Insurance of goods in transit: marine insurance and its kinds

1. Why goods in transit are insured

An export consignment passes through the seller's warehouse, inland transport, port handling, the sea or air voyage, transhipment and delivery. At each stage it can be lost or damaged by perils of the sea, fire, theft, pilferage, rough handling, or war. The carrier's liability is limited by the Hague-Visby Rules, the Montreal Convention or the carriage contract, and excludes many causes (navigational fault, perils of the sea, inherent vice), so the cargo owner cannot rely on the carrier. Insurance shifts the risk to the insurer, and the policy is a document of trade: under a CIF contract or a letter of credit it is one of the documents the buyer or bank must receive.

2. The Marine Insurance Act, 1963

• Definition (section 3): an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent agreed, against marine losses, that is, losses incidental to marine adventure.
• Mixed sea and land risks (section 4): the policy may be extended to cover losses on inland waters or on land incidental to the sea voyage, which is how warehouse-to-warehouse cover fits within the Act.
• Insurable interest (sections 7 and 8): the assured must be interested in the subject matter at the time of loss. Under FOB and CIF the buyer has an interest from the passing of risk, the seller before it.
• Utmost good faith (sections 19 and 20): every material circumstance must be disclosed; non-disclosure lets the insurer avoid the contract.
• The policy (sections 24 to 26): the contract must be embodied in a policy, which must specify the assured and be signed by the insurer.
• Assignment (section 52): a marine policy is assignable by endorsement unless it prohibits assignment. This allows the CIF seller to pass the policy to the buyer with the bill of lading.

3. Kinds of marine policy

• Voyage policy (section 27(1)): covers the subject matter “at and from” or “from” one place to another. The usual policy for a single cargo shipment.
• Time policy (section 27(1)): for a definite period. Usual for hulls.
• Mixed policy (section 27(1)): for a voyage and a period, for example from Mumbai to Singapore and thirty days there.
• Valued policy (section 29): specifies the agreed value of the subject matter, which is conclusive between the parties in the absence of fraud. Cargo is usually insured on a valued basis, commonly the CIF value plus 10 per cent.
• Unvalued policy (section 30): leaves the insurable value to be ascertained under section 18, subject to the sum insured.
• Floating policy (section 31): describes the insurance in general terms and leaves the name of the ship and other particulars to be defined by later declarations, made in the order of dispatch. Suitable for a regular exporter.
• Open cover: not a policy but an agreement by the insurer to issue policies or certificates for all shipments within its scope over a period. Each shipment is covered automatically and the exporter issues an insurance certificate.
• Blanket policy: a single premium paid in advance for all shipments in a period, on an estimated total value.
• Port risk policy: covers a ship or goods while in port.
• Composite policy: underwritten by several insurers, each for his share.

4. The Institute Cargo Clauses

The terms of cover are almost always the London market's Institute Cargo Clauses (revised in 2009), used in India too.

• Clauses (A): “all risks” of loss or damage, subject to the exclusions. The widest cover. Incoterms 2020 requires it for CIP.
• Clauses (B): named perils, including fire or explosion, stranding, sinking or capsizing, overturning of land conveyance, collision, discharge at a port of distress, earthquake, volcanic eruption or lightning, general average sacrifice, jettison or washing overboard, entry of sea, lake or river water, and total loss of a package lost overboard or dropped while loading or unloading.
• Clauses (C): a shorter list of major casualties (fire, stranding, sinking, collision, overturning, discharge at a port of distress, general average sacrifice, jettison). The minimum cover a CIF seller must provide under Incoterms 2020.
• Common exclusions: wilful misconduct of the assured; ordinary leakage, loss in weight or volume and ordinary wear and tear; insufficiency or unsuitability of packing; inherent vice; delay; insolvency of the shipowner; nuclear risks; and unseaworthiness known to the assured. War and strikes are excluded and covered separately.
• Institute War Clauses (Cargo) and Institute Strikes Clauses (Cargo): cover against war, capture, mines, strikes, riots and civil commotion, and terrorism, bought as add-ons.
• Transit clause (clause 8): cover attaches when the goods are first moved in the warehouse for loading and continues in the ordinary course of transit until delivery to the final warehouse at destination, or 60 days after discharge from the ship, whichever is first. This is the “warehouse to warehouse” cover.

5. Losses

Losses are total (actual or constructive) or partial (section 56). Actual total loss is the destruction of the goods or the assured being irretrievably deprived of them (section 57); constructive total loss is where they are reasonably abandoned because total loss appears unavoidable or recovery would cost more than their value (section 60), and requires notice of abandonment (section 62). Partial losses are particular average (section 64), falling on the owner of the goods damaged, and general average (section 66), a sacrifice or expenditure deliberately made for the common safety and shared by all interests in the adventure. The insurer is liable for losses proximately caused by a peril insured against (section 55), and after paying is subrogated to the assured's rights against the carrier (section 79).

6. Who must insure?

• CIF and CIP: the seller must insure, for at least 110 per cent of the contract price, in the currency of the contract, on Clauses (C) for CIF and Clauses (A) for CIP, unless otherwise agreed, and provide the buyer with the policy or certificate.
• FOB, CFR, FCA, CPT: the buyer insures for his own protection, though the seller has no duty to; the seller must give information the buyer needs (Incoterms A5).
• D terms: the seller bears risk until arrival and insures in his own interest.

Indian exporters also use the Export Credit Guarantee Corporation of India for credit risk (buyer insolvency, political risk), which marine insurance does not cover.

How this is examined

For “kinds of marine insurance”: definition (section 3), then the kinds of policy with section numbers, then the Institute Cargo Clauses (A), (B) and (C), war and strikes clauses, and the transit clause. A closing paragraph on the CIF seller's duty to insure ties the answer to the export transaction, which is what this paper wants.