ADITYA.

S
ASSISTANT PROFESSOR
DEPT. OF MARINE ENGINEERING SHIP OPERATION AND MANAGEMENT

Unit -4

MARINE INSURANCE

Insurance In General

Insurance is a means of protection from financial loss. It is a form of risk

management primarily used to hedge against the risk of a contingent, uncertain
loss.
An entity which provides insurance is known as an insurer, insurance company,
or insurance carrier. A person or entity who buys insurance is known as an
insured or policyholder. The insurance transaction involves the insured
assuming a guaranteed and known relatively small loss in the form of payment
to the insurer in exchange for the insurer's promise to compensate the insured in
the event of a covered loss. The loss may or may not be financial, but it must be
reducible to financial terms, and must involve something in which the insured
has an insurable interest established by ownership, possession, or pre-existing
relationship.
The insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be financially
compensated. The amount of money charged by the insurer to the insured for
the coverage set forth in the insurance policy is called the premium. If the
insured experiences a loss which is potentially covered by the insurance policy,
the insured submits a claim to the insurer for processing by a claims adjuster.
Insurance involves pooling funds from many insured entities (known as
exposures) to pay for the losses that some may incur. The insured entities are
therefore protected from risk for a fee, with the fee being dependent upon the
frequency and severity of the event occurring. In order to be an insurable risk,
the risk insured against must meet certain characteristics. Insurance as
a financial intermediary is a commercial enterprise and a major part of the
financial services industry, but individual entities can also self-insure through
saving money for possible future losses.

Premium is an amount paid periodically to the insurer by the insured for

covering his risk.

In an insurance contract, the risk is transferred from the insured to the insurer.
For taking this risk, the insurer charges an amount called the premium. The
premium is a function of a number of variables like age, type of employment,
medical conditions, etc. The actuaries are entrusted with the responsibility of
ascertaining the correct premium of an insured. The premium paying frequency
can be different. It can be paid in monthly, quarterly, semi-annually, annually or
in a single premium.

Marine Insurance

The subject of Marine Insurance is very wide and encompassing, which is why
there is a definite categorization of various types of marine insurance and
different types of marine insurance policies. As per the needs, requirements and
specifications of the transporter, an appropriate type or types of marine
insurance can be narrowed down and selected to be put into operation.

The types of marine insurance available for the benefit of a client are many and
all of them are feasible in their own way. Depending on the nature and scope of
a client’s business, he can opt for the best marine insurance plan and enjoy the
advantage of having marine insurance.

Principles of Marine Insurance:

Some of the principles related to marine insurance are given as under:

1. Utmost Good Faith:

The marine contract is based on utmost good faith on the part of both the
parties. The burden of this principle is more on the insured than on the
underwriter (insurance company). The insured should give full information
about the subject to the insured. He should not withhold any information. If a
party does not act in good faith, the other party is at liberty to cancel the
contract.

2. Insurable Interest:
Insurable interest means that the insured should have interest in the subject
when it is to be insured. He should be benefited by the safe arrival of
commodities and he should be prejudiced by loss or damage of goods. The
insured may not have an insurable interest at the time of acquiring a marine
insurable policy, but he should have a reasonable expectation of acquiring such
interest. The insured must have insurable interest at the time of loss or damage
otherwise he will not be able to claim compensation.

3. Indemnity:
This principle means that the insured will be compensated only to the extent of
loss suffered. He will not be allowed to earn profit from marine insurance. The
underwriter provides to compensate the insured in cash and not to replace the
cargo or the ship. The money value of the subject matter is decided at the time
of taking up the policy. Sometimes the value is calculated at the time of loss
also.

There is one exception to the principle of indemnity in marine insurance. Some

profit margin is also allowed to be included in the value of the goods. The
assumption is that the insured will earn profit when goods reach at their
destination.

4. Cause Proxima:
This is a Latin word which means the nearest or proximate cause. It helps in
deciding the actual cause of loss when a number of causes have contributed to
the loss. The immediate cause of loss should be determined to fix the
responsibility of the insurer. The remote cause for a loss is not important in
determining the liability. If the proximate cause is insured against, the insurer
will indemnify the loss.

The different types of marine insurance can be elaborated as follows:

Cargo Insurance: Cargo insurance caters specifically to the cargo of the ship
and also pertains to the belongings of a ship’s voyagers.

Hull Insurance: Hull insurance mainly caters to the torso and hull of the vessel
along with all the articles and pieces of furniture in the ship. This type of marine
insurance is mainly taken out by the owner of the ship in order to avoid any loss
to the ship in case of any mishaps occurring.

Freight Insurance: Freight insurance offers and provides protection to

merchant vessels’ corporations which stand a chance of losing money in the
form of freight in case the cargo is lost due to the ship meeting with an accident.
This type of marine insurance solves the problem of companies losing money
because of a few unprecedented events and accidents occurring.

In insurance, the insurance policy is a contract (generally a standard form

contract) between the insurer and the insured, known as the policyholder, which
determines the claims which the insurer is legally required to pay.

In addition to these types of marine insurance, there are also various types of
marine insurance policies which are offered to the clients by insurance
companies so as to provide the clients with flexibility while choosing a marine
insurance policy. The availability of a wide array of marine insurance policies
gives a client a wide arena to choose from, thus enabling him to get the best
deal for his ship and cargo. The different types of marine insurance policies are
detailed below:

Voyage Policy: A voyage policy is that kind of marine insurance policy which
is valid for a particular voyage.

Time Policy: A marine insurance policy which is valid for a specified time
period – generally valid for a year – is classified as a time policy.

Mixed Policy: A marine insurance policy which offers a client the benefit of
both time and voyage policy is recognized as a mixed policy.

Open (or) unvalued Policy: In this type of marine insurance policy, the value
of the cargo and consignment is not put down in the policy beforehand.
Therefore reimbursement is done only after the loss to the cargo and
consignment is inspected and valued.

Valued Policy: A valued marine insurance policy is the opposite of an open

marine insurance policy. In this type of policy, the value of the cargo and
consignment is ascertained and is mentioned in the policy document beforehand
thus making clear about the value of the reimbursements in case of any loss to
the cargo and consignment.

Port Risk Policy: This kind of marine insurance policy is taken out in order to
ensure the safety of the ship while it is stationed in a port.
Wager Policy: A wager policy is one where there are no fixed terms of
reimbursements mentioned. If the insurance company finds the damages worth
the claim then the reimbursements are provided, else there is no compensation
offered. Also, it has to be noted that a wager policy is not a written insurance
policy and as such is not valid in a court of law.

Floating Policy: A marine insurance policy where only the amount of claim is
specified and all other details are omitted till the time the ship embarks on its
journey, is known as floating policy. For clients who undertake frequent trips of
cargo transportation through waters, this is the most ideal and feasible marine
insurance policy.

Marine Insurance is an area which involves a lot of thought, straightforward and

complex dealings in order to achieve the common ground of payment and
receiving. But as much as complex the field is, it is nonetheless interesting and
intriguing because it caters to a lot of people and offers a wide range of services
and policies to facilitate easy and uncomplicated business transactions.
Therefore, in the interest of the clients and the insurance providers, it is
beneficial and relevant to have the right kind of marine insurance. It resolves
problems not just in the short run, but also in the long run as well.

Protection and indemnity

A marine policy typically covered only three-quarter of the insured's liabilities
towards third parties. The typical liabilities arise in respect of collision with
another ship, known as "running down" (collision with a fixed object is a
"allision"), and wreck removal (a wreck may serve to block a harbour, for
example). In the 19th century, ship-owners banded together in mutual
underwriting clubs known as Protection and Indemnity Clubs (P&I), to insure
the remaining one-quarter liability amongst themselves. These Clubs are still in
existence today and have become the model for other specialized and
noncommercial marine and non-marine mutuals, for example in relation to oil
pollution and nuclear risks. Clubs work on the basis of agreeing to accept a
shipowner as a member and levying an initial "call" (premium). With the fund
accumulated, reinsurance will be purchased; however, if the loss experience is
unfavourable one or more "supplementary calls" may be made. Clubs also
typically try to build up reserves, but this puts them at odds with their mutual
status.

Protection is required for safe working of seafarer and ship, and indemnity is
required to compensate for the loss of life, environment and property. P & I club
is an association composed of ship owners members to support seafarers’ safety
and well being by providing the required necessities.

What is P&I club?

A Protection and Indemnity or P&I club is a nongovernmental, non profitable

mutual or co operative association of marine insurance providers to its members
which consists of ship owners, operators, charterers and seafarers under the
member companies.

Why P&I insurance is Important?

The three important elements of shipping industry are ship, seafarers and cargo.
The one element which is directly connected to all the three mentioned is the
“Risk” involved in transporting the cargo on ship by seafarers.

Due to the “Risk” factor, a ship owner can face huge monitory losses if his/her
ship meets an accident and there is damage to the environment, cargo or to the
ship. Also, the risk to the lives of seafarers is kept above all and thus P & I
insurance is a very important aspect of sailing.

During the sea service, the most valuable element onboard i.e. human life can
be at risk due to illness, injury by accident or even death by hazards.

A P&I club provides compensation in the form of insurance cover for above
mentioned reasons to the seafarers. This not only helps him in the difficult time
but also to the seafarer’s family in case of death of their earning member.

RISKS COVERED BY P&I CLUBS

 Personal injury, Illness and death claims from crew, passenger and etc.

 Stowaways and its repatriation arrangement.

 Cargo claims for damage or loss of the same.

 Unrecoverable GA contributions.

 Liability due to collision.

 Damage to fixed and floating objects ( Jetty, Pier, marine animals, Rig,
Fishery Facility and etc)
 Liability under approved towage contracts

 Removal of wreck

 Salvage operations

 Civil liabilities imposed due to pollution or oil spill

 Other fines