MARINE INSURANCE IN BANGLADESH – A CASE STUDY

Table of Contents

Introduction
Nature and Scope of Marine Insurance
Historical Development of Marine Insurance
What is Marine Insurance
Existing law in Bangladesh
Features of Marine Insurance
Classification of Marine Insurance
Classification of Marine Insurance Policy
Principles of Marine Insurance
Present situation of Marin Insurance in Bangladesh
Why is Marine Insurance a contract of indemnity?
Marine Insurance v. Fire Insurance
Case relating to Marine Insurance
Evolution
Recommendation
Conclusion
References

MARINE INSURANCE IN BANGLADESH:

A CASE STUDY

INTRODUCTION:

Bangladesh economy holds huge risk in every sector because the country often faces natural disasters like flood, cyclone, draught and hurricane. There are also other factors like political strikes and economic issues like inflation, high interest rate, tax policy, deregulation etc. That depend the risks for the economy.

Insurance a system of spreading the risk of one to the shoulders of many. It is a contract whereby the insurers, on receipt of a consideration known as premium, agree to indemnify the insured against losses arising out of certain specified unforeseen contingencies or perils insured against. Insurance is a business began almost a century back. Insurance business gained momentum in East Pakistan during 1947-1971. When 49 insurance companies transected both life and general insurance schemes. These companies were of various origins British, Australian, Indian, West Pakistan and local.

The rule of insurance as a financial intermediary is particularly important in countries like Bangladesh with low levels of financial penetration. However, there are various types of insurance policy in Bangladesh. Marine Insurance is one of them. Marine insurance is the oldest form of insurance. Insurance was introduced to the world by the concept of marine insurance. It may be called as an origin of insurance business. Marine insurance is a contract of indemnity against the losses of account of perils of sea. The object of marine insurance is to make good losses exposed to the seafarers due to sea condition, war, pirates, weather, diseases, spoilage, etc.

In this assignment we will discuss overall about ‘Marine Insurance’. So, the bottom line of this assignment is “Discussion of Marine insurance in Bangladesh with case reference.”

NATURE AND SCOPE OF MARINE INSURANCE:

We have already mention that, Marine insurance was the earliest form of insurance. It was the oldest risk hedging instruments our ancestors used to mitigate risk in medieval times.

The term marine originates from the fact that goods intended for international trade were traditionally transported by sea. Despite what the name implies, marine insurance is applicable to all modes of transportation of goods. When the goods are sent by air, their insurance is also known as marine cargo insurance.

Marine insurance is a type of insurance that covers cargo losses or damage caused to ships, cargo vessels, terminals and any transport in which goods are transferred or acquired between different points of origin and their final destination. Providing protection against transport related losses, this voyage policy provides a haven for shipping companies and couriers because it protects them from costly potential losses while transporting goods by water.

Despite following laws and safety regulations, transporters can’t control natural occurrences that might disrupt the cargo or vessel. Things like weather hazards, encounters with pirates and cross border conflicts are very common in water transportation and the damages associated with these situations can cause a significant financial hardship for ship owners. This is where a marine insurance policy comes to the rescue, protecting the interests of shipping corporations and transporters by providing them with insurance coverage needed to defend against possible losses.

HISTORICAL DEVELOPMENT OF MARINE INSURANCE:[1]

The origin of insurance is lost in antiquity. However, there is no evidence that insurance in its present form was practice prior to the twelfth century. A brief chronological historical development of the marine insurance is given below:

Marine insurance was the earliest well-developed kind of insurance having its origins in the Greek and Rome. In Bangladeshi context, marine insurance very relevant since Bangladesh is a maritime nation and the seaports are busy with loading and unloading cargoes carried by local and international flag-bearing vessels.

This type of insurance probably began in Northern Italy sometime during the 12^th &13^th century and gradually the concept was rather transferred to or taken over by the United Kingdom. During the 13^th or 14^th century the Italian merchants went to UK and along with the merchandise carried with them the trading customs including the concept of marine insurance.

Marine insurance as such was not being practiced as a separate specialized entity during that time since it was the merchants who used to transact marine insurance business side by side with their general trading activities.

WHAT IS MARINE INSURANCE?

A simple definition of the word insurance would be “Protection against future loss.” marine insurance is another variant of the general term ‘insurance’ and as the name suggests is provided to ships, boats and most importantly, the cargo that is carried in them.

Marine insurance is very important because through marine insurance, ship owners and transporters can be sure of claiming damages especially considering the mode of transportation used.

Incidents like piracy and possibilities like cross-border shoot-outs also pose a major threat when it comes to water transportation and therefore in order to avoid any loss because of such events and happening, in the interest of the corporation and the transporter, it is always beneficial to have a back-up like marine insurance.

Another important aspect of having marine insurance is that a transporter can choose the insurance plan as per the size of his ship, the routes that are taken by his ship to transport the cargo and many such minor points which could go a great length in affecting the transporter majorly.[2]

EXISTING LAW IN BANGLADESH:

The concept of insurance is still very much at its youth in Bangladesh along with the South East Asian region in general. As the need of time, the Parliament of Bangladesh passed a new Insurance Act 2010 in order to reform and update the insurance sector in Bangladesh.

Since just after passing a new act to substitute the old, the previous Insurance Act 1938 became inactive due to pass the Insurance Act 2010. This act contains 160 sections under seven chapters. It provides the provisions applicable to insurer, insured, punishment for violation of the law.

Despite of marine insurance is an important division of insurance, there is no Bangladeshi law to regulate the provisions of marine insurance. In Bangladesh, the provisions of contract act, customary rules and tradition are applicable. To some exceptional cases, the British Marine Insurance Act of 1906 is applied.[3]

FEATURES OF MARINE INSURANCE CONTRACT:

There are some essential elements of marine insurance. Moreover, Marine insurance is a legal contract. For that without general elements, there are some essential elements of marine insurance.

Elements of general contract:[4] In marine insurance contract, there are all elements of general insurance contract. Which kinds of contract are including in general contract:

Two parties: In contract of marine insurance, there are two parties. One party is insurance company and another party is insurance holder.
Offer and acceptance: Like general contract, an insured offered to insurer for accept his policy. If a policy is accepted then contract is accomplished.
Legal consideration: As natural contract, insurer makes confirmation to insurance holder for deducting risk by money. It is given from insurer to insurance holder.
Capacity of contract: Both parties should stay capacity of contract under section 11 of Contract Act, 1872.
Legal object: The contract should be legal contract.

Green consent: Both parties have to give consent with freedom.
Certainty: Insurance subject should be certainty.
Written: Contract must be written.

Insurable interest: The insurable interest is the pecuniary interest where by the policy holder is benefited by the existence of the subject matter and is prejudice by the death or damage of the subject matter.
Utmost good faith: As the under writer knows nothing and the man who comes to him to ask to insure knows underwriter without being asked of all the material circumstances, this is expressed saying it is a contract of utmost good faith.
Compensation for damage: Insurance is a contract of indemnity under which insurance company agrees to pay a certain sum of money to compensate loss caused the occurrence of uncertain event inconsideration of certain periodical payment premium.
Proximate cause: Some kinds of peril are caused by happened waste that is called proximate.
Proportionate contribution: If any waste is happened which did not count over all, its peril fulfills by proportionately.
Subject matter of insurance: In marine insurance way of ships, ships product, ships rent, etc. Are known as a marine insurance subject matter or insurance.
Period: There are two kinds of marine insurance policy. One of specific sea journey base and another one is time base.
Warranties: There are some conditions in marine insurance contract such as,
Ships neutrality,
Journeys time,
Safety time,
Properties neutrality,
Ability to ships journey,
Legality of sea journeys,
No late journey.

So, these are the essential elements of marine insurance that are part of a legal marine insurance. An ideal marine insurance contract should be followed by these elements or must have these elements.

Classification of Marine Insurance:[5]

Hull Insurance: Hull insurance mainly caters to the torso and hull of the vessels along with all the articles and pieces of furniture on the ship. This type of marine insurance is mostly taken out by the owner of the ship to avoid any loss to the vessel in case of any mishaps occurring.
Liability Insurance: Liability insurance is that type of marine insurance where compensation is sought to be provided to any liability occurring on account of a ship crashing or colliding and on account of any other induced attacks.
Freight Insurance: Freight insurance offers and provides protection to merchant vessels corporations which stand a chance of losing money in the form of freight in case the cargo is lost due to the ship meeting with an accident. This type of marine insurance solves the problem of companies losing money because of a few unprecedented events and accidents occurring.
Marine Cargo Insurance: Cargo insurance caters specially to the marine cargo carried by ship and also pertains to the belongings of a ship’s voyages. It protects the cargo owner against damage or loss of cargo due to ship accident or due to delay in the voyage or unloading. Marine cargo insurance has third-party liability covering the damage to the port, ship or other transport forms resulted from the dangerous cargo carried by them.

Classification of Marine Insurance Policy:[6]

The different types of marine insurance policies are detailed below:

Voyage Policy: A voyage policy is that kind of marine insurance policy which is valid for a particular voyage.
Time Policy: A marine insurance policy which is valid for a specified time period- generally valid for a year-is classified as a time policy.
Mixed Policy: A marine insurance policy which offers a client the benefit of both time and voyage policy is recognized as a mixed policy
Open or Unvalued Policy: In this type off marine insurance policy, the value of the cargo and consignment is not put down in the policy beforehand. Therefore, reimbursement is done only after the loss of the cargo and consignment is inspected and valued.

Valued Policy: A valued marine insurance policy is the opposite of an open marine insurance policy. In this type of policy, the value of the cargo and consignment is ascertained and is mentioned in the policy document beforehand thus making clear about the value of the reimbursements in case of any loss to the cargo and consignment.
Port Risk Policy: This kind of marine insurance policy is taken out in order to ensure the safety of the ship while it is stationed in a port.
Floating Policy: A marine insurance policy where only the amount of claim is specified and all other details are omitted till the time the ship embarks on its journey, is known as a floating policy. For clients who undertake frequent trips of cargo transportation through waters, this is the most ideal and feasible marine insurance policy.
Single Vessel Policy: This policy is suitable for small shipowner having only one ship or having one ship in different fleets. It covers the risk of one vessel of the insured.
Fleet Policy: In this policy, several ships belonging to one owner are insured under the same policy.

Principles of Marine Insurance:[7]

The generally used principles of marine insurance includes six principles. But the principle of good faith is considered an essential mandate commonly agreed among all the parties involved. It states that when two parties, the insured and the insurer, agree, all the cargo details shall be provided with utmost honesty.

Along with the principle of good faith, here are the other five:

Principle of Indemnity: This principle differentiates the marine insurance policy from a speculative product for capital markets. For instance, a put or call contract can be used in the capital markets for both hedging’s and for making profits. However, there are various types of marine insurance plans specifically designed to protect against losses. Hence, the payable claims will never exceed the loss incurred by the insured entity.
Principle of Insurable Interest: this principle can be equated with the common phrase of ‘skin in the game.’ it means that that insurer must have some interest in the safe arrival of the goods at the end of the transit cycle. If the goods arrive on time and undamaged, the insured entity stands to benefit, and if they do not reach at their stipulated time in their described condition, the same entity stands to bear a loss. If the insured entity’s loss or gain is not immediately borne, it should at least reasonably expect to bear or attain it soon. This way the insurance cover protects the ‘interest’ of the insured entity.

Principle of Proximate Cause: If you get creative and thinking like a philosopher, you can practically establish some form of speculated causality between any two events. Using this, your insurance claim as an entity can be attributed to almost any reason, giving you an unreasonable advantage against the insurance company.
Principle of Subrogation: Subrogation is the follow-through principle for the indemnity principle. It limits the scope to profit from an insurance contract. After disposing of the damaged goods, the net amount exceeding the actual price of the goods post the claim must be returned to the insurer.
Principle of Contribution: Marine insurance often covers such complex transits that there might be an overlap between two insurers. It is not unfathomable to imagine two insurers insuring the same cargo under two separate jurisdictions or policies. if the cargo gets damaged and the claims are playable, the insurers are supposed to split the claim liabilities.

Present Situation of Marine Insurance in Bangladesh:

The economy of Bangladesh has rapidly been shifting from agricultural to the services sector. The rule so played by the service sector is burgeoning as well. Insurance is one of the ingredients of the financial services industry has a lot to play if it is promoted properly. In this comprehensive and ultimate guide on the insurance sector of Bangladesh, it will walk us through the itineraries of the market.

In spite of the stable growth rate of the Bangladesh insurance industry in the last few years, the expansion of the insurance business, particularly the non-life sector, has experienced a downward trend in the year 2016 because of poor investment and slowdown of economic activities led by the political unrest. The experts have the fear of what the industry was likely to have the similar experience in 2019.

According to the statistics of Bangladesh Insurance Association (BIA), the total premium income of private sector life insurance companies rose from Tk. 62,429 million in 2013 to Tk. 66,879 million in 2014. The gross premium income of non-life private sector insurance companies increased from Tk. 21,038 million in 2013 to Tk. 22,670 million in 2014 with a growth rate of 7.76%. In Bangladesh, the marine insurance is considered to be the lifeguard for the non-life insurance business. Marine insurance completely depends on imports which has continuously being disturbed by the political unrest but the market is expected to improve in 2020.[8]

Why is Marine Insurance a Contract of Indemnity?

The principle of indemnity is the backbone of insurance law and policy. Indemnity means putting the person in the position he would have been if no damage had been incurred. Besides providing compensation it also ensures that the insured doesn’t gain from the insurance contract by merely providing the amount with respect to the actual loss.

Marine insurance is also an indemnity contract where the insurer undertakes to pay the insured for the damages suffered during a marine adventure. Going by its definition, a marine insurance policy aims to reduce the financial loss occurring to an insured’s property during maritime transport. It covers any loss or damage suffered by the insured cargo due to accidents and mishaps that might happen. The insurer legally committed to providing financial indemnity arising out of accidents as well.

“The insurer is liable to pay to the value of loss agreed upon; only when it is proven that the proximate cause of the peril is insured. Therefore, the principle of indemnity does apply to marine insurance policies.”

In simple words, a marine insurance contract can be defined as a legal agreement in which the insurer gives a formal undertaking to indemnify the insured against the loss agreed upon. The insurer will indemnify the insured to the extent specified in the insurance contract.

The extent of indemnify our insurance coverage is subject to the following conditions:

That onus of proving the event lies on the insured,
The financial indemnity is subjected to the extent, borne by the insurer and the market value of the property,
Financial indemnity is provided only for insured proximate causes.

In the case of Ricards vs Forestal land, Timber and Railways co, Lord Wrights has said that:
‘The purpose of both courts and the legislature was to give effect to the notion of indemnity, which is the fundamental principle of insurance, and to apply it to the various complexities of fact and law in relation to which it would function.’[9]

So, we can say that- Marine Insurance is also called a contract of indemnity.

Marine Insurance v. Fire Insurance:

The differences between Fire Insurance and Marine Insurance are given below:

Fire insurance is an insurance contract where in the insurer commits to compensate the insured in case of any incident happening with the subject matter due to fire or any such event. On the contrary, marine insurance refers to a contract, where in the insurance company promises to compensate the insured in case of loss cost two sheep cost to ship or cargo due to perils of sea.
Fire insurance is an insurance that covers the risk of fire. It covers goods or property of the insured person. On the contrary, marine insurance is one that encompasses risks associated with the sea. The subject matter covered here, is the ship, cargo and freight.
In fire insurance, that insurable interest must be present both at the time of taking policy and when the loss occurs. As against, in case of marine insurance, the insurable interest must be there only at the time of loss.
The claim in case of fire insurance is the amount insured, or the actual loss sustained whichever is less. In contrast, the compensation would be the cost of the goods plus a reasonable margin.
In fire insurance contract the moral responsibility of the insured is an important condition, whereas if we talk about merit insurance, there is no clause relating to the moral responsibility of the sheep or cargo owner.
The amount of the policy cannot exceed the value of subject matter covered under the fire insurance contract. On the contrary, the market value of the sheep or cargo would be the policy amount in case of marine insurance.
Fire insurance is the most popular insurance. On the other hand, marine insurance is the oldest type of insurance.

Cases relating to Marine Insurance:[10]

Case name: ‘Pimco Shipping Pty Ltd v. Hermann and Moeher Trading Pty Ltd [1987]

FACT: The plaintiff owned and operated a coastal vessel. In 1978 goods carried by the vessel were damaged in transit and as a result the owner of the goods sued the plaintiff and were awarded damages. The plaintiff claims that at the time of that shipment the defendant was the actual owner of the vessel and brought suit on the basis that the defendant indemnifies the plaintiff for damages.

DECISION: Action dismissed.

HELD: The indemnity action by the plaintiff is time barred pursuant to the Sea-Carriage of Goods Act Art. III, r. 6 which provides that suit in respect of loss of or damage must be brought within one year after delivery of goods or when the goods should have been delivered. In the original proceeding the owner of the goods was granted default judgement against the plaintiff here. The 2nd defendant in that case was the company that had been formed to buy the vessel. However, at the time of the loss the present defendant was the actual owner of the vessel as the corporation had not yet been formed. The personal defendant should have, but was not added as a third party in the original action. Because there was no liability on the part of the defendant to the owner of the goods established within the time limitation period, the plaintiff cannot now seek indemnification outside of the time period. Indemnity may not be awarded without the support of liability on the part of the indemnitor to the injured party.

Case name: ‘Dominion Insurance Ltd v Westpac Banking Corporation [1998]’

FACT: The plaintiffs were the owner of the insured vessel and the bank who held the mortgage on the vessel and was named payee on the policy. The defendant was the insurer. The plaintiff had insured the vessel with the defendant since October 1990. There had been 3 renewals of the coverage in October 1991,1992 and 1993. The vessel was damaged beyond repair in March 1994. The insurer defendant denied coverage on the basis that no insurance premiums had been received since the October 1993 renewal.

DECISION: for the Plaintiff

HELD: The fact that no premiums have been paid does not affect he existence of the contract. The court looked at the Renewal notices and at the history of dealings between the parties. As to the Renewal notices, while they demanded payment, there was no clear statement that coverage would be canceled if payment was not received. As to the dealings between the parties, the court found that previous claims had been paid as credit for owing premiums so clearly in the past it had been the practice to renew without the payment of premiums.

Case name: ‘Richards v. Forest Land, Timber and Railways Co. Ltd. [1941]’

In this case, it was observed that- “The Act is merely dealing with a particular branch of the law of contracts- namely, those of marine insurance. Subject to various imperative provisions or prohibitions and general rules of the common law, the parties are free to make their own contracts and to exclude or vary the statutory terms.

The object both of the legislature and of the courts has been to give effect to the idea of indemnity, which is the basic principle of insurance, and to apply it to the diverse complications of fact and law in respect of which it has to operate. In this way, the law merchant has solved or sought to solve, the manifold problems which have been presented by insurances of maritime adventures.”

Evolution:

We think that Marine insurance provides multiple benefits to the owners and transporters of the goods. The policyholder will get full financial coverage if any accidents occur during the transportation period. Marine insurance also gives financial coverage against any theft or hijack. The policyholders also attain some financial coverage if the goods get damaged by bad weather conditions like rain or snow. Marine insurance also covers some degree of compensation for injury, illness, or death of any transporter on-board the ship. The policyholder can also claim coverage for mishandling of cargo or mistakes in transport. But the insurance premium fee indeed adds a little cost to the shipment. As a result, the price of transportation cost increases a bit. But compared to the risk involved in a shipment, it is very low. It is advised to read the fine prints in the insurance agreement paper.

Recommendation:

While applying the principle of contribution, it is important to ensure that all the applicable conditions are complied with. Otherwise, it might create confusions as up to what amount the insured will be indemnified and the ratio of contribution on the part of insurers.

The insurable value of the property so insured needs to be calculated. In cases involving unvalued policies, it may serve to resolve the calculation of indemnity. In cases of valued policy where the value is not conclusive, such as where there is a constructive total loss, it can also help to calculate reimbursement. It will also help to fix a norm while agreeing on a value in a valued policy.

The requirement of a valid abandonment is a prerequisite to a claim for a constructive total loss. The assured after getting reliable information of the loss, within a reasonable time frame, has to send a notice of abandonment to insurer for getting the compensation. The information gathered by the assured shouldn’t be of doubtful character. If in any case the assured fails to send the notice, the loss would be considered as a partial loss.

The arguments considering similarity in the insurable interest cases of one category to those of another must be dealt with caution and the facts of each case must be carefully examined so that the generalizations are not drawn.

Conclusion:

The aim of marine insurance was to encourage the ship’s owner and the buyer and seller of goods to operate their respective business while at least to an extent relieving themselves of the burdensome financial consequences of the loss or damage to their property as a result of the numerous threats of the high seas.

In other words, maritime insurance adds an integral aspect of financial security in order to ensure that the possibility of misfortune during shipping is not an inhibitory factor in the conduct of foreign trade. Although marine insurance is a boon for the Bangladesh economy, it is also essential that all terms and conditions of the agreement are complied with in order to remove all the ambiguities that may arise in future.

References: