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A Brief Analysis Of The Principle Of Indemnity With Respect To Marine Insurance Contract

Abstract
The primary objective of an insurance contract, which is based on the idea of the Principle of indemnity, is to cover for losses. According to the above principle, the key and intrinsic consequences of the indemnity insurance policy in insurance law are the full coverage of the victim's damages, up to the ceiling of the insurer's responsibility.[1]

The Indemnity Principle as an underlying principle of an insurance policy has two aspects:

firstly, making sure that the reimbursement of damages does not raise claimant assets because the insurance can never be a source of benefit for claimants and secondly, the amount of reimbursement should never surpass the value of the policy taken. Marine insurance as an insurance contract is also a contract of indemnity.[2] It is a kind of insurance policy that provides coverage against any damage or loss occurred to ships, vessels, terminal , etc. It is necessary for all the owner of the ships who use it for commercial or transportation purpose.

It supplies the claimant with benefits equivalent to the loss that happened, that is equivalent to either the sum of the total loss incurred or the worth of the insured object previously decided upon. Incidentally, the concept of principle of indemnity also gives rise to the concept of subrogation and contribution , which ensures that an insured party does not benefit from an insurance policy.

The aim of this paper is to give a clear picture of the essence and purpose of maritime insurance by analyzing the practical implementation of the principle of indemnity and, incidentally, the concept of subrogation and of contribution to the marine insurance contract. The legal issues connected to the principle, in practice and in Theory, are analyzed and discussed through the citation and critical analysis of the related case laws and the recommendation of ways of making India's marine insurance model more efficient.

Introduction:
Insurance is a social device providing financial compensation for the effects of misfortune ,the payment being made from the accumulated contribution of all parties participating in the scheme - Prof. D.S. Hansell[3]

In recent years, the tort law has put greater obligation and financial pressures on insurers due to liberalization and provision for high damage awards. As a result, the insurance sector is becoming increasingly aware of the theories of Indemnity and subrogation that could allow them to move on any of their liabilities to others. As per section 3 of the marine insurance act 1963, a contract of marine insurance is a contract where “the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine hazards”.

The oldest of the many modes of damage protection, Marine Insurance has a long tradition that dates back to ancient times and is in line with the maritime trade itself. By numerous insurance policies, whether in the form of loans or mutual assurances, the primeval Phoenicians, the Greeks and the Romans had the practice of defending themselves against any risks of maritime business. The loan form known under the name of Bottomry is one of the oldest systems.[4]

In this, a ship is mortgaged in such a way that if it is lost, the lender loses the money so advanced, but if the ship arrives safely at the port, he or she will get the loan amount back together with the premium so negotiated during the formation of the contract. This very concept developed into a modern system of insurance.

The fundamental purpose of insurance contract is to compensate the insured for the damage suffered and to the extent agreed upon. Damage indicates the harm suffered by the insured property. The loss agonize under the marine insurance must be the one which is caused by a marine Adventure. Similar to maritime risks, the damages incurred by marine travel often vary from the losses sustained by other types of insurance coverage.

Statement Of Problem
With the growth of industrialization and the liberalization of international trade, overseas exports and imports have increased and the shipping of goods by sea, river or other waterways has also increased. This has tended to raise the risk involved in maritime transport. Marine insurance provides a solution to the danger inherent with marine transport.

As such, as an integral part of international trading, maritime insurance is governed by various international laws and regulations . The Marine Insurance Act of 1963 regulates the law relating to marine insurance in India. This act is an significant copy of the English law of 1906 with appropriate amendments to suit the Indian economy.

The entire idea of the maritime insurance contract is that the amount to be recovered from the insurer is the monetary damage experienced by the insured under the contract. Accordingly, a marine insurance contract is an contract under which the insurer undertakes to indemnify the insured against marine damages, i.e. losses arising from marine adventure. All marine insurance contract are contract of indemnity.

In this research paper , we would be focusing on the application of the concept of indemnity in marine insurance contracts and various legal issues related to the principle.

Research Objective
The objective of this Research paper is three fold:
  1. To study the contribution of principle of indemnity and also principle of subrogation and contribution to Marine insurance contract.
  2. To examine the problems that occur in the context of recent developments in those applications.
  3. To recommend ways to make the Marine insurance regime in India more efficient , which will be beneficial for both insured as well as insurer.
Research Question
  1. What are the contribution of the principle of indemnity in a marine insurance contract?
  2. What are the requisites for entering into a marine insurance contract?
  3. What are the various kinds of marine losses?
  4. How the amount of compensation to be provided to the assured by the insurer in a insurance contract is measured / calculated?

Research methodology
Research is carried out using the doctrinal approach, and secondary sources such as reports, posts, web sources and newspapers are used to collect the information. It is fundamentally associated with a theoretical understanding of the subject . It is also based upon interpretation of statues and cases.

It is also important to note that all the conclusions so formed or derived at the end are logical conclusions and the judgments can be influenced by several other factors such as history , culture , politics and economics.

After analyzing marine insurance policy and indemnity principle by reading from several judicial pronouncements , discussions made in commentaries , textbooks , journals and debates and laws in statues in a holistic manner , objective of the study is highlighted and recommendations are made.

The chapterisation of the research paper following the first chapter of introduction is the critical analysis of the principle of indemnity , subrogation and contribution with respect to marine insurance contract in second chapter.

The third chapter would discuss regarding the valued and unvalued policies in a marine insurance contract and also examines the marine losses.

The fourth chapter discusses regarding the insurable interest in a marine insurance policy as a requisite for entering into a insurance contract.

The fifth chapter is the recommendations and conclusion.

Principle Of Indemnity, Subrogation AND Contribution – A Critical Analysis With Respect To Marine Insurance;

  1. Marine Insurance – not a perfect contract of indemnity
    The principle of indemnity is the backbone of insurance law and policy. Indemnity means putting the person in the position he would have been if no damage had been incurred .Besides providing compensation it also ensures that the insured doesn't gain from the insurance contract by merely providing the amount with respect to the actual loss.

    Marine insurance is also an indemnity contract where the insurer undertakes to pay the insured for the damages suffered during a marine adventure. According to the section 1 of the marine insurance act,1906 "

    A marine insurance policy is an arrangement whereby the insurer undertakes to indemnify the insured against marine damages, i.e. losses incident to marine activity, in the manner and to the range agreed upon therein.”[5]It is clear that the word indemnify is the most operative word in it, and it is within the framework of the cardinal principle of indemnity that the whole contract is founded and from which the laws relating to the right to claim under a policy emanate.[6]

    In the case of Ricards vs Forestal land, Timber and Railways co , Lord Wrights[7] has said that:
    ‘.. The purpose of both courts and the legislature was to give effect to the notion of idemnity, which is the fundamental principle of insurance, and to apply it to the various complexities of fact and law in relation to which it would function...'

    Within an insurance policy, however, the concept of indemnity is not necessarily accomplished successfully. It may be broken by way of a valued policy in the contract.This simply means that the award would be based on the worth negotiated in advance by the parties. These values can be more or less than the worth of the subject matter following a maritime hazard. The conclusion drawn is that, since the sum can be greater or less than it should be, compensation is not always equally rewarded.
     
  2. Subrogation Rights Resulting From Marine Insurance Contracts
    subrogation simply denotes replacement of one person in position of another , so that the person who is replaced succeeds in the rights of another in relation to the debt or claim and its rights, remedies and securities.[8]Subrogation in the context of maritime insurance is the privilege under which the insurer, having settled the loss, recovers all the insured's rights, remedies and liabilities. The insurer is entitled to compensation from the other party responsible for compensating the insured..[9]

    It is pretty widely known law that subrogation is a deduced from the concept of indemnity . It ensures that the assured doesn't get more than the damage occurred to him.
    In the case of Lufeng shipping company Ltd vs M.V. Rainbow Ace[10] , M/S Rainbow Shipping Ltd. made a loss of Rs. 3 crore in shallow waters due to one of its ships being caught in the sand. It was figured that the cost of retrieving the vessel was exorbitantly high, more than the worth of a new vessel of the same capability and resilience.

    The insurer agreed to pay M/S Rainbow for the purchase of a new ship after depreciation and secured the rights to save and retrieve the beached vessel in return. The ship was later spotted floating in the Arabian sea during a coastal cyclone. M/S Rainbow's crew found the vessel and told the administration, but the management refused to recapture the vessel and informed the insurer to do so in place. The insurer seized the ship and later sold it to a scrapyard, recovering Rs. 15 lakhs from it.
     
  3. Double Insurance And Principle Of Contribution In Marine Insurance
    The Marine Insurance Act states that Principle Of Contribution is :(1) Where the insured is over-insured by double insurance, each insurer is obliged to contribute to the loss in proportion to the amount for which he is responsible under the contract, as between himself and the other insurers.[11]

    (2)In case the insurer has spend higher than his or her share of loss .He or she is eligible for keeping a suit for contribution against other insurers and is eligible to get the like remedies as a surety, who has paid more than his or her share of debt.

    Now first of all double insurance occurs when an assured takes insurance from more than one insurer. Although more than one insurance under the same risk is legal, the insured is, however, entitled only once to the relief of his loss. He may , for the entire amount due, continue against any single insurer or combination of insurers, leaving any insurer paying more than its relevant share of the loss to recover the contribution from the other insurers.
     

Valuation Of Insurance

The amount recoverable by the insured from the insurer is known as the measure of indemnity .The estimation of the amount of coverage to be paid by an insurance provider to the insured is fundamentally determined by the category of loss suffered by the claimant and the nature of the policy . It depends on whether the policy is valued or unvalued , whether the loss is total or up to some extent and whether the policy is marine or terrestrial.
  1. Valued And Unvalued Policy
    In a valued marine policy , the valuation of the subject matter to be insured is predetermined and stated. and It is assumed to be the value of the insured property if a loss occurs or it is damaged. The extent of the indemnity provided by the policy must depend upon the value of the insured property so decided.[12] Section 27 of the Marine insurance Act ,1906 and Section 29(1) of the Indian Marine Insurance Act , 1963 enables the parties to agree to a valuation of the subject-matter insured in the contract and the valuation is declared In questionable for all purposes between the parties to the policy, except to determine if a constructive total loss has occurred.

    Once the insurer has accepted the premium on the basis of the agreed value, it is not available to the insurer to dispute the valuation for any reason whatsoever, unless the insured person is guilty of deception in delivering the valuation, or the insured person has overestimated the subject-matter in a material way or has not revealed or misrepresented the valuation. As a consequence, the feasibility of such a policy could offend the concept of indemnity as this could result in insured gaining from the contract as he or she might get more than the actual damage he or she has suffered.

    In the other hand, unvalued marine insurance policies are those in which the sum of coverage is not pre-decided and is determined on the day of a marine hazard ,depending on the market value of the property.
     
  2. Total and partial loss:
    In a marine insurance policy , Insurer provides the insured with an compensation for the total loss or partial loss for the subject matter so insured. A distinction is drawn between the total loss , constructive total loss and partial loss in Indian marine insurance act ,1963.[13] This means that a total loss can either be an actual total loss or constructive total loss. Any loss which doesn't fall in the first two categories, falls into the category of partial loss.
  1. Actual Total Loss:
    The total loss is the one in which the covered person is entitled to reimburse the whole sum of his subscription from the insurer. The definition of total loss is specifically established by section 56 of the Indian Maritime Insurance Act, 1963. Total loss in simple words suggests that, Goods have been totally destroyed and there is no possibility for them to be recovered or retrieved. Remuneration will be based on the entire insured value of the goods in the event of a total loss.

    Actual total loss is a physical and material loss of the insured subject matter Section 57 of the Indian Marine Insurance Act, 1963 defines the concept of actual total loss as one in which the subject-matter of the insurance i.e ship or merchandise is entirely damaged and none of the insured subject-matter is left to be recovered. In this the subject matter is destroyed or so damaged as to cease to be a kind of the thing thereof. The insurer is obligated to provide the whole amount when a vessel is foundered or so damaged as to be valueless.

    The vessel must be so badly destroyed as to become a complete wreck to count as an actual total loss. In Loyal Marines v National Insurance Co Ltd[14] The insurance company attempted to escape its responsibility when the ship unfortunately got entangled and the insured could not do much to straighten it, on the basis that the insured did not manage to avert the damage, but the court ruled that the insured could not do anything in the specified conditions and held the insurer liable to pay the payout.
     
  2. Constructive Total Loss:
    Constructive total loss occurs when the subject matter is not totally destroyed but it is damaged up to an extent that the cost borne to repair the subject matter i.e a ship, is more than the cost borne for purchasing a new one. Section 60 of the Indian marine insurance act,1963 defines the concept of constructive total loss. Abandonment is the most important rule of constructive total loss. The insured has the option to recognize the loss as an actual total loss or a partial loss as soon as a constructive total loss has been determined. Under section 61 of the Act, this privilege to decide has been granted to the assured. When the insured intends to treat a constructive total loss as an actual total loss under the terms of section 62(1), a notice of abandonment must be issued to the insurer.
     
  3. Partial Loss:
    Any loss that is not a total loss is a partial loss. It is defined as partial loss if the insured goods or ship receives partial damage.It isof three types;
    Partial average loss- In this a particular part of the insured subject matter is damaged. Section 64 of the Indian marine insurance act,1963 defines partial loss. In this insured will be indemnified only for the loss occurred.

General average loss:
It is the damage incurred by any party due to a compromise made by that party in lieu of the other parties' interests. For instance, if a portion of goods are thrown from the ship to save all other goods.

Salvage Charges:
These are the amounts paid to protect the vessel against additional losses. The very concept is also covered under the concept of partial loss.[15]

Insurable Interest In a Marine Insurance Contract

If a person wants to insure a property, he or she must have an insurable interest in the property; i.e. the individual should be financially impaired by loss or harm to the property. Marine insurance is also based on the insurable interest in the property. The pre-requisite for the insured to have an insurable interest in the subject-matter of the maritime insurance policy is linked to the fact that the marine insurance contract is an indemnity contract.[16]

The policies issued for some amount of time explicitly waived evidence of assureds interest and thus came to be called " interest no interest' policies. The parties decided to wager irrespective of the insurable interest , in such a policy and it was with the passage of the Act of 1745 that such arrangements were forbidden to deter the illegitimate loss of vessels.
Section 6 of the Indian marine insurance act,1963 renders wagering contracts as void . Basically , Insurance contracts are viewed as wagering contracts where there is no insurable interest at the time the contract is entered into.

There must be a legal relationship between the individual benefiting from insurance (insured) and the insured property in order to enter into an insurance arrangement, that is there should be " insurable interest." An insurable interest is, thus, a pre requisite in a contract of maritime insurance. The insured must primarily have an insurable interest in the insured subject-matter in order to be entitled to claim reimbursement and, secondly, have one at the time of the loss. It should therefore have an economic interest in the subject matter, to the degree that the insured person may benefit from the continued security of the subject matter or may be damaged by the loss, injury or incarceration of the subject matter.

In the landmark judgement of Macura v. Northern Assurance Co[17] ,The court ruled that neither a company shareholder nor a simple lender to a company has any engrossment in any company's asset, even if they incur damages due to the destruction of it. Thus in order to avoid ambiguity all the facts related to the case of insurable interest in a Insurance contract must be carefully observed so that generalizations are not drawn.

Recommendations:
  1. While applying the principle of contribution , It is important to ensure that all the applicable conditions are complied with. Otherwise , it might create confusions as upto what amount the insured will be indemnified and the ratio of contribution on the part of insurers.
  2. The insurable value of the property so insured needs to be calculated . In cases involving unvalued policies, it may serve to resolve the calculation of indemnity. In cases of valued policy where the value is not conclusive, such as where there is a constructive total loss, it can also help to calculate reimbursement . It will also help to fix a norm while agreeing on a value in a valued policy.
  3. The requirement of a valid abandonment is a prerequisite to a claim for a constructive total loss. The assured after getting reliable information of the loss , within a reasonable time frame , has to send a notice of abandonment to insurer for getting the compensation. The information gathered by the assured shouldn't be of doubtful character . If in any case the assured fails to send the notice , the loss would be considered as a partial loss.
  4. The arguments considering similarity in the insurable interest cases of one category to those of another must be dealt with caution and the facts of each case must be carefully examined so that the generalizations are not drawn.
  5. The marine insurance Act,1963 needs to add the various other types of policies, that though are uncommon but are used in the course of business or which may be useful as per the prevailing conditions of the market and the need of the economy.

Conclusions:
The aim of marine insurance was to encourage the ship's owner and the buyer and seller of goods to operate their respective business while at least to an extent relieving themselves of the burdensome financial consequences of the loss or damage to their property as a result of the numerous threats of the high seas.

In other words, maritime insurance adds an integral aspect of financial security in order to ensure that the possibility of misfortune during shipping is not an inhibitory factor in the conduct of foreign trade. Although marine insurance is a boon for the Indian economy , it is also essential that all terms and conditions of the agreement are complied with in order to remove all the ambiguities that may arise in future.

There is always a possibility that the insured is gaining from the insurance agreement by claiming that the losses are either misconceived or wrongly calculated. As a result there shouldn't be any kind of vagueness while calculation of indemnity.It is well founded that the courts used to obey the rules of English law, i.e. the Marine Insurance Act, 1906, before the Indian Marine Insurance Act, 1963, came into force in India. So we may assume that the Indian law is a clear take off from the English equivalent, and if it is not self-evident, it is appropriate to analyze the case law between the two countries to arrive at the true situation.

Bibliography:
Books:
  • Kyriaki Noussia The Principle Of Indemnity In Marine Insurance Contracts (Springer company, Berlin), 5th edu. (2007)
    The author discusses in details regarding the basic features of an indemnity marine insurance contract. The aim of any type of insurance, he argues, is restoring what has been lost. The insured should not benefit from the loss or be in a worse condition than when the loss took place

     In practice the compensation is of monetary in nature and this system of reimbursement is called “Indemnifying”. The principle of indemnity is a basic principle of insurance law in the sense that the insured can only recover the damage that has happened. The other party may argue that the damages are either misconceived or incorrectly calculated and quantified upon reimbursement of losses and assessment, and for this it is important for the insurer to ensure that there is no uncertainty when valuing the indemnity.

    The author mentions that each time the relevant form of insurance is established, based on the nature of the case. For eg, in maritime insurance, the amount insured is payable at the event of a marine hazard. The amount recoverable in indemnity contracts is determined by the magnitude of the pecuniary impairment of the insured, which is why a maritime insurance contract is defined as an indemnity contract.

    The author further specifies how the principle of indemnity can be undermined in a maritime insurance contract by means of a valued policy. The payout can be based on the values agreed in advance by the two parties. Such values can be higher or lower than those currently at risk. Therefore, it has been argued that an insurance contract is not a perfect contract of indemnity..
     
  • R. Sinde, Development of law relating to Marine Insurance in India, ( April 30, 2011)
  • Ivamy ERH (1986) General Principles of Insurance Law,5th edn, Butterworths
Articles from journals
  • Mukul Sharma & Abinas Agrawal “MARINE INSURANCE: THE LEGAL INSTRUMENTS GUIDING IT IN THE ECONOMIC MARKET” International Journal Of Law
  • Amiran Bakshayesh ISA & Bariklou Alireza “THE PRINCIPLE OF INDEMNITY IN INSURANCE LAW” Majlis & Rashbord
Websites:
  • https://www.sid.ir/en/journal/ViewPaper.aspx?id=466006
  • https://legal-dictionary.thefreedictionary.com/subrogation
  • https://www.iedunote.com/types-of-marine-losses
  • What is a Valued Policy? - Definition from Insuranceopedia
  • Double Insurance and its effect on marine policies – NAU Pte Ltd
  • https://legal-dictionary.thefreedictionary.com/insurable+interest
End-Notes:
  1. https://www.sid.ir/en/journal/ViewPaper.aspx?id=466006 (last visited on 15th December, 2020)
  2. Section 1 of the marine insurance act, 1906
  3. https://www.scribd.com/document/343486084/341950762 ( last visited on 20th December, 2020)
  4. R. Sinde, Development of law relating to Marine Insurance in India, ( April 30, 2011) available at http://www.legalservicesindia.com/article/article/development-of-laws-relating-to-marine-insurance-inindia-654-1.html (last visited on 20th December, 2020)
  5. section 3 of Indian MIA,1963
  6. Kyriaki Noussia The Principle Of Indemnity In Marine Insurance Contracts (Springer company , Berlin),5th edu.(2007)
  7. [1941]3A11ER62,HL.
  8. https://legal-dictionary.thefreedictionary.com/subrogation (visited on 25th december,2020)
  9. Section 79 of the Indian MIA ,1963
  10. 2014 (4) BOMCR 241
  11. Section 80 of the Indian MIA,1963
  12. What is a Valued Policy? - Definition from Insuranceopedia (Visited on 25th December,2020)
  13. Section 56-64 of the Indian marine insurance act ,1963
  14. IV (2006) CPJ 250 NC
  15. https://www.iedunote.com/types-of-marine-losses (last visited on december 26th , 2020)
  16. Section 4 of the MIA,1906
  17. [1925] AC 619
List Of Abbreviations:
  1. A11 ER All England Law Reports
  2. AIR All India Reporter
  3. HL Clark & Finelly's House of Lords Reports
  4. BOMCR Bombay Cases Reporter
  5. QB Queens Bench
  6. SC Supreme Court
  7. AC Appeal Court
  8. CPJ Consumer Protection Judgments
  9. MIA Marine Insurance Act
  10. NC National Commission
  11. M&W Meeson & Welsby's Exchequer Reports
  12. V. Versus
  13. WLR Weekly Law Reports
Table of cases:
  1. Ricards v. Forestal land, Timber and Railways co [1941]3A11ER62,HL.
  2. Lufeng shipping company Ltd v. M.V. Rainbow Ace 2014 (4) BOMCR 241
  3. Fisk v. Masterman (1841)8M&W165
  4. Loyal Marines v. National Insurance Co IV (2006) CPJ 250 NC
  5. Macura v. Northern Assurance Co [1925] AC 619
List Of Statues Referred:
  • The Indian Marine Insurance Act , 1963-3,6-9 29,--56-57,60,64,79-80.
List Of International Statues Referred:
  • The Marine Insurance Act , 1906-7-9,21-23,30-35--38-43,65-66.
  • The Marine Insurance Act , 1745--6,31,42-43
  • The Marine Insurance (Gambling Policies) Act 1909--8,24,31,43
 Written By:
  1. Sriman Mishra - KIIT School Of Law, 1st Yr And
  2. Ronak Pattnaik - KIIT School Of Law, 1st Yr
 

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