The Technical sides of Double-Insurance and Contribution in Marine Cargo Insurance

My fellow colleague posed me the following question the other day:

“The seller sold the goods on CIF basis and the buyer also insured the cargo vide their global cargo programme. There was a damage to the cargo on arrival. Is there any contribution involved?”

I have had a discussion at my LinkedIn marine group and the following came out of the discussion:
The question has two sides to it, one being trying to understand if there was a double-insurance while the other is to identify whether contribution did indeed apply and how it should be applied.

There is also an additional question to look into: “What about s 80 of the Marine Insurance Act (MIA)?” This particular section provides for insurer that has settled a claim to file for contribution if it comes to their knowledge that there is another policy covering the same interest and subject matter?

If there truly is double insurance (premium paid and accepted for the risk by both insurers on a primary basis, and claimant having an insurable interest at time of loss), then each insurer should respond proportionately, according to how much they are liable under their respective contracts.

There will be contribution as both policies are covering the same interest. However, situation may be different if one of the policy contains a non-contribution clause or when the global cover is subject to a high deductible while the amount of loss is just below deductible.

If the global programme of the buyer is not on a difference in condition (DIC) basis/contingent basis of cover, and if the seller’s insurer gets to know about the existence of this policy, nothing prevents them from seeking contribution from the other insurer.

One particular LinkedIn member pointed out in a recent claim that concerns his company in NZ, in exactly this scenario, it was agreed (without going to court) that one of the insurance contracts was issued erroneously and therefore could not be called upon to contribute because it should never have been issued by that party and was deemed null and void…. (interesting? but not sure if this is some forgiving matters in Malaysia).

Another LinkedIn member pointed out, since this is a CIF consignment, primary liability to insure the cargo lies with the seller, therefore the coverage under global program shall be considered as null and void unless there in a situation of claim arisen an interest of contingency recoverable under the global program.

Another interesting observation. …where another member highlighted that double insurance (to his mind) invariably arises only under CIF/CIP sale whereby the seller is under obligation to arrange insurance on behalf of the buyer but the overseas buyer also arranges insurance for some reason (erroneously? or better terms? better security ? prefer local insurance as a back up?). If we take the stand that the buyer under CIF/CIP sale should not have taken an insurance in the first place, then Section 80 of MIA becomes meaningless….

I personally feel a contact being a contract and thus double insurance will apply. Further the assured will have the right to chose the insurance company on whom he wants to claim leaving the two insurers to adjust the claim as per rules of double insurance adjustment (e.g, independent liability method). 

Many years back I came across a Hong Kong case, where an Indonesian seller sold logs under a CIF sale and arranged an ICC (A) cover. My company was the reinsurer. The Chinese buyer too arranged an ICC A cover with a local insurer. The ship sank and cargo became a total loss. A very reputed UK based average adjuster somehow discovered the local Chinese policy and therefore advised us to claim contribution under double insurance which we did. Thus a leading average adjuster confirmed double insurance situation in this case of a classic CIF sale.

I have also experienced similar situation where we were CIF Insurer and the buyer abroad had taken local policy too, we had successfully recovered from the buyer’s local insurance coy through our claim survey agents

To summarise what had been discussed at the LinkedIn marine group, in the absence of any contrary contractual elements, double insurance rules would apply. True, marine insurance is one of indemnity and the buyer should be put in his pre-loss position, and the assured could apply to either policy for indemnity; thereafter it is up to the indemnifying insurer to seek the appropriate proportion through contribution from the other insurer with deductibles, limits and conditions all being factored in.

Marine insurance is one of indemnity, therefore the Insured is to be placed in the same financial position they were in prior to the loss. They cannot therefore claim for the same loss under their global programme. Depending upon the language of the policy, it is likely the Insured is covered on a contingent basis (i.e. buyers or sellers interest), to protect them in the event that the policy arranged by the seller fails to respond. The global policy would then respond to the loss as if the buyer had purchased on EXW, FOB or similar terms.

Nevertheless, I personally think those LinkedIn members’ observations were interesting ones and much could be derived chatting via the group platform. If anyone wanted to read further you may try the following blog:
http://ourblog.greenwoods.org/double-insurance-and-contribution/

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1 comment for “The Technical sides of Double-Insurance and Contribution in Marine Cargo Insurance

  1. Ah-yoon
    January 8, 2014 at 00:07

    Well written article, could you write something on subrogation?

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