Insuring Property and Liability Risks
Chapter 9
Marine Insurance Marketing
Cost, Coverage, and Sales
As is true with any coverage, finding the clients is a part of marine insurance. From the beginning, marine insurance has been an international business. Originally, only a few of the more economically developed countries had the financial and legal ability to handle marine risks. Marine insurance requires specialized underwriting ability and large financial resources because of the concentration of values involved. Since vessel owners traveled the world, they had the opportunity to seek coverage anywhere. Vessel owners knew the risks they wanted to be insured against and were typically knowledgeable when it came to such insurance.
Since the inception of the coverage in 1603, Lloyd’s has been a dominant force in marine insurance both as a primary insurer and as a reinsurer. During Great Britain’s rein as the leader in international trade, Lloyd’s was the leader in the marine underwriting field. It was not until after World War I that other countries, especially Switzerland, Germany, France, Japan, and the United States began to engage in the underwriting of marine insurance. Of course, today there are many more countries writing this type of coverage.
Rates
A Judgment Call
As every agent knows, premium rates are important to our clients. Marine insurance companies follow the practice common in other lines of insurance of determining premium rates on the basis of averages arrived at through the tabulation of statistical experience on many risks of the same kind over a considerable number of years.[1] While this is a common procedure of determining rates for many types of products, this method can only establish a basis to work from. It must be additionally supported by factors common to marine insurance. The underwriter must look at the type of coverage being requested and consider the factors that will come into play. There is probably no other area of insurance that relies so heavily on the good judgment of the underwriter. He or she must successfully judge conditions and their importance to place a value on the product. Unlike other types of insurance, marine underwriters have no fixed bureau rates, except for outboard boats under sixteen feet, which are regulated by several states.
Underwriters for life, fire and most other kinds of insurance coverage relate to only specific limited hazards. Marine insurance has a large number of perils, including:
1. The inherent character of a large variety of subject matters of insurance.
2. The effects of the seasons, adverse physical forces, and trade customs on numerous trade routes.
3. The immense variety of special policy provisions involved.
4. Finally, the effects of a constantly changing worldwide economic and political climate that affects multiple aspects of the shipping industry.
While most types of underwriting involve the underwriter’s judgment, the marine underwriter has fewer guidelines to help him or her make those judgments. A lead underwriter for Lloyd’s, or any of the established marine companies, is considered very valuable for his or her ability to take into consideration the numerous factors that will determine premium rates and make them work for both the insured and the insurer.
Client Evaluation
While most types of insurance look at the insured when determining risks and therefore rates, the insured’s individual record is extremely important in marine insurance. Even regulators seem to ignore the importance of the insured’s personal record in safety and training.
When evaluating the past performance of two vessels that are alike in every way, the rates charged can be quite different with the determining factor being the management, operator, or both. If one operator or manager has performed well in the past regarding vessel upkeep and the crew’s performance, that operator or manager may get a lower rate than the vessel that has a poor past record. Underwriters develop a sense of vessel management style and respond to it. The industry considers this a fair way to underwrite since it would be unfair to charge the well managed vessel as much for insurance as they charge the poorly ran one. This underwriting style has never been challenged since premiums charged depend on the results shown by the insured’s account, past experience, and management record.
The same type of underwriting is applied to coverage on cargo. The underwriter will consider past performance when applying insurance rates. As it applies to cargo, such things as packaging, handling, and storage will affect cargo claims. It is only fair to reward the well managed vessels with lower insurance rates.
Cargo insurance experiences a higher rate of dishonesty than might be realized. Since the shipping industry often experiences slim profit margins, there may be the desire to enhance their income by submitting false claims. Underwriters, knowing this, keep statistical information which will eventually indicate such practices. This will lead to either very high premium rates or refusal to insure.
Hull Rates
Although management is certainly important, underwriters must also consider other elements when determining hull rates. The character of the vessel’s route, the vessel’s construction, type and nationality are also important considerations. In addition, the underwriter must consider the nature of the insurance being purchased, what would be covered and under what conditions a claim would be paid.
The vessel’s route is extremely important to underwriting. Some routes are known for their risks, facing permanent or seasonal dangers of fog, storms, ice, shifting sandbars, narrow channels, and so forth. Currents, tides, tidal waves, and seaquakes are also natural forces that affect premium rates.
Where the vessels will stop is also an underwriting consideration. Some ports are known for their dangers, whether it happens to be a difficult approach, shallow water, lack of protection from natural forces (such as wind or waves), or danger of theft and vandalism.
It is not surprising that the quality and construction of the vessel would play a part in determining insurance rates. Just as home construction plays a role in risk, so does the construction and type of vessel. This would also be true when determining cargo premium rates. When the underwriter is assessing the risk to his or her company, he or she will want to know the vessel’s builder and owner, structural plan, material used in construction, type of propulsion, structural strength, adaptability to various kinds of cargo, age, and physical condition at the time of insurance application.
Various classification societies furnish information on vessels that are used by vessel underwriters. These societies were organized for the purpose of formally establishing rules for the construction of vessels, supervising the construction, assigning a “class” to each vessel, and publishing registers of those vessels coming within their jurisdiction. Nearly every vessel of any importance is classified in some register. Assignment to one of the registers carries with it responsibilities: the vessel must have periodic and necessary repairs as directed by the society.
There are two leading societies: the American Bureau of Shipping and Lloyd’s Register of Shipping. The American Bureau of Shipping is referred to as the “Record” and Lloyd’s Register of Shipping is referred to as the “Register.” These are not the only societies. They also exist in France, Norway, Italy, Germany, Japan, and other nations. In fact, most ship owning nations have a classification society. All the societies are similar in that they chart each vessel of their own and others that enter their waters. The information will consist of the vessel’s name, nationality, construction material, registered tonnage, design detail (including its boiler equipment), dimensions, and the date of the last survey completed to determine present condition. The vessels are divided into separate classes in the registries and these classes are further divided into grades. Supplemental lists are regularly published in an attempt to keep the information current. These registries are literally a catalog of all vessels of any size or importance.
Underwriters consider the nationality of the vessel when gauging risk (and therefore premium) because some nations depend economically on ocean commerce. Their citizens are traditionally seafaring people who are masters of the trade. Crews from such nations constitute the most skillful mariners, which is very important when assessing risk to the insurer. Unfortunately, another reason the vessel’s nationality may be important has to do with their record of commercial honor. Some are known for their lack of commercial ethics, especially in connection with the presentation of suspicious claims.
Insurance uses policy conditions to limit the underwriter’s liability. This is also done in marine insurance. The clauses that may be used are numerous. Each policy must be individually assessed to see what clauses have been used. Those that are in the policy are there for the benefit of both the insured and the insurer. Limiting clauses benefit the insured because they keep the cost of the policy down. They benefit the insurer because it limits their liability.
Cargo Rates
The cargo on vessels represents a substantial financial investment. Commonly, therefore, the cargo is insured against the risks faced by ocean commerce. The same risks outlined in the hull policy are often the same as those outlined in a cargo policy. If a storm damages a ship, it may also cause damage to the cargo, so both must be insured against the same risk.
Although the risks insured against may be the same for both vessel and cargo, the application is often different. Just as the underwriter for a vessel must consider the condition of the ship, he or she must consider the condition and requirements of the cargo. Different types of cargo will require different types of storage and care. Hazards may be directly related to the type of cargo. Underwriters will consider not only the type of cargo but also the past record of the vessel for correctly handling and protecting it. Cargos face different types of hazard. Some types may be more likely to be stolen, for example. Whatever hazard the cargo brings with it, the underwriter will consider the likelihood of loss and base the premium rates on that risk. Obviously, the underwriter must know precisely what the cargo is that he or she is insuring.
Just as some roads have a record for higher losses, so do some ocean routes. When insuring cargo, the same risks facing the vessels also faces the cargo. Therefore, the underwriter will assess these same risks when determining premium rates for the cargo. Storms, piracy, delays affecting cargo, and any other possibility will affect pricing. How often cargo must be handled will also affect the possibility of insurance claims. This is especially true of perishable cargo or cargo that may be easily broken, such as glassware.
Obviously, the condition of the vessel used to transport the cargo is important to the underwriter. A vessel in poor condition or with a record of mismanagement is more likely to suffer a cargo claim than would a vessel in good repair with good management. Another element that one may not consider is the speed of the vessel. Even if in good repair, a slower vessel may have cargo damage due to the length of time it takes to move it from one place to another. This would certainly be a consideration if the cargo were perishable commodities. Even for nonperishable commodities, however, the longer the cargo is exposed to the risks of the ocean, the more likely a claim is to occur. That does not mean that slower vessels cannot carry cargo effectively. It merely means that each element must be considered by the underwriter.
Considering Past Performance
Past performance of the vessel and management is a large consideration when insuring cargo. Although every factor is considered, the past performance is one of the best indicators of future performance. Vessels that have had few past cargo losses probably take the care necessary to keep the cargo safe from hazards.
International Competition
Unlike fire insurance in the United States that is usually fixed and enforced by a cooperative association of underwriters, marine insurance underwriters must deal with worldwide competition. For years brokers have acted as freelances in the insurance business, canvassing the world for the best rates for their clients. There are no cooperative actions in marine insurance that sets rates. Foreign competing underwriters have been given easy access to the business of writing marine insurance. The exportation of marine insurance, originating in the United States, to non-admitted foreign underwriters is freely permitted. Many American vessel owners have placed their business with foreign underwriters. This means that marine premium rates may be undercut both at home and abroad.
Pleasure Boats
Obviously, someone insures large ocean vessels, but most agents are more likely to be insuring the smaller pleasure boats. The growth in the quantity of pleasure boats in the United States has been significant. Even during down turns in our economy, the number of pleasure boats continues to rise. In fact, the housing industry reports a growing number of new homes being constructed not only with a two-car garage, but with a third stall for either a boat or motor home. Apparently, the pleasure industry has been successful. This means that more and more property/casualty agents will be asked to insure a boat.
Traditionally boats with inboard motor power and sailboats have been insured according to ocean marine forms and practices. More companies are now developing policies with smaller crafts in mind, but the industry still is largely unstandardized. Outboard motorboats under twenty-one feet in length are most likely to be insured under inland marine policies while those insured under ocean marine forms and practices are covered under “yacht policies.”
Yacht Policies are used for inboard motorboats of any size, sailboats with or without inboard auxiliary power, and jet-powered boats. Keep in mind that there will be variances among the companies and even among the states, if legislation has been placed on this type of insurance. We will be covering “generalities” of boat insurance. It is always necessary to know your own state’s specific requirements.
Many underwriters look at how a pleasure boat will be used. Those that routinely have a rotating passenger list or is rented to others have different risks than those that are only used within a family membership. When writing yacht policies, underwriters may require a private pleasure warranty to limit their liability. Generally, pleasure boat coverage, whether yacht or motorboat, is not standardized. As a result, this section can only be stated in generalities – not absolutes.
Yacht policies usually consist of four sections of coverage on a schedule basis: hull, protection and indemnity, federal compensation insurance, and medical payments.[2] Most underwriters will insist on using a basic hull policy before adding any other types of coverage. If the yacht is used only for pleasure (versus rental or commercial) the policy may be sold as a package by many insurers, even though the types of coverage may be rated separately.
Yacht Hull Coverage
Hull coverage protects the insured against physical damage to their yacht. It usually includes, besides the hull, coverage for spars, sails, boats, fittings, food and drink stored onboard, furniture, and machinery. Sometimes coverage will be extended to the boat trailer and other similar equipment. This additional property would be covered while on board and while laid up on shore. Coverage for property separately stored (off the boat) on shore, except sails, may be limited to some percentage, often 20% to 50% of the hull insurance amount. Whatever the percentage is, it usually reduces the hull insurance by the same percentage or amount.
The insured perils tend to be the same as those for ocean marine policies. Because the oceans contain the same perils for any ship or cargo, insured perils will be the same for any ship or cargo.
Since the oceans contain primarily the same perils for any ship or cargo, insured perils will be primarily the same for any ship or cargo.
The most common coverage for yacht insurance is “all risk.” When the coverage is “all risk” the typical exclusions are wear and tear, inherent vice, and theft of equipment. War damage is usually excluded by a Free of Capture and Seizure Clause. Some perils may or may not be excluded depending upon the policy. When there are additional exclusions, they usually include loss from strikes, riot, and civil commotion. There may also be exclusions for damage to hull occurring during fueling, loading, hauling, launching, or moving. The first two, fueling and loading, are very important because of the increased risk during that time.
Yachts that are less than ten years old may have a “valued” policy. Older yachts and most outboards may have an “actual cash value basis” policy. On valued policies an agreed value of the vessel is stated in the policy and the amount of insurance is separately shown. Most underwriters insist on insuring at least 75 percent of the vessel’s value. There is commonly a deductible that is stated as a percentage of the yacht’s value. If the policy contains a “repairs in full” clause, there is no depreciation on a partial loss. The insured will receive new for old except for sails, outboard motors, batteries, tender, and trailer.
As in basic ocean marine hull policies, there will be a “running-down clause” in yacht insurance coverage. The owner of the insured yacht is protected, to the amount of hull insurance, for liability for damages to another vessel. There is no coverage for the insured’s property or for bodily injury liability.
Other Coverage for Yachts
There are three types of coverage that could be purchased:
· Protection and indemnity insurance
· Federal compensation insurance
· Medical payments insurance
Protection and indemnity insurance is bodily injury and property damage liability coverage. Federal compensation insurance is similar to state workers’ compensation except federal compensation is governed by federal law. Medical payments insurance is similar to that found in the automobile policy.
First Coverage: Protection and Indemnity Insurance
Protection and indemnity insurance has limits for loss of life and personal injury for any one person and for any one accident. The limitation that is imposed per person and per accident for loss of life or personal injury has similarities to automobile and other liability coverage in the United States. It is important that the coverage be greater than the value of the vessel since liability costs may run greater than the yacht’s value.
Second Coverage: Federal Compensation Insurance
The Jones Act for crewmembers and the longshoremen’s and harbor workers’ compensation is provided as a companion to the protection and indemnity coverage. Usually there is a single premium for these two coverages and the same limits apply to loss of life and personal injury.[3]
Third Coverage: Medical payments insurance
Medical payments insurance is not part of the usual ocean marine insurance forms. Since yacht owners are often weekend and holiday sailors, the function of the yacht tends to be for entertainment for the owners and their guests. There is a feeling of obligation to those guests, just as there would be to passengers in an automobile. Some policies may include coverage for water skiers, but this should never be taken for granted. All policies should be read by both the agent and their clients.
Reading the Yacht Policy
As we know, every policy needs to be read. Yacht insurance policies are no exception. There will typically be six items of information on the declaration page, which are necessary for underwriting and premium determination. Those six items are:
1. The vessel being insured, which includes its manufacturer, the year it was built, the model and length of the yacht, horsepower. If it is a sailboat, the auxiliary power is also needed.
2. The speed of the vessel. Some underwriters may not be interested in the yacht’s speed if it exceeds 35 miles per hour.
3. Hull valuations and the amount of the hull coverage.
4. Navigation area; that is, where the yacht will be used (lakes, ocean, and so forth).
a. Atlantic Coast (Maine to Cedar Keys, Florida)
b. Great Lakes, including the St. Lawrence
c. Pacific (Point Conception to Point Banda, Mexico)
5. Navigation period, including the layup warranty specifying dates.
6. Special credits, such as
a. Insured has completed program of Power Squadron or U.S. Coast Guard
b. Insured employs a qualified captain
c. Ship-to-shore radio
d. Diesel engines
e. Equipped with fire extinguishers, depth finder vapor detection.
Outboard Policies
In most areas, outboard is not considered a standardized policy. Even so, with the numbers of outboards growing to more than 10 million, more standardization has occurred. Many states now regulate both forms and rates for outboard boats that are under sixteen feet in length. Most policies will cover outboard motors, outboard motorboats, accessories, and trailers. The boats must be used only for pleasure and not for business or hire. There is seldom any restriction as to where the boat may be used. The policy, like yacht insurance, will be either named perils or “all risks” coverage on the hull, motor, and accessories. In limited circumstances, “all risk” may apply to trailers. When the coverage is “named perils” the form follows the same format as it does for ocean marine.
Policies covering outboard motorboats are typically restricted almost entirely to direct damage. Although there can be variances among policies, the typical policy pays on behalf of the insured all sums up to $500 that he or she becomes legally liable for regarding property damage caused by accidental collision of the boat while afloat. Note the words “legally liable.” The policy may also pay up to another $500 for defense costs resulting from the same limited conditions. There may be other coverage under other policies (Homeowners policy) for bodily injury or property damage occurring as a result of ownership or operation of any outboard motorboat. Some policies may have limitations based on the horsepower of the boat motor. Liability for the trailer use would be covered under the automobile policy of the insured.
Policy rates will vary. Costs will depend upon several factors, including the area in which the boat will be used, horsepower, loss history, boating qualifications of the insured, and the inclusion of a deductible. Deductibles are usually written for $25, $50, or $100 although a deductible may be written for any amount. Premiums may be anywhere from 3 percent to 10 percent of the insured values.
End of Chapter 9