Claims in Marine Insurance
An insured can file a claim with the insurer in case an incident (against which the insurance cover has been taken) takes place. As stated in marine insurance contracts, the insured needs to submit the claim to the insurer at the earliest. Next, the insurer checks the policy cover and investigates the extent of loss to determine the amount of compensation. Finally, the compensation amount is released to the insured. Let us study some important aspects of marine insurance claims in the next sections.
Table of Content
Theory of Cargo Claims
As mentioned earlier, marine insurance is a very complex type of insurance because of the large number of factors contributing to the losses. Therefore, it becomes quite difficult for the insurer to calculate the amount of premium that should be paid by the insured and the amount of compensation that should be paid by the insurer.
Earlier, these decisions were taken intuitively by underwriters on the basis of their past experiences. However, in many cases, past experiences are not very helpful to the underwriters as they are often faced with ‘firstof-a-kind’ i.e. risk that occurred for the first time. Therefore, insurers require certain fixed guiding principles or standards to be able to apply those in different situations.
Following are some of the theories that work as guiding principles for underwriters in determining the extent of compensation:
Credibility Theory
It is a branch of actuarial science that quantifies the uniqueness of a particular outcome as compared to a normal outcome. This theory was originally developed to calculate risk premium. Now, it is also used to determine the extent of loss to be compensated in case of marine insurance.
Conduit Theory
This theory helps in dealing with issues arising out of the involvement of intermediaries in insurance. In a simple twoparty transaction, the rights and responsibilities of the parties are mentioned in the bill of lading. For example, the carriers of goods needs to deliver the goods to the consignee without any damage and the carrier must be paid by the consignor or the consignee for these services. However, practically, a number of intermediaries are involved in transactions.
In most cases, significant amount of confusion remains regarding the roles of these intermediaries in cargo claims. This theory addresses these problems. According to the conduit theory, if an intermediary is only a “conduit” for freight charges, it is not legally bound to pay the carrier unless it is funded by the shipper. Therefore, the conduit theory provides direction to the insurer in fixing liability in case of cargo claims.
Salvages
In marine insurance, salvage refers to the process of recovering a ship and the goods or other properties after any maritime casualty. The different activities under salvage include towing, re-floating, patching, or repairing a ship. At present, marine salvage is given a high priority due to increased awareness of environmental damages in the sea from cargoes, such as petroleum products.
In marine insurance, the concept of salvage is applied for determining the extent of loss suffered to the sea and the cargo. On the basis of the salvage, the loss is categorised and the compensation amount for the insured is decided.
Total and Average Loss
Under marine insurance, the losses suffered to the insured are categorised in different heads for the faster processing of claims. The major categories of losses in marine insurance are shown in Figure:
Let us discuss these losses as follows:
Total Loss
In this type of loss, the extent of loss equals the value of the insured property. Total loss is further divided into the following types:
Actual total loss
It occurs when:
- An insured cargo is destroyed in such a way that the goods cannot be recovered and there is no possibility of salvage.
- The cargo is damaged in such a way that it ceases to be what was described while insuring. For example, cement bags turning into concrete due to contact with sea water.
- The cargo cannot be retrieved. For example, when a ship sinks, the cargoes are irretrievably lost.
Constructive Total Loss
It takes place when a cargo is damaged in such a way that the cost of retrieving/repairing/reconditioning goods is more than the total worth of the goods.
Average Loss
In this loss, the extent of loss is less than the value of the cargo. Average loss is of the following types:
Particular Average Loss
This type of loss occurs in the following cases:
- Total loss of a part of goods: In this case, a part of a consignment is totally lost. In this case, the value of the loss is calculated by multiplying the number of units lost with the declared value of a unit.
- Damaged goods: If a consignment is damaged in such a way that it can be repaired (at a cost lower than its total value), the consignee and the ship surveyor mutually agrees on the depreciated value of the goods. The depreciation amount is paid by the insurance company. For example, if 30% of a consignment is depreciated due to damage, the remaining 70% will be paid by the insurance company to the consignee.
- General average loss: This is a special case as it occurs in the case of insured as well as uninsured goods. At certain circumstances, cargoes can be intentionally destroyed or abandoned by the captain of the vessel for the safety of the vessel/crew/ other goods. In such cases, the extent of loss suffered due to the abandonment of a particular consignment is shared among all the shippers. It needs to be emphasised that the captain of the vessel should have sufficient logical ground of abandoning goods. Following are some of the circumstances in which a general average loss occurs:
- Goods are thrown into the sea to lighten the vessel so that the crew can better handle an adverse weather.
- Goods that can potentially aggravate the fire are thrown into the sea to extinguish fire.
- Goods are thrown into the sea to lighten the vessel so that the crew can better handle an adverse weather.
In case of the occurrence of a general average loss, the captain of the vessel reports port authorities regarding the loss. The port authorities in turn deploy an average adjuster to determine the contribution of the vessel owners and the shippers to compensate for the loss.
Marine Cargo Loss in News Cargo Ship Carrying Clementines to New Bedford Suffers Big Loss
NEW BEDFORD — A storm at sea has resulted in a storm in federal court over a damaged shipment of clementines to the Port of New Bedford. The cargo ship Crown Opal, registered in Panama and owned by a Russian firm, is temporarily marooned in New Bedford while the shipping company demonstrates that it is adequately insured to absorb the losses incurred when the ship met with 25-foot seas, causing massive shifting of the cargo toward the aft of the ship.
he Maroc Fruit Board, based in Morocco, the company that hired the ship alleged in a federal court filing in Boston that the shippers failed to properly secure the cargo, resulting in major shifting of the cargo and extensive damage to the lower decks as well as to the fruit aboard. The court at mid-week ordered a maritime arrest of the vessel to prevent it from going anywhere while the paperwork is put in order to cover all potential losses, estimated in the lawsuit at $3.2 million to $4.4 million in U.S. dollars.
Claim Procedures and Claims Payment
An insured needs to follow the claim procedure as mentioned in the insurance contract signed with the insurer. Though different insurers may follow different procedures, the generic steps that are involved in the claim procedure are explained below:
- Noticing the insurer: After the occurrence of a maritime casualty, the insured needs to inform the insurer of the loss or damage of goods. Failing to do so may reduce the claim amount significantly.
- Taking reasonable care: Under marine insurance contracts, the owner of the goods needs to act as if the goods are uninsured and take appropriate actions to minimise the extent of loss or damage.
- Surveying: After the reporting of the casualty to the insurer, a ship surveyor is deployed by the insurer to examine the extent of loss or damage. Generally, a certified ship surveyor is appointed where the damaged cargo is available.
- Filing of a claim: Based on the report of the survey, the insured can file a claim to the insured to receive compensation for the loss suffered.
- Paying for the claim: Once the survey has been done, the insurer finalises the extent of compensation that should be paid to the insured.
Following documents need to be presented to the insurer while filing a claim:
- Original policy: The document in which the insurance contract is given in detail.
- Invoice: It provides the total value of goods in the cargo.
- Packing list: It contains the description of goods in the cargo.
- Survey report: It describes the extent and nature of loss or damage.
- Letter of indemnity: This is provided in case the insured is unable to produce the original policy. It mentions the rights and obligations of the insurer.
- Claim form: It provides the basic details of a policy.
- Claim bill: It mentions the expenses incurred by the insured to reduce the extent of loss.
