Marine Insurance Law

Marine Insurance Law
— General Conditions in Hull, Cargo and P&I Covers
Lianjun Li*
ABSTRACT
The marine insurance market can represent something of a maze to the un-initiated.
Perhaps it is better described as a jigsaw of interlocking covers, often provided by
hundreds of individuals or corporate, to make a marine adventure cover whole. The
reason for this is largely historic, tracing its routes to the Lloyd’s coffee houses of
London, through the American Civil War to the massive expansion of international trade
— to this day still heavily reliant on the shipping industry. This article does not intend to
provide a complete history of marine insurance, nor a line by line analysis of various hull,
cargo and P&I cover. Instead, it will try to provide some historical context to each strand,
before reviewing some of the more prevalent clauses and covers in today’s marine
underwriting market. It is hoped that the reader will come away from the article with a
clearer idea as to who insures what, for how much and why.
KEYWORDS: Hull Insurance, P&I Clubs, Cargo Insurance, Institute Hull Clauses, ITC
Hulls, the Institute Cargo Clauses 2009
*
Solicitor in Hong Kong, England and Wales, Partner of Reed Smith Richards Butler, M.Sc., LLM,
FCIArb; the author is a fellow of the Chartered Institute of Arbitrators, a Listed Arbitrator of the Hong
Kong International Arbitration Centre (“HKIAC”), a Panel Arbitrator of China International Economic
Arbitration Commission (“CIETAC”) and China Maritime Arbitration Commission (“CMAC”), a
Panel Arbitrator of South China International Economic and Trade Arbitration Commission
(“Shenzhen Court of International Arbitration”), Shanghai International Economic and Trade
Arbitration Commission (“Shanghai International Arbitration Center”) and Xiamen Arbitration
Commission. He is also a Council Member of China Maritime Law Association and a visiting
professor at the Dalian Maritime University, China. He has extensive experience in international
commerce and trade, international commercial arbitration, ship finance, shipping, admiralty, ship
purchase & sale, ship construction, international maritime and shipping arbitration. Email:
lianjun.li@reedsmith.com; He thanks Alexander Brandt and Keith Chan for their kind assistance in the
preparation of this paper.
130 The Asian Business Lawyer [Vol.13:129
The Table of Contents
I. Introduction
II. Part 1 — P & I Clubs
III. Part 2 — Hull and Machinery
IV. Part 3 — Cargo Insurance
V. Conclusion
I. Introduction
The interaction between hull, cargo and protection and indemnity insurance in
the marine underwriting market is, as described above, less than straightforward.
Many of the complexities stem from its rich history, preserved through sometimes
stubborn adherence to traditional market practice combined with the tendency of
English common law to shun radical overhaul and development.
At its most simplistic level, hull and machinery insurance provides the bedrock
of insurance for ship owners, covering the majority of loss in the event of a vessel
sinking. Similarly, cargo insurance forms the basic cover in the event of damage or
loss to cargo. Protection and indemnity insurance provides for more nebulous losses
and perhaps is best viewed as filling in the gaps. Notwithstanding this, in e.g. a
collision casualty, it is not uncommon for the P&I Clubs to take the lead in any
subsequent claim. This is because, as a mutual fund, they tend to be exposed to the
largest percentage of claim; hull and machinery cover and cargo cover being backed
by a syndicate of a large number of individuals and organisations each exposed to a
much smaller percentage.
This paper will explore the subject in three parts. Part One will focus on the
history, practice and rules of Protection & Indemnity Clubs. Part Two will address
Hull and Machinery insurance, providing a historical overview before exploring in
particular, International Hull Clauses 2003 as against Institute Time Clauses (Hull)
(1983). Finally, Part Three will look at cargo insurance, again providing general
background and history before reviewing key clauses found in the Institute Cargo
Clauses policy.
As a final remark, the author approaches this article from an English common
law perspective. This is considered particularly appropriate given the industry’s
tendency to conduct business under English governing law.
2014] Marine Insurance Law 131
II. PART 1 — P&I CLUBS
A. A Brief Introduction and History of P&I Clubs
Simply put, a Protection & Indemnity Club [hereinafter P&I Club] is an

association of commercial ship-owners [hereinafter Owners], charterers and other
associated parties which provides protection against a number of risks inherent in
industrial ship operations. These Clubs are mutual associations where the Members
are both insured and insurers, contributing to claims by way of “calls.”1 Whereas an
Owners’ hull and machinery insurance [hereinafter H&M insurance] primarily
protects the assured against losses to their vessel, P&I insurance primarily
indemnifies Owners in respect of the discharge of legal liabilities incurred through
the operation of their vessel.
The English P&I Clubs trace their ancestry to Hull Clubs. These Clubs first
appeared in the late 18th Century, 2 particularly in the north-east of England,
emerging in response to a number of deficiencies then found in the marine insurance
market. These deficiencies can be summarised as follows:
A lack of security in recovering averages; particularly in 1780, during the
period of the American Civil War, the number and size of losses were such that
many underwriters became bankrupt. The state of affairs was not improved by the
influx of rogues into the marine insurance market. These individuals sought quick
profits from the expansion of overseas trade and they were often either incompetent
or fraudsters in reality.3
The monopolistic state of the marine underwriting market; this could be traced
to 18th Century legislation4 which provided for the creation of the Royal Exchange
of Assurance and the London Assurance. The same legislation prevented all other
corporations from assuring ships and merchandise but preserved the ability of
private or particular persons to transact marine insurance. The monopoly was
ultimately abolished in 1824 5 but during its existence, was responsible for high
premiums and narrow risk coverage.
The litigious nature of underwriters; this served to cause delays in recoveries
and in reduced amounts.
1
See Steven J. Hazelwood & David Semark, P&I Clubs Law and Practice, para. 1.1 (4th ed. 2010).
2
Hull Clubs were referenced in cases such as Reed v. Cole (1764) and Lees v. Smith (1797).
3
House of Commons Report 1810, 26 iv 247, at 29, 44.
4
Bubble Act (1720).
5
5 Geo. IV, c 144 (1824).
The fickle nature of the “coffee house” underwriters; while this article does not
seek to do justice to the history of marine underwriting in the United Kingdom
generally, which can be traced to the coffee-houses then found in the City of London
(now largely replaced by Starbucks), it is sufficed to say on this point that in times
of greatest risk, Owners often found it impossible to find adequate insurance.
The provincial nature of Owners; given that the Owners themselves were often
distanced from London, it proved very difficult to determine the solvency (and
trustworthiness) of those underwriters they were dealing with. This necessitated the
use of brokers who were similarly distrusted and resented for high fees.
It was in this market then, that the Hull Clubs grew. In their infancy these
Clubs were local and intimate; with a manager, secretary or at most a small
committee. The Clubs would tend only to insure locally owned vessel, however this
changed to match the ambitions of their managers who were paid a percentage fee of
the contributions made to the Club.
The Hull Clubs decline in the early 19th Century can be attributed to the
abolition of the monopoly in 1824, which allowed the formation of new insurance
companies. Together with Lloyd’s, these companies were able to offer more
competitive rates which meant that Clubs were left with older, badly-maintained
vessels; ultimately leading to their collapse.
Out of the ashes of these Hull Clubs, P&I Clubs formed. This was in response
to an increase in the size, complexity and values of vessels and cargos. In 1836, it
was held that an Owner could not recover from their hull underwriters, damage
caused in a collision.6 The market responded by only providing cover for 3/4 of the
value of a vessel, leaving the Owners uncovered in respect of 1/4 of the expense and
any excess liability above the value of the vessel, and any liabilities in respect of
death, personal injury and damage to any objects falling outside the definition of
vessel.
It was also around this time that parliamentary legislation was introduced, 7
increasing Owners liability in respect of areas such as port damage and employment
liability. The combined burdens and exposure to liability drove Owners back
together in the form of Protection Clubs. The indemnity element emerged soon after,
in respect of liability for loss, shortage or damage to cargo.8
6
De Vaux v. Salvador (1836).
7
Fatal Accidents Act, 1946 c. 93, Harbours, Docks and Piers Clauses Act, 1847 c. 27, and Employers’
Liability Act, 1880 c.42.
8
Hazelwood, supra note 1. According to the author, the cargo indemnity element was triggered by the
loss of two vessels Westernhope and Emily which resulted in high, uncovered Owner liability with
respect of cargo.
B. The Modern P&I Club
Most P&I associations are registered companies limited by guarantee with no

share capital. The workings of the Club are normally laid down in its Articles of
Association. These Articles, along with the Club’s rules, form the foundations of the
insurance contract.
The highest organ of the Club is the General Meeting, conducted by the Board
of Directors (known for historic reasons as “the Committee”). Like any other
corporate entity, business at the General Meeting may involve signing off accounts
or amendment to the Rules.9
The Committee will be elected in accordance with the Articles of Association,
normally every year, at the General Meeting. The Committee Members (or Directors)
normally represent a cross section of the Owner Members and are required to own a
certain tonnage in order to be eligible for election. The Committee will meet every
two to three months and will discuss a wide range of issues but of particular interest,
the exercise of discretion.10
Finally, the Clubs will have Managers which are often a separate legal entity
(such as a limited company). These Manager companies often have only one client,
their P&I Club. The Managers act as agents of the Club and are responsible for its
day to day management, as well as claims handling.11
C. Discretion
One area of particular interest to Members is a P&I Club’s exercise of

discretion. This concept is pervasive through most Club rule books. Rules relating to
entry, membership, settlement of claims, some exceptions to cover, certain insured
risks12 and calls (but to name a few) are often subject to discretionary decisions of
either the Committee or Managers. As one English high court judge described the
position; “[discretion is] peppered all over the Club’s Rules.”13
The importance of the proper exercise of Directors’ discretion has increased in
recent years, as Club cover has been tightened for certain claims; such as those relating
9
Hazelwood, supra note 1, para. 2.10.
10
Hazelwood, supra note 1, para. 2.13. As to the exercise of discretion, please see the below.
11
12
Eg., certain fines and “Defence” cover.
13
The Vainqueur Jose, [1979] 1 Lloyd’s Rep 557, at 573 per Mocatta J.
to non-accidental oil pollution fines. 14 This tightening serves to increase the

discretionary element of cover and may lead to concern by Members that they are
increasingly exposed to the whims of internal politics, favouritism and discrimination.
An obvious balance to this discretion may be found in the judicial review of
Club decisions. The English courts have become more active in the review of quasi-
judicial decision making and it seems certain principles would be applied in
undertaking such a review.15
First, where Directors have misconstrued the rules and acted outside their
authority, their decision will be open to judicial review and may be treated as a
nullity.16
Second, the principle of natural justice will apply to the exercise of discretion
vested in a quasi-judicial body. Any decision must be reached against a background
of fairness, reasonableness, good faith and absent of misdirection in law. 17 An
important point to note from this is that the courts will not stand in the place of the
Committee; that is to say it will review “whether a decision-making body has
exceeded its powers . . . whether a particular decision is so perverse that no
reasonable body, properly directing itself as to the applicable law, could have
reached such a decision,” 18 but will not overturn a decision simply because it
disagrees with it.
The leading case on the application of natural justice with regards P&I Cover
discretion is the “Vainqueur Jose.”19 In addition to the above principals, the judge
made several observations concerning the nature of P&I Club discretion and the case
suggests the court will take a restrictive approach to the review of Club discretion,
mindful that a Club committee has an obligation to the Members as a whole.20 The
court placed weigh on the fact that the relationship governing Members is
contractual as opposed to statutory, suggesting a lesser standard of review.21 In a
similar vein, the judge was of the view that a Committee should not be charged with
the same degree of care as would otherwise be expected by a court of law.22
14
Hazelwood, supra note 1, para. 3.2; this is particularly noteworthy in the United States following the
“magic pipe” cases where Owners received heavy fines for allegedly by-passing their oily water
separators.
15
16
Eg., Wood v. Wood (1874) LR 9 Ex 190, and the “Warwick” (1890) 15 PD 189.
17
The Vainqueur Jose, [1979] 1 Lloyd’s Rep 557.
18
The Product Star (No 2), [1993] 1 Lloyds Rep 397, at 404.
19
20
Id. at 576.
21
Id. at 574. See also The Product Star (No 2), [1993] 1 Lloyds Rep 397, at 404; Leggatt LJ confirmed
in a non P&I context that the courts’ review of contractual discretion should be exercised cautiously.
22
In addition to the Club’s own rules, the Directors must exercise their authority
in accordance with the Companies Act 2006, which places a fiduciary obligation on
Directors to their company to act in good faith.23 Whether the provisions of the Act
add anything to the above position however is unclear. Certainly, in practical terms,
showing that Directors have acted in bad faith will be difficult, given the Member
would be obliged to prove “bad faith” — a difficult evidential burden to satisfy.
In terms of a Member being granted a fair hearing in the face of a committee’s
discretion; this procedure will be governed by the club rules and will vary as
between them. In any case the Managers would be expected to play a key role in the
presenting evidence before the Committee. Their obligation is to present the facts
and any relevant law fairly in order for the Directors to arrive at a fair and
reasonable decision. It is then for the Directors, and the Directors alone, to reach
their decision independently of the views of the managers and any external lawyers
retained to give advice.24
D. Cover
As alluded to above, P&I protection can, in many cases, be viewed as filling in

the gaps left by other forms of insurance cover. Although varying slightly as
between Clubs, ordinarily the following risks would expect to be covered to a
certain extent; the level of which often depending on other policies, Committee
discretion and Owner culpability.
1. Collision and Non-Contact Damages
Where a collision between vessels occurs, the majority of damages and

resulting liability sustained would be expected to be recoverable against Owners of
H&M insurers. However, under traditional English hull clauses, an Owner will only
be covered under this policy for 3/4 of the damage caused.25 Where this is the case
the P&I Club’s cover extends to indemnify the Member for the remaining 1/4 of
damages.
The Club will expect to cover losses stemming from non-contact damages, such
as those caused by wash damage or where a vessel suffers damage (either by
grounding or colliding with a third vessel attempting to avoid a collision with the
23
See, ss. 171-171 Companies Act 2006 C. 46.
24
See Steven J. Hazelwood & David Semark, P&I Clubs Law and Practice, para. 3.38 (4th ed. 2010);
generally and in relation to Directors’ duties, s. 173 Companies Act 2006.
25
See e.g., International Hull Clauses 2003 Clause 6.1.
covered vessel). Such liabilities are again excluded from traditional H&M policies
which are conditional on direct contact.26
2. Security
Despite a Club’s liability only represents 1/4 of the total sum in a collision case;
because hull cover is normally spread over hundreds of underwriters, the P&I Club
may well be the largest single underwriter and will normally take the lead in
handling collision claims and providing security for vessels under arrest.
There is normally no obligation on a Club to provide security but traditionally
Clubs do so because it is logistically easier and quicker than if the Member was
forced to seek security from the hundreds of underwriters participating in hull
insurance.
It is normal English practice for the Owners’ lawyers of the two vessels
involved in a collision to agree wording of reciprocal letters of security, according to
reasonably settled wording,27 to avoid subsequent ship arrest. The Club will then
look to Lloyd’s brokers for counter security.
3. Damage to Fixed and Floating Object/Loss of Damage to Property
Given that English Hull policies generally exclude any third party claim for
damage to property, save for other vessel and property on other vessels damage,28
P&I Clubs will expect to indemnify the Owner for other heads of property damage.
These would ordinarily include damage to a harbour, dock or pier and floating
objects such as a buoy or semi-submersible drilling rigs. Again the P&I cover will
respond to the extent the H&M policy does not.
4. Cargo Claims
A P&I Club will expect to indemnify Owners in circumstances where cargo

interests claim for loss and damage to the cargo. The cover will normally extend to
claims for short delivery, unseaworthiness, improper stowage, inadequate dunnaging
and inadequate heating or ventilation where these arise out of any breach by the
Member or of any person for whose acts he may be legally liable. These will include
26
France, Fenwick & Co. Ltd. v. Merchants Marine Ins. Co., [1915] 3 KB 290.
27
See e.g., the Admiralty Solicitors Group Collision Undertaking (ASG1).
28
International Hull Clauses 2003, Clause 6.4.2.
obligations to properly load, handle, stow, carry, keep, care for, discharge or deliver
the cargo or out of the unseaworthiness of the vessel. The cover responds where the
Member fails to perform the contract of carriage properly, but not where there is
complete failure to perform.29
It should be noted that the cover under this head is subject to more exceptions
and conditions than under any other head. In addition to generally applicable
exceptions,30 the exclusions are primarily directed to preclude recovery of liabilities
arising out of non-mutual risks e.g. where the Member, for commercial reasons,
assumes greater liabilities than those set out in the Hague-Visby Rule.
One particularly fertile area for Committee discretion referral arises from Bill
of Lading issues, particularly where the Member is pressured into issuing clean bills
of lading in circumstances where the master is unconvinced that the Bills match the
cargo. A claim arising where a Bill has been issued in such circumstances will prima
facie be excluded by Club Rules, so too where a delivery of cargo is made without
production of Bills.31
5. Damage Loss or Damage to Property on Board Vessel
Clubs indemnify their Members in respect for loss of or damage to any

containers, equipment, fuel or other property aboard a vessel, excluding cargo and
possessions of persons aboard the vessel.32 Cover will not extend to loss or damage
to property which forms part of the vessel (as this is covered by H&M insurance) or
which is owned or leased by the Member (or associated company).
Further restrictions under this head include those liabilities which arise from
purely contractual agreements between the Member and a third party and those
which are covered under other Rules.33
6. Loss of Life, Personal Injury and Illness
In respect of seamen, Club cover will extend to damages or compensation for

personal injury, illness or death for those who are on board or proceeding to or from
the vessel. This cover also includes medical expenses. Where Member’s liability is
29
30
E.g., those relating to illegal, hazardous or improper adventures.
31
Issues arising from Bills of Lading and subsequent claims are diverse and voluminous (indeed the
subject of a number of volumes). This article provides just a few examples of deficiencies connected
with Bills of Lading; there are many others and all will ordinarily fall outside club cover.
32
33
Such as eg., wreck liabilities.
triggered solely by a contractual agreement with the crew (i.e. above statutory or
other standards) such terms will only be covered if such terms had been previously
approved by the Club. The Club will also ordinarily cover injury to other persons
aboard a vessel, such as passengers or stevedores.
7. Fines
The categories of fines ordinarily indemnified by a Club will include those

relating to; breach of health and safety regulations; short or over delivery of cargo;
failure to properly declare cargo; smuggling; breach of immigration regulations;
accidental discharge of hazardous substances and any act or neglect of a seamen or
other agent of the Member.
Ordinarily a proviso to this rule will be that a fine is not recoverable unless the
Member is liable to reimburse the seamen who incurred the fine or has reasonably
discharged the fine.
Another restriction include where the fine was incurred by wilful misconduct of
the seaman, save where the Member can satisfy the committee that he took steps as
were reasonable to avoid the fine being incurred.
As a general observation, this is another category of cover that is heavily
subject to Committee discretion.
8. Inquiries and Criminal Proceedings; Quarantine Expenses; Stowaways; and

Rescue of Life
These categories are largely self-explanatory and the extent to which they are
covered will depend upon other insurance policies, Club Rules, agreements with the
individual Members and Committee discretion.
9. General Average
Clubs reimburse Members in respect of GA expenditure, special charges or

salvage which the Member is or would be entitled to claim from cargo or some other
party to the marine adventure, which is not legally recoverable by virtue of a breach
of the contract of carriage.34
34
Richard Lowndes & George Rupert Rudolf, The Law of General Average and the York-Antwerp Rules,
para. D.01-D.34 (13th ed. 2007).
A Club will also indemnify its Members in respect of the entered vessel’s
proportion of general average, special charges or salvage not recoverable under
H&M policies (e.g. because the GA value of the vessel is assessed as a value higher
than the insured value under the H&M policy). This may be subject to the managers
assessing what the proper value of the vessel should have been insured at under
H&M and only insuring above that value.35
10. Wreck Removal
Club cover will extend both to the removal of wrecks consequent to a collision
and other wreck liabilities. These may include expenses relating to the raising,
removal, destruction, lighting or marking of the wreck when such activities are
compulsory by law 36 or the costs of the same are legally recoverable from the
Member.
11. Pollution
Cover in relation to pollution covers both oil and other hazardous substances
and will fall into the following categories; damages, prevention and cleaning up,
government orders and directions and salvors.
In terms of damages; Owners and P&I Clubs are primarily concerned with the
Conventions on Civil Liability [hereinafter CLC].37 The CLC requires compensation
to be payable to victims of oil pollution by Owners as well as the carriers of oil.38
One of the main features of the CLC is a requirement for compulsory liability
insurance sufficient to meet claims under the Convention. P&I Clubs will act as
guarantors under both CLCs and provide necessary evidence that cover is in place as
required.39
The International Group Clubs40 buy reinsurance collectively from the market
for claims above US$70 million up to an amount of US$2.07 billion41 for any one
35
Hazelwood, supra note 1, para. 10.206–10.211.
36
Smit Tak Offshore Services and Oths. v. Youell and General Accident Fire & Life Assurance Corp. plc,
[1992] 1 Lloyd’s Rep 154; found that commercial pressure was insufficient to trigger cover under this
head.
37
N.B. there are two versions of the CLC, the 1969 and 1992. Many states have not yet ratified the later
version so both may be of relevance.
38
Article I.5.
39
By way of “blue cards.”
40
The International Group consists of 13 principal P&I Clubs collectively providing cover for
approximately 90% of global oceangoing tonnage.
claim.42 The reinsurance limit for oil pollution claims is US$1,070 million where the
vessel is entered by Owner (or demise charterer).43
12. Towage
Clubs will indemnify a Member’s towing costs but only where the Club has
approved the terms of the towage contract. Some standard form towage contracts
such as Towcon and Towhire are usually approved but more onerous contracts may
not be. As such, it is advisable for Members to seek Club approval before entering
into any towage contract (as even standardised forms will often be amended).
13. Expenses Incurred Pursuant to the Club’s Direction
If a Member has incurred loss, damage or expense reasonably incurred through

carrying out a Club’s written direction, this may be recoverable at the Committee’s
sole discretion.
14. The Omnibus Rule
This head of cover is unique to P&I Clubs 44 and is a discretionary cover

relating to risks incidental to the operation of a vessel and ship owning. The rule
provides that the Committee, in its absolute discretion, have the power to pay a
Member any amount in respect of losses, liabilities, costs or expenses incidental to
the business of owning, operating or managing vessel which in the opinion of the
Committee falls broadly within the scope of Club cover.
Despite only accounting for a small number of claims, this head is very popular
with Owners and provides P&I Clubs with a flexible and dynamic character. Indeed
some of the claims brought previously under this head are now enshrined
specifically within Club Rules.45
41
IGP&I 2013/2014 figures as sourced from www.igpandi.org.
42
The IG has bought an additional US$1 billion layer of overspill protection primarily in response to
enhanced limits under the 2002 protocol to the Athens convention.
43
For charterers the limit is lower; for the 2013/2014 policy year the combined single limit was set at
US$ 350 million.
44
Hazelwood, supra note 1, para. 10. 277.
45
Indeed the Indemnity head of protection, owes such an existence to this Rule.
E. Warrantees and P&I Cover
The subject of warrantees in English law is worthy of its own paper, and will
not be addressed in detail here. Suffice to say for these purposes that a warranty is a
statement made by the Member to the Club and is a condition which must be
complied with exactly according to its terms, whether material to the risk or not. The
consequence of a breach is that the insurance policy may be avoided.46
Given this draconian feature of warrantees, it is important to establish which
terms of the Club Rules will be considered warrantees and additionally, what
implied warrantees (if any) may be incorporated into the Rules. Often this can only
be determined on the basis of specific wording so the author has confined his review
to a few select terms, set out below.
1. Members Call
It is often found in Club Rules that a Member’s neglect to pay calls will cause
Membership to cease. Further, that calls must be fully paid as a condition precedent
to a Member receiving reimbursement from the club and other club services (such as
the provision of security). There is a historic authority which suggests this provision
may not be a warrantee (in circumstances where there were arguments relating to set
off)47 but Steven J. Hazelwood (2010) suggests that modern Club Rules (and indeed
the law) would treat Member calls as warrantees.48
2. Vessel Must Remain in Class
Whether the obligation placed on Owners to ensure that their vessel remains “in
class” throughout the entire period of entry is a warrantee, is again not entirely clear.
Again, much will depend on the way the rule is stated. It may instead have the effect
of an exception to liability. It is suggested though, that under most club wordings,
only the complete suspension or withdrawal of class would constitute a breach of
warrantee.49
46
Marine Insurance Act 1906, s. 33.
47
Williams v. British Marine Mutual Insurance Co. (1887) 3 TLR 314.
48
49
3. Seaworthiness
Statutory implied warrantees as to seaworthiness are discussed below, but Club

Rules themselves generally do not express a requirement that a vessel should be
seaworthy in terms of a warranty; instead seaworthiness is expressed as an exclusion
from cover over the period where the vessel is deemed unseaworthy. This, combined
with the rule that a vessel must be in class, effectively serves to avoid Club liability
if breached.
4. Trading Limits
Restrictions on trade or geographical limits of an entered vessel are generally

endorsed on the Member’s certificate of entry. This then forms a part of the policy,
to be construed in a manner consistent with the Club Rules. Historically, such
restrictions have been held as warrantees50 although there is a body of thought which
suggests such limits may only operate as an exception to cover.51 As before, much
will depend on the specific wording of the clause in question.
F. Implied warranty of seaworthiness
The warrantee of seaworthiness contained in s. 39(5) of the Marine Insurance

Act 1906 is most relevant to P&I cover. The section states that an assured cannot
recover for a loss where their own default in keeping the vessel seaworthy has
resulted in the loss. Application of this rule to P&I cover has caused some
difficulties, with the leading case in this area52 suggesting that the section does have
some relevance, specifically where a Club Rule does not cover all grounds
addressed in s. 39(5). This is to be contrasted with the American position where it
has been found that there is no implied seaworthiness warrantee in a P&I policy.53
50
E.g. Colledge v. Harty (1851) 6 Exch 205.
51
Morgan v. Provincial Insurance Co. Ltd. 48 TLR 217.
52
The Eurysthenes, [1976] 2 Lloyd’s Rep 171, Denning LJ, at 177.
53
See e.g., Hanover Fire Insurance Company of NY v. Merchants Transportation Company, [1927] AMC
1, at 4–5.
III. Part 2 — Hull and Machinery
A. The Institute Hull Clauses
1. History
Until the early 1980s, ships were insured in the London market under the “Ship
and Goods” or SG Form – a policy form adopted by the Members of Lloyd’s in
1779. The form remained largely unchanged for 200 years and is still scheduled to
the Marine Insurance Act 1906.
The cover provided for was in these terms:
“Touching the adventures and perils which we, the assurers are content to bear
and to take upon us in this voyage: They are of the seas, men of war, fire, enemies,
pirates, rovers, thieves, jettisons, letters of mart and countermart, surprisals, takings
at sea, arrests, restrains, and detainment of all kings, princes, and peoples, of what
nations, condition or quality soever, barratry of master and mariner, and of all other
perils, losses and misfortunes, that have or shall come to the hurt, detriment, or
damage of the said goods, and merchandises, and ship, etc or any part thereof.”54
The SG form was used in conjunction with the Institute Clauses, for example
the Institute Time Clauses–Hulls (01/10/70), which added more modern provisions,
such as collision liability cover and cover for perils not insured under the SG form.
However, until 1983, the principal perils against which a ship was insured, were
found in the SG form.
The principal marine insurance clauses were developed under the auspices of
the “Institute of London underwriters.” The Institute comprised a group of London
company insurers, who operated under the umbrella of the Institute in a similar way
that the Syndicate operates under the umbrella of Lloyd’s. At the end of 1998, the
Institute merged with LIRMA, the London International Insurance and Reinsurance
Market Association, to for the International Underwriting Association of London
[hereinafter IUA].55
The driving force for the change that led to the demise of the SG form started
with the United Nations Conference on Trade and Development (UNCTAD) in 1964.
This recommended the use and adoption of “uniform clauses for marine, land and
54
Lloyds S.G. Policy, para. 7 (as scheduled to the Marine Insurance Act 1906).
55
Available at http://www.iua.co.uk.
air transport insurance.”56 Subsequently, a branch of the Organisation for Economic

Co-Operation and Development proposed the development of an international
convention on marine insurance which was opposed by the UK, protesting that the
London market was able to develop and change in response.
At a later UNCTAD meeting and following publication of a paper entitled
“Marine Insurance — legal and documentary aspects of the marine insurance
contract,”57 member states echoed the UK’s resistance to any form of international
convention and agreement was reached to produce standard clauses which would
move away from the wording of the SG form.
As a result, the Lloyd’s Underwriters Association and the Institute of London
Underwriters developed the Institute Cargo Clauses (01/01/82) and then focused on
hull insurance, which led to the Institute Time Clauses–Hulls (01/10/83). For the
first time all the insuring conditions were to be found in a single wording to include
an updated version of the named perils listed in the SG form. At the same time, a
new policy form was developed, the MAR form to meet the formal requirements of
s. 22 Marine Insurance Act 1906.
There are now three sets of Hull Clauses available in the London Market,
namely (i) the Institute Hull Clause (Voyage and Time) dated October 1, 1983; (ii)
the Institute Hull Clauses (Voyage and Time) dated November 1, 1995; and (iii) the
International Hull Clauses dated November 1, 2003. Parties are free to adopt any
one set of clauses although majority of policies are written on the basis of the 1982
Clauses.
2. ITC–Hulls
As above, the ITC–Hulls (01/10/83) are one of the most commonly used set of
clauses for the insurance of ships in the London market. They were amended in
1995, although the amendments were unpopular; they were introduced in a soft
market and were criticised for a lack of consultation with the buyers of hull
insurance.
The stated aim of the 1995 Clauses was to maintain and increase the standards
of ship maintenance and operations, as well as to address amendments to the York-
Antwerp Rules58 and the introduction of the International Salvage Convention.59 The
more controversial amendments included:
56
E/CONF.46/141, Vol. I - 16/06/1964; Annex A.IV.23.
57
1982; TD/B/C.4/ISL/27/Rev.1.
58
York-Antwerp Rules 1994; The York-Antwerp Rules represent a codification of the rules of GA,
whereby all parties to a marine adventure proportionally share any losses resulting from a voluntary
An expanded due diligence proviso for claims under the “Inchmaree clause.”60
This clause provides cover for machinery breakdown and crew negligence. Under
the 1983 clause, such cover is subject to the proviso that “such loss or damage has
not resulted from want of due diligence by the assured Owners or managers.” The
1995 clauses sought to expand this to include “or superintendents or any their
onshore management;”
The introduction of a classification clause — this had significant consequences
for Owners who failed to comply with class society recommendations which went to
the seaworthiness of the vessel;
The introduction of a one year time limit for the reporting to underwriters of
matters, which might give rise to a claim from the date on which the Owner became
aware or “should have become aware”61 of loss or damage which might result in a
claim.
As a result of these criticisms, a new revision of the ITC–Hulls took place in
March 2002.
3. Types of Clauses — Time, Voyage, Limited Conditions and Increased Value
The clauses described above relate to the insurance of ships for a period of time,
most often 12 months. This is the most common way in which vessels are now
insured. However, for certain types of adventure, vessels may be insured on a
voyage basis.
(i) Voyage Policies

Voyage policies tend now to be used for vessels proceeding on a final
scrapping voyage or vessels proceeding under tow. The Institute Voyage Clauses–
Hulls (01/10/83) [hereinafter IVC] are very similar to the ITC–Hulls (01/10/83),
although there are some significant differences between a time policy and a voyage
policy.
Ss. 42-49 of the Marine Insurance Act 1906 set down specific rules peculiar to
the insurance of voyages, which apply to both cargo and hull risks. There are
important provisions in s. 45 and s. 46 which address change of voyage and
sacrifice of part of the ship or cargo to save the whole in an emergency. The first codification was
drafted in 1890 and the Rules have undergone successive updates.
59
Concluded on April 28, 1989.
60
The Thames and Mersey Marine Insurance Co. Ltd. v. Hamilton, Fraser, & Co. “The Inchmaree”
(1887) L.R. 12 App Cas 484; the Inchmaree Clause was introduced as a result of the House of Lords
decision in The Inchmaree holding that mechanical failure did not constitute a peril of the seas.
61
Clause 13.1.
deviation “without lawful excuse.” In both cases, underwriters are automatically

discharged from liability although the strict position at law is softened by clause 2 of
the IVC. This provides that an Owner will remain “held covered” in case of
deviation or a change of voyage, provided that immediate notice is given to
underwriters and any amended terms of cover are agreed.
Another significant distinction between a time and voyage policy is the
question of unseaworthiness. Section 39(1), Marine Insurance Act provides:
“In a voyage policy there is an implied warranty that at the commencement of

the voyage the ship shall be seaworthy for the purpose of the particular adventure
insured.”
If this implied warranty is breached, then the underwriters are automatically

discharged from liability — and this is so whether or not the unseaworthiness causes
loss under the policy.
The implied warranty applies also to cargo insurance, although is almost
invariably amended in the standard cargo wordings by the “unseaworthiness and
unfitness exclusion clause.” This waives breach of s. 39(1), unless the assured, in
this case the cargo owner, is privy to such unseaworthiness or unfitness.
Perhaps unsurprisingly, there is no equivalent provision in the IVC — Hulls
and the Owner of a ship is not relieved of the obligations to make his vessel
seaworthy for the intended voyage.
The position under a time policy is different — there is no implied warranty of
seaworthiness. However, s. 39(5) of the Marine Insurance Act provides:
“In a time policy, there is no implied warranty that the ship shall be seaworthy
at any stage of the adventure, but where, with the privity of the assured, the ship is
sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable
to unseaworthiness.”
The English courts, notably in the “Sea Star,”62 have considered the meaning
of s. 39(5) on a number of occasions. These decisions show that even where
underwriters can show loss was caused by unseaworthiness; that is not sufficient to
afford then a defence to the claim. They must go further and show knowledge or
privity on the part of the assured. It seems that for insurers to make good arguments
62
[2001] 1 Lloyd’s Rep 389.
of privity, it must be shown that the relevant “head men” were actually aware of the
unseaworthiness.
(ii) Limited Conditions

For older vessels or where underwriters are concerned about an assurer’s loss
record, underwriters may provide for more limited cover.
This can take two forms. Underwriters may provide cover on a “total loss only”
basis — that is cover against actual or constructive loss of the vessel and not for
partial loss. Alternatively, underwriters may provide "limited conditions" cover.
This tends to be shown as, for example:
ITC–Hulls (01/10/83); “but free of any claim in respect of partial loss of or

damage to the vessel unless caused by fire, lightening, explosion, grounding,
stranding, damage received in collision with ship vessel or object.”
This provides slightly broader cover than total loss only, in that some cover for
partial loss is given where it has been caused by the perils listed.
(iii) Industry Specific Cover

There are specific types of insurance for different types of vessels, most
notably fishing vessels and yachts.
In the case of fishing vessels, the basic cover afforded is similar to that given
under ITC–Hulls and also includes P&I cover.63
Cover for yachts is also similar 64 to the ITC–Hulls, but also contain many
provisions peculiar to yachts, relating to, eg., speed, lay-up and a number of
exclusions in relation to loss and damage to outboard motors, sails etc.
(iv) Disbursement and Increased Value

An Owner of a vessel may lose more than the insured value of his vessel in the
event of the vessel sinking.
The usual practice in London is for the vessels to be insured on an “agreed
value” basis and an Owner will be entitled to recover that value, in the event of a
total loss — even if that value is greater than the actual value.
However, an Owner may also purchase “disbursements and increased value
insurances” which essentially respond by paying a further sum in the event that the
63
See the Institute Fishing Vessel Clauses (20/07/87).
64
See the Institute Yacht Clauses (01/11/85).
vessel is a total loss by the traditional and named perils. The sum cannot, in the
absence of prior agreement with the hull and machinery underwriters, exceed 25%
of the hull and machinery insured value.
The standard clauses also provide that the increased value policy will follow
the hull and machinery policy, in ascertaining whether the vessel is a constructive
total loss.65
In the event that a compromised total loss agreement is reached under the
H&M policy, then the increased value policy usually follows by paying out the same
percentage.
(v) Mortgagees’ Interest

The majority of trading vessels are the subject of mortgages. The mortgage
banks will usually require that the vessel is insured on terms which are “no less wide”
than ITC–Hulls (01/10/83) or similar clauses. Mortgagee banks are normally noted
as “loss payees” under the proceeds of any total loss claim, such that the proceeds of
any total loss claim are paid to them.
Traditionally, mortgagee banks have chosen not to be insured under the H&M
policy, in part because they may then incur a liability to pay a premium. Many banks
do however purchase contingent cover under the Institute Mortgagees Interest
Clauses Hulls. These clauses vary in form and many banks have their own wording.
Mortgagees Interest Insurance [hereinafter MII] provides cover to banks in the event
of loss under the H&M policy which is prima facie covered, but which is not
recoverable from the H&M underwriter for some other reason — normally one
which vitiates cover. Examples of this may include material non-disclosure on
placing, breach of warranty, breach of s. 39(5) Marine Insurance Act and even wilful
misconduct.
An important requirement of these insurances is that the Owner has taken out
and maintained the H&M insurance for an amount not less than the amount of the
outstanding loan protected under MII policy. It is also important to note that an MII
policy will not normally respond where the Owner has failed to pay his premium, as
a result of which his H&M cover has been terminated.
65
i.e. whether the cost of repairs exceed the insured value.
B. The International Hull Clauses (1/11/03) and comparison with the ITC Hulls
(1/10/83)
1. Introduction
The ITC-Hulls were subject to further amendment in March 2002, resulting in

the International Hull Clauses 2003. These amendments were introduced to reflect
the changing regime under which Owners must now operate their ships and to bring
together, in a single form, a number of additional clauses commonly found in
London market slips, with a view to achieving consistency in wording. The clauses
were subject (unlike their 1995 predecessors) to an extensive 18 month consultation.
They do not represent a fundamental rewrite of the ITC-Hulls and retain the
traditional “named perils” format.
The Hull Clauses now take the form of three integrated yet distinct parts as
follows:
(i) Part 1 – principle insuring conditions;
(ii) Part 2 – additional clauses and optional covers which may be agreed on
placing (such as lay-up returns, general average absorptions and additional
perils); and
(iii) Part 3 – claims provisions, which set out the duties of the assured and
underwriters.
2. A Comparison between International Hull Clauses (1/11/03) and ITC Hulls

(1/10/83)
(i) Part 1
Whilst Part 1 is similar to the ITC–Hulls (01/10/1983) there are some important
differences. References to clauses in the following section refer to those found in the
2003 Clauses.
(a) Clause 1 – Jurisdiction

The insurance is subject to English law and practice as previously but is also
subject to the exclusive jurisdiction of the English High Court of Justice. This
jurisdiction provision may be deleted by agreement.
(b) Clause 2 – Perils

The “Perils Clause” is divided into two sections. The first section of the clause
is not made subject to a due diligence proviso (such clause is mostly taken from the
old S.G. form). The second part of the clause is qualified by the due diligence
proviso which formerly appeared in the Inchmaree Clauses66 (in the 1983 clause
form and not the 1995).
In the old S.G. Form, there is also the General Clause which extended the scope
of named perils to provide cover for other risks which were ejusdem generis to any
of the named perils. It provides as follows:
“. . . and of all other perils, losses, and misfortunes, that have or shall come to
the hurt, detriment or damage of the said goods and merchandises and ship, etc., or
any part thereof.”
This General Clause, however, is not included in the modern forms. In reality,
there had only been a few cases in which the assured was able to recover on the
basis of the General Clause, and in most cases where the General Clause was said to
be applicable the assured was held entitled, in any event, to recover for loss by the
similar named peril.67 On the other hand, the main classes of perils covered under
the old Marine Clauses have been expanded to cover “perils of the seas, rivers, lakes
or other navigable waters.” It is now clear that casualties occurring in inland waters
are now covered under the modern forms. Yet, for some other named perils such as
that of “fire,” there are more practical consequences in relation to the omission of
the General Clause. For instance, it is arguable that the General Clause would cover
cases where a ship is damaged by the heating of her cargo, although no fire actually
breaks out. Such a loss may not be covered under the new clauses as the word ‘fire,’
in its natural and ordinary meaning, cannot easily be extended to cover heating
without combustion.68
An important clarification has been made in the 2003 Clauses to the cover for
loss and damage caused by burst boilers/broken shafts and by latent defects. No
cover is given for the costs of repairing or replacing the burst boiler/broken shaft or
correcting the latent defect. However, cover is given where damage is caused by the
66
The Inchmaree Clause provided cover for bursting of boilers, breaking of shafts, accidents in loading
fuel and cargo and related perils provided that the loss did not result from want of due diligence by the
assured, Owners or managers.
67
Jonathan Gilman et al., Arnould’s Law of Marine Insurance and Average 37 (London, Sweet &
Maxwell, 17th ed. 2008).
68
See Tempus Shipping Co. v. Louis Dreyfus & Co., [1930] 1 K.B. 699 at 708; c.f. Western Woollen
Mill Co. v. Northern Assurance Co. 139 F. 637 (1905).
bursting boiler or the latent defect. This seeks to restore the distinction between
defect and consequential damage as understood prior to the Court of Appeal
decision in the “Nukila.”69
The Nukila was an accommodation platform. The platform had three legs,
being steel columns, which were welded into large metal boxes [hereinafter spud
cans]. These then rested on the seabed. During a routine inspection, cracks were
discovered in all three legs where they joined the spud cans, caused by fatigue.
These had developed due to defects in the welds holding the spud cans and legs
together. The defects were introduced when the platform was constructed.
The Owners repaired the legs and spud cans and then presented a claim to
underwriters for loss and damage caused through latent defect. The platform was
insured on terms which included the ITC–Hulls (01/10/83). Underwriters denied the
claim, contending that there had been no “consequential” damage to some part other
than the legs and that all that had happened was that there had been manifestation of
latent defects. At first instance, the court agreed with the underwriters. However, the
Court of Appeal took a different view.
The Court of Appeal held that the assured simply had to show “damage” during
the policy period in order to recover. The question of consequential damage did not
arise because clause 6.2.2. of ITC–Hulls 83 contained no requirement that the
assured had to show consequential damage to some other part. The Court held that
what is “damage” is a question of “fact and degree” and that the Nukila’s legs were
damaged by the extensive fatigue cracking.
Thus, the view taken in the new clauses was to go some way to restore the
cover for loss and damage caused by latent defects that was understood prior to the
Court of Appeal’s decision in the Nukila — to reflect that underwriters are happy to
cover damage caused by latent defect, but less happy to effectively guarantee that
the hull and machinery of a vessel is free from such defects or to provide cover for
simple discovery of defects.
In 2003, a new provision was introduced, such that repair costs common to the
repair and correction of the defect and to the repair of damage caused by the defect
are equally split between Owners and underwriters.
(c) Clause 3 – Parts Removed and Leased Equipment

Cover is now given as standard for leased equipment and for parts taken off the
vessel, if lost or damaged by the Clause 2 perils.
69
[1997] 2 Lloyd’s Rep 146.
(d) Clause 6 – Collision Liability Costs

There is a cap on the legal costs payable by underwriters under the collision
liability clause — 25% of the insured value, although this may be amended by
agreement. There was no express limit of the legal costs payable under the 1983
clauses. That is not to say there was no limit, but simply that it was not expressed.
(e) Clause 8 – GA/Salvage

Claims for GA, salvage and sue and labour are no longer subject to a reduction
where the vessel is under-insured.
(f) Clause 10–11 – Trading Warranties

The navigation provisions in both the 1983 and 1995 clauses were warranties,
when written in conjunction with the Institute Warranties.
As touched on above, the principal objection to warranties is that even a minor
infringement can provide an absolute defence in any subsequent claim against
underwriters. In recognition of this, warranties have largely been avoided in the new
clauses. Breach of the navigation provisions is no longer a breach of warranty in the
strict sense under the Marine Insurance Act; instead cover is suspended for the
period of the breach.
(g) Clause 13 – Class and ISM

There are important changes to Clause 13 to reflect current practice regarding
classification and ISM. Owners must ensure that any recommendations by class as
to the vessel’s seaworthiness are complied with by the dates required by class and
they must maintain valid ISM documentation — a document of compliance and a
safety management certificate. Failure to do so results in automatic termination
unless the underwriters waive this right.
(h) Clause 14 – Scrapping Voyages

Under Clause 14.2, there is automatic termination where the vessel sails for
break up, whereas under the 1983 Clauses, the insured value was reduced to the
market value of the vessel as scrap.
(i) Clause 14 – Statutory Requirements

There is a continuing duty upon the assured, Owners and managers to comply
with the requirements of the vessel’s flag state and classification society in relation
to reporting of accidents and defects. Where this duty is breached, there is no cover
for loss attributable to the breach — a causal test. It is important to note that this is
addition to, rather than in substitution for the provisions of s. 39(5), Marine
Insurance Act.
(j) Clause 21 – Constructive Total Loss

A significant change under the new clauses is that the constructive total loss
clause now responds where the cost of recovering or repairing the vessel exceeds 80%
of the insured value of the vessel, rather than the full insured value. This brings the
clause in line with the Norwegian Plan and represents a significant attraction over
the 1983 Clauses (and indeed the American hull form).
(k) Clause 29 – War and Strikes

The war and strikes exclusion have been amalgamated, in the 2003 version
there is a terrorist, political motive and malicious acts exclusion, and exclusion of
loss or damage arising from the use of “any weapon of war” has been widened to
“any weapon.”
(ii) Part 2
Part 2 contains a mix of standard and optional clauses.
(a) Clause 32 – Navigating Limits

The navigating limits have been re-drawn in line with the International
Navigating conditions (01/11/03) and are narrower in scope than the Institute
Warranty limits. Bering Sea transit cover is now given as standard.
(b) Clause 35 – Premium

The London market premium payment clause, LSW 3000 has been adopted in
the 2003 clauses, providing that the assured undertakes to pay premiums within 45
days of inception. This clause does not alter the position under the Marine Insurance
Act that brokers are responsible to underwriters for premium, but it does give
underwriters a direct right to cancel for non-payment of premium in circumstances
where that right was not previously available to them.
(c) Clause 36 – Third Parties

The Contracts (Rights of Third Parties) Act 1999 applies automatically to all
contracts subject to English law concluded after May 11, 2000 and provides that in
certain circumstances, a non-party to a contract can nevertheless rely on

advantageous terms included within it. Clause 39 makes it clear that only parties to
the insurance contract can enforce benefits under it, save where there is contrary
provision.
(d) Optional Extensions

There are optional extensions to cover liability for striking fixed and floating
objects and also the option to extend 3/4 collision liability cover to 4/4.
Clause 40 contains an optional GA absorption clause which enables an Owner
to recover the entirety of GA and salvage expenditure from underwriters, without
claiming against other interests such as cargo or freight, subject to a pre-agreed limit.
This is closely based upon the GA absorption clause developed by BIMCO.70
There is an optional additional perils clause, which dovetails with the standard
latent defect cover to respond to those costs and expenses not covered under the
standard cover. It also includes cover subject to the due diligence proviso, for loss
and damage caused by “any accident or by negligent, incompetence or error of
judgment of any person whatsoever.”
(iii) Part 3
Part 3 contains the claims provisions. It draws on provisions from the 1983
clauses and includes new provisions intended to make the claims process smoother
and more efficient. The principle objective of Part 3 is to encourage and promote a
more active dialogue between the important players in the claims process. It seeks to
avoid the traditional problem of the leading underwriter hearing nothing of the claim
between the first advice and presentation, maybe some years later, of the adjustment.
New provisions are:
(a) Clause 42 – Leading Underwriter Clause

There is a leading underwriter clause, whereby the followers appoint the
leaders identified in the slip to act on their behalf in the claims process, particularly
in such matters as the appointment of experts, the provision of security and the
settlement of claims (although not ex gratia claims settlement).
70
Baltic and International Maritime Council (BIMCO) is the largest of the international shipping
associations representing ship owners. The association’s main objective is to protect its global
membership through the provision of quality information and advice, and while promoting fair
business practices, facilitate harmonisation and standardization of commercial shipping practices and
contracts.
(b) Clause 45 – Duties of the Assured

Clause 45 sets out the responsibilities of the assured in relation to claims and
the consequences of any attempt to mislead underwriters. The clause does not give
underwriters carte blanche in the investigation of claims, but rather sets out the
assistance underwriters might reasonably request from the assured. Setting out,
before any claim has arisen, what is reasonably expected of the assured in any
claims investigation reduces the scope for any later misunderstanding.
The requirements include interviews of employees, most obviously the crew,
surveys of the vessel and inspection of class records. These requirements are in
essence, no more than a codification of what would be expected in the aftermath of a
casualty.
The fraudulent claims clause is a relatively new innovation in marine hull
policies, but is common in most forms insurance — both commercial and domestic.
(c) Clause 46 – Duties of Underwriters

As a quid pro quo, there are reciprocal duties from underwriters. This is new to
the 2003 terms. There is express recognition that underwriters may instruct
surveyors to report on cause, as well as the more usual questions of the extent of
damage and repair cost.
There is also provision for the pre-appointment of adjusters. They may be
confirmed in the slip or agreed between Owners and underwriters.
Perhaps most importantly, Clause 46 sets decision times for the Leaders —
being “prompt” consideration of payment on account requests and also 28 days from
the claim itself. Even if the decision is to request further information or
documentation, it is clearly advantageous to the insured that the process is moved
forward.
(d) Clause 47 – Provision of Security

The difficulties for a subscription market in providing security for third party
claims (such as salvage or collision liability) are well known, however these
difficulties are generally overcome by the provision of short form guarantees and the
support of the bonding companies. There is now a general bail clause. In common
with most marine liability policies, the provision of security is discretionary,
although a decision by the leaders will be binding on the rest of the market.
(e) Clause 49 – Recoveries

Importantly for both underwriters and Owners, there is an express recoveries
clause.
Recoveries are now applied on a pro-rata rather than a “top-down” basis as
before. In other words, Owners and underwriters share in any recovery, with the
underwriters no longer taking the top slice. This may be particularly important in the
event of high deductibles.
The recoveries clause brings recovery to the fore. Whilst there is a positive
burden on Owners to assess the prospect of recoveries from third parties at an early
stage, this is balanced by agreement from underwriters to contribute towards costs.
Claims against potentially responsible third parties should be assessed at an
early stage and evidence gathered. There is no particular reason why this avenue
cannot be explored at the outset nor is there any good reason for delaying the
consideration of recovery potential until after the claim has been settled.
(f) Clause 50 – Mediation

Reference to mediation is not mandatory; however there is a clear recognition
within the new clauses that mediation can be a favourable alternative to traditional
litigation.
IV. Part 3 — Cargo Insurance
A. History
The Institute of London Underwriters issued the first Institute Cargo Clauses in
1912. Work on standard cargo clauses had begun in 1908, but was galvanised by the
disastrous underwriting results of 1912 culminating in the loss of the Titanic. As a
result a sub-committee consisting of two company underwriters, two Lloyd’s
underwriters and two representatives from the brokers’ association was appointed by
the Institute to prepare standard clauses for cargo which were introduced with effect
from August 1, 1912. The standard clauses, which covered named perils, were
actively updated throughout the early twentieth century and standard all risks
clauses, the Institute Cargo Clauses (All Risks), were introduced on January 1, 1951.
The Institute Cargo Clauses were reissued in 1963 and radically revised in 1982
when the MAR Form was introduced as a substitute for the SG Policy Form.71
Similar to hull and machinery insurance, under the old practice three sets of
Institute Clauses were employed. The Institute Cargo Clauses (All Risks) gave the
widest degree of standard cover available in the market. The other two set of clauses
were the Institute Cargo Clauses (W.A.) and the Institute Cargo Clauses (F.P.A.).
Under these set of clauses, certain categories of loss and classes of perils were
insured irrespective of the amount of loss, while others were covered only if the loss
was total or if the amount exceeded the franchise contained in the policy.72
Under the modern system of cargo insurance, the three sets of clauses are
named the Institute Cargo Clauses (A), (B) and (C) (together, the “ICC” [hereinafter
ICC]). The widest cover is afforded by the (A) Clauses which substantially
reproduced and replaced the terms of the former All Risk Clauses. The (B) and (C)
Clauses now contain a list of specified perils in the Risks Covered Clause (Clause 1)
which reflects the terms that followed the average exclusion in the old (W.A.) and
(F.P.A.) Clauses.73 The first incarnation of this new layout was the ICC 1982.
After almost 25 years, in light of the changing nature of world trade as a result
of more modern transport technology, there is an increased demand from insured
parties for up to date terms of cargo insurance. In 2006, the Lloyd’s Market
Association sent out a questionnaire to all partners throughout the world and a
working group consisting of Members of the Joint Cargo Committee was set up to
analyse the responses. After analysing the responses to the questionnaire the
working group produced a detailed consultation document which was distributed to
the worldwide cargo markets in May 2008. Revised drafts were circulated in
October 2008 before the final version was agreed ready for implementation on
January 1, 2009.
B. The Institute Cargo Clauses 2009
A typical marine cargo policy, underwritten on the terms of the Institute Cargo
Clauses, is primarily concerned with physical loss or damage to the cargo, not
financial losses or expenses. 74 However, cover extends to reimbursement of the
liability for two well-recognised categories of marine expense connected with the
71
John Dunt, Marine Cargo Insurance, para. 1.11 (1st ed. 2009).
72
Gilman et al., supra note 67, at 38–39.
73
Gilman et al., supra note 67, at 39.
74
See Clause 4; Exclusions.
carriage of cargo by sea, GA and salvage.75 Expenses reasonably incurred to avert or

minimise a loss, known as sue and labour, are also recoverable.
Cargo insurance also extends beyond physical loss and damage to the goods in
another important respect. When underwritten on a voyage basis, which is invariably
the case, cargo insurance covers loss of the adventure. The position is that a policy
on goods covers a composite interest, the physical loss of the goods by destruction,
damage or deprivation, and also the expected benefit from their arrival, a dual
interest which has been described as “chattels-cum-adventure.”76 The adventure may
be lost although the goods are undamaged and still in the possession and control of
the assured, but are unable to reach their destination.77 The result may be loss of
market or loss of another benefit, such as use of machinery in a factory.
The Institute Cargo Clauses now provide standard terms of cover without the
need for reference to any policy form, whether the MAR Form,78 or the more recent
Market Reform Contract.79
In general, the new Institute Cargo Clauses 2009 [hereinafter ICC 2009]
promotes clarity and removed the archaic language used in the 1982 version. For
instance:
① The term ‘assured’ is now defined for extra clarity and expressly includes
either the person by or on whose behalf the contract of insurance was effected or
assigned.
② The terms ‘goods’ and ‘cargo’ have been replaced by a more general term
of ‘subject-matter insured.’
③ The term ‘underwriters’ has been replaced by ‘insurers’ and the archaic
term ‘servants’ has been replaced by ‘employees.’
④ The side headings to the Clauses have been modified and placed in a more
conventional manner above each of the clauses.
From a commercial perspective, the ICC 2009 has undergone the following
changes to reflect modern cargo practices:
75
See Clause 2; Risks covered.
76
Forestal Land, Timber & Railways Company Ltd. v. Rickards; Middows Ltd. v. Robertson (1941) 70
Ll. L. Rep. 173 (HL), 193, per Lord Wright.
77
British & Foreign Marine Insurance Company Ltd. v. Samuel Sanday & Co., [1916] 1 AC 650 (HL).
78
The MAR Policy Form was adopted in 1982 as a replacement to the antiquated SG Form. It was a
framework policy form, as the substance of the cover had been moved to the Institute Clauses.
79
The MRC is a replacement of the LPM Slip (2001) which introduced a flexible but consistent
insurance contract which provided a common basis for the structure of the slip to be used in the
London market. The MRC has now replaced the LMP Slip and has been adopted for all London
market marine cargo business.
1. Packaging or Preparation Exclusion
The ICC 1982 excluded insufficiency of packaging or preparation even when it

was beyond the control of the assured and arose accidentally after the insurance has
attached. The ICC 2009 exclusion will now apply when the packaging or
preparation is carried out by the assured or their employees or the packaging or
preparation is carried out prior to attachment of the risk.
The new clause also sets out the standard by which any insufficiency or
unsuitability is to be judged which is the packaging or preparation must be sufficient
to withstand the ordinary incidents of the insured transit.
2. Unseaworthiness Exclusion
The effect of the new Clause 5 is to narrow the scope of the exclusion clause
and states that exclusion only applies if the assured is privy to unseaworthiness or
unfitness of the vessel at the time of loading or in the case of the container being
unfit for the safe carriage of goods and either the loading is carried out prior to
attachment or by the assured or their employees and they are privy to that unfitness.
The new Clause 5.2 further protects the position of an innocent party who has
had the policy assigned to them as part of a binding sale contract, since it is assumed
they are unlikely to be in a position to control or verify the suitability of the vessel
or container.
3. Terrorism
The terrorism exclusion in the ICC 2009 has been extended to reflect the wide
range of threats that may be encountered and the range of motives that may be
behind an attack. The exclusion is widened to cover not only political acts but also
acts motivated by ideological or religious motives. However, the new Clause 7.3
makes clear that the exclusion does not apply to lone terrorists as excluded acts of
terrorism has to be undertaken by a person acting on behalf of or in connection with
an organisation.
4. Duration – Transit Clause
Under the ICC 1982, there was no cover until the goods had left the warehouse
so it would only have been insured if an accident happened outside the warehouse.
This however has been inconsistent with the common practice of brokers who are
willing to extend coverage to include the process of loading and unloading. Cover
now attaches from the time the subject matter insured is first moved in the
warehouse for the purpose of the immediate loading. Cover does not therefore
extend to temporary storage prior to transit on vehicles or to such storage in holding
areas within a warehouse. Similarly, transit ceases upon the completion of unloading
instead of delivery.
The new Clause 8.1.3 is added to clarify that insurance terminates if the goods
remain in the carrying vehicle and the assured or their employees elect to use it for
storage, other than in the ordinary course of transit. As the new clause refers
explicitly to the assured and their employees, management is advised to be aware of
decisions at the warehouse floor level because they may have an impact on coverage.
5. Change of Voyage
In the event that the insured changes the voyage destination after the
attachment of the insurance, the insured may still be able to obtain coverage for the
voyage if prompt notice is given to the insurers for rates and terms to be agreed.
Should a loss occur prior to an agreement being made, cover may be provided if
cover would have been available at a reasonable commercial market rate on
reasonable market terms.
6. Insolvency Exclusion
Prior to ICC 2009, loss, damage or expense arising from insolvency or financial
default of the Owners, managers, charterers or operators of the vessel will be
excluded from cover. Under the new Clause 4.6 in the ICC 2009, a claim will only
fail if, at the time of loading, the assured was aware and should have been aware that
the voyage might be interrupted by the financial circumstances of the carrier. The
exclusion will not apply at all when the insurance has been assigned to a third party
in good faith.
The assured is not expected to carry out in depth forensic accountancy checks
by must exercise the common sense standards of a prudent businessman acting in
the ordinary course of business. It follows that the assured should not turn a blind
eye to obvious signs that a carrier is lacking in funds.
V. Conclusion
The author appreciates that this article is not an exhaustive review of all H&M,
ICC and P&I rules; such an exercise would doubtless fill volumes. It is hoped
however, that it provides something of a roadmap, highlighting key clauses and the
reasons for their inclusion. The interpretation and application of these clauses will
invariably be questioned with each incident that arises — each of which will turn on
its own facts. It is therefore important for lawyers to be instructed at an early stage
after a potential insurance claim event, to ensure that a party’s position is properly
protected and represented. Whilst such an instruction represents further expenditure
after a casualty (often at the very time parties least want to incur additional costs), it
can yield longer term dividends, helping to either recover or mitigate what will
normally be much more sizable sums.
REFERENCES
Books, Reports, and Other Nonperiodic Materials
Richard Lowndes & George Rupert Rudolf, The Law of General Average and the
York-Antwerp Rules (13th ed. 2007)
Jonathan Gilman et al., Arnould’s Law of Marine Insurance and Average (London,
Sweet & Maxwell, 17th ed. 2008)
John Dunt, Marine Cargo Insurance (1st ed. 2009)
Steven J. Hazelwood & David Semark, P&I Clubs Law and Practice (4th ed. 2010)
Periodic Materials
Lloyd's Law Reports

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Marine Insurance Law

— General Conditions in Hull, Cargo and P&I Covers

The Table of Contents

II. PART 1 — P&I CLUBS

A. A Brief Introduction and History of P&I Clubs

Simply put, a Protection & Indemnity Club [hereinafter P&I Club] is an

B. The Modern P&I Club

Most P&I associations are registered companies limited by guarantee with no

One area of particular interest to Members is a P&I Club’s exercise of

to non-accidental oil pollution fines. 14 This tightening serves to increase the

As alluded to above, P&I protection can, in many cases, be viewed as filling in

1. Collision and Non-Contact Damages

Where a collision between vessels occurs, the majority of damages and

3. Damage to Fixed and Floating Object/Loss of Damage to Property

A P&I Club will expect to indemnify Owners in circumstances where cargo

5. Damage Loss or Damage to Property on Board Vessel

Clubs indemnify their Members in respect for loss of or damage to any

6. Loss of Life, Personal Injury and Illness

In respect of seamen, Club cover will extend to damages or compensation for

The categories of fines ordinarily indemnified by a Club will include those

8. Inquiries and Criminal Proceedings; Quarantine Expenses; Stowaways; and

Clubs reimburse Members in respect of GA expenditure, special charges or

10. Wreck Removal

13. Expenses Incurred Pursuant to the Club’s Direction

If a Member has incurred loss, damage or expense reasonably incurred through

14. The Omnibus Rule

This head of cover is unique to P&I Clubs 44 and is a discretionary cover

E. Warrantees and P&I Cover

2. Vessel Must Remain in Class

Statutory implied warrantees as to seaworthiness are discussed below, but Club

Restrictions on trade or geographical limits of an entered vessel are generally

F. Implied warranty of seaworthiness

The warrantee of seaworthiness contained in s. 39(5) of the Marine Insurance

III. Part 2 — Hull and Machinery

A. The Institute Hull Clauses

air transport insurance.”56 Subsequently, a branch of the Organisation for Economic

3. Types of Clauses — Time, Voyage, Limited Conditions and Increased Value

(i) Voyage Policies

deviation “without lawful excuse.” In both cases, underwriters are automatically

“In a voyage policy there is an implied warranty that at the commencement of

If this implied warranty is breached, then the underwriters are automatically

(ii) Limited Conditions

ITC–Hulls (01/10/83); “but free of any claim in respect of partial loss of or

(iii) Industry Specific Cover

(iv) Disbursement and Increased Value

(v) Mortgagees’ Interest

The ITC-Hulls were subject to further amendment in March 2002, resulting in

2. A Comparison between International Hull Clauses (1/11/03) and ITC Hulls

(a) Clause 1 – Jurisdiction

(b) Clause 2 – Perils

(c) Clause 3 – Parts Removed and Leased Equipment

(d) Clause 6 – Collision Liability Costs

(e) Clause 8 – GA/Salvage

(f) Clause 10–11 – Trading Warranties

(g) Clause 13 – Class and ISM

(h) Clause 14 – Scrapping Voyages

(i) Clause 14 – Statutory Requirements

(j) Clause 21 – Constructive Total Loss

(k) Clause 29 – War and Strikes