An Introduction to Marine Insurance

Philip RochePartnerTransport, Energy and TradeSeptember 2008

An Introduction to Marine Insurance

Today:

• Introduction• Basic principles• The Standard Shipowner Insurances• Future issues

Introduction• Nature of Marine Insurance• Marine Risk• The parties:

– Owners– Operators– Banks– Charterers– Cargo interests– Crew

Something to Confuse

• Conditions and Warranties

– General English Law Position

– Marine Insurance Position

Risks

• Loss– Total– Constructive Total

• Abandonment• Arranged/compromised

– Partial Loss• What proportion of loss is partial loss?• Deductibles

Risks

• Perils of / on the Sea– Stranding / Sinking / Collision / Heavy weather– Fire / Theft / Jettison / Barratry

• Extraneous Risks– Bursting boilers / breaking shafts / bad bunkers– Rusting / chipping / staining– Non-delivery / sweat

Risks

• Fortuity vs Certainty

• Inherent Vice

• Delay

Risks

• Political

– War

– Strikes / Civil commotion

– Terrorism / Piracy

Risks

• Salvage, Sue and Labour

• General Average

Ship - 300 DrachmaCargo A - 300 DrachmaCargo B - 300 DrachmaTotal Value 900 Drachma

General Average

• Ship Aground• Cargo A thrown overboard

Ship - 300 DrCargo A - NilCargo B - 300 DrTotal 600 Dr

General AverageShip 300 DrCargo A NilCargo B 300 DrTotal 600 Dr

• Ship and Cargo B – pay Cargo A 100 Dr each – so

Ship 200 DrCargo A 200 DrCargo B 200 DrTotal 600 Dr

Fundamental Characteristics of Marine Insurance contracts

• Marine Insurance Act 1906

• Utmost Good faith• Insurable Interest• Proximate Cause• Mitigation

Utmost Good Faith

• S17 MIA - A contract of marine insurance is a contract based upon the utmost good faith and, if utmost good faith be not observed by either party, the contract may be avoided by the other party

Utmost Good Faith

• S18(1) - …the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract

• S20(1) – Every material representation made by the assured…must be true. If it is not true, the insurer may avoid the contract

Utmost Good Faith

• Materiality• Circumstances requiring disclosure

– Physical hazard– Moral hazard– Other circumstances

• Misleading or inaccurate circumstances

Utmost Good Faith

• Circumstances not requiring disclosure:

– Diminution of risk– Within insurer’s actual or presumed knowledge

Insurable interest

• Contract of indemnity• S5 MIA

– legal or equitable relation to the marine adventure

– whereby assured benefits from safe or due arrival of the property

– or is prejudiced by its loss, damage or detention• S6 MIA – assured must have an insurable interest at

the time of loss

Proximate cause

• S55(1) MIA …the insurer is liable for any loss proximately caused by a peril insured against but…he is not liable for any loss which is not proximately caused by a peril insured against.

Seaworthiness

• Section 39 MIA 1906

– implied warranty at the commencement of the voyage

– reasonably fit in all respects

• The Eurysthenes

– turning a blind eye

The Main Types of Marine Insurance

• Hull and Machinery– Increased Value

• Cargo• P&I• War• Mortgagees Interest Insurance

Hull and Machinery

• Institute Time Clauses (Hulls) ITC(H) 1995• International Hull Clauses 2003

• All Risks • Total Loss Only• Named Perils Only

• Burden of Proof

Perils (I)

Total loss/partial loss • marine perils• fire/explosion• Violent theft/jettison/piracy/• Contact with land conveyance, dock or harbour • Earthquake/volcanic eruption/lightning• Accidents in loading/shifting cargo

Perils - (II)

• Machinery breakdown or damage / latent defect• Negligence of master, officers crew or pilots• Negligence of repairers or charterers• Barratry• Contact with aircraft, helicopters or objects therefrom

Hull Machinery - Cover

• Salvage – charges and contributions• Collision liability (RDC) 3/4ths or 4/4ths• Expenses

Hull and Machinery – Scope of Cover

What is not covered:

• Wear and tear / Corrosion • Losses due to unseaworthiness• Losses due to negligence• Scuttling and losses due to fraud• War risks

Marine Perils

• Marine adventure - MIA 1906• Assured indemnified for losses incident to a marine

adventure• Maritime perils include perils incidental to

navigation • The Helen - blockade - a marine peril

The Marine Policy (1)

• ITC Hulls ‘9524 War exclusionIn no case shall this insurance cover loss damage

liabilityand expense caused by:24.1 loss, damage, liability or expense caused by

war, civil war, revolution, rebellion, insurrection or civil strike arising therefrom, or any hostile act by or against a belligerent power”

The Marine Policy (2)

• ITC Hulls ’95

24.2 capture seizure arrest restraint or detainment (barratry and piracy excepted) and the consequences thereof or any attempt thereat

24.3 derelict mines torpedoes bombs or other derelict weapons of war

The Marine Policy (3)

• Strikes exclusion clause (cl 25)

• Malicious acts exclusion clause (cl 26)

• Nuclear exclusion clause (cl 27)

The War Risk Policy (1)

Institute War and Strikes Clauses (Hull/Time) ’95

1 Perils Subject always to the exclusions hereinafter referred to, this insurance covers loss or damage to the vessel caused by:

1.1 war, civil war, revolution, rebellion, insurrection or civil strike arising therefrom, or any hostile act by or against a belligerent power”

The War Risk Policy (2)

• 1.2 capture seizure arrest restraint or detainment and the consequences thereof or any attempt thereat

• 1.3 derelict mines torpedoes bombs or other derelict weapons of war

The War and Strikes Policy (3)

1.4 strikers, locked out workmen or persons taking part in labour disturbances

1.5 any terrorist or any person acting maliciously or from a political motive

1.6 confiscation or expropriation

Definitions

WarCapture Civil War Seizure Revolution Arrest / Restraint

/DetainmentRebellion / Insurrection Requisition Terrorism

P & I Insurance

• Originally set up as mutual insurance by ship owners to cover risks that could not be insured by what is now recognised as H & M cover.

• Pollution, personal injury, collision liability to the extent not covered by H & M (RDC Cover), damage to docks etc.

Coverage - Collision• Standard Hull and

Machinery Policy - ITC (Hulls)

–only 3/4’s liability for collision

–3/4’s “Running Down Clause”

• 1/4 self insured to encourage shipowner to be careful!

Collision• RDC (running down

clause) specifically excludes

• Removal or disposal of obstructions including

–wrecks–cargo–any other thing

Liabilities in respect of Seamen

• Death• Personal Injury• Illness compensation• Damages• Compensation for lost

personal effects and wages

• Repatriation

Liabilities in respect of Supernumeraries

• For temporary “crew members”, e.g.

–Welders undertaking repairs at sea

–supercargoes

Liabilities in respect of Passengers

• As for crewmen but including

–Loss of or damage to baggage

–Accompanied vehicles

Fines • Fine for oil pollution• Fine for mistake in the

preparation of customs documentation

• Clubs DO NOT provide cover for any losses, fines arising from non-compliance with statutory requirements e.g.

–SOLAS–ISM

Stowaways

• Expenses• Deviation expenses• Security guards• Immigration fines• C/P disputes

Damage to Property

• Fixed and floating objects (“FFO”)

–eg. • Buoys• piers• dolphins• fenders• lightships

Pollution

• P&I Club is insurer for all claims for pollution damage

• Pollution insurance is compulsory for all ships in USA but only tankers in rest of world

• Claimants have direct right of action against insurer

Cargo• Most common are area

of claims–Loss of Cargo–Shortage of Cargo–Damage to cargo

• wetting• fire• breakage• contamination

Salvage

• Article 14 of Lloyds Open Form

–special compensation

–SCOPIC• General Average

–where cannot recover cargo GA contribution due to contract of carriage breached

Sue and Labour, Omnibus Risks Incidental to Shipowning

• Umbrella coverage - catch all• Sue and labour• unusual or borderline claims, the omnibus rule• if fail, members may refer their claim to:

–The Managers of the Association–The Association Board of Directors–London arbitration

Cargo

Institute Cargo Clause A - ICC(A) - full cover

Institute Cargo Clause B - ICC(B) - restricted cover

Institute Cargo Clause C - ICC(C) - most restricted cover

“Risks Covered” – All Risks

• All risks cover clause covers all losses likely to be suffered in a marine casualty subject to exceptions provided in Clauses 4, 5, 6, and 7.

• Inevitable loss or damage is not covered.

“Risks Covered” – All Risks

• British & Foreign Marine Insurance Co v Gaunt [1921] 2 AC 41 per Lord Sumner:

“All risks has the same effect as if all insurable risks were separately enumerated; for example, it includes the risk that when it happens to be raining the men who ought to use the tarpaulins to protect the wool may happen to be neglecting their duty. This concurrence is fortuitous; it is also the cause of loss by wetting.”

All Risks

• The assured has the burden of proving that some fortuitous loss or damage has occurred during the time that the policy was in effect.

• The assured does not have to show the exact cause of the loss.

• Financial losses such as loss of profit will not be recoverable insofar as they are not accompanied by physical loss or damage.

Mortgagee’s Interest Insurance

MIA 1906 Section 5

Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may be prejudiced by its loss or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

Mortgagee’s Interest Insurance

Mortgagee’s Protection

1. assignment by shipowner of its rights in the insurance policies with inclusion of a “loss payable clause” in favour of the mortgagee

2. the mortgagee and owner take out joint policies of insurance with a “loss payable clause” in favour of the mortgagee

Mortgagee’s Interest Insurance

The Good Luck - Hobhouse J.

“Typically, this type of policy covers losses which are not recoverable from the borrower’s insurers due to some nondisclosure or misrepresentation by the borrower; or due to some act or omission of the borrower which is not in itself an insured peril, as for example some wilful casting away of the vessel with the privity of the borrower”

Mortgagee’s Interest Insurance• Indemnity – Clause 1

This insurance will indemnify the Assured for loss resulting from loss of or damage to or liability of the Mortgaged Vessel which, in the absence of an Insured Peril set out in Clause 2.1 below, would prima facie be covered by the Owners’Policies and Club Entries, and not excluded therein, but in respect of which there is subsequent non-payment … by any of the underwriters of Owners Policies and Club Entries as a result of any Insured Peril, provided always that such Insured Peril occurs or exists without the privity of the Assured.

IMIC - Clause 2.1 -Perils

“2.1 Insured Perils

2.1.1 Avoidance of the Owners’ Policies and Club Entries .. on the grounds of misrepresentation or non-disclosure of any material circumstances, whether such misrepresentation or non-disclosure arises from the assured thereunder or any of such assured’s insurance agents or insurance brokers,

2.1.2 breach of any statutory provision or any express or implied promissory warranty or condition, including without limitation

2.1.2.1 breach of any implied warranty of seaworthiness or legality,

2.1.2.2 breach of Section 39(5) of the Marine Insurance Act of 1906,

IMIC - Clause 2.1- Perils

2.1.2.3 breach of trading warranties contained in any of the Owners’Policies and Club Entries,

2.1.2.4 breach of any warranty or condition in any of the Owners’Policies and Club Entries in respect of the classification of the Mortgaged Vessel by a Classification Society or any failure to comply with the recommendations of such Society to the extent required by such warranty or condition,

2.1.2.5 breach of any warranty or condition in any of the Owners’Policies and Club Entries which requires compliance with any condition survey, structural survey or P&I Club survey requirements and pursuant to which clauses underwriters deny a claim,

2.1.2.6 breach of any warranty or condition in any of the Owners’Policies and club Entries in respect of the ownership, flag, management or charter on a bareboat basis of the Mortgaged Vessel,

IMIC - Clause 2.1 - Perils

2.1.3 failure of the assured under the hull and machinery policy or the owners, managers or superintendents of the vessel or any of their onshore management to exercise due diligence in respect of any loss or damage to the Mortgaged Vessel where such failure to exercise due diligence entitles the underwriters of the owners’ hull and machinery policy to deny a claim otherwise recoverable thereunder,

2.1.4 any deliberate or fraudulent, casting away of or damage to the Mortgaged Vessel,

2.1.5 avoidance of a claim under any of the Owners’ Policies and Club Entries or of any of the Owners’ Policies and Club Entries by reason of breach of the duty of good faith in respect of such claim, or

2.1.6 the operation of any applicable provision in any of the Owners’Policies and Club Entries which provides for a time limitation on the presentation of claims,

IMIC - Clause 2.1 - Perils

2.1.7 in the event of the total loss of the Mortgaged Vessel, the final judgment or award of the courts or arbitration tribunalagreed to have jurisdiction under the express terms of Owners’Policies and Club Entries (or in the event of their being no such express terms, a competent court) following a contested hearing whereby the Owners’ claim is not recoverable under either Owners’ hull and machinery or war risks policies on the grounds that the loss has not been proved to have been proximately caused by a peril insured under those policies….

Law Reforms

• the test for materiality in non-disclosure and misrepresentation would change from that of a prudent underwriter to that of a "reasonable insured"

• a requirement that insurers can only rely on breach of warranty where there is a causal link between the alleged breach and loss.

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