Insurance industry which is the offspring of socio-economic, political and technological evolution of human society has become the subject matter of discussion, debate and deliberation for all segments of the society today in India after liberalization of Indian Insurance sector and formation of insurance regulatory body Insurance Regulatory and Development Authority (IRDA).
Following globalization moves, Malhotra committee had been formed to look into the methods of liberalization of insurance. Based on the report IRA bill was introduced but later on withdrawn without discussions from the floor of parliament. Later on the bill in the modified form as IRDA bill was introduced in 1999 and the IRDA act was passed. An independent statutory authority as Regulator for insurance business came into existence in 1999.
From a legal perspective, insurance is an agreement by which one party, the policy owner, pays a stipulated consideration called the ‘premium’ to the other party called the insurer in return for which the insurer agrees to pay a defined amount of money or provide a defined service if a covered event occurs during the currency of the policy. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss.
An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage.
Kinds of insurance
Insurance is an important aid to minimize the effect of uncertainties of life as well as property. With the increasing complexities in our personal and professional life, the range of risks that the insurance companies accept has also expanded substantially. The broadest classification of insurance is in terms of
Life Insurance and Non-Life Insurance (General insurance).
A Non-life Insurance contract is different from a Life Insurance contract.
· It is a one-year renewable contract
· The insured event may or may not take place.
· The financial value of any asset can be determined.
· It is a long term contract
· The risk namely ‘death’ is certain in life insurance. The only uncertainty is as to when it will take place.
· It is difficult to determine the economic value of life.
A historical development
Business today knows no boundaries. We have an access to products and services across borders as countries continue to globalize. However the farther our goods travel the more risk they are exposed to. Marine Insurance is the oldest form of insurance in the world. With the globalization of the economy, supplier linkages span oceans, but still require goods to be delivered to the concerned party in a pristine state, just-in-time. Capital or consumer goods are produced in one country whereas users or consumers are located in some other part of the country or elsewhere in the world. Therefore, there is a need for transportation or transit of such goods by rail, road, inland waterway, sea or air. During this process of transportation, the cargo is exposed to various hazards like theft, breakage or damage. In export/ import trade, goods are transported from the warehouse of the exporter at some interior place in one country and travel to the port for loading
on the vessel. There is a trans-shipment of the goods from the land vehicle to the vessel.
Marine Insurance is not of recent origin. Its existence can be traced back to several centuries. Questions concerning it have naturally been coming up for a number of years and the law concerning it had taken a definite shape much prior to 1906 when the English Marine Insurance Act was passed with a view to codify that law. . The law relating to marine insurance was codified in England by the Marine Insurance Act of 1906, and this Act came into force on January 1, 1907. This was proposed and initiated in an attempt to clarify and set forth the regulations and policy variables associated with marine insurance agreements. This enactment purported to codify only those principles of the law which related exclusively to marine insurance and expressly enacted that the rules of the common law, including the law merchant, save in so far as they were inconsistent with the express provisions of the Act, were to continue to apply to contracts of marine insurance.
Contrary to popular belief, Lloyds’ of London was not the first group of people to offer insurance for maritime commerce. The first form of marine insurance dates back to the year 3000 BC when Chinese merchants dispersed their shipments amongst several vessels so as to abridge the possibility of damage to the product(s). The earliest account of insurance came in the form of ‘bottomry’, a monetary payment that protects traders from debt if merchandise is lost or damaged.
Development of Indian law:
Since independence Indian shipping had undergone a considerable expansion, and it became mandatory for an Indian legislation consistent with Indian conditions, for the smooth development of Indian marine insurance. Prior to legislation, questions turning on this branch of law had to be decided by the general law of contract and the English decisions based on the common law rules of contract. Most of the law of marine insurance is in essence pure interpretation of the contract contained in the common form of marine policy.
But, as in the case of its English counterpart, the Indian Act embodies only some and not all of the legal principles and rules of marine insurance, and its language is so extremely concise and general that its full import and meaning can scarcely be understood without referring to the existing law which it was intended to express or to the decided cases from which that law was evolved.
The Indian Marine Insurance Act came into operation on August 1, 1963 and is a comprehensive document containing all regulations of marine insurance business in India.
There is evidence that marine insurance was practiced in India since long time. In earlier days travelers by sea and land were exposed to risk of losing their vessels and merchandise because of piracy on the open seas. It was the British insurers who introduced general insurance in India, in its modern form. The first company known as the Sun Insurance Office Ltd. Was set up in Calcutta in the year 1710. This followed by several insurance companies of different parts of the world, in the field of marine insurance. In India marine insurance is transacted by the subsidiaries of the General Insurance Corporation of India- New India Assurance, National Insurance, Oriental Insurance and United India Insurance. Marine and hull insurance contribute 20% to the total premium of the general insurance industry in India.
Definition of Marine Insurance :
A contract of marine insurance is defined by the Marine Insurance Act 1963 as an ‘agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed losses incidental to marine adventure. It may cover loss or damage to vessels, cargo or freight.’
Thus, in Goole and Hull Steam Towing Co. v. Ocean Marine Ins.Co., the vessel was valued at and insured for 4,000 pounds. She suffered partial damage by collision which the assured repaired by spending 5,000 pounds. The Court held that the assured could not recover more than 4,000 pounds from the insurer in terms of the agreement though he was out of pocket in a larger sum.
Sec 2 (C & F) of the Marine Insurance Act, 1963 defines marine insurance and includes the movables exposed to maritime perils. Movables mean movable tangible property, which includes money, valuable securities and documents etc.
Kinds of marine insurance
There are four classes of marine insurance:
a) Hull Insurance: covers physical damage to the ship or vessel. In addition it contains a collision liability clause that covers the owner’s liability if the ship collides with another vessel or damages its cargo.
b) Cargo Insurance: covers the shipper of goods if the goods are damaged or lost. The policy can be written to cover a single shipment. If regular shipments are made, an open cargo policy can be used that insures the goods automatically when a shipment is made. The open cargo policy has no expiration date and remains in force till it is cancelled.
c) Protection and Indemnity (P&I) insurance: is usually written as a separate contract that provides comprehensive liability insurance for property damage or bodily injury to third parties. P&I insurance protects the ship owner for damage caused by ship to piers, docks and harbor installations, damage to ship’s cargo ,illness or injury to the passenger or crew and fines and penalties.
d) Freight Insurance: indemnifies the ship owner from the loss of earnings if the goods are damaged or lost and are not delivered.
Principles of marine insurance
Marine insurance is based on the basis of certain principles like other insurance. Marine insurance cannot run away from these certain principles because marine insurance is also a contract between insurer and insured. For legalization of the marine insurance, it should be contracted on the basis of the following principles. These principles are as follows.
· PRINCIPLE OF INSURABLE INTEREST: Insurable interest in the subject-matter insured must exist at the time of the loss. It need not exist when the insurance policy is taken
· PRINCIPLE OF INDEMNITY: It is a contract of indemnity. The insured is entitled to recover only the actual amount of loss from the insurer.
· PRINCIPLE OF UTMOST GOOD FAITH: It is based on utmost good faith. Both the insured and the insurer must disclose everything which is in their knowledge and can affect the contract of insurance. If either party does not disclose full facts, the other party can avoid the contract at any time.
· PRINCIPLE OF SUBROGATION: According to this principle after meeting the loss agreed, the insurer steps into the shoes of the insured and becomes entitled to all rights and remedies available to the insured against the insured property or third persons.
· PRINCIPLE OF WARRANTIES: According to Marine Insurance Act, a warranty means a stipulation or term, the breach of which entitles the insurers to avoid the policy altogether and this is so even though the breach arises through circumstances beyond the control of the warrantor.
· PRINCIPLE OF PROXIMATE CAUSE: This principle is based on the maxim in jure non remota causa, sed proxima, spectatur, which means ‘in law the immediate and not the remote cause, is to be considered in measuring the damages.’ Where a loss is brought by several causes in succession to one another, the proximate or nearest cause of loss must be taken into account. If the proximate cause is covered by the policy, only then the insurance company will be liable to compensate the insured.
Scope & need of marine insurance
Marine insurance falls under commercial insurance. The policy is taken to reduce business risks. It caters to small scale business organizations to large corporates. Policy does not cover loss or damage due to willful misconduct, ordinary leakage, improper packing, delay, war, strike, riot and civil commotion. With the due development of commerce and civilization, insurance also developed and now the strict scope of marine insurance, which was concerned only with the risk incidental to a sea voyage, has been expanded and it covers a wide variety of risks which are of course incidental to or connected directly or remotely, with a sea voyage. The contract of marine insurance must be contemplated in a marine policy following by all the fundamental principles.
Since time immemorial, merchants engaged in maritime commerce have explored ways to ensure the security essential for the transportation of their merchandise. The onslaught of the perils of the sea has always threatened the safe passage of goods across the seas and frontiers. Respite from this burden of trade was only possible through mutual aid and assistance. Traders pooled together a fund that could be utilized in the contingency of their partner. Thus became the foundation of what today is popularly known as Marine Cargo Insurance.
Mixed Sea and Land Risks: Marine Insurance need not be confined to sea voyages. It can extend to cover land risks also.
A contract of marine insurance may, by its express term, or by usage of trade, be extended so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.
In Hyderabad (Deccan) Co. v. Willoughby , bullion was insured ‘at and from Boodini to London including all risks of every description from the mines by escort to railway station at Raichur, thence by railway to Bombay and then to London.
A marine policy must be signed by or on behalf of the insurer. Where a policy is subscribed by or on behalf of two or more insurers, each subscription, unless the contrary be expressed, constitutes a distinct contract with the assured.
Importance of marine insurance
In the commercial age of today marine insurance has become most important insurance in the field of insurance. The importance of marine insurance is described below in detail.
1. Importance Of Marine Insurance For The Individual
A person has to import goods from another country which is located on the other side of sea for his business. While carrying goods from other side of sea businessman may have to face dacoits or goods may be damaged because of sinking of ship into the water. So businessman has to experience economic loss. By the result of loss person may be discouraged to engage in business. But when one insures his/her property in marine insurance does not have to face with economic problem because marine insurance provides compensation to the insured against the loss of property.
2. Importance Of Marine Insurance For Ship-owner
Expensive ship may be destroyed due to different types of risks on the marine venture. Ship-owner may have to experience with larger amounts of loss due to the destruction of the ship. Marine insurance provides compensation of loss to the ship-owner. So, marine insurance is important insurance for ship-owner.
3. Importance Of Marine Insurance For Freight
Freight insurance is also included under the marine insurance. Freight refers to the revenue that a cargo ship earns or the money which is paid to the ship-owner for transportation of goods from one part to another. If businessman does not pay freight of his goods to the ship-owner, ship-owner may have to experience economic loss. If such types of loss occur, insurance company indemnifies the ship-owner to marine insurance. So marine insurance is very important for the freight.
4. Importance Of Marine Insurance For Cargo Owner
A businessman wants to be secured for his goods. Especially countries which are located on the other side of sea, businessman may have to use marine venture. Marine insurance keeps them away from worry and fear or all responsibility of cargo owner is transferred to the hand of insurance company that provides compensation to the cargo owner if loss occurs.
5. Importance Of Marine Insurance For The Government
International trade has been increased due to the marine insurance. As international trade increases government also can receive economic profit. Government increases revenue by including extra income tax. So marine insurance is important for the government also.
Types of marine losses
A loss arising in a marine adventure due to perils of the sea is a marine loss.
Marine loss may be classified into two categories:
1) TOTAL LOSS
A total loss implies that the subject matter insured is fully destroyed and is totally lost to its owner. It can be
· Actual total loss, or;
· Constructive total loss.
In actual total loss, the subject matter is completely destroyed or so damaged that it ceases to be a thing of the kind insured.
Example: Sinking of ship, complete destruction of cargo by fire, etc.
In case of constructive total loss, the ship or cargo insured is not completely destroyed but is so badly damaged that the cost of repair or recovery would be greater than the value of the property saved.
Example: When a vessel sinks in the deep ocean & the act of retrieving to ship back from the water is costlier than the cost of the ship itself. Then the ship is left to rest and is taken as constructive total loss.
2) PARTIAL LOSS
A partial loss occurs when the subject matter is partially destroyed or damaged. Partial loss can be
· General average, or;
· Particular average.
General average refers to the sacrifice made during extreme circumstances for the safety of the ship and the cargo. This loss has to be borne by all the parties who have an interest in the marine adventure.
Example: A loss caused by throwing overboard of goods is a general average and must be shared by various parties.
Particular average may be defined as a loss arising from damage accidentally caused by the perils insured against. Such a loss is borne by the underwriter who insured the object damaged.
Example: If a ship is damaged due to bad weather the loss incurred is a particular average loss.
Types of Risks/ Perils generally covered by a Marine Insurance Policy:
· Sinking, stranding and grounding of ship/vessel/boat or craft.
· Collision or contact of vessels, ships, boats with internal and external objects.
· Discharge of cargo at a port of distress.
· Average general sacrifice.
· Volcanic eruption or lightning or fire or explosion.
· Loss of goods or packages containing goods or articles, dropping of packets or package during loading or unloading while on board or off the broad.
· Loss caused by delay, wrongful delivery, malicious damage.
· War, sea pirates, other perils like cyclones, typhoons, spirals.
· Strikes, riots, lockout, civil commotions & terrorism.
· Theft, pilferage, breakage & leakage.
· Loss caused by heating due to the closure of ventilators to prevent the entry of sea waters.
· Loss caused by rats i.e. a hole made in the bottom of the ship, through which sea water enters the ship and damages the cargo.
Marine insurance apart from indemnifying the assured against the maritime perils also includes liability of the third party incurred by the owner of the ship or other person interested in the property assured on happening of the maritime event.
In Bihar Supply Syndicate v. Asian Navigation, it was held by the Supreme Court that the onus lies on the consignor to prove that the loss of cargo was due to perils of the sea. In the absence of proof the insurer cannot be held liable in respect of the loss suffered by the owner.
Marine insurance is a contract. The contract is made to indemnify the assured for the marine losses and other losses incidental to marine adventure. The parties to the contract agree about the manner and the extent of indemnification in the event of loss. The subject matter of the agreement or the contract of marine insurance includes: cargoes, vessels of any description, freights and other interest in relation to such vessels, cargoes. Property of whatever description can be assured for any transit by land or water or by both; may exclude or include warehouse risks or similar risks in addition or as incidental to transit.
The purpose of marine insurance has been to enable the ship owner and the buyer and seller of goods to operate their respective business while relieving themselves, at least partly, of the burdensome financial consequences of their property’s being lost or damaged as a result of the various risks of the high seas. Thus, in other words, marine insurance adds the necessary element of financial security so that the risk of an accident occurring during the transport is not an inhibiting factor in the conduct of international trade. The importance of marine insurance, both to assureds, in terms of the security it provides and its cost element in the overall economics of running a ship or transporting goods, and to countries, particularly developing countries, in its impact on their balance of payments position, cannot be overemphasized.
It is well known that in India, until the coming into operation of the Indian Act of 1963, the courts used to follow the principles of English law and decisions based on such principles as well as the provisions of the English Act, viz. the Marine Insurance Act, 1906. The Indian law is a direct take- off from its English counterpart, and so, whenever it is not self evident, case law spanning over two centuries is to be looked into to arrive at the true position. Moreover, the Marine Insurance Act itself being a codification of previous case law, an appreciation of past authorities is not only an essential requirement to the understanding of the legal concepts generally, but also of paramount importance when wishing to gain an insight into the very constitution of the sections within the Act.
· 1, M. N. Srinivasan, The Principles of Insurance Law, (9th edn. 2009)
· Nirmal Singh, Business Laws, 598-599 (1st edn. 2004)