Essential Elements and Principles of Marine Insurance Contract

Principle of Utmost Good Faith

The principle of Utmost Good Faith, also known as uberrimae fidei, is a cornerstone of marine insurance. This principle requires both the insurer and the insured to be completely honest and transparent with each other. 

When purchasing marine insurance, you are expected to provide accurate and complete information without hiding or misrepresenting any details. This ensures that the insurer can accurately assess the risks involved and accordingly offer appropriate coverage.

If an insurer believes that you have hidden important information or provided false details, they have the right to reject your application or deny a claim. This makes it essential for you to disclose all relevant risks that might impact the insurance contract. Also, this principle requires you to act in good faith throughout the policy’s duration.

Breaches of the Utmost Good Faith principle can be categorised into four types:

• Non-disclosure.
• Concealment
• Innocent Misrepresentation
• Fraudulent Misrepresentation

The Marine Insurance Act 1963 places a statutory duty on you to disclose all material facts that you know or should reasonably know as part of your business. Failure to do so, whether intentional or accidental, can result in the cancellation of your policy.

For instance, if you’re transporting fragile goods and don’t inform the insurer, they might refuse to pay a claim if something goes wrong. Being honest from the start ensures your coverage is solid when you need it most.

Principle of Indemnity

The Principle of Indemnity ensures that you are compensated only for your actual loss without making any profit from the insurance claim. The goal of this principle is to restore you to the financial position you were in before the loss occurred, nothing more, nothing less.

For instance, let’s say you have a marine insurance policy with a coverage amount of ₹50 lakhs. If your cargo suffers a loss of ₹20 lakhs due to a storm, the insurance will compensate you only that ₹20 lakhs, even if your policy covers up to ₹50 lakhs.

In practice, complete indemnity is often not possible, and the policy may have predefined limits on what can be recovered. 

Principle of Insurable Interest

According to this principle, marine insurance only applies if there is some tangible commodity at risk, like cargo or a ship, and you have a legal relationship with it.

This means you must be directly affected by the course of the voyage, either gaining from its success or suffering a loss from its failure. Without this insurable interest, the policy is void. 

Moreover, for marine insurance to be valid, this insurable interest must exist at the time of the loss so that the insurance is protecting something of genuine value to you,

Examples include a lender’s interest in financed goods, seamen with wages at stake, or a freight forwarder managing the transport of goods.

Also Read: Understanding Insurable Interest In Marine Insurance Contracts

Principle of Proximate Cause

The Principle of Proximate Cause is all about finding the primary cause of the loss or damage and determining whether your policy covers that reason. 

This principle focuses on identifying the main cause of the loss, especially when several factors are involved. The insurer will cover the loss only if the primary cause is an insured risk.

For example, say a ship faces a storm (a risk covered by your insurance) and gets damaged. This damage causes the refrigeration system to break down, leading to cargo spoilage. 

While the spoiled cargo directly results from the broken refrigeration (a risk not covered by your insurance), the storm is considered the proximate cause since it triggered the chain of events. Therefore, the insurer would be responsible for covering the loss.

Also Read: Preventing Shipping Damage: Common Causes and Tips

Principle of Contribution

The Principle of Contribution comes into play when you have insured the same cargo with multiple insurance providers. This principle ensures that if a loss occurs, the payment is fairly divided among all the insurers involved.

The goal is to prevent you from receiving more than the actual value of your loss.

For the principle of contribution to apply, the following conditions must be met:

• You must have at least two insurance policies.
• All policies must be policies of indemnity.
• The policies must cover the same subject matter, interest, and risk.

For example, if your cargo is insured for ₹50 lakhs under two different policies, and you suffer a loss of ₹20 lakhs, both companies would split the amount according to the proportion of coverage they each provide.

Principle of Subrogation

The Principle of Subrogation in marine insurance allows the insurer to step into your shoes after compensating you for a loss. This means that once the insurer has paid your claim, they then have the right to pursue any third party that was responsible for causing that loss.

For example, suppose your cargo is damaged due to the negligence of a shipping company, and your insurer compensates you for that loss. According to this principle,  they can then ask the shipping company to recover the amount they paid you. 

In short, subrogation makes sure that the burden of the loss is placed where it belongs.

With these principles in mind, let's look at the essential features of marine insurance contracts.

Proposal and Acceptance

A marine insurance contract is established when the insured (or their representative) submits a proposal, and the insurer accepts it. The contract becomes valid once the insurer agrees to the terms, even if the actual policy document hasn’t been issued yet. However, issuing the policy is essential for legal evidence of the contract.

The policy must clearly specify:

1. Name of the Insured: The individual or entity purchasing the insurance or their representative.
2. Subject Matter Insured: What exactly is being covered, whether it’s a ship, cargo, or another asset?
3. Coverage Scope: The risks that are included, such as storms, theft, or fire.
4. Voyage Details: The exact journey or route being covered, including the departure and destination points.
5. Term of Coverage: Whether the policy covers a specific voyage or a set period, such as a year.
6. Sum Assured/Policy Limits: The maximum amount the insurer will pay in the event of a loss. 
7. Name of the Insurer: The insurance company providing the coverage.

Warranties

Warranties are specific conditions that the policyholder must fulfil to keep the coverage valid. They are of two types-

• Express Warranties: These are clearly stated in the insurance contract. For example, the contract may specify that the vessel must follow a particular route.
• Implied Warranties: These are not explicitly mentioned in the contract but are still binding. A common implied warranty is that the vessel must be seaworthy, meaning it is fit to undertake the intended voyage.

If a warranty is breached, whether express or implied, the insurer may have the right to terminate the contract.

Declaration

The Declaration section includes details such as the names of the insured parties, the specific cargo or vessel covered, the coverage period, and the policy number. This summary makes sure that all essential information is clearly documented for easy reference.

Consideration (Premium)

The premium, known as consideration, is the payment the insured makes based on the proposal. The contract is completed when this payment is made, and it must be paid when the contract is signed.

Marine Insurance Policy Issuance

Once the premium is paid, the insurer issues the marine insurance policy. Once it is prepared, stamped, signed, and issued to you, the policy becomes valid legal evidence.

Even after issuance, if you think the policy doesn’t accurately reflect the agreement, you can have it corrected by a court order.

Assignment

In a marine insurance contract, you have the option to transfer your rights and interests to another party. This transfer is known as an assignment. You can do this at any time, either before or after a loss, as long as you notify the insurer and they agree to it. 

However, you (the original policyholder) are still responsible for the premium unless stated otherwise. 

Customisation and Endorsements

Marine insurance contracts can be customized with endorsements to cover additional risks or specific requirements of the insured, such as coverage for high-value cargo or specialized vessels.

Coverage Extensions

Many marine insurance policies offer extensions to cover more than just standard marine risks. For example, warehouse-to-warehouse coverage protects your goods from the starting point to the final destination, including any land transportation in between.

Exclusions

This section spells out what’s not covered so you’re not caught off guard. Common exclusions may include losses due to war, piracy, intentional damage, or natural wear and tear.

Claims Procedures

The Claims Procedures section provides a step-by-step guide for filing a claim for loss or damage. It includes required documentation and timelines for reporting the incident.

Termination and Cancellation

This section explains how the policy can be ended, including automatic termination when the policy ends or cancellation due to non-payment or breach of terms.

With the features covered, let's move on to how these contracts are created.

How is the cost of a marine insurance policy determined?

The cost of a marine insurance policy is determined by several factors, including the value of the goods or vessel, the nature of the cargo, the risks involved, the voyage route, the coverage limits, and any additional terms or warranties in the policy. The premium is calculated based on these factors.

How do I file a claim under the marine insurance policy in case of damage or loss?

To file a claim under a marine insurance policy, quickly inform your insurer and provide all necessary documents, like policy details, shipping records, and a damage report. Cooperate with their investigation to ensure proper assessment. The insurer will then review your claim and offer compensation according to the policy terms.

What is the Marine Insurance Act of 1963?

The Marine Insurance Act was introduced in India on August 1, 1963, to regulate marine insurance activities. It outlines the obligations and rights of all parties involved, including insurers, insured individuals, and brokers.

What are the Eligibility Criteria for Buying Marine Insurance?

The eligibility criteria for buying marine insurance involve the following:

• Insurable Interest: You must have a financial interest in the subject matter.
• Disclosure of Information: You must provide accurate and complete information to the insurer.
• Payment of Premium: You must pay the required premium.

Who can get marine insurance?

Marine insurance is typically owned by anyone with an insurable interest in the subject matter of the insurance. In this case, it includes importers, exporters, buyers, sellers, manufacturers, freight forwarders, banks, logistics companies, and buying agents.

What Are the Advantages of a Marine Insurance Contract?

Marine insurance comes with several advantages:

1. Financial Protection: It safeguards against potential losses due to risks like damage to ships, cargo, or freight during transit.
2. Peace of Mind: Knowing your assets are protected allows you to confidently conduct business, even in unpredictable conditions.
3. Legal Requirement Compliance: In some cases, marine insurance is required by law or contract, ensuring that you meet regulatory or contractual obligations.

Risk Management: It helps you manage the financial impact of unforeseen events, ensuring your business remains stable even when accidents happen.