Principles of Marine Insurance

Here is a list of the principles of marine insurance:

Principle of Utmost Good Faith

Every insurance product is based on utmost good faith on the part of the insurer and the insured. Marine insurance policy is no exception. The principle of utmost good faith assumes an organisation or individual purchasing marine insurance will furnish accurate details without withholding crucial information.

An insurance provider has every right to reject the application or claim if it believes the entity buying the policy has concealed important information. Hence, the insured must disclose all related risks that may impact the underwriter’s judgement and should act in good faith towards the insurer throughout the policy duration.

The breaches under the principle of utmost good faith are classified under four headings - concealment, non-disclosure, fraudulent misrepresentation and innocent misrepresentation. Hence, providing accurate and complete information when buying marine cargo insurance is essential.

Principle of Indemnity

Cargo insurance aims to put the insured in the same financial position after the loss where he would have been if no loss had occurred. While an insurance company cannot replace the goods in the event of loss or damage, it can pay a reasonable compensation.

The principle of indemnity ensures that the policy covers losses of the damaged goods only. By compensating only to the extent of the loss incurred, the insurer makes sure you do not buy the policy to make profits.

For example, you have a marine insurance policy of ₹35 lakh. You incur a loss of ₹15 lakh during a collision. In this case, you are eligible to receive ₹15 lakh as compensation, even if policy coverage is ₹35 lakh.

Principle of Insurable Interest

The Marine Insurance Act of 1963 clearly defines insurable interest. As per the principle, a tangible commodity must be exposed to marine risks, and the insured entity should have a legal relationship with it.

In other words, marine insurance is applicable only when you have an insurable interest in the insurable property at the time of loss. This means you must stand at benefit if the goods reach their destination safely and on time.

On the other hand, you must stand at a loss if the goods are not delivered on time and in condition as expected. So, according to the principle of insurable interest in marine insurance, you must be interested in goods reaching safely to their destination.

Principle of Proximate Cause

The principle of proximate cause is another one of the marine insurance principles. It is a key to determining the reason for the loss or damage to the goods or vessel. It refers to the most direct or proximate cause, which helps analyse the genuine cause if a series of events led to the damage.

As per the principle, the insurance provider is liable to pay you if the policy covers the proximate cause of your loss. If the proximate cause is not covered by your marine insurance policy, the insurer is not liable to pay you.

For example, pirates attack and steal your cargo on its way to Australia. Your policy covers losses incurred due to natural forces only. In the absence of the principle of proximate cause, you could have stated fog as the cause of the theft, as it did not allow you to see the pirates and take action on time. However, piracy will be considered the proximate cause of your loss in a marine insurance policy.

Principle of Contribution

Often, the same perils or risks the goods are prone to are covered by one or more insurance providers. In cases where multiple insurers cover the same cargo, the principle of contribution comes in. The principle states that each insurance provider splits the payment proportionately in the event of a claim.

This helps ensure that you do not receive more than an indemnity and that any loss is fairly distributed between the insurers.

For example, you insure goods worth ₹50 lakh with two insurance companies. In case of loss of goods in a marine event, the amount of loss will be paid to you proportionately by both companies. Here is a list of factors needed to exist before the loss is shared between the insurers:

A minimum of two policies should exist

Every policy must be a policy of indemnity

The policies should cover the same peril, subject matter and interest

Principle of Subrogation

The principle of subrogation in marine insurance follows the indemnity principle. It ensures that the insured party does not receive more than the loss incurred. Based on this principle, you cannot use the damaged goods after you have received a payout from the insurance provider.

Hence, the principle of subrogation limits the scope of any profit from the marine insurance contract. In case of disposal of the damaged goods, you must return the excess amount to the insurance provider post the claim.

For example, the sum insured on your cargo is ₹5 lakh. The entire cargo gets damaged due to an accident, and the insurer settles your claim. However, by selling the damaged goods, you earn ₹20,000. The total cash you receive now exceeds the loss incurred by ₹20,000. As per the subrogation principle, you must return the extra amount to the insurance provider as you are already compensated for the loss.

Understanding the various elements of marine insurance can help you avoid issues during claim settlement. They act as a guide for both insurers and the insured and are key to the seamless settlements of the marine insurance policies.

Tata AIG provides marine insurance plans, including marine cargo insurance, designed to protect the customer’s goods. Its features and benefits include customisable coverage, prompt claim settlement, international coverage, etc.

So, make sure you understand the principles and key features of marine insurance before choosing the right plan for your specific needs.

What is the Marine Insurance Act of 1963?

The Marine Insurance Act was introduced in India on August 1, 1963. It aims to regulate marine insurance activities and defines the obligations and rights of parties involved, such as insurers, insured and brokers.

What is marine insurance?

Marine insurance is an insurance policy designed to cover various maritime transport perils such as loss or damage to cargo, ship or vessel. The Marine Insurance Act of 1963 governs marine insurance in India, which is broadly categorised into cargo insurance and hull insurance. Marine insurance in India may cover risks like fire, theft, bad weather, piracy, collision, natural disasters, etc.

Why is marine insurance important?

Marine insurance is a crucial aspect of the domestic and international trade and shipping industry. The importance of marine insurance includes the following reasons:

Security against financial loss

Compliance with the law

Risk management

Encourages investment

Facilitates international trade

Offers competitive advantage

What are the eligibility criteria for buying marine insurance?

Marine insurance can be purchased by any business engaged in the transportation of goods by sea. This can be manufacturers, import/export merchants, buyers, sellers, banks, contractors, and buying agents.

What are the characteristics of marine insurance contracts?

Marine insurance has the following characteristics:

• Proposal and acceptance

• Payment of premium

• Contract of indemnity

• Insurable interest

• Principle of subrogation

• Utmost good faith

• Principle of contribution