Professional Documents
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Principles of Insurance:
As per Marine Insurance Act 1963, following are the principles applied to the contract of
Marine Insurance
1) Utmost Good Faith
2) Insurable Interest
3) Proximate Cause
4) Indemnity
There are two corollaries of Indemnity (i) Subrogation &(ii) Contribution
“The Assured must disclose to the insurer every material circumstance which is known
by assured.”
“Every Circumstance is a material which would influence the judgement of Insurer in
fixing the premium, or determining whether he will take the risk”
“There is a duty to represent and disclose all material”
In Simple Words: Contract of Marine Insurance is a contract of Utmost good faith where
it is the duties of both parties to not only represent (provide right answer) but also
to disclose all material facts even if not asked.
A fact is a material if it can influence the decision of Insurer about the contract. i.e.
whether to issue policy or not and if to issue then at what premium and terms &
conditions.
In case of breach of Utmost God faith, either party can avoid the contract (It means
policy becomes null and void and no claim is paid even I claim is not connected with
such breach).
2) Insurable Interest:
As per MIA 63:
“Every contract of marine insurance is a wagering or gaming contract in case insured
has entered the contract without Insurable Interest or with no expectation of
acquiring such an interest”
“A person has insurable interest where he stands in any legal or equitable relation to
the property at risk, where he benefits by the safety of property or may be
prejudiced by its loss or damage.”
In Simple Words:
Insurable Interest is the financial interest of Insured, where he stands to lose financially
in case of loss or damage to subject matter and would be happy if no such loss
happens.
In the absence of valid Insurable Interest or an expectation to acquire Insurable Interest
the policy is considered as a wagering or gaming policy and becomes null and void.
In Hull Insurance following have Insurable Interest: Owner, Partial owner, Financer,
Bareboat charter, Mortgagee, Freight and third-party liability.
In Cargo Insurance following have Insurable Interest: Owner, Partial Owner, Financer,
mortgagee, and Freight if not paid.
For resolving any Query, please send mail to shishirmarine@gmail.com
Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -01 Prepared By: S K Srivastava
Hull & Machinery Policies are no Assignable (Transferrable) therefore there is no transfer
of Insurable interest and policy expires when the Insured loses his insurable interest.
Cargo Policies are Assignable (transferable) therefore the policy is transferred to new
holder of Bill of Lading when cargo is sold. The last holder of B/L can claim for the
loss even if was not the original insured.
Insurable Interest can change also amongst various parties in case of joint ownership or
finance.
3) Proximate Cause:
The Latin phrase “Causa proxima non remota spectator” explains this principle, it means
that proximate cause and not remote cause shall be taken as the cause of loss.
In determining the proximate cause of loss one must consider the most dominant and
effective cause of loss which is not necessarily the nearest cause in time to the actual
loss.
The onus of proof that the cause of loss is an insured peril rests with the claimant
(Insured).
Definition: The active efficient cause that sets in motion a train of events which bring
about a result, without the intervention of any force started and working actively
from a new and independent source.
4) Indemnity:
It is the protection or security against damage or loss. It is also referred to make goo
the loss or damage. It is the financial compensation sufficient to place Insured in the
same financial position after a loss as he enjoyed immediately before it occurred.
(To Cover the Loss)
This principle is introduced so that profit cannot be made by Insured from Insurance
contract. This principle employs evaluation of financial value of subject matter hence
it is not applicable in Life Insurance.
However Marine Insurance is not of strict Indemnity and it can be over ridden. Example
New for Old Clause in ITC Hull 83.
Corollaries of Indemnity:
1) Subrogation:
It is the transfer of rights and remedies of the Insured to the Insurer after he has paid
for the loss as required in the policy.
This principle arises out of Principle of Indemnity, because if the Insured collects the
claim from the Insurer and also from the party liable for the loss, the Insured would
be making a profit, which is not permitted.
Subrogation is transfer of right of recovery from liable party from Insured to Insurer after
the Insured has been paid the Claim by Insurer. N such case the insurer will recover
the amount from the liable party.
As a matter of practice a Letter of Subrogation is taken in advance before paying the
claim by Insurer.
2) Contribution:
This principle ensures that when the subject matter is insured under more than one
policy, then all Insurers bear the risk in proportion to the sum insured by each one
them. i.e. each Insurer pays in a proportion of its insured value to total insured value.
This principle also originated from Principle of Indemnity, where Insured is prevented
from making profit from Insurance.
Double Insurance: Where two or more polices are effected by Insured on same subject
matter for same adventure and the sums insured exceed the indemnity (value of
subject matter), it is called as Double Insurance. As per MIA 63, it is legally allowed
but Insured is not allowed to receive any claim in excess of his insured value. i.e.
each Insurer will pay in a proportion of its insured value to Total insured value.
(Principle of Contribution is followed)
Express warranties are written in policy. Example Harbour craft not to go more than 25 Nm
from the shoreline. These are considered as the safety valve for underwriter, which
reduces the risk. It may be absolute or conditional.
Implied warranties are not written in policy but are considered to be included in policy. Such
as Implied warranty of Seaworthiness of the ship (applicable in voyage policies only) or
Implied warranty of Legality (applicable on all policies)
2) Statutory Exclusions:
These exclusions are specified in MIA 63 and cannot be covered in the policy.
1) Wilful Misconduct of the Assured
2) Ordinary Wear & Tear
3) Ordinary Leakage or Breakage, Ordinary loss of weight or Volume
4) Inherent Vice
5) Rats or Vermin
6) Delay
3) Losses:
Losses are divided in two categories
i) Partial loss : Any loss that is not a Total loss is called partial loss. It is also called as
Average. There are two main types
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Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -02 Prepared By: S K Srivastava
Particular Average : It is defined as a partial loss of the subject matter caused by a
peril insured against and which is not a General Average loss. It is a fortuitous
partial loss.
General Average: Done separately………..
ii) Total loss: These are of two types.
a) Actual Total Loss: It happens when…
…. Subject matter is completely destroyed.
…. Subject matter has lost its merchantable character (loss of species)
….. Insured is permanently deprived of Subject matter.
b) Constructive Total Loss: It happens when….
Insured decided to abandon subject matter to Insurer if estimated cost of
recovery, repairing, reconditioning and forwarding the subject matter exceeds
the Insured value of the subject matter or actual total loss becomes
unavoidable.
Notice of abandonment must be unconditional and given in writing. If such NoA is
accepted by Insurer then he pays for the total loss and takes over the remains
of property and therefore is considered as owner of the property. However
Insurer has a right to reject such notice and pay partial loss equal to total loss.
Waiver Clause in policies state that any measures taken by the Insured or Insurer
shall not be constituted as acceptance / rejection / withdrawal of NoA
4) Deductible: This is the amount agreed in the policy between Insurer and Insured. It is
deducted from claim and insurer pays balance amount. If the claim is lesser than
deductible value the Insured will not raise a claim. It helps in eliminating large number of
small value claims which results in less loss to Insurer due to reduction in administrative
costs, who gives a rebate in premium. Higher the deductible, lower the premium.
Deductible is not reduced from Total loss and Sue & Labour associated with Total loss claim.
5) Duty of Assured: Duty of Assured (Insured) is to “Act like a Prudent Uninsured”. It means
he is expected to exercise due diligence (proper care) of his property during the period of
Insurance and if it suffers danger of loss then take actions as he would have taken if he did
not had insurance policy.
Sue & Labour Clause in policies has originated from Duty of Assured.
Hull Insurance
MAR Policy Form:
Since 1982 MAR Policy form is used with different clauses. This Policy form was drafted by
Lloyd’s of London and Institute of London underwriters. This form is used by Both H&M and Cargo
Insurance.
Clause 6.1 Covers the loss or damage to subject matter caused by:
i) Perils of sea, rivers, lake and navigable waters (It consists of only fortuitous losses and does not
cover ordinary action of wind and waves)
ii) Fire, Explosion
iii) Violent theft by a person outside the vessel
iv) Jettison
v) Piracy
vi) Contact damages
vii) Earthquake, volcanic eruption & Lightening.
Clause 23, 24, 25 & 26 : They are War, Strikes, Malicious Act and Nuclear exclusions respectively. i.e.
these are not covered in policy.
Clause 14: New for Old: Insurer has a right to deduct a reasonable amount based on depreciation
from any claims where an old part is replaced by new part (Indemnity). However, in clause New for
Old the Insurer is waiving their right to such deductions from claim.
As a matter of practice such waivers are not given above the age of 15 years.
Clause 1 Navigation:
This clause gives warranty for Navigation.
The vessel may sail or navigate with or without Pilot, go on trial trip or assist or tow another vessel
in distress. Vessel be towed where it is customary.
Ship to Ship transfer, i.e. loading and discharging cargo to another ship is not allowed, however
Insurer is informed ad additional premium is paid.
Institute Warranties: These are those parts of the sea where Insurer does not want Ship to go. These
includes area infested by Ice such as St Lawrence seaway, Great lakes, Greenland waters, Behring Sea
etc. However in the case vessel wants to visit such areas they can inform Insurer and pay additional
premium.
Clause 2 Continuation: ITC is time policy and expires at a predetermined time irrespective of location
and condition of ship. In such it is difficult to arrange renewal of policy, therefore if ship is in
damaged condition or in between ports, the policy may be continued till arrival next port by
informing Insurer in advance and paying additional premium.
Clause 4 Termination: Insurer shall terminate the policy automatically in case of i) change of
ownership, ii) change of flag, iii) giving ship on bareboat charter iv) suspension / withdrawal of class
certificate or change of class
Open cover is an agreement whereby the insurer under whereby insurer undertakes to insure all
shipments declared by Insured and falling in scope of cover.
If an Insured has products going to various places in the world, he has to take individual policies for
each consignment thereby resulting in lot of manpower requirement and additional expenses.
As an alternative to above difficulties Open Cover is proposed.
For resolving any Query, please send mail to shishirmarine@gmail.com
Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -04 Prepared By: S K Srivastava
Insured has to submit declaration form along with premium at required intervals. Insurer issues
policies for all declared consignments at pre agreed rates and terms & conditions which are valid for
one year, hence there is no need to renegotiate.
However, it comes with two conditions, they are
- Limit per bottom – this is maximum amount of shipment that can be loaded in a single ship
- Limit per Location – this is maximum amount of shipment which can be stored in location
(warehouse)
Advantages:
- Automatic policy for each consignment
- Rates can be negotiated for one year and bargain can be done.
- Reduction in administrative costs
Open Policy:
Open Policy is also known as floating policy. Clients having substantial turnover and large number of
dispatches can obtain continuous insurance cover under open policy.
An Open policy is issued, duly stamped, for an amount representing the assured’s estimated turnover
in respect of consignments which may be declared after paying agreed premium in advance for entire
turnover.
As a consignment is made the sum insured (premium paid) diminishes till it becomes zero or policy
expires after 12 months. In such case unused premium is returned back. There is a provision of
topping up premium and getting sum insured increased.
Insurer has the right to inspect the record of dispatches.
However, it comes with two conditions, they are
- Limit per bottom – this is maximum amount of shipment that can be loaded in a single ship
- Limit per Location – this is maximum amount of shipment which can be stored in location
(warehouse)
Advantages:
- Automatic policy for each consignment
- Rates can be negotiated for one year and bargain can be done.
- Reduction in administrative costs
P&I clubs are association off shipowner to cover each other from perils which are not covered in
Insurance market. They are mutual associations based on principle of mutual insurance where the
member acts as both the Insurer and Insured. When he pays for other members claim he is Insurer
and when he receives claim from others he is Insured.
Apart from Shipowners other parties who are exposed to liability in relation to the vessel can become
members such a bareboat charterer, ship manager or operators.
Club operates on “No Profit No Loss” policy and there is no premium. The payment of members is
known as “CALLS” which are collected as and when required. No Claim No Call. Club collects advance
call which is used to cover the expenses of the club. Further Supplementary calls are collected
whenever club have to settle a claim. The member of the club is obliged to pay such supplementary
calls.
Membership of club is given for one year which traditionally starts from 20th Feb. If a member wants
to leave the club then he can do so by giving one month notice and paying release call.
P&I clubs follows principles and practices of Marine Insurance and each member has to act like a
prudent uninsured, failure to do so can prejudice the cover.
The members of club meets once in two years in a general body meeting and elect a board of
directors, who runs the club either through a Managing Director or appointing a professional CEO.
Rules and Regulation of club are also decided in this General Body meeting. Club has a written
constitution which is provided to members.
Club appoints correspondent at every major port in the world, who carries out various activities of
club on a commission or fees. They acts as intermediate between the club and Master of vessel.
IGPI : International Group of P& I Club are association of P&I Clubs , where the members are P&I
clubs who follows principle of mutual Insurance. Further they acts representative body at various
forums including IMO and they contribute by raising issues concerning shipowners.
Specialist Clubs:
1) FD&D ( Freight Demurrage & Defence )
This is a policy offered by P&I clubs or by specialist FD&D Clubs.
It covers the members legal cost for fighting a case to settle disputes regarding operation,
management & ownership.
Charterparty disputes such as Demurrage, off-hire, stevedores damages, bunker disputes are
covered. It covers lawyer’s fees, court fees, arbitrator’s fees, surveyor’s fees and other
expenses incurred.
General Average
The law of General Average is in every country engaged in maritime adventure. This law existed
before the marine Insurance law. It’s principle is “That which is sacrificed for all, is borne in
proportion by all parties to adventure”
Definition: There is General Average act when and only when an extraordinary sacrifice is made or
extraordinary expenses are incurred in times of peril for the purpose of preserving properties
involved in common maritime adventure.
All properties who have benefitted of such act shall contribute for the sacrifice and expenses in
proportion to their contributory value which is fund after adding amount made good.
Example: Jettison of cargo to save the vessel in case of rough weather.
Essential of GA:
- There is an act
- Act is of sacrifice or extraordinary expenditure.
- Act is Intentional (voluntary) and reasonable
- Act is performed to preserve or save Imperiled properties involved in common maritime
adventure
- Such act is successful.
- Benefited properties contribute (even the sacrificed property contributes)
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Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -05 Prepared By: S K Srivastava
MIA 63 states that Insurer shall pay the contribution of the Insured in respect of GA Sacrifice and GA
Contribution. However, in case of underinsurance, insurer will pay his proportion only.
General Average is declared by Shipowner and calculations are done by Average Adjuster as per York
Antwerp Rule. Latest rules are York Antwerp Rules 94 amended in 2016
To secure the release of cargo, the owner can deposit his contribution in cash or by GA bond.
Insurer’s guarantee and Bank guarantee are also accepted.
Examples of GA:
1) Cargo Jettisoned to save imperiled ship & cargo
2) Water sprayed to fight fire in cargo compartment leading to loss or damage to other cargo
3) Damaging engine while attempting to refloat the ship after grounding.
Valued Policy:
A valued policy specifies the sum insured as agreed between Insurer and Insured. In case of Total
loss this agreed sum is paid irrespective of actual value of subject matter before loss. In such case
the fixed value is guaranteed.
Unvalued Policy:
An unvalued policy does not specifies the value of subject matter but gives a limit of sum insured. In
case of Total loss the value of subject matter just before the loss is estimated and paid upto the limit
specified. It is useful for the subject matter whose value fluctuates.
Claim Procedure:
1) Insured informs Insurer about the loss as soon as he comes to know about it. Policy Number,
Detail of Subject matter, Initial repot of damage is given, so that Insurer can appoint a
surveyor to inspect.
2) Surveyor inspects the subject matter and gives a report that contains extent of loss,
proximate cause, actions to be taken
3) Following documents are submitted
a) For Cargo Claim:
- Surveyor’s report
- Insurance policy / Certificate
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Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -06 Prepared By: S K Srivastava
- Invoice / Packing List
- Bill of Entry / Customs declaration
- Letter of Origin
- Master’s Declaration / statement
- Extract of Ship’s log book
- Photograph and other evidences
- Short landing certificate / non delivery certificate
- Letter of Subrogation cum power of attorney
b) Hull Claims
- Surveyor’s report
- Registration Certificate
- Class Certificate
- Extract of Ship’s log book
- Weather Reports
- Tender for repairs
- Master’s statement
- Statement of account showing wages, bunker & disbursements.
- Letter of Subrogation cum power of attorney
4) In case Insured is not satisfied with the claim settlement he can take following action
- Report to Insurance Ombudsman
- Negotiate with arbitration
- Litigation
Reinsurance:
MIA 63 states that an Insurer under the contract of marine insurance is at risk and he may reinsure it.
The original insured has no rights in respect of such reinsurance.
Insurance is a transfer of risk from Insured to Insurer. When Insurer issues a policy he is subjected to
risk of loss or damage of property. In such case he may retain part risk and transfer the remaining
part risk to another company called Reinsurer.
Such reinsurance can be proportional or non proportional.
In proportional reinsurance the original insurer (ceding company) transfers a percentage of every risk
to reinsurer and pays the proportional premium.
In non proportional reinsurance the original insurer transfers only the risk in excess of his limit of
retention in every case.
Advantages:
- Reduces the risk of original insurer
- Protection against catastrophe loss
- Increase in national market capacity by spreading the risk to other parts of the world
- Reinsurer gets business without contacting Original Insured.
This act was passed by Parliament of India on 18th April 1963 to codify law relating to Marine
Insurance. It follows English law (MIA 1906).
Features:
- It is concerned with both the Law and practice of Marine Insurance.
- Practices are important when the law is silent.
- Many sections of law are flexible, It starts with statement “Unless otherwise agreed”
- Principles are
- Utmost Good faith
- Insurable Interest
- Indemnity
- Proximate Cause.
Extra Notes:
1) Marine Adventure means any adventure where subject matter is exposed to maritime perils.
Subject matter may be property ( ship , cargo ) or freight, liability etc.
2) Maritime Peril means the perils consequent on, or incidental to, the navigation of sea.
Example Perils of Sea, Fire, War, Pirates, Thieves, Capture or Seizure, Jettison, Barratry or any
other peril designated by policy.
3) Contract of Marine Insurance covers both Sea and Land risk (mixed risk)
4) Particular Charges: Expenses incurred by or on behalf of the assured for the safety or
preservation of the subject-matter insured, other than general average and salvage charges,
For resolving any Query, please send mail to shishirmarine@gmail.com
Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 5 -06 Prepared By: S K Srivastava
are called particular charges. Such as Sue & Labour Charges, Particular charges are not
included in particular average.
5) Policy must specify
a. Name of assured
b. Subject Matter
c. Voyage or period of time
d. Sum Insured
e. Clauses ( terms & Condition )
f. Name & Signature of Insurer
6) Time Policy cannot be more than 12 months duration
7) Mixed Policy – where a contract is of both voyage and time
8) Salvage Charges are the charges recoverable under maritime law by a salvor independent of
contract.
9) Measure of Indemnity – The sum which Insured can recover for the loss to subject matter
covered in policy
10) Effect of underinsurance – In case of valued policy if the sum insured is less than the value of
subject matter, Insured is assumed to be his own insurer for the difference of such
underinsurance.
11) Proposal Form: It is the form filled by Proposer and submitted to Insurer, this form can be
given directly or through Agent or Broker.
12) Cover Note: It is an intermediate document stating that Insurance is in force and is valid only
till issuance of Policy
13) Claim Ratio is percentage of Claims Paid divided by Premium Earned.
14) IRDA (Insurance Regulatory & Development Authority of India) is a Government body formed
for promotion of Insurance & reinsurance. Formed in 1999 by IRDA Act, it controls the
functioning of Insurance companies in India by making rules and regulations which these
companies have to follow. All Insurance companies are registered under it and every new
policy is first approved by them before launching. For Customer grievance Insurance
Ombudsman operates under them.
Other Policies:
1) Builder’s Risk Policy: Covers the losses or damage to ship builder while a vessel is under
construction. It includes cost of repairing, replacing or renewing any damaged part. Insurance
terminates upon the delivery of vessel to shipowner.
It covers all risk except earthquake & volcanic eruption, loss due to faulty design.
3) Freight Insurance: Covers Freight payable on delivery, If a ship is lost, it losses the freight
which is not paid.
4) Voyage Policy for H&M – IVC Hull 83- It is similar to ITC Hull 83 with few difference such as
navigational warranty, Continuation & termination clause are not applicable.
5) Port Risk Policy: It is available for shipowner whose vessel is engaged in seasonal trade or is
laid up in port for long duration. It includes risk specific to ports and also certain parts of
Protection & Indemnity cover as ship is not a member of any P&I club at that time.