Shipping cargoes by sea has always been subject to risk like weather, storms, pirates or perils of the sea. Furthermore, there are other ordinary risks like cargo mishandling, simple negligence of stevedores during loading, moving, lashing, securing or safeguarding the cargo.
Maritime law imposes certain minimum liability on ocean carriers and ship operators who undertake responsibility to transport cargoes from one place to another. Minimum liability is merely potential liability. Minimum liability is subject to number of exceptions, exclusions, and defenses. Under Carriage of Goods at Sea Act, cargo claim will usually be subject to limitations of liability like $500 per package Usually, minimum liability is less than the actual value of the goods. As a result, most cargo owners procure insurance covering value of the cargo. Furthermore, cargo owner is also exposed to certain risks from participation in ship voyage:
- ship breaks down and requires salvage
- goods themselves result in some harm to others due to the nature of the cargo or improper packing
- ship is captured by pirates and ship owner must pay a ransom for the release of the ship, crew, and cargo
Cargo owner may be subject to liability, against which the cargo owner will need to insure. Marine cargo insurance cost is really minor when compared to the value of the goods. Prudent cargo owner arranges complete and clear insurance coverage in order to avoid costly disputes over responsibility for losses. Practically, marine cargo insurance market is well developed with numerous standard forms, clauses and practices that are well understood throughout the industry. Principally, marine cargo insurance is used to protect cargo owner against the loss or damage to the cargo due to defined risks. Furthermore, marine cargo insurance may also cover the cargo owner against certain liabilities like salvage or general average claims or other claims.
Generally, any person or company:
- would suffer a loss if the cargo were to be damaged
- would be exposed to liability due to some interest in the cargo
- has a sufficient interest in the cargo
is permitted to purchase insurance on the cargo. Here above interest in the cargo is known as insurable interest. Underwriters are not willing to provide insurance to a person or company that do not have an insurable interest. Providing insurance to a person or company that does not have an actual interest in cargo would undercut the purpose of insurance and would instead be equivalent to a mere wager.
Types of marine cargo insurance policies:
- All Risks Policy
- Named Perils Policy
Named Perils Policy protects cargo owner against certain specified risks only. Name of All Risks Policy can be misleading. All Risks Policy have certain exclusions and exemptions denying coverage for certain risks. Most marine cargo All Risks Policy still exclude coverage for damage caused by piracy, war, civil strife, or restraint. Generally, all marine cargo insurance policies exclude loss or damage that occurs due to the misconduct of the insured person or come about due to the inherent fault of the cargo.
All Risks Policy and Named Peril Policy does not work the same way. All Risks Policy, a loss is presumed to be covered, unless insurer can show that the loss was due to an excepted cause or breached warranty. Named Peril Policy, burden of proof is on cargo owner to show that the loss was due to a covered peril.
Almost in all cases, All Risks Policy offer broadest coverage. All Risks Policy is commonly identified in the marine cargo insurance industry Institute Cargo Clauses.
Usually, marine cargo insurance policy that offers narrowest coverage is Free of Particular Average Policy (FPA Policy). Free of Particular Average Policy (FPA Policy) covers total loss of the insured goods as a result of marine perils named in the policy and only covers partial losses if caused by fire, stranding, sinking, or collision. Two types of Free of Particular Average Policy (FPA Policy) clauses are commonly used:
- Free of Particular Average Policy (FPA Policy) American Conditions Clause only cover partial losses that can be shown to have been caused by fire, stranding, sinking, or collision
- Free of Particular Average Policy (FPA Policy) English Conditions Clause cover losses from a peril of the sea if the ship has been stranded, sunk, burned, been on fire, or been involved in a collision during the voyage; but the insured does not need to show that the loss was caused by the fire, stranding, etc.
Standard Marine Insurance Terms:
Institute Clauses A, B and C are standard marine insurance terms adopted International Underwriting Association of London. International Underwriting Association of London was formed in 1998. International Underwriting Association of London was formed by the merger of London International Insurance and Reinsurance Market Association and Institute of London Underwriters. International Underwriting Association of London are widely utilized in place of
- All Risks Policy
- With Average Policy
- Free of Particular Average Policy
Broadest marine insurance coverage is available under Clause A. Least marine insurance coverage is available under Clause C.
With Average Policy is a marine cargo insurance policy that provides greater protection to the cargo owner than Free of Particular Average Policy in that it covers partial losses caused by perils of the sea when such losses are a defined percentage of the cargo’s insured value. In addition, there are also policies which are not so limited, commonly identified as policies With Average Irrespective of Percentage Policy.
Generally, All Risks Policy exclude war related risks, piracy, strikes, riots and other civil commotions. On the other hand, war clauses and strike clauses have been developed by Institute of London Underwriters and American Institute of Marine Underwriters which are utilized to cover these risks by covering claims that would otherwise be excluded as resulting from war-related risks or due to voyages to war risk areas.
Other Institute Clauses cover specific types of cargoes like bulk oil, frozen food or coal. Generally, Marine Cargo Insurance Policy apply warehouse to warehouse. In other words, Marine Cargo Insurance Policy starts when cargo leaves shipper’s warehouse to be loaded onto the ship until the cargo is delivered to consignee’s warehouse at the destination.
Cargo owner does not need to arrange insurance for every shipment. Person or company that has multiple shipments of cargo may decide to enter into Open Policy, to cover specific types of goods under agreed standard terms and prices. Under Open Policy, insurance coverage is automatic. Cargo owner notifies the underwriter promptly of each shipment. Generally, Open Policy terms limit the amount recoverable for any particular voyage or incident.
All cargo insurance policies are not the same for all cargoes. Specifically, unique cargoes often require unique insurance policies, because unique cargoes may face unique risks. Certain industries, that produce unique cargoes, have developed specialized clauses to cover the unique nature of their cargoes. Radioactive cargoes may be insured against nuclear risks or costs of decontamination of ship in the event of spillage. Grain cargoes may be insured against water damage, mold or infestation. Fragile cargoes may be insured against breakage. Liquid cargoes may be insured against spillage.
Cargo owners are not limited to Institute Clauses. Cargo owners can always put out a request for insurance against specific risks for specific cargoes. Marine Cargo Insurance Underwriters prefer to keep their risks predictable and as standard as possible. Usually, Marine Cargo Insurance Underwriters issue proposals for coverage as requested. Marine Cargo Insurance Underwriters are likely to do so with premiums and conditions that they view necessary to reflect their risk and discomfort. If Marine Cargo Insurance Underwriters are proposing an extraordinarily high premium or overly restrictive conditions, that is a clear sign that Marine Cargo Insurance Underwriters are reluctant to say no to coverage. But, Marine Cargo Insurance Underwriters would prefer not to undertake risks.
Usually, Freight Forwarder offer to procure standard cargo insurance as part of its services and it might be reasonably practical. In some cases, when cargo owner makes multiple shipments, prudent cargo owner gets in touch with direct relationship with marine insurance broker. Marine insurance broker is often better able to shop and search insurance market and find the best coverage and rate.
Much of marine cargo insurance policies are standard. Marine cargo insurance policies are based on well-established Institute Clauses. On the other hand, each marine cargo insurance underwriter may insert unique clauses, procedures, or limitations. Regardless of whether an insurance policy is provided by Freight Forwarder, procured specially by marine insurance broker or obtained directly from insurance underwriter, prudent cargo owner should carefully review insurance policy in order to ensure that policy provides the necessary coverage.
Generally, all insurance policies require cargo owner to act with reasonable dispatch when cargo owner becomes aware of covered loss. Insurer may deny coverage if the insured cargo owner waits too long to notify the insurer of the claim. Because, insurance underwriters will typically notify surveyor or expert to evaluate the claim and determine whether insurance underwriters may pursue ship owner or others to recoup some portion of the damages.
Besides prompt notice, cargo owner will also be required to provide reasonable cooperation to the insurance underwriters in their investigation of the claim. Cargo owner is required to provide the insurance underwriters’ surveyor:
- complete file on the claim
- original bills of lading
- commercial invoice
- packing list
- customs submissions
- mate’s receipt
- survey reports
- other related documents