For as long as there has been commerce, there has been insurance – or risk management, at least. Back in the third millennia BC, Chinese traders carrying goods by sea would divide their cargo between different vessels to limit their losses in the event of an accident or disaster. They were one of the earliest practitioners of risk transfer.
Marine and cargo insurance is a bit more complex these days, but the aim remains the same: to limit the damage or loss incurred as a result of an accident, disaster or other mishap. In this article, we answer a few key questions about marine insurance and shed some light on common marine insurance terms.
What is marine insurance?
Marine insurance covers loss or damage caused to ships, terminals and any transport vessels or cargo by which goods are transferred, obtained, or held between ports of origin and final destinations. A marine insurance policy is designed to minimise the financial loss incurred by a policyholder in the event of an accident, natural hazard or other mishap.
Given that 90% of all Australian international trade is carried by sea, marine insurance is one of the most common – and essential – forms of insurance. It’s also one of the oldest. Without marine insurance, the Australian maritime industry would be fully exposed to risks including
- vessel and machinery failure
- cargo loss
- damage or loss caused by natural disasters and inclement weather
- piracy and armed robbery
What is hull and machinery insurance?
Hull and machinery insurance is an important aspect of marine insurance. It’s specifically designed to cover expenses arising from damage to a ship’s hull (the main body of the ship) plus any fixtures attached to it.
Hull and machinery insurance helps vessel owners protect themselves financially against physical loss or damage for not only the hull of the ship but also the vessels fittings, its machinery, installed equipment and disbursements. The policy can also be extended to include liability for damage to third parties and third party property.
What is marine cargo insurance?
Marine cargo insurance is specifically designed to cover goods in transit against loss and damage arising from external causes, which includes (but is not limited to)
- natural disasters
- theft and piracy
- sinking or stranding of ships
- fires and explosions
- damage caused by jettison or discharge of cargo due to distress.
While marine insurance policies tend to cover transits by water, air, courier, road and rail, marine cargo insurance policies differ slightly from cargo insurance policies for land transport. Sound confusing?
It's a complex area and we recommend talking to your broker about your marine insurance program to understand how and what cargo is covered.
What is an open cargo policy?
A marine open cargo policy or open marine insurance policy is, as the name suggests, an insurance policy that covers an indefinite number of dispatches. It’s a useful policy for bulk commodity traders, operators of commercial trading vessels, fleet owners and generally anyone involved in the movement of goods, because it removes the need to take out individual insurance policies for each journey.
The values of individual shipments aren’t known in advance under an open policy, so the underwriter agrees to insure all shipments on an ‘agreed value’ basis. The policy may cover both incoming and outgoing consignments and remains open until it’s cancelled or the sum insured is exhausted, whichever comes first.
What is a valuation clause in a marine insurance policy?
A valuation clause in a marine insurance policy establishes the insured value of the goods being transported. It contains a fixed basis valuation – agreed upon by the policyholder and the insurance company – which determines how much is payable in the event of a covered loss or damage.
This is what makes marine insurance different to other (non-marine) forms of insurance. Most marine insurance policies are written on an ‘agreed value’ basis, meaning they’re based on a predetermined valuation of the items being insured – cargo, vessels, machinery, etc. In the event of damage or loss, the policyholder is paid the agreed value with no deduction for depreciation. Other insurance policies, such as car insurance, are typically written on the basis of market value.
What are Incoterms®?
International Commercial Terms (Incoterms®) are a set of pre-defined commercial terms developed by the International Chamber of Commerce. They’re designed to communicate the tasks, costs and risks associated with the global transportation of goods, and provide rules and guidance to importers, exporters, insurers, and just about everyone involved in trade.
There are Incoterms® that apply to any mode of transport and terms that are specific to ‘sea and inland waterway’ transport. These terms have a direct impact on your insurance needs and obligations, and it can get complicated. You should talk to a specialist marine insurance broker to understand how Incoterms® impact your marine insurance policy.
What is marine protection and indemnity insurance?
Marine protection and indemnity (P&I) insurance covers vessel owners against third party risks. A typical marine P&I policy covers loss of life, injury and illness of crew members and other third parties, as well as damage to cargo, wreck removal costs, collision liability and much more. Given the scope and cost of these exposures, marine P&I insurance usually includes very high limits of liability.
What is marine liability insurance?
A marine insurance policy typically covers a policyholder’s liabilities towards third parties. Most of these liabilities arise in the event of incidents such as collisions with other ships, allision (collision with a stationary ship) and wreck removal. Cargo owners can use a marine insurance policy to limit their liability with regards to loss or damage of goods carried by ship. A comprehensive marine insurance policy can help cover your risks and keep liability to a minimum.
Does marine insurance include cover for cyber crime and cyber risks?
For marine, cargo and logistics companies, the threat of cyber crime and cyber attack is very real and very common. Unfortunately, there is no single marine insurance policy or foolproof solution that responds to every risk. Some insurers may offer cyber crime extensions to existing marine insurance policies, but many of these provide insufficient protection. A stand alone cyber insurance policy is always recommended in addition to a marine insurance policy.
Gallagher has released a new report entitled The 5 most challenging emerging risks facing the Australian maritime industry. Download the report below.