What is marine insurance?
As the name implies, the purpose of marine insurance is to
indemnify interested parties against loss, damage, or expense caused by
accidents with vessels, cargoes, and freight due to the perils of transportation
by water. Modern policies offer very
broad protection. Vessel owners are
able, through marine insurance, to protect themselves against loss of hull,
freight earnings, and every type of legal liability. The modern warehouse to warehouse
clause allows cargo to be covered from the time they leave the
shippers warehouse until they are delivered to their designation. Marine insurance may also be called transportation insurance.
Marine insurance is divided between ocean (wet) and inland
(dry). The inland coverage is a natural
extension of the ocean coverage.
Is there a standard marine policy?
Unlike fire insurance, there is no specific form of marine
insurance that is recognized by law in the United States. Even so, most companies that issue this type
of coverage use policies and endorsements that are similar.
We can give the credit for the similarity in the policies to
Great Britain, who codified its marine insurance law in the Marine Insurance
Act of 1906, followed by the Marine Insurance Act of 1909. All the necessary rules governing the
writing of marine insurance were carefully defined by these two acts. The acts were set down in the Lloyds form
of policy as an example, not a required form.
Although the purpose was to provide consistent rules of interpretation,
the forms designed were so useful that they were adopted by most other
companies as a matter of convenience.
Since it was so long ago that the Lloyds policy was designed,
the language seems outdated and poorly adapted to todays modern commerce. Even so, the policy has the advantage of
certainty in its meaning with the stability of marine insurance transactions
that have multiple legal decisions backing it up. This has enabled definite meanings in the policy so that today
nearly every word it contains has been interpreted by the courts around the
world. Ocean Marine Insurance, page
164, states: It is the desire to have a definitive contract, the terms of
which are known and understood by insurer and insured, that has been
responsible for the nearly verbatim inclusion of many of the Lloyds policy
provisions in the policies of all U.S. marine insurers. Variations in language and provisions among
the various contracts are only a minor concession to modernization.
How are marine policies classified?
Marine insurance policies are classified into four primary
groups. This is based on the nature of
the interest covered.
The first group
contains the policies covering against damage to the conveyances on which
persons or goods are transported.
The second group
contains the policies covering a carrier against liability to others for loss
of or damage to their property.
The third group,
coverage is for damage to the various kinds of goods being transported.
The fourth group
covers the loss of freight and related losses resulting from the inability to
use a particular vessel.
In ocean marine insurance, cargo
refers to the property transported by a vessel and freight
primarily refers to the compensation received by the vessel owner for
transporting cargo.
First
Group: Loss or Damage to Conveyances
The types of policies include:
1. Builders
risk policies;
2. Port
risk only policies;
3. Fleet
policies;
4. Full
form and total loss only policies; and
5. Hull
policies written according to the class and/or trade of the vessel.
Builders risk policies
are essentially a shore cover with no marine hazard prior to launching. They relate to the construction, conversion,
and/or repairing of hulls. The policy
covers all risks prior to launching of the vessel. This would include fire, while under construction and/or fitting
out, materials used in building the vessel, the workshops, yards, and docks of
the insured, or on quays, pontoons, craft, and so forth. Also all risks while in transit to and from
the site are covered. Risk of loss or
damage through collapse of supports or ways from any cause whatever and all
risks of launching and breakage of the ways are covered as well.
If the vessel fails to be launched, the underwriter is obligated
to assume all expenses incurred in completing the launching. If an additional premium is paid, the
coverage may be extended to include launching (following construction) and
trial trips.
No policy covers everything, of course. There are excluded risks in the Builders Risk Policy. The exclusions include:
Workers compensation or employers liability acts;
Strikes, locked-out workers, riots, and civil commotion,
although the perils of Strike, Riot and Civil Commotion (SR&CC) may be
covered;
Capture, seizure, or the consequences of war;
Consequential damages arising out of delay; and
Earthquake.
If the vessel owner wishes, most of these exclusions could be
covered under other types of policies.
At one time, this type of policy would cover property being conveyed,
but todays policies typically exclude transportation of the finished vessel to
the new owners location, unless extra premium was paid for this coverage. Generally, Builders Risk Policies coverage
is limited to protection of materials in the port of manufacture. There will be special terms for military
vessels regarding weapon testing and submarine diving tests.
Second
Group: Port Risk Only Policies
There are situations that put a vessel in port for an extended
period of time. This might be due to
unemployment, repairs or sale of the vessel.
Since it would not be necessary to insure the perils of navigation, many
owners opt to carry Port Risk Only coverage.
As one would guess, this coverage is less expensive than a full form
policy would be. Premiums can usually
be paid on a monthly basis, although it may be possible to pay them
annually. When premiums are paid
annually, the insured is usually given the option of cancellation on the basis
of a published short-rate table.
Although there can be variations, usually this type of policy covers all
hazards that might happen while in port, including fire, collision, damage to
machinery, and the risks attaching to the transfer of the vessel from one dock
to another, or of placing it in dry dock for repairs. Some policies may, for extra premium, cover navigation for an
occasional trip.
Third
Group: Fleet Policies
Todays modern commerce involves companies that own and operate
multiple vessels. As a result, the
companies that own large fleets found it advantageous to insure the entire
fleet under one policy rather than insuring them individually. This does not necessarily mean that one
company carries the entire risk, although that could also be the case. It is just as likely that 20 to 50 (or even
more) companies participate in the underwriting and insurance. When multiple companies participate in the
underwriting, there typically is a formula used for distribution on a share
basis.
Usually, when the entire fleet can be insured under one policy
(whether underwritten by one or multiple companies) the cost of insurance is
lower. A fleet of vessels has usually
been accumulated over time, so a single policy is an advantage to the
owner. Vessels that are older would experience
higher rates, if insurable at all. By
using a Fleet Policy, all vessels are covered on an all or nothing
basis. It is the same concept used for
group medical underwriting. All are
covered equally. The older vessels are
covered under the same terms used for the newer vessels. Although there can be variations, the
premium will probably be arrived at by segregating the vessels of the fleet
into homogeneous groups and applying appropriate rates to each group, the final
premium being the sum of the combined group rates. Brokers may even combine several fleets into a single large
account, with the object being to get all insured (where an older fleet might
otherwise be denied).
Fourth
Group: Full Form and Total Loss Only Policies
There can be vast differences in exposure depending upon the type
of vessel and where it is used. Blue
water (oceangoing) ships are usually much larger than domestic ships. Domestic ships would include tugs, barges,
dredges, fishing vessels, charter boats, and yachts. Full form and total loss only policies are usually limited to
oceangoing or blue water ships.
It is common for vessel owners to insure part of the value of
their vessels, generally 25 percent, under increased value policies with the
balance being insured under a full form policy. The full form is usually enough to cover even major partial
loss claims. Total loss only
insurance rates are often equal to only about 1/3 to of the rates quoted for
full form insurance (insurance that covers for partial losses as well as full
losses). As is true for most insurance,
partial losses are much more common than are full losses. Therefore, the insurer is more likely to pay
claims on partial losses. In fact,
partial losses, in the aggregate, represent more than two or three times the
loss attributable to total losses.
Why would a vessel owner choose to purchase total loss only
coverage? Sometimes it is the only
insurance obtainable at a cost that is affordable when the vessel is old or in
inferior condition. Often, it is merely
to lower premiums (even on newer good condition vessels). The owner is risking the loss of partial
claims so that the vessel can be covered against a total loss. If the vessel has a very high value, total loss
only coverage may be easier to afford than the high cost of full coverage,
which would include partial losses.
In issuing full coverage contracts and excess collision liability
coverage, it may be necessary to limit the amount of total loss only coverage
that is purchased to a stipulated percentage of the total combined coverage
carried. This is accomplished by use of
a clause called the disbursements warranty
clause. The point of this is
to make the insured purchase what the underwriter considers a sufficient amount
of full form protection.
Fifth
Group: Hull Policies Adapted to the Type of Vessel
As we know, there are multiple types of vessels. There are four main categories: dumb
(nonself-propelled; without sails), sail, auxiliary sail, and powered
vessels. Each class has problems
specific to the type of craft. The
underwriters must deal with the problems presented and use specially adapted
policies and endorsements to meet the needs of the policy.
There may be additional classifications (as subcategories)
depending upon the nature of the water type the vessel is used in and the type
of vessel involved. The policies
usually have a great deal in common with one of the four category types but they
still have important differences that relate to the specific watercraft
insured.
Liability Protection
Like land vehicles, vessels can be involved in accidents. Vessel owners need protection against
liability for damage to others that are the result of the ship or acts of the
crew. Marine liability is divided into
four classes:
1. Collision,
2. Protection
and indemnity,
3. Excess
protection and indemnity, and
4. Water
pollution.
Class
1: Collision
The collision clause is also referred to as the Running Down clause for obvious reasons (another
vessel has been run down). The
collision clause protects the insured against claims arising from their vessel
negligently colliding with, and causing damage to, another vessel. Although this protection is included,
primarily for convenience, in the hull policy the protection is limited to
liability for physical damage to the other vessel and its freight and cargo,
and to loss of earnings due to loss of use of the damaged vessel. The amount of protection given is in
addition to the insurance carried under the hull policy, but the face amounts
or limits are equal. That means that if
there is $5 million covering the hull of the insured ship, there is also
another $5 million covering liability under the running down clause. Up to the value of the vessel will be
covered in any one collision, in the proportion that the insurance carried
bears to the value of the insured vessel.
Class
2: Protection and Indemnity
Even with the collision clause previously mentioned the hull
policy will not protect the vessel owner against liability for damage to cargo
in the custody of the insured, injury to passengers, members of the crew, or
laborers handling the cargo. It also
will not cover losses under the collision clause to the extent of one-fourth of
the claim when this portion of the risk is not covered by the hull policy. Formerly it was the practice for the
underwriters to word the collision clause so that the insured was required to
assume that one-fourth themselves. This
practice is not usually found in the newer contracts, but it is possible that
some policies will still have this. The
policy will also not cover damage to docks, piers, and other fixed objects or
illness of passengers or crew members.
The vessel owner may also be exposed to other liabilities such as
quarantine expenses or crowding that causes other vessels to collide.
At one time it was thought that vessel owners would be more
careful if they had to assume liability risk for some items. Ship owners apparently disagreed because they
organized shipowners mutuals called protection
clubs or indemnity clubs. They
have subsequently merged into protection and
indemnity clubs. Their
purpose is to protect their members against loss from liability that was
previously not covered. The growth of
the clubs made it necessary for marine insurance companies to offer similar
protection, although separate policies are often used to achieve this. The protection and indemnity policy or
clause may be written for more than the amount carried on the hull.
Class
3: Excess Protection and Indemnity
There was a time when a merchant marine fleet was considered
essential to a countrys economic stability.
Even a countrys political position was considered affected by the nations
fleet. As a result, subsidies existed
that reflected this attitude. That is
why a vessel owner could limit his liability to the value of his vessel rather
than the actual liability cost that might exist. The liability of the shipowner was also limited by the Harter Act
and the Carriage of Goods by Sea Act as far as cargo was concerned. Ship owners limited their liability even
more by their selection of the registration flag and the practice of
incorporating a vessel. Despite these
protections, in recent years vessel owners have become aware that they could be
assessed with more liability than the actual value of their ship. Therefore, a vessel owner may wish to
purchase more insurance protection.
Primary and excess insurance can be written as a single limit in one
policy.
Class
4: Water Pollution
On April 3rd, 1970, the Water Quality Improvement Act
of 1970 was signed into law. This Act
was the result of increasing concern over pollution by ships and their
cargo. Known as Public Law 91-224 of
the 91st Congress, it assessed new liability on shipowners that
directly affected marine underwriters.
Amendments have followed that have extended the original act to
hazardous substances, which are divided into two groups: removable and
non-removable. Now, under these laws
and amendments, whenever any oil is discharged into or on the navigable water
of the United States, onto adjoining shorelines, or into or upon the waters of
the contiguous zone, the government is authorized to arrange for the removal of
the oil, unless authorities feel removal will be properly done by the vessel
owner. The owner or operator of the
vessel could be subject to a civil penalty not exceeding $50,000 for
non-removable oils. Under specific
circumstances, additional fines are possible.
When the Exxon Valdez oil spill happened in Alaska in
1989, Congress realized that additional measures had to be taken to prevent
severe pollution. What had previously
only been a concern to a few environmental groups now became the concern of a
nation. As a result, the Oil Pollution
Act of 1990 put a great deal more risk on protection and indemnity insurers
that cover oil tankers on U.S. waters.
Not surprisingly, mutual clubs increased rates and tightened
underwriting rules.
Once cleanup became a requirement, marine underwriters banded
together to create a syndicate to provide vessel owners and operators
protection for the cost of spills. This
syndicate is known as the Water Quality
Insurance Syndicate (W.Q.I.S.).
It was official as of May 31st, 1971. W.Q.I.S., as part of its function, certifies
to the Federal Maritime Commission that those who purchase this insurance have
met the financial responsibility laws.