Unit 5

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UNIT 5 Cargo Insurance Policy

Unit 5 Cargo Insurance Policy

163 Notes __________________ __________________ __________________ __________________

Objectives After reading this unit you will be able to understand: O

The usage, benefits, framework of a cargo insurance policy.

O

Implications of Incoterms in a sales contract and consequential distribution of responsibility in terms of cargo risk, among the trading partners.

O

How to negotiate smartly with the Insurer to tradeoff a good deal on insurance cover at a reasonable premium?

O

The process of settlement of claims of cargo damage or loss in transit.

Dealing with overseas-based buyers or suppliers can be a complex business. Regulatory restrictions, language barriers, political and cultural differences are all factors to consider when a company trades internationally. In these international sales transactions, with cargo generally having to be transported over long distances and being subject to a variety of risks en route, the risk of loss of or damage to cargo is relatively high. If the loss or damage occurs, profitability is lost unless the cargo is covered by insurance. Marine cargo insurance is aimed at removing the financial burden of the risks of loss or damage associated with the transportation of goods between the seller and the buyer, and placing it with specialist insurance companies or so called insurance underwriters. These companies are skilled in assessing risks, and they manage reserve funds, made up of premiums paid by others, out of which those policyholders who incur losses can be reimbursed. With all of these issues to deal with, the additional question of arranging appropriate insurance coverage needs a lot of consideration. In order to provide protection to the goodsowner, an insurance cover is necessary while the goods are

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enroute from the warehouse of the consignor to the warehouse of the consignee. The carrier and other intermediaries, such as the port authorities, warehousing operators, &f agents, etc. have only limited liability during the movement of goods, and therefore, they cannot be held responsible in the event of loss of or damage to the cargo due to a situation which is not in their control, such as manmade accidents, natural calamities (act of god), etc.

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Considering various factors, such as the mode of transport, the nature of cargo, port condition, etc., the seller or the buyer has to select the most appropriate cargo insurance policy suitable to the situation as well as the terms of the contract of sale. The risk covered under a marine cargo insurance policy is governed by the international practice to write policies on standard forms. The Institute of London Underwriters devises these forms. Usually, the insurance policy uses three clauses, namely - Institute Cargo Clauses (ICC), Institute War Clauses (IWC), and Institute Strike Clauses (ISC). A policy with ICC - ‘c’ provides minimum cover for various types of risks associated with international trade, while a policy with ICC - ‘N’ plus IWC and ISC provides maximum insurance cover. Some of the most significant developments in marine insurance had their beginning in a London based coffee house owned by a Mr. Edward Lloyd between 1670 and 1680. Merchants and ship-owners used to gather to discuss insurance and other business matters in this coffee house. Insurance was conducted on an individual and adhoc basis. Those seeking insurance asking reputable merchants (who eventually acted as insurance brokers) to seek other merchants willing to take responsibility for a portion of a marine risk (i.e. provide insurance cover) by writing their names under a statement of the risk on a piece of paper. From this practice the term ‘underwriter’ is derived. Lloyd’s of London, as it is now known, has become a corporation which supplies to its members all facilities required by them in their underwriting businesses. Membership of Lloyd’s is on an individual basis. Expertise and character of individual applicants concerned are subject to stringent investigation

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UNIT 5 Cargo Insurance Policy

by the Lloyd’s Committee. Lloyd’s, together with the insurance companies, forms the ‘London market’, the most important marine insurance market in the world.

165 Notes __________________ __________________

Cargo Insurance issued by various insurance companies and even banks can be tailor made to suit the importer or the exporter’s business needs. Most of these companies employ experienced cargo insurance experts who ensure that the clients are provided with the comprehensive cover they need for a fair market price.

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In a nutshell, a cargo insurance policy helps in:

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1.

Protecting shipments against the uncertainties of international trade transaction.

2.

Selecting a ‘single voyage contract’ or an ‘open policy’ contract for regular shipments.

3.

Giving the option to select either basic or comprehensive insurance protection.

4.

Providing cover for virtually every type of commodity, destination and mode of transportation.

5.

Satisfying all necessary letter of credit requirements.

In addition a cargo insurance policy is normally backed by fast and efficient processing teams of cargo insurance experts.

Transportation of Goods One of the most challenging parts of the cargo insurance management is to understand various modes of transportation available for exports and common terms used in these modes. The most important mode of transport still remains sea transportation being very reliable, cost effective and widespread. Other types of transportation like air transportation, road transportation and rail transportation have their own advantages and are selected on the basis of infrastructure available at the disposal of the exporter at any given time and also time constraints.

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In case of perishable cargo and where it is necessary to send goods quickly even at a higher cost of transportation, air transportation is most popular. Generally air transportation is preferred also for high value products. For smaller distances and for land locked ports of destinations, road transport is one of the most recommended means of transport if it is viable from home country to the host country. Road transport also ensures door-to-door delivery with hassle free transportation but may be costlier when compared to other modes like rail transportation. Additionally rail transport can handle bulk shipments in one single consignment. For example transportation of ‘Soya meals’ from Interiors of Madhya Pradesh to nearest port, the most cost effective means of export is ‘rail’. Rail transport can be a best means of transportation in SAARC countries also where such links are available. However limited availability of railway network and strained relations of India with its neighbor makes it a major bottleneck in efficient utilization of this mode of transportation. Nevertheless in other parts of the world, rail transportation between neighboring countries is highly utilized and finds a major preference vis-à-vis other modes. One example of such a region is NAFTA countries.

Sea Transportation 99% of world cargo in volume terms is moved over the sea. A thorough understanding of the shipping practices is essential for an international marketer. The ocean cargo can be primarily of four types – Bulk, Break Bulk, Neo-Bulk and Containerized. Bulk Cargo: Homogeneous bulk cargo, which is loaded in loose, unpacked form without mark or count, is termed as ‘bulk cargo’. It can either be containerized or stowed in bulk. Examples: Coal, Fertilizers etc. Break Bulk Cargo: Homogeneous or non-homogeneous bulk cargo, which is loaded in, packaged form by count. It can either be containerized or stowed in bulk but always covered by shrink-wrap. Example: Rubber, Steel, Coffee etc.

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Containerized Cargo: Most consumer items are loaded at the premises of an exporter in standard sized metal containers for onward delivery to trucking companies to carry forward to the port and loaded/unloaded using mechanized facility at port. These are termed as containerized cargo. It offers the most safe and efficient mode of transportation but can cost more and many an items cannot be containerized due to its shape and over size. Examples of containerized cargo are Ready Made Garments, Handicrafts, Most consumer items, electronic appliances etc. Many types of automobiles cannot be containerized due to its shapes and size. Neo Bulk: Items requiring specialized vessels. Examples automobiles, wooden logs etc. Types of commercial vessels: A)

Based on Deck Type: Single-deck vessels: Vessels with one continuous deck. Suitable for heavy bulk cargoes like grain, coal, timber, ores and minerals Tween-deck Vessels: Having additional deck below the main deck, running the full length of the ship, these vessels are most suitable for general cargo due to space being divided into separate tiers. The tween decks also provided balanced weight distribution on the ship thereby reducing the risk of damage to the cargo. Shelter-deck Vessels: These vessels have an additional shelter deck over the main deck for providing space for light cargoes. Containerized Vessels: For shipping containerized cargo as part of the multi-modal transport of standard sized metal container. Other specialized Vessels: A number of other types exist for a variety of cargo types. Some examples are refrigerated ships, Oil tankers, Gas Carriers, RORO vessels. RORO vessels are suitable for ‘roll in roll off’ items like automobiles.

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B) Based on Size:

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Handy-size: Ships with 10000- 35000 dead weight (DWT).

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Handy-max: 35000-50000 dead weight.

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Panamax: 55000-80000 dead weight. These have maximum beam of 32.2 meter, which is maximum for a ship to pass through Panama Canal. Mainly carry grain and coal.

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Cape-size: 80000 plus dead weight. Mainly carry ores and minerals, coal, food grains etc.

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C)

Based on Cargo Type: Bulk Carriers: That carries bulk cargo. Tankers: For liquid cargo. Neo-bulk carriers: For specific kinds of cargo. General Cargo carriers: For containers, RORO items etc. Barges: For oversized cargo. These are unmanned vessels, which are towed by a tugboat. Combination Vessels: Carriers designed for various combinations of uses e.g. vessels suitable for certain kind of cargo as well as passengers. Other combinations are also available e.g. dry and liquid cargo vessels.

The Marine Insurance Terminology a)

The assured: The assured pays an insurance premium to the entity (insurer) which is ensuring the cargo, which provides the right to claim compensation in the event of loss or damage arising from any of the risks covered by a particular insurance policy and as agreed. The assured are the buyers of marine cargo insurance who transact goods globally, namely exporters and importers, distributors, indenting agents etc.

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b)

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Underwriter: Underwriters are the sellers of marine cargo insurance policy who may be a local company who may be associated with one of the companies active in the marine insurance field, or they may be underwriting members of Lloyd’s. They are specialists in assessing risks relating to transit cargo. In return for a premium, the underwriters almost ‘takes over’ the whole, or portion, of the assured’s risk. The premium received by the underwriter is used to pay for reinsurance cover as protection against major catastrophes, and to pay for any losses suffered by the assured in terms of the type of cover provided by insurance policy, is used to set aside reserves and meets day-to-day administrative costs and is likely left with a profit as a ‘profit of underwriter’ for carrying the client’s marine cargo risk.

c)

Insurance broker: Ordinary businesses normally lack the necessary expertise and insurance brokers act on behalf of the buyers of insurance to assess the extent of cover which is necessary, that which is available, and whether or not a particular premium rate is reasonable. Insurance brokers are the intermediaries through which insurance business is conducted. Brokers help clients to buy insurance at competitive rates. However, Lloyd’s brokers are the only intermediaries who are permitted to place insurance with Lloyd’s underwriters. There is national insurance broker’s association in each country. These associations can help insurance buyers to approach the good brokers.

d)

Insurance company: Unlike Lloyd’s members, company underwriters are not personally liable for the risks, which they accept. An insurance company employs underwriters who transact business on behalf of the company. There are very few insurance companies operating solely in the field of marine insurance. Those who do are nearly all owned by large general insurance corporations. Many insurance companies have a marine insurance division and may be dealt either directly or through a broker.

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Basic Principles of Marine Insurance (a) Insurable interest of either of the contracting parties: A person may only go for an insurance in a ‘marine venture’ if there is an ‘insurable interest’ - i.e. that the person expects to benefit from the insured status of the cargo under transit and is worried for adverse consequences resulting from its loss or any damage caused to it. Different persons in different role in an international transaction process may have different ‘insurable interest’ in the goods at risk at any one time, e.g. confirming bank which is advancing funds to the exporter under a documentary credit may have an ‘insurable interest’. The insurable interest of the exporter or the importer is obvious but will depend upon delivery terms. Therefore depending upon the trade terms (Incoterms), passing of the insurable interest from one party to another may take place between exporter and importer. One party should always take out the cover on a warehouse-to-warehouse basis. For example, the interest of an exporter contracting on c.i.f. basis is transferred when the ship reaches port of destination. The risk moves from the exporter to the importer, so does the insurable interest. (b) Indemnity: In the event of the assured facing financial loss or having to incur certain expenses arising from the loss of or damage to the cargo caused by any of the perils indicated in the insurance contract, the insurer assures to compensate the assured for the financial loss he / she has suffered. Therefore the contract of marine insurance is also a contract of indemnity. However the assured will only be able to recover such losses from one source. So the result of the principle of indemnity is that of subrogation, i.e. underwriters acquire, in terms of common law, any rights, which the assured may have against third parties such as the carriers.

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Utmost good faith: It is usually practically not possible for a marine underwriter to physically inspect the goods or the carrying means at each stage, which will be used to transport an exporter’s cargo, and so s/he must rely on the integrity of and good faith on the assured to disclose all related facts. For example, an exporter must pack his goods in a manner suitable to withstand the risks of transit (seaworthy packing in case of sea shipments). If s/he declares wrongly to an insurer into believing that the packing of the goods has been adequate when actually it was not adequate, and subsequent damage to cargo occurs, the insurer may refuse a claim. Any non-disclosure of a material fact entitles the insurer to call off the contract, irrespective of whether the nondisclosure was intentional or inadvertent. Therefore, in a contract of marine insurance, both the insurer and the assured must follow the principle of utmost good faith. Before a contract is finalized, the assured must share with the insurer all issues which he/she is aware of and may affect the risk he/she is transferring to the insurer. As another example, the dangerous nature of a particular export product must be declared. The fixation of premium by the underwriters will be based on these disclosed or undisclosed facts.

The Marine Cargo Insurance Policy The basic instrument in marine insurance is the policy itself. The principal purpose of the insurance policy is to define the terms of the agreement between the insurer and the assured. An insurance policy is the evidence of a contract between the insurer and the assured. According to Incoterm c.i.f. the minimum cover which the exporter is obliged to provide his buyer, is the insurance equivalent to the value of c.i.f. + 10% for total loss only. In practice, this is inadequate (as this amount seldom covers import duty and costs such as land transportation at destination, etc.).

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(a) Types of Policies There are following types of marine cargo insurance policies:

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Specific Voyage or Time Policies:

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Also known as facultative policy, it covers a single shipment. Every risk is discussed separately and a premium agreed upon. This approach is time-consuming and would become very tedious for the exporter who regularly enters into export transactions.

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Open policy

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Sometimes, the export contract requires an ‘insurance certificate’ instead of the cargo insurance policy. Regular exporters generally obtain an open cover or open insurance policy with the insurance company. As shipments are made, the exporter gives a marine insurance declaration to the insurance company, based on which company issues the insurance certificate, which is a negotiable instrument. This process saves time for the exporters in taking the cargo insurance policy. Insurance certificates are often, for convenience, issued as evidence of the existence of policies. Under an open policy, all export shipments, within the scope of the insurance, are automatically insured. Details of a particular shipment must be declared when they become known. The open policy provides automatic protection since it frequently happens that a transit commences before the exporter and/or the consignee becomes aware of it. Duty Insurance Policy Once the cargo lands at the port of destination, custom duty is bound to be paid. Custom duties form a major part of the cost of imported goods. In case the cargo is fully or partially damaged during transit from the port to the importer’s warehouse, the c.i.f. value is not sufficient to compensate the actual value of the goods as by this time, the custom duties have already been paid. This additional cost can be covered by going in for a ‘duty insurance policy’. However, claims under a ‘duty policy’ are only payable if the claim is otherwise admissible in the marine cargo policy covering the goods.

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Special Declaration Policy Firms can only take special declaration policy with an annual turnover of Rs 2 crores and above. In this policy, the entire annual turnover has to be declared at the commencement of the policy and the entire premium is paid in advance. This is a sort of the open policy. Further if the assured pay the premium in advance, he gets a discount ranging from 20-50% on the original premium. This policy is suitable for firms having a very large turnover. In such policies, the assured is allowed to make his declarations on a monthly or quarterly basis as agreed. Seller’s Contingency Policy In almost all export transactions where the seller allows credit to the buyer and the goods are exported, for example, on f.o.b. basis, responsibility for the cargo passes to the buyer when the goods are loaded on the overseas vessel. However, ownership does not change until the buyer accepts the cargo along with the documents. Thus, the seller has no control over the conditions of the insurance cover arranged by the buyer beyond f.o.b. terms. In event of loss or damage to the cargo in transit from a peril covered under a marine policy, and the buyer refuses to pay for such loss or damage, the seller could stand to lose financially. Seller’s contingency interest cover can help to prevent this. This contingency cover is arranged as an extension of f.o.b. cover. The seller’s interest cover, in effect, retrospectively reinstates cover, as per the Institute Cargo Clauses, provided for in the policy. It allows the seller to be protected in an area where he has no control over the insurance arrangement.

Information Provided in Cargo Insurance Policy The standard marine cargo insurance policy contains the following information: n

an agreement by the insurer to provide insurance cover in return for the payment of the premium

n

the policy number

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n

the name(s) of the insurer(s)

n

the name of the assured

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the description of the voyage

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the subject matter insured

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reference to the clauses which are to apply.

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n

the value to be covered. This should also include, for example, freight charges, import duty, anticipated profit on the consignment, etc.

n

the premium amount

n

the name or description of the vessel or other conveyance

n

the scope of insurance cover, e.g. ‘all risks including war and strikes’

n

the claims procedure including details of where claims will be paid and in what currency

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Insurance Policy Premium The premium is the amount payable by the assured to the insurer when the policy is issued. Insurance premiums vary according to the extent of cover required, the susceptibility of the cargo to loss or damage, the voyage concerned, the vessel/conveyance used to carry the goods and the assured’s previous claims record. Marine insurance business in India is largely non-tariff based. Although certain guidelines provide chargeable premium rates, insurance companies normally take into account certain important factors while charging the premium rates. The conditions of the insurance policy have a bearing on the premium rates. The wider the cover sought, the more the premium. The nature of goods, their size, weight, and packing are taken into consideration. The quality of the vessel or conveyance is also of great significance. Risks increase considerably when an old or substandard vessel or a vessel of poor classification is used for transporting the cargo. Shipment by such vessels

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UNIT 5 Cargo Insurance Policy

involves loading at a premium rate. Hazardous and fragile cargo attracts a higher rate than normal cargo. The voyage to be undertaken is also an important factor. Some locations may be difficult to reach because of a poor or deteriorated infrastructure or due to trans-shipment during the voyage. The loss experience of the assured if it is favorable to the insurer also enables a discount in the premium rate. In certain cases, excesses or deductibles are imposed to avoid small losses. For higher excesses voluntarily agreed by the assured, a reduction in the premium rate can be given. The loss prevention methods adopted, such as containerized cargo, also merit discount in the premium.

Tips to Remember when Buying Insurance Insurance is obviously not something that a trader needs to buy every day. It is normally a long-term arrangement between the trader’s business and an insurer. Naturally, the insurance seeker will only find out how good a particular insurer is when he really needs them to perform their part of the partnership, i.e. responding to when he have a claim. It is therefore suggested that the insurance seeker take the time to do a little homework before he commits himself to an arrangement with an insurer. The following simple steps can be very useful. When choosing an insurance company, a trader should make enquiries about its background. Questions to be answered are: 1.

Is the insurer a reputed, well-known, financially sound and established name?

2.

Is any of close business associates had a good or bad experience with the particular insurance company?

3.

Has it been ‘rated’ by an independent security-rating agency? (You have the right to ask for this information.). Ratings from entities like ‘Standard & Poors’ and ‘A.M. Best’ are well taken.

4.

Is the insurer licensed in the home and / or host country?

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Do not always accept the cheapest premium options. Many policies fail to provide the client with the full protection required, e.g. the insurance cover may only provide a very low limit of liability protection for the shipments. Sometimes liability claims can take up to ten years to settle and, if the policy limit is not sufficient at the time of settlement, trader may have to pay the balance of the claim himself. Exchange control regulations also create problems in such cases.

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Legal fees in India as well as other countries have become very expensive. It is important to check policy carefully to make sure those legal expenses will be paid in addition to the limit of liability.

Transit Risks The international trade managers need to develop a conceptual understanding of the various types of risks or perils involved in the transit of the cargo. Some of the basic types of cargo risks are categorized in the following manner: Maritime Risks: The possibility of a natural calamity or a manmade event is termed as maritime peril. Natural calamities include events such as earthquakes, flooding of a ship with sea water, volcanic eruptions and lightning, damage of cargo with either sea water or rainwater, whereas smoke, water used to extinguish fire, explosion, fire, piracy, and deliberate damage are manmade perils. Extraneous Risks: It comprises of incidental perils to which the cargo may be exposed during transit, such as faults in loading, unloading of cargo, keeping, carrying. It also comprise of losses due to wrong handling, improper stowage, breakage and leakage, hook and sling damage, contact with pilferage, mud, theft, and non-delivery. War Perils: Risks related to war or war like situations/ incidents, during the war or even before or after the actual war as covered by the Institute War Clauses. These include: n

Capture seizure, arrest, restraint, or detainment of carrier or craft due to above events Note: Confiscation (by customs) of goods being smuggled does not fall under this category and, therefore, cannot be insured.

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War, civil war, revolution, rebellion, insurrection or civil strife, or any hostile act by or against a belligerent power Strike Perils: It includes the perils covered in the Institute Strike Clauses, which includes damage or loss of cargo caused by:

n

Strikers, locked-out workmen, or persons taking part in labor disturbances, riots, or civil commotion

n

A terrorist or any person acting from a political motive

n

Derelict (abandoned) mines, torpedoes, bombs, or other derelict weapons of war

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The Institute Clauses The (UK) Marine Insurance Act of 1906 is the base for marine insurance contracts. Under the legal parameters laid down in this Act, the Institute of London Underwriters have approved various ‘clauses’ defining the risks covered, circumstances excluded, etc. to be incorporated into the insurance policies. Some of these have broad application and are in everyday use. Others are specific to certain trades and categories of goods. The tenets of the Marine Insurance Act, and the Institute Clauses, have been widely adopted amongst trading nations, including India. The standard policy document depicts only the skeleton of a marine insurance contract. It is the clauses, which are incorporated by attachment to the policy, that are the essence of the contract, but the policy may contain, by agreement, specific wordings which extend or restrict the basic cover by imposing, for example, warranties, special conditions, a franchise or an excess. The main coverage provided against risks to any types of cargo is based of Institute Cargo Clauses (ICC) A, B, and C. While these were introduced by the London market as explained above, but have been adopted in India. However, for insurance coverage on internal movements within India,

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Inland Transit Clauses are used. The covers available under Institute Cargo Clauses are summarized below. The main clauses are:

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1.

Institute Cargo Clauses (ICC) which consist of:

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Institute Cargo Clauses (A)

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Institute Cargo Clauses (B)

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Institute Cargo Clauses (C)

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Institute Cargo Clauses (Air)

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2.

Institute War Clauses

3.

Institute Strikes Clauses

4.

Institute Trade Clauses

5.

Additional Clauses

6.

Additional Terms

Exclusions: Normally, underwriters will indemnify a cargo owner against certain occurrences. The major exclusions include: n

misconduct of the assured

n

ordinary leakage or loss in weight

n

inherent vice

n

insufficiency or unsuitability of packing or preparation

n

delay

n

nuclear weapons of war

n

wars

n

strikes, riots and civil commotions

n

insolvency of ship-owners

n

unseaworthiness or unfitness of vessel, container or conveyance

n

radioactive contamination arising from, for example, nuclear fuel or nuclear waste, or any weapon of war employing atomic or nuclear fission.

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Risks Covered in ICC The Institute Cargo Clauses build upon one another in the this way: ICC (C) provides cover against risks; ICC (B) incorporates ICC (C) and provides cover against additional risks; ICC (A) incorporates ICC (B) and provides cover against further risks. Thus, the insurer will incorporate one of Institute Cargo Clauses, i.e. (A), (B) or (C), into an insurance policy, depending on his assessment of the risk and the extent of cover most appropriate in the circumstances. Institute Cargo Clauses (C) These cover loss of, or damage to, the cargo reasonably attributable to the following: n

accident to the conveyance, such as crashing of aircraft, fire, explosion, stranding, grounding, sinking or capsizing, overturning or derailment

n

collision of the vessel, craft or conveyance with any external object other than water

n

discharge of cargo at a port of distress

n

loss of, or damage to, the cargo caused by jettison and general average sacrifice

n

general average and salvage charges.

n

Institute Cargo Clauses (C) are generally used for shipment of bulk cargo.

Institute Cargo Clauses (B) These cover the goods against loss or damage attributable to any one of the risks covered by Institute Cargo Clauses (C) as well as: n

earthquakes, volcanic eruptions or lightning

n

washing overboard

n

entry of water (i.e. sea, lake or river) into the vessel, hold, conveyance, container, or place of storage

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total loss of any pack lost overboard or dropped whilst loading/unloading

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Where necessary, supplementary risk cover can be added, e.g. in respect of theft, pilferage, non-delivery, malicious damage, etc.

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Institute Cargo Clauses (A) These cover the cargo for all risks of physical loss or damage, subject to the above-mentioned exclusions. Institute Cargo Clauses (Air)

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These are similar in scope to the Institute Cargo Clauses (A) except they are used specifically for airfreight. Institute War Clauses The purpose of these clauses is to provide cover against the risks of war/warlike operations or activities. If one were shipping goods to a ‘war zone’, the premium rate would be very high. These clauses are only applicable when goods are being transported by sea or air or international post. This cover does not operate during land transit. Institute Strikes Clauses These cover loss or damage caused by the action of strikers, locked-out workmen and the like. They also cover loss and damage ‘caused by any terrorist or person acting from a political motive’. This, however, does not confer full political risk cover, e.g. a civil war is not covered. Institute Trade Clauses The Institute Cargo Clauses are not used for all types of cargo where there is a special ‘trade risk’ (i.e. related to the specific nature of a product), specialized clauses are used. These clauses have usually been formulated in conjunction with the trade body concerned and are based on the Cargo Clauses. Examples of trade clauses are those relating to the following commodities: coal, oil, corn, flour, frozen meat and produce, raw sugar, rubber and timber.

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Additional clauses These may be added to a policy to ensure cover for specific risks not otherwise insured against in the Institute Cargo Clauses e.g. Malicious Damage Clause, or Institute Replacement Clause.

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Additional terms

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Apart from the printed clauses which may be attached to the insurance policy, there may be typewritten:

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Exclusions

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Warranties, i.e. conditions imposed upon the assured with which he must comply, e.g. ‘Warranted packed in a container’

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Excesses, i.e. a pre-determined monetary amount or a percentage of the shipment value which is deductible from the value of a claim

n

Franchises, i.e. a percentage below which the underwriter will not consider any claim but above which the whole loss will be recoverable. Thus, where a policy contains a franchise clause, the assured must suffer a certain level of loss before any compensation is payable. Once that level is reached, however, compensation is payable in full.

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Malicious damage

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Marine Insurance Claims In order to understand the framework of Marine Insurance claims, a thorough understanding of the Marine Insurance Act, 1963 and Rules for construction of Policy and other statutes having a bearing on claims such as The Indian Carriage of Goods by Sea Act, 1925, the Indian Railways Act, 1890 (as amended), Indian Carriage by Air Act, Merchant Shipping Act, Multi-modal Transportation Act, etc. is required. A claim must be based on a loss, which is caused by a peril insured against in the policy. Claims for losses, which have

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been caused by uninsured perils, e.g. those specifically covered by or excluded in the policy, are rejected. Losses may be one of two types - total loss or partial loss.

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(a)

Total loss can be one of the following Actual total loss: When the assured’s goods are no longer ‘a thing of the kind insured’ or are irretrievably removed from the assurer’s use.

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Constructive total loss: When the cargo is abandoned because their actual loss seems unavoidable, or the cost of recovering the goods would exceed the insured value.

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Total loss of part: When a part of the consignment is fully destroyed but the rest arrives safely at its destination. (b)

Partial loss can either be: General average loss: General average loss refers to intentional partial loss incurred as a result of the voluntary actions of the ship-owner, or the ship’s master, to save the vessel if it is in danger during sailing. The voluntary actions might be, for example: n

jettisoning cargo in order to lighten the ship, which is stranded on a reef

n

pumping water into the ship’s hold to quench a fire

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having the ship towed to port for repairs as a result of engine failure.

Particular average loss: Particular average loss refers to a fortuitous partial loss, which affects a particular cargo owner only, such as the owner of a crate, which was dropped during the loading of the vessel. A claim for a particular average loss is based on the proportion of the invoiced value, which has been lost. This proportion is applied to the insured value in order to arrive at the amount of compensation payable. These contributions are levied pro rata on all the parties who have an interest in the safety of the voyage. These include the owner and/or the charterer of the vessel, the master and crew, and each owner of cargo on board.

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Documentation of Claims To enable claims to be dealt with promptly, the insured or their agents are advised to submit all available supporting documents without delay, including:

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n

Original policy or certificate of insurance

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Original or copy shipping invoices, together with shipping specification and/or weight notes

n

Original bill of lading and/or other contract of carriage

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Survey report or other documentary evidence to show the extent of the loss or damage.

n

Landing account and weight notes at final destination.

n

Correspondence exchanged with the carrier and other parties regarding their liability for the loss or damage.

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Settlement of Marine Insurance Claims Once a damage or loss is discovered, the assured must make every effort to reduce the extent of the loss and / or prevent further loss to the consignment as provided in the policy. These efforts may include re-cooperating barrels, re-bagging, separating wet cargo from dry, etc. Insurance company normally pays reasonable expenses incurred in taking such preventive steps, in addition to the payment of the claim itself. It means that the insurance company expects the assured to act exactly the way s/he would have done if the cargo was uninsured. As stipulated in the Insurance Act, all claims amounting to Rs 20,000 and above are required to be surveyed by a licensed surveyor. The assured should notify the insurance company after these steps has been taken so that the survey of the damage can be arranged quickly, if required. The carrier or his agent should also be notified immediately and advised of the time and place of the survey so that they can be represented. A survey report issued by the surveyors will give a detailed report of the circumstances, nature, origin, cause, and the extent of loss of and damage to cargo.

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It is also necessary that a monetary claim be notified immediately against the carrier, port trust, or any other responsible party in whose custody the shipment was at the time of loss as soon as the loss is known or on taking delivery. This must include the full transit details, a description of the loss of or damage to the cargo, and should state that the carriers or other party will be held responsible for the loss or damage with an indication of the estimated amount of loss.

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After payment of a claim on the basis of a subrogation letter and a power of attorney obtained from the assured, the insurance company proceeds against the carriers or any other responsible party for recovery of the amount as per the laws laid down. If the rights of recovery against the liable parties are not protected, the amount recoverable from the liable party, but prejudiced by the assured, will be deducted from the claimed amount and the balance amount will be paid. In case the amount of recovery prejudiced is not ascertainable, the claim will be settled on non-standard basis for an amount not exceeding 75% of the assessed value of loss of or damage to the cargo.

Summary n

In a complex trading environment which exists today in the global business, getting an insurance cover is inevitable.

n

Depending on the terms of delivery in the sales contract the responsibility of the exporter or importer with regard to liabilities associated with damage or loss of goods in transit, is distributed and it is in the interest of the respective party to ensure that they get compensated in case of any eventuality, in order to minimize the business loss. Therefore a good amount of care is needed while negotiating the sales contract for the terms of delivery of the goods.

n

The framework of the cargo insurance of the goods in transit is a very well defined and complex and is based on the ICC clauses which defines the risks covered in a particular insurance policy and the nature of exclusions.

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Settlement of insurance claims is a very complex issue

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which requires professional help for a business house unless they have large operations and have in-house talent to carry out settlement of claims negotiations with the insurer.

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Review Questions

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1.

Discuss and review the basic principles of marine cargo insurance.

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2.

What are the different kinds of cargo insurance cover are available to

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the insurer? What is the basis for him to choose the best insurance

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policy suited to his requirement?

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3.

What are the precautions an insurer must take while negotiating the premium of a cargo insurance which he wish to buy?