequently in that field of economy. In insurance, it is defined as the right of the inourer to any remedies which the insured may have against others responsible for loss in respect of vhich a‘clain has been paid. Subrogation is incorporated in the laws of most comtries. In insurance, the principle of subrogation is primarily applied to prevent the insured from obtaining more than a full’ indemnity, The insurer takes the place of the insured. He is entitled to every right and remedy of the ss, the insured and his right is a twofold one: in case of payment of a total 1 property rights to salvaged and/or reconditioned goods pass on to the insurer without in any case, all rights to take recourse against the party liable an assignmen’ for the loss or damage are also passed on to the insurer.1D/B/c.3/220 page 49 156. The insurer is entitled to recover only up to the amount which he has paid. Under the relevant legal provisions automatic subrogation applies only after payment of the joss. ‘Therefore, if the insurer wants to dispose of the danaged or salvaged cargo, or to pursue a clsim against a carrier before he has paid the insurance claim, he vill be given 2 letter of subrogation by his insured, or by any other beneficiary, ty in the beneficiary's empowering the insurer to file a claim againet the third par name, The letter of subrogation contains an assignment of all rights and remedies egainst such third party. 157. In order to enable the insurer to make use of his rights of subrogation, the insured must make every effort to preserve his rights against third parties which are likely to be Liable for the loss. In particular, his duty is: (2) to notify the carrier - on land or afloat - the port or customs authorities, and any other parties possibly responsible, of the loss or damage which ified within the time linit occurred; the marine carrier must be no! specified in the bill of lading or charter party, and the inland carrier, Port and customs authorities within the period provided in the bye-lews; (b) to invite the carriers, authorities and others who may be concerned, to take Pert in a joint survey to be made by these parties and the insurer's claine agent, or his surveyor; (c) not to give clean receipts when the goods are in a doubtful condition; (4) to serve the claim on the party lisble, within the Period stimulated in the bill of lading, the waybill of the carrier, the lavs and regulat: other legal provisions applicable in the particular country or place. nS, OF 158. épart fron these specific duties, the insured has to fulfil the demands made uider the principle of his obligetion to avert or minimize the damege, such as to give all information called for by the insurer, and to surrender to him all documentary evidence in his possession which may have a bearing on the third party liability claim. If the insured renounces any of his rights against a third party, the insurer will no jonger be under obligation to honour the insurance claim, but only, of course, to the extent of the amount he vould have been able to recover froma third party if the Claim of the insured had not been waived, time-barred or otherwise prejudiced. Problens related to 2 of cargo insurers acsinst carriers 159. When availing themselves of their right of recourse against carriers for loss of or damage to cargo, marine cargo insurers are often faced with a mumber of problems, mostly related to proving that the loss or damage was sustained under cizcumstances and his & involving the carrier's liability. In this connexion the shipown:p/3/C.3/120 page 50 ¢ an enormous advantage over the cargo omer and his insurer, through having hs they can thus correct and/or vetter access to the holds vhere the goods ere stored; conceal conditions which may have caused damage to cargo ~ euch as water in the holds, improper stowage, holds in a state of disrepair - and then issue a cargo report vhitevashing the shipsend disclaiming Lisbility. 160, The position of the cargo ovmer and his their access to the ship is limited and in many cases they the cargo has been discharged, not to speak of cases where damege is discovered only In many countries, procedures more difficult, In fact, uurer is m can only intervene after after unpacking of the goods at final. destination. are very slow, so that by the time surveyors are appointed it is often too late to goods are discharged. carry out an investigation of the causes of damage bef’ cal laws on the definition of Furthermore, in some countries there are confl ends: is it when the goods leave the ship's tackle, or is when the ship's liabilit it only when they axe safely stored within the facilities of clude a clause requiring arbitration and li on to Most bills of lading in take piace in the country of residence of the shipower who issued the 1 of lading. ‘This clause creates a problem for local marine insurers, because arbitration awards and litigation expenses abroad are quite costly. Hence, maxine insurers seek arbitration or litigation abroad only when the claim is large enough to warrant expenses. The shipowner and his Protection and Indemnity Club are thus spared a the great number of minor claims.t/8/o.3/120 Page 51 Chapter VITZ OTHER POSSIBLE SOLUTIONS FOR CARGO LOSS OR DALLAGE COVER Radical changes as regards the carrier's liabi1i 162. In the preceding chapter the question has been asked whether certain changes in the Frosent level of Liability of the carrier as regards cargo lose or danege might produce * Grop.4n the aggregate cost of marine cargo insurance plus cover for ability related to cargo, whether provided by a Protection and Thdemity Club or by other Liability insurers. In theory, such changes could vazy between ebolishing carrier's liability sltogsther, thus micing protection and indemity cover redundant, and extending carrier's liability to the point of becoming an absolute lisbility, thus making marine cargo insurance unecessary, Tt would seen, however, that both of these tvo extrene solutions would intreduce considerable practical ifficulties, so that the reallocation should be considered rather within the framevork of "co-existence" cf cargo insurance and protection and indemity cover. 163. Liability of the cerrier cannct be abolished altogether for both ethical, an: Sconomic reasons, From the ethical point of view, no society would ever agree to one of Ate members being freed a ortort from all consequences of faults, omissions or gross negligence committed inadvertently or even intentionally, As for the economic reason, the minimum of carrier's liability is the litt beyond which the shipowner loses interest in his claims record, that is to sey when he becomes tempted to save cost and SmPenses by neglecting all measures ained at loss prevention, ‘The saving would hardly result in lover freight rates, but it vould certainly generats more frequent and higher care lesses, The loss or danege occasioned by this neglect would constitute en Sportant uaste of goods and the cost vould have to be borne by the consumer, 164, The other extreme solution, thet of abolicht: ie insurance by extending the carrier's lisbility in such a way that 4 becones an sbsolute Mability and covers eli cargo losses, may seen uore tempting, but this firet impression would probably te based on & fallacy, nanely the assumption that even in the onse of an absolute lability the cervier will continue to cover this practically untinited liability by joining = mtuer Frotection and Indemity Club operating on the lines described in the preceding chapter, tm that chapter, hovever, 2 varning vas given thet the protection and indemnity cover is @ lability cover sui generis, end that the Viebility of the present Protection end Indemnity Clubs is due precisely to the substantially restricted scope of the carrier's iisbility as defined by the Hague Rules, 265. In fact, an absolute liability of the carrier, leading to total abolition of wine cargo insurance, would mean two things: (a) that a1 cargo loss or damage, due to any cause whatsoever vithin or beyond ‘he carrier's control and responsitility, would be covered by his liabitity;1m/8/c.3/120 page 52 imitations by amount, which means that the (b) that there would be no carrier would have to settle claims for the full value of lost or damaged goods. tt is inportant te exemine the impact these tye extensions of lisbility would have on ‘the operation of the Frotection and Indemnity Glubs and on the cost of their cover tension of Lebility to cover all risks would inevitably 166. As regards point (a), an « cheng the entire rating aysten of the Protection and Indemity Clubs, In fact, these the shipowner has some laims records, which Clubs today provide cover for risks over which, in principle, influence, hence the individual rating according to each carrier's prompts each shipowner to try to keep his claims record as low as possible. Should the cover now be extended to include ell other fortuitous and unpreventable risks - which faze in general mich more numerous and costly - individual rating would become alnost pointless and each shipowner would tend to lose interest in having a good clains record. 4 general deterioration in loss prevention would fellow. 167, Yoreover, the shipper, who wold have passed on all liability to the carrier, would be less willing to incur expense on loss preventicn because individual shippers would hardly receive any recognition for such points as good qualivy of merchandise and adequate pacing, Under the new system many shippers would try to economize at the expense of carrier's Liability cover, which woulé lead again to more waste and higher prices for the consumer, especially es many other shippers would, in order to compete, be vempelled to do the same. ” 168, With regurd to point (b), 4t should be borne in mind that in property insurance the sum insured corresponds exactly to an agreed value of the gocds covered, while in o global professional liability insurance a limit of Liability must be selected at ¢ level high enough te cover possible accumulation of valuable cargo exposed simulteneously to total destruction. As explained earlier, the element of uncertainty generally leads to much higher premiums. Furthermore, the use of modern vessels (container-ships, for instance) may, mder a regine of milimited Liability of the carrier, lead to potential accumulations of cargo with such enormous liability amounts that even the largest insurance company, with its vast reserves, substantial solvency margin, end world-wide reingurance arrangements, might face difficulties in carrying such a heavy risk. 169. Tt seems certain that the Protection and Indemity Clubs, under their present specific structure based on mutuality, would not be the proper institutions to cover the absolute and unlimited liability of their members for all the unknown goods accumilated on each of their vessels. Moreover, the Clubs would not te allowed by the insurance supervisory authorities to do so even if they wanted to, because by insuring de facto the property of the public at lerge (the cargo) under the new regine, they10/8/0.3/120 page 53 Would cease to serve a restricted group of moubera (the shipowners) and would thus lose their character of private Clubs and become in fact full-scale insurers operating in Property insurance under a liability make-up, Consequently, all the rules end regulations of insurance legislation and supervision (in particular those concerning solvency) would have tc be made applicable to Protection end Indenn! HY Clubs, which would be Lorced to take over the functions of ingurance companies, and the entire reform would result in its being replaced by a mor sine et eliminating marine cavgo insurance Sspensive and less satisfactory extended Lishility insurance operated by 2 few very iarge insurance companies. Such a concentration would be particularly detrimental to the interest of the developing countries, Tnsured bill of lading 170. The above reasoning is confirmed ty a recent experiment undertaken by @ certain nunber of cermiers, who recognized the inpracticability of any substantial extension of their liability within protection and indemity cover and resorted to the opposite solution, thet of buying on the traditional insurance nerket (through ® grouping Ameluding Moyd's and company undervriters) a package cover for hull, uachinery, As regards cargo, containers, carso, various interests ashore and their Liability, whet the carmiers concerned tought was « conventional cargo (property) insurance of the “all risks" type with all necessary additional clauses (war, riots, ete.) and the usual exclusions (such as inherent defect in quality, vice of cargo and delay), The limit of ‘She cargo cover "per ship's bottom" was six million pounds sterling. Their liability cover was based on the Hogue Rules. A7i. Thus covered, tito carriers concerned vere able to issue an “Mnsured bill of lading, which they proposed to banks and finencing institutions as a negotiable document replacing both the conventional bill of lading and the accompanying cargo insurance policy, ‘The Fixpose of this solutien was twcfold: first, to reduce expenses by elimineting Zecourses and litigation on carrier's liebility, the cargo and the Uability insurer being one end the sane; secondly, to solve a certain mmber of its specific problems related to miltinodal container traffic. In fact, the initiators of the insured bill of iading vere mainly operating in mltimodal container transport. The experiment presents sone interesting asrects of the problem of cost and expenses unich will be analysed in the following paragraphs, 172, As regards the conventionel transport of goods under an insured bill cf lading schene, the question arises whether the hoped for savings in settling claims would weally materialize and if 0, whether they would be large enough to conpensate for certain other disadvantages. From the carrier's point of view and that of his insurer (uho is no longer insurer of the cargo owner), the savings in the settlement of cleins would appear to be considerable. First, thera would be no Fecourses ageinst the1/8/c.3/120 page 54 carriers, since cleins vould in any case be paid out of the sane pool. Secondly, there yould be no further need for adjustments of "general everage", the hull and cargo insurer being one end the same, Everyone mist roadily agree that measures aimed at eliminating or restricting general average would contribute considerably to reducing costs. 173. Houever, fron the cargo ouner's point of view things lool « little difierent. losing all direct contacts with the insurer (eithough, ultimately, he hes to pay the cargo insurance premiun, included in the freight), the slipper would tacitly accept that the great majority of clains vould be settled under the cargo account, even when the shigouner would have been normally at Sault and professionally liable, Such e development vould tend to have einilar effects to those described above, aduitting the bility altogether, a possibility rejected as assumption of auclishing carrier's unethical and uneconomical. In the case of the insured bill of lading, abolition of ex's Liability vould appear less extrens, but in practice an egreenent between the cerrier and his insurer to put sost cleins on the cargo eccount rather than th liability account would have essentially the same effects. 174. furthermore, under the traditional regine where the cargo cuner is also the policy holder, ke chooses his insurer, settles with him all claims (including those with recourse against the carrier), receives nore favourable terns if his clains record is a good one, and can adapt the insurance cover to his specific requirements, Under the insured bill of lading scheme, the cargo owner enjoys none of the above advantages: first, the carrier chooses the insurer; secondly, the shipper hinself must handle all his clains settlenonts; finally, within the carrier's package cover the shipper's good claims record is not taken into consideration and the cover itself 4s e uniform one, possibly too broad or insufficient for the particular type of goods transported. 175. In connexion with the shipper's disadvantages mentioned above, a proposal was made that the insured bill of lading should remmin optional for those skippers who wish to make use of it, and that other shippers should continue to buy marine cargo insurance themselves under the traditionel regine of separate co-existence of cargo insurence and cerrier!s liability cover, From a technical point of view, this solution is e most impractical one. In fact, nothing is more dreaded by insurers than the following adverse selection: under an optional insured bill of leding schene, shippers with good claims record would insure their risa separet 4 the shipowner would have to accept, in his package cover, all the rejects; rates woul become impracticable. scar and the package deal would 176. Last but nob least, entrusting carriers with purchase of the entire insurance cover for cargo loss or demege - and bearing in mind that the majority of shipowners are fron a few developed market economy countries - would result in a further concentration of: 1D/3/c.3/120 page 55 marine cargo insurance in the hands of the insurance markets of the developed countries concerned, Such a result would be harmful to the emerging insurance markets of the Geveloping countries and would clearly be et variance with recommendation 42/IIT adopted by the third Conference (Santiago, Mey 1972), according to article 1 of which "developing countries should take steps to enable their donestic insurance nerkets to cover in these markets - taking into account their national eccnomic interests as vell as the insured interests - the insurance operations generated by their economic activities, including their foreim trede, as far as is technically feasible", Specific liability croblems of container traffic 177. 4s mentioned above, the main reason for the 196% proposal to introduce the insured bill of lading was the desire to solve soue specific problems related to the miltinodal container treffiec. The promoters of the insured bill of lading scheme vere in fact two large container operators of powerful shipping lines interested in container traffic between Europe and Australia, The use of e "Combined Transport Dill of Iading with en Insurance Certificate" ~ which was the official name of the proposed docwient - was neant to rationalize the clerical worl in container traffic. It was also meant to solve the problem of "claused" documents when containers moved from one cerrier to another, oy eliminating the need to blame one specific carrier for loss or damage found when conteiners were opened et destination, 178. The latter problem is « real one. In combined miltinodal transport, recourse against individual carriers is in many cases impossible because of the difficulty of s end through whose fault the loss or damage occurred. As is ascertaining in whose hi only naturel, sach carrier tends to deny responsibility; furthermore, since the Limits of liability by amount are so different for road, train and sea transport, the shipper and his insurer cannot be indifferent as to uho in the combined transvort 1s going to be made liable and pey the clain. 279. The way in which the aforenentioned container operators proposed to solve this Problem under the insured bill of lading scheme was to provide an "all risks" varehouse to warehouse insurance cover through their package deal, including the preliminary voyage and an edditional inland voyage in the country of destination by a suitable conveyance. The carrier's level of Mability, fixed within the package deal, would no jonger concern the shipper, The container operators being shipovners, their insurars could, if they so wished, teke recourse against the other carriers in cases where the debility of those carriers could be easily established, but this again would be of no concern to the shippers, not even to the fully insured shipowners, although it might to some extent affect the cost of the shipowners! liability cover within the package deal.m/sf. page 56 180. Dy proposing the insured bill of lading schsue for miltimcdel container traffic, ‘the operators in question had, as stated above, some very good argumente in theiz Zavour. Nevertheless, their proposal was declined by the British Suppers’ Council end by the largest shippers concerned, on grounds very similar to those given above in connexton 1 ared that they with conventional t ere concern! sport of goods by sea. The weance arrengenents of their om, their nain advantages being had nore favoursble lower premium rates and the direct contact between the shippers and their marine insurers, The British Shippers’ Council rejected the proposal because many of its members objected to making the inclusion of cargo insurance in the bill of lading compulsory, instead of leaving the decision to the shippers. On the other hand, 2 package cover provided to the shipowners and including hull, carriers! liability and cargo insurance ~ the letter only on an opticnal case-to-case basis ~ was not acceptable to the insurers for sound technical reasons of adverse selection, already expleined above. 181, Rejection of the proposal of an insured bill of lading has not brought a sclution to the specific insurance problems of container traffic operators and insurers any closer, As regards the shippers, owing to the fact that the marine insurance uarket provides them with cargo insurance cover from warehouse to warehouse, the situation created by multimodal container traffic is not a matter of major preoccupation to then. Tt ig true that the shippers my face an increase in cargo premiums caused by additional difficulties met with by their cargo insurers in recovering claims attributable to the liability of any of the carriers participating in the multimodal transport; however, this increase is not large dnd is amply compensated by a decrease made possible by reduced cargo loss or demage occurring through better protection of containerized goods, especially when conteiners ere used in the warehouse-to-warenouse system, that is to sey in cases.where the goods are put into containers in the warehouse of the sender end are discharged in the warehouse of the consignee, the containers renaining unopened during the journey. 182. since the whole problen of intermodal transport of goods is being examined at present by an Intergovernnental Preparatory Group with a view to preparing an international corivention, the insurance aspects of container traffic are adequately dealt with by the Group. In order to avoid duplication, the reader is referred to the Intergovernnental Preparatory Group's work programme and container traffic problems will not therefore be dealt with further in the present study. 1 revision of carrier's ability reeine Ear 183. Hone of the radical solutions analysed above (complete atolition of the cerrier!s liability, its extension to beccme an absolute Lisbility, and the insured bill of Iading schexo) seen to meet tha tasic requirements of shippers, carriers and other parties7D/B/6.3/120 page 57 js us back to the existing system of involved in international trade, This fact 1 co-existence of cargo marine insurance taken out by the cargo owners and the protection and indemity cover provided to the carriers, Within this system, it is worth oxemining whether some partial reallocation of rivi:s and duties would improve the services and/or reduce the aggregate costs. 184, Here again, we have to consider possible chenges under two main heeding: (a) en extension of the scope of carrier's liebility as regards risk bearing; (©) an extension of the limitations ty amount of carrier's liability, In theory, a third point might be added, nanely the problem of the onus of proof, but in practice this problem is closely connected vith point (a) above and has to be dealt with under the seme heading. 285. As pointed out in Chapter V of the present study, the catalogue of explicit exonerations of the carrier's liability contained in the Hague Rules comprises three Kinds of exoneretion, namely cases of loss or damage caused by perils of the sea and other events clearly beyond the control of the shipowner and his steff, cases of loss or damage dus to acts or omissions of the shipper and his agents and, finally, cases joss or damage related to errors in nevigstion or in the management of the ship, and fire on board. It should be borne in mind thet in all these cases the shipowner is exonerated from liability unless the shipper or his insurer prove that loss or damage was actually caused by his fault. 186, Taking into account all the ergune: will be agreed that the optimm level of liability for a carrier is the one where he is fully liable Zor cargo loss or damage due to causes within his‘contrel, and free of iebility for causes beyond ais control, In fact, moving avay from this optimum level in any direction would diminish the carrier's eagerness to provent losses, either Decause he would not be liable even when at fault, or because he would be 2iable anyhow, whether the fault wes his or not. 187. By applying the above rule of an optimm level of liability to the catalogue of exonerations contained in the Hague Rules, it becomes evident thet the exonerations referring to perils of the sea and other fortuitous causes, as well as those related to acts and omissions of the shipper and his agents, are fully justified. On the other hand, neutical errors and fire on board are more often than not well within the control of the shipowner and therefore exoneration @ nriori does not seem logical, A revision of the Hague Rules with a view to improving the situation as regards carrier's liebility errors, fire on boerd, and sowe other exemptions is now under considered so faz in the present study, it comected with na wey. In fact, @ new craft convention governing the liability of carriers for goodsw/a/e.3/A20 page 53 which they transport by sea has euerged from four years of work by a United Nations group. It will ve presented to the United ations Commission on International Trade Lev 4n Merch 1976, allowing time for Governuents and organizations to submit coments in the interim, 188. With reference to point ( limitation by amount of the carrier's first, the Visty Rules (see end of Chapter ¥), if ratified, would elready introdise a igher limit of Liability by amounts which, in eddition, would be uniform he 'o) dn pas graph 104 regarding an extensi ity, tvo things should te borne in min considerably in all countries; secondly, it is open to shippers, even under the present regime, to declere the full value of their consignnents and have the carrier's liability extended use of thet possibility simply because they wer, the to that amount. Shippers hardly ever mal prefer to insure the full value of their goods under ¢ cargo insurance co over being cheaper than the increase in freight charges vhen these premium for such o charges are caloulated by the carrier not in terns of veight or space tut of value. 189. In conclusion, while it seems absolutely necessary to create « clear pattern of shigouner!s Liability both easily applicable end reducing litigation to e minimum ~ as regards the anounts of carrier's liability per package, unit or Ilo - there is no need to introduce limits vhich would be higher than the real value of the ordinary cargo. As alzeady explained in other chapters of the present study, liability insurance cover provided globally for e relatively high total amount is generally more expensive than property insurence cover for the exact vellue of each individual consignnent, Hence the need to maintain the globel liability "per ship's bottom!” vithin reasonable insurable Limits, By doing so, the aggregate cost of cargo insurance, plus carrier's liability cover, reaches its most economic level.30 /2/0.3/120 page 59 PaR? TWO MARINE CAR‘O INSURANCE IN DEVELOPING cOUITRIZS Chapter I MARINE INSURACE MARKETS IN DEVELOPING COUNTRIES Marine cargo insurance business in gener: 490. The economies of most develorane countries dep ased on the production and export of a limited rubber, sugar and minerals — and clothing and machinery, on the one hand and nd heavily on foreign trade. The pattern of these economies is number of specific raw materials — such as cotton, on *he import of all other products, including foodstuffs, tn spite of many successful efforts towards diversification industrialisation on the other, the degree of dependence of most developing countries ob inports fren stroac for the wulk of consuner goode remains very high. In order to be able to finance these imports, the developing countries must intensively Promote the export cf their rau materials. This situation leads to very high foreign trade figures. 191. Transportation of goods fron and to most develozing countries generally involves SS Lrt—<“—~—~—~—s~s~—~s~s—s—s—s—s—s—s—s—s—s—s—s—s—s—s—s—s—S—SCSOO—sST Marine cong? Snsurance cover against the econcnic consequences of loss of, or damage to, She daported and exported goods represents an inportant expenditure and showld Sherefore be considered by insurance markets of the developing countries as a Potentially very pronising class of insurance business. However, only a fev Geveloping countries have succeeded so far in inouring locally a subevantiay part of their foreign trade. 192. This negative state of affairs is due to various factors, often historically connected with the pattern of international trade during the colonial period when marine insurance was considered part of the services (such as banking and shipping) *hat Were closely associated with the main developed markete and essential to their Snooth functioning. Tt was only netural, therefore, that these developed markets should have provided all the services necessary for trading. Techniques, policies, conditions and practices were thus established according to the needs of the countries concerned and under their particular legal systens. 193. Whatever the historical reasons, the fact is that aarine cargo insurance evolved Zrom old traditions into a somewhat complex class of insurance, which required a high degree of specialization and considerable experience. Many countries, sven anong the developed ones, keve not succeeded so far in establishing true national0/3/c.3/120 page 60 marine insurance aarkets and continue to depend heavily en a few large marine ingurance centres. In this connexion @ self-perpetusting situation (vicious circle) can easily arise, owing to the fact thet a local marine insurance narket receiving only a very limited volune of cargo business cannot provide adequate cover and satisfactory services, vhile the inability to provide such cover and services may wing +0 this a more substantial volume of marine insurance tusiness from ¢ market. Such a phenomenon is very common in insurance, the technique of which is pased on the theory of large mumbers; unless an insurer succeeds in establishing a relatively large portfolio of homogeneous risks in 2 given class of insurance he can hardly be expected to operate adequately in this class. 194. But viny do traders in developing countries tend to take their marine cargo insurance abroad? Until relatively recently one of the typical features of the insurance markets in many developiag countries was the predominance of foreign ingurers who were represented, in these countries, vy 2 large number of operating units compared with the volume of business available in these markets, Besides their comercial activities, import/export trading firms oumed by foreigners acted as agents of foreign insurance companies. In many cases, these agencies started as mouse agencies", dealing only with the cover of their om trade; ‘ut as there vere no laws or regulations requiring the placing of insurance risks in the local markets, sone of these agents went on writing general marine cargo insurance risks for the direct acccunt of foreign insurance head offices, without constituting any local portfolios. This behaviour largely explains the small volune of marine business which vas written in most developing countries. 195. The change in the political and economic status of developing countries has been followed by a trend towards promoting locel insurance narkets and setting up domestic insurance institutions or companies to carry out the coverage of local risks. In several cases this trend led to regulations aimed at the limitation of tne operations of foreign insurers, or even their coaplete exclusion from the local narket. Ia nerketa serviced exclusively by donestic insurers, there may exist several national coapanies (private, State-owned, or both) or 2 single institution (Gtate monopoly). Marine cargo insurance business is carried on, in principle, by most domestic insurance companies transacting general insurance business. In developing countries, insurance companies dealing exclusively in marine insurance are practically non-existent. 6. Yet a number of factors inherent in the structure and the modus operandi of the insurance industry in developing countries cause most merchants to take out serine insurance abroad. 4s suggested in paragraph 193, those negative factors stem mainlym/B/c.3/120 poge 6 ess, which is in turn a reflection of from the lack of a sufficient volune of busi the preponderant position held in that business by traditional insurance markets. ‘The negative factors mentioned are thus both the cause and the effect of a distorted situation in many developing countries which the countries concerned are trying to ul therefore to attempt first to single out these factors. themselves of experienced correct. It is use 197. First, th and technically qualified underwriters « of the perils and risks to which goods in transit are exposed. This imowledge and international marine insurance markets avai’ 9 have a thorough Imowledge of the nature experience enables then to determine what sort of cover is most suited to each type of trade. Such knowledge and experience is not available in the domestic insurance markets of most developing countries. This assertion, however, calle for a clarification: obviously slills can only develop when professional opportunities are available to technicians. It is therefore true to sey that the lack of skills and technical knowhow is a result of the weaknesses of the markets rather than the other way round. 198. Secondly, as the volume of marine business written in the insurance markets of developing countries is comparatively small, there is not a sufficient spread of risks; furthermore, the expenses of small portfolios are relatively higher, As a result, local marine markets in developing countries are often compelled to quote higher premium retes than those offered ty the international markets. As lower cost is an important factor determining the attitude of the exporter or the importer, preference is given to the market which offers lower premium rates. 199. Thirdly, as a large proportion of marine cargo risks scnetines involves substantial values, which are frequently subject to accumilation aboard vessels, at terminals, or in warehouses, local marine markets find it difficult to cover ‘them, because of their restricted underwriting capacity. International markets, with their vast underwriting limits and their extensive business links with ‘ny "n the othcr hand, absorb such high values, vther insurers and reinsurers ¢ capacity being ne problem. 200. Fourthly, international marine cargo insurers differ from local marine markets in developing countries in that they dispose of a wide netvork of expert loss adjusters, capable of offering adequate services with regard to claims settlement. Moreover, international marine insurers maintain close relationships with the best legal and banking services, factors which are vital for prompt and speedy settlement of cleins. Insurers in developing countries often lack some of these facilities, a situation which may result in delay in the surveying and settlement of clains. ‘The prompt settlement of claims is, of course, a vital factor in inaurance.10/3/0.3/120 page 62 Z0L. Finally, the major consideration when talcing an insurance cover is the certainty of being indemnified promptly in case of loss. Owing to the currency situation in neny developing countries, the ability of funds has not always been guaranteed. ‘This is one reason why importers and exporters in developing countries are tempted to take out marine cargo insurance abroal. Tue to this same currency situstion, furthermore, many insurers in developing countries cannot issue insurance policies in a foreign currency. Since the majority of foreign trade contracts are draw up in terms of foreign currency, it is natural that trade partners prefer to get covers in these currencies to facilitate replacement in case of loss. @ insured in developing countries tend to seek cover abroad inked with the situation mentioned in paragraph 1935 202. As stated above, mainly for reasons closi in other words, they are the consequence rather than the cause of the fact that an insufficient volune of marine cargo insurance ousiness is placed on the national insurence markets of the developing countries. Should a developing country succeed in breaking the vicious circle aud secure for its national marine insurance market a namely, the culk of the cover for a constant flow of a large volume of business - considerable volume of foreign trade - this market vould gradually overcome its traditional vealnesses and develop into a stable marine insurance market providing oth adequate cover st fair prices and satisfactory services to users. 203. Obviously such a fundamental change in marine insurance cannot be achieved withous some major changes in the traditicnal patterns of foreign trade. ds was to ve expected, resistance to such changes developed initially. Fortunetely, the large international insurance centres have recently accepted the UNCTAD thesis that developing countries should, among other things, promote their domestic marine insurance markets, recognizing that a certain protection of emerging local industry is warranted if imposed on a temporary basis. Leading representatives of the above international insurance centres have furthermore agreed that in the long run, the wider the spread of fully developed reliable marine insurance markets, the better will the interests of the users be served, and this can only improve the flow of international trade provided, of course, that each of these new markets develops which ience and reaches a size properly, acquires the necessary expertise and ex; makes marine cargo insurance operations technically safe and eccnomically worthwhile. de patterns affecting the marine cargo insurance business 204. In principle, where and by whom an import or export of goods is insured ract of sal ties of the depends on the kind of trade contract used. or in their absence the corresponding laws, establish not only the liebi! gs, the insurable interest parties involved but alec their rights. Among other +!™/B/c.3/120 page 63 of the contractors at various stages of the transaction can be determined on the basis of such a contract. It is of particular inportance to the marine insurer to know exactly when the omership of the goods passes from the seller to the buyer, because in the event of loss of cr damage to the goods it is essential to establish which Party must bear the loss and be indennified according to the provisions of the insurance policy. 205. In view of the complicated nature of the task, no attempt paper to analyse the main principles of the various laws which deal with the problem of be made in the present cmership. Suffice it to say thet while under Roman lew the omership is trensferred St the monent of the signature of the contract of sale (perfects euptione perioulun Sieaptorsn), under Germanic law the omershin is transferred when the goods are delivered, The British Sale of Goods Act, 1893, follovs the Ronan lave In section 32 At Provides that: "Where, in pursuance of a contract of sale, the seller is authorized as required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the bwer is, prima facie dened to be « delivery of the goods to the buyer.” 10/ 206. Quite apart from the provisions of the various lavs, the parties in a contract of sale may, however, determine special conditions, that is to say special terms of Sale; sone of which have been standardized and becone recognized internationally. 7m this connexion, the INCOTERIS 1953 of the Internstional Chanber of Commerce, sedifying and interpreting the mein terms used in foreign trade, play @ preponderant roles as regards their effect on marine insurance, the Incoterms may be classified into two groups, namely those where insurance is bought by the seller (ergs C.1.F., Ex-Ship,) and those here it is bought ty the buyer of the goods (eeg- F.0.3., C. & Fy PeAS.,). For the Purpose of the present study, it is sufficient to explain triefly the to main cases in each group, namely the C.I.P. and the 7.0.5, terms; since the effects of the other Incoterms as regards insurance are bound to be similar either to O.I.F. or to F.0.B, terns, 207+ Under the 0.2.7, rules, the seller aust contract for tho carriage of goods #0 the agreed port of destination and pay the freight and load the goods on board the ‘vessel at the port of shipment; he must also contract and pay for the insurance cover; thereafter the buyer must bear all risks until the goods arrive at the final 49/ Victor Dever "A handbook to narine insurance", London, 1962.T/B/C.3/120 page 64 destination point. In other words, under C.I.P, rules, the seller's responsibility ends when he has delivered the goods on board the ship and from then om they travel at the buyer's risk, although the seller is responsible for the payment of freight Although no specific provision is made in the and the marine insurance premium, e transfer of omership, it can safely be in, erred that it Incoterms as regards on board the vessel at the port of either Aappens when the seller loads the shipment and receives the bill of lading, or when he delivers this bill of lading to the buyers It should be noted that the two concepts of the transfer of the risk and of owmership are not identical. 208. It therefore follows thet from the point of view of risk becri In the latter, the fundanental difference between C.I.F. and F.0.B. terms. responsibility of the seller ends at exactly the same point, delivered the goods to the shipower who vas designated (end paid) by the buyer. namely when he has The fact that under the F.0.B. terns it is the buyer who is responsible for contracting (and paying) for carriage of the goods and marine insurance in no way alters the position as regards transfer of the risk and of ownership. the C.I.F. and ¥.0.3. terms it is invariably the buyer who bears all the risks Both under from the time the goods pass the ship's rail at the port of shipment. He should therefore have the right to choose his insurer in both cases. Ingurance of imported goods by the wuyer 209. The principal parties usually involved in an import transaction and having en interest in insuring the imported goods are the foreign seller, the domestic tuyer e applicable, the banks or other institutions financing the transaction. As Lt stands to reason that whenever the domestic insurance market and, wher regards the buyer, is able to provide locally adequate narine insurance cover at 2 competitive price and with good servicing, he is interested in purchasing this cover on his own market from an insurer knom to him and from whom he may expect @ proapt end proper settlement of cleins. In other words, it is in his interest to choose F,0.3. or 0. & F. terms, 210. In principle, a seller should not have any objection to selling F.0.B., especially when the arrengements for payment are on the basis of a letter of credit or against delivery of documents. The situation may te different in cases where the seller, although not responsible for the goods after their delivery F.0.5., may fear that in case of loss of or damage to the goods and failure of the buyer to aeet his obligations, the recovery of the price may be prejudiced, Problems of exchange control in the buyers country may also affect the seller's position. However, all ‘these problens can te solved. The insurance markets already provide special policies designed to meet any specific additional requirements of the seller without overlappingTB/B/C. 3/120 page 65 with the main policy providing protection for the gocds in transit. The seller's his insurance needs are adequately net. bankers will also be satisfied 211. It is historically correct to say that the F.0.B. contract was formulated as an instrument of international trade at an earlier date than any other type of contract. It seems natural that such a contract aight have been most suitable to the seller during the late eighteenth and early nineteenth centuries vhen regular shipping lines weze not yet established and such modem instruments as telegraph, radio and postal services, were not yet developed. However, as regarés developing countries, most of which were colonies or semi-colonies at that time, all their imports used to be arranged on C.I.P, terms, for the simple reason that they did not have their own shipping and insurence services and had to rely entirely on the services provided by the metropolitan countries. Under present conditions, the developing countries should endeavour to alter the situation and enable their markets to provide marine insurance cover for their imports. 212. As already mentioned above, the principle of the protection o: The superiority of one an incipient industry in a young and rising nation is generally accepted. country over another in a branch of production often arises only from having started sooner. This is indeed the case in the intemational marine insurance warkets, where soue nations have had the opportunity to build up their markets much earlier and to acquire broad skills and experience in this field. Plans should be formilated and implemented to move the ewerging marine insurance markets of developing countries towards similar efficiency, to service the insured and to support their national tzade. Suggestions on how this should be done will be discussed in the next chapters of the present study.10/3/c, 3/120 hapter IT PROMOTION OF MARINE CARGO INSURANCE MARKETS THROUGH REGULATORY MEASURES Regulatory measures moral 213. 4s shown in the preceding chapter, the main cbstacle to the scund development of marine cargo insurance markets in many developing countries is the lack of a substantia ese markets. Lack of expertise, volume of marine insurance business covered in inadequate rating and insufficient sezvicing should be considered as effects rather than causes of the above situation, Nevertheless, since causes and effects tend to create market conditions which block further development, the warine insurance markets of nost developing countries can hardly be expected to find their way out of this situation unless some effective measures are taken at the national level, involving appropriate regulatory action by the authorities concemed. 214. Recourse to regulatory measures is a more or less current practice in insurance. legislation in many countries, both developed and developing, most aain classes of insurance domestic risks must ve insured in In fact, insurance stipulate that i the domestic i insured directly abroad. Exemptions from this rule are often granted in cases of vance market of the countzy concerned and cannot be taken out to be risks waich cannot be insured locally, as well as for reinsurance operations in e often, for marine cargo insurance. As regards the latter, some general and, a1 countries believe that the traditional notion of a domestic risk does not fully apply to goods in transit, since the perils involved are neither restricted to a specific place, nor do they concer a single nation, several places and interests being involved in international transactions such as imports and exports. Furthermore, some developing countries, depending heavily on their foreign trade with developed rected at changing current practices countries, are very hesitant to teke measures in marine cargo insurance, for fear of impairing their foreign trade in general and their exports in particular. Measures aimed at insuring imports in the local market 215. In the case of exports, there may be valid legal and economic grounds for rejecting the principle of regulatory measures by the exporting country. The situation is basically different for imports where, as vas shown in the preceding chapter, it is invariably the importer who is the owner of the gooda fron the moment they aze loaded on board the carrying vessel, and it is the importing country which pays the premium of the cover, whether or not such payment is reflected seyarately in its valance of payments. ven in cases where the foreign exporter is formally responsible for providing insurance cover, namely under a 0,1.F. contract, the1D/B/C. 3/120 page 67 shipaent represents a national risk for the importing country to the extent that its cost is included in the C.I.P, price of the commodity and, consequently, is ultimately ‘loping countries consider that the basic paid by the importer. Hence, many dew principle of insuring netional risks in the local market should apply in the case of imports. 216. Tt is true, however, that of nationality may sometimes lead to uncertainty. therefore make it clear, in their insurance regulations, that the latter prevails over the former. This principle may be laid down in different ways, depending economic interpretation of the egal an Developing countries should mainly on the extent to which developing countries wish to enforce it. The following paragraphs will describe the three most comon systems available to these countries, a number of which have already adopted then. The impact of these regulations is illustreted ty the fact that in the developing countries which require jocal insurance of their imports the marine premium ranks first or second in tenns of volume of business among all other classes of insurance business transacted, whereas in countries where no specific regulations are laid down marine insurance tends to be an almost marginal class of domestic market business. 217. & straightforverd solution to the problem is that of prescribing by law transportation of goods imported into the country shall be insured with companies tegally established and duly licensed therein. Such a regulation generally curtails conditions that the possibility of selling 0.I.F, to the country, because adoption of ¢.1.F. of sale could lead to some sort of double insurance contracted for the sane shipuent end hence entail unnecessazy costs. The regulation in question therefore brings about F.0.8, or CkF conditiors as a general pattem for imports. 218, The general rule of local insurance for imports way, however, be subject to a ndez normal degree of flexibility, Not all imports, for example, are negotiated contracts of sale and aid programmes are a clear example of this. In these cases the Goverment may waive its right of strict enforcement of the local insurance rule if such a waiver is conducive to core favourable terms in trade relations. An example of this is India where, although it vas stipulated in 1962 that all insurance @ with a local insurance pool, shipments to on government accounts was to be plac Indie frou the United States under an aid programe were insured on a 50 per cent each basis in India and the United States. This, however, may be considered an exception to the general rule and it did not prevent isports umder the Colombo Plan from Australia and Canada, among others, from being insuzed in India, Another case of @ special arrangement made on ccuntry-to-ccuntzy basis vas a recent agreementm/a/o.3/120 page 68 between country would underwrite 50 per cent of the value of the goods exchanged between then, 229. Consequently there is nothing to prevent the requirement of local insurance for geria and the People's Republic of China, under the tems of which each Imports from baing applied with sufficient flexibility when broader national cular case addition to the par interests mast prevail over insurance interests. the preceding paragraph, there a: of aid programmes described some other imports which are effected under the tems of a specific contract of sale but as a transfer of capital goods or primary materials, made to their overseas branch offices by corporations whese head-offices aze in the exporting country, Similar cases may also arise where the tranaportation of goods is not a commercial operation proper involving two digferent corporations or entities - the seller and tuyer ~ and the resident consignee does not have a proper "insurable interest" in the transported commedi of placing insurance mile should only be enforced all these cases are frequently subject to the obligatios Locally, but someacuntries take the view that this basi: for purely commercial transactions. 220, Some countries feel, however, that a strict regulation compelling all imports to ve insured locally is not the gost suitable course to follow. 4 line of action has developed which considers the aatter of foreign insurance for imports to be a commercial problem rather than a purely insurance problem. As pointed out before, exporting C.I.P, to developing countries do not primarily prevailing practices of selection of the insurance company but that of the pattern of the concern + commercial contract. Thus, the second system consists in restricting the choice of ‘the commercial contracts for imports to F.0.B. or C&F, among other possibilities provided in the Incoterms. formulas. Thus, although there is no formal compulsion buy insurance in the douestic market, the local importer is made legally liable for these risks and mist therefore satisfy the basic requirement and cover the risk in to the country. 221. However, as already nenticned ebove, not all inports in a country are made on ‘the basis of commercial contracts. There are a relatively large mumber of shipments that do not relate to two different ana independent tntities and for which no formal contract is established. In other cases when the principal office in a developed country ships goods to its branch in a developing country, the insurance is usually placed in the form of open covers or floating policies arranged sy the former, and the commercial contract is drawn accontingly. Therefore the obligation of F.0.3. cally guarantee that the goods will not automa’ % docs not automatically ensure local coverage ditions for contracts of sale be insured locally; in other words, for these shipments.t/3/c.3/120 page 69 222. It may therefore be accepted that, vhatever the advantages of the regulation whereby F.0.B, conditions aze imposed for imports, the system will not operate fully if it is not supplemented oy appropriate additional measures. Some countries have indirectly found a solution to the problem by providing that benks will open dccumentary credits only if the contract of sale includes F.0.B. or C&P terms, In other countries (s.g. Syria) this systen has been supplenented by requiring that insurance be provided locally for imports made by a local branch office of the foreign exporter - a condition which presupposes that the Links between the exporter and the importer can always be identified, vhich is obviously not the case. The Teasoning underlying these prescriptions is that in uost cases commercial transactions sesort to one of two instraments: bank credit or resident agency of a foreign exporter. These two channels can be nore easily controlled than a system entailing a detailed examination of the documents for all shipments arriving in the country. 223. As to imports financed by foreign loans, it may not be deemed appropriate to subject them to conditions which could encumber the bargaining position of the local importer. In fact, for these shipments the foreign financing body also has an ‘insurable interest" over the commcdities for which a credit is granted, and it might be considered necessary for such an agency to participate in the choice of the insurer. If this were not s0, the foreign financing agency might consider it necessary to buy another insurance cover for the same goods and thus increase their price, 224. A third group of measures involves the mechanisms of both import licences and foreign exchange control. while the basic principle of the national characteristics of import risks subsists, the vay in which this principle is dealt with puts a pertioular emphasis, through these measures, on the foreign exchange couponent of warine insurance and on the need to make sparing use of it if the cover is available in the local market, Thus import licences may only be granted against the presentation of an insurance policy or an insurance certificate providing evidence ef lecal insurance, This means that at least some marine insurances would decoze compulsory. 225. In some markets where the above procedure has been adopted, domestic insurance companies have sometimes been requested by importers to issue insurance certificates for non-existent insurance covers, or have issued insurance certificates under deies on very restricted conditions, while the goods have already been insured in a Pol: foreign market with insurers considered for various reasons to be more acceptable to ‘the contracting parties. Some violations, of course, defeat the purpose of the Reasure, Imports vhich are not subject to licences also fall outside the scope of10/2/c. 3/120 page 70 the tasic rule of local insurance, but these are considered to be imports for which no foreign exchange is required (for instance, aid programmes, personal effects and other non-commercial shipments), so that in these cases marine insurance bought abroad does not adversely affect the national interest. 226. Oth be devised. Well-known anong thess schemes are those consisting of either a refusal 0.3, values (the difficulty sue may al: x measures falling more specifically under the exchange control s: to assign foreign exchange for imports in excess of here is to check the accuracy of these values) or an allocation of foreign exchange for C.I.P. values, on the understanding that foreign exchange representing the difference between C.I.P. and F.0.3, value is available to the local iapozter for ay s are 90 other coumercial operations for which the national authorities would not noma. grant foreign exchange. The aims, scope and limitations cf these measu! evident that they do not need to be described. Suffice it to say thet it may be difficult to enforce them fully, mainly because the F.0.B. or C.I.P. prices declared by the Incal importer may take into account certein commercial considerations and not necessarily reflect the real position. 227. The preceding paragzaphs have sought to describe the different methods developing countries may resort to in attempting to attract marine business for imports to their local market. The national market is generally understood to be the insurance companies authorized to operate in a given country, that is to say those that have met so doing. However, in some countries the legal and other administrative conditions (azgentina is one example) the principle of insurance for imports on the national market has been interpreted in such a way as to debar from transacting insurance of imports not only the foreign insurance markets tut also the foreign companies duly established in the countzy,namely, those to whom the national authorities have granted a licence to transact insurance business in the country. Some observers question whether it is reasonable to authorize foreign insurance companies to operate in a national market in respect of fire, motor vehicle and similar undoubtedly national risks, and to preclude then from operating in the marine branch which is mch more intemational by definition. Am additional problem that arises in this connexion ig the criteria under which 2 company qualifies as a donsstic concer. Measures conceming the insurance of exports reasoning were to be adopted in of insuring exports, it would 228, If similar pe follow that the exporting country should not take legal measures in this field, the absence of regulations béing 2 logical corollary for measures taken on the import ed in a publication of tae central side. This line of thought is clearly expremp/3/¢. 3/120 page 71 reinsurance institute of a large developing country, which points out that “whoever buya from us has the fullest freedom of contracting wherever he wishes the services of transportation and insurance, as 4 corollary of the same rights we claim from cur intemational suppliers as regards our imports". 229. Other developing countries take a different view in this matter and consider taking legal measures aimed at promoting an active participation of their national insurance market in export business as well. Insurance of risks related to exported shipments presents @ positive opportunity to the local insurance market and to the country as a whole. To some extent the opportunity is even wore valuable than that related to imports, for goods damaged or lost in the case of exports will generally be replaced by national products bought in local currency, while in the case of imports goods lost or damaged will have to be replaced by foreign goods, resulting in doubl 28. expenditure of foreign currency. Nevertheless, the enforcenent of legal meas requiring local marine insurance for exports should ensure that such measures do not conflict with any regulations of the importing country aimed at insuring its imports ch would be an economic waste. locally; otherwise double insurance might result, wh Negotiations between the two countries concemed often help to avoid such a danger. 230. However desirable legel measures for local insurance of exports may be in theory, in practice the policies followed in this field by most developing countries have been based on a realistic approach dictated by the need to give local exporters the broadest possible freedom of action in their transactions with foreign importers. The fact that the efforts of most governments are uainly directed at facilitating the export of their national products does not need to be emphasized here. Restrictive measures in the merine insurance field could have adverse effects on this policy and therefore be detrimental to the promotion of exports. Furthermore, when the credit and reputation of many insurance companies in developing countries have not yet been established internationally, there is a marked preference for the foreign importer to resort to his own undervriters, whom he knows and with whom he hae global arrangements for his world-wide activities. ‘These facts may induce exporters in developing countries to feel more at ease in their negotiations with their clients if they can offer F.0.B. or CkF terms of sale. Hence governnents in developing countries have genezelly abstained from attempting toc strongly to make the local insurance market participate in the business. 231. Some developing countries have succeeded in promoting local insurance of exports when transactions are made with ceuntries where no specific regulations for uarine business exist, or when some special commodities are concemed (such as copper,70/8/c.3/120 page 72 uranium and oil) which are subject to particular export conditions. For instance, in Pakistan shipments are generally made on F.0.B. terms for conventional exports such as cotton, cotton yam, hides, skins, and wool. However, some export items such as fresh fruit, carpets, rugs, sports goods, cement ani manufactured items are insured in Pakistan, Sxports to developing countries, shipped on a C.I.F, basis and- especially those near Pekisten, are also covered with Pakistani companies, vaile practically all exports to socialist ceuntries are sent F.0.3. The relevant factor in this example is that no legal provision is responsible for this situation, It merely illustrates the possibility for developing countries to insure a substantial part of their exports even when they cannot regulate the matter on strictly legal terms. 232. Exporters in some countries are encouraged to contract local marine insurance not by laws relating specifically to this field, but in the indirect fom of tax rebates, drawbacks and expert credits which are primarily directed at promoting and supporting the exporters! efforts to increase their sales abroad, The modalities of ‘erences these mechanisms may differ from one country to another and these diff derive more particularly from the individual taxation systess. Basically, these modalities consist of refunds of direct or indirect taxes on account of these exports. ‘The refunds are nomally based on the total amount of the export value, with the result that if insurance were arranged by the foreign importer, or if the export were made on an F.0.3, basis, the basis for caloulating the rebates and other facilities would be lower than if insurance were effected in the exporting countzy. eames of enforcement of remulatory measures 233. In examining the compulsory measures that developing countries have laid down for marine insurance an important question arises: to what extent are these measures effectively applied and what are the loopholes that permit local traders to evade the regulations? 254. The general feeling is that in countries where local marine insurance for imports is compulsory, effective control is carried out by the authorities to ensure that the obligation is fully met. One fom of such control is to require an insurance policy for customs clearance in which the importer can prove that warine insurance has been contracted in the local aazket. But even this kind of surveillance may not be fully effective in every case. For example, only a nominal low coverage insurance may be vought in the countzy waile, for the same shipment, the real full cover is effected are satisfied, having been t is that the custome authori abroad. The resu, presented with an insurance policy for nominal coverage of the shipment, while the veal insurance cover has been transacted with a foreign company, or the operation1/8/C. 3/120 Page 73 actually carried out under C.I.F, terms of sale. Other ingenious and subtle practices are devised, particularly when local insurance is mich less favourable in economic tems, than insurance available in foreign markets, 225. With reference to exports, in most cases one cannot speak of exporters breaking any regulations since, as pointed out before, there are, in genezai, no legal constraints against their taking out insurance abroad. However, it may be appropriate to refer heze to other measures which tend to hinder government efforts to encourage ewporters to take cut local marine insurance. One method is to keep a double set of ledgers, a procedure used on a lange scale in a mmber of countries. It is obvious that when a commodity is billed for less than its real value the exporter can neither buy insurance for its true value - in which case the tex authorities would be suspicious about the accounts - nor for the value shown in the false accounts - in which case the exporter would be underinsured and would himself bear a substantial part of the marine wisks. The solution, when these illegal practices are engaged in, is to let the importer arrange the insurance, so that the liebility for the transported commodities is transferred to the buyer as scon as they are loaded on board. 236. An area in which governmental intervention aimed at increasing the volume of marine business placed on the local insurance market is most successful, is the one where intemal instructions are given by the authorities concemed to the government~ controlled industriel and commercial enterprises to cover their marine insurance risks exclusively with national insurers, wostly vith the State-owned insurance corporatione. Tn Argentina, for instance, the State-owned company "Caja Nacional de ahorros y Seguro! undervrites all business emanating from the State, provincial government and State controlled or semi-State-controlled industries and concems. 237. In concluding thie chapter, it is worth repeating that any regulatory measures directed at increasing the volume of marine insurance business transacted in a developing country can only be effective if the insurance demand originated by these Beasures finds an adequate supply in the local market. Further, the cbligation to insure cargo locally can only be met if a company or group of companies is established in the country and is technically and financially able to cover the risks. Agein, uarket is less the obligation imposed upon local traders to resort to the natio: likely to be opposed when the local insurance institutions provide an efficient and economic service comparable to that offered in other areas, That is why some of the developing countries which have sought to ensure broader local market participation in the insurance business have seen to it that the obligations of local importers (or ing the proper supply of insurance exporters) have been supplemented by measures conce: These probieus are dealt with in cover by the national marine insurance marke ‘the next chapter.napter IIT ‘LOCAL SUPPLY OF MARINE CARGO INSURANCE COVER marine cargo insurance covs Problems related to local supply o: 238. is a result of the policy proposed above, aimed at increasing the participation of the insurence markets of developing countries in providing marine cargo insurance in some cf these countries may be faced with cover, the domestic insurance compan: al problems related to their cepacity to provide such cever. In a series of techni fact, the domestic insurance companies may have to: ~ develop sufficient underwriting capacity, necessary for accepting the business proposed by the mezchants of their country and for providing adequate cover, as regerds toth types and reliebility of cover based on spread; - rate the risks, taking into account the need to keep the cost of cover at noderete levels while securing reascnable underwriting results; se ceses) and secure ~ vroperly service their clains (including foreign excha: recoveries. analysis of the present situation in these three areas may help the domestic insurance comanies of developing countries to find adequate solutions to their technical problems. Underveitine of merine cargo insurance 239. Underwriting capacity is the ability to give cover for risks proposed and consists the evailable reinsurance covers. The of the underwriter's oun retention plu: underwriting capacity of most marine insurers in developing countries depends much more on the reinsurance facilities available to them than on their own retention potential. This is due to the fact that the marine cargo insurance business is nomally characterised by wide variations in risks insured and values covered. Moreover, it is always vulnerable because of the strong possibility of r: accumulation which is often not controllable. The retention capacity of most marine gon wit! insurers in developing countries being relatively low, at least in compa: the volume of risks which they may be called upon to assume, acceptance of risks depends primarily on the ability to make extensive use of reinsurence facilities. This situation compels domestic underwriters to obtain maximum reinsurance facilities enabling them to meet the demand of their national marine cargo insurance market as gully as possible.T/B/o.3/120 page 75 240. The task of determining the underwriting capacity required by 2 given marine insurance market is difficult. Cne first needs to explore, at the market level, the Gifferent types of risks to be insured and the extent of cover which may be requized by each risk. Then the insurers nave to measure what portion of such risks they can choosing the safely retain for their account. One of the factors to ve considered ks of the portfolio and their retention limits is the quality of the individual ri: joss experience. However, the volume of the retained premium also plays a role when fixing the insurer's net retention. In fact, the insurer should alvays encure thet a balance exists between his net premium and his net liabilities. 4 third factor to be taken into consideration is the insurer's financial situation, nemely the size of his capital and reserves and the nature of his investments. With an increase in these nguzer coulé consider reteining a larger pert of the risks underwritten funds, the by him, 2d). after fixing his own retention limits the insurer has to arrange the reinsurance covers which would absorb the belance of risks covered by him. In some developing marine field may not be very countries the individual amounts at risk However, one often finds marine insurers committed to a considerable number of risks susceptible to loss or damage as = result of a single occurrence. This is due to the accumlation hazard, Accumulation is very frequent in developing countries due to ‘t shipping information, the congestion of many factors, mainly to lack of sufficie: cedure of loading and unloading of goods. To ess ports and warehouses and the slow > n hazerds, marine insurers usually take e: Protect themselves against accumuletii of loss covers which limit their loss per any single occurrence to a fixed amount which they can afford. This cover is intended to protect the net retention of the insurer or the whole of his marine account.11/ 242, Since reinsurance plays en important role in providing marine insurers with undervriting capacity and protection in case of adverse experience, and in the absence of local reinsurance facilities, there is a tendency in many developing countries to rely heavily upon foreign reinsurers. This results in a heavy outflow of marine insurance business, which largely defeats the purgoee of increasing the perticiyetion of develovinz countries in providing locally marine carzo insurance cover. Several developing countries have taken corrective stezs to reduce dependence iL For more details on the subject of reinsurance see the UNCTAD document entitled "Reinsurance problens in developing countries", TD/3/C.3/106/Rev.1.