Marine Insurance
Outline of Lecture October 2012
William K. Sheehy
I. Types of Marine Insurance
A. Hull and Machinery Insurance
B. Protection and Indemnity Coverage
C. Cargo Insurance
D. War Risk Insurance
E. Mortgagee’s Interest Insurance
II. Hull and Machinery Insurance (“H&M”)
A. Typical definition:
H&M is a form of marine insurance that pays the owner for damage done
to the ship itself or the equipment which forms part of it (for instance,
cranes, hydraulic winches etc.). It is often simply known as hull insurance
or hull cover. This insuance covers •Costs of repairing physical loss or
damage to a vessel.•Reimbursement following total loss of a vessel
(Actual and Constructive)•Expenses to prevent loss (Sue &
Labour,Salvage and GA contributions)•Collision Liability (if a running
down clause is applicable)•Expenses associated with claims ( survey fees
etc.).
B. Terms of art:
The two parties:
assured=insured=policy holder
assurer=insurer=carrier=underwriter
C. H&M is placed through brokers, not with insurance companies.
D. H&M generally does not cover liability, except when, at additional cost, a
running down clause is added to the policy. The clause adds legal liability
coverage for damage done to another ship or its cargo resulting from a
collision with, and caused by, the insured vessel. Most liabilities of the
shipowner are covered not by the H&M policy, but by Protection and
Indemnity Coverage.
E. At additional cost, the H&M policy may contain clauses covering
“disbursements” and/or “profits”.
F. H&M is generally provided subject to Institute Cargo Clauses 2009, which
are incorporated by reference into the policy. The text of the clauses and
commentary may be found at http://www.rhlg.com./documents.aspx
G. H&M policies issued in the commercial context protect the assured
against named maritime perils, which means
“perils consequent on, or incidental to, the navigation of the sea, that
is to say, perils of the sea, fire, war perils, pirates and rovers, thieves,
captures, seizures, restraints and detainment of princes and peoples,
jettisons, barratry and any other perils which are either of the like
kind or may be specified by the policy.
“Perils of the seas cover losses caused by seawater, stranding, cyclone,
storm, lightning, fog, rough weather, collision with other ship, striking
upon a sunken rock or icebergs.”
http://www.conservatorblog.com/marine-insurance-maritimeperils-explained.php
H. HOWEVER, because most H&M policies include a “free of capture and
seizure” (F.C.&S.) clause, warlike risks are not covered, notwithstanding
the language contained in the above-quoted perils clause. Warlike risks
are therefore only covered if there is a war risk policy in effect.
I. The “loss payee” is the party to whom losses covered by insurance are to
be paid—“From the point of view of legal interpretation, it has been held
that a mortgagee under an open [loss payee] clause is an appointee only
to receive the funds payable in the event of loss, it is not an assignment of
the contract, but an appointment only. It does not create a new contract
with the payee nor abrogate any condition of the policy. The rights of
such appointee are, therefore, no greater than those of the insured, nor is
an undertaking thereby imported to pay the mortgagee, independent of
that to pay the insured or mortgagor. And in any event, such a policy is
insurance on the property of the mortgagor as owner, rather than on the
interest of the mortgagee. The sum for which the company is liable
therefore, is not the loss of the mortgagee, but the loss of the insured….”
Appelman, Insurance Law and Practice
J. Total loss, constructive total loss, and so forth: these two terms are used
to differentiate the degree of proof where a vessel or cargo has been lost.
An actual total loss occurs where the damages or cost of repair clearly
equal or exceed the value of the property. A constructive total loss is a
situation where the cost of repairs plus the cost of salvage equal or
exceed the insured value of the vessel (English rule) or ½ the insured
value of the vessel (American rule).
K. A party without an insurable interest in a vessel may not obtain insurance
on the vessel. A party has an insurable interest where it stands in any
legal or equitable relation to the subject-matter in such a way that it may
benefit by the safety or due arrival of insurable property or may be
prejudiced by its loss, or by damage thereto or by the detention thereof or
may incur liability in respect thereof.
II. Protection and Indemnity Coverage (“PandI”)
Most of the matters covered in my lecture on PandI coverage is outlined
extremely well in the following excerpt taken from Tetley’s Glossary of Maritime
Terms:
“Protection and Indemnity Insurance is mutual insurance which
covers shipowners' liability to third parties for damage to their ship or cargo,
as well as statutory liabilities such as pollution and wreck removal, but does
not cover direct losses to the shipowner's own ship or cargo. Four classes of
coverage are included in P. & I.; (i) Protection, which covers a shipowner for
claims paid in regard to liability for loss of life, personal injury, damage to
fixed or floating objects, wreck removal and one-fault collision (supra) in
liability; (ii) Indemnity, which reimburses the shipowner for indemnity given
to owners of damaged or lost cargo; (iii) War risks; (iv) Freight War Risks.
The bulk of this coverage is provided by: P. & I. Clubs (Protection and
Indemnity Clubs) [Fr.: "mutuelles de protection et d'indemnisation"] [Span.:
"clubs de protección e indemnización"] [Gr.: "Reedervereinigung für die
Versicherung von Schiffsrisiken"]. These have been formed by shipowners to
provide financial protection against the extent of liabilities to which they may
be subjected. As a result of the "homogeneity" of risks faced by shipowners,
P. & I. Clubs operate on a mutual basis where risks are placed in the same
portfolio; annual premiums are paid into a common fund according to the
degree of exposure to risks,(1) and losses are indemnified out of this common
fund. See Tetley, Int'l. M. & A. L., 2003 at pp. 591-592.
In other words, the members of the Club share each other's liabilities; the
insurer also being the assured. At present, there are less than twenty P. & I.
Clubs in operation. The major Clubs have joined the International Group of
Protection and Indemnity Clubs (supra), forming a pool for reinsurance
purposes, as well as giving attention to problems of general concern to
members. The major Clubs are in the United Kingdom, Scandinavia, Japan
and the United States of America. The International Group Clubs are:
The American Steamship Owners Mutual Protection and Indemnity
Association, Inc. - Website: http://www.american-club.com/. Email: info [at]
american-club [dot] net.
Assuranceforeningen Skuld (Gjensidig) Website: http://www.skuld.com/. Email: osl [at] skuld [dot] com.
Britannia Steam Ship Insurance Association Ltd. Website: http://www.britanniapandi.com/. Email:
http://www.britanniapandi.com/contact.html.
Gard AS Website: http://www.gard.no/. Email: companymail [at] gard [dot] no.
Japan Ship Owners' Mutual Protection & Indemnity Association Website: http://www.piclub.or.jp/. Email: general-dpt [at] piclub [dot] or
[dot] jp.
London Steam-Ship Owners' Mutual Insurance Association Limited Website: http://www.lsso.com/. Email: comms [at] a-bilbrough [dot] co [dot]
uk.
North of England P. & I. Association Website: http://www.nepia.com/. Email: general [at] nepia [dot] com.”
Shipowners' Mutual Protection and Indemnity Association (Luxembourg) Website: http://www.shipownersclub.com/. Email: info [at] shipowners
[dot] co [dot] uk.
Standard Steamship Owners' Protection & Indemnity Association
Limited - Website: http://www.standard-club.com/. Email:
p&i.london.ctcplc.com.
Steamship Mutual Underwriting Association Limited Website: http://www.ssmua.com/. Email: steamship [at] simsl [dot] com.
Sveriges Angfartygs Assurans Forening (The Swedish Club) Website: http://www.swedishclub.com. Email: swedish [dot] club [at]
swedishclub [dot] com/">swedish [dot] club [at] swedishclub [dot] com/.
United Kingdom Mutual Steam-Ship Assurance Association Limited Website: http://www.ukpandi.com/. Email: john [dot] mcphail [at]
thomasmiller [dot] com.
West of England Ship Owners Mutual Insurance Services Limited Website: http://www.westpandi.com/. Email: mail [at] westpandi [dot] com.
III. Cargo Insurance
This topic will be covered in class when we review the topic of
conventions governing carriage of goods by sea.
IV. War Risk Insurance
Shipowners' insurance is customarily divided into two groups: insurance for general
marine risks and insurance for war risks. A shipowner must take out both types of
insurance in order to insure itself against all possible kinds of risks.War risk
insurance includes:
"war or warlike conditions, or the use of arms or other implements of war in the
course of military exercises in peacetime or in guarding against infringements of
neutrality…
...riots, strikes, lockouts, sabotage acts of terrorism and the like”
As noted above, the F.C.&S. clause in the typical H&M policy excludes coverage of
damage covered by war risks.
V. Mortgagee’s Interest Insurance
A mortgagee will demand an insurance security for the loan provided to a shipowner. This is
achieved by means of a Letter of Undertaking from Hull insurer to mortgagee. Should Hull
insurance not respond, the mortgagee will require an additional insurance. MII is designed to
cover this exposure.
In a loan agreement between owner and mortgagee, a provision will state that the
mortgagee is entitled to the proceeds from Hull and Machinery cover and any Increased Value
covers, in the event of a total loss or if the claim exceeds a set value. This protects the
mortgagee for the loan amount outstanding at any given time.
Following a Notice of Assignment, the Hull insurer and the insurers of the Increased Value will
issue a Letter of Undertaking in favor of the mortgagee, based on a Loss Payable Clause agreed
between the parties.
Hull or Increased Value insurers will not respond to a claim in some circumstances. Typically,
this might occur if the assured is in breach of warranties or has acted with gross negligence.
Since covers are void in these circumstances, there is no payment from insurers and the
mortgagee would face a loss.
The mortgagee can protect himself by a Mortgagee Interest Insurance. This covers the
outstanding loan amount, should the other covers become void. In some cases the mortgagee
takes this cover and charges the owners. The cover may also be arranged by owners, in favor
of the mortgagee.