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Page 1 Recording of this session via any media type is strictly prohibited. Page 1 KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES April 28, 2014 John.

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Presentation on theme: "Page 1 Recording of this session via any media type is strictly prohibited. Page 1 KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES April 28, 2014 John."— Presentation transcript:

1 Page 1 Recording of this session via any media type is strictly prohibited. Page 1 KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES April 28, 2014 John M. Sylvester Michael T. Fitzgerald Thomas M. Exl

2 Page 2 Recording of this session via any media type is strictly prohibited. Introduction and Overview What is Marine Insurance? Historical Development of Marine Insurance Market Key Considerations for Risk Managers Types of Marine Coverage and Policies Considerations in Underwriting Marine Insurance The Law of Marine Insurance 1 2

3 Page 3 Recording of this session via any media type is strictly prohibited. Introduction and Overview Insurance against the perils of marine commerce o For example, if a ship sinks in transit, various types of losses are possible: loss of cargo; loss of profit from sale of cargo; damage to ship; third-party liability; personal injury o Key difference between marine insurance and other types of insurance is that the “marine adventure” or peril insured must be specifically maritime in nature 3

4 Page 4 Recording of this session via any media type is strictly prohibited. “Marine adventure” – English Marine Insurance Act of 1906: where any goods in shipment are exposed to maritime perils (e.g., perils of the sea, fire, war, pirates, jettisons, barratry) where the earning of any pecuniary benefit from goods in shipment is endangered by exposure to maritime perils where any liability to a third party may be incurred by the owner of insurable property (or any party with an interest in the property) by reason of maritime perils 4

5 Page 5 Recording of this session via any media type is strictly prohibited. Marine Insurance Markets English Market began with Lloyd’s of London in the 1600s Lloyd’s is not an insurer; it is a facility for the selling of insurance by underwriting syndicates at Lloyd’s Historically, the capital for Lloyd’s syndicates was provided by individual investors – “Names” Now, the capital is provided by corporations doing business as syndicates 5

6 Page 6 Recording of this session via any media type is strictly prohibited. Marine Insurance Markets Lloyd’s began in 1688 at Edward Lloyd’s coffeehouse in London Lloyd’s Coffee House was located near the Tower Wharf and Customs House in London, so it was frequented by shipowners, captains, and merchants At Lloyd’s Coffee House, various merchants entered into a side business of underwriting the risk of a ship’s safe passage to its destination, with its cargo intact 6

7 Page 7 Recording of this session via any media type is strictly prohibited. Marine Insurance Markets By 1696, the “Lloyd’s News” and, later, “Lloyd’s List” began publication containing the most authoritative daily journal of shipping intelligence Over the years, Lloyd’s set up reporting stations around the world to provide information on ship movements Because of the need for buyers and sellers to have the same information about the risk, the doctrine of “uberrima fides” developed in the market, and the law 7

8 Page 8 Recording of this session via any media type is strictly prohibited. Marine Insurance Markets From modest beginnings in the 1600s, Lloyd’s has grown to be one of the largest and most influential marine insurance markets in the world Over time, other chartered London insurance companies sprang up London continues to be a major marine insurance center, not only for Lloyd’s Underwriters, but also London-based insurance companies and P&I Clubs 8

9 Page 9 Recording of this session via any media type is strictly prohibited. Marine Insurance Markets Marine Insurance today is underwritten by: o Underwriters at Lloyd’s o Insurance companies located in London and throughout the world o U.S. insurance companies, most of which belong to the American Institute of Marine Underwriters o P&I (“protection & indemnity”) Clubs 9

10 Page 10 Recording of this session via any media type is strictly prohibited. Page 10 Key Considerations for Risk Managers 10

11 Page 11 Recording of this session via any media type is strictly prohibited. From Danger to Opportunity Every business and every production has risks. You can’t get around it. (Lee Iacocca) The only strategy that is guaranteed to fail is not taking risks. (Mark Zuckerberg) 11

12 Page 12 Recording of this session via any media type is strictly prohibited. Plenty of Risks to Choose From Market risk Price risk Counterparty risks (non-payment, non-performance, insolvency, valid documentation, taxation issues, insurance cover) Credit risks Operational risks Geopolitical risks (piracy, terrorism) Compliance with laws / sanctions regulations Liabilities to third parties 12

13 Page 13 Recording of this session via any media type is strictly prohibited. The Risk Review Process Forensic review of your business and YOUR risks Identify risks you can transfer to counterparties, insurers and/or banks ARE THE REMAINING RISKS ACCEPTABLE AND MANAGEABLE TO YOU? 13

14 Page 14 Recording of this session via any media type is strictly prohibited. Manage Your Risks YOUR AIM MUST BE A CONTROLLED ENVIRONMENT. Put a risk policy in place o Risk analysis o Limits o Authorities o Operations procedure o Monitoring o Reporting 14

15 Page 15 Recording of this session via any media type is strictly prohibited. Risk Management Through a Commercial Contract Clearly define the objectives and responsibilities of the parties Use INCOTERMS General Terms and Conditions are useful to fill the gaps Does the contract meet all insurance and banking requirements? PLEASE NOTE THAT A CHARTER PARTY AND A BILL OF LADING ARE ALSO CONTRACTS 15

16 Page 16 Recording of this session via any media type is strictly prohibited. What are Incoterms Created in 1936 by the International Chamber of Commerce (ICC) Regularly updated, most recently in 2010 but 2000 Rules are still referred to Incoterms DO NOT give you a complete contract of sale Incoterms do not deal with the transfer of ownership of goods Incoterms state which party has the obligation to make carriage or insurance arrangements Specify the place of delivery as precisely as possible 16

17 Page 17 Recording of this session via any media type is strictly prohibited. How to Approach the Insurance Markets Choose your broker wisely o Presence in your markets o Familiar with your line of business and risks involved o Proactive claims-handling department o Transparent broker compensation 17

18 Page 18 Recording of this session via any media type is strictly prohibited. Your Relationship With Insurers Meet your lead underwriter Make sure that the underwriter understands your business and the risks involved UTMOST GOOD FAITH: you must disclose BEFORE contracting every material circumstance of your business or transaction that you wish to insure: corporate structure, goods, conveyances, geographical regions, limits, etc. 18

19 Page 19 Recording of this session via any media type is strictly prohibited. Operating An Insurance Policy Strictly comply with the policy terms -- e.g., warranties that some particular thing shall or shall not be done Keep insurers closely informed about changes to your organization and business Make sure that the policy is amended to reflect changes Protect yourself through proactive measure, e.g. vetting procedures for vessels/terminals; use of independent inspectors In cooperation with insurers/broker get an Emergency Procedure in place Renewals should not be negotiated at the last minute 19

20 Page 20 Recording of this session via any media type is strictly prohibited. In Case of An Accident Follow the Emergency Procedure Take all necessary measures to protect people from injury or death Protect property from further loss Alert your broker’s/insurer’s claims department Duty to mitigate loss (experts on the scene) DO NOT ACKNOWLEDGE LIABILITY Start collecting evidence (witness statements, photographs, survey reports, retention of samples, etc.) 20

21 Page 21 Recording of this session via any media type is strictly prohibited. Claims Handling Pre-contract disclosures Policy wording Claim notification/documentation Appointment of loss adjustor Close contact with people involved within company FULL COOPERATION WITH BROKER’S/INSURER’S CLAIMS DEPARTMENT IS KEY 21

22 Page 22 Recording of this session via any media type is strictly prohibited. Page 22 Types of Marine Coverage and Policies 22

23 Page 23 Recording of this session via any media type is strictly prohibited. Lines of Marine Insurance Cargo Insurance Marine Liabilities o (e.g. Charterer’s Legal Liability) Hull & Machinery Insurance Protection & Indemnity (P&I) Insurance 23

24 Page 24 Recording of this session via any media type is strictly prohibited. Unlocking Cargo Terms/Phrases Definitions and/or Translations Average – Loss Collision – 2 vessels running into each other Franchise – Threshold General – Shared Particular – Partial or Individual Warranty i. Exclusions, e.g. Paramount; ii. Coverage requirements, e.g., loading survey 24

25 Page 25 Recording of this session via any media type is strictly prohibited. Unlocking Cargo Terms/Phrases Definitions and/or Translations Average Warranty – Insuring Terms/Coverage o FPA – Free of Particular Average Total loss only o WA – With Average – Total and Partial losses o WA 3% – loss /no loss 3% Franchise Threshold o All Risks – covered unless specifically excluded General Average – Shared Loss Irrespective of percentage – perils added and includes total and partial losses Sue and Labor – Act to avoid/minimize loss 25

26 Page 26 Recording of this session via any media type is strictly prohibited. Cargo Insurance Provides coverage for cargo in transit (with incidental storage) Ocean Cargo Insurance/Certificates are an integral part of international trade Who requires marine cargo insurance? o Anyone engaged in the movement of goods o Buyers, sellers, importers, exporters, manufacturers, and banks The Terms of Sale impact who purchases insurance 26

27 Page 27 Recording of this session via any media type is strictly prohibited. Cargo Insurance Principal areas of coverage o Perils of the Sea – Most important coverage of marine insurance policies – A broad term covering specific types of losses, including: Stranding; Sinking; Grounding; Collisions with other vessels; Heavy Weather; Ice o Assailing Thieves o Barratry o Jettison – Defined as the intentional throwing overboard of the ship’s cargo, material, or stores in time of peril, for the common safety of the ship and her cargo o Fire, lightning and earthquake o All Other Like Perils 27

28 Page 28 Recording of this session via any media type is strictly prohibited. Cargo Insurance All Risks o Shipments of goods insured sufficiently packed to withstand the voyage covered by the policy are insured against all risks of physical loss or damage from any external cause. Paramount Warranties/Paramount Exclusions o Free of Capture and Seizure (FC&S) (War Perils) o Strikes, Riots, and Civil Commotion (SR&CC) o Radioactive Contamination Exclusion (RACE) o Chemical, Biological, Biochemical, and Electronic Exclusion (CBE) o Delay and Inherent Vice 28

29 Page 29 Recording of this session via any media type is strictly prohibited. Cargo Insurance War Risks Perils coverage provided by separate policy. o Coverage is only while water borne or airborne (no coverage for inland transit legs of the voyage) o 48-hour cancellation provisions o “On Application” rates may apply (e.g., shipments to Iraq or Afghanistan) SR&CC Coverage provided by endorsement to the marine cargo policy. o 48-hour cancellation provisions o TRIA Terrorism coverage at the assured’s direction is (i) included for an additional premium, or (ii) excluded 29

30 Page 30 Recording of this session via any media type is strictly prohibited. Cargo Insurance Unique Coverage Features: Warehouse-to-Warehouse Coverage o 1 insurer for all 3 legs of transit General Average and Salvage Charges (GA) Seaworthiness (Airworthiness) o Vessel being in sound condition and well maintained o Vessel being properly manned (number of and qualification of crew) Sue and Labor o Assured required to take steps to prevent or minimize loss 30

31 Page 31 Recording of this session via any media type is strictly prohibited. Cargo Insurance Transportation Carriers o Ocean vessel; aircraft; tug and barge; truck; rail; and package parcel delivery service Carrier’s Legal Liability o Cargo owner must name and waive carrier (none) o Standard Release Bill of Lading/Air Waybill (normal legal liability) o Declared Value Bill of Lading/Air Waybill (legal liability is at an agreed higher amount) o Insured Bill of Lading/Air Waybill (all risks) 31

32 Page 32 Recording of this session via any media type is strictly prohibited. Cargo Insurance Carriers’ Legal Liability – Defenses and Exemptions for loss or damage due to: o Acts of God o Acts of government o Riots and labor disturbances o Improper or insufficient packing or stowage o Inherent vice of the cargo 32

33 Page 33 Recording of this session via any media type is strictly prohibited. Charterer’s Legal Liability Cargo owner charters a vessel. Under the Charter Party Agreement, the Cargo Owner is responsible for: o Safe berth at the designated – Port(s) of loading – Port(s) of offloading o Loss or damage to cargo carried by the vessel – Cargo owner is required to have his cargo underwriters waive rights of subrogation in favor of the vessel owner 33

34 Page 34 Recording of this session via any media type is strictly prohibited. Hull Insurance Basic coverage includes: o Named perils physical damage to the vessel’s hull and her machinery o General Average and Salvage Charges o Collision Liability o Sue and Labor Warranty of Seaworthiness Amount Insured is Agreed Value Coverage applies to Named/Scheduled Vessel or Vessels 34

35 Page 35 Recording of this session via any media type is strictly prohibited. Protection & Indemnity Insurance (P&I) P&I Insurance Policies o Cover claims for damage or compensation for a large number of categories of loss, including: – Injury to or loss of life of crew members – Removal of wreck of the named vessel – Damage to fixed or floating objects or property (other than vessels) – Liability for loss or damage to cargo 35

36 Page 36 Recording of this session via any media type is strictly prohibited. Considerations in the Underwriting of Marine Insurance General Considerations o Years in business o Loss record o Loss control o Geographic limits o Contract review Considerations for Cargo Insurance Considerations for Hull and P&I Insurance 36

37 Page 37 Recording of this session via any media type is strictly prohibited. Page 37 The Law of Marine Insurance 37

38 Page 38 Recording of this session via any media type is strictly prohibited. Key Legal Issues in Marine Insurance Choice of Forum Choice of Law Insurable Interest The Doctrine of Uberrima Fides 38

39 Page 39 Recording of this session via any media type is strictly prohibited. Admiralty Jurisdiction and Choice of Forum Admiralty Jurisdiction o Article III, Section 2 of the Constitution gives federal courts jurisdiction over “all cases of admiralty and maritime jurisdiction” – 28 U.S.C. § 1333 – Marine insurance contracts are within federal court’s admiralty jurisdiction – “Saving to suitors” clause in §

40 Page 40 Recording of this session via any media type is strictly prohibited. Admiralty Jurisdiction and Choice of Forum Choice-of-Forum o Federal Court – Admiralty Jurisdiction o State Court o Federal Court – Another Jurisdictional Ground (diversity, etc.) 40

41 Page 41 Recording of this session via any media type is strictly prohibited. Choice of Forum– Issues to Consider Right to a Jury Trial o Generally, no right to jury trial in admiralty. See, e.g., Concordia Co. v. Panek, 115 F.3d 67 (1 st Cir. 1997) o F.R.C.P. 9(h)(1) designation = no jury trial o Be aware of removal issues and potential to lose right to a jury trial Choice of forum can affect the choice-of-law analysis 41

42 Page 42 Recording of this session via any media type is strictly prohibited. Choice of Law Choice-of-Law Problems Arising in Marine Insurance Disputes o Marine insurance law not codified o U.S. courts used to borrow from English law to fill gaps in federal maritime law related to marine insurance o Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955) – U.S. courts began looking to state law in the absence of a controlling federal maritime law precedent o Since 1955, Marine insurance governed by both federal maritime law and state law 42

43 Page 43 Recording of this session via any media type is strictly prohibited. Choice of Law – Aftermath of Wilburn Boat Wilburn Boat is a highly criticized case and the choice-of-law analysis has since been layered and complex There are two layers to the choice-of-law analysis o Vertical Choice-of-Law Analysis – Maritime vs. State Law o Horizontal Choice-of-Law Analysis – If state law applies, which state law governs? 43

44 Page 44 Recording of this session via any media type is strictly prohibited. Choice of Law – Aftermath of Wilburn Boat Courts interpret Wilburn Boat differently o Fifth Circuit is pro-state law – To apply, the federal maritime rule must be “entrenched” federal precedent – Notwithstanding entrenched federal precedent, courts may apply state law if state has substantial interest o Eleventh Circuit seems to favor application of federal maritime law – If a maritime rule is “well-established” or “entrenched,” it preempts the state law rule Choice-of-law provisions in marine policies are generally enforced 44

45 Page 45 Recording of this session via any media type is strictly prohibited. Insurable Interest An insurable interest in the subject matter insured must exist at time of loss, not at contracting An “Insurable Interest” is defined differently, in some circumstances, under state law than it is under maritime law o This is often true with respect to cases involving the sale of goods o Whether a loss is covered can turn on this definition 45

46 Page 46 Recording of this session via any media type is strictly prohibited. Insurable Interest Defining Insurable Interest o English Marine Insurance Act of 1906 – Very broad definition, including legal and equitable relationships to property o Federal Maritime Law – Hooper v. Robinson, 98 U.S. 528 (1878) – In the law of marine insurance, insurable interests are “multiform and very numerous.” – Injury from the loss of something or benefit from its preservation is sufficient to create an insurable interest o Uniform Commercial Code – Requires title or a security interest 46

47 Page 47 Recording of this session via any media type is strictly prohibited. Insurable Interest ABB Power T&D Co. v. Gothar Versicherungsbank VVAG, 939 F. Supp (S.D. Fla. 1996) o Court held that an insurable interest under federal admiralty law means “any pecuniary interest” o Court held that insurable interest is an “entrenched” principle that preempts state law o ABB Power is the only post-Wilburn Boat case confirming this “entrenched” principle of maritime law 47

48 Page 48 Recording of this session via any media type is strictly prohibited. Misrepresentations, Nondisclosure, and Uberrima Fides Marine insurance is a contract “uberrima fides” – requiring the “utmost good faith” by both parties o In practice, operates against the insured alone The insured is bound to disclose every fact within his knowledge that is material to the risk o This is true even if the insurer does not inquire o Failure to disclose can void the policy ab initio or even after the risk has attached o Doctrine operates regardless of insured’s intent 48

49 Page 49 Recording of this session via any media type is strictly prohibited. Misrepresentations, Nondisclosure, and Uberrima Fides This policy is not only harsh, it is broad because of the definition of “materiality” o Fact considered “material” if the existence of the fact would affect the decision of a prudent insurer to underwrite the risk or even charge a different premium Traditional rule undeniably harsh, but insurers’ arguments in favor of rule have less force in today’s world 49

50 Page 50 Recording of this session via any media type is strictly prohibited. Misrepresentations, Nondisclosure, and Uberrima Fides Policyholders have had some success and American courts have circumvented strict application of the doctrine in various ways o Certain facts were not “material” – Steelmet, Inc. v. Cariber Towing Corp., 842 F.2d 1237 (11th Cir. 1988) o Nondisclosure did not void coverage because it related to a matter of common or public knowledge – Anne Quinn Corp. v. Am. Mfrs. Mut. Ins. Co., 369 F. Supp (S.D.N.Y. 1973) o Courts have split on whether the doctrine is an “entrenched” federal precedent 50

51 Page 51 Recording of this session via any media type is strictly prohibited. Take Away Points Risk Managers should focus on the particular law applicable to a marine insurance policy, which may affect: o Forum for dispute and availability of a jury trial o Insurable Interest Issues o Duties of Disclosure These considerations can be outcome-determinative in a coverage dispute 51


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