Chapter 2 The Marine Insurance Act 1906 Insurance through a broker Book says broker costs nothing to assured Not entirely correct as brokerage is an expense for underwriter in the product he is offering, and as any expense in the making of the product, it will be passed on to the buyer through the price. EFFECTING MARINE INSURANCE (OR PLACING) We will see the practical aspects and documentation used in placing marine insurance Policy and contract (not in book) Explain policy and contract A contract in general, is an agreement with a lawful object, between two parties. A contract may be verbal or in writing. S. 22 of marine insurance act as to admissibility of contract. Means that contract is not binding in law, unless evidenced by a signed policy. In other words the policy is the document evidencing the existence of contract. Does not mean that without a policy the U/W will refuse liability for a claim, the market is based on good faith and on good reputation. It just means that you cannot prove the existence of contract if you have to take it to court. Effectiveness of contract S. 21 the contract is deemed concluded when slip initialed even if the policy is issued later What is risk It depends on the context. For purposes of discussing effecting insurance, it is the subject matter to be insured. In H&M it can be a vessel, or a fleet of vessels From a technical point of view, the basic formula for risk is: Risk = possibility x consequence Who is involved The slip - What is it, what is its use The most important document as far as the broker is concerned Piece of paper describing the risk, where U/W signs for accepting it
Used to be stiff slip, now ordinary A4 and it can contain a lot of information Standardized 1971 Show sample, based on standard form what do we see A risk can be a ship or it can be a fleet of ships Process of slip Broker prepares slip and approaches U/Ws Find lead Book says it is those with experience who others regard highly in assessing risk. Chooses U/Ws, sometimes specialized U/W sees risk. If he accepts it, there will be three things he will put on the slip: his initials, the premium, and the percentage that he is willing to take. Broker sends quote to Principal In practice the broker will not place insurance without instructions from its principal. He will send the quote offered by the lead. It will be on 100% basis, despite the line that the lead will take. Find follow markets If acceptable as a total cost, the broker will visit the insurance market for support, i.e. find UWs who will follow the leader, in completing a 100% placement. Importance of securing a good lead Important so as to find good support Overplacing Have to reduce each U/Ws line pro-rata. But cannot increase any U/Ws line. Line / written line / signed line The percentage of risk accepted by each U/W. If there was overplacing the written line will have to be reduced, the final line is the signed line. This same percentage will apply on the U/Ws entitled to premium, and his obligation to pay claims. Example: If he is writing a 5% line on a vessel of USD10m value, that pays USD50,000 a year in premium, he will get USD2,500 of premium and in case of a total loss will pay USD500,000. Security The meanings: 1. The insurers that make up the total of a risk, are collectively called security. 2. Security boils down to two basic factors:
(i) Ability to pay claims. This is assessed by reference to the insurer s rating (explain) (ii) Willingness to pay claims. This is assessed depending on experience and reputation. An insurer does not have a serious interest in trying to avoid valid claims, for obvious reasons Explain and show security sample - What do we see from sample There are many insurers writing a risk There are insurers from everywhere in the world The signed lines are rather small U/Ws like to spread risk Oblige line When an insurer accepts to write a risk that he is not particularly keen on, for the side benefit of getting the better business that a broker may offer him Original slip / signing slip / off-slip Explain Not valid evidence of contract. However if policy issued, admissible as proof that terms of policy reflect contract Perhaps also admissible evidence in a dispute as between U/W and broker Cover note Advice by the broker to the assured of the details of the insurance as placed, and with whom Difference from Policy? Policy signing Policy signing office, Lloyds or ILU policy, Xchanging insure Separation Read from book, a process intended to speed up payment of premium to the U/Ws, by separating the administration procedures of policy handling and premium processing Recap documents used in effecting insurance Slip Policy Cover note Premium Premium is the price of transferring certain risk to the insurer. So to understand how premium is calculated we have to understand how risk is priced. What is risk We said in context of placing insurance, it is the subject matter insured.
In the context of underwriting practice, risk is the possibility of the occurrence of a loss. It has three components: Peril, exposure and hazard How is risk assessed/priced and how is premium calculated Draw This is the primary job of the underwriter Each U/W will have a model to assess risk Different factors will be taken into account (vessel type, vessel age, nationality of crew, management etc) First the U/W will assess the first factor or risk, peril The U/W will put down all those factors influencing the possibility of a peril, based on the weight he places on them. This will be expressed in the form of a rate Then he will apply the rate on his exposure, which is the 2 nd element of risk The basic formula for premium is: Premium = rate x exposure (or sum insured) This is basically the flip side of the previous formula for risk: Risk = possibility x consequence The U/W is trying to achieve that he collects from 1,000 shipowners enough premium to cover the claims, his expenses, and make profit. In the end, out of 1,000 ships maybe 8 or less will be lost, or more. This is the risk the insurer is retaining, and may cause him an overall loss or an overall gain. To achieve this, the U/Ws tries to write homogeneous risks, so that he can rely on statistical knowledge, and calculate an appropriate rate for each risk. He has a certain statistical knowledge of losses of each type Draw very simplistic example: statistics may show that out of 1,000 vessels insured between the age of 1-5, 8 (or 0.8%) will be lost, out of 1,000 vessels of 5-15 11 (or 1%) will be lost etc. This estimated loss rate gives the U/W a starting point for working out a rate to offer for the assured, after adding an element for other costs (admin etc) and profit. Does anyone have any questions about the different uses of the term risk Retention of risk
Note that insurers, under law, must retain risk. For example an insurer that reinsures 100% of the risk he writes, is not called an insurer. We ll come back to that when talking about reinsurance. Brokers lien As the broker is directly responsible to insurer about payment of premium, despite whether or not he has received it, the broker has a lien on the policy so that if he does not receive premium from the assured, he can hold on to the policy and not give it. This relates to what we said that a marine insurance contract can only be evidenced by a policy, so the broker is depriving the assured from proving in court he is insured. In practice this has limited value or use. Brokerage It is the commission the broker gets for his services. It is calculated on gross premium an deducted from before passing premium on to U/Ws. Discount to client Calculated on net premium. Example on board Deferred premium Additional premium Premium based on risk as assessed. If it is to be increased by a new hazard, then additional premium may be requested. Example IWL or war risks Held covered When the insurer affords cover to an assured for a risk or for a period that has not been fully agreed or settled between them Return premiums Premium deemed earned for duration of policy on attachment of risk. Not returnable for any reason such as total loss of the ship. The insurer agreed to receive so much for this risk, no matter when loss occurs. Only when risk is reduced or cancelled, and provide there has been no loss, is premium returnable. Situations of reduction of risk is cancellation of policy, or a lay-up. MARINE INSURANCE ACT 1906 We are now getting into the MIA
Five basic principles in Marine Insurance, which you need to be well familiar with: 1. Insurable interest 2. Utmost good faith 3. Proximate cause 4. Indemnity 5. Subrogation Insurable interest S.5 of MIA any person who is interested in a marine adventure has an insurable interest Insurable interest is not subject matter insured. It is the financial interest in the subject matter insured. In other words we need to have: 1. The subject matter to be insured 2. A person with an insurable interest in the subject matter The person seeking insurance, needs to have a financial interest in the well being of the subject matter to be insured. The MIA allows for the possibility of insurable interest by a person other than the owner of the property. Examples: o Liability towards the owner of property (e.g. cargo owner) o Freight The Manager of a vessel owned by a third party may have an insurable interest and will usually appear on the policy as one of the assureds Show sample of assureds, other than owner. When should insurable interest exist It does not need to exist at time of policy, as long as: 1. there is an expectation at the time of the policy, and 2. it exists at the time of loss. The book refers to one circumstance where cargo insurance is assigned from seller to buyer during transit, and in case of loss the insurer will pay the assured buyer for the loss anyway, provided he did not know of the loss at the time of assignment No insurable interest, no expectation of insurable interest Section 4 of the MIA declares void all policies that are entered into as gaming or wagering. Two main categories of insurable interest
There are obvious interests and less obvious interests Cargo interests Quick review/list. Students to read themselves Ownership Shipping costs Defeasible interest Contingent interest Hull interests Quick review/list. Students to read themselves Ownership Demise Charterers interest Freight. Either for cargo owner or for shipowner Freight & Disbursements Increased value (IV). Limit on IV, Freight & Disbs Mortgagee s interest (also default of mortgagor?) P&I type interests Contractual liability cargo, crew injury/illness etc Non-contractual third party liability pollution, stevedore injury, wreck removal Collision liability 3/4ths of legal liability up to 3/4ths of insured value up to parties to agree to exclude or include collision liability completely Read as any of these interests may form a specific question in your exams Proof of interest Proving that the assured has actually suffered a financial loss as a result of the occurrence of the peril insured against (is this a good explanation) Policy Proof of Interest PPI There are certain policies that provide that the policy proves that the assured has an insurable interest, and doesn t need to show he had one. By section 4(2)(b), these Policies are treated as gaming Policies and are not recognized by the MIA. This does not mean that they are not in use, it means that they are not enforceable in court. It is up to the good faith of the insurer to honour them. In other words the MIA requires that there is proof of an insurable interest. PPI policies dispense with the requirement for proof, not the requirement for interest. They are not illegal, they are just unenforceable. Examples of PPI policies: LoH on chartered or not chartered terms
Freight & Disbursements Disbursements clause Assignment Speaking of interest, a policy is freely assignable Assignment of interest vs. assignment of policy Assignment of interest is transfer of interest in subject matter Assignment of policy is transfer of beneficial rights in policy Examples: Cargo insurance assignment of interest and policy Mortgagee assignment of policy (mortgagee already had an interest) Assignment of interest not automatically assigns policy. An agreement is necessary. See notice of assignment Effect of assignment Each party has exactly the same rights and defences as before assignment Incoterms Contracts of sale have differing provisions as to parties obligations FOB Seller delivers the cargo at passing ship s rail and responsibility transfers to Buyer Buyer arranges insurance C&F Buyer is responsible for insuring the goods, interest remains with Seller until delivery at destination CIF Seller arranges insurance