Malcolm Hartwell, Director, Norton Rose Fulbright, Head of Transport and Master Mariner
From its humble origins as long ago as 4000 BC, marine insurance has grown into a $30 billion a year industry covering the whole gamut of risks associated with the global economy which depends on 90% of the world’s trade being carried by sea.
Marine insurance has expanded into every facet of the trade, logistics and shipping industries covering risks from assets such as ships and cargo to liabilities from pollution, wreck removal, collisions and cargo damage, to death and injury at sea.
Bottomry bonds were bonds over ships to secure loans taken out by shipowners and traders. The underlying loans bore interest, but only had to be repaid if the ship and cargo successfully reached their intended destination. They were apparently used by Babylonian merchants as early as 3 000 BC, but their first recorded use was in 1 800 BC and was used by Hindus in 600BC and well understood in ancient Greece as early as 400 BC.
The Hammurabi law of 1 800 BC codified this practice as evidenced by a tablet discovered in 1901 detailing, in cuneiform, numerous aspects of trade law for the Babylonians which included the provision of bottomry bonds. These practices spread with traders and ships across the ancient world and developed from the 1300’s CE into the modern form of marine insurance policy still in use today.
On the back of Europe’s domination of world trade and colonialisation, the marine insurance industry developed rapidly in the European trade centres exemplified by the domination of the market by Lloyd’s of London from the 17th century onwards.
The earlier practice of investors writing their names on slips to underwrite the risks faced by shipowners and traders now embraces the world of digitisation and blockchain, but the centuries of practice and law remains as relevant today as when Edward Lloyd supplied his coffee shop customers with shipping information to enable investors to assess the risks that they were underwriting.
Although much of that risk is still underwritten by the world’s leading trading nations, either in the form of direct insurance or reinsurance into the markets of London, New York, Beijing and Tokyo, marine insurance has a distinct traditional flavour when it comes to regulation and practice. This is why it is still treated as an unusual and sometimes strange industry with different rules, practices, contracts and terms that underwriters, brokers, traders and shipowners and their advisors need to be familiar with in order to navigate their peculiarities.
Partly as a result of the idiosyncrasies of marine insurance, it is treated with considerable respect and some trepidation by outsiders. But, at the end of the day, like other forms of insurance, practitioners and users have to familiarise themselves with the contract and the laws and regulations that govern it.
The maturity and peculiarities of the industry have driven the development of many standard forms of policies typified by the Institute Clauses which, although originating England and accordingly aligned with common law legal systems, have been adopted for use across the globe. This widespread use has assisted in developing a huge body of marine insurance law across the common law and civil law countries creating a larger degree of certainty when it comes to interpretation of marine policies and clauses. This certainty is welcomed by the insureds, underwriters, brokers and practitioners involved in marine insurance and does assist in reducing disputes under policies.
Due to the unusual, uncertain and, until the introduction of electronic communication, unknown risks associated with maritime adventures, a degree of trust in marine insurance is more heavily relied on than in other sectors. This is reflected partly in the fact that many assets and risks that are insured are never seen by the underwriter. The underwriter relies heavily on declarations and information from the brokers and secondly on their understanding of a particular trade or risk whether that be pleasure craft exposed in the Caribbean to hurricane season or consignments of coffee beans transported by mule, rail, ship and truck from Kenya to Switzerland.
Lack of space precludes a summary of all the unusual features but a comment on marine insurance would be hollow without commenting on value polices, held covered clauses, general average, and protection and indemnity (P&I) insurance.
Provided the valuation is not fraudulent, marine underwriters are obliged to indemnify the insured on the basis of the agreed value without the application of the principle of average applicable in non-marine policies. This takes into account the vagaries of international trade and the constant movement in commodity markets, places a significant onus of the insured to ensure that the risk is appropriately covered.
In the absence of electronic communication, held covered clauses were developed which allowed traders and shipowners to insure their ship or cargo from a particular time or for a particular voyage even if it subsequently became known that the ship or cargo had already been destroyed or damaged.
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Reflected formally in the Rhodian Law of 235 CE the principle of general average allows a party to a common maritime adventure, such as a shipowner carrying cargo, containers and fuel, to recover from all those interests a proportion of any losses and costs deliberately incurred in order to save the common adventure. Originally this allowed deck cargo owners whose cargo had been dumped over the side of the ship in order to save her from a storm, to recover a percentage of their loss from the shipowner and the other cargo owners whose ship and cargo were saved. Nowadays it is mainly relied on by shipowners who incur extraordinary expense or sacrifice to save the ship and cargo following a casualty such as fire or grounding. This risk is insured under even the most restrictive of cargo insurance policies.
P&I (protection & indemnity) insurance developed as a system to insure shipowners against all of the liabilities that they might face during a voyage. This resulted in the establishment and growth of P&I Clubs where shipowners and charterers effectively act as mutual insurers for all of the ships owned by the various shipowners and charterers in that Club. The pooling of these risks in the Clubs is reinsured by the Clubs, but all liabilities and claims are handled in the first instance by the Clubs on behalf of the shipowners.
Owners are obliged to pay premiums known as ‘calls’ usually on a quarterly basis to the Club and these are based on the anticipated collective losses for the year of all of the members of the Club. Members may be asked to make supplementary calls in the event of an unusual risk eventuating during a particular year such as a massive pollution clean-up bill. Many of these risks are now offered by commercial fixed premium underwriters but the P&I Clubs remain at the heart of managing and insuring shipowners’ and charterers’ risks.
Its unique features make marine insurance fascinating and, for the inexperienced, a dangerous market risk that has resulted in underwriters and brokers developing niche expertise in particular risks and trades.
Covering as it does everything from hull & machinery, cargo, freight, yacht, war risks and every risk involved in global and regional trade, specialisation is inevitable and necessary.