Marine Insurance 101!

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Marine Insurance is the oldest branch of Insurance and is closely linked to the practice of Bottomry which has been referred to in the ancient records of Babylonians and the code of Hammurabi way back in B.C.2250. The first known Marine Insurance agreement was executed in Genoa on 13/10/1347 and marine Insurance was legally regulated in 1369 there. By the end of the seventeenth century, London’s growing importance as a centre for trade was increasing demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house on Tower Street in London which became a popular haunt for ship owners, merchants, and captains, a reliable source of the latest shipping news.. Lloyd’s Coffee House was the first marine insurance market soon thereafter!

BACKGROUND

International business carries with it significant risks. The importing and exporting of goods can expose you to massive financial losses should your international shipments be damaged or destroyed in transit.

Marine insurance is an important component of international trade and commerce and subject to international regulations at every stage of operations. It is governed by the Marine Insurance Act 1963 in India and guided by the various clauses formulated by the Institute of London Underwriters (ILU) and the international commercial terms known as ‘Incoterms’.

MEANING OF MARINE INSURANCE

A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured, against transit losses, damage to the carrier and so on (losses incidental to transit).

A contract of marine insurance is conventionally extended beyond the high seas to protect the insured against losses on inland waters , air transit as well as road transportation.

As sub branches of the area of Marine insurance, the subject includes

a) Hull Insurance:

Hull insurance is the insurance against loss caused by damage or destruction of waterborne craft or aircraft to the owner. It is the insurance of the ship which includes all the articles and pieces of furniture in the ship. Hull and machinery insurance are done to protect the ship owner and investment in the ship. It is a property insurance which covers the ship itself, the machinery and equipment. If the ship is damaged, the owner of the ship gets indemnity from the insurance company. This type of marine insurance is usually, taken out by the owner of the ship in order to avoid any loss of the ship in case of any mishaps occurring.

b) Cargo Insurance:

Cargo insurance is also called marine cargo insurance and provides insurance cover in respect of loss of or damage to goods during transit by rail, road, sea or air. Thus cargo insurance concerns the following : (i) export and import shipments by ocean-going vessels of all types, (ii) coastal shipments by steamers, sailing vessels, mechanized boats, etc., (iii) shipments by inland vessels or country craft, and (iv) Consignments by rail, road, or air and articles sent by post.

It is insured by the owner and insurance of goods shipped through waterways is known as cargo insurance. If the cargo is ruined, the owner gets the indemnity from the insurance company.

c) Marine Liability Insurance:

Liability insurance is that type of marine insurance where compensation is bought to provide any liability occurring on account of a ship crashing or colliding. In the course of the marine adventure, one ship may collide with another ship. The goods of another ship may lose. A crew member traveling with expensive items, such as laptop computers, gold watches etc. should make sure that he has such items separately insured.

d) Freight Insurance:

To transfer the goods from one port to another, the amount paid to the owner of the ship is called freight. The payment of such freight can be made in two ways: either in advance or after the ship reaches its destination safely. Freight insurance offers and provides protection to merchant vessels’ corporations. It stands for the chance of losing money in the form of freight, in case the cargo is lost due to the ship meeting in an accident. This type of marine insurance solves the problem of companies losing money because of a few unprecedented events and accidents occurring.

OPERATION OF MARINE INSURANCE

Most contracts of sale require that the goods must be covered, either by the seller or the buyer, against loss or damage. Who remains responsible for affecting insurance on the goods, which are the subject of sale depends on the terms of the sale contract. A contract of sale involves mainly a seller and a buyer, apart from other associated parties like carriers, banks, clearing agents, etc. Sales Contract Banks Clearing Agents Carriers etc. Buyer Seller

Types of Sales Contracts and Responsibilities

Free on Board : The seller is responsible till the goods (F.O.B. Contract) are placed on board the steamer. The buyer is responsible thereafter. He can get the insurance done wherever he likes.

Free on Rail : The provisions are the same as in (F.O.R. Contract) above. This is mainly relevant to internal transactions.

Cost and Freight : Here also, the buyer’s responsibility (C&F Contract) normally attaches once the goods are placed on board. He has to take care of the insurance from that point onwards.

Cost, Insurance & Freight: In this case, the seller is responsible Freight for arranging the insurance upto (C.I.F. Contract) destination. He includes the premium charge as part of the cost of goods in the sale invoice.

The normal practice in export /import trade is for the exporter to ask the importer to open a letter of credit with a bank in favour of the exporter. As and when the goods are ready for shipment by the exporter, he hands over the documents of title to the bank and gets the bill of exchange drawn by him on the importer, discounted with the bank. In this process, the goods which are the subject of the sale are considered by the bank as physical security against the monies advanced by it to the exporter. A further security by way of an insurance policy is also required by the bank to protect its interests in the event of the goods suffering loss or damage in transit, in which case the importer may not make the payment.

For export/import policies, the-Institute Cargo Clauses (I.C.C.) are used. These clauses are drafted by the Institute of London Underwriters (ILU) and are used by insurance companies in a majority of countries including India.

TYPES OF POLICIES

a) Specific Policy

Provides cover against specified perils under marine cargo sent/received during the policy period

b) Open Policy

– Designed for firms and establishments with huge volumes of trade and transactions

– Assures automatic and continuous insurance protection

– Extends cover for all shipments sent/received during the policy period

c) Open Cover

– Similar to Open Policy

– Covers loss or damage to cargo where specific stamped certificate is issued for declaration made

Covers loss or damage to cargo in relation to and in connection with its carriage by:

– Land (whether by motor vehicle or by railway),

– Waterways (by ship, which includes every description of vessel used in navigation);

– Air (by aircraft used for the transport of cargo, among others); and government or private postal services

Provides cover against loss or damage to cargo during transit from one place to another\

Coverage provided under Marine Cargo policies range from a restricted form of cover, e.g., fire and lightning perils only, to the widest available form of cover, namely, all risks, at the option of the insured.

These policies are issued on a “from and to” basis and the cover commences once the goods leave the place of origin named in the policy and terminates on delivery at the place of destination.

Sometimes these policies are also issued in terms of duration of the voyage, in which case the cover commences on the date and time specified for the same in the policy. Inland specific transit will exclude terrorism.

The insurance rate depends on a variety of factors such as the nature of the cargo, scope of cover, packing, mode of conveyance, distance , the port and its handling abilities, piracy risks, and past claims experience.

PRABHUDAS LILLADHER SERVICES

Prabhudas Lilladher offers Marine Cargo Insurance via its HDFC Ergo Agency tieup which not only provides the best protection for your cargo, but also understands the importance of swift response and efficient service in handling your claims. Catering to both importers’ and exporters’ needs, the coverage is comprehensive and flexible with international shipments protected from the time the goods leave the seller’s warehouse until they reach the Buyer’s warehouse.

Policies are customisable to your needs, with a specific policy to cover each single consignment.

Please mail us at insurance@plindia.com to get in touch with our Insurance experts who can help you navigate the choppy waters of international trade, risklessly!

 

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