Marine Insurance

MTR 5014
Entering the World of Marine
Insurance
You may get to know something
about
• The quiet port, the deep sea……
The hard accident……
Questions raised hereunder
• What do you think and understand about
marine insurance and marine insurance
business?
• What do you want to know further about this
subject?
• How did you get to know about “marine”,
and “insurance”?
• Try to think about the following phrases,
“oversea trading & shipping”, “marine risks”
or “marine adventure”, “marine loss”……
• Aims
– To gain a fresh knowledge of the principles
and practice of marine insurance,
including
• theoretical aspects
• contract transactions
• legal legislations
• operation practice and marketing
• Developments towards insurance
globlization and liberalization integration

– Improving the students’ understanding and

– to study and communicate about marine
insurance knowledge and information
using English language ; thus

– improving the skills of listening & reading

comprehension, and as well as writing and
oral communication in English; then

– keep the pace with the changing,

innovation and development of the world
marine insurance industry.
• Lecturing topics
– General understanding and Definitions
– Scope of marine insurance
– Business environment: oversea trading and
shipping
– Principles formed through practice
– Marine insurance contract
– Marine insurance business 1: Cargo insurance
– Marine insurance business 2: Hull Insurance
– Marine insurance business special: P&I insurance
– Legal Background
– Operating business
• Books & references
– Text books
• In English
– Marine insurance Law and standard clauses
– Selected chapters from
 E.R.Hardy Ivamy, “Marine Insurance”, Fourth edition,
1985
 Howard N.Bennett, “The Law of Marine
Insurance”,1996

– Other references
• PPT files and relevant copy materials
• Information from Relevant e-links
General understanding and
Definitions

• 1.1 The World Insurance

Market
• 1.2 Understanding of Marine
Insurance
• 1.3 Definitions
General understanding and
Definitions
• 1.1 The World Insurance Market
– 1.1.1 The Basic Structure
• Regional structure
• Business structure
– 1.1.2 Marine Insurance Businesses in world
Insurance Market
• Persons involved
• Events occurring
Lecture one: General
understanding and Definitions
• 1.2 Understanding of Marine Insurance
– 1.2.1 Different Viewpoints
• A legal contract, or
• A kind of insurance business?
• Broad or narrow case?
– 1.2.2 Viewpoints of This Course
• legal nature
• Indemnity nature
• International standard
Lecture one: General
understanding and Definitions
• 1.3 Definitions
– 1.3.1 Introduction
– 1.3.2 Marine Insurance Defined
• Marine adventure (Risk)
• Marine perils
• Marine losses
– 1.3.3 Marine Insurance Contract Defined
• The contracting parties
• The subject matter insured
• The Consideration exits in insurance contract
• Contract of indemnity
 Lecture one: General
understanding and Definitions
• 1.3.1 Introduction
– Marine Insurance is commonly taken alongside maritime and
commercial options (Carriage of Goods by Sea, International
Trade, admiralty, etc). Students who are also adept at carriage,
trade, and finance will perhaps acquire a broader and more
comprehensive approach.
– Insurance is a contract, but a contract of great antiquity which
exhibits peculiarities and which are sometimes unexpectedly
different from “ordinary” commercial contracts like sales.
– Marine insurance was the earliest form of insurance, and still, it is
an international business, especially connected with international
trade and shipping. It undertakes the risks that may be
encountered by traders and shipping businessmen.
Lecture one: General
understanding and Definitions
• 1.3.2 Marine Insurance Defined
– Marine Adventure(Risks)
• Mixed Sea and Land Risks

– Maritime Perils
• Perils of the Seas

– Marine Losses
• Damages or losses to Vessels or Cargoes
• Loss of Freight
• Liabilities of Indemnity
 Lecture one: General
understanding and Definitions
• 1.3.3 Marine Insurance Contract Defined
– The Contracting Parties
• Marine Insurer (General Insurer and P&I Club)
• Insured (Cargo or vessel owners, Charterers and
Operators)
– The Subject Matter Insured
• Vessel & Cargo
• Freight & Liabilities

– The Consideration Exits in Insurance Contract

– Contract of Indemnity
Scope of marine insurance

• 2.1 Background
• 2.2 The Scope of Marine
Insurance Business
• 2.3 The Scope of Marine
Insurance Coverage
 Lecture Two:
Scope of marine insurance
• 2.1 Background
– 2.1.1 History of Marine
Insurance Business
– 2.1.2 Marine insurance:
Origin and System Formation
– 2.1.3 The World of Marine
Insurance Business
Lecture Two:
Scope of marine insurance
• 2.1.1 History of Marine Insurance Business
A. Birthplace--Mediterranean Sea
• The History of M.I. is romantic and well known
• It came from Mediterranean, Italy and Greece.
• The earliest extant examples of M.I. policies are
derived from Italy and were written in 16th
century.
 Lecture Two:
Scope of marine insurance
• B. The Popular History of M.I.B---Great
Britain
– It Begins in the late 17th century.
– Edward Lloyd, the proprietor of a coffee house,
began to provide his customers with
“intelligence”, that is: the information about
marine matters , which ships had arrived
and, more important, which were overdue or at
the bottom of the sea.
Lecture Two:
Scope of marine insurance
• The atmosphere of reported disaster
and good coffee turned out to be
conducive to the writing of insurance.
Thus, Lloyd’s insurance market began.
• This period of importance, which
happened to coincide with substantial
increase in international trade and in the
carriage of goods and passengers, made
the development of M.I. as well.
Scope of marine insurance
• 2.1.2 Marine Insurance:
------Origin and Formation
–General Average Contributions
–Marine Insurance in Modern Sense
Scope of marine insurance
• General Average Contributions
– In the early days of marine insurance, the various
merchants who were having goods carried on a ship
would agree to make contributions to those who may
have suffered a loss during the voyage, after the loss
had taken place. This certainly removed the risk of a
total loss from anyone merchant, as each one knew that
his loss would be shared.
– What it did not do was to give the merchant any idea of
what his loss would be; he only knew this after a
voyage. If there had been no losses then he would have
nothing to pay, but he had agreed to share in any
losses which had taken place and the exact
amount of these could only be determined after
Lecture Two:
Scope of marine insurance
• Marine Insurance in Modern Sense
– An insurance system redistributes the cost of losses by
collecting a premium payment from every participant
(insured) in the system.
– In exchange for the premium payment, the insurer promises to
pay the insured's claims in the event of a covered loss.
– Generally, only a small percentage of insured suffers losses.
Thus, an insurance system redistributes the costs of losses
from the unfortunate few members experiencing them to all the
members of the insurance system who pay premiums.
– The losses of the few are met by the contributions of the
many, and the mechanism which allowed this to happen was
the common pool.
Lecture Two:
Scope of marine insurance
• 2.1.3 The World of Marine Insurance
Business
Contract of Affreightment

Hull I. Ship Owner (Buyer)

I. Shipping Charterer Shipper
M. Insurer P&I I. (insured) Operator (Seller)

Buyer
Cargo I. I. Trade Contract of Sale
(insured) Seller
Lecture Two:
Scope of marine insurance

Cargo Insurance International

Trade
Marine
Insurance Shipping

Contract

Hull Insurance International

P&I Coverage Shipping
Lecture Two:
Scope of marine insurance
• 2.2 The Scope of Marine Insurance
Business
– 2.2.1 Cargo Insurance
– 2.2.2 Hull Insurance
– 2.2.3 P & I Insurance
– 2.2.4 Innovated M.I.B.
Lecture Two:
Scope of marine insurance
• 2.2.1 Cargo Insurance
– An insurance interest is established when a
person has a financial involvement in a
marine adventure.
– That person may have an interest in goods
being exported or imported and may be the
owner or the person responsible to the owner
to effect insurance. Then, it came out the
Cargo Insurance
Lecture Two:
Scope of marine insurance

• Cargo Insurance is devised

– to protect the financial interest of exporter (under
the International Trade Term of grope “D” )or
importer (under the International Trade Terms of
group “E”, “F”, and “C”) against the marine losses to
the exported or imported cargoes or goods insured
under the M.I.P.
• There will be an agreement between
– the buyer and seller for the goods transportation,
establishing the responsibility for arranging cargo
insurance.
Lecture Two:
Scope of marine insurance
Terms P/D P/R A/T A/I W/T
Ex work W/S W/S buyer buyer any
FA S A/S A/S buyer buyer sea
*FOB on board C/S buyer buyer sea
* FCA D/C D/C buyer buyer any
* CFR on board C/S seller buyer sea
* CIF on board C/S seller seller sea
* CPT D/C D/C seller buyer any
* CIP D/C D/C seller seller any
DAF D/F D/F seller seller any
DES D/S D/S seller seller sea
DEQ D/Q D/Q seller seller sea
DDU D/D D/D seller seller any
DDP D/D D/D seller seller any
P/R: place of risk transfer W/T: the way of transportation
• Cargo Insurance: Points where delivery
takes place and risks shifts from seller to
buyer:
Term W/S A/S O/B F.paid by C.I.paid by
Ex work √ buyer buyer
FAS √ buyer buyer
FOB √ buyer buyer
CFR √ seller buyer
CIF √ seller seller
Lecture Two:
Scope of marine insurance

• 2.2.2 Hull Insurance

S.M insured insured person insured coverage

Vessel S/O, Charterer, damage or loss

Freight S/O, Charterer, caused by marine
Container Operator adventure (including

Owner including B.B.C.)

Scope of marine insurance
• 2.2.3 P& I Insurance
–P&I insurance, which is a separated marine coverage from the
traditional Hull insurance (only cover the damage to the insured
property---the vessel), is full into the scope of liability insurance. It
is a “non-profit” business.

–The subject matter of P&I insurance coverage is ship owner’s

liabilities incurred in the transportation of goods or passengers.

–The fund of P&I insurance coverage is coming from the ship owner
who pay the money to the P&I insurer as a kind of cost to be paid in
order to obtain the membership of P& I club.
Lecture Two:
Scope of marine insurance

• 2.3 The Scope of Marine

Insurance Coverage
–2.3.1 The Subject Matter Insured
–2.3.2 Mixed Sea and Land Risks
–2.3.3 Marine Losses
Lecture Two:
Scope of marine insurance
• 2.3.1 The Subject Matter Insured
– A ship
– Goods
– Freight
– Profits and commission
– Wages
– The liability of a shipowner to the owner of
the cargo
– Loans, advances and disbursements.
Lecture Two:
Scope of marine insurance
• Any ship, goods or other movables are
exposed to maritime perils. Such property is
referred to as “insurable property”;
– Ship:
• Hull, materials and outfit, stores and provisions for
the officers and crew, the machinery, boilers, and
coals and engine stores, if owned by the assured.
– Goods:
• Goods in the nature of merchandise, deck cargo
and living animals must be insured specifically,
and not under the general denomination of goods.
Lecture Two:
Scope of marine insurance
• The earning or acquisition of
– any freight,
– passage money,
– commission, profit, or
– other Pecuniary benefit, or
– the security for any advances, loan, or
– disbursements, etc.
is endangered by the exposure of
insurable property to maritime perils;
Scope of marine insurance
• “Freight” includes the profit derivable by
a shipowner from the employment of his
ship to carry his own goods or moveables,
as well as freight payable by a third party.
• ‘Freight collected’ is endangered by the
exposure of insurable property to maritime
perils.
Lecture Two:
Scope of marine insurance
• Any liability to a third party may be incurred
by the owner of, or other person interested in or
responsible for, insurable property, by reason of
maritime perils. Insurable Liabilities result mainly
from:
• Collision and pollution-----Tort liability
• Breach of contract
– contract of affreightment
– contract of tug & tow
– salvage contract
Lecture Two:
Scope of marine insurance
• 2.3.2 Mixed Sea and Land Risks
– Perils of the seas, rivers, lakes or other
navigable waters;
• Storm;
• Lightening; and
• Some others that be referred only to fortuitous
accidents or casualties of the sea. It does not
include the ordinary action of the winds and
waves.

– Perils out of the seas

• Perils on or from inland waters or on any land risks
which may be incidental to any sea voyage.
 Lecture Two:
Scope of marine insurance
• Perils of the seas :fortuitous accidents or casualties of the sea /
the ordinary action of the winds and waves
– The insurers are answerable for casualties arising from the violent
action of the elements, as distinguished from the silent, natural,
and the gradual action of the elements upon the vessel itself, which
properly relate to wear and tear.
– The dividing line has therefore to be drawn between that which is
accidental, fortuitous, and unexpected, and that which is natural,
ordinary, and usual in its nature, having regard to the particular
circumstances.
– A loss occasioned by the natural chemical action of salt water, as
distinguished from a loss by the violence of the waves, is not
recoverable as a loss by perils of the seas.

• The loss must be a peril of the sea in the sense that the sea
or salt water must be the destroying agent.
Lecture Two:
Scope of marine insurance
• Section55(2)(c),M.I.A.1906:
“Unless the policy otherwise provides, the insurer is not
liable for:
– ordinary wear and tear,
– ordinary leakage and breakage,
– inherent vice or nature of the subject-matter insured, or
– for any loss proximately caused by rats or vermin, or
– for any injury to machinery not proximately caused by
maritime perils.”
Lecture Two:
Scope of marine insurance
• Explanations---hull policy
– In the ordinary course of navigation, the ship takes the
ground at low water, a straining of the ship is not a loss
by sea perils, in the absence of any unusual
circumstance,
– A ship took ground at low water in harbour in the
ordinary way, and the rising of the tide was accompanied
by a heavy swell, which set into the harbour, causing the
ship to strike the ground and damage herself, the
damage was held to result from sea perils.
– A collision is brought about without waves or winds or
difficulties of navigation contributing to the accident, the
loss is not one by perils of the sea.
 Lecture Two:
Scope of marine insurance
• Explanations---cargo policy
– A cargo of cheese was damaged by rats, it was held
not to be a peril of the seas; but damage to a cargo of
rice, caused by the incursion of water through holes
made by rats, is a loss by perils of the seas.
– Where ventilators had to be closed in bad weather and
the accumulated hot air injured the cargo, the damage
was held to be caused by an ‘accident of the sea’.
– Where cargo was damaged by sea water negligently let
in by the engineer through a tank valve, it was held to
be a loss by perils of the sea.
 Lecture Two:
Scope of marine insurance
• Canada Rice Mills Ltd v. Union Marine and General
Insurance Co Ltd.
– A floating policy in respect of shipments of rice as from time to time
declared had been effected by the assured. The policy covered loss
occasioned by perils of the sea ‘and all other perils losses and
misfortunes that have or shall come to the hurt detriment or damage
of the subject-matter of the insurance.
– Rice was shipped on a vessel at Rangoon bound for the Fraser River.
On arrival there it was found that the rice was overheated due to the
closing of the ventilators and hatches in heavy seas to prevent the
incursion of sea water. The assured claimed for a loss under the
policy.
– The Judicial Committee of the Privy Council held that the action
succeeded because the damage, which was not caused by the
incursion of sea water but by action to prevent incursion, was
recoverable as a loss by perils of the sea.
 Lecture Two:
Scope of marine insurance
• The following are further examples of loss by perils of the
sea:
– A ship was taken in tow by a man-of-war, and in order to keep up
with her, had to carry an excess of canvas in a gale, and consequently
she shipped a large quantity of water, which damaged her cargo.
– A cargo had been negligently stowed, and the ship, becoming leaky,
was beached to save her from sinking.
– The capture of a cargo in a stranded ship.
– Where a ship had come into the control of a foreign power by sea
perils, the charges levied on the cargo were recovered as a loss by
perils of the sea.
– Where two members of a crew went ashore to cast off a rope, and
were seized by the press gang before they had accomplished their
duty, and in consequence the ship was driven ashore, the loss was
held to be one by perils of the sea.
Lecture Two:
Scope of marine insurance
• The term ‘perils of the sea’ does not cover damage by
seawater entering a vessel through holes in her caused by
natural decay.
– A cargo of opium was stored in a wooden hulk moored in the River
Huang-Pu at Shanghai, and was insured against ‘peril of the sea’, the
hulk became leaky due to the natural decay of her hull. Water from the
river found its way into her and damaged the opium. The assured
claimed that the damage was caused by a ‘ peril of the seas’. The
Judicial Committee of the Privy Council held that the loss was not
caused by a ‘peril of the seas,’ and that the action failed.
– Reason: there was no weather, nor any other fortuitous circumstance,
contributing to the incursion of the water; the water merely gravitated
by its own weight through the opening in the decayed wood and so
damaged the opium.
– It would be a abuse of language to describe this as a loss due to perils
of the seas. Although sea water damaged the goods, no peril of the
sea contributed either proximately or remotely to the loss.
 Lecture Two:
Scope of marine insurance
• Fire
– Fire is expressly mentioned in the policy as one of the perils against
which the underwriters undertake to indemnify the assured, and if
the ship is destroyed by fire, it is of no consequence whether this
occasioned by a common accident or by lightning or by an act done
in duty to the State. Nor can it make any difference whether the ship
is thus destroyed by third persons, subjects of the King, or by the
captain and crew acting with loyalty and good faith; fire is still
the causa causans and the loss is covered by the policy.
– Although negligence will not excuse the insurer, yet if the fire is
caused by an inherent vice in the thing insured, he will succeed upon
the ground that the assured has himself occasioned the loss by
having the goods in that condition, eg if spontaneous combustion
took place in a cargo of hemp owing to its having been put on board
in a damaged condition, the insurer would escape liability.
 Lecture Two:
Scope of marine insurance
• Jettison
The voluntary sacrifice in time of peril of
something in or upon the ship, by throwing it
overboard, with the intention of preserving
the ship and cargo.
– Where the jettison is rendered necessary by an
inherent vice, and not by the perils insured
against, the insurer is not liable.
– Goods carried on deck are not protected against
loss by jettison unless it is the custom so to
carry them or unless specifically insured as such.
Lecture Two:
Scope of marine insurance
• PiracyPersons who without legal commission for
the purpose plunder other vessels
indiscriminately on the high seas for their own
ends.
– The term ‘pirates’ includes passengers who mutiny and
rioters who attack the ship from the shore.
– The crew of a ship who mutiny, and seize her and then
carry her off, are pirates, though in such a case the loss
might also be ascribed to barratry. (Brown v Smith (1813)
– The carrying away of a ship by coolie emigrants, who
had mutinied and murdered the master and some of
the crew, is an act of piracy, and the loss is covered
by the word ‘pirates’.
Lecture Two:
Scope of marine insurance
2.3.3 Marine Losses
– The insurer is liable for any loss
proximately caused by a peril insured
against, but, subject as aforesaid, he is
not liable for any loss which is not
proximately caused by a peril insured
against.
Lecture Two:
Scope of marine insurance
• Total loss
– Actual total loss
– Constructive total loss
• Partial loss
– Particular average loss
– General average loss

• Salvage, Sue & labour charges

 Lecture Two:
Scope of marine insurance
• Total loss: the cases of actual total loss
– Actual total loss of a ship
• Entirely destroyed by fire, perils of the sea
• Sale of vessel by master
• Missing ships
– When a ship does not arrive at her port of destination, and
no news is received of her after a reasonable period has
elapsed, she is presumed to have foundered at sea, and the
insurers become liable as for a loss by perils of the sea.
– ‘Where the ship concerned in the adventure is missing, and
after the lapse of a reasonable time no news of her is
received, and actual total loss may be presumed.’ (Sec.58 of
M.I.A.1906)
 Lecture Two:
Scope of marine insurance
• Actual total loss of cargo
– Although a total loss of a ship often involves a total loss of cargo, this
is not necessarily the case. The cargo may be transhipped before the
vessel sinks, and cases are not infrequent where goods are destroyed
although the ship remains intact, e g in the case of jettison, perishable
cargoes, etc.
– Insured cargo cease to be available to their owner for any
purpose whatever, except, perhaps, as waste or refuse.
– Effect of devaluation
– ‘Considering the contract of insurance as a contract of indemnity, it
surely cannot be less a total loss because the commodity subsists in
specie, if it subsist only in the form of a nuisance. There is a total loss
of the thing if by any of the perils insured against it is rendered of no
use whatever, although it may not be entirely annihilated.’ (Lord
Ellenborough CJ said in Cologan v London Assurance.)
Lecture Two:
Scope of marine insurance
• Actual total loss of Freight
Where freight is payable on delivery of the goods at the
port of destination, if there is a total loss of them before
arrival there, there is a total loss of freight.
– A total loss of freight ensures when the shipowner from any cause
whatever has been unable to carry the goods to their port of
destination.
– Loss of goods
– Arrival of goods in unmerchantable condition
– Sale of perishable cargo
– Frustration of chartered voyage
– Loss of ship before sailing
– Ship unable to proceed
Lecture Two:
Scope of marine insurance
• Total loss: the cases of constructive total
loss total loss
– A constructive total loss is a device
intended to subserve the purpose of
indemnity by enabling the assured, when by
insured perils the postulated danger of loss or
deprivation is caused, to disentangle himself,
subject to definite limits and conditions, from
the danger and throw the burden on the
insures.
 Lecture Two:
Scope of marine insurance
• A vessel has stranded. In order to save her it may be
necessary to take out her cargo, pump out the water, and
raise her. When raised, she may require extensive repairs,
and the cost of these operations may be so great that a
prudent uninsured owner might well come to the
conclusion that it is not worth while to save her at
such cost. These operations would involve a financial
loss, unless the value of the vessel so recovered and
repaired exceeded the cost of the operations; and the
assured is entitled to decline to incur such a loss, and may
call on the insurers to pay him for a constructive total loss.
Lecture Two:
Scope of marine insurance
• Sec.60(2) M.I.A 1906 goes on to state:
– ‘Subject to any express provision in the policy,
there is a constructive total loss where the
subject-matter insured is reasonably abandoned
on account of its actual total loss appearing
to be unavoidable, or because it could not be
reserved from actual total loss without an
expenditure which would exceed its value
when the expenditure had been incurred.”
 Lecture Two:
Scope of marine insurance
• Partial loss: the case of particular average
loss
– The term of ‘average unless general’ means a partial loss of the
subject-matter insured other than a general average loss, and does
not include ‘particular charges’.
– The cost of repairs paid to the damaged vessel resulting in
• stranding;
• Sunk or burnt;
• Collision; etc.
– The decrease of value of insured cargo resulting in
• Fire accident;
• Ship’s damage;
• Lack of due diligence/ Negligence of the carrier
• Storm, lightening…. Which full into the scope of perils of the seas
 Lecture Two:
Scope of marine insurance
• Partial loss: the case of general
average loss/sacrifice
– Partial loss of the ship or goods
– Special costs occurred for saving the ship
and cargo
– Loss resulting in taking reasonable
measures in saving the thing insured
from damage by the perils insured
against in the policy
Lecture Two:
Scope of marine insurance
• Partial loss: the case of salvage
award/charge/ expenses
– “Salvage charges’ means the charges recoverable
under maritime law by a salvor independently of
contract. They do not include the expenses of
services in the nature of salvage rendered by the
assured or his agents, or any person employed for
hire by them, for the purpose of averting a peril
insured against.
– Such expenses, where properly incurred, may be
recovered as particular charges or as a general
average, according to the circumstances under
which they were incurred.
Lecture Two:
Scope of marine insurance
• Special cost: sue and labour charge
– It is the duty of the assured and his
agents, in all cases, to take such
measures as may be reasonable for
the purpose of averting or
minimising a loss.