INTRODUCTION

TO

MARINE INSURANCE

STUDY GUIDE AND WORK BOOK

Written by: Cathrine Bjune

 Preface
The intention of this study guide is to provide you with basic knowledge of Marine Insurance. The guide is
an addition to the book “Introduction to Maritime Law” , written by Hans Jacob Bull and Thor Falkanger.
Marine Insurance is an important part of shipping, as it represents an elimination of and reduction of
potential risks, which are numerous. Often it is required by banks and other partners that the ship is “fully
insured” or that specific covers have been taken out. A sales contract may impose liabilities upon the parties
to contract for insurance, as well as specifying the need for insurance.
This guide intends to explain why we have marine insurance, the insurance markets, its tradition and the
various covers available to shipowners, charterers and cargo owners. As we will see, marine insurance has
been shaped by the practical need of those engaged in shipping and commerce.
Relevant terms will be explained in detail, as marine insurance has a language of its own.
This guide, as well as the book referred to above, emphasises on Norwegian Law, but references to English
Law and English covers and conditions is made throughout. Being an international subject, the rules relating
to marine insurance tend to be similar around the world.
You will find self-assessment questions throughout the book. It is recommended that these are answered, in
order to monitor your own understanding of the subject.
 TABLE OF CONTENT
INTRODUCTION TO MARINE INSURANCE..............................................................................................1
The History of Marine Insurance..................................................................................................................1
1lovd's..........................................................................................................................................................3
Insurance companies....................................................................................................................................4
MARINE INSURANCE MARKETS............................................................................................................6
The Norwegian Market.................................................................................................................................6
The English Market......................................................................................................................................7
The role of the Broker..................................................................................................................................8
THE LAW OF MARINE INSURANCE.....................................................................................................10
Introduction................................................................................................................................................10
Statutory Law.............................................................................................................................................10
Standard Insurance conditions....................................................................................................................10
Clauses.......................................................................................................................................................10
The Marine Insurance Act of 1906.............................................................................................................11
The Standard Conditions attached to the Policy or incorporated by reference............................................11
Individual clauses.......................................................................................................................................11
DEFINITIONS OF COMMONLY USED INSURANCE TERMS...........................................................12
MARINE INSURANCE POLICIES...........................................................................................................20
RIGHTS AND DUTIES OF THE PARTIES..............................................................................................22
The obligations of the assured....................................................................................................................22
The duties of the insurer.............................................................................................................................22
MARINE INSURANCE COVERS..............................................................................................................25
Why purchase marine insurance?...............................................................................................................25
Which factors determines the choice of an insurance programme?............................................................25
Marine insurance needs..............................................................................................................................26
HULL AND MACHINERY INSURANCE.................................................................................................28
Introduction to Hull and Machinery insurance...........................................................................................28
The subject matter insured under a hull & machinery insurance................................................................29
Which interests are covered........................................................................................................................29
Perils covered against :...............................................................................................................................29
Cover subject to Norwegian conditions......................................................................................................30
The Marine insurance Plan of 1996, 1999 edition......................................................................................30
Losses covered:..........................................................................................................................................32
Cover subject to English conditions...........................................................................................................34
Perils covered under the English system....................................................................................................34
Losses covered...........................................................................................................................................35
A comparison between the Norwegian cover and English cover................................................................36
HULL INTEREST INSURANCE...............................................................................................................41
BUILDERS RISK INSURANCE.................................................................................................................42
LOSS OF HIRE INSURANCE....................................................................................................................43
FREIGHT INTEREST INSURANCE........................................................................................................45
WAR RISK COVER....................................................................................................................................45
INTRODUCTION TO P&I INSURANCE.................................................................................................46
The shipowners liability insurance.............................................................................................................46
The historical background..........................................................................................................................46
The organisation of the clubs......................................................................................................................47
The Committee...........................................................................................................................................48
The Executive Committe............................................................................................................................48
The Supervisorv Committee.......................................................................................................................48
The Board of Directors...............................................................................................................................48
The international Group of P&I Clubs........................................................................................................48
Who can be a member of a club ?...............................................................................................................50
Classification..............................................................................................................................................50
The main elements of a P&I cover:............................................................................................................52
CARGO INSURANCE.................................................................................................................................58
Introduction................................................................................................................................................58
Insurable interest........................................................................................................................................59
 Who is covered under a cargo policy?........................................................................................................61
INCOTERMS...............................................................................................................................................64
Introduction................................................................................................................................................64
The importance of trade terms....................................................................................................................65
The individual terms...................................................................................................................................66
DEFINITIONS OF IMPORTANT TRADE TERMS................................................................................69
 INTRODUCTION TO MARINE INSURANCE

The History of Marine Insurance

Studying marine insurance is fascinating as well as it important in order to better understand today's rules
and practice. It is also a fact that history has a tendency of repeating itself. The value of research into past
events were stated by Emerigon, a Frenchjurist, as early as in 1783. Re once remarked:

" Research into the antiquity of marine jurisprudence will not appear useless to persons who will remark
that these ancient doctrines, several of which are now obsolete, are still the foundation of those now in force,
and that consequently it is
difficult to comprehend many rules of the modem law without recourse to the ancient."

It was once said, that "marine insurance was veiled in antiquity and lost in obscurity". Although many books
have been written on the subject, the authors have so far not been able to agree as to the beginning of Marine
Insurance.
Some authors claim that the Roman Empire practised nautical insurance.
The concepts of protection against loss by marine perils have been traced back to at least 215 BC, when the
Roman Government were required by the suppliers of military stores to accept "all risks of loss, arising from
the enemies or from storms, to the supplies which they have placed in the ships." Some writers even go
further back in order to trace the origin of marine insurance. It has even been attempted to find Biblical
precedents. One writer considers that it was a Pharaoh of Egypt that invented the principles of insurance w
hen he required Joseph in the years of abundance to store grains against the lean years, on the basis '" that
this was surely an early type of insurance.

It is confirmed that in ancient Chaldea, some communities protected themselves mutually against certain
risks. For instance, people contemplating a journey by caravan, undertook to bear collectively the loss, which
any of the number may suffer during the voyage from robbery or attack. This principle of mutual assistance
has been said to have inspired ancient Greek and Roman associations.

Even earlier traces are said to have been identified in Babylon (2200 B.C.) and as far back as 3000 B.C,
when Chinese merchants on the Yangtze River are alleged to have distributed their cargoes over a number of
vessels so as to "average" the risk of loss.

The general conclusion relating to the origins of marine insurance have been stated by Blackstock, and states
as follows:

"The contract of insurance is a derivative of expedients that in one form or another have served in primitive
fashion the purpose of insurance from ancient times. The doubtful question of the use of insurance in the

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transactions of antiquity has been the issue of prolonged classical and juridical controversy in which the
authorities are sharply divided."

There is, however, a general concurrence in the view that if the existence of insurance in the modem sense in
the ancient world is doubtful and debatable, there is good and substantial evidence of the use of other forms
of contract that in their essence and intent resemble insurance, e.g. maritime loans. It is observed that the
contract of nautical interest, or loan on bottomry or respondentia, was used from the very remote ages by the
Greeks, Romans and other nations as their ordinary insurance contract, which end it perfectly answered, and
that it eventually formed the traditional groundwork on which rose the superstructure of the insurance system
of modem Europe."

Based on this information, we may draw the conclusion that antiquity did not know insurance as we know it
today. But the narrative thread of marine insurance is not an unbroken one. It has be en picked up in various
places, and is altogether quite confusing. It seems clear that the "Ordo et Consults Domaris ( 1063 A.D .) and
the Maritime statute of Venice AD.1255, embodied the principles of mutual insurance against losses from
pillage by requiring contribution. Denmark formed in the l3th century a navigator's guild, which had as its
object the indemnification of its members against losses due to the fortunes of the sea.

Traditionally, the geographical position of Europe has divided its maritime commerce into two great regions.
The first one includes the countries which border on the Baltic, the German and the Atlantic Oceans. The
other region consist of coutnries around the Mediterranean. Trade in the latter region was both earlier and
more splendid than that of England and her neighbours.

Marine insurance in Europe originated with the Hanseatic merchants and with the " Lombard merchants in
Northern Italy in the 12th century. Hence the term "policy" which is clearly derived from the Italian word
"polizza," meaning a promise or undertaking.The Lombard merchants enjoyed a huge influence, even on the
King of England. They persuaded the king Henry IV to grant them a piece of London, from where they could
perform their business in security. This place became known as "Lombard Street", and explains why the
early forms of Lloyd policy annexed to the Marine insurance Act 1906 states that the policy "shall be of as
much force and effect as the surest writing or policy of the assurance heretofore made in Lombard street, or
in the Royal Exchange or elsewhere in London." Lombard Street is located close to Lloyd's, in the "insurance
Section" of the City.

An Act was passed in England by Parliament in 1601, and this Act had a description of marine insurance:

"By means whereof it cometh to pass that upon the loss or perishing of any ship there followeth not the
undoing of any man, but the loss eightieth rather easily upon many than heavy upon few, and rather upon
them that venture not than upon those that do not venture; whereby all merchants, especially those of the
younger sort, is willing to venture more freely and more willingly".

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This constituted an early acknowledgement of a basic principle of insurance. Spreading the risk, and the
importance of insurance to entrepreneurial business. The Act also set up a special mercantile tribunal, the
"Court of Policies of Insurance". This was set up in order to bring in a specialist tribunal, and it was the early
precursor of the Commercial Court, which exists today.

Unfortunately, there was never much activity in the tribunal. Most cases were decided after the old Common
Law system. The tribunal' s place was after a while more or less taken over by arbitration.

In the rest of Europe, the cities of Genoa and Pisa were especially associated with the origins and the growth
of the hull policy. The growth of Spanish trade meant that its development continued in Barcelona, still
under the influence of civil law .This was the basis of the c ode applied in England in the 16th and 17th
centuries, when the expansion of English sea borne trade first made London the seat of an insurance market,
which was to develop until, by the nineteenth century, it had become the most influential market in the
world.

In the second half of the 18th century , Lord Mansfield started to work with the mixed product of marine
insurance they had in England. He realised that little knowledge about the subject could be obtained by
reading books about common law. But upon the subject of marine law, and the particular subject of
insurance's, foreign authorities were numerous, and in general satisfactory. He drew the leading principles,
which may be considered the law of the sea and the common law of merchants, which he found prevailing
throughout the commercial world, and to which every question of insurance was easily referable. Lord
Mansfield presided in the Court of King's Bench from 1756 to 1788. During that time he introduced many
changes in procedure and the approach to substantial commercial Law.

One of the many procedural changes he made of considerable practical importance was to introduce a
Consolidation Rule, whereby a case brought against one underwriter could be made binding on all other
underwriters subscribing to the same policy. This was a precursor of the class action and the " Agreement to
be bound", which is a feature of the modem day practice in today' s Commercial Court. The practice is to sue
the representative "name" put forward by underwriters, and to have a collateral agreement signed by all the
other underwriters on the risk undertaking "inter alia" to be bound by the judgement given by the leading
underwriter.

1lovd's
It will take too long time to give a detailed account of the development of the premier world marine
insurance market from its obscure origin in a small coffee house. But it is difficult to talk about marine
insurance without mentioning Lloyd's. It came mainly as a necessity to the growing ports of Britain and the
growing trade of England. The name Lloyd's derives from the coffee house man, Edward Lloyd. The first
mention of Lloyd came in 1688, but there is no evidence that marine underwriting took place this early there.

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Although Lloyd had competitors, he soon ousted them by publishing newsletters and other activities. The
coffee house became the leading place for the sale of ships, cargoes, and marine insurance policies.

It was not till 1769, many years after Edward Lloyd's death that the customers of the coffee house started to
act in unison. The .connection between the catering and the insurance is still preserved today by a Captain's
room at Lloyd's.
In the older days, insurance was a bit of a gamble. It attracted to some extent some
less serious players. For a while, these coffee houses providing insurance fell into disrepute. The nature of
the risks frequently insured against was productive of much scandal. This fact also encouraged the passing of
new legislation, to void some types of insurance's and certain wordings. Surprisingly enough, an Act was
also passed in England to ban reinsurance, except .J in the cases of death or bankruptcy of the original
insurer. The embargo on reinsurance was repealed in 1864. Knowing how much insurance today depend
upon reinsurance, this was surely a good thing.

Lloyd's list was published first time in 1734. It is one of today's oldest surviving newspapers and is published
daily. Other publications that are published by Lloyds are:
 Lloyds Shipping Index
 Lloyds Voyage Record
 Lloyds loading list
 Lloyds Law Reports
 Lloyds Maritime and Commercial Law Quarterly
 Lloyds weekly casualty reports
 Lloyds survey handbook
 Digest of Lloyds Law Reports
 Lloyds Maritime Atlas
 Lloyds Nautical Year Book

Today, Lloyd's is a market not only for marine insurance, but also for aviation, accident and fire insurance's.
There is hardly anything you cannot insure at Lloyd's. Lloyds is not an insurance company, but an insurance
market, consisting of syndicates. In the past, only private “names” were allowed, but today also company
capital is welcome. In order to purchase insurance at Lloyds, you will have to go through a Lloyds certified
broker.

Insurance companies
The first "companies" to transact marine insurance's in any country were loose groups of individuals, rather
than comparable with partnerships, than companies as now understood. Most of them were limited in time
from one year and up.

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The practice of writing marine insurance remained solemnly in the hands of private individuals, long before
capitalised companies undertook it. Lloyd' s underwriters strenuously resisted all attempts to found
companies to conduct insurance business, claiming that "companies are without conscience".
Today, Marine Insurance business is (in addition to Lloyds and the mutual clubs) written in Joint Stock
Companies. The underwriters of such companies have no personal liability and the Companies liabilities are
limited. Unlike the Clubs, the motive of the insurance companies is profit making.

Self assessment questions

1) Is Lloyds an insurance company?

2) How is an insurance cover at Lloyds obtained?

3) Can foreign shipowners buy insurance at Lloyds?

4) Which factors have influenced the development of marine insurance?

5) Explain the difference between “mutual” and “limited company”

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 MARINE INSURANCE MARKETS

When discussing Marine insurance Markets, the main objective will be to have knowledge as to where to
find the markets, how to approach them and last but not least, to know what they offer in terms of cover and
premiums.
It is of course possible to buy Marine covers in most local markets. However, these markets tend to be
financially weak, they have a lack of international experience, little or no tradition, non experienced brokers
and small capacity along with reinsurance problems.

Local business can also be pure fronting arrangements, meaning a large international company is actually the
real insurer, whereas a local company “fronts” towards the insured. This arrangement may be set up to f.inst.
comply with national laws demanding local ownership. Further, the local markets seldom engage in
international business but insure national vessels trading nationally.

For the following, we will concentrate on the large international markets, focusing on the English and the
Norwegian Markets. (Other important markets are the US market, French market and Japanese market). The
competition between the markets is governed by demand and availability, and of course prices and
conditions. The markets are international, to the extent that covers on foreign conditions can be obtained in
the various markets. The Norwegian Insurance Market may for instance offer cover on English terms, French
terms or German terms etc.

The Norwegian Market

The Norwegian market is a widely recognised independent market for national and international shipowners.
It does not have the long traditions that the English market has. The tonnage referred to in the Norwegian
Market is the so called “Blue Water Tonnage”, which means larger vessels. The preference in the Norwegian
market has been to insure larger bulk and tank tonnage. The Norwegian market has been open to the
development of new insurance products like long terms contracts, special terms for delay delivery, war and
builders risk conditions.

(Energy insurance is not considered part of the Marine insurance Market.) Traditionally, the Norwegian
Market has been a “direct market”, having close connections with the owners. In recent years special
attention has been placed on technical evaluation in the risk assessment process as well as added-value
products such as safety computer programs and participation in loss prevention strategies.
Another specific feature of the Norwegian market is the “Claims lead system”. When an insurance is placed
with several companies undertaking a certain percentage of the risk (as is the norm) one company becomes
the Claims Leader.
The owner/broker can rely on one company to handle the claim in full and it will be that particular
company`s duty to reimburse the owner if the claim is
covered. Then the claims leader must turn to the other companies in order to get reimbursed.

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The Norwegian Marine Insurance Market has both national and international players in the company market.
The insurers are organised through Cefor (International Union of Marine Underwriters). It can be compared
to ILU in London. Cefor was founded in 1911 and it is through this institution an independent marine
insurance market in Norway was created. The aim of Cefor is to act as a co-ordinator in the market. It has
secretarial functions for several committees and acts as a contact between the companies and the
Government, Shipping Community, international Insurance Organisations, Classification Societies and
competing insurance markets.

Members of Cefor are Norwegian Insurance companies, as well as foreign companies with affiliates in
Norway. It shall be mentioned that the number of companies and clubs engaging in marine insurance has
been rapidly decreasing during the last years. In the 1970`s, close to 40 companies offered such insurance in
Norway. Today the number is less than 10. There has been merges and acquisitions as well as a general
decrease in the willingness to write marine insurance.

Cefor produces statistics for the Marine Insurance Market as well as conditions, rules and forms. It is also a
forum for formal and informal discussions between member companies. Cefor also co-ordinated the revision
of the Marine Insurance Plan in 1996.

In addition to the Cefor companies, there are two Norwegian P&I Clubs and a few small Hull Clubs. These
are not members of Cefor.

The English Market

Above, the history of the English Insurance Market (London Market) was outlined. In practise, the market
can be split in two categories, one being the Lloyds market, the other being the company market. You may
also include a third category, being the Clubs (mainly P&I). The Lloyds market was explained earlier. The
company market consists of limited companies and is often referred to as the ILU Market (ILU is short of
“Institute of London Underwriters). However, not all the companies are members of ILU. The London
Market is the Major competitor to the Norwegian Market. The London Market is characterised by the
following factors:
 It is broker dominated
 It is largely self regulated
 It has a great capacity, both on direct insurance and reinsurance.
 It has Lloyds, which is by far the single most important market in the world
 It offers both direct insurance and reinsurance
 It is innovative, trying to always “think ahead”.
 It can be noted that all of the world’s 20 largest reinsurance groups are represented in London. 75%
of the companies are foreign owned.

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The role of the Broker
Brokers have been active in the insurance market for years, but as far as marine insurance is concerned, they
have only played a modest role until the last few decades. The brokers always represents the insured, not the
insurance companies. If they are acting on behalf of a company, they are termed agents. Brokers generally
play a large role in marine insurance. The shipowners rarely possess enough knowledge and “hands on “
information about the markets and premiums and covers in order to make correct and informed choices as to
insurance programs. It may also be useful to have a “third party” identifying the insurance needs of the
owner.

The market share of foreign business coming into Norway placed through Norwegian brokers is
approximately 80%. The remaining 20% is covered in the Norwegian market directly from the foreign owner
or through a London broker without using a Norwegian placing broker.

The practice of brokers is regulated by law in most countries. It is common that brokers are engaged by large
broker firms, and over the past years we have seen a
tendency of larger and larger entities. Small companies or independent firms are being purchased by larger
firms, which again are being merged with international firms, making the broker business an international
one.
In Norway, traditionally there used to be a close link between the companies and the owners, making the
brokers superfluous. But in recent years, also the Norwegian market has become more broker dominated.
Now more than 80% of the fleet insured in the Norwegian market is controlled by brokers.
In England, the Brokers are even more important. When doing business at Lloyds, you have to use the
services of a Lloyd`s certified broker. It is common that the brokers handle the claims on the insured`s
behalf. Also, the brokers are liable for paying the premium to the insurer, which is not the case in Norway.

A split can be made between the:

a) Producing broker and the
b) Placing broker/Co-broker

The Producing broker obtains the business from the assured/owner whereas the Placing broker or Co-broker
does the actual placing of the business in the market(s). In addition, they are often heavily involved in
placing the reinsurance business in the market.

The broker`s job can be described as follows:

 The broker represents the assured
 The broker identifies the owners insurance needs
 The broker presents the risk to the underwriter(s)
 The broker negotiates with the underwriters with respect to cover, conditions and premium
levels
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  The broker collects the premiums
 The broker puts forward claims to the underwriters
 The broker manages the cash flow premiums/claims
 He assists the owner in setting up claims records and statistics
 Chooses accurate strategies
 He keeps the client updated on trends in the market
 The broker keeps the mortgagees informed about the total cover of all insurance
 Being a high volume buyer of insurance covers, he can obtain more favourable rates for his client

Self assessment questions

1) Explain what we mean by “insurance markets”
2) What characterises the Norwegian marine insurance market?
3) What characterises the English marine insurance market?
4) Which factors would you consider when choosing a market for placing your insurance in?
5) What are the benefits, from a shipowners point of view, to use a broker?
6) Are there any downsides to using a broker?
7) What criteria would you consider when choosing a broker?
8) Can any broker buy insurance covers at Lloyds?

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 THE LAW OF MARINE INSURANCE

Introduction
Marine insurance was practised for years without any attempt to reduce it to precise legal form. In earlier
attempts of legislation, no effort was made to elaborate a legal system to govern contracts of marine
insurance. It was eventually practice that gave rise to the first rules. The Barcelona Ordinances had priority
in the field of codification of marine insurance. Statutes were made as early as in the 14th century. In
England, the first general Act was; made in 1906. Today, many laws have been passed around the world
relating to marine insurance. The main rule is that there is freedom of contract also in the insurance world.
The laws that exist are set up both to regulate the industry , but also to protect consumers from unfair
contract provision.

Buyers and sellers of marine insurance are normally professionals; so most marine insurance law tend to be
more guidelines than laws. The laws also tend to be somewhat similar around the world, partly because
maritime law is quite similar and partly because insurance itself is international. Different markets tend to
have similar laws. The most important sources of marine insurance are conditions and clauses. There can
also be questions as to whether or not standard conditions can be considered sources of law.

Statutory Law
In many states, there are laws relating to insurance and/or marine insurance. In Norway, there is a law,
Insurance Agreement Law, from 1989 (FAL) that deals with all kinds of insurance. The law is mostly
mandatory, so one can not agree on clauses differing from those set out in the law. However, when it comes
to marine insurance, there is a general right to exempt these contracts from the law.

Standard Insurance conditions

Due to the fact that the marine insurance laws tend to be non-mandatory, the use of Standard Insurance
Conditions is common. These may be agreed documents, such as for example the Norwegian Insurance Plan.
The standard Insurance Conditions are often printed or drafted by the insurers or their organisations. Some
are also "agreed documents" which mean that representatives from both the Assureds and the Insureds
interests have been involved and have agreed on the wording. These standard conditions may be used on
their own or be implemented in individual contracts. In some countries, such standard conditions have the
form of a large self-contained code, as for instance the Norwegian Marine Insurance Plan. In England for
instance, the standard conditions serve more as a supplement to and up grading of statutory laws.
Clauses
In addition to the standard marine insurance conditions, there are a number of standardised additional
clauses. These are used partly to update existing conditions and also to set up additional rules concerning
specific risks such as nuclear risks, war risks, specialised types of cargo etc.

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The Marine Insurance Act of 1906
It is important to keep in mind that almost all the provisions of the Act are,
expressly or by implication, capable of being altered or deleted to by the parties. Unless the Policy otherwise
provides" is the introduction to most of the sentences.
If a "rule" in the Act is not modified or altered by the parties in practice, this may be because the underwriter
or assured is not prepared to alter that provision, even for an additional premium. There may be several
opinions as to the question of the necessity of having a law to codify practice. Lawyers are normally less in
favour of codification. Others may think it limits the freedom of contract. But codification does set forth an
authoritative text, which does help in deciding disputes without having to litigate. them. It also helps
deciding when a question which has not been thought about in the contact arises.

The factors deciding a Marine Insurance Cover:

Mandatory Statutory Law
The Insurance Policy

The Standard Conditions attached to the Policy or incorporated by reference

Individual clauses
Non Mandatory Statutory Law
Cases
Arbitration judgements

Self assessment questions

1)Are there mandatory laws regulating Marine insurance?

2)What is an insurance policy?
3)What does the Marine insurance Act of 1906 regulate ?
4)Give a definition of the term “standard insurance conditions”?

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 DEFINITIONS OF COMMONLY USED INSURANCE TERMS

Marine insurance, as well as insurance in general, has a terminology of its own. This is partly due to its
origins and traditional history but also due to the conservatism of marine underwriters. Sometimes for the
layman, words may have a meaning different from ordinary or dictionary meaning for instance the word
"average". Below, some of the most important terms will be described:

Underwriter
One who underwrites

Underwrite
To write a risk. An insurer writes, or underwrites a risk when he accepts liability for any loss to the subject
matter insured from an insured peril. The term derives from the practice of the insurer to accept his
proportion of the risk by initialising his name under the conditions stated on the slip. With the passage of
time the word "underwriter" has come to be used for any action whereby a person guarantees the losses of
another .

Underwriting agent
An agent of an insurance company who underwrites business on behalf of his company.

Insurance Companv
A company engaged in the business of underwriting ~

Insurer
The party of an insurance contract who accepts the proposal of the person requesting insurance protection.
Once the contract is accepted, the proposer becomes the insured. The insurer may be termed the
"underwriter" or the "assurer".

Assured
The assured is the person who, having an insurable interest in the property at risk, which is the subject matter
of the insurance, effects an insurance in this respect.

Assurer
The assurer is the person or Company who holds himself liable to compensate the assured in the event of a
loss to the insured property proximately caused by a peril insured against.

Policy

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The formal contract between the insurer and the assured, whereby the insurer t in the policy document. The
policy may be issued and executed either at the time the contract is concluded or afterwards. The insurer
undertakes to settle claims properly recoverable in accordance with the conditions set out in this Policy.

Premium
The consideration, or sum of money, paid by the assured to the insurer in return for which the insurer agrees
to indemnify the insured in the event of loss from an insured perils. The insurer is not bound to issue a policy
until the premium is paid.

Interest
The relationship of the assured to the subject matter of the insurance; whereby the assured may suffer loss or
incur liability in the event that the subject matter is lost or damaged.

Insurer's Interest
The insurer undertakes a liability when he accepts an insurance. Re therefore has an insurable interest in that
liability , so that he may reinsure his liability with other insurers. He may not reinsure on wider terms than
the original insurance.

lnsured value (ins.val)

The value insured under the contract

Claims control clause

A clause sometimes insisted upon by a reinsurer in order that he may not be held
liable for claims which he feels should not have been paid under the original policy. The clause provides that
all claims on the original insurance are submitted to the reinsurer for his approval before they are paid.

Claims documents
The documents required for presentation to the insurer when the assured wishes to make a claim under the
policy.

The main documents required are as follows:

 Policy
 Surveyors report
 Repair specifications
 Details of tenders submitted
 Account receipts in respect of disbursements and repairs carried out
 Extracts from engine room and deck log books
 Average adjustments etc.

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Cargo claims:
It is customary to attach a clause to cargo policies and certificates which, amongst their things, lists the
claims documents required.
This may f. inst. be:

 Original Policy or certificate of insurance

 Shipping invoices
 Weight notes
 Original Bill of Lading or contract of carriage
 Survey reports or other documentary evidence to show the extent of the loss or damage, Landing
account, correspondence exchanged with the carriers and other parties regarding their liability for
loss or damage.

Hull
This is the shell of the ship without taking into account the ship's machinery.

Hull and Machinerv

A term used in a hull slip or policy to de fine the subject matter insured as being the named ship itself, rather
than an ancillary shipowner's interest relating to the ship.

Hull insurance
Insurance on the ship, its machinery and equipment.

Deductible
An amount or percentage specified in the policy which must be exceeded before a
claim is payable. When the deductible is exceeded, only the amount which is in excess of the deductible is
recoverable under the policy. The deductible is normally expressed in the policy as a sum of money.
Sometimes the word “franchise” is used.

Deductible. reinsurance
That proportion of a claim under an excess of loss reinsurance contracts which is retained for the reassured' s
account.

Renewal
The practice o.( renewing an insurance, which is due to, expire. Renewal may depend on the claims
experience on the expiring insurance.

Direct action

14
When an insurer covers liability risks, the policy usually provide that the insurer do not pay directly to the
person who is pursuing an action against the assured. The assured is required to pay the amount for which he
is liable, following which he is reinsured by his insurers.
Thus, in absence of any law to the contrary , the person claiming from the assured cannot bring an action
directly against the insurers. It may be that a country or state will introduce a statement allowing direct
action.
Claim
A demand by the assured upon the insurer to full fill his guarantee of indemnity by reason of an accident in
respect of the insured property proximately caused by a
peril insured against whereby the assured has suffered a loss.

Claims Adiuster
An official employed by a company to be responsible on behalf of the company for claims settlement. It can
also be independent adjusters.

Reinsurance
When an insurer accepts a line on a slip, he becomes liable for a loss under the insurance contemplated on
the slip. This places him in the position of being able to lose financially in the event of loss of or damage to
the insured property .He therefore has an insurable interest in respect of his liability . This liability he may
reinsure with another insurer or several insurers who then become reinsurers. No insurer may reinsure for
more than his liability or on wider terms.

He may reinsure for less than his liability or on narrower terms.

The reinsurer, subject to the terms of the reinsurance, must reimburse the original insurer for all losses for
which he, the original insurer, is legally liable, but, unless the reinsurance so provides the reinsurer is not
obliged to follow the original insurer in respect of ex gratia payment, wp. payments or compromised
settlements.
Reinsurance is mostly carried out by treaty reinsurance, but may also be the subject of individual placing or
by a form of ordinary open cover. Some insurers devote the whole of their business to reinsurance.
Occasionally, however, he may not be protected by either of these methods but requires reinsurance of a
particular acceptance. He effects this through a broker , and it is called a facultative reinsurance.

Obligatory contract
When an insurer or a reinsurer writes a contract, whereby he agrees to accept all
declarations coming within the scope of the contract, there is an implied obligation that the other party will
declare all such risks and declare them in consecutive order. This is termed an "obligatory contract" and is
the basis for most forms of marine open cover and marine insurance contracts in respects of which sessions
are made by the reassured.

15
A direct facultative/obligatory contract allows the broker to declare and to place elsewhere those risks, which
he does not wish to declare. Similarly, a reassured under such a facultative/obligatory reinsurance contract
may retain those risks he wishes to retain and cede only the risks he wishes to reinsure.

Attachment date
It is the date on which a risk attaches. In practice, often the leading underwriter enters the month the risk
attaches on the broker's slip. This gives a basis for assessing the period of credit allowed for premium
payment

Attachment of risk
The term relates to the time w hen the property , to which the insurable interest relates, becomes exposed to
insured perils. If an underwriter writes his line before the risk attaches, he is not liable for losses, which
occur before the risk attaches.
If the underwriter signs after the risk attaches, it should be made clear whether he intends to cover losses
which occurred before he signed. In practice, cargo cover attaches and terminates in accordance with the
conditions in the "transit clause". The standard Hull clauses do not incorporate a clause to indicate w hen
cover attaches and terminates; except that the time clauses provide for automatic termination in certain
circumstances. The point when cover shall attach and terminate for Hull Insurances must be inserted in the
broker's slip and i be negotiated with the underwriter at the time of placing the risk.

Broker
A broker is an intermediary between two parties, who represents one party as
agent in negotiating a contract on his principal' s behalf. The principal of a marine insurance broker is the
assured to whom he is bound by he law of agency.
On some occasions, the broker may also act for the insurer. If he does so, legally he acts as an agent and not
a broker. As an agent, he may use his skill and experience to obtain the cover required by his principal at the
most reasonable rate of premium. A marine insurance broker is liable to the insurer for the premium relating
to the risk he places, whether or not he has collected it from his principal. (England).

Brokerage
Premium which the broker is permitted to deduct from the gross premium before passing it to the insurer .

Marine insurance
Where an insurer enters into a contract with the assured agreeing to indemnify the assured, subject to the
limits of the contract, for losses incidental to a marine adventure.

Marine market

16
The section of the body of underwriters and companies of the insurance market which specialises in marine
risks. In practice the marine market also underwrites incidental non-marine and inland marine risks and vice
versa.

Marine Syndicate
A Lloyd' s syndicate writing marine risks and risks incidental to marine adventures.

Marine Underwriter
One who accepts liability for marine losses.

Maritime Perils
Perils of the sea and incidental thereto.

Market
A group of insurers in a particular area or in a particular branch of insurance (Lloyd's market., Company
market, London market, Continental market etc).

Market Capacity
The maximum amount of liability that an insurance market can, or is prepared to accept.

Market Practice
It means a practice, which is generally acceptable in the insurance market.

Cancellation
If the risk does not attach and the subject matter is not imperiled, the insurance is
cancelled automatically. Once the subject matter has been imperiled, cancellation

can only be effected by agreement between both parties, except when one of the parties is at fault in
circumstances where the aggrieved party is entitled to avoid the policy.

Cancellation clauses
This must not be confused with a "termination" clause. A termination clause is incorporated in the contract to
cancel cover immediately upon the happening of a specific circumstance ( e.g. outbreak of a war brings into
operation the termination clause in a policy covering a ship against war risks and automatically terminates
the policy with immediate effect. )

A cancellation clause, on the other hand, is incorporated in the contract to allow either party the option of
cancelling the contract by giving notice of intent. The
period may vary. It can be noted that there is no cancellation clause in the Institute

17
Hull Clauses for marine risks, whether they cover a time policy or a voyage policy.
Once the risk attaches neither party can give notice of cancellation. Long term contracts, particularly treaty
reinsurance contracts, always incorporate a cancellation clause. Often, this is restricted to the last three
months of the account year.

Facultative
The term derives from the word "faculty". It means the "right of option", that means the right of an
underwriter to decide (in insurance or reinsurance) whether or not to accept a risk. Single named risks, for
instance single voyages are effected on a facultative basis whereby the underwriter assesses the risk.
Most hull insurance is effected facultatively but the majority of cargo insurance is effected on an "open
cover" basis, whereby the underwriter agrees in advance to
accept all shipments coming within the period and scope of the cover. The acceptance by the underwriter of
declarations under an open cover is obligatory , rather than facultative.

Facultative reinsurance
An insurer may protect himself from excessive liability by a permanent reinsurance open
cover or he may commit a great part of his business to a Treaty reinsurance.

Hull syndicates
Groups of insurers in Lloyd's engaged exclusively in underwriting marine hull business.

Hull interest
The term is generally used in relation to any insurable interest enjoyed by the ship's owner or operator by
reason of the ship being exposed to peril, other than his insurable interest in the hull and the machinery , etc.
of the ship itself. The hull assured is restricted to the amount he may insure in respect of hull interests.
The term may be used in connection with the insurable interests of parties other than the shipowner or
operator, w hen they are interested in a ship exposed to risks. Ex: the insurable interests of banks and other
mortgagees, or the insurable interests of charterers and owners in regard to charterhire at risk.

Causa Proxima
This principle is stated in the well-known legal maxim "Causa proxima non remota spectatur". The principle
is also given effect in the English Marine Insurance Act of 1906, Paragraph 55. It means that in order to
obtain recovery from the insurer, the loss must be shown to have been proximately caused by a peril insured
against.

Cargo
Goods and or property and or merchandise carried by a vessel for the purpose of earning freight.

Cargo interest

18
An insurable interest connected with cargo. The term is used w hen referring to any allied interest other than
the cargo owner's, which is obviously a cargo interest, to differentiate from a hull interest.

Co insurance
When two or more insurers each cover part of an insurance.

Disclosure
Presenting relevant information to the insurer.

Representations
Statements of facts

Warranty
A limitation of the insurers liabilities can be effected through a system of warranties, or absolute conditions
for the insurers liability to indemnify the assured. In these cases, the question of causation is irrelevant.
(Normally there must be a causation between the loss and the peril insured against.)
If a warranty has been broken at the time w hen the accident or loss occurs, the insurer can refuse to pay.
This may also be the case even if the loss would have occurred without the breach of a warranty. The
limitation of the cover as to time and space will normally be in the form of warranties.

Warranties give the insurer a more effective protection than the perils and causation system. It is usually easy
to ascertain that a warranty has be en broken. The question of causation will often be far more complicated.
But the use of warranties can lead to solutions, which from the point of view of the assured may seem
unreasonable.

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 MARINE INSURANCE POLICIES

Voyage Policy
This is contrary to the "Time Policy". It is a policy in which the limits of the risk are determined by termini
or places, the subject matter of the insurance being insured for a particular voyage. An example may be
cargo being insured for a carriage from New York to Rotterdam.

Time Policy
This is a Policy, which expresses the insurance being for a specifed period of time, as for example, for 12
months commencing at noon Jan 1 .2001
It is common also to define the time zone, as for instance, GMT (Greenwich Mean Time). This kind of
insurance is usually used in the case of hulls etc. of vessels. ) (Although a shipowner may prefer a voyage
policy also in this respect.) Both types of policies are de alt with under Section 25 of the Marine Insurance
Act in England.

Combined Policy
A policy including both voyage and time would be, for instance, a policy insuring the hull of a vessel for
voyage, and, by agreement, for sixty days after the arrival at the port of destination. A policy covering a
vessel for a period of time within certain specified geographical limits is, however, a time policy and not a
mixed voyage and time policy.

Continuation clause
Time policies on hull and freight usually incorporate w hat is known as a "continuation clause". The wording
commonly used on Hull policies for instance may read as follows: "Should the vessel at the expiration of this
Policy be at sea or in distress or at a port of refuge or call, she shall, provided previous notice be given to the
Underwriters, be held covered at a pro rata monthly premium to her port of destination"

Construction Policy
A construction Policy is also known as a "builders policy" and covers risks incidental to construction or
building of vessels. Usually they are by wording for

provisional values, subject to adjustment on completion, and for provisional periods, "held covered" by the
underwriters at a premium to be arranged in the event of delay beyond the provisional period.

Port risks Policy

This covers vessels for a period whilst in port. It is a risk of a character peculiar to a port, and which is
involved in a vessel being in port for the ordinary purposes for which a vessel is in port. This to distinguish it
from the risks of a vessel on voyage.

20
Valued policy
A valued policy is a policy is a policy, which specifies the agreed value of the subject-matter insured.

Unvalued policy
This is a policy which does not specify the value of the subject-matter insured, but, subject to the limit of the
sum insured, leaves the insurable value to be subsequently ascertained, in the manner herein-before
specified.

Floating policy
This is a policy, which describes the insurance in general terms, and leaves the name of the ship or ships or
other particulars to be defined by subsequent declaration.
These subsequent declarations may be made by endorsements on the policy or in other customary manner .

Certificate of insurance
This may be issued in the respect of the consignment especially w hen required by for example banking
purposes. .

Open cover
This is another method of insurance, akin to a "floating policy". It is an agreement whereby the underwriter
undertakes to insure all shipments or interests of the assured for certain voyages or trades. This may be done
at specified rates of
premium or at rates to be arranged. The underwriter is notified by the assured w hen the shipment is made or
the risk attaches.
PPI Policy
The abbreviation means Policy Proof of Interest. (It is an English term). Under an ordinary marine policy the
assured has to prove his interest exists at the time of the loss in order to substantiate a claim. A PPI policy
foregoes this need. The mere production of the policy is deemed sufficient proof of interest at the time of
loss. Note that it is only proof of interest that is waived not the need to have an interest. Nor is the necessity
of proving a loss waived.

TLO Policy
A policy covering against total loss only.

21
 RIGHTS AND DUTIES OF THE PARTIES

Read Chapter 3 in the Marine Insurance Plan. Below only some main rules will be outlined.

The obligations of the assured

Insurance contracts are based upon the utmost good faith (uberrimae fidei) and involve the application of
strict rules with regard to disclosure of information and representations made by the parties, whether or not
there has been an intention of defraud. The duties may be directly specified in the Policy or in applicable
Law. Duties may also appear “implied” (”understood”).

The principle of good faith is also applicable to disclosure of facts and representations made at the time w
hen the proposal is being made. It has also been held that that the assured is unable to obtain the protection
offered by a "held covered clause" if he has not acted with the utmost good fait towards the carrier. Most
national laws have rules relating to disclosure and representations. In English law this is codified in the
marine insurance Act 1906 §§. 17, 18, 19, 20.

It is necessary for the underwriters in order to ascertain a risk that there is a full disclosure of all facts
concerning the risk. Any circumstance, which is within the knowledge of the person insuring and is likely to
influence the underwriter in deciding whether he will accept or refuse the risk. It will also be an issue w hen
deciding the premium. If there is a non-disclosure, the underwriter may avoid the contract. It is only material
facts that the assured is obliged to tell the underwriter.
The duty of disclosure is present not only when effecting new insurance, but also at renewals. The assured is
also under a duty to give the insurer all the information he needs to evaluate the risk and to stipulate
necessary premium.

Another duty is to assess or mitigate a loss w hen such has occurred.

Another of the principal obligations of the assured is further to pay the premium. The amount is agreed
between the insurer and the assured. The debtor for the premium is the person effecting the insurance, which
is not necessarily the person which interests are covered. In England f.inst. it is the broker that is responsible
for paying the premium.

Under English law, the insurer is not bound to issue the insurance policy until the premium has been paid or
tendered. The broker has a "lien" on the policy as against the assured. He may refuse to hand over the policy
to the assured until he receives the premium. If the assured fails to comply with his obligations, the ordinary
sanction is loss or limitation of the cover

The duties of the insurer

Read chapter 4 of The Marine Insurance Plan

22
According to the definition of insurance, the insurer undertakes to pay to or for the account of the assured a
sum of money on the happening of a specific event.

The questions to be asked is:

a) What shall the insurer pay and
b) When shall the insurer pay.

A detailed answer must be given for each type of insurance separately, but we can outline a few major issues
and outline a legal technique to use deciding w hen the obligation of the insurer to pay arises. The first issue
to be solved is to identify the subject matter insured. As states above, this is the physical matter to which the
insurance attaches. In marine insurance, this will be the ship, cargo, crew, passenger or other interests
assured. It is only the subject(s) the insurer has agreed to insure that will be covered .It is not enough to
identify only the interest insured.

It is further necessary to decide whether the interest in question is an insured interest. At an incident, there
may be a variety of different insurable interests. A shipowner may for instance have both a property interest,
an income interest and a third party liability interest in the ship. The charterer may have another interest in
the ship and so may the cargo owner or others. The next issue to be determined is whether or not there has
been a "loss". Meaning there must be a loss suffered by the insured in regards to his insurable interest.

The loss will often be caused by an accident or a sudden unintended unlucky event. The loss can also occur
over a period of time. For instance being carried at too high temperatures may slowly destroy a shipment of
fruit. Losses can also occur to several interests at the same time. An example of this is a collision case.
There is a general split between the so called "all risk" insurances (that cover all risks unless otherwise
exempted, for instance cover under the Marine Insurance Plan) and "named risk" policies, that only covers
specific named risks.

For a cover to attach, it is necessary that the peril is insured against. There may be events where there are a
combination of perils, whereby some are insured against and some are not. After having determined that
there is a loss and that the loss has occurred to an insurable interest, there are more issues to be looked into.
It is necessary to determine the limitations of time and space.

It is in general a time limitation to the insurance cover. The chances of accidents and losses will be
proportionate to the time the subject matter insured is exposed to the risks covered. The assessment of the
premium will also be based upon the time the risk is covered and thus the period of insurance. The insurance
period is usually agreed to prior to the inception of the policy. It may be for a certain period of time or for a
voyage or consecutive voyages.

23
As shown above, an insurance contract imposes a number of duties upon the
assured in addition to the duty of paying the premium. Normally, a breach of the assureds duties will give the
insurer a right to reduce or avoid liability.

24
 MARINE INSURANCE COVERS

Why purchase marine insurance?

It is a form of risk sharing. Potential losses are large, and few owners have the assets necessary to cover large
losses. There are huge values concentrated in one vessel, and vessels themselves can also be potential
hazards to humans, property, the environment etc. It is necessary to assess the potential losses and liabilities
the particular owner in question may face.

There are no laws requiring the owner of a vessel to insure his interests, but obtaining relevant insurance
cover is often a requirement by mortgagees and other business and trading partners, such as charterers, cargo
owners, passengers and others. Some countries may also require that ships entering their territorial waters or
ports have certain certificates and insurance.

Which factors determines the choice of an insurance programme?

To have an insurance strategy is important for all owners, although it differs a lot how this strategy is
designed for the individual owner. The aim is to have the best cover at the lowest possible cost, and to avoid
over or under insurance. It is also necessary to be well aquainted in the market(s) so that “double insurance”
or gaps may be prevented. Some fleets are attractive in the market(s), and competition will force the
premium levels down. On the other hand, some fleets may be of little interest to the insurers, especially in
selective markets or in periods where the overall underwriting capacity is low.

If the tonnage is over aged, the loss record is bad, the maintenance of the vessels are poor and the owners
have a generally bad reputation in the market, it may be difficult to obtain an insurance cover. The way facts
are presented, and by whom, (somebody experienced or not) also makes a difference.
The shipowner may be forced to take action to better his fleet in order to obtain necessary cover(s). Other
changes may be a change of crew, change of officers, a new loss prevention programme, new joint venture,
changes in the trading pattern for the vessel(s), old vessels may have to be scraped or sold, change of

Management and change in the chartering status of the vessel. All of these factors may also be relevant when
trying to obtain lower premiums.
Other factors the owner may look at when choosing an insurance programme are continuity, long term
agreements causing stability, proximity to market and services offered, possibility of package benefits (f.inst.
lower premiums on life insurance or other types of insurances (non marine), costs and internal control.

Factors reviewed by the underwriters prior to giving an insurance offer:

(Also relevant at renewals)
The following factors will be considered by the underwriters:
 The identity of the owners
 Previous experience with the owner

25
  The owners/vessels record and statistics (losses)
 Profit/losses
 Whether the client overall is an attractive one
 The competition in the market(s)
 I.S.M. Code, other quality management measures?
 Trading patterns for vessels within the fleet
 Whether or not the tonnage in question is exposed to claims or not
 Management of the vessel
 Type of vessel
 Age of vessel
 Crew and officers
 Nationality of the vessel (which flag the vessel is flying)
 Certificates
 Classification society
 Size of deductible chosen

Marine insurance needs

Anyone who has a financial interest in a maritime adventure needs insurance. From a shipowners
perspective, his insurable interest in the vessel can be divided in three different categories:
1)The capital interest in the vessel
2)The income interest in the vessel
3)Potential liabilities arising from the day to day running of the vessel

The first interest is the property interest in the vessel. The shipowner has his own capital along with
borrowed capital invested in the vessel. In addition to the owners interest in the vessel, the mortgagee also
has an insurable interest in the vessel. A mortgagee insurance is a kind of property interest insurance. Others
that may need marine insurance are charterers, cargo owners and others.
The primary insurance that covers the property interest of the owner (and mortgagee) is the Hull &
Machinery Policy. Other insurance covering the capital interest is Builders Risk insurance and Hull Interest
insurance.

If a vessel is damaged or lost, the shipowner will face an income loss. The insurance that covers the income
loss is the Loss of Hire insurance and
Freight Interest insurance.

The shipowner may incur legal liabilities towards third parties, both in contract and in tort. Liabilities in
contract may be under charterparties, bills of ladings and passenger tickets. Liabilities in tort may be
collision liabilities, pollution liabilities and property damage to third parties. The main insurance to cover

26
legal liabilities is the P&I Insurance. In addition, Hull & Machinery Insurance has one element of liability
insurance, namely cover for collision liability.

All marine policies exclude war cover. Purchasing a War risk cover is necessary when the vessel is trading in
or near war zones.

We will take a look at the individual insurance covers below. Only Hull & Machinery Insurance and P&I
and Cargo insurance will be dealt with in some detail. In order to better understand the need for cargo
insurance, Incoterms and Trade Terms will be explained below.

27
 HULL AND MACHINERY INSURANCE

Read chapters 10, 11, 12 and 13 of the Marine insurance Plan and “Introduction to maritime law, pages 545
– 561.

Introduction to Hull and Machinery insurance

Hull insurance is one of the oldest forms of marine insurance and the main property insurance for the
owners. For obvious reasons, the “machinery part” was added later. Today, there are two main parts to a
ship, the hull and the machinery.
The hull can be defined as the actual shell of the ship, including the superstructure. The hull is usually
designed for a special trade in accordance with the shipowners specifications. Statutory regulations exist with
regards to the building and construction of ships. The engine room consists of both the machinery required to
drive the vessel and the generators required for lighting, refrigeration and other auxiliary loads. Engines are
usually located at the broadest part of the vessel. The bridge of a vessel is the navigation center of the ship
where her course is determined. Most modern tonnage today has the Navigation Bridge and machinery
situated aft thereby facilitating the naval architects designing the vessel of the maximum cargo capacity.

Crew accommodation on modern cargo ships and tankers is situated aft in close proximity to the machinery.
More than 85% of the world’s fleet is propelled by diesel engines. Hull insurance today is usually regarded
as hull and machinery insurance. However, some choose not to include the machinery in their cover.

There is no compulsion under English law or Norwegian law for a shipowner to insure his goods or his
vessels. The credit system often requires that such insurance must be arranged. Further, considering the high
values at risk, it would be unwise to skip insurance cover. Otherwise, the shipowner would have to set aside
a large sum of money to cover possible losses, money which he may not even have. The reason for insuring
hull and machinery is both in the shipowners interest as a risk elimination step and in addition it may be a
requirement for him set by banks or others with an interest in the vessel. Others that may have a hull and
machinery cover, or are co assureds, are for instance mortgagees or shipbuilders.

A mortagee can secure his interest in the vessel by taking out a separate hull policy. More practically, both
the shipowner and the mortgagee will be covered under the same policy. In practice, the mortgagee is given
the benefit of the owners hull policy. There are different legal solutions for this.

A ship under construction can be damaged or destroyed during building and this will usually be the builders
risk. He therefore has an insurable interest in the ship, although he is not considered to be the owner. To
reduce or eliminate this risk he can take out a special kind of hull policy, a “Shipbuilders interest policy”.

28
The subject matter insured under a hull & machinery insurance
The hull and machinery cover is primarily a cover of the shipowners property interest in the ship. In addition,
it does contain an element of third party liability cover which is the collision liability. The extent of the latter
cover varies according to types of conditions used.

Generally, the hull and insurance cover is a “full cover”, covering the ship in relation to total loss and partial
damage. There are also different forms of limited covers, f.inst. covers that only protect the shipowner in
respect of total loss.
The insurance covers the hull, materials and outfit, stores and provisions for the officers and crew, and, in the
case of vessels engaged in a special trade, the ordinary fittings requisite for the trade, and also, in the case of
a steamship, the machinery, boilers and coals and engine stores, if owned by the assured. (Marine Insurance
Act Rule 15). When taking out a hull and machinery cover, it is obvious that the parties to the contract must
specify the ship to be insured. It must in general be designated with reasonable certainty in the policy.

Difficult questions may arise when deciding what is to be regarded as part of the vessel. Generally speaking,
the term “ship” should be said to include the above statement from MIA.

Which interests are covered

This question can be split in two. One is related to what is recoverable under the Hull policy and secondly
who is entitled to recover under the policy if an incident occurs.

As to the second question, the policy normally covers the shipowner. But as stated above, others can be
protected under the policy such as the mortgagee or a bare boat charterer or a time charterer. What is
recoverable under the Hull policy will be determined in the policy and the applicable laws and conditions.

Perils covered against :

It is obvious that not all types of perils are covered against and that not all types of losses are covered. For
instance, losses due to lack of maintenance will not be covered. The insurance is obviously not intended to
cover such costs that are part of the business of running a business. Certain types of losses fall outside the
scope of cover. Traditionally, causes of loss are referred to as perils, or sometimes risks. As the word “perils”
indicates, this was originally concerned with some sort of positive action, usually of a violent character. The
intention of cover was “perils of the sea”, which includes storms, collisions and stranding, as well as war,
fire, enemies, pirates, rovers, thieves, jettisons, etc. But the word peril is not restricted to active violent
causes of loss, both delay and inherent vice are regarded as expected perils in relation to cargo insurance and
in relation to negligence in general if this can be regarded as the cause of loss.

The original perils first described in the old Lloyds Policy mainly covered matters outside the control of the
assured. Now it is common also to provide cover for some matters, which actually can be said to be within
the control of the insured. These covers are within the due diligence proviso. Wilful misconduct will always

29
be a ground for exclusion of cover. The same applies for unseaworthiness. A common element for all perils
covered by a hull policy is, as stated above, that they concern accidental, unforeseeable and not inevitable
causes of loss. Further, it depends on the policy wording what is required by the insured and what the
obligation of the insurer is. This will be looked at below.
Cover subject to Norwegian conditions
The Marine insurance Plan of 1996, 1999 edition.
Norway has no Statutes or laws relating to hull and machinery insurance. However, most insurance will be
issued according to the “Plan”, meaning “The Norwegian Marine Insurance plan”. The present plan was
issued in 1996 on the initiative of the Mutual Hull Clubs Committee, The Norwegian Shipowners
Association and the Central Union of Marine Underwriters. The board of Det Norske Veritas set up a
committee to revise the old plan from 1996 in 1993. The result of their work is the current plan of 1996.

The first plan to be made dates back to 1871. A committee appointed by DET NORSKE VERITAS drafted
it. The committee included independent legal and technical experts as well as representatives from the
insurance companies and the
shipowners. Each provision was therefore carefully considered and a reasonable balance was obtained
between the interests of insurer and insured. In addition to the Plan, the committee produced a
comprehensive addition to the Plan, which explains the background for each provision.

Adjustments and modifications have been made in between full revisions of the plan. The changes have been
made partly by drafting additional clauses, and partly by including separate forms, issued for instance by the
Central Union of Marine Underwriters. The Norwegian Insurance Plan has won widespread recognition and
acceptance. In the international market, it represents the major alternative to the American and English
systems. It has also contributed to the development of Marine Insurance Law. When revising the plan from
1964 it was decided that the new plan should be based on the structure and content of the old plan. However
it was necessary to add a few important clarifications. In addition, the old plan had become somewhat
outdated.

Certain “new” types of insurance were incorporated into the plan. The plan contains separate chapters
relating to war insurance, coastal and fishing vessels insurance and rig insurance. Other types of insurance
have not been continued in the plan, first and foremost P&I insurance and other related insurance. The reason
for this being that the P&I insurers clearly indicated that they wished to continue to effect insurance on their
own conditions and that a regulation on shipowners liability insurance in the plan would accordingly not be
expedient.

Before the new plan came into being, all of the important players in the insurance market in Norway had
been invited to add their comments and these were reviewed and taken into consideration.

The Norwegian Insurance plan is split in four parts:

30
The General Part
Hull & machinery Insurance
Other insurance covers
Specialised insurance covers for fishing vessels and smaller vessels.

When determining for the terms of the contract between the insurer and the assured under a Norwegian
policy, you need to look at the following:

The Policy
The appropriate Cefor form
The Marine Insurance Plan
Cases

The cover under the “Norwegian Insurance Plan ”.

The NIP is split in four parts. Part one relates to all types of insurance. It contains definitions, general rules
relating to the scope of the insurance, perils insured against, causation and loss. Further it contains rules
relating to the duties of hence the insurers and the insureds, alterations of the risk during a policy year,
seaworthiness and measures to avert and minimise loss, casualties caused intentionally by the insured and
gross negligence. Problems regarding identification, liability of the insurer, costs of measures to avert or
minimise the loss including salvage and general average and liability of the assured to third parties are dealt
with here. So are the general rules relating to settlement of claims, claims adjustment, premium payment, co-
insurance of mortgagees and third parties and relations between the claims leader and co-insurers.

Part two deals with Hull insurance part three covers other insurance for ocean going ships. Separate
insurance’s against total loss is covered here as well as war risk insurance, damage, owner’s liability,
occupational injury insurance and loss of hire insurance.

What determines the cover?

As stated above, under the Norwegian cover this will be determined by the Policy wording, the Plan,
additional clauses and other laws and cases. The cover will be determined between the insurer and the
assured. He may have taken out a “full cover” or a limited one. This will have to be looked at individually
from case to case.It should thus be noted that if an insurance contract is based on the plan it would as a main
rule is subject to Norwegian jurisdiction. The insurance will terminate on the expiry of the agreed insurance
period unless the parties expressly agree to renew it.

Perils covered under the Norwegian Insurance Plan

Under a Hull and Machinery insurance, it is necessary to establish what perils you are covered against.
According to the Norwegian cover, these are determined to be the perils covered against under a hull policy.

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The plan states in § 2-8 that an insurance against marine perils comprises all perils to which the interest may
be exposed with the exception of:

War perils as defined in § 2-9

Measures taken by Norwegian or allied state authorities
Insolvency
Release of nuclear energy

It is the so-called “all risk” principal. For hull cover, there are two additional clauses in §12-3 and § 12-4.

These two clauses basically exclude all losses that occur as a normal consequence of the use of the ship and
her equipment (wear and tear) and latent defects (cases where a part due to certain causes becomes
defective). The problem of latent defects are a difficult one, and the problems that arise are the same that
those subject to English conditions. Shall the hull cover provide cover for unknown (latent) defects and their
consequences or not. There may for instance be cases where a vessels hull or machinery suddenly breaks
down causing further loss to the vessel. It may even constitute a total loss.

The term “latent defect” has been defined as “a defect of material in respect of either of it’s original or after
acquired could not be discovered by a person of competent skill and using ordinary care”.

The defect could have existed for some time, caused by a previous stranding, collision etc or it could also
have been a manufacturing problem. The answer has to be split in two. Both covers seem to be in agreement
that consequential loss or secondary losses as a result of an unknown defect shall be covered under the hull
policy. The insurer to cover this shall be the one at risk when the incidence occurs. If the cause of the loss
was outside of the policy period, the insurer will not have to cover.

The next question is how far the insured can recover for the cost of repairing the defect part itself, the
primary damage. The cover is restrictive, and the matter may also be specifically regulated in the Policy.

Inadequate maintenance is not covered. The provision in §12-2 subparagraph 1 makes no distinction between
the primary and consequential damage. But it requires that it be established which parts of the ship, its
machinery and equipment that were in defective because of said reasons. This is a difficult issue that will
have to be dealt with by technical experts and surveyors. If it turns out those parts of a damaged area is
below the minimum requirement of the classification society; this part of the damage will be excluded
whereas the remaining part of the damage may be covered.

Losses covered:
A shipowner or insured may have various interests in the ship. The hull insurance is designed to cover the
property interest as the main interest. The property interest is affected when the ship is lost or damaged. As a

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main rule, the losses covered under a hull insurance are the total losses and partial losses. If a hull insurance
is taken out on full conditions, § 10-4 in the plan states that the losses covered are the above (total and partial
loss), and in addition all collision liabilities. The latter is specific for the Norwegian cover.

It is not enough to state that partial and total loss is covered. It is necessary to have rules defining what
constitutes a total loss and what constitutes a partial loss. Further it is necessary to state how much the
insured is entitled to cover when the ship has been damaged. It should be noted that losses such as loss of
income or liabilities to third parties not caused by a collision is not covered under the hull cover. It is usually
unnecessary to state this in the cover but sometimes it is done explicitly. A detailed list of what is not
covered is contained in § 12-5. This includes crews wages, accommodation of passengers, expenses in
connection with the cargo, objects that would have had to be replaced anyway, zink slabs, magnesium slabs,
losses due to lubrication oil, cooling water etc. being contaminated etc. We will not look at these exceptions
in detail.

Now we should take a brief look at what constitutes a partial loss and what constitutes a total loss. The word
average in non marine insurance is applied in its ordinary sense of comparison between the value of that
which is insured and the sum stated in the policy thereby determining under insurance. In marine insurance,
the word average has a different meaning: it simply means “partial loss”. There are two types of average in
marine insurance being “general average” and particular average. General average is a matter of great
interest to the shipping industry, and will not be discussed here. A loss may be total or partial. Any loss,
which is not a total loss, is a partial loss. A total loss may be either an actual total loss or a constructive total
loss. According to the Plan, total loss is dealt with in § 11. It is a total loss when the ship is lost and there is
no prospect of it being recovered. It is also considered a total loss when the ship is so badly damaged that it
is impossible to be repaired and has to be condemned. These situations contemplate actual total losses. It is
interesting to note that no deductions shall be made in the claims adjustment for unrepaired damage
sustained by the ship in connection with an earlier casualty.

There is another situation that constitutes a total loss, which is the so called constructive total loss. This is
dealt with in § 11-3.2. It is deemed to be a situation of condemnation if the cost of repairing the ship will
amount to at least 80% of the insurable value of the ship or if the value of the ship after repairs if the latter is
higher than the insurable value. The value of the ship after repairs shall be determined on the basis of the
market value at the time when the insured makes his request for condemnation. If the condemnation is a
result of perils insured against and perils not insured against, then the compensation shall be reduced
accordingly.

If there is a partial loss or damage, the main rules for cover are set out in §12. The insurer shall pay for
repairs in order to restore the ship to the condition it was prior to the damage occurring. Liability for the
insurer arises when repair costs are incurred. The insured can only claim a pure money compensation if the

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ship passes from him by sale, enforced auction, seizure or requisition, which does not give rise to
compensation under § 15-11.

Cover subject to English conditions

The general law in England relating to marine insurance is the Marine Insurance Act from 1906. This act has
been revised several times over the years. This law deals with general aspects of marine insurance, and is not
restricted to Hull insurance.

Institute Time Clauses

In 1888, a set of clauses for hull insurance known as the “1888 Time clauses” was accepted by the ILU
(Institute of London Underwriters) and was thereafter re-issued annually with any necessary amendments.
The Technical and Clauses Committee formed in 1925, consisting of representatives of the members of
Lloyds underwriting association and the ILU prepare the standard clauses for the British Marine insurance
market. Each of the Institute clauses begins with the statement:” This insurance is subject to English Law
and practice.”

The ITC – Hulls 1/11/95 are arranged in a logical order, starting with clauses which must be observed if the
cover is to be maintained. Each clause has its own title and, for further ease of identification, each line is
numbered.
Two types of cover are available under the institute Clauses. Institute Time Clauses Hulls (ITH) against
ordinary marine risks and institute War and Strikes Clauses (War clauses). These correspond in order to
provide the insured with an optimal cover.

What governs the contract of insurance:

The terms of the contract in the English market is thus to be found in:

1/ The policy itself including special clauses ;

2/ ITCH (Institute Time clauses Hull)
3/ Marine Insurance Act of 1906
4/ Cases

Perils covered under the English system

As stated above, this will be determined by the above. The main rule in the English system is that only
named perils are covered. This means that any peril not expressly listed in the cover is not considered to be
covered. In the English system, it is, as in the Norwegian system, accidental, unforeseeable and not
inevitable losses that are covered. In general, the insurance is meant to cover marine perils. This phrase is
defined in the 1st Schedule to MIA rule / referring “only to fortuitous accidents or casualties of the sea. It

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does not include the ordinary action of the winds and waves. The exact meaning of this phrase has been the
subject of different cases.

In practice, the list in e.g. the ITCHL CL. 6 so comprehensive that it comes close to cover all possible causes
of loss and the list of exclusions is therefore just as long in the a named perils policy as in an all risk policy.
As the Norwegian conditions, the English conditions also covers collision liability. There is however a
notable difference. Under the Norwegian cover, all collision liabilities are covered. Under the English
system, only ¾ collision liability is covered.

Losses covered
What is covered is stated in ITCHL cl.6. “This insurance covers loss of or damage to the subject matter
insured caused by……….”
As said above, also liabilities arising out of collision is covered. As with the Norwegian conditions, it is
necessary to have rules defining what is considered partial and what is considered total loss. The Marine
insurance Act does not have a lot to say about general average, but defines in Section 64 particular average
as being “a partial loss of the subject matter insured, caused by a peril insured against and which is not a
general average loss”. “Particular average” is commonly a used term in practice, but is noticeably absent
from the standard hull and cargo clauses. Leaving aside the technical definitions, particular average means
simply a partial loss. Actual total loss (according to the Marine insurance Act)
Look at Section 57 .

There are three ways in which a total loss may occur.

1/ The subject matter insured is destroyed. Ex. the ship is destroyed by fire.
2/ Where the subject matter insured is so damaged that it ceases to be a thing of the kind insured. This is
called a loss of specie. An example of this would be cement which, when immersed in water, becomes a
solid mass.
3/ There is a total loss when the assured is irretrievably deprived of the subject matter insured. It must be
impossible to recover the property lost. This may occur where the insured matter is sunk on deep waters.

Another example of total loss is when a ship is deemed missing.

Subject to English conditions, it is possible to get “cash” instead of repairing the damage or before it is
repaired.

Constructive total loss. MIA Section 60-62.

It may happen that the subject insured is placed in a position by an insured peril where it has not actually
suffered a total loss but where the expenditure to prevent such a loss would be greater than the value of the
property when saved.

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According to the Norwegian Insurance Plan, the expression “total loss” covers both the actual total loss and
the so-called “unrepairability”. There will of course be a gradual transition at times from the absolute total
loss to cases where there is a question of financial assessment whether or not to undertake salvage and repair
work. Such evaluation will be based on a comparison between the probable salvage and repair cost and the
assessed value applicable to the hull insurance. If the assessed value applicable to the hull insurance is high,
it is conceivable that under special conditions of the market a new ship can practically bc rebuilt around the
remains of the old one without this being unprofitable for the insurer. However, the strictly financial
assessment must also be supplemented with a technical assessment.

All rules of marine insurance contain rules that allow the assured to recover for a total loss where the vessel
is so heavily damaged that it would be uneconomic to repair it. The covers differ with regard to how these
rules are formulated. Under the Norwegian Hull Plan the vessel becomes condemned and the assured may
claim a total loss where the cost of repairs exceeds 80% of the insured value or the true market value,
whichever is higher (§163). The rule is applied after the vessel is salvaged and brought to a place of safety.
Salvage costs are not included in the calculation.

Under the English (and American) cover there is a constructive total loss only when the costs of salvage and
recovery incurred after notice of abandonment plus the cost of repair exceed the insured value agreed in the
policy. Normally, it will be easier to claim a total loss under the Norwegian system. The Norwegian system
is only less favourable where the insured value in the policy is at least 20% lower than the true market value.

A difficult problem to decide upon is whether a vessel, which has suffered a casualty, is worth salvaging.

When claiming for unrepaired damage, the assured is entitled to receive "the reasonable depreciation of the
market value of the vessel". Depreciation shall be judged at the expiry of the policy. In most cases, this will
be the estimated cost of repairs. The problems relating to unrepaired damages can be particularly difficult in
relation to vessels which are to be broken up.

As stated above, subject to English conditions, collision liability is covered, but only ¾ of it. (Look at Clause
8 in the ITCH). The remaining ¼ will normally be covered under the P&I Insurance. But this also shows
why it is important to co-ordinate the two covers.

A comparison between the Norwegian cover and English cover

Causation subject to English cover

Since the insurer has agreed to cover certain perils, it is necessary every time a claim is presented to state the
cause of the loss. This can be easy to determine and it can also be difficult to determine. There are a number
of provisions that give rise to problems of causation, and we must look at the wording of the particular clause
we are dealing with.

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English judges have frequently stated that the ideas of causation to be used in marine insurance are not those
set out in science, but ordinary common sense ideas used by people in general. Sometimes we may be
concerned not with the question of what caused the loss but rather whether somebody can be blamed for it.
In Section 39 (5) MIA it is provided that the insurer is not liable for losses caused by unseaworthiness to
which the assured was privy.

The general rule as to causation is laid down in MIA 55. It states that the insurer is liable for loss
“proximately caused” by a peril insured against. This means the dominant or most efficient cause. ITCH 6.1,
6.2 and 7 simply use the phrase “caused by”. What is important to keep in mind when dealing with the
English conditions is that the insured has the burden of proof as to the cause of the loss. This because it is a
“named perils” policy.

Causation in Norwegian Marine insurance

The basic rule is laid down in NIP §2-13.

“The loss shall be apportioned proportionally over the several perils according to the influence which each
of them must be assumed to have had on the occurrence and the extent of the loss, and the insurer shall only
be liable for that part of the loss which is attributed to the perils covered by the insurance”.

It is the so-called rule of free apportionment that applies, subject to the commentaries to the plan. There is
however an exception to the §2-13, and that is §2-14. Where there is a loss caused partly by a peril insured
against and partly by a peril not insured against, the loss is to be borne by the insurer against the perils which
are regarded as the dominant cause of loss. If not possible to determine, the loss shall be split in two.

Note that under the Norwegian cover, being “all-risk” it is the insurer that has the burden of proof when
proving that the loss in question was caused by an excluded peril.

A brief comparison between the two systems regarding H&M Insurance

There is a difference in the cover for perils under the two systems. Under both systems, in order to claim
under the policy, the assured must prove that he has suffered a loss. In addition, under the English system, he
must also prove that the loss was caused by one of the perils insured against in the policy. Under the
Norwegian Plan, it is sufficient to prove that the loss was caused during the policy period. Then the insurer
must prove that any of the exemptions should apply if the he disagrees with the loss being covered under the
insurance. Under the English cover, the insured must prove that the peril is insured against.

The Norwegian cover is somewhat more advantageous than the English system, because the burden of proof
is less extensive. The Norwegian system, being "all risk" also insures the shipowner against the
"unthinkable”.

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Examples of perils that are covered under the Norwegian System but not under the English system:

Loss caused by runaway bacteria.

There was a case where a stain of bacteria developed to combat oil pollution escaped from confinement and
found their way into a vessel bunker. They broke down the oil so well that it seriously damaged the vessel
machinery.

Loss caused by sandstorms, wind and other natural calamities.

Is this a "peril of the sea? Wind alone is not strictly a peril of the sea.

Loss caused by corrosion.

This is simply a species of wear and tear and is not covered under either policies. But extraordinary corrosion
will be covered under the Norwegian System.

Loss due to negligence.

ITCH covers loss due to negligence of masters, crew, pilots, repairers and charterers. Most cases of
negligence are therefore covered. But there is an area, which is not covered.

For example, negligence exercised by an inspector from a classification society will be covered under the
Norwegian system, but not under the English system. This gap may be remedied by the inclusion of the
Additional Perils Clause.

Non violent theft of part of the vessel or its equipment.

This is covered only under the Norwegian system.

Having mentioned the fault of the assured and his servants above, we should have a further brief look at this
issue. It is an issue that can be difficult to deal with between the insured and the assured, but it should also be
considered what problems this area could cause. In a way, you might say that underwriting a risk in general,
shows that the insurer has a confidence in the assured. Still, the insurer has to look out for fraud. Also, the
insurer shall not carry losses due to certain negligent acts, like lack of maintenance, unseaworthiness etc. If
an assured was to have such losses covered, the premiums would have to increase and the shipowners that
care for their vessels would end up paying for those that didn’t.
On the other hand, a shipowner needs protection against negligence caused by persons he is not in a position
to control, such as the crew for instance.

All insurance covers relieve the insurer of liability for loss resulting from unseaworthiness where the assured
has been at fault. British law requires "privity". Further, it is quite clear that isolated acts of negligence are
covered. the other hand,

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it is clear that the insurer is not liable for damage, which is inevitably due to wear and tear. But borderline
cases do however appear. Latent defects were discussed briefly above and as mentioned then, this issue
causes several problems and has resulted in many cases.

The differences can be summed up as such:

The insurer is only liable under ITCH for the cost of repairing or replacing any part found to be defective if
the detect was caused by a peril insured against. F. Inst. the loss was due to a former collision etc. Under NIP
the assured receives a broader cover because the insurer in addition to being liable in all the cases covered by
ITCH is also liable for cases within NIP.

Both conditions cover loss to other parts of the hull or machinery caused by latent defects. ITCH does not
however cover loss where the cause of the latent defect is wear and tear.

Additional Perils Clause:

This clause was made in 1983. The clause provides basically two things:

1)Any accident
2 ) Any form of negligence on any person.

Both perils are due to the due diligence proviso. The addition goes a long way towards making the cover
under ITCH as extensive as an all risk cover. The word accident has been given a broad definition in court. It
should still be noted that the burden of proof lies upon the assured. The clause also extends the insurer's
liability for the cost of repairing or replacing defective parts.

Coverage against war perils:

War clauses almost always exclude war perils from the policies. The war cover has to be bought separately.
For the assured it is important that there is no gap between the marine and war cover. A difference between
the Norwegian conditions and the English and American conditions is that piracy and mutiny are covered as
war perils. Also, the wording used to identify war perils is not identical. This means that it could be difficult
to combine marine cover from one system with war cover from another.

SELF ASSESSMENT QUESTIONS

What is the “Hull” ?

Why would you buy a hull and machinery cover ?
What factors would you look at when choosing a cover ?
What are factors you assume an underwriter would look at when determining whether or not a ship
will be accepted for cover and when assessing the premium ?

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What perils are normally covered under a hull and machinery policy ?
What is necessary to prove in order to obtain cover under
The Norwegian system and
The English system ?
What do we mean by “Causation” and why must this be decided on ?
Give some examples of the differences between Norwegian and English cover
What is the “Additional Perils Clause” ?
How do you obtain a war cover ?

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 HULL INTEREST INSURANCE

This insurance is covered under chapter 14 in the Norwegian Marine Insurance Plan. It is, as the hull and
machinery policy, fixed or assessed. The difference is, however, that hull interest insurance only covers total
loss, in addition to excess liabilities. If the assessed hull value is adequate, this cover is not necessary. But
shipowners may choose this cover in the event of a total loss in order to save money on the total premium
cost. It shall thus be noted that the insurance is restricted to 25% of the assessed insurable value under the
hull insurance.

The cover is also possible to obtain in the English market. MIA section 21 allows the proposer to agree to an
insured value with the underwriter when negotiating the contract. The section states that the insured value
shall be deemed to be the market value of the ship.

Earlier, going 100 years back, there was little need for this cover as the inflation was low or nil. It was
sufficient to maintain the same value every year when the policy was renewed, so in a way, the underwriter
was insuring the vessel on a “new for old basis”. This despite the fact that all material property, including the
hull and machinery of a vessel, deteriorates every year. As the inflation rose, the need for hedging the hull
and machinery cover arose and the shipowners were allowed to purchase a TLO policy for 10%
disbursement.
Today, the ITCH used in hull and machinery policies today allow the assured to effect an additional TLO
PPI policy on the combined interests of disbursements and increased value for 25% of the insured value
expressed in the underlying hull and machinery policy, without a limit in the proportion relating to
disbursements.

Self assessment questions

How does inflation influence on the hull interest cover?

Who would you recommend to take out such cover?
Is the insurer liable for costs incurred in connection with minimising or avoiding a loss under the
policy?
Is there a maximum for cover under the policy?
What is “disbursements” ?

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 BUILDERS RISK INSURANCE

This is another property insurance aimed at covering the capital interest invested in the vessel during the
building and construction period. The rules are laid out in chapter 19 of the Marine Insurance Plan. This
insurance is aimed at covering the vessel from the commencement of the building period until the test run
has been performed and the hull insurance comes into effect.

The question of who needs to take out such a cover depends on the building contract. In Norway, there are
two standard contracts relating to ship building. Both of these contracts contains provisions requiring the
ship yard to take out a builders risk insurance. However, it can be agreed that this shall be for the account of
the owner. Practice may differ around the world. If the yard takes out a cover, it can be on an individual
basis, covering each vessel separately. But it can also be subject to a different arrangement, where the policy
covers the yard and all new building within an agreed time frame.

The construction period of a ship can be divided in three different stages:

1)Fabrication of sections by cutting of plates and welding.

2)The actual fitting of the sections together. This can be at the yard or dock site.
3)Launch of hull and equipment on board Trial trip(s).

It is obvious that the risk increases throughout the three stages as more and more work and equipment is
invested in the vessel. This means the sum insured will increase as well. The actual rate (premium) will for
example be reflected by the following factors: (The list is not exhaustive).

1)The length of the building period

2)The type of vessel
3)Statistics of the yard with regards to previous losses and damages
4)The particular yards loss prevention program and safety routines
5)The yards equipment and previous experience with the type of ship in question
6)The classification society “guarding” the new building
7)The final contract value will be the sum insured in the policy.

Self assessment questions

Who needs to buy a builders risk insurance?
How is the premium of a loss of hire insurance assessed?
What factors will an insurer look at when assessing the risk?
What types of claims may arise under a building period?

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 LOSS OF HIRE INSURANCE

This insurance shall cover the shipowners income interest, i.e his possible freight losses. It is a very popular
insurance to take out amongst owners in general. The Norwegian conditions are set out in chapter 16 of the
Marine Insurance Plan. It is not a mandatory insurance, but sometimes the banks or other mortgagees will
require that such a cover is taken out.

The loss of hire insurance is an independent insurance, but still linked to hull and machinery insurance. The
loss of hire insurance covers the owners income loss if the ship is unable to sail and to earn freight as
expected. It is important to stipulate in the policy the number of days that shall be covered. The purpose of
the insurance is to cover the number of days necessary to carry out repairs in the vessel.

The link to hull and machinery is as follows: it is a requirement for the loss of hire insurance to come into
effect that the ship is unable to earn freight caused by an incident covered by the hull and machinery
insurance. (On standard conditions). This means if the vessel has to carry out just regular maintenance work,
the number of days this will require is not recoverable under the hull and machinery policy. It is thus not a
requirement that the repairs actually are covered, only that they could have been had the deductible been
lower etc. A small hull and machinery claims may also lead to a large loss of hire claim if the spare part(s)
required for repairs for instance take long to deliver.

The number of days required is stipulated in the policy. But it is also necessary to stipulate a daily amount
for which the owner shall be compensated. Most policies will be fixed on so-called “gross terms” which
means that the daily rate is fixed at a certain amount. It will be specified in which currency the fixed amount
is. The policy may also be open, but this should be clearly specified in the policy.
In addition to stipulating the number of days covered in the policy, the policy shall also state the deductible,
or number of franchise days. This is the number of days the shipowner will have to pay himself before the
insurance comes into effect. It is common to use 14 days or 30 days, but any number of days can be inserted.
The franchise is per claim, not per year. For older vessels or vessels with a negative loss record, the insurer
may demand longer franchises in order not to have to pay on so many claims.

Another specific feature regarding the loss of hire insurance is that the insurance may be “used up” during
the insured period, even if the cover is for a full year. The number of days a shipowner totally can claim
under the policy is also stipulated in the policy. This may for instance be 90 days, 180 days or any number of
days.

If the policy reads as such:

30/90/90, it means that the number of franchise days is 30, the maximum days covered per claim is 90 and
the total number of days covered per year is 90. If a repair takes for instance 130 days to carry out, the
shipowner will cover the first 30 days. Then the insurance will cover the next 90 days and the shipowner will

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have to pay the remaining ten days. In addition, the insurance will be “used up” and if the shipowner wishes
to remain covered throughout the year, he will have to negotiate a new contact with the shipowner or he may
have a reinstatement clause in the original policy. Often, this reinstatement clause is automatically included
in the policy.
If the repair time was as above, but the policy read: 14/90/180, the shipowner would have to cover the first
14 days. The following 90 days would be covered by the loss of hire policy, and the remaining 26 days
would be covered by the shipowner. In this case, where the repairs take long, he would receive the same
payment is in the example above. The difference is however that with the latter cover, he would have 90 days
left of the insurance cover for the rest of the year.

The premium rate is calculated as follows:

If the daily amount for example is stipulated at USD 12.000,- per day, and the underwriter requires 3 daily
amounts as premium, and the total number of days is 180, the rate will be as such:
Premium USD 12.000 = 36.000,-
Sum insured 12.000 * 180 = 2.700.000
Rate: USD 45.000/2.700.000 = 1.67%

The rate will remain the same even if the sum insured is higher. This is because the insurer will charge a
certain number of days premium irrespective of the daily insured amount. The daily amount multiplied by
the total number of indemnity days during the policy period forms the policy limit or sum insured. The fixed
policy daily agreed amount will never be exceeded, but in respect of an open policy the number of indemnity
days agreed upon may be exceeded as long as the compensations does not exceed the sum insured.
It should be noted that sometimes a fleet limitation is added to a placing of loss of hire insurance. The total
number of days covered may be for the entire fleet.

Self Assessment questions

1)Give a brief definition of the term “loss of hire”
2)What is the purpose of obtaining a loss of hire cover?
3)Which factors would you as a shipowner consider before choosing the number of days covered ?
4)How is the loss of hire rate assessed ?
5)Explain what 15/60/120 means

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 FREIGHT INTEREST INSURANCE

This is an insurance cover that only cover total loss incidents. The aim of the cover is to give coverage of a
specific amount limited up to 25% of the hull value. This is to represent anticipated future lost freight income
over a certain period of time The amount covered is fixed or assessed.
The rules relating to Norwegian conditions are laid out in the Norwegian Marine insurance Plan chapter 14.
Please note that the freight interest does not cover excess liabilities. Freight interest insurance covers loss of
future earnings while the freight at risk at the time of the loss is covered by freight insurance. (Freight
insurance is seldom used and is now left out in the Marine Insurance Plan.)
The premium of the freight interest insurance normally follows the hull interest.

WAR RISK COVER

War risk insurance is also regarded as one of the marine insurance covers. Standard marine insurance does
not cover war risks as it is always excluded from cover. This fact necessitated the offer of war risk insurance.
The rules of war insurance is found in chapter 15 of the Marine Insurance Plan. In Norway, war risk cover is
not placed with the insurance companies but with the Norwegian War insurance. It is covered on a mutual
basis. It can thus be noted that the Plan refers to vessels insured with the Norwegian Shipowners Mutual War
Risks Insurance Association. This club is solely engaged in war insurance and insures practically the entire
Norwegian fleet against war risks.

A loss of hire war insurance can though be added to the marine policy, and may not be covered on the above
mutual basis in the club.

In order to determine whether or not a loss is excluded due to “war” it is necessary to define the term “war”.
The Norwegian Marine Insurance Plan chapter 2-9 outlines the difference between war perils and marine
perils. It is not always easy to draw the line, so there has been a number of court cases and arbitration in this
respect.

As the definition of war perils as opposed to marine perils may differ in the various markets it is important to
effect the war insurance on the same conditions as the hull and machinery insurance in order to avoid gaps in
the cover. To give an example, Piracy is considered a war peril in the Norwegian market but a marine peril in
the English market.

A specific feature of war insurance is that it automatically terminates with the outbreak of war between the
“major powers” (See §15-5 in the Marine Insurance plan). Singel trips within a specified trading can be
covered in the company market instead on an annual policy. Such trips usually calls for a substantial amount
of premium (due to high risk) and is usually “short tail” (covering a limited number of days).
In the English market, war risk is covered under the Institute War Clauses.
45
 INTRODUCTION TO P&I INSURANCE

The shipowners liability insurance

P&I stands for “Protection and Indemnity”. This is the shipowners liability insurance. The
insurance is aimed at covering the owners third party liabilities, both in contract and in tort. It is a
mutual insurance, organised in Clubs. The objective of the mutuality is that premiums + investment
incomes shall cover claims and expenses. There are no shareholders and no profit expectations. If
the premiums calculated for one particular year is not sufficient to cover claims and expenses for
same year, the Members will be charged with more premium payments to cover the deficit.

The historical background.

The birthplace of P& I Insurance was England, and the year was 1855. This was a time when England was a
dominant power in both shipping and insurance. They had the largest merchant fleet and it was the home of
Lloyd' s insurance, in addition to other insurance companies. Still, most of the worlds 15 P& I clubs are
based or managed in London.

Prior to the second half of the nineteenth century , the business of owning and managing ships did not attract
the same liabilities as today. It was rather pleasant for the shipowners back then, because they were able to
avoid most liabilities whatsoever. The law allowed them to exclude potential liability in Bills of Lading,
Charterparties and other contracts such as passenger contracts and long term contracts of affreightment.
Cargo owners and underwriters could therefore not bring claims against shipowners in respect of loss of or
damage to cargo. Although the law held the shipowners liable for collision, this liability was usually covered
by the hull underwriters.

The situation was unfair to those relying on the shipping services of others, and was soon about to change. In
1846, the British Parliament passed the fatal accident act, better known as Campbell's act. This Act gave
rights to dependants of persons who lost their lives as a result of the wrongful act of others. Being the times
of huge emigration, especially from Europe to America, this act had huge implications for shipowners
operating passenger lines.

Eight years later, a Merchant Shipping Act was passed in Parliament This Act gave the shipowners the right
to limit their liability for death and personal injury claims occurring without the shipowners actual fault or
privity. The developments of laws imposing liabilities on the shipowners caused concern for potential
unbearable losses. The need for adequate insurance arose.This resulted in the creation of the Shipowners
Mutual Protection Society. (Now the Britannia Steam Ship Insurance Association Limited). In 1855. Mutual
clubs already existed, but these were formed to provide hull insurance. The mutual P&l club was a
descendant of one of these hull clubs.

46
At first, the new clubs were described as protection societies. The class of risks to which the term
"indemnity" would apply still had to be accepted. However, in 1870 there was a case of a sinking ship
"Westonhope", which was to become an important milestone in the history of P&l. Insurance. The ship was
bound for Cape Town, but diverted to Port Elizabeth to load some additional cargo and was later lost on her
way to Cape Town. The cargo interest later sued the shipowners to recover the value of the lost cargo. Had
the ship sailed directly to Cape Town, the owners would have avoided liability for the cargo, by virtue of the
extensive exclusion clauses in the contract of carriage. But in this case, the court held that the deviation
prevented the shipowners from relying on the exclusion of liability clause. The owners were held liable for
the loss of the cargo. This loss was not covered by the protection societies.

Accordingly, the need for an indemnity protection arose, and the first Idemnity club came to being in 1874.
The protecting clubs amended their rules so that they also became indemnity societies. The need for
insurance cover for cargo liability was reinforced by the introduction of the United States Harter Act in
1893. The Act restricted the shipowners in relying on exclusion clauses. The shipowners had to accept a
greater obligation to care for the cargo. In 1924 the Hague Rules were adopted, extending the Harter Act
principles to many states throughout the world.
Since then, shipowners have faced and are still facing a steadily increasing burden of liability towards third
parties. The development of increased liabilities in all fields have been paralleled in a corresponding growth
in the scope of the insurance cover provided by the clubs. P&I insurance is now an essential requirement in
the business of owning and operating merchant ships. (It should though be noted that covers similar to those
offered by the Clubs are also available in the commercial market, but the Clubs still have the vast majority of
this market).

Approximately ninety percent of the world's merchant fleet is now entered in one or more of the fifteen
member associations of the International Group of P& I clubs. This group is linked together by a reinsurance
program. The insurance cover provided by the International Group is therefore broadly similar, although the
form and wording may vary.

While the early P&I Clubs were established as unincorporated associations, without any separate legal status,
most P&I clubs today are incorporated. This in order for them to have a separate legal status from their
shipowning members and they are therefore able to enter into contracts of insurance with those members.
The clubs are owned by their shipowning members themselves. Thus the shipowner could be said to be both
the insurer and the insured.

The organisation of the clubs

The General Meeting is the clubs highest authority . Each member is entitled to a number of votes calculated
by reference to that Members entered tonnage. The Annual General Meeting is responsible for approving the
accounts, amending the statutes and electing members of the Committee, Executive Committee, Supervisory
Committee and Election Committee.

47
The Committee
The Committee is responsible for ensuring that the purpose of the Association (Club) is in association with
the Statutes and decisions of the General Meeting. They determine the rules of the Association, the general
principles for the administration of funds and variations to be made in premiums and , ratings and the levying
of the contributions. The Committee reports to the General Meeting.

The Executive Committe

The Executive Committee administers to the daily business of the Association. In addition, it makes
recommendations to the Committee on important matters, such as the annual reports and accounts and
premiums etc. It may also delegate its authority to the General Manager and his staff, who are employees of
the Association.

The Supervisorv Committee

The Supervisory Committee, who reports to the Committee is responsible for making sure that the
Association operates in a safe and appropriate manner and that it complies with the law, guidelines and
Statutes. The Supervisory Committee has however no executive functions.

The Clubs are organised in claims department (usually specialised within certain fields or geographical areas
), underwriting departments, accounting departments, marketing departments and executives. How this is set
up differs from Club to Club. Some have outsourced their claims to outside companies. This is common
practice in England. It may also delegate its authority to the general Manager and his staff, who are
employees of the Association.

The Board of Directors

The Board of Directors are elected by the General Meeting and administers the day to day running of the
Club.

The international Group of P&I Clubs

The International Group presently consist of 13 Clubs:

Britannia
Gard
The Japanese Club
London
North of England
Skuld
Standard
Steamship Mutual

48
The Swedish Club
UK Club
West of England
Shipowners Mutual
American Club

The International Group of P&I Clubs is an unincorporated Association and the relationship between the
member clubs is regulated by a constitution. The International Group has a secretariat in London, and regular
meetings are held between representatives of the member clubs to discuss Group Policy.
The International Group was established when the first Pooling Agreement was entered into in 1899. It has
constantly been revised and the latest is from 1989, with amendments from 1992 and 1995. Revisions are
made constantly in order to reflect current International Group policy on the acceptance and apportionment
of risks.

The principal purpose of the International group is to arrange for the sharing among Group members of risks
borne by each individual club. The rules for this are laid out in the so called “Pooling Agreement” which
provides for Group Clubs to share amongst themselves claims incurred by each of them. It is thus an
extension of the mutuality. It provides a flexible form of for reinsurance for the constituent clubs. The
reinsurance above the “pooling level” is placed on the open market by the International Group. In addition to
the sharing of risks, the International Group also has other tasks. It represents its shipowning members at an
international level, and has an observer status with the IMO.

Another feature of the International Group of P& I clubs is their regular consultation and review for their
members to ensure conformity and adequacy to meet the constantly changing shipping scene and new
legislation brought in by governments world-wide, which affect the shipping industry. Note that risks that are
perceived to be of a non-mutual nature are excluded from Pooling under the agreement. Examples of
excluded risks are certain activities carried out in the oil and gas industries. These are not deemed to be
normal shipowning activities.

In response to the increasing size of claims a program of reinsurance of the Pool was commenced in 1951.
This reinsurance is available under the Group Excess Loss Policies, which are placed through London
brokers with Lloyds and International Company Insurers. The extent of the cover has increased gradually
since 1951.

Special arrangements exist in relation to oil pollution risks in the US. The OPA 1990 was widely perceived
as having increased very significantly the risk of transporting oil to the US and this risk could no longer be
deemed as being primarily mutual. In 1991 a system was introduced whereby voyage premiums are levied in
tankers loading or discharging persistent oil in the US with proceeds being applied to the payment of that

49
part of the premium for the Group Excess Loss Policies attributable to the risk of oil pollution and to the
payment of US oil Pollution claims.

The other principal agreement regulating relations between members of the International Group is the
International Group Agreement of 1985 (the IGA). This seeks to discourage unreasonable rate cuttings
amongst the Groups on the basis that, as non-profit making organisations they can only achieve cuts by
reducing essential reserves. Stability in the market is achieved by a requirement for a measure to co-ordinate
reasonable rates

Who can be a member of a club ?

Membership is open to owners, operators and charterers of ships, including other floating objects approved
by the committee.
Co assured may be: The manager of the ship, the mortgagee of a ship or other
persons interested in or in possession of a ship.

A joint membership may be for instance w hen an entry is effected jointly by the registered owner and the
bareboat charterer of a ship. This does not include co- assureds or affiliates which are not entitled to
membership

Classification
A very important requirement of entry into a club is that the vessel shall be fully in class throughout the
period of entry with a classification society approved by the Club. The Member has in this respect several
duties, laid out in the Rules.

Governing Law
This may vary, but the Norwegian Clubs (Skuld and Gard) are governed by
Norwegian Law. This is set out in their Rules.
(However, various laws, according to the contract or mandatory laws applicable may govern claims against
the shipowner covered by the Club).

The premiums
How are the premiums calculated and paid?
When membership is sought, the applicants must fill out an "entry form" or application form. There are
different forms for passenger ships, dry cargo ships, tankers etc. The Club will usually require information as
listed below:

Persons to be named as assureds or co assureds

The name of the ship
The port and registry of flag

50
The classification of the ship
The gross and net tonnage
The date of construction
Description of the ship
The intended trading area and types of cargo to be carried
The number and nationality of crew and officers
Details as to what cover is required

These details will be submitted to the underwriting department for review. Further or more detailed
information may be requested and or negotiations may be entered into. The application may finally be
accepted or rejected.

An offer for membership from the Club will include details of the premium rating and other terms of
insurance for the ship in question. A contract is concluded when the offer is accepted. When an entry is
accepted by the Club, normally a Certificate of Entrance is issued to the shipowner by the Club.

The policy year and accounting year of the clubs commences on February 20th. Historically, this was the day
w hen trading was resumed in the Baltic and the ports became accessible after the ice had melted. But it is
possible of course to obtain cover throughout the year as well.

The premiums and calls of each member will be assessed by the underwriting department of the club after
reviewing the member's claim record. This record is normally reviewed over at least a five-year period in
order to determine a general trend. This is to avoid penalising a member on the basis of a single large claim.
Even members with good loss records may have to accept higher premiums due to inflation and the cost of
reinsurance. Members with bad loss records always face higher premiums, They may also have to bear more
of the claims themselves, by higher deductibles.

It would certainly be carrying the mutuality beyond the limits of fairness if members with a consistently
good loss record had to support those that had not. (To some extent they still do, due to the fact that the clubs
are mutual). The club may also decide to exclude a bad member in more extreme circumstances.
A shipowner can enter his ship or fleet of ships with one or more clubs for full P&I cover, or he can choose a
limited cover. He may for instance wish to exclude cover for crew liabilities.

Advance calls
In addition to the yearly premium, referred to as the "advance call", the shipowner will also be charged
supplementary calls which are stated as a percentage of the advance call, and take account of escalating
claims and for claims which is not possible to allow. Skuld for instance make their advance calls payable on
March 15th, July 15th, November 15th.

51
Surplus calls
If; at the time of the cIosing of a policy year, the Advance premiums and contributions obtained throughout
the year shall exceed the claims, expenses and outgoing of the year the club may decide that such surplus call
shall be distributed wholly or partly to the members entered or be transferred to reserves.

Release calls.
The only way a member or a former member can be released from such liability to pay is by the written
agreement of the managers. Following the termination of a member's cover the club may, but is not obliged
to, assess a release call based on an estimate of the member's liability to pay future supplementary calls
excluding Pool claims. On receipt of such assessment, the former member has usually one month to either
pay the release call, in which case he will be discharged from all further liability to the association or elect
to pay future supplementary calls, in which case he has to establish a bank guarantee.

Claims Payment
Before a member can claim under the policy he has to first pay the claim "Pay to be paid", This protects the
clubs from the effects of the Third Parties Rights against the Insurers Act 1930, in cases which a member has
become insolvent, is unable to pay his calls and where his cover has been terminated, but he still has
outstanding claims.

Another important rule is that the insured must notify the club within a year of first being notified himself.
The clubs need to make reserves.

The handling of claims is controlled to a large extent by the club, which reserves the right to appoint lawyers
and surveyors on the member's behalf want to direct the handling of any claim. The club must consent to any
settlement made by the shipowner. One of the privileges of being a member is that with certain pre-
conditions, the club will provide bail or security on behalf of a member whose vessel is threatened with
arrest by a claimant. This is however within the club's discretion.

The main elements of a P&I cover:

P& I stand for Protection and indemnity insurance. The P&I Clubs offer such protection for a variety of
risks, mainly third party liabilities. This is done on a mutual non-profit making basis and with the
shipowning members themselves controlling the operation. Generally speaking, P& I insurance applies to the
whole field of potential liabilities which are not otherwise covered by other marine insurance' s. The P& I
Insurance also covers legal liability (under contract and in tort). The losses must have incurred in connection
with the direct operation of the vessel entered.

Other kinds of liability in which the shipowner is involved as a trading enterprise fall outside the scope of the
P& I cover.

52
With the exception of oil pollution, the clubs (still) offer unlimited liability cover for their member's claims.
However, with the steady increasing cost of reinsurance, this is constantly under review.

The reinsurance is necessary for the clubs in order for them to offer such unlimited cover. The unlimited
cover is not as “dangerous” as it seems, due to the many possibilities the shipowner has to limit his liability
in respect of the most common types of claims. The cover will extend to the liabilities the shipowner is
subject to under various jurisdictions around the world. It is however a general rule that he is under an
obligation to limit his liabilities to the extent possible. If the shipowner f.inst has inserted the value of the
goods in the B/L (An Ad Valorem B/L) he can not rely on the limitations set out in the various cargo
conventions. Unless having taken out a special cover for this excess liability, the Club will not accept such a
claim.

The clubs has a rule called the “Omnibus Rule”. Subject to this Rule, the clubs can offer cover in individual
cases for claims not covered by the rules in the first place. This will be done at the Clubs discression. This
equals an “ex gratia” payment.

The following type of claims are covered by the clubs:

Cargo claims
(Subject to the various Cargo Conventions.)

Collision liability
The history of the collision regulations and their implementation in English law is long and complicated. For
at least two hundred years, there have been rules for the navigation of ships. There has been several laws past
during the years that have passed. A shipowner has a duty to exercise care to ensure that the ships do not
cause damage to other vessels, their cargo, crew or passengers. This duty also applies to the shipowners
servants and agents who are responsible for the management and the navigation of the ship. If, as a result of
a failure to exercise such care and the ship collides, the shipowner may incur liability in tort to:
-the owner of the other vessel,
-the owner of the cargo on the other vessel. -the crew on the other vessel
-the passengers on the other vessel.

These types of tortuous liabilities are often referred to as collision liabilities.

In most cases, it is not immediately apparent who is responsible for the collision, although the majority of all
collisions are the result of negligent navigation on the part of one or more of the vessels involved. In most
cases, the involved parties will bring claims against each other's.

As a result of a collision, the shipowner may also incur a liability towards the cargo, crew and passengers on
board his own ship. In most cases, this liability will be covered by contract and is not regarded as collision

53
liability . However in countries where the convention does not apply, e.g. the U.S., the cargo interests are
entitled to recover all their losses from the other vessel. For this reason, the "both to blame collision clause"
is incorporated in the contract of carriage, thus affording the carrier the same protection as the convention. In
principle, a person claiming in respect of a collision can bring an action against the owner of the colliding
ship. As a general principle, the party who has suffered a loss as a result of a collision acquires a maritime
lien against the colliding ship. The lien gives the claimant a

right to arrest the ship or demand security. Where the owners of two colliding ships sue each other, they
usually try to have the action heard in a state most favourable to their respective claim and defences. The
club cover in will in general cover the shipowners liabilities in respect of collision regardless of the
jurisdiction applicable. Members of P&I clubs are usually required to insert a both to blame collision clause
in their Bills of Ladings and Charterparties.

In general, a claimant is only entitled to recover damages, which may be considered to arise as the direct and
immediate result of the collision. The right to recover damages may be restricted if, and to the extent that, the
claimant has failed to take reasonable steps to avoid or minimise any loss or damage.

The damages recoverable may include:

In the case of total loss, the value of the ship
The cost of repairs
Salvage awards
General average and other charges.
Reimbursement of any sums the shipowner has be come liable for as a result of the collision.
Reimbursement of the freight loss
Reimbursement of the value of the bunkers and the ship' s equipment lost or damaged as a result of the
collision
Compensation for the loss of use of the ship

Oil Pollution and other types of pollution

Liability for damages may include:
Injury to or loss of natural resources including loss of such resources
Injury to or economic loss from the destruction o real or personal property
Loss of subsistence use of natural resources;
Loss of revenues to federal, state and local governments from injury or loss of real property or natural
resources.
Loss of profits or impairment of earning capacity due to injury to or loss of real property, personal property
or natural resources, and
Costs of added public services provided during or after removal activities.

54
Passenger Claims
This includes personal injury and death, subject to the provisions of the tickets issued and applicable law as
well as delays and loss of or damage to luggage.

Crew Claims
Subject to the crew contracts and applicable law. (The law of the flag of the ship)
The provisions of an employment contract govern the terms and conditions of a crew members employment.
There are normally two types of crew employment contracts, an individual contract and a collective
agreement.

The expenses incurred in connection with a crew member's discharge in a port due to sickness or injury is
covered. If a crew member dies as a result of an accident, the shipowner is liable towards his relatives. The
crew member may receive compensation if he is permanently disabled whilst in the employment of the
shipowner or he loses his employment before an agreed period of time due to the loss of or a casualty to the
ship. He normally also receives compensation if his personal belongings are lost or damaged due a marine
peril by a crew member .

Note that the laws of some states specifically oblige a shipowner to take out extra insurance in addition to the
P&I cover.

Claims from stevedores and other third party claims.

Subject to contracts, tort law and applicable law.

Stevedore claims arise from liability for illness, injury or death as a result of negligence on board or in
relation to the vessel. Of major concern is liability under the Jones Act (an U.S. Act). This Act protects
American seamen in order to promote their welfare. There is an absolute responsibility for seaworthiness,
working routines and conditions and the equipment used.

Liability for Stowawavs

A stowaway has been defined (in the 1957 Brussels convention relating to stowaways) as "a person who, at
any port or place, secrefs himself in a ship without the consent of the shipowner or the master (or any other
person in charge of the ship) and who is on board after the ship has left that port or place".

Once the ship has left the state in which the stowaway boarded, it can be difficult to arrange for the
disembarkation of the stowaway.
The immigration laws of most states regulate the entry of any person who is not a national of that state. Any
other person is normal ly required to have necessary entry documents (visa, passport etc). Stowaways rarely
possess necessary documents. In most states, the Master is obliged to notify the immigration authorities of

55
the presence of any stowaway on board the ship. In some states, the authorities will watch over any ship,
which has a stowaway on board, to ensure that the stowaway does not go ashore.

In some ports, the authorities insist that the stowaway be placed in custody ashore for the duration of the
ship' s stay. The shipowner may be held liable for the cost of maintaining a watch on the ship or the expense
of keeping the stowaway in custody. A stowaway must remain on board until the necessary documents are
obtained, which may be months and years. Once the necessary papers are obtained, the stowaway will be
disembarked from the ship, on the condition that the shipowner undertakes to repatriate the stowaway
without delay. In some states, additional conditions are imposed by the immigration authorities before a
stowaway is able to disembark. It may also be necessary for the shipowner to provide an escort to
accompany the stowaway on part or whole of the journey to the stowaway's country of origin.

The costs incurred in maintaining stowaways are refundable from the P&I club. This includes extra
expenses incurred for and debited by the immigration authorities, the cost of employing a translator,
transport and detaining costs, costs of escort, costs of prison, cost of lawyers etc., repatriation expenses,
fines, extra costs with regard to fuel, phone calls, port dues, pilotage etc. is also covered . Political refugees
are often treated differently, given political asylum.

General average
The cover for general average is set out in the Clubs rules.
There are two types of loss or liability that are covered, namely:
The proportion of general average, special charges or salvage payable by
cargo interests or other parties, which is not recoverable as a result of breech of the contract of carriage; The
proportion of the ship's contribution to general average, special charges or salvage, which is not recoverable
under the hull policies because it exceeds the insured value of the ship. The type of loss most frequently
covered is a contribution in general average is payable by cargo interests. In practice, a ship's contribution to
general average, special charges or salvage rarely exceeds the sums insured under the hull policies.

Extra discharging costs

Additional costs are covered if they have occurred either in

a) Handling or discharging cargo, where the extra costs have resulted from: -A physical change in the state of
cargo or the ship being damaged by a marine peril (i.e. a peril insurable under a standard hull policy, such as
fire, grounding), or
b) The consignee has rejected discharging and disposing of cargo which.
It is not necessary that the member be under a legal liability to handle,
discharge or dispose of the cargo. But they need to have been reasonably incurred.

Wreck removal

56
In most maritime states, a. shipowner has a legal duty to carry out the removal of a .chip or wreck, if she
becomes a hazard to navigation or a potential danger in some other respect. ( for example as a source of
pollution).

The shipowner may also be liable to arrange for the removal of any cargo lost from the ship, which creates a
hazard. This may be the case w hen a container falls overboard m a navigable waterway. In most cases, the
shipowner is strictly liable for such wreck or cargo removal, regardless of whether the ship was at fault.
This includes costs incidental to the raising and removal of vessel and of cargo carried on it, provided always
that the shipowner is legally obliged to remove the wreck or to indemnify a third party against the costs of
doing so.

Liabilities under Towage

Such costs are also recoverable under the Rules.

FD&D
Freight, Demurrage & Defense. Legal costs incurred by Charterparty disputes etc.

Self assessment questions

1)What is the difference between a P&I club and a limited company?

2)What is the International Group?
3)Is it mandatory to buy P&I insurance for a shipowner?
4)What factors influence a P&I premium?
5)Where do we find the rules relating to P&I insurance?
6)Can all ships obtain P&I Insurance?
7)Do you have direct action towards a club?
8)How is the re insurance of the clubs arranged?

57
 CARGO INSURANCE

Note: This section is additional to the chapter on Cargo Insurance in “Introduction to Maritime law” page
570.

Introduction
The cover may vary according to the type of cargo, the trade and national differences. The various insurance
companies may also have different conditions.
In England there are Institute Cargo clauses made by ILU relating to cargo insurance. (ICC) These have been
used as a model for writing Norwegian terms, Cefor Form no. 240. “Conditions relating to the insurance for
the carriage of goods.” (Cefor stands for: The Central Union of Marine underwriters).

The practice of writing cargo insurance goes a long way back in time. It is not known exactly when the first
policies were written. But transport of cargo and trade between nations has been going on for thousands of
years. Even way back in time, there were great values on board single ships. In those days, transport of cargo
was more of a hazard, taking into consideration the ships used and the perils of the sea. Until the beginning
of this century, it was common practice for shipowners to exempt themselves from all types of liability
whatsoever. It is not until recent times we have got Statutes, laws and conventions that prevents them from
doing so.

The purpose of the marine insurance contract is to reimburse the insured for a loss suffered as a result of the
operation of an insured peril. In order to suffer a loss that is compensatable the insured must have an interest
in the insured property exposed to peril. If there is no interest there is no loss and thus no need for insurance.
When dealing with cargo insurance, the insurable interest is the cargo. Cargo insurance is a property damage
insurance that covers damages, total loss and shortage. Subject to other types of insurance, the proposer must
have an insurable interest when the insurance is effected. This principle does not apply in marine insurance.
The assured in a marine insurance contract does not need to have an insurable interest at the time the
insurance is effected but he must have a reasonable expectation in acquiring such interest and he must have
an interest at the time of the loss.
This is important because, if the assured’s interest has not attached or has ceased before the loss occurs, he
can not claim under the policy. He must have an interest at the time of loss in order to claim.

Cargo policies are normally assigned with the passing of the interest in the goods from one party to another
and it would be impracticable for each of parties to the assignment to claim on the same policy separately
because each had an interest at different times in the voyage. At times, it is difficult or impossible to
determine exactly when the loss occurred during the voyage. In order to overcome this difficulty, the
standard cargo conditions always contain the words "lost or not lost”. If this wording is included in the
policy and the insured is aware of a loss occurring prior to the attachment of his own interest, the insurer is
not liable for that loss unless he also knew of it when the contract was concluded.

58
Where neither party was aware of a loss when the contract was concluded and the policy is assigned, the
rights of the policy pass to the assignee and he can claim for a loss which occurred before his interest
attached.

Insurable interest
As stated above, it is necessary to have an insurable interest in the goods in order to be reimbursed under an
insurance policy. In English law this is defined in Section 5 of the Marine Insurance Act 1906. This defines
insurable interest, which is one of the fundamental requirements of insurance. In this section, insurable
interest is defined as such:

1)Subject to the provisions of this Act, every person has an insurable interest that is interested in a marine
adventure.
2)In particular a person interested in a marine adventure where he stands in any legal or equitable relation to
the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the
safety or due arrival of marine property, or may be prejudiced by its loss, or by damage thereto, or by the
detention thereof, or may incur liability in respect thereof.
The conclusion to be drawn is that if the assured does not suffer a loss in the event of a misfortune he is not
in a position to claim under the policy. If he will suffer a loss he has an insurable interest. The definition
above may be considered a general definition of the term “insurable interest” applicable for all jurisdictions.
(Although many may have their own, similar definition.) The subject matter in a cargo policy is the cargo
and this is called a “cargo interest''. The term “cargo interest” relates to all types of interests related to the
cargo. These can be:

1) Ownership to the cargo.

The owner clearly has an interest in the goods as long as he has title to the goods. This still applies if the
goods are security for a loan. The extent of his interest is what he paid for the goods, but this may be
increased by additional
Interests as f.inst. :

 Insurance charges.
 Anticipated profit.
 Partial ownership
 Defeasible interest.

The seller has an interest in the goods until it passes to the buyer. The sort of interest, which may cease
during the voyage, is called defeasible interest.

Contingent interest.
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When the title passes to the buyer, the seller’s interest ceases and the buyer’s applies. Sometimes the sales
contract will allow the buyer to reject the goods for various reasons. If this right is used, then the interest
reverts to the seller and this is called a “contingent interest” (Section 7 in the Marine Insurance Act).

Bottomry and respondentia (more of an academic interest today).

Forwarding expenses.
It is not unusual for a contract of affreightment to contain a clause allowing the
carrier to discharge the cargo short of the port of destination port or over-carry it to a further port. Then the
cargo owner is usually obliged to bear these expenses. The

carrier may even be allowed to charge additional freight for over-carriage (The cargo policy usually specifies
when these expenses are recoverable).

Commission
An agent acting for the cargo owner on a commission basis may insure the commission he expects to earn
when the goods arrive (Section 5 of the Act).

Liability
The owner can incur this if there is a degree of negligence. It is possible for the owner of a dangerous cargo
to incur liability to the carrier or to other cargo owners.

Even when there are more liabilities placed on the shipowner, there still is a need for cargo insurance. As
seen above, a transport normally covers several modes of transportation and in addition the carriers liabilities
are almost always limited by weight or package.

Often it is impossible even to decide where the damage happened and hence which carrier should be liable. It
is also easier for the cargo owner to claim the insurer, and leave any recourse action up to the company. It
will give the cargo owner a full and quick settlement and thereby enable him to replace the cargo that was
lost or stolen faster. Remember that a transport can be short or long. It can involve several different types of
carriage. The element of transportation may vary as well. Items being transported to an exhibition for
instance will normally also is covered during the exhibit itself. It is usually required that a transport is
“external” meaning that it is not simply moving cargo within a warehouse (unless this is specifically agreed
to be covered).

If the cargo is stored for shorter periods of times during a long transport, they will normally be covered also
during these periods

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Who is covered under a cargo policy?
This is regularly the person effecting the insurance and for the benefit of persons to whom he has transferred
title to the goods or security in the goods, provided that such security has been established through
assignment of a transport document representing the goods. If the person effecting the insurance neither has
nor will have any interest in the capital value of the goods, the insurance is usually deemed to be effected for
the benefit of the seller and for those who derive title to the goods from him.

Commencement of the period of insurance

The main rule is that the insurance attaches from the time the goods are loaded unto the means of
transportation which conveys them from the warehouse or place of storage at which the transit commences.

Termination of the period of insurance

The insurance terminates when the goods are safely unloaded from the means of carriage that carried them to
the consignee’s warehouse at the destination named in the policy. It can also terminate when they are
delivered to the Assured or put at his disposal or when the carrier sells the goods for the owner’s account.
(He has for instance not paid the freight).

In other circumstances it terminates 30 days after completion of discharge of the insured goods at the
destination named in the Policy. Or 60 days after the completion of discharge overside of the insured goods
at the destination named in the policy.

Risks covered
As a main rule, a cargo cover is an all risk cover subject to express exemptions. The loss must have occurred
during the period covered.

Risks excluded
These are examples of risks generally excluded from cover:

Insolvency
Cargo was unfit for the particular voyage
Insufficient marking
Insufficient packing
Ordinary loss in weight or volume
Protest actions, riots, strikes, sabotage etc (unless a war risk cover is taken out).
The goods being intended for unlawful purposes or processed unlawfully
Delay, unless this causes detoriation of the cargo
War
Measures taken against the goods by state authorities
Capture at sea, condemnation in prize, confiscation, requisition or other similar circumstances.

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Losses caused by nuclear energy

Safety regulations
Most covers will have safety regulations concerning domestic transits, international transits, older ships etc.

Insurable value
This is usually the market value of the goods. In addition charges in connection with the dispatch, premium
and prepaid freight or freight to be paid by the owners of the goods. If the goods are sold, the market price
shall be calculated on the basis of the invoice value. In addition, anticipated profit is recoverable. Unless
otherwise agreed, this is 10% of the insurable value. This means that the insured actually receives more than
the actual value of the goods.

The insurers liability

The main rule is that the insurer is liable for loss caused by any one casualty up to the sum insured. The
exclusions from cover are usually listed in the policy. The exclusions usually refer to general monetary
losses, fluctuations, loss of markets, loss in production, losses caused by delays etc.

Evaluation of loss
There is a total loss when the cargo is lost or destroyed or if the Assured is deprived of the whole cargo
without the possibility of retrieving it. It is also a total loss when it is deemed that at least 90% of the value
must be determined lost.
If there is damage, the insurer may require repairs carried out. In other cases it is the devaluation in value
that will be covered. Usually, when there is a claim for damages or total loss, a survey will be carried out, at
the expense of the insurer.
It is important to note that when a cargo insurer has settled a claim, he will subrogate the rights of the insured
against the carrier if the damage or loss is caused by him.

Salvage charges
Another important feature of the cargo cover is that it will cover the cargo owner’s liabilities in respect of
salvage charges. We will not go in detail as to how these charges are assessed or which rules apply in this
respect.

General Average
This is part of the cargo cover. When the cargo owner becomes liable for a contribution in general average
this contribution will be covered by his cargo insurance. There is a general average situation when a sacrifice
has been made or an expense is incurred for the benefit of more than one interest.
Litigation charges etc. will also be covered in connection with lawsuits relating to liabilities covered by the
insurance.

62
In addition to the basic cover as described above, it is possible to buy additional covers or covers more
specifically designed for the particular type of goods or the particular trade.

A cargo insurance is a valuable tool in order to secure a transport of goods. Even if the carrier is liable, and
has insurance, his liability will seldom cover the cargo owner’s actual loss. A claim against a carrier, maybe
located far away may be both difficult and expensive. A cargo insurance will give a quick settlement and the
insurer will take care of any recourse action.

A cargo insurance will also prevent the cargo owner from becoming liable for salvage awards, contributions
in general average, litigation costs etc. All costs which he has not calculated with to begin with

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 INCOTERMS

Introduction
The essence of any contract of sale is the exchange of goods for money. The INCOTERMS simply
contain a reminder of this. The contract specifies the nature, amount etc … of the goods.Any
particular packing obligations must be specified in the contract. There may be governmental or
other requirements to be obliged to for certain types of goods. Normally, if not specified in the
contract, the packing will be for the seller’s expense. The seller must of course pack the goods as
required for the mode of transport and for the voyage itself. (Only to the extent that the
circumstances of the transport is known to him.) It is important that the buyer duly notifies the seller
of his intentions.

There may also be a pre-shipment inspection (PSI) when the buyer requires a license or a permit from the
authorities to ensure that the goods conform to the contract. Then normally the authorities order an
inspection and engage an independent inspection agency. Legislation in the country in question may decide
whether the authorities can claim reimbursement for their expenses. If reimbursement is required it will
normally be for the buyers expense. Pre-shipment inspections may also be a contractual obligation these will
usually require the buyer to pay for it. In other circumstances it may be the sellers obligation to pay, f inst. if
the inspection shows that the goods were not in condition to satisfy the contract.

PSI may also be required when the contract of sale is concluded between parties that are not: familiar with
one another from previous dealings and who may not intend to establish future commercial relations (as in so
called "one off” contracts on the spot market). There may be an obligation to clear the goods for export and
import. This will of course apply to international sales. This must be decided in advance because the parties
must know who is responsible for doing what and who should obtain necessary licenses, official
authorisations and to submit official forms and requests in the country concerned. Also, the obligation to
clear the goods - particularly for import - usually results in the obligation to pay duty or VAT or other
official charges. The parties must also resolve who bears the risk if it is not possible to clear the goods within
the agreed time or at all. (There can be export/import prohibitions etc).

The obligation to contract for carriage and the sellers obligation to hand over the goods for carriage.
Often it is practical for either of the parties to be responsible for the whole transport, which is the case under
EXW or D-terms. But the majority of international sales still use contracts where the obligations of carriage
are divided between the parties.

 Under F terms the pre-carriage is arranged by the seller (These are FCA, FAS, FOB etc…)

64
  Under C terms the seller only undertakes to arrange the carriage and pay for the costs but the risk is
transferred to the buyer when the goods are shipped (CFR, CIF, COP, CIP).

The INCOTERMS explain how delivery to the carrier is completed in seven different situations under F
terms.
 Rail transport
 Road transport
 Transport by inland waterway
 Sea transport
 Air transport
 Unnamed transport
 Multimodal transport

Difficulties have always been connected to the use of F terms, since the exact time of transferral of the goods
may be difficult to determine.

Handling over to the carrier under C terms does not present particular problems. This is because the seller
has to perform his duties according to the contract of carriage, which he has himself concluded with the
carrier.

D terms state that the goods must arrive at a stated Destination.

E terms deal with departure (Ex Works)

The importance of trade terms

They are key elements of international contracts of sale because they tell the parties what to do with respect
to carriage of the goods, import and export clearance and explain the division of costs and risks between the
parties.
Unfortunately, short explanations often need good interpretation and they are in danger of being
misinterpreted, misunderstood or misused. The use of wrong terms creates unnecessary risks.

The FOB seller may be unpleasantly surprised if something happens to the goods after the point
when they have duly been delivered for carriage but before they have passed to the ships rail. This
will be the case particularly if he had not taken out insurance to protect the goods all the way to the
FOB point.
Though the buyer may have taken out insurance, which covers loss of or damage to the goods before the
FOB point (warehouse to warehouse insurance), the insurer may still refuse payment since the FOB buyer

65
has no insurable interest. Also, the insurer may not be inclined to pay someone who is not the insured party
under the insurance policy.

Remember thus that the trade term’s only deals with the question of whether a party has an
obligation to the other party, according to a particular term. They do not deal with whether it is
common or prudent for a party to take certain measures on his own behalf even though he has no
obligation under the INCOTERMS to do so in relation to the other party. The INCOTERMS do not
deal with how the goods should reach the agreed point of delivery. Nor do they convey what a
buyer may wish to do after taking delivery. Below the 13 terms will be introduced.
Since 1936, these terms have been recognised as practical, cost saving tools, used world wide to smooth the
international trading business. When both parties to a transaction specify the delivery as being according to
INCOTERMS, there need not to be any dispute arising from that aspect of the transaction.The last revision
of the terms were in 2000. In the 1990 revision there were a number of changes of critical importance to the
user. All terms were arranged in four major groups and the possibility of EDI usage was introduced into
several of the terms. The chances reflect the ICC practice of making INCOTERMS flexible enough to adapt
to changes in trade practice.

The INCOTERMS consist of 13 different terms. An INCOTERM will not apply automatically, but by
reference to a standard contract elaborated by an international organisation; as an international custom of the
trade, By assuming that the parties have intended to apply them (so-called implication).It is strongly
recommended that the term be incorporated into the contract to avoid disputes.

INCOTERMS do not deal with breach of contract and consequences following from it. When studying the
individual terms, the parties must always observe the fundamental difference between the C terms and the D
terms and that the seller having sold the goods under D terms should carefully consider the need to protect
himself against breach of contract and non fulfilment risks by adequate clauses in the contract.

Only with the D terms are the sellers delivery obligation extended to the country of destination. Under the
other terms he fulfils his delivery obligations in his own country, either by making the goods available to the
buyer at his premises (ex works) or by delivering thc goods to the carrier for shipment (FAS, FOB, CIF,
etc…). The contracts using D terms would turn the contract of sale into arrival contracts, while contracts
using F or C terms would be called shipment contracts. Using C terms would have to consider two crucial
points, namely the division of risks and also the division of costs.

The individual terms

EXW
The seller will deliver the goods at his premises.

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FCA
The seller must deliver the goods at the named point into the custody of the carrier named by the buyer and
provide export clearance (pay fees, sexes if required) and provide evidence of delivery of the goods to the
carrier.

FAS
The seller delivers the goods alongside the ship and provides an alongside receipt.

FOB
The seller must deliver the goods on board, provide export clearance (pay fees, taxes etc. (if required),
provide a clean on board receipt, pay loafing costs according to the custom of the port to the extent that they
are not included in the freight.
The difference from FAS is that the seller must provide export license at his own risk and must pay any
export taxes and fees. The goods must also be placed on board the ship and not just alongside.

CFR
See the definition below. But the seller does not pay or contract insurance.

CIF
The seller must contract for the carriage and pay the freight to the named port of destination, deliver the
goods on board, provide export clearance (pay fees etc. if necessary), contract for the insurance of the goods
and pay the premium, furnish the buyer with an invoice, a clean transport document and a cargo policy
certificate, pay loading costs and pay unloading costs if these are included in the freight.
The term differs from CFR because here the seller has the addled obligation to provide insurance.

CPT
Seller must contract for carriage and pay freight to the named place of destination. He must deliver the goods
to the first carrier, provide the buyer with export clearance (pay taxes etc. if required.) and furnish the buyer
with the invoice and transport document. CPT is used irrespective of mode of transport.

CIP
The seller must contract for the carriage and any freight to the named place of destination. He must further
deliver the goods into the custody of the first carrier and provide export clearance and pay fees, taxes etc. He
must also contract for insurance and pay for it and furnish the buyer with the invoice, usual transport
document evidence of insurance cover.

The difference from CIP is that CIF is used for sea carriage but CIP is used irrespective of the mode of
carriage.

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DAF
The seller must deliver the goods cleared for export at the named frontier (or the named place at that frontier)
and provide documents to enable the buyer to take delivery at the frontier (e.g. Document of transport or
warehouse warrant) and assist the buyer to obtain any through transport document. The difference from CPT
is that the seller also bears the risk of loss of or damage to the goods and not just the costs.

DES
The seller must deliver the goods on board the ship at the port of destination and to provide documents
enabling the buyer to take delivery from the ship. With DES the seller assumes the risk of loss of or damage
to the goods as well as any cost that increases to the point of delivery.

DEQ
The seller must deliver the goods on the quay at the port of destination and provide documents to enable the
buyer to take delivery from the quay. He must also pay unloading costs and provide import license (and pay
duties etc. if necessary).

The difference from DES is that the seller also has to bear the additional risks and costs to bring the goods
ashore, that is to pay for loading and unloading and he must also clear the goods for import

DDU
The seller must deliver the goods at the named place of destination and provide the documents necessary for
the buyer to take delivery.

DDP
This is in the group D – arrival. The sellers primary obligation is to deliver the goods at the named place of
destination and to provide import clearance (pay import license, taxes and fees if required) and provide
documents to enable the buyer to take delivery at the named place /e.g. delivery order, warehouse warrant or
document of transport). The difference from DDU is that the seller must clear the goods for import and pay
duty.

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 DEFINITIONS OF IMPORTANT TRADE TERMS

These are terms important to be familiar with when dealing with international transport and sales of goods.

ACCEPTANCE
A draft, payable at a determinable future, which the drawee acknowledges his obligation to pay it at
maturity. (Broadly speaking, any agreement to purchase goods under specified terms. An agreement to
purchase goods at a state price and under stated terms.)

ADVANCE FREIGHT
Partial payment of the bill of lading freight in advance; It is the same as guaranteed freight.

AIR WAYBILL
A bill of lading (see bill of) that covers both domestic and international flights transporting goods to a
specified destination. This is a non-negotiable instrument of air transport that serves as a receipt for the
shipper, indicating that the carrier has accepted the goods listed and obligates itself to carry the consignment
to the airport of destination according to specified conditions.

ALL RISK
The broadest form of coverage available, providing protection against all risks of physical loss or damage
from any external cause. It should thus be noted that even all risk policies contain exclusions. However, it
will be the insurers obligation to prove the presence of an exclusion.

ALONGSIDE
It is the side of a ship. Goods to be delivered "alongside" are to be placed on the dock or barge within reach
of the transport ship's tackle so that they can be loaded aboard the ship.

ARBITRAGE
The buying of foreign exchange, securities, or commodities in one market and the simultaneous selling in
another market, in terms of a third market. By this manipulation a profit is made because of the difference in
the rates of exchange or in the prices of securities or commodities involved. Often the purpose of a transport.

AVERAGE
Any loss or damage due to insured perils that is less than a total loss. Two types of average occur: Particular
Average and General Average. It is a term specifically used in English. It can also be called simply a partial
damage or damage.

BENEFICIARY
The person in whose favour a draft is issued or a letter of credit opened.

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BILL OF LADING
The document issued on behalf of the carrier describing the kind and quantity of goods being shipped, the
shipper, the consignee, the ports of loading and discharge and the carrying vessel. It serves as a document of
title, a contract of carriage, and a receipt for goods.

BONDED WAREHOUSE
A building authorized by Customs authorities for storage of goods on which payment of duties is deferred
until the goods are removed. Usually restricted entrance to such.

BREAK BULK
Loose cargo, such as cartons, stowed directly in the ship's hold as opposed to containerized or bulk cargo.
See "Containerization."

BULK SHIPMENTS
Shipments which are not packaged, but are loaded directly into the vessel's holds. Examples of commodities
that can be shipped in bulk are ores, coal, scrap, iron, grain, rice, vegetable oil, tallow, fuel oil, fertilizers,
and similar commodities.

CARGO
Goods, merchandise or commodities of every description which may be carried aboard a vessel, in
consideration of the freight charged; does not include provisions and stores for use on board.

CARNET
A customs document permitting the holder to carry or send merchandise temporarily into certain foreign
countries (for display, demonstration, or similar purposes) without paying duties or posting bonds. The
goods must either be taken out again or declared later.

CARRIER
The transporter of cargo. It usually means Steamship Company, but can also refer to trucking company,
airline, or railroad.

CERTIFICATE OF INSPECTION
A document often required with shipments of perishable or other goods, when certification notes the good
condition of the merchandise immediately prior to shipment.

CERTIFICATE OF MANUFACTURE
A statement sometimes notarized by a producer, usually also the seller, or merchandiser that indicates the
goods have been manufactured and are at the disposal of the buyer.

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CERTIFICATE OF ORIGIN
A specified document, required by certain foreign countries for tariff purposes, certifying the country of
origin of the merchandise. Sometimes requires the signature of the consul of the country to which it is
destined.

CHARTER PARTY
A written contract between the owner of a vessel and a leaser of the whole vessel or vessel capacity. A
charterparty can be a standard one or be made individually.

COLLECT FREIGHT
Freight payable at destination provided the vessel delivers the goods as specified.

COMMERCIAL INVOICE
A statement of transaction between a seller and buyer prepared by the seller, and a description of the
merchandise, price, terms, etc.

COMMERCIAL SET
Set of four "negotiable" documents that represents and takes the place of the goods themselves in the
financing of the cargo sales transaction.

COMMON CARRIER
Transporter who holds himself out to the general public for the transportation of goods over a definite route
and according to a regular schedule.

CONSIGNEE
Party who is to receive the good; usually the buyer. Often mentioned in the B/L

CONSIGNMENT
Merchandise shipped to a foreign agent or customer when an actual purchase has not been made, but under
an agreement obliging the consignee to pay the consignor for the goods when sold.

CONSOLIDATION
The Consolidation Endorsement may be added to an Open Cargo Policy at an agreed premium, to provide
coverage on merchandise while in transit to, and while at, a common consolidation point for the purpose of
preparing or consolidating the merchandise for export.
CONSULAR DOCUMENTS
Bills of lading, certificates of origin or special invoice forms that are officially signed by the consul of the
country of destination.

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CUSTOMS BROKER
Licensed by U.S. Customs to clear shipments for clients, also can forward goods "In Bond" to your port.

D/A-DOCUMENTS AGAINST ACCEPTANCE

Instructions from a shipper to his bank that the documents attached to a time draft for collection are
deliverable to the drawee against his acceptance of the draft.

D/P-DOCUMENTS AGAINST PAYMENT

Instructions a shipper gives to his bank that the documents attached to a draft for collection are deliverable to
the drawee only against his payment of the draft.

DECK CARGO
Cargo carried outside rather than within the enclosed cargo spaces of a vessel.

DOCK RECEIPT
Receipt issued by an ocean carrier or its agent for merchandise delivered at its dock or warehouse awaiting
shipment.

DOCUMENTARY CREDIT
A commercial letter of credit providing for payment by a bank to the name beneficiary, usually the seller of
merchandise, against delivery of documents specified in the credit.

DOCUMENTS
Papers customarily attached to foreign drafts, consisting of ocean bills of lading, marine insurance
certificates, and commercial invoices, and where required, including certificates of origin and consular
invoices.

DUTY
A sum to be paid for import of goods according to the type of goods.

(a) ad valorem duty means an assessed amount at a certain percentage rate on the monetary value of an
import.
(b) Specific duty: an assessment on the weight or quantity of an article without preference toits monetary
value or market price.
(c) Drawback: a recovery in whole or in part of duty paid on imported merchandise at the time of
exportation, in the same or different form.

EX (POINT OF ORIGIN)

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From the point where the shipment begins movement, e.g., "Ex Factory" "Ex Mine" or "Ex Warehouse." See
"Terms of Sale."

EX-DOCK
(From dock.) Seller owns goods until they are unloaded on dock at port of discharge; selling price includes
all costs so far plus cost of unloading from vessel.

EX-FACTORY
Seller owns goods until they are picked up at his factory; selling price is the cost of the goods.

F.A.S. VESSEL
(Free alongside steamer.) Seller owns goods until they are delivered alongside vessel; selling price includes
all costs so far plus cost of transportation to dock.

F.O.B. TRUCK
(Free on board truck.) Seller owns goods until they are loaded on truck at his factory; selling price includes
all costs so far plus cost of loading on truck.

F.O.B. VESSEL
(Free on board vessel.) Seller owns goods until they are loaded on vessel; selling price includes all costs so
far plus cost of loading on vessel.

F.O.B. WAREHOUSE
(Free on board warehouse.) Seller owns goods until they are delivered to buyer's warehouse at final
destination; selling price includes all costs so far plus transportation to final warehouse.

F.O.B./F.A.S. ENDORSEMENT
If a merchant sells on F.O.B., F.A.S., C&F or similar terms, it is the buyer's responsibility to place the
insurance.

FREE TRADE ZONE

A port designated by the government of a country for duty-free entry of any non-
prohibited goods. Merchandise may be stored, displayed, used for manufacturing, etc., within the zone and
reexported without duties being paid. Duties are imposed on the merchandise (or items manufactured from
the merchandise) only when the goods pass from the zone into an area of the country subject to the Customs
Authority. Also called FOREIGN TRADE ZONE

FREIGHT

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The money charged by the carrier for transporting goods.

GENERAL AVERAGE (G.A.)

Ancient principle of equity in which all parties in a sea adventure (ship, cargo, and freight) proportionately
share losses resulting from a voluntary and successful sacrifice of part of the ship or cargo to save the whole
adventure from an impending peril, or extraordinary expenses necessarily incurred for the joint benefit of
ship and cargo. Today most cases are dealt with according to the York antwerp Rules.

GENERAL AVERAGE SECURITY

Documents the cargo owner presents to the General Average Adjuster to replace the vessel owner's maritime
lien on cargo for its share of General Average and to obtain release of the goods by the Steamship Company.
G.A. Security consists of a G.A. Bond and either a cash deposit or an Underwriter's Guarantee.

GUARANTEED FREIGHT
Freight payable whether the goods are delivered or not, provided the failure to deliver the goods resulted
from causes beyond the carrier's control.

HARMONIZED SYSTEM
An international commodity classification system, developed under auspices of Customs Cooperation
Council, adopted by the United States in 1989 and increasingly the most widely accepted import/export
classification methodology. Replaces SCHEDULE B export codes and TARIFF SCHEDULE OF THE U.S.
import codes.
IN BOND
A term applied to the status of merchandise admitted provisionally to a country without payment of duties --
either for storage in a bonded warehouse or for trans-shipment to another point, where duties will eventually
be imposed.

INLAND BILL OF LADING

A bill of lading used in transporting goods overland to the exporter's international carrier.

IRREVOCABLE LETTER OF CREDIT

A letter of credit in which the specified payment is guaranteed by the bank if all terms and conditions are met
by the drawee.

LETTER OF CREDIT - COMMERCIAL

A letter addressed by a bank, at the insurance and responsibility of a buyer of merchandise, to a seller,
authorising him to draw drafts to a stipulated amount under specified terms and undertaking conditionally or
unconditionally to provide eventual payment for drafts.

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LOAN RECEIPT
Document signed by the Assured where he acknowledges receipt of money advanced by the insurance
company as an interest-free loan (instead of payment of a loss) repayable to the insurance company only if
the loss is recovered from a third party and then only to the extent of the recovery.

LOSS OF MARKET
A situation in which, for one reason or another, sound cargo is no longer wanted by the consignee when it
arrives. This is a "business loss" not recoverable under a Marine Cargo Policy; e.g., Christmas trees arriving
in January undamaged.

MANIFEST
An itemized list by Bill of Lading number of the kind and quantity of all cargoes loaded aboard a vessel,
prepared by the vessel's Master.

NAMED PERILS POLICY

Any marine policy limiting coverage to perils specifically listed in the policy; opposed to All Risks policy.
See "All Risks."

OCEAN BILL OF LADING

Bill of lading indicating that the exporter consigns a shipment to an international carrier for transportation to
a specified foreign market. Unlike an inland B/L, the ocean B/L also serves as a collection. If it is a straight
B/L, the foreign buyer can obtain the shipment from the carrier by simply showing proof of identity. If a
negotiable B/L is used, the buyer must first pay for the goods, post a bond, or meet other conditions
agreeable to the seller.

OPEN POLICY
A cargo policy with no expiration date that provides automatic coverage of cargo to or from an Assured in a
specified trade at agreed rates, terms, and conditions. Usually consists of separate Marine and War policies.

PALLET
A low portable platform, usually wooden, on which cargo is stacked for storage or transportation; a skid.

PERILS OF THE SEA

Fortuitous accidents or casualties, peculiar to transportation on a navigable water, such as stranding, sinking,
collision of the vessel, striking a submerged object, or encountering heavy weather or other unusual forces of
nature. It is a term referred to in most marine insurance policies.

PHYTOSANITARY INSPECTION CERTIFICATE

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A certificate, issued by the US Department of Agriculture to satisfy import regulations for foreign countries,
indicating that a US shipment has been inspected and is free from harmful pests and plant diseases.

PILFERAGE
The theft of part of the contents of a shipping package.

POLITICAL RISK
In export financing the risk of loss due to such causes as currency inconvertibility, government action
preventing entry of goods, expropriation or confiscation, war, etc.

PRO FORMA INVOICE

An invoice provided by a supplier prior to the shipment of merchandise, informing the buyer of the kinds and
quantities of goods to be sent, their value, and important specifications (weight, size, etc.)

SHIPPER'S EXPORT DECLARATION

A form required for all shipments by the US Treasury Department and prepared by the shipper, indicating
the value, weight, destination, and other basic information about an export shipment.

SHIPPER'S LOAD AND COUNT

Note on bill of lading indication that the contents of a container were loaded and counted by the shipper and
not checked or verified by the Steamship Company.

SPECIAL POLICY OF INSURANCE

Document issued on behalf of the Underwriter stating the terms and conditions of the marine insurance.
Issued when evidence of insurance is required, as by the bank issuing the Letter of Credit.

STANDARD INTERNATIONAL TRADE CLASSIFICATION (SITC)

A standard numerical code system developed by the United Nations to classify commodities used in
international trade.

STRAIGHT BILL OF LADING

A non-negotiable bill of lading in which the goods are consigned directly to a named consignee.

SUBROGATION
The operation by which the insurance company (on payment of a claim) assumes all of the assured's rights to
recovery from any third parties; substitution of one creditor for another.

SURVEYOR

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A marine specialist who examines damaged property and determines the cause, nature, and extent of damage
and methods of repair and/or replacement. He is not an adjuster, and all his actions are without prejudice to
policy terms and conditions.

TARE WEIGHT
The weight of a container and packing materials without the weight of the goods it contains.

TENOR
The term fixed for payment of a draft.

TERMS OF SALE
The invoice is the sales contract between buyer and seller and indicates the Terms of Sale.

THROUGH BILL OF LADING

A single bill of lading converting both the domestic and international carriage of an export shipment. An air
waybill is essentially a through bill of lading used for air shipments. However, ocean shipments usually
require two separate documents -- an inland B/L for domestic carriage and an ocean B/L for international
carriage. Through bills of lading are insufficient for ocean shipments.

TONNAGE
Gross Tonnage - Total internal carrying capacity of a vessel expressed in measurement tons (one
measurement ton = 100 cu. ft.).

TRANSIT SHIPMENT
A term designating a shipment destined for an interior point or a place best reached by reshipment from
another port.

VALUATION CLAUSE
The clause in the Marine Policy that contains a fixed basis of valuation agreed upon by the Assured and the
Underwriter and which establishes the insured value of the merchandise. The Clause determines the amount
payable under any recoverable loss or General Average contribution.

VESSEL
Every description of watercraft or other artificial contrivance used, or capable of being used, as a means of
transportation on water. The definition of vessel may change according to the law appliccable.

WAR RISKS

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Those risks related to two (or more) belligerents engaging in hostilities, whether or not there has been a
formal declaration of war. Such risks are excluded by the F.C.&S. (Free of Capture and Seizure) Warranty,
but may be covered by a separate War Risk Policy, at an additional premium.

WAREHOUSE RECEIPT
A receipt supplied by a warehouseman for goods he has placed in storage.

WAREHOUSE-TO-WAREHOUSE CLAUSE
The clause in the Cargo Policy that defines when coverage commences and terminates. It is the intent of the
policy to attach at the time the goods leave the
warehouse of origin named in the Policy, and to continue while the goods are in due course of transit until
delivered to the warehouse of destination named in the Policy, where it terminates.

WHARFAGE
A charge assessed by a pier or dock owner for handling incoming or outgoing cargo.

Self assessment questions

1. Give a brief definition of “ cargo insurance”
2. Who needs to buy cargo insurance?
3. Why is it important to have such insurance?
4. If you recover your loss from your cargo insurance, can you still claim the carrier?
5. Does it make a difference what means of transportation is used?
6. Why is the sales contract important when determining cover?
7. Why is the sales contract important when determining who bears the risk for the transport?
8. If goods are sold FOB, and the goods are carried by plain and the plain crashes, can the
seller claim under the cargo policy?
9. What constitutes a total loss under a cargo policy?
10. How is damage to the cargo calculated?

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