FEATURES OF MARINE RISKS AND WARRANTIES IN MARINE INSURANCE

Introduction

“There is no virtue in not knowing what can be known”, says Aldous Huxley. Insurance is no exception to this prescript. Marine Insurance is an essential component in commerce, trade and industry both domestic and international. Without its know-how and the security it affords, expansion and growth of even the most financially secure trading or industrial organization will be stifled and, faced with adversity, the organization could crumble.

 

In the increasingly difficult and highly technical markets of today insurers provide this security with sound financial reserves but it is knowledge and experience that enables active underwriters to recognize the risks that are likely to occur and determine the right cover for the assured. A full understanding of insurance conditionsand market needs enables an underwriter to properly fulfil his role in servicing his client’s needs and come to a harmonious integration of minds as between the insurer and the assured in concluding the insurance contract.

 

Marine Insurance practice and procedure are constantly evolving and changing with times and insurers have to meet the current needs of trade and commerce and maintain economic stability and security in an often unstable financial climate. The complexities of marine insurance underwriting and conditions are particularly intricate to comprehend and more so in recent years with many changes in market practices both domestic and international on one hand and marine insurance covenants on the other.

 

Marine Insurance has had a hoary past tracing its origin to the 12th and early 13th century with the Hanseatic and Lombard merchants who were very much into sea trade. They were forced to migrate to England in the late 13th century in search of a safe haven for their trade. The usages of the Lombard merchants crystallized into a universal body of practices, rules and regulations and these rules and regulations later became part of the English Maritime Law.

 

What really gave impetus to a full-fledged law in respect of marine insurance was the plague and the great London fire of 1666 known as ‘Annus Mirabilis’. The interpretation of the rules and regulations and judicial decisions handed down by courts in course of time led to the enactment of The Marine Insurance Act, 1906 in England and much later The Marine Insurance Act, 1963 in India.

 

A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to maritime adventure, vide Section 3 of The Marine Insurance Act, 1963. The law defines ‘Marine Adventure’ in Section 2 (d) of the Marine Insurance Act, 1963, as any adventure where –

(a) Any ship, goods, or other movables referred to as ‘insurable property’ is exposed to “maritime perils”;

(b) The earning 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”;

(c) Any liability to a third party that may be incurred by the owner of, or other person interested in or responsible for insurable property by reason of “maritime perils”.

 

“Maritime Perils” means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the sea, fire, war or war like activities, 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 be designated by the policy, vide Section 2 (e) of the MIA 1963.

 

Special Features of Marine Risks

By their very nature ships are rarely stationary but more mobile and ambulatory and therefore management is delegated. Ships operate in domestic waters, international waters and environments that are frequently turbulent and hostile and in weather conditions that are most unpredictable. Apart from ocean currents, ships have to navigate through heavy weather and encounter storm, tempest, cyclone, hurricane, sea quakes and other hazards, not to mention fire and mutiny by ship’s crew members and attack by pirates and rovers and aquatic creatures like monstrous whales.

 

Even when they are in ports they are subject to risks that cannot usually be directly controlled by either the ship management nor the officers or crew of the ship. Hence marine insurance both cargo and hull is a class of business quite complex to underwrite. Marine Insurance covers are availed of by even those who consign their goods and commodities by other means of transport such as railway trains and trucks which carry the cargo for reward. What is most essential for marine insurance is that there has to be in place a contract of carriage. The writing of marine insurance is rigorously regulated by a plethora of laws and regulations, some domestic and quite some international, to wit:

(i) The Insurance Act, 1938

(ii) The Marine Insurance Act, 1963

(iii) Carriage of Goods by Sea Act, 1925

(iv) Carriage by Air Act, 1988

(v) Carriage by Road Act, 2007

(vi) Multimodal Transportation of Goods Act, 1993

(vii) Railways Act, 1989

(viii) Institute Time Clauses (Hulls)

(ix) Institute Voyage Clauses (Hulls)

(x) Institute Cargo Clauses

(xi) The Stamp Act, 1899

(xii) York-Antwerp Rules and

(xiii) Hague Visby Rules.

 

The word “Institute” refers to the “Institute of London Underwriters” who draft rules, clauses and conditions that are adopted universally by insurance companies of all nations. In addition,every sea-faring nation has its own set of legal rules and regulations to ensure the safety of its coastal waters, ports and harbors.

 

Shipping operations are classified under three broad groups like :

(i) Liner or Breakbulk Operations – The transport of industrial/commercial shipments on regular or semi-regular services/routes. Container and RO/RO (roll on or roll off ferry) operations have largely replaced traditional breakbulk shipping.

(ii) Bulk Cargo Operations – Where a whole ship is consigned for a single voyage (or series of voyages) to the carriage of a single bulk cargo such as iron ore, crude oil, coal or grains. A bulk cargo may be for a one shipper or a number of shippers and the cargo may be bought or sold during the voyage.

(iii) Specialist Marine Operations- such as support vessels for offshore and onshore and other operations, salvaging, dredging, towage, coastal patrolling, piloting, fire-fighting and others.

 

In the last three decades ship architecture and construction technology have gone through a major transformation, thanks to automation leading to enhanced GRT and DWT. Natural gas has largely replaced coal and diesel as fuel in ships thereby reducing pollution of the environment. Containerization, multi-modular transportation, automation in engine room operations and a high degree of computerization and digitalization of functions which were hitherto done manually, use of the state-of-the-art instruments and mechanisms for ship to shore wireless communication, totally automated cranes with booms which can turn around 360 degrees for loading and unloading operations and others have been installed which have made navigation of voyages of massive ships through very deep waters effortless and smooth, apart from reducing the number of crew members on board the ships.

 

Vessels like bulk cargo carriers, super tankers and crude carriers such as VLCCs and ULCCs with DWT over one million tons have as few as 15 to 25 members. All these features combined with a high degree of volatility and mobility in commercial shipping operations makes underwriting of marine insurance a highly skilled job. It is imperative for the underwriter whether he writes cargo or hull to be fully conversant with the hazards of navigation through the major oceans, seas and other water bodies and fully skilled and understands the geography and climatology and constituents of the risks posed by high seas and oceans. In particular he/she has to be well conversant with the following factors:

(1) Commercial: Routes, ships, nature of cargo carried; port conditions and facilities for loading and unloading cargo; facilities for billeting the crew;facilities for carrying out minor repairs to ships; import-export practices and documentation; functions of excise and customs duty personnel and others.

(2) Technical: Ship’s architecture and design; equipment like wireless and fire-fighting instruments provided; quality of construction of ships especially the engine room and lay out of the holds where cargo is stacked; billets for the crew members; flag the ship flies; tonnage both GRT and DWT of the ship and her classification; law of the sea; nature of cargo the ship is designed to carry; packing of cargo and how it is stowed in the holds; damage from other cargo due to contact or contamination; galley and how it is fitted for making meals for the crew members; emergency medicines etc.

(3) Human: A ship is a miniature world where people of many nations, speaking different tongues and from varied cultures and traditions come together, live together and work together. Hence camaraderie among the members of the crew is very essential. Selection of crew members, how they are trained and supervised; ability to work together (particularly with crew of different nationalities speaking different tongues); social factors of shipboard life; the “culture” of marine life, habits and approach of seafarers.

 

Warranties in Marine Insurance

Warranty in Contract Law: The term ‘warranty’ in its most traditional non-insurance sense is understood as a term of the contract, the breach of which entitles the aggrieved party to damages, but not a right to treat the contract as void. Accordingly, the aggrieved party is still under an obligation to perform the contract despite the fact the contract is breached by the other party. The term ‘warranty’ is also used to refer to certain guarantees given by a retailer under a sale contract. For example, in a contract for sale of a car, the seller might agree to replace parts found to be defective within a period of one year. This kind of guarantee called a warranty is binding on the part of the seller since it forms part of the sale contract.

 

Warranty in Insurance Law: Unlike general contract law, the use of the term ‘warranty’ is rather qualified in Insurance Law. The term is, occasionally, used in some exclusion clauses that intend to limit the liability of the insurer under the policy. For instance, in a clause which is worded “warranted free from seizure and capture”, the warranty means that the insurer is not liable for the perils of capture and seizure.

 

However, the word ‘warranty’, in a technical sense, is used to refer to a certain term of the insurance contract, breach of which has particular legal consequences. With a warranty, one party of the insurance contract, the assured, undertakes certain obligations that need to be fulfilled within a certain time frame and the liability of the insurer, under the insurance contract, depends on the assured’s compliance with those obligations. In this respect, warranties are used by the insurer as a shield against liability.

 

Warranties are quite commonly used in marine insurance policies and The Marine Insurance Act (MIA), 1963 has provided the legal framework therefore. Warranties also appear in all types of non-marine insurance policies. Generally speaking, the rules laid down by the MIA 1963 for marine insurance warranties could also be applied for non-marine insurance warranties. However, there are certain differences that exist between marine and non-marine warranties.

 

First, the implied warranties that have been incorporated in marine insurance policies by MIA 1963 do not exist in non-marine policies. The main reason for this distinction is that non-marine insurance lacks the element of maritime adventure. Accordingly, in non-marine insurance policies warranties must be formulated by express wording.

 

Secondly, in marine insurance it is a statutory rule that an express warranty must be incorporated in the policy by words of reference appearing in the policy itself. This does not, however, appear to be the general rule in non-marine insurance where it is sufficient for an insurer to obtain the signature of the proposer to a declaration in the proposal form which says that “This proposal is to serve as the basis of the contract”, whereupon the warranty is an effective term of the contract, even though not expressly stated in the policy.

 

Finally, it has been observed that courts have a tendency to construe non-marine insurance warranties narrowly so that the scope of the undertaking is restricted. But in marine insurance, despite the applicability of similar interpretation rules, courts are reluctant to interpret warranties in favor of the assured. One possible reason behind this could be the fact that marine insurance market is a place where the demand side is made up of professional people like ship-owners, cargo-owners, consignees, consignors, charterers etc. and they are expected to have a certain amount of knowledge regarding rules and practices which are followed both in domestic and international trade and commerce.

 

Classification of Marine Insurance Warranties

A marine warranty is defined by S 35 (1) of the MIA 1963 as follows :

“……….. 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”.

 

It is clear from this definition that the MIA 1963 has regarded all maritime warranties as “promissory”. The phrase “promissory warranty” is a collective expression for all marine warranties and they are categorized according to different criteria.

(1) Classification of promissory warranties according to the time of undertaking :

Certain warranties relate in time to the circumstances of the risk. For instance,a warranty whereby “the assured declares that the ship-managers have a certain citizenship”, is a warranty of this type. In cases where such a warranty is breached, the insurer never comes on risk and, accordingly, the premium is refundable due to total failure of consideration.

Some warranties undertake that a given state of affairs would be satisfied or avoided at some time after inception of the risk. This kind of warranty is referred to as a “warranty as to future events”. A navigation warranty which requires the insured vessel not to navigate in certain seas during the currency of the policy is a warranty of this type. By virtue of S 35 (3) of the MIA 1963, the breach of such a warranty does not prevent the risk from running and leaves untouched any right that has already vested in the assured at the time of the breach.

An assured with a warranty might undertake that a given state of affairs would not only exist at the inception of the risk but exist during its continuation as well. Warranties of this type are called “continuing warranties”. The implied “warranty of legality” that requires the insured adventure to be a lawful one and be carried out in a lawful manner is a good example of a “continuing warranty”. There could be other warranties which mandate the stowing of cargo in the holds in a given manner so that they don’t shift during voyage. This type of warranty is especially of relevance in respect of cargo stored on the deck of the ship.

(2) Classification of promissory warranties according to the nature of the undertaking :

Depending on the nature of the undertaking, warranties may be divided into “affirmative warranties” and “warranties that need to be satisfied by a positive or negative act”. The ‘affirmative warranty’ affirms or negatives the existence of a particular state of facts, like the warranty whereby the assured warrants that the flag of the insured vessel has always been Indian. The implied “warranty of sea-worthiness”, which requires the insured vessel to be sea worthy at the commencement of a voyage is an example of a warranty of this type. In cases where the assured affirms or negatives the existence of a certain fact with a warranty, and the affirmation or negation is proven to be inaccurate, the insurer never comes on risk.

(3) Classification of promissory warranties according to their structure :

According to their structure, warranties could be express or implied. In fact, this is the classification on which the warranties regime in the MIA 1963 is based. Express warranties appear in the policy or are incorporated therein through reference to them or through endorsement. Under the “doctrine of freedom of contract”, the number and extent of express warranties depend upon the mutual agreement between the assured and the insurer. Implied warranties, on the other hand, are incorporated in certain marine insurance policies by the provisions of the MIA 1963 and, accordingly, their number and scope are determined by the Act.

 

Express Warranties and the necessity for their inclusion in Marine Insurance policies

Section 37 (1) of the MIA 1963 provides that no conventional or technical wording is required for the formulation of an express warranty. An express warranty could be written with any kind of wording, provided that the parties’ common intention is to give the status of warranty to the condition/clause in question. The words “warranty” or “warranted” are, therefore, not essential to formulate an express warranty.

 

To determine whether there was a common intention to incorporate an express warranty in the policy is not an easy task.In the case of HIH Casualty & General Insurance Ltd.v. New Hampshire Insurance Co.and Others (2000),the Court of Appeals, London declared that a term is a warranty:

(a) If it goes to the root of the contract;

(b) If it is descriptive of the risk or bears materially on the risk of loss; and

(c) If damages would be an inadequate or unsatisfactory remedy for the breach.

 

Despite the fact no specific format is necessary to lay down an express warranty, S 37(2) of the MIA 1963 requires a warranty to be included in or written upon the policy or contained in some document incorporated by reference in the policy. Necessity for inclusion of an express warranty is unique to marine insurance and has no application in non-marine insurance. A warranty may be written in any part of the policy document, either at the top or bottom, or transversely on the margin, or on the back. An express warranty does not exclude an implied warranty, unless inconsistent therewith, vide S 37(3) of the MIA 1963.

 

The parties to a marine insurance contract are given a wide range of discretion, not only to lay down an express warranty on any matter but also to determine its scope,range and reach. The express warranties that find a special mention in the MIA 1963 are warranties of good and beneficial safety, nationality and neutrality. Some of the other express warranties that find frequent inclusion are:

(i) Warranties as to geographical limits

(ii) Warranty as to stowage and salvage services

(iii) Warranties as to cargo carried

(iv) Survey warranties and

(v) Premium warranties.

 

Implied Warranties and the purpose they serve Implied warranties do not appear in the policy but are tacitly understood by the parties to the contract. They are implied by law from the circumstances in which the bargain was brought about.

 

Implied warranties are exclusive to marine insurance. They are not found in non-marine insurance. The rationale for this lies in the unique nature of maritime adventure. When a vessel is engaged in maritime adventure, apart from the ship-owner, numerous other interests as such as the crew members, freight, consignees of cargo, consignors, charterers, if any etc. are exposed to maritime perils; however neither the assured nor the insurer is in a position to exactly ascertain the condition of the insured vessel when she is on voyage on high seas despite radio contact between the master and crew of the vessel and the ship-owners. In order to balance the conflicting interests of the contracting parties and minimize the pitfalls of the maritime adventure, marine insurance law has imposed certain implied warranties in marine insurance policies.

 

There are four warranties implied by the MIA 1963:

(i) Warranty of sea worthiness – S 41 (1), (3), and (4);

(ii) Warranty of port worthiness – S 41 (2);

(iii) Warranty of cargo worthiness – S 42 (2);

(iv) Warranty of legality – S 43.

 

Warranty of sea worthiness: The doctrine of sea worthiness was formulated and developed with a view to protect the interests that are exposed to a maritime adventure from the possible hazards of the adventure. Initially, a provision in respect of sea worthiness was inserted into the charter parties of vessels in order to warn merchants who loaded cargo into the holds of the vessel.

 

This provision, however, did not impose any obligation on the ship-owner or charterer of the ship to ensure the sea worthiness of the vessel both at the commencement of the voyage and during the course of the voyage and the merchants who ventured into the sea with their cargo had no recourse against the ship-owner or the charterers of the ship should the vessel meet with disaster primarily because it was not sea worthy.

 

It was in the 17th century that the merchants were afforded a right of indemnity, solely upon proof of the vessels’ unseaworthiness, independent of any fault or negligence on the part of the owner or master. With the enactment of The Marine Insurance Act, 1960 in the UK and subsequently The Marine Insurance Act, 1963 in India seaworthiness of the vessel acquired legal rigor.

 

Section 41 (4) of the MIA 1963 provides that “A ship is deemed to be sea worthy when she is reasonably fit in all respects to encounter the ordinary perils of the sea adventure insured”.

 

Seaworthiness has been further interpreted to mean “ability to withstand ordinary stress of wind, waves and other weather conditions which the vessel might normally be expected to encounter during her voyage”. Another definition of the term has been given by Channel J, who said that “to be seaworthy a vessel must have that degree of fitness which an ordinary, careful and prudent owner would require his vessel to have at the commencement of her voyage, having regard to all the probable circumstances of it”.

 

The required standard of seaworthiness is not absolute, in the sense that it is ‘relative’, among other things, the state of knowledge and standards prevailing at the material time and varies according to the voyage undertaken and the class of the ship. Therefore, the term “seaworthiness” also expands in terms of what it stands for over time to reflect the evolving changes in the technology, standards of ship construction and regular overhaul and carrying out maintenance repairs.

 

The main categories for which the term “seaworthiness” is applicable to are:

i) Structure and other technical equipment of the vessel – the hull, machinery and other mechanical, electrical and electronic equipment, hatches, pipes and pumps, tackle and steering mechanism, temporary defects etc.

ii) Design and construction of the vessel – compliance with the requirements of statutes, and rules of classification societies.

iii) Latent defect in hull and machinery.

iv) Navigational equipment/aids.

v) Certificates and documents necessary for the protection of the vessel and cargo.

vi) Sufficiency of fuel, provisions and medicines.

vii) Efficiency/Competence of the crew.

viii) Stowage and loading.

ix) Pilot.

 

Warranty of port-worthiness: Where a voyage policy attaches ‘at and from’ the place named in the policy, S 41 (2) of the MIA 1963 requires that the vessel while in port must be reasonably fit to encounter the ordinary perils of the port. The term ‘port-worthiness’ does not appear either in S 41 (2) or anywhere in the MIA 1963. It is a term of recent origin. The degree of fitness required to encounter the ordinary perils of the port may vary with according to different factors:

(1) The class of vessel in question can be quite crucial in determining the degree of fitness required. In this sense, while a cargo ship can be considered as port worthy for a specific port. A passenger boat may not.

(2) The degree of fitness may vary from port to port. A lower degree of fitness may be required for a port that is located in a bay than a port that is open to waves and tides of an ocean. A vessel which is port worthy for a certain port during summer season may not be port worthy during winter season. Tides which vary with the moon’s quarters may affect the navigability of a water basin and therefore impact the port worthiness of a vessel.

 

Whether a ship has to be always fit to endure the ordinary perils of the port throughout the period of her stay while ‘at’ port, is an issue that has never been fully answered. As the implied warranty of sea worthiness is applicable only at the commencement of the voyage, it could be said the implied warranty of port worthiness should, likewise, apply at commencement of the risk.

 

Warranty of cargo worthiness: Section 42 (2) of the MIA 1963 defines “cargo worthiness” as the vessel being reasonably fit to carry the goods and other movables to their destination. In terms of this definition, the main factor that has to be taken into account is whether the vessel is in a fit state of repair to receive the cargo contracted for carriage. Not all vessels are fitted out to carry cargo of every description. For instance, if the cargo is frozen meat then the refrigerating machines, holds etc. must be in proper order, hygienically maintained, efficient and fit to receive and carry that particular cargo.

 

A bulk carries which is fit to carry, say food grains may not be fit to carry liquid cargo like edible oil or mineral ore. A plain reading of the warranty indicates that it will be construed in the light of the technical efficiency of the ship, both in design and equipment installed. The voyage undertaken is another factor that is extremely important in determining whether the vessel is cargo worthy or not. While a vessel carrying one type of cargo around the harbor may be perfectly cargo worthy for the voyage, the same vessel carrying the same cargo on an ocean voyage may not be cargo worthy.

 

Warranty of legality: Section 41 of the MIA 1963 regulates the legality of the adventure as an implied warranty. Not only the subject matter insured (for example, ship, cargo, freight) not be tainted with illegality but the adventure must be lawful and be performed lawfully, so far as the assured can control the matter. In non-marine insurance legality is ensured by public policy. For instance, if a machine in a factory has been put to some unlawful use, the insured is precluded from claiming indemnity by public policy. Can the doctrine of public policy be invoked for marine insurance as well? There are practical difficulties in marine insurance in applying the doctrine because of the element of maritime adventure which affects both the assured and the insurer.

 

If S 43 of the MIA 1963 had not created a continuing warranty status, illegality which might arise during the performance of the maritime adventure insured would not have affected the validity of the policy at the inception and the insurer may be obliged to admit a claim. It is S 43 which now provides some sort of protection to the insurer. From the assured’s angle, if illegality that might arise during the performance of the adventure had not been regulated through a warranty, public policy in some cases would have invalidated such insurances from inception. In such a case, the assured would stand to lose his insurance cover if the illegal act beyond his control had been committed by one or more of his employees. Now in view of S 43 of the MIA 1963 the assured is not likely to be prejudiced if any illegal act beyond the assured’s control be committed by his employees during the performance of the adventure.

 

Considering the overarching role marine insurance plays in both domestic and international trade and commerce, the need for reform in marine insurance law cannot be over emphasized. The breath taking speed with which ship and navigation technology is changing in recent years, the need for a thorough revision of marine insurance law cannot be held up for long. Perhaps the powers that be at the Center and the IRDA will look into the matter.