26 April 2008

Basic Principle of Cargo Insurance

Cargo insurance plays an important part in facilitating trade transactions. Through cargo insurance, the financial losses suffered by traders on account of damage to goods in transit resulting from various hazards such as fire, storm, collision, stranding, theft, sinking, explosions etc, are transferred to insurance underwriters. By providing protection cargo insurance enables all those engaged in overseas trade to expand their operations.

There are five basic principles governing cargo insurance:
1. Insurable interest. Two conditions should be fulfilled to establish insurable interest, namely:
a. The person should have a legally enforceable financial interest in the property being insured.
b. He should be exposed to suffer a financial loss if the insured property is lost, damaged or destroyed.

2. Indemnity. This principle states that the assured should be restored as nearly to the same position after the loss, as he occupied immediately preceding it. However, in cargo insurance, it is a common practice to issue “agreed value” policies, e.g. 10 cases of milk powder valued at $5,000.00. This implies that all losses are settled on the basis of agreed value irrespective of market value. However, claims for repairs or partial replacements are paid on the basis of actual cost of repair or replacement subject to the limit of the sum assured.

3. Utmost Good Faith. Utmost good faith is the cardinal principle of all types of insurance. The assured must disclose and truly represent all material facts regarding the subject-matter of insurance, which he knows or should know in the ordinary course of business.

4. Subrogation Rights. This is the right of the insurer to take over the privileges of the insured to recover the loss from those who are wholly or partly responsible for it. For example, if the loss is caused by the negligence of the carrier, the insurer, under subrogation rights, is entitled to recover the loss from the carrier in the name of the insured.

5. Contribution. Where an insurable interest of property is insured by two or more underwriters covering the same risks, each has to contribute in the same proportion as the sum insured under his respective policy to the total amount of the loss. The insured may claim the total loss from any one of the insurers and the insurer, who pays more than his ratable proportion, can claim a contribution from the other insurers.

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