Introduction
Trade was one of the most important economic activities of the ancient civilization. Initially trade was mainly conducted on land .As the scope of the activity expanded with time, another mode of transportation; water transport started to become gradually important and started to attract the attention of commercial enterprises. As this mode of transport became more important, there arose a need for the formulation of insurance scheme to protect the water vessels, the passengers, and cargo for the various risks that they faced in this transport mode. Marine insurance is therefore one of the oldest forms of insurance that has existed for hundreds of years is marine insurance. Marine insurance is thought to have been introduced before the 13th century. Its origin has been traced to some bonds that were used in ancient Roman and Greek empires. It has even been traced even back farther to the Babylonian and their darmathas relationship (Dixon 2007). The first insurance transaction is thought to have taken place in the middle ages. From the time of its inception, marine insurance has undergone rapid changes and transformations and terms and conditions that govern this vice have been altered significantly. The aim of this paper is explore this evolving aspect of marine insurance by analyzing one of the most common forms of marine insurance and this is cargo insurance.
Marine insurance is usually classified into three broad categories. These are: cargo insurance; hull and machinery insurance and property and indemnity insurance.
Cargo and hull insurance are examples of property insurance which insures maritime entities from financial losses that result from the destruction of property that the insured usually has a considerable insurable interest.
Protection Indemnity (P & I) is actually liability insurance. Liability insurance insures a maritime entity from financial loss incurred through the advancement of a claim by an organization or an individual that the said individual or organization underwent bodily harm, property damage, or death due to the direct actions of the one insured entity. The Protection Indemnity (P & I) is represents the losses or damages that are incurred in the course of a vessel’s operations. This insurance policy covers several incidences or scenarios and these are: injuries, sickness, life loss of passengers; cargo damage; damage to docks, piers, jetties; the costs of wreck removal; costs of cleaning up in case of fuel or cargo spillage. Some of the factors that determine the P& I insurance coverage limitation include: nature of the vessel’s usage; the vessel’s size, age, horsepower, value and construction; the total number of passengers, crew and other relevant parties inside the vessel; navigation limits; cargo exposures; claims history. This type of insurance does not insurance coverage when a certain vessel for example collides with another.
The Hull and Machinery insurance protects the ship owners and other relevant individuals from incurable expenses resulting from the replacement or repair of vessels if they are destroyed or damaged. The entire vessel including the equipment and machinery is granted insurance coverage at full value. There are several risks that are indemnified in this type of insurance coverage and these are dependent on the nature of the policy chosen. These risks are: total expenses or loss incurred in replacing or repairing parts of the machinery or the hull that might be damaged; prevention and damage minimization expenses; missing vessels; salvage expenses; war risks; stores and fuel on board amongst others(Parsons 2000).
The other type of insurance is the cargo insurance and it is the one that is going to be explored in detail in this paper. Most of the marine insurance laws and cats in the United States were actually adopted from ancient English law. Although the nature of the marine acts and laws are still relatively similar to those established under the English law, differences on some few key points have developed. This divergence can actually be traced to a decision made in 1955 on Wilburn Boat by the Supreme Court. In this ruling, it was stated that it is indeed state laws that should be applied in specific marine insurance policies where warranties are incorporated. The federal laws should only be used when marine insurance cases where there is an ‘established rule’. If this rule is absent, hen state laws are applied (Dixon 2007).
Ocean cargo insurance is majorly concerned with international trade where exporters and importers of different types of cargo are involved. As the name suggests, this kind of insurance is only confined to goods that are transported through sea. International trade involves movement of goods through many countries or regions. The uncertainty levels in this kind of trade are very high since it is hard to predict what would happen on the waters. Any person who would suffer loss when the ship or cargo is damaged, destroyed, or stolen would need ocean cargo insurance. This means that the ocean cargo insurance assures or indemnifies the importer or the exporter in the event of damage or loss of goods to a risk insured against under the policy.
In every business or investment, risks are prevalent and if not handled properly, can lead to many shortcomings or even an eventual failure or collapse of business .The international trade faces even more risks than most of other businesses Chances of goods on shipment getting destroyed or stolen are very high. The ocean cargo insurance has opened a window of optimism for importers and exporters (Dixon 2007). Historically, every voyage or cruise of an ocean vessel or ship is a property of both the cargo owners and the ship-owner .For centuries, trade practices, and traditions have affected the interests of international business people. The ocean cargo insurance thus comes to the aid of international traders in the sense that all parties taking part in the international business can carry on without fear of losses, which may come along the way. In many a times, the cost of ocean cargo insurance is nominal as compared to the freight cost and the value of goods.
The ocean cargo insurance is not rigid and can be redesigned to meet various customer needs and specifications. Ocean cargo insurance covers damages and losses that may arise from inter warehouse transfer of goods. During the transportation of goods, transfers from one warehouse to another are very common .Before departure of the ship; goods are transferred from the exporter or importer warehouse to the ship. Similarly, during arrival to the intended destinations, the goods are transferred from the ship to the importer or exporter warehouse. During these inter ware house movements the goods are subjected to some physical damages. The ocean cargo insurance covers all forms of physical damages associated with these kinds of transfers. This means that the ocean cover insurance takes care of all physical damages, which may be associated to an external factor or cause.
The insurance policy also covers all the general average losses and contributions during the transit of goods. These are costs incurred when part of the cargo is jettisoned to save or rescue the crew, the ship. These are losses emerging from voluntary sacrifice to save the ship for the benefit of every party (Dixon 2007). When these cases arise, the costs associated are proportioned among all the parties according to the York Antwerp rules. Examples of such costs include contribution by all parties or cargo owners to tow the ship or costs associated to deliberate attempts by the crew to minimize large damages, which may arise from unforeseen circumstances.
The next group of damages or cost covered by the ocean cargo insurance is the labor expenses or costs incurred to mitigate or prevent loss. The policy covers all costs, which are incurred in the attempt to prevent damage or minimize the effects of damage on cargo .For instance when part of the cargo on shipment catches fire; the crew has to employ people to put out the fire. The labor costs associated with such acts are covered by the policy.
Warehousing, landing and forwarding charges invited by the occurrence an insured risk are taken care of by the ocean cargo insurance. In the event of an insured peril, it might become necessary to land some goods or put them in a warehouse. The insurance company and not the cargo owner of the ship owner pay for the costs incurred during these activities.
As pointed out earlier, the ocean marine cargo insurance is flexible and can be tailor made to meet the wants or demands of various clients. The insurance can be extended to cover strikes and riots of the ship or dockworkers. Strikes and riots at the ports may lead to damage, looting, or delay of goods. The insurance company indemnifies all costs associated with such risks. The insurance can also be extended to cover war and damages that may arise from war. With the increase in terrorism and piracy in most seas, most insurance companies have revised their ocean marine cargo insurance products to cove r all the losses that may arise from incidents of terrorism, hijacking, or piracy (Parsons 2000).
There is currently a very big competition between the key insurance players over the ocean cargo covers. This competition has been fueled by the high premiums that come with these types of insurance covers. There are various factors are considered when determining the costs of premiums that are supposed to be played by a client to the insurance company. Some of the factors considered include the worth of cargo or goods that are supposed to be shipped, the degree to which goods or cargo on transit are likely to get damaged ,period of the cover and the types of risks that are insured. This explains why it is relatively expensive to obtain policy, which covers very fragile goods such as glass (McGee 2000). Premiums paid for long-term ocean cargo insurance are comparatively cheaper than insurance covers which goes for a short period. If the likelihood of the insured risk to occur is high, then the coat of premiums would be expected to be relatively higher.
The ocean cargo insurances are complex .Since ocean cargo insurance is very competitive ,the trader intending to import or export goods is advised to seek the guidance of an insurance agent or broker who will canvass the broader insurance market for the best or desired terms of insurance cover with affordable rates. The broker will acts as a liaison between the trader and the insurance company and will tailor make the insurance to make sure that it satisfies the needs or interests of the trader. Marine cargo insurance for an international transaction/shipment may be an arrangement of either the exporter or importer. However, this depends on the terms of sale (McGee 2000). In some instances, the exporter may control the insurance policy. The exporter understands better the technicalities involved in export trade and may be better placed to control the insurance.
However there are instances where the importer has powers to control the insurance cover. In the cases where the importer purchases on C&F and FOB, the importer has the mandate to control; his or her own insurance cover .Controlling the insurance cover is very advantageous to both the exporter and the importer. Either of the two parties in control of the insurance policy can acquire loans and credit facilities using the policy. The policy acts as collateral or security when acquiring credit facilities. The marine insurance cover acts as an assurance to the credit renders that the cargo on transit are safe and hence guarantee that the borrower will not default.
Every marine cargo insurance policy comes with the instructions and procedures that are followed in the event of loss. Once an insured risk has occurred, the client (importer or exporter) notifies the insurance agent or underwriter that the risk has occurred. The underwriter issues a claim form to the client. Once the client has filled the form, the insurance company investigates the case to find out whether the loss can be indemnified or not.
There are many factors, which are considered in determining whether a loss should be indemnified, or not. In the case where the loss occurs because of the insured willingness, then the insurance company cannot indemnify the client. However if the insurer is convinced that the loss actually met all the conditions, then, the insurance company is obliged to indemnify the client. The principle of subrogation applies in the marine cargo insurance. This means that whatever remains after the loss has occurred belongs to the insurer (Dunt 2009).
The scope of the people who are covered by the marine insurance policy is one that has been under a lot of discussion. Some do not clearly know is covered by a given marine cargo insurance policy and who is not. However, relevant marine insurance acts dictate that anyone who essentially possesses or has specific insurable interest can insure this interest under a marine cargo policy of their choice. However, this lead to another question of who exactly has insurable interest? This question is however demystified by the marine acts that state that a person who has interest is one who seeks to benefit from the prompt and safe arrival of a given property that is being transferred or transported through water transport.
If a property or cargo that is on transit is damaged, the party with the insurable interest in that particular property is usually discovered by referring to the sale and purchase terms. Additionally, the seller and the buyer or other interested parties can also insure their cargo to a maximum level of the insurable interest. For instance, the forwarding and shipping agents and carriers who are entrusted with the cargo all have a interest in the endeavor because they may be subject to suits for delivery failure.
As expressed above, marine cargo insurance is a very sensitive issue. There have been several cases where various plaintiffs have taken their insurance policy holders to court seeking insurance payments after experiencing cargo loss, damage, or destruction.
An example of a marine cargo insurance case that was hugely unsuccessful was the Centennial Insurance v. Lithotech sales (McGee 2009). Initially Lithotech had been sued at the New York Eastern District. In this case, the plaintiffs made an allegation that the defendant had not delivered cargo of the desired quality from Indonesia by sea. The cargo which actually comprised commercial printing press that the plaintiff had ordered was not delivered and instead, a substitute was delivered. The plaintiff argued that this had subsequently cost him a lot of money.
Subsequently, Lithotech sales who were the defendants filed a court case seeking for insurance protection form Centennial Insurance that was to take place after the New York suit. The insurance company denied any kind of cargo insurance duty and thus filed a claim for a declaratory judgment to be made concerning insurance coverage. Lithotech made an allegation that the cargo was actually interchanged or substituted somewhere between the United States and Indonesia but it did not state who did it. The company however admitted that it did not perform the mandatory inspection that is required before any shipment is loaded into the ship. The implication here was that the company did not verify that the cargo was actually of the desired type.
Since this case was filed in New Jersey, the state’s open marine cargo laws were used to determine the terms of the case. The state laws imply that when it come s to insurance policies, absence ambiguity is granted a simple and ordinary meaning. In this case, the type of the policy that was at issue stated that the he printing presses and other merchandise of similar nature that happened to be the vessel’s deck and on a lading deck bill were actually insured. The state laws only granted coverage to damages in situations where the fraudulence of lading bills was unambiguous and clear, unlike in this case where ambiguity was a major issue. Since this unambiguous fraudulence was not proven, the court ruled that the plaintiff did not articulate sufficient facts to invoke insurance coverage under the stated clause.
There are however case where insurance cases have been successful. An example is the Nelson Marketing International Inc. v. Royal & Sun Alliance Insurance Company (McGee 2009). In this case, three cargo shipments of wood flooring (laminated) were damaged while on transit to Long Beach from Singapore. The main issue brought before the court was if fortuity on the part of the plaintiff had caused the damage or whether it was the fragile and the sensitive nature of the cargo that had led to the damage. The plaintiff argued that the damage resulted from exposure to rainfall and moisture that took place in the transshipment process of the cargo. The defendant who in this was the insurance underwriters claimed that the observed moisture creped into the vessel’s holds and consequently condensed on the cargo. The two parties engaged in an intensive court battle with each trying to prove their case.
The trial judge however stated that the environment, which the cargoes interacted with, was unnaturally and abnormally amplified in the vessel’s holds by certain conditions that had nothing to do with the characteristics and the nature of the cargo. The judge therefore ruled that the loss claim from the defendant was indeed valid because the damage was not due to the cargo inherent characteristics but was rather due to fortuity. The plaintiff insurance claim was thus granted and the underwriter was forced to pay the insurance as demanded by the plaintiff.
The above two exhibit contrasting scenarios. In the first case, the defendant was quite unsuccessful in his claim for marine insurance coverage. In the second case, the plaintiff was able to prove his case and was able to establish a fortuity. This led the judge to agree with his claim for insurance cover and the underwriter was forced to pay. These decisions were to a large part based on the presentation and articulation of facts before the administering court. It is only after presenting a viable argument of why an insurance coverage should be invoked that the judge actually ruled in favor of the client. To do this requires a comprehensive understanding of all the policy terms is required.
It is therefore very clear to see that for one to convince the court that insurance cover should be incurred is an intensive process, one must be able to convince the court that his suit and claim is at par with the marine clauses established by the relevant maritime bodies. The marine acts are subject to different interpretations in several states in America. In addition, there should be room for consensus establishment where the laws do not clearly stipulate the terms of a particular policy.
Another fact that emanates from this discussion is that parties who are seeking to engage in insurance coverage schemes should take time to understand the full terms and conditions that the policy offered. This will ultimately help them to establish and indeed identify cases where they can invoke marine cargo insurance coverage (Dixon 2007).
References
Dixon, F. B. (2007). Hand-book of marine insurance and average. New York: Continuum International Publishing Group.
Dunt, J. (2009). Marine cargo insurance. London: Informa Law.
Dunt, J. (2012). International cargo insurance. London: LLP.
Marine insurance: notes and comments on ocean cargo insurance. (10th ed.). (2006). Philadelphia, PA: Insurance Co. of North America.
Marine war-risk insurance: report (to accompany H.R. 6572).. (2003). Washington, D.C.?: U.S. G.P.O..
McGee, W. H. (1999). Cargo insurance. New York: McGee.
Parsons, T. (2000). A treatise on the law of marine insurance and general average. Boston: Little, Brown.
