UNDERSTANDING MARINE INSURANCE TRANSACTION
BEING THEME OF THE PAPER PRESENTED BY CHARLES N. NWANZE AT A WORKSHOP ORGANIZED BY THE NIGERIAN INSURERS ASSOCIATION.
AT IJEBU ODE, OGUN STATE ON THE 9TH DECEMBER 2013.
DEFINITION OF MARINE INSURANCE
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 incidental to marine adventure’ (Section 1 Marine Insurance Act 1906).
MARINE ADVENTURE
Marine insurance can be effected on any of the following: goods, ship or other moveables, freight and liability to a third party.
Section 3 of the Marine Insurance Act 1906:
(1) ‘Subject to the provision of this Act, every lawful marine adventure may be the subject of a contract of marine insurance’.
(2) ‘In particular there is a marine adventure where:
(a) "Any ship, goods or other moveables are exposed to maritime perils, such property being referred to in this Act as insurable property;
(b) The earning or acquisition of any freight, passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils;
(c ) Any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils".
MARITIME PERILS
Maritime perils are perils insured against in respect of marine adventure.
Marine Insurance Act1906 defined maritime perils thus: "Maritime Perils" means the perils consequent on or incidental to, the navigation of the seas, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy."
To a layman, maritime perils could simply be defined as "perils of the seas" and "perils on the seas".
GAMING AND WAGERING CONTRACTS
Section 4 (1) of the Marine Insurance Act of 1906 state thus: "Every contract of marine insurance by way of gaming or wagering is void".
(2) "A contract of marine insurance is deemed to be a gaming or wagering contract –
Where the policy is made "interest or no interest" or "without further proof of interest than the policy itself," or "without benefit of salvage to the insurer," or subject to any other like term;
Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer."
GENERAL PRINCIPLES OF MARINE INSURANCEThe following principles of marine insurance are applicable to marine insurance business:
Insurable Interest
Utmost Good Faith
Indemnity
Subrogation
Contribution and,
Proximate Cause.
INSURABLE INTEREST
This principle is defined in the Marine Insurance Act 1906, Section 5(2) thus:
"In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein in consequence of which he may benefit by the safety or due arrival of insurable property or may be prejudiced by its loss, or by damage thereto or by the detention thereof or may incur liability in respect thereof."
APPLICATION TO MARINE INSURANCE
In marine insurance, unlike other classes of insurance, insurable interest need not to exist at the beginning of the contract but, it must exist at the time of loss (Section 6(1) and (2) of M.I.A 1906.)
Section 4(1) and (2) of M.I.A 1906 made it void for any person to enter into a contract of marine insurance without having an insurable interest or having expectation of acquiring such an interest. Also, the Gambling Policies Act 1909 made it a punishable offence for any person to effect marine insurance without an insurable interest.
TYPES OF INSURABLE INTERESTSDefeasible Interest The seller of goods has an insurable interest on the goods until title passes to the buyer, which may occur after the voyage. When title passes the seller’s interest terminates.
This sort of interest, which may cease during the currency of the voyage for reasons other than maritime perils is called "defeasible interest" (M.I.A 1906 Section 7.)
Contingent Interest When title passes to the buyer the seller’s interest terminates and the buyer’s interest attaches. Sometimes the sale contract contains a clause giving the buyer the right to reject the goods because of delayed delivery or for other reasons. If the buyer exercises his right under the clause the buyer’s interest terminates and reverts to the seller.
This sort of interest which attaches during the currency of the voyage on the happening of a contingency is called a "Contingent Interest". (M.I.A 1906 Section 7.)
UTMOST GOOD FAITH
The legal maxim governing every commercial contract is "caveat emptor" meaning "let the buyer beware" but, insurance unlike other commercial contracts is governed by the legal maxim – "Uberrima fidea" meaning "utmost good faith".
This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are as a rule known to one party only, namely the proposer and the insurers in deciding whether or not to accept a risk, must rely primarily upon the information supplied to them by the proposer.
This doctrine requires both parties to a contract of insurance to make full disclosure of all material facts. The duty of disclosure imposed by utmost good faith is strictly interpreted by the courts and is not limited to material facts, which the proposer knows, but extends to those that he ought to know.
The M.I.A. 1906 provides a clear guide and the following Sections may be taken as applying mutatis mutandis to all classes of insurance:
"Section 17, A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.’
"18 (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded every material circumstance which is known to the assured. The assured is deemed to know every circumstance which in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.
(2) "Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk".
(3) In the absence of inquiry the following circumstances need not be disclosed, namely:
any circumstance which diminishes the risk;
any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge and matter which an insurer in the ordinary course of his business, as such, ought to know;
any circumstance as to which information is waived by the insurer;
any circumstance which is superfluous to disclose by reason of any express or implied warranty.
"Section19, Subject to the provisions of the preceding section as to circumstances which need not to be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer:
every material circumstance which is known to himself and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by or to have been communicated to him, and
every material circumstance which the assured is bound to disclose unless it come to his knowledge too late to communicate it to the insurer."
The above doctrine has been modified by Section 54(1) of Insurance Act 2003 which requires that every circumstance considered to be material by the insurer shall now be drawn up in a proposal form. Thus, any question not asked in the proposal form shall no longer be considered to be material.
However, marine insurance is unique because unlike other classes of insurance, proposal form is seldomly used except for the insurance of small crafts as in the case of marine hull and is equally used to effect an open cover contracts for marine cargo insurance. Besides this, proposal forms are not normally used for marine insurance instead, the use of broking slip is commonplace.
INDEMNITY
The object of indemnity is to place the insured after a loss in the same position as he occupied immediately before the event.
Unlike life and personal accident insurance, marine insurance is a contract of indemnity. The law makes insurances of property and liability, subject to the principle of indemnity whereby the insured is unable to recover more than the amount of his pecuniary loss arising from the event insured. An insurance may be for less than a complete indemnity, but it may not as a rule be for more because to do so will run contrary to public interest.
CONTRIBUTION
Contribution ensures the equitable distribution of losses as between insurers. Contribution arises in the case of contracts of indemnity where the same interest, the same peril and the same subject matter are insured with more than one insurer. It prevents the insured from recovering more than the full amount of his loss and thus supports the principle of indemnity.
It is rare in aviation for an insured to be double or multiple insurance, the insured according to common law can claim the whole loss from one of the insurers concerned or he may claim against all.
Marine and aviation insurance are usually insured under ‘valued policies’ thus, the indemnity provided is "in manner and to the extent agreed." By implication, they are not perfect indemnity policies. Section 16 of M.I.A 1906, provided an insurable value on which claims will be assessed in the absence of an agreed value in the policy. (Refer to Castellian Vs Preston1883.)
The principle of subrogation implies that where the insured has legal rights against a third party, the insurer after indemnifying the insured takes over those rights.
This doctrine applies merely for the purpose of preventing the assured from obtaining more than a full indemnity. In both marine and aviation insurance, subrogation applies only after payment of loss. The insurer is entitled to recover only up to the amount which he has paid in respect of rights and remedies (Sections 79(1) & 79(2) of M.I.A 1906 refer.)
CONTRIBUTION
Contribution ensures the equitable distribution of losses as between insurers. Contribution arises in the case of contracts of indemnity where the same interest, the same peril and the same subject matter are insured with more than one insurer. It prevents the insured from recovering more than the full amount of his loss and thus supports the principle of indemnity.
It is rare in aviation for an insured to be double or multiple insurance, the insured according to common law can claim the whole loss from one of the insurers concerned or he may claim against all.
In the former case, the insurer who pays more than his share is enabled to enforce contribution from the others, but the right does not arise until after payment has been made.
In marine insurance a rule which has long been recognized is that when the assured has recovered to the full extent of his loss under one policy, the other underwriter who has insured the same interest against the same risk pays a ratable sum by way of contribution.
The rule is that a contract of marine insurance is one of indemnity and that the insured, whatever the amount of his insurance or number of underwriters with whom he has contracted can never recover more than is required to indemnify him. (The appropriate sections are 32 and 80 of M.I.A 1906.)
PROXIMATE CAUSE
The term proximate cause was defined in PAWSEY Vs SCOTTISH UNION & NATIONAL INSURANCE COMPANY (1907) thus:
"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 sources".
The rule is that the immediate and not the remote cause is to be regarded – "Causa proxima non remota spectatur".
According to the Marine Insurance Act 1906 the position is:
"Section 55(1) Subject to the provision of this Act and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against but subject as aforesaid he is not liable for any loss which is not proximately caused by a peril insured against".
The proximate cause of a loss is that cause proximate to the loss not necessarily in time, but in efficiency. Remote causes are usually disregarded in determining the cause of a loss. There must be a direct and uninterrupted sequence between proximate cause and ultimate loss, such new intervening cause will rule out consideration of preceding causes, subject to its possessing the qualities of reality, predominance, and efficiency.
An interesting and well known marine case on the subject of proximate cause is that of MONTOYA Vs LONDON ASSURANCE CORPORATION (1851.)
The case went thus:
A vessel loaded with hides and tobacco shipped a quantity of sea water which rotted the hides but did not come directly into contact with the tobacco or the packages in which it was contained, the tobacco however, was spoiled by the reek of the putrid hides.
It was held that in this case the perils of the sea were the proximate cause of the loss on the tobacco as well as on the hides. The underwriters were however liable for the loss under Institute Cargo Clauses ‘A’.
It would be realized that the chain of causation leading from a peril of the sea, namely the incursion of sea water was unbroken.
HISTORY OF MARINE INSURANCE
Marine insurance is the oldest form of insurance ever transacted by man on Earth. The ancient Phoenicians, the Greeks, the Romans were in the habit of guarding themselves against maritime risks by various systems of insurance which were in the forms of loans or mutual guarantee.
BOTTOMRY BONDThe commonest method of protection was through ‘Bottomry Bond’.
This concerns itself with a loan raised by the captain of a vessel in order to prosecute a voyage.
This may be defined as the mortgage of a ship in such a manner that if the ship be lost, the lender likewise loses the money advanced on her; but, if she arrives safely at the port of destination, he, not only gets back the loan but in addition, receives a certain premium previously agreed upon.
Although, it was probably the Greeks and the Phoenicians who were among the very first to have insured against maritime loss, however, the first existing record of marine insurance appears to have originated from a Roman edict of AD 533, in the reign of Emperor Justinian.
Marine insurance was first practiced by Lombard Merchants and traders from the Heanseatic cities and it was introduced to the city of London about the 14th century by Italian Merchants. As trade grew, the need for marine insurance also grew.
London by tudor times, became the center for marine insurance worldwide. The earlier insurers or underwriters as they are now known conducted their business in Lombard Street in the city of London along River Thames. When the Royal Exchange was opened in 1570 the meetings of merchant formerly held in Lombard Street transferred to the new venue and insurers naturally followed.
Elizabeth Act of 1601 was the first statute prepared by the English Government and passed by the Parliament. It was entitled: "An Act concerning Matters of Assurance Amongst Merchants" and it is highly memorable as the first statute-book regarding marine insurance. The 1601 Act also established the Court of Insurance which had very little function. This Act was modified by the Marine Insurance Act of 1906 which established the fundamental principles of marine insurance which is currently in use.
The early insurers were private individuals who accepted insurances on their own behalf for their own account. The process of effecting an insurance did not differ greatly from that of today, except that the staff of office has been replaced nowadays by Brokers.
ESTABLISHMENT OF LLOYD’S
In the late 17th and 18th centuries, a coffee house run by an individual named EDWARD LLOYDS became the centre for private insurers, merchants and ship owners to transact their business. Lloyd’s made it his business to cater for his regular customers at the same time collecting news from overseas on shipping matters at large.
Later the coffee house became a recognised centre for all those concerned with the insurance of shipping and overseas trade. From such a humble beginning evolved the great corporation and insurance market at Lloyd’s largely as a result of enterprising spirit displayed by the coffee housekeeper – Edward Lloyd’s.
The first companies that were formed then came into being by Royal Charter of 1720 – these were the Royal Exchange and the London Assurance. The corporation of Lloyd’s as it is now known does not accept insurance business or issue policies. In fact, you can only insure at Lloyd’s and not with Lloyd’s. The corporation only provides facilities for individuals to transact their underwriting business. The affairs of the corporation are managed by a committee which is elected from insurers.
Lloyd’s underwriters are individually liable under Lloyd’s policies and their liability is unlimited. Although, the underwriters transact their business as individuals, they still associate with one another in groups of varying sizes known as "SYNDICATES" with one underwriter acting for each group. Each underwriting member of a syndicate is severally liable for the risk underwritten on his behalf.
EFFECTING OF INSURANCE AT LLOYD’S
On being requested to place an insurance at Lloyd’s, the Lloyd broker will prepare a slip containing brief details of the risk to be placed. He will then approach underwriters who specialize in that class of business, with a view to obtaining one of them as a leader or leading underwriter.
The lead underwriter having vetted the slip may make some amendments regarding some of the terms and conditions indicated on the slip. He then quotes an appropriate rate of premium where necessary and accepts a certain percentage of the risk. He then signs his name or the syndicate’s initials, below the details of the risk, indicating the rate and his proportion hence, the term "Underwriter".
However, the broker on the other hand is not bound to accept the proposed rate, but if it is thought suitable, he circulates among other underwriters, requesting them to accept similar or other proportions of the risk (at the same rate of premium), until 100 per cent has been placed.
It is important to note here that it is only the Lloyd’s brokers that are entitled to place business at Lloyd’s and he could as well place business in the same slip outside Lloyd’s.
However, a policy must be prepared for the policy holder and this is done in the broker’s office but all policies issued at Lloyd’s are checked and signed, being impressed with the formal seal, at Lloyd’s policy signing office.
Conclusively, as this is purely a Co-insurance arrangement, it is pertinent to note that liability is several and not joint.
Marine insurance is classified as follows:
Cargo
Hull & Machinery
Freight
MARINE CARGO INSURANCE
For the purpose of this presentation, I have decided to restrict my discussion with marine cargo underwriting and practice in view of the short time allotted to this paper.
Marine cargo insurance provides protection to the insured’s cargo against maritime perils. It insures the subject matter from one geographical location to another for example, from one country to another irrespective of the length of timer taken
The term marine cargo insurance refers to insurance of cargo and in most cases freight is included in the insurance.
The insurance on marine cargo just like marine hull is usually insured in a manner and to the extent agreed thus, it is a ‘valued policy’. In view of this reason, average does not apply to such policies.
A VALUED POLICY
A valued policy is defined under Section 27 (2) of the Marine Insurance Act 1906 ‘as a policy which specified the agreed value of the subject matter insured’.
PROVISION OF INSURANCE ACT 2003
Insurance Act 2003 made it compulsory that all goods imported into the country must be insured with an insurance company domiciled in Nigeria under cost & freight.
CLASSIFICATION OF CARGOES
The goods imported into the country can be classified into the following headings:
Bulk Cargoes: These include; cement, rice, beans, sugar, salt etc
Perishable Goods: Vegetables, fruits, pepper, frozen meat, cheese, canned foods etc
Fragile Goods: China, glass, ceramics etc
Electronics Goods: Refrigerator, Television set, computers, fan etc
Building Materials: Roofing sheets, ceramic tiles, doors etc
Pharmaceuticals: Hospital drugs, injection moulds, hospital equipment etc
Industrial Goods: Industrial raw materials, finished goods etc
Chemical Goods: Benzene, acids, potassium etc
Inflammable Goods: Crude oil, kerosene, soap, pomade, paints etc
Textile Goods: Cloths, cotton etc
Agricultural Goods: Agricultural produce, day old chicks, fruits, vegetables etc
Paper Goods: Sisal, pauper, bond paper etc
Valuable Goods: Precious stone, work of art, jewelleries etc
Plants and machinery: Generators, turbines, lift, motor cars & accessories
Agricultural Implements: Tractors, ploughs etc
Liquid Goods: Water, mineral water and other liquid substances
Dry Cargoes: Iron rod, steel, stone.
DOCUMENTS USED TO EFFECT MARINE CARGO INSURANCE
The following documents are required in effecting marine cargo insurance:
Proforma Invoice
Central Bank Form ‘M’
Broking slip where such business is being introduced by an Insurance Broker.
DETERMINATION OF SUM INSUREDThe following items are embedded in the sum insured:
The cost of the goods
The freight
Insurance premium
Custom duty
And other incidental expenses relating to shipping.
This explains why the basis of valuation for most marine cargo insurance is cost and freight plus 10%. However, the 10% loading is at the discretion of the insured.
Unlike other classes of insurance, average does not apply.
MARINE CARGO INSURANCE POLICIES
Section 22 of M.I.A 1906 states that: "a contract of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in accordance with this Act". The policy may be executed either at the time when the contract is concluded, or afterwards.
TYPES OF MARINE CARGO POLICIES.These include:
Voyage or single transit policy
Open cover contract
VOYAGE OR SINGLE TRANSIT INSURANCE POLICY
A Voyage Policy insures the subject matter from one country to another irrespective of the length of time taken.
Nevertheless, Cargo insured on this basis is normally subject to ‘warehouse to warehouse’ basis and cover will terminate sixty days (60) after the discharge of cargo from the vessel at the port of destination.
OPEN COVER
An Open Cover is an agreement between a merchant or shipper otherwise referred in the insurance sector as the Assured and an Insurer, under which the Assured undertakes to declare all sendings and, the Insurer agrees to accept all shipments provided that they are within the terms and conditions of the Open Cover contract.
An Open Cover is usually issued for a period of 12 Months after which it becomes permanently open and is subject to cancellation by either party giving each other 30 days cancellation notice.
Each shipment is a separate contract of its own and for every shipment, a marine insurance certificate is issued. By virtue of Section 22 of M.I.A 1906, "a contract of marine insurance is inadmissible in evidence unless it is embodied in a policy". For this reason every declaration under an open cover must be backed up by a marine insurance policy.
TYPES OF MARINE CARGO INSURANCE COVERS
Basically there are three types of covers that can be granted under marine cargo insurance.
These covers include:
Institute Cargo Clauses ‘A’
Institute Cargo Clauses ‘B’ and
Institute Cargo Clause ‘C’.
INSTITUTE CARGO CLAUSES ‘A’
This covers ‘All Risks’. However, the phrase ‘all risks’ is a misnomer because of the general exclusions under Clauses 4, 5, 6 and 7 of the Institute Cargo Clauses.
INSTITUTE CARGO CLAUSES ‘C’This insurance covers:
Vessel or craft being stranded, grounded, sunk or capsized
Overturning or derailment of land conveyance
Collision or contact of vessel craft or conveyance with any external object other than water
Discharge of cargo at a port of distress.
loss of or damage to the subject matter insured caused by:
General average sacrifice
Jettison.
This covers basically all the risks covered under the Institute Cargo Clauses ‘C’ and went further to add the under-mentioned perils:
Earthquake, volcanic eruption or lightning
Washing overboard
Entry of sea lake or river water into the vessel craft hold conveyance container liftvan or place of storage.
Total loss of any package lost overboard or dropped whilst loading on to or unloading from vessel or craft.
The items excluded are as follows:
4. 4.1 Loss damage or expense attributable to willful misconduct of the Assured
Loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured
Loss damage or expense caused by inherent vice or nature of the subject matter insured
Loss, damage or expense proximately caused by delay, even though the delay be caused by a risk insured against
Loss, damage or expense arising from insolvency or financial default of the Owners, Managers, Chatterers or Operators of the vessel
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
War Risk Exclusion
Riot & Strike Exclusion
The important thing to note in respect of the above exclusions is that the general exclusions are common to all the three Institute Cargo Clauses except that both Institute Cargo Clauses ‘B’ and ‘C’ expanded the exclusion with the under-mentioned item:
In no case shall this insurance cover:
Deliberate damage to or deliberate destruction of the subject matter insured or any part thereof by the wrongful act of any person or persons.
This exclusion is known as malicious damage exclusion.
MARINE CARGO RATING/UNDERWRITING CONSIDERATION
The following factors are very paramount in arriving at a reasonable rate:
The scope of cover required; that is, whether Institute Cargo Clauses ’A’ ‘B’ or ‘C’ respectively. The important thing to note here is that the wider the scope of cover the higher the rate vice versa.
Nature of Cargo. By the nature of the cargo, I refer to the type of goods or interests proposed for the insurance. Different Cargo presents different risks’ while some are highly attractive to thieves others may be highly inflammable or perishable. Thus, the higher the risk inherent in a cargo, the higher the rate vice versa.
Mode of Packing. Containerized cargoes attract lower premium rate than non- containerized cargoes.
The voyage. Here, the Underwriter is interested to know the country of origin and destination because some countries are politically unstable than others for example, the Middle East countries are war torn zone.
Also, some countries apart from exhibiting low moral standard are affected by harsh climatic condition. This influences the underwriter’s rating.
The vessel. This is an important rating factor because it enables the Underwriter to determine the seaworthiness of a vessel by ensuring that such vessel complies with the Nigerian Classification Clause.
Valuation. Marine Insurance just like other classes of Insurance is based on law of large numbers, hence, the larger the sum insured the lower the rate vice versa.
The terms and conditions of insurance required
The insured’s loss history or claim experience.
Thank you for listening.
Presented by: Charles N. Nwanze
e-mail: nwanzechango@yahoo.com
GSM: 08065777060, 08055239996
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