INSURANCE POLICIES AND RISKS
“Insurance is a financial scheme where persons exposed to the same type of risk contribute small amounts (premium) to a common fund from where losses of the few will be taken. As such the insurer is really a trustee of the fund. Hence insurers are subject to strict supervision by the Controller of Insurance under the provisions of the Insurance Act., 1938 and the Insurance Rules, 1958.’
1. Classes of insurance business:
2. Kinds of Insurance Policy:
i) Valued Policy : The sound value must be ascertained before insurance by valuation of property.
ii) Open Policy : The sound value of insurance has not been ascertained but ascertained at the time of loss
3. Cover Note : A document issued to give temporary coverage for the proposed property insured.
4. Significance of the Sum Insured:
i) It is the limit of the insurer’s liability.
ii) It is the amount on which the premium is based.
The sum insured, however, is not necessarily the amount the insurer will pay in the event of loss.
5. Alternations and Endorsements:
Endorsement-Document issued to effect a material change in the policy wording or coverage.
6. Mortgage and Loss Payable Clauses:
Applicable when third parties have acquired an insurable interest in the property insurance. This clause is used to serve those property owners who have mortgaged their insured property.
7. Some concepts commonly associated with risk are loss, peril, hazard, accident and event.
Loss is the disappearance of value.
Peril is an event that produces a loss.
Hazard is a factor that enhances the probability of the happening of a peril, or that can either aggravate or mitigate its outcome (Poor house keeping is a hazard it can hasten ignition and also help in the spread of fire).
Accident is a sudden, unexpected happening.
Event is a series of accidental happenings all having the same cause. Fire (a peril) caused by short circuit (Accident) due to defective electrical wiring (hazard) results in a series of happenings (collapsing roofs and walls, injury to people, etc.) all producing losses.
1. Introduction to Marine Insurance:
0.1. International Trade-
0.2 Definition of Trade Terms:
Terms of Sale
FOB (Free on Board).
FAS (Free along side ships)
CFR (Cost & Freight).
CIF (Cost, Insurance & Freight)
FOT (Free on Trucks)
FOR (Free on Rail).
DD (Delivered Docks).
0.3 Classification by Marine Insurance:
According to Subject Matter Insured-
According to Risk Area Covered: Ocean Marine (Wet). Inland Marine (Dry).
0.4 Principles governing the practice of Marine Insurance:
Principle of indemnity.
Principle of insurance interest.
Principle of subrogation.
Principle of utmost good faith.
Principle of proximate cause.
A principle of contribution.
The Current Clauses
The FPA clause, (free from particular average)
The WA clause, (with particular average)
The all risks clause, (All risks) WAR, SRCC common sub-clauses.
The New Clauses:
The “C” clause.
The “B” clause.
The “A” clause.
Comparative analysis of the current and new clauses.
Types of Losses:
Actual total loss. V
Constructive total loss.
Presumed total loss.
Compromise total loss.
* Particular Average. * General Average. * Charges/Expenses.
Functions of Marine Insurance:
Some of the important functions of Marine Insurance are as follows
1. Marine Insurance provides all losses due to maritime and transit perils.
2. Marine Insurance enables ship owners not to freeze portion of their capital as reserve fund for the loss of their vessels.
3. Marine Insurance makes it possible for the rapid expansion and development of the import and export trades.
What is Marine Insurance?
The English Marine Insurance Act of 1906 does not define directly what Marine Insurance is? It does, however, under section 1, define what is a contract of Marine Insurance.
“A contract of Marine Insurance is a contract whereby the insurer undertake to the assured, in manner and to the extent thereby agreed against marine losses that is to say, the losses incident to marine adventure.”
Marine Insurance is an insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest immovable property, may be exposed during a certain voyage or a fixed period of time.
1. Definition of Marine Insurance:
The Insurance Act, 1938 gives the following definition;
“Marine Insurance Business” means the business of effecting contracts of insurance upon vessels of any description, including cargoes, freights and other interests which may be legally insured, in or in relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatever description insured for any transit by land, water or air, or by any combination thereof and whether or not including warehouse risks or similar risks in addition or as incidential to such transit and includes any other risks customerily included among the risks insured against in marine policies.”
2. Classes of Marine Insurance:
Marine Insurance is classified according to the subject matter insured as follows
i) Cargo Insurance :
This refers to insurance on goods or movables. According to the rules for construction of policy, “the term” means goods in the nature of marchandise, and does not include personal effects provisions and stored for use on board.
ii) Hull Insurance :
This refers to insurance on ship, i. e., her hull and machinery and specially covers loss of or damage to hull or machinery directly caused by –
* Accidents in loading, discharging or shifting cargo or fuel.
* Explosion on shipboard or elsewhere.
* Break down or accident to nuclear installations or reaction on shipboard or elsewhere.
* Brusting of boilers, leakage of shafts or any latest defects in the machinery or hull.
* Contract with aircraft-
Negligence of master, officers, crew or pilots provided such loss or damage has not resulted
from grant of due deligence by the assured, owners of managers.
iii) Freight Insurance :
As the name suggests, this refers to insurance on freight. The rules for construction of policy define; ‘Freight’ as including the profit derivable by a ship owner from the employment of his ship to carry his own goods or movables, as well as freight payable by a third party, but does not include passage money.
3. Principles governing the practice of Marine Insurance:
Principles of Indemnity:
“To indemnity “means” to make good a loss,” The principle of indemnity does not allow an insured to recover more than the amount of pecuniary loss arising from the perils insured against. This means to place the insured in the same situation in which he has been before the loss.
“Measure of Indemnity” refers to in the practice of Marine Insurance simply means “the extent of the liability of the insurer for loss (i. e. the maximum amount which the insurer must pay in the event of a claim under the ploicy)”.
Subject always to the adequancy of the sum insured, the maximum amount recoverable under an unvalued policy is the insurable value, and the maximum amount recoverable under a valued policy is the insured value. Therefore, where the loss is a proportion of the whole, only a porportion of the limit is recoverable under the policy.
The Measure of Indemnity for “total loss” is the sum insured by the policy for total loss of part, which is apportionable, the measure of indemnity of the part totally lost, i.e. the insured value of the part loss. But where the sum insured for the whole is less than insured value for the whole, the calculation must be based on the lower figure.
Principle of Insurable Interest:
By insurable interest, it is meant that interest which exist when the insured will suffer a disadvantage if the contingency insured against happens and will enjoy benefit if the contingency insured against fails happen. It is the extent to which the insured might be demnified by the loss or injury.
To enable the insured to claim under a Marine Policy, the insured must have insurable interest at the time of the loss. If he has no interest, he cannot claim for reimbursement for his loss.
Every assured who effect a policy is required to have an insurable interest or a reasonable expectation of acquiring such interest. He needs not have the interest at the time he effects the insurance but he must have it at the time of loss.
Principle of Subrogation:
The principle of subrogation is based on the philosophy that the insured should not be allowed to make profit or gain out of his misfortune.
If the insured were allowed to exercise his rights and remedies on his behalf, he would receive more than the amount of his loss.
In practice, the general rule is that, upon payment of a loss, the insurer is entitled to be subrogated to any right of action which the insured may have against a third person whose negligence or wrongful act caused loss or injury.
Normally, once the insurer has paid a claim in respect of the loss, any rights of recovery are immediately passed on to the insurer. The marine insurer does not acquire his subrogation rights until he has paid the claim but the non-marine insurer acquires subrogation rights immediately the assured has such rights.
Principle of Utmost Good Faith:
In Marine Insurance, the doctrine of utmost good faith is the underlying principle, meaning that any concealment or misrepresentation of a material fact by the insured will invalidate the policy. By material fact, it is meant any fact that may influence or tend to influence the judgement of a prudent under writer in his consideration of the risk or in determining the premium to be charged.
The obligation of the insured to reveal all material facts concerning the risk is of utmost importance, since the contract of insurance invioves the assumption of risk by the insurer. By the very circumstance, one party to this contract (the insured or his broker) is better informed about the risk than the insurer.
Principle of Causa Proxima:
This is derived from the legal dictum “causa proxima non remota spectature” (the proximate and not the remote cause is to be considered).
The law provides that the insurer is liable for any loss proximately caused by the perils insured against, for which it is necessary to ascertain the proximate cause of the loss to determine whether or not a claim for loss or damage is compensable under the policy.
In determining the proximate cause of loss, one must consider only the most that cause the loss and the chain must not be broken by another event or be caused by an excluded peril.
Proximate cause is defined as “that which, in a natural unbroken by any new, and without which that event would not have occured.”
Principle of Contribution:
This principle means that if there is in force more than one policy covering the same interest in the same subject matter against the same peril, insured shall not be entitled to recover more than the full amount of the loss and if he so recovers from one insurer, he shall have no right to further payment from the others. In turn, the insurer who paid the loss may recover a proportionate contribution from the co-insurer.
Again for the purpose of this provision regarding excessive insurance is to avoid the temptation on the part of the insured to destroy or induce some one to destroy the thing insured in the erroneous belief that he would be entitled to collect all the amount of the insurance effected in different insurance companies in excess of the real value of the thing insured or the loss really suffered.
4. Comparision among FPA, WA and All Risks:
The abbreviations FPA and WA stand for Free of Particular Average and With Average. The term “Average” has a special meaning in Marine Insurance ; it means loss. Therefore, FPA means Free from Particular Loss and with Average means, With Partial loss. The FPA, WA and ALL Risks clauses are identical except for clause 5 in each set of clauses which will tell you the extent of coverage afforded by the marine policy.
i) The FPA Clause:
This clause commences with the words “Warranted Free from Particular Average”. It simply means that partial losses are not covered. In order to be recoverable, the loss must be a total loss. However, when the “vessel or craft be stranded, sunk or burnt” the FPA clause covers the consequent partial loss.
ii) This clause commences with the words “Warranted Free from Average” under the percentage specified in the policy.” This simply means that the WA clause pays claims for partial loss if the loss amount to the percentage specified in the policy. For example, insured goods are damaged to the extent of 2% but since the percentage specified in the policy is 3% the policy does not pay. However, if the loss amounts to 3% or more than the policy pays the entire loss.
iii) The All Risks Clause:
This clause commences with the words. This insurance is against all risks of loss or damage to the subject-matter insured.” From this, it will be seen that the All Risks Clause covers not only the perils enumerated in the printed from of Marine Policy except, of course, the war perils and the risks of strikes, riots and civil commotions but also extranneous risks, namely ; theft and pilferage, short-delivery and non-delivery, fresh water damage, damage by other cargo, heating, leakage and breakage, acid and other extreneous substances, denting etc.
However, the term “All Risks” does not cover delay, inherent vice or mere wear and tear.
5. Types of Loss Covered:
Having considered what is and what is not covered under the policy form and presuming that a loss is due to peril insured against, such loss may fall under any of the following categories
(a) Total loss (b) Partial loss (c) Charges.
a) Total loss : “If a vessel be sunk in deep water by the operation of a peril insured against or if the subject-matter be totally destroyed by fire so that no salvage remains there is obviously a total loss under the policy. This is actual “Total Loss.”
b) Partial loss : The word “average” in Marine Insurance is used in a particular sense not to be confused with other meanings of the word. Average losses in Marine Insurance are divided into “particular average” and “General Average” Thus, “Particular Average” means “Partial Loss”, but only such particular loss as is not general average, particular average is fortuitous ; general average arises voluntarily.
“Particular average” may be defined as a “Partial Loss by a peril insured against which “rests where it falls”, i.e. is not distributed over the whole of the interest at risk in the common adventure, as is general average. The commonest form of “Particular Average is seawater damage not amounting to total loss but accidental particular loss by any other peril insured against, e.g. collision or fire, is equally particular average.
“General Average” is another expression which has more than one meaning. it is used to describe (a) General Average Loss (in Marine Insurance, a form of partial loss) and (b) general average contribution, in order accurately to grasp the Principles of General Average it is necessary to realise that, were there no such thing as Marine Insurance, General Average would still apply.
The connection of General Average with the contract of marine insurance is purely incidental, but insurers, in any case, are directly liable to the assured for general average sacrifice of the subject-matter they have insured where the General Average act arises from a peril insured against, but not otherwise over the years, however, the practice of General Average has become intimately linked with that of Marine Insurance, but because Marine Insurance is neither compulsory nor universal,
General Average must be considered in two aspects, viz : (1) as between the parties concerned in the common adventure ; and (2) as between the concerned on the individual subject-matters at risk at the time of the General Average act and their respective insurers.
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