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KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES

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KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES April 28, 2014 John M. Sylvester Michael T. Fitzgerald Thomas M. Exl – PowerPoint PPT presentation

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Title: KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES


1
KEY ISSUES IN MARINE INSURANCE FOR
GLOBAL COMPANIES
  • April 28, 2014

John M. Sylvester Michael T. Fitzgerald Thomas M.
Exl
2
Introduction and Overview
  • What is Marine Insurance?
  • Historical Development of Marine Insurance Market
  • Key Considerations for Risk Managers
  • Types of Marine Coverage and Policies
  • Considerations in Underwriting Marine Insurance
  • The Law of Marine Insurance

1
3
Introduction and Overview
  • Insurance against the perils of marine commerce
  • For example, if a ship sinks in transit, various
    types of losses are possible loss of cargo loss
    of profit from sale of cargo damage to ship
    third-party liability personal injury
  • Key difference between marine insurance and other
    types of insurance is that the marine adventure
    or peril insured must be specifically maritime in
    nature

4
Marine adventure English Marine Insurance Act
of 1906
  • where any goods in shipment are exposed to
    maritime perils (e.g., perils of the sea, fire,
    war, pirates, jettisons, barratry)
  • where the earning of any pecuniary benefit from
    goods in shipment is endangered by exposure to
    maritime perils
  • where any liability to a third party may be
    incurred by the owner of insurable property (or
    any party with an interest in the property) by
    reason of maritime perils

5
Marine Insurance Markets
  • English Market began with Lloyds of London in
    the 1600s
  • Lloyds is not an insurer it is a facility for
    the selling of insurance by underwriting
    syndicates at Lloyds
  • Historically, the capital for Lloyds syndicates
    was provided by individual investors Names
  • Now, the capital is provided by corporations
    doing business as syndicates

6
Marine Insurance Markets
  • Lloyds began in 1688 at Edward Lloyds
    coffeehouse in London
  • Lloyds Coffee House was located near the Tower
    Wharf and Customs House in London, so it was
    frequented by shipowners, captains, and merchants
  • At Lloyds Coffee House, various merchants
    entered into a side business of underwriting the
    risk of a ships safe passage to its destination,
    with its cargo intact

7
Marine Insurance Markets
  • By 1696, the Lloyds News and, later, Lloyds
    List began publication containing the most
    authoritative daily journal of shipping
    intelligence
  • Over the years, Lloyds set up reporting stations
    around the world to provide information on ship
    movements
  • Because of the need for buyers and sellers to
    have the same information about the risk, the
    doctrine of uberrima fides developed in the
    market, and the law

8
Marine Insurance Markets
  • From modest beginnings in the 1600s, Lloyds has
    grown to be one of the largest and most
    influential marine insurance markets in the world
  • Over time, other chartered London insurance
    companies sprang up
  • London continues to be a major marine insurance
    center, not only for Lloyds Underwriters, but
    also London-based insurance companies and PI
    Clubs

9
Marine Insurance Markets
  • Marine Insurance today is underwritten by
  • Underwriters at Lloyds
  • Insurance companies located in London and
    throughout the world
  • U.S. insurance companies, most of which belong to
    the American Institute of Marine Underwriters
  • PI (protection indemnity) Clubs

10
Key Considerations for Risk Managers
11
From Danger to Opportunity
  • Every business and every production has risks.
    You cant get around it. (Lee Iacocca)
  • The only strategy that is guaranteed to fail is
    not taking risks. (Mark Zuckerberg)

12
Plenty of Risks to Choose From
  • Market risk
  • Price risk
  • Counterparty risks (non-payment, non-performance,
    insolvency, valid documentation, taxation issues,
    insurance cover)
  • Credit risks
  • Operational risks
  • Geopolitical risks (piracy, terrorism)
  • Compliance with laws / sanctions regulations
  • Liabilities to third parties

13
The Risk Review Process
  • Forensic review of your business and YOUR risks
  • Identify risks you can transfer to
    counterparties, insurers and/or banks
  • ARE THE REMAINING RISKS ACCEPTABLE AND MANAGEABLE
    TO YOU?

14
Manage Your Risks
  • YOUR AIM MUST BE A CONTROLLED ENVIRONMENT.
  • Put a risk policy in place
  • Risk analysis
  • Limits
  • Authorities
  • Operations procedure
  • Monitoring
  • Reporting

15
Risk Management Through a Commercial Contract
  • Clearly define the objectives and
    responsibilities of the parties
  • Use INCOTERMS
  • General Terms and Conditions are useful to fill
    the gaps
  • Does the contract meet all insurance and banking
    requirements?
  • PLEASE NOTE THAT A CHARTER PARTY AND A BILL OF
    LADING ARE ALSO CONTRACTS

16
What are Incoterms
  • Created in 1936 by the International Chamber of
    Commerce (ICC)
  • Regularly updated, most recently in 2010 but 2000
    Rules are still referred to
  • Incoterms DO NOT give you a complete contract of
    sale
  • Incoterms do not deal with the transfer of
    ownership of goods
  • Incoterms state which party has the obligation to
    make carriage or insurance arrangements
  • Specify the place of delivery as precisely as
    possible

17
How to Approach the Insurance Markets
  • Choose your broker wisely
  • Presence in your markets
  • Familiar with your line of business and risks
    involved
  • Proactive claims-handling department
  • Transparent broker compensation

18
Your Relationship With Insurers
  • Meet your lead underwriter
  • Make sure that the underwriter understands your
    business and the risks involved
  • UTMOST GOOD FAITH you must disclose BEFORE
    contracting every material circumstance of your
    business or transaction that you wish to insure
    corporate structure, goods, conveyances,
    geographical regions, limits, etc.

19
Operating An Insurance Policy
  • Strictly comply with the policy terms -- e.g.,
    warranties that some particular thing shall or
    shall not be done
  • Keep insurers closely informed about changes to
    your organization and business
  • Make sure that the policy is amended to reflect
    changes
  • Protect yourself through proactive measure, e.g.
    vetting procedures for vessels/terminals use of
    independent inspectors
  • In cooperation with insurers/broker get an
    Emergency Procedure in place
  • Renewals should not be negotiated at the last
    minute

20
In Case of An Accident
  • Follow the Emergency Procedure
  • Take all necessary measures to protect people
    from injury or death
  • Protect property from further loss
  • Alert your brokers/insurers claims department
  • Duty to mitigate loss (experts on the scene)
  • DO NOT ACKNOWLEDGE LIABILITY
  • Start collecting evidence (witness statements,
    photographs, survey reports, retention of
    samples, etc.)

21
Claims Handling
  • Pre-contract disclosures
  • Policy wording
  • Claim notification/documentation
  • Appointment of loss adjustor
  • Close contact with people involved within company
  • FULL COOPERATION WITH BROKERS/INSURERS CLAIMS
    DEPARTMENT IS KEY

22
Types of Marine Coverage and Policies
23
Lines of Marine Insurance
  • Cargo Insurance
  • Marine Liabilities
  • (e.g. Charterers Legal Liability)
  • Hull Machinery Insurance
  • Protection Indemnity (PI) Insurance

24
Unlocking Cargo Terms/Phrases Definitions and/or
Translations
  • Average Loss
  • Collision 2 vessels running into each other
  • Franchise Threshold
  • General Shared
  • Particular Partial or Individual
  • Warranty i. Exclusions, e.g. Paramount ii.
    Coverage requirements, e.g., loading survey

25
Unlocking Cargo Terms/Phrases Definitions and/or
Translations
  • Average Warranty Insuring Terms/Coverage
  • FPA Free of Particular Average Total loss only
  • WA With Average Total and Partial losses
  • WA 3 loss /no loss 3 Franchise Threshold
  • All Risks covered unless specifically excluded
  • General Average Shared Loss
  • Irrespective of percentage perils added and
    includes total and partial losses
  • Sue and Labor Act to avoid/minimize loss

26
Cargo Insurance
  • Provides coverage for cargo in transit (with
    incidental storage)
  • Ocean Cargo Insurance/Certificates are an
    integral part of international trade
  • Who requires marine cargo insurance?
  • Anyone engaged in the movement of goods
  • Buyers, sellers, importers, exporters,
    manufacturers, and banks
  • The Terms of Sale impact who purchases insurance

27
Cargo Insurance
  • Principal areas of coverage
  • Perils of the Sea
  • Most important coverage of marine insurance
    policies
  • A broad term covering specific types of losses,
    including Stranding Sinking Grounding
    Collisions with other vessels Heavy Weather Ice
  • Assailing Thieves
  • Barratry
  • Jettison
  • Defined as the intentional throwing overboard of
    the ships cargo, material, or stores in time of
    peril, for the common safety of the ship and her
    cargo
  • Fire, lightning and earthquake
  • All Other Like Perils

28
Cargo Insurance
  • All Risks
  • Shipments of goods insured sufficiently packed to
    withstand the voyage covered by the policy are
    insured against all risks of physical loss or
    damage from any external cause.
  • Paramount Warranties/Paramount Exclusions
  • Free of Capture and Seizure (FCS) (War Perils)
  • Strikes, Riots, and Civil Commotion (SRCC)
  • Radioactive Contamination Exclusion (RACE)
  • Chemical, Biological, Biochemical, and Electronic
    Exclusion (CBE)
  • Delay and Inherent Vice

29
Cargo Insurance
  • War Risks Perils coverage provided by separate
    policy.
  • Coverage is only while water borne or airborne
    (no coverage for inland transit legs of the
    voyage)
  • 48-hour cancellation provisions
  • On Application rates may apply (e.g., shipments
    to Iraq or Afghanistan)
  • SRCC Coverage provided by endorsement to the
    marine cargo policy.
  • 48-hour cancellation provisions
  • TRIA Terrorism coverage at the assureds
    direction is (i) included for an additional
    premium, or (ii) excluded

30
Cargo Insurance
  • Unique Coverage Features
  • Warehouse-to-Warehouse Coverage
  • 1 insurer for all 3 legs of transit
  • General Average and Salvage Charges (GA)
  • Seaworthiness (Airworthiness)
  • Vessel being in sound condition and well
    maintained
  • Vessel being properly manned (number of and
    qualification of crew)
  • Sue and Labor
  • Assured required to take steps to prevent or
    minimize loss

31
Cargo Insurance
  • Transportation Carriers
  • Ocean vessel aircraft tug and barge truck
    rail and package parcel delivery service
  • Carriers Legal Liability
  • Cargo owner must name and waive carrier (none)
  • Standard Release Bill of Lading/Air Waybill
    (normal legal liability)
  • Declared Value Bill of Lading/Air Waybill (legal
    liability is at an agreed higher amount)
  • Insured Bill of Lading/Air Waybill (all risks)

32
Cargo Insurance
  • Carriers Legal Liability Defenses and
    Exemptions for loss or damage due to
  • Acts of God
  • Acts of government
  • Riots and labor disturbances
  • Improper or insufficient packing or stowage
  • Inherent vice of the cargo

33
Charterers Legal Liability
  • Cargo owner charters a vessel. Under the Charter
    Party Agreement, the Cargo Owner is responsible
    for
  • Safe berth at the designated
  • Port(s) of loading
  • Port(s) of offloading
  • Loss or damage to cargo carried by the vessel
  • Cargo owner is required to have his cargo
    underwriters waive rights of subrogation in favor
    of the vessel owner

34
Hull Insurance
  • Basic coverage includes
  • Named perils physical damage to the vessels hull
    and her machinery
  • General Average and Salvage Charges
  • Collision Liability
  • Sue and Labor
  • Warranty of Seaworthiness
  • Amount Insured is Agreed Value
  • Coverage applies to Named/Scheduled Vessel or
    Vessels

35
Protection Indemnity Insurance (PI)
  • PI Insurance Policies
  • Cover claims for damage or compensation for a
    large number of categories of loss, including
  • Injury to or loss of life of crew members
  • Removal of wreck of the named vessel
  • Damage to fixed or floating objects or property
    (other than vessels)
  • Liability for loss or damage to cargo

36
Considerations in the Underwriting of Marine
Insurance
  • General Considerations
  • Years in business
  • Loss record
  • Loss control
  • Geographic limits
  • Contract review
  • Considerations for Cargo Insurance
  • Considerations for Hull and PI Insurance

37
The Law of Marine Insurance
38
Key Legal Issues in Marine Insurance
  • Choice of Forum
  • Choice of Law
  • Insurable Interest
  • The Doctrine of Uberrima Fides

39
Admiralty Jurisdiction and Choice of Forum
  • Admiralty Jurisdiction
  • Article III, Section 2 of the Constitution gives
    federal courts jurisdiction over all cases of
    admiralty and maritime jurisdiction
  • 28 U.S.C. 1333
  • Marine insurance contracts are within federal
    courts admiralty jurisdiction
  • Saving to suitors clause in 1333

40
Admiralty Jurisdiction and Choice of Forum
  • Choice-of-Forum
  • Federal Court Admiralty Jurisdiction
  • State Court
  • Federal Court Another Jurisdictional Ground
    (diversity, etc.)

41
Choice of Forum Issues to Consider
  • Right to a Jury Trial
  • Generally, no right to jury trial in admiralty.
    See, e.g., Concordia Co. v. Panek, 115 F.3d 67
    (1st Cir. 1997)
  • F.R.C.P. 9(h)(1) designation no jury trial
  • Be aware of removal issues and potential to lose
    right to a jury trial
  • Choice of forum can affect the choice-of-law
    analysis

42
Choice of Law
  • Choice-of-Law Problems Arising in Marine
    Insurance Disputes
  • Marine insurance law not codified
  • U.S. courts used to borrow from English law to
    fill gaps in federal maritime law related to
    marine insurance
  • Wilburn Boat Co. v. Firemans Fund Ins. Co., 348
    U.S. 310 (1955) U.S. courts began looking to
    state law in the absence of a controlling federal
    maritime law precedent
  • Since 1955, Marine insurance governed by both
    federal maritime law and state law

43
Choice of Law Aftermath of Wilburn Boat
  • Wilburn Boat is a highly criticized case and the
    choice-of-law analysis has since been layered and
    complex
  • There are two layers to the choice-of-law
    analysis
  • Vertical Choice-of-Law Analysis
  • Maritime vs. State Law
  • Horizontal Choice-of-Law Analysis
  • If state law applies, which state law governs?

44
Choice of Law Aftermath of Wilburn Boat
  • Courts interpret Wilburn Boat differently
  • Fifth Circuit is pro-state law
  • To apply, the federal maritime rule must be
    entrenched federal precedent
  • Notwithstanding entrenched federal precedent,
    courts may apply state law if state has
    substantial interest
  • Eleventh Circuit seems to favor application of
    federal maritime law
  • If a maritime rule is well-established or
    entrenched, it preempts the state law rule
  • Choice-of-law provisions in marine policies are
    generally enforced

45
Insurable Interest
  • An insurable interest in the subject matter
    insured must exist at time of loss, not at
    contracting
  • An Insurable Interest is defined differently,
    in some circumstances, under state law than it is
    under maritime law
  • This is often true with respect to cases
    involving the sale of goods
  • Whether a loss is covered can turn on this
    definition

46
Insurable Interest
  • Defining Insurable Interest
  • English Marine Insurance Act of 1906
  • Very broad definition, including legal and
    equitable relationships to property
  • Federal Maritime Law Hooper v. Robinson, 98
    U.S. 528 (1878)
  • In the law of marine insurance, insurable
    interests are multiform and very numerous.
  • Injury from the loss of something or benefit from
    its preservation is sufficient to create an
    insurable interest
  • Uniform Commercial Code
  • Requires title or a security interest

47
Insurable Interest
  • ABB Power TD Co. v. Gothar Versicherungsbank
    VVAG, 939 F. Supp. 1568 (S.D. Fla. 1996)
  • Court held that an insurable interest under
    federal admiralty law means any pecuniary
    interest
  • Court held that insurable interest is an
    entrenched principle that preempts state law
  • ABB Power is the only post-Wilburn Boat case
    confirming this entrenched principle of
    maritime law

48
Misrepresentations, Nondisclosure, and Uberrima
Fides
  • Marine insurance is a contract uberrima fides
    requiring the utmost good faith by both parties
  • In practice, operates against the insured alone
  • The insured is bound to disclose every fact
    within his knowledge that is material to the risk
  • This is true even if the insurer does not inquire
  • Failure to disclose can void the policy ab initio
    or even after the risk has attached
  • Doctrine operates regardless of insureds intent

49
Misrepresentations, Nondisclosure, and Uberrima
Fides
  • This policy is not only harsh, it is broad
    because of the definition of materiality
  • Fact considered material if the existence of
    the fact would affect the decision of a prudent
    insurer to underwrite the risk or even charge a
    different premium
  • Traditional rule undeniably harsh, but insurers
    arguments in favor of rule have less force in
    todays world

50
Misrepresentations, Nondisclosure, and Uberrima
Fides
  • Policyholders have had some success and American
    courts have circumvented strict application of
    the doctrine in various ways
  • Certain facts were not material
  • Steelmet, Inc. v. Cariber Towing Corp., 842 F.2d
    1237 (11th Cir. 1988)
  • Nondisclosure did not void coverage because it
    related to a matter of common or public knowledge
  • Anne Quinn Corp. v. Am. Mfrs. Mut. Ins. Co., 369
    F. Supp. 1312 (S.D.N.Y. 1973)
  • Courts have split on whether the doctrine is an
    entrenched federal precedent

51
Take Away Points
  • Risk Managers should focus on the particular law
    applicable to a marine insurance policy, which
    may affect
  • Forum for dispute and availability of a jury
    trial
  • Insurable Interest Issues
  • Duties of Disclosure
  • These considerations can be outcome-determinative
    in a coverage dispute
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