The United Kingdom is a trading nation. In order to trade, goods and other merchandise usually have to travel from one country to another. We buy-in raw materials and components, assemble or manufacture them into something else and then sell them overseas or to shops in our own High Streets. This national and international movement of property gives rise to the need for a particular type of insurance, one that provides cover throughout the duration of the transit, that offers protection from risks peculiar to transit and can be handed on from seller to buyer as the property itself changes hands.
There is no law to make insurance of property in transit compulsory but while property is in transit it is at risk. If the prudent trader did not have the opportunity to buy insurance he would need to set aside a considerable sum of money as a contingency against loss or damage. Indeed without insurance the business of trade would be seriously restricted. Raising finance without insurance would be difficult.
The United Kingdom is recognised internationally as being expert in the field of marine insurance. Lloyds and the London based insurance companies and brokers attract foreign insurance buyers. Traders from other nations can buy their marine insurance from the UK market where underwriters and brokers specialise solely in that class. It earns valuable revenue for our country (invisible earnings).
UK based traders have the advantage of both a World leading marine insurance market in London and, as is becoming more frequent, a local insurance market that is growing in ‘marine’ confidence and looks to sell a comprehensive commercial insurance package that meets all the client’s needs, including marine.
Irrespective of the size or nature of the marine transit risk the marine insurance will be governed by the Marine Insurance Act 1906.
The Marine Policy
As long ago as 1791, Justice Buller said of a marine policy that it was ‘ an absurd and incoherent instrument’. The Marine Insurance Act 1906 (MIA) brought some cohesion and uniformity to the subject since when underwriters, while adhering to the principles of policy construction have generally been left to their own devices with regard to clauses terms and conditions. The following structure does however remain largely in place.
A contract of marine insurance must be embodied in a marine policy in accordance with the Act (MIA section 22). Section 22 goes on to say that the policy need not be issued immediately upon commencement of the risk because it does not matter that the policy is dated after the attachment date. This is because cover is said to have attached ‘..when the proposal of the assured is accepted by the insurer’, (MIA section 21).
The Act goes on to insist upon certain matters appearing in the policy, namely
- The name of the assured must be specified (MIA section 23)
- The document must be signed by the insurer (MIA section 24)
- The subject-matter insured must be designated with reasonable certainty, (MIA section 26) but the section goes on to say that if it is described in general terms then the insurer is deemed to have accepted it and it shall be construed to apply to the interest intended by the assured to be covered.
The Act makes reference to an instrument called a floating policy, (MIA section 29). This is a policy that describes the insured risk in general terms leaving the particular details of a shipment to be declared as and when it occurs.
Thus the sum insured is in the first instance referred to as a maximum limit and later confirmed exactly when the fact is known. Likewise the ship’s name will be filled in together with details of the voyage.
This principle gave rise to the modern day Marine Open Cover whereby risk details are firstly described in general terms and later confirmed by declaration as each shipment occurs. It can be seen that utmost good faith must exist because both assured and insurer have to agree to declare and accept all shipments that fall within the scope of the policy.
The Act insists upon declarations being made in the order of despatch and with their value honestly stated. Honest errors can however be rectified even after loss or arrival.
Marine Policy Conditions
The Marine Insurance Act 1906 (MIA) provides a framework on which marine insurance is based and the policy document hangs, upon this framework insurers are obliged to issue their policies. Within the policy the insurers are free to use such words and other terms as they see fit and most insurance companies, have constructed ‘plain language’ policies that try to meet the demands of the modern insurance buyer.
It is also usual for insurers to use the Institute Clauses – the Institute Cargo Clauses (A) afford the most cover with (C) affording the least i.e.
Institute Cargo Clauses (C)
The (C) clauses provide major casualty coverage during the land or sea transit and tend to be used for cargoes that are not easily damaged e.g. scrap steel, coal etc.
Subject to the policy exclusions and warranties the (C) clauses cover loss or damage to the subject matter insured reasonably attributable to
i. Fire or Explosion
ii. Standing, Grounding, Sinking or Capsizing
iii. Overturning or Derailment
iv. Collision or contact of vessel craft or conveyance with any external objects other than water.
v. Discharge of cargo at point of distress.
The insurance also covers loss or damage to the subject matter insured caused by
vi. General Average
Institute Cargo Clauses (B)
Subject to the policy exclusions and warranties the (B) clauses provide all the cover under (C) and also cover loss of or damage to the subject matter insured reasonably attributable to:
i. Earthquake, volcanic eruption or lightning and
ii. water damage by entry of sea/river water (excluding rainwater)
iii. total loss of package lost overboard
iv. total loss of package dropped during loading and unloading.
These are significant additional coverages. Wet damage from sea, lake or river water and accidents in loading and discharge are covered, but there is no coverage for theft, shortage and non-delivery.
Institute Cargo Clauses (A)
Subject to the policy exclusions and warranties the (A) clauses provide the widest of all three covers and are generally summed up as All Risks of loss or damage to the subject matter insured.
The (A) clauses provide all the cover under both B & C and also:
– Scratching, Chipping, Denting & Bruising
– Malicious Damage
– Non Delivery
– All water damage including rain damage.
The advantage of using Institute Clauses is that they are recognised throughout the world so merely by mentioning the title of the clause traders around the world immediately know the terms and scope of cover provided. Also most of the words and phrases of the Institute Clauses have been elucidated by the courts so their meaning has been clarified.
In addition to using the Institute Clauses insurers also include in their policy wording warranties and other typed or hand written clauses as are deemed appropriate. The Act refers to a warranty as where the assured undertakes that something shall or shall not be done or affirms or negatives the existence of a particular state of facts. “Warranted never left unattended” is a not unusual warranty to find when the assured uses his own vehicle to delivery a high-risk cargo. This is an example of an express warranty.
Marine cargo policies also have two implied warranties (being warranties that the insurer can rely upon to apply without having to express them). These are; 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 to the destination; and that the insured adventure is a lawful one so far as the assured can control, and carried out in a lawful manner (MIA sections 33-41).
What is the duration of cover?
There are two types of marine policy (in addition to being valued or unvalued), namely a voyage or time policy. Cargo is almost always insured on a voyage basis, which means that cover begins when the goods start their journey and ends when they arrive irrespective of how long it takes provided reasonable despatch is followed throughout (Marine Insurance Act 1906 (MIA) section 48).
The Act deals with the issues concerning the moment of attachment, in section 42 and in subsequent sections deals with such matters as alterations to the port of departure and destination. It sometimes happens that a voyage policy is extended to cover a period of time in store, for example London to Rome including 30 days in store after arrival.
For time policies, as the name suggests cover attaches at a particular moment in time. It is necessary to show on the policy the precise minute when cover begins and ends.
Consider the situation of a trader insuring his cargo on a time basis. If the time covered by the policy runs out then cover ceases even though the cargo is on the high seas, or in the air. This would be an unacceptable state of affairs and for that reason cargo is insured on a voyage basis where cover continues until the goods arrive.
These are the two options mentioned by the Act but it will be recalled that the Act also mentions a “floating policy” (MIA section 29). The floating policy is ideal for traders with regular sendings because it sets down the details in general terms of the traders total requirements and then allows him to declare actual sendings against it as they occur. The trader has the satisfaction of knowing that all his sendings that fall within the framework of the policy are covered automatically so that he does not have to make individual arrangements.
The floating policy (or open policy as it is now called), is either written for a period of time, say 12 months or on the basis of “Always open on and after the agreed date and time but within that time frame individual sendings are insured on a voyage basis”. Thus, marine insurance today is most usually written on the basis of a time contract containing individual voyage policies.
If on the last day of the open cover a sending began its voyage then cover would continue until arrival even though arrival will not be until after the time period of the open policy had expired.
In order to show evidence that a single sending has been insured under an Open policy a certificate can be issued that will have typed on it the particular details, e.g. sum insured, voyage, description of the goods and a summary of the insurance conditions.
Setting the sum insured
Section 1 of the Marine Insurance Act 1906 (MIA) says that marine insurance is a contract whereby the insurer undertakes to indemnify the assured in manner and to the extent agreed. Unlike most other classes of insurance that seldom agree a sum insured in advance it is a feature of marine policies that the reverse is true. For most non-marine policies indemnity is more usually based on the actual value lost whereas for marine policies indemnity is based on a value agreed in advance that may be more or less than the value actually at risk.
The Act qualifies this state of affairs by providing a formula by which the sum insured is to be calculated in the absence of ‘..any express provision or valuation in the policy,’ namely;
The prime cost of the property insured plus the expenses of and incidental to shipping and the charges of insurance upon the whole, (MIA section 16). This formula appears in most open marine policies – a term used to describe a policy wherein individual transits are declared usually in arrears and where in the absence of such a declaration carrying an agreed value it could become necessary to revert to the formula in order to arrive at a fair sum insured.
Thus in the absence of an agreed value this formula will apply although as mentioned above, for marine insurance most policies are “valued”. So far as concerns the agreed value, insurers would have an expectation of the value bearing some relationship to its actual value, otherwise the opportunity could be taken by the assured to profit from the loss turning a contract of insurance into a type of gaming device, betting against a successful arrival.
An inflated sum insured is a material fact and failure to declare the fact of inflation could jeopardise a policy.
As though to underline all the other provisions section 17 says that marine insurance is a contract based upon the utmost good faith and if it were not observed by either party the contract may be voided.
MIA sections 27 and 28 deal with the subject of valued and unvalued policies. It confirms that in the absence of fraud the value shown on the policy is conclusive of the insurable value. For unvalued policies where the sum insured is not stated on the policy the insurable value is calculated in accordance with the agreed formula referred to above.
What is the measure of indemnity?
Before discussing the measure of indemnity it is important to mention the fundamental principle underlying the marine insurance policy namely that in order to achieve a claims settlement the loss must be shown to have been proximately caused by a peril insured against. The Marine Insurance Act 1906 (MIA) refers to this principle in section 55 and confirms that insurers are liable for any loss proximately caused by a peril insured against.
The term ‘proximate cause’ means the cause that was most efficient in bringing about the loss. It might not be the nearest in time nor indeed the biggest or most noticeable incident in a chain of events.
In most claim situations there is a single cause that is readily apparent but on some occasions, sometimes as a result of goods being conveyed in sealed sea-going containers where loss and damage remain hidden, there are a number of possibilities and trying to distinguish the proximate cause can be troublesome. For example was the proximate cause of loss ‘theft’ during the course of transit that is recoverable under the policy or ‘short shipment’ that is not?
The Act says that the amount the assured can expect to recover is to the full extent of the value fixed by the policy (in the case of a valued policy) or to the full extent of the insurable value (i.e. the formula, section 16) in the case of an unvalued policy, (MIA section 67). Thus for a total loss the full sum insured or the full insurable value would be payable.
For partial loss (MIA section 71) the Act draws a distinction between the measure of indemnity for goods lost and goods damaged. When part of the consignment 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.
When the whole or any part of the goods is delivered damaged calculating the difference between the gross sound and damaged values at the place of arrival and applying the answer to the gross sound value produces the measure of indemnity.
Another feature of maritime trade is that not only can the property insured become lost or damaged but also irrespective of own damage, the owner of property can be asked to contribute towards the losses sustained by others. In circumstances where other parties sacrifice their property in order to save the overall adventure the loss is said to be general and the costs apportioned between the parties who benefited.
The Act refers to such acts in section 73 and confirms that an assured is able to recover his general average (average meaning loss) contribution providing the goods are insured for their full contributory value.
The right of subrogation
Subrogation is one of the first principles of insurance.
Upon payment by the insurer of a claim the insurer is allowed by The Marine Insurance Act 1906 (MIA), section 79, to stand in the place of the assured to the extent that settlement has been paid. This means that the insurer can take over the interest of the assured in whatever may remain of the goods so paid for and take over all the rights and remedies of the assured in respect of those goods.
It is important to emphasise that where the insurer settles a claim for partial loss he cannot take over the rights etc of the whole consignment but only to the extent that the assured has been indemnified.
In practice the assured is offered to sign over his rights at the time of settlement thus allowing the insurer the opportunity to proceed to recover some or all of his outlay from carriers and other third parties. In the absence of a signed form of subrogation third parties would have no obligation to respond to insurers with whom they had no contract.
Insurers, at the time of commencing cover would have an expectation of receiving a right of subrogation. If the assured has agreed in contract with a road carrier, for example, to waive the right of recovery then this fact is material to an insurer.
On the other hand where an insurer manages to recover more from a third party than he actual settled the claim for, he is required to pass back the difference to the assured and retain only to the extent that he has paid.