Cargo Transport Insurance.doc

Cargo Transport InsuranceÜ the concept of cargo transport insuranceÜ risks and losses in marine cargo transportÜ the basic risks coverage and additional risks coverage Ü the notion of overland, air and postal transport insuranceÜ the insurance practice in international trade Human beings are subject to various unpredictable risks risk of death or disability due to natural or accidental causes, risk of loss of or damage to ones property, etc. Risk has the element of unpredictability, but losses can be mitigated through insurance. Insurance is a contract made by a company or society, or by the state, to provide a guarantee of compensation for loss, damage, sickness, death, etc. in return for regular payment. The regular payment here refers to insurance premium, which is the money the insured pays to the insurer for taking out an insurance policy. An insurance policy is the document issued by the insurer to the insured after premium is paid. It sets out the exact terms in an insurance transaction such as the insurance coverage, the insured amount, the premium rate, and the insurance duration. The insurance policy is the key document for the insured to lodge a claim in the event of misfortune or loss. If all the required documents are found in order and the cause of the loss an insured risk, the insurer pays indemnity, which is expressed as the insured value.There are many types of insurance products available for life and non-life property insurance, life insurance, liability insurance, bond insurance, to name just a few. Cargo insurance belongs to property insurance.Cargo insurance covers physical damage to or loss of your goods whilst in transit by land, sea and air and offers considerable opportunities and cost advantages if managed properly. It brings the potential loss of or damage to goods into cost and the insurer, on the basis of a premium received, undertakes to indemnify the insured against loss from certain risks or perils to which the cargo insured may be exposed. Cargo insurance has become a must in international trade. Without it, international trade can not be guaranteed.There are three main principles of insurance, two subsidiary principles and a doctrine: A basic understanding of the underlying principles of cargo insurance will facilitate the process of claims. 7.1.1 Insurable Interest A contract of insurance effected without insurable interest is null. It means that the insured must have an actual pecuniary interest and not a mere anxiety or sentimental interest in the subject matter of the insurance. The insured must be so situated with regard to the thing insured that he would have benefit by its existence and loss from its destruction. The owner of a ship runs a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and profit. So, all these parties have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes it from a mere watering agreement. 7.1.2. Utmost Good FaithSince risks are shifted from one party to another through insurance, it is crucial that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge (a) whether he should accept the risk and (b) what premium he should charge. If that were so, the insured might be tempted to bring about the event insured against in order to get money. 7.1.3 IndemnityA contract of insurance contained in a fire, marine, burglary or any other policy is a contract of indemnity. This means that the insured, in the event of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if his loss had not taken place at all. It would be against public policy to allow the insured to make a profit out of his loss or damage.7.1.4 Two Subsidiary PrinciplesUnder the indemnity principle, there are two sub-principles: (1) Contribution According to this sub-principle, a person has no right to insure twice for the same risk, and claim compensation from both insurers. But when two policies cover the same event, the insurance companies contribute pro rata to the loss, and the insured is only restored to the indemnity position. This is unlikely to happen very frequently in cargo insurance, though. (2) Subrogation This sub-principle is quite important in cargo insurance. It places the insurer in the shoes of the insured and entitles the insurer to all rights and remedies which the insured may have against any third parties. For example, Company A has insured its cargo with Insurance Company B. But the cargo is damaged through a third partys negligence, say, the carrier. Company A will claim against Insurance Company B, who will pay up for the loss suffered. However, because the damage was owing to the negligence of a third party, a legal action by Company A against the third party would almost certainly lead to an award of damages against the third party. In this way, Company A would get two compensations, and this would be a breach of the principle of indemnity. In order to prevent this from happening, Insurance Company B is substituted for Company A, the insured, in any legal action against the third party. The insurance company is entitled to the advantage of every right of the insured which diminish the loss they have been forced to bear, whether it be a contractual right, an action in tort for negligence, a right over property or a statutory right.7.1.4 The Doctrine of Proximate Cause The proximate cause is the direct cause of the loss. When an insurance policy covers a certain risk a claim becomes payable only if that risk occurred as the proximate (closest) cause of the loss suffered. Sometimes it is hard to decide the true cause when there is more than one cause. Careful consideration about that is needed. Where there are several causes which are covered within the insurance, the insurer must compensate for the loss suffered. Wherethere are several causes which are not all covered within the insurance, it would be rather complicated. If the first cause is covered, and the second cause is not, but the second cause is the inevitable outcome caused by the first cause, the first cause is regarded as the proximate cause. Thus, the insurer must make compensation for the loss suffered.7.2 Risks and Losses in Cargo Transport7.2.1 Cargo TransportGoods may be subject to all kinds of risks or losses in transit, so they must be insured against all these. The widespread ways of cargo transport are marine, land, air and postal. Among them, marine cargo transport has the greatest ascendancy, importance and influence.The insurance company is responsible for indemnifying the insured goods in accordance with the loss or damage caused by risks included in different coverage and the expenses involved. Apparently, risk, loss and coverage are interconnected; and their causal relations must be found in order to have a clear understanding of cargo transport insurance.7.2.2 Risks in Marine Cargo TransportThe cargo may encounter all kinds of perils in its traveling to another country, and which could bring about loss of one kind or another. Marine risks in connection with cargo in transit can be classified into two types: perils of the sea and extraneous risks. The former is caused by natural calamities and fortuitous accidents; the latter, by various extraneous reasons, consisting of general extraneous risks and special extraneous risks.7.2.2.1 Perils of the SeaPerils of the sea are those caused by natural calamities and fortuitous accidents.(1) Natural calamities refer to the disasters such as vile weather, thunder and lighting, tsunami, earthquake, floods, etc.(2) Fortuitous accidents refer to the accidents such as stranding, striking upon the rocks, sinking, collision, colliding with icebergs or other objects, fire, explosion, ship missing, etc.7.2.2.2 Extraneous RisksExtraneous risks are risks caused by extraneous reasons, including general extraneous risks and special extraneous risks.(1) General extraneous risks include: theft or pilferage, rain, shortage, contamination, leakage, breakage, taint of odor, dampness, heating, rusting hooking, etc.(2) Special extraneous risks include: war risks, strikes, non-delivery of cargo, refusal to receive cargo, etc.7.2.3 Losses in Marine Cargo TransportMarine losses are the damages to or losses of the insured goods incurred by perils of the sea. Losses sustained by the insured include two parts, one is the loss of the goods or the damage done to the goods, the other is the expenses the insured sustained in rescuing the goods in danger. According to the extent of damage, losses in marine insurance fall into two types: total loss and partial loss. The former may be subdivided into actual total loss and constructive total loss; the latter, general average and particular average. The losses and damages done to the goods can be divided into Total Loss and Partial Loss. 7.2.3.1 Total LossTotal loss refers to the loss of the entire shipment caused by the occurrence of the perils of the sea, fire, or some other reasons. It consists of two different losses: Actual Total Loss and Constructive Total Loss. (1) Actual Total LossThe actual total loss occurs where the insured goods have been totally lost or damaged, or found to be totally valueless on arrival.(2) Constructive Total LossConstructive total loss is found in the case where an actual total loss appears to be unavoidable or the cost to be incurred in recovering or reconditioning the goods together with the forwarding cost to the destination named in the policy would exceed their value on arrival.7.2.3.2 Partial LossPartial loss refers to the loss of part of a consignment. According to different causes, partial loss can be either general average or particular average.（1）General Average(GA)In the insurance business the term “average” simply means “loss” in most cases. It all goes back to the situation where a ship is in danger, somebodys cargo has to be abandoned and one of the shippers will suffer. To cover this situation the concept of general average was introduced. It means that whichever shipper loses all or part of his cargo, all the others will club together to recompense him for his loss. All policies the insured take out automatically cover them against it.（2）Particular Average A particular average means that a particular consignment is suffered by one whose goods are partly lost or damaged. When there is a particular average loss, other interests in the voyage (such as the carrier and other cargo owners whose goods were not damaged) do not contribute to the partial recovery of the one suffering the loss. An example of a particular average occurs when a storm or fire damages part of the shippers cargo and no one elses cargo has to be sacrificed to save the voyage. The cargo owner whose goods were damaged turns to his insurance company for payment, provided, of course, his policy covers the specific type of loss suffered.Since most of losses encountered by shippers are partial, that is, of the particular average nature, it is important to know exactly what provisions for such partial losses are in the insurance policy.7.2.4 ExpensesLosses resulted from the insured not only comes from the risk of the loss of the goods or the damage done to the goods, but also from the expenses the insured spends in rescuing the goods in danger. Therefore, not only has the loss caused by risks been insured by the transportation insurance, the losses of expenses is also insured by the transportation insurance. The main expenses include the following two charges: 7.2.4.1 Sue and Labor ExpenseThese expenses are the expenses arising from measures properly taken by the insured, the employee and the assignee, etc. for minimizing or avoiding losses caused by the risks covered in the insurance policy. The insurer is held responsible to compensate for such expenses.7.2.4.2 Salvage ChargesSalvage charges are expenses resulting from measures properly taken by a third party other than the insured, the employee and the assignee, etc.Scope of CoverageLossesNaturalCalamitiesRisksExpensesExtraneousRisksrisksPerils of the SeaTotal LossrisksParticularLossrisksSue andLabor ExpensesLossrisksSalvage ChargesFortuitous AccidentsGeneral Extraneous RisksSpecial Extraneous RisksConstructive Total LossActual Total LossGeneral AverageParticular Average7.3 Ocean Marine Insurance under C.I.CThe China Insurance Clauses (C.I.C) issued by Peoples Insurance Company of China (PICC) provides both basic risks coverage and additional risks coverage for marine cargo transport. The former can be further divided into three conditions: Free From Particular Average (F.P.A), With Particular Average (W.P.A.) and All Risks（A.R.）and the latter includes general additional risks and special additional risks. 7.3.1 Basic Risks Coverage(1) Free from Particular Average (F.P.A.)Free from particular average, basically, is a limited form of cargo insurance cover in as much as that no partial loss or damage is recoverable from the insurers unless that actual vessel or craft is stranded, sunk or burnt. Under the latter circumstances, the F.P.A. cargo policy holder can recover any losses of the insured merchandise which was on the vessel at the time as would obtain under the more extensive W.P.A. policy. The F.P.A. policy provides coverage for total losses and general average emerging from actual “marine perils”.According to PICCs Ocean Marine Cargo Clauses revised in January 1, 1981, F.P.A. insurance covers:1) Total or Constructive Total Loss of the whole consignment hereby insured caused in the course of transit by natural calamitiesheavy weather, lightning, tsunami, earthquake and flood. In case a constructive total loss is claimed for, the Insured shall abandon to the Company the dama