Salient Features of Marine Insurance - Essay Example

MARINE INSURANCE A contract of marine insurance is a contract based on utmost good faith …………………. and Number …………….. submission …………. Word-counts: 1522 Introduction Insurance is the contract between insurer and insured by which insurer undertakes to given compensation to the insured for any loss or financial risk or any damage suffered by the insured, in consideration of the payment of premium for a specific period of time. Insurance plays crucial role in the economy of almost all the countries since it ensures compensating of financial and business related risks and this help businesses remain regardless of financial contingencies and risks. There are different types of insurances like fire, marine, aviation, life and motor vehicle insurances. This piece of paper addresses salient features of Marine Insurance and the principle of utmost good faith in relation to the Marine Insurance Act 1906. Marine Insurance Marine insurance is an insurance contract between the insurer, normally insurance company and the insured, who is ship owner, ship company or sea-transportation service operator, by which insurer agrees to compensate financial risks that occur incidental to a marine adventure. Marine Insurance is defined as a contract whereby the insurer agrees to indemnify the assured in a manner and to the extent thereby agreed upon, against marine losses (Branch, 2006, p. 255). As marine insurance is a legal contract, both insurer and insured are legally bound by special or the generally accepted implied policy terms. Some of the very fundamental principles and legal boundaries that both the insurer and insured are to take in to account include indemnity, insurable interest, utmost good faith and proximate cause. As Stempel (1999, p. 340) noted, marine insurance was designed to cover property in transit on the sea. The marine Insurance Act 1906 has specified that a contract of marine insurance can be extended, either through express or implied contract, to cover mixed sea and land risks so that there may not need to have a separate insurance policy to cover land transportation risks. The major varieties of Marine Insurance are: Hull Insurance, that provides extensive cover to a water-going vessel and its equipments. Hull insurance often includes coverage of liability coverage for third party claims arising out of collisions of vessels. Cargo Insurance, that provides fuller coverage on the goods or merchandise carried by the water-going vessel, Freight Insurance, that covers the risks and financial losses arising out of the failure to accept freight levied by the shipping company for carrying the goods, and Ship owners’ liability Insurance, that provides coverage to the shipping company against a multitude of events, arising out of either its own fact or that of its employees. Marine Insurance Act 1906 The Marine Insurance Act 1906 is the codification of law relating to marine insurance. This act has now become the legal basis of marine contracts between various parties. The early marine insurance legislation affected only insurable interest, which stated that an insured or applicant can take insurance in any subject matter only if he has insurable interest in it. The marine insurance act 1906 has been developed with the market and courts being left to develop the principles. The Act 1906 didn’t seek a change of the law, but has been the codification of approximately 200 years of judicial decisions. Utmost Good Faith Utmost Good Faith is one of the most important insurance principles that is applicable to all the different types of insurance policies. Utmost Good faith states that insured as well as insurer should keep good faith in all the contractual relationship between both the parties. Insured must observe utmost good faith in each and every communication with the insurer, especially in filling the application form, by disclosing all the relevant material facts that are important for the insurer to calculate the amount of risks and thus to calculate the premium that he has to pay. Basically, for all the insurance contracts, higher the risk, higher the premium and therefore assessing and calculating the premium is up to a large extent depending on the possibility and amounts of the risk. Utmost Good faith principle states that insured is legally bound to disclose all the material facts while filling up the proposal form (application form),and if he has been found to have hidden any material fact, this would be a reason to breach the contract. Not only insured, but insurer also requires to reveal material facts in terms of compensation, amounts of premium to be paid and the period for which the contract will be in place. Contract of Insurance, unlike other contracts, are considered as contracts of the Utmost Good Faith (uberrima fides). A buyer or seller in a general contractual agreement are legally prohibited to make false representation and indulge in any sort of misrepresentation. But, when it comes to utmost good faith, the insured or the proposer is under the duty to disclose material facts to the insurer, in regard to whether or not he expressed answers of the questions in the application form, in details that are relevant to the insurer for assessing the extent of the risks (Merkin and Stuart-Smith, 2004, p. 52). According to the Schedule 17 of the Marine insurance Act 1906, utmost good faith, which in modern formulation is often referred as ‘fair representation’ is applicable to marine contracts as well as other types of insurance such as fire, air, aviation, motor vehicle and life insurance. As Merkin and Stuart-Smith (2004, p. 52) stated, a contract of marine insurance is a contract based on the utmost good faith and therefore if utmost good faith is not observed by either party, the contract may be avoided by the other party. Duty of utmost good faith is not based upon any implied term in the policy, but is operates as a matter of general legal rule, and therefore, the remedy for the breach is avoidance of the policy. When either party finds the other party hasn’t fulfilled utmost good faith, for instance, he hasn’t revealed material facts, he can cancel the contract. Either party cannot claim damages for breach of the duty as such. From the logical point of view, there are reasons why utmost good faith is of utmost importance to an insurance contract whereas it is never applicable to any other sale or buy contracts. It is because, insurance contract includes the payment of premium from the insured, and this amount of premium is to be calculated by the experts called actuary in an insurance company. Actuaries in an insurance company will be able to assess the risks, possibility of risk and extent of risk only If he has sufficient as well as relevant information about the subject matter that has been insured. For instance, when it comes to marine insurance, age of the ship or vessel, the route it takes in transit, types of materials in carries, past records of the ship, capacity of the ship for carrying etc are of significant importance to the insurance company, because all these factors determine the probability of the risk. More specifically, if the ship is too old, or it caries items like petroleum or inflammable items, of it capacity is less but often takes more than that, the risk factors are more and therefore the premium will be high. In contrary, a normal contract such as buy or sell contract never requires assessing the amounts the other party has to pay in consideration. The amount of consideration in a general contract of sale is already fixed, but, the premium, which is the consideration in an insurance contract is to be found based on the information that appear in the proposal form. The information in the proposal form, therefore, are highly critical to insurer’s decision making, and this explains why utmost good faith is extreme importance to an insurance contract. Hooper V Royal London General Insurance Co Ltd In the case of Hopper v Royal London General Insurance Co Ltd (1993, SC 242), it has been concluded that there is no doubt that a marine insurance contract is uberrima fidei, and is thus based on utmost good faith. All the circumstances that are known to the insured while he takes the policy from the insurance company should be disclosed to the company. according to the section 17 of the marine insurance act 1906, marine insurance is a contract based on utmost good faith (Forte and Forte, 1999, p. 81) Conclusion This piece of paper explained the legal perspectives of Marine Insurance and the importance of the principle of utmost good faith to marine insurance contract. Being different from the misrepresentation of contract of sale, insurance contract needs to be applied with the legal policy of utmost good faith, by which the insured is legally bound to disclose all the material and relevant information known to him to the insurance company so that the insurer will be able to assess and calculate the risks and premium. According to the schedule 17 of the Marine Insurance Act 1906, the insured must disclose material facts to the insures and if either party has been found to have failed in disclosing the facts, the party will have legal right to cancel the contract, rather than claiming for the remedy to the damage. References Branch, A.E, 2006, Export practice and management, Fifth illustrated edition, Cengage Learning EMEA Forte, A.D.M and Forte, A.D.M, 1999, Good faith in contract and property, Illustrated edition, Hart publishing, Merkin, R.M and Stuart-Smith, J,2004, The law of motor insurance, Sweet & Maxwell Stempel, J.W, 1999, Law of insurance contract disputes, Volume 2, Second edition, Aspen Publishers Online Read More