Principles in Marine Insurance

                  Principles in marine insurance  

Marine insurance defined:  A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, that is to say, the losses incidental to marine adventure.

Principle of indemnity:

The principle of indemnity states that the insurance company will indemnify the marine insurance policyholder only till the extent of his loss. A policyholder cannot use his marine insurance policy to make a profit. 

Example of indemnity in marine insurance

Let us say that Mr. Mukesh took a cargo insurance policy with a cover of Rs.10 Lakhs. Now, his cargo was damaged while the voyage and the damages amounted to Rs 5 Lakhs. Mr. Mukesh will only be indemnified to the extent of his damages, i.e Rs 5 Lakhs.

Principle of subrogation:

The principle states that when the insurance company pays compensation to the insured, the insurance company assumes ownership of the insured object.

Example of subrogation in marine insurance

Let us say Mr. Sunny is a trader and he has bought a cargo insurance policy from an insurance company. His cargo was damaged due to certain malpractices of the ship owner.

The insurance company will provide the claim amount to Mr. Sunny and after paying the claim amount, they will assume ownership of the damaged goods. The company can use its new ownership to file a suit against the ship owner and recover their damages.

Principle of good faith:

The principle of good faith states that the insured, as well as the insurer, must be completely honest and transparent with each other. They should not falsify, misrepresent or lie about any aspects. If they violate this principle, the contract can be terminated.

Example of good faith in marine insurance

Let us assume that Mr. Doshi purchased a hull insurance policy to protect the hull of his vessel. In order to save on some premium, he falsified the age of the vessel. The insurance company found out about this and terminated the policy.

Principle of contribution:

This principle states that a person can insure the same object with 2 different insurance companies. Both companies can cover the same object as well as the same risks. The coverage amount can vary.

Example of contribution in marine insurance

Let us state that Mr. Ray has bought 2 cargo insurance policies with 2 different insurance companies, each amounting to Rs.5 Lakhs. Unfortunately, his cargo is damaged at the port and Mr. Ray is left with damages amounting to Rs.5 Lakhs.

Mr. Ray now approaches the first insurance company and gets the entire claim amount of Rs 5 Lakhs. Now, under the principle of contribution, the first insurance company will raise a claim with the second insurance company for Rs 2.5 Lakhs, as the second company also agreed to share the risk. The second insurance company will pay the first Rs 2.5 Lakhs and the matter will be settled.

Principle of insurable interest:

Under this principle, a person may only buy insurance for an object that he has an interest in. Insurance can only be bought If loss or damage of that object causes financial strain to the insured.

Example of insurable interest in marine insurance

Let us assume that Mrs. Karuna bought a marine insurance policy to cover any losses to her cargo. Mrs. Karuna could only buy this insurance because if her cargo got lost or damaged it would cause her business financial loss. Mrs. Karuna had a stake in the insured object so she could buy the policy.

Principle of proximate cause: 

There could be a scenario where an incident was caused due to two or more events. Under this principle, the insurance company will consider the closest cause to the incident while handling claims.

Example of proximate cause in marine insurance

 Let us state that Mrs. Pooja bought a cargo insurance policy to protect her cargo. Now, there was an incident where the cargo got damaged, and Mrs. Pooja filed a claim with the insurance company.

Upon investigation, the insurance company found out that the proximate cause (closest cause that caused the damage) was not covered under the cargo insurance policy.

Based on this information, the insurance company rejected Mrs. Pooja’s claim.

Principle of Loss Minimization:

This principle states that the policyholder must do everything in his power to minimize the loss caused due to an unforeseen event. He must not just sit ideally while his insured object continues to get damaged. He must try to minimize the damage.

Example of Loss Minimization in Marine Insurance

Let us assume that Mr. Shyam took a freight insurance policy to insure his freight.

While on the port, his freight caught fire. Mr. Shyam is obligated to call the fire department, try to put out the flames in a safe manner.

He should not just sit ideally while the freight burns. All attempts must be made to save the freight in a safe manner.

Insurance based on mutuality means that a Member is simultaneously both the insurer and the insured. In a P&I Club, Members get together to share each other’s risks. Since it is a mutual, certain standards are expected of and imposed upon the Members.

A number of Rules dictate how a Member is expected to behave. Cover may be prejudiced where a Member fails to comply with the standard expected.

On the other hand, where a Member meets or exceeds the standard expected, this benefits the Club as a whole. Accordingly, The Swedish Club strongly promotes loss prevention measures and initiatives.

The concept of mutuality should be applied with diligence. It does not require a complete sharing of risk. Risks which are confined to certain jurisdictions or certain types of ships or cargo may be shared amongst those in that trade but not by the whole community of Members. That is still mutuality.

What is moral hazard in insurance:

Moral hazard broadly refers to the increase in people’s use of a service when it is covered by insurance, compared to when it is not. 

Example of moral hazard in insurance

We will use doctor-patient situations and related health risk examples at different points. 

A general example would be that when people have health care insurance they are more likely to visit a doctor compared to when they do not have health care insurance. 

OR

To put it simply, a moral hazard in insurance occurs when the borrower knows that someone else [Insurer] will pay for the mistakes he makes. This, in turn, gives him the spur to act in a riskier way. This economic concept is known as moral hazard.

WILLFUL MISCONDUCT - THE MARINE INSURANCE ACT, 1963 

The insurer is not liable for any loss attributable to the willful misconduct of the assured, but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the master or crew;

Third party liabilities:

Marine Liability Insurance/P&I, or protection and indemnity, protects third party liabilities that ship owners and companies are exposed to during their operations. 

It is indemnity and not liability coverage. It includes coverage for injuries, illnesses, and loss of life ,etc, caused by operating the vessel. 

Medical expenditures, damage to other vessels, collision and related expenses are also covered.