530EG - Chartered Insurance Institute
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775EG
(April 2004)
EXAMINATION
GUIDE
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|775 - MARINE INSURANCE UNDERWRITING AND CLAIMS |
|This guide is intended for candidates preparing for the examination subject to which it relates. Candidates will find the guide most |
|helpful if used in conjunction with the self-assessment exercises and assignments in the coursebook. |
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|The answers presented in the guide provide an outline of the key points which candidates could beneficially have covered in the |
|examination. They are not necessarily a definitive statement of some unique, correct answer and, where applicable, other appropriate |
|views could also gain good marks. |
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|The guide should provide greater insight of the approach the examiners were looking for. Practice in answering the questions is highly |
|desirable and should be considered a critical part of a properly planned programme of examination preparation. |
775
THE CHARTERED INSURANCE INSTITUTE
ADVANCED DIPLOMA
APRIL 2004 EXAMINATION PAPER
UNIT 775
MARINE INSURANCE UNDERWRITING AND CLAIMS
Three hours are allowed for this paper, which is in three parts.
READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING ANY QUESTIONS.
THE CHARTERED INSURANCE INSTITUTE
775 – MARINE INSURANCE UNDERWRITING AND CLAIMS
CANDIDATE INSTRUCTIONS
READ THE INSTRUCTIONS BELOW BEFORE ANSWERING ANY QUESTIONS
Three hours are allowed for this paper.
You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III.
The paper carries a total of 200 marks, as follows:
Part I 48 marks
Part II 50 marks
Part III 102 marks
You are advised to spend no more than 45 minutes on Part I. You are strongly advised to attempt ALL the required questions in order to gain maximum possible marks.
In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must cross through these notes before you hand in the booklet.
Answer each question on a new page. If a question has more than one part, leave several lines blank after each question part.
It is important to show all steps in a calculation, even if you have used a calculator.
1. Fill in the information requested on the answer booklet and on form B.
2. You are allowed to write on the inside pages of this question paper but you must NOT write your name, candidate number, PIN or any other identification ANYWHERE on this question paper.
3. The answer booklet and this question paper MUST BE HANDED IN PERSONALLY BY YOU to the invigilator before you leave the examination. FAILURE TO COMPLY WITH THIS REGULATION MAY RESULT IN YOUR PAPER NOT BEING MARKED AND YOU MAY BE PREVENTED FROM ENTERING THIS EXAMINATION IN FUTURE.
THE CHARTERED INSURANCE INSTITUTE
© The Examinations Department, CII, 20 Aldermanbury, London, EC2V 7HY
PART I
Answer ALL questions in Part I.
Each question is worth six marks.
Note form is acceptable where this conveys all the necessary information.
|1. |Briefly describe the following clauses of the Institute Warranties 1/7/76: |
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| |(a) |Bering Sea; (3 marks) |
| |(b) |Indian coal. (3 marks) |
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|2. |What is the purpose of Clause 3 (Event Clause) in the Joint Excess Loss Clauses 1/1/97? |
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|3. |Briefly explain Rule D of the York-Antwerp Rules 1994. |
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|4. |Outline the provisions of the Institute Replacement Clause 1/1/34. |
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|5. |Outline the provisions of the Sistership Clause of the Institute Time Clauses (Hulls) 1/11/95 and briefly explain why it is |
| |necessary. |
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|6. |Explain the differences between the market value of a vessel and its insured value. |
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|7. |List six factors an energy underwriter would take into account when rating offshore units. |
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|8. |What difficulties have arisen from defining ‘any one event’ in marine reinsurance contracts? |
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PART II
Compulsory question.
This question is worth 50 marks.
|9. |A 12-year-old vessel sailed from Buenos Aires on 13 June loaded with 50,000 tons of wheat, bound from Antwerp. At noon on 15 |
| |June the vessel ran aground but, with tug assistance and the use of her main engine, she was able to refloat at noon on 20 |
| |June. |
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| |The master reported that the vessel was leaking and he therefore decided to return to Buenos Aires for examination and |
| |possible repairs. At noon on 22 June the vessel arrived back at Buenos Aires under her own steam. After the vessel had been |
| |surveyed it was decided that 10,000 tons of cargo would have to be discharged to enable permanent repairs to be carried out. |
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| |On 30 June permanent repairs were completed, the discharged cargo had been reloaded and, after taking 300 tons of bunkers, |
| |the vessel proceeded on her voyage at noon the same day. At noon on 2 July the vessel regained the position from which she |
| |had deviated and duly arrived at Antwerp where all cargo was discharged on 20 July. |
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| |The following expenses were incurred by the shipowner: |
| | |USD |
| |Tug assisting vessel while aground (lump sum) |55,000 |
| |Inward port charges at Buenos Aires |11,000 |
| |Outward port charges at Buenos Aires |10,000 |
| |Port charges whilst at Buenos Aires @ USD 1,000 per day |8,000 |
| |Permanent repairs (of which USD 4,000 is refloating damage to the main engine) | |
| | |240,000 |
| |Wages and maintenance of crew, per month |30,000 |
| |Cost of bunkers (see below) per ton |150 |
| |Cost of discharging and reloading 10,000 tons cargo |25,000 |
| |Warehouse rent on cargo @ USD 4,000 per week or part | 8,000 |
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| |The following bunkers were consumed: | |
| | |Tons |
| |Refloating vessel | 40 |
| |Returning to Buenos Aires | 50 |
| |During detention period at Buenos Aires | 30 |
| |Discharging and reloading cargo | 10 |
| |On permanent repairs (of which five tons were in connection with repairs to refloating damage)| |
| | |11 |
| |Regaining point of deviation | 45 |
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| |The sound market value of the vessel at destination was |USD10,000,000 |
| |The invoice value of the cargo, including prepaid freight, was | USD 9,000,000 |
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| |The contract of affreightment for the voyage provided for general average to be adjusted in accordance with the York-Antwerp |
| |Rules 1994. |
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| |Candidates are required to answer the following questions, calculations being made to the nearest whole US Dollar. |
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| |(a) |State and apportion the general average claim (candidates should ignore interest and commission). (30 marks) |
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| |(b) |If the vessel were insured for USD 8,000,000 subject to Institute Time Clauses (Hulls) 1/11/95, show the claim on |
| | |the policy (ignore policy excess). |
| | | (20 marks) |
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PART III
Answer THREE of the following FIVE questions.
Each question is worth 34 marks.
|10. |In December 2002 a CMR carrier subcontracted to a French haulier the carriage of a bonded consignment of perfume from Paris |
| |to London. The vehicle was hijacked by armed robbers in the UK and recovered later the same day with part of the load |
| |missing. The driver collected the vehicle and continued with the transit to London. However, en route he fell asleep and |
| |struck some roadside property also damaging part of the remainder of the goods. As a result of the accident the consignment |
| |arrived in London at its destination on 20 December 2002. |
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| |On 20 January 2003 the receiver of the goods submitted a written claim to the CMR carrier in London which was rejected on 20 |
| |February 2003 and the claim documents returned. |
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| |Discuss the issues involved for the CMR carrier and support your views with stated cases. |
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|11. |Vessels A and B are in a collision in UK waters whereby both are equally liable. |
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| |A sustains damages of £2,500,000 to hull and machinery, £2,250,000 to cargo. B sustains damages of £250,000 to hull |
| |and machinery. |
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| |B limits liability on 9,999 tons. |
| |Assume a rate of exchange 1SDR = £1.20. |
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| |Determine the liabilities. Show your workings and explain your calculations. |
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|12. |Discuss the underwriting considerations of a marine reinsurer when writing excess of loss business. |
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|13. |(a) |A shipment of 400 packages of four different grades of hide were sold on consignment from Romania to London. On |
| | |arrival there was a shortage of 20 packages. The shipment was insured for £130,000 under Institute Cargo Clauses |
| | |(A). |
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| | |The sale prices of the goods were: |
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| | |Grade A 100 packages |£50,000 |
| | |Grade B 100 packages |£40,000 |
| | |Grade C 100 packages |£20,000 |
| | |Grade D 100 packages | £5,000 |
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| | |Adjust the claim and show your calculations. (16 marks) |
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| |(b) |A shipment of 400 packages of the same grade of hide were shipped from Romania to London under Institute Cargo |
| | |Clauses (A) with an insured value of £130,000. Due to an insured peril the hides arrived damaged and were sold at |
| | |£81.25 per package against a sound market value of £300 per package. |
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| | |Sales commission |£250 |
| | |Carriage charges | £50 |
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| | |Adjust the claim and show your calculations. (12 marks) |
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| |(c) |Using the same values as in (b) adjust the claim and show your calculations if an increased value insurance were in |
| | |place for £2,400. (6 marks) |
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|14. |Explain the term ‘freight’. Discuss the issues a shipowner would consider in deciding whether to insure for: |
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| |loss of freight; |
| |loss of hire. |
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| |You should consider the level of indemnity required in each case. |
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775
SUGGESTED SOLUTIONS
The answers set out below show the approach being looked for by the examiners. In many cases there is scope for well-reasoned alternative views which would also receive good marks.
EXAMINER’S COMMENTS
|It was disappointing to find that the overall standard of knowledge displayed by candidates at this session was poor and did not reflect|
|the detailed knowledge required for a technical unit at this level. |
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|In part I, Question 7 was answered well by most candidates, with Question 6 also performing well. Question 3, by contrast, was answered|
|extremely poorly, with only two candidates scoring any marks at all. The remaining part I questions produced variable responses. It |
|evident that most candidates had a patchy knowledge of the syllabus and were not able to perform consistently across the short answer |
|questions. The questions in part I test factual recall across the syllabus and require candidates to focus on the key relevant |
|information. Each question is designed to be answered in approximately five minutes and candidates are advised to allocate their time |
|accordingly. |
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|In part II, it was evident that candidates had not grasped the basic principles of adjustments and lacked a detailed knowledge of |
|general average. This question is worth a quarter of the total available marks and candidates should practise adjusting claims as part |
|of their study and revision programmes. Once the basic principles have been learned, there is no substitute for practice, practice and |
|more practice. This really is the best way to ensure confidence in tackling whichever scenario is presented in the examination. |
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|In part III, questions 11 and 12 were the most popular. Question 11 was answered well by some candidates, including those who had not |
|done as well on the compulsory claims adjustment question. It was disappointing that although Question 12 was relatively popular, it |
|was answered very badly. In fact, only one out of the eight candidates who chose this question reached pass standard. One other |
|candidate came close, but the remaining candidates scored less than a quarter of the available marks. Question 13 was also reasonably |
|popular and was, on the whole, answered well. |
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|Good exam technique is as important as a thorough understanding of the issues. Many candidates let themselves down through a lack of |
|application of knowledge and there was a noticeable tendency to present answers as a list of facts, rather than develop any form of |
|analysis. It is essential to read the question carefully and produce a coherent, structured answer that addresses precisely what has |
|been asked. It is not enough at advanced diploma level to reel off a set of facts – this demonstrates little more than acquisition of |
|knowledge and a good memory. |
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|Question 1 |
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|(a) |Warranted no Bering Sea means that for voyages to the Aleutian Islands an additional premium must be paid, while no East Asian|
| |waters North of 46deg means that Japan is free with the exception of that part North of Soya Strait. Not to enter or sail |
| |from any port or place in Siberia except Nakhodka and/or VladivostockVladivostok. |
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| |Warranted not to sail with Indian coal as cargo between 1stst July and& 30thth September b.d.i. except to ports in Asia not |
|(b) |West of Eden or East of or beyond Singapore. Dates mark the period when during the monsoon the weather is hottest, the danger|
| |of soft and dusty Indian |
| |coal catching fire is at its greatest. |
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|Question 2 |
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|The Event Clause sets out which losses the reassured may aggregate to determine the amount to be applied to the reinsurance. Loss is |
|described as loss, damage, liability or expense arising from one event. Thus, the reassured may add together losses and loss adjustment|
|expenses paid under various original policies to the extent that they arise from one event. The question of what constitutes one event |
|can be the subject of dispute between reinsurers and the reassured, particularly in war and political risks claims. Therefore, there |
|have been a number of judgments on this subject in recent years. The outcome of these cases is that to aggregate multiple losses on the|
|basis of an event, there must be a common factor which can properly be described as an event and which is causative of the losses and is|
|not too remote from the losses. |
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|Unusually, the leading explanation of what constitutes one event in matters of physical loss or damage is derived from an arbitration |
|award known as Dawson’s Field. |
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|Question 3 |
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|Rights to contribute in general average shall not be affected though in event which gave rise to the sacrifice or expenditure may have |
|been due to the fault of one of the parties to the adventure, but this shall not prejudice any remedies or defences which may be open |
|against or to that party in respect of such fault. |
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|Clearly neither the shipowners nor the cargo owners can properly ask the other to contribute to losses and expenditure which have been |
|incurred as the result of their own fault. The contract of affreightment will invariably give carriers exemption from the effect of |
|some faults and therefore whether or not they are legally entitled to a contribution to any general average from other interests or |
|required to contribute to their losses in general average may give rise to a protected legal wrangle. The object of this Rule therefore|
|is to enable an adjustment of the general average to be prepared without looking into the question of any parties to the adventure and |
|to preserve unimpaired any legal remedy at the stage of enforcement (Goulandris Bros Ltdimited v B. Goldman and Sons Ltdimited (1957). |
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|Question 4 |
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|The loss of a small but integral part of a machine may cause the machine to be unfit for the purpose for which it was intended and may |
|give rise to a claim for total loss under the insurance. Therefore, in insurances on machinery, underwriters include the Institute |
|Replacement Clause 1/1/34 to limit their liability in the case of loss or damage. The clause reads as follows: |
|In the event of loss of or damage to any part or parts of an insured machine causedmachine caused by a peril covered by the Policy the |
|sum recoverable shall not exceed the cost of replacement or repair of such part or parts plus charges for forwarding and refitting, if |
|incurred, but excluding duty unless the full duty is included in the amount insured, in which case loss, if any, sustained by payment of|
|additional duty shall also be recoverable. |
|Provided always that in no case shall the liability of underwriters exceed the insured value of the complete machine |
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|Question 5 |
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|The Sistership Clause (Clause 9) is necessary because a person cannot be legally liable to themselves: see Simpson v Thompson (1877) and|
|Cargo ex Laertes (1887). In the latter case, it was decided that should a ship render salvage services to a sister ship, the owner is |
|unable at law to claim salvage in respect of the |
|services to the ship and freight, but they can claim for the services to the cargo. |
|Clause 9 places the assured in exactly the same position as they would have been had the colliding vessel or the vessel affording |
|salvage services belonged to a different shipowner and been under a different management. They can recover their demurrage in respect |
|of the incident on both of their vessels on a cross-liabilities basis if they are both to blame. As the courts will not accept the |
|claim of a sister ship, it is necessary to assess the collision damages or the salvage award, as the case may be, through arbitration by|
|a single arbitrator to be agreed upon between the underwriters and the assured. |
|When one of the vessels limits its liability, the amount payable by that vessel to the other is something less than the proper |
|proportion. Therefore, the other vessel cannot be credited with the proper proportion of recovery when actually such proportion is not |
|received. If, as a result of collision between two vessels, Vessel A sustains damage to the extent of £1m of which Vessel B is liable |
|for £ 500,000, but by limiting liability Vessel B only pays £ 100,000, it is considered inappropriate to assume in the adjustment that |
|Vessel A actually receives the whole £ 500,000 |
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|Question 6 |
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|In respect of a valued policy, where the vessel has been agreed between the underwriter and the assured, it can not be re-opened. The |
|value fixed by the policy is conclusive of the insurable value. The market value of a ship represents its value in the open market. |
|Unvalued policies are rare these days. In the absence of any express provision or valuation in the policy the insurable value is |
|subject to proof by the assured and must be arrived at in accordance with stipulations laid down in the Marine Insurance Act 1906. |
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|More often than not the vessel’s insured value is greater than its market value. |
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|Question 7 |
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|The rating applied to offshore units will depend upon a number of factors, and will include consideration of the following: |
|depth of water; |
|type of structure (whether steel, concrete, fixed or floating); |
|location (whether near to or remote from repair facilities); |
|environment (climate and exposure to earthquake); |
|capacity required (this reflects that high valued structures may create a squeeze on underwriting capacity, leading to higher pricing); |
|depth of water; |
|type of structure (whether steel, concrete, fixed or floating); |
|location (whether near to or remote from repair facilities); |
|environment (climate and exposure to earthquake); |
|capacity required (this reflects that high valued structures may create a squeeze on underwriting capacity, leading to higher pricing); |
|operator’s record and quality control/safety regime. |
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|The rate is applied to the insured value of the individual structure. However, pipelines may sometimes be insured on a first loss basis|
|(a lower figure representing the maximum value that might be lost in any one event), and the premium will be based upon the first loss |
|amount, although insurers will take into account the cost of full replacement. |
|Premium rating on mobile drilling units will take into account the type of unit, whether self propelled or otherwise, and where it will |
|be used, in addition to the contractor’s record. If the unit is likely to undertake trans-ocean tows, such voyages may attract specific|
|additional premiums. |
|Premium rating is of course dependent on the size of deductible. There is no consistent level of deductible applied, since the size of |
|retention will depend upon each assured’s appetite for risk absorption. Some oil companies will take very large retentions, and this |
|will be reflected in a much lower premium rate applied to the exposed amount in excess of the retention, rather than on the full value. |
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|Question 7 |
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|Question 8 |
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|The greatest difficulty has been experienced in defining and understanding the expressionDefining ‘any one event’. in marine reinsurance|
|contracts has presented difficulties because Iit is quite impossible to expect a contract wording to be able to foresee and define |
|every possible contingency likely to affect the class of business in question. Therefore there must always be an element of chance that|
|the finally agreed definition (possibly after legal proceedings) is not in conformity with the ideal solution envisaged or expected by |
|the reassured or indeed, the reinsurer. |
|Mention has been made earlier to this problem in relation to war risks, but it is equally true inIn a hull loss where two or more |
|vessels may be sunk or damaged as a result of one storm and there could be a considerable difference of opinion as to whether the losses|
|were, in fact, attributable to the same storm, and, even if they were, whether it is fair and reasonable to describe the storm as one |
|event when the losses occurred several days and hundreds of miles apart. |
|As an attempt to define the event and avoid argument, the ‘time and radius’ concept was formulated whereby the reassured pinpoints the |
|epicentre of their loss area and draws a circle at an agreed radius from the centre. Thereafter all losses within that circle are |
|accepted as being one loss event. This procedure can be further qualified by applying also a time clause (such as 48 or 72 hours) so |
|that all losses occurring within that time span are collectible. However, the onus of proof that the losses did happen in that period |
|is firmly on the reassured. |
|Clearly, the more specific the description of loss, the less likely there is to be an argument, but the most common basis of excess of |
|loss protection is probably the ‘event’ basis, with the expectation that the finally agreed definition will be acceptable by all |
|parties. |
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|Question 9 |
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|(a) |Statement and apportionment of the general average |
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| | | |General |Particular |
| | | |Average |Average |
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| |Return to BA |50 | | | |
| |50 | | | | |
| |Detention |30 | | | |
| |30 | | | | |
| |Cargo ops |10 | | | |
| |10 | | | | |
| |GA repairs |5 (ex 11) | | | |
| |5 (ex 11) | | | | |
| |Regain posn |45 | | | |
| |45 | | | | |
| | |180 tons | | | |
| |180 tons | | | | |
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| | |Total GA |Sacrifices |Expenditure | |
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|(b) |Claim on the policy | |
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| |Particular average |USD 200,900 |
| |Ship’s proportion of GA sacrifices in full |20,850 |
| |Ship’s proportion of GA expenditure USD 93,826 | |
| |If contributing value of $9,799,100 pays $93,826 | |
| |Insured value of $8,000,000 | |
| |Less PA |200,900 | |
| |200,900 | | |
| | |$7,799,100 pays in proportion |74,676 |
| |$7,799,100 pays | | |
| |in proportion | | |
| |Claim on the Policy (ignoring any excess) |USD 296,426 |
| |Claim on the Policy (ignoring any excess) |
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For some of the following questions, bullet points contain the key information to be included in an answer. Candidates should note that they are expected to produce essay answers in continuous prose to Part III questions. Bullet points have been used here for ease of reference only.
|Question 10 |
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|The CMR convention applies by statute (and can be applied in contract) and covers the international carriage of goods by road and its |
|general scope of application is defined in section 1. Carriage of goods by road: |
|in vehicles; |
|for reward; |
|place of taking over goods and place of delivery (as set out in the contract) are in two different countries; |
|of which one is a contracting country. |
|The transit in question has to fulfil certain criteria other than those stated in Article 1 to be subject to the convention and for the |
|carrier to be a CMR carrier. |
|Goods must never have been unloaded |
|Confirmation of the carriage contract should be evidenced by the making out |
|of the CMR note in triplicate. Top copy remains with the sender, second copy accompanies the goods and the bottom copy goes to the |
|carrier. The absence of a CMR consignment note shall not affect the existence of the contract of carriage under CMR. |
|It is important to remember that a CMR carrier does not ever have to have any contact with the goods themselves and can subcontract the |
|entire carriage. |
|The issues that the London based CMR carrier would have to consider: |
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|Who are the possible claimants, and what if any liability does he owe? |
|owners of the perfume |
|owners of the roadside property |
|(presumably) owner of the truck/trailer |
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|What jurisdictions could the different claimants enforce? |
|country of shipper (FRANCE) / receivers (UK) |
|country of incident (UK) |
|country of place of business of carrier (UK) and subcontractor (FRANCE) |
|Different countries have interpreted the original French translations differently |
|Creating differing standards of defences and liabilities |
|ie, French word “dol” could not be properly translated into English |
|UK = negligence (limitation applies) or wilful misconduct (No limitation) |
|FR = negligence, “gross” negligence (No limitation) and wilful misconduct |
|Will the London based CMR carrier be the liable carrier, or can he avoid liability? |
|Is he the first, last or actual carrier? Art 36. |
|(NB Ulster Swift case considers whether a carrier or a freight forwarder) |
|Can he deflect the claim to the actual French subcontractor |
|Can the subcontractor rely upon any defences? |
|Can he avoid liability at all? |
|This is covered by Arts 17 and 18 of the convention. There are 4 circumstances where the carrier can avoid liability. Art 17(2) refers|
|to ‘circumstances which the carrier could not avoid and the consequence of which he was unable to prevent’. In this case there were two |
|incidents, the first being a hijacking by armed robbers and the second the driver falling asleep. |
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|The courts have considered the application of Art 17 (2) (JJ Silber v Islander Trucking [1985]). The court suggested that the words |
|‘could not avoid’ in the convention wording should be qualified with ‘even with the utmost care’. The standard of care concluded by the |
|court was higher than a duty to do no more than act reasonably but not as high as a requirement to take every conceivable precaution. |
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|We are not privy to the circumstances surrounding the hijack. So it is unknown if the driver considered his intended journey in advance |
|and noted truck stops that offered some degree of security. Was the truck accosted whilst on the move? What degree of threat did the |
|armed hijackers offer and could this still have been avoided? |
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|There are numerous court decisions deciding both ways. Each case will turn on its facts and in practice should the case progress the |
|receiver will make a strong case that the carrier should have had measures in place both to minimise the risk of hijacking, and also to |
|ensure that its drivers were adequately rested. The onus will be on the carrier who wishes to avail himself of the defences under At 17|
|(2) to show that he had taken appropriate measures, or that measures were financially impractical, illegal or would not have prevented |
|the incident. |
|Weight limit restrictions to recovery |
|This impacts the amount of compensation that a successful claimant can receive and Art 23 (3) states that compensation “shall not |
|exceed” and will be calculated at 8.33 SDR per kilo of gross weight (received) short. The SDR is valued as at the date of settlement |
|and it fluctuates daily. The rate in April 2004 was about 1SDR/80p which gives a rough kilo rate of £6.66/kg |
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|Subject to the goods weight and whether limitation applies, the carriers potential maximum liability is the “value of the goods at the |
|place and time at which they were accepted for carriage”. This is fixed according to the commodity exchange price/current market |
|price/normal value of the goods of the same kind and quality – art 23(1and 2) |
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|Higher compensation is possible if “the value of the goods or a special interest in delivery has been declared” art 23 (6) and payment |
|of a surcharge agreed upon CMR art 24 and 26. |
|Consequential loss |
|Art 19 states that the carrier is responsible for any loss caused by delay in delivery. This may apply to the “undamaged” goods if the |
|claimant proves damage has resulted, eg lost market or diminished shelf life for the goods. Delay is defined in two different ways being|
|Not being delivered within the agreed time limits or |
|If there is no agreed time limit in place, and taking in consideration all the circumstances of the carriage including whether the load |
|in question is a partial load, whether the carriage exceeds the time that would be reasonable to expect a diligent carrier to need. |
| |
|The quantum of any consequential loss claim is limited to the original carriage charges – Art23 (5). |
|Other associated charges |
|In addition to whatever a claimant recovers using the weight limit calculation or value of the goods; he can also recover carrier |
|charges (freight), customs duties (as the goods were under bond) and other charges incurred in respect of the carriage of the goods |
|under Art 23 (4). They are paid in full for a TL and on a pro rata basis for partial loss. |
| |
|The courts have considered the application of this article in relation to UK Excise Duty (James Buchanan & Co Ltd v Babco Fowarding & |
|Shipping ( UK) Ltd [1978]) In this case goods designated for export were lost whilst still in the UK and therefore attracted UK Excise |
|Tax. This was decided to be recoverable in full from the carrier under this article. NB Customs duties are not recoverable in France, |
|so non-declaratory proceedings could be an option for the CMR carrier to secure a more favourable jurisdiction if he wishes to reduce |
|his potential outlay. |
| |
|CMR Art 27 allows for interest to accrue at 5%/annum and “shall accrue from the date which the claim was sent in writing to the |
|carrier”. |
|Time bar and notification provisions |
|The convention clearly states what the receiver has to do as soon as he receives the goods (Art 30) |
|Check the condition of the goods with the carrier |
|Send the carrier reservations giving a general indication of loss or damage |
|At the time of delivery for apparent loss |
|Within 7 days of delivery for loss or damage that is not apparent (Sundays, holidays and public holidays do not count as part of the 7 |
|days) This reservation must be made in writing. |
| |
|Apparently no reservations were made at the time of delivery on 20th December, or within 7 days after delivery. Additionally it would |
|appear the consignment note was not claused with the fact that the goods were received damaged and/or lost. The fact that the receiver |
|has taken delivery evidences that he has received the goods in the condition described in the consignment note. It is unlikely that the |
|carrier will secure a defence on these grounds taking into account that sufficient evidence seems to exist to demonstrate that this was |
|not the case, ie a hijack and a road accident occurred. In reality no doubt police records would exist supporting this. |
| |
|No compensation shall be payable for delay in delivery unless reservations have been sent in writing to the carrier within 21days from |
|the time the goods were placed at the disposal of the consignee – art 30 (3). |
| |
|The convention clearly states the time limits within which action can be commenced against carriers in Art 32 (1) and (2) |
| |
|The normal time limitation is 1 year , and time starts to run |
|For partial loss, damage or delay in delivery, from the date of delivery |
|For total loss, from 30 days after expiry of the agreed time limit, or in the absence of an agreed time limit, or where there is no |
|agreement in the time limit 60 days after the goods were taken over by the carrier |
|For all other cases, 3 months after the making of the contract of carriage. |
|Important to note that the day from which time starts to run is not counted (i.e start counting from day after date of delivery when |
|calculating how much time is left. |
| |
|The time limit however for any wilful misconduct claim is 3 years. See section 6 below for discussion of the wilful misconduct point. |
| |
|Submission of a written claim can suspend time running until the carrier formally rejects the claim in writing and returns the documents|
|– art 32 (2). Partial acceptance of a claim leaves the time running on the balance remaining in dispute. The burden of proof concerning|
|sending and receiving documents rests with the party seeking to rely on the facts |
| |
|In this case, the goods were partially lost and the balance finally delivered on 20th December 2002, no reservations appears to have |
|been made at this time or the consignment note claused. This will lead to evidentiary problems for the London based CMR carrier should a|
|formal claim be pursued, since he is unlikely to have initiated investigations as to the circumstances as he was unaware of the loss. |
|Presumably the French subcontractor will have notified his own head office. So the London based CMR carrier could try to just deny |
|liability for late reserves with regards the damaged goods. As to the stolen goods, a written claim was made on 20 Jan 2003 which is |
|well within the 1year time limit. Time was suspended whilst the carrier considered the claim and started to run again when they |
|formally rejected the claim and returned the documents on 20th February 2003. Time will expire on 20th Jan 2004. Time bar can be |
|extended by the carrier – art 32(3). |
|In what circumstances can the carrier’s exposure be greater |
|The carrier will be unable to exclude or limit his liability if the damage was caused by his wilful misconduct, or more importantly if |
|his default was deemed to be equivalent to such wilful misconduct. |
| |
|The leading case is Horabin v BOAC [1952] – where it was set out that to establish wilful misconduct the following needed to be |
|satisfied |
|Person doing the act knew he was doing something wrong |
|He knew it at the time |
|He did it just the same |
|Or he did it quite recklessly, not caring whether he was doing the right thing or not, regardless of the effect |
| |
|Wilful misconduct either by act or omission requires positive mental state, not just forgetfulness or genuine mistake that would only be|
|negligent. |
| |
|In this case consideration must be given to the two incidents. The first, the hi-jacking incident, will be determined on the facts |
|surrounding the incident. and is more difficult to prove either way on the facts given. However there is case law in England concerning |
|commercial drivers falling asleep at the wheel. In the case of Sidney G Jones Ltd v Martine Bencher Ltd [1986], the judge found that |
|the driver was well aware of the regulations surrounding the time that drivers can spend at the wheel and the reason for them, yet |
|deliberately chose to ignore them. This was found to be wilful misconduct. |
| |
|It is important to note that Article 29 provides for wilful misconduct of the carriers servants or agents to be enough to deny the |
|carrier the protection of the convention. |
|Carriage performed by successive carriers |
|The claimants may bring “legal proceedings in respect of liability for loss, damage or delay”. This can be “against the first carrier, |
|the last carrier or the carrier who was performing that portion of the carriage during which the event causing the loss, damage or delay|
|occurred; an action may be brought at the same time against several of these carriers” – art 36. |
| |
|If the carriage is governed by a single contract and performed by successive road carriers each of them shall be responsible for the |
|performance of the whole operation by acceptance of the goods and the consignment note – art 34. In this example the London based CMR |
|carrier can look to his French subcontractor to ultimately settle any liabilities owed. |
| |
|If the first carrier, ie the London based CMR carrier, has paid compensation he shall be entitled to recover this from his |
|subcontractor, the French carrier, together with interest and all costs and expenses incurred, subject to a number of provisions. The |
|pertinent provision here is CMR art 37(a), whereby the CMR carrier is entitled to seek full settlement from his French subcontractor as |
|they were the actual carrier responsible for the loss/damage. The subcontractor is not allowed to dispute this payment by the London |
|based first CMR carrier if this was determined by the courts - CMR art 39. |
|And finally |
|The CMR carrier could also receive claims from the owners of the roadside property that was damaged, but should easily deflect this is |
|outside of the CMR terms and the claim should be pursued solely against his French subcontractor. |
| |
|Similarly for any damages to the truck and or trailer (if articulated) should also be outside of the CMR terms, and very likely to have |
|to be considered under separate property and motor policies of the French subcontractor. |
| | |
| |This Convention shall apply to every contract for the carriage of goods by road in vehicles for reward, when the place of |
| |taking over of the goods and the place designated for delivery, as specified in the contract, are situated in two different |
| |countries, of which at least one is a contracting country, irrespective of the place of residence and the nationality of the|
| |parties. |
| |A CMR carrier is, therefore, someone who has contracted to carry even though they may never take physical possession of the |
| |goods and sub-contract the carriage in its entirety. |
| |The goods are carried over part of the journey by sea, rail or air, and the goods are not unloaded from the road vehicle, the |
| |Convention still applies, as per Article 2, if goods are lost or damaged during that part of the journey unless the loss or |
| |damage was not due to the act or neglect of the road carrier and there are ‘conditions prescribed by law’ for the carriage of |
| |goods by that particular method of transport; in that case the liability of the road carrier will be determined in accordance|
| |with such prescribed conditions, e.g. Hague/Visby Rules for sea crossings. Specific attention is drawn to the prerequisite |
| |that the goods should not be unloaded from the vehicle. |
| |The carriage contract is confirmed by the making out of the CMR note in triplicate. The first copy is retained by the sender,|
| |the third copy by the carrier, and the second copy accompanies the goods. The note is prima facie evidence of the making of |
| |the contract of carriage, the role of the contracting parties and the consignment details |
| | |
| |Liability - The liability of the road carrier is defined in accordance with Articles 17 and 18. Article 17 states that: |
| |Of the four sets of circumstances in which the carrier is relieved of liability under Article 17 (2) the most debate has |
| |related to the circumstances ‘which the carrier could not avoid and the consequence of which he was unable to prevent’. The |
| |most detailed analysis to date was given by Mustill, J in JJ Silber v. Islander Trucking Ltdimited (1985), where goods were |
| |hijacked by armed robbers. |
| |The judge was confronted with several possible interpretations and eventually concluded the standard of care was somewhere |
| |between a requirement to take every conceivable precaution, however extreme, and a duty, on the other hand, to do no more than|
| |act reasonably. The judge proposed the words ‘could not avoid’ should include the qualification ‘even with the utmost care’. |
| |Clearly whether this criterion has been satisfied will depend on the circumstances of the particular case. In practice, the |
| |claimant will suggest measures the carrier could have adopted to avoid the loss/damage and the carrier will be required to |
| |demonstrate those measures were either financially impractical, were beyond the bounds of common sense, would not have |
| |prevented the incident, or were illegal. |
| | |
| |Weight Limit - Article 23(3) states that: |
| |‘Compensation shall not, however, exceed 8.33 units of account per kilogram of gross weight short’ and the unit of account is |
| |defined as ‘the Special Drawing Right (SDR) as defined by the International Monetary Fund’. |
| |Article 23(7) stipulates that the value of the Special Drawing Right (SDR) will be the value at the date of settlement. The |
| |value of the SDR fluctuates, the value on 25 May 2001 was 0.8839 pence, producing a respective weight limit of £ 7.36 per kg. |
| | |
| |Consequential Loss - The carrier is liable for delivery delay in accordance with Article 19 which states: |
| |Delay in delivery shall be said to occur when the goods have not been delivered within the agreed time-limit or when, failing |
| |an agreed time-limit, the actual duration of the carriage having regard to the circumstances of the case, and in particular, |
| |in the case of partial load, the time required for making up a complete load in the normal way, exceeds the time it would be |
| |reasonable to allow a diligent carrier. |
| |In addition, the liability of the carrier for delay is limited under Article 23(5) to the original carriage charges. |
| | |
| |Other Charges - In addition to the weight limit, Article 23(4) of CMR states: |
| |In addition, the carrier charges, customs duties and other charges incurred in respect of the carriage of the goods shall be |
| |refunded in full in case of total loss and in proportion to the loss sustained n case of partial loss, but no further damages |
| |shall be payable. |
| |In the case of James Buchanan & Co. Ltdimited v. Bbco Forwarding & Shipping (UK) Limitedtd (1978), the House of Lords decided |
| |UK excise duty, which became payable following the UK loss of an export consignment (and which would not therefore normally |
| |have attracted UK excise duty), was recoverable in full from the carrier as a charge incurred in respect of the carriage of |
| |the goods. |
| | |
| | |
| | |
| | |
| |…if the damage was caused by his wilful misconduct or by such default on his part as, in accordance with the law of the court |
| |or tribunal seized of the case, is considered as equivalent to wilful misconduct. |
| |In Horabin v. BOAC (1952) Barry, J stated: |
| |‘…in order to establish wilful misconduct the plaintiffs must satisfy you…that the person who did the act knew that he was |
| |doing something wrong and knew it at the time, and yet did it just the same, or alternatively that the person who did the act |
| |did it quite recklessly not caring whether he was doing the right thing or the wrong thing, quite regardless of the effect |
| |of what he was doing upon the satisfy of the aircraft and the passengers for which and for whom he was responsible.’ |
| | |
| | |
| |In other words, what characterise conduct as wilful as opposed to negligent is the state of mind of the defendant. If it |
| |results from forgetfulness or a genuine mistake then it would amount to negligence and it would only amount to wilful |
| |misconduct where they know and appreciate that it is wrong conduct or where such is their disregard for the consequences that |
| |their conduct must be characterised as wilful. |
| |Accordingly in Sidney G. Jones Ltdimited v. Martin Bencher Ltdimited (1986) and where, on the basis of the available evidence,|
| |the court decided the accident was the result of the driver having fallen asleep at the wheel, Popplewell, J, in deciding |
| |there had been wilful misconduct, stated: |
| |‘…the driver was well aware of the Regulations. He was well aware of the purpose of the Regulations. He chose to ignore them|
| |and he did so deliberately. He knew that by ignoring them he exposed the load that he was carrying ..to a greater risk than |
| |if he had complied with the Regulations…in my judgement he appreciated that he was acting wrongfully, persisted in so acting |
| |and was wholly indifferent to the consequences.’ |
| | |
| |Time Limits - The time limits for commencing legal proceedings against carriers is in accordance with Article 32(1) and (2) |
| |which states: |
| |1. The period of limitation for an action arising out of Carriage under this Convention shall be one year. Nevertheless, in |
| |the case of wilful misconduct, or such default as in accordance with the law of the court or tribunal seized of the case, is |
| |conducted as equivalent to wilful misconduct, the period of limitation shall be three years. The period of limitation shall |
| |begin to run: |
| |(a) in the case of partial loss, damage or delay in delivery, from the date of delivery; |
| |(b) in the case of total loss, from the thirtieth day after the expiry of the agreed time-limit or where there is no agreed |
| |time-limit from the sixtieth day from the date on which the goods were taken over by the carrier; |
| |(c) in all other cases, on the expiry of a period of three months after the making of the contract of carriage. |
| |The day on which the period of limitation begins to run shall not be included in the period. |
| |2. A written claim shall suspend the period of limitation until such date as the carrier rejects the claim by notification in |
| |writing and returns the documents attached thereto. If a part of the claim is admitted the period of limitation shall start |
| |to run again only in respect of that part of the claim still in dispute. The burden of proof of the receipt of the claim, or |
| |of the reply and of the return of the documents, shall rest with the party relying upon these facts. The running of the |
| |period of limitation shall not be suspended by further claims having the same object. |
| |The 12 month time limitation period starts to run from 20 December 2002. The owner of the goods submitted a written claim to |
| |the carrier on 20 January 2003. One month of the limitation period has elapsed but the remaining eleven months is suspended. |
| |The carrier wrote to the owner of the goods on 20 Feb’2003 repudiating liability and returning the claim documents. This |
| |recommences the eleven11 month unexpired period of limitation. The claim against the carrier becomes time barred on 20 |
| |Jan’2004 |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|Question 11 |
| | |
|A&B are in collision and both are held equally to blame. |
|A’s damage is |£2,500,000 |
|A’s cargo damage is |£2,250,000 |
|B’s damage is |£ 250,000 |
| |
|B limits liability inliability in respect of other claims under Merchant Shipping Act 1995Act 1995 which embodies the provisions of |
|the 1976 Convention on Limitation of Liabilityof Liability for Maritime Claims. This does not affect B’s rights against the other |
|vessel; the limitation relates to the liability to others; the shipowners right against the other wrongdoing party is dealt with on the|
|basis of the Admiralty Rule. |
|In respect of other claims the limits are: |
|0-500tons |167,000 Units of Account |167,000 | |
|167,000 Units of | | | |
|Account | | | |
|9499 tons 167|167 Units of account per ton |1,586,333 | |
|Units of account | | | |
|per ton | | | |
|Total |1,753,333 | |
|1,753,500 @ £1.20 = £ 2,104,000 |
|Each proves against the fund for the amount they are entitled to claim against B. Thus A proves against the fund for the difference |
|between half their own damage and half B’s (Admiralty Rule of single liability). |
| | |
|One half own damage |£ 1,250,000 |
|One half B’s damage |£ 125,000 |
|A proves against the fund |£ 1,125,000 |
| |
|A’s cargo can claim 50% of its loss from the non-carrying vessel. |
| |
|Apportionment of fund: |
|A proves for |£ 1,125,000 |and receives |£ 1,052,000 |
|A’s cargo (one half) |£ 1,125,000 |and receives |£ 1,052,000 |
| |£2,250,000 | |£ 2,104,000 |
| |
|Cargo has an entirely separate right of claim and is not concerned with the set-off between the vessels. |
| |
| |
| |
|Question 12 |
| |
|The main considerations of a marine reinsurer can be summarised as what am I covering and how much premium am I getting for it? These |
|are the things that a reinsurer should be thinking about. |
|Premium |
|1.Price |
|There are three basic pricing mechanisms in use for XL protection |
|Exposure method – prospective assessment of what is going to be protected |
|Burning costs – looking back at how the account to be protected has performed in the past |
|Rate on line or rate on indemnity |
|Rate and deposit premiums - The main discussions at the negotiating stage are centred on the cost to the reassured and how the price is|
|arrived at i.e. flat premium, percentage of a defined premium income or in the case of a reporting excess of loss contract, a flat rate |
|on the amount exposed. |
|2. How payment is made |
|Flat premium (either all up front or in tranches |
|Percentage of defined premium income |
|Flat rate on amount exposed (used for reporters) |
|Reinstatement premiums if such over is obtained |
|Limit and retention - Basis on which retention is set (i.e. event basis, vessel basis, declaration basis). The statistics - actual or |
|“as if” - may well be radically affected by the different bases and a very different price could thus be obtained from the reinsurer. |
|Consider the operation of an arbitrary rate of exchange being applied to the limit and retention in the event of say a dollar loss on a |
|sterling policy. An arbitrary contract rate of of retention (and therefore less loss potential), but will also increase the limit on |
|the policy in respect of that currency. A series of small losses to the reassured will thereby be better for reinsurers whilst one |
|large total contract loss will be result in reinsurers being in a worse position. |
|3. Brokerages and other deductions |
|Reinstatement provisions. The reassured, in order to obtain maximum coverage during the contract period, will seek as many |
|reinstatements as can be negotiated – the ultimate object being unlimited reinstatements. The price for an unlimited coverage will |
|obviously be higher than for one limited by number of reinstatements and probably carrying an additional premium for such |
|reinstatements. On war business restricted to one reinstatement. |
|General contract terms |
|Limit and retention |
|Event basis, vessel basis, declaration basis depending on type of business being protected |
|Applicable Rate of Exchange |
|Consider whether to fix a ROE at the start of the policy or write just on one currency and hope that currency fluctuations will even out|
|Reinstatements |
|Consider whether to offer any reinstatements and how much to charge for them. War business can only have one reinstatement. |
|Follow clauses |
|Whether as a reinsurer you permit the reassured any freedom to settle claims without reinsurer's involvement even if the reinsurance is |
|impacted by the settlement |
|Contract exclusions and terms - A particular part of the reassured’s subject-matter portfolio may weigh heavily on the reinsurer’s |
|assessment of the overall risk thus materially affecting the price. |
|Specific considerations depending on what reinsurer is being asked to protect |
|Specific XLs Some mention should be made on the three basic methods for the reinsurer of establishing the |
|price for excess of loss protection: |
|War account |
|Important to find out what the extent of the war cover. Is it specific war perils or just incidental coverage? Is there an aviation |
|war account that is traditionally written into a marine book? |
|What terrorism cover is being written and into what accounts. |
| |
|Hull account |
|What sort of hull, blue water, brown water, fishing boats etc. and percentage of the account given to each. Breakdown of premium over |
|each class |
|Breakdown across geographical/classification/ownership |
|What size lines are written |
|Any use of specific facultative reinsurance which will inure to any XL policy |
|Ideally a chart of maximum gross and net lines together with the loss record for as long as possible. |
|Any building risks in the book – these are usually long tail and heavily escalate in value towards the end of the contract, possible |
|more than originally anticipated which might expose the reinsurer. There is also the potential for catastrophe type losses. |
|Does the cedant write specialised business such as TLO? |
| |
|This information permits R/I to analyse the account and the exposures in relation to the limits and retentions requested and to |
|highlight any unacceptable aggregations of exposure. Reporting XLs are used a lot to cover hull business and the R/I will try and |
|analyse the percentage loss required in the case of a PA to exceed the proposed retention. |
|A prospective assessment of the contents of the portfolio to be protected i.e. the exposure method. |
|Cargo account |
|Some idea of the sort of risks written, maximum gross and net lines and loss record |
|Is it transit only or storage as well? |
|Is there specialism in any particularly commodity or type of risk |
|Are the risks primary or excess? |
|What risk management measures are used to minimise loss |
|A retrospective assessment of past results over a certain period – i.e. the burning cost method. |
|Energy Account |
|Participation of cedant in major worldwide facilities |
|What are the aggregate exposures for the large platforms and facilities? |
|Any specific r/I to protect those participations |
|Is any war/terrorist cover provided - how is it coded, into War or Energy account? |
|Maximum gross and net lines written and loss record |
|Rate on line or rate on indemnity. |
|Liabilities |
|What exactly is being written into this account, is it pure marine liabilities such as charterers etc or are there elements of US based |
|energy related liabilities that can give rise to different exposures? |
|Is the business written as primary or excess |
|Any participation in large market risks such as R/I of the International Group |
|Any pollution exposures either as individual writes or elements of other coverage |
|Maximum gross and net line and loss record |
| |
|Loss record is probably most important on this type of business as it is extremely volatile and the portfolio has the potential to be |
|quite wide. |
| |
|Whole account XL |
|As this is an umbrella protection usually covering both fac and underlying specific protections details of these together with a general|
|analysis of the entire account is required |
|Identify whether this account is intended to respond in the event that specifics are exhausted, or in the event of a clash or where |
|there is no specific protection |
|Review the aggregate exposure of the reassured across all classes for any one large loss to ascertain how it will affect any protection |
|written and impact on the reinsurer’s own protections. |
|Overriding considerations by any reinsurer irrespective of what he is writing |
|How does what he write aggregate with and affect what is already within his portfolio? |
|Are his own reinsurance protections adequate? |
|Are his records and that of the reassured adequate to ensure that he has as much information as possible about the exposure that are |
|being accepted? |
|War - It is important take care to determine precisely the scope of the war cover afforded. The marine coverage (as opposed to war) |
|afforded by a specific excess of loss cover will need to take into account various considerations applicable to the classes of business |
|concerned, and the scope of the cover needs to be accurately described. Unless the risks are specifically excluded, may reasonably be |
|expected to cover the reassured’s entire portfolio and the war clause would only serve to identify those war risks which come within the|
|scope of its reinstatement limitations, and the extent to which full war cover itself is granted – i.e. peripheral warlike risks would |
|be covered under the general terms of the contract and not under the war clause. |
|Hull – Reinsurer will want to know the exact composition of the reassured’s hull account, the lines they write on the vessels, the terms under |
|which the vessels are insured and any protective facultative reinsurance effected to reduce the exposure on the excess of loss cover. |
|Information sheet showing the reassured’s maximum gross and net line commitments, the approximate breakdown of their premium by class of vessel |
|(may be difficult to achieve) and their loss record over as long a period as can readily be ascertained. Having acquired as much information as|
|possible, the reinsurers will analyse the potential exposure to the cover itself and its relationship to the reassured’s retention. |
|Particularly important in a reporting excess of loss cover where a rate structure will try to reflect accurately the percentage loss required, |
|in a partial loss casualty, in order to exceed the reassured’s retention. |
|Building risks also considered since values escalate during the construction period and may well exceed the original estimates on which the |
|reassured’s line was based. Escalator clause. |
|The reinsurer may also want to take into consideration the fact that the reassured may be a specialist in ‘limited conditions’ original |
|business: clearly, there is then a case for a higher percentage rate of the available premium. |
|Cargo- It is even more unlikely with cargo than with hull than an exact breakdown of the reassured’s portfolio can be achieved. Even with a |
|restricted national account it would be difficult to determine exact exposures over a given period although, in theory, this exercise would |
|produce the most equitable risk assessment and thereby the fairest method of settling the contract rate. |
|In the absence of such information the reinsurer will have little positive exposure to work on and will rely on a general information sheet |
|outlining the reassured’s line-card, classes of business written or excluded, premium income and recent loss record. |
| |
| |
|An important part of cargo risk potential is contained in the shore risk part of the original policy coverage, not only from the point of view |
|of fire or storm but also from the potential build-up of several cargoes accumulating in one area at the same time. |
|Should the reassured’s loss record show a bias towards any particular commodity, the reinsurer may well want to know what steps have been taken |
|to remedy the situation, whether by rate increases or, preferably, by loss prevention measures adopted by the assured. |
|Rig Account- Drilling rig business is often kept separate from other classes since it often represents a material part of a marine underwriter’s|
|portfolio. The values and limits of market covers are of such significance that an excess of loss reinsurer will invariably on a comprehensive |
|questionnaire being completed by the reassured. This will detail the various line commitments on the major world market placements and any |
|specific reinsurance taken out to protect the cover in question. |
|The questionnaire may well also seek information as to whether the reassured insures the interest against war and/or terrorist risks and, if so,|
|whether such risks are allocated to the war or rig accounts. The answer to such a question clearly has a material effect on the reinsurer’s |
|appreciation of the excess of loss cover under review. |
|Further questions may also be relevant regarding liabilities in relation to drilling or production activities. |
|Following the demise of the Master Drilling Rig Contract (MDRC), more recently known as the London Master Energy Line Slip (LMELS), there has |
|been a proliferation of brokers’ energy covers. This makes it more difficult for the direct writer to keep control of their aggregates on any |
|one platform or field when different operators with an interest may well use different brokers. Reinsurers therefore require a questionnaire to|
|be completed with details of the insured’s lines on different covers and details of their maximum line from cover and/or facultative writings on|
|the major platform/complexes. |
|Liabilities- One of the most important questions to be answered regarding the contents of a marine underwriter’s liability account is whether |
|their book is predominantly high-level or low-level business – that is to say, whether they specialise in risk with large deductibles or whether|
|they prefer to write the primary business. The rating of the excess loss contract should depend heavily on the answer to this question. |
|Probably the largest single marine liability programme emanates from the London Group of P&I clubs. This programme, through several layers, |
|reaches a very high overall limit and therefore an underwriter’s involvement in this programme is of great importance to the reinsurer of an |
|excess of loss cover. |
|Some reinsurers may prefer to keep their involvement in oil pollution risks as low as possible and in this case the reassured’s known |
|commitments shall be made known. |
|On the whole, however, a marine liabilities excess of loss contract will embrace each and every type of liability, with few, if any, exclusions.|
|Due to the near impossibility of analysing exactly the contents of the portfolio the rating of the excess of loss contract will depend heavily |
|on past results allied to a technical appreciation of those contents which are evident and on which information is available. |
|No marine excess of loss programme would be completed without a whole account section. Depending on how much specific protection has been |
|brought by the reassured, the whole account coverage will respond on either the exhaustion of the specific protection or by the accumulation of |
|two or more elements in the specific programme, or by covering sections of the underwriter’s original business not specifically protected. |
|A relatively recent type of coverage is the top and drop. This will have defined parameters of |
|back-up – whole account of specific – and will also provide top layer protection for a vertical loss. In arranging a top and drop contract it |
|is essential that a clear understanding exists as to how and when the drop feature will respond, relative to other underlying protection. |
|A variation on the expression top and drop is the description cascade. This is essentially |
|synonymous with top and drop but implies that it drops to the very bottom of the programme. |
|Aggregate excess of loss is a satisfactory method of protecting these accounts especially where the description of any one event leaves some |
|questions unanswered. The costing of such contracts will depend very much on how much risk protection has been purchased – this is to say – |
|what is the maximum net loss retained by the reassured which will go towards the aggregate above which the aggregate excess of loss contract |
|will respond? This is of fundamental importance since the lower is the retained loss, the less is the likelihood of hitting the aggregate XL. |
|Possibly the most important record is the reinsurer’s aggregate exposure for any one loss. It should be kept for each class written within the |
|XL account, e.g. hull, cargo, rig etc. which are referred to as ‘specifics’ and also for ‘whole account’ layers and XL on XL. XL on XL is |
|usually regarded as having the potential to be completely exposed in the event of a CAT (catastrophe) occurrence whilst excess layers of rig |
|specifics may only be exposed in the event of two or more platforms being destroyed by a hundred-year wave and could therefore be excluded for |
|the aggregation with the XL on XL writings and lower whole account layers. A view would also have to be taken whether a clash is also likely |
|between the hull and cargo XL writing and hull and rig. Using this information the reinsurer can purchase suitable protections of their own or |
|limit their writings and hence exposure within limits that they can stand without having a great impact on the balance sheet. |
|Consequences of inadequate records - Today in a soft market where underwriters are attempting |
|to replace direct business which has become self-insured or lost to an overseas market there is again a small XL on XL reinsurance market. |
|However the account is mostly written gross and net to aggregate exposure limits which have been agreed with general management and which will |
|not greatly affect the balance in the event of a major CAT loss. |
| | |
| | |
| | |
| |
| | |
|(a) |20 packages missing, grades not identifiable hence 5 missing from each grade. |
| | |
| |Grade A. Value per package £500 |
| |5 packages = £2500 |
| | |5 packages = £2,500 |
| |Grade B. Value per package £400 |
| |5 packages = £2000 |
| | |5 packages = £2,000 |
| |Grade C. Value per package £200 |
| |5 packages = £1000 |
| | |5 packages = £1,000 |
| |Grade D. Value per package £50 |
| |5 packages = £ 250 |
| | |5 packages = £250 |
| | |
| | Total value of 20 packages = £5,750 |
| | |
| |Total sound value of 400 packages = £115,000 against an insured value of £130,000 |
| | |
| |20 packages = [pic]x £130,000 = £6,500 |
| | |
| |20 packages = £ 5750 x £130,000 = £6500 |
| |£115000 |
| | |
|(b) |Gross proceeds of sale £81.25 x 400 |£32,500£32,500 |
| |Less sales commission |£250£ 250 |
| |Carriage charges |£50£ 50 |
| | |£32,200£32,200 |
| |Claim is calculated as follows: |
| |Damaged value of 400 packages |
| | |
| | |
| |[pic]x 100 = 27.083% (rounded down to 27% of sound value realised |
| |£32,500 x 100 = 27.083% (rounded down to 27%) of sound value realised |
| |£120,000 |
| |i.e. 73% depreciation of value. |
| | |
| |Insured value £130,000 @73% depreciation |£ 94,900 |
| |Plus extra charges (sales commission and carriage) |£ 300 |
| |£ 95,200 |
|(c) |Increased value insurance arranged for £2,400 |
| | |
| | |Original pays |Increased value pays |
| |73% depreciation |£94,900.00 |£1,752.00 |
| |Extra charges |£232.03 |£67.97 |
| | |£95,132.03 |£1,819.97 |
| | |
| | |Original pays |Increased value pays |
| |73% depreciation£ 94900.00£ 1752.00 |
| |Extra charges£ 232.03£ 67.97 |
| |£ 95132.03 |£ 1819.97 |
| |Total claim £96,952 |
| | |
| | |
| | |
| |
| |
|Basis of cover |
| |
|Freight is the remuneration received by the shipowner for the employment of their vessel to carry goods, i.e. cargo, from one port to |
|another. The term freight is also used to describe that which is being carried but for the purpose of this course the meaning referred |
|to is that given by the former definition. |
|Freight is defined as the price that a ship owner demands to carry goods in his vessel. Basically it the price charged for a space in a|
|ship in which to place goods to be carried from A to B. |
|The Marine Insurance Act 1906 s.90 and the Rules of Construction No. 16 refer to freight without seeking to define it, thus: |
|MIA defines it as |
|…the term freight includes the profit derivable by a shipowner by the employment of his ship to carry his own goods or movables as well |
|as freight payable by a third party, but does not include passage money |
|..the term freight includes the profit derivable by a shipowner from the employment of his ship to carry his own goods or moveables as |
|well as freight payable by a third party, but does not include passage money. |
|Moveables are defined in the Act as … any moveable tangible property, other than the ship and includes money, valuable securities, and |
|other documents. |
|The same section of the Act describes ‘moveables’ as: |
|Hire [or charter hire] is the charge that a shipowner levies to make his whole ship available to someone else [the charterer] not just |
|space in the hold. The distinction is one of control in that it is possible for a shipper to pay a shipowner freight to completely fill|
|the holds of his ship; however the shipowner remains in full control of the vessel. If a charterer hires the vessel, then he has |
|control of the vessel (within the terms of the hire agreement). |
|…any moveable tangible property, other than the ship and includes money, valuable securities, and other documents. |
|Loss of freight |
|A shipowner (or charterer) will only be unable to earn his freight if the freight is payable at destination and the goods do not arrive |
|because the ship was lost or the goods are damaged. Shipowners doing business on freight payable at destination terms have a valid |
|insurable interest that they can purchase insurance to cover. |
|The shipowner may also receive remuneration by hiring their vessel out to another who, in turn, will make a profit by carrying their own|
|goods or those of others. |
|Agreements to carry cargo or hire a vessel are embodied in written contracts, the general types being: |
|bills of lading; |
|voyage charters; |
|bills of lading; |
|voyage charters; |
|time charters. |
| |
|Under English law freight is due on right and true delivery of cargo at destination: Allison v. Britsol (1876). The cargo does not have|
|to arrive in undamaged condition however, but it has got to arrive in specie. In Dakin v. Oxley (1964) it was held that freight was due|
|on delivered cargo even though the value of the damaged cargo was less than the freight due. In Asfar v. Blundell (1896) a cargo of |
|dates was damaged as a result of being immersed in the River Thames following a collision and was sold for animal fodder; it was held |
|that no freight was due, the cargo having lost its specie. |
|At the same time, where freight is paid in advance it is not returnable whatever subsequently happens to the cargo: De Silvale v. |
|Kendall (1815). In such cases the freight element will be merged in the value of the cargo and during the voyage the cargo will have a |
|cost, insurance and freight (CIF) value as opposed to a cost and insurance (C&I) value, where freight is payable at destination. |
|There are specific Institute Clauses to cover loss of freight (ITC – Freight 1/8/89 and IVC – Freight 1/8/89) |
|A loss of freight to the carrier (shipowner or charterer) can therefore only arise when the freight is payable at destination and the |
|carrier runs the risk of not receiving it by reason of loss of the ship and/or damage to cargo. This, of course, only concerns freight |
|due under bills of lading or voyage charters and the shipowner can effect a policy of insurance of cover the risk of such a loss. The |
|standard clauses in use are Institute Time Clauses Freight 1/8/89 and Institute Voyage Clauses Freight 1/8/89. |
|A shipowner can take out protection against loss of freight in addition to his hull and machinery policy as the disbursements warranty |
|in for example the ITC Hulls clauses provides for this amongst other additional insurances. It is in effect an increased value type of |
|policy. If the ship becomes a TL then the insured value is paid out on any freight at risk irrespective of the amount actually at risk.|
|Without the restrictions put in the disbursement warranty of the hull policy it would be theoretically possible to insure a vessel at |
|the lower end of the value spectrum for full cover adding a bit of TLO thus keeping premiums down and hoping that a payout on a freight |
|policy (which without the disbursements warranty have no upper limit) would cover any gaps in the payout.There is no Institute Clauses |
|dealing with loss of hire (earned under above) and such risks are therefore placed on special clauses. There are a number of such |
|clauses currently in use in the London market and the most common one is the AB Stewart (ABS), its most recent form being the 1/10/83 |
|wording, including or excluding war risks. Claims falling under policies incorporating such wording are totally different from those |
|falling to be recoverable from underwriters insuring freight under the above Institute Clauses and are dealt with separately in section |
|G. |
|The MIA provides the measure of indemnity under a freight policy, subject to any express provision in the policy |
|for partial loss of freight |
|for valued policies it is the proportion that sum fixed in the policy bears to the whole freight at the risk of the assured |
|for unvalued policies it is the proportion that the insurable value bears to the whole freight at the risk of the assured |
|The gross freight at risk is measured for time policies at the time of the casualty and for voyage policies at the commencement of the |
|voyage |
|An insurance on freight can be considered, in effect, an increased value policy on the shipowner’s hull and machinery policy since a |
|total loss of the ship will involve a loss of freight then being earned. In the event of a total loss of freight, the insured value is |
|paid regardless of the amount at risk and therefore without any restrictions being placed on the amount insured under freight policies |
|it would be possible for an assured to take out unlimited insurance on freight and to cover their vessel under their Hull and Machinery |
|policy on full conditions for a valuation which they judged sufficient to cover most partial losses, and then arrange additional cover |
|on ‘total loss only’ conditions at a lower rate of premium in order to bring the cover up to the full value required. Such an insurance|
|arrangement would result in the first insurance being a first loss policy and would distort the premium/loss ratio figures. Hence the |
|need for the Disbursements Warranty included in the shipowner’s hull and machinery policy. |
|The prudent level of indemnity would be the maximum permitted by the restrictions in the relevant hull and machinery policy. |
|A shipowner is permitted by the Disbursements Warranty included in their hull and machinery policy to effect an insurance for a period |
|of time against the risk of loss of freight or hire subject to certain limitations. A large proportion of insurance policies on freight|
|will be effected on a voyage basis, either for the total freight at risk for that voyage, or for any sum in excess of that amount |
|insured for time, up to the gross freight at risk for the particular voyage. |
|Loss of hire |
|When a shipowner charters his vessel out it is normally for a fixed period of time (although it is possible that it is measured as a |
|voyage rather than in time) and the hire due is measured on a daily rate payable in advance in accordance with the terms of the |
|charterparty. There are provisions in all charter documents which set out the circumstances when, although the vessel is unable to |
|operate the charterer must still pay hire and when he is not obliged to pay. The shipowner has an insurable interest to protect his |
|expected income. |
|Measures of indemnity |
|There are no Institute clauses to cover loss of hire, but several specialist clauses are in use, being amongst others the A.B Stewart |
|wording, together with the American SP40 form and the Norwegian form. |
|Measures of indemnity |
|As regards the measure of indemnity in the event of loss of freight, s.70 of the MIA 1906 states: |
|This type of insurance will cover the loss of income arising out of loss or damage to the vessel and will pay out a fixed sum for each |
|24hour period, but subject to a deductible of usually 10 or 14 days. Coverage is usually limited to 90 or 180 days. |
|Subject to any express provision in the policy, where there is a partial loss of freight, the measure of indemnity is such proportion of|
|the sum fixed by the policy in the case of a valued policy, or of the insurable value, in the case of an unvalued policy, as the |
|proportion of freight lost by the assured bears to the whole freight at the risk of the assured under the policy. |
|The loss of hire policy in effect when the damage was caused to the vessel leading to the claim will respond to a claim even though the |
|repairs which lead to the vessel being out of action do not take place until up to 12 months after the policy has expired. The repairs |
|can be done in tranches as long as they are all done within the 12 months and no more than 3 sessions are required. If the repairs are|
|done in bits, the deductible does not have to taken again, however each 24 hour period has to be completed and time accrued in separate |
|repair sessions can be aggregated. |
|For the purpose of calculating any claim the gross freight at risk under a voyage policy is that at the beginning of the voyage and as |
|regards a time policy, it is the gross freight at risk at the time of the casualty. Thus, if there were two ports of discharge, the |
|gross freight at risk under a time policy would be the total freight at risk in the event of losses occurring before arrival at the port|
|and only the balance of the freight at risk thereafter. The Institute Time Clauses Freight 1/8/89 and Institute Voyage Clauses Freight |
|1/8/89 are identical except for the clauses in the former dealing with the continuation of the risk, assignment of interest of the |
|policy, lay-up returns and cancellations which would not be appropriate to the voyage clauses. Both sets of clauses provide an indemnity|
|for partial and total losses and amend the law as regards claims for such losses in many ways. |
|If owners and casualty related work is done at the same time, the apportionment will be in accordance to rule D5 in the AAA rules of |
|practice. |
|Loss of Hire |
|If a vessel actually becomes a TL as a result of the casualty there is no claim on the LOH policy, and if the vessel is sold or comes |
|out of charter the policy automatically cancels. |
|If the vessel is time chartered the charterer acquire the right to use the vessel for a period of time, usually twelve12 months, at an |
|agreed daily rate. Hire money is usually paid monthly in advance and the contract for a time charterparty will undoubtedly contain a |
|clause to the effect that hire will cease if the vessel is unable to continue in service by reason of a breakdown of machinery or some |
|other cause. The shipowner consequently has an insurable interest in the money they are due to receive under the time charter and may |
|insure against its loss. As stated earlier, there is no Institute Clauses covering this type of loss and special sets of clauses are |
|used; for example, the AB Stewart wording 1/10/83 is the most common in use in the London market. |
|The appropriate level of indemnity should be the maximum amount of hire expected bearing in mind the fluctuation in charter rates so |
|that underinsurance does not become a problem part way through a policy. |
| |
|The clauses cover the assured for loss of charter hire arising out of loss, damage or an occurrence covered by any one of three sets of clauses |
|(appropriate set to be selected at inception) and agrees to pay the assured a fixed sum for each 24 hours that the vessel is prevented from |
|earning hire up to a maximum number of days, e.g. 90 days or 180 in excess of, for example, the first 10 or 14 days, i.e. the excess period, in |
|respect of any one accident or occurrence. Basically, the principle is that whereas the hull and machinery policy indemnifies the assured for |
|the cost of repairing damage to their vessel caused by a peril assured against, the loss of charter hire insurance indemnifies them for the |
|consequent loss of time incurred whilst those repairs are being carried out. The repairs therefore may be carried out after the loss of hire |
|policy has expired but as long as the repairs are effected within twelve months of the expiry of the policy to damage occurring during the |
|currency of the policy, loss of hire underwriters will settle the claim against them. There are similar provisions to those contained in ITC – |
|Hulls 1/11/95 Clause 12 regarding heavy weather damage sustained between the successive ports being treated as ‘one accident’, and periods of |
|heavy weather falling within and outside the period of cover. |
|The damage caused by the peril insured against need not be repaired all at once. The assured may have to effect temporary repairs immediately |
|and then may elect part permanent repairs on a later occasion with a view to effecting final repairs at a routine period of time or at a time |
|more convenient to them. In those circumstances the assured may aggregate the time on repairs provided the separate periods do not exceed three|
|in number and that all repairs are effected within twelve12 months of the expiry of the policy. As stated above, the agreed amount is paid for |
|each 24 hours that the vessel is prevented from earning hire and nothing is paid for part periods. However, if the repairs to damage are |
|carried out during more than one period, then periods of less than 24 hours in one period of repair, can be added to other period(s) of repair |
|to make up whole 24 hours. Naturally, no claim arises if the vessel is a total (actual or constructive) loss as a result of the casualty and |
|the policy is automatically cancelled if the vessel is sold or becomes unchartered. |
|Provisions are also made for the apportionment of any recovery from third parties in respect of loss or earnings or demurrage and a requirement|
|that the assured shall have repairs effected as expeditiously as possible. Where the assured elects to effect repairs in overtime hours the |
|savings to hull and machinery underwriters are customarily deducted first and the balance borne by loss of hire underwriters up to the saving |
|realised by them. |
|Finally on this subject the wording makes no specific reference to sharing of time when owners’ and underwriters’ repairs are effected |
|simultaneously and the principle laid down in the Adjusters’ Rule of Practice D5 for claims on hull and machinery is generally followed for |
|periods in excess of the deductible period. |
| |
| |
| | | |
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