Marine Insurance Law

Özlem Gürses

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317210337
• Edition: 2
• Topic: Law
• Subtopic: Maritime Law
• Index: Law

Marine Insurance Law, Second Edition introduces and clearly explains all topics covered in courses at Masters level, offering students and those new to the area a comprehensive and accessible overview and way into this important topic in maritime law.

Beginning by introducing the general principles of the subject and structure and formation of insurance contracts, this text goes on to look at individual considerations in detail, including – the duty of utmost good faith /fair presentation of the risk, insurable interest, terms of insurance contracts, brokers, the premium, causation and marine perils, losses, sue and labour, subrogation, fraudulent claims and reinsurance.

This second edition reflects the substantial changes introduced by the Insurance Act 2015, and includes new Appendices containing relevant legislation and example clauses from marine insurance contracts.

Chapter1
Introduction to marine insurance

Chapter Contents

The law of marine insurance

The Marine Insurance Act 1906

Assignment

The Law of Property Act 1925

Further reading

The word insurance (formerly called assurance) is of Italian origin, and the word policy derives from 'polizza', as promise or undertaking.¹ The Lombards were the Italian immigrants who came to England in the thirteenth century to escape from war in the cities of Northern and Central Italy.² The Lombards were the rich who left their homes, carrying all their valuables with them.³ With the money and the leadership they brought, the Lombards engaged in trade, money lending and building ships. They became involved in marine insurance in the fifteenth century, lending money to shipowners in the form of bottomry and respondentia. Bottomry is the transaction under which a shipowner borrowed money to carry out a seafaring venture by pledging his vessel as security for the loan.⁴ The shipowner was obliged to repay the loan only if the vessel arrived safely. If the vessel was lost, the shipowner was relieved of this obligation.⁵ The agreement was a 'bottomry bond' and the word 'respondentia' was used for a similar arrangement under which cargo was given as security.⁶

Insurance on vessels and their cargoes was a response to the expansion of sea trade. In the English jurisdiction the earliest forms of policies were marine, life and fire,⁷ among which marine insurance was the first to emerge.⁸ Marine business was conducted by individual merchants.⁹ There was no restriction in common law on persons who might offer insurance, nor was there any requirement that such persons had the ability to pay claims which resulted in some big losses not being covered.¹⁰ During the war between several European countries in the early eighteenth century in which England was involved, the South Sea Company took part in funding the conflict and assumed a substantial proportion of the National Debt in return for its shares.¹¹ As part of the arrangements, the Company was also given exclusive trading rights in the Americas.¹² The success of the South Sea Company led to other attempts to raise capital on speculative, and often fraudulent, overseas ventures.¹³ Such attempts were called 'bubbles',¹⁴ and the Government passed the Bubble Act of 1720¹⁵ to prohibit companies from being formed and from raising capital other than under the authorisation of an Act of Parliament or Royal Charter. The Bubble Act was also directed at marine insurance, and section 12 prohibited the carrying on of insurance business by corporations, societies and partnerships other than those chartered. Charters were granted only to the Royal Exchange Assurance Corporation and the London Assurance Corporation. For a century those companies had the exclusive right to, and monopoly of, insuring ships and their merchandise as companies, enabling them likewise to undertake the business of fire insurance.¹⁶ Due to the high demand for insurance and the limited capacity of these two companies, there was a need for additional resources to provide insurance. There was nothing in the Bubble Act which prevented individuals from offering marine insurance. Thus, such additional contribution was provided by individual underwriters at Lloyd's and mutual associations – protection and indemnity clubs.

Lloyd’s of London

Lloyd's was initially a coffee house run by Edward Lloyd, who opened the house in 1688 in London,¹⁷ The coffee house was a place to respond to adverts for lost or stolen items or runaway slaves, as well as for actions in regard to selling ships and goods brought by sea.¹⁸ It was also a place where people connected with shipping met, and the shipping intelligence received by the Lloyd's coffee house was well known for its reliability.¹⁹ By 1730 Lloyd's was established as the location for marine underwriting by individuals. In 1 734 the first edition of Lloyd's List was published;²⁰ today, Lloyd's List still provides weekly shipping news to London and beyond. In the early period of their existence the two chartered companies had between them about one-tenth of the total marine insurance business done in London, the other nine-tenths being in the hands of private underwriters, mainly those assembling at Lloyd's coffee house.²¹ In 1774 rooms were rented in the Royal Exchange and Lloyd's ended the coffee house era. By 1800 Lloyd's had begun to dominate shipping insurance on a global scale.²² It was stated that the monopoly conferred upon the London Assurance Corporation and the Royal Exchange Assurance Corporation acted as protection for the private underwriting interest against the possible competition of a host of marine insurance companies.²³ In 1824 the Bubble Act was repealed insofar as it prevented marine underwriting by corporations, societies or partnerships.²⁴ Today the risks can be insured by underwriters at Lloyd's or at the London company market. Lloyd's has grown over 325 years to become the world's leading market for specialist insurance. Among the risks that can be insured at Lloyd's are marine, casualty, property, aviation and reinsurance,

Protection and indemnity clubs

As stated above, the prohibition of insurance by corporations except the two permitted institutions created the need for individuals to insure marine risks. The individual shipowners established mutual clubs –protection and indemnity associations (P & I clubs) in which they were both assureds and insurers.²⁵ A shipowner whose vessel entered into a club is an assured as he is required to pay the premium, which is a 'call' within the context of mutual insurance, to contribute to cover the losses claimed by the members. The same shipowner is also the insurer when he suffers loss and makes a claim, his claim being met by the contributions of the other members through paying their calls. Thus, he receives the premium as an insurer when his claim is to be met by the club. The word 'protection' refers to the cover for liabilities to personnel and for damage to property, while indemnity covers liabilities to cargo owners under a contract of carriage.²⁶ Additionally, a number of clubs have formed 'freight, demurrage and defence' (FD & D) divisions which, for an additional optional premium, provide a claims-handling service and insurance of legal costs and fees for those claims not covered by P & I. By an FD & D cover, clubs do not indemnify their members in respect of claims, but they bear the costs which are incurred.

Shipowners enter their vessels into clubs for the purpose of insuring themselves against a wide range of risks not covered by an ordinary policy of marine insurance. For instance P & I insurance covers shipowners' liability for loss or damage to property carried on board a ship entered.²⁷ The clubs may also cover²⁸ liabilities to passengers, crew or others, for personal injury and death claims; stowaways; crew unemployment indemnity following a casualty; fines; including those for pollution and civil liability for pollution collisions – 1/4th of damages payable to the colliding vessel²⁹; liability for damage to fixed and floating objects and wreck removal. The cover provided by each individual club is stated in the club's rulebook. The clubs also have bodies of rules governing the relationships between the club and its members and between one member and all the other members. When shipowners enter one of their ships in a P & I club there comes into being a policy of marine insurance relating to that ship on the terms of the club's rules.

Section 85(1) of the MIA 1906 defines mutual insurance thus: 'Where two or more persons mutually agree to insure each other against marine losses there is said to be a mutual insurance'. Under section 85(2): 'The provisions of this Act relating to the premium do not apply to mutual insurance, but a guarantee, or such other arrangement as may be agreed upon, may be substituted for the premium'. Mutual insurance associations are permitted to modify the provisions of the MIA 1906, insofar as they may be .modified by the agreement of the parties (s.85(3)). Under subsection (4) the provisions of the Act will apply unless they hate been expressly or impliedly excluded by the terms of the cover granted by the association, and thus the ordinary rules relating to disclosure, warranties, subrogation and the like remain applicable in most cases.³⁰

The law of marine insurance

It is stated that there is no record of any trial affecting questions of marine insurance before the end of the sixteenth century.³¹ In 1601 Parliament passed an Act establishing an insurance court; however, this court fell into disuse for lack of business as merchants and underwriters preferred the regular courts.³² During this period the judges were said to be unacquainted with the nature of insurance contracts.³³ A major development in marine insurance occurred in the eighteenth century with the work of Lord Mansfield. During this time insurance was almost entirely marine.³⁴ In the early development phase of the law of marine insurance, the cases were concerned with interpretation of the contemporary policy wording. For instance in Tiernay v Etherington the court discussed whether the loss of cargo during transhipment was covered by the wording of 'on goods, in Dutch ship, from Malaga to Gibraltar, and at and from thence to England and Holland, both or either; on goods as hereunder agreed, beginning the adventure from the loading, and to continue till the ship and goods be arrived at England, or Holland, and there safel...