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| MAISHA TASNIM RAFA LL.B. Graduate, American International University-Bangladesh (AIUB) |
Marine
insurance is a crucial aspect of international trade and commerce, offering
financial protection against the various risks associated with transporting
goods and vessels worldwide. As globalization has increased the volume
and complexity of international shipping, marine insurance has evolved into an
indispensable tool for exporters, importers, shipowners, and logistics
providers. It serves as a risk management mechanism that safeguards against
financial loss due to accidents, natural disasters, piracy, and other
unforeseen events that may occur during transit.
Legally,
marine insurance is defined under Section 1 of the Marine Insurance Act of
1906. According to this law, a contract of marine insurance is an agreement
whereby the insurer undertakes to indemnify the insured against marine
losses—losses that are incidental to maritime adventures. Although the term
traditionally referred to goods transported by sea, its modern scope has
expanded to include transportation by air, rail, and road, especially when
these modes are connected to international trade. This broader applicability
underscores the relevance of marine insurance in today’s complex supply chain
environment.
Marine
insurance is often a requirement under international trade agreements. Trade
terms such as CIF (Cost, Insurance, and Freight) and CIP (Carriage and
Insurance Paid) specify that the seller must arrange insurance for the cargo
until it reaches the buyer. In such cases, the insurance serves not only to
protect the seller’s financial interest but also to fulfill contractual
obligations. Even when not legally mandated, many parties voluntarily choose to
insure their goods to mitigate potential financial risks during transit. This
is particularly important because the liability of carriers—whether by sea or
air—is typically limited and may not be sufficient to cover the full value of
the goods being transported.
The
functioning of marine insurance involves the transfer of risk from the cargo
owner or shipowner to the insurance provider. Once the policy is issued and the
premium is paid, the insurer becomes responsible for covering specified risks
associated with the transportation of goods or vessels. This indemnification
process is essential for maintaining financial stability in the event of loss
or damage. For example, if a shipment of electronics is lost at sea due to a
storm, the insurer will compensate the insured based on the terms agreed upon
in the policy. This ensures continuity of business and minimizes disruptions in
trade operations.
While
insurance offers financial protection, it is equally important to adopt
preventive measures to reduce the likelihood of loss or damage. Ensuring proper
packaging of goods is one of the most effective ways to prevent claims. Goods
must be securely packed to withstand the rigors of loading, unloading, and
long-distance travel, including exposure to harsh weather conditions. Labeling
shipments clearly, using reputable shipping lines, and adhering to
international safety standards also help in minimizing the risks involved in
maritime transport. Insurers often consider these factors when determining
premium rates, which means that good shipping practices can lead to lower
insurance costs.
Marine
insurance can be categorized based on what is being insured. Hull insurance
covers the physical structure of the ship, including the hull, machinery, and
equipment. This type of insurance is primarily used by shipowners and offers
protection against incidents such as collisions, grounding, and fire. Cargo
insurance, the most common form of marine insurance, provides coverage for
goods transported from the point of origin to the final destination. It is
essential for exporters and importers who want to secure the value of their
shipments against various perils during transit. Freight insurance is used by
shipping companies to cover the loss of freight income if the goods are not
delivered due to damage or loss. Liability insurance, also known as Protection
and Indemnity (P&I) insurance, covers the legal liabilities of shipowners
for third-party claims arising from accidents, pollution, or injury to crew and
passengers.
According
to the Marine Insurance Act of 1906, marine losses can be broadly classified
into total loss and partial loss. A total loss may be actual or constructive.
An actual total loss occurs when the subject matter of the insurance, such as a
ship or cargo, is completely destroyed, irretrievably lost, or damaged to such
an extent that it ceases to be what it was. For example, if a ship sinks in the
ocean and cannot be recovered, it would be considered an actual total loss.
Constructive total loss, on the other hand, arises when the cost of recovering
or repairing the damaged subject is greater than its value. For instance, if a
ship is stranded in a remote area and the cost of salvage exceeds the ship’s
worth, it may be declared a constructive total loss.
Partial
loss is further divided into particular average loss and general average loss.
A particular average loss refers to partial damage to the subject matter caused
by an insured peril, and it is borne solely by the party whose goods are
affected. It is accidental in nature and does not involve any voluntary
sacrifice. For example, if a portion of a cargo is damaged by seawater during a
storm, the loss is specific to the affected cargo owner. General average loss,
by contrast, involves a deliberate sacrifice made for the safety of the entire
voyage. When cargo is jettisoned to prevent the ship from sinking, all parties
involved in the voyage share the resulting loss proportionally. This principle
of shared responsibility is a unique feature of marine insurance.
There
are several types of marine insurance policies designed to meet the varied
needs of traders and shipowners. A voyage policy covers a shipment from a
specific point of departure to a designated destination and is suitable for
one-time or occasional shipments. A time policy provides coverage for a
specific duration, typically one year, and is ideal for shipowners who
undertake multiple voyages during the insured period. A valued policy specifies
the value of the insured subject in advance, which simplifies the claims
process in case of a loss. An unvalued policy does not state the value at the
outset; instead, the value is determined at the time of the claim based on
documentary evidence such as invoices and market rates. A floating policy, also
known as an open policy, is particularly useful for large exporters who make
frequent shipments. It allows coverage for multiple consignments under one
policy, with shipment details declared periodically.
To
determine the extent of coverage provided by marine insurance, standard
Institute Cargo Clauses (ICC) are used. These clauses are classified into
Clause A, Clause B, and Clause C. Clause A offers the most comprehensive
coverage and includes all risks of loss or damage to the goods, except for
those explicitly excluded. It covers events such as theft, breakage, bruising,
and water damage. Clause B provides mid-level protection and includes risks
like earthquakes, volcanic eruptions, and loss of cargo overboard, in addition
to those covered under Clause C. Clause C offers the most basic coverage and is
limited to major risks such as fire, explosion, vessel grounding, or jettison
of cargo. It is essential for policyholders to carefully assess the nature of
their goods and the risks involved before selecting the appropriate clause.
Despite
the wide coverage provided by marine insurance, certain risks are excluded from
standard policies. Inherent vice, which refers to the natural tendency of
certain goods to spoil or decay, is not covered. For example, perishable goods
such as fruits or flowers may deteriorate during transit due to their nature.
Losses resulting from delay, such as reduced market value or profit, are also
excluded. Additionally, improper or insufficient packing, leakage, ordinary
wear and tear, and war-related risks are typically not covered unless
specifically endorsed in the policy. Insurance for high-risk items, such as drugs
or banned substances, is strictly regulated and not honored unless all legal
conditions are met.
The legal framework governing marine insurance emphasizes several key principles. One of the foundational principles is the presence of insurable interest, meaning that the insured must have a financial stake in the subject matter of the insurance. Without insurable interest, the contract is void. Another critical principle is that of utmost good faith, or uberrimae fidei, which requires both the insurer and the insured to disclose all material facts truthfully. Any failure to do so can result in the policy being rendered null and void. The principle of indemnity ensures that the insured is compensated for the actual loss suffered and not for any speculative or inflated claims. Subrogation allows the insurer to assume the legal rights of the insured after compensation has been paid, enabling the insurer to recover the amount from a third party if applicable. The doctrine of proximate cause ensures that only those losses directly caused by insured perils are covered.
In
conclusion, marine insurance is an essential component of global trade that
provides a safety net for businesses and individuals involved in the
transportation of goods and ships. Its role is not only to compensate for
losses but also to instill confidence in cross-border commerce by reducing
uncertainty. By understanding the different types of policies, clauses, and
legal principles, stakeholders can make informed decisions that protect their interests
and support the smooth functioning of international logistics. In a world where
trade routes span oceans and continents, marine insurance remains a cornerstone
of economic resilience and continuity.
MAISHA TASNIM RAFA
Apprentice Lawyer, Dhaka judge court,
LL.B. Graduate, American International