4

NAROTTAM MORARJEE

INSTITUTE OF SHIPPING

MUMBAI

STUDY MATERIAL

RISK MANAGEMENT & MARINE INSURANCE

FINAL YEAR 2019

REGD. OFFICE
76, Jolly Maker Chambers No.2
Nariman Point, MUMBAI-400021 (INDIA)
Tele: +91-22-22024110 or +91-22-22022495
E-mail: [email protected]
Website: www.nmis.net
 NAROTTAM MORARJEE INSTITUTE OF SHIPPING
MUMBAI

These study materials are strictly for private circulation among the bonafide students
and members of the Narottam Morarjee Institute of Shipping only.

Any unauthorized use, copying or taking extract of these study materials, without the
written permission of the Institute for any purpose other than the prosecution of the
Institute's courses are strictly forbidden.

CONTENTS

RISK MANAGEMENT & MARINE INSURANCE

LESSON TOPIC TOTAL PAGE NO.

NO. PAGES
- INDEX/CONTENTS 1 1
- INSTRUCTIONS 1 2
- SYLLABUS 1 3
1 RISK MANAGEMENT IN SHIPPING 7 4 – 10
2 ORIGIN & HISTORY OF MARINE INSURANCE 6 11 – 16
3 PRINCIPLES OF INSURANCE 7 17 – 23
4 HULL & MACHINERY INSURANCE 8 24 – 31
5 PROTECTION & INDEMNITY CLUBS 17 32 – 48
6 LIABILITY INSURANCE FOR OTHER 6 49 – 54
STAKEHOLDERS
7 CARGO INSURANCE 8 55 – 62
8. CARGO INSURANCE – UNDERWRITING 10 63 – 72
FACTORS, BASIS OF RATING AND DIFFERENT
POLICIES
9. GENERAL AVERAGE 10 73 – 82
10. INSURANCE CLAIMS (H&M AND CARGO) 9 83 – 91
11. WAR RISK INSURANCE 4 92 – 95
12. SALVAGE, INTERNATIONAL SALVAGE 8 96 – 103
CONVENTION, 1989
13. NUMERICAL QUESTIONS 1 104
3 MODEL TEST PAPERS (COLOUR PAGES) 6 105 – 110

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 NAROTTAM MORARJEE INSTITUTE OF SHIPPING
MUMBAI

RISK MANAGEMENT AND MARINE INSURANCE FINAL YEAR

INSTRUCTIONS

The book titled “MARINE CLAUSES IC 63” from the Insurance Institute of
India has been supplied to the Course Students. This is the prescribed book
for the examination of the Insurance Institute of India.

2nd year Course Students of NMIS should study all the chapters from this
Book.

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 NAROTTAM MORARJEE INSTITUTE OF SHIPPING

RISK MANAGEMENT & MARINE INSURANCE

SYLLABUS

Sr. RISK MANAGEMENT & MARINE INSURANCE

No.
1. Risk Management in Shipping: Introduction- concept, process & practice; Types of Risks; Risk
identification; Risk Evaluation, Risk Control; Risk Handling; Formal Safety assessment; Risk Matrix. Risk
management of speculative risks.
2. Origin & History of Marine Insurance: History, Lloyds; Lloyd’s agents; Lloyd’s form of policy;
International Underwriting Association of London (IUA); Marine Insurance Act, 1963; Marine Insurance
definition and its scope; Marine insurance & trade; Importance of insurance in trade; Insurance
activities in India; Reinsurance; General Insurance Corporation of India.
3. Principles of Insurance: Significance of principles – Indemnity, Insurable interest, Utmost good faith,
Proximate cause; Subrogation and Contribution. Partial & total loss; Assignment; Warranties; Duty of
assured; Deductible.
4. Hull & Machinery Insurance: Basis of underwriting/rating; Institute Time and Voyage Clauses,
1.10.1983; Perils covered clause; Pollution hazard; Excluded perils; Termination; 3/4th collision liability
clause; Examples of apportionment of collision liabilities; The International Hull Clauses, 2003.
5. Protection & Indemnity Clubs: History, Liability and its consequence; Liability insurance; Concept of
mutual insurance; Constitution of a modern P&I Club; Management of the Club; Rating of Risks & Fixing
of Calls; Premium rating system; Advance & Supplementary calls; Release calls; Scope for P&I Club
cover; Risks insured under P&I cover; Exceptions & Limitations to club cover. International Group and
polling arrangements; Fixed premium and specialized clubs.
6. Liability insurance for other stakeholders: Liabilities of charterers, multimodal transport operators,
freight forwarders, others in multimodal operations. Insurance solutions for such liabilities.
7. Cargo Insurance: Introduction; Incoterms; Institute Cargo clauses – A, B, C, 1.10.1982; Clauses stating
exclusions; Extraneous perils covered; Additional exclusions; Examination of some of the perils covered;
other clauses like Forwarding, Transit etc.; Inland Transit Clauses; Institute War Clauses; Institute Strike
clauses; Brief information on the Revised 2009 Institute Cargo Clauses.
8. Cargo Insurance : Underwriting factors; Basis of Rating; Information essential for proper assessment of
the risk; Factors considered in acceptance & rating of the risk; Payment of premium; Types of policies
– Specific policy, Open policy, Open cover & Cover note; Advantages of an open cover; Certificate of
insurance; Annual policies; Increased value insurance; Multimodal transport policy.
9. General Average: Introduction; Principles & practice; Essential features of GA; GA contribution; GA &
Insurance; York Antwerp Rules 1994; GA Adjustment and examples.
10. Claims: Hull insurance claims: Process, evidences, role of surveyors, etc. Cargo Insurance Claims - Types
of Losses/Expenses; Cargo claims Procedure; Legal Aspects of recovery against the carrier.
11. War Risk Insurance: Applicability, Features, Scope of cover; Detainment; War Risk Trading Warranty
under war risk insurance scheme; Current exclusions.
12. Salvage, International Salvage Convention 1989: Definition; Principles of Salvage, Maritime property;
Crew; Passengers, Salvage Agreements; Lloyd’s standard form (LOF); Development of SCOPIC (Special
Compensation P&I Clause); Advantages & Disadvantages of SCOPIC.
13. Numerical questions: Understanding situations in collision liability cases and general average cases and
solving such numerical problems.

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RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 1

RISK MANAGEMENT IN SHIPPING

1.0 INTRODUCTION :

1.1 At the outset we ought to establish the meaning of RISK. Oxford dictionary defines Risk
as "hazard, chance of bad consequence, loss, etc., exposure to mischance". It is thus normally
considered in a negative way. A better definition is that the "risk is the probability of any outcome
being different from one expected". This implies that risk may not necessarily be negative but could
even be positive if the outcome is better than envisaged. This of course confirms that unless risks
are taken gains cannot be expected. Surely life would be quite dull and boring if there are no risks.

1.2 Risks are of two types:

(1) Pure Risks - where the outcome is negative or at best there is no change. Fire
risk is an example of this type of risk as fire will normally result in loss.

(2) Speculative Risks - where the outcome could be negative or positive e.g the risk
of exchange rates, bunker prices etc.

1.3 An organization today is exposed to assorted, complicated and newer risks. Shipping is no
exception with new risks resulting in exceptionally large, sometime unlimited liabilities. The ships are
also extremely complicated and expansive and any delays and/or non-performance could obviously
be costly.

1.4 Further in the present competitive environment, with the usual unpredictability of the freight
markets, it is imperative that the management of the organization adopts a strategy for managing
its risks efficiently. It is no more sufficient to have measures for accident/incident control as a process
but to include risk management as a management function. The management, right from the top,
should be sensitive to this.

1.5 The RISK MANAGEMENT is a science which ensures that the profit or assets of the
organization are not unduly impaired by the occurrence of any risk.

2.0 PROCESS OF RISK MANAGEMENT:

2.1 The process of risk management consists of following steps:

3.0 RISK IDENTIFICATION:

3.1 It is extremely important that the organization establishes measures for effectively
identifying all the risks to which it is exposed. This would depend on the type of operations of the
company and could include:

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 1. Technical risks: Machinery breakdown, malfunctioning etc,
2. Personnel risks: Injury, death etc.
3. Social risks: Piracy, stowaways etc.
4. Legal risks: Operation of ships under different legal regimes world-wide
5. Financial risks: Bad debts, exchange rates etc,
6. Purchase risks: Purchase of stores, spares and bunkers; and
7. Commercial or Operational risks: Freight rates.

4.0 RISK EVALUATION:

4.1 After having identified each risk these must be analyzed and evaluated. Special
consideration ought to be given on the probability of such risks occurring and further the extent of
severity of their effect on the working of the organization. This process requires a constant flow of
relevant data and information. Certain mathematical models may also have to be developed and
some statistical techniques may be used for quantifying the risks. Based on the information and data
available, both severity and probability can be kept on a scale of 1 to 5 for each identified risk.
Thereafter a matrix can be created. Please refer to para 8.0 in this chapter for this.

5.0 RISK CONTROL:

5.1 For controlling the risks certain measures will have to be taken by the management. This
may include both hardware and software. The hardware could be in the form of safety equipment,
design of the ships etc. The software relates to establishing certain safe practices and safety policy
etc. A systematic safety audit, contingency plan or an emergency response plan could be some of
such systems.

5.2 It is however extremely important that an efficient reporting and analyzing system is in place
so that the progress of these steps can be monitored and remedial steps taken whenever
necessary.

6.0 RISK HANDLING:

6.1 In spite of aforesaid measures the chances of events leading to many of those identified risks
would remain and the senior management would now have to, after making a cost benefit analysis,
strategically decide on the following:

(i) Totally avoid the activity which leads to such risks or is exposed to such risks. This is
called RISK AVOIDANCE.

(ii) If the organization decides to bear the risk then it is referred as RISK RETENTION.
However the management will have to be prepared to provide for the extra costs which may
be incurred due to such risks. This probably could be done by forming a reserve. Yet
another method could be to opt for higher deductibles while purchasing insurance.

(iii) The last possibility is called RISK TRANSFER whereby the risk prone activity could be
transferred to a sub-contractor. The risk could also be transferred to an underwriter by
acquiring insurance against such risks.

6.2 Based on the above referred steps and considering the complete operations of the
company the top management must make strategic choices for various methods for dealing with
both short and long term risks. The adopted techniques must then be implemented and regularly
reviewed and adjusted. Essentially the strategic risk management should be cyclical and therefore
periodical review, instead of just being a feedback mechanism, may turn out to be starting point
of new measures. However, the success of this whole risk management plan depends on the
complete commitment of the top management.
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7.0 FORMAL SAFETY ASSESSMENT:

7.1 The risk management has been in existence in other industries since many years with
Risk Management departments in many corporates. However, it is a more recent development in
shipping/maritime industry. Historically remain is a risky enterprise and the seafarers, historically,
have been taking several measures to minimize such risks. However, now IMO has introduced
the concept of Formal Safety Assessment (FSA) as one of the requirements. The FSA is an
important version of the traditional risk management. The concept of formal safety assessment
was first proposed in 1988 when in a fire on board Alpha Piper about 167 people lost their lives.
This accident resulted in a need for a formal methodology for safety risk analysis and to find the
most suitable ways for that. Now the governments complying with IMO’s guidelines have to follow
a set procedure analyzing the biggest risks they face, finding the most feasible solutions to reduce
those risks and checking those solutions for cost effectiveness.

7.2 FSA is a systematic method of enhancing maritime safety achieved through an

established process of risk assessment and evaluation. IMO defines FSA as a ‘rational and
systematic process for assessing the risks associated with shipping activity and for evaluating the
costs and benefits of reducing the risks.

7.3 FSA is a five step formal and methodological approach that covers all aspects of safety
analysis and suggesting suitable safeguards against all major and minor areas. These are:

1. identification of hazards (a list of all relevant accident scenarios with potential causes
and outcomes);
2. assessment of risks (evaluation of risk factors);
3. risk control options (devising regulatory measures to control and reduce the identified
risks);
4. cost benefit assessment (determining cost effectiveness of each risk control option);
and
5. recommendations for decision-making (information about the hazards, their
associated risks and the cost effectiveness of alternative risk control options is
provided).

7.4 In simple terms, these steps can be reduced to:

1. What might go wrong? = identification of hazards (a list of all relevant accident

scenarios with potential causes and outcomes);
2. How bad and how likely? = assessment of risks (evaluation of risk factors);
3. Can matters be improved? = risk control options (devising regulatory measures to
control and reduce the identified risks);
4. What would it cost and how much better would it be? = cost benefit assessment
(determining cost effectiveness of each risk control option);
5. What actions should be taken? = recommendations for decision-making (information
about the hazards, their associated risks and the cost effectiveness of alternative risk
control options is provided).

7.5 FSA represents a fundamental change from what was previously a largely piecemeal and
reactive regulatory approach to one which is proactive, integrated, and above all based on risk
evaluation and management in a transparent and justifiable manner thereby encouraging greater
compliance with the maritime regulatory framework, in turn leading to improved safety and
environmental protection.

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7.6 IMO has applied FSA in the area of bulk carrier safety. It is highly technical and complex.
But it does offer a way forward and a means of escaping from the dilemma of the past in which
action was too often put off until something went wrong - with the result that the actions taken
often owed more to public opinion and political considerations than they did to technical merit.

7.7 Formal safety assessment clearly happens to be one of the very important aspects of
marine industry. Entire safety profile of a vessel relies on its FSA and its effectiveness. Guidelines
by IMO help in achieving a uniform and standardized way of risk analysis. The standardized
procedure of FSA can be followed by all governments or organizations in consultative status with
IMO or by any other committee or subsidiary body to identify the most risky areas of shipping.

8.0 RISK MATRIX:

8.1 A Risk is the amount of harm that can be expected to occur during a given time period
due to specific harm event (e.g., an accident). Statistically, the level of risk can be calculated as
the product of the probability that harm occurs (e.g., that an accident happens) multiplied by the
severity of that harm (i.e., the average amount of harm or more conservatively the maximum
credible amount of harm). In practice, the amount of risk is usually categorized into a small number
of levels because neither the probability nor harm severity can typically be estimated with
accuracy and precision.

8.2 A Risk Matrix is a matrix that is used during Risk Assessment to define the various levels
of risk as the product of the harm probability categories and harm severity categories. This is a
simple mechanism to increase visibility of risks and assist management decision making.

8.3 For example, the severity of the outcome of a risk can be categorized as ‘Catastrophic’,
‘Critical’, ‘Marginal’ and ‘Negligible’. Similarly the probability of harm occurring might be
categorized as 'Certain', 'Likely', 'Possible', 'Unlikely' and 'Rare'. However it must be considered
that very low probabilities may not be very reliable.

8.4 The resulting Risk Matrix could be:

Severity
Negligible Low Marginal Critical Catastrophic
Certain High High High Extreme Extreme
Probability Likely Moderate Moderate High High Extreme
Possible Low Low Moderate High Extreme
Unlikely Low Low Low Moderate Extreme
Rare Low Low Low Moderate High

8.5 The company or organization then would calculate what levels of Risk they can take with
different events. This would be done by weighing up the risk of an event occurring against the
cost to implement safety and the benefit gained from it.

8.6 An Example:

The following is an example risk matrix with certain accidents allocated to appropriate cells
within the matrix:

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 Negligible Marginal Critical Catastrophic
Certain Stubbing Toe
Likely Fall
Possible Major Car Accident
Unlikely Aircraft Crash
Rare Major Tsunami

8.7 A better risk matrix is given below. It divides the Severity and Probability on a scale of 1
to 5. The blocks thus created are coloured and signifies areas of ‘Not acceptable’, ‘ALARP’ and
‘Acceptable’ as indicated :

 The low probability, low severity area (usually green) that indicates the risk of an event is
not high enough, or that it is sufficiently controlled. No action is usually taken with this.
 The high probability, high severity (usually red) which indicates an event needs a lot or
more control measures to bring the probability or severity down.
 The medium category (usually yellow) is in between these two areas. Any event that falls
in this area is usually judged to be an area that needs to be monitored, but is controlled

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 and referred as ‘As Low As Reasonably Practicable’ or ALARP. It means if we keep the
risk at that level, we accept it.

8.8 Strategies for giving scores:

8.8.1 Ranking an event on a risk matrix can be done in three ways:

 Worst case scenario. This is done by taking the worst that could happen. For instance
in the case of a car crash, there will be multiple fatalities and it might be likely to occur.
Essentially when looking at the worst case scenario, all Barriers are ignored and only
the Hazard, Top event and Consequences are considered. These types of incidents
might occur in reality, but they will most likely be the exception, not the rule.
 Current situation. The second strategy tries to evaluate the severity and probability of
the average event. So the average severity for a car crash might be a single fatality,
and it’s unlikely to happen. This strategy takes into account all the barriers that are
currently implemented.
 Future situation. The last strategy tries to make an estimate of how the risk might go
down after improvements to barriers, or implementation of new barriers. It aims to
estimate the future average of incidents.

8.8.2 Even though the risk matrix has a lot of drawbacks, it has endured the criticism and is still
one of the standard tools used in most risk assessments.

9.0 RISK MANAGEMENT OF SPECULATIVE RISKS:

Speculative risks are where the outcome could be negative or positive e.g. the risk of exchange
rates, bunker prices etc. It is imperative that an organization having an exposure to such risks
also tries to manage these risks.

The techniques like hedging. Futures etc. are some of the techniques that can be used. It is
important to note that these techniques are complicated and should only be used after due
consideration.

10.0 CONCLUSION:

10.1 The concept of risk management is quiet recent in India and especially in shipping, it is still
not adopted universally. The time has now come to critically examine our operations and look at
various risks. It is a pity that in our culture owning up to risk is often confused with defeatism.
Therefore we often deliberately ignore risks and project a confident "can-do" attitude. It is
important now that all levels of the organization, especially at the top, become risk-aware because
the risks are definitely there. The question is that do we ignore them and invoke the optimist's
response to the Murphy's Law that "what can go wrong will go wrong, just not this time", or do we
attempt to practice risk management and develop a corporate risk strategy. Obviously we must
adopt risk management and use it as a management tool for not only the profitability and
productivity of the organization but also for the betterment of the society at large.

ooooo

SELF-EXAMINATION QUESTIONS

1. Define risk management.

2. What are the steps in the process of risk management?
3. How the risk may be retained?
4. What is the important of Formal Safety Assessment?
5. You have to go for shopping, a place which is across a busy road from your house. Conduct
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 a risk management exercise of this activity, including drawing up a risk matrix. List also the
possible risk control measures that may be useful.

RECOMMENDED FOR FURTHER READING:

1. Principles of General Insurance — Insurance Institute of India, Revised Ed., Aug.1993.

[Read Lesson 1, Pages 1-16].
2. Shipping Management -- Cases & Concepts, Published by Macmilian, 1st Ed., 1998.
Most recent book focusing on key management topics related to international shipping Industry.
3. Part VII — Chapter 17 entitled "Risk Management: Its relevance to Shipping Industry" by
Tony Fernandez in the book of “Shipping Management – Cases & Concepts” Edn. 1998 - is
worth reading.
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RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 2

ORIGIN & HISTORY OF MARINE INSURANCE

1.0 HISTORY:

1.1 Marine insurance was practiced by the Jews and the Italians in the 12th and 13th
centuries. The earliest reference to marine insurance can be traced to the beginning of the
14th century when the Italian traders used to practice advancing of loans under Respondentia
and Bottomry bonds. Bottomry was a loan raised by the captain of the vessel when the
money was urgently needed for the prosecution of the voyage. The loan was on the security
of the vessel alone, or sometimes on both vessel and cargo. The loan was not repayable if
the venture was lost. Respondentia was an advance on cargo alone and was repayable - only
if the cargo reached destination safely. The Greeks also modified the system and by 1925
Dutch policies on marine insurance came in market and had the same effect as the
underwriting on the Lombard Street in London. Finally, marine insurance, as it is seen today
developed in London.

2.0 LLOYDS:

2.1 After Italy, the practice of marine insurance prospered in England. Until 1720 individual
underwriters who used to frequent the coffee-houses in London mostly handled this insurance.
The coffee house of Edward Lloyd in London was frequented by traders, boat owners,
underwriters, bankers etc. This coffee-house of Lloyd's at Lombard Street became the centre
of marine insurance in the world. Meanwhile Royal Charter was given to two companies,
namely, The London Assurance and The Royal Exchange Assurance, for conducting marine
insurance business.

2.2 In 1871 Lloyd’s was incorporated by an act of parliament and started being called as
the Corporation of Lloyd’s. The corporation provided facilities for conducting insurance
transactions between its underwriter members and insurance seekers. In other words
insurance is placed at Lloyd’s and not with Lloyd’s. These underwriting members are part of
syndicates that operate under a framework of rules by Lloyd’s. The Lloyd's insurance market
is presently located in its new building where it was shifted in 1986. Today almost anything
can be insured at Lloyd's. The Corporation also provides the services of signing and finalizing
the insurance policies and facilitate handling of claims through its jointly owned companies.

3.0 LLOYD’S AGENTS:

3.1 They are appointed by Lloyd’s in different parts of the world. Their job is to collect all
relevant information in their area and send the same to the Lloyd’s Intelligence Department.
The information may include casualties, shipping movements, happening that affect trade and
transportation etc. This information is made available to others by Lloyd’s. The agents also
arrange cargo surveys, damage surveys, assist masters, if necessary etc. They are not paid
by Lloyd’s but can charge fees for the services rendered by them.

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4.0 LLOYD’S FORM OF POLICY:

4.1 It was first drawn in 1779 and went through changes over the period of time. This was
referred as the ‘Ship & Goods’ policy. Further changes occurred in 1982 and separate policies
for cargo and hull were developed in 1982 and 1983 respectively.

5.0 INTERNATIONAL UNDERWRITING ASSOCIATION OF LONDON (IUA):

5.1 The Institute Time Clauses which were developed by the Institute of London
Underwriters (ILU) in the later part of the 19th century and provided a forum to assist in various
agreements pertaining to insurances. It also developed clauses for different types of
insurances. On 31st Dec 1998 it was merged with another organization called the London
International Insurance & Reinsurance Market Association. The new entity is called the
International Underwriting Association of London (IUA) and has developed clauses.

6.0 MARINE INSURANCE DEFINITION:

6.1 Marine Insurance Act, 1963. Section 3 defines marine insurance as:

"A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify
the assured, in the manner and to the extent thereby agreed, against marine losses, that is to
say, the losses incidental to marine adventure."

7.0 MARINE INSURANCE & TRADE:

7.1 Marine insurance occupies an important position in overseas commerce as it allows

the venture to be covered against various risks. The financing of the international trade is done
through banks. However, banks will not discount a bill of exchange unless the goods, as
specified in the letter of credit, are insured against marine risks and the policy or evidence of
such insurance is lodged with the bank as a collateral security.

7.2 There is no legal requirement to insure the goods, but banks would demand it and it
also makes better sense to buy insurance against exposure of risks at sea.

8.0 SCOPE OF MARINE INSURANCE:

8.1 The scope of marine insurance is as follows:

1. Ship - The vessel itself is subjected to the risks of perils of sea, fire, piracy etc. The
vessel may be lost or damaged due to negligence of the master, officers, crew,
pilot, other parties etc. The owner may be asked to pay general average
contribution or salvage charges. Such insurance is traditionally called for the Hull
& Machinery (H &M) insurance.

2. Cargo - The cargo is transported from the warehouse of the shipper to the
warehouse of the consignee. During this transit, goods may be lost or damaged
due to various risks, including the negligence of the representatives of the
shipowner. This Insurance is called Cargo insurance.

3. Freight - The freight may be prepaid and thus the risk in case of non-fulfillment of
the voyage is on the cargo owner. Under such circumstances the value of the
freight is added in the value of the cargo while effecting cargo insurance. However,
freight may be payable at the destination, and in this case, will be at the risk of the
shipowner, who can get a cover for it. This insurance is called Freight insurance.

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 4. Shipowner's Liabilities - The shipowner may be liable for certain charges,
damages,' etc due to the operation of the ship. For example, damage to cargo;
damage to port equipment and installation; personal injury claims; crew claims;
pollution claims etc. The necessary cover for such liabilities is normally taken
from Protection & Indemnity Clubs.

5. Time Charterer's Liabilities - If a vessel is on time charter, the charterer may be

exposed to certain liabilities, e.g. cargo damage while cargo is being handled by
the charterer's representatives. These can be insured.

6. Liabilities of entities involved in multimodal operations – different entities like truck

operators, ICD owners, and equipment operators may be exposed to the liabilities
for cargo damage. These liabilities can be insured.

7. Builder's Risks - A vessel while being built is exposed to various risks and the ship
builder can insure these.

8. Other covers – like war risks, strike risks, kidnap & ransom risk, coverage for legal
costs etc.

9.0 IMPORTANT MILESTONES ON INSURANCE IN INDIA:

9.1 First insurance company - Oriental Life Insurance Company, Calcutta, 1818.
Bombay Mutual Life Assurance Society, first Indian life insurance company, 1870. The
United India in Madras, National Insurance in Calcutta, Co-operative Assurance at Lahore
started after that.

9.2 Life Insurance Companies Act, 1912: In the year 1912, the Life Insurance
Companies Act, and the Provident Fund Act were passed. The Life Insurance Companies Act,
1912 made it necessary that the premium rate tables and periodical valuations of companies
should be certified by an actuary. But the Act discriminated between foreign and Indian
companies on many accounts, putting the Indian companies at a disadvantage.

9.3 Insurance Act 1938 : From 44 companies with total business-in-force as Rs.22.44
Crores, it rose to 176 companies with total business-in-force as Rs.298 Crores in 1938. With
a view to protect the interests of the Indian Insurance companies, the earlier legislation was
amended with the enactment of the Insurance Act 1938, which consists comprehensive
provisions for effective control over the activities of insurers or insurance organizations. It was
the first legislation governing the life insurance and non-life insurance and to provide strict
state control over insurance business.

9.4 Life Insurance Corporation of India: On 19th of January, 1956, that life insurance
in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies
and 75 provident were operating in India at the time of nationalization. Nationalization was
accomplished in two stages; initially the management of the companies was taken over by
means of an Ordinance, and later, the ownership too by means of a comprehensive bill that
led to the Life Insurance Corporation Act, 1956.

9.5 Marine Insurance Act, 1963: This was in line with the then Marine Insurance Act,
1906 of England. Some details are given below in this chapter.

9.6 Insurance Act, 1938 amended in 1968. Tariff Advisory Committee was
established.

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9.7 General Insurance Business (Nationalization) Act, 1972

10.0 GENERAL INSURANCE CORPORATION OF INDIA:

10.1 Before 1956 private underwriters in India handled life insurance business. Similarly
before 1971 many private insurance companies operated in India and offered cover for general
insurance, i.e., marine, motor, fire, etc.

10.2 General Insurance Corporation was formed for the purpose of superintending,
controlling and carrying on the business of general insurance.

10.3 The general insurance business was nationalized and all private companies were
merged into following four companies:

1) National Insurance Co. Ltd., Calcutta.

2) New India Assurance Co. Ltd., Mumbai.
3) Oriental Insurance Co. Ltd., New Delhi.
4) United India Insurance Co., Chennai.

10.4 Head offices of these companies are located at the cities indicated above and these
companies are structured with regional offices, divisional offices and branch offices. The
control and operation of the business of insurance is conducted from these offices.

10.5 Besides the above four companies, the Government under the General Insurance
Business (Nationalization) Act, 1972, established General Insurance Corporation of India
(GIC) with effect from 1st January 1973.

10.6 Following were the main tasks assigned to GIC:

a) The GIC to help control the costs of its subsidiaries and help them with the
investment of funds.

b) Expand the general insurance in India.

c) The GIC to be the designated national reinsurance company and its subsidiaries
were to yield 20% of their gross direct premium to the GIC.

d) All four subsidiaries were business entities and to be competitive with each other.

10.7 Insurance Act, 1938 was the main legislation regarding insurance in India and also
allowed the establishment of a Tariff Advisory Committee (TAC) to develop a tariff system with
premiums fixed at the same rate for all companies.

10.8 Malhotra Committee and reforms, 1993/94:

10.9 Insurance Regulatory and Development Authority (IRDA) Act, 1999 came in force
on 19th April 2000. It liberalized the Indian insurance market. Under this an Insurance
Regulatory and Development Authority (IRDA) was created to oversee and regulate the
insurance industry in India. The general insurance business went through a change and the
General Insurance Business (Nationalization) Amendment Act, 2002 wherein the GIC was de-
linked from its four subsidiaries. Each subsidiary, with their headquarters based in the four
largest metropolitan areas, became independent. In November 2000, GIC was renotified as

14
the Indian Reinsurer and through administrative instruction, its supervisory role over the four
subsidiaries was ended. (GIC Re)

10.10 Consequently, GIC now undertakes only reinsurance business, while the four public
sector undertakings continue to handle the General insurance business. This Act also
introduced amendment to GIBNA and the Insurance Act, 1938. An amendment to GIBNA
removed the exclusive privilege of GIC and its subsidiaries carrying on general insurance in
India.

10.11 IRDA opened up the Indian insurance market in August 2000. IRDA has been granted
the powers to frame regulations under Section 114A of the Insurance Act, 1938.

10.12 The tariffs for insurance were removed from Jan 01, 2007 was one of the most
important steps taken in the general insurance segment since opening up of the insurance
sector. Before this about 70% of the General Insurance business was driven by various tariffs
being prescribed by Tariff Advisory Committee.

11.0 MARINE INSURANCE ACT, 1963:

11.1 Marine insurance being the oldest form of insurance, various customs, usage and legal
judgments relating to this branch were developed in London which was the maritime center of
the world. These judgments underlined certain principles, which were used to resolve
disputes. The codification of these principles led to the formation of the Marine Insurance Act,
1906 in U.K.

11.2 Considering the international aspect of marine insurance and to take advantage of the
well-defined principles described above, the Indian act on marine insurance, namely Marine
Insurance Act, 1963 was enacted. It only marginally differs from the U.K. act.

11.3 The important sections are appended below:

1. "Marine insurance" is defined (# 3) as:

"a contract of marine insurance is an agreement whereby the insurer undertakes to

indemnify the assured, in the manner and to the extent thereby agreed, against marine
losses, that is to say, the loses incidental to marine adventure".

2. The ''marine adventure" is defined (#2 (d)) as:

"any adventure where:

(i) any insurable property is exposed to maritime perils

(ii) the earnings or acquisition of any freight, passage money, commission, profit
or other pecuniary benefit, or the security for any advances, loans, or disbursement is
endangered by the exposure of insurable property to maritime perils
(iii) any liability to a third party may be incurred by the owner o$ or other person
interested in or responsible for, insurable property by reason of maritime perils".

3. The "maritime perils" are defined (#2 e) as:

"the perils consequent on, or incidental to, the navigation of the sea, that is to say,
perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints
and detainments of princes and people, jettisons, barratry and any other perils which
are either of the like kind or may be designated by the policy".

15
4. "Mixed Sea and Land Risks" are defined (# 4) as:

(i) A contract of marine insurance may, by its express terms, or by usage of trade,
be extended so as to protect the assured against losses on inland waters or on any
land risk which may be incidental to any sea voyage.

(ii) Where a ship in course of building, or the launch of a ship, or any adventure
analogous to a marine adventure, is covered by a policy in the form of a marine policy,
the provisions of this Act, in so far as applicable, shall apply thereto, but except as by
this section provided, nothing in this Act shall alter or affect any rule of law applicable
to any contract of insurance other than a contract of marine insurance as by this Act
defined.

Explanation: "An adventure analogous to a marine adventure" includes an adventure

where any ship, goods, or other movables are exposed to perils incidental to local or
inland transit.

Marine Insurance Act, 1963 is included in this study material as Annexure.

5. "Principles of Insurance" –

The basic principles are defined in the Act. These include 'Insurable Intent" (# 6 to 17),
"Utmost Good Faith" (# 19 to 23), 'Indemnity" (# 18, 67 to. 78), "Subrogation" (# 79)
and "Partial and Total Loss" (# 56 to 63). Students should refer to the lesson "Principles
of Insurance ".

6. "Warranty of Seaworthiness of Ship"(# 41).

Under the voyage policy there is an implied warranty that at the commencement of the
voyage the ship shall be seaworthy. Such warranty is not implied in a time policy,
however "when, with the privity of the assured, the ship is sent to sea in an
unseaworthy state, the insurer is not liable for any loss attributable to
unseaworthiness".

ooooo

SELF-EXAMINATION QUESTIONS

1. What is Marine Insurance?

2. Define Marine Adventure:
3. In what years was insurance business nationalized in India?
4. What are the functions of GIC?
5. What is the importance of marine insurance in international trade?
6. What risks are covered under marine insurance?

RECOMMENDED FOR FURTHER READING:

1. The Law Relating to Marine Insurance by B. C. Mitra.

2. Principles of Insurance — Insurance Institute of India
3. Marine Underwriting - Insurance Institute of India.
4. Marine Insurance Act, 1963 by A.K. Bhattacharjee.
5. A Handbook of Marine Insurance by Victor Dover.

**************

16
RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 3

PRINCIPLES OF INSURANCE
1.0 INSURANCE & TERMINOLOGY:

Insurance can be defined as:

Insurance is a contract whereby, in return for the payment of premium by the insured,
the insurers pay the financial losses suffered by the insured as a result of the occurrence
of unforeseen events.

1.1 It is a method of sharing the financial loss of a few from the common fund established
by the contribution of many who are equally exposed to the same loss. In other words it is a
system of spreading the losses of an individual over a group of individual.

1.2 It must be noted that the insurance only covers events which are fortuitous. If any event
is inevitable and is bound to occur, then it cannot be insured against. Thus loss due to wear
and tear, inherent vice are not covered.

1.3 The insurance has therefore three elements:

(i) Subject matter of insurance - e.g. life, goods, house, motor etc.
(ii) Peril which may cause loss/damage - e.g. fire, heavy weather, burglary etc.
(iii) Financial loss resulting from the loss/damage of the subject matter.

1.4 The insurance business is broadly divided in two categories, life insurance and general
insurance. The general insurance is further grouped as fire insurance; marine insurance; and
miscellaneous insurance which includes insurance of motor, aviation, burglary etc. Some
important terms are:

1.5 Insured/ assured – is the party who’s goods/ possession/ life/ interest is insured e.g.
a car owner; house owner; an individual person taking insurance of his life; a doctor taking
insurance of his professional liability.

1.6 Insurer – is the party who insures the subject matter of an insured e.g. an insurance
company; a P&I Club.

1.7 Subject matter – is that thing which is being insured e.g. a car, a ship, a life etc.

1.8 Premium – is the consideration paid by the insured to the insurer for insuring.

1.9 Policy – is the document/ contract between insurer and insured with all terms and
conditions as clauses.

1.10 Risks covered – are the perils against which the loss/ damage of the subject matter
is insured e.g. fire; bad weather; negligence etc. Insurance covers loss/ damage to the subject
matter. This loss/ damage must occur due to a reason. These reasons are listed in the policy
and insurance company will only pay if loss/ damage happens due to a listed reason (risk
covered).

17
1.11 Period of insurance – is the time span over which the insurance is valid. Usually most
insurances are for a period of a year except cargo, which is for a voyage and life which can
be as decided. Some insurance can be there for the duration of the event e.g. a cricket match.

Principles of insurance:

The Marine Insurance Act, 1906 was the first legislation regarding marine insurance, a branch
of insurance which probably started first almost 350 years back. Certain principles were
established which were later included in the 1906 legislation. These principles are explained
below and need to be understood by the student as they form the foundation.

2.0 INDEMNITY:

2.1 Indemnity is the protection or security against damage or loss or security against legal
responsibility. It is also referred to as the promise to make good the loss or damage. It is not
for making profit.

2.2 Indemnity is thus the exact financial compensation sufficient to place insured in the
same financial position after a loss as he enjoyed immediately before it occurred.

2.3 The principle of indemnity is an advancement of the principle of insurable interest as in

the event of any claim the payment made to the insured cannot exceed the extent of his
interest.

2.4 This principle is expressed in the case of Castellian vs Preston (1883) as :

"The very foundation, in my opinion, of every rule which has been applied to insurance
law is this, namely, that the contract of insurance contained in a marine or fire policy is
a contract of indemnity and of indemnity only, and that this contract means that the
assured, in a case of loss against which the policy has been made, shall be fully
indemnifies, but shall never be more than fully indemnified. That is the fundamental
principle of insurance."

2.5 This principle is necessary so that profit cannot be made from insurance contract by
deliberately causing the damage and it also avoids carelessness in the actions of the insured.
Further this is in public interest for the preservation of the property.

2.6 This principle relies on the financial evaluation of the property insured. However it is
not possible to evaluate the financial value of a person's life and thus this principle is not valid
for the life insurance and personal accident insurance.

2.7 In marine insurance the principle of indemnity is applied in a manner and to the extent
agreed between the two parties. Therefore marine polices are usually valued policies and
specifies the agreed value of the subject matter insured. This value is the insured value.

3.0 INSURABLE INTEREST:

3.1 At first look there seems to be a similarity between insurance and gambling e.g. at races
the bookmaker promises the punter that a certain sum of money shall be paid by him if a
certain horse wins. How is it different from the insurer promising the insured that a certain sum
of money shall be paid if the insured's house is burnt down?

3.2 The difference is the Insurable Interest. In other words, the insured must have an
interest in the preservation of the thing insured, so that he will suffer financially on the
happening of the peril and he will be satisfied if the peril did not happen. This interest is called

18
insurable interest and must be financial and not emotional. In the absence of this the insurance
contract is void.

3.3 The insurable interest can arise under following circumstances:

 From ownership - e.g. ship, motor car

 Under contract - e.g. repairer
 Under law - e.g. liability arising from cargo damage
 A person's life

3.4 Due to the peculiar circumstances in the cargo transportation where the ownership of
goods changes according to the sale contract, in marine insurance the insurable interest must
exist at the time of loss only. Therefore it is not necessary to prove insurable interest at the time
of taking insurance.

4.0 UTMOST GOOD FAITH:

4.1 The sale transactions are Cavet Emptor, i.e. let the buyer beware. In other words seller
need not disclose information which the intending purchaser does not ask. The insurance
contract, on the other hand, is based on Uberrimae fidai or utmost good faith. This means that
each party is required to exercise utmost good faith in his dealing with the other. It also signifies
that the proposer must inform all material facts regarding the subject matter to the insurer.

4.2 The material facts are the facts which would influence the judgment of a prudent insurer
in deciding whether to accept the risk and if so, at what rate of premium and subject to what
terms and conditions.

4.3 According to Section 20 (1) of the Marine Insurance Act, 1963 the insured must
disclose to the insurer ' every material circumstance which is known to the assured, and the
assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known to him.'

4.4 The breach of this principle could be under following circumstances:

(a) Non-disclosure of material fact

 inadvertently by the insured

 proposer thought it was not material
 concealment by the insured

(b) Misrepresentation by the insured

 innocent
 fraudulent

4.5 Out of the above circumstances the contract shall be void under 'concealment’ and
'fraudulent’ categories whereas under other circumstances the contract is ‘voidable’.

4.6 In the absence of inquiry by the underwriter, following facts need not be disclosed:

a) Facts which reduces the risk e.g. presence of fire alarm system in a building being
insured against fire risk.
b) Any circumstance which the insurer knows e.g. existence of war in a certain part of
the world.

19
 c) Any circumstance as to which information is waived by the insurer.
d) Any superfluous circumstance.

5.0 PROXIMATE CAUSE:

5.1 Insurance policies provide protection against some specified perils, expressly exclude
some perils from the cover, and by implication other perils are not covered. It is therefore
necessary to establish the correct cause of loss/damage for asserting if the loss/damage is
covered in the policy.

5.2 Situations where loss is caused by a single peril is simple, however often perils act
simultaneously and it becomes difficult, but necessary to pick out one of these as the actual
cause of the loss e.g. cargo of rice damaged by sea water entering through a pipe gnawed by
rats. The cause here could be presence of rats on board; the hardness of their teeth; the
incapacity of the pipe to resist gnawing; the entry of sea water etc. In this example the entry
of sea water (perils of the sea) was considered to be the proximate cause leading to the
damage.

5.3 The Latin phrase Causa proxima non remota spectator is used in this principle and
means that the proximate cause and not the remote cause shall be taken as the cause of
loss.

5.4 The following definition was given in the case Pawsey & Co. vs Scottish Union
(1907):

"Proximate cause means the active, efficient cause that sets in motion a train of
events which brings about a result, without the intervention of any force started and
working actively from a new and independent source."

6.0 SUBROGATION:

6.1 Subrogation is the transfer of rights and remedies of the insured to the insurer after he
has paid for the loss as required in the policy.

6.2 It is important to note that the insured is entitled to indemnity but no more than that.
The principle of subrogation allows the insurer to pursue any rights and remedies, which the
insured may possess against the party responsible for the loss.

6.3 This principle also arises from the principle of indemnity, because if the insured collects
the claim from the insurer and also from the party responsible for the loss, the insured would
be making a profit and this would be against the principle of indemnity.

6.4 This principle applies to both total loss and partial loss. Whereas in partial loss the
insurer get no propriety interest in the subject matter insured, in case of total loss the insured
is entitled to the remains, if any, of the subject matter insured.

6.5 Some examples are given below:

 Cargo is damaged during the voyage. After paying the claim, cargo insurer may
claim from the ship owner.

 The hull underwriter may pay the claim for damage to the vessel but thereafter claim
from the other vessel, if it was to be blamed for the collision.

20
7.0 CONTRIBUTION:

7.1 This principle ensures that when the same interest is insured with more than one
insurer, than all insurers bear the risk in proportion to the sum insured by each one of them.
This principle also arises from the principle of indemnity and prevents insured from making gains
from the insurance.

Some other common terms:

Besides the above principles there are some basic terms that need to be understood before
we start going through the specific insurances. These are explained below.

8.0 PARTIAL AND TOTAL LOSS:

8.1 Section 57 (1) of the Marine Insurance Act, 1963 states that" any loss other than a
total loss is a partial loss." The partial loss of the subject matter is also called Particular
Average. Under this the subject matter is partially damaged e.g. some damage on the car;
fire damage on the ship; cargo missing partly or some bags damaged etc.
8.2 The total loss is of following two types:

1. Actual Total Loss - There is an Actual Total Loss (ATL) when the subject matter
of insurance is -

 Destroyed. e.g. ship is sunk.

 Damaged to such an extent that it ceases to be a thing of the kind insured,
(change of species) e.g. cement getting hardened by the entry of sea water.
 When the insured is irretrievably deprived of the subject matter insured e.g.
vessel is missing and after a reasonable time no news about it is received.

2. Constructive Total Loss - There is Constructive Total Loss (CTL) when

 The assured is deprived of the possession of subject matter and its recovery
is unlikely or the cost of recovering would exceed its value when recovered.
 The cost of repairing the damage to the ship exceeds the value of the ship
when repaired.
 The cost of repairing/reconditioning the goods and forwarding them to the
destination exceeds their value on arrival.

8.3 Under the conditions mentioned above, in CTL, the insured has two options:

(a) To claim for partial loss and recover accordingly from the insurer. The insured
retains the wreck and any proceeds therefrom.

(b) To claim as total loss. He has, in this case, give a notice of abandonment to the
insurer declaring that he is abandoning the subject matter insured (wreck) to the
insured.

8.4 The insurer may or may not accept the notice of abandonment. If he accepts then the
proprietary rights of the wreck passes to him and he may be exposed to extra expenses and
the botheration of wreck removal. Therefore mostly this notice is not accepted by the insurer
and the claim for total loss is paid. The wreck still belongs to the insured and its
removal/disposal remains the responsibility of the insured.

21
9.0 ASSIGNMENT:

9.1 Assignment is the transfer of rights and liabilities of an insured to a 3rd party who has
subsequently received insurable interest in the property insured. Therefore now the assignee
becomes the new insured.

9.2 Section 52 of the Marine Insurance Act, 1963 allows the assignment unless it is
prohibited under the terms of the policy. Further the assignment may be made before or after
the loss.

9.3 The system of assignment is very helpful in cargo insurance as the custody of the cargo
changes hand at different points depending on FOB/CIF sale. In hull insurance, on the other
hand, the exposure of risks is different for different ship owners as it depends on the policies of
management, repair & maintenance etc. Therefore assignment of hull policy is usually
prohibited.

10.0 WARRANTEES:

10.1 According to Section 35 (1) of the Marine Insurance Act, 1963 warranty is a promise,
that is an undertaking by the assured that

 Some particular thing shall or shall not be done or

 Some condition shall be fulfilled or
 The insured affirms or negatives the existence of a particular state of facts.

10.2 The warrantees could be included in the policy and those are called expressed
warrantees e.g. ship to sail on or before 15th March; goods to be packed in double gunny bags.

10.3 The implied warrantees, on the other hand, are those which the law implies to be binding
upon both the parties, as if they are incorporated in the policy e.g. the ship has to be seaworthy
at the commencement of the voyage under a voyage policy.

10.4 The insurer may avoid a claim if there is a breach of the warrantees and it is immaterial
if the cause of loss has any connection with the breach increasing or decreasing the risk.

10.5 Insurance is many years old and with the passage of times besides the above issues
certain principles has also been established and are like the pillars of insurance. Like the
above points these are also included in the Marine Insurance Act, 1963. These are now
explained below.

11.0 DUTY OF ASSURED (SUE & LABOUR):

11.1 In case of any loss or misfortune it is the duty of the Assured and their servants and agents
to take such measures as may be reasonable for the purpose of averting or minimising a loss.
The insured should behave as if he/ she was not insured and therefore take necessary action
to avert/ minimize loss. Expenses reasonably incurred for this work are paid by the insurer.

12.0 DEDUCTIBLES:

12.1 This is the amount indicated by the assured and is specified in the policy. This amount is
deducted from the total claim due to an insured peril and the insurer pays the remaining part. It
must be appreciated that chances for large claims are less as compare to smaller claims. Thus
if the deductible amount is high the probability of insurance company paying is less as rarely
claims will be raised. This advantage is passed on to the insured by reducing the premium.

22
12.2 This can be explained as follows:

Deductible agreed ~ $ 10,000

Claimed amount 9,000 12,000
Claim payable Nil 2,000

ooooo

SELF-EXAMINATION QUESTIONS

1. Define insurance?

2. What is the difference between ATL and CTL?

3. Can the hull policy be assigned, and if not, why?

4. What is the importance of insurable interest?

5. Define material fact?

6. What is the relationship between subrogation and indemnity?

7. What is the meaning of warranty?

FURTHER RECOMMENDED READING:

1. Principles of General Insurance - Insurance Institute of India Marine

Insurance -Templeman/Lambeth.
2. Marine Insurance by Templeman/Lameth.
3. The Principles of Marine Insurance by Harold A Turner.
4. General Principles of Insurance Law by ER Hardy Ivamy.

***********************

23
RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 4

HULL & MACHINERY INSURANCE

1.0 Hull insurance is also termed as hull and machinery insurance and covers the loss and
damage to the ship by various perils which are incorporated in the policy. While two separate
words, ‘hull’ and ‘machinery’ are included but the insurance is one only and traditionally always
referred as ‘hull & machinery insurance’. The hull insurance may be taken in the Lloyd's market
in London. However in India presently the insurance can be purchased by the four
subsidiaries of the General Insurance Corporation, namely, New India Assurance Co., Oriental
Insurance Co., National Insurance Co. and the United India Insurance Co. These have head
offices at the four metro cities, namely, Mumbai, New Delhi, Calcutta and Chennai
respectively.

2.0 Valued policy:

2.1 The hull policy is a valued policy. This means that the value of the vessel is agreed
between the insurer and the shipowner and indicated on the policy. In case of total loss of the
vessel the insurer pays this amount.

3.0 Period of insurance:

3.1 Usually the hull policy is a ‘time’ policy and is valid for a year. The insurance needs to
be renewed next year. ‘Voyage’ policy is also available if for some reasons shipowner wants
to insure only for a voyage.

4.0 Premium – basis of rating:

4.1 The premium for this insurance is indicated as a percentage of the value and depends
on the following:

A. Details of the ship :

 Type (general cargo, container, tanker, bulk carrier etc.)

 Tonnage (DWT/GT)
 Age
 Method of propulsion
 Trading pattern (liner, tramp)
 Flag - Registration, FOC - indicates level of maintenance
 Class - Classified with an IACS member etc.
 Place/Yard of built
 Value - Hull policy is a valued policy and thus the agreed value of the vessel
becomes important
 Availability of P and I cover.

B. Details of the Shipowner :

 Type - Traditional shipowner or the management company

 Size - Singleton or a fleet of vessels
 Past claim record - Past history, not only of the vessel but also of others in the fleet

24
C. Details of the Insurance :

 Time or voyage cover

 Scope of cover -total loss or complete cover etc.
 Deductibles -? normally higher the deductibles i.e. higher the risk retention by the
owner, lesser will be the premium

4.2 On the basis of the above factors the rating is fixed on following two elements:

 Total Loss (TV) Element - this is expressed as a percentage of the insured value.
 Other than Total Loss (OTL) Element - This is expressed as rate ($) per DWT or
per GT

4.3 A combination of the two is finally calculated in terms of US$ and then expressed as a
percentage of the Insured value.

Example:

Insured value - US$ 4 million

DWT-30,000; Total Loss (TL) Rate - 0.75% of the insured value

Other than Total Loss (OTL) Rate - 1.5 $ per DWT
TL component - 0,75 x 4 (million) = 30,000
OTL component - 1.25 x 30,000 = 37,500
Total in US$ = 67,500
= 1.6875 % of the insured value

5.0 Assignment:

5.1 The hull policy is not freely assignable as the exposure to various risks change if the
ownership of the vessel or its management changes. Similarly the hull insurance terminates if
the flag of the vessel changes or if the vessel is chartered out on bareboat terms. Similarly
classification plays an important role in the way a ship is maintained and therefore the
insurance is not available if the class is withdrawn.

6.0 Clauses:

6.1 The policy document has set of clauses attached with it that indicate the terms and
condition of the insurance, including the rights and responsibilities of both the insurer and
insured. Clauses are available for both time and voyage insurances.

7.0 ITC (HULL) Clauses:

7.1 The Institute Time Clauses are the most important clauses, which are attached with
the hull policy. These were developed on 1/10/1983. A revised set of clauses have been
available from 1/11/1995, however these are mostly still not used. Similarly American' and
Scandinavian clauses are also available and are used in some areas.

7.2 A new set of clauses called the International Hull Clauses, 1 November 2003 have also
been released and are slowly being used. These are more in detail with 50 clauses as against
26 in ITC (Hulls), 1/10/1983. A copy of 1983 clauses are attached in the Annexure of this study
material. See para 14.0 for more details.

25
7.3 These clauses are for time policy i.e. for one year. Similar clauses, namely Institute
Voyage Clause (Hull), are also available for hull insurance for a single voyage.

7.4 The ITC (Hull), 1 Oct 1983 are a set of 26 clauses and some of the important clauses
are explained below:

8.0 Perils Covered:

8.1 This clause enumerates various risks, loss/danger covered. These risks are arranged
in two groups.

(1) The first part indicates that this insurance covers the loss/damage to the ship by:

 Perils of the sea. This refers to the fortuitous accident of the seas e.g. heavy
weather, collision, grounding etc.
 Fire explosion.
 Piracy, violent theft by persons from outside the vessel.
 Contact with aircraft, land conveyance, dock or harbour equipment or installation
e.g. damage caused by crashing of helicopter on board, shore crane falling on
vessel.
 Earthquake, volcanic eruption, lightening.

(2) The second part of the clause lists the circumstances under which the loss or damage
to the vessel shall be covered only if such loss or damage has not resulted from want of due
diligence by the Assured, Owners or Managers.

8.2 Some of these referred circumstances have historical background as earlier

loss/danger by them was not considered to be the result of the perils of the sea and thus cover
was denied.

8.3 This insurance covers the loss of/ or danger to the vessel by:

 Accident in loading, discharging or shifting cargo or fuel. This inclusion is due to

the case ‘Scott Steamers v/s Marton (1916)’ when a boiler was being loaded and
due to the failure of tackle it fell and damaged the vessel.

 Busting of boiler, breaking of shaft or any lateral defect in the machinery or hull. In
‘Wills Sons v/s the World Marine (1911)’ the hoisting chain of a dredger broke due
to a latent defect in a link, the resultant damage to the vessel was held recoverable
under the clause.

 Negligence of Master, Officer and Crew.

 Negligence of Repairer or Charterer. This inclusion is due to the famous

‘Inchmaree case of Hamilton Freaser v/s Thames and Mersey Marine Insurance
Co. (1887)’ where in the vessel Inchmaree a valve was accidentally closed by a
repairer resulting in the bursting of a pump and entry of seawater causing damage.
It held by the court that this was not due to the perils of sea. Thereafter this was
included and the clause is thereafter called "Inchmaree Clause".

 Barratry of Master, officer and Crew. Barratry is a wrongful act willfully committed
by the Master, Officer or Crew to the prejudice of the owner e.g. Seizer of the
vessel.

26
8.4 It must be noted that the loss/danger by the second set of perils is only covered if such
loss/damage is not resulted from want of due diligence on the part the Assured, Owners or
Managers, [Superintendent or any other shore management] – these words, in bracket, were
added in the 1995 clauses.

9.0 Pollution Hazard:

9.1 If a vessel e.g. A tanker is damaged due to grounding or any other accident and there
is pollution or a threat of pollution then the Government authorities may order the vessel's
destruction. The loss of or damage to the vessel by such action is covered. This happened in
the case of Tony Canyon where the UK Court ordered the vessel to be bombed so that
pollution may be prevented.

9.2 The claim under this only admissible on condition that the insured must have used ail
reasonable efforts to prevent pollution.

9.3 It should be understood that this clause does not give an indication that damage
caused due to oil pollution is covered in H&M. Claims arising from such damage are the
liabilities of the ship owner and the same are covered by P&I Clubs.

10.0 Excluded Perils:

11.1 Loss of or damage to the vessel under following circumstances shall not be covered:

Clause 23 - War Exclusion - includes civil war revolution, capture, seizer, arrest,
derelict mines, torpedoes, bombs etc.

Clause 24 - Strikes Exclusion - includes damage caused by striking workers, civil

commotion, terrorists acting from a political motive.

Clause 25 - Malicious Acts Exclusion - This refers to the loss / damage covered by
detonation of an explosion or any weapon of war caused by a person acting
maliciously.

Clause 26 - Nuclear Exclusion.

11.2 These clauses are also referred to as paramount clauses and override anything
contained in the ITC (Hull) clauses.

11.3 Besides these following are also the exclusions:

 Not primarily caused by an insured peril

 Willful misconduct of the assured
 Act of omission
 Act of commission
 Delays
 Wear and tear

11.0 3/4th Collision Liability Clause:

11.1 In the case De Vaux v/s Salvador the court rejected the claim of collision liability as the
loss due to perils of the sea indicating that the claim was due to maritime law and was not
covered under the hull insurance. Thereafter this clause was included in the hull policy. This
clause is also referred as the Running Down Clause. This is the only liability covered under
this insurance.

27
11.2 According to this clause the following is covered subject to the insured i.e. the
shipowner becoming legally liable for the damages caused by collision:

 Loss/damage to any vessel or property thereon;

 Delay to or loss of use to any such vessel;
 General average, salvage of any such vessel.

11.3 Such liability shall be limited to the 3/4th of the sum paid i.e. 3/4th of the total claim.
Further the maximum amount payable will not increase 3/4th of the insured value of the ship.

11.4 The liability was limited to 3/4th as it was thought that the insured will be careful if the
remaining 1/4th risk is on him. However now with the ship values increasing the P & I Clubs
cover the balance l/4th risk.

11.5 Following are not included in this clause:

 Expenses for removal and disposal of wreck, cargo etc;

 Damage to any personal property;
 Damage to cargo or any other property on the insured vessel;
 Loss of life or injury;
 Damage due to pollution,

11.6 If both vessels are held liable than the claim is to be settled by cross liabilities :

Example:

Collision between vessels A and B. Both held equally to blame.

Damage on vessel A - $ 100,000

Damage on vessel B - $ 60,000

Vessel A is liable for $ 30,000 (50%of 60,000) and similarly B is liable for $ 50,000
being 50% of 100,000.

11.7 The final settlement will be as follows:

Claim of vessel A :

Paid as Partial Paid under Paid under P&I

Damage in Hull 3/4th Collision Policy
policy Clause in Hull
Policy
Damage sustained $ 100,000
Collision liability for damage to
ship B = $ 30,000 $ 22,500 (3/4th) $ 7,500 (l/4th)

Recovery from ship B in respect

- $ 50,000
of damage sustained
Grand Total = $50,000 $22,S06 $7,500

28
 Claim of vessel B:

Paid as Partial Paid under Paid under P&I

Damage in Hull 3/4th Collision Policy
policy Clause in Hull
Policy
Damage sustained $ 60,000
Collision liability for damage to
ship A ~ $ 50,000 $ 37,500 (3/4th) $ 12,500 (1/4th)

Recovery from ship A in respect

-$30,000
of damage sustained
Grand Totals $30,000 $37,500 $1230

12.0 Deductibles:

12.1 This is the amount indicated by the assured and is specified in the policy. This amount
is deducted from the total claim due to an insured peril and the insurer pays the remaining
part.

12.2 This can be explained as follows:

Deductible agreed ~ $ 10,000

Claimed amount 9,000 12,000
Claim payable Nil 2,000

12.3 This keeps the smaller claims away from the insurance as their administration costs
can be quite high. Further this brings in the onus of being careful on to the shipowner. Also
higher the deductible lower is the insurance premium.

12.4 The deductible is applied on the aggregate of all the claims pertaining to one accident
or occurrence. Only in case of heavy weather damage it is difficult to correctly assess the
timing of damage as such weather may be for two or three days and once again after few days
similar weather may be encountered. Thus for such damage between two successive ports is
considered for deducting deductibles.

12.5 The deductible is reduced from the aggregate of the following claims:

 Partial damage to vessel.

 Collision liability.
 General average charges.
 Salvage charges.
 Sue and Labour charges.

12.6 The deductible is not reduced from the following claims:

 Total loss, both actual and constructive

 Sue and Labour charges associated with the total loss claim
 Reasonable cost of sighting the ship's bottom after grounding, even if no damage
is found.

29
13.0 Termination:

13.1 The H&M insurance is usually for 12 months and fresh insurance is to be taken after
the expiry of 12 months. However, in certain conditions insurance may be terminated during
the 12 months. This is when the flag, class, or management is changed. Similarly insurance
also terminates if the ship is given on bareboat charter.

14.0 Classification:

14.1 In 1995 following clause on ‘classification’ was added:

Classification:

 Appointment of class to be agreed by Underwriters.

 Recommendations to be complied by required dates.
 Prompt reporting to the class on incidents/damage where class might make
recommendation.
 Underwriters authorized to approach class for information/documents.
 Termination of cover in case of overdue survey.

15.0 The International Hull Clauses 2003:

15.1 These clauses were first introduced in November 2002 by the International
Underwriting Association of London and then re-launched on 1 November 2003. They were
developed under the auspices of the London market's Joint Hull Committee.

15.2 These clauses were developed keeping three main points in consideration :
 First to reemphasize the London market's position as the premier market for the
insurance of ships.

 Secondly, to update certain provisions in the Institute Time Clauses – Hulls

(01/10/83) – particularly concerning Class, brought in 1 November 1995, and the
ISM Code, which was important from the ship operation point of view and was
introduced as an amendment to Chapter IX of the 1974 SOLAS convention.

 Thirdly, to harmonize a number of broker clauses commonly found in London

market slips.

15.3 The new set has 50 clauses arranged in following three Parts:

Part 1 – Principal insuring conditions.

Part 1 – Additional clauses.
Part 3 – Claims provision.

16. The clauses are better arranged and can be termed as user friendly. A copy of
clauses are attached in the Annexure of this study material.

ooooo

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 SELF-EXAMINATION QUESTIONS

1. What are the factors influencing the premium of hull insurance?

2. Describe the perils covered in the ITC (Hull).

3. Describe the salient points of 3/4* Collision Liability Clause.

4. Explain salient points of Classification clause.

5. Due diligence of assured is important while claiming for damages caused by negligence
of the Master – discuss this statement.

RECOMMENDED FOR FURTHER READING:

1. Marine Clauses by Insurance Institute of India.

2. Marine Insurance by Templeman/Lambeth.
3. Analysis of Marine Insurance Clauses by R.H. Brown.

*******************

31
RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON 5

PROTECTION & INDEMNITY CLUBS

SECTION I

Protection & Indemnity Clubs are mutual insurance associations, more commonly known by
the acronym P & I.

1.0 HISTORY:

1.1 Hull Clubs: These Clubs originated mainly in the U.K. and Europe and even to this
day most of the leading Clubs are based in the U.K. who are in fact successors to the Mutual
Hull Indemnity clubs that were formed in the late 18th Century. Until then Hull Insurance was
primarily placed in the United Kingdom.

1.2 Pursuant to a Royal Charter towards the end of the 18th Century, the proprietary (as
distinct from mutual) insurance market for marine risks was restricted to Lloyd's and a few
companies operating under royal charter. This limited market had thrown up some deficiencies
including high premium rates. This gave rise to friendly associations of shipowners for mutual
insurance of their ships in the U.K. and thus Hull Clubs were born.

1.3 These Hull Clubs were local bodies and their members were shipowners who were
based in the vicinity of the clubs. Since these Ship Owners were clustered in certain (remote)
locations; viz. the North East, South, West Coast of the United Kingdom, Hull clubs were
located there.

1.4 These members of each club appointed a Manager to administer the affairs of their
Club and paid premiums which were based on the number of their ships covered by them and
thus the shipowner-members insured each other's ships (Principle of Mutuality). They were
therefore both insurers as well as insured, but it should be borne in mind that these clubs
insured loss of or damage to ships only. In other words, they provided property insurance and
not liability insurance.

2.0 LIABILITY INSURANCE:

2.1 In course of time, after the Royal Charter was withdrawn, London based selected
insurers emerged and offered competition to the Hull Clubs at lower rates which these (Hull)
Clubs could not match.

2.2 While the Hull Clubs declined, the increase in values of ships and cargoes coincided
with the substantial increase in potential liabilities of shipowners in the U.K as enumerated
herein;

2.3 While both Hull Clubs and the traditional market underwriters were insuring the Hull of
the ships up to their declared values as there were no third party liability to which the owners
were exposed to. Certain landmark judgments of the English High Courts (House of Lords)
broadened and burdened the ship owners with the third party liabilities.

32
 (a) The first among them were the RDC (Running Down Claims) claims. The
insurers agreed to include this risk under their Hull policies, by way of an attachment
to the existing policy, but only to the extent of 3/4th RDC (Running Down Clause); the
balance ¼ RDC was left to be borne by the owners. The rationale and purpose was to
ensure that the owners acted with more care and exercised due diligence required of
a prudent ship owner in appointing the Master and the Officers who were competent.

(b) The second was the owners liability to pay for loss of life and injury to the crew,
which until the Court’s ruling were not required under law to be compensated.
Thereafter, the ship owners contacted their Hull clubs to ensure that these extra third
party liabilities which could not be covered under their existing Hull policy: some Hull
Clubs agreed to establish another category of cover namely Indemnity Insurance to
cover these liabilities..

(c) Later Court decisions made the shipowner liable towards cargo that was carried
and caused due to the deviation o the ship. These cargo liabilities were again insured
by such Indemnity Clubs.

2.4 The Indemnity Insurance claims were insured on the basis of ‘Mutual Insurance’. The
reason was that all ship owner members within an Indemnity Club should share the Third Party
Risks imposed upon one of their unfortunate colleague rather than the member by himself.

2.5 Moreover, in the course of the century, social legislation of progressive nature imposed
liability on shipments for (a) death and personal injury to crew, passengers and third parties,
(b) fixed objects like port property.

2.6 Thus, although the business of Hull Clubs declined the framework of mutual insurance
was readily available and shipowners converted these Clubs into "Protecting Clubs" to insure
them against these liabilities.

2.7 As and when shipowners were saddled with other liabilities, the Clubs extended their
cover to insure such liabilities. The present modern clubs are really successors to old
Indemnity clubs.

3.0 CONSTITUTION OF A MODERN P & I CLUB:

3.1 With these developments of the P & I business covering shipping and liabilities, the
Clubs obviously could not function as a group of individual members forming indemnity clubs.
Today's P&I Clubs are registered companies i.e., limited companies with no share capital
because they are non-profit making.

3.2 P&I Clubs are limited by guarantee of the members to subscribe up to a specified sum
in the event of liquidation. The concept of guarantee is based upon a reciprocal system, each
member being under a duty to pay on a mutual basis each other's claims.

3.3 P & I Clubs are governed by their constitution which is embodied in their Rule Books.
These documents provide for the entry and withdrawal of members, as well as the liability of
members to pay premium which are known as calls.

3.4 Articles of Association also provide for voting rights of its members.

3.5 Overall conduct of the Clubs is in the hands of general body of members, but routine
business is conducted by a Committee, also known as the Board of Directors, who are
selected generally upon the size of their entered fleet in terms of Gross Registered Tonnage
(GRT) and their geographical locations.

33
3.6 Committee's/ Board’s Responsibilities:

 Approval of claims of high amounts or where a principle of importance is involved.

 Fixing the level of initial and supplementary calls.
 Investment of Club funds and remuneration of Managers.
 Exercise of discretion in approving claims which do not strictly fall within the rules.
 Approving changes to the Rules of the Association.

3.7 Apart from the actual owner of a vessel, there are other parties who are exposed to
liabilities in relation to the vessel. These parties may be operators, charterers, mortgagees,
managers and even ship builders.

3.8 Prospective members have to furnish complete details of the beneficial owner, the type
and number of ships they own; the ships to be entered, classification society, type of cargo to
be carried, nationality of the crew, flag of the vessel, trading area, past loss record and other
relevant details.

4.0 MANAGEMENT OF THE CLUB:

4.1 Affairs of the Club are handled by a separate team of professional managers or by
professional executives employed by the Club. The Managers' functions are:-

(a) Handling claims.

(b) Assessing risks and quoting premium.
(c) Investment of the Club's funds under guidance of their board.
(d) Screening prospective applicants for membership.
(e) Selecting and maintaining a network of correspondents round the world.
(f) Arranging quarterly Board meetings and reporting to the board developments
concerning large claims in particular, and submitting a summary of the routine
claims.
(g) Financial reports and the investment returns.

4.2 These correspondents can be commercial or legal or both. Clubs always take care to
avoid calling their correspondents as "agents". The reason is that if the club has appointed an
agent in a foreign country, it could be deemed to be doing business in that country through
the agent. The Club is then exposed to direct action by a claimant who may find it more
beneficial to sue the Club rather than the member.

4.3 Some of the bigger Clubs employ staff to do research in analyzing various types of
claims and why they arise. Lessons are drawn from such analysis and members, are given
advice on loss prevention. Clubs also keep their members informed of legal developments in
various parts of the world which may be of interest to the business of the members. This can
be done by circulars and newsletters.

SECTION II

5.0 RATING OF RISKS & FIXING OF CALLS:

5.1 Underwriting the risk for a member and charging premium is an exercise of complexity
and Club Managers over the years have developed expertise in assessing risks. The system
of Clubs in making advance and supplementary calls is better suited to insurance of members'
liabilities as it improves the cash flow.

34
5.2 A traditional market underwriter runs the risk of fixing the premium too high which could
make it unattractive. Or he may quote too low a rate which could make the business
uneconomic of for him. On the other hand the system of mutual insurance adopted by the
Clubs has a self-correcting mechanism built into it through the medium of supplementary calls.

5.3 Inspite of this, there are several well known in respected fixed premium insurers who
are better suited for small and medium size ships which do not create high value claims, but
in a mutual system, these small and medium ship owners mandatorily have to contribute to
the large claim of bigger ships.

5.4 The Clubs usually provide cover for a year at a time and the Club year begins on 20th
February. There is a historical reason for it. Traditionally 20th February was the date when the
Baltic Sea reopened for navigation."'

6.0 PREMIUM RATING SYSTEM:

6.1 When a shipowner wants to be entered as member of a P&I Club, the managers will
require the following basic information;

(a) Full details of the owner’s ship, type and the size (tonnage) of his/her fleet:
(b) Details of existing insurance e.g. hull insurance and whether it covers collision
liability in full or only 3/4ths.
(c) Nature and size of deductibles as these affect the Club's exposure.
(d) Whether cargo, passenger and crew liabilities are excluded or included.
(e) Crew nationality.
(f) Type of cargo and trading area.
(g) Quality of management.
(h) Previous claims record usually for the previous 5 years.

6.2 The basic equation for underwriting is that calls plus investment income should equal
claims plus expenses plus reinsurance premium.

7.0 ADVANCE AND SUPPLEMENTARY CALLS:

7.1 Fixed premium market underwriters charge premium. Clubs collect calls. On payment
of the fixed premium, the liability of the shipowner comes to an end. In the Club system
payment of the first call does not end the member's obligations as he/she continues to remain
liable to contribute to losses of other members of own club and to the International Group (IG)
Pool.

7.2 Advance Calls:

7.2.1 Once the basic rate is achieved it is multiplied by gross tonnage of the member for the
period of cover and this produces the estimated advance calls.

7.3 Supplementary Calls:

7.3.1 Clubs reserve their right to make supplementary or additional calls. Obviously in an
ideal situation supplementary calls would not be necessary and this is what members would
prefer. But the claims graph cannot be predicted accurately and supplementary calls are a
fairly regular feature of P & I Insurance.

7.3.2 It is debatable whether Clubs should aim for high advance calls and nil or low
supplementaries. From the member's point of view it is better if the money remains in his
hands and is only paid out as and when required. On the other hand from the Club's point of

35
view high advance calls reduce the risk of bad debts than when supplementary calls are levied.
When a member defaults in payment of calls due, his contribution has to be made up in some
other way, e.g., by the levy of an additional call or by digging into reserves.

7.4 Non-payment of Calls:

7.4.1 A Member who fails to pay his calls punctually is subject to various sanctions:

(a) Member's cover can be withdrawn not only from the date of failure to pay but
retrospectively in respect of claims which have arisen prior to date of nonpayment.

(b) Charging of interest for non-payment of calls.

(c) Major Clubs who form the International Group will refuse cover to a defaulting
member who is liable for the losses of his fellow members. This is logical as the
member is not only the assured but also the insurer.

7.5 Release Calls:

7.5.1 When a member's entry is terminated, he has to pay a "release" call. The club
determines the member's additional premium based on the anticipated rate of contribution for
the rest of the year for calculating the release call. On payment of this call the retiring member
is "released" from his obligation for future calls.

8.0 DUTY TO ACT AS PRUDENT UN-INSURED:

8.1 It is a well known principle of marine insurance that the assured should at all times act
as a prudent un-insured. It is his duty to take all steps necessary to mitigate the loss.

8.2 This principle also applies in P & I Insurance and failure to act and do so can prejudice
the cover. At the same time, the Club will reimburse the member any extra expense that is/has
been incurred by him/them in consultation with the club in averting a loss which would form a
claim from the Club.

SECTION III

9.0 SCOPE FOR P & I CLUB COVER:

9.1 It is sometimes said that the Club covers risks which cannot be placed elsewhere or
that it covers everything that is not covered by some other policy of marine insurance. A more
accurate description would be that a P & I Club covers its members against their liabilities to
third parties except for crew claims which are in fact contractual liability.

9.2 In the 18th and 19th centuries the prevalent view was that the negligent conduct
deserved to be punished and not compensated for. Hence, liability insurance was not
recognized as legitimate. But today, liability insurance is acknowledged as being a perfectly
legitimate sector of insurance industry and mutual insurance associations have proliferated.
We have a mutual’s system for doctors, accountants, architects, etc.

9.3 In fact, now a system of compulsory marine liability insurance should be established
because the club’s provide the requisite certificate of financial guarantee under the various
Conventions e.g. the International Convention on Civil Liability for Oil Pollution Damage, 1966
(CLC), International Convention on Civil Liability for Bunker Oil Pollution Damage, 2008
(BUNKER) and the Athens Convention Relating to the Carriage of Passengers and their
luggage by Sea, 2002.

36
9.4 Further, it must be noted that once the Nairobi International Convention on the
Removal of Wrecks comes into force, the ships will be required to provide a financial guarantee
for wreck removal also.

RISKS INSURED UNDER P & I COVER :

10.0 LOSS OF LI FE, PERSONAL INJURY AND ILLNESS:

(1) Liability

(a) Ship owners are liable to pay compensation or damages as a result of injury,
illness or death of a seaman during his period of service on board or during the periods
of proceeding to or from the entered vessel. The shipowner may be exposed to such
claims in tort or under statute law, although it is more usual for the claims to be made
under the crew member's collective agreement or particular contract of employment .
Ship owners are also liable for hospital, medical and funeral expenses and such
expenses are recoverable.

(b) Club cover also includes compensation to a seaman for loss of employment
from the loss or wreck of a vessel.

(c) Wages of a crewman during medical treatment whilst abroad and his
repatriation and expenses for sending substitute crew abroad.

(d) Loss of Life or injury to any person other than crew members or passengers
engaged to perform duties on board e.g. pilots, stevedores, and shore workshop
employees working on the ship or in relation to the ship.

(e). Loss of life or injury caused due to a collision with another ship in proportion to
the fault of the entered ship.

(f) Loss of life and injury to Stevedors - This is a frequent source of heavy claims in
tort or under statute law against shipowners and thus by them against their Club

(2) Liability to Passengers:

(a) Clubs cover ship owner’s liability to passengers for death, injury or illness
provided the terms of passage ticket are approved by the Club concerned and
negligence on the part of the ship is established. These claims may in certain
jurisdictions be defeated or limited in amount by the terms of the passenger ticket.
(b) He may also be liable in tort to persons other than crew, stevedores and
passengers who come on board his ship for one purpose or another, including
surveyors, Customs officials, pilots and so on. Cover in respect of liability to these
persons is also included.

(3) Wives and Children of Crew:

It is customary today for crewmen to carry their families on board with the agreement
of the ship owner. Expenses in connection with their death, injury or illness and their
repatriation are recoverable.

37
11.0 DIVERSION EXPENSES:

11.1 Expenses incurred in deviating from the contractual route for saving life or for some
humanitarian reason, whether the life to be saved is on board the vessel or another vessel.
Only extra expenses are recoverable, i.e. expenses over and above the normal expenses
which would have been incurred but for the diversion. The shipowner may suffer losses
through having to divert his ship in order to obtain treatment for an injured or sick person on
board or for the purpose of landing stowaways.

12.0 FINES:

12.1 Fines may be imposed by a court or an authority for:

(a) Breach of regulation regarding safe working conditions.

(b) Short delivery of cargo or failure to comply with regulations regarding declaration
of goods.
(c) Smuggling or violation of Customs regulations.
(d) Breach of immigration rules.
(e) Incidents in respect of discharge or escape of oil or other hazardous substances
from the ship.
(f) Any act or neglect of the seamen.

13.0 OIL POLLUTION LIABILITY:

13.1 In recent years been a huge increase in the exposure of shipowners to liability claims
in respect of pollution caused by cargoes from their vessels, in particular cargoes of oil. Mostly
such liabilities are imposed by international convention such as CLC, domestic statute such
as OPA or common law, but some have been voluntarily assumed by shipowners in
accordance with schemes such as STOPIA. All these liabilities are insured by the Clubs,
although with a limit in respect of oil pollution claims which presently stand at US$1bn each
entered ship each accident or occurrence. Clubs cover ship owner’s liability for pollution of
land, sea or by any discharge from the ship or caused by the ship.

13.2 These liabilities can be extremely heavy, particularly in the USA. The Clubs, however,
offer a maximum of U.S. 1 (One) Billion cover under ordinary P & I cover.

14.0 COLLISION LIABILITY

14.1 When two ships are in collision, each ship is liable to the other for the damage caused
in proportion to the degree of fault. Ship owner recovers ¾ RDC (Running Down Clause)
liabilities to the other vessel from the hull insurers and ¼ RDC (Running Down Clause) from
the Club.

14.2 Non-Running down Clause (RDC) liabilities – e.g. loss of life or injury caused to the
other ship’s crew, pollution or wreck removal in respect of other vessels.

15.0 WRECK REMOVAL:

15.1 Clubs do cover ship owner’s liability for raising, or removing or marking of the wreck of
the entered ship, only if the ship is found to be legally liable. From the cost of the operation
will be deducted the value of the wreck or any part that is recovered as a result of the removal
operation.

38
16.0 NON-CONTACT DAMAGE:

16.1 This is also known as "wash11 damage. It happens when one ship causes physical
damage to another without actual physical contact, e.g., proceeding at excessive speed.
Another example of non-contact damage would be if ship A, by executing a negligent
manoeuvre, caused ship B to run aground or cause damage to other property.

17.0 LIFE SALVAGE:

17.1 Clubs cover expenses incurred by a ship owner in saving life at sea. If life is saved
concurrently with property, the liability falls on the property insurer.

18.0 STOWAWAY/REFUGEES:

18.1 Clubs reimburse their members for expenses incurred in keeping stowaways on board
until they are disposed of ashore and for repatriating them to the country of origin. The rule
has been extended to cover "boat people" also.

19.0 QUARANTINE:

19.1 These expenses are recoverable if incurred because of outbreak of infectious disease
on board. Such expenses could be bunkers, wages, stores, provisions and port charges.

20.0 DAMAGE TO FIXED AND FLOATING OBJECTS:

20.1 When there is a collision between ships, Clubs usually cover ¼ RDC (Running Down
Clause) of the ship owner’s liability. But when a ship hits a pier, dock wall, harbour installation,
submarine cables, etc., the club reimburses its member to the full extent unless this is covered
under certain H&M policies.

21.0 EXCESS OF 4/4TH LIABILITY:

21.1 If RDC (Running Down Clause) liability exceeds the proper insured value pf the ship
such excess costs would be covered by the club.

22.0 CARGO:

22.1 A ship owner is responsible for loading, stowing, carrying and discharging the cargo in
the same good order and condition in which it is received by him for shipment. Of course this
is subject to any exclusions from liability which may exist in the contract of carriage. Cargo
claims can be for short-delivery (short-landing of the said cargo), unseaworthiness of the ship,
improper stowage, defective dunnaging, ventilation, heating, sweating, theft, pilferage,
contamination, leakage from other goods or damaged caused from sea water.

22.2 It should be noted that Clubs cover cargo liability if the ship owner contracts to carry
cargo on terms no less favorable than the Hague or Hague-Visby or Hamburg Rules. Of course
cargo carried subject to the Hamburg Rules will only be covered if the ship is trading to and
from a country which mandatorily applies the Hamburg Rules.

22.3 The cover extends beyond the sea leg of the carriage and thus will protect the
shipowner throughout a combined transport contract from an inland point to another inland
point, provided only that the sea leg is performed by an entered ship.

39
23.0 DEVIATION:

23.1 Deviation can be of two kinds:

(a) Geographical deviation - physical departure from the contractual voyage.

(b) Non-geographical deviation — flagrant breach/violation of the conditions of
carriage.

(i) Geographical Deviation:

As a rule, Clubs do not cover their members for loss or damage to cargo as a result of
deviation. A ship owner can protect himself by advance notice to his Club of intention
to deviate. The Clubs in turn have an open deviation cover in the insurance market
and they declare each incident to their market insurer. The Clubs in turn charge
additional premium to their member.

(ii) The most common example of non-geographical deviation is :

(a) Shipment 'on deck' against 'under deck’ bill of lading.

Deck shipment exposes cargo to avoidable extra risks and amounts to deliberate
falsification of a document of title. Clubs bar recoveries in respect of any claim arising
out of such an occurrence.

(b) Delivery of cargo without production of bill of lading.

This practice is forbidden by Clubs and if a ship owner suffers loss or damage as a
result of releasing cargo in this way, the Clubs will not protect the ship owner who may
have to protect himself by a suitable guarantee from the consignee and his bank.

(c) False descriptions in the bill of lading:

Ship owners often issue a clean bill of lading for cargo which for one reason or another
is not in good order and condition. The main reason for this is to retain the goodwill of
the shipper whose letter of credit may stipulate a clean bill of lading. Another example
of falsification is anti-dating or a pre-dating bill of lading.

23.2 Clubs do not favour such practices and a shipowner loses the benefit of the Club cover
if he adopts such practices.

24.0 GENERAL AVERAGE NOT OTHERWISE RECOVERABLE:

24.1 In a General Average situation, cargo interests are required to contribute their share
of the G.A. sacrifice / expenditure made in the common interest. However, if the G.A. situation
is caused by the fault or negligence of the ship owner or his servants for which the ship owner
is legally liable in terms of the contract of carriage, cargo interests can decline legally to make
their proportionate contribution. In such an event cargo's contribution not recoverable is
reimbursed by the Club to the ship owner.

24.2 Moreover, there are occasions when ship's proportion of G. A. cannot be recovered in
full from the hull underwriters. This situation can arise when the value of the ship on which
ship's contribution to G.A. is assessed, is in excess of the insured value under the hull policy.
If in the Club's opinion the insured value is fixed at a reasonable realistic level, the Club will
reimburse the ship owner for the shortfall in G.A. contribution occasioned by the under
insurance.

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25.0 TOWAGE CONTRACTS:

25.1 Ship owners are very often compelled to sign towage contracts in which the vast bulk
of liabilities arising out of the towage fall upon the ship owner of the ship towed. Clubs can
extend their cover to indemnify the ship owner who incurs such liabilities, provided that the
towage contractual terms is based either on Standard Lloyds contracts namely the Towcon or
Towhire.

26.0 WRECK REMOVAL:

26.1 Expenses for raising, or removing or marking of the wreck of an entered ship are legally
recoverable from the ship owner. Port or State authorities are generally empowered by their
rules to recover such expenses from the owner of the ship concerned. Such a liability is
covered by the Club.

27.0 OMNIBUS RULE:

27.1 The concept of mutuality makes the P & I cover unique. The insurer and the insured
are one and the same people. This Omnibus rule is a "Sweep up" provision and reflects the
attitude of the Clubs, that if possible, a member's claim should be brought within the cover
even if it does not fall within the various risks specifically covered. Consideration of claims
under this rule is strictly discretionary. The Club management will look at such a claim by
asking themselves: "Would we have included such a risk in our rules if we had thought about
it when the cover was formulated?"

28.0 EXCEPTIONS & LIMITATIONS TO CLUB COVER:

28.1 Exclusion of cover in the area of bills of lading has already been mentioned. What
follows deals with general exceptions:

(i) Deductions

A deductible is an initial amount of money which a member has to bear in respect of any
claim settlement. A deductible results in eliminating small claims which would otherwise
take up a lot of administrative work and time of the Club managers. Often, the paper work
is the same whether the claim is small or large. A deductible, thus helps to lower the
overall insurance cost. Moreover, a deductible has a deterrent effect on the member and
makes him more careful.

(ii) Member's willful misconduct:

Club cover is prejudiced if the liability arises from the actual fault or privity of the member.
Fault is self explanatory but privity means knowledge which is deliberately concealed
Privity also means failure to impart the knowledge to someone else who could have
usefully used it. The most glaring example of fault or privity is that of a ship owner sending
his ship to sea in an unseaworthy condition knowing it to be unseaworthy.

(iii) Damage to the entered ship:

A ship owner is expected to take out hull insurance to cover this risk. In addition to damage
to the entered ship, the master's equipment like containers, lashings, stores, and fuel are
also excluded.

(iv) Loss of charter hire, demurrage or cost of delay to the entered ship. These are
commercial risks and Club cover is not available to include them.

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29.0 PROPOSAL FOR OVERALL LIMIT ON CLUB COVER:

29.1 There has been a lot of debate in the recent past as to whether it is advisable for Clubs
to provide unlimited cover. Traditionally Clubs have extended such cover unlike the cover offered
by fixed premium property insurers whose liability is limited to the insured value. However,
catastrophe claims in recent years have set the Clubs thinking. After a period of intense arguments
the Clubs have currently fixed their liability for a single claim at about U.S. $ 2 Billion. This is a
compromise between the Clubs who insist a limit and those who believe in maintaining unlimited
cover. The Limit of Liability (LoL) offered by the Fixed Premium P&I Insurers range from USD 25
Million to USD 500 Million which suits small and medium size ship owners.

SECTION IV

30.0 CLAIMS & HANDLING OF CLAIMS:

30.1 Claims handling is an important function of Clubs and it is the responsibility of the
Managers. Clubs also have correspondents throughout the world and they assist the Members and
of course the Club in the conduct of the claims. As the scope of liabilities covered by a Club is vast,
Club Managers have on their staff professionals who are experts in their own specialty. Where a
claim is large or complicated, Clubs also appoint Independent lawyers to assist in pursuing or
defending the interests of their Members. Clubs also appoint surveyors to assess the cause and
extent of serious losses or damages.

31.0 NOTIFICATION OF CLAIMS:

31.1 Club rules require a Member to promptly notify the Club of any occurrence or casualty
likely to result in a claim on the Club. Notification is usually done by the Master through the port
agent of the member advising the Club correspondent. Failure to notify promptly may prejudice
recovery. It is a perfectly reasonable requirement as any delay could prejudice the Club's ability to
investigate the claim and consider alternative defense arguments. Notification also assists the Clubs
in maintaining adequate records which form the basis of the premium rating of a Member.

31.2 In most cases a Member knows whether an event will give rise to a claim. But there are
cases where there may be some doubt. An obvious example is cargo damage by water entering the
hold of a ship. The cause of the entry of water could be either defective hatches, breach of ship’s
Hull or flooding of hold(s) due to defective bilge values. It could be heavy weather. Defective hatches
could result in a valid claim against the ship whereas unpredicted heavy weather could constitute a
peril of the seas for which the ship owner is exempted from liability.

32.0 MEMBER'S DUTY NOT TO ADMIT LIABILITY:

32.1 It is a condition of Club cover that the Member should not admit liability without the
approval of the Club. A Member cannot expect recovery from the Club unless his liability is
established by a court judgment, arbitration award or "out of Court" settlement with Club approval.
Clubs will reject a claim settled by a Member for business or commercial reasons.

32.2 In the liner trade, Clubs may relax the strictness of this rule by giving the Member and
through him the local port agent "settlement authority" for small claims upto a certain amount.

32.3 Clubs are indemnity underwriters and a member can only seek recovery after he has
settled the claim with the approval of the Club. Clubs undertake only to pay the amount which the
member shall have become liable to pay and shall have paid. This is known as the “Pay to be Paid
Rule”.

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33.0 CLUB LETTERS OF UNDERTAKING (LOU):

33.1 Club LOU or guarantee is a very important facility which the Clubs provide to then-
members for release of their ships from arrest or threat of arrest. In the absence of this facility the
member would have to put a bank guarantee or a cash deposit.

33.2 Issue of an LOU by the Club is not a duty under the standard form of cover and is subject
to the Club’s discretion.

33.3 The service of providing security is usually extended to owner members and not time-
charterer members. When a time-chartered ship is arrested it is a general rule that the owner's Club
provides the security without prejudice to the internal division of liability between the two.

33.4 The Clubs will give an LOU only when the risk giving rise to the claim is covered by the
Club's certificate of entry. If the claim falls below the applicable deductible or if the risk is specifically
excluded from the cover, the LOU will not be provided.

33.5 The payment under the Letter of Undertaking (LOU) is always conditional upon the liability
of the Member being agreed between the parties or established/decreed by a competent court.

33.6 The LOU is given by way of security not only for cargo claims but also third party claims.
Clubs also agree to give an LOU to the port or customs authorities for fines or penalties for which
the Member is or may become liable for infringement of any laws, rules or regulations.

33.7 In India the authorities, normally do not accept Club's LOU and insist on a cash deposit
or a bank guarantee.

34.0 CAN THIRD PARTY CLAIMANTS MAKE DIRECT CLAIMS AGAINST CLUBS?

34.1 This question has been debated in the U.K. vigorously and it was only settled when the
House of Lords gave its decision in the two famous cases — The Padre Island and the Fantri. The
decision was to the effect that under the Club rules Members were not entitled to be indemnified by
the Club unless and until the Member had first discharged liabilities in respect of which he sought
indemnity from the Club. Thus payment of the claim by the Member was a condition precedent to
reimbursement of the Member by the Club.

34.2 Therefore if a Member goes bankrupt or is wound up, the third party having a claim against
the Member which remains unpaid cannot have direct recourse against the Club. Thus the "pay to
be paid" rule of the Clubs was upheld.

34.3 However, Clubs may consider to make an exception in the case of victims or next-of-kin
cases of personal injury or death in the event of bankruptcy or winding up of a
Shipowner-member.

SECTION V

35. RE-INSURANCE:

35.1 As ships grow in size and myriad liabilities which are imposed under law, there could be
a dramatic increase in the extent of liabilities to which the shipowner is exposed. One can well
imagine the extent of liabilities in the event of an explosion in a gas carrier or a serious accident to
a large cruise ship. Hence, no single Club or Fixed Premium Insurer on its own can cope with such
a huge liability and therefore the need for re-insurance.

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35.2 In order to meet the heavy liability and at the same time to offer cover at moderate cost
the mutual Clubs have formed a pool. It is called the "International Group of Clubs". There are 15
pooling members in the Group.

36.0 POOLING OF LIABILITY:

36.1 Pooling of Liability by the International Group Clubs currently is as follows:

For the 2019/20 policy year, the Group has maintained a three layer GXL reinsurance programme,
together with an additional Collective Overspill layer, which combines to provide up to just over US
$3 billion of commercial reinsurance cover.

(a) The first US$ 10 (ten) million of any one claim is borne by the Club in which the
member's ship is entered.

(b) Next, the excess of US$ 10 (ten) million up to US$ 90 (ninety ) million of any one
claim is then passed on to the Group Pool reinsured by Hydra . Liability of each
Member of the Group’s Pool is based upon an agreed formula – which is a
combination of premium incomes, tonnage entered and the claims record of each
member club.

(c) Excess of US$ 100 Million up to US$ 3.1 Billion is re-insured in the open market as
EXCESS-LOSS INSURANCE. It is the highest reinsurance contract in the world.

(d) However, should a Claim Exceed the Combined Limit of Excess-Loss and the Pool
Excess Loss Cover, then this Excess-Loss is met by the Pool (I.G. Clubs) and
collected from each member club – who in turn will call on their members to contribute
towards this Excess Loss.

(e) The Limit of Liability (LoL) of Claims for Oil Pollution from Tankers is USD 1 (One)
Billion and is separately insured with market underwriters.

(f) Club cover continues to contain a standalone cover with a limit on passenger claims
of US $2 bn and a combined limit on passenger and crew claims of US $3 bn
(g) The structure of the Group’s claims-sharing arrangements (the “Pool”) and the
commercial market and captive (Hydra) reinsurance arrangements for the 2019/20
policy year are depicted in the diagram below.
(h) The Pool is structured in three layers from US $10 million to US $100 million. Excess
of US $30 million, the Pool is reinsured by the Group captive reinsurance vehicle,
Hydra Insurance Company Limited. Hydra is a Bermuda incorporated Segregated
Accounts company in which each of the 13 Group Clubs has its own segregated
account (or “cell”) ring fencing its assets and liabilities from those of the company or
any of the other Club cells. Hydra reinsures each Club in respect of that Club's
liabilities within the Pool and reinsurance layers in which it participates. Through the
participation of Hydra, the Group Clubs can retain, within their Hydra cells, premium
which would otherwise have been paid to the commercial reinsurance markets.

(i) The annual Group General Excess of Loss (“GXL”) reinsurance programme attaches
at the Pool ceiling of US $100 million, and provides up to US $2 billion of reinsurance
cover in a three-layer structure (Layer 1 - US $650 million excess of US $100 million,
Layer 2 - US $750 million in excess of US $750 million, and Layer 3 - US $600 million
excess of US $1.5 billion). Hydra retains a US $100 million AAD within the 80% Market
Share in Layer 1, and there are three multi-year private placements, one of 10% within
layer 1, and two of 5% each within Layers 1 and 2.

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(j) A further US $1 billion of reinsurance cover (the “Collective Overspill”) is purchased
annually by the Group to provide protection in respect of claims exceeding the upper
GXL cover limit of US $2.1 billion.

(k) The Pool, the first and second layers of the GXL and the private placement
participation structures for the separate oil pollution cover mirrors the main (P&I)
placement up to the Oil Pollution cover limit (US $1 billion), as depicted above. For
chartered entries, there is a single combined P&I and oil pollution cover limit of
US$350 million. The Pool and Reinsurance layers structures for chartered entries are
identical to those in place for owned entries up to the cover limit.

45
 (l) The Pool and Reinsurance structures are reviewed annually and any changes to the
existing structures will be reported under the News section on the Group website.

36.2 It should be noted that Clubs do not now provide unlimited cover to their members. If,
however a single claim is in Excess of arrangements as described above, these claims are known
as "overspill" claims and they arise in the case of major catastrophes.

36.3 The Clubs can meet such catastrophic claims by (a) setting aside reserve ear-marked for
such payments, (b) purchase special catastrophe re-insurance up to whatever limit they can obtain,
or (c) take out a stop loss policy,

36.4 The stop loss policy is a novel method by which a Club can stabilize its costs. It puts a
brake on the level of supplementary calls. For example, if a policy is taken out covering an excess
beyond an estimated 30 percent call, then if a 50 percent call is warranted the stop loss policy puts
up that excess subject to whatever limit the policy may have.

36.5 Members of the International Group compete with each other for business. But there is
an understanding not to indulge in unreasonable rate cutting. If a ship-owner wishes to change his
Club he has to declare his intention to the Club concerned about 2 (TWO) months before the expiry
of the cover. Moreover, the Club to which the ship-owner wishes to shift his business cannot quote
a rate lower than the existing rate for the first year as quoted by the holding (present) club.
Furthermore, the ship-owner would have to pay Release Calls in respect of ships entered with the
club.

36.6 Functions of the International Group are;

(a) To act as a representative body representing 90 percent of the world's tonnage, and

(b) To be the authentic voice of the industry against governments and governmental
organizations.

36.7 The International Group is an incorporated company and can play an effective role as an
observer at functions on an international level.

37.0 MUTUAL CLUBS VIS-A-VIS FIXED PREMIUM INSURERS:

37.1 FIXED PREMIUM INSURERS are profit based and hence rates are FIXED. Under Fixed
Premium Insurance there are no Supplementary Calls or Standard Increases and Release Calls.

37.2 Clubs as well as Fixed Premium Insurers offer the facility of LOUs and Guarantees.

37.3 Both give services through worldwide correspondents.

37.4 Clubs are managed and controlled by Members themselves through a Board of Directors.

37.5 Clubs operating on the principle of mutuality charge advance and supplementary and
release calls and hence a Club cover lacks predictability in costs.

37.6 From this angle, fixed premium cover offered by market underwriters may be more
attractive for small and medium ship-owners.

37.7 Fixed Premium Insurers provide a lower Limit of Liability (LoL) ranging from USD 25
Million to USD 500 Million as against the International Group P&I Clubs who offer limit of upto USD

46
2.2 Billion.
38.0 LIMITATION OF LIABILITY ON CLUB COVER:

38.1 It was believed and perceived that the clubs had allegedly provided Clubs unlimited cover.
recent years, ship-owners have been saddled with huge liabilities arising out of oil pollution. Claims
settlements as a result of Amoco Cadiz, Torrey Canyon and Exxon Valdez bear testimony to such
huge settlements following oil spill disasters. Oil Pollution Claims are now limited to USD 1 Billion
per claim.

38.2 Gas carriers, large container vessels and very large passenger cruise vessels also
present Clubs with heavy liabilities such as the Costa Concordia (Passenger Ship) and the MV Rena
(Container Ship). Such incidents in the past two years are estimated to cost USD 750 Million and
USD 250 Million respectively. In 1996 Clubs hotly debated whether their cover should have an upper
limit of liability for non-pollution claims also. An uneasy compromise has been reached and Clubs
today limit their liability for non-pollution claims to a figure at 20 percent of the total limit of liability of
all ships entered with the International Group P&I Clubs.

ooooo

SELF-EXAMINATION QUESTIONS

1. What are the functions of Professional Managers appointed by a P & I Club?

2. What information is required by Managers to enroll a new member?
3. Mention the typical risks covered under a P & I cover.
4. List out the general exceptions not covered by the Club.
5. What do you understand by an "LOU"? Is it acceptable in India?
6. What is Pooling of Liability of a Club? How is it achieved?
7. What are the advantages/disadvantages of Mutual International Group P&I clubs vis-a-vis the
Fixed Premium Clubs?
8. Is the liability of a Club unlimited? Discuss.
9. What are "calls"? How many types are they?
10. What is the importance of a P & I cover to a ship-owner?
11. Explain the following:

(a) FD&D
(b) Non-contact damage
(c) P & I collision liability
(d) Diversion expenses
(e) Release calls
(f) Overspill claims
(g) Stop loss policy

RECOMMENDED FOR FURTHER READING:

1. The Standard Protection & Indemnity Rules, 1996/97.

A comprehensive reference book issued by "The Standard Steamship Owners' Protection &
Indemnity Association (Bermuda) Ltd."
Contains special covers, recommended clauses, guarantees of the club, selected circulars,
bulletin briefings, etc.

2. Marine Insurance by Hardy Ivamy.

3. Bes' Chartering & Shipping Terms ~ N.J. Lopez.

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**********************

48
 RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON 6

LIABILITY INSURANCE FOR OTHER STAKEHOLDERS

1.0 LIABILITY:

1.1 Liability is the legal responsibility for one's acts or omissions. Failure of a person or entity to
meet that responsibility leaves that person open to a lawsuit for any resulting damages or a court order
to perform. This liability can arise due to following situations:

1.1.1 Contractual liability – a breach of contract by one of the party of the contract may
make that party liable to the other party. E.g. cargo getting damaged while in the
custody of the ship owner, a seafarer dying on the vessel, damage to the vessel by
the stevedores engaged by the charterer etc. Obviously there must be a contractual
situation for such liabilities to arise.

1.1.2 Liabilities under tort – Tort is ‘civil wrong’ or a lack of social duty. Here due to an
action/ inaction of one party other has a loss/ damage or injury. E.g. collision of a
vessel, pollution damage etc.

1.2 In shipping and maritime operations many entities, besides the ship owner, can be exposed
to such liabilities. These could include charterers, multimodal transport operators, freight forwarders,
other transporters, port and ICD operators etc. It is therefore necessary that suitable insurance solutions
are available for them for these liabilities. Similarly even ship owners may have risk exposures that are
not coming in the purview of the P&I clubs. All these issues are addressed in this lesson.

2.0 SPECIALIST CLUBS:

Apart from the Protection and Indemnity Clubs described in earlier chapters, there are other Specialist
Clubs which have been formed as and when a need for them has been felt.

2.1 DEFENCE ASSOCIATIONS:

2.1.1 The title is misleading as this class of cover is not only in respect of costs incurred in
defending claims but they also assist members in prosecuting claims. The International Group P&I
Clubs and the Fixed Premium Insurers also offer this cover which is known as FD&D cover.

2.1.2 These associations are often known as Freight, Demurrage and Defence Clubs (F.D. & D).
Ship-owners often land themselves in disputes with charterers over freight and demurrage claims. It
should be clarified that F.D.&D. Clubs do not insure sums in dispute. These Clubs are really ("Legal
Costs") Clubs and they cover their members' costs in recovering freight and demurrage claims and
prosecuting and defending other breaches of contract which are not covered under the usual P & I
cover. These could be sale and purchase contracts, stevedoring contracts, hull insurance contracts,
mortgage agreements, bunker disputes with charterers, etc.

49
2.1.3 The cover offered by F.D.&D. Clubs is more discretionary than a P & I cover. The Clubs
reserve the right to decide whether to support a Member in prosecuting or defending a claim. The Clubs
take the attitude that the decision to fight a case should not rest on a matter of principle alone, but on
the economies of a particular case, unless of course, the principle to be tested is of a wider interest to
a large section of the membership.

2.1.4 F.D.& D. Clubs are either separate entities or are a separate class within a P & I Club.

3.0 STRIKE CLUBS:

3.1 A ship is an expensive capital asset and any delay causes serious loss to the owner. Delay
caused by strike can be insured by Strike Clubs.

3.2 The risk is covered in 3 parts:-

(a) Direct delay, (b) Indirect delay, and (c) Crew strikes.

3.3 Direct delay is caused directly by a strike and is limited to the period during which the strike
lasts.

3.4 Indirect delay relates to the period after the strike is over but the vessel is delayed by, say,
port congestion owing to the strike,

3.5 Crew strikes is of course self-explanatory.

3.6 The deductible applicable to this type of insurance is reckoned in numbers of days and the
premium depends on the trading area, i.e., whether it is strike prone or not.

3.7 The spirit of a Mutual Strike Club is similar to that of a mutual P & I Club. Thus, if a Member
takes action to avoid the immediate effect of a strike and sails without completing loading or unloading,
the Club will reimburse him the net loss of freight income provided it is smaller than the loss to him if he
remained at the port during the strike.

4.0 CHARTERERS' CLUBS:

4.1 Demise Charterers enter their liabilities in owner's P & I Club. However, time and voyage
charterers are unsuitable as members of ship owners’ P & I Clubs owing to conflict of loyalties. Having
said that, it should be noted that some time charterers are shipowners in their own right and they could
cover their risks as charterers with their own P & I Clubs.

4.2 But it is more common for time charterers to issue their liabilities in independent Clubs.
Charterers are exposed to:

(a) Liability to Cargo: This liability could be a direct liability to cargo arising out of issue
of charterer's own document, even if it is issued through the master's authority. Some
countries in Europe follow this rule. On the other hand in the U.K. and in India the primary
liability is of the owner of the ship. However, the ship-owner can then have an indemnity
action against the time charterer.

(b) Liability to Shipowner for Damage or Loss of Ship: This risk could arise from breach-
of safe port or safe berth warranty in the charter party or supply of defective quality of bunkers.

50
 It could also arise from damage to ship by stevedores appointed by time charterers.

4.3 Claims of this nature could run into millions of dollars.

4.4 Charterers liability insurance is usually offered on fixed premium.

5.0 WAR RISKS CLUBS:

5.1 Hull and Machinery insurers exclude war risks from their policies. At the same time the regular
P & I cover for liabilities also excludes losses and claims arising from war risks. Hence the need for
separate war risk insurance. It is provided by separate fixed premium or mutual associations insuring:

(a) Loss of or damage to ships arising out of war, warlike situations, bombs, mines and similar
dangers, and

(b) Liabilities arising out of war risks which would normally be excluded by P&I Clubs. Thus,
War Risks Clubs do the work of both hull and machinery insurers as well as P & I Clubs
provided loss, damage or liability arises from a war risk.

5.2 An additional risk covered by War Risk Clubs is that of detention of ships as a result of a war
risk. The most recent example was of ships trapped as a result of the Iran-Iraq war in 1980

6.0 THROUGH TRANSPORT (T.T.) CLUBS:

6.1 Multimodal transportation: The concept of door to door delivery is catching up fast in
international trade, which led to the introduction of Multimodal type of transportation. Multimodal
transport means a combination of at least two means of transport resulting in an integrated transport
chain. The, combined freight transport can be organized in different ways for e.g. trucks may cover
short distances between the loading area and the transshipment point respectively between the
place of arrival and the delivery point. Long-distance haulage would be conducted by other means
of transport such as train, ship or even plane.

6.2 In case of combined container transport, standardized containers are transshipped

along different means of transport. Various combinations of land, water, and air transportation are
used. Trailer shipment (rail transport of trailers) is a combination of rail and road haulage.

51
6.3 The rolling road method is generally the carriage of whole trucks – both tractor and trailer
– on low floor trains or forwarding of trailers without the tractor as it reduces transport weight and
labor costs. Though, this requires a second tractor at the place of arrival.

6.4 Roll-on roll-off traffic means the carriage of freight vehicles on ships over a certain
distance. It is coordinated and planned as a single operation and minimizes the loss of time and risk
of loss, pilferage and damage to the cargo at trans-shipment points. There is faster transit of goods;
the distance between origin or source materials and customers reduces due to the development of
multimodal transport. The burden of issuing multiple documentations for each segment of transport
is reduced to minimum.

6.5 The consignor/consignee has to deal with only the MTO (multimodal transport operator)
in all matters related to the goods transportation.

6.6 Multimodal transportation in India is regulated by a Multimodal Transportation of Goods

Act of 1993. This was introduced to facilitate the exporters and give them a sense of security in
transporting their goods. Reduction of logistics costs is one of the important aspects of Multimodal
Transportation, thereby reducing the overall cost to the exporter and making his products more
competitive in the international market.

6.7 The Multimodal Transport Document issued under the present law is a:

(a) contract for the Transportation of Goods by Multimodal Transport.

(b) a negotiable document unless it is marked non negotiable at the option of the
consignor.
(c) a document of title on the basis of which its holder can take delivery of the goods
covered by it.

6.8 The concerned parties who have commercial interest and is governed by the document
once it is executed would be:

(a) The MTO, the person responsible for the execution of the Multimodal Transport
Contract.
(b) The consignor who places the goods for carriage with the MTO for transporting the
same and the consignee who is to take delivery at the destination.
(c) The bankers who provides the mechanism for documentary credit.
(d) The insurers who insure the goods against loss or damage and the liability insurers
who cover the MTO's liability under contract.

6.9 In the last two decades there has been a revolution in methods of transportation of cargo.
Containerization and roll on/roll off methods of carriage of goods have exposed shipowners to risks
which are over and above the risks covered by the traditional P&I Clubs. Shipowners and all other
stakeholders needed cover for their containers and for the various risks, including liabilities to which
they were exposed in the new door-to-door concept. The P&I Clubs and Fixed Premium Clubs have

52
amended their Rules and now do provide cover for combined through transport documents. Market
cover is also available for this risk.

6.10 Alongside the door-to-door concept, containerization also brought in the concept of Non-
Vessel Operating Common Carrier (NVOCC). These operators do not operate any ships but the use of
containers provides them with the opportunity to book cargoes, issue their own documents of carriage
and then offer the containers to regular ship operators who act as their sub-contractors. These NVOCCs
could not become members of P & I Clubs as they had no ships to enter in the Clubs. In this new
scenario instead of ‘carrier’ a new term got introduced, ‘multi modal operator (MTO)’. The MTO could
be a ship owner, time or bareboat charterer or a NVOCC.

6.11 These two developments led to the formation of a different type of insurer and the T.T. Clubs
were born. Once formed, these insurers extended the ambit of their cover to include port terminal and
inland depot operators, container lessors, freight forwarders and stevedores.

7.0 THE MAJOR RISKS COVERED BY T.T. CLUBS AND OTHER INSURERS:

1. Equipment, the most common being containers.

2. Third-party liabilities — loss of or damage to third-party property (other than cargo), death, illness or
injury of any person other than an employee.

3. Liability to authorities ~ wreck removal of equipment after an accident.

4. Quarantine and disinfection of equipment,

5. Fines, penalties, customs duty for breach of regulations.

6. Legal and other costs incurred in investigating or minimizing liability.

7. Physical loss of or damage to cargo including customers' containers or other equipment.

8. Mis-description or mis-delivery of cargo.

9. Delay.

10. Delivery of cargo contrary to instructions or without production of the Bill of Lading.

11. Contribution in General Average or Salvage.

12. Terminal and depot operators can insure their cranes and other handling equipment.

13. Container lessors can get cover for their leased containers following the lessee's default, risks of
loss of or damage to containers while they are off-lease and for third-party liabilities.

8.0 INSURANCE FOR SHIP AGENTS & SHIPBROKERS:

8.1 These categories of intermediaries are also exposed to risks in the performance of then-field
of activity. In fact when margins are low and competition bites into ship operators, profits, pressure
builds up to find soft targets to attack. Ship agents and brokers then come into the line of fire. Owing to
commercial pressure, agency agreements are not made at arm's length but include provisions which
are biased against the agents. They are made to accept liability not only when they are at fault but when

53
their Principals cannot find anybody else to assign blame. Moreover, agents are held liable by port and
customs authorities for acts or omissions of their Principals. Insurance organizations offering help and
protection to agents and brokers are performing a valuable service.

8.2 The main liabilities covered are:

1. Liability to Principal and to third parties, as a result of professional negligence.

2. Liability for Customs fines and penalties, storage and taxes which are not really agents'
responsibilities but are imposed on them by authorities.
3. Liability arising from default of Principal or because he is unable or unwilling to pay
and the creditor seeks to recover directly from the Agent.

ooooo

SELF-EXAMINATION QUESTIONS

1. What are the major risks covered by T.T. Club?

2. What kind of liabilities may be faced by a time charterer?

3. Explain the following:

(a) MTO
(b) NVOCC
(c) Multimodal transport document
(d) FDD insurance

4. Name some of the specialist clubs.

5. What are the major risks covered by T.T. Clubs & Charterers* Clubs.

RECOMMENDED FOR FURTHER READING:

1. The Standard Protection & Indemnity Rules, 1996/97.

A comprehensive reference book issued by "The Standard Steamship Owners' Protection &
Indemnity Association (Bermuda) Ltd."
Contains special covers, recommended clauses, guarantees of the club, selected circulars, bulletin
briefings, etc.

2. Marine Insurance by Hardy Ivamy.

3. Bes' Chartering & Shipping Terms ~ N.J. Lopez.

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54
RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 7

CARGO INSURANCE

1.0 Cargo insurance is a very important part of the marine insurance. It's the insurance of
cargos that are carried by all types of transport i.e. ship, truck, rail, plane, courier or post.

1.1 It is guided by the principles of insurance like Insurable Interest, Utmost Good Faith,
Indemnity, Proximate cause, Subrogation and Contribution. (Dealt in earlier chapters).
However, as per MIA act 1963, in Marine Insurance the insurable Interest has to be there at
the time of loss unlike other branches of Insurance where the insurable interest has to be there
both at the time of taking the insurance and at the time of loss. Another important feature is
that Marine Insurance Policies are freely assignable.

1.2 The principle of Indemnity is another important feature of the Marine Policy since it's
an agreed valued policy. The value of the goods is agreed upon at the beginning of the contract
between the insured and insurer and unless there is gross overvaluation amounting to fraud,
the loss is settled only on the basis of the agreed value.

1.3 The insurance can be taken for a one-time transportation, i.e. insure the exact
cargo which would be carried from a described place during a determined period of time, or
for long-term insurance contracts, i.e. insuring all cargo being transported during the contract
term of an year or so. The cargo can be insured against all damage, destruction or other
losses, except those that are specifically excluded under the insurance policy.

1.4 The types of cargo carried are either goods in bulk, powder or liquid form. In fact oil,
gases and chemicals form a large part of the world's tonnage. The agriculture is transported
mostly in bulk form. Minerals and fertilizers are also transported in bulk form. There are non
bulk cargoes like machinery, motor vehicles, domestic electric goods, etc.

1.5 There are many parties involved in the trade- the cargo owner to the freight forwarder,
warehouse keeper, ship owner and the stevedores who are people contracted for unloading
and loading of the cargo.

2.0 INCOTERMS:

2.1 To ease the passage of goods from one nation to another a set of rules are devised,
to facilitate their sale. These are called INCOTERMS. They were developed by ICC and are
revised periodically. The latest version is of 2010.

2.2 It spells out the rights and obligations of the seller and buyer under the contract of sale.
These also provide clarity as to who will organize transport, insure the cargo and who will bear
the risk for what leg of the journey and at what point does the title in the goods pass on to the
other party.

2.3 These are 11 terms divided into 7 for any mode of transport, including shipping, and 4
for only sea and inland waterway transport.

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2.4 Particular attention should be paid to the use of INCOTERMS, as they decide who will
organize transport, who will bear the risk for what leg of the journey and at what point does
the title in the goods pass on to the other party.

2.5 As per IRDA regulations, proposal form is not compulsory in Marine Insurance. A
Marine policy should contain the name of the insured, value of the goods, contact details, type
of voyage, transportation details and type of goods.

2.6 Marine Insurance policy is issued subject to certain express and implied warranties
and conditions. The express warranties are specifically mentioned on the face of the policy
e.g. warranted that the cement will be carried in double ply bags. The two implied warranties
are that of unseaworthiness and legality of the adventure. This means that it's the duty of the
insured to ensure that the cargo is sent in a ship which is in seaworthy condition for the voyage
that is contemplated.

3.0 CARGO CLAUSES:

3.1 Now let us examine the coverage of risks under Marine Insurance. The scope of the
coverage of risks during the voyage is covered by Institute cargo clauses. These clauses are
called Institute Cargo Clauses (ICC) to be used for journey by sea. The set of clauses widely
prevalent in the market are 1982 clauses. However these have been revised in 2009. The
same are being issued by some insurers and are not much in practice as yet.

3.2 These clauses are of three types and are called ICC (A), ICC (B) and ICC (C) clauses.
Besides these certain trade clauses for specific trades like bulk oil, jute, coal are also used.
For Air transit only ICC – A (All Risk) clauses are used. For any transits within the geographical
limits of the country we have the Inland transit clauses - IT - A/B/C. The 1982 ICC clauses and
the revised 2009 Clauses are given in the Annexures.

3.3 The three sets of clauses are almost similar except that the risks covered are different.
ICC (C) offers most limited cover, ICC (B) offers little more. They are named perils clauses
and ICC (A) gives maximum risks and is also termed as "all risks". Of course these are all
subject to the exclusions.

4.0 The Risk clause is different in each of the three sets of cargo clauses. There is some
difference in the General exclusions clause as well.

4.1 Risks Covered: A comparative study of risks covered in ICC (C) and ICC (B) is given
below:

Risks - Loss/Damage By ICC(C) ICC(B)

Fire or Explosion • •
Vessel grounding, Sinking, Capsizing • •

Overturning/Derailment of Land Conveyance • •

Collision • •
Discharge of Cargo at port of refuge • •
Jettison • •
General Average sacrifice • •

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 Entry of Sea, Lake, River water in Vessel, X •
Container or place of storage
Total loss of Package lost overboard while X •
loading/discharging
Earthquake, Lightening X •
Washing overboard X •

4.1.1 The ICC (A) includes loss of or damage to the cargo by all risks subject to exclusions
given herein below. It provides the widest clause.

4.2 Clauses stating Exclusions:

4.2.1 Loss of or damage to the cargo under following circumstances is not covered under
the General exclusion clause:

1. Willful misconduct of the assured.

2. Ordinary leakage, ordinary loss, wear and tear.
3. Insufficiency/Unsuitability of packing.
4. Inherent vice.
5. Delays, even if caused by an insured peril.
6. Insolvency/financial default of the shipping company.
7. Deliberate damage by the wrongful act.
8. Nuclear.
These are explained in para 5.5.

4.2.2 Out of the above, Exclusion number 7 i.e. deliberate damage, also called Malicious
damage exclusion does not appear in ICC (A). This exclusion can be covered in ICC (B) and
ICC (C) by agreement and on paying extra premium.

4.3 Extraneous Perils covered:

4.3.1 Along with malicious damage, loss/damage following additional risks may also be
covered in ICC (B) and ICC (C) subject to additional terms and conditions and premium:

1. Theft, Pilferage and Non-Delivery.

2. Fresh/Rainwater damage.
3. Damage by hooks, oils or other extraneous substance.
4. Heating/Sweating.
5. Leakage/Contamination, Breakage.

4.4 Additional exclusions:

1. Unseaworthiness and unfitness exclusion - As per the clause the loss due to the
unseaworthiness of the vessel; unfitness of vessel, container is not covered where
the assured, i.e., cargo owner, is aware of such unseaworthiness/ unfitness. Sea
worthiness is an implied warranty under Marine Insurance.

2. War exclusion - including civil war, revolution, capture, seizure, arrest, derelict
mines, bombs etc.

57
 3. Strikes exclusion - including damage caused by striking workers, civil commuting,
terrorist activity from a political motive.

4.1 The loss/damage due to war/strike can be covered by using Institute War Clause and
Institute Strike Clauses by paying additional premium.

5.0 Examination of some of the perils covered:

5.1 The peril of Fire and explosion covers damage covered by heat, smoke and water used
for extinguishing the fire. It may be noted that spontaneous combustion is an excepted peril
due to inherent vice of the cargo e.g. coal.

5.2 Loss due to sea water resulting from stranding, grounding or sinking is covered under
ICC (B) but not by ICC (C) clauses.

5.3 A port of refuge is a place short of destination where a ship in distress goes to and
discharges the cargo. Jettison of cargo is an act when the cargo is thrown overboard at the
time of peril to save the adventure from total loss.

5.4 Washing overboard is a peril where the cargo is actually washed overboard and is not
lost overboard and does not include damage by breakage or denting due to heavy weather or
otherwise. A sling loss covered by ICC (B) is the total loss of entire package during loading,
transhipment or discharge but not during the rolling and pitching of the ship during heavy
weather.

5.5 How do the exclusions work?

a) Willful misconduct - of the insurer is an exclusion though he is liable for any

loss due to an insured peril even if due to an act of misconduct of the insured.

b) Ordinary leakage, loss in weight, inherent vice - there are some cargoes which
lose weight due to dehydration during the voyage like grain, oil etc. or are damaged
by spontaneous combustion due to self heating.

c) Delay - Insurer will not cover delay even though the delay be caused due to an
insured peril.

d) Insufficiency of packing - any damages to cargo caused on account of this is

not covered. Packing also means wrong stowing, when it's done prior to the attachment
of the insurance. Unless the intent is to cover the cost of packing, any replacement of
damaged packing material will not be paid for.

e) Insolvency of the Insurer - any loss to goods arising from this exclusion is not
covered. This is to encourage the shipper to choose wisely the owner/operator of the
vessel.

5.6 Other exclusions like war and strike perils can be covered by paying additional
premium under a separate War Risk policy. However this policy again excludes loss or
damage by hostile use of nuclear weapons directly or indirectly. Again piracy is covered under
ICC A and is an exclusion in war risks.

5.7 The War and strike clauses provide cover for all the war exclusions given under the
policy. The strike risk covers loss or damage caused by or resulting from strikes.

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6.0 Some of the important clauses of Institute clauses are (1982):

6.1 Transit Clause:

(1) This clause outlines the attachment, duration and termination of the insurance cover.

(2) The cover attaches or commences - from the time goods leaves the warehouse or
place of storage at the place named in the policy for the commencement of the transit,

(3) Continues -during the ordinary course of transit. This transit may be by rail, road etc.

(4) Terminates - under the following circumstances:

A. Delivery of the cargo at the destination which is stated on the policy. This could
be the Consignee's warehouse or other final warehouse or place of storage.

B. Delivery to any other warehouse, whether at the destination or at an

intermediate place used by the insured, either for storage other than in the ordinary
course of transit or for allocation or distribution. It is important to note that the cover
continues if the storage is incidental to the transit:

C. The cover terminates on the expiry of 60 days after the completion of discharge of
cargo from the vessel in case of sea transit and 30 days in case of air transit and 7
days in case of an Inland transit.

(5) The cover shall automatically terminate if any of the above-referred conditions occurs
first.

6.2 Change of voyage clause: Change in the voyage takes place when after the risk
commences, there is a voluntary change in the destination and the insurer is discharged from
liability from the time the change is manifested.

6.3 Increased value clause: The value of the commodities increase in value as they
approach destination so they could be sold for a profit. The assured can then take a basic
value policy and another for increased value. The total insured value should be reflected by
the sum insured .The assured is required to provide the concerned insurance information
about the sum insured under all other insurances.

6.4 Forwarding Clause: According to this clause if the voyage is terminated at a port other
than the destination, reasonable charges will be paid for unloading the cargo, storing the same
and further forwarding it to the destination indicated in the policy. It is important to note that
the termination of voyage must be due to an insured peril. This clause does not apply to the
general average or salvage charges.

6.5 Not to inure clause: The insurance shall not inure to the benefit of the carrier other
bailee. This is to prevent the carrier from contracting in the Bill of Lading in a way that gives
him the benefit of any insurance placed on the goods.

6.6 Sue and Labor clause: The clause contains provisions for the insured or his
representatives to take such measures as may be reasonable for the purpose of averting or
minimizing a loss; and to ensure that all rights against carriers, bailees or third parties are
properly preserved and exercised.

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6.7 There are other clauses too which form a part of the policy. (Details in the Annexure),

1) Institute Classification clause.

2) Institute Replacement Clause.
3) Institute Theft Pilferage and Non delivery clause.
4) Label clause.
5) Pair and set clause.

7.0 INLAND TRANSIT CLAUSES:

7.1 On the pattern of ICC clauses, the Inland transit clauses provide three levels of cover.

ITC (C) provides cover for fire and lightening only.

ITC (B) provides the basic cover.
ITC (A) provides the all-risk cover.

(Complete Clauses are given in the Annexure).

7.2 Exclusions are the same as provided under ICC clauses. Strike, Riot and civil
commotion can be added to ITC- A and B covers for an additional premium.

7.3 The duration of Inland transit terminates either on delivery or at the final destination
or 7 days after arrival at destination town .This period of 7 days may be extended ,subject to
per week additional premium ,for a period not exceeding 8 weeks in addition. This is allowed
only as long as the goods are lying in railway or road carrier's premises or in clearing and
forwarding agents warehouse.

8.0 Institute War clauses:

8.1 The war cover is an exclusion under the ICC A /B/ C cover and can be covered under
the war clauses separately. Institute war clauses covers loss or damage to the insured goods
proximately caused by any of the following:

 War, civil war revolution, rebellion, insurrection or civil strife arising thereof or any
hostile act by or against a belligerent power.

 Capture, seizure, arrest restraint or detainment arising from risks covered and
consequences thereof or any attempt thereat.

 Derelict mines torpedoes bombs or other derelict weapons of war.

8.2 Piracy is not included in the cover nor is terrorism. Losses and damages are covered
only arising from perils covered under war risks. Any damage to the goods recovered
consequent to capture and seizure are covered. However detainment and arrest or seizure by
judicial process (port state authorities) is not covered.

8.3 Exclusions in the war cover are same as under Cargo Institute clauses. Additional
exclusions are Frustration of voyage and Nuclear and similar weapons.

8.4 Duration:

8.4.1 This insurance attaches only as the cargo insured is loaded on an overseas vessel
and terminates either when the subject-matter insured is discharged from an overseas vessel
at the final port or place of discharge,

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or
on expiry of 15 days counting from midnight of the day of arrival of the vessel at the final port
or place of discharge, whichever shall first occur; but this is only if prompt notice is given to
the Underwriters and an additional premium may be charged, such insurance reattaches
when, without having discharged the subject-matter insured at the final port or place of
discharge, the vessel sails therefrom and terminates when insured cargo is thereafter
discharged from the vessel at the final (or substituted) port or place of discharge,
or
on expiry of 15 days counting from midnight of the day of re-arrival of the vessel at the final
port or place of discharge or arrival of the vessel at a substituted port or place of discharge,
whichever shall first occur.

9.0 Institute strike clauses:

9.1 The Strike cover is an exclusion under the Cargo clauses and can be separately
covered .It covers loss or damage to the goods caused by

 Strikes, locked out workmen, or persons taking part in labor disturbances riots or
civil commotions.
 any terrorist or any person acting from a political motive.

9.2 Exclusions :

1) loss damage or expense arising from the absence shortage or withholding of

labour of any description whatsoever resulting from any strike, lockout, labour
disturbance, riot or civil commotion;

2) any claim based upon loss of or frustration of the voyage or adventure;

3) loss damage or expense arising from the use of any weapon of war employing
atomic or nuclear fission and/or fusion or other like reaction or radioactive force or
matter;

4) loss damage or expense caused by war civil war revolution rebellion insurrection,
or civil strife arising therefrom, or any hostile act by or against a belligerent power.

9.3 Frustration of voyage occurs more out of delays resulting from strikes i.e. risk on land
than a war risk. War risk can be covered separately in cargo policy which will have a
waterborne clause.

9.4 The rating for the war risk is based on the bulletin of the War risk rating committee of
the London Market. It issues a schedule of premium rates to be applied to both air and sea
sending's. This is worked out keeping in view the hazard represented by various events across
the globe. The areas are listed as High risk, Low risk and Neutral risk. For High risk areas the
committee may incorporate a "Held Covered" provision, so that the underwriter can decide on
the rate.

10.0 Inland FOB Extension clauses:

10.1 When the sale is done on FOB basis (Free on board), the insurance is arranged by the
buyer overseas. The buyer is on risk from the time the cargo is loaded on the carrying vessel.
The sellers risk is only from the time the goods leave the warehouse till they are loaded the
overseas vessel. The cover is given as an extension of the Inland transit policy. The extension
varies as per the type of loading:

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 1) Loading done directly from the wharf/Quay.

The cover is extended till the goods are placed on board the vessel or LASH
barges or untill expiry of 2 weeks after arrival of goods at the place of storage
at the port town

2) Loading done midstream by craft, raft or lighter.

 This covers any stranding/grounding/sinking and capsizing of the craft.

 Fire, lightining, collision or contact of the craft, raft or lighter with any
external object other than water.
 total loss of any package whilst loading, transhipment or discharge.

10.2 Extra premium is charged for this extension in addition to the basic rate for the Inland
Transit. For storage risk at the port or dock over and above the two weeks already given,
additional rate would be charged.

10.3 Sometimes the cargo may arrive later than the departure of the vessel and is left
stranded at the port. It could also be that there is no space in the vessel for the cargo. This
can be covered at an additional rate for each period of week while awaiting loading in another
vessel. In case the goods are to be returned to the shipper then full premium is applied.

ooooo

SELF-EXAMINATION QUESTIONS

1. What is the purpose of INCO terms?

2. What are the differences between ICC (B) and ICC (C) clauses?
3. List a few exclusions under the cargo clauses
4. Which extra risks may be covered under ICC (B) after paying extra premium?
5. When does the cover for cargo insurance terminates?

FURTHER RECOMMENDED READING :

1. Marine Insurance by Templeman/Lambeth.

2. Marine Underwriting by Insurance Institute of India.
3. General Principles of Insurance Law by ER Hardy Ivamy.
4. Marine Clauses by Insurance Institute of India.
5. Analysis of Marine Insurance Clauses by R.H. Brown.

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62
RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON 8

CARGO INSURANCE - Underwriting factors, Basis of

rating, and Different Policies
1.0 UNDERWRITING FACTORS:

1.1 After the de tariffing of the Marine Insurance business in India, the rates are decided
by the market forces, hence the transaction of marine insurance calls for sound common
sense, knowledge about the nature of various commodities and their behavior under different
circumstances. A proper evaluation of the risk is required to collect adequate premium to
enable the insurer to pay the claim. The premium collected should be able to cover the
acquisition, administration, management expenses and claims payment.

1.2 Marine perils covered are not available for inspection by the insurer being at a different
place or port. The nature or packaging of the goods may not be known accurately, hence,
the need for insured to give correct description is very important. The rating requires an in-
depth knowledge of various factors.

1.3 One must also know the port conditions in different parts of the world, the economic,
social and political conditions in different countries, weather conditions during different
seasons, customs, clearing and forwarding procedures. The same commodity will behave
differently depending on its packaging. This will also happen during different voyages due to
change in weather conditions, which are different from place to place. Severe weather
conditions like rain, storm and snow, play a major part in causing damage to the cargo.

1.4 In addition, knowledge of the trade, methods of packing, facilities of cargo handling,
transit involved, are also to be considered. It is necessary to get complete details of the
proposed transit, in order to assess the risk and quote an appropriate premium. This is more
so because no formal proposal form is obtained in marine insurance, unlike the other classes
of business except in the case of annual policies, increased value/duty policies and Annual
Sales Turnover Policy.

2.0 The following information is essential for proper assessment of the risk:
1. Full description of the goods.
2. Method of packing adopted - bales, bags, cases, bottles, drums or loose.
3. Value and sum insured.
4. Place of shipment and destination.
5. Mode of transit i.e. rail, road, sea or air. In case of shipments, name of the vessel
to be used and probable date of sailing.
6. Type of Cover required.
7. The previous claims experience in relation to the client and the commodity.

3.0 Of prime importance is the nature of the commodity and its susceptibility to damage.
Some cargo is prone to weight loss, leakages or ordinary wear and tear. Few others are
susceptible to 'other cargo’ damage. Cargo that is hydroscopic (becomes liquid) like caustic
soda, salt will be rated differently. Thus each cargo has its own peculiarity on which depends
its rating.

3.1 Where shipments involving imports from certain areas like Iran, Iraq and Syria are
proposed, certain restrictions are applicable. These guidelines are laid down by the various
Joint Cargo, Hull or War Committees of London from time to time. These have to be borne
in mind and strictly followed.
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3.2 Similarly in respect of exports from Mumbai, Calcutta, Chennai, Cochin and Haldia,
certain guidelines have been laid down regarding approval of the vessels carrying export
cargo. This has to be ascertained for a proper rating to be adopted.

3.3 Mostly the valuation is based on CIF + 10%.The particulars of the vessel carrying the
cargo is also very important specially its age, flag and classification etc. A liner vessel is
considered a better risk than a tramp vessel. Some insurers charge additional premium for
overage, under tonnage, non classification or flag of Convenience vessels. These are the
vessels registered in countries where rules are lax, there is no restrictions on nationality of
the crew and low taxation is there and hence not considered a good risk.

3.4 Following factors are considered in acceptance and rating of the risk:

1. Age - Its restricted to 25 years old for liner and for others 15 years may be
accepted as a good risk, provided its operating to a regular pattern of trading on
advertised route. For tankers, overage is set at 11 years old as they have a shorter
span of life. Other than these vessels are covered subject to agreed conditions and
premium.

2. Flag - All vessels fly the flag of the country they are registered with. Some of
them carry the flag of convenience (FOC).A large no. world fleet is registered under
FOC. The rules of these countries are lax, registration formalities are minimum with
very less control over the crew competency and tax advantages.

3. Classification Society - An Institute classification clause is attached to the

Marine Policies. It stipulates that insurance coverage is only for cargoes carried by
mechanically self propelled vessels of steel construction and classed by any of the 13
classification societies. The vessel has at all times to be classed with these societies
which are members of the International Association of Classification society.

4. Tonnage - Minimum acceptable tonnage is 1000GRT.

4.0 The premium rate is also influenced by the voyage and the mode of transit. The air
transit is considered to be the safest. A ship at a given moment pitches in six different
directions causing considerable movement of the cargo. Moreover quayside loading is
definitely less risky than a loading involving lighterage. In a road transit, the condition of the
roads, movement up or down a terrain has a bearing on the risk involved. The number of
transhipments enroute along with the storage facilities is an important factor.

4.1 Despatches by open wagon or open vehicle attract extra loading due to enhancement
of risk. In case of dispatches on carrier's risk 10% discount is allowed in the premium
charged. Where consignment note is issued limiting the liability of the carrier or issued by a
private carrier the liability of the insurer is limited to 75% or at times 90% also.

4.2 The longer the voyage, longer will be the exposure of the cargo to the perils
encountered. Each transhipment means additional handling, storage from the transhipment
port or place resulting in more risks.

4.3 The storage of the cargo on deck or under deck is also a deciding factor for the
premium to be charged and containerized cargo is considered far safer than bagged or lose
cargo

4.4 Further, in the case of named perils coverages like ICC-B and C, the insured may
require additional perils like TPND , Malicious damages, non delivery of entire package,
hooks ,nail oil and acid damages to be covered for which additional premium may be
charged.

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4.5 The Container Risk - cargoes transported by containers are infinitely a better risk as
the turnaround time is faster, more efficiency at handling, seamless movement in various
modes of transport thus facilitating a door to door movement of goods from the sellers
warehouse to the buyers warehouse. The theft claims have reduced considerably. Different
types of container are built to suit the cargoes being transported.

4.6 The Container can either be a Full container Load or Less than Full container Load or
a combination of both. Incoterms FCA (Free Carrier) are most commonly associated with
Container transportation.

4.7 Containerisation can be broken into two stages, commercial and operational. :

(a) The commercial stage involves the declaration of cargo to be shipped.

Misdeclaration of cargo can occur as the result of a simple mistake or commercial
reasons. Shipment of hazardous cargo involves a great deal of paperwork and
consequently mistakes are sometimes made during declaration.

(b) At the operational stage i.e. while packing of the cargo and stowage on board – a
lot of errors can take place, due to lack of knowledge or the speed of the logistics
chain. Moreover Just-in-time (JIT) logistics requires efficiency and leaves little
room for error when stowing containers and a problem could arise if stowage
software systems malfunction.

4.8 Most container lines use automated stowage software, however it is very important for
operators to really understand what they are doing – container stowage should in no way be
thought of as a computer game. Occasionally, when everything is in order on paper, in terms
of total cargo weight and distribution, a ship may not be able to bear the same load and be
in danger of hogging and sagging,

4.9 Of special concern also is the transportation of hazardous chemicals which is regulated
by local and international regulations. These regulations are there so as to transport the
materials in a safe manner rather than applying a complete ban on the transportation of such
materials. Following are guidelines for transportation of hazardous material. Precautions for
each cargo will vary as per its properties; hence there can be no specific common rules for
handling hazardous chemicals.

4.10 Every cargo transported by sea / road will have a United Nations number and a proper
shipping name which can be used for transportation purpose. All cargoes hazardous /
dangerous in nature are classed as per the IMDG code. There are in all 9 classes with sub
divisions. This can be found in IMDG code. About 3500 types of cargo are listed in the code

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 4.11 Modes of transport can be by road/sea/air, as the cargo has to comply with regulations
for different modes of transport. The modal requirements will affect the following (i)
Packaging; (ii) Quantity per package; (iii) Marking; (iv) Shipping documentation. Packaging
is very important and it has to be in compliance with the cargo properties and modes of
transportation. Special consideration has to be given if multiple cargoes are transported.
Proper marking as per the class of the cargo to be done on the cargo container/truck. This
has to be in accordance with the local regulations or IMDG code.

5.0 Payment of Premium:

5.1 Given below are provisions under the Insurance Act, 1938 (as amended) for payment
of premium:

 Section 64- VB of the Insurance Act, 1938 prohibits an insurer from assuming
any insurance risk in India, unless and until-

i. the premium payable is received by him or

ii. is guaranteed to be paid in such manner and within such time as may be
prescribed or .
iii. a deposit of such amount towards premium as may be prescribed, is
made in advance in the prescribed manner.

5.2 Rule 58 and 59 of the Insurance Rules, under the Insurance Act of India provides
certain relaxations and prescribes the manner in which the premium may be guaranteed or
advance deposit may be made, in respect of a policy before assuming the risk.

5.3 Certain relaxations for payment of premium are also made in case of marine covers,
other than Hulls -

i) for Inland Transit Risks, risks may be assumed under Open Policies in
respect of seasonal crops such as tea, on payment of a provisional premium
based on a fair estimate of turnover;
ii) in case of exports, risks may be assumed subject to the condition that the
premium shall be paid within 15 days from the date of sailing of the overseas
vessel;
iii) in case of imports, risks may be assumed subject to the condition that the
premium shall be paid within 15 days of receipt of declaration in India from
the insurer's or insured's representative overseas:

5.4 The relaxations under (ii) and (iii) above shall apply to marine cover notes only and not
to Marine Policies.

6.0 Foreign Exchange Management (Insurance) Regulations, 2015 & General Insurance
Manual: These rules were revised in Dec 2015 and are attached in annexure.

Types of policies
7.0 COVER NOTE:

7.0 The cover note is issued as an evidence of insurance when the issuance of the policy
is pending as all the details of the transit are not available. It's not a legal document and is
unstamped. It should clearly state the validity period which is normally 30 days and as far as
possible should not exceed it. It also contains the terms, conditions and warranties under
which the risk is accepted.

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8.0 SPECIFIC POLICY:

8.1 This policy covers specific one time transit only. The cover is taken prior to the dispatch
taking place. The insured can decide on the consignment to be covered. The premium is paid
in advance and the risk commences from the time the goods leave the warehouse for onward
transportation. The policy terminates on goods reaching the destination as per the clauses
attached. However in case there are many consignments to be covered then it becomes very
cumbersome for the insured to specifically insure each and every consignment.

When some traders are engaged in regular trades involving frequent-dispatch/receipt of

goods, from and at various places, it is necessary to cover each of these dispatches requiring
issuance of hundreds of policies which is a cumbersome procedure and expensive too. To
provide continuous, umbrella cover for all their dispatches and receipts, an open policy/open
cover is issued.

It so happens that in many cases, though the trader has every intention of covering individual
dispatches, some of the dispatches may go undeclared by oversight or bonafide omission by
the insured or his representatives .Open Cover/Open Policy helps provide for such
contingencies.

9.0 OPEN COVER:

9.1 It provides a continuous cover to the exporter /importer engaged in international trade.
It is usually valid for one year or a specified shorter duration. Here the Insurer undertakes to
provide automatic insurance cover for all shipments of imports or exports as the case may be,
subject to all the other terms and conditions agreed to in advance.

9.2 An open cover is only an agreement and is an unstamped document. Each

dispatch/receipt, or batch of such dispatches/receipts, could be covered by specific policy or
a certificate of insurance. The terms of cover and the premium chargeable are already agreed
to in advance. Hence the insured-has only to pay the appropriate premium for such dispatch
or batch of dispatches declared from time to time. The open cover is subject to several
conditions.

9.3 The first relates to the duty of the insured to declare all shipments without any
omission, subject to a definite time limit. Any bonafide omission is held covered. The insured
is also not exposed to the risk of any shipment being uninsured due to oversight as it provides
a continuous cover. It helps save administrative cost.

9.4 The advantages of an open cover:

(a) As the agreement is automatic and continuous, the insured is not exposed to
the risk of any shipment remaining uninsured due to oversight, inadvertent
omission or delayed receipt of shipment advices from abroad.

(b) The necessity of buying specific policies for each individual shipment is
obviated, resulting in savings in administrative costs both for insurers and their
clients.

(c) The premium rates are agreed at inception and this assists the insured in
identifying his costs of insurance right at the outset, which he could include in
his total costs for the goods under CIF contracts

9.5 The sum insured is not given but is declared every time a declaration of transit is made
and the premium is collected based on the rate agreed at the inception of open cover. There
are however two limits:

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 (a) Limit per bottom - An aggregate value of shipment/consignment per one vessel or
other conveyance at any one time i.e. the maximum value of goods that can be
carried in a single shipment or transit. If the value is likely to go up in any transit
then the same needs to be intimated well in advance.

(b) Limit per location - This limit helps to control the accumulation of risks at a particular
location say a port or warehouse either on arrival of the cargo or before its dispatch.
This limit may be the same as the per bottom limit or can be 200% .It is quite
possible for the limits to be restricted to pre shipment accumulation as the insured
has little if any control over the accumulation of the discharged cargo at the port of
destination.

Usually the limits are only pre-shipment accumulations and these may to some extent,
be controlled by the assured by regulating his sending to the port of shipment. If
accumulations do take place exceeding the location limit, it is for the assured to
approach his insurer and arrange for such additional protection as may be required.

9.6 There should be an appropriate deposit premium or Bank Guarantee adequate to

cover shipments during a month or any other agreed duration. The basis of valuation is the
cost of goods plus expenses of shipping, freight and cost of insurance plus ten per cent and
in case of loss prior to declaration it would just be the cost of goods and charges actually
incurred. The policy can be cancelled by giving either party30 days notice in writing.

10.0 OPEN POLICY:

10.1 An open cover is issued in the case of import/export. For the same reasons the
indigenous purchases/sales can be insured under an open policy for a continuous and
automatic cover. It's an undertaking to cover all shipments made during the year.

10.2 An open policy, unlike an open cover is a stamped document with necessary clauses
attached. It is issued for a period of 12 months and all consignments declared during the period
are covered by the insurer. At the inception the insurer will not have details of the exact amount
of dispatches to be made. The policy will be issued for an estimated annual turnover of the
insured, and the premium is collected on this amount. As and when the dispatches take place
the amount is declared .This amount gets reduced gradually and can be replenished by paying
additional premium during the policy period. The cover ceases either on expiry of the policy
period or exhaustion of the sum insured.

10.3 The declaration covering dispatches could be on weekly, fortnightly, monthly basis as
the case may be. The premium can be collected in advance for the entire estimated value of
dispatches during the policy period. Periodical certificates are issued against monthly
payments made. As and when the sum insured under the policy is exhausted by periodical
declarations, the sum insured is restored by passing an endorsement.

10.4 While issuing both Open Policy/Open Cover, care should be taken to incorporate limits
per bottom/sending, limits per location and the declaration clause. In the limit per bottom/limit
per sending, the maximum value at risk in any one ship or conveyance or dispatch has to be
incorporated. This would give an idea of the extent of exposure. If necessary, appropriate re-
insurance protection is also arranged on this basis. Whenever any dispatch exceeds this
specified limit incorporated in the open policy/open cover, advance intimation has to be given
by the insured. This will help the insurer to arrange for re-insurance if necessary.

10.5 Occasionally open policies are issued to cover exports also. In that event, each
declaration should be covered by a duly stamped certificate of Insurance. The value of the
stamps to be affixed are as per Stamp Act for ocean transit.

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11.0 CERTIFICATE OF INSURANCE:

11.1 The certificates are issued on an individual basis either under the open cover or open
policy. These are issued on the basis of specific declarations made by the insured from time
to time. Premium under the open cover would be calculated when the certificates are issued
based on the details of voyage, sum insured declared and other information required.
However, in case of certificates under open policy no premium needs to be collected.

12.0 ANNUAL POLICIES:

12.1 This may be issued only for covering goods:

(a) belonging to the insured or

(b) held in trust by him.

12.2 The goods should not be under contract of sale or purchase. They will be covered
while in transit by road or rail from specified depots or processing units.

12.3 The salient features of Annual Policies are:

(a) The depots must be owned or hired by the assured.

(b) If the goods are sent to specified dealer's premises on consignment basis, this
warranty is not applicable
(c) Such policies cannot be issued to transport operators contractors, clearing
forwarding and commission agents or freight forwarders; They cannot also be
issued in joint names.
(d) The policy cannot be assigned or transferred.
(e) The sum insured will be aggregate maximum estimated value on rail or road at any
one time. This of course refers to all insured goods during the specified journey,
(f) In case of a claim the sum insured will be re-instated and additional premium must
be paid for such reinstatement.
(g) The minimum premium for an annual policy will be Rs. 5,000/-
(h) A duly completed proposal form shall be the basis of an annual policy.
(i) The policy shall be for a period of 12 months.
(j) The policy will be subjected to the condition of average.

13.0 INCREASED VALUE INSURANCE:

13.1 Similarly in some cases the market value of the goods at destination on the date of
landing is higher than the CIF plus duty value of the cargo. Then a separate insurance cover
on the increased value can be effected. The important features of these insurance are
summarized below:

(a) This can be given only when a policy for the CIF value of the cargo has been taken.
The perils covered under the cargo policy and the increased value policy should
be identical. However, if there is an unavoidable contractual obligation to insure
abroad, this restriction does not apply.

(b) The policy is not a valued policy and if the insured value under the cargo policy i.e.
CIF, duty and all increased value policies put together is more than the market
value of goods at destination then claims payable shall not exceed the specified
portion of the market value of the goods at destination. In case it's the other way
around then the insured is his own insurer for the shortfall in the sum insured.

(c) It is not an assignable policy.

69
 (d) The indemnity provided shall be 75% of the liability, the balance 25% must be
borne by the insured himself in the case of increased value policy.

(e) For issue of duty and increased value insurance, a proposal form has to be filled
in by the insured in which case he must declare all other insurance in respect of
the consignment, an e.g. There is a consignment of tea leaves purchased by a tea
dealer for Rs 5,00,000/- on a CIF basis. The exporter effects a policy for Rs
5,00,000/-, so valued and assigns it to the dealer. The dealer expects to sell the
tea leaves in the open market and realize a profit of 10%.However, if there is a loss
during transit, the assignee can only claim Rs 5,00,000 under the policy and will
incur a loss of Rs 50,000/- as the anticipated profit. The assignee can hence effect
an additional policy for Rs 50,000/- to cover loss of profit. This policy would follow
losses settled under the main policy. This additional policy is known as" Increased
value Policy" under Cargo Policy.

(f) This insurance does not pay any part of the General Average, contribution or
salvage charges arising from any casualty.

14.0 SELLERS CONTIGENCY POLICY:

14.1 As per the Marine Insurance Act a contingent insurable interest may arise in cases
where the goods have been rejected by the buyer and payment has not been received by the
seller, thus the interest in the goods reverts to the seller. In all such cases the seller may effect
a contingency insurance to cover their interest upon the happening of the aforesaid event.

14.2 This generally happens when the insurance is taken on FOB or C&F terms by the seller
and the buyer takes his own insurance to cover his interest. The rejection of goods on account
of bad quality or exchange e rate issues is also covered by Export Credit and Guarantee
corporation.

14.3 This policy attaches only from the time the buyer repudiates the sale during the transit
and covers only the physical loss or damage by the insured peril but not the extra expenses
incurred by the seller for return transit or storage.

14.4 It is a pre requisite that the insured should not disclose the existence of this policy to
anyone.

14.5 This policy is largely issued to valued clients only.

15.0 ANNUAL SALES TURNOVER POLICY ONLY:

15.1 This policy is a combination of open cover and open policy and provides a seamless
cover for all the inland, export and import transactions of the insured. All transits related to
Insured's manufacturing activities can be covered under the Policy.

15.2 The transits covered can be all import and indigenous procurements - raw materials,
spares and utilities; transits to and from fabricators' premises; Intermediate storages at
fabricators' premises; and sales - domestic and exports (FOB, C&F and CIF) as well as Stock
transfer between various units/warehouses of insured. However, capital goods, furniture-
fixture and spare parts are not covered.

15.3 The Sum Insured is based on the Gross Sales Turnover - domestic and exports (FOB,
C&F and CIF). Declarations to be submitted are the Gross Sales Turnover figures. Premium
is based on the anticipated Gross sales turnover and at expiry of the policy period is subject
to adjustment based on final Sales turnover completion. Premium adjustment can be both
downward and upward.
70
15.4 The insurer will call for Minimum Premium retention equal to premium for a quarter’s
turnover calculated on the estimated annual sales turnover. The proposer should declare in
the questionnaire given in the proposal form, the breakup of turnovers that they wish to cover.

15.5 Information on duration of storage at the intermediate storage locations and Per
Location Limit (PLL) is to be taken in advance from the insured.

15.6 Rating: The rate is applied on the sales turnover – all the underlying transits of
(imports/domestic purchases) of raw materials including inter-depot transfers/multi-transits are
automatically covered. There is a rate for each leg of transit i.e. exports, imports, domestic
purchases as well as a loading for multi-transit, storage (if any) inter-company/ stock
movements etc. but the assured is charged a single rate (weighted average of various rates
for each transit exposure) on the sales turnover.

16.0 MARINE (ADVANCED) LOSS OF PROFITS INSURANCE :

16.1 Marine Loss of Profit insurance policy is to be issued in conjunction with project
insurance policy. The policy covers Loss of Profits arising out of operation of insured peril,
delay in the project giving rise to loss of profits.

16.2 The policy basically covers delay in transit due to:

(a) Loss/damage to cargo.

(b) Loss/mechanical breakdown/damage to carrying vessel/ aircraft/ its machinery.
(c) Loss/ mechanical breakdown of any conveyance in which insured property is
being carried, conveyance involved in general average (GA) or salvage
charges (SC) or life-saving operations.

16.3 Other features:

(a) There is no time limit anywhere and the cover is available upto property
reaching final site.
(b) Time excess of 30 days
(c) Indemnity for loss of profits. Cargo and other losses are not covered.
(d) Only one claim per project. All delays are to be combined, non-insured delays
are excluded, and from that figure, excess of 30 days is excluded and the loss
of profits for the balanced days is paid.

16.4 Exclusions :

(a) Loss/damage to property.

(b) Delay because of unreasonable withholding of guarantee.

ooooo

71
 SELF-EXAMINATION QUESTIONS

1. How does the type of cargo and its packaging affect the rating of the risk?
2. What impact does the weather conditions have on the transit of the cargo?
3. Discuss the importance of section 64VB.
4. Write a brief note on The GIM rules.
5. When is a cover note issued?
6. What is the difference between a open cover and a open policy?
7. What is the purpose of an Increased Value Policy?
8. Why is a Seller's Contingency Policy required?
9. Why do clients prefer Annual Sales turnover policy?

RECOMMENDED FOR FURTHER READING:

1. Marine Insurance by Institute of Chartered Shipbrokers.

2. Marine Underwriting by Insurance Institute of India.

3. Marine Insurance by Templeman/Lambeth.

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72
RISK MANAGEMENT AND MARINE INSURANCE FINAL YEAR

LESSON 9

GENERAL AVERAGE

1.0 General Average originated about 2,500 years ago as an equitable system of
proportionate sharing between all parties to a common maritime adventure. These sacrifices and
expenses were voluntarily made or incurred at a time of peril by one or a few of the partners, for
the joint benefit of all. Therefore it is much older than marine insurance and probably the first
example of mutual insurance.

1.1 When the ship or cargo are exposed to a common danger and voluntary extraordinary
sacrifice is made or expenditure incurred by the ship or cargo for the benefit of the whole
adventure then such a sacrifice or expenditure is a general average act; and it is subject to a
general average contribution.

1.2 Without the need to show liability in tort or contract, general average contribution is made
by all those interests which have benefitted by the general average act. The amount of
contribution payable by each interest is made on the basis of York Antwerp Rules [YAR].

1.3 The YAR were first promulgated in 1890. They have been amended several times. The
latest version is of 2004. However YAR 1994 remain popular.

1.4 Usually a clause is inserted in the contract of carriage of goods, insurance etc
incorporating the YAR.

1.5 Rule A of the York-Antwerp Rules defines a general average act as follows:

"There is a general average act when, and only when, any extraordinary sacrifice or
expenditure is intentionally and reasonably made or incurred for the common safety for
the purpose of preserving from peril the property involved in a common maritime
adventure."

1. The sacrifice or expenditure must be extraordinary.

2. The act must be intentional or voluntary and not inevitable.
3. There must be peril.
4. The action must be for the common safety and not merely for the safety of part of
the property involved.

2.0 It will be proper to appreciate that General Average is part of the maritime law and is a
highly specialized system. The subject matter, e.g. vessel or cargo, may be sacrificed to save the
common adventure. Further the insured may have to contribute towards general average charges
and expenses. However under a typical marine policy, covering ship, cargo or freight, the insured
has right to recover from the insurer:

1. Loss of or damage to the property insured caused by GA sacrifice.

2. GA expenditure incurred by the assured for the common benefit.
3. GA contribution payable by the assured to other parties to the adventure.
GA deposits paid a security for those contributors.

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2.1 Examples:

2.1.1 A ship carrying a valuable cargo consigned to a number of different receivers strands on
a reef. By order of the master a part of the cargo is jettisoned and as a result the vessel refloats
and, after repairs at a port of refuge, is able to complete her voyage with the rest of her cargo.

2.1.2 From the facts above there would obviously have been other alternatives open to the
master.

2.1.3 He might have engaged tug assistance to tow the vessel off the reef, risking additional
damage to the vessel's bottom and consequently to the cargo through leakage. He might, on the
other hand, have tried forcing her off using the main engine and ground tackle, with similar risks
as well as probable damage to such machinery and equipment. Each of these alternatives might
have given rise to loss or prejudice to different owners of property involved in the adventure.

2.1.4 In situations of peril following marine casualties, a conflict of interest will often arise
naturally from the need to choose means for saving the situation. The owner of the cargo
jettisoned in the example might well have preferred the master to choose another alternative or
that some cargo other than his own had been selected for sacrifice. General average owes its
origin to that conflict of interest and is a device whereby, so far as possible, the conflict is
eliminated. Through general average the owner of the cargo jettisoned has his loss shared by all
the other interests involved; the owner of the property sacrificed is placed as nearly as possible
in the same financial position as the owners of the property saved by that sacrifice.

EXAMPLES OF SACRIFICE:

(a) Ship:
Anchors/and or cables may be lost or damaged in efforts to refloat a vessel which has
stranded.
Damage to machinery and boilers in endeavouring to refloat a stranded vessel.
Burning of ship's materials and stores as fuel for the common safety at a time of peril.

(b) Cargo:
Jettison of cargo, i.e., throwing overboard of cargo to lighten the ship.
Water used to extinguish fire on ship or cargo may cause damage to other cargo not on
fire.
Part of the cargo burnt to keep the engines going.

(c) Freight: '

Freight is not pre-paid but paid on delivery. If cargo is sacrificed, the shipowner "cannot
collect the freight. This is sacrifice of freight.'

EXAMPLES OF EXPENDITURE:

 The expense of hiring tugs to tow a vessel to a port of refuge.

 The cost of discharging storing and reloading cargo at the port of refuge where repairs
are carried out.
 Salvage expenses.
 Hiring of fire fighting tugs.

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3.0 Essential Features of GA: The Essential Features of general average are:
3.1 A common Maritime Adventure:

There must be more than one interest in the voyage, e.g. ship, cargo and leased
equipment. These are necessarily involved in a common adventure.

3.2 A Time of Peril:

The act must be performed to avoid a peril which must exist, not imagined, it must be real
and substantial. It need not be immediate, as it would be imprudent to wait until a state of
things arose to justify the act. All the interests must be imperiled.

3.3 Extraordinary Sacrifice or Expenditure:

The act must be extraordinary in degree and kind, i.e. it must be something which cargo
and other interests do not have a right to expect the shipowners to bear under their
contract of affreightment.

3.4 Intentional:

The act must be voluntary in nature - not involuntary or accidental and must be done with
the assent or sanction of the master of the vessel.

3.5 Reasonable:

This feature is linked with the above point, and the discretion is usually left to the man on
the spot. But since the ultimate intention is to preserve the property, the financial
implication/economics of the situation must also be considered. It means that the sacrifice
or expenditure should be prudent.

The York-Antwerp Rules 1994 also include a Rule Paramount after the Rule of
Interpretation, which states as follows:

"Rule Paramount

In no case shall there be any allowance for sacrifice or expenditure unless

reasonably made or incurred."

The burden of proof therefore lies on the party claiming in general average to prove that
both the general average act and the amount of any allowance are reasonable. It is
suggested that in applying this rule there can be no absolute standard of "reasonableness"
and that a situation must be judged on the particular facts prevailing at the time and place
of the incident.

3.6 Success:

The sacrifice or act must achieve some degree of success as otherwise there will be no
value(s) upon which contribution can be based.

4.0 The relevant section (# 66) pertaining to the General Average for the Marine Insurance Act.,
1963 is given below:

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 1. "A general average loss is a loss caused by or directly consequential on a general
average act. It includes a general average expenditure as well as a general average
sacrifice.

2. There is a general average act where any extraordinary sacrifice or expenditure is

voluntarily and reasonably made or incurred in time of peril for the purpose of
preserving the property imperiled in the common adventure.

3. Where there is a general average loss, the party on whom it fells is entitled, subject to
the conditions imposed by maritime law, to a ratable contribution called a general
average contribution.

4. Subject to any express provision in the policy, where the assured has incurred a
general average of expenditure, he may recover from the insurer in respect of the
proportion of the loss which fells upon him; and in the case of a general average
sacrifice, he may recover from the insurer in respect of the whole loss without having
enforced his right of contribution from the other parties liable to contribute.

5. Subject to any express provision in the policy, where the assured has paid, or is liable
to pay, a general contribution in respect of the interest insured, he may recover there
for from the insurer.

6. In the absence of express stipulation, the insurer is not liable for any general average
loss or contribution where the loss was not incurred for the purpose of avoiding, or in
connection with the avoidance of a peril insured against.

7. Where ship, freight, and cargo, or any two of these interests, are owned by the same
assured, the liability of the insurer in respect of general average losses or contributions
is to be determined as if those interests were owned by different persons."

5.0 Contributory Interests:

5.1 All property which is on board at the time of the general average act and which arrives safely is
liable to contribute towards the general average losses incurred on the voyage, viz., ship, cargo,
containers, time charter bunkers and freight.

5.2 The exceptions are mails, crew's effects, passengers' personal effects and luggage not shipped
under bills of lading.

6.0 General average contribution:

It is the contribution by all the parties in a sea adventure to make good the loss sustained by one of them
on account of sacrifices voluntarily made of part of ship or cargo to save the remaining on board from an
impending peril, or for extraordinary expenses necessarily incurred by one or more parties for the general
benefit of all the interests in the adventure.

7.0 Amounts Made Good:

7.1 The object of the general average system is to "make good" the loss suffered by the injured party,
that is, the interest which has been sacrificed or which has incurred expenditure, by recovering
contributions from the interests saved. The amounts used for this purpose are known as "made good
amount."

7.2 In respect of general average expenditure the amount made good is the expenditure itself. In
respect of general average sacrifices the amounts made good are determined on certain principles as
follows:
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 (a) Ship :
The amount to be made good in respect of sacrifices of ship, her machinery, etc., is the actual
reasonable cost of repairing or replacing the damage or loss. Any savings need to be reduced.
(b) Cargo :
Where cargo is not delivered because it is sacrificed, e.g., jettison, the amount made good is the
"net' arrived value" on the day of discharge from the vessel.

8.0 Contributory Values:

8.1 The interests saved contribute on their net arrived value at the port where the voyage
ends, i.e., either at destination or at an intermediate port where the voyage is abandoned.

8.2 The amount payable by each interest is called "GA contribution" and the values on which
this contribution is assessed are known as the "contributory values".

9.0 Adjustment:

9.1 Let us assume there are three cargoes, ‘A’, ‘B’ and ‘C’ on board a ship. For simplicity sake let us
assume that the ship and the three cargoes are valued at 10,000 each. The ship encounters
extraordinary bad weather and to save the adventure, Master orders cargo ‘B’ to be jettisoned completely.
The voyage is saved and the GA adjustment is carried out in the discharge port.

9.2 Ship along with cargoes ‘A’ and ‘C’ contribute 10,000 and give to cargo owner ‘B’. The
contribution is on the basis of their values (10,000 each) and is of 3,333 each. The table is appended
below:

Value Contribution Position after GA Eventual Loss

Ship 10,000 Pays 3,333 6,667 33%
Cargo A 10,000 Pays 3,333 6,667 33%
Cargo B 10,000 Receives 10,000 10,000 0%
Cargo C 10,000 Pays 3,333 6,667 33%

9.3 It will be noticed that while ship, cargo ‘A’ and cargo ‘C’ have lost 33% each, cargo ‘B’ has not
lost anything. This is not fair and puts the other three at a disadvantage. The methodology needs to be
changed as follows:

The loss of cargo ‘B’ is 10,000 which is 25% of the total value on the adventure (40,000).
Therefore each interest needs to contribute 25% as given below:

Value Contribution Position after GA Loss

Ship 10,000 Pays 2,500 7,500 25%
Cargo A 10,000 Pays 2,500 7,500 25%
Pays 2,500 and
Cargo B 10,000 7,500 25%
receives 7,500
Cargo C 10,000 Pays 2,500 7,500 25%

9.4 It must be appreciated that the above example was extremely easy. In reality things can be
complicated, especially if there are many cargo interests. The job of Average Adjuster is therefore quite
difficult.

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10.0 GA and insurance:

10.1 The insurance is to cover accidental losses whereas the sacrificed/ expenses incurred in the GA
act are intentional. However, considering the minimization of loss in a broader way such contributions
are also insured as follows:

The Institute Time Clause (Hull) - 1/10/1983 cover the vessels proportion under general
average as given below:

1. "This insurance covers the vessel's proportion of salvage, salvage charges and/or
general average, reduced in respect of any under-insurance, but in case of general
average sacrifice of the vessel the assured may recover in respect of the whole loss
without first enforcing their right of contribution from other parties.

2. Adjustment to be according to the law and practice obtaining at the place where the
adventure ends as if the contract of affreightment contained no special terms upon the
subject; but where the contract of affreightment so provides the adjustment shall be
according to the York-Antwerp Rules.

3. When the vessel sails in ballast, not under charter, the provisions of the York-Antwerp
Rules, 1974 (excluding Rules XX and XXI) shall be applicable, and the voyage for this
purpose shall be deemed to continue from the port or place of departure until the arrival
of the vessel at the first port or place thereafter other than a port or place of refuge or
a port or place of call for bunkering only. If at any such intermediate port or place there
is an abandonment of the adventure originally contemplated the voyage shall there
upon be deemed to be terminated.

4. No claim under this clause 11 shall in any case be allowed where the loss was not
incurred to avoid or in connection with the avoidance of a peril insured against.

10.2 Similarly the Institute Cargo Clauses provide cover for loss or damage to the cargo by
general average sacrifice. It also covers general average charges adjusted or determined
according to the contract of affreightment and/or the governing law and practice.

11.0 Example of General Average:

The loss suffered and expenses incurred are:

9.1 The loss suffered and expenses incurred are:

Shipowner

a) Damage to machinery which occurred during efforts to refloat the vessel Rs.30,000
(GA sacrifice)
b) Costs of unloading cargo into barges, warehousing arid reloading
to lighten the vessel (GA sacrifice) 5,000
c) Cost of services of tugs 65.000
Total * 1,00,000
Cargo Owners

a) Net value of cargo jettisoned 35,000

b) Damage to cargo due to forced discharge, }
storage and reloading } 15.000 50.000
(Both are GA Expenses)

Total ship and cargo GA 1,50,000

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ADJUSTMENT

Ship (contributory value):

a) Value of damaged ship at destination 2,70,000

b) (Add) Amount made good (machinery damage - GA) 30.000
3,00,000
Cargo (Contributory Value):

i) Gross Value of damaged cargo at destination 11,50,000

ii) (Add) Amount made good
a) Jettison loss 35,000
b) Damage due to forced discharge 15.000 50.000
12,00,000

Therefore, total contributory value = 15,00,000. Total GA to be contributed = Rs. 1,50,000

The general average liability is, in this example, to the extent of 10% of the contributory value.
Therefore:
Ship pays Rs. 30,000
Cargo pays Rs. 1.20.000
Total Rs. 1,50,000

Final Position

Ship
Loss Rs. 30,000
Expenses Rs. 70,000 Rs. 1,00,000
Contribution to G.A. Rs. 30.000
Balance to be paid Rs. 70,000

Cargo :

Contribution to G. A. Rs. 1,20,000

Losses Rs. 50,000
Balance to be paid . Rs. 70,000

Therefore the cargo owners have to pay the shipowners Rs.70,000/-.

12.0 General Average Procedure:

12.1 Adjustment of general average is the responsibility of the shipowner. For this purpose
Average Adjusters, who are skilled professionals, are appointed.

12.2 Declaring a general average is the decision of the master of the vessel, which he takes
depending upon the gravity of the situation and the threat to the common adventure. On declaration of
general average, the master communicates with the shipowner at the earliest.

12.3 An Average Adjuster is appointed at an early date. His first task is to make estimates of
contribution that the various interests have to make, especially cargo. At common law, the shipowner
has a lien on the cargo by virtue of which he can insist on payment of G.A. contribution before delivery
of the cargo. On the basis of the best information available, the adjuster advises the likely amounts of
contribution from cargo owners.

12.4 If the amount of contribution is small, the cargo is delivered subject to consignees signing an '
Average Bond, usually on Lloyd's Form, which has been approved by the insurers.
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12.5 By signing this form the consignees agree:

i) to pay freight due on delivery,

ii) to pay the proper proportion of any general average and salvage charges, and
iii) to furnish correct particulars of the value of the goods delivered to them.
12.6 When cash deposits are paid, a General Average Deposit Receipt is issued on Lloyd's Form. The
form shows particulars of the casualty, the position of net arrived value of the goods (which are identified
by marks and numbers and a general description), the Bill of Lading number and names of the
Trustees issuing the receipt. The receipt is never issued in duplicate, and refund of the deposit, if any,
is made only to the bearer on surrender of receipt.

13.0 York Antwerp Rules:

13.1 These are a set of internationally-accepted rules, first published in 1890, proposing points
of detail in the application of the maritime law principle of general average. The York Antwerp
Rules are a set of maritime rules that were established in 1890. Amended several times since
their inception, this set of maritime rules outlines the rights and obligations of both ship and cargo
owners in the case that cargo must be jettisoned in order to save a ship. Generally bills of lading,
contracts of affreightment and marine insurance policies all include the York Antwerp Rules in
their language.

13.2 The York Antwerp Rules state clear principles, all of which must be met in order for the
rule to be applied. The first stipulation is that danger to the ship must be imminent and real and
should be effecting all interests. There must be a voluntary sacrifice e.g. jettison of a portion of
the ship’s cargo in order to save the complete adventure. The attempt to avoid the danger must
be successful. If a situation meets all the stipulations, then all parties involved in the maritime
adventure must share proportionately in the financial burden of the losses incurred to the owner
or owners of any of the cargo that was jettisoned in order to save the vessel.

13.3 The York Antwerp Rules are a codification of a principles regarding the law of general
average. Though the York Antwerp Rules are quite old themselves, the law of general average is
a much older. The law specifies that all parties involved in a sea venture must proportionately
share in any losses that result from sacrifices made to the cargo to save the remainder.
13.4 Rule Paramount: In no case shall there be any allowance for sacrifice or expenditure
unless reasonably made or incurred.

13.5 Rule A: It specifies the features of GA.

“There is a general average act, when and only when, any extraordinary sacrifice or
expenditure is intentionally and reasonably made or incurred for the common safety for
the purpose of preserving from peril the property involved in a common maritime
adventure”.

13.6 Lettered Rules:

A. Definition; borne by contributing interests

B. Common adventure while towing
C. Only direct losses & expenses included. Indirect not covered - e.g. demurrage,
delays, loss of market, damage to environment etc.
D. Right of contribution not affected (fault of one of the party)
E. Onus of proof claiming GA, time bar of 12 months
F. Additional expenses incurred in place of other may be allowed
G. Adjustment on basis of place where adventure ends

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13.7 Numbered Rules:

I. Jettison cargo only if carried in accordance with the recognized custom of the
trade
II. Sacrifice for common safety - resulting damage due to this in included
III. Damage due to fighting fire included. Not due smoke or heat
IV. Cutting away wreck not included
V. Voluntary stranding included
VI. Salvage charges as per #13 included. #14 not included
VII. Damage while refloating included
VIII. Fuel etc. when vessel stranded included
IX. Cargo etc. used as fuel included
X. Expenses at port of refuge included
XI. Wages, stores, fuel in port of refuge included
XII. Cost of damage to cargo included, if the cost of handling is included
XIII. New for old applied. Ship >15 years a deduction of one third
XIV. Temporary repairs included
XV. Loss of freight to be included
XVI. Cargo contributory value on CIF basis
XVII. Contribution on the basis of values at termination of adventure
XVIII. Value of damage to ship on basis of reasonable cost of repairing

13.8 Main difference between the lettered and numbered rules:

 York Antwerp rules have two sections. The first section has rules that are identified by
the letters (Rule A to Rule G). They enunciate general principles
 These rules give general guidelines on what can be included in the general average.
 The second section has rules that are identified by numbers (Rule I to Rule XXII).
These rules give specific situations, sacrifices and expenditures that can be included
in the general average. They refer to particular cases and circumstances
 For the purposes of Rule A, as drafted in 1924, peril did not have to be “immediate”,
provided that it was “real and not imaginary”, “substantial and not merely slight or
nugatory”.
 The next step was the adoption in 1950 of the Interpretation Rule, giving the numbered
rules precedence over the lettered rules. The lettered rules were to be applied only
where the numbered rules did not fully cover a particular case.
 The Interpretation Rule has been amended by the York/Antwerp Rules 1994, to
provide that the Rule Paramount (requiring any sacrifice or expenditure to be
reasonably made or incurred), as well as the numbered rules, take precedence over
the lettered rules in cases of conflict between them.
 In general, however, the numbered rules continue to override the lettered rules to the
extent of any inconsistency between them.

14.0 When can the cargo owner refuse to contribute for GA?:

14.1 The general average situation may arise out of the unseaworthiness of the vessel and in
such circumstances, the cargo owner may have a defence to any claim by the shipowner for
general average contributions if the shipowner cannot demonstrate that he exercised due
diligence to make the ship seaworthy.

14.2 Where there is such breach of contract of carriage and cargo owner refuse to pay, the
shipowner’s P&I club may be liable to reimburse the shipowner for the cargo’s contribution to the
general average.

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14.3 Let us say a vessel ran aground. The vessel had to sacrifice (Jettison) some of the cargo
to re-float it.

14.5 As per rule D, the cargo owners cannot claim that the grounding was due to the fault of
ship owners and they would not contribute to the general average. Irrespective of the fault which
led to the event (in this case grounding), all parties have to contribute to the general average.

14.6 But this will not be the case if the ship was unseaworthy. If the grounding resulted because
the vessel was unseaworthy, then shipowner cannot benefit from the general average.

14.7 In spite of rule D of the York Antwerp rule, US law does not allow the navigation fault of
the shipowner to be neglected. As such most of the ship owners make sure to include “New Jason
Clause” in the bill of lading and charter party agreement.

ooooo

SELF-EXAMINATION QUESTIONS

1. What all expenses relating to general average can be recovered under insurance?
2. Describe salient features of general average of the Marine Insurance Act, 1963.
3. How are York Antwerp Rules used?
4. Give main difference between the numbered and lettered rules.

RECOMMENDED FOR FURTHER READING:

1. Marine Clauses — Insurance Institute of India

2. Marine Insurance — R.J. Lambeth.
3. Marine Underwriting by Insurance Institute of India.
4. Marine Clauses by Insurance Institute of India.
5. General Average: Law & Practice by F.D. Rose.
6. The York Antwerp Rules by N. Geoffery Hudson.

************

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wRISK MANAGEMENT AND MARINE INSURANCE FINAL YEAR

LESSON - 10

INSURANCE CLAIMS (H&M and Cargo)

1.0 Claims on Hull & Machinery Policy:

1.1 Claims usually covered:

(a) Actual total loss

This occurs when the vessel is actually destroyed or the owner is irretrievably deprived
of her (Marine Insurance Act 1906, S,57).

(b) Constructive total loss

This occurs either when it appears unlikely that the vessel can be recovered, or when
she can only be recovered and repaired at a cost which would exceed her value when
repaired (Marine Insurance Act 1906, S,60).

When an assured wishes to claim for a constructive total loss, it is necessary for him
to tender notice of abandonment to his insurers (Marine Insurance Act 1906, s,62).
This is important, since in the event of failure to give proper notice of abandonment,
the loss can only be treated as a partial loss.

(c) Particular average damage to the vessel

Particular average means a partial loss caused by a peril insured against and which is
not a general average loss (Marine Insurance Act 1906, S,64). The perils covered are
mentioned in clause 6.0 of Institute Time Clauses - Hulls 1.10.83 which are attached
in the study material.

(d) Damages the owner becomes liable to pay to other vessels or their cargoes
following a collision
Under the normal form of policy the underwriters will be liable to pay for damage to
other vessels or their cargoes following a collision, together with any legal costs which
have been incurred with their consent.

(e) Vessel's proportion of general average or salvage

Where a general average loss is incurred, the parties to the adventure (ship, cargo,
freight at risk, etc.) each contribute to that loss on the basis of their value at the end of
the adventure.

(f) Suing and labouring charges

The assured has a duty, under his insurance contract, to take all reasonable steps to
avert or minimize any loss for which a claim would be payable under the policies.

1.2 The amount of claim: For ATL or CTL the claimed amount will be the insured value
of the ship. However, in case of partial loss/ particular average the amount is the reasonable
cost of repairs. Same is explained below:

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1.2.1 The reasonable cost of repairs:

 The object of a marine hull insurance contract is to "indemnify" or reimburse the

assured for what he has lost in respect of the subject-matter insured. In this
connection, S 1 of the Marine Insurance Act 1960 states as follows:

 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 incident to marine adventure.

 S 69 of the Marine Insurance Act, 1906, relating to the measure of indemnity in

cases involving partial loss of ship, goes on to state:

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

(1) Where the ship has been repaired, the assured is entitled to the reasonable
cost of the repairs, less the customary deductions, but not exceeding the sum
insured in respect of any one casualty.
(2) Where the ship has been only partially repaired, the assured is entitled to the
reasonable cost of such repairs, computed as above, and also to be
indemnified for the reasonable depreciation, if any, arising from the unrepaired
damage, provided that the aggregate amount shall not exceed the cost of
repairing the whole damage, computed as above.
(3) Where the ship has not been repaired, and has not been sold in her damaged
state during the risk, the assured is entitled to be indemnified for the reasonable
depreciation arising from the unrepair.

1.3 Claims on the insurance policy - documents/information required

1.3.1 For normal claims: In addition to copies of the relevant insurance policies, the
following documents and information may be required to accompany a claim put forward
against insurers:

(a) General

(1) Deck and engine room log books covering the casualty, and, if possible, the repair
period(s).
(2) Master's and/or chief engineer's detailed report and/or note of protest, as relevant.
(3) Underwriters' surveyor's report and account (if settled by shipowners and not
directly by underwriters).
(4) Classification Society surveyor's report and account.
(5) Owners' superintendent's report and account.
(6) Receipted accounts for repairs and/or any spare parts supplied by shipowners, in
connection with repairs, endorsed by underwriters' surveyor as being fair and
reasonable.
(7) Accounts covering any drydocking and general expenses relating to the repairs.
These accounts should also similarly be endorsed by underwriters' surveyor.
(8) Accounts for all incidental expenses paid at the port of repair, e.g. port charges,
watchmen, communications expenses, agency, etc.
(9) Details of fuel and engine room stores consumed during the repair period, together
with the cost of replacement.
(10) If any owners' repairs are effected concurrently with the damage repairs, it will
assist the adjuster if the accounts for these repairs are also provided.

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 (11) Copies of faxes/e-mails sent and details of long-distance calls made in connection
with the casualty, together with their costs.
(12) Details of dates of payment of all accounts.

(b) When vessel has been in collision

(1) Details of steps taken to establish the liability for the collisions and the eventual
settlement made between the two parties.
(2) If a recovery has been attempted against the colliding vessel, a detailed copy of
the claim put forward and all the items allowed from the claim by the owners of the
colliding vessel together with accounts covering legal costs.
(3) A detailed copy of any claim received from the other vessel, together with details
of which items included in the claim have been agreed.
(4) Details of efforts to limit liability of applicable.

(c) Where a vessel is removed for repairs

(1) The reason for the removal.

(2) Deck and engine room log extracts covering the removal passage or details of:
(i) The last port prior to the repair port, and the first port thereafter.
(ii) Details of the dates of arrival/departure at the relevant ports.
(3) Details of whether a new cargo or charter was booked on the removal to the repair
port, together with information concerning the freight earned thereon, and also derails
as to any new cargo booked to be loaded following completion of repairs.
(4) Accounts for the outward port charges at the last port prior to the repair port, the
inward and outward port charges at the repair port, and, if the vessel returns to the port
from which she originally moved, the inward port charges at that port.
(5) Portage bill showing the wages of the officers and crew covering the period during
the removal to the repair port, and also for the return passage if the vessel returns to
her original port. The cost of maintenance for the officers and crew should also be
stated.
(6) Details of fuel and stores used during the removal indicated under (5) above, and
the cost of their replacement.
(7) Accounts for temporary repairs if they were effected solely to enable the vessel to
move to the repair port.
(8) Details of owners' repairs, if any, effected at the repair port together with the costs
thereof.

1.4 General average - documents/information required:

1.4.1 The documents required in cases of general average vary considerably according to
the nature of the casualty. The following are selected to cover the majority of cases:

(a) Resort to a port of refuge

(1) Log extracts and reports from the master or other parties showing the dates and
times when the vessel deviated, arrived at a port of refuge, left port of refuge and
regained her position.
(2) Any survey reports, whether held on behalf of underwriters, owners, the
Classification Society, or in the general interest dealing with the vessel's resort to the
port of refuge and/or any repairs effected there.
(3) Details of any repairs effected at the port or refuge, stating whether they were
temporary or permanent repairs, and also how much of the repair account represents
the excess costs of overtime worked by repairers.
(4) Details of any shifting or discharge of cargo at the port of refuge, stating whether

85
such shifting or discharge was necessary either in order to allow repairs necessary for
the safe prosecution of the voyage, or for the common safety or for re-stowage. If any
costs have been incurred in this respect, the accounts covering such expenses,
storage whilst ashore, and insurance during the storage period to be supplied.
(5) Agent's general account covering the detention period at port of refuge together
with supporting vouchers.
(6) Portage bill giving details of wages and allowances paid to crew of vessel during
the resort to the port of refuge.
(7) The daily rate of maintenance paid in respect of the crew of the vessel.
(8) Details of fee and expenses paid to any owners' superintendent/surveyor employed
at the port of refuge.
(9) Details of fuel and stores consumed in deviating to the port of refuge, while detained
there, and in regaining position, together with details of the cost of their replacement.
(10) Copies of faxes/e-mails sent and details of long distance calls made in connection
with the casualty together with their costs.
(11) All accounts should be marked with the date on which they were paid by owners.

(b) In respect of ship

(1) If the vessel has been on fire:

(i) Survey reports showing division of damage between fire and efforts to
extinguish the fire. (The same division should also be made in surveys of any
similar damage to cargo.)
(ii) Accounts for repairs to the vessel should also be divided in this way.
(iii) Accounts for any fire-fighting costs: refilling extinguishers, CO2 bottles, etc.

(2) If the vessel has been aground:

(i) Survey report dividing the damage found between that caused by grounding
and that caused by refloating.
(ii) Repair accounts should be similarly divided.
(iii) If the vessel has been refloated with tugs, details of the Salvage Award and
relevant legal costs, or if the salvage services have been rendered under
contract, a copy of the salvage contract and the relevant accounts.
(iv) Accounts for any costs incurred lightening the vessel (e.g. lighterage).

(c) In respect of cargo

(1) Manifest of the cargo on board at the time of the accident.

(2) Copy of the bills of lading showing the front and reverse sides.
(3) Details of the outturn of cargo delivered.
(4) Any reports of survey on the cargo held directly following the casualty or at the
port(s) of destination.
(5) General average security documents furnished by cargo interests (i.e. average
bonds and general average guarantees).
(6) Counterfoils of any general average deposit receipts issued.
(7) Copy of the commercial invoice(s) covering the particular consignment(s).

(d) In respect of freight/time charterers' bunkers

(1) Details of the chartering situation of the vessel and copies of the charter parties.
(2) If freight was at risk, a copy of the settled freight account will be required together
with copies of all accounts covering the cost of earning the freight subsequent to the
accident.

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 (3) Details of any bunkers owned by time charterers remaining on board the vessel at
the termination of the adventure.
(4) Off-hire statement.

2.0 Claims on Cargo Policy

2.1 A claim under the cargo policy may arise due the following circumstances due to the
happening of an insured peril.

2.2 Total Loss - Actual or Constructive (ATL /CTL)

(A) Actual Total loss :

(a) Complete physical destruction of the goods constitute an Actual Total loss or
(b) where the assured is irretrievably deprived of the possession of his goods eg seizure
of the ship and cargo in a war or
(c) loss in which the subject matter is so destroyed that it ceases to be a thing of the
kind insured e.g. when cement after contact with sea water solidifies.
(d) Proving an ATL requires that an insured peril must have taken place.

(B) Constructive Total loss takes place when :

(a) assured is deprived of the possession of the goods and is unlikely to recover them
or
(b) the cost of recovering them would exceed their value when recovered or
(c) the cost of repairing them and forwarding them to their destination would exceed
their value on arrival or
(d) where an actual total loss appears inevitable

2.2.1 At the time of making a claim of CTL, the insured is obliged to give a notice of
Abandonment. The right to claim CTL rests completely with the insured.

2.2.2 Cloth bales insured value Rs 20,00,000/- are insured for a voyage from Mumbai to
London by a ship M.V Mary. Enroute there is a collision with another ship. She reaches the port
of refuge and the contract of carriage is terminated and goods are discharged at the intermediate
port. The assured notifies the underwriter and a surveyor is appointed. The cost of reconditioning
the bales that have been damaged, repacking and forwarding them would be Rs 15,00,000
against the value of the estimated (damaged) value of goods i.e. Rs 12,00,000 on arrival at the
destination port.

2.2.3 A prudent uninsured person would not spend more than the estimated arrived value of
the bales and would abandon the adventure at the port of refuge for the best price available.
Then he will claim a CTL from the underwriter.

2.2.4 The word "average" really means "division," i.e., division of loss, division of burden
or division of results. For example, the marks obtained by entire class is totaled up and
divided by the number of students and the result is per student "average". In the same way
you average or you should average your weekly expenditure so as not to exceed the income
of the year. Now there are two kinds of average one Particular or, as it is in some countries
designated, "Simple Average", and the other “General Average” so called in all countries.

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2.3 Partial loss or Particular Average:

The word "average" connotes loss in Marine Insurance. So this means it's a partial loss of the
subject matter of the insurance by an insured peril. It can either be a total loss of a part of the
cargo or partial loss of the entire cargo.

2.4 General Average Loss (GA Act):

2.4.1 The owner of a vessel arranges with certain owners of cargo to carry their goods to
certain ports. The vessel meets with an accident say goes aground, and the Master engages
a tug to pull the vessel off, and the tug succeeds in so doing. The Master or the owner of the
ship has to pay to the owner of the tug a sum of money for the services rendered by him to
the ship. The Master in engaging the tug did not do so for the purpose of saving the ship alone,
but for the purpose of saving the cargo also and thus enable him to prosecute the adventure.
It is therefore only right and proper that the money so paid should be borne by all the
adventurers, i.e., each should contribute a share and the money so paid should be "averaged"
or "divided" or "equalized” between all the interested parties. Thus General Average is none
other than general division of a loss between all concerned in the venture. These losses are
declared by the master of the ship where a casualty has occurred. The insurer pays for the
insured's proportion of the GA contribution.

2.5 Expenses incurred towards sue and labour, Salvage charges, forwarding
expenses and extra charges: Particular charges are expenses incurred by or on behalf of
the assured for safety or preservation of the subject matter of insurance. As long as they are
reasonably incurred properly they can be added to the claim recoverable. They are known as
extra charges incurred by the assured as a consequence of the loss or damage, e.g. survey
fees, sale charges.

2.5.1 Sue and labor charges are payable to the insured for the measures taken to safeguard
the goods short of destination. This is known as "duty of the assured" clause. For example
goods are discharged at a port of refuge due to an insured peril and the voyage is terminated
there. The insured would have to make alternate arrangements to store and forward the goods
to the original destination. These expenses when reasonable incurred would be recoverable
under sue and labour charges.

2.5.2 Forwarding charges are incurred by the insured to forward goods to their destination
when the contract of carriage has been terminated short of such destination by the operation of
an insured peril. It does not include salvage charges. They are incurred in respect of unloading
of the goods, moving them to a warehouse, payment of warehouse charges and forwarding
them to the destination

2.5.3 Extra Charges are the surveyor’s fees and other incidentals when the voyage is
terminated short of destination due to an insured peril.

2.5.4 Salvage charges are charges recovered by a salvor independent of a contract for
saving property or life at sea .They are recoverable by the insured either as particular charges
or General Average expenditure. Such service is on a" No cure No pay basis" in practice on a
contract basis. It makes some allowances for the salvor to recover some expenses even when
property could not be salved. Salvage charges are treated as General Average.

2.5.5 Other claim related points: The consignee must notify the insurers immediately
following the loss, so that the goods are surveyed without delay and carriers are held responsible
for any loss or damage. This would allow the underwriters to appoint appropriate surveyors in
order to establish the nature of the cause of the loss/damage and to ascertain its extent. It is
important to remember that the cover terminates once the goods are delivered at the

88
destination or in the storage/ware house of the consignee and therefore any damage thereafter
is not covered. Hence it is necessary that the underwriters are notified immediately.

2.5.5.1 If the goods are landed at an intermediate port (port of refuge) this could indicate that
either the voyage is being abandoned or the goods are so damaged that it may not be worth it
to continue their transit. According to Institute Cargo Clauses the cover may terminate under
some similar circumstances unless prompt notices to the underwriters are given and
continuation has been requested. Therefore it is imperative that the underwriters are informed.

2.5.5.2 The cargo is carried under the contract of carriage and loss/damage is thus a breach
of such contract. Therefore to make the carrier liable the carrier must be informed. A suitable
survey will then have to be carried out which may be done jointly with the survey by the
underwriter.

2.5.5.3 The consignee should put any other entity who may be responsible, on notice. These
could be port authorities as bailees of the cargo.

2.5.4 If the goods have to contribute for the General Average, the consignee may have to
furnish guarantees to the underwriters: Further the consignee may have to pay a general
average deposit. Under such circumstances the consignee should immediately inform the
cargo insurer.

2.6 CLAIM PROCEDURE:

2.6.1 Immediately on notification of the claim, the same is registered and as per the amount
of loss estimated a surveyor is appointed by the insurer.

2.6.2 The surveyor has to assess the loss and ascertain the cause of the same. Calculating
a loss is a complex exercise. It involves several factors depending on the circumstances of
the loss, cause of the loss, nature of cargo and the extent of actual loss or damage. Invariably
a survey by an independent surveyor is required and at times it may be necessary to hold a
joint survey with surveyor of the insured. In Marine insurance the survey fee is borne by the
insured and is reimbursed if the claim becomes payable, there may be exceptions though.

2.6.3 The insured is also expected to carry out immediate loss minimization measures.

2.6.4 Here are a few important documents which have to be produced to substantiate a
marine claim.

A. Shipments - Documents required are:

1. Original insurance policy/certificate duly endorsed

2. Insurance Survey report
3. Carriers' survey report/short-landing or non-delivery certificate
4. Certified true copy of the B/L (In the case of short landing of entire shipment,
original and all negotiable copies of the Bill of Lading duly endorsed would be
required).
5. Certified copy of the Sales Invoice with Packing List
6. Custom Bill of Entry (for duty claim)
7. Claim Bill
8. Letter of subrogation cum Power of Attorney
9. Copies of correspondence exchanged with Carrier/Customs/Port Authorities with
Acknowledgement Due Cards.
10. Letter of Undertaking (in case of short-landing claims)

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B. Inland Transit - Documents required are:

1. Original insurance Policy/Certificate of insurance duly endorsed

2. Insurance survey report
3. Open Delivery Certificate/Carrier's Survey Report for damage observed at the time
of discharge/delivery at destination station/point.

4. In the case of non-delivery of an entire consignment, original Railway Receipt/Way

Bill along with the latest endorsement of the carrier about the non availability of the
consignment
5. Sales Invoice with Packing List
6. Copies of correspondence exchanged with the carriers along with the A.D. Cards
7. Claims Bill
8. Letter of subrogation cum Power of Attorney
9. Letter of undertaking (in the case of Non-delivery)
10. Letter of authority addressed to the carrier.

2.6.5 For export claims, the survey is carried out abroad at the place of destination by the
insurer's settling agent there and the payment is also made by them in the foreign currency.
They are authorized to do so by the insurers in India.

2.5.6 As per the Policy holders protection Act of IRDA certain guidelines have been laid
down for the insurers to follow upon the happening of a claim. One of them is providing the
survey report to the insured.

2.6 Legal Aspects of recovery against the carrier:

2.6.1 In order to protect the subrogation rights of the insurer, the insured has to lodge a
claim for damages against the carriers. The time limit within which to do so varies according
to the mode of transport.

2.6.2 Recovery should be actively pursued from the carriers as it helps to reduce the claim
ratio.

2.6.3 The insured may also ask for a waiver of subrogation for which the insurer can charge
some additional premium.

2.7 A Case Study of how losses are settled under Brand Protection Clause:

2.7.1 A car carrier Hoegh Osaka, ran aground on a sandbank with 1,400 vehicles on board.
After days of lying in a tilted position she was safely berthed at Southampton. There is a
possibility that the vehicles, said to include 1,200 luxury cars, might be declared total losses,
despite the fact that they show no external signs of serious damage.

2.7.1.1 This incident is a painfully clear and current example of the accumulation risk
represented by automobile logistics. The vessels are huge, some able to carry up to 8,000
vehicles, top-heavy and susceptible to loss of stability due to strong wind drifts.

2.7.1.2 Additionally, they are built without separate compartments or bulkheads for quick
loading and unloading, resulting in risk of fast flooding in the event of an accident. This risk is
further pronounced by the construction of the loading ramps which are potentially vulnerable
to water ingress.

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2.7.2 Another example is that of Asian Empire in April 2014 with 4,600 vehicles on board,
the Baltic Ace in December 2012, carrying 1,400 cars, and the Cougar Ace in July 2006 with
4,703 cars on board that were declared as total loss.

2.7.3 One contributing factor to the high volume of losses is brand protection clauses in
automotive policies which give car manufacturers a broad cover in such cases. Exposure is
not limited to car carriers only: automobiles waiting to be loaded are highly vulnerable to
hailstorms and flooding.

2.7.4 Since 2004, there have been 20 hail events with marine losses in Europe alone – as a
result of climate change. Superstorm Sandy, the largest marine cat loss event ever, flooded
the port of New York, leaving 16,000 new cars and 3,000 trucks destroyed.

ooooo

SELF-EXAMINATION QUESTIONS

1. How does Constructive Total loss arise?

2. What is a General Average Claim?
3. Why is subrogation of rights important?
4. What documents are required to support a claim under H&M policy?
5. List the documents which are required to substantiate a Marine Cargo claim.

RECOMMENDED FOR FURTHER READING:

1. Marine Claims Handbook by N.G. Hudson &J.C. Allen-Lloyd's of London Press Ltd.
2. Marine Insurance Claims - Insurance Institute of India.

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RISK MANAGEMENT AND MARINE INSURANCE FINAL YEAR

LESSON 11

WAR RISK INSURANCE

1.0 War risk insurance covers damage due to acts of war, invasion, insurrection,
rebellion and hijacking. Some policies also cover damage due to weapons of mass
destruction. It is mostly used in the shipping and aviation industries. War risk insurance has
two components: War Risk Liability, which covers people and items inside the vessel and is
calculated based on the indemnity amount; and War Risk Hull, which covers the vessel itself
and is calculated based on the value of the craft. The premium varies based on the expected
stability of the countries to which the vessel will travel.

1.1 Cover for war risks can be obtained in London market and Institute War and Strikes
Clauses are used. However, Government of India brought about the above scheme which
came in force with effect from 1st July 1976. This scheme provides for insurance of Marine
hulls against War Risk by the Indian insurance companies. The scheme was amended in
1993. Its salient points are given below:

1.2 APPLICABILITY:

1. Vessels registered or deemed to have been registered under Part V of Merchant

Shipping Act, 1958.
2. Vessels which otherwise qualify for registration as above, which are under
construction or are purchased from foreign owners.
3. All mechanized sailing vessels.
4. Vessels not falling within the scope of Emergency risks (undertaking) Insurance
Act. 1971.

1.3 FEATURES:

1. Scheme is voluntary.
2. Cover granted by any one of subsidiaries of General Insurance Corporation.
3. 100% reinsured with Government.
4. One year cover-1st July to 30th June.
5. Annual rate of premium fixed by Government which is payable in advance.
6. Installment facility allowed. No Stamp Duty.
7. Entered value of ship for War Risk is to be equivalent to the aggregate Hull &
Machinery (H&M), Freight, Disbursement or Increased Value Insurance for Marine
risks.
8. Government empowered to:
(a) Cancel Policy giving 14 days notice.
(b) Revise the premium at any time during the course of the year.
(c) Decide higher rate of premium for vessels eligible for entering the scheme but
had opted out.

1.4 SCOPE OF COVER:

1. H & M - Loss/damage due to:

(a) War, civil war, capture, seizure, arrest, restraint etc.
(b) Mines, torpedoes, weapons of war etc.
(c) Strikes, riots or civil commotion etc.
(d) Terrorist or malicious acts.
(e) Confiscation.

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 2. Detention and Diversion expenses.
3. P&I Risk-Loss of life and personal injury.
4. P&I Risk-Wreck removal.
5. Sue and Labour.

Note: Indemnity provided in (3), (4) and (5) in addition to (1) and (2) - Company's
liability under (3), (4) and (5) is not to exceed Rs. 10 crores or S.I. whichever is less,
for any ONE EVENT."

1.5 The Insured is Held covered in case of breach of warranty as to towage or salvage
services provided notice be given to the Underwriters immediately after receipt of advices and
any additional premium required by them be agreed.

2.0 DETAINMENT:

2.1 In the event that the Vessel is subject to capture seizure arrest restraint detainment
confiscation or expropriation, its deemed that the Assured shall thereby have lost the free use
and disposal of the Vessel for a continuous period of 12 months. For the purpose of
ascertaining whether the Vessel is a constructive total loss the Assured shall be deemed to
have been deprived of the possession of the Vessel without any likelihood of recovery.

2.2 That is to say that if the detainment happens due to a war like situation and the vessel
is not returned to the insured then he is said to have been deprived of its possession and will
be treated as a loss of the vessel.

3.0 War Risks Trading Warranty under War Risks Insurance Scheme:

3.1 This coverage shall extend worldwide, but in the event of a Vessel or craft insured
hereunder sailing for, deviating towards, or being within the Territorial Waters of any of the
countries or places described in the Current Exclusions as set out below (including any port
area that at the date of this notice constitutes part of such a country or places however it may
be described) additional premium shall be paid at the discretion of the Insurers hereon.

3.2 Information of such voyage or deviation shall be given to Insurers as soon as

practicable. In the event of the Insured not requiring a continuation of coverage for a Vessel
proceeding into or remaining within an excluded area, he shall advise Insurers hereon before
the commencement of such voyage, deviation or period.

3.3 Current Exclusions:

(1) Trading to Iraq Ports subject to Additional Premium.

(2) Trading to Pakistan Waters – Cover not exceeding 7 days in total subject to
prior approval.

4.0 Current status of the scheme:

4.1 Following the decision of the Tariff Advisory Committee to de-tariff Marine Hull
Insurance from 1st April, 2005 the Insurance Regulatory and Development Authority (IRDA)
issued Guidelines for Marine Hull Insurance and Insurance of War risk Insurance of
Marine Hulls vide Ref. No: IRDA/CIR/Mrn-Hull/086/Mar-05 dated 23 Mar 2005. As per that
the marine hull class of business was taken out of the tariff from 1.4.2005. On the other hand
the terms & conditions for the war risk insurance policy shall be identical to the existing
Government of India Scheme until further orders.

4.2 General Insurance Corporation (GIC), the country’s official reinsurer, has taken over
the scheme administered by the Centre for the domestic shipping industry. In a bid to protect
the shipping industry during war, an additional war risk cover of Rs 400 crore has been taken
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by the GIC. This extra capacity will make the domestic shipping industry, which has
international exposure on a day-to- day basis, more comfortable. Earlier, the Centre, which
was administering the scheme, had granted freedom to ship owners to place their war risk
cover directly with the domestic general insurance.

4.3 Indian ship owners had to insure their war risk compulsorily with the government,
through the War-Risk Insurance on Marine Hulls (1976) scheme. Though this cover was
provided by the government directly to the ship owners, the scheme was administered only by
the four public sector general insurers. The premium collected on this account was credited to
the government and the claims, if any, was paid by the Centre. The government was charging
a premium of 0.08% per annum on the market value of the ship by way of war-risk (peace-
time war risk).

4.4 Government has liberalized the war risk insurance for Indian flag ships. It has granted
freedom to ship owners to place their war risk cover directly with public sector insurance
companies as well as with private insurance firms operating in the country from January 1
2005.

4.5 The current scheme is now being dispensed with. "All the general insurance companies
operating in India would now be free to underwrite the war risk on marine hulls with effect from
January 1 subject to IRDA regulations and guidelines," says an order issued on December 24
by Mr K.U. Khan, Officer on Special Duty, Insurance Division, Ministry of Finance.

5.0 Features of War risk cover available internationally:

5.1 Sum Insured – to correspond to the Hull & Machinery insurance value and/or any
ancillary interests covered. The total sum insured for all interests not to exceed USD
300,000,000 each vessel.

5.2 Conditions – most major international conditions for War Risks cover.

5.3 Liability Cover (P&I) – includes an independent limit for War Risks P&I which will
indemnify Members for claims that are not recoverable from the P&I Club because of the War
Risks exclusion contained therein. This is normally up to the sum insured; however a higher
limit may be available.

5.4 Blocking & Trapping Inclusion – Total Loss compensation after six months.

5.5 Additional Expenses – up to USD 25,000 per day are covered in excess of 7 days,
but not recoverable following an agreed total loss or after 180 days has expired, whichever
occurs sooner. These are unavoidable expenses following an insured peril.

5.6 Loss of Hire – available upon application with Daily Sum Insured and limit to be agreed
in advance. Subject to Additional Premium for breaches of Trading Warranties.

5.7 Voyage Frustration (Piracy Loss of Hire) – as per the following wording upon
application to The Association and available on an annual basis or for breaches of Trading
Warranties.

5.7.1 This is to indemnify the original insured for their Loss of Hire up to the Daily Sum
Insured to be agreed by The Association for 180 days (or to be agreed by The Association)
but subject to a limit USD 17,500,000 any one accident or occurrence, in the event of the
vessel insured hereunder being prevented and/or delayed from trading as a result of an act of
Piracy, for a period in excess of 48 hours.

5.7.2 Also to pay costs or expenses incurred by the original insured in order to prevent or
mitigate a claim hereunder but excluding any ransom demands absolutely.

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5.7.3 Any subsequent recovery up to the amount of any claims paid hereunder to inure to
the benefit of The Association.
5.7.4 Excluding any fines or penalties absolutely or claims that are recoverable from the
vessels Protection and Indemnity Club and/or War Risks Insurer(s) and/or other insurance
policies in place during the currency of this insurance.

5.8 Trading Warranties – as per list in vogue.

ooooo

SELF-EXAMINATION QUESTIONS

1. The Government of India's War Risk Scheme is applicable to which ships?

2. What risks are covered under this scheme?
3. When is the vessel said to be held covered?
4. What is the new system?

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 RISK MANAGEMENT AND MARINE INSURANCE FINAL YEAR

LESSON 12

SALVAGE, INTERNATIONAL SALVAGE CONVENTION, 1989

1.0 Definition of Salvage:

1.1 Salvage is the preservation by a voluntary salvor of a ship, cargo and certain other classes
of property at sea or in other waters from danger.

Article 1 of the International Convention on Salvage 1989, however, defines “salvage

operation” as: “any act or activity undertaken to assist a vessel or any other property in
danger in navigable waters or in any other waters whatsoever”.

1.2 Salvage means the preservation of a vessel which has been wrecked, stranded or is in distress.
The lives of persons on the vessel or the cargo or apparel of such a vessel could be under threat.
The principles of salvage are almost similar to those of general average. In general average, act or
sacrifice must be made voluntarily and the property saved must have been in real danger.

 It means preserving a vessel that has been wrecked, stranded or in distress.

 Life of persons on the vessel, her apparel, cargo must be under threat.
 Law of salvage was developed to encourage voluntary acts of assistance to property
in danger at sea.
 It is legal liability of the owner of the property salved to reward/ remunerate those
who have salved his property.
 Volunteer/salvor not eligible for consideration but certainly for an award.

1.3 In other words, salvage is a claim brought by a third party volunteer who has assisted the
ship and cargo to save it from a peril. Any event which results in the ship and cargo needing
outside assistance may lead to salvage, for example:

 Grounding
 Fire
 Collisions
 Engine Failure
 Structural failure
 Heavy weather damage
 Capsizing
 Sinking

2.0 Classification of salvage:

2.1 Offshore (in open waters) salvage: The refloating of ships stranded or sunk in exposed
waters is called offshore salvage. In this type of salvage, vessels are exposed to waves, currents
and weather and are the most vulnerable and difficult to work on. They also tend to deteriorate
more rapidly than such vessels in protected harbours. Offshore salvage may provide only a short
window of opportunity for the salvage team due to unusually high tide or inclement weather for
instance. As a result, it is often imperative to work quickly. Typically, offshore salvage is conducted
from pre-outfitted salvage tugs and other tugboats. In addition, portable diving facilities may be
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transported by helicopter or small boat to the work area. From a tactical point of view, working in
unprotected waters is less hospitable for floating cranes, construction tenders, dredges and
equipment barges.

2.2 Harbour salvage: The term harbour salvage refers to the salvage of vessels stranded or
sunk in sheltered waters. Such vessels are not normally subject to the same deterioration caused
by marine and weather conditions as offshore salvage vessels are. In addition, unless the vessel
to be salvaged is obstructing navigation, then there is no need to work as swiftly as in offshore
salvage. Also, harbour pre-salvage survey and planning stages tend to be less time consuming
and environmentally dependent.

2.3 Cargo and equipment salvage: Saving the cargo and equipment aboard a vessel may
be of higher priority than saving the vessel itself. The cargo may pose an environmental hazard
or may include expensive materials such as machinery or precious metals. In this form of salvage,
the main focus is on the rapid removal of goods and may include deliberate dissection,
disassembly or destruction of the hull.

2.4 Wreck removal: Wreck removal focuses on the removal of hazardous or unsightly wrecks
that have little or no salvage value. Because the objectives here are not to save the vessel, the
wrecks are usually refloated or removed by the cheapest and most practical method possible. In
many cases, hazardous materials must be removed prior to disposing of the wreck. The most
common techniques used in wreck removal are cutting the hull into easily handled sections or
refloating the vessel and scuttling it in deeper waters.

2.5 Afloat salvage: The salvage of a vessel that is damaged but still afloat is called afloat
salvage. This type of salvage is mostly unobtrusive and involves primarily damage control work
such as hull welding, stabilization (rebalancing ballast tanks and shifting cargo) and structural
bracing.

3.0 Types of Salvage:

3.1 Pure/Maritime Salvage: In the absence of a contract therefore, there are four
requirements which a salvor has to meet before he is entitled to a salvage award from a court
competent to exercise maritime jurisdiction.

3.1.1 Property to be salved: The subject of salvage includes vessels, cargo or any other
property.

3.1.2 There must be danger: The danger must be a real one, and must not only exist in the
imagination of those to whom the service is rendered. A ship may be in varying degrees of danger.
It cannot be ignored that to lay down too strict rules would discourage salvors as the salvors would
hesitate whether it is in real danger, so that the best opportunity of salvage would be lost.

3.1.3 The activity must be voluntary: The salvors must have been “volunteers” and under no
pre-existing duty to act. This duty may spring either from a contact between the salving and the
salved vessels or from an official duty on the part of the salvors. Where such duty exists the
service is not voluntary. For example, the master and the crew who have duty to salvage their
vessel and cargo cannot get award. Similarly, if the collision happen, the master and crew of one
vessel have duty to salvage the other vessel, and therefore they cannot get award.

3.1.4 There must be success: The services must succeed either wholly or in part. If there is no
salved value, there will be no salvage award, namely the "No Cure-No Pay" principle will apply.
This requirement has now been diluted by the introduction of Article 14 of the 1989 Convention.
The effect of incorporating Article 1(b) in the LOF 1990 will be to apply the

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3.1.5 According to Art. 1 (a) of the International Convention On Salvage, 1989, (Salvage
Convention 1989, also referred further as to “SC 1989”) salvage operation means any act or
activity undertaken to assist a vessel or any other property in danger in navigable waters or in
any other waters whatsoever.

3.1.6 There are several factors that would be considered by a court in establishing the amount
of the salvor’s award. Some of these include the difficulty of the operation, the risk involved to the
salvor, the value of the property saved, the degree of danger to which the property was exposed,
and the potential environmental impacts. It would be a rare case in which the salvage award would
be greater than 50 percent of the value of the property salvaged. More commonly, salvage awards
amount to 10 percent to 25 percent of the value of the property.

3.2 Contractual Salvage: Where there is a contract between the ship owner and salvage
company. In contract salvage the owner of the property and salvor enter into a salvage contract
prior to the commencement of salvage operations and the amount that the salvor is paid is
determined by the contract. This can be a fixed amount, based on a "time and materials" basis,
or any other terms that both parties agree to. The contract may also state that payment is only
due if the salvage operation is successful ("No Cure, No Pay"), or that payment is due even if the
operation is not successful. By far the commonest single form of salvage contract internationally
is Lloyd's Standard Form of Salvage Agreement commonly called, Lloyd’s Open Form (LOF)
(2011), an English law arbitration agreement administered by the Council of Lloyd's, London.

3.2.1 A salvage agreement involves the salvor bargaining for reward before effecting the
salvage. There are various implied conditions in such an agreement:

 the property is in danger;

 the salvor is not already under a duty arising from another contract such as a towage
 contract;
 the salvor is not acting in an official position;
 unless there is a term to the contrary in the Agreement, the services must be
successful –no cure, no pay;
 the sum agreed must be paid out of the proceeds of the property saved;
 the salvor has lien on such property;
 the agreement is made in good faith, all material facts having been disclosed.

4.0 SALVAGE AGREEMENTS:

4.1 Salvage claims arise basically due to any of the following reasons:

 Firstly, where the Master or shipowner enters into an agreement with the salvors knowingly
under a salvage contract.
 Secondly, if services of a salvage nature are provided but no terms are set out prior to
providing assistance.

4.2 As per the law of salvage, salvor is the one who without any particular relations to the ship in
distress proffers useful service and gives the same as a volunteer without any pre-existing covenant that
connected him with the duty of employing himself for the preservation of that ship.
4.3 The law of salvage has been developed as a means of encouraging voluntary acts of assistance
to property in danger at sea. Therefore, it can be said that a volunteer is not eligible for consideration
but he is certainly eligible for an award. Again award can be given if the job is successfully completed.
Thus, the concept of "No Cure - No Pay" is further strengthened. Nevertheless, a salvor voluntarily
offering service to a vessel in distress may stipulate the acceptance of certain contractual terms to govern
the performance of service and payment of remuneration.

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4.4 Lumpsum or Daily Rate Basis:
4.4.1 This type of agreement is a specially-made document for the assignment to be
undertaken, wherein either a total lump sum or daily rate is agreed upon. In this case, the
shipowner is normally responsible for the payment to the salvor. In case the vessel has cargo on
board, then the shipowner may declare general average in order to recover part of the cost from
the cargo owners or underwriters of cargo on board.
4.4.2 Generally the shipowner and the Master will try and work out the minimum cost of
assistance by negotiating with the salvors a fixed price or tariff. But it is very important to realize
the degree of danger or urgency. Negotiations should not result in an inordinate delay. The
Master being the man in charge has to decide the degree of risk and danger involved and if the
need arises, he should act as an agent of necessity.
5.0 LLOYDS STANDARD FORM:
5.1 The Development of Lloyd’s Open Form:

5.1.1 Most salvage services around the world are rendered pursuant to the well-known salvage
contract called Lloyd’s Open Form (LOF). This salvage agreement incorporated the provisions of
the Salvage Convention 1989 to be applied contractually; therefore, even a noncontracting state
will abide by the Convention’s terms and conditions provided the parties have signed the relevant
LOF.

5.1.2 The first modern text of the Lloyd’s Form of salvage agreement was adopted in 1892 and
was standardized by 1908. Delays in contractual terms negotiations would occur in most salvage
operations. As a result, the LOF evolved to allow decisions to be made quicker when a vessel
was in a distress situation. This form allows the parties to essentially agree that the operation will
go ahead and if they are unable to agree on the appropriate amount of salvage award afterwards
then a specialist arbitrator appointed by Lloyds of London shall make the decision. The salvage
contract launched by Lloyds in 1908 was refined over the years, and the latest version is LOF
2011which came into effect on May 9th 2011.This salvage contract continues to evolve to solve
arising practical problems and is administered in London by the Lloyds Salvage Arbitration
Branch (SAB).

The LOF sets a process through which parties can agree to the amount of salvage security, so
that the salved property may be released. To ensure that salvage security is provided, the salvor
has a lien on the cargo (i.e. a right to detain the property) for his claim for salvage. Security must
be lodged at Lloyds to their satisfaction by a UK based guarantor, or in the form of a cash deposit.
For this reason, there are salvage claims handling services based in London

5.1.3 The main changes in LOF 2011 with regards to previous versions relate to:

 The publication of future LOF Awards on the Lloyd’s Website, subject to conditions set
out in the Lloyd’s Standard Salvage Arbitration Clauses.
 A new requirement to notify the Council of Lloyds within 14 days of agreeing LOF.
 A new requirement regarding the provision of security for the fees and expenses of
 Lloyds and the Arbitrator/Appeal Arbitrator.
 New special provisions dealing with salved Container ships in respect of notices to
salved property, binding unrepresented interests to settlement agreements, and
excluding low value cargo from the salved fund.

5.1.4 The LOF 2011 form specifies on the first page with a set of 9 boxes:

 The name of the salvage contractors,

 Identifies the property to be salved,
 Any agreed place of safety (often this is left blank),
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  The currency of the arbitration award (with a default currency of USD),
 The date of the agreement,
 The place the agreement is signed,
 Whether SCOPIC is incorporated, and
 Identifies the person signing on behalf of the salvors and on behalf of the salvaged
 property (usually the ships’ Master).

5.2 LOF 1980 introduced the first movement away from the principle that remuneration should
be based solely upon the value of property salved. This form provided that the salvor might still
be paid, even if there was no cure, if the services were rendered to a laden oil tanker which was
a threat to the environment. Except perhaps with the agreement of the P&I clubs concerned,
salvors had not previously been entitled to payment under such circumstances. LOF 80
introduced a new concept. This provided that the shipowners should reimburse the salvor for his
expenses, plus a supplement up to an additional 15 per cent which would be dependent upon the
value of the result of the salvors' efforts. This term was referred to as the "safety net" and its
introduction reflected an ever-increasing awareness worldwide of the effects of oil pollution on the
environment. A number of headline incidents only served to reinforce the general concerns which
were being expressed by governments and environmental organizations.

Although LOF 1980 introduced significant changes to the standard salvage contract, major
pollution incidents during the 1980s ensured increasing pressure from environmentalists which
eventually lead to further significant change in the salvage industry.

6.0 The International Convention on Salvage 1989:

6.1 An international conference in 1989 agreed a new salvage convention which made a
profound change in the nature of salvage. The previous convention of 1910 had been based on
the traditional principle of "no cure no pay". The awards were paid pro-rata by hull and cargo
underwriters in proportion to the respective salved values and the P&I clubs were not involved.
The fear under the old convention was that salvors might think twice about attempting to salve a
ship where the risk of failure was great and the costs likely to be incurred were also great. The
intention of the Salvage Convention 1989 was to encourage salvors to act in cases where there
is a threat to the environment.

6.2 Under the Convention the main salvage award is still based upon "no cure no pay", but
the award will take into account "the skill and efforts of the salvors in preventing or minimizing
damage to the environment", as well as the traditional factors of salved value, danger, out of
pocket expenses, success, time, and skill. The basic "no cure no pay" award is dealt with under
Article 13 but the Convention provides a safety net for a salvor who has worked on a ship or cargo
which threatens damage to the environment but has failed to earn sufficient reward under that
Article. In such circumstances, he is entitled to special compensation under Article 14, based
upon the cost of his tugs and personnel and his out-of-pocket expenses, plus an uplift of 30-100
per cent if he has prevented or minimized environmental damage. The hull and cargo underwriters
continue to pay Article 13 awards, even if they are increased because of environmental factors,
but the P and I clubs cover Article 14 awards.

6.3 Article 14 extended the "safety net" concept beyond laden tankers to include any vessel
carrying bunkers or other polluting materials on board. However, whereas LOF8O provided that
this compensation might be paid no matter where the incident occurred, LOF90, which
incorporated various provisions from the 1989 Convention, restricted special compensation
payments to "coastal or inland waters or areas adjacent thereto". With the introduction into English
law of the 1989 Convention by means of the Merchant

6.4 Shipping (Salvage and Pollution) Act 1994, Lloyd's Open Form was further amended to
LOP 1995 and incorporated other significant revisions as follows: (a) that the master is entitled to
conclude contracts for salvage on behalf of the ship and the cargo without fear of challenge by
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the cargo interests if the terms are reasonable; (b) that the salvors must exercise "due care"
compared with using their "best endeavours" under LOF80; (c) that when circumstances so
dictate the salvors should seek assistance from other salvors; and (d) that the shipowner acquires
a stronger duty to ensure that security is provided before cargo is released.

6.5 Article 13 - Criteria for fixing the reward:

6.5.1. The reward shall be fixed with a view to encouraging salvage operations, taking into
account the following criteria without regard to the order in which they are presented below:

(a) the salved value of the vessel and other property;

(b) the skill and efforts of the salvors in preventing or minimizing damage to the
environment;
(c) the measure of success obtained by the salvor;
(d) the nature and degree of the danger;
(e) the skill and efforts of the salvors in salving the vessel, other property and life;
(f) the time used and expenses and losses incurred by the salvors;
(g) the risk of liability and other risks run by the salvors or their equipment;
(h) the promptness of the services rendered;
(i) the availability and use of vessels or other equipment intended for salvage operations;
(j) the state of readiness and efficiency of the salvor's equipment and the value thereof.

6.5.2. Payment of a reward fixed shall be made by all of the vessel and other property interests
in proportion to their respective salved values.

6.5.3 The reward shall not exceed the salved value of the vessel and other property."

6.6 Article 14 - Special compensation:

6.6.1 If the salvor has carried out salvage operations in respect of a vessel which by itself or its
cargo threatened damage to the environment and has failed to earn a reward under article 13, he
shall be entitled to special compensation from the owner of that vessel equivalent to his expenses
as herein defined.

6.6.2 If, in the circumstances set out above1, the salvor by his salvage operations has prevented
or minimized damage to the environment, the special compensation payable by the owner to the
salvor under paragraph I may be increased up to a maximum of 30% of the expenses incurred by
the salvor. However, the tribunal, if it deems it fair and just to do so and bearing in mind the
relevant criteria set out in article 13, paragraph 1, may increase such special compensation
further, but in no event shall the total increase be more than 100% of the expenses incurred by
the salvor.

6.6.3 Salvor's expenses for the purpose of paragraphs 1 and 2 means the out-of-pocket
expenses reasonably incurred by the salvor in the salvage operation and a fair rate for equipment
and personnel actually and reasonably used in the salvage operation.

6.6.4 The total special compensation under this article shall be paid only if and to the extent that
such compensation is greater than any reward recoverable by the salvor under article 13.

6.6.5 If the salvor has been negligent and has thereby failed to prevent or minimize damage to
the environment, he may be deprived of the whole or part of any special compensation due under
this article.

6.7 Claims under Art 13 and 14:

6.7.1 Salvage claims which have arisen in circumstances where there is no threat to the
environment are settled in accordance with the criteria set out under Art.13. Where there is a
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threat to the environment and the salvor has failed to earn sufficient reward under Art. 13, the
salvor is entitled to special compensation from the owner equivalent to his expenses as defined
within the Art. 14.

6.7.2 A key point is that the salvor may not have prevented damage to the environment but
during the course of the operation there may have been a threat of damage. If the salvor had
actually prevented or minimized damage to the environment he is entitled under Art. 14.2 to
receive an additional sum equivalent to a maximum of 30 per cent of his expenditure. The
arbitrator may in fact increase the award up to 100 per cent if the salvor has achieved an
exceptional result. Only the owner of the ship is liable to pay special compensation.

6.7.3 Cargo interests are not liable for special compensation but will contribute to the overall
payment to the salvors in the event of an award under Art.13. The calculation of owner's special
compensation will be based upon the award under Art. 14 less the amount payable under Art. 13,
in accordance with Art. 14.4.

6.7.4 P&I Clubs extended their cover to provide for reimbursement of a shipowners' liabilities
under Art.14.

6.8 Difficulties experienced under Articles 13 and 14:

5.8.1 Article 14 only applied if there was a threat to the environment, which had to be proved,
and that Article 14 was not relevant outside "coastal or inland waters or areas adjacent thereto",
a geographical restriction. They often also remained unsecured for this element of their
remuneration. The salvors were also concerned by a decision of the English courts, in the case
of the NAGASAKI SPIRIT, that the rates for equipment and personnel should not include any
element of profit. Profit was to be limited to the uplift, which only applied if damage to the
environment was minimized or prevented. All these issues lead to arbitration under Article 14
being long and expensive, costs generally being for the account of the shipowners and the clubs.

7.0 Special Compensation P&I Club Clause (SCOPIC):

7.1 Considering the above difficulties, the International Salvage Union (ISU) and the
International Group of P&I Clubs developed SCOPIC, in 1999. This was revised in 2000, 2005,
2007, 2011, 2014, and 2017.

 SCOPIC guarantees ‘No cure – some pay’

 Amount under SCOPIC is paid by P&I Club
 Salvor invokes SCOPIC

7.2 No geographical restriction regarding ‘threat to environment’ and it is not necessary to

establish ‘threat to environment’, which were the difficulties in Art 14.

 Ship owner must provide security within 2 days of 3 million $.

 The compensation under this clause is based on ‘Fair rate’ as per tariff attached with the
clause. The compensation = (fair rate + out of pocket expenses) plus 25%. This is not
shared by other property owners and is paid by shipowner through his P&I Club.

7.3 Main provisions of SCOPIC:

 Contractor (Salvor) has the option to invoke SCOPIC clause at any time of his choosing,
regardless of circumstances.
 Contractor not to prove environmental threat.
 No geographical limitation/ restriction to apply.
 SCOPIC remuneration commences from the time of notice and not from start of salvage as
U/A.14.

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  Ship owner to provide $ 3 million security within 2 working days, failing which contractor may
withdraw from SCOPIC and revert to Art. 14[Adjustment to a reasonable sum possible].
 SCOPIC remuneration/rates based on time and materials, plus an uplift in all cases of 25%.
 SCOPIC remuneration payable only if it exceeds the total Art. 13 award. So salvage services
would continue to be assessed in accordance with Art.13.
 If Contractor has invoked SCOPIC, and Art. 13 award is greater than SCOPIC remuneration,
Art. 13 award to be discounted by 25% of the difference between it and the amount of SCOPIC
remuneration.
 Contractor can terminate ‘services of he anticipates the total cost of past and future services
will exceed value of property capable of being salved and SCOPIC remuneration.
 Ship owner can terminate SCOPIC agreement by giving 5 days’ notice.
 Ship owner has the right to send on board a special casualty representative (SCR). So also,
the hull & cargo underwriters
 The salvage master to send daily reports to SCR who may disagree with the salvage report
and prepare a dissenting one.
 If dissenting report given by SCR, the initial payment by ship owner to be based only on what
SCR considers appropriate equipment or procedure until dispute is resolved.

ooooo

SELF-EXAMINATION QUESTIONS

1. What is the meaning of salvage?

2. Explain different types of salvages.
3. What is LOF?
4. What is the difference between Art 13 and Art 14?
5. Write a short note on Salvage Agreements.
6. Discuss with reference to salvage salient features of IMO 89 Convention, LOF 90, LOF
2000 and SCOPIC

RECOMMENDED FOR FURTHER READING:

1. Website of International Salvage Union (ISU).

2. Salvage Convention, 1989.

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RISK MANAGEMENT & MARINE INSURANCE FINAL YEAR

LESSON - 13

NUMERICAL QUESTIONS

1.0 Numerical question:

Two types of such questions are included in the syllabus “Risk Management & Marine
Insurance”. These are in the topics of Collision Liability (Chapter 4) and General Average
(Chapter 9). Some such cases have been included in these chapters.

The aim of this Lesson is to improve the understanding situations in collision liability cases
and general average cases by solving such numerical problems.

Such additional problems will be covered in class.

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104
Three Model Test Papers have been
kept below for each subject.

Every Correspondence Student is to

compulsorily answer two Test
Papers on each subject and send
them back to the Institute before 31st
December, 2020 in order to be
eligible to take up March - 2021
Examination.

********
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NAROTTAM MORARJEE INSTITUTE OF SHIPPING
i

FINAL YEAR
RISK MANAGEMENT AND MARINE INSURANCE

THE TEST PAPER GIVEN BELOW IS ONLY TO ASSIST THE

STUDENTS IN PROBING THE DISTANCE EDUCATION PROGRAMME
STUDY MATERIAL FOR PROPER ANSWERS AND INNO WAY REFLECTS
THE PATTERN OF THE ANNUAL EXAMINATION QUESTION PAPER.

TEST PAPER 1

1. What is the difference between open cover and open policies?

2. Define marine insurance and give its scope.

3. Describe the "forwarding clause" of the Institute Cargo Clauses.

4. What is the difference between risk retention and risk transfer?

5. What are the exclusions in the collision liability clause of the Institute Time
Clauses (Hull)?

6. Define and explain "subrogation".

7. What are the salient aspects of the Government of India's war risk insurance

scheme?

8. List five documents required while pursuing a cargo claim.

9. (a) Define "freight".

(b) Describe the risks covered in Institute. Time Clauses - Hulls which are
subject to "due diligence".

10. Write short notes on any three

(a) Both-to-blame collision clause (b) Trade Warranties in ITC-Hulls
(c) Cross liability (d) Proximate cause

********************
106
107
 NAROTTAM MORARJEE INSTITUTE OF SHIPPING

FINAL YEAR

RISK MANAGEMENT AND MARINE INSURANCE

THE TEST PAPER GIVEN BELOW IS ONLY TO ASSIST THE STUDENTS

IN PROBING THE DISTANCE EDUCATION PROGRAMME STUDY
MATERIAL FOR PROPER ANSWERS AND IN NO WAY REFLECTS
THEPATTERNOF THE ANNUAL EXAMINA TION QUESTION PAPER.

TEST PAPER 2

1. Explain mutual insurance with examples.

2. When does the cover terminate in a cargo policy?

3. Write a note on Lloyd's of London.

4. Why is the principle of "utmost good faith" important in insurance? What

happens if there is a breach of this?

5. When can freight be at risk and how is it insured?

6. What are the essential features of general average?

7. What is the difference between "actual total loss" and "constructive total

loss"?

8. On which factors does the rating (premium) of hull insurance depend upon

and why?

9. What is "insurable interest" and why is it important in marine insurance,

10. Write short notes on any three

(a) Perils of the sea (b) Port of refuge

(c) IWL (d) York Antwerp Rules
(e) Deductibles

108
**********

109
 NAROTTAM MORARJEE INSTITUTE OF SHIPPIMG

FINAL YEAR

RISK MANAGEMENT AND MARINE INSURANCE

THE TEST PAPER GIVEN BELOW IS ONLY TO ASSIST THE STUDENTS IN

PROBING THE DISTANCE EDUCATION PROGRAMME STUDY MATERIAL FOR
PROPER ANSWERS AND IN NO WA Y REFLECTS THE PA TTERN OF THE
ANNUAL EXAMINA TION QUESTION PAPER,

TEST PAPER 3

The cargo has arrived in damaged condition. Describe how a claim would be raised.
1. What are annual policies?

2. Enumerate six risks covered under the P&I insurance.

3. How are general average and marine insurance related?

4. Describe THREE main features of the Marine Insurance Act, 1963.

5. Why must the insured have insurable interest in the subject matter insured?

6. Discuss the importance of risk identification.

8. Vessel A and B collided and both were damaged. Vessel A was held responsible
for 60% and vessel B for 40%. The damage on A and B was $ 200,000 and $
400,000 respectively. Calculate the amount payable under the Hull & Machinery
policy and P&I policy. Mention how deductibles will be applied.

9. Name the exclusions under Institute Cargo Clauses A, B and C.

10. Write short notes on any three

(a) Franchise clause (b) Essential features of general average
(c) Indemnity (d) Sue and labour clause
(e) Sistership clause
***************

110