Marine Insurance Course Paper 3

Compiled by: Capt. Zillur

Page 1 of 3

Principle of Marine Insurance - 1

INSURABLE INTEREST
Marine Insurance Act 1906
Insurable interest defined
Subject to the provisions of this Act, every person has an insurable interest who is Interested in a
marine adventure.
In particular a person is interested in a marine adventure where he stands in any legal or equitable
relation to the adventure or to any insurable property at risk therein, in consequence of which he
benefit by the safety or due arrival of insurable property, or may be prejudice by its loss, or
damage thereto, or by the detention thereof, or may incur liability in respect thereof.
When interest must attach
The assured must be interested in the subject-matter insured at the time of the loss though he
need not be interested when the insurance is effected:
Provided that where the subject-matter is insured lost or not lost, the assured may recover
although he may not have acquired his interest until after the loss, unless at the time of effecting
the contract of insurance the assured was aware of the loss, and the insurer was not.
Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or
election after he is aware of the loss.
Quantum of interest
Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full
value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become
due under the mortgage.
A mortgagee, consignee, or other person having an interest in the subject matter insured may
insure on behalf and for the benefit of other persons interested as well as for his own benefit.
The owner of insurable property has an insurable interest in respect of the full value thereof,
notwithstanding that some third person may have agreed, or be liable, to indemnity him in case of
loss.
Explanation
The first subject to be examined is insurable interest. In the event that a claim is made against a
policy or certificate of insurance, one of the first things that the claim adjuster in the under writers
office will look to is insurable interest. Does the person making claim have aright to do so?
Your immediate reacting to such a question in the case of damage to cargo would be, of course: I
have to right to claim, I insured the cargo under the cargo clauses A and some of the cargo has
been delivered damaged.
Unfortunately it is not quite that simple:
The institute Cargo Clauses A incorporate the warehouse to warehouse clause which would appear
to cover the whole period of the transit. But what you have purchased the cargo F.O.B. (Free on
Board)? Let us suppose that the cargo in question is a bagged cargo which the seller has collected
from various warehouse in the country of origin and has containerised at the port of shipment.
When the container was opened at the final destination a number of bags were split with contents

Marine Insurance Course Paper 3

Compiled by: Capt. Zillur

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spilled onto the container floor. The attending surveyor states that in his opinion the damage was a
result of heavy handling before or during the loading of the container.
In these circumstances, despite the warehouse to warehouse clause, there is no claim on the
policy. The damage took place before the cargo was on board the vessel and hence ownership of
the cargo was till with the supplier. An event clearer example would be that, given a similar cargo,
there is a fire in the port of loading and the container and its contents are brunt and valueless. In
those circumstances the cargo would never be placed on board the vessel and hence a Bill of
Loading would not be issued and consequently the buyer would not pay for the cargo under F.O.B.
contract. The same should apply to damage. The cargo was not delivered sound on board the
vessel and hence the seller has not honoured his contract and the receiver has a claim against the
seller, not the insurer.
Problems of insurable interest can and do arise under C.I.F. (Cost Insurance and Freight) contracts.
In the event that you are a regular supplier of a commodity and usually sell on C.I.F. terms, it is
quite likely that you will have an open cover with an insurance company against which you declare
shipments as and when they arise. Let us suppose that you have shipped a cargo to England and
airmailed all the documents to the buyer, including the bill of lading, Certificate of Insurance and
the invoice. However, after the documents have been received and accepted by the buyer, but
before payment is made, the carrying vessel is lost at sea. The buyer, when he learns of the
disaster, sends the documents back to you advises he is not going to pay for the cargo that was
lost. As soon as you receive the documents you make a claim against the insurance company for a
total loss of the cargo. Your claim will be turned down because did not have an insurable interest at
the time of the loss. The interest in the cargo had been transferred to the buyer in England and
rested with him at the time of the loss and accordingly only he can claim under the insurance
policy.
The basic rules for insurable interest are:
1.

You need not be interested in the cargo at the time the insurance is arranged but

2.

You must have an insurable interest at the timer of the loss.

3.

You cannot acquire an interest after you become aware of a loss if you have no interest at
the time of the loss.

No one may benefit from a policy of marine insurance unless he has an insurable interest, and, in
the words of the Marine Insurance Act, every person has an insurable interest who is interested in
a marine adventure.
The essential features of insurable interest are:

there must be a physical object exposed to marine perils, and

the assured must have some legal relationship to that object in consequence of which he
benefits by its preservation, or is prejudiced by its loss or damage thereto, or incurs liability
in respect thereof.

Insurable interest attaches by the ownership of property, but several different kinds of insurable
interest in the property at risk may be identified in different persons at the same time. For
example, the merchant may insure his cargo, while the shipowner or carrier may have an insurable
interest in respect of his liability for damage to the cargo. The person at whose risk the freight is
may insure the freight and an agent to whom goods are consigned for sale may insure, for if the
goods are lost he will lose the commission he would have made on the sale. The underwriter has
an insurable interest in respect of any reinsurance that he may desire to effect.
ASSIGNMENT

Marine Insurance Course Paper 3

Compiled by: Capt. Zillur

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A marine policy is assignment unless the policy contains some terms prohibiting assignment. It is
this principle that enables international trade to run smoothly. Cargo may be sold by one party to
another with the benefit of an insurance contract that was effected by the seller. However
assignment is closely linked to insurable interest which has already been examined. Under the
heeding if insurable interest an example of damage prior to loading under an F.O.B. contract was
examined. In that example, if the F.O.B. seller had effected an insurance from inland warehouse to
safety on board the vessel, a claim for the pre-shipment damage would exist under that policy.
However, if faced with a claim by the buyer, the seller cannot assign the original insurance to the
buyer and suggest that he claims under the policy. At the time that the seller lost his insurable
interest in the cargo he had not assigned the policy and therefore any subsequent assignment
would be invalid. In this example, at least the seller could claim on his policy, but in the next
example the problem is even more complex.
A cargo owner insures his cargo from A to B under the current Institute Cargo Clauses A. Whilst
the vessel is at sea the owner sells the cargo on terms that payment is not to be made until the
vessel arrives safely at the port of destination.
When the vessel arrives, payment is made for the cargo and the seller assigns the policy to the
buyer to enable him to have the benefit of the transit of the final destination.
This assignment would be invalid unless the sale contract specifically included insurance in its
terms, because at the time of the assignment the seller no longer had an insurable interest in the
cargo. In the event that the sale contract includes insurance then there is an express agreement to
assign the policy and all is then OK.
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