Unit 5 – marine insurance

Nature:
Marine insurance is concerned with overseas trade. International
trade involves transportation of goods from one country to another
country by ships. There are many dangers during the transhipment.
The persons who are importing the goods will like to ensure the safe
arrival of their goods.

The shipping company wants the safety of the ship. So marine

insurance insures the coverage of all types of risks which occur
during the transit. Marine insurance may be called a contract
whereby the insurer undertakes to indemnify the insured in a
manner and to the extent thereby agreed upon against marine
losses.

Marine insurance has two branches:

ADVERTISEMENTS:

(i) Ocean Marine Insurance

(ii) Inland Marine Insurance.

Ocean marine insurance covers the perils of the sea whereas inland
marine insurance is related to the inland risks on the land. Marine
insurance is one of the oldest forms of insurance. It has developed
with the expansion of trade. It was started during the middle ages in
Italy and then in England. The sending of goods by sea involves
many perils; so it was necessary to get the goods insured. In modern
times marine insurance business is well organised and is carried on
scientific lines.
Lloyd’s Association:
This association has played an important role in marine insurance
in England. During the middle of seventeenth century some persons
used to assemble in coffee houses of London and transact marine
insurance business. They used to transact business in their own
names. One of the coffee houses was owned by Edward Lloyd.

ADVERTISEMENTS:

For the facility of his customers he started publishing a paper called

Lloyd’s News in 1696. This paper contained all types of information
about the movement of ships. The persons who used to assemble in
Lloyd’s Coffee House formed an association called Lloyd’s
Association.

This association provided only the requisite information, but

business was contracted by the underwriters in their own names.
Anybody interested in entering marine insurance business could
become the members of this association. The member’s reputation
and financial position was scrutinised properly. The association
earned a great name in marine insurance and is considered one of
the best organisations in the world even today.

Subject Matter to be insured:

The marine insurance may cover three types of things:
(i) Cargo Insurance:
The person who is importing the goods and the person who is
sending them are interested in the safety of goods during the sea
journey. The goods to be insured are called ‘cargo’. Any loss of
goods during journey is indemnified by the insurance company.
ADVERTISEMENTS:

The goods are generally insured according to their value but some
percentage of profit can also be included in the value. The cargo
policies may be special, reporting and floating. The special policy is
only for one shipment. Reporting or open cargo policy, on the other
hand, covers all shipments made by an exporter over a long period
of time.

The floating policy is just similar to open cargo policy but differs
from it only in respect of the method of paying the premium. In
floating policies the value of the future shipments is estimated and
premium is deposited with the company. Later on, actual shipments
are compared with the estimates and the premium is adjusted.

(ii) Hull Insurance:

When the ship is insured against any type of danger it is called Hull
Insurance. The ship may be insured for a particular trip or for a
particular period.

(iii) Freight Insurance:

The shipping company has an interest in freight. The freight may be
paid in advance or on the arrival of goods. The shipping company
will not get freight if the goods are lost during transit. The shipping
company may insure the freight to be received which is known as
freight insurance.

Principles of Marine Insurance:

Some of the principles related to marine insurance are
given as under:
1. Utmost Good Faith:
ADVERTISEMENTS:
The marine contract is based on utmost good faith on the part of
both the parties. The burden of this principle is more on the insured
than on the underwriter (insurance company). The insured should
give full information about the subject to the insured. He should not
withhold any information. If a party does not act in good faith, the
other party is at liberty to cancel the contract.

2. Insurable Interest:
Insurable interest means that the insured should have interest in
the subject when it is to be insured. He should be benefited by the
safe arrival of commodities and he should be prejudiced by loss or
damage of goods. The insured may not have an insurable interest at
the time of acquiring a marine insurable policy, but he should have
a reasonable expectation of acquiring such interest. The insured
must have insurable interest at the time of loss or damage otherwise
he will not be able to claim compensation.

3. Indemnity:
This principle means that the insured will be compensated only to
the extent of loss suffered. He will not be allowed to earn profit from
marine insurance. The underwriter provides to compensate the
insured in cash and not to replace the cargo or the ship. The money
value of the subject matter is decided at the time of taking up the
policy. Sometimes the value is calculated at the time of loss also.

There is one exception to the principle of indemnity in marine

insurance. Some profit margin is also allowed to be included in the
value of the goods. The assumption is that the insured will earn
profit when goods reach at their destination.

4. Cause Proxima:
 This is a Latin word which means the nearest or proximate cause. It
helps in deciding the actual cause of loss when a number of causes
have contributed to the loss. The immediate cause of loss should be
determined to fix the responsibility of the insurer. The remote cause
for a loss is not important in determining the liability. If the
proximate cause is insured against, the insurer will indemnify the
loss.

UNIT -6

VOYAGE , CHANGE IN VOYAGE , DEVIATION

PERILS OF SEA

What is a Voyage Policy?

According to the Indian Marine Insurance Act 1963, a voyage policy is a
type of marine insurance policy that provides coverage for losses due to
unforeseen risks to cargo during a specific voyage. It is also known as
marine cargo insurance.

Summary

 According to the Indian Marine Insurance Act 1963, voyage policy is a type
of marine insurance policy that provides coverage for losses due to
unforeseen risks to cargo during a specific voyage.
 The policy contract contains complete details of the risk, along with
information about the bill of lading, name of the vessel, etc.
 A voyage policy is different from a time policy in that it considers other
aspects of marine travel.

How Voyage Policies Work

Any insurance policy is designed to indemnify the insured against risks of

damage to property, the environment, or human life in the event of a
natural calamity, accident, theft, etc. A voyage involves the following high-
stake risks:

1. Damage to valuable cargo or the expensive ship

2. Damage to the environment due to leakage of oil

3. Loss of life or harm to the captain and crew

To safeguard against the risk of damage to cargo, a voyage policy is taken

before the inception of a voyage. It is valid for that particular voyage and
ends when the cargo arrives at its destination. It doesn’t cover the port stay
and loading/ unloading of cargo.

The policy contract contains complete details of the risk, along with
information about the bill of lading, name of the vessel, etc. As a voyage
policy protects only the cargo in transit and not the ship, it is mostly taken
by cargo owners involved in international trade.

What Risks are Covered?

A voyage policy covers only unforeseeable and unpreventable risks. At the

beginning of the voyage, the ship must be seaworthy for that transit for the
policy to uphold.

It is considered seaworthy when it is fit to encounter the ordinary perils of

the seas in the transit. In addition, the ship’s crew must be reasonably
competent.

The policy covers the cargo during the whole voyage by sea, even if there
are delays en route. It is feasible to extend it to include extra cover against
perils like a strike, riot, civil commotion, etc.

Voyage Policy vs. Time Policy

There are two types of marine policies:

1. Voyage Policy

A time policy is valid for a specified period, generally a year. Its contract
lays down the precise minute when the cover comes into effect and when it
terminates. While a voyage policy insures the cargo in transit from one
place to another, a time policy insures it for a definite period.

A voyage policy suits those businessmen or traders who rarely require

marine insurance policies, or who export a relatively small amount of cargo
by sea.

2. Time Policy

On the other hand, major export houses with a high frequency of voyages
prefer a time policy that protects all the cargo that they ship for a specified
period.

Suppose a trader insured their cargo through a time policy. Due to personal
reasons, the captain of the ship arrives two hours late. As a result, the time
covered by the policy runs out, and the cover ceases even though the cargo
is still on the high seas.

For such a reason, the cargo is mostly insured on a voyage basis. Coupling
the benefits from each end, marine insurance today is mostly an
amalgamation of both time and voyage insurance policies.

Case Study

Consider XY Ltd., a computer hardware manufacturer in India that recently

ventured into the export of monitors and motherboards. Last month, it
received a huge order from an MNC in Singapore. To safeguard the
equipment against the risks in transit, XY Ltd. purchased a voyage policy.

Halfway through the voyage, the vessel found itself in the middle of a
strong typhoon. Though the equipment was carefully packaged, part of it
got damaged. When the vessel reached Singapore’s port, the buyer refused
to accept 60% of the consignment.

XY Ltd. claimed indemnification from the insurance company. As the sea

storm was an insured peril in the policy contract, the insurance company
covered the loss of revenue. Here, the loss was incurred during that
particular voyage before the ship was able to reach its destination. Hence,
XY Ltd.’s claim was valid.
 Section 47 of The Marine Insurance Act, 1963: Change of voyage
Bare Act

(1) Where, after the commencement of the risk, the destination of the ship is voluntarily
changed from the destination contemplated by the policy, there is said to be a change of
voyage.

(2) Unless the policy otherwise provides, where there is a change of voyage, the insurer is
discharged from liability as from the time of change, that is to say, as from the time when the
determination to change it is manifested; and it is immaterial that the ship may not in fact
have left the course of voyage contemplated by the policy when the loss occurs.

Simplified Act

(1) If, once the insurance coverage has started, the ship's planned route is intentionally altered
from the one originally agreed upon in the insurance policy, this is considered a change of
voyage.

(2) Unless the insurance policy says something different, when there is a change of voyage,
the insurance company is no longer responsible for covering any losses from the time the
decision to change the route is made clear. It doesn't matter if the ship hasn't actually started
on the new route when something bad happens that causes a loss.

What Is Voyage Deviation In Marine Insurance?

 Author :
 TATA AIG Team
 ●
 Published on :
 16/01/2024
 ●
 2 min read

Marine insurance is crucial to safeguarding maritime assets and ensuring smooth sailing for shipowners. Amidst
the sea of terms, one that demands attention is "Voyage Deviation."

This nautical jargon refers to any intentional detour from the agreed-upon course during a sea journey. In the
realm of marine insurance, understanding voyage deviation is paramount. It involves potential risks and
implications that can impact coverage and claims.

In this blog, we will talk about the intricacies of voyage deviation in marine insurance, shedding light on why
comprehending this concept is vital for both insurers and insured parties navigating the high seas. So, let’s set
sail, shall we?

Voyage Deviation in Marine Insurance: An Overview

Voyage policy related to deviation in marine insurance refers to any intentional change in a ship's route from the
originally planned and agreed-upon course. This can happen for various reasons, such as:
Weather conditions: Avoid storms or seek safe refuge during bad weather.

Mechanical problems: Needing to divert to a port for repairs.

Cargo requirements: Responding to unforeseen circumstances with the cargo, like picking up additional cargo
or assisting a distressed vessel.

Market opportunities: Taking advantage of a price change or new destination for the cargo.

A ship strays from its planned route, which can significantly affect insurance coverage. Marine insurance
usually protects the ship and its cargo for a particular journey, and any deviation from this journey may lead to
the policy being void or restricted.

Many marine insurance policies have a "seaworthiness" requirement, meaning the vessel must be in good
condition at the voyage's beginning and stay that way. If the ship deviates from its intended course, it might be
deemed unseaworthy, potentially causing the insurer to reject coverage for losses resulting from the deviation.

Therefore, shipowners must grasp the consequences of changing course during a voyage and take steps to
reduce the associated risks. It's important to understand that such changes can also affect the ship's responsibility
for any damages or losses that happen during the deviation.

If the shift from the original route is seen as unnecessary or unreasonable, the shipowner or operator might be
held responsible for resulting damages. To avoid problems, the ship owner or operator should inform the insurer
before making any planned changes. The insurer will evaluate the risks and may adjust the policy to cover the
extra dangers.

Effect of Voyage Deviation in Marine Insurance - Financial & Legal Implications

Understanding voyage deviation and the specific clauses in the insurance policy is crucial for the insured. This
prevents accidental policy voiding, ensures proper communication with the insurer, and avoids potential
financial losses in case of claims.

Also, it is crucial to know that voyage deviation can have significant legal and financial implications for various
parties involved, including:

Breach of Contract: Deviating from the agreed-upon voyage may constitute a breach of contract with the cargo
owner or charterer. This can lead to legal action and potential liability for damages, delays, and additional costs
incurred.

Increased Insurance Premiums: Frequent or unauthorised deviations can result in higher insurance premiums
due to the perceived increased risk.

Damage or Loss of Cargo: Increased exposure to unforeseen risks by deviating from the planned route can
lead to damage or loss of cargo. The cargo owner may have limited recourse for claims if the deviation was
unauthorised or not covered by insurance.

Delays and Cost Overruns: Deviation can cause delays in delivery, disrupting the cargo owner's supply chain
and resulting in additional costs such as storage fees and missed deadlines.

Legal Disputes: If the deviation arises from disputes with the shipowner or charterer, the cargo owner may be
involved in legal action to recover losses.

General Average Contribution: In rare cases where intentional deviation is deemed necessary for the common
safety of the voyage and cargo, a general average contribution might be levied on all cargo owners to share the
resulting expenses.
Subrogation Rights: If the deviation was caused by the shipowner's or the charterer's negligence, the insurer
may have the right to pursue legal action against them to recover the amount paid out for claims.

Marine Scenarios Where the Voyage Deviation Penalties are Excused

While voyage deviation typically comes with potential penalties in a marine insurance policy, there are certain
scenarios where these penalties might be excused, either partially or entirely.

Here are some common examples:

Force Majeure Events: Encountering unexpected storms, hurricanes, or other extreme weather conditions that
pose a danger to the vessel or cargo. Also, circumstances which forced the ship to deviate to avoid imminent
threat of piracy or armed robbery or escaping conflict zones or areas of political instability for the safety of the
crew and cargo.

Engine failure or other technical issues: Diverting to the nearest port for urgent repairs if continuing on the
planned course would endanger the vessel or cargo.

Assisting a vessel or a human in distress: Responding to distress calls and providing assistance to another
vessel in danger, even if it requires changing course. Or deviating to seek medical assistance for sick or injured
crew members, even if it's not the originally designated port.

Port closures or restrictions: If the originally planned port becomes inaccessible due to unforeseen closures or
restrictions imposed by authorities, a deviation to an alternative port may be excused. Or diverting to comply
with unexpected quarantine regulations imposed by a port authority.

How Insurers Handle Voyage Deviation in Marine Insurance?

Insurers handle voyage deviation in a multifaceted way, balancing their own risk assessment with maintaining
good relationships with insured parties.

They generally handle the situation in two different approaches:

Allowing the deviation: Adjustments can involve increased premiums, additional risk mitigation measures, or
amended coverage terms for the new route. Open communication and documentation are crucial in such cases.

Requiring permission: Depending on the insurer's risk assessment, permission might be readily granted or
subject to further scrutiny and potential adjustments upon approval.

It should be noted that minor deviations within acceptable limits might be accommodated without major
adjustments, while significant changes could require permission or policy modifications.

Justifiable reasons like emergencies or safety concerns might lead to greater flexibility compared to commercial
advantage-driven deviations.

Also, a history of responsible behaviour and adherence to policy terms can increase the insurer's trust and
willingness to work with the shipowner in case of unforeseen deviations.

Also Read: How Does Marine Insurance in India Work?

How to Prevent Voyage and Deviation in Marine Insurance?

Preventing voyage deviation entirely is not always possible, as unforeseen circumstances and emergencies can
arise. However, several strategies can be implemented to reduce the risk of deviations and their potential
consequence significantly.

Negotiation and compromise: Open communication and negotiation can sometimes lead to solutions
acceptable to both parties (insurer and insured), even in potentially problematic situations.
Thorough Voyage Planning: Carefully planning the route, taking into account weather patterns, potential
hazards, and regulatory requirements. This can minimise the need for last-minute adjustments that might
constitute deviations.

Clear Communication and Procedures: Establishing clear communication protocols between the crew,
shipowner, and insurer ensures everyone is informed of any potential issues and can collaborate on safe and
responsible decisions.

Real-time Monitoring and Analysis: Utilising technologies like weather forecasting tools and real-time route
optimisation systems can help identify potential issues and adjust the course proactively, minimising the need
for drastic deviations.

Adherence to Regulations and Authorities: Complying with maritime regulations and instructions from port
authorities can avoid unintentional deviations due to non-compliance or unexpected restrictions.

An Example to Better Understand the Situation of Deviation of Voyage in Marine

Insurance
Voyage deviation remains a prominent concern for marine insurance providers. Examining real-life scenarios
sheds light on how such deviations can impact marine insurance coverage.

Here’s one simple example which will help you better gauge the situation at hand:

A cargo ship faced harsh weather conditions during a voyage from China to the United States. In prioritising the
crew's and cargo's safety, the captain made an unplanned stop in Japan to wait out the storm.

Despite the necessity of the stop, it was deemed a deviation from the original voyage plan. Consequently, the
ship's insurance policy was invalidated, leaving the shipowner responsible for covering any damages or losses
from their resources.

Summing it Up,
The impact on marine insurance coverage emphasises the need for proactive measures and transparent
communication between shipowners and insurers. Navigating the unpredictable seas requires a reliable transit
insurance partner who comprehends the intricacies of maritime risks.

As you safeguard your vessels and cargo with cargo insurance, exploring comprehensive marine insurance plans
becomes imperative. Consider aligning with trusted insurers like Tata AIG, who offer tailored solutions,
ensuring a smoother voyage through the unpredictable waters of risk.

After all, in the vast expanse of the sea, a reliable voyage policy in marine insurance can be the anchor that
ensures a secure and prosperous journey.

What Does Perils Of The Sea Mean In Marine Insurance?

In the world of marine insurance, the term "perils of the sea" takes centre stage, hinting at the unpredictable and
often formidable forces that mariners face.

Imagine a ship battling towering waves, fierce winds, and treacherous currents—these are the marine perils that
can test the mettle of any sea-faring vessel.

What exactly does it encompass, and how does it shape the landscape of insurance for ships and cargo? In this
blog, we will take you on this nautical journey as we demystify the challenges posed by the sea and the
insurance safeguards in place.
The interpretation of "perils of the sea" can be complex and vary depending on the specific wording of the
marine insurance policy and the legal context.

Hence, if you are looking forward to investing in marine insurance anytime soon, keep this guide handy!

The Inchmaree Clause or the ‘Perils of Sea’ Meaning – An Overview

The Inchmaree Clause, commonly called the "perils of the sea" clause, is pivotal in cargo insurance policies.
This clause provides coverage for an extensive array of risks and challenges that vessels might confront
throughout their journeys.

Understanding the intricacies of the Inchmaree Clause holds paramount importance for shipowners, cargo
proprietors, and insurers alike. It serves as a vital tool in alleviating the financial repercussions that may arise
from unexpected events at sea, offering a comprehensive safeguard against the uncertainties of maritime travel.

Simply put, marine perils meaning is a pre-specified type of hazards and risks that the cargo and ships face
during maritime journeys. Broadly speaking, it covers damages caused by nature's unforeseen and unavoidable
forces.

These are events beyond human control and often happen with such power that even the most skilled seafarers
cannot overcome them.

Navigating the Legal Waters of Marine Insurance

The provisions outlined in Section 3 of the Marine Insurance Act of 1963 talk about the legal landscape
surrounding marine insurance. It intricately binds insurers to indemnify the insured against losses incurred
during the transportation or shipment of goods by sea, as mutually agreed upon.

The mandate extends beyond national borders, making marine insurance a requisite for all commercial vessels
engaged in the conveyance of goods, transportation of workers, or carriage of passengers across international
waters within India.

This legal framework establishes a robust foundation, ensuring that stakeholders, both insurers and insured,
adhere to specified obligations and entitlements in the aspect of marine insurance.

A Few Common Inclusions Under the Perils of the Sea in Marine Insurance

It is important to note that the "perils of the sea" aren't just the everyday wind and waves. They refer to
exceptional events significantly more powerful and damaging than what is normally encountered at sea.

A marine and cargo insurance policy often includes coverage for these perils, providing financial protection to
shipowners and cargo owners from losses caused by such events.

Here are some of the most frequent perils of the sea encountered in marine insurance that the insurers cover:

 Storms and hurricanes: These violent weather systems can generate powerful winds, high waves, and
torrential rain, causing damage to ships, loss of cargo, and even vessel sinking.
 Lightning strikes: While not as common as other perils, lightning can cause fires, explosions, and
electrical damage to ships and equipment.
 Floods and tsunamis: Coastal areas are susceptible to sudden inundation from tidal waves or
overflowing rivers, leading to vessel grounding, cargo damage, and potential loss of life.
 Sinking and Capsizing Perils: The spectre of a ship succumbing to the depths or capsizing under the
force of adverse weather, cargo shifts, or instability presents a looming risk. These events, resulting in
total losses, carry significant financial implications for shipowners, underlining the critical importance
of risk mitigation measures.
  General Average Dynamics: In moments of dire emergencies, where both ship and cargo confront a
shared threat, the principle of a general average comes into play.

This entails a proportional contribution from all involved parties to cover the losses incurred in safeguarding the
collective interest, highlighting the collaborative nature of risk management in the maritime domain.

 Stranding: Whether running around or becoming ensnared in shallow waters, the repercussions are
profound—ranging from hull damage and cargo losses to potential environmental hazards. Such
stranding scenarios require meticulous attention and strategic solutions to avert substantial losses.
 Collisions: The constant threat of colliding with other vessels, icebergs, or submerged obstacles looms
large during maritime expeditions. Such incidents pose a substantial risk, inflicting considerable harm
to a ship's hull, cargo, or both. The aftermath often translates into financial setbacks for both
shipowners and cargo proprietors.
 Pirate attacks: Though less common in modern times, piracy remains a threat in certain regions,
leading to cargo theft, property damage, and potential injury or loss of life to crew members.
 Loss of anchors and chains: Anchors and chains are crucial for safe mooring and anchoring, but they
can detach due to storms, rough seas, or equipment failure, leaving the vessel vulnerable to drifting or
grounding.
 Sudden changes in water depth: Uncharted shallows or unexpected drops in water depth can lead to
grounding, particularly for smaller vessels navigating unfamiliar waters.

Also Read: Essential Things to Know About Marine Insurance

A Few Exclusions from the Perils of Sea Under Marine Insurance Plans

While "perils of the sea" can offer significant protection for maritime ventures, it is crucial to understand the
exclusions that limit its coverage. These are events deemed outside the realm of unforeseen and unavoidable
natural forces, often attributed to human actions or inherent qualities of the cargo.

Here are some common exclusions:

 Inherent vice: Deterioration or spoilage of cargo solely due to its inherent nature, properties, or
chemical reactions is not covered. This includes perishables expiring or unstable materials reacting
dangerously.
 Negligence: Damage caused by the captain's or crew's errors in judgement, faulty navigation, or
improper operation of the vessel is generally excluded.
 Wear and tear: Gradual damage or loss of value due to ordinary wear and tear during the voyage is
not covered.
 War and related events: Losses caused by war, piracy, strikes, riots, or civil unrest are typically
excluded from the perils of sea coverage.
 Consequential losses: Indirect or financial losses, such as delay in delivery, loss of market, or loss of
profits, are often not covered.
 Infestation and vermin damage: Losses caused by pests like rats or insects attacking the cargo are
typically excluded.

Understanding the Types of Marine Insurance

By now, you are aware that marine insurance protects against risks and losses associated with transporting
goods over water. It is a complex field with various plans catering to different needs.

Here are the four common types of marine policies available for the policyholders:

 Marine Cargo Insurance: This type covers the insured value of cargo against physical loss or damage
during transit, regardless of the transportation mode (sea, air, land). This is the most common type of
marine insurance.
  Hull and Machinery Insurance: Hull insurance covers the physical loss or damage to the ship, its
machinery, and equipment.
 Liability Insurance: This protects shipowners and operators from third-party liabilities arising from
the operation of the vessel, including injury or death to crew or passengers, pollution, property damage,
and cargo claims.

It also covers freight forwarders for their legal liability for loss or damage to cargo entrusted to them during
transportation.

 Freight Insurance: This one covers the freight charges payable by the shipper in case of loss or
damage to the cargo, ensuring they don't lose money on transportation costs.
[To know more about the marine policy types, click here.]

A Simulated Scenario to Better Understand the Maritime Perils in Marine Insurance

Imagine a cargo ship laden with valuable goods embarking on a transoceanic journey. As the vessel ventures
into the vast expanse of the sea, it encounters a violent storm with towering waves and relentless winds.

In the face of these perils of the sea, the ship battles the elements, but unfortunately, a navigational error leads to
a collision with a submerged object, causing substantial damage to the ship's hull and compromising the
integrity of the cargo hold.

This incident triggers a complex chain of events, invoking the marine insurance policy. The collision, a prime
example of a covered peril, necessitates a thorough assessment of the damages and losses.

The shipowner, cargo owner, and insurer collaborate to evaluate the financial impact, considering the
impairment to both the vessel and the valuable cargo.

Under the protective umbrella of marine insurance, the financial burden is alleviated. The insurer, bound by the
terms of the policy, steps in to indemnify the insured parties.

This scenario illustrates how marine insurance serves as a crucial safeguard, offering financial protection and
reassurance in the tumultuous waters of unforeseen perils at sea.

To Sum it Up

From collisions to stranding and sinking, the risks are diverse in marine journeys and can lead to substantial
financial setbacks. Navigating these challenges requires a reliable ally, and amidst the sea of insurance options,
Tata AIG's Marine Cargo Insurance options subtly emerge as a sturdy choice.

Much like a lighthouse guiding ships through stormy seas, these plans offer a beacon of financial security for
the insured. These policies silently ensure a smooth sail for businesses afloat in uncertain waters.

UNIT -7 FIRE INSURANCE

What is a Fire Insurance
Policy?
A Fire Insurance Policy is a form of Property Insurance which provides
reimbursement for damage to the insured assets because of fire and allied
perils. A Fire Insurance Policy also known as Standard Fire & Special Perils
 Insurance Policy (SFSP Policy). A Fire Insurance Policy pays for the cost to
replace or repair the damaged assets. A Fire Insurance Policy is thus essentially a
form of Property Insurance which covers fire-related damage.

What is the need for a Standard Fire and

Special Perils Insurance Policy?
Fire Related Accidents have been all too common for Business Disasters. A small
Short – Circuit or an Explosion has destroyed huge Factories and Buildings. Fire
Damage can result in losses of Crores of Rupees. It can easily destroy years of
savings and set your business back by years.

Moreover, after a Fire Incident, you would require substantial investments to

resurrect your business. These Investments will be required precisely at a time
when you are stretched for resources as your business has been destroyed by a
Fire.

That is why it is always a wise idea to take a property insurance and insure your
valuable assets with a Fire Insurance Policy.

What are the Perils covered under a Fire

Insurance Policy?
A Fire Insurance Policy in India offers coverage against a range of perils apart from
the basic cover against fire. The Fire Insurance coverages are as listed below:

1. Fire
2. Riots, Strikes and Malicious Damage
3. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation
4. Explosion /Implosion
5. Lighting
6. Impact Damage
7. Subsidence, Landslides and Rockslides
8. Bursting and/or Overflowing of Water Tanks, Apparatus and Pipes
You can read our blogpost on Fire Insurance Coverages to understand about the
Perils Covered under a Fire Insurance Policy in detail.

What are the Principles of a Fire Insurance

Policy?
A Fire Insurance Policy works on the following principles:

Principle of Insurable Interest

Insurable Interest means that a person benefits from the continued presence of the
asset or is prejudiced by the loss of the subject-matter. Principle of Insurable
Interest in a Fire Insurance Policy means that the Insured can insure only those
assets which he benefits from. Insurable Interest must exist at the time of
purchasing the fire insurance policy, during the currency of the policy as well as at
the time of loss.

Principle of Utmost Good Faith

Uberrimae Fidei or Principle of Utmost Good Faith is another important principle of
Fire Insurance and means that all parties to an Insurance Contract must make a
complete declaration of all facts that are material for accepting or declining the Fire
Insurance Proposal. The Insured has a duty to disclose all material facts and not
conceal, misrepresent, or withhold any material facts which might change the
decision of the insurance company to accept or reject the risk proposal.

Principle of Proximate Cause

Proximate Cause or Efficient Proximate Cause is the dominant risk factor in the
chain of causation which has caused the loss. It need not be the initiating or last
act in the chain of events. Proximate Cause needs to be identified when 2 or more
causes are responsible for the loss. In that case, the Proximate Cause or the
dominant factor which has caused the loss needs to be determined. If the Proximate
Cause falls within the perils named in a Fire Insurance Policy, the claim is payable.
If the Proximate Cause does not falls within the perils named in a Fire Insurance
Policy or falls within the exclusions in a Fire Insurance Policy, the claim is
repudiated.

Principle of Indemnity
The Principle of Indemnity in a Fire Insurance Policy aims to place the Insured in
the same financial position after the loss as the Insured was in before the
occurrence of the loss. As per the Principle of Indemnity, the Insured is not allowed
to make a profit from his insurance policy.
 Principle of Subrogation
Principle of Subrogation allows the Insurance Company to recover losses from a
negligent third party after it has paid the losses to the Insured Party. The Principle
of Subrogation places the Insurance Company in place of the Insured, allowing the
Insurance Company to pursue all rights and remedies available to the Insured to
recover his losses. Additionally, the Insurance Company is allowed to recover
losses only after payment of the claim to the Insured, and any excess amount that
the insurance company receives should be remitted back to the Insured.
Principle of Contribution
Principle of Contribution in a Fire Insurance Policy means that, if an Insured has
the 2 or more policies covering the same subject-matter at the same time, then the
Fire Insurance Company will pay the losses on a pro-rata basis in case of a claim.
The Principle of Contribution prevents the policyholder from profiting from his
insurance policy by insuring the same assets under multiple fire insurance policies.

What are the Add-On Covers available in a

Fire Insurance Policy?
As part of a Standard Fire and Special Perils Insurance Policy, one can opt for Add-
On Covers by paying additional premiums such as:

1. Damages due to Earthquake

2. Damages due to Storm, Tempest, Flood, Inundation, Hurricane, Cyclone, Typhoon
and Tornado (STFI Cover)
3. Damages due to Terrorism
4. Removal Of Debris
5. Architects and Surveyors Fees
6. Spontaneous Combustion Cover
7. Start-Up Expenses
8. Omission to Insure Additions, Alterations or Extensions
9. Escalation
10. Forest Fire
You can read our blogpost on important add-on covers in fire insurance policy to
understand about these add-on covers in detail.
Types of Fire Insurance: What are they?
There are different types of Fire Insurance Policies in India such as:

Stock Declaration Policy

A Stock Declaration Policy is issued when there are frequent changes in stock
value during the currency of the policy. The Insured has to make monthly
declarations of stock values to the fire insurance company under the Stock
Declaration Policy.

Floater Policy
A Floater Insurance Policy is issued when the stocks are stored at different
locations. The advantage of a Floater Policy is that the Insured has to declare only
a single Sum Insured for stocks stored at all locations.

Average Policy
An Average Policy has an average clause attached to the Fire Insurance Policy and
this clause comes into play when the Insured has underinsured the property by
declaring a lower Sum Insured than the actual value of the property. In such a case,
the Fire Insurance Company will only pay a pro-rata claim amount at the time of a
claim.

Agreed Value Policy

Some assets are hard to value and, in such cases, the assets are insured under an
Agreed Value Policy where the value of the goods to be insured is pre-decided and
this is the value that the Insurance Company will be liable to pay if the Insured
good is damaged or destroyed.

What is Bharat Sookshma Udyam Suraksha

Policy?
A Bharat Sookshma Udyam Suraksha Policy, also referred to as BSUS Policy is a
standard Fire Insurance Policy designed to cover SMEs and small businesses. The
Bharat Sookshma Udyam Suraksha Policy can insure assets such as buildings,
plant and machinery, furnitures and fixtures etc for loss or damage due to Fire,
Explosion, Natural Calamities etc. Bharat Sookshma Udyam Suraksha Policy can be
purchased only if the total value of insurable assets is less than or equal to Rs5
Crores.

What is Bharat Laghu Udyam Suraksha

Policy?
A Bharat Laghu Udyam Suraksha Policy, also referred to as BLUS Policy is a
standard Fire Insurance Policy designed to cover medium sized businesses who
have insurable assets upto Rs50 Crores. The Bharat Laghu Udyam Suraksha Policy
can insure assets such as buildings, plant and machinery, stocks etc. for loss or
damage due to Fire, Explosion, Earthquake, Lightning, Storm, Floods etc. Bharat
 Laghu Udyam Suraksha Policy can be purchased only if the total value of insurable
assets is between Rs5 Crores to Rs50 Crores.

What can be Insured with a Fire Insurance

(Standard Fire and Special Perils) Policy?
All sorts of Assets can be Insured by taking a Standard Fire and a Special Perils
Policy. Most commonly, a Fire Insurance Policy is taken out for the following types
of Assets:

1. Fire Insurance for Factories (Plant & Machinery)

2. Fire Insurance for Residential or Commercial Property Building,
3. Fire Insurance for Stocks and Inventory
4. Fire Insurance for Furniture, Fixtures and Fittings etc

How is the Premium calculated under a Fire

Insurance Policy?
The Premium for a Standard Fire and Special Perils (Fire Insurance) Policy
depends on the following factors:

1. Sum Insured of the Property

2. Perils to be Covered (Earthquake, STFI Cover)
3. Risk Occupancy of the Property
4. Location Details of the Property
5. Add-On Covers Selected as part of the Fire Insurance Policy

How to fix Sum Insured under a Fire

Insurance Policy?
There are 2 methods to calculate Sum Insured for a Fire Insurance Policy:

 Reinstatement Value Method (RIV Method)

 Market Value Method

Under the Reinstatement Value Method, the Insurance Company will pay the
reinstatement cost of replacing the Damaged Property with a New Property in case
of a Claim. This implies that Depreciation is not levied on the Property Value. RIV
Method is applicable only to Fixed Assets and not to Stocks and Contents.
 Under the Market Value Method, the Insurance Company pays the Market Value
(Depreciated Value) of the Insured Property in case of a Claim. Here, Depreciation
is levied on the Asset depending upon its age.

Coverages Provided in Fire Insurance Policies in

India
Fire insurance policies in India typically provide coverage for a wide range of risks
and perils related to fire incidents. Some common coverages provided in fire
insurance policies in India include:

 Fire Damage: Coverage for damage or destruction caused directly by fire,

including flames, heat, and smoke.
 Lightning Damage: Protection against damage caused by lightning strikes,
which can ignite fires or cause electrical system failures.
 Explosion Damage: Coverage for damage resulting from explosions, whether
due to gas leaks, chemical reactions, or other causes.
 Riot, Strike, and Malicious Damage: Protection against damage caused by
riots, strikes, civil commotion, and malicious acts such as vandalism or arson.
 Impact Damage: Coverage for damage caused by the impact of vehicles, falling
objects, or other external forces leading to fire accidents.
 Aircraft Damage: Coverage for damage caused by aircraft, such as crashes or
debris falling from the sky, resulting in fire-related losses.
 Bush Fire: Protection against damage caused by wildfires or bushfires,
especially relevant in rural or forested areas.
 Earthquake Damage: Optional coverage for damage resulting from
earthquakes, which can lead to fires due to structural collapses or gas leaks.
 Additional Coverages: Some fire insurance policies may offer additional
coverages for expenses incurred during fire extinguishment, removal of debris,
loss of rent, and other related costs.
It's essential for policyholders to carefully review the terms and conditions of their
fire insurance policies to understand the specific coverages provided and any
exclusions or limitations that may apply. Additionally, policyholders may have the
option to customize their coverage based on their individual needs and risk
exposures.

Coverages Excluded in Fire Insurance

 In fire insurance policies in India, several common exclusions may limit coverage
for certain types of losses or circumstances. These exclusions vary depending on
the specific insurance provider and policy terms, but some common exclusions
typically found in fire insurance policies in India include:

 Acts of War: Damage caused by war, invasion, acts of foreign enemies,

hostilities, civil war, rebellion, revolution, insurrection, or military power.
 Nuclear Perils: Damage caused by nuclear reactions, nuclear radiation, or
radioactive contamination.
 Intentional Acts: Losses resulting from intentional acts or willful misconduct by
the insured or any person acting with the insured's consent.
 Wear and Tear: Damage caused by gradual deterioration, wear and tear,
corrosion, rust, or gradual deterioration of property over time.
 Pollution and Contamination: Damage resulting from pollution, contamination,
or environmental hazards, unless specifically covered by an environmental
liability policy.
 Electrical and Mechanical Breakdown: Damage caused by electrical or
mechanical breakdown of equipment or machinery, unless covered by a separate
machinery breakdown policy.
 Consequential Losses: Indirect or consequential losses, such as loss of profits,
loss of market, loss of goodwill, or any other economic loss resulting from a fire
incident.
 Unoccupied Premises: Damage occurring while the insured premises are vacant
or unoccupied beyond a specified period, typically 30 or 60 days unless prior
approval or endorsement is obtained from the insurer.
 Illegal Activities: Losses arising from illegal activities, unlawful acts, or
violations of law by the insured or any person acting on behalf of the insured.
It's important for policyholders to carefully review the terms, conditions, and
exclusions of their fire insurance policies to understand the extent of coverage and
any limitations that may apply. Additionally, policyholders may have the option to
negotiate or customize their coverage to suit their individual needs and risk
exposures.

Claims Process in Fire Insurance

 Notification and Documentation
In case of any loss or damage due to fire, the policyholder should notify the
insurance company immediately. The policyholder should provide all the
 necessary details, including the nature and extent of the loss or damage, the
location of the property, and the policy number.

The policyholder should also provide the necessary documentation to support the
claim. This may include police reports, fire brigade reports, photographs, bills, and
receipts. The insurance company may also require proof of ownership or title of the
property.

 Assessment and Settlement

After receiving the notification and documentation, the insurance company will
assess the claim to determine the extent of the loss or damage. The insurance
company may appoint a surveyor or loss assessor to assess the claim.

Once the assessment is complete, the insurance company will settle the claim. The
settlement amount will depend on the terms and conditions of the policy. The
policyholder may receive a cash settlement or repair or replacement of the
damaged property.

It is important to note that the policyholder should cooperate with the insurance
company during the claims process. Any false or misleading information may
result in the rejection of the claim.

Nature of Fire Insurance

As SFSP defines, fire insurance includes specific rules and specialties to consider. These guidelines and
considerations are designed to help you understand the nature of fire insurance and what it covers.

Accurate Property Description:

Ensure that the property in talks for fire insurance is thoroughly and accurately described in the insurance
policy. You may face complications at the time of claim if there are inaccuracies or discrepancies.

Exclusions:

When purchasing fire insurance for your property, pay close attention to pointers mentioned under the policy
exclusions. The insurance company does not cover the events and circumstances mentioned under the
exclusions.

Risks Covered:

Typically, fire insurance covers harm caused due to fire accidents. However, you must know that the policy
covers other related events like explosions, lightning, riots, etc. Be clear on the extensive list of what the policy
covers.

Add-On Covers:
Based on your specific requirements, you may add coverage for natural disasters, including floods, earthquakes,
etc., not very often covered under standard fire insurance plans.

Adequacy of the Sum Insured:

Ensure that your coverage matches the real value of your property and belongings. It is important to accurately
assess and represent the value of what you want the insurance to cover.

Policy Term:

Stay informed about the policy term and any details for renewal. Make sure to renew your policy timely to avoid
gaps and ensure ongoing coverage.

Deductibles:

Opting for high deductibles in your fire insurance policy can lead to lower premiums. However, it is essential to
be ready to handle these increased costs if you need to make a claim.

While it may decrease your regular premiums, choosing higher deductibles means you must be financially
prepared to cover a larger portion of any potential claims out of your pocket.

Claim Process:

You must know the steps to follow if a fire-related event occurs. Knowing the process will help expedite the
claim procedure and ensure you get the entitled financial help sooner.

Premiums:

To make an informed decision, evaluate quotes from various insurance providers. This will allow you to balance
the coverage and the premiums' affordability.

By comparing quotes, you can identify the insurance plan that best meets your needs while remaining within
your budget.

Insurance Company’s Reputation:

Investing in fire insurance from a reputable and financially secure company is advisable for your peace of mind.

Choosing a provider with a solid financial standing ensures that the company has the stability to provide you
with the necessary support and protection in the event of a claim.

Review Periodically:

You must regularly review your fire insurance plan to ensure that it continues to meet your requirements.

Therefore, it is essential to seek advice from a reputed fire insurance provider in the industry to
comprehensively understand the nature and use of fire insurance.

UNIT 8 LIFE INSURANCE

The formation of a life insurance contract involves several steps and elements.
Overview of the Process

Application
The first step in forming a life insurance contract is for the prospective policyholder to submit
an application to the insurance company. The application typically includes personal
information about the applicant, such as age, health condition, occupation, lifestyle habits,
and financial details. The accuracy and completeness of the information provided are
essential for the underwriting process.

Underwriting
After receiving the application, the insurance company initiates the underwriting process.
This involves assessing the risk associated with insuring the applicant. The insurer evaluates
the applicant’s health records, may require a medical examination, and considers other factors
such as occupation, hobbies, and lifestyle choices. Based on this evaluation, the insurer
determines the premium amount and whether to accept the application.

Offer and Acceptance

Once the underwriting process is complete, the insurance company makes an offer by issuing
a policy proposal to the applicant. The proposal outlines the terms and conditions of the life
insurance policy, including the coverage, premium amount, policy duration, riders (if any),
and any exclusions or limitations. The applicant reviews the proposal and, if satisfied, accepts
the offer by signing the policy document.

Consideration
Consideration refers to the premium payment made by the policyholder in exchange for the
insurance coverage. The policyholder agrees to pay the premiums as specified in the policy
document. The premium amount is usually determined based on factors such as the insured’s
age, health condition, sum assured, policy duration, and type of policy.

Policy Issuance
Once the policyholder accepts the offer and pays the initial premium, the insurance company
issues the life insurance policy. The policy document contains the terms and conditions of the
contract, including the coverage details, premium payment schedule, policy exclusions,
beneficiaries’ information, and other relevant provisions.

Policy Delivery and Review

The insurance company delivers the policy document to the policyholder. It is important for
the policyholder to carefully review the policy terms and conditions to ensure they align with
their expectations and needs. Any discrepancies or questions should be addressed with the
insurance company for clarification or changes, if required.

Contractual Obligations
Both the policyholder and the insurance company have certain obligations under the life
insurance contract. The policyholder is obligated to pay the premiums as scheduled and
provide accurate information throughout the policy term. The insurance company is obligated
to provide the agreed-upon coverage and pay the death benefit to the beneficiaries upon the
insured’s death, subject to the terms and conditions of the policy.

What is insurable interest?

You have an insurable interest in something if you would suffer some kind of loss if
that person or property were lost or damaged. For this reason, it would make
sense for you to buy insurance on the person or property, so you can continue to
receive those benefits.

What is insurable interest in life insurance?

You can't take a life insurance policy out on just anyone. In order to buy a policy,
insurable interest must exist. In the case of a life insurance policy, the owner of the
policy must always have an insurable interest in the life of the insured person. If the
owner is not the beneficiary, then the beneficiary named in the contract would also
need an insurable interest.
Insurable interest means a person receives a financial or other type of benefit from
the continued existence of the person insured. So, if the insured person were to die,
the surviving person would experience a financial loss or other hardship.
For example, say you wanted to buy a life insurance policy on person A (Bob) and name
person B (Sam) as the beneficiary. Both you and Sam would need to have an insurable
interest in the life of Bob to purchase the policy.

How to prove insurable interest

Proof of insurable interest is required when applying for and buying a life insurance
policy. Life insurance is a tool to make you whole again financially after the loss of
someone. In theory, some people would be tempted to take out a life insurance
policy on a random person to receive money if that person were to die. This is why
the principle of insurable interest was created: to ensure that life insurance is used
properly.
Insurable interest is nonnegotiable for life insurance policies. Without an insurable
interest, the policy can be voided or denied. It is the duty of the policy owner to prove
they have an insurable interest in the insured person. They must provide proof when
applying and when the insured person dies.
To confirm an insurable interest, a life insurance company will usually talk to the
policy owner, beneficiary and insured person. They will investigate the
relationship to decide if there is an insurable interest. If an insurable interest is not
found, the policy application would be denied or the death benefit would not be paid.

When must insurable interest exist in a life

insurance policy?
You're considered to have an insurable interest in your own life, so you can always
purchase life insurance on yourself. In this case, you would be both the policyholder
and the insured person. The beneficiaries of the policy wouldn't need to prove an
insurable interest in you either, because it's presumed that you would name
beneficiaries who want you to live a long and healthy life.
Insurable interest also extends to your direct dependents and relationships by
blood and marriage. This can include:

 Husbands and wives

 Children (including adopted)
 Grandparents and grandchildren
 Brothers and sisters

All of the examples above are direct relationships where insurable interest is always
present. Insurable interest can also exist in business and between creditors and
debtors.
Business relationships create an insurable interest if you financially depend on the
insured person.
For example, say you start a business and hire Alex to run it. In this case, you would have
an insurable interest in Alex's life, because if he were to die, you would experience a loss of
business profits. This is known as business life insurance and is common.

Often, corporations take out key man life insurance on their officers. And business
partners purchase life insurance policies on each other.
Creditors and credit companies are allowed to take out life insurance policies on their
debtors. In this case, with consent from the debtor, the company could take out a life
insurance policy for the amount owed.

When does insurable interest not exist?

Insurable interest is generally present in blood relationships but would not exist in the
following scenarios, unless there is proof of financial dependence:

 Aunts and uncles

 Cousins
  Nieces and nephews
 Stepchildren and stepparents

Say, for example, you have a neighbor who is 90 years old. You consider taking out
a life insurance policy on her, because she doesn't have many more years to live.
You would not have an insurable interest in this situation, because you would not
suffer a financial loss from your neighbor's death.

Unit –9 Motor vehicle insurance