Marine Insurance Law

“The solutions of new standard clauses have been compared with Institute Time Clauses from 1985. By means of International Hull Clauses from 2003., new standard clauses for vessels´Insurance. The coverage of Institute Time Clauses – Hulls hasn’t been essentially changed. From legal and technical point of view the version of former clauses has been improved by new provisions and changes of the existent ones. By means of new provisions, standard clauses have been compared to new international law on vessel´s safety, as well as new solutions of English legislation and jurisdiction. New conditions of insurance are modern and more successful legal regulation than Institute Clauses.” (11)
In terms of coverage what was Clause 6 of the Institute Time Clauses is now Clause 2 of the new Clauses. Apart from some minor changes the main differences between the sets of Clauses in respect of this coverage clause is in the treatment of bursting of boilers, breakage of shafts and latent defect. In regard to the 1995 Clauses there is one additional difference. This is a change in the due diligence proviso to Clause 6.2 which reads “provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners, Managers or Superintendents or any of their onshore management.” In Clause 2.2 of the International Hull Clauses this proviso is now the same as the 1983 wording, namely “provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers.” (8)Reference to Superintendents and onshore management has been deleted. Wider duties are however placed on Assured, Owners and Managers under Clause 14 of the International Hull Clauses so that there is not likely to be much additional coverage, if any, under the International Hull Clauses over the 1995 Institute Time Clauses as a result of the change in the proviso wording. Indeed Owners may in certain factual circumstances be in a worse position because Clause 14 applies in respect of casualties resulting from any of the perils set out in Clause 2 and not merely those in Clause 2.2 to which the proviso is limited.
　　
The main change in Clause 2 is as mentioned above in relation to latent defect. In this regard the Institute Time Clauses Hulls wording was
“6.2 This insurance covers loss of or damage to the subject matter insured caused by
6.2.1 bursting of boilers, breakage of shafts or any latent defect in the machinery or hull.” (8)
The general meaning of the Clause and the coverage given by it has been well understood. It is not the burst boiler or broken shaft or latent defect that is covered but loss of the vessel or damage to it that is caused by one of these, that is the consequential loss of or damage to the insured vessel. If there is no such consequential damage, for example a latent defect is discovered and nothing more, then there is no recovery at all under the insurance. If there is some consequential damage it is only the reasonable cost of repairs to that damage which is recoverable, not the part of the cost relating to putting right or repair of the defect itself or the boiler or shaft. Such cost can be covered by buying additional coverage from underwriters under the Additional Perils Clause 1/11/95.
There are still certainly difficult factual situations where it would be difficult to apply these principles One such area is where the defect has developed prior to the commencement of the policy and continues to do so and the issue arises as to when damage occurred and what was the cause of the continuing damage. However in considering a claim under the Institute Time Clauses Hulls these are the principles to apply.
The New Clauses
Clause 2.2 of the new clauses reads as follows:
“2.2 This insurance covers loss of or damage to the subject-matter insured caused by…
2.2.2. any latent defect in the machinery or hull, but only to the extent that the cost of repairing the loss or damage caused thereby exceeds the cost that would have been incurred to correct the latent defect.” (9)
The change from the previous wording is the addition of that new underlined limitation. It is worth noting the contrasting change to Clause 2.2.1, where the wording is now “bursting of boilers or breakage of shafts but excludes the cost of repairing the boiler which bursts or the shaft which breaks.” Here the reference is to the actual cost whereas with latent defect it is the cost “that would have been incurred”. (5)
The Reasons for Change.
“The reason for the first change has been said to be to reinstate a distinction between the defect and its consequential damage to what, it is said, it was understood to be prior to the Court of Appeal decision in the “Nukila” (1997), but to do so without referring to ‘part’. However, the first difficulty with this explanation is that the “Nukila” decision turned on a finding of fact that there had clearly been damage. This, under a policy which also contained the Institute Additional Perils Clause, meant that the cost of repairing the defect was in fact covered anyway. Furthermore no previous authorities were overruled in the “Nukila” judgments. As to the relevance or meaning of ‘part’ in the context of latent defects, where the defect is in a continuous structure such as a hull there never has been consensus as to what constitutes a part. That is a difficult but often purely factual area. In the “Nukila” underwriters had put their case very high, accepting in their argument that the hull of a ship would be a single part so that no system of fatigue cracking short of total loss (however extensive and whether or not leading to shearing or other tensile failures) could (they argued) amount to damage to the hull for the purposes of the Inchmaree Clause. One wonders if the desire to resurrect this argument is part of the reason for the change referred to above.
It can be said that the new wording does in one sense refer back to the ‘Nukila’. There Lord Justice Hobhouse , as he then was, said “Correcting latent defects is, as a matter of principle, an expense to be borne by the shipowners and not the underwriters.” This statement would seem to me to be the foundation for the introduction of a threshold of the cost that would have been incurred to correct the latent defect.” (5)
The new clauses also contain a new Additional Perils Clause in Clause 44. Somewhat bizarrely, cover is not there given for the actual costs incurred in repairing the latent defect but as follows　“44.1 If the Underwriters have expressly agreed in writing, this insurance
　　covers…
44.1.2 the cost that would have been incurred to correct the latent defect where such latent defect has caused loss of or damage to the subject-matter insured covered by Clause 2.2.2”… (9)

Here is the table which clearly shows the main differences of the in cover provided by:
1) The Institute Time Clauses (Hulls) 1995 and
2) The International Hull Clauses 2003.

IHC (01/11/03) ITC-Hulls (01/10/85)
1 – General
English law and practice and exclusive English jurisdiction
English law and practice, and exclusive English jurisdiction where written on MAR 91 form
2 – Perils
Tried and tested named perils (perils of the sea, fire, explosion etc), plus “due diligence” perils of latent defect, crew negligence etc.
Cover for accidents in loading etc and contact with satellites etc no longer subject to due diligence proviso.
Cover for common costs given at 50% where loss/damage caused by burst boiler, broken shaft or latent defect
Optional Additional Perils Cover (see 41 below) gives cover for costs of correcting the latent defect and repairing the burst boiler/broken shaft and the remaining 50% of common costs
Named perils as IHC-03, but cover for accidents in loading etc and contact with satellites etc subject to due diligence proviso (cl 6).
No express provision for treatment of common costs. Adjusting practice.

3 – Leased equipment
Cover for equipment not owned by the Assured, but for which the Assured is responsible given as standard
No standard cover
4 – Parts taken off
Cover for parts taken off the vessel given as standard
No standard cover
5 – Pollution hazard
Covers loss and damage caused by governmental authority to prevent pollution and environmental damage/threat, consequent upon damage to the vessel for which Underwriters liable
Cover does not extend to governmental authority action to prevent damage/threat to environment (cl 7)
6 – 3/4ths RDC
Cover for 3/4ths of insured value in respect of legal liability arising on a collision. Cover for legal costs limited to 25% of the insured value (save where agreed). Pollution exclusion does not extend to other vessel or property on other vessel nor to an Art 13(1)(b) salvage award.
Optional 4/4ths and FFO cover (see 37/38 below).
Cover for 3/4ths of insured value in respect of legal liability arising on a collision. Cover for legal costs - no express limit. Pollution exclusion does not extend to other vessel or property on other vessel. Silent on Art 13(1)(b) salvage award.
No optional 4/4ths and FFO cover

7 – Sistership
Where sister ships collide or one salves another, liability determined by mutually agreed arbitrator
As IHC-03. (cl 7)
8 – GA and Salvage
Cover for vessel’s proportion of salvage, salvage charges, general average.
No reduction where the vessel is underinsured.
Pollution exclusions do not extend to Art 13(1)(b) award or expenses under Rule XI(d) of York Antwerp Rules 1994
Optional GA Absorption clause (BIMCO) (see 40 below)
Claims subject to reduction for underinsurance. Silent on pollution. (cl 11)
No optional GA Absorption clause
9 – Sue and labour
Duty of Assured to sue and labour and cover for charges properly and reasonably incurred.
No reduction where the vessel is underinsured
Claims subject to reduction where underinsurance (cl 13)
10/11 – Navigation
Navigating provisions no longer expressed as warranties. Rather, Underwriters not liable during period of breach. Cover resumes post breach.
Navigating provisions expressed as warranties and Underwriters possibly off risk from the moment of breach, even if breach corrected (cl 1)
12 - Continuation
Cover to next port in good safety at pro rata monthly premium continues where vessel in distress/missing (at sea) or in distress (in port) and where notice given as soon as possible
Cover to port of destination at pro rata monthly premium continues where vessel at sea or in distress or at a port of refuge or call and where previous notice given to Underwriters (cl 2)
13 – Class/ISM
Vessel must be classed (and comply with class recommendations as to seaworthiness) with an agreed society and must hold valid DOC and SMC. Automatic termination, save where the vessel at sea or loss of class etc results from insured loss/damage
Automatic termination on change/loss of class save where the vessel at sea etc or loss of class etc results from insured loss/damage (cl 4)
14 - Management
Automatic termination on change of ownership, sailing on scrap voyages. Duty to comply with statutory requirements, failing which Underwriters not liable for causative failures.
Automatic termination on change of ownership etc. Cover on scrap voyages reduced to scrap value, although claims for RDC/GA at original insured value (cl 4, cl 1)
15 - Deductibles
Deductibles apply to all claims except for a total loss and sighting the bottom in certain circumstances. Aggregating provision for heavy weather, ice damage and cargo lightening (where permitted).
Optional AMD.
No deductible for claims under optional GA Absorption clause.
As IHC-03, but no lightening provision (cl 12)
16 – New for old
Claims payable without deduction on the basis of new for old
As IHC-03 (cl 14)
17 – Bottom treatment
No cover for scraping, gritblasting, painting the vessel’s bottom, save for damaged/disturbed areas. Cover extended to anti-fouling coating
As IHC, but no cover for anti-fouling coatings (cl 15)
18 – Wages and maintenance
No cover for wages and maintenance, other than in GA or whilst vessel underway to repair port or on trial trips
As IHC-03 (cl 16)
19 – Agency commission
No cover for time and trouble to supply information or documents
As IHC-03 (cl 17)
20 – Unrepaired damage
Measure of indemnity is the lesser of depreciation in market value or costs of repair
As IHC-03 (cl 18)
21 – Constructive total loss
CTL payable where costs of repair/recovery exceed 80% of the insured value
CTL payable where costs of repair/recovery exceed 100% of the insured value (cl 19)
22 – Freight waiver
If Underwriters admit a total loss, they shall make no claim to freight, whether NoA given or not
As IHC-03 (cl 20)
23 – Assignment
Underwriters will recognise an assignment of or interest in the insurance or in any monies payable under it, in certain circumstances
As IHC-03 (cl 5)
24 – Disbursements warranty
Certain additional insurances are permitted by Underwriters
Sets out additional insurances permitted (cl 21)
25 – Cancelling returns
If the insurance is cancelled by agreement, Underwriters will pay pro-rata monthly net premium, provided there has not been a total loss.
Lay-up returns are optional under clause 39
Cancelling and lay-up returns given (cl 22)
26 – Separate insurances
Where more than one vessel insured, each vessel deemed to be separately insured
No standard provision
27 – Several liability
Underwriters’ obligation several, not joint
No standard provision
28 – Affiliated companies
Underwriters waive rights of subrogation against affiliated companies in certain circumstances
No standard provision
29 – War and Strikes
Exclusions for war and strikes losses
Exclusions for war and strikes losses (cl 23-24)
30 – Terrorists, political motive and malicious acts
Exclusions for loss by terrorists, political motive and malicious acts (any weapon)
Exclusions for loss by terrorists, political motive and malicious acts (any weapon of war) (cl 24-25)
31 – RACE, Chem/Bio
Exclusion for loss by certain radioactivity, nuclear weapons and chemical/biological weapons
Nuclear exclusion (cl 26), but RACE CL 356 and Chem/Bio CL 365 frequently incorporated.
32/33 – Navigating limits
The vessel shall not enter, navigate or remain in certain areas, between certain times. Not expressed as warranties. Bering Sea Transit cover free.
No standard provision, but Institute Warranties (01/07/76) frequently incorporated. Expressed as warranties. Bering Sea Transit has to be specifically agreed
34 – Recommissioning
As a condition precedent to Underwriters’ liability, survey required and conditions to be complied with where vessel laid up for 6 months
Silent
35 – Premium payment
Premium must be paid within 45 days of inception (or by instalment), otherwise Underwriters may cancel on 15 days notice to the Assured, via the broker
No standard provision, but LSW 3000 frequently incorporated
36 – Contracts (Rights of Third Parties) Act 1999
Subject contrary provision, only the assured may enforce benefits under the policy
No standard provision
37 – Optional FFO cover
Fixed and floating cover given as optional
No standard provision
38 – Optional 4/4ths cover
4/4ths RDC given as optional
No standard provision
39 – Optional lay-up returns
Lay-up returns given as optional
See 25 above
40 – Optional GA Absorption
GA Absorption clauses (based on BIMCO) given as optional. Includes cover for special charges and claims payable without deductible
No standard provision
41 – Optional Additional Perils
Additional perils cover given as optional, to include the common costs not covered for burst boilers or latent defect, where loss/damage caused. Cover also included for costs of repairing burst boiler and correcting the latent defect, where loss/damage caused. Cover also given for loss or damage caused by any accident or by negligence, incompetence or error of judgment of any person. Cover subject to due diligence proviso.
No standard provision, but Institute Additional Perils Clause (01/10/83)
42 – Leading Underwriters
Leading Underwriters authorised to agree claims on behalf of slip followers
No standard provision
43 – Notice of Claims
Must be given within 180 days of the Assured, Owners or Managers becoming aware of loss, damage, liability or expense which may result in a claim, failing which Underwriters not liable (unless agreed to the contrary)
Notice to be given prior to survey and to the nearest Lloyd’s Agent (cl 10)
44 – Tender Provision
Underwriters may take tenders or require tenders to be taken, plus allowance pro rata of 30% per annum of insured value given for delays caused by Underwriters’ requirements
As IHC-03 (cl 10)
45 – Duties of the Assured
Sets out the duties of the Assured in relation to claims and the consequences of any attempt to mislead the Underwriters
No standard provision
46 – Duties of the Underwriters
Sets out the duties of the Underwriters in relation to claims, to include the agreement of adjusters and undertakings to give prompt consideration to payments on account and to respond within 28 days of a final adjustment
No standard provision
47 – Provision of security
Underwriters will give due consideration to providing security in an appropriate form.
No standard provision
48 – Payment of claims
Claims payable to the loss payee or the Assured
Silent
49 – Recoveries
The Assured shall assess recoveries and keep Underwriters advised. Underwriters will contribute to costs. Recoveries split pro-rata insured/uninsured losses.
No standard provision, save that recoveries credited first to Underwriters (cl 12).
50 – Dispute Resolution
Optional reference of disputes to ADR/mediation
No standard provision

“The taking of a cargo insurance policy, besides the security provided under a carrier's contract of carriage, allows a party to turn directly to the insurance company, rather than the carrier.
The insurance company will then pay the claimant the damage covered by the insurance policy - usually the full loss value (sometimes 10 percent is added). By contract, the indemnity payable by the carrier - if the carrier is liable - is restricted to his legal maximum liability amount. And the carrier may not even be liable at all if protected by one or more of his legal exoneration or exceptions.” (14)
Generally, as per the bill of lading, If the indemnity paid by the insurance company is important enough, then the insurance may wish to subrogate in the rights of the cargo interest and claim from the carrier and so recoup at least some of the indemnity paid to the cargo interested party.
Institute Cargo Clauses "A"
Provide coverage for all risks of loss or damage to the subject matter insured. The words "all risks" should be understood in the context of the "A" clause to cover "fortuitous loss", but not "loss that occurs inevitably."
Institute Cargo Clauses "B"
Provide all the cover that is available under the "C" clauses, but in addition cover is given for loss or of damage to the subject matter insured "reasonably attributable to":
1. Earthquake, volcanic eruption or lightening.
The insurance also covers loss of or damage to the subject matter caused by:
1. Washing overboard.
2. Entry of sea, lake or river water into the vessel, craft, hold, conveyance, container, liftvan or place of storage.
3. Total loss of any package lost overboard or dripped while loading on to or unloading from vessel or craft.
The "B" clauses provide significant additional coverage; wet damage from sea, lake or river water and accidents in loading and discharging, but there is no coverage for theft, shortage and non-delivery.
Institute Cargo Clauses "C"
Cover loss of or damage to the subject matter insured, "reasonably attributable to:"
1. Fire or explosion.
2. Vessel of craft being stranded, grounded, sunk or capsized.
3. Overturning or derailment of land conveyance.
4. Collision or contact of vessel, craft or conveyance with any external object other than water.
5. Discharge of cargo at a port of distress.
The insurance also covers loss or of damage to the subject matter insured caused by:
1. General average sacrifice.
2. Jettison.
To sum up, the "C" clauses provide major casualty coverage during the land, air or sea transit.
General exclusions:
1. Willful misconduct of the assured.
2. Ordinary leakage, ordinary losses in weight or volume or ordinary wear and tear.
3. Insufficient or unsuitability of packing or preparation of the subject matter insured.
4. Inherent vice or nature of the subject matter insured.
5. Delay.
6. Insolvency or financial default of carrier.
7. Deliberate damage to or deliberate destruction of the subject matter insured.
8. Loss arising from nuclear weapons.
(i) Seawater ballast tank on the M.V. “Eastbourne” leaks into a hold on the ship. A cargo of leather is soaked and the resultant smell containments a cargo of wool. A number of wooden boxes containing bottles of wine are also damaged by water. Many of the labels on the bottles are spoilt. Later in the voyage 500 bottles of wine are destroyed during heavy weather.
According to Institute Cargo Clauses "A"
5. - Unseaworthiness and Unfitness Exclusion Clause

5.1 In no case shall this insurance cover loss damage or expense arising from unseaworthiness of vessel or craft, unfitness of vessel craft conveyance container or liftvan for the safe carriage of the subject-matter insured, where the Assured or their servants are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein.
5.2 The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness.
　　“If a latent defect has existed at the commencement of the period (covered by the policy) and all that has happened is that the assured has discovered the existence of that latent defect then there has been no loss under the policy. The vessel is in the same condition as it was at the commencement of the period. Therefore, in any claim under the Inchmaree clause or any similar clause, the assured has to prove some change in the physical state of the vessel. If he cannot do so, he cannot show any loss under a policy on hull. …. If, however, damage has occurred, that does involve a physical change in the condition of the vessel and can be the subject of a claim under the policy.”

(ii) A container full of television sets is dropped onto the quayside during loading of the M.V. “Wimbledon” and the container then falls into the water. The container is recovered from the water but 95% of the sets have been damaged. After unloading from the “Wimbledon” at port of destination, it is discovered that a containerized cargo of video recorders has been damaged. The cargo owners suggest that the damage to the videos was due to the container shifting during the voyage. The cargo insurers suggest that the damage to the video recorders was due either to an inherent fault within the recorders or to a problem with the container itself which should have been known to the cargo superintendent at the time of loading.
According to Institute Cargo Clauses "A"
4.3 loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured (for the purpose of this Clause 4.3 "packing" shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants)

(iii) Goods are due to be shipped from Felixstowe to Rotterdam in three containers. Container 1 is about to leave the depot outside Felixstowe by lorry when a fire occurs inside the container. The fire is quickly extinguished but the goods inside are damaged by the water used to putt the fire out. B Clauses suppose RISKS COVERED
1.1.1 fire or explosion

Container 2 leaves the depot by lorry for Felixstowe but during the journey, as the driver is taking a break in a café, the lorry is taken by a “joy-rider” who crashes it and part of the cargo is damaged.
In no case shall this insurance cover
4.7 deliberate damage to or deliberate destruction of the subject-matter insured or any part thereof by the wrongful act of any person or persons.

(iv) Container 3 is shipped from the Felixstowe to Rotterdam but 59 days after being discharged in Rotterdam the container is attacked in a Customs car park by vandals and the contents of the container are badly damaged.
In no case shall this insurance cover
4.7 deliberate damage to or deliberate destruction of the subject-matter insured or any part thereof by the wrongful act of any person or persons.

(v) An earthquake causes a tidal wave which results in some containers, carrying general cargo, being washed off the deck of the M.V. “Queens” and lost. Later in the voyage an explosion occurs on board the ship and the “Queens” has to put into the nearest port where part of the cargo has to be unloaded in an emergency and is damaged in the process. The “Queens” later sails but upon reaching the next port, the company owing the “Queens” goes into liquidation and the master and crew, who have not been paid, abandon the ship in port and some perishable cargo rots as a result.
1. - Risks Clause B Clauses suppose RISKS COVERED
1.1.6 earthquake volcanic eruption or lightning



It can be seen that in my view there is more restricted coverage under the new Clauses and that there are many questions which arise and remain unanswered under them. Clearer drafting would be desirable to provide the answers and it would not be satisfactory to attempt to introduce change through claims practices which may or may not be known to or indeed agreed by all market participants. Furthermore the new extended format of these Clauses whereby the Additional Perils Clause now appears as Clause 44 of the main Clauses and not as a separate Clause to be added to the policy means that problems with that particular Clause cannot be dealt with by the simple expedient of withdrawing that Clause on its own and reissuing it with any amendments that might be thought necessary.


References:
1. The Knight of St. Michael 1888
2. Bayview Motors v. Mitsui Marine and Fire 2002
3. Soya v. White (1989)
4. Noten v. Harding (1989)
5. Institute Marine Cargo Clauses A
6. Institute Marine Cargo Clauses B
7. Institute Marine Cargo Clauses C
8. The Institute Time Clauses (Hulls) 1995 and
9. The International Hull Clauses 2003.
10. www.tokiomarine.co.id/InstituteCargoClause(B)CL253.pdf
11http://www.ccmt.org.cn/english/explore/exploreDetial.php?sId=384
12. www.boxun.com/hero/guoguoting/537_1.shtml
13. http://www.bmla.org.uk/annual_report/rep_marine_clark.htm
14. http://www.dtgruelle.com/articles/nuinsabc.html