Principles of Insurance - Pham Ha

CHAPTER I:

BASIC CONCEPTS IN INSURANCE

1.1. Insurance Definition• Insurance is a contract whereby, in return

for the payment of premium by the insured, the insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen events.

1. Insurance

1. Insurance

1.1. Insurance Definition• A contract between two parties whereby

one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event

1.2. Nature of insurancei) Insurance provides financial protection against a

loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.

ii) Insurance is the risk transferring from the insured to the insurer

iii) Insurance works on the basic principle of risk-sharing.

iv) The business object in the insurance sector is risk.

1. Insurance

Example 1

SUPPOSE Houses in a village = 1000Value of 1 House = Rs. 40,000/-Houses burning in a yr = 5Total annual loss due to fire = Rs. 2,00,000/-Contribution of each house owner = Rs. 300/-

UNDERLYING ASSUMPTIONAll 1000 house owners are exposed to a common risk, i.e. fire

PROCEDURE•All owners contribute Rs. 300/- each as premium to the pool of funds•Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Rs. 300) •5 houses get burnt during the year•Insurance company pays Rs. 40,000/- out of the pool to all 5 house owners whose house got burnt

EFFECT OF INSURANCERisk of 5 house owners is spread over 1000 house owners in the village, thus reducing the burden on any one of the owners.

Example 2

SUPPOSENumber of Persons = 5000Age and Physical condition = 50 years & Healthy Number of persons dying in a yr = 50Economic value of loss suffered by family of each dying person = Rs. 1,00,000/-Total annual loss due to deaths = Rs. 50,00,000/-Contribution per person = Rs. 1,200/-

UNDERLYING ASSUMPTIONAll 5000 persons are exposed to common risk, i.e. death

PROCEDUREEverybody contributes Rs. 1200/- each as premium to the pool of fundsTotal value of the fund = Rs. 60,00,000 (i.e. 5000 persons * Rs. 1,200) 50 persons die in a year on an averageInsurance company pays Rs. 1,00,000/- out of the pool to the family members of all 50 persons dying in a year

EFFECT OF INSURANCERisk of 50 persons is spread over 5000 people, thus reducing the burden on any one person.

2. Risk2.1. Concept:

The term Risk is used to describe all the accidental happenings which produce a monetary loss. For e.g.: A factory catching fire, a ship sinking etc.

2. Risk

• Risk is defined here as uncertainty concerning the occurrence of a loss

2. Risk

• 2.2. Chance of loss: is defined as the probability that an event will occur.

Methods of handling risk:

– Avoidance:• You can avoid the risk of being mugged in a high-

crime rate area by staying out of the area• A business firm can avoid the risk of being sued for

a defective product by not producing the product

=> However, not all risks should be avoided


• Loss control: consists of certain activities that reduce both the frequency and severity of losses

• Objectives:• Loss prevention: aims at reducing the probability of

loss so that the frequency of losses is reduced:– Auto accidents can be reduced if motorists take a safe-

driving course and drive defensively– The number of heart attacks can be reduced if individuals

control their weight, stop smoking, and eat healthy diets

• Loss reduction: reduce the severity of a loss after it occurrs:– A department store can install a sprinkler system so that a

fire will be promptly extinguished


• Insurance: the most practical method for handling a major risk

• Characteristics:– Risk transfer is used because a pure risk is

transferred to the insurer– The pooling technique is used to spread the

losses of the few over the entire group so that average loss is substituted for actual loss.

Practice where an Insurance company (the insurer) transfers a portion of its risks to another (the re-insurer).

Legal right of the policyholders (insureds) are in no way affected by reinsurance, and the insurer remains liable to the insureds for insurance policy benefits and claims.

3. Re- insurance

4. Double Insurance

• Situation in which the same risk is insured by two overlapping but independent insurance policy.

4. Double Insurance

• Is it possible to obtain double insurance and make claim to all insurers?

4. Double Insurance

• YES!• It is lawful to obtain double insurance, and

the insured can make claim to both insurers in the event of a loss.

4. Double Insurance

• How much money that insured can received from all insurers?

4. Double Insurance

• The insured, however, cannot profit (recover more than the loss suffered) from this arrangement because the insurers are law bound only to share the actual loss in the same proportion they share the total premium

4. Double Insurance

• Mr A involves in 3 insurance policies for his car at 3 insurance companies X, Y, and Z with insurance amounts are 300, 400, 500 million VND (insurance for physical value of car); Assuming that the value of the car is 500 million VND. Define the compensation of each insurer?

5. Co- Insurance

• Insurance held jointly by two or more insurers.

6. Insurer/ Underwriter

The party to an insurance arrangement who undertakes to indemnity for losses.

.

7. Insured

• an insured or policyholder is the person or entity buying the insurance and receiving indemnity on happening of unforeseen events

8. Subject /matter insured

• The person, group, or property for which an insurance policy is issued

The term “value” refers to the value of the property, on the same basis used in indemnifying losses; that basis is usually actual cash value or replacement cost. The replacement value of property is equal to the amount it would cost to fully repair or replace the property if it must be reconstructed or purchased new.

9. Insurance Value-V

10. Insurance Amount-A

• a certain amount of insurance coverage that the insured requires in the insurance policy, it can be a part or an entire of insurance value

11. Limitation of liability

• The largest total amount the insurance company will pay for covered losses.

11. Insurance rate

a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium.

12. Insurance Premium

• Payments to the insurance company to buy a policy and to keep it in force.

I = V(A) x R

Chapter 2

Fundamental Legal Principles

Outline

Insurance is a repayment of a random loss Utmost Good FaithInsurable InterestIndemnitySubrogation

Insurance is a repayment of a random loss

– The timing or occurrence of the loss must be uncertain.

– For example, you can't know your house is going to be destroyed in three weeks by a demolition team and still get home owner's insurance.

– To be able to fully service major claims, small claims are not covered. This is what the deductible is for. Only damage or loss over the amount of the deductible is covered by the insurance policy.

Utmost Good Faith

• A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contract

Utmost Good Faith

Good faith- Let the buyer beware

Declaration of all material Information about the subject mater of insurance

Material Information is that information which enables the insurer to decide:

a) whether he will accept the risk and;

b) if so, at what rate of premium and subject to what terms and conditions

Utmost Good Faith

• Examples of material facts:– Of a house insurance– Of a person– Of a car– Of a camera

Utmost Good Faith

Breach of duty of utmost good faith arises in two ways:

• Non-disclosure of material facts- oversight, proposer thought it’s not essential etc.

• Misrepresentation- Intentional.

Utmost Good Faith

• Example 1:Terry was an electrician. He had an ineffective right leg. He owned and drove a small van that had been modified for his disability. His job was with a film company and he traveled from location to location wiring up the lighting equipmentHe proposed for personal accident insurance describing himself as an electrician and answered the question about disabilities in the negative. Whilst travelling from one site to another he fell momentarily asleep at the wheel and struck a lamp standard because he was not able to brake effectively.

Utmost Good Faith

• Example 2: – The insured misrepresent that she had no

traffic violation convictions in the prior three- year period. After an accident, a check of her record revealed that she had two speeding tickets in that period. The insurer denied coverage.

Insurable Interest • The legal right enjoyed by the owner of a

property to insure is called ‘Insurable Interest’. The insurance will become null and void, without the insurable interest.

• Purposes: – To prevent gambling– To reduce moral hazard– To measure the amount of the insured’s loss

in property insurance

Insurable Interest

• Examples of insurable interest:– Property and Casualty insurance: ownership

of property– Potential legal liability– Secured creditors– Contractual right

Insurable Interest

• Insurable risk:– Capable of financial measurement– A large enough amount of similar risks– Not be against public policy– Reasonable premium

Insurable Interest

• Insurable interest is where you have a valid reason to insure and stand to suffer a direct financial loss if the event insured against occurs.

• Insurable interest exists when an insured

derives a financial or other benefit from the continuous existence of an insured object

Insurable Interest

• When must an insurable interest exist?– In property insurance, the insurable interest

must exist at the time of the loss:• The insured must incur his financial loss• You may not have an insurable interest in the

property when the contract is first written but may expect to have one in the future, at the time of possible loss

Indemnity • The principle of Indemnity states that under the policy of

insurance, the insured has to be placed after the loss in the same financial position in which he was immediately before the loss.

• 2 fundamental purposes: – To prevent the insured from profiting from a loss– To reduce moral hazard

Indemnity• Applicability:

oWhen the losses suffered by the insured can be measured in terms of money

o It is practicable to place the insured in the same financial position which he occupied before the loss

• In Marine Cargo where valued polices are issued, there is only commercial indemnity- the value declared for insurance is accepted at the time of loss.

Subrogation • Transfer of rights and remedies from the insured to

the insurer who has indemnified the insured in respect of the loss.

• The right of an insurer which has paid a claim under a policy to step into the shoes of the insured so as to exercise in his name all rights he might have with regard to the recovery of the loss which was the subject of the relevant claim paid under the policy up to the amount of that paid claim. The insurer’s subrogation rights may be qualified in the policy.

• Subrogation means substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third person for a loss recovered by insurance.

• Example: a negligent motorist fails to stop at a red light and smashes in to Mergan”s car, causing damage in the amount of $5000. If she has collision insurance on her car, her company will pay the physical damage loss to the car and then attempt to collect from the negligent motorist who caused accident.

• Alternatively, Mergan could attempt to collect directly from the negligent motorist for the damage to her car.

Subrogation

• The principle of subrogation strongly supports the principle of indemnity

• The insurer is entitled to recover from a negligent third party any loss payment made to the insured

Subrogation

• Purposes:– Prevent the insured from collecting twice for

the same loss– Is used to hold the negligent person

responsible for the loss– Help to hold down insurance rate

CHAPTER III:

MARINE INSURANCE

Outline

• Introduction• Risk, damage• Marine cargo insurance

I. Introduction

1. Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination.

2. Needs for marine insurance

• Exporters and importers face all the time uncertainties of loss of their goods.

• Insurance is used to protect their financial interests against such risks and actual losses.

• Without adequate insurance and protection of the interests of those with goods in transit, international trade would be negatively affected.

• Liability of carriers to the goods is very limited

3. History of marine insurance

• MARINE INSURANCE AS WE KNOW IT TODAY, CAN BE DESCRIBED AS MOTHER OF ALL INSURANCES

• IT IS BELIEVED TO HAVE ORIGINATED IN

ENGLAND OWING TO THE FREQUENT

MOVEMENT OF SHIPS OVER HIGH SEAS

FOR COMMERCE AND TRADE

• PRIOR TO THE DEVELOPMENT OF MARINE

INSURANCE, THE PEOPLE ACROSS THE

WORLD, HAD A SYSTEM OF:– POOLING THEIR CONTRIBUTIONS SO THAT IF ANY ONE OF

THEM SUFFERS LOSS DURING VOYAGE– HE WOULD BE COMPENSATED FROM THE

POOL.• TODAY MARINE INSURANCE HAS ASSUMED A VAST

DIMENSIONS DUE TO EVER EXPANDING TRADE ACROSS THE GLOBE.


• IT INVOLVES LARGE SHIPPING COMPANIES THAT REQUIRE PROTECTION:– NOT ONLY FOR THEIR COSTLY FLEET AGAINST THE

PERILS OF THE SEA, BUT ALSO– TO THE CARGO BEING CARRIED IN EACH OF THESE

SHIPS.• THE VALUE OF EACH SHIP AND THE CARGO

CARRIED THEREIN, MAY BE COSTING MILLIONS OF USD TO THE OWNERS.


World’s biggest Passenger-ship ‘MS Freedomof the Seas’ 4300 passenger capacity inside

4. MARINE INSURANCEMARKET

• LLOYD’S, A CORPORATE ESTABLISHED IN LONDON, IS THE BIGGEST CENTRE FOR MARINE INSURANCE IN THE WORLD

• LLOYD’S WAS A COFFEE HOUSE FREQUENTED BY THE TRADESMEN, SHIPOWNERS AND OTHERS

• THE COFFEE HOUSE BECAME THE MEETING GROUND FOR:– BROKERS, INSURERS AND SHIP OWNERS FOR

NEGOTIATING THEIR BUSINESS.

LLOYD’S COFFEE HOUSE

• AT THE COFFEE HOUSE THEY WOULD DISCUSS VARIOUS ASPECTS OF THE SHIPPING BUSINESS INCLUDING CARGO AND SHIP INSURANCE AND:

• ULTIMATELY IT STARTED TRANSACTING MARINE INSURANCE IN A BIG WAY.

• WHEN THE BRITISH OCEAN LINER ‘TITANIC’WHICH SANK IN 1912, DURING HER MAIDEN VOYAGE:

• WAS INSURED BY LLOYD’S WHO PAID AN INSURANCE CLAIM OF ONE MILLION US $.

Titanic Crash

5. Classification

• Marine cargo insurance: covers export- import goods carriage by sea and related- reasonable costs

• Hull insurance: covers material loss of or damage to hull and machinery, a portion of costs for collision liability, and other reasonable costs.

• Protection and indemnity insurance: provide cover to shipowners against third- parties liabilities in connection with the operation of vessels

II. Risk in marine insurance

1. Risk1.1.Definition• Probability or threat of a damage, injury,

liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action.

• Marine risks are the risks that occur on the sea/ the risks of the sea/ the risks related to an ocean voyage.


• Risks are of many kinds• Different risks mean different losses• And different risks are covered by different

clauses• And different insurance clauses mean

different premiums• So we need to have a good understanding

of the different risks and losses before we know how to effect insurance


1.2. Types of risks1.2.1. Base on the causes - Acts of God: vile weather, thunderstorm and lightening,

tsunami, earthquake, flood, volcanic eruption, etc.- Perils of the sea: ship striking upon the rocks, ship

sinking, ship collision, colliding with iceberg or other objects

- Risks caused by Social- political actions: war, SRCC (strikes, riots, civil, commotions)

- Risks caused by particular actions of people: thieve, robber

- Risks caused by other sources

II. Risk in marine insurance1.2. Types of risks1.2.2. Base on the insurance techniquea) Insured common perils: the risks that are normal insured in original

insurance clauses:• Main risks:

- Stranding: a vessel is stranded when, in consequence of some accidental or unusual occurrence, she comes in contact with the ground or other obstruction, and remains hard and fast upon it. The vessel needs an external force in order to getting off the stranding. - Sinking- Fire or explosion- Collision- Jettison: To throw part of the cargo or gear of the vessel overboard to lighten the load and save the vessel. The owner of the jettisoned goods is entitled to a "general average," i.e., the loss is shared by the owners of the vessel and the owners of the cargo which was not thrown away.- Missing: British law: 3 times of ship’s itinerary in normal conditions (no longer than 6 months, no shorter than 3 months)

* Auxiliary risks: theft, rain, leakage, breakage, dampness, heating, hooking, rusting


b) Relatively Excluded Perils: risks that are not included in standard insurance clauses: War, SRCC

c) Absolutely Excluded Perils: risks that are not insured in any circumstances:

• loss damage or expense attributable to wilful misconduct of the Assured

• ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject- matter insured

• loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured

• loss damage or expense caused by inherent vice or nature of the subject-matter insured

• loss damage or expense proximately caused by delay, even though the delay be caused by a risk insured against

• loss damage or expense arising from insolvency or financial default of the owners managers, charterers or operators of the vessel

• loss damage or expense arising from the use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.

III. Losses

• Losses sustained by the insured due to the risks listed above come from not only the loss of the goods or the damage dine to the goods, but also from the expenses the insured sustained in rescuing the goods in danger.

• The losses and the damages done to the goods can fall into total loss and partial loss

• Total loss includes Actual Loss and Constructive Total Loss

• Partial Loss means that the loss or damage dine to the goods is only partial. Partial loss can be either general average or particular average

Kinds of marine losses

Different

Types Of

Marine

Losses

Total loss

Actual total loss

Constructive total loss

Partial loss

General Average Loss

Particular Average

Total Loss

• Actual total Loss: means the whole lot of the consignment has been lost or damaged or found valueless upon arrival at the port of destination

• Constructive total loss: is found in the case where the actual loss of the insured goods is unavoidable, or the ship or the consignment has to be abandoned because the cost of recovery would exceed the value of the ship and the consignment in sound condition upon the arrival of the port of destination

Constructive Total Loss

• Notice of abandonment (NOA): is a notice in which the insured commits to give up all of his right related to the subject- matter insured to the insurer in order to be fully compensated.

• Requirements:– Where notice of abandonment is accepted the

abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice.

– NOA is unnecessary when the consignments have already reached final destination and are in actual total loss

Constructive total loss

Treat as partial loss

Or as CTL

Reasonably abandoned

(if NOA would have

Any possibility of benefit to insurer)

Insurer accepts: admitted

interest and deal with

subject matter insured

as its own

Insurer rejects: partial

Loss or ACT

Partial Loss

• Particular Average: losses of each insured interest individually due to acts of God or Perils of the sea

• Insurer’s liability: compensate for both of the losses and reasonable costs caused by particular average.– Goods: Reasonable costs are the cost used

for saving cargo or reducing its damaged measurement.

General Average

• General Average: the losses/ damages caused by special expenses and sacrifices that intentionally and reasonably conducted to save the vessel, cargo and freight from a threat in the common ocean voyage.

• There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in a common maritime adventure.

=> General Average are for the common safety of all of the interests (cargo, vessel, freight)

General Average

• A ship carrying goods in stranding status• Order of master: a part of cargo is

jettisoned, main engine is damaged (due to the act of forcing the ship off)

• Result: After repairs at the port of refuge, the ship is able to complete her voyage with the rest of her cargo.

Examples

• Cargo, freight:– Jettison from underdeck.– Jettison from on deck.– Water or other means used to extinguish a fire

on board ship.– Discharge and re-shipment for the purpose of

floating a stranded ship when in a position of peril

Examples

• Ship’s materials:– Masts, spars, sails or rigging cut away for the

common safety.– Chains and anchors slipped to avert a threatening

peril.– Damage to a vessel's machinery, ropes, winches,

windlass and other gear sustained in endeavours to float a stranded ship when in a position of peril.

– Damage done in the efforts to extinguish a fire on board or in the process of jettisoning cargo.

Examples

• Expenditure:– Expenses incurred in floating a stranded ship

in peril.– Inward expenses entering a port of refuge to

repair damage to ship.– Cost of discharging cargo at a port of refuge

for the purpose of repairing damage to ship.– Cost of warehousing, re-shipment of cargo

and outward expenses leaving the port of refuge.

General Average

• Essential features:– The loss must be voluntary – It must be properly made– It must be extraordinary in its nature– The object of the sacrifice or expenditure must be

nothing other or less than the common safety of ship and cargo

– There must be imminent danger, and the object must be the attainment of safety

– The loss must be the direct result or reasonably the consequence of the act causing it

General Average

• Contents:– GA Sacrifices: to sacrifice properties for the rest ones.– GA Expenditures: consequent costs of GA act or

expenditures concerning GA act:• Salvage cost• Temporary repairs cost• Cost at port of refuge• Wages and maintenance of master, officers and crew

reasonably incurred and fuel and stores consumed during the prolongation of the voyage occasioned by a ship entering a port or place of refuge or returning to her port or place of loading

• Interest of 7% shall be allowed on expenditure, sacrifices and allowances in general average until three months after the date of issue of the general average adjustment

General Average

• Ship-owner/ master’s liabilities:– Form GA Notice– Arrange survey service to assess the measure of

damage– Send average bond and average guarantee– Arrange GA adjuster– Form Sea Protest (if applicable)

• Cargo owner’s liabilities: – Declare value of the goods– Receive average bond and average guarantee

General Average

• Legal issues:– York Rules 1864– York- Antwerp 1924– York- Antwerp 1950, 1974, 1990, 1994, 2004

General Average

• Amendments of York- Antwerp Rules 2004:– Rule VI: salvage remuneration is not included in GA– Rule XX: A commission of 2 per cent. on GA disbursements,

other than the wages and maintenance of masters, officers and crew and fuel and stores not replaced during the voyage is not included in GA

– Rule XXI: Interest shall be allowed on expenditure, sacrifices and allowances in GA until three months after the date of issue of the general average adjustment. Each year the Assembly of the Committee Maritime International shall decide the rate of interest which shall apply. This rate shall be used for calculating interest accruing during the following calendar year.

– Rule XXIII: limitation of claims: 1 year after the date upon which GA adjustment was issued or 6 years from the date of termination of the common maritime adventure. These periods may be extended if the parties so agree after the termination of the common maritime adventure

General Average

• GA adjustment– Arrange a GA adjuster– Contributing interests: vessel, cargo, unpaid

freight/freight at risk

General Average

• Calculation:– Step 1: Determine GA value, which consists of

GA sacrifices and expenditures• If goods are sacrificed in GA act, value of the

goods is calculated based on loading/ unloading value or the one in commercial invoice. It includes insurance premium and freight, except one case when cargo owner is not liable for paying the freight.

General Average

• Step 2: Determine total value of contributing interests: consists of value of all interests in vessel that were saved by GA act, including properties sacrificed in GA act.– Those damages belong to particular average

occurred before the GA act are not included in contributing value/ after the GA act are included in contributing value

General Average

• Step 3: Determine contributing rate:Rate = total GA value/ total Contributing

value• Step 4: Determine contributing value of each

interestC = Contributing rate X contributing value

• Step 5: Determine financial result (actual income/ expenditure of ship owner/ cargo owner after deducting value of the properties or expenditures spending in GA act

III. Marine cargo insurance

1. Cargo needs to be insured

- High probability of risk occurring in voyage

- Carrier’s liability is very limited

- Marine cargo insurance is a custom in international trade

Marine cargo insurance

• It provides insurance cover in respect of loss of or damage to goods during transit by rail, road, sea, or air

2. Insurer’s liability to the goods

2.1. Introduction of insurance clauses

2.1.1. Definition: Set of terms for cargo insurance policies voluntarily adopted as standard terms by many international marine insurance organizations.

2.1.2. Institute Cargo Clauses- ICC: issued by Technical and Clauses Committee of Institute of London Underwriters (ILU)


• ICC 1963:– FPA- Free from Particular Average– WA- With Particular Average– AR- All Risks– WR- War Risks– SRCC- Strike, Riot, and Civil Commotion


• ICC 1982:– C– B– A– WR– SRCC


2.1.3. Cargo Clauses of Vietnam- QTC 1965: FPA, WA, AR- QTC 1990: C, B, A

2.2. Scope of cover- ICC 1982 & QTC 1990

2.2.1. Risks Cover• C clause: this insurance covers loss of or damage to the

subject- matter insured reasonably attributable to:– Stranding, sinking, fire or explosion, collision– discharge of cargo at a port of distress – overturning or derailment of land conveyance – Sacrifice in and contribution to GA and reasonable expenditures

(salvage – Jettison– Missing– Such proportion of losses sustained by ship owners as is to be

reimbursed by the cargo owners under the contract of affreightment “Both to blame Collision” clause


• B clause– C– earthquake volcanic eruption or lightning – Washing overboard– entry of sea, lake or river water into vessel

craft hold conveyance container liftvan or place of storage

– total loss of any package lost overboard or dropped whilst loading on to, or unloading from, vessel or craft.


• A Clause:– B– Auxiliary risks: theft, rain- water, leakage,

breakage, dampness, heating, hooking, rusting, malicious damage (not by insured), piracy…


• A, B, C are official clauses• Special Clauses: WR, SRCC• Exclusions:

– Contraband– Willful misconduct of the assured– Deviation– Delay– Inherent vice or nature of subject- matter insured– Unseaworthiness of vessel– Insolvency or financial default of the owner or the

operator of the vessel


2.2.2. Duration: Transit Clause “from warehouse to warehouse”

- Stage from port of discharge to final warehouse: insurance policy terminates either:- On safely delivery to the final warehouse, or- On the expiry of 60 days after completion of discharge

- Departure warehouse: place of storage at the place named herein for the commencement of the transit

- Final warehouse:- Final warehouse owned or managed by the assured, or- Store other than in the ordinary course of transit, or- Store using for allocation or distribution, or - Store named in insurance policy

3. Marine cargo insurance policy

• Who can buy a marine cargo insurance policy?– Contract of sale: Legal contract for exchange

of goods, services or property to be exchanged from seller to buyer for an agreed upon value

– The contract of sale determines who buy the policy

– The most common contracts of sale are: FOB, CFR and CIF

Contract of sale

• FOB: Buyer pays freight, buyer arranges insurance

• CFR: Seller pays freight, buyer arranges insurance

• CIF: Seller pays freight, seller arranges insurance

• In marine cargo insurance, the person having insurable interest at the time of loss can only recover

• Marine cargo policy are freely assignable. Unlike other policies, there is no need to take insurance company’s consent for transferring policy to new buyer

Different kinds of marine cargo policy

• Voyage policy: insurance policy/ insurance certificate

• Open cover policy: large export/import oriented industry usually prefer open cover agreement as they have to make numerous regular shipment who would otherwise find it very inconvenient to obtain insurance cover separately for each and every shipment

• A marine cargo open cover insurance policy is an agreement between a merchant and an insurance company to insure all goods in transit within the agreement, until either party cancel the agreement

Different kinds of marine cargo policy

• Valued policy• Unvalued policy

4. Content of marine cargo policy

• Insurance value• V = C + I + F + (a) = CIF + (a) (1)• I = V x R = CIF x R (2)

Replace (2) to (1)

CIF = C + CIF x R + FÞ CIF(1-R) = C + FÞ V = CIF = (C+F)/(1-R) (a=0)Þ V = (C+F)(1+a)/(1-R) (a=10%)

Content of marine cargo policy

• Insurance amount• A ≤ V• A = V = (C+F)/(1-R) (a=0)Þ A = V = (C+F)(1+a)/(1-R) (a=10%)

Content of marine cargo policy

• Insurance premium• I = A (V) x R = (C+F) R/(1-R)• I = (C+F)(1+a)R/(1-R)

IV. Marine Hull insurance

1. Subject- matter insured:a) Hull and machinery insurance is to protect the shipowner’s investment in the ship. It is basically a property insurance which covers the ship itself, the machinery and equipment. The owner will be protected for losses caused by loss of or damage to the ship and its equipment

b) Furthermore, the insurance covers some liabilities, normally collision liability with another ship (known as RDC – “Running Down Clause”) – and sometimes also liability for colliding with

other objects than another ship (known as FFO - “Fixed and Floating Objects).

c) The third part of the insurance is cover for salvage and general average contributions.

• Types of vessels– General Cargo Vessel – Built for specific purpose like car

carriers, live stock carriers, log carriers, heavy lift vessels- Liners or Tramps

– Dry Bulk carriers – Heavy weather damage– Liquid Bulk carriers- shorter life, fire & explosion, risk of

pollution– Passenger vessels – fire damage– Container vessels – loss of containers– Offshore Oil and Gas Exploratory units – blow out– Fishing vessels – moral hazard– Other vessels like Tugs, Barges, Supply vessels, Yachats

• Types of Policies– Hull and Machinery Policy– Freight Policy– Disbursement and Increased Value Policy– Loss of Hire Policy– Builder’s Risk Policy– Ship Repairer’s Liability Policy– Charterer’s Legal Liability Policy– Mortgagee Interest Insurance Policy– Port Package policies– War and strike polices

2. Typical hull and machinery claims include:– Total loss of the ship– Damage to the ship, engines and equipment– Explosions and fires– Groundings – damage to the ship, salvage of the ship

and possible contribution in general average– Collisions – damage sustained to the ship and

sometimes also liability towards the other ship (RDC) – Striking other objects – damage inflicted to own ship

and sometimes also liability towards the owners of the other object (FFO)

• The insurers will pay the shipowner for the cost of repairs to the ship after the damage has been surveyed and tenders from repair yards submitted.

• The shipowner will, however, have an agreed amount referred to as the “deductible” which has to be paid by him before a claim against his insurance policy is submitted.

• For example, if the deductible is USD 100,000 and a claim for repairs is USD 300,000, the insurers will compensate the owner for USD 200,000.

Hull insurance market

• Hull and machinery cover is often arranged and placed in the insurance market by a professional insurance broker.

• It is quite common that the insurance cover is spread to many insurers in various countries.

• The insurers in the hull and machinery market are either companies or syndicates. The company or the syndicate will have an underwriter who signs the policy or the slip produced by the broker for his share of the cover.

• The biggest single market for marine insurance is Lloyd’s in London. Lloyd’s consists of a number of syndicates writing shares on insurance covers. The company market is dominated by Norway and Scandinavia, but also insurers in USA, France, Italy, Japan and Korea are very active in the marine market.

Main Types of Marine Hull Clauses

• ITC Hull 1/10/83• ITC Hull 1995• ITC Hulls Disbursement & Increased Value

( TL including excess liabilities)• ITC Hulls TL,GA, 3/4th Collision • ITC Hulls Port Risk 20-7 87• Institute Builder’s Risk Clauses 1-6-1988• Institute Yacht Clauses

Institute Time clauses 1995

1. Coverage

1.1 This insurance covers total loss (actual or constructive) of the subject-matter insured caused by

1.1.1 perils of the seas rivers lakes or other navigable waters

1.1.2 fire, explosion

1.1.3 violent theft by persons from outside the Vessel

1.1.4 jettison

1.1.5 piracy

1.1.6 contact with land conveyance, dock or habour equipment or installation

1.1.7 earthquake volcanic eruption or lightning

1.1.8 accidents in loading discharging or shifting cargo or fuel

1.2. This insurance covers total loss (actual or constructive) of the subject-matter insured caused by

1.2.1 bursting of boilers breakage of shafts or any latent defect in the machinery or hull

1.2.2 negligence of Master Officers Crew or Pilots

1.2.3 negligence of repairers or charterers provided such repairers or charterers are not an Assured hereunder

1.2.4 barratry of Master Officers or Crew

1.2.5 contact with aircraft, helicopters or similar objects, or objects falling therefrom provided that such •loss or damage has not resulted from want of due diligence by the Assured, Owners, Managers or Superintendents or any of their onshore management.

Collision and liabilities of different parties

TA TB TA TB

HA HB

• “This insurance is extended to indemnify the Assured against such proportion of liability under the contract of affreightment “Both to Blame Collision” Clause as is in respect of a loss recoverable hereunder. In the event of any claim by shipowners under the said Clause the Assured agree to notify the Underwriters who shall have the right, at their own cost and expense, to defend the Assured against such claim”.

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Liability of marine cargo insurers

– If cargo owner has not received compensation: • Loss/ damage in collide accident• proportion of liability under the contract of

affreightment “Both to Blame Collision” Clause

– If cargo owner has already received a portion of compensation:• The rest part of Loss/ damage in collide accident• proportion of liability under the contract of

affreightment “Both to Blame Collision” Clause

Liability of marine hull insurers:

• Insured vessel: loss/damage of ship itself, machinery and equipment

• Other vessel: The Underwriters agree to indemnify the Assured for three-fourths of any sum or sums paid by the Assured to any other person or persons by reason of the Assured becoming legally liable by way of damages for:– Loss of/damage to ship itself, machinery and equipment – Loss of/damage to cargo and other property on other vessel– delay to or loss of use of any such other vessel or property

thereon – general average of, salvage of, or salvage under contract of, any

such other vessel or property thereon,– where such payment by the Assured is in consequence of the

vessel hereby insured coming into collision with any other vessel.

That above amount of money is not exceeded three- fourth insurance amount of insured vessel.

• Provided always that this Clause shall in no case extend to any sum which the Assured shall pay for or in respect of

• removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever

• any real or personal property or thing whatsoever except other vessels or property on other vessels

• the cargo or other property on, or the engagements of, the insured vessel

• loss of life, personal injury or illness • pollution or contamination of any real or personal property or

thing whatsoever (except other vessels with which the insured vessel is in collision or property on such other vessels).

P&I Insurance

• Protection and Indemnity insurance, or “P&I” as it is usually called, is shipowner’s insurance cover for legal liabilities to third parties

• “Third parties” are any person, apart from the shipowner himself, who may have a legal or contractual claim against the ship

• P&I insurance is usually arranged by entering the ship in a mutual insurance association, usually referred to as a “club”. Shipowners are members of such clubs.

• Legal liability is decided in accordance with the laws of the country where an accident takes place

• The P&I insurance cover for contractual liability is agreed at the time the owner requests insurance cover from the club and is usually in accordance with the owner’s responsibility under crew contracts or special terms relating to the trading pattern of the vessel.

Meaning of term “P&I”

• Protection: the insurance also covers assistance when a ship is involved in an accident and the shipowner and his Master need help

• Indemnity: – P&I insurance is an indemnity type of insurance, the shipowner (or

member of the club) must demonstrate his loss before the club will pay out (or indemnify him) under the terms of the insurance policy

– the club never assumes the owner’s liability, therefore technically the owner (or member) is always responsible for payments

– the club takes over the business of handling claims and ensuring that payments are correctly made

History of P&I insurance• Protection & Indemnity Insurance (P&I Insurance) developed from

the old Hull Clubs in England in the eighteenth century• One century later, With the increase of liabilities arising from

shipping activities which were unfortunately excluded by the hull clubs, it was the result of an urgent need for shipowners to seek some new mechanism to protect their potential liabilities in their business activities

Þ P&I club came into the world in order to dealt with those things that excluded from Hull insurance: i.e. third party liabilities and the rest part of collision liabilities

Þ P&I Club has become one kind of mutual insurance with its own legal capacity

Þ modern P&I Insurance not only covers the part of collision liabilities which had once been excluded by the hull insurers but also includes liabilities relating to cargo claims, liabilities relating to personal injury, oil pollution liabilities, as well as some costs and expenses arising from the relevant casualties

Mutuality principle of P&I insurance

• In respect of the organization of insurance

– Members of P&I Clubs have a dual role as both assureds and insurers

– P&I Insurance is not profit-making, all the money raised is from the members and will be used for the members as well

• It is the members themselves to share the losses– The operational principle of P&I Clubs is to balance all the

calls received from the members and the liabilities the members incur in each policy year

– P&I Club would not operate on borrowing, the payment by the members is very important to P&I Clubs

– the clubs also take strict measures to the member: i.e.the club will refuse to provide guarantee, or decline the settlement of claim, even more cancel the insurance contracts in the case that the member fails to pay his member fee in time

• The fund of the club – The club fund plays a very important role in

the operation of P&I Insurance, and it is usually collected by levying calls from the members

– The “calls” are used in P&I Insurance instead of the “premiums”- an agreement that each member should bear his aliquot share of the losses of the year covered by the policy

Evaluating the risk

• / The tonnage of the ship in GT (premiums are expressed in USD per GT)

• / Year of build• / Number of crew members• / Type of vessel • (tanker, dry bulk, reefer, heavy-lift, container, passenger, ro-ro etc)• / Type of cargoes to be carried (if a tanker is clean or dirty)• / Areas of trading• / Liner trade or tramp• / Classification society• / Management expertise• / Compliance with national and international legal requirements• / How many ships in the company• / Previous P&I history

Statistical loss records

• A P&I club will keep records for each individual ship entered with the club.

• These records are normally based on the last five insurance years and provide an accurate record of all payments made by the member in the form of premiums

• all monies collected by the member in the form of compensation paid to him by the club and all other costs.

• Over a fi ve-year period records show:– / The amount of premiums paid in by the member– / The amount of money paid out for market reinsurance– / The amount of money paid back to the owner as compensation– / Other costs and the amount estimated for claims not settled

Coverage of P&I insurance

• Liability in collision accident: insures for the rest part of collision liabilities that excluded from Hull insurance


LIABILITY FOR DAMAGE TO CARGO


• DEATH AND PERSONAL INJURY– Any person injured on your ship – crew, stevedores,

pilots or passengers, for example may allege that your ship was unsafe. The injured person could decide to sue the ship and her owners and demand huge sums of money as compensation

– It is necessary for a Master and his senior officers to have a good idea of what his P&I club’s rules state on the insurance cover for personal injury, illness and loss of life.


• REPATRIATION OF SICK OR INJURED CREW AND HOSPITAL EXPENSES – P&I insurance also covers a shipowner’s

liability to pay for the costs of repatriating crew members who become sick or are injured on board. The insurance also covers the crew’s hospital bills and costs of sending replacement personnel to the ship if necessary

• LOSS OF CREW MEMBERS’ PERSONAL EFFECTS – P&I insurance also covers the owner’s liability for loss

of crew belongings in cases of shipwreck or fi re on board.

– The cover only applies to items which are deemed to be reasonable for any crew member to have with him on board.

– A crew member travelling with unusually expensive items, such as laptop computers, gold watches etc should make sure that he has such items separately insured.


• STOWAWAYS, REFUGEES AND PERSONS SAVED AT SEA


• POLLUTION– Oil from your ship which pollutes a harbour,

dock or waterway will have to be cleaned up. Clean-up costs will be charged to the ship and fines may be imposed on the ship, the Master, and the Chief Engineer. Your ship could be arrested, and the owners required to establish some form of security acceptable to the port authorities.


• WRECK REMOVAL AND OBSTRUCTION– The standard insurance shall cover liability

and costs arising out of the raising, removal, destruction or marking of the wreck of the entered vessel, her equipment, bunkers or cargo lost as a result of a casualty, in so far as the raising and other operations are compulsory by law, or necessary to avoid or remove a hazard or obstruction to navigation, or the costs are legally recoverable from the member


• GENERAL AVERAGE CONTRIBUTIONS – CARGO– The standard insurance shall cover the

member’s loss in respect of general average expenditure and special charges which should be paid by the cargo interest or some other party to the maritime adventure but which are not legally recoverable solely by reason of a breach of the contract of carriage


• FINES • Since fines are imposed for breaches of criminal law, they are

generally not covered by insurance. However, P&I clubs do indemnify members for fines imposed in a few very specific cases. Rule

• P&I insurance normally provides cover for fines imposed for • breach of immigration laws

• inaccuracies in cargo documentation

• accidental pollution

• smuggling or infringement of customs laws

• The club only provides cover for fines imposed on the member, not

the crew. However, the club does have a discretion to cover members

if they pay a fine imposed on the master or crew because they are legally obliged to do so, or because the club accepts that it was

reasonable to do so

CHAPTER 4:

INTRODUCTION TO RISK MANAGEMENT

Meaning of risk management

• Risk management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures

• Risk – loss exposure: is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs

Objective of risk management

• Pre-loss objectives: – Economy: the firm should prepare for potential losses

in the most economical way (analysis of the cost of safety programs, insurance premium paid, the cost associated with the different techniques for handling losses)

– Reduction of anxiety: certain loss exposure can cause greater worry and fear for the risk manager and key executives

– Meeting legal obligations: i.e. government regulations may require a firm to install safety devices to protect worker from harm, to dispose of hazardous waste materials properly

Objective of risk management

• Post- loss objectives:– Survival of the firm: after loss occurs, the firm can

resume at least partial operations within some reasonable time period

– continue operating: the ability to continue operating after a loss is very important, otherwise, business will be lost to competitors

– Stability of earnings: earning per share can be maintained if the firm continue to operate

– Continued growth of the firm– Minimize the effects that a loss will have on other

persons and on society

Steps in the risk management process

• Identify loss exposures• Analyze the loss exposures• Select the appropriate technique for

treating loss exposure– Risk control: Avoidance, Loss prevention,

Loss reduction– Risk financing: Retention, Noninsurance

transfers, Commercial insurance• Implement and monitor the risk

management program

Identify loss exposures

• This step is to identify all major and minor loss exposures, it involves a painstaking analysis of all potential losses:– Property loss exposures– Liability loss exposures– Business income loss exposures– Human resources loss exposures– Crime loss exposures– Employee benefits loss exposures– Foreign loss exposures– Market reputation and public image of the company– Failure to comply with government laws and regulations

Identify loss exposures

• A risk manager has several sources of information that he can use to identify the preceding loss exposures:– Risk analysis questionnaires: risk manager has to answer

numerous question that identify major and minor loss exposures

– Physical inspection: a physical inspection of company plants and operations can identify major loss exposures

– Flowcharts: show the flow of production and delivery that can reveal production bottlenecks where a loss can have severe financial consequences for the firm

– Financial statement: identify major assets that must be protected, loss of income exposures, and key customers and suppliers

– Historical loss data: historical and departmental loss data over time can be invaluable in identifying major loss exposures

Analyze the loss exposures

• This step involves an estimation of the frequency and severity of loss. Loss frequency refers to the probable number of losses that may occur during some given time period. Loss severity refers to the probable size of the losses that may occur

Þ various loss exposures can be ranked according to their relative importance

Þ The risk manager can select the most appropriate technique, or combination techniques, for handling each exposure

- Maximum possible loss is the worst loss that could happen to the firm during its lifetime

- Maximum probable loss is the worst loss that is likely to happen

Select the appropriate technique for treating loss exposure

• Risk control: • Avoidance: a certain loss exposure is never

acquired, or an existing loss exposure is abandoned => the firm may not be able to avoid all losses, it may not feasible or practical to avoid the exposure

• Loss prevention: refers to measures that reduce the frequency of a particular loss

• Loss reduction: refers to measures that reduce the severity of a loss after is occurs


• Risk financing: – Retention: the firm retains part or all of the

losses that can result from a given loss, provided that:• No other method of treatment is available• The worst possible loss is not serious• Loss are highly predictable


• Non-insurance transfer: is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party.

• Insurance: – Selection of insurance coverage– Selection of insurer– Negotiation of terms– Dissemination of information concerning insurance

coverage– Periodic review of the program

Benefits of risk management

• The pre-loss and post- loss risk management objectives are more easily attainable

• The cost of risk is reduced => increase company’s profit (a risk management tool that measures certain costs- includes premiums paid, retained losses, loss control expenditures, outside risk management services, financial guarantees, internal administration costs, and taxes, fees, and certain other expenses

• A firm may be able to enact an enterprise risk management program that treat both pure and speculative lloss exposure

Principles of Insurance - Pham Ha

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