PARA 13.2|IC 67, Marine Insurance One Liner|Chapter-7 | Hull Insurance – Part 1
Insurance exams offered by the Insurance Institute of India (III), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 67, Maine Insurance Chapter 7 “Hull Insurance – Part 1″ for para 13.2 and III exam . These questions will be very helpful for upcoming promotional exam in 2020.
IC 67, Maine Insurance is a very important topic in insurance promotional exam. This IC 67, Maine Insurance paper comes in all GIPSA exams which makes it very important.
CHAPTER 7: Hull Insurance – Part 1
- Hull insurance refers to the insurance of hull and machinery and other interests, known as subsidiary interests, of ocean-going vessels, fishing vessels, sailing vessels, trawlers, barges etc.
- Hull insurance for vessels when they are under construction is called “construction / builders’ risks” insurance.
- there are certain special types of hull covers like Charterer’s Liability Risks, Ship Repairer’s Liability Risks
- Vessels are broadly categorised into following 2 groups
- Mechanically self-propelled vessels of steel construction classed with Lloyd’s Register of Shipping or any other internationally recognised Classification Society including Indian Register of Shipping (IRS).( These vessels may be liners or tramps carrying cargo and or passengers employed in home or foreign trade.)
- Smaller crafts, generally of local origin, built of steel, wood or fiber-glass which may or may not be classed (crafts are used in inland waters, coastal waters or within port areas.)
- Hull Policies can be issued either on time basis or voyage basis.
- As per the Marine Insurance Act 1963, a time policy cannot be issued for a longer period than 12 months.
- The subject matter of Hull Insurance is the Vessel or Ship.
- Registration: Under Merchant Shipping Act 1958, every Indian ship, exceeding fifteen tons net and employed solely in navigation on the coast of India, is required to be registered and a certificate to that effect is to be obtained from Director General of Shipping.
- The Gross Tonnage (GT) of a ship comprises the moulded volume of all enclosed spaces of the shipments to which a formula is applied in accordance with the 1969 International Convention of Tonnage Measurements of Ships.
- Net Tonnage (NT) is also a measurement which takes into consideration the volume of the ship but for measuring the NT, out of GT, engine room space, crews’ accommodation place, fuel space etc., are to be deducted to find out the actual usable area.
- Dead Weight Tonnage (DWT) refers to cargo carrying capacity of the vessel in terms of weight. It also refers to submerging of the ship with cargo up to its load line. It is expressed in tons.
- Classification is like quality certification i.e. certification about the shipowner having followed a particular standard of construction and maintenance
- When a ship is classified with a particular Classification Society, it has to follow their rules of construction and maintenance for the ship.
- Indian Register of Shipping (IRS) is the Indian classification society which attained the full-fledged membership of International Association of Classification Societies (IACS) in June 2010.
- The vessels are classified into two major types: Ocean-going vessels; and Sundry vessels
- Ocean-going vessels:
- General cargo vessels
- Liner vessels
- Tramp vessels
- Dry bulk carriers
- Liquid bulk carrier
- Super tankers
- Combination carriers
- Container vessels
- Lighter aboard ship (LASH x. Roll on – Roll Off (RO – RO) Ships
- Passenger vessels
- Sundry vessels:
- Coastal Vessels
- Fishing Vessels
- General cargo vessels : They generally measure more than 500 GT and include container vessels, barge carriers, Lighter Aboard Ship (LASH), Roll On – Roll Off (RO – RO) ships, Refrigerated ships (Reefers), Car Carriers, Livestock Carriers, etc
- Liner vessels: These operate as per advertised schedules. At any given port, they will not wait beyond a fixed time because they have to maintain an advertised time schedule. So their services are more reliable.
- Insurance companies accept liners with higher age for insurance (generally 25 years) without any extra premium. (Liner vessels)
- Tramp vessels: Tramps, on the other hand, do not operate on any advertised route and generally they are engaged in chartered trade. They go wherever the cargo is available, as time for completion of any voyage is not important
- Tramp vessels operate seasonally, so crew is also not permanent and are not very well paid either.
- Insurance companies accept tramps for insurance at normal rates if their age is not more than 15 years. For older vessels extra premium is charged for both cargo and hull insurance.(Tramp vessels)
- Dry bulk carriers: These are large vessels with very high GT (say 70000 GT) and engaged in bulk cargo trade (cargo without any packing, in loose form) like iron ores, coal, sugar, bauxite, fertilizers etc.
- Liquid bulk carrier: Tanker vessels are liquid bulk carriers. They carry liquid cargo like oils, chemicals etc. The stability of vessel is more important because of the nature of the cargo they carry.
- Liquid bulk carrier : Cargo Underwriters charge normal premium for cargo being carried by tankers upto 10 years of age and above that, extra premium is charged.
- Super tankers: The term VLCC (Very Large Crude Carriers) is used for the tankers of the size of 75,000 to 1,50,000 DWT Tons. The term ULCC (Ultra Large Crude Carrier) is used for tankers of the capacity of 1,50,000 Tons DWT to 3,00,000 Tons DWT.
- Combination carriers: These are used for carriage of dry as well as liquid bulk cargoes. They are classified as OBOs (Oil Bulk Ore or Ore Bulk Oil Vessels) and are generally in the range of 70,000 to 1,50,000 and 1,50,000 to 2,50,000 Tons DWT respectively.
- Container vessels: These are specially built to carry containers and are normally engaged in liner trade.
- Container vessels :engaged in liner operation, upto 30 years of age, normal premium is charged.
- Lighter aboard ship (LASH): These ships carry containers in the forms of barges. Such ships have massive cranes and elevators for loading and unloading operations
- Roll on – Roll Off (RO – RO) Ships: A RO-RO vessel does not have any cranes. The vehicles like lorries, trailers etc. are driven on board with the cargo and once they reach the destination, they are driven out. Cars and other vehicles also can be transported by them.
- Passenger vessels: These are cruises and pleasure crafts carrying passengers to places of tourist interest. They operate on modern navigational systems like satellite
navigation, GP System etc.
- Coastal Vessels: They operate in coastal waters, plying between ports and thus cater to an important sector of India’s trade. These are generally small in size and many are engaged in carriage of bulk cargoes. They operate as Liners or Tramps.
- Fishing Vessels These are built of steel, fibreglass etc.as compared to wood in the days gone by. There may be combination of steel and fibreglass.
- Dredgers: Dredgers are used mainly to dig up sand, mud, gravel etc. from the sea, river, canal etc. bottoms in order to deepen channels and make them navigable. The crafts are fitted with the machinery and appliances for dredging work.
- Barges: A relatively small flat-bottomed vessel. They are generally used in port waters to carry cargo and passengers. They are widely used to lighten big ships, which lay anchor outside port limits, for reasons of their big size or unavailability of berths.
- Launches: Open or half-decked utility boats, used to carry tourists and regular passengers over short distances
- Hull and machinery (H&M) insurance: Policy covers hull, machinery, equipments and stores etc. on board the vessel. It does not cover cargo
- Hull and machinery (H&M) insurance :The cover granted is for:
- Total Loss whether actual or constructive
- Partial Loss
- General Average and Salvage Charges
- Sue and Labour Charges, and
- Ship’s liability for collision
- collision liability is covered for 3/4ths (which can be extended in certain cases to 4/4ths).
- For vessels operating in port areas only; cover for liability towards removal of wreck etc. may also be granted under the P&I cover
- Disbursements insurance: Disbursements are shipowner’s expenses to run the vessel. They can be insured upto a maximum of 25% of sum insured on H&M insurance, provided other supplementary interests are not insured.
- Disbursements insurance : The cover is generally for Total Loss/Constructive Total Loss, with excess liabilities for Collision (3/4ths Liability), General Average, Salvage and Salvage Charges, Sue and Labour Charges etc.
- Freight insurance: Freight, whether chartered or anticipated, time hire, passage money etc. can be insured under a Voyage or Time policy. As it is a supplementary insurance it is allowed up to 25% of H&M insurance, provided other supplementary interests (e.g. Disbursements, Managers’ Commissions, Profits or Excess or Increased value of item) are not insured.
- Main features of Freight insurance:
- The cover provided is as per Institute Time Clauses Freight 1.10.1983, covering loss of freight, upto the extent of gross freight lost.
- Losses resulting from loss of time are excluded.
- Partial losses are covered subject to 3% franchise. (Franchise does not apply to GA, fire, sinking, stranding or collision claims.)
- In total loss claims also, there is no deduction.
- Policy also covers contribution towards GA, Salvage Charges, Sue and Labour Expenses etc.
- Premium reducing insurance: Insurance premium under hull policy is insured separately. The policy covers loss of premium against Total Loss and Constructive Total Loss.
- Premium reducing insurance : The indemnity reduces on monthly pro rata basis i.e.1/12th per mensem.
- Return of Premium: Under an H&M policy, proportionate premium is returned for lay ups of the vessel, but only at the end of the policy and that too if the vessel is not a total loss during the policy period.
- Ship repairers’ liability: A ship repairer needs to cover his legal liability towards loss or damage to vessels under his care, custody and control, including whilst being worked upon, being towed etc
- Ship Builders’ insurance: The cover is granted as per the Institute Clauses for Builders’ Risks 1.6.88 and covers the full period of construction from the time keel is laid, upto the completion of vessel as also to include the trial run and launching.
- The policy may be longer than 12 months and sum insured should be actual completion value. (Ship Builders’ insurance)
- The premium has two components – one is chargeable upfront on the completed value and the other one is chargeable for the construction period at a monthly rate.( Ship Builders’ insurance)
- Charterers’ liability insurance: a charterer is required to return the vessel to its owners in the condition in which the vessel is taken. So, a Charterers’ Liability policy usually covers Charterers’ Liability for Hull & Machinery damage and also the Charterers’ Liability for Protection & Indemnity claims
- Charterers’ liability insurance: Coverage can also be extended to include Liability to Cargo, as well as other extensions, including Freight, Defence and Demurrage cove
- Loss of hire insurance Loss of Hire policy covers the loss of hire suffered by a shipowner if the vessel is laid up for repairs following a loss covered under H&M Insurance Policy.
- Loss of hire insurance: The cover is given when the vessel is under charter. The cover is for other than Total Losses. There is a special condition under the policy making it mandatory to commence repairs within 12 months of expiry of the policy.
- Loss of profits insurance: The policy covers the charterers’ loss of profits over the period of charter, if the vessel is time-chartered or voyage-chartered, if the vessel becomes total loss during the period of charter.
- War and strikes risks: Indian flag vessels can be insured under the Government War Risks Insurance Scheme which is administrated by the General Insurance Corporation of India. Policy can be issued by both private and public sector insurance companies.
- Institute Time Clauses – Hulls provide the widest cover – referred as “on full conditions” — for hull and machinery interests. They contain 26 clause.
- The Indian market mainly uses the 1983 version of the clauses(Institute Time Clauses)
- Perils covered: Clause number 6 specifies the perils in two groups: 6.1 and 6.2
- Section 6.1: This insurance covers loss / damage to the subject-matter insured caused by:
- Perils of the seas, rivers, lakes or other navigable waters
- Fire, explosion
- Violent theft by persons from outside the vessel
- Breakdown of or accident to nuclear installations or reactors
- Contact with aircraft or similar objects or objects falling therefrom, land conveyance, dock or harbour equipment or installation
- Earthquake, volcanic eruption or lightning
- The perils contained in Section 6.1 of the clause are perils over which the assured has little or no control.
- Section 6.2: This insurance covers loss / damage to the subject-matter insured caused by:
- Accidents in loading, discharging or shifting cargo or fuel
- Bursting of boilers, breakage of shafts or any latent defect in the machinery or hull
- Negligence of Master, Officers, Crew or Pilots
- Negligence of repairers or charterers provided they are not the Assured hereunder
- Barratry of Master, Officers or Crew Provided such loss / damage has not resulted from want of due diligence by the assured, owners or managers
- The perils enumerated in Section 6.2 of the clause are perils over which the assured may have some control and for this reason are made subject to the “due diligence” provision. The onus of proof is upon the insurers if they wish to avoid a claim on the grounds of the assured’s want of “due diligence”.
- Pollution hazard (Clause 7): This clause provides cover if the vessel is damaged or destroyed by a Government authority to avoid or mitigate pollution
- General average and salvage (Clause 11) This clause provides that general average and / or salvage will be paid if the loss was incurred to avoid, or in connection with the avoidance of, an insured peril.
- Duty of the assured (Sue and Labour) – (Clause 13): A sue and labour charge is an expense incurred by the assured, their servants or agents, with the intention of preventing or minimising any loss or damage that would be recoverable under the policy.
- The Hull and Machinery Policy pays sue and labour charges in addition to any other claim under the policy, even in addition to a total loss.
- Collision liability (Clause 8): This clause covers legal liability, which the assured may incur by way of damages paid to the owners of the other vessel and cargo thereon, owing to a collision between the insured vessel and the other vessel.
- The insurers provide this supplementary cover to the assured (in addition to the insurance on the vessel itself) to the extent of 3/4ths of such liability.
- In no case shall the total liability of insurers exceed 3/4ths of the Sum Insured, any one collision.
- The insurers will also pay 3/4ths of the legal costs incurred by the assured, with the insurer’s consent, in contesting liability or taking proceedings to limit liability.
There is no liability under this clause in respect of:
- Removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever;
- Any real or personal property or thing whatsoever except other vessels or property on other vessels
- Cargo or other property on, or the engagements of, the insured vessel;
- Loss of life, personal injury or illness;
- Pollution or contamination of any real or personal property or thing whatsoever (except other vessels with which the insured vessel is in collision or property on such other vessels).
- Sistership (Clause 9): This clause provides that if the insured vessel is in collision with or receives salvage services from a vessel under common ownership or management, the assured’s rights under the policy are assessed as if the other vessel was of separate ownership.
- Deductible (Clause 12): An amount specified in the Deductible Clause is deducted from the total amount of claim caused by an insured peril arising out of each separate accident or occurrence.
- 78. The deductible is an “excess” and only the amount in excess of the amount of claim is payable. If the amount of the claim is less than the deductible, nothing is payable.
- The deductible applies to all claims in respect of damage to the ship, collision liability claims, GA and salvage charges and sue and labour charges.
- The deductible shall not apply to a claim for total loss – actual or constructive, of the vessel
- when a sue and labour expense is incurred but a total loss results despite attempts to save the vessel, the deductible is not applied to sue and labour charges, nor to any expense of service in the nature of salvage.
- Notice of claim and tenders (Clause 10): In the event of an accident, the assured must give notice to insurers and also, if the vessel is abroad, to the nearest Lloyd’s agent, so that the insurers can arrange for a survey.
- Under the clause, the insurer may veto a place of repair or repairing firm or may decide, to which port or firm the repair is entrusted(Notice of claim and tenders)
- Insurers are also given the right to take tenders and when they exercise this right, the assured is entitled to an allowance at the rate of 30% per annum on the insured value for time lost between the dispatch of invitations to tender and the acceptance of a tender.
- Failure to comply with conditions of this clause warrants a deduction of 15% from the ascertained claim.
- Navigation (Clause 1): The clause allows the vessel to assist or tow vessels in distress or to be towed when it is customary or to the first safe port when in need of assistance. Otherwise, it is warranted that the vessel shall not be towed, or shall not undertake towage or salvage services under a contract previously arranged by the insured.
- Breach of warranty (Clause 3): The assured is held covered in the event of a breach of warranty as to cargo, trade, locality, towage, or salvage service. ‘Held covered’ means cover can be arranged, subject to due notice and payment of additional premium.
- Disbursements Warranty (Clause 21): The object of this express warranty is to restrict the amount of ancillary insurances, which a shipowner may effect on limited conditions, as additional cover to the amount insured on hull and machinery subject to ITC-Hulls.
- Termination (Clause 4): Unless the insurers agree to the contrary in writing, the insurance shall terminate automatically, if any of the following occur during the policy period:
- Change of Classification Society
- Change, suspension, discontinuance, withdrawal or expiry of Class of the vessel. If the vessel is at sea, such automatic termination shall be deferred until arrival at her next port of call.
- Change, voluntary or otherwise, in the: a. Ownership or flag Transfer to new management etc.
- When the Termination Clause operates, a pro-rata daily net return of premium is allowed.
- Returns for Lay-up and Cancellation (Clause 22) provides for pro-rata return of premium:
- When the policy is cancelled for reasons other than sale or transfer
- Or When the vessel is laid up in port
- Clauses 23 to 26 exclude war, strikes, malicious acts and nuclear risks
- Protection and Indemnity (P&I) Associations and Mutual Clubs The liabilities that are covered by these mutual associations include:
- Personal injury, illness, loss of life of crew members and passengers
- Life salvage
- One-fourth of collision liability not included in the hull policies under the ITC Hulls 3/4ths Collision Liability Clause.
- Damager to docks, piers, jetties and other fixed and floating objects other than ships
- Pollution by oil or other substances escaping from the ship
- Wreck removal charges
- Loss of or damage to cargo carried on the ship
- Each P&I Club is controlled by a Board of Directors elected from among its shipowner and charterer members, but day-to-day operations are entrusted to full-time professional managers, who, among other duties, determine the amount to be paid by each member, help members to deal with the claims made against the Club and give advice on a wide range of shipping problems.
- There are no P & I Clubs in India, and hence a shipowner in India may enter in a P&I Club abroad.
- Institute fishing vessels clauses 20.7.87: Fishing Vessels are normally covered subject to Institute Fishing Vessels Clauses 20.7.87
- Fishing Gear (Clause No. 15): No claim is payable for loss / damage to fishing gear unless:
- Caused by fire, lightning or violent theft by persons from outside the vessel
- Totally lost following total loss of vessel by insured perils
- Collision liability (Clause No. 18): Unlike the similar clause in ITC-Hulls, this covers 4/4ths Collision Liability.( Institute fishing vessels clauses)
- Protection and Indemnity (Clause No. 20): Various Protection and Indemnity (P&I) risks are covered under this clause. There is no P&I Clause in ITC-Hulls.( Institute fishing vessels clauses)
- International hull clauses (IHC) 1/11/2003:
- a) Perils
- Named perils (perils of the sea, fire, explosion etc.) plus “due diligence” perils of latent defect, crew negligence etc.
- Cover for accidents in loading etc. and contact with satellites etc. not subject to ‘due diligence’ proviso.
- Cover for common costs given at 50% where loss / damage caused by burst boiler, broken shaft or latent defect
- Optional Additional Perils Cover provides cover for costs of correcting the latent defect and repairing the burst boiler / broken shaft and the remaining 50% of common costs
b) Leased equipment
Cover for equipment not owned by the assured, but for which the assured is responsible given as standard cover.
c) Parts taken off
Cover for parts taken off the vessel given as standard cover.
d) Pollution hazard
Covers loss and damage caused by governmental authority to prevent pollution and environmental damage / threat, consequent upon damage to the vessel for which underwriters liable.
e) 3/4ths RDC
- Cover for 3/4ths of insured value in respect of legal liability arising out of a collision.
- Cover for legal costs limited to 25% of the insured value (save where agreed in writing otherwise).
- Pollution exclusion does not extend to other vessel or property on other vessel nor to an Art 13(1)(b) salvage award.Optional 4/4ths and Fixed & Floating (FFO) cover available
f) GA :Cover for vessel’s proportion of salvage, salvage charges, general average. No reduction where the vessel is underinsured.
g) Sue and labour :Duty of assured to sue and labour and cover for charges properly and reasonably incurred. No reduction where the vessel is underinsured.
h) Navigation Navigating provisions no longer expressed as warranties; rather, underwriters not liable during period of breach. Cover resumes post breach.
i) Continuation: Cover to next port in good safety at pro-rata monthly premium continues where vessel in distress/missing (at sea) or in distress (in port) and where notice given as soon as possible
j) Class/ISM :Vessel must be classed (and comply with class recommendations as to seaworthiness) with an agreed classification society and must hold valid certificates. Automatic termination, save where the vessel at sea or loss of class etc. results from insured loss/damage
k) Management: Automatic termination on change of ownership, sailing on scrap voyages. Duty to comply with statutory requirements, failing which underwriters not liable for causative failures
l) Constructive Total Loss: CTL payable where costs of repair / recovery exceed 80% of the insured value
m) Navigating Limits : The vessel shall not enter, navigate or remain in certain areas, between certain times. Not expressed as warranties. Bering Sea Transit cover free.
- Fixed and Floating Cover
- 4/4 ths RDC
- Lay up returns
- G A Absorption
- Additional perils: repair cost of bursting of boilers due to latent defect, losses due to negligence etc.
n) Notice of claims Within 180 days of knowledge of loss .
o) Duties of assured – in the event of a claim.
p) Duties of underwriters – in the event of a claim.
- Institute Time Clauses – Hulls are used when a vessel is insured for a period of 12 months or less. In case the insurance is for a particular voyage, then Institute Voyage Clauses – Hulls are incorporated in the policy
- The Institute Time Clauses – Freight and Institute Voyage Clauses – Freight are identical except that the following clauses, which do not apply to voyage insurances, are omitted from the Institute Voyage Clauses – Freight:
- Continuation Clause
- Termination Clause
- Returns for Lay-up and Cancellation
- “The term ‘freight’ includes the profit derivable by the shipowner from 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.”
- Freight policies may be issued on valued basis or unvalued basis. In practice, unvalued policies are issued. Section 18(2) of the Marine Insurance Act, 1963 provides that the insurable value of freight is the gross amount of freight at the risk of the assured plus the charges of insurance. The gross amount includes the expenses of earning the freight.
- The “Measure of Indemnity Clause” of Time and Voyage Clauses provides, inter alia, that “the amount recoverable under this insurance for any claim for loss of freight shall not exceed the Gross Freight actually lost.”
- Partial loss may occur, for example, when there is a non-delivery of part of the goods on which freight is payable on delivery.
- The Franchise Clause of Institute Freight Clauses provides that partial loss is not covered if the amount of loss falls below 3% of insurable amount.
- The 3% limit does not apply:
- to general average loss (this is beyond the control of the shipowner)
- when the partial loss is caused by the sinking, stranding or collision with another vessel (this is so because the object of the franchise is to eliminate small and frequent claims)
- Total loss of freight can occur when the cargo being carried is totally lost, say by fire, and the shipowner consequently does not receive the freight due to him under the contract.
- The same situation would arise if the ship and the cargo were totally destroyed, say, by sinking in heavy weather.
- Clause 15 (Total Loss) of the Institute Freight Clauses provides: In the event of total loss (actual or constructive) of the vessel named herein, the amount insured shall be paid in full, whether the vessel is fully or partly loaded or in ballast, chartered or unchartered.
- Loss of time clause This clause reads as follows:
“This insurance does not cover any claim consequent on loss of time, whether arising from a peril of the sea or otherwise”
- The documents required for freight claims are:
- Bills of lading, Charterparty, other contracts of affreightment. These are required to establish insurable interest.
- Freight Account: This is a document dealing with the whole freight for the voyage. It shows the exact amount of freight earned, and the loss may be determined by deducting this sum from the whole freight at risk.
- Policy covering freight.
- Other documents, such as protest, log books, hull and cargo survey reports etc.
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