Chapter 14

Marine Insurance

Chapter Contents

Introduction

In international sales, goods are normally insured against the hazards they are likely to encounter during the voyage from the seller’s country to the buyer’s country. In the event of loss or damage to cargo due to perils of the voyage, the insured will be able, depending on the terms of the insurance policy, to recover his losses from the underwriter or insurer. In other words, under an insurance contract, the insurer undertakes to indemnify the insured (assured) against future losses/damage to goods caused by specific circumstances, such as fire, earthquakes and theft. The question of what type of insurance needs to be obtained to cover the cargo – for example, marine insurance, air cargo insurance – depends on the mode of transport agreed on by the parties in the contract of sale. Where parties have concluded their contracts on cost, insurance and freight (CIF) and free on board (FOB) terms,1 goods will be transported by sea and will, therefore, be covered by a marine insurance contract. The question of who is responsible for affecting the insurance is dependent on the contract terms. A CIF contract requires the seller, at his expense, to obtain insurance cover for the voyage and tender the policy to the buyer (or the advising/confirming bank where the parties have agreed on a letter of credit arrangement),2 along with the bill of lading. In an FOB contract, there is no legal requirement to obtain insurance cover on the part of the buyer or the seller. The buyer, however, would be well advised to obtain insurance if he wishes to cover himself against losses or damage while the goods are on the high seas. It is not unusual for a buyer in an FOB contract to request the seller to arrange insurance on the understanding that the buyer will reimburse the costs incurred. Such contracts are known as FOB with additional services contracts.3

Insurance of goods during their transit from the exporting country to the importing country is an important incident in an international sale transaction. This chapter, therefore, focuses on cargo insurance, with the emphasis on marine insurance contracts, since much of the cargo is still transported by sea. The general principles applicable to marine insurance contracts, the circumstances in which risk does not attach, the undertakings (warranties) of the insured and the liabilities of the insurer in a marine insurance policy are topics for consideration. It must be noted that the principles applied to marine insurance contracts are relevant to other types of non-marine insurance contracts – that is, where the insurance contract covers carriage by other modes of transport, such as air or road.4

Scope and nature of marine insurance contracts

The law relating to marine insurance is contained in the Marine Insurance Act 1906.5 A marine insurance contract, according to s 1 of the Marine Insurance Act (hereinafter ‘MIA’), ‘is a contract whereby the insurer undertakes to indemnify the assured, in a manner and to the extent agreed, against marine losses, that is to say, the losses incident to marine adventure’. There is a marine adventure, according to s 3(2), ‘where any ship, goods, or other movables are exposed to maritime perils’ – that is, ‘perils, consequent on or incidental to the navigation of the sea, that is to say, perils of the sea, fire, war perils, pirates, rovers, thieves, captures, seizures,6 restraints and detainments of

princes and peoples, jettison, barratry, and any other perils, either of the like kind or which may be designated by the policy’.

The perils listed in s 3(2) are by no means exhaustive. It is, therefore, possible to Insure against other perils if the peril insured against is consequent on or incidental to the navigation of the sea.7 Moreover, under s 2(1) of the Act, it is possible to insure against mixed land and sea risks.8

Until 1982, the insurance market used the Ship and Goods policy (SG policy) as the standard contract.This was replaced by Institute Cargo Clauses (A), (B) and (C), which were further amended in 2009.9 Some of the terms found in these three sets of clauses modify provisions relating to, for instance, availability of cover during deviation and the extent of causal connection (doctrine of proximate causation) in the MIA.The Institute Cargo Clauses (A), (B) and (C) are widely used and, therefore, as much a part of marine insurance law as the statute.

Obtaining marine insurance cover

As for the mechanics of obtaining insurance cover, the interested party will normally instruct an insurance broker (regarded as the assured’s agent) and provide him with details about the cargo, the voyage, date of shipment and name of vessel, as well as state other requirements, such as the amount of cover, the kind of cover, for example, Institute Cargo Clauses (A), (B) or (C) and other terms – for example, Institute Strike Clauses or Institute War Clauses.10

The broker will put all this information on a document known as a slip11 and take it to the underwriters.Where an underwriter is willing to accept the risk, he will ‘write a line’ on the slip. He may underwrite the entire risk or only part of the risk, in which case he will write the percentage of risk he is willing to underwrite.The first underwriter is usually known as the lead underwriter.12 The broker will then have to approach other underwriters until the entire risk is covered. Even after obtaining sufficient ‘lines’ to cover the entire risk, the broker may decide to approach other underwriters to spread the risk more evenly. This may result in the slip being oversubscribed. In such an event, the ‘lines’ will be adjusted appropriately.

The ‘writing of a line’ by the underwriter gives rise to a binding contract between the underwriter and the insured. As Kerr LJ said, in General Re-insurance Corp v Försäkringsaktiebolaget Fennia Patria:13

. . . each line written on a slip gives rise to a binding contract pro tanto between the underwriter and the insured or reinsured for whom the broker is acting when he presents the slip. The underwriter is therefore bound by his line, subject only to the contingency that it may fall to be written down on ‘closing’ to some extent if the slip turns out to have been over-subscribed [at p 867].14

7See Mustill LJ in Continental Illinois National Bank and Trading Co of Chicago v Bathurst (The Captain Panagos DP) [1985] 1 Lloyd’s Rep 625, at pp 630–1.

8Renton (GH) and Co Ltd v Black Sea and Baltic General Insurance Co Ltd [1941] 1 KB 206; 1 All ER 149; Cousins (H) and Co Ltd v D and C Carriers Ltd

[1971] 1 All ER 55.

9The amended version is largely similar to the 1982 version though the language has been updated to reflected modern usage. For instance the word ‘underwriters’ has been replaced with the word ‘insurers;.

10 The text of the 2009 versions of cargo clauses are available at www.lmalloyds.com. The 1982 versions of international Cargo Clauses (A), (B) and (C) are reproduced in Carr and Kidner, International Trade Law Statutes and Conventions, 2008, Routledge-Cavendish.

11 On the character of the slip, see Bennett, ‘The role of the slip in marine insurance law’ [1994] LMCLQ 94.

12 Subsequent underwriters are normally also subject to the same terms as the lead underwriter. It is not uncommon to find the notation ‘tba L/U’, which stands for ‘terms to be agreed with lead underwriter’. See Jaglom v Excess Insurance Co Ltd [1972] 1 QB 250;

American Airlines Inc v Hope [1973] 1 Lloyd’s Rep 233. 13 [1983] QB 856.

14 See also Ionides v Pacific Fire and Marine Insurance Co (1871) 6 QB 674.

Once the entire risk is covered, the insured will receive a cover note from the broker.15The cover note will be a closed cover where the insured has provided all the details pertaining to the subject matter. Where the information is incomplete, the cover note will be an open cover note16 and the insured has to provide further details. As for the insurance policy, it is normally issued and signed subsequently.

It normally takes time for the policy to be issued, and it is not uncommon for a seller, to ‘facilitate business’,17 when required to tender documents, as in a CIF contract or in a letter of credit arrangement, to tender cover notes, certificate of insurance or a letter of insurance.18 The tender of such alternatives, however, is not regarded as valid tender in English law.19 However, the International Chamber of Commerce (ICC) has relaxed the rules where INCOTERMS20 (in relation to standard terms) or the UCP21 600 (relating to letters of credit) are incorporated.

INCOTERMS 2010 addresses the issue of insurance in two terms – CIF and CIP (cost and insurance paid to). In both these cases, cl A3(b) in the relevant part states:

The insurance shall cover the goods from the point of delivery . . . to at least the named place of destination.

The seller must provide the buyer with the insurance policy or other evidence of insurance cover.

Given that other evidence of insurance cover is allowable, the suggestion seems to be that certificate of insurance or cover notes will be acceptable.

Article 28 of UCP 600 which focuses on insurance document and coverage, states:

(a)An insurance document, such as an insurance policy, an insurance certifi cate or a declaration under an open cover, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies. Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf if the insurance company or underwriter.

(b). . .

(c)Cover notes will not accepted

(d)An insurance policy is acceptable in lieu of an insurance certifi cate or a declaration under an open cover.

(e). . .

It seems that tender of insurance certificates, provided it is signed by an insurance company, underwriters, agents or proxies, will be treated as good tender unless the credit stipulates otherwise. Cover notes are specifically excluded and, therefore, will not be regarded as good tender.

19See Diamond Alkali Export Corp v Fl Bourgeois [1921] 3 KB 443; see Chapter 1, Policy. See also Bailhache J in Wilson, Holgate and Co Ltd v Belgian Grain and Produce Co Ltd [1920] 2 KB 1, at p 7. He had no difficulty in accepting American insurance certificates as equivalent to a policy, since the terms of the policy are normally included in the certificate.

20International Rules for the Interpretation of Trade Terms. See Chapter 1 for further on INCOTERMS.

21Uniform Customs and Practices relating to Documentary Credits. See also Chapter 15.

Payment of premium

Premium is payable against the issue of the policy, unless the parties have made other arrangements, according to s 52 of the MIA:

Unless otherwise agreed, the duty of the assured or his agent to pay the premium and the duty of the insurer to issue the policy to the assured or his agent, are concurrent conditions, and the insurer is not bound to issue the policy until payment or tender of the premium.

The insurer normally looks to the broker, even though he is the agent of the assured, for payment of the premium, and the broker, according to s 53(1), ‘is directly responsible to the insurer for the premium’. The origin of this peculiar rule is traceable to a time when underwriters preferred to deal with brokers they could trust.

The assured, of course, is under an obligation to pay the premium to the broker. Where the assured fails to pay the premium, the broker has a lien on the policy until the premium due to him from the assured is paid (s 53(2)).

The onus is on the assured to ensure that premiums are paid as agreed on time. Of course, it is open as between the insurer and the assured to agree otherwise.22

Different kinds of policies

Voyage policy and time policy

A voyage policy, as the name suggests, is a policy for a particular voyage. In other words, the subject matter is insured for a voyage – for instance, from Istanbul to Southampton.Voyage policies are commonly used in international sale transactions. A time policy,23 conversely, is a policy that insures the subject matter for a fixed time – for example, where the ship, Benedict, is insured for two years, commencing at noon on 16 June 2004. Normally, hulls are insured under time policies. It is also possible to have a mixed policy24 where the policy covers a particular voyage and runs for a specified period – for example, where a vessel is insured for a voyage from Singapore to Portsmouth and for 30 days after her arrival at Portsmouth. All of these different types of policies are recognised by s 25(1) of the MIA.

In practice, however, it is common for preand post-shipment risks to be covered. All three sets of Institute Cargo Clauses – that is, (A), (B) and (C) – in cl 8 provide for cover from the moment the cargo leaves the warehouse or storage depot at the place named in the policy for commencement of the transit25 until they are delivered,26 as agreed, to the consignee/final warehouse/place of storage at the port of destination (cl 8.1.1), or the warehouse or storage place at the port of destination or prior to port of destination (cl 8.1.2). Where delivery to the consignee, or warehouse/storage place, has not taken place, cover continues for a period of 60 days from the time the goods are discharged overside of the oversea vessel at the final port of discharge (cl 8.1.4).The 60 days’ cover operates in favour of the assured where the cargo is delayed for some reason after discharge – for example, delay in customs formalities or other import formalities. Where cargo, during the 60-day period post-discharge, is forwarded to a destination not specified in the insurance, cover will cease when transit to the other destination commences (cl 8.2).

22See Betty Weldon v GRE Linked Life Assurance Ltd and Paragon Finance plc [2000] 2 All ER (Comm) 914.

23Compania Maritima San Basilio SA v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1977] QB 49.

24See The Al Jubail IV [1982] 2 Lloyd’s Rep 637.

Valued policy and unvalued policy

A valued policy is one where the agreed value of the subject matter is specified (s 27(2) of the MIA). The value agreed between the insurer and the assured does not, however, necessarily reflect the actual or real value of the goods. For instance, the agreed value may be far less than the actual value of the goods, or the agreed value may be far greater than the actual value of the goods.Valued policies are generally used in international sales since the buyer can include the anticipated profits with the value of the goods in the agreed value. Where the agreed value is in excess of the real value, it would be advisable for the assured to disclose this to the insurer. Failure to do so may be regarded as a non-disclosure of a material fact, especially where the ‘discrepancy between the insured value and the actual value is of such a nature to change the nature of risk from a business risk to a speculative risk’.27 Where a material fact is not disclosed, the contract can be avoided by the aggrieved party.28

By contrast, in an unvalued policy, in the absence of express provision, the value of the subject matter is left to be calculated by applying the rules set out in s 16 of the MIA. According to s 16(3), ‘in insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole’. The prime cost is the true value of the goods at the commencement of the risk. The true value, according to Berger and Light Diffusers Pty Ltd v Pollock,29 is not necessarily the original cost, but the commercial value of the goods – the onus being on the insured to provide evidence, such as receipts and invoices, to establish the insurable value of the goods. In the words of Kerr J:

. . . the words ‘prime cost’ require qualifi cation. Where the assured is not the manufacturer and has bought the goods some time before the insured adventure commenced, their original cost may not give any reliable guidance to their value at the relevant time. Although their cost is no doubt a matter to be borne in mind, the function of the court in such cases is to assess what the true value was at the commencement of the adventure: see Williams v Atlantic Assurance Co Ltd,30 in particular, per Scrutton LJ, p 92, and Greer LJ, pp 102 and 103. The latter passage and the judgment of Slesser LJ, p 107, also show that a false undervaluation for Customs’ purposes is not by itself determinative of the court’s assessment of the insurable value. If there is no evidence on which the court can form any view then the plaintiff will recover nothing or only nominal damages: Tanner v Bennett.31 Similarly, the plaintiff may fail entirely if, on the evidence as a whole, the court cannot ascertain what the true value was. This was the conclusion of Scrutton LJ, in Williams v Atlantic Insurance. The onus of establishing the insurable value and the other ingredients necessary to establish his claim always rests on the plaintiff. The court must look at the whole of the evidence and then arrive at the conclusion if it can. It is natural that the insurable value is often referred to as the market value, but it is not necessary that there should be a market in the goods in the ordinary sense. The value to the plaintiff may be sufficient, provided that it is not a purely subjective or sentimental value. Perhaps ‘commercial value’ is the best description of what the court must seek to determine [at p 455].

It must be noted that, in an unvalued policy, the profit margin will not be included. As a consequence, unvalued policies are not in common use. Merchants prefer valued policies because of the scope for including the profit margin.

27See Bailhache J in Mathie v The Argonaut Marine Insurance Co Ltd (1924) 18 LIL Rep 118.

28See ‘A contract of utmost good faith’, below.

29[1973] 2 Lloyd’s Rep 442. Also see Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association [2000] 1 Lloyd’s Rep 505.

30[1933] 1 KB 81.

31(1825) Ry&M 182.