Written by: R Balasundaram @ https://balasbroadcast-wordpress-com.cdn.ampproject.org/c/s/balasbroadcast.wordpress.com/2020/03/08/the-agreed-value-mystery/amp/
Any insurance beginner who has learnt it in theory or a seasoned marine insurance practitioner will tell you, or rather it will roll off the lips nonchalantly that Marine cargo insurance is an ‘Agreed Value’ policy. What exactly does this mean, you query and the answer is ‘ Marine cargo policy can include profit as well’. Does this not go against the fundamental principle of Indemnity in insurance? Now the nonchalance slips away as they tread shaky ground.
This post is just to set the record straight. The Marine Insurance Act, 1963 spells out this concept clearly. Relevance of the Marine Insurance Act is thus clearly brought out. Section 29(3) of the Act says that the value fixed by the insurer and assured in agreement is conclusive evidence of the value intended to be insured under the policy. ( Typically this will be the invoice value, which does include an element of profit). The meaning is that in case of a loss, the invoice value will form the basis of settlement. Can the Agreed value be challenged? Yes, but only if it can be established that the value was exaggerated with a fraudulent intent. Further the concept of Agreed value will apply to both Total Loss & partial loss. Interestingly, Section 29(4) states that unless otherwise agreed, the value fixed by the policy is not conclusive evidence for determining if a Constructive Total Loss situation has arisen.
Does this mean that a marine cargo insurance policy does not take into account the market value of the cargo at all and settlements are effected solely on the basis of the Agreed value? In case of an Actual Total Loss, yes, but in case of certain partial losses, the answer is No.
Partial losses can be either of the two cases — 1) Where a part of the cargo is totally lost and it is possible to identify the value of the part, the liability of the insurer will be the value of the part or where a portion of the cargo is totally lost , the insurer’s liability will be the proportion of value the lost portion bears to the total value insured under the policy. 2) Where the cargo is received in damaged condition at the final destination, insurer’s liability will be the difference between Gross Arrived Sound Value( GASV) & Gross Arrived Damaged Value (GADV) expressed as a percentage on the Gross Arrived Sound Value and applied to the value insured under the policy. Adjustment of losses relating to cargo reaching the destination in damaged condition is at times flawed and not in line with what has been contemplated under the Marine Insurance Act.
An example will make it clear. Pulses with an insured value of say USD 20,000 reaches the final destination in damaged condition. The loss assessor reckons the cargo in damaged condition will be USD 2000. So the claim is settled for USD 18,000. In other words an allowance(depreciation) of 90% (20,000-2000/20,000 X 100) is given to the claimant. Now how is the depreciation in value arrived at? It could be one of the following:
- Based on the loss assessor’s experience
- Based on the value for the damaged portion ascertained from the local market
- Based on pre-determined percentages agreed between the insurer & assured irrespective of extent of damages
- Negotiated settlement in each case.
What is the flaw in adopting any of the above basis to arrive at the depreciation? (1) , (3) & (4) are subjective & (2) while it has a basis for the value of the damaged portion, it does not take into account the prevalent market conditions locally for the sound cargo. It pre-supposes that the insured value is the value of the sound cargo at the destination, which may not be true always. Markets may be rising, falling or stable. Continuing the same example, let us look at the three scenarios and how they can pan out.
- Stable market : GASV – USD 20,000 GADV – USD 2000.Depreciation USD 18,000 (90%)
- Rising market: GASV – USD 22,000 GADV – USD 2200 Depreciation USD 19,800 (90%)
- Falling market: GASV – USD 19,800 GADV – USD 1980 Depreciation USD 17,820 (90%)
If the GASV is not taken into account and only the value of damaged material ascertained, the claim settlement could be flawed.
- In a rising market, if the damaged material is valued at USD 2200 against the insured value of USD 20,000, the depreciation will work out to 89% and the claimant will get a settlement of USD 17,800 ( 20,000 – 2200)
- In a falling market, if the damaged material is valued at USD 1980 against the insured value of USD 20,000, the depreciation will work out to 90.1% and the claimant will get a settlement of USD 18,020 ( 20,000 – 1980)
The claimant would get more in a falling market and less in a rising market. Paradoxical. What sort of indemnity that would be? Hence the drafters of the Marine Insurance Act had wisely brought in this concept of GASV & GADV, with the percentage of depreciation being applied on the insured value to arrive at the insurer’s liability.
So, the market value at the destination does come into the picture, both that of the sound cargo as well as the damaged cargo. Principle of Agreed value is also upheld because the percentage of depreciation arrived at as stated earlier is of course applied on the insured value, which is the Agreed value.
What has been stated above is only a reiteration from my side. All of us know this, but how closely this is practiced is the question.