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Marine Insurance Essay

The measures that should have been taken to demonstrate due diligence to make the ship seaworthy before and at the beginning of the voyage in order to avoid a potential breach of the contract of carriage As always identified, shipping operations calls for protection of human life, cargo and different parties involved such as the insurers and banks from undergoing huge cargo or financial losses. Therefore, vessels undertaking marine or sea carriage must be seaworthy. According to Marine Insurance Act of 1909, a ship is considered seaworthy when she is reasonably well to face the ordinary perils of the sea regarding the adventure insured .

Shipowners are there fore obliged to keeping the ship in good condition prior and during some of the sea voyages. Every voyage policy has an implied warranty on the seaworthiness of the vessel in use that it is reasonably fit with respect to repairs, equipment, crew and any other aspect that will withstand the ordinary perils of the voyage insured at the time of sailing it . Any detail that may render a vessel unseaworthy must be disclosed prior to the commencement of the voyage or immediately the voyage commences. The importance of seaworthiness

An unseaworthy ship is a potential danger to life as its operation invites danger, loss, cargo damage or environmental damage. The sea has the ability to overwhelm any vessel but it is the onus of those that ply the maritime trade to ensure that a vessel sent to sea is fit for its intended purpose under normal maritime operations. Failure to satisfy the legal requirements on sending a vessel to the sea deserves the bearing of any consequences that may arise due to that failure . Seaworthiness duty promotes safe use of the sea and provides compensation for innocent sufferers emanating from the breach of duty.

Navigators and crew are protected by legal requirements such as the need for all vessels to be seaworthy. Seaworthiness is specified within charterparties’ documents and although it does not cover every conceivable eventuality, litigation may decide the degree of seaworthiness in a vessel under dispute. Seaworthiness Development Protection of life by captain of a vessel requires little legal incentive. Moreover, investment protection is an inherent incentive for any ship owner to protect sea vessels. Moreover the owning of the cargo raises the incentive of a ship owner to have seaworthy vessels.

In the days past, the onus of taking care of cargo rested with the shipowner if the vessel operated as a common carrier and the cargo was not damaged due to an Act of God, Kings Enemies or vice inherent in the cargo . Warranty of seaworthiness A warranty of seaworthiness exists in maritime trade and it may be express or implied. Express warranties are conditions, which are written upon the policy while implied warranties are not written or included in the policy but understood as important terms of the agreement .

MIA section 45(5) codifies seaworthiness warranty by stating that in a time policy there is no implied warranty that a ship will be seaworthy at all stages of an adventure. However, when a ship is sent to the sea in an unworthy state the insurer is not liable for any loss attributable to the unworthiness . On the other hand, not every defect makes a vessel unseaworthy as held by Lord Diplock in Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha, although trivial defects which the crew can repair will render a vessel unseaworthy .

A vessel is presumed to be unseaworthy if it endangers the safety of the vessel, cargo or might cause significant damage to its cargo . The implied warranty protects innocent shippers and crew against the consequences of the owners’ cynical act of sending a vessel whose condition puts vessel interests at risk . A breach occurs when a defect existed prior to sailing and continued to exist until the damage or loss occurred and which the charterer was not aware of. If the charterers were aware of the defect but continued the liability rests on them as they are considered to have waived the owners of the liability.

The MV Gull charterers should have required from the shipowner Ultrasonic tests on the shell plating prior to sailing to ensure that they are able to with stand the normal perils of the sea and therefore avoid an incident such as the one evidenced by the Marel [1994] 1 Lloyd’s Rep 624 . In this incident, the ship hit a rock and water leaked in the ship damaging the cargo that was in transit just as it was evidenced in the MV Gull case. Moreover the charterers should have demanded a present service report to ensure that the ship was in a good state and will be able to deliver the cargo as agreed.

In the Kriti Rex [1996] 2 Lloyd’s Rep 171 case the engine broke down due to particulate matter which could have been detected on regular independent engine analysis. This made the onus shift to the shipowner. Similarly the charterers should have enquired on the performance of the reducing gear and associated parts to avoid their failure during carriage. In the Yamatogawa [1990] 2 Lloyd’s Rep 39 case the reducing gear failed but given that it could not be detected during good engineering practice, the ship was not considered unseaworthy and the liability could not therefore be shifted to the shipowner but to the insurance company.

In the Toledo [1995] 1 Lloyd’s Rep 40, the shell plating of the vessel failed because of corroded brackets. This type of damage was well known to the master who did nothing about it. As a result seawater entered the vessel which ultimately destroyed part of the cargo. Although the problem was not identified during classification it was held that distortion of plates was evident and there was a lack of due diligence by the owners who thereby bore the liability.

This may also apply to the incident of MV Gull as the owner could have avoided the duty of duly servicing the ship for the voyage. Furthermore the charterers should have also inspected the holds and the cargo handling equipment to ensure that they are clean and that the handling equipments are suited for the specified cargo handling . In the Komninos S [1991] 1 Lloyd’s Rep 370 the holds rendered the ship unseaworthy due to the moisture that corroded cargo of steel coils which could have been avoided by the cleaning of holds and replacement of bilge pumps.

This made the liability to rest on the shipowner. In the MV Gull incident proper holding facilities would have protected the rice bags from getting water and thus become damaged. In conclusion therefore seaworthiness of vessels is undoubtedly crucial and although quantifying its significances is hard and its application varies between the various relationships created and individual case the fundamental role it plays in regulating relationships is considerable.

Proper understanding of the complexities of seaworthiness will greatly assist litigations in maritime industry . The Pyrene Co. v Scindia Navigation Co. [1954] 2 All. E. R. 158 established that in Art III it was provided that the carrier should make the ship seaworthy, should be properly manned, equipped and properly supplied and should make the holds, refrigerating and cool chambers and all other parts of the ship in which goods are to be carried fit and safe for their reception, carriage and preservation.

Moreover subject to Art IV the carrier shall properly and carefully load, handle, stow, carry, keep, care for and discharge the goods carried which does not seem to be the case concerning the MV Gull. QUESTION II Identifying the potential cargo claims that may arise and describing how the ICA should work in this situation and any defences that might be available to the shipowner Protection and Indemnity Insurance covers maritime liabilities incurred by member in direct operation of the entered vessel.

The cover protects the members against losses and liabilities towards third parties. Shipowners and charterers are eligible for this cover. P& I Club thus indemnifying the member for the losses whether partial or total covers any proven losses because of actions by the covered member . The cover is provided for all types of vessel used in maritime carriage. A charter party is considered as a contract negotiated in a free market, subjected to the laws of demand, and supply which gives the ship owners and the charterers’ ability to negotiate terms free from any statutory interference .

The charter parties select a standard form of charter party to which they append their additional clauses that suit individual requirements. In both the voyage charter and the time charter, the shipowner keeps control of equipping and managing the vessel and agrees to provide a carrying service. The risk distribution between the two types of charters varies depending on whether the responsibility is taking the cargo to a destined place or the vessel is at the hands of the charterer for a specific period .

Unlike in the voyage charter where the shipowner has full responsibility of the ship, in the time charter the charterer directs the voyages of the ship covering expenses such as fuel costs, port charges and loading and offloading charges incurred as a direct fulfilment of the charterer’s instructions . The crew in the time-charter are employed by the ship owner for navigation and cargo supervision. By the responsibility of a contract, the ship owner has the onus of keeping the vessel in a seaworthy state for the period of the charter .

Bills of lading are issued in the contract of carriage by the owner or the charterer when the cargos are carried for third party cargo interests. Depending on the issuer of the bill of lading and the liability of sharing cargo, losses were claimed against the issuer of the bill of lading or with the proportionate allocations as it related to the terms of the charter party . This complication led to the drafting of the ICA for apportionment of cargo liability under a time charter agreement based on the NYPE form to lessen the endless discussion between owners and charterers .

The stating of part of clause 8 the ICA agreement which states that charterers are to load, stow and trim the cargo at their expense but under the supervision of the captain brought another confusion as to the clauses’ interpretation. However in Court Line v. Canadian Transport [1940] Lloyd’s Rep. 161 case regarding who was responsible for the damaging of wheat during stowing, the House of Lords upheld that the captain’s right to supervise stowing as stated in clause 8 did not ease the charters’ duty to stow properly . Therefore the owner was entitled to indemnity from the charterer.

The ICA apportions liability by reference to the cause of the loss or damage to the cargo compromised as under clause 1(i) . As stated in the ICA the owner bears claims based on unseaworthiness and the charterers bear claims on bad stowage while any other claims based on other grounds are to be shared equally unless clear evidence showing which party is responsible for the loss or damage is available . Short delivery or short landing claim and owners defense In the case of MV Gull there is going to be short landing claim on four thousand bags of rice as indicated in the discharge tally sheet.

According to ICA liability allocation, until the liability for the cargo is paid that is when a claim can be made . Therefore the liability for cargo claims between the Owners and the Charterers according to clause 4 (c) of the ICA will be made only after the claim has been properly settled or compromised and paid. Therefore before the settling of the cargo claim the shipowners cannot call for the operation of the ICA clause on liability allocation in the MV Gull incident. In addition bill of lading in the MV Gull incident must be properly issued under the time charter to warrant claim for short landing.

For claims of shortage or over carriage subjected to clauses 8(a) and 8(b) the claims are covered equally by owners and charterers i. e. 50% by the Charterers and 50% by the Owners . However the owners can put up a defense where there is clear and irrefutable evidence that the claim rose out of pilferage or act or neglect by the charterer of the MV Gull including the servants and subcontractors whereby the charterer will bear 100% of the claim . Stevedore damage claims and owners defense Damages from the stevedores through the use of hooks amounted to three thousand bags of rice by which the consignee may claim from the shipper.

Clause 50 of the ICA Charter party provides special provisions which states that the stevedores although appointed and paid for by the charterers, shippers or receivers of their agents are to be regarded as servants of their owners and remain under the direction of the Master who is then responsible for proper stowage and sea worthiness of the vessel carrying the cargo. In clause 4 the provision for apportionment is said to apply where the cargo responsibility clauses in the time charter have not been materially amended.

A material amendment as defined in ICA (b) is one that makes the liability as between Owners and Charterers for Cargo Claims clear. Therefore the amendment which is really materially must make the liability as between owners and charterers clear as held in London Arbitration 16/84 and London Arbitration 17/84 . A stevedore damage clause which provides that the stevedores are owners’ servant for all purposes and that the master is responsible for proper stowage and seaworthiness in not sufficiently clear to constitute a material amendment for casting out the apportionment under the ICA .

Therefore in the case of MV Gull the owners will bears 100% of the claim but they can put up a defense where there is clear and irrefutable evidence that the claim rose out of pilferage or act or neglect by the MV Gull charterer including the servants and subcontractors whereby the charterer bears 100% of the claim . Unseaworthiness cargo damage and owners defense The damage to cargo caused by unseaworthiness according to ICA clause on the apportionment of damage between the owners and the charterers states that liability bearing is 100% by the owner .

However the owner can put up defense which can be applied where they can prove that the unseaworthiness of the vessel was caused by the loading, stowage, lashing, discharge or other handling of the cargo so as to claim apportionment as under sub-clause 8(b) which states that the claims are covered equally by owners and charterers i. e. 50% by the Charterers and 50% by the Owners . Charterers’ defense on cargo claims is applicable where the words and responsibility are added to clause 8 or any other similar amendment making the master responsible for cargo handling which leads to cargo claim of 50% charterers and 50% owners.

To this defense the following exception occurs where the charterer proves that the failure to properly load, stow, lash, discharge or handle the cargo was caused by the unseaworthiness of the vessel whereby the owner bears the liability 100% . Moreover all other cargo claims of whatsoever nature are equally covered by the charterers and the owners with defenses being that where there is clear and irrefutable evidence that the claim rose out of pilferage or act or neglect by one or the other including the servants and subcontractors whereby the party bears 100% of the claim .

Claim period The ICA operates independently from other charter terms in that the ICA has the effect of cutting across the balance of claims and defenses in the Hague Rules by a rough and ready apportionment of financial liability as between Owners and Charterers and the agreed apportionment do not allow the invocation of Art III (6) of The Hague Rules to claim time barring.

In the ICA claim notification should be done as soon as possible but not more than two years from the date of discharge or the date when the goods will have been discharged while in The Hague Rules a claimant must bring a suit in writing regarding all liability for loss or damage one year after the delivery of goods or the date when the goods would have been delivered . In cases where payment is agreed upon but it is delayed and the one year period is nearing lapse the claimant must file a suit before the year end or the claim will become time barred.

Similarly written notification must be given the other party within 24 months of the date of delivery or the date the cargo should have been delivered unless the 36 months of the Hamburg Rules compulsorily apply . QUESTION III 3. The effect of the letter of indemnity – provided by the charterer in return for clean bills of lading – on the shipowners P&I insurance and suggest how this situation might be avoided Introduction

A letter of indemnity contains promises by the issuer to repay or pay on behalf of the recipient of the letter of indemnity liabilities incurred by the recipient through the performance of something of the issue and requests with majority of the letters of indemnity containing other promises such as to provide security or to defend cases . The letters of indemnity are issued when original bills of lading have not yet reached the hands of the recipients and or the receiver wishes the cargo to be discharged at a port other than the one named on the bill of lading.

In addition, the letter of indemnity is issued when there exists disagreement about what is to be written in the bill of lading . Effects of a letter of indemnity The letter of indemnity allows the transactions to be executed at a much greater speed than otherwise possible without them. In addition the letters of indemnity makes ‘strings’ easier to handle and they make the market more flexible as it benefits from the greater liquidity. The letters of indemnity saves time and money by demurrage and provides a practical solution that is able to reduce the scale of the anticipated and existing problems.

The legal effect of the letters of indemnity can be states as that the issuer becomes liable for all or any liability that will be incurred by the recipient in performing actions specified and requested in the letter of indemnity . Moreover, the letter of indemnity increases exposure to fraud, insolvency and litigation. In instances where it is found that its intent is to defraud, a third party the letter of indemnity may become ineffective in law . In issuing the letter of indemnity, the issuer assumes liability to the ship-owner if the cargo is shown to differ from the description found under the bill of lading.

However, the reliance of the letter of indemnity by the shipowners may by dwindled by the discovery that the ship-owners were aware that the goods did not match the bill of lading description . The Master is obliged to act reasonably in respect to quality and quantity . Therefore if the Master reasonably believes the Shipper and or the Charterers fact that the cargo was in good order and condition the Letter of Indemnity can be accepted . In accepting the letter of indemnity, the shipowner should be prepared for consequences if dispute arises at the destination.

Fraudulent letters of indemnity whose issuer knows the inaccuracies in the bill of lading are ineffective . Without a provision in the Letter of indemnity concerning the period of its validity the issuer becomes liable without any time limit only subjected to the statutory time bar. Open-ended letters of indemnity are advantageous to shipowners as they give them the longest time possible cushioning them against eventual bill of lading litigation . The Master has no obligation to accept a letter of indemnity but has a right to issue a claused Mates Receipt or a claused Bill of Lading on the rightful condition of the cargo.

Accepting a letter of indemnity for disputed cargo condition or for a discharge without Bills of Lading production or for a change of discharge port may lead to the loss of P&I insurance cover. This is because all P&I Rules provides that the discharging of the cargo without the production of the bills of lading or discharging of the cargo to a different port apart from the one on the bill of lading or the issuance of a bill of lading knowingly mis-describing the cargo leads to the loss of the P&I cover . Importantly the issuer of a letter of indemnity should be solvent to enable the letter of indemnity to be contractually valid .

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