MARINE CARGO INSURANCE

I)

LLOYDS OF LONDON

Lloyds is an insurance market located in London. It is the center of the worlds marine insurance and
shipping intelligence. In the 17th century, insurance of cargoes and ships was often underwritten by
merchants who were willing to carry part of the risk of a voyage in return for part of the premium.
Commerce of various types was transacted among the merchants who met each other at various coffee
houses around the City of London. Similarly, those wishing to transact insurance would meet in these
coffee houses. One of these coffee houses was owned by Edward Lloyd, and situated near River
Thames. It was frequently visited by merchants, ship owners, and others having interest in maritime
ventures.
Lloyds Coffee House was in existence by 1688, although the original date of opening is uncertain.
Edward Lloyd encouraged the merchants or underwriters because it brought extra business to his coffee
house. He supplied shipping information and published a news sheet in 1696 called Lloyds News
(superseded some years after his death by Lloyds list, Londons oldest newspaper.
Since its establishment, Lloyds of London has developed a strong world-wide reputation for its ability
to provide risk solutions for its clients. It must be recognized from the outset that Lloyds is not an
insurance company. It is a market of individual and corporate members who underwrite risks on
shared, but competitive basis.
The key components of the Lloyds market are:
a) Lloyds members
Members of Lloyds provide the supporting capital on which the market is built. They could be
either individuals or corporations. Corporate members include investment institutions and
international insurance companies. Capital provided by members is used to underwrite insurance
risks.
b) Underwriting syndicates
An insurance syndicate is a group of Lloyds members. Syndicates operate as independent business
units within the Lloyds market, and usually compete against each other.
c) Managing agents
Managing agents are responsible for running the syndicates. They appoint the underwriting team
which writes risks on behalf of the syndicate members.
d) Lloyds brokers
They are insurance intermediaries acting on behalf of the insured, and approved by Lloyds to
transact business with its syndicates. They should meet Lloyds requirements in respect of
expertise, integrity, and financial standing. Only insurance business offered by Lloyds brokers is
underwritten by the syndicates.
II)

MARINE INSURANCE
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Although the term Marine Insurance leads us to think about the sea, it actually encompasses sea, land
and air transport. Here, we can differentiate between two classes of insurance: the first is cargo which
is concerned with insurance of merchandise. The second is hull which is concerned with the insurance
of the ship itself (truck or aircraft). The discussion here is limited to cargo insurance.
There are various perils which cause losses to the cargo. Partial loss claims are more frequent than total
losses. The causes of such losses are many, such as rust/oxidation, breakage, damage by water, and
shortage. The carrying vessel may sink or capsize with cargo on board as a result of bad weather,
collision etc.. or the cargo itself can be lost even when the vessel has suffered no accident; for example,
during loading/unloading, from washing overboard, from war, strikes, riots, etc..
Some goods are also particularly prone to theft and pilferage, especially those that have a relatively
high value and small volume. Moreover, Piracy still exists today.
Loss or damage often arises under the rule of "General Average" where goods are lost or expenses are
incurred in order to save the ship from danger, for instance in a storm the cargo on deck is jettisoned to
make the ship lighter.
In international trade, commodities often change ownership whilst cargo is on board a vessel on its way
to its destination. In this case a duly assigned insurance policy is required as well an endorsed bill of
lading and other documents. Therefore; the indemnity of a marine insurance policy can be passed by
the initial owner to another one. This is particularly the case in Letters of Credit (L/C) where the
insurance policy is assigned to the bank issuing the L/C.

III)

TYPES OF MARINE CARGO INSURANCE COVERS

In order to cater for the misfortunes, there are many types of covers available ranging from All Risks to
restricted perils. The three main ones are: Institute Cargo Clauses A (I.C.C. A ), I.C.C. B, and I.C.C. C.
These clauses were adopted in 1983. They were written by Lloyds underwriters and The Institute Of
London Underwriters (now absorbed into the International Underwriters Association IUA).
a) Institute Cargo Clauses A (1.1.82)
This Clause covers All risks of loss or damage. This means that any cause of loss is covered except
what is excluded in the list of exclusions. The main exclusions are:
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willful act or misconduct of assured

insolvency
loss or damage caused by inherent vice or delay
loss damage or expense caused by insufficiency or unsuitability of packing
ordinary loss in weight / volume and leakage
ordinary wear and tear
Unseaworthiness or unfit conveyance
loss or damage caused by war, strikes, riots and civil commotion. However,
these perils can be covered under a separate clause, namely Institute War
Clauses and Institute Strikes Clauses subject to an additional premium paid
by the insured
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The details of the exclusions can be pursued by referring to the I.C.C. A complete wording.
Clarification:
Inherent vice, ordinary loss in weight and leakage, ordinary wear and tear:
Some commodities suffer natural loss in weight during the sea voyage due to loss of moisture content
For example pepper can both lose and gain weight: a dry environment will cause to lose weight,
whereas humidity will cause to absorb moisture and so gain weight Oil in wooden barrels can lose
weight through absorption; timber can lose weight because of drying of its moisture. Bulk cargoes
(example corn) are also subject to loss of weight, particularly oils that evaporate. Also any defect in the
goods leading to its damage would not be covered by the policy as this is an inherent vice.
Delay:
If there has been a delay in the arrival of the vessel or the collection of the goods, and if the goods are
damaged because of this delay (delay being the proximate cause) , then the damage is not covered.
Insufficiency and unsuitability of packing:
Cargoes should be packed according to internationally recognized packing standards to ensure
maximum possible protection of the goods. For instance a TV set should be packed in a strong carton
with polystyrene stuffing. Even when shipped inside a container cargo should be stowed properly such
as in the case of a car inside a container. Containers with rough surfaces can damage cargo in bags. In
case of claims resulting from inadequate packing, the insured will not be covered. This exclusion
cannot be waived or deleted by the insurer.
b) Institute Cargo Clauses B (1.1.82)
This clause covers only:
Loss of or damage to the subject matter insured attributable to:
- fire or explosion
- vessel or craft being stranded, grounded, sunk or capsized
- overturning or derailment of land conveyance
- collision of vessel with any external object other than water
- discharge of cargo at port of distress
- earthquake, volcanic eruption or lightning
- jettison or washing overboard
- general average sacrifice & salvage charges
- entry of sea, lake or river water into vessel, hold conveyance, container or storage place
- total loss of any package lost overboard or dropped while loading or unloading
- both to blame collision
The main exclusions are similar to I.C.C. A.

Clarification:
Discharge at port of distress:
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This relates to any port, not the intended port of discharge, at which the carrier discharges the cargo
because the ship has encountered problems that prevent her from continuing its voyage.
Jettison:
Jettison is when all or part of the cargo is deliberately thrown overboard upon instructions from the
captain of the ship to make the ship lighter and more stable. This is done when the ship is in danger of
sinking in order to save it, and save the lives of the crew members and what might remain of the cargo.
The insurance policy covering jettison will pay the insured for the value of his lost goods. Jettison will
lead to General Average.
General Average
Where an extraordinary sacrifice is reasonably and deliberately made in time of danger for the purpose
of preserving the property or saving the common venture.
An example is where the goods, not necessarily belonging to the insured, are sacrificed (jettisoned) in
order to save the common venture (lives of the crew/vessel/remaining goods). The object of such
sacrifice being the common venture, therefore in case of claims involving General Average, expenses
and losses resulting from it are shared proportionately to the values of the interests involved among the
ship owner and the cargo owners.
Another example, when General Average applies, is when goods have been damaged by reason of fire
on board, or when the ship faces problems requiring the help of a tug boat.
Washing overboard:
This peril is covered in I.C.C. B but not in C. It covers the cargo on board of the ship if it is washed
away into the sea by strong waves.
Entry of water into vessel etc..:
This is a major difference in the cover provided by I.C.C. B in comparison to C. The C clauses do not
provide cover for such direct water damage or loss. The B clauses provide cover for loss or damage to
the cargo caused by seawater, lake water or river water when the water actually enters into a place
where the cargo is stored. However, B clauses do not cover damage caused by fresh water such as rain
or leakage of water from the tanks of the ship.
Total loss
Means that a cargo is either completely destroyed or so damaged that its owner cannot use it or dispose
of it commercially.

c) Institute Cargo Clauses C (1.1.82)

This clause covers only:
Loss of or damage to the subject matter insured attributable to:
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fire or explosion
vessel or craft being stranded, grounded, sunk or capsized
overturning or derailment of land conveyance
collision of vessel with any external object other than water
discharge of cargo at port of distress
general average sacrifice and salvage charges
jettison
both to blame collision

The main exclusions are similar to I.C.C. A.

IV) COMPARISON AMONG I.C.C. CLAUSES:
In all the three Clauses goods are covered from warehouse to warehouse, i.e. from their first point of
departure until final destination, unless otherwise specified (i.e. from port to port).
In all the three Clauses a time-limit of 60 days is granted to the insured after arrival of the goods at port
of destination for the discharging operations and customs clearance. The coverage terminates on expiry
of the time-limit or on delivery of the goods to the consignees' warehouse, whichever occurs first.
Time-limit can be extended against payment of additional premium.
The major differences between these Clauses is that the Institute Cargo Clauses A covers all the risks
with the exceptions of the ones specifically excluded, whereas the other Clauses ( B & C ) specify the
insured perils. Thus total or partial losses are covered under the Institute Cargo Clauses B and C if the
proximate cause of the loss is one of the listed insured perils; whereas losses under I.C.C. A are fully
covered unless they are excluded in the list of exclusions. It should be noted that Piracy is covered only
in Institute Cargo Clauses A. Piracy means persons acting for their own benefit who attack the ship.
I.C.C. A provides the widest scope of standard cover, whilst I.C.C. C provides the least cover. Thus
I.C.C. B provides an in between scope of cover.
The major differences between I.C.C. B and C are that I.C.C. C excludes water damage, total loss of
package during loading/unloading, earthquake, volcanic eruption, lightning and washing overboard.
The following table compares the various perils of these two Clauses:
Peril

Fire or explosion
Vessel or craft being stranded, grounded, sunk or capsized
Overturning or derailment of land conveyance
Collision or contact of vessel, craft or conveyance with any
external object other than water
Discharge of cargo at a port of distress
Earthquake, volcanic eruption or lightning
Peril

General Average sacrifice & salvage charges

Jettison

Clause B
Yes
Yes
Yes
Yes
Yes
Yes
Clause B
Yes
Yes

Clause C
Yes
Yes
Yes
Yes
Yes
No
Clause C
Yes
Yes
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Washing overboard
Entry of sea, lake or river water into vessel, craft, hold,
conveyance, container liftvan or place of storage.
Total loss of any package lost overboard or dropped whilst
Loading on to, or unloading from, vessel or craft
Both to blame collision

Yes
Yes

No
No

Yes

No

Yes

Yes

V) UNDERWRITING CONSIDERATIONS
Underwriting involves risk assessment, pricing, and setting the insurance terms and conditions. A
number of factors influence underwriting of marine cargo insurance. The decision of the Underwriter is
mainly based on the combination of the following factors:
a)
b)
c)
d)
e)
f)
g)

Scope of cover & warranties

Nature of the commodity, its packing and whether in container
Voyage (origin and destination of the goods)
Loss record of the insured & his moral hazard
Whether goods are to be transshipped
Sum insured & annual turnover of shipments
Carrying vessel

Scope of cover & warrantees

Ask whether I.C.C. "A", "B" or "C" and if additional extensions required.
Marine policies may carry specific warranties such as shipment of cargo under deck, documents to be
provided in case of claims etc.. These warranties should be strictly adhered to by the insured in order
not to void the cover.
Nature of cargo & its packing
The nature of the cargo is very important, some cargoes being more prone to damage than others. The
same also applies to packing which must be suitable for export. The same type of cargo could be
shipped in different ways and each way leads to different risks to be faced. Example corn could be
shipped in Bulk or in Bulk Containers or in big polyethylene bags or in small plastic bags in
cartons in containers. Food stuff such as jam could be packed in glass jars (risk of breakage) or tin cans
(risk of rust) that are then put in cartons inside containers. Shipments in containers reduce loss
exposure but do not provide 100% loss prevention guarantee even against burglary.
Voyage
Under this heading one should check about the length of the voyage. A prolonged voyage contributes
to increasing the hazard, thus increasing the possibilities of damage because the cargo is exposed to the
elements of nature for a longer period. Certain voyages (in the Tropics) can affect the cargo because of
greater degree of temperature and humidity variations and can cause damage such as mildew.
Ports of shipment and ports of destination can also enlighten the Underwriter for rating a shipment, as
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some of these ports are either properly or ill-equipped to handle cargo and storage facilities. Some ports
have notorious reputations where goods are stolen from them. This information is readily available in
Lloyd's publications.
Loss record of the insured & his moral hazard
Obtaining loss record history from a given insured is essential in risk assessment. Obviously an insured
with a bad loss experience will probably be rated a higher premium. Insurers prefer not to deal with
persons who are known for their bad reputation and constitute a high moral hazard.
Transshipment
Transshipment occurs when the cargo is discharged from one ship at a certain port and loaded on
another ship. This is because not all ships travel from the original destination to the final requested
point of arrival. Consequently the trip has to be made by more than one ship each completing a part of
the voyage. Such interruption of voyage to unload and then reload the goods increases the risks.
Normally, the insurance policy should state that transshipment is allowed and the adequate additional
premium should be charged by the insurer.
Sum insured & turnover
The sum insured must correspond to the insured person's interest in his cargo. Therefore the sum
insured should include the price of the goods, the cost of shipment, clearance and custom duties and
other expenses in order to place the insured in the same financial position as he enjoyed before the
occurrence of the loss.
Insurers would also want to know the total value of shipments to be insured during a year (annual
turnover) in order to asses their exposures and the expected volume of business (premium) from a
particular client.
Carrying vessel
The age, tonnage, flag, ownership and type of vessels are guides in respect of seaworthiness of a given
vessel. Identifying the owner of the vessel can enlighten the underwriter in respect of the good
management of the vessel owners. Tonnage indicates whether the vessel is fit for transatlantic crossings
etc.. Moreover, insurance of shipments using old vessels are subject to an additional premium
(overage), and underwriters may decline insurance if the ship is too old or not classified (refer to
Classification Clause).
The vessel should also be fit to carry the type of cargo that will be shipped. Here we can identify the
following types of ships:
General Cargo Ship
It is a ship that can carry most kinds of goods that do not require specialized vessels.
Bulk carrier (Bulker)
It is a ship that carries goods in bulk in its holds such as iron ore, coal, corn, scrap metals etc
.
Containership (Cont. ship)
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It is a ship specialized in carrying goods in containers.

Gas tanker (LPG/LNG)
It is a specialized ship in carrying gas: liquefied propane gas (LPG) or liquefied natural gas (LNG).
Oil tanker
It is a ship designed to carry petroleum.
Refrigerated Cargo Ship (Reefer)
It is designed to carry refrigerated cargoes (meat, ice cream, etc).
Roll-in Roll-out (Ro-Ro)
It specializes in carrying cars and cargoes loaded on trailers. It is equipped with ramps to allow
vehicles to be driven into (roll in) and out of (roll out) the ship.
Tug boat
It is a powerful small boat that could be used in rescue operations as well as for normal day to day
operations inside ports or channels to tug ships from one place to another.

VI) INSTITUTE CLASSIFICATION CLAUSE

Effective January 1, 2002 the international insurance market has adopted a new Marine Insurance
Classification Clause.
The major new developments in the new clause are that insurance applies to cargoes shipped on:
1) Vessels classed with a Classification Society that is a member of the International Association of
Classification Societies (IACS) such as Lloyd's Register, American Bureau of Shipping, Bureau
Veritas, China Classification Society, Germanischer Lloyd, Korean Register of shipping, Maritime
Register of Shipping, Nippon Kaiji Kyokai, Norske Veritas, Registro Italiano (the list may change
please always refer to web site: www.iacs.org.uk for the updated list).
2) For coastal trading, vessels should be classed with a Classification Society which is domiciled in the
same country as the owner of the vessel concerned and must also operate under the flag of the same
country.
The insurance of any shipment on a vessel not falling under (1) & (2) above will be considered on a
case-by-case basis. The acceptance and the terms of the insurance on such vessels depend on the
specifications of the said vessel, its age & its loss record. Insurers have the right to refuse to insure
shipments not meeting the above criteria.
It is thus safer to effect shipments on vessels classified by an "IACS" Classification Society to avoid
problems and mishaps. If the vessel is not be in compliance with Institute Classification Clause
requirements, then no insurance cover would be available.
In consequence, it is critical to follow the following recommendations:
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It is highly recommended to advise the insurance company of the name of the vessel
prior to its sailing in order to check that it meets the international requirements and
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make sure that coverage is available.

VII)

Traders are recommended to instruct their shippers to ship their cargo on IACS
classified vessels.

Merchants are recommended to advise their bank to warrant all their shipments on
appropriately classified vessels (through the Letter of Credit)

OTHER INSTITUTE CLAUSES

Cover for War, Strikes, Riots, Civil Commotion

In the institute Cargo Clauses the war and strike risks are excluded. However, the war risks can be
covered under a separate clause which includes specifically loss or damage due to hostilities, war-like
operations, civil war, revolution, rebellion, insurrection as well as mines, torpedoes, bombs and the
like.
War cover is only given while the cargo is waterborne (i.e. on the ship) and excludes cover whilst the
cargo is on land. In case the vessel cannot be discharged immediately a time-limit of 15 days is granted.
The Underwriters may cancel war cover subject to 7 days from the time the notice of cancellation is
served to the insured, when cargo is not yet waterborne.
Similarly, the Institute Strike Clauses provides cover for strikes riots civil commotion etcat an
additional premium.
Examples of other Institute clauses are:
Land Transit Clauses (All Risks), which covers against all risks of loss or damage to the subject
matter insured whilst being conveyed by land transport (rail, truck).
Land Transit Clause (Truck Clause) which covers loss or damage occasioned by fire, collision,
overturning, derailment, bridge collapse, or accidents whilst the interest insured is being conveyed
by land transport (truck, rail).
Institute Cargo Clauses (Air) (excluding sending by post).
Cover is against All Risks concerned with air shipments. In common with all Institute
Cargo Clauses for sea voyage, this cover is subject to customary exclusions
Some types of cargo have specific clauses for their insurance, such as:
Institute Commodity Trade Clauses for the insurance of: Cocoa, coffee, cotton, fats, oils not in
bulk, hides, skins, leather, oil seeds, sugar and tea.
Institute Bulk Oil Clauses for the insurance of Oil in bulk.
Institute Frozen Food Clauses for the insurance of frozen products.
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Institute Frozen Meat Clauses for the insurance of frozen meat.

Institute Timber Trade Federation Clauses for the insurance of timber.
Livestock Insurance for shipments of cattle, etc..

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