Marine insurance is a contract of indemnity whereby the assurer or underwriter agrees, for a stated consideration, known as the premium, to protect and indemnify the shipper and/or owner of the goods against loss, damage, or expense in connection with the goods at risk, if the damage is caused by perils specified in the contract known as the policy of insurance.
When the goods have left the shipper’s plant or warehouse and are in the course of transportation, shipper has no physical means for the protection of these goods and must rely upon the ability of the transportation company to which he entrusts them for safe delivery at their intended destination. In addition, there are perils and hazards which the goods may encounter and which are beyond control of the carrier. Hence the importance of marine insurance can well be appreciated.
The carrier in export trade is not an insurer of merchandise. He is exempted by law from certain causes of loss as well as from the conditions and stipulations which may be entered in the contract of carriage between the shipper and the carrier. For these reasons, the merchant must have some means of protecting himself against losses which he may not be able to recover from the carrier under his bill of lading. He, therefore, insures himself against loss or damage.
Despite the fact that they are covered by clean bills of lading indicating that they were apparently in good order and condition when received on board, the damage to the goods might occur in transit, especially if it encounters hazardous conditions during the journey. The buyer may have to pay for the goods before he sees them; or even after lie sees them in the customs shed at his end, the goods may be damaged or pilfered before reaching his warehouse. Another point to be considered is the fact that where no letter of credit has been established, the goods most probably remain the property of the exporter until the buyer takes up the documents; and if that buyer gets to know that the goods have been damaged in transit, he may refuse to retire the draft.
Although a bill of lading are the title to the goods, that title is only worth as much as the goods themselves; and if the goods are worthless because of the damage caused to them, the title to them, too, is worthless. But if the goods are properly insured, then, irrespective of whether they suffer damage or not, the worth of the title remains; and, for this reason, goods cannot be shipped abroad unless they have full insurance cover. In most cases, the insurance is the responsibility of the exporter; and he must arrange to insure the goods on C.I.F. transactions.
Subject Matter of Marine Insurance
There are three classes of properties which are the subject matter of marine insurance:
- Cargo insurance;
- Freight insurance; and
- Hull insurance (insurance of the ship).
In the C.I.F. price quotation, it is only the cargo which is insured because the freight has already been paid. However, freight insurance may be taken out either by the cargo-owner or by the shipping company if freight has not been paid.
The exporter, who only makes occasional shipments, advises the insurance broker or company of the full details of the goods to be shipped, giving the number of cases, a brief description of the goods themselves, the markings on the cases, the name of the ship, the port of shipment and the place of destination to which he is sending the goods, and the value for which he wants the goods covered. At the same time, he has to state the risks which are to be covered. The insurance broker, or company, then issues the appropriate policy of insurance to cover the shipment; and this policy is required in duplicate. As this policy is issued in the name of the shipper, it must be endorsed by the shipper before it is handed over to the bank so that, whoever has the benefit of the bills of lading, may also have the benefit of the insurance cover and can claim reimbursement for any damage or shortage.
It may occasionally happen that a letter of credit asks for insurance policies in favor of the bank which originally opened the credit; and this can be arranged either by asking the insurance company to make out the policy in favor of the required party or by the exporter endorsing the policy is follows: “Pay any claims arising under this policy of insurance to the order of —” and then signing the endorsement.
When the exporter has done a fair amount of export trade with several shipments per month, arrangements for an insurance cover can be speed up and simplified by the exporter having an “open cover” with the insurance broker or insurance company. The exporter tells the insurance broker what his estimate of the total value of his export shipments for the next twelve months and also what he anticipates will be the value of the largest single consignment which he is likely to ship.
The insurance brokers for insurance company then agree to give the exporter an insurance cover for any shipments made within the limits estimated without the necessity of the exporter having to advise them in advance. The exporter is issued a pad of certificates and he himself fills in the details of each shipment, which is to be covered for insurance — the details being the same as those of which he would advise the insurance brokers if he wanted a policy as described earlier. These certificates are in sets of four — the first two are the originals and the other two are non-negotiable copies. The originals valid as part of the shipping documents, whilst one of the copies is sent to the brokers or insurance companies that they are advised of the risk that has been covered and can make the appropriate charge for premium. The other copy is retained in the exporter’s file for reference and for checking the insurance broker’s bill for premiums. These certificates of insurance have to be endorsed in the same way as insurance policies are endorsed.
Care to be Exercised
Care must, however, be taken to see to it that marine insurance policies or certificates are properly initialed because they are legal documents. If, with an open cover, the exporter has an order which is larger than the one he originally estimated, care must be taken to see to it that the limit amount for any one shipment, which is shown on the certificates, is altered and it is necessary to send all the four copies of the certificates to the insurance company or brokers for an official approval of the alteration.
If the exporter has underestimated the total yearly value of his shipments, he would ask, before the total value has been reached, for the total cover to be extended, and the marine insurance company or brokers will be glad to agree, provided that there has not been any excessive number of claims against the earlier shipments.
110% Extra of the actual C.I.F. prices
It is usual to cover 110 per cent of the actual C.I.F. prices of the goods. The reason for this is that, in addition to having paid for the C.I.F. cost of the actual goods when he retires the drafts (or makes payment, or has accepted to make payment in any other way), the buyer has probably also paid for the customs clearance and for the unloading and transit of the goods to his warehouse. There are a few instances when these charges have been exceptionally heavy or when the customs duty cannot be reclaimed even though paid on worthless goods, in consequence, the shipper will be asked to cover the goods for up to 150 percent of their C.I.F. value. The exporter must bear in mind that, where such heavier than normal cover is requested, the premium for insurance is considerably higher, and the buyer should be asked to confirm that he will pay the cost of the excess premium.
The exporter should also remember that it is as well to cover for 110 per cent for his own sake, especially when the shipment is not covered by a letter of credit because it may so happen that the buyer, instead of himself collecting the insurance payment for damaged or missing goods, may send the certificate or the policy back to the exporter, asking the latter to replace the damaged or missing goods and reimburse himself by collecting the insurance money. Such a procedure will mean a higher transit cost to the exporter; and this is covered by the extra 10 per cent cover.
Types of Risks Insured under Marine Insurance
There are many possible risks for goods that are shipped abroad, apart from the possibility of the sinking of the ship itself. She may run into a heavy storm, and the cargo may be damaged by rain or sea-water. There is always the risk of fire or of some of the goods being stolen. Some letters of credit specify the risks which must be insured against. The usual procedure, therefore, is to have an “all risks policy”. It is not worthwhile for an exporter to try to save on premium payments and hence a less comprehensive policy because a few banks, negotiating letters of credit, accept such a policy. A reputable insurance company or a reputable firm of insurance brokers will give the “standard all risks cover” and issue polices and certificates to that effect which will be acceptable by any bank.
The standard “all risks” cover, however, is not quite sufficient for this policy which covers only normal civil happenings. Cover will also be invariably required against “war risk” even in peace time. The exporter should, therefore, instruct the insurance brokers or the insurance company to include a war risk cover, which they will do by endorsing the policy and/ or certificates.
As already indicated, damage or pilferage may occur while the goods are on board. In fact, much of the damage and pilferage occurs during loading or unloading or in transit to the docks in the country of shipment or in transit from the docks at the destination. The exporting manufacturers see to it that the goods are packed safely and in good order at his warehouse; and in normal circumstances, the goods are not seen again until the cases are unstacked in the buyer’s warehouses. The exporter cannot reasonably have all the cases examined immediately before the goods are loaded on board; and the buyer cannot open all the cases for a thorough examination at the docks at his end. Yet goods are damaged by being left out in the rain on the dock, or by being loaded with hooks when they should not be so loaded, or by pilferage by dock workers and dock-side thieves. To cover these risks, it is advisable to have a “warehouse-to-warehouse” cover, which is quite normal and which covers all the risks from the time the goods leave the exporter’s warehouse up to the time they arrive at the buyer’s warehouse. This is usually modified slightly by limiting the period of cover after the arrival of the ship at destination to 30 days irrespective of whether the goods have reached the buyer’s warehouse or not.