Chapter 7 Insurance Clause: International Marine Cargo Insurance

7.1 Fundamental Principles of Insurance

According to the difference of subject matter insured, insurance can be divided into two major categories: property insurance and personal insurance. In China, property insurance consists of property damage insurance, agriculture insurance, liability insurance and credit insurance, while personal insurance includes life insurance, casualty insurance and health insurance. Irrespective of insurance repertoire, the insured and insurer must enter into an insurance contract and observe the following principles.

7.1.1 Principle of Insurable Interest

The subject matter insured is the object of the insurance, which may be anything in respect of property and interest related or the life and body of a person. Insurable interest is a certain kind of lawful economic power or interest of the policy-holder or the insured to the subject matter. The insurer should have an insurable interest to the subject matter insured. If the insurer has no insurable interest to the subject matter insured, the insurance contract would be null and void. This is what we called the“Principle of Insurable Interest”. As to cargo transportation insurance, the interest reflected on cargo transported is mainly the value of the cargo itself, as well as the costs related with the cargo, including freight, premium, tariff and expected profit.

7.1.2 Principle of Utmost Good Faith

The contract of insurance is based on the principle utmost good faith. If one party fails to observe such principle, the other party can call this contract null and void. As stipulated in Insurance Law of P. R. C., either party entering into the insurance must observe the principle of utmost good faith in their right execution and duty performance. The principle of utmost good faith is a minimum standard that requires both the insured and the insurer act as honestly as possible toward each other and do not conceal or withhold information from one another once both have entered into a contract and within the validity of the contract. Asked or not, the insurer is obliged to disclose all the terms and conditions in the contract, whereas the insured has a duty to disclose relevant personal information if consulted. The relations existing between the insured and his insurer are such that a full disclosure of all the important facts concerning the risk must be made, such as the subject matter, transportation, voyage, packing, etc. Such details as do not affect the risk need not, undoubtedly, be communicated.

7.1.3 Principle of Indemnity

All contracts of insurance, except the contract of life insurance, are contracts of indemnity. The principle of indemnity, also the principle of damage compensation, is a contractual obligation for the insurer to compensate for a loss which falls within the scope of liability on the subject matter insured. Three limits are prescribed as follows:1）The compensation shall be limited to the actual loss. 2）The compensation shall be limited to the sum insured. 3）The compensation shall be limited to insurance interests.

7.1.4 Principle of Subrogation

The principle of subrogation is the right of the underwriter, after their performance of compensation for a total or a partial loss, to acquire all rights and remedies possessed by the assured in respect of the loss caused by third parties. Compensation for the assured is a prerequisite to subrogation. Upon setting a loss, the underwriter shall sign a letter of subrogation with the assured, thus being entitled to claim from third parties thereafter.

7.1.5 Principle of Double Insurance

The principle of double insurance is a derivative of indemnity principle. It applies when the subject-matter is insured against one risk with more than one insurer during the same contractual period while the total insured amount exceeds the insured value. Such principle was regulated under Article 59 of the Insurance Contract Law 1981, which states that in double insurance, the insurers are liable for the insured jointly and severally in respect of the overlapping insurance amount, according to the ratio of the amounts of insurance.

7.1.6 Principle of Proximate Cause

The principle of proximate cause is a fundamental principle underlying the contract to clarify whether the underwriter is liable for a loss. It means that the insurer is only liable for such a loss that must have been proximately or directly caused by a peril insured against, but not for a loss occasioned by a peril beyond the liability of the contract.

7.2 Perils in Marine Transport

The losses are subdivided into peril of the see and extraneous risks.

7.2.1 Peril of the Sea

The peril of the sea, also marine peril, refers to the damage to property occurring as a result of an accident at sea, including natural calamity and fortuitous accidents. Such perils do not cover all accidents or casualties which may happen to the subject matter of the insurance on the sea, but are not restricted to risks on the sea. In other words, there must be perils which could not be foreseen or guarded against as probable incidents of the intended voyage.

（1）Natural Calamities

Natural calamities, or natural disasters, are the casualties resulting from natural processes of the earth beyond the manpower, such as atrocious weather, thunder, tsunamis, earthquakes, floods, volcanic eruption, tornadoes, and the like.

（2）Fortuitous Accidents

Fortuitous accidents are casualties occasioned by unforeseeable reasons, examples are vessel grounding, shipwreck, submergence, fire, collision, missing, explosion and other accidents.

7.2.2 Extraneous Risks

Extraneous risks are risks arisen from other external reasons except for perils of the sea. It is subdivided into general extraneous risks and special extraneous risks.

（1）General Extraneous Risks

General extraneous risks, or general risks, include freshwater and rain damage, shortage risk, leakage risk, breakage risk, pilferage, risk of intermixture and contamination, risk of sweating and heating, risk of odor, risk of rust, and risk of hook damage.

（2）Special Extraneous Risks

Special extraneous risks, or special risks, result from political and administrative rules, such as war risk, strikes risk, non-delivery risk, rejection risk, and so on.

7.3 Ocean Average and Charges

Ocean average and charges are the expenses caused by the perils of the sea, which is subdivided into two forms: i. the average resulting from the accident or casualty that may happen to the subject matter itself; ii. the charges for the salvage of the insured goods. In international practice, ocean average and charges also include the losses which may happen offshore or dur ing inland waterway transportation.

7.3.1 Average

In regard to the degree of damage, average is divided into total loss and partial loss.

7.3.1.1 Total Loss

Total loss means the whole lot or inseparable lot of subject matter is destroyed. It includes actual total loss and constructive total loss.

（1）Actual Total Loss

Actual total loss happens when the subject matter insured is totally destroyed or irreparably damaged, or ceases to exist in complete piece, or is incapable of utilization as the thing insured, or is no longer owned by the insured. Examples are:

a. A vessel sinks after collision with the rock, and all of the cargo are“poured”into the sea, so it is held to be actual total loss.

b. A ship of cement is agglomerated because of the rainwater; it can no longer be used in construction.

c. A vessel is captured and keeps missing for half a year; it is also recognized as an actual total loss.

In case of an actual total loss, the insured can be fully indemnified for the losses occur.

（2）Constructive Total Loss

Constructive total loss is a condition in which the cargo insured has been damaged in transportation, and the actual total loss is already inevitable, while recovery or maintenance is also taken at a cost greater than the value of actual total loss.

When a constructive total loss occurs, the assured may abandon the subject matter insured and give the underwriter what is termed as“Notice of Abandonment”. An abandonment is the cession of right to entitle the underwriter to whatever remains of the subject matter insured, and to enable him to take measures if any protection is needed. There is no special form of such notice, but usually the word“abandon”is used therein. If the information of abandonment is sufficient or if the underwriter accepts the abandonment, the underwriter would pay a total loss. However, if the“Notice of Abandonment”is not circulated to the underwriter, then the loss can only be viewed as a partial loss.

7.3.1.2 Partial Loss

Partial loss is the partial damage or loss to the subject matter insured. It is different from actual total loss and constructive total loss in the degree of damage. Due to different reasons of loss, partial loss can be subdivided into particular average and general average.

（1）Particular Average

Particular average is a partial loss of the subject matter insured caused by a peril of the sea which falls exclusively on the owner or other person who is interested in insurable property. For instance, a vessel suffered from consecutive heavy rainstorm, and the deck was damaged because of the weather, then it is a particular average on the ship; while if the rainwater spilled into the cabin and rot the cargo, say apples, then it is a particular average on the apples. In the first condition, the ship-owner or the charter may refer to his underwriter for the loss suffered; while in the second condition, it is the owner of the cargo that may claim indemnity from his underwriter, both provided that the policy covers such type of loss.

（2）General Average

General average is a partial loss caused by a deliberate act of the ship-owner for the general benefit of all the interests embarked. It is a kind of special sacrifice or payment for the partial loss. For example, the vessel cannot sustain the cargo due to the leakage at the hull bottom that only jettison would save the vessel from sinking. In this case, all the parties involved would share the loss of the specific consignor.

There are four conditions to decide whether a partial loss is a general average. First, the peril must be real or inevitable. Second, the deliberate act of the ship-owner must be reasonable and for the benefit of all parties. Third, the special sacrifice and extra expenditure is to remove the danger rather than being caused by such danger. Fourth, the sacrifice and expenditure must be successful in preventing the ship from perishing or whatever, thus the vessel and/or part of the cargo arrive（s）at the destination anyhow.

7.3.2 Charges

Marine charges are the payment made to save the insured goods. The measures in preventing or reducing a loss may be taken either by the assured or a party other than the assured and the underwriter. Therefore, according to the different parties the compensation may be paid to, the charges can be categorized into sue and labor expenses and salvage charges.

（1）Sue and Labor Expenses

Sue and labor expenses are the responsibility of the assured, or their agents, servants, and their assigns to save the property or to minimize a loss which has happened. If the expenditure made with a view to preventing or minimizing a loss is covered by the insurance, the underwriter shall pay his proportion. However, if the expenses in averting or diminishing a loss is not covered by the insurance, the underwriter shall not be liable for the charges.

（2）Salvage Charges

Salvage charges refer to the remuneration paid for the successful rescue of a ship, the cargo or the passengers from a loss at sea by the third party who has no contractual relations with the assured and the underwriter to conduct the salvage. When such a loss falls within the scope of the insurance, the underwriter shall be liable for the compensation. Under this condition, the principle of“no cure no pay”is often adopted.

7.4 Ocean Marine Cargo Clauses of the CIC（PICC）

In China, Ocean Marine Cargo Clause of the People's Republic Insurance Company of China（China Insurance Clause, C.I.C. in short）is often adopted in international marine cargo insurance. CIC was enacted under the practical situation of the insurance affairs in China with reference to international insurance clause, mainly the Institute Cargo Clause of London（abbreviated as I.C.C.）. It was revised on January 1st,1981, with the current version reported to China Insurance Regulatory Commission in 2009 and adopted in 2010; CIC is known as the 2009 version, despite the fact that version 2009 is the same as version 1981. At present, the People's Insurance Company of China, is the biggest insurer in China.

According to the different means of transportation, CIC includes Marine Transportation Insurance Clauses, Overland Transportation Insurance Clauses, Air Transportation Insurance Clauses, and Parcel Post Insurance Clauses. For some special commodities like fruits, frozen meat, timber, oil, etc., there are Refrigerated Cargo Insurance Clauses, Bulk Oil Clauses, Livestock and Poultry Insurance Clauses, and Additional Clauses.

Generally, the cargo transportation insurance in China contains basic coverage（or basic risks）and additional coverage（or additional risks）, wherein basic coverage are the main risks which can be insured independently while additional coverage cannot be purchased independently and has to be arranged together with a basic risk.

7.4.1 Basic Coverage

Basic coverage, also main coverage, can be insured separately, and it is a must for the insurer to buy one of the basic coverage, which covers FPA, WA or WPA, and All Risks.

（1）Free from Particular Average（FPA）

Free from Particular Average（FPA）covers all the losses and fees caused by natural disasters except for particular average. Particular average is not recoverable under FPA. In detail, FPA comprises the following points:

1）The total loss or constructive total loss of the insured goods because of bad weather, lightning, tsunami, earthquake, floods and other natural disasters.

2）The total or partial loss of the insured goods caused by vessel sinking, mutual collision, stranding, rock or ice collision, fire, and explosion.

3）The total or partial loss of the insured goods resulted from bad weather, lightning, tsunami, earthquake, floods and other natural disasters before and after the vessel is stranded, grounded, collided, or sunk.

4）The total or partial loss overboard in handling or transshipping, wherein being liable for partial loss is peculiar to CIC.

5）The expenses for salvage or measures taken to prevent or reduce the damage of the in sured goods in danger, but such expenses could not be more than the premium insured.

6）The loss of discharging at the port of refuge after the marine perils, and the extra expenses for discharging, storing and transporting at the intermediate port or port of refuge.

7）Charges for the sacrifice, contribution and salvage of general average.

8）If the contract for carriage has included liability for collision of ships, then the owner of the goods should be responsible to the ship-owner.

（2）With Average or With Particular Average（WA/WPA）

With Average or With Particular Average（WA/WPA）covers not only FPA, but also partial loss caused by bad weather, lightning, tsunami, earthquake, floods, and other natural calamities.

For example, Hangzhou Yala Food Importing Company has imported 1,000 cases of wine from Australia, unfortunately,100 cases of them were broken due to a heavy collision caused by heavy rain. For the partial loss here, it is the underwriter rather than the ship-owner that should be liable.

（3）All Risks

All risks（AR）is the most comprehensive one of the three basic coverage under which the insurer is responsible for all total or partial loss of, or damage to the goods insured, either arising from sea perils or general external causes. But there are some exclusions:

1）The losses caused by intentional act or fault of the insured party.

2）The losses resulted from the consignor.

3）The losses due to the inferior quality or shortage of the goods insured prior to the commencement of insurance liability.

4）The losses occurred for the natural wear and tear, inherent vice or nature and falling market, and transport delay of the insured goods.

5）The stipulations which fall within the scope of special external risks, such as War Risk Strikes Risk, etc.

For instance, China Newland has insured against All Risks for frozen vegetables export, but the ship is too old to transport, and the speed is too slow, it took three months to arrive at the port of destination. The vegetables were decayed, and the company required reimbursement. Of course, the underwriter has reason to refuse such requirement since the decay was caused by unseaworthiness of the ship.

7.4.2 Additional Coverage

Additional coverage is the supplement and expansion of general coverage. The insured can only insure against additional coverage on the basis of one general coverage. Currently, there are two types of additional coverage: general additional coverage and special additional coverage.

（1）General Additional Coverage

General additional coverage is the total or partial loss caused by general external risks，which includes 11 types under CIC: 1）Clash and Breakage. 2）Taint of Odor. 3）Fresh Water and/or Rain Damage. 4）Theft, Pilferage and Non-delivery, T. P. N. D. 5）Shortage. 6）Leakage. 7）Intermixture and Contamination. 8）Hook Damage. 9）Sweat and Heating. 10）Rust. 11）Breakage of Packing.

（2）Special Additional Coverage

Special Additional Coverage is liable to the total or partial loss caused by special extraneous risks, which include the following 8 categories:1）War Risks. 2）Strike Risks. 3）Aflatoxin. 4）Failure to Deliver. 5）On Deck. 6）Import Duty. 7）Rejection. 8）Fire Risk Extension Clause（F.R.E.C）—for storage of cargo at destination Hongkong, including Kowloon, or Macao.

7.5 Warehouse to Warehouse（W/W）Clause

W/W clause specifies that the liabilities of the underwriter commence at the warehouse of delivery or place of storage named by the policy, and continue to be effective during transit, until the warehouse or storage at the consignee's destination stated by the policy or other places used as allocation, distribution or abnormal transportation by the assured, thus terminating upon the entry of such warehouse or storage place. If the goods insured fail to arrive at such warehouse or storage, the insurance shall expire 60 days after the arrival and completion of discharge therefrom. If the goods are forwarded to any destination other than the one specified on the policy within 60 days above mentioned, the insurance shall terminate thereupon.

7.6 Institute Cargo Clause（ICC）

Originally made in 1912, ICC have been supplemented and amended many times to adapt to the development of international trade, navigation, or law in different periods. These amendments were finished on the January 1st,1982, and enacted on April 1st,1983. The new version of ICC was announced on November 24th,2008 and enacted on January 1st,2009.

The 2009 version of ICC mainly include 6 types of risks, which are ICC（A）, ICC（B）, ICC（C）, Institute War Clauses-Cargo, Institute Strikes Clauses-Cargo and Malicious Damage Clauses. All the risks other than malicious damage are divided into 8 parts: risks covered, exclusions, duration, claims, benefit of insurance, minimizing losses, avoidance of delay, as well as law and practice. The provisions of each part are structurally unified and systematically integrated. Therefore, besides ICC（A）, ICC（B）, and ICC（C）, war risks and strike risks can also be insured separately when needed.

7.7 Export and Import Insurance Practice in China

In this section, insurance clause in the contract, insurance practice, and claim procedures are to be exemplified.

7.7.1 Insurance Clause in the Contract

Insurance clause in the contract is a major part in international sales contract, thus it must be explicit and reasonable. The contents of insurance clause are various on different terms and conditions.

Contracts on FOB, CFR, FCA, FAS, CPT, the insurance provisions shall be:

Insurance: To be covered by the Buyer

If the buyer entrusts the seller to make insurance on the buyer's behalf, then the insured amount, risks, term reference, and who is liable for the premium, etc. should be clarified. Meanwhile, the time and means of payment should be specified.

If the insurance contract is concluded on CIF or CIP, then who is liable to insure, what risk is insured against, how to calculate the insured amount, what the insurance clause is, and when it is enacted must be clarified. Please avoid using general expressions like usual risks, customary risks, or marine clause.

7.7.2 Insurance Practice in China's Export and Import

Export and import insurance practice in China often includes the following procedures: insured amount confirmation, insurance transaction, premium payment, insurance documents collection, insurance claim.

（1）Export Insurance Practice: The Calculation of Insurance Premium

The insured amount, also insurance amount, means the maximum premium that the underwriter shall pay. When making an insurance, the insurer is obliged to apply for insured amount, which is calculated based on the insurable value. Such value generally includes the price of the goods, freight, premium, expected profit, etc.

The insurance amount of exports under CIF term is computed as follows:

Insurance Amount = CIF（or CIP）×（1+ Additional Rate）

As stipulated in UCP 600 and INCOTERMS 2020, the minimum premium is the CIF or CIP price of goods insured plus 10%, the minimum additional rate.

The premium is the fees paid by the insured to the insurer. The premium rate refers to the claim ratio paid by the underwriter. Under CIF or CIP terms, the seller, is obligated to pay the premium. At present, the premium rates are divided into general cargo rate and specified additional rate due to different types of goods, means of transportation, destinations and risks. General cargo rate applies to all cargos except those particularly specified. The goods which are not listed in specified additional rate shall fall within the scope of general cargo rate.

The premium is calculated as:

Premium = Insurance Amount × Premium Rate

When insurance is effected under CIF or CIP terms against additional risks, the formula is:

Premium = CIF（or CIP）×（1+ Additional Rate）×Premium Rate

For example, China is to export 1,000 bags of rice for$50 each under CIF to Malaysia，and has insured the rice against WPA, Fresh Water and Rain Damage, and Risk of Odor with PICC, the premium rates are 0.6%, 0.3% and 0.2% respectively, for 110% of the invoice value. The insured amount and premium are computed like this:

The insurance amount= 50×1,000×110% =$55,000

The premium= 55,000×（0.6% + 0.3% +0.2%）=$605

（2）Import Insurance Practice

The insurance of imports is usually effected under FOB or FCA terms. To make it easier to calculate the premium of imports, some enterprises could negotiate with insurance companies about the average freight rate and average premium rate. The formula is:

Insurance Amount = FOB（or FCA）×（1+ Average Freight Rate+ Average Premium Rate）

There is import premium rate for goods imported, and it is classified into general cargo rate and specified additional rate. General cargo rate is made on the basis of means of transportation, types of risks and regions, and applies to all goods except those fall within the scope of specified additional rate. Specified additional rate is adopted when the specified goods are insured against all risks.

7.7.3 Claim Procedure

When the exports and imports sustain damage covered by the insurance within its validity, and the assured, subject to the provisions, applies for a claim from the insurance company, such claim is called insurance claim. The procedures are listed below.

（1）Apply for Survey

When the goods insured are found to be damaged, the assured shall notify the surveyor as well as claim agent of the insurance company or the company named by the insurance policy, and apply for survey. The insurance company or the designated surveyor and claim agent shall take effective measures, such as inspecting the loss, giving salvage suggestions, checking out the reasons of loss, defining insurance liabilities, and issuing the survey report. The survey report is an important certificate in support of a claim.

（2）Claim for Damages on the Carrier and/ or Other Parties Concerned

When the subject-matter is found to be short for the whole lot, or apparently damaged, besides informing the insurance company, the assured or the agent shall also claim for a certificate of loss or damage from the carrier or the authorities, such as customs authority or port au thority. If the shortage or damage falls within the liabilities of the carrier, the wharf, or the stevedoring company, the assured shall immediately apply for a claim in a written form, and retain the right of recourse, sometimes even apply for extension of the claim validity.

（3）Take Proper Measures

For the danger within the insurance liability, the assured must endeavor to take necessary and appropriate salvage or settling measures immediately to prevent or eliminate the loss. Upon receipt of the special notification of prevention or elimination measures sent by the insurance company, the assured shall act as required. The charges for salvage, prevention, or elimination of loss shall be covered by the insurance company, but the amount shall not be more than the insured amount of the subject matter.

（4）Prepare Documents for Claim

After the subject matter has been surveyed or the recourse procedure from the carrier or the third party has been completed, the assured shall immediately require a claim from the insurance company or their agent. While submitting a claim, the assured shall provide survey report as well as other certificates including insurance policy or original insurance certificate, transportation documents（bill of lading, sea way bill, railway or roadway bill, air consignment note, parcel post receipt, multimodal transport documents）, invoice, packing list or weight list, claim correspondence and other necessary bills or documents, certificate of loss or damage, sea protest, and also exemplify claim amount, computing ways, as well as claim list for all the items and uses.

It should be noted that whether there is deductible with respect to fragile or short weighted goods, that is, compensation irrespective of percentage, I.O.P in short, or the deductible is stipulated. Deductible is adopted by Chinese insurance companies, but not written in ICC.

（5）Subrogation

Subrogation is the right of the underwriter, after their performance of compensation for a total or a partial loss, to acquire all rights and remedies possessed by the assured in respect of the loss caused by third parties, either in the nature of proceedings for compensation or in the name of the assured against third parties. Compensation for the assured is a prerequisite to subrogation. Upon setting a loss, the underwriter shall sign a letter of subrogation with the assured, thus being entitled to claim from third parties thereafter.