Seafarers have long navigated the world’s trade routes as a livelihood. The concept of marine insurance dates back to 533 AD and the clever rulers of the Roman and Greek Empires. The refinement of Maritime insurance spanned the course of medieval Europe in the 1600s – a compelling story in itself, until reaching its more modern version in 1906 with the advent of the Marine Insurance Act. But before venturing down the rabbit hole of why insurance is key to import businesses, let’s have some fun with our imaginations.
Pirates are alive & kicking
The word piracy probably brings to mind movies about the Golden Age of Piracy of around 1650-1730 – with swashbuckling captains and pirates having it out over treasures. We’re talking portrayals of the infamous sword-fighting legend Blackbeard (don’t forget Peter Pan) to Johnny Depp’s epic Captain Jack Sparrow and countless others. However, the 2013 movie with Tom Hanks as Captain Phillips ditches Hollywood romantic fantasy. Instead, it tackles the topic of modern-day piracy and the economic disparity that forces men to take radical measures. What makes Captain Phillips even more compelling is that the movie depicts the events in 2009 surrounding the Maersk Alabama freight ship and Phillips’ courage in negotiating his crew’s safety with the captors. So, piracy remains a genuine phenomenon, and Marine insurance still covers it.
Back to basics
By definition, marine insurance is an indemnity contract ̶ a guarantee that goods dispatched from the country of origin to destination are insured. Marine insurance covers the damage or loss of ships, consignments, terminals, or other modes of transporting, purchasing, or holding goods between the origin and final destination.
The term originated when parties began shipping goods by sea. However, marine insurance relates to all transport modes of goods. For example, when shipping items by air, the insurance is called the “contract of marine cargo insurance.” Today, marine insurance is often grouped with Aviation and Transit (cargo) hazards and therefore referred to by the acronym ‘MAT.’
Typically, marine insurance agencies compete with local insurers over what they cover. As a result, local agencies are filling market gaps for unknown or hard-to-place marine insurance risks that are difficult or impossible to find. In fact, some of these agencies became market makers who work best independently of insurers who fund risks in their name.
The big little coffee shop
MAT’s history began in London in the late 1680s with the later renowned Edward Lloyd. Lloyd opened a coffee shop called Lloyd’s Coffee House on Tower Street. It quickly became a popular hangout for merchants, ship captains, and vessel owners and a place to get the latest shipping news. The Coffee House was the first marine insurance market for parties in the industry wanting to insure ships and cargo and those prepared to fund these ventures. The outcome was the famed Lloyd’s of London and other insurance and shipping companies. In 1906, the Marine Insurance Act systemized the existing common law. While its name implies marine insurance, the general principles apply to non-life insurance. During the 19th century, Lloyd’s and the London Institute of Underwriters created standardized clauses still used for marine insurance. From the Institute clauses grew reinsurance and non-marine insurance, the latter comprising most of Lloyd’s business. As mentioned, this insurance spread and developed into MAT.
Why is marine insurance essential?
Marine insurance is essential in many import and export trade procedures. For example, a forwarding agent, importer, or exporter must insure any goods in transit. By admitting to the insurance terms, insurers and importers are responsible for paying for insured goods.
What’s unique about Marine insurance? Well, of air, rail, road, and water transport modes, the latter causes transporters the most concern due to natural events and other incidents like piracy and cross-border skirmishes that can damage vessels and cargo. Without the backing of marine insurance, transporters and shipping corporations can face massive financial losses.
Also noteworthy is that transporters can select from various insurance plans depending on their ship size, planned routes, and other significant factors that affect transport. Furthermore, multiple policies cover the cargo and the vessel. Hence transporters can select and benefit from the plan that best suits their business.
However, the issues around insurance exceed pledged obligations and require many discussions between purchasing a policy and exporting cargo.
To understand why insurance is crucial, simply look at the scope of the three Institute Cargo coverage clauses (A-C with A being maximum coverage) and risks.
Clause A: Maximum coverage of all loss or damage to goods. Apart from the risks covered under Clauses B and C, it covers loss due to theft, water damage, chipping, breakage, bruising, denting, non-delivery, and all water damage.
Clause B: Added protection layer that includes all risks covered under Clause C and shipment events such as volcanic eruption, earthquake, and damage caused by seawater, river water, rainwater, and such. It also covers the loss of items overboard or when loading and unloading.
Clause C: Basic, restricted shipment coverage, including damage from fire, cargo discharge during explosion, distress, and accidents like capsizing, sinking, collision, or derailment.
Risks: The above clauses do not cover riots, wars, strikes, and civil upheavals. However, insurers may cover these risks upon payment of premium marine insurance.
To obtain marine insurance and prevent insurance claims, pack goods with the following in mind:
- Safety during loading and unloading.
- Surviving natural hazards.
- Theft or clumsy handling.
Without coverage for the above incidents and risks – including a modern-day pirate hijacking a ship and stealing your treasures- you might be unable to protect your bank’s or buyer’s interests or honor your contractual export commitments. These commitments include Cost Insurance and Freight (CIF) or Carriage and Insurance Paid to (CIP) incoterms. Similarly, regarding terms of Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP), you are not required to insure your goods, but most do. And the beauty of insurance is that it helps nurture straightforwardness and dedication between insurers, transport companies, and those receiving the duties!