Marine Cargo Insurance
3
OPEN COVERS, POLICIES AND CERTIFICATES OF INSURANCE
Open covers, policies and certificates of insurance
3.1 Cargo is usually insured under an open cover. This chapter therefore considers open covers first and then considers policies. The policy requirements of the Marine Insurance Act 1906 are reflected in the mandatory requirements of the Market Reform Contract and will be considered in that context as policies are no longer issued for cargo business in the London market.1 Finally we look at certificates of insurance, which we contrast with policies, before examining the rights of the buyer of goods under a c.i.f. contract as assignee of an insurance certificate.Open covers
How cargo insurance operates in practice
3.2 The merchant or manufacturer who wishes to insure cargo may insure a single cargo for a single voyage, known as a “facultative” insurance, but more frequently arranges cover on a continuous basis for all the cargoes he manufactures, buys or trades. The merchant therefore enters into an open cover contract with his insurers under which he can declare cargoes to named destinations, though in today’s market individual declarations have somewhat fallen out of practice and premium will more usually be based on annual transit turnover. Voyages outside this framework can be arranged separately or may be “held covered” on terms, conditions and rates to be agreed by underwriters.2 Cargo insurance is generally underwritten on a voyage basis, to cover the sea voyage and associated land transit, but there has been a significant growth in storage cover for cargo which will also be considered.3The structure of a cargo insurance contract
3.3 A typical cargo open cover, which in the London market is now generally evidenced by a Market Reform Contract, will identify the assured and underwriters; the cargoes to be insured; the period of insurance; the covered voyages and premiums, and the other terms and conditions of the contract of insurance, as well as the governing law and jurisdiction. The terms and conditions fall into two broad categories: firstly, standard printed clauses, such as the Institute Cargo Clauses,4 and, secondly, ancillary conditions prepared by the brokers or, occasionally, by market underwriting organisations, such as the Joint Cargo Committee. The resulting contract of insurance has a potentially complex5 structure particularly where certificates of insurance are issued under the open cover. This section considers the development and structure of open covers and then looks at brokers’ facilities, which have many of the characteristics of open covers, before examining binding authorities which, in terms of cargo insurance, are similar in some respects to open covers.The development and structure of open covers
The origin of open covers
3.4 Open covers for cargo developed out of what was termed a “floating policy”.6 Such a contract was one which described the insurance in general terms and left the names of the ship or ships on which the goods were to be carried, and other particulars, to be defined by subsequent declaration. In the nineteenth century the arrangement was for there to be a contract limit, the value of which was progressively exhausted as each shipment was declared. Any shipments declared after the exhaustion of that limit would be uninsured. Clearly it was important to identify and declare all shipments and for them to be declared in the correct order in which they had been despatched. A modern open cargo cover is similar but the only limit on a modern cover is the limit for each vessel, shipment, conveyance or location.7 Nevertheless, when an open cover is first placed, the assured will be expected to declare the estimated premium income (“EPI”) as underwriters need to monitor estimated premium volumes. Accordingly, while a modern open cover has no overall contractual limit, a misrepresentation as to the premium volume could prove material and entitle the insurers to avoid the contract.8Open covers: types and terms
3.5 Open covers take a number of forms and it is convenient at the outset to define our terms. First there are brokers’ facilities or lineslips. These are framework arrangements enabling the brokers to access capacity across a wide range of the underwriters specialising in the cargo market. The “lines” are subscribed to potential future risks in fixed shares on such a lineslip. This arrangement does not become a contract of insurance until a risk is declared and accepted by the underwriters. We shall call these arrangements for insurance “facilities” or “lineslips”.9 3.6 As we have seen,10 the words “open cover” are also used to refer to an agreement between a particular assured, typically a manufacturer or trader, and his cargo underwriters. Under this arrangement the assured declares the shipments he wishes to insure over a fixed period, for example, a year. We shall call this an “open cover” or a “cargo open cover”. 3.7 Cargo open covers take different forms. The most usual is an obligatory open cover where the assured must declare all the shipments of cargo made in, say, a year, and the underwriters must accept all declarations of shipments falling within the cover description. We shall call this a “standard open cover”.11 3.8 Occasionally cargo open covers are underwritten on terms that entitle the assured to choose which shipments he will declare to the open cover, the underwriters being obliged to accept any declarations which fall within the cover description. This facultative/obligatory arrangement we shall call a “fac./oblig.” cover. The contract of insurance is not concluded in such cases until the assured declares each individual shipment.12Standard open covers
3.9 The usual practice in cargo insurance is that all shipments must be declared by the assured and that the underwriters, for their part, are obliged to accept all shipments falling within the cover terms. In accordance with this practice the Institute Standard Conditions for Cargo Contracts provide as follows:- “2. It is a condition of this contract that the Assured are bound to declare hereunder every consignment without exception, Underwriters being bound to accept up to but not exceeding the amount specified in Clause 3 below.
- 3.
- 3.1 This contract is for an open amount but the amount declareable may not exceed the sum of… … …. in respect of any one vessel, aircraft or conveyance.
- 3.2 Should this contract be expressed in a form of a floating policy the total amount declareable hereunder may not exceed… … ….”
As we have seen, floating policies are no longer used today and the question arises as to the effect of a missed declaration, or a mistaken declaration, under a modern standard open cover. In respect of a floating policy, the Marine Insurance Act 1906 section 29(3) provides that the declarations “must, in the case of goods, comprise all consignments within the terms of the policy, and the value of the goods or other property must be honestly stated, but an omission or erroneous declaration may be rectified even after loss or arrival, provided the omission or declaration was made in good faith”.13 This section of the 1906 Act cannot, as such, apply to a modern open cover for it contains provisions that are not directly applicable.14 In The Beursgracht
15 there was an open cover for declarations in respect of the assured’s liability as charterer under which the assured had to declare all vessels chartered and the underwriters had to “accept” all declarations. It was held that this was like a floating policy16 and that the underwriters were bound when the goods were shipped and not when the declaration was made. The declaration was not consensual in nature but was a part of the administrative machinery of the contract since it informed the underwriter what risks had attached to the cover and enabled him as necessary to collect the premium due.17 It is apparent therefore that a declaration under such an obligatory open cover has no part to play in any contractual offer and acceptance.18 It follows that the rule for floating policies as set out in the 1906 Act, regarding the rectification of bona fide late declarations,19 is likely to be applied to declarations under a standard open cargo cover. Indeed such cargo covers recognise the administrative nature of declarations to the extent that the practice in the London market, in many cases, is to do away with individual declarations and for the risk to be underwritten on a premium based on an estimated “annual transit turnover”.20 The underwriters normally require a deposit premium adjustable on annual transit turnover, the brokers being responsible for preparing an internal list of declarations and calculating and collecting, or returning, the amount due from, or to, the assured in the event of an adjustment. The breakdown of the annual turnover still represents “declarations” and, it is submitted therefore, that underwriters would be on risk for any bona fide late or erroneous declarations omitted from the internal broker’s transit turnover list.21