The Process of Marine Insurance Contract Formation
Marine insurance contracts are designed to protect against risks associated with maritime transportation and commerce. These risks can include loss or damage to cargo, ships, and other property associated with maritime activities. Marine insurance can also provide coverage for liability arising from maritime accidents, such as oil spills. Three parties are involved in forming a contract: the assured, the broker, and the insurer (Soyer, 2020). Each side has a distinct function in the formulation of the agreement. A marine insurance policy’s primary function is to safeguard the policyholder’s interests against financial loss in the event of loss or damage to covered items during ocean shipping. Both the insurer and the insured must agree to the terms of the contract and sign it before it may take effect.
The insurance contract should include the types of items covered, their values, the insurance duration, and the routes traveled. Before setting sail, the policyholder must submit the required premium to the insurance company (Brander et al., 2020). The insured party is obliged to promptly report and file a claim with the insurer in case of any loss or damage to the goods during shipment. If the claim is legitimate, the insurer will pay the covered loss to the insured party up to the policy’s maximum.
Responsibility of a Broker
A marine insurance broker chooses the best insurer for their client. The broker must also verify the consumer understands the policy’s coverage and terms. In the event of a claim, the broker’s role is to ensure a fast, fair settlement. A marine insurance broker tells an insurer about a policyholder’s needs and risks, and finally the brokers assist clients to find the best insurance.
Importance of a Broker
An insurance broker’s organizational skills are crucial in developing a marine insurance policy. This is because it is the broker’s job to interview everyone involved in the case, including the insured, the insurer, and any witnesses (Cerini, 2020). After gathering this information, the broker will have the parties review and sign the finalized contract.
Importance of Gathering Information
When preparing a marine insurance policy, it is critical to collect correct and up-to-date information. This information is used to estimate the risk of insuring a specific vessel or cargo and to calculate the premium for the insurance (Adland et al., 2021). Accurate information is also essential in the event of a claim, as it will be used to assess whether the policy covers the loss and determine the payout amount.
Dual Role
One of the most crucial functions of an insurance broker is to act as a go-between between the insurance company and the policyholder. They aid in making a good case for the risk by giving both parties access to up-to-date information. Because of this, the optimum coverage can be established, which is good for the insurer and the insured (Clarke, 2020). A broker’s ability to juggle two roles at once is an asset because they provide value in mediating between two parties. When working with an insurance broker, you can rely on them to give accurate information and assist in negotiating favorable terms for the insurer and the insured. This aids in the development of a contract that is reasonable and fair to all parties involved.
Slip Policy and Formal Policy
To protect against nautical perils, one might get a slip policy. Ships are the primary beneficiaries of slip insurance, although other marine hazards, including cargo, hulls, and pollutants, may also be insured against (Rogan, 2020). One definition of a formal policy follows the industry standard insurance policy contract. By their nature, formal plans are more all-encompassing and protect against a wider variety of hazards than their more casual counterparts. The hazards associated with marine operations are often the only ones covered by slip insurance, making them narrower in coverage.
The Supreme Court of the United States held in The Golden Victory that a maritime insurance policy is a contract of adhesion, and as such, the agreement must be interpreted in favor of the insured. This case demonstrates the importance of interpreting marine insurance policies in favor of the insured, even when the policies are plain and unambiguous. The court’s decision in favor of the insured highlighted the relevance of the slip clause in a marine insurance policy.
Difference between Slip and Formal Contract
Great Eastern Steamship Co v Hutton [1] is commonly used to compare a slip to a written policy. A ship owner arranged for insurance, but the insurer had not issued a written policy. In case of ship loss, insurance rejected payment since no coverage was formalized (Choudhury and Das, 2020). The ship owner argued the insurer could not deny coverage since it had granted slip insurance, a temporary policy, before a permanent policy was formed.
Without a policy, the court concluded the insurer might refuse coverage. Slip policies are not legally binding contracts since the insurer has no legal obligation to cover you without a policy, one must have one. Based on United States v. Atlantic Mutual Insurance Co., the slip is as binding as the policy. The court deemed the insurance illegal since it was granted without the ship-owners approval.
Need to Reinsure
Many brokers reinsure and move risk to another insurer due to the: First, it spreads the broker’s risk. By employing much insurance, the broker is less likely to be affected by one’s financial problems. It may also help the broker manage financial risks, which can be done by a reinsuring portion of the risk, the broker may limit prospective claims damages (Srivastava, 2020). Finally, it may help the broker get better insurance terms since the broker has more insurers to choose from, they may negotiate better rates.
A high-risk contract like this involves many reinsurers sharing the risk. Each reinsurer’s appetite for risk and ability to sustain losses would determine risk distribution. If there are five reinsurers, each may cover $2 million for a total of $10 million (Srivastava, 2020). This would safeguard each reinsurer from a worst-case situation while allowing them to profit from the contract if the risk did not materialize. Marine insurance contracts are important for several reasons: First, it is market-driven which means the contract can adapt to market changes. The contract’s language may also help parties comprehend their obligations and rights. This might avert future disputes. Contract structure may protect insurer and insured interests.
The Four Marine Insurance Policies
Subrogation
If one has maritime subrogation insurance, the insurer will compensate for the damages caused by another party’s carelessness. An insurer’s takes over the insured’s legal position with respect to the liable party. When it comes to maritime insurance, subrogation programs are beneficial for both policyholders and insurers. The insured is safeguarded against the negligent actions of a third party, and the insurer is compensated for its financial risk. With the potential to recover damages under this policy, insurers have an incentive to look into and pursue claims against the irresponsible party.
However, if the insurer pursues claims for damages too vigorously, the subrogation marine insurance arrangement might backfire. Insurer rates might go up if the company takes on more risk. In Marine v. United States, the court ruled that an insured’s ability to sue the federal government for compensation for personal injuries was not precluded by the insured’s possession of a subrogation marine insurance policy. The court ruled that the insurance only covered losses caused by another party’s fault and not those caused by the government.
Utmost Good Faith
The notion of good faith underpins the Utmost Good Faith marine insurance coverage. This implies that both the insurer and the insured must be honest with each other. This is sometimes referred to as a “fair dealing” policy. The policy compels the insurer to provide the insured with all relevant information (Park, 2020). This information must then be sent to the insurer by the insured. This information must be used by the insurer to assess the risk of insuring the vessel. The insurer must then charge the insured a reasonable insurance premium. Furthermore, the policy requires the insured to act in good faith toward the insurer (Zhu, 2020). The insured must provide the insurer with all relevant information. In the case of a claim, the insured must also cooperate with the insurer.
The insurer and the insured benefit from the Utmost Good Faith marine insurance coverage. It prevents both parties from being exploited. It also assures that both sides get equal treatment. The court concluded in Armstrong v. St. Paul Fire and Marine Insurance Co. that the insurer did not have to establish that the insured acted in ill faith to refuse coverage. The court determined that the policy constituted fair dealing and that the insurer operated in good faith.
Insurable Interest
A legitimate and significant economic interest in the safety or preservation of the subject matter of the insurance in respect of which the person covered is exposed to a risk of loss” is described as an insurable interest in maritime insurance. A person must have a financial interest in something to have an insurable interest in it and stand to lose money if it is harmed or destroyed (Bailey & Gale, 2020). Marine insurance is a sort of insurance that protects ships, cargo, and people at sea against loss or damage. It is one of the oldest forms of insurance, having existed for hundreds of years. Marine insurance is critical for firms in the marine sector because it protects them against financial losses caused by accidents, storms, or other dangers.
There are two forms of marine insurance: hull insurance and cargo insurance. Hull insurance covers the ship, whereas cargo insurance protects the items carried aboard. Other dangers, such as loss of life or limb, may also be covered by marine insurance, as can protection against war and piracy. Insurance coverage is critical for businesses in the maritime industry because it protects them from financial losses caused by accidents, hurricanes, and other natural disasters. Other risks, such as loss of life or limb, may be covered by maritime insurance, as well as protection from war and piracy. The court ruled in Federal Policy Company v. Seligson that an insured must have real, legitimate, and significant interest in the safety or maintenance of the subject matter of the insurance.
In the second instance, the court determined that the ship’s owners did not have an insurable interest in the vessel since they were only financially invested in the ship speculatively. The court ruled in this case that speculative interest alone is not enough. The ship owners had insurance for $50,000, although the ship was only worth $30,000 (Lupton, 2019). They had spent an additional $20,000 on the cargo that was to be delivered on the ship.
The ship sank, and the owners filed an insurance claim with the firm (Brander et al., 2020). The insurance company refused the claim because the owners had no insurable interest in the ship. The court agreed with the insurance company and decided that the ship’s owners had no insurable interest in it. According to the court, the owners simply had a speculative interest in the ship and would have suffered no financial loss if it sank.
Indemnity Policy
An indemnity marine insurance policy is a kind of insurance policy that covers a ship or its cargo against loss or damage. This type of insurance policy is offered by insurance companies. The policyholder is entitled to be indemnified (reimbursed) for any damage that occurs during the duration of the insurance policy (Lupton, 2019). An indemnity marine insurance policy is a reliable alternative for owners of ships and cargo, according to experts. It offers financial protection in the case of loss or damage and may assist in covering the expenses of repairs or replacement. The court ruled in Oceanic Steamship Co. v. Insurance Company of North America that indemnity insurance covered a lost ship owing to a fire that started on another vessel. The court reasoned that the insurance did not limit coverage for fires started on other ships, and therefore the policyholder was entitled to reimbursement for the ship’s loss.
Summary
The assured, broker, and insurer are the three steps of marine insurance contract development. The broker’s responsibility is to discover the finest insurance policy for the assured and to negotiate the contract conditions. The function of the insurer is to provide the coverage provided in the contract. The insurer is also obligated to compensate the insured for any losses that arise. When entering into an insurance policy, the insured has an obligation of good faith to disclose all material information to the insurer. To comply with the insurable interest concept, the insured must have a substantial financial interest in the risk being covered. According to the principle of indemnification, the insurer is obligated to protect the insured against financial loss, but only to the degree of the insured’s financial interest in the matter addressed by the policy.
Reference List
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Srivastava, A. (2020) “Contracts of marine insurance,” International Law and the Global South, pp. 277–291. Web.
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