KEY ISSUES IN MARINE INSURANCE FOR GLOBAL COMPANIES

1. KEY ISSUES IN MARINEINSURANCE FOR GLOBALCOMPANIES April 28, 2014 John M. SylvesterMichael T. FitzgeraldThomas M. Exl

2. Introduction and Overview • 1 What is Marine Insurance? Historical Development of Marine Insurance Market Key Considerations for Risk Managers Types of Marine Coverage and Policies Considerations in Underwriting Marine Insurance The Law of Marine Insurance

3. Introduction and Overview • Insurance against the perils of marine commerce • For example, if a ship sinks in transit, various types of losses are possible: loss of cargo; loss of profit from sale of cargo; damage to ship; third-party liability; personal injury • Key difference between marine insurance and other types of insurance is that the “marine adventure” or peril insured must be specifically maritime in nature

4. “Marine adventure” – English Marine Insurance Act of 1906: • where any goods in shipment are exposed to maritime perils (e.g., perils of the sea, fire, war, pirates, jettisons, barratry) • where the earning of any pecuniary benefit from goods in shipment is endangered by exposure to maritime perils • where any liability to a third party may be incurred by the owner of insurable property (or any party with an interest in the property) by reason of maritime perils

5. Marine Insurance Markets • English Market began with Lloyd’s of London in the 1600s • Lloyd’s is not an insurer; it is a facility for the selling of insurance by underwriting syndicates at Lloyd’s • Historically, the capital for Lloyd’s syndicates was provided by individual investors – “Names” • Now, the capital is provided by corporations doing business as syndicates

6. Marine Insurance Markets • Lloyd’s began in 1688 at Edward Lloyd’s coffeehouse in London • Lloyd’s Coffee House was located near the Tower Wharf and Customs House in London, so it was frequented by shipowners, captains, and merchants • At Lloyd’s Coffee House, various merchants entered into a side business of underwriting the risk of a ship’s safe passage to its destination, with its cargo intact

7. Marine Insurance Markets • By 1696, the “Lloyd’s News” and, later, “Lloyd’s List” began publication containing the most authoritative daily journal of shipping intelligence • Over the years, Lloyd’s set up reporting stations around the world to provide information on ship movements • Because of the need for buyers and sellers to have the same information about the risk, the doctrine of “uberrima fides” developed in the market, and the law

8. Marine Insurance Markets • From modest beginnings in the 1600s, Lloyd’s has grown to be one of the largest and most influential marine insurance markets in the world • Over time, other chartered London insurance companies sprang up • London continues to be a major marine insurance center, not only for Lloyd’s Underwriters, but also London-based insurance companies and P&I Clubs

9. Marine Insurance Markets • Marine Insurance today is underwritten by: • Underwriters at Lloyd’s • Insurance companies located in London and throughout the world • U.S. insurance companies, most of which belong to the American Institute of Marine Underwriters • P&I (“protection & indemnity”) Clubs

10. Key Considerations for RiskManagers

11. From Danger to Opportunity • Every business and every production has risks. You can’t get around it. (Lee Iacocca) • The only strategy that is guaranteed to fail is not taking risks. (Mark Zuckerberg)

12. Plenty of Risks to Choose From • Market risk • Price risk • Counterparty risks (non-payment, non-performance, insolvency, valid documentation, taxation issues, insurance cover) • Credit risks • Operational risks • Geopolitical risks (piracy, terrorism) • Compliance with laws / sanctions regulations • Liabilities to third parties

13. The Risk Review Process • Forensic review of your business and YOUR risks • Identify risks you can transfer to counterparties, insurers and/or banks • ARE THE REMAINING RISKS ACCEPTABLE AND MANAGEABLE TO YOU?

14. Manage Your Risks • YOUR AIM MUST BE A CONTROLLED ENVIRONMENT. • Put a risk policy in place • Risk analysis • Limits • Authorities • Operations procedure • Monitoring • Reporting

15. Risk Management Through a Commercial Contract • Clearly define the objectives and responsibilities of the parties • Use INCOTERMS • General Terms and Conditions are useful to fill the gaps • Does the contract meet all insurance and banking requirements? • PLEASE NOTE THAT A CHARTER PARTY AND A BILL OF LADING ARE ALSO CONTRACTS

16. What are Incoterms • Created in 1936 by the International Chamber of Commerce (ICC) • Regularly updated, most recently in 2010 but 2000 Rules are still referred to • Incoterms DO NOT give you a complete contract of sale • Incoterms do not deal with the transfer of ownership of goods • Incoterms state which party has the obligation to make carriage or insurance arrangements • Specify the place of delivery as precisely as possible

17. How to Approach the Insurance Markets Choose your broker wisely • Presence in your markets • Familiar with your line of business and risks involved • Proactive claims-handling department • Transparent broker compensation

18. Your Relationship With Insurers • Meet your lead underwriter • Make sure that the underwriter understands your business and the risks involved • UTMOST GOOD FAITH: you must disclose BEFORE contracting every material circumstance of your business or transaction that you wish to insure: corporate structure, goods, conveyances, geographical regions, limits, etc.

19. Operating An Insurance Policy • Strictly comply with the policy terms -- e.g., warranties that some particular thing shall or shall not be done • Keep insurers closely informed about changes to your organization and business • Make sure that the policy is amended to reflect changes • Protect yourself through proactive measure, e.g. vetting procedures for vessels/terminals; use of independent inspectors • In cooperation with insurers/broker get an Emergency Procedure in place • Renewals should not be negotiated at the last minute

20. In Case of An Accident • Follow the Emergency Procedure • Take all necessary measures to protect people from injury or death • Protect property from further loss • Alert your broker’s/insurer’s claims department • Duty to mitigate loss (experts on the scene) • DO NOT ACKNOWLEDGE LIABILITY • Start collecting evidence (witness statements, photographs, survey reports, retention of samples, etc.)

21. Claims Handling • Pre-contract disclosures • Policy wording • Claim notification/documentation • Appointment of loss adjustor • Close contact with people involved within company • FULL COOPERATION WITH BROKER’S/INSURER’S CLAIMS DEPARTMENT IS KEY

22. Types of Marine Coverage and Policies

23. Lines of Marine Insurance • Cargo Insurance • Marine Liabilities • (e.g. Charterer’s Legal Liability) • Hull & Machinery Insurance • Protection & Indemnity (P&I) Insurance

24. Unlocking Cargo Terms/Phrases Definitions and/or Translations • Average – Loss • Collision – 2 vessels running into each other • Franchise – Threshold • General – Shared • Particular – Partial or Individual • Warranty i. Exclusions, e.g. Paramount; ii. Coverage requirements, e.g., loading survey

25. Unlocking Cargo Terms/Phrases Definitions and/or Translations • Average Warranty – Insuring Terms/Coverage • FPA – Free of Particular Average Total loss only • WA – With Average – Total and Partial losses • WA 3% – loss /no loss 3% Franchise Threshold • All Risks – covered unless specifically excluded • General Average – Shared Loss • Irrespective of percentage – perils added and includes total and partial losses • Sue and Labor – Act to avoid/minimize loss

26. Cargo Insurance • Provides coverage for cargo in transit (with incidental storage) • Ocean Cargo Insurance/Certificates are an integral part of international trade • Who requires marine cargo insurance? • Anyone engaged in the movement of goods • Buyers, sellers, importers, exporters, manufacturers, and banks • The Terms of Sale impact who purchases insurance

27. Cargo Insurance • Principal areas of coverage • Perils of the Sea • Most important coverage of marine insurance policies • A broad term covering specific types of losses, including: Stranding; Sinking; Grounding; Collisions with other vessels; Heavy Weather; Ice • Assailing Thieves • Barratry • Jettison • Defined as the intentional throwing overboard of the ship’s cargo, material, or stores in time of peril, for the common safety of the ship and her cargo • Fire, lightning and earthquake • All Other Like Perils

28. Cargo Insurance • All Risks • Shipments of goods insured sufficiently packed to withstand the voyage covered by the policy are insured against all risks of physical loss or damage from any external cause. • Paramount Warranties/Paramount Exclusions • Free of Capture and Seizure (FC&S) (War Perils) • Strikes, Riots, and Civil Commotion (SR&CC) • Radioactive Contamination Exclusion (RACE) • Chemical, Biological, Biochemical, and Electronic Exclusion (CBE) • Delay and Inherent Vice

29. Cargo Insurance • War Risks Perils coverage provided by separate policy. • Coverage is only while water borne or airborne (no coverage for inland transit legs of the voyage) • 48-hour cancellation provisions • “On Application” rates may apply (e.g., shipments to Iraq or Afghanistan) • SR&CC Coverage provided by endorsement to the marine cargo policy. • 48-hour cancellation provisions • TRIA Terrorism coverage at the assured’s direction is (i) included for an additional premium, or (ii) excluded

30. Cargo Insurance • Unique Coverage Features: • Warehouse-to-Warehouse Coverage • 1 insurer for all 3 legs of transit • General Average and Salvage Charges (GA) • Seaworthiness (Airworthiness) • Vessel being in sound condition and well maintained • Vessel being properly manned (number of and qualification of crew) • Sue and Labor • Assured required to take steps to prevent or minimize loss

31. Cargo Insurance • Transportation Carriers • Ocean vessel; aircraft; tug and barge; truck; rail; and package parcel delivery service • Carrier’s Legal Liability • Cargo owner must name and waive carrier (none) • Standard Release Bill of Lading/Air Waybill (normal legal liability) • Declared Value Bill of Lading/Air Waybill (legal liability is at an agreed higher amount) • Insured Bill of Lading/Air Waybill (all risks)

32. Cargo Insurance • Carriers’ Legal Liability – Defenses and Exemptions for loss or damage due to: • Acts of God • Acts of government • Riots and labor disturbances • Improper or insufficient packing or stowage • Inherent vice of the cargo

33. Charterer’s Legal Liability • Cargo owner charters a vessel. Under the Charter Party Agreement, the Cargo Owner is responsible for: • Safe berth at the designated • Port(s) of loading • Port(s) of offloading • Loss or damage to cargo carried by the vessel • Cargo owner is required to have his cargo underwriters waive rights of subrogation in favor of the vessel owner

34. Hull Insurance • Basic coverage includes: • Named perils physical damage to the vessel’s hull and her machinery • General Average and Salvage Charges • Collision Liability • Sue and Labor • Warranty of Seaworthiness • Amount Insured is Agreed Value • Coverage applies to Named/Scheduled Vessel or Vessels

35. Protection & Indemnity Insurance (P&I) • P&I Insurance Policies • Cover claims for damage or compensation for a large number of categories of loss, including: • Injury to or loss of life of crew members • Removal of wreck of the named vessel • Damage to fixed or floating objects or property (other than vessels) • Liability for loss or damage to cargo

36. Considerations in the Underwriting of Marine Insurance • General Considerations • Years in business • Loss record • Loss control • Geographic limits • Contract review • Considerations for Cargo Insurance • Considerations for Hull and P&I Insurance

37. The Law of Marine Insurance

38. Key Legal Issues in MarineInsurance • Choice of Forum • Choice of Law • Insurable Interest • The Doctrine of Uberrima Fides

39. Admiralty Jurisdiction andChoice of Forum • Admiralty Jurisdiction • Article III, Section 2 of the Constitution gives federal courts jurisdiction over “all cases of admiralty and maritime jurisdiction” • 28 U.S.C. § 1333 • Marine insurance contracts are within federal court’s admiralty jurisdiction • “Saving to suitors” clause in § 1333

40. Admiralty Jurisdiction andChoice of Forum • Choice-of-Forum • Federal Court – Admiralty Jurisdiction • State Court • Federal Court – Another Jurisdictional Ground (diversity, etc.)

41. Choice of Forum– Issues to Consider • Right to a Jury Trial • Generally, no right to jury trial in admiralty. See, e.g., Concordia Co. v. Panek, 115 F.3d 67 (1st Cir. 1997) • F.R.C.P. 9(h)(1) designation = no jury trial • Be aware of removal issues and potential to lose right to a jury trial • Choice of forum can affect the choice-of-law analysis

42. Choice of Law • Choice-of-Law Problems Arising in Marine Insurance Disputes • Marine insurance law not codified • U.S. courts used to borrow from English law to fill gaps in federal maritime law related to marine insurance • Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310 (1955) – U.S. courts began looking to state law in the absence of a controlling federal maritime law precedent • Since 1955, Marine insurance governed by both federal maritime law and state law

43. Choice of Law – Aftermath ofWilburn Boat • Wilburn Boat is a highly criticized case and the choice-of-law analysis has since been layered and complex • There are two layers to the choice-of-law analysis • Vertical Choice-of-Law Analysis • Maritime vs. State Law • Horizontal Choice-of-Law Analysis • If state law applies, which state law governs?

44. Choice of Law – Aftermath ofWilburn Boat • Courts interpret Wilburn Boat differently • Fifth Circuit is pro-state law • To apply, the federal maritime rule must be “entrenched” federal precedent • Notwithstanding entrenched federal precedent, courts may apply state law if state has substantial interest • Eleventh Circuit seems to favor application of federal maritime law • If a maritime rule is “well-established” or “entrenched,” it preempts the state law rule • Choice-of-law provisions in marine policies are generally enforced

45. Insurable Interest • An insurable interest in the subject matter insured must exist at time of loss, not at contracting • An “Insurable Interest” is defined differently, in some circumstances, under state law than it is under maritime law • This is often true with respect to cases involving the sale of goods • Whether a loss is covered can turn on this definition

46. Insurable Interest • Defining Insurable Interest • English Marine Insurance Act of 1906 • Very broad definition, including legal and equitable relationships to property • Federal Maritime Law – Hooper v. Robinson, 98 U.S. 528 (1878) • In the law of marine insurance, insurable interests are “multiform and very numerous.” • Injury from the loss of something or benefit from its preservation is sufficient to create an insurable interest • Uniform Commercial Code • Requires title or a security interest

47. Insurable Interest • ABB Power T&D Co. v. Gothar Versicherungsbank VVAG, 939 F. Supp. 1568 (S.D. Fla. 1996) • Court held that an insurable interest under federal admiralty law means “any pecuniary interest” • Court held that insurable interest is an “entrenched” principle that preempts state law • ABB Power is the only post-Wilburn Boat case confirming this “entrenched” principle of maritime law

48. Misrepresentations, Nondisclosure, and Uberrima Fides • Marine insurance is a contract “uberrima fides” – requiring the “utmost good faith” by both parties • In practice, operates against the insured alone • The insured is bound to disclose every fact within his knowledge that is material to the risk • This is true even if the insurer does not inquire • Failure to disclose can void the policy ab initio or even after the risk has attached • Doctrine operates regardless of insured’s intent

49. Misrepresentations, Nondisclosure, and Uberrima Fides • This policy is not only harsh, it is broad because of the definition of “materiality” • Fact considered “material” if the existence of the fact would affect the decision of a prudent insurer to underwrite the risk or even charge a different premium • Traditional rule undeniably harsh, but insurers’ arguments in favor of rule have less force in today’s world

50. Misrepresentations, Nondisclosure, and Uberrima Fides • Policyholders have had some success and American courts have circumvented strict application of the doctrine in various ways • Certain facts were not “material” • Steelmet, Inc. v. Cariber Towing Corp., 842 F.2d 1237 (11th Cir. 1988) • Nondisclosure did not void coverage because it related to a matter of common or public knowledge • Anne Quinn Corp. v. Am. Mfrs. Mut. Ins. Co., 369 F. Supp. 1312 (S.D.N.Y. 1973) • Courts have split on whether the doctrine is an “entrenched” federal precedent