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Sink or swim: settling marine claims properly.

Problems settling marine claims arise because of the nature of the business. In India cargo is transported over long distances via ship, plane, train, truck and, at times, bullock cart. Obviously, this process involves cargo handling by various agencies.

Whereas in other types of insurance risk is within the insured's control at all times, marine insured cargo leaves the warehouse of the consignor and is handled by different agencies-the original insured may be the consignor and the final insured under the same policy may be the consignee. At any time neither the consignor nor the consignee has direct control over the cargo. This peculiarity of marine insurance leads to many problems and can create uncertainty in claimants' minds. Therefore, it is necessary to analyze the various contracts that specify the rights and obligations of the contracting parties to ensure cargo protection and delivery. Indeed, the risk manager will understand marine claims when he or she realizes that a marine insurance contract is only one of several relating to cargo insured under the policy.

The contract of sale exists between the buyer and seller or importer and exporter. Its terms clearly describe the cargo that is being bought, its specifications, quality and quantity, packing conditions, mode of conveyance, dispatch and probable delivery period. Depending on the contract terms-Cost and Freight; Cost, Insurance and Freight; Free on Board; Free Along Side responsibility for a particular leg of the voyage, and consequently responsibility to undertake suitable insurance cover, could be that of the consignor or the consignee. These terms, coupled with a letter of credit, determine when the buyer is liable to pay for his or her purchase.

The contract of carriage applies to when the cargo is handed over to any carrier by the forwarding agent or by the insured's (consignor's) own office. Initially, this carrier may function as inland journey transporter, using trains or trucks, and thereafter as shipowner, offering a chartered vessel. The cargo is handled by stevedores who load it on and off the ships. After unloading, the cargo is transported by the regional railway or truck system in the importing countries.

Other agencies such as the authorities at the port of dispatch and the port of destination have temporary custody of the cargo until it is cleared from port premises. In each case a separate contract applies, either one with statutory provisions or an independent contract that pertains to the relevant contract act, Carriage of Goods by Sea Act, Railway Act or the Common Carriers Act. The terms and conditions of the contract are specific, and the person contracting to carry the cargo in his or her own vehicle or vessel is expected to satisfy the sender that the cargo will be loaded, stowed, carried and discharged safely at the destination. If cargo damage occurs during the course of custody with the carrier/agent, then under the contract he or she is legally responsible to compensate the loss. Failure of the carrier to adhere to the terms of the contract or acts of commission would make him or her liable for the damages.

The letter of credit is a contract between the importer's bank and the exporter's bank. In this case letters are exchanged between the banks indicating that under certain terms and conditions payment for the cargo will be made by the importing banker to the exporting banker. In many cases, unless letters of credit are issued, no contract for import or export of cargo can exist in view of import control authority regulations.

The insurance contract is often negotiated by the consignor or the consignee even while the cargo contract is being finalized with either of the three aforementioned parties. For instance, regarding the import of project equipment, this contract can be simultaneously examined by the contracting party with all four parties involved. In fact, it is customary to negotiate all these contracts together to ensure that the cost/benefit ratio is considered. However, regardless of when the contract is finalized, the insurance contract will stand alone vis-a-vis the contracting party (the insured and the insurer).

When disagreements arise, the claimants' natural reaction is to sue the insurer regardless of the gaps in or stipulations of either the sale contract, carriage contract or letter of credit. Problems often arise through the insistence of the insured to adhere only to the insurance contracts regardless of whether another contract fails. The insurer can avoid liability by referring to the sale contract, the carriage contract or the bankers' contract by letter of credit. For instance, if the sender supplies product quality that does not meet contract requirements, the insured cannot claim for devalued cargo under the insurance policy because of non-adherence to quality standards. In addition, the insurer cannot consider pecuniary losses unless there is physical loss or damage to the cargo by insured perils.

Similarly, non-adherence by the carrier to the carriage contract that results in damage to the cargo would allow the aggrieved party, in the absence of the insurance contract, to claim compensation from the carrier. In fact, the party would have done so anyway because the contracts are independent of one another. The carrier was supposed to transport the cargo safely to the destination, but because it was not properly secured, it was damaged. Thus, the claim lies primarily against the carrier, not the insurer.

The insurance company would not deny liability under terms of the contract if the physical loss or damage is covered by the policy. However, remember that the insurance company would like to be in the insured's position vis-a-vis the carrier because the carrier has an obligation to the insured. Therefore, any benefit the insured is supposed to receive from the carrier because of failure of the carriage contract would be claimable through subrogation of the insured's rights to the insurer.

In many cases claims are fraught with difficulty because the insured is unwilling or has neglected to enforce the conditions of the carriage contract against the carrier and yet insists on claims settlement. Observance of the carriage contract, making the carrier liable for compensation, would reduce the claim on the insurer. The insurer, therefore, can insist on the rights of subrogation being passed on to them. To preserve these rights of subrogation against the carrier or agency involved in handling the cargo, the insurer expects these rights under law or contract to be preserved for the benefit of the insurer. This is implicit and expressly provided for in insurance contracts.

Freely Negotiable Contract

Marine insurance contracts, unlike other contracts, are freely negotiable. Indeed, the transfer of cargo from one country to another would cease unless free negotiability is available. It is, therefore, unnecessary that the person who insures be the same person who claims under the policy. In fact, the benefits or the rights and title of the insurance policy are automatically transferred to the next person or the final consignee. However, it must be established that the claimant has an insurable interest at the time of claiming compensation on the policy.

Many problems are caused by the letter of credit. Consideration of sale contract with letter of credit terms has raised disputes about the claimant's rights to the insurance policy. This is due to differences in terms on receipt of cargo due to documents at sight, payment against documents, payment against 90 days credit or payment against six months credit.

In international contracts large-scale equipment is often supplied to the consignee under a World Bank loan or through a foreign bank or government in the supplier's country. In such cases the letter of credit or the sale contract may include a condition requiring claims to be paid in foreign exchange, a stipulation the insurer must be aware of for payment purposes. These peculiar sale contracts and letter of credit terms are best dealt with in a specific framework during client discussions.

The Institute Cargo Clauses are used for cargo policies and contain three levels of coverage, ICC(A), (B) and (C). The narrowest coverage assigned for the physical loss or damage to the cargo is ICC(C), which covers specific perils such as fire, explosion, jettisoning, grounding and sinking. ICC(B) offers slightly wider coverage, often including washing overboard or water damage. ICC(A) is virtually an all risks coverage subject to such exclusions as losses caused by delay, vice or insufficient packing. The insurer is liable for all losses within the policy limits but not through the failure of the sale contract, carriage contract or letter of credit. Non-payment or non-receipt of the cargo because of non-payment of the supplier's dues or consignment rejection by the importer on the high seas are inadmissible under standard marine insurance contracts.

To ensure that claims are handled properly, the insurance policy has an important notice, sometimes printed in red letters, that details how to ensure that a claim is secured. Further, insurance contracts include one important term -reasonable dispatch. The insured must at all times behave with reasonable dispatch, which means taking steps to ensure that the cargo is protected or encouraging the carrier or any other handling agency to protect the cargo and ensure that it is loaded, carried and cleared quickly. In addition, all steps require prompt action. Reasonable dispatch, with its prompt-action requirement, differs from cargo to cargo. For instance, regarding perishable cargo, reasonable dispatch and prompt action must be immediate. In the case of non-perishable cargo such as machinery, metal or plastics there may not be such urgency. However, reasonable dispatch may also relate to potentially damaging cargo conditions or situations that occur after it is damaged and depend on how promptly it can be cleared segregated and assessed.

Promptly informing the insurance company when damage is noticed and notifying the carriers, other agencies or the port authorities to ensure that the recovery rights against them are preserved are extremely important procedures. Because the insured is supposed to be prudent owner uninsured at all times, it is expected that the insured take the necessary steps to ensure that the cargo is preserved and protected from further loss. If, despite these considerations, the cargo has been damaged, precautions must be taken to minimize the loss.

Documentation Procedures

In marine insurance claim settlements the most important document is the marine insurance policy, which is evidence of the insurance contract and specifies the coverage terms of the cargo. The insurance company, which is required to handle the claim, may not be the same office which issued the document. The office that issued the policy could be a foreign insurance company and the office that is required to settle the claim could be a domestic insurance company or the settling agent. If that is the case, the production of policy documents is important because that will determine the policy's scope, coverage period and destination points during the policy period. It is a basic document and the insurance company demands production of the original to settle a claim.

Because marine insurance is different from other insurance contracts, insurance is allowed at Cost, Insurance and Freight plus 10 percent. Marine insurance contracts are called agreed value policies, and once the policy value is set the issue cannot be reopened during claim settlement unless it is proved that the insured has deliberately exaggerated the value for a higher, unwarranted value. The invoice is evidence of the basic cargo value and is helpful when comparing this value with the sum insured.

The bill of lading, railway receipt and lorry receipt are evidence of carriage contracts. With these documents, an assessment can be made of the exact rights and obligations of the insured vis-a-vis the carrier. Subsequently, they help ensure that subrogation rights against carriers are protected. However, these rights and obligations are subject to statutory limitations. The maritime law is complicated and shipowners are capable of avoiding liability under the bills of lading. Therefore, any exception clauses in the bills of lading or charter party are important to the insurance company.

Unlike other tariff business, where rates are reviewed over several years depending on overall experience for that risk, marine insurance rating is essentially customer specific. The customer must ensure that the loss experience for his or her portfolio is improved so that the rate are commensurate with experience. High loss experience leads to high rates. With low loss experience, adjustment can be made under marine insurance rates. Therefore, adhering to these rules and regulations helps the insured ensure that his or her claim is obtained quickly and that the overall experience rating for the marine insurance portfolio is reasonable.

The next important document is the survey report. The surveyor is the only independent authority between the insurer and the insured who can give an opinion on the nature and cause of the cargo damage as well as the extent of cargo damage. The surveyor also points out whether or not the cause of loss is an insured peril. Prompt reporting of the loss to the insured therefore, helps in many ways. The survey report is the end product of the assessment process, which starts with prompt reporting to the insurance company. This step helps the insured and the client by immediately alerting the insurer to appoint a surveyor appropriate to the commodity so the loss is properly assessed.

Also, if there is a possibility of salvaging the loss, the surveyor can ask the insured or the agency to segregate the damaged cargo from the sound cargo and clear the sound cargo quickly without exposing it to further damage. In addition, the surveyor can determine the treatment method to ensure that something can be salvaged and thus minimize the loss. For instance, in the case of toxic resins stored in bags, if due to bursting or tearing the cargo spills, the surveyor can order sound and torn bags to be segregated. Later, by analysis, one can determine whether the cargo, which has been bagged over, can be salvaged.

If prompt assessment is done, the time lag between assessment, submission of documents and claim settlement is automatically reduced. In many cases, by delaying the survey, the insured may contribute to the loss by exposure to natural elements. Due to traffic congestion at most docks, the cargo is likely to suffer from fire, rain, moisture or theft. Prompt cargo clearance from the docks and quick assessment would ensure the claim against the carrier and also minimize the loss from the surveyor's perspective. Another important point involves fixing responsibility on the carrier. It is important to adhere to the time limits for holding a steamer survey and obtaining open delivery or a damage certificate. Failure to do this may result in claims that are not recovered from the carriers.

If there is a customs duty problem, it is necessary to ensure that the bill of entry is completed in advance so the cargo does not lie in the docks, exposing it to further damage and theft. In India the port authorities do not assume much responsibility for cargo. In fact, if the cargo is not cleared within seven days, the port authorities do not accept liability. Because it is virtually impossible to clear cargo from the docks within seven days, it is the insured's responsibility to ensure that cargo clearance is not delayed.

If the insured cannot afford the duty, it is easier to bond the cargo in premises. One important condition is that the insurance policy covers the cargo during the ordinary course of transit. Even for warehouse-to-warehouse coverage, if the cargo is bonded in an intermediate warehouse for a longer period, the cover automatically ceases. It is, therefore, necessary for the insured to seek the insurer's permission to keep the cargo in the bonded warehouse. For short periods, the insurance company may consider continuation of the marine policy. If this procedure is followed, the insurer can consider that the coverage is continuous until shipment to the warehouse. Because coverage is warehouse-to-warehouse, with a time limit of 60 days to reach the destination from the date the cargo is unloaded from the vessel, the cargo is not automatically covered under the policy.

If there is damage to the cargo through which customs duty could be abated or the insured is entitled to a refund of customs duty, it is necessary that the cargo be properly appraised by the customs officer. If the cargo can be repaired or segregated, rebagged or reconditioned, the estimate of repairs and particular charges should be properly documented to the insurer. If the cargo must be replaced because of theft, the pro forma invoice for its replacement should be given to the insurer.

To enforce a claim against the carrier as well as the port trust, the port authority's landing remark is necessary. This can be a short landing certificate or a landed but missing certificate or remarks list. Regarding cargo unloading supervision, for large volume cargo, whether bulk, break bulk or high-valued cargo, the insurer should be promptly informed because it may decide to appoint a supervising agency to oversee the cargo during unloading to ensure that further loss due to handling does not occur. This goes a long way in ensuring proper assessment of the loss and quick claim settlement.

All negotiable copies of the bills of lading are required by the insurer to satisfy the claim. In case of non-delivery there should be a non-delivery certificate, and in case of inland transportation using railways, road carriers or other agencies a shortage certificate, damage certificate or open delivery certificate is required to ensure that the claim against the carrier is protected. Finally, if the insured has lodged a proper claim against the carrier, notice of claim for refund or abatement of duty must be timely served and copies given to the company.

Do not feel overwhelmed by the myriad documents involved in marine claims. Marine insurance business being what it is, one must be aware of the intricacies involved and ensure that claims are properly presented to the company. Timely action on the part of the insured is crucial to settling insurance claims. However, be aware that the insurance company may require time to analyze and assess a loss, depending on the specific conditions of the cargo. High-tech products such as computers or electronic chips may appear to be intact yet are unserviceable. It, therefore, becomes difficult to determine whether damage has in fact taken place and whether it can be attributed to transit. A risk manager who is aware of these intricacies will, in most cases, get claims settled faster for the full value of the damage.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Purohit, M.V.
Publication:Risk Management
Date:Jul 1, 1990
Words:3097
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