In this post we will explain six fundamental principles of marine insurance. The principles of marine insurance may determine the outcome should you ever need to make a claim on your policy.
What are the fundamental principles of marine insurance?
- Utmost Good Faith
- Insurable Interest
- Indemnity
- Proximate Cause
- Contribution
- Subrogation
Principle of utmost good faith
Sometimes referred to by the Latin phrase Uberrimae Fidei, the principle of utmost good faith is basically an agreement that all parties in a marine insurance agreement will be totally honest with each other.
This means that neither the insurer nor the policyholder will falsify or misrepresent any aspect of the agreement. The insurer, for instance, will not mis-sell the policyholder any cover they do not need. Meanwhile, the policyholder will be completely transparent when taking out the policy and will not, for example, misrepresent the age of their ship.
Should either party violate the principle of utmost good faith, it can void the insurance agreement.
Principle of insurable interest
This means that a person can only insure objects in which they have a financial stake. If they would not suffer any financial losses as a result of loss or damage to the object, then they cannot buy insurance for it.
This principle forms the basis of all insurance policies, and it is largely a means of preventing situations where policyholders might actually profit from allowing, or intentionally causing, a loss.
Principle of indemnity
The principle of indemnity means that the settlement the policyholder receives will never exceed the total value of the loss they incurred.
This principle is in place to prevent policyholders from using their marine insurance policies to make a profit, such as through allowing or intentionally causing a loss.
Principle of proximate cause
The principle of proximate cause is designed to simplify the claims process through determining exactly how an instance of loss or damage occurred.
For example: An incident at sea may result in loss or damage to a policyholder’s cargo. Upon investigation, the insurers find that the loss could be attributed to two or more events. In this case, the insurers will aim to determine the proximate cause – the closest or most plausible cause that resulted in the damage.
A marine insurance policy wording will specify the events that are covered, and those that are not covered. The principle of proximate cause allows insurers to ensure that they only provide settlements for insured events, while preventing policyholders from making claims for instances for which they were not insured.
Principle of contribution
The principle of contribution allows policyholders to insure the same object for the same risks with two different insurance companies.
Shipping contracts can get very complex, very quickly. Marine businesses may need multiple policies to cover different jurisdictions, for example. Allowing for overlap between multiple policies allows the policyholder to get full cover for their ship or cargo, from beginning to end.
If the policyholder needs to make a claim on these overlapping policies, the two insurers may work together to split the liabilities.
Principle of subrogation
If the policyholder makes a claim on their policy following an insured incident, the insurer will pay them the settlement to which they are entitled. However, following this, the principle of subrogation allows the insurer to assume future ownership of the cargo.
The insurer may try to salvage and sell the cargo themselves, in order to recuperate the cost of the settlement. But if the policyholder attempts to sell their cargo after making a claim for loss or damage, they may be obliged to donate any money they make to their insurer.
This is a further principle that is designed to prevent policyholders from profiting from their insurance arrangements. Without this principle, unscrupulous policyholders would be able to intentionally damage their goods in order to receive two separate paydays – one for the ultimate sale of the goods, and one from their insurance settlement.
Why it is important to understand marine insurance principles
Understanding these key principles of marine insurance is vital if you want to know exactly what to expect should you ever make a claim on your policy.
These various principles will determine your responsibilities in the claim process, along with your insurer’s responsibilities. They could also determine the settlement you receive, and the ultimate fate of any cargo that might be lost or damaged during an incident.
Have any questions about marine insurance?
If you have any questions about marine insurance, or you want to ensure you have all the insurance you need for your ship or cargo, we are here to help.
Everard Insurance Brokers are the specialist marine trading division of James Hallam Limited who are accredited Lloyd’s brokers.
Find out more about our specialist marine insurance services.