Because of the enormous risks involved in international trade, it has become a core part of the international trading process for the parties involved to insure their respective risks. One of the major risks that international traders (exporters and importers) face is the risk of damage or loss during the trasnportation process. This is where marine insurance comes into play. 'Marine insurance' is thus the term used to described the insurance taken out to cover the risks involved in all forms of transportation, for example, sea, road, rail and air, from the point where the goods are loaded onto their first form of transport until they arrive at their final destination.
Why bother with marine insurance?
As there are many risks involved in the transportation cargo internationally, traders want to minimise these risks. A loss of goods to a buyer (or seller - depending who has contractual ownership of the goods at the time of the damage/loss) could mean:
- Loss of business
- Loss of money
- Loss of goodwill
- Delays in utilisation of the goods
- Expensive repairs
- Penalties for late delivery
Any of these factors could put a small firm out of business and can even cause larger firms serious financial difficulties. The sensible trader will make certain that he or she has taken out suitable insurance cover, covering the correct value and risks thereby ensuring that all aspects of marine insurance have been suitably addressed.
It is a contract of indemnity
The marine insurance contract is a contract of indemnity. The insurer (the marine insurance company), undertakes to indemnify the assured (the policy holder) against financial loss or expenses incurred resulting from any of the risks and hazards which are defined in the policy document. The insurer will define his liability in such a manner that he does not become responsible for loss or damage resulting from any misconduct of the assured. The assured must therefore take reasonable steps to protect the goods/cargo from any potential hazards by ensuring that the cargo/goods are packed, labelled and stored correctly.
The insurer will also limit his liability by excluding losses which arise inevitably from the nature of the goods, such as evaporation or natural deterioration. The insurer therefore indemnifies the assured against fortuitous loss (dropping, crushing, breaking, rusting etc of the goods themselves), accidents and disasters, together with the loss of damage which may arise from causes over which the assured can exercise no control, such as war, riots, strikes and civil commotions.
Categories of risk to cover
There are several different categories of risk thatr you can consider cvovering. These are
- Catastrophe risk - These relate to events which can occur to the carrying ship, aircraft or other conveyance in which the goods are loaded, or to the location in which the goods are temporarily housed in the normal course of transportation. These are:
- Sinking, stranding, collision, or catching fire of the carrying ship
- Overturning or collision of a carrying vehicle
- Fire or flooding of a transit warehouse
- Accidental or fortuitous risks - These are risks which are more commonly the cause of claims and relate to events which affect the goods themselves rather than the conveyance in which they move. These are the risks which account for the greater part of the premium rate. These are:
- Twisting and bending
- Scuffing, scratching, bruising, denting etc.
- Other risks - There are risks which are not accidental or fortuitous but are outside of the control of the cargo owner and include:
- Theft and pilferage
- Losses due to piracy
- Malicious damage
- War and associated risks - These include war, strikes, civil commotion and terrorism and we discuss them separately. Click here.
Certain types of goods are especially prone to damage from these risks and they may in respect of such goods, involve a substantial portion of the premium rate. All these categories of risk are taken into account when the insurer is calculating the rate for the premium. The insurance company would be prepared to offer a reduction on the premium amount if the company in question is moving large volumes of cargo globally. Under these circumstances the insurance company would offer a discount for greater volumes moved.
Factors to consider in taking out marine cover
In taking out marine insurance, there are several factors that the assured must take into consideration. These include:
- The principle of 'utmost good faith'
- The categories of risk to be insured
- The principles of insurable interest and insurable value
- Insuring against the risks of war, strikes, riots and civil commotion
- The duration of an insurance policy
- The principle of general average
- Types of marine insurance cover
- The premium
There are three main contracts these are:
- The contract of sale; between the seller and the buyer
- The contract of carriage; between the carrier and the shipper
- The contract of marine insurance: between the insurer and the assured
While each of the contracts are independent of each other they cannot be detached because they complement each other and look after the interests of both the seller and the buyer. When concluding these contracts the following aspects must be given attention, these are:
Marine insurance policies attach to the goods from the moment they are loaded into a form of conveyance (truck, container (6 or 12 metre), aircraft, rail truck or vessel), until they arrive at their final destination. This type of marine policy is commonly called .
- The nature of the journey
- The means of conveyance that will carry the goods to their final destination
- The goods/cargo being sold