{"id":1382,"date":"2011-11-20T14:11:01","date_gmt":"2011-11-20T12:11:01","guid":{"rendered":"http:\/\/ourblog.greenwoods.org\/?p=1220"},"modified":"2011-11-20T14:11:01","modified_gmt":"2011-11-20T12:11:01","slug":"double-insurance-and-contribution","status":"publish","type":"post","link":"https:\/\/greenwoods.org\/double-insurance-and-contribution\/","title":{"rendered":"DOUBLE INSURANCE AND CONTRIBUTION"},"content":{"rendered":"

\"\"<\/a>There is a misconception quite widely held that double insurance is in itself illegal.<\/p>\n

 <\/p>\n

Firstly,<\/em><\/strong> we shall look at the circumstances where double insurance may arise innocently or unknowingly.<\/p>\n

 <\/p>\n

Secondly,<\/em><\/strong> we shall review those circumstances where double insurance is arranged deliberately for perfectly proper reasons.<\/p>\n

 <\/p>\n

Thirdly<\/em>,<\/strong> there are the cases where the reason for arranging double insurance is completely improper. Whilst discussing these types of double insurance, we shall also look at each of them to identify the effect arranging this cover has for both the Assured’s and Insurers.<\/p>\n

 <\/p>\n

Finally,<\/em><\/strong> there is the question of what happens where an insurer is asked to pay a claim where double insurance has been effected. What are his rights and remedies at law and in market practice? What is contribution and how does it work in these circumstances.<\/p>\n

Having outlined the structure of this session however, I believe it would be wise before we go any further to identify exactly what is meant by the term “Double Insurance”<\/em>, particularly as far as this talk is concerned.<\/p>\n

Marine Insurance Act, which became law in 1906 Double Insurance is defined in the Act – Section 32 (1) – as:<\/p>\n

“Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance”.<\/em><\/p>\n

 <\/p>\n

You will note it does not say this must not happen, or that if it does there will be penalties to pay. The Act simply says:<\/p>\n

“the assured is said to be over-insured by double insurance”.<\/em><\/p>\n

By way of clarification, the indemnity allowed by the Act for cargo insurance is expressed in Section 16(3) of the Act as:<\/p>\n

“In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole”.<\/em><\/p>\n

In international trade it con certainly happen that two insurances are effected on the same risk and which ultimately are on the same interest, although not at the time the insurances were effected. The interest is with the party which has insurable interest at the time the policy was arranged. I hope the following examples and circumstances will make the position clearer.<\/p>\n

However, <\/em>circumstances where double insurance arises unknowingly.<\/strong><\/p>\n

Any international contract of sale will include provisions regarding where risk in the goods transfers from the seller to the buyer. Most international trade is carried out on terms specified by international agreement and regulated by the International Chamber of Commerce – these are known as Incoterms.<\/p>\n

These terms set out clearly the responsibilities of sellers and buyers in an international sale contract. These will include, amongst other things, which party is responsible for:<\/p>\n

    \n
  1. the provision of the carrying vessel;<\/li>\n
  2. export and import documentation;<\/li>\n
  3. insurance arrangements, and;<\/li>\n
  4. the precise point at which the risk of the goods passes from the seller to the buyer.<\/li>\n<\/ol>\n

    Without going too deeply into the technicalities of Incoterms, where a contract of sale is arranged on Free on Board (FOB) terms, the seller, amongst other things, is responsible for delivering the goods to a specified port, packed and prepared for loading on board a vessel by a specified date. The ship which is to carry the goods away from that port is arranged by the buyer.<\/p>\n

    If the sale is on Cost and Freight (CFR, formerly known as C&F) terms, however, in addition to his responsibilities under FOB, the seller has additionally to arrange the vessel which will carry the goods to an agreed port of discharge, where the buyer will arrange for them to be collected.<\/p>\n

    Finally,<\/em> <\/strong>where the contract is on Cost Insurance and Freight (CIF) terms, in addition to his responsibilities under CFR, the seller arranges marine cargo insurance for the sea voyage at least to the same port of discharge. The minimum scope of cover for this insurance is also defined in Incoterms.<\/p>\n

    In all three cases, risk in the cargo transfers from the seller to the buyer at the point the cargo crosses the ship\u2019s rail at the port of loading. It is risk which enables us to identify who holds the insurable interest.<\/p>\n

    Under CIF terms, therefore, the insurance policy arranged by the seller is assigned to the buyer at the point where the risk transfers – that is on crossing ship’s rail at the port of loading.<\/p>\n

     <\/p>\n

    The problem arises when the contract of sale is not entirely clear. Is it a CIF or a CFR sale? Is it a CFR sale where the seller has agreed to arrange the marine insurance outside the contract?<\/p>\n

    Indeed, is it an FOB sale where the seller has agreed, again outside the terms of sale, to arrange a vessel and arrange insurance on the buyer’s behalf, simply acting as his agent?<\/p>\n

    We can picture the scene. A clerk in the buyer’s office, he is very busy, working under a great deal of pressure. An urgent contract must be completed today.<\/p>\n

    He is unable to contact the seller; he does not have a full contract in writing – in all probability all there is to evidence the contract is an e-mail or fax. A few lines detailing what is to be shipped but little else.<\/p>\n

    International trade, as we all know, is not always as simple as it may appear. Speed of action and commercial pressures sometimes go ahead of sound business practices.<\/p>\n

    In these circumstances, what is a prudent buyer to do to protect his risk?<\/p>\n

    Of course! Arrange cargo insurance himself with his local insurer – probably on an open cover he has had in place for many years, he does not even need to trouble his Broker until the end of the month when he produces his declarations for inclusion in his monthly premium charges.<\/p>\n

    Meanwhile, the shipment proceeds and the documents relating to the sale finally arrive (in some trades after the vessel has docked and discharged the goods) and there is a certificate of insurance is enclosed with them. There has been double insurance on the cargo – innocent and unintentional but there nevertheless.<\/p>\n

    How may this be resolved, particularly if there has been a loss or damage and claims surveys must be arranged. If the correct Terms of Trade become known or clear, it is necessary to assess which policy applied to the shipment.<\/p>\n

    In these cases, if possible, the insurance should lie with the more specific policy. This may be identified by the circumstances surrounding the error. Additionally, if it can be shown that one set of Underwriters were never on risk, a full return of premium should be made on that policy. In the scenario we are looking at here, however, two policies were on risk for the same interest.<\/p>\n

    In the event of double insurance in these circumstances, the Assured has a reasonable degree of flexibility as to the policy upon which a claim may be made.<\/p>\n

    The Marine Insurance Act – Section 32 (2) – says:<\/strong><\/p>\n

    a) <\/em>The assured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may think fit, provided that he is not entitled to receive any sum in excess of the indemnity allowed by this Act. <\/em><\/p>\n

    \n

    b) <\/em>Where the policy under which the assured claims is a valued policy, the assured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject-matter insured.<\/em><\/p>\n

    \n

    c) <\/em>Where the policy under which the assured claims is an unvalued policy, he must give credit, as against the full insurable value, for any sum received by him under any other policy.<\/em><\/p>\n

    \n

    d) <\/em>Where the assured receives any sum in excess of the indemnity allowed by this Act, he is deemed to hold such sum in trust for the insurers, according to their right of contribution among themselves.<\/em><\/p>\n

     <\/p>\n

    These clauses refer to Valued and Unvalued policies.<\/p>\n

    1)\u00a0\u00a0\u00a0\u00a0 A valued policy<\/em><\/strong> is one which specifies the value of the subject matter of the insurance agreed between the insurer and the assured.<\/p>\n

    2)\u00a0\u00a0\u00a0\u00a0 An unvalued policy<\/em><\/strong> is one which does not specify the value of the subject matter to be insured but, leaves the value to be agreed subsequently in a way specified in the policy. This is the case for example of a cargo open cover or declaration policy.<\/p>\n

    Another circumstance where such double insurance may arise is where there is a simple misunderstanding as to the terms of sale.<\/p>\n

    The rather faint orders which says “we wish to purchase on C&F terms”<\/em> (C&F is still used by many people) and which the seller reads as CIF, quoting on this basis. A clerk in the purchaser’s office does not check the quote properly and misses the reference to “CIF”. The seller arranges cargo insurance on his export marine open cover; the buyer arranges cover on his import marine open cover. The result; double insurance.<\/p>\n

    Again, what happens when the double insurance becomes apparent? As with the first example the more specific policy would apply, in this case probably the seller’s as their quote was based on CIF, it was an error in the buyer’s office that the discrepancy was not discovered, although this is by no means certain.<\/p>\n

    Every case is specific to its circumstances.<\/em><\/strong><\/p>\n

    There is also the question of which insurance provides the wider cover and which is more easily cancelled. By this I am also referring to the chances of actually obtaining a return of premium.<\/p>\n

    A third example is where cargo is being shipped to a construction project site. An insurance package is arranged by the main parties to the project to insure the construction risks (Contractors’ All Risks<\/em> insurance perhaps) and to insure all imported materials and equipment for cargo risks. These are then wrapped with a liquidated damages or business interruption insurance, a condition of which is that all physical damage risks are insured within the package.<\/p>\n

    A manufacturer of an item of equipment arranges with one of the sub-contractors to supply the required items. Unfortunately the sub-contractor (who may well be at third or fourth tier within the sub-contracting hierarchy) is unaware of the insurance arrangements and, as he does not wish to get involved with insurance, agrees to purchase CIF. The construction package insurance is based on total turnover with no individual declarations of shipments. The double insurance then comes to light when a claim arises, possibly some time after the transit has finished.<\/p>\n

    The question of which policy applies here is complicated by the fact that the overall package insurance is subject to all shipments being insured under the package. This is particularly relevant if there is a loss or damage to a major item, delay in delivery of which has a long term effect on the final completion date of the project, therefore prejudicing the business interruption insurance.<\/p>\n

    One of the major reasons why the consequential loss insurer wishes to insure the physical loss or damage aspect of the transit is so he may make decisions on repair work which may be required taking into account the overall claims position. If, by agreeing for a repair to be carried out which may be uneconomic in the narrow sense of the value of the damaged item, it may be speedier and therefore better overall than waiting for a new item to be produced.<\/p>\n

    Such a decision would not be made by the supplier’s insurers who have no interest in the business interruption policy and are not likely to incur additional costs simply to save insurer\u2019s money.<\/p>\n

    These then are a few examples of where double insurance may arise unknowingly or unintentionally.<\/p>\n

    In some cases where double insurance has arisen deliberately.<\/em><\/p>\n

    This may happen quite legitimately, with no intention of profiting from the arrangement of two insurances.<\/p>\n

    Firstly there is Seller’s Interest.<\/em><\/strong><\/p>\n

    At the outset that there is a strong argument to say that seller’s interest is not double insurance at all. Please bear here, as using this more as an illustration of a point.<\/p>\n

    In cases where the responsibility is with the buyer to insure, such as FOB and CFR, the seller may be faced with difficulty if the buyer does not make adequate arrangements for insurance. If the buyer fails to take up the goods when they arrive, or the goods are lost en route and the buyer does not take up the shipping documents, the seller is faced with a considerable problem.<\/p>\n

    The result of a failure to take up goods or documents is likely to be the failure of the buyer to pay for them. In that case, the seller could look to export credit insurance (or the local equivalent) to remedy the credit risk.<\/p>\n

    This, though, can be a lengthy process, there is usually a 10% or 20% coinsurance clause and in any event the buyer may well be able to cite a good reason why the goods were not acceptable. Failure to comply with contract specification is often a good excuse.<\/p>\n

    Whatever the credit insurance position, if goods have been damaged, by which time they are probably in an overseas port, no cargo insurance cover for the benefit of the seller is in force. The buyer almost certainly would not give the seller the benefit of any policy he holds, assuming he has one. Indeed if the documents have not been taken up by the buyer he may be in no position to assign the insurance because it would not be in force as he had no insurable interest.<\/p>\n

    This is where seller’s interest comes into operation.<\/em><\/strong><\/p>\n

    Seller’s Interest is not credit insurance, neither does it pay for the return or onward shipment of cargo stranded at overseas ports, unless the movement of goods is required as part of the settlement of a marine claim.<\/p>\n

    Seller’s Interest is a contingency insurance providing retrospective cover in cases where a buyer fails to take up the documents or the goods. The insuring conditions are the same as they would be for a primary cargo policy. The same requirements hold for losses to result from an insured peril as with any cargo insurance, with the same exclusions and claims procedures. Likewise the Assured has the same responsibilities to minimize or mitigate losses as with a primary cover.<\/p>\n

    The significant factor with Seller’s Interest cover is the requirement for there to be an insurable interest at the time of loss does not exist. In the same way as the interest is retrospective in the example given, so the insurance cover is retrospective.<\/p>\n

    In view of the lack of an insurable interest element at the time of loss, this insurance is not legally binding and as such is not enforceable in the courts. For this reason Seller’s Interest policies are also referred to as being “honor”<\/em> policies that is they are binding on insurers only in honor, a law suit would not succeed in obtaining settlement if there were to be a dispute over the recoverability of a loss.<\/p>\n

    In the post, such policies included within them such expressions as:<\/em><\/strong><\/p>\n

     <\/p>\n

      \n
    1. \u201cPolicy Proof of Interest\u201d<\/li>\n
    2. \u201cWithout Benefit of Salvage\u201d<\/li>\n
    3. \u201cFull Interest Admitted\u201d<\/li>\n<\/ol>\n

      But as the policies were and remain legally unenforceable, these statements were redundant and are rarely used today. Indeed, the Marine Insurance (Gambling Policies) Act, 1909 positively excludes them from having any legal force.<\/p>\n

      Until relatively the clause noting that the policy had provision for seller’s interest to be pinned to the policy rather than gummed so that in the event of a case going to the courts (not necessarily relating to the seller’s interest element of the cover)<\/em> the clause could be removed. The Courts became aware of this practice however, and it was not unknown for a judge to hold a policy document up to the light to see if it contained any pin holes!<\/p>\n

      Regarding the legality of the policy, it would not be in insurers’ interest to decline a seller’s interest claim on the grounds of the illegality of the insurance.<\/p>\n

      Another area where there may be deliberate double insurance is to cater for those parts of a transit where a buyer has no risk and therefore no insurable interest. At that stage there has already been transit from the time the goods leave the seller’s premises.<\/p>\n

      Quite apart from the transit to the docks, probably by road or rail, there has also perhaps been movement to and from, and time whilst at, packers, freight forwarders, Groupage consolidators, hauliers and other transport service operators.<\/p>\n

      If goods have been damaged prior to loading on board the vessel, it is quite possible for the damage not to be noted on the Bill of Lading. It may however become apparent on the goods arrival at the final destination that damage had occurred prior to loading on the vessel.<\/p>\n

      For example, goods may have freshwater damage and it can be proven there had been no bad weather which would have resulted in such damage after the time the goods became at the buyer’s risk. An insurer may well decide to decline a claim on the grounds of the loss having occurred before the Assured had any insurable interest and therefore could not recover under the policy.<\/p>\n

      One could argue that the buyer should then claim against the seller. This however has a number of problems and can be quite impractical. The supplier may no longer be in business; they may simply ignore the claim particularly if the supplier is a large organization and the buyer a small one; there may be commercial considerations such as the supplier being the only one for a particular item or product. There are many reasons why a buyer would not want to become involved in long and expensive claims of this nature, with no guarantee of success.<\/p>\n

      It is possible to avoid this problem happening by inserting a simple clause in the buyer’s policy which says that his underwriters will pay such losses and then pursue subrogation rights against the supplier. The following is an example of such a clause:<\/p>\n

      “In respect of goods purchased by the Assured on F.O.B., F.A.S., C.F.R. or similar terms where risk passes to the Assured after transit has commenced, it is agreed that cover hereunder attaches with the commencement of transit of the goods from the supplier’s warehouse as detailed in the appropriate Institute Clauses applying hereto, Underwriters being subrogated to the Assured’s rights of recourse against the suppliers and\/or their Insurers”.<\/em><\/p>\n

      This clause also provides cover where there was no insurable interest – in this case not even a contingent one.<\/p>\n

      A third way in which double insurance may arise is where a buyer on CIF terms may not be confident of the financial stability or the claims settling integrity of the insurers selected by the seller.<\/p>\n

      There are many legal regimes throughout the World where exports from and\/or imports to those countries must be insured with local insurance companies, often the state insurer. There are in excess of 60 countries world-wide which have legislation which enforce restrictive measures in the field of marine insurance.<\/p>\n

      The intensity of these restrictions varies considerably. At one end of the scale there may simply be the imposition of special taxes and extra charges when insurance is placed outside the country’s borders. One could include within that definition state Surplus Lines regulations in the USA.<\/p>\n

      At the other end of the scale there are countries where it is forbidden for the seller based in that country to insure exports abroad or to export on any basis other than CIF. Likewise it is forbidden for a buyer based in that country to insure imports abroad or to import on a CIF basis.<\/p>\n

      The reason for such laws are various, often connected with an attempt to develop the domestic insurance industry or to control the movement of hard currencies, but this is a subject all of its own.<\/p>\n

      It is possible to arrange cover in these cases on a similar basis as with seller’s interest as a form of buyer’s interest. Underwriters may agree to cover the buyer in these circumstances on the basis of a “loan” <\/em>fund to assured pending recovery under first policy. This resolves the double insurance complication as the interest in this case is no longer the original cargo but the risk of the Assured failing to collect a recoverable claim under the other insurance.<\/p>\n

      Sellers who suffer from these legislative controls in their buyer’s countries are able to make use of seller’s interest insurance.<\/p>\n

      So far we have looked at those cases where double insurance has arisen either accidentally or, where deliberately, for innocent reasons. Now we shall look at the case where double insurance is arranged for illegitimate reasons.<\/p>\n

      Essentially there is only one reason to arrange a double insurance on a risk where it is not innocent and that is in order to make a fraudulent claim. That is, where an Assured claims two or more times for one loss on several policies. This also introduces the question of deliberate loss of or damage to the cargo. After all, only a lawbreaker is going to take out double insurance on a risk simply in the hope that a loss might actually happen! He will want to make sure a loss which depending on the scale of the fraud, could have very serious consequences both financially and possibly in risk to human life.<\/p>\n

      Attempting to claim more than once for a single loss is illegal almost certainly under any legal regime. There are criminal laws relating to fraud under which this type of activity would be dealt.<\/p>\n

      Within the Marine Insurance Act, Section 32, to which have been already referred, there is this reference:<\/p>\n

      (a) <\/em>The assured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may think fit, provided that he is not entitled to receive any sum in excess of the indemnity allowed by this Act.<\/em><\/p>\n

      Any attempt to put through a claim to exceed the amount allowable under these conditions would be, quite apart from the criminal element of the action, contravene the Act and, in the absence of any agreement to the contrary in the contract – which would be rather unlikely \u00a0would therefore not be enforceable.<\/p>\n

      Having reviewed double insurance, legal or otherwise, there is the question of Contribution. The Assured has, under the Marine Insurance Act, the ability to claim from any policy – provided of course the loss is recoverable – and in any order he may think fit.<\/p>\n

      Where then does this leave the Underwriter who has paid a claim in full?<\/p>\n

      Does he have to carry all the loss, even though there are other legitimate policies in place which could equally as well have been called upon to pay the claim?<\/p>\n

      The Act has this to say in such circumstances in Section 80:<\/em><\/strong><\/p>\n

      1) <\/em>Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract.<\/em><\/p>\n

      We have already seen that the assured may claim for the full loss from one policy. So, it is not the assured who must obtain the payment in the rateable proportion referred to in the MIA. The Act also goes on to say:<\/p>\n

      2) <\/em>If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt.<\/em><\/p>\n

      Thus the insurers each pay their proportion of the loss. What, however of the assured. He has, after all, paid two lots of premium. This is also resolved by the Act. Section 84 (3) (f) says:<\/p>\n

      “\u2026\u2026\u2026. where the assured has over-insured by double<\/em> insurance, a proportionate part of the several premiums is returnable:”<\/em><\/p>\n

      There is, however, a warning to that. If the two policies are, for example, effected at different times and one of the policies carried the whole risk, even for a short time, there is no return of premium. The full paragraph reads:<\/p>\n

      “Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable”.<\/em><\/p>\n

      The final part of this paragraph, relating to cover being arranged deliberately, caters for the case such as seller’s interest<\/p>\n

      Having deliberately taken out a double insurance, even a contingent one, it would obviously be a non-sense if you could then obtain a return of premium.<\/p>\n

      Whilst we are talking about double insurance, returns of premium, contribution and so on where there is over-insurance arranged, what about the case of under-insurance?, the Marine Insurance Act caters for that occurrence.<\/p>\n

      Section 81 of the Act says:<\/em><\/strong><\/p>\n

      “….where the assured is insured for an amount less than the insurable value, or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance”.<\/em><\/p>\n

      So, if you under-insure there is contribution, but in this case by the Assured.<\/p>\n

      In conclusion, in a relatively short space of time, we have now reviewed several forms in which double insurance may occur. Accidental and deliberate, innocent and malicious. Also, Contribution and how it affects insurers and assured\u2019s. There is a misconception over the legality of double insurance.<\/p>\n

      Takis Kalogerakos<\/p>\n

      Marine Underwriter<\/p>\n

      www.greenwoods.org<\/a><\/p>\n

      http:\/\/ourblog.greenwoods.org<\/a><\/p>\n

       <\/p>\n","protected":false},"excerpt":{"rendered":"

      There is a misconception quite widely held that double insurance is in itself illegal.   Firstly, we shall look at the circumstances where double insurance may arise innocently or unknowingly.   Secondly, we shall review those circumstances where double insurance is arranged deliberately for perfectly proper reasons.   Thirdly, there are the cases where the […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[39],"tags":[],"_links":{"self":[{"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/posts\/1382"}],"collection":[{"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/comments?post=1382"}],"version-history":[{"count":0,"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/posts\/1382\/revisions"}],"wp:attachment":[{"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/media?parent=1382"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/categories?post=1382"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/greenwoods.org\/wp-json\/wp\/v2\/tags?post=1382"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}