The cargo (marine) insurance works on the principles of insurable interest, utmost good faith, and indemnity.

Insurable Interest

 

When the goods are lost or damaged and the owner of the goods (i.e., the title holder in the goods) suffers a loss, fails to realize an expected profit, or incurs liability from the loss or damage, the owner (the title holder) is deemed to have an insurable interest in the goods.

When the exporter delivers the goods, the insurable interest in such goods transfers at the point and time where the risk shifts from the exporter to the importer, as determined by the international commercial terms used. For example, the point and time where the risk shifts in:

 

• CIF
  (Cost, Insurance and Freight to the named port of destination) ---
  the point the risk shifts is on board the ship at the named port of loading, as such the insurable interest transfers from the exporter to the importer at the time the goods pass over the ship's rail.
  
   
• CIP
  (Carriage and Insurance Paid To the named place of destination) ---
  the point the risk shifts is at the depot in the country of shipment, as such the insurable interest transfers from the exporter to the importer at the time the goods are loaded on truck or container, rail car, or airplane (or goods placed in the custody of an air carrier) at the named point of departure.

 

The time the insurable interest transfers from the exporter to the importer is, technically, the time the exporter endorses the specific policy or the insurance certificate to the importer, as the case may be.

The insurance certificate bears the open policy number of the exporter and, like in a specific policy, the claim agent at port of destination and that claim payable at destination are also indicated.

The importer relies on the specific policy or the insurance certificate and the supporting claims documents as proof that the goods have been insured and that he/she has the insurable interest in the goods when filing for insurance claims against loss or damage.

In the trade terms DDU and DDP, the exporter is responsible for the risks up to the delivery of goods to the final point at destination (the project site or importer's premises usually), as such the insurable interest in the goods does not transfer from the exporter to the importer in the shipment.

Some countries may require that the import and/or export shipments be insured with their national insurance companies.
 

Utmost Good Faith

 

The principle of utmost good faith is indispensable in any insurance contract. Under the open policy the insurer usually knows only of the shipments made by the exporter after the receipt of the insurance declaration form and/or the copy of the insurance certificates. Under such circumstances, a consignment may have reached the importer in:


 

• good condition, that is, without sustaining any loss or damage, before the insurer knows of such consignment. If the exporter knows that the consignment has safely reached the importer and deliberately does not declare such consignment in the insurance declaration form in order to avoid paying the insurance premium, such action is a breach of good faith. Consequently, the insurer may cancel the insurance policy issued to the exporter when the exporter's bad faith is known.
  
   
• bad condition, that is, sustaining loss or damage, before the insurer knows of such consignment. Whether or not the exporter knows that the consignment has not safely reached the importer and fails to declare such consignment in the insurance declaration form, the insurer is liable to pay for the loss or damage out of good faith.

 

Indemnity

 

Cargo insurance is a contract of indemnity, that is, to compensate for the loss or damage in terms of the value of the insured goods. The amount insured as agreed between the insurer and the assured forms the basis of indemnity.

In U.S.A. and some other areas, the Institute Clauses of the American Institute of Marine Underwriters, often referred to as the American Institute Clauses or American Clauses, are used. The American Clauses and the London Clauses can be different from one another.

The most common Institute Clauses include the Institute Cargo Clauses, Institute War Clauses, Institute Strike Clauses, and Institute Air Cargo Clauses.

Institute Cargo Clauses

 

The Institute Cargo Clauses specifically excludes the risks of war (in the F.C.&S. Clause---Free of Capture and Seizure Clause) and the risks of strikes, riots and civil commotions (in the F.S.R.&C.C. Clause---Free of Strikes, Riots and Civil Commotions Clause). The risks of delay in delivery and inherent vice are not included in the Clauses.

 

Institute War Clauses (Cargo)

 

The Institute War Clauses (Cargo) specifically exclude the loss, damage or expense arising from any hostile use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter. The Clauses cover:


 

• the risks excluded in the Institute Cargo Clauses by the F.C.&S. Clause;
  
   
• the loss of or damage to the interest insured caused by: hostilities, warlike operations, civil war, revolution, rebellion, insurrection or civil strife arising therefrom; mines, torpedoes, bombs or other engines of war;
  
   
• the general average and salvage charges incurred for the purpose of avoiding, or in connection with the avoidance of, loss by a peril insured against by these clauses.

Under the War Clauses, the insurance takes effect only as the interest insured are loaded on an overseas vessel and terminates either as the interest are discharged from the overseas vessel at final port or place of discharge, or on expiry of 15 days counting from midnight of the day of arrival of the vessel at the final port or place of discharge, whichever shall first occur. In other words the goods are covered only while they are on a vessel.

In the case of transhipment, the overseas vessel arrives at an intermediate port or place to discharge the interest for on-carriage by another overseas vessel, the insurance terminates on expiry of 15 days counting from midnight of the day of arrival of the vessel at the intermediate port or place, but reattaches as the interest are loaded on the on-carrying overseas vessel. During the period of 15 days such insurance remains in force after discharge at such intermediate port or place of discharge.
 

Institute Strike Clauses (Cargo)

 

The Institute Strikes, Riots and Civil Commotions Clauses is commonly referred to as the Institute Strike Clauses.

The insurance covers the loss of or damage to the property insured caused by strikers, locked-out workmen, or persons taking part in labor disturbances, riots or civil commotions, and persons acting maliciously. However, it does not cover the loss or damage proximately caused by delay, inherent vice or nature of the property insured and the loss or damage caused by hostilities, warlike operations, civil war, revolution, rebel-lion, insurrection or civil strife arising therefrom.

 

Institute Air Cargo Clauses (All Risks)

 

The Institute Air Cargo Clauses (All Risks) are used specifically in air freight. The terms and conditions of cover closely follow the Institute Cargo Clauses (All Risks) revised to suit air shipments. The Clauses exclude sendings by Post (i.e., postal shipments not covered).

• Other Institute Clauses
• Standard Cargo Insurance---Basic Types of Policy