The Main Function of Marine Insurance - Essay Example

Table of Content 3 Introduction to marine insurance 3 Function of marine insurance 3 Risks covered 4 The insured 5 Compensation 5 Indemnity 5 Drawbacks 7 Conclusion 7 References 9 Marine Insurance Abstract The oldest form of insurance is marine insurance. It dates back to the 19th Century when the Llyods of London hired the services of private individuals who would underwrite their voyages and compensate them in case of losses or damages during their marine adventures. In the modern world, marine insurance plays a crucial role in protecting the interest of the insured against losses or damage to the hull, cargo or third party liability. Occurrence of risks insured against would call for the insurer to indemnify the insured as per the contract of indemnity. Despite the drawbacks in marine insurance, it still remains an important form of insurance and this paper evaluates its function and application in the modern world and critically evaluates the forms of indemnity applicable. Introduction to marine insurance In the period around 215 B.C., Noussia (2008) notes that the Llyods of London had developed measures to protect their interests as they ship their cargo for trade to West Indies. They would cooperate with their fellow merchants to assume some portion of the risk involved such that in the event of a loss, they would share. As time passed by, individuals with no interest in such maritime adventures started insuring these adventures. In this case, the merchants would pay premiums to these individuals and transfer the risks in these adventures to them. Function of marine insurance Insurance Information Institute (2010) acknowledges that the main function of marine insurance has been to compensate the insured in case of losses suffered as a consequence of the insured risk. The owner of the vessel would have the insurable interest on the vessel covered against damages or losses. Liability against third party would also be covered. Similarly, the owner of the cargo in the vessel would be compensated in case of a loss. The crew would also have their interest in payment protected by marine insurance. Risks covered Marine insurance covers losses and damages due to loss or physical damage on the insured vessel as a whole, the hull or leased equipment. These would include navigation instruments, annexes, the propulsion, power generators, installations and equipment. If the stores and bunkers would not have been insured separately, they would also be covered against damages or loss. Kingston (2005) also identifies compensation for losses due to the vessels colliding with fixed or floating objects, which is known as collision liability. Not only would such losses be caused by the vessel but also due to collision with hawsers, chains, anchors and annexes. However, losses resulting from delays of other vessels would be excluded (Birds 2010). In addition, environmental pollution resulting to environmental damage would be excluded. Huybrechts (ed. 2000) also notes that marine insurance covers labor, sue and associated costs where all expenses incurred while attempting to avoid or contain the losses due to a peril would be insured. This would include legal costs due to third party liability. The insurer bears surveying cost after occurrence of risk. According to the principle of proximate cause, the insurer should ensure that indemnified losses have proximate cause (Naess 2009). Being an aleatory contract, the accident resulting to a claim has to be fortuitous and uncertain. As such, claims resulting from vessel’s inherent vice would not be covered. Same applies to losses resulting from engagement in prohibited trade. If risks have been insured under protection and indemnity insurance, they become excluded in marine insurance. Due to the particular nature of some risks, they could be excluded. Such include losses, damages and liabilities as a result of explosive materials, ionization and radiation. Risks resulting from negligence or omission by the insured would be excluded. Lindley (2005) observes that in as much as some of the risks could be excluded in marine insurance, the insured could cover them under other policies. Majority of such would be optional and covers terrorism, war, piracy and loss of income. Conditions under Marine Hull Insurance cover terrorism, war and piracy. The insured As dictated by the principle of insurable interest, there should be insurable interest that the insured has on the subject matter of insurance for the insurer to accept the risk. Noussia (2008) notes that this should be proven at the time of loss but would be unnecessary when concluding the contract. When there is a legal or equitable relation in a marine adventure, insurable interest exists. The person to whom the goods in transit are to be delivered also has insurable interest in ensuring that the goods get to its destination in whole. The crew would also be interested in ensuring that their payment is protected. Finally, the insurer’s insurable interest is in the insured risk which could call for reinsurance. The insured in marine insurance is subject to the principle of utmost good faith as dictated by the Marine Insurance Act 1906 (National Archive 2012). Compensation Nieh and Jiang (2006) categorize compensation in marine insurance as valued or unvalued. The compensation becomes unvalued if the amount to be compensated when a loss occurs has not been specified. Therefore, indemnity amount should be calculated when a loss occurs. On the other hand, if there would be a specified amount to be compensated in the event of a loss, known as agreed value, then it is valued. In the event of a loss, the insurer would compensate the insured an amount equivalent to the agreed value. The Marine Insurance Act provides for inadmissibility of any of these forms of compensation should the provision not be embodied in the marine policy (National Archives 2012) Marine insurance is a contract of indemnity. Lindley (2005) defines the measure of indemnity as the payable amount that the insured is promised by the insurer in the event of a loss. This takes different forms. The first form is referred to as settlement per accident where for each incident resulting to a loss by a proximate cause, settlement would be made. Nonetheless, when a voyage encounters several incidents to be compensated due to bad weather such as in conditions of ice, the insurer could choose to accept this as a single incident (ed. Huybrechts 2000). The Marine Insurance Act 1906 on the other hand stipulates that insurable value of insurance subject matter should be that amount that the assured has at risk when the policy attaches summed up with insurance charges (National Archives 2012). Therefore, in case of successive losses, the insurer would be liable even if the sum insured would be exceeded. Lindley (2005) identifies new for old as another form of indemnity without deductions. It would be important to determine the number of accidents that have occurred as there would be a deductible for each accident. However, in cases of general average, constructive total loss and actual total loss, no deductible would be required for there to be a settlement. The surveyor could recommend that repairs would get back the vessel to its original form. The insurer would in such cases pay for repairs where the insured would have to support the expenses incurred in repairs with invoices. Bull (2005) however indicates that marine insurance, being a form of property insurance would exempt the insured against compensation for financial losses due to immobilizing the vessel under repair. Such losses could be covered under loss of income package. Lindley cautions that the insured is however supposed to inform the insurer of any intents to repair the vessel (2005). The insurer on the other hand reserves the mandate to determine the ship yard where such repairs would be undertaken. Bull (2010) identifies abandonment as another form of indemnity in marine insurance. Abandonment would be undertaken as a measure of indemnity by the insurer when the actual total loss of the vessel would have been recorded; the insured vessel suffers constructive total loss and it becomes impossible to repair it or the cost of repair becomes unreasonably higher than the policy’s agreed value; and when three months lapse without any news on the insured vessel where the date of occurrence of total loss would be taken as the date when the last news on the vessel was received. In this case, there would be no transfer of ownership to the insurer. Insurers calculate the indemnity amount by considering three key factors, namely; period of loss of income, deductible and daily amount insured. These would normally be agreed upon by the parties involved before acceptance of the policy. According to Birds, after the deductible has been deducted, the loss of income would be multiplied by the daily amount insured to give the indemnity amount (2011). Drawbacks Two researchers, Zolkiewski and Morazzani found out the complexity of producing marine insurance in mass (2005). Unlike other insurance policies like motor insurance, marine insurance policies have to be customized depending on the specifications of each vessel and the insured. This calls for vast engagement and interaction of the concerned parties when gathering specific information and preparing for this policy. The increase in piracy has also hampered offering this policy internationally. Similarly, Kingston (2005) observes that few insurance officers have adequate knowledge on marine insurance. Innovation, terms and conditions and wording have to conform to international conditions which pose significant drawbacks in developing and modifying marine insurance policies. Conclusion International trade has been greatly boosted by marine insurance as it ensures that the interests of all concerned parties in a voyage are protected. The core function of marine insurance is to indemnify the insured in the event of occurrence of the insured risk as per the conditions of their contract. Due to its international aspect, such polices should comply with international standards. Being the oldest form of insurance, its relevance in the society stands out. 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. National Archives 2012, ‘Marine Insurance Act 1906’, viewed 22 March 2012 www.legislation.gov.uk 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