Basic Principles of Marine Insurance:
The basic principles which govern the insurance are –
(1) Utmost good faith
(2) Insurable interest
(5) Proximate cause
Utmost good faith:
In the contract of marine insurance, each party is supposed to observe utmost good faith and to disclose all material facts to the other party. By material facts are meant those which are likely to influence the judgment of the other party. For example, the declaration by the insured of the shipment on the deck of cargo which would be the normally carried on under the deck. The holding back of the material facts by the party either party is fraud.
Insurable interest means that the insured should have an interest in the subject when it is to be insured. He should be benefited by the safe arrival of commodities and he should be prejudiced by loss or damage of goods. The insured may not have an insurable interest at the time of acquiring a marine insurable policy, but he should have a reasonable interest in the case of a loss of goods or damage of goods. The insured must have an insurable interest at the time of loss or damage otherwise he will not be able to claim compensation. The insurable interest must exist at the time of the loss though it is a not required at the time of a taking insurance.
The following parties may be said to the have insurable interest.
(a) Cargo owners on their cargo to be shipped
(b) Ship owner on his ship
(c) Shipping company on their freight receivable
(d) An insurer on the insured properties for reinsurance
(e) Captain and crew in respect of their wages and salaries
This principle means that the insured will be compensated only to the extent of loss suffered. He will not be allowed to earn profit from marine insurance. The underwriter provides to compensate the insured in cash and not to replace the cargo or the ship. The money value of the subject matter is decided at the time of taking up the policy. Sometimes the value is calculated at the time of loss also.
There is one exception to the principle of indemnity in marine insurance. Some profit margin is also allowed to be included in the value of the goods. The assumption is that the insured will earn a profit when goods reach their destination.
The transfer of rights and remedies of insured to an insurer who has indemnified the insured in respect of the loss. Subrogation follows the principle of indemnity insured should not make any profits out of loss.
Ex.: Furniture is insured for Rs. 1 lac against fire, it is burnt down and the insurer pays the full value of Rs. 1 Lac to the insured, later on, the damage Furniture is sold for Rs. 10000. The insurer is entitled to receive the sum of Rs. 10000.
It helps in deciding the actual cause of loss when a number of causes have contributed to the loss. The immediate cause of a loss should be determined to fix the responsibility of the insurer. The remote cause of a loss is not important in determining the liability. If the proximate cause is insured against, the insurer will indemnify the loss.
Ex.: Fire destroying goods and Insured losing profits also. Fire is proximate cause payable, loss of market profit is a remote cause and it’s not payable.
Particular goods may be insured with two or more insurers against the same risks. In such cases, the insurers must share the burden of payment in proportion to the amount insured by each. If one of the insurers pays the whole loss, he is entitled to contribution from other insurers
Ex.: B gets his goods insured for Rs. 15000 with insurer P and for Rs. 15000 with insurer Q. A loss of Rs. 15000 occurs, P is liable to pay for Rs. 7500 and Q is labile to pay Rs 75000. If the whole amount of loss is paid by Q, then Q can recover Rs. 7500 from P.
In abandonment, not only the right but also the property is transferred to the insurer.
Ex.: Furniture is insured for Rs. 1 lac against fire, it is burnt down and the insurer pays the full value of Rs. 1 Lac to the insured, later on, the damage Furniture is sold for Rs. 1 lac or 1.5 lakhs. The insurer is entitled to receive the sum of Rs. 1 lac or 1.5 lakhs. The insurer is not entitled to transfer the profit to the insured.