Insurance is a vital aspect of trade since it provides a secure environment for commerce. International trade has many uncertainties and risks and therefore, insurance assumes a very particular importance. If insurance did not exist, the number of people willing to undertake international trade would undoubtedly be diminished. Companies would be forced to ‘insure’ themselves by retaining large capital sums against the possibilities of loss; this would hamper the management of the business and in turn the opportunities to make profits. Insurable Interest: In general, a person may only effect insurance if he has an interest in the goods or property, which are to be insured. The assured (the person whom the insurance covers) must be in such a position that he will lose if there is a mishap. The reason being that if a person does not have an insurable interest, he will not look after the property or goods adequately and might benefit if there is a loss. If there were no insurable interest, the claim would be declared void. The essential features of insurable interest in respect of marine/cargo insurance are: – a) There must be a physical object exposed to marine peril.
b) The Insured must have some legal relationship to that object in consequence of which he benefits by its preservation or is prejudiced by its loss or damage. Unlike other branches of insurance, the Insured, in maritime business, need not have an insurable interest at the time effecting the insurance but in order to recover under his policy, he must be interested at the time of the loss. The simplest form of insurable interest is absolute ownership of the goods being insured but other kinds of insurable interest may exist. A buyer will have an insurable interest whether goods are sold FOB or CIF, even though he has the right to reject them if they are contractually incorrect and return them to the seller to whom property will pass. The seller has an insurable interest while he has the risk or property of the goods or both. If the buyer rejects the goods or there is Stoppage in Transitu, then the rights will revert to the seller. If payment is required before ownership passes, then the goods remain the seller’s property until payment is made. Obviously having insurance in place to take effect as the risk passes from seller to buyer is of vital importance in ship sale & purchase at the moment of handover. Carriers will have an interest because of their liability to cargo owners, and so will shippers to the extent that they wish to cover freight paid in advance. A Charterer will have an insurable interest, as he has a liability to the shipowner. For example, if he fixes a ship to load at “a good and safe berth, always afloat” and, whilst loading, the ship goes aground as a result of the water being shallower than expected, the owner can justifiably hold the charterer responsible for damage to the hull. Or if the charterer describes his cargo as “harmless” and it subsequently corrodes the vessel’s holds, he will be held responsible for the resulting damage. Time Charterers will have additional liabilities to the shipowners in respect of their control over the vessel whilst it is hired to them, so their insurable interest will be more extensive than that of a voyage charterer. Charterers can take out specific cover in respect of these liabilities. The insurer has an insurable interest in the risk he has written; therefore the insurer is able to spread the risk he has undertaken through re-insurance. Commission to agents and brokerage fees may also create an insurable interest. Indeed, some shipbroking companies as a matter of routine insure the brokerage under all their time charter fixtures. A broker, if he should make some significant error in the fixture of a ship, which results in a claim against him or his principal by an owner or a charterer, can (and should) insure against such an eventuality. This is known as “Professional Indemnity Insurance”.