Many people often think that marine insurance is simply too complex to get involved in. Like most classes of insurance some risks will require extensive knowledge of marine underwriting but many can be as straightforward as insuring goods on a simple journey from A to B. Here we look at at the basics of marine cargo insurance, some specific marine terms, the type of covers available and the key risk factors.

One of the first things to notice is the language used, this is often the cause of the difficulties. For example, the word assured is used in marine insurance rather than insured. Like many marine terms this stems from the historic nature of marine insurance – the oldest form of insurance.

The basic principles of marine insurance should be familiar to most, they include: indemnity, insurable interest, subrogation and utmost good faith

Whilst a marine insurance contract is one of indemnity the demands of business make an amount of flexibility necessary.

Interestingly, the person who owns the cargo at the start of a transit is not necessarily the person who will benefit from the policy in the event of a recoverable loss. This is why identifying who has an insurable interest at the time of loss is very important. Transporting commodities such as oil illustrate this as they can be bought and sold several times during the course of the journey.

Once a claim is paid then an insurer will become subrogated to the assured's rights. This means that insurers will attempt to recover "compensation" by way of payment made by the carriers under their conditions of carriage. If the carrier is held in some way responsible for the loss it can really help an assured's claims experience.

Utmost good faith (uberrimae fidei) is a matter of real importance in marine insurance and the onus of disclosing all material information is placed on the assured.

Insurance cover is arranged in accordance with the responsibilities arising under the agreed Terms of Sale. The international shipping industry has agreed a number of terms, which will be honoured by various governments internationally, that allow the transfer of ownership and the control of goods at various stages of the shipping process. These are called the incoterms and are briefly explained on the next page:

Covers in Marine Cargo Insurance
Marine cargo cover is basically standardised into three sets of clauses know as the Institute Cargo Clauses (A), (B) and (C).

Working in reverse order (C) clauses provide the least cover with only some major perils such as fire and explosion being covered i.e. catastrophe cover. (B) clauses include cover for things such as total loss of a package lost overboard during loading. Finally the widest cover is provided by the (A) clauses which can cover all risks of loss or damage. They also include cover for piracy which even today is a major problem with in excess of 200 cases reported each year especially in the South China sea.

There are a number of exclusions under the Institute Cargo Clauses and the Marine Insurance Act 1906 and some of these are common to other classes of general insurance.

General Exclusions include: losses proximately caused by delay; ordinary wear and tear, leakage, loss in weight or volume; inherent vice or nature of the goods.

In addition exclusions are placed on loss, damage or expense caused by or arising from:
- Insufficient/unsuitable packing preparation
- Improper storage in container/trailer by assured or his servants
- War risks, strikes, terrorists, use of nuclear weapons
- Insolvency or financial default of the shipowner
- Unseaworthiness of vessel or craft where assured or servants are privy to this
- Unfitness of container to carry the goods where the assured or servants are privy to this fact
- Other cover details

Cover for loss or damage caused by war, civil war, derelict mines, torpedoes and similar is provided on the cargo whilst on a vessel and continues until the cargo is discharged overside at final port. This cover being provided by the Institute War Clauses.

Under the Institute Strikes Clauses, as the name suggests, cover is provided for damage caused by strikers, riots or any person acting from a political motive including terrorists

The standard of vessels used to carry cargo and the ability of insurers, to charge additional premiums on cargo carried by vessels that do not meet the standards is outlined in The Institute Classification Clause. This is an advisory scale of rates which insurers can use and, if appropriate, charge an "overage AP" (additional premium) reflecting the age and tonnage of the vessel.

When it comes to rating marine insurance there are several key factors that need to be taken into consideration:
- who needs to be insured? – buyer, seller (see incoterms section)
- how is it getting there? – air, sea, road (own or hauliers vehicles)
- where is it going to/from? – is the shipment going direct or is there going to be any storage or transhipment (taking off of one conveyance and putting it on another)
- maximum value any one shipment – this can be different for each form of transport used.
- what is being insured? – including details of how the goods are packed , if containerised or if there are any special requirements for transit
- conditions – any special conditions required?
- excess – if any
- basis of valuation – in the event of loss on what basis will the claim be settled - the normal Basis of Valuation is Cost Insurance & Freight (CIF) plus ten per cent

Each of the above can be split down further to enable more accurate rating. For example, the risk factors involved in finding out where the cargo is going to and from include:
- inland journey involved? If yes, then are there any cross border movements?
- how far is inland journey?
- what is the infrastructure like in the countries travelled through?
- is the route susceptible to hijacking/theft?
- what is the port like, are their facilities for off loading containers or storage?
- can the port handle containers?

The above is by no means exhaustive but illustrates the large number of factors that can come into play when assessing a marine risk.

Essentially there is no real difference between the basic principles behind marine cargo insurance and the rest of general insurance underwriting.

Much of the perceived complexity stems from the use of historic terms and different ways of describing covers.

This article provides people not involved in marine insurance with a basic knowledge of this class of insurance. It should therefore enable brokers to be more confident in discussing aspects of their clients import or export business and being able to meet their needs more effectively.

But don't forget, a marine insurer ensures it's the assured not the insured that's insured!

Risks covered by Institute Cargo Clauses Institute Cargo Clauses
Risks (Proximate Cause) (A) (B) (C)
Stranding, Grounding, Sinking or Capsizing Yes Yes Yes
Overturning or Derailment of Land Conveyance Yes Yes Yes
Collision of Ship or Craft with another Ship or Craft Yes Yes Yes
Contact of Ship, Craft or Conveyance with anything other than Ship or Craft (excludes Water but not Ice) Yes Yes Yes
Discharge of Cargo at Port of Distress Yes Yes Yes
Fire or Explosion, Earthquake, Volcanic Eruption or Lightning Yes Yes No
Malicious Damage Yes No No
Theft/Pilferage Yes No No
General Average Sacrifice Yes Yes Yes
Jettison Yes Yes Yes
Washing Overboard (deck cargo) Yes Yes No
War Risks (except piracy) Yes No No
Loss overboard during Loading/Discharge (total loss only) Yes Yes No
Seawater entering Ship, Craft, Hold, Conveyance, Container Lift Van or Place of Storage Yes Yes No
River or Lake Water entering Yes Yes No

Ex Works Buyer pays for the invoice cost of goods and must arrange insurance from the works to final destination. Seller sells at the invoice cost.
F.O.B. Buyer takes responsibility for goods, once they are on board the vessel. Insurance is the responsibility of the buyer from this moment until final delivery. Seller is responsible for carriage and loading costs and any damage, until goods are loaded on board. Insurance is the responsibility of the seller from works until on board.
F.A.S. (Free Alongside Ship) Buyer takes responsibility for goods as soon as they are alongside the vessel (or on the quay). Insurance is the responsibility of the buyer from this moment until final delivery. Seller is responsible for carriage and unloading costs until goods are alongside the vessel or on the quay. Insurance is the responsibility of the seller from works up to this point.
F.O.Q (Free on Quay). As F.A.S. above
F.0.R. (Free on Rail) Buyer is responsible for goods once they have been loaded on rail or trailer. Insurance is the responsibility of the buyer from this moment until final delivery to final destination. Seller is responsible for goods until loaded on rail or trailer. Insurance is the responsibility of the seller from works until this time.
F.O.T. (Free on Trailer) As F.O.R. above
C & F (Cost of goods & Freight charges paid until port of discharge) Buyer takes responsibility for goods once they are loaded onto the carrying vessel. Insurance is the responsibility of the buyer from this moment until final delivery. Seller is responsible for goods until loaded onto the carrying vessel. Insurance is the responsibility of the seller from works until this time.
C.I.F. (Cost Insurance & Freight) Buyer is not responsible for insurance as this is included n the contract price. However, Increased Value cover at the ultimate destination may be required to meet charges or increased market value. Seller is responsible for providing insurance, but usually follows the buyer's instructions
There are other INCOTERMS but the above are the most common used.