LECTURE 7A

( C H A P T E R 8 & 9 O F R A M A G O PA L

Business Risk Coverage

& Cargo Insurance
 NEED FOR CARGO
INSURANCE Legal liability of the intermediaries is
Exporter may suffer financial loss if
goods are damaged during limited. Intermediaries include clearing
transportation from the port of dispatch and forwarding agents, carriers, port
to the point of destination. and customs authorities etc. that handle
the goods at various stages. when post-
To protect from loss, exporter may have shipment finance is made, banks also
to take insurance policy to protect him insist for insurance coverage to protect
from physical damage to the goods. their financial interests.
This is known as ‘Cargo Insurance’. Insurance is required even on
In case, goods are shipped by sea, the commercial considerations. Once goods
insurance is known as ‘Marine are damaged, importer may not accept
Insurance’. The term ‘Cargo Insurance’ the bill of exchange, in case of D/A bill.
is used in case of air shipment. He may not make payment in case of
However, in practice, both the terms are D/P bill. When loss occurs, loss may
interchangeably used and their not be just shipment of goods, but also
regulations are also common. loss of profits too.

The need for insurance is for two

reasons, Legal and Commercial.
 MEANING OF CARGO
(MARINE) INSURANCE
According to Marine Insurance Act, The underwriter insures the goods
cargo insurance is an insurance cover for against loss and damages caused by
marine goods, air cargo and post parcels. perils specified in the contract for a
stipulated consideration, known as
The purpose of cargo insurance is to ‘Premium’.
protect goods against physical loss or
damage, during transit. There are two parties:
All export consignments should 1. The insurance company is also known
preferably be insured even if the terms as underwriter who assumes the liability
of contract do not provide for it. as and when loss occurs.
Exporter should insure the goods sent on
consignment. 2. The insured is the one who procures
the policy or becomes the beneficiary
Cargo insurance is a contract of through the insurance contract.
indemnity whereby the insurance
company (Insurer) undertakes to
indemnify the owner (Insured) of a ship
or goods, against risks that are incidental
to Marine insurance.
PRINCIPLES GOVERNING
INSURANCE ARE
(i) Principle of Utmost Good the loss arising from the risks
Faith: The insured must covered under a policy. In a
disclose all the facts known to contract of indemnity, only loss
him or ought to be known to is made good. However, a
him, in the ordinary course of marine insurance is
business. commercial indemnity, so even
the reasonable anticipated
(ii) Principle of Insurable profit is also made good.
Interest: Any person who has
‘insurable interest’ in the cargo (iv) Causa Proxima: The
only can insure. Exporter is insurer indemnifies if the loss
said to have insurable interest arises only from the nearest
in the safe arrival of cargo as cause. If goods are stolen due
he is the owner of the property. to faulty packing, the insurer
does not indemnify the loss.
(iii) Principle of Indemnity:
The underwriter indemnifies
TYPES OF INSURANCE
DOCUMENTS
There are three types of insurance documents:
(a) Insurance Policy: The insurance policy sets out all the terms and
conditions of the contract between the insurer and insured.
(b) Certificate of Insurance: It is an evidence of insurance but does
not set out the terms and conditions of insurance. It is also known as
‘Cover Note’.
(c) Insurance Broker’s Note: It indicates insurance has been made
pending issuance of policy or certificate. However, it is not
considered to be evidence of contract of insurance.
 WHEN AND WHY TO INSURE
Before shipment of goods, exporter is sent on CIF basis, exporter invariably
has to insure the goods. takes marine insurance, as it is his duty
to cover the risk.
Date of coverage in insurance policy
should always be earlier to the date of Till ownership in goods is transferred,
shipment of goods, then only insurance in his own interest, exporter has to take
covers totally. the coverage.
Banks insist the date of insurance to There is no obligation to the exporter
be earlier to the date of shipment of to take insurance, after transfer of
goods, at the time of negotiation of ownership.
documents.
Still, it will be wise for the exporter to
Any person who has ‘insurable take adequate insurance policy till the
interest’ in the goods only can insure. goods reach the end of voyage.
Exporter is said to have insurable
interest in the safe arrival of goods.
Equally, its loss, damage or detention
will prejudice exporter. When the cargo
HOW TO INSURE

There are two ways to insure.

First, take insurance policy as and when shipment is made. Those
exporters, who make shipment now and then, do this.
The second and common mode is to take open policy. Under open
policy, the exporter does not have to take insurance contract, every
time, as and when shipment is made. He pays insurance premium, in
advance, and the policy is issued for the amount paid. The policy is,
generally, issued for a period of one year. The insurance company
undertakes to indemnify the insured up to the amount of the policy.
Shipment of goods to the extent of the policy amount is covered. A
brief declaration by the exporter about the basic facts of shipment
would do.
CONTD…..
A great volume in exports business prefers this method for the
following obvious advantages:
(a) Exporter enjoys automatic and continuous protection. Even if
there is delay in declaration or exporter has overlooked to submit
declaration, the shipment is covered provided the delay and oversight
are not intentional.
(b) Trouble of taking insurance policy, each time, is avoided.
(c) Exporter will have prior knowledge of the premium amount and
so exporter can quote competitive rate for his exports.
(d) Better relationship between the exporter and insurance company
will be developed, so better advice would be available. As the
insurance company understands the requirements in a better way, the
insurance company can develop tailor-made protection to the
exporter.
SCOPE OF CARGO INSURANCE POLICY

The scope of the insurance policy incidental perils. These perils are
depends on the risks it covers. Here, caused due to faults in loading,
risks are termed as perils. Perils are carrying and unloading. Examples are
referred as causes of events. The rough handling, leakage, breakage,
various kinds of perils are: pilferage and non-delivery etc.
1. Maritime Perils: These are the 3. War Perils: These perils relate to
events which are created by God or losses due to war including civil war,
man made. Events created by God are revolution, rebellion and detainment
earthquake, collision, storm, of the carrier etc. If the goods are
lightning, and entry of sea water into confiscated by the customs on charges
the vessel, volcanic eruption, rain of smuggling, then insurance does not
water damage and washing overboard cover.
of cargo. The man made events are
fire, smoke, water used to extinguish 4. Strike Perils: This means damage
fire, piracy, barratr (fraud, gross or loss due to lockouts, strikes, labour
criminal negligence of the crew to disturbances, riots, and civil
prejudice ship owner), sabotage, commotion and by any terrorist acting
vandalism etc. from political motive

2. Extraneous Perils: These are

TYPES OF MARINE INSURANCE
POLICIES
The shipper or insured covers This is the widest cover.
the risks depending on the
terms of letter of credit/export (b) Institute Cargo Clause B:
order. The Institute of London This policy covers risks less
Underwriters has drawn up the than under clause ‘A’.
different clauses in marine (c) Institute Cargo Clause C:
insurance policy in respect of This policy covers lowest risks.
risk coverage. The risk
coverage is done in terms of War and Strikes, Riots and
various institute cargo clauses. Civil Commotion (SRCC)
Different marine insurance clause is excluded in all the
policies with different risk above policies. These risks can
coverage are: be covered by specifically
asking for, paying additional
(a) Institute Cargo Clause A: premium.
This policy covers all the risks
of loss or damage to goods.
 RISKS NOT COVERED BY MARINE
INSURANCE
1. Under Normal Conditions: Due to deterioration arising due to delay is
nature, certain goods carry inherent vice excluded.
such as easy breakage. Damage to
fragile glassware is not covered, if 4. Ordinary and Unavoidable Trade
inadequately packed. Damages caused Losses: Shrinkage and evaporation in
during original packing are excluded, no bulk shipment or infestation in case of
matter when the damage occurs, for copra are excluded, unless specifically
instance, damages caused by a nail provided.
driven by careless packers into the 5. Violence: Certain perils such as wars,
contents of packages. strikes, riot and civil wars are excluded,
2. Insurance Contract Specifically unless specifically endorsed.
Excluded: Losses due to leakage or 6. Dangerous Drugs Clause: Insurance
hook losses in case of goods packed in policy stipulates losses connected with
bags may be excluded by the insurance shipment of opium and other dangerous
contract itself. Solidification of palm drugs are not paid unless specified
and coconut oil may be excluded, unless conditions are met.
heated storage is available.
3. Delayed Arrival: Loss of profit,
market loss due to delayed arrival or