Commercial Marine Insurance 101: How the Oldest Insurance Works Today
Marine coverage is one of the oldest and most complex types of insurance.
Commercial marine insurance is a complex topic that involves a wide range of coverages. A commercial marine operation will need protection for a variety of interests, including ocean marine cargo, ocean marine hull, and marine liability policies.
Although it has a bit of a dull name, commercial marine insurance is probably the most interesting type of insurance on the market today. In fact, it's worth going over a bit of history before we get into the basics because it was the genesis for the system of insurance we use today.
A Quick History of (Marine) Insurance
If I were to ask you when insurance as we know it was invented, you would probably picture some bankers coming up with it a couple of centuries ago. If you were going to throw out a ballpark figure, you might guess the year was 1750.
Well, you'd be close, but you'd have the wrong 1750: insurance was invented in 1750 BCE. And maritime travel was at the center of it.
In the early years of human civilization, ocean voyage was one of the riskiest activities. Without modern ship building techniques, navigational equipment, or security, merchant ships laden with expensive goods from exotic parts of the world were regularly lost at sea or overtaken by pirates. This extreme volatility was just crying out for some system that would impart stability to commercial enterprises.
And so, in 1750 BCE, the Babylonians developed a widely copied system of insurance, codified in the Code of Hammurabi. Under the Babylonian system, a merchant who borrowed money to fund a shipment of goods could pay the lender an additional sum (a premium, if you will) to guarantee that the lender would forgive the loan if the shipment was lost. In essence, the merchant would be indemnified if the ship sank or ran afoul of brigands on the high seas.
By the 4th century BCE, this cargo insurance became more refined. Rates for the loans began to take into account various factors like the time of year, weather risks, the estimated likelihood of encountering pirates, and so on. This principle of pricing insurance policies according to risk factors persists today.
It wasn't until the 14th century, in Genoa, that insurance policies began being issued as separate contracts rather than as stipulations in loan documents. And yes, this development came about to protect against marine risks, too.
Commercial Marine Insurance Policies
Marine insurance is at the center of the major historical developments in insurance. But what does it look like today, and what do commercial marine operators need to know about these policies?
Let's go over the three main types of marine insurance coverage to get a sense of what's involved in insuring a commercial operation.
Ocean Marine Cargo Insurance
Ocean marine cargo insurance insures cargo while undergoing an ocean voyage and is purchased by buyers of goods. However, it also includes coverage during incidental transport as well, including land, rail, and even air transport in connection with ocean transport.
One question that adds a layer of complexity to marine cargo insurance is who has an insurable interest in the goods. This issue is handled by examining the Terms of Sale.
The Terms of Sale are commonly referred to in the trade as INCOTERMs. These terms define who is responsible for conveyance, who is responsible for insurance, and at which point in the transit the seller has fulfilled their obligation.
In general, there are 3 INCOTERMs:
- Ex Works: this means the buyer is responsible for everything. The buyer of the goods pays the invoice costs and arranges insurance and transportation. The seller is only responsible for selling the goods at the stated invoice cost.
- Free on Board: this means the buyer is responsible for insuring the goods once they are aboard the ship. The seller, on the other hand, is responsible for insurance during carriage, loading, and so on, until the goods are on board.
- Cost Insurance Freight: this is the total opposite of Ex Works. With these terms, the seller is responsible for everything, and the buyer has no responsibility to insure the cargo.
The seller will also have some financial interest until the goods are fully paid for. And of course, if the buyer has taken out a loan, the financial institution would have financial interest as well.
To determine how much your insurance company is liable for, you must refer to the Bills of Lading. There are three that refer to values:
- Released Bill of Lading: this means there is no specific value to the goods (perhaps because the goods are pretty much worthless or because they are so valuable that it will be insured elsewhere).
- Valued Bill of Lading: this means the shipper declares the value of the goods to the carrier and that is the amount the carrier is liable for.
- Standard Bill of Lading: this means the carrier's liability is equal to the tariff for that class of goods.
There are also some exclusions to be aware of:
- Unseaworthiness Clause: excludes losses due to an unfit vessel of container.
- Strike Clause: excludes losses due to strike, civil commotion, or acts of terrorism. Unlike other forms of insurance, you can buy an endorsement to cover these perils.
- War Clause: excludes losses due to war, but again, you can endorse this.
Ocean Marine Hull Insurance
Ocean marine hull insurance is the policy you would buy to insure the ownership or operation of one of those big container ships.
There's not much to say here. It's not because this coverage is incredibly simple. In fact, it's quite the opposite: coverage for these highly special risks are tailored for each individual client.
Coverage types can range from total loss only to all risks.
Marine Liability Insurance
There are a few different subcategories here, but the general idea is that marine liability coverage insures third party liability for things like:
- Death or injury
- Removal of wreck
- Damage to fixed objects
- Pollution arising out of the ownership or operation of a marine hull while at sea or in related operation
Under this broad umbrella, there is also:
- Ship Repairer's Liability: insures a ship repair firm's liability to the ship owner caused during repairs to vessels in their care or custody.
- Stevedore's Legal Liability: insures damage to the ship and cargo during land-based loading and unloading operations.
- Charterer's Legal Liability: covers the risks a vessel charterer assumes. This is significant in many commercial enterprises because the one who operates the vessel during a marine voyage is rarely the person who owns it. Those who charter a vessel are responsible for returning it to the owner in the same condition it was in when they received it.
- Marine Umbrella Insurance: provides excess liability coverage and works the same way a traditional umbrella policy does (learn more in Umbrella Insurance for Businesses).
With marine insurance being one of the oldest in the world, there are many complexities and nuances not covered here. But the fundamentals covered here have given you a good basis for learning more and understanding the coverage your company needs to purchase.