The Functions of Marine Insurance - Coursework Example

Table of Contents 3 Introduction 3 Function 3 Risks covered under marine insurance 4 Excluded risks 4 The insured 5 Compensation 5 Indemnity 6 Drawbacks 7 Conclusion 8 References 9 Marine Insurance Abstract By the 19th Century, the Llyods of London had private individuals to underwrite their voyages giving birth to the oldest form of insurance, marine insurance. Today, marine insurance has been accepted globally as a means to protect the cargo, hull and any other liability in case of loss or damage. This paper examines the function of marine insurance as is applicable in the modern world. The insured would be protected against various risks that would be analyzed together with how compensations for such losses would be undertaken. In as much as marine insurance has been widely accepted, there are some limitations in its implementation. Introduction Marine insurance began in 215 B.C. and is synonymous with the Lloyds of London. Merchants sending their cargo to West Indies for trade would have their fellow merchants assume part of the risk in the event that the vessel gets lost. With time, people with no interest in these maritime adventures other than insurance were tagged to insure these adventures (Noussia 2008). With payment of premiums, the merchants transferred the risk of losses to these insurers. Functions The core business of marine insurance would be to ensure that the insured is compensated in case of loss or damage as a result of the risk which has been insured against (Insurance Information Institute 2010). The purpose of this insurance would be to insure the owner of the vessel against damages on it or loss. The owner would also be insured against third party liability. It ensures that the owner of the cargo in transit is protected against losses or damage. Similarly, the crew would be insured against loss of income as a result of an insured risk occurring. Risks covered under marine insurance There are various risks covered under marine insurance. This insurance covers physical damage or loss of the insured vessel, parts of the vessel or leased equipment. The vessel in this case encompasses the hull, navigation instruments, installations, annexes, the propulsion, power generators and equipment. It also covers any leased or hired equipment on board. All bunkers and stores would also be covered as long as they have not been insured separately. Secondly, the cover encompasses compensation for loss as a result collision with a floating or fixed object, referred to as collision liability according to Birds (2011). This cover extends to cover damages caused by vessel anchors, hawsers, annexes and chains. However, it excludes losses due to delay of other vessels or otherwise other than by contact with the vessel that has been insured. Similarly, environmental damage due to contamination or pollution is excluded. Finally, the insurance covers sue and labor and all other associated costs. This implies that all expenses incurred in an attempt to minimize or avoid consequences of a peril that has been insured, including all legal costs resulting from third party liability would be covered. The cost of survey following the occurrence of a risk would also be covered by the insurer (Kingston 2005). Excluded risks Insurers are charged with the responsibility of proving that the damage or losses incurred on the vessel or related liabilities, expenses and costs should have proximate cause (Naess 2009). Just like all other insurance contracts, marine insurance is an aleatory contract, which Lindley (2005) explains to mean than when an accident occurs and gives rise to a claim, it has to be fortuitous and uncertain. Thus, marine insurance would not cover damages or loss, expenses or third party liabilities as a consequence of inherent vice in the vessel. It also excludes damages as a result of clandestine or prohibited trade. Risks that have been covered under protection and indemnity insurance would also be excluded in marine insurance. These include losses, expenses and damages due to destruction, removal, lighting or marking of the insured vessel’s wreck. There are other risks that would be excluded merely because of their particular nature such as liabilities, expenses and damages as a result of radiation, ionization or explosive material. Other excluded risks include risks would encompass those caused by omission or negligence of the assured. Nonetheless, some risks that would be excluded in marine insurance could be covered under other insurance policies. Most of these are optional. They include loss of income, lucrative or political piracy, war and terrorism. Piracy, war and terrorism would be covered under conditions in Marine Hull Insurance covering these risks (Lindley 2005). The insured The principle of insurable interest applies in marine insurance. For compensation to be made in case of a loss, the insured should have insurable interest in the insurance subject matter at the time of loss (Noussia 2008). This is however not necessary at the conclusion of the contract. One would have insurable interest in marine adventure when there is an equitable or legal relation to the adventure. The buyer of goods in transit has insurable interest albeit such persons could decide to treat this as the seller’s risk. Members of crew have interest in their payment. The insurer has insurable interest in the insured risk and could choose to re-insure. Compensation Marine insurance could be valued or unvalued. If the sum to be compensated in the event of a loss is not specified, then it is referred to as unvalued. In case of a loss, the indemnity amount would be calculated (Birds). Otherwise, if the amount is given, referred to as agreed value, then it is valued. In this case, in case of a loss, the indemnity amount would be up to the agreed value. Indemnity According to Nieh and Jiang (2006), marine insurance is based on indemnity which could take different forms. The measure of indemnity refers to the amount payable to the insured with respect to occurrence of losses (Lindley 2005). First, it could be in the form of settlement per accident. In this case, settlements would be made for each accident where a damage or loss due to a single proximate cause would be considered as one incident. This principle however has an exception where if a vessel encounters several challenges with heavy weather in a single voyage such that each time it results in damage or loss of the insured vessel, the losses and damages encountered in a single voyage could be considered as a single casualty (Huybrechts 2000). This applies even in cases where the occurrence of loss has been caused by conditions of ice. The losses incurred could also be indemnified on the basis of “new for old” without deductions (Lindley 2005). With agreed deductible, it would be important to determine the number of accidents because a deductible should be applied per accident. Nonetheless, constructive total loss, actual total loss and general average do not require deductible for settlement. There are incidences where surveyors would recommend repairs to have the insured vessel restored back to her original condition before the accident. In such cases, the losses could be indemnified through payment of repairs. All the costs of repairs and expenses incurred in replacements should be supported by invoices that the insured paid. Since marine insurance is a form of property insurance, the insured would not be indemnified for financial or commercial losses as a result of immobilizing the vessel when undergoing repairs. These could be covered under the package of loss of income. It is nonetheless the insured’s obligation to communicate to the insurer in due time before undertaking any repair action. It is within the mandate of the insured to determine the ship yard under which the repairs would be conducted (Bull 2010). Another form of indemnity under marine insurance is referred to as abandonment. According to Insurance Information Institute (2010), abandonment would occur under three conditions: when the vessel’s actual total loss is recorded; in case of the insured vessel’s constructive total loss because it becomes impossible to repair the vessel or the cost of repair would exceed the agreed value in the policy; and in case there would have been no news on the insured vessel for more than 3 months, where the total loss would be taken to have occurred when the news on the vessel were last reported. In abandonment, the insurer accepts claims without transferring ownership of the vessel (Bull 2010). Indemnity to be recovered by the insured would be based on the daily amount insured, deductible and period of loss of income. The parties involved must agree on these three key elements. The indemnity amount would be calculated by multiplying the loss of income period by the daily agreed amount after deducting the deductible. Drawbacks Studies by Zolkiewski and Morazzani (2005) reveal that there are major limitations posed by marine insurance. Unlike other forms of insurance such as general insurance like motor insurance, marine insurance would not be produced in mass but has to be customized according to each individual and vessel. Before they enter into a contract, the concerned parties have to engage in vast preparation and interaction and gathering of specific information. Furthermore, recent increased incidences of piracy and lack of knowledge among insurance officers has furthered the challenges. Because of the international nature of marine insurance, wording and terms and conditions should be internationally accepted. Similarly, innovation in this form of insurance would also be limited by international standards. Conclusion Marine insurance protects the insured against losses and damages on the cargo, hull and third party during transit of goods overseas. In the event of a loss, the insured would be indemnified appropriately so as to take such persons to the financial position they were in before occurrence of the loss. Since it involves location of the insured vessel and cargo globally, the terms and conditions have to be within international terms and conditions. But the basic purpose is to indemnify the insured against insured risks. References Birds, J 2011, Insurance Law in the United Kingdom, Aspen Publishers Inc., USA. Bull, HJ 2010 Insurance Law and Marine Insurance Law: The Unequal Twins. Stockholm Institute for Scandinavian Law. Huybrechts, M (ed.) 2000, Marine Insurance at the Turn of the Millennium, Volume 2, The European Institute of Maritime and Transport Law, Oxford. Insurance Information Institute 2010, Journal of Insurance, The University of Michigan. Kingston, C 2005, Marine Insurance in Britain and America, 1720 – 1844: A Comparative Institutional Analysis, Viewed 9 March, 2012, http://www.ehs.org.uk/ehs/conference2005/Assets/KingstonFullPaper.pdf Lindley, RH, 2005, Introduction to Hull Claims, Viewed 9 March, 2012, http://www.rhlg.com/pdfs Naess, T 2009, An Introduction to Marine Protection & Indemnity Insurance, (3rd ed.), Skuld, Oslo, Norway. Nieh, C & Jiang, S 2006, ‘Against Marine Risk: Margins Determination of Ocean Marine Insurance’, Journal of Marine Science and Technology, Vol. 14, No. 1, pp. 15 – 24. Noussia, KP 2008, ‘Insurable Interest in Marine Insurance Contracts: Modern Commercial Needs Versus Tradition’, Journal of Maritime Law and Commerce, Vol. 39, No. 1. Zolkiewski, J & Morazzani, C 2005, Relationships, Information Technology and the Shipping Industry – An Exploratory Investigation, Manchester School of Management, Manchester, UK. Read More