Chapter 4 - Marine and Aviation Insurance

Ocean Marine Cargo Insurance

• Marine insurance protects goods being transported, especially by sea

• Standard property policies usually exclude ocean shipments, so separate cargo coverage is needed

• Coverage can extend to transit by ship, truck, rail, air, and inland waterways

Insurable Interest:

• Only parties with a financial interest in the cargo can insure it

• May include:

  • Sellers

  • Buyers

  • Carriers

  • Financial institutions

• To determine who has the insurable interest, review:

  • Sales contract

  • Bill of lading

Key Idea:

• Ocean marine cargo insurance protects goods in transit, and coverage depends on who would suffer a financial loss if the cargo is damaged.

Insurable Interest in Ocean Cargo

• To determine who should insure cargo, review:

  • Terms of sale (INCOTERMS)

  • Method of payment

INCOTERMS determine:

• When ownership and risk transfer from seller to buyer

• Who pays transportation costs

• Who is responsible for arranging insurance

• Who has the insurable interest at different stages of transit

Method of Payment can affect insurable interest:

• Financial institutions may have an insurable interest if goods are financed by a loan

• Sellers may still have an insurable interest after shipment if they have not been paid

Common Payment Methods:

• Cash in advance: seller is paid before shipment → seller usually has little or no remaining interest

• Open account: buyer pays later → seller retains a financial interest until payment is received

• Draft: payment made on presentation or at a future date → seller retains an interest until paid

• Letter of credit: bank guarantees payment if shipping terms are met → seller generally retains an interest until payment is received through the banking process

Important Note:

• Even when a buyer arranges insurance or payment appears guaranteed, sellers should consider insuring their own financial interest to protect against non-payment following a loss.

Key Idea:

• Insurable interest depends on both when ownership/risk transfers and whether the seller, buyer, or lender still has money at risk in the shipment.

Bills of Lading

• A bill of lading is issued by the carrier and serves three main purposes:

  • Contract of carriage

  • Receipt for goods

  • Document of title

As a Contract of Carriage:

• Sets out the carrier's responsibilities and liability

• Identifies:

  • Who receives the goods

  • How goods are shipped

  • Special shipping conditions

Common Types:

• Straight Bill of Lading: goods delivered only to the named consignee

• Order Bill of Lading: goods delivered to the order of the consignee; commonly used in international trade

• Released Bill of Lading: carrier's liability is limited to a predetermined amount

• Valued Bill of Lading: carrier is liable up to the value declared by the shipper

• On Deck Bill of Lading: confirms cargo is carried on deck at the shipper's risk

• Optional Stowage Bill of Lading: allows carrier flexibility in cargo placement

As a Receipt for Goods:

• Confirms the carrier received the shipment

• Common forms include:

  • Received for Shipment Bill

  • Clean Bill of Lading (goods appear to be in good condition)

  • Count Bill of Lading (shows quantity shipped)

  • On Board Bill of Lading (confirms goods were loaded onto the vessel)

As a Document of Title:

• Can help establish who has the legal right to receive the goods

• Used as evidence of ownership or possession rights during transit

Key Idea:

• A bill of lading is one of the most important shipping documents because it acts as the shipping contract, proof of receipt, and evidence of ownership rights.

Carrier Liability & Need for Cargo Insurance

• Shippers should not assume the carrier will pay for all cargo losses

• By law, carriers are generally not responsible for losses caused by:

  • Fire (unless caused by the carrier's fault or negligence)

  • Perils of the sea or other navigable waters

  • Acts of God

  • War

  • Public enemies

  • Strikes, riots, and civil commotion

• Even when a carrier is legally liable, its responsibility may be limited by the bill of lading

• As a result, the amount recoverable from the carrier may be less than the actual value of the cargo

Key Idea:

• Cargo insurance is important because carriers have many legal liability exceptions and can often limit how much they must pay after a loss.

Types of Ocean Cargo Policies

• Cargo insurance can be purchased as either an Individual Policy/Certificate or an Open Policy

Individual Policy / Certificate:

• Used for single shipments or occasional shipments

• Certificate confirms coverage is in place for that shipment

Open Policy:

• Designed for businesses with regular or high-volume shipments

• Automatically covers shipments that fall within the policy terms

• Usually provides coverage from the time goods leave the warehouse until they reach their destination

• Often has no fixed expiration date (though some are written for a set term)

• Rates are set in advance, making insurance costs more predictable

• Requires periodic reporting of shipments to the insurer

Open Policy Features:

• May have separate limits for different shipments or locations

• Can cover many types of goods shipped worldwide

• Can distinguish between on-deck and below-deck/containerized cargo

How Cargo Is Insured:

• Marine cargo insurance is typically written on an agreed value basis

• The insurer and insured agree in advance on the cargo's value

• In the absence of fraud, that agreed value is used to settle losses

Key Idea:

• Individual policies are for occasional shipments, while open policies provide ongoing coverage for frequent shipments and are usually based on an agreed cargo value.

Marine Cargo Valuation Clause

• The Valuation Clause determines the maximum amount of insurance that can be purchased for a shipment

• Common formula:

  Invoice value of goods
  + freight/shipping costs
  + other expenses
  + duties and taxes
  + 10%

What Can Be Included:

• Value of cargo (invoice cost of goods)

• Freight costs paid to transport the shipment

• Other expenses such as:

  • Packing costs

  • Inland freight

  • Insurance premiums

  • Miscellaneous charges

• Duties and taxes that may still be payable even if goods arrive damaged

Why Add 10%?

• Covers normal increases in value during transit

• Helps insure part of the anticipated profit on the shipment

• Can sometimes be increased depending on the goods and circumstances

Why It Matters:

• Especially important for open cargo policies, where shipment values are not known in advance

• Creates a consistent method for valuing shipments and avoids disputes after a loss

Key Idea:

• Marine cargo insurance is often based on the shipment's full landed value plus an additional percentage for profit and related costs, not just the cost of the goods themselves.

Marine Cargo Claims Settlement

• Marine cargo losses are usually settled based on the percentage of insured value lost, not the exact dollar value of the damage

• The insurer pays the same percentage of the insurance amount as the percentage reduction in the cargo's value

Example:

• Cargo worth $100,000 insured for $80,000

• Damage reduces value by 50%

• Payment = 50% of $80,000 = $40,000

• Insured's actual loss = $50,000

Effect of Underinsurance:

• If cargo is insured for less than its value, claim payments are reduced proportionally

• Encourages proper valuation and adequate insurance limits

Effect of Overinsurance:

• Can result in payments greater than the actual market loss

• More acceptable in marine insurance because intentional losses are difficult to create

Advantages of This Method:

• Simple and fast for international cargo claims

• Useful when losses must be settled in different countries and markets

• Adjuster only needs to determine:

  • Current market value at destination

  • Percentage loss in value

  • Amount of insurance purchased

Total Loss:

• If the shipment is a total loss, the insurer pays the full insured amount

Key Idea:

• Marine cargo claims are usually settled based on the percentage decrease in cargo value applied to the insured amount, rather than reimbursing the exact dollar value of the loss.

Institute Cargo Clauses

• Most marine cargo policies use Institute Cargo Clauses (ICC) developed by the Institute of London Underwriters

Three Main Forms:

• ICC (A) – All Risks

  • Broadest coverage

  • Covers all risks of physical loss or damage unless specifically excluded

• ICC (B) – Named Perils

  • Covers only listed causes of loss

• ICC (C) – Named Perils

  • Narrowest coverage

  • Covers a smaller list of specified perils

Coverage Depends On:

• Type of cargo being shipped

• Hazards associated with that cargo

Special Cargo Considerations:

• Certain goods require special terms or deductibles

• Examples:

  • Cement → shrinkage deductible

  • Liquids → leakage deductible

  • Chocolate → may exclude heat and sweat damage

  • Eggs and fragile goods → may exclude breakage

Specialized Cargo Clauses Exist For Certain Commodities:

• Timber Trade Federation Clauses

• Corn Trade F.P.A. Clauses

• Jute Clauses

• Flour “All Risks” Clauses

Key Idea:

• Marine cargo coverage ranges from broad All Risks (ICC A) to more limited Named Perils (ICC B & C), with special provisions often applied based on the type of cargo being shipped.

Common Institute Cargo Clauses

• Transit Clause:

  • Provides warehouse-to-warehouse coverage

  • Begins when goods leave the shipper's warehouse and ends at the final destination

  • Covers normal transit by ship, truck, rail, air, or other conveyances

  • Coverage continues during delays or route changes beyond the insured's control

• Termination of Contract of Carriage Clause:

  • Applies when goods cannot reach their intended destination due to circumstances beyond the insured's control

  • Coverage can continue if the insured promptly notifies the insurer

  • May cover reasonable forwarding, storage, and unloading expenses

• Change of Voyage Clause:

  • Coverage can continue if the insured changes the cargo's destination

  • Insurer must be notified promptly

  • Additional premium or revised terms may apply

• Insurable Interest Clause:

  • Only parties with an insurable interest at the time of loss can collect payment

  • May include sellers, buyers, carriers, or lenders, depending on the shipment

• Lost or Not Lost Provision:

  • Coverage applies even if the cargo was already lost when insurance was arranged

  • Only applies if the insured did not know and had no reason to suspect the loss

Key Idea:

• These clauses ensure cargo remains protected when shipments are delayed, rerouted, interrupted, or affected by changes in ownership and insurable interest.

Marine Cargo Policy Exclusions

• All Institute Cargo Clauses contain important coverage exclusions

Unseaworthiness & Unfitness Exclusion:

• No coverage if loss results from an unseaworthy vessel or unsuitable transport method

• Applies only if the insured knew (or should have known) about the problem when the cargo was loaded

• Usually not a major concern for cargo owners, since they rarely control or inspect the vessel

Strikes Exclusion:

• Excludes loss caused by:

  • Strikes

  • Lockouts

  • Labour disturbances

  • Riots or civil commotion

  • Terrorist acts or politically motivated acts

• Coverage can be added through a Strikes Clause

War Exclusion:

• Excludes loss caused by war-related risks

• Coverage can be added through Institute War Clauses (Cargo)

War Coverage Limits:

• Applies only while cargo is on the overseas vessel

• Ends when cargo is:

  • Discharged at the final port, or

  • 15 days after arrival at the final port

• Does not cover inland transportation after discharge

Key Idea:

• Standard marine cargo policies exclude losses from unseaworthiness, strikes, and war, although strike and war coverage can usually be added separately.

Marine Cargo Warranties

• A warranty is a promise or condition that must be followed for coverage to apply

Types of Warranties:

Express Warranties

• Specifically written into the policy

• Require certain conditions to be met or actions to be taken

• Example: an Alarm Warranty requiring a vehicle alarm to be operational and activated when unattended

Implied Warranties

• Not written in the policy, but automatically assumed to exist

Common Implied Warranties:

• Legality: the voyage and cargo must be lawful

• No Delay: the voyage should begin within a reasonable time

• No Deviation: the vessel should follow the customary route unless permitted otherwise

Why They Matter:

• Delays and route changes can increase the chance of loss

• Illegal ventures (e.g., smuggling) are never insured

• Cargo policies often include clauses that may allow coverage to continue if the insurer is notified and agrees

Effect of Breaching a Warranty:

• A breach can allow the insurer to deny coverage from the date of the breach

• The insurer may sometimes waive the breach, often for an additional premium

• If compliance becomes impossible, the insured should notify the insurer immediately

Key Idea:

• Marine cargo insurance relies heavily on warranties; failure to follow them can jeopardize coverage, even if the breach did not directly cause the loss.

Marine Cargo Claims Settlement

Types of Total Loss:

• Actual Total Loss: cargo is completely lost or destroyed

• Constructive Total Loss: cost to recover/save cargo exceeds its value

• Total Loss of a Part: one shipment (or part of a shipment) is completely lost, even if the rest arrives safely

Types of Partial Loss (Average):

• Particular Average: partial loss affecting only a specific shipment

• General Average: loss or expense intentionally incurred to save the entire voyage

  • All parties benefiting from the action share the cost

Coverage Options:

• Total Loss Only: pays only when a total loss occurs

• Total Loss + Certain Partial Losses: pays partial losses from sea perils if they exceed a specified percentage (franchise)

  • Commonly around 3%–5% of the insured value

  • If the loss exceeds the threshold, the loss is paid in full

• All Partial Losses: broadest coverage, typically under Institute Cargo Clause (A)

Subrogation:

• If another party caused the loss, the insured must preserve the insurer's right to recover from:

  • Carriers

  • Bailees

  • Other responsible third parties

Key Idea:

• Marine cargo policies can cover anything from total losses only to all partial losses, while also recognizing special concepts like general average, where everyone benefiting from a sacrifice shares the cost.

Underwriting Ocean Cargo Insurance

Underwriters assess many factors when deciding whether to insure cargo, what premium to charge, and what terms apply.

Key Factors Considered:

• Carrier and vessel quality

  • Type, age, condition, registry, and operating history of the vessel

  • Concerns about substandard ships and poor management

• Experience of the shipper/carrier

  • Past loss history and experience handling similar cargo

  • High claims may indicate poor handling or packaging practices

• Route and weather

  • Areas travelled, seasonal weather conditions, and voyage hazards

• Ports and political conditions

  • Condition of ports, labour issues, political instability, and other local risks

• Type of cargo

  • Susceptibility to:

    • Breakage

    • Leakage

    • Theft/pilferage

    • Moisture damage

    • Spoilage or deterioration

    • Spontaneous combustion

• Perils insured and deductibles

  • Broader coverage and lower deductibles generally increase premium

• Packaging methods

  • Proper packaging is critical to reducing losses

  • Many cargo losses are preventable and often result from theft or poor packing

Good Packaging Practices:

• Use strong, well-constructed packaging

• Avoid worn or damaged boxes

• Use tamper-evident tape and secure fasteners

• Shrink wrap, strap, or band shipments when appropriate

• Avoid obvious labels or markings that attract thieves

• Clearly mark delivery and handling instructions

Key Idea:

• Cargo underwriting focuses on the carrier, route, cargo, and packaging, with proper packing and loss prevention playing a major role in reducing risk and premium costs.

Marine Hull & Marine Liability Insurance

Ocean Marine Hull Insurance:

• Covers vessels owned, operated, or chartered by the insured

• Coverage can range from all risks to total loss only

• War and strike risks are usually purchased separately

Protection & Indemnity (P&I) Insurance:

• Covers a shipowner's liability to third parties

• Used when liability exceeds coverage available under the vessel's hull policy

Common P&I Coverages:

• Injury or damage to third parties

• Excess collision liability

• Pollution liability

• Damage to fixed or floating objects (e.g., wharves)

• Wreck removal costs

Other Marine Liability Policies:

• Ship Repairer's Legal Liability

  • Covers damage to vessels while being repaired and in the repairer's care

• Stevedore's Legal Liability

  • Covers liabilities arising from loading and unloading vessels

  • Can include damage to cargo and the vessel

• Charterer's Legal Liability

  • Covers a charterer's responsibility for vessels they lease or charter

  • Includes liability for damage to the vessel and third-party exposures

  • Additional umbrella-type marine liability coverage may be available

Key Idea:

• Marine hull insurance protects the vessel itself, while marine liability policies protect against legal liability arising from marine operations.

Aircraft Hull Insurance

• Aviation insurance can cover the aircraft itself (hull), liability, and cargo

Aircraft Categories:

• Privately owned aircraft (not for hire)

• Commercial aircraft

• Commercial aircraft used for instruction or rental

Hull Coverage Options:

• Coverage A (All Risks):

  • Covers damage while aircraft is on the ground or in flight

  • Broadest form of hull coverage

• Coverage B (Ground & Taxiing Risks):

  • Covers damage while aircraft is on the ground, including taxiing

  • No coverage while in flight

• Coverage C (Ground Risks Only):

  • Covers damage only when aircraft is on the ground and not moving

Important Definitions:

• In flight: from the start of takeoff until landing is complete

• In motion: aircraft moving under its own power

• Not in motion: aircraft is stationary

Deductibles May Differ For:

• In-motion losses

• Moored aircraft

• Not-in-motion losses

Common Endorsements:

• Lay-Up Endorsement:

  • Refunds part of the premium when aircraft is not used for an extended period

• Detached Undercarriage Endorsement:

  • Covers wheels, skis, or floats when removed from the aircraft and not in use

Key Idea:

• Aircraft hull insurance can range from full flight coverage to ground-only coverage, with premiums and deductibles reflecting how and when the aircraft is exposed to risk.

Aircraft Liability Insurance

• Aircraft operators must carry liability insurance and prove financial responsibility before being licensed

• Liability limits are based on the aircraft's size and passenger capacity

Main Coverages:

• Coverage F – Bodily Injury & Property Damage to Third Parties

  • Covers legal liability for injury or property damage to people other than passengers

  • Also includes limited coverage for:

    • Damage caused by leased/occupied hangars

    • Emergency expenses (crash/fire rescue, search and rescue, emergency runway preparation)

• Coverage G – Passenger Liability

  • Covers legal liability for injury to passengers

  • May also provide limited coverage for passenger baggage

Common Exclusions:

• War, seizure, or hijacking

• Unapproved pilot

  • Coverage may be denied if the aircraft is operated by a pilot not approved by the policy

  • Pilot must have the required licences and ratings

Policy Conditions:

• Coverage territory is generally:

  • Canada

  • Continental U.S. (excluding Alaska)

• Special arrangements may be needed for Mexico and other locations

• Insurer must provide notice before cancellation

Underwriting Factors:

• Pilot experience is extremely important

• Insurers review:

  • Pilot licence and endorsements

  • Total flight hours

  • Hours on aircraft type

  • Accident history

Key Idea:

• Aircraft liability insurance protects against legal claims arising from aircraft operations, with premiums heavily influenced by the pilot's experience and qualifications.

Air Cargo Insurance

• Similar to marine cargo insurance and protects goods transported by air

Key Features:

• Air carriers have limited legal liability for cargo loss or damage

• Carriers often buy Cargo Liability Insurance to cover this exposure

Valuation:

• Uses the same basic approach as marine cargo insurance:

  • Invoice value

  • Freight and other charges

  • Plus 10%

Coverage:

• Usually written on an all risks basis

• Often uses Institute Cargo Clauses (Air), similar to marine ICC (A)

• Provides warehouse-to-warehouse coverage

• Covers transit by other transportation methods connected to the shipment

Exclusions:

• Losses caused by war or strikes are generally excluded

• Coverage can usually be added for an additional premium

Rating:

• No standard rates

• Premium is based on the underwriter's judgment, experience, and market conditions

Key Idea:

• Air cargo insurance closely mirrors marine cargo insurance, providing broad warehouse-to-warehouse protection while recognizing the limited liability of air carriers.

Associated Aircraft Liability Coverages

• Aviation-related businesses often need coverage beyond aircraft ownership and operation

Airport Liability:

• Covers liability from airport premises and operations

• Needed because CGL policies exclude most airport- and aircraft-related exposures

• Can apply to airports, repair facilities, and aircraft servicing operations

Employer's Liability:

• Covers aviation employees who may not be covered by workers' compensation

• Can include:

  • Pilots

  • Ground crew

  • Office staff

Products Liability:

• Covers businesses that sell, repair, service, or refuel aircraft

• Protects against liability arising from aviation products or services

Hangarkeeper's Liability:

• Covers damage to aircraft in the insured's care, custody, or control

• Applies while aircraft are stored, repaired, or serviced

Cargo Liability:

• Covers a carrier's legal liability for damage to customers' cargo

Non-Owned Liability:

• For businesses that don't own aircraft but whose employees may rent, borrow, or fly aircraft for business purposes

Contingent Liability:

• Covers businesses that charter, rent, or borrow aircraft

• Applies when the aircraft is operated by someone other than the insured or its employees

Key Idea:

• These coverages protect the many liability exposures surrounding aviation operations, not just the aircraft itself.

T - Bill of lading

A shipping document that serves as a contract of carriage, a receipt for goods, and proof of the right to receive the goods.

T - Agreed value

A value agreed upon in advance by the insurer and insured that will be used to settle a total loss.

T - Freight

The cost charged for transporting goods from one location to another.

T - Actual total loss

A loss where the cargo is completely destroyed, lost, or damaged beyond any remaining value.

T - Constructive total loss

A loss where the cost to recover or repair the cargo would exceed its value after recovery.

T - Particular average

A partial loss that affects only a specific shipment or owner's property and is not shared by others.

T - General average

A marine loss-sharing principle where all parties in a voyage contribute to losses or expenses intentionally incurred to save the entire venture