Chapter 1
Introduction to Marine Insurance
Chapter Contents
Lloydâs of London
Protection and Indemnity Clubs
The law of marine insurance
The Marine Insurance Act 1906
SG policy
Contract of marine insurance
Valued policy
Unvalued policy
Voyage and time policies
Floating policies and open covers
Assignment
Assignment under the Marine Insurance Act 1906
The Law of Property Act 1925
Assignment in equity
Further reading
The word insurance (formerly called assurance) is of Italian origin, and the word policy derives from âpolizzaâ, as promise or undertaking.1 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 Lombards were the rich who left their homes, carrying all their valuables with them.3 With the money and the leadership they brought, 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 âbottomry bondâ and the word ârespondentiaâ 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 fire7 among which marine insurance was first to emerge.8 Marine business was conducted by individual merchants.9 There was no restriction at 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 âbubblesâ14 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 Lloydâs and mutual associations â protection and indemnity clubs.
Lloydâs of London
Lloydâs 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 auctions 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 Lloydâs coffee house was well known for its reliability.19 By 1730 Lloydâs was established as the location for marine underwriting by individuals. In 1734 the first edition of Lloydâs List was published;20 today, Lloydâs 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 Lloydâs coffee-house.21 In 1774 rooms were rented in the Royal Exchange and Lloydâs ended the coffee house era. By 1800 Lloydâs began 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 Lloydâs or at the London company market. Lloydâs has grown over 325 years to become the worldâs leading market for specialist insurance. Among the risks that can be insured at Lloydâs are marine, casualty, property and aviation.
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 â 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 âcallâ 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 is met by the contributions of the other members by 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 âfreight, demurrage and defenceâ (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 shipownersâ liability for loss of or damage to property carried on board a ship entered.27 The Clubs may also cover 28 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 â one-fourth of damages payable to the colliding vessel;29 liability for damage to fixed and floating objects and wreck removal. The cover provided by each individual Club is stated in the Clubâs 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 Clubâs rules.
Section 85(1) of the MIA 1906 defines mutual insurance âWhere two or more persons mutually agree to insure each other against marine losses there is said to be a mutual insurance.â Under section 85(2) âThe 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.â 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 have been expressly or impliedly excluded by the terms of the cover granted by the association, thus the ordinary rules relating to disclosure, warranties, subrogation and the like remain applicable in most cases.30
The law of marine insurance
It was 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 Etherington34a the Court discussed whether the loss of cargo during transhipment was covered by the wording of âon 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 safely landedâ.35 This was followed by the development of the rules relating to seaworthiness and development of the wording âfree from particular averageâ,36 which aimed to protect underwriters for partial loss claims for commodities particularly susceptible of damage, such as corn, fish, fruit and sugar.37 However, during this period the policies also began to include clauses âinterest or no interestâ. The policies containing these clauses were called âwager policiesâ because the assured did not need to prove his interest in the subject matter. It was available to insure ships or cargoes in which the assured had no interest as a means of gaining profit â if the loss occurred the assured would be able to c...