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Insurance Contract: Creation of Marine Insurance and Marine insurance policy as a contract of indemnity

The principles of insurance law tend to combine aspects of contract, law and practice. Marine insurance shows how the contract is designed in the policy of assurance and advanced based on the Marine Insurance Act 1906 as well as the market practices.[1] The two parties to the policy, the assured and insured are provided with a sense of freedom where they can set the agreement on basis of their preference. However, freedom is accompanied by various restrictions and constraints. Rules of public policy are provided by the law, to ensure that Marine insurance policy has a certain similarity.[2] In insurance, public policy guides against aspects of gaming and wagering, illegal businesses, and the cheating act prevent arrangements of illicit conduct.[3]

In the event that parties to the insurance policy reach an agreement with regard to indemnity, then aspects of public policy and freedom of contract will be defined. Therefore, the parties can reach indemnity and agree on the amount to be paid, and this can be enforced legally provided that it does not constraint the public policy.[4]

The basic functioning of the contract of insurance is to indemnify the insurer where the payment in occurrence on a risk should be equal to the monetary loss specified in the contract. In the case of Brotherston v. Barber, Lord Ellenborough explains that the underwriter should not become the purchaser of the insured property; the sole responsibility should be to indemnify.[5] However, it’s clear that the policy of insurance does not bear aspects of a perfect contract based on certain aspects such as underinsurance, and deductible.

The contract of Marine Policy can be extended to encompass to protect the assured against loses occurring on inland waters or even land provided they affect the sea voyage. The ‘Loss’ covered by the insurance refers to damages as well as loss of property resulting from maritime accidents.[6] The main principle is that insurance cover is a contract of indemnity which means that the party covered should be compensated for the loss but there can never be case where parties get more than the assured indemnity. In Richards v. Forest Land, Timber and Railways Co. Ltd., the court explained that based on the prohibitions and the common law, parties can make their own contracts where they may exclude certain terms.[7] Therefore, the court establishes a form of freedom where parties may use their own terms which means that indemnity may not be perfect. However, the valuation should not be excessive so as to go against the principle of utmost good faith and misrepresentations. In the event that the printed clause in a Marine policy differs from the written version, then it so occurs that the latter prevails under the principle of construction.[8]

Insurable interest

            The requirements of insurable interest are derived from the principle that a contract of insurance is a contract of indemnity.[9] Therefore, in order for the insured to be in a position to make a claim under the marine insurance policy, he must first prove that he has suffered a loss. To prove this, the insured has to demonstrate that he has an interest in the specific marine adventure.   The way to demonstrate that is provided under the 1906 Marine Insurance Act s.5 (2), where it states:

“In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

Hence, the insurable interest determines the relationship between the insured and the subject matter of the property. However, if the insured has no interest in the marine adventure, the nature of the contract will be considered as ‘gaming or wagering’[10].

Section 6 of the 1906 Marine Insurance Act provides that: “The insured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is affected … ”. This section embodies the principle of indemnity.[11] Moreover, the revised Institute Cargo Clauses retain, in Clause 11, an express contractual requirement for an insurable interest as follows: “In order to recover under this insurance the Insured must have an insurable interest in the subject-matter insured at the time of the loss.” Hence, where the Institute Cargo Clauses apply, there is an express contractual requirement for an insurable interest, where they do not, English law implies such an interest on the basis of the indemnity principle.[12] The courts, in cases of a claim under a marine insurance policy, lean towards finding an insurable interest where a premium has been paid and the objection is technical and without merit.[13] In Inglis v Stock[14], Brett M. R. stated that:

“…it is the duty of a court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the insured and the underwriter.”[15]

Moreover, in cases where the claimant claimed under the policy for his cargo, even if the evidence of insurable interest is of less weight than what would normally be expected, the courts will favour the insured.[16] From the ruling of Wunsche v. Tai Ping Insurance Co[17], it can be concluded that the English Courts are ‘less likely to enquire too deeply as to whether the insured was contractually obliged to pay for the goods where the insured has in fact paid for them, has clearly suffered a loss, and there are no potential competing claimants for indemnity under the policy’[18].

Subject Matter

            With respect to the risk of loss from maritime perils, anything can be the subject matter of marine insurance.[19] In order for an object to be characterised as the subject matter falling under a marine insurance policy, it must be cable of exposure to maritime adventure. The most common objects are the vessel and the cargo. However, the marine insurance policy for a vessel is beyond the purpose of this thesis and, therefore, only the cargo as subject matter will be examined. The 1906 Marine Insurance Act, s. 26 (1) reads as follow: “The subject-matter insured must be designated in a marine policy with reasonable certainty.” However, there is no expressed requirement, either statutory or in common law, that can designates subject matter which falls within recognised categories of subjects falling under marine insurance policies.[20] In some policies, the subject matter is described briefly as ‘goods’ and, thus, if the nature of the goods is that they require a more detailed description and the insured fails to provide that in the policy, then the insured may have mislead the insurer.[21] Hence, the insured is bound to disclose the precise character of the subject matter insured. According to that, cargo owners must be as clear as possible in the description of their cargo as a subject matter. Failing to do so, they may find themselves in situation where they cannot raise any legitimate claims under the marine insurance.

Rule 17 of the Rules for Construction of Policy[22] provides a definition of what is considered ‘goods’. It reads as follows: “The term “goods” means goods in the nature of merchandise, and does not include personal effects or provisions and stores for use on board.” ‘Goods’ by this definition basically means cargo.[23] According to the ruling of Duff vs. Mackenzie[24], where effects are insured specifically, the term incorporates nautical instruments, clothes, books, and furniture.[25] Whether the term ‘goods’ includes the materials in which the goods are packed depends upon the description of the insured cargo.[26] The common law is not reliable on this matter. However, the principle that is derived from numerous cases such as Brown Brothers vs. Fleming[27], Berk v. Style[28], and Contrast Vacuum Oil Co vs. Union Insurance Society of Canton,[29] seems to be that “if it is contemplated from the agreement or from market practice that the goods are to be packaged rather than carried in bulk, the insurance covers the packaging, whereas if the packaging does not form part of the description of the risk it is not covered”.[30]

[1] Marine Insurance Act [1906] 8 Edw. 7 c.41

[2] Dobbyn John and Christopher French: Insurance law in a nutshell, (West Academic 2015).

[3] Bridge Michael: The international sale of goods (Oxford University Press 2017).

[4] Rhidian (n 21) 27

[5] Brotherston v Barber [1816] 5 M & S 418

[6] Clarke Malcolm: The Law of Liability Insurance, (Informa Law from Routledge 2017).

[7] Richards v. Forest Land, Timber and Railways Co. Ltd [1941] 3 All ER 62, HL

[8] Malcom (n 41)

[9] Susan Hodges, Law of Marine Insurance, (London: Cavendish Publishing, 1996) p.15

[10] s.4 (2) (a) provides that: “A contract of marine insurance is deemed to be a gaming or wagering contract, where the insured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest…”. Thus, if the insured has no insurable interest and the nature of his contract is considered as gambling or wagering, then the contract will be void.

[11] John Dunt, Marine Cargo Insurance, (London: Informal Law, 2009) ¶4.2

[12] John Dunt, Marine Cargo Insurance, (London: Informal Law, 2009) ¶4.2

[13] John Dunt, Marine Cargo Insurance, (London: Informal Law, 2009) ¶4.3

[14] (1884) 12 QBD 564

[15] Inglis v Stock (1884) 12 QBD 564 at 571

[16] John Dunt, Marine Cargo Insurance, (London: Informal Law, 2009) ¶4.3

[17] [1998] 2 Lloyd’s Rep. 8.

[18] John Dunt, Marine Cargo Insurance, (London: Informal Law, 2009) ¶4.3

[19] F. D. Rose, Marine Insurance Law and Practise, (London: LLP, 2004) p.15

[20] F. D. Rose, Marine Insurance Law and Practise, (London: LLP, 2004) p.15

[21] Susan Hodges, Law of Marine Insurance, (London: Cavendish Publishing, 1996) p.25

[22] The ‘Rules for Construction of Policy’ is part of The Marine Insurance Act 1906: see first Schedule.

[23]  Robert Merkin, Marine Insurance Legislation, 4th ed. (London: Lloyd’s List Group, 2010) p.134

[24] (1857) 3 CBNS 16

[25] Robert Merkin, Marine Insurance Legislation, 4th ed. (London: Lloyd’s List Group, 2010) p. 134

[26] Robert Merkin, Marine Insurance Legislation, 4th ed. (London: Lloyd’s List Group, 2010) p. 134

[27] (1902) 7 Com Cas 245

[28] [1955] 2 Lloyd’s Rep. 382

[29] (1925) 24 Ll LR 188

[30] Robert Merkin, Marine Insurance Legislation, 4th ed. (London: Lloyd’s List Group, 2010) p. 134

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