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Organising Cargo Insurance |
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In international sales transactions, with goods generally having to be transported over long distances and being subject to a variety of hazards en route, the risk of loss of, or damage to, goods is relatively high. If the loss or damage does occur, profitability will be lost unless the goods are covered by insurance. Marine cargo insurance is aimed at removing, as far as possible, the financial burden of the risks of loss or damage associated with the transportation of goods between exporters and importers, and placing it with specialist insurance underwriters. These underwriters are skilled in assessing risks, and they manage reserve funds (made up of premiums paid by others) out of which those who suffer losses can be compensated.
Insurance enables the liability for loss or damage to be shared out equitably amongst the many instead of having to be borne by, say, a single cargo owner or shipowner. By paying an insurance premium, to an insurer (e.g. an insurance company or a Lloyd's underwriter), the assured (e.g. the exporter or importer) earns the right to claim compensation from the insurer for a loss arising from any of the risks covered by the insurance policy.
Marine insurance used to refer to only the limited insurance of ships and their cargoes. Today, however, the term really means 'transportation insurance' and covers all modes of transport from source to destination, i.e. road haulage, airfreight, rail, and/or sea, or even by post. Marine insurance may, in fact, apply to the movement of cargo which involves no ocean transport at all.
Some of the most significant developments in marine insurance had their origins in a London coffee house owned by a Mr Edward Lloyd between 1670 and 1680. It was here that merchants and shipowners used to gather to discuss insurance and other business matters. Insurance was conducted on an individual basis, with those seeking insurance asking reputable merchants (who acted as brokers) to seek other merchants willing to take responsibility for a portion of a marine risk (i.e. provide insurance cover) by writing their names under a statement of the risk on a slip of paper. It is from this practice that the term 'underwriter' is derived. Lloyd's of London, as it is now known, has become a corporation which supplies to its members all facilities (e.g. administrative) required by them for the efficient performance of their underwriting businesses. Lloyd's itself, however, does not do any underwriting. Membership of Lloyd's is on an individual basis, i.e. no insurance company may become a member, and the assets, expertise and character of individual applicants concerned, are subject to stringent investigation by the Lloyd's Committee. Lloyd's, together with the insurance companies, forms the 'London market', the most important marine insurance market in the world.
a) The assured
The buyers of marine cargo insurance are those parties who move cargo around the world - mainly exporters and importers. The assured pays an insurance premium to the insurer, which provides the right to claim compensation in the event of loss or damage arising from any of the risks covered by the particular insurance policy.
b) Underwriter
The sellers of marine insurance are the underwriters who may be local company underwriters if they work for one of the companies active in the marine insurance field, or they may be underwriting members of Lloyd's. Marine underwriters are specialists in assessing risks relating to goods in transit. In return for a premium, the underwriter in effect 'takes over' the whole, or portion, of the assured's risk. The premium received by the underwriter is used to pay for reinsurance cover as protection against major catastrophes, and to pay for any losses suffered by the assured in terms of the type of cover provided by insurance policy, sets aside prescribed reserves and meets day-to-day administrative costs and is (hopefully) left with a profit as a 'reward' for carrying the risk.
South African marine insurers operate under the umbrella of The Association of Marine Underwriters in South Africa (AMUSA), a body which regulates technical matters pertaining to the industry and liaises with the brokers' representative committee. Marine insurance may not be placed with underwriters/companies which are not registered in South Africa to transact marine insurance business and therefore it is only in unusual circumstances e.g. when an amount is too large for the local insurance market to absorb, that the Registrar of Insurance in Pretoria may permit business to be placed with non-registered insurers e.g. foreign insurance companies. Lloyd's is registered in South Africa.
c) Insurance company
An insurance company employs underwriters who transact business on behalf of the company. Unlike Lloyd's members, company underwriters are not personally liable for the risks which they accept. Few insurance companies operate solely in the field of marine insurance and those that do are nearly all owned by large general insurance corporations. Many insurance companies, however, have a marine insurance division and may be approached either directly or through a broker.
d) Insurance broker
Insurance business is usually conducted through intermediaries, known as insurance brokers. Ordinary businesses normally lack the necessary expertise and insurance brokers act on behalf of the buyers of insurance to assess the extent of cover which is necessary, that which is available, and whether or not a particular premium rate is reasonable. Brokers 'shop around' for insurance at competitive rates on behalf of their clients, Lloyd's brokers are the only intermediaries who are permitted to place insurance with Lloyd's underwriters. The South African Insurance Brokers Association (SAIBA) represents the interests of member insurance broking firms practising in South Africa. Regional sub-committees deal specifically with marine insurance matters. The Association is controlled by a National Council.
Whilst marine insurance in its modern form originated at Lloyd's with London still being the Mecca of the industry, it is by no means the only market and much marine insurance is transacted by numerous companies throughout the world. Many South African insurance companies are linked to large overseas parent companies and are able to provide a professional and efficient service at competitive rates.
a) Insurable interest
In legal terminology, the shipment of a consignment of goods is called an adventure or venture. A person may only buy insurance in a marine venture if there is an insurable interest - i.e. that the person stands to benefit, or expects to benefit from the safe and due arrival of the insured goods and will be adversely affected by its loss or any damage caused to it. Different persons may have an insurable interest in the goods at risk at any one time, e.g. the exporter, or confirming house or bank which is advancing funds to the exporter under, say, a letter of credit.
Unlike other branches of insurance, the assured need not have an insurable interest at the time of effecting the insurance, but in order to recover under the policy, the person must be 'interested' at the time of the loss. However, there must at least be an expectation of acquiring an interest when entering a contract with the insurers.
In an export transaction, it is either the buyer's or the seller's responsibility to arrange insurance cover for the goods in transit. The arrangements made will vary with the agreed trade terms (Incoterms) and will reflect the passing of the insurable interest from one party to another. It is not necessary, however, for each party to take out separate insurance cover - one party should always take out the cover on a warehouse-to-warehouse basis, and, in certain circumstances, will cede or assign the policy to the next party.
The interest of an exporter who is selling on an f.o.b. basis, for example, is transferred when the goods pass the ship's rail; the risk moves from the seller to the buyer, and the buyer becomes the person who acquires an insurable interest and should therefore arrange marine insurance for the voyage.
b) Utmost good faith
In the formation of a contract of marine insurance, the principle of utmost good faith ('uberrima fides' in Latin) must be observed by both the assured and the insurer. Before a contract is concluded, the assured must disclose to the insurer all material circumstances of which s/he is aware which could affect the risk s/he is asking the insurer to bear.
A material circumstance is something that will influence the judgement of an underwriter in fixing a particular premium, or in deciding whether or not he will accept the risk in the first place or on what terms. For example, the dangerous nature of a particular export product must be declared.A marine underwriter does not normally inspect the goods or the conveyance(s) which will be used to transport an exporter's goods, and so s/he must rely on the integrity of the assured to disclose all relevant facts. An exporter, for example, must pack his merchandise in a manner suitable to withstand the risks of transit. If s/he misleads an insurer into believing that the packing of the goods is adequate when, in fact, it is inferior, and subsequent breakages occur, the insurer may refuse a claim from the assured. Any non-disclosure of a material fact entitles the insurer to avoid the contract, irrespective of whether the non-disclosure was intentional or inadvertent.
c) Indemnity
The contract of marine insurance is a contract of indemnity, i.e. in the event of the assured experiencing financial loss or having to incur certain expenses arising from loss of, or damage to, the goods caused by any of the perils stated in the insurance contract, the insurer undertakes to compensate the assured for the financial loss s/he has suffered. A corollary of the principle of indemnity is that of subrogation, i.e. underwriters acquire, in terms of common law, any rights which the assured may have against third parties such as carriers. The assured, therefore, may only recover from one source, e.g. the insurer, in respect of loss or damage.
The basic instrument in marine insurance is the policy.
An insurance policy is the evidence of a contract between the assured and the insurer, and its principal purpose is to define the terms of the agreement between the assured and the insurer.
Insurance certificates are often, for convenience, issued as evidence of the existence of policies. The premium is the amount payable by the assured to the insurer when the policy is issued. Insurance premiums vary according to the extent of cover required, the susceptibility of the goods to loss or damage, the voyage concerned, the vessel/conveyance used to carry the goods and the assured's previous claims record.
According to Incoterm c.i.f. the minimum cover which the exporter is obliged to provide his buyer with is insurance to the value of c.i.f. + 10% for total loss only. In practice, this is inadequate (as this amount seldom covers import duty, costs such as land transportation at destination, etc.) and the exporter normally insures for all insurable risks for a value of c.i.f. + 10% or more if mutually arranged with the buyer.
a) Types of policy
There are two types of marine insurance policy:
- Facultative policy (also known as "one-off")
A facultative policy covers a single shipment. Every risk is discussed separately and a premium agreed upon. This approach is time-consuming and would become very tedious for the exporter who regularly enters into export transactions.- Open policy
Under an open policy, all export shipments, within the scope of the insurance, are automatically insured. Details of a particular shipment must, however, be declared when they become known. It frequently happens that a transit commences before the exporter and/or the consignee becomes aware of it and, in such a case, the open policy provides automatic protection. The cover for each individual shipment insured under an open policy is evidenced by the issue of insurance certificates.The standard marine insurance policy contains the following information:
- an agreement by the insurer to provide insurance cover in return for the payment of the premium
- the name(s) of the insurer(s)
- the policy number
- the name of the assured
- the subject matter insured
- the value to be covered. This should also include, for example, freight charges, import duty, anticipated profit on the consignment, etc.
- the premium amount
- the description of the voyage
- the name or description of the vessel or other conveyance
- the scope of insurance cover, e.g. 'all risks including war and strikes'
- the claims procedure including details of where claims will be paid and in which currency
- reference to the clauses which are to apply.
The (UK) Marine Insurance Act of 1906 provides the basis for marine insurance contracts and, within the legal parameters laid down in this Act, the Institute of London Underwriters have approved numerous 'clauses' defining the risks covered, circumstances excluded, etc. to be incorporated into insurance policies. Some of these have broad application and are therefore in everyday use. Others are specific to certain trades and classes of goods. The tenets of the Marine Insurance Act, and the Institute Clauses, have been widely adopted amongst trading nations, including South Africa.
The standard policy document represents only the skeleton of a marine insurance contract. It is the clauses, which are incorporated by attachment to the policy, that are the essence of the contract, but the policy may contain, by agreement, specific wordings which extend or restrict the basic cover by imposing, for example, warranties, special conditions, a franchise or an excess.
The main clauses are:
- Institute Cargo Clauses which consist of:
- Institute Cargo Clauses (A)
- Institute Cargo Clauses (B)
- Institute Cargo Clauses (C)
- Institute Cargo Clauses (Air)
- Institute War Clauses
- Institute Strikes Clauses
- Institute Trade Clauses
- Additional Clauses
- Additional Terms
Each set of clauses is self-contained and designed to stand on its own. The clauses are divided into sub-clauses which are arranged in a logical sequence, viz.
Risks covered: This group of clauses lists those risks actually covered in each case.
Exclusions: Normally, underwriters will indemnify a cargo owner against certain occurrences. The major exclusions include:
- misconduct of the assured
- ordinary leakage or loss in weight
- inherent vice
- insufficiency or unsuitability of packing or preparation
- delay
- nuclear weapons of war
- wars
- strikes, riots and civil commotions
- insolvency of shipowners
- unseaworthiness or unfitness of vessel, container or conveyance
- radioactive contamination arising from, for example, nuclear fuel or nuclear waste, or any weapon of war employing atomic or nuclear fission.
Duration of cover: i.e. the definition of the point at which the risks are the responsibility of the insurer and the point at which the insurer is then relieved of responsibility for the risk.
Claims
Benefit of insurance
Minimising losses: It is the responsibility of the assured (and his agent or forwarder) to take measures to avoid or minimise any loss. It is also the responsibility of the assured to reduce the possibility of damage to goods, for example, by removing goods threatened with damage or loss from the source of the risk, such as a burning warehouse, by claiming promptly on every culpable party, etc.
Avoidance of delay
Law and practice
1. INSTITUTE CARGO CLAUSES
These clauses are detailed in reverse order for ease of explanation. The Institute Cargo Clauses build upon one another in the following way: (C) provides cover against risks; (B) incorporates (C) and provides cover against additional risks; (A) incorporates (B) and provides cover against further risks. Thus, the insurer will incorporate one of Institute Cargo Clauses, i.e. (A), (B) or (C), into an insurance policy, depending on his assessment of the risk and the extent of cover most appropriate in the circumstances.
1.1 Institute Cargo Clauses (C)
These cover loss of, or damage to, the goods reasonably attributable to the following:
- accident to the conveyance, such as crashing of aircraft, fire, explosion, stranding, grounding, sinking or capsizing, overturning or derailment
- collision of the vessel, craft or conveyance with any external object other than water
- discharge of cargo at a port of distress
- loss of, or damage to, the goods caused by jettison and general average sacrifice
- general average and salvage charges.
Institute Cargo Clauses (C) are generally used for shipment of bulk cargo.
1.2 Institute Cargo Clauses (B)
These cover the goods against loss or damage attributable to any one of the risks covered by Institute Cargo Clauses (C) as well as:
- earthquakes, volcanic eruptions or lightning
- washing overboard
- entry of water (i.e. sea, lake or river) into the vessel, hold, conveyance, container, or place of storage
- total loss of any pack lost overboard or dropped whilst loading/unloading
Where necessary, supplementary risk cover can be added, e.g. in respect of theft, pilferage, non-delivery, malicious damage, etc.
1.3 Institute Cargo Clauses (A)
These cover the cargo for all risks of physical loss or damage, subject to the above-mentioned exclusions.
1.4 Institute Cargo Clauses (Air)
These are similar in scope to the Institute Cargo Clauses (A) except they are used specifically for airfreight.
2. Institute War Clauses
The purpose of these clauses is to provide cover against the risks of war/warlike operations or activities. If one were shipping goods to a 'war zone', the premium rate would be very high. These clauses are only applicable when goods are being transported by sea or air or international post. This cover does not operate during land transit.
3. Institute Strikes Clauses
These cover loss or damage caused by the action of strikers, locked-out workmen and the like. They also cover loss and damage 'caused by any terrorist or person acting from a political motive'. This, however, does not confer full political risk cover, e.g. a civil war is not covered.
4. Institute Trade Clauses
The Institute Cargo Clauses are not used for all types of cargo where there is a special 'trade risk' (i.e. related to the specific nature of a product), specialised clauses are used. These clauses have usually been formulated in conjunction with the trade body concerned and are based on the Cargo Clauses. Examples of trade clauses are those relating to the following commodities: coal, oil, corn, flour, frozen meat and produce, raw sugar, rubber and timber.
5. Additional clauses
These may be added to a policy to ensure cover for specific risks not otherwise insured against in the Institute Cargo Clauses e.g. Malicious Damage Clause, or Institute Replacement Clause.
6. Additional terms
Apart from the printed clauses which may be attached to the insurance policy, there may be typewritten:
- exclusions
- warranties, i.e. conditions imposed upon the assured with which he must comply, e.g. 'Warranted packed in a container'
- excesses, i.e. a pre-determined monetary amount or a percentage of the shipment value which is deductible from the value of a claim
- franchises, i.e. a percentage below which the underwriter will not consider any claim but above which the whole loss will be recoverable. Thus, where a policy contains a franchise clause, the assured must suffer a certain level of loss before any compensation is payable. Once that level is reached, however, compensation is payable in full.
- malicious damage
A claim must be based on a loss which is proximately caused by a peril insured against in the policy. Claims for losses which have been caused by uninsured perils, e.g. those specifically covered by or excluded in the policy, will be rejected.
Losses may be one of two types: total loss or partial loss.
a) Total loss can be one of the following:
- Actual total loss: when the assured's goods are no longer 'a thing of the kind insured' or are irretrievably removed from the assurers use.
- Constructive total loss: when the goods are abandoned because their actual loss seems unavoidable, or the cost of recovering the goods would exceed the insured value.
- Total loss of part: when a part of the consignment is destroyed but the rest arrives safely at its destination.
b) Partial loss can either be
- General average loss
General average loss refers to deliberate partial loss incurred as a result of the voluntary actions of the shipowner, or the ship's master, to save the voyage if it is in danger. The voluntary actions might be, for example:
- jettisoning cargo in order to lighten the ship which is stranded on a reef
- pumping water into the ship's hold to quench a fire
- having the ship towed to port for repairs as a result of engine failure.
- Particular average loss
Particular average loss refers to a fortuitous partial loss which affects a particular cargo owner only, such as the owner of a crate which was dropped during the loading of the vessel. A claim for a particular average loss is based on the proportion of the invoiced value which has been lost. This proportion is applied to the insured value in order to arrive at the amount of compensation payable. These contributions are levied pro rata on all the parties who have an interest in the safety of the voyage. These include the owner and/or the charterer of the vessel, the master and crew, and each owner of cargo on board.
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