Miller's Marine War Risks

Michael Davey; James Davey and Oliver Caplin

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CHAPTER 3 The premiums

Background to premiums

3.1 If an underwriter were to assess his premiums for the war risk insurance to merchant ships on a comprehensive or whole basis, he would have to remember that losses will occur during the following periods:

(a) A conflict between the super-powers which is most likely to be a world war or,
(b) a period of peace between the super-powers, in areas of the world which can be described by the relative term of peaceful or,
(c) a period of peace between the super-powers, in areas of the world where there are local wars or where there is a marked danger of a violent attack upon, or interference with, merchant ships.

3.2 If an underwriter were to take such an overall picture of the risks he was insuring, he would have to take into account the consequences of a world war and the stupendous losses that could be expected. His charge of premium would therefore be correspondingly high. Even if he could persuade the insured shipowners to pay it without fear of being undercut by competitors, two exceedingly doubtful propositions, he would amass an enormous sum of money with, if the prospect of a world war was remote, no apparent or immediate purpose. The presence of such money would itself pose formidable problems. Any attempt to establish it as a reserve would be challenged by the names of a Lloyd’s syndicate or by the shareholders of an insurance company who would want it distributed as a profit, and also by the taxation authorities who would question whether it was a reserve for a genuine purpose. A failure to convince them would give rise to an assessment to tax. Even if these difficulties could be overcome, the additional difficulties of forecasting the possibility of a world war and its probable duration would bring into question whether this reserve was adequate to meet the expected losses. Last, but by no means least, is the consideration that possibly not even the enormous capacity of the London market would suffice to meet the claims arising from a world war, either with or without such a reserve. It is considered that only some governments, or combinations of governments bound together by treaty to one another, possess this capability. 3.3 For these reasons, the underwriter and the insured shipowner agree to concentrate on the peacetime war risk insurance as described in (b) and (c) above and to exclude from the war risk policy any insurance of risks during a world war. This is achieved in the policy, not perhaps entirely satisfactorily, by the notice of Cancellation and Automatic Termination of Cover Clause, 6.2 ().

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3.4 Confining the insurance to periods of peace between the great powers leaves two other considerations. Many ships will trade only between peaceful places where even the recently increased risks of terrorism, piracy and confiscation by developing countries can to a great extent be contained or confined either to certain limited areas of the world, or by sensible and reasonable precautions taken on board the ship, or in the event of a casualty, by diplomatic representations, or on occasion by police or military action. Other ships will trade to areas of the world which are dangerous at the time the insurance is underwritten or which subsequently become dangerous at some time during the currency of the policy. 3.5 By the normal methods of insurance, the underwriter is required to assess his premium against his risk at the time that the insurance contract is made and cannot subsequently vary his premium until the renewal of the risk, even though the risk itself should suddenly and unexpectedly increase in a way that was never foreseen. It would, however, scarcely be welcome to the insured shipowners whose ships trade solely between such peaceful places as South Africa to the United Kingdom, Canada to Rotterdam or Western Australia to Japan to have their premiums increased at the time the contract is made because of the underwriters’ fear, which may or may not turn out to be justified, that some other part of the world to which they do not trade is dangerous or should suddenly become dangerous to merchant ships at any time during the period of the insurance.

Additional war risk premiums and their calculation

3.6 Out of these considerations, therefore, has been born the concept of two premiums. The first premium is paid for the whole period of the insurance, which will be paid for war risk insurance cover to the insured ship throughout the world. 3.7 The second premium is the additional premium (the “AWRP”, as it is often referred to) for visits which are made by the insured ship to geographically defined areas which have a high element of danger to them. It contains no surprises when such areas can be agreed between the parties when the contract of insurance is made or is renewed, even if there is some surprise that the amount of the additional premium or premiums to be charged for such visits during the period of the insurance is not then agreed. 3.8 What may come as a surprise to those who come fresh to war risk insurance is the right that the underwriter reserves to him or herself to designate a new area at any time during the period of the insurance, which is not among the areas that were agreed at the time the insurance contract was made, and, by giving seven days’ notice, require additional premiums to be paid for visits to that area. Moreover, he or she can also require that special terms and conditions should be applied to the insurance whilst the insured ship is within the area. In substance, therefore, the insurer effects a unilateral alteration of the agreed terms of the insurance which can only be justified if there is a clear provision in the war risks policy or if there is a custom of the market which permits this. The situation gives an insured shipowner little time to consult his professional advisers or his mortgagees, which he or she may be obliged to do. 3.9 Before coming to the explanation of why this is a long-accepted practice, it should be noted that Clause 6.1, which on its own is known as the Notice of Cancellation Clause, seems remarkably ill fitted for its purpose, bearing in mind that it must be strictly

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construed against the underwriter who, in all but the most exceptional circumstances, is the only party who is likely to make use of it. Clause 6.1 provides:

This insurance may be cancelled by either the Underwriters or the Assured giving 7 days notice (such cancellation becoming effective on the expiry of 7 days from midnight of the day on which notice of cancellation is issued by or to the Underwriters). The Underwriters agree however to reinstate this insurance subject to agreement between the Underwriters and the Assured prior to the expiry of such notice of cancellation as to new rate of premium and/or conditions and/or warranties.

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