Marine Insurance PDF

Marine Insurance
This book is a part of the course by Jaipur National University, Jaipur.

This book contains the course content for Marine Insurance.
JNU, Jaipur
First Edition 2013
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content whenever the need arises, and to vary it at any time without prior notice.
Index
I. Content....................................................................... II
II. List of Figures...........................................................IX
III. List of Tables............................................................ X
IV. Abbreviations..........................................................XI
V. Case Study.............................................................. 140
VI. Bibliography.......................................................... 145
VII. Self Assessment Answers................................... 147
Book at a Glance
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Contents
Chapter I . ..................................................................................................................................................... 1
Introduction to Marine Insurance............................................................................................................... 1
Aim................................................................................................................................................................. 1
Objectives....................................................................................................................................................... 1
Learning outcome........................................................................................................................................... 1
1.1 Introduction............................................................................................................................................... 2
1.2 History...................................................................................................................................................... 2
1.3 Formation of Marine Insurance................................................................................................................ 2
1.3.1 First Lloyd’s Act....................................................................................................................... 2
1.3.2 Second Lloyd’s Act................................................................................................................... 2
1.4 Meaning of Marine Insurance................................................................................................................... 3
1.5 Maritime Perils.......................................................................................................................................... 3
1.5.1 Meaning of Marine Perils......................................................................................................... 3
1.6 Assignment of Marine Policy.................................................................................................................... 4
1.7 Warranties . .............................................................................................................................................. 4
1.7.1 Kinds of Warranties.................................................................................................................. 4
1.8 Types of Marine Losses............................................................................................................................ 5
1.9 Underwriting ............................................................................................................................................ 7
1.9.1 Role of the Underwriter............................................................................................................ 7
1.9.2 Fundamental Factors When Underwriting Marine Cargo Insurance........................................ 8
1.10 Scope of Marine Insurance .................................................................................................................... 9
1.11 Subject Matter of Marine Insurance........................................................................................................ 9
1.12 Nature and Functions of Marine Insurance . ........................................................................................ 10
1.13 General Features of Marine Insurance...................................................................................................11
1.14 Insurance Market.................................................................................................................................. 13
Summary...................................................................................................................................................... 14
References.................................................................................................................................................... 14
Recommended Reading.............................................................................................................................. 14
Self Assessment............................................................................................................................................ 15
Chapter II.................................................................................................................................................... 17
Legal Aspects of Insurance with Specific Reference to Marine Insurance............................................ 17
Aim............................................................................................................................................................... 17
Objectives..................................................................................................................................................... 17
Learning outcome......................................................................................................................................... 17
2.1 Introduction . ......................................................................................................................................... 18
2.2 Evolution of Legal Framework for Marine Insurance............................................................................ 18
2.3 Insurance Contracts................................................................................................................................. 19
2.3.1 Contract of Insurance . ........................................................................................................... 19
2.3.2 Subject Matter of Contract of Insurance................................................................................. 20
2.3.3 Proposal.................................................................................................................................. 20
2.3.4 Non-Marine Insurance............................................................................................................ 20
2.3.5 Marine Insurance.................................................................................................................... 20
2.3.6 Cover Note.............................................................................................................................. 21
2.4 Principle of Utmost Good Faith.............................................................................................................. 21
2.4.1 Insurer’s Duty of Disclosure................................................................................................... 23
2.4.2 Inherent and Contractual Duties of Good Faith...................................................................... 23
2.4.3 Importance of Proposal Form................................................................................................. 23
2.4.4 Material Facts......................................................................................................................... 24
2.4.5 Prudent Insurer Test of Materiality......................................................................................... 24
2.4.6 Duration of Duty of Disclosure.............................................................................................. 24
2.4.7 Revival of Duty....................................................................................................................... 24
2.5 Insurable Interest..................................................................................................................................... 24
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2.5.1 Meaning of Insurable Interest................................................................................................. 25
2.5.2 Time When Insurable Interest must Exist............................................................................... 26
2.6 Indemnity . ............................................................................................................................................ 26
2.7 Subrogation............................................................................................................................................. 27
2.7.1 Insured’s Rights and Remedies............................................................................................... 27
2.7.2 Exercise of Right of Subrogation............................................................................................ 28
2.7.3 Subrogation and Abandonment............................................................................................... 28
2.8 Contribution............................................................................................................................................ 28
2.8.1 Conditions Necessary for Right of Contribution.................................................................... 28
2.9 Doctrine of Proximate Cause.................................................................................................................. 28
2.9.1 Tests for Determining Proximate Cause................................................................................. 29
2.10 Fundamentals of Marine Insurance Contract........................................................................................ 30
2.11 Marine Insurance ................................................................................................................................. 31
2.12 Insured Risks: Perils of the Sea............................................................................................................ 31
2.13 Marine Insurance Policy....................................................................................................................... 31
2.13.1 Subject-Matter ..................................................................................................................... 32
2.13.2 Assignment of Policy ........................................................................................................... 32
2.14 Principles of Marine Insurance............................................................................................................. 32
2.14.1 Principle of Utmost Good Faith............................................................................................ 32
2.14.2 Principle of Insurable Interest............................................................................................... 32
2.14.3 Principle of Indemnity.......................................................................................................... 33
2.14.4 Principle of Subrogation....................................................................................................... 33
Summary...................................................................................................................................................... 34
References.................................................................................................................................................... 34
Self Assessment............................................................................................................................................ 36
Chapter III................................................................................................................................................... 38
Marine Insurance Act, 1963....................................................................................................................... 38
Aim............................................................................................................................................................... 38
Objectives..................................................................................................................................................... 38
3.1 Introduction............................................................................................................................................. 39
3.2 Various sections of Marine Insurance Act, 1963.................................................................................... 39
3.2.1 Section 2 Definitions.............................................................................................................. 39
3.2.2 Section 3 Marine Insurance Defined...................................................................................... 39
3.2.3 Section 4 Mixed Sea and Land Risks..................................................................................... 39
3.2.4 Section 5 Lawful Marine Adventure....................................................................................... 40
3.2.5 Section 6 Avoidance of Wagering Contracts........................................................................... 40
3.2.6 Section 7 Insurable Interest Defined....................................................................................... 40
3.2.7 Section 8 When Interest must Attach...................................................................................... 40
3.2.8 Section 9 Defeasible or Contingent Interest........................................................................... 40
3.2.9 Section 10 Partial Interest....................................................................................................... 40
3.2.10 Section 11 Reinsurance......................................................................................................... 40
3.2.11 Section 14 Advance Freight.................................................................................................. 41
3.2.12 Section 15 Charges of Insurance.......................................................................................... 41
3.2.13 Section 16 Quantum of Interest............................................................................................ 41
3.2.14 Section 18 Measure of Insurable Value................................................................................ 41
3.2.15 Section 20 Disclosure by Assured........................................................................................ 41
3.2.16 Section 21 Disclosure by Agent Effecting Insurance........................................................... 42
3.2.17 Section 23 When Contract is Deemed to be Concluded....................................................... 42
3.2.18 Section 24 Contract must be Embodied in Policy................................................................ 42
3.2.19 Section 25 What Policy must Specify................................................................................... 42
3.2.20 Section 26 Signature of Insurer............................................................................................ 42
3.2.21 Section 33 Premium to be Arranged..................................................................................... 42
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3.2.22 Section 35 Nature of Warranty............................................................................................. 42
3.2.23 Section 36 When Breach of Warranty Excused.................................................................... 43
3.2.24 Section 37 Express Warranties.............................................................................................. 43
3.2.25 Section 39 No Implied Warranty of Nationality................................................................... 43
3.2.26 Section 40 Warranty of Good Safety.................................................................................... 43
3.2.27 Section 41 Warranty of Seaworthiness of Ship..................................................................... 43
3.2.28 Section 42 No Implied Warranty that Goods are Seaworthy................................................ 43
3.2.29 Section 43 Warranty of Legality........................................................................................... 43
3.2.30 Section 44 Implied Condition as to Commencement of Risk............................................... 44
3.2.31 Section 45 Alteration of Port of Departure........................................................................... 44
3.2.32 Section 46 Sailing for Different Destination........................................................................ 44
3.2.33 Section 47 Change of Voyage............................................................................................... 44
3.2.34 Section 48 Deviation............................................................................................................. 44
3.2.35 Section 49 Several Ports of Discharge.................................................................................. 44
3.2.36 Section 50 Delay in Voyage.................................................................................................. 44
3.2.37 Section 51 Excuse for Deviation or Delay............................................................................ 45
3.2.38 Section 52 When and How Policy is Assignable.................................................................. 45
3.2.39 Section 53 Assured Who has no Interest cannot Assign....................................................... 45
3.2.40 Section 54 When Premium Payable...................................................................................... 45
3.2.41 Section 55 Included and Excluded Losses............................................................................ 45
3.2.42 Section 56 Partial and Total Loss.......................................................................................... 46
3.2.43 Section 57 Actual Total Loss................................................................................................ 46
3.2.44 Section 58 Missing Ship....................................................................................................... 46
3.2.45 Section 59 Effect of Transhipment, etc................................................................................. 46
3.2.46 Section 60 Constructive Total Loss Defined........................................................................ 46
3.2.47 Section 61 Effect of Constructive Total Loss....................................................................... 46
3.2.48 Section 62 Notice of Abandonment...................................................................................... 46
3.2.49 Section 63 Effect of Abandonment....................................................................................... 47
3.2.50 Section 64 Particular Average Loss...................................................................................... 47
3.2.51 Section 65 Salvage Charges.................................................................................................. 47
3.2.52 Section 66 General Average Loss......................................................................................... 47
3.2.53 Section 67 Extent of Liability of Insurer for Loss................................................................ 48
3.2.54 Section 68 Total loss............................................................................................................. 48
3.2.55 Section 69 Partial Loss of Ship............................................................................................. 48
3.2.56 Section 70 Partial Loss of Freight......................................................................................... 48
3.2.57 Section 71 Partial Loss of Goods, Merchandise, etc. .......................................................... 49
3.2.58 Section 72 Apportionment of Valuation................................................................................ 49
3.2.59 Section 73 General Average Contributions and Salvage Charges........................................ 49
3.2.60 Section 74 Liabilities to Third Parties.................................................................................. 49
3.2.61 Section 75 General Provisions as to Measure of Indemnity................................................. 49
3.2.62 Section 76 Particular Average Warranties............................................................................. 50
3.2.63 Section 77 Successive Losses............................................................................................... 50
3.2.64 Section 78 Suing and Labouring Clause............................................................................... 50
3.2.65 Section 79 Rights of Subrogation......................................................................................... 50
3.2.66 Section 80 Right of Contribution.......................................................................................... 50
3.2.67 Section 81 Effect of Under-Insurance................................................................................... 51
3.2.68 Section 82 Enforcement of Return........................................................................................ 51
3.2.69 Section 83 Return by Agreement.......................................................................................... 51
3.2.70 Section 84 Return for Failure of Consideration.................................................................... 51
3.2.71 Section 85 Ratification by Assured....................................................................................... 51
3.2.72 Section 86 Implied Obligation Varied by Agreement or Usage............................................ 52
3.2.73 Section 87 Reasonable Time, etc., a Question of Fact.......................................................... 52
3.2.74 Section 88 Covering Note as Evidence................................................................................. 52
3.2.75 Section 89 Power to Apply Act with Modifications, etc., in Certain Cases......................... 52
3.2.76 Section 90 Certain Provisions to Override Transfer of Property Act, 1882......................... 52
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3.2.77 Section 91 Savings................................................................................................................ 52
Summary...................................................................................................................................................... 53
References.................................................................................................................................................... 53
Self Assessment............................................................................................................................................ 54
Chapter IV................................................................................................................................................... 56
Types of Marine Insurance in India......................................................................................................... 56
Aim............................................................................................................................................................... 56
Objectives..................................................................................................................................................... 56
4.1 Introduction............................................................................................................................................. 57
4.2 Marine Cargo Insurance.......................................................................................................................... 57
4.2.1 Mode of Conveyance.............................................................................................................. 57
4.2.2 Voyage..................................................................................................................................... 57
4.2.3 Conditions of Insurance.......................................................................................................... 58
4.2.4 Cargo Inland Transit and Export/Import................................................................................. 58
4.2.5 Other Provisions Applicable to Marine Insurance.................................................................. 58
4.3 Hull Insurance......................................................................................................................................... 59
4.3.1 Hull and Machinery of Hull.................................................................................................... 59
4.3.2 Ship Classification.................................................................................................................. 59
4.3.3 Insurable Interest..................................................................................................................... 60
4.3.3.1 Ship Owners’ Interests............................................................................................. 60
4.3.3.2 Subsidiary Interests.................................................................................................. 60
4.3.3.3 P & I Interests........................................................................................................... 60
4.3.4 Classification of Marine Hull ................................................................................................ 61
4.3.5 Scope of Marine Hull Insurance............................................................................................. 61
4.3.6 Underwriting Aspects of Marine Hull Insurance.................................................................... 62
4.3.6.1 Hull Underwriting and Rating.................................................................................. 62
4.3.7 Hull Insurance Covers............................................................................................................ 62
4.3.8 General Rules and Regulations of Marine Hull Tariff............................................................ 63
4.4 Ordinary Freight...................................................................................................................................... 63
4.5 Chartered Freight.................................................................................................................................... 63
4.6 Liabilities . ............................................................................................................................................ 64
4.7 Loss of Charter Hire................................................................................................................................ 64
4.8 Partial Loss of Ship................................................................................................................................. 64
4.9 Warranty of Seaworthiness..................................................................................................................... 64
4.9.1 Trading Warranties.................................................................................................................. 65
4.9.2 Lost or Not Lost...................................................................................................................... 65
4.10 Stamp Duty........................................................................................................................................... 65
Summary...................................................................................................................................................... 66
References.................................................................................................................................................... 66
Self Assessment............................................................................................................................................ 67
Chapter V..................................................................................................................................................... 69
Marine Insurance Policies.......................................................................................................................... 69
Aim............................................................................................................................................................... 69
Objectives..................................................................................................................................................... 69
5.1 Introduction............................................................................................................................................. 70
5.2 Marine Insurance Policies....................................................................................................................... 70
5.3 Marine Insurance.................................................................................................................................... 71
5.4 Types of Marine Policies......................................................................................................................... 71
5.4.1 Time and Voyage Policies....................................................................................................... 71
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5.4.1.1 Special Rules for Voyage Policies . ......................................................................... 71
5.4.1.2 Time Policy.............................................................................................................. 72
5.4.1.3 Mixed Policy............................................................................................................ 72
5.4.2 Floating Policy........................................................................................................................ 72
5.4.3 Valued Policy.......................................................................................................................... 72
5.4.4 Unvalued Policy (Open Policy) ............................................................................................. 73
5.4.5 Builder’s Risk Policy ............................................................................................................. 73
5.4.6 Blanket Policy . ...................................................................................................................... 73
5.4.7 Port Risk Policy ..................................................................................................................... 73
5.4.8 Wager Policy .......................................................................................................................... 73
5.4.9 Special Hazards Policy .......................................................................................................... 73
5.4.10 Composite Policy.................................................................................................................. 73
5.4.11 Block Policy . ....................................................................................................................... 73
5.4.12 Vessel Insurance Policy........................................................................................................ 73
5.4.13 Special Storage Risks Policy................................................................................................ 74
5.4.14 Annual Policy . ..................................................................................................................... 74
5.4.15 Duty Insurance Policy . ........................................................................................................ 74
5.4.16 Increased Value Insurance Policy ........................................................................................ 74
5.4.17 Package Policy . ................................................................................................................... 74
5.5 Guideline on Most Important Parts of the Policy................................................................................... 74
5.6 Features and Benefits of Marine Policies............................................................................................... 75
5.7 Procedure for Obtaining Marine Insurance Policy................................................................................. 75
5.7.1 Procedure for Filing Marine Insurance Claim........................................................................ 75
5.7.2 Immediate Action after Loss................................................................................................... 75
5.7.3 Claim Procedure..................................................................................................................... 76
5.8 Features of Marine Cargo Insurance [New India Assurance Policy]...................................................... 76
5.8.1 Scope of Policy....................................................................................................................... 76
5.8.2 Add-on Covers........................................................................................................................ 77
5.8.3 Who Can Take the Policy?...................................................................................................... 77
5.8.4 How to Decide the Sum Assured?.......................................................................................... 77
5.8.5 How to Claim?........................................................................................................................ 77
5.9 Features of Marine Hull Policy (New India Assurance Policy).............................................................. 78
5.9.1 Who can Take the Policy?....................................................................................................... 78
5.9.2 What is Covered in the Policy?............................................................................................... 78
5.9.3 Scope of Risk Cover............................................................................................................... 78
Summary...................................................................................................................................................... 79
References.................................................................................................................................................... 79
Self Assessment............................................................................................................................................ 80
Chapter VI................................................................................................................................................... 82
Marine Clauses............................................................................................................................................ 82
Aim............................................................................................................................................................... 82
Objectives..................................................................................................................................................... 82
6.1 Marine Clauses........................................................................................................................................ 83
6.2 Analysis of ICC- A/B/C Clauses............................................................................................................. 84
6.3 Jettison.................................................................................................................................................... 85
6.4 Both to Blame Collision Clause.............................................................................................................. 85
6.4.1 In Addition to the Above, the Following Expenses are also Paid........................................... 86
6.5 Institute Cargo Clause ‘B’ (ICC ‘B’)...................................................................................................... 86
6.6 Institute Cargo Clauses ‘A’ ICC-‘A’........................................................................................................ 87
6.7 The Losses / Damages Excluded under ICC ‘A’ ‘B’ and ‘C’ ................................................................. 87
6.8 Cover for War and SRCC Risks.............................................................................................................. 88
6.9 Sub Clauses Common to ICC A/B/C...................................................................................................... 89
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6.9.1 Duration of Cover or Transit ‘Insurance Clause’.................................................................... 89
6.9.2 Termination of Carriage Clause.............................................................................................. 89
6.9.3 Change of Voyage Clause....................................................................................................... 89
6.9.4 Insurable Interest Clause......................................................................................................... 89
6.9.5 Forwarding Charges Clauses.................................................................................................. 89
6.9.6 Constructive Total Loss Clause.............................................................................................. 89
6.9.7 Increased Value Clause........................................................................................................... 89
6.9.8 Not to Inure Clause................................................................................................................. 89
6.9.9 Duty of Assured Clause.......................................................................................................... 90
6.9.10 Waiver Clause....................................................................................................................... 90
6.9.11Reasonable Dispatch Clause.................................................................................................. 90
6.9.12 Law and Practice Clause....................................................................................................... 90
6.10 Duration of Cover for ‘War Risks’........................................................................................................ 90
6.10.1 Duration of Cover for SRCC Risks...................................................................................... 90
6.11 Inland Transit Rail/Road Clauses.......................................................................................................... 90
6.11.1 Common Exclusions under Clause A/B/C............................................................................ 90
6.12 War Exclusion Clause........................................................................................................................... 91
6.13 Strike Exclusion Clause........................................................................................................................ 91
6.14 Incidental Clauses................................................................................................................................. 91
6.15 Duty Insurance Clause.......................................................................................................................... 93
6.16 Increased Value – Insurance Clause...................................................................................................... 93
6.17 Institute Classification Clause............................................................................................................... 93
6.18 Institute Theft Pilferage and Non Delivery (Insured Value) Clause..................................................... 93
6.19 Institute Replacement Clause................................................................................................................ 94
6.20 Institute Clauses – Trade Clauses......................................................................................................... 94
6.21 Institute Coal Clauses........................................................................................................................... 94
6.22 Institute FOSFA Trade Clauses (A) (B) and (C)................................................................................... 95
6.23 Institute Container Clauses................................................................................................................... 95
6.24 Marine Clauses – Hull.......................................................................................................................... 95
6.24.1 Institute Time Clauses – Hull (ITC Hulls)............................................................................ 95
6.24.1.1 Scope of Perils Cover............................................................................................. 96
6.24.1.2 8 Other Important Provisions................................................................................. 97
6.24.2 Institute Time Clauses Hulls – Only Total Loss.................................................................. 98
6.24.3 Institute Voyage Clauses – Hulls......................................................................................... 98
6.24.4 Institute Time Clauses Hulls – Port Risks........................................................................... 98
6.24.5 Collision Liability is Payable in Full (4/4ths)....................................................................... 98
6.25 Institute Fishing Vessel Clauses............................................................................................................ 98
6.26 Institute War and Strikes Clauses Hulls-Time...................................................................................... 99
Summary.................................................................................................................................................... 100
References.................................................................................................................................................. 100
Recommended Reading............................................................................................................................ 100
Self Assessment.......................................................................................................................................... 101
Chapter VII............................................................................................................................................... 103

Reinsurance............................................................................................................................................... 103
Aim............................................................................................................................................................. 103
Objectives................................................................................................................................................... 103
Learning outcome....................................................................................................................................... 103
7.1 Introduction to Reinsurance.................................................................................................................. 104
7.2 History of Reinsurance......................................................................................................................... 104
7.2.1 Beginning of Reinsurance..................................................................................................... 104
7.3 Need for Reinsurance............................................................................................................................ 105
7.4 Risk Distribution through Reinsurance................................................................................................. 106
7.4.1 Reinsurance – Process Flow................................................................................................. 106
7.4.2 Difference between Coinsurance and Reinsurance............................................................... 107
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7.5 Risk Management through Reinsurers.................................................................................................. 107
7.6 Underwriting - Assessment, Capacity Allocation and Pricing.............................................................. 108
7.6.1 Risk Assessment and Terms and Conditions........................................................................ 108
7.6.2 Principles of Insurability....................................................................................................... 109
7.6.3 Capacity Allocation, Accumulation Control and Peak Risks............................................... 109
7.6.4 Natural Catastrophe Loss Potentials..................................................................................... 109
7.6.5 Pricing and Wording............................................................................................................. 109
7.7 Asset Management................................................................................................................................ 109
7.7.1 Capital Management............................................................................................................. 109
7.7.2 Diversification ......................................................................................................................110
7.8 Benefits of Reinsurance.........................................................................................................................110
7.8.1 Effect of Reinsurance on the Direct Insurer..........................................................................110
7.8.2 Effect of Reinsurance on the Reinsurer.................................................................................111
7.9 Reinsurance Firms: Names and Business Numbers...............................................................................111
7.10 Functions of Reinsurance.....................................................................................................................112
7.11 Categories of Reinsurance...................................................................................................................113
7.11.1 Facultative Reinsurance.......................................................................................................113
7.11.2 Treaty (Obligatory) Reinsurance..........................................................................................113
7.12 Types of Reinsurance ..........................................................................................................................114
7.12.1 Proportional Reinsurance . ..................................................................................................114
7.12.2 Non-Proportional Reinsurance: Excess of Loss (XL) Reinsurance ...................................115
7.13 Comparative Analysis: Direct Insurers and Reinsurers.......................................................................116
7.14 Marine Reinsurance.............................................................................................................................118
7.15 Cargo Reinsurance...............................................................................................................................118
7.16 Hull Reinsurance..................................................................................................................................118
7.17 Common Reinsurance Programme for Indian Business......................................................................119
7.18 Regulating the Reinsurance.................................................................................................................119
Summary.................................................................................................................................................... 121
References.................................................................................................................................................. 121
Self Assessment.......................................................................................................................................... 122
Chapter VIII.............................................................................................................................................. 124

Maritime Frauds and Miscellaneous Features . .................................................................................... 124
Aim............................................................................................................................................................. 124
Objectives................................................................................................................................................... 124
Learning outcome....................................................................................................................................... 124
8.1 Port Procedure....................................................................................................................................... 125
8.2 Procedure for the Clearance of Cargo................................................................................................... 125
8.2.1 Clearance Inward of Vessel................................................................................................... 125
8.2.2 Clearance Outward of Vessel ............................................................................................... 126
8.2.3 Documents to be Carried by a Ship...................................................................................... 126
8.2.4 Special Features of Loading and Discharge of Cargo.......................................................... 126
8.3 Import/Export Procedure...................................................................................................................... 127
8.4 Customs Clearance Procedure and Refund of Duty............................................................................. 128
8.5 Maritime Frauds.................................................................................................................................... 130
8.5.1 Types of Maritime Frauds..................................................................................................... 130
8.6 Prevention of Maritime Fraud............................................................................................................... 132
8.7 Documentary Frauds............................................................................................................................. 135
Summary.................................................................................................................................................... 137
References.................................................................................................................................................. 137
Self Assessment.......................................................................................................................................... 138
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List of Figures
Fig. 1.1 Kinds of warranties............................................................................................................................ 4
Fig. 1.2 Types of marine losses....................................................................................................................... 5
Fig. 1.3 Categories of marine insurance....................................................................................................... 10
Fig. 7.1 Three main concerns of risk management .................................................................................... 108
Fig. 7.2 Basic types of reinsurance..............................................................................................................114
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List of Tables
Table 1.1 Actual total cost and constructive total cost.................................................................................... 6
Table 1.2 General average and particular average.......................................................................................... 6
Table 6.1 Perils covered under institute time clauses................................................................................... 97
Table 7.1 Top professional reinsurers ranked by net premiums written in 2006 ........................................112
Table 7.2 Comparisons between direct insurer and reinsurer......................................................................117
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Abbreviations
C & F - Cost & Freight
CHS - Continuous Hull Survey
CIF - Cost, Insurance & Freight
CMS - Continuous Machinery Survey
FOB - Free on Board
FOSFA - Federation of Oils, Seeds and Fats Associations
GIC - General Insurance Corporation
ICC - Institute Cargo Clause
IFV - Institute Fishing Vessel
ILU - Institute of London Underwriters
IRDA - Insurance Regulatory & Development Authority
IRS - Indian Register of Shipping
ITC - Institute Time Clauses
MIA - Marine Insurance Act
OTL - Other than Total Loss
PPI - Policy Proof of Interest
SRCC - Strike, Riot and Civil Commotion
TL - Total Loss
TPND - Theft, Pilferage and Non-Delivery
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Chapter I
Introduction to Marine Insurance
Aim
The aim of this chapter is to:
• describe historical development of marine insurance
• define meaning of marine insurance
• explain scope of marine insurance
Objectives
The objectives of this chapter are to:
• discuss purpose of marine insurance
• state the subject matter of marine insurance
• define Hull insurance
Learning outcome
At the end of this chapter, you will be able to:
• discuss the history of marine insurance
• explain marine insurance
• define the types of marine insurance
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Marine Insurance
1.1 Introduction
Marine Insurance has developed over many years. Eventualities are always there in the human mind. The concept
of insurance came across from the fear against risk and uncertainty and the aspiration to seek fortification for the
same. In Marine Insurance, it is found that this notion of spreading the risk over a larger group was established since
very ancient times. It is believed that, 5000 years ago the Chinese traders, transferred their goods via boats from the
Yangtze River to the other parts of the world.
1.2 History
• More than 2500 years ago, the Rhodians were involved in advancing of loans under Respondentia and Bottomry
Bonds.
• Bottomry is defined as a loan rose by the captain of the vessel when money was urgently needed for the prosecution
of the voyage. The loan was for the protection either of the vessel or both, vessel and cargo. The loan was not
repayable if the venture was lost.
• Respondentia is defined as an advance on cargo alone and was repayable only if the cargo reached the end safe
and sound.
• The financiers charged the rate of interest under both types of loans which were sufficiently high and also took
care of the risk element, i.e., accidental loss at sea.
• As the name suggests, this policy originally provided for loss of damage to the Hull as well as to the cargo arising
out of maritime perils. Maritime perils (the perils of the seas) against which the insurance cover was provided
were fire, enemies, jettison, barratry of the master or crew, pirates, thieves, arrests by princes, etc.
• Now a days, marine involves large shipping companies that require shield for their fleet against the perils of
the sea.
1.3 Formation of Marine Insurance

• Marine insurance emerged in the Coffee Club of Edward Lloyd in 1779 AD. S.G. (Ship and Goods) policy form
was issued by Edward Lloyd. This establishment was a popular place for sailors, merchants, and ship owners,
and Lloyd catered to them with reliable shipping news. The shipping industry community gathered at this place
to discuss insurance deals among themselves.
• Due to the focus on marine business, during the formative years of Lloyd’s (between 1688 and 1807), one of
the primary sources of Lloyd’s business was the insurance of ships engaged in slave trading.
1.3.1 First Lloyd’s Act

• In 1871, the first Lloyd’s Act was passed in Parliament which gave the business a sound legal footing. The
Lloyd’s Act of 1911 set out the Society’s objectives, which included the promotion of its members’ interests
and the collection and distribution of information.
• The membership of the Society, which was largely made up of market participants, was actually to be too small
in relation to the market’s capitalisation and the risks that it was underwriting.
• Lloyd’s response was to commission a secret internal inquiry, known as the Cromer Report, which reported
in 1968. This report advocated the widening of membership to non-market participants, including non-British
subjects and women, and to reduce the onerous capitalisation requirements. The Report also drew attention to
the danger of conflicts of interest.
1.3.2 Second Lloyd’s Act

• In 1980, Sir Henry Fisher was commissioned by the Council of Lloyd’s to produce the foundation for a new
Lloyd’s Act. The recommendations of his Report addressed the ‘democratic deficit’ and the lack of regulatory
muscle.
• The Lloyd’s Act of 1982 further redefined the structure of the business, and was designed to give the ‘external
names’, introduced in response to the Cromer Report, a say in the running of the business through a new
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governing Council.
• Immediately after the passing of the 1982 Act, evidences encouraged the commencement of internal disciplinary
proceedings against a number of individual underwriters who had siphoned sums from their businesses to their
own accounts. These individuals included a Deputy Chairman of Lloyd’s, Ian Posgate, and a Chairman, Sir
Peter Green.
• In 1986, the UK government commissioned Sir Patrick Neill to report on the standard of investor protection
available at Lloyd’s. His report was produced in 1987 and made a large number of recommendations but was
never implemented in full.
Structure
• Lloyd’s is not an insurance company. It is an insurance market of members. Lloyd’s has retained some unusual
structures and practices that differ from all other insurance providers today.
• Originally created as an unincorporated association of subscribing members in 1774, it was incorporated by the
Lloyd’s Act 1871, and it is currently governed under the Lloyd’s Acts of 1871 through to 1982.
• Lloyd’s itself does not underwrite insurance business, leaving that to its members (see below). Instead the Society
operates effectively as a market regulator, setting rules under which members operate and offering centralised
administrative services to those members.
1.4 Meaning of Marine Insurance

Marine insurance is defined as a form of insurance covering loss or damage to vessels or to cargo during transportation
to the high seas. It allows the insurer to undertake the cover insured in the form and to the position thereby approved
against the marine losses, incidental to marine adventures.
1.5 Maritime Perils

• Marine Insurance policies protect the assured against maritime perils. “Maritime Perils” are perils consequent
on, or incidental to, the navigation of the sea, that is to say, perils of the sea, fire, war perils, pirates and rovers,
thieves, captures, seizures, restraints and detainment of princes and peoples, jettisons, barratry and any other
perils which are either of the like kind or may be specified by the policy.
• Perils of the seas cover losses caused by seawater, stranding, cyclone, storm, lightning, fog, and rough weather,
collision with other ship, striking upon a sunken rock or icebergs.
• War Perils cover loss sustained owing to hostile acts of an enemy.
• Pirates and rovers mean sea robbers and rioters who attack the ship from the shore.
• Jettison refers to throwing a part of the goods overboard with a view to lighten the ship and residue of the
cargoes in an emergency.
• Barratry means wrongful act willfully committed by the captain or crew in contravention of their duties, thereby
causing prejudice to the owners. For example, intentionally setting fire to ship or running aground the ship.
• Perils of the sea refer only to fortuitous accidents or casualties of the seas. It does not include the ordinary wear
and tear, for example, bursting or breakage of shaft because of inevitable action of the winds and waves.
• By the implied warranty of sea-worthiness, it is understood that a ship will be in such a condition as to withstand
the ordinary waves and winds and therefore if the ship is sunk because of unseaworthines (for example, defective
boiler and machinery) at the commencement of voyage, the peril is not a sea peril and the insurer is not liable
for any loss.
• On the other hand, the ship owner shall be liable to compensate the insurer, for any moneys payable to cargo
owners, whose cargoes might have been damaged.
• Perils of the seas usually relate to casualties which might occur, and not to those which must occur.
1.5.1 Meaning of Marine Perils

Maritime perils can be defined as the unexpected (an element of chance or ill luck) accidents or losses of the sea
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Marine Insurance
caused without the willful intervention of human agency. The perils are incidental to the sea journey that arises
inconsequence of the sea journey. There are different forms of perils, of which only a few are covered by insurance
while others are not. There are two types of marine perils. They are as follows:
• Insured perils: Insured perils are storm, collision of one ship with another ship, again strocks, burning and
sinking of the ship, spoilage of cargo from sea water, mutiny, piracy or willful destruction of the ship and cargo
by the master (captain) of the ship or the crew, jettison etc.
• Uninsured perils: Uninsured perils are regular wear and tear of the vessel, leakage (unless it is caused by an
accident), breakage of goods due to bad movement of the ship, damage by rats and loss by delay. All losses and
damages caused due to reasons not considered as perils of the sea are not provided insurance cover.
1.6 Assignment of Marine Policy

• A marine insurance policy may be transferred by assignment unless the terms of the policy expressly prohibit
the same.
• The policy may be assigned either before or after the loss. The assignment may be made either by endorsement
on the policy itself or on a separate document.
• The insured need not give a notice or information to the insurer or underwriter about assignment.
• In case of death of the insured, a marine policy is automatically assigned to his beneficiary. At the time of
assignment, the assignor must possess an insurable interest in the subject matter insured.
• An insured who has parted with or lost interest in the subject matter insured can not make a valid assignment.
• After the occurrence of the loss, the policy can be assigned freely to any person. The assignor merely transfers
his own right to claim to the assignee.
1.7 Warranties
Besides the three important principles, i.e., good faith, indemnity and insurable interest, it is necessary that all the
marine insurance contracts must fulfil the warranties also. Warrantee means a condition which is basic to the contract
of insurance. The breach of which entitles the insurer to avoid the policy altogether. If the warranty is not complied
with by the insured, the contract comes to an end. There are two exceptions where the breach of warranty is excused
and does not affect that insurer’s liability:
• where owning to change in the circumstance, the warranty is inapplicable and
• where due to enactment of a subsequent law, the warranty becomes unlawful.
1.7.1 Kinds of Warranties

Warranties are of two types:
Kinds of
Warranties
Express Implied
warranty warranty
Fig. 1.1 Kinds of warranties
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• An express warranty
It is one which is expressed or clearly stated in the contract and it can be easily ascertained whether it has been
fulfilled or not. For instance a marine policy usually contains the following express warranties:
The ship will sail on a specified day.
The ship is safe on a particular day.
The ship will proceed to the port of destination without any deviation.
The ship is neutral and will remain so during the voyage.
• The implied warranty

The implied warranty is not expressly mentioned in the contract but the law takes it for granted that such warranty
exists. An express warranty does not exclude implied warranty unless it is inconsistent therewith. Implied warranties
do not appear in the policy documents at all, but are understood without being put into words, and as such, are
automatically applicable. These are included in the policy by law, general practice, long established custom or usage.
The important implied warranties are discussed below:
Sea-Worthiness of the ship: A ship is sea worthy when it is in a fit condition as to repair, equipment, crew, and
so on, to encounter the ordinary perils of the voyage. This implies that the ship must be suitably constructed,
properly equipped and manned, sufficiently fuelled and provisioned and capable of withstanding the ordinary
strain and stress of the voyage. It must not be overloaded.
Legality of Voyage: The journey undertaken by the ship must be for legal purposes. Carrying prohibited or
smuggled goods is illegal and therefore, the insurer shall not be liable for the loss.
Non-deviation of the ship route: It is assumed that the ship will maintain the same route as stated in the
policy in ordinary course, but in case of peril it is permitted to deviate. If the ship does not follow the usual
route, the insurer will not be liable even if the ship regains her route before any loss takes place. However,
the insurer remains liable for any loss which might have occurred prior to the deviation.
1.8 Types of Marine Losses

A loss arising in a marine adventure due to perils of the sea is a marine loss. Marine loss may be classified into two
categories:
Total loss
Marine
Losses
Partial loss
Fig. 1.2 Types of marine losses
• Total loss
A total loss implies that the subject matter insured is fully destroyed and has completely lost its owner. Total loss
can be Actual total loss or Constructive total loss.
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Actual total cost Constructive total cost
In case of constructive total loss, the ship or cargo

In actual total loss subject matter is completely
insured is not completely destroyed but is so badly
destroyed or so damaged that it ceases to be a thing
damaged that the cost of repair or recovery would
of the kind insured.
be greater than the value of the property saved.
E.g., a ship dashed against the rock and is stranded

in a badly damaged position. The expenses of
For example, sinking of ship, complete destruction
bringing it back and repairing it would be more
of cargo by fire, etc.
than the actual value of the damaged ship, it is
abandoned.
Table 1.1 Actual total cost and constructive total cost
• Partial loss
A partial loss occurs when the subject matter is partially destroyed or damaged. Partial loss can be general average
or particular average.
General average Particular average
General average refers to the sacrifice made during

Particular average may be defined as a loss
extreme circumstances for the safety of the ship
arising from damage accidentally caused by the
and the cargo. This loss has to be borne by all
perils insured against. Such a loss is borne by the
the parties who have an interest in the marine
underwriter who insured the object damaged.
adventure.
For example, if a ship is damaged due to bad
For example, a loss caused by throwing overboard
weather, the loss incurred is a particular average
of goods is a general average and must be shared
loss.
by various parties.
Table 1.2 General average and particular average
The salient features of a contract of marine insurance are as follows:

• It is based on utmost good faith. Both, the insured and the insurer must disclose everything which is in their
knowledge which can affect the contract of insurance.
• It is a contract of indemnity. The insured is entitled to recover only the actual amount of loss from the insurer.
• Insurable interest in the subject-matter insured must exist at the time of the loss. It need not exist when
the insurance policy is taken. Under marine insurance, the following persons are deemed to have insurable
interest:
The owner of the ship
The owner of the cargo
A creditor who has advanced money on the security of the ship or cargo.
The mortgagor and mortgagee
The master and crew of the ship have insurable interest in respect of their wages.
In case of advance freight, the person advancing the freight has an insurable interest if such freight is not
repayable in case of loss.
• It is subject to the doctrine of cause a proximal. Where a loss is brought by several causes in succession to one
another, the proximate or nearest cause of loss must be taken into account. If the proximate cause is covered by
the policy, only then the insurance company will be liable to compensate the insured.
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• It must contain all the essential requirements of a valid contract, e.g. lawful consideration, free consent, capacity
of the parties, etc.
1.9 Underwriting
• The word “Underwriting” refers to protecting by way of insurance. Marine underwriting refers to providing
marine insurance to the necessary clients. In today’s highly complex marine business, it is very important to
have marine underwriting service.
• Marine underwriting is a very tricky concept. This is because there are many different dimensions to it. The loss
to the body or hull of the ship and the cargo it contained, the reasons or the causes of the loss, the place where
the loss occurred and most importantly the amount that needs to be settled are the main areas that a marine
underwriter needs to focus on.
• It is a well-known fact that insurance claims are very uncertain and there needs to be a complete knowledge of
all the elements involved before placing a claim for compensation purposes.
• A marine underwriter therefore needs to be aware of not just rules and regulations of the country to which the
ship belongs but also about other countries where potential incidents could occur.
• To explain it in simple terms, the maritime rules and regulations of all countries needs to be noted down by a
marine underwriter so that the clients do not face any problems regarding the settlement of the claim.
• Some of the famous companies include the Chubb Group and the United Marine Underwriters firm.
• Additionally, it has to be noted that in some countries there are associations of marine underwriters set up in
order to gain more exposure and experience through a group effort.
• Such associations are majorly present in countries like the United States. Examples of such marine underwriting
associations would be the Association of Marine Underwriters (this is based in San Francisco) and the
American Institute of Marine Underwriters, also known as the AIMU (this is an association based throughout
the nation).
• These organisations ensure that the profession of marine underwriting gets more knowledge on a more regular
basis and that the professionals engaged in marine underwriting get to learn more.
• It is a very interactive concept and the success of such organisations proves the scope and spread of marine
underwriting.
• An insurance contract is really a contract entered between the insured, the party who pays premiums in exchange
for insurance coverage and the insurer, or the party who manages the premium and pays the policy holder the
insurance proceeds at a specified time.
• Insurance companies operate not because of charity or for anything else but for profit. They make profit by
investing the premiums paid by the policy holders, in various financial markets.
• And since the underwriting company is a business entity existing for profit, a contract of insurance becomes
the centre of a court case between the insured or his beneficiaries who is in need of money and an underwriting
company who does not want to part with its money.
• The insurance company is known as the underwriter as it underwrites or manages the risks paid for by the
insured or policy holder. By underwriting an insurance policy, an insurance company makes itself responsible
for the risks being insured by the policy holder.
• In some cases, underwriters or insurance companies also have their companies insured and this is called re-
insurance.
• The growing safety and health concerns all around the world is expected to make the insurance business a bigger
industry than it already is. The business of underwriting risks has never been much lucrative than now when
population is growing and the risk increasing.
1.9.1 Role of the Underwriter

• In order to make the process of marine underwriting simple and feasible, many professional marine underwriting
companies have been set up in many countries. These companies hire professional marine underwriters to make
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the clients get more reliability and benefit.

• The person who provides marine underwriting is known as a marine underwriter. The main expertise of these
professionals is to ensure that their client is protected by unforeseen losses and casualties.
• Marine underwriting is not a new profession. It is a profession that has existed from the very past though the
profession is a relatively unknown one. For people who aspire to be professionals and experts in varied and
unique areas, a career of being a marine underwriter is something that could offer them uniqueness and complete
satisfaction.
• Underwriting is a big business but it is very risky as underwriters promise to provide protection to individuals
or companies who may suffer or face financial losses in the future. To make underwriting a profitable business,
it must make use of underwriters who are able to analyse risk factors and insurability factors.
• Underwriters are the front liners who decide on the insurability of a certain individual or company. These
underwriters are responsible for the proper premiums to be paid up, the calculation of the policyholder’s risk
and the writing of the insurance policies that are aimed at covering these risks.
• There are professionals who work as risks analysts and they collaborate with the underwriters while deciding
on the insurability of a client. Sometimes, the risk analysts work as underwriters themselves.
• Underwriters are the people who know the ins and outs of an insurance business and they can give good advice
to prospective policyholders who would like to be guided in getting the right insurance plans. Underwriters are,
however, guided by computers in assessing the risks involved for particular clients.
• Underwriters are very influential people and they can sway an insurance company into approving the insurance
policy of a person. They are the main people behind the approval of thousand, if not millions of policy loans,
that they are responsible for the rise and fall of many insurance companies.
• Underwriters sometimes have specialisations but they can also work on all insurance categories like health,
casualty, life and property. Property underwriters can be further divided into the areas of automobile, fire, liability,
homeowners or marine insurance.
• A good underwriter must be a good analyst and must place high importance on details and good research skills.
Majority of those in the underwriting business earn big bucks and have very comfortable offices that allow
them to think and analyse. Underwriters study a potential policy holder’s life history, hobbies, preferences and
even his family and friends, to arrive at a safe estimate or conclusion of that person’s insurability. Otherwise,
the insurance company suffers the effects of a wrongful underwriting analysis.
1.9.2 Fundamental Factors When Underwriting Marine Cargo Insurance

Marine cargo insurance, unlike most types of insurance, is custom tailored to protect individual shipments and is not
standardised across international borders. Because cargo insurance is so diverse, and can vary so broadly depending
on the types of goods being shipped, the origin and destination of the goods and the method of shipment factors used
to craft a policy are equally diverse. There are some fundamental factors similar to most policies of this type.
• Origin/Destination
Goods typically begin and end their journey in warehouses and utilise several methods of transportation to ship from
one place to another. Marine cargo insurers want to know the origin and destination of the cargo they are insuring
to consider potential claims problems. For example, if one insurer protects the cargo from origin warehouse to
port, another protects during transit at sea, and a third protects from port to destination warehouse, a claim could be
delayed while the respective insurers decide who accepts liability for the loss. By contrast, an insurer who protects
the shipment from “warehouse-to-warehouse” does not run into these problems.
• Types of goods
Different types of goods face different insurance risks. Perishable goods like certain produce must remain refrigerated
during transit, while non-perishable goods like clothing don’t require this. An insurer will want to verify that any
necessary loss prevention techniques are in place to minimise the risk of damage in transit.
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• Value of goods
Insurers need a value of the goods in order to write an insurance policy on them. Some insurers may want itemised
descriptions of specific goods and specific values, while others may accept a blanket value that applies to all types
of goods being shipped at once. The value of the goods is determined by the person buying the insurance policy,
and usually considers the cost of production, any advance payments made by the importer, a certain percentage
markup for retail or a combination of these things.
• Duration/Location of journey
The journey itself is important to underwriters. A week long journey poses a smaller risk than one which lasts several
weeks or months. Often, policies are crafted to cover specific dates of journey, or are made to cover a specific voyage
regardless of duration to accommodate for unexpected delays. Also, because certain areas of the world are more
dangerous than others, insurers want to know where the marine vessel will travel and what the risks are of weather,
piracy or other losses in that area.
1.10 Scope of Marine Insurance

• The scope of marine insurance is determined by reference to S. 6 of the Marine Insurance Act and by the
definitions of marine adventure and maritime perils.
• It is a convention of protection but the extent of the insurance is determined by the contract. It relates to losses
incidental to a marine adventure or to the building, repairing or launching of a ship.
• Any situation where the insured property is exposed to maritime perils is known as a marine adventure.
• Maritime perils are perils subsequent or subsidiary to routing.
• MIA (Marine Insurance Act) states that a contract of marine insurance is a contract whereby the insurer undertakes
to cover the insured, in the manner and to the extent agreed in the contract, against
losses that are secondary to a marine adventure or an adventure equivalent to a marine adventure, including
losses arising from a land or air peril incidental to such an adventure if they are provided for in the contract
or by usage of the trade
losses that are incidental to the building, repair or launch of a ship
• According to this Act, any legalised marine adventure may be the subject of a contract.
• Marine Adventure states that any situation where insurable property is exposed to maritime perils, and includes
any situation where
the earning or acquisition of any freight, commission, profit or other benefit, or the security for any advance,
loan or disbursement, is endangered by the exposure of insurable property to maritime perils, and
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
• Maritime Perils states that perils resulting on or incidental to navigation, including perils of the seas, fire, war
perils, acts of pirates or thieves, captures, seizures, restraints, detainments of princes and peoples, jettisons and
battery.
1.11 Subject Matter of Marine Insurance

The insured may be the owner of the ship, owner of the cargo or the person interested in freight. In case the ship
carrying the cargo sinks, the ship will be lost along with the cargo. The income that the cargo would have generated
would also be lost. Based on this, we can classify the marine insurance in to four categories:
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Marine Insurance
Hull
Insurance
Liability Marine Cargo

Insurance Insurance Insurance
Freight
Insurance
Fig. 1.3 Categories of marine insurance

• Hull insurance
Hull refers to the ocean going vessels (ships trawlers etc.) as well as its machinery. The hull insurance
also covers the construction risk when the vessel is under construction. A vessel is exposed to many
dangers or risks in the sea during the voyage. An insurance affected to indemnify the insured for such
losses is known as hull insurance.
• Cargo insurance
Cargo refers to the goods and commodities carried in the ship from one place to another. The cargo transported
by sea is also subject to manifold risks at the port and during the voyage. Cargo insurance covers the insurance of
goods if they are damaged or lost. The cargo policy covers the risks associated with the trans-shipment of goods.
The policy can be written to cover a single shipment. If regular shipments are made, an open cargo policy can be
used which insures the goods automatically when a shipment is made.
• Freight insurance
Freight refers to the fee received for the carriage of goods in the ship. Usually the ship owner and the freight receiver
are the same person. Freight can be received in two ways- in advance or after the goods reach the destination. In
the former case, freight is secure. In the latter, the marine laws say that the freight is payable only when the goods
reach the destination port safely. Hence, if the ship is destroyed on the way the ship owner will loose the freight
along with the ship. That is why, the ship owners purchase freight insurance policy along with the hull policy.
• Liability insurance
It is usually written as a separate contract which provides comprehensive liability insurance for property damage or
bodily injury to third parties. It is also known as protection and indemnity insurance which protects the ship owner
for damage caused by the ship to docks, cargo, illness or injury to the passengers or crew, and fines and penalties.
1.12 Nature and Functions of Marine Insurance

Marine Insurance is regulated under The Indian Marine Insurance Act, 1963 (enforced on 1st August, 1963) which is
based on the original Marine Insurance Act, 1906 of U.K. Marine Insurance has been made mandatory in export and
import business. The document containing the contract of insurance is known as the Marine Policy or Sea Policy.
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It essentially provides cover for the losses suffered due to Marine Perils.
The perils of the sea

A Peril of the Sea is stated to cover everything that happens to the ship in the course of voyage by the immediate
act of God without the intervention of human agency. Examples:
• Foundering at Sea
• Shipwreck
• Stranding
• Collision
Losses not regarded as Perils of the Sea (Excluded Losses) are:

• Wear and Tear
• Breakage of Goods
• Inherent Vice (defects in goods)
• Death of Animals etc. due to nature’s causes
• Loss by Rats and Vermin
• Loss by Delay
A contract of marine insurance under Section 3 of The Marine Insurance Act, 1963 is defined as an agreement
whereby the insurer undertakes to covers the assured, in the manner and to the extent thereby agreed, against marine
losses, namely, the losses incidental to marine adventure.
The marine adventure

In a contract of marine insurance, what is insured is not the property exposed to peril but only the risk or adventure
of the assured. The statute therefore states that every lawful marine adventure may be the subject matter of a contract
of marine insurance. Marine adventure includes any adventure where
• any insurable property is exposed to maritime perils
• the earnings or acquisition of any freight, passage money, commission, profit or other pecuniary benefit, or
the security for any advances, loans, or disbursements is endangered by the exposure of insurable property to
maritime perils
• 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
A slip in marine insurance

A Slip or Cover Note is an informal note or memorandum which is drawn at the time when the contract is entered
into. A Slip itself acts as a contract of insurance. It is a complete and final draft/agreement between the parties in
insurance. A slip acts as evidence. It is admissible only to prove the agreement since in practice the slip is never
stamped.
1.13 General Features of Marine Insurance

• Marine Insurance Act – 1963 states that a contract of Marine Insurance is an agreement in which the insurer
undertakes to cover the assured, in the manner and to the extent thereby agreed against marine losses, to be
precise, the losses incidental to marine adventure.
• As a result of its utter provisions or by the usage of trade, a contract of marine insurance may be extended to keep
the secured against losses on inland water or on any land risk which may be incidental to any sea voyage.
• The business of marine insurance is highly specialised. Its conduct requires skilful comprehension as the
underwriting of the marine insurance business has certain peculiarities of its own.
• Marine insurance plays an important role in the activities of international trade and commerce. The sale and
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purchase of goods and merchandise between countries has become possible due to marine insurance which acts
as a collateral security.
• The basic principles of greatest good faith, insurable interest, indemnity and subrogation/contribution are required
to be observed in a marine insurance contract. These principles have been modified in the Marine Insurance
Act, 1963, of India. In the event of violation or break of any of these principles, the marine policy will not
serve the intended purpose. Thus a contract may either become invalid or treated as voidable, depending upon
the circumstances of the case.
• For the purpose of transacting marine insurance business in India, every insurer is required to observe the
provisions of:
The Marine Insurance Act - 1963
Underwriting/Rating Guidelines issued by the head office of the company
• In addition to the above, the following statutes have an indirect bearing on the insurance contract and their
knowledge is essential for the pursuit of recovery from the carriers.
The Carriage of Goods by Sea Act, 1925

This Act defines the minimum rights, liabilities and immunities of a ship owner in respect of loss or damage to the
cargo carried. Broadly speaking, the Act deals with three aspects of the ship owner’s liability.
Circumstances when the ship owner is deemed to be liable for loss or damage to the cargo, unless he can
prove otherwise.
Circumstances when the ship owner is exempted from liability, i.e., when the loss is caused by events beyond
his control, for example, perils of the seas.
Limit of the ship owner’s maximum liability for loss or damage calculated in monetary terms as per a
package or per unit limit.
The Merchant Shipping Act, 1958

This Act provides for some protection to the ship owner, whereby liability is limited to a certain maximum sum,
provided the incident giving rise to such claims has arisen without the actual fault or privatise of the ship owner.
These claims relate to the loss of life, personal injury or loss or damage to property on land or water.
The Bill of Lading Act, 1855

This Act defines the character of the Bill of Lading as an evidence of the contract of affreightment of goods between
the ship owner and the shipper. It serves as an acknowledgement of the receipt of the goods on board the ship and
as a document holding title to the goods. The Bill of Lading is one of the various documents required in connection
with the settlement of marine insurance claims.
The Indian Ports (Major Ports) Act, 1963

The Act mentions about the liability of Port Trust authorities for the loss of or damage to the goods whilst in their
custody. It also prescribes the time limits within which the monetary claim is to be filed; as also time limits and
procedures for a filing suit against the Port Trust authorities.
The Indian Railway Act, 1890 ( Latest Amendment in 1989)

The duties, obligations and responsibilities of the railways are governed by the provisions of Chapter – VII of the
Indian Railway Act, 1890 and (Amendment) Act, 1961 and 1989. It also prescribes the time limit and the procedure
for lodging claims and filing suits.
The Carriers Act, 1865

This Act defines the rights and liabilities of truck owners/operators who carry goods for hire or reward, in respect
of loss or damage to the goods whilst in their custody. It also prescribes the time limit for the intimation of loss and
for filing a suit.
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The Indian Post Office Act, 1898
This Act defines the liability of the postal authorities for loss, non-delivery, delay or damage to any article in the
course of transmission by registered post.
The Carriage by Air Act, 1972

This Act gives effect to the provision of the Warsaw Convention, 1929 and the Hague Protocol, 1955 relating to the
international carriage of passengers and goods by Air. The Act defines the liability of the Air Carriers for death or
injury to passengers and for the loss of or damage to registered luggage and cargo. The Act prescribes the maximum
limits of liability for death, injury, damage, etc. It also mentions the time limits within which the claim notice is to
be served and suit to be filed. The provisions of this Act also apply, with certain modifications, to domestic carriage,
i.e., carriage within India.
1.14 Insurance Market

Insurance is not a tangible commodity for sale but a contractual service obtainable from an insurer for a price called the
premium. The parties operating in the insurance market, in the conduct of insurance on a commercial basis are:
• The insuring public are individuals as well as associations, unions, companies, societies, etc., who may need
insurance.
• The insurers usually are
Lloyd’s underwriters
Insurance Companies
Mutual Insurers, but not individuals.
• The Insurance Intermediaries are the insurance brokers, individual agents, corporate agents, etc.
Lloyd’s is a market for insurance. It is also the world centre of shipping intelligence. Lloyd’s underwriters are
members of the Corporation of Lloyd’s; an institution whose membership is confined to persons of proved integrity
and financial standing. There are now over 5,000 underwriting members working in groups or syndicates. They do
not execute business directly with the public but only through Lloyd’s Brokers of which there are over 200 firms.
Lloyd’s underwriters transact either marine or non-marine business but not both. This institution is peculiar to the
U.K. Insurance Companies are:
Companies registered under the Companies Act, transacting one class of business only, i.e., life or non-life;
or transacting more than one class of business (also called composite Insurers).
Mutual Insurers, i.e., organisations of policy holders transacting business on a cooperative basis and
contributing to the fund whenever calls are made to cover claims and expenses etc.
• In India, until nationalisation, there were the above classes of insurers. After nationalisation, only the Government
undertaking namely, the L.I.C. and the G.I.C. with its four subsidiaries were the insurers, other than a few
insurers like the P and F Insurance Fund and some State Government Insurance Schemes. Private insurers have
been again permitted under the Insurance Regulatory and Development Authority Act, 1999.
• Insurance Brokers are highly competent professional advisers on insurance matters. Only Lloyd’s Brokers, that
is, those who are approved by a Committee of Lloyd’s can place business with the Lloyd’s underwriters. Brokers
act on behalf of proposers for insurance, but are remunerated by way of commission by the underwriters with
whom the business is placed.
• In marine insurance practice, the broker is responsible to the underwriter for payment of the premium, and
underwriters are directly responsible to the assured for claims and returns of premium, and cannot set off against
this any premium not received from the broker. The broker is given a lien on the policy against the non-payment
of premium by the assured. As the assured will require the policy for obtaining bank credit, he will have to pay
the premium due to the broker. In this way, the interests of all are safeguarded.
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Marine Insurance
Summary
• Bottomry is defined as a loan rose by the captain of the vessel when money was urgently needed for the
prosecution of the voyage.
• Respondentia is defined as an advance on cargo alone and was repayable only if the cargo reached the end safe
and sound.
• Marine insurance emerged in the Coffee Club of Edward Lloyd in 1779 AD. S.G. (Ship and Goods) policy form
was issued by Edward Lloyd.
• In 1871, the first Lloyd’s Act was passed in Parliament which gave the business a sound legal footing.
• Cromer report advocated the widening of membership to non-market participants, including non-British subjects
and women, and to reduce the onerous capitalisation requirements.
• In 1980, Sir Henry Fisher was commissioned by the Council of Lloyd’s to produce the foundation for a new
Lloyd’s Act.
• Marine insurance is defined as a form of insurance covering loss or damage to vessels or to cargo during
transportation to the high seas.
• There are two types of marine perils called insured peril and uninsured peril.
• There are two types of warranties, namely, expressed warranty and implied warranty.
• A total loss implies that the subject matter insured is fully destroyed and has completely lost its owner.
• The word “Underwriting” refers to protecting by way of insurance. Marine underwriting refers to providing
marine insurance to the necessary clients.
• A Slip or Cover Note is an informal note or memorandum which is drawn at the time when the contract is
entered into.
References
• Gupta, S. M., Marine Insurance [Online] Available at: <http://www.slideshare.net/smgupta1947/marine-
insurance>. [Accessed 22 June 2011].
• International Trade Rules: MIA (Marine Insurance Act), 1906 [Online] Available at: <http://www.tradegoods.
com/helper/03rules/rules_301.html>. [Accessed 22 June 2011].
• Goel, K., Marine Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-
MARINE-PERILS>. [Accessed 22 June 2011].
• Gauci, G., Marine Insurance 01. [video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>.
[Accessed 4 June 2011].
• Gauci, G., Marine Insurance 02.[ video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>.
Recommended Reading
• Hodges, S., 1996. Law of Marine Insurance. Routledge, p. 647.
• Huebner, S. S., 2010. Marine Insurance. Nabu Press, p. 284.
• Martin, F., 2007. The History of Lloyd’s and of Marine Insurance in Great Britain: With an Appendix Containing
Statistics Relating to Marine Insurance, Macmillan and Co., 1876, p. 416.
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Self Assessment
1. ______is defined as a loan rose by the captain of the vessel when money was urgently needed for the prosecution
of the voyage.
a. Bottomry
b. Respondentia
c. Perils
d. Warranties
2. What is defined as an advance on cargo alone and was repayable only if the cargo reached the end safe and
sound?
a. Bottomry
b. Respondentia
c. Perils
d. Warranties
3. More than 2500 years ago, the _______were involved in advancing of loans under Respondentia and Bottomry
Bonds.
a. Rhodians
b. Chinese
c. Indians
d. British
4. Maritime ________is stated as the fortuitous (an aspect of chance or ill luck) accidents or casualties of the sea
caused without the firm involvement of human action.
a. insurance
b. perils
c. warranties
d. risks
5. Marine __________is a very tricky concept.

a. insurance
b. goods
c. underwriting
d. perils
6. Which of these is not considered as the peril of the sea?

a. Breakage of goods
b. Shipwreck
c. Stranding
d. Collision
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Marine Insurance
7. Which of these are known as excluded losses?

a. Death of animals etc. due to nature’s causes
b. Loss by rats and vermin
c. Loss by delay
d. Wreckage of ship
8. Which is usually written as a separate contract that provides comprehensive liability insurance for property
damage or bodily injury to third parties?
a. Liability Insurance
b. Freight Insurance
c. Cargo Insurance
d. Hull Insurance
9. An insurance affected to indemnify the insured for such losses is known as________.
a. Liability Insurance
b. Freight Insurance
c. Cargo Insurance
d. Hull Insurance
10. What refers to the goods and commodities carried in the ship from one place to another?
a. Cargo
b. Freight
c. Liability
d. Hull
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Chapter II
Legal Aspects of Insurance with Specific Reference to Marine Insurance
Aim
• explain evolution of legal framework for marine insurance
• define insurance contracts
• discuss principle of utmost good faith
Objectives
• explain insurable interest
• discuss indemnity
• define subrogation
Learning outcome
• At the end of this chapter, you will be able to:
• discuss doctrine of proximate cause
• define fundamentals of marine insurance contract
• explain principles of marine insurance
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Marine Insurance
2.1 Introduction
Modern insurance started in late 17th century in England. Originally, traders, merchants, ship owners and underwriters
met to thrash out deals at Lloyd’s Coffee House, precursor to the famous Lloyd’s of London. The growth of life
insurance as a tool of family security, synchronised with the development of prosperous families in England during
the industrial revolution. As an effect of the economic boom brought in by the industrial revolution, the merchants
and manufacturers of England became a wealthy, important and influenced section of the community. They enjoyed
a standard of living which their families would have found difficult to maintain at the event of their death, unless
special provisions were made. To such people, life insurance offered a special attraction as a provider and protector
of family financial security.
2.2 Evolution of Legal Framework for Marine Insurance

• Insurance law in India had its origins in British law with the establishment of a British firm, the Oriental Life
Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras
Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in 1874. The first general
insurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in Calcutta.
• The first general insurance company established by an India was Indian Mercantile Insurance Company Ltd.
in Bombay in 1907. The first legislation in India to regulate the life insurance business was in 1912 with the
passing of the Indian Life Assurance Companies Act, 1912.
• Other classes of non-life insurance business were left out of the scope of the Act of 1912, as such non-life
insurance was still in elementary form and regulating them was not considered necessary. Eventually, with the
growth of fire, accident and marine insurance, the need was felt to bring such kinds of insurance within the
purview of the regulations. While there were a number of attempts to introduce such legislation over the years,
law on non-life insurance was finally enacted in 1938 with the passing of the Insurance Act, 1938.
• The general insurance business was nationalised in 1973, through the introduction of the General Insurance
Business (Nationalisation) Act, 1972. Under the provisions of the GIC Act, the shares of the existing Indian
general insurance companies and undertakings of other existing insurers were transferred to the General
Insurance Corporation (“GIC”) to secure the development of the general insurance business in Indian and for
the regulation and control of such business.
• The GIC was established by the Central Government in accordance with the provisions of the Companies Act,
1956 in November 1972 and it commenced business on January 1, 1973. Earlier to 1973, there were a hundred
and seven companies, including foreign companies offering general insurance in India. These companies were
compound and grouped into four subsidiary companies of GIC i.e. the National Insurance Company Ltd., the
New Indian Assurance Company Ltd., the Oriental Insurance Company Ltd., and the United India Assurance
Company Ltd. GIC undertakes mainly re-insurance business apart from aviation insurance. The volume of
the general insurance business of fire, marine, motor and miscellaneous insurance business is under taken by
following subsidiaries.
• From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the
way for the liberalisation of the Indian economy. Consequently, in 1993, the Government of India set up an
eight-member committee chaired by Mr. R. N. Malhotra, to review the existing formation of guideline and
administration of the insurance sector.
• The Committee submitted its report in January 1994. The major solutions of the Committee incorporated the
privatisation of the insurance sector by permitting the entry of private players of enter the business of life and
general insurance and the establishment of an Insurance Regulatory Authority. Subsequently, the recommendations
of the Malhotra Committee were implemented by the Indian government by allowing private investments in
the insurance sector and establishing a regulatory body through the enactment of the Insurance Regulatory and
Development Act, 1999.
• The aim of the Insurance Regulatory and Development Act, 1999 was “to provide for the establishment of an
Authority, to protect the interests of the policy holders, to regulate, promote and ensure systematic growth of
the insurance industry and to alter the Insurance Act 1938, the Life Insurance Corporation Act, 1956 and the
General Insurance Business (Nationalisation) Act, 1972”.
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• Insurance Act 1938, as amended over the years regulates the principal legislation of the insurance business in
India and regulates general insurance and life insurance. General insurance has been defined to comprise “fire
insurance business”, “marine insurance business” and “miscellaneous insurance business”.
• Several existing legislation in the field is as follows:
the Life Insurance Corporation Act, 1956,
the Marine Insurance Act, 1963,
the General Insurance Business (GIB) (Nationalization) Act, 1972
the Insurance Regulatory and Development Authority (IRDA) Act, 1999
• The provisions of the Indian Contract Act, 1872 are applicable to the contracts of marine insurance. In the
same way, the provisions of the Companies Act, 1956 are relevant to the companies’ continuation insurance
business.
• Marine insurance business is mostly international and subject to law and international regulations in every stage
of operations. Marine Insurance Act, 1963, governs the marine insurance business in India. The Institute of
London Underwriters (ILU) and the International Commercial Terms, known as ‘Inco terms’ developed by ICC
(International Chamber of Commerce) guides marine insurance business with the help of various clauses.
• Marine Insurance Act, 1963, is planned to standardise the transaction of marine insurance business of hull, cargo
and freight. They also have to execute the provisions of section 64VB of the Insurance Act 1938 on payment
of premium in advance of risk commencement. The voyages undertaken are subjected to specific Institute of
London Underwriters (ILU) clauses, defining inception and termination of insurance covers, and the perils
insured against.
2.3 Insurance Contracts

Insurance contracts are governed by principles which belong to the class of contracts. These are a special class
of contracts having characteristics like utmost good faith, insurable interest, indemnity subrogation, contribution
and proximate cause which are common to all types of insurances. Each class of insurance also has individual
characteristics of its own. The law governing insurance contracts is divided in three parts:
• general characteristics of insurance contracts, as contracts
• special characteristics of insurance contracts, as contracts of insurance
• individual characteristics of each class of insurance
2.3.1 Contract of Insurance

• Contract of insurance, as described in Prudential Ins. Co. v. Inland Revenue Commrs is stated as a contract
in which one party (the insurer) assures in return for a money consideration (the premium) to pay to the other
party (the insured) money or money’s worth on the happening of an uncertain event more or less unfavourable
to the interest of the insured.
• As stated in the Indian Contract Act, 1872, “A contract is an agreement between two or more parties to do or
to abstain from doing an act. It is intended to create a legally binding relationship”.
• A contract is an agreement but an agreement cannot be called a contract. It is the legal binding intention that
raises an agreement to the level of a contract.
• Insurance is a contract. The insurer and the policyholder are two parties involved in the contract. The insurer
agrees to pay to the policyholder a certain amount of money, if the incident mentioned in the contract happens,
provided the policyholder on his part, pays the premium. The insurance policy, which is the proof of the insurance
contract, includes the following:
The risk which is the subject matter of the contract.
The incident upon which the liability of the insurer would arise.
The nature of the liability of the insurer, amount and manner of payment.
The amount and manner of payment of premium by the policyholder.
Other obligations, if any, of the policyholder.
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Consequences of any default in obligations by the policyholder.

Other terms and conditions affecting the operation of the contract.
• A valid and enforceable contract has to deal with matters which are legal and are not against public policy. The
subject matter of an insurance contract must be legal. Also personal accident policy does not include disability
or death caused by self-inflicted injuries, because that is caused purposely. Insurance policies will not cover
fines payable for traffic offences. All these exclusions are on grounds of legality as well as on grounds that the
insured peril must be random and accidental.
• The parties involved in a contract must be major and proficient to contract. Minor children are not eligible for
contracts. If a child has to be insured, the contract will be entered into by the parents or guardian. An individual,
who have criminal records or have psychological problem, is not eligible to contract. The insurer, being a legally
constituted corporation or company is competent to contract for insurance, if it is licensed to transact insurance
business.
2.3.2 Subject Matter of Contract of Insurance

As the subject-matter of contract of insurance is money; the responsibility of the insurer is to make good the loss
by a payment of money. In reality, the subject-matter of insurance is not the same. It is the car or house or other
physical object which may be broken or injured in an accident causing loss to the insured. It is to protect the insurer
against such loss that he takes a policy of insurance. What is insured in a contract of insurance is the interest of the
insured in the subject-matter of insurance. The subject-matter of insurance may be:
a physical object such as a house, motor vehicle, ship or stock in trade or in a personal accident policy the
body of a person
a chose-in-action such as a debt, the risk of non-payment of which may be insured
a liability which the insured may incur to third parties by the use of a motor vehicle or the public carrier
etc.
2.3.3 Proposal
One of the necessities for a contract of insurance is the mutual agreement between the insured and insurer. An
offer by one and an unqualified acceptance of it by the other; when acknowledged together form an agreement. An
agreement that has a legal binding on both the parties constitutes a contract. Therefore, a proposal is the basis of
an insurance contract.
2.3.4 Non-Marine Insurance

• For insurance, applicant is to complete a proposal form containing a number of situations of the risk to be
assessed and covered.
• The applicant states that he agrees with the information given in the proposal form and agrees that it shall be the
basis of the contract and that he will accept the usual form of the policy issued by the insurer in such cases.
• On the basis of this declaration, the insurer believes in the statements in the proposal form, calculates the risk
and secures the premium. The applicant is informed by the insurer that he is agreed to enter into a contract if
the proposer pays the first premium quoted in the acceptance letter.
• The unqualified acceptance of this offer is indicated by the proposer by his paying the premium in accordance
with the letter. This gives rise to the contract of insurance from the date of such payment. The terms of the
contract are then personified in a policy issued by the insurer.
2.3.5 Marine Insurance

• In marine insurance, there is no practice of taking a proposal form from the proposer. On the other hand, under
instructions from the proposer, the broker prepares an original slip mentioning all the bare essentials of the
proposed risk and the clauses defining the liabilities to be assumed by the underwriter and submits it. In the
first instance to an underwriter who has a reputation in the market as an expert in the kind of cover required and
whose lead is likely to be followed by other insurers in the market and tries to get the most favourable terms
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for his client.
• The broker supplements the facts on the slip with all the material information furnished by the proposer. The
broker and the underwriter go through the slip together and agree on any amendments to the broker’s draft and
fix the premium. When this leading underwriter signifies the acceptance of the risk by writing the amount he is
prepared to accept and signing the slip, the broker offers the balance to be covered to other underwriters willing
to accept until the full amount is covered.
• The contract is concluded with the underwriters from the moment each of them signs the slip, but the insurance
commences from the date when the voyage commences in the case of a voyage policy. The broker prepares
the policy in conformity with the slip and lodges it with the Lloyd’s policy signing office for verification and
signature, and in the meantime sends a cover note to the proposer advising the terms of the insurance affected.
This is the practice at Lloyd’s in the U.K.
2.3.6 Cover Note

• A cover note is a temporary and limited agreement. It may be self contained or it may incorporate by reference
the terms and conditions of the future policy.
• The cover note is a distinct contract of insurance for the short period and should be properly stamped according
to the Stamp Act.
• It automatically expires at the end of the stated period unless it is earlier outdated by the issue of a regular policy
or the proposal is declined by the insurer.
• The cover does not usually mention that the provisional cover is under the same terms and conditions as the
policy which is usually issued for such proposals. The insurer then examines the proposal and if acceptable
issues a policy for the required period or declines the proposal and informs the proposer before the cover note
period expires.
• Any claim arising during the currency of the cover note will be determined by reference to the terms of the
cover note and not to the terms of the subsequent policy.
• Insurance contracts are a special class of contracts, having distinctive features such as utmost good faith,
insurable interest, protection, subrogation and contribution and doctrine of proximate cause which are more or
less common to all branches of insurance.
• These doctrines are governed by the common law and certain aspects are also modified by statutes such as S. 30
of the Indian Contract Act, 1872; the Indian Marine Insurance Act 1963 and Chapter VII of the Motor Vehicles
Act, 1939 (now Motor Vehicle Act, 1988) and the Railways Act, 1989.
• They are also modified by contract, as in the case of contractual duty of good faith, and the doctrines of subrogation
and contribution. Each class of insurance also has individual features of its own.
2.4 Principle of Utmost Good Faith

• If contract has to be considered as valid both the parties in the contract has to be of the same mind. Equal
awareness of the subject and terms of contract should be clear to the both the parties. Else the contract would
be considered as invalid. On the other hand, it is not permissible that either party has to disclose all information.
Ordinary commercial contracts are governed by the principle of Caveat Emptor or ‘Let the Buyer Beware’. It is
the buyer’s duty to be careful before entering into the arrangement to buy. The buyer should make the necessary
enquiries and do the necessary inspections. He can ask for proofs. Afterward he cannot complain that the seller
had not disclosed all the facts. This is not so in the case of insurance contracts, which are of a fiduciary nature
and based on trust.
• In insurance, the relevant facts relating to the subject matter of insurance are known to one party to the contract,
the policy holder, and cannot be known to the other party, the insurer, unless disclosed.
• A person seeking life insurance may be suffering from heart problem or blood pressure. These may not be
detected through medical examination. Appropriate medication can suppress all the symptoms for some time.
The goods in a go-down can be re-located at the time of inspection. It is not practical for the insurer to verify
the values of all the items to be covered by insurance. If goods are packed and are in transit, the insurer cannot
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have the values verified. Even if verification is done before packing, it is not possible for the insurer to ensure
that what was packed and sent was the same as what was verified. The insurer has to depend on the statements
of the person asking for insurance to decide on the terms of the cover. The normal commercial principle, if
applied to insurance, would be prejudicial to the interests of the insurer, and therefore, to the community of
policyholders.
• Under the Principle of Good Faith, the policyholder is obliged to disclose all facts, which are material to the
assessment of the risk. A fact is said to be material, if it is relevant to the assessment of risk and determination of
premium. Non-disclosure of a material fact puts the insurer at a disadvantage. When a policy holder knowingly
puts an insurer and the community of policyholders at a disadvantage; there is said to be adverse selection or
anti selection. This principle has been upheld by Courts all over the world.
• When material facts are withheld by the proposer, the two parties to the contract are not of the same mind.
Even if the suppression had happened through a mistake, yet the underwriter is deceived and the risk accepted
is really different from the risk understood and intended to be accepted by the insurer. This situation violates
an important requirement of a contract and is therefore, voidable. “Voidable” means that a party to the contract
has the right to declare that the contract is void and invalid. He may choose not to exercise that right.
• If at any time it is proved that some material facts had not been disclosed, the insurer is within his rights to
declare the policy as null and void and forfeit all the premiums paid there under. This right, which is absolute,
can be enforced in India only during the first two years of the policy. After two years, fraud must be established,
to void the policy and forfeit the premiums. This is because of the provision in Section 45 of the Insurance Act
1938. Similar provisions exist in the regulations of many countries. This is referred to as the ‘Indisputability’
or ‘Incontestability’ clause (applicable to life insurance policies).
Following are the conditions in which non-disclosure is suspected:

the fact must be known to the proposer
the fact must not have been known to the insurer
the fact, if made known to the insurer, may have affected the decision to grant cover
the fact must have been deliberately held back with the intention to obtain better terms of insurance
The principle of utmost good faith is not violated if the following are not disclosed:
Facts relating to law. Everyone is supposed to know the law.
Facts of common knowledge.
Facts possible of discovery by insurer’s surveyor during risk inspection
Following are some examples of material facts:

Life Insurance: Own medical history, family history, habits, absence from work, even age, because risk
depends on age.
Fire Insurance: Construction and usage of building, nature of goods in the premises.
Marine Insurance: Description of goods, method of packing.
Motor Insurance: Description of vehicle, how used, details of driver.
• The duty to disclose material facts operates differently in different insurances. In the case of life insurance, the
duty ends with the completion of the contract. Any material fact emerging after the risk has commenced does
not have to be disclosed. For example, any change in occupation after the cover has commenced, may affect
the risk, but is not required to be communicated. The existing cover will continue as it is.
• The duty to disclose revives at renewal of the policy, if there is virtually a fresh contract, but not if the renewal
is regarded as the continuation of the original contract. In life insurance, when the renewal premium is paid,
the original contract continues. In non-life insurance, the contract would stipulate whether changes are required
to be intimated or not. Whenever a non-life insurance policy is renewed – and this would be annually – the
duty for disclosure will arise. When an alteration is made to the original contract affecting the risk, the duty to
disclose will come into operation.
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• The duty of disclosure of material facts is on the insurer also as much as it is on the policyholder. Policyholders
are not aware of benefits available and obligations under the various policies. Agents, who represent the insurers,
may not disclose the facts or may provide wrong information in order to get the business. The Insurance
Regulatory & Development Authority of India (IRDA) has provided that a policyholder has the right to withdraw
from the contract within a specified period of 15 days of receipt of policy if he finds the terms and conditions
of the policy issued to him unacceptable. This is referred to as the ‘free-look’ provision. This practice exists in
many countries.
2.4.1 Insurer’s Duty of Disclosure

• The Act did not define the duty of disclosure falling on the insurer as it did that of the insured. The occasions
where disclosure by the insurer is required may in practice be rare since the circumstances material to the
insurance will ordinarily be known only to the proposed insured. Nevertheless, such occasions do arise.
• The duty failing on the insurer must at least extend to disclosing all facts known to him which are material
either
to the nature of the risk sought to be covered, or
the recoverability of a claim under the policy which a prudent insured would take into account in deciding
whether or not to place the risk for which he seeks cover with the insurer
• The insurer must also inform the insured about the terms and conditions of the policy that is going to be issued
to him and must strictly conform to the statements in the prospectus etc., if any, or made through his agents. He
must issue the policy in conformity with the terms mutually agreed with the insured. The proposer is entitled to
ask for the draft policy though in the proposal form he has agreed to accept the policy in the usual forms used
by the insurer, for that class of insurance. But if he does not ask for it, he will be considered to have accepted
the policy that is issued.
• In case of fraud, the party defrauded not only can avoid the contract but can claim damages also. In the case
of non-disclosure of facts, the insurer can avoid the contract. Section 19 of the Contract Act gives to the party
defrauded an option to enforce the performance of the promise made by the defrauding party or to clam damages
for breach of contract. The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure
of lapsed policies by the insured, which had no bearing on the risk undertaken by the insurer.
2.4.2 Inherent and Contractual Duties of Good Faith

In contract of utmost good faith, contracting parties are placed under a special duty towards each other, not merely
to refrain from active misrepresentation but to make full disclosure of all material facts within their knowledge
and the principle of caveat emptor is not applicable. This is the inherent or common law duty of good faith and
is distinct from the contractual duty of good faith. The common law duty is the basis and it is open to the parties
entering into an insurance contract to extend the duty or restrict it by the terms of the contract. The inherent duty
of the insurer invariably got extended as his contractual duty, by requiring him to declare that he warrants the truth
of his answers in the proposal form, etc.
2.4.3 Importance of Proposal Form

• In practice, the duty of the insured to observe utmost good faith is enforced in non-marine insurances by
requiring the proposer to complete a proposal form framed to obtain all the relevant information necessary in
normal circumstances, with true and complete answers, incorporating it in the policy and making it the basis
of the contract.
• There may be no specific question in the proposal form that may be applicable to the facts of a particular case;
yet the proposer must disclose all the material facts which he knows or ought to know are material to his risk,
so that the insurer is not misled. He is also required to declare that he warrants the truth of the statements made
therein and that he has not misrepresented or concealed any material fact.
• The contractual duty so imposed is such, that any suppression or untruth or inaccuracy in the statements in
the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable
by the insurer whether the statement was made innocently or fraudulently and whether it relates to a material
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matter or not.
• An insurance proposal form is, therefore, not like many a form that is filled up for various other purposes. Great
care must be exercised in filling up the proposal form. It is preferable to reveal too much rather than too little
in the proposal form.
2.4.4 Material Facts

Section 20(2) of Marine Insurance Act, 1963 defines material facts as facts which would influence the judgment
of a ‘prudent insurer’ in assessing the risk and fixing the appropriate premium to be charged or in determining
whether he will take the risk or reject it. As the assured alone knows them, he is deemed to know every circumstance
which in the ordinary course of business ought to be known by him; he is under a duty to disclose them fully to the
insurer whether or not there is a specific question about it in the proposal form. Questions in the proposal form are
presumed to relate to material circumstances, though there is no presumption that other matters not so dealt with are
not material. Even in the absence of specific questions, the proposer must disclose voluntarily the following facts
or circumstances because they are material:
• Facts which render or tend to show that the risk is greater than normal.
• Facts which suggest any special motive for taking the insurance.
• Facts which suggest the existence of moral hazards which relate to the moral integrity of the proposer or which
suggest that the proposer is himself abnormal, that is which indicate his accident proneness, etc. Any fact is
material which leads to the inference that the particular proposer is a person or one of a class of persons whose
proposal for insurance ought to be subjected to special consideration before it can be decided whether it should
be accepted at all or accepted at normal rate. This is usually referred to as the moral hazard.
2.4.5 Prudent Insurer Test of Materiality

Marine Insurance Act, section 20 (2) says that the test of materiality is the “Judgment of a prudent Insurer”. The
same test generally applies in non-marine Insurance also. In relation to the duty of disclosure falling on the insured,
every fact is material which would influence the judgment of a prudent insurer- not the particular insurer. The test is
whether the circumstance in question would influence the prudent insurer and not whether it might influence him.
2.4.6 Duration of Duty of Disclosure

The duty of full disclosure continues throughout the period of negotiations and up to the time ‘the contract is
concluded.’ This is so according to S.20 (1) Marine Ins. Act 1963 also. If there is any alteration in the risk disclosed
in the proposal during the negotiation stage, that must be brought to the notice of the insurer, as otherwise it will be
presumed that the risk accepted is the disclosed in the proposal. After the contract comes into force, there is no duty
to inform the insurer about changes taking place in the nature of the risk, unless the contract specifically requires
it, as in the case of personal accident policies which normally contain such a condition where the change is to be
agreed to by the insurer if the policy is to continue.
2.4.7 Revival of Duty

This duty to disclose revives when the policy ends and has to be renewed for a further period as in the case of fire
and motor insurances. In life insurance it arises again if the policy lapses and is to be revived.
2.5 Insurable Interest

All risks are not insurable. Previously, it was explained that temporary risks are not insurable. Speculative contracts
are wagering contracts and are illegal. A subject matter of a valid contract has to be legal. The difference between
an insurance contract and a wagering contract is that the insured must have an insurable interest in the subject of
insurance; this difference makes it non-speculative. In simple words, the proposer must have a stake in the continuance
of the subject matter insured and could suffer a loss, if the risk occurred. Normally it is believed that everything can
be insured but all risks are not insurable until they have certain characteristics such as:
• They must be capable of financial measurement.
• There must be sufficient number of similar risks.
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• There must be pure and particular risks.
• The occurrences of the event insured must not be against public policy.
• The premium payable must be reasonable.
• There must be insurable interest of the person insuring the risk.
For any insurance contract, the existence of insurable interest is an essential ingredient. This is an important and
fundamental principle of insurance.
2.5.1 Meaning of Insurable Interest

• “In every contract of insurance, it is essential that the insured must have a monetary interest in subject matter
of insurance.” This is how Insurable interest is defined. The insured must be in such a position, that the injury
to the subject matter would affect him adversely or he must own part or whole of its insurance.
• Insurable interest means that the proposer could suffer a financial loss, if the subject insured is physically harmed
in any way. Financial interest is the only thing which can be insured.
• The proposer must be in a relationship with the subject of insurance whereby he/she benefits from its safety
and well being.
• The legal right of the insured to effect insurance is known as Insurable interest. It is pecuniary interest of the
insured in the property insured. In absence of any pecuniary interest, he is said to have no insurable interest. It
is this pecuniary interest of the insured in the property which is actually insured and not the property itself.
• An insurable interest is not created by a mere mortal claim. In the same way, mere hope or expectation which may
be frustrating in the future by the happening of some event, does not contribute to insurable interest. A contract
of insurance affected without insurable interest is void. To summit this point, following is the example:
The owner of the factory has a financial interest in the safety of his factory and he runs a risk of loss in case, the
fire breaks out in its premises. If he wants to take a fire insurance policy to cover the risk of his factory, he will be
considered to have an insurable interest in the subject matter of insurance because he runs a risk and he has something
at stake, something to lose by the happening of the insured peril.
The Insurance Act 1938 does not define “Insurable Interest”. However, its nature and extent was deter-
mined by subsequent case laws established by the courts. Mere effecting of a policy of insurance carries
with it no right to recover there under simply because of the happening of an insured event. An insurable
interest should get recovered by the insured. This differentiates life insurance contracts and wagering
agreements.
The following principles have to be established:

A person affecting the policy (proposer) must have an insurable interest in the life to be assured.
The proposer should be in such a relationship with the life assured, that he should suffer a financial loss
in case the life assured dies, i.e., the proposer should; even though he has affected the policy, not wish the
event to happen, and to gain from it. He should wish for the well being and safety of the life insured at all
times.
The policy must expressly state on whose behalf it has been effected.
The sum assured cannot exceed the extent of the interest when the policy is effected.
Interest must exist at the time of inception, i.e., when the contract is entered into.
To prove insurable interest at death is not required.
• What is insured is the financial or pecuniary interest of the policyholder in the subject matter of insurance.
When a building is insured against fire damage, the continued existence of the building in its present form is
not the issue. The issue is the interest of the insuring person in the continued existence of the building and the
loss he will acquire if the building is damaged. The insured must be in a relationship with the subject matter of
insurance, whereby he has an interest in its safety and well-being and would be prejudiced by its loss or damage.
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This relationship is acknowledged by law. If there is no such relationship, which is called ‘insurable interest’,
there cannot be an insurance contract.
• A wager is what is commonly called a ‘bet’. The risk is called a speculative risk and is not insurable. The party
concerned could have avoided the loss. He got into that situation fully aware that he may incur a loss. He created
the peril. Insurance assumes that the event insured against (peril) is not subject to the control of the insured.
• Thus, for a contract of insurance to be valid, it is not enough that the parties to it are competent to contract, that
it is made with their free consent and that the consideration is lawful. It is necessary in addition that the insured
has insurable interest in the subject-matter of the Insurance. (Even if it is called incontestable). Otherwise, it
will amount to a wager and will be void according to S. 30, Indian Contract Act 1872. Especially in fire, marine
and life insurances, the question of insurable interest is of particular importance.
2.5.2 Time When Insurable Interest must Exist

In life and personal accident, insurances it is enough if insurable interest exists at the time the policy is affected.
In fire and motor insurances, it must exist both at the inception of the contract and at the time of loss. In marine
insurance it must exist at the time of the loss, though not when the insurance is affected. When the contract is entered
the insured must at least have an expectation of acquiring such an interest.
2.6 Indemnity
• Insurance is meant to indemnify, which means, to compensate for losses. The amount paid by the insurer as a
claim should not exceed the amount of loss incurred. Insurance should place the insured in the same financial
position after a loss, as he enjoyed before it, not better. This broadly is the Principle of Indemnity. By implication,
the mechanism of insurance cannot be used to make a profit.
• There is a link between indemnity and insurable interest. It is the interest of the insured in the subject matter
of insurance that is insured. Therefore, the amount of claim cannot exceed the extent of interest. If a bank has
taken an insurance policy against the default in loan repayments, the insurer is required to pay only to extent of
the default and not more. Insurance companies provide cover against fraud or misappropriation by employees.
If misappropriation occurs, only the actual loss will be paid as insurance claim. In case of damage to cars or
equipment in factories, the loss will be determined after providing for depreciation. This amount will be less
than the cost of replacement.
• In the absence of the principle of indemnity, insurance may be taken with the fraudulent intention of inflicting
damage on property and making exaggerated claims of losses. This would not only be illegal but also against
public policy.
• In some cases, the potential future losses are also compensated for. For example, it will take some time before
a factory which is damaged, is put back into operation. In the meanwhile, there is a loss of production and
therefore, loss of income and profits. Insurance can cover this loss as well. Similarly, an individual taking a
personal accident cover, either separately or as a part of a life insurance policy, would be compensated for loss
of earnings if he is unable to report for work due to the accident.
• Because of the principle of indemnity, there are often disputes in settling claims in general insurance. Losses
have to be assessed by qualified surveyors. These assessments are challenged as unfair. Policyholders do not
understand why the insurance company refuses to reimburse the entire cost of repair.
• Such problems do not exist in life insurance. There is no need to assess the extent of loss, because the insurable
interest (on own life) is assumed to be unlimited. It is not possible to make a precise valuation of a human life.
The principle of indemnity does not apply in life insurance. Almost all insurances other than life and personal
accident insurances are contracts of indemnity.
• The object of the contract of insurance is principally to place the insured as far as possible in the same position
in which he would be if the insured event causing the loss had not occurred. It is not a contract to make a gain.
It is to leave him neither a loser nor a gainer subject to his insuring the property for its full value.
• “Every contract of marine, fire insurance is a contract of indemnity and of indemnity only, the meaning of
which is that the assured in case of a loss is to receive a full indemnity but is never to receive more. Every rule
of Insurance Law is adapted in order to carry out this fundamental rule.”
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• The principle of indemnity which means that the insured can in no event make a gain out of that transaction is
a salutary rule of law to keep in check a human weakness. The insured would otherwise be tempted to destroy
the property himself or connive at its destruction and claim the sum insured. Even by over insurance he cannot
recover more than an indemnity from all the policies put together.
• Indemnity is such a fundamental principle of insurance that the doctrines of subrogation and contribution are
corollaries of this principle to further ensure that the insured does not make any profit out of the insurance
transaction. Also, this is the reason why the insured who is indemnified for a total loss must abandon the
subject matter of the insurance to the insurer. Even the need for existence of insurable interest at the time of loss
arises out of this principle, for if the insured has no insurable interest; he loses nothing and does not need to be
indemnified. Thus, where he has transferred the insured property and it is lost by the insured peril thereafter, he
incurs no loss and needs no indemnity.
2.7 Subrogation
• This distinctive feature of insurance contract supports the principle of indemnity in its objective of preventing the
insured from recovering more than his loss under an insurance policy. For example, the insured under a marine
cargo policy may have rights of recovering from other parties such as carriers, for instance, truck operators,
railways, shipping companies etc. for loss or damage to insured cargo. The principle of subrogation provides
that the insurers are entitled to succeed to the rights and remedies of the insured. Having paid the loss to the
insured the insurers recover the loss from the parties responsible for the loss. The insured cannot recover his
loss from two sources in which case he will make a profit.
• In insurance law, subrogation is the name given to the right of the insurer who has paid a loss to be put in the
place of the assured so that he can take advantage of any means available to the assured to extinguish or diminish
the loss for which the insurer has indemnified the assured.
• The doctrine of subrogation confers two specific rights on the insurer:
All rights and remedies of the assured against third parties incidental to the subject matter of the loss, by the
exercise of which the insurer may recoup his loss. The insurer can compel the insured to take proceedings
against the third parties for the benefit of the insurer.
All benefits received by the assured from third parties with a view to compensate the assured for the loss
which the insurer has indemnified him. The insurer is entitled to get even the moneys received by the assured
ex-gratia except those that are given to benefit the assured exclusively.
• Limitations on the doctrine

According to the common law, the right of subrogation arises when the insured’s claim has been fully paid
and not till then. It is from actual payment that the right springs. The right of subrogation arises only in
respect of rights incidental to the subject matter of the loss. Payment for loss of the ship does not entitle the
insurer to be subrogated for the owner’s right of action for loss of freight. The right of subrogation does not
arise where the assured himself has no cause of action against the third party.
Illustration: There was a crash between two ships which were owned by the same person, for the fault of
one of the ships. The owner could not recover from the ship at fault as that was also owned by him. Hence
the insurer of the ship not at fault could not sue the ship at fault under the right of subrogation.
2.7.1 Insured’s Rights and Remedies

When the subject matter of insurance suffers loss or damage from an insured peril, the insured has these rights:
Against the insured, to obtain indemnity under the insurance contract.
Against the Third Party, who caused the loss, to recover compensation for the loss caused, under the law
of tort.
By Virtue of a Contract, against a third person, to make good the loss, for example with the lessee of the
premises insured, to repair it in case of damage.
The insured cannot recover from both the insurer and the third party who has caused the loss. If he proceeds against
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the insurer, the insurer cannot avoid liability on the ground that the insured has the right to claim against the third
party and conversely if he proceeds against the third party, the third party cannot avoid liability on the ground that
the insured has been or will be fully indemnified by the insurer.
2.7.2 Exercise of Right of Subrogation

On being subrogated, the insurer can enforce the right against the third party, only in the name of the insured and can
regain the amount paid to the insured. If they recover more than that, the excess must be paid over to the insured.
The insurer cannot recover under the doctrine of subrogation anything more than he has paid.
2.7.3 Subrogation and Abandonment

• Abandonment is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter
of insurance in case of a total loss accepted by the insurer. The insurer thereafter is entitled to all benefits
flowing out of the subject even exceeding the amount of indemnity paid to the assured. In marine insurance, it
is governed by Sections 61 to 63 of the Marine Insurance Act, 1963.
• In other indemnity insurances, on being paid for a total loss the assured is required to abandon his interest
in the subject-matter of the insurance to the insurer. But in contracts of indemnity insurance, the insurer gets
subrogation rights automatically on payment of indemnity whether the loss is total or partial.
2.8 Contribution
• The Principle of Contribution ensures that if there is more than one policy on the same subject matter, the insured
cannot recover his loss from all the insurers in which case he will recover more than his loss. Contribution
principle provides that each insurer pays only his proportionate share of the loss.
• This is also a result of the doctrine of indemnity designed to ensure that the indemnity provided is proportionately
borne by the several insurers of the risk. Though a person has taken out more than one policy on the same risk
with several insurers, he cannot recover altogether more than a full indemnity from all or any of them. The
insured can select the policy from which he can recover his full indemnity. When that insurer has discharged
his liability, he is entitled to call upon the other insurers of the same risk to contribute their share of the loss.
• In order that a claim for contribution should arise, there must be two or more insurances fully covering the
same risks in respect of the same interest in a subject matter. If one insurer indemnifies the insured in full, he
can claim contribution half or one-third of it as the case may be from other coinsurers; not because there is any
such contract between them whether express or implied.
• The right of contribution is defined as, “The right of contribution is based not in contract but on what has been
said to be the plainest equity that burdens should be shared equally. It would be inequitable for any of the insurers
to receive the benefit of the premium without being liable for their share of the loss.”
2.8.1 Conditions Necessary for Right of Contribution

In order that the right of contribution may arise, following conditions must he satisfied:
• The area under discussion of insurance, in respect of which the claim to contribution arises, must be common
to all the policies, though they may include other properties.
• The peril which causes the loss must be common to all the policies, though they may include other perils.
• All the policies must be affected by or on behalf of the same assured. It is not enough that they all relate to the
same physical object.
• All the policies must be real contracts and be in force at the time of the loss.
• The policy must not contain any stipulation by which it is excluded from contribution.
2.9 Doctrine of Proximate Cause

• The concept of Proximate Cause is used to determine whether the cause of loss is an insured peril. If there
are two causes for the loss, whether operating simultaneously or in sequence, the immediate cause, called the
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proximate cause for damage, must be the insured peril. The proximate cause must be determined in order to
avoid paying a claim on a loss which has occurred due to a peril which is uninsured or excluded.
• The need to identify the proximate cause is not important if the concurrent causes are all insured and not excluded
perils. If one of the causes is an excepted peril and its effects can be separated from the results of the operations
of the insured peril, there is a liability for the latter and not for the former. If the perils cannot be so separated,
there is no liability at all. If there are different causes occurring in sequence, the liability will be decided upon
the sequence, which one preceded which, and so on.
• The proximate cause is defined as the active and efficient cause that sets in motion a train of events which brings
about a result, without the intervention of any force started and working actively from a new and independent
source. This is not always obvious and cannot be determined as part of the process of assessing the loss. It needs
professional knowledge about the effects of the different causes relevant to the case. Judicial intervention is
often sought.
• A proximate cause need not be the nearest or the latest, but must be the direct, dominant, operative and efficient
cause, of which loss is the natural consequence. The time lag between cause and effect is not material.
• Example: A hunter falling in the wet ground after meeting with an accident and being unable to move, contracted
pneumonia and died. It was decided that the proximate cause of death was the accident and not pneumonia.
Because of this decision, accident benefits became payable in that case.
• The practical effect of the concept of proximate cause is to keep the scope of the insurance within the limits
intended by the parties, when the contract was made.
• There is no difficulty if a single peril acts and causes the loss. Often these perils do not operate in isolation, but
act in succession or simultaneously and it will be difficult to assess the relative effect of each peril or pick out
one of these perils as the actual cause of the loss. For instance, damage to a cargo of rice was caused by sea
water escaping through a pipe gnawed by rats. The existence of the rats on board, their thirst, the hardness of
their teeth, the incapacity of the pipe to resist the gnawing, the ship being afloat and so on, which of these can
be said to be the cause of the effect namely the damage of the rice cargo, will be a lengthy assessment.
• The classic definition of proximate cause can be summed up as:
• ‘Proximate cause means the active, efficient cause that sets in motion a train of events which brings about a
result, without the intervention of any force started and working actively from a new and independent source’.
The doctrine of proximate cause is common to all branches of insurance and is based on the presumed intention
of the parties expressed in the contract.
2.9.1 Tests for Determining Proximate Cause

In Yorkshire Dale SS Co. v. Minister of War Transport, Lord Wright observed that “The choice of the real or efficient
cause must be made by applying commonsense standards. Causation is to be understood as the man in the street,
and not as either the scientist or the metaphysician would understand it”. Courts have accordingly formulated some
general rules for determining the proximate cause in cases where perils are acting consecutively or concurrently,
as follows:
Where perils are acting consecutively in unbroken sequence, that is, one peril is caused by and follows from
another peril:
• If there is one insured peril, but no excepted peril, insurer is liable for losses caused by the insured peril.
• If an excepted peril, is involved, and
The excepted peril precedes an insured peril, the insurer is not liable; for example, Tootal Broadhurst Lee &
Co. v. London and Lancashire Fire Ins. Co., where an earthquake fire (an excepted peril) spread by natural
means and burnt the insured premises, the insurer was not liable as the loss was proximately caused by the
excepted peril.
The excepted peril follows an insured peril; the insurer is not liable if the loss caused by each is
undistinguishable. If the loss caused is distinguishable, the insurer is liable for the damage caused by the
insured peril up to the happening of the excepted peril. For example, where fire causes an explosion and
explosion is an excepted peril, the insurer will be liable for fire damage up to the time of explosion.
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Where perils are acting consecutively in broken sequence, that is, each peril is independent of the other:
• If no excepted peril is involved, the insurer will be liable for losses caused by the insured peril.
• If an excepted peril is involved, and precedes an insured peril, the insurer is liable for the loss caused by the
insured peril. Thus, a plate glass insurance policy covered breakages from any risk except fire. A fire occurred
in a neighbouring premise and taking advantage of it a mob broke the insured plate glass to commit theft. It was
held that the mob action was the cause of the loss and not the fire and so the insurer was liable.
• If the excepted peril follows the insured peril, as an independent cause, the insurer is liable only for the loss
caused by the insured peril up to the time of the intervention of the excepted peril.
Where the perils are acting concurrently, that is simultaneously:

• The insurer is liable if:
One of them is an insured peril and none of them is an excepted peril
The losses caused by the insured and excepted perils can be distinguished
• The insurer is not liable if the losses cannot be distinguished. Where the cases are very complicated, the strict
legal position is not invoked, but settled by compromise usually by the insurers by a generous interpretation
of the facts.
Exclusion of proximate cause rule

• The application of the proximate cause rule will be excluded where wide terms are used in policy exclusions,
such as ‘directly or indirectly’ and so on.
• Thus, in Coxe v. Employers’ Liability Assurance Corporation (UK), an Army Officer was accidentally run over
by a train and killed when he was walking along a railway line during inspection of guards and sentries guarding
the track in war time. The place of accident was also dark because of blackout in compliance with defence
regulations. His personal accident policy had excluded death ‘directly or indirectly caused by, arising from or
traceable to …war’. The train was really the proximate cause of the loss, but the proximate cause rule had been
modified by the wide wording of the exclusion and so the officer’s representative’s claim for the sum assured was
rejected by the court on the ground that the insured’s death was not directly but indirectly the result of war.
2.10 Fundamentals of Marine Insurance Contract

• Marine insurance business means the business of effecting contracts of insurance upon vessels of any description,
including cargoes, freights and other interests which may be legally insured in or relation to such vessels, cargoes
and freights, goods, wares merchandise and property of whatsoever description insured for any transit by land
or water or air or all the three.
• The same may include warehouse risks or similar risks in addition or as incidental to such transit and includes
any other risks which are customarily included among the risks insured against in marine insurance policies.
• Thus, insurance is a business of taking over others’ risks; and accordingly, the commitments that insurers
undertake should be honoured as and when they fall due.
• Insurers manage their risk to tolerable levels by adopting such measures as pooling of independent risks,
spreading and reinsuring large risks, exercising control over fraudulent claims, designing suitable asset liability
management etc. In order that insurers are capable of fulfilling the promises under the contracts, they charge
‘premium’ from the assured, depending upon their estimation of degree of the risk, and are mandated to maintain
a sufficient level of capital.
• In other words, the purpose of any form of insurance is to replace what has been lost. It is not intended that
assured should make a profit from his loss but that he should merely be in worse situation than he was before
the loss occurred. Further, it is not practicable to expect the insurer to replace an object which is lost, nor it is
reasonable to expect him to remove the damage thus restoring the damaged object to the whole sound object.
As a compromise, any recompense must be of a monetary nature and this system of reimbursement is called
“indemnifying”.
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2.11 Marine Insurance
Definition: A contract or policy of marine insurance is an arrangement whereby one person called insurer or
underwriter, agrees, according to specific terms of contract, to indemnify another person, called assured, for the
losses incurred in connection with property, such as ship, goods or other movables, in maritime transport.
• Section 3 of Marine Insurance Act, 1963, defines ‘marine insurance’ as follows: A contract of marine insurance
is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby
agreed, against marine losses, that is to say, the losses incidental to marine adventure.
• “Marine adventure” includes any adventure where any insurable property is exposed to maritime perils, i.e.,
perils consequent to navigation of the sea. It also includes the earnings or acquisition of any freight, passage
money, commission, profit or other pecuniary benefit, or the security for any advances, loans, or disbursements
is endangered by the exposure of insurable property to maritime perils.
• Marine adventure also includes 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.
• A contract of marine insurance may, be its express terms, or by usage of trade, be extended so as to protect the
assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.
2.12 Insured Risks: Perils of the Sea

• An insurer underwrites or subscribes to a risk in return for the payment of ‘premium’ by the assured. The premium
is considered compensation for running risks of the insured property and is normally retained whether or not the
insured property is lost or not. The size of the premium depends upon the insurer’s estimation of degree of the
risk that the insured property will incur a loss and on amount of indemnity he will have to pay. Generally, the
insurers spread their potential liabilities in a relatively small amount over a number of risks in order to benefit
from the probability that only a limited percentage will experience losses by ‘law of averages’.
• The word “risk” being in this context to refer to the risk of loss occurring in connection with insured property,
and the risk of loss can include not only actual property in return for the payment of premium by the assured
losses but also financial losses, such as those resulting from the loss of freight, passage money, commission or
profit as well as certain types of liabilities incurred to third parties.
• The specification of insurance contract usually stipulates certain limitations as to the type of occurrences that may
cause losses for which the insurer will pay indemnity. Such occurrences are called “insured risks” or “insured
perils”. The term “perils of the sea” refers only to accidents or causalities of the sea, and does not include the
ordinary action of the winds and waves.
• Besides, maritime perils include, fire, war perils, pirates, seizures and jettison, etc. A marine insurance policy
may specify that only certain maritime risks, or “perils of the sea”, are covered.
2.13 Marine Insurance Policy

A marine insurance policy is a document which embodies all the particulars and the terms and conditions for the
construction of the policy. Contract must be embodied in policy. A contract of marine insurance shall not be admitted
in evidence unless it is embodied in a marine policy in accordance with section 25 of the Marine Insurance Act
1963. The policy may be executed and issued either at the time when the contract is concluded, or afterwards. The
policy must be signed by or on behalf of the insurer. It must contain the following:
• The name of the assured
• The subject-matter insured and the risk insured against
• The voyage, or period of time, or both, as the case may be, covered by the insurance
• The sum or sums insured
• The name or names of the insurer or insurers
In India, the practice is to issue ‘cover notes’ which are similar to slips. As the practice is not to stamp a ‘cover note’
it is admissible only to prove the agreement. It cannot be used for any purpose except to compel the delivery of a
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policy in accordance with its terms.
2.13.1 Subject-Matter
The subject-matter insured must be designated in a marine policy with reasonable certainty. The nature and extent
of the interest of the assured in the subject-matter insured need not be specified in the policy. Where the policy
designates the subject-matter insured in general terms, it shall be construed to apply to the interest intended by the
assured to be covered.
2.13.2 Assignment of Policy

• A marine insurance policy is assignable either before or after the loss, unless it contains terms expressly
prohibiting assignment. A policy on goods is generally freely assignable. Merchandise like tea, jute and wheat
etc., change hands before they reach their destination and policies on ship or on freight are subject to restrictions
on assignment.
• An assignment by the insured of his interest in the subject-matter insured does not transfer his rights in the
policy of insurance thereon to the assignee, unless there is an express or implied agreement to that effect. But a
transmission of interest in the subject–matter insured by operation of law; such as by death or insolvency will
operate as a transfer of the policy also.
• An assured who has assigned or lost his interest in the insured property cannot subsequently assign the policy
of insurance thereon; unless before or at the time of assigning the property, he has expressly or impliedly agreed
to assign the policy. However, he can always assign the policy after loss.
• The marine policy may be assigned by endorsements on the policy itself or in any other customary manner. On
the assignment of the beneficial interest in the policy, the assignee is entitled to sue thereon in his name.
2.14 Principles of Marine Insurance

The various principles which fall under Marine insurance are as discussed below:
2.14.1 Principle of Utmost Good Faith

• There is no difference between a contract of insurance and any other contract, except that in a contract of
insurance, there is a requirement of utmost good faith.
• According to Section 19, a contract of marine insurance is a contract based upon utmost good faith and if the
utmost good faith is not observed by either party, the contract may be avoided by the other party.
• Under section 20, 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.
• Under Section 21, the agent must disclose to the insurer every material circumstance which is known to him,
and an agent to insurer is deemed to know every circumstance where insurance is affected for the assured by an
agent. Very importantly, the duty of disclosure continues to apply even after the conclusion of the contract.
2.14.2 Principle of Insurable Interest

• Insurable interest means that the proposer could suffer a financial loss if the subject insured is physically harmed
in any way. Only financial interest can be insured.
• But the principle of insurable interest states that the insured must be in a position to lose financially if a loss
occurs. In a contract of marine insurance, the assured must be interested in the subject-matter insured at the
time of the loss, though he need not be interested when the insurance is affected.
• A contract of marine insurance is deemed to be a wagering contract, where the assured has not an insurable
interest, and the contract is entered into with no expectation of acquiring such an interest.
• According to the Marine Insurance 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 benefit
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by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by
the detention thereof, or may incur liability in respect thereof.
• The following persons are deemed to have insurable interest:
The owner of the ship has an insurable interest in the ship.
The owner of the cargo has insurable interest in the cargo.
A creditor who has advanced money on the security of the ship or cargo has insurable interest to the extent
of his loan.
The master and crew of the ship have insurable interest in respect of their wages.
If the subject matter of insurance is mortgaged, the mortgagor has insurable interest in the full value thereof,
and the mortgagee has insurable interest in respect of any sum due to him.
A trustee holding any property in trust has insurable interest in such property.
In case of advance freight the person advancing the freight has an insurable interest in so far as such freight
is repayable in case of loss.
The insured has an insurable interest in the charges of any insurance policy which he may take.
2.14.3 Principle of Indemnity

Most kinds of insurance policies other than life and personal accident insurance are contracts of indemnity whereby
the insurer undertakes to indemnify the insured for the actual loss suffered by him as a result of the occurring of the
event insured against. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify
the insured to the extent agreed upon. Although the insured is to be placed in the same position as if the loss has not
occurred, the amount of indemnity may be limited by certain conditions as follows:
Injury or loss sustained by the insured has to be proved.
The indemnity is limited to the amount specified in the policy.
The insured is indemnified only for the proximate causes.
The market value of the property determines the amount of indemnity.
2.14.4 Principle of Subrogation

• The principle of subrogation is a corollary of the principle of indemnity. Subrogation means substitution of the
insurer in place of the insured for the purpose of claiming indemnity from a third person for loss covered by
insurance. The insurer is therefore entitled to recover from a negligent third party any loss payments made to
the insured.
• In the marine policy, the insurer must have paid the claim before they are entitled to rights of subrogation. Whether
the loss paid is total or partial insurers subrogated to all the rights and remedies of the insured. However, the
insurer can retain only up to the amount they have indemnified the insured under subrogation. Such rights and
remedies include right of recovery from third parties.
• In the event of loss of goods at the destination, the sum insured which is the agreed value will be paid. In case
the goods are damaged during transit, the amount payable is arrived as a proportion of the sum insured according
to the percentage of depreciation, suffered by the goods as certified by surveyors.
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Summary
• The GIC was established by the Central Government in accordance with the provisions of the Companies Act,
1956 in November 1972 and it commenced business on January 1, 1973.
• The first general insurance company established by an India was Indian Mercantile Insurance Company Ltd.
in Bombay in 1907.
• The first legislation in India to regulate the life insurance business was in 1912 with the passing of the Indian
Life Assurance Companies Act, 1912.
• General insurance has been defined to comprise “fire insurance business”, “marine insurance business” and
“miscellaneous insurance business”.
• Contract of insurance, as described in Prudential Ins. Co. v. Inland Revenue Commrs is stated as a contract
in which one party (the insurer) assures in return for a money consideration (the premium) to pay to the other
party (the insured) money or money’s worth on the happening of an uncertain event more or less unfavourable
to the interest of the insured.
• An offer by one and an unqualified acceptance of it by the other; when acknowledged together form an
agreement.
• A cover note is a temporary and limited agreement. It may be self contained or it may incorporate by reference
the terms and conditions of the future policy.
• Under the Principle of Good Faith, the policyholder is obliged to disclose all facts, which are material to the
assessment of the risk.
• Section 20(2) of Marine Insurance Act 1963 defines material facts as facts which would influence the judgment
of a ‘prudent insurer’ in assessing the risk and fixing the appropriate premium to be charged or in determining
whether he will take the risk or reject it.
• Insurable Interest is defined as, “In every contract of insurance, it is essential that the insured must have a
monetary interest in subject matter of insurance.”
• Insurance is meant to indemnify, which means, to compensate for losses.
• According to the common law, the right of subrogation arises when the insured’s claim has been fully paid and
not till then.
• Abandonment is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter
of insurance in case of a total loss accepted by the insurer.
• The Principle of Contribution ensures that if there is more than one policy on the same subject matter, the insured
cannot recover his loss from all the insurers in which case he will recover more than his loss.
• The concept of Proximate Cause is used to determine whether the cause of loss is an insured peril.
• The term “perils of the sea” refers only to accidents or causalities of the sea, and does not include the ordinary
action of the winds and waves.
• A marine insurance policy is a document which embodies all the particulars and the terms and conditions for
the construction of the policy.
References
• InterLog. Characteristics of Marine Insurance [Online] Available at: <http://www.inter-log.net/modules/
marine_insurance/marine_insurance_main_p182.htm>. [Accessed 20 June 2011].
• wiseGeek. What is Indemnity? [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>.
• wiseGeek. The Principle of Indemnity [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.
htm>. [Accessed 18 June 2011].
• Knowledge Series. Introduction to Life Insurance [pdf] Available at: <http://www.cifplearning.com/
introduction%20of%20life%20insurance.pdf>. [Accessed 18 June 2011].
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• Chip Merlin Insurance Subrogation Teleconference 11/16/2010 [video online] Available at: <http://www.youtube.
com/watch?v=2uJkgnDl-B8>. [Accessed 22 June 2011].
• Insurance Contracts: Good Faith and Bad Faith [video online] Available at: <http://www.youtube.com/
watch?v=WGykHhOwYgQ>. [Accessed 22 June 2011].
Recommended Reading
• Stempel, J. W., 2006. Stempel on Insurance Contracts, Vol.1, 3rd ed., Aspen Publishers Online.
• Carr, I. & Stone, P., 2009. International Trade Law, 4th ed., Taylor & Francis, p. 738.
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Marine Insurance
Self Assessment
1. What are governed by principles which govern contracts in general and also belong to the class of contracts?
a. Insurance contracts
b. Proposal
c. Insurer’s duty of disclosure
d. Material facts
2. The first general insurance company established by an India was Indian Mercantile Insurance Company Ltd.
in ________in 1907.
a. Bombay
b. Madras
c. Delhi
d. Chandigarh
3. A _______is an agreement between two or more parties to do or to abstain from doing an act.
a. warranty
b. good faith
c. contract
d. proposal
4. A cover note is a temporary and limited_________.

a. agreement
b. insurance
c. proposal
d. claim
5. Which of the statement is FALSE?

a. All risks are insurable.
b. Speculative contracts are wagering contracts and are illegal.
c. A subject matter of a valid contract has to be legal.
d. For any insurance contract, the existence of insurable interest is an essential ingredient.
6. Which of the statement is FALSE?

a. A person affecting the policy (proposer) must have an insurable interest in the life to be assured.
b. Insurance is not a contract.
c. Each class of insurance also has individual characteristics of its own.
d. The first legislation in India to regulate the life insurance business was in 1912 with the passing of the Indian
Life Assurance Companies Act, 1912.
7. Which of these is primarily a voluntary act of the assured giving up his proprietary rights over the subject-matter
of insurance in case of a total loss accepted by the insurer?
a. Abandonment
b. Subrogation
c. Contribution
d. Indemnity
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8. Subrogation means _________of the insurer in place of the insured for the purpose of claiming indemnity from
a third person for loss covered by insurance.
a. addition
b. subtraction
c. substitution
d. multiplication
9. ________principle provides that each insurer pays only his proportionate share of the loss.
a. Abandonment
b. Subrogation
c. Contribution
d. Indemnity
10. _______underwrites or subscribes to a risk in return for the payment of premium by the assured.
a. Underwriter
b. Insurer
c. Owner
d. Creditor
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Marine Insurance
Chapter III
Marine Insurance Act, 1963
Aim
• define contract of marine insurance
• explain different sections of Marine Insurance Act, 1963
• define section 2 of the act
Objectives
• highlight the important sections of the Marine Insurance Act, 1963
• define insurable interest
• explain the concept of disclosure
Learning outcome
• explain liabilities
• discuss warranties
• talk about various different section of the Marine Insurance Act, 1963 in detail
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3.1 Introduction
A contract of Marine Insurance, as per the Marine Insurance Act - 1963, has been defined as a contract in which
the insurer agrees to cover the assured, in the manner and to the extent thereby agreed, against marine losses
supplementary to marine adventure. The Act offers that a contract of marine insurance may be widened so as to
protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.
Every lawful marine adventure may be the matter of a contract of marine insurance. Subject to the provisions of
this Act, every person has an insurable concern who is involved in a marine adventure.
3.2 Various sections of Marine Insurance Act, 1963

Different sections of Marine Insurance Act, 1963 are discussed below:
3.2.1 Section 2 Definitions

In this Act, unless the context otherwise requires:

a. “contract of marine insurance” means a contract of marine insurance as defined by section3;
b. “freight” includes the profit derivable by a ship-owner from the employment of his ship to carry his own goods
or other movables, as well as freight payable by a third party, but does not include passage money;
c. “insurable property” means any ship, goods or other movables which are exposed to maritime perils;
d. “marine adventure” includes any adventure where-

i. any insurable property is exposed to maritime perils;
i. the earnings or acquisition of any freight, passage money, commission, profit or other pecuniary benefit, or
the security for any advances, loans, or disbursements is endangered by the exposure of insurable property
to maritime perils;
ii. a ny 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;
e. “maritime perils” means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils,
of the seas, fire, war perils pirates, rovers, thieves, captures, seizures, restraints and detainments of princes and
peoples, jettisons, barratry and any other perils which are either of the like kind or may be designed by the
policy;
f. “movables” means any movable tangible property, other than the ship, and includes money, valuable securities
and other documents;
g. “policy” means a marine policy;
h. “ship” includes every description of vessel used in navigation;
i. “suit” includes counter-claim and set-off.
3.2.2 Section 3 Marine Insurance Defined

A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner
and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine adventure.
3.2.3 Section 4 Mixed Sea and Land Risks

1. A contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the
assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.
2. Where a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure,
is covered by a policy in the form of a marine policy, the provisions of this Act, in so far as applicable, shall
apply thereto, but, except as by this section provided, nothing in this Act shall alter or affect any rule of law
applicable to any contract of insurance other than a contract of marine insurance as by this Act defined.
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Marine Insurance
Explanation - ‘An adventure analogous to a marine adventure’ includes an adventure where any ship, goods or
other movables are exposed to perils incidental to local or inland transit.
3.2.4 Section 5 Lawful Marine Adventure

Subject to the provisions of this Act, every lawful marine adventure may be the subject of a contract of marine
insurance.
3.2.5 Section 6 Avoidance of Wagering Contracts

1. Every contract of marine insurance by way of wagering is void.
2. A contract of marine insurance is deemed to be a wagering contract:
a. where the assured has not an insurable interest as defined by this Act, and the contract is entered into with
no expectation of acquiring such an interest; or
b.
c. (b) where the policy is made “interest or no interest”, or “without further proof of interest than the policy
itself”, or “without benefit of salvage to the insurer” , or subject to any other like term:

Provided that, where there is no possibility of salvage, a policy may be affected without benefit of salvage to the
insurer”.
3.2.6 Section 7 Insurable Interest Defined

1. Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine
adventure.
2. 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 benefit by the safety
or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention
thereof, or may incur liability in respect thereof.
3.2.7 Section 8 When Interest must Attach

1. The assured must be interested in the subject-matter insured at the time of the loss, though he need not be
interested when the insurance is effected:

Provided that, where the subject- matter is insured “lost or not lost”, the assured may recover although he may not
have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured
was aware of the loss, and the insurer was not.

2. Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after
he is aware of the loss.
3.2.8 Section 9 Defeasible or Contingent Interest

1. A defensible interest is insurable, as also is a contingent interest.
2. In particular, where the buyer of goods has insured them, he has an insurable interest, notwithstanding that
he might, at his election, have rejected the goods, or have treated them as at the seller’s risk, by reason of the
latter’s delay in making delivery or otherwise.
3.2.9 Section 10 Partial Interest

A partial interest of any nature is insurable.
3.2.10 Section 11 Reinsurance

1. The insurer under a contract of marine insurance has an insurable interest in his risk, and may reinsure in respect
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of it.
2. Unless the policy otherwise provides, the original assured has no right or interest in respect of such
reinsurance.
3.2.11 Section 14 Advance Freight

In case of advance freight, the person advancing the freight has an insurable interest, in so far as such freight is not
repayable in case of loss.
3.2.12 Section 15 Charges of Insurance

An insurable interest has been assured in the charges of any insurance which he may affect.
3.2.13 Section 16 Quantum of Interest

1. Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof,
and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.
2. A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf
and for the benefit of other persons interested as well as for his own benefit.
3. The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding
that some third person may have agreed, or be liable to indemnify him in case of loss.
3.2.14 Section 18 Measure of Insurable Value

Subject to any express provision or valuation in the policy, the insurable value of the subject-matter insured must
be ascertained as follows:-

1. In insurance on ship, the insurable value is the value, at the commencement of the risk, of the ship, including
her outfit, provisions, and stores for the officers and crew, money advanced for seamen’s wages, and other
disbursements (if any) incurred to make the ship fit for the voyage or adventure contemplated by the policy,
plus the charges of insurance upon the whole:
2. The insurable value, in the case of a steamship, includes also the machinery, boilers, and coals and engine stores
if owned by the assured; in the case of a ship driven by power other than steam includes also the machinery and
fuels and engine stores, if owned by the assured; and in the case of a ship engaged in a special trade, includes
also the ordinary fittings requisite for that trade:
3. In insurance on freight, whether paid in advance or otherwise, the insurable value is the gross amount of the
freight at the risk of the assured, plus the charges of insurance.
4. In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the
expenses of and incidental to shipping and the charges of insurance upon the whole.
5. In insurance on any other subject- matter, the insurable value is the amount at the risk of the assured when the
policy attaches, plus the charges of insurance.
3.2.15 Section 20 Disclosure by Assured

1. Subject to the provisions of this section, 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 to him. If the assured fails to make such disclosure,
the insurer may avoid the contract.
2. Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium,
or determining whether he will take the risk.
3. In the absence of inquiry, the following circumstances need not be disclosed, namely:-
a. any circumstance which diminishes the risk;
b. any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know
matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his
business as such, ought to know;
c. any circumstance as to which information is waived by the insurer;
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Marine Insurance
d. any circumstance which it is superfluous to disclose by reason of any express or implied warranty.
4. Whether any particular circumstance, which is not disclosed, be material or not is, in each case, question of
fact.
5. The term “circumstance” includes any communication made to, or information received by, the assured.
3.2.16 Section 21 Disclosure by Agent Effecting Insurance

Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance
is effected for the assured by an agent, the agent must disclose to the insurer-
a. every material circumstance which is known to himself, and an agent to insure is deemed to know every
circumstance which in the ordinary course of business ought to be known by, or to have been communicated
to, him; and
b. every material circumstance which the assured is bound to disclose, unless it comes to his knowledge too
late to communicate it to the agent.
3.2.17 Section 23 When Contract is Deemed to be Concluded

A contract of marine insurance is deemed to be concluded when the proposal of the assured is ac-
cepted by the insurer, whether the policy be then issued or not; and for the purpose of showing when
the proposal was accepted, reference may be made to the slip, covering note or other customary
memorandum of the contract, although it be unstamped.
3.2.18 Section 24 Contract must be Embodied in Policy

A contract of marine insurance shall not be admitted in evidence unless it is embodied in a marine
policy in accordance with this Act. The policy may be executed and issued either at the time when
the contract is concluded, or afterwards.
3.2.19 Section 25 What Policy must Specify

A marine policy must specify:

1. the name of the assured, or of some person who effects the insurance on his behalf
2. the subject-matter insured and the risk insured against
3. the voyage, or period of time, or both, as the case may be, covered by the insurance
4. the sum or sums insured
5. the name or names of the insurer or insurers.
3.2.20 Section 26 Signature of Insurer

1. A marine policy must be signed by or on behalf of the insurer.
2. Where a policy is subscribed by or on behalf of two or more insurers, each subscription, unless the contrary be
expressed, constitutes a distinct contract with the assured.
3.2.21 Section 33 Premium to be Arranged

1. Where an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable premium
is payable.
2. Where an insurance is effected on the terms that an additional premium is to be arranged in a given event, and
that event happens out no arrangement is made, then a reasonable additional premium is payable.
3.2.22 Section 35 Nature of Warranty

1. A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say a warranty
by which the assured undertakes that some particular thing shall or shall not be done, or that some condition
shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.
2. A warranty may be express or implied.
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3. A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to
the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer
is discharged from liability as form the date of the breach of warranty, but without prejudice to any liability
incurred by him before that data.
3.2.23 Section 36 When Breach of Warranty Excused

1. Non- compliance with a warranty is excused when by reason of a change of circumstances, the warranty ceases
to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful
by any subsequent law.
2. Where a warranty is broken, the assured cannot avail himself of the defense that the breach has been remedied,
and the warranty complied with, before loss.
3. A breach of warranty may be waived by the insurer.
3.2.24 Section 37 Express Warranties

1. An express warranty may be in any form of words from which the intention to warrant is to be inferred.
2. An express warranty must be included in, or written upon the policy, or must be contained in some document
incorporated by reference into the policy.
3. An express warranty does not exclude implied warranty, unless it be inconsistent therewith.
3.2.25 Section 39 No Implied Warranty of Nationality

There is no implied warranty as to the nationality of a ship or that her nationality shall not be changed during the
risk.
3.2.26 Section 40 Warranty of Good Safety

Where the subject-matter insured is warranted “well” or “in good safety” on a particular day, it is sufficient if it be
safe at any time during that day.
3.2.27 Section 41 Warranty of Seaworthiness of Ship

1. In a voyage policy, there is an implied warranty that at the commencement of the voyage the ship shall be
seaworthy for the purpose of the particular adventure insured.
2. Where the policy attaches while the ship is in port, there is also an implied warranty that she shall, at the
commencement of the risk, be reasonably fit to encounter the ordinary perils of the port.
3. Where the policy relates to a voyage which is performed in different stages, during which the ship requires
different kinds of or further preparation or equipment, there is an implied warranty that at the commencement
of each stage the ship is seaworthy in respect of such preparation or equipment for the purposes of that stage.
4. A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of
the seas of the adventure insured.
5. In a time policy, there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but
where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer in not liable
for any loss attributable to unseaworthiness.
3.2.28 Section 42 No Implied Warranty that Goods are Seaworthy

1. In a policy on goods or other movables, there is no implied warranty that the goods or movables are
seaworthy.
2. In a voyage policy on goods or other movables, there is an implied warranty that at the commencement of the
voyage the ship is not only seaworthy as a ship, but also that she is reasonably fit to carry the goods or other
movables to the destination contemplated by the policy.
3.2.29 Section 43 Warranty of Legality

There is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control
the matter, the adventure shall be carried out in a lawful manner.
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Marine Insurance
3.2.30 Section 44 Implied Condition as to Commencement of Risk

1. Where the subject-matter is insured by a voyage policy “at and from” or “from” a particular place, it is not
necessary that the ship should be at that place when the contract is concluded, but there is an implied condition
that the adventure shall be commenced within a reasonable time, and that if the adventure be not so commenced
the insurer may avoid the contract.
2. The implied condition may be negative by showing that the delay was caused by circumstances known to the
insurer before the contract was concluded, or by showing that he waived the condition.
3.2.31 Section 45 Alteration of Port of Departure

Where the place of departure is specified by the policy and the ship instead of sailing from that place sails from any
other place, the risk does not attach.
3.2.32 Section 46 Sailing for Different Destination

Where the destination is specified in the policy, and the ship, instead of sailing for that destination, sails for any
other destination, the risk does not attach.
3.2.33 Section 47 Change of Voyage

1. Where, after the commencement of the risk, the destination of the ship is voluntarily changed from the destination
contemplated by the policy, there is said to be a change of voyage.
2. Unless the policy otherwise provides, where there is a change of voyage, the insurer is discharged from liability
as from the time of change, that is to say, as from the time when the determination to change it is manifested;
and it is immaterial that the ship may not in fact have left the course of voyage contemplated by the policy
when the loss occurs.
3.2.34 Section 48 Deviation

1. Where a ship, without lawful excuse, deviates from the voyage contemplated by the policy, the insured is
discharged from liability as from the time of deviation, and it is immaterial that the ship may have regained her
route before any loss occurs.
2. There is a deviation from the voyage contemplated by the policy-
a. where the course of the voyage is specifically designated by the policy, and that course is departed from;
or
b. where the course of the voyage is not specifically designed by the policy, but the usual and customary course
is departed from.
3. The intention to deviate is immaterial; there must be a deviation in fact to discharge the insurer from his liability
under the contract.
3.2.35 Section 49 Several Ports of Discharge

1. Where several ports of discharge are specified by the policy, the ship may proceed to all or any of them, but, in
the absence of any usage or sufficient cause to the contrary, she must proceed to them, or such of them as she
goes to, in the order designated by the policy. If she does not there is a deviation.
2. Where the policy is to “ports of discharge” within a given area, which are not named, the ship must, in the
absence of any usage or sufficient cause to the contrary, proceed to them, or such of them as she goes to, in their
geographical order. If she does not there is a deviation
3.2.36 Section 50 Delay in Voyage

In case of a voyage policy, the adventure insured must be prosecuted throughout its course with reasonable dispatch,
and; if without lawful excuse it is not so prosecuted, the insurer is discharged from liability as from the time when
the delay became unreasonable.
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3.2.37 Section 51 Excuse for Deviation or Delay
1. Deviation or delay in prosecuting the voyage contemplated by the policy is excused-
a. where authorised by any special term in the policy; or
b. where caused by circumstances beyond the control of the master and his employer ; or
c. where reasonably necessary in order to comply with an express or implied warranty; or
d. where reasonably necessary for the safety of the ship or subject-matter insured; or
e. for the purpose of saving human life or aiding a ship in distress where human life may be in danger; or
f. where reasonably necessary for the purpose of obtaining medical or surgical aid for any person on board
the ship; or
g. where caused by the barratrous conduct of the master or crew, if barratry be one of the perils insured
against.
2. When the cause excusing the deviation or delay ceases to operate, the ship must resume her course, and prosecute
her voyage, with reasonable dispatch.
3.2.38 Section 52 When and How Policy is Assignable

1. A marine policy may be transferred by assignment unless it contains terms expressly prohibiting assignment.
It may be assigned either before or after loss.
2. Where a marine policy has been assigned so as to pass the beneficial interest in such policy, the assignee of
the policy is entitled to sue thereon in his own name; and the defendant is entitled to make any defense arising
out of the contract which he would have been entitled to make if the suit had been brought in the name of the
person by or on behalf of whom the policy was effected.
3. A marine policy may be assigned by endorsement thereon or in other customary manner.
3.2.39 Section 53 Assured Who has no Interest cannot Assign

Where the assured has parted with or lost his interest in the subject-matter insured, and has not, before or at the
time of so doing expressly or impliedly agreed to assign the policy, any subsequent assignment of the policy is
inoperative:

Provided that nothing in this section affects the assignment of a policy after loss.
3.2.40 Section 54 When Premium Payable

Unless otherwise agreed, the duty of the assured or his agent to pay the premium, and the duty of the insurer to issue
the policy to the assured or his agent, is concurrent conditions, and the insurer is not bound to issue the policy until
payment or tender of the premium.
3.2.41 Section 55 Included and Excluded Losses

1. Subject to the provisions of this Act, and unless the policy otherwise provides, 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.
2. In particular-
a. the insurer is not liable for any loss attributable to the willful misconduct of the assured, but, unless the policy
otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the
loss would not have happened but for the misconduct or negligence of the master or crew;
b. unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately
caused by although the delay be caused by a peril insured against;
c. 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.
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Marine Insurance
3.2.42 Section 56 Partial and Total Loss

1. A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss.
2. A total loss may be either an actual total loss, or a constructive total loss.
3. Unless a different intention appears form the terms of the policy, an insurance against total loss includes a
constructive, as well as an actual, total loss.
4. Where the assured brings a suit for a total loss and the evidence proves only a partial loss, he may, unless the
policy otherwise provides, recover for a partial loss.
5. Where goods reach their destination in specie, but by reason of obliteration of marks, or otherwise, they are
incapable of identification, the loss, if any, is partial and not total.
3.2.43 Section 57 Actual Total Loss

1. Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or
where the assured is irretrievably deprived thereof, there is an actual total loss.
2. In the case of an actual total loss, no notice of abandonment need be given.
3.2.44 Section 58 Missing Ship

Where the ship concerned in the adventure is missing, and when no news of it has been received, after the lapse of
a reasonable time, an actual total loss may be presumed.
3.2.45 Section 59 Effect of Transhipment, etc.

Where, by a peril insured against, the voyage is interrupted at intermediate port or place, under such circumstances
as, apart from any special stipulation in the contract of affreightment, to justify the master in landing and reshipping
the goods or other movables, or in transshipping them, and sending them on to their destination, the liability of the
insurer continues, notwithstanding the landing or transhipment
3.2.46 Section 60 Constructive Total Loss Defined

1. 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 preserved from actual total loss without an expenditure which would exceed its value when the expenditure
had been incurred.
2. In particular, there is a constructive total loss-
i. where the assured is deprived of the possession of his ship or goods by a peril insured against, and
a. it is unlikely that he can recover the ship or goods, as the case may be, or
b. the cost of recovering the ship or goods, as the case may be, would exceed their value when
recovered; or
ii. in the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repair-
ing the damage would exceed the value of the ship when repaired.

In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those
repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any
future general average contributions to which the ship would be liable if repaired; or
iii. in the case of damage to goods, where the cost of repairing the damage and forwarding the goods to
their destination would exceed their value on arrival.
3.2.47 Section 61 Effect of Constructive Total Loss

Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-
matter insured to the insurer and treat the loss as if it were an actual total loss.
3.2.48 Section 62 Notice of Abandonment

1. Subject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the
insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.
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2. Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word
of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured
interest in the subject-matter insured unconditionally to the insurer.
3. Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the
loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make
enquiry.
4. Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the
insurer refuses to accept the abandonment.
5. The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere
silence of the insurer after notice is not an acceptance.
6. 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.
7. Notice of abandonment is unnecessary where at the time when the assured receives information of the loss,
there would be no possibility of benefit to the insurer if notice were given to him.
8. Notice of abandonment may be waived by the insurer.
9. Where an insurer has reinsured his risk, no notice or abandonment need be given by him.
3.2.49 Section 63 Effect of Abandonment

1. Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever
may remain of the subject-matter insured, and all proprietary rights incidental thereto.
2. Upon the abandonment of a ship, the insurer thereof is entitled to any freight in course of being earned, and which
is earned by her subsequent to the casualty causing the loss, less the expenses of earning it incurred after the
casualty; and, where the ship is carrying the owner’s goods, the insurer is entitled to a reasonable remuneration
for the carriage of them subsequent to the casualty causing the loss.
Partial losses (including salvage and general average and particular charges)
3.2.50 Section 64 Particular Average Loss

1. A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and
which is not a general average loss.
2. Expenses incurred by or on behalf of the assured for the safety or preservation of the subject-matter insured,
other than general average and salvage charges, are called particular charges. Particular charges are not included
in particular average.
3.2.51 Section 65 Salvage Charges

1. Subject to any express provision in the policy, salvage charges incurred in preventing a loss by perils insured
against may be recovered as a loss by those perils.
2. “Salvage charges” are 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 loss, according to the circumstances
under which they were incurred.
3.2.52 Section 66 General Average Loss

1. A general average loss is a loss caused by or directly consequential on a general average act. It includes a general
average expenditure as well as a general average sacrifice.
2. There is a general average act where any extraordinary sacrifice or expenditure is voluntarily and reasonably made
or incurred in time of peril for the purpose of preserving the property imperiled in the common adventure.
3. Where there is a general average loss, the party on whom it falls is entitled, subject to the conditions imposed
by maritime law, to a rateable contribution from the other parties interested, and such contribution is called a
general average contribution.
4. Subject to any express provision in the policy, where the assured has incurred a general average of expenditure,
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he may recover from the insurer in respect of the proportion of the loss which falls upon him; and in the case of
a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced
his right of contribution from the other parties liable to contribute.
5. Subject to any express provision in the policy, where the assured has paid, or is liable to pay, a general average
contribution in respect of the interest insured, he may recover therefor from the insurer.
6. In the absence of express stipulation, the insurer is not liable for any general average loss or contribution where
the loss was not incurred for the purpose of avoiding, or in connection with the avoidance of a peril insured
against.
7. Where ship, freight, and cargo, or any two of those interests, are owned by the same assured, the liability of the
insurer in respect of general average losses or contributions to be determined as if those interests were owned
by different persons.
3.2.53 Section 67 Extent of Liability of Insurer for Loss

1. The sum which the assured can recover in respect of a loss on a policy by which he is insured, in the case of an
unvalued policy to the full extent of the insurable value, or, in the case of a valued policy to the full extent of
the value fixed by the policy, is called the measure of indemnity.
2. Where there is a loss recoverable under the policy, the insurer, or each insurer if there be more than one, is liable
for such proportion of the measure of indemnity as the amount of his subscription bears to the value fixed by
the policy in the case of a valued policy, or to the insurable value in the case of an unvalued policy.
3.2.54 Section 68 Total loss

Subject to the provisions of this Act, and to any express provision in the policy, where there is a total loss of the
subject-matter insured-

1. if the policy be a valued policy, the measure of indemnity is the sum fixed by the policy;
2. If the policy be an unvalued policy, the measures of indemnity is the insurable value of the subject-matter
insured.
3.2.55 Section 69 Partial Loss of Ship

Where a ship is damaged, but is not totally lost, the measure of indemnity subject to any express provision in the
policy, is as follows-

1. where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary
deductions, but not exceeding the sum insured in respect of any one casualty;
2. where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs,
computed as above, and also to be indemnified for the reasonable depreciation, if any, arising from the unrepaired
damage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed
as above;
3. where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is
entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding
the reasonable cost of repairing such damage, computed as above;
4. where the ship has not been repaired, and has been sold in her damaged state during the risk, the assured is
entitled to be indemnified for the reasonable cost of repairing the damage, computed as above, but not exceeding
the depreciation in value as ascertained by the sale.
3.2.56 Section 70 Partial Loss of Freight

Subject to any express provision in the policy, where there is a partial loss of freight, the measure of indemnity is
such proportion of the sum fixed by the policy in the case of a valued policy or of the insurable value in the case
of an unvalued policy, as the proportion of freight lost by the assured bears to the whole freight at the risk of the
assured under the policy.
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3.2.57 Section 71 Partial Loss of Goods, Merchandise, etc.
Where there is a partial loss of goods, merchandise, or other movables, the measure of indemnity, subject of any
express provision in the policy, is as follows:-

1. where part of the goods, merchandise or other movables insured by a valued policy is totally lost, the measure
of indemnity is such proportion of the sum fixed by the policy as the insurable value of the part lost bears to the
insurable value of the whole ascertained as in the case of an unvalued policy;
2. where part of the goods, merchandise or other movables insured by an unvalued policy is totally lost, the measure
of indemnity is the insurable value of the part lost, ascertained as in case of total loss;
3. where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination,
the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of
the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged
values at the place of arrival bears to the gross sound value;
4. “Gross value” means the wholesale price, or, if there be no such price, the estimated value, with, in either
case, freight, landing charges, and duty paid beforehand; provided that, in the case of goods or merchandise
customarily sold in bond, the bonded price is deemed to be the gross value. “Gross proceeds” means the actual
price obtained at a sale where all charges on sale are paid by the sellers.
3.2.58 Section 72 Apportionment of Valuation

1. Where different species of property are insured under a single valuation, the valuation must be apportioned over
the different species in proportion to their respective insurable values, as in the case of an unvalued policy. The
insured value of any part of a species is such proportion of the total insured value of the same as the insurable
value of the part bears to the insurable value of the whole, ascertained in both cases as provided by this Act.
2. Where a valuation has to be apportioned, and particulars of the prime cost of each separate species, quality,
or description of goods cannot be ascertained, the division of the valuation may be made over the net arrived
sound values of the different species, qualities, or descriptions of goods.
3.2.59 Section 73 General Average Contributions and Salvage Charges

1. Subject to any express provision in the policy, where the assured has paid, or is liable for, any general average
contribution, the measure of indemnity is the full amount of such contribution if the subject-matter liable to
contribution is insured for its full contributory value; but, if such subject-matter be not insured for its full
contributory value, or if only part of it be insured, the indemnity payable by the insurer must be reduced in
proportion to the under-insurance, and where there has been a particular average loss which constitutes a
deduction from the contributory value, and for which the insurer is liable, that amount must be deducted from
the insured value in order to ascertain what the insurer is liable to contribute.
2. Where the insurer is liable for salvage charges, the extent of his liabilities must be determined on the like
principle.
3.2.60 Section 74 Liabilities to Third Parties

Where the assured has affected insurance in express terms against any liability to a third party, the measure of
indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party
in respect of such liability.
3.2.61 Section 75 General Provisions as to Measure of Indemnity

1. Where there has been a loss in respect of any subject-matter not expressly provided for in the foregoing
provisions of this Act, the measure of indemnity shall be ascertained as nearly as may be, in accordance with
those provisions, in so far as applicable to the particular case.
2. Nothing in the provisions of this Act relating to the measure of indemnity shall affect the rules relating to double
insurance, or prohibit the insurer from disproving interest wholly or in part, or from showing that at the time of
the loss the whole or any part of the subject-matter insured was not at risk under the policy.
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3.2.62 Section 76 Particular Average Warranties

1. Where the subject-matter insured is warranted free from particular average, the assured cannot recover for
a loss of part, other than a loss incurred by a general average sacrifice, unless the contract contained in the
policy be apportionable; but, if the contract be apportionable, the assured may recover for a total loss of any
apportionable part.
2. Where the subject-matter insured is warranted free from particular average, either wholly or under a certain
percentage, the insurer is nevertheless liable for salvage charges, and for particular charges and other expenses
properly incurred pursuant to the provisions of the suing and laboring clause in order to avert a loss insured
against.
3. Unless the policy otherwise provides, where the subject-matter insured is warranted free from particular average
under a specified percentage, a general average loss cannot be added to a particular average loss to make up
the specified percentage.
4. For the purpose of ascertaining whether the specified percentage has been reached, regard shall be had only to
the actual loss suffered by the subject-matter insured. Particular charges and the expenses of and incidental to
ascertaining and proving the loss must be excluded.
3.2.63 Section 77 Successive Losses

1. Unless the policy otherwise provides, and subject to the provisions of this Act, the insurer is liable for successive
losses, even though the total amount of such losses may exceed the sum insured.
2. Where under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed
by a total loss, the assured can only recover in respect of the total loss :

Provided that nothing in this section shall affect the liability of the insurer under the suing and laboring clause.
3.2.64 Section 78 Suing and Labouring Clause

1. Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be
supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly
incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-
matter may have been warranted free from particular average, either wholly or under a certain percentage.
2. General average losses and contributions and salvage charges, as defined by this Act, are not recoverable under
the suing and labouring clause.
3. Expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable
under the suing and labouring clause.
4. 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 minimizing a loss.
3.2.65 Section 79 Rights of Subrogation

1. Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of
the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever
may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the
assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
2. Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-
matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of
the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in
so far as the assured has been indemnified, according to this Act, by such payment for the loss.
3.2.66 Section 80 Right of Contribution

1. Where the assured is over-insured by double insurance each insurer is bound, as between himself and the other
insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract.
2. If any insurer pays more than his proportion of the loss, he is entitled to maintain a suit for contribution against
the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the
debt.
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3.2.67 Section 81 Effect of Under-Insurance
Where the assured is insured for an amount less than the insurable value, or, in the case of a valued policy, for an
amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance.
3.2.68 Section 82 Enforcement of Return

Where the premium, or a proportionate part thereof, is, by this Act, declared to be returnable-
a. if already paid, it may be recovered by the assured from the insurer, and,
b. if unpaid, it may be retained by the assured or his agent.
3.2.69 Section 83 Return by Agreement

Where the policy contains a stipulation for the return of the premium, or a proportionate part thereof, on the happening
of a certain event, and that event happens, the premium, or, as the case may be, the proportionate part thereof, is
thereupon returnable to the assured.
3.2.70 Section 84 Return for Failure of Consideration

1. Where the consideration for the payment of the premium totally fails, and there has been no fraud or illegality
on the part of the assured or his agents, the premium is thereupon returnable to the assured.
2. Where the consideration for the payment of the premium is apportionable and there is a total failure of any
apportionable part of the consideration, a proportionate part of the premium is, under the like conditions,
thereupon returnable to the assured.
3. In particular-
a. where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium
is returnable, provided there has been no fraud or illegality on the part of the assured; but if the risk is not
apportionable, and has once attached, the premium is not returnable;
b. where the subject-matter insured, or part thereof, has never been imperiled the premium, or, as the case may
be, a proportionate part thereof, is returnable :
Provided that where the subject-matter has been insured “lost or not lost”, and has arrived in safety at the time
when the contract is concluded, the premium is not returnable unless, at such time, the insurer knew of the safe
arrival;
c. where the assured has no insurable interest throughout the currency of the risk the premium is returnable,
provided that this rule does not apply to a policy effected by way of wagering;
d. where the assured has a defensible interest which is terminated during the currency of the risk, the premium
is not returnable;
e. where the assured has over-insured under an unvalued policy, a proportionate part of the premium is
returnable;
f. subject to the foregoing provisions, where the assured has over-insured by double insurance, a proportionate
part of the several premiums is returnable:

Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk,
or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect
of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.
3.2.71 Section 85 Ratification by Assured

Where a contract of marine insurance is in good faith effected by one person on behalf of another, the person on
whose behalf it is effected may ratify the contract even after he is aware of a loss.
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3.2.72 Section 86 Implied Obligation Varied by Agreement or Usage

1. Where any right, duty, or liability would arise under a contract of marine insurance by implication of law, it
may be negative or varied by express agreement, or by usage, if the usage be such as to bind both parties to
the contract.
2. The provisions of this section extend to any right, duty, or liability declared by this Act which may be lawfully
modified by agreement.
3.2.73 Section 87 Reasonable Time, etc., a Question of Fact

Where by this Act, any reference is made to reasonable time, reasonable premium, or reasonable diligence, the
question what is reasonable is a question of fact.
3.2.74 Section 88 Covering Note as Evidence

Where there is a duly stamped policy, reference may be made, as heretofore, to the slip or covering note, in any
legal proceeding.
3.2.75 Section 89 Power to Apply Act with Modifications, etc., in Certain Cases
The Central Government may, by notification in the Official Gazette, direct that the provisions of this Act shall, in
their application to contracts of marine insurance relating to any class of ships exclusively used in inland navigation,
be subject to such conditions, exceptions and modifications as it may specify in the notification.
3.2.76 Section 90 Certain Provisions to Override Transfer of Property Act, 1882

Nothing in clause (e) of section 6 of the Transfer of Property Act, 1882, shall affect the provisions of sections 17,
52, 53 and 79.
3.2.77 Section 91 Savings

The rules of law, including the law merchant, which applied to contracts of marine insurance immediately before
the commencement of this Act, save in so far as they are inconsistent with the express provisions of this Act, shall
continue to apply to contracts of marine insurance.
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Summary
• A contract of Marine Insurance, as per the Marine Insurance Act - 1963, has been defined as a contract in which
the insurer agrees to cover the assured, in the manner and to the extent thereby agreed, against marine losses
supplementary to marine adventure.
• The Act offers that a contract of marine insurance may be widened so as to protect the assured against losses
on inland waters or on any land risk which may be incidental to any sea voyage.
• "Contract of marine insurance" means a contract of marine insurance as defined by section3;
• "Freight" includes the profit derivable by a ship-owner from the employment of his ship to carry his own goods
or other movables, as well as freight payable by a third party, but does not include passage money;
• "Insurable property" means any ship, goods or other movables which are exposed to maritime perils;
• "Maritime perils" means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils,
of the seas, fire, war perils pirates, rovers, thieves, captures, seizures, restraints and detainments of princes and
peoples, jettisons, barratry and any other perils which are either of the like kind or may be designed by the
policy;
References
• Advocate Khoj. Marin Insurance Act, 1963 [Online]. Available at: <http://www.advocatekhoj.com/library/
bareacts/marineinsurance/9.php?Title=Marine%20Insurance%20Act,%201963&STitle=Defensible%20or%20
contingent%20interest>. [Accessed 18th June 2011].
• InterLog. Effecting a Marine Insurance Policy [Online] Available at: < http://www.inter-log.net/modules/
• Slideshare. Practice of General Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-
02-principles-and-practice-of-general-insurance>. [Accessed 17 June 2011].
• Marine INsurance Zone. Principles of Marine Cargo Insurance [Online] Available at: <http://marineinsurance2u.
com/marine-cargo/principles-of-marine-cargo-insurance/>. [Accessed 18 June 2011].
• LES 306 BUSINESS LAW ASU WEST [video online] Available at: <http://www.youtube.com/watch?v=ePv5Q
apHaxs&feature=related>. [Accessed 18 June 2011].
• Legal Rights under Implied Warranties [video online] Available at: <http://www.youtube.com/watch?v=ePv5
QapHaxs&feature=related>. [Accessed 18 June 2011].
Recommended Reading
• Tyagi, L., Tyagi, M. & Tyagi, M., 2007. Insurance Law and Practice, C. Publisher Atlantic Publishers & Dist,
p. 400.
• Bose, C., Business Law, PHI Learning Pvt. Ltd.
• Soyer, B., 2005. Warranties in Marine Insurance. 2nd ed., Routledge, p. 312.
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Self Assessment
1. The earnings derivable by a ship-owner from the service of his ship to carry his own goods or other movables
are known as________.
a. freight
b. insurable property
c. marine adventure
d. maritime perils
2. Any ship, goods or other movables which are exposed to maritime perils is known as__________.
a. freight
b. insurable property
c. marine adventure
d. maritime perils
3. Any movable tangible asset, other than the ship which includes valuable securities, money and other documents
is called as_____.
a. movables
b. ship
c. perils
d. adventure
4. Every _________of the marine insurance is invalid by means of wagering.

a. contract
b. claim
c. section
d. perils
5. Defeasible or contingent interest is described in _____ of Marine Insurance Act, 1963.

a. Section 3
b. Section 9
c. Section 10
d. Section 11
6. Section 11 of Marine Insurance Act, 1963 includes ________.

a. Reinsurance
b. Partial interest
c. Marine insurance
d. Contingent interest
7. Which term _________includes any communication made to, or information received by, the assured?
a. Quantum of interest
b. Charges of insurance
c. Advance freight
d. Circumstance
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8. Freight does not include passage money and also payable by the ______party.
a. third
b. first
c. second
d. fourth
9. Which of the statements is false?

a. The original assured has the right or interest regarding such reinsurance except the policy offers.
b. The insurer may reinsure under a contract of marine insurance and also has an insurable interest in his
risk.
c. Any partial interest is insurable.
d. A defeasible interest is insurable, like is a contingent interest.
10. Which of the statements is true?

a. A contract of marine insurance shall be admitted in evidence unless it is embodied in a marine policy in
accordance with this Act.
b. A marine policy must be signed by or on behalf of the creditor.
c. Where an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable
premium is payable.
d. A warranty may not be expressed or implied.
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Chapter IV
Types of Marine Insurance in India
Aim
• introduce the concept of marine cargo insurance
• discuss the conditions of insurance
• state the ship owner’s interest
Objectives
• explain the peculiarities of marine cargo insurance
• highlight other provisions applicable to marine insurance
• classify marine hull
Learning outcome
• explain hull and the machinery of hull
• illustrate the scope of marine hull insurance
• discuss stamp duty
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4.1 Introduction
Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property
is transferred, acquired, or held between the points of origin and final destination. Cargo insurance is a sub-branch
of marine insurance, though Marine also includes Onshore and Offshore exposed property (container terminals,
ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability. In this chapter, we will study different
types of Marine Insurance in India.
4.2 Marine Cargo Insurance

The peculiarities of Marine Cargo Insurance are as mentioned under:
• A policy of Marine Cargo Insurance is freely assignable. A foreign exporter might arrange insurance and raise
a CIF Invoice. After dispatch of the cargo and submission of documents to his banker, he releases his sale
proceeds. Once the sale proceeds are paid by the Indian buyer, he gets an insurable interest in the goods. The
loss or damage to the cargo after that point is a loss to the importer even though the policy stands in the name of
the foreign supplier. The supplier simply endorses the policy in favour of the buyer upon which all the rights and
remedies under the policy are transferred to the buyer, including the proprietary rights. Therefore, unlike other
policies, the Marine Cargo Policy is freely assignable or freely transferable, with the transfer of ownership.
• Under the Marine Cargo insurance, insurable interest need not be there at the time of the proposal or at the time
of policy issuance. However, insurable interest is a must at the time of a claim.
• Marine Cargo Insurance is always on Agreed Value Basis. The sum insured under the policy is fixed on the basis
of agreement between the insured and the insurer.
• The indemnity provided under the Marine Cargo Policy is one of commercial indemnity unlike other policies
which are contracts of pure indemnity.
• All other policies are for a definite period of time. But the marine cargo policy covers the cargo only during
the time of its transit from warehouse to warehouse. Once the consignment reaches its destination, the policy
automatically ceases, subject to the limitations under the transit clause.
• Stamp duty is recovered from the insured in marine insurance.
• Policies are issued on Lost or Not Lost Basis.
• Surveyors fees are payable only if the claim is admissible under the policy.
4.2.1 Mode of Conveyance

• For transportation of cargo, different modes of conveyance are used by the shipper, depending upon the
contemplated voyage. A Marine underwriter is required to analyse various features involved in different types
of transportation systems.
• With regard to shipment by an Ocean going vessel, the underwriter is required to consider the period of transit
involved and the type of vessel engaged for the carriage of cargo. The name and age of the vessel, its tonnage
(capacity) classification and ownership, etc., are required to be checked.
• An over age vessel or an under tonnage vessel can lead to greater hazard from the insurance point of view. It
is also important to check whether the vessel is classed or not. From the underwriting point of view, classed
vessels are considered safer in comparison to non-classed vessels.
4.2.2 Voyage
• The conditions prevailing at ports of shipment and destination have a bearing on the rates of premium charged
for cargo insurance. Some ports are highly congested causing delay in shipment and discharge. Other ports are
notorious for theft and pilferages. Yet others may be prone to labour unrest.
• Other factors to be considered by the underwriter are political unrest, administrative laxity in enforcement of
law, lack of adequate facilities for safe handling of cargo, proper storage and movement. Some ports do not
allow berth to a damaged ship or a ship with damaged cargo, some prohibit discharge of damaged pellets, cases,
whereas in some, the turnaround time is high. Some ports have handling and warehousing facilities like shore
tank farms, forklifts, cranes etc. and provide separate terminals for bulk cargo, containerised cargo, etc.
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• The season or period of voyage also has a bearing or premium rates e.g., insurances on coastal shipments during
the monsoon period attract extra premium, as the cargo is exposed to enhanced perils due to adverse weather
conditions.
• In transit from one port to another, the vessel is likely to pass through various zones which are associated with
specific types of weather. An experienced underwriter is expected to have a broad idea of the geographic and
economic aspects and the major changes in the weather prevailing in various parts of the world during different
seasons.
• Maritime losses are closely related to general climatic and local weather conditions, monsoons, cyclones, storms,
etc. The occurrence of wind storms which depends on the various latitudes and the pattern of Trade winds would
provide a reliable guide to the Underwriter in assessing the safety of the cargo on a said voyage.
4.2.3 Conditions of Insurance

Premium rates vary according to the terms and conditions of insurance. Thus, if insurance cover is sought on the
basis of Institute Cargo Clauses (C), the rates will be the lowest, whereas, they will be the highest for Institute Cargo
Clause (A), i.e., ‘All Risks’ cover.
• Past claims experience
Premium rates are generally fixed on the basis of past loss experience. The rate will vary from client to client,
depending on their claims experience, approach to packaging and business attitude.
4.2.4 Cargo Inland Transit and Export/Import

• The movement of cargo within the country is known as Inland Transit. The inland transit of the cargo may be
by Rail or Road or Inland water -ways and Coastal shipments. Sending by Air and Post are also likely.
• Manufacturers require transit insurance cover for raw material purchased by them and finished goods supplied to
their customers. An open policy is issued to cover a number of incoming and outgoing consignments automatically,
if the insurance is required only for inland transit.
• For regular exporters and importers, continuous and automatic insurance protection is afforded by the Open
Cover. The Open Policy is an ordinary cargo policy expressed in general terms and the sum insured affected for
an amount sufficient to cover a number of dispatches. Thus, the sum insured is adjusted against each sending
and so it is called a floating policy.
4.2.5 Other Provisions Applicable to Marine Insurance

• The Marine Policy cannot be issued to transport companies, transport contractors, freight forwarders or clearing/
forwarding and commission agents, except on goods owned by them.
• Loading on the carrying vehicle/wagon in the warehouse before the commencement of the transit may be
covered on the payment of appropriate extra premium. This should be specifically mentioned on the face of
the policy.
• In case of dispatches by private carriers or under special contracts where the carriers limit their liability, the
liability of the insurers shall be limited to 75% of the assessed loss. However, if in the above circumstances, the
insured choose to pay an additional premium of 50% over and above the appropriate premium, the company’s
liability will be 90% of the assessed loss. Marine covers other than Hulls are:
In the case of inland shipments and transit risks, risk may be assumed under open policies in respect of
seasonal crops such as tea on the payment of a provisional premium based on a fair estimate.
In the case of exports overseas, risk may be assumed subject to the condition that the premium shall be paid
within fifteen days from the date of sailing of the overseas vessel.
In the case of imports, risk may be assumed subject to the condition that the premium shall be paid within
fifteen days of the receipt of declaration in India from the or insured’s representative overseas. Provided
that the relaxation under sub-clauses (ii) and (iii) shall apply to marine cover notes only and not to marine
policies.
approval of vessels loading export cargo at Indian ports vessels other than under the Indian flag are required
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to be approved by G.I.C. either in their own name and for the voyage or in the name of the operating
shipping company. For this purpose, it is necessary for the ship owner or the shipping company to submit
an application to G.I.C. in the prescribed form, well in advance of sailing of the vessel. If the shipping
company is approved by G.I.C., all vessels belonging to them stand approved for all voyages until further
notice. There are over 20 such shipping companies on G.I.C.’s approved list. If the vessel alone is approved,
the approval is valid only for that voyage.
Insurance of imports per vessel from Singapore, Malaysia and the Far East (Excluding Japan and Mainland
China) the vessel should either be (a) approved by the G.I.C. for loading export cargo in India and coming
back with no change in ownership and operation or (b) fixed by Tran chart on account of public sector
undertakings such as STC, MMTC, SAIL, etc. Otherwise, the assured will have to get the vessel designated
to load the cargo approved by the insurer in India. The second requirement is that the loading of cargo at
the port of shipment on board the vessel should be supervised by a surveyor approved by the insurers in
India and the production of their survey report/certificate in regard to the quantity of cargo loaded on the
vessel.
Approval of vessels bringing full load import cargo to India. The system of approval of vessels carrying the full
load of import cargo to India was introduced as a loss minimisation method. Approval of vessels bringing import
cargo is required for all vessels from any country in the world, for both public and private sector clients for the
purpose of insurance in India.
4.3 Hull Insurance

A merchant ship is an elongated floating box made of welded (occasionally riveted) steel frames and plates. The
body of this structure is known as the Hull.
4.3.1 Hull and Machinery of Hull

• The structure of a ship is called the hull. It is divided into three parts, fore, mid ship and aft. Hull and machinery,
as per policy includes superstructures, bunkers / coal stores, provisions, chains, cables, anchors, etc.
• The curved surface of the fore part is called the Bow and the curved surface of the rear or aft is called the stern.
The left hand side (when you are facing the Bow) is the Port side and the right hand side is the starboard side.
• The engine room and navigation deck are at the stern. The cargo is stowed in the Holds and the openings of the
holds are protected by hatch covers. double bottom tanks are used for carrying ballast and fuel.
4.3.2 Ship Classification

Classification of ships is a device which has been in use for over 200 years to inform not only the insurance
underwriter, but all other interested parties that a particular ship and her equipment comply with the accepted
standards of structural and mechanical reliability. A ship must not only be efficiently designed, but it must also be
soundly built and properly maintained. When a ship has been given a “Class” it means, in effect that structurally the
ship is sound and fit for the carriage of appropriate body cargoes so long as the class is maintained by the owner.
The requirements for the classification of a ship are:
• The plans of the ship should be submitted for prior approval of the society before commencing construction.
• All the steel and other material to be used in the construction of a ship should be approved by recognised
surveyors of the society.
• The surveyors watch / inspect the construction of a ship (from time to time).
• When the construction of a ship is complete, the surveyors assign a ‘class’ to the ship and induct the ship in the
society “Register” under the particular class assigned for the ship. Such a ship is called “Built under Survey”.
The society will issue a “Certificate of class”.
• To maintain class, a ship must undergo periodical survey of Hull and Machinery termed as Continuous Hull
Survey (CHS) and Continuous Machinery Survey (CMS).
• The certificate of class can be withdrawn or suspended at any time if the vessel falls below the required standard
formulated by the society.
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• Periodical survey of ship

Annual Survey-usually carried out concurrently with statutory load line surveys and inspection.
Dry Docking Survey – maximum interval normally for 2 years but under approved conditions 2 ½ years.
Special Survey – 4 yearly intervals with a period of grace of up to 12 months.
4.3.3 Insurable Interest

Hull insurance is a highly specialised branch of marine insurance which offers protection against the risks of loss
or damage to the ships and the consequent financial detriment suffered by various parties. While the subject matter
of this insurance remains the same, viz., Hull and Machinery of ships, many and varied financial interests evolve,
develop and co-exist with the ship requiring insurance protection. Some such interests covered under Hull Insurance
are summarised below:
4.3.3.1 Ship Owners’ Interests

• Hull and Machinery: The ship owner has an insurable interest in the Hull and Machinery of the ship in view
of his financial stake therein. This interest remains unaffected notwithstanding the fact that the hirer of the ship
has agreed to indemnify the ship owner in the event of her loss. “Hull & Machinery” includes the hull, materials
and outfit, stores and provisions for the officers and crew, ordinary fittings required for the trade, machinery,
boilers/bunkers and engine stores owned by the ship owner.
• Freight: It includes
The profit derivable by a ship owner from the employment of his ship to carry his own goods.
Freight payable by a third party to carry his goods. Freight however, would not include the passage money
that is earned by carrying passengers.
4.3.3.2 Subsidiary Interests

• Disbursements: This embraces the ship owner’s costs in fitting out the vessel including the cost of provisions
and stores made available on board the ship, port dues, and expenses of loading and unloading at a port of call
etc. Even though these items are nebulous in character, the expenses incurred by the ship owner will be a real
loss in case the ship itself has been lost after these expenses are incurred.
• Premium reducing: Where the ship owner has taken a time policy on his ship for a period of one year, he pays
the premium for the entire one year period. Even if the ship be lost soon after commencement of the risk, the
premium relating to the balance period after the loss will not be refunded by the insurers. If the ship had existed,
the ship owner would recover the premium through his freight earnings during the one year period. Since the
ship has become a loss, and there are no freight earnings thereafter, the owner would not be able to recover
the premium for the balance period. Since the premium is deemed to be recovered from the freight earned, the
insurable interest reduces as time goes on.
4.3.3.3 P & I Interests

Even though all the above mentioned ship owner’s interests are valid insurable interests, insurers do not insure all
of them. It has therefore become the practice for ship owners to join into mutual clubs to protect themselves from
loss in respect of these interests. These clubs are known as Protection & Indemnity Clubs (P & I Clubs). The club
covers:
• 1/4th Collision Liability not borne by the insurer
• Loss of life and personal injury
• Damage to harbours, wharves and other objects
• Removal of wreck
• Infringement of rights
• Quarantine Expenses
• Shipwreck indemnity to crew members
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• Liability to cargo and
• Other interests not covered by insurers: These interests are termed as P & I interests. As an exception to the
above general rule, insurers underwrite P & I interests in the case of small crafts such as fishing boats, barges,
etc., ships under construction and port risks under their hull insurance policies for these vessels leaving other
areas to be covered by the club.
• Removal of Wreck: Where a vessel has sunk in the harbour area, obstructing the navigational fairway, the
ship owner may be ordered by the Port Authorities to remove the wreck at his own cost. Besides the above, the
ship owner may face liabilities in respect of life, personal injury, damage to wharves, piers and other objects,
pollution or contamination of the environment, infringement of rights, quarantine expenses, etc.
4.3.4 Classification of Marine Hull

Marine Hull may be classified under the following heads:
General Cargo/ Dry-Cargo vessels
RO/RO, LO/LO, LASH
Bulk Carriers/ Mini Bulk Carriers
Container Ships
Tankers/ VLCC/ ULCC
Combination Carriers
Whale factory ships
Coal Carriers, Cable Laying Ships, etc.
4.3.5 Scope of Marine Hull Insurance

• Hull Insurance is concerned with the insurance of Hull and Machinery of Ocean-going vessels and other sundry
vessels like barges, trawlers, fishing vessels and sailing vessels. It is also concerned with the ship owners’ other
interests known as subsidiary interests like “freight” and “disbursements”. The subject matter of Hull Insurance
is the vessel.
• There are many types and designs of a ship. The design and construction of a modern ship is normally subject
to the rules of the Classification Society who approves the plans and material in the construction of ship. In
India, the Indian Register of Shipping (IRS) is a recognised Classification Society. Vessels are registered and
the certificate of registry is obtained to comply with the requirements of the Merchant Shipping Act. The hull
policy covers the hull, machinery, equipment/stores, etc. on board against total loss (actual or constructive),
partial loss, ships proportion of G.A. Major Hulls Sundry Hulls Builders Risk Ply in ocean and carry cargo/
passengers or both and include the following types of ships ply in inland waters or coastal waters e.g. barges,
tugs, dredgers, fishing trawlers / sailing vessels, pleasure crafts etc.
• Include land based (on-shore) risks during ship building / ship breaking and salvage charges, sue and labour
charges and ship owners’ liabilities towards other vessels arising out of the collision. The policy covers 3/4th
of such liability; the balance 1/4th is usually covered by the ship owners with their P & I Clubs.
• The coverage, terms, conditions are governed by IVC or ITC (Hulls) depending upon whether the vessel is
insured for a single voyage or for a time period which is normally one year. The earnings of the vessel described
as ‘Freight’ for time can be covered upto 25% of Hull and Machinery value (provided no additional insurances on
the disbursements are placed). The Ship owners’ expenses incurred in fitting out and provisioning the vessel and
other items not included in the hull valuation are covered under ‘Disbursement and Increased value’ Insurances.
The sum insured is limited to 25% of the Hull and Machinery values (provided no additional insurances on
freight are placed). The cover usually provided is on ‘total loss only’ condition including ‘excess liabilities’.
• It is permitted to insure ‘Premium’ of insurance under ‘Premium Reducing Cover’ as the cost of insurance is
considerable. The cover provided is on ‘total loss only’ condition on a reducing basis which means the amount
of indemnity is reduced by 1/12th monthly. The ‘Laid-up Returns’ which are earned can also be insured. Such
earned returns due to the lay-up of the vessel or whilst under repairs are recoverable from the Insurers only at
the expiry of the policy period, as the returns are payable provided the vessel has not become total loss within
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the policy period.

• The ‘G.A. Disbursement’ insurance covers the interest of the ship owner who has incurred G.A. Disbursement
at a Port of Refuge. Contribution to this disbursement by the saved interests will depend upon the values on
arrival. It is possible that between the port of refuge and the destination of the ship, there is another accident
which may reduce the contributory value of the respective saved interests. It may also happen that the ship with
cargo sinks before reaching the destination. In this case, nothing is left over to apportion the G.A. Hence, the
need to protect the ship owners against such eventualities.
• The insurers also cover the insurance of ‘Floating Dry docks’, ‘Jetties’, ‘P & I Liabilities’ in certain cases,
the vessels on their last voyage to the ship breaking yard and while awaiting break-up etc. in the Marine Hull
Department. War and Strikes’ risks in respect of hull and machinery and subsidiary interests like freight,
disbursement/increased value, etc. are covered under the Government War Risk Insurance Scheme in India.
4.3.6 Underwriting Aspects of Marine Hull Insurance

• Contract: Marine Hull Insurance is essentially a ‘Contract’ and embodied in the policy document which is
duly stamped according to the provisions of the Stamp Act. The essential elements viz. Offer, Acceptance,
Consideration, Agreement between parties and legality of the contract are prerequisites.
• Policy form: The policy is issued in the simplified “MAR” form. The Institute Clauses (Time or Voyage as the
case may be) are affixed to define cover, terms, etc. The widest cover is the Institute Time Clauses Hulls.
• Fundamental principles: The Fundamental Principles of insurance viz. Utmost Good Faith, Indemnity, Insurable
interests, etc. are also very much applicable to this class of insurance. The provision of “Assignment” is
related to the concept of Insurable Interest. Hull Policies are not freely assignable. Hence, for assignment, the
underwriter’s consent is essential. The principle of Indemnity is modified in Marine Hull Insurance. Policies
are issued on “Agreed Value” basis. In Marine Hull Insurance, a “commercial” rather than “pure” indemnity is
provided. The Marine Insurance Act provides that the principle of indemnity may be applied “In a manner and
to the extent thereby agreed”. In Total Loss case, the full sum insured is payable without deduction for wear
and tear. Even for partial loss claims there is a provision of “new for old”. The customary deduction of thirds
for wear and tear is also done away with under the I.T.C. Hulls. The Collision Liability (3/4th) i.e. for loss/
damage to the other vessel is covered in addition to the loss/damage to the insured vessel. This is in the nature
of supplementary contract.
• The sue and labour charges are a supplementary contract and are paid in addition to the claim amount payable
under the policy. Even if the policy only covers total loss/constructive total loss, such charges are payable if the
vessel sinks but are salvaged and there is no total loss/ constructive total loss.
• Survey fee is payable by the Insurer even if it is later found that the claim is not payable.
4.3.6.1 Hull Underwriting and Rating

• Rating Aspects: Total loss rate (TL) – Other than Total Loss Rate (OTL) Total Loss rate is usually based on the
age of vessel and is quoted as a certain rate percentage to be applied on the Sum insured. The OTL premium is
usually based on the tonnage of the vessel and is quoted as rupees per GRT of the vessel.
• Rating of Ocean-going vessels: Decided by TAC
• Rating of Sundry Vessels: As per Marine Hull Manual
4.3.7 Hull Insurance Covers

• Institute clauses for insurance of ships:
Until 1983, hull insurers were using the age-old S.G. (Ship & Goods ) form of form policy to cover hull interests,
of course, with suitable modifications by attaching various sets of clauses to suit the needs of the shipping industry.
The Institute of London Underwriters (ILU) have since introduced a new simplied policy form and various hull
clauses for covering ships of different types and other related interests.
• Some of the important Institute Hull Clauses are listed below:
Institute Time Clauses-Hulls
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Institute Time Clauses-Hulls total loss, General Average and 3/4th Collision Liability.
Institute Time Clauses-Hulls Disbursements and Increased Value (Total Loss only including Excess
Liabilities).
Institute Time Clauses – Hulls Total loss only
Institute Time Clauses – Freight
Institute Voyage Clauses – Hulls
Institute Voyage Clauses- Freight
Institute Fishing Vessels Clauses
Institute Time Clauses-Hulls Port Risks
Institute War and Strike Clauses covering Hull Voyage/ Time, Freight Voyage/Time Interests.
4.3.8 General Rules and Regulations of Marine Hull Tariff

• Hull, Machinery and Accessories of the vessel are deemed to be one interest and insured less than one sum.
Splitting of the sum insured is not permitted.
• No change in the conditions of insurance is permitted during the currency of the policy.
• The tariff provides for a maximum 15% discount (which includes 5% Special Discount in lieu of Agency
Commission where no agency is involved).
• Payment of premium in 4 equated quarterly instalments is permitted for a policy issued on an annual basis.
• There is a system of “Bonus” and “Malus” i.e., reduction in the premium is available for a good claims experience
and penalty by way of loading in the premium is livable for adverse claims experience.
• There is also a provision for major casualty deduction and also limiting the rating level to 300%.
• Standard policy forms are used and insurance is made subject to appropriate standard sets of clauses.
• There is a provision for the increase or decrease in the sum insured during the currency of the policy or at
renewal and the rules for computing the extra premium due to the increase in the sum insured and refund due
to the decrease in the sum insured have been prescribed.
• Policies issued to Owner/Charterers, etc.: In case of Bareboat Charter, Hull Policy is issued only to the Bareboat
Charterers (interest of the owner can be protected by attaching the Loss Payable clause on receipt of the dated
notice from the Bareboat Charterer). For other Charter parties, hull policies shall be continued or issued only
in the name of owner. For Charterers other than the Bareboat Charterer, only the Charterers liability Policy can
be issued. The rules provide for Lay-up refunds for vessels laid up in Indian Ports or Foreign ports.
Note: The Insurance Regulatory and Development Authority have decided to Detariff the Marine Hull Portfolio
w.e.f. 01.04.2005.
4.4 Ordinary Freight

• This is the freight payable by the cargo owner to the ship owner for transporting his goods. In the normal
circumstances, the ship owner will receive the price for the carriage of the goods only on their arrival at the
port of destination.
• The ship owner therefore, has an insurable interest in this freight. In many cases, the shipper of goods under a
bill of lading is required to pay freight in advance at the time of issuance of the bill of lading and the same is
not repayable by the ship owner in case of loss. The ship owner does not have any insurable interest in respect
of such freight.
4.5 Chartered Freight

• Chartered freight means the hire paid by the charterer to the ship owner for the use of the ship for a voyage or
for a period of time.
• Whether the ship owner has an insurable interest in the chartered freight or not depends on the terms of charter
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agreement which is called the charter party. If the payment of chartered freight is contingent on some event
which may be frustrated by maritime or other perils, the ship owner is entitled to insure the same.
4.6 Liabilities
There are many ways in which a ship owner may incur liabilities arising from the employment of his ship. In all
these cases, he has an insurable interest. Some of his liabilities are:
• Carrier’s liability to cargo owners

A ship owner who undertakes to carry goods is called a “common carrier” and he has an absolute liability to make
good the loss sustained by the cargo whilst in his care. His liability to the cargo owner is both contractual and
statutory and is governed by the provisions of the Carriage of Goods by Sea Act, 1924.
• Collision liability
The ship owner would be held liable for the losses sustained by the other colliding vessel or the property on board
that other vessel etc. depending upon the degree of blame attaching to his vessel.
4.7 Loss of Charter Hire

When a vessel under charter is so damaged that she must be withdrawn from service for repairs, the ship owner will
lose the amount which the vessel would have earned as charter hire during this period. The ship owner is entitled
to insure this risk.
• Charterer’s liabilities: Under Demise or Bareboat Charters, the charterer takes over full control of the ship
from the ship owner. As a result, all the liabilities that may arise out of the employment of the ship would have
to be met by the charterers. The charterer is also responsible for the safety of the ship whilst it is in his care.
Charterers therefore are entitled to insure their liabilities.
• Loss of freight: Where a charterer pays the charter hire in advance to the ship owner, no part of it would be
refunded in the event of loss as per the provisions of the charter party. Sometimes, the charterers may not pay
the hire in advance but may agree to pay the same if the vessel is lost. In both the circumstances, the charterer
has an insurable interest in the money paid or payable by him.
• Mortgagee’s interests: A mortgagee is one who lends money to the ship owner on the security of the ship. He
has a valid financial interest in the hull and machinery of the ship to the extent of his financial stake therein.
• Crew’s Interest: The master and any member of the crew of a ship can insure their wages/earnings.
• Ship Builder’s interests: During the course of construction of the ships in his yard, a ship builder has to
contend with serious risks of loss or damage to those ships by fire or other accidents. The value at risk during
the construction period, however, does not remain constant but goes on increasing from zero to the contracted
price as work progresses. The Builder’s interests can be insured from the time the keel is laid till the launching
of the ship, which includes the maiden voyage for delivery to the owner at his place. Ship Repairer’s interest:
The ship repairer is entitled to insure his legal liabilities to the ship owners during the ship repairs.
4.8 Partial Loss of Ship

Where the ship is damaged, the assured is entitled to the reasonable cost of the repairs not exceeding the sum insured
in respect of any one casualty. It may be noted that while a total loss payment under a hull policy is a one-time
affair, partial loss payments are of recurring nature each time up to the limit of the sum insured, the total of which
may reach an amount much more than the sum insured during the policy period.
4.9 Warranty of Seaworthiness

A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the
seas. In a voyage policy on ship, there is an implied warranty that at the commencement of the voyage, the ship
should be seaworthy. There is no such implied warranty in a time policy on the ship that she must be seaworthy
at any stage of the adventure. But, where, with the privity of the assured, the ship is sent to sea in an unseaworthy
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condition, the insurer is not liable for any loss attributable to unseaworthiness.
4.9.1 Trading Warranties

The degree of hazard in certain geographical areas is higher than in others. For example, certain areas suffer ice
conditions, either seasonally or permanently, which can provide a serious hazard to a ship navigating in such waters.
In the absence of any limit in the insurance, the ship is at liberty to navigate on any waters world-wide. It may be
that either the insured or the insurer prefers to limit the area of operations of the ship from the risk point of view.
If so, a trading warranty has to be introduced in the policy clearly defining the geographical areas in which the
ship is permitted to navigate. Breaches of institute warranties may be held covered on the payment of additional
premium.
4.9.2 Lost or Not Lost

The Hull policies are customarily issued on lost or not lost basis, the effect of which is to protect the insured where
the ship insured may have been lost before the insurance has been affected. However, the Principle of Utmost Good
Faith still prevails in as much as the insured cannot claim for a loss of which he is aware when the insurance is
placed. The benefit from this retrospective coverage will accrue to the insured only when he is found to be ignorant
of the loss while proposing for insurance
4.10 Stamp Duty

Every Hull insurance policy must be duly stamped as per the provisions of The Indian Stamp Act, 1899. Failure
to comply with this requirement will not only render the contract unenforceable in law but also make the person
committing the breach liable for penalty. The stamp duty applicable to hull policies depends on whether they are
time policies or voyage policies. The relevant provisions are:
If drawn in singly duplicate for each part
• For Voyage policies
Where premium does not exceed 0.10 0.05 the rate of 1/8th per cent
In all other cases, for every full 0.10 0.05 sum of Rs.1500 and part thereof of sum insured
• For time policies:
Up to a period of 6 months For every full sum of Rs.1000 and part 0.15 0.10 thereof of sum insured
Exceeding 6 months but not exceeding 12 months For every full sum of Rs.1000 and part 0.25 0.15 thereof
of sum insured
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Marine Insurance
Summary
• A policy of Marine Cargo Insurance is freely assignable.

• Under the Marine Cargo insurance, insurable interest need not be there at the time of the proposal or at the time
of policy issuance. However, insurable interest is a must at the time of a claim.
• Marine Cargo Insurance is always on Agreed Value Basis.
• For transportation of cargo, different modes of conveyance are used by the shipper, depending upon the
contemplated voyage.
• The conditions prevailing at ports of shipment and destination have a bearing on the rates of premium charged
for cargo insurance.
• The movement of cargo within the country is known as Inland Transit.
• For regular exporters and importers, continuous and automatic insurance protection is afforded by the Open
Cover.
• The Marine Policy cannot be issued to transport companies, transport contractors, freight forwarders or clearing/
forwarding and commission agents, except on goods owned by them.
• A merchant ship is an elongated floating box made of welded (occasionally riveted) steel frames and plates.
• When the construction of a ship is complete, the surveyors assign a ‘class’ to the ship and induct the ship in the
society “Register” under the particular class assigned for the ship. Such a ship is called “Built under Survey”.
• A valued policy is a policy which specifies the agreed value of the ship.
• A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of
the seas.
• The Hull policies are customarily issued on lost or not lost basis, the effect of which is to protect the insured
where the ship insured may have been lost before the insurance has been affected.
• Every Hull insurance policy must be duly stamped as per the provisions of The Indian Stamp Act, 1899.
References
• InterLog. Cargo Insurance [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/
marine_insurance_main_p176.htm>. [Accessed 20 June 2011].
• SurfIndia. Marine Insurance [Online] Available at: <http://www.surfindia.com/finance/marine-insurance.html>.
• Goel, K., Non-Life Insurance. [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-
• Gauci, G., Marine Insurance 09 . [video online] Available at: <http://www.youtube.com/watch?v=PuMsQsYJ1zQ>.
Recommended Reading
• Hodges, S., 1996. Law of Marine Insurance. Routledge, p.647.
• Sherlock, J., 1994. Principles of International Physical Distribution, Wiley-Blackwell, p.327.
• Hinkelman, E. G., 2005. Dictionary of International Trade: Handbook of the Global Trade Community Includes
21 Key Appendices, World Trade Press, p.688.
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Self Assessment
1. Which of these means the hire paid by the charterer to the ship owner for the use of the ship for a voyage or
for a period of time?
a. Chartered freight
b. Liabilities
c. Ordinary freight
d. Collision liability
2. A __________policy is a policy which specifies the agreed value of the ship.

a. insured
b. valued
c. sum insured
d. time
3. Protection & Indemnity Clubs (P & I Clubs) do not cover _________.

a. 1/6th collision liability not borne by the insurer
b. loss of life and personal injury
c. damage to harbours
d. removal of wreck
4. There is a provision for major casualty deduction and also limiting the rating level to _________%.
a. 300
b. 100
c. 200
d. 120
5. Standard policy forms are used and insurance is made subject to appropriate standard sets of__________.
a. claims
b. clauses
c. charter
d. rules
6. What is recovered from the Insured in Marine Insurance?

a. Stamp duty
b. Surveyors fees
c. Cargo loss
d. Liabilities
7. Which of the statements is FASLE?

a. The policy is issued in the simplified “MAR” form.
b. Hull insurance is concerned with the insurance of hull and machinery of ocean-going vessels.
c. Freight includes the profit derivable by a ship owner from the employment of his ship to carry his own
goods.
d. Premium rates are generally fixed on the basis of present loss experience.
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8. Which of the statements is FASLE?

a. The degree of hazard in certain geographical areas is lower than in others.
b. A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils
of the seas.
c. When a loss takes place, the sum which the assured can recover under the hull policy is known as the
“measure of indemnity”.
d. The stamp duty applicable to hull policies depends on whether they are time policies or voyage policies.
9. A __________is one who lends money to the ship owner on the security of the ship.
a. mortgagee
b. crew
c. charterer
d. ship builder
10. Marine hull insurance is essentially a _______and embodied in the policy document which is duly stamped
according to the provisions of the Stamp Act.
a. contract
b. claim
c. principles
d. premium
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Chapter V
Marine Insurance Policies
Aim
• explain marine cargo insurance
• list different types of marine policies
• discuss the features of marine hull policy
Objectives
• list the exclusions from the marine insurance policies
• elaborate various different marine policies
• highlight the special rules for voyage policies
Learning outcome
• discuss marine insurance
• illustrate the features and benefits of marine policies
• explain the guideline on most important parts of the policy
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5.1 Introduction
Underwriters are insurers who are affected due to a policy of marine insurance. Each individual who acts as an
insurer signs his name at the end of the policy and states the amount for which he is to be responsible; that is why
the term Underwriter is used. He may insure the vessel or the goods for a specific voyage or for some period of
time. The insurer is covered against loss, with the help of the contract from the underwriter. The underwriters by
the contract agree with the terms of the policy. The provisions of the policy are organised by an insurance broker,
who is appointed by insurer to systematise with the underwriters. The person insured must have an insurable interest
in the ship or its cargo; or else the contract is not legally required. An insurance certificate is sometimes attached
to a bill, and is a declaration by an insurance company that the goods are insured under a policy which also covers
other goods.
5.2 Marine Insurance Policies

Marine Cargo Insurance provides coverage for damage or loss of goods in transportation by any means like road,
rail, air, courier, sea, post, etc. It can be inland purchases/sales or international imports/exports. Marine insurance
cover can be provided for export and import shipments by seagoing vessels of all types, sailing vessels, coastal
shipments by steamers, shipments by inland vessels or country crafts, mechanised boats, and consignments by rail,
road, air or post etc. It basically covers the following:
• ICC (C)
Fire
Lightning,
Stranding,
Grounding,
Sinking or capsizing of vessel or craft
Overturning or derailment of land conveyance
Collision or contact of vessel
Craft or conveyance with any external object other than water
Discharge of cargo at a port of distress
General average sacrifice and jettisoning
• ICC (B)
Earthquake
Volcanic eruption or lightning
Washing overboard
Entry of sea
Lake or river water into vessel
Craft
Hold
Conveyance
Container
Lift van or place of storage, in addition to the perils of ICC (C)
• ICC (A)
All risks, subject only to the specified exclusions.
• Exclusions
Following are the exclusions of this insurance:
Wilful misconduct
Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear
Inherent vice or nature of the subject-matter
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Delay howsoever caused
Insolvency or financial default of carrier
Inadequate packing, war and kindred perils, strikes, riots, lock-out, civil commotion and terrorism. (War
and SRCC during ocean voyage and SRCC/T for inland transits may be covered at extra premium).
5.3 Marine Insurance

The types of marine insurance available for the benefit of a client are many and all of them are feasible in their own
way. Depending on the nature and scope of a client’s business, he can opt for the best marine insurance plan and
enjoy the advantage of having marine insurance.
• Marine insurance is a blanket term used to describe any policy that covers crafts or goods relating to the water.
Though this can include pleasure craft such as yachts and personal watercraft, it most commonly refers to the
insuring of vessels and inventories engaged in the shipping business. You would buy a marine insurance policy
to protect your goods as they are shipped from one country to another over a water route.
• Marine insurance policies differ from most other types of insurance because the risks that maritime voyagers
face are so varied and unique to individual voyages that each policy has to be crafted to meet specific needs at
specific times.
• Marine insurance is a contract under which the insurer undertakes to indemnify the insured against losses, caused
due to perils of the sea. Here perils of sea include:
Sinking of ship
Damage to ship and cargo due to dashing of waves
Dashing of the ships on the rocks
Fire or explosion on the ship
Spoilage of cargo due to sea water
Destruction of the ship and cargo by crew, captain, piracy etc.
5.4 Types of Marine Policies

The different types of marine policies are discussed below:
5.4.1 Time and Voyage Policies

• It is a policy in which the subject matter is insured for a particular voyage irrespective of the time involved in
it. In this case the risk attaches only when the ship starts on the voyage.
• A common type of marine insurance is the voyage policy. These policies insure specific voyages by specific
vessels along specific routes. They do not often have a set time limit, as sea voyages can be delayed for a number
of reasons.
• However, if the vessel deviates from the prescribed voyage, the policy becomes void. Cargo shipments are
almost always insured by voyage.
• A marine policy may be a voyage or time policy. If it uses the words “at and from” or “from” a particular place
to another place it is a voyage policy. If it insures the subject matter for a period of time it is a time policy.
• A voyage policy comes to an end at the conclusion of the voyage. A time policy comes to an end upon the
expiry of the time specified.
5.4.1.1 Special Rules for Voyage Policies

• For a voyage policy there is an implied term that the marine adventure will commence within a reasonable time
and if it is not, the insurer may avoid the contract unless the insurer waived the right to avoid or was aware of
the circumstances causing the delay. (S.40 MIA)
• A voyage policy will not attach if the ship sails from or to places different from those specified. (S. 41 MIA)
• Where after the commencement of the risk the destination of the ship is voluntarily changed the insurer is
discharged from all liability for any loss occurring on or after the time the intention to change is manifested,
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unless the policy provides otherwise. (S.42 MIA)

• A deviation without lawful excuse from the agreed course or customary course discharges the insurer from
liability for any loss occurring on or after the deviation. Failure to call at the ports of discharge in the order
specified or in their geographical order will be a deviation. (S.43 MIA)
• A voyage policy must be carried out with reasonable dispatch and the insurer is discharged from all liability for
any loss occurring on or after the time when the delay becomes unreasonable. (S.44 MIA)
5.4.1.2 Time Policy

• It is a policy in which the subject matter is insured for a definite period of time. The ship may pursue any course
it likes; the policy would cover all the risks from perils of the sea for the stated period of time.
• A time policy cannot be for a period exceeding one year, but it may contain a ‘continuation clause’.
• The ‘continuation clause’ means that if the voyage is not completed within the specified period, the risk shall
be covered until the voyage is completed, or till the arrival of the ship at the port of call.
5.4.1.3 Mixed Policy

• It is a combination of voyage and time policies and covers the risk during particular voyage for a specified
period of time.
• It offers a client the benefit of both time and voyage policy.
5.4.2 Floating Policy

• It is a policy which only mentions the amount for which the insurance is taken out and leaves the name of the
ship(s) and other particulars to be defined by subsequent declarations.
• Such policies are very useful to merchants who regularly dispatch goods through ships. Floating policy is taken
for a relatively large sum by the regular suppliers of goods. It covers several shipments which are declared
afterwards along with other particulars.
• This policy is most situated to exporter in order to avoid trouble of taking out a separate policy for every
shipment.
• A floating policy is one which leaves the name of the ship or other particulars to be provided at a later time by
declaration or endorsement.
• Floating policies are frequently used by shippers who routinely ship cargo. Floating policies avoid a shipper
having to negotiate a new policy for every shipment.
• Using a floating policy the essential terms of the insurance contract are agreed in advance. Thereafter, all of
the shippers goods will be covered by that policy provided the shipper declares the goods as required by the
contract.
• The shipper must declare all of the goods that are covered by the policy and their value. A failure to properly
declare will jeopardize the insurance coverage although an omission or error made in good faith may be rectified
even after a loss or the arrival of the goods.
• If a declaration of value is not made until after a loss or arrival of the goods, the indemnity is calculated as
though the policy was an unvalued policy.
5.4.3 Valued Policy

• Under its terms, the agreed value of the subject matter of insurance is mentioned in the policy itself. In case
of cargo this value means the cost of goods plus freight and shipping charges plus 10% to 15% margin for
anticipated profit.
• The said value may be more than the actual value of goods.
• In the event of a total loss under a valued policy, the amount of the indemnity is the agreed value.
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5.4.4 Unvalued Policy (Open Policy)
• Where the value of the subject matter of insurance is not declared but left to be ascertained and proved later it
is called unvalued policy.
• It is the policy in which the value of the subject matter insured is not specified. Subject to the limit of the sum
assured, it leaves the value of the loss to be subsequently ascertained.
• In the event of a total loss under an unvalued policy, the amount of the indemnity is calculated pursuant to S.
(19 MIA)
• When a loss occurs the value has to be proved. Goods are usually included in an open policy. The description
in the policy should agree with that in the bill of lading.
5.4.5 Builder’s Risk Policy

• This policy is issued for more than one year.
• This covers the risk of damage to vessels from the time its construction commences until its trail is
completed.
5.4.6 Blanket Policy

• Under the condition of the blanket policy the maximum limit of the required amount of protection is estimated
which is purchased in lump sum.
• The amount of premium is usually paid in advance. This policy describes the nature of goods insured, specific
route, ports and places of the voyages and covers all the risk accordingly.
5.4.7 Port Risk Policy

This policy covers all the risk of a vessel while it is standing at a port for particular period of time.
5.4.8 Wager Policy

• It is a policy in which the assured has no insurable interest and the underwriter is prepared to dispense with the
insurable interest. Such policies are also known as Policy Proof of Interest (P.P.I).
• Where the assured has no insurable interest in the subject matter of insurance that is know as wager policy. As
this policy has no legal effect so it cannot be taken to a court of law.
• If underwrite refuses to accept the claim the policy holder cannot take any legal action against him. It is,
therefore, also called as gambling policy.
5.4.9 Special Hazards Policy

This policy covers special risks incident to piracy and war. It provides protection to insured under agreement against
seizure, capture, detention and other war risks.
5.4.10 Composite Policy

This type of policy is purchased from more than one under writers. If there is no motive of fraud then insured will
be indemnified by each under writer separately in case of loss.
5.4.11 Block Policy

• This policy is particularly purchased to gold diggers. It covers all the risks of damage to gold from the time of
its recovery to its distinction.
• These types of policy have been introduced in Africa and are very popular in the mine fields of gold.
5.4.12 Vessel Insurance Policy

• Vessel insurance policies insure the vessels themselves against physical damage. This is sometimes called hull
insurance.
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• Because vessels are often used to execute a multitude of shipments throughout the year, often along several
different routes, vessel policies usually protect the insured boat for a specified period of time, often on an annual
basis.
• These policies can protect a single craft or an entire fleet. Cargo on the ship is typically insured separately.
In addition to these types of marine insurance, there are also various types of marine insurance policies which are
offered to the clients by insurance companies so as to provide the clients with flexibility while choosing a marine
insurance policy. The availability of a wide array of marine insurance policies gives a client a wide arena to choose
from, thus enabling him to get the best deal for his ship and cargo. The different types of marine insurance policies
are detailed below:
5.4.13 Special Storage Risks Policy

It is granted in conjunction with an Open Policy, Specific Policy or open cover.
5.4.14 Annual Policy

It is issued for 12 months, covers goods belonging to the Insured, which are not under contract of sale and which
are in transit by rail/road from specified depots/processing units to other specified depots/processing units.
5.4.15 Duty Insurance Policy

It covers customs duty alone if so required by the Insured.
5.4.16 Increased Value Insurance Policy

It covers increased value of the cargo if the market value of the goods at destination port on the date of landing is
higher than the c.i.f. and duty value of the cargo.
5.4.17 Package Policy

It is also available to cover transits and storage risks incidental to transits for tea, coffee, cardamom and rubber.
5.5 Guideline on Most Important Parts of the Policy

Following are few very important guidlines:
• Insurable interest: You must have an interest in cargo, in other words you must be owner, seller / buyer, shipper
/ receiver of the goods in transit. Instructions to insure the shipment must be done prior to shipment departure
or prior to any known or reported loss or incident.
• Shore coverage: Your cargo is insured while it’s on land (at the pier, dock, wharf, etc.) waiting to be loaded
on ocean vessel or aircraft.
• Container shipments: Goods and merchandise shipped in containers, or flat racks, or trailers is insured subject
to Under Deck terms. It doesn’t matter if such goods are stowed under- and/or on-deck as long as the carrier
issues an Under-Deck Bill of Lading. Most of the container carriers will provide an under-deck bill of lading
due to the provisions that goods stowed on-deck are considered or deemed stowed under-deck.
• Marine Extension: The coverage begins as soon as the shipment leaves the warehouse/store/location at the place
of origin and continues until the shipment reaches the warehouse/store/location at the place of destination. Goods
must reach their final destination within 15 days of the discharge from the vessel at the port of destination. For
CIS and African countries the coverage stops as soon as the cargo is offloaded from the ship/aircraft at the port
of arrival. Insurance will not cover any losses or damages caused by carrier delays or inherent vice of cargo.
• Control of damaged merchandise: It is understood and agreed that in case of damage to goods the assured is
to retain control of all damaged goods.
• Partial loss: The insurance will replace the value of the damaged portion of the goods and not the whole
shipment unless total loss is reported.
• Returned or refused shipments: This policy specifically covers the return trip of the cargo in case the consignee
or assured refused to accept the delivery.
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• Non-delivery and shortage: In case the goods are overdue and unaccounted for the period of 30 days, then
they will be considered lost and assured can recover under this policy. Claims for shortages caused by theft,
pilferage and non-delivery must be supported by documentary evidence.
• Insufficiency of packing: If the claim is made for loss or damage caused by insufficient or unsuitable packing
or preparation carried out by a 3rd party the underwriters do not agree to use it as a defence against the claim.
This is very important because most of other cargo insurance companies will deny any claim due to improper
packaging. However, you should use extreme care in selecting professional packers. Assured agrees to assist
underwriters to pursue rights of recovery against seller and/or other responsible parties.
• Notice of loss: The Assured must report every loss and damage that may become a claim as soon as may be
practical after it becomes known. Failure to report loss or damage promptly shall invalidate any claim under
this policy.
• War risk: This policy protects your cargo against the risk of capture, seizure, destruction or damage by men-
of-war, piracy, arrests, restrains, and other warlike operations.
5.6 Features and Benefits of Marine Policies

• Cargo policies are freely assignable.
• Existence of insurable interest needs to be established only at the time of loss.
• Marine policies are agreed value policies
• An element of profit can also be included in the sum insured, which is allowed by the insurers.
• Marine policies are transit/voyage policies and not limited to any specific period.
• The interpretation and applicability of various statutes, the legislation in various countries, the port conditions,
customs procedures and the legal systems in various parts of the world, govern the operation and interpretation
of a Marine Insurance Policy.
5.7 Procedure for Obtaining Marine Insurance Policy

Following is the procedure for obtaining a marine insurance policy:
Selecting the insurance company
Deciding appropriate type of policy
Application to the insurance company
Payment of premium
Issue of the insurance policy
Processing of the policy
5.7.1 Procedure for Filing Marine Insurance Claim

Intimation of loss
Appointment of the surveyor
Landing Remarks
Submission of claim
Finalisation of claim
5.7.2 Immediate Action after Loss

• Intimate the insurance company immediately, with a rough estimate of the loss to their nearest office or overseas
agents mentioned in the policy and also obtain a claim form.
• Ensure that all the rights of recovery against carriers, bailees or other third parties are preserved and
exercised.
• In case of Carriage by Sea, you should send an application for survey to the Shipping Company (ship survey)
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within 3 days of taking delivery.

• Obtain damage certificate/open delivery certificate/landing remarks certificate from carriers/ port trust/ airlines/
transporter etc.
• In case of damage due to natural calamities like storm, floods, lightning, obtain the meteorological report for
the weather broadcast at the time of disaster.
• Do not dispose the salvage until advised by the surveyor or insurance company.
5.7.3 Claim Procedure

• In Marine Insurance claims, all the documents of the claim are to be submitted to the insurance company.
• The documents should be submitted in original. Wherever original documents are not available second copy /
printed copy may be accepted but photocopies are not acceptable.
• The documents are to be submitted preferably in one lot and within reasonable time limit of occurrence of the
claim and under all circumstances before claim becomes time barred against carrier etc.
• Following is a list of claim documents which are generally required for any marine claim. The insurance company
may ask for other additional documents depending upon the nature of claim. Basic documents required for
ocean transit are:
Claim form duly filled in and signed
Original policy/certificate
Short Landing Certificate/Landed but Missing Cargo/Damage Certificate (as applicable).
Suppliers invoice
Packing list
Quadruplicate copy of Bill of Entry
Steamer Survey report in original.(if arranged)
Copy of Claim Notice served on Carrier/Port authorities along with postal acknowledgement card.
Copy of correspondence with the carrier/Port authorities/Customs authorities.
Copies of Correspondence exchanged with the suppliers (reply from suppliers is a must) in connection with
short packing (if applicable).
Lost Overboard Certificate from the Port Trust countersigned by the master of the vessel or steamer agents
(in respect of Loss Over Board /Sling Losses).
Original Repair Bills with receipt/Performa Invoice for value of items lost/damaged.
Copy of application filed with customs for refund of duty (if applicable).
Photographs if arranged.
Letter of subrogation along with special power of attorney.
5.8 Features of Marine Cargo Insurance [New India Assurance Policy]

• This policy covers goods, freight and other interests against loss or damages to goods same as being transported
by rail, road, sea and/or air.
• Different policies are available depending on the type of coverage required ranging from an all risk cover to a
restricted fire risk only cover.
• This policy is freely assignable and is basically an agreed value policy.
5.8.1 Scope of Policy

Transportation of goods can be broadly classified into three categories:
• Inland transport
• Import
• Export
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The types of policies issued to cover these transits are:
• For inland transit
Specific policy: For covering a specific single transit.
Open policy: For covering transit of regular consignments over the same route .The policy can be taken
for an amount equivalent to three months dispatches and premium paid in advance. As each consignment
is dispatched, a declaration giving details of the dispatch including GR/RR No. is to be sent to the insurer
and the sum insured gets reduced by the amount of the declared dispatch. The sum insured can be increased
any number of times during the policy period of one year; but care should be taken to ensure that adequate
sum insured is available to cover the consignment to be dispatched.
Special declaration policy: For covering inland transit of goods wherein the value of goods transported during
one year exceeds Rs.2 crores. Although the premium for the estimated annual turnover [i.e., the estimated
value of goods likely to be transported during the year] has to be paid in advance, attractive discounts in
premium are available.
Multi-transit policy: For covering multiple transits of the same consignment including intermediate storage
and processing. For e.g. covering goods from raw material supplier’s warehouse to final distributor’s godown
of final product.
• For import/export
Specific policy: For covering a specific import/export consignment.
Open cover: This policy which is issued for a policy period of one year indicates the rates, terms and conditions
agreed upon by the insured and insurer to cover the consignments to be imported or exported. A declaration
is to be made to the insurance company as and when a consignment is to be sent along with the premium at
the agreed rate. The insurance co. will then issue a certificate covering the declared consignment.
Custom duty cover: This policy covers loss of custom duty paid in case goods arrive in damaged condition.
This policy can be taken even if the overseas transit has been covered by an insurance company abroad, but
it has to be taken before the goods arrive in India.
5.8.2 Add-on Covers

Inland transit policies can be extended to cover the following perils on payment of additional premium:
• SRCC: Strike, riot and civil commotion (including terrorist act)
• FOB: Where the inland transit is required to be extended to cover the goods till they are loaded on board the
vessel, this extension can be taken.
Export /Import policies can be extended to cover War and /or SRCC perils on payment of an additional premium.
5.8.3 Who Can Take the Policy?

The contract of sale would determine who buys the policy. The most common contracts are:
FOB (Free on Board)
C & F (Cost & Freight)
CIF (Cost, Insurance & Freight)
In FOB and C&F contracts, the buyer is responsible for insurance. Whereas, in CIF contracts, the seller is responsible
for insurance from his own premises to that of the purchaser.
5.8.4 How to Decide the Sum Assured?

The sum insured or value of the policy would depend upon the type of contract. Usually, in addition to the contract
value 10/15% is added to take care of incidental cost.
5.8.5 How to Claim?

The following steps should be taken in event of a loss or damage to goods insured:
• Take immediate steps to minimise loss.
• Inform nearest office of the insurance company or claim settling agent mentioned on the policy.
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• In case of damage to goods whilst on ship or port, arrange for joint ship survey or port survey.
• Lodge monetary claim with carrier within stipulated time period.
• Submit duly assigned insurance policy/certificate along with the original invoice and other documents required
to substantiate the claim such as :
Bill of Lading / AWB/GR
Packing list
Copies of correspondence exchanged with carriers.
Copy of notice served on carriers along with acknowledgment/receipt.
Shortage/Damage Certificate issued by carriers.
• A survey fee is to be paid to the surveyor appointed by the insurance company. This fee will be reimbursed
along with the claim if the claim is otherwise admissible.
5.9 Features of Marine Hull Policy (New India Assurance Policy)

The policy covers any loss or damage to ships, tankers, bulk carriers, smaller vessels, fishing boats and sailing
vessels.
5.9.1 Who can Take the Policy?

Ship owners, charterers, Shipbuilders, bankers, financiers of ships or vessels who have insurable interest are eligible
to take this policy.
5.9.2 What is Covered in the Policy?

Following is the list of aspects which are covered in this policy:
• All types of Oceangoing vessels
• All type of Coastal/Inland vessels
• Yard and pleasure crafts
• Port crafts
• Shipbuilding- construction of vessel
• Ship repairers’ liabilities
• Charterers liabilities
• Breaches of warranties / voyage cover
• Freight- at -risks insurance for voyages
• Dredgers
• Fishing vessels / Trawlers
• Sailing vessels
• Jetties (with or without cranes), fixed pontoons/Pontoons Jetties, wharves etc.
• Ship breaking
5.9.3 Scope of Risk Cover

All risks relating to Vessels, Floating Dry Docks, Jetties and Ship owners’ Interests including Hull & Machinery
(H&M), Freight, Disbursements, Increased Value, Premium Reducing, Excess Liabilities, Protection and Indemnity
(P&I) Liabilities, Charterers’ Liabilities, Charterers’ Freight, Charterers’ Hire and/or Disbursements, General Average
Disbursements, Ship Repairers’ Liabilities, Shipbuilding Risks, Ship breaking Risks and other allied interests of
whatsoever nature required to be insured in India.
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Summary
• Marine Cargo Insurance provides coverage for damage or loss of goods in transportation by any means like
road, rail, air, courier, sea, post, etc.
• The types of marine insurance available for the benefit of a client are many and all of them are feasible in their
own way.
• Marine insurance is a blanket term used to describe any policy that covers crafts or goods relating to the
water.
• Marine insurance policies differ from most other types of insurance because the risks that maritime voyagers
face are so varied and unique to individual voyages that each policy has to be crafted to meet specific needs at
specific times.
• Time and voyage is a policy in which the subject matter is insured for a particular voyage irrespective of the
time involved in it.
• The ‘continuation clause’ means that if the voyage is not completed within the specified period, the risk shall
be covered until the voyage is completed, or till the arrival of the ship at the port of call.
• Mixed policy is a combination of voyage and time policies and covers the risk during particular voyage for a
specified period of time.
• Floating policy is one which only mentions the amount for which the insurance is taken out and leaves the name
of the ship(s) and other particulars to be defined by subsequent declarations.
• Where the value of the subject matter of insurance is not declared but left to be ascertained and proved later it
is called unvalued policy.
• In Marine Insurance claims, all the documents of the claim are to be submitted to the insurance company.
References
• Magnum Archieve. Marine Insurance Policy [Online] Available at: <http://www.magnumarchive.com/c/
dictionary-of-banking/Marine-Insurance-Policy.html>. [Accessed 21 June 2011].
• Marine Insurance [Online] Available at: <http://www.bostonapartments.com/archive/insure/marine_
insurance.html>. [Accessed 20 June 2011].
• Gupta, S. M., Marine Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-
principles-and-practice-of-general-insurance>. [Accessed 18 June 2011].
• Goel, K., Non-Life Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/
MEANING-OF-MARINE-PERILS>. [Accessed 18 June 2011].
• Gauci, G., Marine Insurance 02 [video online] Available at: <http://www.youtube.com/
watch?v=KJt41Wfn8Jc>. [Accessed 18 June 2011].
Recommended Reading
• Hodges, S., 1999. Cases and Materials on Marine Insurance Law, Routledge, p. 962.
• Malbon, J. & Bishop, B., 2006. Australian Export: a Guide to Law and Practice, Cambridge University
Press, p. 318.
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Self Assessment
1. Underwriters are insurers who are affected due to a _________of marine insurance.
a. policy
b. claim
c. clause
d. section
2. Marine insurance is a ________term used to describe any policy that covers crafts or goods relating to the
water.
a. legal
b. blanket
c. valued
d. unvalued
3. Which refers to a policy in which the subject matter is insured for a particular voyage irrespective of the time
involved in it?
a. Time and voyage policy
b. Floating policy
c. Valued policy
d. Mixed policy
4. Which policy is one which leaves the name of the ship or other particulars to be provided at a later time by
declaration or endorsement?
a. Time policy
b. Floating policy
c. Valued policy
d. Mixed policy
5. Which policy is issued for more than one year?

a. Builder’s risk policy
b. Blanket policy
c. Unvalued policy
d. Port risk policy
6. Which policy is the one in which the assured has no insurable interest and the underwriter is prepared to dispense
with the insurable interest?
a. Wager policy
b. Port risk policy
c. Composite policy
d. Block policy
7. Which type of policy is purchased from more than one under writers?
a. Wager policy
b. Port risk policy
c. Composite policy
d. Block policy
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8. Which policies insure the vessels themselves against physical damage?
a. Vessel insurance
b. Wager
c. Post risk
d. Block
9. What is granted in conjunction with an Open Policy, Specific Policy or open cover?
a. Special storage risks policy
b. Annual Policy
c. Duty Insurance Policy
d. Increased Value Insurance Policy
10. Which is also available to cover transits and storage risks incidental to transits for tea, coffee, cardamom and
rubber?
a. Package policy
b. Annual Policy
c. Duty Insurance Policy
d. Block policy
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Chapter VI
Marine Clauses
Aim
• explain in detail the marine clauses
• enlist the areas which are excluded from the marine clause
• define jettison
Objectives
• analyse the ICC ‘A’ ‘B’ and ‘C’ clauses
• explain both to blame collision clause
• illustrate cover for war and SRCC risks
Learning outcome
• enlist the sub clauses common to ICC A/B/C
• discuss the duration of cover for ‘War Risks’
• talk about different marine clauses
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6.1 Marine Clauses
The Clauses used for Ocean Transit are ICC ‘A’, ’B’ and ’C’ and the scope of cover is as given below:
• Institute Cargo Clause (C)
Fire or Explosion
Vessel/craft being stranded , grounded, sunk or capsized
Overturning or derailment of land conveyance
Collision or contact of vessel/craft or conveyance with any external object (other than water)
Discharge of cargo at a port of distress
General average sacrifice
Jettison
General average contribution and salvage charges
Liability under both to blame collision clause
• Institute Cargo Clause (B)
In addition to the perils mentioned above, the following perils are also covered:
Washing overboard
Earthquake, volcanic eruption or lighting
Entry of sea, lake or river water into vessel, craft, hold, container, lift van or place of storage.
Total loss of any package lost overboard or dropped whilst loading onto or unloading from vessel or
craft.
• Institute Cargo Clause (A)
All risks of loss or damage to the cargo (other than exclusions)
• Exclusions
The marine clauses exclude the following areas:
Wilful misconduct of the insured
Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear
Inherent vice or nature of the subject matter
Delay
Insolvency or financial default of owners, operators, etc. of the vessel
Insufficiency/unsuitability of packing
War and allied perils
Strikes, riots, civil commotion and terrorism
In addition to exclusions which are given above, ICC- B and C Clauses also exclude malicious damage. However,
the same can be covered by the payment of additional premium.
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Marine Insurance
Marine Cargo
Carriage by Sea
(Including Incidental Inland Transit)
ICC-A IWC-Cargo ISC-Cargo
ICC-B
Carriage by Air
ICC-C (Including incidental Inland Transit)
ICC-Air Cargo IWC-Air Cargo ISC-Air Cargo
Inland Transit (Rail/Road)
IT(R/R)C-A IT(R/R)C-B IT(R/R)C-C IT SRCC
Marine Hull
Time Voyage Builders Risk

ITC – HULLS IVC – HULLS I B/R CLAUSE
6.2 Analysis of ICC- A/B/C Clauses

Different clauses have been discussed below:
Clause No.1: The Risk Clause of the Institute Cargo clauses ‘C’ will pay for loss or damage reasonably attributable
to the following perils:
• Fire or explosion
• Stranding, sinking, grounding, capsizing of the vessel/craft
• Overturning or derailment of land conveyance
• Collision or contract of vessel, craft or conveyance with any object (other than water)
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• Discharge of cargo at a port of distress
• General average sacrifice
• Jettison
Clause No.2: General average clause provides cover for general average and salvage charges adjusted or determined
according to the contract of affreightment and/or the governing law and practice incurred to avoid or in connection
with the avoidance of loss caused by any insured perils mentioned above.
Clause No.3: Both to Blame Collision Clause, indemnifies the assured against liability falling on him under the
‘Both to Blame Collision’ Clause incorporated in the bill of lading.
On examination of the above 3 clauses it will be observed that the cover granted under ICC(C) is essentially for
major maritime perils and major transit risks with regard to incidental inland transit such as overturning or derailment
of inland conveyance.
6.3 Jettison
Jettison means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to
vessel or other property in the vessel. If goods are jettisoned due to inherent vice, the loss will not be indemnified.
To illustrate, jettisoning a consignment of vegetables and fruits to lighten a stranded vessel will be indemnified.
However, if vegetables and fruits in a vessel decay, compelling them to be dumped into the sea, then the loss will
not be compensated.
6.4 Both to Blame Collision Clause

• Where two vessels collide on high seas, the maritime law of various countries provides that the liability for
damages to each other be fixed according to the degree of negligence e.g. 20:80, 40:60, 50:50. According to one
of the conditions in the Bill of Lading, the cargo owners cannot claim damages from the vessel in the event of a
collision of the carrying vessel with another vessel (non-carrying vessel). Under maritime law of certain countries
inclusive of U.S.A., apportionment of blame for collision is determined on 50:50 basis. This situation of fixing
the liability of 50:50, sometimes leads to a peculiar position which is explained by the following example:
Insured Cargo is carried in Ship ‘A’. The two ships ‘A’ and ‘B’ are in collision. They are held to be blamed
equally. So, the liability between these two ships is decided on 50:50 basis. Though as per the Conditions
of the Bill of Lading, the cargo owner cannot recover from his Ship ‘A’ but under International Maritime
Law he can recover 100% from Ship ‘B’. However, the non-carrying vessel may include a proportion of
this amount in his claim against the carrying vessel.
Anticipating this possibility, the carrier incorporates the ‘both to blame collision clause’ in his contract of
carriage whereby he claims reimbursement of this amount from the Cargo owner. Both to blame collision
clause is one of the conditions in the Bill of Lading according to which the Cargo owners are liable to
indemnify the Ship owners for any amount which the carrying vessel is required to pay to the non-carrying
vessel. This Clause under ICC (C) promises to indemnify the insured as and when any liability arises in the
event of a claim by the ship owners under the Both to Blame Collision Clause.
• As regards the General Average Clause, it provides indemnification to the insured as and when any general average
loss in the shape of any sacrifice or expenses are incurred and the insured is required to contribute towards the
same under the International Maritime Law. According to Section 66(i) of the Marine Insurance Act, General
Average Loss has been defined as “a loss caused by being directly consequential on a General Average Act. It
includes general average expenditure as well as general average sacrifice.” Whilst General Average sacrifice is
a covered peril under the Risk Clause, General Average Contribution is payable under this clause.
• Section 66(ii) further states “there is a General Average Act where any extraordinary sacrifice or expenditure is
voluntarily and reasonably made or incurred at the time of the peril for the purpose of preserving the property
imperiled in the common adventure.”
• Salvage Charges are the reward or remuneration paid to Third Parties called Salvors who voluntarily and
independent of contract, render services to save maritime property which is in danger. The salvage charges are paid
by and out of saved property e.g. ship or cargo, etc. However, these charges are paid on ‘No Cure No Pay Basis’.
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6.4.1 In Addition to the Above, the Following Expenses are also Paid
• The Forwarding Charges Clause (Clause No.12) provides for the payment of any extra charges reasonably and
properly incurred in unloading, storing and forwarding the insured subject matter to the destination named in
the policy, when as a result of the operation of an insured peril, the insured transit is terminated at a port or place
other than the original destination.
• The Duty of the Assured Clause (Clause No.16) contemplates reimbursement of any expenses or charges
reasonably and properly incurred by the assured or their servants/agents, in averting or minimising a loss/or
damage covered under the policy and also in preserving and enforcing recovery rights against carriers or third
parties.
• A close look at the above reveals that ICC ‘C’ aims at granting protection for losses/ damages resulting from
casualties to the carrying vessel or vehicle.
6.5 Institute Cargo Clause ‘B’ (ICC ‘B’)

The set of clauses offers a slightly wider cover and provides coverage against the following risks in addition to
what is covered as per ICC ‘C’.
• Earthquake, volcanic eruption or lightning
• Washing overboard
• Entry of sea, lake or river water into vessel, craft hold conveyance, container, lift-van or place of storage
• Total loss of any package lost overboard or dropped whilst loading/ unloading.
Besides, any loss or damage caused due to earthquake, volcanic eruption or lightning, the additional risk covered
under ‘B’ are:
• Loss arising due to the cargo having been washed away from the vessel due to heavy/ rough weather or high
tide of the sea;
• Loss or damage to the cargo due to the entry of sea water during ocean voyage or lake or river water whilst
being carried inland or the entry of lake/river water in the place of storage.
• Total loss of the complete package when dropped, during the loading or unloading operation.
The scope of cover under the above ICC ‘B’ OR ‘C’ can be widened according to the requirements of the insured
by including extraneous perils subject to suitable additional premium. Some of the common extraneous perils are
mentioned below:
• Malicious damage: Loss or damage to the insured cargo caused by a person acting with malicious intentions
can be covered subject to the Malicious Damage Clause.
• Theft, Pilferage and Non-delivery (TPND): Loss of the insured cargo due to theft or pilferage during the insured
transit will be compensated. The risk of non-delivery of cargo by the carriers is also accepted by the insurers.
It should be borne in mind that any type of major loss, say sinking or fire may result in non-delivery. But the
risk of non-delivery here refers to non-delivery due to unascertainable or unexplained cause. The risk of theft,
pilferage and non-delivery are covered subject to the institute Theft, Pilferage and Non-delivery clause.
• Fresh or rain water damage: This may be caused during any portion of the insured transit.
• Damage by hooks, oil, mud, acid and other extraneous substances.
• Heating and sweating: The former risks exist in respect of cargo prone to heating by spontaneous combustion.
Coal or oilcakes shipped in bulk are susceptible to self-heating or spontaneous combustion. “Sweating refers to
the water damage caused by the deposit or condensation of water in the vessel or container hold, as a consequence
of different climatic/ atmospheric conditions. This is referred to as ship sweat or container sweat. If however,
internal moisture trapped in certain cargo like grains or cocoa beans or oilseeds escapes on its own, it is termed
cargo-sweat. Then it is regarded as an inherent vice which is an inevitable loss and hence not payable.
• Leakage/ contamination: Liquid cargoes are exposed to the risk of leakage. Edible goods and chemicals are
susceptible to contamination.
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• Breakage: This is very common to shipments of machinery and spares, glass and porcelain items.
• Country damage: This may arise to cotton shipments due to weather conditions and exposure to the country
climate/dust during inland transit prior to shipment or whilst awaiting shipment.
• Bursting and tearing of bags
• Shortage
6.6 Institute Cargo Clauses ‘A’ ICC-‘A’

• The widest of all covers is provided by the ICC ‘A’ clause. In its broad sweep and wide scope, it encompasses
cover against the risks referred to in ICC ‘B’ and the extraneous perils enumerated above. All risks of physical
loss or damage, other than certain exceptions specifically named in the clauses are covered.
• The losses which are beyond the scope of the cover are enumerated in the Exclusion Clause nos. 4, 5, 6 and
7. Most of the exceptions listed out in Clause No. 4 are statutory exceptions as per the Marine Insurance Act.
Section 55 (i) of the Marine Insurance Act states “subject to the provisions of this act and unless the Policy
otherwise provides, 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.”
• Section 55 (ii) discusses the excluded losses:
The Insurer is not liable for any loss attributable to Wilful misconduct of the assured, but, unless the Policy
otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the
loss would not have happened but for the misconduct of the Master or Crew.
Unless the policy otherwise provides, the Insurer of the ship or goods is not liable for any loss proximately
caused by delay, even though the delay be caused by a peril insured against.
Unless the policy otherwise provides, the Insurer is not liable for 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.
6.7 The Losses / Damages Excluded under ICC ‘A’ ‘B’ and ‘C’
The losses/ damages excluded under ICC ‘A’, ‘B’ and ‘C’ are discussed in detail below:
• Wilful misconduct of the assured: All Insurance contracts are designed with the intention to indemnify the
Insured for only accidental losses. Therefore, no loss which is deliberately caused by the Wilful misconduct
of the insured can be paid. It would also be against public policy to pay for such type of losses and the Act,
therefore says, such losses are not to be paid.
• Ordinary leakage, ordinary loss in weight or volume, ordinary wear and tear of the subject matter: The
above types of losses can generally be termed as “Trade” losses which are not accidental in nature. Generally,
certain liquid cargo (Benzene) may evaporate and fall short of their original quantity. Some unaccounted for
shortages may occur when some liquid cargo may stick to the walls of the carrier, without the operation of
any Insured peril. Similarly, ordinary leakage, breakage, loss in weight/volume are called ullage losses and not
payable under the policy.
• Insufficiency or unsuitability of packing: Here, it also includes stowage in a container or a lift van but only
when such stowage is carried out before the commencement of the risk under the policy or is carried out by the
insured or his agents. It is natural that where the packing is poor, unsuitable or insufficient, the insured is liable
for losses arising out of the bad packing. The yardstick that can be applied is that the packing should be able to
withstand the hazards of the journey it intends to traverse. To explain, for the same type of goods the strength
and the durability of the packing will differ between a short journey and a long journey and also the type of
people who are to handle it in the various spells of transits. In India for a particular cargo, the packing approved
by the Indian Packaging Institute will be treated as standard /customary packing for that type of cargo.
• Inherent vice or nature of the subject matter insured: Inherent vice can be described as a tendency of a
particular commodity to deteriorate or decay, depending upon the duration of the journey, season in question
and other factors. These losses are of an inevitable nature and as such cannot be considered by the insurer. For
example – vegetables/fruits may decay merely because of lapse of time without any external agency being
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responsible for the loss. Grain may be damaged by insects; there may be a change in the physical and chemical
properties of certain cargo during the course of transit.
• Delay, even though delay is caused by risk insured against: Sometimes a voyage may be delayed and if
because of that some perishable goods (fruits/vegetables etc.) deteriorate, such losses are not payable. However,
if there is any physical loss or damage to the goods due to collision, the insurer will be liable to that extent.
• Insolvency or financial default of the shipping company: Exclusion of loss/damage due to insolvency or
financial default of vessel owners, charterers, etc. was a new exclusion introduced in the revised Institute Cargo
Clauses, because there was an unprecedented spurt of maritime frauds and a series of mysterious sinking of
vessels resulting in claims of a complicated and dubious nature. The mushroom growth of tramp vessel and single
vessel owners added yet another dimension to this problem. Faced with claims of fantastic size and alarming
proportions, underwriters had to devote the best of their attention and wisdom to this fearsome trend which
spelt doom for their future. The shippers have to be more careful in the selection of vessels and the reliability
and financial soundness of the shipping company.
• Unseaworthiness and unfitness exclusion clause: The unseaworthiness and unfitness exclusion clause provides
that the insurer will not admit liability for any loss or damage caused by the unseaworthiness of the vessel or
the craft and unfitness of the vessel, craft, conveyance, container or lift van for the safe carriage of cargo, if
assured or their agents are privy or party to such unseaworthiness or unfitness at the time the subject matter
is loaded therein. In all contracts of Marine Insurance, sea worthiness and fitness of the ship for the purpose
of carriage of the goods insured to the destination, is an implied warranty. According to Section 42 (2) of the
Marine Insurance Act “In a voyage policy on goods or other movables, there is an implied Warranty that at the
commencement of the voyage, the ship is not only sea-worthy, but also that she is reasonably fit to carry goods
or other movables to the destination contemplated by the policy”. By sea worthiness, we mean that the vessel
should reasonably be fit to prosecute the voyage and encounter the ordinary perils of the sea. Cargo Worthiness
means that the ship is reasonably fit for the purpose of carriage of the goods insured.
• War exclusion clause: This clause excludes losses or damages due to war and allied perils.
• Strikes exclusion clause: It exempts liability for losses or damages due to Strikes and kindred perils.
• Malicious damage loss exclusion: Besides the above mentioned exclusions, there is one more exclusion under
ICC (B) and (C) which says – “deliberate damage to or deliberate destruction of the subject matter or any part
thereof by the wrongful act of any person or persons” is excluded. This exclusion is also termed as “Malicious
Damage Loss Exclusion”. However, there is a provision whereby, the Insured can get this coverage by the
payment of extra premium and subject to the “Malicious Damage Clause”.
6.8 Cover for War and SRCC Risks

Though the Institute Cargo Clauses exclude the risk of War and SRCC cover against such perils, these are provided
at additional premium. The Institute War Clauses grant cover against War risks and the Institute Strikes Clauses
against strike perils.
The Institute War clauses cover loss or damage to the subject matter caused by:
• War, Civil War, revolution, rebellion, resurrection or civil strike arising there from or any hostile act by or
against a belligerent power.
• Capture seizure, arrest, restraint or detainment arising from risks covered in above 1 and the consequences
thereof or any attempt there at.
• Derelict mines, torpedoes, bombs or other derelict weapons of war.
The Institute Strikes Clauses cover loss or damage to the subject matter insured caused by
• Strikes, lock-outs, workmen or persons taking part in labour disturbances, riots or civil commotions.
• any terrorist or any person acting with a political motive.
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6.9 Sub Clauses Common to ICC A/B/C
The sub clauses are:
6.9.1 Duration of Cover or Transit ‘Insurance Clause’

The duration of cover is the same under all the three sets of clauses ICC ‘A’ ‘B’ and ‘C’. They contemplate cover
on ‘warehouse to warehouse (WW)’ basis i.e., the cover will commence from the time the insured goods leave the
consignor’s warehouse for the purpose of transit and terminates on delivery to the consignee’s warehouse at the place
named in the Policy. Though the cover is obviously continuous, warehouse to warehouse cover is not automatic
and it is subject to the Insured’s acting with reasonable dispatch in all circumstances within their control. There
is a limitation period within which the insured subject matter is expected to reach the final warehouse. The cover
under above clauses ‘A’ ‘B’ and ‘C’ attaches from the time the Insured goods leave the consignor’s warehouse for
the purpose of transit, continues during the ordinary course of the transit and terminates either
• On delivery to the final warehouse of the consignee at the destination named in the Policy.
• On deliver y to any other warehouse /place of storage before the named destination where the consignee takes
delivery for storage for allocation / distribution purposes.
• On expiry of 60 days after the completion of discharge from the vessel at the Port of discharge
- Whichever Shall First Occur.
6.9.2 Termination of Carriage Clause

If due to circumstances beyond the insured’s control, the Contract of Carriage or Transit is terminated before the
delivery of goods as envisaged under the Transit Clause, the insurance shall also terminate unless prompt notice is
given and additional premium paid for continuation of cover in which case, the insurance will remain in force:
• Until goods are sold and delivered at such port or place subject to a limit of 60 days from discharge over side
the vessel.
• If the goods are forwarded within the said period of 60 days to the original destination named in the Policy or
any other destination, until termination in accordance with the transit clause.
6.9.3 Change of Voyage Clause

The Insurance covers change of voyage at an additional premium and subject to prompt notice to the
underwriters.
6.9.4 Insurable Interest Clause

The Assured must have Insurable Interest at the time of loss. Lost or Not Lost benefit is available.
6.9.5 Forwarding Charges Clauses

If due to the operation of an Insured peril, the transit is terminated at a port or place other than the destination under
the policy, the Insurers will reimburse to the Insured, any extra charges reasonably incurred in unloading, storing
and forwarding the cargo to the insured destination. This clause will not apply to G.A. and Salvage Charges.
6.9.6 Constructive Total Loss Clause

Claim for Constructive Total Loss will be recoverable only when cargo is reasonably abandoned because either
Actual Total Loss is unavoidable or the cost of recovering, reconditioning and forwarding to the original destination
would exceed its value on arrival.
6.9.7 Increased Value Clause

Deals with the provision for settling claims for Increased Value Insurance of the Cargo insured under the policy.
6.9.8 Not to Inure Clause

The Insurance will not inure to the benefit of the carrier or other bailee.
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6.9.9 Duty of Assured Clause

It is the duty of the Assured to prevent/minimise losses and protect recovery rights from carriers/bailees. Underwriters
will reimburse the charges for loss prevention/ minimisation in addition to any loss payable.
6.9.10 Waiver Clause

Loss minimisation measures, undertaken by the insurer/insured shall not be treated as waiver or prejudice the rights
of any party.
6.9.11Reasonable Dispatch Clause

The assured must act with reasonable dispatch in all circumstances beyond their control.
6.9.12Law and Practice Clause

Insurance is subject to English Law and practice.
6.10 Duration of Cover for ‘War Risks’

Where war perils are also covered subject to the Institute War Clauses, the war cover attaches from the time the
cargo is loaded on the vessel at the port of loading and continues in the ordinary course of transit and terminates
upon the discharge of cargo from the vessel at the port of discharge or on the expiry of 15 days from the midnight
of the date of arrival of the vessel at the port of discharge, whichever shall first occur. This limited cover is granted
in view of the Waterborne Agreement.
6.10.1 Duration of Cover for SRCC Risks

The duration of cover for SRCC risk is the same as the duration under Institute Cargo Clauses ‘A’ or ‘B’ or ‘C’.
6.11 Inland Transit Rail/Road Clauses

These clauses are attached to policies covering transit by Rail/Road. There are 3 types of clauses viz.,
• Inland Transit Rail/Road Clause “C”: This clause covers the perils of:
Fire
Lightning
• Inland Transit Rail/Road Clause “B” :This clause covers the perils of:
Fire
Lightning
Breakage of bridges
Collision with or by the carrying vehicle
Overturning of the carrying vehicle
Derailment or Accidents of like nature to the carrying railway wagon/ vehicle.
• Inland Transit Rail/Road Clause “A”
This clause covers all risks of Loss or damage to the subject matter insured except the excluded risks
mentioned below:
6.11.1 Common Exclusions under Clause A/B/C

• Willful Misconduct
• Ordinary Leakage/ breakage/ shortage etc. i.e., Ullage Losses
• Insufficiency/unsuitability of packing
• Delay
• Inherent Vice
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6.12 War Exclusion Clause
War, civil war, revolution, insurrection and allied perils cannot be covered under inland transit.
6.13 Strike Exclusion Clause

Losses caused by or resulting from the acts of strikers, locked out workmen or persons taking part in labour
disturbances, riots or civil commotions are excluded along with losses caused by any terrorists or any person’s action
with a political motive. However, this Strike risk exclusion can be deleted by paying additional premium, whereas
other ‘exclusions cannot be removed. The Inland Transit SRCC clause will be attached to the Policy in such cases.
The Sub clauses which are common to Inland Transit A/B/C Clauses are as follows:
• Transit Insurance Clause (Duration of the Cover Clause)

The transit insurance coverage attaches from the time the cargo leaves the warehouse or the storage place
named in the policy for the commencement of transit and continues during the ordinary course of transit
including customary transshipment (if any) and terminates on the delivery of the cargo to the final warehouse
at the destination.
If the cargo is transported by road, delivery of the goods should be taken within 7 days from the date of
arrival of the truck at the destination town and if the consignment/cargo is transported by rail or rail/road,
the delivery must be taken within 7 days from the arrival of the railway wagon at the destination railway
station. The period of 7 days is calculated from the midnight of the day of arrival of the railway wagon at
the destination railway station or the vehicle at the destination town.
• Insurable Interest Clause
On the same lines as ICC A/B/C.
• Not to Inure Clause
• Duty of Assured Clause
On the same lines as ICC A/B/C with minor changes.
• Waiver Clause
• Reasonable Dispatch Clause
On the same lines as ICC A/B/C
6.14 Incidental Clauses

• Accessories clauses: Motor vehicles and similar other cargo have sets of tools and small accessories shipped
with them. If these tools, etc. are sent in separate packages, pilferage risk is high. Further, parts of the vehicle
not attached securely to the vehicle, may be easily removed. The accessories clause provides that underwriters
shall not be liable for the loss of loose spare parts and/or accessories unless these are lost or stolen with the
whole vehicle.
• Country damage: A condition in a policy covering baled or bagged goods which may be exposed to wind, grit,
mud, etc. prior to loading. The clause covers deterioration or damage occurring prior to loading on to the overseas
vessel caused by the absorption of excessive moisture from damp ground, exposure to weather or grit, dust or
sand forced into the subject matter by windstorm or inclement weather.
• Cutting clause: It is used in policies covering pipes or similar cargoes of length. It provides that the damaged
lengths be cut off, leaving the undamaged lengths for the account of the assured. The underwriter’s liability is
limited to the insured value of the damaged part cut off and the cost of cutting. Continental insurances often
provide that if the damage extends to more than an agreed amount (e.g. three metres), the insurer will pay the
insured value of the whole length without cutting.
• Dangerous drugs clause: Underwriters are conscious of the undesirability of encouraging the illicit traffic in
dangerous drugs. Many of these drugs, however, have a legitimate medicinal use and are imported for that
purpose. The clause excludes all claims for drugs which are shipped without the necessary authorisation papers
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or which are shipped by any route other than the customary route.
• Garbling clause: To garble is to sift, or to cleanse, or to select that which is sound from the whole. Generally,
the term is applied in the insurance of tobacco, although it could be applied to most other cargoes. The clause
provides that the underwriter will pay the cost of garbling. This is because garbling of tobacco usually prevents
further loss of the sound tobacco.
• Label clause: Canned and similar goods are identified to the consumer by the attached paper label. Exposure
of the cans to moisture may cause discolouration of the labels or obliteration of the painting on the labels, or it
might cause the labels to come off the cans. In any event, such damage to the labels does not impair the quality
of the contents of the can which is the subject matter of insurance. It does, however, make it difficult if not
impossible to identify such goods if the label is the only means of identification. Today, most consumers stamp
a code number into one end of the can so that whatever happens to the label, the raised metal of the stamped
code number will identify the contents of the can. Thus the consignee can attach fresh labels to replace those
damaged by moisture and his only loss is the cost of the labels and the re-labelling labour costs. The cause of
damage to the labels may not be restricted to sea water. Condensation can cause such damage as also can juice
from other cans which may be blown and leaking or leaking following damage to the cans. The label clause
excludes claims for lost or damaged labels and limits the underwriter’s liability to the cost of re-labelling and
repacking the goods.
• Pair and sets clause: Where the value of the “objects” or jewellery depends on their continuance as a pair or set,
the value is drastically diminished if one of the pair or set is damaged or destroyed. Examples would be a set
of rare antique porcelain figures or a pair of diamond earrings. Naturally, the assured would prefer to abandon
the other earring to the underwriters and claim a total loss. Anticipating this, the underwriter will insist on the
“Pair and Sets Clause” appearing in the policy whereby they limit their liability to the insured value of damaged
part or lost object.
• Picking cause: Cotton, wool and similar fibrous cargoes may be shipped in bales which expose the outer part
of each bale to the risk of damage. The bales are usually large so, overall, the damage, when restricted to the
outer part of a bale, is superficial. Thus by picking out the damaged fibres, the remainder of the bale is saleable
as sound cargo. When a number of bales are so damaged, the sound part may be re-baled to make whole bales.
The fibres picked out as damaged are called “pickings” and, provided the loss was caused by an insured peril,
the insurer is liable for the insured value of the pickings. The “pickings clause” also provides that the insurers
shall pay the cost of picking and the cost of re-baling both sound and picking material. The damaged material
may still be saleable in which case the insurer who paid the claim is entitled to the proceeds of the sale less
sale costs.
• Second-hand replacement clause: If a cargo interest is specified simply as “Machinery”, without qualification, it
is deemed to be new machinery. However, when second-hand machinery is sent say for repairs, etc., the insurer,
will attach the “second-hand replacement clause”. This allows them to replace any part broken or lost, for which
they are liable, with second-hand material i.e. charging depreciation on the new value of the part replaced for
age, usage, wear and tear, etc.
• Spotting clause: Soft leather goods such as gloves react unfavorably when stored in a poorly ventilated, damp,
atmosphere and are particularly vulnerable to spotting by mildew and staining. This peril is inevitable and
should not be embraced within the term “risk” except when the circumstance giving rise to the situation was an
accident. The “spotting clause”, attached by under writers to policies on soft leather goods, excludes liability
for spotting and staining unless it is caused by the vessel being stranded, sunk or burnt.
• Stripping clause: When goods are damaged, underwriters may be prepared to accept a surveyor’s estimate of the
percentage of depreciation or it may be necessary to sell the whole or part of the goods to establish the difference
in market value between the sound and damaged goods. This difference is the true loss to the assured but to find
the difference, damaged goods must be sold, which goods may carry a “brand” wrapping. The term “branded”
goods is applied to goods which are well known as having a good reputation for consistent quality. The brand
is readily recognisable by the wrapper and when branded goods are sold in a damaged state, there is a risk that
where the damage is not immediately apparent, these will be sold in the retail markets represented as sound
goods and thus impairs the reputation of the manufacturers or producers. The stripping clause provides that
wrappers must be removed before damaged goods are sold. The underwriter is liable for the cost of removing
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the wrapping and further, the clause provides that the underwriter must pay the difference between the insured
value of the goods sold and the price realised by the sale. This clause is sometimes called the “brand clause”.
6.15 Duty Insurance Clause

The salient features of the Duty Insurance Clause are summarised below:
• Cover is granted on goods imported into India.
• Policy issued to import license holders only (High seas sales by state agencies is an exception) and the policy
is not assignable.
• Covers losses on duty portion due to damage to goods.
• In order to admit claim under the “Duty policy”, claim under the cargo policy must be admissible.
• No claims are entertained in respect of the Total Loss of the whole or part of the cargo prior to the Duty becoming
payable.
• Claims are payable on the basis of actual duty paid or on the basis of the sum insured, whichever is less. Thus
the policy is one of pure indemnity.
• The Marine Cargo policy on the CIF value of the cargo should exist and be in force simultaneously.
• The “Duty” policy covers the same risks as covered by the basic cargo policy.
• Policy to be given on the basis of a signed proposal form.
• The Duty policy should be issued prior to the arrival of the ship at the destination port. Thus only Duty paid
under the Prior Entry system can be insured under the Duty Policy.
• The rate of premium shall be 75% of the rate applicable for covering the CIF value of the cargo itself.
• War and SRCC rates as applicable will also be on 75% basis but they shall not be below the prevailing Inland
Transit SRCC rates.
• Where the CIF insurance is affected with another insurer, the rate of premium for covering Duty shall be 75%
of the appropriate marine rates of the insurer covering Duty.
6.16 Increased Value – Insurance Clause

Increased Value Insurance as already explained above, is on increased value by reason of the market value of the
goods at the destination of the date of landing being higher than the CIF and the duty value of the cargo and is
subject to the same clauses and conditions as the insurance of the CIF value of cargo. The Insurance will pay 75% of
the actual loss suffered in the market of realizable value of cargo not exceeding 75% of the sum insured. Thus, this
Insurance is Pure Indemnity and not an Agreed Value Policy. Similarly, the insurance shall not be valid if affected
after the arrival of the vessel at the destination port. The clause also provides for specific warranties which must
be complied with by the Insured.
6.17 Institute Classification Clause

The Marine Transit Rates normally apply only to cargoes and/or interests carried by mechanically self propelled vessels
of steel construction classed by one of the recognised classification societies and provided such vessels are:
not over 15 years of age or
Over 15 years of age but not over 25 years of age and have established and maintained a regular pattern of
trading on an advertised schedule to load and unload at specified ports.
Chartered vessels and also vessels under 1000 G.R.T. which are mechanically self-propelled and of steel construction
must be classed by Classification Societies and must not be over 15 years of age. The requirements of the Institute
Classification clause do not apply to any craft or lighter used to load or unload the vessel, whilst they are within the
port area. Cargoes and/or interests carried by mechanically self-propelled vessels not falling within the scope of the
Classification Clause may be covered subject to additional premium and on conditions to be agreed.
6.18 Institute Theft Pilferage and Non Delivery (Insured Value) Clause
The clause extends the policy to cover the risk of theft and/or pilferage irrespective of percentage. There will be no
liability for loss unless notice of survey has been given to the Underwriter/ Agents within 10 days of the expiry of
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the risk under the policy. The clause also covers the risk of Non-delivery of an entire package of which the liability
of the ship owner or other carrier is limited, reduced or negated by the Contract of Carriage by reason of the nature
and value of the goods. Subrogation Rights will apply.
6.19 Institute Replacement Clause

The wordings of the Clause are reproduced are as: “In the event of loss of or damage to any part or parts of an insured
machine caused by a peril covered by the policy, the sum recoverable shall not exceed the cost of replacement or
repair of such part or parts plus charges for forwarding= and refitting, if incurred, but excluding duty unless the
full duty is included in the amount insured, in which case loss, if any, sustained by the payment of additional duty
shall be recoverable. Provided that in no case shall the liability of the underwriter exceed the insured value of the
complete machine.”
6.20 Institute Clauses – Trade Clauses

• Institute Frozen Food Clause (A) (excluding Frozen Meat)
• Institute Frozen Food Clause (C ) (excluding Frozen Meat)
As with the Institute Cargo Clauses (C) The Institute Frozen Food Clauses (C) have been drafted to provide
major casualty cover and the Institute Frozen Food Clause (A) has been designed to provide standard cover
for the insurance of Frozen food.
Risk Clause 1 in the Institute Frozen Food Clauses (A) reads:
This insurance covers except as provided in exclusion clauses 4,5,6 and 7 the perils/contingencies
mentioned below:
- All risks of loss of or damage to the subject matter insured other than loss or damage
resulting from any variation in temperature howsoever caused.
- Loss of or damage to the subject matter insured resulting from any variation in temperature
attributable to.
- Breakdown of refrigerating machinery resulting in its stoppage for a period of not less than
24 consecutive hours.
- Fire or explosion.
- Vessel or craft being stranded, grounded, sunk or capsized.
- Overturning of derailment of land conveyance.
- Collision or contact of vessel craft or conveyance with any external object other than water.
- Discharge of cargo at a port of distress.
6.21 Institute Coal Clauses

These clauses were issued to cater to the basic requirement of the growing international trade in coal. The joint Cargo
Committee have stressed the importance in view of the inherent qualities of coal, the diversity of types and sources
of production of expert supervision at the time of loading and of the employment of specialist coal surveyors in the
event of claims. The insurance attaches on loading on board the overseas vessel and terminates on discharge over
side there from. The coverage is as follows:
• This insurance covers, except as provided in exclusion Clauses 4,5,6,7 the perils / contingencies mentioned
below:
Loss of or damage to the subject matter insured reasonably attributable to
Fire explosion or heating, even when caused by spontaneous combustion, inherent vice or nature of the
subject-matter insured.
Vessel being stranded, grounded, sunk or capsized.
Collision or contact of vessel with any external object other than water.
Discharge of cargo at a port of distress.
Earthquake, volcanic eruption or lightning
Loss of or damage to the subject matter insured caused by
General average sacrifice.
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Jettison or washing overboard.
Entry of sea, lake or river water into vessel holds container or place of storage.
6.22 Institute FOSFA Trade Clauses (A) (B) and (C)

These clauses were designed for Oil, Seeds and Fats after an agreement with the Federation of Oils, Seeds and
Fats Associations. The terms of these clauses are identical to those of the corresponding Institute Commodity
Trade Clauses agreed with the Federation of Commodity Associations. In Addition, four separate Institute FOSFA
Supplementary Clauses were issued also under date for use with the appropriate FOSFA Trade clauses to extend
the cover there under.
6.23 Institute Container Clauses

The clauses used for containers fall into two categories:
Institute Container Clauses – Time (All Risks)
Institute Container Clauses – Time (Total Loss General Average, Salvage Charges, Sue and Labour)
Since a container may be treated as part ‘Cargo’ and part ‘Hull’ in character, these Clauses have been adapted from
the Institute Cargo and Hull Clauses and contain a few provisions which are peculiar to the Container Clauses.
The ‘All Risks’ Clauses provide cover against all risks of loss of or damage to the subject-matter insured including
whilst on deck within the sea and territorial limits set out in the Schedule but claims arising on oversea vessels not
specified in the Schedule are not covered. Loss of or damage to the machinery of the container is only covered if
the container is a total loss or
the damage is proximately caused by stranding or sinking of the vessel or craft or by collision, overturning
or other accident to the land conveyance or aircraft or by general average sacrifice or
The damage is reasonably attributable to fire or explosion originating externally to the machinery or to
collision or contact of the vessel or craft with any external substance (ice included) other than water.
The measure of indemnity for a damaged container (not a total loss) is the reasonable cost of repairing the damage.
Underwriters are only liable for any amount in excess of that entered on the Schedule as the deductible in respect
of each container, each accident or series of accidents arising out of the one occurrence but the deductible does not
apply to:
Total loss.
General average salvages charges and sues and labours.
The Unrepaired Damage Clause excludes (as in the I.T.C. Hulls) payment for unrepaired damage in addition to a
total loss during the currency of the insurance.
The Total Loss, General Average Salvage Charges, Sue and Labour Clauses’ cover within the specified limit including
whilst on deck against:
All risk of total loss of the subject matter insured.
General average salvages and salvages charges.
Sue and labour charges incurred for the purpose of averting or minimising any loss covered by the insurance. Both
sets of clauses stipulate that the container must bear clear marks of identification and that breaches of the Sea and
Territorial Limits are held covered at an additional premium to be agreed subject to prompt notice.
6.24 Marine Clauses – Hull

The types of Clauses attached to Hull policies are as follows:
6.24.1 Institute Time Clauses – Hull (ITC Hulls)

ITC Hulls cover both total and partial losses but it must be clearly understood that this cover offers indemnity only
for losses caused by specified perils. ITC Hulls comprise 26 clauses, each dealing with a different aspect of this
insurance. A list of these clauses is set out below:
• Navigation
• Continuation
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• Breach of Warranty
• Termination
• Assignment
• Perils
• Pollution Hazard
• 3/4th Collision Liability
• Sistership
• Notice of Claim and Tenders
• General Average and Salvage
• Deductible
• Duty of Assured (Sue and Labour)
• New for Old
• Bottom Treatment
• Wages and Maintenance
• Agency Commission
• Unrepaired Damage
• Constructive Total Loss
• Freight Waiver
• Disbursement Warranty
• Returns for Lay-up and Cancellation
• War Exclusion
• Strikes Exclusion
• Malicious Acts Exclusion and
• Nuclear Exclusion
6.24.1.1 Scope of Perils Cover

• The perils covered under this policy are divided into two sections as under:
Section I Section II
Perils of the seas, rivers, lakes or other navigable Accidents in loading, discharging or shifting cargo
waters or fuel
Bursting of boilers, breakage of shafts, or any latent

Fire Explosion defect in the
machinery or hull
Violent theft by persons from outside the vessel Negligence of Master, Officer, Crew or Pilots
Jettison Negligence of Repairers or Charters
Piracy Barratry of Master, Officers or Crew.
Breakdown of or accident to nuclear installations or

reactors
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Contact with aircraft or similar objects, or objects
falling there from, land conveyance, dock or
harbour equipment or installation
Earthquake, Volcanic Eruption or Lightning
Table 6.1 Perils covered under institute time clauses
The perils enumerated in section II above are covered provided the loss or damage does not result from the want of
due diligence of the assured, owners and managers. This condition however is not applicable to section I. All losses
whether total or partial, proximately caused by the above perils will be paid under the policy.
• The following charges are also payable:
Sue and Labour charges
Salvage charges
General Average
• Collision liability:
The liability arises where the insured vessel causes damage to other vessel or vessels due to its negligence. This
insurance indemnifies the insured to the extent of 3/4th of his liability to the other vessel or vessels subject to a
maximum of 3/4th of the sum insured under the policy. The contract covering collision liability is a supplementary
one to the main contract and hence claims for this loss are payable in addition to the other losses the insured vessel
itself may sustain.
• Exclusions:
Apart from the usual exclusions contained in the Marine Insurance Act such as willful, misconduct of the assured,
delay, normal wear and tear, rats and vermin, the following specific exclusions are set out in the policy.
War Exclusion
Strikes Exclusion
Malicious Damage Exclusion
Nuclear Exclusion
• Deductible:
An agreed sum is inserted in the policy as a deductible to be applied in respect of each separate accident or occurrence.
This deductible does not however apply to claims for total loss/constructive total loss and any claims associated
with sue and labour charges.
6.24.1.2 8 Other Important Provisions

• New for old: Where damages payable under the policy have been sustained by the vessel and replacements are
required, settlement will be for the full cost of replacement without reference to the depreciation suffered by
the replaced items.
• Lay-up returns: If the insured vessel is laid up in a port for a considerable period, the insured will be entitled
to the return of the premium on a pro-rata monthly basis for each period of 30 consecutive days of lay up. This
return is allowed because there is substantial reduction in risk whilst the vessel is laid up in protected waters.
• Constructive total loss: It is provided that to claim a constructive total loss under the policy, the cost of recovery
or repair should exceed the insured value.
• Assignment: Since the magnitude of the risk greatly depends upon the ownership and management of the ship,
any change therein may place the insurers in a dangerous situation. The ITC Hulls, therefore stipulate that no
assignment of interest in the policy shall be binding unless due notice is given to the insurers and the assignment
is endorsed by the latter on the policy.
• Termination of cover: The cover granted under ITC Hulls will terminate automatically in the following
circumstances unless the insurers agree to the contrary in writing.
When the classification of the ship is changed or withdrawn and
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When the ownership, management or flag of the ship is changed.
6.24.2 Institute Time Clauses Hulls – Only Total Loss

While this policy covers all the perils that are incorporated in the ITC Hulls, indemnity is restricted to actual or
constructive total loss of the vessel proximately caused by those perils. In addition to a Total Loss, the following
charges are reimbursable:
Salvage charges incurred to avoid a peril insured against and
Sue and Labour expenses incurred by the insured for purpose of averting or minimising a loss which is
recoverable under this insurance
6.24.3 Institute Voyage Clauses – Hulls

Where the owner desires to insure his ship only for a specific voyage, he can do so. The insurance in that event
would be subject to the Institute Voyage Clauses which provide a cover similar to the ITC Hulls excepting that it
applies to a voyage only and not for a time.
6.24.4 Institute Time Clauses Hulls – Port Risks

• When the ship is fully employed, wider cover offered under ITC Hulls would be appropriate for protecting the
interest of the ship owner fully.
• However, there may be periods when the vessel is taken off from service and laid-up for some time until it is
sold or re-employed. There are seasonal trades which also result in lay-up of vessels.
• If a vessel has no employment and has to be confined in a very limited area of a port for considerable periods
of time, it would be worthwhile if the owner insures her for her restricted movements only within the specified
harbour area, as against her hazardous sailing into the high seas.
• Institute Time Clauses Hulls – Port Risks are used to afford the necessary coverage for the restricted use of the
vessel. All the perils that are covered under ITC Hulls excepting earthquake and volcanic eruption are covered
under the Port Risks Clauses as well.
• In addition, the Protection and Indemnity Clauses (Clause No.9 ) of the Port Risk Clauses offer indemnity
against various liabilities of the ship owners in respect of:
Damage to fixed or movable properties
Removal of Wreck of the insured vessel
Loss of life, personal injury, illness and liabilities not governed by statutes like the Workmen’s Compensation
Act.
6.24.5 Collision Liability is Payable in Full (4/4ths)

The chief single hazard in port risk insurance is fire, and because of this, vessels with passenger accommodation
are normally not a good risk as cargo vessels. There is also the possibility of vessels dragging their anchors in
exposed berths and causing damage to them and other vessels. Collision between vessels is not uncommon due
to the movement of a large number of vessels within a limited area of the harbour. Port risks may also be covered
under the ITC Hulls policy through the operation of the lay-up returns clause, in which case, the usual conditions
regarding the payment of 3/4th collision liability with the exclusion of P & I risks will apply. All inland vessels
such as barges, launches, passenger vessels and tugs employed in inland waters (Sheltered and protected waters)
are usually covered in terms of Port Risks Clauses.
6.25 Institute Fishing Vessel Clauses

The coverage contemplated under these clauses is as comprehensive as ITC Hulls. As fishing vessels may not get
the protection from P & I Clubs, the IFV Clauses provide additional indemnity for the following liabilities of the
vessel owner which are usually covered by the clubs in the case of major cargo vessels.
• 1/4th Collision Liability
• P & I Interests such as
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damage to external objects
wreck removal expenses
loss of life, personal injury, illness
• Removal ashore: Cover is extended to parts of the insured vessel whilst they are ashore for the purpose of repairs,
overhaul or refitting including transit from and to the vessel.
• Cover for fishing gear: Loss or damage to fishing gear would be payable only in the following circumstances
When it is caused by Fire, lightning or violent theft by persons from outside the vessel and
When it is a total loss of the gear resulting from the total loss of the vessel by insured perils.
• Machinery damage additional deductible: Apart from the overall policy deductible, provision for the incorporation
of a separate deductible is made under this clause in respect of claims for partial losses of machinery, shaft,
etc.
6.26 Institute War and Strikes Clauses Hulls-Time

These clauses cover loss of or damage to the vessel caused by:
• War or warlike operations
• Capture, seizure, arrest, restraint or detainment
• Derelict mines, bombs or other weapons of war
• Strikers, Locked-out workmen, or persons taking part in labour disturbances, riots and civil commotions.
• Terrorists or any person acting maliciously or from a political motive, confiscation or expropriation.
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Marine Insurance
Summary
• The Clauses used for Ocean Transit are ICC ‘A’, ’B’ and ’C’.
• Jettison means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to
vessel or other property in the vessel.
• Where two vessels collide on high seas, the maritime law of various countries provides that the liability for
damages to each other be fixed according to the degree of negligence e.g. 20:80, 40:60, 50:50.
• According to Section 66(i) of the Marine Insurance Act, General Average Loss has been defined as “a loss
caused by being directly consequential on a General Average Act. It includes general average expenditure as
well as general average sacrifice.”
• Section 66(ii) further states “there is a General Average Act where any extraordinary sacrifice or expenditure is
voluntarily and reasonably made or incurred at the time of the peril for the purpose of preserving the property
imperiled in the common adventure.”
• Though the Institute Cargo Clauses exclude the risk of War and SRCC cover against such perils, these are
provided at additional premium.
References
• Institute Marine Cargo Clauses [Online] Available at: <http://www.jus.uio.no/lm/institute.marine.cargo.
clauses.a.1982/doc.html>. [Accessed 21 June 2011].
• Institute Marine Cargo Clauses-A [Online] Available at: <www.natlaw.com/treaties/global/global/global31.
• Info about Insurance. Institute Marine Cargo Clauses-A [Online] Available at: <http://www.infoaboutinsurance.
com/Marine_Insurance.shtml#cargo>. [Accessed 18 June 2011].
• Transit Insurance - Moving Glossary - Movers.com [video online] Available at: <http://www.youtube.com/
watch?v=8OoYZ2jjR8o>. [Accessed 23 June 2011].
• Gauci, G., Marine Insurance 01. [video online] Available at: <http://www.youtube.com/watch?v=hgjzTfvCDko>.
Recommended Reading
• Board, N., 2003. Secrets for Making Big Profits from Your Business with Export Guidelines, National Institute
of Industrial Re, p. 270.
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Self Assessment
1. An agreed sum is inserted in the policy as a __________to be applied in respect of each separate accident or
occurrence.
a. deductible
b. attributable
c. reasonable
d. liable
2. The duration of cover is the same under all the ______sets of clauses.
a. three
b. four
c. two
d. six
3. Ordinary leakage, ordinary loss in weight or volume or volume or ordinary wear and tear of the subject matter
types of losses can generally be termed as _____ losses.
a. trade
b. accidental
c. physical
d. ullage
4. The widest of all covers is provided by the ICC ‘_______’ clause.

a. A
b. B
c. C
d. D
5. Loss or damage to the insured cargo caused by a person acting with malicious intentions can be covered subject
to which of the following?
a. Fresh or rain water damage
b. Malicious damage clause
c. Heating and sweating
d. Breakage
6. Edible goods and chemicals are susceptible to which of the following?

a. Breakage
b. Heating
c. Contamination
d. TPND
7. What means throwing goods overboard the vessel into the sea in order to save or prevent damage or loss to
vessel or other property in the vessel?
a. Jettison
b. TPND
c. Unseaworthiness
d. Stripping
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8. The _________attached by under writers to policies on soft leather goods, excludes liability for spotting and
staining unless it is caused by the vessel being stranded, sunk or burnt.
a. spotting clause
b. stripping clause
c. picking clause
d. pair and sets clause
9. What can cause such damage as also can juice from other cans which may be blown and leaking or leaking
following damage to the cans?
a. Condensation
b. Sublimation
c. Navigation
d. Continuation
10. Which of the following is not included in the Section II?

a. Accidents in loading
b. Discharging
c. Shifting cargo or fuel
d. Fire explosion
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Chapter VII
Reinsurance
Aim
• introduce the concept of reinsurance
• discuss the need for reinsurance
• explain risk management through reinsurance
Objectives
• define reinsurance
• explain asset management
• highlight the functions of reinsurance
Learning outcome
• state the history of reinsurance
• enlist the benefits of reinsurance
• classify the categories of reinsurance
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7.1 Introduction to Reinsurance

One of the major risk and capital management tools available to insurers is Reinsurance. It’s significance is however
hardly known outside the insurance sector. Reinsurance is insurance for insurers. Insurers buy reinsurance for the
risks they cannot or do not wish to retain fully themselves. Reinsurers help the industry to provide protection for a
wide range of risks, including the largest and most complex risks covered by the insurance system. They have wide
ranging benefits in other areas of insurance too, including underwriting, asset management and capital management.
Reinsurance also makes insurance less expensive and more secure, thus benefiting policyholders who get more
protection at a lower cost. Reinsurers apply sophisticated risk management processes, including risk monitoring and
risk modeling to ensure that the promise to pay future possible claims is honoured. In this unit, we discuss various
issues relating to reinsurance; including its concept, benefits, applications, methods, functions, forms, types, and how
reinsurers deal with risk. The unit concludes with a snapshot of how reinsurance applies to marine insurance.
Reinsurance simply means “Insurance for Insurance Companies”. More precisely Reinsurance transfers insurance
underwriting risk to third-party organisations. Reinsurance is an insurance of insured risk where the insurer retains
a part and cedes the balance of a risk to the reinsurer. This is done to facilitate a greater spread and reduce liability
on the part of the insurer. In other words, reinsurance is insurance of insured risk taken by insurance companies
to protect their liability commitments beyond their net capacity. Reinsurance is one of the major risk and capital
management tools available to primary insurance companies.
Reinsurance Financial Strategies

The following strategies are used by reinsurers:
• Pooling: Large number of small risks are pooled, where individual premiums are inadequate to cover individual
losses
• Funding: Individual risks’ premiums are set high enough to cover likely losses (plus expenses and profit)
• Speculating: Securitisation strategy applied in case of large, unique exposure; low chance of loss; potential value
loss is very high. Low enough likelihood that expected return will be greater than cost of capital.
7.2 History of Reinsurance

• It was man’s desire for security, both present and future; for himself and his family; that he started living in
groups, developed clans, and later the concept of society. It is this notion of community, of “one for all and all
for one”—that forms the base of insurance. In the early days of insurance, as there was no facility of reinsurance,
an insurer accepted only those risks that could be entirely handled by him. The origin of reinsurance dates back
to the fourteenth Century when the Lombardians began to develop the concept of reinsurance.
• The need for reinsurance was first felt in marine business, where there was a concentrated risk with a recognised
catastrophe hazard. The oldest known contract with the legal characteristics of a reinsurance contract occurred in
Genoa in 1370. Soon marine insurance developed rapidly and became a common practice throughout Europe.
• Marine insurance was the first great step in the history of the insurance industry, the second was insurance against
fire. A number of serious fires struck Hamburg between 1672 and 1676, after which the Hamburger Feuerkasse
(Hamburg Fire Fund) was set up. Even today, it is the oldest existing insurance company.
• In 1706, the Amicable or Perpetual Assurance was founded in London, signaling the breakthrough of actuarial
sciences as a means of assessing risks and setting rates. The 19th century saw the rapid evolution of technology,
the remodeling of society, the change in ways of thinking and the increased need for security brought by the
new age. This paved for the origin of the insurance business as we know it today.
7.2.1 Beginning of Reinsurance

• As trade expanded in the late middle ages and the economy flourished – especially in the Italian city-states; the
need for insurance grew. Insurers of the period worked without statistics, rates or calculations of probability,
relying solely on their personal assessment of the risks. Thus, when news of a loss came through, many an insurer
had to ask himself fearfully whether he had taken on too much risk. To protect himself against such situations,
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he soon learned to transfer all or part of the risk to another insurer willing to accept it by way of reinsurance.
• Besides reinsurance, which at that time covered only individual risks, the period’s other main risk-sharing
instrument was co-insurance. English law virtually prohibited reinsurance and as such direct insurers had to
band together into syndicates if they were to cover risks beyond their individual financial means. Thus the law
unintentionally strengthened Lloyd’s of London, the world’s most famous insurance institution.
• One of the earliest reinsurance companies; the Cologne Reinsurance Company was established in 1846 and
started operations six years later. The Company is still in existence and is thus the oldest professional reinsurance
company. The company was founded as an immediate impulse as a result of another catastrophic fire in Hamburg
in 1842. The reserves of the locally-based Hamburg Fire Fund (only 5, 00,000 German marks), had not been
sufficient to cover the loss of 18 million marks. Thus, as a result of this event, insurers finally addressed the
need to distribute entire portfolios of policies among several risk carriers.
• Though at first it was the financially stronger direct insurers who engaged in reinsurance, the Cologne Reinsurance
Company was the first in a long line of professional reinsurance companies founded soon after; among these
were the Aachen Re in 1853, Frankfurt Re in 1857, Swiss Re in 1863, and Munich Re in 1880. The Swiss
Reinsurance company was the first reinsurance company to be founded in Switzerland. The disruption of the
two world wars resulted in London developing into a substantial reinsurance market. The development was
further aided by Lloyds’ increased involvement in reinsurance and the spread of excess of loss covers which
were predominantly written by Lloyds. Of the total business written at Lloyds now, reinsurance constitutes a
significant proportion.
• From 1863 to the World War I, is considered the pioneering age of Reinsurance. After the Hamburg fire of
1842 and the Glarus fire in 1861, Switzerland made it clear that the reserves normally set aside by insurance
companies were inadequate for severe catastrophes. To better prepare for such risks, the Swiss Reinsurance
company was founded in 1863 by the Helvitia General Insurance Company, Credit Suisse of Zurich and the
Basle Commercial Bank. The Swiss Reinsurance company’s reputation gained worldwide after the devastating
San Francisco earthquake and fire of 1906. Swiss Re settled its claims promptly and fairly. The result was a
substantial increase in business.
• In the beginning, reinsurance was done mostly in the area of facultative transactions. With the progress of industry
and commerce in 19th Century the innovative forms of coverage came into operation, giving rise to automatic
forms of reinsurance known as treaties, which has become an indispensable part of a company’s operations today.
By the time of World War-I, proportional treaties became the main vehicle replacing facultative reinsurance
that proved costly to administer and slow to operate besides being inflexible. The invention and technique of
excess of loss cover (non-proportional reinsurance) was the most significant development in reinsurance in the
past 100 years. This form of reinsurance filled a real gap for property policies which were extended to cover
catastrophe hazards.
• Reinsurance too, in its modern form, was the product of the technological changes that changed insurance.
Industrialisation produced ever greater concentrations of value, prompting insurance companies to demand ever
more reinsurance cover. Treaty reinsurance, which provided cover for portfolios (group of risks), took its place
beside the single-risk, facultative form of reinsurance that had been customary until that time.
7.3 Need for Reinsurance

A direct insurer needs reinsurance for the following reasons:
• to limit (as much as possible) annual fluctuations in the losses he must bear on his own account
• to be protected in case of catastrophe
Reinsurance allows direct insurers to free themselves from the part of a risk that exceeds their underwriting capacity,
or risks which, they do not wish to bear alone, for some reasons. Direct insurers find relief from particularly large
individual risks by ceding them individually in the form of facultative reinsurance. However, entire portfolios
containing all of the insurer’s risks; for example, all of the insurer’s fire, motor or marine insurance policies are
also object of reinsurance. These insurance portfolios are covered by blanket agreements, so-called obligatory
reinsurance treaties.
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How much Reinsurance is Necessary?

The question of how much reinsurance is necessary to buy is a matter of judgment. Every direct insurer must
answer that as part of his business decision-making. His final decision will depend on factors such as willingness
to take risks, his company’s financial strength, and market practice. However, there is no absolute security against
bankruptcy. Reinsurance is merely an instrument that can help a company reduce its probability of ruin (Swiss Re:
An introduction of reinsurance).
Who Buys Reinsurance?

Reinsurers deal with professional corporate counterparties such as primary insurers, reinsurance intermediaries,
multinational corporations and their captive insurers of banks. The main clients of reinsurers are primary insurers,
from all classes of insurance. The amount of business an insurer will reinsure depends on the insurer’s business
model, its capital strength and risk appetite, and prevailing market conditions. Among those who buy reinsurance
includes:
• Insurers whose portfolios are heavily exposed to catastrophic events such as earthquakes, storms etc.
• Small local insurance players having low client base need more reinsurance than larger international insurers
who can diversify their insurance covers over a bigger client base.
• Insurers writing many different lines of business (Multiline insurers) need relatively less reinsurance covers
than those that focus on a few business lines or sell to a specific customer group
• Commercial lines portfolios with a small number of risks with large exposures (e.g. aviation industry) need
more reinsurance than personal lines portfolios with a large number of small and homogeneous risks (e.g. motor
insurance)
• Life insurers with a greater proportion of term cover contracts including mortality or disability risk element
tend to cede more than life insurers with a high level of savings premium (i.e. endowment and unit linked
portfolios).
• Insurers expanding into new products or entering new geographical regions use reinsurance to benefit from
reinsurer’s expertise and financing
• Regulatory and rating agency considerations also significantly influence the individual demand for reinsurance
cover, as reinsurance is a means to provide capital relief and to improve balance sheet strength.
7.4 Risk Distribution through Reinsurance

Risk is transferred from policyholder to a retrocessionaire, through a series of distribution strategies collectively
referred to as the risk distribution strategy in insurance.
7.4.1 Reinsurance – Process Flow

• Reinsurance may be defined as a contractual arrangement under which one insurer, known as the primary insurer,
transfers to another insurer, known as the reinsurer, some or all of the losses to be incurred by the primary insurer
under insurance contracts it has issued or will issue in the future.
• Reinsurance is a contract of indemnity, even in life insurance and personal accident insurance. The primary insurer
is sometimes referred to as the ceding insurer, ceding company or reinsured. Reinsurers also may reinsure some
of the loss exposures they assume under reinsurance contracts. Such a transaction is known as retrocession.
• The insurer or reinsurer to which the exposure is transferred is known as a retrocessionaire and the reinsurer
transferring the exposure is called the retrocedent. Retrocession agreements do not differ greatly in detail from
reinsurance agreements. In almost all cases, the reinsurer does not assume all of the liability of the primary
insurer. The reinsurance agreement usually requires the primary insurer to keep or retain a portion of the liability.
This is known as the insurer’s retention and may be expressed as a percentage of the original sum insured or a
specified quantum.
• In other words, reinsurance is insurance of the insured risk taken by insurance companies to protect their liability
commitments beyond their limit.
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• Reinsurance premium: Consideration paid by a ceding company to a reinsurer for the coverage provided by
the reinsurer.
• Treaty: A reinsurance contract under which the reinsured company agrees to cede and the reinsurer agrees to
assume a particular class or classes of insurance business automatically.
7.4.2 Difference between Coinsurance and Reinsurance

• Coinsurance: A form of reinsurance is a system whereby reinsurer shares direct responsibility for a risk with
one or more insurance companies. The Cedent’s liability is limited to the amount it underwrites on the original
policy.
• The system is used especially for covering big industrial risks and certainly has many advantages. However,
to apply it to the underwriting of thousands of medium and small risks would only mean high administrative
costs and inconvenience.
• In co-insurance the relationships are between the primary insured and each insurance company separately. If
one company/insurer fails to pay its share of a claim, the others are not liable to pay more than their share of
claims. In other words, their liability is limited to extent of share accepted by them individually.
• Reinsurance is basically passing on the risk to some other insurer and therefore it does not absolve the insurance
company from making payment irrespective of receipt of payment from reinsurer.
• In reinsurance the reinsured has a contractual relationship with the reinsurers. The insurer must pay valid claims,
even if he fails to recover from his reinsurers.
7.5 Risk Management through Reinsurers

• The concept of risk management: When insurers allow part of their business to reinsurers, they reduce
their underwriting risk. In exchange they assume counterparty credit risk – which is the risk that the reinsurer
cannot honour its financial obligations. For the insurer it is, therefore, crucial that its reinsurers are financially
secure.
• Core competence: Risk management is the core competence of any reinsurer. Reinsurers have implemented
sophisticated risk management processes to ensure their ability to honour financial obligations. The overarching
role of risk management is to guarantee the long term survival of the reinsurance company. The role of risk
management is to identify, monitor, and model the risks and their interdependence and to ensure that risks are
in line with what the company can bear. To meet its tasks, close cooperation with the underwriting units, assets
management, and capital management is the key. The figure below depicts the three main concerns of risk
management.
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Underwriting
Risk
Management
Capital Management Asset Management
Fig. 7.1 Three main concerns of risk management

(Source: Swiss Re publications: Understanding Reinsurance: How reinsurers create value and manage risks)
• Risk modelling: the basis of risk management

In risk modelling, different forms of quantitative and qualitative analysis are applied. A list of risks affecting
reinsurers include all risks that affect direct insurers, such as credit risk, insurance risk, market risk,
interest rates risk, terrorism risks, inflation risks, epidemic risks etc . Based on the analysis of these risks,
a sufficiently representative subset is chosen and mapped using stochastic models which take into account
possible interdependencies among various sources of risk. Finally, these models are used to quantify the
impact of the risk factors on the reinsurer’s balance sheet.
Quantitative modelling has to be complemented by the analysis of risks which are less suited to formal
modelling. These include socio-political risks, regulatory risks and most prominently operational risks.
Operational risk is the risk of loss resulting from external events such as fires and power failures. Internal
guidelines and appropriate management processes are used to minimise such risks.
7.6 Underwriting - Assessment, Capacity Allocation and Pricing

Underwriting is the process of examining, classifying and pricing risks, for example a book of motor business, or
a single risk that is submitted by the primary insurer for reinsurance, as well as concluding the contract for risks
which are accepted. The main task of the underwriting process is to ensure that:
• risks are assessed properly, and terms and conditions are adequate
• the limits of assigned capacity are respected
• there are controls for accumulation and peak risks
• pricing and wording are appropriate
7.6.1 Risk Assessment and Terms and Conditions

• Risk assessment starts with assessing the data provided by the primary insurer and determining whether additional
information about the characteristics of the insured objects or persons is required.
• In life reinsurance, risk assessment will consider information that helps to determine the risk of death or illness,
such as age, gender, smoker status, medical and lifestyle factors.
• Only risks which meet the general conditions of insurability can be reinsured. Terms and conditions under which
the risks are insured have an important function in making risks insurable, as they limit the cover provided in
such a way that the process of insurability are met.
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7.6.2 Principles of Insurability
(Re) insurance can only operate within the limits of insurability. Insurability has no strict formula; rather it is set of
basic criteria which risk must fulfill to be (re)insurable. These criteria can be broadly classified as follows:
• Assessability: It must be possible to quantify the probability that the insured event will occur, as well as its
severity, in order to calculate the potential exposure and the premium necessary to cover it. In addition, it must
be possible to allocate the loss to a particular insurance period.
• Randomness: The time at which an insured event occurs must not be predictable, and the occurrence itself must
be independent of the will of the insured.
• Economic efficiency: Primary insurers and reinsurers must be able to charge a premium commensurate with
the accepted risk.
7.6.3 Capacity Allocation, Accumulation Control and Peak Risks

Reinsurers only accept risks if these are in line with the capacity limits they have set. Capacity is the maximum
amount of coverage that can be offered by a reinsurer over a given period. In the case of risks with low accumulation
potential, such as a portfolio of different fire policies, underwriters are generally able to commit a defined amount
of capacity for a certain line of product and client/country. Risk demanding more capacity is typically escalated for
special approval by senior underwriters for risk committees. Some risks – especially in the field of natural perils
– have a greater accumulation potential. In order to control these risks successfully, it is important that they be
identified and dealt with in the underwriting process.
7.6.4 Natural Catastrophe Loss Potentials

On a worldwide scale, the exposure to natural catastrophe is rising due to higher population density at locations
exposed to natural perils, as well as due to the increasingly complex economic environment. Reinsurers play an
important role in managing these risks.
7.6.5 Pricing and Wording

• The price has to be sufficient to cover the expected cost of acquiring the business, administering it and paying
claims. Clearly the price must also provide the reinsurer with an appropriate return on the capital allocated to
the risk. To arrive at a price, underwriters employ experience- and exposure based models.
• Experience based models use historical claims experience applied to price risks, e.g. fire risks – where a long
history of incidents exists – or mortality risks where the pricing can be based on mortality tables and experience
studies. When such data series are missing – for instance in the case of natural perils where events are relatively
rare – the correct price has to be determined by using exposure-based modelling.
• These models use scientific information and expert opinion. Claims experience is only used to check and calibrate
the model. When the primary insurer accepts the price and the terms and conditions offered by the reinsurer, a
contract is drawn up between the two parties. This document, often called a wording, describes the rights and
duties of the contract parties, as well as the terms and conditions that accompany it. When the agreement is
reached, the risk is accepted into the reinsurer’s portfolio.
7.7 Asset Management

Reinsurers invest the premiums they receive for providing reinsurance cover in the capital markets, which is the
responsibility of the asset management department. Asset management is part of the risk management process as
it delivers portfolio data to risk management and has to respect limits and guidelines on where to invest. This is to
ensure that assets are allocated in a way that matches the characteristics of the corresponding liabilities.
7.7.1 Capital Management

• A reinsurer’s capital has to be appropriate for its specific risk profile and appetite. Capital is needed for those
adverse situations when payments exceed premiums and investment income, or when shocks from inadequate
reserving or asset impairments, such as the severe stock market slump experienced in 2001-2003, and 2008,
have to be absorbed. Capital thus acts as a buffer against unexpected losses.
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• In the risk management process, capital management has the significant task of aligning capital and risks assumed
through insurance and investment activities. If risk monitoring reveals a gap between risk assumed and the
maximum risk bearing capacity of the insurer (that can be borne by the existing capital base), then either the
necessary capital must be increased or underwriting or investment risks have to be reduced. The latter can be
achieved by reducing underwriting and investment capacity or transferring the risks outside the company using
retrocession or securitisation.
7.7.2 Diversification
• A well established risk management process will result in a reinsurer’s portfolio where underwriting and
investment risks are aligned with the capital available; thus ensuring the long-term survival of the reinsurer.
Reinsurers achieve a high degree of diversification by operating internationally, across a wide range of many
lines of business, and by assuming a large number of independent risks.
• Diversification across time also is an important factor. The basic principle behind diversification is the “law
of large numbers”. This statistical principle states that the more independent risks are added to a reinsurer’s
portfolio, the less volatile its results become. In terms of capital, lower volatility translates into lower capital
needs and in turn lower capital costs, for the same protection level. Better diversification helps reinsurers to
offer reinsurance at lower price and; given the level of capital; provide a higher level of protection.
7.8 Benefits of Reinsurance

The benefits of reinsurance are as listed below.
• Stabilisation of underwriting results, financial flexibility and expertise.
• Stabilisation of underwriting results is a dominant driver for non-life insurers to buy reinsurance.
• Reinsurance allows insurers to benefit from economies of scale
• Reinsurance expertise supports insurers in controlling their risks
• Reinsurance provides long-term security as a benefit for primary life insurers
• Benefiting from reinsurers’ expertise is a major driver to buying life reinsurance
• Reinsurance helps to ease insurers’ capital strains
• Reinsurance allows efficient risk and capital management
• Reinsurance facilitates economic growth and social welfare
7.8.1 Effect of Reinsurance on the Direct Insurer

The reinsurer adds value in many ways to the services a direct insurer provides to his clients.
• The reinsurer reduces the probability of the direct insurer’s ruin by assuming his catastrophe risks.
• He stabilises the direct insurer’s balance sheet by taking on a part of the risk of random fluctuation, risk of
change, and risk of error.
• He improves the balance of the direct insurer’s portfolio by covering large sums insured and highly exposed
risks.
• He enlarges the direct insurer’s underwriting capacity by accepting a proportional share of the risks and by
providing part of the necessary reserves.
• He increases the amount of capital effectively available to the direct insurer by freeing equity that was tied up
to cover risks.
• He enhances the effectiveness of the direct insurer’s operations by providing many kinds of services
Reinsurance benefits the direct insurer in the following ways:

• Through facultative reinsurance, insurer:
reduces his commitments for large individual risks such as car factories and large department stores
Protects himself against large liability exposures, whose extent often cannot be properly estimated before
a loss occurs, as in the case of product liability for pharmaceuticals.
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• Through non-proportional treaty reinsurance, insurer:
Receives cover for catastrophe risks such as windstorm, earthquake, tsunami, floods as well as large road,
aviation and marine accidents
• Through proportional treaty reinsurance, insurer:
Finds protection against major deviations in the loss experience of entire portfolios (risk of random fluctuation,
or risk of change due to economic cycles; or new laws and regulations, or social change)
• Through financial reinsurance, insurer:
Procures cover for difficult-to-insure or marginally insurable individual risks or portfolios in order to
guarantee liquidity and income. The majority of claims incurred are balanced on a medium to long term
basis by the direct insurer and reinsurer operating in tandem.
7.8.2 Effect of Reinsurance on the Reinsurer

• The reinsurer is offered highly exposed risks, catastrophe risks and other severe or hazardous business. The
reinsurance company’s task is to give the client the cover he wants (as much as possible) and at the same time
to structure and safeguard its own reinsurance portfolio to achieve balance – and to make a profit doing it.
• The reinsurer thus seeks to balance his portfolio by spreading his activities over many countries (geographical
distribution) and throughout all branches of the insurance business. The reinsurer keeps its probability of ruin
low by:
Exposure and accumulation control together with a suitable acceptance and underwriting policy,
Maintaining long-term client relationships, to achieve compensation in time;
Underwriting, when possible, the more balanced portions of the direct insurer’s business (e.g. motor insurance,
third party liability, personal third party liability, home insurance etc.);
Further reinsuring (retroceding) those risks which exceeds its own capacity
7.9 Reinsurance Firms: Names and Business Numbers

• A number of large direct insurers write reinsurance business, either through their own reinsurance departments
or through reinsurance subsidiaries. However, it is the professional reinsurance companies that offer reinsurance
services on a major scale. Lloyds of London has established a reputation for marine insurance and the coverage
of unusual risks.
• For special types of risks, such as aviation or nuclear energy, insurance pools have been created. These are
mainly designed to balance risks as well as possible at the national level, while attempting to secure further
international cover with reinsurers or foreign pools.
• Reinsurance brokers act as intermediaries in providing direct insurers with reinsurance cover. They play an
especially significant role in the world’s English speaking markets.
• Standard and Poor, the rating major; lists approximately 250 reinsurance firms in 50 countries (Global Reinsurance
Highlights 2004 edition); along with many small companies including primary insurers offering reinsurance.
The world’s top 10 reinsurance companies listed in order of net premium volume (year 2006) is given in table
7.1 (Source: Swiss Re publication: An introduction to Reinsurance).
• World’s top 10 reinsurance companies listed (In order of net premium volume):
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Property/ Life/ Health

No. Reinsurer Total
casualty
1. Swiss Re 26014 16439 9575

2. Munich Re 24526 16358 8168
3. Berkshire Hathaway 11051 8687 2364
4. Hannover Re 8886 5912 2974
5. SCOR 4520 1907 2613
6. RGA 4346 4346
7. Everest Re 3853 3853
8. Partner Re 3667 3180 487
9. Transatlantic Re 3604 3604
10. XL Re 3151 2592 559
Table 7.1 Top professional reinsurers ranked by net premiums written in 2006
(source: Swiss Re)
7.10 Functions of Reinsurance

There are four main functions of reinsurance as discussed below:
• Finance
An insurance company’s growth may be limited because of unearned premium reserve requirement(s). A
company is forced to put all written premium into a reserve account while still paying business (acquisition)
costs, (agents’ commissions must be paid on written premium). The premium on an annual policy is earned at
the rate of 1/12th per month. Because acquisition costs must be paid immediately, there can be a substantial
drain on surplus, particularly when premium volume is expanding rapidly.
The accounting system used by insurance companies is designed to enhance financial strength, with state
insurance regulators monitoring such items as the ratio of written premium to surplus. A general rule of
thumb used to be 3 to 1, but now 2 to 1 is more often used. A ratio above 2.5 to 1 (varies by Company)
could result in a company being viewed as over extended, leading to rating agency action.
Pro rata reinsurance enables a company to continue to write polices without draining capital and surplus. It
reduces written premium and increases the surplus, by means of a ceding commission recouping pre-paid
acquisition expenses.
• Capacity
The ability to offer significant capacity on any given risk allows an insurance company to compete in the
market. Most companies require greater capacity than their own resources can provide. By reinsuring portions
of risk, through pro rata and/or excess of loss, a company can compete in the market.
A company writing to a maximum policy limit of, say, $10,000,000 could double that capacity by arranging
a surplus share reinsurance treaty. Thus, a $20,000,000 policy can be written with 50% of $10,000,000
ceded to a surplus share reinsurer(s).
Alternatively, a per risk excess of loss contract of $10,000,000 has similar effect. On a $20,000,000 policy,
all losses over $10,000,000 are paid by the reinsurers for a predetermined premium.
• Stabilisation
Insurance companies generally prefer stable year-to-year underwriting results, rather than wide
fluctuations.
Excess of loss reinsurance enables a company to determine the loss it will assume on any one risk, in any
one occurrence, or in the aggregate for the entire year. Thus, losses are stopped at a certain level above
which reinsurers pay.
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• Catastrophe
Surplus needs to be protected against severity of major catastrophe, such as hurricanes, tornadoes, floods,
earthquakes, hail, etc.
Most reinsurance arrangements provide some degree of coverage for these occurrences, but catastrophe
excess of loss specifically addresses the accumulation of small losses, some or all or which would not be
covered under any of the company’s other reinsurance.
7.11 Categories of Reinsurance

Following are the basic categories of reinsurance:
7.11.1 Facultative Reinsurance

• There is no single kind of reinsurance that effectively serves all purposes. While reinsurance contracts can be
categorised in several ways, one basic categorisation is between facultative reinsurance and treaty reinsurance.
Facultative form of reinsurance is the oldest form and still used in certain cases.
• In facultative reinsurance, the primary insurer and reinsurer negotiate reinsurance contract for each risk separately.
There is no compulsion for the primary insurer that it should purchase reinsurance on a policy that it does not wish
to insure. Likewise, there is no obligation on the part of the reinsurer to reinsure proposals submitted to it. That
is why it is termed as facultative. The reinsurer has the option of either accepting or declining a proposal.
• Today, however, facultative reinsurance is used mainly as a complement to treaty (obligatory) reinsurance, in
which entire portfolios of risks are ceded according to standing agreements called treaties; which are much
more convenient and efficient than the facultative method. However, treaty method is not suitable for all risks
and therefore it is still necessary to reinsure some risks facultative.
• Facultative reinsurance may be either proportional or non-proportional type. When seeking proportional
facultative reinsurance, the direct insurer must offer the risk at original conditions: that is, on the same terms
and for the same premium that he himself received from the policyholder.
• Thus, the conditions of the reinsurance agreement largely correspond with those of the original policy, even
though the two contracts are entirely independent. There is no contractual relationship of any kind between the
policyholder and the reinsurer, and thus there is no legal obligation at all between them.
• Facultative reinsurance is now widely used for reinsuring hazardous risks not covered by treaty arrangements,
for the purpose of reducing the insurance in certain area, for reducing the treaty reinsurers’ liability, to augment
risk capacity and to get advice of the reinsurer on risks that are considered new and complicated.
7.11.2 Treaty (Obligatory) Reinsurance

• Treaty reinsurance is also referred to as Obligatory reinsurance. In Treaty reinsurance, the direct insurer is
obliged to cede to the reinsurer a contractually agreed share of the risks defined in the reinsurance treaty; the
reinsurer is obliged to accept that share; hence the term obligatory.
• In the treaty reinsurance there is a prior agreement between the primary insurer and reinsurer whereby the former
reinsures certain lines of business in accordance with the terms and conditions of the treaty and the latter agrees
to accept the business that falls within the scope of the agreement.
• An obligation is imposed that all policies that come within the terms of the treaty are required to be placed with
the reinsurer. Similarly, the reinsurer can not decline risks that come within the terms of the treaty. Given that
the treaty reinsurance guarantees a definite amount of reinsurance protection on every risk which the primary
insurer accepts, treaty reinsurance works out to the cheaper than the facultative reinsurance.
• Treaty reinsurance has become popular with primary insurers because of its several advantages over facultative
reinsurance. As the reinsurer has to necessarily accept all business that falls within the terms of the treaty, the
primary insurer, with no prior consultation with the reinsurer, can underwrite, accept and reinsure such business
on each application submitted to him.
• As a rule, treaty reinsurance is terminable on an annual basis. Because of the absence of prior negotiations
with the reinsurer, the transaction cost on each policy is lower under treaty reinsurance than under facultative
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reinsurance.
7.12 Types of Reinsurance

Following are the basic types of reinsurance:
Both forms of reinsurance (facultative and treaty) may be either proportional or non-proportional in type.
Treaty
Reinsurance
Pro Rata Treaties Excess of Loss

(Proportional Reinsurance Treaties
Reinsurance) (Non-proportional
Reinsurance)
Quota Share Surplus Share

Reinsurance Reinsurance
Fig. 7.2 Basic types of reinsurance
7.12.1 Proportional Reinsurance

• In all varieties of proportional reinsurance, the direct insurer and the reinsurer divide premiums and losses
(claims) between them at a contractually defined ratio. According to the type of treaty, this ratio may be the
same for all risks covered by the contract (quota share reinsurance), or it may vary from risk to risk (all other
proportional reinsurance types).
• In all cases, however, the reinsurer’s share of the premiums is directly proportional to his obligation to pay
any losses. For example, if the reinsurer accepts 75% of a particular risk and the direct insurer retains 25%, the
premium is apportioned at a ratio of 75:25.
• There are two kinds of treaties in the proportional reinsurance category:
Quota Share Reinsurance

• Reinsurer assumes an agreed-upon, fixed quota (percentage) of all the insurance policies written by a direct
insurer within the particular branch or branches defined in the treaty. This quota determines how liability,
premiums and losses are distributed between the direct insurer and the reinsurer.
• The quota share arrangement is simple as well as cost-effective. The disadvantage is that it does not sufficiently
address the direct insurer’s various reinsurance requirements, since it measures everything by the same yardstick.
These treaties cannot be used to balance portfolios; that is, they do not limit the exposure posed by peak risks
(i.e. high sum assured risks). Such a treaty may also provide covers where strictly speaking none is needed;
thus restricting the direct insurer’s profit-making options.
• However, quota share reinsurance is suitable for young, developing companies or new companies to a certain
class of business. As their loss experience is limited, they often have difficulties in defining the correct premium;
with a quota share treaty, the reinsurer takes the risk of any correct estimates. It is also suited for limiting the
risk of random fluctuation and risk of change across an entire portfolio of risks.
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Surplus Reinsurance
Surplus reinsurance is more sophisticated form of proportional reinsurance. In this case, the reinsurer does not
participate in all risks; as in the quota share treaty. Instead, the direct insurer himself retains all risks up to a certain
amount of liability (his retention). This retention may be defined differently for each type (class) of risk.
The reinsurer will accept the surplus: the amount that exceeds the direct insurer’s retention. This limit is usually
defined as a certain multiple of the direct insurer’s retention, known as lines. For each reinsured risk, the ratio that
results between the risk retained and the risk ceded is the criterion for distributing liability, premiums and losses
between the direct insurer and the reinsurer.
Surplus reinsurance is usually arranged in terms of number of lines of retention. The amount retained by the ceding
company for its own account is called the net retention or a line. Thus a surplus treaty may be of ten or twenty lines
capacity, which means that the ceding company can assume cover on risks with sums insured ten or twenty times
its own retained line.
The main advantage to the primary insurer of the surplus share treaty is the avoidance of ceding insurance on small
loss exposures as he can afford to retain them. The primary disadvantage in comparison with quota share treaty is
the increased administrative expense.
7.12.2 Non-Proportional Reinsurance: Excess of Loss (XL) Reinsurance

• Non-proportional reinsurance is structured like a conventional insurance policy: the reinsurer pays all or a
predetermined percentage of the claims which fall between a defined lower and upper cover limit. For the parts of
claims below or above limits, the primary insurer has to carry the risk on its own or it may reinsure it under other
contracts. Different to proportional reinsurance, the premium is set independently of the original business.
• Non-proportional reinsurance arrangements are characterised by a distribution of liability between the cedent
and the reinsurer on the basis of losses rather than sums insured, as in case of proportional arrangements. In
fact, no insurance amount is ceded under excess of loss treaties; what is ceded is losses and premiums. As
compensation for the cover granted, the Reinsurer receives part of the original premiums and not part of the
premium corresponding to the sum reinsured as in proportional reinsurance. The following common characteristics
differentiate them from proportional treaties.
The size of cession is not determined case by case.
Administrative costs are substantially reduced.
Usually there is no profit commission.
Reinsurance premium is worked out on the basis of exposure and past loss experience.
• In this type of reinsurance, there is no set, pre-determined ratio for dividing premiums and losses between the
direct insurer and the reinsurer. The share of losses that each pays will vary depending on the actual amount
of loss incurred.
• The treaty defines an amount up to which the direct insurer will pay all losses; that is the excess point (other
terms used include deductible/net retention/ priority). For his part, the reinsurer obliges himself to pay all losses
above the deductible (excess point) amount, up to a contractually defined cover limit.
• As a price for this cover, the reinsurer demands a suitable portion of the original premium. In defining this price,
the reinsurer considers the loss experience of past years (experience rating) as well as the losses to be expected
from that type and composition of risk (exposure rating).
• Excess of loss (or XL) reinsurance is structured quite differently from the proportional types of treaty discussed
above. Cessions, in case of proportional treaties are linked to the sums insured, whereas in case of excess of
loss reinsurance, it is the loss that is the deciding factor.
• No matter what the sum insured, the direct insurer carries for his own account all losses incurred in the line of
business named in the treaty – up to a certain limit known as the deductible (excess point). The reinsurer pays the
entire loss in excess of this amount, up to the agreed cover limit. Thus, it differs from proportional reinsurance
in that the reinsurer pays only when the loss exceeds the deductible or excess point. When this happens, he will
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pay that part of the loss in excess of the deductible, up to the agreed cover limit.
Classes of Excess of Loss (XL) Reinsurance

• Excess of loss treaties meets the needs of those direct insurers who want reinsurance protection (at least against
large losses); while retaining as much as of their gross premium as possible. However, these insurers are also
‘buying’ a risk that is greater than with proportional insurance, for the reinsurer provides no relief from losses
below the deductible amount.
• Thus, non-proportional insurance covers greatly increase the danger that the direct insurer will actually have to
pay in full, and for his own account, any losses near or at the agreed deductible amount. XL reinsurance has a
much shorter history than proportional insurance, and established itself only after the 1970s. One of the main
disadvantages is that treaty wordings do not explicitly define the way premiums are to be shared by the direct
insurer and the reinsurer.
• Excess of loss reinsurance written on a facultative basis is always per risk or per policy excess basis. Per occurrence
and aggregate excess of loss reinsurance relate to a class of business, a territory, or the primary insurer’s entire
book of business rather than a specific policy or a specific loss exposure. A financial reinsurance agreement can
be written for any of the above types of reinsurance. There are three general classes of excess of loss treaties
(sometimes referred to as non-proportional treaties). They are:
Per risk excess treaty or per policy excess treaty (WXL/R):
A per risk excess treaty is applicable to property insurance; the retention and limit apply separately to each
risk insured by the primary insurer. A per policy excess treaty applies to liability insurance; the retention
and limit apply separately to each policy sold by the primary insurer. The retention under each of these
policies is specified as a rupee amount of loss. Further, the reinsurer is obligated for all or part of a loss to
any single exposure in excess of the retention and up to the accepted reinsurance limit.
Per occurrence of loss treaty (Cat XL):
Per occurrence excess of loss reinsurance gives indemnity against loss sustained in excess of the net retention
of the primary insurer, subject to the reinsurance limit, irrespective of the number of risks involved in respect
of one accident, event or occurrence. This kind of reinsurance when applied to property coverage is called
catastrophe excess and when applied to liability coverage is called clash cover.
Aggregate excess treaty:
Aggregate excess treaties, also called excess of loss ratio or stop loss treaties are not common. They are
used generally in crop hail insurance and for small insurers in other lines.
7.13 Comparative Analysis: Direct Insurers and Reinsurers

The Swiss Re report titled “Understanding Reinsurance” sums up the main points of difference between direct or
primary insurers and reinsurers as given in the table 7.2 below. It demonstrates that the relationship between the
two risk carriers is founded primarily on mutual trust, as is the founding principle of insurance itself, involving the
policyholder and the primary insurer.
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Sr.
Points of Difference Direct Insurer Reinsurer
No.
Company Internal (own staff) and External No external organisation (network

1
Organisation organisation (agents) of individual agents)
Obligation solely to the direct

insurer, for a part of the direct
Contractual Obligation Direct obligation to the
2 insurer’s “guarantee obligation”.
policyholder
No contractual relationship with
the policyholder.
Yes, right to claim is the essence No right to claim for the

Right to claim for
of the contractual relationship policyholder, since there is no
3 policyholder
between the policyholder and the contractual relationship with the
direct insurer. reinsurer.
Makes assessment using

information given by direct
insurer on basis of “Utmost good
Risk assessment of the subject
Risk Assessment faith”. Assessment is based on
4 matter of insurance is done
an entire portfolio from one or
directly before insuring the risk.
more insurance lines, and not
the individual risk (except in
facultative reinsurance).
Normally no direct influence

Directly influences individual risk
on individual risk. However,
through acceptance or refusal;
5 Underwriting policy reinsurer can include participation
and risk distribution through
clauses and exclusions, as well as
selection.
the refusal to grant cover.
Direct contact with the Relies on data from the direct

policyholder and the loss location. insurer. On claim notification,
Claim settlement easier in case of reinsurer transfers the reinsured
life and personal lines business portion of the indemnity to
6 Loss Occurrence (based on sum assured) and the direct insurer. The right to
in case of non-life insurance; participate in claims adjustment
based on loss estimation (motor negotiations may be reserved
insurance) or actual expenses by the reinsurer in case of large
incurred (mediclaim). losses.
Table 7.2 Comparisons between direct insurer and reinsurer
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7.14 Marine Reinsurance

• Reinsurance of Marine Risks: Section 9 of Marine Insurance Act 1963 states that an insurer under a contract
of marine insurance has an insurable interest in his risk and may reinsure in respect of it. Unless the policy
otherwise provides, the original assured has no right or interest in respect of such reinsurance.
• Reinsurance of marine risks may be prompted by several factors. If an underwriter finds that he has an
accumulation of risks on anyone vessel or in any one location, he will obviously wish to reduce his overall liability
to within his underwriting limits and capacity. Also it is possible that he may wish to layoff an undesirable or
doubtful risk, either partly or in full. Moreover, to avoid the effects of major losses, catastrophe reinsurances
are placed which provide protection under the Excess of Loss arrangement.
7.15 Cargo Reinsurance

• One of the commonest forms in which cargo business is underwritten is by means of Marine Open Covers.
Under this arrangement the underwriter automatically accepts from his assured all his shipments coming within
the scope of the Open Cover up to an agreed amount per vessel/conveyance. When a number of Open Covers
are issued, it is quite possible that several clients may be shipping full lines perhaps by the same vessel, and an
underwriter may not know the full extent of his cargo commitments on a vessel before the risk commences.
• Also, advices of shipments which may emanate from several overseas branches and agencies of the insurer are
often communicated to him after the risk has attached. Often the name of the carrying vessel is unknown or
known only after the completion of the voyage. Particular difficulties therefore occur in accumulation control,
especially in case of cargo insurance.
• Under such circumstances, it is not possible for an underwriter with general cargo account to protect himself
against unduly heavy commitments on any particular vessel by means of facultative reinsurance alone. Facultative
reinsurance is affected only in special cases for specific risks, while general protection is obtained by treaty
reinsurance arrangements.
• An underwriter’s entire cargo account may be covered under a Surplus or Excess of Line treaty whereby the
ceding company gives off, generally, on original conditions, all amounts up to a specified maximum, in excess
of the “line” which it retains for its own account.
• The “line” which an underwriter intends to retain for his own account on various classes of vessels and risks,
whether hull or cargo, must be decided with considerable care. The “line” must bear a relation to the underwriter’s
probable net premium income for the year, so that a loss on any one risk shall not unduly strain his whole
underwriting account for the year.
• Alternatively, Quota Share arrangements may be resorted to especially when there is need to create reciprocal
treaties. Specie and registered post sending of valuable items, like diamonds, involve values which are
considerably higher than ordinary general cargo. It is usual to reinsure these risks separately under Surplus and
other treaties and facultative when the treaty limits are exceeded.
• In recent years, non-proportional reinsurances have become more popular than in the past years. The main reason
for this is the increasing use of Excess of Loss treaty under which the ceding office bears all claims arising out
of and due to one disaster of occurrence up to a specified amount. Only when this ultimate net loss (that is, after
taking into account all recoveries whether from the assured or under other reinsurance arrangements) exceeds
the retention limit can the ceding office recover from his reinsurers up to a specified maximum limit.
• On the other hand, an Excess of Loss treaty may protect the ceding company’s gross lines or his net lines after
cessions to Surplus and/or Quota Share. Excess of Loss reinsurance is placed in layers. It protects the ceding
company’s net retained account where the ceding company’s basic reinsurance arrangements are on proportional
basis, to reduce the impact of accumulations and catastrophe exposures.
7.16 Hull Reinsurance

• In the field of marine hull, an underwriter has greater control over his commitments because each vessel or fleet
is evaluated and underwritten individually and not under open covers as usually the case in cargo insurance.
• The demand for reinsurance of facultative basis is confined mainly for limited conditions, usually, Total Loss
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Only. Before making any cession, the underwriter must determine his own net retention for the best category
of vessel, graded down, and obtain Excess of Loss facility. As with cargo interests; the present trend is to move
away from proportional treaties towards Excess of Loss methods of protection.
• However, Quota Share and Surplus treaties are still encountered, particularly for those engaged in domestic or
national markets, but the emphasis is increasingly on Excess of Loss arrangements, particularly for “catastrophe”
covers. Wherever Excess of Loss is the chosen method of protection, the agreement is to pay the excess of an
ultimate net loss to the ceding company in respect of each and every loss or series of losses arising out of the
same “loss occurrence”.
• The hull underwriter must take care to obtain sufficiently high reinsurance limits (advisedly on a vessel basis),
since it must be borne in mind that the hull policy may cover liability risks in addition to physical damage to
the vessel. He should pay special attention to the overall constitution of his reinsurance programme -- both
proportional and non-proportional -- the objective being to obtain most extensive coverage at a cost which
leaves him capable of making a profit on his retained account.
7.17 Common Reinsurance Programme for Indian Business

Main objectives of common reinsurance programme are:
To retain as much business as possible within the country consistent with safety and underwriting safeguards
and prudence.
To obtain the best possible terms for reinsurance placed outside the country.
• The main structure of the reinsurance programme is broadly as follows:
20% Quota Share cessions in each classes of business to GIC which is retained entirely within the country
protected by Excess of loss arrangements.
Net retentions of individual companies.
Cessions up to specified limits to Market Pools in Fire and Marine Hull departments. The Pool cessions are
protected by Excess of Loss covers and retrocede back to the companies and are retained fully within the
country. These Polls have been formed with the primary purpose of increasing the net retained premium
within the country.
First and Second Surplus treaties of the 4 companies (Indian public sector general insurers) which are traded
outside the country by the companies themselves, mostly on reciprocal basis.
Market Surplus treaty to take balance surplus in case of huge industrial risks, large marine cargo commitments
and exposure on high valued vessels.
Any balance after the treaties are exhausted is reinsured facultative. Facultative reinsurances up to specified
limits are absorbed within the country and are protected by Aggregate Excess of Loss cover.
Net retained account of the companies in individual departments is protected by Excess of Loss covers.
The reinsurance programme is reviewed periodically and, within the broad framework of the original programme,
changes are effected to ensure suitable revision of retentions and limits.
7.18 Regulating the Reinsurance

• Every insurer should retain risk proportionate to its financial strengthand business volumes.
• Certain percentage of the sum assured on each policy by an insurancecompany is to be reinsured with the
National Reinsurer. National reinsurer has been made compulsory only in the non-life sector. 3. The reinsurance
programme will begin at the start of each financial. year and has to be submitted to the IRDA, forty-five days
before the start of the financial year.
• Insurers must place their reinsurance business, in excess of limits defined, outside India with only those reinsurers
who have a rating ofat least BBB (S&P) for the preceding five years. This limit has been derived from India's
own sovereign rating, which currently stands at BBB.
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• Private life insurance companies cannot enter into reinsurance with their promoter company or its associates,
though the LIC can continue to reinsure its policies with GIC.
• The objective of these regulations is to expand retention within India, ensure the best protection for the reinsurance
costs incurred and simplify administration.
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Summary
• One of the major risk and capital management tools available to insurers is Reinsurance. Reinsurance
is insurance for insurers.
• More precisely Reinsurance transfers insurance underwriting risk to third-party organisations.
• Reinsurance allows direct insurers to free themselves from the part of a risk that exceeds their underwriting
capacity, or risks which, they do not wish to bear alone, for some reasons.
• Reinsurers deal with professional corporate counterparties such as primary insurers, reinsurance intermediaries,
multinational corporations and their captive insurers of banks.
• Risk is transferred from policyholder to a retrocessionaire, through a series of distribution strategies collectively
• The insurer or reinsurer to which the exposure is transferred is known as a retrocessionaire and the reinsurer
transferring the exposure is called the retrocedent.
• In risk modelling, different forms of quantitative and qualitative analysis are applied.
• Quantitative modelling has to be complemented by the analysis of risks which are less suited to formal
modelling.
• Underwriting is the process of examining, classifying and pricing risks.
• Asset management is part of the risk management process as it delivers portfolio data to risk management and
has to respect limits and guidelines on where to invest.
• The basic principle behind diversification is the “law of large numbers”.
• In facultative reinsurance, the primary insurer and reinsurer negotiate reinsurance contract for each risk
separately.
• Four basic functions of reinsurance are finance, capacity, stability and catastrophe.
• Facultative reinsurance and treaty (obligatory) reinsurance are the two basic categories of
reinsurance.
References
• Giaschi, C. J., 1997. Warranties in Marine Insurance [Online] Available at: <www.admiraltylaw.com/.../
Marine%20Insurance%20Act.htm>. [Accessed 18 June 2011].
• Basic Types of Reinsurance [Online] Available at: <http://fa2f2.voila.net/intro_reinsurance.pdf>. [Accessed 22
June 2011].
• Lala Lajpatrai Collage Of Commerce & Economics. Introduction to Reinsurance [Online] Available at: <http://
www.scribd.com/doc/29209663/Re-Insurance>. [Accessed 22 June 2011].
• Reinsurance [video online] Available at: <http://www.youtube.com/watch?v=mgF2wLgQWfk>. [Accessed 22
June 2011].
Recommended Reading
• Rolski, T., 1999. Stochastic Processes for Insurance and Finance, John Wiley and Sons, p. 654.
• Banks, E., 2004. Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and
the Capital Markets, Wiley, p. 226.
• Thoyts, R., 2010. Insurance Theory and Practice, Taylor & Francis, p. 344.
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Self Assessment
1. Which of these is one of the major risk and capital management tools available to insurers?
a. Reinsurance
b. Insurance
c. Insurance system
d. Insurance companies
2. Reinsurers help the industry to provide protection for a wide range of_______.
a. policies
b. risks
c. threats
d. fluctuations
3. Reinsurance is merely the __________that can help a company reduce its probability of ruin.
a. instrument
b. claim
c. policy
d. risk
4. Large number of small risks are_______, where individual premiums are inadequate to cover individual
losses.
a. pooled
b. funded
c. speculated
d. insured
5. Which insurance was the first great step in the history of the insurance industry?
a. Fire
b. Life
c. Marine
d. Health
6. The need for reinsurance was first felt in ________business.

a. marine
b. property
c. casualty
d. aviation cargo
7. Risk is transferred from ________to a retrocessionaire, through a series of distribution strategies collectively
a. policyholder
b. primary insurer
c. reinsurers
d. company
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8. The insurer’s retention may be expressed as a _________of the original sum insured or a specified quantum.
a. percentage
b. proportion
c. multiple
d. function
9. The reinsurance agreement usually requires the __________ to keep or retain a portion of the liability.
a. policyholder
b. primary insurer
c. reinsurers
d. company
10. Which of the statements is FALSE?

a. The insurer or reinsurer to which the exposure is transferred is known as a retrocedent.
b. Reinsurers also may reinsure some of the loss exposures they assume under reinsurance contracts. Such a
transaction is known as retrocession.
c. Reinsurance is a contract of indemnity, even in life insurance and personal accident insurance.
d. Reinsurance is insurance of the insured risk taken by insurance companies to protect their liability
commitments beyond their limit.
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Chapter VIII
Maritime Frauds and Miscellaneous Features
Aim
• discuss port procedure in detail
• classify the types of ports
• explain the procedure for the clearance of cargo
Objectives
• state the stages of clearance inward of vessel
• illustrate the customs clearance procedure and refund of duty
• explain maritime frauds
Learning outcome
• enlist the stages of clearance outward of vessel
• classify different types of maritime frauds
• highlight the precautionary measures for fraud prevention
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8.1 Port Procedure
A port is the converging point where the sea and inland transit meet. There are two types of ports namely, natural
and artificial. The Important features of a Port are:
• geographical and physical features
• range of tides
• depth of channels
Types of port:
• Overside Craft /barges are used, e.g. Kakinada Port.
• Quay/wharves (cargo goes ashore)
Number of wharves/landing stages (They are provided with berths for loading/unloading).
Facilities for dredging operations to remove silt e.g. Kolkata Port.
Facilities for inward/outward pilotage of vessels to/from the respective berths.
Facilities for stevedoring/ loading and unloading of specialised cargo e.g. Bulk Cargo, Containerized Cargo,
etc.
Facilities for warehousing/storage in bond
Number of cargo terminals
Safety features/arrangements
8.2 Procedure for the Clearance of Cargo

Following is the procedure for the clearance of cargo:
8.2.1 Clearance Inward of Vessel

The stages are as follows:
• Before the arrival of the vessel, the Shipping Agent performs the following tasks:
Advises the local harbour authorities/Port Trust/Steamer Agent
Engages suitable berths
Secures pilot/tugs for Inward /Outward pilotage
Arranges for competent stevedores for the loading / unloading of cargo.
• Vessel enters port (Entered in)
• All necessary documentary formalities are completed (Cleared Inward)
• The master prepares the report (most import document). This gives particulars/description of:
All Cargo carried
Whence loaded and where to be unloaded
Names of Consignees
The report is to be signed before the customs officer and the customs officer attests the report/signatures.
• Customs officer inspects and then issues a bill/certificate of health which is called the pratigue. No cargo is
discharged/passenger landed until the master receives the pratigue.
• The Deck Cargo Certificate is separately issued by customs officials.
• Inward Pilotage includes:
Pilot Tug tows vessel Inward to the designated Berth
Pilotage Charges are calculated and Pilot card handed over to the Port Authority
Pilotage charges are paid by Steamer Agent
• Report signed by Master and countersigned by Customs Officer
• Berthing will depend upon type of cargo and port facilities for loading/unloading
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• Risk of collisions during towing is very high due to port congestion.

• Payment of Tonnage Dues: These charges are levied by port authorities and help towards upkeep of wharves /
port installations, etc.
• Ship register: This is the passport of the vessel and gives
GRT
Port of registration
Name of owner/master/crew and their nationality
• Log Book entries: A master may note protest if there has been damage to cargo by perils of the sea. This is made
as a declaration on oath before a Notary. The protest is substantiated by LOG BOOK details and Underwriters
may refer to these details at the time of claim.
8.2.2 Clearance Outward of Vessel

The stages are as follows:
• Entry outward forms are prepared by the Steamer Agent. They provide details of the Cargo and particulars as
to the vessel’s destination.
• Master’s declaration for vessel outward bound with cargo (declaration that all requirements of the Merchant
Shipping Act have been complied with).
• Special Declaration when vessel sails outward in Ballast.
• Pilotage Dues (Outward) + Tonnage Dues (if pending) to be paid.
• Customs clearance.
• Ship cleared outward and ready to sail.
8.2.3 Documents to be Carried by a Ship

Certificate of Registry is the legal proof of the Vessel’s Nationality. This is also called the passport of the vessel.
• Log Books which are of the following types
Official Log Book: which is required as per the Board of Trade
Ship Log: which is maintained by the Chief Officer and provides details of navigation, damage, during
loading / unloading of cargo, etc?
Engineers Log: which provides details of the fuel consumption, working and repair/ maintenance of
engines?
Refrigeration Log - when the ship carries Refrigerated Cargo like meat, milk products, etc.
• Ship articles which should be carried are:
Crew list and muster roll
Bill of health
Ships copies of bill of lading
8.2.4 Special Features of Loading and Discharge of Cargo

The special features are:
• Loading /unloading is done normally by stevedores in the major Indian Ports. Loading/unloading operations
are performed by the Port Trust
• Special arrangements for bulk cargo/ pallets/containers /crude oil
• Breaking bulk means commencement of discharge
• Forced discharge means compulsory discharge of cargo short of the destination due to extraneous
circumstances
The steps in the loading of cargo are:
• Cargo arrives at the transit shed (Shed Superintendent keeps a record as to the condition and outward appearance
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of the Cargo)
• Mate’s Receipt is issued by the Steamer Agent
One portion with shipper and
Another portion with ship owner
• Preparation of the Bill of Lading on the basis of the Mate’s Receipt
• Stowage in the ship as per the stowage plan which depends upon
avoidance of space wastage and cargo loading / unloading port
lashing and wedging of goods
Ventilation of fruits/coal, etc.
Vessel to be kept on even keel and avoidance of list
Avoidance of taint damage/sweat damage
8.3 Import/Export Procedure

The import and export procedure is briefly described below:
• Export is performed by:
Manufacturers
Export Commission House representing overseas buyers
Export Merchants
Export Agencies who act on behalf of sellers
Govt. Organisations e.g. STC/MMTC, etc.
• The export procedure involves:
Buyer’s enquiry with seller
Seller’s quotation to buyer
Buyer indents/places
Purchase order with seller
Seller’s packing/ forwarding
Shipment to buyer
• Shipment procedure consists of:
Reservation of Space on Ship
Confirmation as to “Alongside Date” for Cargo
Shipping note to Dock Superintendent
Preparation of weight note/measurement note
Handing over of cargo to the steamer agent and obtaining the mate’s receipt
Payment of Port dues which include charges for cranes etc.
Preparation of customs specification and classification as per I/E List
Preparation of Bond Warrant for goods shipped from Bond.
Ship owner assesses freight and shipper pays freight charges as per freight note
Obtaining Bill of Lading in return for Mate’s Receipt
Arrange Insurance as per Sale contract
Cargo passes into the hands of ship owner/steamer agent and loaded as per procedure
Preparation of Shipping documents and negotiation of the documents through Bank
• The shipping documents which are important include:
Bill of exchange
Sale invoice and packing list
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Bill of lading
Insurance policy/certificate/cover note
Certificate of origin (if required)
Consular Invoice (if required): This is prepared as per the requirements of customs authorities of the importing
country and must be signed by the consulate of the exporting country.
• Documents required for Import are:
Enquiry
Quotation
Order (Purchase Order)
Order confirmation
Catalogue/Technical literature/Drawing etc. setting out the specifications/dimensions, etc.
“Letter of Credit” established by the importer in favor of the supplier with amendments thereof (wherever
applicable) or other documents setting out the ‘Terms of Payment’ such as D/P, D/A, advance payment,
etc.
Commercial Invoice of the supplier
Packing List/Weight and measurement list giving gross/net weight
Analysis “report/Manufacturer’s Test certificate etc. and / or independent Inspection Agency’s Certificate
Bill of Lading/Airway Bill and/or Freight Certificate
Insurance policy with premium receipt
Certificate of Origin
Importer’s Declaration
Copy of Industrial License – such as DGTD / SSI certificate wherever applicable
OGL declaration wherever applicable
Valid ‘ Import License’
Not manufactured in India Certificate etc.
• The above documents are required by the customs/port authorities:
To satisfy themselves that the import is the result of a bonafide commercial transaction.
To study the description of goods, specifications, etc. and ensure that the goods are authorised to be imported as
per the ‘Import Trade Control and other regulations in force’, quantity/ value wise and description wise.
To arrive at the ‘correct CIF value of goods’ for the assessment of customs duty and for valuation
purposes.
To ensure that no under/over invoicing has taken place in the entire transaction and the CIF value is in
accordance with the price prevalent ‘in internal markets’.
To arrive at the correct Customs Tariff heading and ‘Classify’ the goods accordingly for the ‘Levy of
duty’.
Goods are discharged from the vessel into the custody of the Port Trust and released after the payment of
Port Dues/ Customs Dues, if any.
8.4 Customs Clearance Procedure and Refund of Duty

• When any imported goods are removed from the customs area, directly on the payment of duty for use or
consumption, the clearance is known as “Home Consumption”.
• When any imported goods are not required immediately for use or consumption after landing, such goods are
permitted to be deposited in a warehouse, without payment of duty, for subsequent clearance on the payment of
duty. In such cases, the goods may be deposited in a customs bonded warehouse, a private bonded warehouse
or the importer’s own bonded warehouse. When these bonded goods are cleared on the payment of duty, they
are said to be ex-bonded.
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• Whether the clearance is for Home Consumption or Warehousing, the importer of the cargo must file an Import
Bill of Entry with the Customs. The Import Bill of Entry presented to the customs is stamped by them with the
serial number and date and then compared with the Import General Manifest (I.G.M).
• An Import General Manifest is required to be filed by the carrier or his agent for any conveyance arriving at any
customs station (port) in India, giving all details of cargo, etc. on board for discharge and/or on carriage. If the
Bill of Entry is found in order, it becomes acceptable to the customs for assessment, which is in three parts:
Scrutiny of the documents presented (such as the invoice Packing List, Bill of Lading, Insurance Policy,
Import License, etc, with the Bill of Entry).
Appraisement of value of goods.
Determination of classification and indication of the effective date of duty.
• For completing the assessment, the customs may need to examine the goods, test them and/or examine the
contract of sale/purchase, etc. It should be noted that under Section 17 of The Customs Act, there is an obligation
on the customs to complete their formalities without undue delay.
• Assessment of goods declared in the Bill of Entry on the basis of documents produced subject to the examination of
the goods subsequent to the payment of duty is known as the 2nd check appraisement. When the goods are assessed
after examining and testing them and the duty is paid thereafter, it is known as 1st check appraisement.
• The 1st check procedure is followed by the customs in respect of goods which cannot be correctly identified by
physical inspection and are not of the type which are imported regularly.
• The 2nd check procedure is followed by the customs for goods which are well known and can be classified and
assessed readily.
• Appraisement means to fix the price or arrive at the price of the goods for the levy of duty. The assessed price or
value has to be at the place of delivery; hence it will include the cost, insurance, freight and landing charges.
• Under Section 15 of the Customs Act, the relevant date for charging custom duty is as under:
In the case of goods entered for Home Consumption, the rate of duty applicable on the date of presentation
of the Bill of Entry to the Customs.
In the case of goods cleared from a (Bonded) warehouse, the rate applicable on the date of physical removal
of the goods.
In any other case, the rate applicable on the date of payment of duty.
• The assessed bill of entry is then audited by the customs and if found in order, forwarded to the Assistant
Collector for his signature. Some other internal procedures are also completed after which the Bill of Entry is
ready for the payment of duty. Goods released for delivery by customs after the completion of customs clearance
formalities are said to be out of customs charge.
• The custom clearance procedure may be delayed on account of the objections raised by them for various reasons
such as :
Difference in the shipping marks and numbers or number of packages or their serial numbers.
Difference in the description of goods
Port of destination not the same as shown in the documents
Classification differs
Under/over invoicing
Import License not valid
Difference in weight
Catalogue not produced
• The customs may issue a Detention Certificate stating the period and the cause for which the goods were detained
by them, before release (out of charge); but such a certificate is issued only when the goods are sent by them
for analytical tests or they are detained for no fault of the importer or in the event the documents are lost by
customs due to which the goods cannot be released.
• Delay in clearance may also occur due to the following reasons:
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Non-payment of cost of the goods by the importer to the bank for the latter to release the original
documents.
Importers or their agents’ laxity in completing the procedures.
Goods not traceable.
Congestion at the port.
Survey procedures.
Funds not readily available for the payment of duty.
8.5 Maritime Frauds

• Over the last five decades, numerous incidents of maritime frauds have come to light and many traders all over
the world have lost vast sums of money. Sellers, buyers, ship owners, insurers, bankers in these countries and
other areas of the world have also suffered major losses. As a percentage of the value of the total worldwide
sea-borne trade transactions, the incidence of maritime fraud would not appear to be high, but the problem is
very serious and it is increasing. If not controlled, it will jeopardise the entire system of maritime trading.
• An international trade transaction involves several parties – the exporter, importer, ship owner, charterer, ship’s
master, officer and crew, insurer, banker, broker / agent, freight forwarder, etc. Maritime fraud occurs when one
of these parties succeeds, unjustly and illegally, in obtaining money or goods from another party connected in
the carriage, trade and financial obligations.
• In some cases, several of these parties act in collusion to defraud another. Banks and insurers are generally
the victims of such frauds. In some examples of suspected fraud, there may not “technically” be any illegal
action involved, but one of the parties may nevertheless have defrauded another by purposely confusing
and misrepresenting facts. For example, in documentary frauds, where there is manipulation of documents,
perpetration of frauds is both frequent and easier.
8.5.1 Types of Maritime Frauds

Maritime fraud has many guises and its methods are open to infinite variations. The majority of these crimes can
be classified into four groups:
Scuttling Frauds
• Also known as “rust bucket” fraud, this involves deliberate sinking of vessels in pursuance of fraud against both
cargo and hull interests. With occasional exceptions, these crimes are committed by ship owners in a situation
where a vessel is approaching or has passed the end of its economic life, taking into account the age of the
vessel, its condition and the prevailing freight market.
• The crime can be aimed at hull insurers alone or against both hull and cargo interests. A dishonest owner may
either pay his own crew to scuttle the ship during the course of voyage, or he may hire a different crew who
will be paid to sink the vessel. Divers can operate effectively only at relatively shallow depths, whereas in the
oceans there are “deeps” or “trenches” whose floor is far beyond reach by ordinary devices. It usually into one
of these inaccessible areas that a scuttled ship will settle.
• On the other hand, if the scuttling crew is unable to reach a suitable place, the ship’s position will be finalised in
the casualty report in order to mislead investigators. Alternatively, the scuttling may take place in deep waters
off the coasts of countries where there is absence of law and order the objective being to hamper investigations
under such conditions.
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Documentary Frauds
• The work of FERIT did much to reveal the nefarious activities of the scuttlers. In response to this, the fraudsters
turned their attention to a variation of this practice which does away with the potentially risky business of actually
sinking a ship. This is what has come to be known as a “documentary fraud” which involves the manipulation of
the relevant documents, letter of credit, certificates of equality, certificate of origin, invoices and packing lists,
bills of lading, all may be manipulated in the successful preparation of a documentary fraud.
• This type of fraud involves the sale and purchase of goods on documentary credit terms, and some or all of
the documents specified by the buyer to be presented by the seller to the bank in order to receive payment,
are forged. Bankers pay against documents. The forged documents attempt to cover up the fact that the goods
actually do not exist or that they are not of the quality ordered by the buyer.
• The documents are presented to the bank for the payment of the credit in the normal manner. After checking the
details against those required by the credit, the bank releases the funds, believing that the documents presented
are genuine.
• When the unfortunate purchaser of the goods belatedly realises that no goods are arriving, he starts checking,
only to find that the alleged carrying vessel either does not exist or was loading at some other port at the relevant
time. It is a sad fact that the use of forged documents has become increasingly popular over the last decade.
This can be attributed to the simplicity by which documents can be forged and the small expenditure required
by the fraudsters.
• It is unfortunate that fraudsters exploit the concept of trust which has been such an important and integral part
of international trade. Though their activities are most often directed against insurers, traders, banks and the
like, their crimes are economic in nature and must thus be treated as an attack on the state. This situation can
pose a very serious threat to those developing countries which can least afford it.
Cargo Thefts
• In a typical example, the vessel having loaded a cargo, deviates from its route and puts into a port of convenience.
Such ports are Tripoli, Beirut, Almina, Jounieh, Ras Salaata and others along the coasts of Greece, Lebanon
and Syria.
• Such deviation relies of course on the existence of suitable ports at which to illegally discharge the cargo. The
cargo may be discharged and sold on the quayside or in a more sophisticated manner. Such an act is often
accompanied by a change of the vessel’s name or a subsequent scuttling in order to hide the evidence of theft.
• The whole process of investigation is proved difficult, as, by the time the loss is known, the cargo disappears
and the actual recovery of goods is unlikely. The owners of these ships are “paper companies” set up a few
days prior to the operation.
• The International Marine Bureau holds a data bank listing the viability and track record of ship owners, charterers
and companies involved in illegal deviations. In every case, prudence should be applied. Since the essence of
these crimes is the use of falsely registered vessels, cargo owners and underwriters should check in on the vessel’s
pedigree and the ship owner’s back-ground. One should be wary of offers involving low freight charges.
Fraud Related to the Chartering of Vessels

• This is also known as Charter-Party fraud. The chartering of vessels presents considerable scope for the fraudulent
operator. Establishing a chartering company requires modest initial financial commitment and is usually subject
to little regulations. In the present depressed conditions of the shipping market, there is no heavy demand on
tonnage and owners, anxious to avoid laying up their vessels, are tempted to charter them to unknown companies
without demanding any substantial financial guarantee for the performance of the charter contract.
• The fraudulent charterer can turn this situation to his advantage. Having chartered a vessel from an unsuspecting
owner, the Charterer canvasses for cargo. Knowing that in a depressed economy, shippers will be willing to
cut corners in the hope of reducing transport costs and thus saving on freight so that their goods can be more
attractively priced, the charterer offers low freight rates on a pre-paid basis. He can afford to do that, as he has
no intention of completing the contract of affreightment.
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• Soon after the vessel sails from the port, the charterer disappears. One might call him a “fly by night operator”.
Perhaps he may have paid his first month’s hire or he might not have paid any hire charges as are due from him.
Meanwhile the ship owner may find him with substantial bills to meet from the port authorities along the ship’s
route, as well as for the crew’s wages and for provisioning the ship.
• Worse, the ship owner may find that his ship, not having delivered the cargo to the consignees, has been arrested,
and this leads to a protracted and expensive legal wrangle.
• The problems connected with charter-party fraud have been resolved in various ways. Sometimes the shippers
will agree to pay a freight surcharge to get their goods to destination. Sometimes they will agree to a diversion
and a sale of the goods to cover costs, and then start the export process all over again.
• Sometimes when no such compromise can be reached, the ship owner will instruct the master to divert his ship
and sell the cargo wherever he can, and thus becomes as much of a criminal as the charterer.
8.6 Prevention of Maritime Fraud

Common Characteristics of Maritime Frauds are as mentioned below.
• In a majority of the incidents of fraud, the buyer of the goods has been initially attracted by exceptionally
favourable prices and conditions quoted by the seller.
• In these cases, there is a clear notion of “apparent bargain”, and this fact seems to account for the trader’s neglect
of precautionary measures to avoid fraud.
• A study of cases reported and examined have indicated the following common features:
A majority of vessels involved
have been over 15 years of age
were on a single – voyage charter
Belonged to single – vessel owners (singletons) although in some cases a common management was
established.
• Quite a few of the vessels changed ownership just before the incident or shortly afterwards. This often involved
a change of name, sometimes several times, of the vessel. This is also called the Paint Brush Policy.
• There was a geographical pattern to the losses confined initially to South East Asia and the Far East. However,
this pattern has changed and will continue to change in the future.
Precautionary Measures for Fraud Prevention

There are certain fundamental precautionary measures those commercial parties should be aware of and certain
procedures of international trade that they should clearly understand. The following paragraphs set out these basic
elements of precautions with respect to the different parties involved namely:
• Exporters and Importers
• Embassy Commercial Sections and Chambers of Commerce
• Freight forwarders
• Banks
• Insurance Companies
• Vessel Owners and Charterers
• Maritime and Port authorities.
Exporters and Importers

Some of the more obvious losses and additional charges/expenses that shippers or consignees may have to incur as
a result of maritime fraud perpetrated on them are:
• Delay in delivery of goods resulting in loss of market and dissatisfied customers.
• Where goods do not arrive directly at destination port or are carried to another port.
Storage charges at that port and forwarding charges from the same to the destination port.
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Additional freight surcharges, whether or not the goods are transshipped, to bring them to their
destination.
• Physical loss or damage to the goods during transit, trans-shipment and onward carriage operations.
• Cost of “buying back” or retrieving the goods after they have been “sold” to third parties at a port other than
the destination port.
• Total loss of the goods resulting from their “disappearance” following the arrest of the vessel or fraudulent
sale.
• Possible charges and legal costs involved in the arrest of the vessel and other connected expenses.
The checks and precautions that buyers and sellers can implement to guard against being victims of Maritime Frauds
are suggested below:
• Traders and commercial interests generally should protect themselves by being extremely careful when dealing
for the first time with unknown parties. They should make enquiries as to their standing and integrity before
entering into a binding agreement.
• Shipment should be by well-established shipping lines. In India, shipments on vessels “approved” by GIC should
be preferred. Before “approving” a vessel, GIC makes a close scrutiny of the financial standing reputation,
standards of management, past claims history, ownership, etc. The cargo owner should be wary:
If the freight rate is too attractive
If the ship owner owns only one vessel
If the vessel is over 15 years of age
If the vessel has passed through various owners.
• Concerning the method of payment for the goods, from the seller’s point of view, a documentary credit confirmed
by a bank acceptable to him, provides the greatest safeguard. Should the seller have any doubt about the
authenticity of the documentary credit, he should immediately consult his bank before parting with the goods.
• As far as the buyer is concerned, he should ensure that he receives the documents he has stipulated in his
documentary credit application and against which his bank will have paid on his behalf. In turn, his bank will
look to him for reimbursement. Therefore, it is very essential that the buyer must consider very carefully which
documents he requires.
• An Independent third party document called “report on vessel” can be called for, reporting on the carrying vessel,
verifying its presence at the loading port on the bill of lading date and attesting that the goods as listed in the
bills of lading have actually been loaded on the vessel. In the documentary credits, the name of the organisation
required to issue this “report on the vessel” should be specified, as also the data content of the document. This
is to ensure that the subject cargo is in fact loaded on the specified carrying vessels.
• Conference or national lines bills of lading should be used and marked “Freight Prepaid” with the amount of
the freight clearly stated on the bill of lading.
• Small traders, in particular, would be well advised to seek the services of dependable and well known forwarding
agents. Moreover, an agent at loading and discharge points who is a member of a national association should
be appointed.
• Buyers should attempt to identify whether the carrying vessel is on charter and who the charterers and owners
are. Sellers should take similar precautions.
• When chartered vessels are used, traders should insist on knowing whether chartering is done only through
agents of reputable institutions.
Banks
• Banks are vulnerable to Documentary Frauds as follows:
Presentation of genuine documents but with subsequent fraud by a third party in respect of the goods.
Presentation of fraudulent documents in respect of inferior goods or nonexistent goods.
• In both types of frauds, documents are presented under documentary credits.
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• Banks abide by the “Uniform Customs and Practices for Documentary Credits” issued by the International
Chamber of Commerce (ICC).
• Bankers become victims of maritime frauds, especially when they pay against forged documents for non-existent
cargo supposed to be on a vessel which is scuttled.
• In such a case, the insurer will not pay if they are able to prove that the goods covered under the policy were
never at risk. The bankers will find it very difficult to recover from the openers of the letter of credit, all the
money they had advanced or remitted under the letter of credit.
The following precautions are suggested:

• Bankers should make use of the Lloyd’s Register and Lloyd’s shipping Index and makes their documentary
credit department aware of these publications. Important points to check with regard to the carrying vessel are
ownership, age, size and the position of the vessel at the time the bill of lading was dated.
• If such checks are considered difficult for a bank because of the volume of work involved, then perhaps a
“super-service” at additional cost to the customers should be considered with the actual checks being carried
out by outside agents or brokers retained at annual fees.
• Methods should be evolved for improving documentary credit operations by the application of computerised
and modern business methods.
Insurers
• The CIF purchaser should be advised by the Insurers to instruct the Seller that the goods must be carried on a
vessel approved under the terms of the classification clause. Where the name of the carrying vessel is not known
at the point when the insurance is affected, the policy is made subject to the Institute Classification Clause and
the requirement that the assured must inform the insurers the name of the carrying vessel as soon as the same
is known to the assured.
• In India, the exporter is encouraged to use vessels “approved” by the GIC to carry the export cargo. This system
also applies to import cargo when the carrying vessel is bringing a full load of import cargo to India as also to
imports on vessels from Singapore, Malaysia and the Far East (excluding Japan and Mainland China).
Vessel Owners and Charterers

For vessel owners, to avoid their involvement in incidents of fraud, it is essential for them to make the necessary
enquiries as to the standing and integrity and bonafides of the parties with whom they intend to deal. This should
be done prior to entering into any binding commitments.
The following suggestions are made in this respect:
• Ship owners should seek advice on the prospective time for charters before agreeing to a charter. BIMCO (Baltic
& International Maritime Conference), the Baltic Exchange and similar organisations often assist with enquiries.
Only reputed ship brokers should be used.
• Ship owners should check on the financial status of a charterer, and in certain circumstances should demand a
bank guarantee covering the estimated hire before signing the charter-party.
• Ship owners should ver y firmly resist requests by unknown time charterers for the inclusion of a clause in the
time charter-party that gives the time charterer or their agents the right to sign the bill of lading on behalf of
the master. In fact, the vessel owner should specify in the charter party that bills of lading can only be signed
by the master of the vessel.
• The master should ensure that the cargo signed for, is on board the vessel. Masters should ensure that the cargo
is released only against the original bill of lading. Delivery of the cargo without the presentation of the original
bill of lading renders invalid any defenses or limitations under the contract of carriage, and therefore presents
a considerable commercial risk.
• Where the release of the cargo is requested against a letter of indemnity, such letter of indemnity should cover
200 percent of the CIF value and be guaranteed by a first class bank acceptable to the carrier and owner’s P &
I Club.
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• The master should be advised to radio his position through certain periods of the voyage. For valuable cargoes,
the master should be instructed to report to the Lloyd’s Agents at each port of call giving his estimated time of
arrival (ETA) at the next port.
Maritime and Port Authorities

• They should prevent voyage termination unless the ship owner deposits with reputed agents, money for onward
carriage together with all other handling and insurance expenses. It would be advisable to prevent voyage
termination, and allow the same only in connection with force majeure.
• This could be an effective step towards the control of wrongful deviation where the object of taking a ship from
its planned route is to terminate the voyage at a port where the goods are to be stolen or criminally disposed off.
If effective agreements against such voyage terminations were universally applied, wrongful deviation would
become difficult.
8.7 Documentary Frauds

How they are perpetrated and how they can be prevented:
• In a majority of international trade transactions, certain commercial documents such as the bill of lading, are
treated as documents of title.
• Documentary fraud occurs when one or more parties to the transaction are deprived of goods and / or the
purchase price.
• The buyer and the seller are often separated by political, legal and geographical barriers. The seller is reluctant
to part with the goods until the purchase price is paid. Conversely, the buyer prefers to pay on delivery of
goods.
• The gap between payment and delivery of goods is bridged by the documentary credit system. The buyer instructs
his bank (the issuing bank) to open a letter of credit in favour of the seller.
• The issuing bank instructs the paying bank in the seller’s country to hand over the purchase price when the
seller tenders documents confirming the shipment of goods. In a collection arrangement, payment takes place
in the buyer’s country.
• The seller instructs a bank in the buyer’s country to hand over the documents of title to the goods to the buyer
upon the receipt of payment.
• Both the documentary credit and collection arrangement rely entirely on the honesty of the trading partners and
the system is easily abused.
• A fraudulent seller can cash the letter of credit by presenting bogus documents for a nonexistent cargo.
Alternatively, the cargo can be of lesser quality or quantity.
• Some sellers have gone to the extent of selling the same cargo to two or more parties and collecting money
from all the buyers.
• On the other hand, a fraudulent buyer can present forged bills of lading in a D/P (documents on payment)
transaction and collect the cargo without any payment.
• Although this fact is not recognised or accepted as widely as it should be, fraud is often initiated when commercial
negotiations begin.
• When entering into contact with a previously unknown seller, a prudent buyer will supplement his own experience,
instinct and commonsense with the knowledge of others, including banks, trade circles and organisations such
as the International Maritime Bureau. This information will help the buyer on the credit rating, and the financial
and moral standing of the prospective seller, and his likely trustworthiness in correctly performing his side of
the contract, by delivering the right goods at the right place and at the right time.
• Inability to obtain banking information, or getting information which is as flat and inconclusive as not to inform,
can often signal danger. The impact of the buyer’s own instinct, experience and commonsense should be to
make him suspicious, rather than avaricious, in transactions which indicate need for caution.
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In conclusion, whilst the incidence of documentary fraud shows no signs of abating, there is no doubt that buyers
can go a long way towards reducing their vulnerability through increased care, vigilance and common sense.
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Summary
• A port is the converging point where the sea and inland transit meet.
• Certificate of Registry is the legal proof of the Vessel’s Nationality. This is also called the passport of the
vessel.
• Customs officer inspects and then issues a bill/certificate of health which is called the pratigue.
• When any imported goods are removed from the customs area, directly on the payment of duty for use or
consumption, the clearance is known as “Home Consumption”.
• Also known as “rust bucket” fraud, this involves deliberate sinking of vessels in pursuance of fraud against
both cargo and hull interests.
• There are certain fundamental precautionary measures those commercial parties should be aware of and certain
procedures of international trade that they should clearly understand.
• Documentary fraud occurs when one or more parties to the transaction are deprived of goods and / or the
purchase price.
• For vessel owners, to avoid their involvement in incidents of fraud, it is essential for them to make the necessary
enquiries as to the standing and integrity and bonafides of the parties with whom they intend to deal. This should
be done prior to entering into any binding commitments.
References
• Anderson, P., 1999. The Mariner’s Guide to Marine Insurance, The Nautical Institute, p. 94.
• Noussia, 2007.The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach, Springer,
p. 295.
• Maritime Frauds [Online] Available at: <http://www.documentfraud.org/22-document-fraud-institute.html>.
• The UK Ship Register [video online] Available at: <http://www.youtube.com/watch?v=Hy-vNdP76XI>.
Recommended Reading
• Templeman, 2008. Marine Insurance: Its Principles And Practice, Qureshi Press, p. 140.
• Huebner, S. S., 2010. Marine Insurance, Nabu Press, p. 284.
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Self Assessment
1. Which of these is not a type of maritime fraud?

a. Scuttling of ships
b. Documentary frauds
c. Breakage of goods
d. Frauds in connection with charters
2. Which of the following is not one of the reasons for delay in clearance?
a. Traceable goods
b. Congestion at the port
c. Survey procedures
d. Funds not readily available for the payment of duty
3. Scuttling frauds are also known as ______fraud.

a. rust bucket
b. documentary
c. charter-party
d. maritime

a. Banks are vulnerable to documentary frauds.
b. Bankers should make use of the Lloyd’s Register and Lloyd’s shipping Index and make their documentary
credit department aware of these publications.
c. Bankers become victims of maritime frauds, especially when they pay against forged documents for non-
existent cargo supposed to be on a vessel which is scuttled.
d. Banks abide by the “Uniform Customs and Practices for Documentary Credits” issued by the GIC.

a. A port is the converging point where the Sea and Inland Transit meet.
b. There are three types of ports.
c. Customs officer inspects and then issues a bill/certificate of health which is called the pratigue.
d. No cargo is discharged/passenger landed until the master receives the pratigue.
6. Ship Register is the passport of the vessel and does not give _________.
a. GRT
b. Port of Registration
c. Name of Owner/Master/Crew and their Nationality
d. Deck Cargo Certificate
7. Inward pilotage does not include __________.

a. pilot tug tows vessel inward to the designated berth
b. pilotage charges are calculated and pilot card handed over to the port authority
c. pilotage charges are paid by steamer agent
d. report signed by master and countersigned by customs officer
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8. Which of the following is not a type of log book?
a. Official log book
b. Ship log book
c. Engineers log book
d. Registration log book
9. Export is not performed by_________.

a. manufacturers
b. export commission house
c. customs officer
d. government organisations
10. Who prepares the entry outward forms?

a. Customs officer
b. Steamer agent
c. Local harbour authorities
d. Port trust
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Marine Insurance
Case Study I
International Cargo Transportation Insurance Case
The following case study refers to the international cargo transportation insurance. The case was filed in Supreme
Court of India between United India Insurance Co. Ltd. as the appellant was and was Great Eastern Shipping Co.
Ltd. as the respondent.
The respondent claimant was engaged in the import of sugar and other items. In connection with the import of 12,000
metric tons of sugar from China to Calcutta, the respondent had taken an insurance policy for which the cover note
dated 09/06/1994 and policy was valid from 23/09/1994 and policy was valid from 23/09/1994, i.e. from the date
of issue. The policy was further extended by endorsement dated 28/09/1994 for up-country destinations in India.
Extension of insurance coverage was granted on 28/09/1994.

Relevant provisions of Institute Cargo clause, which was one of the terms of the insurance policy by incorporation
inter alia provided that the policy cover extended to the point of delivery of the delivery to the consignee’s or other
final warehouse, or place of storage at the destination named therein. It further laid down that the cover would expire
on expiry of 60 days after completion of discharge overside of the goods insured from the overseas vessels at the
final port of discharge, whichever occurred first.
The claimant alleged that after taking delivery of sugar, the bags could not be transported from the dock area because
of Durga Puja celebrations as a result of which all activities including transportation facilities virtually came to a
standstill from 10/10/1994. Therefore, all 82,237 bags of sugar were temporarily stored in T-sheds in the Calcutta
port area to en route up-country destinations.
On 21/10/1994, a fire broke out in the godown and destroyed the entire stock of sugar bags. Hence, an FIR was lodged
and the appellant Insurance Company was also informed by the respondent. The appellant appointed two firms of
surveyors. Since, the claim was not settled by the appellant Insurance Company, the responded filed a complaint
before the national consumer commission. Sometime after that the appellant insurer repudiated the claim of the
respondent. The ground taken by the appellant Insurance company for repudiating the claim was that the goods
were destroyed in general storage other than in the ordinary course of transit and it was also observed that what
was covered was transit risk and not storage risk. Therefore, it was held that the claim was not maintainable.
The commission examined the relevant provision and took the view that as per the Institute cargo clause and
extended coverage to the policy on payment of additional amount, the insurance coverage was valid till the goods
were delivered to the final warehouse or the place of storage at the destination. Finally, the appeal was dismissed
by the Supreme Court.
In the present case, as apparent from the Institute cargo clause and the coverage, terms of the policy and the
extended coverage, the intention that appears from the terms and conditions is that the goods were first covered
from the port in China to the destination in Calcutta port and thereafter extended coverage was sought and in that
it was extended to any part of the Republic of India. Since the goods were covered from Calcutta port till the same
reached their destination and they were laying in storage, that would cover the goods by the extended policy and
the insurer cannot defeat the claim of the claimant that the goods once reached the destination at Calcutta the policy
stood discharged.
Case study source: (Source: www.bhojvirtualuniversity.com/ss/sim/llm_pre_pap5_U3.doc)
140/JNU OLE
Questions:
1. Who were the appellant and the respondent in the international cargo transportation insurance case?
2. Why was the transport of goods delayed? Which incident occurred during the cargo transportation and what
was the legal action undertaken?
3. What was the action taken by the Supreme Court in the international cargo transportation insurance case?
Answers
1. The case was filed in Supreme Court of India between United India Insurance Co. Ltd. as the appellant was
and was Great Eastern Shipping Co. Ltd. as the respondent.
2. The transport of the sugar bags were delayed because of Durga Puja celebrations as a result of which all
activities including transportation facilities virtually came to a standstill. All the 82,237 bags of sugar were
temporarily stored in T-sheds in the Calcutta port area to en route up-country destinations. But eventually,
a fire broke out in the godown and destroyed the entire stock of sugar bags. Hence, an FIR was lodged and
the appellant Insurance Company was also informed by the respondent. The appellant appointed two firms
of surveyors.
3. The commission examined the relevant provision and took the view that as per the Institute cargo clause
and extended coverage to the policy on payment of additional amount, the insurance coverage was valid till
the goods were delivered to the final warehouse or the place of storage at the destination. The appeal was
dismissed by the Supreme Court.
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Case Study II
Trans Ocean Marine Cargo Transit Insurance Case
Global logistics is exposed to numerous risks caused by the environment, technology and people. A European client
was insured by a generic company liability policy that covered their whole company (not logistics specific). They
had a relatively minor traffic accident near their destination port in China. They needed assistance to check the cargo,
review documentation with local authorities and ensure the safe onward journey of the cargo.
Whilst attempting to process the claim, they came across various problems. There were delays and increased costs
whilst claim information was collected over different time zones. As the policy was held in Europe, all authorisations
had to come directly from the European client. The claim was minor but the company had a minimum excess fee
payable of 5,000 Euro’s. Due to poor communication, further delays and costs were encountered in arranging local
support in China. The European resources of the client were stretched.
Risk management using Trans Ocean’s marine cargo transit insurance was a structured approach to manage risk
related to threats whether it is physical, financial or legal. When insured with Trans Ocean, authorisations were
given to minimise damage and give peace of mind to the customer. Prompt action and communication were given
through the global and multi-lingual network.
As authorisation was sanctioned by Trans Ocean personnel at the point of the problem, immediate inspection and
reports could take place. There were zero excess payments.
If required, support could be given from regional emergency response teams. All claims were handled and processed
by the insurance team to ensure that resources of European clients were not over compromised. A technical review
and report was also conducted to see if the situation could have been avoided or the supply chain improved for
future shipments.
Case study source: (Source: http://www.transoceanbulk.com/en/case-study.aspx?CaseStudyId=8)

Questions:
1. What problems did the client face while attempting to process the claim?
2. When was the authorisation sanctioned?
3. Which actions were taken after the Trans Ocean insurance was sanctioned?
4. Why was the technical review taken?
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Case Study III
Best Trading Co Pty Ltd
In January 2002, Best Trading Co Pty Ltd contracts with Double Happiness Pte Ltd of Hong Kong for the sale of
15MT of stilton cheese, 15 MT of gorgonzola cheese and 30 MT of cheese spread in jars, all on terms CIF Hong Kong.
Best trading engages Sendit & Hope Forwarders Pty Ltd to arrange for door to door carriage from its Melbourne
cool store to Double Happiness’s Hong Kong cool store.
The consignment of cheese is stuffed into 4 reefer containers by Sendit & Hope at Best Trading’s Melbourne cool
store. The stilton is in one container, the gorgonzola in another and the cheese spread in two others. All of the
cheese is to be carried chilled but the stilton and the gorgonzola are to be carried at much lower temperature than
the cheese spread.
Best Trading fills out an insurance certificate in the standard Institute Frozen Food Clauses A form, issued by
Inherently Equitable Insurance Co., which is in identical terms to the Cargo a Risks form except for Clause 1 which
provides:
1. This insurance covers, except as provided in Clauses 4, 5, 6 and 7 below,
1.1 all risks of loss of or damage to the subject-matter insured, other than loss or damage resulting from any
variation in temperature howsoever caused.
1.2 Loss of or damage to the subject-matter insured resulting from any variation in temperature attributable to
1.2.1 breakdown of refrigerating machinery resulting in its stoppage for a period of not less than 24
consecutive hours
1.2.2 fire or explosion
1.2.3 vessel or craft being stranded grounded sunk or capsized
1.2.4 overturning or derailment of land conveyance
1.2.5 collision or contact of vessel craft or conveyance with any external object other than water
1.2.6 discharge of cargo at a port of distress
The certificate refers to 30MT cheese spread and 30MT “cheese various”. Best Trading sends a copy of the completed
certificate to Inherently Equitable. Sendit & Hope arranges road carriage of the our containers to Melbourne container
terminal where they remain for five days awaiting arrival of the “Platter”, the ship on which they are to be carried
to Hong Kong. During their stay at the container terminal, the settings and Partlow charts on the containers are
monitored by Amnesiac Monitors Pty Ltd. The weather is very hot and unseasonably humid.
On arrival of the “Platter” at Melbourne, the containers are shipped on board and Three Monkey’s Inc, the operator
of the “Platter”, issues a bill of lading naming Sendit & Hope as the shipper. The ship’s departure is delayed for
three days because of engine problems. The weather continues to be hot and humid. Finally, the “Platter” departs
Melbourne.
After departure from Melbourne, the “Platter” experiences further engine trouble necessitating a salvage tow to
Sydney, the next port of call. The vessel is detained there for a week, while 24spares are air-freighted from Singapore
and repairs are undertaken. Sydney is now experiencing hot and humid weather. Finally, the “Platter” departs Sydney.
By the time the vessel arrives in Brisbane, nearly three weeks after leaving Melbourne, the crew members have
noticed an overpowering and unpleasant smell of decay from two of the four containers. Three Monkeys contacts
Sendit & Hope, saying that the ship’s crew is revolting (as, by their smell, are the contents of the containers), and
that the containers should be discharged from the ship in Brisbane. Sendit & Hope contacts Best Trading. Further
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Marine Insurance
investigation reveals three things:

1. that the powerful smell is coming from the two containers containing the stilton and the gorgonzola;
2. that the temperature setting on those two containers is at the level intended to chill the cheese spread;
3. that the temperature setting on the two containers containing the cheese spread is at a level colder than that
intended for the stilton and the gorgonzola.
Best Trading agrees that the two foul smelling containers should be discharged from the ship at Brisbane, saying
that it wishes to protect its commercial relationship with Double Happiness. It also requests the discharge of the two
containers of cheese spread as it suspects it may have been damaged by over chilling. Three Monkey’s discharges
the goods in return for the original bill of lading which had not yet been sent to Hong Kong.
When the containers are opened in Brisbane, it is found that the stilton and the gorgonzola are in an advanced state
of decay. Much, but not all of the cheese spread has frozen solid. When thawed, the frozen cheese spread separates
into a thick curd sludge and an unpleasant astringent whey.
Case study source: (Source: http://www.fpp.edu/~mlas/slo/files/IMLI-Marine%20Insurance%20Law.pdf)
Questions:
1. In January 2002, Best Trading Co Pty Ltd made a contract with which company and for which commodities?
2. For how many days and for what reason is there a departure in the ship from Melbourne?
3. Which three things did the further investigation reveal?
4. Discuss the insurance implications.
144/JNU OLE
Bibliography
References
• Advocate Khoj. Marin Insurance Act, 1963 [Online]. Available at: <http://www.advocatekhoj.com/library/
bareacts/marineinsurance/9.php?Title=Marine%20Insurance%20Act,%201963&STitle=Defensible%20or%20
contingent%20interest>. [Accessed 18th June 2011].
• Anderson, P., 1999. The Mariner’s Guide to Marine Insurance, The Nautical Institute, p. 94.
• Basic Types of Reinsurance [Online] Available at: <http://fa2f2.voila.net/intro_reinsurance.pdf>. [Accessed 22
June 2011].
• Chip Merlin Insurance Subrogation Teleconference 11/16/2010 [video online] Available at: <http://www.youtube.
com/watch?v=2uJkgnDl-B8>. [Accessed 22 June 2011].
• Gauci, G., Marine Insurance 09 . [video online] Available at: <http://www.youtube.com/watch?v=PuMsQsYJ1zQ>.
• Giaschi, C. J., 1997. Warranties in Marine Insurance [Online] Available at: <www.admiraltylaw.com/.../
Marine%20Insurance%20Act.htm>. [Accessed 18 June 2011].
• Goel, K., Marine Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-
• Goel, K., Non-Life Insurance [Online] Available at: <http://www.scribd.com/doc/50915844/9/MEANING-OF-
• Gupta, S. M., Marine Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-02-principles-
and-practice-of-general-insurance>. [Accessed 18 June 2011].
• Info about Insurance. Institute Marine Cargo Clauses-A [Online] Available at: <http://www.infoaboutinsurance.
com/Marine_Insurance.shtml#cargo>. [Accessed 18 June 2011].
• Institute Marine Cargo Clauses [Online] Available at: <http://www.jus.uio.no/lm/institute.marine.cargo.
clauses.a.1982/doc.html>. [Accessed 21 June 2011].
• Insurance Contracts: Good Faith and Bad Faith [video online] Available at: <http://www.youtube.com/
watch?v=WGykHhOwYgQ>. [Accessed 22 June 2011].
• InterLog. Cargo Insurance [Online] Available at: < http://www.inter-log.net/modules/marine_insurance/
marine_insurance_main_p176.htm>. [Accessed 20 June 2011].
• InterLog. Characteristics of Marine Insurance [Online] Available at: <http://www.inter-log.net/modules/
• InterLog. Effecting a Marine Insurance Policy [Online] Available at: < http://www.inter-log.net/modules/
• International Trade Rules: MIA (Marine Insurance Act), 1906 [Online] Available at: <http://www.tradegoods.
com/helper/03rules/rules_301.html>. [Accessed 22 June 2011].
• Knowledge Series. Introduction to Life Insurance [pdf] Available at: <http://www.cifplearning.com/
introduction%20of%20life%20insurance.pdf>. [Accessed 18 June 2011].
• Lala Lajpatrai Collage Of Commerce & Economics. Introduction to Reinsurance [Online] Available at: <http://
www.scribd.com/doc/29209663/Re-Insurance>. [Accessed 22 June 2011].
• Legal Rights under Implied Warranties [video online] Available at: <http://www.youtube.com/watch?v=ePv5
QapHaxs&feature=related>. [Accessed 18 June 2011].
• LES 306 BUSINESS LAW ASU WEST [video online] Available at: <http://www.youtube.com/watch?v=ePv5Q
apHaxs&feature=related>. [Accessed 18 June 2011].
• Magnum Archieve. Marine Insurance Policy [Online] Available at: <http://www.magnumarchive.com/c/
dictionary-of-banking/Marine-Insurance-Policy.html>. [Accessed 21 June 2011].
• Marine Insurance [Online] Available at: <http://www.bostonapartments.com/archive/insure/marine_insurance.
html>. [Accessed 20 June 2011].
145/JNU OLE
Marine Insurance
• Marine INsurance Zone. Principles of Marine Cargo Insurance [Online] Available at: <http://marineinsurance2u.
com/marine-cargo/principles-of-marine-cargo-insurance/>. [Accessed 18 June 2011].
• Maritime Frauds [Online] Available at: <http://www.documentfraud.org/22-document-fraud-institute.html>.
• Noussia, 2007.The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach, Springer,
p. 295.
• Reinsurance [video online] Available at: <http://www.youtube.com/watch?v=mgF2wLgQWfk>. [Accessed 22
June 2011].
• Slideshare. Practice of General Insurance [Online] Available at: <http://www.slideshare.net/iipmff2/chapter-
02-principles-and-practice-of-general-insurance>. [Accessed 17 June 2011].
• SurfIndia. Marine Insurance [Online] Available at: <http://www.surfindia.com/finance/marine-insurance.html>.
• The UK Ship Register [video online] Available at: <http://www.youtube.com/watch?v=Hy-vNdP76XI>.
• Transit Insurance - Moving Glossary - Movers.com [video online] Available at: <http://www.youtube.com/
watch?v=8OoYZ2jjR8o>. [Accessed 23 June 2011].
• wiseGeek. The Principle of Indemnity [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.
• wiseGeek. What is Indemnity? [Online] Available at: <http://www.wisegeek.com/what-is-indemnity.htm>.
Recommended Reading
• Banks, E., 2004. Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and
the Capital Markets, Wiley, p. 226.
• Board, N., 2003. Secrets for Making Big Profits from Your Business with Export Guidelines, National Institute
of Industrial Re, p. 270.
• Bose, C., Business Law, PHI Learning Pvt. Ltd.
• Carr, I. & Stone, P., 2009. International Trade Law, 4th ed., Taylor & Francis, p. 738.
• Hinkelman, E. G., 2005. Dictionary of International Trade: Handbook of the Global Trade Community Includes
21 Key Appendices, World Trade Press, p.688.
• Huebner, S. S., 2010. Marine Insurance, Nabu Press, p. 284.
• Malbon, J. & Bishop, B., 2006. Australian Export: a Guide to Law and Practice, Cambridge University Press,
p. 318.
• Martin, F., 2007. The History of Lloyd’s and of Marine Insurance in Great Britain: With an Appendix Containing
Statistics Relating to Marine Insurance, Macmillan and Co., 1876, p. 416.
• Rolski, T., 1999. Stochastic Processes for Insurance and Finance, John Wiley and Sons, p. 654.
• Sherlock, J., 1994. Principles of International Physical Distribution, Wiley-Blackwell, p.327.
• Soyer, B., 2005. Warranties in Marine Insurance. 2nd ed., Routledge, p. 312.
• Stempel, J. W., 2006. Stempel on Insurance Contracts, Vol.1, 3rd ed., Aspen Publishers Online.
• Templeman, 2008. Marine Insurance: Its Principles And Practice, Qureshi Press, p. 140.
• Thoyts, R., 2010. Insurance Theory and Practice, Taylor & Francis, p. 344.
• Tyagi, L., Tyagi, M. & Tyagi, M., 2007. Insurance Law and Practice, C. Publisher Atlantic Publishers & Dist,
p. 400.
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Self Assessment Answers
Chapter I
1. a
2. b
3. a
4. b
5. c
6. a
7. d
8. a
9. d
10. a
Chapter II
1. a
2. a
3. c
4. a
5. a
6. b
7. a
8. c
9. c
10. b
Chapter III
1. a
2. b
3. a
4. a
5. b
6. a
7. d
8. a
9. a
10. c
Chapter IV
1. a
2. b
3. a
4. a
5. b
6. a
7. d
8. a
9. a
10. a
147/JNU OLE
Marine Insurance
Chapter V
1. a
2. b
3. a
4. b
5. a
6. a
7. c
8. a
9. a
10. a
Chapter VI
1. a
2. a
3. a
4. a
5. b
6. c
7. a
8. a
9. a
10. d
Chapter VII
1. a
2. b
3. a
4. a
5. c
6. a
7. a
8. a
9. b
10. a
Chapter VIII
1. c
2. a
3. b
4. d
5. b
6. d
7. d
8. d
9. c
10. b
148/JNU OLE

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Marine Insurance

This book is a part of the course by Jaipur National University, Jaipur.

The content in the book is copyright of JNU. All rights reserved.

II. List of Figures...........................................................IX

III. List of Tables............................................................ X

V. Case Study.............................................................. 140

VI. Bibliography.......................................................... 145

VII. Self Assessment Answers................................... 147

Chapter VII............................................................................................................................................... 103

Chapter VIII.............................................................................................................................................. 124

• describe historical development of marine insurance

• define meaning of marine insurance

• explain scope of marine insurance

• discuss purpose of marine insurance

• state the subject matter of marine insurance

• define Hull insurance

• discuss the history of marine insurance

• explain marine insurance

• define the types of marine insurance

1.3 Formation of Marine Insurance

1.3.1 First Lloyd’s Act

1.3.2 Second Lloyd’s Act

1.4 Meaning of Marine Insurance

1.5 Maritime Perils

1.5.1 Meaning of Marine Perils

1.6 Assignment of Marine Policy

1.7.1 Kinds of Warranties

Fig. 1.1 Kinds of warranties

• The implied warranty

1.8 Types of Marine Losses

Fig. 1.2 Types of marine losses

Actual total cost Constructive total cost

In case of constructive total loss, the ship or cargo

E.g., a ship dashed against the rock and is stranded

Table 1.1 Actual total cost and constructive total cost

General average Particular average

General average refers to the sacrifice made during

Table 1.2 General average and particular average

The salient features of a contract of marine insurance are as follows:

1.9.1 Role of the Underwriter

the clients get more reliability and benefit.

1.9.2 Fundamental Factors When Underwriting Marine Cargo Insurance

1.10 Scope of Marine Insurance

1.11 Subject Matter of Marine Insurance

Liability Marine Cargo

Fig. 1.3 Categories of marine insurance

1.12 Nature and Functions of Marine Insurance

The perils of the sea

Losses not regarded as Perils of the Sea (Excluded Losses) are:

The marine adventure

A slip in marine insurance

1.13 General Features of Marine Insurance

The Carriage of Goods by Sea Act, 1925

The Merchant Shipping Act, 1958

The Bill of Lading Act, 1855

The Indian Ports (Major Ports) Act, 1963

The Indian Railway Act, 1890 ( Latest Amendment in 1989)

The Carriers Act, 1865

The Carriage by Air Act, 1972

Consequences of any default in obligations by the policyholder.