Like any other branch of insurance, marine insurance is also governed by certain principles. Understanding these principles is crucial for any marine insurance policyholder. We will be discussing the 7 principles of insurance in context with marine insurance. They are:
Let us discuss all these principles with keeping marine insurance in mind.
The principle of indemnity states that the insurance company will indemnify the marine insurance policyholder only till the extent of his loss. A policyholder cannot use his marine insurance policy to make a profit. Let us discuss this with a simple example.
Example of indemnity in marine insurance: Let us say that Mr. Mukesh took a cargo insurance policy with a cover of Rs.10 Lakhs. Now, his cargo was damaged while the voyage and the damages amounted to Rs 5 Lakhs. Mr. Mukesh will only be indemnified to the extent of his damages, i.e Rs 5 Lakhs.
The principle states that when the insurance company pays compensation to the insured, the insurance company assumes ownership of the insured object. Let us understand this concept with an example.
Example of subrogation in marine insurance: Let us say Mr. Sunny is a trader and he has bought a cargo insurance policy from an insurance company. His cargo was damaged due to certain malpractices of the shipowner.
The insurance company will provide the claim amount to Mr. Sunny and after paying the claim amount, they will assume ownership of the damaged goods. The company can use its new ownership to file a suit against the shipowner and recover their damages.
The principle of good faith states that the insured, as well as the insurer, must be completely honest and transparent with each other. They should not falsify, misrepresent or lie about any aspects. If they violate this principle, the contract can be terminated.
Example of good faith in marine insurance: Let us assume that Mr. Doshi purchased a hull insurance policy to protect the hull of his vessel. In order to save on some premium, he falsified the age of the vessel. The insurance company found out about this and terminated the policy.
This principle states that a person can insure the same object with 2 different insurance companies. Both companies can cover the same object as well as the same risks. The coverage amount can vary.
Example of contribution in marine insurance: Let us state that Mr. Ray has bought 2 cargo insurance policies with 2 different insurance companies, each amounting to Rs.5 Lakhs. Unfortunately, his cargo is damaged at the port and Mr. Ray is left with damages amounting to Rs.5 Lakhs.
Mr. Ray now approaches the first insurance company and gets the entire claim amount of Rs 5 Lakhs. Now, under the principle of contribution, the first insurance company will raise a claim with the second insurance company for Rs 2.5 Lakhs, as the second company also agreed to share the risk. The second insurance company will pay the first Rs 2.5 Lakhs and the matter will be settled.
Under this principle, a person may only buy insurance for an object that he has an interest in. Insurance can only be bought If loss or damage of that object causes financial strain to the insured.
Example of insurable interest in marine insurance: Let us assume that Mrs. Karuna bought a marine insurance policy to cover any losses to her cargo. Mrs. Karuna could only buy this insurance because if her cargo got lost or damaged it would cause her business financial loss. Mrs. Karuna had a stake in the insured object so she could buy the policy.
There could be a scenario where an incident was caused due to two or more events. Under this principle, the insurance company will consider the closest cause to the incident while handling claims.
Example of proximate cause in marine insurance: Let us state that Mrs. Pooja bought a cargo insurance policy to protect her cargo. Now, there was an incident where the cargo got damaged and Mrs. Pooja filed a claim with the insurance company. Upon investigation, the insurance company found out that the proximate cause (closest cause that caused the damage) was not covered under the cargo insurance policy. Based on this information, the insurance company rejected Mrs. Pooja’s claim.
Principle of Loss Minimization
This principle states that the policyholder must do everything in his power to minimize the loss caused due to an unforeseen event. He must not just sit ideally while his insured object continues to get damaged. He must try to minimize the damage.
Loss Minimization in Marine Insurance: Let us assume that Mr. Shyam took a freight insurance policy to insure his freight. While on the port, his freight caught fire. Mr. Shyam is obligated to call the fire department, try to put out the flames in a safe manner. He should not just sit ideally while the freight burns. All attempts must be made to save the freight in a safe manner.
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