Workers on a boat
Feb 21, 2021

What is Marine Insurance?

Any insurance helps manage risks in case of an unfortunate event such as fire, accidents, property and environmental damages, and the loss of life.

There are four modes of transport; road, air, water, and rail. Water transport has the highest risks involved, not only due to natural occurrences that can cause damages to vessels and cargo losses but also the numerous incidences that can happen at sea and cause huge losses.

International Maritime Organization (IMO) outlines several sea threats that may cause damages to vessels and cargo losses. These incidences include:

  • Piracy
  • Cross-border conflicts
  • Maritime terrorism
  • Armed robbery at sea
  • Weather hazards

Such incidences may lead to loss of valuable cargo, damages to expansive ships, environmental damages such as oil pollution or greenhouse gas emissions, and risk of seafarers' loss of life

Marine insurance is compulsory for all seagoing vessels and their owners to manage all risks if and when they occur without lacking funds when needed most.

Marine insurance is a type of insurance provided to ships, boats, and cargo covering against cargo loss or damage to vessels from their country of origin to their destinations. There are several types of marine insurances that shippers can choose from depending on the nature and scope of business.  

Despite what the name marine insurance implies, it applies to all transportation modes, including water, air, road, and railway transport. The name only originates from traditional international trade where only sea transport was the only means to transport goods.

How marine insurance works?

When an exporter buys an insurance policy, he transfers the liability of goods being transported to the insurance company. This way, the exporter does not bear the sole responsibility for any loss or damage to transit goods.

The carrier, be it the airline or shipping company, usually bears the cost of damaged or lost goods while onboard. However, their liability is limited and only compensates "per package" or "per consignment" based on agreed terms.

The carrier coverage may not be reliable or sufficient to cover the total cost of goods being shipped, making it necessary to acquire an insurance policy as well as wait until the insurance is processed before shipping.

As pointed out, insurance is often made compulsory for every international trade contract. Depending on the contract terms, the obligation to pay the insurance cost may fall on the exporter, importer, or forwarding agent.

Marine insurance is commonly stipulated by Incoterms used in a contract. For instance, under the Cost of Insurance and Freight (CIF) or Carriage and Insurance Paid (CIP), the exporter is required to insure the goods to protect the buyer's or the bank's interest (when payments terms are under a letter of credit).

Similarly, under Delivered Duty Unpaid (DDU) or Delivered Duty Paid (DDP) Incoterms, the seller is not obligated to buy insurance for the goods. However, most exporters still insure the goods, either unknowingly or as a general trade practice.

What is covered by marine insurance?

Generally, marine insurance covers the following:

  • Physical or structural damage to ships caused by collisions with other submerged or above-water vessels
  • Damage to property on board and bodily injuries
  • Towing, gas delivery, and any other assistance in case of being stranded at sea

Marine insurance also covers any problems faced while transporting goods. You will also be protected against any liability in the event of damaged or lost goods.

However, it is the responsibility of the exporter, the importer or the forwarding agent to get adequate insurance for their goods, especially when transporting commercial goods.

What is not covered by marine insurance?

  • Intentional loss or damage
  • When the packaging quality for cargo being transported is not appropriate
  • If damage or loss occurs due to bankruptcy, liquidation or failure to have enough finances
  • Wear and tear for goods in transit
  • If the loss is caused by delays in cargo
  • If loss or damage is caused by war, strike, riots or civil commotion by individuals aboard a ship
  • Loss or damage due to insolvency

Types of marine insurance

Several types of marine insurances cater to different scope and nature of businesses for ship owners, cargo owners, or charterers.

Liability insurance

Liability insurance is a type of marine insurance where compensation is acquired to provide for any liability if a ship crashes or collides with another or faces any other induced attack when transporting goods.

Sometimes, a ship may collide with a submerged or above-water ship causing damages or losing goods. Shippers are compensated against such liabilities if they acquired liability insurance. If a crew member travels with valuable items such as laptops or gold watches, they should have separate insurance for the items.

Freight insurance

Freight is the amount paid by cargo owners for the goods to be transported from one port of origin to their port of destination. The payment is made either in advance or when the goods are safely delivered to their destination.

During transportation, goods can be damaged or lost, and the operator stands a chance to lose money in the form of freight receivables. Freight insurance protects operators against freight loses due to the occurrence of unprecedented events and accidents.

Hull insurance

Hull insurance protects against loss, damages or destruction of waterborne craft or aircraft. This type of insurance is taken by shipowners and insures the ship's hull and torso and every article and pieces of furniture in the ship.

If a ship or its machinery gets damaged, the owner receives indemnity from the insurance company. Hull insurance applies to all seagoing vessels but limited to commercial-based crafts. Barges, tugboats, offshore oil rigs, floating equipment, and other similar installations can still take hull insurance cover.

Marine cargo insurance

Marine insurance specifically caters for marine cargo in transit as well as belongings of a ship’s voyages. It protects cargo owners against damages, loss or delay in voyages or unloading when the ship experiences accidents at sea.

Marine insurance also has a third-party liability covering damages to the ship, port or other transport modes such as rail or road that may have been caused by dangerous cargo being transported.

Types of marine policies

Voyage policy

A voyage policy is a marine insurance policy only valid for a specific voyage or consignment and covers risk from the port of origin to the port of destination. This policy is more critical for cargo during the period of the voyage.

The insurer's liability is bound by the terms "from" and "to", starting at the port of origin and expiring when the cargo arrives at the port of destination. This policy can be time-wasting since the exporter purchases insurance cover every time a shipment is being sent.

Time policy

Time policy is only valid for a specified period, usually one year. All insured risks that occur within the specified period will be compensated.

Time policy is common with hull insurance than cargo insurance and does not limit the number of insured vessels' voyages.

Mixed policy

The mixed policy is a combination of voyage and time policies. The policy references a certain period for completion of a given voyage. For example, the mixed policy covers a voyage to reach its destination by a certain period, whichever is met first.

Open or un-valued policy

Under the open or un-valued policy, the cargo or consignment value is not indicated beforehand; it is stated after a loss and inspection is conducted. For compensation purposes, in case of an insured risk, the cargo is valued using the cost of cargo and all incidental expenditure.

Valued policy

On the other hand, a valued policy ascertains the cargo or consignment value and indicates it in the policy document beforehand. This makes it easy and straightforward to compensate the insured in case of a loss.

Floating policy

The floating policy is meant for clients who regularly deliver cargo to a particular geographical area. Instead of purchasing a marine policy every time he exports, which is expensive, time-consuming, and involves many formalities, he can take one policy that specifies the amount of claim but omits all other details until when the ship embarks on its journey.

Wager policy

A wager policy does not mention any fixed terms for reimbursement. It is upon the insurance company to determine the amount to reimburse the cargo owner in case of a loss. A wager policy is also not a written policy and is not valid in a court of law.

Single vessel policy

This policy is meant for small shipowners owning only one ship or several ships but spread out into several fleets, each having one ship. Single vessel policy covers only one ship against any risk.

Fleet policy

An owner of several ships can take one fleet policy to insure all his ships, including the old ones. It is also a time-based policy which can be one or more years.  

Port risk policy

This type of marine insurance policy ensures the ship's safety while it is anchored at a port. The policy expires when the ship leaves the dock.

Named policy

This is the most common type of marine insurance policy where the ship's name and the cargo's value are mentioned in the policy documents.

Block policy

This policy covers your cargo throughout its journey. Although it is marine policy insurance, it protects against losses both at sea and on land. The policy covers the cargo from a seller's premises through rail, road, sea and air transports to the buyer's premises.

Benefits of marine insurance
  1. It provides all-round coverage against a wide range of risks that may be faced while at sea.
  2. Most insurance companies offer claim survey assistance worldwide as well as claim settlement assistance.
  3. There are various marine insurance policies that one can choose to suit their budget or scope of business.
  4. Marine insurance covers can also be customized to meet customer needs and preferences.
  5. Marine insurance protects against high costs following a loss.
  6. Some marine insurance policies may be assignable, meaning the exporter can assign the policy to the buyer after transferring legal ownership of the cargo.
  7. Although most insurance companies do not cover war, riots, strikes and other perils, marine insurance policies provide extensions protecting against them if the customer requests.
  8. Voyage policy is best suited for individuals making one-off shipping or just a few in a year. You do not require an expensive one-year policy, but you can get insurance just for your single trip.

The bottom line

Marine insurance is an essential product for exporters, importers, boat, or yacht owners. However, it involves many complex dealings that must be understood to achieve common ground for payment and receiving.

The best way to benefit from marine insurance is to understand the Incoterms involved in a trade before making any insurance purchase. Most of the time, the exporter is tasked with acquiring the insurance policy, which may not be the case if the correct Incoterms code is followed.

It is also very crucial to work with an experienced insurance provider who understands your type of business. This will ease your policy application and save time and hassle when filing for a claim.

Lockstep’s shipment financing comes with no-cost shipment assistance that ensures you significantly save on costs. We also ensure you undertake sustainable shipping that reduces risks to you and the environment. Contact us today to learn how we can partner to add value to your business.

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