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Marine Insurance and Principle of Indemnity

One would concur that an important part of international maritime trade is played by Marine Insurance. Global Maritime trade is affected hugely by the policies of maritime insurance being followed in various nations. Initially, the paper will talk about the mechanism of Marine Insurance in India, its history, and the influence of the English Marine Insurance Act 1906 passed in England.

Then an evaluation will be drawn to show how valued marine insurance is an imperfect example of a contract of indemnity (which forms the basis for an insurance policy) with the help of case laws and illustrations. Then a few steps by the courts will be illustrated to make the policy fairer and just.

What Is Marine Insurance
An insurance policy is a contract in which an individual or entity (known as an insured) receives monetary reimbursement against losses, emerging from the occurrence of an event, from an insurance company (known as an insurer), generally in exchange for a premium.[1] Marine insurance alludes to a contract by which the insurer promises to reimburse the insured a loss resulting from "losses incidental to marine adventure".[2] It provides coverage against any loss/harm to ships, terminals, cargo, etc.
Brief History
It is said that Marine insurance is the primary insurance policy.[3] In Babylonian times (2100 B.C.), the genesis of the initial insurance policy was observed whereby the merchants a sum to guarantee the safe arrival of their goods.[4] Later, around 300 BC, the concept of "Bottomry" came around. It was an arrangement by which the owner of the ship borrows money for repairing or maintenance of the ship and in return pledges the ship as security.[5]

If something happens to the ship by way of any perils, the lender shall lose his money but if the ship returns, the lender shall get his money back with a premium. This laid the foundation stone for the outset of Marine insurance. Marine Insurance, in a somewhat similar way as we know them now, was first found in Middle Ages in Europe. There existed generally agreed-upon Sea Codes that contained various regulations.

In 1688, the first official insurance company was formed in London in a coffee shop that was famous amongst merchants and ship owners and grew to be immensely successful.[6] And that's how the Insurance policies evolved.
- Maritime Insurance Act, 1963
  It is well-established reality that when the Indian Marine Insurance Act of 1963 (MIA 1963) was drafted, the drafters had the Marine Insurance Act of 1906 (MIA 1906) of the English Law at the back of their heads. The 1963 and 1906 Acts are closely similar or indistinguishable from each other. The principles governing the 1906 English Act are duplicated in the 1963 Act of India.[7] The Parliament passed the MIA 1963 to ensure the smooth functioning of shipping which saw a huge expansion right after industrialization.
Indemnity
A contract of Indemnity is when one party promises to compensate the other for a loss incurred by them.[8] In the Indian case, Canada Rice Mills Ltd. v. Union Marine and General Insurance Co. Ltd.[9], the Privy Council held that the principle of Indemnity maintains the sanctity of the insurance policy.

The Indemnity Principle, in the context of insurance, essentially has two elements[10]:
1. To ensure that the amount compensated or reimbursed shall not raise the assets of the insured in any way. An insurance policy can never be a source of benefit or profit for the insured.
2. The amount of compensation or reimbursement should never exceed the value of the policy taken. The amount which has been agreed upon by the insured and the insurer, if any, is the upper limit of the compensation to be paid.
In the case of Castellain v. Preston[11], Justice Brett held that marine insurance is an indemnity contract, and that the assured shall be fully protected against all the loss that happened, but they should never be over-compensated/ reimbursed more than what they have lost. This is the "great principle" of indemnity.
Marine Insurance And Indemnity
The principle of Indemnity is considered to be the backbone of the insurance law and industry. It simply means to put the insured in the place he would have been had the loss not occurred.[12]

There exist broadly two kinds of marine insurance: valued policy and unvalued policy. Unvalued policy (section 30 of MIA 1963) does not specify the value of the subject matter insured but sets a limit of the sum insured.[13] This policy is similar to other kinds of insurance policies like fire, medical, etc. However, in actuality, choosing the valued insurance policy is the modern trend.[14]

The reason for this change in choice is the difficulty in ascertaining the value of damage and avoiding disputes relating to the measure of indemnity. The point that marine insurance is an imperfect contract of indemnity is observed in valued policy insurance.

Valued policy insurance is an insurance policy where the value of the subject-matter insured is specified or mutually agreed upon by both parties while making the contract.[15] This effectively allows the insurer and insured to negotiate the insurable value of the subject matter between themselves, however, it may be very difficult for them to ascertain the value accurately.

The value so decided could be less or more or even equal to the actual loss suffered and such value shall be conclusive. Therefore, the contract of marine insurance is not a perfect contract of indemnity. This was initially noted by Lord Patteson in the English case of Irving v. Manning (1847)[16]. In this case, there was valued insurance which calculated the ship's value as 17,500 pounds. The ship suffered brutal damages on one of the voyages and the repairing cost came out to be 10,500 pounds. The market value of the ship at that time was estimated to be 9,000 pounds.

The reasonable thing for the insured was to give up the repairing of the ship and claim a total loss. The case was fiercely argued by both sides, but the Judges held that the value stated in the contract is conclusive. It is interesting to note that at the time of the case there did not exist 1906 Act. The judgment wouldn't probably shock as many people as it did in 1847. In his judgment, Lord Patteson stated, "A policy of assurance is not a perfect contract of indemnity. It must be taken with this qualification that the parties may agree beforehand in estimating the value of the subject assured, by way of liquidated damages, as indeed they may in any other contract of indemnity."[17]

This was also observed by the Supreme Court of India in State of Insurance v. United India Insurance Co. Ltd.[18], "�But indemnity, as applicable to marine insurance, must not be an indemnity, as contemplated by the Indian Contract Act, as the loss in such a contract is covered by the contract itself and such loss is not caused to the assured by the conduct of the insurer nor by the conduct of any other person."[19] Therefore the well-founded concept of indemnity is not squarely applicable in the marine insurance law. But why though?
- The value agreed in the valued policy is conclusive
  Strictly interpreting section 29 (3) of the MIA 1963 (27(3) of MIA 1906), it is held that the value agreed to by the parties is conclusive.[20] This value relates to the value of the "subject matter insured" when the contract was made and not when the contract would be implemented or the loss will be suffered.[21]Accordingly, in majority of cases where the value of the subject matter would change between the period when the contract was entered into and when it is implemented.
  
  The value agreed upon during the formation of the contract could be different from the real/actual value of the subject matter insured when the loss is suffered. This was seen in the case of Barker v. Janson[22], where the value of a ship decreased significantly and ultimately it was destroyed. The insured claimed the total value of the policy which was decided but the insurer argued otherwise.
  
  The court ultimately held that even if the value of subject matter has reduced significantly before the destruction or loss to the subject matter insured is caused, then also the insurer is expected to pay the whole agreed-upon value. The reason for holding the agreed-upon value as absolutely conclusive (except in cases of fraud) is because a bona fide transaction is being entered into upon the formation of the contract and the value is binding because it was agreed upon by consent of both the parties even if it may not mirror the true value of the subject-matter insured.
  
  In Diwaliben Vasharambhai v. New India Assurance Co. Ltd.,[23] the value agreed, calculated by the surveyors, was held to be conclusive even when it was immensely overvalued.
  
  This demonstrates that because of this nature of "conclusiveness" of the value fixed in the Valued policy, there may arise a situation where the insured might get way more than the loss or even way less except in case of fraud. This goes against the principle of indemnity as we have seen and observed above.
  - Fraud Threshold
    At the time of policy formation, it is cumbersome for the parties to calculate the precise value of the subject matter or to determine how the value will fluctuate or what the value will be in the future. Therefore, the courts have upheld the meaning of the word "conclusive" strictly. But in case of excessive over-valuation, the court might look into the possibility of fraud. If it appears to the judge that the agreed value is aftereffect of fraud then the whole policy is deemed void.
    
    The first time a policy was disregarded for being fraudulently overvalued was Haigh v. de la Cour. However, in reality, it is extremely difficult to prove fraud. In the case of The Gunford[24], the insured had breached the duty of care to disclose the fact that there existed high-value Producer Price Index (PPI) policies. The court held that this heavy overvaluation fraud is, a priori, not very far to seek and upheld the act of insured.
    
    In the case of Hindusthan General Insurance v Punam Chand Chhajar[25], the court upheld The Gunford judgment and placed the benchmark for proving fraud to be high.
    
    Therefore, in cases of excessive overvaluation too the principle of indemnity is not perfectly applied since the insured gets everything or, in rare cases, nothing. It is beneficial for the insurer to enter such a policy as explained by Lord Robson.[26] "In the case of a constructive total loss, if the assured wants to obtain the full value indemnity, he has to establish that the cost of repairs or salvage of the ship will exceed the agreed value to prove the ship is a total loss, which is more difficult. Therefore this makes the insurer want to accept the risk of overvaluation."[27]
A Fair Approach
Now on a plain peruse, the valued policy of marine insurance may appear severely unfair and in urgent need of some change. Even the courts observed such a problem and decided to make it fairer. The drafters decided to include Section 18(1) into the MIA 1906 which appears in Section 20(1) of the MIA 1963, states that every material circumstance, in the ordinary course of business which out to be known by him, should be disclosed to the insurer, if the insured fails to do so then the insurer may avoid the contract.[28]

This section has upheld the concept of utmost good faith mentioned in section 19 of the MIA1963. It was observed that extreme over-valuation occurred in cases where the insured would not disclose some material fact regarding the goods and because the insured cannot know everything, the agreed value was often found to be excessively overvalued.

In the case of Ionides v. Pender[29], Justice Blackburn held that:
But the rule laid down in parsons on Insurance that all should be disclosed which would affect the judgment of a rational underwriter governing himself by the principles and calculations on which underwriters do in practice act and gave 4 tests which the court will refer to in cases of overvaluation:
1. Is the overvaluation excessive?
2. If such overvaluation was made with fraudulent intentions
3. whether fraudulent or not, was it material for the insurer to know the valuation was excessive?
4. was the overvaluation concealed from the insurers? [30]

This case took place before the enactment of MIA 1906, and since then the defence of non-disclosure has been made added in sections 18 of MIA 1906 and 20 of MIA 1963. The courts in India have referred to this judgment in several cases and applied the same rationale to deliver a judgment as well.[31]

Now it may be difficult for the insured to determine the degree of disclosure to be made by the insured as well. To tackle this, certain circumstances have been mentioned in section 20(3)(b) of the MIA 1963. It states that not everything must be disclosed by the assured which might influence the minds of the insurer otherwise the duty to disclose will become too high which would prove to be counter-productive for the business.[32]

In the famous case of General Shipping and Forwarding Co. v British General Insurance Co. Ltd.[33], the ship was overvalued by 3,600 pounds. But the court held that the insurer was in the position to have all the information about the vessel including the actual market value of the vessel. The fact that he still went ahead and accepted the policy to undertake the risks will not allow him to refuse the payment now.

Moreover, a better approach for the courts to adopt, in case of excessive overvaluation, would be to determine a reasonable amount of compensation and grant the same. But from early on, the courts have adopted an "All-or-Nothing" approach, when having a sliding scale would have been a logical step to follow. Because otherwise, it puts an unnecessary burden on the insured, who may not get a single penny in some cases, and the insurer, who is required to pay the gross amount of money.

Conclusion
Though contract of marine insurance is said to be a contract of indemnity but as we have observed above there might arise situations where the insured is over-indemnified or under-indemnified. Therefore it would be safe and right to say that it is an imperfect contract of indemnity.

This was noted by Justice Patteson first, in the case of Irving v. Manning[34], "It is argued that this course of proceedings infringes on the generally received rule, that an insurance is a mere contract of indemnity, for thus the assured may obtain more than a compensation for his loss." [35]

To tackle the unfair disadvantage or advantage and to maintain the merit of a contract of insurance, the English law enacted The Marine Insurance Act, 1906, and subsequently India adopted the Marine Insurance Act, 1963 which is almost identical to the English Act. These laws direct the functioning and mechanism of marine insurance and attempt to make the practice more just.

Apart from this, various judicial decisions have shown the practice of the court in different circumstances and facts, which tries to make the policy even more equitable. Therefore, even if the valued marine insurance policy is not a perfect contract of indemnity, the legislation and the courts have turned it into a meaningful, practical, and favourable contract of insurance.

End-Notes:

Francis Rose, Marine Insurance: Law and practice (first published 2004, Informa Law 2004).
Marine Insurance Act 1963, s 3.
Gaurangi Patil, 'India: Reeling Back In History To Understanding Marine Insurance/ Protection & Indemnity Clubs (P&I) - Marine Insurance' (Mondaq, 27 November 2012) < https://www.mondaq.com/india/marine-shipping/208632/reeling-back-in-history-to-understanding-marine-insurance-protection-indemnity-clubs-pi--marine-insurance> accessed 4 April 2022.
ibid
ibid
ibid
Ajendra Srivastava, Modern Law of International Trade (Published 2020, Springer, Singapore).
Sir Frederick Pollock and Dinshah Fardunji Mulla, "The Indian Contract Act, 1872" (16th edition, Sweet & Maxwell 1909)
Canada Rice Mills Ltd. v. Union Marine and General Insurance Co. Ltd (1940) 67 Ll.L.Rep. 549.
Wang Han, 'On If an Insurance Policy Is a Perfect Contract of Indemnity in Marine Insurance' (2018) 6 China Legal Sci 77.
Castellain v Preston [1883] 11 QBD 380, 386.
Sir Frederick Pollock and Dinshah Fardunji Mulla, "The Indian Contract Act, 1872" (16th edition, Sweet & Maxwell 1909)
Marine Insurance Act 1963.
Neil Beadle and Aisha Lala, 'What Is Your Ship Worth? -Agreed Value Policies in Marine Insurance' (Mondaq, 27 November 2008) < https://www.mondaq.com/newzealand/marine-shipping/70708/what-is-your-ship-worth--agreed-value-policies-in-marine-insurance> accessed on 5 April 2022.
Marine Insurance Act 1963, s 29.
Irving v_Manning [1847] 1 HLC 287.
ibid.
State of Insurance v. United India Insurance Co. Ltd. 1998 (2) ALT 51.
ibid.
Marine Insurance Act 1963, s 29(3).
ibid.
Barkerv. Janson [1868] LR 3 CP 303.
Diwaliben Vasharambhai v. New India Assurance Co. Ltd ORIGINAL PETITION NO. 21 OF 2001.
The Gunford [1911] AC 529, HL
Hindusthan General Insurance v Punam Chand Chhajar AIR 1971 Cal 285.
ibid (n 23).
ibid (n 23).
Marine insurance Act 1963, s 20(1).
Ionides v. Pender[1874] LR9 QB 531.
ibid.
M/S. J.K. Dall Mill v. New India Assurance Co. Ltd. Revision Petition No. 503 OF 2016.
Marine Insurance Act 1963, s 20 (3) (b).
General Shipping and Forwarding Co. v. British General Insurance Co. Ltd [1923] 15 LIL Rep 175.
ibid (n 14).
ibid (n 14).