Insurance
Insurance Obligations
In an export transaction, the sale of goods contract should provide that the costs of and duty to effect, insurance during transit shall be paid for and undertaken by either the seller or buyer, as the case may be. The INCOTERMS may define who is to effect and pay the cost insurance.
If goods are sold on CIF terms, it is the duty of the seller to take out the policy of the insurance and pay the costs. In the case of FOB terms, the cost is borne by the buyer, although the seller may arrange it on his behalf.
The main insurance policies or insurance certificate should form part of the shipping documents. The policy should cover the customary risks. The insured risks may be specific to the trade or to the goods.
The insurance of goods carried by sea is undertaken by marine insurance companies or Lloyds underwriting members. The latter conduct underwriting through an underwriting agent. Every member of the syndicate is liable for a proportion or fraction of the risk.
Role of Broker
An insurance broker is usually instructed to effect insurance. The instructions are usually in a form supplied by the broker which gives the requisite particulars. A broker is usually authorised to place insurance within certain limits and certain rates. Historically, the broker prepared a slip, setting out particulars of the cover required. The presentation of a slip by a broker to an underwriter constitutes an offer, and the initialling comprises acceptance, with an immediate binding contract.
The broker notifies the insured of the terms of insurance and forwards the cover note. He should do so promptly. A closed cover note provides full particulars of the shipment and the insurance. An open cover note may issue for a floating or open policy or where further details defining the goods or the voyage are required.
The standard trading conditions of the Irish International Freight Association provide that freight forwarders are not obliged to arrange insurance unless expressly instructed to do so by the shipper / exporter. When so instructed act, they act as agents of the shipper.
A broker is presumed to be liable to the insurer for payment of the premium. This statutory presumption can be displaced by clear words in the relevant contract indicating the parties’ intent to change the position. The broker has a lien on the policy for unpaid premiums and charges.
The premium is the fee payable to the insurer when he issues a policy. Where an insured has over-insured in the case of an unvalued policy, a proportion may be repayable. There are exceptions where the over-insurance was knowingly done or where an earlier policy bore the entire risk.
Insured Amount
A valued policy values the goods at the outset. A unvalued policy provides a maximum value and allows for the subsequent ascertainment of insurable value of the goods. The insurable value under a valued policy is conclusive in the absence of fraud. The insurable value under a unvalued policy is the direct cost plus the cost of carriage and insurance.
Valued policies are more common than unvalued policies. Anticipated profit may be added. Even with floating and open policies, the value is commonly permitted to be declared in advance for this purpose. In contrast, with unvalued policies, anticipated profits cannot be included in the insurable value.
Common form policies allow for options for clauses to cover the increase in the value of the goods while in transit, prior to loss or damage.
Floating Cover
Floating cover automatically covers shipments made under its terms. The insured must promptly declare individual shipments to the insurer. It might cover shipments to stated places within a certain period, with cover to the aggregate of a stated amount. Shipments / risks within its scope must be accepted by the insurer.
A floating policy is a collection of voyage policies. They are declared as each voyage is made. The declaration of shipment must be made as soon as possible. If a declaration is not made at the earliest moment, the policy may not cover it. However, an omission or incorrect declaration made in good faith may be corrected, even after the loss has occurred.
A floating policy will usually provide a maximum amount of cover per ship. There may also be a location clause by which the insurer fixes the maximum insured amount for covered risks in one place. This limitation typically deals with landside risks incidental to the voyage, which are covered under the general warehouse to warehouse scope of the policy.
Open cover
Open cover has become a common and popular means of insurance in carriage by sea. It is similar to a floating policy. The open cover is an undertaking by the insurer to issue specific future policies within the scope of the defined terms of cover. As such, and in contrast to a floating policy, it is not an insurance policy in itself.
Open cover allows general cover for a series of shipments, the particulars of which are not yet known at the commencement of insurance. In the same way as a floating policy, all individual shipments must be declared unless the policy states otherwise.
Open cover may be for a period of time or may be indefinite. It may usually be terminated by either party by giving a period of notice.
Open cover usually provides a maximum limit of liability per ship and location in the same way as a floating policy. It may be provided that the value declared in advance is binding.
The main terms of open cover are usually found in certificates of insurance, which are issued on foot of the declarations of individual shipments made under it.
If the cover contains unusual conditions (such that consignee who succeeds to the insurance might not be expected to be included), they should be printed specifically on the certificate.
Forming the Insurance Contract
The broker will typically advise and / or decide on the details of the proposed cover. He traditionally prepares a slip memorandum which sets out details of the insurable interest, the voyage, the period of time for which cover is to be provided, a valuation and an indication of the standard policy form needed and particulars of any additional standard form clauses to be incorporated.
The broker presents the slip to insurers / underwriters. Their acceptance, traditionally by initialling, is acceptance of the proposal and forms a contract of insurance / policy. The slip is followed by the formal issue of a policy of marine insurance. The contract is incorporated in the policy. The slip takes precedence over the policy in the event of inconsistency, unless the insurer reserves the right to make changes.
Evidence of Cover
Certificates of insurance acknowledge the existence of insurance. They do not comprise an insurance policy. Certificates of insurance entitle the holder to demand the issue of policy in the terms of the certificates and to claim for losses. In open cover, the certificate may have two parts; one with the general terms and one with the particulars declared for the transit of goods concerned.
The certificate of insurance may be issued by the broker. They are evidence of the right to demand a policy. They usually will be sufficient to allow a claim to be made. However, a formal policy is required as proof in court. In a standard sale contract with shipping, the policy of insurance is presumed to be required, unless it is provided that the certificate of insurance is deemed sufficient.
Brokers cover notes are simply notes sent by the brokers to the client informing him that insurance has been obtained. Their legal status and practical value are less than that of certificates of insurance.
Utmost Good Faith
A marine insurance policy carries a duty of utmost good faith on the part of the insured. Every matter stated by the insured must be true or else the policy may be avoided. A material representation is one which would influence the judgement of a prudent insurer in setting the premium.
Where goods are unusual or particularly dangerous, a greater duty of disclosure exists. Where the goods or any matter concerning them is unusual or requires further information and inquiry, this must be disclosed.
Where a broker or agent is involved the agent must disclose material circumstances known to him or which should be known to him in addition to material circumstances disclosed by the insured. A policy effected by an agent in ignorance of material facts known to the insured cannot be avoided where the facts have come too late to the knowledge of the insured to be communicated to the agent.
Avoiding the Policy
The insurer may avoid liability unless the insured has disclosed every material circumstance which in the ordinary course of business is known or ought to be known by him. The duty covers every matter which might influence the judgement of the insurer in fixing a premium or determining whether he takes the risks.
If there is non-disclosure, the insurer may waive the required disclosure or avoid the insurance policy. It may settle the matter on an ex-gratia without accepting legal liability.
If the policy is avoided, the premium is repaid unless there is fraud.
Matters Which need to be Disclosed
The Marine Insurance Act provides that in the absence of enquiry the following circumstances need not be disclosed
- circumstances which diminish the risk;
- circumstances which are known or presumed to be known by the insurer;
- information waived by the insurer;
- superfluous information
Where the goods are of an ordinary and lawful nature, the exporter need not disclose further details or description. Where there is doubt whether a reasonable person would regard them as such, the particulars should be disclosed.
Insurable Interest
The terms of the sale contract will determine which of the seller or the buyer has an insurable interest at any given time. This depends on the particular contract term and the point in time in the course on the carriage. The default Sale of Goods Act or specific contract provisions may determine the position. There are several default presumptions which depend on the circumstances. A commonly applicable default position is that the property (title) in ascertained goods passes when the contract for the sale of the goods is made.
The point at which the property passes transfers the principal or only interest in the goods. However, the seller will usually continue to have an insurable interest notwithstanding that the property has passed. There are grounds which may apply (principally non-payment) which unwind the contract and revest the property in the goods in the seller.
The insurable interest need not coincide with the proprietary interest. The contact may provide that seller is to bear the risk of loss and / or insure. It is accepted that the party who bears the risk of loss has a sufficient interest even if the property has already passed.
The standard Incoterm phrases incorporate various obligations in contracts for sale which require that carriage of the goods by sea. See the article on the obligations which the various INCOTERMS incorporate and apply.
Assignment of Cover to Buyer
Where insured goods are sold, the insurance policy does not automatically pass to the buyer. The policy must be assigned. The marine insurance policy contract is invariably assignable. The contract for the sale of goods may contain an express or implied condition that the seller shall assign the insurance to the buyer.
The assignment is commonly done by endorsing the policy in blank and delivering it to the buyer. The assignee may then sue and enforce the policy in his own name.
Warranties
There are certain common promises or warranties given by the insured. In the marine insurance context, breach usually gives the insurer the right to avoid cover. Common warranties include, for example, that the packing is proper and that the trade is lawful. Many other matters may be warranted by the policy terms.
Exceptive warranties excuse the insurer from liability under the circumstances defined in the particular clauses. For example, the cover might be warranted free of loss caused by strikers lockout, strike, civil commotion etc. Accordingly, the insurer will not be liable for losses thereby caused.
General Average I
The principle of general average may arise where a number of parties are involved in a common venture. It also arises in many cases of marine carriage. During the sea voyage, the owner of the ship and the various owners of the cargo are subject to many of the same risks.
It may be necessary to make a sacrifice or incur extraordinary expense in circumstances of peril in other to preserve the property imperilled, e.g. by jettisoning cargo to save the ship or by incurring extraordinary expenditure to save the ship.
Such sacrifice or expenditure may be for the benefit of all concerned in the venture, and it is presumed fair and reasonable that the owners of all interests saved by the deliberates sacrifice should contribute proportionately to the loss suffered.
General Average II
Where there is loss subject to general average, the party on whom it falls is entitled, subject to the conditions imposed by maritime law, to a rateable contribution from the other parties interested. Such contribution is called a general average contribution.
Subject to any express provision in the policy, where the assured has incurred a general average expenditure, he may recover from the insurer in respect of the proportion of the loss which falls upon him; and, in the case of a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced his right of contribution from the other parties liable to contribute.
Subject to any express provision in the policy, where the assured has paid or is liable to pay, a general average contribution in respect of the subject insured, he may recover therefor from the insurer.
In the absence of express stipulation, the insurer is not liable for any general average loss or contribution where the loss was not incurred for the purpose of avoiding, or in connexion with the avoidance of, a peril insured against.
Where ship, freight, and cargo, or any two of those interests, are owned by the same assured, the liability of the insurer in respect of general average losses or contributions is to be determined as if those subjects were owned by different persons.
Recovery Subrogation and Salvage
The insured is entitled to recover the sum fixed by a valued policy. He is entitled to recover the insurable value of the goods under an unvalued policy, subject to the limit of coverage.
Once the insurer pays the insurance money, it is entitled to be subrogated to all rights and remedies of the insured in respect of the matter covered. Subrogation prevents the insured from recovering more than once. If the insured has already recovered damages from a third party, the insurer can claim the monies received.
The insurer is subrogated to all rights which the insured had against the carrier and others. For example, the insurer may be entitled to sue the carrier on foot of the negligence that has caused the loss.
The insurer stands in the shoes of the insured in the case of both total or partial loss. In the case of total loss, he may become the owner of whatever interest remains, including the interest in the salvage. Where the insurer pays for a partial loss, the title remains with the insured and any benefits derived from salvage may be retained by him.
The insurer may take over the insured subject matter on abandonment. This arises where there is a total constructive loss. In abandonment the property of the subject matter passes but the right to recover against third persons does not pass.