CAIB 3 - Chapter 4 - New Slides

Ocean Marine and Aviation Insurance

• Ocean Marine Insurance is a very old form of insurance, dating back to 3000 BC
• It covers various hazards faced by commerce
• Hull and liability insurance are crucial for ship owners, while this chapter focuses on cargo insurance
• Global trade heavily relies on the import and export of essential goods like food, raw materials, and machinery.
• Canada, being a major exporter, conducts a significant portion of its trade through ocean-going vessels

Ocean Marine Cargo Insurance

• Commercial property insurance typically excludes coverage for waterborne property
• Separate policies are required for cargo transported over water, encompassing air, land, rail, and inland waterway transport in addition to ocean voyages.
• It is vital for businesses that transport goods globally.

Determining Insurable Interest in Marine Cargo Insurance

• Insurable interest is essential for parties seeking cargo insurance
• Sellers, buyers, carriers, and financial institutions can possess an insurable interest
• Terms of sale and bills of lading are crucial documents for assessing insurable interest

Understanding Terms of Sale and INCOTERMS

• Terms of sale define the ownership and insurable interest in cargo
• INCOTERMS clarify the obligations of buyers and sellers
• Obligations end when the seller's responsibilities are complete, and transfer to the buyer
• Responsibility for future losses, carriage, and insurance is specified

Key Considerations in INCOTERMS

• Key question: the moment ownership transfers from seller to buyer during a journey.
• INCOTERMS specify point of transfer, post-delivery responsibilities, allocation of carriage, and insurance duties by each party.

Insurable Interest and Payment Methods in Marine Cargo Insurance

• Payment methods impact which parties have an insurable interest in shipped goods
• Insurable interest often involves financial institutions (in financing transactions), sellers (particularly in credit transactions), and occasionally buyers
• Key payment methods for international commerce include Cash in Advance, Open Account, Draft, and Letter of Credit

Payment Methods and Insurable Interest

• Cash in Advance: Buyer pays before shipment; seller's interest ends upon payment
• Open Account: Regular settlements; seller retains interest until final payment
• Other payment methods are discussed (Draft and Letter of Credit).

Draft and Letter of Credit in Marine Cargo Insurance

• Draft payment allows immediate or future payment
• Seller retains insurable interest until settlement
• Letter of Credit is the most common method in international trade; seller's interest persists until the buyer's bank honours the payment

Understanding Bills of Lading in Marine Cargo Insurance

• Bills of lading serve as a contract of carriage between the ship owner and shipper
• They act as a receipt for received goods, and establish ownership

Bills of Lading: Contract of Carriage

• Contract of Carriage specifies legal agreement, eliminates separate transport contracts,defines liability and obligations
• Specifies routes, parties responsible for freight costs, and delivery instructions

Types of Bills of Lading: Delivery Instructions

• Straight Bill of Lading: Goods delivered to a specific consignee
• Order Bill of Lading: Permits delivery to others on behalf of the named recipient

Types of Bills of Lading: Valuation and Special Conditions

• Released Bill of Lading: No declared value, limited carrier liability (international agreements often set a limit around $500 per package)
• Valued Bill of Lading: Declared value by shipper, defining carrier liability for that amount
• Special Conditions include on-deck and optional stowage bills of lading

Bills of Lading as a Receipt for Goods

• Received for Shipment Bill of Lading (Dock Receipt): Confirms goods reception for shipment.
• Clean Bill of Lading: Declares no visible issues with the goods; crucial for perishable products.
• Count Bill of Lading: Records actual quantity of goods shipped.
• On Board Bill of Lading: Confirms shipment loading onto the vessel

Bills of Lading as Document of Title & Carrier Liability Limits

• Document of Title: Shows consignee's right to receive goods
• Title transfer is documented by the bill of lading or other receipts
• Carrier's liability limitations are detailed for losses due to fire (except if caused by carrier), perils of the sea, acts of God, war, strikes, riots, or civil commotions.

Types of Cargo Insurance Policies

• Individual Policy (Certificate): For single or infrequent shipments, confirming specified coverage
• Open Policy: General contract for frequent high-volume shipments tailored for ongoing shipper/consignee needs

Characteristics of Open Cargo Policies

• No Fixed Sum Insured: Limits per conveyance/location; separate limits for on-deck and under-deck shipments
• Global Coverage: Automatically covers worldwide goods within specified limits
• Reporting Flexibility: Allows monthly or interval-based reporting, and unintentional reporting does not invalidate coverage

Open Policy Terms and Premium Structure

• No Expiry Date: Policies often issued with no explicit expiry dates; some may be written based on set durations (e.g., a yearly term)
• Pre-Established Premium Rates: Premiums vary according to cargo types; paid per shipment.

Determining the Insured Value of Cargo

• Agreed Value Coverage: Cargo policies cover the agreed value of goods, which may differ from actual market value
• Historical Context: Marine insurance laws permit pre-determined values. Exact valuation is sometimes impractical; agreed values avoid disputes.

Challenges in Determining Cargo Value for Insurance

• Valuation Complexity: Accurate cargo valuation is often complex and challenging; total shipping expenses, duties, and other factors can be hard to determine in advance
• Impact of Time on Value: Extended transit times can either increase or decrease value. Examples include Christmas trees losing value if delivered after the holiday season, or agricultural goods that increase in value during transit based on changes in market prices.

The Valuation Clause in Cargo Insurance Policies

• Purpose of the Valuation Clause: Provides a standardized way of valuing shipments in open policies to prevent each case having to be independently assessed.
• Typical Valuation Formula: The formula typical uses "Invoice value + related charges + prepaid/guaranteed freight + 10%"
• Benefits: Ensures consistency in cargo valuation; reduces disagreements when losses occur

Components of Insured Cargo Value in Open Policies

• Cargo Value: Basic invoice cost forming the insured value basis
• Shipping Costs (Freight): Costs of moving cargo from one port to another; added to final value for resale purposes.
• Additional Expenses: Packing, inland transport, premiums, and fees are part of these expenses.
• Duties and Taxes: Taxes collected at the entry point; represent losses if damage renders goods unusable.

The Ten Percent Allowance and its Significance

• Purpose of the 10% Add-on: Covers natural value increases during transit. It is a buffer against possible profit loss.
• Situational Adjustments: The 10% may be increased depending on good types and/or expected destination value

Section 2. Aviation Insurance

• Similar framework to marine insurance
• Covers airplane (hull), operational liabilities, and transported cargo

Coverage Components for Aviation Insurance

• Aircraft Hull Insurance: Protects the physical worth of the aircraft.
• Liability Insurance: Covers third-party damage or injuries related to aircraft operation.
• Cargo Insurance: Insures goods transported by the aircraft.

Aircraft (Hull) Insurance Categories and Coverage Types

• Private Aircraft: Not for hire or reward;
• Commercial Aircraft: Excludes instruction/rental;
• Commercial with Instruction/Rental; Includes training and rental activities.
• Coverage Options:
• Hull Coverage "A": All Risks covers damage while in motion, on the ground, or in flight
• Hull Coverage "B": Ground and Taxiing covers damage while on the ground or taxiing
• Hull Coverage "C": Ground Risks Only covers damage only when stationary on the ground.

Deductibles for Aircraft (Hull) Insurance Coverage

• In Motion Deductible: Applies when the aircraft is in flight or moving under its own power.
• Moored Deductible: Applies to float/amphibious aircraft, or ski-equipped aircraft on ice or snow.
• Not in Motion Deductible: Applies to aircraft stationary on the ground

Endorsements for Aircraft Hull Insurance Coverage

• Lay-up Endorsement: Refund of premium if aircraft is unused; subject to periods.
• Detached Undercarriage Endorsement: Covers ground risks associated with detached wheels, skis, or floats. Premium determined by standard configurations.

Aviation Liability Insurance; Key Requirements and Coverage Types

• Liability Requirement: Negligence doctrine governing aircraft owner/operators' liability, requiring proof of financial responsibility.
• Public Liability/Property Damage: Coverage limits tied to maximum take-off weight; examples and specific limits are provided
• Passenger Liability: Applies to aircraft above a certain weight, with minimum per-passenger seat coverage amounts.

Liability Coverage "F": Third-Party Bodily Injury and Property Damage

• Covers bodily/property damage to third parties (non-passengers)
• Includes damage to leased or occupied hangars ($10,000 limit; $1,000 deductible).
• Emergency Services Extension: Up to $25,000 per occurrence including, runway foaming, fire, crash rescue or search

Liability Coverage "G": Passenger Bodily Injury

• Covers passenger injuries and personal baggage damage (up to $1,500 per passenger with a $50 deductible)
• Provides coverage for emergency medical first aid
• Covers defense costs for liability claims related to passenger injury

Exclusions in Aviation Insurance Policies

• War, Seizure, or Hijacking: Losses from war, hijacking, or government seizure are typically excluded, but exceptions potentially exist for Canadian governmental needs.
• Unapproved Pilot: No coverage if the aircraft is piloted by someone without proper licensing, instrument, and night flying ratings. Specific exceptions exist for pilot training and approved pilot-related situations.

Terms and Conditions for Aircraft Insurance Policies

• Territory Restrictions: Coverage applies only within specific geographical regions (Canada, Continental US, excluding Alaska, St. Pierre and Miquelon, Mexico, Bahamas).
• Cancellation Terms: Insurers typically require ten-day notice before cancellation; pro rata premium refunds are provided except if a loss exceeds the premium

Underwriting Aviation Risk

• Authority Limitations: Brokers can usually not bind aviation insurance without insurer approval
• Pilot's Record and Report: Essential for underwriting, detailing pilot experience and including license type, hours, endorsements and accident history
• Rate Determination: No standard rates are typically used; underwriting decisions are based on the underwriter's experience & judgment and on comparative market prices

Air Cargo Insurance: Liability, Valuation, and Coverage

• Carrier Liability Limits: Air carrier's liability for cargo is capped by law. Amounts are generally standardized with $27 per kilogram being a common example of limits
• Valuation: Policies typically value cargo as invoice price, freight, charges, and an additional 10%
• Coverage: All-risk coverage similar to marine policies; coverage endures for roughly 30 days after final unloading.

Air Cargo Insurance: Exclusions and Rating

• Exclusions: Typical exclusions include war or strikes; additional coverage may be purchased, but at separate costs.
• Rating: Premiums are not standardized; determined by underwriter experience and competitive marketplace forces

Associated Aircraft Exposures: Airport, Employer, Products, and Hangarkeeper Liability

• Premises, Property, or Operations Liability (Airport Liability): Covers airport operator or tenant liability, excluding activities like refueling, air shows and air meets
• Employer Liability: Needed in provinces where aviation is not covered under Workers' Compensation Act, typically limited to in-flight risks; additional coverage for ground risks can be added through separate endorsements.
• Products Liability: Liability for selling aviation products or services; this often covers refueling, repairs, or aircraft overhaul.
• Hangarkeeper's Liability: Covers liability for damage to aircraft while in the insured's care, custody or control (in repair, storage or overhaul)
• Cargo Liability: Covers liability for loss or damage to goods in carrier's care (during transport or storage).
• Non-Owned Liability: Covers liability for businesses whose employees operate non-owned aircraft, suitable for individuals or companies renting or borrowing aircraft.
• Contingent Liability: Covers businesses chartering, renting or borrowing aircraft that may be excluded when operated by the insured or their employees.

Total and Partial Losses

• Importance of Total vs. Partial Losses: Marine policy definitions clarify total or partial losses
• Types of Total Losses: Actual Total Loss = complete vessel or goods loss; Constructive Total Loss = salvage costs exceeding cargo value
• Total Loss of a Part = loss of a part even if other parts are intact..
• Partial Losses (Average) = defined in marine insurance
• Particular Average = loss to a specific shipment; covered by insurance.
• General Average = losses incurred voluntarily for the safety of the whole venture; costs are shared.

Policy Coverages for Cargo Losses

• Total Losses Only = complete loss coverage; partial losses excluded; typically under Institute Cargo Clause (C).
• Total Losses with Franchise for Partial Losses = coverage for total losses and partial losses exceeding percentage (franchise); franchise amount(e.g.,3-5% of insured value)
• All Partial Losses = coverage for any partial loss regardless of amount; under Institute Cargo Clause (A)

Right of Subrogation in Marine Cargo Insurance

• Subrogation Clause: Insured needs to protect insurer's right to recover from responsible third parties, applicable after insurer pays claim.
• Duty to Preserve Rights: Insured protects rights, helps recover payments from liable parties, e.g, carriers and bailees

Underwriting Cargo Insurance: Adapting to Changing Conditions

• Dynamic Risk Environment: Ocean marine underwriters adjust rates and coverage based on worldwide trade statistics, weather, and human circumstances. Underwriters rely heavily on experience in making these decisions
• Key Underwriting Factors: Carrier information (ship fleet details, seaworthiness), and Shipper Experience (handling history, similar cargo) are important
• Route and Weather: Specific routes and seasonal weather significantly impact risk assessment.
• Port Conditions: Conditions and stability (or lack of it) in ports and harbors influence underwriting decisions
• Cargo Type and Special Risks: Different cargoes pose varying risk levels (e.g., perishables, fragile items); special treatment is given to hazardous substances
• Perils, Deductibles, and Policy Conditions: Tailored peril coverage (based on routes & cargo type) influences policy structure
• Anti-Theft Practices: Utilizing coded markings and consolidated load units help protect cargo.

Test your knowledge on marine cargo insurance with this quiz. Explore topics such as underinsurance, payout calculations, and different types of Institute Cargo Clauses. Understand the key concepts and legal aspects essential for managing marine cargo risks.