Major Elements of Marine Insurance Contract

Marine Insurance Contract enables the ship owner, cargo owner, buyers & sellers, owners of goods to operate their businesses with adequate relief that their businesses have the necessary cover in the event of a financial emergency.

Termed infamously as the “MOST SPECTACULAR FRAUD” was the case of the vessel BRILLANTE VIRTUOSO. This ship carrying fuel oil cargo from Ukraine to China and was drifting on 5th July 2011 off the coast of Yemen to embark a security team prior transiting the Gulf of Aden in the times when the Somali piracy was at its peak. A small boat with seven persons carrying Kalashnikovs approached the vessel and the Captain thinking that they were the security team permitted them to board. On boarding they turned upon the Master and crew, and apparently hijacked the vessel.

The Master was taken to the bridge and the chief engineer to the engine control room. Rest of the crew were rounded up in the day room. While the Voice data Recorder (VDR) audio recording provided evidence that the armed men told the Master to sail towards Somalia, in fact the ship headed towards Djibouti.

Couple of hours later the engine stopped and a fire broke out in the engine room. It was claimed that the fire had started because of detonation of an explosive device used by the pirates. The pirates subsequently were believed to have fled the ship while the Master along with his crew had abandoned the vessel and were rescued by a passing vessel. Salvors known as Poseidon promptly arrived on the scene which in fact drew a remark from the Judge that “their response was rather impressively rapid”. The vessel which was extensively damaged and had to be scrapped later.

Vessel’s owner, Suez Fortune Investments Limited, and mortgagee bank, Piraeus Bank AE, brought a claim on the ship’s war risks policy for a constructive total loss (CTL). The insured value was $55m plus $22m for disbursements and increased value, making a total claim of $77m.

After a series of claims and counterclaims between owners, insurance company and a rather prolonged trial the court declared that the whole incident was pre-planned in order to claim a large insurance. Owners claim was rejected and the incident turned out to be one of the most prominent examples of Maritime Insurance Fraud.
 
 
Marine Insurance, just like any other, is a contract and hence must be very carefully drafted with minutest legal details. It has been in existence for centuries. Its purpose is to enable the shipowner, cargo owner, buyers & sellers, owners of goods to operate their businesses with adequate relief that their businesses have the necessary cover in the event of a financial emergency. The importance of Marine insurance can not be over emphasised as it not only provides security against the overall economics and running of ships but it also assists the developing countries from the impact on balance of payments.

The three pillars of a Marine Insurance contract are “UBERRIMAE FIDEI (UTMOST GOOD FAITH)”, “INDEMNITY” and “INSURABLE INTEREST”.

UBERRIMAE FIDEI (Utmost Good Faith):

Every insurance contract, be it Marine Insurance or any other, is a contract of “Utmost Good faith”. This principle applies both on the insurer and the assured. It is the responsibility of the ship-owner or the cargo owner to an insurance contract to disclose all material facts known to him which an insurer is not expected to know.
  • An interesting development in the latest amendment of UK Marine Insurance act in 2015, under Section 3, a duty of “FAIR REPRESENTATION” was introduced which overtakes the long-standing duties of utmost good faith. The duty of fair presentation requires policy holders to either disclose to insurers 'every material circumstance' which the insured knows or ought to know, or provide the insurer with 'sufficient information' to put a prudent insurer on notice that it needs to make further enquiries into the identified material circumstances. An assured is permitted to provide access to insurer his data base and this puts an obligation on the insurer also to make efforts to ascertain relevant material circumstances. Thus, an insurer cannot now refuse a claim by stating that the assured did not disclose a certain material fact if the same was available to him in the data.
  • Under the Marine Insurance acts of various countries, it is still the duty of the assured to disclose clearly and accurately all material facts related to the risk. A material fact can be understood as which would influence the judgement of a prudent Underwriter in considering whether he would enter into a contract at all. Or it would affect a prudent insurer to decide whether to proceed with the insurance and with what extra premium and at what terms. Apart from the duty of disclosure, the insured must act towards the insurer in good faith throughout the duration of the contract.
Prior the 2015 amendments of UM Marine Insurance Act, an interesting case under the duty of utmost good faith was that of “THE STAR SEA’. Three ships, the Star Sea, the Centaurus and the Kastora were beneficially owned by the Kollakis family. Each was registered under a one-ship company, which in the case of the Star Sea - was Manifest Shipping Ltd. A group insurance cover had been renewed for another year over the 40 vessels in the fleet.

A year before this insurance policy was renewed, there was a fire in the engine room of the Centaurus. The ship became a Constructive Total Loss (CTL). Within two months from the first incident, the Kastora ship also became a CTL due to an engine room fire. A surveyor appointed by the managers of the vessel, found the dampers in poor condition. The directors of the claimants and the managing companies were aware of these facts. Deficiencies in the Star Sea’s emergency fire pump were found in January 1990 by a port authority surveyor who had inspected her after her arrest by cargo claimants. During repairs of the fire pump, the chief engineer cut a suction pipe passing through the forepeak ballast tank to a non-return valve in the ship’s side. Thought the repairs to the pump were completed prior vessels departure the pipe section was not replaced. Absence of this pipe affected the ship’s seaworthiness. On May 27th 1990, the Star Sea sailed from Nicaragua bound for Zeebrugge with a full cargo of bananas, mangoes and coffee. Two days later, as she was approaching the Panama Canal, a fire started in the engine-room. The fire caused such an extensive damage to the vessel that she was declared as a CTL. Owners claim for CTL was rejected by the insurers and the matter was referred to court. Insurers defence were under Sections 17 (UBERRIMAE FIDEI) and Section 39(5) (SEAWORTHINESS). Both their defences failed as under section 17 the underwriters were unable to prove that the claim was fraudulent and under Sec 39(5) no evidence of privity could be attributed to the directors / managers/owners.

The House of Lords even stated that:

The duty of utmost good faith does not continue or even if it does, after court proceedings have been started, the duty is superseded by the court’s procedural rules. The House of Lords said that if there are documents pre-existing the loss which are relevant and were suppressed or deliberately destroyed, then the judge would strike out a claim for failure to produce relevant documents. The duty of the utmost good faith does not end but it is superseded by the court’s procedural rules.

INDEMNITY:

MIA defines Marine Insurance as “A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed".

The underlining principle of an insurance is that “the assured should find himself in more or less the same financial position as he was before the loss”. In other words, the insured shall get neither more nor less than the actual amount of loss sustained and the assured should not make a profit out of the loss. As insurers cannot be expected to reinstate or replace the property insured rather pay a certain sum considered as a “reasonable compensation”. Marine Insurance contract provides for the pre agreed amount subject to certain clauses in the contract. The measure of Indemnity provided under the contract depends on the nature of policy whether it is a “valued” or “unvalued”.

INSURABLE INTEREST:

Insurable Interest is defined as any “insurable property” which includes a ship, goods or other movables which are exposed to maritime perils. It thus means that the property insured should be damaged or lost by Maritime perils and the assured must have some legal relationship with it in such a way as to benefit from its preservation or prejudiced by its loss or damage. In the case of a Marine Insurance the interest of the assured must exist at the time loss occurred though it may NOT have existed when the insurance cover was executed. This is relevant as in Marine Insurance goods can be sold during transit. Though however Marine Insurance provides that the goods can be insured “lost or not lost “and the assured can recover the loss even though he acquires interest after the loss as long as he was not aware of the loss when the insurance was affected.

Unlike the other normal indemnity policies under other classes of insurance, a Marine Insurance policy is freely assignable either before or after the loss provided that the assignee has acquired an insurable interest.

As long back as 1806, In Lucena v Crawford, the Court held that the insured must show the following in order to establish he has insurable interest in the vessel or goods insured:

(1) financial loss,
(2) the loss was caused by the peril insured against,
(3) the subject matter was covered by the peril,
 
SOME OTHER CLAUSES IN A MARINE INSURANCE POLICY
 
WARRANTY:

A Marine Insurance act defines warranty as “A warranty means a promissory warranty, that is to say a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.”

A Warranty may be Express or Implied where EXPRESS warranties are those which are written in black & white whereas IMPLIED are those which are to be understood by the actions of the assured. Two most famous Implied warranties are those of SEAWORTHINESS & LEGALITY in that their existence is assumed at law and would form part of any contract of marine insurance unless inconsistent with an express warranty in the contract.

In Laho Ltd v QBE Insurance (Vanuatu) Ltd [2001] VUSC 130; Civil Case 24 of 2000 (2 April 2001) the vessel owned by the plaintiff went down with 27 persons on board. His claim for loss was rejected by the court stating that If it is was known that the vessel was seaworthy when she set out and she disappeared, then on the balance of probabilities she must have sunk, and on the balance of probabilities the sinking must have been due to the perils of the sea. But if she sailed in an unseaworthy condition then by “implied warranty of seaworthiness” no claim is due to the plaintiffs. The plaintiff was unable to prove on a balance of probabilities that the vessel was seaworthy when she set out on her last voyage.
 
PROXIMATE CAUSE:

MI act says that “the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against”. 

Proximate cause is the cause which has the most significant impact in bringing about the loss, when two or more independent perils operate at the same time (i.e., concurrently) to produce a loss. If the actual peril which causes the loss is covered then the assured is entitled to be claim for his loss. It can also mean the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.” 

In Leyland Shipping Company v Norwich Union Fire Insurance Society 1918, a vessel was damaged by an enemy torpedo at the first World war by a German U -boat, she was severely holed and in danger of sinking. The vessel managed to reach port and the repairs work started but due to an oncoming storm the port authorities decided to shift her out fearing danger of sinking within the harbour. In the course of this transfer, the vessel grounded and succumbed to the storm outside the port and sank. As the danger of sinking had never been removed, the war was deemed to be the proximate cause. The storm was a remote cause but not the active and efficient cause.

SUBROGATION:

Subrogation means substituting of one creditor for another. It is a right of the person enduring the loss to legally pursue the party causing the loss. But when the loss is insured, and the insurer pays the amount of loss, the party receiving the insurance benefit must forfeit the right to pursue the errant party.

In a Marine insurance whenever an Insurer pays for a total loss then he takes over all the rights and title in the property and whatever remains of it. Insurer is then subrogated to all the rights and remedies of the assured as from the time of the loss but in cases of a partial loss, insurer does not acquire any title to the subject-matter insured or to such part of it as may remain, but he is subrogated to all the rights and remedies of the assured as from the time of the loss, and in so far as the assured has been indemnified.

An interesting case under Right of Subrogation was CENTRAL INSURANCE CO LTD v SEACALF SHIPPING CORPORATION - THE AIOLOS

In this case the plaintiff had paid the assured for cargo which was found to be short shipped from Brazil to Taiwan. On payment the plaintiff was subrogated to all rights of the assured and thus acquired a “Loss Subrogation Receipt” from the assured. The important point before the court was whether this document also assigned the “right to sue” to the plaintiff. It was held that:

"Subrogation is concerned solely with the mutual rights of the parties to the contract of insurance and it conders no right and imposes no liability on any third party"

AND THAT

"….an insurer has no right under English Law at any rate to sue under this right of subrogation in his own name, but must bring his action in the name of the insured”

SUE AND LABOUR:

It is a standard clause in a maritime insurance policy which allows the insured to recover from the insurer any reasonable expenses incurred by the insured in order to minimize or avert a loss to the insured property, for which loss the insurer would have been liable under the policy.

It is a clause in the MI contract that compels the insured to take the necessary steps to protect a damaged property from further loss and makes the insurer liable for expenses incurred by the insured in protecting said property.
 
Interesting aspects under this clause are that the act of Sue and labour has to be made by the assured or his agents / actors. Different terms in respect of authorized actors in performing a sue and labour act are available in different sources. While the Lloyd’s SG policy mentions “the assured, their factors, servants and assigns”, Institute Hull and Cargo clauses provide that: “the assured, his servants and agents” are obliged to do sue and labour. One can reasonable presume that the purpose of adding the word “servants” was to include the employees of the assured for instance the master.

It has been accepted that the sue and labour expenses are only recoverable if they incurred by the assured, his agents and servants. So, all third parties’ actions and expenses are not capable of seeking indemnity by the assured as sue and labour charges.

In an interesting case Uzielli v. Boston Marine Insurance Co (1884). The ship was insured by her owner under a policy containing sue and labour clause which mentioned “the assured, their factors, servants and assigns”. The insurer, further reinsured himself with a French insurer and in turn the French insurer reinsured himself under a policy with Boston Marine Insurance Co who were the defendants in this case. The insured vessel stranded and the owner abandoned her. The first underwriter refloated the vessel in order to sell her subsequently. Later he claimed for refloating expenses under the Sue n Labour clause from the French company. The French company paid the expenses and subsequently made a reimbursement claim from the Boston company. The Court of Appeal held that the plaintiff is not entitled to recover the expenses incurred by the original for the reason that the original underwriter was not a factor, servant or assign of the assured.

Lord Brett MR in this case stated:

“I myself should be inclined to give to that clause (the sue and labour clause) all the width that I could: I should be inclined to hold that it gave the assured in this policy power to sue and labour for the benefit of the adventure; I think that the assured would have sufficient interest in the ship to entitle them to do so. But in this case the suing and labouring for the safeguard and preservation of the ship was not by the assured under this policy, but by other underwriters. Those other underwriters were not either the “factors”, the “servants”, or the “assigns” of the re-assured.”
    
There are a variety of other prominent clauses in a Marine Insurance contract but the extent of this article precludes from going into details of each of them. A Marine Insurance cover is usually on a standard form with exclusions, additions & limitations. There are a bunch of Insurance policies in a Marine Hull Insurance basket like the Time policy/Voyage policies/open cover and a mixture of Hybrid policies depending on the type and nature of the insurable interest.

CONCLUSION:

Owing to shipping’s global character, there is always an exposure to cargo thefts/cargo damages/ pirates/storms/shipwrecks. Given the complexities of constant change in jurisdiction of the vessel on her voyages it is advisable to take the benefit of legal services and it is axiomatic that the legal regimes involving international transport are in harmony. With increase in Multi Modal transport, present day policies are offering covers which extend for the entire duration and hence harmonisation will offer distinct advantages not just to the insurers but also to the assureds. The significance of marine insurance to the assureds with respect to the security it provides and its cost component in the general economics of running a ship or transporting goods along with the countries (especially developing countries) on the effects it has on their balance of payments position, cannot be overstated.