Marine Insurance Course Paper 2

Compiled by: Capt. Zillur

Page 1 of 4

Marine Insurance Practice

Marine insurance is accomplished in the form of an insurance contract. This contract may be
defined as an agreement whereby one person, called the insurer or underwriter, agrees,
according to specific terms of the contract, to indemnify the person effecting the insurance for
losses incurred in connection with property and interests involved in maritime transport.
Marine Insurance market
Marine insurance is offered by professional insurers of different legal status. For example, on the
London insurance market, insurance business is transacted by the corporation of Lloyds, which is a
society of underwriters whose members, knows as Underwriting Members of Lloyds, carry out
insurance transactions for their own account and risk. The Institute of London Underwriters is an
association of insurers who offer, inter alia, marine insurance. In the worlds marine insurance
markets and major insurance centres, such as the United Kingdom, the United States of America,
Japan, France, Germany, etc., many companies provide insurance for ships, cargoes and a wide
range of liabilities. In Bangladesh, Shdharan Bima and general insurance companies provide marine
insurance covers for H&M and cargo matters.
The party who enters into an insurance agreement with the insurer and who pays the insurance
premium is referred to as the person effecting the insurance. Often this person will also be entitled
to a potential insurance indemnity, but this is not always the case. Under a c.i.f. contract, the seller
is to obtain insurance, but the buyer has a claim against the insurer if the goods are damaged after
the risk of loss has passed to him (that is, after the goods have been taken abroad at the loading
port). In order to make this clear, it is customary practice to call the person entitled to the
insurance claim the assured. However, nothing prevents there being several assureds under one
insurance agreement. In the case of hull insurances of ships, it is customary for both the owner of
the ship and mortgagees to be covered under the same insurance policy.
In the case of cargo insurance and P&I insurance, the insurance agreement is normally entered
into with one insurer. In H&M insurance, however, it is normal for several insurers to act as co
insurers vis-a-vis the assured, each for his own part of the policy. Usually, one of the insurers will
act as the main insurer, thereby entitling him to certain rights to bind the others. Co-insurance
gives the insurers an opportunity to spread the risk of loss. Another way to accomplish this result is
through re-insurance, which involves the initial insurer going to the market and insuring parts of
his risk with other insurers. In relation to the assured, only the direct insurer is liable. Reinsurance
may be used together with, or in place of, co insurance. Marine insurance is the oldest type of
insurance. Out of it grew non-marine insurance and reinsurance.
Marine Insurance Act 1906
In 1906 the Marine Insurance Act was passed in UK which codified the previous common law; it is
both an extremely thorough and concise piece of work. The common use of standard forms of
insurance clauses has been with influence on the general uniformity of insurance law. This is why
there are no international conventions in this field and the English Marine Insurance Act 1906 is an
Act to codify the Law relating to Marine Insurance, which governs the contract of marine insurance.
Marine Insurance Policy
Normally, the insurance agreement is evidenced by an insurance policy. The policy will contain the
necessary specification of the item or interest which is insured, and refer to the applicable
conditions of insurance. For instance, the various clauses which the assured wishes to be
incorporated are attached to the Lloyds Form of Policy, which is used by Lloyds underwriters and
by other marine companies. Such sets of clauses from in fact a part of the policy.

Marine Insurance Course Paper 2

Compiled by: Capt. Zillur

Page 2 of 4

In the 19th century, Lloyd's and the Institute of London Underwriters (a grouping of London
company insurers) developed between them standardised clauses for the use of marine insurance,
and these have been maintained since. These are known as the Institute Clauses because the
Institute covered the cost of their publication.
Within the overall guidance of the Marine Insurance Act and the Institute Clauses parties retain a
considerable freedom to contract between themselves.
The Marine Insurance Act includes, as a schedule, a standard policy, which parties were at liberty
to use if they wished. Because each term in the policy had been tested through at least two
centuries of judicial precedent, the policy was extremely thorough. However, it was also expressed
in rather archaic terms. In 1991, the London market produced a new standard policy wording
known as the MAR 91 form and using the Institute Clauses. The MAR form is simply a general
statement of insurance; the Institute Clauses are used to set out the detail of the insurance cover.
In practice, the policy document usually consists of the MAR form used as a cover, with the Clauses
stapled to the inside. Typically each clause will be stamped, with the stamp overlapping both onto
the inside cover and to other clauses; this practice is used to avoid the substitution or removal of
clauses.
Because marine insurance is typically underwritten on a subscription basis, the MAR form begins:
We, the Underwriters, agree to bind ourselves each for his own part and not one for another [...].
In legal terms, liability under the policy is joint and not several; i.e. The underwriters are all liable
together, but only for their share or proportion of the risk. If one underwriter should default, the
remainder are not liable to pick his share of the claim.
Typically, marine insurance is split between the vessels and the cargo. Insurance of the vessels is
generally known as 'Hull and Machinery' (H&M).
Cover may be on either a 'voyage' or 'time' basis. The 'voyage' basis covers transit between the
ports set out in the policy; the 'time' basis covers a period of time, typically one year, and is more
common.
Premium
According to the Marine Insurance Act 1906
1.
Where an insurance is effected at a premium to be arranged, and no arrangement is made,
a reasonable premium is payable.
2.
Where an insurance is effected on the terms that an additional premium is to be arranged in
a given event, and that event happens but no arrangement is made, then a reasonable additional
premium is payable.

Marine Insurance Course Paper 2

Compiled by: Capt. Zillur

Page 3 of 4

P&I Clubs
Marine insurance is often provided by what are known as Protection and Indemnity Clubs (P&I
Clubs). The purpose of the P&I Clubs is to insure, on a mutual basis, liability and loss incurred by
the Members (ship owners, charterers, operators) in direct connection with the operation of their
ships. P&I Clubs may be described as protecting organisations which insure on a non profit making
basis, the P&I liabilities, stated in course paper 1.
The P&I clubs do not issue insurance policy but provide each of the members with a certificate of
entry confirming that that vessel is entered with the club. The clubs also provide a rule book
setting out the terms of relationship between the members and the club, such as defining the risks
covered, risks not covered, and rights, duties & obligations between the clubs and members.
In the P&I insurance there is no provision for agreed fixed premium and the premium is
traditionally termed as call. A P&I insurer advises each of the shipowner member what they think
they need to pay known as estimated total call (ETC). The amount a member will have to pay
depends on the type, size and age of the vessel but the most influencing factor is the past claims
record of that member. A member with a bad claims record will be paying a much higher call than
a member operating similar vessels but with a good claims record. This method of calculation goes
to the very heart of the principal of mutuality.
The ETC is expressed as an amount per ton and constitutes the members rate. A percentage of
the total cost known as the Advance call is then levied on the members in one or more instalments
during the policy year. After the policy year is finished, the management assesses the total cost of
the year, giving allowance for not only the claims expenditure but also for the share of pool claims,
cost of reinsurance, administration and other expenses, and also crediting for any investment
income. The amount required to balance the books in excess of the advance call will be levied to
the members in way of Supplementary Calls. In the case of a year closing of surplus income over
liabilities then the Board of Directors may authorise payment to members of a percentage of the
advance call, obviously no supplementary call having been asked.
The worlds leading P&I clubs, while maintaining their independence and autonomy, grouped
together to spread the financial risk of large claims by sharing those risks across all the clubs and
also to take advantage of purchasing power to buy a single insurance for the very large claims. The
International Group came into being in 1979. There are currently 14 P&I club member in the
International Group (IG) and between them they provide liability insurance for more than 90% of
the worlds shipowners. These clubs are also known as Pool Clubs.
IG & Non-IG P&I Insurers
There are a number of P&I insurers outside the International Group (IG) providing covers for
shipowners which are prepared to accept ships which the group clubs will not accept for various
reasons. There are also fixed premium clubs offering P&I type cover. Each individual shipowner or
manager, possibly with the advice of professional brokers, will need to decide which club or facility
would be best for them.
IG Clubs Do not make profit; have long history & managed by specialists; their ethos is proshipowner; benefit from cheap reinsurance. If a vessel is arrested the IG club Letter of Guarantee
is normally accepted by all authorities across the globe. The disadvantage of the IG club is that
they are some type of self insured and if expenses exceed income then the shipowner is asked to
pay additional call (premium).
Fixed premium insurers Cheaper premium and no additional call but seeks to make profit; ethos
is not pro-shipowner; claim settlement & claim service not up to the standard of IG clubs; their
profit making tendency exposed a number of fixed premium insurers to untenable positions leading
to their closing down. Non-IG guarantee may not be acceptable by the potential claimants.

Marine Insurance Course Paper 2

Compiled by: Capt. Zillur

Page 4 of 4

P&I Correspondents
The P&I clubs have a network of correspondents all over the world. A list of correspondents is
available with the master of a vessel for the P&I club the vessel is entered. The P&I correspondents
are not actually appointed by the P&I clubs directly nor are they agents of the club in the legal
sense. The P&I correspondents job is to assist the members (shipowners) and the club technically,
legally, and commercially as and when required and they are paid when actually
assisting/reporting.
P&I correspondents tend to be experienced individuals such as ships agents, surveyors, maritime
lawyers with excellent local knowledge. The value of a P&I correspondent is often under-rated as
they can make all the difference between a problem being handled in a controlled manner,
resulting in the shipowners and clubs position being protected while causing minimum delay to the
vessel, and on the other hand the problem getting out of hand leading to the ship being arrested or
falling foul of local authorities.
Arrest and P&I Letter of Guarantee
In many jurisdictions around the world, a potential claimant can arrest the ship in order to secure
his potential claim. Any such arrest causes heavy loss to the operator of the ship and also for the
owners of the cargo that the ship is carrying. A particularly important aspect of the service
provided by the P&I clubs is the provision of security where arrest is threatened or executed.
The reputation of the clubs is such that a claimant is nearly always prepared to accept a Letter of
Guarantee from an IG club rather than insisting on a Bank Guarantee or Bond. The Letter of
Guarantee ensures a speedy release of the vessel from arrest or threat of arrest at no cost. The
Clubs Letters of Guarantee are readily acceptable to claimants because of the combined financial
strength of the clubs through the IG pool.

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