Decoding Marine Insurance: Hull, Machinery & Cargo

Marine insurance is a specialized form of insurance that provides coverage for risks associated with maritime activities. It encompasses various aspects, including hull insurance, machinery insurance, and cargo insurance. Let's explore each of these components:

Hull Insurance: Hull insurance provides coverage for the physical structure of a vessel, including its hull, superstructure, machinery, and equipment. It protects against risks such as collisions, groundings, fires, and sinking. In the event of damage or loss, the insurance policy compensates the shipowner for repair or replacement costs.
Machinery Insurance: Machinery insurance specifically focuses on the machinery and equipment installed on a vessel. It covers risks related to breakdowns, malfunctions, or damage to the ship's engines, boilers, pumps, and other mechanical systems. This type of coverage ensures that shipowners are protected against the high costs of repairing or replacing essential machinery.
Cargo Insurance: Cargo insurance is designed to protect the goods being transported by sea. It covers various risks that can lead to loss or damage, such as theft, accidents, natural disasters, and improper handling. Cargo insurance provides financial compensation to the cargo owner or exporter if the goods are lost, damaged, or destroyed during transit.

These forms of marine insurance are crucial for the maritime industry as they mitigate financial risks associated with vessel operations and cargo transportation. They provide peace of mind to shipowners, cargo owners, and other stakeholders involved in maritime trade. By transferring the risks to insurance companies, marine insurance ensures that any potential losses are minimized and can be adequately compensated.

It is important for maritime businesses to carefully assess their insurance needs and obtain appropriate coverage tailored to their specific operations. Working with experienced marine insurance professionals, such as brokers or underwriters, can help navigate the complexities of marine insurance and ensure comprehensive protection for hull, machinery, and cargo.

By the time you finish reading this blog, our goal is for you to have a comprehensive understanding of Marine insurance. We will cover various aspects of Marine insurance in detail, including, the following aspects:

We will also explore important aspects related to:

The Purpose of Marine Insurance: Understanding the fundamental objective behind marine insurance and how it serves as a means of financial protection for maritime activities.
Perils of the Sea: Examining the various risks and hazards that vessels, cargo, and individuals face when operating at sea, such as natural disasters, piracy, collisions, and accidents.
Principles Governing Marine Insurance: Exploring the core principles and concepts that guide the functioning of marine insurance, including utmost good faith, insurable interest, indemnity, subrogation, and proximate cause.
Coverage Provided by Marine Insurance: Investigating the types of risks and losses covered by marine insurance policies, such as hull and machinery damage, cargo loss or damage, third-party liabilities, and freight charges.
Key Stakeholders Involved: Identifying the important parties that play a role in marine insurance, including insurers, underwriters, brokers, shipowners, cargo owners, and legal experts, and understanding their respective responsibilities.
Importance of Seaworthiness and Due Diligence: Recognizing the significance of ensuring that vessels are seaworthy, meaning they are fit for their intended voyage, and the importance of conducting proper due diligence before issuing insurance coverage.
Real-World Case Studies Illustrating Marine Insurance Applications: Analyzing practical examples and notable incidents from the maritime industry to illustrate how marine insurance is utilized in protecting against risks and mitigating financial losses.

By delving into these crucial details, we aim to provide comprehensive insights into marine insurance and its significance in safeguarding the interests of maritime stakeholders.

Risk is an inherent factor in any venture, posing potential threats to assets, events, or individuals. The magnitude of risk is directly linked to its frequency of occurrence and the severity of its consequences. In the maritime industry, risks occur frequently, and their consequences can range from minor to severe.

Ship owners and sea traders face substantial financial risks, as their vessels, crews, and cargo are constantly exposed to the unpredictable nature of the sea. While eliminating risk is impractical, it can be effectively managed through risk reduction, risk retention, or risk transfer.

Risk Reduction: Employing qualified and motivated staff who receive proper training and guidance.

Risk Retention: Opting to be self-insured and assuming liability when risks materialize.

Risk Transfer: Entrusting the risk to an insurer or professional risk bearer in exchange for an insurance premium.

Given the integral role of risk in maritime activities, marine insurance plays a paramount role in safeguarding against financial losses.

Purpose of Marine Insurance:
Similar to other insurance types, Marine Insurance constitutes an agreement between the Insured and the Insurer. The Insurer indemnifies the Insured against losses incidental to voyages, in exchange for a premium paid by the Insured. The insurance company's liability extends only to the actual loss suffered; hence, no loss means no liability.

Marine insurance encompasses the protection of goods shipped from the country of origin to the destination, offering a shield against potential losses. It covers risks faced by ship owners, cargo owners, terminal handlers, and various intermediaries involved in the shipping business. Historically, the term originated from the transportation of goods via sea for international trade. Despite its name, marine insurance is applicable to all modes of goods transportation, including air, where it is referred to as marine cargo insurance.

Insurance serves as a preventive measure, allowing individuals and organizations to safeguard themselves against diverse risks. It involves transferring the risk of potential loss from the insured party to the insurance company, in return for a premium and a sense of security. In many export trade contracts, insurance is mandatory, and the responsibility for insurance costs may lie with the exporter or importer, depending on the contract terms. Beyond contractual obligations, there are compelling reasons to consider insurance for export cargo before dispatch.

When insuring goods for transit, the responsibility falls on one of the following parties:

The Forwarding Agent
The Exporter
The Importer

Types of Marine Insurance

Hull and Machinery Insurance: Hull and Machinery Insurance provides coverage for ship owners against any mishaps involving their ships. It consists of two components: hull insurance, which covers the ship itself, and machinery insurance, which covers the ship's machinery. This joint policy protects against operational, mechanical, and electrical damage to the ship's machinery, as well as damage to the hull, equipment, and stores on board. It does not cover the cargo. The policy safeguards ship owners against partial and total loss, their share of general average and salvage charges, sue and labour expenses, and liability towards other vessels resulting from collisions.

To underwrite hull insurance, the following information is required: type, construction, builders, age, tonnage, dimensions, equipment, propulsion machinery, engine, fire extinguisher; classification society, merchant shipping act, warranties, navigation hazards, and moral hazards.

Marine Cargo Insurance: Marine Cargo Insurance refers to the coverage of goods during their transportation from the country of origin to the country of destination. Cargo owners face risks such as mishandling, damage, loss, or misplacement of their goods during terminal handling and the voyage. Marine cargo insurance provides financial protection against these risks in exchange for an appropriate premium payment. It also includes third-party liability coverage for damage caused to ports, railway tracks, ships, other cargo, or individuals due to the insured cargo. The coverage starts from the seller's warehouse and extends until the goods reach the buyer's warehouse. This means that it covers the entire journey, not just the ports of loading and discharge. Marine insurance is "multi-modal," meaning it covers goods transported via various modes of transportation.

For example, a consignment may start its journey from a warehouse to a dockside on a truck (road transport), then be loaded onto a vessel (sea transport) and sail to the destination port. After unloading, it may be transferred to a railway flatbed (rail transport) and eventually to a river barge (river transport). If the goods are stolen or damaged during any of these transportation modes, the insured party can make a claim since the policy covers multi-modal transport.

Usually, marine insurance coverage ceases 60 days after the goods arrive at the final destination port. During this period, the importer has time to clear the consignment through customs and arrange for transportation to the final warehouse. However, if customs clearance or cargo movement at the port takes longer than usual, the 60-day clause can be extended to accommodate the specific circumstances, albeit with a potential increase in the insurance premium. It is advisable to provide a broad description of the warehouses, mentioning the named countries of export and import, rather than specific warehouse names, to account for potential location changes.

To minimize insurance claims, consider the following:

Pack goods with their safety during loading and unloading in mind.
Ensure that the packing is sturdy enough to withstand natural hazards.
Take into account the possibility of clumsy handling or theft when packing goods.

Insurance premiums for marine insurance vary based on factors such as the description and value of the goods, packing specifications (including containerization), country and port of export, country and port of import, and the shipping line involved. The combination of these factors determines the premium amount.

Liability Insurance: Marine liability insurance provides compensation for any liabilities arising from ship crashes, collisions, or piracy attacks. These incidents pose significant risks to the ship, its valuable cargo, and the lives of the crew members and others on board. The appropriate liability insurance indemnifies ship owners against such liabilities resulting from events beyond their control.

Freight Insurance: Freight insurance covers the loss of freight in transit. If goods are damaged during transportation, the operator would suffer a loss in freight receivables. Therefore, insurance is provided to compensate for the loss of freight. This coverage includes situations where the freight is lost, damaged, or the ship itself is lost. By having this insurance, shipping companies can avoid bearing the financial burden of such losses and be appropriately compensated.

In general, all the aforementioned types of insurance cover the following:

Sinking, stranding, fire, and explosion.
Loss during loading or unloading of cargo.
Comprehensive coverage for total losses.
Damage caused by earthquakes or lightning.
Unforeseen administrative expenses.
Losses resulting from jettison or items being washed overboard.
Collisions, overturning, derailments, and accidents.
Damage caused by natural calamities.
General average situations.

Perils covered in insurance: Marine insurance companies cover the following perils:

Perils of the sea: Marine insurance provides financial security by insuring goods against risks associated with the sea. These risks include storms, collisions, robberies, groundings, ship sinkings, adverse weather conditions, typhoons, cyclones, and more. When insured goods are damaged due to sudden accidents caused by these perils, they are covered by the insurance policy.
Fire: Fire is another peril that can lead to the destruction of insured property. In such cases, the insurance company compensates the insured for the damaged property.
War: During times of war between two countries, a ship may be captured along with its cargo. If the ship and cargo are damaged due to capture, and a claim is made by the insured party, the insurer compensates for the loss or damage.
Pirates and thieves: When pirates attack a ship and damage insured goods, or when thieves cause a loss to the insured, the insurer pays for the insured value.
Jettison: Sometimes, for the safety of life and property on the ship, it becomes necessary to dispose of cargo or part of the ship. This act is known as jettisoning of cargo. The insurance company compensates the insured for the loss incurred in such cases.
Strikes: Loss or damage resulting from strikes by employees or shore laborers is covered by the insurer.
Barratry: If the ship's navigator, captain, crew, or employees cause loss and damage to the ship and cargo through mischievous or willful actions, the insurance company may compensate for the loss. These risks are additional and covered under the insurance policy.

Marine insurance covers the loss or damage of ships, goods, or properties exposed to the perils of the sea. It compensates the owner of merchandise for losses sustained from fire, shipwreck, and other covered perils, but excludes losses that can be recovered from the carrier.

The graphic below illustrates various perils of the sea that pose a threat to shipowners' insurable interest.

Types of Marine Insurance Policies for Hull and Machinery/Cargo

A marine insurance policy serves as a contractual agreement, outlining the terms and conditions of coverage. It includes crucial information such as the names of the assured and insurer(s), the insured subject matter, the covered risks, and the sum insured. Given the legal and financial implications of insurance, it is essential to choose the appropriate policies for your ships based on trading patterns. Once you communicate your requirements to a broker, they will initiate the underwriting process by contacting the underwriters. The culmination of this process is a comprehensive policy document that embodies the agreed-upon contract.

Marine insurance policies can be categorized as follows:

Hull and Machinery: These policies provide coverage for physical loss or damage caused by marine perils. They encompass not only the physical damage but also the recovery actions and associated events in the event of a loss at sea. Typically, these policies are time-based and last for up to 12 months, with coverage commencing and expiring at noon or midnight GMT. It's important to note that certain risks are excluded from Hull and Machinery policies.

Cargo/Goods: Carrying cargo on ships involves significant risk. The loss or damage to cargo can result in substantial claims, sometimes exceeding the value of the vessels transporting them. Cargo or Goods policies cover goods, freight, and other interests against loss or damage while being transported by rail, road, sea, or air. Various policies are available to accommodate different coverage requirements. This type of policy is freely assignable and represents an agreed value policy.

Key features of cargo/goods policies include:

Typically, these policies are Voyage Policies, as time policies are not commonly used for insuring goods.
Goods can be insured on a warehouse-to-warehouse basis, extending coverage beyond the voyage alone. Depending on the terms, some cargo Free on Board (FOB) may be covered from the time of loading, while others may be insured up to a named port of destination as per Cost, Insurance, and Freight (CIF) terms.
Marine cargo policies incorporate FC&S (Free of Capture and Seizure) and F.S.R.&C.C. (Free of Strikes, Riots, and Civil Commotions) clauses, excluding war risks, strikes, riots, civil commotions, and similar perils.
Duties are imposed at the point of entry, meaning that if goods are lost before arrival, no duty is payable. However, damaged goods are still subject to duty.
The owner of the goods can choose to self-insure or appoint an agent to handle the insurance.
Other parties, including potential owners, may also arrange insurance, but they must establish legal insurable interest at the time of an incident.

Other Policies: In addition to the basic coverage for hull and machinery and cargo, there are other specialized policies available for seagoing vessels:

Blanket Policy: Large exporters often opt for an open policy, also known as a blanket policy, which provides insurance coverage for all shipments made during an agreed period, typically a year. Under this policy, the exporter periodically declares shipment details such as goods, modes of transport, destinations, etc. The maximum protection amount is paid at the time of policy purchase, streamlining the insurance process.
Floating Policy: A floating policy is issued to shipping lines on an ongoing basis, specifying only the maximum sum insured. The shipping company informs the insurance company about the details of each voyage when the ship embarks. This policy is ideal for regular cargo owners who frequently transport goods via shipping lines, offering time and cost savings.
Unvalued Policy: When the value of goods and consignments is not determined before loading, an unvalued policy, also known as an open policy, is issued. The value is determined and mentioned during the claims process, following verification and validation of the relevant facts.
Valued Policy: In contrast, a valued policy states the specific value of the consignment at the time of policy issuance. In case of a claim, the reimbursement amount is limited to the value specified in the policy, subject to other policy terms and conditions.
Block Policy: To cover the complete journey of cargo involving rail, road, water, and air transportation, a block policy is suitable. If any loss occurs at any point during transit, the insurance amount specified in the policy is payable.
Voyage Policy: A voyage policy provides coverage for a single shipment or consignment. With this policy, the exporter purchases insurance for each overseas shipment, requiring additional effort and time. In contrast, open policies automatically insure shipments. The insurance policy's validity is limited to the specified voyage, earning it the name "voyage policy."
Time Policy: Time policies are typically issued for a fixed period of one year. They can be extended beyond a year or adjusted to cover a specific voyage. However, in marine insurance in India, time policies can only be issued once a year. Customers often seek coverage for a particular duration, which is fulfilled by a time policy.
Mixed Policy: A mixed policy combines a voyage policy and a time policy. It extends insurance coverage for both a specific voyage and a desired duration, offering flexibility to address uncertainties related to ship movements and cargo.
Named Policy: A named policy is widely popular in marine insurance. It specifies the name of the insured ship in the insurance document, indicating that the policy is issued for that particular vessel.
Port Risk Policy: This policy ensures the safety of a ship when it is stationed in a port.
Fleet Policy: A fleet policy covers multiple ships belonging to the same company or owner under a single policy. It offers advantages such as covering even old ships and cost-effective administration. This policy is time-based and is suitable for ship owners with multiple vessels.
Single Vessel Policy: As the name suggests, a single vessel policy provides coverage for a sole ship under the marine insurance policy. Ship owners with a single vessel find this policy ideal in terms of cost and coverage. However, for owners with a fleet of ships, a single vessel policy for each ship is not cost-effective.

Normally, the Marine insurance cycle is as follows:

Offer & Acceptance: It is a prerequisite for any contract. Similarly, the goods under marine (transit) insurance will be insured after the offer is accepted by the insurance company.
Payment of premium: An owner must ensure that the premium is paid well in advance so that the risk can be covered.
Contract of Indemnity: Marine insurance is a contract of indemnity, and the insurance company is liable only to the extent of the actual loss suffered.
Period of marine insurance: The insurance policy covers the normal time taken for transit. Generally, the period of open marine insurance will not exceed one year.
Deliberate Act: If goods are damaged or lost during transit because of a deliberate act by the owner, then that damage or loss will not be covered under the policy.
Claims: To receive compensation under marine insurance, the owner must inform the insurance company immediately so that necessary steps can be taken to determine the loss.

In short, we can explain that a ship requires Marine Insurance cover, claims related to Marine Insurance, and the related documents and information required from the ship, including their validity, as given below:

Any ship, goods, or other movable items are exposed to maritime perils. Maritime perils refer to the perils consequent on or incidental to the navigation of the sea, such as perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints and detainment of crew and people, jettisons, barratry, and any other perils of the like kind designated by the policy.

Hence, marine insurance cover is a contract whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, which are the losses incident to a marine adventure.

These principles apply whether the policy protects against Hull & Machinery (H&M), P&I, Loss of Hire (LOH), or other standard types of marine insurance. However, different types of insurance policies often provide cover in the event of additional perils, provided that such perils have a maritime context.

The fundamental principle of marine insurance is that the assured must have an insurable interest in the subject matter of the insurance. An example of an insurable interest is the ownership of a vessel or cargo. However, a mortgagee of a ship also has an insurable interest in the ship since, pending repayment of the loan by the mortgagor, the ship is a source of security for the mortgagee, who will benefit from its continued well-being and be prejudiced if it is lost or damaged.

Hull and Machinery Insurance claims for Loss of or Damage to the Insured Ship Compensation for the financial loss incurred by a ship-owner as a result of damage to or loss of the ship caused by a collision is normally payable by the ship's Hull and Machinery (H&M) insurers.

Typical items of compensation include the cost of damage surveys, the ship's share of salvage and general average expenses, if any, the cost of any temporary repairs needed to obtain approval from the ship’s classification society for moving (possibly towing) the ship to a yard for permanent repairs, the cost of permanent repairs, including harbor and docking fees, as well as any legal costs and expenses necessary to assess potential collision liability and to secure rights of compensation from the other ship.

In the case of the actual or constructive total loss of the insured ship, the H&M insurers will normally pay the sum insured to the party or parties nominated by the assured as the parties entitled to receive such compensation. The limit of compensation will normally be specified and agreed in the policy (i.e., the insured value). However, the insured value may sometimes prove to be insufficient cover for the assured since the market value of the ship may be greater than the insured value. For such reasons, the ship-owner will usually take out additional cover in the form of Increased Value Insurance.

Cargo claims may also be brought even when the cargo is not actually lost, damaged, or delayed. This usually occurs when the documents evidencing the shipment of the cargo misdescribe some aspect of the cargo (e.g., the quantity, weight, or apparent order and condition of the cargo), and the cargo received differs from that description, even though there has been no event during the carriage that can be attributed to damage or loss. In such circumstances, the misdescription may be held to be a misrepresentation by the carrier, and the claim relates to the financial loss suffered by the receiver of the cargo as a result (e.g., where the receiver, as the buyer, has relied on the accuracy of the cargo description made by the carrier and has paid the seller for more cargo than that which has actually been shipped).

It is inevitable that ships will face cargo claims at some point in time. The most common types of claims relate to the following:

Damage to the cargo
The loss of part or all of the cargo
The delivery of the cargo to the wrong recipient
Delay to the cargo
The extra costs of discharging and/or storing damaged cargo
The costs of the disposal, on-shipment, or transhipment of cargo
Cargo’s proportion of salvage or general average

Documents and information required:
It is difficult to pursue a claim without supporting evidence since the cause of the loss or damage cannot be established without evidence. A claimant will normally wish to establish the cause of the loss or damage for the purposes of the following contracts:

The contract of sale
The contract of carriage
The contract of insurance

There will usually be three sources of evidence:

Carrier source evidence
Cargo source evidence
Survey evidence

A bill of lading or sea waybill will normally record the following data:

The apparent order and condition of the goods
The quantity or weight of the goods
The date and place of shipment

For the investigation of the cause of loss or damage, an investigation of the physical condition of the ship or other vehicle in which the goods have been carried and of the conduct of the crew, the following documents are required to be kept on board ships by a variety of international conventions:

Deck and engine logbooks
Oil record books
Pump-room logbook
Tank cleaning record book
Loading plans
Stability calculations
Fire equipment records
SMS checklists

If such records are not available on the ship, this is likely to be seen as evidence of a failure by the company to exercise due diligence.

Survey Evidence:

Certificates of Quality
Certificates of Origin
Certificates of Quantity or Weight

The documents and records relate to the condition, quantity, etc., of the goods on shipment.

Something extra for Mariners: Underwriting a Policy

When the insured wants coverage, they inform their broker, who prepares a slip (equivalent to an insurance proposal form). The slip contains the basic facts and any material information about the risk provided by the insured under the principle of utmost good faith.

The broker enters into a contract with one or more underwriters to pay an agreed premium for a policy that covers loss or damage, etc. Unless the insured value of the vessel is small, the broker first takes the slip to an influential lead underwriter and then to a succession of others until the risk is 100% covered.

Some underwriters may not be interested in covering any part of the risk. Those who are interested usually "write a line" only on a small percentage of the insured value of the ship (using their line stamp, which gave rise to the term "underwriter").

Each underwriter indicates acceptance of their share of the risk by writing their signature or initials against the line on the slip bearing the percentage they accept on behalf of their syndicate or company.

Once the slip is complete and the risk is 100% covered, the broker prepares the details of the cover on a cover note and sends it to the insured for approval.

If the insured approves of the terms, a formal policy is drafted. Some time will pass before the policy can be signed and the contract legally executed. In English contract law, the presentation of the slip by the broker constitutes an offer, and the writing of each "line" constitutes acceptance. The contract is concluded when the underwriter writes their initials or signature on the slip.

Note: The Marine Insurance Act 1906 requires the contract to be documented in a policy, so the contract is not legally enforceable until the policy is drafted. However, under the code of ethics of the London market, once an underwriter has initialled or signed a slip, they are honor-bound to pay any claim on it.

Happy Learning!