About marine insurance

As early as the 12th century, transporters of goods between ports around the world have had to insure their property against the perils associated with travel on the high seas. Marine insurance indemnifies vessel owners against the loss or damage of ships at sea or on inland waterways and ascribes value to the cargo on board should it be compromised in any way.

Marine cargo insurance further compensates owners of cargo if such cargo is lost or damaged enroute through fire, theft, or shipwreck, but does not cover losses that could be recovered from the carrier’s insurance. Many industry underwriters will include a “time element” clause in policies which extends cover to loss of profit and other business expenses that may be incurred through delays caused by an insured loss.

Marine insurance: historical background

The need for, and use of, marine insurance dates back to the Middle Ages in Europe, and is considered to be the oldest form of insurance. Generally, it is applicable to the risk associated with the movement of goods between ports.

Encyclopedia Britannica Online observes its origination in Rhodes, having been “adopted by the commercial cities of Italy and by the towns of the Hanseatic League between the 12th and 14th centuries”, and reaching England by the 16th century.

Lloyd's Coffee House in London was the main location for conducting this type of business. Much of marine insurance law and its governing custom were developed there by seafaring men and merchants engaged in foreign trade, who gathered to arrange “their mutual contracts of insurance against the sea”.

The person seeking insurance would pass around a slip showing a written description of the vessel and its cargo, the name of the master, the character of his crew, and the voyage considered. Those wishing to insure the venture would write their names and initials below that description with the amount that each was willing to be liable for as an insurer. When the total amount of insurance sought by the owner of the ship was thus underwritten, the contract was complete, hence the term “underwriters” is now applied to insurers to this day.

In 1696, a newspaper was established to publish information about commercial transactions and shipping movements around the world. This initiative gave rise to Lloyd's Lists, published since 1726, and still the most important publication in the shipping and commercial world.

Lloyd's eventually moved to its current location of the Royal Exchange and is still considered the greatest and most important single commercial influence in the mercantile world.

Meanwhile, the first marine insurance company in the US was established in the 18th century to cover American clipper ships and their cargoes. Over time, the industry has developed into an assortment of broad property cover, split between land risks (inland marine) and sea risks (ocean marine).

Until the 20th century, marine insurance traditionally did not cover a substantial number of risks, conferring responsibility on owners of property to look after it themselves, similar to car accident-insurance policies. Now, ship owners can apply for comprehensive cover which protects them against virtually all risks including “collision and running down” clauses, war-risk riders, and protection and indemnity insurance.

Ship owners carry hull insurance on their own ships and protect themselves against claims by third parties in various ways. Should a ship or its cargo be damaged, the matter is settled between insurance carriers.

Types of marine insurance

Marine insurance covers risk at sea (ocean marine) and on land (inland marine).

Ocean marine insurance is split into three main categories, namely:

  • Hull (Cover for loss or damage to the vessel);
  • Cargo (Cover for loss or damage to goods); and
  • Protection and indemnity (Cover for liability of ship owners).

Cargo insurance is applicable for freight companies that move goods by sea or air in international trade. When a ship is threatened at sea by fire, storm, or other disaster, it is essential to try and keep the ship afloat, which might result in further damage. In this instance, each owner takes responsibility for a share of the property which is damaged or lost, a process known as general averaging.

Ship Owners’ Liability, Protection and Indemnity (P & I) insurance is recommended to cover damage to cargo, or in the event of death or injury to passengers, crew, cargo loaders, and others; damage to piers, docks, underwater cables, and bridges; and, more recently, damage by pollution.

Inland marine insurance covers domestic risks connected to transportation of valuables and deals mostly with mobile property of a personal or commercial nature.

Cover can be tailored to suit individual needs, while rates are based on the discerning underwriter’s experience in a competitive global market. Underwriters set rates based on their own experience, the loss history of the cargo or ship, as well as the rates of current competitors in the industry. Important considerations to be taken into account as it relates to the vessel include owner management, crew experience, trade routes, ports visited, as well as the age and maintenance history of the ship.

Source: An article from Funk & Wagnalls® New Encyclopedia. © 2006 World Almanac Education Group.

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