In
this article you will study in detail about the concept of Marine Insurance
including definition, nature and scope; origin and historical development;
classifications and significant principles
1.
INTRODUCTION
We
all anticipate countless risks in our daily life. Risk is closely connected
with loss. Every risk result in loss of one or other kind. There can be loss
due to perils of sea, illness, death, fire, earthquakes and so on. The risk
cannot be eliminated but loss can be. This desire to protect a person from
uncertain loss, the business of insurance comes into existence. Marine
insurance covers risk at sea (ocean marine) and on land (inland marine). Marine
insurance indemnifies vessel owners against the loss or damage of ships at sea
or on inland waterways. Marine cargo insurance compensates owners of cargo lost
or damaged en route through fire, theft or shipwreck. Inland marine insurance
covers domestic risks connected to transportation of valuables and deals mostly
with mobile property of a personal or commercial nature.
Ocean
marine insurance is split into three main categories-hull (for loss or damage
to the vessel); cargo (for loss or damage to goods); and protection and
indemnity (for liability of ship owners to others). Underwriters set rates
according to their own experience, the loss history of the cargo or ship, and current
competition in the industry. Important elements for the vessel include owner
management, crew experience, trade routes, ports visited, and age and
maintenance of the ship.
2.
DEFINITION OF MARINE INSURANCE
The
basic principle of a contract of marine insurance is that the indemnity
recoverable from the insurer is the pecuniary loss suffered by the insured
under the contract in a manner and to the interest thereby agreed.
The
dictionary meaning of the term insurance is coverage by contract whereby one
party undertakes to indemnify or guarantee another against loss by a specified
contingency or peril.
Section
3 of the Marine Insurance Act, 1963 gives a comprehensive definition of “marine
insurance” as:
“A
contract of marine insurance is a contract whereby the insurer undertakes to
indemnify the assured, in manner and to the extent thereby agreed, against
marine losses, that is to say, the losses incident to marine adventure”.
Section
2(d) of the Act defines the term marine “adventure” as it includes any
adventure where-
(1)
any insurable property is exposed to maritime perils;
(2)
the earnings or acquisition of any freight, passage money, commission, profit
or other pecuniary benefit, or the security for any advances, loans, or
disbursements is endangered by the exposure of insurable property to maritime
perils;
(3)
any liability to a third party may be incurred by the owner of or other person
interested in or responsible for, insurable property by reason of maritime
perils.
Section
2(e) of the Act defines “maritime perils” as-
“The
perils consequent on, or incidental to, the navigation of the sea, that is to
say, perils of the sea, fire, war perils, pirates, rovers, thieves, captures,
seizures, restraints and detainments of princes and peoples, jettisons,
barratry and any other perils which are either of the like kind or may be
designated by the policy”.
As
discussed above, the contract of marine insurance can be further extended as
noted in Sections 4 and 5 of the Act as follows - Section 4 of the Act defines “mixed
sea and land risks” as-
(1)
A contract of marine insurance, by its express terms, or by usage of trade, may
be extended so as to protect the assured against losses on inland waters or on
any land risk which may be incidental to any sea voyage.
(2)
Where a ship in course of building, or the launch of a ship, or any adventure
analogous to a marine adventure, is covered by a policy in the form of a marine
policy, the provisions of this Act, insofar as applicable, shall apply thereto,
but except as by this section provided, nothing in this Act shall alter or
affect any rule of law applicable to any contract of insurance other than a
contract of marine insurance as by this Act defined.
3.
NATURE AND SCOPE OF MARINE INSURANCE
Maritime
insurance, also known as marine insurance, is a specialized form of insurance
that provides coverage for risks and perils associated with marine activities,
transportation, and commerce. It is designed to protect the interests of
individuals and businesses involved in maritime trade and navigation. The
nature and scope of maritime insurance encompass various aspects related to
shipping, cargo, vessels, and other marine-related risks. Here are the key
elements of its nature and scope:
3.1.
NATURE OF MARITIME INSURANCE:
Risk
coverage: Maritime insurance covers a wide
range of risks and perils that can occur during marine activities, including
but not limited to shipwrecks, collisions, fires, piracy, theft, natural
disasters, and damage to cargo.
Indemnity:
The
primary purpose of maritime insurance is to provide financial compensation for
the insured parties in the event of an insured loss or damage. The aim is to
return them, as much as possible, to the same financial position they were in
before the loss occurred.
Contractual
agreement: Maritime insurance is based on a
contractual agreement between the insured and the insurer, typically outlined
in a marine insurance policy. The policy specifies the terms and conditions of
coverage, premium payments, and claims procedures.
Specific
coverage options: Various types of
maritime insurance policies are available, such as hull insurance (covering the
vessel), cargo insurance (covering goods in transit), liability insurance
(covering third-party liabilities), and freight insurance (covering loss of
freight revenue).
3.2.
SCOPE OF MARITIME INSURANCE:
Marine
vessels: The scope of maritime insurance
includes coverage for different types of vessels, including cargo ships,
container ships, tankers, fishing boats, yachts, and other marine crafts.
Cargo:
It provides coverage for the cargo being transported by sea, whether in bulk,
containers, or as individual shipments. Cargo insurance can protect against
loss, damage, theft, or non-delivery of goods.
Freight
revenue: Freight insurance safeguards the
financial interests of shippers and carriers against the loss of expected
freight revenue due to covered events.
Third-party
liabilities: Maritime insurance also
covers third-party liabilities arising from marine-related incidents, such as
collisions with other vessels, damage to ports or infrastructure, or pollution
caused by a ship.
Global
coverage: Maritime insurance has a global
reach, and policies can be tailored to cover risks during international
voyages, ensuring protection across various waters and jurisdictions.
Legal
and contractual requirements: In
many cases, maritime insurance is mandated by international conventions and
local laws for ships and cargo engaged in international trade. It may also be required
by contractual agreements between parties involved in marine transactions.
4.
ORIGIN AND HISTORICAL DEVELOPMENT OF MARINE INSURANCE
4.1.
The Origin of Marine Insurance
The
origin of marine insurance is as old as historical society. The oldest forms of
insurance contracts traced are found in the form of bottomry contracts which
were practiced by the merchants of Babylon in as early as 4000-3000 BC.
Bottomry was also practiced in India by the Hindus during 600 BC. Under a
contract of bottomry, loans were granted to the merchants with the provision
that if the shipment was lost or robbed by pirates or got sunk in the deep
water the loan didn't have to be repaired. The interest on the loan covered the
risk. However, there is no evidence yet that in the present form insurance was
practiced prior to 12th Century. As the civilization progressed, insurance
cover grew with it.
4.2.
Historical Development of Marine Insurance
Global
Development
Marine
insurance is the oldest form of insurance. Under the bottomry contract, loans
were granted to merchants of Babylon with the provision that if the shipment
was lost, robbed or sunk at sea the loan did not have to be paid. The interest
on the loan covered the risk. This led to a system of credit and the law of interest
was well-developed. The contract of insurance was made an essential part of
contract of carriage. Bottomry was also anticipated and practiced by Indians in
600 BC. As the marine transportation was then very much dependent on the mercy
of winds and elements, the freight was fixed according to the season. The
sailors were also very much exposed to the risk of piracy on the open seas and
highway robbery. The vessels and merchandise were looted. Besides there were
several risks such as vessel-capturing by King's enemies or sinking of vessel,
floods etc. in the deep waters. These enormous risks phenomenal led to the
requirement of a co-operative device to safeguard the marine traders. The
co-operative device was voluntary in the beginning, but now in the modern time
it has expanded rapidly.
Marine
insurance was imported from the cities of Northern Italy where it was practiced
at about the end of the 12th Century. It became highly developed in the 15th
Century. In the year 1556, Philip II made marine insurance regulations for
Spain and in the year 1563, three ships were insured on a voyage from Hawaii to
Central America. In the year 1575, during the rule of Queen Elizabeth I,
Chamber of Assurance in the Royal Exchange was opened for the registration of
marine parcels. Subsequently, an Act of Parliament was passed in 1601 to deal
with the disputes arising out of marine insurance.
During
the period 1720-1824, two companies viz., London Assurance and Royal Exchange
enjoyed a prominent position in the field of marine insurance. With the growing
complexity of life, trade and commerce, specialized marine services were
introduced. It was only during the 18th Century that marine insurance was
started as a specialised business. In 1906, the Marine Insurance Act was passed
under British law, creating a standard operating procedure for policies that
dictates the world's policies to this day. The market for insurance on a
worldwide scale has expanded rapidly in 20th Century.
Development
in India
In
India, the growth of marine insurance has been phenomenal. It has a deep-rooted
history. It finds mention in the Vedas written by Manu (Dharmasastra) and
Kautilya (Arthsastra). It talks in terms of pooling at the time of natural
calamities such as fire, floods, famine and epidemic. But as known to the world
today, marine insurance has its origin in England. The Britishers opened seven
marine insurance companies in Calcutta between 1797 and 1810.
Since
independence Indian shipping had undergone a considerable expansion, and it
became mandatory for an Indian legislation consistent with Indian conditions,
for the smooth development of Indian marine insurance. In India the law of
marine insurance has been put in a statutory form by passing the Marine
Insurance Act, 1963. It was based on the original English law. The preamble to
the Act states that it is "an Act to codify the law relating to marine
insurance." Prior to the legislation, questions turning on this branch of
law had to be decided by the general law of Indian Contract Act, 1872 and the
British Marine Insurance Act of 1906.
The
Marine Insurance Bill, having been passed by both the Houses of Parliament,
received the assent of the President on April 18, 1963 and became an Act (Act
11 of 1963). This Act was amended by the Repealing and Amending Act, 1974 (Act
56 of 1974).
Today
marine insurance in India has assumed a vast canvas due to the expanding trade
across the globe, which involves large shipping companies that require
protection for their fleet against the perils of sea.
5.
CLASSIFICATION OF MARINE INSURANCE
Marine insurance can be broadly categorized into several main types, each
designed to cover specific aspects of risks and perils associated with maritime
activities. The main categories of marine insurance are as follows:
1. Hull Insurance: This category provides coverage for the physical hull or structure of the vessel itself. It protects the shipowner against damage to the vessel caused by various risks, including collisions, fires, grounding, sinking, and other maritime perils.
2. Cargo Insurance: Cargo insurance covers the goods or merchandise being transported by sea. It protects cargo owners and shippers from potential losses due to damage, theft, or non-delivery during transit.
3. Freight Insurance: Freight insurance, also known as freight revenue insurance, covers the loss of expected freight revenue if the shipment cannot be completed due to an insured event. It provides protection to carriers and ensures they are compensated for their anticipated earnings.
4. Protection and Indemnity (P&I) Insurance: P&I insurance covers third-party liabilities arising from the operation of a vessel. It protects shipowners, operators, and charterers from claims brought by third parties, including crew, passengers, cargo owners, and other vessels, for damages resulting from accidents or negligence.
5. Builders' Risk Insurance: This type of insurance is relevant during the construction or repair of a vessel. It covers the shipbuilder's or shipowner's interests in the vessel while it is under construction, including machinery, equipment, and materials.
6. War Risk Insurance: War risk insurance provides coverage for vessels navigating in high-risk zones or during times of war or political unrest. It protects against damage or loss caused by war, acts of hostility, terrorism, or related perils.
7. Strikes, Riots, and Civil Commotions (SR&CC) Insurance: This category covers damage or loss caused by strikes, riots, civil commotions, labor disputes, or similar events that may occur during the course of maritime operations.
8. Sue and Labor Insurance: Sue and labor insurance covers the costs incurred by the insured in taking reasonable and necessary measures to prevent or mitigate a loss. It includes expenses for salvage operations, repairs, and other actions taken to protect the vessel or cargo.
9. Loss of Hire Insurance: Loss of hire insurance compensates the shipowner for the loss of income resulting from a vessel's immobilization due to damage or repairs covered under the hull insurance policy.
10. General Average Insurance: General average is a principle of maritime law where all parties involved in a sea venture proportionally share the losses incurred for the common good, such as sacrificing cargo to save the vessel. General average insurance covers the financial contribution required from the cargo owners in such situations.
These
categories of marine insurance provide comprehensive coverage to different
stakeholders involved in maritime activities, ensuring the protection of their
interests against a wide range of risks and perils that may arise during sea
voyages and marine commerce.
5.
PRINCIPLES OF MARINE INSURANCE
Marine
insurance is based on the basis of certain principles like other insurance.
Marine insurance cannot run away from these certain principles because marine
insurance is also a contract between insurer and insured. For legalization of
the marine insurance, it should be contracted on the basis of the following
principles:
a)
Principle of Utmost Good Faith (Uberrimae fides).
A
marine insurance contract is based on the principle of utmost good faith, i.e.,
a higher degree of honesty is imposed on both parties to an insurance contract
than it is imposed on parties to other contracts. The principle has its
historical roots in ocean marine insurance. An ocean marine underwriter had to
place great faith in statements made by the applicant for insurance concerning
the cargo to be shipped. The property to be insured may not have been visually
inspected and the contract may have been formed in a location far removed from
the cargo and ship. Thus, the principle of utmost good faith imposed a higher
degree of honesty on the applicant for insurance. 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
other party.
The
practical aspect of this principle of utmost good faith takes the form of the
positive duty of the proposer or his agent to disclose all material circumstances
and not to make untrue representation to the insurer during the negotiations
for the contract. Every circumstance is material, which would influence the
judgment of a prudent insurer in fixing the premium, or determining whether he
will take the risk.
b)
Principle of Insurable Interest
The
principle of insurable interest is another important legal principle. The
principle of insurable interest states that the insured must be in a position
to lose financially if a loss occurs. A valid contract of insurance can be
entered into by a person only if he has insurable interest in the
subject-matter of insurance, i.e., if he is interested in the marine adventure.
A
person is interested in a marine adventure where he stands in any legal or equitable
relation to the adventure or to any insurable property at risk therein in
consequence of which he may benefit by the safety or due arrival of insurable
property or may be prejudiced by its loss or by damage thereto or by the
detention thereof or may incur liability in respect thereof. Thus, the
ship-owner, the cargo-owner and the person who has advanced loan on the
security of the ship or on any goods arriving by the ship and even the insurer
of the ship or cargo have insurable interest to the extent of their several
interests.
c)
Principle of Indemnity.
The
principle of indemnity is one of the most important legal principles in marine
insurance. All insurance contracts except life insurance are contract of
indemnity and are governed by Section 124 of the Indian Contract Act, 1872. The
loss caused to insured is covered by the contract itself and such loss need not
necessarily be caused to the assured by the conduct of the insurer or by the
conduct of any other person."
In
Dalby v. India and London Life Assurance Co., (1854), it was
observed that policies of assurance against both fire and marine risk are
contracts of indemnity, the insurer engaging to make good, within certain
limited amounts, the losses sustained by the assured in the buildings, ships
and effects. A life insurance contract is not a contract of indemnity.
In
simple words, indemnity is a promise from insurer side to compensate the actual
loss. The assured is entitled to be indemnified to the extent he suffers loss
or damage, not the entire value of the property insured.
In
Castellian v. Preston, (1883), it was observed that the insured
will be indemnified to the extent he suffers loss. It would be against the
public policy to allow an insured to make an income out of his loss or damage.
The assured shall get indemnity for loss, and he shall get no more. In other
words, the insured will be re-instated to the previous position after loss.
Likewise, when the property owner has been insured with many insurers, all the
insurers can be called upon together to pay the actual loss. When he received
the full agreed price from one insurer, the other insurers will not be liable
to pay anything to the insured though inter se they may be liable to contribute
in proportion to the amount which each has undertaken to pay to the insurer who
alone paid for the loss.
d)
Principle of Proximate Cause (Causa Proxima).
The
doctrine of proximate cause is expressed in the maxim Causa proxima non
remota spectator, which means that the proximate and not the remote cause
shall be taken as the cause of loss. It is another important principle of
marine insurance as it is applicable to marine insurance but the application is
very difficult due to the different kinds of maritime perils. It lies down that
the proximate cause (nearest cause) is to be the basis of determining the
liability of the insurer and not the remote cause. If the immediate risk is
insured, the insured will be indemnified. It means that if the risk or cause of
loss is not specifically covered under the policy, no compensation will be
paid. It is, therefore, necessary to identify the risk to determine whether it
is payable under the policy or not. When the loss is caused by more than one
cause and if one of the causes is uninsured one, the insurer shall be liable to
the extents of the effects of insured risk, if it can be separated or
ascertained. The insurer will not be liable if the effects of the insured risk
cannot be separated from uninsured one.
To
make a marine insurer liable the insured must prove three things-
i)
that the loss is caused by the perils of the sea;
ii)
that the peril is one that is insured against in the policy; and
iii)
that the peril insured against is the proximate cause for the loss sustained.
e)
Principle of Subrogation.
The
principle of subrogation strongly supports the principle of indemnity.
Subrogation means substitution of the insurer in place of the insured for the
purpose of claiming indemnity from a third person for loss covered by
insurance. The insurer is, therefore, entitled to recover from a negligent
third party any loss payments made to the insured. Once the insured is
compensated for loss or damage, the insurer stands in place of him and inherits
all the rights available to him against the third-party regarding
subject-matter of the insurance. Also, insurer cannot recover the claim from
third party more than the sum paid out to insured. However, if he gets more
than the compensation given to the insured, the surplus will have to be given
to the insured and the insurer cannot retain it.
In
Hobbs v. Marlow, (1978), it was decided that
principle of subrogation cannot be limited to recovery after compensation is
paid. This right may be exercised by the insurer against the third party before
payment of loss. Until and unless the insured is fully paid, he has the right
to control over any such proceedings. Also, an insurer is subrogated to the
rights and remedies of the insured who does not ipso jure enable him to sue
third parties in his own name. It will only entitle the insurer to sue in the
name of the insured, it being an obligation of the insured to lend his name and
assistance to such an action.
In
Mason v. Sainsbury, (1782), Lord Mansfield observed, every day
the insurer is put in the place of the insured.
In
Randal v. Cockran, (1748), it was held that the
plaintiff-insurers, after making satisfaction, stood in the place of the
assured as to goods, salvage and restitution in proportion for what they paid.
In
Burnand v. Rodocanachi, (1782), Lord Blackburn observed that, “if
the indemnifier (insurer) has already paid it, then, if anything which
diminishes the loss comes into the hands of the person (insured) to whom he has
paid it, it becomes an equity that the person who has already paid the full
indemnity (the insurer) is entitled to be recouped by having that amount back.”
It
must be clarified that the insurer’s right of subrogation arises only when the
insured has been fully paid. In Scottish Union and National Insurance Co.
v. Davis, (1970), the Court of Appeal rejected the claim of the insurer
as it had not paid anything to the insured in respect of the damage and,
therefore, no question of subrogation arose.
6.
CONCLUSION
In
conclusion, Marine insurance plays a crucial role in managing the risks
associated with marine activities and provides financial security to
individuals and businesses involved in the maritime industry. Its comprehensive
coverage spans various aspects of shipping, cargo, vessels, and liabilities,
ensuring a safer and more secure environment for maritime trade and commerce.
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