Marine Insurance – A catalyst in the process of liberalisation of general insurance in India

Marine Insurance is the oldest form of insurance originating from England. This was originated when merchants from different parts of London used to assemble in a coffee house (Lloyd’s coffee house) which gave birth to Lloyds underwriters. Contracting Marine Insurance cover with the owners of sea going vessels and merchants. Way back in 1906 Marine Insurance Act was passed in England.

This business started gaining ground with the Respondentia and bottom bonds, i.e. a vessel owner carrying goods of cargo owners reaches the destination used to get some consideration from the cargo owner and in the event of loss or damage to cargo, the vessel owner used to indemnify the losses. This trade practices continued for long. Thereafter only Lloyd took over the business and subsequently this business got legal sanctity.

Lloyd’s is now the biggest International general insurance underwrite in the world. Ship owners and merchants are not legally bound to insure their property against loss or damage nor are they bound to insure against their legal liabilities to third parties but the modern method of financing, trade and shipping leave them with little or no choice whatsoever. The capital exposed to loss in modern ships with gigantic properties is such that few shipping lines could or would consider it desirable to carry the involved risks themselves.

Moreover, a considerable amount of tonnage is mortgaged to financial institutions, which obviously require insurance as collateral security. It is therefore mandatory that insurance is required for marine voyage and in most of the transactions.

Marine insurance was legalized in England and in 1906 Marine Insurance Act was passed. Subsequently Carriers’ Act was passed in 1963. Subsequently in India Marine Insurance Act, was passed in 1963. Various other Acts were passed connected to Marine Insurance which was internationally recognized and accepted trade practices involved with the Marine insurance.

Carriage of Goods by sea 1924 (COGSA) which defines the rights, responsibilities etc. of sea carrier cargo owners and other parties. The Act gives effect to the protocol signed by maritime nations at Brussels in 1924 called Hague Rules. These Rules were improved upon in 1968 by the Hague Visby rules.

Carriers Act, 1865 defines a common carrier and is responsible in respect of cargo carried in trades etc.

Railways Act 1989 is a comprehensive legislation relating to railway operation but also includes provisions on rights and responsibilities etc. of railways in respect of goods carried.

Carriage by Air Act

Multi model transport of goods Act, 1993 provides for rights and liabilities of related carriers in respect of carriage of goods by more than one mode of transport i.e. land, inland, waterways, sea etc.

Merchant Shipping Act, 1958

This base legislation governing all the shipping operations such as relationship of ships, maintenance of ships etc.

There are also other law such as Bill of Lading Act, Foreign Exchange Regulation Act etc. However, Marine Insurance is subject to Insurance Act, 1938.

Apart from the salient features of offer and acceptance, consideration, lawful object and legal capacity of the insured, insurable interest in Marine insurance may not exist at the time of taking the cover but it should exist at the time of loss.

Marine Insurance can be broadly divided into two categories :

i) Cargo Insurance

ii) Hull Insurance

Marine cargo insurance covers the following:

i) Export and import shipment including sending by air and registered post parcel and certainly ocean going vessel;

ii) Goods in transit by rail and/or road, air and post;

iii) Coastal shipment by steamers;

iv) Shipment by smaller vessels in Indian waters or by country craft and Inland vessels of different types.

Hull Insurance means the insurance of the hulls, machinery, materials and other ancillary interests of ocean going vessels of all types and smaller vessels such as fishing vessels/trawlers, dredgers, tugs, salvage vessels, launches, ferry/steamers/boats, yatches and other pleasure crafts, dumb of self propelled barges, lighter crafts, iron cargo boats and other country crafts.

Marine Insurance policy is a legal document and apart from Marine Insurance Act it is also governed by the Indian Contract Act. In International trade it stands as a collateral security by the financial institutions.

With its easy negotiability it may pass or change from one hand to another even when the goods are in mid sea. Again based on the period of cover, marine policies are divided into two groups, viz. Time and Voyage policy. In a time policy the cover is fixed for at least for one year, but in voyage policy the covers for the entire voyage.

Time policies in cargo insurance are issued for open policy or open cover policy, which covers each and every dispatch of goods made by the insured during the term of the policy. The final premium and sum insured are adjusted at the end of the term of insurance.

Cargo Insurance initially was governed by the All India Marine Cargo tariff effective from 31.3.1983 but subsequently it underwent changes fixing the basic rate for basic cover. But the process of acceptance changed over to the New Institute Cargo Clause (ICC) from 1.1.1982.

Our Marine insurance business was in line with that of the international market based on the recommendation of the United Nations Conference on Trade And Development (UNCTAD). This insurance subsequently became a Non-tariff business premium rates were quoted based on the availability of reinsurance arrangement.

Unlike other types of general insurance, marine cargo policies are freely assignable for which prior consent of the insurer is not necessary. Even a blank endorsement on the back side of the policy is sufficient for negotiation and so it is a negotiable instrument.

There was no specific proposal form specified for Marine Insurance but should contain the following information :

i) Name of the shipper and client;

ii) Description and value of the goods to be insured;

iii) Method of packing;

iv) Transit particulars like Bill of lading Bill of entry Rail Receipt No., Cover note No., Original Policy of insurance

v) Particulars of vessel, shipping company and date of sailing;

vi) Terms of cover;

vii) Past claims experience.

Some familiar terms used in Marine Insurance are as under :

i) Actual Total Loss : It is a loss where the goods are completely lost and become irrecoverable;

ii) Average: refers to partial loss;

iii) Barratry: It is the wrongful act committed willfully by the master and/or crew members against the ship owner.

iv) Bill of Exchange: it is a bill drawn by the exporter against the importer;

v) Bill of lading : it is the receipt given by the ship owner to the shipper as an evidence that goods are loaded on board the ship;

vi) C & F Contract: It signifies cost and freight. As per this contract the buyer is responsible for loss or damage to the goods and freight as well and for that the buyer arranges insurance.

vii) C.I.F. contract : CIF means cost, insurance and freight. In this type of contract it is the seller’s responsibility to arrange insurance before he adds insurance premium in the invoice.

viii) Constructive Total Loss : In constructive total loss the goods are not physically destroyed but so damaged that the cost involved in bringing back to its original position would be more than the value of goods after repair. Such loss is also called constructive loss.

ix) F.O.B. : F.O.B. means free on board. In this type of contract the seller is responsible till the goods are loaded / boarded on the ship and thereafter the buyer is responsible;

x) F.O.R.: Free on rail is also the responsibility of the seller till the goods are loaded / boarded on the rail.

xi) General Average : When the entire venture is endangered, in order to save the ship and cargo, certain sacrifices are made and/or certain expenses are incurred. When such a loss arises, it is apportioned among the interest saved.

xii) Jettison: Jettison means throwing of cargo from above board the ship to save the vessel and/or other cargo

xiii) Particular Average : Particular losses other than general average are called particular average.

Exclusions in Institute Cargo Clauses (A)

4.1 Attributable to willful misconduct of the assured;

4.2. Ordinary leakage, loss in weight or volume ordinary wear and tear of the subject matter insured.

4.3. Caused by insufficiency or unsuitability of packing or preparation;

4.4. Caused by inherent vice or nature of the subject matter insured

4.5. Proximately caused by delay

4.6. Arising from insolvency or financial default of the owners, manager, chatterers or operators of the vessel;

4.7. Arising from the use of any weapon of war, employing atomic or nuclear fission etc.

5.1. Arising from undersea worthiness of vessel or craft where assured or their servants are privy at the time off loading. Arising from unfitness of vessel, craft, conveyance, container or lift van where assured are privy at the time of loading;

5.2. Of breach of implied warranty of seaworthiness or fitness is with the privy of the assured or the servants;

6.1. Caused by war, civil war, hostile act etc.

6.2. Caused by capture, seizure etc. (piracy excluded);

6.3. Caused by derelict mines, torpedoes etc.

6.4. Caused by strikes, lock outs, workmen etc.

7.2. Resulting from strikes, lockouts etc.

7.3. Caused by any terrorist or any person acting from a political motive.

In case of export/import marine policies, Institute Cargo Clauses are invoked in the international market.

However Institute War Clause (Cargo) and Institute Strike Clause (cargo) and excluded from Institute Cargo Clauses. But, however, these clauses are included separately by charging additional premium as per the ratings agreed upon by the protocol signed by the maritime nations and no one can violate the terms, conditions and rating of these clauses.

In case of inland transit by Rail/road, ITC (Inland transit clauses) are invoked which are rather similar to that of Institute Cargo Clauses?

Without going into much detail, Let us study the perils covered under various clauses to understand Marine insurance in nutshell.

Inland Transit (Rail/Road) Clause ‘A’ (ITC ‘A’) This covers all risks of loss and/or damage to the subject matter insured except other than caused by risks expressly excluded. The loss or damage in order to recover must have occurred fortuitously, Inland Transit (Rail/Road) Clause ‘B’ (ITC ‘B’):

Perils covered:

i) Fire;

ii) Lightning

iii) Breakage of bridges

iv) Collision with or by the carrying vehicle;

v) Overturning of the carrying vehicle;

vi) Derailment or accidents of like nature to the carrying railway wagon or vehicle;

Inland Transit (Rail/Road) clause ‘C’ (ITC ‘C’ covers only Fire and lightning risks. Perils covered institute cargo clauses:

Institute Cargo Clause ‘A’:

a) All risks of loss and/or damage to the subject matter insured except those specifically excluded. The term ‘All risks’ is not to be constructed as embracing loss or damage which is inevitable loss or damage and in order to be recovered must have occurred fortuitously.

b) General Average and salvage charges

c) Extra charges incurred in unloading, storing and forwarding the cargo to the destination.

Institute Cargo Clause ‘B’:

Loss and/or damage reasonably attributed to

i) Fire or explosion

ii) Vessel/ crafts being stranded, grounded, sunk or capsized;

iii) Overturning / derailment of land conveyances

iv) Collision or contract of vessel craft or conveyance with any external object other than water;

v) Discharge of cargo at a port of Distress;

vi) Earthquake, volcanic eruption and lightning Loss or damage caused by :

vii) General Average sacrifices

viii) Jettison;

ix) Washing overboard;

x) Entry of sea, lake or river water into the vessel, craft, hold, conveyance, container, lift van, or place of storage

xi) Total loss of any package lost overboard whilst loading onto or unloading from vessel or craft

xii) General average and salvage charges incurred to avoid loss form any common adventure except those excluded

xiii) Liability under both to blame collision;

xiv) Charges reasonably and properly incurred to avoid / minimize an insured loss and to proceed and pursue recovery rights

xv) Extra charges incurred in unloading, storing and forwarding insured cargo the destination.

Institute cargo clause ‘C’ covers the above perils except (vi), (ix), (x) and (xi) are excluded.

There are certain loss minimization measures to be followed in dealing with Marine Cargo claims (Export/import).

In the event of claim all the essential documents are to be called such as Original Insurance policy / certificate duly endorsed, invoice, packing / weight list, printed copy of bill of lading, bill of entry. In case of damage, ship survey report, shortage of foods survey report, port authority’s landing remarks certificate, estimate of repairs/proforma invoice for replacement of short received goods in case of damage to machineries and in case of non delivery of entire consignment all negotiable copies of bill of lading.

If the claims under duty insurance policy for damage to or shortage of goods – Customs certificate of loss/damage to goods and bill of entry, Notice of claim served on steamer co., port authorities, custom authorities for refund of duty etc.

Limitations in case of recovery of claim from the steamer companies, survey in 3 days if the loss is not apparent at landing time, claim immediately on the carriers / port trust authorities for any missing package, suit to be filed within one year from the date of landing.

In case of port authorities to lodge a monetary claim against port authorities within 7 days from the date of discharge, and suit should be filed against port authorities within 6 months from the date of discharge after giving one month notice as per Port Trust Act.

Similarly in case of Rail or Road transit claim, the following requirements viz.Original insurance policy/certificate duly endorsed, railway receipt/lorry receipt No. and date, invoice, packing /weight list, damage/shortage/Non delivery certificate, survey report, copies of notice of claim served on the carriers and their acknowledgement etc.

Limitation in case of Rail/road – Notice of claim should be lodged within 6 months and suit to be filed within 3 years from the date rail/lorry receipt.

Recovery from the carriers should be pursued within the stipulated time and as far as possible immediate.

Under Marine Insurance specially designed annual policies are issued to the corporate clients such as Open cover in case of export /import shipment and Open policy and Special declaration policy in case of Inland transit, Duty insurance, increased value (profit) policy.

Marine Hull insurance on the other hand deals with the insurance ocean going vessels, and other vessels.

Ships are of two types :

a) Sailing vessels;

b) Wooden fishing vessels

Marine Hull insurance is governed by Institute Time clause and very rarely Institute voyage clause is invoked.

A sailing vessel is of any description of vessel provided with sufficient sail area for navigation under sail alone whether or not fitted with mechanical means of propulsion. A fishing vessel is a vessel which can be either of steel construction or wooden construction and is engaged solely for the purpose of fishing, they are

a) Trawlers;

b) Outriggers;

c) Dredgers/barge

Various underwriting guidelines such as registration certificate and valuation certificate of vessel, previous insurance history, risks to be covered must clearly stated in the proposal form, vessel trading details, financial institutions interest on the vessel, trading limit, type of vessel whether wood or steel, fibre glass are to be examined carefully before issuance of the policy.

Since Marine insurance had undergone frequent changes prior to liberalization of insurance and being non tariff business, no significant changes took place in these branches of insurance after liberalization of insurance in India. At times, it acted as an accommodative insurance business to grab other major insurance business of the corporate clients.

Marine insurance grew out of experience and lot of clauses introduced to control the losses and effective loss minimization measures were adopted to safeguard the international trade and reputation of the organization in the international market such as packing, pre-inspection detailed survey, selection of reputed shipping lines negotiation through bankers and/or financial institution etc.

The only insurance to withstand the pressure of liberalization is primarily due to various procedure involved in the export/import and other loss minimization measures. But one of the basic underwriting of this insurance is to ascertain the reputation of the consignor/consignee and their business particulars are to be ascertained strictly. Last but the lease, Marine insurance is a spreading business with its length and breadth of voyage from one to another country and covering the entire world is more or less uniform in its operation.

However, in India this business constitute only 10 to 15% of the gross premium underwritten in the country. This may not be in terms of quantity but in terms of premium income which are very negligent compared to other branches of the insurance. All said and done, Marine Insurance is highly informative to ascertain the economy of the nation and it also meet with the demand and supply of the requirements of any country.

By Mr. P. V. Sethu, Dy. Manager, New India Assce. Co. Ltd. Grievance Cell, H. O., Jaipur, Published in The Insurance Times, September, 2010

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