Evolution and Aphorisms of Marine Insurance

 

—Adv. (Capt.) Ashwani Jhingan

Marine Insurance is the oldest branch of insurance and is closely linked to the practice of Bottomry which has been referred to in the ancient records of Babylonians and the code of Hammurabi way back in B.C. 2250. The first known marine insurance agreement was executed in Genoa on 13/10/1347 and marine insurance was legally regulated in 1369 there. 

Manufacturers of goods advanced their material to traders who gave them receipts for the materials and a rate of interest was agreed upon. If the trader was robbed during the journey, he would be freed from the debt but if he came back, he would pay both the value of the materials and the interest.

The contract of insurance is a contract under which the insurer is legally bound to pay a sum of money or its equivalent to the insured, upon the happening of a specified event involving some element of uncertainty as to time or likelihood of occurrence, which affects the insured’s interest in the subject matter of the insurance. The objective is to indemnify the insured against losses attributed to marine adventure. 

As a general rule, globally, marine insurance isn’t mandatory to operate a shipping vessel or ship goods across the sea. Except for CIF and carriage and insurance paid (CIP), the other Incoterms do not include insurance as a term of the contract.

Nature of marine insurance

The nature of marine insurance lies in its ability to protect against financial losses arising from maritime risks. It operates on clear legal principles to ensure fair compensation.

(a) Legal Contract

Marine insurance works on a contract between the insurer and the insured. This is a legal document that states all terms of coverage, exclusion, and how compensation is paid, hence forming a legally binding relationship.

(b) Risk Mitigation

It shifts the potential financial risks of maritime ventures from the insured to the insurer. This gives the firm the freedom to operate with no fear of unpredictable losses.

(c) Principle of Indemnity

Marine insurance indemnifies the loss actually suffered. Claimant cannot make profit on insurance. This way, a fair process of claims handling is assured.

(d) Worldwide Application

Marine insurance covers risks globally without borders. It is important to develop global trade between continents.

(e) Very Comprehensive Protection

Marine insurance protects what is on the ship, cargo, freight charges, and liabilities up to a court of law. 

Scope of marine insurance

It safeguards ships, cargo, freight and liabilities against risks like theft, fire and natural calamities. Its broad coverage ensures financial security and operational continuity for businesses engaged in global commerce and protections vital for maritime trade.

(a) Hull Insurance

This type of insurance covers the ship’s structure, machinery and equipment. For instance, if a vessel is damaged during a storm, hull insurance will pay for the repair or replacement costs, thereby minimising the interest disruption.

(b) Cargo Insurance

Cargo insurance covers shipment goods against all risks such as theft, fire, or even accidental damage during transit. Business enterprises will therefore not incur losses due to unseen events.

(c) Freight Insurance

Freight insurance ensures that shipping companies are compensated for the transported goods if these goods do not reach their intended destination due to an insured hazard.

(d) Liability Insurance

This covers legal liabilities resulting from accidents, for instance, collision or damage to third-party property. For instance, if oil spills from a ship, liability insurance helps in the clean-up and the legal cost.

(e) Comprehensive Trade Protection

The scope also includes other coverages such as piracy, strikes and war damages that ensure that maritime operations go on despite the conflicts in the world.

Marine insurance is guided by several principles, viz, Indemnity, Insurable Interest, Utmost Good Faith (uberrimae fidei), Proximate Cause, Contribution, Subrogation and Loss Minimisation, which ensure fair and ethical dealings between the insurer and the insured.

What is the Marine Insurance Act of 1963?

The Marine Insurance Act of 1963 is a legal framework that regulates maritime insurance contracts in India. The law defines the regulations for marine insurance policies, as well as their principles, guidelines, obligations and much more.

Case Study

Kingdom of Tonga & Shipping Corporation of Polynesia Ltd v Allianz Australia Insurance Ltd [2005] TOSC 8; CV 723 2003 (25 Feb. 2005): (Marine Insurance-Breach of Express Warranty):

Marine Insurance - Voluntary removal from ‘class’- breach of express warranty suspension of insurance - renewal of insurance constitutes a fresh contract - no automatic renewal:

The plaintiff’s vessel, the MV Olovaha sustained severe damage in a cyclone on January 15, 2003. The plaintiff looked to its insurer to cover its loss, but the insurer denied coverage. The plaintiff sued to recover.

Decision: Action dismissed.

Held: The defendant was the insurer for 3 of the plaintiff’s vessels including the MV Olovaha. However, in July 2002 the plaintiffs had removed the MV Olovaha from ‘class’, such class referring to a classification by Germanischer Lloyd, a world leading classification Society. A vessel in class is subject to the Society’s rules including periodic surveying and maintenance. The plaintiffs had voluntarily removed the vessel because of its age and were aware that the insurance would be suspended as a result because removal from class was contrary to a warranty in the policy. 

The defendant claimed that the coverage had not been renewed for 2003, but even if it had, it would have been subject to the same warranty and at the date of the occurrence the vessel was not class. The plaintiffs argued that the defendant had agreed to reinstate cover upon certification that the vessel was up to requisite standard for Local Class certification - a much less stringent classification. The plaintiff’s case relied upon various oral discussions and written communications between the plaintiff’s broker and the defendant’s underwriting manager. 

The court decided that any decision regarding reinstatement of coverage could only be made by the underwriters after proper consideration of all the material facts, and there was no evidence that the underwriter had received a vessel report. Each renewal constituted a fresh contract and any agreement reached in July 2002 would have no relevance to the 2003 contract unless that had been expressly agreed to in the negotiation of the 2003 contract. There was no evidence of a promise to automatically renew coverage in 2003 after the plaintiffs had voluntarily suspended coverage in July 2002. This was especially true where the vessel had been removed from class so the former coverage could not be renewed.

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