Marine Cargo Insurance - Part I

Cargo includes goods, merchandise or produce or other movable properties being transported from one place to another for a commercial purpose.  Transportation of cargo is undertaken in consideration of what is called Freight.  Insurance of cargo against the risks of loss or damage due to perils encountered during their ordinary course of transit has traditionally been classified under Marine Insurance, probably for reason that overseas cargo movement originally started involving water transport.  Cargo is transported by different means of transport including sea, road, rail and air. 

 

There are different types of Cargo that are relevant from an insurance point of view.  They include Containerised cargo, Commodities such as Sugar, Salt, Oil, etc., Bulk Cargo such as Timber, Gypsum, etc., Break Bulk Cargo usually stacked on wooden pallets, Heavy Lift Cargo such as Machinery, Power Equipment, etc.

 

There are different types of Cargo insurance Policies (a legal document authenticating existence of insurance contract between the person(s) having title on the cargo, usually referred to as insurable interest, and the named Insurance Company underwriting[3]  the risk).  They can be classified based on their mode and extent of transportation such as Inland Policy dealing with cargo that may be exposed to hazards or perils while being transported by road or rail; Inland Island Policy dealing with cargo transported by navigable waters or air within the country; Import and Export Policies that cover risks due to perils involved in transportation of goods by sea or air or post parcel from one country to another.  They can also be classified based on the description of cover granted, namely, Specific policies covering the specified transit from one location to another; and Open Policies that cover multiple transits during a specified period of time.

 

Many countries have their own laws governing Cargo Insurance.  However, several provisions of the English law hold good in international trade.  The English Marine Insurance Act, 1906 defines Marine Insurance thus:  "A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure."  In India, the law governing Marine Insurance is Marine Insurance Act, 1963.  Thanks to contributions on the Internet, one can refer to provisions of the law of Marine Insurance by clicking here for the English law and here for the Indian legislation.  The Australian law can be referred by clicking here.  The Canadian law can be seen furnished here.

 

Originally, a common Policy format was used for insuring both the Ship and Cargo (called SG Policy Form).  Cover issued under this Policy Form was subjected to various Clauses attached thereto.  The scope of Insurance varied depending on the nature of the cargo, mode of transport, method of packing, terms of the contract of affreightment, etc.  During the last century, there were several changes including the Policy Form itself that was simplified (called  MAR Policy Form) and the clauses attached to it.  Scope of cover for general cargo can be classified into three, namely, covers offered by Institute Cargo Clauses (A), (B) and (C).  These Institute clauses were originally formulated by the International Underwriting Association of London (formerly Institute of London Underwriters) way back in the last decades of the 19th century and is still relevant with periodical changes made from time-to-time.  There are also special terms of coverage for certain types of cargo such as Bulk Oil, Commodities such as Cocoa, Coffee, Cotton, Fats and Oils not in bulk, Hides, Skins and Leather, Metals, Oil Seeds, Sugar - Raw and Refined and Tea, Natural Rubber, Oil Seeds and Fats, Frozen Food other than Frozen Meat, Frozen Meat, Timber, etc.

 

Risks covered under general ocean cargo with Institute Cargo Clauses (C) attached form the basic cover that indemnifies Loss of or damage to the subject-matter insured reasonably attributable to Fire or Explosion, Vessel or Craft being stranded, grounded, sunk or capsized, overturning or derailment of land conveyance, Collision or contact of vessel, craft or conveyance with external object other than water; and discharge of cargo at a port of distress.  This set of clauses also insures against Loss of or damage to the subject-matter insured caused by General Average sacrifice and Jettison (dispensing with all or part of a ship's cargo overboard to lighten the vessel or to meet some danger, such as fire).  Certain additional clauses extending the cover are also attached subject to payment of additional premium.  The second set of clauses that provides extended coverage beyond the basic cover described above is called Institute Cargo Clauses (B).  This set of clauses extends the cover to include Earthquake, Volcanic eruption or Lightning, Washing overboard and Entry of Sea, Lake or River into vessel, craft, hold, conveyance, container or liftvan or place of storage.  ICC(B) also indemnifies against Total loss of any package lost overboard or dropped whilst loading onto or unloading from vessel or craft.  The third set of clauses that provides comprehensive or All Risks cover is called Institute Cargo Clauses (A).  ICC(A) covers All risks of loss of or damage to the subject-matter insured except exclusions specified.

 

Marine Cargo insurance also covers General Average and Salvage charges incurred to avoid loss from any cause other than those expressly excluded.  The insurance is extended to indemnify the assured against such portion of liability under Both to Blame Collision clause of the Bill of Lading as is in respect of a recoverable loss.

 

All Marine Cargo Insurance policies exclude from the scope of cover certain general losses including  (1)  loss/damage attributable to wilful misconduct of the Assured, (2) ordinary leakage, ordinary loss in weight or volume or wear and tear, (3) loss/ damage due to insufficiency or unsuitability of package or preparation, (4) loss/damage caused by inherent vice or nature of the subject-matter; (5) loss/damage proximately caused by delay; loss/damage arising from insolvency or financial default of the Vessel Owners/ Managers/Operators or Charterers; (6) loss/damage arising from the use of any weapon of war employing atomic or nuclear fission/fusion or similar reaction or radioactive force/matter.  Other exclsuions are loss/damage due to the Vessel's unseaworthiness or unfitness if known to the Assured or their Servants at the time of loading cargo; War Risks[1] (capture, seizure and arrest, etc.); and Strikes Risks[2] (Riots, Civil Commotions and Terrorism, etc.).

 

According to the Transit Clause of the Institute Clauses, the insurance cover attaches to the cargo when the goods leave the warehouse, continues during the ordinary course of transit and terminates either

However, the period of 60 days in (c) above will be reduced to 30 days in case of transit by Air.

 

If the contract of carriage is terminated at a port or place other than the intended destination and before delivery of the goods due to reasons beyond the control of the Assured, the insurers are to be notified immediately requesting continuation of cover for an extra premium that may be charged. 

 

Failure to notify will terminate the insurance as well.  However, such extension of cover against additional premium will only be till the goods are sold or delivered at that place OR till expiry of a period of 60 days (30 days for transit by Air) after arrival of the goods at that place, whichever occurs first. 

 

If, however, the goods are forwarded to the intended destination during the 60-days period (or 30-days, as may be applicable) mentioned above or any further extensions allowed, then termination of the cover will be in accordance with the normal rule.

 

If the destination is changed by the Assured after attachment of the insurance, prompt notice should be given to the underwriters who may, charging additional premium and/or subject to additional terms/conditions, agree to continue the cover.

 

This is an essential requirement.  The insured should have insurable interest in the subject-matter at the time of loss.  It may be noted here that  the  right of the Assured to recover for insured loss occurring even before the conclusion of the contract of Insurance, but during the active period of coverage if it is proved that the Assured was aware of a loss, but the underwriter was not.

 

The Assured is entitled to claim reimbursement of any extra charges properly and reasonably incurred in unloading, storing and forwarding cargo to the original destination if the transit is terminated at a place other than the original destination.  However, such termination should be due to operation of a risk insured against.  This provision, however, is not applicable to General Average or Salvage Charges nor is it applicable in case of charges arising from fault, negligence, insolvency or financial default of the Assured or Servants of the Assured.  It may also be noted that this provision is also subject to general exclusions and exclusions pertaining to War and Strikes.

 

Constructive Total Loss (often abbreviated as CTL) is nothing but a partial loss of the subject-matter insured (as opposed to Actual Total Loss or ATL) to such an extent that the cost of restoring the damage would exceed its value after such restoration.  In order for a claim for Constructive Total Loss to be recoverable, the subject-matter insured should have been  reasonably abandoned either --

 

Increased value includes increase on account of Customs Duty as well. In case of Increased Value effected by the Assured on the cargo insured, the agreed value of the cargo shall be deemed to be increased to the TOTAL amount insured under the basic insurance and all Increased Value Insurances covering the loss and liability under the basic insurance shall, therefore, be proportionate.  The Assured shall furnish evidence of the amounts insured under all other insurances in case of a claim.

 

Insurance on cargo shall not benefit any party not having insurable interest and shall not inure to the benefit of the carrier or any other bailee.

 

The Assured is supposed to take all reasonable measures so as to minimise, if not avert, the loss.  It shall also be the duty of the Assured to protect, preserve and exercise all rights against carriers, bailees or other third parties.  In order to encourage the Assured, the Underwriters also reimburse all proper and reasonable charges incurred by the Assured in pursuance of these duties.

Measures taken either by the Insured or the Insurer to save, protect or recover the insured cargo is not considered as a waiver or acceptance of abandonment or otherwise prejudice the rights of either party.

The Assured is expected to act with reasonable despatch in all circumstances within control as it is a statutory requirement in many countries that in the absence of any lawful excuse, the insured adventure must be prosecuted through its course with reasonable despatch.

This is a common clause found in all three sets of the Institute Cargo Clauses, making the insurance subject to English law and practice.

War risks are generally excluded under ordinary Marine Cargo Insurance policies.  However, by attaching the Institute War Clauses (Cargo) for ocean cargo and Institute War Clauses (Air Cargo) (excluding sendings by Post) for Air cargo, the effect of this exclusion is negated.  War risks include the following, namely:-

1. War
2. Civil War
3. Revolution
4. Rebellion
5. Insurrection
6. Civil strife arising from the above
7. Any hostile act by or against a belligerent power
8. Capture
9. Seizure
10. Arrest
11. Restraint
12. Detainment
13. Consequences of the above (8 to 12) or attempt at the above
14. Derelict mines
15. Torpedoes
16. Bombs
17. Other derelict weapons of war

It may be noted that the so-called Frustration Clause forming part of the Institute War Clauses (Cargo) specifically excludes any claim based upon of or frustration of the voyage or adventure.  It may also be noted that the Transit Clause limits the number of days of coverage for War Risks to 15 days counting from midnight of the day of arrival of vessel at the final port of discharge as against 60 days for general cargo by sea and 30 days by Air.

Strikes risks are also excluded under ordinary Marine Cargo Insurance policies.  However, by attaching the Institute Strikes Clauses (Cargo) for ocean cargo and Institute Strikes Clauses (Air Cargo) for cargo by Air, the effect of exclusion is negated.  Strikes risks include the following, namely:-