Marine Insurance - History & Cargo Insurance

HISTORY OF MARINE INSURANCE

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Contrary to popular belief, Lloyds' of London was not the first group of people to offer insurance for maritime commerce. The first form of marine insurance dates back to the year 3000 BC when Chinese merchants dispersed their shipments amongst several vessels so as to abridge the possibility of damage to the product(s). The earliest account of insurance came in the form of bottomry, a monetary payment that protects traders from debt if merchandise is lost or damaged.

Another form of early insurance was the general average. During cargo shipments in 916 BC, a merchant would accompany his cargo to see that it was not jettisoned, or voluntarily thrown overboard by the crewmen in times of a storm or sinkage. To guard against this mutual interest of safety and quarreling amongst merchants, the Rhodians initiated the general average, which ideally meant that a person would be compensated through pro rata contributions of other merchants if their goods were jettisoned during shipment.

From the 11th century to 18th century, a few additional breakthroughs occurred in marine insurance. In 1132, the Danish began to reimburse those who experienced loss at sea. In 1255, insurance premiums were used for the first time as the Merchant State of Venice pooled these premiums to indemnify loss due to piratry, spoilage, or pillage. The first marine insurance policy was introduced in 1384 in an attempt to cover bales of fabric traveling to Savona from Pisa, Italy. Within the next century, merchants from Lombard began the first insurance practice in London. Finally, in 1688, Lloyd's of London, named after Edward Lloyd, began the risky business of insurance underwriting and have grown to become the largest marine insurance underwriters in the world. The Marine Insurance Act of 1906 was then proposed and initiated in an attempt to clarify and set forth the regualtions and policy variables associated with marine insurance agreements.

CARGO INSURANCE

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Marine insurance covers anything from yachts to fishing vessels to jetboats but within the transporataion/commercial sector there are three main subdivisions; cargo, hull and freight.

The owner of the shipment, not the owner of the ship mostly purchases cargo insurance. This is usually a trading company or an import/export company. Cargo insurance could include such risks as theft, sea water damage, shortage, contamination, fire, explosion, jettison and loss overboard, general average sacrifice, general average contribution and salvage charges, and would depend on the cargo that is being insured. Cargo insurance would normally be on a warehouse to warehouse basis for containerised cargoes and port to port basis for bulk cargoes depending on the terms of sale or terms of purchase.

Cargo insurance is pre-eminent and has within itself two classes, general and full cargo. General cargoes consist of a variety of commodities shipped by one or by many merchants. A vessel that facilitates a general cargo usually loads at berth and admits any commodity bound for any part to which the ship is journeying. On the other hand, full cargoes are loaded under charter, where the entire capacity is hired out to one merchant, who controls the use of the ship for the duration of the voyage.

Once again, cargoes can be divided into two more categories, under- and on-deck cargoes. On-deck cargo consists of all commodities loaded upon the ship's main deck, whether it be undercover or not. On the other hand, under-deck cargo are all goods stored under the main deck. Comparatively, it is harder to find all risk coverage for on-deck cargo as opposed to under-deck cargo. The reason for this is that on-deck cargo is more prone to disastrous events such as a storm, large waves, war or other such perils.

Usually the insurance underwriter becomes liable for the cargo from the time it is loaded on the ship until the time the boat reaches its destination and the goods are unloaded. Nevertheless, deviation is allowed when unforeseen circumstances demand that the vessel venture off course to avoid an accident or adverse weather conditions.

The Cost of Cargo Insurance

As of October 1992, any vessel used for international or domestic transportation, had up to $100 million insurance capacity; up 10-15% from 1991. This price hike reflected the fact that there was a shortage of reinsurance offered by Lloyd's of London, the world's largest cargo insurance underwriter. Lloyd's capacity within the marine insurance sector had diminished by a remarkable 40 percent during the five years previous. At one time, it was very popular for American risk managers to have their respective freight forwarders buy cargo insurance and add it on to overall service charges. Nowadays, many companies are buying insurance separately and paying upwards to $.30 per $100 for cargo coverage.

Institute Cargo Clauses A, B & C - What they cover.

Following is a summary of the risks covered under the three main sets of clauses. Each is subject to listed exclusions.

Institute Cargo Clauses "C"

Cover loss of or damage to the subject matter insured, "reasonably attributable to:"

1. Fire or explosion.
2. Vessel of craft being stranded, grounded, sunk or capsized.
3. Overturning or derailment of land conveyance.
4. Collision or contact of vessel, craft or conveyance with any external object other than water.
5. Discharge of cargo at a port of distress.

The insurance also covers loss or of damage to the subject matter insured caused by:

1. General average sacrifice.
2. Jettison.

To sum up, the "C" clauses provide major casualty coverage during the land, air or sea transit.

Institute Cargo Clauses "B"

Provide all the cover that is available under the "C" clauses, but in addition cover is given for loss or of damage to the subject matter insured "reasonably attributable to":

1. Earthquake, volcanic eruption or lightening.

The insurance also covers loss of or damage to the subject matter caused by:

1. Washing overboard.
2. Entry of sea, lake or river water into the vessel, craft, hold, conveyance, container, liftvan or place of storage.
3. Total loss of any package lost overboard or dripped while loading on to or unloading from vessel or craft.

The "B" clauses provide significant additional coverage; wet damage from sea, lake or river water and accidents in loading and discharging, but there is no coverage for theft, shortage and non-delivery.

Institute Cargo Clauses "A"

Provide coverage for all risks of loss or damage to the subject matter insured. The words "all risks" should be understood in the context of the "A" clause to cover "fortuitous loss", but not "loss that occurs inevitably."

General exclusions:

1. Willful misconduct of the assured.
2. Ordinary leakage, ordinary losses in weight or volume or ordinary wear and tear.
3. Insufficient or unsuitability of packing or preparation of the subject matter insured.
4. Inherent vice or nature of the subject matter insured.
5. Delay.
6. Insolvency or financial default of carrier.
7. Deliberate damage to or deliberate destruction of the subject matter insured.
8. Loss arising from nuclear weapons.

The general exclusions are supplemented by the 'Unseaworthiness and unfitness Exclusion Clause" and the "War & Strikes Exclusion Clause."

Summary - Notes - Cargo insurance and routes to indemnification 

The taking of a cargo insurance policy, besides the security provided under a carrier's contract of carriage, allows a party to turn directly to the insurance company, rather than the carrier.

The insurance company will then pay the claimant the damage covered by the insurance policy - usually the full loss value (sometimes 10 percent is added). By contract, the indemnity payable by the carrier - if the carrier is liable - is restricted to his legal maximum liability amount. And the carrier may not even be liable at all if protected by one or more of his legal exoneration or exceptions.

Generally, as per the bill of lading, If the indemnity paid by the insurance company is important enough, then the insurance may wish to subrogate in the rights of the cargo interest and claim from the carrier and so recoup at least some of the indemnity paid to the cargo interested party.