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Introduction in Marine Insurance of Liner Vessel

Paper Type: Free Essay Subject: Business
Wordcount: 5418 words Published: 13th Sep 2017

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This report is written upon a request to produce an overall understanding in marine insurance according to the liner vessel m.v. ‘Container Ship 1’. Which was driven aground into the water at the English Channel while it was sailing to deliver 2000 container units of cargo toward Algeciras Spain. This report will explain from the basic of the insurance market in London to recommendations for the appropriate cover for the vessel and cargo. In conclusion, it will address the importance of well-understanding in marine insurance and being familiar with the procedure of handling claim is heavily amended capability to underwriters and ship owners.


London marine insurance market

Although the UK is only the fourth largest domestic insurance market in the world, London remains the major international insurance market whether measured in volume of international business or the range and the diversity of insurance products and services that are available. The London insurance market consists of underwriters, brokers, and a wide range of support services in its unique combination. The Marine Insurance Act includes a standard policy which is known as the ‘SG form’, and even though it had been tested through at least two centuries, the London market produced a new standard policy in 1991 with having it called MAR 91 form and using the Institute Clauses. While MAR 91 form is more the general type of the insurance, the Institute Clauses are for setting out the details of the insurance cover. In practice, the policy document is consisted of the MAR 91 form being a cover, and the clauses stapled to the inside with each clause stamped to avoid the substitution or removal of clauses. The underwriting element is provided by Lloyd’s and the Other companies. There is the International Underwriting Association of London for allowing both individuals and corporate bodies to have direct access to the insurance company in the London market. Meantime, the Lloyd’s has Lloyd’s Market Association. Brokers act on behalf of their clients help them obtain the most satisfying cover for the type of risk. The cover is provided for ships, oil platforms and aircraft. This form of Hull and Machinery policy provides limited cover for insured perils including fire, explosion, earthquake, contact with land conveyances, aircraft, general average, salvage, total loss, constructive total loss, partial collision liability and with additional premium limited cover for bursting of boilers and braking of shafts. All forms of hull cover must be placed through an insurance broker. With all that, however, the marine insurance market does not get involved at any point of the insurance of shipowner’s liabilities. This particular cover is provided by Protection & Indemnity Clubs (P&I Clubs). It is a cooperative association of shipowners to provide mutual protection against liabilities which they may arise. The same form of cover is available from Insurance Companies on payment of a premium. Other forms of insurance cover including War Risk, Strike and Freight Defense are needed by a ship. The difference between those two concepts is important. Generally, Lloyd’s and the companies cover hulls while the clubs cover liabilities.

Rationale and principles of marine insurance

To simply define why insurance exists, it is that no one would be delightful to take responsibility for anything that might go wrong even if there has little chance. In another word, people wanted to avoid holding a risk in their own hands and came up with a fascinating idea to transfer a risk from themselves to somebody would take it in exchange. Former is an insurant and later is an insurer. The value traded is money. These basics equally apply to the marine insurance market. Therefore, the most suitable rationale for having a marine insurance can be a prevention of uncertain financial loss that may cause to the insurant by paying a certain amount of money to the insurer company. Potential risks that marine insurance covers are the loss or damage of vessels, cargo, terminals and any transport or cargo from the point that the insured items were loaded and to the final destination or to the specific point that is stated on the document. Then the insurer works based on some principles to have insurant that is considered throughout the whole process of marine insurance. These principles are utmost good faith, subrogation, insurable interest, a measure of indemnity, and proximate cause.

Utmost Good Faith

With the utmost good faith in marine insurance, the likely insurant must provide all the information voluntarily to the insurer without concealing any conditions whether it is good or bad. Then, the insurer will make condition and contract for the article based on the collected information which is given by the broker who works on behalf of the proposer. The utmost good faith is required for both parties evenly under the Marine Insurance Act 1906, Section 17. If fail to observe the utmost good faith by either party the contract may be avoided by the other party which in case, the contract is put unenforceable in a court of law. A Policy Proof of Interest (PPI) is a void contract. When the contract gets avoided, the insurer must return the premium to the assured as written in Section 84-3a of the Marine Insurance Act 1906. There are most likely two situations that avoidance might take place such as; breach of good faith and an act amounting to fraud in any policy conducted by Section 17, failure to commence the voyage within a reasonable time after the risk has been accepted by the insurer in a voyage policy under the Section 55. If the avoidance has been taken place by the insurer, the policy stays legally. Accordingly, the assured may pursue the claim by taking the insurer to court. However, when the breach of warranty and deviation had been in place, the insurer would be discharged from liability from a certain date and time. Although, the insurer can claim liability for recoverable losses on the property which happened ahead the time the insurer became discharged from liability.


Subrogation is a legal principle where the insurer takes over the rights of a creditor to legally pursue their debtor. The right of subrogation can emerge in two different ways. One way is through law, and the other way is through a contract agreement. Subrogation by law mainly arises in contracts of insurance, whereas subrogation by law is an equitable legal principle which is a section of law known as unjust enrichment. The relevance of subrogation is most common in the areas of insurance and sureties. It is also possible that subrogation passes proprietary rights such as claim or interest to ownership of goods. When an insurant claims recovery for its financial loss rightfully by their contract, an insurer pays the money back to the insurant for their loss or pay on behalf of them at the time.

Insurable Interest

An insurable interest is the value of an insured which an insurance policy is paid to diminish the chance of loss. It is a fundamental requirement for the issuance of the insurance policy to make it legal and valid and to protect the insured entity against deliberate harmful acts. Anything that is not agreed for financial loss from an event does not satisfy the insurable interest, and in like manner, it cannot purchase the insurance policy to cover that particular event. In marine insurance, for example, an insured person will have the insurable interest for the subject-matter when he is in the position to benefit from it being safe or arrived on due time. As long as when he may be prejudiced by its loss, damage to the subject-matter, detention thereof of any events that may incur in respect thereof. Since marine insurance is constantly affected before the deal is officially done, it is common not to have the insurable interest at the stage of discussion. Though the person must show an expectation of acquiring such an interest when it is on impact and if in the case of failure, the person is not entitled to indemnification.

  • Defeasible or Contingent interest

These are events that may be cancelled that may or may not have occurred. Both of these interests in the subject matter may be insured. When the buyer of goods insures the subject matter, they must have an insurable interest. However, it may happen that the goods are rejected, treated them as a sellers risk because of the delay in delivery or otherwise, on the part of the seller.

  • Partial Interest

A partial interest may be insured.

  • Re-insurance

The spread of risk and division of client premiums among insurance companies allowing the sharing of the burden of a large risk. The insurer has an insurable interest in the risk and may, therefore, re-insure it. Unless the policy provides otherwise, the assured has no interest in the re-insurance of the risk.

  • Bottomry and Respondentia

Bottomry Bond: The bond between the lender and borrower where the ship’s bottom is given as security against money which had been lent. Under this agreement, if the ship reaches ashore with no damages then the borrower has to pay fixed premiums every month to pay off the loan. But if the ship sinks then the loan is completely written off.

Respondentia bond: Loan taken against the Cargo of the ship as security. In today’s world of communication, these bonds almost never exist, the master of the ship can obtain funds across the globe with a simple international bank transfer within minimal time. The lender therefore of a bottomry or respondentia bond has an insurable interest in respect of the loan.

  • Master’s and Seaman’s Wages

Both master and crew have an insurable interest in wages.

  • Advance freight

The person advancing freight has an insurable interest as this money is non-refundable in the case of loss.

  • Charges of Insurance

The assured has an interest in the charges of any insurance that is made.

  • Quantum of interest

The lender of money the mortgagee has an interest in any sums due under a loan and the mortgagor, the borrower, has an interest in the full value of the loan. A mortgagee or consignee has an insurable interest in the subject matter and may insure on behalf of and for the benefit other parties as well as for their own benefit. The owner of a property has an insurable interest in respect of the full value. A third party may also indemnify the owner of the property in the event of the loss.

  • Assignment of Interest

Where the assured assigns the rights in the subject matter to a third party, the rights in the insurance contract are not transferred unless with implied or express agreement to do so. The provisions of this section do not affect a transmission of interest in the property.

Measure of Indemnity

Under no circumstance, an insured cannot be overpaid for its loss upon subject-matter. A measure of indemnity is where the concept is stood for. The measure of indemnity is the extent of the liability of the insurer to loss or the maximum amount which the insurer must pay in the event of a claim under the policy. This is identified in The Marine Insurance Act 1906 sections 67, 69, 70, 71, 75 and 77. The insurer and insured agreed to the value the vessel or cargo has, and the value may be measured by two different way, one is insured value and another is insurable value. Insured value is called if the value of the entity is estimated at the stage of taking policy. When the insured value is being fixed to a certain amount of money, the transportation cost and profit anticipated by the cargo is added up to its original value. By doing so, insured can recover some percentages of profit as well as the lost cost of goods. With that, if loss arises in the future, the indemnity will be taken in the proportion of its pre-measured value to help calculating compensation amount. Once both parties agree on the insured value and bound to contract, it is not to be changed afterwards. On the contrary, if the value of the insured goods has not been discussed while the contract is being made leaving it to be determined at the time of loss, the measurement is taken place based on the insurable of the cargo. However, it is not commonly taken as it would not allow the estimated profit added to indemnification. With the concept of the insurable value, if the assured sum is higher than the insurable value, it would be partially uninsured. Alternatively, in the case when the assured sum is higher than the actual insurable value, by the basic rule of insurance which is that the insured can never make a profit out of claims, the underwriter should be liable for a return of premium of the difference.

Proximate Cause

It can be as simple as that; the insured will get his remuneration for loss, damage or liability only when such clauses are proximately caused by one of the perils specified in the policy. There are few predictable cases in respect of proximate cause to be applied to. If the insured peril and uninsured perils operate concurrently, the insured peril is the proximate cause. If the insured peril runs simultaneously with an excepted peril and the effects of the two cannot be separated, the excepted peril is the proximate cause, and the claim is excluded. If the loss arises from many successive perils, the last peril is the proximate cause unless an earlier hazard has set up a direct chain of causation in which case the last risk is merely incidental and is the natural and probable outcome of the previous cause.

  • Case: Leyland Shipping Co Ltd. v Norwich Union (1918)

The insurers argued that the incorporated phrase ‘warranted free from all consequences of hostilities’ excluded the loss from the hull policy. The vessel had been struck by a torpedo and sustained damage to the hull. When the vessel finally laid off at Le Harve, it sank after facing terrible weather conditions. The court ruled that the Torpedo was the direct cause of the loss and not the marine peril of heavy weather.

It is covered by The Marine Insurance Act 1906, section 55.

  • Case: Samuel v Dumas (1926)

The vessel was scuttled by the crew with the connivance of the Owner. Owners cannot benefit from misdeeds. Therefore, based upon the insured perils in the policy the claim was rejected.


Different types of insurance in the marine environment

Cargo insurance

Marine cargo insurance covers not only goods carried by ship but also by road, rail, air and post. Once the goods are ready to go off in a shipment, and while the cargo is carried from one port to another, one of the many standard Incoterms will be used to identify where the responsibility of the goods lie on. In other words, it is to see who has a reasonable expectation of acquiring an insurable interest between buyer and seller. Incoterms are standardised trade terms used in international sale contracts to allocate certain costs, obligations and risks between seller and buyers. Understandably, it has to be chosen to fit the best cover for the types of the vessel and cargo. It is revised in 2015 and widely used to be 11 incoterms.

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EXW (Ex Works) is the first term coming up giving the seller the least responsibility. The seller fulfils his obligation by preparing goods to be collected from the premises of them, and the buyer takes all the risks from there. Such as transportation costs, taxes and duties from that point straight on. It is commonly used in quoting a price. It should not be used when the buyer is not available to manage to carry out the export formalities directly or indirectly.

FCA (Free Carrier) contract gives the seller an obligation to deliver the goods to the buyer at the indicated point. The seller is responsible for handover, cleared for export, into the charge of the carrier named by the buyer at the named place or point. Then the buyer is taking responsibility for the whole transport process to the final destination. It may be used for any mode of transport such as in rail or air transport, including multimodal transport. Also, it can be taken when the buyer has no availability to take care of the export formalities instead of EXW.

CPT (Carriage Paid To) means the seller pays the freight for the carriage of goods to the agreed destination. Any risks or damage arisen to the goods as well as any additional costs occurred by the late delivery rely on the seller until it is transferred to the buyer when the cargo have been delivered into the custody of the carrier. This term is also able to be applied to any mode of transport, including multimodal transport.

CIP (Carriage and Insurance Paid) gives the same obligations as the CPT, but in addition to that, the seller has to procure cargo insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller contracts for insurance as well as pays the insurance premium. However, by this term, the seller only requires obtaining insurance on the minimum coverage. Other than that, the seller also clears the goods for export. This term may be implied for any mode of transport, including multimodal transport. It is appropriate to use when the CIF term is not considered to be the best option for the cargo as to that the ship’s rail serves no practical purpose.

DAT (Delivered at Terminal) requires the seller to pay for transport to the specified point. The buyer takes care of the cost of importing the goods and the responsibility transferred to the buyer once the goods are unloaded at the terminal.

DAP (Delivered at Place) is the term giving the seller an obligation to pay for transport to the named place while the buyer still has the responsibility to pay the cost of importing the goods. The seller is responsible for the goods until the cargo is set to be unloaded at the port by the buyer.

DDP or DTP (Delivered Duty Paid) is which the seller bears the maximum obligation that involves risks and costs the both contrastively to EXW which gives the seller the minimum commitment. The seller is responsible for delivering when the goods have been made available at the specified place in the country of importation. As said in the precedes line, the seller takes care of duties, taxes and other charges of delivering the goods to the named point, cleared for importation. It is only applied when the seller is eligible directly or indirectly to obtain the import licence and may be used irrespective of the mode of transport.

FAS (Free Alongside Ship) is the term used when the buyer can carry out the export formalities as the buyer bears all the costs and risks of loss of or damage to the goods from the moment that the cargo is placed alongside the vessel on the wharf or in lighters at the specified port of shipment. The buyer is also required to clear the goods for export. The seller, on the other hand, fulfils his obligation by putting the goods alongside the ship at the named port the cargo is expected to be shipped from and getting the goods ready for export. The term is commonly used in a contract for heavy-lift or bulk cargo such as generators or boats with an exception for those transported in containers using multimodal transport.

FOB (Free on Board) means the seller finishes his work once he clears the goods for export and the goods have passed over the ship’s rail at the agreed port of shipment. Correlatively, all costs and risks lie on the buyer’s side from that point. The term applies suitably when the cargo is transported by sea or inland waterway. Other than that, FCA is more appropriate to use.

CFR (Cost and Freight) gives the seller the obligation to pay the costs of carrying cargo to the agreed port while the buyer is responsible for any risks from the point of getting the goods unloaded onto the vessel. As it is used for sea or inland waterway only, for the multimodal transport cargo, CPT is more appropriate to apply.

CIF (Cost, Insurance and Freight) requires the seller the same obligation as CFR, but insurance procurement additionally allowing the seller to obtain the minimum coverage on the marine insurance. Under CIF, even though the seller has the responsibility for arranging the insurance, the goods belongs to the buyer once they are safely loaded on board ship. Thus the insurance purchased to cover the cargo should be assignable to the buyer. It is only available for sea and inland waterway transport.

Hull insurance

Under the hull insurance, there are many different types of policies exist for the policyholder to choose from. The hull insurance is more likely taken by the ship owners so that they can avoid any loss to the ship in case there has been any mistakenly handled situation as much as possible. The first thing to look at under the hull policy is Voyage policies. It covers the ship for the only specific voyage or group of voyages. The range of the term could be very wide in terms of the coverage, but it is used as simply as ‘at and from, or from one place to another’. Time policies are next. Those precede two policies are important in marine insurance as The Marine Insurance Act 1906 states in its Section 25 that a marine policy is either a voyage policy or a time policy. Unlike the voyage policy covers the one or bound voyages with more than one voyage, time policy is contracted for its cover by the specific period of time. Which is normally a year with an option allowing the policy to be extended in case the policy may be about to expire whilst the ship is in peril. There is mixed policies which is combined policy of time and voyage policy. As it is easily assumed, it covers the risks for both specific voyage and for a described time. Floating policies are taken by the goods suppliers who has a relatively large sum. It covers more than one shipment that is declared afterwards along with other particulars. Valued policies are used when the discussed value of the particular goods in mentioned in the policy itself. The value is estimated by the rule or the agreed way in writing it, and the stated value can possibly be more than the actual value of the goods. On the other side, unvalued policies are taken when there are no such goods that are with specifically mentioned as a value. Even is this the case, the value is left to be determined and proved for the later time. Under blanket policies, the maximum limit of the protection coverage is stated by which purchased in a lump sum. The nature of subject matter, stated route, ports and places of the entire voyages have to be described with this policy, and it covers all the accordingly arisen risks along the way. Another policy coming up next is Construction policies as also known as the builder’s risks. It covers against the damage while the ship is under construction. It can cover the both when the vessel is built at the builder’s side and when the machinery is under the construction while it is at the subcontractor’s side. The policy holds good until the ship is finally at owner’s hand. Port policies are not really used as in the port there is much less risk of loss of or damage to the delivered goods compared to when the vessel is at sea. However, in case of delayed lay-up, the policy is often possible to arrange. Then interest policies are of options. In the policy, the term “interest” means financial interest. These may be an auxiliary type of interest such as disbursement, however, these are not used commonly coming to these days. Honour policies are the ones used assuming that the insured’s interest is admitted by the insurer even when there has been none quantified. It is frequently used when the insured has insufficient financial interest while he has an insurable interest. Fleet policies are the last policy under the hull policies. It covers all vessels that are managed under the same ownership or by the same management. Though, the each vessel is deemed to be a separate insurance. As it is mentioned in the above paragraph, the marine policy has to be either the voyage policy or the time policy by the Marine Insurance Act 1906.

Recommendations for an appropriate cover    

For the m.v. ‘Container Ship 1’, it is recommendable to obtain a voyage policy for its most appropriate cover. This policy provides financial protection for the goods transported by the ship. Therefore any loss of or damage to cargo will be covered by it. However, like any other policy, the voyage policy requires the crew onboard competent and the vessel in seaworthy condition with a capability of making the intended journey. If this is not the case, then the insurer is not required to provide any financial protection. The reason for that is the fact that such policies are not intended to protect against the risk that a preventable, but instead for risks that are unforeseen. Voyage policies are commonly used in the export business and therefore play a very big part in it.

Procedures that must be carried out with the case of m.v. ‘Container Ship 1’

Briefly, m.v. ‘Container Ship 1’ lost one of its engine power while it was sailing from Hamburg to Algeciras in passing through the English Channel. Attempts that had been made to fix the situation have gone in vain. In here, it will address what procedures are to be made with the example of the m.v ‘Container Ship 1’. First, when one of the engines lost power, it must be checked if there has been any pollution or possibility of pollution. Then lighten up the vessel allowing it may be floated off the sand bank. Also the arrangements must be made promptly to assess damage to vessel and the engine itself. There also has to be stated steps to follow in order to get the repairs done. The crew member must ensure that full records are kept for the whole time at the accident as possible. The records can be referred to as handwritten logs, course recorders, echo sounder printouts and photographs or so. The collected information must be preserved for owners and insurers exclusively and not to be exposed to other interested parties. At the repair port, the superintendent will attend as it goes with Salvage Association for underwriters, classification surveyors and if it is necessary, cargo damage P&I surveyors. When finally the repairs have been done, the Salvage Association surveyor will work on the submission of the accident report with the detail for underwriters and a copy for the ship manager as well. The manager will send the handed report with accounts covering repairs to the average adjuster who will submit the full claim to brokers for settlement by underwriters.

Figure Bill of Lading Sample

Meanwhile, shipowner would have responsibility for successful delivery. The arrangement is relied upon the shipowner to make sure the cargo is delivered to the destination. The ship owner is obliged to complete the delivery to the named destination using delivery notes and the bill of lading which is an evidence of a contract of affreightment between the owner of cargo and the carrier.


Cargo insurance claims

Keeping up with the m.v. ‘Container Ship 1’, as it was fully loaded 3,500 TEUs with 2000 containers and the shipping rate for the 3,500 TEUs is 6,200 USD (As of 4, Mar, 2017). Below is the GA claim draft for the m.v. ‘Container Ship 1’.



Ship Value


Expenses from GA cargo removal





Damage caused by GA


Expenses in floating the vessel damage to and removal of cargo


Ship Value


Less expenses from GA cargo removal


(No record of damage to ship)

(A separate claim will be made for machinery repairs)

Net Value for GA


Cargo Value


Damage to cargo during GA


Net Value for GA


Award to Salvors (Paid by Owners)


Damage to cargo


Expenses from GA cargo removal


Total amount to be made good under GA


Values at risk (Ship Value + Cargo Value)


Values at risk (Ship Value + Cargo Value) 30,400,000

Therefore ship contributes

12,400,000 x 100 40.78%


Therefore cargo contributes

14,000,000 x 100 59.22%


Owner’s contribution to the GA fund is $3,017,720

Cargo contribution to the GA fund is $4,382,280


Fundamental principles of salvage and remuneration

Salvage is an action from one’s pure intention to save life or property. It is often misunderstood in some cases to be applied, but at sea, it has clear requisite to be claimed. What it means as ‘at sea’ is where there is in tidal waters, but excluding the range where being under the jurisdiction of a harbour authority (Merchant Shipping Act of 1894, Sections 546 and 742). If it qualifies ‘at sea’, before anyone from the salving ship can claim salvage they must prove the saved is a ‘wreck’. ‘Wreck’ is defined at common law as any ship lost at sea and its cargo, gear and equipment that were thrown on the land. To be more specific with what falls within a definition of the wreck, Sea Fisheries Act of 1883 defines all fishing boats’ gear, nets, floats regardless marked or not as a ship’s gear or cargo. However, a navigation buoy or a club’s racing mark is not a part of ship’s gear or cargo and therefore is not wreck. With all this condition met, there are three basic requirements to be fulfilled by salvor to complete salvage. First, a property is in danger. It is evident to be premised a situation that salvage is needed. With respect of ‘in danger’, it can be proved to exist by th


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