(May, 2007)
Ocean Marine Cargo coverage allows for the owner of the goods to be quickly compensated by his or her own carrier and then that carrier can subrogate against the handler of the goods. Parties have traditionally resisted buying the coverage since it has been perceived as redundant. Typically, the party handling the cargo is legally responsible for its loss. The bill of lading states exactly how liability applies and it normally does not include acts of God or other activities that are beyond the control of the cargo-handler. In addition, the transporter is only responsible for the amount appearing in the bill of lading. This value may be well below the actual value of the goods. Finally, there is the concern about jurisdiction. In order to bring claim against the transporter, a lawsuit may need to be filed in a jurisdiction at a considerable distance from the cargo owner.
There is no universal Ocean Marine Cargo Policy. The policies are built using clauses that the carrier believes are applicable to the type of cargo, for the type of vessel and type of travel. The following analysis is based on the revised cargo clauses from the American Institute of Marine Underwriters. It was selected because it was recently revised with the hopes that it could become a standard for underwriters. This revision was made in 2004
The cargo policy can be named peril or all risk. Since the all risk is the broadest it will be used as the basis of this analysis.
The following terms apply:
The policy covers loss or damage from any external cause except for War, Strikes, Riots, Seizure and Detention. In addition, risks excluded under the Nuclear/Radioactive Contamination Exclusions Clause, the Free of Capture and Seizure Warranty and the Strikes, Riots and Civil Commotions Warranty are excluded. These exclusions may be covered if the policy is so endorsed.
When property is shipped under an “On Deck” bill of lading, the insurance company imposes significant restrictions of coverage. The property is free from particular average for most losses. This means that partial losses are not covered so only if a total loss of the property occurs is there any coverage. This limitation is not applicable if the loss is caused by:
This limitation is put in place because cargo on deck is more susceptible to loss. By accepting the “On Deck” bill of lading the shipper receives a lower cargo rate but exposes the cargo to greater potential damage. The insurance carrier wants to discourage this behavior and therefore imposes this limitation. The shipper must make a decision on lower shipping rates or better insurance coverage.
Note: This limitation is only in place with an On Deck bill of
lading. If the master or crew place cargo “On Deck” that did not have an “On
Deck” bill of lading and there is a loss, this limitation does not apply.
The policy provides the following expenses and contributions:
If it is decided that jettisoning equipment or cargo will lighten the load and possibly save the rest of the cargo and crew, the owner of the jettisoned cargo suffers the greater loss for the common good. Over the years, it has been determined that it is only fair that all of the persons who did not sustain loss should then contribute to the person who did in order to make them somewhat whole. This is the concept of general average. One loses for the benefit of the whole so then the whole contributes from their saved goods to help the one.
This policy pays for the insured’s part of the general average should a covered loss occur and cargo and equipment has to be jettisoned. It is important to note that the potential loss must be from a covered loss and not just loss in general.
Example: Foxes Exporters had $200,000 in cargo shipping to Amsterdam. A storm came up and half of the cargo was jettisoned in order to save the vessel and other cargo. Although Foxes Exporters cargo was undamaged, they were charged $75,000 as their portion of the general average and their carrier responded since the general average was due to a covered loss.
The policy also pays for any salvage charges that are due.
When a covered loss occurs and the trip is terminated at a port other than the planned destination, there is coverage for the expense of storing and forwarding the insured cargo to the planned port of destination.
This clause doesn’t include the general average or salvage charges (those are covered above) and doesn’t include any charges that have to do with the insured’s insolvency or any financial default.
Example: The vessel carrying Foxes Exporters’s cargo was damaged in a storm. It pulled into Portsmouth, England as a port of distress in order to be repaired. The cargo was warehoused for three weeks. The insurer paid the warehouse charge.
If there is a loss and the insurance carrier takes the salvage, the carrier will pay to remove the brands and trademarks from the salvage. The loss adjustment section explains exactly how this is handled.
This clause only comes into to effect if a shipper agrees to a “both to blame” clause in the bill of lading. The “both to blame” clause is notifying the shipper that if there is a collision between the carrying vessel and other vessels in which all vessels are to blame, the shipper will be pay proportionately for any amount the carrying vessel must pay to other vessel owners because of damage to the shipped cargo. Under this clause, the insurance company agrees to pay the “both to blame” amount of loss and all defense costs associated with it.
Example: Periwinkle is shipping goods on Ship A. Ship A and Ship B collide and Periwinkle’s goods are destroyed. Periwinkle sues Ship B for the loss of goods. Ship B pays Periwinkle.
Since both ships were at fault or “both to blame”, Ship B asks Ship A to pay their share of the loss. Since Periwinkle has a “both to blame” clause in the bill of lading, Ship A then asks Periwinkle to pay a portion of the payment Ship A had to pay to Ship B.
Following a loss, the insured has a duty to take reasonable measures to reduce the loss and to secure rights against third parties who might be responsible for the loss. The insurance carrier agrees to pay for the expenses that are incurred by the insured even if the combined expense and loss amount exceed the limit of insurance.
If following a loss, goods must be removed from the vessel using crafts, lighters or rafts, the expenses that are incurred are covered.
There is no coverage for the following.
· Regular wear and tear, expected leakage, and loss of weight or volume are not covered since these losses can be anticipated and expected.
· Loss that occurs because of the willful misconduct of the insured. This could be compared to the intentional act exclusions under other policies. If the insured destroys his property, there is no coverage.
· Losses that occur because of the nature of the cargo or inherent vice of the product.
· Any loss that is caused by the financial default or insolvency of the owners, managers, charterer or operators of the vessel is not covered. This is important and makes the insured responsible for choosing a reputable carrier.
· Loss due to improper packing by or at the direction of the insured. The insured is expected to know the cargo and pack it appropriately. If they don’t make the effort, there is no coverage.
Example: Marilyn’s Gallery was shipping artwork to a customer in the Caribbean. She arranged for the artwork to be crated. When the piece arrived at the warehouse, the crate was broken and the artwork destroyed. It was determined that the crating was appropriate for inland shipping but was not capable of withstanding ocean shipping. The packer had never prepared packages for ocean travel. Coverage was denied.
These warranties are really exclusions and apply in all circumstances unless a policy is modified specifically to change them.
This is warranty excludes consequences. Consequences refer to losses that happen because of other actions taking place during use of the particular vessel. Uncovered consequences include:
· Capture, arrest, nationalization, confiscation, detainment, preemption, requisition, seizure, and restraint including any attempts. It does not matter when they occur, nor does it matter when they occur lawfully.
Example: One Star was docked. A governmental official notified the ship master that all goods on board were being confiscated for the greater good and he had the armed forces to back up his request. There is no coverage for the lost cargo.
· Loss or damage due to any nuclear or atomic weapon of war or any mine or torpedo - in war or peacetime.
Example: Phillips Manufacturing was sending items to the Middle East that required travel through the Suez Canal. The vessel ran into a mine left behind following the first Iraqi conflict. Although the vessel was not destroyed, it was damaged along with some of the cargo, including Phillips’ property. The loss would not be covered because of this exclusion.
· Hostilities or warlike operations (declared or undeclared) but there are exceptions. Collision or contact with rockets is covered provided they are not weapons of war. Collision or contact with floating or fixed objects (not a mines or torpedoes) stranding, heavy weather, fire or explosion is covered unless caused by a hostile act by or against a belligerent power
· Civil war, rebellion, revolution, civil strife including the imposition of martial law, military or usurped power, or piracy
There is no coverage for damage or expense that is caused by strikers or others having labor disputes, riots or civil commotion. In addition, there is no coverage for terrorists or others operating with a political motive.
Example: Aruba Flowers shipped flowers to the West Coast for distribution in California. The particular shipment arrived in California just as the Longshoremen’s Dock strike started. The flowers remained on the ships. When the strike ended, the flowers were spoiled. The loss was not covered due to this clause.
There is no coverage for any claim that arises to a delay of delivery even if the delay is caused by a peril. This means that loss of income or market, expenses or deterioration of the goods are not covered.
Example: Mary shipped several holiday-oriented items to be sold before the Chinese New Year. The ship transporting the cargo sustained damage due to a storm and had to deviate from course and wait for repairs. Because of the delay, Mary’s cargo arrived after the New Year celebration and had to be sold for less than half its original sales price. Mary could not collect any damages for loss of market.
Loss or damage due to nuclear reaction, radiation or radioactive contamination is not covered no matter what lead up to the loss. The one exception is that if the property is within the United States, a territory of the United States or in Puerto Rico, there is coverage for any fire damage that may result provided the fire was not due to any of the F.C.& S. exclusions. There is also no coverage for nuclear reaction, radiation or radioactive contamination that results from the covered fire.
The following conditions apply to the policy:
A. Seaworthiness
If the insured knows that the vessel is not seaworthy, there is no coverage for any loss that occurs because of the unseaworthiness of the vessel but if the insured is not aware of a problem with the vessel, the insurance company waives the seaworthiness requirement. If the insured signs a bill of lading that has a negligence clause or a latent defect clause, the loss will still be covered.
B. Carrier Clause
This insurance is for the benefit of the insured only. Nothing about this policy is to benefit any carrier or bailee.
C. Economic & Trade
Sanctions
If the U.S. economic or trade sanctions prohibit coverage, the policy is null and void.
This clause describes when coverage begins for a particular shipment and when the coverage ceases for that shipment. Coverage starts at the warehouse or place where the insured has indicated the attachment would begin. There is no coverage in the warehouse since the coverage starts when the goods leave the warehouse or place of storage.
Coverage ends when the cargo is delivered to the final destination indicated by the insured or at another warehouse that the insured has chosen for storage, allocation or distribution or 60 days after the voyage is complete.
After the goods leave the vessel at the final destination, but prior to the termination of coverage, if the insured chooses to forward the goods to a destination that is not mentioned in the policy, coverage ends when the transit to the new destination begins.
If the insured is aware of a change in the destination and notifies the insurance company of the change, coverage will continue but the insurance company may change the conditions and premium.
Example: The ship owner notified Jonny’s Pet Food that the original destination plan was being changed due to a contagious disease outbreak. Although the final port would remain, two of the midpoints were being revised. Jonny’s then notified the carrier. There was no change in premium and coverage remained in place.
Problems can occur which are beyond the control of the cargo shipper. Therefore, if a deviation of the travel plans occur or if the cargo is forced off a vessel and then shipped using a different vessel and different travel because the ship owner arranges it, there remains coverage for the cargo.
There is no coverage if transit is suspended or interrupted unless the action is due to circumstances out of the insured’s control. Even if it is out of their control, the policy expects the insured to act with dispatch to gain control.
Please refer to PF&M Section 160_001, Cargo Shipment Held Not Covered By Virtue Of “Suspension Of Transit Condition” in Court Cases.
B. Shipments Returned or Refused
If a delivery is not accepted for any reason, coverage remains in effect until there is an acceptable disposition. However, the period the coverage is extended applies only if the insurance company is notified of the circumstances and the insured agrees to pay additional premium.
C. Consolidation/Deconsolidation
If the insured property is stopped so that it can be either consolidated into an overseas container or deconsolidated from a container coverage continues but only for up to 30 days – regardless of who is in control of the delay. The 30 days can be extended by written agreement with the insurance company and payment of additional premium.
A. Constructive Total Loss Clause
A loss is considered to be a constructive total loss when it appears that the cost to get it to final destination in an acceptable condition is more than the value of the cargo. The costs could be from the recovery operation, the renovating, repairing or the shipping.
Example: Barry’s Forest Products were being shipped East. A collision with a bridge abutment breached the hull and allowed water into the area where the timber was kept, warping it. Although the wood could be used in some ways, the value of the salvage was less than the cost of recovery and shipping so the items were considered a constructive total loss.
B. Partial Loss
If a partial loss occurs, the damaged and undamaged property must be separated. The payment for the damaged property is based on the depreciated value of the property. However, if the insured and insurance company can’t reach an agreement, the damaged items are sold and the insured receives the difference between the proceeds of the sale and the insured value of property.
C. General Average and Salvage Charges
The charges are determined by United States Law, the York Antwerp Rules or other applicable laws stated in the contract of affreightment.
D. Machinery Clause
If machinery that consists of several parts is being shipped and some of the parts are damaged, the loss payment is limited to the proportional value of the part to the total machine or at the insured’s option for the cost and expense of replaced or repairing the part. However, the insurance company will not pay more than the insured value of the complete machine.
E. Labels Clause
If labels, wrappers or capsules of insured property are damaged, the insurance company pays only the amount needed to replace them and recondition the property but not more than the insured value of the property.
F. Brands and Trademarks
Under Additional Coverages, the expense to remove brands and trademarks is a covered expense. This section explains how such unbranded items damages will be paid. The damage value is based on the unbranded value. If the brand or trademark cannot be removed, the insured can destroy the damaged goods but only if the insurance company is paid the salvage value of the property.
Example: My Heart Blue Jeans are sold for $300 a pair. They are recognized by the embroidered heart on the back pockets and the burnt on brand located on the left leg panel. When a loss occurred and damaged the items, the trademark branding could not be removed without destroying the jeans. My Heart was paid for the blue jean value of the items and then they paid the insurance company to buy back the salvage so that they could destroy the jeans in order to prevent them from entering the marketplace.
The insurance company is given the insured’s rights of subrogation after they pay a loss. If the insured impairs those rights in any way, the insurance company may deduct the worth of the subrogation from the value of the claim.
The insured has a duty to report any condition that could become a loss. It must be reported to an office close to where the property is or where it was heading.
The insured must provide a satisfactory proof of loss to the insurance company. The insurance company then has 30 days in which to pay the loss. If the amount of loss has not been determined, the insurance company can advance an agreed upon amount pending final adjustment. The insured may be required to return part of the money if the final adjustment amount is less than the advance.
The insured cannot sue the insurance company unless all the terms of the policy have been met. Any such suit must be brought within 12 months following the loss or whatever is the shortest time allowed by state law where the contract was issued.
The policy is to be interpreted using U.S. federal maritime common law. If such law does not apply, the law of the state of New York is to be used.
Most cargo policies are open cargo policies and therefore on a reporting basis. The insured must report all details of shipments for a particular month within 30 days after the end of the month. Willful non-reporting voids the policy for unreported shipments but unintentional errors in reporting do not void the policy provided they are reported as soon as the insured becomes aware of the error. Premium is paid based on the values reported.
The insurance company has the right to inspect books and records of the insured that relate to the insured items for a period of up to 12 months following the expiration of the policy.
Special cargo policies are given to third parties to prove that the insured has coverage. They can also be called certificates. The insured can issue this with permission of the insurance company but they must accurately reflect the coverage on the policy. If the insured issues an incorrect policy and the insurance company must pay for losses not covered, the insured agrees to compensate the insurance company for the overpayment.
The insured must provide copies of all certificate and special cargo policies to the insurance.
Insurance is void if insurance is available to the insured from a carrier or other bailee. When coverage is available from other than a carrier or other bailee, this coverage pays its proportional share. If the insurance company is relieved of liability, the premium they received is not returned.
The American Institute produced three addition coverage forms in their 2004 revision.
This is a basic peril form that allows the insured to select the percentage for deductible. If the loss is less than the percentage listed on the policy declarations, there is no coverage but if it exceeds the percentage, the entire loss is covered. Many of the same clauses listed above apply. Items 1, 2 and 3 replace item 1 in the “all risk” clauses.
The policy declarations will state an average percentage. If the loss is less than that percentage the policy will pay nothing. If over that, it will pay the entire loss (including the amount under the percentage). This limitation is not applicable if the loss is caused by:
· the vessel being stranded, sunk or burnt
· fire
· collision
· contact with external non-water substances (think icebergs and other ships)
· discharge of cargo at a port of distress.
The basic perils are perils of the seas, fire, assailing thieves, jettisons, loss overboard of overseas containers stowed on deck, barratry of the master and mariners and other similar situation that damage the insured’s property.
There are several additional perils:
While the property is on shore, the policy covers collision, derailment, overturn and similar accidents to the conveyance (truck, train or car for instance). In addition, it covers fire, lightning sprinkler leakage, cyclones, hurricanes, earthquakes, floods, and collapse or subsidence of the docks or wharves.
B. Package Totally Lost
If a package is lost in the loading, transshipment or discharge, it is covered.
C. Inchmaree, Explosion,
Pollution Damage/Deliberate Damage
Damage is covered if caused by the bursting of boilers, shafts braking or latent defect in the machinery, hull or attachment or from errors in either in the navigation or management of the vessel. In addition, any explosion is covered. Lastly, if the government causes damage to the property in order to prevent or mitigate a pollution situation, there is coverage provided the situation that triggered the pollution situation was caused by a covered peril and the insured property is on a waterborne conveyance.
These are similar to the Cargo Clauses 2004 with Averages except for item 1.
If the loss is less than total (Warranted Free of Particular Average) the policy will pay nothing. If total, it will pay the entire loss. This limitation is not applicable if the loss is caused by;
· the vessel being stranded, sunk or burnt
· fire
· collision
· contact with external non-water substances (think icebergs and other ships)
· discharge of cargo at a port of distress.
When property is shipped under an “On Deck” bill of lading, the insurance company imposes significant restrictions of coverage. The property is free from particular average for most losses. This means that partial losses are not covered so only if a total loss of the property occurs is there any coverage. This limitation is not applicable if the loss is caused by:
· the vessel being stranded, sunk or burnt
· fire
· collision
Note: This
limitation is only in place with an on deck bill of lading. If the master or
crew place cargo “On Deck” that did not have an “On Deck” bill of lading and
there is a loss, this limitation does not apply.
In addition, property that is jettisoned, washed overboard, or by overseas containers being washed overboard is not subject to the limitation whether or not subject to the “On Deck” bill of lading.
The cargo policies presented above are the unendorsed versions. Many of the clauses can be changed or removed entirely for a premium.
Ocean marine forms are not like ISO or AAIS coverage forms and they are not filed and approved by the states. Underwriters choose the clauses and forms that they will be used in a given policy. They expect the broker or agent to be knowledgeable enough to help insureds understand the coverage being provided. A broker who understands the form and the market is vital to proper placement and development of coverage.