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CERTIFICATE IN MARINE CLAIMS

2009

MODULE 2

Marine Insurance

AUTHOR

Patrick Donner

Professor, Associate Academic Dean

World Maritime University

Sweden

Lloyd's and the Lloyd's crest are the registered trademarks of the society incorporated by the Lloyd's Act 1871 by the name of ‘Lloyd's’





Certificate in Marine Claims 2009 (LW1072) 2-1

Page No.

GENERAL INTRODUCTION 2

PART ONE: DISTINCT FUNCTIONS AND INTERACTION OF DIFFERENT

TYPES OF INSURANCE 4

1. TYPES OF INSURANCE 4

1.1 Hull and Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61.2 Protection and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

1.3 Freight, Demurrage and Defence . . . . . . . . . . . . . . . . . . . . . . . . . . .18

1.4 Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

1.5 War and Strikes Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

1.6 Other Forms of Cover for General and Special Purposes . . . . . . . .36

2. LIMITS TO COVER AND EXCLUSIONS 44

2.1 Limitations to Cover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

2.2 Factors Excluding Cover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .452.3 Specific Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

PART TWO: ROLES AND RESPONSIBILITIES 50

3. ROLES AND RESPONSIBILITES IN MARINE INSURANCE 50

3.1 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

3.2 Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

3.3 Insurers – Companies and Syndicates . . . . . . . . . . . . . . . . . . . . . . .53

3.4 P&I Clubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

3.5 Average Adjusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

BIOGRAPHICAL DETAILS 56

BIBLIOGRAPHY 57

CONTENTS

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2-2 Certificate in Marine Claims 2009 (LW1072)

2-001

The purpose of this module ‘Marine Insurance’ is to provide you with a generalintroduction to marine insurance, the most common types of marine insurancecover as well as the roles and responsibilities of the main parties involved inmarine insurance and the insurance aspects of marine claims.Virtually any risk,including marine risks, can be insured against, but insurance does not eliminatethe risk of loss or damage as such. All insurance can do is protect againstfinancial loss by providing compensation or indemnification to the assured inorder to put him in the same financial position that he was in before the lossoccurred. That still leaves the actual loss or damage to be dealt with by theinterested parties and their experts to determine who is responsible and for howmuch – the various types of claims, the surveyors and experts and the actualhandling of the claim are the topics of subsequent modules and will only be

hinted at here. One category of claims that will not be dealt with in detail is theinsurance claims which follow from any marine accident or loss. In this context itis sufficient to understand that the claim against the underwriter under theinsurance policy and the handling of that claim are directly linked with anddependent on the handling and settlement of the primary loss or damage. It isalso useful to know that the insurers are often involved in the original claim,providing assistance and expertise. Moreover, the insurers can, and quite oftendo, become directly involved parties in the claim, since the insurer becomesentitled to all rights and remedies of the assured to the extent that the insurerhas already paid compensation to the assured.

2-002 A complete and comprehensive coverage of marine insurance, the market andits players would require hundreds of pages of text, which is obviously neitherpossible nor the intention with this module. Only a very general introduction tothe field of marine insurance will be provided, but it is designed to cover theessential types of marine insurance available in the market for ships, shipoperators and cargo interests. At the same time, it builds on the assumption thatstudents are already familiar with the general legal and commercial principlesrelating to marine insurance. As such the text will serve as a reminder andbrush-up of knowledge acquired earlier.

GENERAL INTRODUCTION



Module 2 General Introduction


LEARNING OUTCOMES

At the completion of this module the students will be able to:

Explain fundamental principles of marine insurance;

Differentiate between various types of insurance cover;

Demonstrate understanding of limits of cover and commonexclusions from cover; and

Describe the roles and responsibilities of the main actorsinvolved in marine insurance.




2-003 In any maritime adventure there are many different interests involved, bothphysical property as well as earnings. The main interests are the ship itself, thecargo and the freight payable for the carriage of that cargo or the hire payable forthe use of the vessel for the required period of time.There are also various partieswho have a vested interest in them. These include the owners of the vessel andcargo, respectively, but also, for example, banks which have financed theiracquisition and, obviously, the insurers. At the same time these interests are

subjected to a number of different risks. Section 3(2) of the Marine Insurance Act1906 (MIA 1906) defines both ‘marine adventure’ and ‘marine perils’ as follows:

(2) In particular, there is a marine adventure where –

(a) Any ship, goods or other moveables are exposed to maritime perils.Such property is in this Act referred to as ‘insurable property’;

(b) The earning or acquisition of any freight, passage money,commission, profit, or other pecuniary benefit, or the security forany advances, loan, or disbursements, is endangered by the

exposure of the insurable property to maritime perils; and

(c) Any liability to a third party may be incurred by the owner of, orother person interested in or responsible for, insurable property,by reason of maritime perils.

‘Maritime perils’ means the perils consequent on, or incidental to, the navigationof the sea, that is to say, perils of the sea, fire, war perils, pirates, rovers, thieves,captures, seizures, restraints, and detainments of princes and peoples, jettisons,barratry, and any other perils, either of the like kind or which may be designatedby the policy.

2-004 Since the interests and the risks are so varied, they are normally covered byseveral separate insurance policies, each with its specific scope of cover – andspecific exclusions. This part will identify the most important categories of marineinsurance policies and their respective scope of cover and briefly explain theconcept of general average. The English MIA 1906 is used as the primary sourceof applicable legislation and where English law is applicable, this statute, as appliedto the insurance contract (the insurance policy) between the parties, will constitutethe norms that govern the legal relationship between the parties. The main focuswill be on the various standard insurance clauses in use in the English insurancemarket.1 English law and the insurance market in England are particularlyimportant, because the London market holds a very strong position in marine

PART ONE:DISTINCT FUNCTIONS AND INTERACTION OF

DIFFERENT TYPES OF INSURANCE

1. TYPES OF INSURANCE

1 For example, the Institute Time Clauses – Hulls (ITCH), Institute Voyage Clauses – Hulls (IVCH), International Hull Clauses(IHC), Institute Cargo Clauses A, B and C (ICC), Institute Time Clauses – Freight (ITCF), Institute VoyageClauses – Freight (IVCF) and Institute War and Strikes Clauses (Hulls), Institute War Clauses (Cargo), and so on.



Module 2 Types of Insurance


insurance covering about one quarter of the Hull and Machinery (H&M) premiumsand two-thirds of the Protection and Indemnity (P&I) market. However, whenappropriate, reference and comparison will be made to other insurance markets.

2-005 The definition of marine adventure above is quite comprehensive and includes, in

addition to the property interests, also the very tangible risk that vessel operationscause damage to cargo or crew onboard the ship or to property outside the vessel,thereby incurring liability. Most, but not all, third party liabilities are normallycovered by the P&I insurance, which is predominantly provided by shipowners’mutual insurance associations.The scope of P&I insurance will also be presented.Similarly, insurance for other important property interests, namely cargo, and forfreight and earnings will be introduced.

2-006 Most losses can be covered by insurance, at least in principle, provided they arecaused by fortuitous events and as long as there is an insurer who is willing tocover the risk, but that does not mean that all risks are actually covered. Most

marine insurance policies are standard form contracts based on standardisedinsurance conditions and the prevailing practice in the London market is toinsure ships, and other maritime interests, for separate and specified risks byenumerating the risks in more or less detail. The risks are referred to as ‘namedperils’ and if a loss has been caused by a peril, which has not been named, theloss is not covered by the insurance. In addition to defining covered risks,practically all insurance policies also define some perils, which are specificallyexcluded from cover. In marine insurance some risks are almost always listed asexclusions from cover: war and strikes risks, loss or damage caused byterrorists, persons acting from political motives and by malicious acts, whichinclude use of weapons and detonation of explosives, and loss or damageresulting from radioactive contamination, chemical, biological, bio-chemical andelectromagnetic weapons.2 On the other hand, cover for war and strikes risks isoffered, and in most cases bought, under a separate War and Strikes Riskspolicy. It is, therefore, important for the assured to carefully study the policywording to ensure that he has got cover against the risks that he wishes to haveprotection against. In fact, reading the policy is probably not enough as boththeory and case law need to be studied to understand the scope of the cover,which is defined in terms that have evolved over centuries.

2-007 Some insurance policies are made on an ‘all risks’ basis, for example, somecargo insurance and insurance for shipbuilders’ risks. In many other insurancemarkets, for example, in Scandinavia and the European Continent,3 ships are

commonly covered for ‘all risks’, but the difference is not as great as it may seembecause policies covering ‘all risks’ are always subject to specific exclusions.The list of exclusions is longer and includes the same specific exclusions for warrisks and so on mentioned above plus additional excluded risks. In comparison,the actual scope of cover can be quite similar. On the one hand you have coverfor all risks except a list of excluded risks or, on the other hand, you have arelatively comprehensive list of perils, expressed in rather general terms. At theend of the day the biggest difference probably lies in the burden of proof. If coveris based on named perils, the assured has to prove that the claimed loss wascaused by an insured peril, but if the cover was for all risks with exceptions, the

2 See, for example, Clauses 29–31, International Hull Clauses (01/11/03).3 See, for example, the Norwegian Insurance Plan 1996 (version 2007), Sections 2–8, Finnish Hull Insurance Conditions

(FKV 2001), Clause 6, General Swedish Hull Insurance Conditions of 1 January 2000 and the GermanDTV-Kaskoklauseln 1978/1994 (Fassung 2004), all of which provide cover for ‘all risks’ with specified exceptions.



insurer is obliged to cover the loss unless he proves that the cause of the losswas excluded from cover.

1.1 HULL AND MACHINERY

2-008 The first type of marine insurance to be looked at is hull insurance, which is oftenreferred to as H&M insurance. Insurance policies are usually complementaryand mutually exclusive, so that if a risk is excluded by one type of insurance, itcan be covered by another and if it is covered by one, it is correspondinglyexcluded by others. An explanation of the types of risks that are covered underhull policies will, therefore, inevitably touch upon types of risks, perils andevents, which are equally relevant under other types of insurance cover as wellas some that are commonly excluded.

1.1.1 Scope of Cover – Risks Insured

2-009 Hull insurance is, first and foremost, property insurance, which the shipowner takesout to protect the value of his most important asset, the ship. In addition to the shipbeing exposed to physical risks the shipowner may become liable to third partiesas a result of being responsible for the operation of the vessel and the liability of ashipowner, whose vessel causes a collision, is often covered by the H&M policy.Furthermore, when a loss has occurred, the shipowner is under an obligation totake steps to mitigate the loss. Reducing the extent of the loss is obviously in theinterest of the insurer as well and, consequently, costs and expenses incurred inaverting or minimising loss are normally also recoverable under the H&M policy.The cover for liabilities and aversion costs will be explained later in this section.

2-010 Clause 2 of the International Hull Clauses (01/11/03) lists the perils, which theship is insured against.4

2.1 This insurance covers loss of or damage to the subject-matter insuredcaused by

2.1.1 perils of the seas, rivers, lakes or other navigable waters

2.1.2 fire, explosion

2.1.3 violent theft by persons from outside the vessel

2.1.4 jettison

2.1.5 piracy

2.1.6 contact with land conveyance, dock or harbour equipment orinstallation

2.1.7 earthquake, volcanic eruption or lightning

2.1.8 accidents in loading, discharging or shifting cargo, fuel, stores

or parts

Types of Insurance Module 2


4 The perils covered by the ITCH, Clause 6 and IVCH, Clause 4, are essentially the same, although with some differencesin wording.



2.1.9 contact with satellites, aircraft, helicopters or similar objects,or objects falling therefrom.

2.2 This insurance covers loss of or damage to the subject-matter insuredcaused by

2.2.1 bursting of boilers or breakage of shafts but does not coverany of the costs of repairing or replacing the boiler whichbursts or the shaft which breaks

2.2.2 any latent defect in the machinery or hull but does not coverany of the costs of correcting the latent defect

2.2.3 negligence of Master, Officers, Crew or Pilots

2.2.4 negligence of repairers or charterers provided such repairers

or charterers are not an Assured under this insurance

2.2.5 barratry of Master, Officers or Crew provided that such loss ordamage has not resulted from want of due diligence by theAssured, Owners or Managers.

2.3 Where there is a claim recoverable under Clause 2.2.1, this insuranceshall also cover one half of the costs common to the repair of the burstboiler or the broken shaft and to the repair of the loss or damagecaused thereby.

2.4 Where there is a claim recoverable under Clause 2.2.2, this insuranceshall also cover one half of the costs common to the correction of thelatent defect and to the repair of the loss or damage caused thereby.

2.5 Master, Officers, Crew or Pilots shall not be considered Owners withinthe meaning of Clause 2.2 should they hold shares in the vessel.

2-011 The clause essentially covers two broad categories of risks. Clause 2.1 coverstraditional marine perils, in a broad sense, while Clause 2.2 is sometimes calledthe Additional Perils Clause,5 but more often the Inchmaree clause, named aftera vessel, which suffered an explosion in a boiler.6

1.1.1.1 Perils of the Sea

2-012 The most traditional marine risk is ‘perils of the sea’, but any accident that takesplace when the vessel is at sea is not considered an insured peril of the sea.

2-013 Lord Herschel explained the difference succinctly in The Xantho7 with thefollowing words:

Again, it is well settled that it is not every loss or damage of which the sea isthe immediate cause that is covered by these words. They do not protect, forexample, against that natural and inevitable action of the winds and waves



5 See American Institute Hull Clauses (June 2, 1977), lines 75–86.6 Thames and Mersey Marine Insurance Co v Hamilton Fraser and Co (The Inchmaree) (1887) 12 App Cas 484.7 The Xantho (1887) 12 App Cas 503 at 509.



which result in what may be described as wear and tear.There must be somecasualty, something which could not be foreseen as one of the necessaryincidents of the adventure. The purpose of the policy is to secure an indemnityagainst accidents which may happen, not against events which must happen.

2-014 Lord Herschel’s words were subsequently mirrored in Rule 7 of the Rules forConstruction of Policy, which form the First Schedule to the Marine InsuranceAct 1906, as follows:

The term “perils of the sea” refers only to fortuitous accidents or casualtiesof the seas. It does not include the ordinary action of the winds and waves.8

2-015 A fortuitous or unexpected accident will be covered by the hull insurance even if itcould have been foreseeable and cover is not limited to damage caused by violentor unfavourable sea conditions. If that were the case, striking an underwater rockor an iceberg in calm weather would be excluded from cover, but they are not.9 In

the previously mentioned case The Xantho, the Court stated that:

in the case of a marine policy the causa proxima alone is considered. If thatwhich immediately caused the loss was a peril of the sea, it matters not how itwas induced, even if it were by the negligence of those navigating the vessel.10

2-016 It is not possible to give a comprehensive definition of the concept of ‘perils of thesea’. One could, therefore, try to construe practically any accident occurring at seaas being caused by a peril of the sea, but since it is an old concept, there is a lot oflegal precedent to draw on and most important types of maritime occurrences haveprobably been tried over the centuries. Rough weather, grounding, stranding,collision and incursion of seawater are examples of marine casualties, which have

been seen as perils of the sea. If the vessel was not seaworthy at the beginning ofthe voyage and a loss is caused by that unseaworthiness alone, then the loss is notcaused by perils of the sea, but if the owner was not privy to the unseaworthiness,he may still claim against the insurance under a time policy. If, on the other hand,the owner can prove that the vessel was seaworthy when the voyage began and thevessel later sinks in unexplained circumstances, even in good weather, the sinkingwill be presumed to have been caused by a peril of the sea.11

1.1.1.2 Fire, Explosion

2-017 If a ship is damaged by a fire or an explosion occurring on board while the ship

is at sea, the damage will not be considered as caused by a peril of the sea. Fireand explosion are separately named as insured perils and if the assured canprove that the loss was caused by a fire or explosion, hull insurance under thestandard clauses will cover the loss. The assured does not need to prove thatthe fire was fortuitous and he has, at least prima facie, a valid claim against theinsurance even if the fire resulted from negligence, barratry, arson or adeliberate but justifiable act.12 However, if the insurer proves that the fire orexplosion was caused by wilful misconduct of the assured, the insurer is notliable according to Section 55(2)(a) of the MIA 1906.



8

Marine Insurance Act 1906, Section 30 and Schedule 1, Rule 7.9 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 270.10 The Xantho (1887) 12 App Cas 503 at 510.11 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, pp. 271–274.12 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 276 and the cases referred to there.



2-018 If there is an imminent danger of a fire starting, but it is prevented by some deliberateact, which causes loss or damage to the ship, it could be argued that the loss wascaused by the peril of fire. On the other hand, the question might not arise, as it islikely that the ship would declare general average and the claim would be dealt withas a case of general average. General average will be introduced later in the text.

1.1.1.3 Other Marine Perils

2-019 In this short overview of hull insurance it is not possible to cover everysub-clause in detail. The other marine perils enumerated in Clause 2.1 of theIHC13 are relatively self-explanatory. It was mentioned before that damage to aship caused by collision is a peril of the sea. Strictly speaking, a collision has inthe maritime context been given a limited definition of meaning a collisionbetween two navigable objects, which is why damage arising from physicalcontact with other objects, such as docks, harbour equipment or installations,land conveyances and aircraft are specifically named as insured perils.

2-020 Piracy is currently treated as a marine risk in the English insurance market. Atother times it has been considered a war risk and may be placed under war risksagain in the future, like it is in some other markets.14 For example, theNorwegian Marine Insurance Plan of 1996 (2007 version) places piracy risksunder war risks.15 Loss or damage caused by violent theft by persons fromoutside the vessel is also considered a maritime peril, and one clear advantageof treating piracy as a marine risk is that making a clear difference betweenthose two risks could be very difficult, almost a question of semantics.

2-021 Although losses caused by forces of nature, often called Acts of God, are in

principle not considered insured perils, unless they can be categorised as perilsof the sea, standard marine insurance clauses do provide cover for lossescaused by earthquakes, volcanic eruptions and lightning.

1.1.1.4 Inchmaree Risks

2-022 The perils listed in the second part of the perils clause are often called Inchmareerisks, although only some of them were at issue in the particular case from which itdraws its name.The Inchmaree was a steamer, which suffered damage to a donkey-pump due to negligent operation of a valve by a member of the crew. The ownersclaimed under the insurance policy, which provided cover against losses caused by,

among other things, perils of the sea and ‘all other like perils’, but it was held that thedamage was not covered, since it was caused by negligence of the crew, which wasnot considered to be a peril of the sea or ‘other like peril’.16 As a result, specificwording was introduced in the standard clauses to provide cover for such losses.The current wording is quite specific in mentioning ‘bursting of boilers or breakageof shafts’, but does not include any words like ‘or similar occurrence’, or other wordsto that effect. Consequently, the clause will be given a narrow interpretation and ifthe damage was not literally caused by a bursting boiler or breaking shaft, it will notbe covered under these heads of claim, but might still be covered, for example,under the provision ‘… any latent defect in the machinery or hull . . .’.17



13 See also ITCH, Clause 6 and IVCH, Clause 4.14 Donner, P, ‘Marine Insurance for Piracy or Terrorism – Drawing a Line in Water’, Strategic Insights, No.10, March 2008, p. 20.15 NIP, Section 2–9, paragraph 1(d).16 Thames and Mersey Marine Insurance Co v Hamilton Fraser and Co (The Inchmaree) (1887) 12 App Cas 484.17 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 290.



2-023 It is worth pointing out that the insurance policy only covers the damage to theship caused by the bursting of the boiler or breakage of a shaft or latent defect,but does not cover the cost of repairing or replacing the boiler, shaft or thedefective part itself.The International Hull Clauses (1/11/03) explicitly state this,but they also now state that the insurance covers half of the common costs forrepairing the boiler, shaft or latent defect and the damage caused by them.18

2-024 The distinction between fortuitous accidents and wear and tear described under‘perils of the sea’ above appears obvious, but it is particularly important in thecontext of Inchmaree risks. When an accident at sea has caused damage and theship and its equipment need to be repaired, almost inevitably there are parts whichthe owner feels need to or ought to be repaired or replaced at the same timebecause they are components or parts of a whole system. However, some of thecomponents may be old but may not have suffered damage in the event, in whichcase the actual need for replacement is wear and tear, which is not an insured risk,but the owner would like to include it in his claim, since the question of replacement

would not have arisen in the first place without the accident. One aspect of thestandard hull insurance conditions, which makes this issue particularly significantand possibly tempting is that claims shall be paid ‘without deduction new for old’.19

2-025 As a matter of principle, insurance will only cover losses, which are proximatelycaused by an insured peril even if that particular insured peril was brought aboutby negligence of someone other than the insured. Section 55(2)(a) of the MIA1906 states:

The insurer is not liable for any loss attributable to the wilful misconduct of theassured, but, unless the policy otherwise provides, he is liable for any lossproximately caused by a peril insured against, even though the loss would not

have happened but for the misconduct or negligence of the master or crew.

2-026 The Inchmaree risks clause specifically covers losses caused by ‘negligence ofMaster, Officers, Crew or Pilots’ as well as ‘negligence of repairers orcharterers’, but what distinguishes the Inchmaree clause from the ordinarymarine perils clause most, is that cover is subject to a proviso ‘that such loss ordamage has not resulted from want of due diligence by the Assured, Owners orManagers’. Different versions of the standard hull insurance clauses show somedifferences in the exact wording of the Inchmaree clause. For example, the ITCH(01/11/95) version listed ‘Assured, Owners, Managers or Superintendents orany of their onshore management’ in this clause. ITCH (01/11/95) also listed the

peril ‘contact with aircraft … or objects falling therefrom’20

as an Inchmaree riskrather than as a marine peril. From a practical and claims perspective it cannotmake much difference, as it is difficult to see how a shipowner or manager canexercise due diligence, or fail to do so, to avoid his ship colliding with an aircraft.Perhaps more importantly, the ITCH (01/10/83), which are still used morecommonly than the 1995 version, listed ‘accidents in loading discharging orshifting cargo or fuel’ as an Inchmaree risk. However, since owners andmanagers are seldom even remotely involved in cargo handling operations,whether cover is subject to requirement of due diligence of the assured probablymakes very little difference in practice.



18

It is, of course, possible to buy separate cover for the cost of repairing the boiler, shaft or latent defect. IHC (01/11/03)provide it as an option in the ‘Additional Perils’ Clause 41.

19 ITCH, Clause 14; IVCH, Clause 12 and IHC, Clause 16.20 ITCH (01/11/95), Clause 6.2.5.



1.1.1.5 Losses Covered – Partial and Total

2-027 It is important to make a clear distinction between the types of risks insured against,that is, the perils which may cause a loss, and the type of loss that the insured objectmay suffer. By way of illustration, running aground is a peril of the sea, an insured

risk, while the damage to the hull caused by the grounding is the loss.

2-028 The MIA 1906 categorises losses as being either total or partial and defines anyloss, which is not a total, as a partial loss,21 and as long as a loss or damage iscaused by one of the insured perils, both total losses and partial losses will becovered by the H&M insurance.

2-029 A total loss can be categorised as either an actual total loss or a constructivetotal loss. According to the MIA 1906, Section 57, an actual total loss occurswhen a ship is:

Destroyed (eg it sinks in deep water or is completely burnt out),

So damaged as to cease to be a thing of the kind insured (loss of specie,eg it is a wreck rather than a ship), or

The insured is irretrievably deprived thereof (eg the ship is seized by a foreigngovernment or sold by order of a court with jurisdiction over the matter).

2-030 A constructive total loss is also defined by the MIA (Section 60) and occurs whenthe owner reasonably abandons his ship when an actual total loss seemsunavoidable. In particular, this is the case when the owner is deprived ofpossession of the ship and it is unlikely that he can recover it (note the difference

in nuance compared to an actual total loss where being deprived of the vessel mustbe a fact) or that the cost of recovering it would exceed its value. If the ship hassuffered severe damage it will be considered a constructive total loss if the cost ofrepairs would exceed the value after repairs. It is always difficult to put an exactmarket value on a ship and even more difficult to estimate what the future value willbe after repairs so, in order to avoid uncertainty and disputes, the standard hullclauses contain an agreement on the repaired value. In the London market thetraditional definition in the Institute Clauses (both Time and Voyage) has been thatthe insured value shall be considered as the repaired value.22 The InternationalHull Clauses, in Clause 21, have introduced a new principle according to which‘80% of the insured value of the vessel shall be taken as the repaired value’, whichcorresponds with the definition in the Norwegian Marine Insurance Plan (version2007), Section 11–3, for determining when a loss is a constructive total loss.

2-031 A notice of abandonment is a condition precedent for a claim for a constructivetotal loss, unless the insurer waives the requirement of giving notice or if theinsurer could have no benefit of a notice, which would be the case, for example,when the vessel has run aground on a rocky shore in bad weather and is rapidlybeing broken up by the waves. By giving a notice of abandonment the shipownerunconditionally surrenders the property to the insurer, which is only fair if he is toreceive full compensation for the loss.On the other hand, if the insurer accepts thenotice of abandonment, the acceptance is irrevocable and the insurer has to payfor a total loss even if it later turns out that the loss was not caused by an insured



21 MIA 1906, Sec. 56(1).22 ITCH Clause 19 and IVCH Clause 17.



peril. Furthermore, the insurer acquires all rights to what may remain of the ship,but not only the rights, but also all liabilities, which, for example, may entail a wreckremoval obligation. For these reasons, the insurers, more often than not, refuse toaccept the notice of abandonment, at least at first.

2-032 Even if the estimated cost of repairs would not quite amount to the insured value,there are situations where the insurer and assured may agree to treat the vessel asa total loss. Especially in depressed market conditions, where the market value of aship has fallen well below the insured value. For example, if the insured value wereUSD 10 million, the estimated cost of repairs USD 7 million, but the reasonablemarket value only USD 5 million the vessel could not be considered a constructivetotal loss.On the other hand, it would not make commercial sense to repair the shipwhen a comparable replacement could be bought for less. In such a situation theparties may agree on a compromise.The insurer may pay an indemnification of say(for the sake of simplicity), USD 6 million, whereby both parties benefit.This is calleda Compromised Total Loss, a term which does not appear in and is not regulated by

the MIA 1906 or standard insurance clauses – it is a pure commercial settlementbetween parties to a contract.

2-033 In marine insurance a partial loss is called ‘average’, which typically meansphysical damage to the vessel and is also called Particular Average. In principle,adjustment of a partial loss is relatively simple – the assured will be indemnifiedfor the reasonable costs of repair or a reasonable depreciation as a result ofunrepaired damage (but not exceeding the estimated cost of repair), less theagreed deductible.23 Even if the vessel has suffered extensive damage, whichmight render it a constructive total loss, the assured can choose not to give anotice of abandonment. In such a situation the damage will be treated as apartial loss and the owner retains all rights in the ship and he can have the shiprepaired, but his indemnity will be limited to the insured value of the ship, whichcould turn out be less than the cost of repairs. Why would a shipowner choosethis alternative? In the recent past freight levels were very high in many marketsegments. At the same time, shipyards were fully booked so that newbuildingprices were high and it would take several years to get a newbuilding while inmany cases, second-hand prices for reasonably modern tonnage exceedednewbuilding prices. In such a situation a shipowner may very well find itadvantageous to repair even extensive damage.

1.1.1.6 Aversion and Minimisation of Loss

2-034 A second category of partial loss is the incurring of extraordinary expenses toprevent further loss. Since a marine insurance contract is fundamentally acontract of indemnity, it is in the interest of the insurer as well as the assured thatloss is, as far as possible minimised, if it cannot be averted completely. Theinsured shipowner is always under an obligation to take ‘ordinary’ measures toavoid damage or loss and costs and expenses incurred for such measures willnot be indemnified by the insurers as they are considered normal operatingexpenses. But if the owner incurs extraordinary costs to avert or minimise a loss,



23 MIA 1906, Section 69.



for which his insurer is or would be liable, the insurance policy will cover suchexpenses under the ‘sue and labour’ clause.24 General average losses andsalvage charges are also examples of such extraordinary expenses.

2-035 The standard clauses for H&M insurance will cover the ship’s portion of salvage,

salvage charges or general average, provided the loss was incurred to avoid aperil insured against. Salvage and general average are actions taken to avoid agreater or total loss and, therefore, as much in the insurers’ as in the shipowner’sinterest. Consequently, it is logical that the insurance covers these partial lossesbut only if they were ‘incurred to avoid or in connection with the avoidance of aperil insured against’.25

2-036 In maritime law, the act of saving maritime property from peril is known assalvage, which term also refers to the reward payable for successfully carryingout such an act. The person who carries out a salvage operation is known as asalvor. Generally speaking, in order for a claim for a salvage reward to succeed,

three elements must be present:

voluntariness;

danger; and

success.26

2-037 Section 65 of the MIA 1906 defines salvage charges as ‘charges recoverableunder maritime law by a salvor independent of contract’. In practice, most salvageoperations are based on a salvage contract, but even if such services are notconsidered ‘pure’ salvage, they are covered by standard insurance policies.

2-038 General average is a maritime principle about sharing loss among the partiesinterested in the voyage on which a loss occurs.27 The concept has developedfrom an ancient system of dividing and sharing losses and expenditures amongthe parties who held an interest in the maritime adventure.28 Section 66(2) of theMIA 1906 defines the concept of general average in the following words:

There is a general average act where any extraordinary sacrifice orexpenditure is voluntarily and reasonably made or incurred in time of peril forthe purpose of preserving the property imperilled in the common adventure.

2-039 General average acts can take many forms and will be covered in subsequentmodules. Considering that the general average losses may involve, forexample, expenses incurred in port of refuge, including costs for unloading,storing and re-loading cargo and that the cargo interests on a large, fully ladencontainer vessel can involve several hundred, if not several thousand cargoowners, and all the various losses and contributory values need to beassessed, it is easy to imagine just how complicated the general averageadjustment can be.This is the task of specialist average adjusters. At this point



24 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, pp. 373–374. See also ITCH 83, Clause 13;ITCH 95, Clause 11 and IHC 03, Clause 9.

25 ITCH 83, Clause 11; ITCH 95, Clause 10; IVCH 83, Clause 9; IVCH 95, Clause 8 and IHC 03, Clause 8.26 Gold, E, Chircop, A and Kindred, H, Maritime Law, Irwin Law, Toronto, 2003 at 594 and Hodges, S, Law of Marine

Insurance, Cavendish Publishing, London, 1996, p. 426.27 Gold, E, Chircop, A and Kindred, H, Maritime Law, Irwin Law, Toronto, 2003, p. 628.28 Bennett, H, The Law of Marine Insurance, Oxford University Press, Oxford, 1996, p. 383.



it is sufficient to know that the ship’s portion of general average is covered bythe standard hull insurance clauses.

1.1.1.7 Liabilities

2-040 Apart from the fact that the ship is exposed to physical risks the shipowner may alsobecome liable to third parties as a result of being responsible for the operation of thevessel. If a vessel is damaged in a collision, the damage to the vessel itself isconsidered to be caused by a peril of the sea, but in 1836 it was held that an owner’sliability for damage caused by his ship colliding with another ship was notconsidered a peril of the sea29 and as a result the practice evolved to cover suchliability by a so-called ‘running down’ clause (RDC), which nowadays is called the‘collision liability’clause.30 The ITCH and IHC label the clause as the ‘3/4ths CollisionLiability’ clause because the underwriters agree to provide indemnity insurance for75% of the assured’s liability in relation to the particular incident.The underwriter’sliability is further limited to a maximum of 3/4ths of the insured value of the vessel.Consequently, the shipowner has to cover the remaining 1/4th of the liability and anyliability in excess of 75% of the insured value of his own vessel. The shipowners’response to this reality was to set up mutual insurance for the remaining 1/4th andthe excess liability in the form of P&I (protection and indemnity) cover.31

2-041 The standard H&M insurance conditions in most other markets cover theowner’s collision liability in full (up to the insured value of the vessel)32 and inresponse to that underwriters in the London market would also sometimesdelete the reference to 3/4ths. The IHC 2003 now offer this alternative as anoptional Clause 38, named ‘4/4ths Collision Liability’.

2-042 When the insured vessel becomes liable for a collision the hull insurance coversthe following:

8.1.1 loss of or damage to any other vessel or property on any other vessel;

8.1.2 delay to or loss of use of any such other vessel or property thereon; and

8.1.3 general average of, salvage of, or salvage under contract of, anysuch other vessel or property thereon.33

2-043 It was stated earlier that the definition of a ‘collision’ means two navigable thingsdamaging each other. If a ship strikes something else than another ship, theoccurrence is sometimes called allission, but more commonly referred to as‘damage to fixed and floating objects’, or FFO for short. The standard hullconditions in the UK market specifically exclude liability for ‘any real or personalproperty or thing whatsoever except other vessels or property on othervessels’34 and consequently, the FFO liability of the shipowner is not covered. InScandinavia and Continental Europe, FFO liability cover is normally included in



29 De Vaux v Salvador (1836) 4 AD & E 419.30 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 301.31 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 302.32 See, for example, American Institute Hull Clauses, lines 158–163, Norwegian Marine Insurance Plan, Sections 13–1 and

13–3 and Finnish Hull Insurance Conditions (FKV 2001), Sections 13.1 and 65.3, General Swedish Hull InsuranceConditions, Sections 5(d) and 6.3 and the German DTV-Kaskoklauseln 1978/1994 (Fassung 2004), Clauses 34.1 and 34.8.

33 ITCH, Clause 8.1; IVCH, Clause 6.1 and IHC 03, Clause 6.1 is identical except for using the expression ‘property thereon’instead of ‘property on any other vessel’ in sub-clause 6.1.1.

34 ITCH, Clause 8.4.2; IVCH, Clause 6.4.2 and IHC, Clause 6.4.2.



the hull insurance. In this respect too the IHC 2003 offer FFO liability cover asan optional Clause 37, named ‘Fixed and Floating Objects’.

2-044 In summary, we have seen that there are essentially three aspects of H&Minsurance cover: damage to the ship itself, collision liability and costs for

aversion or minimisation of loss.

1.2 PROTECTION AND INDEMNITY

2-045 Operating ships exposes shipowners to a wide range of third party liabilities, whichare not covered by the hull insurance, which primarily insures the shipowner’sproperty. In a case known as De Vaux v Salvador ,35 the court held that liability forcollision damage was not a peril of the sea and not covered under the standardform of marine insurance policy at the time. This decision prompted thedevelopment of the so-called ‘running down’ clause in hull policies pursuant towhich the hull insurance would cover, subject to an additional premium, 3/4ths ofliability for collision damage inflicted on another ship and its cargo. The rationalefor the limited cover was that it would induce the shipowner, through his servantthe master, to take extra care to ensure the safe navigation of the ship. Concernfor various other kinds of potential third party liabilities eventually led to theformation in 1855 of the first mutual protection club known as the Shipowners’Mutual Protection Society, the forerunner of today’s Britannia Ship InsuranceAssociation Ltd, followed by other so-called ‘protection societies’.36 They providedcover for death and personal injury claims as well as the 1/4th balance of thecollision liability, which was not covered by the hull policy.They also provided coverfor collision liability in excess of the amount insured under the hull policy.

2-046 The sinking of The Westenhope in 1870 was the impetus for another majordevelopment in the field. The vessel, which was entered with the North of EnglandProtection Association, sank off the Cape of Good Hope on its way to Cape Townafter it had deviated to Port Elizabeth to load additional cargo. The court held thatan unjustified deviation precluded the shipowners from successfully invoking theexclusion clauses in the carriage contract and no cargo liability cover was availableunder the contract with the protection society. In 1874, shipowners whose shipswere entered with the North of England Protection Society proposed extension ofcover to include indemnity risks, that is, liability for loss of or damage to cargo.Therules of the society were amended and the first P&I Club came into existence.37

There were parallel developments in Scandinavia, which resulted in theestablishment of P&I Clubs outside the United Kingdom as well.38

2-047 P&I Clubs provide cover for third party liabilities, including death and personal injuryclaims and pollution damage. The ‘protection’ element covers the shipowner’sliabilities arising out of the ownership of the ship whereas ‘indemnity’ refers toliabilities incurred in respect of risks related directly to the operation of the ship.Themajor Clubs providing P&I cover internationally are members of the InternationalGroup of P&I Clubs (IG). Today the International Group has a total of 13 members,eight of which are based in the United Kingdom, two in Norway and one each inJapan, Sweden and the United States and it is estimated that more than 90% of



35 (1836) AD & E 419.36

Gold, E. et al., Maritime Law, Irwin Law, Toronto, 2003, p. 303.37 Ibid at p. 304. See also Hazelwood, S., P&I Clubs: Law and Practice, 3rd edition, LLP, London, 2000, p. 7.38 Ibid at p. 305. See also Gold, E., Gard Handbook on P&I Insurance, 5th edition, Arendal: Assuranceforeningen

Gard-gjensidig, 2002 at pp. 68–69.



the shipowners of the world are entered in IG Clubs.39 Although there are otherproviders of P&I cover beside the members of the IG – for example, British MarineMutual Insurance Association Ltd, which has been existence since the latenineteenth century,40 provides liability insurance to approximately 4,000 ships ofless than 10,000 gross tonnage and 1,500 fishing vessels – the fact remains thatP&I cover is predominantly offered by the mutual P&I Clubs.

2-048 From the early days, when the P&I Clubs offered indemnity cover for liabilities inrespect of death or personal injury of seamen and that part of collision liability,which was not covered by hull insurance, the scope of cover offered by the P&IClubs has gradually widened to cover a broad range of liabilities. Although eachclub has its own Rules the cover they provide is, for all practical purposes, verysimilar:41

1. Liability to persons other than seamen

2. Injury and death of seamen

3. Illness and death of seamen

4. Repatriation and substitute expenses

5. Loss of and damage to the effects of seamen and others

6. Shipwreck unemployment indemnity

7. Diversion expenses

8. Stowaways and refugees

9. Life salvage

10. Collision with other ships

11. Loss or damage to property

12. Pollution risks

13. Liability arising out of towage of or by an entered ship

14. Liability arising under certain indemnities and contracts

15. Wreck liabilities

16. Quarantine expenses

17. Cargo liabilities



39 For a current list of P&I Clubs, see Gold, E., Gard Handbook on P&I Insurance at pp. 71–72.40 British Marine demutualised in 2000.41 The risks are listed here in the order they appear in Rule 2 of the United Kingdom Mutual Steamship Association, or

UK Club, for short.



18. Property on the entered ship

19. Unrecoverable general average contributions

20. Ship’s proportion of general average

21. Special compensation to salvors

22. Fines

23. Enquiry expenses

24. Expenses incidental to the operation of the ship

25. Sue and labour and legal costs

26. Expenses incurred by direction of the Association.

2-049 The willingness of the P&I Clubs to extend the cover can be explained by the factthat the Clubs have always existed for the purpose of sharing risks. Even today,when a new category of liability emerges, either by new legislation or bydecisions of courts, and all or a significant portion of the members appear to beaffected, the Clubs would probably consider amending the rules to extend coverto such new liability. The special compensation to salvors (item 21 above) is onerelatively recent example of this.

2-050 A unique aspect of the P&I Clubs is the discretionary cover, often called the‘Omnibus Rule’, but actually named Expenses Incidental to the Operation of Ships(item 24 above).42 Under this rule, the directors may in their absolute discretiondecide to cover liabilities, costs and expenses, which are incidental to the businessof owning, operating or managing ships and which in the opinion of the directors fallwithin the broad scope of the association, although not within the scope of the coverspecifically defined in the rules. As mentioned above, the decision to provide coverunder this rule is in the directors’ absolute discretion and they do not have to giveany reasons for their decision.The Omnibus Rule has made it possible for a club tocover a type of claim not previously contemplated and later change the rules to adda new head of claim if the type of claim has become more common.43

2-051 It is not possible to explain every point of cover in the long and

comprehensive list of covered liabilities, but as a general comment, it isimportant to point out a few important principles of P&I insurance. First, P&Icover is subsidiary to other insurance policies, that is, it only provides coverif and to the extent that the liability is not covered by other insurance,particularly hull insurance. Second, unless otherwise specifically agreed,the P&I Club will only indemnify the shipowner if and to the extent thatliability is imposed by law, but not a liability which the shipowner hasvoluntarily agreed. In principle this would mean that the assured shipowneris under an obligation to contest and defend himself against any claim,including invoking any right to limit his liability, until no further appeal ispossible. In reality, following this principle strictly would be very impracticaland there may be situations where the owner deems it necessary to acceptcontractual liability beyond that imposed by law. In these situations the P&I



42 UK Club, Rule 2, Section 24.43 Hazelwood, S.J., P&I Clubs: Law and Practice, 3rd edition, LLP, London, 2000, pp. 228–230.



Club will often provide cover, provided the terms, including payment ofextra premium, are approved in advance.44 In similar fashion, if the basisand amount of the member’s liability appear reasonably clear, the Club willconsent to the member settling the claim without resorting to litigation.

2-052 A third fundamental principle of P&I is the ‘pay-to-be-paid’ rule. In everydaylanguage P&I Cover is often called ‘liability insurance’, but in fact it is not – it isstrictly ‘indemnity insurance’. This principle is clearly expressed in the Clubs’rules, which typically would read:

PAYMENT FIRST BY THE OWNER

Unless the Directors in their discretion otherwise decide, it is a conditionprecedent of an Owner’s right to recover from the funds of the Associationin respect of any liabilities, costs or expenses that he shall first havedischarged or paid the same out of funds belonging to him unconditionally

and not by way of loan or otherwise.45

2-053 This means that the P&I Club is only obliged to indemnify the member for any sumsthe member has actually paid to a claimant to settle its liability, and the Club willnot, at least not in normal circumstances, settle the member’s liability directly witha claimant. As the quoted rule states, the Club can, in its sole discretion, decideotherwise. An important service provided by the P&I Clubs is that they assist in andsometimes take control over the handling of a claim and in these situations the Clubwill often settle the claim directly with the claimants.46

2-054 To conclude this brief overview of P&I insurance the IG pooling and reinsurancearrangements should be mentioned. It was said at the start of this section that

the essence of mutual P&I Clubs is the sharing of risks between the membersof the Club. In fact, the risk sharing is spread even wider as the Clubs in theInternational Group of P&I Clubs have agreed to pool all claims over and abovea certain amount47 and cover such claims in proportion to the relative sizes ofthe Clubs. For large claims the IG has an elaborate reinsurance programme inplace, partly by self-insurance and partly reinsured in the market, which providescover up to approximately USD 5.4 billion.

1.3 FREIGHT, DEMURRAGE AND DEFENCE

2-055 Freight, Demurrage and Defence (FD&D) insurance provides cover for legalcosts and expenses in connection with enforcement or defence of claims relatingto ship operations and chartering. Strictly speaking, it is not a category of marineinsurance, although it only exists in the context of maritime operations.FD&D does notnormally cover legal expenses in relation to H&M or P&I claims. However, FD&D iscommonly provided by mutual insurance associations, which are often linked to P&IClubs and managed by the same managers that manage the P&I Club, but operatedas a completely separate entity with its own Board of Directors and separate accounts.There are also specialist organisations offering FD&D, such as the Nordisk DefenceClub (Nordisk Skibsrederforening), with no links to any P&I Club.



44 Ibid at pp. 253–254.45 UK Club Rule 5 A.46 Hazelwood, S.J., P&I Clubs: Law and Practice, 3rd edition, LLP, London, 2000, pp. 351–352.47 Currently the Club retention is USD 7 million.



2-056 The basic cover offered by FD&D insurance indemnifies the assured for costs andexpenses incurred for lawyers, surveyors and other experts, including costsawarded to the opposite party, in connection with disputes relating to ships and theiroperations. The disputes can relate to claims concerning freight, deadfreight, hire,laytime and demurrage, safe ports and berths, vessel description clauses andspeed and consumption clauses and other disputes regarding charterparties as wellas bills of lading. However, disputes regarding cargo loss or damage are P&I issuesand would normally not be covered by FD&D insurance. Furthermore, FD&D maycover costs and expenses in connection with disputes with suppliers, bunker qualityor quantity, insurance policies, recovery of debts in connection with salvage orgeneral average and even purely commercial contracts, such as sale and purchasecontracts, newbuilding contracts and mortgages.

2-057 FD&D cover is discretionary in the sense that an insured does not have anabsolute right to be indemnified for any legal costs and expenses he may incur.The FD&D Club will review the case or claim and decide whether or not it falls

under the agreed cover and has the right to reject covering a claim, for example,if the amount in dispute does not justify the likely costs of pursuing the claim. If theFD&D Club agrees to cover the legal expenses of a claim, the Club has the rightto control the case management, including the right to recommend a settlementand the discretionary right to refuse further cover of costs and expenses if themember does not accept a settlement recommended by the Club.48

1.4 CARGO

2-058 Cargo insurance in the UK market is offered as three sets of Institute CargoClauses called (A), (B) and (C),which define cover at three different levels.The

clauses have recently been revised and the revised clauses are dated 01/01/09.As has been the case with revisions of other standard clauses one can expectthat the previous version (01/01/82) will continue to be used in parallel with thenew clauses for some time

1.4.1 Insurable Interest

2-059 An important basic principle of all insurance is the concept of insurable interest.According to the definition of insurable interest contained in Section 5 of the MIA1906 a person has an insurable interest if:

. . . he may benefit by the safety or due arrival of insurable property, or maybe prejudiced by its loss, or damage thereto, or by the detention thereof, ormay incur liability in respect thereof.

2-060 Section 14(3) of the MIA further states that:

The owner of insurable property has an insurable interest in respect of thefull value thereof, notwithstanding that some third person may have agreed,or be liable, to indemnify him in case of loss.



48 Gold, E., Gard Handbook on P&I Insurance at pp. 100 and 119–121.



1.4.2 Duration of Cover

2-061 The definition of a marine adventure in Section 1 of the MIA 1906 extends theconcept to ‘losses incident to marine adventure’. Section 2 is called ‘mixed seaand land risks’ and Section 2(1) specifically extends the application beyond themarine element as follows:

A contract of marine insurance may, by its express terms, or by the usageof trade, be extended so as to protect the assured against losses on inlandwaters or on any land risk which may be incidental to any sea voyage.

2-062 The inclusion of ‘land risks . . . incidental to any sea voyage’ is a clear referenceto cargo, although it can be used for ships as well.49 The practice of insuringcargoes for such incidental risks had developed long before the MIA 1906. Thiswas done by including specific provisions to cover not only the risks the goodsmay face in connection with moving the goods from shore onto the carrying ship

(‘craft risks’) but also risks while in the loading port and even before the goodsarrived at the loading port as well as in the port of unloading. Such specificclauses, which were commonly referred to as ‘warehouse-to-warehouse’clauses, are no longer needed as the modern Institute Cargo Clauses includethis cover in Clause 8 ‘Duration’, which is called the ‘Transit Clause’. Theprovisions of the clause regarding commencement of cover are quite simple, butfor termination of cover there are several alternatives, which makes the clauserather long. For the sake of clarity Clause 8 in its latest version reads as follows:

8.1 Subject to Clause 11 below, this insurance attaches from the timethe subject-matter insured is first moved in the warehouse or at theplace of storage (at the place named in the contract of insurance) forthe purpose of the immediate loading into or onto the carrying vehicleor other conveyance for the commencement of the transit, continuesduring the ordinary course of transit and terminates either

8.1.1 on completion of unloading from the carrying vehicle or otherconveyance in or at the final warehouse or place of storageat the destination named in the contract of insurance,

8.1.2 on completion of unloading from the carrying vehicle orother conveyance in or at any other warehouse or place ofstorage, whether prior to or at the destination named in the

contract of insurance, which the Assured or their employeeselect to use either for storage other than in the ordinarycourse of transit, or for allocation or distribution, or

8.1.3 when the Assured or their employees elect to use anycarrying vehicle or other conveyance or any container forstorage other than in the ordinary course of transit or

8.1.4 on the expiry of 60 days after completion of discharge oversideof the subject-matter insured from the oversea vessel at thefinal port of discharge, whichever shall first occur.



49 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 204.



8.2 If, after discharge overside from the oversea vessel at the final port ofdischarge, but prior to termination of this insurance, the subject-matter insured is to be forwarded to a destination other than that towhich it is insured, this insurance, whilst remaining subject totermination as provided in Clauses 8.1.1 to 8.1.4, shall not extendbeyond the time the subject-matter insured is first moved for thepurpose of the commencement of transit to such other destination.

8.3 This insurance shall remain in force (subject to termination asprovided for in Clauses 8.1.1 to 8.1.4 above and to the provisions ofClause 9 below) during delay beyond the control of the Assured, anydeviation, forced discharge, reshipment or transhipment and duringany variation of the adventure arising from the exercise of a libertygranted to carriers under the contract of carriage.

2-063 Regarding Regarding commencement or attachment of cover, the first important

thing to note in placing the insurance and describing the adventure is theproper designation of the location, that is, ‘the place named in the contract ofinsurance’. If the assured should name the port of loading as the place ofcommencement, the cover would not start at a warehouse in another location.Second, the risk attaches as soon as the goods are moved inside thewarehouse for the purpose of immediate loading onto a vehicle (in the 01/01/82version when the goods actually leave the warehouse), so the goods are notcovered while they are in storage in the warehouse or being handled for packing,but the transit to a container freight station for stuffing into a containerwould be covered, provided it is the warehouse and not the container freightstation that is ‘the place named’. On the other hand, it was held inWünsche Handelsgesellschaft International GmbH v Tai Ping Insurance CoLtd50 that it was possible for the goods to be covered from the momentthey left the warehouse, although the insurance contract had not been made atthat time and the goods had not been appropriated to any specific contract ofsale or contract of carriage. It should also be noted that there is an impliedcondition in Section 42(1) of the MIA 1906 that the transit begins within areasonable time from the placing of the contract of insurance.51

2-064 The goods are transported from one named place to another named place andthe goods remain covered under the insurance during this transit. It is normalthat during the course of any transit some delays occur, such as the goodshaving to wait for the arrival of the vessel, customs clearance or the processing

of necessary documentation. The goods remain covered during such delays, asthey would be considered part of the ordinary course of transit. However, if thereare delays due to clear, avoidable omissions on the part of the assured inmaking the necessary arrangements for documentation or loading, the goodswould not be covered as it is a condition under Clause 18 of the Institute CargoClauses that the assured has a duty to avoid delays and ‘act with reasonabledespatch in all circumstances within their control’,52 but a delay or deviation,which is beyond the control of the assured, is covered under Clause 8.3.53



50 [1998] 2 Lloyd’s Rep 8 (CA).51 Brown, RH, Marine Insurance, vol 2, Cargo Practice (5th edition), Witherby & Co Ltd, London, 1998, p. 183.52 Ibid at p. 184.53 See also MIA 1906, Sections 46, 48 and 49.



2-065 There are several alternative points where the cover can come to an end. In normalsituations, this takes place when the goods have been unloaded ‘in or at the finalwarehouse or place of storage (delivered to the consignee’s warehouse according tothe 01/01/82 version) at the intended destination (Clause 8.1.1), but the assured or theiremployees have the option to designate some other warehouse, at the destinationor even a point before the intended destination, where they want the goods to be stored(Clause 8.1.2). Similarly, cover terminates if the assured chooses to use the carryingvehicle or container for storage and not for ordinary transit of the goods (Clause 8.1.3).These latter cases simply mean a change of plans, since storage here means the endof the ordinary transit, because the owner intends to use that warehouse as the basefrom which the goods are distributed or allocated or he simply wishes to keep themstored for some time. However, the cover will in any case end 60 days after theunloading of the goods from the carrying ship has been completed, even if the transitto the final place of storage for some reason should take longer (Clause 8.1.4). Theinsurance cover would terminate even earlier, if the owner of the goods decides tochange the final destination of the goods after completion of the carriage by sea. If they

are to be forwarded to another destination, the insurance cover terminates at the pointwhen the transit to that new destination starts (Clause 8.2).

2-066 If there is an unjustifiable deviation or delay, Sections 46 and 48 of the MIA 1906relieve the insurer from further liability, in principle, but if the deviation or delays arebeyond the control of the cargo-owner and not caused by him, he would remainprotected under Clause 8.3. Similarly, if the voyage cannot be completed for reasonsof force majeure, the insurance cover would terminate, unless continuation of coveris requested and additional premium paid. In such a case, the cover continues for60 days in the place where they are landed or until the goods are sold at that placewithin that time (Clause 9.1). On the other hand, if the goods are forwarded to theirdestination within 60 days, they will be covered and termination of the insurancecover falls under the provisions of Clause 8 (Clause 9.2).54 When the earlytermination of the voyage is caused by an insured peril, Clause 12 of the InstituteCargo Clauses will also provide cover for all reasonable forwarding charges.

2-067 Finally, Section 45 of the MIA 1906 stipulates that if there is a change of destinationafter the attachment of the risk, the insurer is discharged from further liability, unlessthe policy provides otherwise, from the time the ‘change is manifested’. According toClause 10 of the Institute Cargo Clauses, however, the goods will be held covered,provided the insurer is promptly notified and the conditions and premium for thechange in the risk will have to be agreed between the parties.

2-068 The most traditional form of marine insurance policy was for a particular voyage,but today time policies are much more common than voyage policies for insuringships. However, a voyage policy is still a normal way of insuring cargo since theparticular cargo is at risk during transit from one place to another, including theincidental land risks, but is not exposed to risk continuously year after year theway vessels are. For a large shipper, who ships goods very frequently andpossibly to the same destinations, placing cargo insurance separately for everyshipment would become tedious and very time consuming. In that situation, theshipper may choose a floating policy, which only contains a general descriptionof the terms of the insurance, usually at least the time and the total value ofshipments, while the details of the particular shipment, carrier, destination and



54 See MIA 1906, Section 59 and Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 212.



so on are provided later in a separate declaration for each shipment.55 Section29 of the MIA 1906 defines a floating policy:

(1) A floating policy is a policy which describes the insurance in generalterms, and leaves the name of the ship or ships and other particularsto be defined by subsequent declaration.

(2) The subsequent declaration or declarations may be made byendorsement on the policy, or in other customary manner.

(3) Unless the policy otherwise provides, the declarations must be madein the order of dispatch or shipment.They must, in the case of goods,comprise all consignments within the terms of the policy, and thevalue of the goods or other property must be honestly stated, but anomission or erroneous declaration may be rectified even after loss orarrival, provided the omission or declaration was made in good faith.

(4) Unless the policy otherwise provides, where a declaration of value isnot made until after notice of loss or arrival, the policy must be treatedas an unvalued policy as regards the subject-matter of that declaration.

2-069 Under a floating policy, the insurer undertakes to cover all shipments and the shipperhas an obligation to declare the individual shipments, but provided the shipper was notin bad faith, the goods will be covered even if the shipper makes errors in thedeclaration of the value of the goods or forgets to make the declaration of a shipmentor its value altogether, in which latter case, however, the policy will be an unvalued one.However, the policy itself may contain more strict obligations on the part of the assured.

2-070 An insurance contract for open cover is similar to and may even be a floating policy.An open cover contract can be made for a specific period of time or an indefiniteperiod, subject to termination by notice, and means that the assured declares allshipments and the insurer subsequently issues policies for them, often on a monthlybasis. Essentially, open cover means a pre-existing agreement to insure all futureshipments on agreed terms. Although floating policies and open covers insure allshipments during a period of time, the cover for each separate shipment retains thecharacter of voyage cover for a particular shipment from one place to another.

1.4.3 Scope of Cover

2-071 Cargo insurance differs from insurance of vessels in that cargo insurancenormally insures the adventure, which means that the insurance does not onlycover the goods themselves, but also the anticipated profit from the adventure.56

In Rickards v Forestal Land, Timber & Railways Co,57 Lord Wright expressed thisprinciple in the following words:

The primary subject of the insurance is the goods as physical things, butthere is superimposed an interest in the safe arrival of the goods . . . [A]



55

Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 111.56 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 20.57 [1942] AC 50. The case is sometimes referred to as The Minden and sometimes as the Forestal cases as there were,

in fact, three separate cases heard together.



policy on goods is in truth one covering a composite interest, the physicalthings or chattels, and also the expected benefit from their arrival. Thesubject-matter may be described as chattels-cum-adventure.58

2-072 The general principle is that it is the person who has title to goods who has an

insurable interest in them, that is, the owner of the cargo. It is, therefore, either theseller or the buyer of the goods who has an insurable interest, or to put it moreprecisely, they both do, but at different times. In international trade, where goodsare transported from a place of export to a place of import, the goods are normallysold and it is the law and contract of sale that determines when property passesfrom seller to buyer.However, and, in the context of insurance more importantly, thecontract of sale will, or at least should, stipulate clearly when the risk passes fromthe seller to the buyer. Often this is done in a standardised manner by reference toa specific term in the standard international commercial terms, called theINCOTERMS elaborated and published by the International Chamber ofCommerce,.59 The risk can pass to the buyer before he acquires ownership, but it

is equally possible that title may have passed to the buyer, but the goods remain atthe seller’s risk.60 Therefore, whoever bears the risk of loss of or damage to thegoods has an insurable interest in them.

2-073 The purpose of cargo insurance is to cover the interests of the owners of thecargo against the risks that they face. As stated above, cargo insurance in theUK market is offered as three sets of Institute Cargo Clauses called (A), (B) and(C), which define cover at three different levels.The (A) clauses are based on ‘allrisks’ cover, while the other two are based on named perils. Insurance of cargotends to be placed locally to a much higher degree than insurance for vesselsand standard cargo insurance conditions exist in many countries. In addition tothe American Institute Cargo Clauses (1 January 2004), the Norwegian,61

German,62 Swedish63 and Finnish64 cargo insurance conditions could bementioned. Although they all differ in details, it can be said that they aregenerally modelled after the Institute Cargo Clauses (A), (B) and (C) and thatthe actual differences in cover are relatively minor.65



58 Ibid at pp. 90–91.59 For a comprehensive explanation of the INCOTERMS and their use, see International Chamber of Commerce, Incoterms

2000, ICC publication No. 560, 1999, ICC Publishing SA, Paris and Ramberg, J., ICC Guide to Incoterms 2000, ICCpublication No. 620, 1999, ICC Publishing SA, Paris.

60 Ibid at p. 35.61 Norwegian Cargo Clauses: Conditions Relating to Insurance for the Carriage of Goods of 1995, CEFOR form No. 252.62 DTV Cargo Insurance Conditions 2000, as amended July 2004 (DTV Cargo 2000/2004), ‘All Risks’, ‘Limited Cover’, ‘War’

and ‘Strikes, Riots and Civil Commotions’ Clauses.63 General Conditions for Insurance of Goods, 1 April 2000, which incorporate ‘Basic Insurance’, ‘Extended Basic Insurance’

and ‘Standard Insurance’ (which is for all risks).64 Tavaran Kuljetusvakuutus, 1 January 2001, KU 1 (basic insurance), KU 2 (all risks), KU 3 (special conditions) and KU 4

(English conditions).65

The American Institute Cargo Clauses, the Norwegian Cargo Clauses and the Swedish General Conditions for Insuranceof Goods also provide three levels of cover while the German DTV Cargo Insurance Conditions and Finnish conditionsspecify two levels of cover.



2-074 The most comprehensive of these are the Institute Cargo Clauses (A), which arethe only general Institute Clauses to provide cover on an ‘all risks’ basis. But itmust be remembered that even ‘all risks’ actually do not provide cover for eachand every event that may occur. As a concept insurance only protects againstfortuitous events and all insurance policies contain specific exclusions, risks,which are expressly defined as non-insured perils. In the case of the InstituteCargo Clauses (A), they largely correspond with the statutory exclusions stated

in Section 55 of the MIA 1906 (wilful misconduct of the assured, loss caused bydelay, ordinary wear and tear, ordinary leakage and breakage and inherent viceor nature of the insured property) plus seaworthiness and the usual exclusion ofwar and strikes risks. The (B) and (C) clauses are traditional ‘insured perils’clauses, the (B) Clauses giving somewhat more comprehensive cover than the(C) Clauses.The following table gives an overview of the risks covered under thethree sets of clauses:

2-075 The table indicates the number of the clause under which the risk is covered.‘NO’ indicates risks which are not mentioned as insured perils and risks whichare specifically excluded are shown in brackets.



Risks covered/not covered/excluded A

Fire or explosion 1

1

1

1

1

1

1

1

1

1

1

1

1

2

3

1.1.1

1.1.2

1.1.3

1.1.4

1.1.5

1.1.6

1.2.1

1.2.2

1.2.2

1.2.3

1.3

(4.7)

2

3

1, 6.2

Vessel or craft being stranded, grounded, sunk orcapsized

Land conveyance overturned or derailed

Collision or contact of vessel, craft or conveyancewith any external object other than water

Discharge of cargo at a port of distress

Earthquake, volcanic eruption, lightning NO

General average sacrifice

Jettison

Washing overboard NO

Entry of sea, lake or river water into vessel, craft,

hold, conveyance, container or place of storage NO

NO

Total loss of any package lost overboard or droppedwhilst loading on to, or unloading from, vessel orcraft

Malicious damage

Theft NO

Piracy (6.2)

1.1.1

1.1.2

1.1.3

1.1.4

1.1.5

1.2.1

1.2.2

(4.7)

2

3

NO

(6.2)

General average and salvage charges

‘Both to Blame Collision’ liability

CB

Table 1.1Overview of Risks Covered under the Three Institute Cargo Clauses (A), (B) and (C)



1.4.4 Marine Risks

2-076 The Institute Cargo Clauses do not mention ‘perils of the sea’ as such, but sincethe (A) clauses cover ‘all risks’, damage caused by perils of the sea would becovered in any case. Although the (B) and (C) Clauses do not cover ‘perils of thesea’ in general they do, however, list a number of perils which are closely linkedto or are, in fact, perils of the sea.66 Thus, losses resulting from stranding,grounding, sinking or capsizing of the vessel or craft (Clause 1.1.2), jettison(Clause 1.2.2) or collision or contact with external objects (Clause 1.1.4) arecovered under both the (B) and (C) Clauses. In addition, the (B) Clauses coverlosses due to washing overboard (Clause 1.2.2) and water ingress (Clause1.2.3). However, the words ‘entry of sea lake or river water’ means that the waterhas to come from the outside and the clause does not cover damage from rainor snow. It is worth noting that the cover provided by Clause 1.1.4 includes lossor damage from both collisions with vessels in the traditional sense and strikingagainst ‘any external object other than water’, that is, fixed or moveable objects.

An interesting difference in this respect can be found in the American InstituteCargo Clauses, which have retained the wording used in previous wordings ofthe English clauses and provide cover for losses resulting from contact ‘with anyexternal substance (ice included) other than water’.67 The assumption has beenthat ice, although only frozen water, would be considered as an ‘object’ ratherthan water under the English Institute Cargo Clauses as well.68 This is probablytrue if the ‘object’ was an iceberg, but, in the absence of specific wording theInstitute Cargo Clauses might not cover damage caused by the vessel strikingor being crushed by ice, unless it resulted in the sinking of the vessel.

2-077 Loss caused by entry of seawater was given a very clear explanation by LordWright in Canada Rice Mills Ltd v Union Marine & Gen Ins Co:69

Where there is an accidental incursion of seawater into a vessel at a part ofthe vessel, and in a manner, where seawater is not expected to enter in theordinary course of things, and there is consequent damage to the thinginsured, there is prima facie a loss by perils of the sea. The accident mayconsist in some negligent act, such as improper opening of a valve, or a holemade in a pipe by mischance, or it may be that seawater is admitted by stressof weather or some like cause bringing the sea over openings ordinarily notexposed to the sea or, even without stress of weather, by the vessel healingover owing to some accident, or by the breaking of hatches or other coverings.These are merely a few amongst many possible instances in which there may

be a fortuitous incursion of seawater. It is the fortuitous entry of the seawaterwhich is the peril of the sea in such cases.

2-078 A loss of cargo can be caused by spontaneous combustion. The proximate causeof the loss is fire, which is covered, provided it was not caused by an inherent viceof the cargo at the time of shipment. If a cargo is damaged through a fire, whichstarted because another cargo on board had an inherent vice which causedspontaneous combustion, the loss of the first cargo should still be covered.



66 The American Institute Cargo Clauses 2004, With Average and Free of Particular Average do cover perils of the seas in

Clause 2.67 Ibid , clause 1. Similarly, in the German DTV Cargo 2000/2004 Limited Cover, Clause 2.1(a) ‘an accident involving the

means of transport’ includes situations when the vessel is ‘damaged by ice’.68 Brown, RH, Marine Insurance, vol 2, Cargo Practice (5th edition), Witherby & Co Ltd, London, 1998, p. 167 and

Bennett, H, The Law of Marine Insurance, Oxford University Press, Oxford, 1996, p. 174.69 [1941] AC 55, at 68–69.



1.4.5 Land Risks and Cargo Handling

2-079 The listed perils in the Institute Cargo Clauses include references to risks thatspecifically concern landside activities, in particular ‘overturning or derailment ofland conveyance’ (Clause 1.1.3), ‘discharge of cargo at a port of distress’(Clause 1.1.5) and, in the (B) Clauses, ‘total loss of any package lost overboardor dropped whilst loading on to, or unloading from, vessel or craft’,70 althoughthe latter may also occur, and the risk may even be greater, when shifting cargobetween the vessel and lighters at sea (Clause 1.3). However, the clause doesnot cover accidents in connection with loading or unloading land conveyances.The words ‘collision or contact of vessel or conveyance’ (Clause 1.1.4) are wideenough to include collisions suffered by land transport vehicles, so this clausewould find application in losses on land as well as at sea.

2-080 Although basically similar, the various sets of standard clauses used in othermarkets show numerous variations and sometimes additions to the definition of

the landside perils. Thus, the American Institute Cargo Clauses provide thefollowing cover for ‘shore perils’:

Where this insurance covers property while on shore, including during landtransportation, the risks of collision, derailment, overturn or other accidentto the conveyance, fire, lightning, sprinkler leakage, cyclones, hurricanes,earthquakes, floods (meaning the rising of navigable waters) and collapseor subsidence of docks or wharves.71

2-081 The Norwegian Cargo Clauses provide cover for:

‘land conveyance having collided, struck any object, overturned, been

derailed or been driven off the road’;72

‘aircraft having collided, struck any object, crashed or been driven off therunway’;73

‘sea, lake or river water entering into warehouse or place of storage’;74 and

‘loading, unloading or shifting of the insured goods in a port of distress, andtheft or precipitation while the goods are stored at a port of distress’.75

2-082 German cargo insurance conditions cover, for example:

‘collapse of warehouse buildings’; and

‘total loss of entire packages during loading onto or unloading from a meansof transport, or during transhipment to or from a means of transport’.76



70 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 282.71 American Institute Cargo Clauses 2004, With Average and Free of Particular Average, Clause 3A.72 Norwegian Cargo Clauses, Sections 4.2 and 5.2.73 Ibid , Sections 4.3 and 5.3.

74 Ibid , Section 4.7.75 Ibid , Section 4.9.76 DTV Cargo 2000/2004 Limited Cover, Clause 2.1(b) and 2.1(g), respectively.



2-083 Swedish conditions make a difference between:

‘collision, derailment, overturning or running off the road of the landconveyance whilst on land’, which is included in the Basic Insurance; andthe same accidents to

‘land conveyance whilst waterborne’, which is an additional risk covered bythe Extended Basic Insurance.77

2-084 On the other hand, in Finland:

‘shunting damage’ on railways is specifically excluded; while

damage caused if cargo loaded on a lorry or train strikes an object outsidethe conveyance is specifically covered.78

2-085 These examples show that the assured needs to pay great attention to theprecise wording of the policy conditions.

2-086 It is not possible to describe all listed perils in detail, but the natural meaning ofterms like fire, explosion, theft, and natural forces describes the scope of coverwith sufficient accuracy for the present purposes, while general average will beexplained in greater depth in subsequent modules. However, one further aspectof cargo insurance, that is, the ‘both to blame collision’ clause, requires someexplanation.

2-087 All three sets of Institute Cargo Clauses contain the following Clause 3:

This insurance is extended to indemnify the assured against suchproportion of liability under the contract of affreightment Both to BlameCollision Clause as is in respect of a loss recoverable hereunder. In theevent of any claim by shipowners under the said Clause, the Assured agreeto notify the Underwriters who shall have the right, at their own cost andexpense, to defend the Assured against such claim.

2-088 It is not entirely logical that the owner of cargo onboard a ship should becomeliable for anything if that ship is in a collision, but there is an explanation. Inmost collisions between vessels, both vessels are found to carry part of theblame for the collision. The cargo-owner can claim his loss against eachvessel in proportion to their respective blame, and according to Clause 16.2of the Institute Cargo Clauses he is obliged to do so, but usually he cannotclaim against the carrying vessel, that is, the vessel on which his cargo iscarried, because most contracts of carriage exempt the carrier from anyliability towards cargo onboard for losses as a result of a collision. Therefore,the cargo-owner can only claim against the other vessel and, in the UnitedStates, he can usually claim his full loss from that other vessel. The owner ofthat vessel can, however, include what he has become liable for in his claimagainst the carrying vessel. The carrying vessel thus, indirectly, ends uppaying its share of the cargo loss, but since the carrying vessel has exempteditself from liability in the contract of carriage, it can claim this amount back



77 General Conditions for Insurance of Goods 2000, Clauses 1.13 and 1.23, respectively.78 Tavaran Kuljetusvakuutus 2001, KU 1 (basic insurance), Clause 4.1.5.



from the cargo-owner. That is how the cargo-owner becomes, indirectly, liablefor collision damage, which he himself has suffered, and it is that liability,which Clause 3 of the Institute Cargo Clauses covers.79

2-089 The explanation for the second sentence of the clause is that the ‘Both to Blame

Collision’ Clause in bills of lading has been declared invalid by courts in theUnited States so there may be a real interest to challenge the Both to BlameCollision Clause in the contract of carriage.

1.5 WAR AND STRIKES RISKS

2-090 Marine insurance, as a concept, includes both ordinary marine perils and warrisks,80 and historically the Lloyd’s SG Form of marine policy covered them all,but as early as the seventeenth century it had become common practice toexclude war risks in the hull policies and these risks were covered by a separate

policy or with a mutual insurance association. Since 1982, with the introductionof the MAR policy, one can say that war and strikes risks are always specificallyexcluded under all ordinary marine risks policies. This is true regarding H&Minsurance, loss of hire insurance, cargo insurance, standard protection andindemnity cover, as well as builders’ risk and ship repairers’ liability cover. Thereason for the distinction between insurance for ordinary marine perils and warand strikes risks is that the scope of cover differs, but there is also the practicalaspect that different insurers normally underwrite them.81 The fact that theordinary risks and war risks are covered by different policies and differentinsurers may be the reason why war risk insurance has given rise to a largeamount of case law over the centuries. Another reason may be that wars andwarlike activities were perhaps more frequent in the past.

2-091 War, or warlike operations, have changed considerably after the SecondWorld War but have, unfortunately, not disappeared. For example, the KoreanWar (1950–1953) involved troops or support personnel from a great numberof countries, but the fighting was not preceded by a declaration of war. TheUnited States’ involvement in Vietnam in the 1960s escalated from equipmentand advisors to full-scale employment of fighting units in and against severalcountries for over a decade up to 1975, but the United States Congress hadnot at any point declared war. The war between Iran and Iraq in the early1980s was also an undeclared one, as also the Falkland conflict betweenApril and June of 1982 when the United Kingdom and Argentina clashed over

the supremacy over the Falkland Islands with brief but outright warfareinvolving both naval and ground forces while there was no official state of warand citizens of either country residing in the other country were relativelyunaffected. The best-known marine casualty of the conflict is The Atlantic

Conveyor , which was carrying war supplies to the Falklands when it was hitby missiles, caught fire and eventually sank. Whether this conflict constituteda war is debatable, but the loss of The Atlantic Conveyor was covered as aninsured peril under its war risks cover. It is, therefore, clear that the term ‘war’in the Institute War and Strikes Risks Clauses does not only mean war in thetechnical sense when the parties to the conflict have declared war (or at least



79 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 312. See also Brown, RH, Marine Insurance,

vol 2, Cargo Practice (5th edition), Witherby & Co Ltd, London, 1998, pp. 219–222 and 471–473.80 MIA 1906, Section 3 and Schedule 1.81 For a concise but comprehensive description of the historical development of war risk cover, see Miller, MD, Marine War

Risks, LLP, London, 2005, 3rd edition, pp. 2–9.



one of them has), but clearly would apply to a de facto war without adeclaration of war, that is, according to the ordinary meaning of the wordsused to describe the insured perils. It must be considered equally clear that‘war’ means a conflict between countries where the governments havedecided to take military action, offensive or defensive.82

1.5.1 Scope of Cover

2-092 War and strikes risks are in most cases covered by the same policy and included inthe same standard clauses (the cargo clauses being the exception) and, forconvenience, they will hereafter only be referred to as war risks, unless specificallyotherwise stated. Similarly, with most types of insurance, war risk insurance is basedon named perils, which are defined by enumeration of the perils in the policy. Sincewar insurance is designed to cover the gap left by exclusions in the ordinaryinsurance cover, the assured, who wants his normal cover extended to cover war

risks, needs to mirror all his normal policies with specific war risk policies, whichmeans he may need separate war risk policies for hull, freight, and so on. Similarly,the cargo-owner may wish to take out separate cover for war and/or strikes risks inaddition to his ordinary cargo policy.

1.5.1.1 H&M Insurance

2-093 The basic war risk policy would probably be for hull insurance in accordance withthe Institute War and Strikes Risks Clauses Hulls – Time, or Institute War andStrikes Risks Clauses Hulls – Voyage, as the case may be. Both sets of clausesexist in versions dated 1 October 1983 and 1 November 1995, corresponding

with the Institute Time Clauses – Hulls (ITCH) and Institute Voyage Clauses –Hulls (IVCH). Although the two versions are quite similar, they are not identical,so in order for the cover to be both clear and comprehensive, the assured shouldmake sure that the conditions of his war risk policy are co-ordinated with his hullpolicy, that is, that they are on corresponding versions of the clauses. Althoughthe 1995 version did not differ very much from the previous version, shipownerswere not keen to adopt it as it was perceived to be less favourable to them.83 Asthe insurance market at the time was ‘soft’, the 1983 version remained as thepredominant set of conditions. The following text will primarily be based on the1983 version, unless otherwise indicated.

2-094 The perils defined in Clause 1 of the Institute War and Strikes Risks Clauses

Hulls – Time84 are as follows –

Subject always to the exclusions hereinafter referred to, this insurance coversloss of or damage to the vessel caused by:

1.1 war, civil war, revolution, rebellion, insurrection, or civil strife arisingtherefrom, or any hostile act by or against a belligerent power;

1.2 capture, seizure, arrest, restraint or detainment, and theconsequences thereof or any attempt thereat;



82

Ibid at pp. 40, and 49–50 and Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 330.83 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 3.84 The wording of clause 1 of the Institute War and Strikes Clauses Hulls – Voyage, is identical. There was no change in

wording in the 1995 version compared to the 1983 version.



1.3 derelict mines, torpedoes, bombs or other derelict weapons of war;

1.4 strikers, locked-out workmen, or persons taking part in labourdisturbances, riots or civil commotions;

1.5 any terrorist or any person acting maliciously or from political motive; or

1.6 confiscation and expropriation.

2-095 The wording of the clause mirrors the wording of the war and strikes exclusionsunder the standard hull cover, but where the risks are excluded from the hullcover they are insured perils under the war and strikes risk cover. The riskscovered by Clauses 1.1 to 1.3 are identical with the risks excepted by the ‘WarExclusion’ clause in the ITCH and IVCH and Clauses 1.4 to 1.5 use the samewords as the ‘Strikes Exclusion’ clause. The ‘Malicious Acts Exclusion’85

exempts hull underwriters from covering losses caused by:

the detonation of an explosive; or

any weapon of war

and caused by any person acting maliciously or from a political motive.

2-096 These exact words are not repeated in Clause 1 of the Institute War and StrikesRisks Clauses Hulls, but it is safe to assume that the words appearing in Clause1 are sufficient to cover any events falling within the definition in the ‘MaliciousActs’ exclusion.

2-097 In the International Hull Clauses (01/11/03) the ‘War and Strikes Exclusion’has been combined into one Clause 29 incorporating the same words asClauses 1.1 to 1.4 above while Clause 30 ‘Terrorist, Political Motive andMalicious Acts Exclusion’ corresponds with Clause 1.5 above.86

2-098 A detailed analysis of all the listed perils is not possible here, but a fewcomments may be useful. The term ‘war’ involves a foreign state while the otherperils listed in Clause 1.1, that is, civil war, revolution, rebellion, insurrection andcivil strife, deal with internal or domestic dangers, even though the ‘civil strifearising therefrom’ clearly refers to all the listed perils, including war. It is difficult,and not entirely necessary, to define each one separately, as they would appear

to describe different levels or perhaps stages of an internal conflict. What maystart as mere political opposition (which, of course, is not an insured peril underwar risks) may develop into insurrection or rebellion and further escalate to anattempt to overthrow the government by revolution or an outright civil war. Theperils seem to be listed in a descending but logical order of severity, but theorder cannot be seen as meaning that one would automatically have to followthe other. What is relevant in the present context, though, is that they are allinsured perils and an exact distinction would only become important if, for some



85 ITC – Hulls 01/10/83, Clause 25; ITC – Hulls 01/11/95, Clause 26; IHC 01/11/03, Clause 30.3 and IVC – Hulls 01/10/83,

Clause 22.86 The IHC 01/11/03 exclusion differs from the ITCH and IVCH in that it excludes loss ‘arising from . . . the use of any

weapon’ instead of ‘caused by . . . any weapon of war’ – this difference may be significant.



reason, the policy would include some while excluding other types of civildisorder.

2-099 The perils enumerated in sub-clause 1.4 can be divided into two groups. Thefirst one deals with industrial disturbances and covers strikers, locked-out

workmen and other persons taking part in labour disturbances. Most strikesand lock-outs entail the closing of the workplace (factory or other) or at leastthe stoppage of all work and in most cases they do not entail physical forceor any violence. However, large strikes and general strikes have more politicalmotives and are more likely to involve violent confrontation. In any case,labour disputes rarely cause physical loss of or damage to ships, which is theinsured subject-matter, and it had not been necessary for courts to considerthis peril in War and Strikes Risks policies.87 The most common form of losscaused by strikes is loss of time, that is, delay and ‘any claim for expensesarising from delay’ is specifically excluded in Clause 4.4. However, cover forlosses due to delay, either due to or as a result of strikes, can be obtained

through membership and entry of the vessel in, for example, the Shipowners’Mutual Strike Insurance Association or Transmarine, an affiliate of theCharterers’ P&I Club. In this case, the compensation is based on ‘a specificsum which shall be a fair estimate of the ship’s daily running costs’ multipliedby the number of days of delay and subject to a deductible and an overall limitof days.88

2-100 It is a point to note that strikes or other labour disturbances do not causedamage in themselves. Any damage would be caused by the peopleparticipating in strikes, that is, strikers or locked-out workmen. This distinctionis reflected in the wording of the clause. The other group of perils, namelyriots and civil commotions, are quite different in character and they should,perhaps, have been included in Clause 1.1 because logically they belong inthe list of violent disturbances covered there. In Spinney’s (1948) Ltd and Others v Royal Insurance,89 Mustill J undertook an exhaustive analysis of theconcepts and what differentiated them from each other. The case concernedthe breaking into and looting of two shops belonging to Spinney’s during theunrest in Beirut in 1975–1976. The court held that the events did not amountto a civil war and that insurrection required ‘some unanimity of purpose’,which ‘must involve the displacement of the government’. The court held thatviolent attacks by one section of the population on another on religious orracial grounds did not amount to a popular rising (insurrection). Finally, itstated that a civil commotion does not necessarily involve a revolt against the

government, but it:

. . . must involve a really substantial proportion of the populace, althoughobviously not all of the population need participate, and there should betumult or violence on a large scale.

2-101 The scale sets a civil commotion apart from a riot, which was defined in Field v

Receiver of Metropolitan Police90 as requiring, among other things, at leastthree people to be present and have a common purpose. The number of peoplehas been changed to 12 by the Public Order Act 1986, and according to



87 Miller, MD, Marine War Risks, 3rd edition, LLP, London, 2005, p. 177.88 The Shipowners’Mutual Strike Insurance Association, Rules 4 and 11.89 [1980] 1 Lloyd’s Rep 406.90 [1907] 2 KB 853.



Section 10(2) of the Act, it applies to Rules 8 and 10 in the Schedule to theMarine Insurance Act 1906.

2-102 Sub-clause 1.5 covers damage caused by ‘any terrorist or any other personacting maliciously or from a political motive’. There appears to be relatively

little legal precedence defining the different terms and even if there were,older case law might not be particularly relevant. Courts tend to interpretterms in commercial contracts according to the ordinary everyday meaning ofthe words and terrorism is such a topical issue these days that the termterrorism and what people understand it to encompass may change veryquickly. According to Miller,91 the term ‘political motives’ has not been thesubject of definition by the courts. One basic principle defining terrorism isthat terrorist acts are always for a public cause. A person who kills or destroysproperty for his own personal gains is simply a criminal but not a terrorist. Thedifficulty with this principle is that it is sometimes almost impossible todetermine the motives of the perpetrators.

2-103 The face of terrorism is changing and so may the available insurance cover. Afterthe September 11, 2001 attacks in New York and Washington and the subsequentdevelopment of the International Ship and Port Facility Security (ISPS) Code therehave been calls for the exclusion of terrorism from the war risks cover. Such amove would make the risk of terrorism subject to separate insurance, but there isalso the possibility that the risk would not be insurable at all.

2-104 In this context, it is necessary to mention piracy, which is currently covered asan ordinary marine peril92 and excluded under the Institute War and StrikesRisks Clauses93 (with the proviso that the exclusion does not affect cover underClause 1.4). A definition of a pirate was given by Pickford J in the case Republic

of Bolivia v Indemnity Mutual Marine Insurance Company Ltd :94

. . . a man who is plundering indiscriminately for his own ends, and nota man who is simply operating against the property of a particular State fora public end . . .

2-105 This definition, although very clear, again turns on the motives of the person,but what if those motives cannot be ascertained. If a ship has been attackedand boarded by an armed gang who want to take over the whole ship and/orits cargo, it is not very likely that the master under gunpoint would interrogatethe gang leader as to his motives and whether they are political or for

personal gain, but in principle he should as the answer is relevant fordetermining which insurer the claim should be sent to. Piracy has changedtoo, and pirate attacks have become more violent and hijacking of vessels hasbecome more common. In the past few years, there have also beensuggestions that the reason for hijacking vessels has been to supply terroristswith marine hardware or freight earnings to finance terrorist activities or just



91 Miller, MD, Marine War Risks, 3rd edition, LLP, London, 2005, p. 204.92 ITC – Hulls, Clause 6.1.5; IHC 01/11/03, Clause 2.1.5; IVC – Hulls, Clause 4.1.5; ITC – Freight, Clause 7.1.5 and

IVC – Freight, Clause 5.1.5.93 Clause 4.1.7.94 [1909] 1 KB 785.



to provide them with training opportunities so that they can use vessels infuture terrorist attacks. The point is that it has become even more difficult thanbefore to distinguish between piracy and terrorism.

2-106 Recently, the London market has again considered the possibility of shifting

the risk of piracy from the ordinary marine cover to the war risks cover,95 andthe London Market’s Joint Hull and Joint War Committees have drawn up anew set of clauses which remove piracy from the hull cover and place it underwar risks. However, these new clauses are at this time offered as analternative solution to alter the scope of cover of the standard hull clauses.96

The Mutual War Risk Associations already (or still) include ‘piracy and violenttheft by persons from outside the ship’ in their cover and in the Norwegianmarket, piracy is also covered under war risks.97 Opinions differ as to thedesirability of such a shift, but one advantage of uniformity between thedifferent standard conditions is that the risk of gaps in the insurance cover orof having double insurance would be reduced.

1.5.1.2 P&I Insurance

2-107 P&I Clubs generally exclude war risks from the scope of their cover. 98 On theother hand, the risks excluded from the standard P&I cover are included asinsured perils in the respective rules of mutual marine war risks associations.What has been said earlier about the war risks cover beginning where theordinary cover ends applies here as well, although the same word of caution thatthe assured must carefully study the wording of the respective rules also appliesand even to a greater extent as there are some minor differences between them,which may leave some gaps in the cover.

1.5.1.3 Cargo Insurance

2-108 War and strikes risks for cargo are covered under two separate sets ofclauses – the Institute War Clauses (Cargo) and Institute Strikes Clauses(Cargo), both dated 1 January 1982. The two sets of clauses in combinationprovide very similar cover to that described for H&M above. With some minordifferences, the War Clauses correspond to Sections 1.1–1.3 and the StrikesClauses to Clauses 1.4–1.5. More importantly, the insured perils in the WarClauses correspond with the war risks, which are excluded from the ordinarycover for cargo by Clause 6 of the Institute Cargo Clauses (A), (B) and (C)

and the risks covered by the Strikes Clauses correspond completely with therisks excluded by Clauses 7.1 and 7.3, but not the risks excluded by Clause7.2 of the Institute Cargo Clauses (A), (B) and (C).99 This means that wherethe Institute Strikes Clauses (Cargo) do cover the physical loss or damagecaused by persons participating in labour disturbances they do not cover thefinancial losses that the labour disputes cause. This is underlined by Clause3.7, which excludes losses:



95 See Lloyd’s List (15 November 2005) ‘Owners set for battle over piracy cover’.96 ‘Piracy and terrorism to be covered by single policy’, 17 March 2006, http://www.lloyds.com/News_Centre/

Features_from_Lloyds/Piracy_and_terrorism_to_be_covered_by_single_policy.htm97

NIP, Section 2–9, paragraph 1(d).98 See, for example, United Kingdom P&I Association, Rule 5 E or Assuranceforeningen Gard, Rule 58.99 Clause 7.2 of the Institute Cargo Clauses excludes loss, damage or expense ‘resulting from strikes, lock-outs, labour

disturbances, riots or civil commotions’.



loss damage or expense arising from the absence shortage or withholdingof labour of any description whatsoever resulting from any strike, lockout,labour disturbance, riot or civil commotion.

2-109 One important point to make regarding the war risks (but not the strikes risks)

cover for cargo is that as per Clause 5.1.1 of the Institute War Clauses(Cargo) the insurance attaches only when the cargo ‘is loaded on an overseavessel’.100 This is a clear exception from the general principle of attachmentof risk for cargo insurance. Normally, the risk attaches from the time the goodsare ‘first moved in the warehouse’ (01/01/09 version) or ‘leave the warehouse. . .’(01/01/82 version)101. Another difference in the Institute War Clauses (Cargo) isthat the cover terminates no later than 15 days after the vessel’s arrivalinstead of the normal 60 days.

1.5.1.4 Termination of Cover

2-110 Just like with any other insurance contract, cover for war and strikes risks willterminate upon the expiry of the period of insurance or completion of the insuredvoyage as well as in such situations as a breach of warranty by the assured orif the subject-matter is sold and the assured no longer has an insurable interestin it. However, the Institute War and Strikes Clauses for hulls (and for freight)have an additional termination clause,102 according to which the insurance canbe cancelled by giving seven days notice, but will be reinstated if theunderwriters and assured agree a new rate of premium and/or conditions beforethe cancellation becomes effective.

2-111 It may appear harsh that the insurance cover may be withdrawn during the

agreed period of the policy, but the explanation lies in the fact that the war andstrikes risks cover ordinarily offered is for the risks that occur during peacetimeand this cover can be provided at a relatively moderate cost of premium for theassureds. When vessels operate in actual active war zones the risks aredramatically increased and require a considerably higher premium. For thispurpose, the Joint War Committee (JWC) in the London insurance marketmaintains a list of areas, which are excluded from the ordinary war risks coverand when a vessel enters one of the excluded areas (now called ‘areas ofperceived enhanced risk’) it is deemed to breach the ‘War Risk TradingWarranties’ unless the owners agree to pay an additional premium, which isbased on the degree of perceived risk in that particular area.The ‘hot spots’ in theworld change from time to time and Clause 5.1 of the Institute War and StrikesClauses provides the mechanism whereby the war risks insurance can beterminated on short notice when there is an increased risk of war or warlikeactivities in a new area so that this new area can be included in the ‘areas ofperceived enhanced risk’, that is, the trading limits can be altered. The justification for allowing the market to cancel cover on short notice to adjust thetrading limits may be said to lie in the fact that without this facility the premiumthat the shipowner would have to pay for his ordinary war risk cover would haveto include the possibility of the risk for warlike activities increasing somewhere inthe world sometime during the policy year.This is a risk that may not materialiseat all and, even if it did, the shipowner could avoid it by choosing not to trade his



100 An ‘oversea vessel’ is defined as a vessel carrying the insured cargo from one port to another on a sea passage.101 Institute Cargo Clauses (A), (B) and (C), Clause 8.1 and Institute Strikes Clauses (Cargo), Clause 5.1.102 Clause 5 has the same wording for both hulls and freight and for both time and voyage policies. The wording of the

01/11/1995 version shows some changes and the clause number is 6 in the Institute War and Strikes Clauses Hulls.



vessel in that area. It can, therefore, be said that this cancellation clause allowsthe market to assess the premium realistically in accordance with the actual risk.

2-112 The war risk cover will terminate automatically if there is an outbreak of war, withor without a formal declaration of war, between any of the permanent members

of the United Nations’ Security Council. Furthermore, war risk cover under the1 October 1983 War and Strikes Clauses also terminates automatically in caseof ‘any hostile detonation of any nuclear weapon of war’ but this sub-clause nolonger appears in the 1 November 1995 version, but the change is not ofsignificant importance as any loss arising from such a detonation of nuclearweapons is specifically excluded from cover anyway. The justification for theautomatic termination of war risk cover in the above situations is that theyrepresent uninsurable fundamental risks.

1.6 OTHER FORMS OF COVER FOR GENERAL AND

SPECIAL PURPOSES

1.6.1 Freight Risks

2-113 Freight is included in the definition of marine adventure in Section 3 of the MIA1906. According to the definition, all kinds of freight earnings can be the subjectof marine insurance, for example, freight for goods carried under a bill of lading,freight payable under a voyage charterparty and hire payable under a time ordemise charterparty. On occasion, shipowners also carry their own goods andin this situation he does not ‘pay’ freight to himself and he could not sue himselffor non-payment, but the vessel is still a profit-earning vehicle and the ownerexpects to derive a benefit from the carriage of his own goods in the form of a

higher value on the goods at the destination. The freight that a shipowner whocarries his own goods would have earned if the goods had belonged to a thirdparty is also recognised as ‘freight’ and can be insured.103

2-114 At common law, the general rule in voyage chartering is that the freight ispayable when the goods are delivered at their destination. However, it isestablished law that even if freight is payable upon delivery, the freight has to bepaid even if the goods arrive in damaged condition. For example, in Dakin v

Oxley ,104 the charterer abandoned a cargo of coal, which was damaged to suchan extent that the cargo was worth less than the freight payable, but since thecargo had been carried and delivered, albeit in damaged condition, the

charterers were found liable for the full amount of freight and their remedy wasto sue the carrier for damages. Under English law it is clear that if freight is paidin advance and, as many charterparties state, is deemed earned on shipment,the freight risk is clearly on the charterers. Furthermore, many standardcharterparties require the freight to be paid in advance, particularly for drycargoes. Consequently, once the voyage has begun and the shipowner is nolonger at risk of losing his freight, he would not have an insurable interest. If theshipowner suffers no loss, there can be no indemnity as there is nothing toindemnify.105 On the other hand, if the freight is earned in advance according tothe charterparty, whether paid or simply due, the charterer has an insurableinterest in the freight since the freight risk is on him.This rather obvious principle



103 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, pp. 24–25.104 (1864) 15 CB (NS) 646.105 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 36.



is clearly stated in Section 12 of the MIA 1906:

In the case of advance freight, the person advancing the freight has aninsurable interest, in so far as such freight is not repayable in case of loss.

2-115 Standard cover for freight in the London market is provided under the InstituteTime Clauses – Freight (ITCF) and Institute Voyage Clauses – Freight (IVCF). Inmany respects, the freight clauses mirror the hull clauses and, just as is the casewith the Institute Clauses for hulls, the freight clauses exist in versions dated 1October 1983 and 1 November 1995.The freight clauses are quite similar to thehull clauses and often the clauses employ identical, or almost identical,language, in many cases simply replacing the word ‘vessel’ with the words‘subject-matter insured’.

2-116 The insured marine perils and Inchmaree risks are the same in both the hull andfreight clauses.106 Putting it simply this means that if a loss of or damage to the

vessel is covered under the Institute Time (or Voyage) Clauses – Hulls, and theaccident also results in loss of the freight, that loss would be covered under theInstitute Time (or Voyage) Clauses – Freight. However, where the hull clausescover ‘loss of or damage to the subject-matter insured’ the freight clauses onlycover ‘loss of the subject-matter insured’ as the freight earnings, obviously, canbe lost, totally or partially, but cannot suffer damage.

2-117 Provided that the freight risk is on the carrier, an actual total loss of the vesselor the cargo will in most cases result in total loss of the freight. Strictly speaking,though, the loss is not caused by the loss of the vessel but by the loss of thecontract, which has to be performed in order to earn the freight. Thus, the freightis totally lost when earning it depends on carriage of a particular cargo and that

cargo is lost, when the carriage has to be performed by a particular vessel andthat vessel is lost and, of course, if particular cargo has to be carried on aparticular vessel and both the vessel and the cargo are lost.107 The freight wouldalso be lost, although neither the cargo nor the vessel is lost, if the performanceof the contract becomes illegal, the particular cargo is detained so thatperformance of the contract becomes impossible or if the adventure is frustratedby the vessel becoming delayed.108 However, and this requires a preciseanalysis of the proximate cause, if the cause of the loss of freight is delay, theloss is not covered under the Institute Freight Clauses even if the delay itself wascaused by an insured marine peril.109

2-118 A constructive total loss of the vessel may also, but does not necessarily, leadto an actual total loss of the freight. If, for example, the vessel suffers veryserious damage to its machinery so that the cost of repairs would exceed therepaired value of the vessel, it could be considered a constructive total lossunder the hull insurance and the vessel could be abandoned to the insurers.However, it is conceivable that the cargo could still be carried to its destination,either on a different vessel (if the charterparty allows substitution of the vessel)or even by towing the damaged vessel to the destination. Then, upon delivery ofthe cargo at the destination, the freight would be earned and the assured would



106 See ITCH, Clause 6; IVCH, Clause 4; ITCF, Clause 7 and IVCF, Clause 5.

107 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 453.108 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 453.109 ITCF 83, Clause 14; ITCF 95, Clause 15 and IVCF 83, Clause 12.



have no claim under the freight insurance, and this is so despite the fact that,due to the abandonment of the vessel, the freight would belong to the hullunderwriters as the new owners of the vessel.110

1.6.2 Loss of Hire

2-119 The owners’ interest in the capacity of the vessel to earn income may be insuredas hire rather than as traditional freight insurance.111 There is a form ofinsurance, which can cover the shipowner against loss of hire or earningsresulting from damage to the vessel called loss of hire (or loss of earnings)insurance. Loss of hire insurance has been much more common in theScandinavian markets, but the generally high charter rates seen in recent yearsand the desire to insure against loss of hire has attracted renewed interest in theLondon market to capture a greater share of this market. Most accidents whichlead to a claim under the H&M insurance also cause unemployment for the

vessel during the time of repairs. During this time, the vessel can be off-hire withno earnings but the daily costs have to be paid. Moreover, the actual loss of timefor the vessel can be greater than the time actually needed for the repair whendelivery of replacement parts takes a long time. This can very well be the caseif, for example, the vessel’s propeller(s) have been damaged and new propellerblades have to be manufactured. The loss of hire insurance indemnifies theowner for loss resulting from the vessel being wholly or partially deprived ofearnings as a consequence of damage to the vessel, which is recoverable underthe hull conditions. Note, however, that indemnity under loss of hire policies isnot payable in case of a total loss of the vessel.112

2-120 The indemnity is based on an agreed daily amount and the number of days of

lost income. The daily amount can be ‘assessed’, that is, agreed in the policy, or‘open’, which means the ‘amount of freight per day under the current contract ofaffreightment less such expenses as the assured saves or ought to have saveddue to the ship being out of regular employment’. In the absence of a contract,the daily amount is determined based on the average freight rates for the typeand size of ship at the time of the loss of earnings.113 Each casualty is subjectto a deductible period of days and an agreed maximum number of days. Thistype of insurance is essentially business interruption insurance and isparticularly appropriate when a vessel is engaged on a time charter, but oftenalso demanded by financiers as additional security.

2-121 The case concerning The Woundrous,114

clarifies how freight insurance and loss ofhire insurance operate differently. The ship was insured both under a freight policyfor freight at risk and a loss of hire policy (against war risks). The vessel wasdetained by customs in Bandar Abbas for a considerable period of time and incurredconsiderable liabilities as well as requiring significant repair work before it could goback into service. Since the vessel did earn its freight, eventually, there was norecovery under the freight policy, but the owners were indemnified for loss ofearnings for ‘financial causes’under its loss of hire insurance.



110 Bennett, H, The Law of Marine Insurance, Oxford University Press, Oxford, 1996, p. 372.111 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 39.

112 See, for example, NIP 1996 (version 2007), Section 16–2, the American Loss of Charter Hire Insurance (ABS 1/10/83Wording), Clause 2 and Swedish General Conditions for Ship Owners’ Loss of Earnings Insurance, Clause 6.

113 NIP 1996, Sections 16–5 and 16–6.114 Ikerigi Cia Naviera SA v Palmer (The Woundrous) [1991] 1 Lloyd’s Rep 400; affirmed [1992] 2 Lloyd’s Rep 566 (CA).



1.6.3 Mortgagees’ Interest

2-122 Owners of ships (and goods) very often need to obtain a loan in a bank or otherfinancial institution in order to make the purchase of the subject-matter possibleand the lender would typically secure the investment with a mortgage in the shipbut he also needs to make sure that the loss of or damage to the asset is notgoing to reduce the value of the security. In this respect, the mortgagee willnormally choose, either to be a co-assured in the marine policy, or to arrangethat the insurance policy is assigned to the mortgagee. However, neither ofthose two methods is perfect.

2-123 If the ship becomes a total loss or is severely damaged the mortgage wouldbecome worthless but if the policy has been assigned to the mortgagee, hecould claim against the insurance. However, the insurer could declare the policyvoid on several grounds, namely with reference to MIA 1906,Sections 17–20, due to misrepresentation or non-disclosure, under MIA 1906,

Sections 33–41, due to breach of an express or implied warranty,115 or underMIA 1906, Section 55 because the loss or damage was not caused by aninsured peril or was caused by wilful misconduct of the assured.116 Since anassignee cannot acquire a better right than the original assured the mortgageewould not be entitled to indemnification in such cases. Being covered as aco-assured principal under the policy puts the mortgagee in a slightly betterposition, but does not protect him in all situations. Mortgagees’ interestinsurance has been developed to provide that additional protection. The MIAclearly states that security for loans is insurable as a marine adventure and thata mortgagee has an independent insurable interest in Sections 3(2)(b) and14(2), respectively.

2-124 The Institute Mortgagees’ Interest Clauses, Hulls (1/3/97) are relatively briefand their wording is quite straightforward. Only a couple of points need to bemade here.

2-125 Clause 2, Definition of Insured Perils, contains a list of all the individual reasonsfor non-payment under the shipowners’ policies and Club entries that will formthe basis of coverage under the Mortgagees’ Interest Insurance. When themisconduct, failure or fraud of the owner or his agent or broker, managers orsuperintendents causes his underwriters to deny payment, the Mortgagees’Interest Insurance will cover the loss thereby suffered by the mortgagee.

2-126 Clause 2.2 defines ‘Owners’ Policies and Club Entries’.The definition means thatthe insurance cover that the shipowner must have, and which is supplementedby the Mortgagees’ Interest Insurance, should be equivalent to or wider than thecover offered by the current Institute Time Clauses – Hulls, or American InstituteHull Clauses, Institute War and Strike Clauses Hulls – Time, and full protectionand indemnity cover ‘on conditions equivalent to the rules of a P&I Club that isa member of the International Group of P&I Associations’. Furthermore, if theshipowner has taken an increased value policy, which in connection with a shipacquisition is quite common, it should be on terms equal to the Institute TimeClauses – Hull Disbursements and Increased Value Clauses. Since thisdefinition of equivalent cover refers to English conditions, the mortgagee should



115 For example, if the owner knowingly sends the vessel to sea in an unseaworthy condition; see Marine InsuranceAct 1906, Section 39(5).

116 Bowtle, G and McGuinness, K, The Law of Ship Mortgages, LLP, London, 2001, p. 111.



be very careful if the shipowner’s hull cover is based on other conditions or if hisP&I cover is not through a member of the International Group. And even if theunderlying insurance cover is entirely in the UK market the mortgagee needs tobe careful as the reference to ‘current Institute Time Clauses – Hulls’ could beseen as a reference to the 1995 version as being the most current. On the otherhand, this version was not well received by the market and, therefore, it has ‘notproved to be sufficiently popular to supersede the corresponding 1983clauses’.117 The argument might then be that the ‘current’ clauses are the ones‘currently in use’ rather than the ‘most current’. As the reason for the relativeunpopularity of the 1995 clauses was that shipowners perceived them as lessfavourable, the definition ‘. . . terms equivalent or wider than the current . . .’ is apotential pitfall for the mortgagee. Likewise, it would be difficult to argue that thereference is to the International Hull Clauses, originally issued in 2002 andrevised in 2003, as they are not even issued by the ‘Institute’,118 but they weredesigned to replace the Institute Clauses and gradually will. A revision of theMortgagees Interest Clauses is clearly needed but in the meantime it is

important for the mortgagee to make sure that the terms of his Mortgagees’Interest Insurance, by clear references or suitable amendments, give him theprotection he is looking for.

1.6.4 Builders’ Risk

2-127 One might think that the building of a ship is not a ‘marine adventure’ at all andin many respects this is true because the risks that a ship under construction isexposed to are very different compared to the marine risks that a trading vesselfaces. However, the Marine Insurance Act of 1906 does contemplateshipbuilding risks in Section 2(2):

Where a ship in the course of building, or the launch of a ship, or any adventureanalogous to a marine adventure, is covered by a policy in the form of a marinepolicy, the provisions of this Act, in so far as applicable, shall apply thereto.

2-128 Therefore, the shipbuilders’ risks may, of course, be covered by insurance and itis to be considered a marine insurance, provided that the policy is a marineinsurance policy. In the London market, standard cover for builders’ risks hasbeen provided under the Institute Clauses for Builders’ Risks (01/06/88),hereafter referred to as ICFBR. The ICFBR are based on the original set ofclauses first developed in 1963.119 Consequently, they are quite outdated and in

many ways do not properly reflect modern shipbuilding practices, which relyheavily on third-party suppliers and sub-contractors constructing modules orparts of ships in other locations than the actual shipyard. Therefore, andprompted by a spate of major losses at shipyards in recent years, the Londonmarket’s Joint Hull Committee has developed a new set of standard clauses forbuilders’ risks called the London MarCAR 2007 (marine construction all risks)Clauses. The new clauses are intended to improve contract clarity between theparties and to clarify the extent of cover enjoyed by sub-contractors and other



117 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 3.118

The Institute of London Underwriters (ILU) has been superseded by the International Underwriting Association (IUA).119 ‘Bridging the Gap on Builders’ Risk Conditions’, Lloyd’s List , 28 March 2007.



parties.120 There will, presumably, be a period of adaption before the newclauses replace the previous ICFBR in the market.

2-129 Due to the increasing dominance of South East Asia in shipbuilding, theshipbuilding contracts are often based on the standard contract form of theShipbuilders’ Association of Japan (SAJ form) or corresponding standardcontracts in Korea or China. As a consequence, the insurance may be taken out‘under the Japanese Builder’s Risks Insurance Clause’,121 which is a referenceto the Japanese Special Clauses for Builders’ Risks (1/12/77 as amended inApril 1977) conditions. However, particularly in contracts for ships being built forexport, this clause is often amended so that it refers to the Institute Clausesinstead.122 The standard forms in common use in Europe, such as theNorwegian Standard Form Shipbuilding Contract (published jointly by theNorwegian Shipowners’ Association and the Norwegian Shipbuilders’Association) or the Association of European Shipbuilders and Shiprepairers(AWES) form, do not specifically mention under what conditions the insurance

must be effected. It would, consequently, be logical to expect that a Norwegianshipyard would insure in the Norwegian market under the Norwegian MarineInsurance Plan 1996 (NIP 1996)123 while a German yard might insure under thecorresponding German market conditions,124 and so on.

2-130 In most standard shipbuilding contracts, the vessel under construction is theshipyard’s property and remains at its risk during the period of construction untilit is delivered to the buyer, the shipowner, although there are variations to thisrule. Consequently, it is the shipbuilder that needs to, and contractually has to,insure the risk, but the shipowner is sometimes named as co-assured in thepolicy and materials or equipment supplied by the buyers are normally includedin the Builders’ Risks insurance.

1.6.5 Risks Covered

2-131 It has been noted above that insurance for builders’ risks is normally offered onan ‘all risks’ basis, but the expression ‘all risks’ should not be taken literally asthere are always specific exclusions from the cover. As usual, war risks areexcluded from the standard cover but can, at the buyer’s request and cost, becovered under a separate insurance policy under the Institute War ClausesBuilders’ Risks.

2-132 The basic objective of taking out builders’ risk insurance is to getindemnification if the newbuilding is lost or suffers physical damage during theconstruction period, essentially an insurance policy for the hull and themachinery. The most obvious risk of major damage is through fire. Fires atshipyards can be devastating and, when they do occur, it is often in the laterstages of outfitting when work, including ‘hot work’ such as cutting andwelding, takes place on board at the same time as there are lots ofinflammable materials present. The materials used in the fittings (bulkheads,carpeting, furniture etc.) generally have to be inflammable or at least treated



120 Stuart, D, ‘New Guidelines Promise Better Cover for Builders’, Lloyd’s List , 16 August 2007.121 Article XII.1 in the SAJ form.122 Curtis, S, The Law of Shipbuilding Contracts, 3rd edition, LLP, London, 2002, p. 200.123 Version 2007.124 DTV-Bedingungen f ̈ur die Versicherung von Schiffbaurisiken 1998, Fassung 2004.



with fire-retardant, but they are often delivered in packaging and the packingmaterial is not always removed immediately. Furthermore, controlling a fireonboard a new building is even more difficult than onboard ships in operation,since passageways may be partly blocked by equipment being installed andthe vessel’s own firefighting equipment is not yet in place or operable.Although fires may be seen as the greatest risk or at least the risk that maylead to the most serious consequences, they are by no means the only causeof large claims in this connection.This was clearly demonstrated by the partialsinking of the Pride of America at the outfitting berth a couple of monthsbefore its scheduled delivery.

2-133 The ICFBR provide cover for the cost of repairing, replacing or renewing partswhich have latent defects if they are discovered during the period of cover, butthe Clauses specifically state that the cost of renewing faulty welds will not becovered.125 Similarly, any loss of or damage caused to the subject-matter, thatis, the ship under construction, due to faulty design of any part is also covered

under the policy, provided the loss or damage is caused and discovered duringthe policy’s validity. However, the expense of ‘repairing, modifying, replacing orrenewing’ the faulty part itself and additional costs incurred in altering orimproving the design is never covered. This is entirely logical. The wholepurpose of insurance is to provide financial protection against the risk ofaccidents. A faulty design, on the other hand, is essentially a professional error(or negligence), which would be difficult to interpret as a fortuitous event. It is thesame logic that excludes cover for the cost of renewal of faulty welds, but ifdamage were caused to the ship due to the faulty weld, that damage would becovered. It might be added that Article 3 of the Japanese Special Clauses forBuilders’ Risks contains similar exclusions of cover for faulty design and weldsas the ICFBR.126

2-134 The risks that a newbuilding is exposed to extend beyond loss of or damage toitself. It is essentially a ship, at least towards the end of the building period. Allnewbuildings undergo sea trials on at least one or two occasions and duringthese they are exposed to both ordinary marine perils as well as the risk ofincurring third party liabilities. Under Clause 9 of the ICFBR the insurance allowsthe vessel to:

proceed under own power, loaded or in ballast, as often as required, forfitting out, docking, trials or delivery, within a distance by water of 250nautical miles of the port or place of construction, or held covered at a

premium to be arranged in the event of such distance being exceeded.127

2-135 In addition to loss of or damage to the ship itself, the ICFBR also cover thevessel’s portion of salvage and general average, 4/4ths collision liability,protection and indemnity liabilities and sue and labour costs relatively similar tothose described earlier in this module. The insurance cover under the NIP 1996is very similar to that offered by the ICFBR but the Japanese Special Clausesfor Builders’ Risks (and standard builders’ risk insurance conditions in other



125 ICFBR 01/06/88, Clause 5.1.

126 Similarly in NIP 1996, Section 19–15.127 Similar protection is afforded under Article 4 of the Japanese Special Clauses for Builders’ Risks and Section 19–5(b) of

the NIP 1996, but the distance is left open to be agreed in the policy.





markets) do not include the protection and indemnity liabilities. The new LondonMarCAR 2007 clauses will also extend standard cover to include damage as aresult of earthquakes as well as accidental pollution risks.

1.6.6 Ship Repair and Conversion

2-136 There are clear similarities between shipbuilding, ship conversion projects andrepairing of ships. For example, the possibility of a fire is probably an evengreater risk during conversion or repair work than in connection with buildingnew ships.

2-137 Although the nature of the risks that the vessel is exposed to appears similar,there is, however, a substantial difference between shipbuilding and repair in asmuch as a newbuilding will normally be the property of the shipyard and only becovered by the builders’ risk insurance. A ship under repair, on the other hand,

is the property of the shipowner and will already have valid H&M insurance andloss of or damage to the vessel will be covered by this insurance. Clause 6.2.4of the Institute Time Clauses – Hulls (1/11/83) specifically covers loss caused by‘negligence of repairers’.128 The same risk should, of course, not be coveredunder two different policies so a builders’ risk policy would be superfluous – thebuilders probably do not even have an insurable interest. They do, however,need to have professional negligence insurance to cover any liability that theymight incur. Any third party liabilities are (probably) already covered by thevessel’s P&I Club entry.

2-138 The picture may be somewhat different if the vessel is undergoing a majorconversion, which keeps it out of operation for an extended period, as the

owners may have declared that the vessel is laid-up and be entitled to a returnof part of the premium as a consequence of the reduced risks.129 In such asituation, a separate shiprepairers’ liability insurance may be taken out for thespecific ship.

128 ITCH (1/11/95), Clause 6.2.3 and IHC (1/11/03), Clause 2.2.4.129 See ITCH (1/10/83), Clause 22; ITCH (1/11/95), Clause 23 and IHC, Clause 39.




2-139

There are limitations to all kinds of insurance – limitations both in scope andcover. There are, obviously, limits to the amounts that are recoverable underinsurance policies, every insurance policy defines the risks that are covered, butalso those that are specifically excluded, there are circumstances that preventor disqualify the assured from making a claim against the insurance and somerisks may not be insurable at all. These limits to cover and exclusions from coverwill be briefly discussed below.

2.1 LIMITATIONS TO COVER

2-140 The compensation payable for any insurance claim will be limited to its

amount, either in relative or absolute terms. First and foremost, the recoveryis limited by the overriding principle that insurance is a contract of indemnity.The MIA 1905, Section 1 opens with the words ‘A contract of marineinsurance is a contract whereby the insurer undertakes to indemnify theassured, in a manner and to the extent thereby agreed . . .’ The whole purposeis that when an assured has suffered a loss, the insurance should reinstatehim in the same position that he would have been in if the loss had notoccurred. However, striving for a ‘perfect’ indemnity is neither realistic norpractical – if a ship has suffered a total loss the insurer cannot give the ownerback the vessel, or even another equivalent vessel. Instead, the insurer will,as per the terms of the policy, pay him an amount of money to put himfinancially in the same position that he was in before the loss, at least as faras that can be achieved with money. It is then up to the assured to decidewhether he uses that money to buy another ship.

2-141 The measure of indemnity is regulated in Sections 67–78 of the MIA 1906separately for total loss, partial losses of ships, freight and goods generalaverage contributions and salvage charges and liabilities and they all havetheir separate rules for assessing the amount of indemnity, which cannot bediscussed in detail. It has been said earlier that the indemnity for damage toa ship is a relatively simple question when the damage has been fullyrepaired – the insurer will indemnify the actual cost of repair, as long as thecosts are reasonable, or at least reasonably incurred, and the upper limit of

indemnity is the sum insured. In fact, one could say the standard clausesprovide an ‘over-indemnification’ since claims shall be paid ‘without deductionnew for old’.130

2-142 In cases of total loss, the indemnity can be a little more difficult to assess ifthe policy is unvalued. The principle is clear: the indemnity is the maximuminsurable value at the commencement of the risk, which is fine if the insurablevalue can be objectively ascertained.131 For ships this is rarely the case, butfor cargo it may be easier to get an objective market evaluation. The fact thatship values can fluctuate greatly even within a short time span would create

2. LIMITS TO COVER AND EXCLUSIONS

130 ITCH, Clause 14; IVCH, Clause 12 and IHC, Clause 16.131 For ships it is the insurable value ‘at the commencement of the risk’, and for goods ‘the prime cost of the property insured,

plus the expenses of and incidental to shipping and the charges of insurance’. MIA, Sections 16 and 67–68.



considerable uncertainty for both insurer and assured and probablyunacceptable uncertainty to a mortgagee. Consequently, hull insurance inparticular is almost always based on valued policies, which means that thesum agreed in the policy is the measure of indemnity. If the market has fallensharply after the policy has been entered into and the ship subsequentlysuffers a total loss, the assured would be paid the full amount, an amountwhich would be, in fact, considerably higher than the current market value ofa similar ship. This would appear to be a contradiction of the principle ofindemnity, but it is not. The insured value fixed by the policy is bindingbetween the parties and, more importantly, according to MIA 1906, Section27, that value is, in the absence of fraud, ‘conclusive of the insurable value ofthe subject intended to be insured’. By definition it is the value and, therefore,the amount to be indemnified.

2-143 The principle of indemnity is reinforced by the rule prohibiting double insuranceand the doctrine of subrogation. If the assured has taken out several policies for

sums exceeding the amount of indemnity allowed by the MIA, he can claimagainst those policies in any order, but is not entitled to receive sums exceedingthe total indemnity allowed by the MIA.132 The doctrine of subrogation meansthat when the assured has been indemnified (for a total loss) the insurer isentitled to take over any rights and interests in the property that the assured hadand which may remain.133 The principle of indemnity would be breached if theassured first received full compensation for a total loss and then afterwardscould benefit from some residual value or, for example, indemnification by theparty who was liable for sinking his vessel.

2-144 Another limitation on the amount of indemnity to be paid is the possibility that theparties have agreed to insure the property for a lower amount than its full value.The Lloyd’s Marine Policy (MAR 91) contains two amounts, that is, the ‘agreedvalue’ and the ‘amount insured hereunder’. Usually, or at least very often, theentered amounts are the same, but the owner may choose to insure only part ofthe agreed value and retain part of the risk or to insure say 50% at Lloyd’s andthe other 50% in the Scandinavian market. In this case the total sum to be paidby the insurer is, of course, limited to the sum insured. However, as long as thetotal amounts insured under the different policies do not exceed the value thatwould have been insurable having two or more policies in place does not breachthe rule against double insurance.

2-145 A final point is that absolutely full indemnification will not always be paid since

practically all insurance policies will have a deductible – an agreed sum,which is deducted from any claim. Note, however, that according to thestandard hull clauses the deductible does not apply in case of an actual orconstructive total loss.134

2.2 FACTORS EXCLUDING COVER

2-146 There are some general principles which are prerequisites for a valid claimunder an insurance policy. Most of them have already been mentioned, so theywill only briefly be mentioned here.

Module 2 Limits to Cover and Exclusions


132 MIA 1906, Section 32.133 MIA 1906, Section 79.134 ITCH, Clause 12; IVCH, Clause 10 and IHC, Clause 15.



2.2.1 Insurable Interest

2-147 First, MIA 1906, Section 4 declares any marine insurance contract ‘by way ofgaming or wagering’ to be void and goes on to say that a marine insurancecontract is considered a gaming or wagering contract if the assured does nothave an insurable interest and is not expected to acquire an insurable interest.The principle of insurable interest has been mentioned several times as well aswho is deemed to have an insurable interest in the different aspects of a marineadventure.

2.2.2 Insured Peril – Proximate Cause

2-148 Second, MIA 1906, Section 55, provides that the insurer is liable for lossesproximately caused by insured perils but ‘is not liable for any loss which is notproximately caused by a peril insured against’. It has been said before that

most insurance policies, at least in the London market, are based on ‘namedperils’ and in order to be covered the proximate cause for the loss must havebeen a named peril and the burden of proof is generally on the claimant, thatis, the assured, to prove his claim.135 There are often many concurrent orconsecutive factors contributing to an event, which causes a loss and it canbe quite difficult to identify the proximate cause. The proximate cause is thedominant one and not necessarily the one that is closest in time. A typicalexample is the scuttling of a ship where it is the act of scuttling that is theproximate cause of the loss and not the entry of seawater.136 Due to thecomplexity of the question of proximate cause it has given rise to a vastamount of case law. In general it can be said that when the evidence is notclear between an insured and an uninsured peril, the claim should prevail. But

if one cause is an insured peril and another is a specifically excluded peril theclaim should fail.137

2.2.3 Utmost Good Faith – Duty of Disclosure

2-149 There are certain circumstances in which insurance cover will be deniedbecause the insurer voids the policy. One such circumstance is breach ofuberrimae fidei, the requirement of utmost good faith, one of thefundamental principles of marine insurance. Section 17 of the MIA 1906reads as follows:

A contract of marine insurance is a contract based upon the utmost goodfaith, and, if the utmost good faith be not observed by either party, thecontract may be avoided by the other party.

2-150 Although the duty of utmost good faith is clearly stated to be reciprocal, it isa fact that the duty rests more heavily on the assured, or at least theconsequences of a breach will hit him harder. This is underlined by the factthat the following sections of the MIA deal with the duty of disclosure, whichrests on the assured and his agents. MIA 1906, Section 18 clearly states thatit is the duty of the assured to disclose every material circumstance known to

Limits to Cover and Exclusions Module 2


135 If the policy is based on ‘all risks’ the burden is generally on the insurer to prove the loss was caused by an excludedperil.

136 Brown, RH, Marine Insurance, vol 1, Principles and Basic Practice (6th edition), Witherby & Co Ltd, London, 1998, p. 91.137 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 369.



him before the policy is entered into, he is deemed to know everything that inthe ordinary course of business ought to be known by him and that acircumstance is material if it would influence a prudent insurer (notnecessarily the insurer he is negotiating with) regarding the setting of thepremium or whether to cover the risk or not. If the assured fails in any way tomake a full disclosure the insurer may ‘avoid’ the contract, leaving the assuredwithout cover, even if the failure to disclose is completely inadvertent. Thereare, however, some things that do not need to be disclosed, unless the insurerspecifically asks. MIA 1906, Section 18(3) lists four such items: anycircumstance which diminishes the risk, which is known or ought to be knownby the insurer, which the insurer has waived or which is superfluous by reasonof an implied or express warranty. The consequences of breach of the duty ofdisclosure and duty of utmost good faith are very harsh, but have beenexplained by the ‘information imbalance’ between the insurer and the assured.The fact remains, though, that the assured is left completely withoutinsurance cover, and this is probably after a loss has already occurred.

2-151 In other markets the assured also has a duty of disclosure, but theconsequences of failing to do so are quite different. In Norway, for example,the insurer is not bound by the policy if the assured has fraudulently givenfalse information or it must be assumed that the insurer would not haveagreed to cover the risk if full disclosure had been made. On the other hand,if it must be assumed that the insurer would have taken the risk, but on otherconditions, he is still liable if there was no causal connection between the lossand the circumstance that should have been disclosed and if the failure todisclose was an innocent mistake, the insurer is liable as if full disclosure hadbeen made, but the insurer is entitled to cancel the insurance by 14 daysnotice.138

2.2.4 Warranties

2-152 Insurance cover can also be lost due to a breach of warranty by the assured.Warranties in marine insurance can be either express or implied and arecontractual terms according to which the assured agrees to do or not to do acertain thing or to fulfil certain conditions.139 In either case, a warranty imposesa very strong obligation on the assured. Section 33(3) of the MIA 1906 states:

A warranty, as above defined, is a condition which must be exactlycomplied with, whether it be material to the risk or not. If it is not socomplied with, then, subject to any express provisions in the policy, theinsurer is discharged from liability as from the date of the breach ofwarranty, but without prejudice to any liability incurred by him beforethat date.

2-153 Section 34(2) further states:

Where a warranty is broken, the assured cannot avail himself of thedefence that the breach has been remedied, and the warranty compliedwith before the loss.



138 NIP Chapter 3, Section 1.139 MIA 1906, S. 33(1) and (2).



2-154 As the quoted sections show, the consequences of a breach of warranty aresevere, even draconian and this is so regardless of whether the breach isserious or a minor breach of the warranty. First, the assured shipowner will notbe covered for loss, which occurs after the day when the warranty wasbreached. Second, the loss of insurance cover applies to all losses, even if thebreach of warranty was in no way the cause of the loss. And third, loss ofinsurance cover is irreparable – cover will not be reinstated even if the assuredhas remedied the breach before any loss occurred. It must be noted that thisapplies to insurance policies, which are governed by English law. In most otherinsurance markets, governed by laws of other countries, the consequences of abreach of warranty are not quite as harsh.140

2-155 Express warranties are specifically agreed in the policy or incorporated byreference. In addition the MIA 1906 mentions two important implied warranties.One is the warranty of legality, meaning that the marine adventure is lawful andwill be carried out in a lawful manner.141 The other implied warranty is that the

vessel will be seaworthy at the commencement of the voyage.142 The impliedwarranty of seaworthiness applies only to voyage policies and in time policiesthere is no such warranty, but if the vessel is sent to sea in an unseaworthycondition and the assured knew or should have known about theunseaworthiness (‘with the privity of the assured’), the insurer is not liable forany loss caused by that unseaworthiness.

2.2.5 Wilful Misconduct

2-156 Finally, the MIA 1906, Section 55(2)(a) specifically exempts the insurer fromliability for ‘any loss attributable to the wilful misconduct of the assured’.

Wilful misconduct has been commented on earlier in the text on severaloccasions. Therefore, it is sufficient to mention it here for the sake ofcompleteness.

2.3 SPECIFIC EXCLUSIONS

2-157 In addition to wilful misconduct, Section 55 of the MIA 1906 lists a number ofstatutory exclusions from cover. Thus, the insurer is not liable to compensatelosses caused by delay, ordinary wear and tear, ordinary leakage and breakage,inherent vice or nature of the property, rats or vermin ‘unless the policy otherwiseprovides’, which means that the wording of the insurance policy may expressly

provide cover for losses from such causes, and they sometimes do. However,most often they are also listed as specific exclusions in the standard conditionsor the policy itself. For example, most of them are expressly excluded in theInstitute Cargo Clauses.

2-158 Any insurance policy will contain a clause or clauses with specific exclusionsfrom cover. We have already noted that practically all ordinary marine insurancepolicies exclude losses caused by war, strikes and terrorism or other maliciousacts from political motives, which can then be covered separately. Standard

Limits to Cover and Exclusions Module 2


140 See, for example, NIP, Section 3–25.141 MIA 1906, Section 41.142 MIA 1906, Section 39.





policies may also exclude losses caused by nuclear weapons of war, which areexcluded even in war and strikes risk insurance.

2-159 It is impossible here to comprehensively cover even the more commonexclusions appearing in various standard clauses and some exclusions have

already been mentioned previously in the text when the cover offered by thevarious types of insurance has been explained. Usually, though, specificexclusions are relatively clearly stated in the standard clauses or in the policyitself. Therefore, and provided he reads the ‘fine print’, the assured can informhimself about the specific exclusions much more easily than about those riskswhich are ‘excluded’ because they are not included in the named perils.




PART TWO:

ROLES AND RESPONSIBILITIES

3. ROLES AND RESPONSIBILITIES IN MARINE

INSURANCE

2-160 In any marine insurance relationship there are a number of different entitiesinvolved. In addition to the direct contractual parties, the assured and one ormore insurers, an insurance broker very often, but not necessarily always, actsas an intermediary in the placement of the insurance and payment of premiumand if the marine adventure is uneventful, that may be the end of it. But moreoften than not, things do not run as smoothly and events may occur, which lead

to claims and require further involvement of the broker as well as otherspecialists such as surveyors, average adjusters and recovery agents.The rolesof the insurer and assured are rather obvious and the previous sections havemainly discussed the responsibilities of the assured. The following section willdiscuss the roles and responsibilities of some of the other parties involved.

3.1 BROKERS

2-161 An insurance broker, when negotiating for a contract, is neither assured nor insurer.An insurance broker acts as an agent and, like any other broker, he acts as anintermediary between the two parties. The insurance broker is usually engaged by

the prospective assured to place an insurance, that is, to negotiate the terms andconditions of the proposed contract on behalf of the principal with the intendedinsurer. Brokers’ activities are governed by the law of agency and the broker, whenacting as the principal’s agent, must act so that he does not prejudice the interestsof the principal. An insurance broker does not have to accept a request to placeinsurance and, if he accepts the order, he does not guarantee that he will be ableto place the insurance contract on the terms proposed or requested by the client,but he is duty bound to use his skills and efforts to make the placement on the bestterms and conditions available to him and to the principal and to inform the principalif the placement cannot be made.

2-162 When the broker is negotiating for his principal with the prospective insurer, hemust disclose to the insurer everything that the assured must disclose, unlessthe assured gets the information too late for it to be communicated to thebroker.143 This last proviso may have been relevant in 1906 but with the meansof communication available today it is difficult to imagine how anyone could useit as a defence for non-disclosure. In addition, the broker must disclose everymaterial circumstance which is known to himself and he is deemed to knowthings that a broker in the ordinary course of business ought to know or whichshould have been communicated to him. Since the broker, as an expert in thefield should know the importance of full and fair disclosure, it is not enough tosimply receive information from the principal. The broker is expected to askrelevant questions in order to ensure that he has all the information that he then

needs to disclose to the insurer when presenting the risk.144

143 MIA 1906, Section 19.144 Rose, FD, Marine Insurance: Law and Practice, LLP, London, 2004, p. 86.



Module 2 Roles and Responsibilities in Marine Insurance


2-163 When an assured negotiates through a broker the risk of non-disclosure iseven greater than when the assured conducts the negotiation himselfbecause there is one more party involved who can make a mistake. If thebroker fails to disclose a material fact, the insurer can void the contract justas if it was the assured who failed the duty of disclosure. The broker is not, infact, responsible towards the underwriter for non-disclosure ormisrepresentation by his principal and it is the principal who suffers theconsequences if the policy is avoided. However, if the broker fails in his ownduty to disclose circumstances which the principal had communicated to himor which he should have known in the ordinary course of business and theinsurer avoids the contract, then it is likely that the broker’s negligencerenders him liable for damages to the assured who has suffered a loss. Theprinciples regarding disclosure apply similarly to material representationsmade by the broker on behalf of the assured.

2-164 In ordinary agency relationships the contacts between the contractual parties

may be conducted through the broker or agent, and quite often the monetarytransactions are also channelled via the intermediary, but as a generalprinciple, the agent is not responsible for the contractual or financialobligations of the parties. When an insurance contract is effected by a brokerthe situation is different. Section 53 of the MIA 1906 specifically makes thebroker ‘directly responsible to the insurer for the premium’ even if the principalhas not paid the premium to the broker. The broker is basically anintermediary, but ‘he is not solely an agent; he is a principal to receive themoney from the assured and to pay it to the underwriters.’145 The broker’sposition is somewhat protected by the fact that he has a possessory lien onthe policy. The policy is always sent to the broker and should the principalhave failed to pay the premium to the broker, the broker can retain it, whichprevents the assured from making any claim on the policy.146 The broker alsorepresents the assured in preparing and handling claims against the insurer,but unlike the situation regarding the payment of premium, the insurer is liabledirectly to the assured for paying the indemnity when there has been a validclaim and the broker is not responsible to the assured for claims or for returnpremiums, if the insurer fails to pay.

2-165 As payment for his services an insurance broker is normally entitled to acommission based on a percentage of the premium to be paid to the insurer.Although the broker is the agent of the assured, the commission is, in principle,paid by the insurer. In practice the assured pays the premium to the broker and

the insurer authorises the broker to retain the agreed commission and deduct itfrom the premium payable to the insurer.

2-166 In most countries brokers in the financial sector (which insurance must be seenas part of) are quite strictly regulated and national law imposes restrictions onwho may act as an insurance broker in a particular country. Having said that, anyinsurance broker who fulfils the statutory requirements can normally placebusiness with any insurer in any market, but only Lloyd’s brokers can placebusiness at Lloyd’s and all business must be presented by Lloyd’s brokers toLloyd’s underwriters.147 A Lloyd’s broker must be approved by Lloyd’s and,

145 Power v Butcher (1829) 10 B & C 329, at 340.146 Brown, RH, Marine Insurance, vol 3, Hull Practice, Witherby & Co Ltd, London, 1975, pp. 28–29.147 The Corporation of Lloyd’s was incorporated by Act of Parliament.



among other things, abide by the Lloyd’s code of practice. In this context it isimportant to understand that the Corporation of Lloyd’s is not an insurer anddoes not sell insurance – Lloyd’s is a market, which provides facilities andservices for underwriters and brokers working at Lloyd’s. Insurance is placed atLloyd’s – not with Lloyd’s.

3.2 AGENTS

2-167 Many insurance companies appoint agents to represent the companyregionally or in foreign markets. Such agents can be appointed to represent aprincipal exclusively, but in most cases the insurance agency business is onlypart of the agent’s overall business activity and the agent may representseveral different companies as agent (as long as they avoid conflicts ofinterest). An agent is often authorised to underwrite business on behalf of theprincipal company, but the agency agreement normally defines the maximum

amounts and the types of business (classes of insurance) that the agent maycommit the underwriter to. If a proposed risk exceeds the stipulated amountor is outside the agreed type of insurance, the agent can only submit it as aproposal to the principal for their approval. Similarly, the agent is normallyauthorised to settle claims on behalf of the company, but may be obliged toseek the principal’s prior approval.

2-168 An agent’s basic remuneration is normally based on a percentage of thepremium that the agent collects on behalf of the underwriter. In addition, theagent would normally also receive a commission based on the profitgenerated by the business that the agent has written on behalf of thecompany.

2-169 Lloyd’s agents are appointed by the Corporation of Lloyd’s in most major portsof the world. A Lloyd’s agent is different from a company agent in that Lloyd’sagents do not write or solicit business, just like Lloyd’s does not sell insurance.The entities that are appointed Lloyd’s agents are usually businesses alreadyinvolved in the shipping industry and they could already act as underwritingagents for insurance companies. However, their prime duty as Lloyd’s agents isto collect information in their geographical location about, shipping movements,casualties (marine, aviation non-marine), strikes, weather and naturalcatastrophes and so on, which may affect shipping and insurance.They are alsoavailable to assist those who need it, particularly those who have an interest in

a policy at Lloyd’s. In this respect they can assist a master of a ship in distress,help in arranging surveys of or organising safekeeping of goods or ships thathave suffered damage.

2-170 A Lloyd’s agent does not receive any payment from the Corporation ofLloyd’s for holding that role or for providing the information – their only‘compensation’ in this respect is the prestige involved in being a Lloyd’sagent. A Lloyd’s agent can be authorised to settle claims on behalf of cargounderwriters and for this service and the other services rendered toshipping companies or cargo owners mentioned above they would chargenormal fees.

Roles and Responsibilities in Marine Insurance Module 2




3.3 INSURERS – COMPANIES AND SYNDICATES

2-171 The role and responsibilities of the insurer appears rather obvious – it is tounderwrite the risks presented to them (if the risk is accepted) against apayment by the assured of a fee, called the premium. When the risk has been

accepted as evidenced by the insurance policy, the insurer is liable toindemnify the assured for losses that occur and which are covered bythe policy.

2-172 The insurer is often called an underwriter because traditionally the insurerssigned the contract document at the bottom, underneath the terms andconditions which described the risks. The underwriter can be a limited liabilitycompany, but can also be an individual underwriter or a group of individuals whoform a syndicate. Another traditional form of insurer is the mutual indemnityassociation where a group of people, for example, shipowners who are exposedto the same types of risks, decide to share the risks mutually between

themselves. In this case the member is at the same time both an assured andan insurer. It has already been said that mutuality was the start of, and still is thepredominant organisation form of P&I Clubs, but mutual insurance associationsfor hull cover were common, especially in the late nineteenth and early twentiethcenturies and many such mutuals still thrive today. Mutual associations havebeen common in most other forms of insurance as well (fire, home owners, carowners, etc.).

2-173 There is little need to explain how a limited liability insurance company operatesand is organised, but the individual underwriters and syndicates may merit somecomment.

2-174 Traditionally, only individuals (called ‘names’) could be members of Lloyd’s andthere were two types of members. Working members and external members –the latter were essentially investors only and were not involved in the day-to-daybusiness at Lloyd’s. A single individual, even if he or she were very wealthy,would have quite limited capacity to underwrite risk and, consequently, membersgroup together to form syndicates, represented by an active underwriter whoworks in the underwriting room at Lloyd’s. In the late 1980s the number of‘names’ was over 30,000, but a period of high claims and heavy losses forcedmany members to withdraw. In order to attract new capital to the market Lloyd’shas allowed limited liability corporate members since the beginning of 1994 andcorporate members now provide the majority of the underwriting capacity at

Lloyd’s. Underwriting members have to pay an annual contribution to the CentralFund. The Central Fund is held in trust by Lloyd’s to protect policy holders. If anunderwriting member is unable to honour his liabilities towards a policy holder,the claim will be paid out of the Central Fund. Therefore, the purpose of theCentral Fund is purely to protect the holder of a Lloyd’s policy – if a claim hasbeen paid out of the Fund the underwriter remains responsible for his liabilitiestowards the Fund.

3.4 P&I CLUBS

2-175 The origin of Protection and Indemnity Associations, or P&I Clubs for short was

already briefly described in connection with the overview of P&I cover. The best





way to describe what a P&I Club is may be to quote how they define themselves.This definition is given on the website of the United Kingdom SteamshipAssurance Association (UK Club) (Bermuda):

An insurance mutual, a club, provides collective self-insurance to its

members. The membership is comprised of a common interest group whowish to pool their risks together in order to obtain ‘at cost’ insurance cover.

2-176 This definition describes the fundamental features of P&I Clubs – they operateon a not-for-profit basis and the members pool their risks so that basically theyare at the same time both the insurers and the assureds. The members exercisetheir rights, for example approving the Articles of Association and amendmentsto them and the Rules of the club, at General Meetings of the association. TheGeneral Meeting also elects the members of the Board of Directors, often calledthe Committee, which consists of representatives of the members and which isresponsible for the management of the Club.The actual day-to-day management

is in most cases entrusted to a separate management company, and the P&IClub may be its only client, but sometimes the managers also manage othermutual associations insuring other marine risks or risks related to the maritimefield.148

3.5 AVERAGE ADJUSTERS

2-177 Average adjusters are a special category of highly qualified insuranceprofessionals who provide essential services to shipowners, cargo owners andunderwriters in documenting and calculating claims. An average adjuster isnormally appointed by the shipowner or cargo-owner who has a claim under an

insurance policy, although there are occasions when an underwriter appoints anaverage adjuster to evaluate the validity of a claim.

2-178 The average adjuster collects all the relevant data and documents concerningthe incident in order to determine whether there is a valid claim under the policyand produces a detailed statement to support the claim. This can be a delicatetask which requires complete impartiality, since the average adjuster’sresponsibility is to ensure that the assured receives the maximumindemnification that he is entitled to under the terms and conditions of the policybut at the same time he must make sure that the underwriters are not payingmore than they are liable to pay under the policy. An accurate average

adjustment, which is readily acceptable to both the insurer and the assured, canserve the purpose of avoiding lengthy and costly litigation. In order to achievethat result an average adjuster needs to be very knowledgeable, not only inmarine insurance but also in shipping in general as well as both maritime andinsurance law.

2-179 Adjusting general average claims is a central task of average adjusters. In ageneral average case the average adjuster usually also collects average bondsfrom the various parties as security for their contribution in the general average.The average bond can be a cash deposit, but more often it is in the form of aguarantee, either a bank guarantee or an underwriters’ guarantee. Considering

Roles and Responsibilities in Marine Insurance Module 2


148 Gold, E., Gard Handbook on P&I Insurance at pp. 102–104 and Hazelwood, S.J., P&I Clubs: Law and Practice,3rd edition, LLP, London, 2000, pp. 16–21.



the potentially large number of cargo interests involved, this can be a huge andquite difficult, or at least time consuming task, as cargo owners who have beenfortunate enough not to suffer a direct loss often find it very difficult tocomprehend why they should have to contribute in the first place.

2-180 In general average the average adjuster’s fee and expenses are included in thefinal adjustment and, therefore, borne proportionally by all interested parties. Fora particular average claim adjustment the situation is a little different. Standardhull clauses contain a clause, which specifically excludes ‘remuneration of theAssured for time and trouble taken to obtain and supply information ordocuments’ and charges or commission to agents or agencies appointed toprovide such services.149 Although the cost of employing an average adjuster isa cost for proving a claim rather than part of the actual claim, it is an establishedcustom that this clause does not affect the assured’s right to include the averageadjuster’s fee and expenses for preparing the claim in the claim under theinsurance.150



149 ITCH, Clause 17; IVCH, Clause 15 and IHC, Clause 19.150 Hudson, NG and Allen, J, Marine Claims Handbook , 5th edition, LLP, London, 1996, p. 50.




PATRICK DONNER

Professor Donner received an LLM from the University of Turku. He qualified forthe bar in Finland (vicehäradshövding) in 1977 and served on the bench asdeputy judge and acting chief judge of the City Court of Mariehamn for severalyears in the late 1970s.

Professor Donner served the Sally Shipping Group for 12 years, advancing fromchief legal counsel and company secretary to deputy managing director withresponsibility for the legal affairs of the Group, which operated tankers and had

ferry operations in Scandinavia and the United Kingdom and cruise operationsin the Caribbean.

After the Sally Group he was managing director of Delfin Cruises Ltd in Finland,operating cruises in the Baltic, after which he ran his own law and managementconsultancy firm for a few years.

During all this time, he taught maritime law (part-time) at the Maritime Academyof Åland and also held numerous non-executive positions on boards of directorsof shipping and insurance companies as well as elected public office at locallevel.

Since January 1995, Professor Donner has been at the World MaritimeUniversity in Malmö, Sweden, currently as Associate Academic Dean, teachinginternational post-graduate students in all commercial aspects of shipping withan emphasis on maritime and commercial law.

He is the author of Insurance Perspective on Places of Refuge (in Chircop, A.,and Linden, O., Places of Refuge for Ships, Leiden, Boston: Martinus NijhoffPublishers, 2005).

BIOGRAPHICAL DETAILS



Bennett, H., The Law of Marine Insurance, Oxford University Press, Oxford, 1996.

Brown, R.H., Marine Insurance, vol. 1, Principles and Basic Practice, 6th edition,Witherby & Co Ltd, London, 1998.

Brown, R.H., Marine Insurance, vol. 2, Cargo Practice, 5th edition, Witherby &Co Ltd, London, 1998.

Brown, R.H., Marine Insurance, vol. 3, Hull Practice, Witherby & Co Ltd, London, 1975.

Donner, P., ‘Marine Insurance for Piracy or Terrorism – Drawing a Line in Water’,

Strategic Insights: Global Maritime Security Analysis, No. 10, March 2008, pp.19–23.

Falkanger, T., Bull, H.J., Brautaset, L., and Mlynarczyk, J., Compendium for

Model Course 6.08 – Maritime Law, International Maritime Organization,London, 1993.

Gaskell, N.J.J., Debattista, C., and Swatton, R.J., Chorley & Giles’ ShippingLaw, 8th edition, Pitman Publishing, London, 1987.

Gold, E., Gard Handbook on P&I Insurance, 5th edition, AssuranceforeningenGard-gjensidig, Arendal, 2002.

Gold, E., Chircop, A., and Kindred, H., Maritime Law, Irwin Law, Toronto, 2003.

Guerrero, J.A., Marine Cargo Insurance: Adjusting, Claims Administration,

History , Witherby, London, 2003.

Hazelwood, S.J., P&I Clubs: Law and Practice, 3rd edition, 2000, LLPProfessional Publishing, London, 2000.

Hodges, S., Law of Marine Insurance, Cavendish Publishing, London, 1996.

Hudson, N.G., and Allen, J., Marine Claims Handbook , 5th edition, LLP, London,

1996.

‘Owners set for battle over piracy cover’, Lloyd’s List , 2005, 15 November.

Miller, M.D., Marine War Risks, 3rd edition, Informa Professional, London, 2005.

‘Piracy and terrorism to be covered by single policy’, 17 March 2006,downloaded from http://www.lloyds.com/News_Centre/Features_from_Lloyds/ Pi d t i t b d b i l li ht

BIBLIOGRAPHY

Documents

LW1072 Module2 Website