Principles of Insurance
Marine Insurance – Actually all general Insurance — is based on seven basic principle and you need to understand all these correctly to improve your knowledge in Marine Insurance
The seven principles of insurance are:-
Principle of Uberrimae fidei (Utmost Good Faith),
Principle of Insurable Interest,
Principle of Indemnity,
Principle of Contribution,
Principle of Subrogation,
Principle of Loss Minimization, and
Principle of Causa Proxima (Nearest Cause).
Will discuss each of these in the following topics
For all those who are involved in decision-making with the operation of ships, it is of fundamental importance to clearly understand the principles of marine insurance and how these are made applicable in practice. Before we go into the details of this complicated, and often tricky subject, we need to understand clearly, what is meant by “insurance”, since, although we are confident of having an idea of this subject, we find it often difficult to express it. So what is insurance? It is basically, “an arrangement by which a company or the state undertakes to provide a guarantee of compensation for a specified loss, damage, illness, or death in return for payment of a specified premium”.
Indemnity
As we all know, the Marine Insurance Act, 1906, says that a “contract of marine insurance” is basically a contract in which the insuring company / association, formally undertakes to “indemnify” (i.e. compensate for harm or loss suffered) the assured, in a mutually-agreed manner and extent, against losses consequent upon a marine adventure. From this it is obvious that the prime purpose of a marine insurance contract is to provide “indemnity” to the assured. According to the fundamental principle of “indemnity”, the insurer will indemnify the assured against a loss he has suffered, and will “restore the assured to the financial-position he was in, immediately before the loss occurred”. This is quite contrary to insurance-contracts in which “indemnity” is not the target, such as in “life insurance” and “accident insurance” contracts, for which the purpose is to pay a “known-sum-of-money”, once an event instances. As a result of the receipt of this “known-sum-of-money”, it is not impossible that the assured is “more-solvent-than-he-was”, just before he suffered the loss. To explain things clearly, in insurance-policies where the target is “indemnity”, such as in the case of marine-insurance, the assured is not to be in a position of “more-solvent-than-he-was”. As compared to non-marine insurance-policies, there are complexities involved in, ascertaining the ongoing “value” of a ship at sea, and even that of the cargo-in-transit, since its value rises with its getting closer to their eventual markets. Therefore, ships and cargoes, have a value assigned to them, right at the time of effecting the policy, i.e. the instance at which in fact the “risk” commences. The insurers use this value to ascertain the “quantum of the indemnity”, they would give the assured. When the loss is total, the “quantum of the indemnity” is 100% of the insured value, and similarly, the “quantum of indemnity” will be the same fraction of the insured value, as much of the fraction of the insured-matter that has been destroyed.
There are two sub-principles of “indemnity”, “Contribution” and “Subrogation”.
For Contribution, the assured is not permitted to make a claim, more than once on the same risk. However, if say, the assured has insurance-policies covering the same risk with two insurers (i.e. a double insurance), each will make a pro-rata contribution to any settlement.
For Subrogation, the assured cannot re-coup his losses from another party, after the insurer has settled his claim. For example where the insurer has paid a goods owner’s claim, the goods owner later on, cannot claim from the carrier. The insurer who paid the claim, “subrogates” (i.e. substitutes by another person or group) the rights of the assured in respect of any claim against a third party. The insurer who has paid the assured a claim for goods lost or damaged on the ship, could subsequently make a claim against the carrier in his own name.
Insurable Interest
The basic issue is that, before an assured legally enters into a marine insurance contract, he must have (or at least expect to acquire) an “insurable interest” in the property at risk, which means, the assured must stand to benefit by the safety or due arrival of the insurable-property, or, may be adversely-affected by its loss or its damage or its detention, or may incur liability in respect to it.
The two distinctive aspects of an “insurable interest” are:
The matter which is insured, must be a physical object exposed to a peril(serious danger), and,
Any assured must have a “legal relationship” to the matter insured and, must also have the prospect of “benefitting” by its preservation or,
“losing” on account of its loss or damage.
In the case where the assured in a marine insurance contract has no “insurable interest” or does not even look forward to acquiring it, the insurance policy is considered to be a “wagering contract”. This contract is void and unenforceable, though there is some controversy on its being “illegal”.
The “insurable interest” of an assured is limited to the amount which he “actually stands to lose”. A simple form of insurable interest is “ownership” of the matter that is insured.
The Master or any member of the crew has an insurable interest in respect of his wages. A “carrier” does have an insurable interest in the goods on account of his liability to the owner-of-the-goods.
Utmost good Faith
The doctrine of “good faith” is prevalent in the regime of law-of-contract. The law –of-insurance, however, requires an even higher standard of honesty than usual. This is of specific importance in the maritime trade, which puts the insurer, somehow, at the mercy of the assured. Under the general law, no party to a contract is entitled to misrepresenting essential facts, to the other party. In fact, however inadvertently the misrepresentation is made, the other party is well-entitled to dishonour the contract, if such a false statement was “material” and had induced him to the contract.
The Marine Insurance Act, 1906, provides that, “a contract of marine insurance is a contract based upon utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party”. A person who is about to execute a policy, must therefore, not only make no active misrepresentations, but must also disclose to the insurer every material circumstance, that is, everything which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he should take the risk. Obviously, disclosure must be made before the contract is made. As will also be seen later, the business of marine insurance is transacted in a somewhat informal manner, and, the policy-document may be issued after sometime. It is for this specific reason, that the instant at which the contract is actually concluded, has been the subject of some controversy. It has therefore normally accepted that, the contract is deemed to have been concluded when the “insurer has accepted the proposal”, and this is commonly established by the slip, bearing the insurer’s initials.
In the ordinary circumstances, a person can only be expected to disclose the facts which he is aware of. However, the business of insurance would be even riskier than it is if the prospective assured was allowed to take shelter, either behind his failing memory or his ignorance. In the eye of the law, a prospective assured is deemed to have knowledge of “every circumstance which, in the ordinary course of business, ought to be known by him”.
Please Note – So what kind of circumstances are “material” and must therefore be disclosed? The Act is of little assistance, when we need to deal with individual cases. It is normally provided, that, in the absence of inquiry, the following circumstances need not be disclosed:-
Circumstances which reduce the risk;
Circumstances actually known to the insurer; as well as, circumstances of common notoriety or knowledge, and, matters which the insurer ought to know in the ordinary course of business, such as trade-usages and political events;
Circumstances in respect of which, informatio
n has been waived by the insurer.
