Marine insurance Manage most probable risks

In a slowing economy, it’s important that the industry reengages itself in an optimal risk management exercise to provide adequate protection to an already strained balance sheet, says Vikash Khandelwal. In the second episode of our insurance insight series, he writes about marine insurance.

Project risks can be broadly summarised as planning, movement of resources, execution, and commissioning. Movement of cargo in an efficient manner has been the key to a successful and timely execution of projects. The two major risks associated are actual physical damage to cargo during transit and the resultant delay in start-up. This specifically assumes importance due to the costs involved in procuring high-end infrastructure equipment and the just in time policies followed by the companies.

1. The risk has gone up significantly specifically for high-end and critical equipment. Imagine a large turbine to be erected for an under-construction power plant being carried by single chassis and related risks to timely execution.
2. The multimodal routes to be followed for the purpose of carrying such critical cargo are also a major cause of concern in India, where there is a major infrastructure gap. There has been many incidents of loss¡es from collapse of bridges, roads etc, resulting in major damages to the equipment.
3. Also, there are challenges with choosing the approp¡riate mode of transporting large and critical equip¡ment. There have been many instances where in the chassis carrying the over dimensional cargo (ODC)/equipment have broken down leading to material damage and consequential losses.
4. Piracy, terrorism and civil commotion are also major causes of concern.
5. Marine insurance covers risks involved in the transit of materials, building components, machinery, equipment, etc, being transported through roads, rail, sea, inland waterways and air and consignments that require multiple modes of transportation, intermediate storage and transhipment.  

Marine insurance cover commences at the time of the goods being loaded on to the carrying vehicle or vessel (loading) and terminates at either of the following:/p>

1. On completion of unloading at the final destination named under the policy.
2. On completion of unloading from carrying conveyance at any other warehouse/place of storage whether prior to or at the destination named in the policy.
3. On expiry of the specified duration after completion of discharge at the final port/town of discharge.

There are primarily four types of marine insurance:

1. Hull Insurance covers the vessels and its equipment.
2. Cargo Insurance covers the goods carried.
3. Freight Insurance covers the freight receivable by the transporter. For example, the freight is payable only on the safe arrival of the goods at the destination and should the cargo be stolen en route, the owner may refuse the payment of the freight.
4. Liability Insurance.

There may be occasions where the ownership of the cargo changes hands while in transit. Hence, under Marine Insurance, the insurable interest need not be present at the time of buying the policy. For a claim being payable, the insurable interest should exist at the time of the claim.

There are three broad classifications of marine insurance policies:

1. Specific Policy: This policy is taken on a consignment basis covering a specific consignment and therefore a separate policy needs to be obtained for each consignment.
2. Open Policy/Open Cover: Under these cover the insurer and the insured agree to cover consignments of agreed nature on pre agreed terms and conditions, subject to the sum insured under the policy.
3. Sales Turnover Policy: The entire anticipated sales turnover of the company over the subsequent 12 months period is covered under this policy. This is relevant to the manufacturing company.

An Open Marine Policy is normally preferred over the others, the advantages being:

• No gaps or duplication of cover
• The rates and terms are pre-agreed. Open Policy provides an extended security to the insured.
• Administrative ease.

The global practice: Marine insurance business globally follows fairly standardised practices. They are always written in an international format given the nature of the business. The cargo normally passes through different geographies governed by different regulations and the policy has to respond in the event of a loss in each of these geographies. One of the most accepted and standardised is the Institute Cargo Clauses.

Being an agreed value policy, it is essential to address the following for the marine insurance to be effective:

1. Transit details need to be declared under the policy.
2. The subject matter to be insured has to be completely declared under the policy.
3. Over-dimensional cargo and on-deck cargo must be specifically declared and covered under the policy.
4. Modes of conveyance to be used during the transit should be clearly declared under the policy in detail
5. Loading and unloading should be specifically covered.
6. Concealed Damages: Electro-mechanical equipment is generally stored at site post arrival and the packaging is to be opened only once it is required to be erected. It is advisable to get concealed damages covered under the policy.
7. Electrical and Mechanical Derangements:  This cover is a must for all projects involving critical electrical/mechanical equipment.
8. Transhipments and intermediate storage should be declared and properly covered under the policy in order to guard the policy holder’s interest.
9. Emphasis should be on compliance with warranties related to mode of conveyance imposed under the policy. It is also critical to insure that warranties under the policy are complied with as a failure to do so shall render the insurance contract void-ab-initio.
10. In a typical project scenario, it is essential to ensure that the tail-end risk is duly transferred through an appropriately worded policy.
11. It is advisable to ensure that clauses are carefully opted for under the policy such as the 50-50 clause to secure the policy holder’s interest.
12. Excess should be carefully discussed and agreed.
13. Disputes: Generally, disputes in claim settlement arise when there are two underwriters involved in a single movement and the point of loss cannot be clearly defined. To avoid such a scenario, it is always advisable to insure the entire movement with a single underwriter.

In case of an accident involving ODC the actual loss may be more than the cost of equipment. In the event of such an incident the insured may need to bring in specialised equipment/cranes to move the cargo from one carrying vehicle to other and may also have to take up a storage near the site of accident till the time an appropriate carrying vehicle is available. A cover canbe obtained for such expenses as well.

Underwriters often prefer a survey done for ODC:

• Before dispatching from manufacturing unit.
• At the time of loading on vessel.
• At the time of unloading from vessel.
• At the time of final unloading at site.

The insured should always check with their insurer for a list of preferred surveyors who may specialise in particular kinds of equipment.

During the project, another critical aspect is of concealed damages. It’s always advisable to get themcovered depending upon the nature of cargo. Incidents beyond control: Delay in start-ups has been an area of concern for all stakeholders. Increasing complexity of projects, and the development of large pre-assembled modules offshore for many critical equipment have only brought more focus on DSU.

Heavy lift project cargo often consists of machinery or equipment that is critical components needed for the construction and subsequent operation of various industrial infrastructure projects. Despite best efforts, an unexpected or unavoidable event can severely interrupt these plans.

Marine DSU arising out of below mentioned events can be covered:

1. Loss due to material damage during transit.
2. Occurrence of a fortuitous event to the carrying conveyance.
3. Loss due to uncontrollable maritime events.

Arriving at the appropriate sum insured for marine DSU loss can be simplified in the construction risk by making a worst-case scenario assumption of a total loss on the last day before hand-over of the project.

The range of interests has also evolved further as project owners and financiers have gained a greater understanding of the precise needs of a specific project.

The range of DSU interests can now include items such as:

• Gross revenue cover
• Gross profit cover
• Standing charges
• Increased cost of working
• Additional increased cost of working
• Claims preparation expenses
• Liquidated damages
• Take or pay contractual commitments
• Salaries and wages
• Loss of bonus
• Expediting expenses

Interest payments/refinancing costs

Most businesses today regularly ship/transport goods. Hence it’s imperative that the marine policy and its terms are structured appropriately to suit the nuances of the business, the kind of cargo being shipped and the mode of transport used. It is only then that the policy will respond in the event of the goods being lost or damaged.