CHAPTER I:

BASIC CONCEPTS IN INSURANCE

1. Insurance
1.1. Insurance Definition
Insurance is a contract whereby, in
return for the payment of premium by the
insured, the insurers pay the financial
losses suffered by the insured as a result
of the occurrence of unforeseen events.

1. Insurance
1.1. Insurance Definition
A contract between two parties whereby
one party called insurer undertakes in
exchange for a fixed sum called
premiums, to pay the other party called
insured a fixed amount of money on the
happening of a certain event

1. Insurance
1.2. Nature of insurance
i) Insurance provides financial protection against a
loss arising out of happening of an uncertain
event. A person can avail this protection by
paying premium to an insurance company.
ii) Insurance is the risk transferring from the
insured to the insurer
iii) Insurance works on the basic principle of risksharing.
iv) The business object in the insurance sector is
risk.

Example 1
SUPPOSE
Houses in a village = 1000
Value of 1 House = Rs. 40,000/Houses burning in a yr = 5
Total annual loss due to fire = Rs. 2,00,000/Contribution of each house owner = Rs. 300/-

UNDERLYING
ASSUMPTION
All 1000 house owners are exposed to a common risk, i.e. fire

PROCEDURE
All owners contribute Rs. 300/- each as premium to the
pool of funds
Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses *
Rs. 300)
5 houses get burnt during the year
Insurance company pays Rs. 40,000/- out of the pool to all
5 house owners whose house got burnt
EFFECT OF INSURANCE
Risk of 5 house owners is spread over 1000 house owners
in the village, thus reducing the burden on any one of the
owners.

Example 2

SUPPOSE
Number of Persons = 5000
Age and Physical condition = 50 years & Healthy
Number of persons dying in a yr = 50
Economic value of loss suffered by family of each dying
person = Rs. 1,00,000/Total annual loss due to deaths = Rs. 50,00,000/Contribution per person = Rs. 1,200/UNDERLYING
ASSUMPTION
All 5000 persons are exposed to common risk, i.e. death

PROCEDURE
Everybody contributes Rs. 1200/- each as premium to the
pool of funds
Total value of the fund = Rs. 60,00,000 (i.e. 5000 persons *
Rs. 1,200)
50 persons die in a year on an average
Insurance company pays Rs. 1,00,000/- out of the pool to
the family members of all 50 persons dying in a year
EFFECT
OF
INSURANCE
Risk of 50 persons is spread over 5000 people, thus
reducing the burden on any one person.

2. Risk
2.1. Concept:
The term Risk is used to describe all the accidental
happenings which produce a monetary loss. For
e.g.: A factory catching fire, a ship sinking etc.

2. Risk
Risk is defined here as uncertainty
concerning the occurrence of a loss

2. Risk
2.2. Chance of loss: is defined as the
probability that an event will occur.

Methods of handling risk:

Avoidance:
You can avoid the risk of being mugged in a highcrime rate area by staying out of the area
A business firm can avoid the risk of being sued for
a defective product by not producing the product
=> However, not all risks should be avoided

Methods of handling risk:

Loss control: consists of certain activities that
reduce both the frequency and severity of losses
Objectives:
Loss prevention: aims at reducing the probability of
loss so that the frequency of losses is reduced:
Auto accidents can be reduced if motorists take a safedriving course and drive defensively
The number of heart attacks can be reduced if individuals
control their weight, stop smoking, and eat healthy diets

Loss reduction: reduce the severity of a loss after it

occurrs:
A department store can install a sprinkler system so that a
fire will be promptly extinguished

Methods of handling risk:

Insurance: the most practical method for
handling a major risk
Characteristics:
Risk transfer is used because a pure risk is
transferred to the insurer
The pooling technique is used to spread the
losses of the few over the entire group so that
average loss is substituted for actual loss.

3. Re- insurance
Practice where an Insurance company
(the insurer) transfers a portion of its risks
to another (the re-insurer).
Legal right of the policyholders (insureds)
are in no way affected by reinsurance, and
the insurer remains liable to the insureds
for insurance policy benefits and claims.

4. Double Insurance
Situation in which the same risk is insured
by two overlapping but independent
insurance policy.

4. Double Insurance
Is it possible to obtain double insurance
and make claim to all insurers?

4. Double Insurance
YES!
It is lawful to obtain double insurance, and
the insured can make claim to
both insurers in the event of a loss.

4. Double Insurance
How much money that insured can
received from all insurers?

4. Double Insurance
The insured, however,
cannot profit (recover more than the loss
suffered) from this arrangement because
the insurers are law bound only
to share the actual loss in the
same proportion they share the
total premium

4. Double Insurance
Mr A involves in 3 insurance policies for
his car at 3 insurance companies X, Y, and
Z with insurance amounts are 300, 400,
500 million VND (insurance for physical
value of car); Assuming that the value of
the car is 500 million VND. Define the
compensation of each insurer?

5. Co- Insurance
Insurance held jointly by two or more
insurers.

6. Insurer/ Underwriter
The party to an insurance arrangement who
undertakes to indemnity for losses.
.

7. Insured
an insured or policyholder is the person
or entity buying the insurance and
receiving indemnity on happening of
unforeseen events

8. Subject /matter insured

The person, group, or property for which
an insurance policy is issued

9. Insurance Value-V
The term value refers to the value of the
property, on the same basis used in
indemnifying losses; that basis is usually
actual cash value or replacement cost.
The replacement value of property is
equal to the amount it would cost to fully
repair or replace the property if it must be
reconstructed or purchased new.

10. Insurance Amount-A

a certain amount of insurance coverage
that the insured requires in the insurance
policy, it can be a part or an entire of
insurance value

11. Limitation of liability

The largest total amount the insurance
company will pay for covered losses.

11. Insurance rate

a factor used to determine the amount to
be charged for a certain amount of
insurance coverage, called the premium.

12. Insurance Premium

Payments to the insurance company to
buy a policy and to keep it in force.
I = V(A) x R

Chapter 2
Fundamental Legal Principles

Outline
Insurance is a repayment of a random
loss
Utmost Good Faith
Insurable Interest
Indemnity
Subrogation

Insurance is a repayment of a
random loss
The timing or occurrence of the loss must be
uncertain.
For example, you can't know your house is going to
be destroyed in three weeks by a demolition team
and still get home owner's insurance.
To be able to fully service major claims, small claims
are not covered. This is what the deductible is for.
Only damage or loss over the amount of the
deductible is covered by the insurance policy.

Utmost Good Faith

A higher degree of honesty is imposed on
both parties to an insurance contract than
is imposed on parties to other contract

Utmost Good Faith

Good faith- Let the buyer beware

Declaration of all material Information

about the subject mater of insurance

 Material Information is that information

which enables the insurer to decide:
a) whether he will accept the risk and;
b) if so, at what rate of premium and subject to what
terms and conditions

Utmost Good Faith

Examples of material facts:
Of a house insurance
Of a person
Of a car
Of a camera

Utmost Good Faith

Breach of duty of utmost good faith arises
in two ways:
Non-disclosure of material facts- oversight,
proposer thought its not essential etc.
Misrepresentation- Intentional.

Utmost Good Faith

Example 1:
Terry was an electrician. He had an ineffective right leg.
He owned and drove a small van that had been modified
for his disability. His job was with a film company and he
traveled from location to location wiring up the lighting
equipment
He proposed for personal accident insurance describing
himself as an electrician and answered the question
about disabilities in the negative. Whilst travelling from
one site to another he fell momentarily asleep at the
wheel and struck a lamp standard because he was not
able to brake effectively.

Utmost Good Faith

Example 2:
The insured misrepresent that she had no
traffic violation convictions in the prior threeyear period. After an accident, a check of her
record revealed that she had two speeding
tickets in that period. The insurer denied
coverage.

Insurable Interest
The legal right enjoyed by the owner of a
property to insure is called Insurable
Interest. The insurance will become null
and void, without the insurable interest.
Purposes:
To prevent gambling
To reduce moral hazard
To measure the amount of the insureds loss
in property insurance

Insurable Interest
Examples of insurable interest:
Property and Casualty insurance: ownership
of property
Potential legal liability
Secured creditors
Contractual right

Insurable Interest
Insurable risk:
Capable of financial measurement
A large enough amount of similar risks
Not be against public policy
Reasonable premium

Insurable Interest
Insurable interest is where you have a valid
reason to insure and stand to suffer a direct
financial loss if the event insured against occurs.
Insurable interest exists when an insured
derives a financial or other benefit from the
continuous existence of an insured object

Insurable Interest
When must an insurable interest exist?
In property insurance, the insurable interest
must exist at the time of the loss:
The insured must incur his financial loss
You may not have an insurable interest in the
property when the contract is first written but may
expect to have one in the future, at the time of
possible loss

Indemnity
The principle of Indemnity states that under the policy of
insurance, the insured has to be placed after the loss in
the same financial position in which he was immediately
before the loss.
2 fundamental purposes:
To prevent the insured from profiting from a loss
To reduce moral hazard

Indemnity
Applicability:
o When the losses suffered by the insured can be
measured in terms of money
o It is practicable to place the insured in the same
financial position which he occupied before the
loss

In Marine Cargo where valued polices are

issued, there is only commercial
indemnity- the value declared for
insurance is accepted at the time of loss .

Subrogation
Transfer of rights and remedies from the insured to
the insurer who has indemnified the insured in
respect of the loss.
The right of an insurer which has paid a claim under
a policy to step into the shoes of the insured so as
to exercise in his name all rights he might have with
regard to the recovery of the loss which was the
subject of the relevant claim paid under the policy
up to the amount of that paid claim. The insurers
subrogation rights may be qualified in the policy.

 Subrogation means substitution of the

insurer in place of the insured for the
purpose of claiming indemnity from a third
person for a loss recovered by insurance.

 Example: a negligent motorist fails to stop at a

red light and smashes in to Mergans car,
causing damage in the amount of $5000. If she
has collision insurance on her car, her company
will pay the physical damage loss to the car and
then attempt to collect from the negligent
motorist who caused accident.
Alternatively, Mergan could attempt to collect
directly from the negligent motorist for the
damage to her car.

Subrogation
The principle of subrogation strongly
supports the principle of indemnity
The insurer is entitled to recover from a
negligent third party any loss payment
made to the insured

Subrogation
Purposes:
Prevent the insured from collecting twice for
the same loss
Is used to hold the negligent person
responsible for the loss
Help to hold down insurance rate

CHAPTER III:

MARINE INSURANCE

Outline
Introduction
Risk, damage
Marine cargo insurance

I. Introduction
1. Marine insurance covers the loss or
damage of ships, cargo, terminals, and
any transport or property by which cargo
is transferred, acquired, or held between
the points of origin and final destination.

2. Needs for marine insurance

Exporters and importers face all the time
uncertainties of loss of their goods.
Insurance is used to protect their financial
interests against such risks and actual
losses.
Without adequate insurance and
protection of the interests of those with
goods in transit, international trade would
be negatively affected.
Liability of carriers to the goods is very
limited

3. History of marine insurance

MARINE INSURANCE AS WE KNOW IT TODAY, CAN
BE DESCRIBED AS MOTHER OF ALL INSURANCES

IT IS BELIEVED TO HAVE ORIGINATED IN

ENGLAND OWING TO THE FREQUENT
MOVEMENT OF SHIPS OVER HIGH SEAS
FOR COMMERCE AND TRADE

3. History of marine insurance

PRIOR TO THE DEVELOPMENT OF MARINE
INSURANCE, THE PEOPLE ACROSS THE
WORLD, HAD A SYSTEM OF:
POOLING THEIR CONTRIBUTIONS SO THAT IF ANY ONE OF
THEM SUFFERS LOSS DURING VOYAGE

HE WOULD BE COMPENSATED FROM THE

POOL.
TODAY MARINE INSURANCE HAS ASSUMED A VAST
DIMENSIONS DUE TO EVER EXPANDING TRADE
ACROSS THE GLOBE.

3. History of marine insurance

IT INVOLVES LARGE SHIPPING COMPANIES THAT
REQUIRE PROTECTION:
NOT ONLY FOR THEIR COSTLY FLEET AGAINST THE
PERILS OF THE SEA, BUT ALSO
TO THE CARGO BEING CARRIED IN EACH OF THESE
SHIPS.
THE VALUE OF EACH SHIP AND THE CARGO
CARRIED THEREIN, MAY BE COSTING MILLIONS OF
USD TO THE OWNERS.

Worlds biggest Passenger-ship MS Freedom

of the Seas 4300 passenger capacity inside

4. MARINE INSURANCE
MARKET
LLOYDS, A CORPORATE ESTABLISHED IN LONDON,
IS THE BIGGEST CENTRE FOR MARINE INSURANCE
IN THE WORLD

LLOYDS WAS A COFFEE HOUSE FREQUENTED BY

THE TRADESMEN, SHIPOWNERS AND OTHERS

THE COFFEE HOUSE BECAME THE MEETING

GROUND FOR:
BROKERS, INSURERS AND SHIP OWNERS FOR
NEGOTIATING THEIR BUSINESS.

LLOYDS COFFEE HOUSE

AT THE COFFEE HOUSE THEY WOULD DISCUSS
VARIOUS ASPECTS OF THE SHIPPING BUSINESS
INCLUDING CARGO AND SHIP INSURANCE AND:
ULTIMATELY IT STARTED TRANSACTING MARINE
INSURANCE IN A BIG WAY.
WHEN THE BRITISH OCEAN LINER TITANICWHICH
SANK IN 1912, DURING HER MAIDEN VOYAGE:
WAS INSURED BY LLOYDS WHO PAID AN
INSURANCE CLAIM OF ONE MILLION US $.

Titanic Crash

5. Classification

Marine cargo insurance: covers export- import

goods carriage by sea and related- reasonable
costs
Hull insurance: covers material loss of or
damage to hull and machinery, a portion of
costs for collision liability, and other reasonable
costs.
Protection and indemnity insurance: provide
cover to shipowners against third- parties
liabilities in connection with the operation of
vessels

II. Risk in marine insurance

1. Risk
1.1.Definition
. Probability or threat of a damage, injury,
liability, loss, or other negative occurrence,
caused by external or internal vulnerabilities,
and which may be neutralized through premediated action.
. Marine risks are the risks that occur on the
sea/ the risks of the sea/ the risks related to an
ocean voyage.

II. Risk in marine insurance

Risks are of many kinds
Different risks mean different losses
And different risks are covered by different
clauses
And different insurance clauses mean
different premiums
So we need to have a good understanding
of the different risks and losses before we
know how to effect insurance

II. Risk in marine insurance

1.2. Types of risks
1.2.1. Base on the causes
- Acts of God: vile weather, thunderstorm and lightening,
tsunami, earthquake, flood, volcanic eruption, etc.
- Perils of the sea: ship striking upon the rocks, ship
sinking, ship collision, colliding with iceberg or other
objects
- Risks caused by Social- political actions: war, SRCC
(strikes, riots, civil, commotions)
- Risks caused by particular actions of people: thieve,
robber
- Risks caused by other sources

II. Risk in marine insurance

1.2. Types of risks
1.2.2. Base on the insurance technique
a)
Insured common perils: the risks that are normal insured in original
insurance clauses:
)
Main risks:
- Stranding: a vessel is stranded when, in consequence of some
accidental or unusual occurrence, she comes in contact with the ground
or other obstruction, and remains hard and fast upon it. The vessel needs
an external force in order to getting off the stranding.
- Sinking
- Fire or explosion
- Collision
- Jettison: To throw part of the cargo or gear of the vessel overboard to
lighten the load and save the vessel. The owner of the jettisoned goods is
entitled to a "general average," i.e., the loss is shared by the owners of
the vessel and the owners of the cargo which was not thrown away.
- Missing: British law: 3 times of ships itinerary in normal conditions (no
longer than 6 months, no shorter than 3 months)
* Auxiliary risks: theft, rain, leakage, breakage, dampness, heating, hooking,
rusting

II. Risk in marine insurance

b) Relatively Excluded Perils: risks that are not included in standard
insurance clauses: War, SRCC
c) Absolutely Excluded Perils: risks that are not insured in any
circumstances:
loss damage or expense attributable to wilful misconduct of the
Assured
ordinary leakage, ordinary loss in weight or volume, or ordinary
wear and tear of the subject- matter insured
loss damage or expense caused by insufficiency or unsuitability of
packing or preparation of the subject-matter insured
loss damage or expense caused by inherent vice or nature of the
subject-matter insured
loss damage or expense proximately caused by delay, even though
the delay be caused by a risk insured against
loss damage or expense arising from insolvency or financial default
of the owners managers, charterers or operators of the vessel
loss damage or expense arising from the use of any weapon of war
employing atomic or nuclear fission and/or fusion or other like
reaction or radioactive force or matter.

III. Losses
Losses sustained by the insured due to the risks
listed above come from not only the loss of the
goods or the damage dine to the goods, but also
from the expenses the insured sustained in
rescuing the goods in danger.
The losses and the damages done to the goods
can fall into total loss and partial loss
Total loss includes Actual Loss and Constructive
Total Loss
Partial Loss means that the loss or damage dine
to the goods is only partial. Partial loss can be
either general average or particular average

Kinds of marine losses

Different
Types Of
Marine
Losses

Total
loss
Partial
loss

Actual total
loss
Constructive
total loss
General
Average Loss
Particular
Average

Total Loss
Actual total Loss: means
the whole lot of the
consignment has been
lost or damaged or
found valueless upon
arrival at the port of
destination

Constructive total loss: is

found in the case where
the actual loss of the
insured goods is
unavoidable, or the ship
or the consignment has
to be abandoned
because the cost of
recovery would exceed
the value of the ship and
the consignment in
sound condition upon
the arrival of the port of
destination

Constructive Total Loss

Notice of abandonment (NOA): is a notice in
which the insured commits to give up all of his
right related to the subject- matter insured to the
insurer in order to be fully compensated.
Requirements:
Where notice of abandonment is accepted the
abandonment is irrevocable. The acceptance of the
notice conclusively admits liability for the loss and the
sufficiency of the notice.
NOA is unnecessary when the consignments have
already reached final destination and are in actual
total loss

Treat as
partial loss

Constructive
total loss
Or as CTL

Reasonably
abandoned
(if NOA would
have
Any possibility of
benefit to insurer)

Insurer accepts:
admitted
interest and deal
with
subject matter
insured
as its own

Insurer rejects:
partial
Loss or ACT

Partial Loss
Particular Average: losses of each insured
interest individually due to acts of God or
Perils of the sea
Insurers liability: compensate for both of
the losses and reasonable costs caused
by particular average.
Goods: Reasonable costs are the cost used
for saving cargo or reducing its damaged
measurement.

General Average
General Average: the losses/ damages caused by
special expenses and sacrifices that intentionally and
reasonably conducted to save the vessel, cargo and
freight from a threat in the common ocean voyage.
There is a general average act when, and only when,
any extraordinary sacrifice or expenditure is intentionally
and reasonably made or incurred for the common safety
for the purpose of preserving from peril the property
involved in a common maritime adventure.
=> General Average are for the common safety of all of the
interests (cargo, vessel, freight)

General Average
A ship carrying goods in stranding status
Order of master: a part of cargo is
jettisoned, main engine is damaged (due
to the act of forcing the ship off)
Result: After repairs at the port of refuge,
the ship is able to complete her voyage
with the rest of her cargo.

Examples
Cargo, freight:
Jettison from underdeck.
Jettison from on deck.
Water or other means used to extinguish a fire
on board ship.
Discharge and re-shipment for the purpose of
floating a stranded ship when in a position of
peril

Examples
Ships materials:
Masts, spars, sails or rigging cut away for the
common safety.
Chains and anchors slipped to avert a threatening
peril.
Damage to a vessel's machinery, ropes, winches,
windlass and other gear sustained in endeavours to
float a stranded ship when in a position of peril.
Damage done in the efforts to extinguish a fire on
board or in the process of jettisoning cargo.

Examples
Expenditure:
Expenses incurred in floating a stranded ship
in peril.
Inward expenses entering a port of refuge to
repair damage to ship.
Cost of discharging cargo at a port of refuge
for the purpose of repairing damage to ship.
Cost of warehousing, re-shipment of cargo
and outward expenses leaving the port of
refuge.

General Average
Essential features:
The loss must be voluntary
It must be properly made
It must be extraordinary in its nature
The object of the sacrifice or expenditure must be
nothing other or less than the common safety of ship
and cargo
There must be imminent danger, and the object must
be the attainment of safety
The loss must be the direct result or reasonably the
consequence of the act causing it

General Average
Contents:
GA Sacrifices: to sacrifice properties for the rest ones.
GA Expenditures: consequent costs of GA act or
expenditures concerning GA act:
Salvage cost
Temporary repairs cost
Cost at port of refuge
Wages and maintenance of master, officers and crew
reasonably incurred and fuel and stores consumed during
the prolongation of the voyage occasioned by a ship entering
a port or place of refuge or returning to her port or place of
loading
Interest of 7% shall be allowed on expenditure, sacrifices and
allowances in general average until three months after the
date of issue of the general average adjustment

General Average
Ship-owner/ masters liabilities:
Form GA Notice
Arrange survey service to assess the measure of
damage
Send average bond and average guarantee
Arrange GA adjuster
Form Sea Protest (if applicable)

Cargo owners liabilities:

Declare value of the goods
Receive average bond and average guarantee

General Average
Legal issues:
York Rules 1864
York- Antwerp 1924
York- Antwerp 1950, 1974, 1990, 1994, 2004

General Average
Amendments of York- Antwerp Rules 2004:
Rule VI: salvage remuneration is not included in GA
Rule XX: A commission of 2 per cent. on GA disbursements,
other than the wages and maintenance of masters, officers and
crew and fuel and stores not replaced during the voyage is not
included in GA
Rule XXI: Interest shall be allowed on expenditure, sacrifices
and allowances in GA until three months after the date of issue
of the general average adjustment. Each year the Assembly of
the Committee Maritime International shall decide the rate of
interest which shall apply. This rate shall be used for calculating
interest accruing during the following calendar year.
Rule XXIII: limitation of claims: 1 year after the date upon which
GA adjustment was issued or 6 years from the date of
termination of the common maritime adventure. These periods
may be extended if the parties so agree after the termination of
the common maritime adventure

General Average
GA adjustment
Arrange a GA adjuster
Contributing interests: vessel, cargo, unpaid
freight/freight at risk

General Average
Calculation:
Step 1: Determine GA value, which consists of
GA sacrifices and expenditures
If goods are sacrificed in GA act, value of the
goods is calculated based on loading/ unloading
value or the one in commercial invoice. It includes
insurance premium and freight, except one case
when cargo owner is not liable for paying the
freight.

General Average
Step 2: Determine total value of
contributing interests: consists of value of
all interests in vessel that were saved by
GA act, including properties sacrificed in
GA act.
Those damages belong to particular average
occurred before the GA act are not included in
contributing value/ after the GA act are
included in contributing value

General Average
Step 3: Determine contributing rate:
Rate = total GA value/ total Contributing value
Step 4: Determine contributing value of each
interest
C = Contributing rate X contributing value
Step 5: Determine financial result (actual
income/ expenditure of ship owner/ cargo owner
after deducting value of the properties or
expenditures spending in GA act

III. Marine cargo insurance

1. Cargo needs to be insured
- High probability of risk occurring in
voyage
- Carriers liability is very limited
- Marine cargo insurance is a custom in
international trade

Marine cargo insurance

It provides insurance cover in respect of
loss of or damage to goods during transit
by rail, road, sea, or air

2. Insurers liability to the goods

2.1. Introduction of insurance clauses
2.1.1. Definition: Set of terms for cargo
insurance policies voluntarily adopted as
standard terms by many international
marine insurance organizations.
2.1.2. Institute Cargo Clauses- ICC: issued
by Technical and Clauses Committee of
Institute of London Underwriters (ILU)

2. Insurers liability to the goods

ICC 1963:
FPA- Free from Particular Average
WA- With Particular Average
AR- All Risks
WR- War Risks
SRCC- Strike, Riot, and Civil Commotion

2. Insurers liability to the goods

ICC 1982:
C
B
A
WR
SRCC

2. Insurers liability to the goods

2.1.3. Cargo Clauses of Vietnam
- QTC 1965: FPA, WA, AR
- QTC 1990: C, B, A

2.2. Scope of cover- ICC 1982 &

QTC 1990
2.2.1. Risks Cover
C clause: this insurance covers loss of or damage to the
subject- matter insured reasonably attributable to:
Stranding, sinking, fire or explosion, collision
discharge of cargo at a port of distress
overturning or derailment of land conveyance
Sacrifice in and contribution to GA and reasonable expenditures
(salvage
Jettison
Missing
Such proportion of losses sustained by ship owners as is to be
reimbursed by the cargo owners under the contract of
affreightment Both to blame Collision clause

2.2. Scope of cover- ICC 1982 &

QTC 1990
B clause
C
earthquake volcanic eruption or lightning
Washing overboard
entry of sea, lake or river water into vessel
craft hold conveyance container liftvan or
place of storage
total loss of any package lost overboard or
dropped whilst loading on to, or unloading
from, vessel or craft.

2.2. Scope of cover- ICC 1982 &

QTC 1990
A Clause:
B
Auxiliary risks: theft, rain- water, leakage,
breakage, dampness, heating, hooking,
rusting, malicious damage (not by insured),
piracy

2.2. Scope of cover- ICC 1982 &

QTC 1990
A, B, C are official clauses
Special Clauses: WR, SRCC
Exclusions:

Contraband
Willful misconduct of the assured
Deviation
Delay
Inherent vice or nature of subject- matter insured
Unseaworthiness of vessel
Insolvency or financial default of the owner or the
operator of the vessel

2.2. Scope of cover- ICC 1982 &

QTC 1990
2.2.2. Duration: Transit Clause from warehouse to
warehouse
- Stage from port of discharge to final warehouse:
insurance policy terminates either:
- On safely delivery to the final warehouse, or
- On the expiry of 60 days after completion of discharge

- Departure warehouse: place of storage at the place

named herein for the commencement of the transit
- Final warehouse:
-

Final warehouse owned or managed by the assured, or

Store other than in the ordinary course of transit, or
Store using for allocation or distribution, or
Store named in insurance policy

3. Marine cargo insurance

policy
Who can buy a marine cargo insurance
policy?
Contract of sale: Legal contract for exchange
of goods, services or property to be
exchanged from seller to buyer for an agreed
upon value
The contract of sale determines who buy the
policy
The most common contracts of sale are: FOB,
CFR and CIF

Contract of sale
FOB: Buyer pays freight, buyer arranges
insurance
CFR: Seller pays freight, buyer arranges
insurance
CIF: Seller pays freight, seller arranges
insurance

 In marine cargo insurance, the person

having insurable interest at the time of
loss can only recover
Marine cargo policy are freely assignable.
Unlike other policies, there is no need to
take insurance companys consent for
transferring policy to new buyer

Different kinds of marine cargo

policy
Voyage policy: insurance policy/ insurance
certificate
Open cover policy: large export/import
oriented industry usually prefer open cover
agreement as they have to make
numerous regular shipment who would
otherwise find it very inconvenient to
obtain insurance cover separately for each
and every shipment

 A marine cargo open cover insurance

policy is an agreement between a
merchant and an insurance company to
insure all goods in transit within the
agreement, until either party cancel the
agreement

Different kinds of marine cargo

policy
Valued policy
Unvalued policy

4. Content of marine cargo

policy
Insurance value
V = C + I + F + (a) = CIF + (a) (1)
I = V x R = CIF x R
(2)
Replace (2) to (1)
CIF = C + CIF x R + F
CIF(1-R) = C + F
V = CIF = (C+F)/(1-R)
(a=0)
V = (C+F)(1+a)/(1-R)
(a=10%)

Content of marine cargo policy

Insurance amount
AV
A = V = (C+F)/(1-R) (a=0)
A = V = (C+F)(1+a)/(1-R)(a=10%)

Content of marine cargo policy

Insurance premium
I = A (V) x R = (C+F) R/(1-R)
I = (C+F)(1+a)R/(1-R)

IV. Marine Hull insurance

1. Subject- matter insured:
a) Hull and machinery insurance is to protect
the shipowners investment in the ship. It is
basically a property insurance which covers the
ship itself, the machinery and equipment. The
owner will be protected for losses caused by
loss of or damage to the ship and its equipment

b) Furthermore, the insurance covers some

liabilities, normally collision liability with another
ship (known as RDC Running Down Clause)
and sometimes also liability for colliding with
other objects than another ship (known as
FFO - Fixed and Floating Objects).

c) The third part of the insurance is cover for

salvage and general average contributions.

 Types of vessels
General Cargo Vessel Built for specific purpose like car

carriers, live stock carriers, log carriers, heavy lift

vessels- Liners or Tramps
Dry Bulk carriers Heavy weather damage
Liquid Bulk carriers- shorter life, fire & explosion, risk of

pollution

Passenger vessels fire damage

Container vessels loss of containers
Offshore Oil and Gas Exploratory units blow out
Fishing vessels moral hazard
Other vessels like Tugs, Barges, Supply vessels, Yachats

 Types of Policies

Hull and Machinery Policy

Freight Policy
Disbursement and Increased Value Policy
Loss of Hire Policy
Builders Risk Policy
Ship Repairers Liability Policy
Charterers Legal Liability Policy
Mortgagee Interest Insurance Policy
Port Package policies
War and strike polices

2. Typical hull and machinery claims include:

Total loss of the ship
Damage to the ship, engines and equipment
Explosions and res
Groundings damage to the ship, salvage of the
ship and possible contribution in general average
Collisions damage sustained to the ship and
sometimes also liability towards the other ship (RDC)
Striking other objects damage inicted to own ship
and sometimes also liability towards the owners of the
other object (FFO)

 The insurers will pay the shipowner for the cost of

repairs to the ship after the damage has been surveyed
and tenders from repair yards submitted.
The shipowner will, however, have an agreed amount
referred to as the deductible which has to be paid by
him before a claim against his insurance policy is
submitted.
For example, if the deductible is USD 100,000 and a
claim for repairs is USD 300,000, the insurers will
compensate the owner for USD 200,000.

Hull insurance market

Hull and machinery cover is often arranged and placed in the
insurance market by a professional insurance broker.
It is quite common that the insurance cover is spread to many
insurers in various countries.
The insurers in the hull and machinery market are either
companies or syndicates. The company or the syndicate will
have an underwriter who signs the policy or the slip produced
by the broker for his share of the cover.
The biggest single market for marine insurance is Lloyds in
London. Lloyds consists of a number of syndicates writing
shares on insurance covers. The company market is dominated
by Norway and Scandinavia, but also insurers in USA, France,
Italy, Japan and Korea are very active in the marine market.

Main Types of Marine Hull Clauses

ITC Hull 1/10/83
ITC Hull 1995
ITC Hulls Disbursement & Increased Value
( TL including excess liabilities)
ITC Hulls TL,GA, 3/4th Collision
ITC Hulls Port Risk 20-7 87
Institute Builders Risk Clauses 1-6-1988
Institute Yacht Clauses

Institute Time clauses 1995

1. Coverage
1.1 This insurance covers total loss (actual or constructive) of the
subject-matter insured caused by
1.1.1 perils of the seas rivers lakes or other navigable waters
1.1.2 fire, explosion
1.1.3 violent theft by persons from outside the Vessel
1.1.4 jettison
1.1.5 piracy
1.1.6 contact with land conveyance, dock or habour equipment
or installation
1.1.7 earthquake volcanic eruption or lightning
1.1.8 accidents in loading discharging or shifting cargo or fuel

1.2. This insurance covers total loss (actual or constructive) of

the subject-matter insured caused by
1.2.1 bursting of boilers breakage of shafts or any latent defect in
the machinery or hull
1.2.2 negligence of Master Officers Crew or Pilots
1.2.3 negligence of repairers or charterers provided such
repairers or charterers are not an Assured hereunder
1.2.4 barratry of Master Officers or Crew
1.2.5 contact with aircraft, helicopters or similar objects, or
objects falling therefrom provided that such
loss or damage has not resulted from want of due diligence by
the Assured, Owners, Managers or Superintendents or any of
their onshore management.

Collision and liabilities of different parties

TA

HA

TB TA

HB

TB

Collision and liabilities of different parties

TA

HA

TB

TA

TB

HB

 This insurance is extended to indemnify the

Assured against such proportion of liability under
the contract of affreightment Both to Blame
Collision Clause as is in respect of a loss
recoverable hereunder. In the event of any claim
by shipowners under the said Clause the
Assured agree to notify the Underwriters who
shall have the right, at their own cost and
expense, to defend the Assured against such
claim.

Liability of marine cargo

insurers
If cargo owner has not received
compensation:
Loss/ damage in collide accident
proportion of liability under the contract of
affreightment Both to Blame Collision Clause

If cargo owner has already received a portion

of compensation:
The rest part of Loss/ damage in collide accident
proportion of liability under the contract of
affreightment Both to Blame Collision Clause

Liability of marine hull insurers:

Insured vessel: loss/damage of ship itself,
machinery and equipment

 Other vessel: The Underwriters agree to indemnify the Assured for

three-fourths of any sum or sums paid by the Assured to any other
person or persons by reason of the Assured becoming legally liable
by way of damages for:
Loss of/damage to ship itself, machinery and equipment
Loss of/damage to cargo and other property on other vessel
delay to or loss of use of any such other vessel or property
thereon
general average of, salvage of, or salvage under contract of, any
such other vessel or property thereon,
where such payment by the Assured is in consequence of the
vessel hereby insured coming into collision with any other
vessel.
That above amount of money is not exceeded three- fourth
insurance amount of insured vessel.

 Provided always that this Clause shall in no case extend to

any sum which the Assured shall pay for or in respect of
removal or disposal of obstructions, wrecks, cargoes or any
other thing whatsoever
any real or personal property or thing whatsoever except other
vessels or property on other vessels
the cargo or other property on, or the engagements of, the
insured vessel
loss of life, personal injury or illness
pollution or contamination of any real or personal property or
thing whatsoever (except other vessels with which the insured
vessel is in collision or property on such other vessels).

P&I Insurance
Protection and Indemnity insurance, or P&I as it is usually
called, is shipowners insurance cover for legal liabilities to
third parties
Third parties are any person, apart from the shipowner
himself, who may have a legal or contractual claim against the
ship
P&I insurance is usually arranged by entering the ship in a
mutual insurance association, usually referred to as a club.
Shipowners are members of such clubs.
Legal liability is decided in accordance with the laws of the
country where an accident takes place
The P&I insurance cover for contractual liability is agreed at
the time the owner requests insurance cover from the club and
is usually in accordance with the owners responsibility under
crew contracts or special terms relating to the trading pattern
of the vessel.

Meaning of term P&I

Protection: the insurance also covers assistance when a ship
is involved in an accident and the shipowner and his Master
need help
Indemnity:
P&I insurance is an indemnity type of insurance, the shipowner (or
member of the club) must demonstrate his loss before the club will pay
out (or indemnify him) under the terms of the insurance policy
the club never assumes the owners liability, therefore technically the
owner (or member) is always responsible for payments
the club takes over the business of handling claims and ensuring that
payments are correctly made

History of P&I insurance

Protection & Indemnity Insurance (P&I Insurance) developed from
the old Hull Clubs in England in the eighteenth century
One century later, With the increase of liabilities arising from
shipping activities which were unfortunately excluded by the hull
clubs, it was the result of an urgent need for shipowners to seek
some new mechanism to protect their potential liabilities in their
business activities
P&I club came into the world in order to dealt with those things
that excluded from Hull insurance: i.e. third party liabilities and the
rest part of collision liabilities
P&I Club has become one kind of mutual insurance with its own
legal capacity
modern P&I Insurance not only covers the part of collision
liabilities which had once been excluded by the hull insurers but
also includes liabilities relating to cargo claims, liabilities relating
to personal injury, oil pollution liabilities, as well as some costs
and expenses arising from the relevant casualties

Mutuality principle of P&I

insurance
In respect of the organization of insurance
Members of P&I Clubs have a dual role as
both assureds and insurers
P&I Insurance is not profit-making, all the
money raised is from the members and will be
used for the members as well

 It is the members themselves to share the losses

The operational principle of P&I Clubs is to balance all the
calls received from the members and the liabilities the
members incur in each policy year
P&I Club would not operate on borrowing, the payment by
the members is very important to P&I Clubs
the clubs also take strict measures to the member: i.e.the
club will refuse to provide guarantee, or decline the
settlement of claim, even more cancel the insurance
contracts in the case that the member fails to pay his
member fee in time

 The fund of the club

The club fund plays a very important role in
the operation of P&I Insurance, and it is
usually collected by levying calls from the
members
The calls are used in P&I Insurance instead
of the premiums- an agreement that each
member should bear his aliquot share of the
losses of the year covered by the policy

Evaluating the risk

/ The tonnage of the ship in GT (premiums are expressed in USD
per GT)
/ Year of build
/ Number of crew members
/ Type of vessel
(tanker, dry bulk, reefer, heavy-lift, container, passenger, ro-ro etc)
/ Type of cargoes to be carried (if a tanker is clean or dirty)
/ Areas of trading
/ Liner trade or tramp
/ Classication society
/ Management expertise
/ Compliance with national and international legal requirements
/ How many ships in the company
/ Previous P&I history

Statistical loss records

A P&I club will keep records for each individual ship entered with the
club.
These records are normally based on the last ve insurance years
and provide an accurate record of all payments made by the
member in the form of premiums
all monies collected by the member in the form of compensation
paid to him by the club and all other costs.
Over a ve-year period records show:

/ The amount of premiums paid in by the member

/ The amount of money paid out for market reinsurance
/ The amount of money paid back to the owner as compensation
/ Other costs and the amount estimated for claims not settled

Coverage of P&I insurance

Liability in collision accident: insures for
the rest part of collision liabilities that
excluded from Hull insurance

Coverage of P&I insurance

LIABILITY FOR DAMAGE TO CARGO

Coverage of P&I insurance

DEATH AND PERSONAL INJURY
Any person injured on your ship crew, stevedores,
pilots or passengers, for example may allege that
your ship was unsafe. The injured person could
decide to sue the ship and her owners and demand
huge sums of money as compensation
It is necessary for a Master and his senior ofcers to
have a good idea of what his P&I clubs rules state on
the insurance cover for personal injury, illness and
loss of life.

Coverage of P&I insurance

REPATRIATION OF SICK OR INJURED
CREW AND HOSPITAL EXPENSES
P&I insurance also covers a shipowners
liability to pay for the costs of repatriating
crew members who become sick or are
injured on board. The insurance also covers
the crews hospital bills and costs of sending
replacement personnel to the ship if
necessary

LOSS OF CREW MEMBERS PERSONAL EFFECTS

P&I insurance also covers the owners liability for loss
of crew belongings in cases of shipwreck or re on
board.
The cover only applies to items which are deemed to
be reasonable for any crew member to have with him
on board.
A crew member travelling with unusually expensive
items, such as laptop computers, gold watches etc
should make sure that he has such items separately
insured.

Coverage of P&I insurance

STOWAWAYS, REFUGEES AND
PERSONS SAVED AT SEA

Coverage of P&I insurance

POLLUTION
Oil from your ship which pollutes a harbour,
dock or waterway will have to be cleaned up.
Clean-up costs will be charged to the ship and
nes may be imposed on the ship, the Master,
and the Chief Engineer. Your ship could be
arrested, and the owners required to establish
some form of security acceptable to the port
authorities.

Coverage of P&I insurance

WRECK REMOVAL AND OBSTRUCTION
The standard insurance shall cover liability
and costs arising out of the raising, removal,
destruction or marking of the wreck of the
entered vessel, her equipment, bunkers or
cargo lost as a result of a casualty, in so far as
the raising and other operations are
compulsory by law, or necessary to avoid or
remove a hazard or obstruction to navigation,
or the costs are legally recoverable from the
member

Coverage of P&I insurance

GENERAL AVERAGE CONTRIBUTIONS
CARGO
The standard insurance shall cover the
members loss in respect of general average
expenditure and special charges which should
be paid by the cargo interest or some other
party to the maritime adventure but which are
not legally recoverable solely by reason of a
breach of the contract of carriage

Coverage of P&I insurance

FINES
Since nes are imposed for breaches of criminal law, they are
generally not covered by insurance. However, P&I clubs do
indemnify members for nes imposed in a few very specic cases.
Rule
P&I insurance normally provides cover for nes imposed for
breach of immigration laws
inaccuracies in cargo documentation
accidental pollution
smuggling or infringement of customs laws

The club only provides cover for nes imposed on the member, not
the crew. However, the club does have a discretion to cover members
if they pay a ne imposed on the master or crew because they are
legally obliged to do so, or because the club accepts that it was
reasonable to do so

CHAPTER 4:
INTRODUCTION TO RISK
MANAGEMENT

Meaning of risk management

Risk management is a process that
identifies loss exposures faced by an
organization and selects the most
appropriate techniques for treating such
exposures
Risk loss exposure: is any situation or
circumstance in which a loss is possible,
regardless of whether a loss occurs

Objective of risk management

Pre-loss objectives:
Economy: the firm should prepare for potential losses
in the most economical way (analysis of the cost of
safety programs, insurance premium paid, the cost
associated with the different techniques for handling
losses)
Reduction of anxiety: certain loss exposure can cause
greater worry and fear for the risk manager and key
executives
Meeting legal obligations: i.e. government regulations
may require a firm to install safety devices to protect
worker from harm, to dispose of hazardous waste
materials properly

Objective of risk management

Post- loss objectives:
Survival of the firm: after loss occurs, the firm can
resume at least partial operations within some
reasonable time period
continue operating: the ability to continue operating
after a loss is very important, otherwise, business will
be lost to competitors
Stability of earnings: earning per share can be
maintained if the firm continue to operate
Continued growth of the firm
Minimize the effects that a loss will have on other
persons and on society

Steps in the risk management

process
Identify loss exposures
Analyze the loss exposures
Select the appropriate technique for
treating loss exposure
Risk control: Avoidance, Loss prevention,
Loss reduction
Risk financing: Retention, Noninsurance
transfers, Commercial insurance

Implement and monitor the risk

management program

Identify loss exposures

This step is to identify all major and minor loss exposures, it
involves a painstaking analysis of all potential losses:
Property loss exposures
Liability loss exposures
Business income loss exposures
Human resources loss exposures
Crime loss exposures
Employee benefits loss exposures
Foreign loss exposures
Market reputation and public image of the company
Failure to comply with government laws and regulations

Identify loss exposures

A risk manager has several sources of information that he can
use to identify the preceding loss exposures:
Risk analysis questionnaires: risk manager has to answer
numerous question that identify major and minor loss
exposures
Physical inspection: a physical inspection of company
plants and operations can identify major loss exposures
Flowcharts: show the flow of production and delivery that
can reveal production bottlenecks where a loss can have
severe financial consequences for the firm
Financial statement: identify major assets that must be
protected, loss of income exposures, and key customers
and suppliers
Historical loss data: historical and departmental loss data
over time can be invaluable in identifying major loss
exposures

Analyze the loss exposures

This step involves an estimation of the frequency and
severity of loss. Loss frequency refers to the probable
number of losses that may occur during some given time
period. Loss severity refers to the probable size of the
losses that may occur
various loss exposures can be ranked according to their
relative importance
The risk manager can select the most appropriate
technique, or combination techniques, for handling each
exposure
Maximum possible loss is the worst loss that could
happen to the firm during its lifetime
Maximum probable loss is the worst loss that is likely to
happen

Select the appropriate technique for

treating loss exposure
Risk control:
Avoidance: a certain loss exposure is never
acquired, or an existing loss exposure is
abandoned => the firm may not be able to avoid
all losses, it may not feasible or practical to avoid
the exposure
Loss prevention: refers to measures that reduce
the frequency of a particular loss
Loss reduction: refers to measures that reduce
the severity of a loss after is occurs

Select the appropriate technique for

treating loss exposure
Risk financing:
Retention: the firm retains part or all of the
losses that can result from a given loss,
provided that:
No other method of treatment is available
The worst possible loss is not serious
Loss are highly predictable

Select the appropriate technique for

treating loss exposure
Non-insurance transfer: is a method other than
insurance by which a pure risk and its potential financial
consequences are transferred to another party.
Insurance:
Selection of insurance coverage
Selection of insurer
Negotiation of terms
Dissemination of information concerning insurance
coverage
Periodic review of the program

Benefits of risk management

The pre-loss and post- loss risk management objectives are more
easily attainable
The cost of risk is reduced => increase companys profit (a risk
management tool that measures certain costs- includes premiums
paid, retained losses, loss control expenditures, outside risk
management services, financial guarantees, internal administration
costs, and taxes, fees, and certain other expenses
A firm may be able to enact an enterprise risk management program
that treat both pure and speculative lloss exposure