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Insurance on the risks of transportation of goods is the oldest and most vital forms of insurance. All types of trade depend heavily on the availability of insurance for successful and expeditious handling. The goods shipped by business firms each year are exposed to damage or loss from numerous transportation perils. The goods can be protected by ocean marine and inland marine contracts.
1, Ocean Marine Insurance: provides protection for goods transported over water. All types ocean – going vessels and their cargo can be insured by ocean marine contracts; the legal liability of ship owners and cargo owners can also be insured.
2, Inland Marine Insurance: provides protection for goods shipped on land. This includes insurance on imports and exports, domestic shipments, and means of transportation such as bridges and tunnels.
1, Ocean Marine Insurance
Modern commerce has caused insurance to develop and attain the high degree of refinement it has today. As world trade grew and values at risk became larger, the need for coverage became more apparent. Larger ships and more advanced instruments of navigation made long voyages possible, and with these changes came the realization that insurance protection was almost a necessity.
Majority types of Coverage: Ocean marine insurance can be divided into four major classes to reflect the various insurable interests:
- The vessel
- The cargo
- The shipping revenue or freight received by the ship owners
- Legal liability for proved negligence – protection and indemnity (P&I)
1, Hull insurance [vessel Insurance]: covers physical damage to the ship or vessel. It is similar to automobile collision insurance that covers physical damage to automobile caused by collision. Hull insurance is always written with a deductible. In addition, hull insurance contains a collision liability clause (also called a running down clause) that covers the owner‘s legal liability if the ship collides with another vessel or damages its cargo. However, the running down clause does not cover legal liability arising out of injury or death to other persons, damage to piers and docks, and personal injury and death of crew members. The insurance is commonly subject to geographical limits. If the ship is laid up in port for an extended period of time, the contract may be written at a reduced premium under the condition that the ship remains in port. The contract may cover a builder‘s risk while the vessel is constructed.
2, Cargo insurance: covers the shipper of the goods if the goods are damaged or lost. The policy can be written to cover a single shipment. If regular shipments are made, an open cargo policy can be used that insures the goods automatically when a shipment is made. All shipments, both incoming and outgoing, are automatically covered. The shipper reports to the insurer at regular intervals as to the values shipped or received during the previous period. Under the opencargo policy, there is no termination date, but either party may cancel upon giving notice, usually 30 days. If the policy is cancelled, the coverage continues on shipments made prior to the cancellation date.
3, Freight Insurance: indemnifies the ship owner for the loss of earnings if the goods are damaged or lost and are not delivered. The money paid for the transportation of the goods, known as freight, is an insurable interest because in the event that freight charges are not paid, the carriers has lost income with which to reimburse expenses incurred in preparation for a voyage. The earning of freight by the hull owner is dependent on the delivery of cargo unless this is altered by contractual arrangements between the parties. If a ship sinks, the freight is lost, and the vessel owner loses the expenses incurred plus the expected profit on the venture. The carrier‘s right to earn freight may be defeated by the occurrence of losses due to perils ordinarily insured against in an ocean marine insurance policy. The hull may be damaged so that it is uneconomical to complete the voyage, or the cargo may be destroyed, in which case, of course, it cannot be delivered. Freight insurance is normally made a part of the regular hull or cargo coverage instead of being written as a separate contract.
4, Protection and Indemnity (P&I) Insurance: is usually written as a separate contract that provides comprehensive liability insurance for property damage or bodily injury to third parties. To provide liability coverage for personal injuries, loss of life, or damage to property other than vessels, the protection and indemnity (P&I) clause is usually added to the hull policy. This clause is intended to provide liability insurance for all events not covered by the more limited running down clause.
Basic Concepts Ocean Marine Insurance
Ocean marine insurance is based on certain fundamental concepts. The following section discusses these concepts and related contractual provisions.
- Implied Warranties: Ocean marine contracts contain three implied warranties (1) seaworthy vessel, (2) no deviation from course, and (3) legal purpose. The ship owner implicitly warrants that the vessel is seaworthy, which means that the ship is properly constructed, maintained, and equipped for the voyage to be undertaken. The warranty of no deviation means that the ship cannot deviate from its original course, no matter how slight the deviation. However, an intentional deviation is permitted in the event of an unavoidable accident, to avoid bad weather, to save the life of an individual on board, or to rescue persons from some other vessel. The warranty of legal purpose means that the voyage should not be for some illegal venture, such as smuggling drugs into a country.
The implied warranties are just as binding as any expressed warranty stated in the contract. A violation of an implied warranty, such as an unexcused deviation, permits the insurer to deny liability for the loss. The implied warranties are strictly enforced, since a breach of them would cause an increase in hazard to the insurer.
- Covered Perils: An ocean marine policy provides broad coverage for certain specified perils, including perils of the sea, such as damage or loss from bad weather, high waves, collision, sinking, and stranding. Other covered perils include loss from fire, enemies, pirates, thieves , jettison ( throwing goods overboard to save the ship) , barratry (fraud by the master or crew at the expense of the ship or cargo owners), and similar perils.
Ocean marine insurance can also be written on an ―all-risks‖ basis. All an expected and fortunes losses are covered except those losses specifically excluded. Common exclusions are losses due to delay, war, inherent vice (tendency of certain types of property to decompose) and strikes, riots, or civil commotion.
- Particular Average: In marine insurance, the word average refers to a partial loss. A particular average is a loss that falls entirely on a particular interest, as contrasted with a general average, a loss that falls on all parts to the voyage.
- General Average: A general average is a loss incurred for the common good and consequently is shared by all parties to the venture. For example, if a ship damaged by heavy waves is in danger of sinking, part of the cargo may have to be jettisoned to save the ship. The loss falls on all parties to the voyage: the ship owner, cargo owners, and freight interests. Each party must pay its share of the loss based on the proportion that its interest bears to the value in the venture. For example, assume that the captain must jettison birr one million of steel to save the ship. Also assume that the various interests are as follows: Value of steel birr 2 million
Value of other cargo 3 Million
Value of ship and freight 15 Million
Total Birr 20 Million
The owner of the steel would absorb 2/20 of the loss, or Birr 100,000. The owners of the other cargo would pay 3/20 of the loss or, Birr 150,000. Finally, the ship and freight interests would pay 15/20 of the loss, or Birr 750,000.
- Coinsurance: Although an ocean marine policy does not contain a specific coinsurance clause, losses are settled as if there is a 100 percent coinsurance clause. An ocean marine policy is a valued contract, by which the face amount is paid if a total loss occurs. If the insurance carried does not equal the full value of the goods at the time of loss, the insured must share in the loss. Thus, if Birr 50,000 of cargo insurance is carried on goods worth Birr 100,000, only one-half of any partial loss will be paid. The policy face is paid in the event of a total loss.
- Inland Marine Insurance
Inland, marine insurance is transportation insurance that provides protection for goods shipped on land including imports, exports, domestic shipments, and means of transportation, personal property floater risks, and commercial property floater risks.
Inland marine cargo insurance covers shipments primarily by land or by air. Although the trucker, railroad, or airline may be a common carrier with the extensive liability (under bailee liability exposures), the shipper may still be interested in cargo insurance because (1) it is usually more convenient to collect from an insurer than a carrier, and (2) a common carrier is not responsible for perils such as an act of God (e.g. lightning), an act of war, acts of public authority, improper packaging by the shipper, and inherent vice.
No one cargo insurance contract exists. Instead, different insurers may issue different contracts, and a given insurer will tailor the contract to the insured‘s needs. A convenient way to classify the contracts is according to the type of transportation covered. One or more of the following modes of transportation may be covered-railroad, motor truck, or air. Shipments by mail are covered under separate first-class mail, parcel post, or registered mail insurance. Another classification of these contracts would group them according to the perils covered. Most provide protection against a broad list of specified perils, but some, especially those covering air transportation of high value items, are written on an all risk basis. Finally, some contracts cover one trip, while others cover all shipments during the term of the policy.
- Floater Contracts: The practice of insuring property at a fixed location or while it is being transported by a common carrier is well established. A more difficult insurance problem is the risk of loss associated with property that is either not at a fixed location or not being transported by a common carrier.
Inland marine property floaters can be used to cover properties that are frequently moved from one location to another, such as bulldozers, tractors, cranes, earth movers, and scaffolding equipment.
The term floater policy is generally understood to be a contract of property insurance that satisfies three requirements:
- Under its terms, the property may be moved at any time.
- The property is subject to being moved; that is, the property is not at some location where it is expected to remain permanently.
- The contract insures the goods while they are being moved from one location to another, that is, while they are in transit, as well as insuring them at affixed location.
- Property Held by Bailees: Inland marine insurance can be used to insure property held by a bailee. A bailee is someone who has temporary possession of property that belongs to another. Examples of bailees are dry cleaners, laundries, and television repair shops. Bailee liability insurance protects a bailee against liability for damage to property in his or her care, custody, or control.