In shipping business, ship owners must have an appropriate and complete insurance for their ships. Despite the best education, training of officers and other technological systems on board, ships still involve in catastrophic accidents. Marine insurance is very similar to other types of property insurances. Marine insurance has a long history and based on rich tradition. Ships confront with variety of risks during ocean voyages, at the ports and at the shipyards. Risks like collisions with other ships, collisions with stationary objects, storms, fire, piracy, and armed attacks. Ship owners and third parties in shipping must consider the need to insure:
- ship’s hull and machinery against property damage and loss
- ship’s cargo from theft and loss
- ship’s crew from personal injury, death, and disability
- the ship, its owners, managers, charterers, officers, crew, and cargo against liability to third persons for damages due to personal injury, death, property damage, pollution, and other losses.
Specific marine insurance products available to alleviate above risks:
- Hull and Machinery (H&M) Insurance
- Protection and Indemnity (P&I) Insurance
- Cargo Insurance
- Pollution Insurance
- Longshoreman and Harbor Worker Compensation Act (LHWCA) Insurance
- Kidnap and Ransom (K&R) Insurance
- War Risk P&I Insurance
- War Risk Hull Insurance
Marine insurance is a maritime contract governed by laws. In the United States, marine insurance is covered under federal maritime jurisdiction. Insurance law has been left to the states by well-established federal tradition and statutory enactments like McCarran Act. United States Supreme Court has held that marine insurance contracts, are generally subject to state law, with the choice of law dependent upon which state has the most significant contacts with the place of contracting, the place of contract performance and similar factors. United States Federal Law may apply where there is a long-standing rule of federal maritime law or where there is a finding that the interests of national uniformity necessitate the application of a uniform rule across state lines. Generally, marine insurance contracts are interpreted like other contracts. Marine insurance contracts are strictly construed against the insurer (the party in an insurance contract undertaking to pay compensation) and liberally construed in favor of the insured person or company. Nevertheless, general rule tends to be ameliorated where the insured is a sophisticated party and has engaged a sophisticated broker. Marine insurance operates as an indemnity of insured person or company. Insured person or company must first make a payment to a third party to be entitled to an indemnification from the insurance company. If the insured person or company is able to avoid liability to a third-party claimant, then there is no claim to be reimbursed by the insurance company. That will be true whether payment to the third party is avoided based on a substantive legal decision, due to limitation of liability or even due to bankruptcy of the insured party.
In some cases where the law of the state applies and permits direct action against the underwriters through laws commonly known as direct action statutes, a claimant may be able to avoid this rule. For this reason, state law applicable to marine insurance might be a critical issue for a maritime plaintiff. Uberrimae Fidei is a Latin word which means with the utmost good faith. Marine insurance contracts are entered into by the parties under Uberrimae Fidei standard which requires the insured person or company to disclose all circumstances known to the insured that materially affect the risk to be insured person or company. Insured person or company who fails to disclose all material facts to the marine insurer risks loss of insurance coverage. Doctrine of Uberrimae Fidei applies with particular strictness to hull and machinery insurance policies.
Marine Insurance Providers:
- Traditional insurance companies throughout the world
- Protection and Indemnity Clubs (P&I Clubs)
Protection and Indemnity Clubs (P&I Clubs) have become the leading providers of protection and indemnity and other marine insurance services for ship owners. Protection and Indemnity Clubs (P&I Clubs) provide insurance cover to their members who are ship owners and operators. Protection and Indemnity Clubs (P&I Clubs) are mutual assurance entities. Protection and Indemnity Clubs (P&I Clubs) are owned by their members rather than third-party stockholders. Day-to-day management of the Clubs is conducted by managers hired by the Protection and Indemnity Clubs (P&I Clubs) members. Protection and Indemnity Clubs (P&I Clubs) members pay scheduled calls to fund the P&I Clubs’ resources, instead of paying fixed premiums. Annual amount of calls required are determined by P&I Clubs’ managers, based on anticipated operating expenses and claims. Furthermore, P&I Clubs provide very efficient insurance services because any profit is retained for the benefit of the individual members. P&I Clubs’ members face the risk that expenses or claims could exceed estimates, in that case P&I Clubs’ members may be subject to supplemental calls to restore the P&I Clubs’ resources to the necessary levels. Usually, P&I Clubs provide a high level of service to their members, including loss prevention guidance and the ability to obtain letters of undertakings or bonds to permit the release of ships from arrest or detention. P&I Clubs have networks of professionals around the world who are available to assist members with any legal or other issues that may arise, from arrests to port-state control detentions. P&I Clubs’ networks of professionals are called correspondents. P&I Clubs’ networks of professionals may include ship agents and maritime attorneys who serve as general problem solvers for the P&I Clubs’ members. Top thirteen (13) Protection and Indemnity Clubs (P&I Clubs) formed the International Group of P&I Clubs, known as the International Group or IGA. International Group of P&I Clubs (International Group or IGA) represents approximately 90% of the world’s commercial ships. International Group or IGA has significant influence in maritime matters. International Group or IGA represents its members in front of International Maritime Organization (IMO), national governments and the European Union. International Group or IGA (Thirteen P&I Clubs) have a shared loss pooling and re-insurance agreement under which ship owners have access to approximately $5.7 billion in coverage. International Group or IGA (Thirteen P&I Clubs) members:
- American Steamship Owners Mutual Protection and Indemnity Association
- Assuranceforeningen Skuld
- Gard P&I (Bermuda) Ltd.
- The Britannia Steam Ship Insurance Association Limited
- The Japan Ship Owners’ Mutual Insurance Association Limited
- The London Steam Ship Owners’ Mutual Insurance Association Limited
- The North of England Protecting & Indemnity Association Limited
- The Shipowners’ Mutual Protection and Indemnity Association (Bermuda) Limited
- The Standard Club Ltd.
- The Steamship Mutual Underwriting Association (Bermuda) Limited
- Sveriges Angfartygs Assurans Forening (The Swedish Club)
- United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited
- The West of England Ship Owners Mutual Insurance Association (Luxembourg)
Main types of marine insurance:
- Protection and Indemnity
- Hull and Machinery
- War Risk
Protection and Indemnity Insurance provides protection to the ship owner and other covered persons against third-party liabilities arising from the operation of the ship. Hull and Machinery Insurance protects against loss of the ship or damage to the ship or its machinery and similar risks. Since both protection and indemnity and hull and machinery insurance typically exclude losses arising from war, terrorism, piracy or violence.
Usually, ship owner must ensure to the insurance provider these warranties:
- Warranty of absolute good faith (Uberrimae Fidei): This warranty means that ship owner must provide all information material to the risk being insured, whether requested or not, and may not mislead or withhold information from the insurer. A breach of this warranty may render an insurance policy void even if the casualty does not relate to the withheld information.
- Navigational limits: Insurance policies usually set navigational limits such that the ship owner warrants to stay within those limits.
- Use warranties: ship owner will typically warrant the type of use of ship, such as for pleasure, commercial, or the like, and the use of the ship otherwise may void the coverage.
- Seaworthiness: ship owner usually warrants that the ship is seaworthy at the inception of the voyage. The basis of this warranty is that insurance covers the ship against perils of sea or accidents, but not ship owner’s failure to maintain the ship such that it can sail and safely achieve its purpose otherwise.
Insured person or company need to give notice of a claim immediately. Generally, marine insurance policies require prompt notice of a claim. Courts have determined that notice long after the claim arose voids coverage even when the Protection and Indemnity Club (P&I Club) was not prejudiced by the delay. It necessary that the insured person or company must have an insurable interest in the subject matter of the insurance for the policy to be valid. Protection and Indemnity Insurance covers claims against the ship brought by third parties who have been injured or damaged by the ship’s operations. Protection and Indemnity Club (P&I Club) providing protection and indemnity insurance issue rules rather than policies. Rules are setting out the terms of insurance coverage, insurance exclusions and other terms of insurance. Such rules typically require the ship owner to comply with international maritime conventions as a precondition to the provision of coverage.
Hull and Machinery (H&M) Insurance covers:
- risk of loss of a ship
- costs due to damage to the ship or its machinery
- other costs due to salvage incidents
Actual payment under hull and machinery coverage is typically limited to the market value of the ship at the time of the incident giving rise to the loss, damage, or other costs. When ship is involved in a serious accident, insurance company may declare the ship as constructive total loss. If a ship is Constructive Total Loss, insurance company pay ship owner the market value of the ship and thereby obtain title to the ship to either sell or scrap. Actual Total Loss means the total destruction of the ship or that the ship has been damaged beyond the physical ability to repair. Constructive Total Loss means that the ship has been damaged to the point that the likely cost of repair would not be justified in view of the current value of the ship. A ship that has sunk is generally an Actual Total Loss. Insurance terms for hull and machinery insurance policies are largely standardized and identified as Institute Clauses or Institute Warranties issued by organizations such as the Institute of London Underwriters or the American Institute of Marine Underwriters. Hull and Machinery Policies cover ship collisions. Traditional Hull and Machinery Policies only covered three-fourths (3/4) of the cost of running down another ship on the theory that full coverage would remove the incentive for a ship owner to avoid collisions. Most policies today offer full collision coverage sometimes referred to as 4/4 collision coverage. One of the reasons that Protection and Indemnity Club (P&I Club) were formed was for ship owners to cover the uncovered one-fourth (1/4) of collision liability which is not covered by traditional Hull and Machinery Policies. Depending on insurance policy terms, insurance companies might be liable to pay for wreck removal in the event of a serious accident. Generally, if a sunken or stranded ship must be removed by law, Hull and Machinery Insurance company will cover the costs of such wreck removal. If the removal is not required by law, the ship owner may be responsible for those costs if it wants to recover the ship. Marine insurance policies contain subrogation rights. Subrogation is the right of the person paying the claim, in other words insurance company, to step into the shoes of the insured party and pursue that party’s rights against third parties. Subrogation is the insurance company’s right to recover payment from a negligent party. Subrogation rights are important where a particular harm has more than one cause, such as where both ships may be a party at fault in a collision. Marine insurance policies do not cover risks arising from war or violence. Generally marine insurance policies exclude war risk. War Risks include losses stemming from war, civil war, revolution, rebellion, insurrection, civil strife, and terrorism. In addition, warranties regarding navigational limits or specific identification of areas where a ship may not steam, such as the territorial waters of Iraq or Iran, create similar war risk limitations for ship owners. Ship owners purchase separate War Risk Insurance coverage for war and terrorism related risks at an extra premium. Insurance companies typically reserve the right under such coverage to identify specific excluded geographic areas to account for a change in circumstances. In some highly risk areas, cost of obtaining war risk insurance is commercially prohibitive. In such situations, some governments step into the breach and provide general war risk coverage to ensure that ships are able to operate in areas to support some government policy. United States Maritime Administration is authorized by law to insure against war risk loss or damage when commercially available war risk insurance cannot be obtained on reasonable terms and conditions.
United States Maritime Administration is authorized to provide:
- War Risk Hull and Machinery Insurance
- War Risk Protection and Indemnity Insurance
- Other forms of war risk insurance such as a cargo insurance product.
Both Protection and Indemnity Insurance and Hull and Machinery Insurance usually insure against pollution risks Hull and Machinery Insurance with regard to pollution incidents arising as a result of ship hull casualties. Protection and Indemnity Insurance with regard to third-party pollution liabilities. United States Oil Pollution Act of 1990 (OPA 90) requires most ships operating in United States waters to maintain a Certificate of Financial Responsibility (COFR) to verify that the ship is covered by insurance that covers pollution liabilities. Other types of marine insurance or land-based insurance with marine applications are available for certain risks:
- cargo insurance
- business interruption insurance
- hazardous cargo insurance
- employer’s liability insurance
- longshoreman and harbor worker’s insurance