Principles of Insurance

CHAPTER I:
BASIC CONCEPTS IN INSURANCE
Pham Thanh Ha (MA) 1

1. Insurance
1.1. Insurance Definition
• Insurance is a contract whereby, in
return for the payment of premium by the
insured, the insurers pay the financial
losses suffered by the insured as a result
of the occurrence of unforeseen events.

1. Insurance
1.1. Insurance Definition
• A contract between two parties whereby
one party called insurer undertakes in
exchange for a fixed sum called
premiums, to pay the other party called
insured a fixed amount of money on the
happening of a certain event

1. Insurance
1.2. Nature of insurance
i) Insurance provides financial protection against a
loss arising out of happening of an uncertain
event. A person can avail this protection by
paying premium to an insurance company.
ii) Insurance is the risk transferring from the
insured to the insurer
iii) Insurance works on the basic principle of risk-
sharing.
iv) The business object in the insurance sector is
risk.

Example 1
SUPPOSE
 Houses in a village = 1000
 Value of 1 House = Rs. 40,000/-
 Houses burning in a yr = 5
 Total annual loss due to fire = Rs. 2,00,000/-
 Contribution of each house owner = Rs. 300/-
UNDERLYING ASSUMPTION
All 1000 house owners are exposed to a common risk, i.e. fire

PROCEDURE
• All owners contribute Rs. 300/- each as premium to the
pool of funds
• Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses
* Rs. 300)
• 5 houses get burnt during the year
• Insurance company pays Rs. 40,000/- out of the pool to
all 5 house owners whose house got burnt
EFFECT OF INSURANCE
Risk of 5 house owners is spread over 1000 house owners
in the village, thus reducing the burden on any one of the
owners. Pham Thanh Ha (MA) 6
Example 2
SUPPOSE
 Number of Persons = 5000
 Age and Physical condition = 50 years & Healthy
 Number of persons dying in a yr = 50
 Economic value of loss suffered by family of each dying
person = Rs. 1,00,000/-
 Total annual loss due to deaths = Rs. 50,00,000/-
 Contribution per person = Rs. 1,200/-
UNDERLYING ASSUMPTION
All 5000 persons are exposed to common risk, i.e. death
PROCEDURE
Everybody contributes Rs. 1200/- each as premium to the
pool of funds
Total value of the fund = Rs. 60,00,000 (i.e. 5000 persons *
Rs. 1,200)
50 persons die in a year on an average
Insurance company pays Rs. 1,00,000/- out of the pool to
the family members of all 50 persons dying in a year
EFFECT OF INSURANCE
Risk of 50 persons is spread over 5000 people, thus
reducing the burden on any one person.

2. Risk
2.1. Concept:
The term Risk is used to describe all the accidental
happenings which produce a monetary loss. For
e.g.: A factory catching fire, a ship sinking etc.

2. Risk
• Risk is defined here as uncertainty
concerning the occurrence of a loss

2. Risk
• 2.2. Chance of loss: is defined as the
probability that an event will occur.

Methods of handling risk:
– Avoidance:
• You can avoid the risk of being mugged in a high-
crime rate area by staying out of the area
• A business firm can avoid the risk of being sued for
a defective product by not producing the product
=> However, not all risks should be avoided

• Loss control: consists of certain activities that

reduce both the frequency and severity of losses
• Objectives:
• Loss prevention: aims at reducing the probability of
loss so that the frequency of losses is reduced:
– Auto accidents can be reduced if motorists take a safe-
driving course and drive defensively
– The number of heart attacks can be reduced if individuals
control their weight, stop smoking, and eat healthy diets
• Loss reduction: reduce the severity of a loss after it
occurrs:
– A department store can install a sprinkler system so that a
fire will be promptly extinguished
• Insurance: the most practical method for

handling a major risk
• Characteristics:
– Risk transfer is used because a pure risk is
transferred to the insurer
– The pooling technique is used to spread the
losses of the few over the entire group so that
average loss is substituted for actual loss.

3. Re- insurance
Practice where an Insurance company
(the insurer) transfers a portion of its risks
to another (the re-insurer).
Legal right of the policyholders (insureds)
are in no way affected by reinsurance, and
the insurer remains liable to the insureds
for insurance policy benefits and claims.

4. Double Insurance
• Situation in which the same risk is insured
by two overlapping but independent
insurance policy.

4. Double Insurance
• Is it possible to obtain double insurance
and make claim to all insurers?

4. Double Insurance
• YES!
• It is lawful to obtain double insurance, and
the insured can make claim to
both insurers in the event of a loss.

4. Double Insurance
• How much money that insured can
received from all insurers?

4. Double Insurance
• The insured, however,
cannot profit (recover more than the loss
suffered) from this arrangement because
the insurers are law bound only
to share the actual loss in the
same proportion they share the
total premium

4. Double Insurance
• Mr A involves in 3 insurance policies for
his car at 3 insurance companies X, Y,
and Z with insurance amounts are 300,
400, 500 million VND (insurance for
physical value of car); Assuming that the
value of the car is 500 million VND. Define
the compensation of each insurer?

5. Co- Insurance
• Insurance held jointly by two or more
insurers.

6. Insurer/ Underwriter
The party to an insurance arrangement who
undertakes to indemnity for losses.
.

7. Insured
• an insured or policyholder is the person
or entity buying the insurance and
receiving indemnity on happening of
unforeseen events

8. Subject /matter insured
• The person, group, or property for which
an insurance policy is issued

9. Insurance Value-V
The term “value” refers to the value of the
property, on the same basis used in
indemnifying losses; that basis is usually
actual cash value or replacement cost.
The replacement value of property is equal
to the amount it would cost to fully repair
or replace the property if it must be
reconstructed or purchased new.

10. Insurance Amount-A
• a certain amount of insurance coverage
that the insured requires in the insurance
policy, it can be a part or an entire of
insurance value

11. Limitation of liability
• The largest total amount the insurance
company will pay for covered losses.

11. Insurance rate
a factor used to determine the amount to
be charged for a certain amount of
insurance coverage, called the premium.

12. Insurance Premium
• Payments to the insurance company to
buy a policy and to keep it in force.
I = V(A) x R

Chapter 2
Fundamental Legal Principles

Outline
Insurance is a repayment of a random loss

Utmost Good Faith
Insurable Interest
Indemnity
Subrogation

Insurance is a repayment of a
random loss
– The timing or occurrence of the loss must be
uncertain.
– For example, you can't know your house is going to
be destroyed in three weeks by a demolition team
and still get home owner's insurance.
– To be able to fully service major claims, small claims

are not covered. This is what the deductible is for.
Only damage or loss over the amount of the
deductible is covered by the insurance policy.

Utmost Good Faith
• A higher degree of honesty is imposed on
both parties to an insurance contract than
is imposed on parties to other contract

Utmost Good Faith
 Good faith- Let the buyer beware
 Declaration of all material Information

about the subject mater of insurance
Material Information is that information
which enables the insurer to decide:
a) whether he will accept the risk and;
b) if so, at what rate of premium and subject to what
terms and conditions

Utmost Good Faith
• Examples of material facts:
– Of a house insurance
– Of a person
– Of a car
– Of a camera
Utmost Good Faith
Breach of duty of utmost good faith arises
in two ways:
• Non-disclosure of material facts- oversight,
proposer thought it’s not essential etc.
• Misrepresentation- Intentional.
Utmost Good Faith
• Example 1:
Terry was an electrician. He had an ineffective right leg.
He owned and drove a small van that had been modified
for his disability. His job was with a film company and he
traveled from location to location wiring up the lighting
equipment
He proposed for personal accident insurance describing
himself as an electrician and answered the question
about disabilities in the negative. Whilst travelling from
one site to another he fell momentarily asleep at the
wheel and struck a lamp standard because he was not
able to brake effectively.
Utmost Good Faith
• Example 2:
– The insured misrepresent that she had no
traffic violation convictions in the prior three-
year period. After an accident, a check of her
record revealed that she had two speeding
tickets in that period. The insurer denied
coverage.
Insurable Interest
• The legal right enjoyed by the owner of a
property to insure is called ‘Insurable
Interest’. The insurance will become null
and void, without the insurable interest.
• Purposes:
– To prevent gambling
– To reduce moral hazard
– To measure the amount of the insured’s loss
in property insurance

Insurable Interest
• Examples of insurable interest:
– Property and Casualty insurance: ownership
of property
– Potential legal liability
– Secured creditors
– Contractual right
Insurable Interest
• Insurable risk:
– Capable of financial measurement
– A large enough amount of similar risks
– Not be against public policy
– Reasonable premium

Insurable Interest
• Insurable interest is where you have a valid
reason to insure and stand to suffer a direct
financial loss if the event insured against occurs.
• Insurable interest exists when an insured

derives a financial or other benefit from the
continuous existence of an insured object

Insurable Interest
• When must an insurable interest exist?
– In property insurance, the insurable interest
must exist at the time of the loss:
• The insured must incur his financial loss
• You may not have an insurable interest in the
property when the contract is first written but may
expect to have one in the future, at the time of
possible loss
Indemnity
• The principle of Indemnity states that under the policy of
insurance, the insured has to be placed after the loss in
the same financial position in which he was immediately
before the loss.
• 2 fundamental purposes:
– To prevent the insured from profiting from a loss
– To reduce moral hazard

Indemnity
• Applicability:
o When the losses suffered by the insured can be
measured in terms of money
o It is practicable to place the insured in the same
financial position which he occupied before the
loss
• In Marine Cargo where valued polices are
issued, there is only commercial
indemnity- the value declared for
insurance is accepted at the time of loss.

Subrogation
• Transfer of rights and remedies from the insured to
the insurer who has indemnified the insured in
respect of the loss.
• The right of an insurer which has paid a claim under
a policy to step into the shoes of the insured so as
to exercise in his name all rights he might have with
regard to the recovery of the loss which was the
subject of the relevant claim paid under the policy
up to the amount of that paid claim. The insurer’s
subrogation rights may be qualified in the policy.

• Subrogation means substitution of the
insurer in place of the insured for the
purpose of claiming indemnity from a third
person for a loss recovered by insurance.
• Example: a negligent motorist fails to stop at a
red light and smashes in to Mergan”s car,
causing damage in the amount of $5000. If she
has collision insurance on her car, her company
will pay the physical damage loss to the car and
then attempt to collect from the negligent
motorist who caused accident.
• Alternatively, Mergan could attempt to collect
directly from the negligent motorist for the
damage to her car.
Subrogation
• The principle of subrogation strongly
supports the principle of indemnity
• The insurer is entitled to recover from a
negligent third party any loss payment
made to the insured

Subrogation
• Purposes:
– Prevent the insured from collecting twice for
the same loss
– Is used to hold the negligent person
responsible for the loss
– Help to hold down insurance rate

CHAPTER III:
MARINE INSURANCE

Outline
• Introduction
• Risk, damage
• Marine cargo insurance

I. Introduction
1. Marine insurance covers the loss or
damage of ships, cargo, terminals, and
any transport or property by which cargo
is transferred, acquired, or held between
the points of origin and final destination.

2. Needs for marine insurance
• Exporters and importers face all the time
uncertainties of loss of their goods.
• Insurance is used to protect their financial
interests against such risks and actual
losses.
• Without adequate insurance and
protection of the interests of those with
goods in transit, international trade would
be negatively affected.
• Liability of carriers to the goods is very
limited
3. History of marine insurance
• MARINE INSURANCE AS WE KNOW IT TODAY, CAN
BE DESCRIBED AS MOTHER OF ALL INSURANCES
• IT IS BELIEVED TO HAVE ORIGINATED IN

ENGLAND OWING TO THE FREQUENT
MOVEMENT OF SHIPS OVER HIGH SEAS
FOR COMMERCE AND TRADE

• PRIOR TO THE DEVELOPMENT OF MARINE
INSURANCE, THE PEOPLE ACROSS THE
WORLD, HAD A SYSTEM OF:
– POOLING THEIR CONTRIBUTIONS SO THAT IF ANY ONE
OF THEM SUFFERS LOSS DURING VOYAGE
– HE WOULD BE COMPENSATED FROM THE
POOL.
• TODAY MARINE INSURANCE HAS ASSUMED A
VAST DIMENSIONS DUE TO EVER EXPANDING
TRADE ACROSS THE GLOBE.

• IT INVOLVES LARGE SHIPPING COMPANIES THAT
REQUIRE PROTECTION:
– NOT ONLY FOR THEIR COSTLY FLEET AGAINST THE
PERILS OF THE SEA, BUT ALSO
– TO THE CARGO BEING CARRIED IN EACH OF THESE
SHIPS.
• THE VALUE OF EACH SHIP AND THE CARGO
CARRIED THEREIN, MAY BE COSTING MILLIONS OF
USD TO THE OWNERS.

World’s biggest Passenger-ship ‘MS Freedom
of the Seas’ 4300 passenger capacity inside

4. MARINE INSURANCE
MARKET
• LLOYD’S, A CORPORATE ESTABLISHED IN
LONDON, IS THE BIGGEST CENTRE FOR MARINE
INSURANCE IN THE WORLD
• LLOYD’S WAS A COFFEE HOUSE FREQUENTED BY

THE TRADESMEN, SHIPOWNERS AND OTHERS
• THE COFFEE HOUSE BECAME THE MEETING

GROUND FOR:
– BROKERS, INSURERS AND SHIP OWNERS FOR
NEGOTIATING THEIR BUSINESS.

LLOYD’S COFFEE HOUSE
• AT THE COFFEE HOUSE THEY WOULD DISCUSS
VARIOUS ASPECTS OF THE SHIPPING BUSINESS
INCLUDING CARGO AND SHIP INSURANCE AND:
• ULTIMATELY IT STARTED TRANSACTING MARINE
INSURANCE IN A BIG WAY.
• WHEN THE BRITISH OCEAN LINER ‘TITANIC’WHICH
SANK IN 1912, DURING HER MAIDEN VOYAGE:
• WAS INSURED BY LLOYD’S WHO PAID AN
INSURANCE CLAIM OF ONE MILLION US $.

Titanic Crash

5. Classification
• Marine cargo insurance: covers export- import

goods carriage by sea and related- reasonable
costs
• Hull insurance: covers material loss of or
damage to hull and machinery, a portion of
costs for collision liability, and other
reasonable costs.
• Protection and indemnity insurance: provide
cover to shipowners against third- parties
liabilities in connection with the operation of
vessels
II. Risk in marine insurance
1. Risk
1.1.Definition
• Probability or threat of a damage, injury,
liability, loss, or other negative occurrence,
caused by external or internal vulnerabilities,
and which may be neutralized through pre-
mediated action.
• Marine risks are the risks that occur on the
sea/ the risks of the sea/ the risks related to an
ocean voyage.

• Risks are of many kinds
• Different risks mean different losses
• And different risks are covered by different
clauses
• And different insurance clauses mean
different premiums
• So we need to have a good understanding
of the different risks and losses before we
know how to effect insurance
1.2. Types of risks
1.2.1. Base on the causes
- Acts of God: vile weather, thunderstorm and lightening,
tsunami, earthquake, flood, volcanic eruption, etc.
- Perils of the sea: ship striking upon the rocks, ship
sinking, ship collision, colliding with iceberg or other
objects
- Risks caused by Social- political actions: war, SRCC
(strikes, riots, civil, commotions)
- Risks caused by particular actions of people: thieve,
robber
- Risks caused by other sources
1.2. Types of risks
1.2.2. Base on the insurance technique
a) Insured common perils: the risks that are normal insured in original
insurance clauses:
• Main risks:
- Stranding: a vessel is stranded when, in consequence of some
accidental or unusual occurrence, she comes in contact with the ground
or other obstruction, and remains hard and fast upon it. The vessel needs
an external force in order to getting off the stranding.
- Sinking
- Fire or explosion
- Collision
- Jettison: To throw part of the cargo or gear of the vessel overboard to
lighten the load and save the vessel. The owner of the jettisoned goods is
entitled to a "general average," i.e., the loss is shared by the owners of
the vessel and the owners of the cargo which was not thrown away.
- Missing: British law: 3 times of ship’s itinerary in normal conditions (no
longer than 6 months, no shorter than 3 months)
* Auxiliary risks: theft, rain, leakage, breakage, dampness, heating, hooking,
rusting Pham Thanh Ha (MA) 68
b) Relatively Excluded Perils: risks that are not included in standard
insurance clauses: War, SRCC
c) Absolutely Excluded Perils: risks that are not insured in any
circumstances:
• loss damage or expense attributable to wilful misconduct of the
Assured
• ordinary leakage, ordinary loss in weight or volume, or ordinary wear
and tear of the subject- matter insured
• loss damage or expense caused by insufficiency or unsuitability of
packing or preparation of the subject-matter insured
• loss damage or expense caused by inherent vice or nature of the
subject-matter insured
• loss damage or expense proximately caused by delay, even though
the delay be caused by a risk insured against
• loss damage or expense arising from insolvency or financial default
of the owners managers, charterers or operators of the vessel
• loss damage or expense arising from the use of any weapon of war
employing atomic or nuclear fission and/or fusion or other like
reaction or radioactive force
Phamor matter.
Thanh Ha (MA) 69
III. Losses
• Losses sustained by the insured due to the risks
listed above come from not only the loss of the
goods or the damage dine to the goods, but also
from the expenses the insured sustained in
rescuing the goods in danger.
• The losses and the damages done to the goods
can fall into total loss and partial loss
• Total loss includes Actual Loss and Constructive
Total Loss
• Partial Loss means that the loss or damage dine
to the goods is only partial. Partial loss can be
either general average or particular average
Kinds of marine losses
Different
types of
marine losses
Total loss Partial loss
Actual total Constructive Particular General

loss total loss Average Average Loss

Total Loss
• Actual total Loss: means • Constructive total loss: is
the whole lot of the found in the case where
consignment has been the actual loss of the
lost or damaged or found insured goods is
valueless upon arrival at unavoidable, or the ship
the port of destination or the consignment has to
be abandoned because
the cost of recovery
would exceed the value
of the ship and the
consignment in sound
condition upon the arrival
of the port of destination
Constructive Total Loss
• Notice of abandonment (NOA): is a notice in
which the insured commits to give up all of his
right related to the subject- matter insured to the
insurer in order to be fully compensated.
• Requirements:
– Where notice of abandonment is accepted the
abandonment is irrevocable. The acceptance of the
notice conclusively admits liability for the loss and the
sufficiency of the notice.
– NOA is unnecessary when the consignments have
already reached final destination and are in actual
total loss

Constructive total loss
Treat as partial loss Or as CTL
Reasonably abandoned
(if NOA would have
Any possibility of
benefit to insurer)
Insurer accepts: admitted
interest and deal with
subject matter insured
as its own
Insurer rejects: partial

Loss or ACT
Partial Loss
• Particular Average: losses of each insured
interest individually due to acts of God or
Perils of the sea
• Insurer’s liability: compensate for both of
the losses and reasonable costs caused
by particular average.
– Goods: Reasonable costs are the cost used
for saving cargo or reducing its damaged
measurement.
General Average
• General Average: the losses/ damages caused by
special expenses and sacrifices that intentionally and
reasonably conducted to save the vessel, cargo and
freight from a threat in the common ocean voyage.
• There is a general average act when, and only when,

any extraordinary sacrifice or expenditure is intentionally
and reasonably made or incurred for the common safety
for the purpose of preserving from peril the property
involved in a common maritime adventure.
=> General Average are for the common safety of all of the
interests (cargo, vessel, freight)

General Average
• A ship carrying goods in stranding status
• Order of master: a part of cargo is
jettisoned, main engine is damaged (due
to the act of forcing the ship off)
• Result: After repairs at the port of refuge,
the ship is able to complete her voyage
with the rest of her cargo.
Examples
• Cargo, freight:
– Jettison from underdeck.
– Jettison from on deck.
– Water or other means used to extinguish a
fire on board ship.
– Discharge and re-shipment for the purpose of
floating a stranded ship when in a position of
peril

Examples
• Ship’s materials:
– Masts, spars, sails or rigging cut away for the
common safety.
– Chains and anchors slipped to avert a threatening
peril.
– Damage to a vessel's machinery, ropes, winches,
windlass and other gear sustained in endeavours to
float a stranded ship when in a position of peril.
– Damage done in the efforts to extinguish a fire on
board or in the process of jettisoning cargo.

Examples
• Expenditure:
– Expenses incurred in floating a stranded ship
in peril.
– Inward expenses entering a port of refuge to
repair damage to ship.
– Cost of discharging cargo at a port of refuge
for the purpose of repairing damage to ship.
– Cost of warehousing, re-shipment of cargo
and outward expenses leaving the port of
refuge.
General Average
• Essential features:
– The loss must be voluntary
– It must be properly made
– It must be extraordinary in its nature
– The object of the sacrifice or expenditure must be
nothing other or less than the common safety of ship
and cargo
– There must be imminent danger, and the object must
be the attainment of safety
– The loss must be the direct result or reasonably the
consequence of the act causing it

General Average
• Contents:
– GA Sacrifices: to sacrifice properties for the rest ones.
– GA Expenditures: consequent costs of GA act or
expenditures concerning GA act:
• Salvage cost
• Temporary repairs cost
• Cost at port of refuge
• Wages and maintenance of master, officers and crew
reasonably incurred and fuel and stores consumed during the
prolongation of the voyage occasioned by a ship entering a
port or place of refuge or returning to her port or place of
loading
• Interest of 7% shall be allowed on expenditure, sacrifices and
allowances in general average until three months after the
date of issue of the general average adjustment

General Average
• Ship-owner/ master’s liabilities:
– Form GA Notice
– Arrange survey service to assess the measure of
damage
– Send average bond and average guarantee
– Arrange GA adjuster
– Form Sea Protest (if applicable)
• Cargo owner’s liabilities:
– Declare value of the goods
– Receive average bond and average guarantee
General Average
• Legal issues:
– York Rules 1864
– York- Antwerp 1924
– York- Antwerp 1950, 1974, 1990, 1994, 2004

General Average
• Amendments of York- Antwerp Rules 2004:
– Rule VI: salvage remuneration is not included in GA
– Rule XX: A commission of 2 per cent. on GA disbursements,
other than the wages and maintenance of masters, officers and
crew and fuel and stores not replaced during the voyage is not
included in GA
– Rule XXI: Interest shall be allowed on expenditure, sacrifices
and allowances in GA until three months after the date of issue
of the general average adjustment. Each year the Assembly of
the Committee Maritime International shall decide the rate of
interest which shall apply. This rate shall be used for calculating
interest accruing during the following calendar year.
– Rule XXIII: limitation of claims: 1 year after the date upon which
GA adjustment was issued or 6 years from the date of
termination of the common maritime adventure. These periods
may be extended if the parties so agree after the termination of
the common maritimePham Thanh Ha (MA)
adventure 85
General Average
• GA adjustment
– Arrange a GA adjuster
– Contributing interests: vessel, cargo, unpaid
freight/freight at risk

General Average
• Calculation:
– Step 1: Determine GA value, which consists
of GA sacrifices and expenditures
• If goods are sacrificed in GA act, value of the
goods is calculated based on loading/ unloading
value or the one in commercial invoice. It includes
insurance premium and freight, except one case
when cargo owner is not liable for paying the
freight.

General Average
• Step 2: Determine total value of
contributing interests: consists of value of
all interests in vessel that were saved by
GA act, including properties sacrificed in
GA act.
– Those damages belong to particular average
occurred before the GA act are not included in
contributing value/ after the GA act are
included in contributing value
General Average
• Step 3: Determine contributing rate:
Rate = total GA value/ total Contributing
value
• Step 4: Determine contributing value of each
interest
C = Contributing rate X contributing value
• Step 5: Determine financial result (actual
income/ expenditure of ship owner/ cargo owner
after deducting value of the properties or
expenditures spending in GA act

III. Marine cargo insurance
1. Cargo needs to be insured
- High probability of risk occurring in
voyage
- Carrier’s liability is very limited
- Marine cargo insurance is a custom in
international trade

Marine cargo insurance
• It provides insurance cover in respect of
loss of or damage to goods during transit
by rail, road, sea, or air

2. Insurer’s liability to the goods
2.1. Introduction of insurance clauses
2.1.1. Definition: Set of terms for cargo
insurance policies voluntarily adopted as
standard terms by many international
marine insurance organizations.
2.1.2. Institute Cargo Clauses- ICC: issued
by Technical and Clauses Committee of
Institute of London Underwriters (ILU)

• ICC 1963:
– FPA- Free from Particular Average
– WA- With Particular Average
– AR- All Risks
– WR- War Risks
– SRCC- Strike, Riot, and Civil Commotion

• ICC 1982:
–C
–B
–A
– WR
– SRCC

2.1.3. Cargo Clauses of Vietnam
- QTC 1965: FPA, WA, AR
- QTC 1990: C, B, A

2.2. Scope of cover- ICC 1982 &
QTC 1990
2.2.1. Risks Cover
• C clause: this insurance covers loss of or damage to the
subject- matter insured reasonably attributable to:
– Stranding, sinking, fire or explosion, collision
– discharge of cargo at a port of distress
– overturning or derailment of land conveyance
– Sacrifice in and contribution to GA and reasonable expenditures
(salvage
– Jettison
– Missing
– Such proportion of losses sustained by ship owners as is to be
reimbursed by the cargo owners under the contract of
affreightment “Both to blame Collision” clause

QTC 1990
• B clause
–C
– earthquake volcanic eruption or lightning
– Washing overboard
– entry of sea, lake or river water into vessel
craft hold conveyance container liftvan or
place of storage
– total loss of any package lost overboard or
dropped whilst loading on to, or unloading
from, vessel or craft.
QTC 1990
• A Clause:
–B
– Auxiliary risks: theft, rain- water, leakage,
breakage, dampness, heating, hooking,
rusting, malicious damage (not by insured),
piracy…

QTC 1990
• A, B, C are official clauses
• Special Clauses: WR, SRCC
• Exclusions:
– Contraband
– Willful misconduct of the assured
– Deviation
– Delay
– Inherent vice or nature of subject- matter insured
– Unseaworthiness of vessel
– Insolvency or financial default of the owner or the
operator of the vessel

QTC 1990
2.2.2. Duration: Transit Clause “from warehouse to
warehouse”
- Stage from port of discharge to final warehouse:
insurance policy terminates either:
- On safely delivery to the final warehouse, or
- On the expiry of 60 days after completion of discharge
- Departure warehouse: place of storage at the place
named herein for the commencement of the transit
- Final warehouse:
- Final warehouse owned or managed by the assured, or
- Store other than in the ordinary course of transit, or
- Store using for allocation or distribution, or
- Store named in insurance policy

3. Marine cargo insurance
policy
• Who can buy a marine cargo insurance
policy?
– Contract of sale: Legal contract for exchange
of goods, services or property to be
exchanged from seller to buyer for an agreed
upon value
– The contract of sale determines who buy the
policy
– The most common contracts of sale are: FOB,
CFR and CIF
Contract of sale
• FOB: Buyer pays freight, buyer arranges
insurance
• CFR: Seller pays freight, buyer arranges
insurance
• CIF: Seller pays freight, seller arranges
insurance

• In marine cargo insurance, the person
having insurable interest at the time of loss
can only recover
• Marine cargo policy are freely assignable.
Unlike other policies, there is no need to
take insurance company’s consent for
transferring policy to new buyer

Different kinds of marine cargo
policy
• Voyage policy: insurance policy/ insurance
certificate
• Open cover policy: large export/import
oriented industry usually prefer open cover
agreement as they have to make
numerous regular shipment who would
otherwise find it very inconvenient to
obtain insurance cover separately for each
and every shipment
• A marine cargo open cover insurance
policy is an agreement between a
merchant and an insurance company to
insure all goods in transit within the
agreement, until either party cancel the
agreement

Different kinds of marine cargo
policy
• Valued policy
• Unvalued policy

4. Content of marine cargo
policy
• Insurance value
• V = C + I + F + (a) = CIF + (a) (1)
• I = V x R = CIF x R (2)
Replace (2) to (1)
CIF = C + CIF x R + F
CIF(1-R) = C + F
 V = CIF = (C+F)/(1-R) (a=0)
V = (C+F)(1+a)/(1-R) (a=10%)
Content of marine cargo policy
• Insurance amount
• A≤V
• A = V = (C+F)/(1-R) (a=0)
A = V = (C+F)(1+a)/(1-R) (a=10%)

Content of marine cargo policy
• Insurance premium
• I = A (V) x R = (C+F) R/(1-R)
• I = (C+F)(1+a)R/(1-R)

IV. Marine Hull insurance
1. Subject- matter insured:
a) Hull and machinery insurance is to protect
the shipowner’s investment in the ship. It is
basically a property insurance which covers the
ship itself, the machinery and equipment. The
owner will be protected for losses caused by
loss of or damage to the ship and its equipment

b) Furthermore, the insurance covers some
liabilities, normally collision liability with another
ship (known as RDC – “Running Down Clause”)
– and sometimes also liability for colliding with
other objects than another ship (known as
FFO - “Fixed and Floating Objects).

c) The third part of the insurance is cover for
salvage and general average contributions.

• Types of vessels
– General Cargo Vessel – Built for specific purpose like car
carriers, live stock carriers, log carriers, heavy lift
vessels- Liners or Tramps
– Dry Bulk carriers – Heavy weather damage
– Liquid Bulk carriers- shorter life, fire & explosion, risk of
pollution
– Passenger vessels – fire damage
– Container vessels – loss of containers
– Offshore Oil and Gas Exploratory units – blow out
– Fishing vessels – moral hazard
– Other vessels like Tugs, Barges, Supply vessels, Yachats

• Types of Policies
– Hull and Machinery Policy
– Freight Policy
– Disbursement and Increased Value Policy
– Loss of Hire Policy
– Builder’s Risk Policy
– Ship Repairer’s Liability Policy
– Charterer’s Legal Liability Policy
– Mortgagee Interest Insurance Policy
– Port Package policies
– War and strike polices

2. Typical hull and machinery claims include:
– Total loss of the ship
– Damage to the ship, engines and equipment
– Explosions and fires
– Groundings – damage to the ship, salvage of the
ship and possible contribution in general average
– Collisions – damage sustained to the ship and
sometimes also liability towards the other ship (RDC)
– Striking other objects – damage inflicted to own ship
and sometimes also liability towards the owners of the
other object (FFO)
• The insurers will pay the shipowner for the cost of
repairs to the ship after the damage has been surveyed
and tenders from repair yards submitted.
• The shipowner will, however, have an agreed amount
referred to as the “deductible” which has to be paid by
him before a claim against his insurance policy is
submitted.
• For example, if the deductible is USD 100,000 and a
claim for repairs is USD 300,000, the insurers will
compensate the owner for USD 200,000.

Hull insurance market
• Hull and machinery cover is often arranged and placed in the
insurance market by a professional insurance broker.
• It is quite common that the insurance cover is spread to many
insurers in various countries.
• The insurers in the hull and machinery market are either
companies or syndicates. The company or the syndicate will
have an underwriter who signs the policy or the slip produced
by the broker for his share of the cover.
• The biggest single market for marine insurance is Lloyd’s in
London. Lloyd’s consists of a number of syndicates writing
shares on insurance covers. The company market is dominated
by Norway and Scandinavia, but also insurers in USA, France,
Italy, Japan and Korea are very active in the marine market.

Main Types of Marine Hull Clauses
• ITC Hull 1/10/83

• ITC Hull 1995
• ITC Hulls Disbursement & Increased Value (
TL including excess liabilities)
• ITC Hulls TL,GA, 3/4th Collision
• ITC Hulls Port Risk 20-7 87
• Institute Builder’s Risk Clauses 1-6-1988
• Institute Yacht Clauses

Institute Time clauses 1995
1. Coverage
1.1 This insurance covers total loss (actual or constructive) of
the subject-matter insured caused by
1.1.1 perils of the seas rivers lakes or other navigable waters
1.1.2 fire, explosion
1.1.3 violent theft by persons from outside the Vessel
1.1.4 jettison
1.1.5 piracy
1.1.6 contact with land conveyance, dock or habour equipment
or installation
1.1.7 earthquake volcanic eruption or lightning
1.1.8 accidents in loading discharging or shifting cargo or fuel
1.2. This insurance covers total loss (actual or constructive) of
the subject-matter insured caused by
1.2.1 bursting of boilers breakage of shafts or any latent defect in
the machinery or hull
1.2.2 negligence of Master Officers Crew or Pilots
1.2.3 negligence of repairers or charterers provided such
repairers or charterers are not an Assured hereunder
1.2.4 barratry of Master Officers or Crew
1.2.5 contact with aircraft, helicopters or similar objects, or
objects falling therefrom provided that such
• loss or damage has not resulted from want of due diligence by
the Assured, Owners, Managers or Superintendents or any of
their onshore management.Pham Thanh Ha (MA) 120
Collision and liabilities of different parties
TA TB TA TB
HA HB
Collision and liabilities of different parties
TA TB TA TB
HA HB
• “This insurance is extended to indemnify the
Assured against such proportion of liability under
the contract of affreightment “Both to Blame
Collision” Clause as is in respect of a loss
recoverable hereunder. In the event of any claim
by shipowners under the said Clause the
Assured agree to notify the Underwriters who
shall have the right, at their own cost and
expense, to defend the Assured against such
claim”.
Liability of marine cargo
insurers
– If cargo owner has not received
compensation:
• Loss/ damage in collide accident
• proportion of liability under the contract of
affreightment “Both to Blame Collision” Clause
– If cargo owner has already received a portion
of compensation:
• The rest part of Loss/ damage in collide accident
• proportion of liability under the contract of
affreightment “Both to Blame Collision” Clause
Liability of marine hull insurers:
• Insured vessel: loss/damage of ship itself,

machinery and equipment

• Other vessel: The Underwriters agree to indemnify the Assured for
three-fourths of any sum or sums paid by the Assured to any other
person or persons by reason of the Assured becoming legally liable
by way of damages for:
– Loss of/damage to ship itself, machinery and equipment
– Loss of/damage to cargo and other property on other vessel
– delay to or loss of use of any such other vessel or property
thereon
– general average of, salvage of, or salvage under contract of, any
such other vessel or property thereon,
– where such payment by the Assured is in consequence of the
vessel hereby insured coming into collision with any other
vessel.
That above amount of money is not exceeded three- fourth
Pham Thanh
insurance amount of insured Ha (MA)
vessel. 126
• Provided always that this Clause shall in no case extend to
any sum which the Assured shall pay for or in respect of
• removal or disposal of obstructions, wrecks, cargoes or any
other thing whatsoever
• any real or personal property or thing whatsoever except
other vessels or property on other vessels
• the cargo or other property on, or the engagements of, the
insured vessel
• loss of life, personal injury or illness
• pollution or contamination of any real or personal property or
thing whatsoever (except other vessels with which the insured
vessel is in collision or property on such other vessels).
P&I Insurance
• Protection and Indemnity insurance, or “P&I” as it is usually
called, is shipowner’s insurance cover for legal liabilities to
third parties
• “Third parties” are any person, apart from the shipowner
himself, who may have a legal or contractual claim against the
ship
• P&I insurance is usually arranged by entering the ship in a
mutual insurance association, usually referred to as a “club”.
Shipowners are members of such clubs.
• Legal liability is decided in accordance with the laws of the
country where an accident takes place
• The P&I insurance cover for contractual liability is agreed at
the time the owner requests insurance cover from the club and
is usually in accordance with the owner’s responsibility under
crew contracts or special terms
Pham relating
Thanh Ha (MA) to the trading pattern128
of the vessel.
Meaning of term “P&I”
• Protection: the insurance also covers assistance when a ship
is involved in an accident and the shipowner and his Master
need help
• Indemnity:
– P&I insurance is an indemnity type of insurance, the shipowner (or
member of the club) must demonstrate his loss before the club will pay
out (or indemnify him) under the terms of the insurance policy
– the club never assumes the owner’s liability, therefore technically the
owner (or member) is always responsible for payments
– the club takes over the business of handling claims and ensuring that
payments are correctly made

History of P&I insurance
• Protection & Indemnity Insurance (P&I Insurance) developed from
the old Hull Clubs in England in the eighteenth century
• One century later, With the increase of liabilities arising from
shipping activities which were unfortunately excluded by the hull
clubs, it was the result of an urgent need for shipowners to seek
some new mechanism to protect their potential liabilities in their
business activities
 P&I club came into the world in order to dealt with those things
that excluded from Hull insurance: i.e. third party liabilities and the
rest part of collision liabilities
 P&I Club has become one kind of mutual insurance with its own
legal capacity
 modern P&I Insurance not only covers the part of collision
liabilities which had once been excluded by the hull insurers but
also includes liabilities relating to cargo claims, liabilities relating
to personal injury, oil pollution liabilities,
Pham Thanh Ha (MA) as well as some costs 130
and expenses arising from the relevant casualties
Mutuality principle of P&I
insurance
• In respect of the organization of insurance
– Members of P&I Clubs have a dual role as

both assureds and insurers
– P&I Insurance is not profit-making, all the
money raised is from the members and will be
used for the members as well

• It is the members themselves to share the losses
– The operational principle of P&I Clubs is to balance all the
calls received from the members and the liabilities the
members incur in each policy year
– P&I Club would not operate on borrowing, the payment by
the members is very important to P&I Clubs
– the clubs also take strict measures to the member: i.e.the
club will refuse to provide guarantee, or decline the
settlement of claim, even more cancel the insurance
contracts in the case that the member fails to pay his
member fee in time

• The fund of the club
– The club fund plays a very important role in
the operation of P&I Insurance, and it is
usually collected by levying calls from the
members
– The “calls” are used in P&I Insurance instead
of the “premiums”- an agreement that each
member should bear his aliquot share of the
losses of the year covered by the policy

Evaluating the risk
• / The tonnage of the ship in GT (premiums are expressed in USD
per GT)
• / Year of build
• / Number of crew members
• / Type of vessel
• (tanker, dry bulk, reefer, heavy-lift, container, passenger, ro-ro etc)
• / Type of cargoes to be carried (if a tanker is clean or dirty)
• / Areas of trading
• / Liner trade or tramp
• / Classification society
• / Management expertise
• / Compliance with national and international legal requirements
• / How many ships in the company
• / Previous P&I history
Statistical loss records
• A P&I club will keep records for each individual ship entered with the
club.
• These records are normally based on the last five insurance years
and provide an accurate record of all payments made by the
member in the form of premiums
• all monies collected by the member in the form of compensation
paid to him by the club and all other costs.
• Over a fi ve-year period records show:
– / The amount of premiums paid in by the member
– / The amount of money paid out for market reinsurance
– / The amount of money paid back to the owner as compensation
– / Other costs and the amount estimated for claims not settled

Coverage of P&I insurance
• Liability in collision accident: insures for
the rest part of collision liabilities that
excluded from Hull insurance

LIABILITY FOR DAMAGE TO CARGO

• DEATH AND PERSONAL INJURY
– Any person injured on your ship – crew, stevedores,
pilots or passengers, for example may allege that
your ship was unsafe. The injured person could
decide to sue the ship and her owners and demand
huge sums of money as compensation
– It is necessary for a Master and his senior officers to
have a good idea of what his P&I club’s rules state on
the insurance cover for personal injury, illness and
loss of life.

• REPATRIATION OF SICK OR INJURED
CREW AND HOSPITAL EXPENSES
– P&I insurance also covers a shipowner’s
liability to pay for the costs of repatriating
crew members who become sick or are
injured on board. The insurance also covers
the crew’s hospital bills and costs of sending
replacement personnel to the ship if
necessary

• LOSS OF CREW MEMBERS’ PERSONAL EFFECTS
– P&I insurance also covers the owner’s liability for loss
of crew belongings in cases of shipwreck or fi re on
board.
– The cover only applies to items which are deemed to
be reasonable for any crew member to have with him
on board.
– A crew member travelling with unusually expensive
items, such as laptop computers, gold watches etc
should make sure that he has such items separately
insured.
• STOWAWAYS, REFUGEES AND
PERSONS SAVED AT SEA

• POLLUTION
– Oil from your ship which pollutes a harbour,
dock or waterway will have to be cleaned up.
Clean-up costs will be charged to the ship and
fines may be imposed on the ship, the Master,
and the Chief Engineer. Your ship could be
arrested, and the owners required to establish
some form of security acceptable to the port
authorities.

• WRECK REMOVAL AND OBSTRUCTION
– The standard insurance shall cover liability
and costs arising out of the raising, removal,
destruction or marking of the wreck of the
entered vessel, her equipment, bunkers or
cargo lost as a result of a casualty, in so far
as the raising and other operations are
compulsory by law, or necessary to avoid or
remove a hazard or obstruction to navigation,
or the costs are legally recoverable from the
member Pham Thanh Ha (MA) 143
• GENERAL AVERAGE CONTRIBUTIONS
– CARGO
– The standard insurance shall cover the
member’s loss in respect of general average
expenditure and special charges which should
be paid by the cargo interest or some other
party to the maritime adventure but which are
not legally recoverable solely by reason of a
breach of the contract of carriage

• FINES
• Since fines are imposed for breaches of criminal law, they are
generally not covered by insurance. However, P&I clubs do
indemnify members for fines imposed in a few very specific cases.
Rule
• P&I insurance normally provides cover for fines imposed for
• breach of immigration laws
• inaccuracies in cargo documentation
• accidental pollution
• smuggling or infringement of customs laws
• The club only provides cover for fines imposed on the member, not
the crew. However, the club does have a discretion to cover members
if they pay a fine imposed on the master or crew because they are
legally obliged to do so, or because the club accepts that it was
reasonable to do so Pham Thanh Ha (MA) 145
CHAPTER 4:
INTRODUCTION TO RISK
MANAGEMENT
Meaning of risk management
• Risk management is a process that
identifies loss exposures faced by an
organization and selects the most
appropriate techniques for treating such
exposures
• Risk – loss exposure: is any situation or
circumstance in which a loss is possible,
regardless of whether a loss occurs

Objective of risk management
• Pre-loss objectives:
– Economy: the firm should prepare for potential losses
in the most economical way (analysis of the cost of
safety programs, insurance premium paid, the cost
associated with the different techniques for handling
losses)
– Reduction of anxiety: certain loss exposure can cause
greater worry and fear for the risk manager and key
executives
– Meeting legal obligations: i.e. government regulations
may require a firm to install safety devices to protect
worker from harm, to dispose of hazardous waste
materials properly
Objective of risk management
• Post- loss objectives:
– Survival of the firm: after loss occurs, the firm can
resume at least partial operations within some
reasonable time period
– continue operating: the ability to continue operating
after a loss is very important, otherwise, business will
be lost to competitors
– Stability of earnings: earning per share can be
maintained if the firm continue to operate
– Continued growth of the firm
– Minimize the effects that a loss will have on other
persons and on society
Steps in the risk management
process
• Identify loss exposures
• Analyze the loss exposures
• Select the appropriate technique for
treating loss exposure
– Risk control: Avoidance, Loss prevention,
Loss reduction
– Risk financing: Retention, Noninsurance
transfers, Commercial insurance
• Implement and monitor the risk
management program
Identify loss exposures
• This step is to identify all major and minor loss exposures, it
involves a painstaking analysis of all potential losses:
– Property loss exposures
– Liability loss exposures
– Business income loss exposures
– Human resources loss exposures
– Crime loss exposures
– Employee benefits loss exposures
– Foreign loss exposures
– Market reputation and public image of the company
– Failure to comply with government laws and regulations

Identify loss exposures
• A risk manager has several sources of information that he can
use to identify the preceding loss exposures:
– Risk analysis questionnaires: risk manager has to answer
numerous question that identify major and minor loss
exposures
– Physical inspection: a physical inspection of company
plants and operations can identify major loss exposures
– Flowcharts: show the flow of production and delivery that
can reveal production bottlenecks where a loss can have
severe financial consequences for the firm
– Financial statement: identify major assets that must be
protected, loss of income exposures, and key customers
and suppliers
– Historical loss data: historical and departmental loss data
over time can be invaluable
Pham Thanhin
Haidentifying
(MA) major loss 152
exposures
Analyze the loss exposures
• This step involves an estimation of the frequency and

severity of loss. Loss frequency refers to the probable
number of losses that may occur during some given time
period. Loss severity refers to the probable size of the
losses that may occur
 various loss exposures can be ranked according to their
relative importance
 The risk manager can select the most appropriate
technique, or combination techniques, for handling each
exposure
- Maximum possible loss is the worst loss that could
happen to the firm during its lifetime
- Maximum probable loss is the worst loss that is likely to
happen Pham Thanh Ha (MA) 153
Select the appropriate technique for
• Risk control:
• Avoidance: a certain loss exposure is never
acquired, or an existing loss exposure is
abandoned => the firm may not be able to avoid
all losses, it may not feasible or practical to avoid
the exposure
• Loss prevention: refers to measures that reduce
the frequency of a particular loss
• Loss reduction: refers to measures that reduce
the severity of a loss after is occurs

• Risk financing:
– Retention: the firm retains part or all of the
losses that can result from a given loss,
provided that:
• No other method of treatment is available
• The worst possible loss is not serious
• Loss are highly predictable

• Non-insurance transfer: is a method other than

insurance by which a pure risk and its potential financial
consequences are transferred to another party.
• Insurance:
– Selection of insurance coverage
– Selection of insurer
– Negotiation of terms
– Dissemination of information concerning insurance
coverage
– Periodic review of the program

Benefits of risk management
• The pre-loss and post- loss risk management objectives are more
easily attainable
• The cost of risk is reduced => increase company’s profit (a risk
management tool that measures certain costs- includes premiums
paid, retained losses, loss control expenditures, outside risk
management services, financial guarantees, internal administration
costs, and taxes, fees, and certain other expenses
• A firm may be able to enact an enterprise risk management program
that treat both pure and speculative lloss exposure

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Principles of Insurance

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CHAPTER I:

BASIC CONCEPTS IN INSURANCE

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• Loss control: consists of certain activities that

• Insurance: the most practical method for

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Fundamental Legal Principles

Insurance is a repayment of a random loss

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– To be able to fully service major claims, small claims

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 Declaration of all material Information

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• Insurable interest exists when an insured

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• IT IS BELIEVED TO HAVE ORIGINATED IN

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• LLOYD’S WAS A COFFEE HOUSE FREQUENTED BY

• THE COFFEE HOUSE BECAME THE MEETING

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• Marine cargo insurance: covers export- import

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Total loss Partial loss