Marine Insurance in International Trade-Part III

In earlier articles, we had studied what is marine insurance,  why it is required, who can obtain it , and the types of insurance available.   In this article, we shall briefly examine the concept of loss ascertainment in marine insurance, and the system of  ‘Averages’, by which loss or damange is compensated for the insured assets, that are destroyed or damaged.

Intenational Trade, or for that matter, even domestic trade, involves the movement of merchandise from the place of its origin, and or production, to the place of its delivery and or consumption.  

This movement, or transport of goods involves initiating several steps, or actions, till the goods, or cargo reach their final destination.   Some of these steps include loading the cargo on to trucks or railway carriages, or barges from the point of origin to be taken to the vessel, or ship that actually carries the cargo across the seas,  to its destination.  

At every step of the way, from the time the cargo leaves the origin point, till the time it reaches the final destination, and handed over to the consignee, it is subject to several known and unknown risks, that might cause loss or damage to the cargo.

The quantum or extent of loss or damage that the vessel and the cargo within, may suffer, is measured by a system of ‘averages’.   There are two types of ‘averages’, namely, Particular Average, and the General Average, that are discussed below.

Particular Average:  This average relates to two types of situations.   One, where loss or damage occurs, both to the vessel as well as the cargo.   And the other, where loss or damage is restricted to the cargo.  

In the first type of situation, the loss or damage may involve both the cargo and the ship.   Some of the situations where this might happen, are the sinking of the vessel, resulting in the total loss of the vessel and the cargo.   Another example is a collision between two vessels, causing either sinking of the ship, or considerable damage to the ship, and of course, the cargo.   A third example, is where a ship is grounded on encountering an obstruction in its path, in the sea.   Here, considerable damage may be caused to the ship, and to some extent, the cargo.

In the second type of situation, only the cargo on board the ship may be subject to loss or damage.   Typical examples of such loss and damage may relate to one or more of the following: theft/pilferage of the cargo;   degeneration in the quality and quantity of the goods on account of vibrations of the ship;   episodes of turbulence, acceleration or deceleration experienced by the ship on account of exposure to elements, and inclement weather, etc.  

General Average:  This average refers to the loss or damage suffered by one or more of the shippers  whose cargo had to be jettisoned, or thrown overboard, into the sea, in order to save the rest of the cargo.   Certain situations at sea may demand the ’sacrifice’ of certain cargo to safeguard certain other type of cargo.

Naturally, this would be unfair to the shippers that lost the cargo, as they had also obtained insurance for their cargo, like the others.  

Hence, in order to compensate such shippers, who find themselves at the receiving end,  as above, all the other parties involved in the shipment are obliged to contribute towards the losses suffered by the shippers whose cargo had to be jettisoned.

The quantum of contribution to be made by the other shippers depends on the equation between the value of the cargo jettisoned and the value of the cargo thus saved.   Again the value of the cargo that was jettisoned is fixed according to its  insured value.   This process can be a bit complicated, and requires the services of a specialist called the “average adjuster”.

                                                                                      To be concluded