775EG

(April 2004)

EXAMINATIONGUIDE

775 - MARINE INSURANCE UNDERWRITING AND CLAIMS

This guide is intended for candidates preparing for the examination subject to which it relates. Candidates will find the guide most helpful if used in conjunction with the self-assessment exercises and assignments in the coursebook.

The answers presented in the guide provide an outline of the key points which candidates could beneficially have covered in the examination. They are not necessarily a definitive statement of some unique, correct answer and, where applicable, other appropriate views could also gain good marks.

The guide should provide greater insight of the approach the examiners were looking for. Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

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THE CHARTERED INSURANCE INSTITUTE

ADVANCED DIPLOMA

APRIL 2004 EXAMINATION PAPER

UNIT 775MARINE INSURANCE UNDERWRITING AND

CLAIMS

Three hours are allowed for this paper, which is in three parts.

READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING ANY QUESTIONS.

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THE CHARTERED INSURANCE INSTITUTE

775 – MARINE INSURANCE UNDERWRITING AND CLAIMS

CANDIDATE INSTRUCTIONS

READ THE INSTRUCTIONS BELOW BEFORE ANSWERING ANY QUESTIONS

Three hours are allowed for this paper.

You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III.

The paper carries a total of 200 marks, as follows:

Part I 48 marksPart II 50 marksPart III 102 marks

You are advised to spend no more than 45 minutes on Part I. You are strongly advised to attempt ALL the required questions in order to gain maximum possible marks.

In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must cross through these notes before you hand in the booklet.

Answer each question on a new page. If a question has more than one part, leave several lines blank after each question part.

It is important to show all steps in a calculation, even if you have used a calculator.

Fill in the information requested on the answer booklet and on form B.

You are allowed to write on the inside pages of this question paper but you must NOT write your name, candidate number, PIN or any other identification ANYWHERE on this question paper.

The answer booklet and this question paper MUST BE HANDED IN PERSONALLY BY YOU to the invigilator before you leave the examination. FAILURE TO COMPLY WITH THIS REGULATION MAY RESULT IN YOUR PAPER NOT BEING MARKED AND YOU MAY BE PREVENTED FROM ENTERING THIS EXAMINATION IN FUTURE.

THE CHARTERED INSURANCE INSTITUTE© The Examinations Department, CII, 20 Aldermanbury, London EC2V 7HY

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PART I

Answer ALL questions in Part I.Each question is worth six marks.

Note form is acceptable where this conveys all the necessary information.

1. Briefly describe the following clauses of the Institute Warranties 1/7/76:

(a) Bering Sea; (3 marks)(b) Indian coal. (3 marks)

2. What is the purpose of Clause 3 (Event Clause) in the Joint Excess Loss Clauses 1/1/97?

3. Briefly explain Rule D of the York-Antwerp Rules 1994.

4. Outline the provisions of the Institute Replacement Clause 1/1/34.

5. Outline the provisions of the Sistership Clause of the Institute Time Clauses (Hulls) 1/11/95 and briefly explain why it is necessary.

6. Explain the differences between the market value of a vessel and its insured value.

7. List six factors an energy underwriter would take into account when rating offshore units.

8. What difficulties have arisen from defining ‘any one event’ in marine reinsurance contracts?

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PART II

Compulsory question. This question is worth 50 marks.

9. A 12-year-old vessel sailed from Buenos Aires on 13 June loaded with 50,000 tons of wheat, bound from Antwerp. At noon on 15 June the vessel ran aground but, with tug assistance and the use of her main engine, she was able to refloat at noon on 20 June.

The master reported that the vessel was leaking and he therefore decided to return to Buenos Aires for examination and possible repairs. At noon on 22 June the vessel arrived back at Buenos Aires under her own steam. After the vessel had been surveyed it was decided that 10,000 tons of cargo would have to be discharged to enable permanent repairs to be carried out.

On 30 June permanent repairs were completed, the discharged cargo had been reloaded and, after taking 300 tons of bunkers, the vessel proceeded on her voyage at noon the same day. At noon on 2 July the vessel regained the position from which she had deviated and duly arrived at Antwerp where all cargo was discharged on 20 July.

The following expenses were incurred by the shipowner:USD

Tug assisting vessel while aground (lump sum) 55,000Inward port charges at Buenos Aires 11,000Outward port charges at Buenos Aires 10,000Port charges whilst at Buenos Aires @ USD 1,000 per day 8,000Permanent repairs (of which USD 4,000 is refloating damage to the main engine) 240,000Wages and maintenance of crew, per month 30,000Cost of bunkers (see below) per ton 150Cost of discharging and reloading 10,000 tons cargo 25,000Warehouse rent on cargo @ USD 4,000 per week or part 8,00

0

The following bunkers were consumed:Tons

Refloating vessel 40Returning to Buenos Aires 50During detention period at Buenos Aires 30Discharging and reloading cargo 10On permanent repairs (of which five tons were in connection with repairs to refloating damage) 11Regaining point of deviation 45

The sound market value of the vessel at destination was USD10,000,000The invoice value of the cargo, including prepaid freight, was USD 9,000,000

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The contract of affreightment for the voyage provided for general average to be adjusted in accordance with the York-Antwerp Rules 1994.

Candidates are required to answer the following questions, calculations being made to the nearest whole US Dollar.

(a) State and apportion the general average claim (candidates should ignore interest and commission). (30 marks)

(b) If the vessel were insured for USD 8,000,000 subject to Institute Time Clauses (Hulls) 1/11/95, show the claim on the policy (ignore policy excess).

(20 marks)

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PART III

Answer THREE of the following FIVE questions.Each question is worth 34 marks.

10. In December 2002 a CMR carrier subcontracted to a French haulier the carriage of a bonded consignment of perfume from Paris to London. The vehicle was hijacked by armed robbers in the UK and recovered later the same day with part of the load missing. The driver collected the vehicle and continued with the transit to London. However, en route he fell asleep and struck some roadside property also damaging part of the remainder of the goods. As a result of the accident the consignment arrived in London at its destination on 20 December 2002.

On 20 January 2003 the receiver of the goods submitted a written claim to the CMR carrier in London which was rejected on 20 February 2003 and the claim documents returned.

Discuss the issues involved for the CMR carrier and support your views with stated cases.

11. Vessels A and B are in a collision in UK waters whereby both are equally liable.

A sustains damages of £2,500,000 to hull and machinery, £2,250,000 to cargo. B sustains damages of £250,000 to hull and machinery.

B limits liability on 9,999 tons.Assume a rate of exchange 1SDR = £1.20.

Determine the liabilities. Show your workings and explain your calculations.

12. Discuss the underwriting considerations of a marine reinsurer when writing excess of loss business.

13. (a) A shipment of 400 packages of four different grades of hide were sold on consignment from Romania to London. On arrival there was a shortage of 20 packages. The shipment was insured for £130,000 under Institute Cargo Clauses (A).

The sale prices of the goods were:

Grade A 100 packages £50,000Grade B 100 packages £40,000Grade C 100 packages £20,000Grade D 100 packages £5,000

Adjust the claim and show your calculations. (16 marks)

(b) A shipment of 400 packages of the same grade of hide were shipped from Romania to London under Institute Cargo Clauses (A) with an insured value of £130,000. Due to an insured peril the hides arrived damaged and were sold at £81.25 per package against a sound market value of £300 per package.

Sales commission £250Carriage charges £50

Adjust the claim and show your calculations. (12 marks)

(c) Using the same values as in (b) adjust the claim and show your calculations if an increased value insurance were in place for £2,400. (6 marks)

14. Explain the term ‘freight’. Discuss the issues a shipowner would consider in deciding whether to insure for:

loss of freight; loss of hire.

You should consider the level of indemnity required in each case.

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The answers set out below show the approach being looked for by the examiners. In many cases there is scope for well-reasoned alternative views which would also receive good marks.

EXAMINER’S COMMENTS

It was disappointing to find that the overall standard of knowledge displayed by candidates at this session was poor and did not reflect the detailed knowledge required for a technical unit at this level.

In part I, Question 7 was answered well by most candidates, with Question 6 also performing well. Question 3, by contrast, was answered extremely poorly, with only two candidates scoring any marks at all. The remaining part I questions produced variable responses. It evident that most candidates had a patchy knowledge of the syllabus and were not able to perform consistently across the short answer questions. The questions in part I test factual recall across the syllabus and require candidates to focus on the key relevant information. Each question is designed to be answered in approximately five minutes and candidates are advised to allocate their time accordingly.

In part II, it was evident that candidates had not grasped the basic principles of adjustments and lacked a detailed knowledge of general average. This question is worth a quarter of the total available marks and candidates should practise adjusting claims as part of their study and revision programmes. Once the basic principles have been learned, there is no substitute for practice, practice and more practice. This really is the best way to ensure confidence in tackling whichever scenario is presented in the examination.

In part III, questions 11 and 12 were the most popular. Question 11 was answered well by some candidates, including those who had not done as well on the compulsory claims adjustment question. It was disappointing that although Question 12 was relatively popular, it was answered very badly. In fact, only one out of the eight candidates who chose this question reached pass standard. One other candidate came close, but the remaining candidates scored less than a quarter of the available marks. Question 13 was also reasonably popular and was, on the whole, answered well.

Good exam technique is as important as a thorough understanding of the issues. Many candidates let themselves down through a lack of application of knowledge and there was a noticeable tendency to present answers as a list of facts, rather than develop any form of analysis. It is essential to read the question carefully and produce a coherent, structured answer that addresses precisely what has been asked. It is not enough at advanced diploma level to reel off a set of facts – this demonstrates little more than acquisition of knowledge and a good memory.

Question 1

(a) Warranted no Bering Sea means that for voyages to the Aleutian Islands an additional premium must be paid, while no East Asian waters North of 46deg means that Japan is free with the exception of that part North of Soya Strait. Not to enter or sail from any port or place in Siberia except Nakhodka and/or Vladivostok.

(b) Warranted not to sail with Indian coal as cargo between 1st July and 30th September b.d.i. except to ports in Asia not West of Eden or East of or beyond Singapore. Dates mark the period when during the monsoon the weather is hottest, the danger of soft and dusty Indian coal catching fire is at its greatest.

Question 2

The Event Clause sets out which losses the reassured may aggregate to determine the amount to be applied to the reinsurance. Loss is described as loss, damage, liability or expense arising from one event. Thus, the reassured may add together losses and loss adjustment expenses paid under various original policies to the extent that they arise from one event.

Question 3

Rights to contribute in general average shall not be affected though in event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure, but this shall not prejudice any remedies or defences which may be open against or to that party in respect of such fault.

Clearly neither the shipowners nor the cargo owners can properly ask the other to contribute to losses and expenditure which have been incurred as the result of their own fault. The contract of affreightment will invariably give carriers exemption from the effect of some faults and therefore whether or not they are legally entitled to a contribution to any general average from other interests or required to contribute to their losses in general average may give rise to a protected legal wrangle. The object of this Rule therefore is to enable an adjustment of the general average to be prepared without looking into the question of any parties to the adventure and to preserve unimpaired any legal remedy at the stage of enforcement (Goulandris Bros Limited v B. Goldman and Sons Limited (1957).

Question 4

The loss of a small but integral part of a machine may cause the machine to be unfit for the purpose for which it was intended and may give rise to a claim for total loss under the insurance. Therefore, in insurances on machinery, underwriters include the Institute Replacement Clause 1/1/34 to limit their liability in the case of loss or damage. The clause reads as follows: In the event of loss of or damage to any part or parts of an insured machine caused by a

peril covered by the Policy the sum recoverable shall not exceed the cost of replacement or repair of such part or parts plus charges for forwarding and refitting, if incurred, but excluding duty unless the full duty is included in the amount insured, in which case loss, if any, sustained by payment of additional duty shall also be recoverable.

Provided always that in no case shall the liability of underwriters exceed the insured value of the complete machine

Question 5

The Sistership Clause (Clause 9) is necessary because a person cannot be legally liable to themselves.

Clause 9 places the assured in exactly the same position as they would have been had the colliding vessel or the vessel affording salvage services belonged to a different shipowner and been under a different management. They can recover their demurrage in respect of the incident on both of their vessels on a cross-liabilities basis if they are both to blame. As the courts will not accept the claim of a sister ship, it is necessary to assess the collision damages or the salvage award, as the case may be, through arbitration by a single arbitrator to be agreed upon between the underwriters and the assured.

When one of the vessels limits its liability, the amount payable by that vessel to the other is something less than the proper proportion. Therefore, the other vessel cannot be credited with the proper proportion of recovery when actually such proportion is not received. If, as a result of collision between two vessels, Vessel A sustains damage to the extent of £1m of which Vessel B is liable for £ 500,000, but by limiting liability Vessel B only pays £100,000, it is considered inappropriate to assume in the adjustment that Vessel A actually receives the whole £500,000

Question 6

In respect of a valued policy, where the vessel has been agreed between the underwriter and the assured, it can not be re-opened. The value fixed by the policy is conclusive of the insurable value. The market value of a ship represents its value in the open market. Unvalued policies are rare these days. In the absence of any express provision or valuation in the policy the insurable value is subject to proof by the assured and must be arrived at in accordance with stipulations laid down in the Marine Insurance Act 1906.

More often than not the vessel’s insured value is greater than its market value.

Question 7

The rating applied to offshore units will depend upon a number of factors, and will include consideration of the following: depth of water; type of structure (whether steel, concrete, fixed or floating); location (whether near to or remote from repair facilities); environment (climate and exposure to earthquake); capacity required (this reflects that high valued structures may create a squeeze on

underwriting capacity, leading to higher pricing); operator’s record and quality control/safety regime.

Question 8

Defining ‘any one event’ in marine reinsurance contracts has presented difficulties because it is quite impossible to expect a contract wording to be able to foresee and define every possible contingency likely to affect the class of business in question. Therefore there must always be an element of chance that the finally agreed definition (possibly after legal proceedings) is not in conformity with the ideal solution envisaged or expected by the reassured or indeed, the reinsurer.In a hull loss where two or more vessels may be sunk or damaged as a result of one storm there could be a considerable difference of opinion as to whether the losses were, in fact, attributable to the same storm, and, even if they were, whether it is fair and reasonable to describe the storm as one event when the losses occurred several days and hundreds of miles apart.As an attempt to define the event and avoid argument, the ‘time and radius’ concept was formulated whereby the reassured pinpoints the epicentre of their loss area and draws a circle at an agreed radius from the centre. Thereafter all losses within that circle are accepted as being one loss event. This procedure can be further qualified by applying also a time clause (such as 48 or 72 hours) so that all losses occurring within that time span are collectible. However, the onus of proof that the losses did happen in that period is firmly on the reassured.

Question 9

(a) Statement and apportionment of the general average

General Average

Particular Average

USD USD USDTug assisting vessel 55,000 55,000Inward port charges 11,000 11,000Outward port charges 10,000 10,000Port charges at BA 8,000 8,000Permanent repairs 240,000 40,000 200,000

Wages etc of crew(30,000 per month is 3,000 per day20 June to 2 July = 12 days @ 3,000 36,000 36,000

Bunkers (General Average)Refloating 40 tonsReturn to BA 50Detention 30Cargo ops 10GA repairs 5 (ex 11)Regain posn 45

180 tons

180 tons @ USD 150 27,000 27,000

Balance of Bunkers:6 tons on PA repairs @ USD 150 per ton 900 900

Discharging and reloading cargo 25,000 25,000

Warehouse rent 8,000 8,000 ______ 220,900 200,900

Apportionment

Total GA Sacrifices Expenditure

Ship sound market value $10,000,000Less Particular Average $200,900 *

$9,799,100 114,675 20,850 93,826

Cargo, invoice value 9,000,000 105,325 19,150 86,174 $18,799,000 220,000 40,000 ** 180,000

(b) Claim on the policy

Particular average USD 200,900Ship’s proportion of GA sacrifices in full 20,850Ship’s proportion of GA expenditure USD 93,826If contributing value of $9,799,100 pays $93,826Insured value of $8,000,000Less PA 200,900

$7,799,100 pays in proportion 74,676 Claim on the Policy (ignoring any excess) USD 296,426 Claim on the Policy (ignoring any excess)

For some of the following questions, bullet points contain the key information to be included in an answer. Candidates should note that they are expected to produce essay answers in continuous prose to Part III questions. Bullet points have been used here for ease of reference only.

Question 10

The CMR convention applies by statute (and can be applied in contract) and covers the international carriage of goods by road and its general scope of application is defined in section 1. Carriage of goods by road:

in vehicles; for reward; place of taking over goods and place of delivery (as set out in the contract) are in two

different countries; of which one is a contracting country.

The transit in question has to fulfil certain criteria other than those stated in Article 1 to be subject to the convention and for the carrier to be a CMR carrier.

Goods must never have been unloaded Confirmation of the carriage contract should be evidenced by the making out

of the CMR note in triplicate. Top copy remains with the sender, second copy accompanies the goods and the bottom copy goes to the carrier. The absence of a CMR consignment note shall not affect the existence of the contract of carriage under CMR.

It is important to remember that a CMR carrier does not ever have to have any contact with the goods themselves and can subcontract the entire carriage.

The issues that the London based CMR carrier would have to consider:

Who are the possible claimants, and what if any liability does he owe? owners of the perfume owners of the roadside property (presumably) owner of the truck/trailer

What jurisdictions could the different claimants enforce? country of shipper (FRANCE) / receivers (UK) country of incident (UK) country of place of business of carrier (UK) and subcontractor (FRANCE)

Different countries have interpreted the original French translations differently Creating differing standards of defences and liabilities ie, French word “dol” could not be properly translated into English UK = negligence (limitation applies) or wilful misconduct (No limitation) FR = negligence, “gross” negligence (No limitation) and wilful misconduct

Will the London based CMR carrier be the liable carrier, or can he avoid liability? Is he the first, last or actual carrier? Art 36.

(NB Ulster Swift case considers whether a carrier or a freight forwarder) Can he deflect the claim to the actual French subcontractor Can the subcontractor rely upon any defences?

Can he avoid liability at all? This is covered by Arts 17 and 18 of the convention. There are 4 circumstances where the carrier can avoid liability. Art 17(2) refers to ‘circumstances which the carrier could not avoid and the consequence of which he was unable to prevent’. In this case there were two incidents, the first being a hijacking by armed robbers and the second the driver falling asleep.

The courts have considered the application of Art 17 (2) (JJ Silber v Islander Trucking [1985]). The court suggested that the words ‘could not avoid’ in the convention wording should be qualified with ‘even with the utmost care’. The standard of care concluded by the court was higher than a duty to do no more than act reasonably but not as high as a requirement to take every conceivable precaution.

We are not privy to the circumstances surrounding the hijack. So it is unknown if the driver considered his intended journey in advance and noted truck stops that offered some degree of security. Was the truck accosted whilst on the move? What degree of threat did the armed hijackers offer and could this still have been avoided?

There are numerous court decisions deciding both ways. Each case will turn on its facts and in practice should the case progress the receiver will make a strong case that the carrier should have had measures in place both to minimise the risk of hijacking, and also to ensure that its drivers were adequately rested. The onus will be on the carrier who wishes to avail himself of the defences under At 17 (2) to show that he had taken appropriate measures, or that measures were financially impractical, illegal or would not have prevented the incident.

Weight limit restrictions to recovery This impacts the amount of compensation that a successful claimant can receive and Art 23 (3) states that compensation “shall not exceed” and will be calculated at 8.33 SDR per kilo of gross weight (received) short. The SDR is valued as at the date of settlement and it fluctuates daily. The rate in April 2004 was about 1SDR/80p which gives a rough kilo rate of £6.66/kg

Subject to the goods weight and whether limitation applies, the carriers potential maximum liability is the “value of the goods at the place and time at which they were accepted for carriage”. This is fixed according to the commodity exchange price/current market price/normal value of the goods of the same kind and quality – art 23(1and 2)

Higher compensation is possible if “the value of the goods or a special interest in delivery has been declared” art 23 (6) and payment of a surcharge agreed upon CMR art 24 and 26.

Consequential lossArt 19 states that the carrier is responsible for any loss caused by delay in delivery. This may apply to the “undamaged” goods if the claimant proves damage has resulted, eg lost market or diminished shelf life for the goods. Delay is defined in two different ways being

Not being delivered within the agreed time limits or If there is no agreed time limit in place, and taking in consideration all the

circumstances of the carriage including whether the load in question is a partial load, whether the carriage exceeds the time that would be reasonable to expect a diligent carrier to need.

The quantum of any consequential loss claim is limited to the original carriage charges – Art23 (5).

Other associated chargesIn addition to whatever a claimant recovers using the weight limit calculation or value of the goods; he can also recover carrier charges (freight), customs duties (as the goods were under bond) and other charges incurred in respect of the carriage of the goods under Art 23 (4). They are paid in full for a TL and on a pro rata basis for partial loss.

The courts have considered the application of this article in relation to UK Excise Duty (James Buchanan & Co Ltd v Babco Fowarding & Shipping ( UK) Ltd [1978]) In this case goods designated for export were lost whilst still in the UK and therefore attracted UK Excise Tax. This was decided to be recoverable in full from the carrier under this article. NB Customs duties are not recoverable in France, so non-declaratory proceedings could be an option for the CMR carrier to secure a more favourable jurisdiction if he wishes to reduce his potential outlay.

CMR Art 27 allows for interest to accrue at 5%/annum and “shall accrue from the date which the claim was sent in writing to the carrier”.

Time bar and notification provisionsThe convention clearly states what the receiver has to do as soon as he receives the goods (Art 30)

Check the condition of the goods with the carrier Send the carrier reservations giving a general indication of loss or damage

i. At the time of delivery for apparent lossii. Within 7 days of delivery for loss or damage that is not apparent (Sundays,

holidays and public holidays do not count as part of the 7 days) This reservation must be made in writing.

Apparently no reservations were made at the time of delivery on 20 th December, or within 7 days after delivery. Additionally it would appear the consignment note was not claused with the fact that the goods were received damaged and/or lost. The fact that the receiver has taken delivery evidences that he has received the goods in the condition described in the consignment note. It is unlikely that the carrier will secure a defence on these grounds taking into account that sufficient evidence seems to exist to demonstrate that this was not the case, ie a hijack and a road accident occurred. In reality no doubt police records would exist supporting this.

No compensation shall be payable for delay in delivery unless reservations have been sent in writing to the carrier within 21days from the time the goods were placed at the disposal of the consignee – art 30 (3).

The convention clearly states the time limits within which action can be commenced against carriers in Art 32 (1) and (2)

The normal time limitation is 1 year , and time starts to run For partial loss, damage or delay in delivery, from the date of delivery For total loss, from 30 days after expiry of the agreed time limit, or in the

absence of an agreed time limit, or where there is no agreement in the time limit 60 days after the goods were taken over by the carrier

For all other cases, 3 months after the making of the contract of carriage.

Important to note that the day from which time starts to run is not counted (i.e start counting from day after date of delivery when calculating how much time is left.

The time limit however for any wilful misconduct claim is 3 years. See section 6 below for discussion of the wilful misconduct point.

Submission of a written claim can suspend time running until the carrier formally rejects the claim in writing and returns the documents – art 32 (2). Partial acceptance of a claim leaves the time running on the balance remaining in dispute. The burden of proof concerning sending and receiving documents rests with the party seeking to rely on the facts

In this case, the goods were partially lost and the balance finally delivered on 20 th December 2002, no reservations appears to have been made at this time or the consignment note claused. This will lead to evidentiary problems for the London based CMR carrier should a formal claim be pursued, since he is unlikely to have initiated investigations as to the circumstances as he was unaware of the loss. Presumably the French subcontractor will have notified his own head office. So the London based CMR carrier could try to just deny liability for late reserves with regards the damaged goods. As to the stolen goods, a written claim was made on 20 Jan 2003 which is well within the 1year time limit. Time was suspended whilst the carrier considered the claim and started to run again when they formally rejected the claim and returned the documents on 20 th February 2003. Time will expire on 20th Jan 2004. Time bar can be extended by the carrier – art 32(3).

In what circumstances can the carrier’s exposure be greaterThe carrier will be unable to exclude or limit his liability if the damage was caused by his wilful misconduct, or more importantly if his default was deemed to be equivalent to such wilful misconduct.

The leading case is Horabin v BOAC [1952] – where it was set out that to establish wilful misconduct the following needed to be satisfied

Person doing the act knew he was doing something wrong He knew it at the time He did it just the same Or he did it quite recklessly, not caring whether he was doing the right thing or not,

regardless of the effect

Wilful misconduct either by act or omission requires positive mental state, not just forgetfulness or genuine mistake that would only be negligent.

In this case consideration must be given to the two incidents. The first, the hi-jacking incident, will be determined on the facts surrounding the incident. and is more difficult to prove either way on the facts given. However there is case law in England concerning commercial drivers falling asleep at the wheel. In the case of Sidney G Jones Ltd v Martine

Bencher Ltd [1986], the judge found that the driver was well aware of the regulations surrounding the time that drivers can spend at the wheel and the reason for them, yet deliberately chose to ignore them. This was found to be wilful misconduct.

It is important to note that Article 29 provides for wilful misconduct of the carriers servants or agents to be enough to deny the carrier the protection of the convention.

Carriage performed by successive carriersThe claimants may bring “legal proceedings in respect of liability for loss, damage or delay”. This can be “against the first carrier, the last carrier or the carrier who was performing that portion of the carriage during which the event causing the loss, damage or delay occurred; an action may be brought at the same time against several of these carriers” – art 36.

If the carriage is governed by a single contract and performed by successive road carriers each of them shall be responsible for the performance of the whole operation by acceptance of the goods and the consignment note – art 34. In this example the London based CMR carrier can look to his French subcontractor to ultimately settle any liabilities owed.

If the first carrier, ie the London based CMR carrier, has paid compensation he shall be entitled to recover this from his subcontractor, the French carrier, together with interest and all costs and expenses incurred, subject to a number of provisions. The pertinent provision here is CMR art 37(a), whereby the CMR carrier is entitled to seek full settlement from his French subcontractor as they were the actual carrier responsible for the loss/damage. The subcontractor is not allowed to dispute this payment by the London based first CMR carrier if this was determined by the courts - CMR art 39.

And finallyThe CMR carrier could also receive claims from the owners of the roadside property that was damaged, but should easily deflect this is outside of the CMR terms and the claim should be pursued solely against his French subcontractor.

Similarly for any damages to the truck and or trailer (if articulated) should also be outside of the CMR terms, and very likely to have to be considered under separate property and motor policies of the French subcontractor.

Question 11

A&B are in collision and both are held equally to blame.A’s damage is £2,500,000A’s cargo damage is £2,250,000B’s damage is £250,000

B limits liability in respect of other claims under Merchant Shipping Act 1995 which embodies the provisions of the 1976 Convention on Limitation of Liability for Maritime Claims. This does not affect B’s rights against the other vessel; the limitation relates to the liability to others; the shipowners right against the other wrongdoing party is dealt with on the basis of the Admiralty Rule.In respect of other claims the limits are:0-500tons 167,000 Units of Account 167,0009499 tons 167 Units of account per ton 1,586,333

Total 1,753,3331,753,500 @ £1.20 = £ 2,104,000Each proves against the fund for the amount they are entitled to claim against B. Thus A proves against the fund for the difference between half their own damage and half B’s (Admiralty Rule of single liability).

One half own damage £1,250,000One half B’s damage £125,000 A proves against the fund £1,125,000

A’s cargo can claim 50% of its loss from the non-carrying vessel.

Apportionment of fund:A proves for £1,125,000 and receives £1,052,000A’s cargo (one half) £1,125,000 and receives £1,052,000

£2,250,000 £2,104,000

Cargo has an entirely separate right of claim and is not concerned with the set-off between the vessels.

Question 12

The main considerations of a marine reinsurer can be summarised as what am I covering and how much premium am I getting for it? These are the things that a reinsurer should be thinking about.

Premium1.PriceThere are three basic pricing mechanisms in use for XL protection

Exposure method – prospective assessment of what is going to be protected Burning costs – looking back at how the account to be protected has

performed in the past Rate on line or rate on indemnity

2. How payment is made Flat premium (either all up front or in tranches Percentage of defined premium income Flat rate on amount exposed (used for reporters) Reinstatement premiums if such over is obtained

3. Brokerages and other deductions

General contract terms1. Limit and retention

a. Event basis, vessel basis, declaration basis depending on type of business being protected

2. Applicable Rate of Exchangea. Consider whether to fix a ROE at the start of the policy or write just on one

currency and hope that currency fluctuations will even out3. Reinstatements

a. Consider whether to offer any reinstatements and how much to charge for them. War business can only have one reinstatement.

4. Follow clausesa. Whether as a reinsurer you permit the reassured any freedom to settle claims

without reinsurer's involvement even if the reinsurance is impacted by the settlement

Specific considerations depending on what reinsurer is being asked to protect

Specific XLs War account

Important to find out what the extent of the war cover. Is it specific war perils or just incidental coverage? Is there an aviation war account that is traditionally written into a marine book?

What terrorism cover is being written and into what accounts.

Hull account What sort of hull, blue water, brown water, fishing boats etc. and percentage of the

account given to each. Breakdown of premium over each class

Breakdown across geographical/classification/ownership What size lines are written Any use of specific facultative reinsurance which will inure to any XL policy Ideally a chart of maximum gross and net lines together with the loss record for as

long as possible. Any building risks in the book – these are usually long tail and heavily escalate in

value towards the end of the contract, possible more than originally anticipated which might expose the reinsurer. There is also the potential for catastrophe type losses.

Does the cedant write specialised business such as TLO?

This information permits R/I to analyse the account and the exposures in relation to the limits and retentions requested and to highlight any unacceptable aggregations of exposure. Reporting XLs are used a lot to cover hull business and the R/I will try and analyse the percentage loss required in the case of a PA to exceed the proposed retention.

Cargo account Some idea of the sort of risks written, maximum gross and net lines and loss record Is it transit only or storage as well? Is there specialism in any particularly commodity or type of risk Are the risks primary or excess? What risk management measures are used to minimise loss

Energy Account Participation of cedant in major worldwide facilities What are the aggregate exposures for the large platforms and facilities? Any specific r/I to protect those participations Is any war/terrorist cover provided - how is it coded, into War or Energy account? Maximum gross and net lines written and loss record

Liabilities What exactly is being written into this account, is it pure marine liabilities such as

charterers etc or are there elements of US based energy related liabilities that can give rise to different exposures?

Is the business written as primary or excess Any participation in large market risks such as R/I of the International Group Any pollution exposures either as individual writes or elements of other coverage Maximum gross and net line and loss record

Loss record is probably most important on this type of business as it is extremely volatile and the portfolio has the potential to be quite wide.

Whole account XL As this is an umbrella protection usually covering both fac and underlying specific

protections details of these together with a general analysis of the entire account is required

Identify whether this account is intended to respond in the event that specifics are exhausted, or in the event of a clash or where there is no specific protection

Review the aggregate exposure of the reassured across all classes for any one large loss to ascertain how it will affect any protection written and impact on the

reinsurer’s own protections.

Overriding considerations by any reinsurer irrespective of what he is writing How does what he write aggregate with and affect what is already within his

portfolio? Are his own reinsurance protections adequate? Are his records and that of the reassured adequate to ensure that he has as much

information as possible about the exposure that are being accepted?

Question 13

(a) 20 packages missing, grades not identifiable hence 5 missing from each grade.

Grade A. Value per package £5005 packages = £2,500

Grade B. Value per package £4005 packages = £2,000

Grade C. Value per package £2005 packages = £1,000

Grade D. Value per package £505 packages = £250

Total value of 20 packages = £5,750

Total sound value of 400 packages = £115,000 against an insured value of £130,000

20 packages = x £130,000 = £6,500

(b) Gross proceeds of sale £81.25 x 400 £32,500Less sales commission £250Carriage charges £50

£32,200Claim is calculated as follows:Damaged value of 400 packages = £81.25 x 400 = £32,500Sound value of 400 packages = £300 x 400 = £120,000

x 100 = 27.083% (rounded down to 27% of sound value realised

i.e. 73% depreciation of value.

Insured value £130,000 @73% depreciation £94,900Plus extra charges (sales commission and carriage) £300

£95,200 (c) Increased value insurance arranged for £2,400

Original pays Increased value pays73% depreciation £94,900.00 £1,752.00Extra charges £232.03 £67.97

£95,132.03 £1,819.97

Total claim £96,952

Question 14

Freight is defined as the price that a ship owner demands to carry goods in his vessel. Basically it the price charged for a space in a ship in which to place goods to be carried from A to B.

MIA defines it as …the term freight includes the profit derivable by a shipowner by 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

Moveables are defined in the Act as … any moveable tangible property, other than the ship and includes money, valuable securities, and other documents.

Hire [or charter hire] is the charge that a shipowner levies to make his whole ship available to someone else [the charterer] not just space in the hold. The distinction is one of control in that it is possible for a shipper to pay a shipowner freight to completely fill the holds of his ship; however the shipowner remains in full control of the vessel. If a charterer hires the vessel, then he has control of the vessel (within the terms of the hire agreement).

Loss of freightA shipowner (or charterer) will only be unable to earn his freight if the freight is payable at destination and the goods do not arrive because the ship was lost or the goods are damaged. Shipowners doing business on freight payable at destination terms have a valid insurable interest that they can purchase insurance to cover.

There are specific Institute Clauses to cover loss of freight (ITC – Freight 1/8/89 and IVC – Freight 1/8/89)

A shipowner can take out protection against loss of freight in addition to his hull and machinery policy as the disbursements warranty in for example the ITC Hulls clauses provides for this amongst other additional insurances. It is in effect an increased value type of policy. If the ship becomes a TL then the insured value is paid out on any freight at risk irrespective of the amount actually at risk. Without the restrictions put in the disbursement warranty of the hull policy it would be theoretically possible to insure a vessel at the lower end of the value spectrum for full cover adding a bit of TLO thus keeping premiums down and hoping that a payout on a freight policy (which without the disbursements warranty have no upper limit) would cover any gaps in the payout.

The MIA provides the measure of indemnity under a freight policy, subject to any express provision in the policy

for partial loss of freight for valued policies it is the proportion that sum fixed in the policy bears to the whole

freight at the risk of the assured for unvalued policies it is the proportion that the insurable value bears to the whole

freight at the risk of the assured The gross freight at risk is measured for time policies at the time of the casualty and

for voyage policies at the commencement of the voyage

The prudent level of indemnity would be the maximum permitted by the restrictions in the relevant hull and machinery policy.

Loss of hireWhen a shipowner charters his vessel out it is normally for a fixed period of time (although it is possible that it is measured as a voyage rather than in time) and the hire due is measured on a daily rate payable in advance in accordance with the terms of the charterparty. There are provisions in all charter documents which set out the circumstances when, although the vessel is unable to operate the charterer must still pay hire and when he is not obliged to pay. The shipowner has an insurable interest to protect his expected income.

There are no Institute clauses to cover loss of hire, but several specialist clauses are in use, being amongst others the A.B Stewart wording, together with the American SP40 form and the Norwegian form.

This type of insurance will cover the loss of income arising out of loss or damage to the vessel and will pay out a fixed sum for each 24hour period, but subject to a deductible of usually 10 or 14 days. Coverage is usually limited to 90 or 180 days.

The loss of hire policy in effect when the damage was caused to the vessel leading to the claim will respond to a claim even though the repairs which lead to the vessel being out of action do not take place until up to 12 months after the policy has expired. The repairs can be done in tranches as long as they are all done within the 12 months and no more than 3 sessions are required. If the repairs are done in bits, the deductible does not have to taken again, however each 24 hour period has to be completed and time accrued in separate repair sessions can be aggregated.

If owners and casualty related work is done at the same time, the apportionment will be in accordance to rule D5 in the AAA rules of practice.

If a vessel actually becomes a TL as a result of the casualty there is no claim on the LOH policy, and if the vessel is sold or comes out of charter the policy automatically cancels.

The appropriate level of indemnity should be the maximum amount of hire expected bearing in mind the fluctuation in charter rates so that underinsurance does not become a problem part way through a policy.