Understanding Maritime Insurance Prajakta Kanegaonkar - Assignment Example

Insurance industry is a significant industry in the world. Maritime insurance was the first form of insurance which gave way to multiple other forms of insurances in the commerce industry. Let us understand first what insurance is all about. Insurance basically started as a form of risk management. It protects against the uncertainties and the damages caused by uncertainties. It is equitable transfer of risk of loss from one entity to another. Considering the extent of maritime activity it would be very difficult to understand the extent which can be covered by maritime insurance. Hence we need to understand the definition of maritime insurance. Marine insurance covers the loss or damage of ships, cargo, terminals and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination. The history of insurance goes back to 2100 BC where code of Hammurabi was considered as the first basic form of insurance policy. This was meant to protect caravan of goods against, robbery, travel and transit damage, bad weather and breakdowns. During the industrial revolution, the industry and commerce had flourished in the countries of Europe. This further gave rise to the practice of insuring cargo while being shipped in the maritime nations of Europe. First insurance company was formed in 1688 at Lloyd’s coffee house where merchants, underwriters, ship-owners met for business transactions. Lloyd’s later on developed into England’s foremost insurance company Lloyd’s. Today marine insurers cover a huge industry across the world. The ship, cargo, goods and finally the eventualities of the journey all are covered under this insurance form. Truly it is considered as the type of insurance which gave rise to further insurance rise in the world. Components of marine insurance are: 1. H&M Insurance: This basically refers to the body of the ship or the vessel. This covers the hull and machinery that constitutes the ship itself. Different types of ships and vessels require flexibility in consideration while insuring 2. Cargo Insurance: cargo refers to goods and commodities in transit whether carried by air, sea or land transport. Cargo at sea is subjected to damage at the port and damage during voyage. 3. Freight Insurance: Freight is the money paid by the person for transportation of goods. John Bouvier has described freight as the sum agreed on for the hire of the ship, entirely or in part, for the carriage of goods from one port to another. 4. Liability Insurance: Liabilities are divided in two parts, legal and marine general liabilities. Legal liabilities cover various maritime legal contracts and liabilities thereby entered by the person who gets into a contract for shipment. Maritime liabilities covers, sea as well land legalities and liabilities therein. 5. Pollution Insurance: These days pollution has become a watch word for business communities. With cases of oil tankers leaking and damaging the marine and oceanic life, the transport companies are liable to pay heavy fines and duties towards protection of environment. This factor is covered on marine insurance as well. 6. Flood insurance: In the recent past water bodies all over the world are constantly threatened by natural calamities such as floods, tsunamis and storms etc. it becomes imperative for the companies to insure against such calamities. Although this forms the basis of the marine insurance covering the loss of goods in transit, these calamities are especially accounted for in marine insurance. 7. Worker’s compensations: Now a day, worker’s compensation is a clause included by many marine insurance companies. This covers accident and life insurance of the crew and staff of the vessel or the ship. This clause would have been incorporated because taking care of its workforce is thought to be the most prime responsibility of the ship owner and employer. We have to understand that marine insurance or any form of insurance is basically a contract between two parties. Earlier it was a group of people coming together and pooling their money to cover a particular vessel, voyage, cargo or goods. The loss if any was compensated from the money pooled by these group’s members. This started the system of underwriting in insurance industry. Like any other contract marine insurance also comprises following factors: 1. Parties: These are entities involved between whom the contract is agreed upon and signed. These could be individuals or business entities. These parties to the contract should be mentally competent. 2. Consideration: Consideration involves what each party stands to gain from the practical implementation of business agreement. 3. Terms and Conditions: These specify the rights and obligations of each party involved 4. Legal Purpose: The contract should be made for perfectly legal purpose. The intention of the contract should be legally valid. We see all these elements in an insurance policy. Most importantly any agreement or contract between two parties for the purpose of business should have an implicit trust to carry the contract through. No two parties get involved in the transaction with mutual understanding to fail. They get into an agreement to make it fruitful, conducive and rewarding for each other. Therefore the concept of trust and faith in insurance industry holds the maximum validity. The faith and trust here are expected mutually. Insurer and insure in insurance are expected to execute their part of the contract with honesty and desire to fulfil. Here comes the most crucial factor of insurance industry and that is ‘good faith’. To understand this better we need to understand the concept of ‘good faith’ in business and what does it mean by ‘utmost god faith’ in insurance industry. Defining ‘Good Faith’ ‘Faith’ in itself is a very abstract term. It is an intangible concept. It does imply that both the parties involved in the contract or business will behave in trustworthy manner with each other. So what does it mean actually? It means that the transactions carried out would be without any malice, any harmful intention or any ulterior motive. One implicitly and sincerely trusts the other in business and to make the contract valid and fruitful Defining ‘utmost good faith’ ‘Utmost good faith’ means a minimum standard that requires both the buyer and the seller in a transaction to act honestly toward each other and not to mislead or withhold critical information from one another. This especially applies to financial transactions. This concept has travelled from maritime insurance to general insurance industry and is widely applicable today. We are going to discuss this concept from maritime insurance law and general insurance perspective. Doctrine of ‘utmost good faith’ in insurance Insurance industry functions on the principle of ‘utmost good faith’. It expects extreme honesty from both the parties involved. For example, if any individual is seeking for motor or automobile insurance, then he must be able to provide valid ownership, make of the vehicle, condition of the vehicle, price paid etc. Likewise the insurance provider or its agent should also be able to provide clear terms and conditions on which the policy is going to be executed. This builds the mutual confidence of the parties involved. However the insurer in majority of situations may not get an opportunity to inspect all the facts before the insurance papers are issued and executed, or the insurer may claim that the some facts privy only to the insured and hence not made known. In both the situations the claims can go haywire. This could result in sever loss for the insured as well as insurer. Hence it is always appreciated and advised that the insured calls a representative of the insured to inspect and get satisfied about all the facts ascertained in the papers, so that the claim is not later falsified by the organization. This sounds like a tedious exercise for both the parties but where money is involved, it becomes a harsh reality. The concept of utmost good faith in marine insurance was covered under English laws in when Sir McKenzie Chalmers drafted the Codified English Law of Marine Insurance in the Marine Insurance Act 1906; it provided in Section 17 beneath the heading “Insurance is Uberrimae Fidei”: “A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party”. English judiciary and especially marine laws were followed in majority of the countries world over who followed the precedents and implemented them. This doctrine goes back to 18th century when Lord Mansfield stated that non-disclosure of facts in the case before the insurance contract affected the risk of the contract. Hence the contract should any way be considered as void and the insurer should not be made to pay. This actually created the doctrine of utmost good faith in the marine insurance, in which the insured is expected to be honest and transparent about the facts prior to the insurance documents are signed. The burden of disclosure easily weighs heavy on the insured here however in many circumstances the insurance company can’t escape it as well. Hence both the parties are expected to disclose ‘every material perspective’ possible. Increasingly the legal machinery is finding this principle to be very rigid and not suiting the contemporary needs. Initially at least it appears that this principle is designed for giving a leverage to the insurer to not to pay. Recently there is an alternative statement given that if the insurer had known all the facts he might have refused to insure, increased the premium or assessed the risk more substantially. As again the insurance seeker is not aware of the underwriting process he would not be in a position to fulfil the terms and conditions in totality which leaves the settling of the claim in the hands of the insurer. To summarise the concept of utmost good faith in marine insurance we can quote T.-L. Wilhelmsen, “The second item of the Guidelines specifies acting in good faith as mentioned under the first point as the duty to be honest and especially to disclose and not misrepresent material facts during the currency of the contract. Further the duty to disclose any material alteration of the risk is mentioned. It summarises therefore the duties which are established under the doctrine of good faith, but which had its origin in the pre-contractual duty of disclosure. The purpose of the duty to disclose material facts is regarded as giving the insurer the best possible knowledge to assess the risk and therefore also the premium. The duty to pass the information lays mainly on the assured, as he is the person who knows the most about the circumstances of the assured assets. This duty is seen not only for the benefit of the insurer, but for the assured as well, as the insurer does not have to take into account the possibility that he does not know all material risks.” Even as we read it we understand a commoner that the law needs to be changed and made soft to suit the current business scenario. References: 1. The history of Insurance - Risk through the Ages - Nick Asensio - www.thehistoryof.net 2. www.marineinsurance. 3. www.duhaime.org/LegalDictionary 4. www.marine-ins.com 5. www.investopedia.com/term 6. T.-L. Wilhelmsen Duty of disclosure, duty of good faith, alteration of risk and warranties in CMI Yearbook 2000 7. www.localinstitutes.cii.co.uk 8. Sir MAcKenzie Chalmers English Law of Marine Insurance – English and Continental Maritime Law – Antwerp Maritime Law seminars – Eric Van Hooydonk ISBN 90-621-5809-9 Word count: 1840 Read More