Maritime Insurance

Maritime Insurance

What is Maritime Insurance?

It is a type of insurance covering the risks that may occur during the transportation of insured goods transported by sea from one place to another. Cargoes transported by ship are faced with different threats when unloading and loading both at sea, and the port and seaway insurance is made to cover these risks.

International trade includes advice and regulations on who will be responsible for commodity insurance. Insurance liability can be shared between the exporter and the importer. The guarantees to be covered by the insurance can be negotiated, or the party responsible for shipping makes standard insurance.

If the insurance liability is not clearly regulated in the sales contracts, the standard conditions applicable to international commodity sales activities are accepted. The oldest type of insurance for global commodity sales is marine commodity insurance.

Brief History Of Maritime Insurance

The place where insurance is born and developed is the seas. Because maritime trade started before land trade. In the process where land trade is carried out with limited exchanges,

It is the practice of “sea loan”, which is seen as an example in Ancient Greece, Phoenicians, and Rome, and it is accepted as the primary point in the development of the idea of ​​marine insurance. At that time, a loan was given to the shipowner or the owner of a ship for a voyage, equal to the ship’s value or the cargo to be carried. If the ship and cargo arrived intact at the destination port, the lent money was taken back with additional interest.

The oldest known insurance policy is the insurance on the cargo carried by the ship named Santa Clara on 23 October 1347 in Genoa Port of Italy. Lloyd’s has a significant role in the formation of the unique insurance idea and its current status. With more than 28,000 members, Lloyd’s is an international insurance exchange and world maritime information center.

In the British Maritime Insurance Law (M.I.A.) of 1906, this damage must occur due to a marine risk for any damage to be covered by insurers. Marine insurance laws around the world are based on this definition.

Incoterms & Insurance Liability

The easiest way to show who is responsible for insurance is to add incoterms to your invoice and/or sales contract.

For example, C.I.F. is a port delivery incoterm showing that the seller will cover insurance and freight costs. At C.F.R. term, a seller will cover only the freight cost. The insurance liability belongs to the buyer.

An important issue: Insurance liabilities within Incoterms are a limited liability. For comprehensive insurance, the buyer or seller must also contact their insurer.

According to Incoterms 2020, delivery types used in maritime transport: F.A.S., F.O.B., C.F.R., and C.I.F.

Within the scope of Incoterms 2020, it was decided to continue the “Clauses (C) of the LMA / IUA Institute Cargo Clauses,” which is currently valid for C.I.F is, insurance at the minimum insurance level. For C.I.P. shipments, “Clauses (A) of the Institute Cargo Clauses,” in other words, insurance including all risks, is required.

Delivery terms in which the insurance liability belongs to the buyer: EXW, F.O.B., F.C.A., F.A.S., F.O.B., C.F.R., CPT DPU (D.P.U. insurance condition may change between buyer or seller depending on mutual agreement)

Delivery terms where the insurance liability belongs to the seller: C.I.F., C.I.P., D.A.P., DDP

Essential Notes on Maritime Insurance:

Does the Risk of All Risks Include Everything?

Even in the widespread “All Risks” insurance coverage, despite its name, it is only covered for damage and loss caused by theft, plagiarism, non-delivery, loading-unloading, stacking, weather conditions, and water damages.

No cover is provided for risks arising from war, riot, strike or inherent risk, loss due to delay, or loss due to improper packaging.

As the cargoes carried on the ship can be damaged by a riot, strike, or war. Loads on a ship that is stranded in a region or a port for a long time due to these events may be damaged by deteriorating or missing the deadline, depending on the time.

Piracy and Insurance Coverage

Maritime piracy is the plundering, hijacking, or detention of a ship in international waters. It continues to be a problem for maritime shipping. So this is a real insurance issue.

In recent years, pirates, which have been frequently encountered in the Far East and South Africa regions, are a sea threat. The piracy incident may have been considered a war risk in the past, but many guarantees do not cover the risk of war. Piracy was removed from war risks and added to sea risks.

Because, if such a change had not been made, those who insured their cargo against sea risks would have to prove that the incident was a theft in order to receive compensation when they suffered damage caused by piracy.

Average – General Average

Extraordinary damage, loss, and damage to the average ship and cargo Include extraordinary expenses incurred.

Actions such as protecting the ship and cargo, throwing the goods into the sea for salvage, putting the ship aground, and taking measures that will damage the cargo to extinguish the fire are covered by the common average if the action is successful.

Ship sinking Issue (general average)

For example, due to the 40-50 containers on the starboard part of the ship falling into the sea during a storm, the balance of the ship was disturbed, and the ship was in danger of sinking. Upon the captain’s decision, the locks of 40 containers on the port side are unlocked and fall into the sea to ensure balance. This action balances the ship, and if the ship does not sink, and general average occurred. If the ship sinks despite these measures taken, the status to be applied for containers that are spilled into the sea is called “private average”.

Fire Damages

In order to extinguish the fire on the ship, interfering with the ship with water or other fire extinguishing agents may damage the ship’s cargo. Any damage was done in any other way, including putting the ship on fire or sinking it by opening its porthole, is considered standard average.

The common average is a different maritime institution other than shipping insurance. Even if some of the cargo on board is not insured, the cargo owner is a party to the “general average”. Damages and expenses included in the expected average are shared among those who have cargo on the ship by an institution called a dispatcher.

For the “general average” cost to be paid by your insurance institution, there must be a risk provided in the policy.

What is the Commodity Shipping Insurance Coverages?

Today, in addition to the Institute Cargo Clauses (A), (B), (C), and (Air) Clauses added to the policies, they are listed in 5 types as all risks clause and complete loss clause.

There are three main types of coverage commonly used for freight fuses.

a) Broad Coverage:

This coverage covers all risks with the following exceptions.

Exceptions: Intentional Movement: Loss, damage, or expense attributable to the deliberate act of the Insured

Ordinary Damages: The usual leakage, the typical loss of weight or volume, or the usual wear and tear of the insured item.

Packaging and Preparation Inadequacies: Loss, damage, or expense caused by the packaging or structural unsuitability of the insured goods

Hidden Defect: Loss, damage, or expense caused by the hidden defect or nature of the insured item

Delay: Even if it arises from an established risk, the immediate cause of delay is a loss, damage, or expense.

Failure to Fulfill Financial Obligations: Loss, damage, or expense arising from the loss of the ability of the ship’s owners, managers, tenants, or operators to fulfill its financial obligations or

Intentional Damage: The intentional damage or deliberate destruction of the insured thing or any part of it due to the tort of any person or persons.

War Weapon Damages: Loss, damage, or expense arising from any war weapon using radioactive material such as nuclear weapons

War and strike: The damage caused by the beginning of the war or strike.

b) Narrow Guarantee:

If the transport vehicle sinks, runs aground, collides with another marine vehicle, tilts, burns, etc., the result compensates for the loss and damage to the transported cargo.

c) Full Loss Coverage:

It ensures that the transported commodity is also lost due to the complete sinking and destruction of the ship carrying out the transport. Joint average and specific average losses are not included in this coverage type.

What is I.C.C Institute Cargo Clauses?

It guarantees against damages that will occur due to a sudden and unexpected, accidental event during transportation. The coverage does not cover inevitable events occurring in an expected process such as wear and tear, events occurring in the product, such as the product’s defect or physical properties.

Sea risks can be divided into three groups as shown below:

Risks arising from natural factors; Sinking, Disappearance, Stranding, Crashing, Fire and Explosion, Storm,

Risks arising from the behavior of seafarers; Throwing Goods into the Sea, Forced Deviation from Course, Ship, and Voyage Change, Negligence of Barratary, Captain, Pilot, and Seamen,

Risks arising from the behavior of third parties outside the ship: Piracy,

Broad coverage; It is given under the name of Institute Cargo Clauses (A) or All Risk on land and sea and under the name of Institute Cargo Clauses (Air) on an airline.

Institute Cargo Clause A: It is the most comprehensive insurance policy. The insurance premium you will pay at the coverage rate and coverage is also lower than other cargo clauses.

Institute Cargo Clause B: More restrictive coverage than Clause A, so the premium rate will be lower.

Institute Cargo Clause C: It is considered the most limited coverage and can be preferred by companies that consider risk low or limit insurance costs. The risks covered by insurance are limited. 

The most comprehensive clause is I.C.C (A), The main differences are:

  • Natural disasters such as earthquakes, volcano eruptions, or lightning do not cover I.C.C (C) clause.
  • Clause I.C.C (B), (C) does not cover malicious acts of third parties.
  • I.C.C (B), (C) It does not cover theft.
  • I.C.C (B), (C) Does not cover acts such as piracy, kidnapping
  • I.C.C (B), (C) It does not cover partial losses in loading and unloading.
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